[Senate Hearing 107-1134]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 107-1134
 
                EXTENSION OF THE INTERNET TAX MORATORIUM

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 14, 2001

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation




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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas                JOHN B. BREAUX, Louisiana
GORDON SMITH, Oregon                 BYRON L. DORGAN, North Dakota
PETER G. FITZGERALD, Illinois        RON WYDEN, Oregon
JOHN ENSIGN, Nevada                  MAX CLELAND, Georgia
GEORGE ALLEN, Virginia               BARBARA BOXER, California
                                     JOHN EDWARDS, North Carolina
                                     JEAN CARNAHAN, Missouri
                  Mark Buse, Republican Staff Director
               Ann Choiniere, Republican General Counsel
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 14, 2001...................................     1
Statement of Senator Allen.......................................    23
Statement of Senator Dorgan......................................     4
Statement of Senator Hutchison...................................    29
Statement of Senator Kerry.......................................     3
Statement of Senator McCain......................................     1
    Prepared statement...........................................     2
Statement of Senator Stevens.....................................     6
Statement of Senator Wyden.......................................     5

                               Witnesses

Comfort, Robert D., Vice President of Tax and Tax Policy, 
  Amazon.com.....................................................    53
    Prepared statement...........................................    55
Dircksen, Jeff, Director of Congressional Analysis, National 
  Taxpayers Union................................................    65
    Prepared statement...........................................    68
Geringer, Hon. Jim, Governor, State of Wyoming...................     6
    Prepared statement...........................................    11
Harchenko, Elizabeth, Director, Oregon Department of Revenue.....    56
    Prepared statement...........................................    59
Julian, Frank G., Operating Vice President and Tax Counsel, 
  Federated Department Stores, Inc...............................    33
    Prepared statement...........................................    35
Lowy, Peter, CEO, Westfield America; Founding Chairman, e-
  Fairness Coalition.............................................    45
    Prepared statement...........................................    46
Swift, Hon. Jane, Lieutenant Governor, Commonwealth of 
  Massachusetts..................................................    17
    Prepared statement...........................................    20

                                Appendix

Anderson, Christopher, President, Massachusetts High Technology 
  Council, letter to Hon. John McCain............................    86
Electronic Commerce Association, prepared statement..............    83
Norquist, Grover G., President, Americans for Tax Reform, 
  prepared statement.............................................    84
Response to Written Questions Submitted by Hon. John McCain:
    Hon. Jim Geringer............................................    86
    Jane Swift...................................................    88
    Elizabeth Harchenko..........................................    89
Rosen, Arthur R., on Behalf of the Coalition for Rational and 
  Fair Taxation, prepared statement..............................    81


                EXTENSION OF THE INTERNET TAX MORATORIUM

                              ----------                              


                       WEDNESDAY, MARCH 14, 2001

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 a.m. in room 
SR-253, Russell Senate Office Building, Hon. John McCain, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. Good morning. First let me thank the 
witnesses for being here today. This hearing is similar to one 
held by the Committee nearly a year ago to examine whether to 
extend the Internet Tax Freedom Act's moratorium on the ability 
of state or local governments to impose new sales taxes on 
Internet access services, or to impose any multiple or 
discriminatory taxes on electronic commerce.
    Opponents of the extension of this limited tax moratorium 
succeeded in postponing its consideration last year. We face 
different circumstances now. Foremost, the Internet Tax Freedom 
Act expires this October. I believe the Congress will and must 
act before then to renew its objections to multiple and 
discriminatory taxes on the Internet as well as to taxes that 
inhibit Internet access.
    One needs only to turn on the news or glance at the front 
page of the paper to know that the Internet economy is not 
bullet-proof. The plunge in the NASDAQ is a clear sign that we 
need to be mindful of the economic effects of our tax policy 
decisions as we move forward on this issue, and we must move 
forward. Several states and localities, as well as the majority 
of the so-called brick-and-mortar retailers, have asked that we 
consider legislation in addition to just the extension of the 
Internet tax moratorium. Principally, they have asked Congress 
to authorize them to require all remote sellers to collect and 
remit sales taxes on deliveries into their states, provided 
that the states and localities dramatically simplify their 
sales and use tax systems.
    I have met frequently with Members of Congress, including 
several on this Committee, who are interested in joining me to 
extend the Internet tax moratorium, but only as long as we take 
action to broaden the state's authority to collect sales taxes 
from remote sellers, including those conducting business on the 
Internet. We pledge to work together on a consensus proposal 
that we can put in place before the moratorium expires in 
October.
    Personally, I have not seen evidence of the sales tax 
revenue losses predicted by the states and local governments 
when we took up this issue a few years ago. Even so, the Main 
Street retailers have a legitimate fairness argument when they 
see customers come to the store to locate items they want to 
purchase, only to leave and order the items over the Internet 
just to escape the sales tax.
    I want to emphasize again, Congress must act before the 
Internet tax moratorium expires in October. Reaching its 
consensus by then on the broader issues that we will hear more 
about today will be difficult. All interested parties must be 
willing to make significant sacrifices. The states and 
localities in particular must be able to make some tough 
decisions now to advance true sales tax simplification before 
Congress will consider subjecting remote sellers to the reach 
of more than 7,000 taxing jurisdictions in the United States. I 
do not think that is too much to ask.
    The states and localities are asking us to overturn 
longstanding limits on their ability to tax out-of-state 
businesses and transactions put in place to ensure that myriad 
taxes do not create an undue burden on interstate commerce.
    Thanks again to our witnesses, and I look forward to 
hearing testimony today from Governor Geringer and Lieutenant 
Governor Swift. Opening statements. Senator Kerry.
    [The prepared statement of Senator McCain follows:]

   Prepared Statement of Hon. John McCain, U.S. Senator from Arizona

    First, let me thank the witnesses for being here today. This 
hearing is similar to one held by the Committee nearly a year ago to 
examine whether to extend the Internet Tax Freedom Act's moratorium on 
the ability of state or local governments to impose new sales taxes on 
``Internet access services,'' or to impose any ``multiple or 
discriminatory taxes'' on electronic commerce.
    Opponents of the extension of this limited tax moratorium succeeded 
in postponing its consideration last year. We face different 
circumstances now. Foremost, the Internet Tax Freedom Act expires this 
October. I believe that Congress will and must act before then to renew 
its objections to multiple and discriminatory taxes on the Internet, as 
well as to taxes that inhibit Internet access.
    One needs only to turn on the news or glance at the front page of 
the paper to know that the Internet economy is not bulletproof. The 
plunge in the NASDAQ is a clear sign that we need to be mindful of the 
economic effects of our tax policy decisions as we move forward on this 
issue, and that we must move forward.
    Several states and localities, as well as the majority of the so-
called brick and mortar retailers, have asked that we consider 
legislation in addition to just the extension of the Internet tax 
moratorium. Principally, they have asked Congress to authorize them to 
require all remote sellers to collect and remit sales taxes on 
deliveries into their states, provided that the states and localities 
dramatically simplify their sales and use tax systems.
    I have met frequently with members of Congress, including several 
on this Committee, who are interested in joining me to extend the 
Internet tax moratorium, but only as long as we take action to broaden 
the states' authority to collect sales taxes from remote sellers, 
including those conducting business on the Internet. We have pledged to 
work together on a consensus proposal that we can put in place before 
the moratorium expires in October.
    Personally, I have not seen evidence of the sales tax revenue 
losses predicted by the states and local governments when we took up 
this issue a few years ago. Even so, the Main Street retailers have a 
legitimate fairness argument, when they see customers come to the store 
to locate items they want to purchase, only to leave and order the 
items over the Internet just to escape the sales tax.
    I want to emphasize again. Congress must act before the Internet 
tax moratorium expires in October. Reaching a consensus by then on the 
broader issues that we will hear more about today will be difficult. 
All interested parties must be willing to make significant sacrifices.
    The states and localities in particular must be able to make some 
tough decisions now to advance true sales tax simplification before 
Congress will consider subjecting remote sellers to the reach of more 
than 7,000 taxing jurisdictions in the United States. I do not think 
that is too much to ask. The states and localities are asking us to 
overturn longstanding limits on their ability to tax out-of-state 
businesses and transactions, put in place to ensure that myriad taxes 
do not create an undue burden on interstate commerce.
    Thanks again to our witnesses. I look forward to hearing your 
testimony today. Governor Geringer, welcome to the Committee. Would you 
like to begin?

               STATEMENT OF HON. JOHN F. KERRY, 
                U.S. SENATOR FROM MASSACHUSETTS

    Senator Kerry. Mr. Chairman, thank you very much. I will be 
very brief. Let me take this opportunity to welcome our 
Lieutenant Governor here, all three of you. We are delighted to 
have you here and look forward to your testimony. She has been 
involved in our state on the electronic signature and the 
Internet tax issue, and we certainly welcome her opinion today, 
and Governor, also, thank you for being here with us.
    Mr. Chairman, we have had a number of meetings, one most 
recently, I guess about 3 weeks ago, a month ago, where a 
number of us on this Committee sat down and tried to come to 
grips with this issue. We have been working on it for some 
period of time now. It is good that we are here to followup 
with another hearing, but my hope is, and I have expressed this 
to you personally, that we are going to be able to move very 
soon to a markup on this.
    I think most people understand that we want to continue to 
have a moratorium on any kind of discriminatory taxation 
whatsoever. I think that is good for the Internet, that is good 
policy, and we want to try to continue that. But there is also, 
I think, a growing consensus now among many Internet, most 
Internet providers, service providers, and certainly business 
people, that we have got to have a playing field that makes 
sense. You cannot have sort of a Cayman Island situation in 
cyberspace to the disadvantage of bricks and mortar, and you 
cannot create a loophole where people can just sort of set up 
some kind of quick-buy Internet capacity right outside the 
store they visit to pick all the items they want and avoid 
taxation as a result.
    Communities all across this country depend on that. 
Certainly we can come up with a structure that encourages all 
of the states to figure out for themselves what the best method 
is for each state, but we cannot have thousands of 
jurisdictions competing. We cannot have people absolutely 
incapable of figuring out what tax they owe and how, and to 
which jurisdiction. It seems to me that everybody has an 
obligation to come up with a sensible way of mixing the 
national interest here and the local interest, and prerogatives 
of determining locally how they would like to treat their own 
uniformity within a state.
    So my hope is that this hearing will really sort of set us 
on the road to a relatively imminent markup so we could proceed 
forward. This is an important piece of legislation, and we need 
to clarify for many users how this playing field is going to be 
equalized and fair.
    Thank you.
    The Chairman. Thank you, Senator Kerry. It is interesting 
that the three most active Senators on this issue are here with 
us this morning. Senator Dorgan.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Chairman, thank you very much. This is 
clearly a complicated issue, but yet a very important issue, 
and I would agree with the chairman and with Senator Kerry that 
we should and we will extend the moratorium. No one supports 
punitive taxes, discriminatory taxes on Internet transactions, 
so we will extend the moratorium.
    My hope, however, is that while we do that we will also 
take the time and make the effort to fix some of the other 
problems that exist with remote sales. It is important for 
everyone to understand that a tax already exists on almost all 
of these transactions, with the exception of the few states 
that do not have a sales tax. In other circumstances the tax 
always exists. If it is not collected by the seller, it then 
exists in the form of a use tax which is then never paid to the 
state governments, and that is the issue.
    The question is, could we find a way to require state and 
local governments to substantially simplify the collection 
requirements for remote sellers? I believe we should. We ought 
not ask a remote seller to comply with thousands and thousands 
of different jurisdictions with different rates and different 
bases, but if we are able to do that, to provide substantial 
simplification, then can we and should we not ask remote 
sellers to collect the tax. The answer to that ought to be yes, 
but we ought to do it in a thoughtful manner. The discussions 
many of us have had I think would allow us to reach agreement 
on that. There are different opinions here, but we ought to, in 
my judgment, be able to come together to fix it.
    The Commerce Clause requires that the Congress make this 
judgment. I know some feel the states can do it by themselves. 
I do not share that judgment. I do not believe the federal 
courts are going to allow the states to solve this problem. I 
think Congress must address it, and we must do it in the right 
way.
    Mr. Chairman, one final point. We had testimony at that 
table by one of our country's largest merchandisers, who 
described the need to set up a separate corporation to be able 
to make a remote sale of that which someone wants to purchase 
from their store so that they can sell it without the 
collection requirement of a tax.
    That clearly, in my judgment, in the future will dissipate 
the amount of revenues that are used, and it is probably just 
coincidence, but roughly $160 billion is collected by the sales 
and use taxes by the states, and roughly $160 billion is spent 
on and elementary and secondary education. It is probably a 
coincidence, but it is very important to understand the 
consequences of this issue and our need to respond to the 
growth of remote sales and the lack of collection of the 
central tax that underscores the funding requirement for 
elementary and secondary education.
    Having said all that, I thank you for holding the hearing. 
This is a tough issue, and you have been neck-deep in this 
issue because you care about solving it, and I think that is 
something that we are all grateful for, Mr. Chairman.
    Thank you very much.
    The Chairman. Thank you, Senator Dorgan. Senator Wyden.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, and I share, Mr. Chairman, your 
views and those of our colleagues. I think it is clear we are 
going to work very hard and cooperatively to come up with a 
solution here. Having been the original sponsor of the Internet 
Tax Freedom Act I would just offer the judgment that I do not 
see what the significant problems are with the bill as written. 
It is a straightforward ban on discriminatory taxes on e-
commerce, and that just means if you buy your local newspaper 
and there is no tax on the local newspaper when you buy it the 
traditional way, you do not pay a tax if you read it online.
    A local jurisdiction can impose a variety of taxes on 
Internet commerce as long as it does to the offline world what 
it does to the online world, so we ought to be clear, there is 
no Cayman Islands today with respect to Internet sales. You can 
tax the Internet, you have got to just treat the offline world 
like you do the online world.
    Two other points are significant. First, there has not been 
a jurisdiction in this country that has been able to show that 
they have been hurt by their inability to impose discriminatory 
taxes on electronic commerce, so this bill, which bars 
discriminatory taxes on electronic commerce and which has 
generated considerable discussion on the part of local 
officials, in my view requires that somebody, if they want to 
turn this thing on its head, come forward and show that they 
have actually been hurt by their inability to impose a 
discriminatory tax on electronic commerce. I have been unable 
to find a jurisdiction in this country that has been hurt by 
their inability to impose discriminatory taxes.
    The last point I would mention involves a Supreme Court 
case, which is really what is at issue with respect to these 
remote sellers. The question is, should you tax one of these 
remote sellers, who has got no presence in a local jurisdiction 
other than a website? The U.S. Supreme Court has said, and this 
is really what is at issue in our efforts to work all this out 
and produce a bipartisan and cooperative bill, the Supreme 
Court has said, you do not tax somebody unless they have got 
physical presence somewhere, and for fairly obvious reasons, 
they are using roads, and water, and sewers, and the like.
    That is not what is going on with these remote sellers, and 
I would only say, because I am anxious to work with our friends 
here, and we have had very good discussions, that at a time 
when the technology sector is very fragile, and we see that in 
the newspaper every day, I would just hope that we are very 
careful in terms of how we proceed here.
    There has not been evidence that somebody has hurt. You 
have got the technology sector fragile--and we are talking 
about throwing a Supreme Court decision out the window, and 
taxing folks who have no physical presence somewhere, and that 
is the case.
    If you have got physical presence somewhere, kiosks, and 
the like, then it is a different story, but what concerns me is 
people who have no physical presence somewhere, and I, as you 
have said and our colleagues have said, believe that we are 
going to work very constructively to get at this, and time, of 
course, is of the essence, and I thank you.
    The Chairman. Thank you, Senator Wyden.
    Senator Stevens.

                STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Senator Stevens. I have no comments this morning.
    The Chairman. Thank you, sir.
    We would like to welcome Hon. Jim Geringer, the Governor of 
the State of Wyoming, and Hon. Jane Swift, the Lieutenant 
Governor of the Commonwealth of Massachusetts. Governor 
Geringer, we would like to begin with you. Thank you for taking 
the time to appear before our Committee, and we appreciate your 
involvement in this very important issue.

           STATEMENT OF HON. JIM GERINGER, GOVERNOR, 
                        STATE OF WYOMING

    Governor Geringer. Thank you, Chairman McCain, and thank 
you to the Members of the Committee who are here today to 
participate in this hearing. I am Jim Geringer. I am here as 
Governor of Wyoming, but I am also here to speak on behalf of 
the National Governors' Association, who just recently 
overwhelmingly reaffirmed their approach to working for a 
simplified tax system for our states to adopt, and working 
through the states. We are here to ask for your partnership to 
help enable that.
    Last night, as I was flipping through the channels, one of 
the meeting notices that came up on the hotel marquee where I 
was staying provided a notice there is a meeting coming up 
today to ban land mines, and I thought of that as I thought of 
this meeting this morning. Land mines, those unexpected things 
that pop up here and there.
    Today's discussion ought to be defined in terms of what it 
is or is not, and I would like to start with that. Today's 
discussion is not about taxing the Internet. Obviously, there 
have been statements already made about extending the 
moratorium, which the NGA, the National Governors' Association 
supports. Today's discussion is not about new taxes on the 
Internet.
    Today's discussion is about whether our states and cities, 
our local governments, will be able to collect currently 
authorized taxes, and several of you this morning have already 
made reference to the shift in how e-tailing, or retailing, or 
e-commerce, or business-to-business transactions are shifting 
toward an Internet-based transaction, and the uncertainty that 
was created by the previous Internet Tax Freedom Act, 
definitions that are there that are unclear as to whether 
something is or is not a remote sale or an Internet-only sale.
    This is also not about whose state is most friendly toward 
high technology, or the new economy businesses. In fact, if I 
were to gauge which state is most friendly in terms of the cost 
of doing business, I would say Wyoming. Come on down. We can 
treat you well. We do not have tax rebates because we do not 
tax it to begin with. We leave the money in your pocket.
    But we do need to talk about the nature of business 
transactions in the new economy, and much of our discussion 
this morning will be for us to understand just the nature of 
how business transactions are occurring, and financial 
transactions are occurring over the Internet, and what it does 
to our states. Again, we are here to ask for your partnership 
to simplify the sales and use tax collections. Let me emphasize 
that point again. It is collections. It is not to impose taxes. 
It is whether or not we will be enabled.
    So I come back, Mr. Chairman, to your invitation to appear 
today, as to whether Congress should allow states to require 
all remote sellers to collect and remit sales taxes. I would 
say, Mr. Chairman, that the issue is not whether Congress 
should allow, but whether Congress should enable the collection 
of such taxes, and the answer is yes.
    Electronic commerce is not new. Electronic commerce has 
been around for sometime. I look back to my own experience with 
technology. I worked in the Air Force Space Program, worked 
with NASA. I can still recall when fax machines came along, and 
we had this marvelous new thing that could transmit one page in 
7 minutes, just a remarkable invention at the time, but that 
must have been the same feeling as when Marconi invented the 
telegraph, or Alexander Graham Bell invented the telephone. 
They initiated electronic commerce, so it is not new.
    The new economy is not new, either. It is just more 
noticeable, and what is most noticeable about the new economy 
is productivity, and that is what we are talking about today. 
How can we foster the continuing and sustainability of the new 
economy through productivity increases? That is what the new 
economy has fostered. That is what technology has enabled.
    Our citizens are accustomed to access to the Internet, and 
they will continue to demand access through the Internet for 
everything in their lives. What we want to talk about today is 
what businesses want. Businesses want from the states 
predictability, particularly in taxes. They want uniformity, 
and our choices today would be that we impose no tax at all for 
anything that is done for a business transaction, or we could 
propose that the Congress mandate a tax, or a tax approach, or 
we could say to the states, if you could come up with a way to 
develop a uniform system to taxation and its collection, then 
we can work to eliminate the existing patchwork of state and 
local laws, and enable the growth in the new economy that we 
all desire.
    The Internet Tax and Freedom Act, Senator Wyden, that you 
sponsored, has a statement associated with it that information 
should not be taxed, and we agree. Commerce conducted over the 
Internet should not be taxed in new and creative ways. We 
agree.
    The question is, what happens to state revenue sources that 
currently depend on sales taxes as they shift? What we are 
talking about, Mr. Chairman, is, today's taxes are authorized 
at this level. Transactions on the Internet are fairly low, and 
what we are seeing is a trend that is causing the balance to 
shift, and what we are looking for is the ability of the states 
to collect the same taxes that would already be due them, but 
they cannot reach them because their jurisdiction does not 
apply.
    The reason it is important is because of the 45 states who 
levy sales and use taxes in some form--and use tax is due, as 
Senator Dorgan said. Even though it may not be collected, it is 
still due. How do we collect it? Forty-five states impose some 
sort of a sales and use tax, and nationwide about 40 percent of 
all state revenues do depend on sales and use taxes, and where 
does that money go?
    In Wyoming over 50 percent of it goes to education, so as 
we talk about the impact on the states, and it is real, we do 
have forecasts of the growth that will happen, the real issue 
is, how much will be shifted away from education? How much will 
be shifted away from health care, prescription drugs, or other 
things that the states are currently engaged in helping to 
fund, and how much will have to shift to other tax areas or 
shift away from providing these vital services?
    The issues today include energy, and I will talk a little 
bit more about that later, because Wyoming is quite an energy-
producing state, and I will talk about the impact that may come 
about.
    The reason sales tax is important to the state, probably 
more so than the Federal Government, is that the Federal 
Government generates its revenues almost entirely from income 
tax. Income tax is only one leg of a three-legged stool for the 
states.
    Our message today should be fairly simple. By the rule of 
unintended consequences, Congress should not preempt the state 
prerogatives on tax issues. You should enable, and can enable 
the states to come up with their own approach that will lead to 
uniformity, and how current authorized taxes may be collected 
in the future.
    Our states have already begun to cooperate and simplify 
local tax systems, and state tax systems. We have a number of 
states who are participating, and Mr. Chairman, I would make 
reference to the last page of the testimony that has been 
provided. There is a map that shows the United States, the 50 
states and their participation in the simplified tax approach 
that we are taking through our own initiative.
    If you look at the chart, it shows a variety of colors, and 
let me point out that the blue, the red, and the green states 
are all involved in our simplified tax project. The light blue 
in Wyoming indicates that Wyoming was the first state to adopt 
model legislation to enable the compact that would allow our 
states to work together. The darker blue, legislation has been 
introduced and is pending approval. Several states are 
anticipating signature within the week. The states that are 
red, they are official participants, but have not yet 
introduced legislation to develop the project. We believe we 
can easily reach 20 states to provide a multistate agreement on 
a compact that we would ask the Congress----
    The Chairman. How many, Governor?
    Governor Geringer. Pardon me?
    The Chairman. How many did you say?
    Governor Geringer. There are 32.
    The Chairman. And you said you could easily reach----
    Governor Geringer. We think we could reach 20, easily, of 
those 32.
    The Chairman. Thank you.
    Governor Geringer. Thank you, Mr. Chairman.
    The states that are in green are observers to the process. 
They have taken a wait-and-see approach as to how this works 
out. There are states that are indicated in beige that collect 
no sales tax and then, of course, the ones that are listed in 
gray have indicated their--I am not sure what their opposition 
is to, because I think uniformly all the states agree that we 
do not want to tax new. We want to adjust how we collect, and 
enforce the tax collection.
    Let me talk a minute, though, about tax and revenue systems 
at the federal level. When it comes to the shift to the 
Internet purchase of any kind of product or service, there are 
federal Internet taxes today, where the states have been 
somewhat--at least, it is hazy as to whether or not the states 
are prohibited. I do not know how we would clarify that except 
through your hand and through your adoption of legislation.
    While states have been precluded from taxing Internet 
transactions, the Federal Government imposes many federal taxes 
that are being conducted over the Internet. For example, 
airline tickets, liquor, tires, tobacco. In fact, I have a list 
of all the federal excise taxes that, as any product that is 
listed on here shifts to Internet purchase, the Federal 
Government still collects the excise tax, and you have the 
enforceability to do it, and the system engaged to do it. The 
states are asking for an even playing field to do the same. 
Fair is fair. If the states are prohibited, the Federal 
Government ought to examine its own approach and prohibit the 
same collection.
    The difference is, the states cannot reach beyond their own 
jurisdiction, and that is the authority that we are asking for, 
is the simplification through the adoption of technology, 
through the use of the Internet, and through the use of 
standardized software that will allow us to extend our 
jurisdiction to collect taxes.
    The estimate that was given to me is that there is $90 
billion a year in a variety of federal excise taxes, many of 
which are over the Internet. The equivalent would be, over 
time, the erosion of that $90 billion if the Federal Government 
were in the same situation as the states currently find 
themselves in. That is evidence, I believe, Mr. Chairman, that 
we ought to do something to assure the idea of fairness. It is 
not just a matter of resident merchants and nonresident 
merchants. It is a matter of fairness as to how excise taxes 
are collected, regardless.
    The most significant unintended consequence is that 
traditional business transactions that are taxable today can 
completely avoid paying taxes in the future by simply setting 
up an electronic means to complete a transaction that fits the 
current definition under the Internet Tax Freedom Act, but the 
need for simplification goes beyond that for our small 
businesses.
    In Wyoming--I believe that the SBA defines a small business 
as anything under 500 employees. That is a big business in 
Wyoming, Mr. Chairman. Unequal taxation between in-state 
merchants and out-of-state merchants means that you will be 
driving out more and more of our small businesses, particularly 
those in our smaller states, but in the rural areas of any of 
our states, for those who can transact remote or electronic 
sales, and you will force people to migrate to the Internet.
    In terms of the impact, Mr. Chairman, the report that I 
make reference to today is the Forest report of November 2000. 
They are based in Massachusetts. They estimate that the sales 
tax losses, just to states, not counting local governments, 
will total $13.7 billion by 2004, and the most significant 
sales tax loss could be business-to-business, where today most 
everyone thinks in terms of the retailing of business to 
consumer.
    Many have suggested that we should just eliminate all sales 
taxes, and that is certainly very appealing. Let me give you an 
example now of why energy is a significant issue to Wyoming. We 
are probably the BTU capital of North America, if all of our 
energy were developed at one time. Many of our western states 
are. The difference in Wyoming is, as we shift tax burdens from 
one to another, we will probably shift it to energy, and if we 
shift it to energy, it will be the energy that is exported to 
the rest of the country, and as we talk about the high impact 
of energy costs today, and the impact on our individual 
citizens' pocketbooks and what they can and cannot afford, 
mostly cannot, it would force Wyoming, just to support its 
current education and health programs, to shift more of its 
income revenue-raising to energy, and we would export that to 
others, whereas today our philosophy is, it ought to be user 
pay. We would be left with fewer options if we are not able to 
guide our own destiny, if you will.
    The Governors recognize the need to simplify the current 
sales and use tax collection system, and so we support the 
effort that is being proposed particularly in Senator Dorgan's 
bill, cosponsored by our own Senator Enzi. We would ask that 
any extension of the moratorium connect those two concepts: 
simplification initiated by the states, a compact that could be 
approved by Congress, and should be, to set up centralized one-
stop multistate registration, adopt uniform definitions, 
relieve sellers from liability on any states errors that might 
be introduced, use information that is provided by the states--
in other words, have a state-level administration of state-
level taxes, and we would take care of the local option taxes.
    The Dorgan-Enzi bill, sponsored by others, also contains a 
provision that says first of all there would be a single 
blended rate to simplify even further anything that might be 
applicable to remote commerce. The states then would also in 
that bill have the alternative of requiring collection at the 
actual rate should they enact all the simplification measures 
that are enumerated.
    So Mr. Chairman, in summary, we are asking for a 
partnership. We are asking first of all that we clarify the 
issue to say this is not about new taxes. It is not about 
taxing access. It is about simplifying our current system, 
which you have aptly pointed out, is well over 7,000 
jurisdictions. We need to simplify. The nature of business 
today requires it. It is time it were done, regardless, but let 
us not let the unintended consequence of letting everything 
shift to the Internet simply to avoid paying of taxes be the 
way it is done.
    We need your partnership. What we do not need is that the 
marketplace would make its decisions based on arbitrary tax 
policies. Business ought to be in the true sense of 
entrepreneurship, where they make their decisions based on the 
free enterprise system, not on some taxing scheme.
    Mr. Chairman, I thank you again for your courtesies 
extended. I look forward to your questions.
    [The prepared statement of Governor Geringer follows:]

  Prepared Statement of Hon. Jim Geringer, Governor, State of Wyoming

    Chairman McCain, Senator Hollings, and Members of the Commerce 
Committee, thank you for your invitation to address issues of state and 
local taxation authority on behalf of the National Governors 
Association. I am here today both as the Governor of Wyoming and as the 
co-chair of the E-Governance Task Force for the National Governors 
Association.
    The hearing notice on your Committee's web page indicated that the 
purpose of this hearing is ``whether Congress should allow states to 
require all remote sellers to collect and remit sales taxes on 
deliveries into that state, provided that states and localities 
dramatically simplify their sales and use tax systems.'' I suggest Mr. 
Chairman, that the issue is not whether the Congress should allow 
states and local governing bodies, but whether the Congress should 
enable such actions. The answer is ``yes.''
    Since their initial meeting in 1908 to discuss interstate water 
problems, the Governors have worked through the National Governors 
Association to deal collectively with issues of public policy and 
governance. The Association's ongoing mission is to provide a 
bipartisan forum to help shape and implement national policy and to 
solve state problems. Today we ask your participation as we begin the 
process of simplification of taxation at the state, local and federal 
levels of government.
    There's an old saying that ``he who defines the issue wins the 
argument.'' Part of our work today then, is to decide who has the 
responsibility and authority to implement new approaches to tax and 
revenue solutions in the age of the New Economy. I submit that taxation 
is and should be, the primary responsibility of the states. 
Preservation of state and local sovereignty is the cornerstone of our 
government.

Today's Situation
    Congress, the states and local governments need to function in the 
new economy without hindering its continuing expansion. Our economy is 
changing in fundamental ways and much more rapidly than government's 
ability to react to it, particularly with regard to taxation.
    Electronic commerce is not new. When Marconi invented the 
telegraph, when Alexander Graham Bell invented the telephone, they 
initiated electronic commerce. Nobody suggested then that there was 
something unique that ought to lead the Federal Government to prohibit 
the states from imposing taxes on transactions conducted using these 
new industries or later ones such as fax machines.
    Likewise, the ``New Economy'' is not new. It's just more 
noticeable. It has taken many of our traditional approaches to 
governing and service delivery by surprise. Each of us in our 
respective states wants a piece of the new economy and all that it 
implies--innovation, productivity, enhanced opportunity and income. 
Technology and globalization are changing the rules in the economy and 
the traditional domains of federal, state and local governments, 
particularly in tax and revenue systems.
    Our citizens have become so accustomed to access to the Internet 
for business transactions that they now expect the same from government 
programs and services. They want to make purchases and to access 
services independently of time and place. Our citizens want government 
to be more accountable and responsive to their needs. That expectation 
has led to more programs being brought back to the states.
    That's what citizens want. Now, what do our businesses want? They 
want uniformity, particularly when it comes to tax and revenue systems. 
In order to be competitive, businesses don't want to accommodate the 
existing patchwork quilt of state laws, regulations and tax programs. 
How can they achieve uniformity? They might ask the states to develop a 
uniform approach to taxation, or go to the Federal Government to ask 
for uniform standards or a federally imposed tax. Another option would 
be to not have any tax on any transaction. What we have today is a 
blend of all--some transactions with a patchwork quilt of laws and 
regulations, some with simplified taxes and, the newest one, some with 
no tax at all. The no-tax-at-all transactions are very appealing, both 
to the on-line retailer and to the on-line customer. This last category 
is the result of the Internet Tax Freedom Act, which is currently being 
interpreted to allow any transaction to be conducted electronically and 
thus avoid the collection of state or local sales and use taxes.

The Internet Tax and Freedom Act
    The Internet Tax Freedom Act (Pub. L. 105-277) was passed in 
October 1998 to provide the new electronic commerce industry with 
short-term protection from a burdensome and discriminatory system of 
state and local taxation. In March 1998, one of the primary sponsors, 
Rep. Cox (California) held a news conference to announce the support of 
the National Governors Association, the U.S. Conference of Mayors, the 
National Conference of State Legislatures, the National Association of 
Counties, and the National League of Cities for the legislation. 
Several changes had been made to ease state and local government 
concerns, including: shortening the moratorium to three years; 
providing for what was seen as a targeted moratorium instead of a 
blanket prohibition on all Internet-related taxes; and creating a 
temporary commission to study the complex state and local tax issues 
relating to electronic commerce.

State Revenue Sources Focus on Sales Tax
    The National Conference of State Legislatures indicates that states 
collect revenue from three primary sources: sales tax, income tax and 
property tax. The sales and use taxes dominate, representing anywhere 
from 27 to 45 percent of state revenues in the 45 states and the 
District of Columbia that impose transaction taxes. Collectively, 
approximately 40 percent of all state revenues come from sales and use 
taxes. Similarly, our cities and other local governing bodies obtain 
significant revenue from local option taxes.
    Our states through our legislatures have figured out how to cut $25 
billion worth of taxes over the course of the last decade. How we have 
cut those taxes has been different in every state, because the people 
and businesses of each state have different needs and priorities. Many 
states have shifted reliance away from property tax and broadened 
(while reducing the rate) the sales tax base in order to provide a much 
fairer system to invest in public education.
    The Federal Government is empowered to regulate interstate 
commerce, but it would be unwise to usurp the most basic rights 
reserved to the states as to how they may or may not raise, or lower, 
revenues.

State Spending Patterns Focus on Children
    Taxes finance the highest priority programs for state and local 
government. The latest survey of state spending patterns shows that 
states' highest single priority for spending is education, followed by 
health care and family services. In Wyoming, nearly 90 percent of our 
budget is allocated to four main areas: education, health, family 
services and public safety. Any tinkering with our primary source of 
income will dramatically affect our top spending programs, particularly 
those that affect children. Actions or even specific inactions on tax 
issues by the Congress then, can and will dramatically affect our 
Wyoming priorities.

Federal Revenue
    Contrasted to the states, the Federal Government generates revenues 
almost exclusively from income tax. That makes decisions easy from your 
Congressional point of view. No harm, no foul. No tax, no problem, 
since no federal revenue comes from sales or use taxes. Our state and 
local taxes differ by the choices of those who are governed. Five 
states do not impose any sales tax. A different number of states do not 
impose an income tax. My message is simple: the Congress should not 
dictate an absolute pre-emption of state prerogatives on tax issues. 
You can and should enable the states to come up with their own approach 
that will lead to uniformity.

Tax Simplification Criteria
    The states have already begun to cooperate to simplify state and 
local tax systems. Restructuring will enable citizens and businesses to 
understand which level of government imposes taxes and which provides 
services. We can and will craft a simplified tax structure that is 
close to the people, fair to both businesses and customers and equally 
applicable to all transactions.
    Any remedy must be equitable, uniform and non-discriminatory. 
Proper authority of the states must be preserved. Tax policy should not 
play favorites, whether between and among states or between and among 
economic activities. Education, health and public safety issues should 
not be put at risk.
    Tax and revenue systems for the new economy should be cost-
effective and customer-friendly, afford flexibility in how standards 
are met and provide transition as states and locals adapt. Today 7,500 
different state and local tax jurisdictions are a nightmare for the 
private sector. Given this mish-mash, federal standards might be 
appropriate. However, if we are to lower the cost of tax administration 
as well as of doing business, we need local innovation. That tips the 
scale toward state responsibility. The solution rests with nationally 
developed standards, not federally mandated systems.

Federal Internet Taxes
    No one has clean hands when it comes to electronic transaction 
taxes. While states have been precluded from taxing electronic 
transactions, the Federal Government imposes many federal taxes on 
Internet transactions or businesses, including excise taxes as well as 
individual and corporate income taxes. The airline ticket tax increase 
was a critical part of the Balanced Budget Act of 1997, a tax that was 
increased again last year. No member offered an amendment to exempt 
from those federal taxes, domestic or international tickets purchased 
on the Internet, perhaps because such an exemption would have 
accelerated the migration of ticket purchases to the Internet. That 
might have eroded a critical source of revenues to the Airport and 
Airway Trust Fund. Airport and aviation safety in this country and 
around the world are dependent upon a reliable source of trust fund 
revenues. Today, Northwest Airlines reports that 65 percent of its 
customers use E-tickets with little thought given to the taxes that are 
collected. Do consumers have to pay a federal excise tax when buying 
tires, airline tickets, liquor or cigarettes over the Internet? Should 
we propose federal legislation to not tax the income of any person or 
corporation which makes its money over the Internet as an incentive to 
boost Internet activity?
    Fair is fair. No state taxes, no federal taxes.

Avoiding Unintended Consequences
    The argument that Internet-based fledgling businesses need to be 
nurtured is not a relevant argument. Electronic commerce has become a 
mature and important part of the U.S. and international economy. Since 
the moratorium imposed three years ago, much has come to light on the 
intended as well as the unintended consequences of the Act. The most 
significant unintended consequence is that traditional business 
transactions that are taxable today can completely avoid paying taxes 
in the future simply by setting up an electronic means to complete a 
transaction.
    Any extension of the Internet Tax Freedom Act must modify the 
definition of Internet access as contained in the Act. Internet and 
electronic commerce technologies are experiencing a convergence and 
becoming indistinguishable from other related communications 
technologies and media.
    The Act protects against the imposition of new tax liability for 
consumers and vendors involved in commercial transactions over the 
Internet, including the application of discriminatory tax collection 
requirements imposed on out-of-state businesses through interpretations 
of `nexus.' It also protects from taxation, for the duration of the 
moratorium, goods or services that are sold exclusively over the 
Internet with no comparable offline equivalent.
    This effectively allows a broad range of content and other services 
to be bundled with Internet access and to potentially be considered as 
protected under the prohibition on the imposition of new taxes on 
Internet access. The range of content, services and even goods that can 
be bundled with Internet access is virtually unlimited. It includes all 
manner of printed material, video material, voice communications and 
other services. As the Internet technology converges with services such 
as telecommunications and cable television, it will become increasingly 
difficult to distinguish one from another. Today, one out of every 33 
international long distance calls is handled over the Internet. A draft 
report from Geneva last week projects this level to increase from 3 
percent today to between 25-40 percent over the next five years. Yet, 
different service providers could be subject to widely different tax 
regimes because of the intervention of the Internet Tax Freedom Act.

The Need for Simplification
    The states recognize the problem of unequal taxation between in-
state merchants and out-of-state merchants, nearly all of whom now use 
the Internet for a variety of business practices.
    In-state merchants who must collect sales/use taxes are at a 
disadvantage with merchants who transact remote or electronic sales. 
It's not that the remote or electronic sale is exempt. It is not. Every 
state that levies sales taxes requires a use tax to be paid if a 
customer purchase is made on-line or out of state. It is a consumption 
tax on the consumer, not the vendor. Under current legal standards, a 
state may only impose sales and use tax collection requirements on 
sellers with a physical presence, or nexus, in the state whether the 
transaction is over the Internet or not. This means that remote sellers 
(i.e., sellers outside the state without a physical presence in the 
state) are able to fully exploit the market in that state--whether by 
mail, telephone or the Internet--without being required to collect or 
remit tax on their sales into the state. Sellers that are physically 
present in the state are required to collect and remit the tax.
    The remote merchants are quick to point out that they have to 
charge shipping and handling and that cancels their advantage over the 
in-state merchants. That ignores the fact that in-state vendors have 
already included shipping and handling in their pricing. The in-state 
merchant not only has to charge and collect the tax but is also 
responsible for reporting and remitting it and becomes liable for the 
tax if an audit indicates inadequate collection and remittance. We 
fully support unfettered interstate commerce but as a matter of basic 
fairness, similar transactions of goods and services should be treated 
similarly no matter what means are used to effect the transaction.
    Not collecting the use tax on electronic transactions would be an 
incentive for merchants to use electronic or Internet transactions. 
States are concerned that Congress' actions or inaction could lead to 
accelerating the erosion of sales and use tax revenues as the nature of 
the retail industry evolves. We have learned that one of the nation's 
largest retailers has entered into an agreement with one of the 
nation's largest e-tailers. This arrangement could permit a means to 
avoid sales taxes. For example, Mr. Chairman, someone in Arizona might 
wander into a store, pick out a nice pair of Levis, and instead of 
pulling them off the rack and paying for them at the counter, might now 
use an in-store Internet kiosk to place an order. Then he could go to 
the counter and pick up his purchase with no liability for state or 
local tax, since under the Internet Tax Freedom Act definition, it 
would be a remote sale. Under such a system, one can imagine just how 
long it would take for every brick and mortar retailer in America to 
migrate to some form of in-store system simply to compete.
    If such a scenario were to play itself out, state sales and use tax 
systems would become obsolete and inefficient for raising revenue for 
the state and local governments. While the prospect of no taxes at all 
is certainly appealing, we are prepared to offer a more pragmatic 
alternative.
    The definition of discriminatory taxes contained in the Act 
provides that certain activities when performed by an Internet service 
provider on behalf of a retailer will not be considered in determining 
substantial nexus for tax collection purposes. When enacted as part of 
a short-term Act, these provisions were not considered problematic. If 
the Internet Tax Freedom Act is to be extended, however, these 
provisions should be examined carefully. The provisions could be 
interpreted to allow a seller to avoid a collection obligation even 
though the seller has substantial activities and presence in the state.

The Growth of eCommerce
    We support the free flow of commerce and equal competition in the 
marketplace. The accounting firm Ernst & Young predicts that consumers 
will use e-commerce for five to ten percent of retail sales in the next 
five years. Goldman Sachs predicts inroads of 25 percent in ten years. 
Even these could be significant underestimates. Business-to-business e-
commerce is growing far faster than popular on-line consumer purchases. 
Business-to-business e-commerce is expected to reach $1.3 trillion in 
annual revenue by 2003, ten times the projected size of the business-
to-consumer market. That's very much why the National Retail 
Federation, representing some 1.5 million members and nearly one in 
every five workers, voted last week for fairness.
    It's also why my distinguished colleague Governor Gilmore's 
proposal would preserve business-to-business use taxes on Internet 
transactions. He clearly understands the enormity of the adverse impact 
on his budget and education and transportation commitments to the high 
tech businesses in Virginia were he to lose this critical source of 
revenues. This tax is too important not to work hard to save it in its 
broad application.
    The Governors recognize the need to simplify the current sales and 
use tax collection systems to benefit the national economy through the 
removal of unnecessary complexity. We now have agreement by some 32 
states on model state legislation and an interstate agreement through 
the Streamlined Sales Tax Project. States and their local government 
partners have taken the initiative to fashion a solution.

Tax Simplification Recommendations
    States that enact the model legislation and that dramatically 
simplify their sales tax systems should have the authority to require 
out-of-state sellers to collect and remit sales and use taxes. States 
that do not enact model legislation would be stuck with the old ways. 
The fact that we have 40 states that are willing to simplify their 
systems and dramatically reduce the complexity and cost of collection 
for all sellers is evidence of our commitment to adapt to the new 
economy. While the project still has work to do, a model Administrative 
Act was completed with Wyoming the first state to approve it last 
month. The project will continue to refine the terms in its second 
phase this year.
    The Wyoming simplifications, which are the same as recommended by 
the Streamlined Project include:

   centralized, one-stop multi-state registration;

   uniform definitions for goods and services;

   uniform rules for attributing transactions to particular 
        taxing jurisdictions;

   uniform and simplified rules for dealing with exempt 
        transactions;

   procedures for relieving sellers from liability to the state 
        for errors resulting from use of information provided by 
        states;

   certification of software that sellers may use to determine 
        tax due on transactions;

   uniform rules for claiming bad debts;

   uniform formats for returns and remittances, including 
        electronic filing and remittances;

   state-level administration of all state and local sales and 
        use taxes; and,

   uniform audit procedures, including the option for a single, 
        multi-state audit.

    The Streamlined Sales Tax Project has even developed a system that 
would accommodate local option tax rates but, at the same time, reduce 
the burden of administering those rates for remote sellers and other 
retailers. The streamlined system would require each state 
participating in the system to provide sellers with a database that 
assigns nine-digit zip codes to taxing jurisdictions and to relieve 
sellers from liability for any tax not collected due to a seller's 
reliance on the information provided by the state. The system would 
also limit the frequency with which local tax rates may be changed and 
requires advance notice of these changes.
    Wyoming Senator Mike Enzi has advocated a single blended rate for 
each state that would be applicable to remote commerce only. States 
would also have the alternative of requiring collection of the actual 
rate rather than the blended rate when a state has enacted all 
simplification measures enumerated in the bill. We support this two 
part approach.
    The states are working to implement these simplification measures. 
When an appropriate number of states do agree to a common approach 
through an interstate compact, we expect Congress to grant states the 
authority to impose the duty to collect on remote vendors.

Partnerships
    We propose a partnership between the states and the Federal 
Government to authorize the states to mandate collection and remittance 
of use tax by remote sellers but only for those states that have 
enacted the radical simplification measures recommended by the 
Streamlined Sales Tax Project. The Governors would favor a sales 
threshold below which remote sellers could not be required to collect 
use taxes, otherwise known as the de minimis provision. Collection duty 
would then be tied to volume of business rather than location, which is 
more in keeping with a free market economy.
    We recommend that Internet access be defined in a fashion that 
achieves the Congressional goal of protecting basic access to the 
medium and services of the Internet without being so broad as to create 
inequities and distortions. The Governors recommend that the Committee 
establish some mechanism to examine and address the issue of bundling 
and convergence in the near future.
    The Governors recommend that Congress should use any extension of 
the Internet Tax Freedom Act as an important opportunity to enact 
legislation establishing a procedure that would encourage states and 
localities to continue their initiative to develop and implement a 
simplified and streamlined sales tax system. Those states that do 
simplify their sales tax systems to require remote sellers could then 
collect sales and use taxes on sales into a state.
    The Governors support the simplifications contained in S. 521 
introduced in the U.S. Senate on March 9 to reduce the burden of state 
and local sales tax compliance and to save the nation's economy 
millions of dollars through streamlining our current horse and buggy 
tax system. The simplifications in the bill are consistent with many of 
the efforts now being undertaken by the Streamlined Sales Tax Project. 
The project has completed what it considers the first phase of its task 
with the development of a model statute and accompanying agreement that 
states would enact to implement a much simpler multistate sales tax 
system. The system provides all of the simplifications contained in S. 
521.
    Congress should support and encourage this extraordinary effort by 
the states and local governments. We recommend that you authorize an 
interstate compact that extends the authority to require collection 
only to those states that simplify their tax systems. The structure 
embodied in S. 521 is appropriate for accomplishing this. The authority 
to require collection would be automatic for those states enacting the 
compact with the simplified structure.

Conclusion
    States must be allowed to determine our own revenue policies under 
the laws the people of our state have adopted and we are elected to 
implement. Most sales taxes have been in place for at least 50 years. 
The system is an unwieldy horse and buggy system of another age. We are 
moving to fix it, to radically simplify the system so that it works.
    Federal Reserve Board Chairman Alan Greenspan in his remarks to the 
Committee on the Budget, U.S. House of Representatives, March 2, 2001 
spoke of the unusually long period of economic growth in America. He 
spoke of technical innovation and structural productivity growth driven 
by individual creativity, of how the rate of growth of productivity in 
the past five years has far exceeded the growth rate of the previous 
twenty years. Much of that growth has been fueled by activity through 
the Internet. Chairman Greenspan pointed to the sustainability of our 
economic growth as being tied to Internet activity. He warned against 
actions by government that would discourage innovation and stifle 
productivity growth. Likewise, I caution this Committee against 
recommending an approach that would stifle the states by prohibiting 
certain taxes and forcing the imposition of others.
    We need to let the marketplace make the decisions of which 
businesses succeed and which businesses fail. Let us not set arbitrary 
tax policies for the states at a federal level. That is wrong and 
unfair. That would only force people to make their decisions based on 
the taxing scheme and not the free enterprise system.
    Thank you, Mr. Chairman, and Members of the Committee for your 
courtesy. I would be pleased to respond to any questions or comments.
                                 ______
                                 

                                 
                                 

    The Chairman. Thank you, Governor, and I would like to 
congratulate you on being one of the first states, I believe 
the first to pass a uniform sales tax proposal, and I think it 
is a very commendable and laudable action on the part of you 
and the Wyoming State legislature. Thank you, Governor.
    Lieutenant Governor Swift, welcome.

STATEMENT OF HON. JANE SWIFT, LIEUTENANT GOVERNOR, COMMONWEALTH 
                        OF MASSACHUSETTS

    Ms. Swift. Thank you very much, Mr. Chairman, and thank you 
to the Members of the Committee for giving me this opportunity 
to speak with you today on this very important issue. I am Jane 
Swift. I am the Lieutenant Governor of Massachusetts, and this 
is an issue of particular importance to my home state, and that 
is why I am so glad to be able to be here today to speak on 
behalf of our residents.
    Massachusetts has been at the leading edge of the high 
technology revolution, and our residents have been the ones 
that have benefited tremendously from the infusion of high tech 
jobs into our state. Currently, there are 185,000 
nonmanufacturing high technology jobs in Massachusetts, an 
increase of roughly 20,000 such jobs since last year.
    These positions represent well-paying, quality jobs that 
allow people truly to live the American Dream, to support their 
families, and to enjoy a quality of life that no numbers could 
readily quantify.
    Over the past decade, these types of companies have brought 
new life to aging mill towns throughout our state, like North 
Adams, and Lowell, and have helped drive the longest economic 
expansion in American history. I am deeply concerned, as is our 
Governor, Paul Cellucci, that attacks on Internet growth will 
serve to hinder the very growth in this very important sector 
at a time, as you reference, Mr. Chairman, that it can least 
afford it.
    The proper role of government in this emerging industry is 
to encourage its growth. It would be a grave mistake on our 
part to start taxing Internet commerce before it has had even a 
chance to establish itself. We have seen a precipitous decline 
in the NASDAQ over the past year, and as I am sure everyone 
here is aware, just this week it dipped below the 2000 mark for 
the first time since 1998, and we do not see signs of recovery 
in that industry in the near future.
    Some dot coms that were once the toast of Wall Street are 
now auctioning off the remains of their companies and the 
imagined threat to brick-and-mortar stores has all but 
disappeared. While other segments of the high tech sector have 
been able to offset these company closings, it would be a 
mistake to drive remaining businesses out of business through 
added taxes. That would be the equivalent of tossing them an 
anchor at a time when they need a life vest.
    Passing a tax on Internet sales will put people in my state 
out of work. The reality is that the impact of Internet sales 
on current state revenues has been negligible. In 
Massachusetts, the impact of Internet commerce on traditional 
retailers has been nearly insignificant. Retail sales this past 
holiday season and sales tax collections held steady, despite 
some signs of a slowing economy. We found that the positive 
effects of high technology sectors have far outweighed the 
perceived detriment to local retailers or to state sales tax 
revenues.
    These firms have rejuvenated crumbling cities and have 
provided high quality high-paying jobs to thousands. This is 
the kind of economic activity we need to develop across the 
country, and I fail to see how taxing that activity will 
provide that needed encouragement.
    Most of the concern I think has been widely recognized. The 
concern behind the push for Internet taxation came from state 
fears that dot com companies were taking over the economy and 
that there would be no traditional sales tax revenues left. 
This has just not been the case. Despite the Internet, people 
still leave their homes to go shopping. Brick-and-mortar stores 
will always have their place in our communities. They also 
provide jobs, and they also provide the personal touch that 
people will always desire, as well as the immediacy of not 
having to wait for a purchase to be delivered.
    Beyond the detrimental effect that Internet taxation will 
have on this growing segment of the high tech economy, I also 
question the wisdom of plans that are as complex as those 
proposed by the NGA. The complexity of these interstate sales 
taxes is something that I do not believe the government should 
be undertaking. With all due respect to my colleagues from the 
NGA, I am not sure that establishing a large bureaucracy to 
deal with online sales taxes is what this country needs. It 
seems to me that one IRS in Washington is enough, and we do not 
need a second.
    The necessity of federal bureaucracy or online taxation 
also, I believe, raises another important issue that I hope 
your Committee will consider as you look at this issue, which 
is the issue of privacy. I do not believe that people want the 
government keeping track of every item they purchase online, 
nor do I believe that this Orwellian oversight would encourage 
the sales of current electronic retailers. Internet companies 
have to address privacy and security concerns, and big 
government involvement I believe would make that considerably 
more difficult.
    Customers who may not be driven away by the tax complexity 
may, in fact, then be driven away by their concerns for their 
personal privacy. I would just request that all of the Members 
of this Committee look at the long-range benefits of growing 
our high tech economy, consider the ramifications of burdening 
that sector with this complex tax system, and I hope you will 
come to the conclusion that Governor Cellucci and I have, that 
any short-term revenues do not make up for the economic costs 
of restricting Internet growth. Governor Cellucci and I have, I 
think, been very public in stating we believe there should be a 
permanent ban on Internet taxation.
    Let me, if I may, just also address this issue of a level 
playing field for out-of-state sales transactions. It would 
seem to me that were we to adopt this system on remote sellers 
that is being discussed and is being put forward by many of the 
national Governors, that a level playing field would dictate 
that it apply not just to remote sellers, not just to online 
sellers, but offline, or brick-and-mortar companies as well.
    The truth is that today, particularly maybe more in states 
like Massachusetts, that are relatively small geographically 
and have borders that people cross quite easily, we do not 
place the burden of sales tax collection on the seller. If a 
state resident of Massachusetts crosses the border into another 
state, whether it be New Hampshire or Vermont, Connecticut, New 
York, Rhode Island, it is not the small company there who is 
asked to determine where that person's residence is and to 
determine what the applicable sales tax collection should be. 
It is, in fact, the responsibility of the buyer, through use 
taxes, and it is the complexity of trying to enforce that has, 
in fact, made, as Governor Geringer said, the collection of use 
taxes widely unenforceable.
    If we are talking about a truly level playing field, then 
when a Massachusetts resident would travel to Jackson Hole, 
Wyoming, and purchase an item in a small brick-and-mortar 
retail establishment that would be subject to Massachusetts 
taxes, then the logical extension of this argument would be, it 
would be the responsibility of the retailer in Wyoming to 
collect the appropriate Massachusetts sales tax. I do not 
believe that is something that would be supported by a majority 
of small employers and small brick-and-mortar businesses across 
the country. We are talking about shifting the responsibility 
to remote sellers, to those sellers rather than to the buyer 
and, in fact, subjecting businesses in our state to burdensome 
tax regulation that we have found would be a detriment to the 
growth of our economy, and we think it should be our 
prerogative to reject that type of system. Thank you.
    [The prepared statement of Lieutenant Governor Swift 
follows:]

      Prepared Statement of Hon. Jane Swift, Lieutenant Governor, 
                     Commonwealth of Massachusetts

    Thank you, Chairman McCain and Members of the Committee for giving 
me this opportunity to speak with you on the important issue of 
Internet taxation. This is an issue of particular importance to my home 
State of Massachusetts, and I am glad to have the chance to speak here 
on behalf of our residents.
    Massachusetts has been at the leading edge of the high-technology 
revolution, and our residents have benefited tremendously from the 
infusion of high-tech jobs into the state. Currently there are 185,000 
non-manufacturing high technology jobs in Massachusetts, an increase of 
roughly 20,000 since last year. These positions represent well-paying, 
quality jobs; jobs that allow people to live the American dream, 
support their families, and enjoy a quality of life that no numbers can 
quantify. Over the past decade, the presence of these companies has 
brought new life to aging mill towns like North Adams and Lowell, and 
has helped drive the longest economic expansion in American history.
    I am deeply concerned that a tax on the Internet will serve to 
hinder growth in this important sector at the time when it can least 
afford it. The proper role of government in this emerging industry is 
to encourage its growth. It would be a grave mistake on our part to 
start taxing Internet commerce before it has even had a chance to 
establish itself.
    We have seen a precipitous decline in the NASDAQ over the past 
year. This week it dipped below the 2000 mark for the first time since 
1998, and has shown no signs of recovery in the near future. Some dot-
coms that were once the toast of Wall Street are now auctioning off the 
remains of their companies, and the imagined threat to traditional 
brick and mortar stores has all but disappeared.
    While other segments of the high tech sector have been able to 
absorb some of these company closings, it would be a mistake to drive 
remaining businesses out of business through added taxes we don't need. 
That would be the equivalent of tossing them an anchor when they need a 
life vest. Passing a tax on Internet sales will put people in my state 
out of work; and they would be losing their jobs just because 
government can't keep its hand out of the cookie jar.
    The impact of Internet sales on current revenues is negligible. We 
have found in Massachusetts that the impact of Internet commerce on 
traditional retailers has in reality been nearly insignificant. Retail 
sales this past holiday season held steady, despite some signs of a 
slowing economy.
    We have found that the positive effects of high technology sectors 
have far outweighed any perceived detriment to local retailers or to 
state sales tax revenues. These firms have rejuvenated crumbling 
cities, and have provided high-quality, high-paying jobs to thousands. 
This is the kind of economic activity we need to develop across the 
country, and I fail to see how taxing that activity will provide the 
needed encouragement.
    I am especially skeptical of the need for increased taxes at a time 
when state revenues have been reaching record highs. I believe now is 
the time to lower the tax burden on our citizens, not raise it. 
Republican Governors have worked hard over the last decade to cut tax 
rates for the citizens of Massachusetts, and I would encourage the 
Senate to act to cut federal taxes as well.
    Most of the concern behind the push for Internet taxation came from 
state fears that dot-com companies were taking over the economy, and 
that there would be no traditional sales revenues left. This has not 
been the case. Despite the Internet, people still leave their homes to 
go shopping. The new economy juggernaut has slowed to a walk, and most 
people have realized that previous fears of an economic revolution were 
unfounded. Brick and mortar stores still have their place in our 
communities. They also provide jobs and they provide the personal touch 
that people will always need, as well as the immediacy of not having to 
wait for a purchase to be delivered.
    Beyond the detrimental effect that Internet taxation will have on 
this growing segment of our high-tech economy, I also question the 
wisdom of plans that are as complex as that proposed by the NGA. The 
complexity of these interstate sales taxes is something that the 
government should not be undertaking. With all due respect to my 
colleagues, I am not certain that establishing a large bureaucracy to 
deal with online sales taxes is what this country needs. It seems to me 
that one IRS is enough for Washington. We don't need a second.
    The necessity of federal bureaucracy for online taxation also 
raises substantial concerns over privacy issues. I do not believe that 
people want the government keeping track of every item they purchase 
online, nor do I believe that this Orwellian oversight would encourage 
the sales of current electronic retailers. Internet companies have to 
address privacy and security concerns, and big government involvement 
makes that considerably more difficult. Customers who aren't driven 
away by the tax, may be driven away by their concerns for privacy.
    I would encourage all the Members of this Committee to look at the 
long-range benefits of growing our high-tech economy, and consider the 
ramifications of burdening that sector with further taxes. I hope that 
you will come to the conclusion, as I have, that any short-term 
revenues do not make up for the economic cost of restricting Internet 
growth. I would encourage you to enact a permanent ban on Internet 
taxation.

    The Chairman. Thank you very much. We obviously have a 
significant difference of opinion here between the two 
witnesses. We do have another panel, and we have a vote at 
10:45. If there are questions for the Governor and Lieutenant 
Governor we would be glad to entertain them, recognizing 
Senator Dorgan first, and I would ask the members to make the 
questions fairly brief, because we have a whole other panel. We 
are going to have to break at 10:45 and that is going to extend 
the hearing for a significantly long time.
    Senator Dorgan.
    Senator Dorgan. Mr. Chairman, I understand that, and we 
want to make sure we hear the other panel, so I will be brief.
    Let me ask Governor Swift, you indicated, I quote, 
``passing a tax on Internet sellers would be a death knell, et 
cetera.'' You understand that the discussion and debate and 
legislation here is not about passing a tax on Internet 
sellers, do you not?
    Ms. Swift. Well, what I understand is that it would subject 
those sellers who may have a physical location in my state to a 
complex tax system that they would then be required to 
implement that we think would restrict their growth, as is not 
currently the case in most jurisdictions for brick-and-mortar 
businesses. We do not subject that person who is selling the 
product to determine the residency of the person who is 
purchasing it.
    Senator Dorgan. But, so you do understand, we are not 
talking about passing a tax on the Internet, which is your 
testimony. We are talking about requiring a collection on 
behalf of sellers.
    Ms. Swift. I think it does give new authority. I do 
understand that it would give new authority to the states to 
require companies who do not have a physical presence in their 
state to become the collector, and while you may say that is 
not a specific tax on the Internet, it would subject those 
companies to all the tax regulations, to the audits, and to the 
complexity of a system that I think would be detrimental to 
their growth.
    Senator Dorgan. I understand your point. I just want the 
language to be accurate. The tax already exists. You understand 
that. The tax exists. It is not collected. I do not want people 
to talk about Congress talking about imposing some new tax, 
which was in your testimony, passing a tax on Internet sales. 
That is not what this discussion is about. Enforcing the 
collection of a tax that already exists.
    Second, let me ask----
    Ms. Swift. But I do think it would extend taxing authority 
that does not currently exist.
    Senator Dorgan. Well, let me--that is not the case at all. 
The taxing authority exists. It is a use tax authority that 
exists on the transaction of those sales. The question is, is 
it collected? Governor Geringer said no. He is accurate about 
that. It is almost never collected.
    So this is not a new tax. The tax already exists. It is 
about collection of tax.
    But let me ask one additional question on the issue of, you 
talked about the necessity for a federal bureaucracy and big 
government involvement. Could you describe that, because that 
is--you are winning a debate we are not having.
    [Laughter.]
    Ms. Swift. Well, I think the concern is, while we talk 
about simplification of the tax system, we have yet to see 
evidence that would happen and, in fact----
    Senator Dorgan. I am talking about the federal bureaucracy. 
Could you describe what that bureaucracy----
    Ms. Swift. Well, my concern is who would ultimately--if 
Congress makes the decision that, in fact, they are going to 
allow through interstate commerce there to be a taxing 
authority, a tax collection authority for states, with states 
that do not have a physical presence, then whose responsibility 
would it be to do the enforcement?
    Senator Dorgan. The states.
    Ms. Swift. Whose responsibility would it--so Massachusetts 
could be told by Congress that we have to enforce--I mean, I 
think that is the essence of the debate.
    Senator Dorgan. Well, you are misunderstanding--Governor 
Swift, with due respect you are misunderstanding this issue. No 
one is telling Massachusetts you have to do anything. The 
question is, will the Congress allow Massachusetts to be able 
to effect collections. It is the testimony of Governor 
Geringer--you apparently oppose it, but it is not enforcing 
anything on anybody with respect to the state governments, and 
I only raise this question because when you talk about the 
establishment of a new federal bureaucracy, no one is talking 
about anything that remotely resembles some sort of bureaucracy 
of the Federal Government. This would only empower the state 
revenue agencies.
    Ms. Swift. Let me just be very clear. I think the threat of 
that is a real one. For example, if Massachusetts chose not to 
enforce, for their businesses that are located there, the 
remote sellers who have a physical presence in our state, that 
we were not going to go out and use our Department of Revenue 
to enforce collections that were supposed to be made in 
Wyoming, then who would have jurisdiction? Would the Department 
of Revenue, or whatever their name is in Wyoming, have then 
jurisdiction to come into Massachusetts, to Massachusetts 
businesses, not to Massachusetts buyers, but to Massachusetts 
businesses, and if not, then it would be unenforceable. There 
has to be some entity that would have to be created to make it 
enforceable, particularly if not every state agreed with the 
premise.
    Senator Dorgan. Governor Swift, the State of Massachusetts 
has a right to decide not to enforce any tax laws you enact. 
You can do that. I assume your constituents would not like it 
very well, but this issue is not about forcing Massachusetts or 
any state to do anything. The issue here is about a tax that 
currently exists and is not collected, and the proposition that 
we are making is, if we require the states to substantially 
simplify the requirements here, should we then require the 
collection of those taxes.
    It would be up to the state to effect those collections, 
not some federal bureaucracy, and I just object to this issue 
of big government involvement, quote, federal bureaucracy, 
because as I said, you are winning a debate we have never had 
and will not have, because that is not what we are discussing 
today.
    Ms. Swift. I think--and I take your point, Senator. I think 
it is important to point out that as we enter into what would 
establish new taxing authority that there are a variety of 
threats that all should be considered, because we have not 
previously had to deal with this issue, and as the complexity 
of commerce changes, we want to make sure there are not 
unintended consequences to the decisions that we make today, so 
that was the intention of my remarks.
    The Chairman. As I feared, we are about to begin a debate 
that may best be suited for the floor of the Senate, but 
Governor, former Governor, Senator Allen.
    [Laughter.]

                STATEMENT OF HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Mr. Chairman, thank you. It is good to see 
my former colleague, Governor Geringer here, and they have some 
great stores there in Jackson Hole, Wyoming, and my wife has 
some beautiful clothes from there, good prices, and we like 
Cheyenne Outfitters as well.
    The Chairman. Senator Allen, we are going to restrain you 
to 3 minutes.
    [Laughter.]
    Senator Allen. The great thing about Cheyenne Outfitters, 
even though you do not buy things over the Internet, it is a 
catalogue, and they are not compelled by Virginians to collect 
sales taxes.
    I think the issue, Mr. Chairman, as I understand this 
Committee, is not all--and I enjoyed listening to Governor 
Swift's remarks, and generally my view is similar to that of 
Governor Cellucci's, and his predecessor, Governor Weld. The 
issue I think, Mr. Chairman, before this Committee is whether 
or not to extend the moratorium on access taxes on the 
Internet. That advisory commission fought over this issue for a 
long time, and the one thing that they could agree on was 
extending the Internet moratorium, first and foremost.
    In my view, it should not be a moratorium extended for 5 
years. I think the moratorium on taxing access to the Internet 
should be made permanent. We do not need to create another 
Spanish American War luxury tax which would impede the ability 
of people to get access to the Internet, especially when people 
think of broadband access, or high-speed access.
    To me, increasing, or allowing further taxes by states, 
municipalities, or other entities I think would be very harmful 
for the expansion of the Internet, which I look at as the 
modern-day Gutenberg Press for the dispersement of ideas and 
beliefs and commerce and education, so in my view we ought to 
have a permanent extension on the moratorium.
    Now, the issue of getting into simplicity as far as the 
harmonization of various sales tax laws in the nation, 
implicitly says if the states and localities could get together 
and get a similar sales tax regime, then the issue of the nexus 
or the physical presence does not matter so much, and it seems 
to me that does still matter, and I think it will be a very 
long day before you can get all the states, whether it is 
Wyoming, or Tennessee, or Texas, or California, or Virginia to 
agree on the same sort of tax policies.
    So I would ask the two witnesses, the issue before this 
Committee is whether to extend the moratorium on access taxes. 
In my view, it ought to be extended permanently, and we ought 
to repeal the Spanish American War telephone tax.
    The issue of simplification ought to be completely separate 
from this, and would you all agree that the issue of 
simplification could go forward as an independent matter for 
the states to determine from the issue of whether or not the 
moratorium, which is going to expire in October of this year, 
should be made either permanent or extended for 5 or 6 years?
    I would first go to Governor Geringer.
    Governor Geringer. Mr. Chairman--and thank you, Senator-
Governor Allen.
    [Laughter.]
    Governor Geringer. What you may have missed is that my 
testimony implied, if it did not outright state, yes, we agree 
with the extension of the moratorium on access. The question 
is, how will the states be able to continue their current 
system of taxation, which they rely on heavily, or will be able 
to simplify it as they go along so they can modernize 
government approaches at the same time business is modernizing 
its approaches, so what I have advocated is less government, 
lower taxes, and simpler ways of doing business.
    It is a pretty neat package. There would be less 
bureaucracy at the state level. There would be no federal 
bureaucracy. It would all work out in the end because the 
states would get together and make it work.
    The thing that seems to be missed here is, why we are 
coupling the issues together of allowing the states to 
determine what a remote sale is, and to be able to collect a 
tax that is already due. It is a use tax that already needs to 
be paid, just as Virginia collects business-to-business sales 
taxes today, even those done over the Internet. We are talking 
about those that are eroding, if you can package it correctly 
and be in compliance with the current Internet Tax Freedom Act. 
That needs to be clarified.
    If you are going to extend the moratorium, extend the Wyden 
bill, whether it be 5 years or indefinitely, you have to 
clarify this misunderstanding, or misinterpretation that is 
allowing retailing today and business transactions to migrate 
to the Internet and avoid currently obligated taxes.
    Senator Allen. But there is--I would say to the Governor, 
they are still subject to the use tax, and what the issue here 
is whether or not we are going to impede Internet transactions 
simply to make it convenient for the government, or should the 
government adapt to new technology?
    Governor Geringer. What I would suggest, then, is that you 
also extend that same authority to repeal all the federal 
excise taxes. Here is the document that documents them all, $90 
billion a year. $90 billion a year that you would give up. In 
the current debate over the sales tax, or the tax cut, the 
package from the White House, this over 10 years would be $900 
billion. The debate today is even far less than that.
    What is the difference between the Federal Government, that 
allows the collection and enforcement of taxes on the Internet 
for their purposes, but will not permit or enable the states to 
do the same on their own, so if a remote sale is transacted, 
and the use tax is due in Wyoming, we cannot collect it, just 
as the other 32 states who have already signed on, they say 
they believe in this simplified approach, another eight in May, 
that is pretty popular right there. They have already worked 
out a simplified approach.
    We are asking you to engage in prevention. The crisis is 
not here. The crisis could be coming. I guess there is more 
credit given to recovering from a disaster than from preventing 
it in the first place, but we are asking for some judicious 
partnership up-front to allow the states to proceed on their 
own, which is a good idea.
    Senator Allen. Well, I would like to get rid of the federal 
telecommunications tax. I see the red light is on, so I want to 
respect that.
    The Chairman. I think perhaps we would give the Lieutenant 
Governor a chance to comment.
    Ms. Swift. I would just say, we would absolutely support an 
extension or a permanent ban, preferably, on the moratorium on 
the access tax, and I would agree with you, Senator, that it 
should be up to the states, not an act of Congress, to have the 
states proactively act as I understand is probably the intent 
of Senator Wyden's bill to achieve simplification, although I 
hate to be a skeptic, but I have my doubts that it would 
happen, but that does seem to be the fairer way to proceed than 
to shift the burden of collection to a technology entity that I 
think has provided great benefits, at least for the economy in 
Massachusetts.
    The Chairman. Further questions? Senator Wyden. Oh, Senator 
Kerry, did you want to make any----
    Senator Kerry. Thank you, Mr. Chairman. Let me just say, I 
guess this is part of the debate we are having on this 
Committee with my colleagues here as we have been trying to sit 
down privately to work through this, but I guess Senator Wyden 
and I have a disagreement over the interpretation of the 
Supreme Court decision, which is really why we are here.
    There were two components of the decision. One, I agree 
with my colleague, talks about the nexus necessary in a taxing 
state in order to collect sales and use tax, but it says very 
clearly--let me just read from it--it says, Congress is free to 
disagree with the Supreme Court's evaluation of the burdens 
that use taxes impose on interstate commerce, and Congress 
remained free to decide whether, when, and to what extent the 
states may burden interstate mail order concerns with a duty to 
collect use taxes.
    So I think, you know, the question here is, what can the 
states do in order to remedy what they perceive, maybe not 
every state, but most states are currently perceiving as an 
inequity in the marketplace?
    I have personally walked into some stores where the owners 
of the stores have said to me, you know, Senator, I got people 
coming in here now, and what they do is, they go through all my 
stuff in the store and they use my salesman, and they figure 
out exactly what works for them best and what they want, then 
they go out--they do not buy here. They go out and they use the 
Internet, and they buy it on the Internet, and this store owner 
was actually complaining to me personally about this inequity, 
replicated, I have heard, many times in many places.
    Now, the obvious question is, what happens if all of a 
sudden Congress embraces this concept of permanency, and a tax 
that already exists, a sales tax, suddenly finds a kind of 
haven, if you will, the kiosks that we have heard about?
    Some people have talked about going to Wal-Mart, setting up 
a separate Wal-Mart kiosk, you go in, you look at all the 
things you want to do, then you come out and you pump it in on 
a computer, and you pump it into a remote selling place where 
they fill the order and you do not pay a use tax, a sales tax 
on that.
    If we entered into this so-called notion of permanency, we 
would be creating a sort of institutionalized divide between 
ways in which people can choose to buy, and I think, Governor 
Swift, you would agree with me that we already have a lot of 
people in Lowell, and Lawrence, and Haverhill and elsewhere who 
take advantage of the proximity to the border. One of the 
complaints I have heard for years in that northern sector of 
Massachusetts is, you know, sort of the differential between 
New Hampshire and the incentive to buy elsewhere. What we are 
trying to do, I think, is see if we cannot even this out.
    Now, Governor Geringer, share with me in the simplest form 
possible what you see here as the issue of fairness, and how 
this has impacted your state. Why do you think we need some 
sort of remedy to adjust this if, as Governor Swift suggests, 
it is not that serious a problem?
    Governor Geringer. Mr. Chairman and Senator, the impact to 
any small business is very much as you described it, except it 
would be magnified significantly more. Wyoming is very well-
connected to the Internet. It has been one of the chief things 
I have advocated, so people all across the state are very 
connected. Our schools are not only connected to the Internet, 
they are connected to each other so we can do a lot of 
teaching. It is inoculated into our whole society. We advocate 
that because of the productivity it brings.
    It has been a disadvantage where it is hard to the 
businesses that would engage in any kind of a transaction, 
particularly of goods, but even of services, where, as you 
describe, somebody comes into the store, they browse through 
everything--in fact, even after they have bought it off the 
Internet, they try to return it to a local retailer. When you 
talk about, even the larger retailers, who look at a 2-percent 
profit margin overall, and in our state they might be able to 
save 5 percent by not being able to charge taxes, that is a 
very significant purchase.
    The current federal excise taxes would allow for tractors--
and our state has a few tractors out there in some of the rural 
areas. You could buy your tractor over the Internet and avoid 
paying 5 percent on a tractor that probably costs $100,000. 
That is a very significant impact to a small implement dealer, 
and that might be his entire week's income.
    That is the type of thing that we are looking at, and that 
is the same person who is expected, then, to help maintain that 
tractor when the person brings it in for servicing or repair.
    So it is a question not of, how do we create a bizarre, 
perverse incentive by allowing people to avoid paying taxes 
through an Internet transaction or remote sale, any electronic 
means of transaction versus what they would pay otherwise. We 
have to even it out for any small business.
    As far as collecting that tax, if the vendor is small and 
they are engaged in business, the concept that the NGA supports 
would be the de minimis rule, where if you have sales below a 
certain amount, a certain threshold, you would not be required 
to track and help collect that same tax that is done in-state 
now, so there are some practical limits to what we are 
proposing here in order to achieve simplification.
    Senator Kerry. Thank you. My time is up.
    The Chairman. Thank you, Senator Kerry. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    First, Governor Geringer, let me say again, as the Senate 
sponsor of the Internet Tax Freedom Act, I am very anxious to 
work with you and the Governors and our colleagues to try to 
come up with a sensible approach to this area, and let me offer 
what I think is the central question in terms of our being 
actually able to work out a bill and work with all of you in a 
cooperative fashion.
    We have now talked about the two elements in the Supreme 
Court case. I do not quarrel with Senator Kerry's analysis in 
the least. The Court said you have got to have physical 
presence to impose a tax, and they said Congress through the 
Commerce Clause can make decisions in this area as well.
    What concerns me is the process wherein in effect the 
states would let the horses out of the barn here at a time when 
the technology economy is very fragile, and Congress would then 
have to come back and disapprove your plan. What I call for in 
my legislation is essentially the opposite. We give you all the 
tools you need, and the time you need to go out and put your 
plan together and address these uniformity and simplification 
issues, and then when you have done it, we would have an up or 
down vote on the floor of the U.S. Congress.
    What is the problem with going the route that I envisage in 
the legislation I proposed, rather than the situation where, 
without a vote of the Congress, we in effect overturn a Supreme 
Court decision as it relates to the physical presence issue? 
Could you give us your thoughts on that?
    Governor Geringer. Mr. Chairman, it reminds me of a cartoon 
I saw once where an individual standing in the middle of 
Wyoming prairie, and he is holding a rope in his hand, and he 
said, let me see now, did I lose my horse or find the rope? I 
think that may be part of the question here. I do not think the 
horses are out.
    What we are asking for is a partnership. The question you 
phrased is, should we let the states come forward with a plan 
that could be rejected or accepted by the Congress, but by what 
criteria? What criteria would we work against?
    Senator Wyden. We are happy--and that is one of the things 
that has been so good about the progress with Senator Kerry and 
Senator Dorgan and the chairman, I think we are very willing to 
work with you on those criteria so you are not just flailing 
around in the dark. The difference, though, is that before it 
kicks in at a time when the technology economy is so fragile, 
we would first have to have a vote. We are happy to work with 
you, to make sure that the criteria are fair.
    Governor Geringer. But I think you take that vote when you 
pass either your bill or the Dorgan bill, or whatever bill 
comes along, which outlines a one-stop system definition for 
how you describe a sale, which could be exempt, what software 
could be adopted, so you have standardized approaches, 
simplified, less expensive, uniform tax returns, the use of the 
Internet for electronic filing, uniform auditing procedures--
those are criteria that could be used, but the extension 
without further definition is risky.
    And here is another example that we have not talked about 
yet. With the emergence of what is called convergence, where 
you can package up all types of things to offer online, items 
that are currently taxed and offered for sale as a taxable item 
are going to be packaged as part of an Internet service. Now, 
how do you differentiate between what is sold as merchandise 
over the Internet now, and what is included as an overall 
package, such as staying in a hotel here in Washington and 
avoiding the tax, because you bought it online? That is the 
difference that we have not even talked about yet. How do you 
even describe that?
    The states have already developed a simplified taxing 
approach. That policy is already in place. Why not make the 
states an equal partner, rather than subservient to the final 
approval by the government?
    Senator Wyden. Governor, I just want to make it clear, I am 
anxious to work with you. That, to me, is the central question. 
I cannot support something, at a time when the technology 
sector is so fragile, that would put in place a new taxing 
regime before we have been out on the floor of the U.S. Senate 
and debate it, and the fact is that this is an important 
question for the U.S. Senate. The Senate has voted twice on the 
question of whether to set aside that Supreme Court decision. 
More than 60 Senators on each occasion said no, so we are going 
to work with you, and it is an important process question.
    The second question I want to ask real quickly is, could 
you tell us what provisions in the Internet Tax Freedom Act as 
written now are unfair?
    The Chairman. Would you tell us briefly?
    [Laughter.]
    Governor Geringer. I cannot quote you the section, Mr. 
Chairman, Senator, but it is the portion that describes the 
arbitrary or--and I cannot remember the terminology that is 
there, but it is the discriminatory taxes. It would appear to 
disallow any current state tax that is collected as being a new 
tax. That is unclear in the current act.
    Senator Wyden. We will work with you on that. We have 
always said that we are interested in technological neutrality, 
treat the offline world like you treat the online world. We 
will work with you.
    My time is up, and I thank you, Mr. Chairman.
    The Chairman. Any other questions?

            STATEMENT OF HON. KAY BAILEY HUTCHISON, 
                    U.S. SENATOR FROM TEXAS

    Senator Hutchison. Mr. Chairman, thank you. I will be 
brief. I know that time is of the essence, but I do appreciate 
so much your holding this hearing, because I am very concerned 
about two issues.
    I come from a state that has no state income tax. 40 
percent of our state revenue comes from sales and use taxes. We 
do not want to tax access to the Internet, but we do want a 
fair and level playing field for the Main Street businesses 
that operate and contribute to our communities, and we do not 
want a huge deficit to form in our state revenues because there 
is an unlevel competition.
    So I am signed on with Senator Dorgan and Senator Enzi to 
encourage states, and I have written to the National Governors 
Association and the National Council of State Legislatures 
today asking that they come up with a model law immediately. 
Let Congress look at it so that we would have the comfort that 
states who wished to create the level playing field would be 
able to do that on an expedited basis, and those states which 
do not would certainly not have to join the compact.
    But I think we are coming to some agreements, and I hope 
that with your testimony and the next panel that we will be 
able to create a level playing field, give states some options 
where they need it, but not in any way keep from allowing the 
states to do what they need to do and certainly keep the 
strength of the Internet and what it has provided for consumers 
in our country.
    Thank you.
    The Chairman. Thank you, Senator Hutchison.
    Senator Edwards. Senator Fitzgerald.
    Senator Dorgan. Mr. Chairman, might I ask consent to put a 
letter in the record?
    The Chairman. Without objection.
    [The information referred to follows:]

Hon. John McCain,
Chairman,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

Hon. Ernest F. Hollings,
Ranking Member,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Chairman McCain and Ranking Member Hollings:

    We are writing to outline the importance of our legislation, the 
Internet Tax Moratorium and Equity Act (S. 512), and specific 
legislative provisions in the Internet Tax Freedom Act of 1998 that 
should be further discussed during the first session of the 107th 
Congress. We believe that it is absolutely imperative that Congress 
move quickly this year to consider this legislation and the difficult 
tax issues relating to Internet sales that it seeks to address.
    First, most everyone who is familiar with this issue knows that the 
current expiration date for the moratorium on Internet access and 
discriminatory taxes is fast approaching. We believe the moratorium 
should be extended. That's why S. 512 would extend the current 
moratorium for an additional four years. Also, this legislation moves 
toward a solution to the growing web of tax compliance problems that 
faces virtually everyone who would do business across state lines--
sellers and customers alike.
    Despite some setbacks, Internet technology and commerce will 
continue to be a real growth engine for our economy. The past holiday 
season, retail sales over the Internet jumped 76 percent from the same 
period a year earlier. A recent University of Texas study estimated 
that $830 billion in revenues were generated by the Internet economy in 
2000, up 58 percent from 1999 levels. Together, this information 
suggests that Internet sales are not going to be either temporary or 
insignificant, and neither are the compliance problems.
    We believe that the approach embraced in our bill would help create 
a climate in which web-based firms and Main Street businesses can co-
exist and compete on fair and even terms. Any new form of commerce 
presents a challenge to the rules and structures that have grown up 
around the old. The automobile required the reform of traffic-control 
rules designed for the horse-and-buggy era. And the Internet is no 
exception. The Internet has raised vexing questions about privacy and 
property rights. It has raised similarly vexing questions regarding the 
revenue systems of the states and localities of this nation. Clearly, 
the Internet does not fit neatly into these systems as they have 
evolved over the last two hundred years. This disconnect has created 
tensions between vital new businesses (Internet service providers and 
web-based businesses), state and local governments, and Main Street 
merchants, which is understandable and valid. Our job in Congress is to 
try to address the problem in a fair and constructive way.
    The solution begins with a recognition of the problem. Collecting a 
sales tax in a face-to-face transaction on Main Street or at the mall 
is a relatively simple process. The seller collects the tax and remits 
it to the state or local government. But with remote sales--such as 
catalog and Internet sales--it's more difficult. States cannot require 
a seller to collect a sales tax unless the business has an actual 
location or sales people in the state. So most states, and many 
localities, have laws that require the local buyer to send an 
equivalent ``use tax'' to the state or local government when he or she 
did not pay taxes at the time of purchase.
    The reality, of course, is that customers almost never do that, and 
in many cases are unaware of their obligation to pay a use tax. It 
would be a major inconvenience, and people are not accustomed to paying 
sales taxes in that way. So, despite the requirement in the law, most 
simply don't do it. This tax, which is already owed, is not paid. For 
years, state and local governments could accept this loss because 
catalog sales were a relatively minor portion of overall commerce. The 
rapid growth of Internet sales is changing all that.
    Internet and catalog sellers correctly argue that collecting sales 
taxes would be a significant burden for them. Understandably, they 
contend that it would be difficult for them to have to comply with tax 
laws from thousands of different jurisdictions--46 states and thousands 
of local governments have sales taxes with different tax rates and all 
of the idiosyncrasies regarding what is taxable and what is non-
taxable. However, there are some remote sellers who know they enjoy an 
advantage over Main Street businesses and simply do not want to lose 
it. They can sell a product without collecting the tax, whereas Main 
Street businesses must collect the local sales tax. Main Street 
businesses claim that is unfair, and they have a point, too.
    There are three basic principles underlying the Internet Tax 
Moratorium and Equity Act. First, we believe that this new Internet 
technology will remain a real growth engine for our economy, and the 
solution must begin by putting the worries of web-based entrepreneurs 
to rest. They should not be concerned about new and discriminatory tax 
burdens, and they should not be singled out as cash cows. Congress 
should make this clear. That's why our bill would extend the existing 
moratorium, which is set to expire on October 21st, through December 
31, 2005, That will help remove some of the anxiety about the 
approaching expiration date, while giving all stakeholders--state and 
local governments, Internet sellers, and the bricks and mortar retail 
community--time to work together to develop a real solution for the 
sales and use tax compliance problems now facing many businesses and 
their customers.
    Second, state and local governments should be encouraged to 
simplify their sales tax systems as they apply to remote sellers. And 
third, once states have reduced the burden on sellers by simplifying 
their sales and use tax systems, then it is only fair that remote 
sellers do their part and collect any use tax that is owed, just as 
local merchants collect sales taxes. This simple step would free the 
consumer from the burden of having to report such taxes individually. 
It would level the playing field for local retailers and others that 
already collect and remit such taxes, and it would protect the ability 
of state and local governments to provide necessary services for their 
residents in the future.
    Further, additional concerns have been raised by interested parties 
that the definition of Internet access and ambiguous provisions in the 
definition of discriminatory taxes in the Internet Tax Freedom Act as 
passed by Congress in 1998 may be used inappropriately by some 
retailers to avoid collection responsibilities in a manner never 
intended by Congress. Their concerns stem from the fear that as 
Internet and electronic commerce technologies continue to develop they 
may converge with other related communications technologies and media. 
Yet, these service providers could be subject to widely different tax 
regimes because of the intervention of the Internet Tax Freedom Act. As 
a consequence, the current definition of Internet access in the Act 
could have large, unintended consequences if the definition is not 
changed. Also, there is a concern that some sellers will try to 
inappropriately use ambiguous provisions in the definition of 
discriminatory taxes to avoid collecting sales taxes even though the 
seller uses Internet kiosks or Internet cash registers physically 
located in a state as a means of making sales. The attempts to use 
ambiguous language as a potential loophole will only exacerbate the 
inequity between retailers that collect the tax and those who don't.
    In our judgment, it would be a serious mistake for Congress to 
adopt a lengthy extension of the current Internet tax moratorium 
without addressing these underlying problems. If we do not address the 
problems, then the growth of the Internet, which should be a benefit to 
Americans, will instead mean a major erosion of funds available to 
build and maintain schools and roads, finance police departments and 
garbage collection, and all the other services that citizens in this 
country want and need.
    There is no question that left unchanged the current collection 
system will have a significant impact on the ability of states and 
local governments to fund their core responsibilities. States and local 
jurisdictions rely on sales taxes to fund a host of community services. 
Permanently exempting Internet sales from state and local taxation 
would lead to one of two bad outcomes: higher state and local taxes in 
other areas to compensate for a devastating loss of sales tax revenue, 
or a greater reliance on the Federal Government for even the most basic 
community services. The slowing economy has already reduced tax revenue 
in many states, and as many as 15 states that depend on sales and 
manufacturing taxes are facing spending cuts as high as 15 percent. 
Further, federal preemption in this area erodes the ability of state 
and local taxpayers to shape the policies that affect their lives.
    Moreover, the competitive crisis facing local retailers is also 
growing more urgent. In testimony before the Commerce Committee in the 
last Congress, a representative from a large retailer testified that 
his company is incorporating a separate business to put the business on 
the Internet. It will do so in a manner that will enable them to avoid 
sales and use taxes. Even though the retailer has locations in every 
state and therefore would be required to collect such taxes on Internet 
sales, it believes that such avoidance is needed to compete with other 
large competitors that will be making those sales tax-free. This 
scenario could play out over and over again unless we act quickly and 
decisively. If we do not act, the large retailers will survive, the 
small Main Street businesses will continue to struggle, and there will 
be a massive loss of revenues to fund schools and other basic services.
    It is important for Congress to begin the process of finding a 
long-term solution to the problem this year before the moratorium 
expires. We believe that our legislation strikes a proper balance 
between the interests of the Internet industry, state and local 
governments, local retailers and remote sellers. We look forward to 
working with you in an efficient and effective manner to achieve the 
best outcome for all involved parties.
        Sincerely,
                                           Byron L. Dorgan,
                                                      U.S. Senator.
                                           Michael B. Enzi,
                                                      U.S. Senator.
                                                Bob Graham,
                                                      U.S. Senator.
                                          George Voinovich,
                                                      U.S. Senator.
                                               John Breaux,
                                                      U.S. Senator.

    The Chairman. Well, Governor and Lieutenant Governor, 
obviously we have a very interesting issue here. I want to 
thank you. We have two major Internet issues facing the 
Congress and the American people. One is this issue, and the 
other is the issue of Internet privacy. We would also 
appreciate your input on the issue of Internet privacy as well, 
as we try to address that very important issue.
    Governor.
    Governor Geringer. Just a brief comment, Mr. Chairman. I am 
the chairman of the Task Force on Technology and E-Governance. 
We have privacy at the top of our list. We would be pleased to 
work with you on that.
    The Chairman. We will look forward to it, and we will 
invite you back to another hearing in order to be able to hear 
your views and communicate with you frequently.
    Thank you very much. Thank you, Governor.
    Governor Geringer. Thank you.
    The Chairman. And Lieutenant Governor Swift, we all hope 
that the ensuing weeks proceed very well for you.
    Ms. Swift. Thank you.
    The Chairman. We will be watching the media.
    [Laughter.]
    Ms. Swift. Hopefully not too much of it.
    The Chairman. And congratulations.
    Ms. Swift. Thank you.
    The Chairman. Our next panel is Mr. Frank Julian, the 
operating vice president and tax counsel of Federated 
Department Stores, Incorporated, Mr. Peter Lowy, who is the 
chief executive officer, Westfield America, Mr. Robert Comfort, 
the vice president of tax and tax policy of Amazon.com, Ms. 
Elizabeth Harchenko, who is the Director of the Oregon 
Department of Revenue, Mr. Jeff Dircksen, director of 
congressional analysis of the National Taxpayers Union.
    Senator Dorgan. Mr. Chairman, while the panel is forming, 
might I ask that you send a letter to all the stakeholders. We 
have gotten a lot of letters back from them on this issue. I 
wonder if I could ask the Senator if you felt it appropriate 
that we include those letters in the Committee hearing record 
for today.
    The Chairman. Without objection. I think it would be very 
beneficial. Mr. Julian.

         STATEMENT OF FRANK G. JULIAN, OPERATING VICE 
  PRESIDENT AND TAX COUNSEL, FEDERATED DEPARTMENT STORES, INC.

    Mr. Julian. Good morning, Mr. Chairman. My name is Frank 
Julian, and I am operating vice president of the Federated 
Department Stores.
    The Chairman. Before you begin, Mr. Julian, I am told that 
we have a vote in about 5 minutes. We would like to get through 
a couple of the opening statements. We may have to take a break 
and then the Members will return for the rest of the hearing, 
and I am told that there are three votes, so there may be a 
lengthy break here and not a short one.
    Thank you, Mr. Julian.
    Mr. Julian. Yes, sir. I will proceed and I am here all day, 
so I am at your disposal.
    My name is Frank Julian. I am operating vice president of 
Federated Department Stores in Cincinnati. Federated operates 
400 department stores in 33 states under the names of Macy's, 
Bloomingdale's, the Bon Marche, and others, and a significant 
direct consumer business with its Fingerhut, Bloomingdale's by 
Mail, and Macy's.com subsidiaries. I am here today on behalf of 
the Internet Tax Fairness Coalition, an alliance of retail, 
technology, and communications companies.
    As the Supreme Court has recognized, the myriad of complex 
state and local sales tax systems in existence today places 
intolerable burdens on interstate commerce. Federated collects 
and remits over $1 billion per year in sales tax for the states 
where we do business. I can assure you that the burdens of 
collecting this tax are very real. Sales taxes must be 
simplified if they are to survive. S. 288, introduced by 
Senators Wyden and Leahy, establishes a solid framework for the 
needed simplification.
    As noted in my written testimony, the ITFC developed a list 
of 19 essential simplification parameters, virtually all of 
which are included in the Wyden-Leahy bill. Of these 19 
principles, however, two that are among the most important to 
business are the two that state and local governments have 
opposed the most. Only one sales and use tax rate and base per 
state, and bright line nexus standards for business activity 
taxes.
    A third important principle, uniform definitions, also 
seems to be a difficult pill for the state and local 
governments to swallow. There are over 7,600 sales tax 
jurisdictions in the U.S. There are 1,296 in the State of Texas 
alone. Is it fair to require a direct marketer with residence 
only in Oregon to know which combination of these 1,296 rates 
applies to every item of merchandise it sends to a customer in 
Texas, and then to collect and remit the proper amount of tax 
to the Texas authorities, when that same direct marketer is not 
required to collect any sales tax on behalf of its home State 
of Oregon?
    There should only be one tax base per state. Allowing local 
jurisdictions to separately determine the taxability of items 
shipped to their residents adds immeasurable complexity. If the 
State of Colorado exempts widgets from sales tax, the city of 
Denver should not be allowed to impose a sales or use tax on 
that same widget. Businesses should not be required to pay a 
business activity tax to jurisdictions in which they are not 
physically present, and thus not receiving significant tangible 
benefits.
    If Congress is going to exercise its Commerce Clause 
authority to require remote sellers to collect sales tax, then 
Congress should at the same time protect those sellers from 
being subjected to business activity taxes in those foreign 
states. We urge Congress to enact a bright line nexus standard 
that requires physical presence in a state before a company can 
be subjected to a business activity tax.
    The Commerce Clause vests in Congress the authority to 
protect interstate commerce. This is a serious responsibility 
that Congress should not abdicate to the states. For this 
reason, Congress must establish the parameters of 
simplification and uniformity and evaluate the states' efforts 
before granting them extended tax collection authority. The 
states have begun simplification efforts through the 
streamlined sales tax project. In December, the SSTP released a 
model act that it encouraged its member states to adopt. The 
SSTP model includes some of the important simplification 
standards included in S. 288.
    I applaud the states' efforts. In the final analysis, 
however, their proposal falls into the category of 
simplification light. In January, the NCSL created its own 
version of the model. If the SSTP's model is simplification 
light, the NCSL's version is simplification ultra light. As a 
result, there are now competing simplification bills pending in 
several state legislatures. As of March 1, eight states were 
considering the SSTP's model, eight were considering the NCSL 
version, and two states created their own proposal. For a topic 
in which the goal is tax uniformity, this smacks of chaos, and 
clearly underscores the need for congressional oversight.
    The ITFC strongly supports Senators Wyden and Leahy in 
their efforts to extend the moratorium and to permanently ban 
sales tax on Internet access charges. Elimination of sales 
taxes on Internet access will help to close the so-called 
digital divide.
    Many of my fellow retailers have argued that they cannot 
compete against the dot coms, and that if e-commerce is not 
saddled with complex tax collection burdens, it could spell the 
end of traditional brick-and-mortar retail. Some of the most 
passionate testimony in this regard was delivered to this very 
Committee in its hearings last April.
    Although I have a lot of respect and admiration for my 
fellow retailers, this is one instance where they were wrong. 
The sky is not falling on brick-and-mortar retail. Many of the 
once-feared dot coms have become dot bombs. Our weakening 
economy is having a profound negative impact on the fledgling 
e-commerce sector. Allowing state and local governments to 
unleash economic anarchy in the current environment could have 
long-term devastating effects on the economy, business, and 
employment.
    It is critical for Congress to protect this vital segment 
of our economy from potentially failed tax burdens by extending 
the moratorium and by demanding that the states significantly 
simplify their sales tax systems. Only after the states prove 
that they have met the high bar for simplification established 
by Congress should they be granted the broad tax collection 
powers they now seek.
    Mr. Chairman, I thank you very much for the opportunity to 
testify and, as I said, I am here all day to answer your 
questions.
    [The prepared statement of Mr. Julian follows:]

Prepared Statement of Frank G. Julian, Operating Vice President and Tax 
               Counsel, Federated Department Stores, Inc.
Introduction
    Good Morning. My name is Frank Julian. I am Operating Vice 
President and Tax Counsel for Federated Department Stores, Inc. in 
Cincinnati, Ohio. Federated is one of the nation's leading department 
store retailers. We operate more than 400 department stores in 33 
states under the names of Bloomingdale's, Macy's, Rich's, The Bon 
Marche and others. Federated also has a significant direct mail catalog 
and electronic commerce business with its Fingerhut, Bloomingdale's By 
Mail, bloomingdales.com and Macys.com subsidiaries.
    Although Bloomingdale's By Mail, bloomingdales.com and Macys.com 
are each separate subsidiaries, they collect sales tax on sales into 
any state where Bloomingdale's and Macy's, respectively, have 
department stores.
    I am here today on behalf of the Internet Tax Fairness Coalition 
(``ITFC''). The ITFC is an alliance of business, consumer, retail, 
technology and communications companies and industry groups that 
promote clear and simple tax rules for the borderless marketplace. I 
also chair the Tax Committee of The Direct Marketing Association. The 
DMA is one of the members of the ITFC.

Summary of Position
    The myriad of confusing and inconsistent state and local sales tax 
systems in existence today places tremendous burdens interstate 
commerce and the economy. The ITFC believes that S. 288, introduced by 
Senators Wyden and Leahy, represents a significant first step toward 
unraveling this confusion. The ITFC supports the following objectives 
for reducing the tax burdens imposed on interstate commerce that thwart 
the development of a borderless marketplace:

   Establish simple and uniform sales and use tax rules that 
        reduce compliance burdens for all taxpayers, and provide a 
        reasonable collection allowance to compensate all sellers for 
        the burdens they must incur in collecting the tax.

   Enact nexus standards for business activity taxes that 
        eliminate uncertainty and the potential for double taxation.

   Promote availability of the Internet to all by prohibiting 
        taxes on access fees.

   Prevent multiple and discriminatory taxation by extending 
        the application of established nexus rules to remote commerce.

    The ITFC supports neutral tax treatment of electronic commerce; it 
does not support the creation of a ``tax-free'' zone for electronic 
commerce. ITFC believes it is also critical to enact appropriate 
bright-line nexus standards for business activity tax nexus purposes in 
conjunction with an extension of the moratorium and development of 
uniform and clear rules for the taxation of all commerce.
    Moreover, the ITFC believes that Congress should not pass any 
legislation that would give states ``prior approval'' to a 
simplification compact before the details of the simplification are 
known and evaluated.

Discussion
    The burdens that the current sales tax systems place on interstate 
commerce have been well documented. The Supreme Court recognized these 
intolerable burdens on interstate commerce in its 1967 decision in 
National Bellas Hess v. Department of Revenue, and again in 1992 in 
Quill Corp. v. North Dakota. In National Bellas Hess, the Court found 
that the ``many variations in rates of tax, in allowable exemptions, 
and in administrative and record keeping requirements could entangle . 
. . interstate business in a virtual welter of complicated obligations 
to local jurisdictions with no legitimate claim to impose `a fair share 
of the cost of the local government.'''
    The hearings conducted by the Advisory Commission on Electronic 
Commerce (``ACEC'') raised an awareness, in an unprecedented manner, of 
the level of complexity and burdens imposed by the current sales tax 
systems. By the time the ACEC completed its work, there was near 
universal agreement that the disparate state sales tax systems in place 
today must be substantially simplified and unified--as they apply to 
all sellers--if they are to survive.
    Federated collects and remits more than $1 billion per year in 
sales tax for the state and local governments where we do business. We 
incur substantial costs in collecting and remitting these taxes, and in 
administering the many audits that follow.
    While this is a steep burden for us, it is not one that will put us 
out of business. The same may not be said, however, for some smaller 
companies or those less financially stable. In those cases, such a 
burden could put them out of business.
    Substantial simplification of the sales tax systems will make it 
much easier for the states to administer and enforce the tax, and will 
make it much easier for sellers to comply with tax collection 
requirements.

Guidelines for Simplification and Uniformity
    ITFC believes that simplification and uniformity must be at a level 
that eliminates undue and discriminatory burdens on interstate 
commerce. The ITFC has spent considerable time developing draft federal 
legislation that it believes would encourage the states to simplify and 
unify their sales and use tax systems so as to eliminate undue burdens 
on interstate commerce. Some of the specific items in that draft that 
we believe are crucial to achieving such a goal include:

         1.  A centralized, one-stop, multi-state registration system 
        for sellers.

         2.  Uniform definitions for goods or services that could be 
        included in the tax base.

         3.  Uniform and simple rules for attributing transactions to 
        particular taxing jurisdictions.

         4.  Uniform rules for the designation and identification of 
        purchasers and transactions exempt from sales and use taxes, 
        including a database of all exempt entities and a rule ensuring 
        that reliance on such a database shall immunize sellers from 
        liability for both under-collection and over-collection of tax.

         5.  Uniform procedures for the certification of software upon 
        which sellers may rely to determine applicable sales and use 
        tax rates and taxability, and immunity from liability for 
        under-collection and over-collection of tax for sellers who 
        rely on such software.

         6.  Uniform bad debt rules.

         7.  Uniform tax returns, remittance forms, and filing and 
        remittance dates.

         8.  Uniform electronic filing and remittance methods.

         9.  State administration of all sales and use taxes in such 
        state.

        10.  Uniform audit procedures, including a provision giving a 
        seller the option to be subject to no more than a single audit 
        per year using those procedures; provided that if the seller 
        does not comply with the procedures to elect a single audit, 
        any state can conduct an audit using those procedures. If 
        elected, however, the single audit binds other states.

        11.  Reasonable compensation for tax collection by all sellers.

        12.  Exemption from use tax collection requirements for remote 
        sellers falling below a specified de minimis threshold of less 
        than $5,000,000 in prior-year gross annual sales, or less than 
        $100,000 in any state during that prior-year. This exemption 
        would not, however, operate to exempt a seller with less than 
        $5,000,000 in prior-year gross annual sales for any obligation 
        to collect and remit sales or use taxes imposed by the state in 
        which that seller is located.

        13.  Appropriate protections for consumer privacy.

        14.  A single, uniform statewide sales and use tax rate and 
        base on all transactions on which a sales or use tax is 
        imposed.

        15.  For those states that impose a sales or use tax on digital 
        products, an origin state default rule, for transactions where 
        the location of the customer is not disclosed during the 
        transaction, that permits the seller to rely upon information 
        given by the customer during the transaction.

        16.  Appropriate bright-line nexus standards for business 
        activity tax nexus purposes that limit business activity tax 
        nexus to sellers that lease or own substantial tangible 
        personal property, or have a number of employees or actual 
        agents, in the taxing jurisdiction for more than 30 days during 
        the taxable year.

        17.  Uniform dates, not to exceed two (2) in any calendar year, 
        on which changes to sales and use tax rates may become 
        effective, and a requirement that a state give at least 120 
        days' notice before any change in its sales or use tax rate 
        becomes effective.

        18.  Allows the Untied States Court of Federal Claims to 
        resolve conflicts that arise with regard to interpretation of 
        similar sales and use tax provisions of the different states.

        19.  Such other features that will achieve a simplified and 
        uniform sales and use tax system.

    The ITFC is very pleased that virtually all of these simplification 
points are included in the Wyden-Leahy Bill (S. 288).
    Of these 19 principles of simplification, two that are among the 
most important to the business community are the two that state and 
local governments have opposed the most: One sales and use tax rate and 
base per state, and nexus standards for business activity taxes. A 
third very important principle, uniform definitions for goods and 
services, also seems to be a very difficult pill for state and local 
governments to swallow.

One Rate and One Base Per State
    There are more than 7,600 different sales tax jurisdictions in the 
United States today, each with its own tax rate, and many with their 
own tax base and rules and regulations. I should also note that in 
1967, when the Supreme Court ruled in National Bellas Hess that it was 
an unconstitutional burden on interstate commerce to require sales tax 
collection in states where the seller did not have a physical presence, 
there were ``only'' 2,300 jurisdictions to deal with. This 
proliferation of taxing jurisdictions is symbolic of the ever-
increasing complexity of the existing sales and use tax systems.
    In the State of Texas alone there are 1,109 separate city tax rates 
and 119 county tax rates. In addition, there are 67 ``special'' tax 
jurisdictions, ranging from crime control districts to library 
districts; 27 of these special jurisdictions have geographical 
boundaries that do not correspond to any city or county boundary. When 
combined with the state rate, this results in 1,296 different taxing 
jurisdictions in the State of Texas.\1\
---------------------------------------------------------------------------
    \1\ Although Texas was used for illustration purposes here, there 
are several states in which the burdens imposed by the local taxing 
jurisdictions are significantly greater than in Texas.
---------------------------------------------------------------------------
    Is it fair to require a direct marketer with presence only in 
Oregon to know which combination of these 1,296 rates applies to every 
item of merchandise it sends to a customer in Texas, and then to 
collect and remit the proper amount of tax to the Texas authorities, 
when that same direct marketer is not required to collect any sales tax 
on behalf of its home State of Oregon? \2\ Add to this the fact that 
there is a zero margin of error for the seller: If the seller under-
collects the tax from its customer, the seller must pay the tax out of 
its pocket and is subject to interest and penalties by the taxing 
authorities. If the seller over-collects the tax, it is subject to 
class action law suits from its customers, as well as consumer fraud 
actions from state attorneys general. This puts the seller in an 
untenable position.
---------------------------------------------------------------------------
    \2\ Oregon is one of five states in the country that does not have 
a sales tax.
---------------------------------------------------------------------------
    The states will argue that this problem can be fixed by using 
software that calculates the applicable sales tax rate by ZIP Code. We 
submit that this is not an acceptable solution. There are hundreds of 
five digit ZIP Codes across the country in which there are multiple 
taxing jurisdictions; moreover, there are scores of nine digit ZIP 
Codes in which there is more than one taxing jurisdiction. Thus, even 
if software existed that could provide an accurate nine digit ZIP Code 
for every order placed with a remote seller, the seller still might not 
be able to accurately collect the proper amount of sales tax.
    It should also be noted that none of the proposed ``software 
solutions'' will alleviate the problems faced by sellers whose 
customers pay by check.
    The states have suggested alternatives that would use the Census 
Bureau's ``FIPS'' Code, or would create a unique 10-character coding 
scheme for each separate taxing jurisdiction.\3\ None of this very 
sophisticated technology exists today. However, under the best of 
circumstances, forcing remote sellers to collect tax for 7,600 
different taxing jurisdictions will saddle interstate commerce with 
substantial burdens. The ITFC believes that Congress should do 
everything in its power to eliminate undue burdens on this vital 
segment of America's economy.
---------------------------------------------------------------------------
    \3\ For example, a remote seller sending merchandise to a customer 
who lives in the Dripping Springs Community Library District in Texas 
would need to know that the customer lives in Tax Jurisdiction Number 
48DLI21424.
---------------------------------------------------------------------------
    In 1999, the National Tax Association (``NTA'') conducted a 
Communications and Electronic Commerce Tax Project, the precursor to 
the ACEC, which included all the major state and local government 
organizations and electronic commerce industry trade associations. The 
only tax reform measure to receive unanimous agreement from the 
Project's participants was ``There should be one rate per state which 
would apply to all commerce involving goods or services that are 
taxable in that state.''
    Some have recommended that there be one rate per state for remote 
commerce only, and that in-state businesses continue to collect all of 
the local jurisdictions' taxes. The NTA Project participants 
considered, and rejected, this proposal. The ITFC agrees that such a 
proposal is ill-advised for the following reasons:
    The ITFC strongly advocates ``channel neutrality'' in the treatment 
of commerce. To achieve channel neutrality, and to avoid favoring one 
business medium over another, the sales tax rate applicable to a 
particular item must be the same regardless of whether the purchase was 
made from an Internet vendor or from an in-state brick and mortar 
store.
    The ITFC also strongly believes that there should only be one tax 
base per state. Allowing local jurisdictions within a state to 
separately determine the taxability of items sold in, or shipped to, 
their jurisdictions adds immeasurable confusion and complexity. If the 
State of Colorado exempts widgets from sales tax, the City of Denver 
should not be allowed to impose a sales or use tax on that same widget.
    Congress has a duty under the Commerce Clause to facilitate the 
flow of commerce among the states. Incorporated in this duty is 
Congress' responsibility to limit the imposition of barriers to the 
free flow of commerce. Insisting that there be no more than one tax 
rate and one tax base per state, for all types of commerce, before 
requiring remote sellers to collect sales tax in states where they lack 
a physical presence is wholly consistent with Congress' duty under the 
Commerce Clause.

Business Activity Tax Nexus
    Determinations of the jurisdiction to impose a tax should be 
governed by one fundamental principle: a government has the right to 
impose economic and administrative burdens only on taxpayers that 
receive meaningful benefits or protections from that government. In the 
context of business activity taxes,\4\ this guiding principle means 
that businesses that are not physically present in a jurisdiction, and 
are therefore not receiving significant tangible benefits or 
protections from the jurisdiction, should not be required to pay a 
business activity tax to that jurisdiction.
---------------------------------------------------------------------------
    \4\ ``Business activity tax'' refers to tax imposed directly on 
businesses and not generally passed directly on to consumers. These 
include corporate income taxes, franchise taxes, single business taxes, 
capital stock taxes, net worth taxes, gross receipts taxes, use taxes 
and business and occupational taxes.
---------------------------------------------------------------------------
    In its Commerce Clause jurisprudence, the Supreme Court has ruled 
that a business must have ``substantial nexus'' in a state before a 
state can constitutionally subject that business to its taxing power. 
For purposes of requiring a business to collect a state's sales and use 
tax, the Supreme Court has ruled that substantial nexus requires 
``physical presence'' in the state.
    Although the Supreme Court has not had occasion to address the 
requisite level of nexus for a state to impose a business activity tax, 
several state courts have addressed the issue. Many of these state 
courts have affirmed that the nexus standard for business activity 
taxes can be no less than the ``physical presence'' standard for 
collection of sales and use taxes. For example, one state court has 
held that the retention of credit cards by an out-of-state credit card 
issuer was insufficient to give the issuer physical presence for state 
income tax purposes. Unfortunately, courts in some states have reached 
the opposite conclusion.
    Litigation and uncertainty in this area continue to proliferate. If 
remote sellers are required to begin collecting and remitting sales tax 
in every state, then those states will have a road map by which to 
aggressively pursue these same sellers for business activity taxes. 
Many small and medium-sized sellers lack the resources to challenge 
spurious claims for state income taxes.
    If Congress is going to exercise its authority under the Commerce 
Clause to require remote sellers to collect sales tax in states where 
they have no physical presence, then Congress should, at the same time, 
protect those sellers from being subjected to business activity taxes 
in those same states. The manner in which to provide this protection to 
business, and to put and end to the litigation and uncertainty, is for 
Congress to enact a bright line nexus standard that requires physical 
presence in a state before a company can be subjected to a state's 
business activity tax.

All Sellers Should Receive a Reasonable Collection Allowance
    We believe that all sellers should receive a reasonable collection 
allowance to compensate them for the costs they incur in collecting 
sales tax.
    Obviously, the more simplification measures that are enacted, the 
more the collection costs incurred by sellers will be reduced, thus 
reducing the amount of collection allowance that will be required.
    Studies have shown that the average cost to collect sales tax 
exceeds 3 percent of the amount of tax collected. Of the 45 states with 
a sales tax, however, only seven provide for an uncapped collection 
allowance of greater than 1 percent. For a company like Federated, this 
amounts to tens of millions of dollars a year in expenses we incur to 
serve as a tax collector for the states. This number will clearly grow 
if we are forced to collect tax on behalf of every state in the 
country. For smaller businesses, and for those with tight budgets, the 
unreimbursed cost of collecting sales tax is yet one more large straw 
on the camel's back. In today's economic times, it could be the fatal 
straw for many companies.
    Several members of the business community have approached 
representatives from state and local government about jointly 
commissioning a new, independent study to determine the cost of 
collecting sales tax. We are hopeful that the public sector will join 
us so that we may quickly get this study underway. Such a study should 
prove very helpful to Congress in determining the amount of collection 
allowance to which sellers are entitled.

Congress Must Provide the Framework for Simplification
    The Commerce Clause vests in Congress the authority to regulate 
interstate commerce, and to guard against interference with interstate 
commerce. This is a serious responsibility that Congress should not 
abdicate to the states.
    For this reason, ITFC believes it is incumbent upon Congress to (1) 
establish the parameters of simplification and uniformity that must be 
enacted before states are given the right to require remote sellers to 
collect their tax, and (2) review and evaluate the measures which the 
states enact--before granting them extended tax collection authority--
to ensure that the states actually have met the Congressionally 
mandated standards.
    The states have begun efforts to simplify their sales tax systems. 
Beginning in March, 2000, an ever-growing number of state tax 
administrators has been working on the Streamlined Sales Tax Project 
(``SSTP''). The SSTP was formed to develop measures to design, test and 
implement a sales and use tax system that radically simplifies sales 
and use taxes. The ultimate goal of the Project is to develop a 
simplified sales tax under which remote sellers without a presence in a 
state will voluntarily agree to collect sales tax on their sales into 
that state. In December, 2000, the SSTP released a model act and model 
agreement that it encouraged its member states to adopt.
    The various state tax administrators who have been involved in the 
Project have worked tirelessly to accomplish their goal. They have 
included in their work product some of the important tax simplification 
standards that are included in S. 288. Moreover, the SSTP proposals 
include many elements of tax simplification that will be beneficial to 
brick and mortar sellers in collecting the tax in the states where they 
do business. On behalf of the ITFC, I applaud them for their efforts.
    Before Congress authorizes the states to require remote sellers to 
collect tax in states where they lack a physical presence, the sales 
and use tax laws must be substantially simplified and made more 
uniform. The sales tax system developed by the SSTP, however, falls 
into the category of ``simplification light.'' While it alleviates some 
burdens on all sellers, it would nonetheless result in undue burdens on 
interstate commerce if all sellers were required to collect in every 
state under this system.
    Some of the particular shortfalls of the SSTP proposal include: (1) 
failure to require only one tax rate per state,\5\ (2) failure to call 
for business activity tax nexus standards, and (3) failure to provide 
simple definitions for items like ``clothing.''
---------------------------------------------------------------------------
    \5\ The SSTP calls for one tax base per state beginning in 2006.
---------------------------------------------------------------------------
    In January, 2001, the National Conference of State Legislatures 
(``NCSL'') met to discuss the legislation proposed by the SSTP. The 
NCSL was unhappy with several provisions in the SSTP's final proposals, 
so it made several significant modifications and created its own 
version of a model act and agreement. In particular, the NCSL version 
does not call for one tax base per state, and eliminated virtually all 
of the common definitions included in the SSTP model.
    If the SSTP's proposal represented a first step toward the kind of 
simplification the business community believes could lead to a 
reduction in compliance burdens, the NCSL's proposal represents a step 
backwards.
    The stated purpose for the NCSL's actions was to be able to have 
model legislation that would be likely to pass in many state 
legislatures this year. In our view, the goal should not be to propose 
legislation that will pass just for the sake of passing. The goal must 
be to achieve simplification and uniformity that will substantially 
reduce, not merely maintain, the current undue burdens on interstate 
commerce.
    The result is that there are now competing versions of sales tax 
simplification bills pending in several state legislatures. According 
to the SSTP's website, as of March 1, 2001, eight \6\ states were 
considering the SSTP's model legislation, eight states were considering 
the NCSL version, and two states were considering separate modified 
legislation. (A printout of this portion of the SSTP's website is 
attached as Exhibit A.)
---------------------------------------------------------------------------
    \6\ This includes Wyoming, which enacted the SSTP version.
---------------------------------------------------------------------------
    For a topic in which the goal is tax uniformity, this smacks of 
chaos, and in our opinion clearly underscores the need for 
Congressional oversight of this process.

Congress Should Extend the Moratorium and Ban Taxes on Internet Access
    As Senators Wyden and Leahy have proposed in S. 288, the moratorium 
contained in the Internet Tax Freedom Act on multiple and 
discriminatory taxes on electronic commerce should be extended, and 
taxes on Internet access should be permanently banned.
    The purposes of the moratorium were to (1) ensure that the rules 
that apply to other forms of remote commerce also applied to electronic 
commerce, and (2) allow time for the ACEC to study ways to simplify the 
current complex state sales and use tax systems. The Internet Tax 
Freedom Act has never prevented the states from collecting sales and 
use tax otherwise due on goods and services purchased over the 
Internet.
    Allowing the moratorium to expire would send a signal to the states 
that it is now permissible for them to treat electronic commerce 
differently from transactions using other channels. Extending the 
moratorium on discriminatory taxes thus is essential to ensuring 
neutral tax treatment for electronic commerce going forward. The fact 
that state and local government groups oppose the moratorium suggests 
that they are poised to assert that the nexus rules that apply to mail 
order transactions do not apply to Internet transactions. If this is 
not the position of the state and local governments, then they have 
nothing to fear from an extension of the moratorium.
    The ITFC also supports Senators Wyden and Leahy in their efforts to 
permanently ban sales tax on Internet access charges. A majority of the 
ACEC recommended a similar ban.
    The Internet has been a tremendous growth engine for our economy. 
Access to this very important medium should not be burdened with taxes. 
Moreover, imposition of sales taxes on Internet access will have a 
deterrent effect on the ability of lower income families to use the 
Internet. Elimination of these taxes will help to close the so-called 
digital divide.

The Sky Is Not Falling
    During the past three years, many of my fellow retailers, as well 
as representatives from the shopping center industry, state and local 
government and others, predicted that there would be an explosive 
growth of electronic commerce, and that it would be detrimental to 
their interests. Remarkably, they argued to the ACEC and to Congress 
that if electronic commerce were not saddled with the complex tax 
collection burdens, it could spell the end of traditional brick and 
mortar retail as we know it today. Some of the most passionate 
testimony in this regard was delivered to this very Committee in its 
hearing last April.
    Although I have a lot of respect and admiration for my fellow 
retailers, this is one instance where they were wrong: The sky is not 
falling on brick and mortar retailers. Many of the once feared ``dot-
com's'' have become ``dot-bombs.'' The demise of E-Toys is just one 
example of many recent failures in the electronic commerce world. Our 
weakening economy is having a profound negative impact on the fledgling 
electronic commerce sector.
    Allowing state and local governments to unleash economic anarchy in 
the current environment could have long term, devastating effects on 
the economy, business and employment. We believe it is critical for 
Congress to protect this vital segment of our economy from potentially 
fatal tax burdens by extending the moratorium against discriminatory 
taxes, and by demanding that the states significantly simplify their 
sales tax systems before being allowed to require remote sellers to 
collect their tax.

Conclusion
    The labyrinth of sales and use tax systems in existence today is 
entirely too complex. State and local governments should not be 
permitted to export their burdensome tax collection obligations on 
remote sellers that do not have a physical presence in the state. The 
states should only be granted the authority to require remote sellers 
to collect their sales and use tax in a manner that does not interfere 
with, or place undue or discriminatory burdens on, interstate commerce.
    To achieve this result, Congress must establish the parameters 
under which the state sales and use tax systems should be substantially 
simplified and made more uniform. Congress must then evaluate the 
states' efforts to be sure that the requisite level of simplification 
and uniformity has been attained. Only then should Congress grant the 
states the broad tax collection powers they now seek.
    In addition, Congress should act now to extend the moratorium and 
to permanently ban Internet access charges.
    I sincerely appreciate the opportunity to testify before you today, 
and I will be happy to answer any questions.




    The Chairman. Thank you very much.
    Mr. Lowy, I think we have time for your statement, and then 
we will probably have to take a break here.

   STATEMENT OF PETER LOWY, CEO, WESTFIELD AMERICA; FOUNDING 
                 CHAIRMAN, e-Fairness COALITION

    Mr. Lowy. Thank you, Mr. Chairman. Good morning, Mr. 
Chairman, and distinguished Members of the Committee. First of 
all, I thank you for inviting me here this morning. I am the 
CEO of Westfield America, and am also the Founding Chairman of 
the e-Fairness Coalition, which represents the retail and real 
estate industries on this issue.
    The Chairman. I retract. The vote has not been called yet, 
so we will probably be able to continue. Go ahead, Mr. Lowy. I 
am sorry.
    Mr. Lowy. That is Okay.
    The e-Fairness Coalition advocates a level playing field 
for sales and use tax collection for all retailers. We also 
support the continued growth of the Internet, and firmly oppose 
any form of discriminatory taxes and taxes on Internet access. 
The equitable collection of sales tax needs to be addressed 
concurrently with an extension of the current moratorium.
    Congress must take action to level the retail playing field 
for three reasons: (1) the current sales tax system is broken. 
It simply does not work in the clicks and bricks environment; 
(2) equity or fairness, and (3) states rights, that is, the 
right of states to set their own tax policy.
    The most urgent issue facing the Senate is the viability of 
the current consumption tax system. No longer are we looking at 
catalogue sellers who own a small percentage of the 
marketplace. We are discussing the ability of states to 
maintain their revenues and to provide a level of services 
needed within the current system.
    The current sales tax system does not work in today's 
business environment. Due to market realities, brick-and-mortar 
retailers are forced to respond to their online tax-free 
competitors by setting up their own online stores as separate 
subsidies. A number of retailers, including K Mart, The Gap, 
Barnes & Noble, are installing systems in their stores 
connected to the Internet and their Internet retailing sites. 
Under this structure, companies then avoid physical nexus.
    For instance, K Mart's online store, Bluelight.com, only 
collects sales taxes in California and Ohio. These are states 
where they have warehouses or headquarters. As long as this 
system is in place, more and more retailers will do the same.
    As Internet kiosks are placed into physical stores, a 
customer can enter the store, sample or try on the merchandise, 
have the sales person order the merchandise over the Internet, 
have it delivered to the consumer, and avoid charging and 
collecting the sales tax.
    The lack of clarity in the current law, especially with 
regard to returns, is preventing the natural convergence of 
these two systems. Convergence benefits business, consumers, 
and economic growth. Most of the country's largest retailers, 
who, in order to compete in the Internet economy, are forming 
these subsidiaries, would rather not be forced to do so. In 
fact, many are members of the e-Fairness Coalition, and 
strongly advocate a level playing field.
    The question is, where will states go to make up for the 
loss of revenue due to the advent of the dot com subsidiary? 
The issue of equity or fairness is not a question of whether 
there should be a consumption tax on goods and services but, 
rather, if a state chooses to have a consumption tax, should it 
be implemented equally? There is no logical argument that 
supports taxing the same retail transaction differently, 
depending on the delivery system. The marketplace should 
determine sales decisions, not discriminatory tax policies. The 
states, not the Federal Government, should have the right to 
impose or not impose consumption taxes as they see fit.
    The reality is that education and other essential services 
are funded largely by the states, especially through sales 
taxes. Passing extension of the moratorium without taking steps 
toward a comprehensive solution would send a clear signal that 
Congress is willing to ignore a major national inequity in 
order to provide some businesses with preferential tax 
treatment. This could halt the substantial progress that states 
have made in simplifying and unifying their sales tax systems, 
and may force states to consider raising property or income 
taxes to make up for the revenues lost to remote sales.
    I firmly believe that Congress should allow states to 
require all remote sellers to collect sales taxes on deliveries 
in that state, provided they dramatically simplify the sales 
tax system. As Amazon agreed in their letter to the Commerce 
Committee, once states simplify, thereby lifting administrative 
burdens off retailers, there is no reason to provide remote 
sellers with an exemption from collecting sales taxes.
    The e-Fairness Coalition supports the Internet Tax 
Moratorium and Equity Act, which is introduced by Senators 
Dorgan, Enzi, Breaux, Chafee, Durbin, Hutchison, Graham, 
Lincoln, Rockefeller, Thomas, and Voinivich. The legislation 
will promote the growth of the Internet, and will allow states 
to ultimately require that remote sellers collect sales and use 
taxes just as traditional retailers do today. It promotes 
startup Internet retailers by having a de minimis threshold of 
$5 million in gross annual sales, has reasonable compensation 
for tax collection by sellers, and uniform order procedures.
    The e-Fairness Coalition opposes S. 288, the Wyden-Leahy 
bill, primarily because it would impose unreasonable burdens on 
the states during the simplification process without ultimately 
providing them with a mandate to require that remote sellers 
collect.
    Thank you, Mr. Chairman, and I welcome any questions.
    [The prepared statement of Mr. Lowy follows:]

  Prepared Statement of Peter Lowy, CEO, Westfield America; Founding 
                     Chairman, e-Fairness Coalition

Introduction
    Good morning Mr. Chairman, Mr. Ranking Member and Distinguished 
Members of the Committee. Thank you for inviting me to discuss with you 
the issues surrounding Internet taxation and specifically whether 
Congress should extend the Internet Tax Freedom Act, and if so, what 
changes may be needed. I appreciate this opportunity and commend your 
efforts to include diverse views in the Senate's consideration of these 
important issues.
    I am the CEO of Westfield America, which owns a portfolio of 39 
super regional and regional shopping centers across the country. I am 
also the Founding Chairman of the e-Fairness Coalition, which includes 
brick-and-mortar and online retailers, realtors, retail and real estate 
associations, as well as publicly and privately owned shopping centers. 
The e-Fairness Coalition also includes high tech related companies such 
as Gateway and Vertical Net. Through these companies and associations 
our Coalition represents 1 in 5 American workers on this issue.
    Let me be clear. The e-Fairness Coalition advocates a level playing 
field for sales and use tax collection for all retailers. We also 
support the continued growth of the Internet and do not support any 
form of discriminatory taxes or taxes on Internet access. However, the 
government should not provide preferential sales tax treatment based 
solely upon the distribution system used to sell goods. Requiring brick 
and mortar retailers to collect sales taxes while exempting their 
online competitors is fundamentally unfair, and presents a glaring 
national problem that requires Congressional action. Therefore, 
equitable collection of the sales tax needs to be addressed 
concurrently with an extension of a moratorium on discriminatory taxes 
and taxes on Internet access.

Supreme Court Invites Congressional Action
    In 1992, the Supreme Court ruled in Quill v. North Dakota (504 U.S. 
298) that the Due Process Clause of the United States Constitution did 
not bar enforcement of the state's use tax if the vendor purposefully 
directed its activity toward the state, even if the vendor had no 
physical presence in the state. At the same time, however, the Court 
reaffirmed the Commerce Clause rule of National Bellas Hess that an 
out-of-state vendor must have a physical presence in the state in order 
to be required to collect use taxes on sales into the state. In the 
decision, the Court reasoned, ``the underlying issue is not only one 
that Congress may be better qualified to resolve, but also one that 
Congress has the ultimate power to resolve.'' To date, the Quill 
decision's invitation for Congressional action has been unanswered.
    Under Quill, the Court indicated that any further refinements of 
the Commerce Clause rule of physical presence must emanate from 
Congress in light of its authority to ``regulate Commerce with foreign 
nations, and among the several states.'' Justice Stevens addressed this 
in his opinion in Quill:

         ``No matter how we evaluate the burdens that use taxes impose 
        on interstate commerce, Congress remains free to disagree with 
        our conclusions. See Prudential Insurance Co. v. Benjamin, 328 
        U.S. 408 (1946). Indeed, in recent years Congress has 
        considered legislation that would ``overrule'' the Bellas Hess 
        rule. Its decision not to take action in this direction may, of 
        course, have been dictated by respect for our holding in Bellas 
        Hess that the Due Process Clause prohibits states from imposing 
        such taxes, but today we have put that problem to rest. 
        Accordingly, Congress is now free to decide whether, when, and 
        to what extent the states may burden interstate mail-order 
        concerns with a duty to collect use taxes.''

    Therefore, the e-Fairness Coalition urges Congress to use its 
Commerce Clause authority, to which the Supreme Court emphatically 
deferred, to assist states by enacting federal legislation to ensure a 
level playing field.

Need for a Level Playing Field
    I believe we must have a level playing field for three reasons: (1) 
the current sales tax system is broken--it simply does not work in the 
``clicks and bricks'' environment; (2) equity or ``fairness''; and (3) 
states rights--that is the rights of states to set their own tax 
policy.

Closing the Loophole: The Current Consumption Tax System is Broken
    The most urgent issue facing the Senate is the viability of the 
current consumption tax system. No longer are we looking at catalog 
sellers who owned a small percentage of the marketplace, we are 
discussing the ability of states to maintain their revenues and to 
provide needed services within the current system. The General 
Accounting Office (GAO) estimated in June 2000 that state and local 
revenue losses from remote sales could be as much as $20 billion by 
2003.
    The current sales tax system does not work in today's competitive 
business environment. Due to market realities, brick-and-mortar 
retailers are forced to respond to their online, tax-free competitors 
by setting up their online stores as separate subsidiaries. This 
corporate structure allows the online store to avoid physical nexus 
rules and the corresponding sales tax collection responsibilities. 
These ``dot.com'' subsidiaries only collect sales taxes in states where 
they have a warehouse or a headquarters. For example, K-Mart's online 
store, bluelight.com, only collects sales taxes in California and Ohio; 
Barnes and Noble.com only collects in New Jersey, Nevada, New York, 
Tennessee and Virginia; Wal-Mart.com only collects in Arkansas, 
California, Ohio and Utah. As long as this system is in place, more and 
more retailers will do the same.
    I have attached two items, which discuss this very subject. The 
first, an E-Commerce Tax Alert article from March 2000, describes how 
to set up a subsidiary to avoid sales tax collection responsibilities. 
The articles states that, ``Internet tax headaches and the accompanying 
competitive disadvantages may be avoided by setting up a nexus-breaking 
subsidiary to shield transactions from sales tax collection duties in 
all but a few instances.'' The second attachment is drawn from the 
www.thewebstoreguide.com. That piece outlines for consumers how to 
avoid paying sales tax and also refers to the growing practice of 
setting up separate Internet entities ``just to avoid having to charge 
customers sales tax.''
    Another tactic currently employed by a number of retailers is the 
installation of kiosks with Internet terminals in their physical 
stores. A customer can today enter the store, sample or try on the 
merchandise, have the sales person order the merchandise over the 
Internet, and have it delivered to the consumer and avoid charging and 
collecting the sales tax. While the law is still unclear on this issue, 
it is possible that a consumer may also purchase goods on the Internet 
and then return those items to a physical store. Those retailers may 
argue that this would not establish nexus as the Internet business has 
contracted with the physical store to accept returns. As more and more 
retailers place internet kiosks in their physical stores, states will 
have to rely on the consumer to voluntarily pay the use tax owed, 
devise a system to track the sale or delivery of remote sales, or 
forego the sales tax. This, I believe, is the major risk that Internet 
retailing presents for state and local revenues.
    However, I would like to note that most of the country's largest 
retailers, who--in order to compete in the Internet economy--are 
forming these subsidiaries under the current law, would rather not be 
forced to do so. In fact, many are members of the e-Fairness Coalition. 
They recognize that the current consumption tax system is inequitable 
and support providing a level playing field for all retailers. The 
nation's largest on-line retailers, such as Wal-Mart, are also the 
nation's largest physical retailers--and they are willing to forsake 
short-term advantages for a collection system that is fair for all.
    Since even in-store sales can now be set-up to avoid sales tax 
collection, the question is no longer whether pure Internet sellers 
should collect sales taxes; the question is where will states go to 
make up for the loss of revenue due to the explosion of the dot.com 
subsidiary. Will it be increased personal or commercial property 
taxes--or will states cut funds for education, police, and roads?

Fairness in the Consumption Tax System
    The issue of equity--or ``fairness `` is not a question of whether 
there should be a consumption tax on goods and services, but rather, if 
a state chooses to have a consumption tax, should it be implemented 
equally. Simply put, there is no logical argument that supports taxing 
the same retail transaction differently depending on the delivery 
system. The market place should determine sales decisions, not 
discriminatory tax policies.
    It is bad policy and bad economics to have a tax policy that favors 
one group of businesses over another when both groups are selling the 
same products to the same consumers into the same localities. Tax 
policy should not distort the free enterprise system by picking winners 
and losers in the marketplace. Consumers should make their buying 
decisions based on price, availability, service and convenience. They 
should not be influenced by discriminatory tax policy.

States Rights
    The states, and not the Federal Government, should have the right 
to impose, or not impose, consumption taxes as they see fit. The 
reality is that education and other essential services are funded 
largely by the states, especially through sales taxes. Passing an 
extension of the moratorium without taking steps toward a comprehensive 
solution would send a clear signal to the states that Congress is 
willing to ignore a major, national inequity in order to provide some 
businesses with preferential tax treatment. This would halt the 
substantial progress the states have made in simplifying and unifying 
their sales tax systems, and may force states to consider raising 
property or income taxes to make up for the lost revenues.
    I firmly believe that Congress should allow states to require all 
remote sellers to collect and remit sales taxes on deliveries in that 
state provided that states and localities dramatically simplify their 
sales and use tax systems. Simply put, remote retailers--that is 
Internet and catalog retailers--should be subject to the same sales tax 
collection responsibilities as traditional or Main Street retailers, if 
the states are successful in simplifying their sales tax systems. Once 
the states simplify, thereby lifting administrative burdens off of 
retailers, there is no reason to provide remote sellers with an 
exemption from collecting sales taxes.
    The e-Fairness Coalition believes that states should have the right 
to either opt in--or not opt in--to a compact that would require 
simplification and decide for themselves whether or not to require 
collection. If a Governor of a state believes that remote sellers 
should be exempt from having to collect use taxes--they will maintain 
their right to not collect taxes. However, if another state chooses to 
require collection and meets simplification criteria set out by the 
Congress, that state should be given the mandate to require collection. 
Further, if a state does not currently collect sales tax, they would 
not be required to do so. Pure and simple, this is an issue of 
federalism and of states' rights.

Support for the ``Internet Tax Moratorium and Equity Act''
    That is why the e-Fairness Coalition supports a comprehensive 
solution to this issue. We support the ``Internet Tax Moratorium and 
Equity Act,'' which was introduced last week by Senators Dorgan, Enzi, 
Breaux, Chafee, Durbin, Hutchison, Graham, Lincoln, Rockefeller, 
Thomas, and Voinovich. This legislation will (1) promote the continued 
growth of the Internet and (2) will allow states to ultimately require 
that remote sellers collect and transmit sales and use taxes just as 
traditional retailers do today.
    I would also like to note that the ``Internet Tax Moratorium and 
Equity Act'' promotes the growth of Internet-related entities through 
such provisions as an exemption from use tax collection requirements 
for remote sellers falling below a de minimus threshold of $5 million 
in gross annual sales; reasonable compensation for tax collection by 
sellers; and uniform audit procedures.

Opposition to S. 288
    The e-Fairness Coalition opposes the language found in S. 288, 
introduced by Senators Wyden and Leahy. Our opposition to this bill is 
based on a number of specific factors, the most basic of which is that 
this bill would impose unreasonable burdens on the states during the 
simplification process without ultimately providing them with the 
authority to require that remote sellers collect sales taxes.
    Section 4(b)(1)(B) of the Wyden bill requires uniformity among all 
states ``in which a seller is located or does business.'' In other 
words, under the Wyden bill, no state could require a seller to collect 
use taxes if any single state in which that seller ``is located or does 
business'' had a dissimilar ``tax, procedure, standard, or system.'' 
Thus, for any state to institute a comprehensive collection system, 
uniformity would be required in all 50 states. Any requirement that 
all, or almost all, the states adopt uniform measures as an initial 
threshold before any collection authority is granted is unduly onerous 
and will likely never be met.
    Second, unlike the Internet Tax Moratorium and Equity Act, S. 288 
requires any ``simplified sales and use tax system for remote sales'' 
to have a single statewide rate for all sales subject to use tax. While 
the Coalition may ultimately agree to support legislation (such as S. 
2775 introduced in the 106th Congress) that includes one use tax rate 
per state, we do not deem it necessary to limit states to one rate per 
state as a prerequisite to a grant of authority to require collection 
by remote sellers.
    Third, the e-Fairness Coalition considers it absolutely essential 
that states be given some assurance that if they enact extensive sales 
and use tax simplifications specified by Congress, they will receive 
authority to require remote sellers to collect use taxes. Without at 
least the ``sense of the Congress'' that compliance with Congressional 
criteria should result in the grant of such authority, state lawmakers 
will have great difficulty enacting any meaningful simplification.
    There is no such assurance in the Wyden bill. This means that under 
the Wyden bill, states would have less incentive to enact controversial 
simplification measures. Proponents of simplification may have 
difficulty getting such measures passed by state legislatures when 
critics would complain that simplification and conformity with federal 
guidelines might well go entirely unrewarded.
    Fourth, the Wyden bill would expressly preclude the overruling of 
Quill corp. v. North Dakota. Section 5(a) reserves to the Congress the 
exclusive authority to change existing nexus law for the collection of 
sales and use taxes. This provision would be effective even if Congress 
did not grant any collection authority over remote sales. It would 
therefore freeze current nexus law with no chance of redress in the 
Supreme Court, even if the states simplified their sales and use tax 
systems to the point that the Court might otherwise find that they did 
not burden interstate commerce.
    Finally, we oppose S. 288 because the Wyden bill includes a 
provision regarding business activity taxes--an issue that is not 
addressed in the current Dorgan, Enzi et al bill. The e-Fairness 
Coalition does not believe that restrictions on the application of 
business activity taxes should be imposed as a precondition to a grant 
of broader collection authority for sales and use taxes. These two 
issues are unrelated and should not be linked together. S. 288 would 
require as part of any ``simplified sales and use tax system for remote 
sales'' a restriction that is not related to sales and use taxes: a 
nexus standard for corporate income taxes and similar levies that is 
significantly narrower than the existing standard. The Wyden bill would 
exempt businesses from any business activity taxes in states where they 
do not own or lease property or have employees or agents more than 30 
days a year. If this provision were applicable, it would almost 
certainly force many states to choose between continuing to lose use 
tax revenues and giving up a portion of the business activity taxes 
that they are currently collecting. It would be extremely unfortunate 
to create a situation where states that are willing to simplify their 
sales and use taxes are discouraged from doing so because of the 
possible curtailment of their ability to collect corporate income and 
franchise taxes.
    Thank you for the opportunity to provide input on these important 
policy questions. I look forward to continuing to work with you to 
provide an equitable and streamlined sales tax collection system and I 
welcome any questions you may have for me today.
                                 ______
                                 
E-Commerce Tax Alert Vol 1 Issue 1 (March 2000)
Separate incorporation for e-commerce boosts tax planning strategies
    As more established companies move on to the Internet, 
competitiveness with smaller dot-com operations creates questions over 
how to avoid sales and use tax nexus and keep the playing field level. 
While most large companies have nexus nationwide, small web-based 
upstarts often carefully choose where they locate with avoiding nexus 
in mind.
    How can your company meet this challenge? Some experts advocate 
having an affiliate conduct your e-commerce operations. It sounds 
radical, but it represents solid tax-planning advice for some companies 
selling goods on the web. Internet tax headaches and the accompanying 
competitive disadvantages may be avoided by setting up a nexus-breaking 
subsidiary to shield transactions from sales tax collection duties in 
all but a few instances.
    Perhaps the next memo you write should be addressed to those in 
charge of your company's electronic sales operation. Before they start 
selling, explore the possibility of creating a new subsidiary or 
affiliate to handle Internet sales and separate those sales from the 
nexus-creating activity your company already conducts.

Learn by example
    Traditional businesses can learn from upstart cyberspace 
operations, which offer the convenience of shopping online and not 
collecting sales tax, suggests Jeremiah Lynch, a partner with Ernst & 
Young LLP in New York. Just as mail-order sellers avoid collecting 
sales or use taxes in most states, companies that rely on the Internet 
instead of a sales staff establish nexus only in states where they have 
offices, staff or property.
    While brick and mortar businesses race to set up electronic 
commerce operations, many don't realize that a traditional structure 
establishes nexus for online transactions as well. Lynch says they miss 
an opportunity to reduce the number of states in which they must 
collect tax.
    Just as companies once limited nexus through mail-order affiliates 
(Saks Holdings Inc., for example, set up Folio to handle its mail-order 
sales), they can establish affiliates to handle electronic sales. Lynch 
says the tactic limits nexus-creating activities to traditional 
transactions and offers customers a lower overall price-a necessity in 
a world where smaller competitors are selling the same goods with no 
sales taxes applied.
    Amazon.com founder Jeff Bezos has said many times that he chose 
Washington state because it would not account for a large number of 
sales, thus allowing the bookseller to avoid nexus in major markets 
nationwide. When Amazon built an East Coast distribution center, it 
chose Delaware because that state has no sales tax.
    Though Amazon's competitor, barnes-andnoble.com, was not created 
solely with tax considerations in mind, the online bookstore has nexus 
only in New Jersey, New York and Virginia, where it has a distribution 
center, its headquarters and its online site, respectively, explains 
Ben Boyd, vice president of communications for the online bookseller.

A competitive issue
    Traditional companies must consider such factors because upstart 
competitors that sell exclusively on the Internet offer the same 
products without charging tax. Though consumers who purchase goods free 
of sales tax are supposed to remit use tax, most never do, and states 
rarely press the issue unless it involves business-to-business 
transactions.
    If sales tax is a competitive issue for booksellers, imagine the 
implications of purchasing large-ticket items tax-free. When an online 
customer faces the choice of purchasing a $2,000 computer from a vendor 
who charges sales tax or one who doesn't, the decision is obvious, 
Lynch says.
    Internet sales continue to climb, and whenever sales tax is a 
competitive issue, traditional retailers should at least consider 
setting up a separate affiliate for online transactions. ``Too many 
businesses are not taking advantage of this,'' Lynch says. ``There 
would be no reason not to form a separate company for electronic 
commerce.''
                                 ______
                                 
Internet Sales Tax Guide

Ever wondered why only some online stores charge sales tax?
    Never pay tax again! Simply follow these principles below to save!
    1.  If an Internet Store has a physical presence in the state that 
you are buying from, you will be charged that state's local sales tax.
    2.  If you buy from an internet store that isn't based in the state 
you are buying from, you will not be charged sales tax--great huh?
    3.  Even bricks and mortar stores count as a physical presence. 
Therefore it is much more likely that online sellers like Borders and 
Barnes&Noble will charge you sales tax because they have retail stores 
in most states
    4.  As a result of number 3, some companies are now even setting up 
separate internet divisions of there company, just to avoid having to 
charge customers sales tax. Good news for internet shoppers then!
Examples of taxing:
    1.  If you live in New York and buy from Bigwords.com, they do not 
have a physical presence in that state, so you won't be charged any 
sales tax.
    2.  If you live in New Jersey and buy from CDNOW, they have a 
physical presence in that state so they will charge you New Jersey's 
sales tax--currently 3 percent.

TheWebStoreGuide Sales Tax Advice
    Take a look at the table below to see whether you will be charged 
sales tax, as this can save you extra dollars. This is especially true 
when the product you want to purchase costs the same price in more than 
one online store--pick the store that won't charge you sales tax. Or 
buy from 800.com, they are based in Oregon which has no sales tax! 
Tough luck if you live in California--its the worst state to live in 
for being taxed in--many online stores have a physical presence there! 
Basically, if you buy from a store that has a presence in the same 
state as you, you will always pay the local sales tax.



Members of the e-Fairness Coalition include:
    Alabama Retail Association
    American Booksellers Association
    American Jewelers Association
    Ames Department Stores
    Atlantic Independent Booksellers Association
    CBL & Associates Properties, Inc.
    Circuit City Stores, Inc.
    Electronic Commerce Association
    First Washington Realty Trust, Inc.
    Florida Retail Federation
    Gateway Companies, Inc.
    General Growth Properties, Inc.
    Georgia Retail Association
    Great Lakes Booksellers Association
    Home Depot
    Illinois Retail Merchants Association
    International Council of Shopping Centers (ICSC)
    International Mass Retail Association (IMRA)
    Kentucky Retail Association
    Kimco Realty Corporation
    K-Mart Corporation
    Lowe's Corporation, Inc.
    The Macerich Company
    Michigan Retailers Association
    Mid-South Booksellers Association
    Missouri Retailers Association
    Mountains & Plains Booksellers Association
    National Association of College Stores
    National Association of Convenience Stores
    National Association of Industrial and Office Properties (NAIOP)
    National Association of Real Estate Investment Trusts (NAREIT)
    National Association of Realtors (NAR)
    National Community Pharmacists Association
    National Retail Federation
    New England Booksellers Association
    Newspaper Association of America
    North American Retail Dealers Association
    Northern California Independent Booksellers
    Pacific Northwest Booksellers Association
    Performance Warehouse Association
    RadioShack Corporation
    Regency Realty Corporation
    Retailers Association of Massachusetts (RAM)
    ShopKo
    Simon Property Group
    Southeast Booksellers Association
    Southern California Booksellers Association
    South Carolina Merchants Association (SCMA)
    Target, Inc.
    Taubman Centers, Inc.
    The Gap, Inc.
    The Macerich Company
    The Musicland Group, Inc.
    The Real Estate Roundtable
    The Rouse Company
    Variety Wholesalers
    VerticalNet, Inc.
    Virginia Retail Merchants Association
    Wal-Mart
    Weingarten Realty Investors
    Westfield America, Inc.
    (As of March 13, 2001)

    The Chairman. Thank you, Mr. Lowy.
    Mr. Comfort, welcome.

 STATEMENT OF ROBERT D. COMFORT, VICE PRESIDENT OF TAX AND TAX 
                       POLICY, AMAZON.COM

    Mr. Comfort. Thank you, Mr. Chairman, Members of the 
Committee. My name is Bob Comfort, and on behalf of all my 
colleagues at Amazon.com I would like to express our gratitude 
at being invited here to testify before this Committee.
    I am Amazon.com's vice president of tax and tax policy. 
Amazon opened its virtual doors in 1995 on a mission to use the 
Internet to transform book-buying into the easiest, most 
enjoyable shopping experience possible. Some 30 million 
customers today in more than 160 countries have made us the 
Internet's number one retailer, offering a wide array of 
consumer products.
    As a proponent of widespread, low-cost access to the 
Internet and the opportunities it offers to Americans, Amazon 
fully supports congressional action to extend the Internet Tax 
Freedom Act's moratorium on multiple or discriminatory taxes. 
Extending the moratorium for a few years would be helpful, but 
a permanent moratorium would be preferable.
    Although it is not directly related to the moratorium, it 
has been suggested here today that Congress should take this 
opportunity to define the circumstances in which states could 
require all remote sellers to collect sales taxes without 
imposing an unreasonable burden upon interstate commerce.
    This would require the states to simplify their sales and 
use tax regimes and to achieve some degree of uniformity from 
state to state. If substantial simplification and uniformity 
were not achieved, imposition of a collection obligation in the 
absence of judicially defined nexus would continue to impose an 
unreasonable burden upon Internet sellers, as described in the 
Supreme Court's decisions, National Bellas Hess and Quill.
    Amazon would support a properly focused effort among the 
states to bring their sales tax systems into conformity within 
the Constitution, as applicable to remote sellers. Amazon is 
quite concerned, however, that over the life of the streamlined 
sales tax project, most of the difficult decisions required to 
achieve substantial simplification and uniformity have either 
been deferred or completely removed from consideration.
    Given this history, Amazon strongly believes that Congress 
must not authorize states to require all remote sellers to 
collect sales taxes based solely upon representations that the 
states will address somewhere down the road a variety of 
criteria for simplification.
    To this end, Congress should provide the states with 
specific guidance about the criteria that Congress deems 
necessary for acceptable simplification of the current sales 
tax system. Each state would be free to decide whether or not 
it wished to make these changes to its sales tax systems in 
exchange for subsequent congressional approval. This process 
would respect state sovereignty, while providing motivation and 
a clear road map for simplification, and it would allow 
Congress to conduct a followup review to ensure that the states 
have indeed genuinely simplified their sales and use tax 
systems in order to eliminate the unreasonable burden on 
interstate commerce. I cannot emphasize this last point 
strongly enough, Mr. Chairman.
    The states have repeatedly demonstrated inability or 
unwillingness to grapple with the issues that must be resolved 
in order to achieve genuine simplification. The streamlined 
sales tax project is only the most recent example. If the 
states are free to leave uniformity, sourcing, and compensation 
issues for future consideration while proclaiming that their 
systems have been streamlined, they will do just that.
    Congress must review their actions at the end of the 
simplification process, not approve them in advance, otherwise, 
Amazon and all other remote sellers will lose their Commerce 
Clause protections, even though the unreasonable burden imposed 
upon our businesses by the crazy quilt of sales and use tax 
regimes would remain.
    Congress must also provide a mechanism to ensure that 
states that are permitted to require remote sellers to collect 
tax will continue to comply with a congressionally mandated 
criteria for simplification and uniformity. If, in the future, 
a state chooses to diverge from these criteria, then the 
constitutional limitation set forth in National Bellas Hess and 
Quill will once again apply to that state.
    Amazon believes that, at a minimum, states and localities 
must meet and maintain the following requirements for 
simplification and uniformity. Sales tax rates on remote sales 
must be determinable based solely on the geographic area 
information included in a customer's address.
    Although a single, nationwide rate applicable to all remote 
sales would be the simplest approach, one rate per state would 
also work. Five-digit zip codes would be the smallest 
acceptable sales tax rate area, because consumers do not know, 
and remote sellers have no way of determining any smaller or 
different tax rate areas within those five-digit zones.
    Uniform definitions and rules must define the sales tax 
base and provide specific rules regarding allocation of 
shipping and handling charges, coupons, discounts, and other 
charges to orders that contain both taxable and nontaxable 
goods. Uniform rules must also cover the refund of sales taxes 
in the case of customer returns where the seller retains 
shipping charges.
    Uniform definitions and sourcing rules must be developed 
for the sale of digital goods such as downloaded music and 
software.
    States must provide reasonable compensation to remote 
sellers for collecting the taxes. At a minimum, this 
compensation must encompass the cost incurred by remote sellers 
for credit card processing fees which are assessed as a 
percentage of the total amount of both the price of the item 
sold and the applicable sales tax.
    Last, Mr. Chairman, state and local governments should be 
required to assist remote sellers in educating consumers on 
this issue by, for example, establishing a toll-free phone 
number and Internet website, and a direct mailing effort.
    Mr. Chairman, Amazon.com appreciates your invitation to 
provide its views on this important public policy matter, and 
would welcome the opportunity to elaborate further.
    Thank you.
    [The prepared statement of Mr. Comfort follows:]

Prepared Statement of Robert D. Comfort, Vice President of Tax and Tax 
                           Policy, Amazon.com

    Mr. Chairman, Senator Hollings, and Members of the Committee, my 
name is Robert Comfort. I am Amazon.com's Vice President for Tax and 
Tax Policy. A pioneer in electronic commerce, Amazon.com opened its 
virtual doors in July 1995 with a mission to use the Internet to 
transform book buying into the easiest and most enjoyable shopping 
experience possible. Today, Amazon.com also offers consumer 
electronics, toys, CDs, videos, DVDs, kitchenware, tools, and much 
more. Some 30 million customers in more than 160 countries have made us 
the Internet's number one retailer.
    Amazon.com is grateful for this opportunity to address the issue of 
Internet taxation. As a proponent of widespread, low-cost access to the 
Internet and the opportunities it offers Americans and the American 
economy, Amazon.com fully supports Congressional action to extend the 
Internet Tax Freedom Act's moratorium on multiple or discriminatory 
taxes on the Internet. Extending the moratorium for a few years would 
be helpful, but a permanent moratorium would be preferable.
    Although not directly related to the moratorium, it has been 
suggested that Congress should simultaneously define the circumstances 
in which states could require all remote sellers to collect sales 
taxes, without imposing an unconstitutional burden upon interstate 
commerce. It is widely agreed that this would require the states to 
simplify their sales and use tax regimes and to achieve some degree of 
uniformity from state to state. If substantial simplification and 
uniformity were not achieved, any imposition of a collection obligation 
in the absence of judicially defined ``nexus'' would continue to impose 
an unconstitutional burden upon remote sellers, as described in the 
Supreme Court's decisions in National Bellas Hess and Quill.
    Consequently, Mr. Chairman, Amazon.com urges Congress, should it 
decide to address the sales tax collection issue, to establish clearly 
defined goals for the states to achieve, and to scrutinize with care 
the results of their efforts, in order to assure Congress and the 
American people of adherence to the strictures of the Commerce Clause.
    Amazon.com would support any properly focused effort among the 
states to bring their sales tax systems into conformity with the 
Constitution as applicable to remote sellers. Amazon.com is quite 
concerned, however, that over the life of the Streamlined Sales Tax 
Project, most of the politically difficult decisions required to 
achieve substantial simplification and uniformity have either been 
deferred or completely removed from consideration. Given this history, 
Amazon.com strongly believes that Congress must not authorize states to 
require all remote sellers to collect sales tax based solely upon 
representations that the states will address, somewhere down the road, 
a variety of criteria for simplification.
    Instead, Congress should provide the states with specific guidance 
about the criteria that Congress deems necessary for constitutionally 
acceptable simplification of the current sales tax system. The states 
should be free to decide whether or not they wish to make these changes 
to their sales tax systems, in exchange for subsequent Congressional 
approval. This process would respect state sovereignty while providing 
motivation and a clear roadmap for simplification. And it would allow 
Congress to conduct a follow-up review to ensure that the states have 
indeed genuinely simplified their sales and use tax systems in order to 
eliminate the unconstitutional burden on interstate commerce.
    I cannot emphasize this point too strongly, Mr. Chairman. The 
states have repeatedly demonstrated inability or unwillingness to 
grapple with the issues that must be resolved in order to achieve 
genuine simplification. The Streamlined Sales Tax Project is only the 
most recent example. If the states are free to leave uniformity, 
sourcing, and compensation issues for ``future consideration,'' while 
proclaiming that their systems have been streamlined, they will do just 
that. Congress must review their actions at the end of the 
simplification process, not approve them in advance. Otherwise, 
Amazon.com and all other remote sellers would lose our Commerce Clause 
protections, even though the unreasonable burdens imposed upon our 
businesses by the crazy-quilt sales and use tax regimes would remain.
    Congress must also provide a mechanism to ensure that states that 
are permitted to require all remote sellers to collect sales tax will 
continue to comply with the Congressionally mandated, constitutionally 
required criteria for simplification and uniformity. If, in the future, 
a state chooses to diverge from these criteria, then the constitutional 
limitations set forth in National Bellas Hess and Quill must once again 
apply to that state.
    Amazon.com believes that, at a minimum, states and localities must 
meet and maintain the following requirements for simplification and 
uniformity:

   Sales tax rates applicable to remote sales must be 
        determinable based solely on the geographic area information 
        included in a customer's address. Thus, although a single, 
        nationwide rate applicable to all remote sales would be the 
        simplest approach, Amazon.com does not believe it would be 
        necessary; one rate per state would work very well. Five-digit 
        zip codes would be the smallest acceptable sales tax 
        jurisdiction areas, because consumers don't know--and remote 
        sellers would have no way of determining--any smaller or 
        different tax rate areas.

   Uniform definitions and rules must define what is includable 
        in the sales tax base, and provide specific rules regarding the 
        allocation of shipping and handling charges, coupons, 
        discounts, and other charges to orders that contain both 
        taxable and nontaxable goods. Uniform rules also must cover the 
        refund of sales taxes in the case of customer returns where the 
        seller retains shipping charges.

   Uniform definitions and sourcing rules must be developed for 
        the sale of digital goods, such as downloaded music and 
        software.

   States must provide reasonable compensation to remote 
        sellers for collecting sales tax. At a minimum, such 
        compensation must encompass the cost incurred by remote sellers 
        for credit card processing fees assessed as a percentage of the 
        total amount of both the price of the item sold and the 
        applicable sales tax.

   Lastly, state and local governments should be required to 
        assist remote sellers in educating consumers on this issue by, 
        for example, establishing a toll free phone number, an Internet 
        website, and a direct mailing effort.

    Mr. Chairman, Amazon.com appreciates your invitation to provide its 
views on this important public policy matter and would welcome the 
opportunity to elaborate further on these comments.

    The Chairman. Thank you.
    Ms. Harchenko, welcome.

 STATEMENT OF ELIZABETH HARCHENKO, DIRECTOR, OREGON DEPARTMENT 
                           OF REVENUE

    Ms. Harchenko. Thank you, Mr. Chairman, and Members of the 
Committee. I am Elizabeth Harchenko, Director of the Oregon 
Department of Revenue and chair of the Multistate Tax 
Commission. It is an honor for me to be here before this 
Committee today.
    The Multistate Tax Commission is an interstate compact 
agency with 45 participating states, including the District of 
Columbia. The commission works to preserve federalism and to 
promote fairness, uniformity, and simplification in state and 
local tax systems. I thank you for the opportunity to address 
the most important issue of federalism facing our nation today.
    That issue is whether Congress will join in partnership 
with the states to support their efforts to ensure that all 
commerce, from local to global, is treated in an equal, 
uniform, and nondiscriminatory manner by state and local tax 
systems. A federal-state partnership is essential to support 
the free flow of commerce and fair competition in the national 
marketplace. Forging this partnership will influence the speed 
and the extent to which the benefits of modern technology and 
economic prosperity spread from one state and region to 
another.
    Finally, developing this partnership will shape the future 
of federalism. It will determine whether states and local 
governments will be able to perform the role and functions that 
the nation, including the Congress, expects them to perform in 
supporting the national economy and ensuring the quality of 
life for all citizens, and doing so efficiently and 
effectively.
    Why is it so critically important that Congress join the 
states in this partnership? Because the principles on which our 
nation was founded recognized that the states would work 
cooperatively through our National government, and that the 
National Government has the power and resources to support and 
participate in these joint efforts.
    All states and local governments tax their own residents 
and nonresidents who engage in local and interstate business 
through different mixes of income taxes, business activity 
taxes, sales and use taxes, excise taxes, and other kinds of 
taxes, depending upon local circumstances and needs.
    Regardless of the types of taxes state and local 
governments choose to levy, those taxes must apply fairly to 
all forms of commerce. In this regard, we should all understand 
it was never the constitutional intent of the Commerce Clause 
to deprive the states of the ability to ask for a fair share 
contribution from interstate businesses to support government 
service.
    Tax policy should not play favorites. Similar economic 
activity should be taxed in similar ways to support the free 
flow of commerce and equal competition, so balance and equity 
in taxation between local and interstate commerce is 
economically essential and constitutionally appropriate.
    The greatest imbalance in state and local taxation arises 
in the area of collection of sales and use taxes. There is no 
sound tax policy that supports a tax being collected on a 
shirt, or a music recording, or a computer sold through a local 
store but not collected when the same product is sold by mail 
order, or through the Internet.
    States recognize that we must do our part to correct this 
imbalance by simplifying state and local tax structures so that 
the collection of the taxes does not create an undue burden on 
interstate commerce.
    Through the streamlined sales tax project the states, 
working side by side with business, have developed measures 
that will radically simplify sales and use taxes and eliminate 
undue burdens that may be associated with their collection. In 
light of this development, Congress should join in partnership 
with the states and act to level the playing field between 
local and remote commerce by requiring remote sellers with 
sales greater than a national threshold amount to collect sales 
and use taxes for those states implementing the streamlined 
sales tax project recommendations. Doing so will achieve 
fundamental fairness and nondiscrimination in the application 
of sales and use taxes between local business and interstate 
commerce.
    Within the context of this partnership, Congress also needs 
to examine the technical language in the Internet Tax Freedom 
Act should Congress choose to extend the Act, which may 
exacerbate existing inequities in sales and use taxation. 
Governor Geringer described those in a little more 
particularity during his testimony, and they have been referred 
to specifically in the written submissions.
    In addition to encouraging a federal-state partnership, we 
ask Congress to refrain from making any of the current 
inequities worse. In particular, Congress should not enact new 
restrictions on the ability of states to tax a fair share of 
the income of multistate enterprises.
    Proposals advanced by some business interests would 
dramatically change current law, and would simply create and 
multiply within the business activity tax realm the same 
problems that have existed for sales and use taxes. These 
proposals would allow a select group of companies to avoid 
their fair share of state and local taxes and to create a 
resulting shift in that burden to wage-earners, small 
businesses, traditional manufacturing and natural resource 
industries, those who are captive within the taxing state, and 
cannot avoid taxation.
    Congress should recognize that in an era when companies can 
make substantial quantities of sales and earn substantial 
income within a state from outside that state, the concept of 
physical activity as a standard for state taxing authority is 
inappropriate.
    Among other problems, this concept discourages the free 
flow of investment across state boundaries, and restricts the 
spread of economic prosperity from areas of initial investment 
to all states and regions. If a company is subject to state and 
local taxes only when it creates jobs or facilities in a state, 
then many companies will choose not to do so. They will stay 
where they are, and the states that would like to attract them 
will lose the opportunity for additional jobs in their states. 
Instead, companies will choose to make sales into our states 
and earn income from them without investing in them.
    If Congress ties states to a physical activity concept for 
a business activity taxing jurisdiction, Congress will be 
choosing to freeze investments in some areas and prevent the 
flow of new technology and economic prosperity in a balanced 
way across the entire nation. Congress should recognize that a 
standard of physical activity for tax nexus is not in the best 
interests of our nation, and that sound economic policy 
requires adoption of practical concepts of economic nexus as a 
standard for the application of state and local taxes.
    Finally, let me address how the nation as a whole, its 
corporate citizens, and its taxpayers, benefit from strong 
state and local governments and a strong federal-state 
partnership. The nation relies on states and local governments 
to educate our citizens for a modern economy and society. It 
relies on states and local governments for civil order, and a 
framework of commercial law that supports orderly commerce.
    The nation relies on states and local governments to 
provide the infrastructure over which commerce flows. It relies 
on states and local governments to adopt policies that ensure 
the flow of electrical energy across state boundaries so that 
the new technology-based economy can flourish.
    The genius of our system of federalism is that our nation 
relies on states and local governments to tailor vital services 
of national benefit to fit local circumstances. If this system 
of federalism is to continue to serve this nation well in the 
new century, then Congress and states must form a partnership 
to ensure that interstate commerce participates on a full and 
equal basis to help finance the state and local services that 
benefit the entire nation.
    Mr. Chairman, thank you very much for the opportunity to 
address the Committee. I am happy to answer any questions that 
you or the Members may have.
    [The prepared statement of Ms. Harchenko follows:]

         Prepared Statement of Elizabeth Harchenko, Director, 
                      Oregon Department of Revenue

    The Multistate Tax Commission is an organization of state 
governments that works with taxpayers to administer, equitably and 
efficiently, tax laws that apply to multistate and multinational 
enterprises. Created by an interstate compact, the Commission:

   encourages tax practices that reduce administrative costs 
        for taxpayers and states alike;

   develops and recommends uniform laws and regulations that 
        promote proper state taxation of multistate and multinational 
        enterprises;

   encourages business compliance with state tax laws through 
        education, negotiation and enforcement, and

   protects state fiscal authority in Congress and the courts.

    Forty-five states (including the District of Columbia) participate 
in the Commission, as Compact Members (21), Sovereignty Members (3), 
Associate Members (18), and Project Members (3).
    On February 26, 2001, Senators McCain, Dorgan, Enzi, Hollings, 
Kerry, Wyden, and Voinovich requested input from interest groups on 
issues relating to the potential extension of the Internet Tax Freedom 
Act and simplification of sales and use taxes in general. The 
Commission is committed to achieving equitable, uniform and non-
discriminatory taxation and to securing the benefits of federalism that 
arise from preserving the proper authority of the states within our 
nation. The Commission strongly supports state efforts to streamline 
and simplify sales and use tax laws to alleviate undue administrative 
burdens on interstate sellers. In the context of simplification of 
sales and use taxes, the Commission supports the equitable collection 
of sales and use taxes on remote sales by sellers exceeding a threshold 
level of sales. The Commission supports the development of a 
partnership between Congress and the states to accomplish the equitable 
collection of sale and use taxes. The Commission opposes new federal 
restrictions on state authority to levy business activity taxes because 
the proposed restrictions would diminish the proper authority of states 
in our federal system and would undermine equity in taxation by 
allowing a select group of companies to avoid their fair share of 
taxes. These proposals would unfairly shift the state and local tax 
burden to wage-earners, small businesses and traditional manufacturing 
and natural resource firms. As a membership body, the Commission has 
not taken a position on extension of the Internet Tax Freedom Act. 
However, the Commission recognizes certain technical difficulties with 
legislative language in the Act that appears to undermine the goals of 
equity, uniformity and non-discrimination and asks Congress to examine 
that language if it considers extension of the Act in any form.
    Attached is the response from the Multistate Tax Commission to the 
Senators on issues related to the taxation of remote commerce, the 
simplification of sales and use tax laws, and technical issues relating 
to the Internet Tax Freedom Act.
                                 ______
                                 
                                                      March 6, 2001
Hon. John McCain,
U.S. Senate,
Washington, DC.

Hon. Ernest Hollings,
U.S. Senate,
Washington, DC.

Dear Senators McCain and Hollings:

    Thank you for your letter of February 26, 2001, in which you 
request input from the Multistate Tax Commission (MTC) on issues 
related to the potential extension of the Internet Tax Freedom Act. The 
Multistate Tax Commission appreciates the opportunity to provide you 
with its position on issues of state and local taxation of interstate 
commerce raised in your letter. These views are based on a fundamental 
commitment to achieving equitable, uniform and non-discriminatory 
taxation and to securing the benefits of federalism that arise from 
preserving the proper authority of the states within our nation.
    Tax neutrality is essential to achieving equity, uniformity and 
non-discrimination. Tax policy should not play favorites: similar 
economic activities should be taxed in similar ways to support the free 
flow of commerce and equal competition in the national marketplace. 
States within our nation should be treated in an equal and even-handed 
manner in support of the economic health, fiscal stability and 
governmental authority of all. The national economy and the free flow 
of commerce benefit from the services and laws provided by state and 
local governments and the efficient tailoring of those services to fit 
local circumstances. That is the genius of our federal system: by 
preserving state sovereignty, flexible federalism efficiently supports 
the national economy.
    The MTC provides here a summary response to the points raised in 
your letter. We will supplement this summary within a few days with a 
white paper discussing these issues in greater detail.
Should Congress allow states to require all remote sellers to collect 
        and remit sales taxes on deliveries into that state provided 
        that states and localities dramatically simplify their sales 
        and use tax systems?
    Yes, provided that remote sellers whose sales do not exceed a 
specified level of de minimis national sales (a ``sales threshold 
standard'') be exempt from the requirement to collect and remit state 
sales or use taxes. The recommendations of the Streamlined Sales Tax 
Project will dramatically simplify sales and use taxes to a degree 
sufficient to require remote sellers above a sales threshhold to 
collect those taxes. Congress should level the playing field between 
local and remote sellers to advance tax fairness, increase national 
economic efficiency and growth, and provide for more balanced economic 
development among states and communities. Congress should form a 
partnership between the states and the Federal Government and require 
remote sellers to collect sales and use taxes once the specified 
minimum of states have enacted the simplifications recommended by the 
Streamlined Sales Tax Project. Finally, in light of newly emerging 
business operations and technologies, Congress should revisit certain 
provisions in the ``multiple and discriminatory'' definitions in the 
Internet Tax Freedom Act if that act is extended. Those provisions, 
ironically, may increase tax discrimination against local retailers, 
instead of eliminating that discrimination.
    There is no dispute that sales and use taxes are an indispensable 
element of state and local government finances. No one seriously 
disputes that such a tax, to be efficient and effective, is best 
collected at the retailer level--just as federal and state individual 
income taxes are most efficiently collected through employer 
withholding.
    The inability of the states to require collection of sales and use 
taxes on remote sales subjects local retailers to unfair competition 
from remote sellers. Moreover, this substantial inequity violates the 
standards of tax neutrality and thereby reduces overall economic 
efficiency and national growth by diverting the allocation of capital 
away from its most efficient uses. In practical terms, this inequity is 
a source of additional pressure on the viability of local businesses in 
communities across the nation--businesses that the marketplace would 
treat more kindly if only the rules were fair and even-handed.
    The inability of the states to require collection of sales and use 
taxes on remote sales creates a second inequity. It allows remote 
sellers to benefit from state and local services without helping to 
collect the taxes that finance those services. The state and local 
services that benefit remote sellers and, indeed, the national economy 
are extensive and include: education, university research, state and 
local infrastructure, public safety, commercial laws, the state court 
systems, environmental management and energy conservation and 
development, among others. A sampling of just some of these benefits 
includes: states and localities provide the roads used by the contract 
carrier to deliver goods purchased by remote commerce; states provide 
the courts that enforce the security interest of the remote seller in 
an installment sale to ensure proper payment; states finance the 
schools and universities that educate workers for the high technology 
industry and provide markets for computers and software . . . and the 
examples go on. Thus, remote sellers should bear the responsibility of 
participating in the process of financing these services.
    The inability of the states to require collection of sales and use 
taxes on remote sales leads to yet a third inequity. The failure of a 
large portion of remote sellers to collect sales and use taxes 
typically allows their customers to escape paying sales and use taxes 
they owe. In the case of Internet purchases that require ready access 
to a properly connected computer, these customers tend to have higher 
incomes than the general population. The ability of higher income 
individuals to avoid the sales and use tax on purchases from remote 
sellers puts pressure on state and local governments to keep the rates 
of sales taxes artificially high to support needed services. This 
shifts the tax burden to those with the least ability to pay and 
increases the regressive nature of the sales tax.
    In addition, the failure of remote sellers to collect sales and use 
taxes confuses the public into believing that tax is not due on remote 
sales. Accordingly, when states attempt--as they increasingly have in 
recent years--to collect from purchasers the lawfully due use tax, the 
state is wrongfully accused of imposing a new tax when, in fact, the 
state is only seeking to collect a tax that has been on the books for 
decades. By failing to collect the tax, remote sellers first create a 
collection problem for the states and then make it more difficult for 
states to solve that problem.
    Finally, the current judicial interpretation of nexus for use tax--
so-called ``physical presence nexus''--actually prevents the free flow 
of interstate commerce and detracts from balanced economic development 
by acting as a barrier to capital investment flowing from one state 
into another. Companies have a disincentive to create jobs and invest 
in facilities in different states because once they establish 
facilities in the state they will be subject to a sales and use tax 
collection requirement. The ability of companies to make substantial 
sales into a state, but not collect that state's sales and use taxes, 
distorts investment decisions. This circumstance tends to ``freeze'' 
economic development in states where certain activities originate and 
prevents the flow of investment into other states in a balanced manner. 
Thus, the current state of case law, absent congressional action, 
unwittingly favors some states and regions and prevents investment and 
prosperity from flowing evenly to all areas of the nation.
    Congress can remedy this state of affairs by adopting--consistent 
with the nature of the modern economy and the principle of tax 
neutrality--a practical sales threshold standard requiring remote 
sellers with sufficient sales to collect sales and use taxes. Companies 
exceeding the sales threshold would no longer refrain from investing in 
a state out of a fear the investment would trigger a new collection 
requirement. Instead, the investment would be evaluated entirely on its 
free market merits. Moving to a sales threshhold standard for sales and 
use tax collection for remote commerce will eliminate a barrier to the 
free flow of investment across state boundaries and help generate more 
balanced economic development across the nation.
    In summary, the states' inability to require the collection of 
sales and use taxes on remote sales constitutes bad tax policy, is 
inequitable and causes real economic damage. It is unfair to ask local 
retailers to compete with remote sellers who do not collect tax on 
identical sales, and that unfair competition creates economic pressures 
on local businesses and the communities that rely on them. It is unfair 
for remote sellers to escape collecting the taxes that finance state 
and local services from which they benefit, and that failure impairs 
the proper financing of those services. It is unfair that higher income 
taxpayers can disproportionately avoid sales and use taxes, and that 
shift in the tax burden makes it harder for lower income families to 
make ends meet. It is unfair that current standards of sales and use 
tax nexus tend to freeze economic development in the places of initial 
investment and prevent prosperity from flowing evenly to all states and 
regions of the nation. Congress as a matter of equity and sound 
economic policy should require remote sellers with sales above a 
certain threshhold to collect sales and use taxes in conjunction with 
state efforts to streamline the administration of those taxes.
    States recognize that the current sales and use taxes need to be 
updated to fit with the modern economy. Forty states--thirty-two voting 
states and eight observers--have undertaken the Streamlined Sales Tax 
Project with the active involvement of the multistate business 
community. The project's work is described in greater detail below. At 
this point it is sufficient to note that the project has identified the 
critical areas of change needed to make existing sales and use taxes 
work efficiently in the modern national economy. Congress should enact 
a ``sales threshhold'' remote sales collection requirement--subject 
only to a subsequent congressional veto--when a sufficient number of 
states have adopted an interstate compact implementing simplification 
in the areas identified by the Streamlined Sales Tax Project. The 
federal-state partnership approach will achieve a level playing field 
in sales and use tax collection based on dramatic simplification of 
those taxes. Such a role for Congress was clearly envisioned by the 
framers of our Constitution. If Congress is not prepared to enter into 
this partnership with the states, it should refrain from specifying the 
details of simplification and should not preempt the sovereign right of 
states to have full and fair access to the courts to secure judicial 
approval of simplifications they may enact.
    One final point. The combination of two obscure, ambiguous 
provisions in the definition of ``discriminatory taxes'' in the 
Internet Tax Freedom Act [Section 1104 (A)(iii) and (B)(ii)(II)] may be 
inadvertently encouraging new inequities among retailers. Some 
retailers are placing Internet kiosks in local stores, making sales 
through those kiosks and allowing customers to return goods to those 
local stores. A portion of these retailers collect sales and use taxes 
on their Internet sales. Other retailers employing this practice do 
not. States find no legal justification for the retailers that fail to 
collect the sales taxes, despite their physical presence, other than 
the possibility of an ill-advised reading of the two provisions cited 
above whose language is manifestly unclear. While states would dispute 
this unfortunate reading of these provisions, their ambiguity should 
not be creating new discrimination in the marketplace. They should 
simply be eliminated if Congress chooses to extend the Internet Tax 
Freedom Act.

Should goods purchased from remote sellers be taxed at the same rate as 
        goods purchased through more traditional means (e.g., in-store 
        sales)?
    Yes, it is sound tax policy for the same goods to be taxed at the 
same rate within any given jurisdiction. Further, the U.S. Constitution 
requires that goods sold by remote means be taxed at a rate no higher 
than goods sold locally, and many state constitutions effectively 
require goods sold by different means to be taxed equally.
    Applying the same rate to different modes of selling fulfills the 
fundamental economic precept that taxes should operate neutrally. 
Otherwise a tax system in effect chooses winners and losers and 
displaces the free market determination of efficient and viable 
economic activity. Once the law selects economic favorites, the 
interests that benefit from the favored treatment work to preserve 
their privileged status to the detriment of non-favored players without 
regard to any underlying need for such protection. Taxing the same good 
at different rates based on delivery would perpetuate all of the 
inequities and problems associated with the present circumstance where 
many remote sales are taxed at a zero rate while local sales of the 
same goods are taxed at a full rate.
    Furthermore, the U.S. Constitution requires that tax rates on 
products sold in interstate commerce be no higher than on products sold 
locally. The states accept this fundamental understanding of non-
discrimination that supports the national market in our federal union. 
Traditional local commerce must bear its fair share of taxation as much 
as interstate commerce, including electronic commerce. The rule is well 
established that the tax rate imposed on sales by remote sellers not 
exceed the rate that is imposed on goods sold through the more 
traditional means. Thus, no further congressional action is needed to 
ensure equity in tax rates applied to both local and remote sales.

What simplifications in state and local sales and use tax laws would 
        you consider important to reduce the burden of compliance?
    The recommendations of the Streamlined Sales Tax Project will 
dramatically simplify the sales and use tax and will reduce compliance 
burdens for multistate businesses sufficiently to support Congress 
allowing states to require remote sellers exceeding a specified sales 
threshhold to collect state and local sales taxes. The work of having 
multistate businesses identify the areas of simplification actually 
began over six years ago with the industry-led MTC Sales Tax 
Simplification Committee created by the Multistate Tax Commission. 
Business representatives on that Committee from the American Institute 
of Certified Public Accountants (AICPA), the Committee on State 
Taxation (COST), the National Tax Association (NTA), the Tax Executives 
Institute (TEI) and the Institute for Professionals in Taxation (IPT) 
completed an inventory of desired areas of simplification in 1997. That 
process has continued through several other regional and national 
projects and studies involving multistate businesses, including the 
National Tax Association Communications and Electronic Commerce Tax 
Project cited in the Internet Tax Freedom Act. This extensive process 
of multiple state-industry consultation has reached a sound conclusion 
in the recommendations of the Streamlined Sales Tax Project. Congress 
can with confidence endorse--as a complete, comprehensive and 
sufficient package--the areas of simplification addressed by the 
project in legislation authorizing states to require collection of 
sales and use taxes by remote sellers.
    Perhaps the most significant area in which simplification is 
required--and is being addressed effectively by the Streamlined Sales 
Tax Project--is in reducing the number of sales and use tax returns and 
reducing the number of tax bases in each state and all of its local 
entities. Using the benefits of statewide administration, the number of 
returns a retailer is required to file can be reduced from hundreds 
nationwide to one per state. Concurrently, the number of tax bases 
should be reduced so that retailers will be required to keep track of 
one tax base per period for each state into which it makes sales. These 
changes radically reduce the compliance burden of multistate retailers. 
A few dozen returns will suffice for even the largest retailers where 
hundreds of returns were required before. Smaller retailers will see 
comparable reductions.
    The other areas of simplification being addressed by the 
Streamlined Project include:

   a centralized, one-stop, multistate registration system for 
        participating sellers;

   uniform definitions for goods or services;

   uniform rules for attributing transactions to particular 
        taxing jurisdictions;

   uniform procedures for handling sales that are exempt from 
        sales and use taxes by virtue of the nature of the purchaser or 
        the use of the purchased item and relief from liability to the 
        states for sellers that rely on such state procedures;

   uniform procedures for certifying software that sellers may 
        elect to determine applicable taxes and relief from liability 
        to the state for sellers that rely on such software;

   simplified, uniform procedures for claiming bad debts;

   a uniform format for tax returns and remittances; consistent 
        electronic filing and remittance methods;

   uniform audit procedures;

   appropriate protections for consumer privacy;

   limitations on the frequency with which local units of 
        government may change their sales and use tax rate and the 
        provision of adequate notice to sellers of the effective dates 
        of such changes;

   standardized procedures requiring each state to provide 
        sellers with the information necessary to assign the 
        appropriate sales and use tax rate to any transaction 
        attributed to the state and relief from liability to the states 
        for sellers relying on such information provided by a state;

   and a study of the cost of collection by retailers before 
        and after simplification.

    In total, the elements addressed by the Streamlined Sales Tax 
Project are the areas of simplification most important to reducing 
burdens of compliance with sales and use taxes.

Does simplification necessarily mean that states will have to develop 
        one tax rate per state to apply to a certain taxable good?
    No. All of the simplification benefits of one rate per state can be 
achieved largely through the approach developed by the Streamlined 
Sales Tax Project. That approach combines uniform, strategic 
simplifications in tax policy with technology. Those simplifications 
include: (a) limiting rate changes to quarterly periods, (b) providing 
uniform advance public notice of the changes, and (c) relieving 
enterprises of liability for errors in local rates if they use 
databases of local rates provided by states. Congress, in the Mobile 
Telecommunications Sourcing Act, Pub. L. 106-252, 114 Stat. 626 (2000), 
has already endorsed the use of governmentally supplied tax rate 
databases. The advantage of the Streamlined Sales Tax Project approach 
is that it achieves efficiency and simplification for interstate 
commerce, while allowing states and localities to tailor fiscal policy 
to fit local needs. It avoids, in particular, the problem of raising 
taxes in rural areas to finance services in urban areas that is 
inherent in requiring ``one rate per state.''
    The latter portion of the question appears to raise the question 
whether Congress should require states to eliminate different state tax 
rates for different goods, such as lower rates on food or electricity 
than on other items. The states in the Streamlined Sales Tax Project 
chose wisely to develop a proposal for the phase-out of most of the 
differential state tax rates that apply to different items of personal 
property or services. Although current computer technology is 
sufficiently advanced to be able to assign different rates to different 
taxable items accurately, having one state rate for most taxable goods 
certainly is more easily administered. However, the states recognized 
that a simplified sales tax system could accommodate multiple rates for 
high value, durable goods such as motor vehicles, aircraft, watercraft, 
modular homes, manufactured homes and mobile homes--goods that are 
typically subject to either registration requirements or property 
taxation. Accordingly, the states did not adopt a phase-out for 
multiple rates on these enumerated items.

Should Congress reconsider the definition of Internet access, and if 
        so, how would you propose defining Internet access?
    If Congress extends the moratorium on state and local taxes on 
Internet access, it should re-evaluate the definition of Internet 
access within the moratorium to account for the increasing variety and 
extent of services that are ``bundled'' with access.
    Since Congress wrote the original definition, changes in technology 
and corporate business structures have made it clear that it is now 
possible for large enterprises to bundle a broad array of otherwise 
taxable services with Internet access. The current definition appears 
to create the potential for discrimination in tax policy that would 
stifle competition and increase consumer costs, provide financial 
advantages to large enterprises, and erode state and local tax bases. 
Services delivered by large enterprises that can assemble the capital, 
technological, information and entertainment resources to bundle an 
array of services with Internet access would appear to be granted a tax 
exemption under the current language of the moratorium. The same 
services delivered through the Internet by smaller enterprises without 
the bundling capability or by non-electronic means would remain 
taxable. There is no economic or tax policy justification for Congress 
to create this disparity. Expanded bundling by large enterprises can 
substantially erode the tax bases of state and local governments that 
tax services.
    The definition of Internet access should cover only access to the 
Internet. Because of the increasing problems in distinguishing between 
pure access and other services, Congress should explore a quantitative 
approach to defining access, such as was enacted by the State of Texas 
in the last few years.
    The Commission has a neutral position on the question of whether or 
not Congress should extend a moratorium on state and local taxes of the 
Internet. We oppose removing, however, the ``grandfather protection'' 
in the Internet Tax Freedom Act for state and local governments levying 
taxes prior to the original moratorium as an unacceptable preemption of 
existing state and local tax policy.

Again, this list is not exhaustive. We welcome any and all comments. 
        Our expectation is that the Commerce Committee will conduct a 
        hearing on the Internet tax issue soon after we receive your 
        policy recommendations.
    The questions you raise in the letter of February 26, 2001, reflect 
a proper focus by the Senate Commerce Committee on sales and use taxes. 
The U.S. Supreme Court in its Quill decision invited Congress to 
address the issue of use tax collection by remote sellers. We are aware 
that some interests have sought to burden the sales and use tax issue 
with unrelated topics, especially the question of the authority of 
states to levy business activity taxes. Action by Congress to extend 
the authority of states to require the equitable collection of sales 
and use taxes will not result in a change in the authority of state and 
local governments to levy business activity taxes. Claims to the 
contrary are simply false.
    The proposals advocated by some with regard to business activity 
taxes would dramatically change existing law. Typically the proposals 
would impose new restrictions on state authority in the form of 
physical activity standards of nexus for business activity taxes 
(including corporate income taxes, gross income or gross receipts 
taxes, and capital stock and franchise taxes). The imposition of these 
new standards would simply create and multiply within the business 
activity tax realm many of the problems that have existed in the 
context of sales and use taxes. Again, tax equity would suffer. 
Companies earning income from within a state and benefiting from state 
and local services would be excused from paying their fair share of the 
cost of those services. These proposals would elevate corporate form 
over economic substance and allow companies, through sophisticated tax 
strategies, to shift income unfairly away from where it was earned to 
tax haven locations. In terms of tax equity, the net result of the 
proposals would be to allow a select group of corporations to escape 
their fair share of state and local taxes and to shift that burden to 
wage-earners, small businesses and traditional manufacturing and 
natural resource industries--all of which are ``captive'' within the 
taxing state.
    These proposals for new restrictions on state authority to levy 
business activity taxes would also detract from economic efficiency and 
balanced economic development by, again, discouraging the flow of 
investment across state boundaries. The physical activity approach to 
state authority is really an anachronism arising out of 17th and 18th 
century mercantilism. Centuries ago, the only way enterprises could 
earn income from a territory would be to undertake physical activities 
there. Today, companies can earn substantial income from a state--and 
in the process benefit from the services of a state--with only minimal 
activities that might traditionally be labeled ``physical.'' To achieve 
tax neutrality--taxing the same income earned in the same state to the 
same degree--concepts of physical activity as a standard for state 
taxing authority need to be assigned to the dustbin of history. If 
companies can earn income from within a state, but escape taxation by 
keeping their activities within the boundaries of certain physical 
activities defined in a new federal law, then companies will be 
discouraged from going beyond those physical activities and making new 
and more substantial investments in that state. Thus, the proposals for 
new federal laws restricting state business activity taxes will only 
interfere with the free flow of commerce and balanced economic growth 
across the nation.
    Thank you again for providing an opportunity for the Multistate Tax 
Commission to offer information and perspective on this important 
issue. The MTC would be glad to provide you with any further 
information or to answer any questions you may have. Please feel free 
to contact Dan Bucks, MTC Executive Director concerning these issues at 
202-624-8699.
        Sincerely,
                                       Elizabeth Harchenko,
                            Director, Oregon Department of Revenue,
                               Chairman, Multistate Tax Commission.
    cc:
    Hon. Ron Wyden, U.S. Senator
    Hon. Byron Dorgan, U.S. Senator
    Hon. George Voinovich, U.S. Senator
    Hon. Mike Enzi, U.S. Senator
    Hon. John Kerry, U.S. Senator

    The Chairman. Thank you.
    Mr. Dircksen, we will see if we can get in your statement 
before we take a break here.

STATEMENT OF JEFF DIRCKSEN, DIRECTOR OF CONGRESSIONAL ANALYSIS, 
                    NATIONAL TAXPAYERS UNION

    Mr. Dircksen. Thank you, Mr. Chairman.
    The Chairman. Take the microphone if you would, please.
    Mr. Dircksen. Mr. Chairman, Members of the Committee, I 
appreciate the opportunity to testify today on such a critical 
issue. I am the director of congressional analysis for the 
National Taxpayers' Union Foundation, the education and 
research arm of the National Taxpayers Union. NTU is America's 
oldest and largest grassroots taxpayers' organization, with 
over 300,000 members in all 50 states. I am here on behalf of 
NTU and its members to urge you to extend the Internet tax 
moratorium, and to ensure that the Internet and online 
transactions remain tax-free.
    Today, I want to briefly share three taxpayer concerns 
about increasing taxes on Internet usage and applying 
additional tax structures to Internet transactions. First, 
taxpayers are already burdened with heavy taxes, fees, and 
other charges on telecom services, and adding more would be 
headed in the wrong direction.
    Second, concerns that essential government services will 
disappear because certain online transactions are not taxable 
are false.
    Third, the imposition of taxes on Internet sales will make 
life for taxpayers and retailers far too complicated.
    First, there are enough taxes and other fees on telecom 
services. Both the public and private sectors have benefited 
significantly from the deregulation of the telecom industry and 
from the productivity gains made possible by telecom products 
and the Internet, yet the National Conference of State 
Legislatures reported last February that state governments and 
local governments, nearly 11,000 of them, levy taxes or fees on 
telecommunications activities, including franchise taxes, 
utility taxes, line access, and right-of-way charges, 911 fees, 
relay charges, and maintenance surcharges.
    As has been highlighted already, this past Monday, the 
NASDAQ composite index dipped below the 2000 point level for 
the first time since December 1998. The last thing that a 
slumping technology sector needs is higher taxes on the 
industry and on its consumers.
    I must admit that I now have a personal stake in this 
issue. I found out on Sunday evening that my brother-in-law, 
who farms near Gann Valley, South Dakota, will be leaving 
agriculture to begin working for an ISP in Woonsocket, where my 
sister has been working for a mail order firm. The Internet 
touches the lives of people from all across the globe, 
including those on the Great Plains. Extending the Internet tax 
moratorium will help technology firms both large and small, 
including one in Woonsocket, South Dakota.
    Rather than placing hurdles in front of telecom and e-
commerce industries, Congress should consider instead reducing 
or eliminating barriers. Last year's attempt to repeal the 
phone excise tax was a good start, as mentioned by Senator 
Allen earlier.
    Two, concern that essential government services will 
disappear are false. This scare tactic serves the interest of 
those who wish to raise taxes and extend government, yet the 
U.S. Department of Commerce reports that retail e-commerce 
sales in calendar year 2000 totaled $25.8 billion, or just 0.8 
percent of all retail transactions. State government coffers 
are actually flush with cash.
    The Nelson A. Rockefeller Institute of government reports 
that the growth in state tax revenues is at a record high. 
While states believe the information superhighway to be paved 
with gold, many online transactions such as online services or 
business-to-business transactions may not be subject to sales 
taxes in all states, resulting in far lower revenue gains than 
expected.
    As Senator Wyden correctly observed, quote, not a single 
community has come forward and proved that it is being injured 
by its inability to impose discriminatory taxes on electronic 
commerce. There is no evidence that the states have lost 
revenues by technology-driven economic activities, and despite 
the argument to the contrary, where individuals go into 
retailers, kick the tires of the merchandise and then leave, 
most people I have talked with actually use the Internet to 
research available products and then go to their local retailer 
to buy.
    Three, attempts to simplify and harmonize sales tax codes 
will make life far too complicated for taxpayers and retailers. 
The ensuing debate among the 7,500 entities that levy a sales 
tax will make past attempts by the European Union to define 
what constitutes marmalade, mayonnaise, or a cucumber seem like 
a pleasant tea party in comparison.
    Variances in statutory definitions will force states to 
develop a new common definition for all goods available on the 
Internet, leading to questions about whether chocolate candies 
are a food, and whether they should be taxed as such. One 
hesitates to ponder the amount of time and taxpayer money that 
will be consumed in this endless wrangling. Taxpayers should be 
concerned that efforts to simplify and harmonize tax rates will 
run roughshod over the Supreme Court's 1992 Quill decision.
    Once tax officials have simplified the system of Internet 
sales taxes, the next step is to impose the structure on mail 
order and phone orders, and then expand it to all retail 
purchases. This last step is the ultimate goal of NGA's 
simplification proposal. It is conceivable that under the 
simplified tax scheme Equal Protection and Commerce Clause 
concerns will arise, and local merchants will be required to 
collect and remit out-of-state sales taxes when selling goods 
across the counter to a customer from another state.
    Additionally, we believe tax competition is a good thing. 
Before joining NTUF, I worked as a revenue analyst for the 
Commonwealth of Pennsylvania's Department of Revenue. The 
Commonwealth provides sales tax exemptions to people who 
purchase tangible personal property that is to be used in the 
production of feature-length films, as well as to bakers, horse 
breeders, and numerous others. Adopting this scheme to 
harmonize and simplify taxes will kill a state's competitive 
tax advantage, trample that state's sovereignty, remove 
incentives to keep taxes low, and hurt taxpayers in the 
process.
    Should anyone actually believe this process will be either 
simple or easy, I would point out the difficulties that have 
been faced in revamping the Internal Revenue Service. By our 
account, the IRS has reorganized itself 29 times since 1952, 
and has spent billions of dollars on tax administration systems 
and computer networks that simply do not work. When you add the 
economic impact and the uncertainty that brings from Internet 
taxes, we believe that this dynamic sector should be left tax-
free. The message cannot be more clear. Congress should declare 
this tax territory off-limits by extending the Internet tax 
moratorium and preventing states from imposing sales taxes on 
online transactions.
    I thank the Committee, and I look forward to your 
questions.
    [The prepared statement of Mr. Dircksen follows:]

    Prepared Statement of Jeff Dircksen, Director of Congressional 
                   Analysis, National Taxpayers Union

    Mr. Chairman, Senator Hollings, Members of the Committee, I 
appreciate the opportunity to testify today on such a critical 
technological and economic issue facing America. I am the Director of 
Congressional Analysis for National Taxpayers Union Foundation, the 
education and research arm of the National Taxpayers Union (NTU). NTU 
is America's oldest and largest grassroots taxpayer organization with 
over 300,000 members in all 50 states. I am here on behalf of NTU and 
its membership to urge you to extend the Internet Tax Moratorium and to 
ensure that the Internet and online transactions remain tax-free.
    Today, I want to share three taxpayer concerns about increasing 
taxes on Internet usage and applying additional tax structures to 
Internet transactions. First, taxpayers are already burdened with heavy 
taxes, fees, and other charges on telecommunications services, and 
adding more is moving in a counterproductive direction. Second, 
concerns that essential government services will disappear, because 
certain online transactions are not taxable, are false. Actually, state 
tax revenues are growing at a near record pace. Third, the imposition 
of taxes on Internet sales will make life for taxpayers and retailers 
far too complicated.

1. There are enough taxes, fees, and other charges on 
        telecommunications services and adding more is heading in a 
        counterproductive direction.
    Cutting taxes, especially those levied on telecommunications and e-
commerce activities, is beneficial to consumers. Both the public and 
private sectors have benefited significantly from the deregulation of 
the telecommunications industry and from the productivity gains made 
possible by telecom products and the Internet. Yet, the National 
Conference of State Legislatures reported last February that nearly 
11,000 state and local governments levy taxes or fees on 
telecommunication activities, including franchise taxes, utility taxes, 
line access and right-of-way charges, 911 fees, relay charges, and 
maintenance surcharges.\1\ A Federal Communications Commission survey 
of 95 metropolitan areas determined that the average tax rate levied by 
all governments on a phone bill was 15.7 percent. In Richmond, 
Virginia, the highest-taxing jurisdiction in the analysis, the rate 
approached 36 percent.
---------------------------------------------------------------------------
    \1\ Scott Mackey, ``Telecommunications and the Tangle of Taxes,'' 
State Legislatures, February 2000, http://www.ncsl.org/programs/pubs/
200TELE.HTM.
---------------------------------------------------------------------------
    In early trading this past Monday, the Nasdaq Composite Index was 
down 2.9 percent, sinking below the 2,000-point level for the first 
time since December 16, 1998.\2\ In the last twelve months, the Nasdaq 
has fallen nearly 60 percent. The last thing that a slumping technology 
sector needs is higher taxes on the industry and its consumers. In the 
interest of full disclosure, I must admit that I now have a personal 
stake in this issue. I learned late Sunday night that my brother-in-law 
who farms near Gann Valley, South Dakota, has decided to leave farming 
and will begin working for an ISP--which is probably not listed on the 
Nasdaq--in nearby Woonsocket, where my sister has been working for a 
mail order firm that sells duck decoys. The Internet touches the lives 
of people from all across the globe, including those on the Great 
Plains. Extending the Internet Moratorium will help technology firms, 
both large and small, including one in Woonsocket, South Dakota.
---------------------------------------------------------------------------
    \2\ David Runk, ``Nasdaq Drops 2.9 percent as Outlook Worries Drag 
Down Market,'' The Wall Street Journal, WSJ.com, March 12, 2001.
---------------------------------------------------------------------------
    Rather than placing hurdles in front of the telecommunications and 
e-commerce industries, Congress should instead consider reducing or 
eliminating tax barriers. Last year's attempt to repeal the 103-year 
old telephone excise tax was a step in the right direction. NTU 
endorsed the Portman-Matsui bill, H.R. 3916, which the House passed 420 
to 2 on May 25, 2000. Congress should move beyond the simple repeal of 
the 3 percent phone excise tax, and make the current moratorium on 
Internet taxes permanent, as well as establish the Internet as a tax-
free zone for the sale of goods and services in perpetuity.
    Moving in the wrong direction will have significant consequences. 
In 1998, economist Austan Goolsbee found that the number of online 
shoppers would fall by 25 percent, and the amount of dollars spent 
would plunge by 30 percent, if existing sales taxes were applied to 
Internet purchases.\3\ Last year, a poll of 1,016 America Online 
subscribers found that two-thirds said ``they'd be a lot or a little 
less likely to shop online if their purchases were subject to a uniform 
sales tax.'' \4\ The Internet is a shopper's dream. In addition to 
offering just about every product imaginable, it allows consumers to 
compare prices, products, and providers quickly and easily with little 
out-of-pocket expense. Consumers no longer need to spend time driving 
from mall to mall looking for the best possible deal since the deals 
literally come to them--a definite benefit to those who may be 
homebound or may have difficulty traveling to shopping centers. 
Haggling is virtually eliminated because a better price is just a click 
away. Shackling the Internet with additional taxes will push many 
consumers offline, and for those who are able, back into their cars.
---------------------------------------------------------------------------
    \3\ Austan Goolsbee, ``In a World Without Borders: The Impact of 
Taxes on Internet Commerce,'' National Bureau of Economic Research, 
Working Paper No. W6863, December 1998.
    \4\ David Muhlbaum, ``AOL Members Say No New Net Taxes,'' CBS 
MarketWatch, March 20, 2000, http://netscape.marketwatch.com/source/
blq/netscape/archive/20000320/news/current/cbsmwaol_poll.nsp.
---------------------------------------------------------------------------
    Any scheme that intends to simplify, streamline, or to make sales 
taxes ``fairer'' online is just one step away from trampling the 
Supreme Court's 1992 Quill ruling. Consumers should be wary of this 
backdoor attempt to run roughshod over the Court's restrictions on 
taxing phone and catalog sales. If such a system of extraterritorial 
collection is allowed, Congress will have opened the door to any number 
of potential tax cartels that will eventually harm rather than help 
taxpayers.

2. The argument that state revenue coffers will be devastated is bogus.
    Despite assertions to the contrary, taxpayers are already chipping 
in more than their fair share, and state government coffers are flush 
with cash. According to The Nelson A. Rockefeller Institute of 
Government, state tax revenues grew 8.7 percent in Fiscal Year 2000. 
This represents the second largest year-over-year increase in the last 
decade, after adjusting for inflation.\5\ Even when adjusting for the 
impact of legislated tax cuts, states have continued to see strong 
year-over-year revenue growth for the last eight fiscal years (See 
Figure 1).
---------------------------------------------------------------------------
    \5\ Nicholas W. Jenny and Elizabeth I. Davis, ``Fiscal 2000 Tax 
Revenue Growth: Strongest of the Last Decade,'' State Fiscal Brief, No. 
61, The Nelson A. Rockefeller Institute of Government, February 2001.




    Those who support broadening the ability of states to collect sales 
taxes on remote retailers suggest that the potential rise in e-commerce 
will deprive states of billions of dollars in needed revenue and that 
essential government services will suddenly disappear.\6\ This scare 
tactic serves the interests of those who wish to raise taxes and expand 
government, yet the Department of Commerce reports that retail e-
commerce sales in calendar year 2000 totaled $25.8 billion, or just 0.8 
percent of all retail sales.\7\ While states believe the information 
super-highway to be paved with gold, it is important to remember that 
many online transactions, such as business-to-business sales and online 
services, would not be taxable in most states, resulting in far lower 
revenue gains than expected. In its report from last year, the General 
Accounting Office noted, ``Little empirical data exist on the key 
factors needed to calculate the amount of sales and use tax revenues 
that state and local governments lose on Internet and other remote 
sales. What information does exist is often of unknown accuracy.'' \8\ 
As Senator Wyden correctly observed when introducing the Internet Tax 
Nondiscrimination Act, ``Not a single community has come forward and 
proved that it is being injured by its inability to impose 
discriminatory taxes on electronic commerce. There is no evidence that 
the states have lost revenue by technology-driven economic activity.'' 
\9\
---------------------------------------------------------------------------
    \6\ Andrew Caffrey, ``States at Odds Over Web Taxes,'' The Wall 
Street Journal, March 7, 2001, p. B3.
    \7\ United States Department of Commerce, ``Retail E-commerce Sales 
in Fourth Quarter 2000 Were $8.7 Billion, Up 67.1 Percent from Fourth 
Quarter 1999, Census Bureau Reports,'' Press Release, February 16, 
2001, http://www.census.gov/mrts/www/current.html.
    \8\ United States General Accounting Office, Sales Taxes: 
Electronic Commerce Growth Presents Challenges; Revenue Losses Are 
Uncertain, June 2000, p. 3.
    \9\ John Connor, ```Internet Tax Freedom' Bill Proposed in U.S. 
House, Senate,'' Dow Jones Newswires, February 8, 2001.
---------------------------------------------------------------------------
3. Attempts to simplify and harmonize sales tax codes will make life 
        far too complicated for taxpayers and retailers.
    Any tax simplification scheme will require an extremely large table 
to ensure that everyone who has an interest in the discussion has a 
seat. If an agreement among the 46 states that impose a sales tax was 
all that was needed, the process might only be somewhat painful. 
However, there are an estimated 7,458 entities, including cities, 
counties, and other jurisdictions, that impose a sales tax (See Figure 
2). Obtaining agreement among all jurisdictions would seem virtually 
impossible.




    The ensuing debate among these entities will make past attempts by 
the European Union to set standards for what constitutes ``marmalade,'' 
``mayonnaise,'' or a ``cucumber'' seem like a pleasant tea party in 
comparison. Variances in statutory definitions will force states to 
develop a new common definition for all goods available on the 
Internet, leading to questions about whether chocolate candies are a 
food and should be taxed as such. Ironically, a press release from the 
National Governors Association (NGA) expresses their support for a 
simplified sales tax structure by highlighting the difficulties 
associated with taxing a marshmallow. NGA argues that the definitional 
differences across various states make it ``very difficult for 
retailers to calculate, collect, and remit taxes on transactions that 
are done in multiple locations.'' \10\ Actually, there is a very simple 
way to avoid this problem: do not let states trample on Quill. One 
hesitates to ponder the amount of time and taxpayer money that will be 
consumed by endless wrangling over definitions for candies and 
marshmallows.
---------------------------------------------------------------------------
    \10\ National Governors Association, ``Streamlined Sales Tax 
Project Gains Momentum,'' Press Release, March 8, 2001. http://
www.nga.org/nga/newsRoom/1,1169,C_PRESS_RELEASE-D_1453,00.html
---------------------------------------------------------------------------
    Again, taxpayers should be wary of attempts to harmonize or 
simplify tax structures across state boundaries. Once tax officials 
have ``simplified'' the system for Internet sales, then the next step 
is to impose the structure on mail order sales, and then extend it to 
all retail purchases. This last step is the ultimate goal of NGA's 
simplification proposal. It is conceivable that under this simplified 
tax scheme, Equal Protection and Commerce Clause concerns will arise, 
and local merchants will be required to collect and remit out-of-state 
sales taxes when selling goods across the counter to customers from 
another state.\11\ Creating more paperwork and headaches for all 
business owners is not our idea of making something simple.
---------------------------------------------------------------------------
    \11\ Adam D. Thierer, ``The NGA's Misguided Plan to Tax the 
Internet and Create a New National Sales Tax,'' The Heritage Foundation 
Backgrounder No. 1343, February 4, 2000.
---------------------------------------------------------------------------
    Additionally, one must ask whether it is wise to end tax 
competition among states. The current sales tax structure allows states 
and localities to determine taxing priorities, allowing tax bases and 
rates to vary as legislative bodies see fit. Before joining NTUF, I 
worked as a Revenue Analyst for the Commonwealth of Pennsylvania's 
Department of Revenue, which like many states, has chosen to exempt 
certain activities or industries from sales and use taxes. For example, 
``Tangible personal properly used directly in the production of a 
feature-length commercial motion picture distributed to a national 
audience is exempt from taxation.'' \12\ Why does the Commonwealth 
provide this exemption? It wants to encourage commercial films to be 
made in Pennsylvania. Via another exclusion, the Commonwealth exempts 
foundations for machinery and equipment in an attempt to prevent 
multiple taxation ``which could occur in the production of a finished 
good for consumption.'' \13\ The Commonwealth also provides sales tax 
exemptions for bakers and horse breeders, in addition to numerous 
others. NTU frequently receives letters and email messages from 
individuals who are considering relocating and want to find information 
on state and local tax burdens. These individuals see tax competition 
among states as extremely beneficial. Adopting a scheme to harmonize 
and simplify sales taxes structures would kill a state's competitive 
tax advantage, trample that state's sovereignty, remove incentives to 
keep taxes low, and hurt taxpayers in the process.
---------------------------------------------------------------------------
    \12\ Governor's Executive Budget 2001-2002, Commonwealth of 
Pennsylvania, p. D42.
    \13\ Ibid.
---------------------------------------------------------------------------
    Even if a consensus agreement on what constitutes a marshmallow and 
how it should be treated under a simplified system does emerge, new 
software to track, collect, and remit revenues will be required. Should 
anyone believe that this process would be simple or smooth, I would 
point out the difficulties in revamping the Internal Revenue Service 
(IRS). By our count, the IRS has reorganized itself 29 times since 
1952.\14\ According to the Service's 1984 annual report, ``Within the 
next five to ten years we will have a totally redesigned tax 
administration system. Paper tax returns can largely be a thing of the 
past.'' \15\ Yet, in 1996, the IRS announced that after having spent 
more than $4 billion to modernize its computer systems that its efforts 
were ``badly off track.'' \16\ During my time as a Department of 
Revenue employee, the Department contracted with a private consulting 
firm to develop a Pennsylvania sales and use tax model to aid in 
forecasting tax collections. After nearly two years of development and 
testing the model, the Department was still not satisfied that the 
package could accurately model sales transactions in the Commonwealth. 
Writing software to address the collection and remittance needs of 
7,500 governmental entities will be a programmer's nightmare and a 
potential taxpayer-funded boondoggle.
---------------------------------------------------------------------------
    \14\ Peter J. Sepp, ``NTU Official Serves on IRS Reform Panel,'' 
Dollars & Sense, August 7, 1996, p. 4.
    \15\ Cited in Shelley L. Davis, Unbridled Power (HarperBusiness) 
1997, p. 48.
    \16\ Ibid.
---------------------------------------------------------------------------
    Add the uncertain economic impact that blanket Internet taxes could 
have on this dynamic sector, and the message to Congress could not be 
more clear. Congress should declare this tax territory ``off limits'' 
by extending the Internet Tax Moratorium and preventing states from 
imposing sales taxes on online transactions.

    The Chairman. Thank you very much. We will take a break. We 
are not sure whether we have two votes or three votes, but we 
will be back as soon as possible to have questions for the 
panel, and we thank you for your patience. We will take a brief 
recess.
    [Recess.]
    The Chairman. We will resume. Would the witnesses please 
regain their seats.
    Mr. Julian, what costs should be considered in determining 
whether various modes of retail transactions are on a level 
playing field?
    Mr. Julian. What costs should be considered? I think, 
Senator, it is the entirety of the cost of collection, which is 
not only the cost of the software, but the cost of employees in 
the company's tax department to file tax returns, the cost of 
companies involved in training their sales associates to deal 
with tax issues as they arise on the sales floor, or if it is a 
remote seller, to train their telephone operators and so forth, 
in the cost of administering the audits and litigation that 
follow from the tax collection.
    The Chairman. Mr. Lowy, if it is so easy for mainline 
retailers to set up subsidiaries to avoid sales tax 
responsibilities, why is this option not their principle 
pursuit, rather than one of arguing for the states' abilities 
to broaden their sales tax collections?
    Mr. Lowy. Well, if you look at it, Mr. Chairman, a number 
of the major retailers who have dot com subsidiaries were 
previously collecting sales taxes on some of those 
subsidiaries, and Wal-Mart, which is a member of ours, was one. 
They are now moving to a position where they are setting up 
their dot com subsidiaries and separate subsidiaries, the dot 
com retailers, and starting to go into the system of not 
collecting sales taxes.
    The Chairman. Mr. Comfort, is it imperative that Congress 
act to extend the moratorium imposed by the Internet Tax 
Freedom Act before it expires in October?
    Mr. Comfort. Yes, sir, Mr. Chairman. Amazon.com would 
strongly endorse the extension or permanency of the moratorium.
    The Chairman. Ms. Harchenko, what do you think of the 
proposal for one tax rate and one tax base per state for all 
types of commerce?
    Ms. Harchenko. Mr. Chair, we believe that retailers should 
not have to figure out rates, but the work in the streamline 
sales tax project is designed to eliminate the need for 
retailers to figure that out by having the states provide them 
a database that will deal with those rate issues and if the 
retailers rely on the database they will be held harmless from 
any errors.
    The Chairman. Mr. Dircksen, some of the state and local 
government officials argue that Internet sales will eventually 
force their sales tax systems to become obsolete, and 
inefficient for raising revenue for state and local 
governments. Besides your inherent opposition to taxes per se, 
what is your response to that?
    Mr. Dircksen. Thank you, Mr. Chairman. We would argue that 
primarily what you will see, the concern is, as the Governor 
said this morning, is balance, that you will see a dramatic 
shift, and there will be virtually ghost towns on Main Street 
and everyone will be purchasing online.
    We do not believe that to be true. Primarily what we 
suspect will be that e-commerce sales, online transactions will 
replace most of the catalogue sales, and so states will be no 
worse off than they currently are.
    The Chairman. Would you agree that we are in a, quote, 
worsening economy right now?
    Mr. Dircksen. I would, Mr. Chairman, yes.
    The Chairman. That means that retail stales, in a worsening 
economy, none of us know whether it is a V or a U or an L, but 
would you agree that there will be a reduction in retail sales 
as part of this, at least temporarily, we all pray, temporarily 
worsening economy?
    Mr. Dircksen. That would seem most likely, yes.
    The Chairman. And if I was a smart shopper and I had less 
money, and I went into Wal-Mart and I saw a piece of whatever 
it is I wanted to buy, and I knew that very close by there is a 
computer, would you not see an increase in this activity, 
coupled with the continuing forever increase in computer usage 
on the part of American citizens?
    Mr. Dircksen. That may be a possibility, and states can 
look into collecting use taxes. However, one thing to keep in 
mind is that there is an additional cost to most online 
transactions, in terms of, you may not pay direct sales tax, 
but few companies deliver it to your door without charging you 
shipping and freight, so the difference between sales tax and 
your total bill when you include shipping may be extremely 
negligible, so that it really does not affect or distort 
customer behavior that significantly.
    The Chairman. Mr. Lowy, I am on vacation in California, 
which a lot of my constituents have a habit of doing in the 
summer, given the mild climate in Arizona in the months of 
June, July, and August, but I still maintain my residence in 
the State of Arizona, so I get on the Internet and I order 
something over the Internet from L. L. Bean, which is delivered 
to me in California. What is the tax situation there?
    Mr. Lowy. Well, if you order it over the Internet, 
obviously you use a credit card to pay for it. That credit card 
will have a billing address, and if that billing address is 
your home address in Arizona, then they should charge you 
Arizona use taxes for that purchase.
    The Chairman. Then why have we had so much trouble with 
catalogues, with mail order catalogues?
    Mr. Lowy. I think the issue, when you look at it, is that 
before the states had started going into the simplification 
process, the argument of complexity was a very legitimate 
argument to use at the time, but as with the states moving to 
their simplification process, if you simplify the system, and 
then you use the technology that is in place today, that the 
burden on the retailers, both online and physical retailers can 
be lessened substantially so that the burden will be, not zero, 
but almost de minimis for them to be able to collect those 
sales and use taxes.
    The Chairman. Mr. Comfort, do you have a different view?
    Mr. Comfort. Senator, I do not know that I have a different 
view of the general statement, but we have a concern about what 
it means to achieve simplification.
    I would also suggest that the use of the billing address 
raises other concerns that Members of the Committee have 
expressed about creating Cayman Islands problems. It is not 
terribly difficult to get a credit card with a billing address 
at a post office box in the Cayman Islands, so I am not sure 
that the billing address would be the right way to go. I think 
a five-digit zip code for the shipping address might be the 
better way, if you were going to do it.
    Our concern is that we not be put in the position of having 
to deal with the same regime under a new name, be it 
streamlined, or simplified, or whatever, and that Congress 
clearly establish the criteria it needs before the approval for 
remote sales collections is provided.
    The Chairman. Well, I want to apologize to the panel for 
having to leave. I will, however, turn you over to the tender 
mercies of Senator Dorgan, who is the--perhaps the single most 
knowledgeable--he and Senator Wyden and Senator Kerry are the 
most knowledgeable on this issue.
    I want to thank you for your patience today. I want to 
thank you for your testimony, and as I mentioned earlier there 
are two major issues that face this Committee and this Congress 
on the Internet, and both are very difficult. One is Internet 
tax and the other is Internet privacy, and we thank you for 
your contributions and continued communications with us as we 
work our way through this particular issue.
    Senator Dorgan.
    Senator Dorgan. Mr. Chairman, thank you very much. I will 
ask questions and then adjourn the hearing, and let me again 
thank you for the courtesy of having the hearing.
    Mr. Lowy, some witnesses have said that this issue of 
fairness is really pretty irrelevant, and the issue of the 
impact on brick-and-mortar sellers is irrelevant. 
Characterizing their argument, there is really nothing 
happening here. There are not lost sales. In fact, people are 
shopping on the Internet and then going and buying in brick-
and-mortar stores.
    Mr. Comfort I am sure was gritting his teeth when he heard 
that statement, but nonetheless, people are saying that this is 
all--this fairness and lost sales, this is all a mirage.
    Can you respond to that?
    Mr. Lowy. Yes. I think if you look at the issue, we have 
never come into the argument saying that the brick-and-mortar 
retailers are going to be devastated by the online retailers. 
What we did say is that the online retailers compete with 
brick-and-mortar retailers, and that competition is unfairly 
influenced by the lack of collection of sales taxes over 
Internet sales.
    But I think if you look at where the business model has 
gone today, I think the arguments and the discussion needs to 
change, because with the advent of the dot com subsidiary, and 
the ability to avoid nexus by having a physical retailer who 
has an online store actually have a screen in their store, with 
the ability to bypass the sales tax system, creates issues that 
need to be dealt with.
    Senator Dorgan. Ms. Harchenko, your state does not have a 
sales tax, and so some would say you really probably have less 
at stake as a state. However, you are chairman of the 
Multistate Tax Commission, and I know you speak for a number of 
states, and the interests of a number of states on tax 
enforcement issues.
    The suggestion has been made by Mr. Julian that there needs 
to be dramatic simplification, and if we move down this road, 
and I frankly have some sympathy with that. I think it was Mr. 
Comfort, in discussions we had previously, who said to me--or 
his staff, one or the two, said to me that in one zip code in 
Colorado there are five separate sales tax rates, in one zip 
code. Now, that is complexity, so we do not want someone 
mailing a product into that zip code as a part of a remote sale 
to have to try to figure out which one of the five rates do I 
apply, and if they make the wrong decision, be held accountable 
for it.
    Do you generally agree that there needs to be substantial 
simplification here if the Congress is going to proceed to 
allow the states to force a collection on use taxes?
    Ms. Harchenko. Yes, Senator, and that is one of the 
objectives of the streamline sales tax project, is to be able 
to provide a database so that the retailer does not have to 
sort their way through it.
    We have precedent that the Congress has already enacted in 
the Mobile Telecommunications Sourcing Act, whereby the states 
agree to provide databases to the industry so that industry 
people do not have to be concerned about guessing and guessing 
wrong, and that is one of the fundamental objectives of the 
streamline project as well, is to take that risk of not knowing 
away from the retailers, put it on the states, and hold the 
retailers harmless if they use the state database.
    Senator Dorgan. You notice that in the legislation my 
colleagues and I have introduced we have a study dealing with 
the issue of compensation to retailers, not just remote 
sellers, especially remote sellers, but all sellers. How do you 
feel about that?
    Ms. Harchenko. Senator, the Multistate Tax Commission voted 
at a recent meeting to engage and financially report such a 
study, so we are ready to be full participants.
    Senator Dorgan. I think it is fair. I mean, there clearly 
are compliance issues. There are costs that businesses have, 
and it is one of the reasons we have a de minimis in the 
legislation I have introduced. I do not want someone who starts 
up and is only selling a couple of hundred thousand dollars 
worth of goods to be confronted with the requirement to comply 
with a wide range of tax authorities.
    But in any event, I just wanted to make the point that the 
work the Multistate Tax Commission does is good work. I 
appreciate their leadership, but I want you to know that as a 
supporter of your work I also feel strongly that if the 
Congress is going to do something that extends their reach with 
respect to the collection of use taxes upon remote sellers, 
then we must require simplification, real simplification, not 
simplification in name, but real simplification. In my 
judgment, that is a requirement.
    Mr. Dircksen, you testified that the technology sector is 
weak, and I agree that is the case. Would that have altered 
your testimony, however? I mean, would you, a year-and-a-half 
ago when the technology sector was strong, have said anything 
that is at odds with what you have just described today?
    Mr. Dircksen. Not likely, Senator.
    Senator Dorgan. That is just an observation?
    Mr. Dircksen. It is an observation. It is a concern, 
though, that a struggling technology sector that is based on 
business-to-business transactions, or business-to-consumer 
retail transactions, needs not to be shackled with additional 
taxes, or additional requirements such as the Internet.
    Senator Dorgan. In your statement you did something similar 
to the Lieutenant Governor of Massachusetts. I again want to 
make sure you understand, the issue is not about any new taxes. 
There is nothing that was discussed here today that represents 
a new tax. A tax exists on the transaction. Do you agree with 
that?
    Mr. Dircksen. That is correct, Senator. That is true, and 
it is up to states to collect and enforce their own use tax, 
and if they decide not to enforce that, then we do not believe 
it is appropriate for states to come to the Federal Government 
and say, force us, or force our taxpayers to pay us what they 
owe us. It should be up to the states.
    Senator Dorgan. Do you believe those use--well, states, 
actually no state that I am aware of--I would ask you, I guess. 
Are you aware of a state that has decided not to enforce their 
use tax? No state that I am aware of has made that decision.
    Mr. Dircksen. I do not believe any state that has a use tax 
on the books has repealed a use tax.
    Senator Dorgan. But are you aware of any that have decided 
they will not enforce it?
    Mr. Dircksen. Other than South Dakota, where Governor 
Janklow has suggested stopping all the UPS trucks coming into 
the state and examining them for possible use tax collections, 
I do not know that any state really makes a significant effort 
to really track down use tax collections.
    Senator Dorgan. Right, and the point I am making is they 
have not made an affirmative decision not to collect use taxes. 
The reason use taxes are not collected is because it is 
impossible to collect use taxes against millions and millions 
of purchasers on individual purchases.
    I will not ask you whether you have shopped on the Internet 
and whether you filed a use tax report with a state.
    Mr. Dircksen. Thank you, Senator. I appreciate that.
    [Laughter.]
    Mr. Dircksen. But I would point out in terms of fairness 
and simplification, you know, the concern is, again, from when 
I was with the Commonwealth of Pennsylvania, when is a phone 
tax calling card taxable and when is it not taxable? For the 
Commonwealth of Pennsylvania, phone tax cards are not subject 
to sales tax, except when maybe they are a collectible item 
because all the taxes are based into your using the minutes on 
the card, but if it has Michael Jordan on the cover, and you 
may never open the package, and you may never use the time, and 
you may never pay the taxes, well then, should that item be 
subject to sales tax?
    These are the types of discussion that go on within state 
government about, well, how do you define what is taxable, what 
is not taxable, and the idea that, well, we need to streamline 
and simplify and get all taxing jurisdictions to agree to a 
common standard, I think is going to be extremely difficult, 
and will represent burdens for both taxpayers and for 
businesses.
    Senator Dorgan. I agree if you go over to the edge and 
start spending all of your day defining the edge issues, you 
can have that kind of discussion, but if you go to the middle 
and describe the purchase of something that is more common, and 
which is taxed in every jurisdiction, and which the application 
of the tax is pretty straightforward, you will not have that 
kind of discussion, but the point is, to the extent that we 
move in this direction, we should require simplification.
    Mr. Julian, your testimony sort of straddles both sides of 
this issue, and I thought it was interesting testimony. You are 
representing a corporation that I assume does business as a 
brick-and-mortar seller and also does business with respect to 
remote sales, is that correct?
    Mr. Julian. The vast majority of business, Senator, is 
brick-and-mortar department stores, but we do have a growing 
direct-to-consumer business. In terms of, to address the issue 
of competitive advantage, we were one of the first companies to 
have a catalogue subsidiary with Bloomingdales by Mail, and 
back in the eighties, states were aggressively going after the 
catalogue subsidiaries to try to require them to collect tax.
    At that point in time, our business belief was that it was 
best for that Bloomingdales by Mail subsidiary not to have to 
collect tax, so we structured that business in a very precise 
manner so that we did things that would not create nexus in 
other states.
    We spent literally over $1 million litigating that issue in 
states that came after us. We succeeded in the litigation. The 
supreme courts of two states ruled that we did not have nexus 
and therefore were not required to collect tax in those states.
    As time went on, from a business standpoint our management 
wanted to do some things like put the catalogues in stores, 
things that would have created nexus. They were concerned about 
the effect that would have on the sales of the Bloomingdale's 
by Mail subsidiary, so we did it, we put the catalogues in the 
stores, we registered to collect tax in every state where there 
is a Bloomingdale's store.
    We looked at it very closely, and we were surprised on two 
accounts. Number one, we thought that we would see a decrease 
in sales because we were now collecting tax in those states. We 
did not see that decrease in sales, but the bigger surprise 
was, we grossly underestimated the cost of collecting the tax 
in those states, and there we are only talking 10 states.
    Senator Dorgan. And that is the point that Mr. Comfort, 
testifying on behalf of Amazon and others make, and I think it 
is a fair point.
    Mr. Comfort, I happen to be a customer, and I like the one 
click, and you know, there is a convenience. I also shop at 
bookstores and other outlets that sell the merchandise you 
sell, but I shop online as well, and I recognize that your 
testimony, your company's representation, at least to me, has 
been you do not object to being required to collect taxes that 
are owed on a transaction, but you do not want to be in a 
position as a company of having to deal with thousands and 
thousands of different jurisdictions that have a different 
base, different rates, in some circumstances multiple rates 
where you really cannot determine exactly what rate should be 
applied, and you want to be held harmless in circumstances 
where you have that uncertainty.
    I agree with all of that. I understand all of that, and I 
think your position is a very responsible position for the 
company to take, and I believe very strongly that we will reach 
some kind of an agreement on this Committee. I do not know 
exactly where it goes from there, but we will reach an 
agreement by which the extension of the moratorium, which I 
support, which prohibits taxing access, prohibits punitive and 
discriminatory taxes, will be accompanied by a mechanism that 
mandates and requires a simplification process that is real, 
number 1, and then number 2, the requirement for collection of 
taxes that are already owed as a result of that simplification.
    I want to make one additional point, because I do not know 
that it has been made here this morning. The streamlining 
process I think is encouraging. I think states are moving in a 
way that is encouraging, Ms. Harchenko, but I also must tell 
you that there are some discouraging signs from time to time.
    There are groups and local governments who say, do not 
tread on me, do not do anything that will make me 
uncomfortable, and so you have got five or six different 
organizations and groups representing local governments--I will 
not mention them all, but having different positions on 
simplification.
    That cannot be the case. Ultimately they are all going to 
have to come to the same conclusion. All the spotlights are 
going to have to shine on the same spot with respect to 
simplification, and not everyone is going to get what they want 
with respect to local governments, and I am a big supporter of 
the local prerogatives of state and local governments, but I am 
also going to insist as we proceed here that we proceed in a 
way that requires fairness, and requires also simplification. 
Those are twins that must move together.
    So I wanted to say that there is a lot of misinformation 
about this, the issue of new tax and all of these issues. The 
one piece of misinformation that I think existed at this 
hearing again today and traditionally exists is the Supreme 
Court has ruled a certain way and what Congress is trying to do 
is overturn the Supreme Court ruling. In fact, that has been 
said again today.
    That is fundamentally wrong. It is unsound and in my 
judgment uninformed reading of the Supreme Court decision. The 
Commerce Clause gives Congress, and only the Congress, the 
opportunity to say to the courts, or say to the states, rather, 
here is the basis on which you are able to describe nexus. Only 
the Congress can give that opportunity to the states.
    Now, some state and local folks will disagree with me. They 
believe the courts have said that they do certain things, mind 
their manners, and make their changes, that they eventually 
will be able to get through that door by themselves. I do not 
think there is a chance of that happening. I disagree with 
them. But Congress does have the requirement, if it chooses, to 
say to the states, here is how we describe nexus for you.
    So that is what the Supreme Court issue was. It is not 
overturning the Supreme Court. It is simply saying to the 
states, this is not your prerogative. It is the prerogative of 
the U.S. Congress and only the U.S. Congress. That is why we 
have a hearing, that is why we have legislation.
    Your testimony is very important to us, those who support 
and those oppose these issues. It is very important to get a 
full record established, and the chairman and I and Senator 
Wyden and Senator Kerry and others have been meeting, and we 
will meet some more as a result of this hearing, and I do 
remain hopeful that we will find a way to solve several issues, 
1) simplicity. I do not want in any way to injure those who are 
involved in Internet commerce. I think it is a wonderful new 
way to extend and to provide outreach and give the American 
people new opportunities.
    I also do not want in any way to have a tax system that is 
unfair to Main Street. A lot of mom and pops across this 
country have risked their all and have their entire investment 
in their business, and there is enough of a Jeffersonian 
Democrat in me to believe that broadbased economic ownership in 
this country still represents the hallmark of both economic 
freedom and political freedom, and so I want to be sure that we 
are fair to Main Street businesses.
    Then I want to be sure that we are fair to the states to 
have an opportunity to collect the revenues that are owed, to 
be able to support state and local education initiatives that 
are very important to me.
    So with that, let me thank all of you very much. Your 
testimony was very informed and interesting, and this hearing 
is adjourned.
    [Whereupon, at 12 noon the Committee adjourned.]
                                APPENDIX

 Prepared Statement of Arthur R. Rosen on Behalf of the Coalition for 
                       Rational and Fair Taxation

    Thank you for this opportunity to address certain issues of state 
taxation that have reached critical importance due to the expansion of 
electronic commerce. I am Arthur Rosen and am a member of the 
international law firm of McDermott, Will & Emery. I respectfully 
submit this testimony on behalf of the Coalition for Rational and Fair 
Taxation (``CRAFT''), a diverse coalition of some of America's major 
corporations involved in interstate commerce, including Internet 
companies such as Cisco, Microsoft, and America Online; broadcasters 
such as ABC/Disney and CBS/Viacom, electronics manufacturers such as 
Sony Corporation of America, interstate retailers such as J. Crew Group 
and Sara Lee Corporation, publishers, financial services businesses, 
and other major businesses engaged in interstate commerce, such as 
Eastman Kodak. Many of my partners and I at McDermott, Will & Emery 
have been deeply involved in many of the relevant state tax issues, 
having successfully represented the taxpayer in such landmark Supreme 
Court cases as Quill, ASARCO, and Woolworth.
    CRAFT urges that you not attempt to address Internet-related 
taxation issues without establishing national standards for when a 
state or locality can impose business activity taxes, such as income 
and franchise taxes, on businesses located in other states.
    One of the principal recommendations of the Advisory Commission on 
Electronic Commerce majority report was that business activity tax 
nexus issues be addressed, along with the moratorium on Internet access 
taxes and sales tax simplification. We applaud Senator Gregg and 
Senator Kohl for their leadership in this effort, by introducing the 
New Economy Tax Simplification Act last Congress. We understand that 
they plan to re-introduce similar legislation shortly. We strongly urge 
the Members of this Committee to consider their legislation before 
acting in this area.

Constitutional Framework
    The principal motivation for our adoption of the Constitution to 
replace the Articles of Confederation was a desire to establish and 
ensure the maintenance of a single, integrated, robust American 
economy. This is reflected in the Commerce Clause, which, as you know, 
provides Congress with the authority--and the responsibility--to 
safeguard this principle. Perhaps the hallmark of American federalism 
is this assignment to the Federal Government (along with responsibility 
for foreign affairs and the national monetary/fiscal system). 
Accordingly, legislation regarding imposing, regulating, or removing 
tax burdens placed on transactions in interstate commerce is not only 
within Congress' realm of authority, it is also Congress' 
responsibility. Thus, there is absolutely no validity to the argument 
raised by some state and local tax officials to the effect that 
Congress should abdicate its responsibility and leave these issues to 
the states. Those who claim that congressional activity in this area 
violates the principles of federalism are simply wrong.
    As a second point in the context of the fundamental principles to 
be considered, it is important to remember that while Congress has 
Constitutional authority and responsibility under the Commerce Clause, 
it may be constrained by the confines of the Fourteenth Amendment's Due 
Process Clause. While it is far from clear, most commentators believe 
that Congress cannot permit states to violate the protections afforded 
by that clause. In the context of state taxation, the Supreme Court has 
determined that Due Process means that ``the simple but controlling 
question is whether the state has given anything for which it can ask 
return. '' Wisconsin v. J. C. Penney Co., 311 U. S. 435 (1940).

Policy Concerns
    Turning to the overarching, fundamental, crucial policy issues, 
there is one that I believe warrants substantial, focused congressional 
consideration.
    This policy issue relates to business activity taxes. There has 
been a great amount of discussion and publicity regarding sales and use 
tax nexus issues. These, however, are merely ``the tip of the iceberg. 
'' While collecting tax from customers and remitting it to governmental 
units pursuant to numerous inconsistent laws is quite a burden, it 
pales in comparison to the immense burden that is faced by a remote 
seller that must compute and pay income, franchise and license taxes to 
every jurisdiction where it has a customer. Such a situation not only 
causes huge administrative burdens as with the sales tax, but also 
imposes true, substantial economic hardship for interstate businesses.
    As background, it should be noted that states, like governments 
worldwide, have traditionally imposed their corporate income and/or 
franchise taxes (``business activity taxes'') only upon businesses that 
receive governmental benefits and protections afforded by the 
jurisdiction. This has meant that businesses maintaining offices, 
inventory, employees or agents in a state would be subject to business 
activity taxes in return for the benefits and protections afforded by 
the taxing state to the businesses' people and their property. 
Corporations could develop and carry on interstate business knowing 
that only their activities and presence in a state would incur a 
business activity tax liability, fostering a business environment 
without artificial market barriers that would retard economic growth.
    Over 40 years ago, Congress passed legislation to ensure that 
states could not tax the income of out-of-state corporations whose in-
state presence was minimal. Public Law 86-272 set uniform, national 
standards for when states could and could not impose such taxes. 
However, like the economy of the time, Public Law 86-272 was directed 
at sales of tangible personal property.
    Recently, however, a large number of states have been alarmingly 
aggressive and ``creative'' in attempting to expand the reach of their 
business activity taxes to burden those businesses that are not 
provided with any measurable governmental protections or benefits by 
the taxing state. These states are seeking to tax the income of out-of-
state corporations carrying on virtually no income-producing activity 
in those jurisdictions, for activities involving intangible property 
and services.
    For example, these efforts have resulted in the imposition of 
business activity taxes by several states on out-of-state corporations 
that merely licensed trademarks to another corporation for use in the 
state, but itself carried on no activity and had no tangible property 
or personnel there. Another state attempted to impose business activity 
taxes on an out-of-state bank issuing credit cards to residents based 
largely upon the possession of the plastic credit cards by the state's 
residents. In yet another instance, a state Comptroller attempted to 
impose the state franchise tax upon a company whose only contact with 
the state was its possession of a certificate of authority to do 
business within the state. In other instances, states have attempted to 
impose business activity taxes when corporations merely have held 
passive investments in operating businesses, owned accounts receivable 
payable by residents, and performed services for residents even though 
the services were performed in another jurisdiction.
    In this period where the rapid growth of e-commerce will shape the 
economy of the 21st century, these efforts by states to expand their 
taxing jurisdiction to cover activities conducted in other 
jurisdictions will constitute an even greater burden on the business 
community's ability to carry on business. Left unchecked, this 
expansion of the states' power to impose business activity taxes will 
have a chilling effect on the entire economy as tax burdens, compliance 
costs, litigation, and uncertainty escalate.
    Consequently, a large portion of the business community is asking 
Congress to consider when state and local governments should and should 
not be permitted to require out-of-state businesses to pay income and/
or franchise tax (``business activity taxes''). It appears eminently 
fair and reasonable for Congress to provide relief from unfair and 
unreasonable imposition of income and franchise taxes on out-of-state 
businesses that have little or no physical connection with the state or 
locality.
    The time has come to update Public Law 86-272 for the digital age. 
Ours has become a more service-oriented economy, and intangible 
property such as intellectual property now plays a much greater role in 
our economic output. Public Law 86-272 must be modernized to include 
coverage of services and intangible property, and other refinements.
    The report of the majority of the Advisory Commission on Electronic 
Commerce agreed with the importance of accomplishing this goal. Those 
suggestions, if augmented by certain additional items that are set 
forth below, would establish a clear, understandable, administerable 
demarcation of taxation that is extremely less restrictive on the 
governments than the ``permanent establishment'' rule that the United 
States and most other countries have imposed on themselves in the 
context of international tax treaties.
    We strongly urge Congress to adopt the Advisory Commission on 
Electronic Commerce's recommendation, and further suggest that Congress 
consider adding provisions that would permit states and localities to 
impose tax only on companies that have either or both of the following 
types of presence in the taxing jurisdiction during the taxable year:

   Leasing or owning substantial tangible property in the 
        jurisdiction for more than 30 days.

           For purposes of this 30-day property rule, property in the 
        taxing jurisdiction for purposes of being assembled, 
        manufactured, processed, or tested by in-jurisdiction persons 
        for the benefit of the owner or lessee, or used to furnish a 
        service by in-jurisdiction persons to the owner or lessee, 
        would be disregarded.

   Any number of employees or actual agents in the taxing 
        jurisdiction for more than 30 days.

           For purposes of this 30-day employee rule, presence of 
        employees for purposes of purchasing goods or services, 
        gathering news and covering events, meeting with government 
        officials, attending conferences, seminars and similar 
        functions, and participating in charitable activities would be 
        disregarded. In addition, solicitation activities would be 
        disregarded, as they are under current law.

    It would appear that these business activity tax provisions warrant 
your support because:

   States have, in recent years, sought to expand their 
        imposition of business activity taxes in an apparent challenge 
        to generally understood Constitutional principles. Permitting 
        such expansion would dampen business innovation and expansion, 
        thus bringing harm to the American economy. The imposition of 
        new, expanded tax liabilities on the business community would 
        seriously undermine the ability of the U. S. economy to remain 
        robust. Removing this contentious thorn from the American 
        business community can only be beneficial to the economy.

   When a company's presence in a state is minimal, it is not 
        deriving material or meaningful protections or benefits from 
        that state. The fact that a business may have customers in a 
        state, or is itself a customer in a state, is a benefit to in-
        state persons who are already subject to tax. To assert, as 
        some state officials have, that sellers reap an economic 
        benefit from market states and thus should pay taxes there, 
        flies in the face of an extremely elementary economic 
        principle. That principle recognizes that a buyer in any market 
        situation is, in his or her or its value system, obtaining more 
        than is being given. Someone buys an item for $3 because the 
        item is worth more than retaining the $3; the seller believes 
        that the $3 is more valuable than the item. While this may 
        sound somewhat academic and theoretical, it is how we all 
        actually operate. Consequently, the seller is no more ``taking 
        advantage of'' the buyer and the market state than the buyer is 
        ``taking advantage of'' the seller and the production state.

   This proposal would have a de minimis fiscal effect. This is 
        because state and local governments are currently collecting 
        very little through their relatively new, but aggressive, 
        attempts at expanding their tax jurisdiction over business 
        activity taxes. All major attempts by states at doing so are 
        currently the subject of intensive litigation.

    These changes will remove impediments to the growth of e-commerce 
and interstate commerce generally, provide certainty to states and 
businesses and reduce wasteful litigation, and ensure that states which 
provide services to in-state businesses receive the income tax revenue 
which should rightly go to them. We look forward to working with the 
Committee to achieve these goals.
                                 ______
                                 
               Prepared Statement for the Record by the 
                    Electronic Commerce Association

    In assessing and guiding the states' effort to simplify their sales 
tax systems, it is important to recognize what is possible and 
efficient for technology to accomplish, on the one hand, and for the 
states to accomplish, on the other. For instance, it is tempting to 
define simplification by the standard of one tax rate per state, and to 
compel states to meet that standard. Yet overcoming the political 
hurdles of achieving one rate per state would be more difficult than 
overcoming the technological hurdles of calculating varying tax rates 
in a simple and cost effective manner. Companies that create software 
to calculate sales taxes in various states soon will demonstrate that 
they have overcome the technological hurdles.
    That does not mean that state governments can or should let 
technology do all the work. The states need to agree on certain 
standards to avoid burdening merchants and the technology that they 
use. Participating states should simplify and standardize their sales 
tax systems by implementing the following:

   uniform product definitions

   simplified exemptions procedures for retailers

   uniform, electronic tax filing forms

   standard format for remittances

   statewide audits

   uniform rounding rules

   a central database for tax rates of all jurisdictions, which 
        each state will maintain

   uniform and electronic registration for out-of-state 
        retailers

   restrictions on frequency of rate changes and common start 
        dates for changes

   elimination of or limitation on caps and thresholds for 
        imposition of tax on certain items

    The recommendations of the Streamlined Sales Tax Project 
incorporated most of these simplifications.
    The Electronic Commerce Association represents service providers 
for online merchants. The ECA has a task force composed of payment 
processing companies and other companies providing services to online 
merchants. The task force advises state organizations about potential 
problems they need to address in streamlining their sales tax system.
                                 ______
                                 
         Prepared Statement of Grover G. Norquist, President, 
                        Americans for Tax Reform

    Thank you for this opportunity to offer my testimony. I offer this 
testimony on behalf of our individual members, our network of over 
3,000 state and local taxpayer groups nationally and taxpayers in 
general. As you may know, I was one of 19 members of the Advisory 
Commission on Electronic Commerce. This Commission was authorized by 
Congress to study federal, state, local and international taxation and 
tariffs on transactions using the Internet and Internet access. Our 
goal as appointed Commissioners was to bring each of our unique views 
and experiences to the table, to learn how other industries, 
representatives and groups utilize the Internet and the issues 
surrounding interstate commerce. These issues included the barriers to 
growing and cultivating this new marketplace and ways to eliminate 
these barriers. Policy proposals from the Commission to Congress 
required a two-thirds majority.
    Our discussions during this Commission are of merit now because we 
had before us the same questions you have before your Committee. Should 
the Internet be taxed? What should the Congress do in order to make 
taxing the Internet, and taxing sales over the Internet, easier or more 
difficult? Is there a role? Should taxing be easier? Can taxing 
possibly get more complicated? These are the questions I would like to 
respond to today.
    Others represent their company industry perspectives, and by 
extension what effects changes of law will have on them and how they 
will pass this on to consumers. For instance, the 3 percent federal 
luxury tax on telephone service--which is no longer a luxury--is passed 
directly through to the taxpayer. Telephone companies add an additional 
line item onto telephone bills, and while these companies shoulder the 
burden of charging and collecting these fees, it falls to working 
Americans to pay the tax. Telephone companies expend resources having 
to collect these fees, but on behalf of the taxpayer, I believe the 
bigger issue is that this is a tax, and every American will realize the 
benefit when Congress again votes to repeal it. I look forward to that 
vote again this year.
    Today, as a representative of the taxpayer I'm speaking against an 
additional tax on Americans. Extending unfettered state and local sales 
taxes to the Internet is a tax. This Committee is entertaining ways to 
take more money out of the pockets of hard working Americans rather 
than finding ways to return it, in light of the growing surplus.
    The Federal Government is not the only governmental entity with a 
surplus. The states that will come before you and demand federal 
intervention in their laws so that they may add more money to their 
growing budgets also have surpluses. In addition, because most e-
commerce is business-to-business or other exempt products not subject 
to sales taxes, the actual ``loss'' to state and local sales tax 
collection was one percent of sales taxes collected in 2000. There is 
certainly no shortage of tax revenues entering the budgets of the 
government on any level. And yet we're discussing a tax increase. We 
should not be taxing Americans again.
    Furthermore, not only do state and local governments want to add 
additional taxes onto working Americans, they want Congress to devise a 
plan for them to implement it. Congress would in effect be the 
proponent of this additional tax. Local governments, storefront 
associations and tax commissioners have not been able to develop a plan 
they all can agree on, so they are now asking Congress to formulate it 
for them. Congress should resist these efforts and instead retain its 
sole ability to regulate interstate commerce as provided under the 
Constitution. State and local governments should not tax Internet 
transactions.
    The Internet's most fascinating effect on America has been the 
nationwide marketplace that has developed. It is interstate commerce on 
a scale never imagined. The Internet and taxes placed upon this 
marketplace are directly within the realm of Congress and the Commerce 
Committee specifically. The Congress should monitor the system and 
ensure that no goods or services are unfairly taxed or discriminated 
against, in order to ensure regulatory certainty for new innovation and 
growth.
    Rather than implement an additional sales tax over the Internet, 
Congress should focus on the regulatory burden on sellers over the 
Internet. They are required to know the unique sales tax laws in each 
state and local jurisdiction that levies a tax and how to file and 
remit taxes to each of those jurisdictions. According to the 
Congressional Research Services, forty-five states and the District of 
Columbia have some type of sales tax. Additionally, of the 30,000 local 
jurisdictions that can levy taxes, approximately 25 percent have done 
so.
    In addition to simplifying sales taxes, Congress should demand that 
states simplify their business compliance taxes (e.g., income, gross 
receipts, and franchise taxes). In many cases, the myriad taxes placed 
upon telecommunications companies and the companies that supply the 
Internet backbone are discriminatory in nature. For instance, property 
taxes placed upon a neighboring business should be the same as those on 
telecommunications carriers. Sales taxes on phone bills should be no 
higher than the local sales tax. Gross receipts taxes should also not 
be taxed higher, or more often, than any other business in the state. 
As was provided for railroads, airlines, and trucking companies, 
telecommunications carriers who provide the backbone for interstate 
commerce should also not have discriminatory tax burdens.
    Finally, Congress ought to look at the definition of nexus. 
Defining this word in the new Internet marketplace would help alleviate 
the bureaucratic burden that some companies suffer under, especially 
those who only have a server or other computer equipment in certain 
areas, but nothing that under common sense definitions could be 
construed as ``nexus.'' Last Congress Senator Judd Gregg introduced a 
bill to this effect that could serve as a starting point for discussion 
this Congress.
    Contrary to what some tax hungry politicians will try to tell you, 
the Internet is not a threat to Main Street bricks-and-mortar 
businesses. It is a tremendous opportunity. The Internet allows 
businesses to offer more choices to a larger number of consumers than 
ever before. It also offers rural customers convenience and a broader 
selection.
    The Internet economy accounts for nearly one-third of our nation's 
economic growth. As recent stock market fluctuations have amply 
demonstrated, government intervention in the high-tech marketplace 
creates fear and uncertainty among investors. We must stop tax hungry 
politicians from concocting a scheme to tax to death the goose that 
laid the golden egg and destroying our high-tech economy.
    As we enter the 21st century we have the opportunity and the 
ability to give consumers the full benefits of high technology without 
harming Main Street or state governments. The Advisory Commission on 
Electronic Commerce has pointed us in that direction, but we must all 
to our part to make sure that the Internet will remain free from the 
heavy hand of government taxation.
    Again, thank you for this opportunity.
                                 ______
                                 
                 Massachussetts High Technology Council

Hon. John McCain,
Chairman,
Committee on Commerce, Science, and Technology,
U.S. Senate,
Washington, DC.

Dear Senator McCain:

    In 1997, the Massachusetts High Technology Council strongly 
supported passage of the Internet Tax Freedom Act. Today, the High Tech 
Council supports keeping the Internet as a tax-free zone in order to 
allow the growth of a high potential growth industry that has 
experienced setbacks in recent months. Therefore, we join Massachusetts 
Lt. Governor Jane Swift in urging Congress to extend the federal 
Internet tax moratorium set to expire this year.
    The Massachusetts High Technology Council is a non-profit, non-
partisan corporation made up of 200 entrepreneurial and respected chief 
executive officers of Massachusetts high technology companies employing 
more than 200,000 people. Its goal is to help make Massachusetts the 
world's most attractive place in which to live and work, and in which 
to create, operate and expand high technology businesses.
    It is essential that the Net not be tangled in a web of taxation. 
This is especially important to allow for the growth of an industry 
still in its infancy. Imposing taxes on the Internet, whether by the 
Federal Government or any of the 30,000 taxing jurisdictions around the 
country, would have grave consequences for many high tech employers in 
Massachusetts and across the nation.
    The High Tech Council also opposes a nationwide sales tax 
collection system, offered under the guise of ``tax simplification,'' 
because of its potential negative impact on businesses and consumers. 
Not only will it increase the costs of goods for consumers and prove a 
logistical nightmare for businesses (particularly small companies), the 
plan proposed by the National Governors Association would create 
another massive, intrusive tax collecting bureaucracy. As Lt. Governor 
Swift said in her testimony, ``One IRS is enough for Washington.''
    Thank you for your consideration of this matter of the utmost 
importance to the nation's economy.
        Sincerely,
                                      Christopher Anderson,
                                                         President.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                           Hon. Jim Geringer

    Question 1. Governor Geringer, your testimony says that ``the 
states have already begun to cooperate to simplify state and local tax 
systems.'' I assume you are referring to the efforts of the Streamlined 
Sales Tax Project, which has developed model legislation for states to 
adopt. I am told, however, that some of the adopting states have chosen 
not to enact uniform definitions for taxable goods--a simple and basic 
piece of the package--much less simplify the myriad tax rates among 
taxing jurisdictions without their state.
    If the states cannot even agree to adopt uniform definitions for 
taxable goods, what assurance does Congress have that the states and 
localities can act on their own to truly simplify their sales tax 
structures?
    Answer. Mr. Chairman, the Streamlined Sales Tax Project has been 
working hard to radically streamline and simplify the nation's myriad 
state and local sales and use tax systems. That effort is ongoing and 
significant progress has been achieved. The project includes two parts: 
model state legislation and an interstate agreement. No state will be 
able to join as a fully participating state unless and until these 
simplifications, including uniform definitions for taxable goods, have 
been adopted. We can give no assurance to Congress that all states will 
adopt the simplifications recommended by the Streamlined Sales Tax 
Project. However, if Congress would grant the states the authority to 
mandate collection by remote vendors and specify that this authority 
was contingent upon adoption of all simplification measures, only those 
states that have complied would benefit from the authority. This may be 
exactly the incentive the states and localities need to act positively 
on the Project recommendations.
    Just as Congress has found that simplification of the federal 
income tax system and campaign finance laws are inherently 
exceptionally complex and difficult to reform without strong 
leadership, so too here the complexity is not just daunting, but 
involves multiple jurisdictions. The Governors undertook this effort to 
achieve meaningful change. Any action that Congress can take to provide 
incentives to assist in our efforts would be invaluable.

    Question 2. Your testimony states that the Internet Tax Freedom Act 
is ``being interpreted to allow any transaction to be conducted 
electronically and thus avoid the collection of state or local sales 
and use taxes.''
    Even without the Internet Tax Freedom Act in place, according to 
the Supreme Court Quill decision, aren't states and localities 
prevented from requiring remote sellers to collect sales taxes because 
the requirement would be an undue burden on interstate commerce?
    Answer. Mr. Chairman, the Quill decision bars states from requiring 
remote sellers to collect and remit sales and use taxes. Some remote 
sellers do voluntarily, and we applaud them. Other vendors which do 
have nexus are, understandably, concerned about federally conferred 
advantages or economic benefits which discriminate against them 
relative to their non-nexus competitors. This has increased pressure to 
avoid tax collection responsibilities by means of exploring loopholes 
in the Internet Tax Freedom Act (ITFA) and to explore the use of 
subsidiaries or affiliates to operate kiosks or electronic cash 
registers in order to claim that the in-store purchase was made via a 
company which has no nexus.
    Moreover, with the accelerating changes in technology, the ability 
to distinguish between the kinds of services entering a home or 
business through a wire or wirelessly is constantly eroding. As Senator 
Steven's staff expert indicated when the Act was first considered, `If 
I represented the electric, telecommunications, or cable industry; I 
would be working very hard to define my business as Internet access 
because of the enormous federal incentives.'

    Question 3. Have the Governors who are concerned about lost tax 
revenues associated with Internet sales explored alternative ways to 
collect the corresponding use taxes from people who make purchases over 
the Internet?
    Answer. Mr. Chairman, every state conducts audits, just as the 
Federal Government does, in an effort to ensure compliance. While this 
is more effective with large businesses with regard to business-to-
business Internet sales, it is far more difficult with regard to 
business-to-consumer sales. States have stepped up notice efforts to 
advise consumers of their responsibilities and to attempt to undo 
misleading information that such transactions are tax-free. But, as you 
can imagine, there are serious privacy issues and enormous enforcement 
costs to effective collections on individuals. I would venture that if 
Congress were to eliminate the collection and remittance requirement of 
the federal airline ticket taxes on the purchase of domestic and 
international airline tickets purchased over the Internet, Congress and 
the U.S. Department of Transportation would experience singular 
difficulties in enforcing the responsibility of individual travelers to 
voluntarily remit. At the least, it would create an exceptionally 
cumbersome and intrusive federal bureaucracy just to collect the taxes 
that were owed.

    Question 4. Your testimony states that ``the Federal Government is 
empowered to regulate interstate commerce, but it would be unwise to 
usurp the most basic rights reserved to the states as to how they may 
or may not raise or lower revenues.''
    Given the states' current tax structures, how is Congress proposing 
to usurp states' rights to raise or lower the tax rates?
    Answer. Mr. Chairman, there is no more basic right or 
responsibility of any level of government than to determine what 
revenues to reduce or raise in order to meet the needs and priorities 
of its citizens. As our global economy has become more and more 
borderless, and as our national economy has shifted more and more to 
services and technology--and away from manufacturing--the base for the 
most important source of revenue for states--and for public education 
in America--has eroded. Some experts project the erosion to be as much 
as 60 percent.
    Much of that is the nature of the economy. But two federal issues 
arise--action and inaction. The Quill decision invited Congress to step 
up to the plate and help ensure an equitable system for commerce. 
Unless and until Congress acts, there will be a continuing and 
accelerating erosion of state and local sales and use tax revenues. 
There is no shortage of evidence--from the General Accounting Office, 
Forrester Research, etc.--of the erosion. Because of the interstate 
nature of the emerging economy, federal inaction exacerbates this 
erosion and consequent erosion of state and local rights to determine 
their taxpayers' and citizens' wishes in this fundamental arena.
    Second, the enactment of the ITFA specifically preempted state and 
local--but not federal--taxation of Internet access and multiple and 
discriminatory taxes. That is a direct preemption or usurpation of 
states' rights. In addition, the definitions of ``Internet access'' and 
``multiple and discriminatory'' taxes creates avenues to evade or avoid 
existing state and local taxes. The federal insistence in applying 
these restrictions on state and local governments, but not on the 
Federal Government, can only appear to be intended as a direct 
intrusion into the rights of Wyoming taxpayers to be able to make their 
own decisions and choices about who and what ought to be subject to the 
taxes necessary to balance our budget.
    Finally, there is legislation pending before the Senate to preempt 
existing grandfathered states--in violation of Congress' own Unfunded 
Mandates Reform Act--and to alter existing federal laws in a way that 
would usurp existing state business activity revenues. These are 
pending, proposed intrusions that would take away or usurp basic 
decisions of Governors, state legislators, and municipal elected 
leaders with regard to our own responsibilities to guard our respective 
governments' fiscs and to respect the right and will of our own 
citizens.
    We fully respect the right and authority of Congress to eliminate 
or restrict federal taxes on the Internet. Congress could eliminate 
federal excise taxes on Internet transactions, federal income taxes on 
Internet transactions and businesses, etc. We would note that in 
considering some $1.6 trillion in federal tax relief, however, there 
has--as yet--been no proposal to provide special tax relief or benefits 
unique to the Internet or Internet transactions. The only proposals 
pending in the House and Senate to provide special tax treatment and 
benefits to the Internet would instead apply only to state and local 
governments.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                            Hon. Jane Swift

    Question 1. What is your response to what appears to be a 
legitimate concern, that traditional business transactions that are 
taxable today can avoid sales taxes altogether simply by sellers' 
setting up an electronic means to complete a transaction?
    Answer. This ``Kiosk Theory'' is simply not true. Some people have 
mistakenly argued that retail sellers will circumvent current sales tax 
collection obligations by diverting sales to Internet ready kiosks 
located inside (or outside) their stores. For example, Consumer X will 
enter brick and mortar Store Y, and test items before using an in-store 
kiosk to purchase those very items through Store Y's website, to be 
delivered either to the store or to the consumer's home, tax-free. The 
theory is that by using an Internet server located in another state, or 
by shipping the goods from out of state, a ``tax-free Internet'' 
provides an uneven playing field for merchants to exploit the tax code 
and provide goods more cheaply than competitors, because no tax is 
assessed and collected.
    However, this ``tax-free kiosk'' assumption is wrong. Under Quill 
Corp. v. North Dakota. 112 S. Ct 1904 (1992), stores which have a 
substantial physical presence in a state, and thus ``nexus'' in that 
state, must subject their sales transactions to a sales tax (and 
collect that tax on behalf of the state). Orders taken at in-store 
kiosks will not allow any store to escape being the location of the 
sale, because the kiosks themselves will provide physical presence, or 
nexus. Regardless of the location of the Internet server and location 
from which the goods are shipped, if the transaction occurs at an 
Internet terminal located within a retail store, a sales tax must be 
imposed and collected. Simply put, merchants who have such a physical 
presence in a state cannot avoid an obligation to collect taxes simply 
by setting up an electronic means to do business.
    If this inquiry involves a traditional retailer establishing a 
separate corporate entity ``to complete a transaction,'' then the 
ability of the retailer ``to avoid sales taxes'' by redirecting sales 
does not really exist. In order to avoid sales tax obligations in a 
state, the corporate entity must not have nexus with the state. 
Generally, a retailer directing a customer to a website, of a separate 
corporate entity, to complete a particular transaction would vitiate 
the separation and establish nexus. Furthermore, even if such 
affirmative redirection could occur, the average shipping charge 
exceeds the average sales tax. Thus, particularly when coupled with the 
consumer having to delay receipt, the consumer benefit to such a tax 
avoidance scenario is vastly overstated.

    Question 2. Please be more specific in your critique of the 
interstate sales tax proposal of the National Governors Association and 
the proposal itself.
    Answer. The National Governors Association has a general policy in 
support of Congress granting states remote sales tax collection 
authority. The NGA also has been involved in supporting the Streamlined 
Sales Tax Project, and has endorsed Senator Dorgan's legislation. 
Because the NGA itself has not put forward a highly specific proposal, 
specific critiques are difficult. Philosophically, however, the NGA 
approaches this issue with a tax collectors' mentality, and we place a 
higher priority on maintaining the integrity of the commerce clause, 
limiting the states' tax powers, and not imposing undue burdens on 
interstate entrepreneurs. While the NGA believes the states should 
receive new national tax powers, we believe other values are more 
important than helping every states' tax bureaucracy achieve revenue 
collection perfection.
    We object to any needless federal, state, or local bureaucracy. We 
particularly object to an unaccountable bureaucracy. We believe that a 
compact of the states with an exceptionally broad mandate to collect 
sales tax on all sales of tangible real property would be accountable 
to the electorate in no one state and thus be prone to overstep its 
powers. In any case, we believe it is unlikely Congress would give its 
sanction to such a compact without including a federal oversight role 
that we believe would unnecessarily complicate federal/state relations. 
Regardless of how such a compact is structured, we believe the ultimate 
impact will be to weaken the sovereignty of individual states not 
strengthen it.
    There is also the issue of enforcement and compliance. Although 
currently as written, a vote of member states is required to admit a 
new state to the compact, we do not see adequate safeguards to ensure 
that (1) a state admitted to the compact is in full compliance with the 
simplification requirements and (2) it stays in compliance with the 
simplification requirements. We are very concerned that tax paying 
Massachusetts businesses that disagree with any ruling by the compact 
have no means of recourse.
    Finally, and perhaps most importantly, the Streamlined Sales Tax 
Proposal does not close the door on future taxes. Massachusetts 
companies who could register as tax collectors under the plan have no 
assurance that, upon assuming the obligation to collect sales tax, they 
will not themselves be subject to new forms of taxes. States and 
localities might seek to impose business license or business income 
taxes on non-present sellers (or at least force such businesses to 
defend multiple tax audits seeking to impose such taxes). For example, 
Alabama just enacted a law (SB 806) that would require the state 
finance department to provide the address of all businesses collecting 
sales tax to the local jurisdiction for which the tax was collected. 
Such reports are then used to identify out-of-jurisdiction businesses 
in order to impose other taxes on them. Thus, the simplification 
project is just a mechanism for state and local governments to force 
all businesses to register in every state so that they can impose a 
multitude of business taxes on them. Small businesses, in particular, 
will be overly burdened under such a system and often times be forced 
to pay illegitimate tax assessments, if not put out of business because 
they do not possess the wherewithal to fight. It is no surprise that 
large ``box'' retailers like Wal-Mart are spending millions to lobby 
Congress to support the NGA's tax power quest. While there are many 
other concerns, such as privacy, lack of documentation, and a host of 
technical administrative issues that remain to be resolved, we believe 
that an open door to nexus creep is the worst aspect of the NGA's 
remote tax position.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                          Elizabeth Harchenko

    Question 1. What do you think of the proposal for one tax rate and 
one tax base per state, for all types of commerce?
    Answer. We believe that it is not necessary to impose a strict one-
rate or one-base limit on states in order to eliminate unreasonable 
administrative burdens on interstate commerce arising from sales and 
use taxes. Current complexity arises from the administrative functions-
including reporting functions, rate changes, and liability-with which 
sellers must comply, rather than from the number of tax rates or 
differences in tax bases. The Streamlined Sales Tax Project (SSTP) has 
developed a reasonable and responsible approach to resolving the issue 
of sales and use tax complexity through statewide administration by 
participating states and simplification of state and local tax rates 
and base in a manner consistent with state and local fiscalstability.
    The SSTP recommendations would substantially eliminate unreasonable 
burdens on interstate commerce through statewide administration by 
participating states. Under the SSTP, the number of returns per tax 
period can be reduced from hundreds nationwide to just one per state-a 
dramatic, cost-saving simplification as compared to the current system.
    With regard to tax rates, the SSTP recommendations will actually 
achieve more simplification than would a one-rate-per-state system. 
States would provide companies with free software that will calculate 
the tax automatically for each transaction, risk free to the seller. 
This approach builds on recent advances in information technology that 
make it possible for sellers to know and automatically calculate the 
actual rate applicable to each transaction. Sellers would be relieved 
of liability for errors incurring in tax rate information provided by 
states. Further, states would be required to limit changes in tax rates 
to occur only quarterly, with a uniform 60-day advance notice of 
changes in tax rates so that sellers can incorporate the rate changes 
into their sales software. An automated, simplified and risk-free ``one 
rate per transaction'' system will achieve an extraordinary level of 
simplification without disrupting systems of state and local finance.
    The SSTP effort to simplify administrative and tax rate functions 
goes hand-in-hand with the rationale for allowing states and localities 
to retain their tax rate structures to enable them to tailor their 
fiscal policies to fit local needs. Congressional attempts to require 
states to adopt a one-rate-per-state methodology would dramatically 
upset the revenue balance within individual states and greatly skew the 
distribution of revenue within states toward urban areas. For instance, 
rural areas, with lower populations, demand a lesser share of state and 
locally funded services-such as education and mass transit-than densely 
populated urban areas. As such, tax rates in rural areas are generally 
lower. In contrast, more densely populated areas demand a larger share 
of these types of services and, thus, routinely assume a higher level 
of taxation to support those services. If states are forced to accept a 
one-rate-per-state methodology, then taxpayers in rural areas may be 
forced to assume a higher level of taxation to fund services in other 
parts of the states from which they receive no benefit.
    With regard to tax bases, the SSTP recommendations would eliminate 
administrative burdens for interstate sellers through uniform 
definitions of major items in the tax base and a process of phasing out 
major variations within each participating state between state and 
local bases. Variations in tax bases within a state would occur only 
for large items subject to registration or property taxes-vehicles, 
boats, manufactured homes and similar items. Consistent with principles 
of federalism, each state would retain the full sovereign right to 
determine the taxability of items within their tax base. Thus, tax 
bases would continue to differ between states. These base 
simplifications are a common sense approach to easing administrative 
burdens for all sellers, especially those engaged in interstate 
commerce.

    Question 2. What is your view on the proposal for a bright-line 
nexus standard that requires physical presence in a state before a 
company can be subjected to a state's business activity tax?
    Answer. Two thoughts come to mind when this suggestion is made-
``tax havens'' and ``litigation.'' A number of groups are actively 
seeking to muddy the debate on sales and use tax simplification by 
inserting the unrelated issue of requiring states to adopt a new and 
restrictive nexus standards for business activity taxes. The MTC firmly 
believes these actions and proposals are detrimental to reaching 
consensus on sales and use taxes, would create ``tax havens'' that 
would serve to shift income away from jurisdictions in which it is 
earned, and would dramatically increase litigation in the corporate tax 
arena.
    The U.S. Supreme Court has established the nexus standard for 
business activity taxes in a series of corporate income tax cases. For 
corporate income tax purposes, ``nexus is established if the 
corporation avails itself of the 'substantial privilege of carrying on 
business' within the state.' Exxon Corp. v. Wisconsin Dept. of Revenue; 
International Shoe Co. v. Schactel; Ford Motor Company v. Beauchamp; 
Colonial Pipeline Co. v. Traigle; Memphis Natural Gas Co. v. Beeler; 
International Harvester Co. v. Wisconsin Dept. of Taxation; and New 
York ex rel. Whitney v. Graves. These cases clearly establish that 
physical presence is not required for the imposition of a business 
activity tax. In this regard, it is important to understand the Quill 
case applies only to the imposition of a sales and use tax collection 
obligation and not to business activity taxes.
    There is good reason for the current business activity standard. 
Unlike sales tax collection obligations under which the states ask 
sellers to serve as collection agents, business activity taxes are the 
quid pro quo imposed on those who take advantage of the benefits of 
doing business within the states. Does the company take advantage of 
the consumer market by selling goods or services; does the company take 
advantage of the infrastructure--transportation systems, 
telecommunications networks, labor force, raw materials; does the 
company enjoy the protection of the court system to enforce its 
contracts and collect debts? These are the questions the court asks 
when determining whether a business organization is ``doing business'' 
sufficiently to justify the states asking for a contribution toward the 
cost of maintaining the infrastructure that affords that organization 
the opportunity to earn income from its activities within the state. 
The states must afford interstate business the same benefits that it 
affords their own resident businesses. The states cannot keep 
interstate business out; the states must scale the measure of their 
business activity taxes to the level of the business activity that 
occurs. And the states should be able to ask fair return for 
maintaining their markets and infrastructure for the benefit of 
interstate business enterprises.
    The proposals advocated by some groups would dramatically change 
current law by replacing the constitutional ``substantial privilege of 
doing business'' standard with physical activity standards. We 
addressed the problems that would arise from imposing these new and 
excessive restrictions on state business activity tax authority in our 
letter of March 6, 2001 to Senators McCain and Hollings.
    The proposals advocated by some with regard to business activity 
taxes would dramatically change existing law. Typically the proposals 
would impose new restrictions on state authority in the form of 
physical activity standards of nexus for business activity taxes 
(including corporate income taxes, gross income or gross receipts 
taxes, and capital stock and franchise taxes). The imposition of these 
new standards would simply create and multiply within the business 
activity tax realm many of the problems that have existed in the 
context of sales and use taxes. Again, tax equity would suffer. 
Companies earning income from within a state and benefiting from state 
and local services would be excused from paying their fair share of the 
cost of those services. These proposals would elevate corporate form 
over economic substance and allow companies, through sophisticated tax 
strategies, to shift income unfairly away from where it was earned to 
tax haven locations. In terms of tax equity, the net result of the 
proposals would be to allow a select group of corporations to escape 
their fair share of state and local taxes and to shift that burden to 
wage-earners, small businesses and traditional manufacturing and 
natural resource industries-all of which are ``captive'' within the 
taxing state.
    These proposals for new restrictions on state authority to levy 
business activity taxes would also detract from economic efficiency and 
balanced economic development by, again, discouraging the flow of 
investment across state boundaries. The physical activity approach to 
state authority is really an anachronism arising out of 17th and 18th 
century mercantilism. Centuries ago, the only way enterprises could 
earn income from a territory would be to undertake physical activities 
there. Today, companies can earn substantial income from a state-and in 
the process benefit from the services of a state-with only minimal 
activities that might traditionally be labeled ``physical.'' To achieve 
tax neutrality-taxing the same income earned in the same state to the 
same degree-concepts of physical activity as a standard for state 
taxing authority need to be assigned to the dustbin of history. If 
companies can earn income from within a state, but escape taxation by 
keeping their activities within the boundaries of certain physical 
activities defined in a new federal law, then companies will be 
discouraged from going beyond those physical activities and making new 
and more substantial investments in that state. Thus, the proposals for 
new federal laws restricting state business activity taxes will only 
interfere with the free flow of commerce and balanced economic growth 
across the nation.
    Further, a federal statute that revises the current standard for 
business activity tax nexus could increase the amount of litigation in 
this area of tax law several fold. Today, sophisticated tax strategies 
are being developed that would appear to anticipate these proposed 
changes in federal law. These strategies would allow companies to shift 
income away from where it is earned into tax havens-both domestic and 
international. If a federal statute is enacted and these strategies are 
implemented, states and localities will be forced to audit and legally 
challenge the validity of such arrangements (in order to protect the 
integrity of their tax systems vis a vis their own local industry)-
forcing companies to reveal the origin of their income and instigating 
what surely would constitute decades of legal entanglement. 
Effectively, these complex tax strategies and the resulting litigation 
would adversely affect the revenue streams of many state and local 
governments-forcing many jurisdictions to pursue cutbacks in services 
or a shift of the tax burden to wage-earners, small business and 
traditional manufacturing and natural resource industries.
    Finally, we doubt that it is possible to define by law a true 
``bright line'' test. The proposed ``tests'' we have seen are unclear 
and subject to widely varying interpretations. Several of the ``tests'' 
seem to invite creation of separate corporate entities, not because 
there is a business purpose but solely in order to avoid paying state 
taxes. These conditions invite the kind of uncertainty and litigation 
that the proponents decry.
    Thus, the MTC urges Congress to reject proposals that pursue 
creation of a new and restrictive nexus standard that requires physical 
presence for the application of state business activity taxes. Such a 
standard would ultimately result in more litigation, greater costs of 
administration and an unfair system of state taxation.

                                  
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