by Greg Mitchell
Thursday, May 4
Thursday, May 4
The charge for the day was to "Study the economic impact of Internet commerce on state and local tax revenues; and to monitor the activities and recommendations of the federal Advisory Commission on Electronic Commerce(ACEC)."
For those that have not had a chance to review the ACEC report, the following summarizes its contents. The ACEC was charged with coming up with "Findings and Recommendations." In order for the Commission to issue a formal "finding," it had to be supported by a 2/3 majority of the members. Unfortunately, only very general principles were issued in the form of official "Findings and Recommendations" because of the inability to achieve a 2/3 majority. Those general principles included:
1. To encourage state and local governments to partner with private technology companies to address the "digital divide," specifically to make computers and the Internet widely accessible for needy families, libraries, schools, and community centers, and to train needy families how to use computers and the Internet;
2. To explore the privacy issues involved in the collection and administration of taxes on E-commerce;
3. To support implementing and making permanent a standstill on tariffs as early as possible;
Despite the ACEC's directive to only include "Findings and Recommendations" if they gathered the required 2/3 majority, the ACEC, under Virginia Governor Gilmore's leadership, chose to include (despite some controversy) proposals that only obtained a mere majority. These "majority proposals" are as follows:
Sales and Use Taxes
1. To extend the current moratorium barring multiple and discriminatory taxation of e-commerce;
2. To prohibit taxation of sales of digitized goods and products and their non-digitized counterparts;
3. To clarify which factors would not, in and of themselves, establish a seller's physical presence in a state for purposes of determining whether a seller has sufficient nexus with that state to impose collection obligations. These include the following:
(a) a seller's use of an Internet service provider (ISP) that has physical presence in a state;
(b) the placement of a seller's digital data on a server located in that particular state;
(c) a seller's use of telecommunications services provided by a telecommunications provider that has physical presence in that state;
(d) a seller's ownership of intangible property that is used or is present in that state;
(e) the presence of a seller's customers in a state;
(f) a seller's affiliation with another taxpayer that has physical presence in that state;
(g) the performance of repair or warranty services with respect to property sold by a seller that does not otherwise have physical presence in that state;
(h) a contractual relationship between a seller and another party located within that state that permits goods or products purchased through the seller's Web site or catalogue to be returned to the other party's physical location within that state; and
(i) the advertisement of a seller's business location, telephone number, and Web site address.
4. To 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 collections costs between remote sellers and comparable single-jurisdiction vendors that do not offer remote sales.
Business Activity Taxes
1. To clarify the circumstances that determine whether a seller has sufficient nexus with a state to be required to meet business activity and income tax reporting and payment obligations of that state.
Internet Access
1. To make permanent the current moratorium on any transaction taxes on the sale of Internet access, including taxes that were grandfathered under the ITFA.
Taxation of Telecommunications Services and Providers
1. To eliminate the 3% federal excise tax on communications services;
2. To eliminate the excess tax burdens on telecommunications real, tangible and intangible property;
3. To afford similar treatment of telecommunications infrastructure in states that exempt purchases of certain types of business equipment from sales and use taxes;
4. To encourage state and local governments to work with and through the NCCUSL in drafting a uniform telecommunications state and local excise tax act, within 3 years, that would require states to follow one of two simplified tax structure models.
International Taxes and Tariffs
1. To support the formal, permanent extension of the World Trade Organization's current moratorium on tariffs and duties for electronic transmissions.
With that background, several speakers took turns elaborating as to why the ACEC report was either seriously flawed or a great idea, or somewhere in the middle.
Dallas Mayor Ron Kirk
Mayor Kirk was the first to speak, and as expected, he described, to some length, why the ACEC report was very seriously flawed. Not only did the report ignore the 2/3 super majority requirement, but it also went beyond the Commission's charge to focus on the effect of sales tax on Internet transactions. Mayor Kirk made several points and raised numerous issues, among them:
1. Financing of MTA districts is 100% dependent on sales tax;
2. States rights vs. national uniformity;
3. The regressive nature of the sales tax will be exacerbated by the digital divide;
4. Bond buyers are backing off any bonds that are backed solely by the sales tax;
5. Mayor Kirk pointed out that there IS technology available to handle the complex system that exists today, but that he encouraged simplification. However, any simplification would have to take into account the rights of local governments.
6. When asked if Mayor Kirk believed TX should consider turning to a state income tax for its primary revenue source, he responded, "I would have an afro and dreadlocks before the State of Texas will adopt an income tax."
7. He noted that states with an income tax would be impacted less by any national uniformity campaign than those states, like Texas, who depend as much as they do on the sales tax.
David Cowling
David Cowling spoke very generally (at the request of the Committee) on some background of the Internet taxation debate. He presented various scenarios (of Internet transactions) that could present issues as to which jurisdiction would have the taxing authority to a transaction. Finally, he pointed out that there are very few alternatives in Texas to the current system of sales taxes. He recommends embracing the simplification, but maintaining sovereignty such that Texas could still drive the process.
In discussing simplification, David noted 10 key elements of simplification that were discussed in the ACEC report:
1. Uniform tax base definitions;
2. Uniform vendor discounts;
3. Uniform and simple sourcing rules;
4. One sales and use tax rate per state;
5. Uniform application of rate changes; (i.e., once per year; once per quarter, etc.)
6. Uniform audit procedures;
7. Uniform tax returns/forms;
8. Uniform electronic filing and remittance methods;
9. Uniform rules and administration of tax exemptions (including a database of all exempt entities to determine who in a particular state is exempt from tax);
10. A method to approve software that retailers may rely upon to determine rates.
James Lebas - Chief Revenue Estimator, Texas Comptroller's Office
Mr. Lebas was called to, among other things, discuss the potential revenue impact to the State of Texas of the proposals of the ACEC. Those projects, and other interesting facts presented, are as follows:
1. An estimated $200 million per year is lost to catalog sales.
2. In 2000, an estimated $50 million per year will be lost on business to consumer sales on the Internet. That amount is estimated to grow at approximately 70% per year for several years.
3. There are no revenue impacts on any of the ACEC proposals which achieved a supermajority.
4. No revenue impact detected from extending the current moratorium on Internet access charges.
5. The revenue loss from exempting the sale of digitized goods and their tangible counterparts would be approximately $300 million per year. This includes software, books, CD's etc. (Basically, the explanation was that anything that could be purchased solely in digitized form would be exempted, as would the tangible counterpart. Therefore, since a CD could be purchased over the Internet, it would be exempted when sold over the Internet as well as in a store). If telecommunications and other services were deemed to be a "digitized good," then the revenue impact could exceed $1billion.''
6. The "clarification" of nexus standards would have an estimated $1.2 billion revenue impact.
7. Uniformity was not expected to have any revenue impact.
8. A permanent moratorium on access services (of any amount) would have an estimated revenue impact of $50 million per year.
9. No revenue impact had been computed with respect to the exemption of telecommunication equipment from sales tax.
10. The business activity taxes provision would have a $70 million per year revenue impact from the loss of franchise taxes.
11. The elimination of the federal telecommunications excise tax would have no revenue impact.
Ron Parrish (Tandy) and Dale Threadgill (JCPenney)
Both Ron Parrish and Dale Threadgill spoke on the issue of equitable taxation. Representing retailers, they believed it was critically important that E-tailers be treated the same as brick and mortar retailers. Both advocated simplification in taxing laws and reporting laws. Both stated that if there were any incentive to selling over the Internet, then they would take advantage of that for their online business.
Patrick Nugent - Director of Tax Legislation at Worldcom
Mr. Nugent basically espoused simplification of telecommunications taxes and advocated the exemption of telecommunications equipment to spur investment.
Richard Levine - Center for Public Policy Priorities
Mr. Levine generally seemed to advocate taxing everything in sight, but he did make the point that E-transactions should be taxed just as any other. His agenda seemed to focus on the generation of state funds to be used to fund other public goals.
Friday, May 5
The charge for the day was to "Identify and list the specific changes to the tax structure that would: (1) produce the most positive effect on gross state product; (2) produce the most positive effect on the creation and retention of jobs that pay a living wage; (3) most benefit troubled or declining industries, such as agriculture or oil production; (4) promote enhanced tax equity, including mitigation of the regressivity of the current tax structure; and (5) address loopholes that permit certain classes of taxpayers to avoid equitable taxation."
James Lebas and Ellen Beeson, from the Revenue Estimating Division of Texas Comptroller's office
This pair from the Comptroller's office spoke on the issue of the State "dynamic analysis," which basically is an economic theory which addresses the revenue impact of tax cuts and includes the concept that a tax cut can either partially or fully pay for itself by putting more money back into people's pockets, which will then be spent again, thus generating more tax revenue.
The large majority of the testimony for the rest of the day came from oil and gas industry representatives advocating the elimination of the severance tax on oil and gas production. The witnesses included: (1) Railroad Commissioner Williams; (2) Railroad Commissioner Matthews; (3) Mr. Plank - VP of Apache Oil & Gas; (4) Ed Signer - EOG Resources; and (5) Mr. Bill Stephens - VP of West Central Texas Oil & Gas.