Spring 2000

Internet Tax Freedom Update

In October of 1998, Congress voted the Internet Tax Freedom Act into law. The law established a three-year moratorium (October 1, 1998 - October 21, 2001) on new Internet access taxes and on multiple or discriminatory taxes on electronic commerce. The legislation did not prevent states and localities from collecting existing sales tax on sales made over the Internet. As it stands now, Internet retailers are subject to the same state and local sales taxes as mail-order retailers. This means, according to the last U.S. Supreme Court ruling on the subject, that if the seller has a physical “nexus” in a state (a store, a warehouse, and a distributor) then it must collect state and local sales taxes. Not surprising, Internet retailers are careful not to establish a nexus anywhere but at their headquarters. Obviously, this contributes to their pricing and gives them a direct advantage over their brick-and-mortar competitors.

The passage of the Internet Tax Freedom Act mandated that an Advisory Commission on Electronic Commerce (ACEC) be formed to explore and recommend solutions to the taxation question. Under the law, the commission was to be comprised of three representatives from the Federal Government, eight representatives from state and local governments and eight representatives of electronic commerce industry, telecommunications carriers, local retail businesses and consumer groups. Congress ordered that the Commission deliver a report by April 21, 2000 and, to ensure that the competing interests reached consensus, mandated a “super-majority” of 13 votes to make any recommendations.

After nearly two years of meetings, on March 31, 2000, the ACEC voted 10 to 8 to approve a report that asks Congress to extend an existing ban on Internet taxes for five years and includes a host of biased tax exemptions favoring the high-tech companies that were represented on the commission. Brick-and- mortar retailers, who were not represented on the commission, as well as local governments, will suffer if Congress adopts this report. Specifically the report recommends:

SALES AND USE TAXES
For a period of 5 years, extend the current moratorium barring multiple and discriminatory taxation of electronic commerce and prohibit taxation of sales of digitized goods and products and their non-digitized counterparts.

Clarify which factors would not, in and of themselves, establish a seller’s physical presence in a state for purpose of determining whether a seller has sufficient nexus with that state to impose collection obligations.

Encourage state and local governments to work with and through the National Conference of Commissioners on Uniform State Laws (NCCUSL) in drafting a Uniform Sales and Use Tax Act that would simplify state and local sales and use taxation policies so as to create and maintain parity of collection costs (net of vendor discounts) between remote sellers and comparable single-jurisdiction vendors that do not offer remote sales.

Establish a new Advisory Commission responsible for oversight of the progress of NCCUSL’s efforts to create Uniform Sales and Use Tax Act.

BUSINESS ACTIVITY TAXES
Clarify that, in determining whether a seller has sufficient nexus with a state to be required to meet business activity and income tax reporting and payment obligations of the state.

INTERNET ACCESS
Make permanent the current moratorium on any transaction taxes on the sale of Internet access, including taxes that were grandfathered under the Internet Tax Freedom Act.

Taxation of Telecommunications Services and Providers
Eliminate the 3% federal excise tax on communications services.

Eliminate excess tax burdens on telecommunication real, tangible and intangible property.

Afford similar treatment of telecommunications infrastructure in states that exempt purchases of certain types of business equipment from the sales and use taxes.

Encourage state and local governments to work with and through the National Conference of Commissioners on Uniform State Laws (NCCUSL) in drafting a Uniform Telecommunications State and Local Excise Tax Act, within three (3) years, that would require states to follow one of two simplified tax structure models.

The International Council of Shopping Centers (ICSC) emphatically opposes the recommendations in this report. Instead of leveling the playing field between brick-and-mortar retailers and pure Internet retailers the ACEC recommendations will only exacerbate the problem. If Congress adopts this proposal all books, music and software that currently are subjected to state and local sales taxes would become tax-free. According to Forrester Research, in 1999, states lost more than half a billion in uncollected sales taxes because of purchases made over the Internet. This figure will surely grow if the ACEC proposal is adopted.

Sales taxes account for approximately 49% of state and local government’s revenue; revenue that pays for schools, hospital, roads and police and fire protection. In 1999, shopping centers generated $47 billion in state sales taxes. It is hard to imagine that it is the intent of the ACEC to erode the tax base of local government. But that is exactly what the ACEC is recommending. To deny states the ability to collect taxes due on purchases made via the Internet and in the process hurt brick-and-mortar retailers and the local communities they serve is wrong. Faced with a loss in sales tax revenue, state and local governments will have to make up for the short fall. The tools they have are few but powerful: they will have to increase sales taxes (which would only widen the gap between brick-and-mortar stores and Internet retailers), income and property taxes.

ICSC will lobby Congress to reject this proposal. It is our belief that any extension of the moratorium will lead to a permanent ban. We are working with a coalition of retailers and municipal officials that will also lobby Congress. We have also begun an extensive campaign to enlist the support of unions that represent municipal, county and state employees, teachers, police and firefighters and others whose jobs are funded in part from sales taxes.

ICSC believes competition in the marketplace is good. It provides price stability and affords consumers a ready supply of goods and services. However, competition can only be maintained and free trade upheld if the competition takes place on a level playing field. Creating a bias toward one segment of the marketplace is a detriment to free trade. Legislating tax-preferred status for goods purchased via the Internet could seriously damage the marketplace in retail stores and shopping centers, the jobs and tax revenue the marketplace creates, and the competition that keeps prices low.

E-commerce, Spring 2000 index