[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







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                       COMMITTEE ON THE JUDICIARY

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


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                               __________

    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


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                               __________

    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


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                               __________

    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:]


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                               __________
    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:]


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                               __________

    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:]


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                               __________

    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:]


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                               __________

    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:]


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                               __________

    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:]


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                               __________

    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

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               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


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




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


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


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


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


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              Additional Material submitted for the Record


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