[House Hearing, 109 Congress]
[From the U.S. Government Printing Office]

                                                   S. Hrg. 102-000 deg.



                               before the


                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION


                    WASHINGTON, DC, FEBRUARY 8, 2006


                           Serial No. 109-39


         Printed for the use of the Committee on Small Business

 Available via the World Wide Web: http://www.access.gpo.gov/congress/



27-415                 WASHINGTON : 2006
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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
SAM GRAVES, Missouri                 DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri                  ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania           DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado           DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire           ED CASE, Hawaii
STEVE KING, Iowa                     MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan          RAUL GRIJALVA, Arizona
RIC KELLER, Florida                  MICHAEL MICHAUD, Maine
TED POE, Texas                       LINDA SANCHEZ, California
MICHAEL SODREL, Indiana              JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska           MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania    GWEN MOORE, Wisconsin

                 J. Matthew Szymanski, Chief of Staff
          Phil Eskeland, Deputy Chief of Staff/Policy Director
                  Michael Day, Minority Staff Director


W. TODD AKIN, Missouri Chairman      MADELEINE BORDALLO, Guam
MICHAEL SODREL, Indiana              ENI F. H. FALEOMAVAEGA, American 
LYNN WESTMORELAND, Georgia           Samoa
LOUIE GOHMERT, Texas                 DONNA CHRISTENSEN, Virgin Islands
SUE KELLY, New York                  ED CASE, Hawaii
STEVE KING, Iowa                     LINDA SANCHEZ, California
TED POE, Texas                       GWEN MOORE, Wisconsin

               Christopher Szymanski, Professional Staff


                            C O N T E N T S



Hellerstein, Mr. Walter, Distinguished Professor of Law, 
  University of Georgia, Athens, GA..............................     4
Bierbon, Mr. Brian, Senior Director, Federal Government 
  Relations, eBay, Inc...........................................     6
Misener, Mr. Paul, Vice President, Office of Global Policy, 
  Amazon.com.....................................................     8
Perry, Mr. Ernest, Owner, Perry's at Southpark, Charlotte, NC....    10
Rawlings, Mr. Rory, Founder and Chief Tax Automation Officer, 
  Avalara, Inc., Seattle, WA.....................................    11


Opening statements:
    Akin, Hon. W. Todd...........................................    23
    Bordallo, Hon. Madeleine.....................................    24
    Christensen, Hon. Donna......................................    25
Prepared statements:
    Hellerstein, Mr. Walter, Distinguished Professor of Law, 
      University of Georgia, Athens, GA..........................    27
    Bierbon, Mr. Brian, Senior Director, Federal Government 
      Relations, eBay, Inc.......................................    42
    Misener, Mr. Paul, Vice President, Office of Global Policy, 
      Amazon.com.................................................    49
    Perry, Mr. Ernest, Owner, Perry's at Southpark, Charlotte, NC    60
    Rawlings, Mr. Rory, Founder and Chief Tax Automation Officer, 
      Avalara, Inc., Seattle, WA.................................    62




                      WEDNESDAY, FEBRUARY 8, 2006

                   House of Representatives
    Subcommittee on Regulatory Reform and Oversight
                                Committee on Small Business
                                                     Washington, DC
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360 Rayburn House Office Building, Hon. W. Todd Akin 
[Chairman of the Subcommittee] presiding.
    Members present: Representatives Akin, Sodrel, Kelly, 
Bordallo, and Christensen.
    Mr. Akin. The committee will come to order. I am 
Congressman Todd Akin. We will proceed as I make an opening 
statement. There will also be a couple of other opening 
statements, one by the Ranking Member Ms. Bordallo. She is due 
here any minute. And also from Congresswoman Kelly, also very 
interested in this topic. After that what I would like to do is 
to proceed through all of our witnesses.
    I think it is better for us who are in Congress, the 
different staffers that are here as well, I think we get a 
better picture by just running through all of your testimony. 
Then you can submit written statements if you would like. What 
I would like to do is in order of time, keep you to somewhere 
in the five minutes range? I just want to hit the highlights of 
what you want to say in five minutes.
    When we get done going through all the witnesses we will 
come back with specific questions. Different members here will 
ask you questions based on comments that you made but maybe 
comments that someone else made and want to just cross check 
with you. Typically I have a pretty good record of being able 
to get things done in an hour.
    Today this may be a hot enough topic that we may want to 
run a little bit more than that but I would think maybe at the 
most an hour and a half we should be able to wrap things up. 
You will see these little lights. There is a little light in 
front of you. When it gets red that means your five minutes is 
up. I don't usually throw these things but still we want to 
keep things moving.
    Good morning and welcome to today's hearing entitled ``The 
Internet Sales Tax: Headaches Ahead for Small Business?'' I 
want to especially thank those witnesses who have traveled to 
participate in today's hearing, particularly all the way from 
Washington State.
    The Internet has emerged as an extremely important channel 
of commerce in our nation. For this reason, we must be vigilant 
in keeping this medium as unencumbered from regulations and 
taxes as possible. I am skeptical of anything that constitutes 
a new tax or imposes new onerous regulations on our nation's 
businesses, especially those selling over the Internet.
    We are here to investigate recent federal and state efforts 
to shift responsibility to collect state sales and use taxes to 
out-of-state Internet vendors. A state currently can not impose 
that burden unless a business has a constitutionally 
significant presence or ``substantial nexus'' within the state. 
Because e-commerce has become a vital channel for businesses of 
all sizes, many states are concerned with the loss of potential 
tax revenue.
    Consequently, these states have banded together to form the 
Streamline Sales and Use Tax Agreement, which is an effort to 
harmonize sales and use tax laws and simplify tax collection 
for vendors. Member states of this agreement argue that by 
creating a more uniform system of laws in this nation and 
easing burdens on vendors, they in turn should be given the 
authority by Congress to collect sales and use taxes from out-
of-state Internet vendors.
    Currently, two nearly identical bills have been introduced 
in the Senate that would provide such authority to states. Both 
measures include an exception from remote sales and use tax 
collection for small businesses. However, the bills differ in 
how this should be accomplished. Thus far, no companion 
legislation has been introduced in the House.
    Today our panelists will address the many issues 
surrounding implementation of the Streamline Sales and Use Tax 
Agreement. Particular emphasis will be placed on the scope of 
the current federal legislation and the many new compliance 
burdens that could be placed on our nation's businesses if this 
legislation is enacted.
    I look forward to the testimony from our witnesses today. I 
now yield for an opening statement from the gentlelady from 
Guam. If she is not here, we will proceed to a second opening 
statement. I want to explain if it wasn't previously clear that 
this is the Small Business Committee and one of the things that 
we are jealous to do is to guard small businesses from 
unnecessary red tape and regulations because we are big 
believers that small businesses are the engine of the future 
growth of our country. Certainly that is the angle that we are 
looking at this issue from is the Small Business Committee. 
That is why we are having the hearing in the first place.
    Now I would recognize the gentlelady from New York State, 
Ms. Kelly.
    [Chairman Akin's opening statement may be found in the 
    Ms. Kelly. Thank you very much, Mr. Chairman. I represent 
New York's Hudson River Valley where small businesses simply 
can't bear additional burdens, especially as they relate to 
taxes. The existing moratorium that affects state and local 
taxation of Internet transactions should be handled in a way 
that certainly does not have a negative impact on these small 
    We cannot forget that we are dealing with small businesses 
that have limited resources in terms of employment and finances 
which also means limited capabilities. When the Government puts 
unnecessary and unreasonable strains on such, those small 
businesses will be forced to close. There is no doubt that 
having to collect and remit taxes for states other than the 
state where the small business resides would be an extreme 
burden. It is not just collecting and remitting.
    Specifically, these taxes involve tracking closely where 
the items are purchased as well as the tax code of that state 
to be certain that the proper tax is collected. Further, the 
paperwork would prove to be a nightmare for these small 
businesses and it would be expensive. It is a burden that many 
small businesses simply cannot meet. Companies would be forced 
to limit sales outside the state they are in.
    No business should be held to such limitations simply 
because the tax requirements are insurmountable. I am hopeful 
that through discussions such as this today and in the future 
that we can develop a solution that does not hurt the people 
who are involved. Most importantly we must work to eliminate 
existing tax burdens on our small businesses and not create new 
    I thank all of our panel here today. I look forward to your 
testimony and I appreciate the sensitivity that you have to 
this issue. Thank you for being here.
    Mr. Akin. Thank you, Congresswoman. Appreciate your 
perspective and your care and interest in small business as 
    Also now from our ranking member, Ms. Bordallo, opening 
statement, please.
    Ms. Bordallo. Thank you very much, Mr. Chairman. Greetings 
to all of the witnesses here. I apologize for being a few 
minutes late.
    I want to thank you, Mr. Chairman, for holding this hearing 
to review the application of a sales tax to Internet commerce 
and the affect that this would have on the vitality of American 
small businesses. I look forward to hearing the testimony 
    I represent Guam, way out there in the Pacific. Internet 
based commerce is particularly important to my constituents. 
The advent of the Internet and the massive growth of the e-
commerce sector have certainly opened up a wealth of 
opportunity for business owners and consumers on Guam and 
across the country.
    On site such as Amazon.com, eBay and countless others have 
allowed sellers and buyers and it has made it easier for the 
purchasing of goods and services at the competitive price. 
Internet based commerce has had a notable positive impact on 
the U.S. economy that has resulted in tens of thousands of new 
highly-skilled and high-paying jobs. Expectations are that the 
Internet commerce industry will continue to grow in the coming 
    For example, retail e-commerce sales projected to top $80 
billion for fiscal year 2005 which is up from $69.2 billion in 
on-line retail sales generated in fiscal year 2004. Many small 
businesses will contribute to and benefit from this growth. The 
Internet allows them to expand their markets at marginal 
additional cost allowing them to compete more fairly with their 
larger counterparts.
    However, the uncertainty of the sales tax treatment of 
goods sold over the Internet is a major obstacle for many small 
businesses entering into Internet based commerce. In 
particular, the collection and remittance of taxes on Internet 
commerce is a complex and costly problem from small businesses 
to solve.
    Currently, on-line buyers are taxed according to where the 
item they purchased will be delivered as opposed to where the 
vendor is located. The opposite is the case with traditional 
over-the-counter sales in traditional businesses. A buyer, for 
instance, from Guam who makes a purchase from a store in 
Virginia will pay Virginia sales tax.
    Because the tax law varies from state to state and among 
U.S. territories, small businesses, many of which only have a 
few employees, face difficulty in comply with the complexity of 
these various tax codes and a barrage of federal regulations 
that they need to follow.
    Although the Internet may be able to quickly connect you to 
every community across the U.S. knowing the particulars for the 
roughly 7,500 distinct tax jurisdictions in the United States, 
is quite a daunting task even for the most talented of 
entrepreneurs. The application of a sales tax to Internet 
commerce would appear to be a potential to curb the further 
growth of this unique sector of the American economy.
    Today's hearing, gentlemen, will provide us with an 
opportunity to hear more about this issue in an effort to 
better understand the potential impact of tax collections on 
small on-line retailers. I am particularly interested in 
hearing more on how these changes will impact the future 
development of our nation's 23 million small businesses many of 
which have already tried their hand at Internet sales. Thank 
you very much, Mr. Chairman.
    [Ranking Member Bordallo's opening statement may be found 
in the appendix.]
    Mr. Akin. Thank you for that opening statement. With that 
we are going to just proceed pretty much down the line here 
with our witnesses. Our first is a distinguished professor of 
law at the University of Georgia, Walter Hellerstein. Did I get 
that right?
    Mr. Hellerstein. That's good enough.
    Mr. Akin. Pretty close? And I note you are a graduate of 
Harvard and the University of Chicago Law School. Look, we've 
only got five minutes but we are going to try to be good 
students and go back to class here and try and pick your brain 
for five minutes of highlights. Thank you. Proceed, please.


    Mr. Hellerstein. Thank you very much, Mr. Chairman. I 
really appreciate your invitation and the opportunity to 
address this Subcommittee. I want to just try to do two things 
in my oral testimony. One, briefly --
    Mr. Akin. Is your mic on or is it aimed at you in anyway?
    Mr. Hellerstein. First of all, I want to thank you very 
much for inviting me. I want to focus just on two points in the 
oral testimony. One, to try to give you a broad overview of 
what the law is, the law of Internet sales taxation. Second, to 
try to focus on what policy choices you have should you decide 
to change the law in any way that you deem appropriate.
    First of all, what is the law? Every state that started to 
have a sales tax had this problem. The problem was if someone 
went to a jurisdiction that didn't have a sales tax, they would 
lose revenue. Their business would lose revenue. So they 
couldn't impose a sales tax. Washington can't impose a sales 
tax on a sale that takes place in Oregon which doesn't have a 
sales tax. What do they do? They impose something called a use 
tax. What is a use tax? A use tax is the same thing as the 
sales tax but it is within the state's jurisdiction because it 
is imposed on the use of property in the state.
    I will give you an example. I come from Georgia. Say I go 
to Oregon to buy a car. Do I pay a sales tax? No. Why not? 
Oregon doesn't impose a sales tax. I bring my car back to 
Georgia. What happens? I go to register my car and I pay a use 
tax equal to the sales tax that I would have paid had I bought 
the car in Georgia.
    Okay. Now, I buy a book from Amazon.com. Do I pay sales 
tax? No. Why not? The sale takes place in Washington or 
wherever their fulfillment facility is. I bring the book back 
to Georgia. Very simple. I go to the book registry. Right? 
There is no book registry. As long as we have a first amendment 
there probably won't be a book registry. I owe the use tax but 
I'm not going to be the first person in the history of Georgia 
voluntarily to remit a use tax. Now you see the problem.
     The tax is due, I'm not going to voluntarily remit it, and 
there is no jurisdiction over Amazon to require Amazon to 
collect the tax in the same way that a Wal-Mart or a local 
vendor would collect the tax. Why not? For the very reasons 
that you have already alluded to. There are so many different 
state tax laws and so many different states and counties that 
the U.S. Supreme Court said, ``It is so complicated we're not 
going to require the out-of-state vendor to collect the tax 
unless there is a physical presence.''
    There you have it very briefly. There is power to tax the 
stuff that I am bringing into Georgia wherever I buy it. There 
is no power to require the out-of-state vendor to collect it 
and, therefore, these taxes that are legally due don't get 
    Now, what do you do about this? If you like the law the way 
it is, you leave it. You do nothing but maybe you don't and 
here it seems to me there is a question of what you might think 
about in terms of your choices. First of all, I think one 
policy choice not before you is whether or not something that I 
buy over the Internet is taxable. It is taxable.
    Every state, the 45 of the 50 states that have sales taxes 
say, ``We want to tax stuff that you buy in other states that 
don't have sales taxes.'' I don't think that should be on your 
plate. What is on your plate is whether or not it's right to 
require a small mom and pop business to collect. I think you 
might want to look at these questions in deciding whether the 
law is appropriate as it is or should be fixed.
    What are the costs of collecting sales and use tax under 
this new regime? What are the additional revenues collected 
under the proposed regime? What is the relationship between 
nationwide gross sales and these costs? What is the 
relationship between costs in a particular state and cost of 
collection and revenues? What is the relationship between 
having a separate legal entity and cost collection?
    I think in the end you have to decide on the basis of facts 
that I don't have personally but you will hear from other 
witnesses what is the appropriate line to draw? Right now we 
have a physical presence test. Does that make sense? Does it 
make sense if we are concerned about small business, for 
example? A small business sends one sales person into a state 
and they have physical presence.
    They have to collect a huge multi-million dollar retailer 
that maybe has sophisticated software and a staff of tax 
people. Maybe it is appropriate for them to collect. I don't 
know but I think one thing you have to ask is what test makes 
sense, if any? Maybe you want to say nobody who sells over the 
Internet should ever have to collect a tax because that makes 
sense. All I'm telling you, or urging you to focus on, is the 
policy issues associated with the collection of taxes and the 
revenues of the states that derive from it. With that I see the 
yellow light is on. I will end my testimony.
    [Mr. Hellerstein's testimony may be found in the appendix.]
    Mr. Akin. You have redeemed about 30 seconds of your time. 
That is admirable and a great way to start a hearing. Thank you 
very much for coming in and we'll get back with some questions.
    Our next witness is Brian--is it Bieron?
    Mr. Bieron. Bieron.
    Mr. Akin. Bieron. And you are the Senior Director of 
Federal Government Relations with eBay?
    Mr. Bieron. Yes, sir.
    Mr. Akin. And hailing from Washington, D.C. right here. Is 
that right, Brian?
    Mr. Bieron. Well, before I started in Buffalo, New York. 
I'm originally from Buffalo, not from here.
    Mr. Akin. Thank you, Brian. Please proceed.


    Mr. Bieron. Mr. Chairman, thank you, and thank you to the 
members of the Subcommittee. I would like to thank the 
Committee for giving eBay this opportunity. We agree that this 
is a critically important issue to small business entrepreneurs 
who increasingly use the Internet to compete in the 21st 
century economy.
    One of the most important developments on the eBay market 
place is that hundreds of thousands of small businesses from 
across America have discovered that eBay is a vibrant place to 
do business. Currently over 700,000 of our nation's small 
business people are using eBay as a valuable marketing channel. 
We believe that nearly a half million of these began their 
business off of eBay, in many cases in brick and mortar stores.
    They are using the Internet as a new way to compete and 
grow. Increasingly main street and the Internet are not 
competing with each other so much as main street small 
businesses are using the Internet to compete and survive 
against global retail companies. That creates small business 
jobs in communities all across the nation. The stated goal of 
the Streamline Sales Tax Project is to increase state revenues.
    Before I talk about the SSTP process itself, I wanted to 
mention a few points related to the overall economic 
environment that we think are important in this debate. One is 
that the U.S. economy is strong and growing and small business 
entrepreneurs and innovators using Internet technologies in 
many cases are one of the most important engines of growth in 
job creation.
    No. 2 is that state tax revenues including sales tax 
revenues are up at record levels. There simply is no state 
revenue crisis. Three, off-line and on-line retail are both 
growing and in terms of actual dollars of retail sales, off-
line retail actually grew $65 billion more than on-line retail 
in the last quarter that we have data.
    Please keep in mind that off-line retail is still 97 
percent of total retail sales. The SSTP is supposed to deliver 
real simplification and true sales tax simplification would 
have real merit but we believe that the SSTP is a long way from 
true simplification.
    Complying with the sales tax regimes in every state tax 
jurisdiction is about more than just calculating how much sales 
tax is required for each product sold. Although with over 7,600 
different tax jurisdictions, just calculating is a major job in 
itself. Complying with the SSTP would require four distinct 
phases, calculation and collection of the money, remittance to 
the proper jurisdiction, and all the record keeping because you 
can be audited every year.
    I am afraid that it is not possible to do justice to the 
SSTP in just five minutes but I think it is revealing that both 
into the entire SSTP scheme is the clear understanding that 
small businesses cannot comply on their own ever. The SSTP is 
designed to required small businesses to be associated with 
technology firms, Certified Service Providers, or CSPs for 
short, that will need to do the job for them.
    I believe that it is really a critical point for every one 
here to walk away with. The SSTP supporters admit that their 
system won't work unless outside technology companies are 
involved. If small businesses can't or don't use an outside 
technology, then under the SSTP they basically need to get off 
the Internet. While states claim that they will pay those 
providers, the amount promised is likely to prove very 
insufficient and would put small businesses at the mercy of a 
very unreliable system
    With this in mind and with over 700,000 Americans using the 
eBay market place to help run their small businesses, we 
believe that a workable and robust exemption for small business 
is an indispensable component of any Internet sales tax plan.
    SSTP legislation in recent Congress has included a small 
business exemption in name, often called an SBE, but the 
substance fell short of the mark. The level of the SBE was 
arbitrary and far below established federal small business side 
standards for retailers. This deficiency still plagues S.2152, 
the recently introduced Enzi bill.
    Senator Byron Dorgan, a long-time advocate of the SSTP, 
recently introduced S.2153 with a small business exemption 
process that eBay believes would protect small businesses. It 
would empower the Small Business Administration to establish 
the SBE-size standard in process. They are the federal agency 
with the mission to help promote America small business and 
entrepreneurs and the experience to do this job right.
    On behalf of the hundreds of thousands of small businesses 
using eBay today and the countless small business entrepreneurs 
that we are confident will be empowered by the Internet in the 
coming years, we are committed to working with Congress and 
this Committee, as well as the SBA to ensure that this process 
is done right. Thank you and I am happy to answer any 
    [Mr. Bieron's testimony may be found in the appendix.]
    Mr. Akin. Thank you, Brian. I appreciate your bringing it 
in on time also. Our next witness is Paul--is it Misener?
    Mr. Misener. Yes, sir.
    Mr. Akin. And you are with Amazon?
    Mr. Misener. That is correct.
    Mr. Akin. So we have got both eBay and Amazon side by side 
agreeing on every point or maybe not.
    Mr. Misener. Usually. Usually.
    Mr. Akin. Proceed, please, Paul.


    Mr. Misener. Thank you, sir. Thank you for inviting me to 
testify as well. I appreciate that.
    Mr. Chairman, the Internet is a great enabler of small 
business. In it's early days the Internet was a haven for 
innovative technically savvy small businesses. Today it has 
become an important channel for all kinds of small retail 
businesses, not just those with technical expertise. Less we 
forget, a decade ago Amazon.com, eBay, Yahoo, and other current 
household names were observe small businesses with something in 
    Technical skills that enabled them to provide content-based 
services useful to nontechnical people. These small business 
owners overcame the technical challenges of putting up and 
running a website, tracking consumer traffic to the site, and 
with the help of electronic payment processors facilitating 
retail transactions.
    At the time none of this was easy but as these small 
businesses grew into the big businesses they are today, they 
have actually simplified the task of getting a small retail 
business on-line. Indeed, these companies and others now 
provide services so that today's small businesses don't have to 
be technically savvy to make good use of the Internet.
    There are several different e-commerce business models now 
co-existing and vigorously competing on the web. One model of 
platform retail where large companies such as Amazon.com and 
eBay and Microsoft's MSN provide e-commerce services to other 
companies both large and small.
    My friends at eBay deserve particular credit for their 
success with the platform model. eBay sells marketing, 
inventory management, sales tracking, reporting, and other 
services to small businesses and annually has tens of billions 
of dollars of sales transactions running through their website.
    The first public policy question presented by these 
circumstances is whether the states should be authorized to 
require remote sellers to collect tax. By conserving fuel, 
saving time, and using fewer public roads and other local 
services, e-commerce arguably should remain under taxed. 
Amazon.com does not have a position on this high-level policy 
question. We concluded almost six years ago, however, that 
Amazon would not be hurt by a sales tax collection requirement 
so long as the administration burden of collection were 
eliminated in that our on-line competitors also would collect.
    The second key question for policy makers is have the 
states adequately simplified their tax codes. Although Amazon 
believes that even more simplifications could and should be 
made, we think the current Senate bills if applied fairly would 
require adequate simplification, at least for sellers on line 
or using other electronic transaction services.
    This brings us to the third and last key question. Is there 
any justification for requiring only some classes of sellers to 
collect but not others? It has been suggested, for example, 
that small out-of-state businesses be given a blanket exemption 
from tax collection requirements. At Amazon.com we are not 
particularly familiar with transactions involving paper money 
or substitutes like personal checks or traveler's checks. There 
may be good reasons to exempt truly small interstate sellers 
using such instruments.
    But we are very familiar with electronic payment systems, 
especially those operating on-line. With these systems, 
transactions are processed by a relatively small number of very 
large companies that can and will provide tax collection 
services if they are required directly or by law or by market 
    To be sure, no one expects truly small businesses to do the 
work of sales tax collection alone but that doesn't mean they 
shouldn't be required to do it at all. By analogy we require 
small business persons to sign their legal documents in ink but 
we don't expect them to make their own ballpoint pens.
    Amazon.com will offer sales tax collection services to our 
small seller customers. I am sure that our on-line competitors 
also can and will. Of course, this discussion so far as been 
limited to small businesses conducting interstate sales. What 
about small main street businesses selling locally? Even after 
a decade of e-commerce, as Brian has pointed out, still over 90 
percent of retail sales are off line.
    Small main street businesses already collect sales tax and, 
thus, have both the administrative burden of tax collection and 
the higher prices caused by it. If out of state small 
businesses would not have to collect, then their main street 
brethren would be saddled with a competitive disadvantage both 
as to burden and price. Hopefully policy makers never would 
conclude that this disparity would be fair to main street small 
    In conclusion, Mr. Chairman, the Internet is a great 
enabler of small business and if Congress eventually decides to 
allow states to require out of state sellers to collect sales 
tax, large companies will provide the necessary tax collection 
services to small businesses and cure the preexisting 
disadvantages to small businesses off-line.
    Thank you again for inviting me to testify. Of course, I 
look forward to your questions.
    [Mr. Misener's testimony may be found in the appendix.]
    Mr. Akin. Thank you very much, Paul. Appreciate your coming 
in and we will get back to you with some questions in a minute.
    Ernest Perry. You are actually one of the people we are 
talking about. You are the owner of a small business from, I 
believe, Charlotte, North Carolina. Is that correct?
    Mr. Perry. That is correct.
    Mr. Akin. Please proceed, Ernest.


    Mr. Perry. Mr. Chairman and members of the Subcommittee, my 
name is Ernest Perry and I have been a small business owner in 
North Carolina for more than 25 years. I started in the jewelry 
business in 1978, managing a store for the retail chain Jewel 
Box Stores Corporation in Greensboro and learned as much as 
possible about running a business and the jewelry industry.
    Always wanting to go into business for myself, I had also 
become a licensed auctioneer and began offering my services to 
non-profits where I helped sell donated estate and antique 
jewelry to raise funds for their organizations. I later opened 
my own store called Perry's Jewelry Emporium, specializing in 
antique and estate jewelry in 1980.
    In 2002 I got my business on-line. As I was undergoing a 
remodeling project for the store, a woman who was helping me 
with the remodeling introduced me to eBay. She talked about the 
ease of conducting business on eBay and of the many success 
stories and I was immediately interested. While my storefront 
was continuing to do well, I was intrigued about having an on-
line presence for my jewelry collection and being able to reach 
a much broader customer base. It was then that I recognized 
eBay's marketing potential and I developed the concept for 
Treasures Recycled.
    Along with the overstocked items from my store, I began to 
accommodate the growing number of people turning to me to 
handle the resale of their personal jewelry. People bring me 
the items they would like me to sell for them and I turn to 
eBay to get the job done. This approach has allowed me to sell 
items to people in every state and many, many countries.My 
sales from my eBay business continue to increase each year, 
approximately generating $1 million in annual sales. With just 
the on-line store, I have five employees and offer full 
    While some people claim that there are big technology 
companies that would be happy to step in and take care of the 
tax collection and remittance job, I think that the SSTP 
process is filled with risk for small business owners. There 
are significant potential costs that I can see for any 
complicated sales tax plan, especially when a small business is 
forced to contract the job out to one of a handful of 
technology companies.
    Computer system upgrades or changes, training employees on 
new systems, and the possibility that the off-the-shelf 
solution doesn't work right, are all expensive risks. And 
finally, what if a couple of years down the road the fees go 
up? There is no going back and small businesses will be the 
    There is no question that it has not been easy to be a 
small business retailer over the last few decades. The world 
has changed so much. The Internet is obviously one big change, 
and it's been both a challenge and an opportunity in the retail 
    I understand the tax issues and the ``fairness'' question 
raised by on-line businesses that do not collect and remit 
sales tax for sales to out-of-state customers. Be assured I do 
collect and remit taxes for Perry's according to the tax code 
in North Carolina. There is single sales tax rate and a single 
tax authority to remit the taxes to.
    Legally I am not required to collect and remit sales taxes 
for all the customers outside of North Carolina who visit 
Treasures Recycled, my on line presence. There is really no 
doubt in my mind regarding the complexity of what would be 
required to collect and remit taxes on the thousands of 
different tax jurisdictions around the country. My 
understanding is that there are more than 7,600 jurisdictions 
nationwide. There would undoubtedly be new costs imposed on my 
on-line business that would be very hard, if not impossible, to 
deal with as a small business owner.
    But small retailers have also had to adapt and adjust to 
mega-retailers like Wal-Mart and the Big Box Stores who have 
used all kinds of technologies to revolutionize their global 
retail businesses. And in my experience, the Internet has 
actually empowered small business people to deal with those 
dramatic changes.
    I believe there is no question that the Internet offers a 
small business more opportunity than risk. And I believe that 
Congress changing the status quo on state sales tax laws would 
make it harder in the long-term for small businesses and 
entrepreneurs to succeed in the face of those challenges.
    Again, thank you for inviting me to speak to this Committee 
    [Mr. Perry's testimony may be found in the appendix.]
    Mr. Akin. Ernest, thank you for your testimony. That is 
really the heart of what this Committee is about is to take a 
look at small business and make sure that we are not going in 
some direction that is going to hurt our small businesses. 
Thank you very much for sharing with us.
    Our last witness, Rory Rawlings. I believe that you are one 
of the people that has taken a look at this complexity and kind 
of dared to step into that nexus of red tape and everything and 
actually try to provide a service. Is that correct?
    Mr. Rawlings. That is correct.
    Mr. Akin. To try and sort this out and make it simple for 
small business. Rory Rawlings, you are the Founder and Chief 
Tax Automation Officer of Avalara is it?
    Mr. Rawlings. Yes.
    Mr. Akin. In Seattle.
    Mr. Rawlings. Yes.
    Mr. Akin. You get the award for coming the farthest today. 
We really thank you for making the travel for us. Thanks, Rory. 
Go ahead.


    Mr. Rawlings. Thank you, Mr. Chairman. I believe that we 
really have two competing interests that we are dealing with. 
First of all, we've got the state and local jurisdictions. I 
live on Bainbridge Island. It is a suburb of Seattle separated 
by eight miles of water. On Bainbridge Island we vote 
periodically on whether or not we should levy new taxes for the 
city of Bainbridge Island. Those taxes are for various 
different local services, services that are needed by our city.
    Those services vary from transient taxes to police services 
to needed local services. The real question is when people on 
Bainbridge Island or people in any local jurisdiction purchase 
goods on the Internet or purchase goods anywhere from out of 
state should they really be required to pay those sales taxes. 
So that is on one side.
    On the other side we have got small businesses. We work 
with small businesses day in and day out. Out whole mission is 
to serve small businesses and make sales tax less taxing. I 
believe that small businesses are the key to continued growth 
and prosperity for our nation. I believe that red tape is a 
very bad thing for small businesses. The administrative burden 
on the current tax law is very high. So how do we reconcile 
those two issues?
    Well, we reconcile those two issues with Sales Tax 
Management Services. Sales Tax Management Services, or STMS, is 
really the result of the convergence of various technologies 
and public policy. If you take a look at the tax industry over 
the years, it really began as information services or 
information subscriptions from companies like CCH and RIA, data 
subscriptions, statute, research, that sort of things.
    Then it evolved into sales tax software, sales tax software 
that was very large, very complex to implement, and very 
expensive to purchase. Sales tax software that was applicable 
to very large businesses and fulfilled the needs of very large 
    Now with the Internet technologies, with security 
technologies, with spacial and geographic information systems 
we can take the software that was built and provided to large 
businesses and put it into a service environment. Just as main 
street merchants sell goods across the Internet as well as 
their brick and mortar store, we can now offer the Sales Tax 
Compliance Services across the Internet.
    With STMS, or Sales Tax Management Services, we can provide 
at very low cost these full compliance services. Not only can 
we accurately validate, correct, and standardize the address 
which then feeds into the jurisdiction assignment but at a 
street level we can determine what the boundaries are. We can 
determine what the product taxability is, customer exemptions, 
as well as automatically generate those returns, automatically 
do the remittance for any size business.
    Whether that is a small business or a large business we can 
do this at a very affordable price. The reason we can do it at 
a very affordable price is because we are not selling software. 
It is a service. It is very similar to a cell phone plan. With 
a small up front fee and a monthly fee based on transaction 
volume, Avalara sells a service today as well as other 
companies. This service starts in the case of Avalara at $29.99 
a month. So with this service we can resolve the competing 
interest of both the local jurisdictions who have passed the 
taxes who really are owed the taxes.
    These taxes have been on the books for many years and have 
not been collected. As well as eliminate the burden on small 
business. I believe that the real issue is not whether or not 
we should exempt small business from taxes or whether or not we 
should not provide the taxes owed to local jurisdictions. It 
really is a matter of resolving both of these two competing 
interests through the use of technology.
    [Mr. Rawlings' testimony may be found in the appendix.]
    Mr. Akin. Thank you for completing your testimony. It is 
interesting. All of you have had fascinating questions, 
potential questions anyway, that are quite interesting. 
Obviously from a political point of view there are a whole 
series of different questions involved here.
    Some of them are fairly complicated in the sense that they 
are touching so many different jurisdictions. Then there is the 
overall question about taxes themselves. As the Chairman I 
guess I have the opportunity to start with some questions. 
Maybe I'll start, Walter, with you. I'll just say what will 
happen if Congress does nothing and the states try to 
relitigate the Quill decision?
    Mr. Hellerstein. That is a very good question. I think a 
question frankly that no one really knows the answer to. What 
it will depend on is whether or not the court, which in the 
past has said things are so complex for the remote or out-of-
state vendor that we can't require them to collect without 
imposing a burden on commerce and, therefore, they can't be 
required to collect.
    The question is have things gotten simple enough that that 
burden doesn't exist anymore? Honestly, Mr. Chairman, I don't 
think we know the answer to that question. If you ask me, I 
suppose right now would I take on a contingency a case that was 
going to relitigate Quill no I wouldn't.
    If Streamlined were enacted, obviously in the absence of 
congressional blessing, and every state or 35 out of the 45 
states joined, and there was additional evidence of 
administrative simplification, maybe my answer to that would 
change. I think it is a very good question and the key to the 
answer is to what extent have the states actually simplified to 
remove the underlying premise of Quill which is that life is 
too complicated.
    Mr. Akin. Then just a follow-up question. Should Congress 
enact legislation that enable the collection of taxes on remote 
    Mr. Hellerstein. If Congress can satisfy itself that it has 
provided sufficient standards to simplify the life of the small 
business person. I think presumably with some reasonable 
threshold. I think it is important to have a threshold, a 
reasonable threshold that makes sense, whether it is based on 
100 pounds of flesh in the state or $200 million of sales in 
the state, I don't know.
    I think you need to have evidence on that issue but I would 
very much encourage you to do that because I think that way you 
have a fair collection of revenues without putting a burden on 
small business. And you satisfied yourself that the 
simplification is sufficient but I think those are the 
questions you need to look at very carefully. What is 
sufficient simplification and what is the appropriate standard 
for exempting small business.
    Mr. Akin. I guess part of what I was asking and maybe to 
venture into a little bit of a policy question, is it possible 
that this non-tax part of commerce is something that actually 
is very positive and will drive the economy. Maybe by exempting 
it in a sense we are just allowing something to go on which is 
good for the economy overall. I guess I was getting a little 
bit at that.
    Mr. Hellerstein. Again, my answer is that that is an 
important policy point but I guess I would say assuming that is 
correct, it is important to have a rational standard for 
exemption. I am not sure that 100 pounds of flesh is a rational 
    Mr. Akin. My co-Chair here.
    Ms. Bordallo. Thank you very much, Mr. Chair. I have just 
one question, I guess, for each one of them but I will go back 
to you, Mr. Chairman. The first is for Dr. Hellerstein. Is that 
    Mr. Hellerstein. Some people call me Dr. I think doctors 
give injections. Walter is just fine.
    Ms. Bordallo. Walter is fine. All right. It is 
understandable that local communities wish to collect taxes 
from the sale of goods over the Internet just as they tax the 
sale of goods over the counter. Local communities stand to 
generate a significant amount of revenue by doing so. However, 
in your opinion would a tax on Internet sales prevent small 
firms from doing business on the Internet?
    Mr. Hellerstein. I think, Representative, the answer to 
that question is really what you have already talked about and 
what other witnesses have spoken about which is the extent to 
which that burden would impose cost on the small business. I 
think that at some point if the marginal cost of collecting tax 
is greater than the marginal revenue of the sale, they will no 
longer do that. That is a factual question. I don't know the 
answer to it but I think I know how I would go about inquiring.
    Ms. Bordallo. Thank you. Then I have one for Brian Bieron. 
Is that correct?
    Mr. Bieron. Yes, ma'am.
    Ms. Bordallo. If sellers on eBay were required to collect 
sales taxes in as many as 7,500 taxing jurisdictions, would you 
expect to see some of eBay's sellers close their businesses?
    Mr. Bieron. Well, we have been told by many of them that 
they think that it would be a significant burden. As Mr. 
Hellerstein said, it would raise their cost. It would make it 
far more complicated to do business. In many cases we think it 
would dissuade them from starting down the path. In a lot of 
ways eBay is a market place that is very friendly to small 
business so small businesses come and start doing some business 
over our market place.
    As I said, we have about 500,000 of the small businesses 
that are using the market place now. They didn't start there. 
They weren't born on eBay but they were small businesses who 
came to it to get at a global market really. We think that it 
would create a new complicated burden where let's say you have 
a storefront somewhere and you are competing with the Wal-Marts 
of the world. You think that the Internet is a new place to 
start to get some marginal sales. If part of that first hurdle 
was to have to take on this whole burden, we think that would 
stop a number of the small businesses from trying that avenue.
    Ms. Bordallo. Thank you. I have a couple more questions, 
Mr. Chairman.
    Mr. Akin. Go for one more.
    Ms. Bordallo. All right. Okay. This is for Ernest Perry. If 
your business were to be charged with collecting sales taxes 
from customers from out of state, what impact would this have 
on your bottom line and what kinds of human and technical 
resources would you need to fulfill this particular 
    Also, it seems to me that if you are required to collect 
sales taxes on Internet sales to out-of-state customers, this 
could be an expensive proposition for you that might require 
you to raise prices on items in your storefront. Is this 
    Mr. Perry. You are exactly right and I am glad you asked 
that question. I was just sitting here thinking listening to 
these comments that I am paying taxes now in the state of North 
Carolina and I was just thinking about how much paperwork that 
it takes that I have to keep for like five years. It would be 
the equivalent of this table just to keep the North Carolina 
sales tax. Can you imagine if I had to keep tax records for 50 
different states, although it would be maybe simplified.
    Then I have got to worry about maybe being audited by any 
or all of those 50 states at any given time of the year. It 
would be a nightmare and I just don't think that it would be--I 
think it would discourage a lot of Internet sellers, especially 
the small mom and pop that are working out of their garage or 
out of their bedrooms even to just throw their hands up and not 
even try. It would be impossible.
    I mean, there is no way they can keep up with the paperwork 
they would have to keep up with. Also the worry about the 
audits that they may have to worry about. I am sure the 
technology companies can do it but we have to pay these guys to 
do this and we don't know if it is going to work or not. We 
will still be the ones that would saddle the burden for all of 
    Ms. Bordallo. Thank you.
    Mr. Akin. I just think I will continue along the same line 
of questioning just to make things fair here.
    Rory, you have got the company that has got all this stuff 
programmed. You must be a very patient fellow to have 
programmed all of these different jurisdictional laws into a 
computer, or else you have hired some very patient people. I 
wanted to give you a chance to respond to the other comments.
    Mr. Rawlings. Sure. I appreciate that opportunity. When it 
really comes down to the burden on small business, small 
businesses are currently burdened. Small businesses currently 
pay sales tax. Small businesses currently spend a lot of money 
paying sales tax. Sales tax compliance is very difficult. It is 
very complicated. It is very confusing.
    Even with a single taxing jurisdiction you have got to deal 
with product exemptions. You have got to deal with entity based 
exemptions. You have got to deal with filling out the forms. 
Many of these small business owners don't know how to fill out 
these forms. They are making guesses.
    The real solution, or I believe the real solution, is 
solved in technology with the convergence of Internet 
technologies, security technologies, and geo-spacial 
technologies we can accurately determine what those taxes are. 
We can take those tax transactions and the history of those tax 
transactions and store it in a secure database behind multiple 
firewalls. We can use the power of the Internet, the same 
Internet that we are talking about.
    Mr. Akin. If I could jump in, are you saying that you would 
then as a service provide all the record keeping that was 
necessary for a small business?
    Mr. Rawlings. Absolutely. That is what we do today and that 
is what we have been doing for the past three years.
    Mr. Akin. Go ahead and proceed.
    Mr. Rawlings. So we maintain those tax transactions. We 
automatically generate those tax returns through a web browser 
interface. Here again the power of the Internet. The small 
business owner opens up their web browser, logs on through a 
secure log on, and views their tax return, prints out all of 
their historical transactions. All that information is 
available for an audit. Under Streamline it even gets simpler.
    I do believe there are opportunities under Streamline to 
make the taxes even simpler. Really from a technology 
standpoint it doesn't make a difference. All of those rules are 
coded into the software. The software will be, and is in the 
process of being certified by the states. The security and the 
reliability is being certified by the states.
    We have gone through months of audits and months of review 
and months of working with the states submitting multiple test 
decks and verifying that we can generate it in an electronic 
return and verify that we can, in fact, collect the taxes, that 
we can, in fact, remit those taxes to the states. We have gone 
through many, many hours of review.
    From my perspective, it is not a matter of increasing the 
burden on small business. It is a matter of providing a service 
that is affordable. Now, whether that is paid for by the state 
or paid for by the small business, frankly we have got 2,200 
users from the beginning of 2005 so our business is growing 200 
percent quarter over quarter.
    We have got a very big need to fill with or without sales 
tax, with or without a change in policy. Our belief and our 
experience is that small businesses are burdened today with the 
collecting and complying with sales tax in their local 
jurisdiction. Here, again, we have 2,200 users. We are growing 
at 200 percent quarter over quarter rate.
    We charge a lot of our customers $29 a month for a complete 
compliance solution. Does it make sense to exempt small 
businesses? That really is a policy question. Avalara does not 
want to get involved in policy but I believe it is a timing 
issue. You know, it is a matter of adoption. We may want to as 
a nation exempt small businesses to begin with and then start 
dropping the exemption over time. Whatever makes sense for the 
country but I can tell you this. I can tell you that there are 
technology solutions available, that there are very easy almost 
zero burden tax compliance solutions available. In my mind it 
doesn't make sense to use that as an excuse to exempt--
    Mr. Akin. I hear what you are saying. If there is a mistake 
made, who is liable? Let us say that something isn't calculated 
the right way and the small business guy says, ``Hey, wait a 
minute. You did something wrong.'' Is it your company or is it 
the small business guy that has to pick up the tab legally if 
something isn't done right?
    Mr. Rawlings. Under Streamline I am liable. For anyone who 
uses my system I am liable. If I make a mistake, I have to pay 
the difference.
    Mr. Akin. And not the small business guy? Okay. Thank you.
    Next question, Ms. Bordallo.
    Ms. Bordallo. Thank you, Mr. Chairman. I have just one 
other question and I think it is along the same lines of your 
question. I don't want a dollar figure but how much would a 
comprehensive software package cost to small business? Do you 
feel it would be reasonable? Is it affordable? Do you have 
different types of packages for them to engage in such as just 
the basics or full service? Also in line, you said your firm 
has conducted audits. Have they always been successful?
    Mr. Rawlings. First of all, the types of services that we 
do provide. We have various levels of service. We have a basic 
plan. We have a full product tax ability, what we call AvaTax 
Pro. Then we have a full breadth of services so we have a full 
service offering which is nearly zero burden as far as the 
business is concerned. The costs do start at $29.95 cents a 
    Ms. Bordallo. That is the basic package?
    Mr. Rawlings. Yes.
    Ms. Bordallo. Your audits.
    Mr. Rawlings. Oh, the audits. Here again, we have 2,200 
users and none of those users have ever had an issue with the 
tax audit. We have had numerous clients that have gone through 
multi-year audits with California and virtually every state in 
the country. Not once have we had anyone of those clients come 
back and say, ``Hey, you guys really screwed up and we are 
having trouble.''
    Ms. Bordallo. Having trouble, yeah. All right. Thank you, 
Mr. Chairman. That concludes my questions.
    Mr. Akin. Thank you.
    This is a general question. Usually now sales tax is 
collected at the original of where a sale is made is my 
understanding. What we will be talking about here would be a 
destination type of sales tax. Does that make things more 
complicated or how do you see that influencing things? Walter, 
if you want to start.
    Mr. Hellerstein. Mr. Chairman, I really don't think it is 
appropriate to say that the sales tax is tax at origin. The 
sales tax is a destination tax. It is a consumption tax. In 
fact, for example, if a Georgia vendor sells to an out-of-state 
purchaser, there is no tax. When we buy over the counter, 
origin and destination happen to be the same. In the end a 
consumption tax, which a sales tax generally is, is normally 
imposed at the destination. That is exactly why Georgia will 
impose a use tax on me when I go to Oregon to buy a car.
    In fact, if a Washington dealer could ship a car out of 
Washington, the title not passing, they wouldn't impose a tax. 
Nobody wants to impose a tax on exports. So really we have a 
destination based sales tax in this country except when we have 
destination and origin that in the particular transaction are 
at the same point.
    Mr. Akin. So you are saying in a way that is a false 
distinction. You are saying everything is destination. Is that 
what you are saying?
    Mr. Hellerstein. What I am saying is that, in general, 
sales tax is a destination based tax and states generally tax 
things coming into the state and exempt things going outside 
the state. When I go to South Carolina and I buy something over 
the counter, to be sure I am going to pay a South Carolina 
sales tax.
    In principle when I get back to Georgia I would owe a use 
tax and get a credit against the South Carolina sales tax but 
that is just a matter of cross-border shopping. No one tries to 
trace an over the counter transaction back to my destination. 
But I think it is fair to say that we have a destination-based 
sales tax in the U.S.
    Mr. Akin. A couple of others. Brian and then Paul.
    Mr. Bieron. Just to mention that a couple of states who are 
in the effort to make their state taxes compliant with the SSTP 
concept have actually headed down the path that you are talking 
about which is switching from a source based internal state 
sales tax process because, of course, until Congress changes 
the law it would not apply to out-of-state sales.
    But in a state, and I will use the example of Kansas, where 
they have different sales tax rates at the county level, and it 
is a state that has a huge number of counties, they have 
actually over the last couple of years headed down the path of 
trying to become internally compliant and changing their 
internal sales tax regime from a source based to a destination 
based. I know that at eBay we have had complaints from some 
    Mr. Akin. I don't quite understand how that would work in 
    Mr. Bieron. I will give you an example. I am not an expert 
on Kansas geography so I am afraid I might run into problems 
but I think Topeka and Lawrence, for example, are both inside 
Kansas. We have some eBay sellers who have been concerned that 
if they sell over eBay from Lawrence to Topeka that their sales 
tax requirements will have changed because currently let us say 
they have a store front. If somebody comes from Topeka and buys 
it in Lawrence, they charge the source tax rate whatever is the 
Lawrence tax rate. But if they mail the product, if they 
deliver the product into Topeka because they sell over eBay or 
over another Internet or--
    Mr. Akin. Are they worried that they have got to pay the--
    Mr. Bieron. They would. Kansas was proposing to change the 
law inside Kansas and with hundreds and hundreds of different 
jurisdictions in Kansas that was really going to be a little 
test case of what this whole switch from source based to 
destination based would be like. I can tell you that those 
Kansas sellers have been extremely dismayed by this change. I 
know that there were a couple of years where Kansas deferred, 
essentially delayed the implementation of this because of the 
uproar from small businesses. It really makes it much more 
complicated. Of course, it can only happen right now inside a 
    Mr. Akin. That means in Kansas the small business guy now 
has to know about all the jurisdictions within his own state. 
Not within the nation but within his own state.
    Mr. Bieron. Right.
    Mr. Akin. Even that is a major headache for him.
    Mr. Bieron. My understanding is that many of those small 
businesses their attitude has been essentially they are going 
to charge their local rate because it is just too complicated.
    Mr. Akin. It is just too complicated. And Kansas government 
is just going to have to put up or shut up.
    Mr. Bieron. To be honest I don't think that the Kansas 
state government thinks that there is a huge revenue windfall 
from getting that compliance inside the state. But that is an 
example of what you are talking about and you can multiply it. 
I know that there are technology companies at the table who 
would describe on one hand how extraordinarily complicated this 
would be to go from just the complexity of one state or one 
county like Mr. Perry's store just in one place in North 
Carolina to the whole country.
    Obviously I think we can all recognize that would be 
extraordinarily complicated. If a technology company were 
offering solutions, the fact is in the real world there is some 
relationship between how complicated something is, how much you 
have to have the service, and how much it ends up costing. If 
you require this mandate on everybody and it wasn't just, for 
example, inside Kansas but the whole country that there would 
be a cost and it would be a cost that small businesses 
operating on fairly narrow margins would really feel.
    Mr. Akin. Thank you.
    Paul, I'll let you have a crack at that.
    Mr. Misener. Thanks, Mr. Chairman. I think I was going to 
say some of the same things that Brian was but it also helps to 
calibrate this whole thing. If we step back a second and look 
at what the Streamline Sales and Use Tax Agreement is all 
about, Missouri is not part of it. They are not in it and not 
part of it.
    Mr. Akin. Now you are getting personal.
    Mr. Misener. It doesn't apply to the territories outside at 
all. The states that are not party to it, the major ones, 
California, Texas, Illinois, all have the same source issue 
that Brian was describing. They currently have a longstanding 
rule of you buy something, if you live in Laredo and you buy it 
from Dallas, the retailer in Dallas makes the collection and 
sends it to the Dallas government.
    To flip flop that, to become compliant with the Sales and 
Use Tax Agreement would be a huge internal upheaval in states 
like California, Texas, Illinois. New York is not part of it 
either. I mean, the major population centers of the country 
have not been in and that is a key reason why.
    We have said at Amazon that we are going to collect for 
small businesses. We have a platform business and we are going 
to do it. We are a technology company. We are fairly 
sophisticated with computers. There are others that are as 
well. To small sellers I say that if Amazon can do it, your 
platform service provider also can do it almost certainly. If 
not, certainly you are welcome to come to Amazon.
    Mr. Perry's business is perhaps the perfect example or the 
perfect kind of business to run through eBay. He is selling 
high value items that are very small and light. As a result, 
the opportunities for sales tax arbitrage are very great 
because the price differential between what is paid on-line and 
what is paid on main street is very great, but the shipping 
costs are very low. You don't see many very successful eBay 
sellers that are selling, say, fertilizer which is just the 
    What we have just suggested is that at some level you just 
want to not have quirky sales tax exceptions that drive 
businesses unnecessarily into different directions. I really 
meant the point about the ballpoint pen. A lot of small 
business persons are required to drive to their place of 
employment. We don't expect them to make automobiles.
    We don't expect them to make ballpoint pens to sign their 
legal documents but we still require them to sign in ink. This 
is a case where we don't expect small businesses to be pouring 
over tax tables in 7,600 jurisdictions and all that. There will 
be service providers. Amazon has said it has stepped up and 
said that, ``We will do this.'' Eventually I would imagine 
others will as well.
    Mr. Akin. We have another member that is joining us. Would 
you like to jump into the discussion?
    Mr. Sodrel. No, I am just playing catch-up right now. Thank 
you. I may have some questions later.
    Mr. Akin. Okay. Let me just toss a different question out 
entirely. One of the things that is at least being 
theoretically, and maybe even more than theoretically looked at 
is tax simplification. There are two competing schemes out 
there right now.
    One of them is the flat tax which has its own political 
problems and that is that every time you want to cut out an 
exemption somebody is going to offer an amendment so you end up 
with not a flat tax. That is one question. You take the basic 
income tax and you get rid of a whole lot of exemptions and the 
theory is you can file it on a card.
    The competing alternative out there is the national sales 
tax. I guess my question is if we were thinking about it, and 
obviously that would require probably an appeal of the 
constitutional amendment that created the income tax so that is 
a big hurdle, too, politically. Let us say we were to get to 
the point where we are really looking at a national sales tax. 
How does that impact our discussion?
    Mr. Perry. I will speak to that briefly. In one of the 
papers this morning there is a little article about eBay 
complains about the European tax system. The Internet in Europe 
right now is really not growing anywhere like here in the 
states because of the complexity of the tax situation over 
    Basically some of the tax rates over there are from 15 to 
25 percent, I understand, and it scares me to death to think 
that as a retailer I have got to charge if we go this national 
sales tax somewhere between 15 to 20 percent sales tax. It is 
going to drive a lot of business back to the underground into 
the flea markets. It will be devastating to our economy in my 
opinion. The flat tax is okay. I think that would be fine.
    Mr. Akin. Let me make a distinction, I didn't do this, 
between what is called a value added tax which is what the 
Europeans do. It is a great thing for politicians because you 
can crank it a fraction of a percent and just gain tremendous 
taxes. The trouble is it just kills the economies and that is 
why a lot of the European economies are really flat.
    We are not talking about a value added tax. It would be 
over most of our dead bodies to do something like that. We are 
talking about a straight sales tax which is very different. The 
value added is every time something changes like if you are 
starting with a paper clip, you start with an ingot or whatever 
it is, and the Coke Company and whoever, the Ingot Company. The 
guy who has got the rolling mirror there is a tax there. Then 
there is a guy that rolls it and a guy that bends it. You have 
all these layers of taxes where we are talking about just 
simply a simple sales tax as opposed to value added.
    Mr. Perry. I am certainly not a tax expert but it just 
seems to me like if the burden is passed on as a national sales 
tax to retailers, we become the IRS in essence and I am not 
sure our customers are going to be real excited about looking 
on us in the same light they do now.
    Mr. Akin. Any other thoughts?
    Mr. Hellerstein. Yeah, just a few general observations. I 
am going to agree with Mr. Perry. I think at one level clearly 
we could not have a sales tax that substituted for the national 
income tax at the rates that we would need to generate the same 
amount of revenue and have it take the same form that we have.
    Let me just give a clarification of the value added tax. 
The truth of the matter is that in the end a value added tax 
and a retail sales tax do precisely the same thing. The value 
added tax is simply collected at many points, that is on the 
intermediary. If I am General Motors and I buy steel, I pay a 
value added tax on that. When I sell the car and I collect a 
value added tax on my output, I get a credit against the tax 
that I paid. In the end the only person that pays a value added 
tax is the ultimate consumer.
    Now, the truth is that if you are going to have something 
with rates from 15 to 25 percent as we have on a VAT, then you 
have to have it collected at each level because, as Mr. Perry 
correctly points out of the incentives to go to the black 
market. We have this in Europe, too with carousel fraud.
    There is a lot of fraud because the rates are so high but 
at least there are a lot of collection points. I think that if 
we were to switch to a consumption tax which is way beyond the 
scope of what you people are focusing on, it is a huge 
question. I think we would almost have to go to a VAT from a 
mechanical and administrative standpoint. If we are going to 
have a national consumption tax it would almost have to be a 
VAT because you couldn't raise the revenues and rely on that 
final transaction, that 25 percent, as being the only place 
where we collected tax.
    Mr. Akin. That is interesting. It is maybe a little bit 
afield but, on the other hand, as people think about one thing, 
it does sort of affect our overall question about sales tax and 
how that is collected.
    Brian, did you want to make a comment?
    Mr. Bieron. No, just to say that certainly eBay doesn't 
generally take positions on broad tax reform, although we 
believe that if lower taxes incurred stronger economic growth, 
then that is good for everybody involved with the eBay market 
    I would say, though, that as a retail company at the end of 
day eBay is a retail market place and having the entire tax 
burden on the retail business we think would hurt all the--
again, eBay's success is tied entirely to the success of the 
sellers who actually do the business over eBay and we think 
those retailers--if all of the federal tax burden were put on 
the retail sector, that was the collection point, that would 
reduce consumption and hurt those sellers.
    Mr. Akin. Right. I am not going to do the counter argument 
for the national sales tax. It is an interesting discussion and 
it is sort of a little philosophical change whether you are 
taxing consumption or whether you are taxing income. I mean, 
there is a difference there in what you are trying to 
accomplish but I hear what you are saying.
    Are there any other questions?
    Ms. Bordallo. I have none.
    Mr. Akin. Thank you all very much for attending today and 
helping us out with some of these difficult and vexatious items 
here. I appreciate your expertise. With that the hearing is 
    [Whereupon, at 11:11 a.m. the Subcommittee adjourned.]