    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

              DIGITAL GOODS AND SERVICES TAX FAIRNESS ACT OF 2011

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

                                    HEARING

                                   BEFORE THE

                       SUBCOMMITTEE ON COURTS, COMMERCIAL
                             AND ADMINISTRATIVE LAW

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                       ON

                                   H.R. 1860

                                   __________

                                  MAY 23, 2011

                                   __________

                               Serial No. 112-137

                                   __________

             Printed for the use of the Committee on the Judiciary

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          Available via the World Wide Web: http://judiciary.house.gov

                                    _____

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                           COMMITTEE ON THE JUDICIARY

                          LAMAR SMITH, Texas, Chairman
    F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
        Wisconsin                        HOWARD L. BERMAN, California
    HOWARD COBLE, North Carolina         JERROLD NADLER, New York
    ELTON GALLEGLY, California           ROBERT C. ``BOBBY'' SCOTT,
    BOB GOODLATTE, Virginia                  Virginia
    DANIEL E. LUNGREN, California        MELVIN L. WATT, North Carolina
    STEVE CHABOT, Ohio                   ZOE LOFGREN, California
    DARRELL E. ISSA, California          SHEILA JACKSON LEE, Texas
    MIKE PENCE, Indiana                  MAXINE WATERS, California
    J. RANDY FORBES, Virginia            STEVE COHEN, Tennessee
    STEVE KING, Iowa                     HENRY C. ``HANK'' JOHNSON, Jr.,
    TRENT FRANKS, Arizona                  Georgia
    LOUIE GOHMERT, Texas                 PEDRO PIERLUISI, Puerto Rico
    JIM JORDAN, Ohio                     MIKE QUIGLEY, Illinois
    TED POE, Texas                       JUDY CHU, California
    JASON CHAFFETZ, Utah                 TED DEUTCH, Florida
    TIM GRIFFIN, Arkansas                LINDA T. SANCHEZ, California
    TOM MARINO, Pennsylvania             DEBBIE WASSERMAN SCHULTZ, Florida
    TREY GOWDY, South Carolina
    DENNIS ROSS, Florida
    SANDY ADAMS, Florida
    BEN QUAYLE, Arizona
    [Vacant]

          Sean McLaughlin, Majority Chief of Staff and General Counsel
           Perry Apelbaum, Minority Staff Director and Chief Counsel
                                     ------

           Subcommittee on Courts, Commercial and Administrative Law

                     HOWARD COBLE, North Carolina, Chairman

                   TREY GOWDY, South Carolina, Vice-Chairman

    ELTON GALLEGLY, California           STEVE COHEN, Tennessee
    TRENT FRANKS, Arizona                HENRY C. ``HANK'' JOHNSON, Jr.,
    DENNIS ROSS, Florida                   Georgia
    [Vacant]                             MELVIN L. WATT, North Carolina
                                         MIKE QUIGLEY, Illinois

                          Daniel Flores, Chief Counsel

                          James Park, Minority Counsel

                                C O N T E N T S

                                  ----------

                                  MAY 23, 2011

                                                                       Page

                                    THE BILL

    H.R. 1860, the ``Digital Goods and Services Tax Fairness Act of
      2011''.........................................................     3

                               OPENING STATEMENTS

    The Honorable Dennis Ross, a Representative in Congress from the
      State of Florida, and Member, Subcommittee on Courts,
      Commercial and Administrative Law..............................     1
    The Honorable Steve Cohen, a Representative in Congress from the
      State of Tennessee, and Ranking Member, Subcommittee on Courts,
      Commercial and Administrative Law..............................    17

                                   WITNESSES

    Robert D. Atkinson, President, Information Technology &
      Innovation Foundation, Washington, DC
      Oral Testimony.................................................    23
      Prepared Statement.............................................    26
    Russ Brubaker, National Tax Policy Advisor, Washington Department
      of Revenue, Olympia, WA, on behalf of the Federation of Tax
      Administrators
      Oral Testimony.................................................    34
      Prepared Statement.............................................    36
    James R. Eads, Jr., Director, Public Affairs, Ryan, LLC, Austin,
      TX
      Oral Testimony.................................................    45
      Prepared Statement.............................................    47

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Prepared Statement of the Honorable Lamar Smith, a Representative
      in Congress from the State of Texas, and Chairman, Committee on
      the Judiciary..................................................    19

                                    APPENDIX
                   Material Submitted for the Hearing Record

    Prepared Statement of the Honorable Dennis Ross, a Representative
      in Congress from the State of Florida, and Member, Subcommittee
      on Courts, Commercial and Administrative Law...................    60
    Letter from Steve Largent, President/CEO, CTIA--The Wireless
      Association....................................................    63
    Letter from Martin S. Morris, Chief Director, Legislative
      Affairs, the Federation of Tax Administrators (FTA)............    64

              DIGITAL GOODS AND SERVICES TAX FAIRNESS ACT OF 2011

                                  ----------

                              MONDAY, MAY 23, 2011

                  House of Representatives,
                        Subcommittee on Courts,
                     Commercial and Administrative Law,
                                    Committee on the Judiciary,
                                                        Washington, DC.

        The Subcommittee met, pursuant to call, at 4:05 p.m., in
    room 2141, Rayburn House Office Building, the Honorable Dennis
    Ross (acting Chairman of the Subcommittee) presiding.
        Present: Representatives Ross, Cohen, and Johnson.
        Staff Present: (Majority) Daniel Flores, Subcommittee Chief
    Counsel; Travis Norton, Counsel; Johnny Mautz, Counsel; Allison
    Rose, Professional Staff Member; Ashley Lewis, Clerk; John
    Coleman, Intern; (Minority) James Park, Subcommittee Chief
    Counsel; and Norberto Salinas, Counsel.
        Mr. Ross. Good afternoon. The Subcommittee will come to
    order.
        Pursuant to this notice, this is a legislative hearing on
    H.R. 1860, the ``Digital Goods and Services Tax Fairness Act of
    2011.''
        Before we begin, I would like to pass along Chairman
    Coble's regret that he could not be here today. And, also, the
    Chairman of the full Committee, Lamar Smith, intended to be
    here and express his strong support for the bill, but his
    flight back from Texas has delayed him.
        With that, I will recognize myself for an opening
    statement.
        Digital goods and services are increasingly important in
    our modern American economy. The digital platform not only
    makes consumption of entertainment media more convenient for
    consumers, but it also improves the efficiency of society as a
    whole. Data no longer need to be printed out and mailed to
    another location for processing. They can be delivered through
    cloud computing or e-mail. And more students have access to a
    college education by logging into remote classrooms hosted on
    Web-based applications.
        Advances in digital technology have also resulted in
    advances in the mobile telecommunication industry. Rather than
    carry around a wad of plastic supermarket value cards in your
    wallet, you can now download an inexpensive application to your
    smart phone that will store all of your cards and make them
    available for scanning upon the touch of a button.
        A December, 2010, study revealed that consumers prefer to
    receive breaking news via smartphone more than on any other
    platform, including the Internet and television.
        State governments are generally free to set their own tax
    policy, but they may not do so in a manner that burdens
    interstate commerce. Transactions involving digital goods and
    services are unique. Imagine you are sitting at Dulles Airport
    in Virginia waiting for a flight back to Florida. You download
    a music file from Apple, which is headquartered in California.
    The music is sent to you via a server in Oklahoma. Which of
    these States should be permitted to tax this transaction?
    Without a clear national rule, all four States may attempt to
    tax the transaction.
        There is already some confusion among States concerning
    where the sale of digital goods takes place. Every State has an
    incentive to claim that the sale took place in its borders and
    therefore subject that transaction to its own sales tax. As a
    result, some transactions risk being taxed several times over.
    Confusing tax policies not only gets passed on to the consumers
    in the form of higher prices, but it also slows down
    innovation. A Federal framework for taxation of digital goods
    will relieve the potential burden on interstate commercial that
    a patchwork of State laws may impose.
        I am pleased to be a co-sponsor of the Digital Goods and
    Services Tax Fairness Act. I look forward to hearing testimony
    from the witnesses today concerning this important legislation.
        [The bill, H.R. 1860, follows:]

                                   __________

        Mr. Ross.I will recognize the Ranking Member from
    Tennessee, Mr. Cohen, for an opening statement.
        Mr. Cohen. Thank you, Chairman Ross. I am pleased to be
    here, especially as this particular subject matter is one that
    I have worked on in the past and look forward to working with
    Chairman Smith and see it come to fruition this year.
        Since I have become a Member of Congress, I have
    consistently favored easing State and local tax burdens that
    threaten to impede consumers' access to the digital economy. I
    have supported making permanent prohibition on discriminatory
    State and local Internet access taxes and have backed a
    temporary moratorium on discriminatory State and local taxation
    of wireless communication services.
        H.R. 1860 is of a piece with these other measures. It is
    similar. This legislation, of which I am the lead Democratic
    co-sponsor, creates a single national framework to govern the
    taxation of digital commerce by State and local jurisdictions,
    limiting inconsistency and confusion for consumers and
    business. Importantly, the Act prohibits State and local
    jurisdictions from imposing multiple or discriminatory taxes on
    the sale or use of digital goods and services, making sure
    those digital goods and services are not taxed differently than
    other forms of goods and services. This prohibition is helpful
    in ensuring that consumers, particularly low-income consumers,
    have access to innovative digital goods and services.
        Under the framework established under H.R. 1860, State and
    local jurisdictions can only impose taxes on retail sales of
    digital goods or services and limit those taxes to a customer
    or a seller. This ensures that digital goods and services are
    not taxed during multiple stages of the transaction,
    particularly for instruments that merely facilitate the sale
    itself.
        The Act also determines the appropriate taxing jurisdiction
    by limiting taxing authority to the jurisdiction encompassing
    the consumer's or customer's tax address. This will ensure the
    customer is not taxed by multiple States. And multiple States
    like to do that, but that is not necessarily good policy, nor
    is it fair to the consumer.
        As I have said in previous hearings that the Subcommittee
    has held on State taxation issues, I am not unmindful of the
    needs of State and local governments to have authority and that
    there is a certain regard we have to pay in Congress to
    intervening State and local tax powers because State and local
    governments need to provide goods and services. But we should
    intervene when it is just and do it sparingly, and this is one
    of those times we should do that. This broader national policy
    overrides the traditional deference that Congress gives to
    State and local governments regarding their taxation policies.
        The Constitution permits Congress to intervene under these
    circumstances. I can think of no better example when that is
    the case with respect to the multiple discriminatory and
    disparate tax treatment of digital goods and services of a
    fast-moving, borderless marketplace, and it crosses State and
    national boundaries thousands and perhaps millions of times a
    day.
        This bill, H.R. 1860, addresses a clear need for a uniform
    national framework for determining which jurisdictions can tax
    digital goods and services and under which circumstances. I
    applaud our Chairman, the distinguished Chairman Lamar Smith,
    for introducing H.R. 1860 and for the leadership he has shown
    on this issue, going back to the previous Congress; and I thank
    the Subcommittee acting Chairman, Mr. Ross, and Subcommittee
    Chairman, Mr. Coble, for their co-sponsorships of the bill.
        I believe I am correct, Mr. Ross, you are co-chairman?
        Mr. Ross. Today I am.
        Mr. Cohen. You are going to be. The doors to the church are
    open.
        I urge my colleagues to support this legislation.
        I yield back the remainder of my time.
        Mr. Ross. Thank you, Mr. Cohen.
        Without objection, other Members' opening statements will
    be made part of the record.
        [The prepared statement of Mr. Smith follows:]

                                   __________

        Mr. Ross. At this time, I would like to invite our panel to
    be seated and I will introduce you, after which we will allow
    you 5 minutes to summarize your testimony before we go into
    questions.
        With us today is Mr. Rob Atkinson. He is the president and
    founder of Information Technology & Innovation Foundation, in
    Washington, D.C. He is the author of the forthcoming book, The
    Global Race for Innovation Advantage and Why the U.S. is
    Falling Behind. He has an extensive background in technology
    policy.
        Before coming to ITIF, Mr. Atkinson was vice-president of
    the Progressive Policy Institute and director of the
    Progressive Policy Institute's Technology and New Economy
    Project. While at PPI, he wrote numerous research memorandum on
    technology and innovation policy, including e-commerce and
    innovation economics.
        Our next witness is Mr. Russ Brubaker. He currently serves
    as Tax Policy Advisor to the Washington State Department of
    Revenue, where he has served for over 25 years in various tax
    administration positions. Notably, from 1992 to 2006, he served
    as the assistant director of the Legislation and Policy
    Division, a capacity in which Mr. Brubaker drafted bills and
    advised State officials on matters of tax policy. He is
    scheduled to be the next president of the Streamlined Sales Tax
    Governing Board.
        Mr. Brubaker holds bachelors degrees in Political Science
    and English from Washington University and a masters in English
    from the University of Rochester.
        Our third witness is Mr. Jim Eads. He is director of Public
    Affairs for Ryan, LLC, a tax services firm with a large
    transaction tax practice in the United States and Canada. He
    recently completed 2 years of service as the executive director
    of the Federation of Tax Administrators, where he worked with
    and represented the tax agencies of the 50 States, New York
    City, and the District of Columbia. His career includes over 35
    years in State tax work and tenure in the private sector.
        In addition, he has taught State tax law as an adjunct
    professor at the University of New Mexico School of Law. He
    holds a bachelor of science degree in business administration
    and a J.D. From the University of Arkansas.
        I wish to welcome each of you. Each of the witnesses'
    written statements will be entered into the record in its
    entirety.
        I ask that the witnesses summarize each of your testimony
    in 5 minutes or less. To help you stay within the time line,
    there is a timing light on your table. When the light switches
    from green to yellow, you will have 1 minute to conclude your
    testimony. When the light turns red, your 5 minutes has
    expired.
        After the witnesses have testified, each Member will have 5
    minutes to question the witnesses concerning their testimony.
        With that, I now recognize our first witness, Mr. Atkinson.
    You are recognize for 5 minutes.

        TESTIMONY OF ROBERT D. ATKINSON, PRESIDENT, INFORMATION
           TECHNOLOGY & INNOVATION FOUNDATION, WASHINGTON, DC

        Mr. Atkinson. Thank you, Chairman Ross, Ranking Member
    Cohen. I appreciate the opportunity to come before you today to
    talk about the importance of a creating a fair tax system for
    digital goods and services.
        While States may look to discriminatory and duplicative
    taxes on digital content to create short-term gains in
    revenues, these policies would discourage investment in the
    digital economy, they would increase the cost of doing business
    online, they would lower national productivity, and they would
    ultimately hurt businesses and consumers. That is why we
    believe Congress is wise to consider legislation such as the
    Digital Goods and Services Tax Fairness Act.
        When we look at the trends in digital goods, we see that
    they are growing dramatically. In 2010, there were almost
        1.2 billion downloads of digital music tracks in the U.S.,
    totaling $1.5 billion in revenue. E-books sales have reached a
    billion dollars and are expected to be $3 billion by the year
    2015. These are important innovations that are driving
    important benefits to the U.S. Economy. One benefit is energy
    intensity. Getting a digital good online like a book consumes--
    or a CD--consumes about eight times less energy than getting
    the similar good going to the store and buying it.
        Not only that, but consumers can save considerable amounts
    of money by consuming digital goods. Just look at the price of
    a typical hardback book, which is $26. You can buy that same
    book as a digital book on an iPad or a Kindle for normally
    around just half of that--$13.
        So this is an important set of developments that are going
    to benefit U.S. consumers, and yet we shouldn't let the narrow
    interest of States override the national interests. And a State
    who wants to tax digital goods on a discriminatory basis or a
    multiple basis, they get all the financial benefit of that. In
    other words, they get more tax revenues. But the overall U.S.
    economy suffers the cost.
        And the reason for that is because of what economists call
    network effects. The digital goods economy is not simply like a
    widget economy. If there are fewer digital goods consumed
    because of high taxes--and it is pretty clear the evidence
    shows that higher taxes would lead to less consumption of
    these--this does two things, in essence. One is, it lowers the
    demand for digital devices--let's say iPads or Kindles or
    devices of broadband--that people are going to use to consume
    those. But the other thing it would do, it would raise the
    price of digital goods; and the reason for that is because the
    marginal cost of digital goods are quite low. You spend a lot
    of money as a company building the digital good, creating it;
    and then selling the next copy is quite low. So if you are
    getting fewer sales, that means that you are getting less
    revenue overall in which to amortize your cost. Therefore, you
    have to raise prices on other consumers because of that. So,
    therefore, it is important that Congress act on this.
        And, in fact, in the past we have seen States that have
    discriminatory taxes on digital activities. For example, there
    are many, many States now that have discriminatory taxes on
    Internet access. I am not talking about sales taxes on goods. I
    am talking about just Internet access. And I testified before
    this Committee I think perhaps 2 years ago on discriminatory
    wireless taxes. We see many States have very, very high taxes
    on wireless access, much, much higher their sales tax.
        So States can do this. They have shown they have done this
    in the past. And there is a particular I think reason why
    States might do this today, is that digital goods normally are
    consumed from outside the State.
        I don't know, by the way, if there is a clock. I don't see
    a red light, green light.
        Mr. Ross. There is not one up there, is there? Then I will
    let you know.
        Mr. Atkinson. I guess I can talk as long as I want.
        Mr. Ross. You have a minute and fifteen seconds.
        Mr. Atkinson. Thank you. So I will wrap up.
        One of the reasons I think States will have an incentive to
    do this is that, normally, a consumer will consume a digital
    good from anywhere in the country--in fact, anywhere in the
    world; and States might want to have higher taxes there so they
    incent their consumers to buy from local bricks and mortar
    companies.
        Right now, States have a long and I would say sordid
    tradition of imposing protectionist laws on e-commerce. Right
    now, it is illegal in all 50 States to buy a car from the
    automobile producer. So while we can go online and buy a
    computer from Dell or HP, we can't go online and buy a car from
    General Motors, although we can do that in other countries. If
    you are in Brazil, you can go online and buy a car from General
    Motors, but you can't in this country because car dealers have
    gone to State legislators and they have been able to pass
    discriminatory protectionist laws.
        So I think we have seen very clear evidence that States are
    willing to do these things that harm the overall digital
    economy; and, therefore, that is why we support this
    legislation that would not prohibit States from putting taxes
    on but clearly making sure the taxes are not discriminatory and
    not duplicative.
        Thank you very much.
        [The prepared statement of Mr. Atkinson follows:]

                                   __________

        Mr. Ross. Thank you, Mr. Atkinson.
        Mr. Brubaker, you are recognized for 5 minutes for an
    opening.

       TESTIMONY OF RUSS BRUBAKER, NATIONAL TAX POLICY ADVISOR,
    WASHINGTON DEPARTMENT OF REVENUE, OLYMPIA, WA, ON BEHALF OF THE
                    FEDERATION OF TAX ADMINISTRATORS

        Mr. Brubaker. Chairman Ross, thank you for the opportunity
    to address the Subcommittee concerning the Digital Goods and
    Services Tax Fairness Act of 2011.
        I am Russ Brubaker, testifying on behalf of the Federation
    of Tax Administrators. FTA's members are the Departments of
    Revenue in each of the 50 States, New York City, and the
    District of Columbia.
        FTA strongly opposes many of the provisions in H.R. 1860.
    This legislation would create a large revenue loss for States
    and local governments. As structured, it would also create a
    major competitive sales advantage for large out-of-State
    businesses that sell goods and services
        online. They will often have an opportunity to restructure
    their way out of tax, an opportunity most small businesses will
    not have.
        The legislation will cause extensive litigation in Federal
    courts that will go on for years. Small businesses, whether
    Main Street shops or digital startups, are unlikely to have the
    resources to go to Federal court over a State tax matter.
        FTA recognizes that Congress has an interest in making sure
    that there are no real impediments to interstate commerce.
    Current State tax law in this area does not create any. Digital
    goods and services are not even included in most State tax
    systems. The digital goods and services taxed by most States
    that tax them are the familiar books, videos, and music. This
    bill prohibits or preempts perfectly legitimate State tax
    authority. Intermediary provisions mean online travel companies
    will be agents, rather than sellers. They will not collect any
    hotel taxes. Many other intermediaries, often the only logical
    collectors of a tax, will not have to do so, and there will be
    no recourse to the seller.
        Resale provisions would prevent application of my State's
    business and occupation tax when digital goods and services are
    licensed, even though no discriminatory or multiple taxes are
    imposed on these transactions.
        Origin sourcing provisions mean banking services provided
    online by remote sellers could escape taxation. The same kinds
    of services provided by small instate banks would be subject to
    tax.
        Discriminatory or multiple taxes are vaguely defined. We
    will be fighting for years over what those terms include.
        We have been told in other testimony that the Mobile
    Telecommunications Sourcing Act is a good model for State and
    business cooperation. We agree. We agree it is a good model
    because there was a strong partnership between businesses and
    the States in developing it. There has been no such partnership
    here.
        We do have models for such partnerships on digital goods
    and services. Within the Streamlined Sales and Use Tax
    Agreement, business worked with the States to adopt definitions
    and sourcing rules and bundling rules that the member States
    would be required to use in taxing these products and services.
        Because we agreed to the changes business wanted, my State
    had to adopt a new imposition statute; and, as you know,
    adopting new tax impositions is not easy. Starting in 2007, the
    Washington Department of Revenue staffed an intensive year-and-
    a-half study, legislatively mandated, with a committee of
    legislators, business, and government stakeholders and subject
    matter experts. Initial legislation was run in 2009, followed
    by the anticipated clarifying legislation the next year.
        We continue to work with stakeholders by making refinements
    to the implementing rules and tax advisories. As we have done
    that, we have held no one liable for back taxes in unsettled
    areas where guidance is not yet available.
        Ironically, H.R. 1860, will undo or put at risk much of
    that cooperative work. Definitions, sourcing rules, and
    bundling rules in this bill are different in key ways from what
    21 full-member streamlined States have agreed to.
        Another key difference, States and businesses participating
    in streamlined long ago agreed that canned software should be
    treated as tangible personal property, regardless of the manner
    of delivery. This bill would treat it as a digital good if
    delivered by electronic means. Neither the software change nor
    the prohibition on my State's business tax addresses multiple
    or discriminatory taxation of digital products and services,
    but they certainly do impinge on State sovereignty.
        Finally, I want to address the undocumented fears that are
    being raised. We have not been provided actual evidence of
    significant discriminatory and multiple taxation of digital
    goods and services. Tax administrators, at least the ones I
    have come to know across the country, approach the taxation of
    digital goods and services with great caution. They know there
    is much to understand, and they have absorbed the lessons of
    the Internet Tax Freedom Act.
        Mr. Chairman, that concludes my testimony. Thank you again
    for the opportunity to appear before the Subcommittee.
        [The prepared statement of Mr. Brubaker follows:]

                                   __________

        Mr. Ross. Thank you, Mr. Brubaker.
        Mr. Eads, you are recognized for 5 minutes for an opening.

              TESTIMONY OF JAMES R. EADS, JR., DIRECTOR,
                 PUBLIC AFFAIRS, RYAN, LLC, AUSTIN, TX

        Mr. Eads. Chairman Ross, Ranking Member Cohen, thank you
    for your invitation to appear here today in support of H.R.
    1860, the Digital Goods and Services Tax Fairness Act of 2011.
        My name is Jim Eads. I am a director of Public Affairs for
    Ryan, a tax services firm that represents taxpayers. Our firm
    is headquartered in Dallas, with offices throughout the United
    States, in Canada, and in Europe.
        I applaud you, Mr. Chairman, Chairman Smith, and
    Representative Cohen for your leadership on this issue. This
    bill would establish a national framework for State and local
    taxes imposed on digital commerce, precluding multiple and
    discriminatory taxation. Some might question whether this is a
    solution in search of a problem. Indeed, in a prior position, I
    might have suggested that. But, today, digital commerce is a
    rapidly growing segment of our economy. This legislation will
    provide certainty to the millions of consumers and businesses
    that purchase digital goods and services, the thousands of
    providers required to collect taxes on that commerce, and the
    State and local jurisdictions seeking to tax those goods and
    services.
        Prior to my employment at Ryan, I was the executive
    director of the Federation of Tax Administrators. That role
    brought me before this Committee many times when it was
    considering various legislative proposals impacting State and
    local taxes.
        While I am here today to testify in support of H.R. 1860,
    my approach to the consideration of these issues and possible
    solutions is the same today as it was then. Congress should
    respect State sovereignty and the need for State and local
    governments to administer their own fiscal issues. Congress
    should proceed cautiously in moving forward with any
    legislative measure impacting State and local tax authority.
        As you consider this kind of legislation, please be
    thoughtful first as to the Nation's interest in a national and
    vibrant market, then cautious, deliberate, and mindful of the
    respective roles of government in our Federal system. While
    this was and is my opinion as to how these kinds of issues
    should be considered, I have come to believe that this measure
    strikes the right balance and demonstrates when congressional
    action is needed. The complexities that surface in today's
    Internet-based economy with digital transactions taking place
    all over global broadband networks transcending State
    boundaries cries out for a reasonable solution. Congressional
    action is needed to grant a jurisdiction the right to tax these
    goods when it is appropriate. This measure will provide
    consumers, sellers, and State governments and tax
    administrators with the certainty and the stability that they
    are seeking.
        A little over a year ago, then-Governor Douglas of Vermont
    testified on behalf of the National Governors Association at a
    hearing of this Subcommittee entitled, State Taxation: The
    Impact of Congressional Legislation on State and Local
    Government Revenues. At that hearing, he
        outlined four principles to consider when it was
    appropriate for Congress to enact legislation of this sort.
        His testimony suggested that any Federal legislation in
    this area should, first, do no harm, preserve flexibility, be
    clear, and find the win-win. By do no harm he meant legislation
    should not disproportionately or unreasonably reduce existing
    State revenues. In suggesting the preservation of flexibility,
    he meant that States should not be unduly hindered in their own
    pursuit of reforms by Federal legislation that restricts their
    authority to act. By being clear, he meant that the legislation
    should avoid ambiguity or the need for expensive and time-
    consuming litigation. Finally, the Governor suggested that
    Congress should find the win-win. He noted that the goal of all
    legislation should be to find a balance that improves the
    standing of all stakeholders.
        I believe that the provisions of H.R. 1860 are consistent
    with each and every one of these principles and, as such, is
    worthy of your enactment.
        The other main provision of this legislation is to preclude
    expansion of utility-type taxes. Given the wide range of
    providers of goods and services, these kind of taxes can indeed
    be inequitable in our digital economy.
        In summary, the economy of the 20th century is different
    than the economy of the 21st century. States cannot address all
    these issues on their own, and Federal legislation is needed.
        Thank you for your invitation to speak here today, and I
    would be pleased to answer any questions that you might have.
        [The prepared statement of Mr. Eads follows:]

                                   __________

        Mr. Ross. Thank you, Mr. Eads.
        I will now begin the questioning by recognizing myself for
    5 minutes.
        Mr. Atkinson, this bill has a diverse group of supporters,
    including the disabled community, the high-tech sector, and
    various African American, Asian, and Hispanic groups. Why do
    you think there has been such a broad base of support for this
    bill?
        Mr. Atkinson. Well, I think for two reasons. One is it is a
    commonsense bill. It doesn't preclude the States from taxing
    this. It just says you can't tax it twice and you can't take it
    at a higher rate. I think the average person would just say
    that is just common sense and that is going to be good.
        Mr. Ross. It is consumer-friendly.
        Mr. Atkinson. And consumer-friendly. Exactly. It is not
    unfair to consumers. It treats them the way they would be
    treated in kind of the existing realm.
        Secondly, I think people are very aware that this is going
    to be a very fast-growing area of our economy, and increasingly
    people are going to be consuming more and more digital goods
    online. And, as that happens, people want to know that they are
    going to be treated fairly by tax authorities.
        That would be my guess as to why it has seen such broad
    support.
        Mr. Ross. Some recent news reports have stated this bill
    would affect State taxes on all online purchases, including
    purchases of tangible goods made online. In your opinion, is
    that an accurate statement of what this bill would do?
        Mr. Atkinson. No. My view of this bill is it would deal
    with a small subset of goods that are sold online, which are
    the digital goods, not analog or physical goods that are
    purchased online but shipped on non-telecommunications means.
    To me, I read the bill as a narrow slice of that overall
    digital economy, just the goods that are delivered digitally--
    and services.
        Mr. Ross. They say that the power to tax is the power to
    destroy. I guess, as Mr. Eads pointed out, in this particular
    case H.R. 1860 gives us a balance between the over-exercise of
    that taxing power and yet not abridging the sovereignty of the
    States' rights. Would you agree?
        Mr. Atkinson. Well, I do agree with that, although I have
    to say I have a slightly different view of States authority
    here and sovereignty. Having worked for a Governor, I am quite
    aware of State issues, and I respect the challenges they face.
    But the digital economy is fundamentally different than the old
    physical analog economy, where much of what people purchased
    was within their State, and it made sense for State regulatory
    and tax systems to be at the State level. But when we are
    talking about a digital economy, we are talking about something
    that is inherently national, if not international. I think that
    just fundamentally changes the way we have to think about it.
        Mr. Ross. Thank you.
        Mr. Brubaker, when I purchase a digital good or service
    today, the seller is ultimately the tax collector for that
    transaction. Digital goods providers have to figure out which
    States impose a tax and then apply the tax to the transaction.
    Without a national framework, won't digital goods providers be
    exposed unnecessarily to litigation over where a sale takes
    place and how much the tax can be imposed by a certain State?
        Mr. Brubaker. Right now, there are very few States imposing
    taxes on digital goods, so I don't think it is much of a
    challenge at this point. And the States are being extremely
    cautious.
        I think developing a framework in fact is an excellent
    idea. I just don't think the framework in this bill works yet.
    I think we would certainly like an opportunity to work with the
    business community on some of the issues that we find in the
    bill, like the definitions, which are vague and unclear in some
    cases or nonexistent in others. Those are the kinds of things
    that lead to litigation. And the Federal court provision will
    make it difficult to get resolution to those issues so that
    States can provide authoritative guidance to taxpayers.
        I worry about the small taxpayers in our State that want to
    know now what do I need to do on this. So I think we need a
    framework. I just don't think this bill is there yet.
        Mr. Ross. Thank you.
        Mr. Eads, you are the former executive director of the
    Federation of Tax Administrators, as you mentioned, a group
    that is represented here today by Mr. Brubaker and is opposed
    to this bill. Responding to Mr. Brubaker's testimony, can you
    explain to us how this bill would bring clarity and
    simplification to each State's policy for taxing digital goods,
    in 1 minute or less?
        Mr. Eads. Chairman Ross, the States are in a quandary here,
    as are businesses, as are consumers. Most certainly in the
    retail sales tax area most of these laws were written right
    after the Depression and have been updated on an ad hoc basis
    since then. The economy simply is more robust, more vibrant,
    more changing than it has been. And tax policy tends to lag in
    that area. So I believe that you are trying to do the right
    thing here by setting forth some framework in which all the
    parties have a clear understanding of the rules.
        Mr. Ross. Thank you.
        With 12 seconds left, I will conclude my questioning and
    then recognize the distinguished Member from Tennessee and the
    Ranking Member, Mr. Cohen, for 5 minutes.
        Mr. Cohen. Thank you, Mr. Ross.
        Mr. Brubaker, you are from Washington State, is that
    correct? And you say you are looking out for the small
    taxpayers, is that right?
        Mr. Brubaker. We try very hard to do so, yes.
        Mr. Cohen. Your State, like my State in Tennessee, is one
    of the few States that doesn't have a State income tax, is that
    correct?
        Mr. Brubaker. That is correct.
        Mr. Cohen. Doesn't that make your State like my State, one
    of the most regressive States in the country for taxation and
    hurt the small taxpayer?
        Mr. Brubaker. Well, it is certainly regressive in its
    taxation of low-income families. I think our business taxes are
    not quite as regressive as our taxes that affect individuals.
        Mr. Cohen. I am thinking in terms of the small,
        low-income families. I guess that is different from small
    taxpayers because they don't have lobbyists. That is the people
    I am concerned about.
        Mr. Brubaker. The business and occupation tax has a very
    low rate. It is really broad, and so the rates are generally
    low. I don't think it poses a large burden on most small
    taxpayers. We do have an exemption for them--or a threshold--so
    they only pay once they are above a certain income.
        Mr. Cohen. How about those low-income folks when you don't
    have that income tax? It is regressive. It hurts them, doesn't
    it?
        Mr. Brubaker. Yes.
        Mr. Cohen. What is Washington State doing to try to make
    your tax system more progressive and concern about the low-
    income people that are in favor of this bill?
        Mr. Brubaker. We have quite a few limitations on what we
    can do to change our tax system right now that have been
    enacted by initiatives. So you won't be seeing any changes in
    our tax without a two-thirds vote of our legislature. It is
    very hard to achieve.
        Mr. Cohen. So you can't have an income tax without
        two-thirds.
        Mr. Brubaker. That is correct.
        Mr. Cohen. As a result of that, does that mean you have to
    look for other forms of taxation to supply the services that
    Washington State needs to supply to those low-income people
    that are suffering?
        Mr. Brubaker. Right now, it means that we can't get
    anything else without a two-thirds vote either. So we are doing
    all of our budgeting by cuts.
        Mr. Cohen. The bottom line is you need more access to taxes
    like this that can make up for the fact that you don't have a
    flexible tax system that has now been handicapped by these
    initiative processes in your constitution and you don't have
    the opportunity of a more progressive tax system through an
    income tax. So you have got to resort to these type of taxes to
    care of the needs of your people.
        Mr. Brubaker. We are using the taxes we already have and
    applying some of them to some digital goods and services as
    much as we do others. We have a thriving digital goods and
    services economy in our State, so we are being very careful in
    how we do this. We do not want to harm that sector of our
    economy.
        Mr. Cohen. Are you familiar with the Amazon Tennessee issue
    that just came through our legislature?
        Mr. Brubaker. I am not quite sure how to answer that.
        Mr. Cohen. Yes or no would be the appropriate answer. These
    aren't real tough ones.
        Mr. Brubaker. I haven't read what came through your
    legislature. I know there have been different things pending,
    but I haven't read what actually passed. So I can't give you a
    yes or no to something I don't know.
        Mr. Cohen. Mr. Eads, Mr. Camp predicted the end of the
    world was going to happen Saturday.
        Mr. Eads. I am sorry, Mr. Chairman?
        Mr. Cohen. We are here. Mr. Camp predicted the world was
    going to end on Saturday.
        Mr. Eads. To the best of my knowledge, it did not.
        Mr. Cohen. That is right.
        Mr. Brubaker suggested it will occur when we pass this
    bill. Tell us why he is wrong, too.
        Mr. Eads. Thank you ever so much, Mr. Cohen. I would never
    compare my friend Russ Brubaker to Mr. Camp.
        I think in the debate about these taxes, depending on which
    side you are on, fear is a powerful ally; and I think that what
    you are called on to do in the exercise of your
    responsibilities in the national Congress is to try to sort
    that out and determine what is best for the United States.
        Don't get me wrong. I have appeared before you when I
    represented FTA and argued quite zealously for the right of the
    States to determine their own fiscal destiny. I still do
    believe that. But I also believe that, in exercise of your
    responsibility to protect this vibrant market, some rules that
    enhance understanding are almost always worthwhile.
        Mr. Cohen. Thank you.
        Mr. Atkinson, please provide some examples of the States
    taxing on digital goods and services. Mr. Brubaker said there
    are no discriminatory taxes. I think you can maybe cite some
    examples of discriminatory taxes that are imposed.
        Mr. Atkinson. At least certainly in some areas, it is not
    exactly digital goods, but we see that in the wireless areas
    where there are States such as New York State and California
    and other States that have very, very high taxes on wireless
    services, including data services for your iPhone or your
    BlackBerry, for example, that are much higher than any other
    kinds of sales taxes in the State. So that would be a very good
    example of that.
        Mr. Cohen. Thank you.
        My time has expired. Therefore, I yield back the remainder
    of my time.
        Mr. Ross. Thank you, Mr. Cohen.
        The Chair now recognizes the distinguished gentleman from
    Georgia, Mr. Johnson, for 5 minutes.
        Mr. Johnson. Thank you, Mr. Chairman.
        I was thinking I woke up on Sunday morning and I thought I
    was in heaven. But you all have now burst my bubble. So back to
    reality, right?
        Mr. Atkinson, you believe that unless Congress creates a
    national framework to ensure consistency and fairness in the
    Tax Code, there is a risk that digital goods and services
    purchased and downloaded in one State will be taxed at higher
    rates than related fiscal goods. Is that correct? And, Mr.
    Brubaker, do you agree that that is a legitimate problem?
        Mr. Atkinson. I would say I think it is certainly a risk.
        Mr. Johnson. Excuse me, Mr. Brubaker, do you see that as a
    legitimate issue?
        Mr. Brubaker. Well, I think there is some risk if we leave
    it unattended too long. But we need to work for a framework
    that takes into account the need for definitions and for
    allowing things to be taxed somewhere. And so I think it is
    possible to construct a framework, and I think it needs to be
    done in a timely fashion, and I think it can be. I just think
    that this framework is not there yet. I do think we need a
    framework for this area of taxation.
        Mr. Johnson. So you are concerned about definitions lodged
    in this proposed legislation. What definitions do you have
    problems with?
        Mr. Brubaker. Well, there are quite a few.
        One is a term that is not even used in the bill, but it
    actually is a foundation for how it works, which is that you
    should have to have a tangible equivalent before you tax
    something in the digital world. I have concerns about that.
    Because, one, if the term is not in the bill but yet it is the
    basis of the bill in some respects and you end up in a
    situation where, with all the kinds of digital products there
    are, it is very hard often to describe an exact tangible
    equivalent. People will disagree about what is a tangible
    equivalent and what is not.
        Just think about all the way music is now provided through
    digital services. When is it a tangible equivalent and when is
    it not? So without some work on a precise definition on that,
    then we are going to have difficulties.
        There are quite a few definitions that are not in the bill
    at all, and then again there are--I can actually--I will supply
    the Committee shortly with a complete list in writing of the
    terms we think are deficient or nonexistent.
        Mr. Johnson. Please do.
        And so you are willing to work with folks like Mr. Atkinson
    and Mr. Eads to actually perfect this legislation--or can it be
    perfected? Must we start out again, totally new legislation?
        Mr. Brubaker. It is a tough question to answer in the sense
    that I am not sure how quickly this particular framework could
    be brought into line with something that the States could
    support. I hope it could be.
        I think it is important that the certain principles have to
    be followed. They include simplicity and fairness, conformity
    with the Streamlined Sales and Use Tax Agreement, neutrality
    regarding industry and the means of delivery, some
    consideration to revenue impacts and pyramiding. And, on the
    business side, consideration given to the amount of pyramiding
    on them. I think that is an important issue in digital goods.
        I think it takes time to sort through those, so I don't
    want to say that I think it can be done in a couple of weeks. I
    think it could be done in the course of a reasonable amount of
    time.
        Mr. Johnson. Mr. Atkinson, do you agree that it would make
    sense to sit down and work through some of the problems that
    some of the bill's opponents might have? Wouldn't that be
    reasonable to do?
        Mr. Atkinson. I am not a tax administrator. So when I hear
    an issue like the tangible equivalent, that seems reasonable to
    me. But I am not a tax administrator.
        Mr. Johnson. I am not either, but it seems like a
    reasonable observation. Does it seem that way to you as well?
    Could be reasonable.
        Mr. Atkinson. It could be. But I also know that the United
    States has a long history of opposing any Federal intervention
    on taxes, and I am not clear what this is from.
        Mr. Johnson. Do you think that there is some reason to go
    forward with this legislation quickly, as opposed to just
    simply having a bipartisan, if you will, reasonable discourse
    about it to try to perfect it? Do you think that would be the
    best thing to do?
        Mr. Atkinson. I think it would be useful to pass this bill
    in this Congress, because these are issues that are going to
    get worse. And even as Mr. Brubaker said, I think he said,
    ``There is some risk if we leave it unattended too long.''
        Mr. Johnson. Well, I tell you, anytime somebody tells me
    that, okay, you have got to buy this timeshare today or else
    you won't able to buy it tomorrow, the price will go up or it
    is going to be gone, you must act quickly, do it now, impulse
    buying is great, then I get the opposite reaction. It causes me
    to just want to hold up and think that there is some ulterior
    purpose for moving forward, like perhaps there is a privileged
    category in the legislation for certain types of goods and
    services or there is some kind of trick in there that is going
    to protect somebody's ability to make an unfair profit off of
    something. So something doesn't smell right, in other words,
    when that happens.
        Mr. Ross. The gentleman's time has expired.
        That being the last of our questions, I would like to thank
    our witnesses for being here today.
        Without objection, all Members will have 5 legislative days
    to submit to the Chair additional written questions for the
    witnesses.
        Mr. Johnson. Mr. Chairman, excuse me for interrupting,
    respectfully, but I find that we have a pattern here with these
    hearings on legislation, here in this Committee particularly.
    We just have one round of questions. We stick to the 5-minute
    rule. We are not really getting into the guts of the matters
    that come before us. And I just want to make that known for the
    record.
        I certainly would not be opposed to a second round or even
    a third round of questions on this particular issue. I would
    ask the Ranking Member what his thoughts were as far as another
    round of discussion about this. This bill is coming up for
    markup, I understand, in about 2 weeks or so, and I just think
    we have got about an hour and 40 minutes before votes are
    called, and I myself would really like to talk with Mr. Eads,
    get his thoughts on it.
        Mr. Ross. I do have a conflict starting at 5 o'clock so
    that would put a little hamper on that.
        Mr. Cohen?
        Mr. Cohen. I am at the discretion of the Chair. I do have a
    teleconference on peace in the Middle East. And I am afraid if
    I am not there, God knows what will happen.
        Mr. Johnson. I see I am outvoted on this.
        Mr. Ross. Point well taken, Mr. Johnson.
        Mr. Cohen. People in the Middle East may be concerned about
    that.
        Mr. Ross. Please do note, however, if there are additional
    questions that need to be asked or would like to be asked by
    the Members, please have the written questions for the
    witnesses, which we will forward and ask the witnesses to
    respond to as quickly and promptly as possible so that their
    answers can be made part of the record.
        Without objection, all Members will have 5 legislative days
    to submit any additional materials for inclusion in this
    record.
        With that, again, I thank the witnesses, and this hearing
    is adjourned. Thank you.
        [Whereupon, at 4:50 p.m., the Subcommittee was adjourned.]

                                A P P E N D I X

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                   Material Submitted for the Hearing Record