Is Congress Serious About Use Tax, or Is It Election Year Politics?

After a year's culmination of work and meetings, the Advisory Commission on Electronic Commerce delivered its report to Congress outlining a number of findings and recommendations.

The report's arrival on Capitol Hill set in motion numerous hearings, speeches and press conferences beginning what is sure to be a widely debated issue this year and for years to come. Specifically, the committee finds one particularly contentious issue to be the sales and use tax collection obligation for remote sellers. These proposals will shape the future of the sales and use tax system. Additionally, it is important for all parties involved to stay abreast and follow legislation arising from the ACEC's proposal. Businesses should actively participate by making their views known, or they risk being left out of the process.

Implications for Direct Marketers

The ACEC proposes to simplify the existing sales and use tax system, extend the current Internet tax moratorium and clarify nexus standards. Historically, the question of when remote sellers must collect sales and use taxes on out-of-state sales has resulted in numerous legal disputes between direct marketers and tax authorities.

Since the release of the ACEC's report, “nexus clarification” has become more contentious and hotly debated. If some “bright lines” for guidance were established, costly litigation and uncertainty would be reduced. The ACEC proposal provides an opportunity to develop stronger nexus standards to meet the evolving business needs of the 21st century.

The existing rules for the road are based on two Supreme Court decisions: the National Bellas Hess case in 1967 and the Quill case in 1992. These decisions prevent a state from imposing a business activity or sales and use taxes unless the seller has a “substantial physical presence,” or nexus, in the state. The ACEC report highlights the need to move beyond the Bellas Hess and Quill cases and establish “bright line” nexus standards.

Now, the debate regarding bright line nexus rules has shifted from the ACEC to Congress because the commission failed to develop the requisite two-thirds vote.

Congressional response to the nexus clarification issue has been swift. In April, Sens. Judd Gregg, R-NH, and Herb Kohl, D-WI, introduced the New Economy Tax Simplification Act, S. 2401, which seeks to provide bright line nexus rules on sales and use taxes for today's remote sellers, just as Public Law 86-272 provided similar bright line nexus rules for income tax purposes in 1959.

The legislation would ensure that the presence of intangibles, Web pages and servers would not create nexus. Certain business activities that were argued to be nexus-creating activities and were the source of contentious debate in the past are more clearly defined under this new legislation as activities that do not establish substantial physical presence.

How S. 2401 Will Likely Progress

Several committees on both sides of Capitol Hill lay claim to jurisdiction over Internet-related legislation. In the Senate, the Commerce, Science and Transportation Committee, led by John McCain, R-AZ, has primary jurisdiction over Internet-related legislation. However, S. 2401 is in the Finance Committee, chaired by William Roth, R-DE, where hearings may be scheduled for sometime this month.

Internet tax relief and sales tax simplification have become hot-button issues in the fall elections. Both political parties have laid claim to these issues, which will complicate and slow this bill's process as it moves through Congress.

Although a number of bills relevant to e-commerce and telecommunications have been introduced, no comprehensive legislation regarding nexus is before the House. It is anticipated that the subcommittee will begin a series of hearings on the commission's report later this year.

Analysis of the Election Year

Although mainstream media are reporting separate Republican vs. Democratic viewpoints, when you get down to it, the issues really do cross party lines. This is an election year, and the Republicans and Democrats are jockeying to gain both monetary support and votes.

The Republicans favor a five-year extension of the Internet Tax Freedom Act, while the Democrats support a shorter extension.

We believe this issue will ultimately cross party lines. As the debate progresses, politicians will likely be swayed by their own constituents' interests rather than party affiliation. For example, Texas Gov. George W. Bush has taken a moderate stance on these issues and, to date, has not supported a total ban on sales tax imposed on goods and services sold over the Internet. Note that Texas relies heavily on sales tax revenue because the state does not impose a personal income tax.

Because of the divergence of stakeholders, this issue does not present a clear win-win solution, which may dampen enthusiasm for Congress to act on S. 2401. Moreover, Congress has been reluctant to pass similar legislation in the past, e.g., Sen. Dale Bumper's Main Street Tax Fairness legislation.

Analysis of Stakeholders

The divergence of stakeholders ranges from the local retailer to the remote retailer to the consumer. In many cases, consumers believe they're already being taxed on remote sales through shipping costs.

Businesses are split on this issue. Many traditional bricks-and-mortar retailers are opposed to the nexus clarification, which they view as extending an unfair competitive advantage to those remote sellers with little or no physical presence. In addition, state governmental bodies are concerned about potential revenue losses arising from nexus clarification and a lengthy extension of the moratorium.

The real wild card is the fast-moving nature of the Internet. The best chance for radical legislation passage would have to come before the election year. Historically, the legislative process has been slow; however, maybe this time Congress will act in Internet time. Therefore, interested parties need to stay close to developments and keep up-to-date on the process.

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