[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
SALES TAX FAIRNESS AND SIMPLIFICATION ACT
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
ON
H.R. 3396
__________
DECEMBER 6, 2007
__________
Serial No. 110-167
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts CHRIS CANNON, Utah
ROBERT WEXLER, Florida RIC KELLER, Florida
LINDA T. SANCHEZ, California DARRELL ISSA, California
STEVE COHEN, Tennessee MIKE PENCE, Indiana
HANK JOHNSON, Georgia J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
Joseph Gibson, Minority Chief Counsel
------
Subcommittee on Commercial and Administrative Law
LINDA T. SANCHEZ, California, Chairwoman
JOHN CONYERS, Jr., Michigan CHRIS CANNON, Utah
HANK JOHNSON, Georgia JIM JORDAN, Ohio
ZOE LOFGREN, California RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts TOM FEENEY, Florida
MELVIN L. WATT, North Carolina TRENT FRANKS, Arizona
STEVE COHEN, Tennessee
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
----------
DECEMBER 6, 2007
Page
TEXT OF THE BILL
H.R. 3396, the ``Sales Tax Fairness and Simplification Act''..... 2
OPENING STATEMENTS
The Honorable Linda T. Sanchez, a Representative in Congress from
the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 1
The Honorable Chris Cannon, a Representative in Congress from the
State of Utah, and Ranking Member, Subcommittee on Commercial
and Administrative Law......................................... 8
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and
Administrative Law............................................. 9
The Honorable Zoe Lofgren, a Representative in Congress from the
State of California, and Member, Subcommittee on Commercial and
Administrative Law............................................. 10
The Honorable William D. Delahunt, a Representative in Congress
from the State of Massachusetts, and Member, Subcommittee on
Commercial and Administrative Law.............................. 11
WITNESSES
Ms. Joan Wagnon, Secretary of Revenue, State of Kansas, Topeka,
KS, on behalf of the Streamlined Sales Tax Governing Board
Oral Testimony................................................. 17
Prepared Statement............................................. 19
Wayne Zakrzewski, Esquire, Vice President, Associate General
Counsel--Tax, J.C. Penney Corporation, Inc., Dallas, TX, on
behalf of the National Retail Federation
Oral Testimony................................................. 37
Prepared Statement............................................. 39
Mr. George Isaacson, Brann & Isaacson, Lewiston, ME, on behalf of
the Direct Marketing Association
Oral Testimony................................................. 44
Prepared Statement............................................. 46
Mr. Steven J. Rauschenberger, Rauschenberger Partners, LLC,
Elgin, IL, on behalf of the National Conference of State
Legislatures
Oral Testimony................................................. 97
Prepared Statement............................................. 99
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan,
Chairman, Committee on the Judiciary, and Member, Subcommittee
on Commercial and Administrative Law........................... 10
Prepared Statement of the Honorable Zoe Lofgren, a Representative
in Congress from the State of California, and Member,
Subcommittee on Commercial and Administrative Property......... 10
Prepared Statement of the Honorable Steve Cohen, a Representative
in Congress from the State of Tennessee, and Member,
Subcommittee on Commercial and Administrative Law.............. 15
Articles submitted by the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and Ranking
Member, Subcommittee on Commercial and Administrative Law...... 132
APPENDIX
Material Submitted for the Hearing Record
Responses to Post-Hearing Questions submitted to Joan Wagnon by
the Honorable Linda T. Sanchez, a Representative in Congress
from the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 138
Responses to Post-Hearing Questions submitted to Wayne Zakrzewski
by the Honorable Linda T. Sanchez, a Representative in Congress
from the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 144
Responses to Post-Hearing Questions submitted to George Isaacson
by the Honorable Linda T. Sanchez, a Representative in Congress
from the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 147
Responses to Post-Hearing Questions submitted to the Honorable
Steven J. Rauschenberger by the Honorable Linda T. Sanchez, a
Representative in Congress from the State of California, and
Chairwoman, Subcommittee on Commercial and Administrative Law.. 148
Prepared Statement of Paul Misener, Vice President, Global Public
Policy, Amazon.com............................................. 151
Letter from Steve DelBianco, Executive Director, The NetChoice
Coalition...................................................... 162
Prepared Statement of Brian Bieron, Senior Director of Federal
Government Relations, eBay Inc................................. 165
Letter from the United States Telecom Association and CTIA--The
Wireless Association........................................... 172
SALES TAX FAIRNESS AND
SIMPLIFICATION ACT
----------
THURSDAY, DECEMBER 6, 2007
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:06 a.m., in
room 2237, Rayburn House Office Building, the Honorable Linda
Sanchez (Chairwoman of the Subcommittee) presiding.
Present: Representatives Conyers, Sanchez, Lofgren,
Delahunt, Cohen, Johnson, and Cannon.
Staff present: Norberto Salinas, Majority Counsel; Stewart
Jeffries, Minority Counsel; and Adam Russell, Majority
Professional Staff Member.
Ms. Sanchez. This hearing of the Committee on the Judiciary
Subcommittee on Commercial and Administrative Law will now come
to order. I will recognize myself first for a short statement.
A recently released report on e-commerce revealed that
online sales on Cyber Monday, 2007, the Monday following the
Thanksgiving weekend, were $733 million, a 21 percent increase
from the same shopping day last year. And the total online
sales for this holiday season are predicted to be $29.5
billion, an increase of $5 billion from the same shopping
period last year.
These numbers reflect the growing number of consumers who
see the benefits of shopping online: no waiting in line, no
traffic to deal with, no parking hassles, and the convenience
of items being shipped to your front door. But there is an
additional benefit that some consumers enjoy when purchasing
items online: not having to pay sales taxes.
Some companies actually post this on their Web sites to
increase sales. States currently have limited legal authority
to require remote sellers to collect sales taxes on items they
sell. Instead, the burden is on consumers to remit use taxes,
which are the equivalent of sales taxes, to their state of
residence.
However, most consumers do not, partly due to the
complexity in calculating how much taxes they need to pay
partly because they are not even aware of their obligation and
partly because, let us face it, those who do know about the
obligation are actually going to go out of their way to avoid
paying additional taxes for their purchases.
State and local governments have voiced their concerns that
the increasing online sales and the resulting loss in
collection of sales taxes are affecting an ever-larger portion
of their revenue. On the other hand, online businesses remind
us that the Supreme Court has ruled that States do not require
them to collect sales taxes and remit them to the States
because the tax systems are overly complex.
In an effort to remedy this issue, Congressman Delahunt has
introduced H.R. 3396. H.R. 3396 will give Congress' consent to
the Streamlined Sales and Use Tax Agreement, which several
States have entered into to simplify their sales tax system and
respond to the Supreme Court's ruling. The legislation also
sets forth 19 minimum simplification requirements which the
States must follow to receive authorization to require remote
sellers to collect sales taxes on items they sell.
[The text of the bill, H.R. 3396, follows:]
HR 3396 IH ___________________________________________________
deg.
I
110th CONGRESS
1st Session
H. R. 3396
To promote simplification and fairness in the administration and
collection of sales and use taxes.
__________
IN THE HOUSE OF REPRESENTATIVES
August 3, 2007
Mr. Delahunt (for himself, Mr. LaHood, and Mr. Bachus) introduced the
following bill; which was referred to the Committee on the
Judiciary
__________
A BILL
To promote simplification and fairness in the administration and
collection of sales and use taxes.
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 ``Sales Tax Fairness and
Simplification Act''.
SEC. 2. CONSENT OF CONGRESS.
The Congress consents to the Streamlined Sales and Use Tax
Agreement.
SEC. 3. SENSE OF THE CONGRESS.
(a) Sales and Use Tax System.---It is the sense of the Congress
that the sales and use tax system established by the Streamlined Sales
and Use Tax Agreement, to the extent that it meets the minimum
simplification requirements of section 6, provides sufficient
simplification and uniformity to warrant Federal authorization to
Member States that are parties to the Agreement to require remote
sellers, subject to the conditions provided in this Act, to collect and
remit the sales and use taxes of such Member States and of local taxing
jurisdictions of such Member States.
(b) Purpose.--The purpose of this Act is to--
(1) effectuate the limited authority granted to Member
States under the Streamlined Sales and Use Tax Agreement; and
(2) not grant additional authority unrelated to the
accomplishment of the purpose described in paragraph (1).
SEC. 4. AUTHORIZATION TO REQUIRE COLLECTION OF SALES AND USE TAXES.
(a) Grant of Authority.--
(1) In general.--Each Member State under the Streamlined
Sales and Use Tax Agreement is authorized, subject to the
requirements of this section, to require all sellers not
qualifying for the small business exception provided under
subsection (d) to collect and remit sales and use taxes with
respect to remote sales sourced to that Member State under the
Agreement.
(2) Requirements for authority.--The authorization provided
under paragraph (1) shall be granted once all of the following
have occurred:
(A) 10 States comprising at least 20 percent of the
total population of all States imposing a sales tax, as
determined by the 2000 Federal census, have petitioned
for membership and have become Member States under the
Agreement.
(B) The following necessary operational aspects of
the Agreement have been implemented by the Governing
Board:
(i) Provider and system certification.
(ii) Setting of monetary allowance by
contract with providers.
(iii) Implementation of an on-line
multistate registration system.
(iv) Adoption of a standard form for
claiming exemptions electronically.
(v) Establishment of advisory councils.
(vi) Promulgation of rules and procedures
for dispute resolution.
(vii) Promulgation of rules and procedures
for audits.
(viii) Provisions for funding and staffing
the Governing Board.
(C) Each Member State has met the requirements to
provide and maintain the databases and the taxability
matrix described in the Agreement, pursuant to
requirements of the Governing Board.
(3) Limitation of authority.--The authorization provided
under paragraph (1)--
(A) shall be granted notwithstanding any other
provision of law; and
(B) is dependent upon the Agreement, as amended,
meeting the minimum simplification requirements of
section 6.
(b) Termination of Authority.--
(1) In general.--The authorization provided under
subsection (a) shall terminate for all States if--
(A) the requirements contained in subsection (a)
cease to be satisfied; or
(B) any amendment adopted to the Agreement after
the date of enactment of this Act is not within the
scope of the administration of sales and use taxes or
taxes on telecommunications services by the Member
States.
(2) Loss of member state status.--The authorization
provided under subsection (a) shall terminate for a Member
State, if such Member State no longer meets the requirements
for Member State status under the terms of the Agreement.
(c) Determination of Status.--
(1) In general.--The Governing Board shall determine if
Member States are in compliance with the requirements of
subsections (a) and (b).
(2) Compliance determination.--Upon the determination of
the Governing Board that all the requirements of subsection (a)
have been satisfied, the authority of each Member State to
require a seller to collect and remit sales and use taxes shall
commence on the first day of a calendar quarter at least 6
months after the date the Governing Board makes its
determination.
(d) Small Business Exception.--No seller shall be subject to a
requirement of any State to collect and remit sales and use taxes with
respect to a remote sale if--
(1) the seller and its affiliates collectively had gross
remote taxable sales nationwide of less than $5,000,000 in the
calendar year preceding the date of such sale; or
(2) the seller and its affiliates collectively meet the
$5,000,000 threshold of this subsection but the seller has less
than $100,000 in gross remote taxable sales nationwide.
SEC. 5. DETERMINATIONS BY GOVERNING BOARD AND JUDICIAL REVIEW OF SUCH
DETERMINATIONS.
(a) Petition.--At any time after the Governing Board has made the
determination required under section 4(c)(2), any person who may be
affected by the Agreement may petition the Governing Board for a
determination on any issue relating to the implementation of the
Agreement.
(b) Review in Court of Federal Claims.--Any person who submits a
petition under subsection (a) may bring an action against the Governing
Board in the United States Court of Federal Claims for judicial review
of the action of the Governing Board on that petition if--
(1) the petition relates to an issue of whether--
(A) a Member State has satisfied or continues to
satisfy the requirements for Member State status under
the Agreement;
(B) the Governing Board has performed a
nondiscretionary duty of the Governing Board under the
Agreement;
(C) the Agreement continues to satisfy the minimum
simplification requirements set forth in section 6; or
(D) any other requirement of section 4 has been
satisfied; and
(2) the petition is denied by the Governing Board in whole
or in part with respect to that issue, or the Governing Board
fails to act on the petition with respect to that issue not
later than 6 months after the date on which the petition is
submitted.
(c) Timing of Action for Review.--An action for review under this
section shall be initiated not later than 60 days after the denial of
the petition by the Governing Board, or, if the Governing Board failed
to act on the petition, not later than 60 days after the end of the 6-
month period beginning on the day after the date on which the petition
was submitted.
(d) Standard of Review.--
(1) In general.--In any action for review under this
section, the court shall set aside the actions, findings, and
conclusions of the Governing Board found to be arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with law.
(2) Remand.--If the court sets aside any action, finding,
or conclusion of the Governing Board under paragraph (1), the
court shall remand the case to the Governing Board for further
action consistent with the decision of the court.
(e) Jurisdiction.--
(1) Generally.--Chapter 91 of title 28, United States Code,
is amended by adding at the end the following:
``SEC. 1510. JURISDICTION REGARDING THE STREAMLINED SALES AND USE TAX
AGREEMENT.
``The United States Court of Federal Claims shall have exclusive
jurisdiction over actions for judicial review of determinations of the
Governing Board of the Streamlined Sales and Use Tax Agreement under
the terms and conditions provided in section 5 of the Sales Tax
Fairness and Simplification Act.''.
(2) Conforming amendment to table of sections.--The table
of sections at the beginning of chapter 91 of title 28, United
States Code, is amended by adding at the end the following new
item:
``1510. Jurisdiction regarding the streamlined sales and use tax
agreement.''.
SEC. 6. MINIMUM SIMPLIFICATION REQUIREMENTS.
(a) In General.--The minimum simplification requirements for the
Agreement, which shall relate to the conduct of Member States under the
Agreement and to the administration and supervision of such conduct,
are as follows:
(1) A centralized, one-stop, multistate registration system
that a seller may elect to use to register with the Member
States, provided a seller may also elect to register directly
with a Member State, and further provided that privacy and
confidentiality controls shall be placed on the multistate
registration system so that it may not be used for any purpose
other than the administration of sales and use taxes.
Furthermore, no taxing authority within a Member State or a
Member State that has withdrawn or been expelled from the
Agreement may use registration with the centralized
registration system for the purpose of, or as a factor in
determining, whether a seller has a nexus with that Member
State for any tax at any time.
(2) Uniform definitions of products and product-based
exemptions from which a Member State may choose its individual
tax base, provided, however, that all local jurisdictions in
that Member State shall have a common tax base identical to the
State tax base of that Member State. A Member State may enact
other product-based exemptions without restriction if the
Agreement does not have a definition for the product or for a
term that includes the product. A Member State shall relax the
good faith requirement for acceptance of exemption certificates
in accordance with section 317 of the Agreement, as amended
through the date of enactment of this Act.
(3) Uniform rules for sourcing and attributing transactions
to particular taxing jurisdictions.
(4) Uniform procedures for the certification of service
providers and software on which a seller may elect to rely in
order to determine Member State sales and use tax rates and
taxability.
(5) Uniform rules for bad debts and rounding.
(6) Uniform requirements for tax returns and remittances.
(7) Consistent electronic filing and remittance methods.
(8) Single, State-level administration of all Member State
and local sales and use taxes, including a requirement for a
State-level filing of tax returns in each Member State.
(9) A single sales and use tax rate per taxing
jurisdiction, except that a State may impose a single
additional rate, which may be zero, on food, food ingredients,
and drugs, provided that this limitation does not apply to the
items identified in section 308 C of the Agreement, as amended
through the date of enactment of this Act.
(10) A Member State shall eliminate caps and thresholds on
the application of sales and use tax rates and exemptions based
on value, provided that this limitation does not apply to the
items identified in section 308 C of the Agreement, as amended
through the date of enactment of this Act.
(11) A provision requiring each Member State to complete a
taxability matrix, as adopted by the Governing Board. The
matrix shall include information regarding terms defined by the
Agreement in the Library of Definitions. The matrix shall also
include, pursuant to the requirements of the Governing Board,
information on use, entity, and product based exemptions.
(12) A provision requiring that each Member State relieves
a seller or service provider from liability to that Member
State and local jurisdiction for collection of the incorrect
amount of sales or use tax, and relieves the purchaser from
penalties stemming from such liability, provided that
collection of the improper amount is the result of relying on
information provided by that Member State regarding tax rates,
boundaries, or taxing jurisdiction assignments, or in the
taxability matrix regarding terms defined by the Agreement in
the Library of Definitions.
(13) Audit procedures for sellers, including an option
under which a seller not qualifying for the small business
exception in section 4(d) may request, by notifying the
Governing Board, to be subject to a single audit on behalf of
all Member States for sales and use taxes (other than use taxes
on goods and services purchased for the consumption of the
seller). The Governing Board, in its discretion, shall
authorize such a single audit.
(14) As of the day that authority to require collection
commences under section 4, each Member State shall provide
reasonable compensation for expenses incurred by a seller
directly in administering, collecting, and remitting sales and
use taxes (other than use taxes on goods and services purchased
for the consumption of the seller) to that Member State. Such
compensation may vary in each Member State depending on the
complexity of the sales and use tax laws in that Member State
and may vary by the characteristics of sellers in order to
reflect differences in collection costs. Such compensation may
be provided to a seller or a third party service provider whom
a seller has contracted with to perform all the sales and use
tax responsibilities of a seller.
(15) Appropriate protections for consumer privacy.
(16) Governance procedures and mechanisms to ensure timely,
consistent, and uniform implementation and adherence to the
principles of the streamlined system and the terms of the
Agreement.
(17) Each Member State shall apply the simplification
requirements of the Agreement to taxes on telecommunications
services, except as provided herein. This requirement is
applicable to Member States as of July 1, 2010, except that
sales and use taxes on telecommunications services shall be
subject to the Agreement and the authority granted to the
Member States when the requirements of section 4(a) are met. On
or after July 1, 2010, for those Member States which meet the
requirements of this paragraph, the authority granted such
Member States under section 4 may be exercised by such Member
States, pursuant to the terms of section 4 and section 5, with
respect to taxes on telecommunications services other than
sales and use taxes on such services. The following are
exceptions to the requirement established under this paragraph:
(A) The requirement for one uniform return shall
not apply, provided, however, there shall be one
uniform return for each type of tax on
telecommunications services within a State.
(B) The requirements for rate simplification are
modified to require that each taxing jurisdiction shall
have only one rate for each type of tax on
telecommunications services.
(C) The requirements for tax base uniformity in
section 302 of the Agreement shall apply to each type
of tax on telecommunications services within a State,
but shall not be construed to require that the tax base
for different types of taxes on telecommunications
services must be identical to the tax base for sales
and use taxes imposed on telecommunications services.
(18) Uniform rules and procedures for ``sales tax
holidays''.
(19) Uniform rules and procedures to address refunds and
credits for sales taxes relating to customer returns,
restocking fees, discounts and coupons, and rules to address
allocations of shipping and handling and discounts applied to
multiple item and multiple seller orders.
(b) Requirement To Provide Simplified Tax Systems.--
(1) In general.--The requirements of this section are
intended to ensure that each Member State provides and
maintains the necessary simplifications to its sales and use
tax system to warrant the collection authority granted to it in
section 4.
(2) Reduction of administrative burdens.--The requirements
of this section should be construed--
(A) to require each Member State to substantially
reduce the administrative burdens associated with sales
and use taxes; and
(B) as allowing each Member State to exercise
flexibility in how these requirements are satisfied.
(3) Exception.--In instances where exceptions to the
requirements of this section can be exercised in a manner that
does not materially increase the administrative burden on a
seller obligated to collect or pay the taxes, such exceptions
are permissible.
SEC. 7. LIMITATION.
(a) In General.---Nothing in this Act shall be construed as--
(1) subjecting a seller to franchise taxes, income taxes,
or licensing requirements of a Member State or political
subdivision thereof; or
(2) affecting the application of such taxes or requirements
or enlarging or reducing the authority of any Member State to
impose such taxes or requirements.
(b) No Effect on Nexus, Etc.--
(1) In general.--No obligation imposed by virtue of the
authority granted by section 4 shall be considered in
determining whether a seller has a nexus with any Member State
for any other tax purpose.
(2) Permissible member state authority.--Except as provided
in subsection (a), and in section 4, nothing in this Act
permits or prohibits a Member State from--
(A) licensing or regulating any person;
(B) requiring any person to qualify to transact
intrastate business;
(C) subjecting any person to State taxes not
related to the sale of goods or services; or
(D) exercising authority over matters of interstate
commerce.
SEC. 8. EXPEDITED JUDICIAL REVIEW.
(a) Three-Judge District Court Hearing.--Notwithstanding any other
provision of law, any civil action challenging the constitutionality of
this Act, or any provision thereof, shall be heard by a district court
of three judges convened pursuant to the provisions of section 2284 of
title 28, United States Code.
(b) Appellate Review.--
(1) In general.--Notwithstanding any other provision of
law, an interlocutory or final judgment, decree, or order of
the court of three judges in an action under subsection (a)
holding this Act, or any provision thereof, unconstitutional
shall be reviewable as a matter of right by direct appeal to
the Supreme Court.
(2) 30-day time limit.--Any appeal under paragraph (1)
shall be filed not more than 30 days after the date of entry of
such judgment, decree, or order.
SEC. 9. DEFINITIONS.
For the purposes of this Act the following definitions apply:
(1) Affiliate.--The term ``affiliate'' means any entity
that controls, is controlled by, or is under common control
with a seller.
(2) Governing board.--The term ``Governing Board'' means
the governing board established by the Streamlined Sales and
Use Tax Agreement.
(3) Member state.--The term ``Member State''--
(A) means a Member State as that term is used under
the Streamlined Sales and Use Tax Agreement as of the
date of enactment of this Act; and
(B) does not include associate members under the
Agreement.
(4) Nationwide.--The term ``nationwide'' means throughout
each of the several States and the District of Columbia, the
Commonwealth of Puerto Rico, Guam, American Samoa, the Virgin
Islands, the Northern Mariana Islands, and any other territory
or possession of the United States.
(5) Nondiscretionary duty of the governing board.--The
phrase ``nondiscretionary duty of the Governing Board'' means
any duty of the Governing Board specified in the Agreement as a
requirement for action by use of the term ``shall'', ``will'',
or ``is required to''.
(6) Person.--The term ``person'' means an individual,
trust, estate, fiduciary, partnership, corporation, or any
other legal entity, and includes a State or local government.
(7) Remote sale.--The term ``remote sale'' refers to a sale
of goods or services attributed to a particular Member State
with respect to which a seller does not have adequate physical
presence to establish nexus under the law existing on the day
before the date of enactment of this Act so as to allow such
Member State to require, without regard to the authority
granted by this Act, the seller to collect and remit sales or
use taxes with respect to such sale.
(8) Remote seller.--The term ``remote seller'' means any
seller who makes a remote sale.
(9) State.--The term ``State'' means any State of the
United States of America and includes the District of Columbia,
Puerto Rico, and any other territory or possession of the
United States.
(10) Streamlined sales and use tax agreement.--The term
``Streamlined Sales and Use Tax Agreement'' (or ``the
Agreement'') means the multistate agreement with that title
adopted on November 12, 2002, as amended through the date of
enactment of this Act and unless the context otherwise
indicates as further amended from time to time.
(11) Tax on telecommunications services.--The term ``tax on
telecommunications services'' or ``taxes on telecommunication
services'' shall encompass the same taxes, charges, or fees as
are included in section 116 of title 4, United States Code,
except that ``telecommunication services'' shall replace
``mobile telecommunications services'' whenever such term
appears.
(12) Telecommunications service.--
(A) In general.--The term ``telecommunications
service'' means the electronic transmission,
conveyance, or routing of voice, data, audio, video, or
any other information or signals to a point, or between
or among points.
(B) Inclusion.--The term ``telecommunication
service''--
(i) includes transmission services in which
computer processing applications are used to
act on the form, code, or protocol of the
content for purposes of transmission,
conveyance, or routing without regard to
whether such services are referred to as voice
over Internet protocol services or are
classified by the Federal Communications
Commission as enhanced or value added services;
and
(ii) does not include the data processing
and information services that allow data to be
generated, acquired, stored, processed, or
retrieved and delivered by an electronic
transmission to a purchaser where the primary
purpose of such purchaser for the underlying
transaction is the processed data or
information.
SEC. 10. SENSE OF THE CONGRESS ON DIGITAL GOODS AND SERVICES.
It is the sense of the Congress that each State that is a party to
the Agreement should work with other States that are also party to the
Agreement to prevent double taxation in situations where a foreign
country has imposed a transaction tax on a digital good or service.
Ms. Sanchez. Today's hearing serves three purposes. First,
the witnesses will help us understand whether there is a need
for a simplified sales and use tax system. Second, this hearing
will provide us with an opportunity to hear about the progress
that States have made in coming to an agreement to simplify
their sales and use tax system. And finally, the testimony will
help us determine how soon the States can meet the requirements
established in H.R. 3396 and whether the legislation fully
addresses the concerns of consumers, States and businesses.
We have four witnesses with us this morning to testify
about the issues addressed by H.R. 3396 and to answer our
questions about the legislation and the agreement and what
impact H.R. 3396 would have on consumers, business and States'
local revenue. Accordingly, I look forward to today's hearing.
I now recognize my colleague and distinguished Ranking
Member, Mr. Cannon and the co-author of the bill that we are
examining today for his opening remarks.
Mr. Cannon. I thank you, Madam Chair. I am pleased that we
are holding this hearing after the passage of the Internet Tax
Act Amendments of 2007. In years past, these issues have become
intertwined. I appreciate the leadership of Chairman Conyers
and Chairwoman Sanchez in keeping them separate during the
consideration of Internet tax moratorium.
The Streamlined Sales Tax and Use Agreement, which is now
expanded--I am trying to figure out whether we should call it
the SST, which seems simpler and more innocuous, or the SSUTA,
which is a little more cumbersome. I think it deserves the
cumbersome title. But I may lapse into the SST.
This agreement was borne out of a desire to simplify and
reduce the administrative burden of imposing sales taxes for
businesses. And it was also designed to drive a framework for
the remote collection of sales taxes.
And this was done to address two decisions by the U.S.
Supreme Court that held that States cannot compel out-of-state
vendors--that is businesses that do not have any physical nexus
with the State--to collect and remit the sales tax owed by that
State's residents. With the growth of Internet commerce, there
is concern on behalf of many States that their sales tax
revenues will decline as more consumers buy goods from
retailers that the States cannot compel to collect sales taxes.
A 2000 study conducted by two University of Tennessee
professors showed that by 2006 the total sales that would be
lost to States due to e-commerce would be about $45 billion. I
thought that laughable years ago when we first viewed that
study. And those authors have revised their study repeatedly,
and the latest estimate is that States and local governments
will lose in uncollected sales taxes between $21.5 billion and
$32.6 billion in 2008.
However, these numbers are not beyond dispute. Direct
Marketing Association estimates that in 2006 States lost only
$4.2 billion, less than 10 percent of what the Tennessee study
estimated.
Further, as more e-commerce is transacted on the Web sites
than more traditional brick and mortar stores, the so-called--I
call them the click and brick stores--the number of sales that
are conducted tax-free continues to decline. That is because
the click and brick stores have a physical presence in many
taxing jurisdictions and accordingly, collect taxes in those
jurisdictions, even for sales on the Internet.
In fact, forbes.com recently reported that one of the
authors of the original University of Tennessee study estimates
that 50 percent of all sales taxes--or all sales conducted on
the Internet are subject to sales taxes. So while I appreciate
the concerns of the States involved in this process, it appears
to me that many of the original reasons for implementing a
streamlined sales agreement have not materialized and, in fact,
are being gradually abated by the presence of the so-called
click and brick enterprises.
Further, while I laud the goals of a streamline tax, it
seems to me that the SST or the SSUTA as it has been
implemented is not streamlined at all. The agreement as it
exists today is over 130 pages, been modified no less than 10
times in its 5-year history. If Congress enacts H.R. 3396, I
fear that we will be giving our imprimatur to something that is
just a work in progress.
Which brings me to my final point. If Congress enacts H.R.
3396, it would require businesses in all 50 States, including
the 5 States that have no sales tax, to collect and remit sales
taxes--sales and use taxes--to the 17 States that actually have
implemented the SSUTA. This is different from the approach that
Congress usually takes when it approves interstate compacts.
That is, permitting the States in the compact to share
resources. Rather, H.R. 3396 would require businesses in States
that are not party to the SSUTA to, in effect, participate
against their will.
Madam Chair, while I commend you for holding a hearing on
this legislation, I would much prefer that we think of other
issues affecting interstate commerce and discriminatory taxes.
To that end, may I suggest the Subcommittee hold hearings on
bills that prevent the States from imposing discriminatory
taxes on pipelines, rental cars and multi-channel video
services? I hope the Subcommittee will deal with these issues
next session, in the interest of putting more money into the
pockets of consumers and less in the coffers of tax collectors.
And may I just say as a final note that it has been a great
pleasure to work with Mr. Delahunt on this issue over a very
long period of time. He is expert in these issues, and our
disagreements tend to be relatively minor and pleasant. And I
appreciate that, Madam Chair, and yield back.
Ms. Sanchez. I thank the gentleman for his statement. I
want to apologize. I misspoke earlier when I introduced you. I
said that you were a co-author of the bill. And I understand
that you are not. I apologize. My apologies----
Mr. Cannon. But a dear friend was the author.
Ms. Sanchez. My apologies and so noted that you are a dear
friend of Mr. Delahunt. And I am sure he is not offended.
Mr. Cannon. Not in the least, Madam Chair.
Ms. Sanchez. At this time, I would like to recognize for an
opening statement, Mr. Conyers, the distinguished Member of our
Subcommittee and the Chairman of the full Committee on the
Judiciary. Mr. Conyers?
Mr. Conyers. Thank you, Chairwoman Sanchez.
And good morning to all of you.
I commend you, Madam Chairwoman, for holding hearings on
the important legislation, and I was just busily lining out my
commendations to Chris Cannon before I found out he was not a
sponsor of the bill. But he is still a good friend.
I join Bill Delahunt and the gentleman from Alabama, Mr.
Bachus and others, Ray LaHood, in looking at this very
important question. And I think that holding hearings about a
simplified, streamlined tax agreement could increase our
Nation's economic efficiency, facilitate the growth of
electronic commerce, and help our States and local government
maintain financial support for public health, education,
safety.
And so, I come here with the encouragement of my governor,
Jennifer Granholm, who has lost somewhere between $700 million
and $1.1 billion in foregone sales tax because of the complex
system which we are here to examine how we can simplify. So I
am very happy to join you and would ask that my statement be
included in the record.
Ms. Sanchez. Without objection, so ordered.
[The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and Administrative
Law
Sales taxes constitute a significant state and local revenue
source, with the census bureau estimating that nearly one third of
State and local revenues come from general sales and use taxes. With
ever increasing online sales, states and local governments must plan
their budgets anticipating huge revenue loses due to uncollected sales
and use taxes from online sales. For example, my beloved state of
Michigan is estimated to lose between $700 million and $1.1 billion in
foregone sales taxes in 2008, with online sales accounting for over
half of those losses. Even the most conservative estimates suggest that
Michigan will lose in the hundreds of millions of dollars in 2008, at a
time when the state is hemorrhaging and is in dire need of revenue to
support quality education, effective public safety, and other basic
services. And that is just Michigan. Think of how much each state could
do to reduce class sizes, build new schools, strengthen our bridges,
and protect our communities and citizens with these funds.
However, the Supreme Court has ruled that partly because the states
had very complex tax systems, state do not have the authority to
require out-of-state sellers to collect sales taxes. This bipartisan
legislation, of which I proudly cosponsor, addresses the Supreme
Court's concern for a simplified tax system. It authorizes states to
develop and enter into an interstate sales and use tax agreement where
states joining the agreement and adopting a simplified sales tax system
would be authorized to require remote sellers to collect sales taxes.
Many states have already settled on a framework and streamlined their
tax code for the benefit of consumers and both small businesses and
national retailers. Thus, the framework makes it easier for businesses
to collect sales taxes across state lines.
I thank my colleague from Massachusetts, Mr. Delahunt, for
introducing this legislation. And I am pleased that the Chair of this
Subcommittee is holding this hearing on the important legislation. I
believe that a simplified streamlined tax agreement would increase our
nation's economic efficiency, facilitate the growth of electronic
commerce, and help our states and local government maintain financial
support for public education, health and safety. H.R. 3396 accomplishes
this goal.
Ms. Sanchez. I want to thank Mr. Conyers for coming. And I
would also like to recognize a colleague of mine from the state
of California, Zoe Lofgren.
Ms. Lofgren. Thank you, Madam Chair. And I would ask
unanimous consent that my full statement be made a part of the
record.
Ms. Sanchez. Without objection, so ordered.
[The prepared statement of Ms. Lofgren follows:]
Prepared Statement of the Honorable Zoe Lofgren, a Representative in
Congress from the State of California, and Member, Subcommittee on
Commercial and Administrative Property
Thank you Madam Chairwoman. I would also like to thank the
witnesses and thank Mr. Delahunt for all of his work on this issue.
I'm sorry that I can't attend today's hearing in its entirety.
Unfortunately I will have to leave shortly to chair a hearing on the
use of robocalls in federal elections
Simplification and interoperation of state sales and use tax
systems is a worthy goal and area in which state and local governments
as well as private businesses have many shared interests.
I have watched this issue closely and with each iteration, the
Streamlined Sales Tax Project and authorizing legislation gets closer
to a system that is simple, fair, and does not unduly burden interstate
commerce.
That being said, I am uncertain that we have reached the conclusion
of this process. Numerous question and concerns remain.
For example, it is still unclear how to reconcile a dual-sourcing
system that would accommodate either origin or destination sourcing
with the requirement in HR 3396 to maintain uniform sourcing.
Similarly it is unclear exactly what is entailed by the bill's
requirement that states provide ``reason compensation for expenses
incurred by the seller'' in implementing the SSUTA. Given that there
are over 7,500 distinct taxing jurisdictions in the United States with
their own rates, exclusions, and tax holidays, compliance will be
significantly more difficult and costly than simply purchasing
software.
This issue takes on added significance given the initial estimates
of how much revenue states are losing, and therefore would realize
under SSUTA, may have relied on incorrect assumptions.
Obviously these issues are very serious ones not only for online
commerce, but also for states, like California, that have concluded
that ``conforming would require a major overhaul of the state's sales
and use tax system.'' [California Board of Equalization.]
Member states believe that they have many of these issues solved.
The best way to test that claim would be to have the SSUTA operate as a
voluntary multistate compact among member states for a few years before
imposing it on every state in the nation.
This would allow us to determine exactly how simplified and
streamlined the SSUTA has become.
Barring that approach, I think we must continue to examine the most
significant obstacles to a genuinely simplified remote sales tax system
and therefore appreciate the Chairwoman's decision to hold this
hearing.
Thank you.
Ms. Lofgren. I would just note that I think this is an
important hearing. I thank you and also especially Mr. Delahunt
for his years of work on this issue. I am going to have to
leave the hearing before it is concluded because I am chairing
a hearing in another Subcommittee. But I do believe that the
goal of simplification is a worthy one. However, as we all
know, it is very complicated and with the over 7,500 distinct
taxing jurisdictions in the United States with their own rates,
exclusions, tax holidays, compliance could be tough.
I note that the state of California has indicated to me
that conforming would require a major overhaul of California's
sales and use tax system. California is not on board on this
proposal yet, and as you know, I chair the California
Democratic delegation. So we are concerned that maybe we are
not there yet. But that the goal is a worthy one, and so we
have many questions, and I am sure that we will have ample
opportunity to review these issues. I appreciate, once again,
Mr. Delahunt's leadership.
Ms. Sanchez. Thank you, Ms. Lofgren.
Now, last but certainly not least, I would like to
recognize the author of this bill for his opening statement,
the distinguished gentleman from Massachusetts, Mr. Delahunt.
Mr. Delahunt. Well, thank you, Madam Chair. And I
appreciate the opportunity and your sincere efforts to see that
Congress gives full consideration to the issue of taxation of
remote sales. I want to thank you for scheduling this hearing
and look forward to working with you and other Members of the
Subcommittee to make it a productive exercise.
I also want to thank the Chair of the full Committee for
his leadership on this issue, because I know it is of
importance to him. And for a moment I was pleased to hear that
my good friend from Utah had an epiphany, however brief. But I
am sure that after listening to the testimony today he will
give more consideration, more thoughtful consideration to the
issue.
Every year the first days of the holiday shopping season
are examined as an indicator of economic health. I can't say
that I am one of those people in line at the retail stores at 5
a.m. after Thanksgiving, but so-called Black Friday has become
a staple of measurement in the retail sector. In the last few
years, the media coverage of those early shopping days has
included a new term, Cyber Monday, when shoppers who didn't get
enough of Black Friday flood online stores in search of gifts
for friends and loved ones.
Well, this year Cyber Monday, which was November 26, online
sales increased 21 percent over last year, 21 percent, $733
million, which was an excess of over--rather $733 million over
the $610 million figure in 2006. Each of the next 3 days also
surpassed $700 million in sales, resulting in more than $4
billion in online spending during the week.
More than $13.4 billion has been spent online during this
year's holiday season to date, clocking an 18 percent gain
versus the corresponding days of last year. Now, people will
use these numbers to debate the health of the economy. But my
point is simple. It is that with every passing year, the
American people are fulfilling more of their retail needs
online as opposed to so-called brick and mortar stores.
Why is this important? Several reasons. States have relied
on sales and use taxes since 1932 for roughly one-third of
their revenue. Today our States are collectively losing tens of
billions of dollars each year because the taxable transactions
on which they rely on are increasingly taking place over the
Internet.
Adjusted retail e-commerce sales from the third quarter of
2007 were an estimated $35 billion, an increase of 3.6 percent
from the second quarter of 2007 and an increase of almost 20
percent from the third quarter, the corresponding quarter of
2006, almost 20 percent. These increases far exceed overall
brick and mortar retail growth.
When the remote sellers in these e-commerce transactions do
not collect sales tax, the obvious result is an erosion of the
sales tax base of those States that rely on this revenue
stream. This amounted to State and local governments losing
between $17 to $20 billion in uncollected sales and use taxes
for remote transactions in the year 2004. That number is likely
to go up to $66 billion by 2011 with the total loss, the
aggregate coming to nearly half a trillion dollars by that
date.
Put these numbers together with recent reports about the
health of State budgets, and, folks, we have a serious problem.
Sixteen States are facing major budget shortfalls right now
largely due to the rising health care costs and housing costs.
In fiscal year 2007 State budget balances are below 2006 fiscal
year levels. And the downward trend is expected to carry over
into fiscal year 2008, given the State of our economy.
Many of our State and local government officials are facing
a stark choice between unpopular tax increases. Many will have
to resort to the most aggressive of all taxes, the property tax
and drastic cuts, more drastic cuts in services or maybe both.
But this issue isn't just simply about the devastating loss
of revenue. It is about fairness and equity. By failing to
ensure sales tax parity between remote sellers and Main Street
merchants, we are putting at risk the thousands of small
businesses that sustain our local economy as well as the fabric
of our communities and our neighborhoods.
For example, it is that small store, the independent book
store, for example, that doesn't just provide books. It
sponsors the little league team, creates a venue for people to
come together. It enhances, if you will, a sense of community.
If there is any bill that is supportive of the small
business owner in this country, it is this legislation that is
before us today. And please note it is both local and remote
businesses that benefit from local infrastructure, roads, fire,
and safety services in our cities and towns. But right now most
remote sellers have an unfair advantage over their brick and
mortar competitors.
States, cities, and towns must be empowered to level the
playing field for their home town businesses. And I am not in
any way opposed to the progress represented by e-commerce. I am
amazed by it. But I strongly believe that fairness requires
that remote sellers collect and pay the same taxes that our
home town businesses on Main Street have to collect and pay.
You know, States have gone to work. They have done their
jobs. And it is time that Congress recognizes that.
States went to work beginning with the creation of the
streamlined sales and use tax agreement, which has served as a
blueprint of States to streamline their taxation systems. In
the 108th Congress, I stated back then that the States have
made substantial progress and that once a sufficient number of
States have implemented the agreement, Congress should move
expeditiously to pass what was an earlier version of the bill
that we are having this hearing on today. That bill, like the
one before us, would simply bless, if you will, the agreement
and authorize those member States to compel out-of-state
sellers to collect and remit sales and use tax arising from
sales out of the member's jurisdiction.
Our current bill also outlines minimum simplification
requirements and exempts remote small businesses from any such
requirement. Let me repeat. It is straightforward. It is
narrowly tailored and responds directly to the Supreme Court's
conclusion in Quill.
It is Congress' authority and responsibility to enable the
States to develop tax policy that reflects today's economy,
rather than buying into antiquated notions of what the
marketplace wants. But we have yet to adopt what I believe to
be common sense legislation.
Well, since October 1, 2005, approximately 1,100 remote
retailers have volunteered to collect an out-of-state sales tax
for these States. To date, member States have collected almost
$115 million in new sales tax revenues from those volunteer
sellers which previously would have been uncollected.
You know, in the 7 years since this bill was first
introduced the States have organized and lined up to address
the issue. They have done everything that we have asked them to
do. Now that the States are meeting their responsibilities, it
is long past due that the Federal Government and the United
States Congress stand up and do what is clearly our
responsibility.
Recognizing that the Ranking Member is from Utah, I thought
it might be apropos that I conclude with a very brief quote
from the former governor of Utah, the current secretary of
health and human services, a good man, a man with great common
sense and on this particular issue, a man of great insight and
intellect. These are Secretary Leavitt's words back in 1995.
And I presume I have no doubt that he continues to embrace
them.
``The current sales tax is a great system of taxation for
the agricultural and industrial economy it was created for. But
it is unworkable now. There is no new tax involved in a
streamlined sales tax system, none. Every tax obligation talked
about exists today.''
``Citizens know what the sales tax is and what it pays for,
the schools their children attend, the roads they drive, and
the fire and police departments that protect them. The new
streamlined sales tax system when fully deployed treats every
buyer and seller the same, no special privilege, no selected
burden, just a level playing field.''
``The new system is voluntary. Whether you are a New
Hampshire that has no sales tax or a Nevada where sales tax
comprises 80 percent of all State revenue, it is your choice.
If you don't like it or you don't need it, don't use it.''
I yield back, and I----
Mr. Cannon. Would the gentleman yield briefly?
Mr. Delahunt. Very briefly.
Mr. Cannon. I noticed the clock wasn't working as you spoke
briefly.
Ms. Sanchez. I want it noted for the record the Chair has
been very generous with the time.
Mr. Delahunt. I would note that.
Mr. Cannon. My dear friend, Mr. Leavitt, former Governor
Leavitt, now Secretary Leavitt made that statement in 1995,
generations ago in Internet time. And I think that the State
legislature, which is now back to the Utah State Legislature,
which was, I think, the first legislature to back the SST, has
now pulled out and is in that standby status, and I think
wisely so because time has led them to understand the
difficulties of SST and the burdens that it puts on the world
probably don't make sense. And that is why we are going to have
this hearing.
So we will examine that in a little more, but I wanted to
validate the prescience of my former governor, but it is the
transformation of society that has made him less relevant.
Thank you, and I yield back.
Ms. Sanchez. Well, I am glad everybody is happy about
today's hearing. I hope that it will provide us with the
information that we are seeking in order to make a more
informed decision on where we fall on this issue.
I want to thank Mr. Delahunt for his opening statement. And
without objection, other Members' opening statements will be
included for the record. Without objection, the Chair will be
authorized to declare a recess of the hearing at any point.
[The prepared statement of Mr. Cohen follows:]
Prepared Statement of the Honorable Steve Cohen, a Representative in
Congress from the State of Tennessee, and Member, Subcommittee on
Commercial and Administrative Law
Ms. Sanchez. And at this time, I am pleased to introduce
the witnesses for today's hearing. Our first witness is Joan
Wagnon. Ms. Wagnon is currently serving as secretary of revenue
for the state of Kansas and was appointed to her post on
January 13, 2003 by Governor Kathleen Sebelius. Is that a
correct pronunciation?
Prior to her appointment, she was president of Central
National Bank, Topeka, elected mayor of Topeka on April 1,
1997. Ms. Wagnon was the first woman to serve as mayor since
the city's incorporation in 1867. Wow, what a breakthrough.
She also served 12 years in the Kansas House of
Representatives from 1983 to 1994. Ms. Wagnon currently serves
as president of the Streamlined Sales Tax Governing Board and
has been an officer since the organization's inception in 2005.
She also has served as chair of the Multi-State Tax Commission
from 2005 to 2007 and is currently on the board of directors
for the Federation of Tax Administrators.
Our second witness is Wayne Zakrzewski. Mr. Zakrzewski is a
vice president and associate general counsel for tax for
JCPenney Company, Incorporated where he has responsibility for
all legal matters related to tax, audit of sales, use and State
income taxes, property tax compliance, and value appeals, and
State tax research and planning. From 1981 to 1988 he served as
attorney deputy chief counsel of the Arkansas Revenue Division.
He has been an active participant in the streamlined sales
tax project since its beginning and currently serves as a
member of the board of directors of the Business Advisory
Council to the governing board of streamlined sales tax
agreement. He also served as co-chair of the steering committee
for the Joint Cost and Collection Study which was a joint
business and State government project to provide data
concerning the cost of the current sales tax business and to
provide tools to compare that cost with those costs of a
streamlined business.
We welcome you to our panel.
Our third witness is George Isaacson. Mr. Isaacson is a
senior partner in the law firm of Brann & Isaacson in Lewiston,
Maine, which represents over 70 direct marketers and electronic
merchants throughout the United States in connection with State
sales use and income tax matters.
For over 15 years he has provided counsel to the Direct
Marketing Association and has represented the DMA in the filing
of amicus cure briefs in State and Federal court. In addition
to tax advice, Mr. Isaacson also consults for direct marketers
on a wide range of electronic commerce issues.
We want to welcome you as well.
Mr. Isaacson also serves as outside general counsel to L.L.
Bean, Incorporated and frequently speaks before business groups
and trade associations regarding legal issues affecting
electronic commerce.
Our final witness is Steve Rauschenberger. Mr.
Rauschenberger is president of Rauschenberger Partners, a
partnership with extensive experience in government affairs,
strategic development, and business management. Prior to
founding the firm, Mr. Rauschenberger served for 15 years in
the Illinois State Senate holding various leadership positions,
including assistant Republican leader and Chairman of the
Senate Appropriations Committee.
He is immediate past president of the National Conference
of State Legislature where he also served as co-chair of the
task force on telecommunications and electronic commerce. Prior
to his tenure in government, Mr. Rauschenberger was president
of Ackerman Brothers, Incorporated, which owned and operated
three retail furniture stores. And before taking that position,
he was a partner in the Rauschenberger Furniture Company, a
third generation family furniture retail business.
We want to welcome you to our panel this morning.
We want to thank you all for your willingness to
participate in today's hearing. Without objection, your written
statements will be placed in the record in their entirety. And
we would ask that you please limit your oral remarks to 5
minutes.
We have a lighting system when we remember to employ it,
which gives you a green light at the beginning of your
testimony. When you are 4 minutes into your testimony, it will
turn yellow to warn you that you have a minute remaining. And
when the yellow light turns red, you know that your time has
expired. If we catch you mid-sentence when the light turns red,
we would ask that you please just summarize your final thoughts
so that we can move on to the next witness.
After each witness has presented his or her testimony,
Subcommittee Members will be permitted to ask questions subject
to the 5-minute limit.
With that, I would now invite Ms. Wagnon to please proceed
with her testimony.
TESTIMONY OF JOAN WAGNON, SECRETARY OF REVENUE, STATE OF
KANSAS, TOPEKA, KS, ON BEHALF OF THE STREAMLINED SALES TAX
GOVERNING BOARD
Ms. Wagnon. Well, good morning, Chairwoman Sanchez and
Chairman Conyers and Ranking Member Cannon, and all of the rest
of you Members of the Committee. I do appreciate the
opportunity to speak to you today. I am here representing the
governing board of the streamlined sales tax. And I do refer to
it as SST because it is shorter.
And I want to encourage Congress to recognize that the
simplifications that we have achieved in our member States
sales taxes are sufficient to remove the burden on interstate
commerce that the Supreme Court noted in Quill v. North Dakota
and sufficiently simplified for Congress to allow the States to
require remote retailers to collect our sales tax. That is our
goal. That is our work on simplification, and that leads to
mandatory collection.
I wanted to make one point today about the nature of----
Ms. Sanchez. Ms. Wagnon, I am sorry. Can I interrupt you
for a moment?
Ms. Wagnon. Yes.
Ms. Sanchez. We just want to check and make sure that your
microphone is on. Otherwise your testimony isn't recorded.
Ms. Wagnon. It says that it is green.
Ms. Sanchez. Okay.
Ms. Wagnon. Am I not close enough?
Ms. Sanchez. I suspected as much, I just wanted to verify.
And I apologize for interrupting.
Ms. Wagnon. Not a problem. I am just still looking to see
my light. So----
Ms. Sanchez. We will give you additional time and make sure
that you finish your statement.
Ms. Wagnon. My first point was that the nature of retail is
changing. And I think Congressman Delahunt's statement and Ms.
Sanchez's statement have eloquently spoken to that. And I won't
go into it again, except to say that our sales tax bases in
States across this country are rising maybe at 2 percent a
year. And we see the erosion at maybe 27 to 30 percent a year.
So that point is so valid.
So let me really give you an update on where we are with
SST about our need for simplification. And I am, quite frankly,
amazed at the phenomenon that is the streamlined sales tax
because you for the first time have seen business stakeholders
coming together with tax administrators, legislators, and
members of the public to devise solutions to problems that have
been huge.
We have a myriad of sales tax laws. You asked why do we
need to simplify. Just the number of forms that you fill out in
order to report in every State--they are all different. We now
have 22 States that are part of the agreement, and they all
have a single reporting form done electronically. That in and
of itself is simplification.
There is a map in your packet that we have provided that
shows you the number of States. Today we have 22. It is my hope
that we have 10 more States that we are working with that over
the course of the next year if we are able to maintain the
progress that we have made so far will be able to join with us.
Twenty-eight percent of the country's population now lives
in a streamlined state. The reason those States are not--those
10 are not with us now--we need to make a minor adjustment in
our sourcing rules so that some of the barriers that currently
exist can be overcome. We have a meeting scheduled in Dallas
next week, and we will be discussing those changes.
We made a number of changes in the agreement, as was noted
in the opening remarks, because we had not completely finished
the work when the agreement was first adopted. But what we have
done so far is absolutely amazing. Since December of 2005, we
have been able to bring those 22 States onboard, achieve the
simplifications that are outlined in the bill. And section 6 of
that bill is a wonderful framework for what simplification
looks like.
And our annual report does show that just in the last year
we brought in almost $89 million for the 2007 fiscal year. So
if you compare that to the number that is collected overall, it
has been an explosion of collections by these 1,072 sellers
that are currently registered.
What does our simplification look like? We have certified
service providers that provide services free of charge to
remote sellers to collect and distribute these new taxes. So
what could be simpler than that?
The payments come from the new money that is being
collected. We do have a simplified reporting form used by all
States.
In the past it was said there wasn't sufficient software.
But that is just not right. The software has been there. What
has been missing is the rates and boundaries databases where
States will certify these are the rates in all of these
different jurisdictions, these are the boundaries.
We do not allow them to change more than once a quarter. We
give notice to retailers when it does change. We hold them
harmless if we use these States' boundaries and databases. And
so, that makes it possible to do the collection.
We have a central registration system that provided amnesty
in the first 12 months. And it provides liability protection
for people that are enrolling.
We have managed to, I believe, accomplish everything that
is in section 6 of the bill where there is a listing of
simplification measures with one exception. We have not gotten
around to the issues in the dispute resolution process. We have
been pretty busy organizing the board. We have taken care of
our governance issues. We have come up with a standard uniform
product definitions.
The most recent amendment to the agreement was an amendment
about digital goods. We had a hard time figuring out what
digital goods are going to look like in the future. But we
finally have come up with those descriptions.
I think you are going to see fewer amendments in the
future, more effort toward bringing in new States. I think you
are going to see more effort to work with you in Congress to
help you with having information that shows that we have indeed
simplified the system and that our voluntary system is bringing
in to the best of our ability.
But the question is should it stay voluntary forever. I
don't think so. I think we are letting a lot of people off the
hook who are operating, as Mr. Delahunt said, at a competitive
advantage over the people in your home States because they
don't have to collect the sales tax. And that simply isn't
fair. So we would ask you to overturn the Quill decision, to
work with us and give us the ability to collect this tax.
[The prepared statement of Ms. Wagnon follows:]
Prepared Statement of Joan Wagnon
Good Morning Chairwoman Sanchez, Ranking Member Cannon, and Members
of the Subcommittee:
Thank you for giving me the opportunity to speak with you today. I
am Joan Wagnon, President of the Streamlined Sales Tax Governing Board
and Secretary of Revenue for the State of Kansas. I have also served as
a state legislator for 12 years, Mayor of Topeka for 4 years and
president of Central National Bank in Topeka--all helpful experiences
in my current capacity with the Streamlined Sales Tax Governing Board
since SST brings together state legislators and state tax
administrators with business interests and local governments. It's
quite a balancing act for the Board, but we recognize the importance of
respecting the partnerships that have been created in this process and
continuing to work together.
I am here today representing the Governing Board and wish to urge
Congress to recognize that the simplifications we have achieved in our
Member State's sales taxes are sufficient to remove the burden on
interstate commerce as noted by the Supreme Court in Quill v. North
Dakota, and sufficiently simplified for Congress to allow states to
require remote retailers to collect our sales taxes. That's our goal:
simplification and mandatory collection.
My remarks today will attempt to give you some background on
Streamlined Sales Tax (SST), why it is important to states as well as
the business community, and why the federal legislation is so important
to all of us involved in the project.
First, retailing is changing rapidly. So rapidly, that in fact,
without the federal legislation allowing states to require remote
retailers to collect the sales tax on interstate sales, whether catalog
or internet, states will experience an ever-accelerating loss in their
sales tax bases. I have attached an article to my testimony, ``E-
Tailers Launch Holiday Shopping Season'' that talks about the ``Cyber
Monday'' and the push for on-line sales. In the article internet
retailers are reporting huge surges in sales. One retailer reported ``.
. . that traffic soared more than 70 percent and sales were up 82
percent as of Monday afternoon. Another reported, ``. . . an almost 49
percent increase in sales compared with a year ago, beating
expectations for 20 percent growth.''
This continued explosion in growth of online sales is at the
expense of the brick and mortar stores in our hometowns. The
competitive advantage of shopping without sales tax collection is huge.
Most consumers don't remit the compensating use tax which their laws
have imposed, so the loss to the states is quite real. And that loss is
growing faster than our sales taxes grow. In Kansas, for example, our
sales tax collections are flat, and the money coming in from the use
tax collected under the voluntary SST program because we are a
Streamlined state, is quite necessary to prevent having to raise our
taxes which no one wants to do.
Second, I'd like to talk a little about SST, how we got started,
how many states are involved, the Agreement which all of us have
adopted, and where we are going.
The rise of the Streamlined Sales Tax Project is an amazing
phenomenon--45 states voluntarily coming together time after time over
a period of several years to create a voluntary system to demonstrate
to Congress and business that we can simplify sales taxes. The
leadership exerted by the National Conferences of State Legislatures,
the National Governor's Association, the Federation of Tax
Administrators, and the Multistate Tax Commission was enormously
helpful. The commitment and guidance from the business community was
remarkable. They have now formed a Business Advisory Council that meets
regularly to advise the Governing Board and have two ex officio members
on the Governing Board. In my 20 plus years in government, I've never
seen a coalition like this come together and work to solve problems.
The result was the Streamlined Sales and Use Tax Agreement (SSUTA)
which was adopted by the participating states in November, 2002. States
then set about changing and simplifying their tax laws.
WHO BELONGS TO THE STREAMLINED SALES TAX GOVERNING BOARD?
The Governing Board was formed pursuant to the Streamlined Sales
and Use Tax Agreement (SSUTA) on October 1, 2005 by thirteen states
which were in full compliance with the SSUTA, representing 20.3 percent
of the population of all the sales tax states. This accomplishment is
unparalled in government history. Certainly we've had compacts before,
and model legislation, but nothing like SST. Five associate states
joined with those thirteen full member states making a total of 18
states involved since the beginning. An additional four states have
joined the Streamlined Sales Tax Governing Board since its founding
bringing the number today to 22.
I would encourage you to examine the attached map and listing that
shows the status of states. On January 1, 2008 Associate Members
Arkansas and Wyoming will become full members. Washington will become a
full member on July 1, 2008. Nevada's petition for full membership will
be considered at our Governing Board meeting next week in Dallas. These
states either had future effective dates in their legislation, or had
to rework some part of their law to pass the stringent review by the
Compliance and Interpretations Committee and the full Governing Board.
The review is indeed, stringent, and some states didn't make it the
first time! It requires a 3/4 vote to be admitted and certified that
your state's laws are simplified in accordance with the Streamlined
Sales and Use Tax Agreement. Once certified, each state has to
recertify annually that it didn't change its laws and come out of
compliance. We take compliance seriously!
Over 28 percent of the country's population now lives in a
Streamlined state. We are in constant communication with the other
states that support Streamlined, but haven't yet simplified all their
laws. We call them Adviser states, and they participate substantively
in the State and Local Advisory Council, and on the governing board in
a limited way as they continue to try to amend their laws in order to
join with us. I believe there are another 10 states that are likely to
join in the next two years if we can continue the progress we have made
so far. Some states are waiting to see if there is movement in
Congress, so this hearing is particularly encouraging for them. Others
need a modification in our sourcing rule which will be discussed at the
meeting in Dallas next week.
HOW MUCH MONEY HAS BEEN COLLECTED?
Our Annual Report which is attached notes several successes in this
past fiscal year. One of the greatest is the amount of tax collected by
the sellers who have registered on the Streamlined registration system.
The sellers registered on the Governing Board's registration system
collect sales taxes for the member states. Member states report that
those sellers who registered voluntarily to conduct business in their
states collected $88,958,093 in sales tax for the 2007 fiscal year.
This represents tax that was owed but would otherwise not have been
collected or paid to those states.
HAS THE SYSTEM BEEN SIMPLIFIED? ABSOLUTELY!
These collections were made possible, in part, because the
Governing Board contracted with three Certified Service Providers to
provide services, free of charge, to remote sellers to collect and
distribute these sales taxes. What could be simpler? The payments to
these CSP's come from the new money that is collected. A fourth company
is in the process of being certified. All reporting is electronic on a
simplified reporting form used by all states. The development of this
single form and the ability to transmit electronically is a huge
accomplishment and simplification.
A Rates and Boundaries data base, provided by each member state,
ensures that the monies collected go to the appropriate jurisdiction,
and CSP's and retailer are held harmless if they use these state tools
and they inaccurately distribute the funds. In the past, concerns have
been raised to this Subcommittee about the existence of software to
handle this tax collection function. While software has been available
for a number of years, what was missing was the accurate information
about tax rates and district boundaries. These Rates and Boundaries
data bases make it possible to collect taxes at the destination of the
goods and services.
The Governing Board maintains a web site with a central
registration system, making it easy for these remote retailers to
register, and also provided amnesty during the first 12 months in order
to encourage retailers to register. Every effort is made to balance the
burden, relieve sellers of responsibility when the state doesn't
function or makes an error, and to work electronically.
As of November 28, 2007 there were 1,072 companies registered on
the Governing Board's centralized registration system. The system asks
sellers to choose a ``model'' which indicates whether the seller will
utilize the services of a certified service provider or a certified
automated system (CAS) or will file and pay their sales tax using their
own system. One hundred nine of the registered sellers stated they were
using a CSP, 53 said they would use a CAS, and 910 said they would use
their own system to collect and report sales tax to the member states.
These sellers range in size from the very large to the very small pure
internet sellers.
The Agreement, itself, has been modified regularly since it was
first signed, largely to embrace issues, such as the handling of
digital products, which were not included in the original agreement.
The basic simplification requirements remain unchanged; however some
issues just simply needed more discussion and those have been the
subject of the amendments. It is envisioned that changes in the future
will be fewer and much further between since the large number of
unresolved issues has now been addressed. Although a few contentions
issues are still on the Dallas meeting agenda, it is expected that the
Governing Board will turn its attention to trying to recruit more
states, and become more active with the federal legislation.
Other simplification has been achieved in the form of a single,
simplified report form, electronic registration and reporting, uniform
product definitions, availability of a certified service provider for
collecting and reporting to the states, uniform sourcing and rounding
rules, elimination of caps and thresholds, state administration,
consistency between local and state tax bases, and a host of other
things, most of which are included in your legislation, H.R. 3396,
section 6. Although the Governing Board has not formally compared the
Agreement to this particular piece of legislation, Mr. Scott Peterson,
our Executive Director and I agree that all the requirement of that
section are in place now, with the exception of the rules and
regulations for dispute resolution, which fortunately, we have not
needed to date. Those are on our list to accomplish in the near future.
WHAT'S NEXT?
There are still a few issues to resolve and they are being worked
on in the State and Local Advisory Committee and will reach the
Governing Board this year, some as early as December 11, 2007 in
Dallas.
A review of the direct mail and delivery definitions
and rules.
A review of the replacement taxes definition.
A review of the rule on software maintenance
contracts.
A review of the florist sourcing issue paper.
A review of the Energy Star products definition for
sales tax holidays.
A review of the sales price/sale for resale
definitions.
The biggest issue is to expand the sourcing rule, while retaining
uniformity, to allow for origin sourcing in-state for those states that
have been unable to convert totally to destination sourcing. (The
current rule says that the source of a sale, i.e., where the tax is
applied, is where the goods are delivered, not where the sale
originated. About half of the states use origin sourcing--where the
sale was made--as the place where the tax is applied. This is quite a
change for certain businesses, such as furniture stores, pizza delivery
places, etc.) Texas, Ohio, Tennessee, Utah, Virginia, Illinois, New
Mexico, Missouri have all been participating in the refinement of the
current rule as well as members of the Business Advisory Council.
Several alternatives are on the table for discussion in Dallas next
week.
The SST Executive Committee, officers and I will be approaching
other states that are interested in becoming member states to see if we
can assist them. Scott Peterson and I have visited with the tax reform
commissions in Massachusetts, and Connecticut. There is interest in
both states. Several southern states are also interested and we plan to
visit them in the coming months to assess their interest and potential
participation.
Finally, with regard to H.R. 3396, the Governing Board stands ready
to work with this Subcommittee as you mark up the bill and try to
resolve the remaining outstanding issues. The important thing to
remember, however, is that the basic framework of the bill mirrors the
current Streamlined Sales and Use Tax Agreement. The provisions in
Section 6 are included in the Agreement as it exists today. We have met
and exceeded the threshold provisions for numbers of states, and
percent of population. The Governing Board is operating smoothly, has
excellent staff, and can continue to expand as required. We are in the
process now of analyzing what changes we might have to make to conform
to the legislation as written, or any suggested changes when you mark
up the bill.
On behalf of the Governing Board, I urge you give states the
ability to require remote sellers to collect our sales tax and use the
authority to overturn Quill that the Supreme Court acknowledged
Congress has. Please pass H.R. 3396.
Attachment #4
Ms. Sanchez. Thank you, Ms. Wagnon. Your time has expired.
And I am told that the lights are actually not working.
Ms. Wagnon. They are not working. I had no idea where I
was.
Ms. Sanchez. We are employing them, they just aren't
working. So we are resorting to good, old fashioned ingenuity.
We will let you know when you have 3 minutes remaining and when
you have 1 minute remaining. We do have the timer up here. So
thank you for bearing with us.
Okay, we just roll with the punches. What can I say?
I want to thank you for your testimony.
And I want to invite Mr. Zakrzewski to please proceed with
his testimony.
TESTIMONY OF WAYNE ZAKRZEWSKI, ESQUIRE, VICE PRESIDENT,
ASSOCIATE GENERAL COUNSEL--TAX, J.C. PENNEY CORPORATION, INC.,
DALLAS, TX, ON BEHALF OF THE NATIONAL RETAIL FEDERATION
Mr. Zakrzewski. Thank you, Chairwoman Sanchez, Chairman
Conyers, Ranking Member Cannon, and Members of the Committee.
We appreciate the opportunity to talk with you this morning.
I am Wayne Zakrzewski. I am vice president and associate
general counsel for tax for JCPenney. I am here to talk to you
on behalf of JCPenney and our trade association, the National
Retail Federation to speak in support of Mr. Delahunt's bill,
3396. And both on behalf of Penney and the National Retail
Federation we urge your support for this important piece of
business legislation.
As a representative of JCPenney, I have been involved with
the streamlined sales tax project since its beginning. I
currently serve as a member of the board of directors of the
business advisory council to the governing board and as co-
chair to the steering committee for the joint cost and
collection study.
JCPenney is a multi-state retailer. We have got $20 billion
in sales. And those sales occur through both our stores,
catalogue, and an Internet business. Our Internet site is one
of the top largest Internet sites for selling apparel and home
furnishings.
And to give you a picture of how that business is growing,
in 2002, we had $400 million in sales through our Internet
business. This year we should hit $1.4 billion. In that short
period of time, that business has grown by three-fold. True,
some of that business is moving customers from the catalogue to
the Internet, but this represents a remarkable growth in the
Internet marketplace, which has got to be paid attention to.
So we are here to ask you today to level the playing field
between sellers like JCPenney who are required to collect tax
because we have physical stores and those people who exploit
the marketplace in your States virtually rather than through
physical presence. We remit $1.2 billion in sales tax each
year. And that $1.2 billion that we collect and our competitors
don't give them a competitive advantage, not because they
provide innovation or value to the customer, but because they
are not required to collect sales tax.
We believe there are compelling reasons that you should act
now to allow the streamlined States to require collection.
Primary among those is the simplification and uniformity the
streamlined agreement has provided and Chairman Wagnon has just
described to you. We believe, though, that--we commend them for
this effort, but we believe a lot more States would participate
if they were rewarded for this difficult effort by having the
ability to require remote sellers to collect the tax that is
due from their customers.
We support this bill because we believe it would strengthen
the streamlined agreement by mandating, by mandating that
certain levels of uniformity and sophistication and
simplification be maintained and providing an enforcement
mechanism to ensure compliance. In the past there has been a
major stumbling block to you all acting on this proposal. And
that is the concern that collection places on businesses,
particularly small businesses.
That burden is illustrated by the results of the cost of
collection study that I chaired. That study was conducted by a
group of businesses and government organizations interested in
streamlining who wanted to measure the cost that collecting
would place on business. The result of this study showed that
over all businesses the cost of collection under the current
system was 3.09 percent of the sales tax collected.
If you break that down by business size, for major--for
large businesses with sales over $10 billion, that cost was
2.17 percent. For mid-sized businesses, it was 5.2. And for
small businesses, it was 13.4 percent.
This demonstrates that there is a significant burden on all
businesses and that it is significantly more for small
businesses. We believe, though, that the right way to relieve
that burden is not necessarily through a small business
exception, but to provide for reimbursement for all businesses
based on this cost of collection study.
Rather than having to draw a single line between all
business, if you provide for reimbursement, it is a fair
system. It also eliminates the burden generally on interstate
commerce by providing for reimbursement to all sellers. And it
takes care of that burden by removing it through compensation.
So again, we would like to urge you to support this and think
about this as an alternative.
[The prepared statement of Mr. Zakrzewski follows:]
Prepared Statement of Wayne Zakrzewski
Ms. Sanchez. Thank you, Mr. Zakrzewski. We appreciate your
testimony. You came in right under the 5-minute mark.
We have been summoned across the street for votes, the
bells that you have heard. So we are going to take a recess to
allow Members to cross the street to vote. And hopefully in
that time we will also get a page in here to look at the
lighting system. And we will reconvene immediately after the
last vote.
[Recess.]
Ms. Sanchez. I am going to call the Subcommittee back to
order. And I want to thank the witnesses for their patience. I
believe we are now to Mr. Isaacson.
So, Mr. Isaacson, I would invite you to begin your
testimony.
TESTIMONY OF GEORGE ISAACSON, BRANN & ISAACSON, LEWISTON, ME,
ON BEHALF OF THE DIRECT MARKETING ASSOCIATION
Mr. Isaacson. Thank you, Madam Chair and Members of the
Committee. On behalf of the Direct Marketing Association and
its more than 4,700 member companies, I want to thank you for
the opportunity of testifying today and to discuss with you
serious concerns that I have, both as an attorney who has
practiced in the field of sales and use tax law for more than
20 years and also as a teacher of constitutional law at Bowdoin
College.
I have serious concerns that the bill which this Committee
is considering would undermine core constitutional principles
that have served this Nation well for more than two centuries
and would also erect a tax compliance barricade across the
electronic highway to the detriment of the very small
businesses and medium-sized businesses that have had the
opportunity to access the unified national market that the
commerce clause has created.
Advocates of the STA have stated that they believe that it
is worth abandoning these constitutional principles because of
the lost sales tax revenue that they believe that they are
suffering. The real problem is that the numbers that are used
are totally illusory.
And Mr. Cannon referred to the discrepant numbers that
exist between the University of Tennessee study and the recent
study that was undertaken by the Direct Marketing Association.
And the question then becomes why are these figures so
different. And I think that there are three basic reasons.
The first reason is that the growth of electronic commerce
just has not been the rocket sled that was predicted in the
University of Tennessee study. Growth rates have been much more
modest than those predictions anticipated. And that fact has
been admitted by the authors of the study.
The second reason and one which is oftentimes missed in
this discussion is that 90 percent of electronic commerce,
these huge numbers that you hear, are business-to-business
sales. And in the business-to-business sales community, there
is very little loss of sales tax revenue. And that is because
most of those sales are either exempt sales that are made as
sales for resales or sales in connection with the manufacturing
process or businesses self-report their tax liability to State
revenue departments.
A recent study undertaken by the Washington State Revenue
Department reported that for Internet sales that are made
between businesses, 85 percent of the sales tax is, in fact,
collected. So the notion that there is this sieve of lost
revenues is not accurate, even when you look at what the
overall volume of Internet sales may be.
And perhaps the most significant reason why the University
of Tennessee study is inaccurate is because of the fact of
multi-channel merchandising, which has really become the
predominant clicks and bricks phenomena that, again, Mr.
Cannon, described. Most companies that use the Internet to
expand their market, develop brand equity, provide customer
service find that it is to their advantage to open retail
stores or other customer service facilities, create nexus in
States, and then commence use tax collection.
In effect, the problem that has been described is largely a
self-correcting one. And certainly, much of these figures that
we described from Cyber Monday are by companies that are clicks
and mortar retailers, are collecting the tax. In that regard,
the issue is simply not one that reflects the kinds of numbers
that are frequently bandied. And I think we need to be very
cautious before surrendering long-established constitutional
standards based upon illusory figures.
In my opinion, the streamlined sales tax project has been
the wrong approach to this issue. Unlike most uniform laws
which are submitted to the Uniform Law Commission that consists
of distinguished jurists, law school professors, practicing
attorneys, and has produced such works as the uniform
commercial code, the Uniform Division of Income for Tax
Purposes Act, the famous UDITPA law that State practitioners
are very familiar with. That process wasn't followed in this
instance.
Instead, this was essentially a government-only exercise.
And I think in being a government-only exercise, an agreement
negotiated by tax administrators for tax administrators, the
project failed to take on some of the key areas of needed tax
reform that had been recommended to it by the previously
congressionally authorized advisory commission on electronic
commerce and by the National Tax Association Project that
looked into this same issue.
So, for example, the project early on abandoned the idea of
reducing the more than 7,600 different tax jurisdictions in the
United States. It failed to address the issue of one rate per
State. It failed to address the issue of having a single audit
for companies that were registered under the agreement. It
failed to come up with even a uniform definition for selling
price, which is the core concept that underlies the application
of a sales tax rate.
The fact that these issues were simply not addressed
because State laws were already too discrepant to reach
conformity on those issues shows that there was a low bar that
was established at the beginning of the project. Perhaps even
more problematically, however, is that the STA has been a
moving target.
It has had more than 70 different amendments since it was
adopted in 2002. And most of those amendments have been for the
purpose of diluting or simply eliminating conformity provisions
that were previously in the original agreement that was
adopted. That is not the right direction for sales and use tax
reform. And there are 20 more amendments that are going to be
considered by the governing board at the meeting next week in
Dallas.
Ms. Sanchez. Mr. Isaacson, your time has expired. But
hopefully we will be able to follow up with your testimony
during the round of questions.
Mr. Isaacson. Thank you.
[The prepared statement of Mr. Isaacson follows:]
Prepared Statement of George S. Isaacson
Ms. Sanchez. Thank you so much.
At this time, I would invite Mr. Rauschenberger to begin.
TESTIMONY OF STEVEN J. RAUSCHENBERGER, RAUSCHENBERGER PARTNERS,
LLC, ELGIN, IL, ON BEHALF OF THE NATIONAL CONFERENCE OF STATE
LEGISLATURES
Mr. Rauschenberger. Good afternoon--or good morning still,
I guess. I appreciate the opportunity to be here.
I am Steve Rauschenberger, past president of NCSL, a former
assistant Republican leader in the Illinois State Senate, third
generation retailer and an accountant by education. The
National Conference of State Legislatures is a bipartisan
national organization representing every State legislature from
all 50 States and our Nation's commonwealths, territories, and
possessions and the District of Columbia.
I am pleased to have the opportunity to appear before you
today in support of H.R. 3396. But I have to tell you this. My
spending 15 years in the Illinois Senate, much of it in hearing
rooms and chairing the appropriation committee for 10 years of
testifying in Congress on four separate occasions in the past,
I am nervous today because today's it is not just a good idea I
am representing. I am representing the work of hundreds of
people who have devoted literally thousands of hours and effort
and compromise to try to figure out a way to bring the States
together.
I am representing the active involvement of 35 States
through their legislative leaders and the executive branches.
More than 37 States have taken action in both chambers or
through executive order to participate in this process. I am
commenting in favor of what I think is the most important piece
of legislation to sustain, to reform, and stabilize our world-
admired system of federalism that 50 sovereign States and an
indivisible union that I have ever been involved with.
So I am a little nervous. It is because I care a great deal
about this issue. And it is much more important than I think
people realize.
You have heard a lot about the substance and the structure.
Maybe, you know, I can touch on some of the soft balls that
need to be added out of the ballpark a little bit.
What this bill in combination with the streamlined sales
tax agreement does is it levels the playing field so businesses
that play by the rules that have been traditional retailers are
treated equally with everybody using cyber to a sort. I am in
favor of Internet retail. I think it is a wonderful thing. It
expands the assortment. It strengthens the American economy.
But we should have a tax system that treats all
transactions of like transactions in similar ways from a tax
point of view. The streamlined sales tax together with this
bill provides stability for State and local revenues. So
whether there is a treasure hidden somewhere under the sand or
not, equity doesn't require justification. I mean, that is what
our tax laws should be pursuing.
This provides both administrative and liability relief for
businesses that adopt the modernized sales tax. States accept
the responsibility to compensate retailers for the cost of
collection. The bill includes protections for small retailers
who have sales of less than $5 million over the Internet so
they don't have to come into compliance with this.
It retains and protects State sovereignty and tax
competition between the jurisdictions, which is something we
all believe in. It retains local governments' rights its
States' granted to impose sales taxes on their own. And it
recognizes in a way other things don't the political realities
of adopting reform in a complex economy, in a complex country
under our laws.
Taxes are never popular. However, if State and local
governments are to have the necessary resources to provide
education and homeland security and public safety, then we need
to maintain their ability to levy taxes. In surveys across the
Nation, the tax that is least disliked is, surprisingly, the
sales tax.
When you think about it, sales taxes when they were first
imposed in the 1930's customers bought goods from local
merchants. There were very few remote sellers.
In the 1970's and the 1980's we saw more goods being sold
by remote mail order sellers and without collection of tax.
This was adjudicated in the court cases of Bellis, Hess in 1967
and reaffirmed by the Quill decision. What we have tried to do
rationally since 1999 is to pull together legislative leaders
and business leaders, executive branch, tax commissioners and
try to come up with a solution to the change in commerce that
adopts State laws.
This is not replacement of sales tax law in the 50 States
with some new model act, which maybe the UCC would be. It is a
convergence of State policy. It is complicated necessarily
because it is designed to protect and to defend State
sovereignty at the same time it provides local options and
local resources.
I am going to wind up real quick because I can tell you
lots. I could do this for about 45 minutes and probably bore
you to death. But, you know, let me end by reminding you. You
know, it is wonderful that the uniform commercial code went to
the uniform group on laws. I think it took about 40 years from
the beginning of the adoption of that to its last adoption.
We are in an Internet age. And the challenge is are States
going to be able to conform and to change and adapt to the
changing environment, whether it is our taxes, whether it is a
regulation of professions, whether it is a regulation of
insurance.
This is a fragile flower of reform that has been brought
along by people working very hard. I hope you treat it
delicately. I hope you treat it thoughtfully. I couldn't
disagree more with some of the representations from the
previous distinguished speaker. And if we get to him in
questions, I would be happy to try to knock some more out of
the park.
[The prepared statement of Mr. Rauschenberger follows:]
Prepared Statement of Steve Rauschenberger
Ms. Sanchez. Great. Thank you, Mr. Rauschenberger.
We will now begin our round of questioning. And I will
begin by recognizing myself for 5 minutes.
My first question is for Ms. Wagnon. In establishing a
uniform set of rules, one of the heated discussions that a
uniform rule--for a uniform rule is the issue of sourcing for
sales taxes and whether the taxing should be based on the
destination of the goods or the origin of the goods. As the
secretary for revenue of Kansas and knowing that Kansas has
altered its sales tax system, what insight can you provide
about the change from destination to origin sourcing?
Ms. Wagnon. It was painful. I think the concept of using
destination sourcing makes sense. But it does require an
adaptation on the part of, in Kansas, about 25 percent of our
retailers. And we had to provide the rates and boundaries
database. We had to provide consistent assistance. And I am
still sending some of our technical staff from revenue out to
companies that deal in many jurisdictions. We have 750
jurisdictions.
We made the conversion because all of us believe from the
governor to the Republican and Democratic leadership that this
was an appropriate thing to do. But the political reality is
that there are 10 States or more that some of which are
associate member States now that have tried and simply cannot
get that done. The state of Texas is very interested in being
part of this.
They were involved from the very beginning. But they don't
see this as politically possible. So we are now considering on
the governing board next week an option to allow for origin
sourcing in-state and uniform among any State that would adopt
that. So it would be an addition to our sourcing rule.
It would still be uniform so you won't have all origin
States doing everything differently, but one rule. And then for
the remote sales, either destination sourced. Or the other
proposal that is being considered is a single rate. And we will
be debating that and making a decision. I think the political
reality is it simply is not going to accommodate all the States
that need to be there with the rule that we have in place.
The state of Washington has its deadline for making its
conversion on July 1 of 2008. Arkansas has made a conversion.
Iowa made some changes. But Ohio has been unable to do it. Utah
has been unable to do it. Tennessee has been unable to do it.
And we are trying to adjust so that we can bring in these
other groups. I hope that is sufficient.
Ms. Sanchez. Thank you.
Mr. Zakrzewski, some opponents of the SSUTA and the
legislation Mr. Delahunt has introduced argue that the
collection and remittance of sales tax by remote sellers would
impede electronic commerce. And I know that you are a
representative of a company that conducts business online. So
in your experience, would the requirement of collecting and
remitting sales tax impede electronic commerce?
Mr. Zakrzewski. It shouldn't impede electronic commerce.
Today you have to have a system that takes your order and
records it and tells the customers what the price is.
With the streamlined sales tax project, the project
provides software and certified service providers that will
come in and attach to your system and collect the tax and tell
your customers how much that tax is. So to me it is really not
a legitimate concern that that would impede commerce because
not only can you do it, you are doing it at least in the State
where you are located today and software to do it for a multi-
state is free.
Ms. Sanchez. So with the emerging technology you have found
a solution to that particular problem?
Mr. Zakrzewski. That provides a solution to these sellers.
Ms. Sanchez. Thank you.
Mr. Isaacson, is there any policy reasons why the medium to
which a particular good is sold to the consumer should dictate
whether it is subject to sales tax? The question specifically
is is there anything about the Internet that suggests sales of
goods ordered over that medium should not be taxed?
Mr. Isaacson. The issue is not whether goods should be
taxed if they are sold over the Internet or not. As I pointed
out before, multi-channel merchants who are selling over the
Internet such as JCPenney are collecting. And a large number of
the largest companies are, in fact, doing so. So that is not
the issue.
The issue is whether a company that has no presence within
a State does not benefit in any way from any services being
provided by that State, does not get tax increment financing
for building new facilities or getting bypasses and access
roads built to its stores, who has no political role in that
State whose employees are not voting in that State, whether it
is appropriate for a 7,600 tax jurisdictions to be able to
export their unique and non-unifying tax systems across their
State borders to 49 other States. That is the issue the Supreme
Court has repeatedly addressed and has said that the commerce
clause protects commerce from that type of approach.
It also happens to be the reason the commerce clause was
adopted in the first place. What was happening in 1878 and the
reason why the convention was called in Philadelphia was
because States were imposing tariffs, duties and taxes on each
other's trade and the country was going into a depression. And
the commerce clause is what created the unified market to
prevent them.
Ms. Sanchez. Thank you. I see my time has expired.
So I will recognize Mr. Cannon for 5 minutes.
Mr. Cannon. Madam Chair, would you mind if I deferred my
time?
Ms. Sanchez. Not at all.
We may do a second round, depending on the interest of
questions.
Mr. Cannon. I shall do everything in my power to help us
get done in one round.
Ms. Sanchez. Okay, Mr. Delahunt, you are recognized for 5
minutes.
Mr. Delahunt. Thank you, Madam Chair. I was going to direct
my question to the three panelists other than Mr. Isaacson. Mr.
Isaacson made the statement that this was a government
exercise. The implication being that we are a bunch of
bureaucrats stuck in a corner someplace. At least this is the
way I interpret. And maybe I am mischaracterizing.
But would you explain to me--maybe there was some packet of
missions that weren't allowed in or maybe even a professor of
constitutional law at a fine institution, a fine ivy college up
in Maine didn't participate. But the point is I think it was
misleading because--and why don't I address it to Secretary
Wagnon.
How did this come about?
Ms. Wagnon. Well, I think----
Mr. Delahunt. What was the process? I know you have had
numerous amendments. And I congratulate you, by the way, on
having numerous amendments. I think what that reflects, at
least from my vantage point, is an effort to get it right and
to do it well and to attempt to look at a very complex problem
and to achieve a balanced resolution.
Ms. Wagnon. And I think that is exactly correct. It started
out with governors, State legislators, and business
representatives as well as tax administrators. The members of
the governing board are selected by the State. Some of them are
business representatives.
Mr. Delahunt. If I may, Madam Secretary. The National
Governors Association, I know, in the past has taken a position
on earlier versions of the bill that is before us. Are you
aware of their position on this particular legislation?
Ms. Wagnon. Yes, I am. We work very closely with NGA, NCSL,
the Federation of Tax Administrators, all of the organizations
that they support.
Mr. Delahunt. What is their position on this bill?
Ms. Wagnon. They are supportive of this.
Mr. Delahunt. Do you know how many of the governors have
indicated their support for this particular or earlier versions
of this legislation?
Ms. Wagnon. It is a little difficult for me to answer that
because governors keep going in and out of office.
Mr. Delahunt. I know. They keep coming and going.
Ms. Wagnon. And Governor Leavitt was a good example of a
leader early on who is now no longer in that position. But the
fact that 22 States have embraced this legislation and
governors have signed it--there is a minimum of 22 and probably
10 more that were involved earlier. The NGA has consistently
had a position on this legislation in support of it. And that
is true also for the National Conference of State Legislatures.
Mr. Delahunt. Let me go to Mr. Rauschenberger and ask him
to respond to both of those questions.
Mr. Rauschenberger. I am happy to have the opportunity
because I don't think it is the only thing Mr. Isaacson got
wrong. I have been involved since----
Mr. Delahunt. Well, don't----
Mr. Rauschenberger. You know State legislators. You
shouldn't let us near microphones anyway. Since 1999 I had been
a co-chair of a task force that NCSL has had to work on this
issue. I have never participated in a meeting that wasn't a
public meeting. We spend more time with members of the business
community. It is why we have so much broad-based business
support.
There is only a single association I am aware of that they
looked hard to find that was in opposition. So to say that this
was done by bureaucrats--this was done by elected officials and
people representing the business community together with people
who understood the tax system, which makes sense to me.
To the question of support, NCSL has supported this effort
since 1999, which requires a majority, I think 70 percent, of
the 50 States to be in support at all times for us to have
stayed in continuous support of this. We have had a lot to do
with drafting it.
And I think the number I recall is--I think it was Franklin
who presented more than 50 changes to the Constitution before
it was finally ratified. The amendment process is about seeking
perfection, not about confusion about goals.
Mr. Delahunt. And let me just make a comment, too. I think
you said something here that is very significant. We do have a
unique system of federalism. And I think it is very important
for this Congress to respect federalism.
I happen to embrace the concept of devolution and States'
rights. Sometimes I am surprised at my colleagues of your party
that seem to believe that Washington knows best in terms of
what the States ought to do or ought not to do.
But out of respect for the States I think it is important
that we understand that this is about sustaining that system of
federalism and conferring to the States the power to raise
revenue which is justifiably there. I want to commend you all
for really a tremendous effort and for the significant progress
that you have achieved. I wish we could do the same here in the
United States Congress.
And with that, I will yield back.
Ms. Sanchez. The gentleman yields back.
Mr. Cohen is recognized for 5 minutes of questions.
Mr. Cohen. Thank you, Madam Chair.
First, I would like to say hello to my former colleague and
good friend, Mr. Rauschenberger.
It is good to see you.
Mr. Rauschenberger. Good to see you. You look taller and
better now.
Mr. Cohen. It is Congress. We have a great basketball team.
Tennessee is a State that is heavily sales tax reliant and
yet has been somewhat reticent, maybe, to become a full-fledged
member. And I probably should know the answer to this. But can
you tell me why Tennessee, a State so starved for revenue, is
an associate member and hasn't joined in?
Mr. Rauschenberger. The sourcing complications of the local
jurisdictions have been a hard bite for both chambers in
Tennessee to embrace. Most of the States that are having
trouble coming into compliance it is around the changes
required and the risks that are assumed by the local
jurisdictions in the sourcing change and its effect on local
revenues. States that have kind of bridged that gap have done
it.
And I think Washington is one of them which actually set
aside, directed the set-aside of a major portion of the new
increment revenue and used that as a hold harmless to kind of
solve the local jurisdictional problems. But that is my best
understanding right now.
Mr. Cohen. And I have thought about this issue. And, of
course, Mr. Isaacson, I read your statement. There is a lot of
revenue that--your brief or the brief that is attached to it
questions how much revenue the Tennessee study suggested we
might be losing in Tennessee. But there is considerable
revenue, and there is the years to come of revenue. When you
have a State like Tennessee and there are only a handful that
don't have an income tax and that are relying on the sales tax.
It really does deprive people of basic services because you
have got a progressive tax system.
And if you have a State, Mr. Isaacson, with a progressive
tax system like Tennessee has and others without any major
source like oil or gambling, Nevada, Texas, and those other
States that don't have any income tax, how would you suggest
that they survive in the future years to provide the services
to people that need education and health care and help with the
utility bills? Should they just kind of let e-commerce grow and
grow and grow and their sales base just decline?
Mr. Isaacson. It is a fair question. And I think that there
is a clear answer to your question. I think the starting point
has to be understanding what are the numbers that we are
dealing with.
If you look at the United States Commerce Department
figures in regard to those States that are currently full
members and based on that commerce department data, the lost
tax revenue is $145 million. So dealing with what is the scale
of the issue, I think, is significant.
One of the reasons why Tennessee has not wanted to
participate in this process is that Tennessee has had different
tax rates or different kinds of products, agricultural
products, heavy equipment, for example, different tax rates,
and not wanting to conform to the tax regime or protocol that
the SSUAT has called for. That is part of their sovereignty.
That makes sense.
The real reality is that this problem is largely self-
correcting because companies do start collecting as they expand
their businesses. The incubator is electronic commerce. The
long-term business plan is to leverage grand equity, establish
retail stores, provide after-sale customer services and by
doing so, establish a nexus. That is what we are seeing in all
of the major large retailers. And I think it is a development
that says that we don't need to be concerned about the future
in the manner that has been described by my co-panelists.
Mr. Cohen. I hope you are right. We have been waiting for
Saks to come to Memphis for a long time.
Mr. Rauschenberger says that they searched long and hard to
find you. Are there other business groups that are against this
proposal that you are familiar with?
Mr. Isaacson. I don't know what he means by long and hard.
When the project began in 2000, the Direct Marketing
Association submitted 30 suggested reform proposals. And I met
with the leaders of the organization at that time.
Of 30 proposals that were recommended by the Direct
Marketing Association, only one was adopted.
Mr. Cohen. I don't think that--other than the Direct
Marketing Association, other business or commercial groups that
are in opposition to this. He said that you were kind of a
singular----
Mr. Isaacson. There are. And I don't speak for them. Some
of them are in the room today.
Mr. Cohen. They are in the room?
Mr. Isaacson. I believe so. I have been talking to them. I
haven't looked behind me while I have been questioned, but they
were here earlier today.
Mr. Cohen. Some of them are nodding their heads. We will
figure out who they are later.
I appreciate you on that. And I really appreciate the work
of the NCSL. It is well-represented here. And there are two of
your predecessors, I guess, were Claybough and--Bill Claybough
and Matt Kisworth. They were great State legislators----
Ms. Sanchez. The gentleman yields back?
Mr. Cohen. I do.
Ms. Sanchez. The gentleman yields back his time. There is
sufficient interest on the part of Members of the Committee and
a second round of questions.
Mr. Cannon. I think actually this is still the first round.
But, I mean, I understand there is a second round.
Ms. Sanchez. I apologize. You are correct, Mr. Cannon. You
are recognized for 5 minutes.
Mr. Cannon. Thank you, Madam Chair.
I appreciate you all being here.
We appreciate, Ms. Wagnon, the update. I think that is the
only new thing that is on the table today. And that is
appreciated.
And, Mr. Isaacson, you know, you said it all very well. And
then frankly now, Mr. Rauschenberger and I probably need to go
back and punt a little bit because we have had this same
discussion many, many, many times. And to suggest that there is
error in your thinking, I think, is appropriate. Personally we
have looked at all the data, I think, and we have not seen
errors in your presentation. That was very concise. I think
this is probably the fourth time you have made a presentation
like this to this Committee. And that was by far the most
elegant, not new particularly, but well-done.
Let me see if we can get some basic consensus on issues
here. And I do this in the context of many other hearings. But
do we have a basic consensus among the panelists, for instance,
that the Internet is one of the major drivers for economic
growth in America?
Ms. Wagnon?
Ms. Wagnon. I would agree with that.
Mr. Cannon. Well, we have unanimous view on that, which is
good because that means we are all in America, we are all
recognizing what is going on.
Is there unanimity on the idea that there is a tendency for
ideas on the Internet--remember, we have these hierarchies. You
have got business-to-business as far as you getting taxes paid.
And I think Mr. Isaacson laid those out. And I don't think
there is much disagreement with that.
But in the environment where you are getting new ideas on
the Internet, is there any disagreement by anybody on the panel
that the tendency of those new ideas as they succeed is to
become multi-channel, which means they tend to become not just
clicks, but clicks and bricks?
Ms. Wagnon?
Ms. Wagnon. I think there are going to continue to be a
rise in the number of pure Internet retailers. The figures that
I saw in the New York Times last week----
Mr. Cannon. Pardon me. I agree with you on that. But the
question is as you get this increase in retailers, is there a
tendency for those to--as they become successful, is there a
tendency to move into bricks so that you have nexus.
Ms. Wagnon. And I would not agree with that. I think we
have seen a number who have registered that are in that
situation where they are multi-channel clicks and bricks. But
there are many out there that are going to never adopt that
model. So I would dispute that.
Mr. Cannon. Can you tell me what is it about those that
means they won't adopt the model?
Ms. Wagnon. They don't want a brick and mortar store. They
like to remain pure Internet sellers.
Mr. Cannon. But if they succeed and they brand themselves,
won't they tend to want to become multi-channel?
Ms. Wagnon. I don't think you can State that universally,
no, sir.
Mr. Cannon. No, no, no, this is not universal. I am
suggesting there is a tendency. I think I used the word trend
or tendency for successful stores to go multi-channel.
Ms. Wagnon. I think the trend is that the stores that are
successful--the most recent one that was announced in the paper
was like Cabella's, which have separated everything. They are
going to multi-channeling so that you can return the goods in
the stores.
Mr. Cannon. Right.
Ms. Wagnon. So if you have a store there, the tendency is
to adopt that. But you also have to understand that that is not
going to solve your tax problem if you haven't broken in yet.
Mr. Cannon. Okay. But we are just looking for broad
consensus on trends here. And Cabella's, of course, is a great
example because the fact is--and I think Wal-Mart was probably
the first that tried to have separate channels and then went
back to a merging because people want to return their items to
a store. It is easier to return to a store than it is to put it
back in a box.
But that would argue for the underlying trend. Now, you may
have boutique operations forever, but an operation that has
less than $5 million in revenue is exempted, so you don't care
about those little guys.
Ms. Wagnon. Well, Amazon doesn't have a store that I am
aware of.
Mr. Cannon. Amazon is one of the uniques, I grant you that.
Ms. Wagnon. And they are huge. So I think there are two
trends, sir. That is my point.
Mr. Cannon. No, no, the point is not that all stores will
become multi-channel. And clearly, Amazon is one of those very
interesting cases where they are struggling and trying to
figure out where they are going. They are competing with
companies that have advantages because they have clicks and
bricks.
And so, Barnes and Noble is where somebody can go and drink
coffee and read a book and then decide to buy it. Barnes and
Noble is a place where you can just stop on your way to work
and pick up a book if there is something you wanted to read. So
there are advantages to both places.
Mr. Zakrzewski?
Ms. Sanchez. Zakrzewski.
Mr. Zakrzewski. Zakrzewski.
Mr. Cannon. Do you pronounce the second z?
Mr. Zakrzewski. Zakrzewski.
Mr. Cannon. Zakrzewski, okay. Mr. Zakrzewski, do you agree
that there is a broad trend to go multi-channel and therefore,
if you are successful on the Internet to create bricks as well
as clicks?
Mr. Zakrzewski. What you have described is stores like
Barnes and Noble, stores like L.L. Bean, Eddie Bauer and stores
that began as bricks going to clicks. I am trying to sit here
and think of an example of a pure Internet retailer, though,
that----
Mr. Cannon. Well, actually, Eddie Bauer was a catalogue
that went to Internet and then went to bricks, I think, after
they went to the Internet.
Mr. Zakrzewski. They had a store----
Mr. Cannon. Okay, I can see we don't have broad consensus
on this.
Mr. Zakrzewski. I don't think you do.
Mr. Cannon. So let me just say that it is my view of the
world that success in American markets--this debate could go on
eternally. I see that my time is expired.
I will reserve the right to participate in the second round
if new issues would arise, Madam Chair. And I yield back.
Ms. Sanchez. I thank you, Mr. Cannon, for being so
cognizant of your time.
Mr. Cannon. The Chair could have poked the Ranking Member
and I would have recognized sooner that my time had expired.
Ms. Sanchez. You were just over the 5-minute mark. We are
not going to hold it against you.
There is sufficient interest in a second round of
questions.
And I will recognize Mr. Delahunt.
Mr. Delahunt. Yes, I would like to follow up on the respect
that was implied in a question by my friend from Utah, Mr.
Cannon. And we are talking about Eddie Bauer. We are talking
about L.L. Bean. You know, I have a concern.
The small, independent business that I think adds something
to the community--I am not saying that Eddie Bauer does not. I
am not saying that Barnes and Noble doesn't. But there is
something more than just the economic factor in this particular
equation.
As I said in my opening remarks, I think this is, you know,
Norman Rockwell home town small business protection act. I
really do. If we are going to have a space for the continued
existence of that kind of entity that, I think, is a
significant piece of what we know in terms of the American
experience, how are they going to compete when they are put at
a competitive disadvantage ranging from 3, 4, 5, 6, I think it
is 8 percent in Florida?
Mr. Rauschenberger?
Mr. Rauschenberger. I think your point is well taken. This
bill, your bill levels the playing field and makes the
amazon.coms of the world play by the same set of rules that the
open hearth bookstore in a little town plays by. What is more,
it also for the first time obligates States to pay reasonable
reimbursement, reasonable compensation to businesses for
collecting their sales taxes.
I mean, those are two important strides forward. You know,
we don't know what the products that are going to be in the
marketplace 3 years from now, let alone 30 years from now. So
this is exactly the right thing to do.
Mr. Delahunt. I mean, one only has to look at the economy
in terms of mergers, acquisitions, consolidations, et cetera. I
think we lose something as a society when, you know, I can't go
into the local drug store anymore like I did when I was a child
and go to the soda fountain and sit down and communicate with
Mr. Johnson and have him ask about, you know, how is mom and
dad. That is not happening today in this country. And I think
we miss something as a result of it.
You know, Mr. Isaacson spoke about, you know, core
constitutional--or erosion, if you will, of core constitutional
safeguards.
I mean, Secretary Wagnon, I read the Quill decision. And it
said to me, ``Congress, do something about it.'' Can you
explain to me--do you have an understanding of the
constitutional erosion of core values?
Ms. Wagnon. I think the Supreme Court was very clear in the
Quill decision saying that when simplification and the burden
is removed, Congress can require that. In fact, the Supreme
Court threw this back in your lap. And I think we have come to
you today to say we have achieved those simplifications. We can
certainly achieve more.
But we have a functioning board. We have a functioning
process. We have gone a long way. And it is time to recognize
that you make a burden across all businesses equal, large to
small. So, yes, you are right.
Mr. Delahunt. Again, Secretary Wagnon and any panelist, I
mean, I keep hearing about how complicated it is. Seventy-five
hundred taxing jurisdictions. You know, to be perfectly candid,
I think that is fooforall.
I mean, I am hearing from--what you are saying is one
simple form, one simple reporting form. I mean, don't give me
that when somehow you have done it and people are voluntarily
complying.
Mr. Rauschenberger. But every one of those sellers uniquely
has a zip code, which is the source of the taxing. The States
have agreed to match every zip code to a tax rate. So the
question of one rate or complications or allowing States to
sovereignly decide to allow governments, municipalities to
impose sales taxes is over. It is no more complicating than
saying do you realize Members of Congress vary by height by
more than seven inches.
Mr. Delahunt. But at the same time--and you make a point--
you are taking the burden or the cost of collection away from
the remote seller. Am I accurate?
Ms. Wagnon. Yes.
Mr. Delahunt. I mean, I guess I am frustrated. I have been
involved in this particular issue for 7 years. To me it just--
well, I don't know.
Does anyone have an opinion on the small business
exemption? Because this is a small business bill.
And, you know, Mr. Isaacson, I presume that Mr. Cannon is
going to give you some time. But I don't know.
Ms. Sanchez. And, Mr. Delahunt, your time has expired. But
I will allow the panelists to answer.
Mr. Delahunt. Well, thank you so much. The question is we
do have the small business exemption, which would require
businesses in excess of $5 million nationwide and gross taxable
sales in excess of $100,000. Would you alter that? Would you
tweak that?
You know, we are open. I mean, I am trying to protect small
businesses in this country. I want them to continue to exist
and be able to flourish and grow and to prosper. Can we help.
Secretary Wagnon?
Ms. Wagnon. I think the small business exemption is
important to have. Whether it needs to be stated in the
congressional act as to exactly what the limit is, it could
perhaps be decided by the governing board. You could put that
in section 6 of the bill and then let the governing board
adjust that exemption as economic times change. But I believe
you need to protect those small businesses. And there are
several ways to get around it.
We have had proposals come before the governing board about
what ought to be that deminimus rule. I believe the governing
board is the best place to have that debated.
Mr. Delahunt. Thank you.
Thank you, Madam Chair.
Ms. Sanchez. Thank you. The gentleman's time has expired.
Mr. Cohen is recognized for 5 minutes.
Mr. Cohen. Thank you, Madam Chair. I am going to go back to
Mr. Rauschenberger and ask him. This whole thing with origin
and destination--that is a Tennessee issue, too. That hasn't
been resolved, has it?
Mr. Rauschenberger. Unfortunately, it is the nexus, it is
the point of most of the problems. If a State chooses to source
the sale at the location of the seller, there is no way to
avoid the seller moving his presence or his official office to
a non-tax jurisdiction.
So every State that has a traditional or historical origin,
you know, retailer-based sale origination is going to have to
adjust that if you are going to solve the problem of remote
sellers because sales taxes, unlike what some people may think,
are not imposed on the seller. They are imposed on the
purchaser and collected by the seller.
So States should have to go through some measure of
political pain and reform. You can't have reform without
change. But sourcing is going to be tough for all States. It is
California's challenge. It is Illinois' challenge and part of
Tennessee's challenge. But if you don't move the sourcing of
the sale to the address of the buyer, you can't get at the
fundamental inequities because the seller simply moves his Web
site, his mailing address to the Cayman Islands.
Mr. Cohen. What my memo says is that Tennessee wants to
have an origin rule or a portion origin rule. How would that
differ from the destination?
Mr. Rauschenberger. Well, the streamline sales tax in one
of those 170 or 140 amendments that they are considering, which
are good because they are about--that is how we debate in the
process--are considering what might be a bifurcated rule where
the sourcing for sales that occur both from an in-state seller
and an in-state buyer would be sourced on an origin basis but
sales originating from outside of the State's jurisdiction
would use a destination source or a bifurcated rule.
The fundamental problem of that are two things. Number one,
there is a question of equal protection under the U.S.
Constitution. Can you treat different sellers in a different
way under your law? You know, there is a question there, which
probably Secretary Wagnon probably is better expert at that
than I am what our chances are there as well as there is some
question of in States which have multiple rates, whether they
will have to adopt a blended rate or one rate for all incoming
sales.
Mr. Cohen. So are we talking about more of an intrastate
sales issue?
Mr. Rauschenberger. Yes.
Mr. Cohen. I can see where Tennessee would have a problem
with that.
Mr. Rauschenberger. And the solution is elegantly simple
but really politically difficult. So it is normal. It is right
that States are struggling with this. But----
Mr. Cohen. The other issue--apparently there are 19
simplification requirements in this bill. And my notes inform
me that so far six have been met. Is that accurate? No? How
many have been met?
Ms. Wagnon. All but one.
Mr. Cohen. All but one?
Ms. Wagnon. And the issues and resolution, dispute
resolution is the only one we have not addressed.
Mr. Cohen. Okay, well, that is good. For a minute I was
concerned you all weren't doing any better than the Shia and
the Sunni. But that is good. Thank you.
Madam, I yield.
Ms. Sanchez. The gentleman yields back his time.
Mr. Cannon is recognized for 5 minutes.
Mr. Cannon. Thank you. Let me just make one point for the
record. The political problem in a State for adjusting between
the source of the sale and the destination of the sale is that
often cities have created incentives for big box companies and
instead of the sales receipts coming to the city that gave
those incentives, they go to the city where the person came to
buy. So rich cities end up buying more stuff from big boxes and
getting more money. And the other cities end up tending toward
bankruptcy, which is one of, I think, the fundamental problems.
I suspect, by the way, that the current governor of Utah,
Governor Huntsman, opposes the SST. I am not sure he has been
on record with that. But we certainly have moved in the other
direction in Utah.
We have talked a lot about the leveling of the playing
field. The fact is the playing field is level unless you
disagree with me. And raise your hand or something if you do.
The cost of delivery pretty much--wait a minute. Let me get the
statement out, you know, the particular. Let us get the
particular out so you can particularly disagree.
I know that there are some interests here. I am astonished
at the idea that this would be called a small business bill
when we have JCPenney's here and we have Staples pushing this
and other companies around the country. People that want this
done are people that are working hard to create a rigid system
where they can continue to succeed.
But the cost of doing business on the Internet is greater
because it is on the Internet. So you have a delivery cost,
which is roughly equal to the cost of sales. That is not 5
minutes, was it, Madam Chair?
Ms. Sanchez. No.
Mr. Cannon. Is that not true that the cost of doing
business is relatively equal because the cost of delivery is
more or less the same as the cost of tax for an Internet
company?
Mr. Zakrzewski. That is not necessarily true.
Mr. Cannon. Well, how far off true is it?
Mr. Zakrzewski. Well, I mean, it is going to depend on what
the individual business model is. But you have still got to get
delivered goods to the customer through a store or through----
Mr. Cannon. Well, that is right because the customer walks
into the store. That is the point.
Mr. Zakrzewski. But you have got--there is still a delivery
cost built into the cost of goods that you can sell in your
store.
Mr. Cannon. Sure, but when you deliver a truckload of goods
to a store that is not the same as delivering an item to a
buyer across the country.
Mr. Zakrzewski. But it is not true that there is a pure
additional incremental cost for that delivery charge.
Mr. Cannon. Wait, wait, wait. You are saying it is not true
that there is--you are saying that there is not a clear
delivery cost for an item that is sold online and shipped
across the country?
Mr. Zakrzewski. No, I am saying that it is not true that
there is a pure difference that is equal dollar for dollar to
that delivery cost.
Mr. Cannon. But we are talking about more or less here. But
we are not talking more or less. We are just talking about the
cost of delivery. You would not disagree that there is a
significant cost to deliver something that has been ordered on
the Internet.
Mr. Zakrzewski. That is true.
Mr. Cannon. Well, thank heavens. We got some consensus
here. Amazing.
Is there any disagreement that if we did an SST interstate
compact that that would create the second biggest tax
collection agency in the history of mankind, the Federal
Government being the first, Steve? Yes. No?
Mr. Rauschenberger. It isn't comtemplated at all.
Mr. Cannon. Who is going to collect the taxes?
Ms. Wagnon. The States.
Mr. Rauschenberger. The 50 States, the same ones----
Mr. Cannon. No, no, no, the SST is going to collect and
distribute the taxes.
Ms. Wagnon. No.
Mr. Rauschenberger. No.
Mr. Cannon. No. Explain to me how this works.
In fact, Mr. Isaacson, you have been very clear on these
points. Would you mind explaining how it works? You think he
would learn something in the process.
Mr. Isaacson. What, you are going to have 7,600 different
tax jurisdictions that are now going to be allowed to
administer their tax systems in 49 other States. And so, you
are, in fact, going to create one of the largest and most
complex tax systems in the world. And perhaps it will be one
that challenges the Federal Government's.
Mr. Cannon. Well, Mr. Rauschenberger, please do respond,
but briefly.
Mr. Rauschenberger. I don't know where he has been because
that is not what it does. The city of Elgin in Illinois is not
a book on its way out to Lands End or to L.L. Bean to tell them
how to manage their store.
Mr. Cannon. But part of----
Mr. Rauschenberger. If you source the sale to my zip code,
all it is going to tell you is 6.75 percent is my sales tax
rate, collect it, and remit it. I mean----
Mr. Cannon. Where does he remit it?
Mr. Rauschenberger. Well, it depends whether he chooses----
Mr. Cannon. Where does the dealer remit?
Mr. Rauschenberger. If L.L. Bean chooses to hire a
certified service provider, the service provider assumes the
liability and does all the collection and the remittance and
the tax forms for them at no cost. If he chooses to adopt a
certified software, he would collect the seller's discount, the
reward, the compensation for doing it. And he would collect and
remit.
Mr. Cannon. Thank you. I suspect that what would really
happen in this context is that we would tend to homogenize
sales taxes. And I find that disconcerting in the least.
Governor Spitzer called taxing Internet sales a tax
increase. What we are dealing with here is, in fact, taxes that
are taking more taxes out of the pockets of consumers. You
know, one of the things I just don't understand--let me put
this on the record.
I have talked to many individual State tax commissioners.
And we have had, I think, pretty broad consensus. It seems to
me that the interest of the States is to encourage an
environment which has made them flushed, by the way. Virtually
all the States are flushed with cash. It has created an
environment of economic growth. The Internet does that.
Why would you want to poke the baby in the eye as it is
beginning to grow? That is one of the facts I can't understand.
Or I understand how as a group States would have wanted to tend
to do this. But individually if they thought about it, there
ought to be a tendency to say we have a great economy that is
growing, let us encourage innovation online and----
Ms. Sanchez. Mr. Cannon?
Mr. Cannon. Now it actually has expired, hasn't it?
Ms. Sanchez. Your time has expired.
Mr. Cannon. Thank you. What remains I yield back.
Ms. Sanchez. No time, so we will put that in the negative
account, and we will charge you for that later.
We are being summoned across the street to vote. But I do
have one quick question that I think will clarify a statement
that Mr. Cannon just made. So I recognize myself for 5 minutes,
but won't take that entire time.
Mr. Rauschenberger, I am particularly concerned about the
statements similar to the ones Mr. Cannon just made about
people thinking that this is a new tax on consumers. And can
you please clarify exactly what the SST does?
Mr. Rauschenberger. The enemies of this reform in States
across the country--and you will hear, I think, in Congress
that this is a tax increase. But nothing, in my opinion, could
be further from the truth.
These are taxes that the Supreme Court says States legally
have the right to levy. And they have the right to collect as
long as there is reasonable notice to the seller.
We have cured the rise, the increased bar that Bellis Hess
and the Quill decision raised of simplifying our system so that
it is not a burden on interstate commerce and crossing that
threshold to be, hopefully, to be blessed by Congress. So this
is about--I mean, the same argument could be used of abolishing
the IRS and not requiring people to mail in their tax returns.
Ms. Sanchez. Mr. Rauschenberger, I wouldn't go there
because there are Members who would be in favor of that.
Mr. Rauschenberger. Well----
Mr. Cannon. If I could figure it out.
Mr. Rauschenberger. These are legally levied taxes that are
due from the customers. Sales taxes are not taxes that are
unpopular. They win referendum time after time. When local
governments--the state of Michigan when they chose to change
the way they funded education by referendum, they selected the
sales tax. People perceive the sales tax as relatively fair. It
is less regressive than property taxes because at least it has
indexed the amount of income because you spend more as you earn
more. So it is not a tax increase in any way that I can agree
to.
Ms. Sanchez. Thank you. I appreciate that. I will yield
back my time.
And I want to thank----
Mr. Cannon. Madam Chair, may I ask unanimous consent to
introduce two articles into the record? One, an A.P. article
entitled, ``Spiked Clarification and Tax Law Aimed to Collect
from Web Sales'' and one from Forbes, ``Point, Click, Pay
Tax''?
Ms. Sanchez. Without objection, so ordered. I want to thank
all of the witnesses for their testimony today and for being
patient during the interruption to go vote.
[The information referred to follows:]
Ms. Sanchez. Without objection, Members will have 5
legislative days to submit any additional written questions,
which we will forward to the witnesses and ask that you answer
as promptly as possible so that they can be made a part of the
record. Without objection, the record will remain open for 5
legislative days for the submission of any additional material.
And because this is the last planned hearing of the
Subcommittee before the winter recess, I want to take this time
to thank my Ranking Member, the Members on the dais, and their
staff for all of the hard work. And I want to wish everybody a
safe and happy holiday season. And with that, this hearing on
the Subcommittee of Commercial and Administrative Law is
adjourned.
[Whereupon, at 12:29 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Responses to Post-Hearing Questions submitted to Joan Wagnon by the
Honorable Linda T. Sanchez, a Representative in Congress from the State
of California, and Chairwoman, Subcommittee on Commercial and
Administrative Law
Responses to Post-Hearing Questions submitted to Wayne Zakrzewski by
the Honorable Linda T. Sanchez, a Representative in Congress from the
State of California, and Chairwoman, Subcommittee on Commercial and
Administrative Law
Responses to Post-Hearing Questions submitted to George Isaacson by the
Honorable Linda T. Sanchez, a Representative in Congress from the State
of California, and Chairwoman, Subcommittee on Commercial and
Administrative Law
Responses to Post-Hearing Questions submitted to the Honorable Steven
J. Rauschenberger by the Honorable Linda T. Sanchez, a Representative
in Congress from the State of California, and Chairwoman, Subcommittee
on Commercial and Administrative Law
Prepared Statement of Paul Misener, Vice President, Global Public
Policy, Amazon.com
Letter from Steve DelBianco, Executive Director, The NetChoice
Coalition
Prepared Statement of Brian Bieron, Senior Director of Federal
Government Relations, eBay Inc.
Letter from the United States Telecom Association and
CTIA--The Wireless Association