E-COMMERCE TAXATION Issue Brief

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INTERNATIONAL COUNCIL OF SHOPPING CENTERS 1033 NORTH FAIRFAX STREET, SUITE 404 x ALEXANDRIA, VA 22314-1540 x 703-549-7404 x 703-549-8712 (Fax) The Internet is rapidly becoming America 9s new marketplace. While tax policy should not discourage consumers from exploring this new purchasing channel, it should not favor Internet purchases over store purchases either. Instead, tax policy should provide a level playing field for traditional retail businesses, mail order companies and Internet- based merchants.

Over the years, Congress and the courts have addressed the issue of state-imposed sales and use taxes on remote sellers as it applied to mail-order merchants. In 1992, the Supreme Court in Quill v. North Dakota , held that a state could not require a remote retailer to collect sales or use tax on its behalf unless that merchant had a physical presence (or cnexus d) in that state.

The Court said it would be too burdensome on retailers if they were required to collect sales taxes for hundreds of state and local jurisdictions across the country. However, it did say that Congress could address this interstate commerce issue at some other time. The recent explosion of Internet commerce brings a new focus and sense of urgency to this issue.

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Internet marketplace is rapidly expanding, yet it remains mostly free from traditional forms of taxation. According to a University of Tennessee study, uncollected state and local sales taxes from e-commerce exceeded $13 billion in 2001 and is projected to exceed $45 billion in 2006. In a dramatic reversal from the late-1990 9s, most states are now experiencing significant budget deficits and desperately need to look for other sources of revenue, including uncollected sales and use taxes. Otherwise, states and localities will have to start raising taxes (including business income and real estate taxes) and/or cut back on essential governmental services. The current dilemma facing Congress is whether it should give states the authority to require out-of-states merchants to collect taxes currently owed on e-commerce sales or maintain the current tax collection system (which gives most on-line sellers an unfair advantage over traditional merchants.). In 1998, Congress enacted a three-year moratorium which expired on October 21, 2001 on Internet access taxes and new, multiple or discriminatory taxes on electronic commerce. The moratorium was later extended until November 2003, however, it did not address the remote sales tax collection issue. ICSC supported legislation introduced in the 107 th Congress by Senators Mike Enzi (R- WY) and Byron Dorgan (D-ND) and Representatives Ernest Istook (R-OK) and William Delahunt (D-MA) that, in addition to extending the moratorium, would give those states ISSUE BACKGROUND LEGISLATION International Counci of Shopping Centers E-COMMERCE TAXATION Issue Brief Updated February 2003 INTERNATIONAL COUNCIL OF SHOPPING CENTERS 1033 NORTH FAIRFAX STREET, SUITE 404 x ALEXANDRIA, VA 22314-1540 x 703-549-7404 x 703-549-8712 (Fax) that simplify their sales tax systems the authority to collect remote sales taxes. Unfortunately, a Senate amendment that would have provided such authority was tabled. In the meantime, the Streamlined Sales Tax Implementing States, a group consisting of 34 states and the District of Columbia, approved in November 2002 a Streamlined Sales and Use Tax Agreement that would encourage, but not require , remote sales tax collection. Among other things, the agreement calls for uniform definitions, sourcing rules, a limited number of state and local sales tax rates, and amnesty provisions. The agreement will become effective once 10 states representing at least 20-percent of the U.S. population enact its conforming changes. In February 2003, some of the nation 9s largest retailers, including Wal-Mart, Target and Toys R Us, entered into an agreement with 38 states and the District of Columbia to voluntarily collect sales taxes from their customers who buy over the Internet, even from those in states where their on-line subsidiaries do not have a physical presence. In return, those states have agreed not to pursue sales and use taxes they believe are owed to them due to the close relationship (agency) between the on-line retailers and their brick-and- mortar affiliates. Legislation will soon be introduced in the 108 th Congress that would allow those states that simplify their sales tax systems (based on the Streamlined Sales and Use Tax Agreement) to require remote sellers to collect sales taxes on their behalf. Many Internet-based retailers claim that imposing remote sales tax collection requirements on them would be too burdensome, given the thousands of state and local taxing jurisdictions across the country. While we agree that states and localities need to simplify their sales and use tax systems, there is currently software available that can adequately determine, collect and remit a merchant 9s remote sales taxes. These retailers also claim that remote sales tax collection will slow the growth e-commerce. According to Juniper Research, most of those surveyed said that remote sales tax collection would not affect their Internet purchase decisions. ICSC believes that tax policy should be consistent and equitable for all forms of consumer purchases 3 whether they take place in shopping centers, via mail order or over the Internet. Internet retailers should not receive a tax advantage at the expense of traditional retailers and state and local governments. ICSC and the e-Fairness Coalition will continue to work to convince Congress and the Administration to enact remote sales tax collection legislation as they debate a second extension of a moratorium on Internet access taxes and discriminatory e-commerce taxes. For more information, contact Wayne A. Mehlman at 703-549-7404, ext. 225. OUR POSITION OPPOSING VIEWPOINTS International Counci of Shopping Centers

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