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



 
                 CONSTITUTIONAL LIMITATIONS ON STATES'
                    AUTHORITY TO COLLECT SALES TAXES
                             IN E-COMMERCE

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


                                HEARING

                               BEFORE THE

                       COMMITTEE ON THE JUDICIARY

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 30, 2011

                               __________

                           Serial No. 112-89

                               __________

         Printed for the use of the Committee on the Judiciary


      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 R. 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             [Vacant]
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
MARK AMODEI, Nevada

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


                            C O N T E N T S

                              ----------                              

                           NOVEMBER 30, 2011

                                                                   Page

                           OPENING STATEMENTS

The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Chairman, Committee on the Judiciary.......     1
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Ranking Member, Committee on 
  the Judiciary..................................................    33

                               WITNESSES

Dan Marshall, Marshall Music Company, on behalf of himself and 
  the Michigan Retailers Association
  Oral Testimony.................................................    36
  Prepared Statement.............................................    39
Patrick M. Byrne, Chairman & CEO, Overstock.com, Inc.
  Oral Testimony.................................................    52
  Prepared Statement.............................................    54
The Honorable John Otto, Texas State House of Representatives
  Oral Testimony.................................................    58
  Prepared Statement.............................................    61
Tod Cohen, Vice President and Deputy General Counsel, Global 
  Government Relations, Intellectual Property, Regulatory and 
  Asset Protection, eBay Inc.
  Oral Testimony.................................................    65
  Prepared Statement.............................................    67
The Honorable Luke Kenley, Indiana State Senate, on behalf of 
  Streamlined Sales Tax Governing Board, Inc.
  Oral Testimony.................................................    76
  Prepared Statement.............................................    78
Paul Misener, Vice President of World-Wide Public Policy, 
  Amazon.Com, Inc.
  Oral Testimony.................................................    79
  Prepared Statement.............................................    82

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Material submitted by the Honorable Daniel E. Lungren, a 
  Representative in Congress, from the State of California, and 
  Member, Committee on the Judiciary.............................     4

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of Jeffrey A. Eisenach, and Robert E. Litan, 
  Empiris LLC....................................................   124
Letter of opposition to S. 1452/H.R. 2701........................   161
Letter from Steven Bercu, President, Austin Independent Business 
  Alliance (AIBA)................................................   163
Material submitted by the Hudson Institute.......................   164
Prepared Statement of David French, Senior Vice President, 
  Government Relations, National Retail Federation...............   181
Prepared Statement of the National Governors Association (NGA)...   187
Prepared Statement of the Federation of Tax Administrators (FTA).   192
Letter from the National Association of Counties, the National 
  League of Cities, the United States Conference of Mayors, and 
  the Government Finance Officers Association....................   199
Letter from Toby Lenk, President, Gap Inc. Direct................   201
Prepared Statement of the International Council of Shopping 
  Centers........................................................   203
Prepared Statement of R. David L. Campbell, Chief Executive 
  Officer, the Federal Tax Authority, LLC........................   208
Prepared Statement of Joseph Henchman, Vice President, Legal & 
  State Projects, Tax Foundation.................................   211
Prepared Statement of Rebecca Madigan, Executive Director, 
  Performance Marketing Association, Inc. (PMA)..................   221
Letter of support from labor unions..............................   224


CONSTITUTIONAL LIMITATIONS ON STATES' AUTHORITY TO COLLECT SALES TAXES 
                             IN E-COMMERCE

                              ----------                              


                      WEDNESDAY, NOVEMBER 30, 2011

                          House of Representatives,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:09 a.m., in 
room 2141, Rayburn House Office Building, the Honorable Lamar 
Smith (Chairman of the Committee) presiding.
    Present: Representatives Smith, Sensenbrenner, Coble, 
Goodlatte, Lungren, Chabot, Issa, Pence, Forbes, King, Franks, 
Gohmert, Jordan, Poe, Chaffetz, Griffin, Ross, Adams, Quayle, 
Amodei, Conyers, Scott, Lofgren, Jackson Lee, Johnson, Quigley, 
Chu, Deutch, and Sanchez.
    Staff present: (Majority) Travis Norton, Counsel; Ashley 
Lewis, Clerk; and (Minority) Norberto Salinas, Counsel.
    Mr. Smith. The Judiciary Committee will come to order.
    Without objection, the Chair is authorized to declare 
recesses of the Committee at any time.
    We welcome everyone here. We knew this subject was going to 
have and be of great interest and that is clearly reflected in 
the audience that we have here too. I will recognize myself an 
opening statement, then the Ranking Member. Then I will 
introduce the witnesses and then we will proceed to questions.
    Black Friday marks the unofficial beginning of the holiday 
shopping season. But over the past few years many Americans 
have begun to wait until the Monday after Thanksgiving to shop.
    On Cyber Monday, online merchants offer deals similar to 
the promotions shoppers find in Brick and Mortar stores on 
Black Friday with one exception. Online merchants usually do 
not collect a sales tax.
    The Constitution grants Congress the exclusive power to 
regulate interstate commerce. By negative inference, a state 
may not unduly burden interstate commerce, a constitutional 
principle commonly referred to as the dormant Commerce Clause.
    As applied to state tax policy, the dormant Commerce Clause 
prohibits a state from taxing a person with whom it lacks a 
substantial nexus. In tax terminology, nexus refers to the 
relationship between the taxing authority and the taxpayer.
    In its 1992 decision in Quill Corporation v. North Dakota 
19 years ago, the Supreme Court held that at least for purposes 
of collecting sales tax a state lacks substantial nexus over a 
taxpayer that has no physical presence in the state.
    The Quill court thus established a bright-line physical 
presence rule for sales tax nexus. In the Quill decision, the 
Supreme Court was concerned with burdens to America's small 
businesses.
    It reasoned that without a bright-line physical presence 
rule for nexus, thousands of state and local taxing 
jurisdictions across America, each with their own unique tax 
bases and rates, would use vague concepts like economic nexus 
to impose sales tax collection requirements on businesses.
    In the court's view, uncertainty about what jurisdiction 
has power to tax as well as compliance with numerous and 
difficult tax policies would place an undue burden on 
interstate commerce.
    Today, we will hear testimony from online retailers, Brick 
and Mortar retailers and state governments about the impact of 
Quill on their operations.
    This hearing will explore two issues--first, whether 
Congress should exercise its Commerce Clause power to enact 
sales tax reform legislation, and second, if Congress should 
act, how we can do so in a manner that does not increase 
administrative and compliance burdens on America's small 
businesses.
    Some in the online retail community believe that physical 
presence is a fine rule for sales tax nexus. Online retailers 
typically maintain physical presence in only a handful of 
states and rely on common carriers to transport purchased goods 
to customers.
    Most states, therefore, cannot require those online 
retailers to collect and remit sales tax.
    Some argue that shielding businesses from the complex 
patchwork of sales tax laws was precisely the benefit of Quill 
and that Congress should take no action. But it is precisely 
this reality that frustrates Brick and Mortar retailers who 
claim to suffer a competitive disadvantage compared to their 
online counterparts.
    State revenues are also affected by the Quill rule. Forty-
five states and the District of Columbia have a sales tax.
    Those jurisdictions also have a use tax equal to the sales 
tax rate which residents must pay for the usage, consumption or 
storage of goods purchased in a non-resident state and brought 
into the resident state.
    For example, a shopper in Austin, Texas, who buys goods 
online from a retailer that lacks a physical presence in Texas 
is responsible to pay Texas use tax even though he or she pays 
no sales tax on his--on his transaction.
    But states rely on taxpayers to self-report their purchases 
in other states, and states lack the resources and means to 
effectively police use tax avoidance. So online purchases 
usually escape taxation altogether.
    Some believe that Congress should not come to the states' 
assistance. If a state chooses to impose a use tax it should 
also find a way to enforce it. Others would like to see 
Congress help states collect sales taxes on all transactions, 
thereby eliminating the need for use taxes.
    I am aware of three legislative proposals that could give 
states nexus over online and other remote sellers. Ranking 
Member Conyers has reintroduced the Main Street Fairness Act 
this Congress.
    Representative Steve Womack and Jackie Speier have 
introduced the Marketplace Equity Act, and most recently, 
Senators Enzi and Durbin introduced the Marketplace Fairness 
Act.
    Although this is an oversight hearing, I invite our 
witnesses to comment on any of these three bills and I look 
forward to hearing from our distinguished panel of witnesses 
today and thank them in advance for their testimony.
    Before I recognize the Ranking Member with his agreement, I 
would like to recognize a Member of the Committee for a 
unanimous consent request and the gentleman from California, 
Mr. Lungren, is recognized for that purpose.
    Mr. Lungren. Thank you, Mr. Chairman. I am sorry I have to 
go to a hearing on the House Administration to decide how much 
we are going to cut every Committee and I can't miss that. 
[Laughter.]
    Mr. Smith. Maybe we don't--maybe we don't want you to go. 
[Laughter.]
    Mr. Lungren. Well, if the gentleman won't allow me to go. 
No, what I asked unanimous consent that a constitutional 
analysis by Paul Clement on the proposed Streamlined Sales Tax 
legislation be made a part of the record.
    Mr. Smith. Without objection, so ordered.
    [The information referred to follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

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    Mr. Smith. Thank you, Mr. Lungren.
    The gentleman from Michigan, the Ranking Member of the 
Judiciary Committee, Mr. Conyers, is recognized for an opening 
statement.
    Mr. Conyers. Thank you, Chairman Smith, and Members of the 
Committee and the distinguished witnesses here.
    I want to associate myself with the Chairman's opening 
statement and description of why we are here this morning and I 
am glad that he mentioned my bill.
    The only thing I regretted was that he is not a co-sponsor 
of it yet. So we will see how this hearing proceeds and whether 
we can enjoy the benefit of his support.
    Now, we all know about the Quill decision. But since the 
Quill decision there has been a tremendous growth in online 
commerce.
    The number and diversity of goods purchased from large 
online retailers with little physical presence in the buyer's 
state has dramatically increased. What is it, up to 36 percent 
now, 38 percent over the weekend--38 percent is now online.
    The result, of course, is that online retailers have, let's 
face it, an unfair advantage over local and small businesses 
who are required to collect sales taxes and so what we are 
doing today is exploring the need for legislation to level the 
playing field between small businesses and online retailers. 
Main Street retailers, local mom-and-pop stores in many 
instances, and even some of the big-box retailers suffer when 
they have to collect a sales tax but online retailers don't, 
and fewer purchases at local retailers means less local jobs.
    And I might suggest to you that that 38 percent retail 
number is going up. The number of people purchasing over the 
Internet is going up and it is at 38 percent already. Lower 
sales at local retailers means lower revenue for local and 
state governments as sales taxes constitute a significant 
revenue source in each and every state.
    With ever increasing online sales, the state and local 
governments anticipate larger and larger revenue losses as a 
result of uncollected sales and use taxes. Michigan, my state, 
for example, estimates that it has lost around $368 million 
each fiscal year and that it will lose more than $450 million 
in the fiscal year 2013.
    The impact of such lost revenue is reflected in reduced 
school programs, extracurricular activities at the public--in 
the public school systems across the state, bridges and roads 
in need of critical repairs are neglected and reduced services 
even for police and firefighter protection sometimes occurs.
    And so H.R. 2701, the Main Street Fairness Act, would grant 
the consent of Congress to the Streamlined Sales and Use Tax 
agreement drafted by local and state governments and then 
business community to simplify sales tax rules and 
administrative requirements, making it easier for businesses to 
collect sales taxes across state lines.
    Already, 24 states have changed their laws to comply with 
this agreement and I await your consideration of your--the 
great witnesses we have, Mr. Chairman, and we urge that we 
consider the relative merits of all the bills that are before 
this Committee and I thank you.
    Mr. Smith. Thank you, Mr. Conyers.
    I would also like to recognize Congressman Steve Womack 
sitting in the front row over here. He is the author of the 
Marketplace Equity Act. We appreciate your introducing that, 
Steve. Thank you.
    We will now go to the introduction of our witnesses and 
actually the Ranking Member, Mr. Conyers, will introduce going 
from left to right, our first witness.
    Mr. Conyers. Thank you.
    I am happy to introduce our first witness at this hearing 
because he is a small-business owner from Lansing, Michigan, 
Dan Marshall, the second-generation operator of a family-owned 
chain of music stores called Marshall Music with seven stores 
located throughout Michigan.
    As a failed musician himself, I should visit you as often 
as I can when we have the time in this busy Congress.
    But his parents founded the store in 1948 and it has grown 
and is doing well and he has got now 300 full-time and part-
time employees, music instruments and offers performance space 
and lessons to shoppers and musicians. I am doing quite a bit 
of advertising for you today, sir. [Laughter.]
    But I am glad that you are here to tell your story on 
behalf of many of the small-business owners in the country.
    Thank you, Mr. Chairman.
    Mr. Smith. Thank you, Mr. Conyers.
    Our next witness is Dr. Patrick Byrne. Dr. Byrne is the 
chairman and CEO of Overstock.com, a Utah-based Internet 
retailer that has been publicly traded since 2002. Like many 
so-called e-tailers, Overstock takes orders over the Internet 
from customers and relies on common carriers to deliver 
purchased merchandise.
    In 2010, Overstock reported approximately $1.2 billion in 
revenue. Dr. Byrne received a Bachelor's degree in philosophy 
and Asian studies from Dartmouth College, a Master's in 
philosophy from Cambridge University as a Marshall Scholar and 
a doctorate in philosophy from Stanford University.
    He has taught at the university level and frequently guest 
lectures on business, the Internet, leadership and ethics.
    Our next witness will be introduced by the gentleman from 
Indiana, Mr. Pence.
    Voice. From Texas, Mr. Poe.
    Mr. Smith. Oh, I am sorry. Jumping ahead. The next witness 
will be introduced by the gentleman from Texas, Mr. Poe.
    Mr. Poe. Thank you, Mr. Chairman.
    Our next witness is my friend, John Otto, who is my state 
representative in Texas. He was elected to the House of 
Representatives in 2004. He is from small-town America, Dayton, 
Texas.
    Mr. Chairman, you may not know this but this is important. 
Dayton, Texas has a population of about 5,000. They have a high 
school football stadium that seats 7,000 and it is always full 
on Friday night.
    But by trade John Otto is a CPA. He has served on the Texas 
House Appropriations Committee and he serves as Vice-Chairman 
of the House Committee on Ways and Means. In 2008, he was 
chosen to Chair the House Select Committee on property tax 
relief and appraisal reform.
    In 2005, he was named the Republican Freshman of the Year 
in the Texas House of Representatives and Texas Monthly has 
named him one of the ten best legislators in Texas.
    He is a graduate of Texas A & M and a BBA from that 
university.
    John, in your Honor I have worn orange today to celebrate 
last week's Thanksgiving Day game. [Laughter.]
    Where Texas won.
    I yield back, Mr. Chairman. Thank you. [Laughter.]
    Mr. Smith. Thank you, Mr. Poe.
    Our next witness is Tod Cohen. Mr. Cohen is the vice 
president of government relations for eBay. Since 2000, Mr. 
Cohen has been responsible for global public policy for eBay 
including adding PayPal when it was acquired in 2002. 2006 he 
became responsible for eBay's legal, regulatory and 
intellectual property work as well as law enforcement affairs 
and global investigation teams.
    Mr. Cohen received his B.A. from the University of Utah in 
1985 and his J.D. with highest honors from the George 
Washington University Law School in 1992. Before law school, 
Mr. Cohen worked as a congressional aide for 4 years.
    Founded in 1995, eBay's website facilitates private 
transactions between private buyers and sellers. It currently 
boasts about 100 million users worldwide. Many are small 
business owners who maintain a virtual storefront on the eBay 
platform. 2010, the total value of goods sold on eBay was $62 
billion, which is more than $2,000 every second.
    The next witness will be introduced by the gentleman from 
Indiana, Mr. Pence.
    Mr. Pence. Thank you, Chairman. Thanks for the courtesy of 
having a chance to introduce and welcome my friend and a fellow 
Hoosier to testify before the Judiciary Committee today in 
what, after a long and distinguished career of public service 
in Indiana, I am pleased to say is his first opportunity to 
testify before Congress and I am privileged to be here.
    Senator Luke Kenley is from Noblesville, Indiana. He is a 
five-term Indiana state senator.
    He has provided exceptional leadership on fiscal 
responsibility and pro-growth policies in Indiana throughout 
his career.
    He is Chairman of the Senate Committee on Appropriations at 
the State House in Indianapolis and I hasten to add, since we 
are doing a little bit of trash talk between states, Indiana 
has found a way even in these difficult economic times to 
balance our budgets without raising taxes and Senator Kenley 
has been a driving force in making Indiana the fiscal envy of 
the Nation.
    His career spans several decades, involves several 
different disciplines. After completing his undergraduate 
degree at Miami University of Ohio and 2 years of law school at 
Harvard University, he answered the call of his country, 
enrolled in Officer Candidate School for the U.S. Army, 
graduated first in his class, served as an Army lieutenant, 
returned to Harvard to complete his law degree and then 
returned to the Hoosier State to develop and operate Kenley 
Supermarkets and serve as Nobleville's city judge.
    Senator Kenley comes before us today though on behalf of 
the Streamlined Sales Tax Governing Board in his capacity as 
president of that organization. The Streamlined Sales Tax 
Governing Board has been a leading advocate for fair and 
effective collection of online sales taxes.
    I am confident that his experience in this area and his 
testimony today will be of great benefit to the Committee as we 
work toward an equitable and common sense solution for all 
parties concerned.
    So thank you, Mr. Chairman, for the courtesy of allowing me 
to introduce this esteemed fellow Hoosier, Senator Luke Kenley, 
to the Committee's hearing today and I yield back.
    Mr. Smith. Thank you, Mr. Pence.
    Our final witness is Paul Misener. Mr. Misener is the vice 
president of worldwide public policy for Amazon.com where he 
has worked for over a decade. He holds an engineering degree 
from Princeton and earned his law degree from George Mason.
    At Amazon, he is responsible for formulating and 
representing the company's public policy positions worldwide as 
well as for managing policy specialists in Asia, Europe and 
North America.
    Jeff Bezos founded Amazon in 1995. According to Amazon's 
website, during the first 30 days of business Amazon.com 
fulfilled orders for customers in 50 states and 45 countries, 
all shipped from Mr. Bezos' home garage near Seattle.
    Today, Amazon is one of the largest e-tailers. It offers 
customers the ability to purchase everything from books to 
electronics and now even prepared gourmet foods over the 
Internet.
    We appreciate the witnesses who are here today and Mr. 
Marshall, we will begin with you.

TESTIMONY OF DAN MARSHALL, MARSHALL MUSIC COMPANY, ON BEHALF OF 
         HIMSELF AND THE MICHIGAN RETAILERS ASSOCIATION

    Mr. Marshall. Good morning, Chairman Smith and----
    Mr. Smith. Make sure your mike is on there. If you will----
    Mr. Marshall. I am sorry?
    Mr. Smith. Is your mike on? Push the--there. There we go.
    Mr. Marshall. Thank you.
    Good morning, Chairman Smith, Ranking Member Congress--
Conyers and Members of the Committee.
    My name is Dan Marshall. I represent Marshall Music 
Company, a Michigan-based chain of retail music stores and I am 
also here to speak on behalf of the Michigan Retailers 
Association, an association of small-business entities totaling 
roughly 4,800 individual businesses, and I am here to speak on 
behalf of small-business Main Street retailers in connection 
with what we see as an unlevel playing field relating to all of 
us as retailers being required to collect sales tax and having 
customers every day, every hour that we operate coming in and 
price shopping and comparing our price with Internet retailers 
that do not collect the Michigan sales tax.
    Marshall Music was started in 1948 by my mother and father, 
Bill and Mary Marshall. I am the second-generation family 
leadership of the business. We have seven locations throughout 
the state of Michigan.
    We provide sales and service for musical instruments and 
accessories, repair, lessons and, indeed, call on music 
educators throughout the state of Michigan and rent and sell 
band and orchestra instruments to beginning music participants.
    I can't begin to tell you what challenges retailing in a 
state like Michigan have presented to Marshall Music but myself 
and other Main Street retailers have adjusted to the economic 
realities that a fiercely competitive environment present and 
we are perfectly comfortable with that.
    In the absence of competition, I suppose we would all 
become complacent. That is certainly not the case with Marshall 
Music and my fellow retailers.
    The size of small business I think is something that 
somehow gets lost in the shuffle sometimes. Michigan retailers 
of 4,800 individual members, a casual measurement, you know, 
roughly 70 percent of those members are doing less than 
$300,000 a year in business.
    You know, in many cases it is a husband and a wife, maybe a 
part-time employee. So, you know, Main Street retailing is not 
a big numbers game but, you know, every strip mall and shopping 
center and downtown shopping district is replete with retailers 
just like my family who every day employ, you know, significant 
numbers of people for services and support.
    Illustrative of that would be today in Michigan we got 
eight inches of snow overnight so there is snow removal, small-
business snow removal companies removing snow from all of our 
parking lots and, you know, helping us get our doors open for 
business today.
    We have been selling on the Internet through eBay for some 
time now and Internet retailing is just a wonderful opportunity 
for small-business people.
    You know, it allows us not necessarily to sell everything 
that we have in inventory, you know, and in many cases we are 
just not prepared or capable of providing the support and 
fulfillment and having the computer systems to effectively 
represent our entire product mix on the Internet.
    But in virtually every instance there are some products or 
some area of expertise, whether it is oddball, obsolete or used 
merchandise that--to promote that, you know, on the World Wide 
Web to a much larger market is very beneficial.
    In our case, that is exactly what we do. A product that we 
have had in inventory too long or is used or unique we will put 
in on the Internet and find a buyer in a larger market than our 
area markets.
    I understand and accept that, you know, we have to be 
competitive and we are. We price match every day. We price our 
products, you know, according to what the marketplace dictates.
    But to have that additional 6 percent sales tax 
differential is something that just creates an unlevel playing 
field and doesn't really make sense to me or other retailers 
why a Michigan resident has to pay sales tax if they buy from a 
local merchant or buy from an Internet site that has a presence 
in Michigan whereas if they do business with somebody that is 
not employing people or supporting the Michigan economy they 
don't have to--that retailer doesn't have to collect sales tax.
    As far as requiring us to collect sales tax from out-of-
state sales, I see that as an entirely doable endeavor. You 
know, clearly, capitalism--people, you know, if they perceive a 
need people are going to flock to fill that need and the 
resources that are available today make the collection of that 
sales tax possible and I am sure it will only get easier and 
more streamlined if, in fact, you provide states like Michigan 
enabling legislation to allow us to have all Internet retailers 
collect tax.
    [The prepared statement of Mr. Marshall follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Smith. Thank you, Mr. Marshall.
    Mr. Marshall. Thank you.
    Mr. Byrne?

 TESTIMONY OF PATRICK M. BYRNE, CHAIRMAN & CEO, OVERSTOCK.com, 
                              INC.

    Mr. Byrne. Thank you. Good morning, Chairman Smith, Ranking 
Member Conyers and Members of the Committee.
    My name is Patrick Byrne. I am the chairman and CEO of 
Overstock.com. Thanks for this opportunity to share my views on 
the question of state authority to collect sales tax on e-
commerce.
    My basic view is that Brick and Mortar has become 87 
percent--I am sorry, big-box has become 87 percent of Brick and 
Mortar and what is going on here is they are trying to pull up 
the drawbridge after them. They are trying to get a law passed 
that will suppress competition from small remote sellers and 
just Internet sellers in general.
    For that reason, Overstock supports the current law as 
supported in the Supreme Court's Quill decision because it 
facilitated the advent of vibrant innovative e-retailers like 
Overstock, Newegg, eBay and Amazon.
    We oppose the bills now pending in Congress that would 
empower states to conscript remote retailers to become sales 
tax collectors and believe that had such remote sales 
obligations existed when we launched in 1999 we would not be 
here today.
    In 1999, we had 18 employees, carried 100 products and had 
$1.8 million in revenue. If we had been required to administer 
and collect sales tax on behalf of remote state governments 
without meaningful simplification, indemnity and compensation, 
our chances of becoming an employer of 1,500 American workers 
that we are today would have been small.
    Too high a hurdle would have been established by the cost 
of compliance in 9,746 taxing jurisdictions--the 
unavailability--the unavailability of affordable off-the-shelf 
software solutions, the cost of employing people to implement 
and manage the software, the Administration and resolution of 
state audits and resulting assessments and the risk of 
penalties and lawsuits by plaintiff or attorneys for software 
errors and omissions.
    The question the Committee must consider is whether this 
innovation will continue if Congress alters current law by 
allowing states to burden interstate commerce. In my opinion, 
the pending bills allow states to shirk their responsibilities 
to collect taxes that they impose on consumers; instead, 
enforce that burden onto nonresident and nonvoting businesses. 
Passage of such legislation would poison the Internet's fertile 
ground for new innovative e-commerce firms.
    More specifically, we oppose the pending bills because we 
believe the taxing jurisdiction should be responsible for 
collecting taxes from residents and should not unilaterally 
outsource to retailers without compensation for the burden of 
collecting taxes from residents of states where those retailers 
have no presence.
    The absence of any nexus threshold in the pending bills 
makes remote sales tax collection a burden on innovation, entry 
and commerce.
    However, if a majority in Congress is determined to replace 
current law, Overstock believes that a fair legislative 
solution must include three essential elements.
    First, because tax collection is really a function of 
states and not retailers, the states should be required to 
provide a truly plug-and-play software solution.
    Supporters of the pending bill claim such solutions are 
readily available in the marketplace but the fact is they are 
not. For example, we have been considering opening a warehouse 
in Kentucky. In preparation, we acquired what was described as 
an affordable plug-and-play software package that would ensure 
we were in compliance with the tax collection obligations for 
sales to Kentucky residents.
    The reality is that the so-called off-the-shelf software 
required $300,000 of investment and months of man hours of our 
developers to build.
    Implementation for the Nation's nearly 10,000 different 
taxing jurisdictions would be extraordinarily costly for 
companies like mine, not to mention companies with fewer 
resources.
    So if states want us to collect tax on our sales to their 
residents when we have no presence there, they should supply 
software that makes it possible to do so and I believe such 
software today is vaporware, by the way. They tell you this 
exists. It is vaporware.
    Second, retailers should be liable to state or--should not 
be liable to state or plaintiff lawsuits if errors arise from 
use of such software like missing a tax holiday or a new tax 
rate, the fact that one city in a state taxes the sale of a 
product one way while another exempts it from taxation.
    And third, taxing authorities should compensate all 
retailers asked to implement state software and to collect 
sales tax on their behalf. It is expensive to implement 
software and expensive to collect and remit the tax to the 
jurisdiction.
    Just as I cannot force other parties to work for free, 
states should not be permitted to compel companies to do their 
work without reimbursement and without some degree of revenue 
sharing.
    I have attached to my written testimony a draft bill 
incorporating these principles. I believe it will garner 
support from the majority of e-commerce companies as well as 
many Brick and Mortar and Brick and Click retailers, 
particularly smaller and mid-sized Main Street retailers who 
would otherwise be hurt by the pending bills.
    Thank you for the opportunity to share my views and I look 
forward to answering your questions.
    [The prepared statement of Mr. Byrne follows:]
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Smith. Thank you, Mr. Byrnes.
    Mr. Otto?

             TESTIMONY OF THE HONORABLE JOHN OTTO, 
              TEXAS STATE HOUSE OF REPRESENTATIVES

    Mr. Otto. Thank you, Chairman Smith and Ranking Member 
Conyers and Members of the Committee.
    Since 1992, the Quill decision has been the law of the land 
and physical presence has been the measuring stick for whether 
or not a retailer has to collect sales tax.
    Over the last 19 years, technology has advanced in the 
marketplace to the point that a physical presence can largely 
be controlled and isolated to a few states while selling into 
many states.
    If you doubt that, you have two online retailers here would 
be--I would be curious to know how many states they sell into 
versus how many that are actually claiming a physical presence 
and collecting tax in.
    If action is not taken and Quill is allowed to remain the 
law of the land, then are we not picking winners and losers 
within the retail sector?
    H.R. 3179, in my opinion, levels the playing field while 
protecting states' rights, and that is very important here on 
the protection of states' rights. Previous legislation that has 
been introduced in Congress has contained the requirement that 
a state join the Streamlined Sales Tax compact in order to 
receive the benefits of that legislation.
    While I fully support the rights of states to join the 
compact, I do not believe a state should be forced into joining 
the compact in order to receive the benefit of such 
legislation. H.R. 3179 leaves it up to each state whether they 
wish to join the compact or not.
    Let me also point out that, in my opinion, the Streamlined 
states will comply with the requirements of H.R. 3179 as soon 
as they adopt a small-business exemption. So they are at a 
distinct advantage in regards to how quickly they could 
implement H.R. 3179.
    Now, let me address briefly why I think H.R. 3179 best 
serves the interest of states. It requires a small-business 
exemption, it requires a uniform tax base rules within a state, 
i.e., what is and is not taxable, it requires for centralized 
filing and remitting within a state and it also offers options 
on the tax rates.
    It can be a state-only rate. If you cannot get your local 
jurisdictions to comply with these other three requirements 
then the state could implement a state-only rate.
    It also has a blended rate possibility as well as an 
address-based rate with software made available to the retail 
sector. In my opinion, the requirement for a uniform tax base 
within a state is desirable. It may cause delays in 
implementing the provisions of H.R. 3179 in some states.
    This is going to be the biggest issue if legislation is 
passed is how can states implement this and over what time 
period.
    In Texas, we don't meet again until 2013. It will take 
several legislative sessions in order to bring about the 
changes to get to a uniform tax base if we wanted to go down to 
collecting the local taxing jurisdictions as well.
    So, therefore, I believe that the flexibility that is 
provided in H.R. 3179 best serves the interest of the states in 
allowing us to level this playing field.
    You know, I don't fault anybody that is taking advantage of 
Quill. They fall within the law.
    The problem is the marketplace has changed in 19 years and 
we have not. And if we are going to be fair, you know, what 
encouragement am I offering to my local business in Dayton, 
Texas, to build a storefront as opposed to strictly putting his 
business online?
    And those are the--those are the kinds of businesses that 
support the local community. They have a physical presence 
there. They are the contributors to the Little League, the PTA. 
They are the people--they are also the ones that employ my 
local people and my local citizens.
    So that is why it is most important to me that a bill that 
would follow the guidelines as set out in H.R. 3179 that if 
Congress is going to take action this is by far, in my opinion, 
the best legislation I have seen proposed to assist the states 
in addressing this issue.
    Thank you.
    [The prepared statement of Mr. Otto follows:]
    
    
    
    
    
    
    
    
                               __________

    Mr. Smith. Thank you, Mr. Otto.
    Mr. Cohen?

   TESTIMONY OF TOD COHEN, VICE PRESIDENT AND DEPUTY GENERAL 
 COUNSEL, GLOBAL GOVERNMENT RELATIONS, INTELLECTUAL PROPERTY, 
           REGULATORY AND ASSET PROTECTION, eBAY INC.

    Mr. Cohen. Chairman Smith, Ranking Member Conyers and 
Members of the Committee, my name is Tod Cohen and I am the 
vice president of global government relations and deputy 
general counsel of eBay, Inc.
    eBay empowers and connects millions of buyers and sellers 
across the globe. Ebay's priority on remote sales tax policies 
has always been the treatment of small-business retailers. 
Hundreds of thousands of small businesses and entrepreneurs 
across America use eBay to engage in commerce.
    Protecting the ability of small-business retailers to play 
a meaningful role in the 21st-century marketplace creates jobs, 
fosters competition and promotes innovation. The Internet and 
mobile technology is, clearly, a part of every retail business 
model going forward. This is true for small, mid-size and giant 
retailers.
    Small-business retailers have used the Internet to survive 
and grow outside of their traditional markets. The remote sales 
tax debate is decades old. While the pro-tax rhetoric largely 
stays the same, the world of retail has changed around it.
    The idea that this debate is about the Internet versus 
offline stores is a false paradigm. All retail business models 
large and small use the Internet. They also involve physical 
facilities like stores, warehouses, management offices or 
distribution centers.
    A term you should be comfortable using is Brick and Click 
retail. It means a network of stores, Web and technology 
services all combined in a single retail business model. Large 
in-store retailers in America operate Brick and Click 
businesses.
    To give some perspective, 93 percent of retail goes on in 
stores while 7 percent is exclusively online. But almost 45 
percent of in-store sales are Web enabled and that is 
exploding. Big and small retailers offer consumers different 
benefits on different scales and their models come with 
different costs.
    Giant billion-dollar retailers with national store or 
distribution networks offer services like same-day delivery, 
lower cost shipping and in-store returns of items bought 
online. Being giant creates an economy of scale that has 
advantages.
    The largest retailers on the Internet including Bricks and 
Clicks are growing their market share. In fact, national Brick 
and Click retailers are 18 of the top 25 retail websites. 
Amazon's version of a Brick and Click is based on its 
distribution centers.
    Small-business retailers are losing market share even under 
the sales tax status quo. As has been the case for decades, the 
fundamental threat to small independent retailers is coming 
from billion-dollar competitors, not other small businesses. 
You hear a lot about fairness in this debate as if sameness is 
equal to fairness. It is not.
    Different sized businesses face very different conditions 
and different rules. In retail, small businesses on the 
Internet face higher shipping costs, higher product costs and 
difficulties dealing with returns. Retail competition is about 
more than remote sales taxes.
    Today, the benefits of local presence come with a tax cost. 
Honestly, that is fair. If remote sales tax laws changed 
without protecting small businesses, consumers will face a new 
tax cost on goods purchased from small remote retailers.
    But the consumer will not gain any retail benefits tied to 
physical presence. Without a small-business exemption, remote 
sales taxes will tip the scales further against small-business 
retailers and benefit the largest retailers that have the most 
facilities.
    That is why retailers with national store or distribution 
networks support changing current law. Current law regarding 
remote sales tax authority is not perfect.
    A few large retailers, Amazon, for example, have not 
operated in the spirit of the law and link sales tax collection 
to physical presence.
    Some states have used tax-related incentives to encourage 
large-retailer investments without offering similar investments 
incentives to small businesses that fulfill their in-state tax 
obligations. That is not fair.
    Congress has the power to address inequities among a few 
giant retailers without putting a new tax barrier in front of 
small-business retailers. A real small-business exemption and a 
Federal law reversing the Quill decision would meet that goal.
    Remember, there will always be small-business retailers 
that you want to protect and you want to grow. It is where 
tomorrow's big retailers come from. Protecting small businesses 
from regulatory and tax burdens is not a new concept.
    This is a traditional bipartisan legislative goal. House 
Resolution 95, sponsored by Representatives Lungren and 
Lofgren, is in that spirit. They are championing small-business 
retailers with their resolution. It retains an aspect of 
current law that works.
    eBay stands willing to work with the Committee to ensure 
that any changes in remote sales tax law include meaningful 
small-business protections that create an opening for small 
retailers to grow into the next billion-dollar businesses.
    I appreciate the opportunity to testify before the 
Committee and I look forward to your questions.
    [The prepared statement of Mr. Cohen follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Smith. Thank you, Mr. Cohen.
    Mr. Kenley?

 TESTIMONY OF THE HONORABLE LUKE KENLEY, INDIANA STATE SENATE, 
    ON BEHALF OF STREAMLINED SALES TAX GOVERNING BOARD, INC.

    Mr. Kenley. Thank you, Mr. Chairman Smith and Ranking 
Member Conyers and Members of the Judiciary Committee for the 
invitation to talk to you today.
    I chair the Senate Appropriations Committee in Indiana and 
I am a long-time retailer. I come before you today in my role 
as someone responsible for producing a balanced state budget, 
which we do every year in Indiana, for developing a fair and 
sensible tax policy to support that budget, and as president of 
the Streamlined Sales Tax Governing Board, the country's most 
successful business tax simplification initiative, with 24 
fully-qualified member states and, I might add, interestingly, 
about three-fourths of the legislators on that board are 
Republicans because this is such a pro-business activity.
    As a law student at Harvard, when I studied the Bellas Hess 
case, I never imagined I would be testifying before Congress 
about the court's interpretation of the Constitution's limits 
on state sales taxes.
    But with the development of the Internet and e-commerce, 
both wonderful developments for consumers, serious issues for 
state budgets and for retailers have come to the fore.
    Today, local retailers compete with Internet retailers, a 
development good for consumers, but must do so at a 6 to 10 
percent government-mandated price disadvantage through no fault 
of their own.
    In Quill, the U.S. Supreme Court made it clear that a 
state's ability to employ an effective sales tax was going to 
depend on the authority granted by Congress under the Commerce 
Clause. I come before you today to ask you to exercise that 
authority.
    In several other cases, the U.S. Supreme Court has made it 
clear that voluntary agreements among states such as the 
Streamlined Sales Tax Agreement are constitutional exercises of 
state authority.
    According to the Department of Commerce, e-commerce sales 
in 2005 were $87 billion. This year, they will total more than 
$175 billion, more than twice that amount. The quarterly sales 
of e-commerce have increased on the average 17 percent above 
last year's figures. Sales on Cyber Monday 2 days ago increased 
22 percent over last year.
    Retailers across this country often find themselves acting 
as the display case for consumers who come in, try out the 
product, solicit information and product comparisons from the 
local retailer, then go home and buy it online.
    In fact, the amazing power of mobile phones allows 
consumers to scan product codes, check prices and buy a product 
from online business before they even leave the local store.
    Today's technology, with the tremendous advances made in 
recent years, makes tax collection simple, cheap and reliable. 
Streamlined, with its uniformity of definitions and procedures, 
has further enhanced the ease of collection.
    We provide free software for companies and our certified 
service provider system with six qualified providers will 
provide for free to the small Internet retailer collection and 
remission services.
    In many ways, the Internet is the perfect environment in 
which to collect sales tax because it is something that can be 
automated. Any small-business exemption for small Internet 
retailers will further discriminate against the local small 
Brick and Mortar businesses who do not receive the exemption.
    In any case, with the free collection service offered by 
Streamlined, the perceived burden is removed. The only 
remaining burden is that 6 to 10 percent government-mandated 
price disadvantage placed on local retailers.
    Is this a tax increase? Paying a tax you legally owe but 
were not previously paying is not a tax increase.
    This tax is already owed as a use tax in every state with a 
sales tax by the same thinking. If you refuse to pay or fail to 
pay a tax already owed, for example, Federal income tax, that 
would be a tax decrease.
    None of us elected officials who have sworn to uphold the 
Constitution and the laws of the United States are likely to 
run a campaign on the platform of don't pay your taxes and get 
a tax decrease.
    The obligation to pay exists today, and asking one retailer 
to collect without asking the same of all retailers doesn't 
seem like equal protection under the law.
    Some say that we should use other ways to collect the tax 
with a tighter audit system. To me, this feels like overzealous 
enforcement, practices which seem to invade the consumers' 
privacy and fails to adhere to our standard belief that most 
people file their returns with integrity and we trust them to 
do so.
    Three bills have been filed on this subject. There are some 
differences among the bills that affect businesses in very 
different ways. The original bill filed by Senator Durbin is 
the most business friendly in terms of the simplicity and 
uniformity.
    But that bill does not offer an alternative to non-
Streamlined states which Streamlined agrees should be available 
to other states, and we agree with Mr. Otto on that point.
    Through the advancement of supporting technology and the 
work of business and states together, much progress has already 
been made. The differences reflected in the bills are about the 
only serious issues left to resolve and those issues are 
clearly identified.
    I come before you today as a state legislator who develops 
budget and tax policy as a retailer seeking a level playing 
field to ask you to exercise your authority under the Commerce 
Clause and grant states the ability to solve these problems.
    [The prepared statement of Mr. Kenley follows:]
    
    
    
    
                               __________

    Mr. Smith. Thank you, Mr. Kenley.
    Mr. Misener?

         TESTIMONY OF PAUL MISENER, VICE PRESIDENT OF 
           WORLD-WIDE PUBLIC POLICY, AMAZON.COM, INC.

    Mr. Misener. Thank you, Chairman Smith and Ranking Member 
Conyers, for inviting me to testify.
    Amazon has long supported an even-handed Federal approach 
for sales tax collection and to that end we have participated 
in the Streamlined Sales Tax project for over a decade and we 
are very pleased to participate in this hearing. Amazon 
strongly supports enactment of a Federal bill with appropriate 
provisions.
    Mr. Chairman, Congress should authorize the states to 
require collection with the great objects of protecting states' 
rights, addressing states' needs and leveling the playing field 
for all sellers.
    Congress should protect the states' rights and authorize 
them to require collection of sales tax revenue already owed, 
and doing so would not violate pledges that are limited to 
questions of income tax rates and deductions.
    Congress should help address the states' budget shortfalls 
without spending Federal funds by authorizing the states to 
require collection of the billions of revenue dollars already 
owed.
    Congress should not exempt too many sellers from 
collection, for these sellers will obtain a lasting unlevel 
playing field versus Main Street and other retailers.
    Mr. Chairman, Congress feasibly can authorize the states to 
require collection. With today's computing and communications 
technology, widespread collection no longer would be an 
unconstitutional burden on interstate commerce and Congress 
feasibly can authorize the states to require all but the very 
smallest-volume sellers to collect.
    Much attention has been paid to the size of a small-seller 
exception threshold in Federal legislation, and rightfully so. 
Such a threshold, which would exempt some sellers from a 
collection requirement, must be kept very low to attain the 
objection--the objectives of protecting states' rights, 
addressing the states' needs and creating fairness among 
sellers.
    In this context, several kinds of small volume sellers must 
be considered. Foremost are the Main Street small-business 
retailers who, unless the small-seller exception threshold is 
kept very low, will forever face an unlevel playing field 
compared to a newly-created exempt class of out-of-state 
sellers.
    Small-volume online sellers have received most of the 
attention and not without reason. No one wants these sellers to 
shoulder alone burdens compared to those faced by the small-
business retailers who already collect sales tax in our local 
communities.
    Yet, no one should want these online sellers to take 
advantage of a newly-created unlevel playing field over small 
Main Street businesses and no one should want government to 
pick business model winners and losers this way.
    The consequences of a threshold's level to states' rights, 
the states' needs and fairness are very significant because a 
surprisingly large fraction of e-commerce is conducted by 
smaller-volume sellers.
    For example, nearly 30 percent of uncollected sales tax 
revenue today is attributable to sellers with annual online 
sales below $150,000 and only 1 percent of online sellers sell 
more than this amount.
    In other words, a $150,000 exception would deny the states 
nearly 30 percent of the newly available yet already owed 
revenue but would exempt from collection 99 percent of online 
sellers.
    Any higher threshold would deny the states even more 
revenue and keep the playing field even more unlevel.
    Fortunately, today's computing and communications 
technology will allow all--excuse me, all online sellers to 
collect and remit tax like Main Street retailers. The 
technology is not limited to large sellers.
    Rather, service providers also make the technology 
available to medium- and small-volume sellers. Thus, collection 
is either by sellers or for sellers.
    There are many such service providers today--ADP, Avalara 
and FedTax, for example. Two other examples come to mind, 
Amazon and eBay.
    Both companies use sophisticated computing and 
communications technology to serve their seller customers. But 
while Amazon is prepared to make its technology available as a 
service to help sellers by collecting tax for them, eBay seeks 
to avoid any role in collection, claiming that small-volume 
sellers will be burdened and implicitly that eBay's technology 
is not capable of helping its larger sellers to collect.
    And these claims are made despite the fact that eBay 
manages to collect the transaction fees it charges its sellers 
and despite the fact that eBay already calculates state sales 
tax for eBay sellers all the way down to the local jurisdiction 
level.
    Amazon and many other service providers will help smaller 
online sellers collect and, surely, eBay can as well.
    In conclusion, Mr. Chairman, Congress may, should and 
feasibly can attain the objectives of protecting states' 
rights, addressing the rights--the needs of states without 
Federal spending and leveling the playing field for all sellers 
but only if any, quote, ``small-seller exception'' is kept very 
low.
    The time to act is nigh. Amazon is grateful for this 
hearing and we look forward to working with you and your 
colleagues in Congress to pass appropriate legislation as soon 
as possible.
    I look forward to your questions.
    [The prepared statement of Mr. Misener follows:]
    
    
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Smith. Thank you, Mr. Misener.
    Let me recognize myself for questions and let me address my 
first question to Mr. Byrne and Mr. Cohen, and it is this.
    If states already have the authority to collect sales tax 
from remote sellers, why shouldn't they also have the means to 
collect sales taxes from the remote sellers?
    Mr. Byrne. Thank you----
    Mr. Smith. Go on, Mr. Byrne, first, if you will.
    Mr. Byrne. Mr. Chairman, the Quill decision establishes 
that it would be that the states can go up to a certain line 
and no further, and that line is drawn by the Supreme Court 
at----
    Mr. Smith. But Congress could change that line and in fact 
the Supreme Court almost invited us to, didn't it?
    Mr. Byrne. No question, and they did. No question you have 
the power to. No question that per the Quill decision you have 
the power to change it.
    Mr. Smith. Again, if states can collect it why shouldn't 
they have the means to collect it?
    Mr. Byrne. I am sorry, sir?
    Mr. Smith. If states have the authority to collect a sales 
tax from remote sellers, why shouldn't they also be given the 
means to do so?
    Mr. Byrne. Well, so states have the authority--actually, 
the U.S. Congress has the authority to empower the states to 
but they shouldn't because at this point it is--what it is 
really going to be about is Amazon and the big-box--big-box 
retailers having a way to draw the drawbridge up after them.
    It is very burdensome and it will be very burdensome for 
companies like mine to establish databases or plug in to 
databases and keep--charge appropriate taxes on every kind of 
product in 10,000 jurisdictions.
    Mr. Smith. Okay.
    Mr. Byrne. You know, in some--in some jurisdiction candy is 
taxed like a candy and some is taxed like food, a gift basket. 
It will be extraordinarily complex for us to implement.
    Mr. Smith. Okay. Thank you.
    Mr. Cohen?
    Mr. Cohen. Well, Mr. Chairman, we agree that not only do 
you have the power but the means should be provided to the 
states. It is just a question of small business and small-
business protection that we believe is where the issue lies, 
not whether the states have the--should be given the right and 
the means to collect.
    Mr. Smith. Okay. Thank you, Mr. Cohen.
    Mr. Misener, which of the three bills under consideration 
would you support?
    Mr. Misener. Well, I think there has been--there have been 
three breakthroughs this year, Mr. Chairman. The first 
breakthrough was when Mr. Conyers and his colleague, Senator 
Durbin, introduced a bill in July which gave to the Governing 
Board of the Streamlined Sales Tax Project the right to decide 
the correct threshold for a small-seller exception.
    The next breakthrough is Mr. Womack's bill, which 
recognized that not all states will be able to make the changes 
required by Streamlined. And the third breakthrough was the 
Senate bill introduced a few weeks ago which would----
    Mr. Smith. Would you--would you support any of those 
breakthroughs?
    Mr. Misener. Yes, sir. All three.
    Mr. Smith. All of them?
    Mr. Misener. All three.
    Mr. Smith. Would you? Okay.
    Mr. Misener. We were concerned about the size of the small-
seller carve-out in Mr. Womack's bill but we believe that that 
is a subject for discussion here today.
    Mr. Smith. Okay. Okay. Thank you, Mr. Misener.
    Mr. Marshall, Mr. Otto and Mr. Kenley, if we were to enable 
states to collect a sales tax from remote sellers, wouldn't 
that increase the cost of merchandise to consumers? And if so, 
is that justified or not justified? Mr. Marshall?
    Mr. Marshall. Well, I don't--I certainly can't speak as an 
expert on that topic but my understanding is that sales tax is 
or use tax is owed by Michigan residents on all their 
purchases.
    So it is not a new tax. It is simply leveling the playing 
field as it relates to who is required to collect it and who is 
required to voluntarily disclose it in their tax return.
    Mr. Smith. Right. That was my point. They had the authority 
and they can impose a tax. It is just right now most states do 
not actually collect it. But that is my--Mr. Otto?
    Mr. Otto. I would agree with what he says.
    Here is one interesting point, though. If you are a 
business and you hold a sales tax permit in the state of Texas, 
you go through audit you are going to be found if you have not 
remitted use tax you should have.
    So in those instances, there is some. But in Texas we have 
no way for a household to remit use tax. There is no state 
income tax. There is no form for anybody to remit the use tax.
    Mr. Smith. So you are saying the taxes are owed anyway, 
they might as well be collected?
    Mr. Otto. They are owed.
    Mr. Smith. Okay. Mr. Kenley?
    Mr. Kenley. Thank you, Mr. Chairman.
    My perspective is that the only disparity in the 
competitive world that we have today in this arena is the 6 to 
10 percent sales tax that is being imposed on some retailers 
and not on others.
    I think if you eliminate that and level the playing field, 
I think you are going to see more competition. So I don't think 
the consumer is necessarily going to suffer in that--in that 
situation, Mr. Chairman.
    Mr. Chairman. Okay. Thank you, Mr. Kenley.
    The gentleman from Michigan, Mr. Conyers, is recognized for 
his questions.
    Mr. Conyers. Thank you, Chairman Smith, and I want to thank 
the witnesses for their individual contributions to this 
subject.
    Now that we have established that Quill gives us the 
authority, as a matter of fact we are encouraged to take some 
action in this, I think the question really is how do we do it 
as fairly as we can.
    Now, ironically, as our witness, Mr. Marshall, has pointed 
out, there is already a tax on Internet transactions but nobody 
is paying it any attention.
    Am I correct that Michigan is in that posture, Mr. 
Marshall?
    Mr. Marshall. Yes, you are. We are required to report our 
Internet sales, purchases and pay--remit a use tax on that. But 
there is just no way for the state of Michigan to know what 
transactions are occurring.
    Mr. Conyers. I wonder how many other states are like that. 
Does anybody know how many states might be in the same position 
that the state of Michigan is in? Namely, that there is a tax 
already existing and that, by the way, there is a 6 percent 
sales tax in Michigan and there should be a Internet tax and it 
is being ignored.
    So couldn't someone argue, Mr. Marshall, that we don't need 
to do anything, just if everyone followed the law we would be 
better off? What do you say to that?
    Mr. Marshall. Well, I just think collection ought to be 
uniform. If some retailers are required to collect then all 
retailers should be required to collect. I think it is just the 
unfairness of some of us being required by law to collect sales 
tax and other retailers that are selling product in our state 
are not.
    Mr. Conyers. Well, suppose we passed a law and everybody 
did what Michigan does is ignore it. What would you say to 
that?
    Mr. Cohen. Mr. Conyers, the current law in the 45 states 
that have sales tax plus the District of Columbia is that there 
is a concurrent use tax obligation for a purchaser who does not 
pay the sales tax when they purchase the item. Some states, 
like Texas, don't have a way in which that can be remitted.
    Other states, like California, have a line on the income 
taxes, state income taxes, for use tax collection. It is done. 
It is the law.
    It is very difficult and I do respect the tax collection 
efforts by many states that it is very hard to do and it will 
cost a significant amount of money to do that, and therefore it 
does seem to make a lot more sense that on large retailers you 
impose a burden that they collect and remit sales taxes across 
all 45 states.
    Mr. Conyers. So you support my legislation?
    Mr. Cohen. As currently written, we do not support the 
legislation, Mr. Conyers.
    Mr. Conyers. Well, that----
    Mr. Cohen. Because of the lack of a sufficiently high 
small-business exemption.
    Mr. Conyers. So that is your main reservation about it?
    Mr. Cohen. Yes, sir.
    Mr. Conyers. Well, let me ask you this. Is it fair for some 
witnesses--some businesses to have a sales tax advantage by not 
having to collect sales taxes, which is why you are for this 
bill if we could get that small-business exception straightened 
out.
    Mr. Cohen. Yes, sir. And let me quote Jeff Bezos from 1996: 
``In the mail order business, you have to charge sales tax to 
customers who live in any state where you have a business 
presence. We thought about the Bay Area, which is the single 
best source for technical talent, but it didn't pass the small 
state test.''
    So there was an advantage that he chose for his company to 
place it in Washington State to take advantage of the distant 
state sales tax exclusion.
    Mr. Conyers. Thank you very much.
    Mr. Misener. If I may, since my CEO was just mentioned, I 
think we have to recognize something here that that choice was 
made under current law. What we are proposing today is to 
change the current law. Congress has this authority very 
clearly.
    Let's recall, of course, that eBay has facilities in 20 
states around the country. They have fulfillment centers in 
eight states around the country. It is not a isolated business, 
as they would suggest.
    They also, of course, are a multi-billion-dollar company. 
Sales through eBay exceed Amazon's retail sales. So doing 
something to carve out eBay from collection will have 
significant ramifications to the states and for fairness.
    Mr. Conyers. Mr. Chairman, could I ask my friend here if he 
has any rebuttal comment to that statement?
    Mr. Cohen. If eBay was a retailer, of course, eBay, where 
it had physical presence, would have an obligation to collect 
and remit sales taxes in those states. But eBay is not a 
retailer.
    eBay is a marketplace in which people offer items for sale 
and are the sellers, and the sellers have the obligations. And 
one of the things we are quite proud of is that our sellers 
that are in the 45 states and the District of Columbia that 
remit and owe sales taxes collect and remit them.
    Mr. Conyers. Yeah.
    Mr. Cohen. So our small sellers, including Mr. Marshall, 
pays his sales tax in Michigan for his sales in the state of 
Michigan online. Amazon----
    Mr. Conyers. Mr. Chairman, could I get a rebuttal to the 
rebuttal, please?
    Mr. Smith. The gentleman from Michigan is recognized for an 
additional minute.
    Mr. Misener. Yes, sir. Thank you very much, both of you.
    Amazon also has a platform for sellers and we have over 2 
million sellers that sell through our sites. We will make a 
service of tax collection or remittance available to our 
sellers. We only ask that eBay do the same.
    Mr. Smith. Thank you, Mr. Conyers.
    The gentleman from North Carolina, Mr. Coble, is 
recognized.
    Mr. Coble. Thank you, Mr. Chairman.
    Gentlemen, good to have you all with us today. Mr. Otto, 
the Committee--this Committee recently passed H.R. 1439, the 
Business Activity Tax Simplification Act, which confirms 
Quill's physical presence standard for collection of corporate 
income and other business activity taxes.
    Would your bill apply just--the nexus just for the sales 
tax or would it reach into other business taxes as well?
    Mr. Otto. No. It is my understanding that all we are 
dealing with here is sales and use tax. We are not trying to 
change nexus statutes for any other tax.
    Mr. Coble. That was my thinking. I wanted to hear it from 
you to be sure. What do you believe, Mr. Otto, is an 
appropriate small-seller exemption threshold?
    Mr. Otto. Well, you are asking me to get into a battle I am 
not sure I am willing to get into. [Laughter.]
    Without looking--I mean, I am only familiar with my state. 
Without looking, and you are talking about a bill here that is 
going to affect 45 states and the District of Columbia, that is 
something I understand from the testimony that has been given 
here today that is going to be an important issue.
    I don't have a preconceived idea. I can't pick a number out 
of the air and tell you this should be the small-business 
exemption. I think it is going to require some study on this 
Committee's part in order to come up with what is fair. I do 
support a small-business exemption. It is just in defining what 
is small business.
    Mr. Coble. I didn't intend to have you to put your oars 
into troublesome waters, Mr. Otto.
    Mr. Misener, I am getting involved in some hearsay evidence 
here. Last week, a constituent of mine told me that he heard on 
the radio an ad for Blinds.com. The gist, he tells me, was that 
they--was to buy blinds from Blinds.com because there is no 
sales tax in most states.
    Is it true, in fact, that there is no sales tax in most 
states for Internet sales, and if so, would you agree that that 
could very well present a competitive edge over the Brick and 
Mortar sellers?
    Mr. Misener. Thank you, Mr. Coble.
    We collect--in the four states where our retail business 
has a physical presence we already do that. What we are seeking 
today is congressional legislation that would authorize the 
states to require all out-of-state sellers including Amazon and 
Blinds.com to collect regardless of whether their retail 
business has a physical presence in a state.
    Mr. Coble. Mr. Bryne--where is Mr. Bryne? I don't see Mr. 
Bryne. Byrne--Mr. Byrne.
    Mr. Byrne. I am sorry.
    Mr. Coble. Mr. Byrne, Brick and Mortar retailers 
characterize the Marketplace Equity Act as restoring fairness 
to the retail industry. How do you respond to that?
    Mr. Byrne. I would say that there is--it cuts both ways. 
Brick and Mortars also have advantages over us. They get to--
over Internet companies. They get to interact directly. They 
get to hand over the goods immediately. Customers get to, you 
know, touch them before they buy them. They can return them 
right there.
    So there is--so there is advantages and disadvantages that 
cut both ways. We wouldn't--we wouldn't come and say gee, 
Congress has to do something in order to level the playing 
field on Brick and Mortars to take away those advantages. So I 
will stop there.
    Mr. Coble. Mr. Cohen, advocates of sales tax reform 
legislation insist that technology can easily calculate and 
collect sales tax--taxes at the destination rate. If this be 
the case, what would be the burden on eBay's small-business 
customers if such technology were made available to them?
    Mr. Cohen. Mr. Coble, we have been very clear for at least 
the 11 years I have been working with the company that this is 
not a technologically difficult thing to accomplish. It is 
burdensome.
    It is a morass of many, many different state laws with 
9,647 different taxing jurisdictions. But that does not make it 
impossible for people to collect and remit.
    Our basic point of view is that it would be much more fair 
if all small businesses were to receive the same fairness that 
a large retailer were to get--lower shipping costs, economies 
of scale--and that this is a place in which tax policy can be 
used to make sure that small businesses have an opportunity to 
participate in the global market.
    Mr. Coble. I got you. Thank you, sir.
    Mr. Chairman, I am going to try to beat that red light 
before it illuminates by putting a question to Mr. Misener.
    How have states' affiliate nexus statutes affected your 
business and how does Amazon use affiliates? What toll has the 
ensuing litigation had on your--on your operation?
    Mr. Misener. Thank you, Mr. Coble.
    Affiliates are small websites within states around the 
country, around the world that place links on their site to a 
variety of retailers including Amazon, and when a consumer 
clicks on that link and ends up buying something at the 
retailer, the website gets a commission.
    It is a great advertising model. It is a great business 
model. A lot of small businesses have benefited. There have 
been counterproductive bills enacted around the country--I 
think a half dozen now--where states have tried to describe 
those advertising activities as giving an out-of-state retailer 
nexus.
    We completely reject it but at the same time these laws 
have passed and so we simply have stopped advertising. It is 
unfortunate.
    We certainly wish we could get those advertisers back, and 
in North Carolina included we would love to be able to welcome 
back our Amazon.com associates and we would do so when Federal 
legislation is enacted.
    Mr. Coble. I thank you. Mr. Chairman, I lost the race with 
the red light. I yield back.
    Mr. Smith. Thank you, Mr. Coble.
    The gentleman from Virginia, Mr. Scott, is recognized.
    Mr. Scott. Thank you, Mr. Chairman.
    I yield to the gentleman from Michigan.
    Mr. Conyers. Thanks, Mr. Scott.
    I just want to ask Mr. Misener, who represents Amazon, you 
are one of the big guys but yet you are supporting a fair tax, 
a balanced tax, with the little guys like Marshall.
    Is there some explanation for your extraordinary good moral 
bearing that you bring to this hearing today?
    Mr. Misener. Well, personally, it is worthy of question 
with me but we have long supported Federal legislation. In 
fact, we made this decision right after I joined the company a 
dozen years ago.
    At the time we faced a choice. Could we draft off of the 
Internet Tax Freedom Act moratorium and somehow claim that the 
Internet deserved a privileged non-tax position. We have never 
taken that position.
    We have participated constructively in the Streamlined 
Sales Tax Project as a way to work with the states to get the--
eventually get to the point of Federal legislation. The three 
breakthroughs that I mentioned this year starting with your--
with your bill in July really, I think, are breaking the 
logjam.
    So we are to the point of actually recognizing the fruits 
of our labor all these years.
    Mr. Conyers. Let the record show that there are corporate 
good guys in this world. Thanks, Mr. Scott.
    Mr. Scott. Thank you.
    Senator Kenley, if somebody in Washington, D.C., goes to a 
Brick and Mortar store in Virginia and buys something, do they 
pay the Virginia sales tax?
    Mr. Kenley. If they go to the Virginia store they do and 
the basis of the tax is on the destination--in other words, 
where the transaction takes place, and it is normally where the 
consumer is.
    Mr. Scott. And if the Virginia store delivered it in 
Washington, D.C., a washing machine, for example, where would--
who would pay the tax?
    Mr. Kenley. Well, we spend a lot of hours arguing those 
points in Streamlined and we have refined that so that in some 
cases it would be in Washington, D.C., where the sales takes 
place and in some places it could be in Virginia.
    Mr. Scott. Well, if the sale took place in Virginia and 
they delivered the washing machine to the residents in D.C.----
    Mr. Kenley. Okay. If they deliver it, it is taxable in 
Washington, D.C.
    Mr. Scott. Okay. Now, are you aware--is there any small-
business exemption to the local sales tax?
    Mr. Kenley. No, not in--I don't think there is in any of 
the states. Everybody is on the level playing field there.
    Mr. Scott. If the tax is due but not collected by the 
business, do you have an estimate of how often it is actually 
collected, some kind of way?
    Mr. Kenley. You mean how often it is paid through the use 
tax system?
    Mr. Scott. Right.
    Mr. Kenley. In Indiana, we have less than 1 percent of our 
filers who actually fill out a use tax return and remit a use 
tax based on remote purchases.
    Mr. Scott. If the business were to actually collect the 
tax, what would they do with the money? How would they get it 
to the various states and localities?
    Mr. Kenley. Well, the service--first off, the small 
business can use a certified service provider and we actually 
have one small business in New Hampshire of less than $50,000 
in sales that signed up for this in 18 minutes and that is all 
it took, and they are not charged anything to be a participant, 
and the certified service provider--the retailer collects the 
tax when they bill the customer.
    They then turn it over to the service provider. They fill 
out all the returns necessary in the 45 states that have sales 
tax and remit it appropriately in a very seamless proposition.
    Mr. Scott. Now, who pays for that service?
    Mr. Kenley. The states pay for it and then the certified 
service providers take the amount of compensation that 
Streamlined offers or that those states offered in addition to 
the regular compensation package.
    Mr. Scott. Now, is that service actually available to 
everybody now?
    Mr. Kenley. Yes. We have six certified service providers 
who can do this. Many of the larger companies have chosen to 
just implement their own system, and Amazon has developed a 
system where they are a certified service provider for their 
retailers that participate on their platform.
    Mr. Scott. Does that include the--some localities have a 
local sales tax.
    Mr. Kenley. That is correct. It includes all of those 
jurisdictions with local sales tax as well, no problem.
    Mr. Scott. And so a small business can sign up for the 
service, no cost----
    Mr. Kenley. That's right.
    Mr. Scott. Assess the tax. Do you have some software to 
tell them how much to charge?
    Mr. Kenley. No cost on the software.
    Mr. Scott. So the software tells them how much to charge so 
they add it to the bill. They collect it and then they send in 
the aggregate amount collected to some service who will 
distribute the money----
    Mr. Kenley. To the--right.
    Mr. Scott. At no cost.
    Mr. Kenley. That is right.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Smith. Thank you, Mr. Scott.
    The gentleman from Indiana, Mr. Pence, is recognized.
    Mr. Pence. Thank you, Chairman.
    Thanks for holding this hearing and I am grateful for the 
testimony of all the participants but I particularly want to 
acknowledge not only Senator Kenley that I had the opportunity 
to introduce, who is a leader in Indiana, a man I greatly 
admire but also I want to appreciate two other of the 
witnesses.
    Mr. Misener with Amazon--Amazon is a great corporate 
citizen in Indiana and we are--appreciate the tone and tenor of 
your testimony and your remarks today.
    And I also want to acknowledge Mr. Byrne, who I have had 
the pleasure to meet because of his association with education 
reform at the Milton and Rose Friedman Foundation that is 
proudly located in Indianapolis, Indiana. So this is a 
distinguished panel, to say the least.
    I find this discussion enormously helpful, Mr. Chairman. It 
is--it is clear that since the advent of not the Quill decision 
but the Commerce Clause itself that under our form of 
government we have--the Congress has essentially granted 
exclusive power to regulate interstate commerce at the national 
level.
    I have, as you know, Mr. Chairman, and other Members on 
this end of this Committee I have long opposed taxing the 
Internet. I greatly associate myself with comments that were 
made about the extraordinary innovation that has occurred in e-
commerce in this country and I believe it represents a bulwark 
of American prosperity in the last 20 years.
    I believe the moratorium on Internet taxation has been 
prudent and I have strongly supported it. It does strike me, 
though, that as this marketplace has matured that there is an 
argument as has been made eloquently by several on the panel 
for us to consider letting states decide.
    But it--but it strikes me that we ought to follow--at least 
this conservative is committed to following a couple basic 
principles.
    Number one is no new taxes. My colleague from Texas and I, 
I feel instinctively share a particular view of taxes. Maybe I 
am presuming but I--we ought to make sure there is no new taxes 
on the people of the several states.
    Secondly, I do--I do acknowledge that there ought to be no 
undue burden on commerce, particularly e-commerce in this case. 
I am also very interested in the--in what would be the 
recommendation of members of the panel about the proper small-
business exemption.
    I think the two large principles here for me is I don't 
think Congress should be in the business of picking winners and 
losers, and inaction by Congress today results in a system that 
does pick winners and losers.
    I also--I am a very strong advocate of federalism, as you 
are, Mr. Chairman, and it is my judgment that having Congress 
continue to stand in the way of letting states decide if we can 
meet these other criteria is worthy of our deliberations here 
as we preserve and promote and seek to invigorate the 
principles and the practice of federalism across this country.
    Let me ask this question, though. I will direct this to 
Senator Kenley in the time that is remaining, that we just 
heard Mr. Coble speak about a Blinds.com radio ad, the tagline 
of which--well, I will just quote him and paraphrase him, I 
don't accuse the company of any particular distortion--but we 
have all heard ads like this, saying that in most states no 
sales tax. There is no sales tax on Internet sales.
    Let me ask you, Senator Kenley, as--in a point of fact is 
it that there is no sales tax on Internet sales or is it simply 
that states do not have the authority to collect taxes that are 
owed?
    Because this, to me, is a very--in our very first 
conversation about this, Senator Kenley, you know, I am someone 
who believes if you owe taxes pay taxes. But maybe you can 
address that. Is it--what is the situation in America today, 
first, in Indiana and all over the country?
    Is there no sales tax on Internet sales or is there in fact 
a sales tax, it just simply--Indiana and other states do not 
have the ability or capacity to collect it under the law?
    Mr. Kenley. Thank you for the question, Congressman Pence.
    First off, I would say that this is not a tax on the 
Internet. This is a tax on the consumer who is going to receive 
the government services that are provided in whatever state 
that is.
    As to your question about whether or not there is a tax or 
whether the tax is collected, we have noticeably been unable to 
collect the tax other than by having the retailer remit, and so 
that is why we have gone to these great lengths to make it cost 
effective or cost free, particularly for small retailers, to be 
able to have a collection and remission process.
    If we didn't do this, I am afraid we would end up like 
Greece and nobody would pay their taxes. But--and we don't want 
to go there. So it has just been a difficult proposition to 
work it out.
    I think once you start down other paths of trying to find 
ways to collect that use tax, which is already due and owed, 
then you get into things that you are trying to get information 
about consumers, are you participating in invasion of privacy, 
are we using the heavy hand of government and the tax collector 
to beat on people unduly.
    And the sales tax system, which historically has been, as 
Mr. Marshall states, that the retailer collects and remits the 
tax, that is the historical precedent and we could make that 
work in this system due to the advances in technology even 
since the Internet age of commerce started.
    Mr. Pence. But the tax under Indiana law, and I will only 
ask you this, the tax is owed.
    Mr. Kenley. The tax is owed.
    Mr. Pence. It is owed by the consumer.
    Mr. Kenley. It is owed in all 45 states. They all have the 
same situation in that regard.
    Mr. Pence. Thank you.
    Thank you, Chairman.
    Mr. Smith. Thank you, Mr. Pence.
    On the way to recognizing the gentlewoman from California, 
I would like to recognize Congresswoman Jackie Speier who, 
along with Congressman Womack, is a sponsor of the Marketplace 
Equity Act and who has just come into the room. Does she--there 
she is. Okay. Good.
    The gentlewoman from California, Ms. Lofgren, is 
recognized.
    Ms. Lofgren. Well, thank you, Mr. Chairman, and for this 
useful and interesting panel. I didn't have the chance to 
introduce Mr. Cohen but eBay is actually headquartered in San 
Jose. So welcome, San Jose-based eBay.
    You know, one of the things that I am listening here is to 
try and identify we want to stand with the little guys because 
small businesses are the engine for the American economy. They 
are the ones that are creating the jobs and the difficulty is 
who is that.
    You know, who is standing up for the little guys, and I 
guess the question I have for you, Mr. Cohen, is I know eBay is 
an entity but you don't sell stuff. I mean, it is your--it is a 
platform and people are selling.
    When I go on eBay, it looks like it is mainly small guys. 
When I go on Amazon, which I do a lot and thank you for having 
your service, especially when we are in Washington and 
Christmas is coming up, you know, sometimes there are small 
guys, like especially for specialty books, but it is mainly 
larger retailers that you get to through your site.
    What percentage of eBay's users are what you would consider 
small business and how would you define that, Mr. Cohen? And 
then I would like to ask the same question of the Amazon 
witness.
    Mr. Cohen. Congressman Lofgren, for many of our sellers 
eBay is only one channel that they use. So whatever statistics 
we know of their use of our platform, like Mr. Marshall, eBay 
is one part of his business.
    Ms. Lofgren. I see.
    Mr. Cohen. He has a significant portion of his business, a 
much larger portion of his business, in the state of Michigan.
    What is important, though, what we believe is important is 
how do you define what the size of a small business should be 
to take advantage of an exemption, and we have recommended and 
endorsed bills that have included the Small Business 
Administration's determination of what is an electronic 
retailer.
    That is what determines whether a small business qualifies 
for SBA loans and other assistance, and the number, which is 
reset annually to determine what is the appropriate size, the 
last year was approximately $30 million in distance sales. That 
is what we would----
    Ms. Lofgren. Now, that sounds like a lot but for--that is 
gross, correct? What would that usually--if you had that kind 
of gross sales what would that really net you as a business, 
ordinarily?
    Mr. Cohen. Well, if you live in the state of Texas, where 
they don't have a personal income tax, it may make a lot more 
money than in the state of California or in other states.
    But our general impression is that most of those sellers, 
even up to a $30 million in sales, are having very, very tiny 
margins and that what they are making and netting out from that 
is significantly less than what their large retailer 
competitors can be.
    For one example, our estimate is that $30 million number we 
believe that would be the amount of sales on Amazon since the 
beginning of this hearing today.
    Mr. Misener. Thank you, Ms. Lofgren.
    First of all, on Mr. Cohen's Small Business Administration 
number, we just need to debunk that right from the start. It 
has absolutely nothing to do with the conversation today which 
is about burden on small businesses for collecting sales tax.
    It has everything to do about set-asides for small business 
in government contracting context. Absolutely nothing to do 
with remote sale collection.
    Mr. Cohen's company has told Wall Street, at least, that 
they have something over 25 million sellers. I assume that is a 
worldwide number so, forgivingly, that is probably about 10 
million domestically. We have analyzed it with just as few as 5 
million sellers so really cutting off a large part of the long 
tail that exists. Analyzing at $5 million, only 1 percent of 
those sellers sell more than $150,000----
    Ms. Lofgren. But my question to you was what percentage of 
your sellers are small businesses as compared to big, you know, 
larger retailers?
    Mr. Misener. Yeah. Our retail business, which clearly is 
not a small seller, is still the bulk of the sales at 
Amazon.com. We have only 2 million sellers, additional sellers, 
the vast majority of which are small. But that pales in 
comparison----
    Ms. Lofgren. But that is a number. In terms of dollar 
amount, I mean----
    Mr. Misener. We don't----
    Ms. Lofgren. A little book seller--I sometimes get my 
husband the books. I mean, they are not doing big volumes, it 
doesn't look like, in terms of money.
    Mr. Misener. Yeah. I am sorry. We have not released that 
amount in our SEC filings. But just for scaling it, it is 
important to recognize that the sales through eBay still exceed 
the sales by Amazon retail and the number of small sellers at 
eBay is many times as----
    Ms. Lofgren. Well, that is really not--that doesn't tell us 
anything.
    Let me ask you this, Mr. Cohen. If we did not have an 
exemption for small businesses, what would the impact be? I 
mean, you have got small businesses all over the United States, 
people that are actually supporting themselves in these tough 
economic times by having, you know, helping to sell stuff, I 
mean, including Mr. Marshall.
    What would the impact be, do you think, on those small 
businesses across the country?
    Mr. Cohen. Without a robust small-business exemption you 
put an artificial limit on the size and impose the costs 
immediately upon those people, and we think that the cost on 
the economy would be fairly significant.
    There is an enormous amount of income generated by the eBay 
platform, by the use of ad words through Google for many 
different small businesses through the Amazon marketplace to 
have an opportunity to compete on a global marketplace.
    So we think our estimate is that there would be significant 
job losses with low small-business exemptions.
    Ms. Lofgren. My time is up, Mr. Chairman. I thank you and 
thanks to the panel.
    Mr. Goodlatte [presiding]. I thank the gentlewoman and the 
Chair is now pleased to recognize the gentleman from Utah, Mr. 
Chaffetz, for 5 minutes.
    Mr. Chaffetz. And thank you. This has been a great 
discussion. I appreciate the panel and all of your 
participation.
    Does everybody agree there should be some exemption for 
small business or is anybody advocating that there--we should 
actually get to be at zero?
    Mr. Kenley. The Streamlined organization in their plan has 
a $500,000 small-business exemption. Speaking for myself as a 
retailer, I think that the--there should be no small-seller 
exemption and I say that because the minute you give a small-
seller exemption to the Internet retailer you are then 
discriminating against the small-seller of the Bricks and 
Mortar type.
    Mr. Chaffetz. Okay, but everybody else is agreeing that--in 
my mind, one of the big questions is what should be that 
threshold.
    Mr. Kenley. Right.
    Mr. Chaffetz. What is the threshold by which small--what is 
a small business and what threshold should it be?
    Mr. Byrne, I would like to start with you, if I could. 
Let's talk about the difference in the modeling and how that 
affects what you are doing, what eBay is doing, what Amazon is 
doing and what advantages, disadvantages.
    I mean, we are really trying to empower small businesses in 
this country. Some may say oh, you get an advantage but the 
others say it is a terrible burden when you are trying to start 
a new business or supplement your income and do it part time.
    Can you just go a little bit deeper into that, please?
    Mr. Byrne. Yes. Sure. In the bill as we have proposed the 
small-business exemption is up to $20 million. I think that may 
be the highest of any proposed cap. But as far as the models, 
if I understood your question correctly, what is really going 
on is this.
    If we open a warehouse in Indiana, as we did once, we 
interpret the law to be that we have to pay taxes in Indiana.
    My fine competitor down at the end of the table, Amazon, 
they have done--taken a much more aggressive tax position 
historically where they open a new warehouse in a state, they 
put it in as a subsidiary and they say oh, you see, we don't 
own that warehouse, we just own a subsidiary which owns the 
warehouse. So we don't owe taxes.
    They have been doing that from the beginning. Our tax 
accountants would never let me try something so aggressive. 
What has happened is the ground is dissolving under their feet 
on that position and so now they are jumping on this, which is 
really giving the sleeves out of their vest because Amazon is 
essentially turning into a big-box retailer, not in the sense 
of having storefronts everywhere but in the sense of having 
warehouses.
    Mr. Chaffetz. Mr. Misener, how many distribution centers do 
you have across the country?
    Mr. Misener. A couple dozen.
    Mr. Chaffetz. A couple dozen?
    Mr. Misener. Yes, sir.
    Mr. Chaffetz. And do you pay taxes on those or don't pay 
taxes on it?
    Mr. Misener. It is not a tax on Amazon that we are talking 
about. It is a collection responsibility.
    Mr. Chaffetz. Right.
    Mr. Misener. We collect where we are legally required, 
which is in the four states where we have a retail presence.
    Mr. Chaffetz. I know you--I mean, you got a nice compliment 
shout-out from Mr. Conyers there but you have also taken a 
fairly aggressive tax position in saying well, we have no 
physical presence because it is supposedly--but it is under 
your control, is it not?
    Mr. Misener. No. These are separate corporations. I don't 
think anybody on this Committee want to start----
    Mr. Chaffetz. Let me go back to Mr.--let me go back to--my 
time is real short. Let me go back to Mr. Byrne here.
    Finish that thought. I interrupted you.
    Mr. Byrne. You see my point.
    Mr. Chaffetz. Yes.
    Mr. Byrne. You see my point. Okay. So because--but that 
ground is eroding from beneath their feet so they are looking 
more and more like a big-box and therefore they are jumping on, 
well--they are jumping on let's get this tax reform. But it is 
the sleeves out of the vest.
    All this tax reform is sleeves out of the vest for big-
boxes because they already have--they already have nexus 
everywhere. So there is--so they are already charging tax 
anywhere so--everywhere so they don't have to pay any new tax 
through this, and Amazon is in exactly the same boat.
    Mr. Chaffetz. Mr. Cohen, let's--eBay is so pervasive 
everywhere. We are talking about the exemption threshold.
    Where do you see that line? I happen to think it should be 
higher rather than lower but where--what number do you like and 
what is your perspective on it?
    Mr. Cohen. Mr. Chaffetz, we do support the Small Business 
Administration's calculation for the size of small businesses 
but we are also open to a discussion that makes it relevant to 
trying to determine what the appropriate level is.
    But our general viewpoint is that if a small business 
qualifies to obtain loans or if it qualifies as a small 
business by the people that we entrust to determine the size of 
small businesses, that it makes a lot more sense than handing 
the power over to the tax collector who has an interest in 
trying to maximize every single possible dollar and does not 
have any interest whatsoever in determining how you create more 
jobs.
    Mr. Chaffetz. What is that threshold number? I forget.
    Mr. Cohen. Thirty-one--it is approximately $31 million 
right now.*
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    *Mr. Cohen changed this figure to $30 million.
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    Mr. Chaffetz. Okay. Thanks to the Chairman. I yield back.
    Mr. Goodlatte. I thank the gentleman.
    The Chair recognizes the gentlewoman from Texas, Ms. 
Jackson Lee, for 5 minutes.
    Ms. Jackson Lee. Mr. Chairman, thank you very much and let 
me thank a number of Members who have legislative initiatives 
including--certainly all are my friend but my dear friend and 
the Ranking Member, Mr. Conyers. And I think it generates or it 
speaks to the emerging reconsideration of where we are today in 
2011 as where we might have been a decade ago or 15 years ago 
and I believe this issue was before this Committee.
    I am delighted to see my colleague from the state of Texas 
and listen to testimony. So I--let me just show my cards. I 
think compromise and the recognition of changing times is 
vital, and all of us have heard the refrain of creating jobs.
    Jobs can be created, maybe, if you are a small business and 
you are using online sales and maybe you have one or two 
persons in your home or one or two persons in their homes 
working with you and we don't want to disrespect that level of 
jobs.
    But we also know that the idea of building Bricks and 
Mortar, persons working in a place, creates a stream of jobs--
those who are building, those who pave the parking lot, those 
who have worked on the roads to get you to the location and, 
certainly, those who work in the facility, and maybe if we had 
a number of Black Fridays you would have people working the 
midnight shift in retail.
    So I have to be very concerned about how we bring about 
this balance and I want to go to my friend from Texas, 
Representative Otto, and tell me, frame for me, that story you 
were saying about your town and stores and how much of a 
difference that makes.
    I would then like to follow up with Mr. Misener, excuse me, 
who has a little twist on this issue. You are the famous Amazon 
with all of its attractiveness but I hope that you are also in 
the realistic world that can help us be part of the solution.
    Let me go to Mr.--Representative Otto at this time.
    Mr. Otto. Thank you, Congresswoman. The--thank you.
    It is estimated currently in the state of Texas that there 
is between $600 million and $800 million a year in sales and 
use tax that is not collected on out-of-state sales. That is a 
tremendous amount of money.
    That points out to me the unfair competition that my 
storefronts are competing with. If I am a retailer going into 
business, certainly I am going to take advantage of the 
Internet and selling over the Internet. No one here is 
discouraging that. No one here is wanting to tax the Internet.
    But in leveling the playing field to make sure that my 
local stores will continue to be developed, you know, my 
concern is are we migrating to an economy, and it appears that 
way if you look at the growth. Not where we are in total 
dollars but if you look at where the growth is, the growth is 
definitely to entice people to go to the Internet.
    Anybody that thinks they are not going to take an 8 to 10 
percent discount into consideration on a big-ticket item such 
as a camera or something or a computer or a television set, I 
just don't believe that.
    Ms. Jackson Lee. Let me, because my time is short--you have 
eloquently stated that. Speak quickly to the issue of it is too 
complex if you begin to tax, and my point would be we have 
migrated or moved to a level of technology that it is probably 
less complex than it might have been 10 or 15 years ago.
    Mr. Otto. All of the bills, as I understand, that are 
before Congress right now call for the very simplification. For 
example, if we take H.R. 3179 and allow states to do a states-
only, you could end up with as few as 25 jurisdictions because 
Streamlined has got 24 already in one.
    There is 21 states not in Streamlined that have a sales tax 
and all of these provide that the states have to provide the 
software if they are going to get down to the local area.
    Ms. Jackson Lee. One quick question and then I would like 
the gentleman from Amazon. It would probably be unfair 
competition if we left--I know there is an opt-in scenario but 
if we left some states out I think we are at a point now where 
we need to look at whether or not all 50 states need to be 
under that umbrella.
    Mr. Otto. I agree. I think that whatever is passed it needs 
to be made available not only to the compact states but the 
other states as well that will comply.
    Ms. Jackson Lee. Thank you, sir.
    Mr. Misener, thank you.
    The question is you are the mother of all. What could you 
live with, and as you look at this legislation do you see the 
complexity of trying to deal with helping communities, taxation 
for education and the online marketplace?
    Mr. Misener. Yes, ma'am, Ms. Jackson Lee. We want----
    Ms. Jackson Lee. And you have compacts with New York and 
California.
    Mr. Misener. Yes. What we are trying to do here is to get 
Congress to authorize all the sales tax state to require out-
of-state sellers like Amazon to collect.
    We believe it is imminently feasible. We have come out in 
strong support of a bill that has a $500,000 small-business 
exception in it.
    It seems very reasonable to us. We wanted one much lower. 
We really think that if 1 percent is at $150,000 we are talking 
about a fraction of 1 percent of online sellers would be 
required to collect under a $500,000 exception. That seems to 
be a decent compromise to us.
    Ms. Jackson Lee. So your issue is to make it all the states 
in a compact and you believe that there can be a system, a 
technology system, that would not be complex to collect those 
taxes for the states. Is that what you are saying?
    Mr. Misener. Yes, ma'am. I actually feel very badly for Mr. 
Cohen because he is in a position of having to try to prove a 
negative, that it can't be done or they don't want to do it. We 
are saying we can do it and we will do it for our sellers.
    Ms. Jackson Lee. Well, I think we have come to some means 
of collaboration here and I hope for those who oppose it we 
will find a common ground for them as well.
    But I think the economy is such, Mr. Chairman, that we need 
to do that.
    Mr. Chairman, may I just get a yes or no answer from Mr. 
Marshall?
    I am not sure if--it looks as if he has a different 
perspective but, Mr. Marshall, would you be willing to engage 
in compromise and discussion, listening to the testimony not 
only that you have given but to others on the--on the panel 
here, recognizing the loss of resources and revenue that states 
are losing under the present scheme?
    Mr. Marshall. Well, if I--if I understand your question 
correctly, indeed, and as it relates to the small-business 
exemption, you know, I have small retail stores and I am not 
exempt.
    I collect sales tax on the very first dollar of my sales 
and, quite frankly, you know, any level of exemption is still 
picking winners and losers. All you are doing is changing the 
measure of which are winners and which are losers.
    But I would still be competing with some online retailers 
that wouldn't be obligated to charge that same sales tax that I 
have to charge.
    Ms. Jackson Lee. Well----
    Mr. Goodlatte. The time--the time of the gentlewoman has 
expired.
    Ms. Jackson Lee. We will work through that for the 
gentleman. Thank you. I yield--I yield back. Thank you.
    Mr. Goodlatte. The gentleman from Arizona, Mr. Quayle, is 
recognized for 5 minutes.
    Mr. Quayle. Thank you, Mr. Chairman.
    My first question is to Mr. Byrne and Mr. Kenley because I 
want to get kind of opposing views on this. Now, the U.S. 
Supreme Court has interpreted the due process clause of the 
14th Amendment to require that a minimum connection between a 
state and the person, property or transaction it seeks to tax.
    Now, I want to talk about a different avenue that raises 
some concern. Each of the three bills actually has a clause 
that says that this doesn't establish a nexus for any other 
type of tax or payment that is required.
    But my concern is since we are kind of getting rid of that 
minimum connection are we opening the door for other states to 
actually apply their regulatory environment onto companies who 
have no physical presence within that state, whether it be they 
pass a law that bases it if you do not have a physical presence 
and you meet some sort of threshold with annual revenue, which 
will be easily ascertained via the sales tax, then they meet 
that threshold and then they have to actually abide by the 
regulatory environment in said state.
    I will give just a specific example of this, is that 
Arizona is right next to California, and California and Arizona 
have very different overtime rules. We have overtime that kicks 
in a 40-hour work week. Once you go over 40 hours a week, 
overtime kicks in. However, in California, it kicks in also at 
the 8-hour day.
    Now, are we opening a Pandora's Box where we are actually--
since we are getting rid of this connection that we are 
actually going to allow a court to interpret what Congress has 
done and also the ability for the state to regulate within its 
own--within its own environment but since we got rid of that 
specific connection are we not opening the door to the fact 
that states will be able to regulate companies that have no 
connection besides the actual sales into their state?
    I will start with you, Mr. Byrne.
    Mr. Byrne. I would think that doing so is--would be a 
direct insult to the dormant Commerce Clause so I would think 
it wouldn't be capable of being done. But I have been surprised 
before.
    Mr. Quayle. As have I.
    Mr. Kenley, do you see any danger of that? That is one of 
my chief concerns of opening this--opening this door. I 
understand what we are trying--what is trying to be 
accomplished by this, these pieces of legislation.
    However, if we are not looking at the unintended 
consequences of this are we opening this door, which would 
basically eviscerate, you know, a company's ability to kind of 
look at the states and what their regulations are, to move 
their facilities there?
    Mr. Kenley. That's a very legitimate question. It is a very 
legitimate question and one that needs to be carefully 
considered as we do this because I agree with your fear if that 
were to happen that that would be totally inappropriate.
    There are two things that protect you on this. The first 
thing is that Congress has the authority and that is why you 
see the language in the bill that says Congress has the 
authority to define how you can regulate the interstate 
commerce.
    So if they restrict it to the sales tax instance it is only 
Congress that can change that and enlarge that and make it be 
further.
    Now, secondly----
    Mr. Quayle. But in each of the three bills it only talks 
about the nexus that is established only for state and sales 
tax and only in terms of the cost, not in terms of regulations 
or those types of things moving forward. That is where my 
concern is. Do we need to actually broaden that, the language 
there, to----
    Mr. Kenley. I think the language could be broadened and I 
think it should be. I think we--before we pass a bill I think 
we should look at that carefully. I think the language needs to 
be broadened to the point where we feel more confident that it 
will not do that.
    Now, the second backup you have in addition to the fact 
that Congress gets to set the rules as to what will be 
happening in interstate commerce is you still have the 14th 
Amendment due process clause which allows any individual to go 
to court and say look, this has gone beyond that and it is a 
due process question too.
    So but I agree with your thoughts that this needs to be 
handled very carefully.
    Mr. Quayle. Okay. Thank you.
    Mr. Cohen. Mr. Quayle, can I add to that?
    Mr. Quayle. Absolutely.
    Mr. Cohen. Because the due process question is particularly 
important for small businesses who are not necessarily in a 
position to advocate on their behalf that there would be a due 
process violation--the lower the small-business exemption is.
    So you are exactly along the right lines that it is not 
simply that just for their sales alone that they may be subject 
to different state laws but also the collection.
    Mr. Quayle. Well, one thing, and since we are talking about 
the small-business exemption I wanted to ask you about this as 
well is we have different numbers--$150,000, $500,000, $1 
million.
    I just want to know on eBay, at eBay what percentage of 
your sellers are--have annual revenues via eBay of $150,000 or 
over $150,000? Do you--do you know offhand?
    Mr. Cohen. So like I said to Congresswoman Lofgren, we have 
a significant number of sellers that are below that and we have 
a significant number of sellers that are above that.
    But we have very few sellers that only use eBay--they are 
multi-channel retailers in which they use many, many other 
places. And so therefore they may use eBay for sales. Many of 
them use Amazon for sales. That's why it makes much more sense 
to say for each retailer what their obligation is across their 
entire portfolio of business.
    Mr. Quayle. Okay. Mr. Misener, do you want to respond to 
that real quick?
    Mr. Misener. Yes, sir, if you don't mind, Mr. Quayle.
    First of all, that means that the sellers are actually 
smaller than Mr. Cohen is alleging--larger than Mr. Cohen is 
alleging. They look unnaturally small if you are only counting 
how they look as an online channel.
    But back to the due process point, Mr. Cohen is right 
except that the Quill court already decided that the due 
process clause does not apply in the context of sales tax 
collection by--in interstate sales. That was part of the 
difference between the national Bellas Hess decision and the 
Quill decision. They actually dropped out the due process 
concern and left only the Commerce Clause concern.
    Mr. Quayle. All right. Thank you, Mr. Chairman. I yield 
back.
    Mr. Goodlatte. The gentleman from Georgia, Mr. Johnson, is 
recognized for 5 minutes.
    Mr. Johnson. Thank you, Mr. Chairman.
    Is there anyone on the panel who disagrees with the thought 
that government facilitates the ability of Brick and Click or 
just Click as well as Brick and Mortar businesses to actually 
do business?
    Is there anyone who disagrees with that, government enables 
or facilitates your ability to do business whether or not you 
do it just over the Internet, whether or not you do it over the 
Internet and you have a Brick and--you have a Brick and Mortar 
distribution facility or if you are just Brick and Mortar? Mr. 
Cohen, you?
    Mr. Cohen. No, we don't, and----
    Mr. Johnson. You don't----
    Mr. Cohen. We're thankful that the government helped to 
create the Internet.
    Mr. Johnson. Okay. All right. Okay.
    So now, state and local governments facilitate your 
ability, your company's ability, Mr. Cohen, to deliver your 
merchandise. Isn't that correct?
    Mr. Cohen. Yes, sir.
    Mr. Johnson. Yeah. I mean, you got to--somebody has to 
drive it down a road that was maintained or built by state or 
local government, the road is laned, it is properly maintained, 
traffic signals, police officers to enforce the rules of the 
road, a court system for those who may be accused of--those 
delivery drivers who may get accused of speeding or something 
like that they have a right to go to court.
    And even if eBay is unable to obtain payment from someone, 
they may have to depend on the local police or the court system 
funded by the local government or the state government in order 
to collect. Is that not correct?
    Mr. Cohen. That is correct.
    Mr. Johnson. Okay. So is there anybody on the panel who 
thinks that we should do away with state and local sales taxes?
    Mr. Cohen. Mr. Johnson, can I continue though? But 2 
years----
    Mr. Johnson. Well, no. I just want to answer that 
particular question. Sales tax revenues, should they be 
outlawed so that we can level the playing field between Brick 
and Mortar and Brick and Click?
    Because I am assuming everybody believes that there should 
be--there should not be a difference in treatment between Brick 
and Mortar and Brick and Click.
    Mr. Cohen. We don't object to that. We think it makes 
perfect sense.
    Mr. Johnson. Yeah. So--yeah. So you got to pay the sales 
tax in order to do the business and so the question is how do 
we go about collecting the sales tax. That is what we are here 
for today.
    It is not so much, I don't think, that we should not have 
an obligation by Internet retailers to collect the sales tax. 
Is that correct? Mr. Byrne?
    Mr. Misener. If I may, Mr. Johnson, I could--quick answer. 
I think that you are absolutely right that it should be a 
matter of state choice. States can choose whether or not to 
have a sales tax.
    Mr. Johnson. Yeah. And if they--yeah. This just--this----
    Mr. Misener. Texas--yeah. Texas, for example, chose not to 
have a personal income tax and they--so they rely heavily on a 
sales tax, and so a company like eBay, which just opened a 
facility in Austin with a nearly $3 million Texas Enterprise 
Fund grant, they are taking advantage, clearly, of Texas' 
hospitality yet at the same time have not done anything to help 
with the sales tax collection in the state.
    Mr. Cohen. Mr. Johnson, I appreciate the need for state 
sales taxes in the states that choose to do it. What I do find 
remarkable, though, is that just 2 years ago Mr. Bezos, when 
describing what the obligations were for Amazon in states 
around the country, said, ``In Washington State where we have a 
presence we get police protection. We get fire protection. We 
send our kids to local schools. I don't see why, since we get 
no services in North Carolina, that they should be able to 
force us to collect sales tax.''
    Mr. Johnson. Well, because you do have to--you do have to 
use the police and the fire and the roads and drainage and that 
kind of thing. You use that.
    Mr. Cohen. No, no. That's what Mr. Bezos from Amazon's 
position 2 years ago----
    Mr. Johnson. Well----
    Mr. Cohen. Was that he didn't want to have to collect and 
remit in North Carolina.
    Mr. Johnson. Okay. All right. Well, things change. 
[Laughter.]
    Things happen. But let me ask this question.
    Why is it that we would need a carve-out for small Internet 
businesses from collecting sales taxes on Internet sales when 
we don't have an exemption for small businesses Brick and 
Mortar?
    Why should we have one for Brick and Click?
    Mr. Byrne. Congressman, well one reason is there is an 
implementation cost for the software and there is a friction 
cost, and if you did a cost benefit analysis you would see that 
the cost for a----
    Mr. Johnson. Well, why--how about making it--subsidizing it 
for small businesses?
    Mr. Byrne. I am all for that.
    Mr. Johnson. The cost.
    Mr. Byrne. I am all for that. But as long as there is some 
cost, which there is always going to be, then at some point if 
you are--if you are having people who sell $10,000 or $20,000 
on the Internet have to pick up that cost in order to 
integrate, that cost is going to be higher than the taxes they 
actually remit. So it is actually a net loss to society.
    Mr. Johnson. Okay. Thank you. And you all have been 
excellent spokespersons for the need for government.
    Mr. Goodlatte. On that note, the time of the gentleman has 
expired. [Laughter.]
    I am going to recognize myself and take us back here.
    The history of this is not that this originated with the 
Internet. In fact, the Quill decision was a decision based on a 
mail order case and the principle--the Chairman asked earlier 
what was the reason for not giving to the states the ability to 
collect the money. Well, the reason, of course, was delved into 
somewhat by the gentleman from Arizona but the principle is 
that those states who want to impose this collection 
requirement on taxes have jurisdiction over their citizens.
    They don't have jurisdiction over the citizens of other 
states and therefore those citizens of other states engaged in 
various business activities don't have any say in how the laws 
are constructed in those states that they are going to then be 
forced to comply with.
    So the court ruled that that was the province of the 
Congress under the Commerce Clause and here we are today and 
have been for the last at least decade that we have been 
dealing with this issue.
    So the question really becomes one, not only of fairness 
but also of practicality for those businesses. So my first 
question for you, Mr. Kenley, is why should the Congress cede 
the authority, as some of these bills apparently do, to your 
organization to determine what is the standard for out-of-state 
businesses to collect these taxes rather than set a standard 
ourselves and allow that to take place that way?
    Mr. Kenley. The reason that we had originally put forth in 
having Congress cede the authority with the proviso that you 
could always appeal anything determined by the Governing Board 
to the Federal courts, which is the normal process through the 
interstate Commerce Clause was----
    Mr. Goodlatte. But you would be effectively a legislative 
body that would set the, for example, size of a small business 
that would be exempt from having to comply with the collection 
of the taxes.
    Mr. Kenley. The whole premise of the thing had been with 
the--when the legislators went to the Governing Board and from 
their respective states and then they had to go back to their 
state and then pass their state laws in compliance was that 
they were acting as agents of the state. And so it was really 
the states doing it, not the Governing Board itself.
    Mr. Goodlatte. What about the five states that don't 
collect sales taxes now? How would they fit into this?
    Those states would be burdened. In other words, businesses 
that do business online in those states would be burdened but 
there would be no benefit to those states because they don't 
have a sales tax.
    Mr. Kenley. Well, Mr. Chairman, let me go back first and 
say that the Streamlined organization recognizes that there 
needs to be an avenue for the states who do not want to join 
Streamlined and do not want to adhere to those rules.
    Mr. Goodlatte. Would their--would their businesses in those 
states--if they don't want to have a sales tax collected would 
they be allowed to exempt those businesses from having to 
collect state taxes for other states that do?
    Mr. Kenley. I am not sure I follow that question.
    Mr. Goodlatte. Well, if you are in Delaware and you don't 
have a state sales tax but you have a business in Delaware that 
is engaged in online businesses and making sales, that business 
is going to be burdened by having to collect sales taxes for 
other states, even though Delaware hasn't for all time as I 
understand it not collected sales tax.
    Mr. Kenley. Well, first off, I would argue that there is no 
burden on the business because there is no cost to the business 
to do that.
    Mr. Goodlatte. Let me--let me get to that question. You 
indicated that you had software that would work for the 
Streamlined businesses--states, the states that have 
participated in this.
    What about a state that wants to collect this tax but wants 
to continue its own unique definition of what is subject to tax 
and what the tax rate is, and do you make a difference between 
the rates of these 10,000 jurisdictions? Do you have one 
unified rate or do you have a different rate for each 
jurisdiction?
    Mr. Kenley. Well, the Streamlined software allows you to 
handle every jurisdiction in the United States and sort out the 
rates as well as any other. We have----
    Mr. Goodlatte. So if a state collects--has a local grocery 
store collect a sales tax----
    Mr. Kenley. Which is my business, yeah.
    Mr. Goodlatte. On potato chips and another state makes a 
distinction between the size of the bag, and different 
jurisdictions in different states do that, this software will 
make that distinction? It will say this is a 5-ounce bag so we 
are going to not impose the tax but the 12-ounce bag, that is 
subject to the tax?
    Mr. Kenley. Within the Streamlined rules and definitions we 
have toggle switches that allow you to exercise choices.
    But to go back to your basic question, we do feel that it 
is appropriate for Congress to enact a bill which allows states 
not to join Streamlined but to have their own systems and to 
make some of the----
    Mr. Goodlatte. That complicates the matter for that small 
business, particularly in a state that----
    Mr. Kenley. Not really.
    Mr. Goodlatte. Doesn't even have a sales tax.
    Mr. Kenley. Not really.
    Mr. Goodlatte. Well, I think the--I will ask Mr. Byrne to 
respond since he had a very different experience with the cost 
of the software implementation for his business.
    Mr. Byrne. Yes. I don't believe the software is, at least 
as of a year ago, it is not--it is what they call in the 
industry vaporware. It is not as advertised. It is expensive 
and so forth. However, that is a technical problem that could 
be solved probably in a year or two.
    They could--software could be created that does this 
smoothly. I still--I think that there is not quite the range of 
disagreement among us as may first appear, although I would 
prefer you didn't change anything at all. If you----
    Mr. Goodlatte. But you want a small-business exemption. He 
says you don't need a small-business exemption.
    Mr. Byrne. Okay.
    Mr. Goodlatte. Tell me why you do need a small-business 
exemption.
    Mr. Byrne. Well, I think you need a small-business 
exemption to reflect the fact that there will be implementation 
and costs for any business. I think the states who want to do 
this should be providing it for free but there is still going 
to be an implementation cost and that--for really small sellers 
that implementation cost is going to be higher than the tax 
this----
    Mr. Goodlatte. Let me ask both of you this question.
    If we are doing this for interstate sales, and I assume you 
are going to do this for not only online businesses but also 
mail order businesses, telephonic businesses and so on, if you 
are going to do it, why not have one uniform interstate 
definition of what the tax is?
    If a state wants to collect some different formula with 
different conditions in its state, great. But if it is going to 
collect sales taxes, require a business out of state to collect 
taxes, why not have one uniform definition of what is subject 
to the tax and one uniform interstate tax? Some states that 
have a very high sales tax, well, they may lose a point or two.
    Some states with a low sales tax, they might gain a point 
or two. But for the business doing business online, it would 
seem to me a lot more practical and a lot more fair to say this 
is the rate that you have to pursue if you are going to do 
business online.
    Mr. Byrne. Sir, I agree. That is very much in the direction 
of the bill that we are proposing. What we are saying is don't 
do it but if you are going to do it don't go with the 
Streamlined project, which will end up--it doesn't create a 
uniform system.
    It is still a complicated system. Go with a much simpler 
uniform system but where the states are--the bill as we propose 
it would still allow the states to keep their individual rates 
but they would have to provide the software and the interface 
but it would be uniform. What you are proposing is going a step 
further where even the rates get unified, which I would 
applaud.
    Mr. Goodlatte. Mr. Kenley, I want to give you an 
opportunity to respond to that but my time has expired so be 
brief.
    Mr. Kenley. I struggle with--I struggle with your--the 
thing that you posit there because it intrudes so much on the 
federalism and the state sovereignty side of the issue. And so 
I think----
    Mr. Goodlatte. It is interstate commerce. It is--it is 
business being conducted across state lines. It is not 
something that is confined within the jurisdiction of a state. 
That is why we are here. That is why the court ruled as it did 
in Quill.
    Mr. Kenley. Well, I--I will have to think that through and 
I am not sure if I can buy that on that basis. But let me think 
about that.
    But, secondly, let me say that the technology that we have 
today, even within Streamlined, allows those toggle switches to 
be developed to allow states to have different choices both as 
to rates and both as to the--your example on the bag of potato 
chips, which is taxable and which is not taxable.
    So those are things that are being done within that realm.
    Mr. Goodlatte. Anybody else want----
    Mr. Kenley. And I think the technology allows us to solve 
that without it being a problem.
    Mr. Goodlatte. Anyone else want to comment on this point? 
Mr. Otto?
    Mr. Otto. I think--I am okay with the states having to 
provide the solution and hold the retailer harmless as long as 
they are using it. I mean, there is nothing wrong with that.
    The same thing that the Streamlined compact has done why 
couldn't the states that maybe don't want to join Streamlined, 
don't want to change their definitions, but maintain the 
definitions uniformly throughout their state be allowed to 
develop the software to give to the retailer?
    Mr. Goodlatte. But now you are talking about having a small 
business having to deal with a variety of different software 
programs.
    They have got one program for the Streamlined folks and 
then you have got 20 other----
    Mr. Otto. Most of these are going to end up in----
    Mr. Goodlatte. States with different definitions and you 
got 20 different software programs that----
    Mr. Otto. Not if the states go together to form a compact 
to develop it.
    Mr. Goodlatte. Right. But that is--but that is why the 
suggestion that you have one definition and one rate----
    Mr. Otto. But are you talking about one definition for all 
the states or a definition within each state?
    Mr. Goodlatte. No, no. One definition for all the states 
and one flat rate.
    Mr. Otto. Then I have to agree on the--on the, you know, 
from a federalism standpoint I am not--the reasons Texas 
doesn't belong to the Streamlined sales compact is we are not 
willing to give up that right to determine what is taxable and 
what is not taxable.
    Mr. Goodlatte. I understand, but you are making it harder 
to get to where you want to go in terms of collecting sales 
taxes through businesses that are not under your jurisdiction 
in your state.
    Mr. Otto. Then what we are going to end up with is what we 
have today, which is states going out on their own to try to 
define physical presence in all kinds of ways.
    Mr. Goodlatte. Well, I think we need to develop more 
consensus here. That would be my observation.
    Ms. Chu, the gentlewoman from California, is recognized for 
5 minutes.
    Ms. Chu. Thank you, Mr. Chair.
    Well, before I came to Congress I was elected to the 
California State Board of Equalization, whose main 
responsibility it was to collect the state sales tax as well as 
the use tax, and I can attest to the dramatic decline of sales 
tax revenue as a proportion of the state budget revenue because 
of online sales and I can also attest to the complete lack of 
compliance with use tax obligations despite the fact that we 
have a line on our income tax forms reminding people of their 
use tax obligation.
    And besides that, what I found was that few people even 
know what a use tax is and are shocked to find that they 
actually owe that tax regardless of whether they buy online or 
not.
    So I would like to ask our two state representatives, 
Senator Kenley and Representative Otto, why are the current 
methods of collecting the use tax such as auditing not an 
effective way to collect use tax?
    Mr. Otto. In Texas, because we do not have a personal 
income tax, the only audit provision you have on use tax is a 
business that holds a sales and use tax permit.
    Those are the only people that would be buying across state 
lines that would be subject to audit for the purposes of 
determining whether they had paid the appropriate amount of use 
tax.
    We have no form. We have no reporting system for 
individuals or anybody else unless they hold a permit to comply 
with paying the use tax.
    Ms. Chu. Do you even have auditors that do such things?
    Mr. Otto. Yes. We have auditors. The comptroller, you know, 
because sales and use tax makes up a very large portion of our 
state budget and from the revenue standpoint we have auditors 
that are very aggressive.
    Ms. Chu. And Senator Kenley?
    Mr. Kenley. Well, in Indiana we do have an income tax. 
Certainly, what you are suggesting would be a Full Employment 
for Auditors Act.
    It would require an awful lot of auditors, and I pointed 
out earlier in the testimony that it seems that traditionally 
sales tax has been administered by the retailer doing the 
collection and being given an allowance to do so to try to 
cover their cost of doing that, and it is the most efficient 
way of doing--making the collection.
    Now, a secondary problem, and we have talked about this in 
Streamlined, is once you start trying to find ways other than 
hiring legions of auditors to do this to make this work out, 
then you for example, you might say somehow or other we are 
going to demand that all the credit card companies send us a 
cross-reference file on all the purchases by a consumer and 
then so you get into that and then all of a sudden with a 
married couple you have a discussion about well, gee, what was 
this purchase from Victoria's Secret, I don't remember that.
    And so there is a element of privacy intrusion there that 
we are uncomfortable with, I think, as public officials to go 
too far on that point.
    So that is--those are the concerns that we have discovered 
in that audit process. It may be over time that people will 
declare and pay use tax because it is becoming more a 
phenomenon that we are all shopping over the Internet in one 
way, shape or form.
    So maybe it is a experiential factor. But I think there are 
some barriers to going a different way than we have in the past 
traditionally, which is that the retailer does the collection 
and the remission.
    Ms. Chu. In other words, it is expensive and inefficient to 
use auditors to collect the use tax.
    Mr. Kenley. Right. Since you are doing it at the time of 
the transaction with the retailer it just kind of fits within 
the flow of the commerce system.
    Ms. Chu. And what would it mean to your states, to your 
respective states, if you were able to collect the remote sales 
tax?
    Mr. Kenley. What would it mean to the states to----
    Ms. Chu. For your--for your state budget.
    Mr. Kenley. The estimates in Indiana run anywhere from $150 
million a year to $400 million a year under the current 
situation.
    I think the bigger issue that we need to think about here 
today in Congress is that this is a growing part of our 
commercial environment so it is probably going to be a growing 
number regardless of what number you project or settle on.
    Mr. Otto. In Texas, the current estimates are $600 million 
to $800 million per year.
    Ms. Chu. And finally, I would like to ask Mr. Misener of 
Amazon, Mr. Byrne said that it was very onerous to have a 
software to collect sales tax revenue and that it cost $300,000 
and many man hours of the IT staff. But you seem to have a 
different view regarding the type of technology that is 
available to help collect the sales tax.
    Can you talk more about that and about the purchasing of 
software to remit sales tax in locations where you do have 
nexus, and does the technology exist?
    Mr. Misener. Thank you, Representative Chu. Thank you very 
much.
    Yes, we do collect, as I mentioned before, in the four 
states where we have--our retail business has a physical 
presence and thus we have nexus there, and so it is possible. 
You only need to look around and see all the multi-channel 
retailers who also are collecting nationwide in 46 states.
    So it is absolutely doable. Now, you might say, well, those 
are only big companies like Amazon and the multi-channels--what 
about the little guy.
    Well, the little guy will get services provided for him or 
her. Those small sellers won't have to create the software from 
whole cloth. They will obtain it as a service from service 
providers and it certainly is something that we plan to do.
    I certainly hope eBay does it and maybe our friends at 
Overstock will sell through Amazon and take advantage of our 
service as well.
    Ms. Chu. Thank you. I yield back.
    Mr. Goodlatte. The gentleman from Florida, Mr. Ross, is 
recognized.
    Mr. Ross. Thank you, Mr. Chairman.
    Mr. Marshall, Dr. Byrne indicates in his written testimony 
that based on the Quill decision the status quo is a success. 
Would you agree?
    Mr. Marshall. No. I don't agree at all. You know, I feel 
the current situation is picking winners and losers, and 
retailers incur expenses and benefits in all types of sale 
endeavors and if I choose to sell nationwide I am perfectly 
comfortable incurring the responsibility of collecting and 
remitting the sales tax for those purchases just as I do at my 
retail stores for state of Michigan residents.
    It is--any level of consideration for a certain size or a 
certain type of retailer is creating a unlevel playing field 
and that is what is difficult is not to be able to compete on a 
level playing field with all other players in the retail 
Internet or retail----
    Mr. Ross. With your customer base.
    Dr. Byrne, you indicated in your opening testimony, of 
course, that the cost of compliance is rather significant. I 
mean, you have got over 9,000 taxing districts I think you 
alluded to. Wouldn't this legislation, the Marketplace Equity 
Act, quite frankly, you know, bolster your concern and even 
give an argument that we need this because we would have 
uniformity in the taxing laws?
    Mr. Byrne. Well, I think that the bills as proposed would 
not--the Streamlined initiative would not create uniformity but 
that is why we have proposed a bill that says if you are going 
to do this, this is the way to do it.
    It really does create uniformity. It lets the--where the 
states indemnify. But it also has a provision where there is a 
small reimbursement of----
    Mr. Ross. And that is what I want to talk to you about 
because I think that that is important, and when you talk about 
cost of compliance it doesn't matter whether you are a small 
Bricks and Mortar retailer or an e-tailer. The cost of 
compliance is something that you have to face as a cost of 
doing business.
    So would you propose and what would you propose a cost of 
collection that would be--that would be adequate compensation 
for your business if you were to do this?
    Mr. Byrne. Two to 3 percent of the taxes that we collected 
on behalf of the state would be our fee and that would be--that 
would not just be Internet people. That would be for Brick and 
Mortar people. So it would create a truly level playing field.
    Mr. Ross. And Mr. Otto, I--when I served on the floor of 
the legislature I was an advocate of and sponsor of the 
Streamlined Sales Tax initiative. It got nowhere, I mean, and I 
understand that.
    But would you not agree then that maybe as an--as an 
inducement for these online companies that they should be 
compensated at least to cover the cost of their collection from 
an administrative----
    Mr. Otto. Texas currently has a collection allowance of \1/
2\ percent that we grant but not all states do. Again, this is 
a question of--you know, I agree. The reason we have left it in 
our law is to try to compensate retailers in our state that 
collect and remit the sales tax.
    Mr. Ross. Senator Kenley, would you agree, I mean, that 
there ought to be some compensation at least to cover the cost 
of collection?
    Mr. Kenley. Yes, and within the Streamlined agreement we 
struggled and worked to reach a compensation agreement that's a 
three-tiered compensation agreement with a higher level of 
compensation for the smaller retailer, and it moves down as you 
get larger and we think that provides adequate compensation. 
Plus, we have the free software and the certified service 
provider system.
    Mr. Ross. Mr. Cohen, you were asked this question and I am 
not sure I got the answer. How many of your members would be 
affected by the exemption that is currently being proposed in 
the Marketplace Equity Act? Do you know?
    Mr. Cohen. The Marketplace Equity Act is----
    Mr. Ross. As Representative Womack's and Speier's bill. It 
is the----
    Mr. Cohen. The $1 million?
    Mr. Ross. Yes, $1,100,000.
    Mr. Cohen. Like I said, we can't determine the users that 
go outside of our system and use others. There are a 
significant number that would be above the threshold.
    Mr. Ross. Dr. Byrne or Mr. Misener, did you want to speak 
to that?
    Mr. Misener. I am pleased to be called Doctor.
    Mr. Ross. I am sorry. I was just--thank you. [Laughter.]
    Dr. Byrne, let me ask you a question because this is 
something that is--in my position back home, I have a couple, 
married couple, Ron and Nancy, put their life savings in a 
small retail boutique retail out--a store.
    They sell barbecue grills, they sell smokers and 
accessories, and they constantly have open houses. They are a 
great corporate partner for the community, doing fundraisers.
    But people come in and try their products. They try their 
spices that they buy through a distribution center. They try 
their products. They measure them. But when it comes to 
purchase, and this is their complaint to me, is that they as a 
retailer are now having to negotiate with the consumer whether 
they will discount at 6 percent, which is our state sales tax 
there, and they say they can't do it.
    My question to you is how do I respond to them? I mean, 
there is a--there is a desperate need there for community 
partners in the retail establishment, those who invest their 
life savings in Bricks and Mortar to make sure that their 
livelihoods are not only maintained and fulfilled but also that 
their communities are better off because of their investment.
    How do I respond to them when I say, I am sorry, we don't 
have any enforcement jurisdiction to allow you to have an even 
playing field in the retail environment with online retailers?
    Mr. Byrne. Well, Congressman, I love the Brick and Mortars. 
I have been a Brick and Mortar guy myself. There are advantages 
and disadvantages of being Brick and Mortar. But what I would 
really say is that their pressure came from the big-boxes.
    It is the big-boxes who have taken over 87 percent of 
retail and so that is really where their competition has come 
from. There is other small retailers in some other state than 
yours who is maybe selling their barbecues online and so it 
creates winners and losers.
    The issue is, I think, as Mr. Cohen said, it is a false 
dichotomy to view this as Internet players versus small Brick 
and Mortars. It really is the big-box retailers versus small 
entrepreneurs.
    Mr. Ross. But the small entrepreneurs are the ones who make 
the investment to allow the consumer to see the product and 
then the consumer makes the choice to buy it online because 
they don't have to pay sales tax. And I see my time is up and I 
yield back.
    Mr. Amodei [presiding]. Thank you, Mr. Ross.
    The gentleman from Florida is recognized.
    Mr. Deutch. Thank you, Mr. Chairman.
    I would just like to follow up on that point, Mr. Byrne. I 
don't--I don't know that it is entirely accurate to try to 
couch this in terms of--to shift the debate to a battle between 
smaller retailers like Mr. Marshall and the bigger retailers.
    The fact is in many ways some of the smaller retailers--
correct me if I am wrong--who have specialized products sell 
those products.
    That is--those are the products where the consumer has to 
go online if they want to try to find a lower price and often 
does, and when you speak about the benefits, and this is a 
question I would like to put to you and to Mr. Marshall because 
you spoke, Mr. Byrne, about the benefits that Brick--that Brick 
and Mortar retailers have and the advantages they have and 
people being able to go in and touch the product, people being 
able to go in and interact with someone directly, to have 
questions answered about the product.
    What are the--what are the benefits? Let me start with you, 
Mr. Marshall. What are the benefits, given all those wonderful 
benefits that you have, why would anyone go online ever to buy 
a product?
    Mr. Marshall. Well, in many cases, that purchase decision, 
in a final analysis, is based on price. Every hour of every day 
our sales associates entertain customers' questions, provide 
demonstrations, allow them to evaluate different instruments 
and then they are confronted with okay, now, you know, here is 
the best price I can get on the Internet, can you match that.
    And with our 6 percent sales tax we could and we 
comfortably do with Internet retailers that also charge sales 
tax. But those that have that competitive advantage it is just 
a burden that we cannot overcome.
    It is an unlevel playing field and there is just no logical 
sense to it, and engaging that customer and saying well, you 
understand that this 6 percent that we have in our price we are 
not taking that, we are giving it to the state, you know, the 
customer doesn't care. You know, the bottom line is price in so 
many cases, and in this unlevel playing field we cannot compete 
with that.
    Mr. Deutch. Mr. Byrne?
    Mr. Byrne. Well, that is why the bill that we have proposed 
totally eliminates the tax benefit. What we are saying is if 
you are going to do something don't--you know, you can level a 
playing field by either, you know, filling in dirt on one side 
or scraping it off the other.
    Our bill says if you are going--if you are going to do this 
it totally eliminates the tax--the tax benefit of shopping 
online versus Brick and Mortar and it says let us--since the 
states are now deputizing or not just deputizing, conscripting 
retailers to do their work for them as tax collectors, there 
should be a--they should be providing the software. They should 
be indemnifying us and Mr. Marshall against mistakes and they 
should be reimbursing us as well.
    Mr. Deutch. All right. So let me--since Mr. Womack and Ms. 
Speier are so committed to this issue that they have sat 
through this hearing, let's assume for a moment that the 
legislation that they have introduced passed the Congress and 
was signed into law by the President tomorrow.
    What would--in the--as you talk about all of the potential 
costs, and I would like to actually open this question to Mr. 
Misener and Mr. Cohen as well as Mr. Byrne, what would you have 
to do? How much would it actually cost? What would the burden 
be to you?
    Mr. Byrne. Myself first?
    Mr. Deutch. Mm-hmm.
    Mr. Byrne. On the--right now would be fairly cost, I would 
imagine, a couple of million dollars and a year of sort of 
integration to the different commercial packages that are 
available and there would still be a liability because no one 
is yet guaranteeing that if we use the package----
    Mr. Deutch. I understand.
    Mr. Cohen?
    Mr. Cohen. We believe there would be a significant loss of 
sales from a significant number of sellers who would leave 
online platforms and go to either using places in which it 
would be much harder to collect from, use other types of 
services where they wouldn't, for example, ad words or other 
systems in which the auditing of different states would not 
apply to them.
    That is why we are so adamant that we would like a 
significant small-business exemption so that they are not 
driven from the Internet. We think the cost will go up, 
absolutely.
    Mr. Deutch. Well, I understand you think the costs will go 
up and Mr. Marshall's argument is the cost is going to go up. 
You are going to bear some additional cost. He bears an 
inordinate amount of additional costs by having his store open 
so the customers can come in and look at the products before 
going online. What--I don't understand. The customers are going 
to be driven where?
    Mr. Cohen. To larger retailers. Just to larger retailers. I 
mean, the cost advantage that Amazon has right now will be 
magnified without--some pushback on small businesses who have a 
sales tax advantage, no question.
    Mr. Deutch. Mr. Marshall, is that a battle you are willing 
to engage in? Do you think that is right that everyone----
    Mr. Marshall. We do every day.
    Mr. Deutch. Everyone is going to leave and run off to the 
larger retailers?
    Mr. Marshall. Well, that is a battle that retailers, small 
retailers, are joined every day and comfortably joined. You 
know, it is a competitive world and, you know, if you can't 
stand the heat you shouldn't be in retailing. But as long as 
the field is level, you know, we will battle the big retailers.
    We have advantages over them. You know, we have a 
connection with the community. You know, our--you know, it is a 
level playing field and there is benefits and drawbacks to 
being a big-box and being a small retailer. That is just fine.
    Mr. Deutch. But at that point--at that point, the big-box 
retailer, the smaller retailer, the online, at least at that 
point there is a level playing field to engage in that.
    Mr. Marshall. Absolutely.
    Mr. Deutch. Thank you. Thank you, Mr. Chairman.
    Mr. Amodei. Thank you, Mr. Deutch.
    The gentleman from Texas is recognized, Judge Poe.
    Mr. Poe. Thank you, Mr. Chairman.
    I want to start with you, Mr. Otto. Just so everyone on the 
panel or the Committee understands, the Texas legislature meets 
every 2 years for 5 months. Is that correct?
    Mr. Otto. That is correct.
    Mr. Poe. And yet Texas is, what, the 13th largest economy 
in the world, something like that. And your primary source of 
revenue for the state is----
    Mr. Otto. Sales and use tax.
    Mr. Poe. Sales tax and use tax. It seems to me--let's talk 
about Dayton, Texas. People who build a building and sell a 
product take a greater risk than someone that is somewhere else 
in the fruited plain selling through the Internet.
    In Dayton, just since you have been elected, you have had 
Hurricane Katrina, Hurricane Rita, Hurricane Humbert, Hurricane 
Gustav and Hurricane Rita all hit Dayton, Texas. Some of those 
Main Street businesses were destroyed, rebuilt, destroyed, 
rebuilt, destroyed, rebuilt.
    It seems to me that that is a risk they take yet they have 
a disadvantage with the Internet service retail. Do you agree 
with that or not?
    Mr. Otto. That is true in Dayton, Texas. That is true 
anywhere in the state of Texas.
    Mr. Poe. Yeah, I know. The whole state, whether it is fires 
or hurricanes or droughts, all of that has, you know, occurred 
since recently.
    Tell me about your concept that this is not a new tax. You 
know, nobody wants new taxes on anybody. Well, most people 
don't want new taxes.
    Mr. Otto. I, for one----
    Mr. Poe. Tell me--explain that to me. Make it simple.
    Mr. Otto. Right. I don't--this is not a new tax.
    Mr. Poe. Yeah. You are a CPA but keep it simple.
    Mr. Otto. All right. This is a tax that, when the sales tax 
laws were passed decades ago, the use tax was put into 
existence. This is not a tax that the business pays. This is a 
tax on the consumer that the businesses that retail collect on 
behalf of the states.
    So this is not a new tax we are imposing. It is a tax we 
have been unable to collect partly because of the line drawn in 
the Quill decision. But even in that, we have--I mean, Amazon, 
we had a--we had a battle with them this session.
    They have a distribution center in Irving, Texas, owned by 
a wholly-owned subsidiary and are not collecting the Texas 
sales tax.
    I have read Quill over and over and I can't find where that 
is not physical presence but--and before we went into session 
the comptroller sent them a tax due notice for $269 million 
that should have been collected over a 4-year period.
    Mr. Poe. Has that tax been paid?
    Mr. Otto. Not to my knowledge. So what we are looking at is 
in order to avoid--what I don't like seeing on the landscape 
right now for Texas and for any other state is what states are 
trying to do to, in my way, Mickey Mouse the definition of 
physical presence, all right, and that is not a desired 
outcome.
    We need to create a level playing field where everybody 
understands the rules and they are very clear. This bill that 
has been introduced in the House calls for simplification. It 
calls for software to be provided. All of these additional 
costs the states are going to have to front that.
    If we want to take advantage of the--of the provisions that 
are going to be made available to us in this legislation, we 
are going to have to come up with the money to provide that 
software.
    Mr. Poe. Sales tax revenue in the state of Texas, has it 
been going up? Has it been going down? Is it about the same?
    Mr. Otto. Well, when I first got to the legislature in 
2005, the--our sales tax revenues were growing at double-digit 
percentages until we hit the current recession. We have just 
now become where our August sales tax collections for 2011 got 
back to the level the were at at 2008 pre-recession but they 
are not back to the 2006-2007 levels that they were at and what 
I would call our peak economy.
    Mr. Poe. There are a lot of factors, of course, involved in 
that. Is one factor or not the fact of consumers buying online?
    Mr. Otto. That is correct. I will tell you what is driving 
our recovery right now is the oil and gas sector down in the 
Eagle Ford formation in south Texas. We have got an oil and gas 
boom going on that is driving most of the sales tax. Our 
housing sector has not come back, which is a big driver in 
sales tax in the state.
    Mr. Poe. One other question. What is the biggest store in 
Dayton, Texas? It is not Sonic but what is it?
    Mr. Otto. Oh, wow.
    Mr. Poe. Well, let's go to Houston. Here is an example.
    Mr. Otto. Probably Western Auto.
    Mr. Poe. Western Auto. I have seen this and I have heard 
about this phenomena where a consumer goes into, let's use Best 
Buy, finds the TV they want and while they are there, they are 
ordering it on the Internet right there in the store, the Main 
Street store--ordering it on the Internet because they can get 
a, you know, no sales tax. Texas 8\1/2\ percent, 8\1/4\?
    Mr. Otto. 8\1/4\.
    Mr. Poe. So they can save that 8\1/4\ percent by ordering 
it in Main Street business the same TV set. That jus doesn't 
seem right to me.
    Mr. Otto. It doesn't. We had the same kind of testimony 
before the House Ways and Means Committee this last session 
that that was occurring on big-ticket items.
    Mr. Poe. All right. Thank you, Mr. Chairman. I will yield 
back.
    Mr. Amodei. Thanks, Judge.
    The lady from California, Ms. Sanchez.
    Ms. Sanchez. Thank you. I feel like the last person who 
gets to go at a roast and all the best lines are already taken. 
[Laughter.]
    I appreciate your patience in hanging in here and I have 
listened to all of the testimony and the questions with a lot 
of care. So, hopefully, I won't be repeating some of the points 
that some of my colleagues made.
    I want to start with Mr. Marshall. Mr. Marshall, I 
understand you are a family-owned business. It is second 
generation.
    Mr. Marshall. Correct.
    Ms. Sanchez. And that you have seven physical stores. 
Didn't start out that way, did it?
    Mr. Marshall. No. It was just in the last 15 or 20 years 
that we expanded from a single location to seven.
    Ms. Sanchez. When you opened that single location, did the 
government help you with any of the costs of collecting sales 
tax on the items you sold in that Brick and Mortar store?
    Mr. Marshall. Well, it----
    Ms. Sanchez. Did they subsidize any of that for you?
    Mr. Marshall. It predates my time but to my knowledge, no. 
The system that exists within the state of Michigan for 
collection of sales tax, you know, seems reasonable and there 
are--there are considerations shown for the burden that we 
incur collecting it.
    The government did assist in the creation of Marshall Music 
because my father was a pilot in World War II and my mother 
worked for the government during World War II, and it was 
savings that they accumulated during that time that made the 
down payment on their first music store.
    Ms. Sanchez. Okay. I am somewhat facetiously highlighting 
that point because there seems to be a lot of consternation 
about the cost of implementing, you know, compliance with 
collecting sales tax revenue through online purchases.
    Now, you have admitted that you also sell products online. 
Is that correct?
    Mr. Marshall. Correct.
    Ms. Sanchez. And what percentage, just roughly, can you 
give me a ballpark, of your business is done through online 
sales versus the Brick and Mortars that you own?
    Mr. Marshall. Less than 1, 1\1/2\ percent online.
    Ms. Sanchez. Okay. So if you were--if we were viewing you 
strictly through the lens of your online sales and what you 
take in on a yearly basis through those online sales, under 
some of the definitions that people have proposed for the 
small-business exemption you might look like you actually were 
a small business that qualified for that exemption, would you 
not, if we were strictly looking through the prism of what a 
small business does in online sales?
    Mr. Marshall. Indeed, and I apparently would not have to 
collect sales tax and would have a competitive advantage over 
those that do. You are--it would--you know, it would still be 
picking winners and losers.
    Ms. Sanchez. And so, you know, with some of these, you 
know, proposed limits for what a small-business online retailer 
is, and I believe, Mr. Cohen, and you can correct me if I am 
wrong, you don't know exactly what percentage of people 
strictly sell online but very well could be a situation like 
Mr. Marshall's situation in which part of their portfolio of 
sales is online but, you know, you could--and they could look 
strictly through that prism like a small-business entity but in 
fact they could be doing millions or billions of dollars worth 
of business through other, you know, platforms from which they 
sell.
    Is that correct, Mr. Cohen?
    Mr. Cohen. Yeah, and for many online and for many Main 
Street retailers we think the Internet is a great way for them 
to expand their business. Exactly.
    Ms. Sanchez. I understand but, you know, again, the--you 
know, creating these artificial distinctions between Brick and 
Mortar and online sales and small-business versus--you know, 
what is the definition of small business.
    I have listened with a lot of attention to the small 
business discussion because I used to serve on the Small 
Business Committee, and the definition of small business pretty 
much is in the eye of the beholder because if you look at SBA, 
government entity, you know, their definition in some instances 
is 500 or fewer employees.
    And if you asked the average person out on the street does 
500 employees sound like a small business to you I think most 
people would say no. If you look at the IRS and the filings 
that they receive, in the IRS's eyes--most businesses in the 
United States employ five or fewer people, and if you asked the 
average man out on the street does five or fewer people sound 
like a small business to you I imagine most people would say 
yes. And yet, you have these huge disparities in what the 
definition for small business is.
    So with respect to the small-business exemption and with 
all due respect to the idea that there are some start-up costs 
to starting a new system and to implementing it and to 
recouping those sales taxes, you know, those are--those are 
expenses that Brick and Mortars incur and nobody is--nobody 
helps them with the cost of that transition or the cost of 
that--doing business that way.
    And so I think we need to be very careful in terms of when 
we talk about small-business exemption what exactly the 
criteria should be because something that looks like a small 
business through small-business online sales could actually be 
somebody that does a lot of--generates a lot of sales in 
another context.
    And I see that my time has expired. I thank you all for 
your participation and for your patience and I yield back my 
time.
    Mr. Amodei. Thank you, Ms. Sanchez.
    I would like to thank our witnesses for their testimony 
today.
    Without objection, all Members will have 5 legislative days 
to submit additional written questions for witnesses or 
additional materials for the record. The hearing is adjourned.
    [Whereupon, at 12:42 p.m., the Committee was adjourned.]
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