[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
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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
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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