Subject: RE: IOTP and taxes

From: [email-masked]
Date: Wed, 9 Dec 1998 17:45:53 +0100

> Sorry to drop into the tax conversation late, I just became aware of the
> discussion.
> 
> The problem with the tax situation as it now exists is that the question
> of
> what entity will collect the tax owed by the purchaser, and on what basis,
> is
> in a state of flux.  Certainly in the U.S., it is not now the
> responsibility of
> many merchants to collect the tax, although certainly the tax agencies
> would
> prefer to be able to compel them to do so.  The U.S. Supreme Court and
> Congress
> have declined to allow that, due to the complexities of complying with up
> to
> 30,000 possible taxing jurisdicitons in the U.S. alone, all with different
> tax
> rates and (to a lesser extent) which tax different products.
> 
> One of the other big issues in this area is privacy.  Mr. Hardy put it
> exactly
> right: taxes mean "who, what, where, when, and how much".  Transporting
> all of
> this information presents severe privacy issues.  When it comes to taxes
> we
> cannot have all 3 of: privacy, destination-based taxation, and seller
> collection.  Two of the three can be achieved, but NOT all three.  There
> are
> mechanisms for dealing with this that do NOT involve seller collection, or
> do
> not involve destination-based taxation, however achieving them is
> politically
> difficult in the U.S and perhaps as well in Europe.
> 
A couple of points on the first few paragraphs:

By running the few paragraphs together in this fashion and by quoting me by
name, some readers may be confused into thinking that the OECD is
responsible for U.S. sub-national tax policy. This is not the case. The
30,000 tax jurisdictions are a domestic U.S. challenge over which the OECD
has no influence or control.

The OECD has not suggested that the answers to the who, what, where, when
and how much questions need necessarily be transported together. The
information does need to be found somewhere in the audit trail. In trying to
visualise answers to the questions you might consider a typical physical
invoice which can include the customer name and shipping or billing address,
the vendor name and address, a date, a description of the order and an
amount payable.

Part of the neutrality approach proposed by the OECD would see that the
existing balance between individual's rights of privacy and the necessities
of tax administration are maintained. For example the OECD recognises that
the use of encryption is legitimate in commercial transactions.

The OECD has not proposed a blanket destination based taxation. In
consumption tax (which the US does not have at the Federal level), the OECD
has proposed that taxation should be at the place of consumption (because
this is what consumption tax is all about). The alternative to an
internationally consistent approach could result in something like country A
taxing consumption at place of supply and country B taxing consumption at
place of consumption. In this case a sale from country A to country B would
result in double taxation for the consumer in country B.

In the case of direct taxes, like income tax, the OECD is adopting a neutral
approach so that if a conventional sale results in a business in country A
having to pay income tax on the profit, then you should get the same result
if the businesses uses electronic commerce to complete the sale.

In the case of direct taxes, like income tax, the seller, the merchant, is
usually responsible for their own income tax and so "seller responsibility"
is the law. In relation to indirect taxes, the OECD has not proposed "seller
collection" as a solution, but some business groups have asked the OECD to
examine such options based on their experience with pilot trials conducted
for commercial, not taxation, reasons.

There are a number of mechanisms for collecting consumption tax that do not
involve "seller collection" and these are in use in some countries for the
taxation of conventional commerce. As the U.S. does not have a Federal level
consumption tax, I think that the political difficulties alluded to may be
to do with sub-Federal taxation, which is not something that the OECD can
address. 

> To make the issue more clear: imagine if every time you used your credit
> card
> in a store the seller collected your home address (and required you to
> provide
> ID to prove its accuracy).  This is what the tax agencies want on the
> Internet.  It is ILLEGAL in California to ask for that data. And depending
> on
> how the EU Data Protection Directive works out, it could be illegal for a
> merchant to use software that transports user data to third parties.  Or
> it
> could be illegal for an ISP to allow access to out of EU sites that use
> software that transports user data from EU citizens to non-EU merchants.
> Note
> that the EU officials recently REJECTED the U.S. Government's proposed
> merchant
> privacy policy safe harbor agreement.  This is quite a serious problem.
> Furthermore, the U.S. sales tax and European VAT systems are significantly
> different - and harmonizing them could be difficult.
> 
If the "the tax agencies" you mean the Federal level Revenue authorities of
OECD countries, lets be clear that the OECD has not suggested that the
seller should collect a home address with each transaction.

In the physical world the seller (even, I understand, in California) will
probably want you to authenticate yourself by comparing your signature on
the credit card receipt with the one on the back of your card. The seller
will have also obtained a copy of your card number and it may be possible,
through the issuing bank, to determine the country in which the card was
issued and where the card holder resides. This linkage of information is the
audit trail. I'm not suggesting the seller can, or should, be given access
to the buyer's residency information, I'm just stating that the seller holds
a piece of the chain, which links to another party with additional
information. Each party along the audit trail only needs to keep a record of
the relevant information for their part of the chain, so that privacy can be
protected by separation of data. However, if the need arises, and their is
legal justification and sanction, the audit trail can be reconstructed from
many sources to give a complete picture to verify an issue.

Also, while the EU may have rejected the US proposed merchant privacy
policy, the OECD is not the EU. The OECD includes such countries as the
U.S., Canada, Mexico, Japan, Korea, Australia and New Zealand and is a
consensus building organisation. It is a mistake to characterise the OECD
and the EU as holding the same views given they have very different
membership. 

> In general, I would hesitate to deal with the tax issues, particularly in
> the
> U.S., until the recommendations of the Internet Tax Freedom Act are
> published
> AND ENACTED.  
> 
The U.S. Internet Tax Freedom Act deals primarily with U.S. sub-Federal
taxation and so caution IN the U.S. might be warranted. 

However, at the international level, where the OECD has an international
co-ordination role, the U.S. view is probably best shown in Presidential
Directive 6 in the First Annual Report of the U.S. Government Working Group
on Electronic Commerce, published in November, which states:  "I direct the
Secretary of the Treasury to work with ... foreign governments to achieve
agreements that will ensure ...  that existing taxes should be applied in
ways that avoid inconsistent national tax jurisdictions and double taxation;
and that tax systems treat economically similar transactions equally,
regardless of whether such transactions occur through electronic means or
through more conventional channels of commerce."

The OECD is trying to achieve the application of existing taxes in a neutral
fashion compared with conventional commerce so I do not believe that
hesitation is required at this level.

> I would also encourage you to consider privacy issues when it comes to
> consumer
> purchasing mechanisms.  There is no reason that a consumer should be
> forced to
> provide ANY personally identifiable information in order to complete a
> transaction on the Internet, any more than they would do so in a store on
> Main
> Street.
> 
I would agree that privacy needs to be taken into account and that there is
no reason why a business transaction conducted by electronic commerce means
should require the disclosure of any more personal information than the same
transaction conducted on Main Street. The OECD has not suggested otherwise.

> - Kaye Caldwell
> Participant in the OECD tax meetings, Member of the Steering Commiteee of
> the
> National Tax Association's Communicaitons and Electronic Commerce Taxation
> Project, author of the CommerceNet white paper on Sales and Use Taxes and
> Internet Commerce.
> 
> Comments on some earlier messages:
> 
> From [email-masked]:
> 
> >Equally the moritorium,
> >in theory, does not relieve the trader from the usual requirements of
> record
> >keeping and accounting to the tax authority.
> 
> But many traders in interstate commerce in the U.S. do NOT now have those
> requirements, and the moratorium requires states to treat Internet traders
> equivalently.
> 
> >One ought to remember that, notwithstanding a trader may be conducting
> >business electronically,  most tax authorities have draconian powers of
> >investigation and enforcement,
> 
> Again, not always, the U.S. Supreme Court and Congress have NOT extended
> "draconian powers of
> investigation and enforcement, to merchants that do not have physical
> presence
> in the state where the buyer resides.
> 
> From: "Smith, Chris" <[email-masked]>:
> 
> >Perhaps you should go back and look at my actual
> >suggestion. It is analogous to the 'Tax' button on a cash
> >register. Jut because it's there doesn't mean you have to
> >push it.
> >
> >The idea was for the Order Description to contain
> >Payment Annotations - notes that might specify details
> >such as "Value Added Tax UK XX% Paid UKP 1.23". If you
> >as a merchant don't want to include them, then, like
> >not pushing the Tax button, don't include them.
> >
> I would agree with this suggestion, there will need to be a mechanism for
> indicating taxes.  Merchants required to collect them will need that,
> those
> not
> required to do so will simply not use the mechanism.  I would however note
> that
> the complexities of the data that might be required are more than you are
> envisioning, for example, you may need to include exemption status
> handling,
> product classification code, and different amounts for taxes in a state,
> city,
> county and, to quote the AT&T tax person "mosquito abatement districts".  
> (Unfortunately, he was NOT kidding.)  On the other hand, perhaps we will
> be
> successful in reducing the complexity.
> 
> 
> ===================================
> Kaye Caldwell,  Policy Director
> CommerceNet 
> 
> http://www.Commerce.net
> E-mail: [email-masked]
> Phone: (831) 479-8743    Fax: (408) 273-6345
> ===================================
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From: Kaye Caldwell <[email-masked]>
Date: Wed, 09 Dec 1998 11:43:48 -0800

>has no influence or control.

Sorry, Michael, I did not mean to cause confusion on that issue.  However, it
is the U.S. sub-national tax issues that  will affect the international
community if we don't resolve them, since our consumption taxes are
sub-national rather than national.

>the vendor name and address, a date, a description of the order and an

I'd disagree on the point that the information needs to be found somewhere -
where is that information found when someone makes a purchase from a physical
store?  A store receipt typically contains store name, date, product
description, tax amount, total amount but identity of the buyer is not
typically part of the record (although sometimes it is).

>result in double taxation for the consumer in country B.

Ths question of course is where does consumption take place? That will be a
difficult determination in the case of consumption via the Internet.  Also
I am
curious to know how the OECD handles purchases in stores by residents of other
countries - for example if I purchase a new article of clothing while on
vacation I will clearly consume that article over a period of years - most of
it in my country of residence, not the country I was vacationing in when I
purchased the item.  Which country taxes that transaction in the OECD - the
country of sale or the country of consumption? 

>for commercial, not taxation, reasons.

Here in the U.S., seller collection works fine when the seller is collecting
for their own state - but when that is extended across state borders it has
created such a mess that the U.S. Supreme Court has said that states can't
require seller collection unles the seller is physically present in the
buyer's
state.  Furthermore, the U.S. Supreme Court invited Congress to overrule them
if Congress so desired.  Congress has since expressly voted DOWN overruling
the
Supreme Court on that issue, by a margin of 2-1.

>to do with sub-Federal taxation, which is not something that the OECD can

Yes, absolutely, the political difficulties I was referring to are in the U.S.
with respect to state taxation of interstate commerce.  I would be extremely
interested in hearing about the mechanisms you refer to that do not involve
seller collection, especially as regard to consumer purchases.

>seller should collect a home address with each transaction.

I agree that they have not, but it was certainly hinted at by one OECD member
at the tax meeting in October.

>issued and where the card holder resides. 

Issuing banks are reluctant to provide address information.  It may also be
illegal in California.  It is certainly illegal for the merchant to ask for
it,
the question of whether it is illegal for the merchant to obtain it from other
parties by use of the credit card number has not been litigated.  

>This linkage of information is the

I agree with this analysis, however it precludes seller collection of
destination based taxes.

>and the EU as holding the same views given they have very different

Again, I agree that the EU and OECD have different views, unfortunately we
must
deal with both and there is the realistic danger that one will require what
the
other prohibits.

>hesitation is required at this level.
So long as "application of existing taxes in a neutral fashion compared with
conventional commerce" is adhered to I would agree, however it is not clear to
me that this is the case.   It is certainly NOT the case in the U.S. when
local
commerce and mail order commerce are compared.

>transaction conducted on Main Street. The OECD has not suggested otherwise.

I'm looking forward to working with the OECD technical advisory groups to
ensure that we can make this a reality.  I do believe it's possible.

- Kaye

http://www.Commerce.net