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

                         MARKETPLACE EQUITY ACT OF 2011

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

                                    HEARING

                                   BEFORE THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 SECOND SESSION

                                       ON

                                   H.R. 3179

                                   __________

                                 JULY 24, 2012

                                   __________

                               Serial No. 112-157

                                   __________

             Printed for the use of the Committee on the Judiciary

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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

                      U.S. GOVERNMENT PRINTING OFFICE

    75-308 PDF                WASHINGTON : 2013
    -----------------------------------------------------------------------
    For sale by the Superintendent of Documents, U.S. Government Printing
    Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
    area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC
    20402-0001

                           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             JARED POLIS, Colorado
    TREY GOWDY, South Carolina
    DENNIS ROSS, Florida
    SANDY ADAMS, Florida
    BEN QUAYLE, Arizona
    MARK AMODEI, Nevada

               Richard Hertling, Staff Director and Chief Counsel
           Perry Apelbaum, Minority Staff Director and Chief Counsel

                                C O N T E N T S

                                  ----------

                                 JULY 24, 2012

                                                                       Page

                                    THE BILL

    H.R. 3179, the ``Marketplace Equity Act of 2011''................     3

                               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..................................................    13

                                   WITNESSES

    The Honorable Steve Womack, a Representative in Congress from the
      State of Arkansas
      Oral Testimony.................................................    15
      Prepared Statement.............................................    18
    The Honorable Jackie Speier, a Representative in Congress from
      the State of California
      Oral Testimony.................................................    20
      Prepared Statement.............................................    23
    The Honorable Bill Haslam, Governor of Tennessee, on behalf of
      the National Governors Association
      Oral Testimony.................................................    27
      Prepared Statement.............................................    29
    The Honorable Wayne Harper, Utah House of Representatives, on
      behalf of the Streamlined Sales Tax Governing Board
      Oral Testimony.................................................    32
      Prepared Statement.............................................    34
    Hanns Kuttner, Visiting Fellow, Hudson Institute
      Oral Testimony.................................................    38
      Prepared Statement.............................................    75
    Joseph Henchman, Vice President, Legal & State Projects, Vice
      President, Operations, Tax Foundation
      Oral Testimony.................................................    80
      Prepared Statement.............................................    82
    Steve DelBianco, Executive Director, NetChoice
      Oral Testimony.................................................   102
      Prepared Statement.............................................   105

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Prepared Statement of the Honorable John Conyers, Jr., a
      Representative in Congress from the State of Michigan, and
      Ranking Member, Committee on the Judiciary.....................    13
    Material submitted by Hanns Kuttner, Visiting Fellow, Hudson
      Institute......................................................    39
    Material submitted by the Honorable Zoe Lofgren, a Representative
      in Congress from the State of California, and Member, Committee
      on the Judiciary...............................................   135
    Material submitted by the Honorable Steve King, a Representative
      in Congress from the State of Iowa, and Member, Committee on
      the Judiciary..................................................   144

                                    APPENDIX
                   Material Submitted for the Hearing Record

    Questions for the Record submitted by the Honorable Jason
      Chaffetz, a Representative in Congress from the State of Utah,
      and the Honorable Melvin L. Watt, a Representative in Congress
      from the State of North Carolina...............................   158
    Response to Questions for the Record from the Honorable Bill
      Haslam, Governor of Tennessee..................................   160
    Response to Questions for the Record from the Honorable Wayne
      Harper, Utah House of Representatives..........................   161
    Response to Questions for the Record from Hanns Kuttner, Visiting
      Fellow, Hudson Institute.......................................   162
    Response to Questions for the Record from Joseph Henchman, Vice
      President, Legal & State Projects, Vice President, Operations,
      Tax Foundation.................................................   165
    Response to Questions for the Record from Steve DelBianco,
      Executive Director, NetChoice..................................   168
    Additional Material submitted for the Record.....................   179

                         MARKETPLACE EQUITY ACT OF 2011

                                  ----------

                             TUESDAY, JULY 24, 2012

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

        The Committee met, pursuant to call, at 10:06 a.m., in room
    2141, Rayburn House Office Building, the Honorable Lamar Smith
    (Chairman of the Committee) presiding.
        Present: Representatives Smith, Coble, Gallegly, Goodlatte,
    Chabot, Pence, Forbes, King, Franks, Jordan, Poe, Griffin,
    Marino, Adams, Amodei, Conyers, Scott, Watt, Lofgren, Jackson
    Lee, Cohen, Johnson, Chu, Deutch, Sanchez, and Polis.
        Staff Present: (Majority) Richard Hertling, Staff Director
    and Chief Counsel; Travis Norton, Counsel; David Lazar, Clerk;
    (Minority) Perry Apelbaum, Staff Director and Chief Counsel;
    Danielle Brown, Counsel; and 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 anytime. We welcome our witnesses, and we
    welcome the large amount of interest today in the subject as
    well. I am going to recognize myself for an opening statement
    and then the Ranking Member.
        Last November, the Judiciary Committee held a hearing to
    explore whether Congress should enable States to collect sales
    taxes from retailers who lack a physical presence in the State.
    Today we will consider a legislative proposal authored by our
    colleagues Congressman Steve Womack of Arkansas and
    Congresswoman Jackie Speier of California. Their bill, H.R.
    3179, the ``Marketplace Equity Act of 2011,'' has bipartisan
    support from Members both on and off this Committee.
        In the 1992 case Quill v. North Dakota, the Supreme Court
    held that under the Dormant Commerce Clause, a State may not
    compel a retailer to collect and remit the State's sales tax if
    the retailer lacks a physical presence in the State. In the
    Supreme Court's view, to force a retailer to collect and remit
    taxes to more than 9,000 State, county, and local taxing
    jurisdictions throughout the country places a serious burden on
    the retailer's ability to sell in interstate commerce. Quill's
    bright-line ``physical presence'' rule for tax collection makes
    sense for small businesses that cannot afford to track and
    comply with 9,000 different tax codes as a cost of doing
    business throughout the country.
        The Constitution does not allow one State to reach into the
    pockets of another State's retailers to exact taxation without
    representation. But brick-and-mortar retailers claim that the
    physical presence rule creates an unlevel playing field between
    them and their online retailer counterparts. Online retailers,
    who maintain a very limited physical presence and use common
    carriers to fill orders, enjoy a competitive advantage over
    traditional retailers. This is because most States cannot
    compel the online retailer to collect and remit its sales tax.
    Neighborhood brick and mortar stores, meanwhile, must collect
    and remit taxes on all purchases.
        Moreover, State and local governments view the taxes they
    cannot collect on most online sales as lost revenue. It is true
    that online consumers owe a use tax to the State in which they
    reside, but data show that use taxes are easily avoided, rarely
    paid, and difficult to enforce.
        The Court's decision in Quill was based on the observation
    that compliance with numerous taxing jurisdictions' laws would
    be burdensome and confusing. The Constitution does not require
    a physical presence standard as a tax collection criterion.
    Congress may pass legislation that uses a different standard
    under its power to regulate interstate commerce. The
    Marketplace Equity Act replaces the physical presence
    requirement with a requirement that State and local governments
    significantly simplify their tax policies if they want to
    collect sales taxes from out-of-State retailers.
        It also contains an exception from the tax collection duty
    for small sellers. Any bill to enable sales tax collection from
    remote vendors should contain a robust small seller exception.
    This way America's job-creating small businesses do not become
    mere tax collection agencies for those 45 States with a sales
    tax.
        While today's hearing is on the Marketplace Equity Act, at
    least two other similar bills have been introduced this
    Congress: one by Senators Enzi, Durbin, and Alexander called
    the Marketplace Fairness Act, and one by the Ranking Member of
    this Committee, Mr. Conyers, called the Main Street Fairness
    Act.
        We look forward to hearing from our witnesses today and
    appreciate their testifying, and the Ranking Member, the
    gentleman from Michigan, Mr. Conyers, is recognized for his
    opening statement.
        [The bill, H.R. 3179, follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________

        Mr. Conyers. Thank you, Chairman Smith, for a very
    excellent description of the issue that brings us here today. I
    have been working on this since 1998 with Spencer Bachus and
    then with Bill Delahunt of Massachusetts, and I have a bill of
    my own, H.R. 2701, but I want to announce today that I am going
    to ask all of my cosponsors to join me with the measure that is
    before the House today. I think this is an excellent resolution
    of what you have been--we have all been working on for a number
    of years.
        This matter comes to the House Judiciary Committee because
    of the Commerce Clause, Article I--the commerce section,
    Article I, clause 3, and what we try to do is follow the advice
    of the Quill decision, and I think by addressing it we will
    bring about a more competitive equity among retailers. Now, I
    think the bottom line is simply this: Tax-free sales on the
    Internet may be coming to an end, and this could mean a very
    large boost in revenue. I think it would help the economy, and
    I suggest it would probably also help create more jobs.
        Now, the competitors should compete on things other than
    sales tax policy, and so for those arguing for more of a free
    market, they should support eliminating any competitive
    advantage based on sales tax policy. In addition, uncollected
    sales taxes have a negative impact on local communities,
    including retailers and local and State governments. Now that
    our technology has eliminated much of the difficulty that we
    had experienced before with ever-increasing online sales, we
    can anticipate significant losses as a result of uncollected
    sales and use taxes. In my State I have an example that we
    could lose as much as $872 million during the fiscal years 2012
    and 2013. Fortunately, the Federal legislature can assure a
    level playing field and address State revenue issues by passing
    this bipartisan-supported legislation that allows States to
    require remote sellers to collect and remit sales tax.
        So with that, I join the Chairman in welcoming our two
    colleagues to describe their bill, and I would ask unanimous
    consent to put the remainder of my statement in the record.
        [The prepared statement of Mr. Conyers follows:]
    Prepared Statement of the Honorable John Conyers, Jr., a Representative
     in Congress from the State of Michigan, and Ranking Member, Committee
                                on the Judiciary
        Twenty years ago, the Supreme Court decided in Quill Corp. v. North
    Dakota that it was too difficult for a remote seller to comprehend
    every tax law in every state and locality in which it may sell
    something. In its view, states needed to simplify their sales tax laws
    so remote sellers could understand them easily. Otherwise, these
    complicated sales tax laws burdened interstate commerce.
        The Supreme Court decided that without simplification, a remote
    seller would not have to collect sales taxes in a state in which it
    does not have a substantial presence, or in its view, a physical
    presence.
        But the court did clearly state that Congress is better suited to
    determine whether a remote seller must collect and remit sales taxes.
        It is past time for Congress to make that determination and we
    should do so now particularly in light of the many technological
    advances that have occurred since the Court rendered its decision 20
    years ago.
        For example, because of these technological advances, smartphones
    can tag a photo with the date, time, and most relevant, the precise
    location through GPS, where the photo was taken, no matter where it was
    taken.
        Clearly, technology has eliminated the burdens a remote seller
    would have had in 1992. And technology has made it easier for Congress
    to act now. Doing so will accomplish several important goals.
        By addressing the Quill decision, Congress will ensure competitive
    equity among retailers.
        The Internet allows consumers to comparison shop quickly before
    making a final purchase. Oftentimes, a consumer can walk into a brick
    and mortar store, check the price of the item, ask the salesperson a
    few questions, and then take out a smartphone to find a cheaper price
    online.
        The online retail price is generally lower because many Americans
    do not have to pay any sales tax, which can make a significant
    difference in the final purchase price, ranging anywhere from 3 to 12%
    of the price of the item.
        This gives out-of-state retailers who operate online a clear
    advantage. They can charge the same basic pre-tax price as a local
    retailer for a pair of designer jeans or a video game console, but the
    price the consumer actually pays is lower because they do not collect a
    sales tax.
        It is obvious why savvy consumers, especially in this cost-
    conscience environment, would take advantage of such considerable
    savings.
        This also explains why the percentage of online sales and the total
    amount of online sales continue to increase.
        Competitors should compete on things other than sales tax policy.
    For those arguing for more of a free market, they should support
    eliminating any competitive advantage based on sales tax policy.
        Uncollected sales taxes also have a negative impact on local
    communities, including retailers, and local and state governments.
        Fewer purchases at local retailers translate to fewer local jobs.
    Main Street retailers, local mom-and-pop stores, and even big-box
    retailers suffer when they lose customers because they have to collect
    a sales tax while online retailers do not.
        Lower sales at local retailers also translate to lower revenue for
    local and state governments. Sales taxes constitute a significant state
    and local revenue source.
        For example, the Census Bureau estimates that nearly one third of
    state and local revenues are derived from general sales and use taxes.
        With ever increasing online sales, states and local governments
    anticipate huge revenue losses as a result of uncollected sales and use
    taxes.
        For example, the Michigan Department of Treasury estimates that
    total revenue lost to e-commerce and mail order purchases will total
    $872 million during fiscal years 2012 and 2013.
        The impact of such lost revenue is reflected in

          forced cutbacks to public education programs, such as
    sports, after-school enrichment programs, and extracurricular
    activities,

          delapidated roads and bridges not being repaired, and

          reductions in critical services, such as police and
    firefighter protection.

        Just last week, the State Budget Crisis Task Force, which is led by
    Paul Volcker and Richard Ravitch, released a report on the plight of
    states.
        In its report, the task force recommended that Congress should
    grant states the authority to collect sales taxes on online sales.
    Doing so would help states address their budgetary problems.
        Otherwise, states will have to cut services further. Or, replace
    the erosion of sales taxes by increasing taxes in other areas,
    something anti-tax advocates would surely oppose.
        Fortunately, Congress can ensure a level playing field and address
    state revenue issues by passing bipartisan supported legislation that
    would allow states to require remote sellers to collect and remit sales
    taxes.
        H.R. 3179, the ``Marketplace Equity Act of 2011,'' introduced by my
    colleagues, Representatives Steve Womack and Jackie Speier would grant
    that much-needed authority.
        I introduced similar legislation, H.R. 2701, the ``Main Street
    Fairness Act.''
        Our colleagues on the other side of the Capitol, Senators Mike
    Enzi, Dick Durbin, and Lamar Alexander, introduced S. 1832, the
    ``Marketplace Fairness Act.''
        Although each of the three bills take different approaches, they
    each would accomplish the same goal: leveling the playing field between
    retailers and online sellers by granting that essential authority.
        Today's hearing focuses on H.R. 3179, a bipartisan bill that would
    simplify collection rules and increase compliance. As a result, it
    would ensure fairness and provide a national solution.
        This bill would neither impose a national sales tax nor lead to any
    new taxes. Consumers already owe sales and use taxes on the goods and
    services they purchase; however, many do not pay it voluntarily.
        The business community has worked tirelessly on this issue and
    supports this bill. Big-box retailers, such as Walmart, Best Buy, and
    JC Penney, and small businesses, such as Michigan-based Marshall Music
    and the National Association of College Stores, are urging Congress to
    act and pass much-needed legislation.
        Even giant online retailer Amazon.com, which has benefitted from
    not having to collect sales taxes in many states, supports Congress
    acting.
        Other supporters of this legislation include at least a dozen
    governors--both Democratic and Republican--as well as the National
    Governors Association. In addition, the National Conference of State
    Legislatures, and the National League of Cities, along with many
    organizations also urge Congress to pass legislation addressing this
    issue.
        I believe that Congress should pass legislation that promotes
    economic efficiency and helps our states and local governments maintain
    financial support for public education, health, and safety.
        The Marketplace Equity Act and the other legislative proposals that
    I mentioned accomplish these goals.
        I thank Chairman Smith for holding this very important hearing and
    I urge the Chairman to markup this bill at the next scheduled markup.
                                   __________

        Mr. Smith. Without objection, thank you for your comments,
    Mr. Conyers.
        Our first panel consists of two of our colleagues, and they
    happen to be the authors of the piece of legislation that this
    hearing is about.
        Our first witness is Congressman Steve Womack, who
    represents the 3rd District of Arkansas. Prior to his election
    to the House this Congress, he served as the mayor of Rogers,
    Arkansas. Congressman Womack is the sponsor of H.R. 3179, the
    ``Marketplace Equity Act of 2011,'' and he is a Member of the
    Appropriations Committee. We welcome you here today, Steve.
        Our next witness is Congresswoman Jackie Speier, who has
    represented the 12th District of California since 2008. She
    previously served on the San Mateo County Board of Supervisors
    and in the California State Assembly and State Senate. In the
    House, Congresswoman Speier serves on the Oversight and
    Government Reform Committee and the Armed Services Committee.
    She is the lead Democratic cosponsor of H.R. 3179. We welcome
    her today as well.
        And, Mr. Womack, we will begin with you.

     TESTIMONY OF THE HONORABLE STEVE WOMACK, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF ARKANSAS

        Mr. Womack. Thank you, Mr. Chairman, Ranking Member
    Conyers, and Members of the Judiciary Committee. Let me take
    this opportunity to thank you for allowing us to have this
    discussion today regarding an issue that Congress and only
    Congress can resolve. I would also like to thank my colleague
    and cosponsor, Jackie Speier, for her hard work and dedication
    to the bill before you.
        In short, this bill levels the playing field in the world
    of retail sales. Currently, as I trust most of you now
    understand, traditional retailers--I will refer to them as
    brick and mortar retailers--collect sales taxes on purchases
    made in their respective stores. These taxes are remitted to
    the political subdivisions who levy them, typically by the
    State Department of Finance and Administration. This is not an
    option for the retailer; it is a requirement.
        There is no requirement, however, for online remote
    retailers with no presence in a given State to collect such a
    tax. The United States Supreme Court in a 1992 decision, Quill
    v. North Dakota, ruled that pursuant to the Commerce Clause,
    States cannot make such a requirement on businesses that do not
    have a nexus or a presence in the State. The burden of
    remitting these use taxes falls on the consumer, not the
    retailer, and the realistic effect of this situation is bad for
    our traditional retailers, bad for cities, counties, and States
    who levy sales taxes, and bad for consumers who are unwittingly
    exposed to potentially incriminating audit issues.
        Mr. Chairman, in short, the Quill decision explicitly says
    that only Congress can remedy this terrible disparity, and it
    is my strong belief that Congress should intercede.
        Prior to serving in Congress I had the honor of serving as
    mayor of a city in northwest Arkansas that has become a premier
    destination for retail shopping. A revitalized Main Street and
    new outdoor lifestyle center in Rogers, Arkansas, were the
    basis for more than a billion dollars in local development
    during my tenure. We created thousands of jobs; revenue
    generated through retail sales growth lifted our city, our
    county, and our State. These retailers in my district and
    retailers across America are crying out for help to eliminate
    the loophole that chases more and more discriminate shoppers
    away from Main Street and to the Internet, where the feeling of
    buying something tax free is all too often a major factor for
    shopping online.
        Small retail stores have become showrooms for their online
    counterparts. Merchants have intimated to me the stories of
    would-be consumers in growing numbers visiting their stores to
    get a firsthand look at the merchandise under consideration for
    purchase, and once committed to purchasing simply use their
    smartphone to purchase it online--there is an app for that--
    having it delivered to their home, and motivated by the
    opportunity to save the tax.
        I do very little online shopping, but recently having made
    a purchase from a well known online retailer without a presence
    in Arkansas, I realized the burden of remitting the tax was on
    me. So I downloaded the proper form, filled it out, and
    enclosed a check to my State's Department of Finance. This is
    the form I used for the State of Arkansas. And there are other
    forms I have with me, just a sample. Three-page form from the
    State of Florida. Here is a form from Indiana, Virginia, Ohio,
    and still another from Tennessee. It occurred to me, Mr.
    Chairman, that a lot of my constituents don't know this is a
    requirement, and when told of the requirement would not know
    how to process that payment. These transactions, millions of
    them every day, are simply going without proper tax treatment,
    and with the exponential growth of Internet retailing, the
    result to traditional retailers, not to mention critical local
    services, is devastating.
        It is time this loophole was closed. Our bill, H.R. 3179,
    is purposed in doing just that. It is simple and
    straightforward. It is not instructive, it is permissive
    legislation, just like the Quill decision invited us to do, and
    our bill is based on three conservative values: States' rights,
    allowing States to decide whether or not to compel remote
    sellers to collect and remit, to determine the rate and the
    method of remittance; promoting free market competition,
    allowing the discerning shopper to make decisions on price,
    convenience, service, not on an outdated tax policy weighted to
    one business model; and keeping taxes low, helping our cities,
    counties, and States meet their growing demands by avoiding the
    certain reality of raising other taxes to offset the
    exponential loss of sales tax revenue.
        I have heard the arguments against the legislation: It is
    too complicated, too many rates, punitive to small online
    retailers, the notion of this involving a new tax. It is not
    complicated. There is existing off-the-shelf software to make
    the necessary reports, and our bill requires the States to
    provide that software, and just as it is easy to track in real
    time approaching storms or traffic congestion, even the
    activities of this institution, it is also very easy for online
    merchants to provide the necessary documentation and payment of
    taxes just as their Main Street counterparts do. Plus our bill
    has a small business exemption to lessen the burden on the
    small operators and the newly formed e-retailers. And, Mr.
    Chairman, this is not a new tax. This is an existing lawfully
    due tax imposed on consumers. The difference is that it is paid
    to the traditional retailer at the time of purchase and the
    remittance is handled by the retailer, but for the online
    shopper, the obligation is on them.
        The traditional brick and mortar retailer is not asking for
    special treatment. They know they have to compete against a
    number of consumer criterion. What they don't want and should
    not compete against is a disadvantage based on a tax loophole.
    With simple legislation, we can finally address an issue that
    has been 20-plus years in the making. I plead with this
    Committee to give favorable support to bringing this bill to
    the floor, and I thank you for your time.
        [The prepared statement of Mr. Womack follows:]
               Prepared Statement of the Honorable Steve Womack,
            a Representative in Congress from the State of Arkansas

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________

        Mr. Smith. Thank you, Mr. Womack.
        Congresswoman Speier.

     TESTIMONY OF THE HONORABLE JACKIE SPEIER, A REPRESENTATIVE IN
                 CONGRESS FROM THE STATE OF CALIFORNIA

        Ms. Speier. Mr. Chairman and Ranking Member Conyers and
    Members, thank you for giving us the opportunity to discuss
    this important issue in H.R. 3179, the ``Marketplace Equity Act
    of 2011.'' Now, I am very proud to have partnered with
    Congressman Womack on this truly bipartisan effort. If a
    Republican from Arkansas and a Democrat from California can
    come together on a bill that deals with tax issues, then the
    time has really come to finally resolve this issue. And this is
    an issue that only Congress can resolve.
        The fundamental unfairness in the marketplace and in our
    communities that this bill addresses has grown dramatically
    over the past few years. When Quill was decided by the Supreme
    Court in 1992, the Internet and the World Wide Web did not even
    exist. Sales taxes were collected on almost all retail sales.
    But according to the Commerce Department, online retail sales
    have increased 300 percent to $224 billion over the past 8
    years, and they are expected to almost triple again over the
    next 8 to more than $600 billion. And this chart over here
    makes the case. And this is the key. It will overtake, overtake
    the sales at brick and mortar stores by the year 2020. This is
    clearly not a business model in its infancy, and there should
    be no doubt that this is not a new tax.
        Consumers owe sales and use tax for these purchases in all
    States with a sales tax, but only about 1 percent actually pay
    them. This is an issue of collection and fairness. Some
    retailers have to collect the tax from the consumer and some
    don't for the very same product. That is just not fair.
        Now, a poll commissioned by Amazon that just was released
    makes the case that 72 percent of respondents believe it is the
    seller's responsibility, not the purchaser's to collect that
    tax.
        State and local governments impose sales tax to help pay
    for essential public services, such as police, firefighters,
    and teachers. As online sales grow, the financial hit to our
    communities gets more severe. Each sales tax dollar not
    collected is a service not provided and a possible job lost.
    These are cuts to police, to fire, to schools. I have seen it
    happen in my district, and I am sure it is happening in all of
    your districts as well.
        Compounding the problem to our communities, the brick and
    mortar stores that can't compete with tax-free online sales are
    closing. Seven dollars out of every $10 spent at a local
    retailer stays local. Here is a chart over here that makes that
    case. More than $4 out of every $10 spent at a national
    retailer stays local. But none, zero of the money spent at an
    online retailer stays in the community. That means that with a
    local retailer or national retailer, they are paying their
    employees, they are paying rent, they are paying local taxes,
    but the online retailer is paying none of that.
        We have all seen it, large, online-only retailers have been
    able to use the small retailers as their virtual showrooms. In
    a State like California, that hit has been huge, particularly
    at a time when financially strapped consumers are looking for
    ways to stretch their dollars as far as possible. Technology
    has now made it possible for consumers to shop for goods in
    brick and mortar stores, get advice, kick the tires on products
    like TVs, computers, cameras, and bicycles and then find and
    buy the item online, sometimes right on their mobile phone
    while standing in the store.
        Eric McCrystal, who runs a small power tools company in my
    district in San Carlos, told me it happens regularly, people
    come in and test his power tools, and then go online to buy
    because they can escape the sales tax, even though it is still
    owed. This simply isn't fair to the merchants like Eric who
    have invested in a storefront and hired employees to provide a
    service, and ultimately it isn't fair to the taxpayer who has
    the legal obligation to pay but isn't able to easily fulfill it
    or doesn't even know that they owe the tax and could be subject
    to audit and penalties for failure to pay.
        As Ranking Member Conyers said, this is also about jobs.
    Brick and mortar retailers create four jobs for every one job
    created by an online retailer, and they participate in our
    communities. They sponsor the little league teams, they join
    the local Chamber of Commerce, they join the Rotary Clubs and
    the Lion Clubs, they are engaged in our communities. So why
    should we be creating an environment that places them at such a
    disadvantage? Why are we picking winners and losers in this
    particular setting?
        The same way technology has made it easy for online
    shopping, technology has made it much simpler for online
    retailers to collect sales tax, and since Congress must grant
    this authority to the State, our bills provide a simple
    framework for States to opt in. It also requires States to
    provide cost-free the software and services to figure out the
    sales tax required to comply to online retailers. This is
    certainly more than brick and mortar retailers get.
        Once upon a time there was a valid argument that the
    Internet marketplace was in its infancy and we didn't want to
    stifle its development. Those days are gone. Companies like
    Amazon and Overstock.com are proof of it. California is
    expected to lose more than $1.8 billion in uncollected tax
    revenues this year alone.
        Now, this chart up here has every State represented by you
    as Members of this Committee, and you have a handout that will
    provide you with this data that shows an incredible loss of
    State revenue, State taxes, sales tax that should have been
    paid that was not paid, and the number is growing
    exponentially.
        The failure of Congress to address this issue has led to
    more, not less, confusion in the marketplace. Instead of a
    national approach, desperate States are taking their own
    actions in response to this problem. There are the streamlining
    States, the Amazon deals, and the States that have expanded the
    reach of nexus. At least 30 States have taken some action to
    try and collect the sales tax owed from online sales.
        Rather than hide its head in the sand, Congress could solve
    this issue for all States by allowing States to require online
    sellers to collect tax even if they do not meet a physical
    presence test. It could set the conditions that States must
    satisfy if they wish to do so, ensuring that it is simple and
    not unduly burdensome while at the same time respecting States'
    rights. That is what the Quill decision urged Congress to do 20
    years ago. That is precisely what the Marketplace Equity Act
    does. It is not perfect, but it is headed in the right
    direction, and I urge you to recognize this opportunity as one
    that a bipartisan Congress can fix. Thank you for the
    opportunity.
        [The prepared statement of Ms. Speier follows:]
              Prepared Statement of the Honorable Jackie Speier,
           a Representative in Congress from the State of California

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________

        Mr. Smith. Thank you.
        Thank you both for your testimony. Appreciate your
    comments. And then we will move on to the next panel.
        Mr. Cohen. Mr. Chairman.
        Mr. Smith. Our first witness is the Governor of Tennessee
    who is on his way, and when he arrives he will be introduced by
    the gentleman from Tennessee, Mr. Cohen, and I will proceed to
    introduce the other witnesses who are here, and we will look
    forward to the Governor's testimony when he arrives.
        Mr. Cohen. I was just wondering, until he comes could I be
    Alexander Haig?
        Mr. Smith. No. After the Governor, our next witness is the
    Honorable Wayne Harper. Mr. Harper is a member of the House of
    Representatives in the State of Utah and is the incoming
    President of the Streamlined Sales Tax Governing Board on whose
    behalf he is here to testify. The SSTGB was started 12 years
    ago with the goal of finding solutions to the complexity in
    State sales tax systems that resulted in the Supreme Court's
    holding in Quill v. North Dakota. Today 24 States have
    subscribed to its simplification principles. Representative
    Harper holds both a Bachelor's and Master's Degree in history
    from Brigham Young University. His business background is in
    real estate development and consulting.
        Our next witness is Hanns Kuttner. Mr. Kuttner is a
    Visiting Fellow at the Hudson Institute, where he contributes
    to the Future of Innovation Initiative. He served during the
    George H. W. Bush administration on the White House's domestic
    policy staff. More recently he was a research associate at the
    University of Michigan's Economic Research Initiative. He is
    the author of many recent articles on sales taxes, including a
    recent article comparing origin and destination-based tax
    models. Mr. Kuttner holds a Bachelor's Degree from Princeton
    University and a Master's Degree from the Graduate School of
    Public Policy Studies at the University of Chicago.
        Our next witness is Joseph Henchman. Mr. Henchman is Vice
    President of Legal and State Projects at the Tax Foundation, a
    nonprofit organization dedicated to educating taxpayers about
    all aspects of tax policy. He joined the Tax Foundation in
    2005. Mr. Henchman's analysis of fiscal trends, constitutional
    issues, and tax law developments has been featured in numerous
    print and electronic media, including the New York Times, the
    Wall Street Journal, CNN and Fortune magazine. Relevant to this
    hearing, in 2007 Mr. Henchman published an article in a popular
    State tax periodical entitled Why the Quill Physical Presence
    Standard Shouldn't Go the Way of Personal Jurisdiction. Mr.
    Henchman graduated from the University of California at
    Berkeley with a degree in political science and a law degree
    from George Washington University.
        Our last witness is Steve DelBianco. Mr. DelBianco is the
    Executive Director of NetChoice, a coalition of trade
    associations, e-commerce businesses, and online consumers, all
    of whom share the goal of promoting convenience, choice, and
    commerce on the Internet. Mr. DelBianco is well known for his
    expertise on Internet taxation. We look forward to his
    testimony on that subject today. Mr. DelBianco holds degrees in
    engineering and economics from the University of Pennsylvania
    and a business degree from Wharton. We welcome you.
        Oh, the Governor has arrived and the gentleman from
    Tennessee, Mr. Cohen, is recognized to introduce his Governor.
        Mr. Cohen. Thank you, Mr. Chairman. It is indeed my
    privilege to introduce our 49th Governor of the State of
    Tennessee, the Honorable Bill Haslam. Governor Haslam is a
    native Knoxvillian, and I think that may be why the orange is
    in his tie, and is also--but he also represents the western
    part of the State, marrying a young lady from Memphis, Crissy,
    and that is why I wore my blue tie today, so we are well
    represented from Memphis to Knoxville. He is a graduate of
    Emory University, was very successful in his family business,
    won the governorship with the largest plurality of any Governor
    in the history of the State of Tennessee and probably has the
    highest approval ratings of any politician in the State of
    Tennessee. He is part of a mainstream Republican tradition in
    Tennessee that goes through Howard Baker, Lamar Alexander, Bob
    Corker, and others that have kept Tennessee in the mainstream
    of America. It is my honor to work with Governor Haslam. I
    sponsored this bill at his request early, we have worked
    together on other issues. Senator Alexander and Senator Corker
    are also sponsors, and I reflect back on his father, who was on
    the board here of the Kennedy Center and is a leading business
    person who joined with me in helping pass one of the finest
    lotteries in the history of this Nation and that is continually
    bringing in more and more money that the Governor will, I am
    sure, spend in a good fashion to bring back more and better
    educated and college graduates in Tennessee.
        With that, I am especially appreciative of the Governor
    being here and looking forward to his testimony. I yield back
    the balance of my time.
        Mr. Smith. Thank you, Mr. Cohen. Governor Haslam, if you
    will begin.

    TESTIMONY OF THE HONORABLE BILL HASLAM, GOVERNOR OF TENNESSEE,
            ON BEHALF OF THE NATIONAL GOVERNORS ASSOCIATION

        Governor Haslam. I will. Thank you, Congressman Cohen, we
    appreciate the introduction and despite occasional political
    differences, we appreciate your services in the State of
    Tennessee. Mr. Chairman, thank you very much, Ranking Member
    Conyers, and I appreciate you accommodating my schedule. I
    apologize for being a little late.
        I am here to testify on behalf of the National Governors'
    Association, but I also think I am maybe uniquely qualified to
    testify on this. My family business started out with one retail
    store 54 years ago, has grown to have locations, 450 locations
    all across the U.S. and Canada. I also served as the Chief
    Executive Officer of Saks Direct, that is the online arm of
    Saks Fifth Avenue, so I understand the Internet retail business
    as well. I was the mayor of Knoxville for 7 years where we rely
    on property tax, property taxes paid not just by residents but
    businesses, and the critical role that having vital, healthy
    real life businesses matter to a city and to all of our local
    governments, and finally I am the Governor of a State that
    relies heavily on sales tax collections.
        Let me be clear, I am a Republican Governor that does not
    believe in increasing taxes. We are a low tax State to begin
    with, and we have been able to cut taxes over the last 2 years.
    This discussion isn't about raising taxes or adding new taxes.
    This discussion is about States having the flexibility and
    authority to collect taxes that are already owed by in-State
    residents. The discussion is about leveling the playing field
    for local brick and mortar businesses and communities across
    Tennessee and across the community.
        I have heard Senator Alexander, as Congressman Cohen
    mentioned, talk about the national boot company where owners
    talk about customers who come in the store, try on a pair of
    boots, ask the employee questions about the boots, and then go
    home and order them online to avoid paying sales tax. As I was
    coming up here, I got an email from someone who heard I was
    coming to testify. They are a supplier to mom and pop truck
    accessory companies, and they said whatever you do, please tell
    them our story, because those mom and pop businesses that sell
    truck accessories are all going out of business to folks who
    can compete online and not have to collect the State and local
    sales tax.
        This is an issue of fairness, comparable businesses that
    sell the same things that are not being treated the same. Most
    people that I talk to understand and agree that isn't fair. So
    why is it happening? Twenty years ago the Supreme Court said
    that States couldn't require out-of-State catalogs for online
    businesses to collect sales tax; it was too complicated to
    calculate the sales tax in each State, much less in local
    communities. But in the past 2 decades, technology has advanced
    more than anyone could have believed. It is not only possible
    but it is now easy for those businesses to collect the taxes
    that they are owed, just like local businesses with cash
    registers do. Current software available today, you can go find
    it from eight different companies, that compete to provide
    software that covers over 12,000 different--12,000 State and
    local tax rates. But this isn't only an issue that affects
    businesses. As State budgets are stretched and State leaders
    are working to provide services to taxpayers at the lowest
    cost, we are talking about real dollars. The current estimate
    of sales tax that goes uncollected each year in the U.S. is
    more than $20 billion. In Tennessee we believe that number to
    be $400 million. Where we are from, that is still real money.
    That money could fund critical programs that vulnerable
    citizens rely on, it could cover Federal mandates that States
    face or it could go back to the taxpayers in the form of
    further tax relief. We can certainly have a healthy discussion
    in Tennessee about how to allocate those dollars, but that is
    for another time. My point today is that States should have the
    authority to collect that money, which is already owed, and to
    be able to make budgeting decisions that include those dollars.
        We probably all know that intuitively Internet shopping is
    a trend that is on the rise. My daughter-in-law buys her
    dishwashing detergent online. We are no longer just talking
    about books and scarves and a few other items. Dishwashing
    detergent. According to the U.S. Census Bureau, e-commerce is
    now 16.6 percent of all retail sales, one out of every six
    retail dollars happens online. It is not a small business.
    Retail sales grew four times faster online than they did in
    brick and mortar last year. Next year 25 million more--in the
    next 4 years 25 million more Americans are expected to shop
    online. The argument that this is a small piece of the economy
    just doesn't hold up. This is the right time for Congress to
    act.
        Let me make a final note. As Governors and mayors, we
    understand that regardless of how the budget discussions come
    out, there will probably be less money coming out of Washington
    to fund State and local governments. As a Republican, I support
    that, and I understand that. But if that is true, then let
    States have the authority to collect the State sales tax that
    is already owed us. This is an issue of fairness, and I urge
    you to take up this issue at this time. Thank you very much.
        [The prepared statement of Governor Haslam follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________
        Mr. Smith. Thank you, Governor.
        Mr. Coble [presiding]. Thank you, Governor. Mr. Harper, you
    are next in line.

        TESTIMONY OF THE HONORABLE WAYNE HARPER, UTAH HOUSE OF
        REPRESENTATIVES, ON BEHALF OF THE STREAMLINED SALES TAX
                            GOVERNING BOARD

        Mr. Harper. Thank you. Thank you, Chairman, Ranking Member
    Conyers, and Members of the Judiciary Committee, for the
    opportunity to present today.
        Today Congress is facing one of the most challenging issues
    regarding State authority over their taxes and also one of the
    most challenging issues for our retailing community. I am a
    Republican State representative from Utah, and I chair the
    House Rules Committee. I come before you today in my role as
    someone who is responsible for producing a balanced State
    budget, reducing government's burden on business, and is the
    incoming President of the Streamlined Sales Tax Governing
    Board.
        I appreciate the title of today's hearing. That subject is
    of paramount urgency and importance. As you know, two U.S.
    Supreme Court decisions of the previous century are the basis
    of this hearing. The crux of the issue Congress is addressing,
    why we are here, is the competitive advantage government grants
    certain retailers over others. The bottom line problem that
    exists today is the 6 to 10 percent government-mandated price
    difference. Remote businesses selling the same product as a
    retailer in your hometown has an inherently lower end-
    transaction price. Government is picking winners and losers
    under the current court decision. I come before you today to
    ask you to exercise your congressional authority and end the
    current government sanctioned tax in business inequality.
        According to the Department of Commerce, e-commerce sales
    in 2005 were $87 billion. This year e-sales will total more
    than twice that amount. The stark truth, as has been stated
    before, is that local retailers across the country often find
    themselves acting as the display case for consumers who come in
    and try out the product but then go home and buy it online.
    Why? Because there is a court and government sanctioned
    incentive to buy remotely as remote sellers are not required to
    collect sales tax, as are stores in your hometowns. Also States
    are not receiving the taxes they need to either provide
    services or cut their tax rates.
        Let's investigate some of the arguments regarding tax
    parity and simplification. First, some argue that it is
    impossible or expensive to collect online or catalog sales tax.
    In many ways the Internet is the perfect environment in which
    to collect sales taxes. The consumer is already supplying to
    the vendor in their shopping cart all data that is needed to
    collect due sales tax. Existing technology available from over
    eight companies allow for the easy collection of the due sales
    tax. For example, eBay is currently doing a pilot program with
    two companies that, and I quote, deliver small and mid-sized
    businesses a fast, easy, accurate, and affordable solution for
    achieving sales and use tax compliance.
        Second, some opponents will argue against placing another
    burden on business, and especially on small business.
    Unfortunately, today the real burden is on those retailers who
    are trying to compete against someone who isn't collecting due
    sales tax. Your hometown retailers are at the mercy of a 6 to
    10 percent government-mandated price disadvantage. That I
    submit is the real burden on small business.
        Third, some groups will ask you, will tell you that these
    bills are a tax increase. That is not true. How, may I ask, is
    collecting a tax you owe but are not paying a tax increase?
    Asking one retailer to collect sales tax simply because they
    have a store in your hometown without asking the same of all
    retailers doesn't seem like equal protection under the law.
        Four, some groups claim that States don't do a good enough
    job collecting the use tax. Under current court rulings there
    are basically only two ways to collect the use tax, have the
    retailer collect it or educate, then audit consumers. To those
    who argue that States should engage in more audits, I would ask
    if they really think we should have a more intrusive collection
    system in which the average consumer will be made to feel as if
    they have a resident auditor at their kitchen table. I
    resoundingly say no.
        Fifth, some opponents will say that the States have not
    simplified their tax systems enough to warrant congressional
    authority. What the Supreme Court didn't answer in 1967 was how
    much simpler the State sales tax system would have to be and
    what technology would have to exist to rule differently. The
    debate since Bellas Hess decision is how much simplification
    must be done.
        In conclusion, I would submit that technology has so
    radically improved that the challenge issued by the Supreme
    Court has been answered. Resolving a 50-year-old tax inequity
    will ensure fairness for all. With this bill, Congress is
    authorizing a collection tool, not a new tax nor is it a tax on
    retailers. It is time now to eliminate the government-
    sanctioned competitive advantage some retailers have over your
    hometown businesses. It is time to end government picking
    winners and losers in the retail community. It is time to treat
    all retail businesses the same. I believe Congress has the
    ability to balance appropriately the needs for simplification,
    State sovereignty in tax matters and equity. I encourage you to
    make that decision and to act now. Thank you.
        [The prepared statement of Mr. Harper follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________

        Mr. Coble. Thank you, Mr. Harper.
        Gentlemen, we try to work within the 5-minute rule if
    possible, so if you could, when the red light appears on your
    panel that says to you that the ice is getting thin upon which
    you are skating, but you won't be keelhauled for violating it.
        Mr. Kuttner, we are glad to have you next in line.

             TESTIMONY OF HANNS KUTTNER, VISITING FELLOW,
                            HUDSON INSTITUTE

        Mr. Kuttner. Thanks so much, and I have been forewarned.
    Well, as part of what we are doing at Hudson Institute looking
    at innovation, I would be very interested in innovation in
    buying and selling, and I have prepared two reports in this
    area.
        Mr. Watt. Could the witness pull the mike closer to him?
        Mr. Kuttner. One entitled Future Marketplace Free and Fair,
    another about some of the issues that have come up in thinking
    about an origin-based versus destination-based sales tax, and I
    would be very appreciative if they could be made a part of the
    record of this hearing.
        [The information referred to follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________

        Mr. Coble. Without objection. You may continue, Mr.
    Kuttner.
        Mr. Kuttner. Thank you. I am reminded as I thought about
    this today about Charlie Schultze, who had been the Chair of
    the Council of Economic Advisers in the Johnson administration,
    and Schultze said that it was very simple to be an economist in
    the Federal Government, which was you just leaned forward every
    so often and say marginal cost, remember marginal cost. Well,
    my little contribution today is to lean forward and say
    remember the declining cost of information and the cost of
    gathering information and putting information together and
    making information useful.
        In this area that you are looking at today, information is
    described by the world of 1992 when the Quill decision was
    rendered, a time when there weren't any smartphones and looking
    something up meant getting out some paper document and turning
    to a particular page and having your fingers run down the
    column.
        In talking about the issues that you are looking at today
    with one of my most junior colleagues at Hudson, he said to me,
    Well, why just can't you Google that or why isn't there a
    smartphone app for that? And so that is the world, how much the
    world has changed since 1992. And the thing I would lean
    forward and remind you is that information's cost is declining,
    and that is going to both change this marketplace and change
    the challenge of what does it mean to be an undue burden in
    this area.
        Thank you.
        [The prepared statement of Mr. Kuttner follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________

        Mr. Coble. You were indeed forewarned, Mr. Kuttner. You
    done good, as we say in the rural South. Thank you, Mr.
    Kuttner.
        Mr. Henchman.

      TESTIMONY OF JOSEPH HENCHMAN, VICE PRESIDENT, LEGAL & STATE
          PROJECTS, VICE PRESIDENT, OPERATIONS, TAX FOUNDATION

        Mr. Henchman. Thank you, Mr. Chairman, Mr. Ranking Member,
    Members of the Committee. Thank you for the opportunity to
    testify today on Congress' role in authorizing States to expand
    their sales tax authority to out-of-State sellers.
        In the 75 years since our founding we at the Tax Foundation
    have monitored tax policy trends at the Federal and State
    levels and our analysis is guided by the principles of
    economically sound tax policy: Simplicity, neutrality,
    transparency, and stability.
        To be American is to be a believer in Federalism, and that
    means Congress has its area and the States have their areas.
    Most of the time Congress should let the States do their thing,
    even if it is bad policy. But in a few very important
    situations, Congress has the power and the responsibility to
    get involved in State tax policy. This history is important
    because it is the original understanding of the Commerce
    Clause. The Constitution was adopted in part to give a Federal
    entity, the Congress, the power to rein in State tax authority
    when it threatens to do harm to the national economy. This is a
    power you have exercised in the past. Page 6 of my testimony
    gives some examples. In those cases you balanced, on one hand,
    letting the States have the ability to set tax policies in line
    with their interests so that citizens have choices of different
    baskets of goods and taxes and services with, on the other
    hand, ensuring that State tax power does not reach so far as to
    harm the free flow of commerce in the national economy. Indeed,
    from the founding all the way until the 1950's the rule was
    simple: States cannot tax interstate commerce. We are more
    nuanced now. Congress and the courts permit State taxation of
    interstate commerce where it is nondiscriminatory, fairly
    apportioned, related to services, and imposed on one with
    substantial presence in the State, nexus.
        Now, as I am sure you know, and we have talked about
    already, States have use taxes. These taxes are imposed on
    items used within a State upon which sales tax has not been
    paid. So if I, as a D.C. resident, go up to Pennsylvania and
    buy a pair of blue jeans there where they are tax free and
    bring them back here to D.C. where I live, I owe a D.C. use tax
    of 6 percent and, yes, I owe it, not the seller. An economist
    will argue that I bear the economic burden of it, not the
    seller.
        Now, while the purpose of use taxes is to equalize tax
    burdens and thwart tax competition between States, the issue
    you are dealing with today is about purchases made in the same
    State. Brick and mortar retailers rightly point out that when
    someone buys from them they usually pay tax, and when someone
    buys from an Internet retailer, they often don't pay tax. So
    perhaps you just let the States tax whomever they want. Well,
    that is the other extreme that the Supreme Court warned about
    in Quill. There are, as we have mentioned already,
    approximately 9,600 sales tax jurisdictions in the United
    States, a number that grows by several hundred each year. There
    is a chart on page 9 of my written testimony that shows that.
    States have different taxes on different items, sometimes even
    different times of year. Now, I have sat down and read the
    sales tax statutes for the 46 States that have them, try to
    figure out what they tax and what they don't, a lot of the
    revenue rulings that try to parse out the things that aren't
    clear, plus there is seven States that let local government set
    their own sales tax basis. We at the Tax Foundation subscribe
    to a number of the sales tax systems and calculation software
    that we talk about here, and it is tough for us to keep up, and
    we are not also trying to run a small business, a small
    business that needs to know that on August 7th of this year
    computer microphones in the State of New Mexico are not taxed
    but computer headsets are, that painting canvas is exempt from
    tax but dry erase boards are taxed, and that the rules are
    completely different the next day on August 8th.
        Now, if you want to do something about that disparity
    between Internet and brick and mortar, while making sure that
    States cannot foist their burdensome and complicated tax
    systems on out-of-State sellers the world over, there are
    options. I run through them on page 15 of my testimony. One of
    those options, the third one on my list, is the bill before you
    and its companions. On page 16, and if you look at anything in
    my testimony, it is the chart on page 16, I list features of
    effective simplification that should be part of any bill
    authorizing greater State tax power over out-of-State sellers.
    As you can see, this bill before you now comes a lot closer
    than previous efforts. However, there are some things left
    unchecked though. If Congress decides to modify the physical
    presence rule in the limited context of State taxation of use
    tax from out-of-State sellers, Federal standards for simplified
    sales tax must be an effective bulwark against aggressive State
    tax overreaching. Today with new technologies, even the
    smallest business can sell their products and services in all
    50 States. The temptation is great to treat interstate commerce
    like a golden goose to be squeezed. When this behavior is not
    prevented by Congress or the courts, the results will be
    taxpayer uncertainty, incompatible standards, and harm to
    national economic growth. This temptation can only be countered
    by well thought out, uniform rules imposed at the Federal
    level.
        Thank you.
        [The prepared statement of Mr. Henchman follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________

        Mr. Coble. Thank you, Mr. Henchman.
        Mr. DelBianco.

      TESTIMONY OF STEVE DelBIANCO, EXECUTIVE DIRECTOR, NetCHOICE

        Mr. DelBianco. Thank you, Mr. Chairman, Ranking Member
    Conyers, Members of the Committee. I also speak today for
    members of a new coalition, the True Simplification of
    Taxation, which includes the American Catalog Mailers, the
    Direct Marketing, and the Electronic Retailing associations. It
    must be incredibly hard to get a handle on this issue when you
    hear such contradictory facts and counter arguments. I
    personally have really enjoyed debating this on some of the TV
    talk shows, but I have to admit it is not very enlightening to
    anybody who watches it. You deserve some straight answers
    today.
        So, first, is this legislation really about equity and
    fairness? Equity is when everyone plays by the same rules, and
    that is the situation today. Every online and catalog retailer,
    just like every store, collects sales tax for every place they
    have a physical presence, but this bill requires remote
    businesses to pay sales tax based on where the customer lives.
    Now, if you really wanted equity, let's force all stores to do
    sales tax that same way. So think about the outlet malls on I-
    95 or the souvenir shops in downtown Washington where nearly
    all the customers come from out of State. Equity would mean,
    what, requiring their customers to show an ID so the clerk
    could figure out the sales tax where they live and file a
    return where they live? No, that is ridiculous. You wouldn't do
    that. But that is the unfair burden this legislation would
    impose on online and catalog sellers in other States.
        We talked a lot about Quill, and in Quill the Court said it
    was concerned not so much by fairness as by, quote, concerns
    about the effects of State regulation on the national economy,
    end quote. Well, our national economy is an area where the U.S.
    leads the world, but we are also number one when it comes to
    the complexity of our State sales taxes. Number two is the
    European Union, who has just 27 VATs, but our 46 States are
    approaching 10,000 jurisdictions, and each gets to have up to
    two different tax rates, yet this legislation endorses this
    State tax disaster and it forces businesses in other States to
    comply.
        Question, would it be fair and equitable if Congress passed
    this Marketplace Equity Act? First, would it be fair to senior
    citizens who use catalogs and mail checks with their orders?
    Here is a catalog, Mr. Chairman, from National Wholesale
    established in 1952 in North Carolina, and with 200 employees
    today. They sell sensible clothing and shoes for senior women.
    The average age of their customer is 70years old, and 40
    percent of them pay by check with a mail-in. National collects
    sales tax for North Carolina but not for customers in other
    States. It just isn't fair to ask a grandmother to fill out
    this form in a way that causes her to search through 46
    different States and thousands of jurisdictions to find the tax
    rate applying to her and put it on her form.
        Second, would this bill be fair to a small business? This
    bill has a $1 million small seller exception, but that is not
    nearly high enough since $1 million is just a tiny little
    operation, and let me explain. Out of a million in gross sales,
    that business is going to pay $750,000 or so for cost of sales,
    they will pay $70,000 more for marketing, advertising, travel
    to trade shows, 60K for computers and programming and web site,
    another $50,000 for supplies, insurance, shipping, and
    accounting. If there is anything left, they might be able to
    pay an employee or two. A million retail sales is still just a
    mom and pop operation, and it is not fair to hit them with new
    costs for software, customer support, and accounting.
        What is a more reasonable small business exception? Take a
    look at the top 500 e-retailers. They account for 90 percent of
    the uncollected sales tax last year. Number one was Amazon at
    nearly $50 billion, number 500 was a small firm at $15 million.
    You could spare businesses on that long tail to the left of the
    $15 million and still let the States collect 90 percent of
    their tax.
        So, third, would it be fair to a business who is just big
    enough to get over the small threshold? A one-State business
    would be forced to pay for all States. They need radical
    simplification and they need reduced administrative burdens,
    but this bill leaves out true simplification. It is not fair,
    for instance, for a business in your State to have to file 46
    different tax returns every quarter and be subject to 46
    separate audits every year. These are just two of the eleven
    missing simplifications that we detail in our testimony.
        So to conclude, really, these tax fairness bills aren't so
    fair after all, and they would unmistakably create a new tax on
    America's businesses. State sales tax is due from the business
    who made the sale, whether or not they pass the tax on to the
    consumers. Most States call it a business privilege tax for the
    privilege of doing business in their State. It is due from the
    business. So for businesses in every State, even States that
    don't have a sales tax of their own, this bill would authorize
    a uniquely complex and new tax burden.
        So, in closing, please keep in mind the costs on American
    businesses if you were to empower States to export their tax
    burdens to external businesses. And please compare that to the
    potential new taxes which, at most, would be less than 1
    percent of total State and local tax revenue. Compare those
    two, and I think you will conclude that the juice just isn't
    worth the squeeze, and I sincerely look forward to your
    questions.
        [The prepared statement of Mr. DelBianco follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________

        Mr. Smith [presiding]. Thank you, Mr. DelBianco.
        Governor Haslam, let me direct my first question to you.
    And it is this: If this bill, H.R. 3179, were to be enacted, it
    is obviously going to generate a lot of additional revenue for
    a lot of States. What do you think is going to happen to that
    revenue? Is it going to in some form be passed along to
    consumers--perhaps a lower sales tax--or is it simply going to
    be spent by elected officials?
        Governor Haslam. That is a great question. It is one of the
    beauties of the State systems. I think you will see 50
    different answers to that question. In our State, I think we
    would use it to do a variety of things. I think our history has
    been since we have been in office we have cut taxes both years.
    And so we would probably lead with that. That being said, would
    we apply some to infrastructure, yes? Would we look at trying
    to mitigate some of the rising costs of higher ed? I know you
    all have looked at that in Congress in very serious ways. My
    sense is the honest answer is there would be a myriad of ways
    that money would be used. I think, in our State, part of that
    would be used to cut taxes.
        Mr. Smith. Thank you, Governor.
        Mr. Harper, the SSTGB that you represent has done good work
    to make taxes simpler and easier to comply with. Do you believe
    the simplification requirements built into this bill comport
    with SSTGB's benchmarks?
        Mr. Harper. I do. There are a lot of good safeguards that
    are built into this bill. I would like to see some additional
    ones that would provide the security and the surety to small
    businesses and retailers. But I think this goes a long way to
    addressing the issues.
        If I may follow up on Governor Haslam's comment to your
    first question, I have a bill file opened in the State of Utah,
    with the anticipation that this bill or the Senate bill will
    pass that will go through and reduce the State sales tax rate
    and basically have this as a revenue-neutral impact to the
    State of Utah.
        Mr. Smith. Thank you, Mr. Harper.
        Mr. Kuttner, do you have any alternative ideas--and I
    regret I missed your testimony. You may have mentioned them in
    your testimony. Do you have any alternative ideas to level the
    playing field between the online and the bricks and mortar
    retailers that are not in the bill that we are considering
    today?
        Mr. Kuttner. Well, it would bother Governor Haslam here a
    lot, but a different way to approach the problem would be to
    say that there are certain categories where online sales have
    become so great or that the competition is so intense it is
    only unfair that the State should just not tax those
    categories. But I think that is going to make his life a little
    more difficult. But it does answer your question about another
    way you can get at this, which is to narrow the sales tax base
    to exclude certain categories.
        Mr. Smith. Thank you, Mr. Kuttner.
        Mr. Henchman, many proponents of this legislation claim
    that there is software available to facilitate tax collection
    by remote sellers, thereby alleviating the burden on interstate
    commerce that concerned the Supreme Court in Quill. What is
    your opinion as to how well that software works?
        Mr. Henchman. It can facilitate the lookup of rates. But
    rates aren't everything. Indeed, generally zip codes do not
    align with sales tax jurisdictions. So that is a problem. Just
    as one example, there is a zip code that straddles the line
    between California and Oregon. Oregon has no sales tax.
    California has very high sales tax. If you put in the zip code,
    that is not going to tell you the complete story.
        But even putting aside just rates, the question of what is
    taxed and what is not is often a question of reading the
    revenue rulings and trying to figure it out. It is often
    unclear. Just as one example, in my testimony I pull from a
    colleague's work who tried to see whether a bottled Frappuccino
    drink will be taxed under sales tax statutes. Some States they
    are, sometimes they are not. Some States it is unclear. There
    is a lot of work that can be done to simplify that software
    isn't going to solve. This is a legislative problem at the
    State level.
        Mr. Smith. Mr. DelBianco, that is your question, too.
        Mr. DelBianco. I am amazed at the claims of software making
    everything so simple. I made my living building software, a lot
    of it point of sale and back office systems.
        The Governing Board of the Streamlined Sales Tax paid a
    million dollars for PricewaterhouseCoopers to do a study of
    what does it cost American businesses today, under the current
    rules, to collect sales tax. They concluded the businesses at a
    billion dollars in sales were spending 17 cents of their own
    money to collect the sales tax for the one or two States they
    collect in. And of that 17 cents of their own cost, only 2
    cents had anything to do with software. The rest is for the
    cost of handling exceptions and problems and questions,
    following up on audits that are done, following up on questions
    from consumers about nontaxable items.
        There is nothing to the beauty of software for doing a
    lookup. But let's not kid ourselves. Software doesn't plug and
    play into some back-office system or custom fulfillment system.
        There is a Virginia seller called The Silver Gallery, who
    studied what it would cost them to modify their fulfillment
    system. They are about a $3 million seller of jewelry and a lot
    of engraved items and pewter. They have a custom system to
    allow the consumer to specify their order. They will spend
    $15,000 to $20,000 to integrate free software into their
    existing systems.
        Mr. Smith. Thank you, Mr. DelBianco.
        Mr. Harper, do you want to comment on the software
    question?
        Mr. Harper. Yes. Since that PricewaterhouseCoopers study
    was done a number of years ago, there has been a number of
    additional players who have come to the table with software.
    Back then, I think there was two or three. There are at least
    eight that are on the table today. The software has vastly
    improved.
        Some of the things that are being worked on through the
    Streamlined Sales Tax is a jurisdictional database, a State
    certified collection of software, vendor compensation, things
    of that nature, that will go through and ameliorate the burden
    that can placed on business. So I think some of those issues
    are truly answered today.
        Mr. Smith. Thank you, Mr. Harper. That concludes my
    questions, and the gentleman from Michigan, Mr. Conyers, is
    recognized for his.
        Mr. Conyers. Thank you, Chairman Smith.
        This seems to be a question that starts off with a great
    deal of excitement about us finally dealing with our obligation
    in Quill, but then it comes down to whether there is technology
    sufficient to make this practical. How can, I ask Governor
    Haslam and Governor Harper--wait a minute, Harper is not a
    Governor.
        Mr. Harper. Representative, please.
        Mr. Conyers. Yes. Not yet. But how can we accommodate the
    particularly practical objections that have already been raised
    by Mr. Henchman and Mr. DelBianco? How do we deal with that end
    of the table of witnesses?
        Governor Haslam. I would say a couple of things. First of
    all, that is what American industry does best. The progress we
    have made on being able to track those sales from when the
    Supreme Court decision was made is night and day. That is the
    first thing.
        The second thing, I do come back, despite some of the
    testimony, it is really not fair. We are saying it is fair for
    everybody that has a retail presence. But everyone doesn't have
    a retail presence. The reality of the fact is you have local
    businesses contributing property tax and sales tax and jobs
    that are having to play on an unlevel playing field. We have to
    figure out a way to make it work.
        Mr. Conyers. Yes, sir.
        Mr. Harper. Thank you. And I think the question and the
    response from my two other witnesses over here is exactly why
    we want to have this legislation passed. We have nearly 10,000
    jurisdictions in the country. If we go through and require one
    return in each State and one audit in each State, as is what is
    being promulgated by the Streamlined Sales Tax Organization,
    that is a significant reduction on business.
        J.C. Penney has hundreds and hundreds of accountants that
    respond today to sales tax returns and sales tax audits from
    thousands of jurisdictions across this country. Imagine what
    they and other retailers could do if we had a single audit, a
    single return each month, that could be reduced and they could
    focus on the core business of developing and designing and
    selling goods.
        Mr. Conyers. Thank you.
        Mr. Kuttner.
        Mr. Kuttner. I guess I am the man in the middle here
    between the two sides.
        The emphasis I would have is on the innovation and this
    very steep curve we are on here where we have gotten since
    1992, since Quill and where we have yet to go. So the fact that
    this technology isn't quite there, there are going to be new
    entrants into this field. And as an associate of mine put it to
    me, Isn't there an app for this yet? If not yet, there will
    soon be a group of folks sitting down trying to get the app
    worked out that will make the solution on somebody's iPhone.
        Mr. Conyers. Well, this can be improved. The bill isn't
    perfect. Most bills, when they are finished, they are not
    perfect, much less when they start out.
        But, Mr. Henchman, do you have any suggestions about where
    we might start in on the improvement of this measure before us?
        Mr. Henchman. Certainly. I agree with you that technology
    is a concern, but also how far States have to simplify under
    this legislation is important, too. Maybe the two can meet in
    the middle.
        One example in this bill that I think is a great feature is
    the option of using a blended rate, a combined State and
    average local rate. That way, retailers are just dealing with
    46 different jurisdictions rather than 9,600. That is a feature
    unique to this bill, not in some of the other competing
    legislation. There are, however, some features that are not in
    this bill that are in some of the other bills. I go through
    those on page 16. Maybe including some of those might further
    make sure that the system that we foist on online retailers and
    that national retailers currently have to deal with can be a
    lot simpler.
        Mr. Conyers. I think that this Committee and another
    Committee in the Congress have a lot of work to do. I am
    willing to begin that because I think the fairness issue
        overrides everything that we are here for. There are
    problems, and I would like to invite all of you to help us work
    them out.
        Thank you, Chairman Smith.
        Mr. Smith. Thank you, Mr. Conyers.
        The gentleman from North Carolina, Mr. Coble, is recognized
    for his questions.
        Mr. Coble. Thank you, Mr. Chairman.
        Gentlemen, good to have you all with us this morning. As
    the distinguished Ranking Member pointed out, we have been
    kicking this issue around in excess of a decade. And we may be
    standing in the shadow of being close to a resolution. I hope
    so.
        Governor, let me start with you and work our way down the
    table with a two-part question. Rhetorical question, I think,
    but I still would like them on the record.
        Will this bill create a new tax, A?
        Governor Haslam. No.
        Mr. Coble. And B, is it feasible for Internet retailers to
    collect and remit State sales tax?
        Governor Haslam. No, it won't bring a new tax. It is a tax
    that is already owed. It is a sales tax that is paid--when
    businesses put their P&Ls together they don't show sales tax
    owed and sales tax paid. It is due from the buyer. That is
    number one.
        Number two is the capacity to do this. I really do. I
    understand there are issues and I understand different
    jurisdictions, I understand there are sales tax holidays in
    different places. But given the capacity that we have today, I
    am very confident that we can solve these issues.
        Mr. Coble. Thank you, Governor.
        Mr. Harper.
        Mr. Harper. No, this is not a new tax. What we are asking
    for is Congress to authorize a collection tool. Is the software
    perfect out there? No. As we continue on, improvements will be
    made. Bright eyes and bright minds will see things and make
    changes that will facilitate the improvement in the software.
    But it has come a long ways, and I think it is really for trial
    and for congressional authorization now.
        Mr. Coble. You think it, therefore, is feasible for
    Internet retailers to collect and remit?
        Mr. Harper. Yes. Because everything that is needed to be
    told to a State tax authority is already being provided by the
    consumer in their shopping cart.
        Mr. Coble. Thank you, sir.
        Mr. Kuttner.
        Mr. Kuttner. Is it a new tax? No. It is an
        uncollected tax often, but it is not a new tax. Is it
    feasible? Yes. Is it a burden for some small entities? Perhaps.
    That is a question to be decided on. It is an empirical
    question, not a question of feasibility.
        Mr. Coble. Thank you, sir.
        Mr. Henchman.
        Mr. Henchman. On the question of whether it is a new tax,
    it is an existing tax that is not paid by the vast majority of
    people who should be paying it. Whether that is a new tax or
    not I think is in the eye of the beholder. I think a lot of
    people will see it as a new tax.
        As for the question of whether it is feasible, I would
    agree with Mr. Kuttner's point. The question is not really
    feasibility but how burdensome will it be and how much can
    congressional legislation reduce that burden.
        Mr. Coble. Mr. DelBianco.
        Mr. DelBianco. Thank you, Representative Coble. On the
    first question, it is absolutely a new tax. It is the use tax
    of consumers that isn't being paid. And what they want you to
    do is to allow the States to force sellers to pay a sales tax.
    Sales tax is the flip side of the use tax. And when a sales tax
    is due, it is due from the business, it isn't due from the
    consumer. The business has to pay it, whether they collected it
    or not.
        In your State, National Wholesale has a line item on their
    order form to put in the sale tax. If grandma puts the wrong
    amount in or leaves it blank, National Wholesale pays the sales
    tax. They can't tell the State that, I'm sorry, she didn't pay
    her tax. It is due and payable with penalties and interest from
    the sellers. That is why it is called a sales tax or a
    privilege tax. It is not called a consumer tax.
        Mr. Coble. This is obviously subject to interpretation. I,
    again, thank you all for being with us.
        I yield back, Mr. Chairman.
        Mr. Smith. Thank you, Mr. Coble.
        The gentleman from Virginia, Mr. Scott, is recognized.
        Mr. Scott. Thank you, Mr. Chairman.
        Mr. Chairman, I think we have heard comments and your
    questions pointed this out, the logistics of collecting this
    tax can be absolutely impossible, particularly if people are
    coming in and mailing in orders from all over the country. You
    may owe tax to one little jurisdiction and have to account for
    all of that.
        But, Mr. Harper, the last time we had a hearing like this
    did I understand that there is a service that can be provided
    that would assess and calculate the tax, just like it is done
    now on shipping, just stuff where it does it for you and the
    business can collect the tax and send one check to the service
    and the service will figure out who gets what? Was it you that
    testified the last time we had a hearing like this?
        Mr. Harper. No, it was Senator Luke Kenley from Indiana.
        Mr. Scott. Did I describe it right, where you just get the
    software, put it on, and it does all the calculation for you.
    You write one check to the service.
        Mr. Harper. There are certified service providers that do
    have and do offer software that can go through and you can use
    them as a third-party, if you choose, and they will go through
    and remit. So you can just run it all through them. Or, some of
    the larger companies will do it on their own. But there are
    existing software companies who will handle it for you.
        Mr. Scott. And what is the cost of that service?
        Mr. Harper. The cost of the service depends on the company.
    The intent through the Streamlined Sales Tax is that vendor
    compensation will be provided so that the company will not have
    to pay for that.
        Mr. Scott. Say that again.
        Mr. Harper. Okay. The intent of the Streamline Sales Tax is
    that there will be vendor compensation so that the retailer
    will not have to pay for it. It will come out of the tax that
    is collected as a compensation tool.
        Mr. Scott. So that just like you collect the handling and
    shipping and the software plugs in the number, for no cost to
    the business you can get the software that will provide the
    calculation of the tax and you write one check to the service
    and they will figure out where it goes?
        Mr. Harper. Yes.
        Mr. Scott. And it is not cost to the business. Is that
    right?
        Mr. Harper. Yes. That is correct.
        Mr. Scott. Now if there are problems with what is taxable
    and what is not taxable, does the software deal with that, too?
        Mr. Harper. Yes. For those members of the Streamlined Sales
    Tax project or program there are definitions of every product
    that is out there and then States will choose what is taxable
    and not taxable based on the definitions that exist.
        Mr. Scott. Is this by product code?
        Mr. Harper. It could be by product code or by product type,
    yes. There is a whole bunch of data that you can turn on and on
    off. Yes.
        Mr. Scott. Thank you.
        Mr. DelBianco, you indicated that if your Internet is based
    on the person's residence of bricks and mortar based on this
    location--and the last time had this hearing we also had
    another category--if the product was purchased from a brick and
    mortar but delivered somewhere else; if you buy it in D.C. and
    deliver a washing machine to Virginia, that Virginia can get a
    tax. Is that right?
        Mr. DelBianco. In a situation like that, if their own
    delivery trucks are delivering the good to Virginia and the
    purchaser lived in Virginia, well, then the D.C. company would
    have to collect or remit the Virginia sales tax. That isn't the
    situation, though, that we are talking about here, because you
    compared the ease of calculating shipping and handling
    suggesting that makes it easy to do sales tax. But it isn't the
    case. Think about when a sales tax comes in on an address, the
    seller has to know is there a sales tax holiday in this day in
    that State.
        Mr. Scott. I totally agree with you if the seller was
    actually making the calculation. Mr. Harper has suggested that
    the software would figure that out for you. And it plugs in
    just like the shipping fee.
        Mr. DelBianco. May I follow up on that? Let's assume that
    free software, if I put in an address and a product code, can
    return a rate. But that is where my problems just begin.
    Because I now need to know was the payer, the person that
    bought it, a tax exempt person. Their own study shows that a
    lot of the costs of collecting sales tax has to do with
    figuring out whether the person purchasing it is an exempt
    purchaser. What about whether the item is taxable or not?
    Consumers get on the phone and call and say, Why is this item
    being taxed in my State?
        Refunds and exchanges are the beginning of the expense
    because every time a product is changed out in a refund or an
    exchange or a back order, that has to make adjustments to the
    system, and finally the audits; 46 State audits.
        Mr. Scott. Let me let Mr. Harper respond to what that
    software does with people who may be taxable or not taxable.
        Mr. Harper. There is a taxability matrix in there and yes,
    you can go from, say, this is taxable, it is not taxable, we
    have got jurisdictions, we have got sales tax holidays, all
    those things built into the software. So I believe that have
    there is the functionality to address the issues which cause
    you concern.
        Mr. Smith. Thank you, Mr. Scott.
        The gentleman from California, Mr. Gallegly, is recognized
    for his questions.
        Mr. Gallegly. I thank the Chairman very much. I have to
    commend the Committee on putting together what I think is one
    of the more balanced panels that we have had in a long time.
    There has certainly been an interesting diversity in the
    testimony. And like so many cases, we always kind of get back
    to this fairness issue. Clearly, fairness, when you put five
    political people together--or variations of political people
    together--the fairness sometimes becomes a tad subjective.
        I am a Republican. I was a former mayor. And I have been a
    member of the Chamber of Commerce for over 40 years. I am
    having a little problem with the Governor's assessment of it
    not being a new tax. When you have to pass a law to tax
    somebody, a tax they are not paying, to me that seems as though
    it is a new tax. Is it a fair tax? Well, that is where the
    subjectivity comes.
        Now, I would like to ask Mr. Henchman a question, maybe Mr.
    DelBianco or maybe even the Governor would like to respond to
    this. The source, the provider has got a business set up. Pays
    for the business. The State, county, also local jurisdictions
    get a percentage of sales tax. These are the folks that are
    providing the service in the State where this product is made.
    It would seem to me that if we had a uniform tax on this type
    of a transaction, States that are charging 2 percent would
    charge 2 percent to every consumer; a State that charges 8
    percent would charge 8 percent to every consumer that opts to
    buy in that State. The provider would only have one sales tax
    percentage to work with.
        I would like to get a response from Mr. Henchman first, and
    then perhaps Mr. DelBianco, about the point of origin, maybe,
    if we are going to go this direction. I am still wrestling. It
    has been a topic of discussion for a long time.
        Mr. Henchman. I think you might mean Mr. Kuttner. He has
    written papers on it. But it is not the approach taken by this
    bill, though.
        Mr. Gallegly. Well, I understand that, but that doesn't
    mean that there might not be amendments during the course of
    it.
        Mr. Henchman. Sure. The issue you might be concerned about,
    at least when I describe it to other people, is: Are all
    Internet businesses going to flee to States with no sales tax.
    We don't all flee to States with no individual income tax.
    Businesses don't all flee to States with no corporate income
    tax. But maybe it is different for this.
        Mr. Gallegly. Well, it might not be a bad idea for people
    to do things to create business in their States to lower the
    taxes. I would vote for that.
        Mr. DelBianco, your assessment?
        Mr. DelBianco. Thank you, Congressman.
        What you described, the notion of assessing the taxes
    strictly based on where the item is sold from, is essentially
    what brick-and-mortar stores do today. They don't have to ask
    where you live, even though you are taking the item home with
    you; they don't have to calculate the rates where you live,
    they don't have to file returns for other jurisdictions. They
    all presume that you are using it right where you bought it.
    And that simplicity is the same simplicity that ought to be
    applied if we decide to force
        out-of-State sellers to collect. So I think you are on to
    something there. We may need to turn this destination-based
    system upside down and take a hard look at an origin-based tax
    system.
        Mr. Gallegly. Mr. Kuttner, you have written on this. So if
    you could be brief enough that I could hear from the good
    Governor over there.
        Mr. Kuttner. An origin-based approach is much more complex.
    It has a lot of added complexities that need to be thought
    through. Where is the origin? Is the origin for a company going
    to be where the good is shipped from, is it going to be where
    that corporation's headquarters are located, if it happens to
    be in a different State. And the question of imports. Is
    anything that is imported to the U.S. sold from outside the
    U.S. therefore going to become
        tax-free because it does not have any origin inside the
    United States. That is the kind of questions that come up as
    one thinks about origin.
        Mr. Gallegly. But it would appear that the challenges that
    you have just presented might be a little simpler to work with
    than 48 different taxes from 48 different States, just my own
    assessment of that, which I stay open with.
        Governor.
        Governor Haslam. While I very much appreciate and
    sympathize with your view that let's incentivize people to go
    to where the taxes are lowest, remember, States have a
    different mix of taxes. Some, like us, have no income tax so
    they rely more on sales tax. There is a variety of different
    approaches so you are going to be incentivizing folks to locate
    one place due to one particular tax.
        Mr. Gallegly. Thank you, Governor.
        I see my time has expired. Just a brief response to the
    Governor. Unlike California, we have got high taxes on
    everything--income tax, sales tax, property tax. You name it,
    we got it.
        Governor Haslam. We find your State to be a great place to
    recruit.
        Mr. Gallegly. And many have been doing just that.
        Thank you. I yield back.
        Mr. Smith. Thank you, Mr. Gallegly.
        The gentleman from North Carolina, Mr. Watt, is recognized.
        Mr. Watt. Thank you, Mr. Chairman. I keep wondering when my
    friend from California is going to export himself from
    California.
        Mr. Kuttner, listening to your testimony, at least before I
    heard Mr. Henchman and Mr. DelBianco, I was tempted to think
    that maybe innovation is taking place so rapidly that you
    wouldn't need the $1 million exemption or the hundred thousand
    dollar exemption that this bill does because you could just
    pull up an app and it would be done pretty simply. That is
    where we are headed, isn't that right?
        Mr. Kuttner. The technology is going to reduce the cost
    over time. As to where the threshold goes, that is a question
    for you to decide.
        Mr. Watt. Well, this is a good panel because you have got
    divisions. Mr. Kuttner doesn't seem to have a dog in this
    fight. He can go either way.
        Mr. Henchman. We sat in the right order, too.
        Mr. Watt. Mr. Henchman seems like he could go either way if
    you simplified the tax. You are not saying this is a bad idea.
    You are just saying it would be a lot simpler if you simplified
    the tax.
        Mr. Henchman. It would be simpler if you simplify, yes.
        Mr. Watt. Mr. DelBianco says he doesn't want this I don't
    care what--even if you simplified the tax I guess you think
    this is a bad idea.
        Am I misstating where you are? You think it is fair the way
    it is?
        Mr. DelBianco. Congressman, I have done I think what I hope
    to be a thorough job explaining how unfair it will be to
    collect. And that is why at the end of my testimony I burned
    two pages describing the minimum simplifications, the true
    simplifications under which it makes sense to require remote
    companies to collect.
        Mr. Watt. All right. Well, let's look at some of those
    simplifications. I guess some of these are on page 16 of Mr.
    Henchman's testimony. You are talking about offering immunity
    to remote sellers who misapply sales tax holidays. Do we offer
    immunity to local sellers who miscalculate? I mean, we hold
    them responsible. Why wouldn't we hold remote sellers equally
    responsible if we are trying to apply the law to everybody?
        Mr. Henchman. Is that directed to me, Congressman?
        Mr. Watt. Yes.
        Mr. Henchman. The rationale for that would be brick and
    mortar retailers just have to deal with the sale tax holiday
    that they are dealing with in their jurisdiction, whereas an
    online seller would have to deal with this year 17 State sales
    tax holidays.
        Mr. Watt. What I am trying to get to is an equal
    application of tax, regardless of who is responsible for it. I
    don't think I would be more interested in giving somebody
    immunity from something that I am not giving, because then you
    are creating another disparity between in-State and
        out-of-State collectors, it seems to me.
        Do we compensate brick-and-mortar retailers for collecting
    the tax?
        Mr. Henchman. Many States do, yes.
        Mr. Watt. You do. Do you compensate brick-and-mortar
    vendors in your State, Governor?
        Governor Haslam. Compensate in which way?
        Mr. Watt. Compensate brick-and-mortar vendors who collect
    your tax; for collecting your tax.
        Governor Haslam. No, we do not.
        Mr. Watt. Do you, Mr. Harper?
        Mr. Harper. Yes, we do.
        Mr. Watt. How do you do that?
        Mr. Harper. We had a study that was done, cost of
    collection, and the businesses in the State agreed to it and we
    put it in the State Code. It is 3.12 percent of what is
    collected.*
    ---------------------------------------------------------------------------
        *Mr. Harper edited his response as follows: The figure I stated
    was, ``It is 3.12 percent of what is collected.'' That was an incorrect
    figure. The current rate for vendor reimbursement to collect sales tax
    is 1.31 percent. That reimbursement is available only to businesses
    that file a monthly sales tax return.
    ---------------------------------------------------------------------------
        Mr. Watt. So you think that would be a fair addition to
    this bill?
        Mr. Harper. Yes. There are some other things I would like
    to see in this bill for safeguards. But yes, vendor
    compensation as agreed to between the business community and
    the States would be good.
        Mr. Watt. What about require local jurisdictions to align
    geographically with five-digit zip codes? Do you require that
    of brick-and-mortar retailers?
        Mr. Harper. In the State of Utah, we have a jurisdictional
    database, yes, and you go through and based on where the
    transaction occurs, that is where the tax is imposed. And I
    think that would be another safeguard for all States to have.
        Mr. Watt. But if you are going to a State opting for one of
    these three options, as I understand this bill to do, what
    sense would that make?
        Mr. Harper. What it does is it allows each State to
    maintain control of their own State tax policy and to choose
    one of the options that best fits their State.
        Mr. Watt. But once they choose one of those three options,
    aren't they basically foregoing all of the other variables
    within the State?
        Mr. Harper. It depends on what amendments are made, but in
    the present form they could be locked in. But I think that is
    still an item for discussion.
        Mr. Watt. All right. I think I am confused enough, and I
    will yield back.
        Mr. Goodlatte [presiding]. The gentleman yields back, and
    the Chair recognizes the gentleman from Virginia, Mr. Forbes,
    for 5 minutes.
        Mr. Forbes. Thank you, Mr. Chairman, and thank all of you
    for being here. This is a very important issue, and we
    appreciate your expertise.
        Governor, we are all sympathetic with this issue. We are
    trying to work through the logistics with the best piece of
    legislation. One of the questions we have is I know that your
    State is one of a few States that uses the physical presence
    standard also for the imposition of business activities taxes.
    This Committee lauded that approach last year when it voted
    favorably for H.R. 1439, which was the Business Activity
    Simplification Act. That confirms the Quill's holding and
    applies to corporate income and other business activities tax.
    I don't know if you had time to review that bill before coming
    or not to see if how we reconcile that with this particular
    piece of legislation.
        Governor Haslam. I am sorry, Congressman, I have not.
        Mr. Forbes. And I wouldn't expect you to.
        Mr. Henchman, I think you testified on that bill when it
    was here. Can you reconcile the two, this legislation with
    that?
        Mr. Henchman. Sure. Although it is an issue that you should
    be thinking about, the physical presence standard, as I
    mentioned in my testimony, is a cornerstone of State taxation,
    not just for sales tax but for individual income tax and
    corporate income tax for a long time, and the BASA bill and the
    Mobile Workforce bill seek to enshrine different components of
    physical presence for those two tax standards.
        The way I, at least for myself, relate it to sales tax is
    the tax that we are dealing with here is one that is imposed on
    and has to be paid by the consumer, which does have a physical
    presence in the State, and the economists who work in my office
    tell me that they bear the economic burden of the tax, that
    while businesses collect it and they bear some administrative
    costs associated with it, the economic burden is passed forward
    to the consumer. The consumers do have physical presence in
    their State. So that is how I would reconcile it.
        Mr. Forbes. Mr. Harper, what do you believe is the
    appropriate small seller exception threshold? Does this bill
    get it right? And is that something that we have pulled out
    because it is politically acceptable or is there some
    substantive reason why we would pick that particular dollar
    amount?
        Mr. Harper. This bill has a million dollar small seller
    exemption. The Senate bill has a $500,000. As we have talked
    about it with Streamlined Sales Tax, we believe that for the
    remote sales $500,000 is probably appropriate. But it is up to
    Congress to go through and weigh that out and come up with the
    final factor.
        Mr. Forbes. Mr. Henchman, one of the concerns that some
    people have about this bill is that the small seller exemption
    carves out remote small businesses with less than a million
    dollars in sales into the State. It actually treats out-of-
    State small businesses much better than in-State because the
    in-State business still has to collect and remit the tax while
    the out-of-State seller does not. Is this a problem to you or
    how do you reconcile that?
        Mr. Henchman. Well, that is non-neutral treatment. Maybe if
    Mr. Watt had more time, that is what he might go to next,
    because that is a differential treatment between remote sellers
    and people within the State.
        The list of possible simplifications, of course, don't all
    need to be done. Adopting one might obviate the need for
    another. So if we have a really simplified system, maybe we
    don't need a small seller exception. But if we are to punt on
    simplification, maybe we would need a really high level for a
    small seller exception. However, I don't know what the magic
    number is. There is no economic policy that dictates what the
    magic number is, but I think that is the balancing approaching
    the Congress should use.
        Mr. Forbes. Mr. DelBianco, I am going to let you address
    any of those questions in your response, but also I would like
    for you to address--there is a concern that this is putting
    small mom-and-pop businesses in a very difficult position and
    that they are going to go out of business. How do you address
    that concern if we don't do something to
        offset this?
        Mr. DelBianco. I couldn't agree more. Small
        mom-and-pop businesses on Main Street have been getting
    clobbered by Wal-Mart, Target, Amazon for over a decade now.
    And that impact has driven them as the last best hope to turn
    to the Internet to try to sell excess inventory, to try to
    reach customers that maybe never darken their doorstep or
    customers that bought once in their store and then traveled
    home. So the Internet turns outs for small business to be
    perhaps the only way they can survive against the competition
    that I spoke of.
        Just as we are counting on those small businesses to create
    the jobs and help our economy recover, this bill would impose
    on those small businesses the obligation to collect not just
    for the only State that they are in now, but for all 46 States
    and all 9,600 jurisdictions. That, to me, is the ultimate
    opposite thing we should do to small businesses who use the
    Internet to compete and survive.
        Mr. Forbes. Mr. Chairman, my time is out, and I yield back.
    Thank you, gentlemen, for your expertise.
        Mr. Goodlatte. I thank the gentleman.
        The gentlewoman from California, Ms. Lofgren, is recognized
    for 5 minutes.
        Ms. Lofgren. Thank you, Mr. Chairman. This is a very
    helpful hearing. I think all of us want to make sure that we
    nurture small businesses, whether they are on Main Street or
    whether they are an Internet company.
        I met recently with a woman who lives in my district who
    had retired from the tech industry she worked for. Her early
    twenties son got cancer and he didn't have any health
    insurance. She spent everything she had to save his life. And
    now she is running a little small business out of her living
    room. She thought she would be retired, but she used all her
    retirement to save her son's life. So I am thinking of her and
    people like her that are running little businesses out of their
    living rooms to get by and how is this going to impact them, as
    well as the empty store fronts that I also worry about. But I
    am mindful that I think the Big Box stores have done more to
    the little small businesses on Main Street probably than the
    little tiny Internet businesses. The Big Box stores, along with
    Amazon.
        As I look through this, page 14, Mr. DelBianco, and page
    16, Mr. Henchman, are very helpful because they are giving us
    things to think about if we are going to move forward on this.
    And you are right, maybe we don't have to do all of them.
        But here is one question I had, Mr. Henchman, on your
    suggestion that we establish a single tax return for all taxing
    jurisdictions. With that are you suggesting that if it is 8
    percent in California, it should be 8 percent in every city and
    county? What is your suggestion?
        Mr. Henchman. No. Just that there be one return that you
    have to fill out.
        Ms. Lofgren. I see.
        Mr. Henchman. So, for instance, California, where I think--
    - I am originally from California--maybe just shy of 100
    different sales tax jurisdiction, rather than somebody selling
    into California repeatedly having to fill out a hundred
    different forms for all those----
        Ms. Lofgren. I see. Because our voters have approved sales
    tax increases, primarily for transportation. Also, our county
    hospital. And we can't overturn what the voters did.
        Mr. Henchman. Each one of those is a new tax jurisdiction
    in California.
        Ms. Lofgren. Have you looked at the software that Mr.
    Harper described?
        Mr. Henchman. Yes. It is expensive. I don't know how much
    of a budget your constituent with the living room business has
    for software.
        Ms. Lofgren. None.
        Mr. Henchman. But it is expensive. Now that may change as
    technology goes forward but, of course, the simpler we make
    sales tax systems by setting Federal standards, the cheaper
    that would be.
        Ms. Lofgren. We could make that available for free. We
    could require the State to make that available for free.
        Mr. Henchman. Right.
        Ms. Lofgren. Mr. Harper, is this software available
        online so that the Members of the Committee can go try it
    out and see for ourselves?
        Mr. Harper. Yes. We have also had a number of
    demonstrations here on Capitol Hill.
        Ms. Lofgren. But we are all busy. We don't necessarily go
    to those. Can you give us the sites so we can play with it and
    look at it?
        Mr. Harper. I can provide that to you for each of the
    different companies.
        Ms. Lofgren. Thank you very much.
        I am also interested in how we arrive at, as other members
    have mentioned, the small business exemption. And I think that
    the dollar amounts in the bills are somewhat arbitrary. Why
    wouldn't we use what the Small Business Administration says,
    for example, or what the IRS says is a small business instead
    of just the sort of arbitrary numbers?
        Mr. Harper. I think, if I may, the reason for the $500,000
    and the million is because that is what Members of Congress,
    both of the House and Senate, have come up with. So we have
    responded to that rather than the other standards that are out.
        Ms. Lofgren. I guess if we are going to move forward on any
    of this, I would want to have some further examination of that
    because it seems to me the SBA's whole reason for living, I
    mean existence, is small businesses. And they have studied what
    is a small business in a particular type of field. We should be
    guided I think by that or maybe the IRS. I am not critical of
    my colleagues who have introduced these bills, but I think, as
    Mr. Conyers said, these are starting points not ending points
    when a bill is introduced and maybe we should get some guidance
    from either the IRS or from the SBA on what in fact is a small
    business for the exemption.
        And I would just close, sometimes we think a solution is
    going to solve problems and it won't. I was in local government
    for 14 years and I know that revenue is a problem. At the time
    I was in local government we talked a lot about catalog sales
    more than Internet sales. But when you buy something online,
    you have to pay postage. And if it is not a high-dollar item,
    the postage is probably as much as the sales tax would be in a
    lot of these States. So to think that the sales tax application
    is somehow going to--it is not just the sales tax. It is the
    availability of inventory in some cases.
        It upsets me so much that brick-and-mortar book stores are
    closing. I love to go to book stores. And yet if you go, you
    can't get the book you want because the inventory is
    insufficient and you end up buying things online because as
    retail gets hit, the inventory decreases and it is sort of a
    death spiral. So it is not just Internet sales.
        Anyhow my time is up, Mr. Chairman. I thank you for this
    hearing. And I think this is the beginning, not the end, of our
    inquiry.
        Mr. Goodlatte. I thank the gentlewoman. It may not be the
    beginning of the end, but it may be the end of the beginning.
        Ms. Lofgren. I meant the beginning of the inquiry.
        I ask unanimous consent, Mr. Chairman, to put into the
    record a listing of the businesses who sent us letters--the
    letters are too voluminous--in opposition to the bill.
        Mr. Goodlatte. Without objection, the listing will be made
    part of the record.
        [The information referred to follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________

        Mr. Goodlatte. And the Chair will recognize himself for 5
    minutes to say that the gentlewoman is quite right, this issue
    did not start with the Internet. In fact, the Supreme Court
    decision that articulates the standard was a mail order case
    that pretty much predated any significant business being
    transacted on the Internet. And there are also telephone sales.
        So it raise a question here that hasn't been addressed by
    any of you yet and I am wondering if any of you are concerned
    about the fact that this advantages foreign businesses. We talk
    about States not collecting sales taxes for businesses in other
    States, but what about Canada, Mexico, Caribbean Islands, Hong
    Kong, China, India? You can buy goods from a couple hundred
    different countries around the world and those countries, to my
    knowledge, are not going to be required and this law is not
    going to reach a requirement that they have to collect sales
    tax for the State in which the consumer is receiving the
    product.
        Do any of you have a comment on that?
        Mr. DelBianco.
        Mr. DelBianco. Thank you, Mr. Chairman. You are absolutely
    true. If a consumer were bound and determined to find a way to
    avoid paying sales tax on that digital camera----
        Mr. Goodlatte. He doesn't have to be bound and determined.
    He could be going on the Internet and seeing an ad from a
    company in Canada and saying, Hey, I like their price and I am
    going to buy it from them.
        Mr. DelBianco. So it is absolutely true, consumers, as
    Congressman Lofgren said, consumers go online for the variable
    choices they get, the lower prices, completely aside from sales
    tax. They don't actually go online to save sales taxes. There
    is no data that show that. In fact, there is more data to
    support the fact that people go online to research their
    purchases and then use that online
        research----
        Mr. Goodlatte. Anybody want to respond? I have got a
    limited amount of time.
        Mr. Harper?
        Mr. Harper. Yes. This bill deals with State tax authority
    and the 10th Amendment. What you are talking about is a very
    valid issue but it is one that Congress has authority to deal
    with tariffs and imports and all the other dealings.
        Mr. Goodlatte. Absolutely right, but it may have the
    unintended consequence of enhancing--if you think a business
    outside a State isn't required under current law to collect
    sales taxes for that State, it may have the unintended
    consequence of enhancing the competitiveness of businesses
    outside of the United States.
        Mr. Harper. I am not going to disagree with that.
        Mr. Goodlatte. Let me ask you this. One of the concerns I
    have--and I am completely sold on the fairness issue. The
    gentlewoman from California makes a good point about offsetting
    cost of the shipping and handling charges that you encounter
    often on the Internet, but there are lots of different
    advantages and disadvantages of each type of way of doing
    business. And the fact that a brick-and-mortar business is
    required because they have a nexus with the State to collect
    that tax and a business outside of the State selling into the
    State doesn't have that nexus and therefore isn't required to
    collect it is unfair, and finding a way to address that is a
    desirable thing.
        On the other hand, that business outside of the State--and
    I will direct this to Governor Haslam--it doesn't have any
    representation in the State in terms of the whole process that
    one undergoes to collect the tax. And I am not sure we have
    enough uniformity in the legislation that we are holding this
    hearing on to say with confidence that a small business outside
    of your State could, A, feel confident they were going to be
    treated fairly by a State that might be aggressive in pursuing
    collection of taxes.
        We encounter this with business activity taxes and other
    things all the time, States making businesses out-of-State
    having to dance on the head of a pin to comply with their laws.
    What recourse do these out-of-State businesses have if they
    don't like the particular laws that your legislature or a
    legislature of another State might enact which would require
    them to comply with that requirement?
        Governor Haslam. Ultimately, it is the free-market system.
    And they have customers in those States who are saying we
    desire their product.
        Mr. Goodlatte. But the businesses in Tennessee aren't
    operating under the free-market system. They are operating
    under the fact that they are represented by a local member of
    the State legislature who goes to Nashville and casts a vote on
    whether or not it is a fair way to make that business in
    Cookeville or wherever collect taxes for them. They don't have
    that representation if they are in Richmond, Virginia, or
    Indianapolis, Indiana, or anywhere else in the country.
        Governor Haslam. And I appreciate the shout out for
    Cookeville. I would say that is not really an Internet versus
    retail issue. That same thing could be true of a retail chain
    that had one store in a State and their headquarters are
    somewhere else. I don't know that that changes with this
    argument.
        Mr. Goodlatte. Well, the other concern I have about this is
    that I think we are on a road toward making progress on
    cooperation, but I don't think we are there yet. We have some
    States that have joined together with the Streamlined Sales Tax
    provision. But this law apparently lets a State that doesn't
    join into the Streamlined Sales Tax, which may have one
    definition of what is taxable, to nonetheless step in. And some
    of the largest States in the country are sort of flexing their
    muscles with this legislation--California, Texas, New York,
    saying, We want to able to do this, but we also don't want to
    change our sales tax rules to have some kind of uniformity for
    these interstate transactions that are taking place. And that
    is what comes back on the shoulders of the Congress, because we
    have the ultimate responsibility for writing laws related to
    Internet commerce, and doing so in a fair manner not only for
    those brick-and-mortar businesses but also for those small
    businesses that are at this point in time I think still
    confronted with a very complex, many thousands of multitudes
    more complex than a business in your State or another State
    knowing what that State's requirements and only having to meet
    the requirements of that State.
        So I commend the author of the legislation and I commend
    all of you who are trying to find a way to simplify it, but I
    would urge you to work further to bring about more
    simplification in terms of a definition. Any State that wants
    to participate in this, they ought to agree on one definition.
    I would prefer to see one rate. Three rates is better than
    9,000-some rates. But I would prefer to see something that made
    it simpler.
        And let me say this with regard to small businesses. I am
    concerned about exempting them from this. Your local small
    businesses in Tennessee are not exempt from collecting the tax.
    And businesses out of State, if there is a million dollar-cap,
    or some other cap, why would you not want to grow your business
    beyond that. And when you do that, you are going to face an
    artificial penalty for doing so and having to change your
    system and collect a tax that you weren't having to collect
    before.
        If we are going to do this, I think we ought to find a way
    to make it work and make it work for everybody.
        At this time the Chair would recognize the gentlewoman from
    Texas, Ms. Jackson Lee, for 5 minutes.
        Ms. Jackson Lee. Mr. Chairman and the Ranking Member, I am
    thankful for this hearing and thankful to have the opportunity
    to plunge into I think an issue, as the gentleman from Virginia
    has mentioned, has been discussed for a number of years. Many
    of us come with backgrounds from local government, the city
    council in the City of Houston, after serving as a municipal
    judge. It is not a city manager form of government so in fact
    we write budgets and seek opportunities for providing revenue
    to our constituents or for services. Likewise, the State of
    Texas has a unique structure as well. And I think it is
    important, Governor, to note that Texas brags that it does not
    have an income tax and therefore is in the recruiting business.
        But I would make the statement as well that States, except
    for the politics of it, have other unique measures. There are
    individual States with casino gambling of all forms, and
    certainly that goes to the nature of the constituency. There
    are lotteries that have exploded across America. And certainly
    there are opportunities there where States continue to look. It
    is a curious situation for me because I come from a State where
    we have had the opportunity to receive $40 million in Medicaid
    dollars that were rejected. So it makes it very difficult when
    you think of opportunities to secure moneys that are rejected,
    that you want to do something that may cause some concerns
    among your small businesses.
        So in order to educate myself a little better, I am going
    to ask Mr. DelBianco and I will ask some of the other members
    as well an extensive question, if I might. First of all, I
    think it is important that we argue for tax simplification. And
    the underlying bill seems to strike a cord of possible
    overlapping confusion. And I think it is correct that we need
    to find a way to handle this, if by chance this bill passed and
    it is making it way through the deliberative process.
        But the current State system is a morass of over 9,600
    taxing jurisdictions. Many zip codes cover multitude taxing
    entities. An op ed in today's Wall Street Journal cites the
    Dallas-Forth Worth airport that in the State of Texas as being
    in six separate taxing jurisdictions. In addition, the
    definition of taxable goods varies from jurisdiction to
    jurisdiction. In one, a Snicker's bar is taxed as a candy while
    in another it is taxed as food because it contains peanuts.
        It is obvious to me that even if we were to adopt the bill
    before us, we would still have a long way to go. What
    responsibility does the Federal Government have to businesses
    to ensure a seamless and inexpensive transition to this new tax
    collection system, if adopted? And then would you also comment
    on the fact is this a new tax and would the Quill case be
    overturned. I hope others are listening because I am going to
    go to some others for that question.
        I think my last point that I would like you to comment on
    is as I read the bill, it seems like it says $100,000 dollars
    in sales in-State, and collectively, a million dollars.
        I would raise the concern of the lady in the living room
    with her business, but also a sufficiently small business that
    may have $1.2 million in business and is a small business and
    it would be an enormous burden to try and keep up with this new
    structure.
        Would you comment, my friend? Thank you.
        Mr. DelBianco. Thank you, Congresswoman. First, you asked
    about the path on simplification. As Chairman Goodlatte pointed
    out, the bill before you only has three elements of
    simplification, whereas Congress has considered as many as 16
    minimum requirements. And it is Congress' job to impose bold
    and robust minimum simplification requirements before it sweeps
    away the protection of physical presence.
        Within this bill, two of them are fundamentally flawed. On
    definitions, this bill permits each State to have its own
    definitions. It doesn't even require all the States to use the
    same. This bill also says that each State can provide its own
    software to each and every seller. So imagine the seller having
    to take 46 different pieces of software, because this bill
    doesn't require that they all be the same.
        You also asked about is it a new tax. As we have discussed
    earlier in this hearing, it is absolutely a new tax burden on
    businesses to collect it. The tax is due and payable from the
    business. It isn't due and payable from the consumer. In your
    State of Texas, your State tax collectors boldly said that
    Amazon has had a physical presence in Texas. So therefore you
    should have been collecting for the past couple of years. Your
    State sued Amazon for $290 million. Amazon couldn't turn around
    to you and say, Well, the consumers didn't pay it so we don't
    have to pay it. Because the tax is due from the retailer, in
    all cases, with penalties and interest.
        Fortunately, your State used that as a bargaining chip to
    get Amazon to keep its distribution center in Texas. So under
    the physical presence rule we have today, Amazon will begin
    collecting in Texas next year, and there goes a lot of what you
    thought was the uncollected sales tax.
        So does it overturn Quill? In a way, it completely blows
    away Quill's physical presence standard. Quill always said that
    Congress has the right to do that. We know you have the right
    to do it, but is it the right thing to do.
        Ms. Jackson Lee. Can I just ask the Governor, do you think
    the exemption is high enough for small businesses and do you
    hear my underlying premise that it is a strange number because
    you could be small and go over the limit?
        Governor Haslam. Right. I don't know that I am qualified to
    define what that is. Like I said, one bill said $500,000. One
    is at a million. I do hear your underlying premise. It is
    worthy of discussion. Obviously,
        Internet-based businesses are a little less labor
    intensive. So you have to be a pretty large Internet business
    to be over a million because of the smaller size of employees.
        Ms. Jackson Lee. Just a tiny question. You believe in
    states' rights. Isn't this a case of nullifying State laws?
        Governor Haslam. No. Actually it is just the opposite. I
    think what you are doing is giving States the rights to force
    businesses to collect that tax that is already due them.
        Ms. Jackson Lee. Well, I thank the Chairman for his
    indulgence. I read it differently. And I think we will have a
    long time for discussing and reviewing this matter, Mr.
    Chairman.
        Mr. Goodlatte. I thank the gentlewoman.
        The gentleman from Texas, Mr. Poe, is recognized for 5
    minutes.
        Mr. Poe. Thank you, Mr. Chairman. Gentlemen, thank you for
    being here.
        As mentioned by my colleague, Ms. Jackson Lee, in Texas we
    don't have an income tax. We are proud of it. And if any public
    official advocates an income tax, they are a former public
    official. Republican, Democrat, or Independent. So our main
    source of revenue is property taxes and the sales tax.
    Businesses collect sales tax. We have a pretty good system, I
    believe. It has been worked on for a great number of years as
    to the exemption, the exceptions, and who pays and how it is
    collected.
        I think States ought to have the right to collect a sales
    tax. And the Federal Government should not prevent them from
    collecting a sales tax. I think it is a states' rights issue,
    as you mentioned, Governor.
        We have heard the stories about Best Buy. So this weekend I
    went to a Best Buy in Houston, Texas, and talked to the folks
    that worked there. I learned a lot of things. First of all,
    unfortunately 50 Best Buy stores have gone out of business this
    year. One of the reasons, they say, is because they are
    competing with someone that is not in Texas. And they pointed
    out the fact that customers come in, they get this free advice
    about all these electronic gizmos that I know nothing about,
    and as they are walking out the store they order it online and
    reap the benefits of the expertise of the store that is in
    Houston and they get this big monster TV sent to them. There
    are other stories about--because they don't pay the tax. They
    save that 8\1/4\ percent and they aren't paying that tax and
    they get it for a bargain. That kind of bothers me that people
    would do that, but they do.
        And we have the problem also of small businesses. I mean,
    am talking about small business. It is one store, mom and dad
    or cousins or whatever own one store.
        And they have to compete with people online. It costs more
    to run a one-business store operation than it does a chain, of
    course, and there are events that take place with these small
    businesses that are out of everybody's control, including the
    government. We call them hurricanes. Just since I have been a
    Member of Congress in my congressional district, we have had
    the experience of Katrina, Rita, Humberto, Gustav, and Ike.
    When Ike came through Dayton, Texas, it destroyed, eliminated
    businesses to the ground because of the winds and the rain. It
    is an expense that they have to incur to rebuild that small
    business. Western Auto in Dayton, Texas, is a perfect example.
    I don't know how many Western Autos there are in the country,
    but there is one less in Dayton, Texas, until they rebuild it.
    All of those are because they have a presence in the community.
    Going back to Best Buy, they have a community outreach employee
    that is working with the community, doing things for the
    community, donating money and time to Big Brothers, Big
    Sisters, all these organizations because there is a presence.
        So but I understand the online operation and why it works
    and why it is successful, so, Governor, I want you to, if you
    would, before you drink that glass of water, expand on why you
    think we need to have the ability, States need to have the
    ability to collect a tax that is already due the State as
    opposed to, as some have said, this is a new tax. Can you
    explain the difference between the concept this is a new tax
    versus States are just collecting the tax that hadn't been paid
    for years because they weren't allowed to collect it. Can you
    expand on that please, sir?
        Governor Haslam. Right. Well, I mean, as we have said, it
    is a tax that is due, and I respect the gentleman on the other
    end, but when Amazon is sued, I don't remember the exact, sued
    by the State of Texas, I am betting that they sued them for not
    collecting that tax, I am betting that is what they sued them
    for. So it wasn't the tax that they were due, it was that they
    weren't collecting that tax. The Quill decision gave Congress
    the right to specifically address that, and to your point, you
    know, I keep coming back, it is basically an issue of fairness.
    It is some people pay it and some don't, and, again, as a
    former mayor, when that Western Auto went away, you didn't just
    lose the sales tax, you lost the property tax that it is
    paying----
        Mr. Poe. And jobs.
        Governor Haslam [continuing]. For basic services, and jobs.
    The same thing with that Best Buy. It ultimately comes down--I
    understand all the issues that have been talked about. It is
    very complex. But it is too big of an issue of fairness not to
    address.
        Mr. Poe. And you don't buy your boots online?
        Governor Haslam. I don't buy my boots online.
        Mr. Poe. Neither do I.
        Governor Haslam. We have a lot of great stores in
    Nashville, though, come on down.
        Mr. Poe. So do we in Texas. Mr. Chairman, I will yield back
    the balance of my time. Thank you.
        Mr. Marino [presiding]. Thank you. The Chair recognizes the
    gentleman from Georgia, Congressman Johnson, for 5 minutes.
        Mr. Johnson. Thank you, Mr. Chairman. I would respectfully
    disagree. I think this is a new tax, and it is not simply a tax
    that is due. I think technically what we are doing here is
    imposing or we are seeking the ability of States to have the
    authority to impose a sales tax on Internet, on the sale of
    Internet goods. So it is a new tax for those who purchase their
    goods on the Internet and who don't, up to this point, have to
    pay taxes on that. I don't think there should be any
    disagreement with that.
        Am I correct? Anybody disagree? Yes or no.
        Governor Haslam. I disagree.
        Mr. Johnson. You disagree, okay. Well, I tell you. I want
    to say right now that I am in favor of the Marketplace Equity
    Act of 2011. Having been a local elected official, a county
    commissioner, Chair of the Budget Committee, you know, I
    understand the unfunded mandates that have to be met that are
    imposed by the Federal Government, I understand the dwindling
    amounts that are collected through property taxes and also
    sales taxes on brick and mortar, and so as a fundamental issue
    of fairness I think it is only right that our, everywhere from
    our big box retailers down to our small mom and pop operations
    should be treated fairly, should not be discriminated against
    in tax law based on the fact that they have a brick and mortar
    location and a presence in a particular location. So I am in
    favor of this legislation, but I feel the specter of Grover
    Norquist in the room, and so therefore I feel compelled to ask,
    Governor and Representative Harper, whether or not you, too, as
    Republican State elected officials have signed on to the Grover
    Norquist ``read my lips no tax'' pledge? Have you signed on to
    it, Governor Haslam?
        Governor Haslam. I have not.
        Mr. Johnson. Okay. And how about you, Mr. Harper?
        Mr. Harper. I have not because I am accountable to the
    people who elect me, not to Grover Norquist.
        Mr. Johnson. Well, I fully agree.
        Mr. Haslam, how come you didn't sign?
        Governor Haslam. In the end I think people judge you by
    what you do. In the State of Tennessee since I have been
    Governor we have cut taxes four times. I think actions speak
    louder than words.
        Mr. Johnson. And, Governor, I know that you have said you
    disagree with me that this is not a new tax, and we could get
    caught up in semantics, but you did say that $400 million in
    lost tax revenue----
        Governor Haslam. Right.
        Mr. Johnson [continuing]. Is incurred by the State of
    Tennessee. $20 billion for the Nation.
        Governor Haslam. Right.
        Mr. Johnson. I can think of a whole lot of great things
    like police, fire, public safety, these kinds of needs that
    local governments are deprived of that tax money because of our
    inability, your inability to tax Internet sales, and that is
    why I support this legislation, but, you know, if Grover
    Norquist were to be sitting right here and he made the
    observation that, you know, by aiding or by supporting this act
    that you would be aiding and abetting the States in their
    ability to impose a tax increase on people who are not used to
    paying taxes on Internet sales, and therefore it is against the
    pledge, how would you respond to that?
        Governor Haslam. I would say to Mr. Norquist, I respect--I
    don't know what he would say on this, so I won't put words in
    his mouth, but my answer to that from whoever said it would be,
    no, we are trying to help a Nation of people right now that are
    breaking the law by not paying the taxes that they owe.
        Mr. Johnson. Is it breaking the law?
        Governor Haslam. You don't pay a tax that is owed.
        Mr. Johnson. Or is it skirting the law that there is?
        Governor Haslam. Well, we will quibble about that later,
    but----
        Mr. Johnson. Okay. Yes, sir?
        Mr. Harper. And in that same vein, we have done surveys in
    the State of Utah, nearly three-quarters of the people in the
    State of Utah when they buy online or via catalog believe that
    they are already paying the sales tax, the use tax that is due.
    They are unaware of the fact that it is not being collected.
        Mr. Johnson. Well, I guess when they become aware of it
    they will probably say read my lips, no new taxes. But maybe
    not.
        I will yield back.
        Mr. Marino. Thank you, sir. The Chair now recognizes the
    gentleman from Iowa, Congressman King, for 5 minutes.
        Mr. King. Thank you, Mr. Chairman. So I am here listening
    to the testimony, and particularly that of Judge Poe from
    Texas, and he said do you buy your boots over the Internet. I
    had to stop and think for a minute, and I looked at the label
    of my jacket on the suit I have on, and I thought, well, I
    really do. Actually every suit in my closet is from Tennessee,
    and what I do is I go on the Internet, and I look at the
    inventory down at my local clothing store in Dennison, Iowa,
    Reynold's Clothing Store, and I call them up and say can you
    get me a couple of suits that meet this, and they have got my
    measurements and they order them out of Tennessee, and they do
    whatever tailoring is necessary to fit my figure, and they put
    it on UPS and ship it on up to Kiron, Iowa. Now, so I think I
    met all those standards, and I hope I pleased the Governor of
    Tennessee in the process.
        Governor Haslam. We are very grateful.
        Mr. King. And so this picture of what is going on with the
    free enterprise side of this, I have a letter that I am going
    to ask to be introduced into the record, but it is from Mark
    Jorgensen, and he is a co-owner of Carpet World Flooring in
    Fort Dodge, Iowa. There are many statements that have been made
    about brick and mortar and retail businesses and the costs and
    the point of the property tax that gets paid because of Main
    Street businesses. And he goes through that argument as well,
    like we have heard from the witnesses and other narratives. But
    he puts it in a fairly compressed way. He says the customer
    comes into my store to buy some hardwood and he wants to
    install it himself. We show him the samples and quote him $3
    per square foot. He goes home and gets on the Internet and he
    is quoted $3.15, a higher price, but he buys it online anyway
    because the sales tax takes the price that he has to charge at
    the brick and mortar store to $3.21. I don't know what the
    freight works out, that is not in this narrative, but this
    little margin that turns out to be a 7 percent advantage that
    he has because of the sales tax in Iowa is generally 7 percent,
    and here is where he makes the point. He says my competition
    has not used his money to compete with me, he has used State of
    Iowa sales tax money to compete with me. That is the point I
    would like to emphasize here at this hearing is that we are all
    about competition, competition has made America great, free
    enterprise is one of the essential pillars of American
    exceptionalism. But when government competes or if you are in a
    position where you can use sales tax money as a competitive or
    comparative advantage, then you end up with people buying
    things over the Internet to avoid the tax purposes. So I just--
    but this has been examined really well by the witnesses and by
    the other members of this panel. So I have this other thought
    that I wanted to inject into this, and I want to pose a
    question to the panel.
        First, Mr. Chairman, I should ask unanimous consent to
    introduce this letter into the record.
        Mr. Marino. Without objection.
        [The information referred to follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   __________

        Mr. King. Thank you, Mr. Chairman.
        This other thought is this, that I am one of those people
    that believes that I want the IRS out of my life. I want them
    out of the interference business of free enterprise decisions
    completely. I don't want to have to look at some corporate
    structure and see they have a whole floor of tax lawyers up
    there. I don't want to hear again from my oldest son who owns
    the second generation now of King Construction tell me the
    narrative about talking about a business proposal with an
    individual whose business background complements his very well,
    for 90 minutes they discussed a business proposal that at the
    end of that time David King said do you realize our entire
    discussion about this business venture has been about taxes,
    the IRS, tax avoidance, and how we are going to incorporate it
    into our business model? Couldn't we have spent that time a lot
    better planning business and figuring out how to provide a
    profit or service or good that has a marketable advantage? And
    so you will all know then by now that I am for a national sales
    tax, that I want to eliminate the Federal income tax, and in
    doing so there is no necessity for the IRS. We can find a way
    to collect this Internet sales tax without the IRS, and--but
    here is the problem I have. If we go forward with a tax
    situation as some of the opponents of this bill have and if we
    are not able to collect the simplest thing, which is the sales
    tax on Internet sales, how in the world could we ever, then,
    have an Internet sales in the world of a national sales tax?
    And I turn to the Governor to see if he would like to respond
    to that because you are a State that has a version of the
    income tax, and I appreciate it.
        Governor Haslam. Right. I mean, that--I won't go into the
    whole national sales tax debate, but I think that, I mean, if
    you were there, obviously that would make, that would prove,
    that would make this argument even more sensitive. So I do
    think, you know, your basic argument about the retailers who
    are using the States' money to compete is really what we are
    talking about.
        Mr. King. I thank you, Governor. I turn to Representative
    Harper and ask if he would have a comment on the point that I
    made.
        Mr. Harper. Yeah. I personally am in favor of a consumption
    or national sales tax and, you know, doing away with the
    others, but that is just my opinion, not speaking for
    Streamlined Sales Tax. In some of the versions of the national
    sales tax it appears, though, that the States would be
    collecting on behalf of the Federal Government, remitting to
    the Federal Government. That is just an observation that I
    have.
        Mr. King. Of course there would be a fee that would go back
    to the States that would compensate them for their trouble, and
    we would make sure that that was there.
        Mr. Harper. There would be collection compensation.
        Mr. King. Pardon me?
        Mr. Harper. There would be a collection compensation.
        Mr. King. Yes. That is my plan anyway. I thank all the
    witnesses. I see the light has turned red, and so I would yield
    back the balance of my time.
        Mr. Marino. Thank you. The Chair recognizes the gentlewoman
    from California, Congresswoman Chu, for 5 minutes.
        Ms. Chu. Thank you, Mr. Chair. Before I came to Congress I
    was on the California Board of Equalization, which is the
    Nation's only elected tax board, and our primary responsibility
    was, in fact, to collect sales tax. During the years I was on
    this board I saw a steady decline in sales tax revenue, and
    today this loss will cost our State $1.9 billion at a time when
    the State is facing a potential $6.1 billion in cuts in
    November, most of which would be absorbed by K-12 and higher
    education. So this is serious business.
        And one thing I know is that the current system doesn't
    work. The current system relies on individual compliance to pay
    their use tax or for the State entities to do auditing. A very
    inadequate means to address this. So it is clear that we must
    pass legislation such as the Marketplace Equity Act, of which I
    am a cosponsor, so that States can collect all the sales tax
    they are owed, and I want to commend Chairman Smith for calling
    today's Judiciary hearing on this bill, but I hope we can work
    to get this bipartisan bill to the floor before the end of the
    year.
        Let me first talk about the tactic of getting individuals
    to try to pay their use tax. Some panelists have talked about
    the burden for small remote sellers of collecting the sales tax
    for the consumer, but under current law the burden falls on the
    individual. To ensure compliance, a consumer would have to keep
    a running list of all the online or catalog purchases they make
    in an entire year, from a pair of cheap flip flops to diamond
    earrings. They would have to record the description of the
    purchase, the price and the date of the purchase. In many
    situations consumers have to submit an additional form and a
    separate payment to ensure compliance.
        Mr. Kuttner, can you explain in more detail why businesses,
    even small businesses, are able to do this more efficiently
    than individuals can?
        Mr. Kuttner. It goes back to what you started off with,
    which is how----
        Mr. Marino. Sir, is your microphone on? Could you pull it a
    little bit closer?
        Mr. Kuttner. It is, but my voice isn't on. The current
    sales tax, your board, your predecessors on it years and years
    ago could have started off with the idea of not having
    businesses do it, they could have had the idea of every
    taxpayer keep track of these things, but that would have been
    an incredibly inefficient approach, and so that is what the
    notion of having the businesses doing the collection does. It
    brings in a degree of efficiency and it makes it easier, and
    that is why from the little data that we have about, only about
    in those States which do have an effort to try to put sales tax
    on their, use tax on their income tax returns, only about 1.1
    percent of households are going ahead and doing it. So clearly
    at the household level it is an incredibly burdensome tax, and
    so the efficient solution regardless of whether, how you want,
    what the tax should be, the efficient solution is to get the
    companies, the sellers which have scale economy to use that
    scale economy to realize the efficient result.
        Ms. Chu. Right. Governor Haslam and Representative Harper,
    I wanted to talk for a moment about the inefficiencies of
    auditing, and you may have encountered that. Of course, we call
    this tax that people owe use tax, but I can attest to the fact
    that there is a complete lack of compliance with this use tax
    obligation by State residents, and even though in our State of
    California we actually have a line on the income tax form that
    says that people have a use tax obligation, people still ignore
    it. Few people even know what a use tax is, and then they are
    shocked to find out that they even owe it, which leaves
    auditing as our only alternative. But why is auditing more
    burdensome both for the State and for the consumer?
        Governor Haslam. I think just the sheer number of
    individual audits that would have to happen in this case makes
    it, you know, particularly in a State as large as yours, makes
    it incredibly difficult. One anecdotal piece of evidence, we
    did have one of our retailers put on its yearly statements to
    folks saying you bought this much, you owe this much to the
    State. Now, there was no, you know, threat of enforcement
    anywhere, but once people were notified, we actually saw the
    amount we collected off of that go up like tenfold. But it is
    still, you know, the ability to audit that for the State would
    require an incredible amount of work.
        Mr. Harper. And I think, if I may, the Governor is correct.
    As we have looked at it, you know, there are two ways to go
    through and collect the use tax, either a business does it or
    an individual does it, and by having the additional auditors
    come in, people would feel like they have an auditor sitting at
    their kitchen table which would be very onerous and irritating.
    Granted in Utah we only have 1.6 percent compliance with the
    use tax, we have a line on our income tax return. Most people
    don't even think about it. But I think some people more and
    more are thinking about it and are intentionally saying, hey, I
    can save a little bit because of this government inequality
    that is on the books.
        Ms. Chu. Thank you. I yield back.
        Mr. Marino. Thank you. The Chair now recognizes the
    gentleman from Arkansas, Congressman Griffin.
        Mr. Griffin. Thank you, Mr. Chairman. Thank you all for
    coming. I appreciate your time. I first want to say that I am--
    I want to congratulate my colleague from Arkansas, Congressman
    Womack, Steve Womack, for all the work that he has done on this
    particular issue.
        I have studied this issue quite closely, and I would first
    like to just mention that if you take a look at the pledge that
    we have talked about, the gentleman that is leaving has talked
    about, it clearly is dealing with marginal tax rates, which
    this does not.
        Second of all, I am a pledge signer, and I signed that
    pledge not because of what Grover Norquist, says but because
    that indicates in a formal way my position to my constituents,
    and so I want to just make that very clear.
        I also want to talk about something, I support the bill, I
    am a cosponsor, so I want to say that, and I support it because
    of fairness. I support it because of the current unfairness,
    the way that brick and mortar are treated versus Internet
    businesses. I do not support it because I am worried or feel
    sorry for governments not collecting more money. That is not
    why I support it. I support it because I want a level playing
    field, because I hear from my constituents back home who have
    businesses like Hank's Fine Furniture in Little Rock and
    around, and they talk about the different folks who may come in
    and shop and then buy elsewhere, and there is an unlevel
    playing field there. They are very involved in the community.
    They give to a lot of charities. They have a $4.7 million
    payroll. I asked them this morning before this hearing to give
    me some stats. They have 250 employees, and of course they have
    to hire people to fix their air conditioner and take care of
    their physical plant. So I support this because of fairness.
        One of the things that I never hear discussed hardly at all
    in this context, though, is what the States are going to do
    with the money, okay? So I am on the record of supporting this,
    and a lot of money will go back to the States and others. I
    think that every Governor in the country, every State
    representative in the country, every State senator in the
    country ought to go on record and tell constituents what they
    are going to do with the money that they are going to get as a
    result of this.
        My personal view is that we should reduce taxes
    commensurate with the additional revenue that comes in. That is
    what I believe. Why do I say that? That way you get fairness
    between the Internet and bricks and mortar, but you are not
    raising the tax burden. I understand you are not increasing
    taxes here. These are taxes on the books. But you do have some
    people who will pay taxes that didn't pay before. And so I
    think it is fair to say we have ensured fairness with this
    bill, it is up to the States, but every State rep, State
    senator and Governor ought to tell us what they will do with
    that money, and I personally believe they ought to return it to
    the taxpayer. Then if they think they need additional revenue,
    they can make the case, they can make the case to people.
        That is the way I would like to see it play out. Obviously
    that is going to be up to the States. That is not something the
    Federal Government will decide. Some States will say, man, we
    are enjoying all this extra money, and we are going to spend it
    this way. Other States are going to say, we are going to have
    conservative leadership, you know, I have heard that there is a
    gentleman on this Committee who is going to be Governor of a
    midwestern State, and I think, I don't want to steal his
    thunder, but, you know, I think he has indicated that he would
    like to take the additional revenue and return it by lowering
    some of the tax rates. So that is going to be up to the States
    to decide. But with this microphone I am going to preach that
    my opinion is we need to pass this, we need to have the
    fairness as a result, but we need to return the extra money to
    the taxpayers.
        Governor Haslam. Thank you, Congressman, I will take that
    as a question maybe and----
        Mr. Griffin. What do you think?
        Governor Haslam. Right now we are proud in Tennessee.
        Mr. Griffin. My time is up but----
        Governor Haslam. We have the second or third lowest
    combined State and local tax rate in the Nation right now. So,
    believe me, we are tracking with you.
        Mr. Griffin. Yes, sir.
        Governor Haslam. We have cut rates two or three times. Here
    is the message that I would bring back to Washington, and I
    know you agree with it. We understand there is going to be less
    money coming from Washington in the future. I don't know how
    the budget battle, but somehow it has got to get solved, and as
    a Republican I am encouraging you to get it solved. We
    understand there will be less money coming from Washington, and
    like I said, we will live with that. You have to let us then go
    through our budget process as well and then judge us by our
    records. Like I said, we have cut taxes three times since I
    have been Tennessee's Governor, a year and a half.
        Mr. Griffin. Mr. Chairman, may I have 15 more seconds?
        Mr. Marino. Yes.
        Mr. Griffin. One thing, I agree with you, and one thing I
    would add to that is I think we are over the coming decades
    going to be living in a world where less money will come up
    here, and that makes more sense. When you have got small town
    mayors asking, begging for Federal money to build something
    completely unrelated to anything in the Federal Government, it
    is because we have taken so much of their money in the first
    place, and we have created dependency with those mayors and
    those city councilmen, so they come begging us for money. I
    would much rather that money stay in the States and we take
    less of it up here.
        Thank you.
        Mr. Marino. The Chair now recognizes the gentleman from
    Florida, Congressman Deutch.
        Mr. Deutch. Thank you, Mr. Chairman. Mr. Chairman, my
    friend from Arkansas suggested what he might like to hear some
    of the State representatives and State senators and Governors
    say. I would take this opportunity to point out that I would
    like to hear every one of my colleagues that I serve with in
    this body say exactly what Mr. Harper said quite heroically
    earlier, and that he is and everyone who serves in this body is
    accountable to the people who elect them and not to Grover
    Norquist. So thank you, Mr. Harper, for that statement, and I
    wanted to be on the record with that as well.
        Now, let me talk about this legislation, and I would like
    to broaden the discussion a bit. We talk a lot about fairness,
    and my colleagues have talked about it, and they are right to
    do it, but I want to talk about the impact that goes beyond
    that mom and pop retailer who is at a significant competitive
    disadvantage today and talk about the other retailers who may
    not be impacted directly but are impacted very significantly by
    this unlevel playing field that we have today, and here is how,
    and I would love to hear from the panelists about this.
        We know about, we have heard lots of examples about the
    individual retailers who have a customer come in, someone they
    think is going to be a customer, and they ask questions, they
    take advantage of all that retailer's expertise, then they may
    leave and buy the product online or they may ask the retailer
    to match the price. Often the retailer can't, and they will buy
    it online. But what we don't--what we haven't talked about this
    entire day is the role that not just that retailer but that
    that entire Main Street block or that that entire shopping
    center plays in the community and what happens because of this
    system is not just because--not just that small retailers can't
    compete and may have to close but, yes, there are some larger
    retailers as well that can't compete and have to close, and
    let's talk about what happens when they do. If that larger
    retailer closes, the larger retailer that has been blamed so
    often for all of the ills of these small mom and pops, when
    that larger retailer closes, all of the employees of that
    larger retailer lose their job, and that has an impact on the
    community, and when that larger retailer and the small mom and
    pop, when they all start to close, there are other businesses
    on that block or in that shopping center who are also impacted.
    The nail salons, the barbershops, the restaurants. When you
    have part of Main Street that goes dark, then suddenly you are
    not drawing as many consumers. There aren't as many people from
    the community who are coming to shop there. It is true on Main
    Street, and for those of us who represent suburban areas, it is
    true for a shopping center. And when there are lots of
    vacancies, it is a lot harder for those other service providers
    who don't pay sales tax often, not in my State, but it is
    harder for those service providers then to have that flow of
    customers, people who come to see that they are there when they
    are out purchasing something in a store, and then they are
    impacted. And what is the impact then? They lay people off,
    they shut their doors. And suddenly you are in a situation
    where half or three-quarters or all of Main Street is dark, not
    just that mom and pop retailer who couldn't compete as a result
    of this unlevel playing field. And the same thing is true when
    the shopping center goes dark. When half of it or three-
    quarters of it goes dark, there are a lot of people who lose
    their jobs beyond, as I pointed out, beyond just the individual
    mom and pop retailer that has been the focus of this hearing.
    There are a lot of people who lose their jobs, and for people
    who live in the communities near these shopping centers or for
    people who live downtown near Main Street, they lose the
    ability to go out and pick something up in those stores that
    could no longer survive. They lose the ability to go out and
    spend time with their community members in those shopping
    centers, and the community loses corporate citizens who
    contribute to the baseball teams, who contribute to the Boy
    Scouts, who contribute to making that community great. There is
    a lot more at stake here than just the issue of fairness for
    one particular retailer. There is a community at stake here.
    And I think that is what we have to realize, that is why I am
    supportive of these efforts, and I don't know if--I guess I
    would turn to our local elected officials first to see if they
    have anything to add to what I have just said.
        Governor Haslam. Amen.
        Mr. Harper. Total agreement.
        Mr. Deutch. Mr. Chairman, I hope as we have an opportunity
    to move forward that, yeah, we continue to figure out the best
    ways to do this and how the technology, and I hope we have
    another chance to talk about the technology that exists now
    that actually makes this collection I think easier than it has
    been suggested at some point earlier today. I hope we can talk
    about that, I hope we can talk about the broader issues having
    to do with this legislation, but let's not lose track of what
    is happening in our communities today because of a playing
    field that makes it too hard for too many to compete on.
        I appreciate it, Mr. Chairman. I yield back.
        Mr. Marino. Thank you. The Chair now recognizes the
    gentleman from Nevada, Congressman Amodei.
        Mr. Amodei. Thanks, Mr. Chairman. I want to thank, first of
    all, Ms. Sanchez for being here because usually I am the last
    guy, and so thanks for taking the anchor for me today. I
    appreciate that.
        Mr. DelBianco, I have listened to most of this stuff and I
    get that, and I have looked through the testimony, and some of
    the gentlemen say we think this ought to be origin based, and
    obviously the gentlemen from the Beehive State and the
    Volunteer State are in favor of it, that sort of thing. Is it
    your position that Internet sales should not be taxed, either
    sales or use or are they tax exempt in your organization's
    view?
        And since I waited a long time, I won't do something like
    Mr. Griffin did, but please be crisp in your response since you
    are probably having as much fun as I am at this point.
        Mr. DelBianco. Thank you, Congressman, and as all of us
    know, although it has been glossed over today, all Internet
    sales are taxed exactly the same as brick and mortar sales,
    every single catalog company, online company in Nevada collects
    in Nevada, 17 of the top 20 e-retailers already collect for
    everything they sell in Nevada because they have stores. There
    has never been and no one has ever asked for some exemption for
    the Internet. The Quill case was written in catalog. Internet
    sales are all subject to sales tax, and they are today.
        Mr. Amodei. So your answer to my question is yes, they
    should be taxed?
        Mr. DelBianco. And they are.
        Mr. Amodei. Okay. So that is yes in my view, and you can
    say they are, and we won't spend time on that.
        Now, having said that, I have listened to your testimony
    about 10,000 different taxing jurisdictions. With the
    alternative being, as I believe the gentleman from Utah
    indicated, it is like, well, we have got a form on our State
    income tax and we can do that. I don't know how many customers
    you have, but I am guessing it is a bit north of 10,000 when
    you talk nationwide, and God forbid we use the word efficiency
    in anything we should do in a policy sense at this level, but--
    and I understand 10,000 is a big number, but relying upon even
    the, you know, number of people that shop online or in catalogs
    in Nevada to fill that out, although we don't have an income
    tax, we do have a use tax, it is like, I mean, seriously at
    some point in time efficiency has got to come into play and
    where is the best spot for this? You indicated the Texas
    example with Amazon. It is not that Amazon had to pay the tax,
    it is that Amazon decided not to charge the tax, and I guess
    whatever happened in the Lone Star State didn't go their way,
    so they were liable for it. That is that way everywhere. But
    when we talk about the dents in the bill because it is not
    perfect, surely we are not going to rely upon the tens of or
    hundreds of millions of customers nationwide to file those
    documents as opposed to using it at point of sale, whether it
    is at the origin rate or at different rates depending on the
    jurisdiction?
        Mr. DelBianco. You are absolutely right, it would be crazy
    for us to expect individual consumers to start to remit use
    tax. I think that what will happen is that we need a bill that
    forces the States to truly simplify the way they set out after
    the Quill ruling, where there is one rate per State for the
    remote companies, where vendors are compensated for the cost of
    collection, just like in-State vendors are compensated. One
    audit for all 46 States, one set of definitions and a small
    seller exception that protects that small company in your State
    who is just trying to satisfy customer orders outside of
    Nevada.
        Mr. Amodei. Okay, and I get that, but then we get back into
    the fairness stuff that Mr. Deutch, so it is like so if I have
    to be doing business in Truckee, California, into Nevada I get
    a $500,000 exemption, but if I am in Reno selling into Nevada I
    don't. That bothers me a little bit on the general fairness
    stuff, but--and I appreciate that you have thought about
    things, saying here is what we recommend. So is your
    alternative you want an exemption and you want to simplify to
    one return per State, and then it is okay to do use or sales
    tax?
        Mr. DelBianco. If we implemented all the simplifications in
    here, and they are very similar to what Mr. Henchman has
    articulated, with those in place we then turn to a small seller
    exception, and the small seller exception can't be anything as
    low as a million dollars. As I explained earlier, that is a
    one- or two-person company at most, and you talk about
    fairness, is it fair for that one- or two-person Nevada company
    shipping their specialty items around the country to collect
    for all those jurisdictions? It isn't. The small seller
    exception needs to be high enough and yet still allow the
    States to collect 90 percent of what they claim they are not
    getting, and a level of $15 million in sales gets them 90
    percent.
        Mr. Amodei. Are you aware of anywhere in the Nation where
    there is a small seller exemption under State law right now?
        Mr. DelBianco. Under Federal law, the Small Business
    Administration says a retailer is small when they are under $20
    million. This Congress has passed----
        Mr. Amodei. No, the question is, the question is, is there
    an existing exemption in State law anywhere that you are aware
    of that says if your sales are below X amount a year, you don't
    have to collect State sales or use tax?
        Mr. DelBianco. Of course not, and every online seller
    already collects.
        Mr. Amodei. Why would we do it now?
        Mr. DelBianco. There's no small seller exception.
        Mr. Amodei. So why would we create one in this context?
        Mr. DelBianco. The Federal Government has plenty of small
    seller exceptions, recognizing the burdens in Quill. You should
    probably enact a similar small seller exception. The States
    can't do this on their own, they need Congress to force
    businesses to comply, and Congress ordinarily, like the bill
    you just passed this year on the small business tax cut, said
    that a small business was under 500 employees. That may not be
    appropriate for retail, but you need a small seller exception.
        Mr. Amodei. You have exhausted my time, and thank you for
    doing so, and thank you for your responses.
        Mr. Marino. Thank you. The Chair now recognizes the
    gentleman from Colorado, Congressman Polis.
        Mr. Polis. Thank you, Mr. Chair. I would also like to
    engage with Mr. DelBianco. I want to understand taking away
    sort of breaking out how many small businesses work, sales and
    margins. What would a typical, if there is a small company, it
    could be a vintner, it could be anything, and their sales are a
    million, two million. What would be typical of the margins, you
    know, how much more they are selling a good for than what they
    purchase it for for a small business like that?
        Mr. DelBianco. Thank you for the question. We look at gross
    margins, which is the cost of sales as a percentage of the
    retail price.
        Mr. Polis. And what do you find?
        Mr. DelBianco. And they range anywhere from 30 percent down
    to as low as 20 percent in the data that I looked at. So I used
    25 percent for the example I articulated earlier today, that a
    million dollar seller right away loses $750,000 for cost of
    sales, and then has to cover all those other expenses from
    marketing, distribution, web site, accounting, computer
    programming.
        Mr. Polis. And your estimates further show that the cost of
    collection, I believe this was from the Streamlined Sales Tax
    estimates, that it would cost about 17 cents for every tax
    dollar it collects for the States?
        Mr. DelBianco. That is the data that Streamlined Sales Tax
    collected.
        Mr. Polis. So again that would effectively in many cases
    wipe out the margin for a hypothetical million dollar business.
    Coupled with the gross margin and the cost of compliance and
    all their other costs, it might have been a business that
    previously had a small profit, but after this additional burden
    it would cause it to go into the red. Is that possible?
        Mr. DelBianco. Yeah, absolutely.
        Mr. Polis. And I think the concern there is that in that
    situation where you have a business that can no longer exist
    profitably, they are not going to exist. Therefore, they are
    not going to pay any taxes to the government. It is a very
    hypothetical tax when you are talking about imposing it on
    businesses at the $500,000 or million dollar in gross sales
    level where in many cases these taxes would be a deterrent to
    even having that sort of business. They would be very
    difficult, the under $150,000 which is being talked about, and
    then once you are several million, you know, whether, you know,
    five, 10, 20, whatever it is you might be able to absorb some
    compliance costs, but there is very little margin to spare for
    many of these businesses in that middle realm that we hope that
    job growth emerges from. These are not, you know, in many cases
    terribly profitable businesses. As you mentioned, they might be
    purchasing something for $7.50 and selling it for $10, some of
    them are even less than that. In fact, the more competition we
    have in the marketplace, and the Internet obviously encourages
    and makes it easier, reduces barriers to competition, the more
    squeeze on the margins there will be in general, and that is
    obviously a good thing for consumers, and the more efficiently
    retailers are able to turn around products and operate,
    consumers will benefit from that.
        Now, again, the flip side is that this is both a compliance
    cost and a tax on the gross sales, not on the margin. So when
    you have a particularly low margin product, you are effectively
    taxing the gross sales, which will make it very difficult to
    profitably sell low margin products, which are equally as
    important to the economy as high margin products. Therefore
    that makes, you know, again some of the estimates of the taxes
    that would be collected hypothetical in the sense that many
    businesses that they would be collected from would actually be
    driven out of business or uneconomical by having to both comply
    with and pay these taxes which would otherwise obliterate any
    margin that they have.
        I was also wondering, Mr. DelBianco, if you could address
    briefly now, mail order has existed for, you know, certainly as
    long as I have been alive, Sears catalog, all those days. This
    has always existed, and we have had the issue of doing the
    nexus, and why is this any different today other than is it any
    different than just basically having more volume going through
    mail order channels which, by the way, was the case in the
    Sears catalog height days. It probably--you know, that was a
    big deal on where you could get things. Is there really any
    difference in the landscape or is it just an order sort of the
    volume coming through these channels?
        Mr. DelBianco. You are absolutely correct, it is just the
    volume. The Quill ruling was with respect to a catalog company
    and had to do with remote burdens on businesses to have to
    collect and remit taxes for places where they had no physical
    presence at all.
        Mr. Polis. And, you know, many of these e-commerce
    companies as they grow actually establish nexuses in many
    different States for logistical reasons, for business reasons.
    As they do so, they of course fully contribute to those States
    as well, sort of one of the natural cycles of growing. That is
    why many of the large e-commerce companies operate and pay
    taxes in a number of States that they operate in as well.
        So I think as we look at small business, to a lot of people
    a million dollars a year sounds like a lot of business, a lot
    of money. It is important to point out this is not somebody who
    is going to the bank with a million dollars a year. They may be
    earning $50,000 a year, they may be earning $75,000 a year,
    their earnings may be wiped out entirely if they have to hire
    accountants and implement software and take their time away
    from selling their product to manage the compliance of this
    until they get to a size where truly they can absorb any of
    those additional costs, and I yield back.
        Mr. Marino. Thank you, Mr. Polis, and I might add the only
    ballplayer this season when we played the congressional
    baseball game to get an inside-the-park home run.
        Mr. Polis. Which I thank the Chair for the credit. It was
    officially scored as a double and a two-base error, but I will
    take the home run.
        Mr. Marino. It was still a run, so we will chalk it up to
    that.
        The Chair now recognizes the woman from California and, I
    might add also, the only woman to be drafted in the
    congressional baseball team this year, Congresswoman Sanchez.
        Ms. Sanchez. Thank you, Mr. Chairman. And thank all the
    gentlemen on the panel for being so patient, and I was not here
    for much of the hearing, so I apologize if I will cover
    territory that has already been covered. But I am a big fan of
    H.R. 3179, the ``Marketplace Equity Act of 2011,'' and I think
    it is a great bill, and I applaud the Committee for discussing
    it today. I probably don't need to remind my colleagues from
    California and probably anybody else here about the need for
    State governments to receive the entirety of taxes that are due
    to them. The State of California, which is undergoing
    tremendous budget shortfalls, is expected to lose nearly $1.8
    billion in uncollected revenue alone, and that would go a large
    way toward helping us with our budget woes. You know, and not
    trying to place blame because many consumers just aren't aware
    of their responsibility to pay their use tax from online
    payments. And furthermore because remote sellers aren't
    required to collect sales tax, it puts them, as many of the
    witnesses noted in their written testimony, at a distinct
    advantage to the brick and mortar businesses that exist in all
    of our districts and that we want to see survive and thrive.
        The Internet undoubtedly has changed many sections of our
    economy, particularly how we treat remote sellers. It is my
    humble opinion that we no longer live in an era when the
    complications that the Supreme Court acknowledged in the Quill
    decision continue to be an obstacle to the collection and the
    remission of sales tax by remote sellers. At a time when many
    local governments and States are struggling and many people are
    out of work and looking for work, I think that H.R. 3179 is a
    common sense solution that helps level the playing field for
    retailers and provides States with the tax dollars they deserve
    and also allows States the flexibility to address taxation in a
    way that best fits their unique situation.
        So I have given my opinion, but I would like to just touch
    on a couple of questions, and I would like to start with
    Governor Haslam.
        Your State, I understand, is not a full member of the
    Streamlined Sales Tax Agreement; is that correct?
        Governor Haslam. Currently, right.
        Ms. Sanchez. Okay, and neither is my home State of
    California. Can you reiterate in your opinion why we need the
    national solution outlined in the Marketplace Fairness Act?
        Governor Haslam. Well, I think without it the Quill
    decision stays in effect, and Quill specifically said it was up
    to Congress to change the thing, Congress had the ability to do
    that.
        Ms. Sanchez. Great. And you noted in your testimony that
    you don't believe in increasing taxes, so when your
    constituents in Tennessee ask you about the collection of
    online sales tax, how do you explain it to them in a way that
    reassures them that it is, in fact, not a new tax?
        Governor Haslam. Well, not always easy, but I think the
    reality is what I firmly believe, it is a tax that is currently
    due and not collected, and so we have a situation where we are
    enabling a lot of people out there to break the law.
        Ms. Sanchez. Thank you. Representative Harper, as many
    witnesses and Members of the Committee have acknowledged today,
    consumers just aren't paying the use tax. Do you think that
    that system is fair to consumers?
        Mr. Harper. Which system, the one in this bill?
        Ms. Sanchez. No, the status quo right now that many people
    aren't paying the use tax.
        Mr. Harper. I think it advantages wise consumers who go out
    there and specifically try to avoid paying a sales tax based on
    the government inequity that is on the books, and I think it
    disadvantages local businesses who are required to pay a--to
    collect a sales tax and not those who are remote.
        Ms. Sanchez. Would it also disadvantage consumers that
    perhaps aren't technologically sophisticated or don't even have
    a computer or access to the Internet in their home?
        Mr. Harper. Yeah, it creates an unlevel playing field.
        Ms. Sanchez. Thank you. You also spoke in your testimony to
    a point that technology currently exists to collect sales tax;
    is that correct?
        Mr. Harper. Yes.
        Ms. Sanchez. And you noted that eight companies currently
    have the technology to collect that tax. Do you have a sense of
    what it costs to have that technology in order to do that?
        Mr. Harper. It depends on the size of the company and how
    you handle it. I have met with a number of small businesses who
    say it is very simple, cheap, they can afford it, they have,
    you know, just a single product that they sell online, they use
    it. I am concerned with statements that have been made that,
    you know, the cost of collection or the collection of the tax
    would be an undue burden on business and would drive them out
    of business. What we are promulgating is the fact that there
    will be a vendor--there can be a vendor compensation, and it
    will not increase the cost on a business.
        Ms. Sanchez. Would it be accurate to make the assumption
    that if the burden of collecting sales tax was placed on the
    remote seller, companies would look into developing that kind
    of technology and that the price for remote sellers would be
    lowered eventually?
        Mr. Harper. Absolutely.
        Ms. Sanchez. Great. Those are the points that I was
    interested in hearing testimony on. I thank you for your
    answers, and I yield back.
        Mr. Marino. Thank you. Seeing no additional colleagues for
    questioning, and in the interest of our guests in the gallery
    and our distinguished panel, I will not tax you with any
    questions, and 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 the witnesses or
    additional materials for the record. This hearing is adjourned.
    Thank you.
        [Whereupon, at 12:52 p.m., the Committee was adjourned.]
                                A P P E N D I X

                                  ----------

                   Material Submitted for the Hearing Record

     Questions for the Record submitted by the Honorable Jason Chaffetz, a
     Representative in Congress from the State of Utah, and the Honorable
     Melvin L. Watt, a Representative in Congress from the State of North
                                    Carolina

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

     Response to Questions for the Record from the Honorable Bill Haslam,
                             Governor of Tennessee

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

     Response to Questions for the Record from the Honorable Wayne Harper,
                         Utah House of Representatives

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       Response to Questions for the Record from Hanns Kuttner, Visiting
                            Fellow, Hudson Institute

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Response to Questions for the Record from Joseph Henchman, Vice
      President, Legal & State Projects, Vice President, Operations, Tax
                                   Foundation

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          Response to Questions for the Record from Steve DelBianco,
                         Executive Director, NetChoice

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                  Additional Material submitted for the Record

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]