[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




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      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.]




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