Enzi Offers Remote Sales Tax Bill as States, Business Rush for Agreement

The result of not collecting tax on remote sales is that “other taxes, such as income or property taxes, will have to be increased to offset the lost revenue to state and local governments. I want to avoid that,” Enzi said. The bill has no relation to the Internet tax moratorium, expiring in Nov. and hotly debated on the Hill (see separate story in this issue). Enzi’s bill comes as business and state officials try to hash out their differences on what digital products to tax under the SSUTA, ahead of a June 22-23 meeting of the Streamlined Sales Tax Governing Board.

Remote sellers would have to collect taxes once 10 states, comprising at least 20% of the population of states collecting sales tax, pass laws embracing SSUTA. So far, 15 states have implemented SSUTA. Businesses with less than $5 million gross remote taxable sales yearly -- including from their affiliates -- wouldn’t have to collect. Businesses with sales under $100,000, but with affiliates collectively meeting the $5 million threshold, also would be exempt. An Enzi spokeswoman confirmed the bill has a new section letting tribal govts. participate in the streamlined system. The Governing Board would have to consider applications if tribes meet state standards and if each tribe and its “primary” state negotiate a separate accord on tribal tax collection. Member state tribes would have board representation.

SSUTA must meet “minimum simplification requirements” to take nationwide effect, an Enzi summary said. That includes “one-stop multistate registration” online; uniformly defined products and product exemptions, certification methods for tax administration software and requirements for tax returns and remittances; consistent electronic filing and remittance methods and single, state-level administration; a “statewide taxability matrix” and liability for sellers using state- provided information; and “application of simplification requirements to transactional taxes on telecommunications services,” among many other requirements. The bill defines “telecommunications services” to include VoIP and “enhanced or value-added services” as defined by the FCC, but it excludes “data processing and information services” used primarily for the purpose of delivering the “processed data or information” to the purchaser.

The bill, which offers a “sense of Congress” on double taxation, says states should cooperate to prevent additional taxation on digital goods or services purchased from a foreign country that already has taxed them.

Uniform Definitions for Digital Goods Sought by Business

The Enzi bill comes as states and businesses clash over how to define “digital property” in the SSUTA. The dispute largely revolves around the relevancy of a “white paper” drafted in 2003 at the Governing Board’s behest that narrowly defined “tangible personal property” (TPP), which included “prewritten software” but not other digital products with “hard” versions like CDs and DVDs. Anything outside the TPP definition would require legislative approval to be taxed. The paper is widely used for guidance by e-commerce players like Apple. States and businesses are trying to find common ground ahead of next month’s board meeting.

Tempers flared in the group’s State & Local Advisory Council teleconference last week. State officials have problems with the business community’s proposed language that would exempt “any other [digital] product” than software from the definition of TPP, which unlike services is taxed, Okla. Tax Comr. Jerry Johnson said. The group plans to send a survey to member states asking whether they tax audiovisual works, audio works and books, and if so, under what authority they tax -- such as the TPP definition -- and whether they tax goods with “less than permanent use,” such as time- limited or tethered downloads.

Longstanding policy on e-commerce taxation is being upended by the Governing Board, Apple Tax Dir. Terry Ryan said. “All those things have already been dealt with” in the white paper, he told Johnson: “Now we seem to be revisiting” TPP and backing away from “uniform” definitions. The white paper isn’t binding on the group, Johnson said: It was “written by somebody in a state and it was adopted by the [Streamlined Sales Tax] Project possibly [the Governing Board’s predecessor], but it was never adopted by the governing board.” Another participant said the white paper preceded the Board’s formation, so it should be considered binding. Richard Dobson, exec. dir. of the Ky. Dept. of Finance & Administration, warned that the group was “rehashing past history” and should move forward. The board can’t define some digital goods so it’s not “currently” excluding them, but it may reach agreement in the future, Johnson said.

Not all states liked the TPP definition in the white paper, “but they were in the minority,” Ryan later told us. His request last fall for clarification of whether participating states need to interpret digital definitions uniformly has been put off in subsequent meetings, he said. Without uniform definitions, “it adds a lot of uncertainty” for businesses on what they need to tax. States would like to add streaming media to the TPP definition, but the business community considers those services, Ryan said. State officials want to do an end-run around state legislatures, who may vote down any attempt to define such gray-area digital commerce as TPP, he said.

It’s too early to say whether a compromise can be reached between states and business, Council on State Taxation Gen. Counsel Stephen Kranz told us. The group represents “multistate” businesses. A “set of narrow definitions” for digital books, music and movies that give states the option to “legislatively” impose taxes on digital goods is the hope, Kranz said. Otherwise regulators may “sweep into the tax base other digital things that are more like services,” such as streaming media: “The legal guidance out there is not definitive.”

The business community wants the white paper to be given “serious weight” in considering the TPP definition, Kranz said: Some states consider that paper to have been written in “stream of consciousness” and therefore unfit for guidance. All states assume that “services and intangibles” are exempt from TPP taxes unless “specifically enumerated,” Kranz said. Prewritten software was easier to see as TPP, because it was commonly sold “off the shelf in a box” as well as online. The question is whether media that can be downloaded and played on an iPod or an e-book reader would also be considered to have tangible counterparts, like CDs and books, he said.

The SSTP finished its TPP definition before it even considered digital goods, Governing Board Exec. Dir. Scott Peterson told us. Digital goods were mentioned in the original SSTP agreement “for some reason” he can’t remember. Many people argued against defining digital goods, predicting a long impasse to “arrive at uniformity” between states. The white paper was written “with the understanding that once all the definitions were done, that there would be this concept of how you use the definitions,” Peterson said. But none of the other definitions were adopted and the Governing Board never adopted the white paper.

Business defending legislative prerogative for digital taxation is a “red herring,” Peterson said. Concern about states’ differing product definitions for the purpose of taxation has “come up since the beginning of the sales tax” and most states have “near-identical statutes” for common items such as shoes, he said. Courts and agencies don’t have the luxury of fixing a poorly-drafted law: “If you write a law… for which there can be multiple interpretations, you need to fix the law.” A former legislator, Peterson said he’s written thousands of statutes that looked clear when passed but were drawing different interpretations 3 months later.

It’s harder to settle on definitions than one may think, Peterson said, explaining the dragged-out dispute: “Everybody has a statute that they've been interpreting for 75 years,” and legislatures can’t be brought to heel every time a conflict arises between state definitions. S.D., Peterson’s state, got around gray areas like streaming media by levying an “amusement” tax. There’s a solution for such digital categories, but “we've been so bottled up inside this definition” of TPP that “nobody’s been able to focus” on the gray areas yet. The states are “relatively comfortable” with the definitions of digital products in the white paper, and are “more than willing to go back and use them,” but they balk at the business community’s proposal of explicit exemptions from TPP.

There’s little chance that state regulators will simply ignore business concerns and press ahead with an “expansive” TPP definition, Kranz said: Business has “tremendous leverage in the political process that’s been set up” under SSTP. If regulators won’t compromise, businesses may try to get legislatures to pull their states out of the agreement, he said. Only a few states have actually tried to expand digital taxation, and in N.J. the attempt failed, Kranz added.