SPEAKERS CONTENTS INSERTS Tables
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65–438
2000
INTERNET TAX REFORM AND REDUCTION ACT OF 2000, INTERNET TAX SIMPLIFICATION ACT OF 2000 AND FAIR AND EQUITABLE INTERSTATE TAX COMPACT SIMPLIFICATION ACT OF 2000
HEARINGS
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
ON
H.R. 4267, H.R. 4460 and H.R. 4462
MAY 17 AND JUNE 29, 2000
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Serial No. 146
Printed for the use of the Committee on the Judiciary
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama
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JOE SCARBOROUGH, Florida
DAVID VITTER, Louisiana
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
Subcommittee on Commercial and Administrative Law
GEORGE W. GEKAS, Pennsylvania, Chairman
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LINDSEY O. GRAHAM, South Carolina
STEVE CHABOT, Ohio
ASA HUTCHINSON, Arkansas
SPENCER BACHUS, Alabama
MARY BONO, California
JOE SCARBOROUGH, Florida
DAVID VITTER, Louisiana
JERROLD NADLER, New York
TAMMY BALDWIN, Wisconsin
MELVIN L. WATT, North Carolina
ANTHONY D. WEINER, New York
WILLIAM D. DELAHUNT, Massachusetts
RAYMOND V. SMIETANKA, Chief Counsel
SUSAN JENSEN-CONKLIN, Counsel
ROBERT N. TRACCI, Counsel
C O N T E N T S
HEARING DATES
May 17, 2000
June 29, 2000
TEXT OF BILLS
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H.R. 4267
H.R. 4460
H.R. 4462
OPENING STATEMENTS
Gekas, Hon. George W., a Representative in Congress From the State of Pennsylvania, and chairman, Subcommittee on Commercial and Administrative Law
WITNESSES
Benham, Robert, owner and president, Balliet's, L.L.C.
Doerfler, Katrina, senior manager of planning and external affairs, Cisco Systems, Inc.
Friedensohn, David, CEO, BigStar Entertainment, Inc.
Good, Larry, senior vice president, Electronic Commerce Association
Harris, Paul C., member, Virginia House of Delegates
Haynes, Ray, California State Senator
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Hunt, James, president and CEO, Ernst and Young Technologies
Julian, Frank, operational vice president and tax counsel, Federated Department Stores, Inc.
Kirk, Ronald, mayor, City of Dallas, TX
Lebrun, Gene N., Lynn, Jackson, Schultz and Lebrun, P.C.
Lowy, Peter, co-president, Westfield America, Inc.
Nebergall, Mark, president, Software Finance and Tax Executives Council
Norquist, Grover G., president, Americans for Tax Reform
Rappaport, Gary, president and CEO, the Rappaport Companies, vice president, International Council of Shopping Centers
Rosen, Arthur, Esq., McDermott, Will & Emery
Sokul, Stanley S., Davidson and Company, Inc.
Southcombe, R. Michael, chairman, Multistate Tax Commission, Idaho State Tax Commissioner
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Stemberg, Tom, CEO, Staples, Inc.
Strain, Rodney, Jr., sheriff and ex-officio tax collector, St. Tammany Parish, Covington, LA
Viken, Gary, vice president, National Federation of Tax Administrators, secretary of revenue, State of South Dakota
Walters, Scott H., vice president, Research and Development, TAXWARE, International
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Benham, Robert, owner and president, Balliet's, L.L.C.: Prepared statement
Conyers, Hon. John, Jr., a Representative in Congress From the State of Michigan: Prepared statement
Doerfler, Katrina, senior manager of planning and external affairs, Cisco Systems, Inc.: Prepared statement
Friedensohn, David, CEO, BigStar Entertainment, Inc.: Prepared statement
Gekas, Hon. George W., a Representative in Congress From the State of Pennsylvania, and chairman, Subcommittee on Commercial and Administrative Law: Prepared statement
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Good, Larry, senior vice president, Electronic Commerce Association: Prepared statement
Harris, Paul C., member, Virginia House of Delegates: Prepared statement
Haynes, Ray, California State Senator: Prepared statement
Hunt, James, president and CEO, Ernst and Young Technologies: Prepared statement
Julian, Frank, operational vice president and tax counsel, Federated Department Stores, Inc.: Prepared statement
Kirk, Ronald, mayor, City of Dallas, TX: Prepared statement
Lebrun, Gene N., Lynn, Jackson, Schultz and Lebrun, P.C.: Prepared statement
Lowy, Peter, co-president, Westfield America, Inc.: Prepared statement
Nebergall, Mark, president, Software Finance and Tax Executives Council: Prepared statement
Norquist, Grover G., president, Americans for Tax Reform: Prepared statement
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Rappaport, Gary, president and CEO, the Rappaport Companies, vice president, International Council of Shopping Centers: Prepared statement
Rosen, Arthur, Esq., McDermott, Will & Emery: Prepared statement
Saland, Stephen, New York State Senator: Prepared statement
Sokul, Stanley S., Davidson and Company, Inc.: Prepared statement
Southcombe, R. Michael, chairman, Multistate Tax Commission, Idaho State Tax Commissioner: Prepared statement
Stemberg, Tom, CEO, Staples, Inc.: Prepared statement
Strain, Rodney, Jr., sheriff and ex-officio tax collector, St. Tammany Parish, Covington, LA: Prepared statement
Viken, Gary, vice president, National Federation of Tax Administrators, secretary of revenue, State of South Dakota: Prepared statement
Walters, Scott H., vice president, Research and Development, TAXWARE, International: Prepared statement
APPENDIX
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Material submitted for the record
INTERNET TAX REFORM AND REDUCTION ACT OF 2000, INTERNET TAX SIMPLIFICATION ACT OF 2000 AND FAIR AND EQUITABLE INTERSTATE TAX COMPACT SIMPLIFICATION ACT OF 2000
WEDNESDAY, MAY 17, 2000
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to call, at 10 a.m. in room 2141, Rayburn House Office Building, Hon. George W. Gekas [chairman of the subcommittee] presiding.
Members present: Representatives George W. Gekas, Steve Chabot, Asa Hutchinson, Lindsey O. Graham, Mary Bono, Spencer Bachus, John Conyers, Jr., Jerrold Nadler, and William D. Delahunt.
Staff present: Raymond Smietanka, chief counsel; Diana Schacht, Full Committee deputy staff director and chief counsel; Michele Utt, Full Committee administrative assistant; and Dan Freeman, parliamentarian and counsel.
OPENING STATEMENT OF CHAIRMAN GEKAS
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Mr. GEKAS. The hour of 10 o'clock having arrived, we have kept faith with our precedent of hitting the gavel at the appointed hour. The rules of the House, however, to which the rules of the committee are attached, insist that two members be present for a hearing of this type. So out of necessity, we have to recess until the appearance of the second member.
The committee stands in recess.
[Recess.]
Mr. GEKAS. The subcommittee will come to order.
Noting the presence of the second required member, the gentleman from South Carolina, Mr. Graham, we are able to proceed with this hearing. This hearing has been convened as a result of a pledge made by many of us who have been involved, deeply involved in the Internet issues. As everyone in this chamber recognizes, last week we in the House passed the moratorium extension that applies to access to the Internet and all that that entails.
What we are about to delve into today and in hearings subsequent to this is the overall effect of the problem of taxation on the Internet and all the transactions, the multifarious transactions that accrue from the existence of the Internet. We are circumscribed somewhat in what we are attempting to try to discover through several factors. One, the constraints on the Congress itself, self-imposed in some manner, and in others, by statute and existing constitutional precept.
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But we also have guidance from the report to Congress from the Advisory Commission on Electronic Commerce. This of course is a mixed report, one that perhaps sets some guidelines for us to follow in the discourse that is about to ensue. But because even they themselves are greatly divided and were not able to reach their own requirement of a majority vote, we are still in qualms about exactly what the total meaning of this is to the world of the Internet.
With all these things in mind, we believe that the testimony that will be offered here today by our distinguished panel will go a long way toward putting us right on the road to Internet success.
[The bills, H.R. 4267, H.R. 4460 and H.R. 4462 follow:]
106TH CONGRESS
2D SESSION
H. R. 4267
To amend the Internet Tax Freedom Act to impose a permanent moratorium on State and local taxes on Internet access; to extend for 5 years the duration of the moratorium applicable to multiple and discriminatory taxes on the electronic commerce; to impose a 5-year moratorium on sales of digitized goods and products (and their counterparts); to encourage States to adopt a Uniform Sales and Use Tax, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
APRIL 13, 2000
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Mr. HYDE (for himself, Mr. CONYERS, Mr. GEKAS, and Mr. NADLER) introduced the following bill; which was referred to the Committee on the Judiciary
A BILL
To amend the Internet Tax Freedom Act to impose a permanent moratorium on State and local taxes on Internet access; to extend for 5 years the duration of the moratorium applicable to multiple and discriminatory taxes on the electronic commerce; to impose a 5-year moratorium on sales of digitized goods and products (and their counterparts); to encourage States to adopt a Uniform Sales and Use Tax, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ''Internet Tax Reform and Reduction Act of 2000''.
SEC. 2. MORATORIUM AMENDMENT TO THE INTERNET TAX FREEDOM ACT.
(a) MORATORIUM AMENDMENT.—Section 1101(a) of title XI of division C of Public Law 105–277 (112 Stat. 2681–719; 47 U.S.C. 151 note) is amended to read as follows:
''(a) MORATORIA ON STATE AND LOCAL TAXES ON THE INTERNET.—No State or political subdivision thereof shall impose any of the following taxes:
''(1) Taxes on Internet access.
''(2) During the period beginning on October 1, 1998, and ending on October 21, 2006, multiple or discriminatory taxes on electronic commerce.
''(3) During the period beginning on the date of the enactment of the Internet Tax Reform and Reduction Act of 2000 and ending on October 21, 2006, taxes on sales of digitized goods and products (and their counterparts).''.
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(b) TECHNICAL AMENDMENTS.—Section 1101 of title XI of division C of Public Law 105–277 (112 Stat. 2681–719; 47 U.S.C. 151 note) is amended—
(1) by striking subsection (b); and
(2) by redesignating subsections (c) through (h) as subsections (b) through (g), respectively.
(c) LIABILITIES AND PENDING CASES.—Nothing in the amendments made by this section affects—
(1) liability for taxes accrued and enforced before the date of enactment of this Act; or
(2) ongoing litigation relating to such taxes.
SEC. 3. OTHER AMENDMENTS TO THE TAX FREEDOM ACT.
Title XI of division C of Public Law 105–277 (112 Stat. 2681–719; 47 U.S.C. 151 note) is amended—
(1) by redesignating section 1104 as section 1107; and
(2) by inserting after section 1103 the following:
''SEC. 1104. DETERMINATION OF JURISDICTIONAL NEXUS.
''(a) COLLECTING TAXES.—The following factors shall not be sufficient, separately or collectively, to empower a State to impose on a seller that is not physically present in such State an obligation to collect a tax payable to such State by a purchaser that is physically present in such State:
''(1) The use by such seller of an Internet service provider that is physically present in such State.
''(2) The placement of digital data by such seller on a server located in such State.
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''(3) The use of telecommunications service provided to such seller by a telecommunications provider that is physically present in such State.
''(4) The use or presence in such State of intangible property owned by such seller.
''(5) The presence in such State of persons that purchase from such seller.
''(6) The affiliation of such seller with a person that is physically present in such State and that pays any tax imposed by such State or by a political subdivision of such State.
''(7) The performance of repair or warranty services in such State by or on behalf of such seller with respect to property sold by such seller if such seller is not physically present in such State except to perform such services.
''(8) The existence of a contract between such seller and a person that is physically present in such State to the extent that such contract provides for the return to such person of goods purchased from such seller by means of the Internet or of a nonelectronic catalog.
''(9) The advertisement of the business location, telephone number, or Internet address of such seller.
''(b) PAYMENT OF INCOME TAXES.—The following factors shall not be sufficient, separately or collectively, to empower a State to require a seller to meet the business activity and income tax reporting and payment obligations of such State:
''(1) Any of the factors specified in paragraphs (1) through (9) of subsection (a).
''(2) The registration relating to sales or use taxes in effect in such State, by such seller with such State.
''(3) The collection or remittance of use taxes by such seller to such State.
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''SEC. 1105. DEVELOPMENT OF UNIFORM SALES AND USE TAX ACT.
''It is the sense of the Congress that, not later than October 21, 2004, States and political subdivisions of States should work cooperatively with the National Conference of Commissioners on Uniform State Laws (in this section referred to as the 'Conference') to develop and draft a Uniform Sales and Use Tax Act that—
''(1) reflects a simplified synthesis of the sales and use tax policies of States and political subdivisions of States, applicable to sellers described in paragraph (2);
''(2) creates and maintains parity of collection costs (net of vendor discounts) between—
''(A) sellers that are not physically present in a State and that sell goods to purchasers that are physically present in such State; and
''(B) sellers that are physically present in a State and that sell goods to purchasers that are physically present in such State; and
''(3) contains, among other matters—
''(A) uniform tax base definitions;
''(B) a uniform vendor discount;
''(C) uniform and simple sourcing rules;
''(D) a single sale and use tax rate per State and a uniform limitation on any change in such rate;
''(E) uniform audit procedures;
''(F) uniform forms for preparation by sellers to determine and report the amount of tax payable or remittable to a State;
''(G) uniform electronic filing and remittance methods;
''(H) uniform rules for the determination of the exempt status of sellers, and for the creation, distribution, and maintenance of a database containing the identities of sellers that have such status);
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''(I) a methodology for approving computer software that sellers may rely on to determine State sales and use tax rates; and
''(J) a methodology for maintaining revenue neutrality in overall sales and use tax collections within each State (such as reducing the Statewide sales tax rate) to account for any increase in revenue that is payable (on a voluntary basis or otherwise) with respect to sales to purchasers that are physically present in such State made by sellers that are not physically present in such State.
''SEC. 1106. ADVISORY COMMISSION ON UNIFORM SALES AND USE TAX.
''(a) ESTABLISHMENT.—There is established the Advisory Commission on Uniform Sales and Use Tax (in this section referred to as the 'Commission'). The Commission shall—
''(1) be composed of 19 members appointed in accordance with subsection (b), including the chairperson who shall be selected by the members of the Commission from among themselves; and
''(2) conduct its business in accordance with the provisions of this section.
''(b) MEMBERSHIP.—
''(1) IN GENERAL.—The Commissioners shall serve for the life of the Commission. The membership of the Commission shall be as follows:
''(A) 3 representatives from the Federal Government, comprised of the Secretary of Commerce, the Secretary of the Treasury, and the United States Trade Representative (or their respective delegates).
''(B) 8 representatives from State and local governments (1 such representative shall be from a State or local government that does not impose a sales tax and 1 representative shall be from a State that does not impose an income tax).
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''(C) 8 representatives of the electronic commerce industry (including small business), telecommunications carriers, local retail businesses, and consumer groups, comprised of—
''(i) 3 individuals appointed by the Majority Leader of the Senate;
''(ii) 1 individual appointed by the Minority Leader of the Senate;
''(iii) 3 individuals appointed by the Speaker of the House of Representatives; and
''(iv) 1 individual appointed by the Minority Leader of the House of Representatives.
''(2) APPOINTMENTS.—Appointments to the Commission shall be made not later than 45 days after the date of the enactment of the Internet Tax Reform and Reduction Act of 2000. The chairperson shall be selected not later than 60 days after the date of the enactment of the Internet Tax Reform and Reduction Act of 2000.
''(3) VACANCIES.—Any vacancy in the Commission shall not affect its powers, but shall be filled in the same manner as the original appointment.
''(c) ACCEPTANCE OF GIFTS AND GRANTS.—The Commission may accept, use, and dispose of gifts or grants of services or property, both real and personal, for purposes of aiding or facilitating the work of the Commission. Gifts or grants not used at the expiration of the Commission shall be returned to the donor or grantor.
''(d) OTHER RESOURCES.—The Commission shall have reasonable access to materials, resources, data, and other information from the Department of Justice, the Department of Commerce, the Department of State, the Department of the Treasury, and the Office of the United States Trade Representative. The Commission shall also have reasonable access to use the facilities of any such Department or Office for purposes of conducting meetings.
''(e) SUNSET.—The Commission shall terminate 60 days after the Commission submits the report required by subsection (g).
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''(f) RULES OF THE COMMISSION.—
''(1) QUORUM.—Nine members of the Commission shall constitute a quorum for conducting the business of the Commission.
''(2) MEETINGS.—Any meetings held by the Commission shall be duly noticed at least 14 days in advance and shall be open to the public.
''(3) OPPORTUNITIES TO TESTIFY.—The Commission shall provide opportunities for representatives of the general public, taxpayer groups, consumer groups, and State and local government officials to testify.
''(4) ADDITIONAL RULES.—The Commission may adopt other rules as needed.
''(5) No finding or recommendation shall be included in the report required by subsection (g) unless agreed to by at least two-thirds of the members of the Commission serving at the time the finding or recommendation is made.
''(g) DUTIES OF THE COMMISSION.—The duties are—
''(1) to monitor the progress of the Conference in carrying out the activities described in section 1105; and
''(2) not later than 180 days after the Conference carries out the activities described in section 1105, submit to the Congress a report containing the following:
''(A) The findings of the Commission regarding—
''(i) the growth of electronic commerce;
''(ii) the impact of electronic commerce on traditional retailers; and
''(iii) the impact of sales to purchasers that are physically present in a State made by sellers that are not physically present in such State, on the revenue of States and political subdivisions of States;
during the 5-year period ending on December 31, 2004.
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''(B) An assessment of whether the Uniform Sales and Use Tax Act drafted by the Conference, as provided in section 1105, contains the matters described in section 1105(3).
''(C) An assessment of whether the enactment by States of such Uniform Sales and Use Tax Act would result in equal tax collection burdens (net of vendor discounts)—
''(i) for sellers that are not physically present in a State and that sell goods to purchasers that are physically present in such State; and
''(ii) sellers that are physically present in a State and that sell goods to purchasers that are physically present in such State.
''(D) An assessment of whether requiring sellers that are not physically present in a State to collect and remit sales and use taxes to any such State that has not enacted such Uniform Sales and Use Tax Act, would impose any unreasonable burden on interstate commerce or would have any other adverse impact on economic growth and activity through remote electronic channels.
''(E) A recommendation regarding whether any State that enacts such Uniform Sales and Use Tax Act should be permitted by the Congress to collect sales and use taxes from all sellers that are not physically present in such State and that sell goods to purchasers that are physically present in such State.
''(F) Any other recommendations as required to address the findings of the Commission's report.''.
SEC. 4. CONFORMING AMENDMENTS.
(a) CROSS REFERENCE IN THE TRADE ACT OF 1974.—Section 181(d) of the Trade Act of 1974 (19 U.S.C. 2241(d)) is amended by striking ''section 1104(3)'' and inserting ''1107(3)''.
(b) OTHER CROSS REFERENCE.—Section 1203(c) of division C of Public Law 105–277 (112 Stat. 2681–727; 19 U.S.C. 2241 note) by striking ''section 1104(3)'' and inserting ''1107(3)''.
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SEC. 5. SENSE OF THE CONGRESS REGARDING DEVELOPMENT OF UNIFORM TELECOMMUNICATIONS STATE AND LOCAL EXCISE TAX ACT.
(a) DEVELOPMENT OF UNIFORM TELECOMMUNICATIONS STATE AND LOCAL EXCISE TAX ACT.—It is the sense of the Congress that, not later than October 21, 2003, States and political subdivisions of States should work cooperatively with the National Conference of Commissioners on Uniform State Laws (in this section referred to as the 'Conference') to develop and draft a Uniform Telecommunications State and Local Excise Tax Act under the terms of which States and political subdivisions of States may impose on telecommunications only a simplified tax described in paragraph (1) or (2) of subsection (b).
(b) SIMPLIFIED TAX.—(1) Except as provided in paragraph (2), the simplified tax referred to in subsection (a) that may be imposed by a State shall—
(A) allow only 1 State transaction tax;
(B) require each telecommunications provider to file only 1 tax return per reporting period per State;
(C) allow only 1 audit at the State level;
(D) establish nationwide uniform sourcing rules;
(E) establish nationwide uniform definitions; and
(F) provide for 120 days lead time for implementing tax base and rate changes.
(2) If, on the effective date of this section, political subdivisions of a State are authorized by State law to impose a tax on telecommunications, then the simplified tax referred to in subsection (a) that may be imposed by such State and such political subdivisions shall—
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(A) allow only 1 State transaction tax;
(B) require each telecommunications provider to file only 1 tax return per reporting period per State;
(C) allow only 1 audit at the State level;
(D) establish nationwide uniform sourcing rules;
(E) establish nationwide uniform definitions;
(F) provides for 120 days lead time for implementing tax base and rate changes; and
(G) require with respect to such political subdivisions that—
(i) tax base and exemptions conform to the simplified tax as imposed by such State;
(ii) a single tax return be filed with the State tax return and with State distribution of funds;
(iii) a unified audit be conducted at the State level;
(iv) there be maintained a State-administered address, jurisdiction, and rate database in a nationwide uniform format to assign addresses to the appropriate taxing jurisdiction and to provide the appropriate rate;
(v) telecommunications providers that rely on such database be immune to liability to such political subdivisions for such simplified tax; and
(vi) there be provided a vendor's compensation.
SEC. 6. SENSE OF THE CONGRESS REGARDING ELIMINATION OF EXCESSIVE TAX BURDEN ON TELECOMMUNICATIONS.
It is the sense of the Congress that States and political subdivisions of States should eliminate the excessive tax burden on telecommunications by—
(1) eliminating telecommunications industry-specific and higher transaction tax rates;
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(2) eliminating the excessive tax burdens on telecommunication real, tangible, and intangible property; and
(3) affording similar tax treatment of telecommunications infrastructure by States that exempt from sales and use taxes purchases of certain types of business equipment.
SEC. 7. ENACTMENT BY STATES.
It is the sense of the Congress that States should establish, jointly, a deadline for—
(1) enacting the Uniform Telecommunications State and Local Excise Tax Act drafted under section 5; and
(2) removing excess and multiple taxation of telecommunications.
SEC. 8. PENALTY.
It is the sense of the Congress that Federal requirements against adverse discrimination by a State in taxation of telecommunications services, property, or providers in relation to other services, property, and providers in such State should apply to any State that fails to enact, before October 21, 2004, the Uniform Telecommunications State and Local Excise Tax Act drafted under section 5.
106TH CONGRESS
2D SESSION
H. R. 4460
To amend the Internet Tax Freedom Act to extend the moratorium applicable to State and local taxes on Internet access and electronic commerce; and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
MAY 16, 2000
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Mr. HYDE (for himself, Mr. CONYERS, Mr. GEKAS, and Mr. NADLER) introduced the following bill; which was referred to the Committee on the Judiciary
A BILL
To amend the Internet Tax Freedom Act to extend the moratorium applicable to State and local taxes on Internet access and electronic commerce; and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ''Internet Tax Simplification Act of 2000''.
SEC. 2. AMENDMENTS.
(a) MORATORIUM AMENDMENT.—Section 1101(a) of title XI of division C of Public Law 105–277 (112 Stat. 2681–719; 47 U.S.C. 151 note) is amended to read as follows:
''(a) MORATORIA ON STATE AND LOCAL TAXES ON THE INTERNET.—No State or political subdivision thereof shall impose any of the following taxes:
''(1) Taxes on Internet access during the period beginning on October 1, 1998, and ending on October 1, 2006, unless such tax was generally imposed and actually enforced prior to October 1, 1998.
''(2) During the period beginning on October 1, 1998, and ending on December 31, 2003, multiple or discriminatory taxes on electronic commerce.''.
(b) STREAMLINED UNIFORM SALES AND USE TAX.—Title XI of division C of Public Law 105–277 (112 Stat. 2681–719; 47 U.S.C. 151 note) is amended—
(1) by redesignating section 1104 as section 1109; and
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(2) by inserting after section 1103 the following:
''SEC. 1104. DEVELOPMENT OF STREAMLINED UNIFORM SALES AND USE TAX ACT.
''It is the sense of the Congress that, not later than January 1, 2004, States and political subdivisions of States should work cooperatively with the National Conference of Commissioners on Uniform State Laws (in this section referred to as the 'Conference') to develop and draft a Streamlined Uniform Sales and Use Tax Act that—
''(1) is characterized by simplicity, uniformity, neutrality, efficiency, and fairness; and
''(2) includes, but is not limited to—
''(A) a centralized, one-stop registration system;
''(B) uniform tax base definitions;
''(C) uniform and simple sourcing rules;
''(D) uniform exemption administration rules (including a database of all exempt entities and removal of the 'good faith' acceptance rule);
''(E) appropriate protection of consumer privacy;
''(F) a methodology for certifying software used in the sales tax administration process for tax rate and taxability determinations;
''(G) uniform bad debt rules;
''(H) uniform tax returns and remittance forms;
''(I) consistent electronic filing and remittance methods;
''(J) State administration of all State and local use taxes on sales by sellers that are not physically present in a State, to purchasers that are physically present in such State, with distribution of revenues to political subdivisions of such State according to precedent and applicable State law;
''(K) uniform audit procedures;
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''(L) reasonable compensation for such sellers that reflects the complexity of the tax structure of such State (including the tax structures of political subdivisions of such State); and
''(M) an appropriate sales volume threshold below which such sellers that are small businesses would not be required to collect use taxes payable on sales to purchasers that are physically present in such State.
''SEC. 1105. INTERSTATE SALES AND USE TAX COMPACT.
''(a) AUTHORIZATION AND CONSENT.—States are authorized to enter into an Interstate Sales and Use Tax Compact, and Congress hereby consents to such a compact. The Compact shall provide that member States agree to adopt a uniform, streamlined uniform sales and use tax system consistent with section 1104(a).
''(b) EXPIRATION.—The authorization and consent in subsection (a) shall automatically expire if the Compact has not been formed before January 1, 2004.
''(c) COMPLIANCE.—The streamlined uniform sales and use tax system prescribed by the Compact as provided in subsection (a) shall be evaluated against the requirements of section 1104(a) in a report submitted to Congress in a timely fashion by the Secretary of the Treasury who shall certify whether such a system has met the requirements in section 1104(a).
''SEC. 1106. AUTHORIZATION TO SIMPLIFY STATE USE TAX RATES.
''Notwithstanding any other provision of law, any State levying a sales tax is authorized to administer a single uniform statewide use tax rate relating to all remote sales (as defined in section 1107 of this title) on which it assesses a use tax, provided that for each calendar year in which such statewide rate is applicable, if such rate had been assessed during the second calendar year prior to such year on all such sales on which a sales tax was assessed by such State or its local jurisdictions, the total taxes assessed on such sales would not have exceeded the total taxes actually assessed on such sales during such year. A State may use a blended rate that reflects the weighted average of State and local taxes across such State.
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''SEC. 1107. AUTHORIZATION TO REQUIRE COLLECTION OF USE TAXES.
''(a) GRANT OF AUTHORITY.—(1) A State that has adopted the streamlined uniform system prescribed by the Compact referred to in section 1105 of this title is authorized to begin collecting use taxes on remote sales by January 1, 2004, or by the date of adoption of the Compact, whichever is earlier.
''(2) Paragraph (1) shall not apply to a State that does not choose to simplify its tax collection system.
''(3) A State that neither simplifies its sales and use tax system nor meets the criteria spectified in section 1104, by December 31, 2001, may adopt the streamlined uniform system prescribed by the Compact and begin collecting use taxes on remote sales with any succeeding calendar year by meeting such criteria.
''(b) NO EFFECT ON NEXUS.—No obligation imposed by virtue of authority granted in subsection (a) shall be considered in determining whether a seller has a nexus with any State for any tax purpose.
''(c) DEFINITION OF REMOTE SALE.—For purposes of this section, the term 'remote sale' means a sale by a seller that is not physically present in a State, to a purchaser that is physically present in such State.
''SEC. 1108. LIMITATIONS.
''Nothing in this Act shall be construed as subjecting sellers to sales taxes, franchise taxes, income taxes, or licensing requirements of a State or political subdivision thereof, nor shall anything in this Act be construed as affecting the application of such taxes or requirements or enlarging or reducing the authority of any State or political subdivision to impose such taxes or requirements.''.
SEC. 3. SENSE OF THE CONGRESS REGARDING STATE AND LOCAL TELECOMMUNICATIONS TAXES.
It is the sense of the Congress that States and political subdivisions of States should continue to work cooperatively with the telecommunications industry and other relevant groups—
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(1) to dramatically reduce the complexity and cost of complying with State and local telecommunications taxes;
(2) to create more uniform telecommunication State tax laws that include the adoption of common definitions and sourcing rules; and
(3) to address taxes that appear to be discriminatory toward the telecommunications industry.
SEC. 4. CONFORMING AMENDMENTS.
(a) CROSS REFERENCE IN THE TRADE ACT OF 1974.—Section 181(d) of the Trade Act of 1974 (19 U.S.C. 2241(d)) is amended by striking ''section 1104(3)'' and inserting ''1109(3)''.
(b) OTHER CROSS REFERENCE.—Section 1203(c) of division C of Public Law 105–277 (112 Stat. 2681–727; 19 U.S.C. 2241 note) by striking ''section 1104(3)'' and inserting ''1109(3)''.
106TH CONGRESS
2D SESSION
H. R. 4462
To provide for the simplification of sales and use taxes on interstate commerce and to ensure that such taxes are equitably applied.
IN THE HOUSE OF REPRESENTATIVES
MAY 16, 2000
Mr. BACHUS (for himself, Ms. MCCARTHY of Missouri, Mr. ISTOOK, and Mr. DELAHUNT) introduced the following bill; which was referred to the Committee on the Judiciary, and in addition to the Committee on Rules, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned
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A BILL
To provide for the simplification of sales and use taxes on interstate commerce and to ensure that such taxes are equitably applied.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ''Fair and Equitable Interstate Tax Compact Simplification Act of 2000''.
SEC. 2. FINDINGS.
The Congress finds that—
(1) the moratorium of the Internet Tax Freedom Act on new taxes on Internet access and on multiple and discriminatory taxes on electronic commerce should be extended;
(2) States should be encouraged to simplify their sales and use tax systems;
(3) as a matter of economic policy and basic fairness, similar sales transactions should be treated equitably, without regard to the manner in which the sales are transacted, whether in person, through the mails, over the telephone, on the Internet, or by other means;
(4) Congress may facilitate such equitable taxation consistent with the Supreme Court's decision in Quill Corp. v. North Dakota, 502 U.S. 808 (1992), which based its decision not to extend States' collection powers in significant part on its view that Congress has, by virtue of its constitutional power to regulate interstate commerce, the ability to authorize States to require out-of-State sellers to collect taxes on sales to in-State residents;
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(5) States that adequately simplify their tax systems should be authorized to correct the present inequities in taxation by requiring sellers to collect taxes on sales of goods or services delivered in-State, without regard to the location of the seller or to the means by which the good or service is sold;
(6) the States have experience, expertise, and a vital interest in the collection of sales and use taxes, and thus should take the lead in developing and implementing sales and use tax collection systems that are fair, efficient, and nondiscriminatory in their application;
(7) States, by their own initiative, have formed the Streamlined Sales Tax System Project, a cooperative effort with local governments to radically simplify the sales and use tax system by bringing uniformity to tax bases, definitions, and administration, by simplifying the tax rate structure and administration, and by incorporating stringent privacy controls and technology into the collection process to preserve the basic tenets of consumer privacy, and that such project should be allowed to proceed without intervention by Congress; and
(8) online consumer privacy is of paramount importance to the growth of electronic commerce and must be protected.
SEC. 3. EXTENSION OF INTERNET TAX FREEDOM ACT MORATORIUM THROUGH 2006.
Section 1101(a) of the Internet Tax Freedom Act (47 U.S.C. 151 note) is amended by striking ''3 years after the date of the enactment of this Act—'' and inserting ''on October 21, 2006:''.
SEC. 4. STREAMLINED SALES AND USE TAX SYSTEM.
(a) DEVELOPMENT OF STREAMLINED SYSTEM.—It is the sense of the Congress that States and localities should work together to develop a streamlined sales and use tax system that addresses the following:
(1) A centralized, one-stop, multi-state registration system for sellers.
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(2) Uniform definitions for goods or services that may be included in the tax base.
(3) Uniform and simple rules for attributing transactions to particular taxing jurisdictions.
(4) Uniform rules for the designation and identification of purchasers exempt from sales and use taxes, including a database of all exempt entities and a rule ensuring that reliance on such database shall immunize sellers from liability.
(5) Uniform procedures for the certification of software that sellers rely on to determine State and local use tax rates and taxability.
(6) Uniform bad debt rules.
(7) Uniform tax returns and remittance forms.
(8) Consistent electronic filing and remittance methods.
(9) State administration of all State and local sales taxes.
(10) Uniform audit procedures.
(11) Reasonable compensation for sellers for tax collection obligations that reflects the complexity of an individual State's tax structure, including the structure of its local taxes.
(12) Exemption from use tax collection requirements for remote sellers falling below a specified de minimis threshold.
(13) Appropriate protections for consumer privacy.
(14) Such other features that the member States deem warranted to promote simplicity, uniformity, neutrality, efficiency, and fairness.
(b) NO UNDUE BURDEN.—Congress finds that if States adopt the streamlined system described in subsection (a), such a system does not place an undue burden on interstate commerce or burden the growth of electronic commerce and related technologies in any material way.
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SEC. 5. INTERSTATE SALES AND USE TAX COMPACT.
(a) AUTHORIZATION AND CONSENT.—States are authorized to enter into an Interstate Sales and Use Tax Compact, and Congress hereby consents to such a compact. The Compact shall provide that member States agree to adopt a uniform, streamlined sales and use tax system consistent with section 4(a).
(b) EXPIRATION.—The authorization and consent in subsection (a) shall automatically expire if the Compact has not been formed before January 1, 2004.
SEC. 6. AUTHORIZATION TO SIMPLIFY STATE USE TAX RATES THROUGH AVERAGING.
Notwithstanding any other provision of law, any State levying a sales tax is authorized to administer a single uniform statewide use tax rate relating to all remote sales on which it assesses a use tax, provided that for each calendar year in which such statewide rate is applicable, if such rate had been assessed during the second calendar year prior to such year on all such sales on which a sales tax was assessed by such State or its local jurisdictions, the total taxes assessed on such sales would not have exceeded the total taxes actually assessed on such sales during such year.
SEC. 7. AUTHORIZATION TO REQUIRE COLLECTION OF USE TAXES.
(a) GRANT OF AUTHORITY.—Subject to the limitations in subsection (b), any member State that has adopted and participates in the streamlined system prescribed by the Compact is authorized, notwithstanding any other provision of law, to require all sellers not qualifying for the de minimis exception specified in such system to collect and remit use taxes on remote sales in such State.
(b) CONDITIONS.—The authority in subsection (a) shall be of no effect unless all of the following conditions are met:
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(1) The streamlined system prescribed by the Compact has been submitted to the President of the United States prior to January 31, 2004, with the approval of at least 20 member States.
(2) The President has submitted a report to the Congress certifying that the streamlined system prescribed by the Compact satisfies the requirements of section 4(a).
(3) 90 days have passed from the date of the submission of the report to Congress under paragraph (2), and no joint resolution disapproving the system has been enacted pursuant to the procedures in subsection (c).
(c) PROCEDURE FOR JOINT RESOLUTION OF DISAPPROVAL.—A joint resolution disapproving the streamlined system prescribed by the Compact may be enacted no later than 90 days from the date of the submission of the report to Congress under subsection (b)(2). Such submission and such 90-day period shall be governed by the provision of section 2194 of title 19, United States Code. Consideration of such joint resolution shall be pursuant to the expedited procedures prescribed in section 2192 of title 19, United States Code, with the following modifications:
(1) Sections 2192(b) and 2192(f)(1)(a)(i) shall be inapplicable.
(2) Section 2192(a) shall be inapplicable, and shall for purposes of this section be replaced by the following:
''(a) CONTENTS OF RESOLUTION.—For purposes of this section, the term 'resolution' means only a joint resolution of the 2 Houses of the Congress, the matter after the resolving clause of which is as follows: 'That the Congress does not approve of the determination of the President under section 7(b)(2) of the Fair and Equitable Interstate Tax Compact Simplification Act of 2000 transmitted on XX.', the blank space being filled with the appropriate date.''.
(3) Section 2192(f)(3) shall be applicable in the case of a veto message with respect to any joint resolution under this section.
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SEC. 8. LIMITATIONS.
(a) NO EFFECT ON NEXUS.—No obligation imposed by virtue of authority granted in section 7(a) shall be considered in determining whether a seller has a nexus with any State for any tax purpose.
(b) NO EFFECT ON LICENSING, REGULATION, ETC.—Nothing in this Act shall be construed to permit a State to license or regulate any person, to require any person to qualify to transact intrastate business, or to subject any person to State taxes not related to the sales of tangible personal property.
SEC. 9. DEFINITIONS.
For purposes of this Act—
(1) the term ''State'' means 1 of the 50 States of the United States and the District of Columbia;
(2) the term ''the Compact'' means the Interstate Sales and Use Tax Compact authorized by section 5;
(3) the term ''goods or services'' includes any tangible or intangible personal property and services;
(4) the term ''member State'' means a State that has joined the Compact;
(5) the term ''remote sale'' means a sale in interstate commerce of goods or services attributed, under the rules of section 4(a)(3) of this Act, to a particular taxing jurisdiction which jurisdiction could not, except for the authority granted by this Act, require the seller of such goods or services to collect and remit sales or use taxes on such sale;
(6) a remote sale ''in'' a particular taxing jurisdiction means a remote sale of goods or services attributed, under the rules of section 4(a)(3) of this Act, to a particular taxing jurisdiction;
(7) the term ''seller'' means a seller of goods or services; and
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(8) the term ''uniform'' refers to interstate uniformity.
Mr. GEKAS. Does the gentleman from South Carolina have any opening statements?
Mr. GRAHAM. No, thank you, Mr. Chairman.
Mr. GEKAS. The gentleman has acquiesced very warmly to be with us on this committee. I'm not going to both him with making an opening statement.
We'll begin by introducing the members of the panel. Of the 19 commissioners appointed to the Advisory Commission on Electronic Commerce, the report of which I just mentioned in my opening statements, we have five of them here today. After nearly a year of study of Federal, State, local and international tax and tariff treatment of electronic commerce, the Commission reported their findings to Congress in April of this year.
Our first witness is Ron Kirk, Mayor of the City of Dallas, Texas. Ron Kirk was elected mayor in 1995, and serves on the Advisory Board of the United States Conference of Mayors and chairs the standing committee on urban economic policy for the United States Conference of Mayors. Prior to his election, Mayor Kirk was appointed as Texas' 98th Secretary of State. He also worked as the City of Dallas' assistant city attorney and chief lobbyist.
Our next witness, Paul C. Harris, Sr., is a representative of the 58th District in the Virginia House of Delegates, and is also a partner in the law firm of Bays, Miller and Freer. Mr. Harris is active in many community and civic organizations, including the Virginia State Bar, the Charlottesville-Albemarle Chamber of Commerce and the United Way. Prior to his election to the House of Delegates, Mr. Harris worked as a Deans Fellow teaching legal research and writing to first year law students.
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Mr. Gene Lebrun is the immediate past president of the National Conference of Commissioners on Uniform State Laws. While president of the conference he was a member of the House of Delegates of the American Bar Association, was a member of the South Dakota legislature from 1971 trough 1974, and served as speaker of the house of that organization during the 1973–74 sessions.
Grover G. Norquist, well known to Members of Congress and particularly to the members of the Judiciary Committee, is President of the Americans for Tax Reform, a coalition of taxpayer groups, individuals and businesses opposed to higher taxes on both the Federal and State levels, and also writes the monthly politics column for the American Spectator. Mr. Norquist served as economist and chief speech writer for the U.S. Chamber of Commerce, served in the National Commission on Restructuring the Internal Revenue Service and was executive director of the National Taxpayers Union.
Our final witness, Mr. Stanley S. Sokul, is an independent consultant to the Association of Interactive Media on Internet taxation and a public policy consultant at Davidson and Company in Washington, DC. He is an experienced congressional advisor with extensive knowledge of a variety of Internet and taxation issues. Mr. Sokul previously served as the top D.C. aide to Senator Judd Gregg. In this position he helped draft Senator Gregg's Net Fair Internet tax moratorium bill, many of which key provisions were incorporated into the final version of the Internet Tax Freedom Act.
We again welcome the panel, and will begin in the order in which they were introduced, with the edict of the Chair that the written statements will be accepted for the record without objection. And we will ask that each panelist try to restrict the oral remarks to 5 minutes, after which we will attempt to interrogate you wisely about your presentations.
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We note the presence of the gentleman from Massachusetts, Mr. Delahunt, who now confirms the quota required for a quorum in our hearing process.
With that, we'll begin. First I want to ask the Mayor of Dallas, what's happened to Steve Bartlett? We haven't seen him or heard from him.
Mayor KIRK. Mr. Chairman, I think you should hear from him a lot more frequently now. He's in Washington now, running either, I believe it's one of the national banking associations. He moved up here last spring.
Mr. GEKAS. Steve Bartlett and I came into the Congress and as such, learned to be good friends. Then he removed himself, graduated to become Mayor of Dallas. The gentleman may begin his testimony.
STATEMENT OF RONALD KIRK, MAYOR, CITY OF DALLAS, TX
Mr. KIRK. Mr. Chairman and members of the committee, thank you for the privilege of testifying before you on this very important subject for America's future, for the future of the Internet and America's public.
As you know, I along with the other gentlemen that will be testifying before you this morning had the privilege of serving on your Advisory Commission on Electronic Commerce. We labored very diligently over the last 9 months to study all of the implications of taxation and the Internet, as well as the impact on State and local government revenues.
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You have our written statement before you, but at your desk you also have a copy of an analysis and a report on the work of the Commission prepared by the United States Conference of Mayors. Mr. Chairman, I would simply ask that you submit that into the record as well.
Mr. GEKAS. Without objection, it is so ordered.
[The information referred to follows:]
VIEWS ON THE ADVISORY COMMISSION'S REPORT TO CONGRESS ON ELECTRONIC COMMERCE-MAY 2000
Wellington E. Webb, Mayor of Denver, President
H. Brent Coles, Mayor of Boise, Vice President
Marc Morial, Mayor of New Orleans, Chair, Advisory Board
Ron Kirk, Mayor of Dallas, Chair, Urban Economic Policy Committee
J. Thomas Cochran, Executive Director
This report was prepared by The U.S. Conference of Mayors in response to the Report to Congress issued by the majority members of the Advisory Commission on Electronic Commerce (ACEC). The views of The U.S. Conference of Mayors are presented on how the recommendations in the ACEC report would adversely affect tax fairness and the ability of local governments to provide essential public services. Views on the collection of sales and use taxes on electronic commerce and remote sales are also discussed. Finally, an analysis is presented on how the ACEC majority members' recommendations will provide telecommunications providers and electronic commerce businesses huge tax breaks at the expense of taxpayers.
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For further information about this report, please contact Larry Jones at The U.S. Conference of Mayors, 1620 Eye Street, NW, Washington, DC 20006, or ljones@usmayors.org, or (202) 293–7330.
THE IMPACT OF ELECTRONIC COMMERCE ON LOCAL AND STATE TAX SYSTEMS: BUILDING A CONSTRUCTIVE SOLUTION AFTER THE COMMISSION'S FAILURE
A bare majority of the Advisory Commission on Electronic Commerce (ACEC) submitted a report to Congressional leaders on April 12 that says much more about ideologies of taxation than about electronic commerce. Recommendations in the report would seriously undermine local and state taxes, and even some federal taxes, and call for federal legislation to exempt many sales transactions—whether electronic commerce or not—from local and state taxes. Instead of grappling with hard issues to produce a win-win for both electronic commerce and state and local government, the Commission turned itself into the mouthpiece for companies that want tax breaks at the expense of their competitors.
In establishing the Commission, the Congress tried to avoid this one-sided result. The enabling legislation for the Commission requires that the final recommendations be ''tax and technology neutral.'' The law also requires that the Commission obtain a two-thirds majority vote for any report that the Commission submits to the Congress. The purpose of these requirements was to assure that the Chair of the Commission and any majority would try to achieve a fair consensus on the difficult issues before them. Instead, the Chair and a bare majority refused even to publish a minority report that might have provided some balance. The Commission has failed to meet its mandate and it is time to build a constructive solution in its place.
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The U.S. Conference of Mayors has prepared this report on behalf of its member cities and the many businesses and individuals in their communities who would be disadvantaged by new tax exemptions and tax avoidance on out-of-state sales that would be possible under the Commission's bare majority recommendations. We wish to make five points:
Sales taxes are an essential part of the tax base for many cities.
Localities and states have chosen different tax systems that reflect local traditions and needs. Therefore, it is important to preserve the local option sales tax on electronic commerce and remote sales.
The report makes recommendations that would harm American communities by eroding their ability to collect sales taxes that are essential (1) for tax fairness and (2) to pay for essential public services.
The report makes recommendations that would dramatically reduce state and local taxes on telecommunications providers at the expense of taxpayers.
Working together, local and state governments, businesses involved in electronic commerce, traditional retailers, other concerned parties and individuals can create a win-win system of fair and minimally burdensome taxation of electronic commerce and remote sales that leaves local and state tax systems intact.
I. Sales taxes are an essential part of the tax base for many cities.
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The Commission's majority report itself admits that sales taxes are important to many localities. It points out that sales taxes have been historically important and that thirty-three states currently authorize local sales taxes. As the majority report concedes:
''State and local governments that levy sales taxes rely on them as a major source of revenue for their general funds. According to the U.S. Census Bureau, state and local governments collected approximately a total of $237 billion in sales and use taxes in 1999, comprising 24.8% of all revenues generated that year.''
For many local governments, sales taxes are an essential source of revenue. Of the 25 largest cities that collect general sales taxes, four cities (Albuquerque, Denver, Oklahoma City, and Tucson) rely on them for over half of all tax revenues. Another seven cities (Austin, El Paso, Nashville-Davidson Metro area, New Orleans, Phoenix, San Antonio, and San Diego) rely on them for between thirty and fifty percent of tax revenues. (U.S. Census, Statistical Abstract of the United States: 1999, p. 334, ''City Governments—Revenue for Largest Cities: 1996'').
These are huge numbers. For most of these cities (Albuquerque, Austin, Denver, Nashville-Davidson Metro area, New Orleans, New York, Oklahoma City, San Diego, and Tucson), the amount collected in general sales taxes exceeds the amount that they spend on police protection. (U.S. Census, Statistical Abstract of the United States: 1999, compare p. 334, ''City Governments—Revenue for Largest Cities: 1996'' to p. 335, ''City Governments—Expenditure and Debt for Largest Cities: 1996).
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Sales taxes also are an important source of a city's local bonding capacity. Local governments use sales taxes to back bonds for many different purposes: local school district capital needs in Iowa and Louisiana, infrastructure in Texas and California, transportation in New York City, a jail in New Mexico, and municipal parking in Phoenix, for example. (Standard & Poor's CreditWeek Municipal, August 16, 1999, p. 10).
II. Localities and states have chosen different tax systems that reflect local traditions and needs.
The American federal system reflects democracy at its best. Localities and states choose the mix of taxes, and the level of taxes that best suits their preferences, traditions, and needs. Thousands of localities levy sales taxes while many others do not. In addition to general sales taxes, some localities and states may tax special items, such as tobacco or alcohol products, at special rates.
Two recent examples are of special interest because they show how high-technology companies themselves support increased local sales taxes to meet new local needs. In Silicon Valley and in the high-tech corridor of Northern Virginia, technology companies have played a major role in calling for increased local sales taxes to pay for transportation projects, to alleviate traffic congestion. (See, ''Region Coalition Presents Comprehensive 'Infrastructure Investment Platform,''' www.region-va.org, release dated August 23, 1999; Northern Virginia Technology Council, www.nvtc.org, ''The Voice of Technology—September 1999; and Carl Guardino, ''Self-Help Counties—California's Transportation Success Story,'' Cal-Tax Digest, July 1999, www.caltax.org).
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It is remarkable that, just when their representatives on the Advisory Commission were calling for an erosion of local taxes, these technology companies also were urging an increase in the level of sales taxes in their own localities. If the Commission's bare majority recommendations ever become law, these companies would be able to place all of that local sales tax burden on consumers who shop at local retail stores, rather than over the Internet.
Cities and states have local traditions and concerns about tax equity that they build into their tax systems. A major concern about the Commission recommendations is the way that high-income taxpayers would be favored by the proposed tax exemptions on Internet and catalogue sales. Experts point out that households with incomes over $ 75,000 are over eight times as likely to have home Internet access as households with incomes between $ 10,000 and $ 15,000. While households with incomes below $25,000 make 25 percent of all retail purchases, they make only six percent of on-line purchases.
The same disparity exists with catalogue sales that the Commission also would favor. Households with incomes above $ 80,000 are more than twice as likely to shop from catalogues as households with incomes of $ 25,000 and below. (Testimony of Iris J. Lav, Deputy Director, Center on Budget Priorities, before the Senate Budget Committee, February 2, 2000; Michael Mazerov, Center on Budget Priorities, ''Should the Internet Remain a Sales Tax Haven,'' December 23, 1999).
Federal preemption of local and state tax systems, as urged by the Commission majority, is especially noxious when it favors the well-to-do over lower income consumers who have a greater need for tax relief.
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III. The majority report makes recommendations that would harm American communities by eroding their ability to collect sales taxes that are essential (1) for tax fairness and (2) to pay for important public services.
The majority report recommends sweeping federal preemption of the authority of local and state governments to collect sales taxes. The recommendations hit at many different levels. Some of the most egregious recommendations call for:
(1) Exemption of many Internet transactions from sales taxes;
(2) Reduced taxation of property taxes paid by telecommunication companies;
(3) Expansion of the exemptions to include transactions that currently would subject a company to responsibility for collecting sales taxes (the so-called ''nexus'' rules that currently subject sales by out-of-state companies to local and state taxes);
(4) Creation of a single rate per state for all remote sales; and
(5) Expansion of sales tax exemptions to include ordinary goods that today are sold in local stores such as CDs, newspapers, books, software, movies and other products that are deemed to be ''functionally equivalent'' to so-called ''digitized'' products and services.
Consider each of these in turn:
Exemption of many Internet transactions from sales taxes: The Commission majority would impose a five-year prohibition on taxing sales of so-called digitized goods and products. The preemption would apply to a broad and undefined number of goods, including software, subscriptions to online databases and information services, online publications, and probably tangible products such as music and software CDs and diskettes. The exemption of such goods and services would add significant complexity to the variety of sales tax rates and exemptions that the Commission itself complains about. More important, local and state governments would need to compensate for the lost revenue by increasing other taxes.
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Reduced taxation of property taxes paid by telecommunication companies: This item is egregious because it shows that there are few limits to the desire of the Commission to preempt local tax systems. Under our constitutional system, the property tax is not a suitable subject for federal legislation.
Moreover, telecommunications companies have flourished in recent years, despite the current property tax. This is an example of the fallacy of the Commission's fundamental logic. On the one hand the Commission argues that it must prevent taxation of Internet transactions to assure that they will continue to grow; on the other hand, the Commission is quite happy to urge preemption of telecommunications property taxes even when the companies have thrived despite the current tax levels.
Expansion of the exemptions to include transactions that currently would subject a company to responsibility for collecting sales taxes (the so-called ''nexus'' rules that currently subject sales by out-of-state companies to local and state taxes): Under the guise of ''clarifying'' court cases relating to ''nexus,'' the Commission proposes legislation that would create major sales tax loopholes for out-of-state companies that engage in business activities within multiple states. The result would be to place even greater competitive pressure on local merchants who are unable to take advantage of those loopholes. The Commission simply fails to recognize the value of local communities that include local businesses as a mainstay. The Commission seems instead to prefer to subsidize out-of-state sellers with tax exemptions, even if these result in a weakening of local merchants and the local tax base.
Creation of a single rate per state for remote sales: Disregarding the great variations in each state, among urban, suburban and rural localities, and among local traditions and community needs, the Commission imperiously prescribes that there should be only ''one sales and use tax rate per state.'' The Commission justifies this sweeping change to two hundred years of American tradition by complaining about the administrative burden that is involved in paying different sales taxes to different localities.
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The Commission should know better. Software now exists that can provide an immediate calculation of the appropriate sales tax, based upon the zip code of the purchaser. Technology provides an answer to the problem of tax administration, without disrupting local and state tax systems.
The one-rate-per state requirement poses serious problems for state and local governments. First it preempts local control, particularly in home rule cities and counties that have varying local rates. In these areas the sales tax is controlled locally and it only applies to local residents. The single rate, on the other hand, is controlled at the state level and it applies to all residents of the state. This will create different tax rates for purchases at local retail outlets and purchases over the Internet from remote sellers. Local retail outlets will still be required to collect the current state and local tax rates on goods purchased over-the-counter, while out-of-state merchants will be required to collect the single rate on Internet transactions. The single rate in all likelihood will be lower than the combined state and local rates because it will be a blended or average rate of the state=s rate and all local rates.
The local option sales tax provides local governments the ability to raise their own revenues to support projects that are important to local residents. The advantage of the local option tax is that local communities are free to use it or not. For example, they can use it to support a new mass transit system or a new library. The local rate allows people in local communities to pay for their projects without imposing the cost on other residents of the state. The single rate does not. This rate is applied to all residents of the state, in areas that use the local option and in those that do not.
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Expansion of sales tax exemptions to include ordinary goods that today are sold in local stores such as CDs, newspapers, books, software, movies and other products that are deemed to be ''functionally equivalent'' to so-called ''digitized'' products and services: Having decided to grant multiple tax exemptions to out-of-state vendors, the Commission then takes the final step to disrupt local and state tax systems. In the name of tax fairness, the Commission proposes to preempt local and state taxation of sales of goods and products that are sold locally that are ''functionally equivalent'' to digitized products.
This is a fiscal time bomb. Goods and services are turning digital at an exponential rate. The Commission is proposing that once a product becomes digitized in some form (recently photo developing, for example) both the digitized product and the nondigital equivalent immediately would obtain a mandatory sales tax exemption. Nowhere does the Commission propose how local and state governments are supposed to fill the fiscal void left by this federal preemption.
It is little wonder that the Chair of the Commission praised the majority for sending ''a strong anti-tax report'' to the Congress. Unfortunately, that was not the mandate that the Congress set for the Commission.
The Commission attempts to justify its recommended preemption of local and state sales taxes by noting that many localities and states are in sound fiscal condition. This is true but shortsighted. The United States is entering the ninth year of an unprecedented period of economic prosperity. However, even the longest business cycles turn downward at some point. When the business cycle does turn down, localities will be called upon—as always—to provide increased public services on the basis of a revenue base that will shrink as consumers become more cautious and limited in the amount of disposable income that they can spend. Today's welcome period of prosperity provides no excuse for the Commission majority to try to impair local and state sales tax revenues for years or even permanently.
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Providing preferential tax exemptions for Internet sales is unfair as well as unwise. If localities and states collect taxes from people who shop at local merchants, but not from people that shop over the Internet, then they will help to drive some of those local merchants out of business. Chief Justice John Marshall long ago stated that ''the power to tax is the power to destroy.'' If the Commission's recommendations were enacted, they would help to destroy local businesses at the expense of out-of-state sales.
The Constitution protects local communities and states from such unfair consequences by leaving to the states (and, by extension, localities) the power to decide on the proper level and type of tax that best suits each community. It is not the place of an unelected Commission that violates the rules of its own enabling act to upset this careful constitutional balance. Indeed, if the Commission had followed the rules, it might have reached a win-win position rather than its one-sided position. That is the purpose of democratic freedom and the principle of taxation with representation.
IV. The report makes recommendations that would dramatically reduce state and local taxes on telecommunications providers at the expense of taxpayers
Failing to reach broad-based consensus on the more dominant issue of applying state and local taxes to electronic commerce and remote sales, the commission turned its attention to creating special tax subsidies for the telecommunications industry.
Mayors are intimately familiar with the lobbying efforts of powerful telecommunications utilities and providers. Nevertheless, we were stunned to see their efforts appear in the final report of the Commission. We thought the Commission was examining tax policies for Internet activities, not developing special national policy directing unfunded federal mandates to essentially force local taxpayers to subsidize the Bell Operating Companies and other telecommunications providers.
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Since the bare majority of Commission members felt compelled to wander into this territory, we would like to provide a brief analysis of the destructive nature of these recommendations.
The Proposal. Confusing tax simplification with tax fairness, the report recommends a series of proposals that will dramatically reduce the tax responsibilities of telecommunications providers. At the same time, it fails to address how to replace those lost tax revenues. Further, the report endorses tax policies that will greatly increase the day-to-day destruction and burden on public rights-of-way and the problems all citizens are experiencing with inappropriate use of this precious public property.
Local Governments Support Reasonable Management and Compensation for Use of Public Rights-of-Way. The first, striking error in the report is its confusion of tax policy with fair payment for use of public property. Rent for use of public rights-of-way is sound economic policy. Public rights-of-way are the most precious property interests held by local governments. Of course the telecommunications providers want free use of our streets and highways. Similarly the oil companies want free oil leases on federal lands. But free use means over-use. And the daily commuter, the abutting shop-owner, and water system user will pay dearly if the rights-of-way they all depend on are not managed to achieve the highest and best use for all. Every business should pay the fair costs of its impact on others: inspection and oversight fees; adverse impacts on other rights-of-way users; shortened road life due to cuts to road surfaces; and fair-market value for the public resource permanently occupied.
Local Governments Support Tax Fairness for Telecommunications Providers. The second striking error in the report is suggesting that the only appropriate tax reform is ''simplification'' and reduction in taxes paid by the largest corporations in our communities. Local governments instead call for tax ''fairness'' which asks each business to pay for its share of local government services in a manner that does not bias the competitive marketplace.
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The report speaks of ''excess tax burdens on telecommunication real, tangible and intangible property.'' In fact, the proposal eliminates the taxes currently paid by telecommunications providers. It also ignores the real common ground among thoughtful observers of telecommunications taxation and instead seeks to force both reductions in, and in some instances elimination of, existing telecommunications taxes.
Local governments support a tax system at all levels of government that treats competitors the same when they engage in the same activity. It is true that current utility taxes often apply to the Bell Operating Companies and other traditional telephone and cable television companies in ways that do not apply to new telecommunications providers. This needs to be fixed. We should make sure that taxes apply to all the competitors.
Specifically, a broad-based attack on ''unit valuation'' property tax assessments is wrongheaded. ''Unit valuation'' actually makes eminently good public policy. It is a reasonable response to other problems associated with tax equity as the changing nature of the telecommunications business requires accelerated depreciation and dispersed networks based on leasing and resale of various facilities. Further, it is wrongheaded to assert that the tax rate for telecommunications providers must necessarily be same as the tax rate for other industries. This is a unique, community by community question. It is common, and appropriate, to ask that individual industries pay taxes that are related to the burden they place on the community's infrastructure and services. A software development company does not place the same demands on the sewers, roads, or police as a major heavy manufacturing facility. It is fallacious public policy to suggest that all businesses, necessarily, should have exactly the same tax burden.
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Local Governments Support Efficient Tax Administration—NOT Tax Eradication. The report calls for a wide range of tax administration changes. Some of these may be helpful. Others will be destructive. Local governments are firmly committed to finding more efficient and fair ways to administer their taxes. This is NOT the same as adopting a single tax-rate statewide, or adopting uniformity, which ignores necessary local differences.
It is self-evident that the business opportunity presented by access to mid-town Manhattan is different than by access to Sarasota Springs, NY. The tax rates in those two locations will—and must—be different. The cost of necessary municipal services in Manhattan is greater, just as the business opportunity is greater, than in Sarasota Springs. The tax system must produce the revenues needed to sustain the required LOCAL public services. Similarly, the difficulties of enforcement and auditing compliance are different in the two communities. One tax form will not fit all businesses and all circumstances.
V. Working together, local and state governments, businesses engaged in electronic commerce, traditional retailers, and other concerned parties and individuals can create a win-win system of fair and minimally burdensome taxation of electronic commerce that leaves local and state tax systems intact.
Now that the Commission has failed, The United States Conference of Mayors calls for an open process of cooperation to achieve a win-win approach to the difficult issues concerning the impact of Internet transactions on local and state tax bases. The U.S. Conference of Mayors and other Big-Seven state and local groups have developed a proposal for a ''Streamlined Sales Tax System for the 21st Century'' that we believe provides a good starting point for constructive dialogue. Attached is the Task Force Recommendation that provides details of the proposal.
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In summary, the proposal has two parts:
1. First, use the benefits of electronic technology to create a sales tax collection system that alleviates the administrative burden on all sellers, including local retailers, mail order catalogue companies, and Internet retailers. This could be accomplished without federal legislation or multistate agreements.
2. Second, enact state legislation and multistate agreements to create a more uniform tax system, including a classification system for products, a single definition of exemptions, and a one-stop audit process for local and state governments.
The first part of the proposal builds on the ability of information-based technologies to tailor transactions to each individual customer. While legal responsibility to pay local and state sales taxes would remain with the seller, the burden of collecting the taxes would be alleviated through use of new software and other modern techniques that the states would fund to help process such transactions. Localities and states also would begin to simplify sales and use tax laws to help facilitate the collection process.
The first part of the proposal is completely voluntary on the part of sellers. Of course, as is indicated by the Commission's efforts to weaken the current standards for ''nexus,'' many out-of-state companies may face legal liability if they attempt to combine in-state retail sites with out-of-state sales. Localities and states urge the Congress to leave the law alone in this area, to provide sellers with an incentive to live up to their legal responsibilities to assure the collection of sales taxes.
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The second part of the proposal will require localities and states to harmonize their sales and use tax systems. While localities and states would retain the authority to change tax rates, this would be done only through a uniform system. For example, localities and states would be limited in the number of changes that they could make, and the timing of those changes. The system of automated transaction processing would become more formal, and rules would be developed for operating in a harmonized system.
The proposed ''Streamlined Sales Tax System for the 21st Century'' has three important advantages. First, it creates parity among all classes of seller, including local retailers, catalogue companies and Internet vendors. Second, it builds upon available technologies to create a simpler and less burdensome process of tax administration. Third, it allows localities and states to retain their tax systems and the flexibility to change those systems in response to community needs.
The United States Conference of Mayors invites all parties to engage in a constructive dialogue to help improve, develop, and implement a proposal that contains all three of these features.
Summary. The report is a disappointment. The Commission chose to attack the fundamental financial underpinnings of local governments. Their recommendations would deny us the necessary revenues to support the local services our citizens require. And the report uncritically adopts the preferential tax proposals we observe the large telecommunications companies pushing in various state legislatures. We had hoped for more from this Commission.
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Mr. KIRK. As the sole mayor and one of the few local government representatives on this commission, Mr. Chairman, I bring a fairly pedestrian analysis to this particular issue, on the standpoint that in our cities in the State of Texas and most cities around the country, we comply with tax laws written and administered by our State authorities and have no independent ability to levy taxes, other than those dictated by our State.
But our concern principally was focused on the impact of any decisions this Commission and recommendations might make to Congress on revenues of State and local governments. And in that vein, we have very grave concerns about H.R. 4267, which I believe seeks to codify most of the majority recommendations of our Commission.
I would be careful to note, as you noted, Mr. Chairman, that the report of the Advisory Commission does not fairly reflect the full body of thought and analysis and work given by this report. Regrettably, the chairman and a majority of the committee decided to issue a report with less than the two-thirds vote required by Congress in the statute that mandated our Commission's efforts.
I'm even more disappointed, I understand that many of the views of the minority commissioners on the report were either not included in the report and not included in the site available on our Website.
Having said that, our principal concern is that the majority report, while seen and passed off as a pathway to tax reduction, is essentially a pathway for a complete avoidance of paying any sales and use taxes at the State and local level whatsoever. I think in my analysis, it is in fact the greatest assault on State and local government revenues in my recent memory.
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What the report essentially recommends to Congress is that we have a complete rewriting and expansion of the so-called nexus requirements to incorporate a new series of nexus carveouts that would effectively make it possible for any business to create a new corporate entity, solely for the purpose of avoiding ever having nexus in a State and thereby avoiding paying of any sales taxes, not only on transactions over the web, but also on transactions that are now typically taxed within a State in which the buyer, the seller, the goods and the retailer all exist in one community.
While there were several areas in which the Commission was able to reach consensus, most notably, I think all of us were in the agreement that the Internet itself should not be subject to access taxes. We have some divergence of opinion as to whether the extension of the moratorium that was passed by Congress last year should have been 5 years and 2 years, but we were all in agreement, taxing the Net itself was not a good thing.
We also agreed that there are serious issues of privacy that need to be addressed and that we would be supportive of the Administration's position in terms of keeping the Internet free from international tariffs and trades. But where we had the greatest divergence was on the issue of the fairness and equity of treating retail transactions and goods bought and sold over the Internet the same as those bought on Main Street.
While there are various complex issues of State sovereignty and prior court rulings that limit the ability in some cases of State and local governments to require retailers out of their jurisdictions to pay taxes, I don't believe that the majority report of the Commission took seriously and looked at the fairly substantial negative impact on State and local government revenues of creating effectively the Cayman Islands on the Internet for sales tax avoidance.
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Some 45 States and the District of Columbia rely on the sales tax as an integral part of our revenue systems, in States like Texas, in which we don't have an income tax, the sales tax can be as much as 50, 60 percent of the State's revenue. And effectively having government sanction a tax-free environment on the Internet just because the transaction takes place there as opposed to otherwise, and giving that tax exemption would result in a very serious erosion of our ability to provide goods and services that all of our citizens are dependent on.
Whether we shop on the Internet, whether we buy on Main Street, all of us have the same needs. We want strong neighborhoods, we want public safety, we want good water, good schools, good roads, and government has to have, State and local governments in particular, have to have the ability to pay for those services.
The legislation before you represents the most serious threat to our ability to do that in our history, and raises a very serious question of whether or not Congress should be in the business of not only legislative, the State and local governments, how we raise our revenues, but in this case, taking affirmative actions to cut those revenues as steeply as what occur under this legislation.
[The prepared statement of Mayor Kirk follows:]
PREPARED STATEMENT OF RONALD KIRK, MAYOR, CITY OF DALLAS, TX
Mr. Chairman, and honorable members of the House Judiciary Subcommittee on Commercial and Administrative Law, it is an honor and pleasure to be able to provide testimony today regarding the Internet Tax Reform and Reduction Act of 2000 (HR 4267), and more generally on the impact of electronic commerce on state and local governments.
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As you know, I had the privilege of representing local government interests as one of Congressman Gephardt's appointees to the Advisory Commission on Electronic Commerce (ACEC). Over the course of 18 months, my fellow Commissioners and I explored the uncharted territory of the relevance and application of sales tax in the New Economy of the Digital Age. The Commission was unified in its support for addressing several important issues posed by the growth of electronic commerce, most notably that we must undertake a serious effort to close the digital divide, to protect the privacy of merchants and consumers, and that a standstill on international taxes and tariffs should be maintained.
However, there was significant divergence between the interests of state and local government appointees and those of industry on the issue of whether or not state sovereignty and local autonomy should be preempted.
For 45 states, as well as the District of Columbia and thousands of municipalities, the sales and use tax represents a stable and secure source of revenue to carry out essential, and even critical, public services. Public safety, education, social services and infrastructure improvement and maintenance all fall within this category. For states such as my own, Texas, the sales and use tax is especially important, as we do not levy an income tax. In fact, 60% of our state revenues are comprised of the sales tax. You can imagine that any reduction in these revenues would have serious consequences on our ability to provide the aforementioned public services.
The divergence of opinion between industry Commissioners on the ACEC, who held the majority position, and government Commissioners, who held the minority position, resulted in a Final Report short on recommendations. The Commission failed to reach the mandated 2/3rds majority on many points of discussion. However, over the objections of the minority, several policy proposals were sent to Congress for consideration with only a simple majority approval. Most of those policy proposals now make up the bulk of HR 4267.
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The vast majority of state and local leaders are opposed to this legislation for one fundamental reason—it will hinder our ability to carry out our public duties by preempting our historical right to determine tax bases and rates. Our concerns have been articulated in detail by the 7 major public interest groups.
As I stated in my comments to the Final Report of the ACEC, my personal view of the Internet is that human beings have finally created a way to amass our collective knowledge and make that knowledge available to anyone, anywhere, anytime. The Internet is an amazing tool for sharing information and ideas. In less than a decade, the Internet has changed the way we communicate and interact within our relationships, be they familial, employee-employer, citizen-government, or consumer-seller. I believe that as we continue to develop the Internet, it has the potential to improve our standard of living, and should be encouraged to flourish.
Therefore, I do not espouse the position that the Internet is a vast new resource to be tapped for tax dollars. This is not what we are attempting to do. We are simply calling for equal treatment of similar products, whether they be purchased online, or from traditional brick and mortar retailers. In fact, even without any congressional action, the complement to the sales tax, the use tax, is legally due on goods and services purchased over the Internet. It is the collection mechanism that needs to be fixed.
Certainly the sales and use tax system has not kept pace with technological advances in the way consumers purchase goods and services. State and local leaders are aware that the system must undergo a complete overhaul to make the collection system simple, equitable and fair. In fact, the minority position on the Commission was centered in addressing the outdated nature of the system. The majority agreed with this position, but with one completely unacceptable caveat. State and local governments are to be held back during the system overhaul by a prohibition on the exercise of state sovereignty and local autonomy to determine tax bases and rates, which is exacerbated by a series of what has come to be known as nexus carve-outs, and which are enumerated in HR 4267.
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What state and local leaders are asking for is an opportunity to work toward a simplification of the sales and use tax system without restrictions being placed on our ability to set the tax base and tax rates. Several efforts are already underway, most notably headed by the Multistate Tax Commission, to develop a streamlined system that simplifies rules and procedures for collecting and remitting sales and use tax without creating an undue burden on retailers. We feel this can be done without an extension of the current moratorium. If an extension is inevitable, we are asking that it is no longer than 2 years, and is directly tied to congressional authorization for states that implement the streamlined system to collect tax on remote sales. Under no circumstances can we support the aforementioned nexus carve-outs.
These nexus carve-outs serve only one purpose—to provide a special class of businesses with a get-out-of-sales-tax-free card. We should not establish policies that cause the Internet to be used as a tool that profits certain businesses at the expense of the public welfare. That is precisely what the ACEC Final Report proposes, and HR 4267 would codify. State and local government revenues will be impacted by the losses that stem from the proposed tax breaks, but ultimately it is the small business and individual taxpayer that will suffer the results.
Small Main Street retailers are severely hampered by the absence of a level playing field vis-à-vis etailers. Under the Final Report proposals, local bricks and mortar establishments are required to collect and remit sales taxes while their on-line counterparts can avoid doing so. In effect, this margin of cost is a huge subsidy to on-line retailers, which traditional retailers cannot receive.
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Individual taxpayers will be responsible for taking up the slack for the billions of dollars in proposed tax breaks. In addition to a shift in the tax burden from industry to individual, these same taxpayers will be receiving less in the way of public services because state and local government revenues that pay for education, public safety, and local infrastructure will diminish.
Let us be clear. The proposed legislation is less of a ''Tax Reduction Act'' than it is a ''Tax Shifting Act''. Please oppose this affront to our federal system of governance, to this unfunded mandate on state and local governments, and to this shift of the tax burden onto our local Main Street merchants and individual taxpayers.
Thank you for the opportunity to present my views.
Mr. GEKAS. We thank the gentleman.
Let the record indicate that the gentleman from New York, the ranking member on the minority, Mr. Nadler is present at these proceedings.
We will proceed with Mr. Harris.
STATEMENT OF PAUL C. HARRIS, MEMBER, VIRGINIA HOUSE OF DELEGATES
Mr. HARRIS. Thank you, Mr. Chairman and members of the committee. It's a delight for me to be here before you today. I regard it as a great privilege to have had the opportunity to serve on the Advisory Commission on Electronic Commerce, to which I was appointed by Senate Majority Leader Trent Lott.
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I've learned a lot through our deliberations on the Commission. And if there is an opinion on whether the Internet should or should not be taxed, I think certainly we have heard all the opinions that are available to us. I am very pleased with the leadership of the Commission. Governor Gilmore, from my State of Virginia, I think did an extraordinary job at pulling together as broad a consensus as possible, which is reflected in our majority report.
Clearly, in any discussion on Internet taxation, whether there should be taxation or should not be, whether systems are available, software to make the collection as expedient, efficient and least costly as possible, are all very interesting and substantive to a debate on this issue. Having said that, there are philosophical orientations that need to be considered in this debate, as well as practical discussions. I certainly would say from the beginning that my approach has been more along the philosophical lines, which questions what is government's role in this new information age that we're in. Is government's role to facilitate new markets, to facilitate expanded opportunities for individuals that they now have over the Internet that they never had before, and less about whether systems and software are available to allow for collection effort.
My input on the policy deliberations of the Commission was guided by an unwavering reverence for the dynamic principles preached by Adam Smith and Thomas Jefferson. Ironically, Smith wrote the Wealth of Nations, a handbook of economic development, in the same year Mr. Jefferson penned the Declaration of Independence. In my view, both Smith's and Jefferson's principles provide the crucial philosophical framework for formulating public policy for the new information age. Smith admonished the great efficiency that comes from creativity and exchange of ideas. He stressed the need to remove the blundering hand of government in order to unleash competitive spirit and maximize efficiency.
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Jefferson moralized that as the human mind becomes more developed, more enlightened, as new discoveries are made, new truths are discovered and manners and opinions change with the change of circumstances, institutions of government must advance and keep pace with the times. In Jefferson's words, ''We might as well require a man to wear still the coat which fitted him when a boy as civilized society to remain ever under the regimen of their ancestors.'' These concepts are essential to any serious discussion of the subject of taxation of electronic commerce.
After all, the challenge for tax policy in the new information age will be how to maximize the potential efficiency gains of the Internet and at the same time protect revenue bases, but without hindering the development of these new technologies. I am most excited about the possibilities the Internet afford to small and medium size companies, and startup business, define new markets and compete on a national and international scale. Their horizons are now limitless and their role in the Internet economy has been spectacular.
These resilient companies do not fear competition as some pro-tax advocates and commissioners have suggested. They thrive on competition. What they fear is precisely what Adam Smith cautioned against, the heavy hand of government. They fear the blundering hand of government in the form of taxation and regulation that would make the compliance burdens for Internet marketers, especially small Internet merchants, almost impossible to meet.
On this point, in the policy arena, we should be mindful of the admonition of the physician's oath, first, do no harm. Expanded taxation of the Internet has become increasingly attractive to governments, both foreign and domestic. The Clinton-Gore appointees and the pro-tax State and local officials on this Commission argue that the Internet is where the action is, that it's where the money is, that it's where taxation should be directed.
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The business representatives on this Commission and the five anti-tax commissioners resisted this temptation. The aggressive and complex taxation of the Internet will only obstruct this new revenue of commerce and limit access to the electronic highway only to those companies that are large enough to hire costly accounting and legal staffs to cope with the compliance burdens.
In connection with my service on the Electronic Commerce Commission, I've met with Virginia companies, many of them small businesses, which have grown through exciting Internet marketing strategies. A couple of examples may facilitate your understanding of both my enthusiasm and concern for the future of electronic commerce.
One of these small Virginia retailers started as a family hardware store. The owner invented a unique type of wood screw that attracted great interest among craftsmen and makers of fine furniture. Initially, the market for this product was limited. The Internet, however, has changed that. Today, this Lynchburg, Virginia-based company has customers in all 50 States and several foreign countries. Its Website describes the product, explains its application and takes customer orders.
A woman started another one of these companies on her kitchen table. She sells a line of gift items, some of which are of her own design. Initially, marketing was exclusively by catalog. But catalogs are expensive to print and mail. As a result, circulation was limited. The Internet has removed antiquated circulation restraints. Today this company's markets have expanded and its product lines have increased. It has more tax paying employees and its sales are up.
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Still, there is good news and bad news. The good news is the Internet helps small companies grow. In turn, these companies inject into the modern stream of commerce an unprecedented level of efficiency and creativity. Because of the Internet, these click and mortar companies are able to employ more people and pay taxes on their profits and prosperity.
In conclusion, Mr. Chairman, I think this report, this majority report that we have submitted to Congress, embraces the Jeffersonian principle that as new discoveries are made and the human mind becomes more developed and enlightened, institutions of government must advance and keep pace with the times. The tax everything that moves model is simply out of date.
Finally, the majority report is infused with well settled American values of individual initiatives, opportunity, privacy and the freedom to maximize one's God-given talents and abilities. In short, this majority report represents a victory for the American taxpayers. And it is, understandably, a setback for the proponents of unlimited government and expanded taxation.
[The prepared statement of Mr. Harris follows:]
PREPARED STATEMENT OF PAUL C. HARRIS, MEMBER, VIRGINIA HOUSE OF DELEGATES
My input on the policy deliberations on the Commission was guided by an unwavering reverence for the dynamic principles preached by Adam Smith and Thomas Jefferson. Ironically, Smith wrote The Wealth of Nations—a handbook of economic development—in the same year Mr. Jefferson penned The Declaration of Independence. In my view, both Smith's and Jefferson's principles provide the crucial philosophical framework for formulating public policy for the new Information Age.
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Smith admonished the great efficiency that comes from creativity and exchange of ideas. He stressed the need to remove the blundering hand of governments in order to unleash competition and maximize efficiency.
Jefferson moralized that as the human mind becomes more developed, more enlightened, as new discoveries are made, new truths are disclosed and manners and opinions change with the change of circumstances, institutions of government must advance and keep pace with the times. In Jefferson's words: ''We might as well require a man to wear still the coat which fitted him when a boy, as civilized society to remain ever under the regimen of their ancestors.''
These concepts are essential to any serious discussion on the subject of taxation of electronic commerce. After all, the challenge for tax policy in the Information Age will be how to maximize the potential efficiency gains of the Internet and at the same time protect revenue bases without hindering the development of these new technologies.
I am most excited about the possibilities the Internet affords to small and medium-sized companies, and start-up businesses, to find new markets and compete on a national and international scale. Their horizons are now limitless, and their role in the Internet economy has been spectacular. These resilient companies do not fear competition—as some pro-tax advocates and Commissioners have suggested; they thrive on it.
What they fear is precisely what Adam Smith cautioned against: the heavy hand of government. They fear the blundering hand of government in the form of taxation and regulation that would make the compliance burdens for Internet marketers, especially the small Internet merchants, almost impossible to meet.
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On this point, those in the policy arena should be mindful of the admonition in the physician's oath: ''First, do no harm.'' Expanded taxation of the Internet has become increasingly attractive to governments, both foreign and domestic. The Clinton-Gore appointees and the pro-tax state and local officials on the Commission argue that the Internet is where the action is, that it's where the money is, and that it's where taxation should be directed. The business representatives on this Commission and the five anti-tax Commissioners resisted this temptation.
The aggressive and complex taxation of the Internet will only obstruct this new venue of commerce and limit access to the Electronic Highway only to those companies that are large enough to hire costly accounting and legal staffs to cope with compliance burdens.
In connection with my service on the Electronic Commission, I have met with Virginia companies, many of them small businesses, which have grown through exciting Internet marketing strategies. A couple of examples may facilitate your understanding of both my enthusiasm and concerns for the future of electronic commerce.
One of these small Virginia retailers started out as a family hardware store. The owner invented a unique type of wood screw that attracted great interest among craftsmen and makers of fine furniture. Initially, the market for this product was limited. The Internet, however, has helped change that. Today, this Lynchburg, Virginia-based company has customers in all 50 states and several foreign countries. Its web site describes the product, explains its applications, and takes customer orders.
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A woman started another one of these companies on her kitchen table. She sells a line of gift items, some of which are of her own design. Initially, marketing was exclusively by catalogue. But catalogues are expensive to print and mail. As a result, circulation was limited. The Internet has removed antiquated circulation restraints. Today, this company's markets have expanded and its product lines have increased. It has more taxpaying employees and its sales are up.
Still, there is good news and bad news.
The good news is that the Internet helps small companies grow. In turn, these companies inject into the modern stream of commerce an unprecedented level of efficiency and creativity. Because of the Internet, these ''click and mortar'' companies are able to employ more people and pay taxes on their profits and prosperity—that is, taxes that help build roads, construct schools, and purchase fire trucks. These companies contribute substantially to the economic vitality and overall health of their local communities.
The bad news is that new tax collection burdens on these companies would stop their Internet strategies dead in their tracks. The risks are real, and, if the Internet is to achieve its full potential, governments must curb their insatiable appetites for expanded tax authority.
The Internet has helped to sustain the largest and longest economic boom in America's history. It not only makes good sense, but it is in the national interest, to keep the economy on a roll. To do so, it is imperative that we avoid Articles of Confederation-style tax policies that would allow each state to erect its own tollbooth on the Electronic Highway.
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The Majority Report embraces the Jeffersonian principle that, as new discoveries are made and the human mind becomes more developed and enlightened, institutions of government must advance and keep pace with the times. The tax-everything-that-moves model is simply out of date.
Finally, this Report is infused with well-settled American values of individual initiative, opportunity, privacy, and the freedom to maximize God-given talents. In short, this Report represents a victory for American taxpayers, and a reverberating set back for the proponents of unlimited government and expanded taxation.
Mr. GEKAS. The time of the gentleman has expired.
We turn to Mr. Lebrun.
STATEMENT OF GENE N. LEBRUN, LYNN, JACKSON, SCHULTZ AND LEBRUN, P.C.
Mr. LEBRUN. Thank you, Mr. Chairman, members of the committee.
I submit this testimony as a member of the Advisory Commission on Electronic Commerce and as immediate past president of the National Conference of Commissioners on Uniform State Laws. Seven other members of the Advisory Commission and I voted against the Commission's report to Congress that H.R. 4267 would enact into Federal law. In response to the majority report, Commissioners Jones, Kirk, Leavitt, Locke and I co-sponsored a minority report. A copy of that minority report has been submitted to this committee.
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Governor Kirk, I believe, has submitted a written report to this committee, and I concur and join in that statement.
H.R. 4267, if enacted into law, would cost my State of South Dakota approximately $60 million a year. South Dakotans have chosen to have a broad sales tax which covers almost all retail goods and services. It has chosen the sales tax over an income tax. South Dakota is a conservative State, favoring small government and low taxes.
It sees the sales tax as a stable tax that provides an effective limit to government spending. The sales tax also is not as subject to the economic and business cyclical swings as an income tax.
In the last fiscal year, 58 percent of the taxable sales in South Dakota were items that someone, somewhere, is selling over the Internet. Those taxable items constituted $5.9 billion in taxable sales out of a total of $10.1 billion. That's over half. And this number does not include the myriad of taxable services, such as accountants and attorneys fees, that could and are being delivered over the Internet.
H.R. 4267 has the potential to exempt those services from sales tax, further reducing revenue and widening the digital divide.
A recent stud indicates that by the year 2003, South Dakota will not collect $57.7 million because of the shift in consumer purchases to Internet retailers that do not collect sales tax. The Federal preemption of South Dakota's tax and Internet access will cost the State at least $1.6 million. It will create a non-level playing field for the telecommunication providers and cable TV companies that do not sell Internet access. Those that sell Internet services and bundle their services with taxable services will not have to charge and collect a sales tax.
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Last year, South Dakota collected $10.2 million in sales tax in in-State, local and long distance telephone services. The exemption for digitized goods and their counterparts, non-digitized counterparts, would further reduce tax revenues in South Dakota by at least $13 million a year.
The greatest impact on sales tax revenue would come from the nexus carveouts contained in H.R. 4267. By corporate restructuring, companies that currently have a physical presence in South Dakota could spin off their repair or return services to affiliates and escape the sales tax collection responsibilities. This alone could cost South Dakota another $45 million a year.
These are not surplus revenues for South Dakota. They fund essential services such as education, fire and police protection, the court system and many other programs, many of which are mandated by legislation passed here in Washington. These tax exemptions, created for a privileged segment of commerce, would only result in a shift to higher sales taxes, higher property taxes or an income tax, which the people of South Dakota have repeatedly rejected.
Let me address briefly sections 3 and 5 of H.R. 4267. Those sections urge the States to work with the National Conference of Commissioners on Uniform State Laws to develop and draft a uniform sales and use tax act and a uniform telecommunications State and local excise tax. In both cases, the bill sets forth in considerable detail what should be contained in the suggested uniform acts. In the case of the suggested uniform sales and use tax act, the bill would set up another Federal commission to monitor the progress of the work of the conference and then report back to Congress whether it thought the final act met certain specified criteria.
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The National Conference of Commissioners on Uniform State Laws has been drafting and promulgating enactment of uniform laws for over 100 years. It has worked cooperatively with the States to enact such things as the Uniform Commerce Code, Uniform Child Custody Jurisdictions Act, Uniform Probate Code and many, many more. The drafting process of the conference assures the input of not just government, but of industry, consumers, trade associations and other interested parties. The input takes place during the drafting process, rather than when the act is before 50 different State legislatures.
The process I have described has been going on for over 100 years without, I might add, urging or direction from Congress. For sure, without another commission monitoring its work and second guessing its final product.
Many of the States are already working on a streamlined sales tax project which will radically simplify and harmonize the sales and use tax laws of the State. The uniform laws conference has appointed a special committee to provide whatever assistance it can to render help to that group. The leadership of the conference has been in communication with the co-chairs of that project.
I would urge Congress to stand back and let the States address the simplification and harmonization of the sales and use tax laws. I urge Congress not to grant any special privileges to any segment of commerce, be it Internet, catalog or brick and mortar retail. And finally, I urge Congress to respect the tenth amendment and States' rights, including those which allow States to determine their own revenue and spending programs.
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Thank you for the opportunity to present this testimony, Mr. Chairman. I hope it helps.
[The prepared statement of Mr. Lebrun follows:]
PREPARED STATEMENT OF GENE N. LEBRUN, LYNN, JACKSON, SCHULTZ AND LEBRUN, P.C.
INTRODUCTION
The advent of the Internet and electronic commerce is revolutionizing American society. It is altering the way individuals communicate and manage their personal affairs; it is changing the way government interacts and provides services to its citizens. Above all, it is radically reforming the way business operates, particularly with respect to the sale of goods and services to other businesses and to the consuming public.
The U.S. fiscal system—federal, state and local—must likewise undergo a radical reformation if it is to work in concert with the new economy. Governments must provide a fiscal climate that allows electronic commerce to fully mature and reach its untold potential. Tax systems must be modernized so that revenues are available to meet the legitimate expectations of citizens for desired services. All this must be done in a manner that is as neutral as possible across all forms of commerce and that avoids putting the government in the role of choosing winners and losers in the new economy.
As elected leaders of state, county, and city government, we also have a fundamental bottom line that drives our decision making—providing effective and efficient public services. As members of the Advisory Commission in Electronic Commerce, we have focused on protecting our ''bottom line'' in this new economy as well as recognizing the need for change in our state and local revenue systems. While we are ready and willing to take the steps necessary to ensure that our revenue collection systems reflect this increasingly borderless economy, we are not willing to compromise our ability to deliver high quality services to all of our constituents. Despite the remarkable opportunities offered by technology, there will never be a time when you can completely digitize the delivery of public services such as public safety, public education, and public works.
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The Advisory Commission on Electronic Commerce was created to examine precisely this question: How should U.S. tax systems be adjusted so that both electronic commerce and government can fulfill the roles required of them in the new economy. It is unfortunate that the Commission was unable to reach the 2/3 majority required by the Internet Tax Freedom Act to enable it to make a recommendation to Congress. Perhaps an appropriately balanced Commission could have achieved such a consensus.
Nonetheless, much was learned from the Commission process, and each member can take away a great deal from the process that will inform his/her decisions as we move into the 21st century. From the work of the Commission, we have discerned a number of principles that we believe enjoy reasonably widespread support among members of the Commission as well as the taxpaying public. We have used those principles to guide the development of a comprehensive proposal to address many of the issues presented to the Commission. We offer them for consideration by Congress, the Administration, state and local governments and others.
LEVEL PLAYING FIELD AND RADICAL SIMPLIFICATION OF THE SALES TAX
We believe there are two preeminent principles that all parties should take away from this process. First, it is paramount that government officials and business leaders accord the highest priority to creating a level playing field that will treat all sellers—regardless of the channels through which they choose to market—as fairly and uniformly as possible for sales and use tax purposes. Second, the cornerstone of that level playing field should be a radically streamlined state and local sales and use tax system that is characterized by simplicity, uniformity, neutrality, efficiency and fairness. Unless we are able to achieve these objectives, we will have sanctioned a system in which certain retailers face an insurmountable competitive disadvantage simply because of how they operate. We will also have implicitly made a choice that the sales and use tax is a relic of a bygone era and not capable of operating in the digital, electronic world of the 21st century. We do not believe that Main Street retailers should be put at such a disadvantage; neither do we believe it is necessary or desirable to abandon the sales tax.
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Electronic commerce makes it a certainty that many traditional businesses will compete on an uneven playing field against on line retailers. Under current Supreme Court holdings, states may not require a seller that does not have a physical presence in a state to collect tax on goods and services sent into that state. Use tax is still owed on the purchase, but the individual consumer is responsible for remitting the tax directly to the taxing authority. The Court has clearly held that it is within the authority of Congress to authorize states to require remote sellers to collect tax on sales into a state and that its standard can change if the states reduce the burden of collection on remote sellers. Without a change in current law, however, state use tax is unlikely to be collected on a substantial portion of electronic commerce transactions; estimates are that the potential revenue loss could reach $20 billion annually by 2003.
This differentiation between remote and other sales might be allowed to continue if retailing remained divided between companies that are primarily on line sellers and others that are basically ''bricks and mortar'' sellers. We have learned in the Commission, however, that the on line and the physical worlds are rapidly integrating their operations to meet the demands of the consumers. ''Bricks and mortar'' retailers will pour millions into their on line shopping offerings as they morph into ''clicks and mortar'' retailers. Likewise, on line sellers are trying to establish relationships with traditional storefronts to offer better customer services.
In this integrated world, if remote sales are taxed differently than over-the-counter sales, we will have a system based upon a tangle of legal maneuvering to create fictitious separations between local merchants and their Internet counterparts and a playing field that will be viewed as inherently unfair. Such unfairness, if left to fester, will bring contempt and noncompliance that will, in turn, undermine the ability of state and local governments to provide required state and local services.
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The conceptual solution to the state taxation issue is the creation of a level playing field in which all retailers are treated in an essentially similar manner with respect to requirements for collecting state sales and use tax. We recognize, however, that compliance and administration of the current sales and use tax system is complex and burdensome, particularly for multistate retailers. Accordingly, the linchpin of the proposals we offer below is that state and local governments must pursue an aggressive program to make the sales and use tax and its administration simpler and more uniform across states. If a level playing field is to be achieved, states and localities must act to make the sales tax more understandable and consistent across states. They must also act to reduce substantially the administrative complexity and burden imposed on all types of sellers.
OTHER PRINCIPLES
Several other principles have helped guide our proposals:
We do not see the Internet as a target for new taxes. Neither do we believe there exists any compelling reason to impose taxes exclusively targeted at the Internet as a medium or electronic commerce as a distinct channel of commerce. Discriminatory taxes on electronic commerce will not create an environment that is conducive to economic growth and will simply increase the digital divide, i.e., reduce the availability and affordability of the Internet to those Americans at the bottom of our socioeconomic ladder.
The service demands placed on state and local governments will not dissipate in the near future. Despite the move to a virtual world, there is still a demand for real-world services of police and fire protection, quality education, environmental resource management and the like. State and local tax systems must be adapted to deal effectively with the new economy if states and localities are to meet the legitimate expectations of the voters for quality services.
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One of the most important and enduring features of the United States is the ability of taxpayers at each level of government to determine which taxes, fees, or levies they will or will not use to finance public safety, education, and public infrastructure. There is no reason to stand federalism on its head, much less to eviscerate this essential component of our history and tradition. There has been no showing of a need for restrictions on state and local taxation of electronic commerce, and such intervention would inevitably lead to unintended consequences and government involvement in choosing winners and losers. At the same time, states and localities must be prepared to take the initiative in simplifying their tax systems and adapting them to operate in the new economy.
The federal, state and local system of taxing telecommunications is to a considerable extent a relic of a more regulated communications era. In an unregulated environment, complying with the telecommunications tax structure has become overly burdensome, and some of the taxes have discriminatory aspects to them. Substantial action must be taken in cooperation with the telecommunications industry to simplify and rationalize this tax structure.
The work of the Commission highlighted the enormous sensitivity concerning privacy rights on the Internet. Individuals harbor fears that personal information given on line might have unfortunate, and unintended, uses that could impinge upon their private lives. While taxation policy itself might not be able to have any great detrimental effect on the tidal wave of growth in electronic commerce, tax policy that compromises individual privacy rights is unacceptable. Every care must be taken in designing tax systems for electronic commerce that there will be no compromising of consumer privacy.
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With these principles in mind, we have fashioned proposals that address the primary state and local tax issues brought before us. We believe that, if adopted, they would establish an environment that continues to foster innovation and technological advancement in the development of the Internet and electronic commerce. At the same time, they recognize the obligation of the state and local governments to continue providing needed services to its citizenry. They are consistent with our beliefs that Governments should keep the tax and administrative burden on consumers and businesses as low as possible. They are also consistent with our view that federal policies in this area should be respectful of the sovereignty of sub-federal jurisdictions and interstate commerce. We believe they accomplish a balance between the needs of the Internet economy and the responsibilities of state and local governments.
THE COMPONENTS OF A STREAMLINED, FAIR TAX SYSTEM
No Discriminatory or New Internet Taxes
The ultimate purpose of the Internet Tax Freedom Act, which remains effective until October 2001, is to prevent targeted taxation of the Internet and electronic commerce. We believe that is a worthy goal, and we do not advocate discriminatory taxation of electronic commerce.
PROPOSAL
The temporary moratorium on transaction taxes on Internet access charges established in the Internet Tax Freedom Act (ITFA) should be extended.
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The temporary moratorium barring multiple and discriminatory taxes on electronic commerce should be extended for a period of time commensurate with the implementation of the sales tax simplification efforts outlined below. Congress should then examine whether these provisions of the ITFA should be continued.
This extension of the ITFA should be accompanied by an examination to ensure that it is consistent with technological and other advances since its passage and does not create unintended consequences. In particular, the issues of appropriate treatment for ''bundled'' communications services and Internet telephony should be examined.
Level Playing Field and Radical Sales Tax Simplification
We believe that the creation of a level playing field that will treat all sellers—regardless of the channels through which they choose to market—as fairly and uniformly as possible for sales and use tax purposes is a matter of the highest priority. The cornerstone of that level playing field must be a radically streamlined state and local sales and use tax system that is characterized by simplicity, uniformity, neutrality, efficiency and fairness.
We further believe that states adopting the simplified system should be granted the authority to require remote sellers whose sales volume exceeds a specified threshold to collect sales and use tax on goods and services sold into a state. Consumer choices should not be distorted by disproportionate tax collection responsibilities. This proposal is intended to enable all consumers, whether they make purchases on the Internet or elsewhere, to enjoy the benefits of a newly restructured sales and use tax system.
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Our system of federalism mandates that the burden and the right to simplify the sales tax system fall on the states. This proposal gives the states until December 31, 2003 to simplify their state and local sales tax systems in a manner that will substantially reduce the administrative and compliance burden associated with collecting state and local sales and use taxes. This system should not be materially more burdensome on a business that collects and remits taxes to several taxing jurisdictions than it is to a business that collects and remits taxes in a single taxing jurisdiction.
PROPOSAL
We recommend that states and localities work with the National Conference of Commissioners on Uniform State Laws (NCCUSL) to develop a streamlined sales and use tax system as delineated below. If such a system is adopted by the states, it will not, in our estimation, create an undue burden on interstate commerce or burden the growth of electronic commerce and related technologies in any material way.
The features that a streamlined sales and use tax system should address include, but are not limited to:
Centralized, one-stop registration system
Uniform tax base definitions
Uniform and simple sourcing rules
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Uniform exemption administration rules (including a database of all exempt entities and removal of ''good faith'' acceptance rule)
Appropriate protection of consumer privacy
Methodology for certifying software used in the sale tax administration process for tax rate and taxability determinations
Uniform bad debt rules
Uniform tax returns and remittance forms
Consistent electronic filing and remittance methods
State administration of all state and local use taxes on remote sales with distribution of revenues to local governments according to precedent and applicable state law
Uniform audit procedures
Reasonable compensation for remote sellers that reflects the complexity of an individual state's tax structure, including the structure of its local taxes
Appropriate sales volume threshold below which small business remote sellers would not be required to collect use tax except in states in which they have a physical presence
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To implement this streamlined sales tax system, we recommend that Congress enact legislation authorizing states to develop and enter into an Interstate Sales and Use Tax Compact by December 31, 2003. The legislation should provide that states joining the Compact will be required to adopt a simplified sales tax system addressing the criteria outlined above. States adopting the simplified system would be authorized to require remote sellers above the sales volume threshold to collect use tax on all taxable sales into a state. The legislation should also authorize a single use tax ''collection'' rate per state for remote sales with the revenues therefrom to be allocated proportionately among local governments. This authorization should offer states the option of employing a ''blended'' rate reflecting the weighted average of state and local rates across the state.
This proposal allows states that have adopted such a system to begin collecting use taxes on remote sales by January 1, 2004 or by the date of adoption of the compact, whichever is earlier. For those states that do not choose to simplify their tax collection system, current law will apply. In future years, states that had either chosen not to simplify, or failed to meet the required criteria by December 31, 2003, can opt into the system, commencing with any succeeding calendar year, by meeting the simplification standards set forth.
Nexus Standstill
Constitutional considerations of due process prevent a state from imposing tax obligations on a person or entity unless that person or entity has a connection with the state that would be sufficient to justify that state's exercise of jurisdiction over the person or entity. This is the concept of ''nexus.'' The Commission has considered several proposals to establish supposed ''bright lines'' for determining what constitutes nexus in the state tax world. We believe such efforts are misguided for two reasons. First, the proposals considered by the Commission try to define nexus in terms that are focused on physical presence in a state, when all observers recognize that the world of electronic commerce is increasingly ''borderless,'' digital and intangible. This seems entirely incongruous. Second, the establishment of new, purported ''bright line'' nexus rules, no matter how well meaning, will simply result in more litigation and legal contortions as entities attempt to restructure themselves to take advantage of the tax advantages.
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Many of the historic concerns of taxpayers over nexus for sales and use tax purposes will disappear, as irrelevant, after enactment of the simplified sales tax system contained in this proposal. Defining tax collection obligations on the basis of sales volume in a simplified system is the only standard that makes sense. In the meantime, however, states do have an obligation to make the standards they employ in determining nexus as clear as possible to taxpayers.
PROPOSAL
Congress should take no action to establish in federal law any standards that should be applied in determining nexus for state sales and use taxes or business activity taxes. Each state, however, should examine its current policies and practices to determine if there are areas where additional taxpayer guidance is necessary. States should also ensure that they have a procedure a taxpayer may utilize to obtain a response to questions regarding nexus and a ruling on whether a specified set of activities constitutes nexus.
The legislation authorizing the Interstate Sales and Use Tax Compact should make clear that any obligation for use tax collection imposed on a remote seller, as a result of this proposal, shall not be considered as a factor in determining nexus in a state for any other tax purpose.
States should make clear that voluntarily registering and collecting a state's use tax is not a factor in considering nexus for any other state tax purpose.
Simplify and Reduce Telecommunications Tax Burdens
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The telecommunications industry is subject to several levels of complicated taxes that put an onerous and costly compliance burden on that industry. These costs ultimately are borne by the American consumer, thus increasing the difficulty lower-income households have in enjoying the fruits of the information highway. The oldest of these taxes—the federal excise tax on telecommunications—was a telegraph tax enacted to pay for the Spanish American war. Any inequitable taxation and compliance burden on the telecommunications industry is an impediment to universal access to the emerging digital world. The telecommunications tax system should be reformed to reduce the overall tax burden on consumers and simplified so consumers can have lower access costs to the nation's information highway. State and local governments, at the behest of the telecommunications industry, have already begun the process of formulating a strategy for achieving these goals.
PROPOSAL
Phase-out of the 3-percent federal excise tax on communications services is a worthy policy objective that should be considered. It must be weighed against other proposed tax reductions and must not be allowed to threaten the important priorities of maintaining fiscal discipline, paying down the national debt, extending the solvency of Medicare and Social Security, and maintaining core government functions such as health care and education.
State and local governments should continue to work cooperatively with the telecommunications industry and other relevant groups to dramatically reduce the complexity and cost of complying with state and local telecommunications taxes, and to create more uniform telecommunication state tax laws. This is not an issue of the amount of tax, but of the onerous nature of the current compliance mechanisms. Consistent with the proposal submitted to the Commission by the representatives of the telecommunications industry, the simplification should consider the adoption of common definitions and sourcing rules.
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State and local governments are encouraged to address taxes that appear to be discriminatory toward the telecommunications industry, largely because they were enacted during an era when telecommunications services were provided by a price-regulated monopoly. Such taxes are no longer appropriate in a deregulated environment.
Revenue Neutrality
The Advisory Commission on Electronic Commerce was not established to increase the revenues available to states and localities. No Commissioner wants the recommendations to be an excuse for increasing the tax burden on citizens or increasing the size of government. At the same time, state and local elected officials should be trusted to make choices between expending available tax revenues on services desired by the citizens and reductions in the overall tax burden. That is, after all, one of the primary jobs they were given when the voters elected them. Likewise, it should be the voters of the state or local jurisdiction that determine whether they have exercised appropriate stewardship over the revenues entrusted to them. To assist in this effort, citizens will require information on which to base their decisions.
PROPOSAL
We recommend that states adopt a process to provide information, sunshine and accountability to the citizenry in determining the impact of these proposals on state revenues and tax burdens. Citizens should be provided information on the effects of these recommendations and the use of any additional revenues they may produce. They can then evaluate the propriety of the actions of their elected officials. We believe this to be a very significant part of our proposal. We believe it is important to create a fair and level playing field and to protect the states from the potential of future tax revenue losses, but we are not in favor of any tax increase arising from our proposals.
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Digital Products and Services
The taxation of on line digital goods and services and on line digital supply of data and information services is a complex matter. Several states under current law have in place statutes, predating the Internet Tax Freedom Act, taxing on line services or data and information. Additionally, several states have interpreted their statutes as they existed prior to ITFA to impose use taxes on digital goods and services that are transmitted by the seller and consumed by the buyer on line without ever being converted into tangible personal property. If not handled properly, attempts to determine some reasonable site of use or consumption of purely digital goods either invites an unacceptable invasion of a buyer's privacy or an unacceptable level of complexity or both. We believe that these issues can be resolved by the states.
PROPOSAL
We propose that prior to December 31, 2003 the states develop a uniform, simple, non-burdensome system to tax these on line digital products without violating individual privacy or creating a compliance burden.
Further Study on Items Outside the Commission's Scope
The Commission's efforts focused attention on several areas beyond its scope and ken. We believe that Congress should request additional empirical research on:
The Digital Divide. We believe that it is clearly in the best interest of all Americans to eliminate the digital divide expeditiously. Congress should address the causes and potential solutions of this growing problem with the sense of urgency that it deserves. This work should therefore be done with one eye on the problem, and the other eye focused continually on the steps that can be taken NOW to bring all Americans into the mainstream of the emerging digital economy. We believe that no other item in this proposal addresses a problem as important to the country as does the elimination of the digital divide.
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Impact of E-commerce. Because of the speed of the beneficial changes in the economy brought about by e-commerce there was a very wide range of views presented to us by responsible parties on the likely future impacts of e-commerce on state and local revenues. We believe that Congress should establish an ongoing review measuring and projecting the impacts of the new digital economy on the revenues and functions of the federal, state and local governments.
THE ''MAJORITY'' REPORT: PERMANENT SPECIAL PRIVILEGES AT THE EXPENSE OF THE PUBLIC INTEREST
The so-called ''majority report'' of the Advisory Commission on Electronic Commerce would create special tax privileges that would benefit e-commerce businesses at the expense of small businesses, working families, homeowners and local retailers. Conservatively estimated, the proposals in the document would cause at least a $20 billion annual tax shift from privileged e-commerce businesses to small businesses, working families and homeowners in the form of higher income and property taxes. The ''majority'' proposals will also undermine state sovereignty and reduce the capacity of state and local governments to fulfill their vital roles in meeting the needs of their citizens and supporting the national economy.
The ''majority'' produced a document that violates the Internet Tax Freedom Act. The document failed to receive the necessary 2/3 majority required by law (and under the original version of the Commission's rules) for submitting a report to Congress. The document also violates the requirement that the recommendations of the Commission be ''tax and technologically neutral.'' Far from being neutral, the ''majority'' report picks ''winners and losers'' by substantially favoring a select group of businesses and technologies over other businesses and technologies. No amount of procedural maneuvering can overcome the hard fact that this document is not a legitimate report under both the procedural and substantive standards set by Congress.
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The business members of the Commission represented a narrow range of high-tech companies, but Main Street retailers and small businesses were not included within the business membership. Thus, it is not surprising that an unbalanced membership has produced an unbalanced result. The proposals included in the document submitted to Congress would:
Provide special new tax breaks to each industry directly represented on the Commission.
Impose a greater tax burden on those least able to afford it.
To an unprecedented degree, turn over key control of state and local property, income and sales taxes to the federal government, guaranteeing higher property taxes on homeowners and Main Street businesses and higher income taxes on working families.
On the other hand, the proposal would not:
Solve the problems Congress asked the Commission to address, but rather introduces significant new complexities and indefinite delays to any solutions.
Level the playing field for businesses or consumers, but would guarantee years and years of complex litigation, with tax lawyers and lobbyists enjoying windfall gains.
Special Tax Privileges
A listing of some of the special tax privileges proposed in the ''majority'' document illustrates why that document is inconsistent with the direction from Congress that the recommendations of the Commission be ''tax and technologically neutral.'' Under the proposals Congress would mandate these tax privileges through an unprecedented interference in state and local tax policy. The proposals in the ''majority'' document would:
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Expand and make permanent the unfair advantage that remote sellers into a state enjoy over local retail stores. (The so-called ''pathway'' in the proposal to ending this inequity is weak and uncertain and would be trumped by permanent exceptions to nexus granted under the proposal. Those exceptions to nexus cement in place the unfair competition confronted by traditional retailers.)
Allow high-volume sellers of high value goods—primarily durable products such as computers, electronic equipment, jewelry and furniture—to avoid the collection of sales and use taxes on their products even where they maintain a physical presence through display stores, ''stores within stores,'' ''internet kiosks,'' and contract repair services.'' (This circumstance will create unfair competition for primarily local stores without the means of taking advantage of the sophisticated business operations and technology necessary to use the marketing loopholes created under the Commission proposal.)
Create special sales and excise tax exemptions for all movies, music, newspapers, magazines, digital satellite and cable TV services, telecommunications services and other forms of entertainment and information services, thus shifting the burden of taxation to other products and services.
Allow a broad range of service sector industries—primarily successful companies employing modern information technology—to shelter income from state income and business taxation through sophisticated income shifting made legal under the proposal. (The burden of income and business taxes would be shifted to working families, small businesses, and natural resource and manufacturing companies among others.)
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Create the potential for special treatment of some companies under the property tax, with the threat of a shift of that burden to homeowners and small businesses.
These special tax privileges primarily arise from the combined effect of (a) the proposed tax exemptions for ''digital products and their conventional counterparts'' and (b) nine special dispensations from state taxing authority—''nexus carve outs''—granted to certain business operations and technologies. These proposals violate the principles of tax and technological neutrality. Instead, of encouraging the movement of the state and local tax system toward a level playing field, the ''majority'' recommendations tip the field steeply in favor of high-tech, e-commerce businesses.
The exemption for ''digital products and their conventional counterparts'' would create a major tax advantage for entertainment, software, and information industries and for any other industry that can ''digitize'' its products. It pretends to advance ''tax neutrality'' by treating conventional movies, tapes and CD's, magazines, newspapers, and boxed software the same as the new digital forms of such items. However, if the advocates of this tax break were consistent in their support of neutrality, they would support requiring sales taxes to be collected on all items sold over the Internet and by catalog just as those taxes are collected in local stores. Far from being neutral, the digital tax break constitutes special treatment for a privileged industry. Moreover, this tax break will spawn a host of litigation over whether a product qualifies as a digital product or its conventional counterpart. Finally, through this tax break, Congress would intervene in determining the tax base of state and local governments on an unprecedented scale and would open the floodgates to other industries seeking broad state and local tax exemptions in the future.
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The nine special dispensations from state taxing authority—''nexus carve outs''—would confront local businesses and traditional store retailers with an even higher level of unfair competition from out-of-state sellers than they face under current law. Charged by Congress with solving the problem of the absence of a level playing field among retailers, the proposals in the ''majority'' document run away from the solution and would make the problem worse. The nine special dispensations from state tax authority are a laundry list of special tax treatment for certain technologies and business operations and directly violate the requirement that the Commission send to Congress recommendations that are ''tax and technologically neutral.''
In the hands of skilled tax planners and litigators, these nine special dispensations will be used in combination with each other to ensure that the remote sale of virtually any product and service is free of the collection of any sales and use tax and free of the payment of any tax on the income earned from such sales. The nine dispensations can even be used to forgive taxes on ''display stores within stores'' and will allow some sellers to avoid taxes even though they are physically present in a state. Litigation over the extent of the privileges granted under the nine dispensations will explode.
State Sovereignty and the Role of States and Localities in the National Economy
The nine dispensations from state tax authority are an affront to state sovereignty and will undermine federalism. These dispensations restrict the jurisdiction of states to tax by linking state authority to outmoded concepts of physical presence. These concepts are out-of-date because it is possible for companies to make enormous sales, earn large quantities of income and benefit from the services of state and local governments through contacts other than traditional stores or offices. State and local governments provide services that benefit the national economy as well as local residents. State and local governments need to be able to ask those who benefit from these services to share in their costs. Indeed, the U.S. Supreme Court has recognized that states have the right to tax a fair share of interstate commerce. That right will have no practical meaning if the concept of nexus continues to be tied to outmoded notions of physical presence. Nexus in the modern economy needs to be updated to reflect measures of economy activity.
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Those who argue that the national economy—as represented by multistate and multinational enterprises—do not benefit from state and local services ignore some fundamental facts about the role of state and local government in our society. Where would e-commerce and the entire information economy be today if state and local governments did not invest trillions of dollars in the last century in elementary and secondary education and a vast network of public colleges and universities? How would remote sellers ship products to customers in states if state and local governments did not make huge investments in highways and byways that enable, among other benefits, express deliveries to their customer's doorstep? How would these remote sellers secure payment for goods and services and earn their profits if the states did not provide a system of laws and courts to ensure collection? How would the marvelous networks of telecommunications be linked together and operate were it not for access to the public rights of way established and maintained by state and local governments and for the police and fire protection provided to these networks? How can, in the face of these and a host of other benefits to the national economy provided by state and local services, some industries be granted favored exemptions from sharing in the cost of these services?
The ''majority'' document interferes with state sovereignty in an even more fundamental way. The U.S. Supreme Court recognizes that taxation is a core element of state sovereignty. Without the independent authority to raise revenues, states will not be able to set independent policy. If states and localities are not able to perform their historic functions in our system of government, citizens will inevitably turn to Washington for answers to state and local issues. The nine dispensations combined with the digital product tax exemption would preempt state authority to a degree that demonstrably weakens federalism and centralizes power in Washington.
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The ''majority'' document does more than ask for special tax breaks; it asks representatives of state and local governments to compromise permanently the sovereign authority of the state and the autonomy of local governments. That authority ultimately belongs to the citizens of each state and cannot and should not be bargained away to grant special privileges to a favored few.
Respectfully Submitted,
| The Honorable Delna Jones, Commissioner, |
| County of Washington, Oregon. |
| The Honorable Ron Kirk, Mayor, |
| City of Dallas, Texas. |
| The Honorable Michael O. Leavitt, Governor, |
| State of Utah. |
| The Honorable Gary Locke, Governor |
| State of Washington. |
STREAMLINED SALES TAX ADMINISTRATION SYSTEM
SUMMARY OF KEY FEATURES
General Approach
The goal of the Streamlined Sales Tax Administration System is to substantially reduce or eliminate the costs and burdens of sales tax compliance for participating sellers through a combination of:
Simplification of sales and use tax laws and administrative practices in key areas.
Shifting sales tax administration to a technology-oriented business model in which primary responsibility for calculating, collecting, reporting and/or paying the tax can be assumed by ''certified'' tax calculation service providers.
State assumption of responsibility for the costs of the system either by providing the certified tax calculation service free of charge to remote sellers or compensating the remote sellers for the use of the certified services.
Participation in the System
Participation in the Streamlined System will be voluntary for sellers. There will be no change in current legal standards regarding the imposition of a use tax collection obligation on interstate sellers. Participants in the system will be presumed to have met their sales tax obligations with respect to transactions flowing through the system in all participating states. Thus, they will be free to engage in such business activities in those states as they desire without incurring additional sales tax obligations. States will also be free to choose whether they wish to participate in the system.
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Simplifications Accompanying the Streamlined System
Participation in the system will require that states enact certain simplifications before they may participate. These include:
Adoption of uniform product codes;
Uniform sourcing rule;
Uniform procedures for the administration of certain exempt transactions (to include changes in the ''good faith'' standard for acceptance of exemption certificates);
Initiating the development of uniform definitions for use in state tax laws;
Uniform deduction for bad debts;
No or minimal sales tax returns and reporting for participating sellers;
Central, one-stop registration system;
Limits on the frequency with which local government tax rate changes may be made;
Required advance notice of such changes; and
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State and local tax remittance at the state level only with state responsibility for remitting tax to local governments.
Tax Calculation Service Providers
A primary objective of the system is to create a simplified and more uniform sales tax system in which technology operated by private sector service providers can be used to perform key aspects of the sales tax administration process on behalf of participating retailers. While there are currently service providers used in various parts of the sales tax process, the aim of the Streamlined System is to combine simplification of the tax with certification of qualified service providers to enable technology to play a larger role in the administration process and to reduce the burden to retailers and service providers alike.
The nature of the services provided by Tax Calculation Service Providers will vary depending on the capacities of any individual provider (and its partners) as well as on the preferences of the retailers to whom it is providing services. It is also likely that the nature and role of the service provider will vary depending on the type of seller involved. In particular, certain larger retailers may desire to act as their own service provider.
An example of example of the full range of services that could be provided is shown in the attached chart. A participating retailer would enter into a sales tax service relationship with an ''approved'' or ''certified'' tax calculation service provider. The retailer would provide the service provider with required information on each transaction that would allow software of the service provider to determine the taxability of a transaction, the appropriate tax rate and the tax due. The service provider would provide tax information to the retailer on a real-time basis so that information on tax due is available to a customer before completion of the transaction.
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Payment for goods and services through a credit card or other electronic payment vehicle would proceed as it does today. Once the customer has approved the purchase, the vendor would send the transaction (in the amount of goods/services plus tax) through the payment processing system. Settlement to the vendor would be in the full amount of the purchase plus tax (less any charges from the payment processors). The tax service provider could, depending on the arrangement with the retailer, as well as its capacities, provide additional tax administration services such as providing a periodic, direct remittance of tax to state tax agencies and filing returns on behalf of the retailer with the states.(see footnote 1)
A central component of the Streamlined System is that states will ''certify'' qualified service providers as being capable of performing various aspects of the tax administration system in a fashion that is consistent with state law. The certifications will be done by states as a group, and it is anticipated that multiple service providers will be certified. The process will include a certification of the software used by the provider to make taxability determinations and to determine the appropriate state and local tax rate. It will also include a certification of any remittance and return filing services provided by the provider. Systems operated by individual retailers may also be certified for certain functions.
Transactions sent through a certified tax calculation service provider will be presumed to have had the correct tax calculated and paid. Accordingly, the post-transaction audit will be limited to those parts of the process not approved as part of the certification process. The certified parts of the process will be evaluated for any necessary prospective changes necessary.
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Privacy Concerns
Provisions will be included in all aspects of the Streamlined System to ensure that personal information is not unnecessarily gathered and is not improperly used by persons acting on behalf of the states. Tax administration agencies will not come into possession of personal identifying information for an individual paying tax at the time of the transaction. Tax calculation service providers will be prohibited from using personal information for non-tax administration purpose, and provisions will be made to limit the length of time information is retained by the providers.
Incentives for Sellers
Participation in the Streamlined System will be voluntary for sellers. It is expected that the simplicity of the sales tax system, coupled with the minimal burden that can be achieved through use of a certified tax calculation service provider will encourage sellers to participate. It is also anticipated that ''pure'' remote sellers will not be subject to examination or review for any tax liabilities they may have incurred by inadvertent nexus-creating contacts prior to entering the system, provided they have not been contacted by a state for such purposes prior to entering the system. Participation in the system will not be considered as a factor in determining potential liability for any other tax imposed by a participating state.
Costs of the System
States will assume responsibility for the costs of the system for remote sellers either directly or indirectly through arrangements to be determined as the system is developed.
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STREAMLINED SALES TAX PROJECT
Co-Chairs: Charles D. Collins, Jr., North Carolina Department of Revenue; Diane L. Hardt, Wisconsin Department of Revenue
Contact:
Ellen B. Marshall
Palumbo & Cerrell Consulting
202–466–9000
STATES PROCEEDING WITH STREAMLINED SALES TAX PROJECT
(April 5, Washington, DC) Recognizing the need for simplification and the long-range implications to existing tax bases, 26 states are continuing concentrated discussions aimed at formulating a new sales and use tax system.
''States have accepted the challenge to design, test, and implement a streamlined sales tax system for the 21st century,'' stated Diane L. Hardt, Wisconsin Department of Revenue, a co-chair of the project. ''We agree that the current sales and use tax system is not equipped to address the needs of the existing and new electronic economies. The new system under development will protect the privacy of consumer transactions, greatly simplify definitions, tax rates, and tax bases, and incorporate technology into the collection process.''
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The Streamlined Sales Tax Project is an effort created by and comprised of the governments of the States. 26 states are currently supporting the project, most having already demonstrated their commitment through passage of legislation or issuance of an executive order authorizing their participation.
During the March 30-31 discussions in Denver, Colorado, the project took action on the following issues:
Appointed Ms. Hardt and Charles D. Collins, Jr., North Carolina Department of Revenue, as co-chairs of the project;
Approved the Project Structure and Operating Rules;
Established the following Work Groups to address various components of the system;
— Technology, Audit, Privacy Issues, and Paying for the System
— Tax Base Uniformity and Exemption Administration
— Tax Rate and Registration, Returns and Other Remittances
— Sourcing and Other Simplification Issues
Discussed and approved a timetable for development of a pilot project.
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''The states are designing a new, simpler sales and use tax system that increases uniformity and maintains some state flexibility,'' commented co-chair Charles Collins. ''The system also incorporates the highest degree of security and privacy. This new system will ease consumer concerns regarding tax collection during online purchasing and will streamline the tax collection process for both online and brick and mortar businesses.''
The project anticipates seeking input and technical assistance from both the public and private sector to address numerous issues within the Work Groups. A public comment period is also provided at each of the project meetings to allow interested parties to address issues relevant to the project.
The project is establishing a website to provide information regarding its ongoing activities and upcoming meetings. The project's website address is www.streamlinedsalestax.org.
The project will hold its next meeting on April 26-27, 2000 in St. Louis, Missouri.
Mr. GEKAS. The time of the gentleman has expired.
We turn to Mr. Norquist.
STATEMENT OF GROVER G. NORQUIST, PRESIDENT, AMERICANS FOR TAX REFORM
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Mr. NORQUIST. Thank you, Mr. Chairman.
I'm Grover Norquist, President of Americans for Tax Reform. I served as the consumer representative on the Commission. I want to commend Governor Gilmore for his leadership on the Commission. I regret that the three Federal appointees chose to abstain on many votes and keep us from getting a two-thirds majority. But we did get a solid majority vote for our recommendations.
In keeping with the truth in testimony law, neither I nor Americans for Tax Reform accept any Federal, State or local taxpayer funds.
There are six myths that the Commission discovered while it was doing its work. The first was the idea that the Internet is not now taxed. In point of fact, the component parts of the Internet are very heavily taxed. The 3 percent Federal excise tax on telecommunications that we're all aware were put in to fund the Spanish-American War. There is the Gore tax, put in—not by Congress—but by the FCC. That tax does not have a sunset. I urge Congress to sunset the Gore tax when schools have been wired, or your grandchildren will be paying the Gore tax as people now 100 years later are paying the Spanish-American War tax.
Third, State and local excise taxes on telecommunications are 14 percent on average. That's about triple what sales taxes are in other industries. Only tobacco and alcohol are more heavily punished on taxes than telecommunications.
The second myth is that States are broke and need additional revenue. In 1998, States ran up $11 billion in surplus. We've seen a lot of States and cities be able to afford to build stadiums. Clearly, they've met all their legitimate needs when they're spending money in that way.
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At the Federal level, we've actually had significant spending restraint. We've gone from 21 1/2 percent of GNP spent by Federal Government down to about 18 1/2 percent since 1994, which is commendable. State and local spending has gone from about 6.9 percent of GNP up to 9 percent. So there's been this growth at the State and local level and their restraint has not taken place.
The third myth is that there's this lost revenue. I would urge you to think about that. When a politician says that revenue is lost, what he means is, the taxpayers still have it. It's not lost. I know where it is. It's in the pockets of people who earned it. But even if you accept the definition of lost revenue, because most Internet sales are business to business and then either exempt from sales tax or sales tax is collected, all of those big numbers you keep hearing about how big Internet sales are not reflected in lost revenue to States. In fact, Ernst & Young did a study that said in 1998, only $170 million, or one-tenth of 1 percent of sales taxes in this country were lost, or rather kept by consumers as a result of not taxing Internet sales.
And again, this is the third panic we've been at with this lost revenue story. We were told 25 years ago that everything would be bought through catalogs and the Main Street stores would be wiped out because of catalogs and there wouldn't be any money for police or cities because of the catalogs. And 25 years later, none of these things have taken place. Sales tax revenues continue to increase.
We went through this in the 1980's. We were told everything was going to services, nothing would be goods, and therefore the States were going to run out of money. That didn't happen either.
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And a fourth myth is the States' rights versus federalism argument. I and the Commission sided with Ronald Reagan's vision of federalism. We want 50 States and local governments to compete to provide the best government at the lowest cost, not George Wallace's view of States' rights, which is that certain politicians get to do anything they want to people who live in their territory. That is not the federalism that Ronald Reagan endorsed or that the Constitution envisioned.
We should learn from the abuse of tort law, we now see what Alabama juries do to Detroit businesses, they rape them, and not allow Alabama taxing authorities to reach into L.L. Bean or into Amazon.com and audit people and tax people who don't live in their State and can't vote for them. If you allow one State to tax businesses in another State through the Internet or catalogs, you are allowing taxation without representation.
The reason why some politicians at the State and local level like this is they're always looking for ways to tax people who can't vote against them. So they tax people who rent cars and people who stay at hotels. I think we should minimize taxes on people who aren't allowed to vote because of the taxation without representation concern.
The fifth myth is the fairness issue that we sometimes hear about. Somebody who is in Utah, with a 6 percent sales tax, they buy $100 worth of books at the local book store. They pay $100 to the book store, State of Utah takes $6 from them. If they buy it from Amazon.com and have those $100 worth of books shipped, it's a $12 shipping fee. Shipping fees are higher than sales taxes on almost every case, with the possible exception of very expensive furniture and very expensive computers.
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So the concern that some politicians claim to have on behalf of retailers, it is not a real one. They're concerned they're not getting the money. But on the even-handedness, the extra money you pay for shipping is greater than the extra money that you pay for sales taxes.
Thank you.
[The prepared statement of Mr. Norquist follows:]
PREPARED STATEMENT OF GROVER G. NORQUIST, PRESIDENT, AMERICANS FOR TAX REFORM
Thank you for the opportunity to testify today.
In keeping with the Truth in Testimony legislation, let me assure you that neither I nor Americans for Tax Reform receives any taxpayer dollars from federal, state or local sources or contracts. As a matter of policy ATR does not accept taxpayer monies.
I was appointed to the Advisory Commission on Electronic Commerce as the representative of consumers. Other members of the 19-member commission were appointed to represent state, federal or local governments.
A majority of the commission agreed on a set of proposals that were transmitted to Congress in April of this year.
Those recommendations included:
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1. Extending the present three-year moratorium on discriminatory taxes on the Internet by another five years.
2. Endorsing federal legislation banning taxation of Internet access.
3. Abolishing the 3 percent federal excise tax enacted to pay for the Spanish-American war more than 100 years ago.
4. Reducing and simplifying the array of state and local taxes on telecommunications.
5. Codifying the Quill Supreme Court decision so that businesses and consumers would have a clear understanding of when Nexis does and does not exist. At present ''gray'' areas are being defined haphazardly by courts rather than congress.
6. The commission repeatedly rejected the attempts by some lobbyists for state and local governments to call for undermining the commerce clause of the constitution and allowing taxing authorities in one state to force businesses in another state to collect that states sales taxes.
7. The commission also called for keeping the Internet tax-free at international borders—opposing new tariffs on electronic commerce between nations. The commission commended The Clinton Administration for its pro-taxpayer, pro-consumer position against tariffs on electronic commerce.
8. The commission called for the elimination of taxation on digitally transferred goods and services. Taxing the downloading of software or video or audio would require a massive invasion of the privacy of American cities and would damage the Internet as a means of commerce.
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The Commission heard from all parties, including a great deal from politicians who hoped to use the Internet as a new source of increasing taxes and spending at the state and local level.
Experts testifying before the commission helped to expose four myths that have clouded the discussion of taxation and the Internet.
First, The Internet is not taxed.
At present the building blocks of the Internet—telephone and cable services—are very heavily taxed. There is the 100 plus year old federal excise tax of 3%. There is the Gore tax—imposed by the FCC without congressional approval. And without sunset. This tax will still be with us in l00 years. State and local governments impose an average excise tax of 14% on telecommunications. This makes telecommunications the most highly taxed good or service other than tobacco or liquor.
These heavy excise taxes were imposed when phone companies were local, regulated monopolies. Politicians found they would hide small taxes in the phone bills of their constituents. The phone companies didn't complain too loudly—they could pass on the tax as a cost of doing business and they wouldn't want to complain too much on behalf of their consumers as they were under the regulatory thumb of the local and state politicians.
Now, however, Congress has begun the process of moving telecommunications to a fully competitive market. These heavy taxes are no longer sustainable.
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I would strongly recommend that Congress look to include telecommunications in the 4R law that prohibits state and local governments from levying discriminatory taxes on railroad property. This would allow a state with a five percent sales tax to have a five percent sales tax on phone bills—but not a ten percent tax. Similar protection must be afforded telecommunications in the property and income tax area. The other industry that mirrors telecommunications in having once been local monopolies now moving to national competition is the electric utility industry and it too should be protected by the 4R law.
I join the commission majority in strongly endorsing the abolition of the federal excise tax and I urge you to sunset the Gore tax before it also lives to tax your grandchildren.
The Second myth is that states are broke and desperately need more money. In 1998, the 50 states ended the year with $11 billion in surpluses. The first Internet Christmas found sales tax revenue at an all time high. The untold story is that while Congress has found fiscal discipline in recent years—federal spending has fallen from 21.5% to 18.7% since 1994 state and local governments have not become more productive.
State and local governments have grown from 6.9 percent to percent from 1968 to 1998. State and local politicians should focus on providing the best government at the lowest cost to taxpayers. State and local governments should be increasing productivity because of the technological progress of the past decade. Instead, some politicians not competent to improve their work have turned instead to calls to increase taxes on the very technologies that are making the rest of the country more efficient and productive. Any politician who sees the Internet as a source of even more taxes rather than a tool to save taxpayer monies should retire and let a more competent person take over.
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The third myth is that the growth of the Internet is ''costing'' state and local governments lots of ''Lost'' revenue.
First, when the government fails to take a dollar from a citizen that dollar is not lost. It is found in the pocket of the person who earned it. WE learn a great deal about the thought processes of politicians who view every dollar they fail to take as ''lost.''
Second, a June 1999 study by Ernst and young point out that because most e-commerce is business-to-business or the sale of intangible services or other products not subject to sales taxes the actual ''loss'' to state and local sales tax collection was $170 million in 1998 or one tenth of one percent of sales taxes collected.
The recent panic attacks by some politicians is the third in a series.
First, these politicians said that catalogue sales would eliminate sales tax revenues to states—everyone would buy everything from out of state catalogues and there would be no money for police or schools. This didn't happen. Catalogue sales are about 2% of the sales of goods.
Second, in the 1980s we were told, by these same forces that America was moving from a goods economy to a service economy and that unless we began taxing services there would be—yes, no schools, no police. (They never threaten stop building stadiums or hiring their brothers in law in response to less taxes.) Governor—Former Governor Martinez of Florida tried this and was retired. Somehow sales taxes have increased each year anyway.
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Now this third crisis is the Internet. It too will pass—unless congress allows tax and spend politicians at the state and local level to undermine the commerce clause in search of more taxes.
The fourth myth is that the commerce clause is a loophole and that there is no good reason to forbid Utah from imposing its sales taxes on businesses in other states. The commerce clause was a good idea. It created a single American market and stopped states from attacking ''foreign'' (out-of-state) businesses. We do not want to create a situation where Alabama businesses can levy taxes on New York businesses. We have already seen the damage Alabama juries to do ''foreign'' auto companies in Detroit through the abuse of tort law.
Politicians love to hide taxes and love to tax those who cannot vote against them. Allowing Utah politicians to audit, harass, and tax L.L. Bean in Maine or Amazon.com In Washington state give politicians power without responsibility. IT is taxation without representation. WE used to be against that.
Myth Five: Fairness.
Some politicians have enlisted the political support of some shopping mall owners and retailers by arguing that it is unfair that some consumers must pay a sales tax when buying in state and not have to pay the sales tax when buying over the Internet. Let's look at this. Buy one hundred dollars of books at your local bookstore in Utah and the state government will take six dollars from you—a six percent tax. Buy that $100 of books from Amazon.com and you will pay $12 in overnight shipping fees. If that $l00 of books weighs more than one pound—as is likely—the shipping fees double.
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For most sales the shipping fees are higher than the sales taxes avoided.
If the politicians who employ the ''fairness'' argument were seriously could end this problem by one, taxing all sales at the point of origin. Maine could tax all sales by L.L. Bean. Utah could tax all sales by Utah firms. The politicians refuse this simple solution because they don't want instead to levy taxes on out of state businesses. But this does expose the hypocrisy of the argument. Or politicians could cap the sales tax on large furniture purchases or computers so that the sales tax would always be lower than the shipping fees. This would reduce the sales tax revenue only a little and solve the problem of ''fairness'' for retailers. But again, the politician who use the ''fairness'' argument would accept this idea if they were the least bit interested in fairness—they are not, they want more tax dollars. A third solution would be to lower the sales tax burden governors and mayors impose on their own citizens and businesses.
A number of shopping mall and retail representatives have told me that they have been threatened by mayors and governors that if they do not help this drive to tax the Internet they will be the victims of property tax hikes. As they are not able to move easily, I appreciate the pressure they are under and look forward to working with them to oppose tax hikes on them and their consumers.
Myth Six: The Leavitt Constant.
Governor Mike Leavitt of Utah was a consistent advocate on the commission in support of higher taxes and in opposition to tax relief. He would ask witnesses to assume government spending was a fixed number, could not be reduced, and then ask them what taxes they thought would best raise the amount of money now spent by government.
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The Leavitt constant, that government spending is fixed (and American families will have to adjust to the demands of government spending) is the Breshnev doctrine of big government. What the government owns today of your income is fixed. What you have kept to date is negotiable.
American taxpayers reject the Leavitt constant. Competent political leaders can reduce the cost of government by becoming more productive. Welfare reform, the Freedom to Farm Act and the reduction of the defense budget from 10% of GNP to 3% of GNP are examples. Privatization saves many states and municipalities billions. Avoiding white elephants such as stadiums and light rail subsidies reduce the cost of government.
Tax and Spend politicians look at tax cuts and ask ''where are we going to get the money'', they never look at their tax increases and ask what sacrifices citizens will be forced to make.
Government spending is not a fixed number. Not for competent political leaders.
The commission report is a good collection of policy ideas that will protect consumers and taxpayers from invasion of their privacy and will allow the Internet to develop free of the heavy hand of government.
I look forward to working with this committee and this Congress to make the Gilmore Commission Report a reality as soon as possible.
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Mr. GEKAS. The time of the gentleman has expired.
Our last witness is Mr. Sokul.
STATEMENT OF STANLEY S. SOKUL, DAVIDSON AND COMPANY, INC.
Mr. SOKUL. Thank you. Thank you for inviting me to testify today.
I was appointed to the Commission as a representative of electronic commerce companies. I'll focus my remarks today on the Internet sales tax question, which involves the nature and scope of State powers. First, I'd like to point out that the States can and do compel in-State businesses to collect sales taxes on in-State sales, including Internet sales. While the issue is often couched as whether to tax or not tax the Internet, that's not the question.
The Internet sales tax issue exists because the States and cities believe their taxing authority should mirror the Internet's borderless nature. This belief, however, goes against the U.S. Supreme Court ruling in the Quill case that States lack the power to force out of State sellers to collect sales taxes, unless a seller has a physical presence or nexus, some connection to the taxing State. That's because imposing every State sales tax system on a multi-State seller, the Court found, would unduly burden interstate commerce.
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Thus the Internet sales tax issue is actually an out of State tax collection issue and involves whether States should receive national tax collection powers. The States and cities support the pursuit of new national tax collection powers with doomsday scenarios, the destruction of State and local revenue bases and the demise of main street business. However, Internet sales comprised just 0.6 percent of total retail sales last year. And both State coffers and retail sales have been surging.
The majority of the Commission therefore concluded there was no need to rush to provide States with national tax collection powers, but instead, Congress should ensure it knows the full cost of doing so. Those costs include fairness costs, privacy costs, international costs and protectionism costs.
First, the States argue that it is unfair that out of State companies do not confront the same tax obligations as in-State retailers. But as the Supreme Court in Quill pointed out, the key constitutional question in terms of fairness is the fairness of allowing every State to burden out of State businesses with disparate tax collection and auditing regimes.
Congress' dilemma is to determine which is more unfair, a single State imposing tax burdens on its own businesses, or every State imposing tax burdens on out of State businesses.
Privacy is another cost of expanded tax authority. When I go to Wal-Mart and buy something, I don't have to identify myself and my purchase for the Government. Some type of individualized tracking system would be required for a multi-State Internet sales tax regime to collect and remit taxes to the proper jurisdictions. Consumers are already fearful enough of their privacy on the Internet. If consumers fear that the Government will violate their privacy when they shop on line, they are less likely to utilize e-commerce.
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Third, a State Internet sales tax system could have detrimental international ramifications. A new State Internet tax collection system cannot be practically enforced internationally. Therefore, imposing a web of new sales tax collection burdens on U.S. companies would disadvantage U.S. firms as they sell to the domestic market, a perverse result.
The cost of using tax policy as a protectionist competitive weapon also exists. It's no surprise that the Nation's major retail chains are spending millions to back a State and local government national tax collection power quest. They know that when the States gain national tax collection powers, new burdens and new barriers to entry will be imposed on their electronic commerce competition.
All of these concerns, fairness, privacy, international and protectionism, lead to a potential significant discrimination against electronic commerce. For all these reasons, the majority of the Commission believed that before granting States the national tax power they seek, Congress should know the costs involved.
Our report therefore urges the States to actually undertake their promised simplification efforts first. Only after it's clear how the States will use their new power will Congress be positioned to judge the ramifications.
Finally, I believe the subcommittee should consider that the Internet tax issue is a subset of a larger federalism issue that Congress will repeatedly confront as the Internet continues to mature. Under what circumstances should Congress give State laws national effect in the borderless national environment? Should the States harmonizing their disparate regulatory regimes provide sufficient reason for Congress to grant each regime national reach?
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The States' response to the Internet thus far trends toward seeking expanded national power, quasi-Federal power, not toward undertaking internal reforms to maintain control within their borders. Does the Internet mean the end of competition among the States, tax competition, regulatory competition, policy competition through Congress providing States with national powers, in exchange for implementing harmonized rules?
The key public policy question of the Internet era is not one of taxes, or privacy, or a whole host of other issues, but rather one of the future of federalism.
Thank you, and I'll be happy to answer any questions.
[The prepared statement of Mr. Sokul follows:]
PREPARED STATEMENT OF STANLEY S. SOKUL, DAVIDSON AND COMPANY, INC.
Thank you for inviting me to testify today concerning the work of the Advisory Commission on Electronic Commerce. As you know, I was appointed to the Advisory Commission by Senator Lott, and represented electronic commerce companies through the Association for Interactive Media, a trade association of firms that do business on the Web.
I will focus my remarks on the Internet sales tax question, which involves the nature and scope of state powers. First, I would like to point out that states can and do compel in-state businesses collect sales taxes on in-state sales, including Internet sales. So please understand that that while the media and others often couch this issue as whether to ''tax or not tax'' the Internet, that is not the question.
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The Internet sales tax issue exists because the states believe their taxing authority should mirror the Internet's borderless nature. This belief, however, goes against the U.S. Supreme Court ruling in the Quill case, that states lack the power to force out-of-state sellers to collect sales (or ''use'') taxes, unless a seller has a physical presence or ''nexus'' in the taxing state. The Supreme Court concluded that to impose every state's sales tax system upon a multi-state seller would unduly burden interstate commerce.
Thus, the Internet sales tax issue is actually an out-of-state tax collection issue. In the post-Quill context, the issue involves whether and under what circumstances states should receive national tax collection powers.
The states and cities support their pursuit of new national tax collection powers with doomsday scenarios—the destruction of state and local revenue bases and the demise of Main Street businesses. Contrary to these claims, recent Commerce Department data showed Internet retail comprised just 0.6 percent of total retail sales. Furthermore, state coffers and retail sales have been surging due, in large part, to the economy's Internet engine. The majority of the Commission therefore concluded that no dire need existed to rush to provide states with national tax collection powers based on doom and gloom predictions.
The costs Congress should examine include fairness costs, privacy costs, international costs, and protectionism costs. First, the states argue it is unfair that out-of-state companies do not confront the same tax obligations as in-state retailers. The Supreme Court in Quill, however, found greater unfairness would exist should the states get their way. The Supreme Court ruled it would be unconstitutionally unfair for every state to burden out-of-state businesses with disparate tax collection and auditing regimes. Congress' dilemma is to determine which is more unfair—a single state imposing tax burdens on its own businesses, or every state imposing tax burdens on out-of-state businesses.
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Privacy is another cost of expanded tax authority that Congress must address. When I go into a Wal-Mart and buy something, I do not have to identify myself and my purchase for the government. Some type of individualized tracking system would be required for a multi-state Internet sales tax regime to collect and remit taxes for the proper jurisdictions. Consumers are already fearful enough of their privacy on the Web. If consumers feel that the government will violate their privacy when they shop online, they are less likely to utilize electronic commerce. The privacy implications of Internet taxation remain largely unexplored. For this reason, the Commission adopted a resolution I offered that urges Congress to study the privacy ramifications very carefully. This resolution was one of the very few to gain the two-thirds supermajority required to be considered a formal recommendation to Congress. (A copy of this recommendation is attached.)
Third, a state Internet sales tax system could have detrimental international ramifications as well. Unless Congress approves an international tax collection treaty—a tax WTO—a new state Internet tax system could not be enforced internationally. For example, Mr. Chairman, Pennsylvania will most likely never gain the power to compel European businesses to collect the Pennsylvania sales tax on Internet sales to Pennsylvania consumers. As such, imposing a web of new sales tax collection burdens on U.S. companies would disadvantage U.S. firms as they sell to the domestic market (and could encourage them to move off shore). This would be a perverse result.
The costs of using tax policy as a protectionist competitive weapon also exist. Entrenched interests will use every means possible to stamp out the new competition that the Internet empowers. It should come as no surprise that the nation's major retail chains are spending millions to back the state governments' national tax collection power quest. The major retailers know that when the states gain national tax powers, new burdens, and new barriers to entry, will be imposed on their electronic commerce competition.
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All of these concerns—fairness, privacy, international, and protectionism—lead to a potential significant discrimination against electronic commerce. For all these reasons, the majority of the Commission believed that before granting states the national tax power they seek, Congress should know the costs involved. A majority felt strongly that these costs cannot be known and judged until the states demonstrate in detail how their new national tax powers will be used. Our report therefore urges the states to actually undertake their promised simplification effort first. Only after that occurs, and the operational details of the states' Internet sales tax plans are fully known, will Congress be positioned to judiciously consider their desire to gain expanded tax authority and all of its ramifications.
Finally, I believe this subcommittee should consider that the Internet tax issue is a subset of a larger federalism issue that Congress, and particularly this subcommittee, will repeatedly confront as the Internet continues to mature: Under what circumstances should Congress give state laws national effect in the borderless Internet environment? Should the states' harmonizing their disparate regulatory regimes provide sufficient reason for Congress to grant each regime national reach? The states' response to the Internet thus far trends toward seeking expanded national power, not toward undertaking internal reforms to maintain control within their borders. Does the Internet mean the end of competition among the states—tax competition, regulatory competition, policy competition—through Congress providing states with national powers in exchange for implementing harmonized rules? The key public policy question of the Internet era is not one of taxes, or privacy, or a whole host of other issues—but rather one of the future of federalism.
Thank you again for the opportunity to testify, and I would be pleased to answer any questions you may have.
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THE ADVISORY COMMISSION ON ELECTRONIC COMMERCE RECOMMENDATION ON PRIVACY
G. PRIVACY IMPLICATIONS OF INTERNET TAXATION
The issue of consumer privacy is one that pervades all aspects of e-commerce.
The Commission process has shown that proposals to increase state and local authority over the taxation of e-commerce have significant privacy ramifications.
Furthermore, technological advances will likely allow for increased tax collection efficiencies, however other important principles—such as increased exposure of individual privacy—must be balanced against what is technologically possible.
The issue of consumer privacy is one that pervades all aspects of e-commerce, and not just the tax administration system.
Recommendations: Privacy
Explore privacy issues involved in the collection and administration of taxes on e-commerce, with special attention given to the repercussions and impact that any new system of revenue collection may have upon U.S. citizens and the steps taken in systems developed to administer taxes on e-commerce to safeguard and secure personal information.
Take great care in the crafting of any laws pertaining to online privacy (if any such laws are necessary) to avoid policy missteps that could endanger U.S. leadership in worldwide e-commerce.
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Votes on Adoption: 16 Yeas, 1 Abstention, 2 Not Present
The proposal passed by more than 2/3rds (16) and is considered a finding or recommendation.
Advisory Commission on Electronic Commerce Report to Congress, page 37 (April 2000)
Mr. GEKAS. We thank the gentleman.
We acknowledge the presence of the gentleman from Ohio, Mr. Chabot, and the gentleman from Alabama, Mr. Bachus, as members of the committee in attendance, as well as the senior member of the committee on the minority, Mr. Conyers.
Now we'll begin with a round of questioning. The Chair will allot itself the customary 5 minutes and will begin by simply first of all commending Mayor Kirk for accenting the fact that what we have done thus far in the Congress is dealt with access to Internet. Even on the Floor of the House last week, whenever we had this gigantic debate, members misunderstood or miscalculated that what we were talking about was sales tax or other kinds of taxation, when all we were discussing was, you know, the only thing the moratorium attached itself to was, access to Internet. Thank you for re-endorsing that concept.
I note that Mr. Sokul and Mr. Harris agree that the issue of federalism creeps into every aspect of this debate. Is Mr. Sokul saying, and does Mr. Harris confirm, that the main argument among the Commission, or the main emphasis was on collection of taxes, rather than the imposition of them, that nobody questioned the imposition, but rather how uniformly to effect collection? Mr. Sokul?
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Mr. SOKUL. Yes, I think that's true. The Internet sales tax question is an out of State collection question. I use L.L. Bean as an example, because everyone has heard of L.L. Bean. If a Maine customer walks into L.L. Bean, a Maine sales tax is imposed and L.L. Bean collects it. If a Maine person goes on the Internet or orders L.L. Bean through the catalog, L.L. Bean collects the tax because it's an in-State sale.
The issue arises because if a Virginia resident goes on the Internet and orders from L.L. Bean, Virginia's tax powers are generally limited to their border. They cannot compel a Maine company, unless Congress so grants that.
Mr. GEKAS. Even if the Congress grants it, I think it's a constitutional problem, is it not? At least it's a question.
Mr. SOKUL. It's a question. The Quill case said that this was an issue under the commerce clause and dealt with the burdens, the cumulative effect of every State imposing its tax system on one out of State seller. And because it's a commerce clause question, I think people generally assume that Congress could utilize its commerce clause authority to grant that power. But I do think other constitutional limits would come into play. Grant that power to the States, correct. But it would be constrained maybe by due process.
Mr. GEKAS. I see to Mr. Lebrun and Mr. Kirk, keeping in mind Mr. Norquist's definition of lost revenues, and I thank him for that definition, I'd like to use that in some of my speeches from now on, did South Dakota or did Texas in recent years suffer a situation in which there was no surplus? Didn't South Dakota and Texas both enjoy surplus in their tax revenues the last few years?
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Mr. KIRK. Mr. Chairman, in fact we did, and I think most States did. So not only did they enjoy surplus, but like most other States and local governments, and I can only speak for my city, in many cases, we gave that money back to the people. We reduced taxes, either by property taxes or some States' income taxes. But I think to only focus on what's happened in recent years, Mr. Chairman, would really skew the seriousness of this issue. Every business representative on this Commission testified about the explosive potential for growth of e-tail versus catalog sales. And the fact that we are not now experiencing a diminution in sales tax revenues is not indicative at all of the growth of this. If you have a sales tax policy that's going to encourage people to shop——
Mr. GEKAS. But you have to acknowledge it's a factor we have to determine, that when you're talking about losses and when Mr. Lebrun is talking about losses, you're talking about anticipated losses, if the Internet explodes, if——
Mr. KIRK. Well, we know the Internet is going to explode. Our concern is if we as a matter of public policy make a determination that you can avoid paying sales taxes by buying it one way or the other. We know the Internet is going to explode. We know e-commerce will explode. It is inescapable that those losses would occur.
But Mr. Chairman, if I might quickly, I thank you for your recognition of our reality of the distinction between the issue of taxation on the Net. But I also want to draw a point that many others have tried to couch this as a pro-tax issue. In many cases, every State has a sales and a use tax. So separate from that burden on that seller, it is arguably incumbent on each of us to pay a use tax on goods, no matter where we buy them.
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Now, most of us don't enforce them, because they don't do it. But we're not talking about new taxes. None of us want to impose new taxes on the Net. We simply want every transaction to be treated fairly, no matter where it occurs.
Mr. GEKAS. The time of the Chair has expired. I wish I could explore more with Mr. Lebrun and one other question from Mr. Harris. Maybe I'll corner you after the meeting.
We turn to the gentleman from New York for a period of 5 minutes of questioning.
Mr. NADLER. Thank you. I confess that I think ultimately this is a simple issue. I'm astounded to hear from some of the people who normally defend the States. I always thought that States should have the right, so long as they don't discriminate against people from out of State to tax whatever they want, or refrain from tax wherever they want, consistent with their own constitutions or with majority votes in their own States. It's not up to the Federal Government to tell them what to do.
Now, whether we consider that New Jersey taxes too heavily or taxes too lightly, that's up to the New Jersey voters, and you go and run ads in the elections there if you want to. Because it's not up to the Federal Government to tell New Jersey to raise or lower its taxes.
The issue here is, as Mr. Kirk said and as Mr. Sokul said, enforcement. Can the State enlist the seller in collecting a sales or use taxes for a sale made to a buyer in the State. That's the question. And the fact that there are surpluses in State budgets now because we're having an unprecedented economic boom is not relevant, because at some point there will be a recession and we will have big deficits, which no one would then say means everybody should raise taxes. But the question is, for good times and bad times, what are the appropriate authorities for the States.
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We have suffered or allowed a situation to continue with catalog sales that States couldn't enforce their own use tax laws in practical terms, because for a catalog seller that didn't have a nexus in the State, that was the Quill decision, and because catalog sales as a percentage of business was tiny, it didn't really have an impact on the States, didn't matter.
Now we have the Internet, which from a business point of view is simply a more modern catalog sales device, at last insofar as sales and use taxes are concerned. It enables people to have a different kind of at a distance purchase more efficiently. And we confront the same question as with catalog sales, except that we confront the situation that this is likely to get very big and have a major impact, as opposed to a minor impact.
Therefore we have to either say to heck with it and the States are going to lose a lot of their potential taxing power and face the decision either to lower spending, which Mr. Norquist would like across the board, but that's for the voters of that State, not for us to impose, or to raise income taxes or to raise property taxes or some other thing.
So the question is, is it proper to allow the States or how do we allow the States to collect the tax. The Supreme Court in the Quill decision said that it would be an unconstitutionally unfair burden for every State to burden out of State businesses with disparate tax collection auditing regimes. The assumption there is that that would in fact be a major burden on the collector.
My question is, first of all, with modern software, is it a burden at all, even if you had 6,000 jurisdictions? I understand that Wal-Mart or K-Mart, which has a nexus in every State, has no problem making these collections.
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Mr. GEKAS. The time of the gentleman has expired.
Mr. NADLER. I have not directed a question to anyone yet, sir.
So the question is, first of all, with modern software, is it any burden. Number two, if you had a uniform policy, why would that be a burden. And why shouldn't, I would ask Mr. Kirk first, with the proper uniform, not rate, but uniform definitions, would there be any burden and is there software available that eliminates that problem. Then I would ask Mr. Norquist, how do you defend telling States from the Federal Government, you cannot collect the taxes you decide. Why should we tell them? Why shouldn't we let them make those decisions?
Mr. KIRK. I'll be very brief. There is software available and there were witnesses who would have loved to have given more in-depth testimony to our Commission on how you could collect and administer under our current system.
But more importantly, one of the central elements of the minority point, and one of the commitments of those of us that would like to see reformation is that we would not only have the software, but simplify and move to a simplified system, so that we would greatly reduce particularly the audit end of the reporting burden, not just on e-tailers, but on all retailers. We think it's ridiculous to do this just because of one industry. It could make sense, let's do something that's fair for everybody, main street and e-tail.
Mr. NADLER. Mr. Norquist, and before you answer, let me just make one observation——
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Mr. GEKAS. The gentleman is granted an additional 1 minute.
Mr. NADLER. Thank you.
You said that Federal expenditure as a percentage of GDP had gone down, but State expenditures as a percentage of GDP had gone up. Isn't that exactly what would be expected after years of Congress and the President saying we ought to devolve more power to the States and let them make the decisions? Isn't that a success of the Republican revolution of 1994?
Mr. NORQUIST. Actually, that growth is over a longer period than the 1994 to 1998 at the State level. What you're seeing actually at the Federal level is the Defense budget was cut in half from 6 to 3 percent. That's what you're seeing in the decline of Federal spending.
You asked on the role of the Federal Government and State government, States don't have rights. States have powers, people have rights. The Constitution protects against the Federal Government or State or local government abusing people in certain ways. The whole Constitution is a list of things States and the Federal Government are not allowed to do. That's the purpose of a constitution. And it's our strength and other countries' weaknesses that they don't have that.
What the commerce clause forbids is Alabama reaching into another State and taxing a business in that State. And I would point out——
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Mr. NADLER. Excuse me, but we're not talking about taxing a business. We're talking about taxing the purchase in, let's say, New York and forcing the company that makes the sale into New York to do the work and remit the proceeds. If Congress, under the commerce clause, said you can do that, there's not a constitutional problem, why shouldn't we?
Mr. NORQUIST. Two things. I would argue that you should not allow that, even if—Congress, can, as I understand the Constitution——
Mr. NADLER. Congress what?
Mr. NORQUIST. Congress can, as the court has ruled, change those rules. You have refused for 60 years——
Mr. NADLER. My question is, assuming we can, under the Constitution——
Mr. NORQUIST. Why shouldn't you?
Mr. NADLER. Why shouldn't we, yes.
Mr. NORQUIST. Take a look at what's happened with tort law. What Alabama juries do to Detroit business. And then imagine what Alabama taxing authorities will do to New York business. I talk to——
Mr. NADLER. Here you're talking about taxation of purchase. In Alabama legislature, not a jury, the Alabama legislature could not constitutionally differentiate based on where the sale came from. They've had to say, we have an X percent sales tax on things sold to residents of Alabama, no mater where it's coming from. They couldn't say 6 percent on Minnesota and 8 percent on Washington.
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Mr. NORQUIST. And who do you think Alabama politicians will audit? Alabama businesses or New York businesses? I've talked to businesses that when they were based in New York and they would get audits out of New Orleans because New Orleans has some odd taxing authorities. When they moved to Indianapolis, the audits stopped, because the politicians loved to come up to New York and audit the New York business, but they didn't want to go to Indianapolis to audit the same business.
Mr. GEKAS. The time of the gentleman has expired.
Mr. NORQUIST. It's the abuse of audits that would be one major problem.
Mr. GEKAS. Let the record indicate that the lady from California, a member of the committee, Ms. Bono, is with us at this juncture.
We now turn to the gentleman from Ohio, Mr. Chabot, for a period of 5 minutes.
Mr. CHABOT. Thank you, Mr. Chairman. I want to thank you for having this important hearing and such a distinguished panel here.
I only have one question, and I'll address this to Mr. Kirk and Mr. Norquist, thinking that you're probably on opposite ends of my point. It's my view, basically, and it's certainly not a secret, that I think we should keep the Internet as tax-free as possible, whether it be access taxes today or sales taxes tomorrow. Because I'm against taxes at just about every level.
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But with my theory being in this particular case that this literally could be the goose that laid the golden egg that we could kill, and that so many, our economy has been spurred on by the growth in the Internet and that if we can keep it tax-free, that ultimately local levels of government will also, their revenues will increase, the whole pie grows larger, people's incomes grow up. Like in my community in Cincinnati, we have an earnings tax. People earn more, so the city's going to get more money. They pay State income taxes, they pay Federal income taxes.
So Government's going to get its money. But to the extent that we're able to keep the Internet as tax-free as possible, we're going to continue to grow the Internet and the businesses that are spurred from it, so we ought to keep it tax-free. That's basically my view.
Mr. Kirk, would you comment on that and how it affects local government, and then Mr. Norquist, if you would care to comment.
Mr. KIRK. Thank you, Congressman. I want you to know that I think most local government officials share your sense that the Internet be kept tax-free, and we want to see it grow. But the people of Cincinnati and the people in the State of Ohio have made the decision to have an income tax and have an earnings tax. The people of the State of Texas have said no.
So if that sales tax diminishes, even though there may be expansion of the economy, our income is going to drop. And at the local level, I don't have the luxury of deficit spending. I either cut services or I have to raise taxes some other place. My main concern is that if Congress feels that strongly about giving one particular set of industry a break, just the Internet, then Congress ought to find a way to fund that, and not require me to have to absorb that funding at the local level.
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And the people of Texas ought to have the ability to say we want an income tax and not have one imposed on us de facto by Congress cutting out 40 percent of the stuff, potentially cutting into 40 percent into the State of Texas' revenues, which is what we use to pay for everything from roads and public education without a way to replenish that.
Now, I've heard from many people that the economy's going to do better and government will find new revenue. I've not had anyone show me how that's going to manifest itself in a practical way in the City of Dallas. And that is our principal concern, just that I don't see that. I agree with you perhaps on expansion of government, but we are going to create a world in which we're going to deprive most State and local governments of a fairly significant source of revenue without some other way to make up for that.
Mr. CHABOT. Thank you. And I should have probably mentioned, I do have a local government experience. I was on the Cincinnati city council for 5 years, and I was a county commissioner in the county that surrounds Cincinnati for 5 years before getting elected to Congress. I've heard from some of those folks, and a number of them disagree with me on this point and take your position here.
Mr. Norquist.
Mr. NORQUIST. I think it's very important for State and local governments, like businesses, to compete with each other to provide the best government at the lowest cost. What some people want to do, who want to eliminate tax competition between the States, and come up with some sort of compact and restraint of trade, as the Europeans do, they have a 15 percent floor on their value added tax, their sales tax. If you're Ireland and you'd like to have a more business friendly, consumer friendly economy, you can't cut under 15 percent.
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Some of the Governors' schemes that they've come up with would get all the States together and get them to not compete with each other by producing the best government at the lowest cost, but allow them to go into other States and impose taxes on businesses in other States. Again, every State could tax every transaction if they taxed its origin. Maine could tax every sale by L.L. Bean, whether they're selling to Alabama or everywhere else. States have decided not to do that in order to support economic growth in their States.
There are a number of ways we could deal with these issues, but there are some politicians that want to answer every question in a way that gets you higher taxes. That's really what this debate, is about some people would like to see taxes restrained and competition between States and cities. There are some people who think any restraint on taxing and spending is a bad idea. And those people voted against the 5 year moratorium last week.
Mr. CHABOT. Thank you, Mr. Kirk and Mr. Norquist.
Mr. GEKAS. The time of the gentleman has expired.
We now yield to the gentleman from Massachusetts a period of 5 minutes for examination of the witnesses.
Mr. DELAHUNT. Let me follow up with Mr. Norquist for just a moment on the line of questioning that was posed by Mr. Nadler. Because his questioning was logical and you were going along fine, until he raised the issue that no one, that I'm aware of, would support a discriminatory tax. That's what this is all about.
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Then you alluded to an anecdote, presumably hypothetical, but I guess it wasn't hypothetical. So we have one anecdote. Are there any data? Has there been any kind of a study that has been done showing that there is discrimination in interstate taxation?
Mr. NORQUIST. There's anecdotal stuff, people are also——
Mr. DELAHUNT. The question was, has there been any study to support your conclusion?
Mr. NORQUIST. The conclusion is——
Mr. DELAHUNT. That's not my question.
Mr. NORQUIST. Any study on tort law abuse——
Mr. DELAHUNT. I'm not asking about tort law. I'm asking about, you made a statement and this is the follow-up. You cited an anecdote, now give me some empirical information.
Mr. NORQUIST. An example is empirical information.
Mr. DELAHUNT. No, it's not. I'm asking you——
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Mr. NORQUIST. Can I get you ten? Sure, I'll get them for you.
Mr. DELAHUNT. Do you know of any right now?
Mr. NORQUIST. No. That's not my line of business. But I've talked to people in the business who say they've had these problems. I'm not aware of a study.
Mr. DELAHUNT. You're not aware of a study. Thank you.
Mr. NORQUIST. I can go look for one.
Mr. DELAHUNT. No, thank you. You've——
Mr. NORQUIST. This guy's from the business.
Mr. SOKUL. I would just say that virtually every year, the Supreme Court takes cases and rules State taxes unconstitutional. The Quill case is one of those. North Dakota——
Mr. DELAHUNT. I understand. But let me rephrase the question. As the follow-up to the line of questioning that the ranking member asked regarding discriminatory taxes, he outlined a hypothetical. And the final response of Mr. Norquist was an anecdote. Of course there are cases and of course there are instances. But to suggest that this would be a valid reason to you know, to not entertain, I just don't think we have, it's an assertion, it's an allegation without any basis in reality.
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Mr. NORQUIST. What you're asking about sir, the present Federal law as the Supreme Court has ruled, forbids States from behaving this way, and the question is, are there examples of States breaking that rule? Yes, they go to the Supreme Court every once in a while.
Mr. DELAHUNT. I understand. But what I'm talking about, in terms of crafting a policy based upon aberrations is not what we're about. What we're saying here is the law, the rule, the law of the land is no discriminatory taxation based upon State residency. And you say, well, there's a case here and a case there. Of course. But has there been any exhaustive study to establish that conclusion. And you said, Mr. Norquist, the answer is no.
Mr. NORQUIST. I'm not aware of it, but——
Mr. DELAHUNT. And Mr. Sokul, are you aware of it?
Mr. SOKUL. I am not aware of any study, unless it's a law review article dealing with all the Supreme Court cases and——
Mr. DELAHUNT. I understand. But I'm not talking about a law review article in terms of——
Mr. NADLER. Would the gentleman yield?
Mr. DELAHUNT. I would yield.
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Mr. NADLER. I think you're not understanding the question. The question is, are either of you aware of a study, not on law, not on Supreme Court cases, are either of you aware of a study that shows that the discriminatory enforcement, discrimination by one State against businesses from another State is a major problem, as opposed to, there's an instance here and an instance there? Is there any study that shows that this is in fact systematic and going on and a major problem? That's your question, right?
Mr. DELAHUNT. That's my question. You articulate it better than I, Mr. Nadler.
Mr. NORQUIST. Present law forbids Alabama from doing that which I say they would do if the law changed. So you're asking——
Mr. DELAHUNT. Reclaiming my time, I don't think there's any proposal here that would change current law in regard to discriminatory enforcement. I mean, let's accept that. There is nobody I'm aware of who's on this panel or in Congress who would even suggest an inane policy such as that.
Mr. NORQUIST. The National Governors Association proposal would open the door to——
Mr. DELAHUNT. You know, listen, it might open the door and nudge the door open and all that. But it's not going to happen. And I daresay that the National Governors Association has not made that statement. And if you can show it to me, I'd be happy to retract that point. But I think for you to make that assertion is——
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Mr. NORQUIST. They've come out for overturning Quill, which would open the door to this.
Mr. CHABOT [ASSUMING CHAIR]. The gentleman's time has expired. Would you like an additional minute to conclude?
Mr. DELAHUNT. I'd like to have an additional minute, and I'd like to have another round.
Mr. CHABOT. Without objection.
Mr. DELAHUNT. And I yield to the gentleman from New York.
Mr. NADLER. There is a suggestion to overturn Quill, I personally would support that. And you're saying that if Quill were overturned, and States could require catalog sales or Internet sales companies to collect their sales taxes, you are then asserting that States which would not be allowed to do so would nonetheless discriminate in order to, other ways against companies in other States.
You're stating that that would happen. And maybe it would. There's no evidence that it would. And the question is, is there any study to show that that would happen or is there any history or are you saying that could occur?
Mr. NORQUIST. That screams out that that would happen.
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Mr. CHABOT. The gentleman's time has expired.
Mr. NORQUIST. Some people don't think tort until it obviously happens, others——
Mr. DELAHUNT. Reclaiming for just a minute, we're not talking about tort reform here. We do that on Thursdays. This is Wednesday. We're talking about interstate compacts. Let's stick to the——
Mr. CHABOT. The gentleman's time really has expired here. We'll recognize the gentleman from Alabama, Mr. Bachus.
Mr. BACHUS. Mr. Norquist, have you ever visited Alabama?
Mr. NORQUIST. Yes, I have.
Mr. BACHUS. Did you have a bad experience? [Laughter.]
Mr. NORQUIST. Any State would work. Your Governor has been aggressive in his tax collection recently.
Mr. BACHUS. I beg your pardon?
Mr. NORQUIST. Any State would work. Your Governor has been aggressive in his tax collection recently.
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Mr. BACHUS. Is this Governor Segelman?
Mr. NORQUIST. Yes. Not Bob James. He was just swell.
Mr. BACHUS. But you're not trying to single out Alabama?
Mr. NORQUIST. No, actually, we usually work on Utah, but Governor Leavitt isn't here.
Mr. DELAHUNT. If the gentleman would yield for a minute, it's your jurors down there, not your Governor, that are the problem, Mr. Bachus.
Mr. NORQUIST. I'm from Massachusetts, and we have a wonderful Governor there.
Mr. BACHUS. You have indicated that you believe that Internet commerce, which has grown substantially over the last few years, will continue to grow at an increased rate?
Mr. NORQUIST. Yes. No trend continues forever. One presumes that it will increase and largely eat away at what are presently sales through catalogs. So the question of lost revenue I think is going to be less of a problem. I think 5 years from now we'll look back and not see the problem.
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Mr. BACHUS. Actually, you and others have indicated, and I think all the studies show that it's actually increasing at a faster rate. Do you contradict that?
Mr. NORQUIST. There are several kinds of Internet sales: business to business, which is either exempt from State sales tax or collected at State sales tax, which is about 80 percent of the pie. So sometimes you hear people talk about a big number for Internet sales. And then people say, oh, well, I'm losing 6 percent of that big number. Actually it's a much smaller number, because only about a third of sales in a State are subject to sales taxes, because a lot of them are services or purchasing houses and stocks and things like that.
Mr. BACHUS. But I'm just looking at what you said in the past. You said that it's grown substantially and you expect it to continue to grow at a fast pace.
Mr. NORQUIST. Sales tax revenue will continue to grow.
Mr. BACHUS. Do you think it will grow, Internet sales will grow, whether or not sales tax is collected? Or do you think it will slow the rate of growth if we start collecting sales taxes?
Mr. NORQUIST. Professor Goolsby did a study suggesting it would be about a 25 percent drop in Internet business to consumer sales if you apply the sales tax on it. That would certainly do interesting things to the market capitalization of NASDAQ.
Mr. BACHUS. Let's just assume, that's probably true——
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Mr. NORQUIST. I think it would have some effect, yes.
Mr. BACHUS. Does that concern you in and of itself, that you'd put a tax on it and it would reduce the sales by 25 percent?
Mr. NORQUIST. You tax anything, you get less of it.
Mr. BACHUS. Right. But that doesn't concern you in and of itself, does it? Do you prefer people to buy over the Internet, or do you promote that, or do you think that ought to be given preferential treatment? Over say, cash register sales at the corner drug store?
Mr. NORQUIST. I know we focus on the Internet, but sales across State borders, whether you drive across the State border or you buy from a catalog, or Internet sales, are different than sales inside a State.
Mr. BACHUS. You don't favor those sales as opposed to, you don't want to encourage people to drive across the border as opposed to go down to the corner drug store, do you?
Mr. NORQUIST. No, that's not the goal. The goal is to stop States from imposing taxes on people that can't vote in their State.
Mr. BACHUS. That can't what?
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Mr. NORQUIST. That can't vote in their State.
Mr. BACHUS. I see. Well, what about the use tax that's imposed on people? Do you think that people that buy over the Internet ought to pay, the States all have use taxes, do you think that the people, when they buy over the Internet, they ought to pay a use tax? Or do you advocate that they avoid paying that tax?
Mr. NORQUIST. I would support the effort by Governor Gilmore——
Mr. BACHUS. No, no, let me just talk about that question.
Mr. NORQUIST. I never advocate that anybody not pay a tax that is legal.
Mr. BACHUS. Let me say this, then. If the States already have a law that if you buy something over the Internet from a remote location, you pay a tax, then giving the State a right or a mechanism to collect that tax from the person who sells it, that's not going to result in, I mean, legally, that tax should have been paid anyway. Is that correct?
Mr. NORQUIST. By the individual who purchased it, somebody from your home State buys something from L.L. Bean——
Mr. BACHUS. So you're saying the person, that it's fair for the person who pays it, I mean, who buys the item, that person ought to pay it, as opposed to the remote seller collecting it?
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Mr. NORQUIST. Under present law under use and sales taxes, if I'm in Alabama, I buy something from an Alabama store, I pay sales taxes.
Mr. BACHUS. But if I buy it out of State, I'm still legally obligated to pay it.
Mr. NORQUIST. Correct.
Mr. BACHUS. And you—do you have a problem with that?
Mr. CHABOT. The gentleman's time has expired. Would you like an additional minute, Mr. Bachus?
Mr. BACHUS. I would. Do you have a problem with that?
Mr. NORQUIST. If the State of Alabama wishes to go and look through people's houses and assess those taxes, they have the legal right to do that.
Mr. BACHUS. So your concern is not for actually the taxpayer in the States, your concern is for the remote seller.
Mr. NORQUIST. My concern is States trying to expand their power outside their borders. That's a bad idea.
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Mr. BACHUS. Okay, now why have you said that I don't believe anyone, when they buy something over the Internet, ought to have to pay a tax on it?
Mr. NORQUIST. I'm opposed to additional taxes on the Internet. I'm opposed to most taxes on the making of the Internet——
Mr. BACHUS. So your opposition is not really constitutional, your opposition is you just don't think people ought to pay taxes when they buy stuff over the Internet. That's the bottom line, isn't it?
Mr. NORQUIST. No, that's not my position, and I'm not on record saying that or——
Mr. BACHUS. So you don't have a problem with that? You don't have a problem with people paying a tax when they buy things?
Mr. NORQUIST. If the State of Alabama wishes to collect use taxes——
Mr. BACHUS. Well, let's use Massachusetts. [Laughter.]
Mr. NORQUIST. Okay. Actually, Massachusetts is a bad example, because the pro-taxpayer Governor is not for taxing electronic commerce.
Mr. BACHUS. Well, let's use Utah.
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Mr. NORQUIST. Utah, the Governor there oddly enough is. And didn't get renominated for the governorship as a result of his pro-tax position on this issue.
Mr. BACHUS. But you're not advocating tax avoidance?
Mr. NORQUIST. Absolutely not.
Mr. BACHUS. On legally passed taxes?
Mr. NORQUIST. No.
Mr. BACHUS. So that tax is legally owed, and we'll use Alabama as an example. We have a law that says that if you buy something over the Internet, you remit a tax. So if I buy it out of State, and we allow the States to collect it from a remote seller, my legal obligation hasn't really changed, has it?
Mr. NORQUIST. As a person in the State who gets to vote, the State has the power——
Mr. BACHUS. Well, we've already voted, and we voted that a tax would be collected on that.
Mr. NORQUIST. Right.
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Mr. BACHUS. And actually, what we voted in Alabama was that we'd collect it from the remote seller, but the Supreme Court came along and said we couldn't do that. So now this voting stuff, we've already voted in all these States to collect a tax, haven't we? The Supreme Court has blocked our ability to do that. But I will tell you that all the States that want to collect it on the remote seller, those States have already passed a law, they've already voted, they've elected people and those people they elected have already, in a democratic system, elected to collect that tax.
And what you're basically doing, I think, is disagreeing with the voters in those States who have already said, we want to collect a tax on that——
Mr. DELAHUNT. Would the gentleman yield for a moment?
Mr. BACHUS [continuing]. To pay for our schools and our police and our fire, and you actually, I think you're stepping and saying——
Mr. GEKAS [RESUMING CHAIR]. We extend the time of the gentleman from Alabama for another 1 minute.
Mr. NADLER. Would the gentleman yield?
Mr. BACHUS. I'll yield.
Mr. NADLER. Thank you. I think you're onto something. I think frankly, and I think Mr. Norquist is an honest man and will agree with what I'm about to say. The bottom line really is, is that he wants to constrain the ability of the States acting democratically to tax. And let me say why I think that's what you're saying. The State should not be allowed to get someone from another State to help it collect its use tax in the State.
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The States should compete, you said this several times today, should compete with each other in terms of taxes, which is to say that since you, which is to say that you enable corporations to say, we will move all our jobs to the cheapest tax State. So you have a race to the cheapest tax, because you can't let Nevada, Alabama, you can't levy a tax heavier than the other one, because the business climate, meaning, the companies will move to the other State.
So what you're really saying is, enable a situation where you cannot, where if a company moves or threatens to move, you can't levy that tax if you don't want it to. And you can't allow distance purchases to be taxed, because that would get in the way of this enabling corporations to dictate the taxes to the State by threatening to move. And it's really a systematic thing saying, empower the corporations to let them essentially blackmail the States to the lowest taxes they want.
Mr. NORQUIST. You're half right about my position. The competition between States is not only to provide the lowest cost but the best government at the lowest cost. That's why people don't go to cities or States with no government, but they do tend to wish to go from States that cost too much and provide bad government to other States, I mean, New York City had a real problem with people leaving. And the city provided better government at lower cost. Not just lower cost, but better government, safer streets, over the last several years.
So the competition between States and governments is for the better government services at lower cost. And where you said corporations, I'd say people, people in this country under the commerce clause are free to move from one State to another. And if the State is abusive of the people in that State, or if 10 of them get together and call themselves a corporation——
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Mr. NADLER. People can certainly move. But the point is, the seller, the corporation, that moves is still selling into New York or Alabama or whatever. And the person is still buying it in Nevada. But you move the tax bases, but not the sale. So it's different than people moving. Because they're still doing business in New York. But if New York tries to tax that more than some other State, they'll move the business.
Mr. GEKAS. The time of the gentleman has expired. We'll provide an additional round if the gentleman requires later.
We now, if you want to indulge in a second round—Mr. Hutchinson is a visitor. Does Mr. Hutchinson wish to, through any member, pose any question?
Mr. HUTCHINSON. I just want to thank the Chairman for allowing me to sit in on your subcommittee as an honorary member or something of that nature, and appreciate the witnesses' testimony. I'm here to listen and observe and learn and I thank you for this very interesting debate.
Mr. GEKAS. We thank the gentleman.
The gentleman from New York—I'm skipping the Chair for the moment. The gentleman from New York is accorded another 5 minutes for a second round of questioning.
Mr. NADLER. Thank you very much. I think this discussion, discussion, not debate, has been interesting and really elucidating where people are coming from. And I have to say that I think that if you want democratic government, with a small D, and if you want the States to be able to do their jobs and people can move and vote with their feet, but they also vote with ballots.
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You have to allow the States to function, and you have to allow electorates in States, through their elected representatives, to impose the tax levels and the service levels that they want. You can go and campaign and say we could have less services and less taxes or more efficient government and less taxes, and somebody else can say, well, we're as efficient as we can be, less taxes means less services. And that's a perfectly proper political debate with a State.
But the fact is that you do have this problem that large companies, and increasingly this country is dominated by large companies, the economy, I forget the percentage of business done, of sales done by large companies as opposed to small, can move. And half the political debates in half the States are over business climate, which is to day, reduce taxes, not because we think we have too much services, or because we think we're inefficient, but because if you don't reduce taxes, the company will move.
And they'll still sell here, but essentially, you can't have a much higher tax rate than the other State. If your only goal is that there should be as few taxes as possible, tat's a good thing. But if you think States should have the ability and local electorates should have the ability to do what they want to do, that's not such a good thing.
Now, I have a different question, which we haven't focused on. We're told that the Internet, and I have no doubt it's true, the Internet is a wonderful new technology and it's going to burgeon and it's going to have tremendous benefits and contributions to our economy. And it's going to take an increasing share of business. And that's fine and wonderful and ought to be encouraged.
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But at the same time, we're told it's so fragile that if we allow sales taxes on stuff sold over the Internet, so that it doesn't have a competitive advantage over the brick and mortar store, then suddenly it won't grow. Either it's very strong economically or it's so fragile economically, both can't be true.
I've always thought that one of the goals of tax policy, at whatever level, was to be neutral, that your economy is most efficient, most productive, yields the most economic growth, if decision makers in the economy, sellers, buyers, entrepreneurs, make decisions based on business considerations, not on tax avoidance considerations. Therefore, your tax policy insofar as possible ought to be neutral. If someone wants to buy a book, he'll buy it in the brick and mortar store if he wants to thumb through it, he'll buy it over the Internet if he thinks that's more convenient, because he doesn't want to walk to the store or whatever. But it shouldn't be because on one he pays a tax and on the other, he doesn't.
Now, you say, Mr. Norquist, that while that unfairness is not there because he'll having to pay a shipping fee. Well, maybe he will. On the other hand, that's part of the game. That's part of the advantage of the brick and mortar store. The brick and mortar store, on the other hand, has to pay more rent. So maybe it will have to charge a higher price for its books, because it's got more overhead.
But you make the economy most efficient if the decisions are made taking into the account the higher rent for the brick and mortar store, the higher shipping costs, whatever, shouldn't be, and you shouldn't use tax policy to try to say, we're going to take away the disadvantage of the shipping costs for one form of commerce, or we're going to tax the Internet higher than brick and mortar stores, because after all, they've got to pay the rent and we should make it up for that. Frankly, it ought to be neutral.
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So let me ask Mr. Kirk to comment on that, and Mr. Sokul and Mr. Norquist to comment on that. Shouldn't we be looking for tax neutrality in terms of economic decisions, and saying that this area of commerce, sales on the Internet should be tax-free is completely going against that principle?
Mr. KIRK. Mr. Nadler, thank you for bringing that point. And absolutely, Congress should have tax policies that are neutral, that are fair and that are equitable, that don't pick winners and losers. And I'm glad you raised the point.
I find the most specious arguments of these opponents of all State taxes is that on one hand, they tell you that those of us that believe in equity and that are concerned about State and local governments are in this hysteria and that in fact, they Internet and sales lost to e-commerce is just a small percentage of all of their business. But yet they wanted you to believe that if we were to tax only that small percentage, and if we accept their theory that most business, most sales over the Internet are business to business or tax-free, then applying a sales tax equitably isn't going to affect that other 80 or 90 percent of the business.
But it also ignores the reality that we heard testimony from e-tailer after e-tailer, from representatives from American Online and Gateway, they didn't grow because they came up with an idea to avoid sales tax. The Internet is exploding because people have found a way to shrink time and distance between what they offer and the end users of that product. The Internet is growing because it's the best way to get customers and businesses together in a cheap way and a faster way and shrink that business. E-commerce is just one element of it. I don't believe having equitable tax treatment is going to threaten or override all of the other benefits that are derived from the Internet.
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Mr. GEKAS. We yield to the gentleman an additional 2 minutes.
Mr. NADLER. Thank you.
Mr. SOKUL. A couple of responses. First of all, neutrality, correct, is the goal. But tax policy is not pure. Wal-Marts, all the people in the e-fairness coalition, all the major retailers, all the shopping centers, they get tax breaks to locate in a certain area. So the tax competition and tax in States——
Mr. NADLER. Wait a minute. They get tax breaks by the local government or the State government to locate in a given area. Some of them do, some of them don't. Okay. That's a violation of the fairness, it's not pure, as you said.
Mr. SOKUL. Right.
Mr. NADLER. But on the other hand, the City of New York or whoever gives tax breaks to some Internet company to make its major facility located there, too.
Mr. SOKUL. I'm not trying to—I'm just saying that there's unfair—that tax policy isn't pure. So the goal of neutrality is——
Mr. NADLER. So a small impurity should justify a systematic across the board impurity?
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Mr. SOKUL. No, no, no. I'm just saying that as a background to what I'm about to say about neutrality and Internet sales tax collection. If you were to impose the same burdens across the board that States and retailers seek to be imposed on Internet commerce, the retailers, the local retail stores, particularly in tourist areas, you would think, would have to start identifying consumer origin and collecting and remitting the taxes for the jurisdiction where that consumer resides and is going to take the good and use it.
But that's not what they want. They want the collection and remittance regime imposed just on e-commerce, just on Internet sales.
Mr. NADLER. What you're saying is that if you walk into J.C. Penney and you buy a lawn mower, J.C. Penney assumes you live in the same jurisdiction.
Mr. SOKUL. That's the assumption of sales tax.
Mr. NADLER. Collects the sales tax and gives it to that jurisdiction. If you want it to be fair and equitable, they should ask you where you are, and have the burden of sending some of their sales tax money to wherever.
Mr. SOKUL. If you're going to impose——
Mr. NADLER. Yes, okay. If there were——
Mr. SOKUL. That's an equal burden.
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Mr. NADLER. If in fact, as I suspect is the case with modern software and a simplified regime of uniform, it really won't make a practical difference in that burden. My question is, so what?
Mr. SOKUL. That's another whole issue, the software issue.
Mr. NADLER. Software plus a uniform——
Mr. SOKUL. Right. Let me just say this. The software isn't there now and the uniform system isn't there now. The basis of my testimony was, I would urge Congress to show us what you're going to do with the power before we give you the power, at a minimum. The software is there, if you listen to the software marketers. But if you listen to the companies that actually use it, it's incredibly expensive, it doesn't work like it says, and the Commission had testimony from Federated Department Stores, which collects tax in 39 States and uses one of the leading software firms. He talked about how it was a nightmare. I think he said it costs—no, I don't want to say, because I can't remember for sure.
What's going on, though, a State does decide to impose a tax on its own citizens. But it's trying to collect that tax from non-citizens.
Mr. NADLER. Not from non-citizens, through non-citizens.
Mr. SOKUL. Through non-citizens. But by gaining legal authority over them. And every day, I'm from New Hampshire, every day thousands of Massachusetts consumers drive across the border and shop in New Hampshire, because New Hampshire doesn't have a sales tax. In fact, there are a lot of malls along the borders and liquor stores for that very reason.
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But Massachusetts right now doesn't collect a use tax, but it's citizen by citizen——
Mr. NADLER. But if New Hampshire—people go from New Hampshire, physically go to New Hampshire to buy stuff and then deliberately avoid the Massachusetts use tax, otherwise they wouldn't go to New Hampshire to buy it.
Mr. SOKUL. Well, there's other good reasons to go to New Hampshire. [Laughter.]
Mr. NADLER. There may be. But what you're testifying is that to avoid the use tax, many people go, and that's clearly true, many people, to avoid, to illegally avoid Massachusetts use tax, drive across the border and collect that. And maybe New Hampshire, Massachusetts should have power to enforce its own tax laws.
Mr. SOKUL. So what happens now is they don't enforce it citizen by citizen because of the cost involved. The cost to its citizens——
Mr. NADLER. But is there anything, as a matter of principle, let's assume we invented some means of effectively and cost effectively enforcing Massachusetts' law. They shouldn't?
Mr. SOKUL. Over their own citizens?
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Mr. NADLER. Over their own citizens.
Mr. SOKUL. They have that power now.
Mr. NADLER. And if Massachusetts and New Hampshire were to have an interstate agreement in which Massachusetts would enforce the laws, New Hampshire laws on New Hampshire people coming into Massachusetts to buy products and vice versa, anything wrong with that?
Mr. SOKUL. I have not researched that, if it would violate the Constitution or not. Congress would have to sanction——
Mr. NADLER. It clearly wouldn't violate the Constitution. Anything wrong, as a matter of policy, it's clearly not against the Constitution, assuming there were a compact approved by Congress, two States made a compact.
Mr. SOKUL. I don't know the answer. The State has that authority.
Mr. GEKAS. The time of the gentleman has expired.
Mr. NADLER. Let me have an additional 30 seconds, please.
Mr. GEKAS. The gentleman has an additional 30 seconds.
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Mr. NADLER. I would simply urge—not urge, observe—that it will be hard to find people, and Mr. Norquist may be an exception, but it will be hard to find many people in this country that would think that if Massachusetts and New Hampshire, or Massachusetts and New York, made a reciprocal agreement authorized by Congress, because it's a State compact, to enforce their tax laws on citizens and each other, that that's not within their rights and as a matter of principle, okay? I would simply also observe that all we're debating here is extending that. If there were a uniform agreement among a lot of States authorized by Congress, I would think that would be okay, too.
Mr. SOKUL. I think what you said at the very end gets to the heart of the issue. There are 50 different States with 50 different tax systems. When one State starts reaching outside its borders with collection authority, you have to remember that what you're talking about is giving all the States that authority. That's what the Supreme Court looked at, the cumulative burden of every State getting their way, not just one State getting their way.
Mr. GEKAS. The time of the gentleman has expired. In view of the fact, Mr. Delahunt, that Mr. Nadler has covered Massachusetts 40 times, I'm wondering if the gentleman wishes to relinquish his time, or does he want the 5 minutes.
Mr. DELAHUNT. I'll inquire about Pennsylvania or something, Mr. Chairman.
Mr. GEKAS. But I'll yield to the gentleman for a round of questioning. I'll end with Mr. Bachus. I will yield now to the gentleman from Massachusetts. Five minutes.
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Mr. DELAHUNT. Well, again, just to follow through on Mr. Nadler's question, you're not suggesting that in any way, Mr. Sokul, it would be unconstitutional, pursuant to the Quill decision, for States to enter into that agreement?
Mr. SOKUL. I think there might be a question of the States to do it amongst themselves, but——
Mr. DELAHUNT. Well, with all due respect, I don't think anyone else—is there anyone else on the panel that would suggest it's unconstitutional if——
Mr. SOKUL. Congress would have to sanction the compact.
Mr. DELAHUNT. Right. If Congress, pursuant to Quill, authorized it.
Mr. SOKUL. Right.
Mr. DELAHUNT. Could I ask you, then, I'll ask this of the panel. Mr. Gekas, who Chairs this subcommittee, Mr. Hyde, Mr. Conyers and Mr. Nadler introduced legislation doing just that, articulating the sense of Congress and initiating a—let me see if I can find it.
I see somebody getting it for me, authorizing the States to enter into a compact. This isn't it. But there's legislation before us that has the imprimatur or the support, on a bipartisan basis, of the ranking member of the Full Committee, the ranking member of the subcommittee, and the respective Chairs of both the Full Committee and the subcommittee—I mean, does anybody take issue with——
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Mr. NORQUIST. It's my understanding that that was introduced as a courtesy. I'm not sure that either Mr. Gekas or Mr.—I believe that was introduced as a courtesy. When I heard that it might be introduced as a courtesy——
Mr. DELAHUNT. I yield to the Chair, to one of the authors of this.
Mr. GEKAS. Mr. Norquist is exactly correct. It was introduced by virtue of a courtesy, so that the minority views of the Commission——
Mr. DELAHUNT. I see.
Mr. GEKAS [continuing]. Can be fairly represented.
Mr. DELAHUNT. I thank the Chair for the clarification.
Mr. SOKUL. But I would say that is the very issue. That is the issue before you. Should you do that? Should the States, should you grant——
Mr. DELAHUNT. Should we authorize the States to enter into an interstate sales and use compact?
Mr. SOKUL. Right. That is the question. And my testimony is that there are costs to doing that which I think discriminate in the end, or discriminate against electronic commerce. So I would think it would be a bad idea.
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Mr. DELAHUNT. Okay. Mr. Harris, you talked about this being a defeat for unlimited government. Do you concur with the theories of federalism propounded by Mr. Norquist?
Mr. HARRIS. I have not heard Mr. Norquist's theory of federalism. I've heard him answer some of the questions here today which relate to federalism.
Mr. DELAHUNT. He did articulate his, I think his interpretation of federalism as put forth by President Reagan. And whose was the other theory, who's the other author?
Mr. NORQUIST. Reagan was the federalist who believed States should compete with each other to provide the best government at the lowest cost. The alternative was George Wallace as the State's rights, meaning States' powers over their citizens.
Mr. DELAHUNT. Thank you. When you were referring to the defeat of unlimited government, are you suggesting that the States and local municipalities are taxing heavily?
Mr. HARRIS. I think if you look at the cumulative weight of taxes today, both at the local level, the State level and the Federal level, it points to the fact that we're paying, as Americans, more taxes now than——
Mr. DELAHUNT. You're suggesting now that in Virginia, where——
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Mr. HARRIS. We pride ourselves on cutting taxes.
Mr. DELAHUNT. You pride yourselves on cutting taxes. But the other 49 States and the municipalities within the political subdivisions within those States are putting a disproportionate burden of taxation on their citizens, is that your position?
Mr. HARRIS. I believe you asked me about the unlimited government question.
Mr. DELAHUNT. Right. Now I'm asking you another question.
Mr. HARRIS. And your question is, do I believe the other 49 States and localities are imposing too much of a tax burden?
Mr. DELAHUNT. A disproportionate burden on their citizens.
Mr. HARRIS. In some cases, yes, and in other cases, no. But because I don't have, I wouldn't be able to say what Massachusetts or North Carolina proposes at the State and local level. We heard testimony that there are about 6,500 different taxing jurisdictions in the country.
Mr. DELAHUNT. But you really haven't done an analysis of other political subdivisions in other States in terms of their taxing policy on their citizens?
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Mr. HARRIS. No, which is why I have not made a statement about that.
Mr. DELAHUNT. I'm sorry?
Mr. HARRIS. Which is why I have not made any statement about other States' taxing——
Mr. DELAHUNT. Yes, and I guess my disconnect is, you suggest that it's a defeat for unlimited government. I really, to be honest with you, I just can't understand the basis of that particular statement.
Mr. HARRIS. The government functions on the basis of the amount of taxes that it collects from its citizens. If we cast aside well settled American principles about individual initiative and government being——
Mr. DELAHUNT. Right, I understand all that.
Mr. HARRIS. Well, this is important. If government is to facilitate a person's individual initiative and the ability to maximize their God-given talents and abilities, then it's important to recognize the role, adopt that role to modern technology and the information age that we're living in now.
And the government continues to say that we have unrestrained authority to reach in and just grab taxes——
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Mr. DELAHUNT. But that's not what this debate is about.
Mr. HARRIS [continuing]. For whatever purpose—ultimately it is, sir, I disagree with that. I come from a low income background and I know that there are many individuals in this country from backgrounds just like mine in all 50 States who have extraordinary gifts and talents who for the first time have the ability to market their ideas, their creativity and their initiative——
Mr. DELAHUNT. This debate——
Mr. HARRIS [continuing]. In a medium they've never had before.
Mr. DELAHUNT. This is not about restraining that.
Mr. HARRIS. Yes, it is. Because if you impose a tax collection burden that is overly burdensome on just the same people that I'm talking about today, what you will have is a diminution of the growth of the electronic commerce industry that we have today. Which is why when you use the term growth of the industry, it's really about growth of opportunities for individual American citizens.
Mr. DELAHUNT. What I would suggest is——
Mr. HARRIS. Government wants to hamper that.
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Mr. DELAHUNT. I'm going to reclaim my time.
Mr. HARRIS. What we're going to do is——
Mr. DELAHUNT. Clearly you're an articulate individual and I'm sure you're well educated and the kind of services that government provides that allow people to access opportunities will not be available. That's what this is about.
Mr. HARRIS. I disagree with that. Does Congress have any studies that will show that?
Mr. DELAHUNT. Does Congress have any studies that will show what?
Mr. HARRIS. That it will diminish the opportunities you just spoke of. Because I haven't seen any.
Mr. DELAHUNT. Absolutely. There are extensive studies that show that education is absolutely essential to compete in this new economy today. I mean, that has been——
Mr. HARRIS. We all agree with that.
Mr. DELAHUNT. And I have to tell you right now, there's a debate going on this afternoon about the dearth of available talent in this country to meet the demands of the high tech economy. We are going to find ourselves in a position where we're going to have to raise the numbers of visas so that folks who are trained and educated elsewhere on the globe can come to this country to provide that talent.
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Mr. HARRIS. I agree with that. Education no doubt has a central role in the information industry. But you speak to the inability to find——
Mr. DELAHUNT. I—listen, we're all——
Mr. HARRIS [continuing]. Skills for the information industry today is not a result of government not being able to collect taxes for our educational system. It's because governments, both at the Federal level, the State level and local level, have had appallingly low levels of academic standards in education. The District of Columbia spends $9,000 per student on education and has one of the worst public education systems in the country. So I respectfully disagree with that.
Mr. DELAHUNT. Well, I'm sure I'm not going to comment on what happens in the District of Columbia. It's like I'm not——
Mr. HARRIS. I thought you were interested in local issues. I thought that's what you were asking about.
Mr. DELAHUNT. I am. And I'm not going to comment upon jurors in Alabama.
What I am suggesting, however, is that, whether it's States or local subdivisions, the revolution of 1994 was all about returning power—and power translates into dollars in this world—back to the States and local governments. And what we want to be able to do is to assure that at least they can make the decisions in terms of what their needs are and what their priorities are.
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I just want to conclude with a question to Mr. Kirk. Mr. Mayor, it's my understanding that conversations are ongoing now between the States with the commissioners on uniform laws about streamlining the process, making it more sensible. I think we can all agree that this is an opportunity here too. Because of the disparate approaches administratively and in terms of differences between more than, I think it's 30,000 taxing jurisdictions, it does provide an opportunity to make the sales and use tax application more sensible. Can you tell us what's happening, is there any time line involved, and can we look froward to a resolution or at least an understanding among the States and political subdivisions?
Mr. KIRK. Yes, thank you, Mr. Delahunt, and I'm going to ask Mr. Lebrun if he would add, because his work with NCCUSL is element to that. First of all, let me say that there is not a member of this Commission that would like to defend the current system of State and local sales taxes as a model for business in the 21st century. Recognizing that we are working very quickly to come up with a simplified model system that could be adopted by the States pursuant to the scenario laid out by Mr. Nadler and others that would allow us to do that, that would remove the burdens from the sellers, protect individual privacy, have common definitions and have a system that was fair both to e-tailers and retailers.
But before I yield to Mr. Lebrun, I'd like to add that you are absolutely correctly on point on this issue of education. If you talk to any leader of the Internet industry, they are much more concerned about the future of an available, qualified pool of talented individuals as to whether or not they pay State and local taxes. They want a tax system that's simplified. They want a system that's not burdensome. They want a system that doesn't impose unreasonable audit requirements.
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But their greatest concern is they can't find workers. The State of Texas now employs the second largest number of people in the technology industry in any State. It's an incredible part of our universe. But in the Dallas Metroplex area alone, we have 10,000 jobs that are vacant every day of the year because we can't find people.
If you want a sobering lesson, and I challenge every member of this committee, and it's that period of the year that I'm sure you all get more commencement requests than you can stand. But attend a graduate school of science and engineering schools in the country and look at the dearth of American borne students graduating from those schools. That's the greatest threat to the Internet.
And for those of us on the State and local side, our concern is that we do have sufficient funds to fund both secondary and higher education to ensure the real pipeline that feeds this incredible technology, and it's education and information.
Mr. GEKAS. The time of the gentleman has expired, but we wish to extend it for the purpose of hearing Mr. Lebrun's answer, and will consider that the end of the gentleman's time.
Mr. LEBRUN. Thank you, Mr. Chairman.
Mayor Kirk is correct, there is an ongoing project that I think 26 plus States are participating in to draft a streamlined State sales tax law. They have met twice, is my understanding, and the uniform laws conference has appointed a special committee to work with this project. The leadership of the conference has been in communication with the co-chairs of that project.
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It's my understanding that that project hopes to have some type of a proposal ready for comment by the fall of this year and perhaps ready for legislation and enactment in the States as early as 2001. I personally think that's a little ambitious. The uniform laws process, it would take about 2 years to complete the project. I think it's a little more detailed than what this project's undergoing. But we are wanting to work with the States, and I concur that the project can be done and it can be done on a timely fashion.
Thank you, Mr. Chairman.
Mr. GEKAS. The time of the gentleman has expired. We now turn for the last set of questions to the gentleman from Alabama.
Mr. BACHUS. Thank you.
First of all, Mr. Chairman, I want to make an announcement that George Wallace died. He died about a year ago, and may he rest in peace. Heard a lot of reference to him today.
We have heard about the majority report, the report that came to Congress, that there was only one report to Congress. I think you said that the only reason there was a minority bill introduced, that Mr. Hyde and Mr. Gekas did that as a courtesy, although that was not the official report. Is that right? I mean, there was just one report to Congress?
Mr. NORQUIST. There was one report that included all the individual comments. For instance, while I agreed with the majority report, I also had a little section in the back, each of us did as well. So you could call each of those minority reports, they were part of the actual report.
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Mr. BACHUS. How many votes did the majority report get?
Mr. NORQUIST. Eleven.
Mr. BACHUS. Okay.
Mr. NORQUIST. With the three Administration people abstaining on everything, even the things they said they agreed with us on.
Mr. KIRK. Mr. Bachus, I thank you for raising that point. I think it would be instructive for Congress if you recall, when this Commission was created, principally at the urging of some of the strong anti-tax advocates, a requirement that was put into that Commission that we make any findings back to Congress with a two-thirds vote of that Commission, principally to force us all to the center. We worked diligently to get there, and in fact, we were almost there. But there was a group that was insistent we would not bring you back any report at all that recognized the need to have an amended but simplified system, and would rather have a majority report.
The real travesty was that the majority then refused to even include in the report to Congress the minority report of those members of our Commission, forcing us to submit individual statements rather than the minority report. They refused to even record the full votes of the Commission on every issue. And we had the most arcane legal ruling ever that even while Congress required a two-thirds vote, that only a majority vote was required to go ahead and send you a report.
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So it's a report but it's not a report, but it doesn't accurately reflect the findings of our committee. And I especially want to offer my thanks to the chairman and other members who did submit the bill, so that you would have the full view of all the members of the Commission.
Mr. BACHUS. As you say, the Internet tax freedom required a two-thirds vote on all recommendations. Several of the recommendations that came to us did not meet that requirement.
Mr. NORQUIST. No, actually, I called for a series of test votes and I got everybody on the Commission except for Mr. Lebrun to praise the Clinton Administration's opposition to taxes at the border of electronic commerce. So we had like an 18 to 1 position on that.
And on the question of abolishing the 3 percent Spanish American War tax, everybody except Mr. Lebrun and the three Federal guys——
Mr. BACHUS. Well, I support that.
Mr. NORQUIST. Yes, but I think that's an important step forward. Again, we got overwhelming support for those. And the three Federal people told me that they opposed anything that would allow States to tax across State borders, but that they couldn't vote on that publicly. They abstained on everything. Remember what happened on the Medicare Commission? The Feds abstained. They did that to us here.
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That's why Senator Lott and Speaker Hastert sent a letter to the Commission saying, give us a majority report, don't let any block stop you from getting two-thirds. That's why you have a majority report.
Mr. NADLER. Will the gentleman yield?
Mr. BACHUS. Well, they actually, by letter, they basically just said do this anyway, and although the law says——
Mr. NADLER. Will the gentleman yield?
Mr. BACHUS. Well, let me go on with my questions.
Mr. NADLER. Just on that point for a second.
Mr. BACHUS. Without losing any time.
Mr. NADLER. Bottom line, you didn't get the requisite votes for that, and therefore there are no official recommendations.
Mr. GEKAS. That's correct.
Mr. NORQUIST. Actually, I think we had two thirds on some of them.
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Mr. BACHUS. Well, but not on, I mean, there were two bills by the chairman and by the subcommittee chairman, neither of which reflect a two-thirds vote.
Mr. GEKAS. That's correct.
Mr. BACHUS. So neither of them are the official recommendation of the Commission, it shouldn't be represented as——
Mr. NORQUIST. One of them reflects a majority report.
Mr. BACHUS. But not according to the law, which is it be two-thirds. Which is what the law says a majority report would be.
Mr. NORQUIST. Some of us have been suggesting that we have a two-thirds requirement to raise taxes by this Congress. I appreciate the support of some of you for that.
Mr. BACHUS. I appreciate your consistency on that. [Laughter.]
Mr. Sokul, you have said that you oppose a sales tax being collected on Internet sales, because it would be discriminatory. In fact, you said that again today. I had your testimony early.
Why would collecting a tax on Internet sales be discriminatory against that? Why is that unfair? Mr. Norquist said it was unfair. Why do you say it's unfair to collect it on Internet sales when you collect it on other types of sales?
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Mr. SOKUL. Again, this gets to the crux of the matter, which is number one, we're talking about not a State collecting a tax on its own citizens, within its own border.
Mr. BACHUS. So the first—and I understand, I think you've made that point, is that the first argument is, and I think Mr. Norquist, a citizen in one State shouldn't have to enforce the law of another State.
Mr. SOKUL. Unfairness results from——
Mr. BACHUS. So that wouldn't be discriminatory, that would be more unfair. Why is it discriminatory?
Mr. SOKUL. When you give, if Alabama gets the power from Congress to enforce its use tax, to collect its use tax nationwide, not just Alabama is going to get that authority, but every State is going to get the authority.
Mr. BACHUS. I understand, but wait a minute, and I'm saying to you, I understand, is your only argument that it's discriminatory the fact that another State, it has to be enforced in another State? It has to have the——
Mr. SOKUL. It's the cumulative effect of every State getting their way. That is discriminatory.
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Mr. BACHUS. In other words, a law in one State being enforced or a citizen or another State having to help assist enforce that law, that's where it's discriminatory?
Mr. SOKUL. Right. A local merchant in Alabama collects taxes just for Alabama.
Mr. BACHUS. Sure. When someone in Alabama—I understand, I'm not disputing what you're saying. I'm trying to get at it. What you're saying is that when I buy something in New Hampshire, in Alabama, it's just really unfair for New Hampshire or a citizen there to have to collect a tax to enforce a law back in Alabama.
Mr. SOKUL. Correct. And to do that for 50 different States.
Mr. BACHUS. And as you said, a citizen in one State having to assist a State 2,000 miles away enforce its laws. Well, let me use that analogy. What if a person in New Hampshire——
Mr. GEKAS. If the gentleman would wind down.
Mr. BACHUS. I'll wind down.
Mr. DELAHUNT. I'll ask unanimous consent that the gentleman get additional time as he may need.
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Mr. GEKAS. The Chair has already decided to do that. I'm asking the gentleman to wind down.
Mr. BACHUS. Thank you. Let me wind down. [Laughter.]
A guy goes into that liquor store on the New Hampshire border and sticks a gun in the face of the guy that runs the liquor store and robs him, and then he flees over into Massachusetts. Do you think the people in Massachusetts have any obligation to enforce the law in New Hampshire against robbery? It used to be, if you made it across a State line that you didn't have to enforce those laws.
Mr. SOKUL. That becomes a Federal crime and the FBI comes in.
Mr. BACHUS. Well, no, I'm saying the State of Massachusetts—there's interstate contacts and they have to—nothing to do with the Federal law.
Mr. SOKUL. In that case the State government is helping New Hampshire, Massachusetts——
Mr. BACHUS. Well, yes, the Massachusetts police officers risk their lives, they make an arrest, or let's just say that he's arrested in Massachusetts on a totally different charge. Well, then the State of New Hampshire sends and extradition warrant and makes a request on the State of Massachusetts, when you're through with this person, extradite him.
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Now, let me give you an example. In Alabama, we allow people to carry concealed weapons. Now, Washington, DC does not allow that. They don't allow guns at all. We in Alabama, we voted that people have a right to bear arms. Now, that's a real, you know, two jurisdictions with two different views.
What if a citizen violates a gun law here? And he goes to Alabama. Do you think that the citizens of Alabama and the courts in Alabama ought to pay to enforce the law up here and hold hearings in the judicial system and help send him back, when they don't even agree, they think that you ought to have a right to possess arms? Is that discriminatory?
Mr. NORQUIST. The second amendment applies to the whole Nation. And the fact that D.C. violates people's second amendment laws shouldn't impose on other people.
Mr. BACHUS. So you would say that Alabama shouldn't send him back?
Mr. NORQUIST. If I was on a jury, I sure wouldn't vote to send someone back for exercising their second amendment right.
Mr. BACHUS. You would say to heck with it, this might be a violation in Washington, DC, but we're not sending him back?
Mr. NORQUIST. I live in D.C. It's a very unsafe city because only the criminals have guns. You're mixing issues here.
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But——
Mr. BACHUS. So basically it's sort of consistent with what you're saying, if another State ought not help us enforce the laws of another State, particularly if they don't agree with them?
Mr. NORQUIST. I'm not arguing that State taxes by D.C. of D.C. citizens are violations of civil liberties on the face of it. I do consider D.C.'s gun laws to be violations of civil liberties on the face of it.
Mr. BACHUS. Let's just take the gun law that you can't possess a gun even in your home in Washington, okay?
Mr. NORQUIST. It's outrageous.
Mr. BACHUS. Let's take that specific case. A person is arrested here for possessing a gun. He's arrested in Alabama on a different matter. Washington, DC says, when you get through with him, send him up here.
Mr. NORQUIST. That's what the Government does.
Mr. BACHUS. Alabama shouldn't do that, right?
Mr. NORQUIST. My question was, if I was on a jury, I certainly wouldn't vote to——
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Mr. BACHUS. No, I'm talking about, you're not on a jury, you're the police chief in Bessemer, Alabama, you have a piece of paper from Washington, DC saying, send this guy back.
Mr. NORQUIST. I think there's a different issue between simple taxation and violation of civil liberties.
Mr. BACHUS. Well, these are laws, I mean, there is a law——
Mr. NORQUIST. The fugitive slave law was a law.
Mr. BACHUS. All 45 States that have sales tax have a use tax. So it's not a question of really making the Internet tax-free, in that these States have already said, we're going to tax, these are taxable transactions. All the State is saying, is please, enforce our laws.
Mr. NORQUIST. If Alabama went to an Alabama citizen and said, you bought a shirt from L.L. Bean, we're taking money from you, that's Alabama's business. Alabama is not allowed to go to Maine and——
Mr. BACHUS. Well, I guess what I'm saying, bottom line, let me wind down here.
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Mr. GEKAS. Winding up or winding down?
Mr. BACHUS. I'm winding up and down.
Mr. NADLER. You're doing a good job.
Mr. BACHUS. You've basically said your theory against this is that you don't think people in other States ought to help assist another State in enforcing its law.
Mr. NORQUIST. They should not be compelled without pay to do things.
Mr. BACHUS. Without pay? Well, I've got legislation that actually would allow them to be compensated for reasonable expenses of collecting those taxes.
Mr. NORQUIST. Reasonable decided by who?
Mr. BACHUS. By the law.
Mr. GEKAS. All time has expired. All time has wound down, and the committee stands adjourned. Thanks to all the members of the panel who testified. We appreciate it.
[Whereupon, at 12:06 p.m., the subcommittee was adjourned.]
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INTERNET TAX REFORM AND REDUCTION ACT OF 2000, INTERNET TAX SIMPLIFICATION ACT OF 2000 AND FAIR AND EQUITABLE INTERSTATE TAX COMPACT SIMPLIFICATION ACT OF 2000
THURSDAY, JUNE 29, 2000
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to call, at 10 a.m., in Room 2237, Rayburn House Office Building, Hon. George W. Gekas [chairman of the subcommittee] presiding.
Members present: Representatives George W. Gekas, Steve Chabot, Lindsey O. Graham, Spencer Bachus, David Vitter, John Conyers, Jr., Jerrold Nadler, William D. Delahunt, and Anthony D. Weiner.
Staff present: Raymond V. Smietanka, subcommittee chief counsel; Robert N. Tracci, counsel; Brie Harlow, staff assistant; Peter Levinson, Full Committee counsel; Michone Johnson, minority counsel; Sampak Garg, minority counsel; and David Lachmann, minority professional staff member.
OPENING STATEMENT OF CHAIRMAN GEKAS
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Mr. GEKAS. The hour of 10 o'clock having arrived, the committee will come to order. Because of the rules of the House, which also seep down to the rules of each committee, a duly constituted hearing cannot proceed without the appearance of a hearing quorum, which in our case consists of two members. We will have to await the presence of the next member so that the gavel can fall again.
What we have done, at least in the short term, is to live up to our commitment to begin every hearing on time, which we have succeeded in doing, even though we have to recess many times until the second member should appear. I have the option of reciting Othello verses from the last act or simply gavelling again to await the next member. I think we will wait. We are in recess.
[Recess.]
Mr. GEKAS. To conserve some time will the members of the first panel please approach the table and take seats so that we can at least be prepared when the next member has arrived. The next member has arrived; the gentleman from Louisiana, Mr. Vitter, has arrived. The committee will come to order. The record will indicate that the Chair along with the member from Louisiana, Mr. Vitter, are present and we can proceed with today's business.
Today's business is that of trying to develop a record on the various issues that have arisen by reason of the advent of the Internet. The blessing is that the Internet is well-acknowledged throughout the world. Some of the Internet's shortcomings, when they have to do with taxing and commercial issues that the society is not yet ready to accept 100 percent, are slowly being debated and conclusions are being gathered. But the question of taxation of the Internet will be with us for quite some time to come, even when some conclusions might be reached.
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The purpose of the hearing today is to develop the various opinions that will impact the final decisions made by Congress with regard to Internet taxation which will also impact decisions made by the local and State taxing bodies. It is for this reason that the moratorium was even conceived in previous months and why the report of the Advisory on Electronic Commerce Commission that was set up to examine these issues came to the conclusion that at least for the time being the tax moratorium should continue. This gives us, of course, ample opportunity timewise to prepare ourselves for a well-advanced set of principles to apply to the vexing issue of Internet taxation. Our witnesses will go a long way, I am sure, in helping us to put together a record that will serve this committee and the Congress and the people of our Nation well.
With that, we ask the gentleman from Louisiana if he should have an opening statement.
[The prepared statement of Mr. Gekas follows:]
PREPARED STATEMENT OF HON. GEORGE W. GEKAS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA, AND CHAIRMAN, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
The Internet has revolutionized society in a manner few could have imagined. The Internet has brought people together while dramatically increasing the accessibility of information once reserved to the privileged few. The Internet and related industries have also demonstrated enormous commercial success, presently accounting for over a third of real U.S. economic growth.
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While the government deserves credit for helping create the infrastructure of the new digital economy, regulation and taxation threaten to undermine its tremendous commercial potential.
In 1998, Congress passed the Internet Tax Freedom Act to address some of manifold issues raised by electronic commerce. The Act imposed a three year moratorium on certain Internet taxes and created the Advisory Commission on Electronic Commerce to examine the social and economic impact of electronic commerce. The Commission consisted of representatives from a broad spectrum of government and industry and reported its findings to Congress in April of this year.
Last month, this Subcommittee invited members of the Commission to a hearing on the tax implications of Internet commerce. While many opinions were expressed, those testifying shared the common view that current multi-state taxing complexities threaten to stymie the full commercial potential of the Internet.
This morning, we will consider three bills that are intended to bring a measure of uniformity and predictability to a myriad of disparate state and local taxes on electronic commerce. Representatives from state government will discuss the impact of electronic commerce on tax revenue and suggest methods to simplify state taxing policies that affect interstate commerce, a subject over which this Subcommittee has jurisdiction.
We will also hear from traditional ''brick and mortar'' retailers, who claim that the current Internet tax system places them at a competitive disadvantage, and from electronic merchants who also insist that current taxing complexities stifle their ability to effectively compete.
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Finally, we will consider the legal limitations on state taxing authority and examine proposals to simplify administrative tax burdens on electronic merchants while ensuring a level taxing playing field for traditional merchants.
I look forward to an informative hearing and personally welcome the distinguished panelists who will testify this morning.
Mr. VITTER. Yes. Thank you, Mr. Chairman. Mr. Chairman, I want to thank you for calling this hearing to study several issues, including the collection of sales and use taxes on Internet sales, and also I want to thank you specifically for inviting Sheriff Jack Strain of St. Tammany Parish in my district to testify today and offer his perspective on this issue. In Louisiana, sheriffs also serve as the ex officio tax collectors of their respective parishes, so I believe Sheriff Strain's testimony will be very useful to this committee in building a record as we study the future of local tax administration in the digital age.
Sheriff Strain, thank you for being here today, and I look forward to your testimony as well as those of all the other witnesses.
Mr. Chairman, I am excited about the explosive growth of the Internet and I am convinced the information technology sector is propelling the current U.S. economic expansion. Electronic commerce is undoubtedly having positive effects on our economy and with innovations of new value and greater efficiency assured, it promises even more growth. I am convinced that it does not have to produce winners and losers. It can offer the potential to be the rising tide that lifts all boats.
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I hope Congress will continue to support this burgeoning sector of our economy. But to ensure that State and local governments remain viable in the 21st century, we must foster greater awareness of the ramifications the growth of e-commerce could have on existing local sales tax revenue. Currently, 45 States impose a sales tax, many, many more local jurisdictions. And they use that to fund local priorities such as education, transportation and law enforcement. Should State and local sales tax revenue fall off, local governments will be strapped to provide what are essentially local services. Regardless of your views on the fairness and efficiency of sales taxes, this is a change we must all be prepared for and probably legislate in light of.
Fewer States are more reliant on sales tax revenue than mine. In Louisiana, sales taxes account for over 20 percent of many parishes' operating budgets. In the City of New Orleans, for instance, sales tax makes up about 43 percent of the city's annual budget. While the average U.S. citizen pays about $100 in local sales taxes each year, Louisiana residents pay an average of $450. Although online sales make up less than 1 percent of total retail sales now in Louisiana, everybody knows that this will rise significantly over the next few years.
Given the serious situation and hard choices facing Louisiana local governments in the near future, I have been encouraging Louisiana elected officials in my district to help address this issue now. To that end, I invited several local officials from southeast Louisiana to attend this hearing and to participate in a series of in-depth briefings that I have arranged on the future of taxation in the digital age. Many of these Louisiana elected and appointed officials are in the audience today and I thank them as well for coming. I am confident that we can continue a constructive dialogue we have begun to address this very real challenge.
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Again, Mr. Chairman, I thank you for calling this hearing and I look forward to the testimony of our panelists. With that, I yield back my time.
Mr. GEKAS. The record should indicate that the gentleman from Alabama, Mr. Bachus, a member of the committee, is present, as well as the gentleman from New York, the ranking minority member, Mr. Nadler. Does either individual wish to make an opening statement?
Mr. Bachus is recognized.
Mr. BACHUS. I thank the chairman. Last month, the House of Representatives passed H.R. 3709, the 5-year extension of the moratorium on access and multiple and discriminatory taxes on the Internet. Unfortunately, in doing so, the House failed to solve the more vital and complex issue of the collection of sales and use tax on Internet commerce. We did, however, take the all-important step of acknowledging this pressing need by agreeing to the Istook amendment.
Currently online sales are subject to sales and use taxes. However, because of the Supreme Court's Quill decision, States cannot require Internet retailers to collect sales tax unless the retailer has a physical presence in the State of the buyer. When the sales tax is not collected, the purchaser is required to pay the use tax to their home taxing jurisdiction. Understandably, compliance with the use tax is very low and therefore most Internet sales occur tax-free.
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Congress's failure to act on the sales tax issue means that Internet retailers will continue to enjoy a tax haven while brick and mortar retailers will pay higher and higher taxes to make up the revenues lost to tax-free online sales.
By not solving the sales and use problem, Congress is endorsing an unlevel playing field that places Main Street retailers at a competitive disadvantage to their online competitors. Sound policy requires a tax system that does not favor one type of sales over another. An unlevel playing field is not the only issue. The solvency of our State and local governments is at stake as well. Sales tax are the backbone of most State budgets and the foundation for the funding of education, police, fire, and transportation needs in our community.
In my home State of Alabama, as in many other States around the country, our public schools' primary source of funding comes from sales tax collections. As untaxed e-commerce has become an increasingly popular mode for purchasing, Alabama schools today face a funding crisis that threatens to undermine their ability to educate our children. This problem will only worsen with time if we do not act to ensure a level playing field in retail sales taxation. If Congress does not act to ratify the current unfair treatment of online and in-store retail sales, the States will lose more than $20 billion a year by 2003.
That is why a bipartisan group of 41 governors has petitioned Congress to address the sales and use tax issue and to do so now. Most agree the current situation is untenable and needs to be addressed. The House voted 289–138 in favor of the Istook amendment, which expresses the sense of Congress that the States and localities should work together to develop a nondiscriminatory tax system on electronic commerce.
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While the passage of the Istook amendment sends a clear message that Congress will work with the States and localities to develop tax systems that will treat all retailers fairly, it does not solve the fundamental issue. The Supreme Court made it clear in the Quill decision that it is Congress' responsibility to address the sales and use tax issue. Therefore, I and several colleagues have introduced H.R. 4462, the Fair and Equitable Interstate Tax Compact Simplification Act. This legislation will encourage the States to simplify their sales tax system, ease the burden of sales tax collection, and provide a level playing field for all retailers. Congress must act to provide States the ability to lift the use tax burden off of consumers and place all retailers with equal collection responsibility.
My legislation would authorize States to develop and enter into an interstate sales and use tax compact. States that join the compact would be required to adopt a simplified sales tax system. In turn, States adopting the simplified system would be authorized to require remote sellers above a sales volume threshold to collect use tax on all taxable sales into a State. My legislation also provides Congress an expedited review procedure to consider and approve or disapprove the results of the compact.
Finally, my legislation will provide a framework for simplification and allow States to require collection when the simplification process has been completed. Allowing the States to require collection when the States meet the established criteria for simplification is a reasonable and necessary step for Congress to take. This legislation is a necessary complement to the 5-year extension of the moratorium of H.R. 3709.
Mr. GEKAS. Does the gentleman require additional time?
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Mr. BACHUS. An additional minute.
Mr. GEKAS. Without objection.
Mr. BACHUS. Thank you, Mr. Chairman. Simply extending the moratorium by itself is an empty gesture that does not solve the most pressing issue of electronic commerce.
In conclusion, Mr. Chairman, I would simply say that when you exempt certain retailers from a use or sales tax, you are shifting that burden to other retailers. In this case, we are shifting the burden to hometown businesses and to brick and mortar businesses. Those businesses are the very businesses that are already paying licenses and other local taxes. They are paying property taxes already to support law enforcement, to support schools. To me it is unconscionable that we would discriminate in such a way against family and hometown businesses.
Thank you, Mr. Chairman.
Mr. GEKAS. We thank the gentleman. The gentleman from New York is recognized for the purposes of an opening statement.
Mr. NADLER. Thank you, Mr. Chairman. Today we continue our hearings on the question of the Internet and taxation, most importantly with respect to the question of how we manage the appropriate needs of State and local governments with the right of businesses not to be exposed to multiple and discriminatory taxes. Although the House has already passed legislation without hearings and serious and proper consideration, I am pleased that the chairman has scheduled these hearings to illuminate some of these important questions.
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I want to welcome all our witnesses, but especially the New Yorkers who will be testifying today. Mr. Arthur Rosen of the firm of McDermott, Will & Emery, an expert in the law of interstate taxation, and Mr. David Friedensohn, CEO and chairman of the Board of BigStar Entertainment, the pioneering Internet company. In addition to being a leader in his field, Mr. Friedensohn has been a thoughtful advocate for his industry and has, I believe, some interesting thoughts to share with the subcommittee.
I look forward to the testimony of all our witnesses. I want to add a couple of thoughts of my own on the subject.
I think there is probably unanimity, or near unanimity, in the Congress that neither Internet companies nor anybody else should be subject to multiple or discriminatory taxation. I don't think that is the question before us. The real question is how do you tax sales over the Internet. Obviously States have made their own sales and use tax laws. Most States have required that people who purchase objects or goods through catalog companies based out-of-State pay a use tax. States have not been able—because of a Supreme Court decision requiring a nexus, States have not been able for the most part to require the catalog company making the sale to enforce the State sales tax law, or the State use tax law, and for the most part those laws have not been enforced.
Given the rather small percentage of catalog sales in the overall scheme of things, this has not been for the most part a terribly debilitating problem for the States. But if the Internet is going to realize the potential we all believe it will and a very large fraction of sales will be done, a much larger fraction of sales will be done over the Internet, if all sales on the Internet were to escape State taxation, this would cripple, in my opinion, the tax base of the States. We must find a way, without undue burden on Internet companies or service or ISP companies or companies selling over the Internet, to subject those sales to local taxes, to State sales taxes on an equal basis with sales taxes for brick and mortar companies so that the playing field is leveled, so that people make purchase decisions based on economic, not tax avoidance, criteria. All the economists tell us that that is essential if we are going to have an efficient and a growing economy and so that we don't wreck the tax bases of the States.
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Now, I realize that there are ill-motivated ideologues, such as, for instance, Mr. Norquist, who simply want to destroy the tax bases of the States because they have an ideological bias against States or any other governments doing anything. I hope we will avoid those ideological traps, as, unfortunately, the commission the Congress set up in the legislation that I cosponsored a number of years ago to establish the original moratorium did not.
So I hope we will hear testimony today as to fair and equitable ways in which States can enforce their tax laws without placing inequitable or undue burdens on anybody using the Internet. For my part, I take it as axiomatic that it is wrong to simply say that an entire area of commerce should not be subject to any taxes whatsoever and certainly wrong for the Federal Government to impose that on the States. Some of us believe that State sovereignty has some real meaning even if not the meaning that some other people would give to it.
So I hope that the witnesses today can elucidate on these questions. I will apologize in advance that I have another appointment to go to at 11:30. So I may not hear some of the subsequent panels, but my staff will be here the entire day. I thank you and I yield back.
Mr. GEKAS. The time of the gentleman has expired. We will extend an invitation to Mr. Norquist to submit a statement if he wishes to.
Mr. NADLER. That would be delightful.
Mr. GEKAS. In rebuttal of the statements made by the gentleman from New York.
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Mr. BACHUS. Chairman Gekas.
Mr. GEKAS. The gentleman is recognized.
Mr. BACHUS. You might recall that Mr. Norquist did testify at an earlier hearing and made quite an unusual statement.
Mr. GEKAS. We are aware of that.
Mr. NADLER. And that I expressed my opinion at that time, and he expressed his rebuttal at that time.
Mr. GEKAS. I really appreciate the observation.
We will proceed with the introduction of the panel. Our first witness is California State Senator Ray Haynes. He received his bachelor of arts degree in political science from Lutheran College and his law degree from the University of Southern California. Senator Haynes completed his education with a master's degree in public administration from Eastern Kentucky University. He has served in both chambers of the California General Assembly and is currently chairman of the American Legislative Exchange Council.
Our next witness is R. Michael Southcombe, chairman of the Idaho State Tax Commission. Mr. Southcombe also serves as chairman of the Multistate Tax Commission, a governmental agency seeking uniformity, fairness and simplicity in State taxation. A licensed attorney for 38 years, Mr. Southcombe has served as Chief Deputy Attorney General for Boise County, Idaho. He retired from the U.S. Army Judge Advocate General Corps in 1987.
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Gary Viken, our third witness, is secretary of revenue for the State of South Dakota and also serves as vice president of the National Federation of Tax Administrators. Mr. Viken holds a bachelor of science degree in business administration from Huron University and a master's of business administration degree from Minnesota State University of Mankato. As a Bush Foundation Leadership Fellow, he has completed executive programs at Harvard University's Kennedy School of Government and the University of Minnesota's Carlson School of Management.
For our last witness, the Chair will yield to the gentleman from Louisiana for the purposes of that introduction.
Mr. VITTER. Thank you, Mr. Chairman. Our fourth witness is Sheriff Jack Strain. Sheriff Strain grew up in his jurisdiction, St. Tammany Parish and became a police officer in 1981 for the City of Covington Police Department. In 1986, at age 23, he became the youngest elected law enforcement executive in Louisiana when voters chose him as Abita Springs police chief. He was reelected in 1990 and in 1994.
Then in November 1995, Mr. Strain led a field of 10 candidates and replaced the retiring sheriff of St. Tammany Parish to become the new sheriff and ex officio tax collector of St. Tammany Parish. In October 1999, Sheriff Strain was reelected with no opposition, the first time in 40 years that a sheriff was elected in St. Tammany Parish with no opposition. He is currently in his second term.
I would also note that St. Tammany Parish is probably the highest growth area of Louisiana, enjoying a very healthy economy in many respects, but still very much feels the impact of the growth of Internet sales on declining sales tax revenues, at least declining from what they would otherwise be.
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Thank you, Mr. Chairman.
Mr. GEKAS. We thank the gentleman. At the outset, we can say to the members of the panel that their written statements will become automatically a part of the record without objection, and that we will ask you to restrict your presentation to about 5 minutes, and we will, if you are willing, examine your testimony thereafter.
We will begin in the order in which the witnesses were introduced with Senator Haynes.
STATEMENT OF RAY HAYNES, CALIFORNIA STATE SENATOR
Mr. HAYNES. Thank you, Chairman Gekas. For just a real brief statement of what the American Legislative Exchange Council is, I am the national chairman of the American Legislative Exchange Council. Our 2500 volunteer members are members of State legislatures all across the country. It is a national organization. It is a bipartisan organization, represents about one-third of the State legislators. In order to become a member of American Legislative Exchange Council you actually have to pay dues. So it is a purely voluntary organization.
I appreciate the opportunity to speak to the committee today on the question of Internet taxation. One point I want to make, there is, I believe, an unfortunate misconception among casual observers of the debate on Internet taxation that all State and local officials are eager to tax e-commerce. This is clearly not the case. We at ALEC are happy to dispel the myth.
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Speaking of myths, it does seem that as though the Internet has spawned as many policy myths and half truths as it has dot.com addresses. The taxation of e-commerce is one area in particular that is plagued by dubious assumptions, misguided fears and alarmist rhetoric. Many State lawmakers are acting on unsubstantiated claims that untaxed e-commerce will result in a significant drain on State coffers and that it will ultimately force traditional retailers out of business. There are a host of half-baked notions about e-commerce, and I would like to use my time to discuss some of the worst of the lot.
Number one, State and local governments are facing imminent fiscal crisis unless they are allowed to tax e-commerce. Without the opportunity to tax a single e-commerce transaction, the State of California this year experienced a $12 billion surplus. To give you an example, I joined the California legislature in 1992. At that time our total State budget was $39 billion. This last year, 8 years later, it was $78 billion. It was $12 billion above what we thought we were going to have last year. It was $20 billion above what we thought we were going to have this year 2 years ago. And it was fully $25 billion above what we thought we were going to have 3 years ago in this tax year. So we are not suffering from the lack of the ability to tax e-commerce.
During this entire period of time, we managed to spend every dime of that without a whole significant—without much tax relief to the voters of the State of California. That causes some concerns among my 900,000 constituents, but nevertheless it is not a problem for the State legislature in terms of the ability to—we finance our local schools, we finance local and State government, most of the money comes out of Sacramento to do those things. In light of that, I can't help but wonder why some politicians are looking for a new source of revenue when the established sources seem to be doing such a good job.
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I am aware that the current economic good fortune is not a permanent condition, but it is specious to assert that State and local government finances in general are in immediate peril unless they are given greater power to tax e-commerce. The dubiousness of these claims is further illustrated when you take into consideration how meager e-commerce is with respect to the whole domestic retail market. According to figures from the U.S. Commerce Department for the last two quarters, total e-commerce amounted to $5.2 billion and $5.3 billion respectively. These numbers account for less than 1 percent of the total retail sales during the same period. Taxable sales online would be even lower, since a large portion of e-commerce is not subject to State and local taxation. Airline tickets, financial services, two of the most popular e-commerce items, are exempt from State and local taxes.
Second, e-commerce represents a direct threat to the economic health and viability of Main Street retailers. I want to make this point, I think, with that. The problem with respect to competition between e-tailers and retailers, brick and mortar, is a problem caused by government, taxation by government. I am not quite sure how you solve a problem created by government by creating more government. That is what those who want to tax or at least have Congress step in the middle of telling States, allowing States to tax e-commerce, that is what they want to do, to say the way to solve the problem created by government is to create more government.
Finally, States are capable of simplifying and unifying their own sales tax system without Federal guidance. I don't think we need the help. The biggest fear I think that most States have is that Congress will actually tell us that we get to do it on our own and allow federalism to truly work by letting the States compete for the e-tailers and the retailers on an equal basis.
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[The prepared statement of Mr. Haynes follows:]
PREPARED STATEMENT OF RAY HAYNES, CALIFORNIA STATE SENATOR
SUMMARY
Taxation of e-commerce is a policy issue that is plagued by dubious assumptions, misguided fears, and alarmist rhetoric. Many state lawmakers are acting on unsubstantiated claims that untaxed e-commerce will result in a significant drain on state coffers and that it will ultimately force traditional retailers out of business. Proponents of plans to tax e-commerce argue that state and local governments are facing an impending crisis unless they are given greater authority over Internet transactions. They make these claims despite the fact that most state governments are enjoying unprecedented budget surpluses. Estimates about the size of ''lost revenue'' appear even more dubious when you take into consideration the meager size of e-commerce relative to the entire domestic retail market. According to figures from the U.S. Commerce Department, e-commerce accounts for less than one percent of total retail sales. Furthermore, there is no evidence that e-commerce presents an eminent threat to traditional ''main street'' merchants. According to the limited survey research that is available, small businessmen view the Internet as an opportunity to expand their market share, not as a danger to their livelihood. Although advocates of e-commerce taxation like to couch their arguments in the rhetoric of states rights and local control, they are missing an important point. The e-commerce debate, stripped of its technical and legal jargon, is essentially an interstate commerce question and as such it falls under the unambiguous purview of the federal government. States and localities have a stake in e-commerce and they should be an active partner in whatever policy is developed, but the American Legislative Exchange Council does not believe that the states can address this issue absent federal advice. Undoubtedly, the Internet poses a challenge for policy makers in the new millennium and we are aware that sales tax revenue will continue to be an issue that crops up, but the concern right now is out of proportion to the perceived problem. At ALEC we take seriously the adage ''the power to tax is the power to destroy.'' We continue to hope that Congress will take the lead and explore issues raised by e-commerce and the Internet, but that it will not make bad policy based on unsubstantiated claims and misplaced fears.
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STATEMENT
Introduction
Thank you Chairman Gekas and members of the Judiciary Subcommittee on Commercial and Administrative Law for extending this gracious invitation to speak before you today on an issue that has broad ranging implications for state policy in the 21st century. I would especially like to commend you for soliciting ALEC's opinion with respect to e-commerce taxation. There is, I believe, an unfortunate misconception among casual observers of the debate that all state and local officials are eager to tax e-commerce. This is clearly not the case and we at ALEC are happy to dispel the myth
Speaking of myths, it seems as though the Internet has spawned as many policy myths and half-truths as it has dot.com addresses. The taxation of e-commerce is one area in particular that is plagued by dubious assumptions, misguided fears, and alarmist rhetoric. Many state lawmakers are acting on unsubstantiated claims that untaxed e-commerce will result in a significant drain on state coffers and that it will ultimately force traditional retailers out of business. There are a host of half-baked notions about e-commerce and I would like to use my time to discuss some of the worst of the lot.
Myth #1: State and local governments are facing an eminent fiscal crisis unless they are allowed to tax e-commerce.
In their zeal to tax e-commerce some policy makers have taken hyperbole to new heights by claiming that police, fire, and sanitation service, not to mention school budgets, are all in jeopardy because of the growth of e-commerce. This claim is not justified by the facts. Over the past five years state and local governments, collectively speaking, have seen a dramatic growth in revenue collection that, in many cases, far exceeds the estimates used to craft budgets. Despite a series of tax cuts and significant and sustained increases in government spending, state governments have still been able to amass significant budget surpluses. It seems contradictory that while governors and legislators are looking for ways to get rid of extra revenue, they should simultaneously attempt to broaden their tax authority. In my home state of California, for example, policy makers face the difficult task of what to do with a $12 billion surplus—the largest in state history. Unfortunately, at the same time they spent that surplus without significant tax relief the Assembly has passed a bill that will make it easier for the state to collect sales tax from out of state vendors who sell on-line. I can't help but wonder why politicians are looking for a new source of revenue when the established sources seem to be doing the job?
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I am aware that the current economic good fortune is not a permanent condition, but it is specious to assert that state and local government finances in general are in immediate peril unless they are given greater power to tax e-commerce. The dubiousness of these claims is further illustrated when you take into consideration how meager e-commerce is with respect to the whole domestic retail market. According to figures from the U.S. Commerce Department, for the last two quarters total e-commerce amounted to $5.2 billion and $5.3 billion respectively. Yet these numbers only account for less than one percent of total retail sales for the same periods. Taxable sales on-line would be even lower since a large portion of e-commerce is not subject to state and local taxation. Airline tickets and financial services—two of the most popular e-commerce items—are exempt from state and local sales tax. Given these facts, the question I have to ask proponents of taxing e-commerce is—where is the fire?
Myth #2: E-commerce represents a direct threat to the economic health and viability of ''main street'' retailers.
With the exception of some anecdotal stories, there is no evidence that proves e-commerce is harming main street businesses. In fact, what little data we have seems to point in the opposite direction. According to surveys conducted by the Small Business Administration and the National Trust for Historic Preservation among others, small business owners see the Internet as an opportunity for, not a threat to, their livelihood.
At a meeting last May I heard a compelling story from Todd Mogren with Coastal Tool & Supply, a small independent hardware retailer from Connecticut. In the mid 1990s the store came under severe pressure from a large national hardware chain and it appeared unlikely that they would survive. Then they discovered the Internet and created a web site to sell their goods. During the next several years business grew by leaps and bounds until they finally needed to relocate to a larger venue to accommodate the increased demand. Last year they opened a new store directly across the street from the national competitor that threatened to put them out of business a few years earlier. That modern day success story, however, is also a cautionary tale. The retailer assured me that his company would not have moved to the web if it had been liable to collect sales tax from every customer's jurisdiction. It is clear, from a small business perspective, that the greatest impediment to future use of the Internet is the possibility of more regulation and a higher tax burden.
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I think policy makers also need to remember that the larger dot.com firms and etailers are not invincible juggernauts that are capable of always beating their traditional brick-and-mortar competitors. For every Amazon.com success story there are a hundred companies that fail. Some stock analysts assume that over half of these dot.com companies—most of which have never turned a profit—will go belly up in the next few years. This is not to suggest that etailers need special government protection. The market is doing a fine job of winnowing the field down to the strongest, most viable businesses. What it does suggest, however, is that these companies do not possess some insurmountable advantage over traditional retailers
Myth #3: States are capable of simplifying and unifying their own sales tax systems without federal guidance.
During the past year the National Conference of State Legislatures (NCSL) and the National Governors Association (NGA) have been promoting their answer to the e-commerce dilemma. They have drafted model legislation that would enable state governments to enter into negotiations to simplify state sales tax systems as a preliminary step toward taxing remote sales. I applaud any serious effort to simplify state and local sales tax. In most states the sales tax code is rife with questionable exemptions that favor certain kinds of business and distort the proper functions of the market. Yet it seems unrealistic, not to mention a sharp departure from the historical record, to expect that states can get together and settle this matter on their own. It is a common and accepted practice in state legislatures to draft tax exemptions that benefit local industries and merchants. In fact, some observers would argue that it is an intrinsic part of the legislative process. The old habits die-hard and remain entrenched even among states that seem willing to simplify the sales tax. Since January, 15 states have adopted the NCSL model bill entitled ''A Streamlined Sales Tax for the 21st Century.'' During the same period in the same states, over 150 bills were introduced that carved exemptions for items ranging from gumballs and bee keeping equipment to nicotine patches and car wax. Of these bills, 25 were enacted into law. So while the states are claiming to be working toward a simpler, unified tax structure, they are simultaneously complicating the existing code. That is not the kind of behavior that inspires trust among on-line vendors.
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Conclusion
The reason why I have devoted my time to some of the key misconceptions in the e-commerce debate is to illustrate that the states are not in a crisis that demands an immediate response—particularly one that could threaten the continued growth of e-commerce. ALEC believes that current efforts to institute a tax plan to capture supposed ''lost revenue'' due to Internet sales are misguided. The obvious question is do we need to extend the hand of the tax man into the web? We believe the answer, for the moment, is no. On the contrary, we encourage policy makers to take it slow with respect to e-commerce. In the absence of an obvious fiscal crisis or evidence that e-commerce is damaging traditional retail sales, there is no pressing need to implement a new, radical tax scheme. Undoubtedly, the Internet poses a challenge for policy makers in the new millennium and we are aware that sales tax revenue will continue to be an issue that crops up, but the concern right now is out of proportion to the perceived problem. At ALEC we take seriously the adage ''the power to tax is the power to destroy.'' We continue to hope that Congress will continue to explore issues raised by e-commerce and the Internet, but that it will not make bad policy based on unsubstantiated claims and misplaced fears.
In the end, a free market, and a proper respect for the principles of Federalism, contained in the Constitution, will solve the issue of Internet taxation. Congress is important to ensure that the states respect the Constitution, and to promote a free market. As long as it accomplishes those two tasks, the sales tax issue will resolve itself.
[The prepared statement of Mr. Saland follows:]
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PREPARED STATEMENT OF STEPHEN SALAND, NEW YORK STATE SENATOR
Chairman Gekas, Ranking Member Nadler and members of the Subcommittee on Commercial and Administrative Law, I appreciate the invitation to testify before you today on behalf of the National Conference of State Legislatures. The National Conference of State Legislatures is a bi-partisan organization representing every state legislator from all fifty states and our nation's commonwealths, territories, possessions and the District of Columbia.
I am pleased to have the opportunity to speak to you about state and local taxation of electronic commerce, particularly, the ability of state and local governments to collect the sales and use tax presently owed on transactions which occur on the Internet through remote sellers. Let me make clear, state legislators are not advocating any new taxes on electronic commerce. We desire, however, to create a streamlined sales and tax collection system to more efficiently collect the transactional taxes legally imposed by our states.
ELECTRONIC COMMERCE AND THE STATES
Let me first acknowledge that there is much misinformation being disseminated that state governments view the Internet and Electronic Commerce as a ''cash cow'' and we, as state officials, are salivating for our prime cut. This is simply not true.
Speaking for my colleagues, we recognize the vital economic force that the Internet and advanced telecommunications services will be for our states and our nation. We also are as concerned as you are about the unintended consequences of obsolete, discriminatory or multiple taxes on this vital new technology.
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It is important to note for the record that no state has enacted any Internet specific taxes. In some states where a tax on Internet access was grandfathered by the Internet Tax Freedom Act of 1998, state legislatures have worked to repeal those taxes. For example, the state legislatures in Connecticut, Iowa and the Wisconsin state Assembly have voted to do so.
With that said, we need to make clear that state legislatures are equally concerned about the impact that sales tax free electronic commerce transactions will have on state revenues and the unfair competitive burden it will have on small main street businesses, the life blood of many of our small towns and communities. I am sure many of you each year are asked to help sponsor a little league team or take an ad in a high school yearbook somewhere in your district. Your hometown brick and mortar store does that every year. Will America Online, Time Warner, Amazon.com, Microsoft, or Cisco sponsor the little league team next year or support your local boy and girl scout troop? I think you know the answer.
For the record, let me state that,
State legislators recognize the role that a strong telecommunications infrastructure will play in future economic growth.
In the last five years state legislatures and governors have reduced taxes by over $25 billion. And as long as the economy remains strong, tax reductions will continue.
Most states do not tax Internet access charges and the trend is to exempt them. And even in states that do tax Internet access, a 5% to 8% tax imposed on the customer is not going to measurably affect demand for Internet access. America Online increased prices by 10% in 1998 and its revenue base, stock price, and market position remain strong.
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If business is concerned about taxes on the ''Internet,'' they should be talking to Congress. Most of the current taxes on the ''Internet'' are federal excise taxes, access charges, and other taxes and ''fees'' on the telecommunications providers that are the backbone of the Internet—not state and local sales and use taxes.
Our concern at the state level is the future of our primary consumption tax—the general sales and use tax. This tax provides about one-third of state revenue—over $150 billion in 1998—with most of the funds used to finance K–12 education.
SALES TAX POPULARITY
As we all know, taxes are not very popular. However, if state and local governments are to provide necessary services, like education and public safety, then we need to maintain our ability to levy taxes. In surveys of taxpayers as to which tax of all the major federal, state and local taxes they dislike the least, the surprising answer has been the sales tax.
Voters all over the country have approved local sales taxes to pay for sports stadiums, added police protection, land acquisition for open space, and transportation improvements. The taxpayers of the state of Michigan overwhelming voted to use the sales tax as opposed to property tax as the major source of revenue for education and then the next year, they voted to increase the sales tax.
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As you know, the sales tax is imposed on the customer, not the seller. Sellers collect the tax on behalf of state and local governments and pass this money along to them. Many states pay merchants for this service, typically allowing them to keep between 1 and 3 percent of what they collect to offset the administrative cost.
SALES TAX AND ELECTRONIC COMMERCE
The problem states have with the sales tax is that the base keeps shrinking. In the 1930s, when the sales tax was first imposed, consumers bought goods from the local merchant and it was not that difficult for the merchant to collect a few cents on the dollar. Also, most Americans spent very little on services—they spent most of their money on taxable goods. And there were very few ''remote sellers.''
In the 1970s and 1980s, the share of personal consumption expenditures began to shift from taxable goods to services—things like medical care, health clubs, legal and accounting services. So the sales tax was applied on a smaller and smaller share of tangible products. This was compounded on the goods side by mail order outlets selling goods without collecting sales taxes from their customers—a practice sanctioned by the U.S. Supreme Court in the National Bellas Hess case in 1967 and reaffirmed in the Quill decision in 1992.
Today, states face a new threat to sales tax revenue, electronic commerce, with the potential to dramatically expand the volume of goods sold to customers without collection of a sales or use tax. The combined weight of the shift to services and the tax erosion due to electronic commerce threatens the future viability of the sales tax and essential governmental services such as education and public safety.
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According to the Center for Business and Economic Research at the University of Tennessee, by 2003 states will lose $ 11 billion in sales tax revenue due to the emergence and growth of electronic commerce. This amount will continue to grow each year. The following is a list of the revenue losses for those states which have a member serving on this Subcommittee:
Let me pose a hypothetical question. What would happen if the federal government allowed customers to avoid paying federal airline ticket excise taxes if travelers purchased their tickets over the Internet, but kept the tax in place on purchases from travel agents? That would give air travelers with access to the Internet a 10% price discount and provide a tremendous incentive to buy over the Internet. Obviously, travel agents would disappear and federal revenues would dry up in a hurry. To some extent, this is the same situation that state and local governments face with the sales and use tax on Internet purchases.
As state legislators, we recognize that we have been part of this problem. We have created a confusing, administratively burdensome tax system with very little regard for the compliance burden placed on multi-state businesses. Last year, NCSL passed a resolution, written by NCSL's Task Force on State and Local Taxation of Telecommunications and Electronic Commerce, that acknowledged that states need to simplify their sales and use taxes and telecommunications taxes for the 21st Century. We recognize that we have been a key part of the problem—and we also are the solution.
In our resolution, we formulated a set of seven principles that we used to develop a proposal for simplifying and streamlining state and local sales and use tax collection systems. These principles are:
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First, that state and local tax systems should treat transactions involving goods and services, including telecommunications and electronic commerce, in a competitively neutral manner; and
Second, that a simplified sales and use tax system that treats all transactions in a competitively neutral manner will strengthen and preserve the sales and use tax as vital state and local revenue sources and preserve state fiscal sovereignty; and
Third, that the Internet and Internet vendors should not receive preferential tax treatment at the expense of local ''main street'' merchants, nor should such vendors be burdened with special, discriminatory or multiple taxes; and
Fourth, that states recognize the need to undertake significant simplification of state and local sales and use taxes to reduce the administrative burden of collection; and
Fifth, that under such a simplified system remote sellers, without regard to physical presence in the purchaser's state, should be required to collect sales and use taxes from the purchaser and remit such taxes to the purchaser's state; and
Sixth, that NCSL encourages current and future cooperative efforts by states to simplify the operation and administration of sales and use taxes; and
Seventh, that NCSL will continue to oppose any federal action to preempt the sovereign and Constitutional right of the states to determine their own tax policies in all areas, including telecommunications and electronic commerce.
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STREAMLINED SALES TAX PROJECT
Since September of 1999, state legislators, governors, local elected officials and state tax administrators have worked to develop the Streamlined Sales Tax Collection System for the 21st Century. I am pleased by our progress, and I would like to take a few minutes to tell you the status of the Project.
The Streamlined Sales Tax Collection System will allow state and local governments to reduce or eliminate the costs and burdens of sales tax compliance, especially for remote sellers.
The key features of the Streamlined Sales Tax System are SIMPLIFICATION of sales and use tax laws and administration; the use of TECHNOLOGY for calculating, collecting, reporting and/or paying the tax through ''certified'' tax calculation service providers; and the STATE ASSUMPTION of the COSTS of the system for remote sellers. Participation in the Streamlined Sales Tax Collection System is VOLUNTARY both for the vendors and for the states.
Simplifications being drafted by the Streamlined Sales Tax Project:
Uniform product codes;
Uniform sourcing rule;
Uniform procedures for exempt transactions;
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Uniform definitions for use;
Uniform deduction for bad debts;
Central, one-stop registration system;
Limits on the frequency when rate changes may be made;
Required advanced notice of changes;
Remittance of tax to state level only, states to remit to the local governments.
STATE INVOLVEMENT IN THE STREAMLINED SALES TAX PROJECT
In January of this year, the NCSL Task Force on State and Local Taxation of Telecommunications and Electronic Commerce drafted and along with NCSL's full Executive Committee unanimously approved model legislation to authorize a state's participation in multi-state discussions. These discussions will lead to the development of a more simple, uniform, and fair system of state and use taxation that removes the burden imposed on retailers, preserves state sovereignty, and enhances the ability of U. S. firms to compete in the global and information economy.
It was the only second time in NCSL history that NCSL produced and advocated the passage of model legislation in the states. In January we anticipated that if six to eight states authorized the multi-state discussions by the end of this year's legislative session, we would be able to declare solid movement by the states to streamline their sales tax systems. Instead 18 states have formally joined the multi-state discussions either through enactment of legislation or an executive order by the Governor and action is still pending in another five states.
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As of June 29, 2000: Florida, Iowa, Kansas, Kentucky, Maryland, Minnesota, Oklahoma, South Dakota, Tennessee, and Wyoming enacted legislation to enter into multi-state discussions. In Louisiana, Michigan, Missouri, Nebraska, North Carolina, South Carolina, Utah and Wisconsin, the governors issued Executive orders including their states in these discussions, though legislators in Missouri, Nebraska and North Carolina are moving resolutions endorsing their governor's action. The authorization legislation is currently pending in California (passed Senate), Illinois, (Passed both Houses), Ohio (Passed both Houses), Pennsylvania and Rhode Island (Passed Senate). Legislatures in Alabama, New Mexico and West Virginia also introduced the legislation, but were unable to enact the bills before their adjournment. We expect to have 23 states as active participants in the project by the end of this year.
A number of states wishing to observe the discussions and are awaiting possible action within their respective state legislatures or executive action are: Arkansas, Colorado, Connecticut, Idaho, New Jersey, New Mexico, North Dakota, Texas and Washington.
The quick response to NCSL's model legislation by the state legislatures is unprecedented. The current activity by 23 states is a sign that state legislatures are serious about taking action to streamline and simplify their sales tax collection systems.
The tax and revenue commissioners from the states listed above have been meeting since February and are moving quickly to have draft legislative proposals ready to submit to NCSL's Task Force on State and Local Taxation of Telecommunications and Electronic Commerce by November of this year. It is our hope that the Task Force and our Executive Committee will be able to recommend these model bills to our colleagues for consideration as early as January 2001. The members of the Streamlined Sales Tax Project are meeting as we speak in Chicago, and will continue to meet on a monthly basis.
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The Streamlined Sales Tax Project also will have a pilot project in the field by October of this year and will run through the Christmas season. The pilot project will include four or five states, and four and five retailers. The retailers will include at least one brick and mortar vendor, one click and mortar vendor and one vendor who conducts business solely online. The pilot project will test the technology that has been developed to determine the proper sales tax rate based upon the destination of the product and even collect the sales tax if the vendor so chooses.
The Streamlined Sales Tax Collection System is moving successfully. We would urge the Congress to let the states fix their sales and use tax systems without any interference or mandates.
Both President Clinton and Congressman Christopher Cox of California have said that the sales and use tax system should be simplified at the state and local level, not in Washington, and especially not by Congress.
We would recommend to Congress that it not rush to consider or approve legislation incorporating either the majority report, H.R. 4267 or the minority report, H.R. 4460, of the Advisory Commission.
INTERNET TAX MORATORIUM
First, let me make clear, NCSL opposes the extension of the current moratorium on state and local taxes applied to Internet access.
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The current moratorium on Internet access taxes as established in the Internet Tax Freedom Act of 1998, does not expire until October 21, 2001, some 16 months from now. Not one of the sponsors or advocates of this legislation has put forward a sound public policy explanation as to why a moratorium which does not expire until late next year, needs to be extended this year. We are disappointed that this Committee and the House Commerce Committee have failed to hold a single public hearing this year on the need to extend the moratorium, almost a year and a half before it expires.
Today, we know Internet access generally refers to the $19.95 (+/-) consumers pay for their monthly access to the ''net'' through America Online, Mindspring, Microsoft and so on. However, as we witness the convergence of technologies and industry giants, what will Internet access mean in three years, or five years and so on. For example, telephony technology is quickly improving to allow consumers to actually make telephone calls and speak over the Internet. Thus, consumers may soon be able to make long distance or local calls while online at no additional cost, other than the fee paid for Internet access. You can already download free service from such sites as ''freephone.com,'' ''Net2phone.com,'' or ''MediaRing.com.'' Current state revenues will decline, as states will be unable to tax these long distance or even local telephone calls. This also would put telephone companies at a competitive disadvantage to Internet service providers.
As the industry mergers continue, consumers will soon be receiving their telephone, cable television and Internet service from the same vendor. The vendor will be able to bundle all these services for one price under the banner of Internet access. If states and local governments are prohibited from ever taxing Internet access, then states and localities would have to find new revenue sources to make up for the loss from not being able to tax telephone and/or cable services.
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H.R. 4267 also would repeal the grandfather clause enacted in the original Internet Tax Freedom Act, as does H.R. 3709 approved by the House last month. The grandfather clause allowed those states presently collecting a tax on Internet access the ability to continue to do so. If either of these bills became law, the states of Connecticut, Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington and Wisconsin would face a reduction in current revenues. Total loss in 2000 to the listed states over $ 75 million. This loss combined with future revenue decreases from the prohibition on Internet access has been determined by the Congressional Budget Office to be an unfunded federal mandate on state and local governments under the provisions of the Unfunded Mandates Relief Act of 1995.
ADVISORY COMMISSION REPORT—H.R. 4267
Finally, let me briefly discuss our concerns and opposition to H.R. 4267, which contains the majority report of the federal Advisory Commission on Electronic Commerce.
If adopted by the Congress, this proposal by the business members on the Advisory Commission would result in an immediate loss of over $30 billion in ''current'' state and local tax collections. Furthermore, according to Charles McClure, former tax policy expert in the Reagan administration, the loopholes created under this proposal would permanently eviscerate the sales and use tax as a future state and local revenue source. Here are some of the most egregious provisions of the proposal:
H.R. 4267 would impose a five year moratorium on sales and use taxes on digitized products and their ''non-digitized counterparts.'' In effect, any sales and use tax on products that could be sold in digital form—books, compact disks, newspapers, magazines, and so on—would be prohibited by federal law. This provision strikes at the very heart of states' ability to determine their own tax base and will reduce existing state revenues by at least $6 billion per year. This provision should really be called the ''Pornography Growth Initiative'' as the one of leading digitized products being downloaded everyday, tax free, are pornographic pictures, and movies. Why Congress or the Advisory Commission would want to give the pornography industry a competitive economic advantage is something few if any of your colleagues in the state legislatures can understand.
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Additional loopholes for sales tax avoidance. The proposal would allow companies to set up tax-free kiosks in their brick and mortar stores. Companies that shipped goods to customers ordering from these kiosks would not be required to collect sales and use taxes. Over time, sales tax collections from ''Main Street'' stores would be severely eroded as companies encouraged customers to order ''tax free'' from their web sites. This proposal would result in a $15 billion per year reduction for state and local governments.
New loopholes for corporate income tax avoidance. Under this proposal companies could perform numerous activities in a state without creating nexus for corporation income taxes. Estimated loss of revenue to states, at least $10 billion.
Creates federal government oversight and possible pre-emption of state and local telecommunications taxes. Requires states to reduce taxes on telecommunications companies and shift to a single statewide tax, or face federal sanctions, including pre-emption of telecommunications taxes. NCSL and our Task Force have been working closely with the telecommunications industry to develop model legislation to reform our state and local telecommunications taxes.
Mandates one sales and use tax rate per state for all remote commerce. A single rate—even if it only applies to remote sales—is a deal killer in a dozen or more states and raises a host of problems.
First, it preserves a dual system for nexus and non-nexus merchants that will prevent states from simplifying the sales and use tax system for ''clicks and mortar'' retailers. Sellers with physical stores and remote operations will face two sets of tax rates, frustrating efforts at simplification for all types of retailers. The Streamlined System being developed by the states would create a single system for all retailers. Businesses and technology companies tell us that the rate issue is the easiest one to overcome with technology. It is not necessary to mandate a single rate in a simplified system.
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Second, the dual system will lead to continued litigation over nexus because different rates will be charged based upon the seller's nexus status. The Streamlined Sales Tax System being developed by the states would make nexus irrelevant and treat all sellers the same.
Finally, we anticipate that some state legislatures could not support a blended rate that would increase tax rates for some taxpayers. The alternative—choosing the lowest rate in the state—could cause powerful cities to oppose such a system. Businesses located in areas with high tax rates that now ''self-report'' use taxes would have incentives to buy from remote vendors.
This industry tax grab, if adopted, would permanently erode states' sovereign power to control their own tax policies and place Congress in the position of dictating state sales and use, corporation income, and telecommunications tax policies.
The National Conference of State Legislatures encourages you and your colleagues in the 106th Congress to do no further harm this year to your state and local governments. We would urge you to let the states proceed with the Streamlined Sales Tax Project. If by this time next year, we have failed to make real progress in simplifying our sales and use tax system, then we would be willing to work you on a reasonable Congressional solution. We respectfully request that you take no further action on extending the moratorium or on the legislation before this Subcommittee this morning.
Finally, with only good thoughts for the work you do here in our nation's capitol, let me remind you that the state legislatures in the next two years will be spending some time in a once in a decade event, redistricting congressional districts based on the this year's Census count. We would remind the honorable members of the House of Representatives that though you may send most of your time here in Washington, I am sure you still want your state legislature to make sure that you have some nexus back home.
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Thank you for this opportunity to discuss the state legislative viewpoint on state and local taxation of electronic commerce and telecommunications.
Mr. GEKAS. Thank you. We will return to you then. Mr. Southcombe, you may begin.
STATEMENT OF R. MICHAEL SOUTHCOMBE, CHAIRMAN, MULTISTATE TAX COMMISSION, IDAHO STATE TAX COMMISSIONER
Mr. SOUTHCOMBE. Thank you, Mr. Chairman, members of the committee. I have been a Tax Commissioner in Idaho for about 7 years, as the chairman since 1995, and now I have the privilege of being the chairman of the Multistate Tax Commission. This opportunity allows me to tell you our case in Idaho and what we are concerned about.
We have some problems with bordering towns in the State of Oregon. In the past and in the present, it tends to be our remote seller. Oregon doesn't have any sales tax. We have small communities on that border that had thriving businesses until Idaho passed a sales tax, that were vibrant, consumer-oriented, Main Streets. Oregon now gets a lot of that business. We suffer for it in Idaho. There is not much we can do about that. That is the law. When those Oregon merchants come to Idaho and have nexus with us, we do require that they collect tax.
But the sense of it is what is happening nationwide. And what we have, Idaho sales tax has increased to 5 percent. But the tax base is decreasing all the time. I agree with the Senator that now the horn of plenty is full, but the horn of plenty is fickle and that is not going to last that long. In 1996 and 1997, the State of Idaho had appropriation holdbacks because the appropriations exceeded the amount of revenue that was calculated to be collected.
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I am not here to say that we are out to tax everything that comes down the line, but I think that in fairness every merchant ought to be treated equally in the sense of paying their fair share for the cost of maintaining government, maintaining the streets and roads, the education, and the ability of vendors from outside the State to protect their interest in the courts of Idaho by filing mortgages, by securing property, and all those things that make interstate business move at a good pace and keep things in order.
Those little towns in Idaho have increased in population but their retailers are gone. They are just not there anymore. What you have now on Main Street are service providers and not retail merchants.
One of the things that we do in Idaho, and I think this is a matter that complicates things, is the collection of use tax. It is difficult, especially in the consumer field. But businesses are subject to use tax and they pay a bigger portion of the use tax than they should. If things were equal, everybody ought to pay the same rate at the same time and it ought to be an even playing field for consumers and merchants. It is difficult to go after merchants for use tax on things they have purchased for their own consumption and not be able to go after consumers. The time and effort is very difficult. But I think the fairness is that everybody ought to pay the same rate if they are doing the same thing. I can see no difference between an out-of-State vendor using the Internet and a local merchant selling face to face.
As I review Quill in my mind, and believe me I am not an expert on technology, in 1992 when Quill was decided, there wasn't a World Wide Web. There wasn't a World Wide Web of any significance. There was something like 50 servers worldwide. The increase in that availability, of reaching consumers is just amazing. It is light speed. The new people that can be reached and sold products to is amazing.
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So it comes down to two simple principles as far as I am concerned. One is fairness. Everybody ought to pay the same rate for the same product while doing the same business. The other is simplification. The States have been remiss in handling their garden. I believe that the simplification processes that are ongoing bear fruit and will help resolve this problem, but it will take a little time.
The streamlined program that is going on in Chicago as we speak is an indication of that. Individual States have gone a long way in helping to resolve these problems. Our neighbor, Washington, has a GIS program which would allow an interstate vendor on the Internet to determine the sales tax at a precise street address. Those capabilities are there. That is not fiction. It is possible.
In Idaho we are pretty simple. We don't have any local taxes. We are pretty clean. But the idea that people can come into our State and use our resources without paying their fair share is somewhat offensive. I think that the legislation that is needed is something that will allow the States the opportunity to simplify, have uniform definitions and make the technology that is available now help them in resolving the problem.
[The prepared statement of Mr. Southcombe follows:]
PREPARED STATEMENT OF R. MICHAEL SOUTHCOMBE, CHAIRMAN, MULTISTATE TAX COMMISSION, IDAHO STATE TAX COMMISSIONER
Good morning Mr. Chairman and members of the Committee. My name is Mike Southcombe. Since 1995 I have served as Chairman of the Idaho Tax Commission. In addition, I currently serve as Chairman of the Multistate Tax Commission, an organization of state governments committed to simplification of and compliance with state tax laws. Thank you giving me the opportunity to appear before you today to discuss the importance, complexities, and competitive nature of sales tax collection for states, brick and mortar retailers, and the burgeoning e-commerce industry. While I may paraphrase my statement at times, I ask that my complete remarks be entered into the record of this hearing.
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It is without dispute that sales and use taxes are too disparate and complex. It is equally without dispute that the substantial problem of collecting sales or use tax from remote sellers is exacerbated by the speed of light expansion of the Internet and the incredible commercial opportunities it allows.
To better illustrate the situation, the difficulties, and the ramifications, I would like to describe a situation that has occurred in my own state. This is an example that is very familiar to me—but you can see it happening in towns and states all across the country. Unfortunately, it is a situation that shows no bias—it affects towns both large and small, and the damage inflicted upon Main Street businesses comes not just from other retail businesses located close by but also from remote vendors including catalog companies and Internet vendors that may operate out of a neighboring state or thousands of miles away.
In Idaho, we have several small towns bordering Oregon, a state that has no sales tax. When Idaho adopted the sales tax of 3% in 1965, the population of Payette County was 12,402, and the population of Washington County was 8,033. Most of the sales tax permits for these two counties were issued in the small, but vibrant, towns of Payette and Weiser.
Today, the population of Payette County is 20,846, up 68%; Washington County is 10,298, up 28%. However, the number of businesses catering to the retail customer has faded away. The sales tax has increased to a statewide rate of 5% while the base to which it is applied has decreased. Payette and Weiser are a reflection of this and a reflection of a national trend—a decrease in the tax base that results in an increase in the tax rate.
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Where did all the retail business in Payette and Weiser go? To the tax-free shopping in Oregon. In essence, Oregon has become Idaho's remote seller. Through advertising, retail establishments located across the border in Oregon have lured Idaho residents to their stores. However, because these Oregon businesses do not have a ''physical presence'' in Idaho, they have not created nexus with the state that would require them to collect and remit sales taxes on sales to Idaho residents. As a result of this type of activity, the retail business in Payette and Weiser and many other small towns like them has dried up.
The demise of the retail community in Payette and Weiser due to the competition of untaxed sales foreshadows what may well happen to Main Street businesses across America. Companies using electronic means to sell to consumers are implementing corporate structures that are intended to avoid the taxing jurisdiction of the states in all but the most obvious cases. Increasingly, goods and services are being sold without the applicable state and local sales taxes being collected with Main Street businesses facing a rising tide of unfair competition from remote sales. Tax-free remote sales will inevitably undermine local retail businesses and will threaten the viability of the sales tax that finances one-third of state and local services—including services that substantially benefit interstate commerce.
The problem of tax-free remote sales arises from the concepts of physical presence nexus that currently limit state taxing jurisdiction. In an electronic, borderless world, physical presence standards of nexus are obsolete and unfair. Physical presence standards allow companies to make huge sales into states and to benefit from state and local services without having to participate on a fair and equitable basis in the tax systems that help finance those same services. Our federal system relies on state and local governments for a host of services that benefit the national economy. State and local governments provide the streets and roads over which commerce flows, including the goods sold by the remote seller. They provide the landfills that dispose of the packaging for those same goods. State and local governments provide remote sellers a system of laws and courts that protect the sales from beginning to end, including the safe and secure delivery of goods and services and the means of ensuring payment to the remote seller. Most importantly, for electronic commerce, state and local governments provide the educational systems from kindergarten through the university levels that have substantially contributed to this marvelous electronically connected economy. The physical presence standards of nexus prevent states and localities from being fairly reimbursed for the services they provide to interstate commerce—including electronic commerce—and results in discrimination against local businesses.
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While the current circumstances surrounding the application of nexus standards are unacceptable, the majority report of the Advisory Commission on Electronic Commerce and the legislative language contained in HR 4267 will make the current situation even worse. These proposals provide special tax privileges to remote vendors—and, if enacted, will cement in place obsolete concepts of nexus and will expand opportunities for remote sellers to capture market share based on an unfair tax advantage. If the majority report is enacted, traditional Main Street businesses will be unable to compete in the marketplace—and the sales tax itself could be in danger of becoming a relic of the past.
Thus, I believe there are two core principles that should drive the debate on this issue.
First, fairness. Tax policy governing the application of nexus and sales and use tax laws must be fashioned in a manner that is fair to all retailers—both brick and mortar retailers and all remote vendors. When the Supreme Court decided Quill in 1992, the World Wide Web was still a year away, and office supplies were still purchased in Main Street businesses and through catalogs. The Internet and electronic commerce were not even mentioned in the Court's decision. Today, if you log-on to the Internet and type the words ''office supplies and equipment'' you are referred to a listing of 3,173 websites offering merchandise for sale.
Thus, as we welcome a new participant into the retail arena, states and the courts need to reexamine the fundamental tax policy principles that have guided the marketplace thus far and consider readjusting those principles to insure that the retail arena remains a competitive and fair place to do business.
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Second, simplification. The sales and use tax system must be streamlined and simplified. The need for this simplification has been magnified in the past several years with the advent of electronic commerce and the move by Main Street businesses to incorporate e-commerce operations into their business structures. State and local governments are best equipped to handle the task of simplifying their tax laws—and should be encouraged, not hindered, by Congress in their efforts.
States are involved in numerous efforts to simplify the sales tax. For the past couple of years, I have been involved in two sales tax simplification initiatives'the Northwest Project and the Multistate Tax Commission's Sales Tax Simplification Committee. These projects are working on many issues, including common definitions of products in the tax base, a centralized vendor registration process, and uniform exemption administration procedures. Technology is also being examined. Washington State, for example, has developed a Geographic Information System (GIS) that provides a merchant hooked up to the Internet the ability to determine the precise tax applicable to a street address.
These various projects focus on different elements of the sales tax system—but all are compatible and share a common goal. In fact, the recommendations of these projects are now being brought together into one effort, the Streamlined Sales Tax Project. As we sit here today, more than 30 states involved in the Project are meeting in Chicago discussing and drafting proposed statutory changes to the sales and use tax laws'some of which are modeled after recommendations of the aforementioned efforts. These proposed changes will bring radical simplification and uniformity to the current out-moded sales and use tax system. Technology will also play a key role in the development of a new system. However, states are adamant that technology will not be a substitute for simplification.
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Finally, as Members of the Committee depart for your districts and the upcoming recess, I urge you to pull out the Skymall catalog that will probably be in the seat-pocket on your next airplane ride. Many of the merchants participating in Skymall do not collect sales or use tax on their remote sales through their own catalogues. However, if you order something from the same merchant via the Skymall catalog, Skymall will collect and remit sales tax on your purchase to the proper jurisdiction. I ask, if companies like Skymall—and organizations like the Boy Scouts of America—have found a way to collect sales tax on remote sales, can't everyone?
Members of the Committee, the thought I want to leave you with today is simple: Congress should support and protect the sovereignty of the states to formulate their sales and use tax laws. In turn, the states will abide by the fundamental principles of good tax policy'that is, implement a system that is fair to both businesses and consumers and insures continued vibrancy in the retail marketplace.
Thank you and I would be happy to answer any questions you have.
Mr. GEKAS. We thank the gentleman. Let the record indicate that the gentleman from New York, Mr. Weiner, a member of the committee, is present and also that the ranking minority member of the Judiciary Committee, the gentleman from Michigan, Mr. Conyers, is in attendance.
We will proceed with the next witness, Mr. Viken.
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STATEMENT OF GARY VIKEN, VICE PRESIDENT, NATIONAL FEDERATION OF TAX ADMINISTRATORS, SECRETARY OF REVENUE, STATE OF SOUTH DAKOTA
Mr. VIKEN. Thank you, Mr. Chairman. I am here today as Secretary of Revenue for the State of South Dakota, a State which depends upon the sales tax for its very existence. I also am presenting this testimony on behalf of the Federation of Tax Administrators, which is the organization which represents the 50 States, tax officials from the 50 States in this country, the District of Columbia and New York City.
The issue before us today is how to collect tax on remote sales, including electronic commerce. The answer clearly lies in expanding the duty to collect to those sellers when sales exceed a certain volume. States should be authorized to require remote sellers to collect tax on goods and services they sell into a State.
We recognize that a significant part of that requirement has to be a radical simplification of sales taxes and their administration. States are hard at work on this. This is an extremely important issue to all States.
In South Dakota, the sales tax accounts for 54 percent of our general fund revenues. It finances 66 percent of our public education, accounts for 67 percent of tax revenues available to municipalities in our State and is the predominant source of revenue for virtually all core services in South Dakota.
This is not just a money issue, as has been noted before in the hearing this morning. It is primarily one of fairness to Main Street retailers. I know it is an important issue to the retailers of South Dakota because I work with them all the time. They are consistent in their coming out with strong positions on the need to eliminate the 4 to 6 percent competitive advantage now being enjoyed by out-of-State Internet sellers.
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The States are committed to simplification. Our State was the first to pass legislation authorizing us to participate in a streamlined sales tax project. There are now 30 States participating in this project. We have an agenda of simplification activities that includes developing definitions for key parts of a sales tax, reducing the burden of exemption administration, including shifting responsibility for policing exemptions to the States, examining various methods for simplifying local sales and use tax rate structures, simplifying the registration process through a uniform registration form or a centralized approach that would meet the needs of all States, looking at the potential for developing a uniform sales and use tax return, and standardized procedures for remitting sales and use taxes, examining the appropriate structure of due dates for returns and remittances, and developing uniform rules by which all participating States would source sales; that is, assign transactions to particular taxing jurisdictions for tax purposes. We are working hard to quickly turn these activities into reality.
With regard to the Advisory Commission on Electronic Commerce report, we understand that the committee is charged with reviewing all the recommendations of the advisory commission. We would draw particular attention to two of those: First of all, that there should be no tax on digital products and no tax on any tangible product that has a digital counterpart; secondly, the establishment of another commission to review simplification efforts of States to determine if a recommendation regarding a duty to collect should be made to Congress.
Some States, including South Dakota, have a broad-based sales tax that applies to all goods and services. Unless specifically exempted in State statute, a service is automatically taxed. This being the case, Internet access charges and sales of digital products are a normal part of our tax base. As tax policy professionals, we strive for neutrality in a tax system. Our goal is always to never interfere with the marketplace, not to show favoritism for one type of product over another or one method of selling over another.
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The report of the Advisory Commission on Electronic Commerce does not promote neutral tax policy. With no justification whatsoever, it recommends an exemption for digital products and their tangible counterparts, thus establishing such products as a favored class over all others. It also perpetuates the unlevel playing field in which remote sellers enjoy a competitive advantage over Main Street sellers that must collect the tax. This is not a neutral approach to taxation. It arbitrarily and unfairly favors goods for which there exists a digital counterpart. While the tax issues surrounding digital products may be new, they are by no means insurmountable.
Beyond this, the Advisory Commission on Electronic Commerce calls for an unprecedented and unwarranted intrusion into State tax sovereignty and our system of federalism. Arbitrarily carving out tangible goods blows a hole in State tax bases. In South Dakota the proposed exemption would represent a significant revenue loss. Nationally it is over $5 billion per year.
In conclusion, we urge you to reject the majority report of the Advisory Commission on Electronic Commerce. We urge you instead to consider and recommend legislation similar to that offered by Mr. Bachus of Alabama, H.R. 4462, which would authorize States to enter into an interstate sales tax compact and, once having adopted a simplified tax, to require remote sellers to collect tax on goods and services they sell into a State.
Thank you for the opportunity to present testimony before your committee, Mr. Chairman. I hope I have provided some information that will help you in your deliberations. Thank you.
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[The prepared statement of Mr. Viken follows:]
PREPARED STATEMENT OF GARY VIKEN, VICE PRESIDENT, NATIONAL FEDERATION OF TAX ADMINISTRATORS, SECRETARY OF REVENUE, STATE OF SOUTH DAKOTA
Mr. Chairman and Members of the Committee:
My name is Gary R. Viken. I am Secretary of the South Dakota Department of Revenue, and I serve as 1st Vice President of the Federation of Tax Administrators. The Federation is an association of the principal state tax administration agencies in the 50 states, D.C., and New York City. Thank you for the opportunity to appear before you today on the general subject of the state and local tax issues involved with electronic commerce.
The policy of our organization in this area has been established generally in three resolutions adopted by our members at the June 2000 Annual Meeting in Boston, Massachusetts. The first resolution advocates simplification of state sales and use tax structures and administration as a prelude to requiring collection of sales and use taxes by all sellers above a de minimis sales volume threshold, regardless of whether they have a physical presence in the taxing jurisdiction. The second affirms the support of our members for the proposition that Congress should not enact legislation attempting to establish physical presence nexus standards in federal law. The third resolution contains a general position against federal preemption of state tax sovereignty and tax authority.
In this testimony, I would like to achieve five goals:
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Provide a high-level overview of the essential features of state and local sales and use taxes;
Outline the primary state and local tax issues associated with electronic commerce;
Identify the expected revenue impact on states and localities of electronic commerce;
Outline a general approach to an appropriate resolution of the issue; and
Review the reasons that many state and local officials have called on Congress to reject the so-called ''majority report'' of the Advisory Commission on Electronic Commerce.
BASICS OF STATE AND LOCAL SALES AND USE TAXES
Forty-five states plus the District of Columbia levy a sales and use tax. In addition, local governments in approximately 30 states are authorized to impose a local sales tax. In all but four states (Alabama, Arizona, Colorado and Louisiana), these local taxes generally ''piggyback'' on the state tax base and are collected by the state tax administration agency on behalf of the local government.(see footnote 2) Sales tax rates range from 3 percent to 7 percent at the state level; local option rates generally run from 1 to 2 percent. The ''average'' state and local tax rate in the U.S. is roughly 6.0–6.5 percent.
Every state with a retail sales tax also levies a ''compensating use'' tax, often simply referred to as the use tax. A use tax is levied on all taxable goods and services that are used and consumed in the taxing state if there has not been paid an appropriate sales tax. Thus, goods and services on which no sales tax has been collected are subject to the compensating use tax.
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The sales tax is a consumption tax that is applied on a destination basis, meaning the tax is applied in and remitted to the jurisdiction in which delivery of the good or service is taken or where it is to be used or consumed. [Receiving goods at the time of sale is considered taking delivery. The point of delivery is presumed to be the jurisdiction in which consumption occurs.] Goods and services travelling through multiple jurisdictions or involving multiple jurisdictions are still taxable only in the state of consumption or use.
A seller may not be required to collect use tax on goods shipped to a buyer in another state unless there is a sufficient ''nexus'' or level of contact between the seller and the state of the buyer. The U.S. Supreme Court has held that for an out-of-state seller to be required to collect use tax on goods and services sold into a state, the seller must have some physical presence in the state of the buyer, either directly or through the activities of a representative.(see footnote 3) If the sales or use tax is not collected by the seller because of the lack of a requirement to do so, the buyer is still responsible for payment of the use tax directly to the state in which the good or service is used or consumed.
TAX ISSUES RAISED BY ELECTRONIC COMMERCE
Collection of Tax on Remote Electronic Commerce Sales
In terms of potential revenue effect, the largest and most immediate issue raised for state and local governments is, by far, the potential increased sales tax base erosion caused by the explosion in electronic sales(see footnote 4) on which no sales or use tax is collected because the seller has no nexus with the state in which the buyer resides. In many ways, electronic commerce can be likened to the longstanding issue of mail order or catalog sales in which state and local use tax is not collected because the seller has no physical presence or nexus with the state. This is particularly true of the sale of tangible goods where it is only the medium through which the transaction is conducted that differs, not the nature of the product.
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The remote sales tax collection issue arises because of the U.S. Supreme Court decision in Quill Corp. v. North Dakota (1992), upholding its decision of 25 years earlier in National Bellas Hess v. Illinois Department of Revenue (1967). The Court held that, under the Commerce Clause, a taxing state could not require an out-of-state seller whose only contacts with the state were the solicitation of orders by catalog and shipping goods by common carrier or U.S. mails to collect use tax on goods shipped into the state. Without such a physical presence, the Court held, requiring a seller to comply with the sales tax laws of each jurisdiction and the large number of local tax rates would create an undue burden on interstate commerce.(see footnote 5)
The combination of the Quill physical presence rule with the advent of electronic commerce exposes state and local sales tax system to a potentially large erosion of the tax base. A hallmark characteristic of the Internet is its ability to allow a seller to market directly to individual consumers on a worldwide basis while, at the same time, minimizing the physical facilities necessary to undertake such efforts. As a consequence, the exposure of state and local sales tax systems to remote sales is magnified exponentially.
The issue is not limited only to purchases by individual consumers. State and local sales and use taxes generally apply to purchases by businesses where the item purchased is for use and consumption by the business itself, rather than for resale or incorporation into an item being resold to another consumer. Where tax is not collected by the seller (because of nexus reasons), the purchaser is to accrue and remit tax on its purchases. Use tax compliance among businesses is substantially better than among individuals because many of them routinely accrue tax and they are routinely subject to audit. Nonetheless, the noncompliance in the area of business purchases should be expected to increase as more sellers use the Internet to accomplish what once took sales personnel and in-state facilities.
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The consequences of a rapidly growing volume of retail transactions going effectively untaxed (even though the tax is owed by the consumer) are several: (1) Erosion of the retail sales tax base and revenue stream; (2) Violation of a principle of tax neutrality because sales of identical goods are taxed differently based only on the location of the seller; (3) Unfair competition with Main Street and other businesses required to collect tax on their sales; and (4) Growing concerns about the long-term viability of the sales tax as a mainstay in the state and local tax structure.
That is to say, the issue goes well beyond that of the amount of revenues available to states and localities although that, too, is an important issue. There is an important issue of the competitive disadvantage faced by fixed-base retailers and others who are required to collect tax. The threat to their survival from this built-in, government-sanctioned disadvantage is real. Likewise, the long-term threat to the sales tax as a whole cannot be overstated. If a tax is seen as increasingly unfair because some have to pay and some do not (and the only reason for the difference is the manner in which a purchase is made), the end result may be demands to repeal the tax for everyone.
Complexity of the Current System
Another effect of electronic commerce has been to shine a spotlight on the complexity of the current sales and use tax system and its administration for sellers, particularly those operating on a multistate basis. As efforts to address the remote sales issue are undertaken, they run head-long into the complexity of the current system, and the ''undue burden'' it places on sellers required to comply. Discussions of the state and local tax issues associated with electronic commerce naturally include a discussion of ways in which the current system can be simplified and made more uniform across states.(see footnote 6) Likewise, any resolution of the remote sales issue will necessarily entail substantial simplification of the tax.
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The complexity arises from the simple fact that the sales tax has been developed as a stand-alone tax in each state without a great deal of regard for the degree to which it conforms to similar taxes in other states. This is natural since when sales taxes were developed, most retail activity was confined to a single state. As a result, there are differences in tax bases across states, differences in administrative laws and procedures as well as differences in filing, returns and remittances.
Another aspect of complexity in the current system is the extent to which local option sales taxes are used. Over the last 30 years, in an effort to reduce reliance on property taxes, states have increasingly authorized local governments to levy sales taxes (often only after approval by the voters). Local governments in 30 states now levy sales taxes. While the base and administration are generally piggybacked on the state sales taxes, the rate varies across some localities. The result is considered complex by multistate sellers that are required to identify the jurisdiction into which an item is being sold, determine the appropriate tax rate, and account for tax collected in each local jurisdiction.
IMPACT OF ELECTRONIC COMMERCE ON STATE AND LOCAL TAX REVENUES
There have been several studies done of the impact of electronic commerce on state and local revenues.(see footnote 7) The most comprehensive has been prepared by Donald Bruce and William Fox, two University of Tennessee economists.(see footnote 8) Bruce and Fox use forecasts of electronic commerce sales into the future (2003) to look at the expected near-term magnitude of the impact. They also try to estimate the impact in both the business-to-consumer (B2C) and the business-to-business (B2B) markets. They also account for the current impact of mail order sales on state revenues and the substitution of e-commerce sales for mail order as well as the ''natural'' decline in state tax bases due to a shift to services in the economy.
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The results of the Bruce and Fox analysis can be summarized as follows.
In 2003, the total amount of state and local sales and use taxes going uncollected due to electronic commerce is projected to be $20.1 billion. The ''incremental'' (i.e., sales newly shifted to electronic commerce) impact is estimated at $10.8 billion, of which about 70 percent is from B2B sales.
On a state-by-state basis, the projected total state and local revenue impact due to e-commerce ranges from $31.8 million in Vermont to $2.8 billion in California. The expected impacts exceed $1 billion in each of New York, Texas and Florida.
Expressed in terms of total tax revenues, the revenues not collected due to e-commerce range from 4.9 percent of total taxes in Texas to 1.5 percent in D.C. It is more than 4 percent in each of Florida, Nevada, South Dakota, Tennessee and Texas.
On average, states would have to raise their sales tax rates by 0.5–0.75 percentage points to maintain constant revenues in 2003, i.e., to offset the impact of e-commerce on tax receipts.
POTENTIAL SOLUTION TO REMOTE SALES/USE TAX COLLECTION
Policy Objectives
Congressional activity to address the issue of electronic commerce and remote sales should, in my estimation, focus on several policy objectives, including:
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Ensure that the tax system is neutral across all types of sellers, regardless of the channels through which they choose to market;
Preserve the sovereignty of states to design their tax systems to fit their own circumstances, particularly as to the taxes employed, items to be taxed and tax rates;
Promote substantial simplification and greater uniformity across states so as to minimize the burden imposed on sellers to comply, particularly smaller retailers;
Foster the use of advanced technology in administration of and compliance with the sales tax system; and
Protect the privacy rights of consumers
Expanded Duty to Collect
From a tax administrator perspective, the answer to the potential erosion of the sales tax base by electronic and other remote commerce seems clear. Congress should use its authority under the Commerce Clause to authorize states to require sellers without a physical presence in the state to collect use taxes on goods and services sold into the state. Included within the authorization should be a requirement that states accomplish meaningful simplification of the sales tax and its administration as well as a de minimis threshold stated in terms of a dollars-denominated sales threshold below which a seller would not be required to collect tax for multiple states.(see footnote 9)
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There are at least two types of federal legislative vehicles that could be used to implement a system such as that outlined here. First, Congress could pass a law simply authorizing those states that modified their sales tax law to meet certain standards to require remote sellers above the de minimis threshold to collect tax. Congress has considered similar legislation in recent years.
Alternatively, Congress could authorize states to form an interstate sales tax compact and authorize states that join the compact to require remote sellers to collect tax on goods and services sold into the state. A requirement of participation in the compact would be to adopt a sales and use tax law that met certain standards of simplification and uniformity that Congress considered necessary. Such a compact could achieve the same or greater simplification and uniformity objectives as federal legislation and leave a greater proportion of the details to the states. It could also provide a framework for ensuring continued uniformity and simplification over time.
The Federation has not expressed a preference for one vehicle over another. We would urge the Congress to include an examination of the appropriate vehicle as it considers this issue
Simplification and Uniformity—Streamlined Sales Tax Project
States and localities recognize that concomitant with any expanded duty to collect use taxes there must be a significant simplification and improvement in uniformity in state and local sales taxes and their administration. In an economy that is increasingly multi-jurisdictional, it is necessary for states to cooperate in the design and administration of their taxes so as to facilitate commerce and to reduce compliance burdens for the increasing number of multistate sellers. Simplification also has rewards for fixed-base retailers.
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States have initiated a project called the ''Streamlined Sales Tax System for the 21st Century.'' The Project is intended to overhaul the existing sales and use tax system to better accommodate interstate commerce, especially the changes presented by electronic commerce. The Project is aimed at developing a substantially simplified sales and use tax system while employing emerging technologies to remove or reduce the burden on sellers for collecting the taxes, with the states contributing substantially to the financing of the streamlined system. There are approximately 30 states participating in the Project at this time. Further information on the Project membership and organization is available at <www.streamlinedsalestax.org>.
There are four key aspects to the Streamlined Sales Tax system being developed:
Strategic Simplifications. The Project is developing a series of simplifications that will substantially reduce the burden associated with sales and use tax collection. Among the primary simplifications are uniform definitions of items that may be included in a tax base, simplified and uniform exemption administration, repeal of the ''good faith acceptance'' rule for exemption certificates, uniform sourcing rules, limitations on local tax rate changes, simplified returns and remittances and centralized registration. The simplifications being addressed are primarily those that have been identified as most critical by fixed-base and electronic commerce retailers.
Use of Advanced Technologies. A second major component of the project is the use of emerging technologies to reduce the burden on sellers. A number of companies provide technology and services to assist sellers in calculating the taxes due on a given sale. The range of services offered varies from a simple tax calculator to compiling and filing returns and tax remittances. The aim of the project is to ''certify'' qualifying technology vendors as offering a service that meets the requirements of state sales tax law. Sellers that use certified technology would then be provided a ''safe harbor'' against future audit assessments for any failure attributable to the certified software.
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Paying for the system. The project is committed to financing as much of the system as it reasonably can for sellers. The primary method of financing sellers' participation will be through vendors' compensation—i.e., allowing sellers, or their tax service providers, to retain a portion of the sales and use tax collected as compensation for collection of the tax.
Privacy concerns. Provisions will be included in all aspects of the project's work to ensure that personal information is not unnecessarily gathered and is not improperly used by persons engaged in the tax administration process. Tax administration agencies will not come into possession of personal identifying information for an individual paying tax at the time of a transaction. Tax calculation service providers will be prohibited from using personal information for any non-tax-administration purpose.
Rationale
Beyond the protection of the state and local revenue base, an expansion of the duty to collect sales and use tax under a simplified administrative system promotes several tax policy goals and strengthens federalism.
It promotes neutrality in the tax system by treating all purchases of the same or similar products similarly, regardless of the seller.
It will promote equity among sellers and eliminate an ''unfair'' competitive advantage now enjoyed by remote sellers who are not required to collect tax compared to the Main Street/shopping mall seller who is required to collect.
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It recognizes that the current approach of each state independently administering its own tax is inefficient and imposes undue burdens on multistate sellers. It recognizes that multistate cooperation and uniformity are required to promote simplification and avoid other, more dire consequences such as federal intervention.
By strengthening the sales tax, it will also strengthen our system of federalism. If the largest single state and local revenue source is crippled, the strength of states and localities as partners in that federal system is weakened.
''MAJORITY REPORT'' OF THE ADVISORY COMMISSION ON ELECTRONIC COMMERCE
The Internet Tax Freedom Act created the Advisory Commission on Electronic Commerce (ACEC). The Commission was to be a balanced representation of the public and private sector interests at stake in the issue of taxation of electronic commerce. Its mission was to undertake a thorough study of the federal, state and local tax issues associated with the taxation of electronic commerce and to make recommendations to Congress for ways to resolve those issues. Any recommendations to Congress were required to have the support of two-thirds of the Commission members.(see footnote 10)
Shortcomings of the Report
Many state and local officials have been forced to conclude that the Commission fell woefully short of its goal. Forty-two governors have written to the leadership of the Congress asking that they reject the Commission report.(see footnote 11) More than 100 academic economists have also signed a letter criticizing the report as reflecting inappropriate and misguided tax policy. State and local officials see four major shortcomings in the ACEC report.
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Unlevel Playing Field. Rather than promoting neutrality across marketing channels and creating a level playing field for all retailers, the ACEC recommendations further tilt the playing field against fixed-base retailers and others currently carrying the state and local tax burden. The ACEC recommendations would open many new opportunities for firms to actively engage in business in a state without incurring tax obligations. As such, they exacerbate, not eliminate, the competitive disadvantage faced by fixed-base retailers and other taxpayers.
Failure to Address Remote Sales. The ACEC report fails to address in any meaningful way the remote sales tax collection issue outlined earlier. The report would have required states and localities to develop and implement a series of mandated simplifications, which process would have been followed by an elongated, inconclusive and likely negative review of whether tax collection obligations should be extended to remote sellers.
Preemption of State Sovereignty. If adopted, the recommendations of the ACEC would constitute a frontal assault on the sovereignty and authority of states to determine their own tax structures. It would have, for the first time in our nation's history, placed nearly complete authority over the details of state tax law in the hands of the U.S. Congress. As such, the report showed little understanding of federalism or the role of the states in the federal system.
Unwarranted Tax Preferences. The report recommends, with little or no justification in most instances, that Congress preempt state tax authority in several key areas. These areas include an exemption for Internet access charges and all digitally delivered goods and services as well as their tangible counterparts. In addition, the report calls for Congress to enact a federal law mandating that a series of activities (commonly carried on by electronic commerce firms) could not be considered to constitute nexus for sales and use or business activity taxes. Taken together, these nexus carve-outs would enable electronic commerce firms to engage in a wide range of activities within a state without being required to meet tax obligations in the state and would exempt a considerable portion of their content and activities from tax. Estimates are that the combination of the tax preferences included in the ACEC report, discussed in more detail below, would reduce current law state and local tax revenues by as much as $25–30 billion per year.
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Further Discussion
Internet access. The majority report recommends making permanent the Internet Tax Freedom Act's moratorium on any transaction taxes on the sale of Internet access, including taxes that were grandfathered under the ITFA. At present, the following 11 states impose the sales tax (or a similar gross receipts tax) on such charges: Connecticut, Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas,(see footnote 12) Washington State and Wisconsin.(see footnote 13) In each case, the tax is part of a broader based tax (e.g., sales tax) and is not a levy targeted specifically at Internet charges. The impact of this repeal of the grandfather clause is approximately $75 million per year, according to information submitted by the states to FTA.
There are three additional issues that must be considered in any permanent or long-term moratorium: (1) Dealing with other services that may be bundled with access; (2) The addition of substantial amounts of content to a package including access; and (3) Apparent competitive issues that arise as Internet telephony technology improves and takes hold.
Digitized goods and their counterparts. The majority report recommends a tax exemption for ''sales of digitized goods and products and their non-digitized counterparts.'' Such preemption would do substantial damage to the tax base of a number of states. Twenty-eight states currently consider downloaded software to be taxable, and nineteen states consider downloaded information to be taxable. About fifteen states tax a broad category of ''electronic information services.''
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An exemption for ''digitized goods and products'' would logically apply to all subscriptions to on-line databases and information services, on-line publications, on-line photos and movies, and a variety of services that produce digitized products (e.g., photo finishing). And, if taxing the ''non-digitized counterparts'' of digitized goods and products were also preempted, states and localities would lose the ability to tax all sales of newspapers, books, music and CDs, periodicals, photos, software, movies, cable services, etc.
In one estimate, including the states of Florida, Texas, Washington and Wisconsin, this provision would reduce state and local sales tax revenues by over $1 billion per year in just these four states. Another estimate sets losses of state and local tax revenues at $5.7 billion per year.
Nexus standards. The majority report purports to attempt to ''clarify'' the circumstances under which a seller has a sufficient nexus, or connection, with a state to be required to collect and remit sales and use taxes and to report and pay business activity taxes to that state, by listing nine activities that, individually or in combination, would not establish nexus for that seller in the state. The net effect of these nexus ''carve-outs'' would be to allow a firm, especially electronic commerce firms, to engage in a wide range of activities in the state, either directly or indirectly through affiliates and representatives, without incurring a direct tax obligation or a sales/use tax collection responsibility. As such, they would further tilt the playing field against fixed-base retailers.
Space does not allow a full explication of all the potential ramifications. A few examples should, however, suffice to demonstrate the issues.
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The report would prohibit the consideration of the relationship between an out-of-state seller and an affiliate with a physical presence in the taxing state as a basis for establishing nexus, which opens up the potential for an ''Internet kiosk'' arrangement. That is, a seller could establish kiosks in the stores of an affiliate through which goods are ordered from the seller and, if the goods were delivered from outside the state, the seller would not be required to collect tax. (For example, a barnesandnoble.com kiosk inside a Barnes and Noble store.)
The report would prohibit the consideration of the use of telecommunications services from an in-state provider in making a nexus determination. This prohibition would create a safe harbor by which a telecommunications provider could be acting as the representative of a seller, a situation that would create nexus under current law. In addition, the prohibition creates opportunities for resellers of telecommunications to operate in the state without establishing nexus.
The report would prohibit states from considering the ownership of intangibles in the state as a factor in determining income tax nexus, as states now do. With this restriction in place, a financial services company could conduct its entire menu of operations with every person in a state—i.e., it could make loans, hold accounts receivable, finance purchases, etc.—without tax obligations. In addition, to the extent that a physical presence was considered desirable, it could use an affiliate to perform the services and still avoid any tax liability for the income arising from that state.
CONCLUSION
Any serious effort to address the state and local tax issues associated with electronic commerce must confront the issue of sales/use tax collection by remote sellers. State tax administrators believe that the exercise of congressional authority to require remote sellers with sales in excess of a specified threshold to collect tax on goods and services sold into a state is appropriate and necessary for the long-term survival of the sales/use tax. It also represents sound tax policy that promotes neutrality in the treatment of similarly situated taxpayers and eliminates a competitive disadvantage faced by retailers that currently collect tax.
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States recognize that an expansion of the duty to collect must be accompanied by substantial simplification and improved uniformity in the sales tax and its administration. They have begun in earnest to address that task through the Streamlined Sales Tax Project.
The Report of the Advisory Commission on Electronic Commerce unfortunately, in the opinion of most state and local officials, does not further the goals of sound tax policy and administration in this area. Instead, it contains recommendations for substantial preemption of state tax authority that are not only detrimental to the fiscal position of states and localities, but will likewise cement into place the unlevel playing field facing fixed-base retailers and other current taxpayers.
Mr. GEKAS. We thank the gentleman.
We turn to Sheriff Strain.
STATEMENT OF RODNEY STRAIN, JR., SHERIFF AND EX-OFFICIO TAX COLLECTOR, ST. TAMMANY PARISH, COVINGTON, LA
Mr. STRAIN. Mr. Chairman, Congressman Vitter, members, ladies and gentlemen.
First, my thanks for the opportunity to speak to you today on the issue of taxing Internet commerce. This matter and the decisions you will make in coming months will be a crucial element in the continued operations of local government. In preparation for my appearance today, I have discussed this matter with officials in my own community and with tax administrators from throughout Louisiana. We all share the same concern, that in the foreseeable future the growth of e-commerce will result in a devastating loss of tax revenue that could cripple the operations of local agencies.
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Our State legislature recently raised taxes to generate an additional $200 million next year. The reason, according to our governor, is at least partially the growth of Internet sales and the loss of sales tax revenue. An estimated $2 billion was spent in catalog and Internet commerce in my State last year, with loss to Louisiana of $76 million in tax revenue. Agencies in my parish lost an estimated $2.4 million in tax money and our sheriff's office is approximately 50 percent dependent on sales tax revenue for our operations.
Quite frankly, ladies and gentlemen, we are afraid of the long-term consequences of e-commerce as it continues to grow, and I needn't tell you it will grow. My fear, which is shared by tax collecting authorities throughout my State, is that a continued loss of tax moneys due to thriving e-commerce will have a devastating effect. If we begin to lose funding to pay for even the most essential services such as deputies' salaries, public utilities, education and public health, this alone is frightening. If these funding losses are accompanied by an expected reduction in availability of local jobs, we will see a dramatic growth in the underclass and a burgeoning rate of unemployment while simultaneously losing the moneys to provide the services for the most in need.
I appeal to you to act quickly and decisively in addressing this problem and forestalling a true crisis. After speaking with experts on this issue from around Louisiana, we have crafted the following recommendations.
Congress could impose a 1-year moratorium on Internet taxation, but immediately form a research and development team comprised of Federal, State, local and business authorities. A trusted third party system could be established whereby private companies would provide a uniform system of monitoring, collect taxes from vendors and distribute these moneys to the States for disbursement. This solution would allow tax collecting authorities such as my agency to effectively audit a business, the third party collector, rather than mount the daunting task of monitoring individual expenditures and consumption.
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It is our obligation as public officials to ensure a level playing field for all businesses and to give no competitive advantage through our action or failure to act. It is our responsibility to protect the community investments made by local commercial entities, and it is incumbent on us to protect the interest of our citizens by ensuring that the public service agencies on which they rely are not bankrupted by the failure of vendors to do their fair share.
The solutions, unfortunately, will prove more difficult to implement than the technology itself but as a local official charged with preserving, protecting and promoting the quality of life my constituents hold dear, I appeal to you to act decisively to prevent a true calamity. We are depending on you to do so.
I thank you again for the opportunity to speak on behalf of Louisiana's local governments.
[The prepared statement of Mr. Strain follows:]
PREPARED STATEMENT OF RODNEY STRAIN, JR., SHERIFF AND EX-OFFICIO TAX COLLECTOR, ST. TAMMANY PARISH, COVINGTON, LA
Ladies and Gentlemen:
First, my thanks for the opportunity to speak to you today on the issue of taxing Internet commerce. This matter, and the decisions you make in coming months, will be a crucial element in the continued operations of local government, and it must no longer be placed on the back burner.
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With E-commerce thriving and growing at an exponential rate, the issue of whether and when to tax Internet sales is quickly becoming a question of how to collect tax revenues that are already due.
St. Tammany Parish, Louisiana, the community I am proud to serve as sheriff is among the fastest-growing communities in the United States. With over 200,000 residents, it has the second-highest per capita income in Louisiana and is seventh overall in retail sales volume. Per capita retail sales in our parish are nearly $8,200 per year.
Although statistics are not available on the percentage of local homes with Internet access, we can extrapolate from national data: Eighty percent of upper-income homes are online, and St. Tammany Parish is largely populated by families in that income bracket. This suggests that a majority of our community has Internet access.
Nationally, 80 percent of Internet shoppers are females between the ages of 16 and 50. Twenty-six percent of our population is in that demographic, equaling approximately 35,000 people. If even half of those 35,000 shop online—for even half of their purchases—my community could lose tax revenue on an additional half a million dollars in sales each year. At this time, this loss is not significant enough to be crippling, but with the rapid growth of e-commerce, I fear and anticipate that it could become catastrophic.
In Louisiana in 1999, an estimated $2 billion was spent on untaxed Internet and catalog sales, resulting in a loss to the state of $76 million in uncollected tax revenue. In my parish alone, local governments lost more than $2.4 million in uncollected tax revenue. The three largest cities in St. Tammany Parish lost a combined $450,000.
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With 48.7 percent of American homes online—and with that number rising daily—the potential impact on my community does not exist in a vacuum; within the foreseeable future, local and state governments around the nation could experience substantial reductions in sales tax revenue. Several states, in fact—Florida and Texas among them—rely on sales taxes to provide more than 40 percent of all state revenues. Louisiana depends on a similar income from sales-tax revenue.
I am neither a proponent of taxation nor a Luddite, and I am resolved to the fact that Internet communications and commerce are changing the world. I would oppose any measures to overburden e-commerce with more than its fair share of taxation. I believe that all legitimate commerce is good for the nation and for local communities, but that such commerce cannot and should not be permitted to skirt regulation and taxation by virtue of its lack of brick-and-mortar housing or geo-political boundaries. The burden of tax collection, moreover, should not be placed solely on local businesses, inhibiting their ability to compete.
Critics of taxing e-commerce will argue that while the actual product or service is not being taxed, related events such as shipping, fuel and tariffs remain in place. It takes little computation to realize that existing revenue-generating measures will not compensate for a loss due directly to tax-free e-commerce. Additionally, taxes already in place on the shipment and delivery of products generally benefit federal and state government, but do little to directly fund local operations such as law enforcement, education and infrastructure.
But the critics are outnumbered. Indeed, a Gallup poll released early this year shows that 65 percent of online consumers expect to be taxed appropriately; I suspect that a large percentage of Internet shoppers are not even aware that their purchases are tax-free and provide no benefit to the local governments on which they, the consumers, rely.
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Whatever path you choose, I suggest that the situation be addressed, and quickly. There is no crisis at the moment, but one is looming on the horizon. We should not tax e-commerce into oblivion, but we cannot allow Internet business to bankrupt local government.
If no effort is made to effectively eliminate the problem of uncollected revenue, I truly fear what the outcome may be. Taxation and technology experts with whom I have spoken raise a number of important concerns:
1. If tax-free Internet shopping continues, there may develop a ''societal expectation'' that this is, quite simply, the way it ''should be.''
2. Businesses that are complying with existing tax law will feel they have lost a competitive edge, and will begin to find ways to skirt tax payments.
3. As state and local governments lose revenue to businesses operating in cyberspace, we will be forced to raise other taxes or cut services. I needn't tell you what the potential fallout might be in terms of education, health and public safety alone.
4. Local jobs may be lost as small businesses fold to the online commercial world. This could result in greater burdens on the community, with no revenue to address the ensuing needs.
There are a number of interesting questions that will have to be addressed: Will we tax sales at the point of origin or of delivery? How will we effectively audit consumers as we currently do businesses, without becoming a fiscal ''Big Brother''? Will the states be required to create conforming tax codes for simplicity of collection? Will the voters understand that this is not a new tax, but simply the proper enforcement of existing taxes?
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Having reviewed the available research and data, and having consulted with informed sources in my home state, my recommendation would be as follows:
Congress should not allow the five-year moratorium to renew, but should impose—at most—a one-year moratorium on Internet taxation. Further, Congress should immediately implement a research and development team combining federal, state, local and business leaders. A ''trusted third party'' system could be established whereby private companies would provide a uniform monitoring system, collecting taxes from vendors and distributing monies to the states for disbursement to local agencies.
This solution would allow tax-collecting authorities, such as my agency, to effectively audit a business—the third-party collector—rather than mount the daunting task of monitoring individual expenditures and consumption. Further, it would give the agencies that most benefit from sales tax collection the tools to fulfill their own civic obligations.
It is our duty as public officials to ensure a level playing field for all businesses, and to give no individual or industry a competitive advantage through our action or failure to act. It is our responsibility to protect the community investments made by local small businesses. And it is incumbent on us to protect the interests of our citizens by ensuring that public service agencies are not bankrupted through the failure of online vendors to pay their fair share.
The solutions, unfortunately, will prove more difficult to implement than the technology itself. But as a local official charged with preserving, protecting and promoting the quality of life my constituents hold dear, I appeal to you to act decisively to forestall a true calamity.
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I thank you again for this opportunity to speak on behalf of Louisiana's local governments.
Mr. GEKAS. We thank the gentleman. We will begin with a round of questioning by the members of the committee. We will also restrict it to 5 minutes. The gentleman from Michigan seeks recognition.
First, before I do that, I want the record to indicate that the gentleman from Massachusetts, Mr. Delahunt, is also present.
Mr. CONYERS. Mr. Chairman, I merely seek to insert my statement into the record.
Mr. GEKAS. Without objection.
[The prepared statement of Mr. Conyers follows:]
PREPARED STATEMENT OF HON. JOHN CONYERS, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN
I appreciate the Subcommittee's continuing interest in the issue of Internet taxes, but I am concerned that these hearings are coming too late in the process. We moved far too quickly in approving legislation to extend the moratorium on new Internet taxes, and now we are moving far too slowly in addressing the more important issue of state tax simplification. Every day we delay acting on this issue causes continuing harm to retailers, state and local governments, and consumers. That is why today I am calling on the Subcommittee to take up tax simplification legislation immediately after the recess.
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Let me explain why this issue is so important. First, the cost of deferring consideration of state tax simplification has been estimated as creating a state revenue loss of $20 billion per year in lost sales taxes, to say nothing of the private sector costs of complying with the complex state tax system. All of this lost revenue is comes from somewhere—most likely in the form of reduced services such as police, fire and education—hardly a very desirable policy outcome.
Second, the current disparate tax treatment as between traditional ''bricks and mortar'' retailers (which are subject to state sales tax) and remote sellers (which are not) causes continuing economic disruption. An elementary principle of taxation says that taxes should distort purchasing decisions as little as possible. It should not be the role of a tax code to determine whether customers shop in stores, online, or by mail order—yet that is what our current system does.
Finally, the present system harms individual consumers. This is obviously the case where individuals face increasing income and property taxes as a result of the loss of sales taxes from remote sales. A separate concern is the adverse impact of the present bifurcated system on poor and minorities. According to a recent Commerce Department study, wealthy individuals are 20 times more likely to have Internet access, and Hispanics and African Americans are far less likely to have such access. This means that poor and minorities who only buy locally face a greater sales tax burden than their counterparts. Maintaining the present system only serves to perpetuate that disparity.
Mr. Chairman, the time to act on this issue is now. When the issue before us was extending the moratorium, this Committee was in such a rush to judgment that we moved the legislation to the floor without so much as a hearing. Today is our second hearing on the far more important tax simplification issue, and our retailers, states, and consumers demand and expect action.
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Mr. CONYERS. I won't be able to stay for this hearing, as important as it is. I wanted to commend the Chair for moving this issue forward. We have about three bills in front of us now, I am a cosponsor on two of the three, but the one that is beginning to attract my attention is the bill from the gentleman from Alabama, Mr. Bachus. I am looking forward to the hearing, and I will have staff here after I leave.
Thank you very much.
Mr. GEKAS. I thank the gentleman. The Chair will indulge in the first 5 minutes and we will restrict the questioning of the members to that 5 minutes.
I just have a brief question for each member of this panel. First, I want to comment on Sheriff Strain's recommendation about the entity for research and development. I am going to give extra thought as one member to that proposition. But on another issue I would like to have Senator Haynes and Sheriff Strain comment on, what about the advent of the street vendors as we call them, as you are calling them, and brick and mortar as others call them, also engaging in Internet? Isn't that a new phenomenon? Isn't that a burgeoning phenomenon that somehow vitiates the problem? If they are both Internet and street, does that help or hurt the overall problem?
Mr. HAYNES. I can just tell you, Mr. Chairman, the story that I heard not too long ago, I believe the name of the company was Coastal Tool and Supply, which was a small independent hardware retailer in Connecticut. They had a Home Depot move in down the street which was threatening to put them out of business. They opened up their Internet business and in fact not only did their Internet business save their retail business but they are now—they were down the street and around the corner from Home Depot, they are now the same size as Home Depot, on the same street right in front of them and competing with them, and mainly because of the opportunities that the Internet provided. The owner of the company said in this particular instance if he had had to do the things that the panelists are requiring, had to collect sales tax for all 50 jurisdictions—in California we have 58 counties, there are 53 different sales tax requirements in California alone. If he had been required to administer that, he wouldn't have been able to go onto the Internet. If he had been required to have to collect those taxes, he would have gone out of business because he would not have been able to compete with Home Depot.
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Mr. GEKAS. Sheriff Strain, you had noted in your testimony about the potential or actual loss of sales tax revenue that your State or your region is experiencing and I am wondering how much of this duplication or amplification of a street business into Internet mitigates your problem, if it does at all?
Mr. STRAIN. Yes, sir, this is a great concern in Louisiana. As I said, we have already experienced some problems in our State, from the State level. Some of our larger municipalities, such as Baton Rouge and Lafayette, have already experienced losses in sales tax collections. Our concern is, as we all know, there is a small portion of profit margin in the brick and mortar business of sales. As those retailers have more difficulty competing with e-trade, they will find solutions to become more competitive. As a local tax collector, what our concern is is that that competitive spirit is going to result in no taxation for local coffers and the result, as I said in my testimony, could be devastating to local governments.
Unfortunately, basically all we have to look in now is a crystal ball. There is no guarantee how rapidly the e-commerce will grow and there is no guarantee how quickly local brick and mortar retailers will respond to that growth. But what we can be assured of is a failure to act on our part could result in devastating results.
Mr. GEKAS. Mr. Southcombe, you lament the flight of retailers from the small towns in your area. Do you believe that a solution to Internet taxation will draw retailers back into the domain?
Mr. SOUTHCOMBE. Mr. Chairman, it very well could. As long as there is no advantage of going out of your Main Street consumer area, I think they will flourish again. My concern is, and this has been discussed, is we have people in Idaho that sell in every conceivable way, bricks and mortar, catalogs, over the Internet. The problem is the corporate structures that some of these vendors use to avoid taxes. But fair is fair. If it is legal, they can certainly do that. But the so-called dot.coms are doing the very same thing that their brothers in bricks and mortar are doing, but they are not paying taxes. And the structures become very sophisticated.
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There is one particularly good Internet seller that has 13 different corporations, limited partnerships, and limited liability companies. So it is very difficult to follow them through their sales.
So it is a combination of factors. There is very good counsel on the other side of the fence, and they are doing everything they can to avoid taxes, which is perfectly legal. But it does affect revenue.
Mr. GEKAS. The time of the Chair has expired. I just want to make the comment with respect to Mr. Viken's testimony, that the approbation you give to the gentleman from Alabama for his concept of the interstate compact, isn't an act of Congress in this regard a 50-State compact in effect?
The time of the Chair has expired. I want you to think about that. Maybe you can answer it in one of the other questions that might be posed to you.
The gentleman from New York is recognized for 5 minutes.
Mr. NADLER. Thank you. Senator Haynes, assuming the question of multiple taxation could be solved, what policy reason is there, if any, for saying that a television set sold over the Internet should not be taxed while a television set sold at a store should be?
Mr. HAYNES. Understand this, we are not talking about whether or not it should be taxed, because it already is taxed.
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Mr. NADLER. What policy reason exists for the States being unable to enforce the use tax by having the seller remit the tax as would the seller of the store on Main Street, assuming the question of multiple taxation could be solved?
Mr. HAYNES. I understand the question. But I also want to start with the concept. Understand that States can collect this tax from the buyer. They don't do it because——
Mr. NADLER. I understand that they don't it because it is impossible to do it. Just answer the question, please. Assuming the question of multiple taxation could be solved, assuming it didn't exist, what reason is there, if any, why we should differentiate between a seller over the Internet and a store on Main Street with respect to their obligation to collect and remit the sales or use tax?
Mr. HAYNES. First of all, assuming Congress wishes to enter into this, I think they ought to give the States—I will answer it this way. The States ought to be in competition with each other and ought to have the essence of what is going on. The State and local—actually the local retailers can solve the sales tax problem at the State and local level. What they would be then arguing for, however, is lower taxes on them as opposed to higher taxes on their competition.
Mr. NADLER. In other words, what you are saying is you have an ideological opposition to taxes because you believe it is wrong for some reason?
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Mr. HAYNES. That is not true.
Mr. NADLER. What you are saying is the States should compete with each other. The local merchants in order to survive should exercise their political influence to lower the local taxes so that they have a better competition with someone who is not paying any taxes over the Internet.
Mr. HAYNES. No, what I am saying is that the competitive problem that is being discussed is caused by the tax systems currently exercised by the States. The problem should be solved at the State level by the States if that indeed is the basis of the competitive problem. And the way that it will work——
Mr. NADLER. Excuse me a second. If there is indeed a problem, why should Congress not help the States solve the problem if they can't do it by themselves? Why should it be solved at the State level?
Mr. HAYNES. The States are unwilling politically to do it themselves.
Mr. NADLER. Why shouldn't they have the freedom—if the States are unwilling to do it politically by themselves, that means the local voters don't want to. Why shouldn't we help the States if they decide they need the help?
Mr. HAYNES. Because the States ought to solve the problem themselves.
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Mr. NADLER. That is my question. Why should they be required to solve it themselves if they ask us for help?
Mr. HAYNES. They are the ones that are creating the problem.
Mr. NADLER. By levying a tax?
Mr. HAYNES. No, they are creating the problem by being unwilling to do what is necessary to simplify their own taxes and pay whatever consequences attach politically or otherwise to taking the appropriate steps. What you are asking is basically step in and solve my problem. I have got 900,000 constituents. I am willing to face those voters with the decisions that I make.
Mr. NADLER. Isn't it true that the States can't solve the problem because of the Supreme Court nexus decisions?
Mr. HAYNES. No, the States can solve the problem. And the way that they can solve it is by taxing those who are located in their own State.
Mr. NADLER. But what about those who aren't?
Mr. HAYNES. Those who are not——
Mr. NADLER. But are selling in their States.
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Mr. HAYNES. Interestingly enough, if indeed they tax those who are in their States, you will end up basically in a competition between the various States, that the State and local folks——
Mr. NADLER. What you are really saying is that competition among the States to see who can be the lowest taxer in order to survive is a good thing and let's let that competition force the States to lower their taxes. I understand.
Mr. Viken, would you like to comment on Senator Haynes' testimony, please.
Mr. VIKEN. Mr. Chairman and members of the committee, I agree that States need to solve this problem. But we need some help from Congress as well. The Bachus proposal really provides a vehicle that creates a duty to collect, provided States on their own and working collectively work with their legislatures to simplify their sales tax structures. Sales taxes vary widely from State to State, as you know. We have to work with our individual legislatures to make those sales tax structures look more alike, however, and we are willing to do that. We are actively involved in trying to do that.
Mr. NADLER. Thank you. Mr. Chairman, could I have unanimous consent for 1 additional minute?
Mr. GEKAS. Without objection.
Mr. NADLER. Thank you. Let me simply observe that in order for the States to effectuate such a compact, the approval of Congress is needed. Let me also simply observe as my personal opinion that what we are really talking about here, and Senator Haynes was pretty honest about it up to a point, is that there are a group of people in this country who believe that State sales taxes either shouldn't exist or are too high and that it is a good thing to have a race to the bottom in which competitive pressures force States to get their sales taxes as low as possible.
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I personally believe that State electorates, State citizens, are entitled to set taxes at whatever level they think appropriate. Insofar as that freedom to exercise the sovereignty of the States and of their electorates and their decisions through the exercise of the local democratic system, with a small D, is constrained by the modern nature of commerce, that you can sell at any distance and the Supreme Court decisions on nexus forces States into a competition with each other, it is the duty of Congress to help the States by removing such impediments so that their local political systems can determine what taxes, if any, they want to impose and at what levels. That should be determined by a local democratic process in those States and not by a competition among the States. I think competition among the States on tax levels is something the Congress ought to stop from happening or at least provide a level playing field rather than applauding it.
Mr. GEKAS. Would the gentleman yield some time to the Chair of his nontime?
Mr. NADLER. I will be glad to yield whatever remains of my non-1 minute.
Mr. GEKAS. Only to ask Senator Haynes if he wishes to rejoinder to what the gentleman has said up to now about your position.
Mr. HAYNES. Certainly. I think it, with all due respect, sort of misrepresents what I am saying. States will set—right now at the local level, a lot of e-tailers as opposed to the retailers, a lot of the e-tailers don't use the police services, they don't use the street services, they don't use the street cleaning services, all the things that the sales tax pays for, yet they are being asked to pay for it. I think what would end up happening is with the competition between the States, what will end up happening is the tax level will seek the balance and that the locals will be able to use their political influence to make it even. That is all I was trying to say.
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Mr. NADLER. Let me if I may——
Mr. GEKAS. More nontime for the gentleman from New York.
Mr. NADLER. I have a one-sentence comment on that if I may. Whether e-commerce or e-tailers use the same level of services as retailers is debatable. Maybe they don't, maybe they do, I don't know. But one would think that that is up to the State electorates, the State political system to judge as to how to tax that and if the e-tailers don't like it, they can, A, use their political influence to change it and, B, if they don't want to, not do business in the State. Companies have threatened that in the past and that is the way the political system operates, and the State legislatures can take that threat into account if they wish. All those decisions should be made at the local level.
Mr. GEKAS. The time of the gentleman has expired, expired, expired. The gentleman from Alabama is recognized for 5 minutes.
Mr. BACHUS. Thank you. Senator Haynes, when I was in the State Senate I was a member of the National Association of State Legislators.
Mr. HAYNES. There is the National Council of State Legislators and then the American Legislative Exchange Council. That is the group of about 3,000 State legislators.
Mr. BACHUS. Now you are a member—you are representing a different organization, is that right?
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Mr. HAYNES. NCSL. Every State legislator in the country is automatically a member of NCSL. ALEC is a voluntary organization. You pay dues to ALEC. We have about 2500 members. Of the 7700 State legislators, we have about 2500 that pay the dues to ALEC.
Mr. BACHUS. Has your statement been approved by your group?
Mr. HAYNES. Yes. I am the national Chair speaking on behalf of that organization.
Mr. BACHUS. Let me ask you this. You talked about reasons for not taxing e-commerce but, as you said, we tax e-commerce today, don't we?
Mr. HAYNES. There are taxes. The States actually have the ability to tax e-commerce today. They have just got to tax the buyer.
Mr. BACHUS. The issue is not whether we should tax e-commerce or not.
Mr. HAYNES. Correct.
Mr. BACHUS. States have already made that decision and that is to tax e-commerce.
Mr. HAYNES. They have the opportunity today to collect taxes on all—the States today have the opportunity.
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Mr. BACHUS. You don't disagree that the State legislatures should have the right to tax e-commerce. You don't disagree with that?
Mr. HAYNES. They have the right today to do that.
Mr. BACHUS. Okay. Now, when they do that, do you disagree—then they have made that decision. Now, to do that, to collect that tax, they have made the decision. You don't disagree with that. In fact, I think that is one of the more fundamental principles of our government is that our elected officials make those decisions.
Mr. HAYNES. Right.
Mr. BACHUS. Once those decisions are made, should there be any debate as to whether or not those decisions are carried out?
Mr. HAYNES. I understand where you are trying to go. I will put it to you this way. What the State tax collectors are saying is they don't want to have to go after the buyers——
Mr. BACHUS. I am not interested in where I am going. You are saying you disagree with those laws on the books?
Mr. HAYNES. No, I don't disagree with those laws on the books.
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Mr. BACHUS. Let's assume they are on the books.
Mr. HAYNES. Yes. They are on the books today.
Mr. BACHUS. The use tax. You were mentioning to another member, you said if the States want to collect them, they can collect them now.
Mr. HAYNES. Correct. They can.
Mr. BACHUS. Now, you know that that is not true. You know that is—aren't you being disingenuous with that?
Mr. HAYNES. No. If they start going after the individual buyers, there is a political consequence that will attach to that.
Mr. BACHUS. Let's be honest. You and I both know that as a practical matter, they can't collect those taxes. Is that right?
Mr. HAYNES. What I know is that if they attempted to collect those taxes, they would get thrown out of their office on their tail because the voters would vote them out.
Mr. BACHUS. But they cannot collect those taxes as a practical matter.
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Mr. HAYNES. They can. But the——
Mr. BACHUS. What is the compliance rate?
Mr. HAYNES. It is very low. Because they choose not to do it. They choose. They choose not to do it, because they are afraid of the political consequences of doing it.
Mr. BACHUS. There is only one practical way to collect that and that is to collect it from the remote seller. Would you disagree with that?
Mr. HAYNES. No.
Mr. BACHUS. As a practical matter.
Mr. HAYNES. As a political matter——
Mr. BACHUS. I am saying as a practical matter.
Mr. HAYNES. Since we are all politicians——
Mr. BACHUS. But I am not asking you for a political. I am asking you as a practical matter. Is there any——
Mr. HAYNES. If the tax collectors did it they would get voted out, so as a practical matter they are not going to do it because they don't want to lose their job.
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Mr. BACHUS. You don't want to answer my question?
Mr. HAYNES. I am saying I agree but the assumption——
Mr. BACHUS. You agree there is no other practical way?
Mr. HAYNES. No, I disagree with that. What I am saying is the practical——
Mr. BACHUS. How do you advocate to collect? Let me ask you this. When a tax is passed by a legislature, you would agree that there ought to be compliance with the law, right?
Mr. HAYNES. Sure.
Mr. BACHUS. You don't advocate people not meeting their—do you advocate people meeting their tax liability?
Mr. HAYNES. Certainly. You should meet your tax liability.
Mr. BACHUS. So this is a tax liability.
Mr. HAYNES. Correct.
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Mr. BACHUS. Is there anything wrong with selecting the most practical way and the most economic way to collect those taxes?
Mr. HAYNES. If people—look, if people complied with the use tax laws, there would be a political consequence to those who passed those use tax laws. So I think the State ought to enforce the law as they wrote it and then suffer the political consequences.
Mr. BACHUS. In your written statement, you said we need help from the Federal Government, we need direction, we need advice. In your oral statement, you said the States can do it themselves, we don't need Federal involvement.
Mr. HAYNES. What I said in my written statement was the Congress ought to do that which is consistent with an appropriate respect for federalism in the free market.
Mr. BACHUS. The Supreme Court—you don't disagree with—the Supreme Court has said, and you don't disagree with us enforcing the commerce clause?
Mr. HAYNES. No.
Mr. BACHUS. And fashioning a remedy where the States can collect legally owed taxes, do you?
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Mr. HAYNES. What I would advocate is basically saying to the State legislatures, you set the tax.
Mr. BACHUS. They have already done that.
Mr. HAYNES. Right. Then letting the free market and federalism——
Mr. BACHUS. The Supreme Court has said that they cannot practically collect them without congressional involvement.
Mr. HAYNES. And I think the appropriate level of setting that is the nexus requirements that are set by the Supreme Court. I honestly believe if e-commerce is located in that State and using the services of that State——
Mr. BACHUS. Then you are arguing against the laws that have already been passed in 44 States.
Mr. HAYNES. I don't think so.
Mr. BACHUS. Which require a tax to be paid.
Mr. GEKAS. The time of the gentleman has expired. We now turn to the gentleman from New York, Mr. Weiner, for a period of 5 minutes and we will ask the gentleman from Alabama to assume the Chair for that purpose.
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Mr. WEINER. Thank you, Mr. Chairman. It strikes me that the previous line of questions and frankly much of the focus of the testimony seems to assume that there are only two variables in this conversation, the level of taxation and the level of the ability to collect the taxation. But there is a third variable, and that is the ability of retailers to change their behavior. There is nothing, Sheriff Strain, stopping a shoe store in Louisiana from selling me a product, selling me shoes over the Internet. I would not visit Louisiana to shop for shoes in a thousand years, with no offense to the fine people and their shoes of Louisiana.
Mr. DELAHUNT. Especially the alligator shoes.
Mr. WEINER. But the fact remains that there are other ways for retailers to change their behavior to take advantage of the Internet. I mean, a perfect example of something that has been going on for a very long time, a shoe store in Louisiana is competing with L.L. Bean in the same way. There is nothing stopping a shoe store in Louisiana from starting a catalog business themselves. If anything, the Internet has reduced the barriers to entry that will make it so much easier now for a shoe store in Louisiana to deal with me in New York.
So the assumption that the only variable that is in place here is the State tax rate, the Federal Government's ability to give you folks an opportunity to form compacts among yourselves, is just simply wrong. If anything, if anything, the problems that Mr. Southcombe addressed about the border wars that exist and have existed for hundreds of years on tax rates are now mitigated by the Internet, because now you have the ability clear across the country to set up operations to sell to the consumers in New York, to consumers in Montana, to consumers in Louisiana alike.
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It really does seem like we are focusing a bit too much on the effect of the tax rate and tax collection that e-commerce has highlighted, and we are ignoring another fundamental thing that is getting lost here in that e-commerce has given the ability of folks in Louisiana to compete with folks in New York.
Mr. VITTER. Will the gentleman yield?
Mr. WEINER. I certainly will.
Mr. VITTER. The chairman made a similar comment; namely, that local stores now have the ability to go into Internet transactions themselves and that certainly mitigates the problem for local retailers. I think though the answer to the question is you are right, that is an ability, that is a great opportunity that mitigates the issue for local retailers. It does nothing, in fact it worsens the issue in terms of loss of local sales taxes. It encourages more people to get into that and that doesn't solve the local sales tax problem in any way.
Mr. WEINER. Let me reclaim my time. You have a bookstore on a main street in your district that begins to sell on the Internet and then has the ability to sell to me in New York which it never had before. You are going to have the ability to grow that business exponentially, bringing in all kinds of revenues for the State by having more people operating in a State. The barriers to competition for New York book buyers for a Louisiana bookstore were insurmountable previously. I would have to fly to Louisiana to buy or I would have to know about them by getting a catalog or something. Now with a click of a mouse I can shop for books in Louisiana.
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Mr. NADLER. Would the gentleman yield on that point?
Mr. WEINER. I certainly will.
Mr. NADLER. I think what is more likely to happen with the barrier—with the lack of necessity for a national bookstore with national discounts of quantity not having to build facilities in Louisiana, what is more likely to happen is that five book companies in the country will replace all the local book stores.
Mr. WEINER. I have got to tell you something. First of all, I would remind Mr. Nadler that this is something that was argued before and now Barnes and Noble is racing to catch up with Amazon and they are doing a better job and they have a better site. I shop there even though I have to pay tax there because they have a nexus in New York. There is no saying that a Louisiana bookstore that has every book that you would ever want to buy about Louisiana shoes isn't going to spring up and allow us to go to that site and grow their business exponentially. There is nothing about the tax code that is stopping that from happening. If anything, the opposite is happening because of the advent of e-commerce.
Perhaps, Sheriff Strain, you can just comment on the construct. I know you have painted kind of an apocalyptic picture here of what is going to happen to the tax base in Louisiana. I think the feisty and entrepreneurial people of Louisiana are going to see this rule of the road, see that what the Internet is in a sense is a giant catalog that we all have access to that we never had before, and I think that benefits Louisiana certainly when competing against a New York bookseller, for example.
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Mr. STRAIN. Thank you, sir. In many ways I agree with your statements aside from the shoes. I can tell you alligator hide is probably very popular nationally. But there is a fourth variable that you fail to mention and as a local tax collector I must consider. We have talked and I have heard the debate go back and forth about Federal and State. I have heard very little comment about the small taxing authority, who on the local level who has passed a sales tax to build a school, to build a jail, a mosquito district or whatever may be the need in your community. That district, that taxing authority has an amount of money dedicated to retiring the debt and providing the service. We can debate all day long whether or not e-commerce is good, bad, whether you can buy a shoe in Louisiana or a book in New York. The fact of the matter is if that commerce and that trade is no longer taxable in that small district and in my parish, I have 18 taxing bodies and we split it 35 different ways. Now, the taxpayers, the voters in those districts voted those taxes in place. They were not deemed from the State nor from Washington, DC. If the income reduces that is dedicated to that tax due to trade or commerce moves into your State or anyone else's, then there is the risk that the product or the service that is provided could be lost.
Mr. WEINER. Could I ask unanimous consent to have one additional minute to follow up on that point?
Inherent in your assumptions is that because of Internet commerce, there is going to be a reduction in the collection of local sales tax. Inherent in that assumption is that people are going to stop going down the street to the local alligator shoe store and they are going to start buying elsewhere. There is nothing about the advent of e-commerce that makes that more or less likely to happen. You are simply being—that shoe store operator is going to be up on the Internet as sure as we are sitting here. They are going to be competing as well, there are going to be additional jobs created, and this is the dynamic that is going on now because of e-commerce.
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I am not hypothesizing about something we have no evidence of. That is kind of going on now, that there has been an explosion of retail, an explosion of jobs in this sector. I have to tell you, Barnes and Noble opened a Barnes and Noble dot.com and New York City has a local tax as well that supports a lot of our local activities. As a former city councilman, I can tell you that. There is nothing about that activity that necessarily meant that the revenues dropped for a Queens—for a New Jersey bookseller. There is nothing inherent in that that meant that that dropped.
Mr. BACHUS. [Presiding.] I thank the gentleman. Mr. Vitter, you had a question.
Mr. VITTER. Just to follow up on that question, I guess what you are saying, Mr. Weiner, is that the growth shot in the arm of the Internet sector of the economy perhaps overcompensates for sales tax percentage loss. That could be true. I mean, there is certainly something on that side of the equation because clearly the Internet side of the economy is driving our boom economy. But certainly as a percentage, you are taking away from sales tax revenues. A greater percentage of overall sales are essentially sales tax free now.
Mr. WEINER. If the gentleman will yield, they are all happening in a State. They are all happening in a locality. They aren't happening in Guam. They are happening in our States, in our localities, in our neighborhoods.
Mr. VITTER. There is no sales tax there.
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Mr. NADLER. Would the gentleman yield for a moment?
Mr. VITTER. Yes.
Mr. NADLER. Let me just observe that the speculation as to how the economy will evolve and the resultant impact on State and local revenues is interesting although none of us really knows. The only thing that we can do, I think, is to observe two principles, two paramount principles. One is that we should strive to have a level playing field where people make economic decisions, how they should buy their shoes, whether from the corner store, from the Internet or wherever, based on whatever factors they want to make based on economic factors and not on tax avoidance factors. There should be a level playing field across the board and people should use the Internet if they want to and they should use something else if they want to, but not because of tax avoidance motivation.
That is because, number one, it is equitable, number two, that is the way you get the most efficient economy, where people make economic decisions for economic reasons, not for tax avoidance reasons.
Second, that we should protect the tax bases of the State from unfair destruction. Those are the two paramount considerations that I think we have to look at.
I thank the gentleman. I yield back.
Mr. VITTER. Senator Haynes, one of your comments was essentially the States should solve this problem themselves. One way they are attempting to do that is through these national streamlining initiatives which could in fact lead to the States going directly to the court and not to Congress to get authority to tax remote sales. Are you in favor of that initiative?
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Mr. HAYNES. I have no problem if indeed that is what the States want to do. I don't think that that requires congressional intervention to say that that is enforceable among States that don't wish to participate in that, though.
Mr. VITTER. Have you or would you vote in favor of California participating in that initiative?
Mr. HAYNES. I don't know that it has been in front of California. It would depend on what the agreement was. I have not followed NCSL on this, so I am not sure exactly what NCSL is doing.
Mr. VITTER. NCSL and the governors, NGA, have this initiative to in fact on a purely voluntary State basis streamline systems.
Mr. HAYNES. Without knowing what is specifically in that, I don't have a problem with the States doing that. I don't think Congress needs to tell States that don't wish to participate that they have to, though.
Mr. VITTER. Mr. Viken, I wanted to follow up on one of your comments. You made the point that some of the recommendations of the commission you strongly disagreed with, like taking certain things like digital products off the table in terms of sales tax collection. But you also put on the list Internet access. I consider those very different things. I am all for keeping Internet access tax free and keeping a moratorium there because I don't want to create a greater divide between those who are online and those who can't get online because of economic reasons. Would you agree that we should keep Internet access tax free?
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Mr. VIKEN. I am very much aware of the sensitivity over taxation of Internet access. My point when I was talking about that was simply that many States like ours pick up all evolving services and goods simply by the way our statutes are written. Internet access, if we lost the taxation on that, would cost us, our State, about $1.6 million. It may be a good investment to lose that to help address the digital divide.
Mr. VITTER. I would suggest with the importance of the Internet in the future, education, the economy, every aspect of our lives that that is a good investment. That is one thing we should take off the table because otherwise we are going to encourage this digital divide that is going to exacerbate the situation of the computer haves and have-nots.
Mr. VIKEN. I know I mentioned both of those things. I want to make sure that you understand from our standpoint, there is a very definite division between taxation on Internet access, taxation of Internet access and the lack of taxation on digital products and their physical counterparts. That is a problem for sales tax States.
Really if I could just for a second speak on behalf of someone who is responsible for collecting tax in a State, people don't like to pay taxes generally. We all know that. But if taxes are perceived as being fair, compliance isn't too bad, quite frankly, without a lot of work. What we are seeing, though, with e-commerce and the growth of an area of sales that is potentially not taxable is something which is going to create a feeling amongst the business community and all our States that are currently very compliant, it is going to create an attitude of unfairness. So we are going to start having compliance problems with our ongoing businesses when it comes to collecting sales tax.
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Mr. GEKAS. The time of the gentleman has expired.
The Chair intends to continue these hearings without break throughout the luncheon period so that I can issue an invitation to the third panel now, if they wish to step out for some peanut butter or cheese crackers, they can do so and return. The second panel I wish would stay where they are. We will proceed with them. The other people could eat lunch and come back in time for their presentation and the members will remain in place as best as the Chair can determine.
We now turn to the gentleman from Massachusetts, Mr. Delahunt, for an examination of 5 minutes. But before that, we want to acknowledge for the record the attendance of the gentleman from Ohio, Mr. Chabot.
Mr. Delahunt is recognized for 5 minutes.
Mr. DELAHUNT. I would just want to pursue the comment by Mr. Vitter regarding the taxation of the Internet. I agree with him. I think there is overwhelming sentiment in Congress that access to the Internet not be the subject of taxation. I would respectfully suggest, Mr. Viken, that that is information that you should take back to your State and to your State legislature, because I think that is going to happen. Also Mr. Vitter talks about the digital divide. I think in addition to that, taxation on access to the Internet is inequitable in terms of the e-tailer because it would carry an additional cost. And I think the sentiment here and the reason that I am a cosponsor with Mr. Bachus of his proposal, that what we are really trying to do is create a level playing field, so that there is not a divide within the business community and that the consequences for local and State taxing entities will be revenue neutral.
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I would ask the question to Senator Haynes. Senator, do you purchase items on the Internet yourself?
Mr. HAYNES. I am glad you asked me that question. It kind of gives you an example of how e-commerce has actually increased as opposed to costing States money. I was actually looking for a book a couple of years ago when I discovered Amazon.com. I had searched at least 15 different book stores trying to find the book, was not aware of Amazon.com, happened to hit it when I was surfing the net one day and said, well, maybe they have my book. Not only did they have my book but they had four others that are not common books. I was reading——
Mr. DELAHUNT. Could you be a little briefer?
Mr. HAYNES. To make a long story short, I bought a book that I would not have otherwise been able to purchase.
Mr. DELAHUNT. Where is Amazon physically located?
Mr. HAYNES. I have no idea.
Mr. DELAHUNT. Did you pay the user tax?
Mr. HAYNES. No, I did not.
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Mr. DELAHUNT. I think what that does is underscores, not the fact that you are dishonest—I don't suggest that.
Mr. HAYNES. There are others that do.
Mr. Delahunt [continuing]. Or that you are a tax evader. I am not suggesting that, either. But what I am suggesting is the point that was raised by Mr. Bachus. This isn't about testing the political courage of elected officials in terms of compliance. I wouldn't, either. I am sure no member of this panel would go and make an effort. I would think that the costs to the respective taxing entities in terms of truly implementing the use tax would be exorbitant. It would create a bureaucracy that would equal anything here in Washington.
We want to be fair. We want to make sure you can work it out. I yield back to the chairman.
Mr. BACHUS. Would you yield a minute of your time?
Mr. DELAHUNT. Of course. I yield, rather than to the Chair, to Mr. Bachus.
Mr. BACHUS. Senator, did you not pay the use tax for practical reasons or political reasons?
Mr. HAYNES. I will be real blunt. If I had gotten a letter from the local taxing authority saying please pay it, I would have paid it. I wasn't aware of it at the time. I just simply was not aware of it. I sit in the legislature and I am not aware of it.
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Mr. BACHUS. You still buy things over the Internet?
Mr. HAYNES. I haven't bought something over the Internet in about a year. The book I bought was one that I couldn't find anywhere else. It would never have occurred but for that.
Mr. BACHUS. Well, that probably is an exemption from the use tax. That would probably exempt you.
Mr. DELAHUNT. Mr. Bachus, may I have my remaining time back? I don't mean to interrupt, but we are talking here in terms of economic efficiencies and so forth. But I think the sheriff made a point particularly about small local taxing entities and their needs which we really have to be sensitive to. But even more, I am thinking of that small businessperson in some small town in Louisiana or in Massachusetts that is really an integral part of the community, that has been there for a long period of time, someone who probably like me is computer illiterate and just really would find great difficulty in terms of raising the capital necessary or having the technical expertise to do what Barnes and Noble is doing. There is more to the American way of life than simply economic efficiency.
Mr. GEKAS. The time of the gentleman has expired. Does the gentleman from Ohio seek recognition?
Mr. CHABOT. Yes, Mr. Chairman, I will be brief.
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Mr. GEKAS. I yield 5 minutes to the gentleman.
Mr. CHABOT. Thank you. Nothing has prevented the States from simplifying their complicated patchwork of sales and use tax rates and differing definitions of what items are taxable. Shouldn't the States first come forward with a comprehensive simplification of their State's tax policy before they come to Congress asking for new authority to tax interstate commerce? I would welcome a response from any of the panelists to that question. Mr. Viken.
Mr. VIKEN. There are at least 30 States that are working very hard to do just that, sir. The simplified sales tax project has a goal of developing a package of structural and legal changes to sales tax systems for those 20 or 30 States by this fall, things that could be put before State legislatures in 2001.
We are also as a group trying to develop a number of pilot projects to test the technology that is out there to take the burden out of the collection of use tax by out-of-State sellers. States have awakened to the need to simplify their sales tax systems, to make their systems look more alike and to call on technology to help us resolve this dilemma. The real problem here is that we have been talking about use tax and how the compliance is poor and so on. The analogy of the Internet to a large catalog I think was a good one. What that tells me as a tax commissioner is that there is going to be a heck of a lot more use tax being created, use tax liability being generated as the Internet continues to grow.
That is what we are concerned about as States. I don't think there is any State right now that is having that big of a problem because of revenue loss, but looking down the road, we need a solution to this problem because we are going to have more and more and more use tax owed. Those two Supreme Court decisions stand in the way of doing much about it.
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Mr. CHABOT. I also understand that to date, despite the rapid growth of the Internet, State sales tax revenues across the country are rising, not declining. Further, in recent years State treasuries again across the country are reporting surpluses. It seems to me that the growth of the Internet economy is creating higher paying jobs and these individuals are purchasing goods and services and paying taxes, sales taxes and income taxes to the States. Why do States feel like they are losing in this proposition? Shouldn't we wait to see first evidence of a widespread loss of revenue before Congress grants increased taxing authority? It seems to me that as the economy continues to grow at an ever increasing rates, and I would argue that much of that has to do with how the Internet has taken off and the new businesses, the new start-up companies, people are making more money. And so they are paying ever increasing income taxes and being a pretty strong tax cutter myself, I am for cutting those taxes, too, quite frankly, but many of the States do have income taxes like my State, Ohio, and they are receiving revenues from those. Again if anyone would like to respond.
Mr. STRAIN. I would like to respond to that. Coming from Louisiana, we are one of those States who has not been able to have huge surpluses, what have you. I don't know nor can I explain how or why that has occurred. I can only tell you that there are some studies that our governor has quoted that at least a portion of the loss is due to a loss of retail sales tax due, I guess in some part, to the Internet and catalog sales, some $2 billion in our State alone last year and a loss of $76 million in tax money to our State. Our legislature this past session raised $200 million in increased revenue.
I can't address this, why it is happening everywhere but not in Louisiana. I don't know if it is because of the tobacco settlement or anything else. But I have not heard anyone say let's run out today and go tax Internet. Let's go out and institute it this evening. What I have heard is people come together and try to find a way that is fair to everyone and it doesn't destroy e-commerce.
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I think most government agencies now have Web pages and use the Internet. I am certainly not a proponent of going out haphazardly and instituting a tax that is going to destroy the Internet, nor am I willing to sit back and say that it is going to take us 8 years to determine how to do it fairly. Because as the gentleman from Ohio stated, most mom and pop businesses do not have the Internet next to their cash registers nor do most local taxing authorities. They do not understand the complexity of the Supreme Court decisions or the process Congress has to take in order to enable States to come together and do these things.
Mr. GEKAS. The time of the gentleman has expired.
Mr. DELAHUNT. Will the gentleman yield?
Mr. CHABOT. I have no more time, but I would ask unanimous consent for an additional minute so I may yield.
Mr. GEKAS. Without objection.
Mr. DELAHUNT. I thank my friend from Ohio. I have heard the data, and presumably it is accurate, I am sure it is, in terms of increased State revenues as a result of the prosperity that we have been enjoying in the course of the past 8 or 9 years. But I think we make a mistake, and I would be interested in any response, to link it directly to e-commerce. There are many other factors responsible for this prosperity, clearly the Information Age and the advancements that we have seen in technology, but I daresay that e-commerce while it is growing, is certainly not responsible for the level of prosperity that we are enjoying and that doesn't translate into it being a catalyst for the increased revenues at the State and local level. That is just my opinion. I share it and welcome any response.
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Mr. GEKAS. The time of the gentleman has again expired. We are prepared now to thank the members of the panel for their testimony and to excuse them with our gratitude.
We will now convene panel number two.
The gentleman from New York is recognized.
Mr. NADLER. I thank the chairman. While the second panel is assembling, I simply want to say that I have other obligations and I have to leave now but we will be hearing from a number of New Yorkers in particular on the next two panels who have important things to tell us. I hope the members pay attention to it. I will review all their remarks. I will have staff here to listen to it also.
I regret that there are other obligations now that make me have to leave this hearing at this time. Thank you, Mr. Chairman.
Mr. GEKAS. Your comments will be noted.
We want to proceed with introduction of the second panel so that everyone can hear.
The Chair recognizes the gentleman from New York.
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Mr. NADLER. Mr. Chairman, since I won't be here later to say this, I now ask unanimous consent to grant all members 5 additional legislative days to insert material in the record.
Mr. GEKAS. Without objection.
Mr. NADLER. Thank you.
Mr. GEKAS. The second panel consists of the following individuals. Tom Stemberg, the CEO of Staples. He is a graduate of Harvard University and Harvard Business School. Before he opened the first Staples store in 1986, he held various senior management positions with First National Supermarkets. Mr. Stem is also director of PetsMart and Cornerstone Brands, a catalog business.
The second witness is president and CEO of the Rappaport Companies. Gary Rappaport founded his retail development and management company in 1983. The Rappaport Companies are currently responsible for 21 shopping centers located throughout the mid-Atlantic region. He was named to the International Council of Shopping Center Board of Trustees in May 1998 and is vice chairman for operations for the International Council of Shopping Centers.
The third witness is Robert Benham, owner and president of Balliet's L.L.C. In Oklahoma City, Oklahoma. He attended Vanderbilt University and graduated from Monmouth College with high honors. Mr. Benham is a member of the Board of Directors of the Executive Committee and Policy Council of the National Retail Federation and has served in the U.S. Army.
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Katrina Doerfler, the next witness, is the senior manager of planning and external affairs for Cisco Systems, Inc. She received her bachelor of science degree in accounting from California State University and her master's in taxation from Golden Gate University in San Francisco. Ms. Doerfler joined Cisco Systems in 1997 and is currently responsible for tax issues related to mergers and acquisitions as well as long-term planning and external tax affairs.
The next witness is David Friedensohn, the CEO and chairman of the board of BigStar Entertainment, Inc., which he founded in 1998. BigStar Entertainment is the largest film entertainment e-commerce site on the Web and the 30th largest e-commerce site overall. Mr. Friedensohn received an AB from Dartmouth College and a master's in business administration from Columbia University.
Mr. Frank Julian, the next witness, is one who completed his undergraduate studies at the University of Kentucky before receiving his law degree from the University of Notre Dame. Mr. Julian is the operating vice president and tax counsel of Federated Department Stores, Inc. in Cincinnati, Ohio. Mr. Julian has published articles dealing with the State and local tax aspects of bankruptcy and the collection of attorneys' fees in State tax litigation.
Peter Lowy is our next witness on this panel, president of Westfield America, Inc., which owns interests in 38 major shopping centers. He holds a bachelor of commerce degree from the University of New South Wales in Australia. Prior to joining Westfield in 1983, Mr. Lowy worked in investment banking in London and New York. He is the founding chairman of the E-Fairness Coalition.
The final witness is James H. Hunt, president and CEO of Ernst and Young Technologies. He is a graduate of the University of Notre Dame and the Rochester Institute of Technology. Mr. Hunt has served as a managing director for Price Waterhouse and as president of BDS, Inc., a systems integration firm. He has also served as an intelligence officer with the United States Government.
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We will proceed as before with the acknowledgment that each written statement will be accepted and made a part of the record and that the oral testimony should be restricted to somewhere around 5 minutes. We will begin in the order in which the witnesses were introduced with Mr. Stemberg being tabbed as number one.
STATEMENT OF TOM STEMBERG, CEO, STAPLES, INC.
Mr. STEMBERG. Thank you, Mr. Chairman. Mr. Chairman, members of the committee, my name is Tom Stemberg. I am the chief executive officer of Staples, and I am honored to be here today to testify on behalf of Staples, the office supply superstore and our e-commerce business, Staples.com. I thank you, Mr. Chairman, for holding this hearing to consider the viewpoint and concerns of retailers who were not represented on the Advisory Commission on Electronic Commerce, which submitted recommendations to Congress on the issue of Internet taxation.
Let me say at the outset that Staples supports the goals of States and most of our Nation's governors to develop a system of taxation that provides uniformity, simplicity and fairness to all retailers regardless of whether their transactions occur in stores or over the Internet. We are very concerned, however, that the current moratorium and the proposed extension of the moratorium passed by the House last month will serve to make the Internet a very unfair market from a taxation perspective.
As a first priority, I would like to clear up a very common misconception about taxes on the Internet. Despite the recent assertions of some Members of Congress and the media, the Internet is not tax free. The Internet tax moratorium that was extended by the House last month does not preclude the imposition and collection of State and local sales and use taxes. The Internet Tax Freedom Act, contrary to its misleading title, merely established a moratorium on the ability of State and local governments to impose new taxes on Internet services or electronic commerce. Nevertheless, reputable media sources such as the National Journal in its May 13 issue proclaimed in the headline, ''House extends ban on Internet taxes,'' and the NBC Today Show news announced that the Internet would be tax free for 5 more years. Local and Internet retailers, the so-called brick and click retailers like ourselves, are still required to assess and collect sales taxes on Internet purchases when the purchased items are shipped to a State where the retailer has a store or other facility. Consequently, local merchants that sell on the Internet must collect sales taxes in States where they have physical presence, while those retailers who sell only on the Internet largely escape State sales taxation. This physical presence test was reconfirmed in a 1992 Supreme Court decision, Quill v. North Dakota. Quite ironically, Staples has since acquired Quill, an office supplies direct marketer. We wish we could simply assert that the litigant was wrong. Unfortunately, such an assertion would not change the state of the law. To explain our concerns, let me offer an example of how Internet taxation affects brick and click companies.
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If a Staples Internet purchaser lives in your district, Mr. Chairman, near Harrisburg, Pennsylvania, Staples is required to charge that purchaser a 6 percent State and local sales taxes for any Internet purchase because Staples with its many stores in your district has a, ''physical presence in Pennsylvania.'' If you buy those same items from a so-called ''pure play'' Internet retailer, one who has no presence and has no employment in your State, you are not charged sales tax simply because the Internet retailer does not have physical presence in Pennsylvania. This effectively means that Pennsylvania consumers are getting up to a 6 percent discount from Internet retailers who do not charge the sales tax. This also means that companies that have made investments and created jobs in Pennsylvania in both facilities and our extensive workforce are being penalized on their Internet sales to Pennsylvania residents and businesses for having made those investments.
Staples has made investments in stores or distribution centers in many States, 44 as of today. That means that most consumers are paying sales tax if they live in a State that has a sales tax when they purchase from Staples on the Internet. When one considers where to buy a thousand dollar piece of computer equipment, fax machines, office furniture or other high value merchandise, this 4 to 8 percent discount is very likely to make a difference in the purchasing decision by the individual. Of course even if one decides to purchase goods from a ''pure play'' Internet retailer that does not charge sales tax because it does not have physical presence in the State of the purchaser, that State applies a use tax which is required to be remitted to the State in lieu of a sales tax on goods where a sales tax has not been collected.
However, a number of governors have testified before Congress about the significant difficulties they face in enforcing this use tax, which apparently even Senator Haynes could not find his way to paying, and thus these Internet goods remain virtually sales tax free. Most States simply do not have the desire or the resources to conduct home inspections to determine if goods have been purchased without payment of a sales and use tax.
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If Congress moves to extend the current moratorium as the House did last month, we believe that the only fair and equitable solution in the short term is to expand the moratorium to include all existing sales and use taxes on Internet transactions so that the original Internet Tax Freedom Act truly lives up to its name. Extending the Internet tax moratorium without addressing this taxation inequity will perpetuate an unfair advantage to Internet ''pure play'' retailers. We simply ask for a level playing field. Otherwise, retailers which sell locally and on the Internet will continue to be at a significant competitive disadvantage.
As I said at the beginning of my testimony, Staples certainly understands and supports the position of State and local officials that the sales tax base must be protected to ensure adequate funding for State and local government. We cannot, however, be subsidizing our Internet competitors who compete for the very same customers we do in a given State simply because we made investments of people and facilities in that State. The extension of the Internet Tax Freedom Act moratorium without the revisions we have suggested will result in the Congress aiding and abetting efforts to circumvent nexus or physical presence through the creation of questionable corporate tax mechanisms for the sole purpose of avoiding sales tax on Internet sales. Such a result would not only be poor tax policy, it would create chaos on the Internet and would simply be unfair to those who have already made significant investments in their States.
[The prepared statement of Mr. Stemberg follows:]
PREPARED STATEMENT OF TOM STEMBERG, CEO, STAPLES, INC.
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INTRODUCTION
Mr. Chairman and Members of the Committee, my name is Tom Stemberg. I am the CEO of Staples and I am honored to be here today to testify on behalf of Staples, the office supplies superstore, and our e-commerce business Staples.com.
I thank you Mr. Chairman for holding this hearing to consider the viewpoint and concerns of retailers who were not represented on the Advisory Commission on Electronic Commerce, which submitted recommendations to Congress on the issue of Internet taxation. Let me say at the outset that Staples supports the goals of states and most of our nation's Governors to develop a system of taxation that provides uniformity, simplicity and fairness to all retailers, regardless of whether transactions occur in stores or on the Internet.
We are very concerned, however, that the current moratorium and the extension of the moratorium passed by the House last month will serve to make the Internet a very unfair market from a taxation perspective.
As a first priority, I would like to clear up a common misconception about taxes on the Internet. Despite the recent assertions of some Members of Congress and the media, the Internet is not tax-free. The Internet tax moratorium that was extended by the House last month does not preclude the imposition and collection of state and local sales and use taxes. The Internet Tax Freedom Act, contrary to its misleading title, merely established a moratorium on the ability of state and local governments to impose new taxes on Internet services or electronic commerce. Nevertheless, reputable media sources such as National Journal in its May 13th issue proclaimed in a headline ''House Extends Ban on Internet Taxes'' and NBC Today Show news announced that the Internet would be tax-free for five more years. Local and Internet retailers, so-called ''brick and click'' retailers, are still required to assess and collect sales taxes on Internet purchases when the purchased items are shipped to a state where the retailer has a store or other facility. Consequently, local merchants that sell on the Internet must collect sales taxes in states where they have physical presence, while those retailers who sell only on the Internet, largely escape state sales taxation.
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This ''physical presence'' test was reconfirmed in a 1992 Supreme Court decision Quill v. North Dakota. Ironically, Staples has since acquired Quill, an office supplies direct marketer. We wish that we could simply assert that the litigant was wrong, but, unfortunately, such an assertion would not change the state of the law.
To explain our concerns, let me offer an example of how Internet taxation affects brick and click companies: If a Staples Internet purchaser lives in Chairman Gekas' home state of Pennsylvania, Staples is required to charge the purchaser 6% state and local sales taxes for any Internet purchase because Staples has a ''physical presence'' in Pennsylvania. If you buy these same items from a so-called ''pure-play'' Internet retailer (one that has no retail stores or facilities in any states or just one or two states), you are not charged sales tax because the Internet retailer does not have physical presence in Pennsylvania. This effectively means that Pennsylvania consumers are getting up to a 6% discount from Internet retailers that do not charge sales tax. This also means that companies that have made investments in Pennsylvania, in both facilities and a workforce, are being penalized on their Internet sales to Pennsylvania residents for having made those investments.
Staples has made investments in stores or distribution centers in many states—44 states as of today. This means that most consumers are paying sales taxes (if they live in a state that has a sales tax) when they purchase from Staples on the Internet. When one considers where to buy thousand-dollar plus computer equipment, fax machines, office furniture or other high value merchandise, this 4–8% ''discount'' is likely to make a difference in a person's purchasing decision.
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Of course, even if one decides to purchase goods from a pure-play Internet retailer that does not charge sales tax because it does not have physical presence in the state of the purchaser, that state probably applies a use tax which is required to be remitted to the state in lieu of a sales tax on goods where sales tax has not been collected. However, a number of Governors have testified before Congress about the significant difficulties they face in enforcing this use tax, thus these Internet goods remain virtually sales-tax free. Most states simply do not have the desire or the resources to conduct home inspections to determine if goods have been purchased without payment of a sales and use tax.
If Congress moves to extend the current moratorium, as the House did last month, we believe that the only fair and equitable solution in the short-term is to expand the moratorium to include all existing sales and use taxes on Internet transactions so that the original Internet Tax Freedom Act truly lives up to its name. Extending the Internet tax moratorium without addressing this taxation inequity will perpetuate an unfair advantage to Internet pure-play retailers. We simply ask for a level playing field. Otherwise, retailers which sell locally and on the Internet will continue to be at a significant competitive disadvantage
As I said at the beginning of my testimony, Staples certainly understands and supports the position of state and local officials that the sales tax base must be protected to ensure adequate funding for state and local government. We cannot, however, be subsidizing our Internet competitors who compete for the same customers that we do in a given state simply because we have invested in facilities and people in that state. The extension of the Internet Tax Freedom Act moratorium, without the revisions we have suggested, will result in the Congress aiding and abetting efforts to circumvent nexus or physical presence through the creation of questionable corporate tax mechanisms for the sole purpose of avoiding sales tax on Internet sales. Such a result would not only be poor tax policy, it would create chaos as the Internet would simply be unfair to those who have already made substantial investments in states.
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Mr. GEKAS. We thank you.
Mr. Rappaport is recognized.
STATEMENT OF GARY RAPPAPORT, PRESIDENT AND CEO, THE RAPPAPORT COMPANIES, VICE PRESIDENT, INTERNATIONAL COUNCIL OF SHOPPING CENTERS
Mr. RAPPAPORT. Thank you, Chairman Gekas. My name is Gary Rappaport. I am president and chief executive officer of the Rappaport Companies, a retail development and management company. My company oversees 21 shopping centers throughout the mid-Atlantic region. I am here on behalf of the International Council of Shopping Centers and its 40,000 members.
Last year, shopping centers in the U.S. generated $1.2 trillion in retail sales and over $47 billion in State sales tax revenue and employed over 11 million people. I appreciate this opportunity you have given me to present my views and those of ICSC on the need to apply existing State sales and use taxes to electronic commerce. Simply stated, we believe that all goods, regardless if they are purchased over the Internet, via catalog or in traditional retail stores should be subject to the same State and local tax collection requirements. One form of commerce should not receive preferential tax treatment over another.
Unfortunately, existing tax law is structured to favor electronic commerce over sales made in local retail stores. We do not support the enactment or implementation of Internet access charges or new multiple or discriminatory taxes on electronic commerce. In fact, we believe that the longer the moratorium on such taxes is extended without requiring the collection of sales taxes by remote sellers, the more difficult it will be for Congress to level the playing field. Existing sales and use taxes should be collected uniformly on all types of retail sales.
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The taxes which States should be able to require remote sellers to collect are not new taxes. Instead, they are existing use taxes which buyers are currently obligated to remit to their State and local governments. As a practical matter, most individuals are either unaware of their tax obligations or simply do not bother to comply. ICSC supports electronic commerce and believes it should be fostered. In fact, many traditional brick and mortar retailers and shopping center owners are incorporating Internet commerce into their businesses in order to obtain new customers and better serve existing ones.
As a matter of fairness and sound tax policy, Internet based retailers should not receive a competitive advantage over traditional brick and mortar merchants simply because electronic commerce is a new and growing form of transacting business. The inequitable situation that traditional retailers find themselves in is very clear to most Americans.
In fact, earlier this month, ICSC commissioned Wirthlin Worldwide to survey Americans on this issue and found that two-thirds of them believe it is unfair to require brick and mortar retailers to collect State and local sales tax without requiring Internet based retailers to do the same. In addition, State and local governments could experience a decrease in sales tax revenues that provide essential public services such as education, police and fire protection and road repairs. Governments that rely heavily on sales tax revenues to fund key programs could potentially face severe budget shortfalls.
When Wirthlin worldwide surveyed Americans about this scenario, they found that 55 percent felt reduced sales tax revenues would cause State and local governments to either raise other taxes such as property taxes or cut State and local programs. Our critics claim that forcing Internet retailers to collect sales and use taxes for the thousands of State and local taxing jurisdictions across the country would be too burdensome on electronic commerce and could not be done.
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It is agreed that State and local governments should work to simplify their State sales tax systems. However, relatively inexpensive software exists today that can assist electronic retailers in determining how much sales and use tax needs to be collected on their out-of-State sales.
Another argument made is that States and localities are flush with cash and do not need to tax electronic commerce. While it is true that most State and local governments are currently enjoying budget surpluses, there is no guarantee that this economic prosperity will last forever. In fact, some States such as Kentucky and Tennessee are currently experiencing budget difficulties.
That is why we support the Fair and Equitable Interstate Tax Compact Simplification Act of 2000, introduced by Representatives Bachus, Delahunt, Istook and McCarthy. We also agree with the Internet Tax Simplification Act of 2000, introduced by Representatives Hyde, Gekas, Conyers and Nadler. In addition to providing for a short-term extension of the moratorium, these bills would give those States that simplify their sales and use tax systems the authority to require remote sellers to collect and remit use taxes.
In closing, ICSC urges Congress to enact legislation now that would level the playing field among Internet based and traditional retailers. Thank you for this opportunity to express our views on this very important matter. I would be glad to answer any questions you may have.
Mr. GEKAS. We thank you, Mr. Rappaport.
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[The prepared statement of Mr. Rappaport follows:]
PREPARED STATEMENT OF GARY RAPPAPORT, PRESIDENT AND CEO, THE RAPPAPORT COMPANIES, VICE PRESIDENT, INTERNATIONAL COUNCIL OF SHOPPING CENTERS
Good morning. My name is Gary Rappaport, and I am President and Chief Executive Officer of the Rappaport Companies, a retail development and management company that I started in 1983. My company oversees 21 shopping centers with a combined gross leasable area of over 3 million square feet throughout the mid-Atlantic region, including North Carolina, Virginia, Maryland and the District of Columbia. I am here on behalf of the International Council of Shopping Centers, of which I am Eastern Divisional Vice President and a member of the Board of Trustees.
ICSC is the global trade association of the shopping center industry. Its 40,000 members in the United States, Canada and more than 70 other countries around the world include shopping center owners, developers, managers, investors, lenders, retailers and other professionals. The shopping center industry contributes significantly to the U.S. economy. In 1999, shopping centers in the U.S. generated over $1.2 trillion in retail sales and over $47 billion in state sales tax revenue, and employed over 11 million people.
I appreciate this opportunity you have given me to present my views, and those of ICSC, on the need to apply existing state sales and use taxes to electronic commerce.
Simply stated, we believe that all goods, regardless if they are purchased over the Internet, via catalog or in traditional retail stores, should be subject to the same state and local tax collection requirements. One form of commerce should not receive preferential tax treatment over another. Unfortunately, existing tax law is structured to favor electronic commerce over sales made in local retail stores.
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Contrary to popular belief, it is not the existing moratorium on Internet taxes that precludes states from requiring out-of-state retailers to collect sales and use taxes on their behalf. Instead, it is a 1992 Supreme Court case, Quill v. North Dakota, that held that remote merchants are not required to collect sales and use taxes for states in which they do not have a substantial physical presence or ''nexus''. The moratorium—which expires in October 2001—applies only to access charges and new, multiple and discriminatory taxes on electronic commerce.
We do not support the enactment or implementation of Internet access charges, or new, multiple or discriminatory taxes on electronic commerce. Instead, we believe that existing sales and use taxes should be collected uniformly on all types of retail sales. The taxes which states should be able to require remote sellers to collect are not new taxes. Instead, they are existing use taxes which buyers are currently obligated to remit to their state and local governments. However, as a practical matter, most individuals are either unaware of their tax obligations, or simply do not bother to comply.
We support electronic commerce and believe it should be fostered. In fact, many traditional brick-and-mortar retailers are incorporating Internet commerce into their businesses in order to obtain new customers and better serve existing ones. However, as a matter of fairness and sound tax policy, Internet-based retailers should not receive a competitive advantage over traditional brick-and-mortar merchants simply because electronic commerce is a new and growing form of transacting business.
The inequitable situation that traditional retailers find themselves in is very clear to most Americans. In fact, earlier this month, ICSC commissioned Wirthlin Worldwide to survey Americans on this issue and found that two-thirds of them believe it is unfair to require brick-and-mortar retailers to collect state and local sales tax without requiring Internet-based retailers to do the same.
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The reality is, as more and more Americans go online to purchase goods, the competitive tax advantage that Internet-based retailers enjoy will negatively affect many local retailers, shopping centers (including my own) and their communities in the near future. Not only will traditional retailers sell fewer goods, but their employees will suffer from reduced working hours, wages or layoffs.
In addition, state and local governments could experience a decrease in sales tax revenues that provide essential public services such as education, police and fire protection, and road repairs. Governments that rely heavily on sales tax revenues to fund key programs could potentially face severe budget shortfalls. When Wirthlin Worldwide surveyed Americans about this scenario, they found that a majority (55%) believe that reduced sales tax revenues would cause state and local governments to either raise other taxes, such as property taxes, or cut state and local programs.
Furthermore, if governments decide to increase sales tax rates to make up for lost revenues, lower-income individuals would be particularly vulnerable to paying a higher share of their income on sales taxes since they are less likely to own computers and purchase products on-line. The survey found that Americans overwhelmingly agree (62%) that this situation would be unfair.
Our critics assert that electronic commerce is a new and growing industry and, therefore, should not be saddled with ''old world'' sales tax collection requirements. They say we should not kill the goose that lays the golden egg. Our response is that, while electronic commerce is a growing and important part of our economy, subjecting it to the same sales tax collection requirements that traditional merchants have been subject to for decades would not harm its growth or vitality. Electronic commerce will continue to flourish, regardless of whether or not sales and use taxes are imposed on it.
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These critics also claim that forcing Internet retailers to collect sales and use taxes for the thousands of state and local taxing jurisdictions across the country would be too burdensome on electronic commerce and cannot be done. We agree that all businesses, especially small businesses, should not be overburdened by sales tax collection requirements and that state and local governments should work to simplify their sales tax systems. However, relatively inexpensive software exists today that can assist electronic retailers in determining how much sales and use tax needs to be collected on their out-of-state sales.
Another argument made by our critics is that states and localities are flush with cash and do not need to tax electronic commerce. While it is true that most state and local governments are currently enjoying budget surpluses, there is no guarantee that this economic prosperity will last forever. In fact, some states, such as Kentucky and Tennessee, are currently experiencing budget difficulties.
It is important to reiterate that the shopping center industry does not oppose the actual substance of the current moratorium—its ban on Internet access charges and new, multiple and discriminatory taxes on electronic commerce. However, we strongly believe that the longer the moratorium is extended, the more difficult it will be for Congress to level the playing field for all retailers with regard to sales and use tax collection.
That is why we applaud legislation such as the Fair and Equitable Interstate Tax Compact Simplification Act of 2000 introduced by Representatives Spencer Bachus, William Delahunt, Ernest Istook and Karen McCarthy and the Internet Tax Simplification Act of 2000 introduced by Representatives Henry Hyde, George Gekas, John Conyers and Jerrold Nadler. In addition to providing for a short-term extension of the moratorium, these bills would give those states that simplify their sales and use tax systems the authority to require remote sellers to collect and remit use taxes.
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In closing, I would like to point out that the U.S. Supreme Court has recognized Congress' authority to enact legislation that would allow state and local governments to require out-of-state retailers to collect sales and use taxes. Therefore, ICSC urges Congress to enact legislation that would level the playing field among Internet-based and traditional retailers.
Thank you for this opportunity to express our views on this very important matter. I would be glad to answer any questions you may have.
Mr. GEKAS. We turn to Mr. Benham for 5 minutes.
STATEMENT OF ROBERT BENHAM, OWNER AND PRESIDENT, BALLIET'S, L.L.C.
Mr. BENHAM. Thank you, Mr. Chairman and members of the committee.
I guess I am the Main Street guy everybody has been talking about this morning. I am here representing the National Retail Federation, and I am here representing the hundreds of thousands of small and independent retailers that populate this wonderful land of ours.
I am also the immediate past chairman of the Independent Stores Board, which is a board within the National Retail Federation consisting of approximately 30 CEOs of small and independent stores across the country. We assist the National Retail Federation in guiding policy and other issues.
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I am very pleased and proud that someone from Oklahoma can represent our industry on the national stage, and I am very pleased to be here. I thank you for this opportunity.
Balliet's is a small women's specialty store located in Oklahoma City. It has been there since 1936. We have 33 employees and last year collected almost a half a million dollars in sales taxes. We had a profit of just under 2 percent of net sales, which is fairly typical of our industry in this day and age.
I am going to talk just about the Internet for a moment as it relates to small independent stores. Balliet's has embraced the Internet. Our Website is www.balliets.com. Hope all you gals took that down.
We primarily view our Website—which, by the way, has been up since last October—as a traffic building vehicle and advertising vehicle for our store. I am very pleased to report that we are running about 550 hits a day. That is almost 200,000 a year. That is a lot of exposures for a store on Main Street in Oklahoma City.
We see our Website as a very important aspect of our business on a going-forward basis. We are not yet engaging in e-commerce, that is, we are not putting individual stock keeping units and items on our Website and trying to sell them. However, we plan to develop that capability over time. That is a very large next step to take. We do have a full-time person who maintains our Website.
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Last year, our profit was $78,000; and I put $26,000 into developing our Website. So you can see how important we think this form of exposure is going to be to a small independent business.
As far as the shakeout, there have been a lot of failures in the dot.com world recently—for example, boo.com, which was in the Wall Street Journal earlier this week. And, fear not, it has been the Wild, Wild West out there in dot.com land. This form of commerce will go through a natural shakeout and a natural process of selection, and new business formats will develop that will be very successful on the net.
So I think that equalizing sales tax on all forms of remote commerce is not going to be a hindrance to development of retailing on the web. Certainly we haven't seen that in our case.
On the other side of the coin, our business is primarily a storefront business. We have been in business for 64 years. Our Website has been up for 8 months. We are operating at a very severe competitive disadvantage versus the remote sellers. For example, on sales of $6 million last year, we had to charge our customers an extra $500,000, an extra half million dollars, for the same products they could acquire on the Internet. There is nothing that we sell at Balliet's that cannot be bought on the Internet. So we are at a tremendous competitive disadvantage.
I wanted to put a number on that for you from a real store on a real Main Street and quantify what the competitive disadvantage was for Balliet's in a single year. I will give you an example of what is beginning to happen.
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We had a customer come into our Trish McEvoy counter, which is a color cosmetics line, a few months ago. She went through the whole process, the consultation, the makeup lesson, wrote down all of the notes for all the products that she wanted; and when she didn't purchase them, our beauty adviser in that line, Eden Turrentine, asked her why she wasn't purchasing. She said, ''I am going to go home and order them on the Internet.''
We are beginning to see customers come in and write down style numbers on apparel items after they work with our sales associates in our store, leave the store, and we know they are going to order on the Internet. We developed our Website frankly in self-defense and because we think it is a great way for us to reach more customers. I am very concerned about the increase of this kind of activity in our store. It is growing exponentially.
One other thing I want to say about small and independent stores. Balliet's is a microcosm of literally hundreds of thousands of stores that are out there. Our 33 employees are a microcosm of 22 million retail employees in the United States. We are part of the fabric of our communities.
As an example, since we bought Balliet's in 1991, we have produced 31 fashion shows, at an approximate cost of $3,500 each, that is more than $100,000 we have spent, and these have raised more than $1.1 million for various charities, including over half a million dollars for breast cancer research and early detection. We are fairly typical of a lot of businesses like ours that are so involved in our local communities.
We feel we are facing an unfair and anticompetitive environment. Congress has it within its ability to remedy this. We strongly support H.R. 4462 and again thank Mr. Gekas and Mr. Delahunt and others who have been supportive of this and hope that you will provide a fair and level playing field for retailers of all stripes. Let us sort it out. Let the consumers sort it out. Let us succeed or fail on the merits of our own abilities.
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Mr. Chairman, I would like to thank you for this opportunity today and would welcome any questions.
Mr. GEKAS. We thank the gentleman.
[The prepared statement of Mr. Benham follows:]
PREPARED STATEMENT OF ROBERT BENHAM, OWNER AND PRESIDENT, BALLIET'S, L.L.C.
Good morning, Mr. Chairman. My name is Bob Benham. I am the owner and operator of Balliet's, a women's specialty store in Oklahoma City, Oklahoma. In 1999, Balliet's sales were nearly $6,000,000, with a net profit of 1.9%, the stores best since the banking bust and oil price collapse of the mid-1980's. Balliet's has been in business since 1936 and employs 33 wonderful people, for whom we provide health care and other employee benefits. Our payroll and benefit cost for 1999 was $1,230,000. We collected $483,000 in sales taxes and paid $11,200 in property taxes. Balliet's is a ''bricks and clicks'' retailer, with a 14,200 square foot store and a 50-page web site (www.balliets.com). We have embraced Internet technology while remaining firmly grounded in the fundamental skills of retailing.
I am testifying today on behalf of the National Retail Federation, the world's largest retail trade association, representing 1.4 million retail establishments that employ more than 22 million Americans. I am immediate past chairman of the Independent Stores Board of Directors of the National Retail Federation. I have been in retailing since 1966 obtaining experience with May Department Stores Company and Federated Department Stores Company. I was president and CEO of Halls Merchandising Inc. for 15 years before my family bought Balliet's in 1991.
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The growth of consumer shopping on the Internet is expanding at a rapid rate. In 1999, 40 million Americans shopped online, up from 17 million in 1998. The total of goods and services traded on the Internet is expected to reach $300 billion by 2002. The Internet provides retailers the opportunity to reach millions of people in markets never before imagined and provides consumers instant access to information, products and services from around the world. As this new medium evolves, so too should government policy to ensure that no one is left behind, and that everyone competes on a level playing field.
In 1998, Congress enacted a moratorium on any ''new'' Internet taxes until October 21, 2001, while creating a special advisory commission, the Advisory Commission on Electronic Commerce (ACEC), to address a host of Internet and remote commerce tax issues in the interim. Unfortunately, most of this debate has ignored a broader inequity that currently exists in the state sales and use tax systems that disadvantages mainstreet retailers and low-income consumers.
Both the ACEC, as well as recent legislation passed by the House of Representatives failed to address the broader state sales and use tax inequity that exists today. Not only did the ACEC findings lack the supermajority consensus mandated by Congress for approval of its recommendations; it did not include a mainstreet retail representative, as was dictated in the original statutory language.
Like many other taxes, retailers oppose new taxes on the Internet, including ''bit'' and/or ''access'' taxes, and even the existing telephone ''excise'' tax. However, the retail industry feels that Congress must also address the broader more complicated state sales and use tax inequity as well.
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Existing sales and use tax law creates an ''unlevel playing field'' among retailers. Presently, 45 states and the District of Columbia impose sales and use taxes on purchases of tangible goods. Under current law, retailers are required by the states to collect these taxes from a customer and immediately remit this sales tax to the state. However, based on two Supreme Court rulings, some out-of-state retailers (those without a physical presence in the purchaser's state) are not required to collect and remit a state's sales and use tax. In this case, the consumer still has the legal responsibility to pay a ''use'' tax directly to his or her own state. Since many Internet sites and remote sellers aren't located in a purchaser's state, they do not have to collect these taxes. Exempting some out-of-state sellers from having to collect sales and use taxes creates an ''unlevel playing field'' among retailers.
Refusing to address the existing state sales and use tax inequity in the same context as other Internet tax issues ensures that an unlevel tax playing field will continue to exist. If the current inequity is not addressed soon, resolution of this issue could be deferred for years, with the result being continued erosion of the state tax base and continued discriminatory tax treatment that disadvantages storefront retailers and low-income consumers.
Retailers want a ''level playing field''—where a product is taxed (or not taxed) the same regardless of how it is ordered or delivered. All retailers, regardless of the channel or channels in which they do business, should have the same collection responsibilities—no matter if the transaction is made in a traditional store, through a traditional store's own website, by a strict e-commerce retailer or through any other type of remote seller.
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Government tax policy shouldn't determine the winners and losers. In the retail industry, where a 1–2% net profit margin is standard, a 6–8% tax differential (the average state sales and use tax rate) is a significant pricing advantage. Why would someone buy something in a store when they could log onto the Internet and buy it for 8% less? Consumers should pick winners and losers based on factors that they decide are important such as selection, service, convenience, etc. Tax policy shouldn't provide one retailer a pricing advantage over another.
A ''level playing field'' does not mean a new tax—consumers are already required to pay ''use'' taxes. Under current law, if sales tax is not paid on an out-of-state purchase at the time of sale, the purchaser is required by state law to pay a comparable ''use'' tax to his or her state, usually when they file their state income tax return. Historically, states have not enforced collection of ''use'' taxes, but they do exist.
State and local government services will suffer as their revenue base decreases. On average, sales and use taxes account for approximately 40% of a state's total tax revenue (more than $150 billion in 1998). With projections of on-line sales estimated to exceed $300 billion by 2002, state and local governments could lose as much as $20 billion in uncollected sales tax. Sales tax revenue is used to fund basic state and local governmental services including police and fire protection, school funding, and road construction and maintenance.
An ''unlevel playing field'' disproportionately hurts the poor. In 1998, 55 million people had access to the Internet. According to a recent Commerce Department study, affluent individuals are 20 times more likely to have Internet access. With an average Internet household income of $70,000, an ''unlevel tax playing field'' would benefit those with higher levels of income and shift the tax burden to lower income individuals who can buy only locally (and thus pay sales tax at the sales counter).
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Opponents of sales tax equity argue that collecting sales and use taxes will retard the growth of the Internet. Considering the recent rate of growth of the Internet, it's clear that Internet retailers need no special tax advantage. Those companies simply seek to retain an unfair competitive advantage.
Why do dot coms fail? Some for the same reasons that main street retailers fail: poorly conceived strategies, inept management, flawed execution. But there is a more compelling reason for many dot com failures—greed. The desire for instant wealth. The inflation of stock prices with no earnings. Many of the dot com players know a lot about computer science, but they haven't taken the time to learn the most fundamental fact of retailing—you must satisfy your customers. They are in the business of satisfying impatient shareholders.
Tax equity opponents also maintain that the Internet is ''the driving force of the new economy.'' Wrong. The driving force of the new economy is the American free enterprise system, just as it has always been. The net is just the latest manifestation of American innovation and competitive drive. Retail businesses of all types—Internet, catalog, storefront—should succeed or fail in an open, fair competition on the field of combat, not because Congress chooses winners and losers.
Mainstreet retailers are part of the fabric of our communities, sponsoring Little League teams, buying tables at local charity events, giving door prizes to non-profits, holding fashion shows for worthy organizations. In 1999 alone, Balliet's, at our cost, produced 5 fashion shows that helped local charities raise over $200,000. In addition, we donated over $7,000 in cash and merchandise to various worthy causes. That's nearly 10% of our net profit
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Mainstreet retailers are angry about the unfair competitive advantage given to catalog and Internet retailers. We are concerned about the growing erosion of the sales tax base in the communities where we live, work and raise our families. It's time for Congress to restore basic tax fairness to all retailers.
In summary, we ask for no new taxes on the Internet, tax equity for all forms of retail trade, and tax simplification. Congress has a responsibility to my business, my employees and my community to eliminate this existing tax inequity.
On behalf of the National Retail Federation and small and independent retailers who believe in the American dream of equality under the law, open and fair competition and the right to succeed or fail on our own merits, we thank you Mr. Chairman.
Mr. GEKAS. Could we ask Mr. Friedensohn to move his name card a little bit so that we can see?
That is good.
Mr. BACHUS. Mr. Chairman, the gentleman said in his testimony that you are supporting my legislation. Is that true?
Mr. GEKAS. We will discuss that later.
The lady, Ms. Doerfler, is recognized for 5 minutes.
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STATEMENT OF KATRINA DOERFLER, SENIOR MANAGER OF PLANNING AND EXTERNAL AFFAIRS, CISCO SYSTEMS, INC.
Ms. DOERFLER. Thank you, Mr. Chairman and members of the committee.
I am a tax senior manager with Cisco Systems, Inc., the world's largest manufacturer of equipment that connects people and business to the Internet.
Today, I am representing the American Electronics Association. AEA is the Nation's largest high-tech trade group, representing more than 3,000 U.S.-based technology companies. AEA is a strong proponent of achieving Internet tax simplification.
Simplification is one of the very few issues that all AEA companies will benefit from. The large companies need the relief from the administrative burden of the sales tax collection across the country; and the small companies, which make up the bulk of AEA's membership, needs simplicity in order to break into the multistate sales environment.
All three of the bills before the subcommittee today focus on the importance of simplification, but AEA believes Congress should direct the States on the matter of simplification. My comments today will focus on the three most important components that should be included in any simplification legislation: namely, one, how this model act, this uniform and simplified tax system, will be created; two, how Congress approves the model act and ensures it does not create an undue burden in interstate commerce; and, three, why business activity tax nexus clarification is integral to any simplification effort.
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Let me address the model act creation first. One key concern we have is how and to what extent simplification is achieved. How do we know that State and local governments will really radically simplify their systems?
With all due respect to the government, people that are working this issue now—we are talking about State governments who were warned 30 years ago in the Willis Commission report that they needed to simplify their systems and have done nothing but complicate their systems since. Many State and local governments have not demonstrated the track record of understanding the need to simplify or make their systems uniform. Instead, we believe Congress should direct the States on the process for developing a simple and uniform sales and use tax system.
Specifically, AEA does support the National Conference on Commissioners on Uniform State Laws, or NCCUSL, undertaking the task of drafting a uniform sales and use tax act. NCCUSL's drafting process is open to the public, and participation in the drafting process is encouraged. This process ensures the participation of all interested parties and leaves ultimate decisionmaking regarding the details to the NCCUSL drafters. We believe the insertion of a neutral third party between the various business and government groups will facilitate the drafting process.
The model act should be adopted by a majority of the States and preferably a supermajority without revision, and those States should be held to the model act without revision in the future. By way of example, if only 20 States adopt the model act, business is still left with 26 other disparate systems that they will need to comply with. That is not simplification at the end of the day. Those States not adopting the model act should not be allowed to impose any expanded duty to collect and should be subject to clarified bright line nexus standards.
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Next, let me address the congressional consideration of the model act and expanded duty to collect. Another concern we have is the methodology by which Congress ensures that the simplification effort has resulted in no undue burden on interstate commerce and thereby allow State and local government to impose an expanded duty to collect. AEA understands that State and local governments need the assurance of collection in order for them to undertake the act of simplifying their sales and use tax rules. We fail to see why Congress would not want to affirmatively approve such a system to ensure that simplification was indeed achieved before they allowed such a system to operate in interstate commerce. As introduced, all three bills before the subcommittee need to be improved on this point.
The majority of AEA companies are reluctant to agree to an expanded duty to collect but understand it is a necessary component to getting to the right tax answer. The vote by Congress should be an affirmative vote at a specific time following creation and implementation in a majority of the States of the model act. We understand State and local governments are loath to accept this type of approval for fear the business will prevail in the end and prevent an expanded duty to collect.
AEA wants simplification. We want clarity in the nexus rules for taxes. We are motivated to participate and help make this happen. Without this process, we also lose.
Lastly, let me address business activity tax nexus clarification and why it is so integral to the simplification process. To us, Internet tax simplification means clarification of the nexus rules as they apply to all taxes, including business activity taxes; taxes such as income, franchise and business license taxes. Any simplified system must contain nexus clarifications and safe harbors. Otherwise, we have ignored the whole other universe of taxes and only solved the problem with respect to sales and use taxes. In fact, we may have even made the situation worse because of relaxation of the nexus standard in the area of sales and use tax and the new amount of information that will be available to State and local governments once remote sellers are required to collect and remit.
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Without clarity, business will continue to operate in an increasingly unclear tax environment, and government will continue to litigate nexus issues. Nexus is nexus is nexus. If we are going to resolve the nexus issue with respect to sales and use tax, why would we ever omit the universe of other taxes that the nexus rules are applied to?
Electronic commerce activities have the same effect in the business activity area as in the sales and use tax area. In other words, current rules don't address these new e-commerce products and activities that take place electronically or through the Internet.
In conclusion, States have been overreaching in their attempts to expand their income tax nexus jurisdiction beyond their borders. Why is it right for a State to demand business activity tax revenues from a business that derives no benefits from that State? There is a whole body of case law to support that principle. Consumers who are residents of a State should and do pay income and other taxes in support of services provided by States and localities.
Thanks for inviting me to testify today. I will be happy to answer any questions.
Mr. GEKAS. We thank the witness.
[The prepared statement of Ms. Doerfler follows:]
PREPARED STATEMENT OF KATRINA DOERFLER, SENIOR MANAGER OF PLANNING AND EXTERNAL AFFAIRS, CISCO SYSTEMS, INC.
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SUMMARY
The member companies of the American Electronics Association (AEA) strongly support Internet Tax Simplification. AEA supports the following broad E-commerce tax principles as Congress looks to whether and how to tax Internet sales: One, impose no greater tax burden on electronic commerce than other traditional means of commerce. Two, support simplicity in administration. Three, retain and clarify nexus standards. Four, avoid new taxes on the Internet. And, five, consider tax issues in a global context.
AEA companies firmly believe that similar transactions ought to be taxed similarly. That is why achieving meaningful and uniform simplification of the sales and use tax rules across the 50 States is so important. All three of the bills before the Subcommittee today focus on the importance of simplification and AEA believes Congress should direct the States on this important matter of simplification. I will focus my testimony on the three most important components that should be included in any Internet Tax Simplification legislation:
1) Creation of Model Uniform and Simplified Act
The National Conference on Commissioners on Uniform State Laws (NCCUSL), with the advice of and in consultation with representatives of State and local governments, business, and taxpayers, should develop a simplified and uniform sales and use tax system that would be adopted by the States. Once drafted by NCCUSL, the Uniform and Simplified Model Act should be adopted by a majority of the States without revision.
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2) Congressional Approval of Uniform and Simplified System
AEA supports simplification first and then congressional consideration. AEA supports expedited consideration and voting on this matter by Congress. However, AEA strongly opposes the notion of Congress granting prior approval for an expanded duty to collect on business prior to simplification
3) Business Activity Tax Nexus Clarification
Clarity of the nexus standards goes hand-in-hand with simplification and compliance. Business needs a bright line test in the business activity tax nexus area because the States have increasingly used new and novel nexus theories to assert jurisdiction over out-of-state companies.
STATEMENT
Thank you for inviting me to testify before the Commercial and Administrative Law Subcommittee today to testify on the Internet Tax Simplification bills before the House Judiciary Committee.
I am Katrina Doerfler, Manager for Tax Policy & Analysis for Cisco Systems. As you may know, Cisco is the world's largest manufacturer of equipment that connects people and businesses to the Internet. Cisco employs over 30,000 people, is headquartered in San Jose, California, and also has significant operations in Massachusetts, North Carolina, and Texas.
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Today, however, I am representing the American Electronics Association (AEA), where I serve as Chair of the AEA E-Commerce Taxation Task Force. AEA is the nation's largest high-tech trade group, representing more than 3,000 U.S.-based technology companies. Membership spans the industry product and service spectrum, from semiconductors and software to computers, Internet and telecommunications systems and services. For 56 years, AEA has been the accepted voice of the U.S. technology community. While Cisco is an active and enthusiastic member company of the AEA, the views I offer here today are those of AEA and not necessarily Cisco as well.
AEA is a strong proponent of achieving Internet Tax Simplification. This simplification is one of a very few issues that all AEA companies will benefit from—the large companies desperately need the relief from the administrative burden of sales tax collection across the country, and the small companies which make up the bulk of AEA's membership need simplicity in order to break into the multistate sales environment. The three bills before the Subcommittee today, H.R. 4267, H.R. 4460, and H.R. 4462, all address the important issue of providing for simplification of sales and use taxes on interstate commerce, but each do so in a slightly different fashion. As introduced, none of these bills is ''perfect'' in the opinion of AEA, but each contains important policy objectives. My comments today will focus on the component parts AEA believes are essential to the legislation Congress will ideally enact.
AEA supports the following broad E-commerce tax principles as Congress looks to whether and how to tax Internet sales: One, impose no greater tax burden on electronic commerce than other traditional means of commerce. Two, support simplicity in administration. Three, retain and clarify nexus standards. Four, avoid new taxes on the Internet. And, five, consider tax issues in a global context.
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Although not the direct focus of the Subcommittee today, AEA thanks the House Judiciary Committee for quickly approving and sending to the full House for their overwhelming vote of 352–75 in support of H.R. 3709, the Internet Nondiscrimination Act. AEA supports the five-year moratorium extension included in H.R. 3709, which also provides for a permanent ban on Internet access taxes and repeals the previous State grandfather provision included in the original Internet Tax Fairness Act, enacted in 1998. Although this moratorium extension does not directly impact State sales and use taxes, AEA believes a five-year moratorium extension is important because it will allow the time sufficient for the States to achieve sales tax simplification. Both H.R. 4267 and H.R. 4460 include a moratorium extension.
AEA companies firmly believe that similar transactions ought to be taxed similarly. That is why achieving meaningful and uniform simplification of the sales and use tax rules across the 50 States is so important. All three of the bills before the Subcommittee today focus on the importance of simplification and AEA believes Congress should direct the States on this important matter of simplification. I will focus my testimony on the three most important components that should be included in any Internet Tax Simplification legislation:
1) Creation of Model Uniform and Simplified Act
2) Congressional Approval of Uniform and Simplified System
3) Business Activity Tax Nexus Clarification
Creation of Model Uniform and Simplified Act:
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The issue of taxing interstate commerce is an issue appropriate for congressional consideration. AEA believes Congress should direct the States on the process for developing a uniform and simple sales and use tax system. Specifically, AEA supports the National Conference of Commissioners on Uniform State Laws (NCCUSL) undertaking the task of drafting this uniform and simple sales and use tax act. NCCUSL should work jointly with State and local government, business and taxpayers in the drafting process. NCCUSL's drafting process is open to the public and their participation in the drafting process is encouraged. AEA believes this open process ensures the participation of all interested parties and leaves the ultimate drafting decision making regarding the details to the NCCUSL drafters. We believe the insertion of a neutral third party between the various business and government groups will facilitate the drafting process.
Both H.R. 4267 and H.R. 4460 reference NCCUSL in the drafting process and H.R. 4462 only references the States. AEA believes each could be improved by specifically stating that ''it is the sense of the Congress that the National Conference of Commissioners on Uniform State Laws, with the advice of and in consultation with representatives of State and local governments, business, and taxpayers, should develop a simplified and uniform sales and use tax system that would be adopted by the States.'' AEA believes all three bills include an appropriate the itemized list of appropriate simplification points to be included in the uniform and simple model act.
Once drafted by NCCUSL, the Uniform and Simplified Model Act should be adopted by a majority of the States without revision. This consistency across the country is an element of importance to creating a meaningful simplified system. If the NCCUSL process is properly utilized, AEA does not believe that a successor commission to the Advisory Commission on Electronic Commerce, as envisioned is H.R. 4267, is necessary.
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Congressional Approval of Uniform and Simplified System
AEA understands that the State and local governments are reluctant to simplify their sales and use tax rules without the guarantee that they will ultimately benefit from an expanded duty to collect on remote sales made by business. However, this expanded duty to collect cannot be imposed on out-of-state businesses until simplification is achieved. Therefore, because this issue is one that involves both interstate commerce and State taxes, it is appropriate for Congress to carefully review the envisioned uniform and simplified sales and use tax system. After this review, then Congress should vote on whether or not the uniform and simplified system presents a burden on interstate commerce. If the finding is no, then Congress should approve the system and if the finding is yes, that a burden still remains because it system is not appropriately simplified, then Congress should vote to disapprove the system. AEA supports simplification first and then congressional consideration. AEA supports expedited consideration and voting on this matter by Congress. However, AEA strongly opposes the notion of Congress granting prior approval for an expanded duty to collect on business prior to simplification.
As introduced, all three bills before the Subcommittee could be improved on this point. AEA believes the vote by Congress should be an affirmative vote at a specific time following creation and implementation in a majority of the States of the model uniform and simplified act.
Business Activity Tax Nexus Clarification
Once a majority of States has enacted this model uniform and simplified sales tax system, a very important related issue involving business activity tax nexus comes into play. Therefore, any legislation directing State sales and use taxation simplification should also address clarification of the business activity tax nexus standards too. The phrase business activity tax collectively refers to a State's corporate income tax, franchise tax or business licensing tax. Under the model uniform and simplified sales tax system, States will now know to the dollar how many sales a particular out-of-state vendor is making into each of the States. Since the rules vary significantly State to State as to what constitutes physical presence for business activity tax purposes, AEA supports Congress creating bright line clarifications of the nexus standards in order to give business the certainty they need.
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AEA believes that this clarification of the nexus standards for all types of taxes is a good idea for both State tax authorities as well as business. It will result in litigation and audit cost savings for both government and business. It creates certainty in the marketplace, which is good for all business, including E-commerce. Without this clarity, there will continue to be differing interpretations by different States as to the type and quality of nexus standards to apply.
It is important for Congress to understand that there is a whole other area of taxes out there that affect business and are just as important and costly to business as sales and use tax compliance that should also be considered. Clarity of the nexus standards goes hand-in-hand with simplification and compliance. Business needs a bright line test in the business activity tax nexus area because the States have increasingly used new and novel nexus theories to assert jurisdiction over out-of-state companies.
Some of the State nexus theories include such things as agency nexus: the theory that unrelated parties can somehow create nexus for each other, because of the type and quality of business relationships that they have. Affiliate nexus is another area: the theory that a subsidiary of a company would have traditional nexus in a State, and therefore creates nexus for all other legal entities in a business structure. And finally there is the economic nexus theory that States if a business has a certain level of economic activity in a State, then that business must have nexus for income tax purposes. Court cases involving these varying theories abound across the country and nexus clarification is definitely needed.
States have aggressively tried to use these theories to pull more businesses into their State for income tax purposes. Permitting such expansion would dampen business innovation and expansion and, thus, bring harm, we believe, to the American economy. When a company's presence in a State is minimal, it is not deriving material or meaningful protections or benefits from a State.
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A whole body of case law that underpins and defines what is a constitutional tax with respect to a multi-state business currently exists. Most of this case law revolves around a four-prong test to determine if a tax is constitutional. The most important prong being—is the tax fairly related to the benefits received in a State? AEA does not believe that happens with economic, affiliate, or agency nexus theories. However, States are aggressively using those theories to pull companies in.
Only H.R. 4267 sets out the issue of nexus clarification, and AEA supports that section. It is important for Congress to recognize that the imposition of new and expanded income tax liabilities by the States on business could undermine the ability of the US economy to remain robust. E-commerce is changing business-to-business relationships in a profound way. Many unrelated companies are going to market together to jointly exploit technology or they are creating Internet ecosystems, where many businesses in a particular industry or niche work together to create a market for products and services. Businesses should not be hampered or penalized in this new world by business activity tax nexus standards that are confusing and inconsistent between jurisdictions. There should be clearly defined and uniform safe harbors for business activity tax nexus. The business community fears that any expansion of State tax jurisdiction rules in the area of sales and use taxes may have an unintended effect on business activity tax nexus standards. We would urge Congress to clarify the nexus standards at the same time Congress directs the States to simplify the current sales tax administration system.
Thank you for inviting me to testify today and I will be happy to answer any questions.
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Mr. GEKAS. We turn to Mr. Friedensohn.
STATEMENT OF DAVID FRIEDENSOHN, CEO, BIGSTAR ENTERTAINMENT, INC.
Mr. FRIEDENSOHN. Thank you.
First and foremost, I would like to thank the committee for permitting me to speak today. This is an important issue and can gravely influence the development of the new addition to our economy, the Internet.
The Internet has permitted a great and welcome change in the method through which Americans purchase goods. For the first time, at any hour of the day, a consumer may access a huge catalog of items for sale through a computer. This computer may be geographically remote from the source of the goods to be purchased. This gives the consumer options never before available. The increase in competition among sellers of these goods greatly improves the efficiency of our economy for all Americans.
I am by no means an expert in tax law. I do believe firmly, however, that the role of our government has traditionally been to level the playing field, to ensure that all are permitted access to economic improvement. As CEO and chairman of an Internet company seeking to take advantage of these new methods of marketing, I urge you all to continue to play this role.
While some in the Internet community might seek preferential treatment, I ask only that we in the electronic commerce space be permitted to compete along the same rules and regulations that govern other commercial ventures. After all, what we are trying to do is make buying goods and services easier, lower barriers to competition and thereby lower prices and increase choice to all Americans.
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Bigstar was founded on the belief that online marketing is direct marketing. We operate two divisions, one which sells filmed entertainment products and another that creates personalized messaging through e-mail to voluntary participants. Today, we sell over 40,000 titles of filmed entertainment products, a selection that permits our customers to have greater access to more titles than any local retail store. In this regard, we operate as an online catalog.
With respect, we ask only that we be treated exactly the same as other catalog sales companies which market directly to their customers. This means that we are required to collect taxes only in the States where we have a physical location. This is the current method of taxation that is applied to other direct marketing companies like the Spiegel catalog, L. L. Bean and the Lands End catalog. This creates a level playing field and helps the American consumer find better prices and increased choice.
There is also the question of fairness. We have heard several times today that taxing the Internet at the local level is inappropriate. A local physical presence benefits greatly from local government services. The police department provides protection; the fire department provides safety; the roads allowing customers to access the store are paved; the sanitation department allows for adequate removal of debris and so on. The Internet retailer, like the direct mail catalog company, benefits from none of this. So the fairness of forcing the Internet retailer to collect taxes on every locale that the Internet passes through is questionable.
There is also the question of practicality. I think what has not been heard from today is the speed at which the Internet changes and at the way the economy reacts to those changes. For example, if the burden of local taxation were to grow too great, I believe many companies may go out of business or have their functions be taken over by companies operating outside the United States completely. Since the World Wide Web is exactly that, with any computer anywhere being able to contact any other on the planet, it would be simple to escape outside the country to avoid onerous local taxation.
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Another aspect to this rapid evolution of the Web is that many goods are losing their physical presence. Filmed entertainment, music, books and computer software, are all becoming digital files that can be transferred throughout the world. The issue of taxation on goods that have no physicality can become an even greater problem down the road.
I don't bring this up to ask for greater taxes on these goods. I bring it up to illustrate the fact that the speed at which the Internet changes argues for restraint in imposing new regulations.
I urge Congress to consider the implications of novel tax methods and indeed all new regulation on Internet businesses very carefully and to try to keep the playing field level among both new industries and old. It is only by permitting free and fair competition that the country will reap the benefits of the innovations that Internet technology can bring us. Thank you very much.
Mr. GEKAS. We thank the gentleman.
[The prepared statement of Mr. Friedensohn follows:]
PREPARED STATEMENT OF DAVID FRIEDENSOHN, CEO, BIGSTAR ENTERTAINMENT, INC.
First and foremost, I would like to thank the Committee for permitting me to speak today. This is an important issue and can greatly influence the development of our new addition to our economy, the internet.
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The internet has permitted a great and welcomed change in the methods through which Americans can purchase goods. For the first time, at any hour of the day, a consumer may access a huge catalog of items for sale through a computer. This computer may be geographically remote from the source of the goods to be purchased. This gives the consumer options never before available. The increase in competition among sellers of these goods greatly improves the efficiency of our economy for all Americans.
I am by no means an expert in tax law. I do believe firmly, however, that the role of our government has traditionally been to ''level the playing field'', to insure that all are permitted access to economic improvement. As CEO and chairman of an internet company seeking to take advantage of these new methods of marketing to consumers, I urge you all to continue to play this role. While some in the internet community might seek preferential treatment, I ask only that we in the electronic commerce space be permitted to compete along the same rules and regulations that govern other commercial ventures. After all, what we are trying to do is make buying goods and services easier, lower barriers to competition and thereby lower prices and increase choice to all Americans.
BigStar was founded on the belief that online marketing is direct marketing. We operate two divisions, one which sells filmed entertainment products and another that creates personalized messaging through email to voluntary participants. In fact, today, we sell over 40,000 titles of filmed entertainment products, a selection that permits our customers to have greater access to more titles than any local retail store. In this regard, we operate as an online catalog. With respect, I ask only that we be treated exactly the same as other catalog sales companies which market directly to their customers. This means that we are required to collect sales taxes only in the states where we have a physical location. I believe this is the current method of taxation that is applied to other direct marketing companies like the Spiegel Catalog, LL Bean and the Lands End Catalog. This creates a level playing field and helps the American consumer find better prices and increased choice.
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There is also the question of fairness. Taxing the internet at the local level is inappropriate. A local, physical retail presence benefits greatly from local government services. The police department provides protection, the fire department insures safety, the roads allowing customers to access the store are paved, the local sanitation department allows for adequate removal of debris, and so on. The internet retailer, like the direct mail catalog company, benefits from none of this. So the fairness of forcing the internet retailer to collect taxes on every locale that the internet passes through is questionable.
The imposition of local taxes would also greatly burden the software development costs of internet direct marketing companies. From a compliance standpoint, the increased burden of collecting and distributing local taxes from a myriad of states and jurisdictions would drive many smaller players right out of the business, lowering consumer choice. As we have our corporate headquarters in New York State, we are collecting sales tax in New York. The number of different tax rates in different locations throughout the state created a substantial computer software project. Increasing this burden by the every local jurisdiction in the country may make the software development cost insurmountable.
If the burden of local taxation grows too great, companies may move outside the United States completely. Since the World Wide Web is exactly that, with any computer anywhere being able to contact any other on the web, it would be simple to escape outside the country to avoid onerous local taxation.
I urge Congress to consider the implications of novel tax methods and indeed all new regulation on internet businesses very carefully, and try to keep the playing field level among both new industries and old. It is only by permitting free and fair competition that the country will reap the benefits of the innovations that internet technology can bring us.
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Thank you.
Mr. GEKAS. We turn to Mr. Julian.
STATEMENT OF FRANK JULIAN, OPERATIONAL VICE PRESIDENT AND TAX COUNSEL, FEDERATED DEPARTMENT STORES, INC.
Mr. JULIAN. Thank you, Mr. Chairman.
My name is Frank Julian. I am Operating VP and Tax Counsel for Federated Department Stores, Inc. in Cincinnati, Mr. Chabot's home district.
Federated is one of the Nation's leading department store retailers. We operate more than 400 department stores in 33 States under the names of Bloomingdale's, Macy's, Lazarus, The Bon Marche and others. Federated also has a significant direct mail catalog and electronic commerce business with its Fingerhut, Bloomingdale's By Mail, Macy's By Mail and Macy's.com subsidiaries.
Federated collects and remits over $1 billion per year in sales tax for the State and local governments where we do business. We incur substantial costs in collecting and remitting these taxes and in administering the many audits that follow.
Federated supports the majority policy proposal contained in the April, 2000, report to Congress submitted by the Advisory Commission on Electronic Commerce, ACEC, which has been incorporated in H.R. 4267. Accordingly, we strongly support H.R. 4267.
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Federated believes that Congress should not pass any legislation that would give the States the right to require sellers without physical presence in a State to collect that State's sales tax unless and until, one, the States substantially simplify their sales tax systems and make them more uniform; two, such simplification has been fully and fairly evaluated by an objective group; and, three, all sellers are assured that they will receive a reasonable collection allowance for collecting sales tax. We believe it would be a big mistake for Congress to give prior approval to a simplification compact before the details of the simplification are known and evaluated. For that reason, we oppose H.R. 4460 and H.R. 4462.
The ACEC hearings raised an awareness, in an unprecedented manner, of the level of complexity burdening the current sales tax system. Even though the ACEC could not reach a two-thirds majority on the nexus issue, there was near universal agreement that the 46 different State sales tax systems are in dire need of substantial simplification.
I would like to give you just a few examples of some of the burdensome complications and complexities of the current system.
First, determination of taxable items. Determining the taxability of certain categories of products such as clothing, food and medicine is extremely complicated for a multistate business. Several States exempt these items, in whole or in part, but the States all have different definitions and/or interpretations for the same general exemption. As a leader in the apparel industry, Federated is most familiar with the challenges imposed by clothing exemptions. There are nine States with permanent or temporary clothing exemptions. Handkerchiefs, for example, are considered clothing and thus exempt in five of these States but are not considered clothing, and thus taxable, in the remaining four.
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Despite what you are likely to hear from others testifying today, our firsthand experience shows that the software that is currently available cannot accurately determine the taxability of all articles of clothing in these nine States.
It is critical for the States to adopt single, uniform definitions of food, clothing and medicine. Although development of new software is also important, the key to success lies in simplification and uniformity.
State and local tax rates. There are currently over 7,000 different State and local jurisdictions across the country that impose a sales tax. Although there is software available that can determine with a reasonable degree of accuracy the tax rate by Zip Code, there are many Zip Codes in which more than one sales tax rate applies. Before States are permitted to require remote sellers to collect sales tax, there should only be one sales tax rate per State. Moreover, as a matter of fairness and equity, this rate should apply to instate sales as well as to remote sales. It would be grossly unfair to consumers as well as sellers if States are permitted to impose one rate for sales made by remote commerce and another rate for sales made in local stores.
Third, collection allowance. It is extremely expensive for sellers to collect and remit sales tax. Studies have shown that the cost to collect sales tax is typically greater than 3 percent of the tax collected. However, of the 46 States with a sales tax, only seven provide for an uncapped collection allowance of over 1 percent. As a matter of fundamental fairness, all sellers should receive a reasonable and adequate collection allowance for the sales taxes they are required to collect.
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This is far from an exhaustive list of the problems sellers face under the current sales tax systems or the elements that need to be implemented before substantial simplification can be deemed to have occurred. These examples, however, make it clear that the existing sales tax systems are entirely too complicated.
The States have begun a process of developing a simplification model. To a large degree, however, they are working under a shroud of secrecy. Despite their good intentions, we believe that it will be virtually impossible for the States to successfully develop a truly simplified tax system without significant input and participation from several types of affected taxpayers, including direct mail and e-commerce vendors.
Moreover, Federated very strongly believes that there should be an independent, objective evaluation of any simplification adopted by the States before Congress passes any legislation that would permit States to require sellers without physical presence in a State to collect that State's sales tax. The language in H.R. 4460 and H.R. 4462 that gives prior authorization to the States' simplification programs amounts to buying a pig in a poke. For these reasons, we oppose those bills.
Finally, Mr. Chairman, the States should not be permitted to require sales tax collection unless they provide for a reasonable and meaningful collection allowance to the sellers that collect the tax.
I thank you very much for the opportunity to testify.
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Mr. GEKAS. Thank you, Mr. Julian.
[The prepared statement of Mr. Julian follows:]
PREPARED STATEMENT OF FRANK JULIAN, OPERATIONAL VICE PRESIDENT AND TAX COUNSEL, FEDERATED DEPARTMENT STORES, INC.
INTRODUCTION
Good Morning. My name is Frank Julian. I am Operating Vice President and Tax Counsel for Federated Department Stores, Inc. in Cincinnati, Ohio. Federated is one of the nation's leading department store retailers. We operate more than 400 department stores in 33 states under the names of Bloomingdale's, Macy's, Lazarus, The Bon Marché and others. Federated also has a significant direct mail catalog and electronic commerce business with its Fingerhut, Bloomingdale's By Mail, Macy's By Mail and Macys.com subsidiaries.
Although Bloomingdale's By Mail, Macy's By Mail and Macys.com are each separate subsidiaries, they collect sales tax on sales into any state where Bloomingdale's and Macy's, respectively, have department stores.
SUMMARY OF POSITION
Federated supports the ''Majority Policy Proposal'' contained in the April, 2000 Report to Congress submitted by the Advisory Commission on Electronic Commerce (the ''ACEC''), which has been incorporated in H.R. 4267. Accordingly, we strongly support this bill.
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The myriad of state and local sales tax systems that are in place today are too complex; these systems should be substantially simplified and made more uniform. In addition, we believe that all sellers that are required to collect sales tax should receive a meaningful collection allowance from the respective states to compensate them for the costs of collecting sales tax.
Finally, Federated believes that Congress should not pass any legislation that would give states the right to require sellers without physical presence in a state to collect that state's sales tax unless and until (i) the states substantially simplify their sales tax systems and make them more uniform, (ii) such simplification has been fully and fairly evaluated by an objective group, and (iii) all sellers are assured that they will receive a reasonable collection allowance for collecting sales tax. We believe it would be a big mistake for Congress to give prior approval to a simplification compact before the details of the simplification are known and evaluated. For that reason, we oppose H.R. 4460 and H.R. 4462.
DISCUSSION
The ACEC hearings raised an awareness, in an unprecedented manner, of the level of complexity burdening the current sales tax system. Even though the ACEC could not reach a two-thirds majority on the nexus issue, there was near universal agreement that the 46 different state sales tax systems are in dire need of substantial simplification.
Federated collects and remits over $1 billion per year in sales tax for the state and local governments where we do business. We incur substantial costs in collecting and remitting these taxes, and in administering the many audits that follow. Substantial simplification of the sales tax systems will make it much easier for the states to administer and enforce the tax, and will make it much easier for sellers to comply with the tax.
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I would like to give you just a few examples of some of the burdensome complications and complexities of the current system:
1. Determination of Taxable Items. Determining the taxability of certain categories of products, such as clothing, food and medicine, is extremely complicated for a multi-state business. Several states exempt these items, in whole or in part, but the states all have different definitions and/or interpretations for the same general exemption. As a leader in the apparel industry, Federated is most familiar with the challenges imposed by the clothing exemptions. There are nine states with permanent or temporary clothing exemptions. Handkerchiefs, for example, are considered clothing, and thus exempt, in five of these states, but are not considered ''clothing,'' and thus taxable, in the remaining four. Despite what you are likely to hear from others testifying today, the software that is currently available cannot accurately determine the taxability of all articles of clothing in these nine states, because each state has its own set of peculiar rules. To accurately tax an article of clothing in a multi-state environment, the retailer must assign one of dozens of ''clothing product codes'' to each and every item, or SKU, which that retailer sells. Whether you are an e-commerce retailer with 30,000 SKU's, or a department store with 3 million SKU's, the current compliance burdens are overwhelming. It is critical for the states to adopt single, uniform definitions of food, clothing and medicine, so that the ''product code'' decision is a simple choice. Although development of new software is also important, the key to success lies in simplification and uniformity.
2. State and Local Tax Rates. There are currently over 7,000 different state and local jurisdictions across the country that impose a sales tax. Although there is software available that can determine, with a reasonable degree of accuracy, the tax rate by Zip Code, there are many Zip Codes in which more than one sales tax rate applies. Before states are permitted to require remote sellers to collect sales tax, there should only be one sales tax rate per state. Moreover, as a matter of fairness and equity, this rate should apply to in-state sales as well as to remote sales. It would be grossly unfair to consumers as well as sellers if the states are permitted to impose one rate for sales made by remote commerce and another rate for sales made in local stores.
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3. Collection Allowance. It is extremely expensive for sellers to collect and remit sales tax. Studies have shown that the cost to collect sales tax is typically greater than 3% of the tax collected. However, of the 45 states with a sales tax, only seven provide for an uncapped collection allowance of over 1%. As a matter of fundamental fairness, all sellers should receive a reasonable and adequate collection allowance for the sales taxes they are required to collect.
4. Exempt Customers. The sales tax systems should be able to accommodate purchases by customers that are entitled to various types of exemptions in a manner that does not impose burdens on either the seller or the customer. A non-exhaustive list of these exemptions includes: purchasers with resale certificates, purchasers with direct pay permits, sales to charitable organizations, sales to religious organizations, sales to foreign diplomats, certain sales to Native Americans, sales to governmental agencies, etc.
5. Privacy of Customers. Maintaining customer privacy will be critical to the success of a sales tax system, particularly for sales made over the Internet. Under no circumstances should a retailer ever be required to disclose the name and/or address of its customers to the states or to any agent of the states.
6. Third Party Gift Sends. Under current law, if a person who lives in California, for example, orders a gift to be sent directly to a third party in New York, neither state may impose a sales or use tax on the transaction. California has no authority to tax the transaction because neither title nor possession of the merchandise was transferred to the buyer in California. New York cannot impose its tax on the buyer because the buyer lacks nexus in that state, and it cannot impose its tax on the recipient of the gift since the recipient did not pay any consideration for the merchandise. A sales tax system will be constitutionally flawed if it is unable to recognize this type of transaction.
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7. Applicability to Mail Order and Check Sales. The position of many who have commented on this issue presumes that all payments are by credit card, which, in fact, is not the case. A substantial portion of direct marketing customers pay by check, and for certain market segments, checks and money orders remain the preferred method of payment for a majority of customers. Sales tax systems must address the many difficulties associated with these type of sales.
This is far from an exhaustive list of the problems sellers face under the current sales tax systems or of the elements that need to be implemented before ''substantial simplification'' can be deemed to have occurred. These examples, however, make it clear that the existing sales tax systems are in dire need of substantial simplification.
The states have begun a process of developing a simplification model. To a large degree, however, they are working under a shroud of secrecy. Despite their good intentions, we believe that it will be virtually impossible for the states to successfully develop a truly simplified tax system without significant input and participation from several types of affected taxpayers, including direct mail and e-commerce vendors.
Moreover, Federated very strongly believes that there should be an independent, objective evaluation of any simplification adopted by the states before Congress passes any legislation that would permit states to require sellers without physical presence in a state to collect that state's sales tax. The language in H.R. 4460 and H.R. 4462 that gives prior authorization to the states' simplification program amounts to buying a pig in a poke. For these reasons, we oppose H.R. 4460 and H.R. 4462.
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Finally, the states should not be permitted to require sales tax collection unless they provide for a reasonable and meaningful collection allowance to the sellers that collect the tax.
I sincerely appreciate the opportunity to testify before you today, and I will be happy to answer any questions.
Mr. GEKAS. Mr. Lowy.
STATEMENT OF PETER LOWY, CO-PRESIDENT, WESTFIELD AMERICA, INC.
Mr. LOWY. I am Peter Lowy, CEO of Westfield America and founding chairman of the e-Fairness Coalition. I would like to thank Chairman Gekas and ranking member Nadler for providing me the opportunity to speak on this important issue and to discuss the legislation in front of this committee, specifically H.R. 4462, which the e-Fairness Coalition supports, and H.R. 4267, which we oppose.
The e-Fairness Coalition represents the retail and real estate industries which employ one out of every five American workers nationwide. The current sales tax system allows an Internet sales tax loophole that will lead to the narrowing of the sales tax base.
I would like to quote from the CCH e-commerce tax alert, published in March of this year. The article describes how a bricks and mortar retailer addresses the current inequity in the sales tax system, and I quote:
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''As more established companies move onto the Internet, competitiveness with smaller .com operations creates questions on how to avoid sales and use tax nexus and keep the playing field level. While most large companies have nexus nationwide, small web-based upstarts often carefully choose where they locate with avoiding nexus in mind. How can your company meet this challenge? Some experts advocate having an affiliate conduct your e-commerce operations. It sounds radical, but it represents solid tax planning advice for some companies selling goods on the web. Internet tax headaches and the accompanying competitive disadvantages may be avoided by setting up a nexus-breaking subsidiary to shield transactions from sales tax collection duties in all but a few instances.''
Because of the business environment fostered by the current law, companies are being forced to find ways to compete with tax-free online retailers. That is, in order to compete, traditional retailers are searching for a way to avoids sales tax collection responsibilities.
The solution to their problem is actually quite simple. Retailers with physical presence and online stores are setting up a corporate structure in a way that does not require the collection of sales or use taxes on online sales. In this arrangement, the online business is set up in a separate subsidiary that does not have a physical presence or nexus in the State of the buyer and is therefore not required to collect sales and use taxes.
Let me give you real-world examples. Gateway has stores across the country. Yet because they have separated their .com and their retail stores into wholly-owned, separate subsidiaries, they do not collect sales taxes.
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Barnes and Noble has physical stores as well all across the country. However, BarnesandNoble.com collects sales taxes in only three States—New Jersey, New York and Virginia—where it has a distribution center, its headquarters and its online site respectively.
Under the current system, retailers can set up terminals within their stores, encourage customers to come in, view merchandise, and then walk over to the terminal and make their purchase, an Internet purchase, right within the store. However, the terminal will be linked to a Website which is a wholly-owned subsidiary of the company which owns the store and will allow the consumer to shop tax free, with the merchandise shipped from out-of-State directly to the customer's doorstep. This will especially be true for high ticket items such as refrigerators, electrical appliances and computers.
The majority report of the Advisory Commission on Electronic Commerce, which is embodied in H.R. 4267, would exacerbate the problem by making it clear that online subsidiaries do not have nexus. For example, an online buyer could return products to the physical store; and yet, for sales tax purposes, the physical store would not create nexus for the online company. This proposal would encourage companies to distort their corporate structure for tax avoidance purposes. In our opinion, H.R. 4267 eliminates the concept of nexus and will ultimately lead to the disintegration of the State sales tax systems.
The message of the e-Fairness Coalition is simple. We support a level playing field so that all retailers—in-store catalog and online—all have the same sales and use tax collection responsibilities.
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Therefore, the e-Fairness Coalition strongly supports the enactment of H.R. 4462 introduced by Representative Spencer Bachus and joined by Representatives Delahunt, Istook and McCarthy as original sponsors.
H.R. 4462 will provide a framework for simplification and allow States to require collection when the simplification process is completed. The legislation authorizes the States to develop and enter into an interstate sales and use tax compact. States that join the compact and simplify their sales tax systems would be authorized to require remote sellers to collect use tax on all taxable sales on behalf of the State. The legislation provides Congress an expedited review procedure to consider the results of the compact.
The legislation is a necessary complement to the 5-year extension of the moratorium. Extending the moratorium without addressing sales and use taxes will narrow the consumption tax base and lead to an increase in other taxes on businesses and individuals. Local and State governments may be forced to raise income, property, sales or other taxes to make up for lost revenues.
It is important to remember that sales and use taxes are consumption taxes paid by the consumer to fund schools, police, roads and other services that benefit those local consumers. The retailer is merely the collection agent. How a product is purchased, whether in a store or online, should not determine whether a consumption tax is paid. In either situation, the buyer receives the benefit of those public services.
No one wants to tax the Internet or provide discriminatory taxes on the Internet. Congress must address all three issues: access taxes, discriminatory taxes and sales taxes. Our Nation's Internet tax policy should be fully integrated, incorporating a permanent solution for all three issues. Therefore, the e-Fairness Coalition urges all members of this committee to cosponsor and support Mr. Bachus's bill, H.R. 4462. Thank you.
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Mr. GEKAS. We thank the gentleman.
[The prepared statement of Mr. Lowy follows:]
PREPARED STATEMENT OF PETER LOWY, CO-PRESIDENT, WESTFIELD AMERICA, INC.
I am Peter Lowy, CEO of Westfield America, and Founding Chairman of the e-Fairness Coalition. I'd like to thank Chairman Gekas and Ranking Member Nadler for providing me the opportunity to speak on this important issue—and to discuss the legislation in front of this committee: specifically, H.R. 4462 which the e-Fairness Coalition supports and H.R. 4267 which we oppose.
Westfield America owns interests in 38 major shopping centers across the country, which are home to approximately 4,700 retail stores. In many communities, we are one of the largest contributors to the local tax base through the property taxes we pay and the sales taxes we generate.
The e-Fairness Coalition includes brick-and-mortar and online retailers, realtors, retail and real estate associations, and publicly- and privately owned shopping centers. Our Coalition represents 1.5 million retail stores ranging from Cody's Booksellers in San Francisco to national retailers such as Wal-Mart and Sears, as well as 1 out of every 5 American workers nationwide.
PROBLEMS WITH CURRENT LAW
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Currently, the law creates an unfair playing field where brick and mortar retailers collect sales taxes, but their on-line competitors are exempted from collection responsibility and unfortunately, HR 4267 aggravates this situation. Collecting a sales tax in a face-to-face transaction on Main Street or at the mall is a relatively simple process. The seller collects the tax and remits it to the state or local government.
But with remote sales, such as catalog and Internet sales, it's more difficult. Because of the Supreme Court's 1992 Quill decision, the states cannot require remote retailers to collect and remit sales tax when the seller does not have a physical presence in the state of the buyer. So states, and many localities, have laws that require the local buyer to send an equivalent ''use tax'' to the state or local government when he or she did not pay these taxes at the time of purchase.
The reality, of course, is that customers almost never do that. Firstly, most consumers don't even know that they owe this tax. Further, the way that collection occurs now is inconvenient for the customer. Finally, people aren't used to paying sales taxes in that way. So, despite the requirement in the law, this tax, which is already owed, is not paid. For years, state and local governments could accept this loss because catalog sales were a relatively minor portion of overall commerce. The Internet, however, has changed that.
As e-commerce grows—the loss of sales tax created by the transference of sales to the Internet will not be offset by use tax unless we make that collection system simpler and mandatory. Thus, the burden must be taken off of the consumer and replaced by the natural agent to collect these taxes—the Internet retailer. Under a simplified tax system, this will need to amount to a virtually zero burden system for the remote retailer.
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Otherwise, as tax-free online sales grow, estimated to be in excess of $100 billion in 2003, the states and cities will look for other revenue sources to offset uncollected sales and use tax from sales that have migrated to the Internet. By not allowing the collection of consumption taxes on remote sales, the sales tax base will shrink and lead to increases in other taxes—such as property or income taxes. Allowing sales tax collection on all sales will expand the tax base, which can lead to lower sales taxes for all consumers.
The Supreme Court's Quill decision stated that Congress has the authority to allow states to require the collection of sales and use taxes and that Congress should address the issue.
By taking no action on the issue of sales and use taxes, and instead, passing a 5-year moratorium extension that purposely avoids the real problem, Congress has encouraged companies to find ways to take advantage of the current loophole for online sales.
THE INTERNET LOOPHOLE
Because of the business environment fostered by the current law, companies are being forced to find a way to compete with tax-free on-line retailers. That is, in order to compete, traditional retailers will need to find a way to avoid sales tax collection responsibilities. The solution to their problem is actually quite simple. Retailers with physical and online stores are setting up a corporate structure in a way that does not require the collection of sales or use taxes on on-line sales. In this arrangement, the online business is set up in a separate subsidiary that does not have a physical presence, or ''nexus'' in the state of the buyer, and is therefore not required to collect sales and use taxes.
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Let me give you real world examples. Gateway competes with Dell Computer in the PC market. Gateway opened stores across the country to better serve their customers—this then forced them into a sales tax collection responsibility. However, Dell does not have to collect sales taxes because it does not have nexus in many states. Therefore, Gateway was at a competitive disadvantage. To compete, Gateway has set-up the online store as a separate subsidiary from the physical store and therefore does not have nexus, and now Gateway can avoid collecting sales tax also—thereby eliminating the competitive advantage that Dell had.
Barnes and Noble has physical stores all across the country. However, Barnes and Noble dot com (BarnesandNoble.com) collect sales taxes in only three states: New Jersey, New York and Virginia where it has a distribution center, its headquarters and its on-line site respectively.
Under the current system, retailers can set up terminals within their stores and encourage customers to come in, view merchandise, and then walk over to a terminal and make their purchase an Internet purchase right within the store. However, the terminal will be linked to a separate, wholly owned subsidiary of the company which owns the store, and will allow the customer to shop tax-free, with the merchandise shipped directly to the customer's doorstep. This will especially be true for high-ticket items such as refrigerators, electric appliances and computers.
Should Congress not address the current inequity in sales tax collection rules, more companies will create corporate structures that avoid sales tax collection responsibilities. While corporations would like to integrate their physical and online stores, discriminatory tax policies are forcing retailers to separate their on-line and in-store strategies.
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In short, the current Internet business model has moved beyond the argument of pure e-tail versus brick and mortar stores. Successful companies are merging these channels of sales. However, our nation's discriminatory tax sales tax policies are hindering this integration.
The majority report of the Advisory Commission on Electronic Commerce, which is embodied in H.R. 4267, would exacerbate the problem by making it clear that online subsidiaries do not have nexus. For example, an online buyer could return products to the physical store, and yet for tax purposes, the physical store would not create nexus for the online company. This proposal would encourage companies to contort their corporate structure for tax avoidance purposes. In our opinion, H.R. 4267 eliminates the need for nexus and will ultimately led to the disintegration of the states' sales tax system.
H.R. 4267 would also provide a tax exemption for all goods that could be sold in a digitized form. Therefore, all newspapers, CD's, movies, etc along with their digitized counterparts would be immune from state and local sales tax. This would clearly violate states' right. Thus, support for H.R. 4267 at its base level is support for the federal government interference in rights clearly given over to the states to raise revenue.
SUPPORT FOR A LEVEL PLAYING FIELD
The message of the e-Fairness Coalition is simple: We support a ''level playing field'' so that all retailers—in-store, catalog, and online—all have the same sales and use tax collection responsibilities. Preferential tax policies and government subsidies for Internet retailers distort the market, and give Internet retailers an unfair competitive advantage.
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Taxation of the Internet involves three interrelated issues.
1) Taxes on Internet access charges
2) Multiple and discriminatory taxes, and
3) Collection of sales and use taxes on retail sales made on the Internet.
We believe that there should be a fully integrated solution with regard to taxation and the Internet. While the House of Representatives has already passed a 5-year extension on the moratorium on internet access and on multiple or discriminatory taxes, the House has not dealt with the more important and more complex issue of sales and use taxes and e-commerce.
Therefore, the e-Fairness Coalition strongly supports the enactment of H.R. 4462, the ''Fair and Equitable Interstate Tax Compact Simplification Act of 2000,'' introduced by Representative Spencer Bachus, and joined by Representatives Delahunt, Istook, and McCarthy as original cosponsors.
H.R. 4462 will provide a framework for simplification, and allow states to require collection when the simplification process is completed. The legislation authorizes the states to develop and enter into an Interstate Sales and Use Tax Compact. States that join the Compact would be required to adopt a simplified sales tax system. In turn, states adopting the simplified system would be authorized to require remote sellers above a sales volume threshold to collect use tax on all taxable sales into a state. The legislation provides Congress an expedited review procedure to consider the results of the Compact.
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Congress must act to provide states the ability to lift the use tax burden off of consumers and provide all retailers with equal collection responsibilities. Allowing the states to require collection when the states meet the established criteria for simplification is a reasonable and necessary step for Congress to take.
The legislation is a necessary complement to the 5-year extension of the moratorium. Extending the existing moratorium without including language allowing the states to require collection from all retailers will mean at least five more years of tax free sales for internet retailers, and a strong likelihood that internet sales will be given permanent preferential treatment.
Extending the moratorium without addressing sales and use taxes will narrow the consumption tax base and lead to an increase in other taxes on businesses and individuals. Local and state governments may be forced to raise income, property, sales, or other taxes to make up for lost revenues. Without solving the sales and use tax issue, an extension of the moratorium could result in an increase in taxes to the consumer.
It is important to remember that sales and use taxes are consumption taxes paid by the consumer to fund schools, police, roads, and other services that benefit local consumers. The retailer is merely the collection agent. How a product is purchased—whether in a store or on-line—should not determine whether a consumption tax is paid. In either situation, the buyer receives a benefit from public services (like roads, police, and fire). Congress should support efforts to level the playing field and provide all retailers with equal sales tax collection responsibilities.
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No one wants to ''Tax the Internet'' or provide discriminatory taxes on the Internet. Extending the moratorium without addressing the equitable collection of sales tax is an incomplete and counter-productive exercise. Congress must address all three issues: 1) Access taxes, 2) discriminatory taxes, and 3) sales taxes. Our nation's Internet tax policy should be fully integrated incorporating a permanent solution for all three issues. Therefore, the e-Fairness Coalition urges all Members of this Committee to co-sponsor and support Mr. Bachus' bill H.R. 4462
Mr. GEKAS. We turn to the final witness on this panel, Mr. Hunt.
STATEMENT OF JAMES HUNT, PRESIDENT AND CEO, ERNST AND YOUNG TECHNOLOGIES
Mr. HUNT. Mr. Chairman, thank you.
I am Jim Hunt, the president and CEO of Ernst & Young Technologies. That is my day job. I am also the chairperson of the CompTIA, the Computing Technology Industry Association Internet tax task force.
CompTIA represents over 8,000 computer hardware, software, Internet providers, telecommunications providers, system integrators and local resellers here in the United States and abroad. We supported the moratorium on Internet taxation initially, and we continue to support the bills that recognize that approach.
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I would like to spend my time, if I could, talking about two or three key technology areas that I think relate very squarely on this issue.
Clearly, the Internet has had dramatic impact not only on our industry but the economy of the country as a whole. Certainly, we are going to see developments and changes with net-based approaches over the next several years. It is our view that you are not really going to know what the impacts are with respect to taxation for at least a few more years.
One of the most widely publicized approaches to looking at how do they efficiently collect taxes on the Internet is the use of portals and software that can be implemented on the fly by a retailer to calculate a jurisdiction's tax and then apply it to a purchase or a transaction. It is my belief that that technology is, while infant, sufficiently worthy of consideration, and it will be a worthwhile approach to use in future years.
If you look at some of the technology that exists today, there are vendors out there with portal sites that will allow any merchant to hit that site and will provide a loan, a consumer loan, to a client within 30 seconds. So it basically does a scan of that consumer's creditworthiness and finds a lender out there who will make that loan.
So it is, I think, equally apparent that we could use the same kinds of portal technology to determine what the tax liability would be on a given transaction across the net. It is probably not ready today, but it will be.
However, I think it is very important to realize that the States have probably not done the job they should at making consumers understand that it is their responsibility to pay the tax, and certainly use taxes exist almost in parallel to the sales taxes in those jurisdictions. If that portal exists and is available to, on the fly, determine the tax liability of a given transaction, that same data could be provided to the jurisdiction; and effectively a bill at the end of the period could be submitted to the consumer to pay the use tax. There is no reason that the exact same technology that is being recommended to merchants to be able to collect the tax could not be used by a jurisdiction to collect its use tax.
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The second compelling vector that I believe you are going to see over the next few years is the fact that you will not be able to know precisely what taxes apply to a transaction. It is now suggested in many surveys that, by the year 2004, wireless connect to the net will exceed wired connect to the net, and there will be probably hundreds of millions of individuals connected to the net on the fly as mobile users and potentially purchasing goods.
To truly understand where that transaction is taking place, where the product is delivered and how the tax rules apply to that given transaction could be extremely difficult. Without simplification of the Tax Code as we know it, there will be virtually no way to guarantee that a retailer, trying to collect the tax on behalf of a jurisdiction, would be compliant, and the liabilities to our members as we see them could be extraordinary.
We think that over the next few years things will settle out with respect to how the technology evolves and how the consumers use it to make purchases. It is our conviction that the moratorium, as it stands right now, will give lawmakers and others the chance to really view what makes the most sense in those few years and then determine a very fair tax.
I would like to finish my comments by saying, if my count is correct, the term level playing field has been used 33 times this morning. It is our conviction that consumers are required to pay the tax and the retailers in certain jurisdictions are required to collect them. We are not suggesting otherwise. But the dynamics of the Internet are such that if we do not pay attention to a simplified Tax Code and what this medium does to the general consumption of goods over the next few years, we will not be able to solve the problem.
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Thank you.
Mr. GEKAS. We thank the gentleman.
[The prepared statement of Mr. Hunt follows:]
PREPARED STATEMENT OF JAMES HUNT, PRESIDENT AND CEO, ERNST AND YOUNG TECHNOLOGIES
Mr. Chairman and members of the Subcommittee, thank you for inviting me to testify here before you today on the very important issue of Internet Taxation. CompTIA, the Computing Technology Industry Association, represents over 8,000 computer hardware and software manufacturers, distributors, retailers, e-tailers, IT resellers, value-added resellers, systems integrators, computer training services, telecommunications providers, and Internet companies.
CompTIA supports Internet growth without burdensome government regulations and unfair taxation. CompTIA actively supported passage of the original ''Internet Tax Freedom Act'' which was signed into law fall 1998. CompTIA also actively supported passage of H.R. 3709, which recently was approved by the House by a wide margin, and would extend the moratorium of the Internet Tax Freedom Act for an additional 5 years. H.R. 3709 also would eliminate state Internet access charges as recommended by the Advisory Commission on Electronic Commerce (ACEC). CompTIA applauds your leadership, Chairman Gekas, and the support of the House Judiciary Committee in passing both important bills.
The technological and legal complexities of the Internet have collided and now present Congress with an extremely challenging policy issue. The current IT revolution is vital to our national economic prosperity. It has been credited by Federal Reserve Board Chairman Alan Greenspan as the primary cause of our nation's sustained productivity and economic growth over the last decade. For that reason we respectfully caution Members of Congress not to take any rash actions that will threaten our continued prosperity.
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I want to comment briefly on the three bills, which are the subject of today's hearing: H.R. 4267, H.R. 4460, and H.R. 4462, all of which address Internet taxation. The first bill, H.R. 4267, the ''Internet Tax Reform and Reduction Act of 2000'' incorporates the ACEC ''majority'' recommendations. H.R. 4267 would extend the moratorium on Internet access and discriminatory and duplicative taxes until 2006. H.R. 4267 also includes a ''sense of Congress'' provision encouraging States to work cooperatively with the National Conference of Commissioners on Uniform State Laws to develop a simplified and uniform sales and use tax.
CompTIA supports H.R. 4267, which clearly recognizes the need to simplify the multi-jurisdictional state and local tax structures before moving ahead with any other Congressional action.
The second bill, H.R. 4460, the ''Internet Tax Simplification Act of 2000,'' embodies the ''minority'' report of the ACEC. H.R. 4460 also provides for a five year moratorium on state and local taxes on Internet access, but limits for only two years the moratorium on multiple and discriminatory Internet taxes. H.R. 4460 also authorizes interstate sales and use tax ''compact agreements'' for states that adopted a simplified and uniform sales and use tax system.
The third bill, H.R. 4462, the ''Fair and Equitable Interstate Tax Compact Simplification Act of 2000,'' also would authorize an interstate sales and use tax compact. States entering the compact would be required to enact a uniform sales tax law and would be authorized to require certain remote sellers to collect tax on all sales into a state.
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I would like to comment briefly on both H.R. 4460, and H.R. 4462, in particular the interstate ''compact'' authority provisions, which addresses the mandatory interstate and multi-jurisdictional tax collection for remote sales. One of CompTIA's most fundamental objection to both bills is the interstate compact authority mandating remote tax collection. Particularly troubling is the fact that the eventual terms of the compact are completely unknown. Aside from a very broad and general outline specified in these bills, the details are unknown. Respectfully, I believe Congress would be grossly negligent in its duties to approve any interstate compact agreement without first knowing the terms of the compact.
CompTIA applauds provisions encouraging tax simplification in both bills. However, simplification can mean a lot of different things to a lot of different people. There are over 6,500 taxing jurisdictions in the United States, when all State, county and municipal authorities are included. In simple terms, these bills ask Congress and the industry to buy a car without first taking a test drive and knowing the sticker price. Until the specifics of the ''new Internet tax simplification'' plan are developed and available for review, CompTIA cannot support the legislation.
Another very serious CompTIA concern is the precedent that would be set by a Congressional pre-approval of a compact agreement in which e-vendors are held to other state's laws. If Congress were to approve such a radical and fundamental concept of tax obligation and collection, what is next? Will Internet vendors next be asked to make sure their businesses are comply with all the thousands of different state and local environmental, work safety, health, criminal and other laws and regulations?
Admittedly those laws also tilt the playing field from one state to another. However, we believe that it is healthy for states to compete with each other in order to attract businesses to establish themselves there. Granting compact authority, in advance of the development of mandated provisions, is bad public policy and would upset our fundamental Constitutional principles of interstate commerce.
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Also, I feel it is incumbent upon the states to develop and initiate some type of consumer education program regarding Interstate tax collection before asking Congress to move ahead with any radical propositions. Under current state laws, consumers are required to pay state and local sales and use taxes on purchases outside their state. Numerous surveys show many consumers are unaware of their obligation and most states have not initiated any significant debt management programs to increase compliance with this requirement. This is equivalent to a business not having in place an on-going program and procedures for invoicing its customers.
State and local governments have at their disposal a variety of underutilized free and inexpensive tools they could use to increase taxpayer compliance. Existing state and local agency public relations staff could be directed to develop and implement an aggressive program to educate their taxpayers of their responsibility to pay those taxes. Potential vehicles could include press releases to print and electronic media in the state, op-eds and interviews with state or local tax officials, and many other actions. Prominent stand-alone educational materials could be included with statewide taxpayer mailings such as annual tax forms and other communications with taxpayers at no additional cost in postage and minimal cost of printing.
Until such programs are implemented it is impossible to determine if there is an underlying tax compliance problem in this area. If substantial state efforts prove only partially successful, then we must then ask whether the problem is sufficiently serious as to justify major changes in the Interstate Commerce clause of the Constitution. State budgets ended1999 with a $35 billion surplus. Moreover states with high levels of Internet use have the largest gains in tax revenue, so if there is a need to act, it is not pressing. For these reasons Congress should not be in any haste to enact any legislation undermining the Interstate Commerce clause and current judicial interpretations of nexus.
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CompTIA applauds the provisions in both bills (H.R. 4460, H.R. 4462), which exempt small business owners from mandatory tax collection. Protecting small businesses both on-line and off-line is important to the health of our economy. In the off-line world, small businesses make up 75 percent of the economy. With more than one million business web sites in this country, they are also the vast majority of online businesses.
There has been a lot of discussion regarding the use of computer software as a reliable and cost effective tool for online tax collection. There is a potential role for outside parties to provide voluntary assistance to states in collecting sales and use taxes on purchases made outside of the state by their residents. However in addition to the policy challenges there are also technical challenges to automated state and local sales tax collection software.
Web based technology and business processes are being developed at a very rapid rate. For instance, there are web sites, which will almost instantaneously check a customer's credit and create a loan for the consumer as a third party service. Some of these web companies will guarantee a merchant very fast response times—frequently less than a minute—to do an entire credit check on a client and offer an appropriate loan package for the consumer's purchase. These ''on-the-fly'' web services are, in theory, available to any merchant wanting to access the web site and pay a fee for each loan presented.
Clearly if the web technology exists to offer such services, it is conceivable that similar, web-based approaches could be developed for computation of taxes on a transaction-by-transaction basis. However, there are three additional relevant points to consider here:
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Current estimates suggest that the number of mobile web users will surpass ''fixed site'' users mid-decade. That means that certainly millions and perhaps billions of Internet users will be accessing the net from their phones and other wireless devices. Individuals will have multiple e-mail addresses and the net will need to react much faster than it does today to orders placed from net-based purchasers. Many progressive ''net-merchants'' expect to see millions of orders being placed from handheld devices by very mobile consumers. For instance, a traveling businesswoman may place an order for a book while in the airport in Chicago, knowing her next stop is Atlanta and have the book delivered to her when she arrives in Atlanta. However, Atlanta isn't where the woman lives—she lives in Minnesota. Another example of the mobile utility of the net is perhaps best brought to light by other recent technology directions. It is now thought that at least 25% of the computer printers in operation by 2005 will be net connected and have their own net address. These printers will also have wireless receivers that will take a command from a mobile device. The concept here is that a mobile consumer will be able to access intellectual property (books, etc.) while on the go. They will download the book order information on their phone and store only the address of that book and its unique identifier number. Then when they pass by any printer (perhaps set up as a kiosk in an airport for example), the user will be able to send a very small amount of stored data to the printer and the book will print out for the consumer. Attributing that purchase to any specific jurisdiction will be virtually impossible.
B. As outlined earlier, consumers have a very poor understanding of their obligation to pay ''use taxes'' if they do not pay sales taxes in their respective states. Even if you conclude that it is technically possible to ''on-the-fly'' collect sales tax data on the Internet for different transactions, why couldn't the states themselves pay third party, web based companies to compile purchase information and simply send a bill to the consumer at the end of the year for their use tax payments. The same technology that many groups want merchants to use to ease the computation process would work equally well for use tax tracking.
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C. If state and local governments wished businesses in other jurisdictions to assist them in their tax collection responsibilities the program would have to be voluntary for the policy reasons previously stated. It would also be in the interest of state and local governments to allow for flexibility in incentives to participating Internet companies. It is no different than when a company goes to a debt collection service to assist it in collecting its bills. This will allow state and local governments to maximize their net revenues (no pun intended). The greater the incentives they offer to companies outside their jurisdiction to provide them tax collection services, the more will participate. At the same time they should not pay more than they need. The market will determine the revenue maximizing formula as is does with commercial debt collection services.
CompTIA is also concerned about the privacy issues surrounding this type of software. As we speak, Congress is poised to consider any number of online privacy bills, including a bill that will create a task force to study online privacy. What privacy consideration has been given with regard to these software tax collection programs in light of the current privacy debate before Congress?
I would also like to mention the liability concerns associated with the tax collection software program. This includes potential liability for unauthorized disclosure of private information by independent third parties, overcharges or mischarges to consumer's credit cards by those parties, etc. I recognize small business exemptions have been mentioned in many proposals, but until more details are available, I want to take a moment to respectfully remind members of the subcommittee of the business liability risk involved.
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Particularly for a small business on the margins, a large legal bill can spell the end of their business. Certainly online companies are no different than traditional companies in that respect. What is more, the legal action does not need to be meritorious, even an unwarranted legal action requires legal representation and the costs involved. I know Congress is aware of the burden unwarranted legal action can have on a small business because as members of the House Judiciary Committee, you spent considerable time on tort and liability reform.
One reason the online world has been so exciting for businesses, is that many traditional barriers to competition have been removed. Many of the barriers of the bricks and mortar model, such as the cost of prime retail space, and newspaper and radio advertising budgets, are a must and cost dearly. However in the on-line world anyone can establish a presence on the Internet and compete with modest capital.
In closing I would respectfully encourage members of this panel and the Congress to continue working to keep this revolutionary technology free of regulatory and taxing barriers. I would like to thank the panel for inviting me to testify on this very important issue of Internet taxation. I would be very happy to address any questions you might have.
Mr. GEKAS. The Chair will allot itself 5 minutes for a round of questions. I want to extract from each of the testimonies that we received what I consider to be the salient point of each witness, and then if I have time to come back to address a question to some of them.
Mr. Stemberg wants, as many who are watching this phenomenon, believes that taxes should apply equally to all existing sales, and that would be a solution to the problem.
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Mr. Rappaport mentions that stores are already integrating so that brick and mortar retailers are becoming electronic merchants. So, there seem to be three different types of enterprises. You represent the landlords and the supermarkets who have tenants who are brick and mortar retailers. Then you have others who are both brick and mortar and Internet.
Mr. RAPPAPORT. They are members, also.
Mr. GEKAS. Pardon me?
Mr. RAPPAPORT. The retailers and the property owners and landlords, some of those retailers who are members also now have Internet sites.
Mr. GEKAS. Mr. Benham mentions that a brick and mortar store which goes on a Website, which creates a Website, now has advertising and outreach capabilities that were not existing before the Internet; and so we have to take that into consideration in how and where we tax.
Ms. Doerfler makes collection of taxes the important feature of our problem here. If I am correct, you prefer a system somewhat like the uniform laws that we have on commercial transactions to apply to these specific Internet sales.
Ms. DOERFLER. The same body to oversee the drafting, NCCUSL.
Mr. GEKAS. Mr. Friedensohn brings up a matter that has been of great concern to me, and I have not been able to sort it out yet, and that is how many of these entities are going to go outside the borders of our country to start doing business. That is really frightening to me. We have seen this phenomenon in the context of Internet gambling.
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Mr. FRIEDENSOHN. With all respect, I do it today. I sell goods in the United Kingdom, and I don't force the collection of value added tax there.
Mr. GEKAS. Mr. Julian, the exemptions that many of the States have, including Pennsylvania, with respect to their sales tax as it might apply to medicine or clothing, et cetera, involves another set of problems that, if we don't take that into consideration at the outset, we are lost from the beginning. So, multi-tiered sales tax rates present a salient feature of our Internet taxing analysis.
Mr. Lowy brings out the important point that we all have to acknowledge, that the services that a taxing authority renders—highways, lighting, sewage—all government services that benefit citizens, rely on fair taxation. He insists, therefore, that we should be creating a system which encourages people to recognize that fair apportionment of taxes is in everyone's best interest. Some of these principles are generally understood, but you reinforce them, and that is the purpose of the hearing, so that we can have it in the record.
Mr. Hunt insists, and I think it is also a facet of what must be considered, that the use tax, because of advances in computer software and technology, can be collected under current conditions and thus be part of the tax collection system.
These are my own summaries, as I said, of the themes which I will be putting into my own little computer.
My time has expired. I yield to the gentleman from Ohio a period of 5 minutes.
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Mr. CHABOT. I thank the gentleman for yielding. I also thank him for holding this very interesting and very important hearing that we have had this morning.
My first question is, is it legitimate, is it fair, is it accurate to say that the e-commerce businesses or Internet businesses do not use as many of the local services like police, like fire, like the roads and others, they don't use those services to the extent that traditional retailers do and, therefore, it is not fair to tax them at the same rate because they are not using the same services to the same degree?
I know that Mr. Friedensohn made that comment. I saw a lot of heads shake around the room when that comment was made. I would be interested to hear both sides, perhaps either Mr. Friedensohn, Mr. Julian on the one side, and then perhaps one of the other folks over there.
I have got a couple of questions, so if you could do it relatively quickly.
Mr. FRIEDENSOHN. The only point I was making is that direct mail catalogs—Spiegel, Lands End, L. L. Bean, there are hundreds of them, are taxed in a certain manner. If you wanted to make an analogy, the way that people sell on the web is analogous to that. It is not analogous to the local retail store. It is really much more of a direct mail catalog business. The economics, the way it works, the way you pursue it as a businessperson is more analogous to that and should be taxed in the same manner.
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Mr. LOWY. I think—if I could jump in there for 1 second, I think the point you make, we look at it a little differently in that consumption tax isn't a tax on the retailer, it is a tax on the consumer. So, in essence, the physical retailer doesn't pay for the use of those services. The consumer who consumes those services pays for them.
So if you are living in a jurisdiction, the sales tax you pay on the goods and services you buy in that jurisdiction is collected by the retailer, sent to the local government who pays for your use of those services. So whether you shop on the web or whether you shop in a physical store, the question isn't really whether the retailer uses those goods and services, it is the consumer who pays for those goods and services through the sales tax.
Mr. CHABOT. Anyone want to comment quickly or is that sufficient?
Let me ask another question. Rather than tax the Internet to a greater extent than we do now to make it more equal to retail taxes or regular taxes that people pay, sales taxes that we are used to, why don't we try to lower the sales taxes that we pay on everything else?
I understand that the local folks and States will argue that we have to pay for the police and the fire and the other things, but what I have seen basically is that, over time, our government has grown far too large, we pay far too much tax.
When I was born back in the early 1950's, the average American family sent something like 3 to 5 percent up here to Washington. Now the average American family sends 25 percent up here to Washington. To some degree, I think we need to starve the beast. We will spend as much money as you send up here to Washington.
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We have got a surplus finally for the first time in many, many years. That is a good thing. We have balanced the budget. But the bad thing is, now that we have got that surplus, rather than pay down the debt or reduce the tax burden on the American people, things which I think we ought to do, there is a strong faction, a lot of people who want to spend that money on a whole range of things because the government knows better how to spend the money than the people of this country do. That is more or less the argument. You won't hear it in those terms, but that is what it is.
I kind of look at this, and I am a strong advocate, if you have looked at my record, for trying to keep the Internet as tax-free as possible. This may be an opportunity for us to begin that road toward reducing the tax burden on the American people. Maybe the next step is to try to bring those sales taxes down which in my community we have got—we couldn't lose the Reds, we couldn't lose the Bengals, so we had to build—you can't have teams play in the same stadium, of course, you have to build two new stadiums, and the public is going to pay for that. It is a lot of money, something like 700, $800 million. We had to raise the sales tax.
In any event, this has been kind of a long-winded answer, but why don't we try to lower taxes? Would you all be opposed to doing that if we could lower the sales taxes? Anybody that would be opposed to that?
Mr. LOWY. I think what we are arguing, though, is that, if you expand the base of the sales tax to include the Internet, that you can lower the sales tax rate for all people who shop both on the Internet and in physical stores; and if you don't, that you narrow the sales tax base and that as sales migrate to the Internet you will have to raise other taxes for the people living in those jurisdictions.
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Mr. JULIAN. But the problem that Mr. Lowy and people who are advocating his position, they are trying to export the burdens of the tax. It is the collection burdens that are the problem. Why should a company based in Ohio or Massachusetts be subject to audit from every parrish and every mosquito district in Louisiana? With all due respect to the sheriff from Louisiana, he mentioned that he wants the opportunity to audit all those companies. Why should a company that has a business location in one place all of a sudden be subjected to thousands of audits and thousands of different tax rates and tax burdens? That is the problem. They are trying to export the burden.
Mr. BACHUS. Did you say mosquito district?
Mr. JULIAN. I believe in the earlier testimony he made a reference to a mosquito district. If I am wrong, I apologize.
Mr. BACHUS. Y'all have mosquitos in Cincinnati, don't you?
Mr. JULIAN. No, we don't have mosquitos in Cincinnati. They are outlawed.
Mr. GEKAS. The time of the gentleman has expired.
We turn to the gentleman from Massachusetts, Mr. Delahunt, for a period of 5 minutes.
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Mr. DELAHUNT. The question of the use of services by e-tailers as opposed to brick and mortar business entities, I guess my response or my concern would be that if—and that is a big if—if brick and mortar stores should find themselves at an extreme competitive disadvantage over a period of time, aren't the people who work in those brick and mortar stores—the salespeople, the vendors, the managers—aren't those the people who are using the services of the fire departments and the police forces and education? Mr. Stemberg?
Mr. STEMBERG. Representative Delahunt, I think it is important to note that if you operate a local retail establishment, you pay very significant property taxes. It is primarily those property taxes that go to pay for the police forces and so forth.
I think, as correctly pointed out by a fellow panelist here, these are use taxes being imposed upon users. While I certainly wouldn't oppose them being lowered, they should be lowered or raised evenhandedly and not, in effect, create an incentive to shop one channel over another and not disadvantage and threaten the jobs of those people working in the local retail store.
Mr. DELAHUNT. That is my point. We can conjure up an Orwellian concept. I think it was my friend, Mr. Weiner, who earlier talked about it being a giant catalog. Why don't we just close down these town centers and have giant warehouses scattered throughout the country in strategic locations? We can all—I wish I had invested heavily in Fed-Ex or UPS.
Mr. STEMBERG. You will find most of those warehouses located in small States, particularly those without a sales tax, because that is how you essentially orchestrate your business not to collect the sales tax. And if we allowed this legislation to go forward, I think that would be a real threat to Massachusetts, to New York, to Pennsylvania and other populated States with sales taxes.
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Mr. DELAHUNT. I guess one can have an opinion as to the level of taxation within the respective States and at the municipal level, but I certainly don't think the States and the local authorities want to be told by some bureaucrat or some Member of Congress how they should generate their revenues for services such as school and fire and police and what have you.
Those are just my comments. Anyone who wants to respond may.
Ms. DOERFLER. Certainly with respect to business activity tax nexus and business activity taxes which are not a passthrough tax like a sales and use tax, there should be a connection between the amount of tax that goes on an out-of-State tax and the benefits received by that taxpayer in that State. My comments earlier were addressing that issue, that there isn't a real connection there, there isn't a benefit received for an out-of-State retailer or company with respect to business activity taxes, income, franchise, business license taxes. I think we need to draw a distinction there.
Mr. LOWY. I think one other distinction is that the physical retailer, it was said before, who is in a jurisdiction pays real estate tax which goes to the local government that an Internet retailer does not have to have because they don't have real estate.
Mr. JULIAN. I disagree. The Internet retailers have to be someplace. They pay property taxes, income taxes and every other type of tax in the States where they are located. It is not fair to ask a Massachusetts based e-commerce company that only does business in Massachusetts to pay taxes in Idaho or Washington or California. They do pay taxes, every type of tax conceivable. They pay in the places where they do business.
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Mr. DELAHUNT. But the logical extension of the catalog metaphor that Mr. Weiner was talking about is that Mr. Stemberg could go to——
Mr. STEMBERG. New Hampshire.
Mr. DELAHUNT. [continuing]. New Hampshire, Idaho, Utah and operate the business from there, having made those decisions based upon the particular tax structure of the State. You would have empty storefronts all over—I think you have a storefront, if I am correct, in the hometown of the chairman—several. When those start to close down, there is going to be a different perception.
Mr. RAPPAPORT. If we can state that we are talking about——
Mr. GEKAS. I yield the gentleman an additional 1 minute.
Mr. RAPPAPORT. Even with the catalog sales, we have been discussing that to be on a level and even playing field for many years. Only because of the size of what that business is has it not come to the forefront today. That, of course, being on this level playing field, our concern as well is that as the retailers that are both in stores and on the Internet, as was previously mentioned, if there is a way that they are going to have to be competitive against the true e-commerce retailers, they are going to end up doing that. What is going to happen is we are going to end up with less collection of sales tax on the local level if this is not an even playing field.
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Mr. DELAHUNT. And less property tax. When you start to see those stores boarded up and these communities have to deal with a reduced property tax valuation, there is going to be a lot of pain inflicted, I suggest unnecessarily, unless we make it a level playing field.
Mr. GEKAS. The time of the gentleman has expired.
We turn to the gentleman from Alabama, Mr. Bachus, for 5 minutes.
Mr. BACHUS. Mr. Chairman, before using my 5 minutes, may I introduce something into the record?
Mr. GEKAS. Without objection. Is it a document?
Mr. BACHUS. It is a voting record.
Mr. GEKAS. Your own?
Mr. BACHUS. No, it is Senator Haynes' voting record from the California Senate. He had made the statement before the committee that we don't need the Federal Government to get the States together. The States can and should enter simplification discussions. In fact, the California Senate voted 26–10 to enter streamlining discussions, but he did not follow the advice he gave this committee. He voted against that. He voted not to enter those discussions.
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Mr. GEKAS. Without objection, for whatever value the committee can glean from that.
Mr. BACHUS. I think it is a value to know that what he said here is not what he said in California.
Mr. GEKAS. Without objection, the gentleman's request will be granted.
[The information referred to follows:]
65438a.eps
65438b.eps
65438c.eps
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Mr. GEKAS. Your 5 minutes now begins.
Mr. BACHUS. Thank you, Mr. Chairman.
Mr. Julian, y'all have got Rich's stores and Macy's stores in Alabama.
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Mr. JULIAN. Yes, sir.
Mr. BACHUS. Federated has a physical presence in the State?
Mr. JULIAN. We operate each of our department stores as subsidiaries. So Rich's Inc. and Macy's East Inc. have physical presence in Alabama.
Mr. BACHUS. In your testimony you said Federated has a physical presence in 33 States.
Mr. JULIAN. Through various subsidiaries, yes.
Mr. BACHUS. You were saying basically you are all over, in 33 States?
Mr. JULIAN. Yes, sir.
Mr. BACHUS. That means that when someone buys goods from your catalog operation, Fingerhut or from Macy's or Bloomingdale's and they pay that—since you have a nexus with the State you pay that sales——
Mr. JULIAN. If you purchase something from Macy's .com or Macy's By Mail catalog, we would collect Alabama sales tax if it is shipped to Alabama. We would not if you purchased from Bloomingdale's. Bloomingdale's is a separate subsidiary. It does not have presence in Alabama.
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Mr. BACHUS. Macy's By Mail is headquartered in Brooklyn, New York.
Mr. JULIAN. Yes, sir.
Mr. BACHUS. If you order something, it is a separate subsidiary from Macy's?
Mr. JULIAN. It is a separate subsidiary. We are a business. We try not to allow the tax tail to wag the dog. We believe—when we were setting that up, if we wanted to—by operating Macy's By Mail as a separate subsidiary out of New York, we could have followed the tightrope and not collected anywhere except New York. However, the business is more important to us, and it is important to us to allow customers to return that merchandise to a Macy's store if they so desire.
Mr. BACHUS. You really can't set it up because of that and also because you advertise that in the Macy's stores?
Mr. JULIAN. To be honest, I don't know if we advertise in the Macy's store or not, but because we want to allow customers to return the merchandise in a Macy's store, we do collect in those States.
Mr. BACHUS. Now in Bloomingdale's or Fingerhut, if I ordered something through there, you wouldn't collect a tax?
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Mr. JULIAN. We would not in Alabama because neither of those entities have stores in Alabama, and we don't allow returns of that merchandise in Alabama.
Mr. BACHUS. But Rich's and Macy's have about six or seven stores in the State.
Mr. JULIAN. Yes.
Mr. BACHUS. Federated has—I am not arguing with you, but what I am pointing out, Federated has a tremendous presence in Alabama, with over 2,000 employees. Yet when you deal with certain subsidiaries like Fingerhut or Bloomingdale's, your two largest Internet sellers, you don't collect the sales tax.
Mr. JULIAN. Correct.
Mr. BACHUS. Because it is a different subsidiary.
Mr. JULIAN. Correct.
Mr. BACHUS. What Mr. Lowy talked about, the Internet loophole, he used Gateway as an example. But, actually, Federated through this system avoids more collection of sales tax than any other corporation in America.
Mr. JULIAN. I would strongly disagree with that. I don't know whether we are big enough to meet that criteria.
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Mr. BACHUS. That is what I have been—can you tell me a bigger—anyone that does more than that? Because I did look and I found that, in fact, y'all, because of this corporate structure, do have bigger sales. Now General Electric, but they collect taxes.
Mr. JULIAN. There are other retailers that have set themselves up in subsidiaries—May Company.
Mr. BACHUS. But none bigger than y'all with more physical presence, I don't think.
How much do you think—through this, what he calls the Internet loophole, how much do you think is avoided in collection of sales tax? Have y'all looked at that?
Mr. JULIAN. No, we have not. We have been focusing on the cost of collection and the compliance burdens. I can tell you that it costs us tens of millions of dollars every year out of our own pocket to collect in the jurisdictions where we do collect.
Mr. BACHUS. Of course, you don't in these jurisdictions.
Mr. JULIAN. We collect in Alabama for—we follow the law. The Quill decision says you have to collect——
Mr. BACHUS. Listen, nothing here that I am saying is saying that you are doing anything illegal through this subsidiary structure. You have a tremendous physical presence in Alabama. Yet when I buy from your subsidiaries, Fingerhut, Bloomingdale's and two others, I don't pay sales tax. That is perfectly legal, but it is—you do have a physical presence in the State, and Federated is enjoying tremendous benefits from our educational system in Alabama and our law enforcement.
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Mr. JULIAN. And we pay millions of dollars of property tax and corporate income tax to enjoy its benefits.
Mr. BACHUS. But on your Internet sales, the vast majority of catalog and Internet sales are through these other companies.
Mr. DELAHUNT. Would my friend yield for a moment?
Mr. BACHUS. Yes.
Mr. DELAHUNT. I think that is an interesting question. If you don't have those figures—and no one is suggesting that the company is doing anything improper or illegal—but it would be interesting if you could submit to the committee the amounts—the dollar amounts that you have managed to avoid in terms of tax payments.
Mr. BACHUS. And even in your stores, there are Fingerhut things that are made available.
Mr. JULIAN. No, sir, we do not advertise Fingerhut in our department stores, to my knowledge.
Mr. BACHUS. Maybe it is Bloomingdale's.
Mr. GEKAS. The time of the gentleman has expired.
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Mr. BACHUS. If I could have an additional minute—and I am changing the subject here.
Mr. CHABOT. Could I ask that the gentleman be given an additional 2 minutes, if he would be kind enough to yield one of those minutes to me?
Mr. BACHUS. I will.
Mr. GEKAS. Without objection, the request for 2 minutes supersedes the request for 1 minute. We will allot 2 minutes, thanks to Mr. Chabot.
Mr. BACHUS. Ms. Doerfler, one thing you mentioned, and when you said it, it sort of rang a bell, you said that if only 20 States or 18—one of the reasons you oppose the legislation I have drafted is, if only 20 States sign it, then you are still dealing with 30 other jurisdictions.
Ms. DOERFLER. Twenty-six, right.
Mr. BACHUS. But do you realize that only those 20 jurisdictions would be required to collect from the remote sellers? So what you said is you would be dealing with 50 odd——
Ms. DOERFLER. Twenty-six other disparate.
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Mr. BACHUS. Which makes it 50 odd different collections. You wouldn't. You would only be dealing with the 20 States that entered the compact.
Ms. DOERFLER. I am not sure that the legislation you are referring to actually makes it clear that the other 26 States, one, would not be able to collect on remote sellers and, two, would be subject to very clarified——
Mr. BACHUS. Absolutely, the other States would not have any right to participate. So you would only be dealing with one——
I just wanted to clarify that. When you first said that, I actually thought, oh, gosh, that's right. Then I thought, wait a minute, that's not right. But you would be only dealing with only those States that came in, and they would be under the same law. So it would be very much of a simplification, as opposed to what you may have thought as a tremendously more complex thing.
Ms. DOERFLER. I agree. I agree with what you said. One point, though. We want to make sure that we end the costly litigation over nexus issues. So the one other thing I think you need to add to that piece of it is that those States not joining the compact are subject to very strict bright line nexus standards, so that we, at the same time, fix the one model system for the 20 that adopt, we——
Mr. BACHUS. And it is certainly not intended by this legislation to give rights to States which don't simplify theirs.
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Ms. DOERFLER. We want to end the costly litigation over nexus issues.
Mr. BACHUS. We would be glad to work with you on that. The second thing is that although it does not come back for approval, you might say, in mine it does say that Congress can disapprove it. So it is a type of approval in that we have a right to disapprove what is done. You can call that approval or disapproval. When you say that there is no mechanism in the bill for approval by Congress, there is, in that we have a mechanism for disapproval.
Ms. DOERFLER. I guess the only comment there is, let's be honest with ourselves. Is a 90-day window to disapprove sufficient time for Congress to really give the study that it needs to give this to——
Mr. BACHUS. I think this is tremendous. I think we are getting someplace here. Maybe it isn't. Maybe it ought to be 180 days. I would say this, because of the Senate rules where one Senator can block legislation, approval would absolutely hinge on—98 Senators could say yes and two could say no, and we could never get approval. That is one reason that I have actually heard writing from those who oppose all this legislation, anyway, saying let's advocate for approval because that obviously would never happen. That is why we went for disapproval.
Mr. GEKAS. The time of the gentleman has expired. The panel has been very——
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Mr. CHABOT. Mr. Chairman, I was supposed to get 1 minute of his time, and I would ask that he yield it at this time, even though he used up the 2 minutes.
Mr. BACHUS. I took it, I used it, I am sorry.
Mr. CHABOT. Could I ask that you give him one more minute to yield to me?
Mr. GEKAS. The gentleman from Alabama is granted an additional minute which he immediately yields to the gentleman from Ohio.
Mr. CHABOT. I thank the gentleman for yielding. That was very kind of him. Some of the things that have been mentioned with respect to Federated, I just think it has to be said that Federated, which happens to be headquartered in my district in Cincinnati.
Mr. BACHUS. Biggest employer.
Mr. CHABOT. I don't know if it is the biggest, but they certainly have a lot of employees. They have been a wonderful corporate citizen. They contribute to numerous educational, the arts, numerous charities in the community. Their employees are known to volunteer for many, many worthwhile causes. I think they are just a great corporate citizen. We hope they stay and have their headquarters there.
Mr. DELAHUNT. We want them to stay there.
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Mr. CHABOT. We don't want them relocating in Alabama or Massachusetts.
Mr. BACHUS. The money they save by not paying sales taxes they are plowing into the community there.
Mr. DELAHUNT. Now we understand some things.
Mr. CHABOT. I am sure they are paying very, very high taxes for real estate and many other things, and their employees pay an awful lot of income tax, and I think we all ought to work together to lower those income taxes. I yield back the balance of my time.
Mr. GEKAS. The time of everyone has expired. We really appreciate the testimony that has been offered here today by this panel and the other panels. It will go a long way toward a final solution when we come to the time to produce one.
We have another panel now. We thank you, and we dismiss you with our gratitude. We invite the next panel to appear.
The committee will come to order. We are prepared to introduce the members of the final panel.
Arthur Rosen is a graduate of New York University and St. Johns University Law School. Mr. Rosen is currently a partner in the New York City office of McDermott, Will & Emery. Mr. Rosen served as deputy counsel to the New York Governors Temporary Sales Tax Commission and New York State Senate's tax committee. We interpolate the special greetings of the gentleman from New York, Mr. Nadler and those of Mr. Weiner, your fellow New Yorkers.
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The next witness is Mark Nebergall, a graduate of the University of Missouri. He attended law school at Pepperdine and received his masters of laws in taxation from New York University. Mr. Nebergall has served as special trial counsel in the Department of Justice, as public policy counsel for the Software Publishers Association and is president of the Software Finance and Tax Executive Council.
Joining them is Mr. Larry Good, senior vice president of the Electronic Commerce Association. He has 25 years of experience as a consultant on Federal and State public policy issues, with an emphasis on technology and tax policy. A graduate of Goddard College, Mr. Good leads a task force on the potential impact of State sales tax reform.
Our final witness, Scott Walters, is the vice president of research and development of TAXWARE, International, where he manages tax research and associated software development. A graduate of Illinois State University, he is a frequent speaker on e-commerce taxation issues and will help demonstrate taxing software intended to simplify Internet commercial transactions.
Let's begin in the order in which our panel was introduced with the first in order Mr. Rosen, who will be allowed 5 minutes after recognizing that his written statement will be accepted as part of the record.
Mr. Rosen.
STATEMENT OF ARTHUR ROSEN, ESQ., MCDERMOTT, WILL & EMERY
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Mr. ROSEN. Thank you, Mr. Chairman. Thank you for this opportunity. I am Arthur Rosen and a member of the law firm of McDermott, Will & Emery. Many of my partners and I have been deeply involved in State tax issues for several years, having litigated successfully for taxpayers at the U.S. Supreme Court, including Quill. My comments reflect my 26 years of experience, which has been focused solely on State and local tax matters. I do note, however, that we are representing several clients with specific interests in the matters before this subcommittee. My written testimony covers three areas. The constitutional framework within which these bills should be considered, policy concerns addressed or not addressed by the three bills, and many technical concerns or drafting problems with the three bills.
Turning to the overarching fundamental crucial question, there are two substantive policy issues. The first of these policy issues I would like to discuss relates to business activity tax nexus. There has been a great amount of discussion and publicity regarding sales and use taxes. These, however, are merely the tip of the iceberg. While collecting tax from customers and remitting it to governments pursuant to numerous inconsistent laws around the country may place a burden on businesses, it pales in comparison to the immense burden that is faced by remote sellers who must compute and pay income taxes or franchise taxes to every locality or every State where they have customers. Such a situation not only causes huge administrative burdens as with the sales tax, but also imposes a true substantial economic hardship on interstate businesses.
As background, it should be noted that States, like governments worldwide, have traditionally imposed their taxes only on businesses that were present in the jurisdiction. That has meant maintaining offices, inventory, employees or agents in a State would subject a business to tax in that State. The business would be receiving benefits from the local government or the State government to which it paid taxes. Corporations would carry on their business on an interstate or international basis knowing where they had to pay tax.
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Recently however, a large number of States have been aggressively seeking creative solutions to export their tax. They have been imposing, or trying to impose, their income and franchise taxes on remote businesses with no physical presence in the State. In this period where the rapid growth of e-commerce will shape the economy of the entire country in the 21st century, these efforts by States to expand their taxing jurisdiction to cover activities conducted in other jurisdictions will constitute an even greater burden on the business community's ability to carry on business. Left unchecked, this expansion of a State's powers to impose business activity taxes will have a chilling effect on the entire economy as tax burdens, compliance costs, litigation and uncertainty escalate. The provisions of H.R. 4267, as well as a bill pending in the Senate, seek to accomplish this goal.
These provisions, and if augmented by some additional items set forth in my written submission, will establish a clear, understandable, and administrable demarcation between taxability and nontaxability. This demarcation is much less restrictive than the Federal Government puts on its own self in the international sphere with the permanent establishment concept. We believe that these business activity tax provisions, those that are contained in 4267 and certain additional ones, warrant your support for several reasons.
When a company's presence in a State is minimal, it is not deriving any material or meaningful protections or benefits from that State. The fact that a business may have customers in a State, or itself is a customer in a State, is a benefit to instate persons who are already subject to tax. To assert, as some tax officials have in this forum, that sellers reap an economic benefit from where their customers are located, and therefore should pay taxes to those jurisdictions, because a State is maintaining a marketplace for those out-of-State sellers flies in the face of an extremely elementary economic principle.
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That principle recognizes that when a buyer in any market situation buys something, he or she is getting something more than he or she has currently. For instance, if people buy an item worth $3, they, in their mind, think that their $3 they have is worth less than the item they are buying and the seller believes the $3 in cash is worth more than what he is giving up. This sounds a bit academic and theoretical, but it is what we all do every day when we buy or sell something. Consequently, the seller is no more taking advantage of the buyer or the buyer's jurisdiction than the buyer is taking advantage of the seller or the production State. So if a remote seller should pay income taxes to where the customer is located, the customer should have to pay taxes to where the production takes place.
This business activity tax proposal contained in one of the bills before this subcommittee would have a de minimis fiscal impact on the States. This is because the State and local governments that are trying to do this throughout the country now are being met with litigation. Company after company is fighting cases in courts throughout the country trying to stop States from exceeding their authority when States try to impose income taxes.
The second major policy issue concerns the kick-in mechanism, in other words, when there is simplification of sales and use tax, what should Congress have to do to make sure it is simple enough. My written submission goes into detail on that. I offer some thoughts in that area. The written submission also contains several technical concerns that I think the drafters should look at.
In closing, I would offer Members of Congress or their staffs to ask me any questions, even the questions they have asked the other panelists if you would like objective and correct answers. I will be at your disposal.
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Mr. GEKAS. We thank the gentleman.
[The prepared statement of Mr. Rosen follows:]
PREPARED STATEMENT OF ARTHUR ROSEN, ESQ., MCDERMOTT, WILL & EMERY
Mr. Chairman and members of the Subcommittee, I thank you for this opportunity to address the critical issues raised by the three bills that are the subject of this hearing. I am Arthur Rosen and am a member of the international law firm of McDermott, Will & Emery. Many of my partners and I have been deeply involved in many of the issues of the subject bills, having successfully represented the taxpayer in such landmark Supreme Court cases as Quill, ASARCO, and Woolworth. I am here today to offer my personal thoughts, which have been formed as a result of my 26 years of full-time practice focusing solely on state and local tax matters. I do note, however, that we represent several clients with significant interests in these matters.
What I would like to cover today are three areas: (1) the Constitutional framework within which these bills should be considered; (2) policy concerns addressed or not addressed by the three bills; and (3) technical concerns with these bills.
CONSTITUTIONAL FRAMEWORK
My understanding—and it is merely an understanding, because I was not around in 1789—is that the principal motivation for our adoption of the Constitution to replace the Articles of Confederation was a desire to establish and ensure the maintenance of a single, integrated, robust American economy. This is reflected in the Commerce Clause, which, as you know, provides Congress with the authority—and the responsibility—to safeguard this principle. Perhaps the hallmark of American federalism is this assignment to the federal government (along with responsibility for foreign affairs and the national monetary/fiscal system). Accordingly, legislation regarding imposing, regulating, or removing tax burdens placed on transactions in interstate commerce is not only within Congress' realm of authority, it is also—I would humbly suggest—Congress' responsibility. Thus, there is absolutely no validity to the argument raised by some state and local tax officials to the effect that Congress should abdicate its responsibility and leave these issues to the states. Those who claim that Congressional activity in this area violates the principles of federalism are simply wrong.
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As a second point in the context of the fundamental principles to be considered, it is important to remember that while Congress has Constitutional authority and responsibility under the Commerce Clause, it may need to consider acting within the confines of the Fourteenth Amendment's Due Process Clause. While it is far from clear, most commentators believe that Congress cannot permit states to violate the protections afforded by that clause. In the context of state taxation, the Supreme Court has determined that ''the simple but controlling question is whether the state has given anything for which it can ask return.'' Wisconsin v. J.C. Penney Co., 311 U.S. 435 (1940).
POLICY CONCERNS
Turning to the overarching, fundamental, crucial policy issues, there are two that I believe warrant substantial, focused Congressional consideration.
The first of these policy issues relates to business activity taxes. There has been a great amount of discussion and publicity regarding sales and use tax nexus issues. These, however, are merely ''the tip of the iceberg.'' While collecting tax from customers and remitting it to governmental units pursuant to numerous inconsistent laws is quite a burden, it pales in comparison to the immense burden that is faced by a remote seller that must compute and pay income, franchise and license taxes to every jurisdiction where it has a customer. Such a situation not only causes huge administrative burdens as with the sales tax, but also imposes true, substantial economic hardship for interstate businesses.
As background, it should be noted that states, like governments worldwide, have traditionally imposed their corporate income and/or franchise taxes (''business activity taxes'') only upon businesses that receive governmental benefits and protections afforded by the jurisdiction. This has meant that businesses maintaining offices, inventory, employees or agents in a state would be subject to business activity taxes in return for the benefits and protections afforded by the taxing state to the businesses' people and their property. Corporations could develop and carry on interstate business knowing that only their activities and presence in a state would incur a business activity tax liability, fostering a business environment without artificial market barriers that would retard economic growth.
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Recently, however, a large number of states have been alarmingly aggressive and ''creative'' in attempting to expand the reach of their business activity taxes to burden those businesses that are not provided with any measurable governmental protections or benefits by the taxing state. These states are seeking to tax the income of out-of-state corporations carrying on virtually no income-producing activity in those jurisdictions.
For example, these efforts have resulted in the imposition of business activity taxes by South Carolina on an out-of-state corporation that merely licensed trademarks to another corporation for use in South Carolina, but itself carried on no activity and had no tangible property or personnel in South Carolina. Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E. 2d 13 (S.C. 1993), cert. denied, 510 U.S. 992 (1993). In Tennessee, the state attempted to impose business activity taxes on an out-of-state bank issuing credit cards to residents based largely upon the possession of the plastic credit cards by residents of Tennessee. J.C. Penney National Bank v. Johnson, No. M1998–00497–COA–R3–CV (Tenn. Ct. App. Dec. 17, 1999), cert. denied, No. XXX (Tenn. Sup. Ct. May 8, 2000). In Texas, the Comptroller of Public Accounts attempted to impose the Texas franchise tax upon a company whose only contact with the state was its possession of a certificate of authority to do business within the state. Rylander v. Bandag Licensing Corp., No. 03–99–00427–CV (Tex. Ct. App. May 11, 2000). In other instances, states have attempted to impose business activity taxes when corporations merely have held passive investments in operating businesses, owned accounts receivable payable by residents, and performed services for residents even though the services were performed in another jurisdiction.
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In this period where the rapid growth of e-commerce will shape the economy of the 21st century, these efforts by states to expand their taxing jurisdiction to cover activities conducted in other jurisdictions will constitute an even greater burden on the business community's ability to carry on business. Left unchecked, this expansion of the states' power to impose business activity taxes will have a chilling effect on the entire economy as tax burdens, compliance costs, litigation, and uncertainty escalate.
Consequently, a large portion of the business community is asking Congress to consider when state and local governments should be prohibited from requiring out-of-state businesses to pay income and/or franchise tax (''business activity taxes''). It appears eminently fair and reasonable for Congress to provide relief from unfair and unreasonable imposition of income and franchise taxes on out-of-state businesses that have little or no physical connection with the state or locality.
The provisions of H.R. 4267 (as well as those in a pending bill in the Senate) seek to accomplish this goal. These provisions, if augmented by certain additional items that are set forth below, would establish a clear, understandable, administerable demarcation of taxation that is extremely less restrictive on the governments than the ''permanent establishment'' rule that the United States and most other countries have imposed on themselves in the context of international tax treaties.
I suggest that Congress consider adding provisions that would permit states and localities to impose tax only on companies that have either or both of the following types of presence in the taxing jurisdiction during the taxable year:
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Leasing or owing substantial property in the jurisdiction for more than 30 days.
For purposes of this 30-day property rule, property in the taxing jurisdiction for purposes of being assembled, manufactured, processed, or tested by in-jurisdiction persons for the benefit of the owner or lessee, or used to furnish a service by in-jurisdiction persons to the owner or lessee, would be disregarded.
Any number of employees or actual agents in the taxing jurisdiction for more than 30 days.
For purposes of this 30-day employee rule, presence of employees for purposes of purchasing goods or services, gathering news and covering events, meeting with government officials, attending conferences, seminars and similar functions, and participating in charitable activities would be disregarded.
It would appear that these business activity tax provisions—those that are currently in H.R. 4267 and the additional ones I have suggested—warrant your support because:
States have, in recent years, sought to expand their imposition of business activity taxes in an apparent challenge to generally understood Constitutional principles. Permitting such expansion would dampen business innovation and expansion, thus bringing harm to the American economy. The imposition of new, expanded tax liabilities on the business community would seriously undermine the ability of the U.S. economy to remain robust. Removing this contentious thorn from the American business community can only be beneficial to the economy.
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When a company's presence in a state is minimal, it is not deriving material or meaningful protections or benefits from that state. The fact that a business may have customers in a state, or is itself a customer in a state, is a benefit to in-state persons who are already subject to tax. To assert, as some state officials have, that sellers reap an economic benefit from market states and thus should pay taxes there, flies in the face of an extremely elementary economic principle. That principle recognizes that a buyer in any market situation is, in his or her or its value system, obtaining more than is being given. Someone buys an item for $3.00 because the item is worth more than retaining the $3.00; the seller believes that the $3.00 is more valuable than the item. While this may sound somewhat academic and theoretical, it is how we all actually operate. Consequently, the seller is no more ''taking advantage of'' the buyer and the market state than the buyer is ''taking advantage of'' the seller and the production state.
This proposal would have a de minimis fiscal effect. This is because state and local governments are currently collecting very little through their relatively new, but aggressive, attempts at expanding their tax jurisdiction over business activity taxes. All major attempts by states at doing so are currently the subject of intensive litigation.
The second policy issue concerns what I call the ''kick-in mechanism,'' which focuses on what, if anything, should be after states adopt a simplified, uniform sales and use tax law before they are permitted to require out-of-state sellers to remit the state's use tax when the seller lacks a physical presence within the state. There are several possibilities, some of which have been raised by the bills under consideration today. The most prevalent of these possibilities are: (1) automatic kick-in of the ''Quill override'' unless Congress votes otherwise; (2) kick-in of the Quill override only if affirmatively approved by Congress; and (3) kick-in of the Quill override if an independent body (such as a panel comprised of three federal judges) finds that the uniform bill meets the criteria set forth by Congress. In considering these alternatives, I urge you to keep in mind the following points: It will likely be impossible for Congress to pre-set the simplification and uniformity criteria with enough specificity so that we can all be comfortable that what is ultimately developed meets the intended goal. State governments have, for decades, declared their desire for uniformity, but have never achieved it; in other words, we have heard this promise may times before, but it has never been fulfilled. Second, political reality is—I am told by experts in this area—that it is much easier for legislation not to be enacted, than enacted. Consequently, I would be very concerned with any proposal that provides for an automatic kick-in of a Quill override based on necessarily vague criteria, without any affirmative review by Congress to ensure that the sanctity of the principle of protecting interstate commerce, and thus the interests of all Americans, is fully protected.
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TECHNICAL CONCERNS
Turning to technical concerns that are raised by these three bills, I have the following comments based on an initial relatively cursory review. With respect to H.R. 4460, Section 1101(a)(1) [page 2, line 6] refers to ''Taxes on Internet access.'' This, without further refinement, will surely continue to generate problems in its interpretation and application because of the growing trend of service providers offering ''bundled prices'' for Internet access and other services. Clarification regarding how the Internet access charge is to be computed when it is included with charges for other services would be extremely helpful. Two possibilities are providing for apportionment of a bundled price based on the relative costs or on the relative fair market values. Section 1104(2) [page 3, lines 11 through 14 et seq.] calls for ''uniformity.'' To resolve the immense problems inherent in the current morass, perfect, exact uniformity is required, because any state-specific variation would destroy the uniformity objective. This should be made clear in the bill. Section 1104(2)(D) refers to exempt entities and a removal of the ''good faith'' requirement. This seems to assume that all exemptions relate to the identity of the purchaser and it fails to address exempt uses (such as purchases for manufacturing). Some type of ''good faith'' immunity is required for such situations. Section 1105(c) [page 5, lines 8 and 9] would require the Secretary of the Treasury to certify as to the simplification achieved. The bill does not, however, clearly explain the ramifications of a lack of such certification.
In connection with H.R. 4267, I have the following comments. Section 1104(a) [page 3, lines 19 and 20] refers to ''payable to such State by a purchaser.'' Inasmuch as some states impose certain taxes directly on the vendor, research and analysis should be conducted to ensure that those states are covered. Section 1104(a)(6) [page 4, line 8] refers to nexus through affiliation. The concept of affiliation should be further refined. I suggest consideration be given to allow nexus attribution only when the in-state party is acting as the actual agent of the remote seller in the performance of market enhancement activities within the state (irrespective of whether the parties are affiliated by ownership). Section 1104(b) [page 5, lines 3 and 4] relates to ''business activity and income tax[es].'' The term ''business activity tax'' needs to be defined to ensure that all income, franchise, business & occupation, single business, and business profits taxes, and similar impositions, are covered. Section 1105's [pages 5 and 6] reference to uniformity raises the same issue as that noted above in the context of H.R. 4460. Section 1105(3)(H)'s [page 6, lines 22 and 23] reference to exempt status raises the issue noted above with respect to H.R. 4460. Section 1105(3)(J)'s [page 7, lines 6 and 7] requirement of revenue neutrality, to the extent it mandates a specific state tax treatment of intrastate commerce, may be beyond Congress' Commerce Clause powers. Section 1101(a)(1) [page 2, line 13] refers to taxes on access charges and raises the same ''bundling'' issue raised above in connection with H.R. 4460.
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In connection with H.R. 4462, I have the following comments. Section 2(5) [page 2, lines 23 and 24] implies that the current inequities always favor remote sellers. This is not accurate. A local store ''selling over the counter'' must contend with a single rate and base for all of its sales. A remote seller that also has a single store in a state must often contend with varying local tax rates and bases throughout the state. Section 2(6) [page 3, lines 3 through 5] fails to recognize that states have no experience dealing with the myriad of inconsistent, often-conflicting laws and administrative requirements. In contrast, the business community has an enormous wealth of experience in this area, being confronted with the attendant problems on a daily basis. Perhaps, therefore, business should take the lead. Section 4(a)(2) [page 4, line 14, et seq.] calls for uniformity and this raises the same issue discussed above in relation to H.R. 4460. Section 4(a)(4) [page 4, lines 17 through 22] raises the same concerns regarding exemptions as discussed above in connection with H.R. 4460. Section 4(3) [page 4, lines 16 and 17] appears to be a substantive tax provision and may be delegating too much authority to those outside the legislative branch of government. In Section 6 [page 6, line 11 et seq.], there appears to be no explicit requirement for a single, statewide rate; thee would merely be authority to administer such a rate.
Thank you for this opportunity. I look forward to answering any questions you may have today or any time hereafter.
Mr. GEKAS. We turn to Mr. Nebergall.
STATEMENT OF MARK NEBERGALL, PRESIDENT, SOFTWARE FINANCE AND TAX EXECUTIVES COUNCIL
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Mr. NEBERGALL. Good afternoon, Mr. Chairman. My name is Mark Nebergall. I am president of the software finance and tax executives council, or SoFTEC. On behalf of my members, I thank you for the opportunity to testify on the various bills relating to State taxation of electronic commerce that are pending before your subcommittee. SoFTEC is a new organization formed to address public policy issues for the software industry in the areas of tax, finance and accounting. SoFTEC's members have long been interested in the issue of taxation of electronic commerce. SoFTEC commends the subcommittee for having three bills, H.R. 4267, H.R. 4460 and H.R. 4462, all focused on the problems of remote commerce in general and specifically electronic commerce taxation.
In reviewing these bills, SoFTEC applied three criteria in determining whether they adequately address the problems associated with electronic commerce taxation. First, we look at the bills to see if they describe an adequate process for crafting a simplified and uniform sales and use tax system that States can use in overhauling their sales and use tax laws. In this regard we look to see whether the bills provide an adequate voice to business and government in the drafting process, and we look to see whether the bills sufficiently identify the issues on which simplification is needed. All three of the bills contain provisions that identify a host of issues which should be included in any simplified sales tax system. This is good, although some fine, tuning of the particular provisions of some of the bills might be in order.
However, we are concerned that none of the bills under consideration provide for equal input by business and government in the drafting process. In fact, some of the bills seem to contemplate that the process will be driven exclusively by the governments. We believe that the perspectives of both business and government, while different, are essential to the drafting of a system that both sides can support.
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Mr. Chairman, the business community has experience participating in projects in this area with government where both sides have an equal role. Unfortunately, our experience is that in such an environment, agreement is reached on very few issues. We believe that the National Conference of Commissioners on Uniform State laws, or NCCUSL, would be an appropriate body to appoint as a leader in the drafting process. NCCUSL is a body that has been in existence for more than 100 years and has given us such innovations as the uniform commercial code. The business community is comfortable that NCCUSL's process will provide equal opportunity for input by all interested parties.
While two of the bills before you mention NCCUSL's participation in the process of drafting a simplified sales tax system, they relegate NCCUSL to a secondary role. We believe that any legislation would have to elevate NCCUSL to a leadership role to eliminate any concern that the process was dominated by one interested party or another.
The second criterion SoFTEC used to judge the three bills is whether each contains an appropriate mechanism for Congress to consider exercising its power under the commerce clause, to permit States to require that remote vendors collect and remit sales and use taxes. SoFTEC firmly believes that Congress should not consider exercising such constitutional power unless it has before it clear and convincing evidence that the States have in place a system that eliminates, or drastically reduces the burdens on interstate commerce.
We believe that Congress can only assess whether it would be appropriate to exercise that power after a putative, simplified system has been in place for a sufficient period of time and multi-State taxpayers have had an opportunity to gain some experience working with it.
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Mr. Chairman, some of the proposals contained in the bills before the subcommittee amount to a complete abdication of Congress's authority to regulate commerce between the States. We believe the wiser course is to demand from the States hard proof that they have, in fact, made their systems both simple and uniform before considering whether to grant them the authority they want under the commerce clause.
Mr. Chairman, the third criterion SoFTEC used in reviewing the three bills was to see if they included any provisions establishing bright lines for business activity for tax nexus purposes. Only one of the bills, H.R. 4267, suggests an approach in this area that would be appropriate. I could go on about the business activity tax nexus issues, but I believe Mr. Rosen and Ms. Doerfler from the prior panel addressed those issues in further detail. Suffice it to say that we consider it essential to the complete resolution of the issues in this area.
In conclusion, Mr. Chairman, we believe that the subcommittee, as it moves toward a markup of legislation in this area should keep in mind the three simple criteria I have described this morning, number one, an equal voice for both business and government in a process led by NCCUSL; number two, preservation of Congress's authority under the commerce clause; and, three, business activity tax nexus bright lines.
Mr. Chairman, this concludes my testimony. Again, I thank the subcommittee for inviting me to testify this afternoon. I welcome any questions you or the other members of the subcommittee might have. Thank you.
Mr. GEKAS. I thank the gentleman.
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[The prepared statement of Mr. Nebergall follows:]
PREPARED STATEMENT OF MARK NEBERGALL, PRESIDENT, SOFTWARE FINANCE AND TAX EXECUTIVES COUNCIL
SUMMARY
Mark Nebergall is president of the Software Finance and Tax Executives Council (SoFTEC), the voice of the US software industry on finance and tax policy issues. SoFTEC's members are vitally interested in the area of taxation of Internet transactions because they make the software that enables the Internet to operate and they use the Internet and an efficient and cost effective channel for distribution of their products.
SoFTEC believes that Congress, in considering legislation dealing with state taxation of electronic and other forms of remote commerce, should be guided by three principles: such legislation should (1) encourage a process for developing a simplified and uniform state sales and use tax system which process gives equal voice to both business and government, and asks that the National Conference of Commissioners on Uniform State Laws (NCCUSL) lead the drafting process; (2) preserve Congressional authority under the Commerce Clause to regulate interstate commerce and not confer upon the states any additional authority to enforce sales and used tax collection obligations against remote vendors unless and until it is certain that the states in fact have made their tax systems simple and uniform; and (3) establishes bright lines that appropriately limit taxable presence for business activity tax purposes.
The three bills before the Subcommittee, HR 4267, HR 4460 and HR 4462, all contemplate a process for developing a simplified and uniform state sales and use tax system. However, none of those bills provides a mechanism for drafting a system that gives equal voice to both business and government. In addition, while HR 4267 and HR 4460 mention the involvement of NCCUSL, they relegate it to a secondary role with governments leading the process. To be effective, legislation in this area should have NCCUSL lead the effort with business and government having equal roles as advisors.
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The three bill also do not provide appropriate mechanisms for Congress to evaluate whether the states have effectively enacted simplified and uniform sales and use tax systems and whether it would be proper for Congress to exercise its power under the Commerce Clause giving the states additional authority to expand sales and use tax collection and remittance obligations against remote vendors. To be effective, any legislation in this area should provide for close congressional scrutiny of any simplified, uniform sales and use tax system, and any affirmative exercise of its power under the Commerce Clause should come only after Congress is certain that the system in place no longer imposes undue burdens on interstate commerce.
All three bills address the issue of taxable presence for business activity tax purposes. However, HR 4460 and 4462 contemplate retaining the current standards while lowering the standards sales and use tax collection and remittance. Only HR 4267 adopts and approach that would achieves a proper balance between the taxable presence standards for sales and use tax collection and the standards for business activity taxes.
STATEMENT
Good morning Mr. Chairman and members of the Subcommittee. My name is Mark Nebergall. I am the President of the Software Finance and Tax Executives Council. My members and I thank you for the opportunity to present our views on the various Internet tax bill currently pending before your subcommittee.
SoFTEC is an organization comprised of the major software companies of the United States and its mission is to provide software industry focused public policy advocacy on tax and finance issues. Taxation of electronic commerce is an issue in which software companies have long held a keen interest. We make the software that enables the Internet to operate efficiently and also use it as a low-cost mechanism to distribute software to customers worldwide.
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SoFTEC advocates policies that promote fair and efficient interstate and international taxation of goods and services contracted for and delivered using the Internet. We believe hat the cornerstone of these policies must be neutrality of tax treatment. Because the three bills that are the subject of this hearing go to the heart of these policies, SoFTEC has been following them very closely.
Before discussing the pending legislation, I would like to explain the criteria that SoFTEC uses to evaluate each of the bills.
A. Criteria Used to Evaluate Internet Tax Legislation
The first criterion is: does the legislation create a suitable environment in which simplification and unification of state sales and use tax systems can occur. This criterion has two components: (1) whether the legislation suggests a process by which a simplified system is developed that facilitates equal input by both business and governments, and (2) whether the legislation sufficiently identifies the issues that must be addressed in order to achieve meaningful simplification and unification at the state level.
SoFTEC firmly believes that any process for developing a simplified and unified sales and use tax system must involve both the tax administrators and the businesses that will be asked to comply with such a system. We reject any notion that the states are somehow in a better position to know which measures will lead to simplification and which will not. There are many businesses today that have a physical presence in several states and are already burdened by a plethora of multistate sales and use tax collection obligations. SoFTEC will not support any legislation that does not afford business an equal voice with state governments in the development of a simplified and unified sales and use tax system.
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The business community has had much experience in dealing with state and local government in efforts to devise simpler sales and use tax system. We know full well that whenever such discussions take place in an environment that gives neither side control of the process that consensus is difficult to achieve. To increase the probability of consensus, SoFTEC believes that any process that gives business and government equal voice in the development of a simplified sales and use tax system requires the appointment of some neutral third-party decision maker. We believe that the National Conference of Commissioners On Uniform State Laws (NCCUSL) is the body best suited to perform the functions of neutral third-party in such a process. NCCUSL is a body that is over 100-years old and has given us uniform state laws such as the Uniform Commercial Code and the Uniform Trade Secrets Act. NCCUSL's forte is the development and enactment of uniform laws at the state level. SoFTEC is comfortable that NCCUSL's procedures ensure equality of voice between business and government. In addition, NCCUSL's expertise in drafting and enacting uniform state laws could prove useful in the effort to draft a simplified and uniform state sales and use tax system.
On the issue of substance, SoFTEC believes that any federal legislation aimed at reducing the current burdens on interstate commerce imposed by the differing state sales and use tax systems should address the issues for which simplification is needed. Simplification issues include first and foremost a reduction in the number of different tax rates and uniform definitions of items that a state might include in its tax base. While some attempt to catalog the issues for which simplification is desirable, care must be taken to ensure that those charged with the task of developing a simplified and unified system have flexibility in addressing other issues that might come to light during the process. In other words, the drafting process must not be hamstrung with a rigid list of issues that at first appears complete but later is found lacking.
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The second criterion that SoFTEC uses in evaluating Internet tax legislation is: does the legislation set forth an appropriate process for Congressional consideration of whether a sufficient number of states have simplified and unified their tax systems to the extent that the undue burden on interstate commerce is relieved and an expansion of the duty to collect and remit taxes is justified? As you know the Supreme Court repeatedly has ruled that the current system could entangle interstate business in a virtual welter of complicated and burdensome interstate obligations to state and local jurisdictions and that this is a domain where Congress alone has the power of regulation and control.
SoFTEC firmly believes that if Congress is to give consideration to expanding the states' authority to impose a tax collection and remittance obligation on out-of-state vendors, it should first require the states to develop and implement a simplified and uniform system and then study the experience of multistate taxpayers operating under it. Only then will Congress have available to it evidence against which to judge whether the burdens on interstate commerce found by the Supreme Court have been relieved to the degree that an expansion of the duty to collect and remit sales taxes is warranted.
The third criterion used by SoFTEC in evaluating Internet tax legislation is: does the legislation include protections against aggressive business activity tax claims by state governments. Many states impose an income tax or other business activity tax such as a franchise tax or business license tax on firms that do business in their state. Businesses with a taxable presence in more than one state are required to apportion their income among those states and pay a business activity tax on the income apportioned to each state.
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In this regard, it is important to keep in mind the distinctions between the sales and use tax and the business activity tax. In the sales and use tax context, the taxpayer is the customer of the vendor and the vendor merely collects that tax from the customer and remits to the state. The business activity tax is levied directly against the business that earned the income. Many businesses that operate from a single physical location nevertheless find themselves subjected to claims by other states for business activity taxes. These claims often result in costly and time-consuming litigation. Many times, state revenue departments visit novel taxable presence claims against small business that lack the resources necessary to finance expensive tax litigation, forcing these businesses to pay a questionable tax liability.
A few examples of the novelty of the claims state revenue departments make to support their contention that an out of state business has a taxable presence in their state reveal the lengths to which the states will go to assert taxing jurisdiction against an out of state company. New Jersey has asserted that because an out-of-state software company licensed its products to New Jersey customers instead of selling its products, the software company was obligated to file a New Jersey income tax return and to pay an income tax. New Jersey also asserted against the same company that taxable presence was triggered because New Jersey customers could receive technical support by telephone from the out-of-state software company. In another case, Tennessee asserted that an out-of-state credit card issuer had a taxable presence because it retained legal ownership of the credit cards used by its customers in Tennessee. Because the New Jersey case was against a small company, the case was never litigated. The Tennessee Supreme Court ruled against the state tax authorities in the credit card case.
If Congress were to exercise its power under the Commerce Clause and grant states expanded power to require out of state vendors to collect and remit sales or use taxes, then those states will come into possession of accurate information regarding the volume of sales the out of state vendor is making into a state. The states make no apologies that they will use this information in order to assert business activity tax claims against out of state businesses. The states will have greater incentive to make these kinds of claims, which we consider questionable, described above in the New Jersey and Tennessee cases. Unless Congress enacts some bright line tests regarding taxable presence for business activity tax purposes, businesses will be subjected to the same sort of undue burden that motivated the Supreme Court to limit states authority in the sales tax cases.
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The states vigorously oppose any clarification of the standards for determining when a business has a taxable presence. They claim improper infringement of states rights. However, the Constitution gives the Congress plenary power in this area. Indeed, Congress exercised that power in the area of income taxation of multistate business when it enacted P.L. 86–272 in 1959 (15 U.S.C. Sec. 381). This statute prohibits states from imposing an income tax obligation against an out of state vendors whose only contacts within a state amount to the solicitation of orders for sales of tangible personal property where the order are sent outside the state for approval and if accepted, the goods are shipped into the state by common carrier. Given the states' continued abuse of their taxing power by making questionable claims against nonresident taxpayers, we believe it appropriate for the Congress to intervene and set bright line standards. Thus, we believe that any federal legislation in this area should include provisions that establish bright lines for purposes of business activity taxable presence.
That concludes the discussion of the criteria SoFTEC uses to evaluate Internet legislation. I now will turn to an examination of the three bills in light of those criteria.
B. Application of Criteria to Internet Tax Legislation
Currently pending in the House of Representatives are three separate Internet tax bills: H.R. 4267, the ''Internet Tax Reform and Reduction Act of 2000,'' H.R. 4460, the ''Internet Tax Simplification Act of 2000'' and H.R. 4462, the ''Fair and Equitable Interstate Tax Compact Simplification Act of 2000.'' Application of the criteria to each of these bills reveals that none of them meets all of the criteria. Some of the bills meet some of the criteria to differing degrees.
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1. Simplification Process:
The first criterion to be addressed is whether the legislation suggests an adequate process for achieving a simplified and unified sales and use tax system. In order for the particular legislation to satisfy this criterion, it must give equal voice to both business and government and it must contain an adequate specification of the issues on which simplification would be desirable. SoFTEC also recommends that the legislation appoint NCCUSL as a neutral third-party for drafting the proposed system.
All three bills propose a process for developing a simplified and uniform sales and use tax system. HR 4462 cedes to state and local governments the task of drafting the system. HR 4462 seems to suggest that business should have no voice in this process. In fact, after specifying a number of simplification issues that the system should address, it goes so far as to provide that the system should include only those other provisions that states deem warranted. In addition, the findings section of HR 4462 contains provisions that plainly provide that the states should take the lead in this area.
HR 4267 and 4460 are somewhat better than HR 4462 in that they both provide for NCCUSL participation in the drafting process and neither contain findings suggesting that the states are somehow in a better position to craft the system than the business community. Nevertheless, neither HR 4262 nor 4460 make any express provision for business participation in the drafting process. Also, neither bill places NCCUSL in charge of a process that employs its usual procedures for drafting and enacting uniform state legislation. SoFTEC believes that the usual NCCUSL procedure will give equal voice to both business and government and will not give undue weight to the desires of either.
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We would suggest language along the lines of:
It is the sense of Congress that the National Conference of Commissioners on Uniform States Laws, with the advice of and in consultation with representatives of State and local governments, business, and taxpayers, should develop a simplified and uniform sales and use tax system that would be adopted by the States and that contains the following:
All three bills contain provisions that detail the issues on which simplification is desirable. Generally, while some fine tuning of some of the specific provisions might be in order, the list of simplification criteria in each bill should lead to the development of a simplified and uniform sales and use tax system that should go a long way to relieving the undue burdens on interstate commerce that currently exist.
2. Process for Congressional Consideration of Expanding the Duty to Collect and Remit Sales Taxes
SoFTEC fully understands that state and local governments want Congress to use its power under the Commerce Clause to expand the states' power to require out of state vendors to collect and remit sales and use taxes. SoFTEC does not oppose Congressional consideration of this issue. However, SoFTEC believes that Congress should not consider exercising its constitutional power in this area unless and until it is satisfied that the burden imposed on interstate commerce is drastically reduced.
HR 4267 would replicate the Advisory Commission on Electronic Commerce established by the Internet Tax Freedom Act for the purpose of reviewing the ''Uniform Sales and Use Tax Act'' which is this bill's version of a simplified and uniform sales and use tax system. This second commission would make a recommendation to Congress as to whether any state should be permitted to expand out of state vendors' obligation to collect and remit sales and use taxes. This recommendation is due 180 days after NCCUSL finishes drafting the proposed Uniform Sales and Use Tax Act.
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First, SoFTEC does not support the creation of a second commission to study the issues and provide a recommendation to Congress. SoFTEC believes that the usual committee referral and hearing process should accompany any Congressional consideration of these issues. Enactment of a federal law that permits states to conscript out-of-state vendors as tax collectors is significant legislation. Congress should hear the evidence first hand rather than delegate the fact-finding process to a commission.
Also, SoFTEC believes it appropriate to allow for a test period whereby the putative simplified and uniform system is used by taxpayers that currently have multistate sales and use tax compliance obligations. Only after it is clear that the simplified and uniform system drastically reduces the compliance burdens of multistate business should there be any consideration to expanding it to all other business. The 180-day period specified in HR 4267 is insufficient. SoFTEC respectfully suggests that a test period on the order of 2-years would be appropriate.
HR 4460 merely provides for a certification by the Secretary of the Treasury that a Streamlined Uniform Sales and Use Tax Act meets the simplification criteria specified in the bill. Once a state has adopted the ''streamlined'' system (apparently regardless of whether the Treasury Secretary has certified it) that state will automatically be authorized to compel out of state vendors to collect and remit transactions taxes. This, in our view, constitutes an inappropriate transfer of Congress' power under the Commerce Clause to the states. SoFTEC respectfully suggests that the Subcommittee request the views of the Attorney General on whether such a mechanism is constitutional before it considers approving such legislation.
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HR 4462 does contemplate some form of congressional consideration of the simplification measures taken by the states before states are authorized to enforce an expanded duty to collect and remit sales taxes. The schema contemplated by this bill would authorize the states to form an interstate compact for sales and use tax purposes. When 20 states have joined the compact, the President would be authorized to submit a report to Congress certifying that the terms of the compact conformed to the requisite simplification criteria. Then, using a fast-track procedure modeled on the 1974 Trade Act, Congress would be required to pass a resolution that disapproved of the President's finding. If Congress failed to pass a resolution disapproving of the President's finding, then the states that had joined the compact would automatically be granted authority to enforce sales and use tax collection obligations against remote vendors.
SoFTEC has several problems with the approach taken in HR 4462. First, we believe that there may be a constitutional problem with Congress delegating to the states the authority to draft an interstate compact. Our understanding is that whenever Congress approves an interstate compact, it approves the precise language. There may be an issue whether Congress has the authority to delegate its power in this area. This is another area where the opinion of the Attorney General might provide some guidance.
Also we find the ''disapproval resolution'' procedure dubious. We find astonishing a provision that abdicates completely Congress authority to regulate commerce between the various states by providing for automatic approval of expanding states' collection authority if Congress does not affirmatively deny their request. We firmly believe that the future cannot be predicted with the accuracy sufficient for Congress to say today that the simplification criteria set out in the bill are all that is needed to eliminate the current burdens on interstate commerce, or that the states will effectively implement a simplification program. Therefore, Congress must retain control of the debate and the authority in this area.
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In fact, if history can serve as a portal to the future, the states have been on notice for over 30-years that their tax systems are overly complex. In that time, instead of moving towards more simple systems, they have made their systems more complex. For example, we see states adopting sales tax holidays where certain consumer goods are sales tax free during certain times of the year. In those states, in addition to all of the other complexity, it matters what time of the year an item is purchased whether it is subject to the sales tax.
The ''disapproval resolution'' procedure of HR 4462 displays too much confidence in the states' ability to simplify their tax systems. SoFTEC believes that Congress should demand hard proof that a system is simple and uniform in practice before it even considers exercising its powers under the Commerce Clause in this area.
Congress should jealously guard its power under the Commerce Clause and should not transfer it to the states on their promise that they will simplify and unify their tax systems.
To summarize, none of the three bills under consideration provide a suitable mechanism for Congress to examine the effectiveness of the states' tax simplification efforts. While SoFTEC does not oppose congressional consideration of allowing the states authority to enforce interstate sales tax collection obligations, we feel strongly that it should do so only after a sufficient foundation has been established.
3. Taxable Presence for Business Activity Tax Purposes:
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The last criterion to be discussed is whether any of the legislative proposals seek to establish bright lines for taxable presence in the area of business activity taxation. There is a direct link between allowing states authority to require out of state vendors to collect and remit sales and use taxes and the current authority of the states to apply their income and other business activity taxes directly against that out of state vendor. As noted above, the former arms the state revenue departments with an arsenal of information that could be used to assert direct tax claims against out of state business with no connection to the state other than the existence of in-state customers.
All three bills contain language that could be construed as impacting taxable presence for business activity tax purposes. Both HR 4460 and HR 4462 contain language that makes clear that the authority granted in the sales and use tax area has no impact on the taxable presence rules for any other tax purpose. These two bills would merely preserve the current taxable presence rules for business activity tax purposes and fail to recognize the definite link between the sales and use tax rules and the business activity tax rules. When the bar for sales and use taxes is lowered, it is necessary to raise the bar for business activity tax purposes. These two bills would leave the bar unchanged.
HR 4267 contains provisions that effectively raise the taxable presence bar for business activity tax purposes. Many of the provisions contained in HR 4267 either are current law or draw lines that otherwise are appropriate. While one may be able to argue about the details of the bright lines contemplated by HR 4267, we believe it charts the right course in reigning in overly aggressive state revenue departments in an environment where the sales tax collection thresholds have been lowered. SoFTEC supports the approach taken by HR 4267 in this area.
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C. Conclusion
SoFTEC believes that each of the three bills before this have provisions promote simplification of state sales and use tax systems. However, each also has provisions that either are inappropriate or deficient. We hope that when the Subcommittee moves towards a mark-up of Internet tax legislation it makes use of the criteria we have set out in our testimony.
On behalf of SoFTEC's members, I thank the Subcommittee for the opportunity to present this testimony.
Mr. GEKAS. Now we turn to the team of Good and Walters. What I will do as the Chair is to allot 10 minutes to the joint enterprise, and you can begin with Mr. Good and end wherever you want. And Mr. Walters will have the balance of the time.
STATEMENT OF LARRY GOOD, SENIOR VICE PRESIDENT, ELECTRONIC COMMERCE ASSOCIATION
Mr. GOOD. I appreciate that. Thank you, Mr. Chairman. I am Larry Good, and I am appearing on behalf of the Electronic Commerce Association. The ECA has a task force composed of payment processing companies and other companies providing services to online merchants. The task force provides information to State groups about potential problems they need to address in reforming their sales tax systems.
It is important to recognize what technology can do and what the States can do to simplify sales tax administration. For instance, it is tempting to define simplification in terms of the standard of one tax rate per State and to compel States to meet that standard. Yet overcoming the political hurdles of achieving one rate per State would be extremely difficult because of existing local laws. It would be easier to overcome the technological hurdles of calculating varying tax rates in a simple and cost effective manner. That, however, does not mean that State governments can or should let technology do all the work. Technological solutions cannot replace common sense simplifications the States should enact. States should simplify and standardize their product definitions, exemptions, filing requirements, remittances and audits. Also, they must make consumer privacy protection a top priority of the tax collection system design. My written testimony contains other suggestions for simplification of those State sales tax systems.
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I am here today with one of ECA's members, TAXWARE, International, that has developed technology that will help reduce the burden of calculating State sales taxes. I want to allow TAXWARE ample time to demonstrate its approach. I appreciate the opportunity to appear before you today.
[The prepared statement of Mr. Good follows:]
PREPARED STATEMENT OF LARRY GOOD, SENIOR VICE PRESIDENT, ELECTRONIC COMMERCE ASSOCIATION
The Electronic Commerce Association is a Washington, D.C.-based association representing online merchants and their service providers. ECA applauds the effort of various states to simplify state sales taxes, especially the plan's goal to eliminate collection burdens on merchants. The ECA has a task force composed of payment processing companies and other companies providing services to online merchants, to provide information to state groups about potential problems they need to address.
BACKGROUND
For the past 20 years, state governments have searched for ways to collect sales taxes due on purchases by their residents from out-of-state catalog companies. The mail order companies argue that collecting sales taxes on behalf of consumers in the 46 states that charge sales taxes is overly burdensome. Tax rates, exemptions, and items subject to the sales taxes differ among the states. In many states, local governments add their own varying rates of tax to an array of products. A total of 7,000 taxing jurisdictions can lay claim to sales taxes.
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The Supreme Court in 1992 agreed with the mail order companies that the collection of the sales taxes is an undue burden if the companies have no nexus, or direct investment, in the state. In Quill Corp. v. North Dakota, the Supreme Court cited constitutional grounds in deciding states may not force out-of-state merchants to collect sales taxes. But the court invited Congress to consider legislation that would establish the states' rights to collect sales taxes on interstate commerce even if the merchant has no nexus in the taxing state.
In 1998, Congress passed legislation imposing a three-year moratorium on (1) new state taxes on Internet access, and (2) multiple or discriminatory taxes on electronic commerce. Contrary to widespread belief, the current moratorium in the Internet Tax Freedom Act does not apply to the application of existing sales and use taxes to purchases on the Internet. Those purchases are subject to the same rules as out-of-state phone and mail orders. States cannot obligate retailers to collect sales taxes in jurisdictions where they have no stores or other nexus. Consumers technically owe use taxes on purchases when the retailer does not collect the sales tax, but that rule is unenforceable
The following factors will drive the issue of applying state sales and use taxes to Internet purchases:
Some states depend on sales taxes for over 40% of their revenues. State and local governments estimate they will lose a combined $10 billion per year in revenues by 2003, and a multiple of that amount by 2010, because they are not collecting taxes on Internet purchases.
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Internet sales as a percentage of total retail sales are growing rapidly. In 1998, Internet sales amounted to less than 0.4% of total retail sales. According to recent projections by Forrester Research, Internet sales will grow to $184 billion annually by 2004, or over 7% of retail sales. Soon thereafter, Internet sales will amount to over 10% of retail sales. Mail order sales amount to just 2.7% of total retail sales.
Consumers will not lose interest in shopping online if they have to pay sales taxes. Internet consumers report in surveys they like the idea of avoiding taxes, but they tend to cite other advantages when asked the main reason they shop online. In a survey of 5,800 adults by Harris Interactive in August 1999, respondents cited the following leading reasons for online shopping: (1) convenience, (2) obtaining a product/service not available locally, (3) lower prices, (4) avoiding crowds, and (5) use of automated shopping searches, including price comparisons. Sales tax advantage did not make the list of leading reasons to shop online.
THE STATES' CHALLENGE
In assessing and guiding the states' effort to simplify their sales tax systems, it is important to recognize what is possible and efficient for technology to accomplish, on the one hand, and for the states to accomplish, on the other. For instance, it is tempting to define simplification by the standard of one tax rate per state, and to compel states to meet that standard. Yet overcoming the political hurdles of achieving one rate per state would be more difficult than overcoming the technological hurdles of calculating varying tax rates in a simple and cost effective manner.
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That does not mean that state governments can or should let technology do all the work. The states need to agree to certain standards to avoid burdening merchants and the technology that they use. For example, states should limit the frequency of changes in their tax rates and tax base. Furthermore, states should establish safe harbor treatment for certain combinations of goods, such as food baskets with a mix of taxable and nontaxable items.
The states should adhere to the following minimum criteria in simplifying their sales taxes:
Sales tax collection should not discriminate based on the medium used to conduct commerce
Any new system should rely on private enterprise to the extent possible
Any entity that participates in any state plan should receive adequate compensation to offset the cost of implementing new technological systems and collecting taxes
No new nexus burdens for sales tax or other taxes should apply to any entity that participates in any state plan
Consumer privacy protection must be a top priority of the tax collection system design. The states should assemble a panel of expert privacy advocates to review current and proposed sales tax collection plans. That panel will recommend ways to ensure the sales tax collection process does not diminish consumer privacy compared to the current system of collecting sales taxes. The states' goal should be to increase the protection of consumer privacy to an unprecedented level.
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Certification of software to calculate applicable state taxes should be centralized.
Participating states should simplify and standardize the following:
— product definitions
— exemptions
— filing forms
— remittances
— audits
CONCLUSION
The future of e-commerce is likely to include state sales tax collection on Internet sales. The major questions are when and in what form. Difficult technical and political issues remain for the states to solve, but they have enormous incentive to solve those issues.
Technology can help the states simplify their sales tax collection systems and reduce the burden on merchants. But technological solutions cannot replace common sense simplifications the states should enact. Before the states ask Congress to consider legislation that removes the nexus barrier for tax collection on remote sales, they should demonstrate that they can create a simple, cost effective tax collection system.
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Mr. GEKAS. If we can turn the lights off, please.
Proceed.
STATEMENT OF SCOTT H. WALTERS, VICE PRESIDENT, RESEARCH AND DEVELOPMENT, TAXWARE, INTERNATIONAL
Mr. WALTERS. Thank you, Mr. Chairman. I would also like to thank the committee for the opportunity to present today the technology solution that is in place and working in many merchants. We are a strong supporter of tax fairness. We believe that tax technology can help ease the burden of sales use tax compliance functions. We have been providing tax calculation software applications to taxpayers for over 20 years.
We have thousands of customers throughout the country using the tax technology that you will see today to administer their tax compliance requirements. These customers range in size from the largest of retailers in the U.S. to the smallest of dot.coms operating within the Internet marketplace. This list of companies also includes many mail order companies as well.
During a recent evaluation of our tax compliance and administration functions that taxpayers perform today, we have determined that the activities related to the administration of jurisdictional tax rates is the easiest and least burdensome tax. The reporting, collection and remittance functions represent the more costly and extensive task as far as burden.
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Next I will provide a brief demonstration of the technology being used today within e-commercial applications, whether they be portals or ASPs. As the screen demonstrates, here is a simple storefront and we will walk through a couple of calculation scenarios. Initially if I were to buy an item related to software, by the mere selection of the quantities, whether it be software or clothing, and adding that item to the shopping cart, from there I continue the shopping expedition and I have determined where the item is going to be shipped. One of the items that you will note is that I don't necessarily need, in fact, I don't need the customer's name or address. I will demonstrate that by keeping the name and address, street address the same in both transactions. This initial transaction is within the State of Massachusetts. As I have finalized my order, I submit the charge to be calculated.
As you see here, no taxes are being calculated. This is due to the fact that this particular customer, or I should say vendor, does not have the requirement to calculate tax in Massachusetts. Now, if I would start the transaction over and use a different location, I am going to move to a location that would select from an Illinois storefront, I should say an Illinois customer, again shipping the same products. The process of selection here is very similar to what a consumer would do when they are buying today on the Internet. They would determine or present where the item is supposed to be shipped. If the ship-to location was definitely not known, it might be a digital item, then the mechanism of payment might be a credit card, the system has the ability to default to a billing address.
This does demonstrate what can happen if for some reason a line goes down. What I will do is I will end the task and this happened to me in an earlier presentation. One of the concerns with technology is that it does need to be tested, and I believe members of other panels did present that.
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I will stop the server and restart it. In a live transactional setting, this activity would be set up where you would have a fault tolerant mechanism so that your servers would not go down, ensuring constant performance.
Mr. GEKAS. Is that the presentation?
Mr. WALTERS. I would like to demonstrate the ability to calculate the tax, clearly because it is important to note that not only does it have the ability to determine the tax based on the geographic location but also based on the item that you are buying. There is a difference between the tax calculation function requirement related to not only the geographic location but the item or the article which you are buying.
What this will demonstrate is through the calculation process, it will distinguish the difference between clothing and software, in particular Massachusetts, and demonstrate how that clothing here is being taxed at a reduced rate based on the laws of the State within Massachusetts, and that the software is being taxed at the full rate. There was comment earlier by another panel that the technology does not have the ability to distinguish the differences between tax base. Clearly there are some laws that are gray in nature that does make the process a little bit difficult to turn a gray definition into the tax technology required black and white answer, but the software does have the ability as this demonstrates to actually calculate the appropriate tax based on the geographic location and the item that is being purchased within the transaction.
This is what the consumer would see on the purchase transaction. Now, for the merchant to actually set this up, it is a relatively simple process. Through the integration of the tax technology software, with the merchant billing application, they establish a profile for which they identify their physical presence. If they have multiple business locations they go through an additional identification process and outline all of the business locations for which they have, and then the next step would be to identify their nexus collection requirements. As you can see, it is a basically point and click type of application. This is a one-time setup, unless your business operations change significantly and your tax collection requirements are different.
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The final step in the process is doing an association of the items that you are selling through catalog number scheme or skew application and in association of your internal codes to the tax-software-provided technology identified codes. For example, clothing. The clothing calculation function that you saw from the storefront, that back behind the scenes is an allocation or mapping process that takes place when the merchant signs up and does an association of their articles of clothing to an identified tax provider code. As you increase or contract your nexus calculation requirements, there is not a remapping process that takes place. The setup that I have just demonstrated here is a one-time setup. If your tax collection requirement is to change, the system has the ability to calculate the tax.
In closing, I would like to make the final comment that the tax calculation software does exist today and is being used in many applications. Clearly, there are some benefits to simplification of the tax laws that will reduce the ultimate cost of the compliance systems that we are demonstrating today. Thank you.
[The prepared statement of Mr. Walters follows:]
PREPARED STATEMENT OF SCOTT H. WALTERS, VICE PRESIDENT, RESEARCH AND DEVELOPMENT, TAXWARE, INTERNATIONAL
I. INTRODUCTION
Over the past four years, the number of products and services sold through eCommerce has grown at an extraordinary rate. In 1996, TAXWARE International released the first software program that provided sales and use tax compliance for Internet merchants. The TAXWARE INTERNET Tax System was adapted to eCommerce despite the enactment of the Internet Tax Freedom Act, which did not preclude the application of existing transaction-based taxes to transactions occurring over the Internet. The INTERNET Tax System applied the technology of TAXWARE's SALES/USE Tax System and its WORLDTAX System (International Tax Calculation). These programs, which have been developed over a period of twenty years, are being used by thousands of taxpayers. The INTERNET Tax System quickly became the system of choice for almost every eCommerce software system on the market today. The success of the program can be attributed to the speed and accuracy of tax calculations, as well as its affordability. Virtual merchants currently license the Internet Tax System for a little as $25.00 per year. The systems have significantly reduced the burden Internet merchants face in complying with state and local sales and use taxes.
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INTERNET Tax System technology can further reduce the tax collection and reporting obligations of eCommerce merchants through the implementation of a Transaction Tax Server that would be operated in a service bureau environment. A Certified Sales Tax Service Provider (''CSTSP'') will be responsible for keeping up with tax rules and product definitions (exemptions) for all state and local taxing jurisdictions. This centralized tax collection service shall also be responsible for the reporting and payment of transaction taxes to the appropriate taxing authorities. The Service Provider, will absorb virtually all sales and use tax compliance burdens that plague merchants (retailers) today, creating a Zero Burden Tax Collection Scheme.
II. THE ZERO BURDEN TAX COLLECTION SYSTEM AND THE TRANSACTION TAX SERVER
While the Transaction Tax Server (''TTS'') concept does not require the implementation of the new Zero Burden Tax Collection System (the ''Zero Burden System'') for application by any participating merchant, it does fulfill the requirements of the Zero Burden System. This software tool enables the widespread application of the Zero Burden System that has the ability to ease the tax compliance burden for all sellers required to administer sales and use tax. The technology needed to create a TTS exists today; and the execution of TTS to eCommerce merchants may occur over a period of time. This submission describes how TTS will work within the Zero Burden System, and addresses the criteria for evaluation identified by the Advisory Commission on Electronic Commerce.
It should be emphasized that TTS can be applied with or without the Zero Burden System, and can be implemented at a small cost to merchants (or at no cost to the merchant, if the tax authorities encourage participation by supporting TTS financially).
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III. TRANSACTION TAX SERVER
The Transaction Tax Server is a melding of various TAXWARE software systems (SALES/USE including Toolkit, WORLDTAX, VERAZIP and STEP) used during the tax calculation process. The address driven VERAZIP system validates the consumers address. Then, the seller (Merchant) and customer (Buyer) locations are compared to determine the taxing location, and the type of tax (i.e., sales or use). Exemptions are generated through the use of the Tax Rate File, the Product Taxability File and Merchant Exemption Files. Merchant Nexus Data Files allow sellers to implement their use tax collection obligation by turning off taxing jurisdictions in which they have no physical presence (point and click).
After transactions are calculated, the results are sent to the merchant's billing system for entry onto the transaction document (i.e., invoice), and are stored in the Audit File. The ReMIT System places summary data from the Audit File onto the appropriate space on the tax return. This tax compliance system, ReMIT ''Data Highway'', will be used to electronically transmit tax liability information. The same system used by tax payers to prepare and transmit tax returns shall be provided to taxing authorities that receive taxpayer returns. Thus, the taxpayer (pitcher) and the government (catcher) use the same system (ReMIT).
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The process through which Internet sales are fulfilled consists of the following series of events:
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1. Buyers create orders to purchase products or services from virtual merchants.
2. When buyers finish shopping, they will provide the address to which the purchase will be shipped as part of the checkout process.
3. If buyers are purchasing digital products, the credit or debit card billing address will be applied as the taxing location.
4. Sellers will transmit this information into TTS, which will calculate the appropriate tax on the transaction.
5. The tax information will be reviewed by the buyers, who will either finalize or cancel the transaction.
6. If the transaction is finalized, the buyer will be charged for the sales price plus appropriate tax.
7. The seller, through the credit card or banking network, will receive the revenue generated from the transaction; appropriate tax authorities will receive the calculated tax amounts. Both the seller and the tax authority will also receive the tax information pertinent to the transaction.
TTS can implement the concept into all areas of commerce. Technology used to tax Internet sales can be equally applied to sales occurring through catalog or mail order or through traditional storefronts. TTS technology can be applied to all types of taxes, including telecommunications, transportation, utilities, and any other kind of transactional taxes which must be collected and remitted.
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Participation in the Zero Burden System is voluntary; any merchant with the technological capacity to tie in to TTS can participate. Because tax compliance will occur ''real time'' at the point of sale, participating merchants would be relieved of tax calculation, reporting and remittance obligations. Merchants will only be subject to ''TTS Audits,'' in which tax authority personnel review the configuration of merchants' business practices into TTS. The CSTSP will fulfill all remaining audit responsibilities. Participating merchants would no longer need to monitor tax rate and law changes; in-house tax calculation systems would no longer be needed. Tax compliance and audit prevention and defense costs will be dramatically reduced.
Tax authorities will also benefit from the implementation of the Zero Burden System. Tax data can be received at the time of the sales transaction. Tax revenues can be transmitted to the tax authority almost immediately upon completion of the sale, increasing tax authorities' time-value of money. Tax authority personnel can implement law changes immediately, and can monitor the application of rates and laws at any time. Tax authorities can also attach their existing back office systems to TTS by accommodating imports of tax data.
The CSTSP will be compensated through contracts with participating federal, state and local tax authorities. Payment can be based upon a reasonable percentage of tax calculated, the number of transactions processed by TTS, or a combination of both; funding will originate from the amount of tax collected, upon the value of float on tax collected, or a combination of both.
IV. CRITERIA FOR EVALUATION
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Simplification
TS is a tool through which existing sales and use tax schemes can be automated. There is a clear need for the adoption of a coding system through which exemptions from tax bases can be identified. Each unique exemption must be identified with a unique code. ''Commodity Codes'' will identify exemptions that are based upon status of the commodity transferred or service performed, and ''Reason Codes'' will identify exemptions that are based upon the status of the purchaser or the use to which the purchase will be put. TAXWARE has developed a coding scheme that can be applied as the basis behind the adopted coding system. The coding schemes for Commodity and Reason Codes are amendable, allowing new exemptions to be added to the list.
The existence of thousands of local tax rates, in conjunction with hundreds of different tax bases, wreaks havoc upon the tax departments of multi-jurisdictional retailers. It is for this reason that today's tax compliance software has become a necessity for any multi-jurisdictional vendor. This technology, when deployed into TTS, will eradicate the need to include resources to address this complexity in merchants' budgets and project plans.
Because participation in the Zero Burden System is voluntary, no clarification of nexus standards is necessary for TTS implementation. Participating merchants will submit transactions to TTS in return for liberation from tax compliance obligations.
TTS can implement any transaction tax system. After deployment, each taxing jurisdiction can decide how to tax information, digital goods and services provided electronically over the Internet.
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Implementation of TTS will dramatically reduce the difficulty and expense inherent to transaction tax compliance. The Certified Sales Tax Service Provider will inherit the audit responsibility for all transactions calculated by TTS. Merchants will only be subject to TTS audits, to determine only whether their billing systems are correctly configured to TTS.
Tax authorities will benefit from the aggregation of all transaction tax data into one universal location, in one universal format. Such aggregation will reduce audit difficulty and expense from state and local governments. Data preparation and modification responsibilities will be dramatically curtailed. State and local auditors will work closely with the Certified Sales Tax Service Provider to audit all transactions calculated by TTS, and new, more accurate methods of sampling can be applied to audits of TTS performance. Further, state and local tax authorities will have the ability to monitor TTS on a monthly, daily, or even hourly basis. Finally, TTS technology allows for remote audits, reducing the need for travel to taxpayer locations to perform audits.
Taxation
The implementation of TTS is merely the tool used to implement legislative and regulatory tax decisions. If Internet access becomes taxable, or if Internet sales are subject to new taxes, TTS stands ready to implement the appropriate tax decisions. Conversely, if Internet access or other eCommerce transactions were granted exempt status, TTS can easily automate all aspects of that exemption. This flexibility makes TTS the ideal tool for automating the Zero Burden System.
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TTS will not increase consumers' net tax burden; it will, in fact, facilitate the payment of consumers' existing tax compliance obligation. Although most businesses comply with their obligation to remit use tax on untaxed purchases, most consumers are not aware that they have an existing duty to pay use tax on any non-taxed purchase they make. By automating the transaction tax compliance process, TTS removes the existing duty upon purchasers to calculate and report use tax on purchases from remote sellers. Furthermore, as overall use tax compliance increases, state coffers will increase concurrently. Ensuing budget surpluses could then justify reduced state and local tax rates, which would in turn reduce the tax compliance burden of the purchaser that purchases goods and services from in-state vendors.
The implementation of TTS would not reduce or increase taxes upon state and local telecommunication services or other charges on services designed or used for access to or use of the Internet. The versatility of TTS allows for easy implementation of reduced or increased taxes upon these products and services.
Because the Zero Burden System will be a voluntary system, no vendor would be required to fulfill any additional tax compliance obligations. Accordingly, TTS would not be mandatory, but sellers that wish to participate will be required to configure their business practices into TTS. TTS allows merchants to designate the taxing jurisdictions in which they wish to participate in TTS.
The automation of the Zero Burden System will indeed increase federal, state and local governmental revenue bases. The implementation of TTS will prevent taxpayers from shirking their use tax payment responsibilities, increasing tax remittances. Further, tax liabilities can be paid to the appropriate tax authorities as transactions occur, allowing governments to take advantage of the time-value of money.
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Burdens on Sellers
The Zero Burden System implemented through TTS will remove much of the current transaction tax compliance burden sellers face today. After sellers agree to participate in the Zero Burden System, they will open up a standard Internet browser, and surf to the CSTSP Merchant Sign Up Page. Through this page, merchants will set up their TTS account, input their business locations, and attach their catalog control numbers (''SKU's'') to the appropriate Commodity Code. Merchants will also select the Zero Burden states that they agree to participate with. All functions use easy, point-and-click technology. The Sign Up Page appears as follows:
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After initial configuration, sellers would only be subject to ''TTS Audits,'' through which tax authority personnel review the linkage between the merchants' billing systems and TTS. Reviews will determine whether the merchant has accurately attached the appropriate data to TTS, and will also function as a fraud control mechanism.
The CSTSP would thereafter take on all tax compliance and audit responsibilities, removing the administrative burden from the merchant. Merchants participating in the Zero Burden System will have access to TTS for no cost; TTS will be funded through contractual relationships between the CSTSP and participating states. Further, some Zero Burden proposals provide for payment to merchants agreeing to participate at the onset of the program.
TTS does not include any special provisions with respect to small, medium-sized, or start-up businesses. Any business with a computer and internet access can utilize TTS for the same cost: $0.00.
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Discrimination
Today's transaction tax systems bestow a significant advantage upon remote sellers. Customers purchase goods from remote sellers because those customers believe such transactions are legitimately tax-free. Purchasers in general do not know of (or ignore) the use tax compliance obligation imposed upon their purchases from remote sellers. The remote vendor iniquity, publicized by the expansion of eCommerce, has existed for decades. TTS can easily be applied to all commerce, leveling the playing field for in-state vendors. eCommerce, mail order, catalog and in-store vendors can each access TTS. TTS would apply the same calculations across the same tax data for all participating merchants, regardless of the method the purchase order was created.
TTS will not automate discrimination against remote vendors. The voluntary nature of the Zero Burden System allows equal access to TTS by in-state and remote vendors alike. All types of vendors in all industries in which transaction tax liabilities are incurred can participate.
International
Automating the Zero Burden System through implementation of TTS will increase the ability of U.S. businesses to participate in global commerce. Existing transaction tax schemes inflict a substantial burden on any merchant doing business in the United States. The removal of this burden will allow these merchants to reallocate resources currently used to comply with transaction tax obligations, increasing their ability to compete.
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TTS can easily be scaled to the international level. Merchants from outside the United States will have access to TTS, allowing participation in the Zero Burden System. Furthermore, TAXWARE technology calculates and reports international transaction tax liabilities; such technology can rapidly be included in TTS. With the cooperation of international tax authorities, TTS would be the global transaction tax solution.
TTS has the versatility to implement all existing transaction tax systems, including countries in which the origin of the transaction is deemed to be the tax situs. TTS fully automates transactions which are exempted (or zero rated) from transaction tax liability due to export. Although harmonization of global transaction tax schemes is desirable, TTS allows for the existence of many schemes.
Technology
Businesses have been using widely available software to facilitate transaction tax compliance for more than twenty years. This well-proven software can be deployed into TTS, enabling all participants in the Zero Burden System to access tax compliance technology. Expenses incurred upon initial configuration of merchants' business processes into TTS can be paid by participating state and local governments according to Zero Burden System.
Funding for CSTSP will be provided by participating state and local governments. Certified Sales Tax Service Provider will charge for their services based upon a reasonable percentage of tax calculated, the number of transactions processed by TTS, or a combination of both. TTS updates will be applied as needed; fees related to updates will be factored into the agreement between the CSTSP and the participating state or local government.
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Privacy
One of the most controversial components of eCommerce taxation is the need to protect purchasers' privacy. This concern stems from the creation of detailed information that will be collected through automating the Zero Burden System. TTS can implement the Zero Burden System while preserving an eCommerce purchasers' sensitive information.
Any citizen should rightly be concerned that information provided for tax compliance purpose be protected from unauthorized use. Any Certified Sales Tax Service Provider must therefore be required to maintain the privacy of tax data; inappropriate use would disqualify the CSTSP from further participation in the Zero Burden System.
It is important to note that no transaction tax can be accurately calculated unless the location at which the purchase will be used is known. TTS will derive this information from the mailing address the purchaser designates as the ship-to location (or the billing address for transactions of digital products). Fully taxable transactions require a review of purchasers' mailing or billing addresses, but only the purchasers' state, city and Zip Code will be stored in an Audit File. Purchasers' names and street address information will not be retained.
If a transaction is fully or partially exempt, additional data must be retained. If the exemption is due to the status of the product or service purchased (i.e., food items), the Commodity Code assigned to the product or service by the vendor will be stored in the Audit File. If the transaction is exempt due the purchasers' status as an exempt entity, or if the transaction is exempt because the purchase will be put to an exempt use, the applicable Reason Code will be retained to support the exemption. Such purchasers will be required to provide an Exemption Identification Number; existing exemption certificate numbers will be the basis of the identification number. TTS will store the Exemption Identification Number and the Reason Code in the Audit File, but the CSTSP will not be provided with the true identity of the holder of the number. Tax authorities will determine which exempt purchasers to audit based upon review of the transactions in which authorized Exemption Identification Numbers were used.
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Sovereignty/Local Government Autonomy
State governments unanimously wish to retain the ability to enact the tax base that is appropriate for their taxpayers. The perceived inability to simplify state transaction tax schemes while preserving state autonomy was instrumental in the failure of previous transaction tax simplification efforts. TTS automates all tax distinctions in all state tax bases, regardless of the complexity.
Native Americans wish to retain their exemption from transaction tax. TTS can automate this exemption through the use of the Exemption Identification Numbers that will be assigned to Native Americans. Exemptions for transactions occurring within Native American territory will also be available in TTS.
Local governments also wish to retain the ability to enact the tax base that is appropriate for their taxpayers. The same methods used by TTS to automate varying state tax schemes are used to automate differing local tax schemes.
Constitutionality
The voluntary nature of the Zero Burden System removes the constitutional barrier to imposing the use tax collection obligation on remote sellers.
V. CONCLUSION
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In summary, TAXWARE recognizes the need for simplification of the existing sales and use tax system within the United States. We support the use of new tax technology that will shift the administrative burdens associated with transactional taxes away from the sellers of products and services. The Internet is creating many new business opportunities, and the tax dilemma eCommerce merchants face should not be the focal point of eCommerce discussions. Most governmental agencies and businesses would all agree that the tax system is too cumbersome and complex. The implementation of a Zero Burden System, which adopts the Transaction Tax Server technology, has the ability to simplify our sales and use tax system. A voluntary program adopting new technology to solve the eCommerce tax dilemma, that shifts the administrative compliance burden away from merchants, will only enhance the growth of the Internet and our free enterprise economy.
Mr. GEKAS. We thank everyone. We will review some of the pieces of testimony and then I will yield to the gentleman from Ohio for concluding questioning. First, I wanted to ask Mr. Good and Mr. Walters, did you hear the testimony of the gentleman who was representing, was it Ernst and Young?
Mr. GOOD. Yes.
Mr. GEKAS. Does his testimony gibe with yours?
Mr. GOOD. Not entirely, but I think a lot of it does. I think a lot of the point there is that there needs to be a demonstration that the technology can work before anything is changed in Federal law affecting the States.
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Mr. GEKAS. I think we need a moratorium of 20 years to sort these things out.
Mr. Rosen, your great concern is, of course, the general complexity of the problems we face with the remote sellers.
Mr. ROSEN. The distinction I tried to make is the difference between the sales and use tax issue that everyone else is focusing on pretty much. What I was focusing on was the corporate income tax economic burden as well as complexity, that if a company has no connection with locality it should not have to pay the income tax. If I may, I forgot I had a smoking gun here. This is a law that was passed in Florida 3 weeks ago. May I read one sentence?
Mr. GEKAS. Certainly.
Mr. ROSEN. Section one, paragraph 6(a)(2). Florida set up a new tax study commission to develop a new tax system for Florida. Principle number two under the principles of sound tax policy: ''To what degree can the tax burden be exported to tourists, the Federal Government or out-of-State businesses?''
A new law in Florida.
Mr. GEKAS. Do you want to stick around for another hour after this where we can discuss that?
Mr. ROSEN. I would love to.
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Mr. GEKAS. I wouldn't.
Mr. Nebergall, you mentioned something that I want to make clear and I want the record to fully assert, that this committee has in the recent past indulged in a markup of a bill which came about because the taxing authorities involved and the targets of the taxing authorities, in that case the wireless communications people——
Mr. NEBERGALL. The uniform sourcing rule for wireless telecommunications, I think.
Mr. GEKAS. Yes. Came about not because of the great intellect of the people on this panel, of which there is an abundance, but because of the willingness of the parties to sit down and iron them out together and make proposals in joint recommendation to this committee. You are saying something of that same ilk in how this problem should be solved.
Mr. NEBERGALL. Precisely.
Mr. GEKAS. Therefore, we will take that into consideration. I believe that is a solution that ought to begin now.
With that, I yield the balance of my time and additional time if he requires it to the gentleman from Ohio, Mr. Chabot.
Mr. CHABOT. Thank you, Mr. Chairman. In the interest of time I will be relatively brief. The Federal Government sometime in the recent past, in fact, we have done this several times, we keep trying to land a space vehicle on Mars, we sent one up there, it went all the way up there, we thought it was going to land, we lost track of it, it went back. What went wrong, it turned out somebody had I think forgot to convert something to metric or some sort of deal, a small mistake. But the thing apparently crashed on the Mars surface. I have seen a number of stories when I am back home, the I-team type reports where shoppers are in a store, these new scanners that apparently I guess George Bush got in trouble because he wasn't sure, he didn't get out of the White House too much or something, they amazed him, but now we are all used to these things. They do these stories where somebody will send 30 items down there, three or four of them are going to be the wrong charge on them. The technology looks good up there. But how does the consumer know that he or she is being taxed the right amount? With all the different tax things we have got in the country, how are they going to know they are not being overcharged under this system or any system that we might devise? Is there any foolproof way to do that?
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Mr. GOOD. I don't know if there is anything that is foolproof. But my understanding is what the States intend to do is to have an audit of the process of calculating the tax rates for specific products to make sure that the information there is accurate. And they would certify the tax calculation software once they find that it is measuring things properly.
Mr. CHABOT. And you would be satisfied with all the different tax codes that we have all over the country, because the government has certified that it is right, that it is accurate?
Mr. GOOD. I am not saying that anything is completely foolproof. I am just saying that there are problems with the system we have today and that I think that there might be some technological solutions that will help do those calculations.
Mr. ROSEN. The problem that comes about is not the processing. Most people believe that ultimately the technology would be there in order to have the processing and the program efficient enough and effective enough to do what it is supposed to do.
However, the input, what the retailers themselves have to input can cause problems and liability on the retailers. The example is where the retailer has to encode each item. For instance, in certain States steel-tipped shoes are exempt because they are safety shoes. What about if they have hard plastic in the tip? If the seller makes a mistake on how it classifies that, then the seller would be open to audit liability. One thing that is very important in whatever system is ultimately developed, is that the merchant is not put at risk to having this audit liability because it did not know whether heavy plastic was a safety shoe or not safety shoe.
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Mr. CHABOT. I think that just points out that there are other areas within the system where people can make errors and the public ultimately may be overtaxed. I am certainly not at this point convinced that there is a workable solution to determining what the tax rates ought to be all over the entire country in all the different jurisdictions that we have. In any event, I do appreciate your presentation here this morning.
I will yield back the balance of my time at this time.
Mr. GEKAS. I thank the gentleman. Again, I wish to express the Chair's personal and professional gratitude to all the members of this panel and the ones that preceded it. We have come a long way, we have a long way to go. We will see you, I am sure, in the near or distant future. Thank you very much.
This meeting stands and the committee stands adjourned.
[Whereupon, at 1:30 p.m., the subcommittee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
EMBARGOED UNTIL 10:00 A.M. EDT
Text as Prepared for Delivery
May 17, 2000
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TREASURY ACTING ASSISTANT SECRETARY JONATHAN TALISMAN TESTIMONY BEFORE THE HOUSE JUDICIARY COMMITTEE SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
Chairman Gekas, Ranking Member Nadler, and distinguished Members of the Subcommittee, thank you for your invitation to participate in the hearing before the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary regarding H.R. 4267, the Internet Tax Reform and Reduction Act.
Your letter inviting the Administration representatives on the Advisory Commission on Electronic Commerce to testify indicated that H.R. 4267 is intended to reflect what you have termed the ''majority position'' of the Commission.
As you know, the Commission was charged by Congress with the important challenge of trying to provide recommendations to Congress on the significant issues surrounding state taxation of electronic commerce. Electronic commerce and the associated explosion of the information technology sector are key sources of economic growth in the United States and around the world. As the President has stated on several occasions, it is important to establish the right rules in this area in order to promote a policy environment that is pro-growth, nondiscriminatory, and provides appropriate revenues that communities need to meet vital public purposes.
Regarding the issue of state taxation of electronic commerce, the Commission unfortunately was not able to serve as a forum to forge a consensus, and the Commission could not fulfill its statutory charge of achieving two-third's support for Congressional recommendations. The final Commission Report contains no recommendations regarding state taxation of the Internet and instead includes only what has been termed the ''majority'' view. That so-called majority view, which is incorporated in H.R. 4267, is strongly opposed by the vast majority of Republican and Democratic Governors, virtually all other state and local government officials, and large segments of the business community. It does not represent the broad cross-section of views that Congress intended to be represented when it established the Advisory Commission.
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We are disappointed that the Commission was unable to reach a compromise able to attract the two-thirds majority required for a valid recommendation to Congress. There was a significant effort to do so, and the Administration worked hard to be an honest broker and a catalyst throughout the Commission's deliberations to try to achieve a balance between the interests of technology, the needs of state and local governments, and the continued viability of traditional retailers, both large and small.
The Administration continues to participate in constructive discussion of these issues with members of Congress, state and local officials, representatives from all sectors of the business community, and anyone who seeks to find solutions to these important and complex issues. It is the Administration's view that these issues should be addressed comprehensively and not in isolation. More specifically, it is the Administration's view that in the absence of an overall compromise regarding sales and use taxes, the current nexus rules should not be changed legislatively. Finally, it is the view of the Administration that such a comprehensive position should include the following elements:
1. NO INTERNET ACCESS TAXES
The current statutory moratorium on Internet access taxes should be made permanent.
It is critically important to encourage access to the Internet. Because taxes on Internet access would create an obstacle to the access of all Americans to the Internet, and in turn, their ability to participate in electronic commerce, these taxes should be prohibited permanently.
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2. NO MULTIPLE AND DISCRIMINATORY TAXES
The current statutory moratorium on multiple and discriminatory taxes should be extended.
Multiple or discriminatory taxes on electronic commerce plainly would hinder its development. This existing statutory moratorium should be extended, and final protections against such taxes should be crafted after the States develop simplified sales tax systems.
3. SIMPLIFICATION AND REFORMATION OF STATE AND LOCAL TAXES ON TELECOMMUNICATIONS
States and local governments should work expeditiously, in conjunction with the private sector to simplify and reform these taxes. The goal of these reforms should be neutrality in taxation of telecommunications as compared to other sectors as well as neutrality in taxation of providers of similar telecommunications services.
This complex web of taxes is in large part a relic of the time when telecommunications services were a regulated monopoly and when taxes on these services were passed on to consumers through the regulated rate structure. Today, telecommunications on all levels have moved from regulated monopoly to competitive markets, and the line between telecommunications and other types of services becomes less clear every day. State and local governments have recognized the pressing need for reform in this area. We believe that these governments, working in cooperation with businesses and consumers, can accomplish this goal.
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4. SIMPLIFICATION OF STATE AND LOCAL SALES AND USE TAXES
States and localities should develop a simplified sales and use tax system within two years. During that time, the current rules governing this area, which were established by the Supreme Court, should remain unchanged.
While this simplified system is being developed, States and localities should engage in a dialogue with businesses and consumers to address the complex and difficult issues regarding the application of these taxes to Internet sales. These issues include:
fairness to both Internet businesses and ''bricks and mortar'' businesses;
significantly reducing or eliminating the cost to businesses of collecting these taxes;
the effect of these taxes on the international competitiveness of U.S. Internet companies;
whether lower-income Americans are paying, or will be required to pay, an unfair and disproportionate share of state and local sales taxes;
ensuring protection of consumer privacy; and
the feasibility of imposing and collecting sales taxes on goods delivered digitally over the Internet (software, music, etc.).
The application of sales tax laws to Internet transactions raises difficult issues. It is essential that we maintain the vitality of electronic commerce, which is one of the primary drivers of our economy. It also is essential that States and localities have the revenues they need to provide citizens with essential services'such as education, police, fire protection. Addressing this issue is extraordinarily complex for a number of reasons, including the fact that policymakers do not now have all of the information they need. Everyone agrees, however, that simplification is the key. So the States should proceed in developing a model act that produces real and effective simplification, while discussion on the other issues continues. While the model act is being developed, which is estimated to take two years, the current sales and use tax rules, established by the Supreme Court, should remain in place; they plainly have not hindered the growth of electronic commerce. In the event of any change in existing rules governing the application of sales and use taxes to Internet sales, there should be full accountability so that citizens of each State can determine the appropriate consequences of any projected increase in revenue.
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5. REVIEW OF THE CONTINUED VIABILITY OF THE FEDERAL EXCISE TAX ON COMMUNICATIONS
Phase out of this tax is a worthy policy objective and should be considered, but must be weighed against other worthy objectives including other proposed tax reductions, and must not be allowed to threaten the important priorities of maintaining fiscal discipline, paying down the national debt, extending the solvency of Medicare and Social Security, and maintaining core government functions such as health care and education.
This tax currently contributes more than $4 billion in revenue per year and $52 billion over ten years. Because of this substantial budgetary impact, phasing out of the tax cannot be considered in a vacuum, but must be weighed against other important priorities.
6. NO CUSTOMS DUTIES ON ELECTRONIC TRANSMISSIONS
The current moratorium on customs duties on electronic transmissions should be made permanent.
Maintaining the moratorium on customs duties on electronic transmissions is a goal shared both domestically and internationally. There is a broad recognition that imposing customs duties on electronic transmissions would only undermine the ability to attract the investment and technology necessary to build and develop an e-commerce infrastructure.
7. FAIR INTERNATIONAL TAXATION
Any taxation of electronic commerce should be neutral, nondiscriminatory, simple, certain, fair and flexible.
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Regarding international taxation of electronic commerce, our view is that any taxation of electronic commerce should be neutral and non-discriminatory. We must continue to work within the Organization for Economic Cooperation and Development (OECD) to agree on tax rules based on the principle of neutrality and other core principles, such as simplicity, certainty and fairness. We must also continue to work with non-OECD member countries. Global electronic commerce should not be impeded by globally inconsistent tax treatment and thus a global consensus must be reached regarding appropriate taxation.
Thank you again for the opportunity to participate.
(Footnote 1 return)
The payment and remittance process has been modified from the original proposal submitted to the ACEC. This has been done to insure that it will operate within the constraints of the credit and charge card systems as they operate today. The intent of the proposal is to avoid placing any new obligations (beyond the debit/payment authorization) on any credit card issuing bank, merchant bank or transaction processor.
(Footnote 2 return)
In these 4 states, local governments administer their sales taxes independently of the state. There may be differences in the state and local tax base, and returns, remittances, etc. are filed directly with the local governments.
(Footnote 3 return)
Quill Corporation v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d. 91 (1992); National Bellas Hess, Inc. v. Dept. of Revenue of Illinois, 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d. 505 (1967).
(Footnote 4 return)
This includes sales of both digital products and, more importantly, tangible goods via electronic means.
(Footnote 5 return)
Some observers argue that the Quill and Bellas Hess decisions require a seller to have a ''substantial physical presence'' in the taxing state before it can be required to collect tax. The Quill decision does not use the phrase ''substantial physical presence''; it requires a ''substantial nexus'' with the taxing state, and says that nexus is satisfied if the seller maintains a physical presence in the taxing state.
(Footnote 6 return)
For an extensive discussion of the types of simplifications that have been discussed, see the Final Report, National Tax Association Communications and Electronic Commerce Tax Project, supra.
(Footnote 7 return)
See, for example, Robert Cline and Thomas Neubig, ''The Sky is Not Falling,'' (published by the E-Commerce Coalition) which projects that in 1998, the net impact of electronic commerce was to reduce state and local revenues by about $170 million. Forrester Research estimates that the comparable number for 1999 was $500 million. Both of these analyses examine only business-to-consumer sales.
(Footnote 8 return)
Donald Bruce and William F. Fox, ''E-Commerce in the Context of Declining State Sales Tax Bases,'' (mimeo) February 2000. [To appear in a forthcoming edition of the National Tax Journal.]
(Footnote 9 return)
Sellers below the threshold level might be required to collect only on sales within the state(s) in which they operate or simply remit tax on all sales to that state. Such an approach would avoid placing undue burdens on the smallest sellers. A sales threshold de minimis would eliminate a large amount of litigation that occurs currently regarding what constitutes nexus and the required level of contact with a taxing state.
(Footnote 10 return)
The Commission's report was presented to Congress in April 2000. It is available at the Commission Web site <www.ecommercecommission.org>.
(Footnote 11 return)
See testimony of Gov. Michael O. Leavitt before the Committee on Commerce, U.S. Senate, April 12, 2000.
(Footnote 12 return)
Tax is imposed only on amounts greater than $25 per month.
(Footnote 13 return)
Certain cities in Colorado and Arizona also apply their tax to such charges.