[Senate Hearing 112-831]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-831

 
  MARKETPLACE FAIRNESS: LEVELING THE PLAYING FIELD FOR SMALL BUSINESS

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             AUGUST 1, 2012

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation




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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             KAY BAILEY HUTCHISON, Texas, 
JOHN F. KERRY, Massachusetts             Ranking
BARBARA BOXER, California            OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida                 JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey      ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas                 JOHNNY ISAKSON, Georgia
CLAIRE McCASKILL, Missouri           ROY BLUNT, Missouri
AMY KLOBUCHAR, Minnesota             JOHN BOOZMAN, Arkansas
TOM UDALL, New Mexico                PATRICK J. TOOMEY, Pennsylvania
MARK WARNER, Virginia                MARCO RUBIO, Florida
MARK BEGICH, Alaska                  KELLY AYOTTE, New Hampshire
                                     DEAN HELLER, Nevada
                    Ellen L. Doneski, Staff Director
                   James Reid, Deputy Staff Director
                     John Williams, General Counsel
             Richard M. Russell, Republican Staff Director
            David Quinalty, Republican Deputy Staff Director
   Rebecca Seidel, Republican General Counsel and Chief Investigator


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on August 1, 2012...................................     1
Statement of Senator Rockefeller.................................     1
Statement of Senator Ayotte......................................     3
    Letter dated July 30, 2012 to Hon. Kelly Ayotte from Joe 
      Cortese, Owner, NobleSpirit................................     4
Statement of Senator Wicker......................................    11
Statement of Senator Hutchison...................................    36
    Prepared statement...........................................    36
Statement of Senator Klobuchar...................................    40
    Letter dated July 31, 2012 to Hon. Any Klobuchar from Mark 
      Dayton, Governor, State of Minnesota.......................    40
Statement of Senator DeMint......................................    46
Statement of Senator Pryor.......................................    49
Statement of Senator Boozman.....................................    50
Statement of Senator Begich......................................    52
Statement of Senator Blunt.......................................    54
    Prepared statement...........................................    54

                               Witnesses

Hon. Michael B. Enzi, U.S. Senator from Wyoming..................     5
Hon. Richard J. Durbin, U.S. Senator from Illinois...............     7
Hon. Lamar Alexander, U.S. Senator from Tennessee................     9
    Prepared statement...........................................
Paul Misener, Vice President for Global Public Policy, Amazon.com    12
    Prepared statement...........................................    13
Steven Bercu, CEO and Co-Owner, BookPeople.......................    15
    Prepared statement...........................................    16
Scott Peterson, Executive Director, Streamlined Sales Tax 
  Governing Board................................................    19
    Prepared statement...........................................    20
Steve DelBianco, Executive Director, NetChoice Coalition.........    22
    Prepared statement...........................................    24

                                Appendix

Hamilton Davison, President and Executive Director, American 
  Catalog Mailers Association, prepared statement................    59
Jerry Cerasale, Senior Vice President, Government Affairs, Direct 
  Marketing Association, Inc., prepared statement................    68
Bill McClellan, Vice President, Government Affairs, Electronic 
  Retailing Association, prepared statement......................    71
Andrew Moylan, Vice President, Government Affairs, National 
  Taxpayers Union, prepared statement............................    74
Letters of support from Republican Governors Haslam (TN), Daniels 
  (IN), LePage (ME), Bentley (AL), Snyder (MI), Daugaard (SD), 
  and Corbett (PA)...............................................    77
David French, Senior Vice President, Government Relations, 
  National Retail Federation, prepared statement.................    85
Harold A. Schaitberger, General President, International 
  Association of Fire Fighters, prepared statement...............    88
National Governors Association, prepared statement...............    89
Letter dated July 24, 2012 to Hon. John Boehner, Hon. Nany 
  Pelosi, Hon. Harry Reid, and Hon. Mitch McConnell from Robert 
  Bentley, Governor of Alabama; Dennis Daugaard, Governor of 
  South Dakota; Paul LePage, Governor of Maine; Tom Corbett, 
  Governor of Pennsylvania; Mitch Daniels, Governor of Indiana; 
  Bill Haslam, Governor of Tennessee; and Rick Snyder, Governor 
  of Michigan....................................................    91
Federation of Tax Administrators, prepared statement.............    91
Letter dated July 31, 2012 to Hon. John D. Rockefeller IV and 
  Hon. Kay Bailey Hutchison from Donald J. Borut, Executive 
  Director, National League of Cities............................    92
Letter dated July 31, 2012 to Hon. John D. Rockefeller IV and 
  Hon. Kay Bailey Hutchison from Bill Hughes, Senior Vice 
  President, Government Affairs, Retail Industry Leaders 
  Association....................................................    93
Letter to Hon. John D. Rockefeller IV from David Broyles, 
  Chairman, West Virginia Retailers Association and Owner, Calvin 
  Broyles Jewelers...............................................    94
Joseph Henchman, Vice President, Legal & State Projects, Tax 
  Foundation, prepared statement.................................    95
Letter dated August 1, 2012 to Senator Jay Rockefeller and 
  Senator Kay Bailey Hutchison from State Senator Jay Emler, 
  Kansas, CSG Chairman and Governor Luis Fortuno, Puerto Rico, 
  CSG President..................................................   102
Letter dated August 1, 2012 to Hon. John D. Rockefeller IV and 
  Hon. Kay Bailey Hutchison from American Federation of Labor and 
  Congress of lndustrial Organizations (AFL-CIO); American 
  Federation of State, County and Municipal Employees (AFSCME); 
  American Federation of Teachers (AFT); Department for 
  Professional Employees, AFL-CIO (OPE); International 
  Association of Fire Fighters (IAFF); International Federation 
  of Professional and Technical Engineers (IFPTE); National 
  Education Association (NEA); Service Employees International 
  Union (SEIU); The International Union, United Automobile, 
  Aerospace and Agricultural Implement Workers of America (UAW)..   103
Letter dated August 1, 2012 to Hon. John D. Rockefeller IV and 
  Hon. Kay Bailey Hutchison from Mark E. Nebergall, President, 
  Software Finance & Tax Executives Council......................   104
Senator Pamela Althoff, Illinois; Delegate Sheila Hixson, 
  Maryland; and Senator Curt Bramble, Utah; Executive Committee 
  Task Force on State and Local Taxation, National Conference of 
  State Legislatures, prepared statement.........................   106
National Association of Chain Drug Stores, prepared statement....   108
R. David L. Campbell, Chief Executive Officer and Joan Wagnon, 
  Executive Vice President, The Federal Tax Authority, LLC, 
  prepared statement.............................................   109
Kelly William Cobb, Government Affairs Manager, Americans for Tax 
  Reform, prepared statement.....................................   111
Letter dated August 1, 2012 to Hon. John D. Rockefeller IV and 
  Hon. Kay Bailey Hutchison from Lincoln D. Chafee, Governor, 
  State of Rhode Island and Providence Plantations...............   114
Letter dated August 1, 2012 to Hon. John D. Rockefeller IV and 
  Hon. Kay Bailey Hutchison from Tod Cohen, Vice President and 
  Deputy General Counsel, Government Relations, eBay, Inc........   114
Article dated July 30, 2012 entitled ``The Marketplace Fairness 
  Act Would Create a State Sales Tax Cartel and Hurt Consumers'' 
  by Jessica Melugin, Competitive Enterprise Institute...........   125
Article dated October 2011 entitled ``The Internet, Sales Taxes, 
  & Tax Competition'' by Veronique De Rugy and Adam Thierer, 
  Mercatus on Policy.............................................   129
Article dated February 2010 entitled ``Uncollected Sales Taxes on 
  Electronic Commerce: A Reality Check'' by Jeffrey A. Eisenach 
  and Robert E. Litan, Empiris LLC...............................   134
Letter dated July 31, 2012 to Hon. Jim DeMint from Timothy P. 
  Judge, Owner, Purple Bomb LLC..................................   153
Article from the Backgrounder dated April 6, 2012 entitled 
  ``Congress Should Not Authorize States to Expand Collection of 
  Taxes on Internet and Mail Order Sales'' by David S. Addington.   154
Letter dated July 30, 2012 to Hon. Dean Heller from Jason T. 
  Smith, Owner, TikiPug Music....................................   163
Response to written question submitted to Paul Misener by:
    Hon. Frank R. Lautenberg.....................................   167
    Hon. Mark Begich.............................................   167
Written questions submitted by Hon. Jim DeMint to Paul Misener...   167
Response to written questions submitted by Hon. Jim DeMint to 
  Steve Bercu....................................................   168
Response to written questions submitted to Scott Peterson by:
    Hon. Frank R. Lautenberg.....................................   169
    Hon. Jim DeMint..............................................   169
Response to written question submitted to Steve DelBianco by:
    Hon. Frank R. Lautenberg.....................................   170
    Hon. Mark Begich.............................................   174
    Hon. Jim DeMint..............................................   177


  MARKETPLACE FAIRNESS: LEVELING THE PLAYING FIELD FOR SMALL BUSINESS

                              ----------                              


                       WEDNESDAY, AUGUST 1, 2012

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:30 p.m. in room 
SR-253, Russell Senate Office Building, Hon. John D. 
Rockefeller IV, Chairman of the Committee, presiding.

       OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    The Chairman. I want to welcome our three distinguished 
colleagues here: the soon to be distinguished when he comes in 
the door, Senator Durbin; Senator Alexander, who is an old 
friend, and he and I were Governors together, and I wanted him 
to make me president of Vanderbilt and he never did--but I do 
love him; and Senator Enzi, who I met when he had long 
sideburns and was mayor of Gillette, and who I co-sponsored 
this bill with in 2001. So we've got some history there.
    And I invite all of you, if you can, when you finish your 
testimony, to just come up and join us on the dais and be part 
of the questioning. So if that's of interest to any of you, 
there is a seat for you and a welcome.
    This is about the legislation, the Marketplace Fairness 
Act, and I am pleased to join them in their efforts to get this 
legislation into law. I know that Senator Enzi has worked on 
this issue for more than a decade. And I recall that Senator 
Enzi's original bill on this issue was referred to this 
committee. That's not a macho statement. That's just a fact. 
And he is to be commended for his commitment on this issue.
    I've always thought it was the right idea and co-sponsored 
that first bill with Senator Enzi, just as I am co-sponsoring 
his current bill. When he first introduced this bill, it was 
not a popular idea, and it may not be today. But I don't care. 
It's the right thing to do. Over time, more people have come to 
understand that this is an issue of basic fairness and critical 
to states' financial health--precarious health--not just now 
but in the future.
    There is a growing bipartisan consensus on this, and not 
only here but around the country, that the Congress should 
address this issue. In West Virginia, we are fighting to keep 
our small towns vibrant. We have nothing but small towns. Our 
largest town is 50,000, barely, and we just keep it a little 
bit above 50 so we can qualify for certain government grants. 
Where it actually is, I'm not entirely sure.
    But we need local retailers. I'm sick of traipsing up and 
down our streets in our small communities and seeing all these 
shuttered stores where people used to do business. We need 
local retailers to make that happen. I believe we can have both 
a vibrant main street economy and e-commerce businesses.
    Let's be honest. Allowing states to collect sales tax on 
online purchases will not stop the growth of e-commerce. Now, 
I'll be interested in any arguments to the contrary. But no 
matter where or how the purchase is made, our commerce needs 
the revenue from these sales to fund basic functions of state 
government. As I recall, when I was Governor many years ago, I 
think about 70 percent of the sales tax went to our school 
system. Now, obviously, it doesn't. I think that's right.
    When we debated the Internet sales tax reform 10 years ago, 
Internet commerce was still in its relative infancy. Fewer 
people had online access, and many were reluctant to share 
their credit card information, for heaven sakes, with online 
retailers. But as the Internet has grown, so too has the 
consumer's confidence in Internet transactions. Millions of 
consumers now click and buy online with ease.
    Because sales tax is not collected for most Internet 
transactions, consumers know how they can benefit from a 5 
percent to 10 percent discount online. In fact, the mobility of 
cell phones allows shoppers to scan products for information. 
This bothers me so much. They can wander around our local 
stores--hardware, whatever, books--and they can sort of check 
things out, see what they want, and then they go buy it online. 
I think that's terrible behavior, it's very costly to our 
states, and I think it's very wrong.
    Again, I think it is profoundly unfair to traditional 
shops. They are, after all, small businesses, and small 
businesses are always in peril. And they end up serving as a 
kind of display case for consumers who see the product in 
person but buy it online to avoid paying state sales tax.
    State and local governments are losing billions. West 
Virginia loses a staggering $100 million a year. In my opinion, 
this revenue could be used to help, for example, in those 
couple of years before Medicaid expansion--of Governors who go 
that direction--kicks in. There's a couple of years where more 
money is needed from the states, and it could go to this, and 
it could go back to the Board of Education. It could go to lots 
of things. $100 million is a lot of money.
    Welcome, Senator Durbin. And after you've given your 
testimony, if you want to come up and join us up here, you'd be 
welcome.
    If Congress does nothing, we'll end up with states forced 
to raise income or property taxes to offset the growing losses 
of sales tax revenue, which is just a fact. That doesn't seem 
like the right solution to me. To be clear, this debate is not 
about imposing new taxes. It is not. Instead, it's just 
allowing states to collect taxes they are currently owed under 
existing law but are being systematically avoided.
    Today's technology, with the tremendous advances made in 
recent years, makes tax collection simply cheap and reliable. 
In many ways, the Internet is the perfect environment to 
collect sales tax because it can be automated. And our 
witnesses will talk to us about that.
    I know there is still debate on this point, and I look 
forward to hearing from the witnesses about the cost that 
businesses will bear and why they believe that small business 
exemption is not enough to alleviate these concerns. So I look 
forward to the testimony that will be forthcoming.
    And Senator Hutchison not being here, and Senator Ayotte 
being here, I would welcome you.

                STATEMENT OF HON. KELLY AYOTTE, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Ayotte. I thank you very much, Chairman 
Rockefeller, and I appreciate the opportunity to give a 
statement today. I know you didn't have to allow me to do that, 
but I'm very appreciative of that.
    This proposal we'll discuss today is very critical to New 
Hampshire and to other states that have opted to not have a 
sales tax. And I really want to welcome our colleagues who are 
here, all three of whom I have great respect for, Senator 
Durbin, Senator Enzi, and Senator Alexander. So thank you very 
much for being here to personally introduce your bill.
    Under current Supreme Court precedent, in the absence of a 
sufficient nexus, a state cannot reach beyond its borders to 
compel out-of-state vendors to collect taxes on a particular 
transaction. This is the result of the 1992 decision, Quill v. 
North Dakota, in which the Supreme Court held that requiring 
remote vendors to collect such taxes would place an 
unconstitutional burden on interstate commerce.
    By circumventing the court's will, the proposal under 
discussion today would undermine an important limitation of the 
Commerce Clause, the nexus requirement. By imposing collection 
requirements on businesses that have no physical presence 
outside of their home state, I fear the proposal may erode 
existing protections on state sovereignty. These concerns 
should resonate even for the 45 states that do have a sales 
tax.
    I am particularly concerned about how this proposal will 
hurt small businesses in my home state of New Hampshire. Our 
online retailers, for the first time, would have to collect and 
remit sales taxes to over 9,600 tax jurisdictions across the 
country. New Hampshire has no sales tax. For non-sales tax 
states like New Hampshire--and I know my colleague in Alaska--
Alaska does not have a sales tax, either--this is simply an 
unfair burden for our businesses to bear. Why should New 
Hampshire businesses be penalized because we have chosen not to 
have a sales tax and, as a result of it, frankly, we do have a 
leaner state government.
    This bill, in my view, tramples on New Hampshire's choice 
not to have a sales tax. This week, I received a letter from 
Joe Cortese, who owns NobleSpirit, an online retailer based in 
Pittsfield, New Hampshire. NobleSpirit sells stamps, coins, and 
other collectibles. And in that letter, Joe argues that under 
the proposal we will discuss today, quote, ``Other states where 
I have no presence or affiliation would mandate that I have to 
start collecting and remitting sales tax for items that my own 
state, New Hampshire, has deemed exempt.''
    He further points out that ``I don't believe it is fair to 
New Hampshire businesses that another state has the authority 
to turn us into their personal tax collector.'' I couldn't 
agree with Joe more. And Joe's position mirrors that of many 
businesses across New Hampshire that I have heard concerns from 
about this bill.
    With your permission, Mr. Chairman, I would like to submit 
this letter for the record.
    The Chairman. Of course.
    [The letter follows:]

                                                NobleSpirit
                                      Pittsfield, NH, July 30, 2012
Hon. Kelly Ayotte,
United States Senate,
Washington, DC.

Dear Senator Ayotte,

    I write regarding the upcoming Senate Commerce Committee hearing 
scheduled for Wednesday, August 1, 2012 on the Internet sales tax 
issue. We have met previously to discuss this issue, and I sincerely 
appreciate your sensitivity to the small business dimension of this 
debate. I know it can be a challenge for some of your colleagues to 
understand the small business impacts of this legislation, as well as 
the impact on non-sales tax state sellers. As a New Hampshire small 
business owner that uses the Internet to market my products, I wanted 
to share my experience.
    My story starts out in a dinner car of a Florida-bound train. While 
on the train, I happened to meet a gentleman who collected World War II 
memorabilia. Being a collector myself, I was very interested in hearing 
his story. The man shared with me that he just sold some items on this 
place called eBay and ``the checks just rolled in.'' At this point in 
my life I didn't have much use for a computer, much less the Internet, 
but this man's story stuck with me long after we departed company.
    About a year later I remembered this man's story and decided to 
check eBay out for myself. As a coin and stamp dealer, I was always 
looking for innovative ways to sell my goods. eBay and the Internet 
marketplace ended up being a very important tool in growing my 
business. I had Originally been focused on wholesale, but eBay allowed 
me to transition to being a retailer that goes straight to the end 
user. The minute I sold that first duck stamp to a stamp collector in 
Alaska, I knew that I was hooked and over the last 15 years I have had 
numerous opportunities to bring joy to collectors all around the world. 
After 15 years, I remain enthralled to this day by the notion that we 
in the United States are able to market to the world via the concept of 
the Internet.
    Access to the global marketplace is one of the beauties of selling 
on the Internet. It can give a small business in a rural state, like 
mine, endless opportunities to reach consumers beyond the boundaries of 
their county, state or even country. The idea that a small business in 
New Hampshire could reach a customer thousands of miles away in remote 
Alaska is a truly amazing thing. Access to the global marketplace is no 
longer reserved for large corporations. With the Internet and platforms 
like eBay and PayPal small businesses finally have the opportunity to 
try and compete head to head with the big guys.
    However, I am concerned that the Internet sales tax proposal 
currently before the U.S. Senate has the ability to diminish the 
amazing strides small business retailers have made through the use of 
the Internet. If policymakers decide to impose new sales tax collection 
burdens on small businesses and force them to collect and remit in 9600 
tax jurisdictions nationwide, the legal, compliance and administrative 
costs alone would undoubtedly make it harder, and in many cases 
impossible, to enjoy the opportunities and benefits that come with 
access to the Internet marketplace.
    In addition, as a New Hampshire small business, I am not required 
by my state to collect and remit sales tax on the goods I sell. Our 
great state has made a decision to be a non-sales tax state and I 
believe that this decision has helped drive economic activity across 
our state. However, I am concerned that under the current proposal, 
other states, where I have no presence or affiliation, would mandate 
that I have to start collecting and remitting sales tax for items that 
my own state has deemed exempt. I don't believe it is fair to New 
Hampshire businesses that another state has the authority to turn us 
into their own personal tax collector. It seems odd to me that one 
state would be given that much authority over another state and I urge 
you to fight to protect New Hampshire's ability to protect their 
businesses from out of state tax authorities.
    Our nation's economy is top of mind as we approach the next general 
election. Our small business infrastructure forms the very backbone of 
that economy. At a time when we are so uniquely positioned to provide 
our fundamental economic roots with uniquely defensible strategies, we 
as a nation would benefit greatly from exploring ways to foster those 
resources instead of permitting them to be impacted and impaired. Big 
Box retailers enjoy specific advantages, the scope of which is 
unchallenged by small business, which is exactly why they are pressing 
so hard to eliminate their competitive small business counterparts. If 
we as a nation allow that to take place we will impede our Nation's 
prosperity on a global scale, in both the short and long term.
    Thank you for the opportunity to share my story and express my 
concerns with the Internet sales tax proposals currently before the 
U.S. Senate. I want to personally applaud you for all of the work that 
you have done on this issue. You have been a true champion for New 
Hampshire and small Internet-enabled businesses, like me, and I 
appreciate everything that you are doing on our behalf. If there is 
anything that I can do to assist you in the future on this issue, 
please do not hesitate to call me. Thank you again for all of your 
efforts and I appreciate you keeping me and the other New Hampshire 
small businesses in mind as the Senate Commerce Committee considers 
Internet sales tax policies.
            Sincerely,
                                               Joe Cortese,
                                                             Owner,
                                                           NobleSpirit.
cc: The Honorable John D. Rockefeller IV, Chairman, Senate Committee on 
            Commerce, Science, and Transportation

The Honorable Kay Bailey Hutchison, Ranking Member, Senate Committee on 
            Commerce, Science, and Transportation

    Senator Ayotte. Thank you.
    One final point: Why would we enact legislation that would 
increase the cost of online commerce and also will cost 
consumers more? Ultimately, it will be the consumers who pay 
for the cost of this. By imposing onerous collection 
requirements, this bill would be a disincentive for retailers 
to embrace the e-commerce model.
    I understand that there are a number of witnesses here 
today who will have a different viewpoint. I certainly look 
forward to hearing from them. And I thank the Chairman for the 
opportunity to give a statement today.
    The Chairman. Thank you, Senator.
    And now looking at these three distinguished senators, I've 
settled on the distinguished gentleman in the middle, the 
senator from Wyoming, remembering his long sideburns from many 
years ago.
    Senator Enzi, you're welcome.

              STATEMENT OF HON. MICHAEL B. ENZI, 
                   U.S. SENATOR FROM WYOMING

    Senator Enzi. Thank you, Mr. Chairman, for holding this 
hearing and also for your visit to Wyoming at that time. I do 
have that picture that has you in a little bit different dress 
than you wear right now, too. It was an enjoyable time having 
you come out to take a look at our coal mines in Wyoming, and 
I've been to West Virginia and looked at your coal mines, too.
    But I appreciate you holding this hearing today. It's an 
important issue for retailers, for state and local governments, 
and for consumers. State and local governments, particularly, 
have been hit by the fact that we don't do earmarks anymore, 
and we've run out of money so we can't do the projects even in 
a grant form that we've done before. So they're looking for a 
way to be able to continue to sustain their state.
    So I've been working on this sales tax fairness issue since 
I came to the Senate in 1997. As a former small business owner, 
it's important to level that playing field for all retailers, 
whether they're in-store, catalog, or online, and so an 
outdated rule of sales tax collection doesn't adversely affect 
those small businesses and main street retailers.
    I remember, as a state legislator in Wyoming, we never 
passed a law that burdened the people who pay the property tax, 
who hire the residents, who participate in the community, who 
are in all the events, and then tell the businesses from out of 
state that we're going to give them a special deal so that they 
don't have to collect the money. We'd take money from the local 
community, but those from out of state wouldn't have to do 
anything in return for the services that our consumers are 
getting as a result of the tax.
    So we never intended to give those out-of-state businesses 
an advantage over those businesses that are a part of the 
community. Yet that's exactly what we are facing unless 
Congress allows the states the opportunity to fix it, if they 
so choose. My original versions--and I've had a number of 
different versions of this bill--were considerably more 
complicated until Senator Alexander suggested to Senator Durbin 
and I, who had been working on the previous versions, that this 
should be a states' rights bill and be considerably simpler, 
and it is.
    For the past 20 years, states have been unable to enforce 
their own sales and use tax laws on sales by out-of-state 
catalog and online sellers due to the 1992 Supreme Court Quill 
decision, Quill v. North Dakota. In 1992, the Supreme Court 
stated that the Congress needs to decide how to move forward. 
In other words, the Supreme Court challenged us to do a law. I 
strongly believe that now is the time for us to act.
    Most customers do not realize that when they buy something 
online or order something from a catalog from a business 
outside of their own state that they still owe the sales tax. 
And a lot of the sales are small enough that they don't even 
realize they've made the purchase. So this isn't a new tax. 
This is a tax that's already owed. The bill doesn't tax 
Internet use. The bill doesn't tax Internet services. The bill 
doesn't raise taxes. It collects what's owed by the purchasing 
individual.
    Last year, Senator Durbin, Senator Alexander, Senator Tim 
Johnson and I introduced with six of our other colleagues--half 
Republican, half Democrat--the Marketplace Fairness Act to 
close the 20-year loophole that distorts the American 
marketplace by picking winners and losers and by subsidizing 
some businesses at the expense of other businesses and 
subsidizing taxpayers at the expense of other taxpayers. All 
businesses in the retail sales and all consumers in their 
purchases should be treated equally and fairly.
    I want to provide you with some highlights of the 
Marketplace Fairness Act. It does allow states, if they choose 
to do so, to have out-of-state retailers collect the sales tax 
that's due on all sales, whether they're online, catalog, or 
in-store sales. The legislation would streamline the country's 
more than 9,000 diverse sales tax jurisdictions, and it 
provides two options by which states can begin collecting sales 
taxes from online and catalog purchases. But those are 
voluntary options that would allow them to collect the sales 
taxes if they choose.
    Now, the bill also carves out small businesses so they're 
not adversely affected by the new law by exempting businesses 
with less than $500,000 in online or out-of-state sales from 
collection requirements. This small business exemption will 
protect small merchants and give them time to get started.
    Don't let the critics get away with saying this kind of 
simplification cannot be done. In the early 1990s when the 
Quill decision was handed down, the Internet was still in 
diapers and cell phones came in bags and looked like bricks. 
Now, the Internet permeates just about every part of our life 
and it's time to stop treating businesses that rely almost 
exclusively on that like a novelty.
    Cell phones now have Internet capability. Software, 
computers, technology--they've all advanced at an exponential 
pace. And the different rates in various jurisdictions are no 
problem for today's software programs.
    I want to publicly commend Senators Durbin and Alexander 
for taking a leadership role in this and looking for some of 
the flaws that were in the bill and helping us to eliminate 
them, because this is a really important policy issue. 
Marketplace fairness is simple. It's about states' rights and 
it's about fairness. At a time when states' budgets are under 
increasing pressure, Congress should give state and local 
governments the ability to enforce their own laws. This will 
give states less of an excuse to come knocking on the Federal 
door for handouts, and it will reduce the problem of federally 
attached strings and give the states a choice to reduce 
property taxes or other taxes.
    So I strongly encourage my colleagues to support S. 1832, 
the Marketplace Fairness Act, and get it enacted in public law, 
hopefully, this year.
    The Chairman. Thank you, Senator Enzi.
    And then Senator Durbin to be followed by Senator 
Alexander.

             STATEMENT OF HON. RICHARD J. DURBIN, 
                   U.S. SENATOR FROM ILLINOIS

    Senator Durbin. Thank you very much, Mr. Chairman. It's an 
honor to be with you today. I do want to thank Mike Enzi. I 
picked up this banner when Byron Dorgan retired. This is 
something that he worked on with Senator Enzi over the years.
    But I think Mike and I would both give special credit to 
Lamar Alexander. He stepped in, helped us through some 
complicated issues, simplified them, and made this much easier 
to explain and implement.
    So, Lamar, thank you. Mike and I appreciate very much all 
the help that you've put into this.
    I want to go directly to Senator Ayotte's question, because 
I think she really has raised what is a concern expressed by 
many. And let me say at the outset: if you don't have a sales 
tax in New Hampshire or in Alaska, this bill will not impose 
one penny of sales tax obligation on any resident of New 
Hampshire, Alaska, Oregon, or any other state without a sales 
tax. Not a single resident of that state has to pay an 
additional penny in sales tax, period. Whatever your state law 
is, that governs.
    The second point I want to make is one that she addresses, 
and I think it's very important. What kind of burden are you 
putting on NobleSpirit? I don't know what they sell.
    Senator Ayotte. Stamps and collectibles.
    Senator Durbin. What kind of burden are you putting on a 
business like NobleSpirit that wants to do business in other 
states? Well, right now, there are burdens in every single 
state represented here today.
    Senator Isakson, if somebody wants to come into Georgia and 
do business, it's probably the same as Illinois. You have to 
register with the state that you're there, where you can be 
served with process, and, once there, follow Georgia law as it 
applies to your business. That happens in every single state in 
the Union.
    And what we're saying here is that if NobleSpirit wants to 
do business in Illinois and open a storefront to sell stamps, 
it's pretty obvious what they have to do. There's a long list 
of state requirements in each and every state. So what if they 
want to do it remotely? What if they want to sell their product 
electronically or by catalog? What obligation do they have in 
the state of Illinois or in the state of West Virginia? That's 
what this addresses.
    First, there's a small business exemption. If they're 
selling Grandma Ayotte's Apple Butter, that famous New 
Hampshire apple butter, and they're selling less than $500,000 
worth----
    Senator Ayotte. That's maple butter.
    [Laughter.]
    Senator Durbin. Sorry--maple butter--and selling less than 
$500,000 in value in a given year, they're exempt. And we're 
ready to talk about what the right level of small business 
exemption is. Let's get that right. Let's find something we all 
agree on.
    Second, does this mean you have to go out and buy a new 
computer network and software and hire some technology manager? 
No. What we've said here is if you're not under the streamlined 
version, which has already been in the law for a number of 
years, we're setting up a simple access for retailers selling 
online or by catalog so that, when they punch in Senator 
Wicker's address in Mississippi, they know automatically how 
much has to be added to the bill, because the sales tax 
obligation is there.
    And who do they remit that money to? One agency in the 
state. So, frankly, it's going to be as simplified and direct 
as possible at the end of the day.
    So it comes down to this. It is about fairness, marketplace 
fairness. Each and every one of us represents a brick-and-
mortar businessman or woman who came up the hard way with their 
own entrepreneurial determination and said, ``I'm going to make 
a go of it.'' Ninety-five percent of them fail. But the 5 
percent that make it really are the backbone of the American 
economy.
    Right now, they're facing unfair competition, unfair 
competition in my state--maybe not so much in New Hampshire 
with no sales tax--when their competitors online are not 
collecting sales tax and they have to collect it. They collect 
it, obviously, to keep the lights on in the streets, the 
traffic functioning, and the police and firemen, and all of the 
rest that we expect. So at the end of the day, this is about 
fairness for all businesses across the board.
    And let me go to the point that Senator Enzi made, which I 
probably should have addressed at the beginning. It is not a 
new tax. It is a question of collecting a tax already owed.
    A couple of years ago, my bookkeeper, when she was putting 
together our tax returns, which I file with my disclosure each 
year, said, ``Well, on your state tax return, are you going to 
pay the sales tax that you owed for your Internet purchases?'' 
I said, ``I didn't think of that.'' She said, ``It's an 
obligation under the law.'' So you'll not be surprised, since 
I'm announcing it, to know that I paid it.
    [Laughter.]
    But you may be surprised to know that fewer than 5 percent 
of Illinoisans who make purchases on the Internet actually pay 
what they already owe under the law. This bill says no new tax. 
We're just collecting the tax already owed.
    It's like enforcement. If you happen to believe that people 
who are evading taxes now, illegally evading taxes now, should 
not be required to pay them, then I can understand the logic of 
your argument that this is a new tax. But if the tax already 
exists, and we're just talking about compliance and collection, 
that's all this bill does. And I think it's an important thing.
    I won't tell you what it means in terms of revenue for each 
state. I think you each know it--$23 billion nationwide. For 
many of us, our states are struggling with their budgets. I 
take a look at those who have announced support for this bill: 
240 business and labor organizations, eight Democratic 
Governors, 13 Republican Governors, including Governor Quinn, 
Democrat from Illinois; Governor Christie, Republican from New 
Jersey; Governor McDonnell, Republican from Virginia; Governor 
LePage, Republican from Maine; and Governor Daniels, Republican 
from Indiana.
    There's bipartisan support not only at this table but 
across the country. And I hope this committee will support the 
bill as well.
    The Chairman. Thank you, Senator Durbin.
    Senator Alexander, we look forward to your testimony.

              STATEMENT OF HON. LAMAR ALEXANDER, 
                  U.S. SENATOR FROM TENNESSEE

    Senator Alexander. Thanks, Mr. Chairman. Thanks for 
inviting us. And a salute to Senator Enzi and Senator Durbin 
for doing what would be a Washington, D.C., miracle. They've 
come up with an 11-page bill about a two-word issue, and the 
issue is, in my view, states' rights.
    The longer I've been in Washington--and I've tried to be 
here long enough to be vaccinated but not infected over the 
years--the more I've come to the conclusion that the two 
biggest problems here are, one, that we spend money we don't 
have, and two is that we make a lot of decisions here that 
ought to be made at home by families, communities, and states.
    I have a conservative Republican Governor and a very 
conservative Republican Lieutenant Governor and a very 
conservative Republican legislature, who represent a lot of 
conservative Tennesseans. And they believe that it is their 
business, not ours, to decide whether they should collect taxes 
from everybody who owes it in Tennessee or from just some of 
the people who owe it, or whether we should give a 10 percent 
tax break to out-of-state businesses but not to in-state 
businesses.
    They may make a wrong decision from our point of view about 
that. But in our Constitutional 10th Amendment Federal system 
of government, states have a right to be wrong.
    We're talking about this. If I buy a TV set from the 
hardware store, the hardware store collects the sales tax and 
pays it to the state. If I buy a TV set from a catalog, I still 
owe the tax, but the catalog owner doesn't collect the tax so 
it's not usually paid. So we're talking about really whether--
it's like a game we used to play when we were kids--``Mother, 
May I?''--whether Washington will allow the people of Tennessee 
to elect Governors and legislators who will make the decision 
about whether to collect taxes from everybody who owes it or 
just some of the people, and whether to treat all businesses in 
the same way.
    We don't have to make that decision. The only decision we 
have to make is whether we respect the right of states to make 
that decision for themselves, which is why I say it's about two 
words, states' rights. It's not a new tax. In fact, as Governor 
Jeb Bush, former Governor Jeb Bush, said, he thinks many of the 
states will use the extra revenue collected, when you collect 
from everybody who owes it, to lower rates. I'm almost certain 
we'll do that in Tennessee.
    It's not an Internet tax. We have a Federal moratorium on 
Internet taxes. That's very important. We have a Federal law 
that puts a moratorium on Internet taxes, and it's not a 
Washington mandate. In fact, it's just the reverse. If I were 
to ask the question: What does Al Cardenas, the Chairman of the 
American Conservative Union, and Governor Chris Christie and 
Governor Jeb Bush and Governor Mitch Daniels and Governor 
Snyder of Michigan and Governor Corbett of Pennsylvania and the 
Governor of Maine, who is sometimes called a Tea Party 
Governor, and even William F. Buckley--what do they all have in 
common, they're conservatives, they're Republicans, and they 
all support this legislation.
    Mr. Buckley wrote about it before he died, this principle. 
I'd like to put in the record some of the things they said, 
including Governor LePage saying, ``Passing this bill would 
give thousands of small Maine businesses a real boost. Federal 
policy now gives some out-of-state corporations an unfair 
advantage over other Maine retailers.''
    Al Cardenas describes this instance as an area where 
prejudice is most egregious. It's unfair. Mike Pence: ``I don't 
think Congress should be in the business of picking winners and 
losers.'' Inaction by Congress today results in a system today 
that does pick winners and losers. This is not the Americans 
for Democratic Action that are making these comments. This is 
an honor roll of conservative Republicans who believe in making 
decisions at home instead of in Washington. They believe this 
is a matter of states' rights.
    The question has been raised about whether this puts a 
burden--the Supreme Court said 20 years ago that states 
couldn't do this. It was too much of a burden. But they invited 
Congress to solve the problem, to do what we're proposing to do 
today. It will be just as easy today to collect the sales tax 
online as it will be over the counter. You just take your 
credit card--it has your address on it. The software in your 
machinery will add the tax. The software will pay the state. 
You won't have liability. You only have one audit a year from 
the state. That's the system that will be set up here.
    My conservative Governor, Lieutenant Governor, and 
legislature don't believe I get any smarter each week when I 
fly to Washington and any dumber when I go home. They don't 
want me making decisions up here that they're elected to make 
by the people of Tennessee. They're perfectly capable, they 
believe and I believe as well, of deciding whether or not to 
collect taxes, their taxes already owed from the people who 
already owe it, from some of them or all of them, or whether to 
prefer some businesses over others.
    They might make a wrong decision. They have a right to do 
that in our American system of government. But if we give them 
this structure and authority, I'm pretty sure that they will 
collect tax from everybody who already owes it, that they will 
use most of the revenues to lower our tax rates in Tennessee. 
And I'm pretty sure that if we pass this bill and they're 
allowed to act that it will eliminate for the foreseeable 
future the possibility that Tennessee will ever have to have a 
state income tax, which is the one thing we really don't want 
in our state.
    Thank you very much for the invitation to be here.
    The Chairman. Thank you very much, Senator Alexander.
    And I will repeat, Senator Durbin, before you came in, any 
of you--and I believe that Senator Alexander may do this--and I 
would welcome you and Senator Enzi just coming up on the dais 
here and listening to the testimony and asking questions. If 
it's true that you're busy, you probably won't do it.
    Senator Enzi. I appreciate it, but I'm going to have to go 
to some other meetings. Thank you for the offer.
    The Chairman. Thank you both, all of you.
    Senator, you can just come forward here.
    I'd like to call forward now our witnesses.
    And, Senator Alexander, do you insist on being the most 
junior Republican?
    Senator Alexander. I kind of like it.
    [Laughter.]
    The Chairman. You do? OK.
    Mr. Paul Misener, who is Vice President for Global Public 
Policy, Amazon.com; Steve Bercu, Chief Executive Officer of 
BookPeople; Scott Peterson, Executive Director of the 
Streamlined Sales Tax Governing Board; and Steve DelBianco, 
Executive Director of the NetChoice Coalition.

              STATEMENT OF HON. ROGER F. WICKER, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Wicker. Mr. Chairman, did we get all of the quotes 
that Senator Alexander offered submitted to the record by 
unanimous consent? Because I do want them in the record.
    The Chairman. They're in the record by virtue of him having 
said them. But we can make it more formal.
    Senator Wicker. I think there were other quotations that he 
didn't read. [Please see pp. 164-166, ``Conservatives Support 
E-Fairness'']
    Senator Alexander. Mr. Chairman, if I may ask consent to 
include this in the record.
    The Chairman. That will be in the record.
    Mr. Misener, we'll start with you.

  STATEMENT OF PAUL MISENER, VICE PRESIDENT FOR GLOBAL PUBLIC 
                       POLICY, AMAZON.COM

    Mr. Misener. Thank you, Chairman Rockefeller and members of 
the Committee, for inviting me to testify. I greatly appreciate 
it.
    Amazon has long supported an even-handed national framework 
for state sales tax collection, and only Congress may create 
this framework. To this end, Amazon believes that Congress 
should authorize the states to require out-of-state sellers to 
collect sales tax already owed, and we strongly support 
enactment of S. 1832 from Senators Enzi, Durbin, and Alexander.
    Mr. Chairman, the last time I testified before your 
committee on this particular topic was 9 years ago. And much 
has changed since then, including the introduction of S. 1832 
with its several innovations and the development of advanced, 
widely available sales tax collection services. Also since 
then, most of the important questions around this legislation 
have been answered.
    For example, is it a new tax? No. It authorizes enforcement 
of existing state laws. Does it impose burdens on states? No. 
To the contrary, it protects states' rights to make policy. May 
the states take care of this on their own? No, only may 
Congress. Does it require states to join the Streamlined Sales 
Tax Project? No. States have the choice of joining the project 
or making other stipulated simplifications.
    Does it violate the ATR pledge? No. That pledge only 
applies to income tax. Is it taxation without representation? 
No. Those paying the tax are represented in the state doing the 
taxing and the Supreme Court holds that constitutional due 
process is met when requiring interstate sellers to collect. 
Does it harm tax competition? No. Taxpayers still may choose 
low-tax states.
    Does it represent more Federal involvement in state tax 
matters? No. To the contrary, by inaction, Congress continues 
to deny the states' rights to make policy choices, like low 
income tax rates or no income tax at all. Only by passing this 
legislation would sales tax decisionmaking devolve to the 
states.
    Asked another way, does Federal action on this issue 
promote centralization of power? No. Passing this legislation 
will decentralize policymaking to the states and localities. So 
is it constitutional? Yes. The Supreme Court has invited 
Congress to act. Does it restore federalism? Yes. As Justice 
Scalia has pointed out, dormant commerce clause decisions like 
Quill render superfluous part of the 10th Amendment.
    Do the states want it? Yes. The long list of state 
government supporters, including many prominent Republican 
Governors, highlights this fact. How about voters? Do they want 
it? Yes. A recent national survey by a prominent Republican 
pollster showed that 69 percent of registered voters support 
this legislation; 67 percent of Republican registered voters 
support it; and even among conservative registered voters, 61 
percent support it.
    So what important questions are left unresolved? There is 
really only one. Would the legislation impose significant 
administrative burdens on small sellers, including small 
businesses? For five key reasons, we can be confident that this 
legislation would not impose a significant administrative 
burden on small sellers, including small businesses.
    First, we shouldn't lose sight of the fact that this 
legislation clearly would help, not burden main street 
businesses selling locally. Second, the legislation would 
restore the revenue and jobs lost by small online advertisers, 
who have suffered under counterproductive state laws enacted 
over the past 4 years.
    Third, S. 1832 specifically protects small interstate 
sellers. The bill outright exempts sellers with less than 
$500,000 per year in interstate sales, and this is well over 99 
percent of online sellers, including the occasional sellers and 
small businesses that sell through eBay and Amazon.
    Fourth, even for medium and large businesses, those with 
interstate sales over $500,000, third-party sales tax 
collection services, like those provided through eBay or run on 
Oracle, facilitate compliance. A key point is that sellers 
already are collecting with the help of third-party service 
providers like Avalara. And, last, S. 1832 provides for sales 
tax simplifications and other provisions that will make it even 
easier for third-party service providers to assist sellers and 
the states.
    Mr. Chairman, this issue has been considered by Congress 
for over a dozen years. Advanced sales tax collection services 
are available today that weren't available even just a few 
years ago. The sponsors of S. 1832 have drafted the bill so 
that it addresses all the important questions that have been 
raised in over a decade of discussions, including with respect 
to small volume interstate sellers.
    Respectfully, therefore, I ask that you support enactment 
of S. 1832, and I look forward to your questions. Thank you.
    [The prepared statement of Mr. Misener follows:]

 Prepared Statement of Paul Misener, Vice President for Global Public 
                           Policy, Amazon.com

    Thank you, Chairman Rockefeller and Ranking Member Hutchison, for 
inviting me to testify. Amazon has long supported an even-handed 
nationwide framework for state sales tax collection, and only Congress 
may create this framework. To this end, Amazon believes that Congress 
should authorize the states to require out-of-state sellers to collect 
the sales tax already owed, and we strongly support enactment of S. 
1832, a bipartisan bill already before the Senate.
    Mr. Chairman, at the Philadelphia Convention, which the Founders 
convened principally to consider the challenging issue of trade among 
the states, Congress was granted exclusive power to regulate interstate 
commerce. Exactly two centuries later, in 1987, North Dakota challenged 
this exclusivity and, following five years of litigation, the U.S. 
Supreme Court held in Quill v. North Dakota that requiring out-of-state 
sellers to collect tax would impose an unconstitutional burden on 
interstate commerce. Importantly, the Quill court also invited Congress 
to act, saying that this issue is ``not only one that Congress may be 
better qualified to resolve, but also one that Congress has the 
ultimate power to resolve.''
    Far from an e-commerce ``loophole,'' the constitutional limitation 
on states' authority to collect sales tax is at the core of our 
Nation's founding principles. For this reason, Amazon has steadfastly 
opposed state attempts to require out-of-state sellers to collect 
absent congressional authorization. We believe that, instead, Congress 
should enact S. 1832, the Marketplace Fairness Act, to authorize the 
states to require out-of-state retailers to collect sales tax at the 
time of purchase and remit those taxes on behalf of consumers.
    Mr. Chairman, Congress should enact S. 1832 to protect the states' 
rights, address the states' fiscal needs, and level the playing field 
for all sellers.
    Congress should act to protect the states' right to make their own 
revenue policy choices. For example, some states have chosen to eschew 
personal income tax, making them particularly vulnerable to uncollected 
sales tax. The right of any state to make such a policy choice 
effective should be protected by allowing states to ensure that sales 
and use taxes already owed are collected in a uniform manner, including 
when sales are made across state lines. And doing so would not violate 
pledges that are limited to questions of income tax rates and 
deductions.
    The states' financial needs should be addressed. The states face 
serious budget shortfalls. Adopting sales tax collection reform is a 
way for Congress to help the states without spending Federal funds. S. 
1832 would simply allow the states to collect more efficiently the 
billions of dollars of uncollected sales/use tax revenue already owed.
    Fairness among sellers also should be created and maintained. 
Sellers should compete on a level playing-field. Congress should not 
exempt too many sellers from interstate collection, for these sellers 
will obtain a lasting un-level playing field advantage versus Main 
Street and other retailers. Congress should rectify the current 
imbalance and avoid a future imbalance.
    Mr. Chairman, the facts in the Quill decision arose a quarter of a 
century ago, and the Supreme Court's decision was rendered a year 
before the World Wide Web was invented. With today's computing and 
communications technology, widespread collection no longer would be an 
unconstitutional burden on interstate commerce, and Congress feasibly 
can authorize the states to require all but the smallest volume sellers 
to collect. Much attention has been paid to the size of a ``small 
seller exception'' threshold in Federal legislation--and rightfully so. 
Such a threshold, which would exempt some sellers from any collection 
requirements, must be kept low to attain the objectives of protecting 
states' rights, addressing the states' needs, and creating fairness 
among sellers.
    In this context, several kinds of small volume sellers must be 
considered. Foremost are the Main Street small business retailers who, 
unless the small seller exception threshold is kept very low, will 
forever face an un-level playing field compared to a newly-created 
exempt class of out-of-state sellers. Next are the online advertising 
affiliates, tens of thousands of whom have lost jobs or income as the 
result of ineffective, counterproductive sales tax laws recently 
enacted in many states. Congressional adoption of reform legislation 
would immediately restore the lost jobs and income by creating a 
national framework for state sales tax collection.
    Small volume online sellers have received much of the attention, 
and not without reason. No one wants these sellers to shoulder alone 
additional burdens compared to those faced by the small business 
retailers who already collect sales tax in our local communities. Yet 
no one should want these online sellers to have a newly-created un-
level playing field advantage over small Main Street businesses, and no 
one should want government to pick business model winners and losers 
this way.
    The consequences of the threshold level are significant, because a 
surprisingly large fraction of e-commerce is conducted by smaller 
volume sellers. According to research commissioned by Amazon, only one 
percent of online sellers sell more than $150,000 per year. In other 
words, the $500,000 threshold in S. 1832 would exempt well over 99 
percent of online sellers.
    Fortunately, today's computing and communications technology will 
readily allow all but the smallest online sellers to collect and remit 
tax like Main Street retailers. Large volume online sellers already 
have and use this technology. Amazon, for example, collects tax on 
sales to consumers in states where our retail businesses have nexus. 
And the online arms of large multichannel brick and mortar retailers 
collect in the states where they have retail stores. Quite obviously, 
state sales tax can be collected across state lines, and the technology 
is not limited to large sellers. Rather, service providers also make 
the technology available to medium and small volume sellers. Thus, 
collection is either by sellers or for sellers. There are many service 
providers already: ADP, Avalara (which works with eBay), and FedTax, 
for example. Amazon also helps third party sellers by providing sales 
tax collection services to them, and we are committed to expanding 
these services.
    In conclusion, Mr. Chairman, Congress may, should, and feasibly can 
attain the objectives of protecting states' rights, addressing the 
states' needs without Federal spending, and leveling the playing field 
for all sellers. Amazon is grateful for the opportunity to submit these 
comments, and we look forward to working with you and your colleagues 
in Congress to enact S. 1832.

    The Chairman. Thank you very much, Mr. Misener.
    And we'll go on now to Mr. Bercu, and I'll repeat that you 
are the CEO of BookPeople.

    STATEMENT OF STEVEN BERCU, CEO AND CO-OWNER, BookPeople

    Mr. Bercu. Thank you, Mr. Chairman, for inviting me here to 
present my views on the Marketplace Fairness Act today.
    My name is Steve Bercu, and, as you said, I'm the CEO and 
Co-owner of BookPeople, an independent book store in Austin, 
Texas. I employ about 100 people. My store is a general 
interest, large format store. And, parenthetically, two members 
of this committee have appeared at my store to sign copies of 
their books--Senator Hutchison twice and Senator Kerry once.
    I'm in favor of this act. I'd like to share with you just a 
little about how sales tax collection impacts my small 
business. Online retailers, as the chairman pointed out, 
encourage behavior that has been called show-rooming, in which 
consumers spend the time and energy of brick and mortar stores 
to inform themselves about products, and then purchase those 
products online to avoid paying the sales tax due for those 
purchases.
    I've had the misfortune to observe this behavior in my 
store many times. But my store is a small ticket item store. My 
friends who have large ticket item stores will go apoplectic 
about this. They spend many hours a day explaining every aspect 
of cameras, musical instruments, jewelry, electronic gadgets, 
and more, only to have the consumers at the end of the day tell 
them that they are going to buy these items online to attempt 
to avoid paying the sales tax that is due for those purchases. 
My friends lose millions of dollars a year in sales in this 
manner.
    We can all compete on price, and all of us can actually 
compete on any offer that's made on the Internet. But what none 
of us can do who have a brick and mortar store is sell without 
collecting sales tax. This Act protects small, online 
retailers. As mentioned, sellers who sell under $500,000 in 
annual online sales would be exempted from the Act. BookPeople 
would be exempted from the Act under its present provisions.
    However, I will tell you that BookPeople already collects 
in every state that has sales tax by simply using currently 
available software. We do so because it's the right thing to 
do, and also because none of my books can arrive at any remote 
location without using public roadways and public services in 
those remote locations. Everybody is the same with regard to 
this.
    I do not feel burdened, and I doubt anyone else who is in 
my position would feel burdened by doing our small part to help 
maintain those services that are instrumental in the operation 
of our businesses. The Act's requirement that states simplify 
their tax laws should remove any major burden a small retailer 
has to deal with the tax issues. I can send a package across 
the globe with a simple table of shipping costs. I should be 
able to handle a little sales tax.
    As pointed out by Mr. Misener, collecting sales tax is 
simply not that difficult. By typing in a shipping address, a 
customer already has given the online retailer the exact 
information necessary to collect the appropriate tax. The 
calculation takes a nanosecond. Small, truly small sellers, 
will be exempt. But remember that many small sellers also sell 
the majority of their products through eBay, Amazon, and 
others. And those companies do have the ability to collect and 
remit the appropriate sales tax, and they offer that service to 
their sellers.
    Collection has become radically simpler with new and 
cheaper software. Combined with a streamlined process, there is 
simply no legitimate excuse for Congress to be treating some 
retailers differently than others, to be picking winners and 
losers in the marketplace.
    This Act is not a new tax. Texas has done its part to 
attempt to remedy this situation, but it's only a partial 
solution in Texas. And Texas and other similarly situated 
states need Federal help. We need a Federal solution. As 
pointed out, the estimated revenue loss by the states 
approaches $23 billion. I certainly believe that most Americans 
would consider that to be a sum worth taking congressional time 
to resolve and make this situation clear, fair, and complete.
    And for all those reasons, I certainly believe that this 
Act will create jobs. It will help retail. It will help our 
states. It will help consumers stop being scofflaws. And 
because the free market deserves fair competition, I urge you 
to support the Marketplace Fairness Act.
    And, by the way, if anyone has a book to promote, please 
get in touch. I'll be glad to get you a signing in Austin, 
Texas.
    [The prepared statement of Mr. Bercu follows:]

    Prepared Statement of Steven Bercu, CEO and Co-owner, BookPeople

    Chairman Rockefeller, Ranking Member Hutchison, and Members of the 
Committee: Thank you for inviting me to present my views on the 
Marketplace Fairness Act. I hope to be able to give you an insight into 
the day-to-day impact of collecting sales tax, both in-store and for 
remote sales online.
    My name is Steven Bercu, CEO and co-owner of BookPeople, an Austin, 
Texas, independent bookstore that has been in business since 1970. I 
employ about 100 people, with some slight seasonal variations. My store 
is a large format, general interest bookstore that hosts numerous 
community events, including about five author signings per week. 
Parenthetically, two members of this Committee have appeared at my 
store to sign copies of their books, Senator Hutchison (twice) and 
Senator Kerry. I am actively involved with both independent retail and 
the book world, serving as Vice President of the American Booksellers 
Association, Vice President of the American Independent Business 
Alliance, Founder and President of the Austin Independent Business 
Alliance, and as a Board Member of the Texas Retail Association.
    I am in favor of the Act. There are many reasons why I urge you to 
support it.

The Act will end the unfair advantage online retailers have over 
        traditional stores and level the playing field.
    Currently, many online retailers are exercising a business model 
that encourages tax avoidance by consumers as the online retailers fail 
to collect and remit sales tax. This provides them with an unfair 
advantage over brick-and-mortar stores as traditional Main Street 
stores must collect sales tax at the point of purchase every day (and 
for orders they take via their e-commerce sites). As a result, remote 
online retailers receive a government-sanctioned price advantage of up 
to 10 percent in many states. Furthermore, as well as tax avoidance, 
online retailers encourage a behavior that has been called 
``showrooming,'' in which consumers spend the time and resources of 
brick-and-mortar stores to inform themselves about products, and then 
make their actual purchases online to avoid paying the sales tax. I 
have had the misfortune to observe this in my store many times; but 
what is somewhat discouraging in a small-ticket environment like mine 
becomes cause for apoplexy in big-ticket worlds. Peers of mine have 
spent hours explaining every aspect of various cameras and other 
electronic gadgets only to have the customer tell them they intend to 
buy online to save the hundreds of dollars due in sales tax. A friend 
with a jewelry store tells me he loses over $2 million per year in 
sales to the Internet to avoid sales tax. We can all compete on price 
and match any price offered online, but we cannot sell without 
collecting the sales tax. This Act would level that playing field.

The Act will allow for free markets to pick and choose winners, as 
        opposed to the government.
    America is built on a free-market economy that encourages business 
competition. By allowing some businesses to avoid collecting sales tax 
while others are required to do so, the government is effectively 
picking winners and losers in the marketplace. I do not believe the 
government should be in the business of picking winners and losers in 
the marketplace, but so long as the government allows remote retailers 
to work at this unfair advantage, that's exactly what is happening. 
Nobody likes paying or collecting sales taxes, but everyone should be 
playing by the same rules. It makes no sense to promote tax avoidance 
for some sales while taxing the rest. A sale is a sale no matter where 
it takes place.

This bill will save and create jobs.
    The approximately 1,600 member stores of the American Booksellers 
Association who operate in approximately 2,000 locations nationwide 
generate annual sales of approximately $1 billion. When those 
bookstores, and small businesses just like them, lose sales to out-of-
state, online-only retailers due to an unfair competitive advantage, it 
threatens jobs nationwide and damages the very retailers that currently 
create millions of jobs everywhere. An economic impact study conducted 
in Texas by Angelou Economics, an economic development consulting firm, 
showed that more than 13,000 jobs would be created annually in Texas 
alone as a result of collecting the sales tax from online-only 
retailers, and more than 9,600 of these jobs would be created in the 
retail sector. In addition to the $774.4 million in sales taxes that 
would be collected in Texas as a result of collecting the sales tax 
from online-only retailers, nearly $400 million more in local and state 
tax revenues would be generated annually throughout the state (figures 
from Susan Combs, Texas Comptroller of Public Accounts). These numbers 
derive from conservatively estimating what the thousands of Texas 
businesses that employ about two million people would generate if they 
only added 0.5 percent to their payrolls to handle the increase in 
business to be expected when the approximately ten percent competitive 
disadvantage they suffer is removed. We will be able to track those 
gains to some degree over the coming year now that the largest online 
retailer has begun to collect sales tax for Texas sales.

Collecting sales tax is good for local economies.
    BookPeople participated in a landmark economic impact analysis in 
2002. The study showed that shopping at locally-owned businesses 
provides 3.5 times the economic impact as shopping at chain retail. 
Shopping online at remote Internet retailers has no economic impact 
locally. This Act would help remedy this unfortunate situation.
    It is well known that recycling money within a community causes 
what economists call a ``multiplier'' effect as the money recirculates 
within the community and its value is ``multiplied'' at each subsequent 
use. Since 2002, numerous other economic impact analyses in cities 
across the country (Chicago, San Francisco, Grand Rapids, Salt Lake 
City, etc.) have confirmed these findings. These and more studies can 
be found at www.civiceconomics.com, the website of the economists who 
did most of these studies, under their ``library'' tab.

The Act is not a new tax.
    Under existing law, tax on these sales is due. The Act simply 
defines who is liable to collect an existing tax, as consumers already 
owe use taxes on purchases. However, as most state comptrollers will 
tell you, unless you collect sales tax at the point of purchase, it is 
very hard (impossible) to collect. The Act provides an even-handed 
solution to sales tax collection that would require online-only 
retailers to play by the same rules as every other business. It 
provides states with the clear authority to require retailers to 
collect sales tax.
    It is sometimes argued that the Act would authorize states to 
impose a new tax with complex burdens on businesses without a 
storefront, in that it would impose obligations on out-of-state 
businesses. Just because some online retailers do not currently collect 
sales tax does not mean the tax is not due. Online retailers are simply 
shifting the burden to report and remit the tax to consumers, knowing 
that the overwhelming majority will never declare and remit the tax. 
Undoubtedly, the Act contemplates that retailers would be obliged to 
collect sales tax for another jurisdiction, but the collection is not 
difficult and the Act simplifies the process of remitting the collected 
revenues. These days there are numerous services that can manage as 
much of the sales tax collection process as a retailer would want from 
simply supplying the data necessary (the tax rates) to becoming the 
backend of your website and handling the entire process.

The Act allows states to decide whether or not to collect sales and use 
        taxes already owed under state law.
    This legislation is not a government mandate. Under this 
legislation, it is the states that decide whether or not they will 
collect sales tax on online sales. If they do choose to collect, they 
can do so by either becoming a member state of the Streamlined Sales 
and Use Tax Agreement, or they can adopt minimum simplification 
requirements.

The Act preserves states' rights.
    The Marketplace Fairness Act would help states enforce their own 
tax laws and collect millions of dollars in lost revenue from online 
retailers that do not collect sales tax.

The Act protects small online retailers.
    Sellers with less than $500,000 in annual online sales would be 
exempted from collecting sales and use taxes, so they are not overly 
burdened by tax collection requirements. BookPeople would be exempted 
from collection under the Act, but BookPeople already collects for 
every jurisdiction that has a sales tax using some of the software 
mentioned above. We do so because it is the right thing to do and 
because our books can only arrive at a remote location by using public 
roadways and services in those remote locations. That is true for 
everyone. It is fatuous to argue that we are burdened by being asked to 
help maintain the services necessary to the functioning of our 
businesses.
    The Act requires states to simplify their tax laws if they do not 
participate in the Streamlined Sales and Use Tax Agreement. Those 
provisions remove any major burden a small retailer might face. If I 
can send a package across the globe using a simple table of shipping 
costs, then I should be able to handle a little sales tax.

Collecting sales tax will not be difficult.
    The simple fact is, collecting sales tax is not all that hard. 
Those who trot out this red herring are doing so solely to keep the 
special tax treatment they currently enjoy. By typing in a shipping 
address, a customer has already given the online retailer the exact 
information they need to collect the appropriate sales tax--the 
calculation will happen in a nanosecond.
    Whether a state is part of the Streamline Sales Tax and Use 
Agreement or not (Texas is not) a common set of definitions of what is 
or is not taxable, along with a single collection authority for the 
entire state, will make collection quite simple for online retailers. 
Truly small sellers will be exempt, but remember that many small 
sellers also sell the majority of their products through eBay, Amazon, 
Best Buy, and others. Those companies all have the ability to collect 
and remit the appropriate sales tax, and all offer that service to 
their sellers.
    This isn't that hard. The truth is that collection has become 
radically simpler with new and cheaper software. Combined with a 
streamlined process, there is simply no legitimate excuse for Congress 
to be treating some retailers differently than others.

The Act does NOT add a penny to the Federal deficit.
    This legislation does not impose funding requirements on the 
Federal Government. In fact, it should have a positive impact on 
government since all extra revenue to the states should reduce their 
reliance on Federal funds (and their requests). It is argued that the 
anticipated revenue does not justify whatever might be required to 
collect it since e-commerce generates only about 1 percent of total tax 
revenue. That reasoning makes anything irrelevant. The estimated 
revenue lost by the states is around $23 billion. I think that most 
Americans would think that is enough to worry about.

Conclusion
    For all the reasons above and because the Act will create jobs, 
help retail, help our states, help consumers stop being scofflaws, and 
because the free market deserves fair competition, I urge you to 
support S. 1832.

    The Chairman. Thank you very much, sir.
    We go now to you, Mr. Peterson.

 STATEMENT OF SCOTT PETERSON, EXECUTIVE DIRECTOR, STREAMLINED 
                   SALES TAX GOVERNING BOARD

    Mr. Peterson. Thank you, Chairman Rockefeller and members 
of the Committee. My name is Scott Peterson. I am the Executive 
Director----
    The Chairman. And you're the one who can answer all the 
questions about paperwork.
    Mr. Peterson. Thank you for the warning, sir.
    My name is Scott Peterson. I am the Executive Director of 
the Streamlined Sales Tax Governing Board. Prior to that, I was 
the Sales Tax Director for the state of South Dakota for 10 
years. So I do have a lot of experience in how states 
administer their sales tax.
    I'd like to talk to you today about three things. The work 
done by the Streamlined Sales Tax to make their sales tax 
simpler and more uniform, the impact of unpaid sales tax--
you've heard that from Mr. Bercu--and the need for Congress to 
act.
    Streamline was created by the National Governors' 
Association and the National Conference of State Legislatures 
in 1999 in response to the 1992 Quill decision, which the 
states felt that they lost, and years and years and years and 
years of debate and argument and court battles. The leaders of 
those two organizations at the time felt it was time for the 
states to sit down and have a legitimate conversation with 
businesses about the issue, and the issue was complexity.
    We spent years trying to identify what the complexity 
issues were, coming up with best practices. Streamline is an 
organization designed to help states use best practices, modern 
business practices, in the way they administer their sales tax.
    Our three goals--make things uniform that can't be made 
simple. Sometimes things can't be made simple. But if you can 
make them uniform, the retailers benefit from the fact that 
it's always the same way.
    Balance the interest of state sovereignty with simplicity 
and uniformity. Don't ask a state legislator or a Governor to 
change their constitution for the sake of simplicity and 
uniformity. Find some way of doing these things that don't 
revolve around a political suicide or a practical 
impossibility.
    Help the private sector make their software better. We 
strive to eliminate the administrative differences. We don't 
try to tell states you have to tax shoes if you don't tax shoes 
today; you have to tax digital goods if you don't tax digital 
goods today; you have to exempt groceries if you don't exempt 
groceries today.
    Those are legitimate state policy issues that the consumers 
of those states and the legislators and the Governors of those 
states have an interest in having. Is there a legitimate reason 
for one state's sale tax return to be 16 lines different than 
its neighboring state's sales tax return when they tax exactly 
the same thing and have the exact same rate?
    We created dozens of uniform definitions. One of the things 
retailers told us years ago was ``You all tax and exempt almost 
exactly the same thing, but you use definitions that differ 
from each other to a degree that makes it impossible for us to 
understand what you're trying to do.''
    Candy--half the states in this country exempt groceries, 
but they tax candy. And the state law would say ``We hereby 
exempt groceries from the sales tax except candy.'' And it's 
the same word in every state's law, except when it comes time 
to administering the law, the Departments of Revenue and the 
retailers in those states came up with a different definition 
of what candy meant. So if you're a retailer looking at the 
state's law, and it says candy is taxable and groceries are 
exempt, you don't have a clue what candy means. We came up with 
a definition of candy.
    Create uniform processes for sales tax returns, sales tax 
remittances. Try to get to one sales tax return around this 
country. Come up with one uniform exemption certificate. And, 
first and foremost, make sales tax administration software that 
exists in the private sector today better. We made it better in 
a couple of different ways.
    One, we certify the accuracy. There are six companies in 
this country that sell the certified software. We've looked at 
their sales tax decisions. We have said to retailers, ``If you 
use this software, it's going to give you the right answer 
every time.''
    Now, if on the off chance it's wrong one out of a million 
times, it's not your fault, Mr. Retailer. It's the state's 
fault, because the state didn't do a very good job of 
certifying the software. In addition, the Streamline states pay 
those six companies to provide this service to retailers when 
that retailer doesn't have an obligation to collect that state 
sales tax.
    The impact of unpaid sales tax--I'm not going to tell you 
it's lost revenue, because that's not a very good selling 
point. I am going to tell you that it's unfair for one consumer 
to pay 100 percent of their sales tax and the next consumer not 
to pay 100 percent of their sales tax when they both make the 
exact same purchases. They just choose different venues in 
which to make the purchases.
    And this isn't a bricks and mortar versus the Internet. 
This is a retailer versus retailer. Main street retailers who 
use the Internet are just as disadvantaged as Internet 
retailers in another state, just as disadvantaged as the bricks 
and mortars are.
    And I've run out of my time, Mr. Chairman. Thank you.
    [The prepared statement of Mr. Peterson follows:]

       Prepared Statement of Scott Peterson, Executive Director, 
                 Streamlined Sales Tax Governing Board

    Thank you Chairman Rockefeller, Ranking Member Senator Hutchison 
and Members of the Commerce Committee for the invitation to talk to you 
today.

Introduction
    I am the Executive Director of the Streamlined Sales Tax Governing 
Board. I want to talk with you today about three things: 1) sales tax 
simplification done by the 24 Streamline states, 2) the impact of 
unpaid sales and use taxes, and 3) the need for Congress to act 
authorizing willing states to require out-of-state vendors to collect 
sales and use taxes.

Background
    Streamline was created in response to years of court battles ending 
in the 1992 Quill decision. The National Governor's Association and the 
National Conference of State Legislatures decided it was time to sit 
down with business to identify and solve the sales tax administration 
issues business said made sales tax compliance complicated.

Streamline's Efforts
    The three goals of Streamline are to: (1) make uniform those things 
that cannot be made simple, (2) balance the interest of state 
sovereignty with uniformity and simplicity, and (3) help the private 
sector make the best possible sales tax software and services available 
to retailers. We strive to eliminate the administrative differences 
between states while maintaining a state's sovereign authority to 
choose what and what not to tax.
    The 24 Streamline states created and implemented uniform 
definitions for many commonly taxed and exempted products and services, 
such as groceries, candy, durable medical equipment, and digital goods. 
Streamline states created and implemented uniform procedures for 
electronic sales tax returns and payments and a single, central 
registration system retailers can use to register to do business across 
the country.
    For a long time retailers have worked to automate every aspect of 
their business, including their sales tax obligations. Sales tax 
automation can be as simple as knowing what is the sales tax rate at 
any location or as complicated as knowing that a state has a 48 hour 
sales tax holiday on back-to-school supplies. The Streamline states 
enhanced the ability of retailers to automate sales tax collection by 
adopting uniform sales tax rules, such as defining what products are 
included in a back-to-school sales tax holiday, by evaluating and then 
certifying the accuracy of the tax answers provided by software 
companies, and by paying those companies to provide accurate answers 
and to file the tax returns and pay the tax. The Streamline certified 
software companies allow a retailer to automate and outsource their 
sales tax work. In addition each Streamline state pays the certified 
software companies to provide that service to retailers who do not have 
a physical presence in their state.

The impact of unpaid sales and use taxes
    The impact of unpaid sales and use taxes isn't just a matter of 
some state not collecting what its tax law says should be collected. 
The sales tax is too often the price difference that turns local 
retailers into display cases for consumers who come in and try out the 
product and then go home and buy on-line. According to the Department 
of Commerce, e-commerce sales doubled from 2005 to 2011 and e-commerce 
sales in the first quarter of 2012 increased 15 percent more than the 
same quarter in 2011. E-commerce sales are increasing at a rate greater 
than total sales and the difference are sales that would have otherwise 
gone to a local retailer.

Should Congress authorize willing states to require out-of-state 
        vendors to collect sales and use taxes
    The 24 Streamline states believe Congress should exercise its 
authority over interstate commerce and authorize states to collect 
their sales tax. Opponents say the sales tax is too complex, that it 
will harm small business, that it is a tax increase, and that the 
states have not done enough.

Collecting is too complex
    Every retailer today looks to automate everything that can be 
automated. Sales tax collection software exists, it works, and it is 
affordable. Internet shopping carts may be the perfect technological 
environment in which to collect sales taxes because the customer can't 
make a purchase without providing all the data necessary to determine 
what sales tax to collect. Technology exists today to easily collect 
sales tax.

It will hurt small business
    Small main street businesses believe they are the small business 
that is being harmed as they try to compete against someone who isn't 
collecting the tax. Many of them believe they are at the mercy of a 6-
10 percent government mandated price disadvantage. The Marketplace 
Fairness Act protects truly small businesses by exempting them from 
state authority. In addition, the Marketplace Fairness Act requires 
states to simplify their laws and processes, and requires them to 
provide software and services.

Collecting a tax that is already due is a NOT a tax increase
    If the retailer doesn't collect the sales tax the consumer owes the 
use tax. Having the retailer collect the sales tax is the only 
efficient method. Collecting the use tax from consumers would require 
an army of auditors.

States have not simplified enough
    One of the goals of Streamline is to balance state sovereignty with 
simplification. It would be easy to create a simple sales tax if we 
were starting over and if every retailer sold only one product and sold 
that product in only one way. Unfortunately, that isn't our reality. We 
have taken the knowledge of 70 years of sales tax collection and 
applied it to the millions of products being sold by millions of 
retailers and tried to achieve something that meets today's need

Conclusion
    In conclusion, we believe that between the great advances in 
technology and the simplifications found in the Marketplace Fairness 
Act it is time for Congress to act. Many today believe the government 
is picking winners and losers in the retail community. It is time to 
treat all retail businesses the same. Congress has the ability to 
balance simplification with state sovereignty and equity. We encourage 
you to make that decision and act now.

    The Chairman. Thank you very much, Mr. Peterson.
    And now Steve DelBianco, who is Executive Director of the 
NetChoice Coalition. We welcome you.

  STATEMENT OF STEVE DelBianco, EXECUTIVE DIRECTOR, NETCHOICE 
                           COALITION

    Mr. DelBianco. Thank you, Chairman Rockefeller, Senator 
DeMint, members of the Committee. I also speak for the True 
Simplification of Taxation Coalition just formed, and that 
includes the American Catalog Mailers, the Direct Marketing 
Association, and the Electronic Retailing Association.
    As the only one of seven witnesses you've heard today who 
doesn't support the legislation, I sort of feel like the body 
at an Irish wake. Everyone expects me to be here, but nobody 
really wants me to say anything.
    But, after all, you've already heard how simple this is. 
Right? You've heard that constitutional restraint on state 
taxing powers is really a loophole and that it's unfair. You've 
heard that it's free and easy to pay taxes for 46 states and 
9,600 jurisdictions. You've heard that the Internet is some 
foreign virus that's killing main street businesses around the 
country.
    But not so fast, please. It's not nearly that simple. 
First, the founders put Article I in the Constitution because 
they knew the colonies favored their own businesses over out-
of-state businesses by tariffs and trade barriers. The founders 
deliberately limited states' power to impede interstate 
commerce, and that was the basis of the 1992 Quill ruling. It 
wasn't to shield e-commerce, because it hadn't even been born 
yet.
    SSTP, as Scott described, was the states' response to 
Quill, and for 10 years I've been to nearly all SSTP meetings 
and I'm a participant there. After a decade of trying, though, 
it's clear that states don't really want to give up the local 
rules and rates. They don't want to give up their own 
definitions. They don't want to give up thresholds, their own 
tax returns, and their own audits of every single seller.
    SSTP is stalled out right now, but the big box stores 
desperately want to make Amazon collect in more states. So 
they've asked you to force remote collection on everyone 
without the true simplifications that I detailed in my 
testimony. This legislation lets states impose their tax 
disaster on businesses in your states, businesses that have no 
votes and no voice and no benefits from the taxing state.
    The second point is that I'm glad that Mr. Bercu claimed 
that it's free and easy to collect sales tax for other states, 
because as it turns out, the way he's doing it is perhaps free 
and it may be even easy, but it's completely wrong. I used the 
web store to buy a book this morning about the U.S. 
Constitution for delivery to my Virginia home. And in front of 
you is a panel showing the screen shot from today.
    Like Mr. Bercu said, BookPeople did add sales tax, but not 
for me in Virginia where it's 5 percent. They added 8.25 
percent, which is Austin, Texas' rate. They didn't have to look 
up the rate in Virginia. They didn't have to check to see if 
Virginia was having a sales tax holiday. They are later this 
month. They don't have to file returns in Virginia, and they 
don't have to face audits from Virginia.
    So what BookPeople does today is not even remotely close to 
what this bill, 1832, would require. Selling books, if you 
think about it, is pretty simple. There's no size or color 
choices involved. But it's much harder for a business who does 
complex fulfillment. The Silver Gallery has a store on Main 
Street in Waynesboro, Virginia. They do $3 million in sales 
through multiple channels, online, web store, their Amazon 
store as well, and phone orders. And they do custom engraving 
on a lot of the jewelry that they ship.
    So I've got a chart in front of you that shows the 
information systems that they built on their own to handle that 
custom engraving and ordering. They already collect for every 
single sale they make in Virginia, just like all online sellers 
do. They collect for their own states via their custom system. 
That's at the top of the chart.
    But when discussing the challenges of collecting for 9,600 
jurisdictions, a witness last week told the House Judiciary 
Committee, ``That's easy. There's an app for that. You can just 
punch it in and it'll return the rate.'' But that app would 
have to be in the bottom row, Mr. Chairman, of the chart in 
front of you. Imagine every time something moves through my 
system, I have to punch in a rate and then punch it back into 
the system. That would never work for an automated shopping 
cart with a company with just four employees.
    So is it free, the software? Yes, it's free like a puppy is 
free. They come with a lifetime of costs. And the Silver 
Gallery did a detailed estimate that it will cost them $22,000 
to implement free software--at the bottom of the chart with all 
those blue arrows that connect it to their in-house information 
systems.
    There are similar businesses in each of your states. I 
would be happy to talk to you about each of those examples, 
because they are real companies--Tamarack in Beckley, West 
Virginia, where 2,800 artisans reach customers around the 
country through their website. Those businesses in your states 
that use the Internet--they haven't made so much noise about 
this legislation so far. I think they're too busy just trying 
to survive the competition from Wal-Mart, Amazon, and the big 
box stores, who have huge economies of scale and enjoy local 
tax benefits.
    But when your state's businesses have to start spending 
money on new systems and have to face 46 state audits, I think 
that's when you'll start to hear from them. And the thing is 
you won't be able to help if you pass this legislation first. 
And don't expect the small seller exception to provide any 
relief, either. At $500,000 in retail gross sales, it won't 
even exempt a mom-and-pop operation in your states. And I look 
forward to talking to you about a more reasonable small 
business exception during the Q&A.
    So, to close, I'd say that this shows that the Internet is 
not some deadly virus from outer space. We invented the 
Internet. The Internet is in every town of America, and it 
helps every business and every consumer find what they're 
looking for. So it doesn't make sense to think of the Internet 
as unfair or the enemy. So to paraphrase Pogo, that comic 
strip, we have met the Internet and it is all of us.
    I look forward to your questions.
    [The prepared statement of Mr. DelBianco follows:]

  Prepared Statement of Steve DelBianco, Executive Director, NetChoice

    Chairman Rockefeller, Ranking Member Hutchison, and members of the 
Committee: thank you for holding this hearing on whether new ``internet 
tax'' collection burdens would level the playing field for small 
business. My name is Steve DelBianco, and I serve as Executive Director 
of NetChoice, a coalition of leading e-commerce and online companies 
promoting the value, convenience, and choice of Internet business 
models. NetChoice members include industry leaders such as eBay, 
Expedia, Facebook, LivingSocial, NewsCorp, Overstock, VeriSign, and 
Yahoo, plus several thousand small businesses that go online to reach 
their customers.
    NetChoice has been deeply engaged on Internet tax issues for over a 
decade, including debates in the Wall Street Journal, on CNBC, 
Marketplace radio, CNN, and PBS. Since 2004, we have participated in 
meetings of the Streamlined Sales Tax Project (SSTP), a long-term 
effort that S. 1832 seeks to sweep aside with an ``Alternative'' method 
to let states tax remote businesses.
    NetChoice is a founding member of TruST, the coalition for True 
Simplification of Taxation, a new group whose association members also 
include: the American Catalog Mailers Association; the Direct Marketing 
Association; and the Electronic Retailing Association 
(www.TrueSimplification.org). Each coalition member has submitted 
written statements for today's hearing, and we respectfully ask that 
their statements be included as part of the hearing record.
    In this testimony we are discussing legislation that would 
authorize states to impose sales tax obligations on out-of-state 
businesses. Our major points are:

  1.  For online and catalog businesses, S. 1832 would let 46 states 
        impose new tax burdens that are uniquely complex and far more 
        unfair than the current Quill standard of physical presence.

  2.  S. 1832 does not require nearly enough sales tax simplification 
        to justify imposing these significant new burdens on out-of-
        state businesses.

  3.  The new tax burdens imposed by S. 1832 are not justified by 
        anticipated revenue, since total potential sales tax on all e-
        retail is well below one percent of total state & local tax 
        revenue.

  4.  S. 1832 does not adequately protect America's small businesses, 
        where these new collection burdens would be disproportionately 
        complex and expensive.

    The Commerce committee has a unique perspective on the need to 
prevent state-imposed burdens on interstate commerce. To help with that 
deliberation, we begin with some straight answers to critical 
questions.
Why don't online retailers pay sales tax to every state?
    Last November, the editors of the Wall Street Journal asked 
NetChoice whether all online retailers should have to pay sales tax to 
every state. My argument in the published debate began with this:

        Should online retailers have to collect sales tax? Yes, and 
        they already do.

        Just like all retailers, online stores must collect sales tax 
        for every state where they have a physical presence. That's why 
        Amazon.com adds sales tax to orders from customers in the 5 
        states where it has facilities. But Amazon and online retailers 
        aren't required to collect tax for other states, leaving those 
        customers to pay a ``use tax'' that states rarely enforce 
        against individual taxpayers. This framework frustrates state 
        tax collectors and businesses that compete with online 
        retailers. But when we learn how this physical presence 
        requirement evolved, it becomes clear why we should retain this 
        standard for imposing new tax collection burdens on online 
        retailers.\1\
---------------------------------------------------------------------------
    \1\ Steve DelBianco, Should States Require Online Retailers To 
Collect Sales Tax?, Wall Street Journal (Nov. 14, 2011) (emphasis 
added).

    As members of this committee know, today's physical presence 
standard is based on Article 1 of the U.S. Constitution, designed 225 
years ago to stop states from impeding interstate commerce. The 
Commerce Clause was a necessary condition to unite the independent 
colonies, since they had a legacy of imposing customs duties and trade 
barriers to favor in-state businesses.
    Fast-forward to the 1960s, when state tax collectors wanted catalog 
retailers to collect their sales taxes, even where those catalogs had 
no operations in the state. The U.S. Supreme Court relied on the 
Commerce Clause in deciding that states could not impose tax collection 
requirements on catalogs ``whose only connection with customers in the 
State is by common carrier or the United States mail.'' \2\
---------------------------------------------------------------------------
    \2\ Nat'l Bellas Hess, Inc. v. Dept. of Rev. of Ill., 386 U.S. 753 
at 758 (1967).
---------------------------------------------------------------------------
    In 1992, the Supreme Court took another look at tax collection by 
an office products catalog company by the name of Quill.\3\ Seeing a 
patchwork of rates and rules for several thousand sales tax 
jurisdictions, the Court again held that requiring out-of-state 
companies to collect and remit taxes was so complicated that it 
presented an unreasonable burden on interstate commerce.
---------------------------------------------------------------------------
    \3\ Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
    
    
    Moreover, the Supreme Court was not moved by the state's argument 
that computer technology created the necessary simplification. Instead, 
the Supreme Court acknowledged the lower court's finding that advances 
in computer technology had eased the burdens of tax collection, but 
still found the requirement of tax collection unduly burdensome.\4\
---------------------------------------------------------------------------
    \4\ See Quill Corp. v. North Dakota, 504 U.S. 298 at 313 FN 6 
(1992).
---------------------------------------------------------------------------
    Quill was not concerned with ``fairness.'' While some argued 
fairness as justification for tax collection, ``[i]n contrast, the 
Commerce Clause and its nexus requirement are informed not so much by 
concerns about fairness for the individual [state] as by structural 
concerns about the effects of state regulation on the national 
economy.'' \5\
---------------------------------------------------------------------------
    \5\ Id. at 312 (emphasis added).
---------------------------------------------------------------------------
    Quill is the law of the land today, protecting businesses from 
sales tax imposition by states where that business has no physical 
presence, while requiring businesses to pay sales tax for every state 
where they do have a physical presence.

Haven't states simplified their sales tax systems? What about the SSTP 
        initiative?
    Quill also made it clear that states could simplify their sales tax 
systems and come back to the Supreme Court at any time to argue that 
they had eliminated the unreasonable burden on interstate commerce. But 
instead, a handful of states chose to skip the harsh judgment of the 
Court and go directly to Congress to request the power to impose these 
burdens on out-of-state businesses--whether or not state sales taxes 
were significantly simplified.
    State efforts began a decade ago with the Streamlined Sales Tax 
Project (SSTP). Despite a decade of concerted effort, the actual 
simplifications achieved by the SSTP are not nearly sufficient to 
justify Congress abandoning its role in protecting interstate commerce. 
Rather, the SSTP has shown that simplification has become just a 
slogan--not a standard.
    First, critics cite the fact that SSTP originally promised just one 
tax rate per state, but now accommodates over 9,600 local 
jurisdictions,\6\ each with its own tax rates and sales tax holidays. 
That's up from 7,800 jurisdictions in the 20 years since Quill, and 
still growing. This makes the U.S. a true outlier when it comes to 
sales tax jurisdictions. The European Union has 27 jurisdictions for 
Value Added Tax (VAT) and India lets each state have a single tax rate, 
but we are the only country where sales tax is controlled at the local 
government level.
---------------------------------------------------------------------------
    \6\ ``Vertex Press Release (Mar. 21, 2012), available at http://
www.vertexinc.com/pressroom/PDF/2012/vertex-address-cleansing.pdf (``At 
the end of 2011, there were over 9,600 taxing jurisdictions across the 
U.S. with an average of 651 new and changed sales and use tax rates per 
year.'').



    Second, the SSTP has abandoned many of its original simplification 
requirements. For example, the SSTP no longer contains required 
compensation for all retailers and has all but eliminated the small 
seller exception. In an effort to attract states with origin sourcing, 
the SSTP abandoned one sourcing rule and now allows both origin and 
destination-based regimes--at the same time. To entice Massachusetts to 
join SSTP, the Governing Board voted to allow thresholds for certain 
clothing items, even though thresholds were one of the most complex 
elements it pledged to simplify. (Notwithstanding this allowance, 
Massachusetts has not yet joined SSTP.)
    Despite these concessions to attract member states, less than half 
of eligible states have joined SSTP (only 22 full member states in 
SSTP, out of 46 states that have sales tax).

Why is SSTP losing momentum when states expect billions of dollars in 
        new tax revenue?
    Some argue that SSTP lost momentum because non-member states are 
reluctant to let unelected tax administrators make decisions about tax 
rules and determine compliance. More likely however, SSTP lost momentum 
because states began to see the revenue estimates as wildly inflated.
    A simple calculation using government data shows that the maximum 
sales tax potential for consumer e-commerce is less than one percent of 
total state and local tax revenue:

        Start with the U.S. Department of Commerce's 2010 Electronic 
        Commerce Industry Assessment, which reported total retail e-
        commerce of $169 billion.\7\
---------------------------------------------------------------------------
    \7\ U.S. Census Bureau E-Stats, http://www.census.gov/econ/estats/
2010/2010reportfinal.pdf

        Apply an average tax rate of 7 percent, giving total potential 
---------------------------------------------------------------------------
        sales tax of $11.8 billion.

        Divide that by total state and local tax revenue in 2010, 
        reported as $1.3 trillion by the Commerce Department.\8\
---------------------------------------------------------------------------
    \8\ U.S. Census Bureau E-Stats, http://www2.census.gov/govs/qtax/
2011/q2t1.pdf

    The result is clear: the maximum potential sales tax on all e-
commerce is less than one percent of state & local tax revenue--
assuming that no sales taxes are collected by e-retailers.
    But under Quill, e-retailers already collect sales tax for states 
where they have physical presence, as seen in the table at right. 
NetChoice commissioned a study by economists Robert Litan and Jeffrey 
Eisenach to determine where e-retailers were already collecting sales 
tax for web sales.



    They concluded that uncollected sales tax on e-commerce in 2010 was 
$4.2 billion nationwide, or less than one-third of one percent of total 
state and local tax revenue.\9\ This relatively small incremental 
revenue does not justify a dramatic expansion of state taxing powers 
and new collection burdens on remote businesses.
---------------------------------------------------------------------------
    \9\ Eisenach & Litan, Uncollected Sales Taxes On Electronic 
Commerce: A Reality Check, Empiris LLC (Feb. 2010), available at http:/
/bit.ly/EisenStudy.
---------------------------------------------------------------------------
Isn't there increased momentum to overturn Quill?
    Recently, despite flagging momentum and diminishing revenue 
estimates, members of this committee have surely noticed increased 
lobbying efforts to overturn Quill's physical presence test and empower 
states to collect from remote retailers. Aside from the usual tax 
proponents in state government, the renewed push is coming from big-box 
retailers.
    Big-box retail chains are pushing hard for Federal legislation for 
a simple and predictable reason: it serves their interests. Even a 
little simplification helps a big-box retailer who must already collect 
tax for most states, as seen in this list. Big-box retailers now have 
expansive web-stores of their own and give customers the convenience of 
doing pickups and returns at their local stores. These chains use 
plenty of local public services wherever they have stores, so they must 
collect sales tax in all their states--as required under Quill. The 
Eisenach study looked at sales collection practices for the top 500 e-
retailers, and found that 17 of the top 20 already collect in at least 
38 of the 46 sales tax states.
    Another way that overturning Quill would also help big-box 
retailers is that it would force tax collection costs on their biggest 
online competitor, Amazon.

Why would Amazon.com support overturning Quill?
    Big-box retailers have aggressively gone after Amazon in the 
states, lobbying for new ``Amazon Tax'' laws declaring that Amazon 
already has physical presence by virtue of its advertising affiliates, 
distribution centers, or other subsidiaries in the state. The big-box 
retailers also lobbied for a new tax reporting law in Colorado, which 
was enjoined by a Federal court as a violation of the Commerce 
Clause.\10\ Despite the setback in Colorado and pending court 
challenges of the ``Amazon Tax'' in New York and Illinois, this 
aggressive and expensive state lobbying campaign has succeeded in 
creating well-publicized tax compliance problems for Amazon. Those 
problems have helped to drive Amazon to support Federal legislation to 
overturn Quill.
---------------------------------------------------------------------------
    \10\ See Order of Ct., The Direct Marketing Ass'n v. Huber (U.S. 
Dist. Ct. Colo. Mar. 30, 2012), and see 1 Colo. Code Regs. Sec. 201-
1:39-21-112.3.5 (2010).
---------------------------------------------------------------------------
    But there's another reason for Amazon's about-face: the company is 
changing its business model by adding distribution centers in new 
states to enable faster delivery to customers. Amazon is also adding 
drop-boxes in convenience stores and marketing daily deals to local 
merchants. As a result, Amazon will have physical presence in 14 states 
by 2014 \11\--requiring Amazon to collect sales tax for more than half 
of all Americans. And as Amazon opens more distribution centers across 
the country they will continue to increase their tax collection 
requirements.
---------------------------------------------------------------------------
    \11\ By 2014, Amazon will collect and remit sales taxes in the 
following 14 states: California, Indiana, Kansas, Kentucky, Nevada, 
North Dakota, New Jersey, New York, Pennsylvania, Tennessee, Texas, 
Virginia, Vermont, and Washington.
---------------------------------------------------------------------------
    Like the big-box stores, Amazon would reduce its tax compliance 
costs if states adopted even tiny steps toward simplification. 
Moreover, Amazon and big-box chains benefit if Congress allows states 
to impose new tax collection burdens on their smaller online-only 
competitors.
    To impose expensive collection burdens on small sellers would be 
grossly unfair, which brings us to the aspect of ``fairness'' in the 
debate over new Internet sales taxes.
Is this debate really about ``fairness'' for small business?
    Yes, and ``fairness'' is what you get when everyone plays by the 
same rules. Today, with Quill in place, all online and offline 
businesses play by exactly the same rule: all retailers collect sales 
tax for every state where they choose to have a physical presence.
    Ironically, in many states the fairness argument cuts the other 
way. A retail store on Main Street collects sales tax for just the one 
jurisdiction where it's located. But in most states, an online retailer 
operating right upstairs must collect and remit for each of the local 
towns and counties whenever it ships within the state. That means 
collecting for several hundred local tax jurisdictions, each with its 
own rates and rules. Yet when customers from surrounding towns walk in 
the door, the store collects and files only in the local jurisdiction.
    Again, all retailers collect sales tax for every state where they 
choose to have a physical presence. I say, ``choose'' because it is the 
business that chooses whether to be just an online retailer or to 
operate physically in multiple states. When a business chooses to open 
stores or send sales reps to another state, it accepts the obligation 
to collect that state's sales tax, along with state-provided benefits 
of infrastructure, public safety, etc.
    There's actually little evidence that retailers who do collect 
sales tax are losing significant sales to catalog and online retailers 
who collect sales tax only for their home state customers. That makes 
sense, since sales tax and shipping costs aren't added until a 
consumer's online shopping cart goes to checkout. So comparison 
shoppers are usually comparing prices before adding any tax and 
shipping charges. Moreover, online shoppers usually pay shipping and 
handling charges that offset any tax that's not collected on most 
commodities. Most shoppers go online for the convenience and selection 
available, not to avoid taxes. While small and expensive electronics 
are an anecdotal exception, tax proponents have shown no data 
indicating that significant numbers of electronics shoppers 
deliberately choose out-of-state online retailers just so they can 
avoid paying sales tax.
    For example, Amazon begins collecting sales tax in California on 
September 15, 2012 because it has physical presence there with its 
Kindle labs and new distribution centers. Even though customers in one 
of Amazon's largest markets is facing the prospect of an 8 percent 
effective price increase, the company is not warning analysts about any 
impending drop in sales. In a conference call with equity analysts on 
July 26, 2012, Amazon executives fielded questions about the sales 
impact of collecting sales tax in more and more states. The company's 
CFO said:

        ``We have also certainly added some new geographies or new 
        jurisdictions that we clocked during that time period. But you 
        see that we have seen very very strong growth even while 
        collecting.'' \12\
---------------------------------------------------------------------------
    \12\ Tom Szkutak, CFO, in a transcript of Amazon's Q2 2012 Earnings 
Call, http://seekingalpha.com/article/754571-amazon-com-s-management-
discusses-q2-2012-results-earnings-call-transcript?part=single
---------------------------------------------------------------------------
    This is more evidence that American consumers go online seeking 
better selection, convenience, and lower prices--they don't shop online 
to avoid paying sales taxes.
    The argument that remote sellers have an unfair advantage just 
doesn't hold up. Paying sales tax for thousands of jurisdictions in 46 
states is far more expensive and complex than paying sales tax for a 
single jurisdiction on over-the-counter purchases. Moreover, state and 
local governments often provide incentives and benefits to in-state 
retailers, such as tax increment financing, transportation 
improvements, worker training subsidies, grants, tax credits, property 
and income tax incentives, etc. None of these benefits are available to 
out-of-state businesses.

e-Commerce is the best hope for Main Street to compete with Big-Box 
        Stores
    Those who make the fairness claim about online versus offline are 
missing the far greater fairness concern of smaller retailers competing 
against big-box chain stores.
    For decades, ``Main Street'' retailers have been getting battered 
by Walmart and other national chains. To survive, many Main Street 
retailers have gone online with their own web stores or with e-commerce 
platforms to serve repeat customers and to find new customers across 
the country. For example, the specialty retailer SilverGallery.com has 
a warehouse and store--located on Main Street--in Waynesboro, Virginia. 
SilverGallery, which was featured in a Wall Street Journal article last 
year, does some walk-in trade, but most sales come from their web store 
and other online channels.\13\ Online sales growth enabled 
SilverGallery to buy their building and increase employment, right 
there on Main Street.
---------------------------------------------------------------------------
    \13\ See Angus Liten, Sales-Tax Measures 'to Cost Us Big', Wall. 
St. Jo. (Dec. 1, 2011).
---------------------------------------------------------------------------
    The last decade has seen another body blow delivered by big-box 
chains, who integrated their website operation with their stores in 
every city and town. Customers love the savings of doing in-store 
pickups to avoid shipping charges. And they love the convenience of 
returning online purchases to stores for exchange or credit--instead of 
packaging returns and standing in line at the post office. But small 
sellers like SilverGallery can't afford to open stores in every state. 
It's yet another advantage that big retailers have over small 
businesses with websites. The big chains also negotiate much lower 
rates for advertising, shipping costs, and health insurance, too.
    Next comes the knockout punch for small retailers. Overturning 
Quill may be good news for big-box retailers with websites, since they 
already have to collect in nearly all states. But overturning Quill 
will definitely raise costs and prices for small businesses that 
compete--and survive--via their web and catalog sales.
    There's collateral damage of overturning Quill when it comes to 
artisans and specialty manufacturers in your state. Smaller suppliers 
have little hope of qualifying to be on the shelves at Walmart or 
Target. For artisans and small manufacturers, distribution comes 
through their own Internet web stores and specialty catalogs, which are 
in no position to absorb the extra costs of collecting for not just one 
state, but 45 additional states. Those costs are described in the next 
section.

What is the impact on small businesses if they are required to pay 
        sales tax to 46 states?
    What costs would a small business face if Congress forced them to 
pay sales tax to all 46 states? The SST's own Cost of Collection \14\ 
study found that a small business (under $1M in annual sales) spends 17 
cents for every tax dollar it collects for states. And even if tax 
software works as promised, that only helps with 2 cents of the 17 
cents in costs per dollar collected. That leaves small businesses with 
a 15 percent cost burden on every dollar they collect, for things such 
as:
---------------------------------------------------------------------------
    \14\ Available at http://www.netchoice.org/wp-content/uploads/cost-
of-collection-study-sstp.pdf.

   Paying computer consultants to integrate new tax software 
        into their home-grown or customized systems for point-of-sale, 
---------------------------------------------------------------------------
        web shopping cart, fulfillment, and accounting

   Training customer support and back-office staff

   Answering customer questions about taxability of items, or 
        sales tax holidays

   Handling audit questions from 46 states

   Paying accountants and computer consultants to answer all 
        these questions

    These collection burdens will be a big problem for small catalog 
and online businesses that collect only their home-state sales tax 
today. Ask any small business, on Main Street or online, and you'll 
learn it's hard enough to collect sales tax for one state, let alone 
all 46 states with sales tax laws of their own.
    One of the most significant costs and challenges for remote 
retailers is integrating tax rate lookup software into their in-house 
information systems. This point was demonstrated when the Silver 
Gallery explained to the Streamlined Sales Tax Governing Board how they 
would incur nearly $22,000 in costs for design, programming, 
integration, testing, and employee training. This cost estimate was 
developed for the task of integrating ``free'' software into Silver 
Gallery's existing information systems, at each of the integration 
points shown in their diagram below.



    With that understanding of what small online businesses would face 
from overturning Quill, it's easy to see why Senate Commerce Committee 
members Ayotte, Begich, and Heller co-sponsored a resolution to protect 
our Nation's Internet entrepreneurs from new tax collection burdens. S. 
Res. 309 is titled ``Supporting the Preservation of Internet 
Entrepreneurs and Small Businesses,'' and its main point is this simple 
pledge:

        Congress should not enact any legislation that would grant 
        State governments the authority to impose any new burdensome or 
        unfair tax collecting requirements on small online businesses 
        and entrepreneurs, which would ultimately hurt the economy of, 
        and consumers in, the United States.\15\
---------------------------------------------------------------------------
    \15\ S. Res. 309, 112th Cong. (2011) (emphasis added).

    The bottom line on ``fairness'' is that big-box retailers have 
wielded that term for their own benefit, to the detriment of any small 
retailers they haven't already extinguished.

Would S. 1832 create a new tax burden on businesses?
    State sales tax laws put obligations on both buyers and sellers in 
order to maximize tax revenue collection. States levy a sales tax on 
sellers within their jurisdiction, and it's usually up to the seller 
whether to pass the tax along to buyers, whether at the cash register, 
online, or over the phone. But after an audit, a seller is liable for 
any sales tax they were obliged to collect but failed to collect, even 
when the seller can't recover the tax from those previous customers.
    Moreover, several states impose their sales tax for the 
``privilege'' of selling goods to state residents, even if shipped via 
common carriers:

        Arizona: ``The Arizona transaction privilege tax is commonly 
        referred to as a sales tax; however, the tax is on the 
        privilege of doing business in Arizona and is not a true sales 
        tax. Although the transaction privilege tax is usually passed 
        on to the consumer, it is actually a tax on the vendor.'' \16\
---------------------------------------------------------------------------
    \16\ http://www.azdor.gov/business/transactionprivilegetax.aspx

        California: ``The sales tax portion of any sales and use tax 
        ordinance adopted under this part shall be imposed for the 
        privilege of selling tangible personal property at retail'' 
        \17\
---------------------------------------------------------------------------
    \17\ http://www.boe.ca.gov/lawguides/business/current/btlg/vol1/
ulsutl/7202.html

        Michigan: ``there shall be collected from all persons engaged 
        in the business of making sales at retail, by which ownership 
        of tangible personal property is transferred for consideration, 
        an annual tax for the privilege of engaging in that business 
        equal to 6 percent of the gross proceeds of the business, plus 
        the penalty and interest if applicable. . .'' \18\
---------------------------------------------------------------------------
    \18\ Michigan Compiled Laws Of 1979, Chapter 205 Taxation, General 
Sales Tax Act, Sec. 205.52]

    Today, only businesses that have presence in these states are 
required to pay a tax for the privilege of engaging in business there. 
S. 1832 would enable states to impose their ``privilege'' tax on 
businesses with no facilities, no vote, and no voice in those states. 
Sales and ``privilege'' taxes are the personal liability of the seller. 
The fact that the tax can be passed on to consumers does not make it 
any less a new tax burden for businesses all over the country.
    Clearly, sales tax is due from sellers whose activities or 
locations create enough of a physical presence for a state to impose 
collection obligations. But if Congress overturns the Quill standard, 
businesses would be forced to pay a new tax to states where they have 
no physical presence. Most of those businesses would pass the tax along 
to their customers, but make no mistake about it--the states will 
demand that businesses pay the new tax--whether or not their customers 
were charged.
    If Congress were to enact S. 1832, your state businesses will hear 
about these new tax obligations for the first time when they receive 
demand letters and audit notices from dozens of states. That may be the 
first time you hear from many businesses in your own state, when they 
complain about complex new burdens of collecting taxes for 45 
additional states.

S. 1832 is not an improvement on Quill's physical presence standard.
    The actual simplification required in S. 1832 is not nearly 
sufficient to convince Congress that it should abandon its 
Constitutional role in protecting interstate commerce.
    Fortunately, Congress can afford to take the time to design 
legislation that requires real simplification and makes states 
accountable to these requirements. As noted above, the uncollected 
taxes are far lower than tax advocates have claimed: uncollected sales 
tax on consumer e-commerce is under one percent of all state and local 
taxes. And the uncollected amounts are not growing as fast as tax 
advocates have claimed, since the fastest growth in e-commerce is among 
multi-channel retailers who already collect for states where they have 
stores--17 of the top 20 e-retailers collect for at least 38 of the 46 
sales tax states.\19\ And Amazon.com will collect for over half the 
U.S. population by 2014--under the Quill standard of physical presence.
---------------------------------------------------------------------------
    \19\ Eisenach & Litan, Uncollected Sales Taxes On Electronic 
Commerce: A Reality Check, Empiris LLC (Feb. 2010), available at http:/
/bit.ly/EisenStudy.
---------------------------------------------------------------------------
    However, if Congress is determined to overturn Constitutional 
protections for interstate commerce, it must exempt small businesses, 
require states to adopt minimum simplification requirements, and create 
fair procedures to resolve sales tax disputes between states and 
taxpayers. Each of these points is covered below.

S. 1832 does not include adequate protection for small businesses
    S. 1832 includes a small seller exception that is appropriately 
mandated by Congress, as opposed to other legislation that leaves it to 
state tax administrators to set the exception level. But S. 1832 sets 
the exception threshold at just $500,000 in annual remote sales, a 
number that is far too low for retailers, whose entire expense and 
payroll must be paid from the margin on sales:

   $500,000 in gross sales times 25 percent average gross 
        margin leaves just $125,000 to cover all other costs of running 
        the entire business.

   All other costs would include advertising, rent, supplies, 
        insurance, shipping, computers and programming, website, 
        accounting, communications, travel, etc.

   If there's anything left after paying those costs, this 
        business might be able to pay the owner a modest salary. But 
        there's nothing left to pay other employees.

    Make no mistake about it--$500,000 in retail sales is still just a 
sole proprietor operation. The Small Business Administration says a 
``small'' retailer is one with annual sales 40 to 60 times larger than 
the threshold in S. 1832.
    One way to set a more realistic small seller exception is to exempt 
all businesses that are out on the ``long tail'' in terms of e-retail 
sales. For example, Internet Retailer publishes a Top 500 Guide each 
year, ranking the Nation's largest retailers on their U.S. e-commerce 
sales. For 2011, the #1 e-retailer was Amazon.com, at $48 billion in e-
retail sales. Number 500 had just $15 million in remote e-retail sales. 
In total, the Top 500 had $181 billion in e-retail sales.
    Economists Eisenach and Litan started with this Top 500 Guide when 
analyzing where each retailer already collected sales tax under Quill's 
physical presence standard. Using their analysis, we estimated that the 
Top 500 were responsible for 93 percent of the uncollected sales tax on 
U.S. e-commerce in 2011, as shown in the graph below \20\ 
(netchoice.org/top500collect).
---------------------------------------------------------------------------
    \20\ Top 500 e-Retailers and total e-commerce sales from Internet 
Retailer, Top 500 Guide, p. 32 (2012 Edition). Top 500 e-retailer tax 
collection from Eisenach & Litan, Uncollected Sales Taxes On Electronic 
Commerce: A Reality Check, p.17, 25 (Feb. 2010), available at http://
bit.ly/EisenStudy



    Congress could set a small seller exception that adjusts with 
inflation and retail trends by exempting sellers below the Top 500 
cutoff from the previous year. Under this method, the small seller 
exception for 2012 would have been $15 million in annual sales. That 
would leave exempted retailers with a more reasonable gross margin to 
cover expenses, while allowing states to recover over 90 percent of the 
uncollected sales tax on e-retail.

S. 1832 fails to require true tax simplification or reduce 
        administrative 
        burdens
    Congress should require robust minimum simplifications before 
overturning the Quill standard of physical presence for states to 
impose sales tax on remote businesses. Previous Congressional 
legislation to overturn Quill included as many as 16 minimum 
simplification requirements that SSTP states would have to honor. But 
S. 1832 requires only 3 measures and they lack essential provisions:

    Minimum Simplification Requirements lacking in S. 1832:

   Remote retailers should not be subject to audits from 46 
        separate state tax authorities. States should respect the 
        outcome of a single audit by any state, on behalf of all 
        states.

   Remote retailers should be allowed to use a single sales tax 
        rate for remote sales made into each state, which was the 
        original goal of the SSTP. State lawmakers would, of course, be 
        able to allocate sales tax proceeds among local jurisdictions.

   States should be required to adopt a single set of 
        definitions for taxable and exempt products across all states. 
        S. 1832 allows each state to have its own unique definitions:

      ``(g) Provide a uniform sales and use tax base among the State 
            and local taxing jurisdictions within the State.''

   States should compensate all businesses for the fair and 
        reasonable cost of collecting sales taxes, taking into account 
        such elements as credit card fees and costs of software 
        implementation and maintenance. Compensation was required in 
        previous Federal legislation to overturn the Quill physical 
        presence standard, but was dropped in recent versions. S. 1832 
        requires no compensation for either the integration costs or 
        collection costs incurred by businesses in order to collect 
        state taxes.

   Remote businesses should not be required to file sales tax 
        returns for all 46 states. All states should accept a single 
        sales tax return filed with a business' home state. The home 
        state revenue department would be responsible for distributing 
        funds to remote states.

   Remote retailers should not be required to honor, but may 
        observe, thresholds for sales tax calculation. (an example of a 
        threshold is Massachusetts, where the first $175 of any 
        clothing item is exempt from sales tax.\21\)
---------------------------------------------------------------------------
    \21\ http://www.mass.gov/dor/individuals/taxpayer-help-and-
resources/tax-guides/salesuse-tax-guide.html#apparel

   Remote retailers should not be required to honor state-
---------------------------------------------------------------------------
        specific sales tax holidays.

   States should be required to adopt a single rule for 
        sourcing sales. The SSTP originally maintained destination 
        sourcing for all sales tax transactions. But to accommodate 
        origin-based states, SSTP's Governing Board voted to allow 
        origin sourcing for in-state sales while requiring destination 
        sourcing for remote sales. Such ``dual sourcing'' should not be 
        permitted as part of any Federal legislation overturning the 
        physical presence standard.

   States must provide certified software for collection, 
        filing, and remittance of taxes. But S. 1832 requires only that 
        states provide software ``that identifies the applicable 
        destination rate''. That leaves remote businesses to bear the 
        full cost of integrating the rate lookup into their in-house 
        systems and processes. And the business would also have to pay 
        for software to handle filing and remittance in 46 different 
        states.

    These minimum simplifications should be required for any state that 
seeks collection authority outside of Quill's physical presence 
standard.
    And if Congress were to grant states taxing powers over out-of-
state businesses, it should explicitly prohibit states from otherwise 
attempting to stretch the definition of physical presence, such as many 
states have attempted through laws asserting that advertising alone 
creates nexus.

S. 1832 fails to hold states accountable to simplification requirements
    If Congress grants states the authority to impose sales tax on 
remote sellers, there must be a mechanism to hold states accountable to 
the minimum simplification requirements above. S. 1832 does not 
designate Federal court jurisdiction, so disputes would be subject to 
the Tax Injunction Act (28 U.S.C. Sec. 1341), where taxpayers are 
forced to use state courts to litigate disputes with state tax 
collection authorities--even on questions of whether a state is 
following Federal law. It would be far better if Federal courts had 
sole jurisdiction over disputes arising between states and remote 
businesses regarding a state's compliance with Federal law.

Congress should consider a multi-state compact to preserve tax 
        competition among the states
    Congress should retain the benefits of market discipline to 
restrain states from expanding the complexity of their sales tax 
systems and skirting the minimum simplification requirements. 
Fortunately, Congress has a simple way to enforce ``tax competition'' 
as part of any legislation that overturns the physical presence 
standard: Congress could authorize remote collections through a multi-
state compact instead of a national mandate on all businesses.
    S. 1832 would impose collection burdens on businesses in all 50 
states--including those in states that don't even have a sales tax. 
Lawmakers in all 50 states would lose the sovereign right to protect 
their citizens and businesses from tax burdens imposed by other states.
    If these new collection burdens are hurting businesses in a state, 
their legislators won't be able to rescue those businesses if Congress 
makes collection mandatory for all. This comes as a surprise to many 
lawmakers who are just beginning to understand the implications of 
legislation such as S. 1832.
    Contrast the national mandate in S. 1832 with a multi-state 
compact, where states could opt-in if they believed new tax revenues 
justified having their in-state business collect taxes for other states 
in the compact. By the same token, states could opt-out of the compact 
if remote state tax burdens were excessive. States opting-out would 
lose the power to force remote sellers to pay their sales tax, but at 
least states could protect their own businesses from unreasonable 
burdens on interstate commerce.

Conclusion
    Quill's physical presence standard remains a principled and 
practical way to limit states' imposition of tax burdens on out-of-
state businesses. Congress should not sweep Quill aside without first 
requiring that states truly simplify their tax systems in an 
accountable way, while providing adequately protection for America's 
small businesses.

    The Chairman. Thank you very much.
    On our side, I'd like to yield my right to ask first 
questions to Senator Durbin, who is an author of this bill and 
has taken the time out of his busy schedule to be here. And 
after that, when the next Democrat comes up, it will be Senator 
Nelson.
    On the Republican side, that would be up to you, Mr. 
Ranking Member, and also Assistant Ranking Member Ayotte, if 
you would have Senator Alexander go ahead and ask the first 
question.
    All right. Senator Durbin.
    Senator Durbin. Thank you, Mr. Chairman. It's very kind of 
you.
    Mr. DelBianco, first, it's the state's option. The state 
has to decide whether they want to be part of this. It is not 
mandated on any state. Second, the notion that every retailer 
then has to go fix the sales tax software--that is not the 
purpose. In fact, just the opposite is true. We're trying to 
establish a national access to software for every retailer, 
simplify it, make it direct, and put the burden on someone 
other than the small business to make sure that it's timely.
    Third, Mr. Misener, you represent the largest Internet 
retailer in America today. In the recent past, Amazon has 
opposed measures taken by the states and others when it comes 
to sales tax collection. Mr. DelBianco is still trying to 
protect you, but you've come here to endorse this bill. So can 
you tell us why Amazon, the largest Internet retailer, would 
support a bill which Mr. DelBianco thinks is so deleterious to 
Internet commerce?
    Mr. Misener. Senator, we always have--I joined the company 
over 12 years ago, and one of the first choices we had to make 
as a policy decision was whether or not we were going to oppose 
sales tax collection or support it. At the time, as you may 
recall, the Internet Tax Freedom Moratorium was up for renewal, 
and there was talk about the Internet should be free of all 
taxes, including sales taxes.
    We had a choice. Do we simply ride the coattails of the 
Internet Tax Freedom Act and oppose all sales taxes as well, or 
do we work with the states? We chose the latter. When we work 
with the states, we work cooperatively. Mr. DelBianco mentioned 
that he's also worked in Streamline. I think he worked in 
Streamline much like Napoleon visited Moscow. It was really--
sorry.
    But we tried to be cooperative, and I think the Streamlined 
Sales Tax Project representatives would grant that. When we 
were going through the past decade of work in Streamline, it 
became clear that the large states weren't going to join. And 
so the innovation in your bill now is allowing the large states 
also to participate in this in a way that makes it feasible 
nationwide.
    And so that's why we're so supportive of this legislation. 
We always have been, but now, in particular, your legislation 
takes care of a preexisting problem, which was that Streamline 
was the only way to go. Now, you've produced alternatives for 
the states.
    Senator Durbin. Mr. DelBianco also suggests that keeping up 
with 9,600 taxing jurisdictions is beyond the grasp of many 
Internet retailers. Well, you're the largest, and you would be 
affected more than anyone. So how do you deal with the fact 
that laws do change?
    Mr. Misener. Well, we try to keep up, for sure. And we 
offer our sellers a service by which we will collect the sales 
tax for them. Mr. DelBianco's point on fairness, I think, is 
that it's harder for smaller businesses to do this. If smaller 
businesses were to do what we've done, which is to build a 
homegrown system, that would be enormously difficult for them.
    But they don't have to do that anymore. That was the case 
six, 7 years ago. But now there are a host of service providers 
who can do this for them without them having to reinvent the 
wheel.
    Senator Durbin. So, Mr. Bercu, let's go to the purchase 
that he made today--Mr. DelBianco made today--at your store and 
believes he should have been charged the Virginia sales tax and 
he was charged the Austin, Texas.
    Mr. Bercu. Well, evidently, there's a mistake in the sales 
tax, assuming this is exactly what happened. But the bill, as I 
understand it, specifically protects small retailers by 
choosing certified data providers and certified back ends for 
our websites that would cover all of this. If there was a 
mistake made, obviously, as a retailer, I would certainly 
refund the extra money. But that's not particularly a big 
issue. I actually did not know about this, and I will certainly 
check with our provider to find out what happened. I don't 
know.
    Senator Durbin. So the bill would actually simplify it?
    Mr. Bercu. The bill would make it much simpler, as I 
understand it. It would, number one, protect me as long as I'm 
using the certified data providers, as I said. And, also, it 
would give me a place to go look for those certified data 
providers without even having to look for myself.
    Senator Durbin. Thank you.
    Thank you, Mr. Chairman. I appreciate your kindness in 
allowing me to ask questions.
    The Chairman. Thank you, Senator Durbin.
    Senator Alexander.
    Senator Alexander. Mr. Chairman, I've pretty well had my 
say, and I thank you for that. There are a lot of Republican 
members here. Let me just ask one question of Mr. Peterson, who 
has been involved a while. It's about the Quill decision that 
Senator Ayotte certainly properly asked about.
    The way I read the Quill decision, it says the following. 
The Supreme Court decision said 20 years ago it was too 
complicated to allow states to require out-of-state sellers to 
do the same thing in-state sellers do. But the Supreme Court 
said, quote, ``This aspect of our decision is made easier by 
the fact that the underlying issue is not only one that 
Congress may be better qualified to resolve, but also one that 
Congress has the ultimate power to resolve. No matter how we 
evaluate the burdens that use taxes impose on interstate 
commerce, Congress remains free to disagree with our 
conclusions.'' That's the Supreme Court.
    Accordingly, Congress is now free to decide whether, when, 
and to what extent the states may burden interstate mail order 
concerns with a duty to collect use taxes. What's different 
today?
    Mr. Peterson. Thank you, Senator Alexander. There is a lot 
that's different today, because, actually, in 1992, the Supreme 
Court based that decision on the 1967 decision they had made, 
and it was effectively a stare decisis decision where they 
said, ``We're not going to overturn the decision we made in 
1967,'' because there had been an industry that had developed 
around that decision.
    But the difference in 1992 was they said, ``This is 
interstate commerce.'' They eliminated the due process issue 
that they had raised in 1967. They said that this is just an 
interstate commerce issue, and Congress has the authority to 
regulate interstate commerce. And if Congress wanted to act, 
they would be able to do so, and they would be able to set the 
rules in which states became engaged in regulating interstate 
commerce.
    Senator Alexander. Thank you, Mr. Chairman.

            STATEMENT OF HON. KAY BAILEY HUTCHISON, 
                    U.S. SENATOR FROM TEXAS

    Senator Hutchison [presiding]. The Chairman has stepped 
out. Let me say that I apologize for being so late, and I 
especially welcome Mr. Bercu from Texas. I'm just going to give 
my opening statement in the record so that you don't have to 
listen to it.
    [The prepared statement of Senator Hutchison follows:]

  Prepared Statement of Hon. Kay Bailey Hutchison, U.S. Senator from 
                                 Texas

    Thank you, Chairman Rockefeller, for holding this hearing, and I 
appreciate all of the witnesses for being here today to provide 
testimony.
    I would especially like to thank Mr. Bercu from BookPeople in 
Austin, Texas, for traveling here to testify before us today.
    In my state of Texas, which does not have an income tax, we rely 
heavily on revenue collected by sales taxes.
    This is why during my tenure in the Senate I have worked so hard to 
ensure the permanent deduction of state and local sales taxes. Without 
this deduction, taxpayers in Texas would see their Federal tax bills 
increase by an average of $500 for 2012.
    However, the issue that we are discussing today--uncollected sales 
taxes resulting from online purchases--is of concern to many brick-and-
mortar businesses and needs to be explored.
    Bipartisan legislation introduced by my colleagues, Senators Enzi, 
Alexander, and Durbin, takes a first step in trying to address this 
issue.
    The Marketplace Fairness Act provides states two options if they 
choose to collect sales taxes from remote sellers: they can either join 
the Streamlined Sales Tax and Use Tax Agreement or they can adopt six 
minimum requirements to streamline their taxes.
    My home state of Texas has not joined the Agreement, and under the 
Marketplace Fairness Act, Texas would not be required to do anything.
    Instead, if Texas wanted to collect taxes from remote sellers, it 
would have the choice of whether and how to pass the minimum 
requirements set forth in the bill.
    I strongly support states' rights, and I think they should have the 
power to decide for themselves if it is in their constituents' best 
interests to change their respective state laws to collect sales taxes 
from remote sellers.
    I hope the focus of today's hearing will be on how the Marketplace 
Fairness Act might affect states' ability to collect sales tax and the 
impact--if any--the law might have on small businesses.
    Additionally, I would like to hear from the witnesses today about 
the cost implications that may be placed on states or businesses 
implementing the minimum streamlining requirements in this bill.
    I also look forward to hearing the perspective of Mr. Bercu, whose 
business, which has an online presence in addition to his brick-and-
mortar store in Austin, is currently collecting sales taxes from remote 
sales.
    I believe the discussion today will provide an opportunity to 
explore these issues and whether further dialogue and steps are 
necessary to ensure that states' rights are not constrained by this 
legislation.
    Thank you.

    Senator Hutchison. I was working on the cybersecurity bill 
and just couldn't get away on time. We are working feverishly 
to get an agreement to move forward on cybersecurity. So I do 
apologize.
    But let me go ahead and call on the next person who was 
here, which would be Senator Ayotte. But let me ask after 
Senator Ayotte--Senator Klobuchar has to preside at 4, so I do 
want to allow her to get some questions in. So I'll go ahead 
with Senator Ayotte, and then go to Senator Klobuchar.
    Senator Ayotte. Thank you.
    Mr. Misener, can you tell me how many accountants work for 
Amazon?
    Mr. Misener. Accountants--I presume you're meaning with 
respect to tax.
    Senator Ayotte. Well, just roughly.
    Mr. Misener. So, globally, somewhere between 30 and 40.
    Senator Ayotte. And how many work in your IT department?
    Mr. Misener. Oh, gosh. Remember, we're an IT company, so 
we've got thousands of----
    Senator Ayotte. A lot? Thousands?
    Mr. Misener. Yes, ma'am.
    Senator Ayotte. And, you know, how many actually probably 
work for you that--we talked about accounting. You probably 
have a pretty big even government affairs department.
    Mr. Misener. Sadly, no.
    Senator Ayotte. No?
    [Laughter.]
    Senator Ayotte. Well, there's probably plenty that would 
love to step up there. But here's the difference. Do you think 
that my company from New Hampshire, NobleSpirit, the company I 
mentioned, has a team of IT professionals and accountants? 
Because if this goes forward, many companies in a state like 
mine of New Hampshire and many businesses across this country 
are now going to have to not only comply with--to find a way 
for the software that you all described that's so easy to 
administer--we've already seen some of the difficulties--but 
also then they are subject to filing tax returns in every 
single one of those jurisdictions. Isn't that right?
    Mr. Misener. Not necessarily, Senator. What I would point 
out to you is that NobleSpirit is an eBay power seller, which 
entitles them to eBay tax remittance services provided by----
    Senator Ayotte. OK. Well, let's take another small business 
that's not connected there. They don't have to file taxes in 
those states? They're not going to have to file tax returns? 
Did I miss something?
    Mr. Misener. They need to file, but they don't need to do 
it themselves. The service providers are enabled and doing it 
already for tens of thousands of sellers.
    Senator Ayotte. And that doesn't cost them something?
    Mr. Misener. Oh, sure, it costs them something.
    Senator Ayotte. Sure. And----
    Mr. Misener. Not 30 or 40 accountants globally, not 
compared to Amazon. They pay a lot less.
    Senator Ayotte. But let's just agree with me that your 
small business doesn't have the team of IT or accountants. 
Correct?
    Mr. Misener. They don't need it for this purpose.
    Senator Ayotte. But they also are going to have to file tax 
returns that they never had to file before in every 
jurisdiction that they sell something to if they fall outside 
the exemption. Correct?
    Mr. Misener. They don't. They need to have it done on 
behalf of them.
    Senator Ayotte. On their behalf. They've got to pay someone 
to do it in some way. Correct?
    Mr. Misener. Yes.
    Senator Ayotte. And, in addition, if they are then audited 
in any of those jurisdictions, they have to then go and defend 
themselves against an audit in other states. Correct?
    Mr. Misener. That's correct.
    Senator Ayotte. And that costs--lawyers. You might have a 
few lawyers that work for you as well.
    Mr. Misener. Not any good ones.
    [Laughter.]
    Senator Ayotte. OK. Well, let's face it. That's very costly 
for small businesses as well. So this is not really comparable 
to compare Amazon in terms of how you could treat those costs 
versus the burden on a small business.
    And I would like to ask Mr. DelBianco to comment on that. 
And, if you could, comment also on the fact that the small 
business exemption is so small compared to other exemptions, 
even those set by our Small Business Administration.
    Mr. DelBianco. Thank you, Senator. You asked about 
NobleSpirit. And think about it. NobleSpirit, more than likely, 
has a cash register for walk-up sales. They have their own 
website. They may have a catalog. I don't know if they take 
phone orders. And they may sell on places like eBay and Amazon, 
just like Silver Gallery that I described earlier on the chart 
that you have in front of you.
    When that happens, they have multiple information systems 
that handle the sale. It isn't just one place. So each and 
every step of their fulfillment, from the cash register in the 
front to the back office, all have to be tied into this free 
software, and there's where the tremendous expense is incurred.
    You asked about the small seller exception. Just think 
about this for a moment. The $500,000 small seller exception--
think about it--$500,000 times 75 percent cost of sales at a 25 
percent gross margin means they're spending $375,000 for the 
cost of goods, then thousands more for marketing, advertising, 
traveling to trade shows, more for computers, programming and 
accountants, supplies and insurance, shipping, and a website.
    When you do that, you're lucky in a good year if there is 
anything left at all to pay the owner. A $500,000 retail seller 
is no more than a sole proprietor. This small seller exception 
needs to be much higher.
    Senator Ayotte. Mr. Peterson, states have to opt in to the 
Streamlined Sales Tax Governing Board. Is that right?
    Mr. Peterson. Yes, ma'am.
    Senator Ayotte. And why shouldn't states like mine that 
don't have a sales tax be able to opt out?
    Mr. Peterson. There's a misunderstanding of what it means 
to opt-in and opt-out. You opt-in to Streamline because you 
agree to change your laws so they look like your neighbor's 
laws. New Hampshire wouldn't have any laws to change. You're 
comparing New Hampshire retailers with South Dakota, the state. 
South Dakota, the state, decided to join Streamline because 
they wanted their sales tax administrative practices to look 
like North Dakota's and to look like Tennessee's.
    The state of South Dakota doesn't have any authority over 
the retailers in South Dakota. They can't tell a retailer in 
South Dakota, ``You have to collect somewhere else.'' So 
there's a difference between the two concepts.
    Senator Ayotte. But one concern I have about this whole 
thing is that in a state like mine, like New Hampshire, where 
we don't have a sales tax, essentially, what you're going to 
have is a whole host of my businesses are going to now have to 
not only file all of the paperwork we talked about, to be the 
essential tax collector for other businesses, but then we're 
now in a position where states who have actually chosen, like 
mine, to not have a sales tax--I think they should have the 
option of opting out of these collection requirements to be 
fair to those states.
    The Chairman [presiding]. Senator Ayotte, I don't mean to 
be rude, but you're over your time, and a lot of people have to 
ask questions. Will you excuse me?
    Senator Ayotte. Yes. I'm sorry.
    The Chairman. Thank you.
    Senator Klobuchar.

               STATEMENT OF HON. AMY KLOBUCHAR, 
                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. Thank you very much, Mr. Chairman. Thank 
you to our witnesses. Today we're here to discuss the 
Marketplace Fairness Act, and while I know that there are 
people that like to complicate this issue--and I understand 
that there are concerns from certain states--I really see it as 
something quite simple.
    We are here because of Quill v. North Dakota, my 
neighboring state of North Dakota. In that 1992 case, the 
Supreme Court made clear their decision need not be the final 
word. And they wrote, ``our decision is made easier by the fact 
that the underlying issue is not only one that Congress may be 
better qualified to resolve, but also one that Congress has the 
ultimate power to resolve.'' And that's what we need to do.
    I thought Senator Alexander's testimony, when he talked 
about how it's really two words--this is about states' rights 
and the states' abilities to do their work. And we have the 
fact that this isn't a new tax. This is simply about collecting 
taxes. And I note that several Governors were noted as 
supporting this bill, including Governor McDonnell of Virginia 
and Governor Christie of New Jersey. I would also like to add 
Governor Dayton of Minnesota.
    And, Mr. Chairman, I would like to put this letter in the 
record.
    The Chairman. So ordered.
    [The letter follows:]

                                         State of Minnesota
                                      Saint Paul, MN, July 31, 2012
Hon. Amy Klobuchar,
Senator,
United States Senate,
Washington, DC.

Dear Senator Klobuchar:

    Thank you for your co-sponsorship of the bipartisan ``Marketplace 
Fairness Act'' (S. 1832). I am pleased to learn the Senate Commerce 
Committee will hold a hearing on ``Marketplace Fairness'' and strongly 
support your leadership to move this measure forward.
    Today, e-commerce constitutes a large and growing share of retail 
sales in the U.S. as well as an expanding tax enforcement problem, 
which states can ill afford during a period when their resources are 
already spread thin. More specifically:

   E-commerce sales comprised 5.6 percent of all U.S. retail 
        sales in the fourth quarter of 2012.

   During the 2011 Holiday Season, U.S. consumers purchased 16 
        percent more over the Internet than during the 2010 season.

   Minnesota lost about $394 million last year from e-commerce 
        and remote sales upon which tax is legally due but not 
        collected. This lost revenue comprised over 7 percent of 
        Minnesota's general sales tax liability in 2011. Not collecting 
        those obligations translates into an increased burden on other 
        taxpayers and reduced funding for public services and 
        infrastructure.

   The inability to collect the legally due tax on e-commerce 
        provides a significant and unfair tax advantage for on-line 
        retailers to the detriment of Minnesota's Main Street 
        businesses. In Minnesota, local brick-and-mortar retailers 
        assess sales tax at a rate of 6.875 percent (the state sales 
        tax rate, excluding local rates), while their on-line 
        competitors typically assess no sales tax.

   Customers buying the same item are taxed in different ways 
        depending on where the purchase is made. This encourages tax 
        avoidance and undermines revenue stability and tax fairness.

    Under the U.S. Supreme Court's 1992 Quill Corp. v. North Dakota 
decision, only retailers who have physical presence in a state can be 
required to collect and remit sales tax from consumers. While a use tax 
is technically imposed and owed by the consumer, very few comply with 
or are even aware of their tax obligation. It is important to note that 
e-commerce as we know it today did not exist in 1992.
    In Quill, the court explicitly held that Congress can resolve this 
unfairness once sales tax simplification occurs and there is no burden 
to interstate commerce under the Commerce Clause. This presents an 
important opportunity for Congress to resolve this inequity, as you 
well know.
    As you also know, Minnesota has already simplified its sales tax 
system through participation as a full member of the multi-state 
Streamline Sales and Use Tax Agreement (SSUTA). The 24 SSUTA states 
have adopted common practices, definitions, and processes, allowing 
remote sellers to comply at little cost to them, thus removing any 
``undue burden'' on interstate commerce.
    Your support for S. 1832 allows SSUTA states like Minnesota-which 
have implemented the administrative reforms sought by the retail 
community-to collect the sales tax revenue to which they are already 
legally entitled.
    States should have the right to collect sales tax on sales in their 
state as long as they do so responsibly by not placing an ``undue 
burden'' on interstate commerce. I agree with Tennessee Governor Bill 
Haslam's recent comments on behalf of the National Governors 
Association before the U.S. House Judiciary Committee when he stated, 
``This discussion isn 't about raising taxes or adding new taxes. This 
is about states having the flexibility and authority to collect taxes 
that are already owed by their own in-state residents.''
    I have attached two charts. The first chart shows the magnitude of 
lost sales tax revenue from 2004 through 2011 in Minnesota, as well as 
the breakdown across three categories of lost sales tax revenue:

        a. Retail/consumer e-commerce sales tax gap--$149 million in 
        2011

        b. Mail order/consumer remote sales tax gap--$55 million in 
        2011

        c. Wholesale/business remote sales and use tax gap--$190 
        million in 2011

    The second chart shows the increasing trend of retail e-commerce 
sales as a percent of total U.S. retail sales from 2000 to 2012, now at 
5.6 percent as noted above.
    Thank you for your leadership on the Marketplace Fairness issue and 
for being a true champion for equitable tax reforms, which will benefit 
not only Minnesota but the entire nation.
            Sincerely,
                                               Mark Dayton,
                                                          Governor.
Attachments (2)

cc: Chairman, Senator Jay Rockefeller
Ranking Member, Senator Kay Bailey Hutchison
Senator Al Franken
Congressman Tim Walz
Congressman John Kline
Congressman Erik Paulsen
Congresswoman Betty McCollum
Congressman Keith Ellison
Congressman Colin Peterson
Congressman Chip Cravaack
Congresswoman Michele Bachmann

                              Attachments






    Senator Klobuchar. Very good. And then also on the record a 
list of 138 small businesses in Minnesota who recently wrote to 
me in favor of this bill.
    The Chairman. So ordered.
    [The information referred to follows:]

    
    
    
    
    
    

    Senator Klobuchar. Thank you. And, by the way, included in 
that group is Mary's Morsels and Catering, Big Guy's Bar, 
Sleepy Eye Floral and Design, and the Chapel of Love. I mention 
that only because this isn't only about big stores. It is also 
about small businesses who seem to believe that they will find 
a way to do this and do this right.
    And that actually is my first question of you, Mr. Bercu. 
In addition to your store in Austin, you also sell books on 
your website. Is that correct?
    Mr. Bercu. Yes.
    Senator Klobuchar. And this means that, at a minimum, when 
you sell a book through your website to a customer in Texas, 
you're already required to collect the sales tax. Is that 
right?
    Mr. Bercu. Yes.
    Senator Klobuchar. But in reality, you already collect 
sales tax from every state with a sales tax that you sell books 
in, despite the fact that even if this legislation was signed 
into law, you would be exempt. But you already do that with 
other states?
    Mr. Bercu. Yes, I do.
    Senator Klobuchar. OK. So I'm assuming you----
    Mr. Bercu. Apparently with some errors. But I will state 
that I do collect the sales tax through a data provider that I 
will be speaking with. I do not do this in my store, and I do 
not have a gigantic store. I do not do this in my store with a 
data provider giving me the actual rate at an actual location. 
That's being done at the back end, and that's being provided to 
me. It is actually very simple for me, though incorrect, 
apparently, for Mr. DelBianco. And I will see what has happened 
with that by talking with that data provider.
    But, yes, I do that already, and it's not complicated. And, 
actually, if I could simply respond to one other thing you 
said----
    Senator Klobuchar. That's fine. Please do.
    Mr. Bercu --Senator, is that the idea that I shouldn't be 
concerned about the other jurisdictions makes no sense to me. 
If my customer is in this other jurisdiction, I am somehow 
using public services, roadways, et cetera, to get my product 
to that consumer. That's who I'm collecting the tax from, and 
I'm not collecting it for me. I'm collecting it for their 
state. It's not that hard.
    Senator Klobuchar. And, Mr. Misener, one of the concerns 
that was raised by Senator Ayotte and others is that it's a 
burden of complying with this myriad of tax laws. And while I 
think the testimony we're hearing today is going a long way to 
showing why this isn't the case, I think that argument also 
ignores the fact that in the absence of a Federal law, states 
are passing laws for dealing with the sales tax on a piecemeal 
basis, which is creating its own myriad of problems. Do you 
want to describe that to us?
    Mr. Misener. Yes, Senator. Thank you. It certainly is the 
case that many states have attempted to enact and some have 
passed unconstitutional legislation to try to solve this state 
by state. We have opposed that vehemently, because it is 
unconstitutional. The right to resolve this issue is the right 
of Congress alone.
    I might also point out that the Supreme Court could easily 
take this case again next week and rule differently. And if the 
Supreme Court did that, there would be no small seller 
exception. There would be no simplification. And so right now, 
the benefit to small businesses of getting the legislation done 
without a Supreme Court decision is manifest.
    Senator Klobuchar. Thank you very much. And I appreciate 
the chair and the ranking member allowing me to go out of order 
here because I have to preside. And I wanted to end with this. 
It's just that not only is this an issue for businesses in our 
state, small and large, it's also clearly an issue for our 
state governments and, as I read, with their ability to be able 
to collect taxes.
    It's forecast that it's something like $300 million and 
some a year in Minnesota. I note that we are today on the fifth 
year anniversary of the I-35W bridge collapse. Clearly, our 
states need money for infrastructure, and our businesses need 
to have an even playing field.
    Thank you very much to all of you.
    The Chairman. Thank you, Senator.
    Senator DeMint.

                 STATEMENT OF HON. JIM DeMINT, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Senator DeMint. Thank you, Mr. Chairman. We hear a lot from 
the group here today of the term, fairness, and that we need to 
be fair to different retailers, tax them the same. I've had a 
chance to work with a lot of retail businesses. I've been in 
the marketing business most of my life.
    And there are a lot of different business models with 
different cost structures. I think all of you know that. You 
can be a freestanding retailer, where you have to be a 
destination, much different from locating in a mall, where they 
help attract the people, but your cost of doing business is 
very different.
    You could locate downtown and pay city taxes, but you get 
some of the advantages of sanitation services and fire and 
others that you might not get in a county location. Or you 
could open a retail store in an outlet on an interstate 
highway, and you locate it across a state line in a low tax 
area, which is not fair to those states around it, because 
people from many states come to that outlet to shop. And they 
pay the tax where they buy it, not where they're going.
    We talk about fairness. But we don't require bricks and 
mortar retailers to pay taxes based on where the consumer is 
from. We don't check their ID. Let's be clear about what this 
bill does. It mandates that online companies with no physical 
presence in a state collect sales taxes for any state that 
demands it. So this is a mandate on businesses.
    And we talk about this being owed by consumers, but if the 
tax is not collected, the consumer is not audited. The business 
is audited. If you don't collect enough taxes that you're 
supposed to, you'll pay it. Your consumers won't.
    I've been here a long time, and I've seen many businesses 
that used to be small. They grow, and then they use their 
political clout to come here to advantage themselves and to 
erect barriers to entry for smaller companies.
    Mr. Misener, you've laid it out very clearly. You've said 
that this is very difficult for small companies to comply with. 
But they can use companies like yours and eBay, which basically 
forces a lot of small companies that could otherwise be 
marketing on their own to go through these major companies.
    One of the great things about the Internet is the 
entrepreneurs that have been developed on the Internet and able 
to market direct to consumers. They don't have to pay the cost 
of a mall. They don't have to pay--but, see, it's a different 
business model.
    We talk about the roads or whatever. Sales taxes are 
collected, and they pay for education and other things in that 
state. But we've never had a situation where we as a Federal 
Government require a business to be subject to every other 
state. Are we going to ask those businesses to comply with 
labor laws, to pay income taxes based on business that they've 
done?
    It's not a new concept. We've had different business models 
for years. There have been corporations that primarily do 
business in South Carolina, but they incorporate in Delaware 
where the corporate taxes are lower. But we don't have the 
right to charge them income taxes based on the business they do 
in South Carolina. They picked a business model and located 
somewhere else.
    And I think what we're doing here is trying to suggest that 
all these business models are the same. Every retailer is 
different, whether they're bricks and mortar or online. And if 
someone picks an online business model, just like Amazon was 
years ago--and, Mr. Misener, you know that when you had no 
physical presence in other states, you tended to support the 
status quo.
    But now that you've changed your business model to build a 
location so you can really leapfrog some of your competitors, 
not only are you an online business, but you can do same-day 
delivery by having a physical presence. Now that you're going 
to have to pay taxes in all of these states where you have a 
physical presence, you want to come back and tax those other 
companies that don't.
    The online companies don't have police service and fire 
service and sanitation service and municipal parking and all of 
the things that come with that business model. We can't make 
them the same. And so fairness being that we tax them the same 
is inconsistent with everything else that we're doing here.
    And, again, the more testimony I hear--oh, they're only 
subject to one audit a year--from 50 states? Are they going to 
have to fill out a sales form and send to every state and be 
taxed? They won't have any problem, I guess, if they've done 
that through one of these service companies.
    Mr. Misener, how much are you going to charge your 
marketers to collect this sales tax, percentage wise?
    Mr. Misener. We already do, and it's 2.9 percent of the tax 
collected, which is not a profit for us. So this is not a 
profitable business. This is part of the host of services that 
we provide to our third-party sellers, which number over 2 
million. So we are an enabler of small businesses. Over 2 
million small businesses sell through us.
    Senator DeMint. Three percent, about half the whole sales 
tax in South Carolina just to collect it.
    Mr. Misener. No, sir. It's a percent of the sales tax. So 
on a $100 purchase in my home state of Virginia, that's $5 in 
tax and that's about 15 cents.
    Senator DeMint. So they'll have to bill that cost into the 
cost of their product.
    Mr. Misener. Like small businesses offline do, of course.
    Senator DeMint. Oh, sure. But isn't that putting them at a 
disadvantage? They're actually paying more tax now than brick 
and mortars.
    Mr. Misener. I'm sorry. I don't understand that.
    Senator DeMint. Well, you're adding 3 percent to the sales 
tax that they would pay in South Carolina.
    Mr. Misener. No, Senator. That's actually a 
misunderstanding, and I'm sorry I wasn't clear. That 2.9 
percent is covering our out-of-pocket costs for the credit card 
processing fees. And so the brick and mortar retailer who 
swipes the card has the same fee structure. They're paying 
credit card companies money out of their pockets for the----
    Senator DeMint. So you're not charging them anything to 
collect the sales tax on their behalf?
    Mr. Misener. We are not making a profit on it.
    Senator DeMint. But you are charging them.
    Mr. Misener. Yes, sir. Why would we pay Visa for that 
privilege?
    Senator DeMint. Well, I would encourage my colleagues to 
look back at this. The Federal Government cannot make retail 
business models the same. Whether they're bricks and mortar, 
online, or some combination, which we're seeing all over the 
country, they pick a business model with different cost 
structures. We cannot make all those the same. A lot of 
businesses have decided to do business different ways.
    For us to come in and change the rules now to subject every 
online business to 50 states, I think would be an unprecedented 
action on our part. I certainly plan to oppose it, and I would 
encourage all of you to think. Is the next step--does an online 
business need a business license in South Carolina if they're 
located in New Hampshire? Should they collect income tax if the 
people of New Hampshire are using--I mean, they're making a 
profit.
    What about tort laws? What's the next step? I think we are 
setting--we've got a precedent that we're establishing here 
that's going to open a door that I think all of us are going to 
regret.
    Thank you, Mr. Chairman.
    The Chairman. You were two and a half minutes over.
    Senator DeMint. Thank you for your courtesy.
    The Chairman. No, I'm just trying to keep some people happy 
here.
    Senator Begich left briefly. He should theoretically be the 
next one on our side, but he left, so he has to be punished.
    [Laughter.]
    The Chairman. So it's going to Senator Pryor. And then let 
me say----
    Senator Begich. I was taking care of a West Virginia 
constituent problem, but that's OK.
    [Laughter.]
    The Chairman. So Senator Begich has to speak. Senator Thune 
is gone. Senator Blunt, Senator Boozman, and Senator Cantwell 
and Senator Pryor. And I'll do it in proper order.

                 STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Thank you, Mr. Chairman. And I would like to 
just start by making a comment on what Senator DeMint said. I 
do agree completely that there are different business models, 
and not every single business model should be treated the same 
way.
    But I do think in a retail setting, one thing we--another 
way to look at it, I guess, would be we could look at the point 
of sale. And in a traditional bricks and mortar transaction, 
when the customer walks in the store, that's the point of 
sale--the customer and the store in the same place.
    In an online transaction, you could say--and I think the 
point of sale is actually at the person's computer. He's 
sitting in his home. To me, that's the point of sale, and 
that's why I'm OK--that's one of the reasons why I'm OK with 
the local sales tax applying.
    Let me start with you, if I may, Mr. DelBianco. You said in 
your testimony a few moments ago that your clients, your 
members, don't get any benefit from paying a local sales tax. 
Is that right?
    Mr. DelBianco. I said they will be forced to collect the 
tax and remit and file for states where they don't enjoy any 
local services. After all, they ship things through common 
carrier, like a UPS or a post office. But they send no trucks 
or sales reps into those states.
    Senator Pryor. Well, I disagree with you on that, because 
the product that you're shipping is carried on a truck, a 
delivery vehicle like UPS or FedEx, and that UPS or FedEx truck 
is using the local streets that are paid for by local taxes. 
And if that package is dropped at someone's door and it is 
stolen, it's the local police that come and investigate. They 
don't call you back in your home state. They go where that 
delivery is made.
    And, also, likewise, if you use FedEx or UPS and there's a 
handling center there where they're loading their trucks and 
doing all that, if there's a fire, it's the local fire 
department that shows up there. I think you are getting benefit 
by the customer paying local sales tax there.
    Mr. DelBianco. Senator, FedEx and UPS in those cases are 
paying plenty of taxes--property taxes, payroll taxes, income 
taxes--in the states where they operate today. That's the whole 
notion of common carrier. And, of course, Congress is free to 
say that we don't agree with Quill, because Quill said--the 
case said that because the office products company used common 
carriers, they didn't have sufficient physical presence.
    So Congress has the power to do so, but it also has the 
obligation, I think, to protect interstate commerce and require 
true simplification, not just token simplification. Senator 
Enzi and Senator Dorgan years ago had 16 significant minimum 
simplifications baked into the bills that would authorize 
Streamline. Well, they're all gone now, because the states 
figure that that's a little hard to do. We now have a bill with 
merely token simplifications, and we still permit all of these 
jurisdictions.
    Senator Pryor. Well, I don't necessarily agree with what 
you said, but I do want to move on to my next question. And 
that is, you know, we talked about just a moment ago your 
example of using Mr. Bercu's website to purchase a book and 
getting the wrong sales tax. I'm not that familiar with the 
sales tax in Virginia and how that works in buying something 
online through his store.
    But, to me, that is another reason--I think you've made 
another point on why we should support this legislation, 
because this legislation would protect a retailer that has made 
a mistake, whether it's inadvertent or--you know, however that 
works, it would protect the retailer so he doesn't have the 
liability.
    Mr. Bercu, do you have any comment on that?
    Mr. Bercu. Well, yes. That's exactly what the act provides. 
The other thing about this is I believe that, with the 
simplified procedures that the act contemplates, there are 
going to be a whole slew of people getting in the business of 
data provision. There will be other companies, and the costs 
will go down, just like every other thing that is suddenly 
available. Suddenly there will be a market, and suddenly there 
will be a value, and suddenly there will be people who decide 
they can beat Amazon's 2.9 percent and do some other deal to 
sell that data or sell those services to individual retailers.
    So I don't see this going forward as being a problem. And I 
guess the most salient factor is what one of the senators 
pointed out earlier, that $500,000 exempts 99 percent of the 
people doing online business in the first place. That's a 
substantial number of people doing online business, and I 
believe that the 1 percent that are left probably already are 
taking steps to make this not be a problem.
    Senator Pryor. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Pryor.
    Senator Boozman.

                STATEMENT OF HON. JOHN BOOZMAN, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Boozman. Thank you, Mr. Chairman.
    Mr. DelBianco, you were talking about a lot of pressure 
coming from the big box retailers in regard to getting this 
done. What do you say, though, to Main Street Interiors in Van 
Buren, a town adjacent to where I grew up in Arkansas? They 
have the problem of starting out 8.5 percent behind. And so 
we've been talking about fairness and stuff. How do you compete 
in that situation?
    Mr. DelBianco. The big box retailers who already have to 
collect from their websites in every single state today would 
benefit from even a tiny bit of simplification. But this 
Interiors company--when they sell to customers in other states, 
other than Arkansas, they would be incurring brand new 
obligations to collect for all those other states when they're 
taking advantage of the opportunity to ship things at a lower 
price to customers in other states.
    For them, there's nothing remotely simple about having to 
collect and file for all those different jurisdictions. So most 
businesses on main street today use the Internet as a way of 
surviving and competing against the big box stores and by 
Amazon.
    Senator Boozman. Why does the vast majority of small 
businesses in Arkansas and many of our other states disagree 
with that? I mean, they're overwhelmingly--small business is 
overwhelmingly for this.
    Mr. DelBianco. Small business, small retail, has been 
really taking it in the shorts for decades from shopping malls, 
from the advent of big box stores, and certainly by giant 
retailers. Small business is under assault, and the small 
business retail environment has changed dramatically. It's now 
very top heavy as opposed to being bottom heavy.
    So those businesses are under assault, and they might well 
believe that that price difference associated with the consumer 
who wants to save sales tax will be the answer to all their 
problems. But there's no evidence, other than anecdotal, that 
consumers will go online to avoid sales tax. A few do, Senator, 
and I'm aware of that. A few do.
    But the vast majority of people who buy online--probably 
your family included--we buy online for convenience and 
selection, and we pay for the shipping. And often we pay sales 
tax for 17 of the top 20 e-retailers today.
    The Chairman. You haven't answered his question.
    Senator Boozman. Well, again, really what you're saying is 
that the vast majority of retailers who are overwhelmingly 
supportive of this--they don't really understand why they're 
not doing as well as they would like. I'll tell you why I think 
they're not doing it.
    I've got three daughters. The youngest is 26. The oldest is 
probably 33 or 34. They go into a store. They get their iPad 
out, and they start doing the prices. And when they compare a 
price online, where they don't have to pay 8.5 percent more 
compared to the price there, there's definitely a differential, 
and that's making a difference, in my way of thinking, and, 
again, to the vast majority of small businesses throughout 
America.
    And that's why the compact states have been so successful 
in states like Arkansas and Texas in getting these things 
passed, in the sense that the states have voted to do this.
    Mr. DelBianco. Senator, Texas is not a member. Texas got 
Amazon to collect simply because Amazon has a distribution 
center in Texas.
    Senator Boozman. Well, Arkansas is, and many other states 
are.
    Can you comment on that, Mr. Peterson?
    Mr. Peterson. Thank you, Senator. Your retailers are most 
certainly impacted by the price differential that comes from 
that sales tax. There's no question whatsoever. Consumers 
expect the retailer to collect the sales tax. They don't even 
think about the sales tax as an obligation of their own. That's 
an obligation of the retailer.
    So they look at the bottom line. Is that price cheaper than 
what I can get somewhere else? And they're certainly going to 
buy where there isn't a--where there's a price difference. They 
don't think about that as they're cheating the system. They 
just think, well, the price is cheaper. It's 8.5 percent 
cheaper. Why wouldn't I buy here?
    Getting to Senator Ayotte's point a little while ago, the 
software companies that the Streamline states have certified do 
everything that she's concerned her New Hampshire retailer is 
left to do on their own. It figures out what the sales tax rate 
is. It knows what's taxable. It knows what's exempt. It keeps 
track of sales tax holidays. It keeps track of whether or not 
shipping is taxable or shipping is exempt. It files the sales 
tax returns for that business and makes the sales tax payment 
for that business.
    And if that person is audited--and there isn't a business 
in this country that gets audited by 50 states every year. No 
business in the country does. Wal-Mart doesn't get audited by 
every state every year. These companies handle the audit 
defense.
    Senator Boozman. How many states have gone through the 
process?
    Mr. Peterson. Twenty-four states, sir.
    Senator Boozman. Twenty-four states. OK.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Boozman, very much.
    And now the noble senator from Alaska.

                STATEMENT OF HON. MARK BEGICH, 
                    U.S. SENATOR FROM ALASKA

    Senator Begich. Thank you, Mr. Chairman. Thank you very 
much. Let me say a couple of things first. This is an issue, as 
a former mayor, I dealt with more than I wanted to in the 
Municipal League as well as the U.S. Council of Mayors, but 
also as someone--and I was listening to your commentary. I'm 
probably one of the few that can comment on this in this way.
    We own five retail shops, and they're a variety of shops. 
My wife started them. She owns them and operates them. But we 
have five different retail shops, and so we're a brick and 
mortar business, but I also have a brother that runs an online 
business, which is not in the ether, either. There is some 
location.
    So I come to this with kind of mixed views on it. But I 
think there is a basic fairness issue here of how do you ensure 
that if you're a retailer--it doesn't matter if you're a brick 
and mortar that's invested quite a bit in your community and 
you're doing a lot of things in your community. You're paying 
for the roads and everything else that goes along with it. And 
then you have to compete against an online, which avoids this 
issue and doesn't have to deal with the sales tax.
    So I hear your commentary. I'm not sure I buy it, just so 
you know. And I come from one of your people. I'm a retailer, 
and I've been in the retail business myself. My wife has, like 
I said, five different stores. So we're not top heavy, as you 
described. I wish we were. It would make our life a lot easier.
    But we innovate all the time with the products and services 
we do, but when you then have to compete against someone online 
with the exact same product, and they can do things to undercut 
you, it does create a competitive edge that we do not have and 
can't gain. So you can tell me all the research you want to do. 
I'm telling you from a life of 30 years in the retail business. 
So let me put that over there for a second.
    I guess my question is the small business operator--because 
this bill does--I'm not sure of the percent, but I'm just going 
to use the number, $500,000. The question I have to anyone who 
wants to answer it--is $500,000 the right number, knowing as 
time progresses, that number is stale, is stagnant? Does it 
have to be adjusted? Is it the right number? And is it the 
number that over time will clearly protect most of the small 
businesses that don't have to deal with this issue?
    I guess everyone wants to answer. So I'm going to go 
quickly down the line.
    Mr. DelBianco. Senator, if you took a look at the top 500 
retailers last year, they were responsible for over 90 percent 
of the uncollected sales tax. And that starts with Amazon at 
the top end at $50 billion and a small company called Summit 
Sports at $15 million at the bottom end of that. So businesses 
under $15 million could be protected and the states could still 
collect 90 percent of their sales tax. And that kind of a 
number would adjust over time if you wanted to target it on the 
top 500 collecting. Those are the businesses that can afford 
it.
    Senator Begich. That data--will you share that with me?
    Mr. DelBianco. It's in my testimony, sir.
    Senator Begich. Great. And the reason I say this--when I 
was mayor, we changed the law, because we used to tax 
everybody's inventory. And what we found is for 96 percent of 
the people we were taxing, it cost us more to collect it than 
what we were receiving. So we created an exemption--all but the 
top 4 percent and got a big chunk of our money, in essence. So 
your point is a good one.
    Next?
    Mr. Peterson. Thank you, Senator. The half a million 
dollars that's in the Marketplace Fairness Act was arrived at 
by looking at where it was cost effective for states and 
retailers to file sales tax returns. But it was looking at the 
world that exists today. Six months after this bill passes, a 
year after this bill passes, sales tax administration software 
will be ubiquitous. It will be everywhere. The cost of 
collecting will go down radically.
    Now, the people I represent aren't advocating a different 
rate. But the reason it doesn't exist today is because there is 
no law that requires it to exist. Once that law happens, this 
will be everywhere, and the cost of administration goes down 
radically.
    Senator Begich. It's like my son just got--he's 10. I 
forget what it's called, but the little piece that you can hook 
up to your iPad and Visa--he wanted to get it for my wife to 
help her do more charges. So I'll leave it at that.
    Mr. Bercu. I agree with Mr. Peterson. And, frankly, when 
credit cards started, there was a charge, and there still is a 
charge, for credit card processing. Every one of us in retail 
pays that charge. It is a cost of our doing business. You know 
that if your wife has stores.
    Senator Begich. My wife tells me about it.
    Mr. Bercu. And we worry about it, but that is a cost of our 
businesses. And if we have to incur a slight cost to deal with 
sales tax remotely, because we're selling something remotely, 
it strikes me as eminently fair and eminently fair for us to 
bear that cost. And so I don't see it as a big problem. I 
definitely agree with Mr. Peterson that in the future, once 
this bill is enacted, we will see this software available all 
over the place, certified all over the place, and the cost will 
have gone down to be--yes, it will be a cost, but it will be a 
tiny one that no one will have any problem bearing.
    Senator Begich. Last person.
    Mr. Misener. Senator, very conservatively assuming 5 
million online sellers in this country through eBay, Amazon, 
through their own channels, only 1 percent of those sellers 
sell more than $150,000 a year. So we're already talking 
about----
    Senator Begich. Online.
    Mr. Misener. Correct. Interstate. So we're already talking 
about a fraction of 1 percent that would be affected with the 
$500,000 carve-out. We would prefer one lower, but we're 
willing to live with the $500,000.
    Senator Begich. Understood. Thank you all very much, and I 
appreciate it.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Begich.
    Now, Senator Blunt.

                 STATEMENT OF HON. ROY BLUNT, 
                   U.S. SENATOR FROM MISSOURI

    Senator Blunt. Thank you, Chairman. I have a statement for 
the record.
    [The prepared statement of Senator Blunt follows:]

    Prepared Statement of Hon. Roy Blunt, U.S. Senator from Missouri
    Thank you, Chairman Rockefeller and Ranking Member Hutchison, for 
holding today's hearing on the Main Street Fairness Act. I also want to 
thank our colleagues Senators Durbin, Enzi and Alexander for taking the 
time to appear before this committee on behalf of this important 
legislation.
    The debate over online sales tax collection, something we've been 
talking about in Congress for more than ten years now, hinges solely on 
fairness and states' rights. I strongly believe that states should have 
the right to decide to collect or not collect sales taxes for online 
transactions. This 10 page bill would simply give them that right--and 
keep up with changes in technology and the way consumers make purchases 
today. States lost this right 25 years ago due to a Supreme Court 
decision well before Internet sales took place or companies like 
Amazon, who is here with us today, existed.
    We all know very well that our current Federal and state tax 
systems are overly complex and burdensome. As we gear up for what I 
hope will be meaningful reform of our tax code, I believe this is the 
right moment to also consider allowing states to level the playing 
field for the $4.7 trillion retail industry and helping states access 
the $23 billion in uncollected sales tax that is owed.
    When I talk to consumers in Missouri about this issue, most are 
shocked to hear that they actually are required by state law to pay 
taxes for their online purchases. As a matter of fact, a study 
conducted by The Winston Group found that 65 percent of people believe 
that ``online retailers are required to collect sales taxes from 
customers just like brick-and-mortar retailers do.'' These same voters, 
72 percent of them, overwhelmingly view sales tax collection as the 
seller's responsibility only.
    If a responsible taxpayer in Missouri wants to report and remit 
taxes for their everyday purchases on Amazon.com such as $65 worth of 
DVD movies, they would need to download a form, fill it out, and write 
a $3.12 check to the Missouri Department of Revenue. By the way, my 
staff was able to quickly determine the sales tax example I just gave 
by logging on to JCrew.com and putting a $65 item into the shopping 
cart feature, along with a Missouri zip code. It's really that simple--
thanks to Paypal, which is owned by Ebay, an opponent of this bill.
    I can't understand why Ebay argues against this legislation, which 
would help both states and retailers alike access affordable software 
to calculate sales tax and increase their annual revenues. This bill is 
good for states that need to maintain their infrastructure and keep 
other tax rates competitive as they look to attract new businesses. The 
effects are equally positive for small retailers who wish to grow and 
hire more employees but need software to assist them in managing the 
checkout process.
    When I think about the issue of fairness, I recall a recent 
conversation I had with a reporter in St. Louis whose wife knows a 
local bridal shop owner. That brick-and-mortar bridal shop loses 
thousands of dollars in dress sales each month as customers come into 
the store to find a dress they like but then leave to purchase that 
same dress online from a seller without `nexus' to their state, thereby 
avoiding sales taxes. This same example is true for countless large 
ticket items and so many other purchases small and large.
    On the heels of the House Judiciary Committee hearing last week, 
I'm pleased that this committee is thoroughly discussing this topic and 
look forward to each of the witnesses' testimony today.

    Senator Blunt. I'm glad to be a co-sponsor of the bill. I 
think I'm going to add to that, in case somebody else hasn't, a 
pretty good outline of conservatives, like the Chairman of the 
American Conservative Union; Governor Mitch Daniels; Chris 
Christie; Congressman candidate for Governor, Mike Pence, in 
Indiana; former Governor Haley Barbour, all making the point 
that if we don't do this, the government is really just picking 
winners and losers.
    I remember when we first introduced this bill, I had a news 
conference in St. Louis, and the TV reporter who was 
interviewing me, immediately when we were done, said, ``You 
know, my wife says she has a friend who has a bridal store, and 
people constantly come in, try on the dress, write down the 
number of the dress they want to order, and then clearly are 
ordering it somewhere else. And she's convinced the only 
difference, more times than not, is the sales tax.''
    And as somebody else was suggesting, maybe Senator Pryor, a 
person came in, and in this case, in this store, parked on a 
public street, used the police protection that's available in 
that community to come in, and, of course, used the store 
itself, but also used all the taxpayer things that they don't 
share. And I think a lot of conservatives share that.
    Mr. Peterson, the Quill case has been mentioned a lot. In 
the Supreme Court ruling in 1992, they said--and I'll put this 
with my statement, too. They said, quote, ``This aspect of our 
decision is made easier by the fact that the underlying issue 
is not only one that Congress may be better qualified to 
resolve, but also one that Congress has the ultimate power to 
resolve.'' Do you want to comment on that?
    Mr. Peterson. Thank you, Senator. The states were very 
heartened when the Supreme Court said in 1992 that their 
decision really rested on the interstate commerce case, because 
you do have the authority. And at that point in time, the 
states knew that this was going to be a negotiated settlement--
what do they need to do to convince you that this is something 
that you should give to them--knowing full well that there 
would have to be obligations put on them, because you're not 
going to pass something that just gives them carte blanche. And 
I think some of the statements made by the other senators give 
some effect to that.
    Quill was decided long before the Internet because it was 
stare decisis of 1967. When the Bellas Hess case was created in 
1967, it was a catalog case, and I think it was reasonable for 
the Supreme Court in 1967 to say that perhaps the technology 
didn't exist for a retailer to have a reasonable chance of 
complying.
    In 1992, it was getting much better. In 2012, the 
technology is immensely different than it was in 1992. It is 
immensely different today than it was when we started 
Streamline. We didn't even imagine when we started Streamline 
in 2000 that the software that the certified service providers 
provide today would do as much as it does today, because we 
couldn't even imagine that kind of technology existing in 
something as simple as this.
    This is a map of the United States with every sales tax 
rate on it. I can push any spot in this map, and it'll tell me 
what the exact sales tax rate is for that jurisdiction. This is 
relatively simple stuff.
    Senator Blunt. Did anybody on this panel submit the numbers 
to the Committee on the amount of e-commerce this year, 
estimated next year--I mean, huge growth. It's up 16 percent 
last year from 2010. The estimate is it will be up another 15 
percent this year from 2010 up to $224 billion.
    Mr. DelBianco, the one other thing I want to pursue--your 
thought is if we did go in this direction--I understand all of 
your arguments not to do that--that we could have a bigger 
exemption number.
    And then, Mr. Misener, I think you believe the number may 
be too big already. And if the two of you would, just talk 
about that a little bit.
    Mr. DelBianco. Senator, it's not just that. There are three 
elements of this that have always been there in Streamline. The 
first was true simplifications. The conditions that were in 
place when we started Streamline have all disappeared. They're 
now allowing thresholds, multiple sourcing rules, separate 
returns, separate audits for every state. There was an idea of 
one rate per state. That's gone. There's no requirement for 
vendor compensation.
    The first thing is put the true simplifications back in, 
and I put it in my testimony. The second is a strong small 
seller exception. And the third is enforcement mechanisms, 
because if this thing starts going awry, and Missouri-based 
businesses tell you, ``Please get me out of this,'' that 
business can't try to hold the other 45 states to the standards 
of simplification. There's nothing in this bill to allow a 
business to sue for enforcement against the other states.
    Senator Blunt. All right. And I think I'm out of time. And 
I'll look at the comments you previously made on this, Mr. 
Misener.
    Thank you.
    The Chairman. Senator Blunt, you were waving something 
around, talking about putting it in the record, and I want to 
put something in the record. Tell me what to put in the record.
    Senator Blunt. In the record I'd like to put this 
statement, what conservatives are saying in support of the 
Marketplace Fairness Act, and then a specific part of the 
Supreme Court decision, where they say not only is Congress may 
be better qualified to resolve this, but has the ultimate power 
to resolve it. So I'll add those two things to my statement.
    The Chairman. It is so ordered.
    [The information referred to follows:]

          What Conservatives are saying in support of S. 1832,
                      the Marketplace Fairness Act

    ``There is no more glaring example of misguided government power 
than when taxes or regulations affect two similar businesses completely 
differently.'' Al Cardenas, Chairman of the American Conservative Union

    ``The only complete answer to this problem is a Federal solution 
that treats all retailers and all states the same.'' Governor Mitch 
Daniels

    ``I too--along with governors like Governor Daniels and others--
urge the Federal Government and the Congress in particular to get 
behind Senator Lamar Alexander's legislation to allow states to be able 
to make theses choices for themselves . . .'' Governor Chris Christie 
(NJ) 5/31/12

    ``Congress should not be in the business of picking winners and 
losers.'' Congressman Mike Pence

    ``Since the Quill ruling, at least two facts have changed: (1) the 
proliferation of computers to calculate taxes due on sales--just as 
shipping costs are determined based on Zip Code--and (2) a state 
agreement on streamlining and simplifying sales taxes so that it is 
easier to collect and remit sales taxes wherever a company does 
business.'' National Governors Association (11/28/2011)

    ``There is simply no longer a compelling reason for government to 
continue giving online retailers special treatment over small 
businesses.'' Former Mississippi Governor Haley Barbour

    ``Current policy grives remote sellers a price advantage, allowing 
them to sell their goods and services without collecting the sales tax 
owed by the purchaser. This price difference functions like a 
subsidy.'' Hanns Kuttner, Hudson Institute
                                *  *  *
    The Supreme Court actually noted in their decision that this 
disparity in tax law should be clarified by Congress. They stated:

        ``This aspect of our decision is made easier by the fact that 
        the underlying issue is not only one that Congress may be 
        better qualified to resolve, but also one that Congress has the 
        ultimate power to resolve. No matter how we evaluate the 
        burdens that use taxes impose on interstate commerce, Congress 
        remains free to disagree with our conclusions . . . 
        Accordingly, Congress is now free to decide whether, when, and 
        to what extent the States may burden interstate mail order 
        concerns with a duty to collect use taxes.''

    The Chairman. Gentlemen, thank you very, very much. It's 
very strange for me, because, in a way, it strikes me as such a 
simple matter, a fairness matter, a simple matter. The software 
has already solved most of it. Has all the software been 
coordinated? I know not. But I worry not. And it became 
intensely sort of mathematically, algorithmically difficult 
about halfway through, which I sort of couldn't understand and 
didn't worry about.
    So I want to thank you. This is a very important subject. 
People care very strongly about it, as you can tell. You've 
taken your time to come and enlighten us and to be forthright 
with us, which you all have. You've been an excellent panel. I 
thank you, and this hearing is adjourned.
    [Whereupon, at 4:10 p.m., the hearing was adjourned.]

                            A P P E N D I X

    Prepared Statement of Hamilton Davison, President and Executive 
             Director, American Catalog Mailers Association

    The American Catalog Mailers Association (ACMA) thanks Chairman 
Rockefeller, Ranking Member Hutchison, and the Senate Committee on 
Commerce, Science, and Transportation for this opportunity to present 
its views on the efforts of states to impose tax and tax collection 
obligations on retailers located outside of their states and who have 
no physical presence in those states, all per the Marketplace Fairness 
Act, S. 1832. The bill would give states the authority to require out-
of-state businesses to collect sales or use taxes. Such efforts 
represent neither Federal nor state tax reform, but merely states 
seeking to impose a 1930s tax regime on 21st Century commerce rather 
than reforming their tax regimes and seeking Congressional help. 
Effectively, states are seeking to impose business activity taxes on 
companies with no physical presence, no employees, and no political 
voice in the state. Such a move is bad for the economy, hurtful to the 
affected companies, moves the marketplace toward less equity, and fails 
to solve acute revenue issues for states and municipalities.
    Founded in 2007, ACMA is the only industry association that 
advocates specifically for catalog marketers. As the primary voice of 
the Catalog Industry, ACMA represents its members on issues that 
directly concern their immediate and long term commercial interests 
such as tax issues, postal rates, regulations and technical matters; 
environmental issues; and regulatory and government relations
    ACMA is also a member of TruST, the coalition for True 
Simplification of Taxation, a recently-formed group whose association 
members are all filing written testimony that ACMA has read and concurs 
with. More information on TruST can be found at 
www.TrueSimplification.org.
    As part of this written testimony and our presence at the hearing, 
ACMA would like to respond to the charge ``real companies do not care 
about this issue.'' To illustrate how erroneous a claim this is, ACMA 
has gathered more than 120 letters from remote marketers--primarily 
companies that sell via catalogs--all of whom explain in specific 
detail the harm this bill would cause their companies, growth, and most 
notably their employment. It is notable that this quantity of letters 
was assembled in only a few business workdays between the notice of 
last week's House Judiciary Committee hearing on H.R. 3179 and the 
deadline to submit that testimony. This underscores the veracity of 
opposition to that bill as well as S. 1832 and clearly addresses 
concerns that no real opposition to this change exists.

1. Background
    ACMA would like to address the current movement rallying behind the 
so-called Marketplace Fairness Act. The bill is hardly fair and would 
do much harm to the marketplace. It presents a serious threat to 
catalog, online, and other direct marketers because it would require 
the collection of sales taxes in more than 9,600 state and local tax 
jurisdictions, with differing rates, taxable product categories, 
definitions, sales tax holidays, and reporting and audit requirements. 
If enacted, it would result in lost sales, confused customers, daunting 
administrative burdens, repetitive audits, and expensive assessments 
without impartial recourse. The market value of direct marketing 
businesses would be similarly affected.\1\
---------------------------------------------------------------------------
    \1\ Abe Garver, Focus Investment Bankers as originally published on 
Seeking Alpha on October 9, 2011 and also found at http://
www.focusbankers.com/publications/articles/Valuations/articles 
webonlyretailers.asp
---------------------------------------------------------------------------
    The argument that current nexus standards result in an ``uneven 
playing field'' is patently false. National retail chains receive many 
state and local tax benefits and other incentives to locate stores in 
particular areas. These include rebates of property and sales tax 
(TIFs), subsidies for utility lines, training allowances and tax 
deductions for new hires, etc. Employees of businesses located within a 
jurisdiction use education and public services. Remote sellers get none 
of these government benefits, yet would be burdened with collection of 
the tax to fund these subsidies. In fact, remote sellers are obliged to 
pay these taxes whether or not they collect them from customers, 
effectively making this a new tax on remote marketers.
    The U.S. Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 
(1992), ruled that without specific authorization from Congress, states 
could not impose tax collection burdens upon remote sellers that have 
no ``physical presence'' as this would interfere with interstate 
commerce. Moreover, if allowed by Congress, the myriad of state tax 
jurisdictions with resulting variance in rates, definitions, and audits 
would create a complex and administratively costly nationwide sales tax 
collection system. The costs of that collection are a tax on the out-
of-state business.

2. Hardships on Businesses
    Consider the potential situation of several ACMA members:

    1. Dr. Leonard's Healthcare Corp., based in Edison, NJ. This 40-
year-old, privately-owned and operated company is very much the catalog 
mail order equivalent of a main street store. Dr. Leonard's provides 
clothing, undergarments, general merchandise, healthcare related 
products and shoes tailored to meet the special needs of mature 
customers from across the country. A sizable number of Dr. Leonard's 
customers are in their 70s, 80s and even their 90s. More than one-third 
of the company's orders still come in an envelope with check enclosed. 
Many of their customers rely on mail order purchases of products from 
Dr. Leonard's that are simply not available locally or are of a 
sensitive nature, and a large majority of their customers do not have 
access or are not comfortable using a computer or the Internet to 
order.
    Dr. Leonard's operates out of a several states and on the order 
form of all Dr. Leonard's catalogs is a note indicating ``residents 
please add applicable sales tax for NJ, NY, NE, OH, there is no sales 
tax on clothing and shoes in NJ''. (See Appendix I for a picture of a 
Dr. Leonard's order form.) Many of Dr. Leonard's customers get this 
wrong either by paying the wrong rate or not paying the tax at all. 
Imagine if the company's catalog order form had to have a list with the 
tax rates from more than 9,600 taxing jurisdictions for customers to 
decipher. It would be impossible for Dr. Leonard's to explain the tax 
instructions across all the different jurisdictions in the limited 
space available on a printed order form. And if the older consumers the 
company serves are confused on how to calculate the tax, or which rate 
should apply, there's a very good chance they just won't order at all.
    For the elderly consumer who is confused with what's going on with 
sales tax, Dr. Leonard's would end up absorbing the unpaid tax rather 
than chasing after customers for the unpaid or under-paid tax. The 
significant harm to its business in chasing after customers for unpaid 
or incorrectly remitted sales tax would be twofold: (i) the cost burden 
of collecting from their customers would be substantial and 
unsustainable, and (ii) the confusion, irritation and negative feelings 
its customers would have toward the company over their shipments being 
held up pending payment of sales taxes would cost the company many lost 
orders--and customers.
    As a small company, Dr. Leonard's would also face the tremendous 
burdens of trying to figure out whether each transaction's tax is 
correct or not, and remitting it to then being subject to sales tax 
audits from all those different taxing jurisdictions.
    2. Littleton Coin Company, based in Littleton, NH. This fairly 
small catalog company was founded in 1945 after its founder Maynard 
Sundman returned from World War II. Littleton Coin allows Americans 
across the country the opportunity to enjoy the hobby of coin 
collecting from the comfort of their homes. In addition to Littleton's 
mailed catalogs, customers see can find its products in print 
advertisements in newspapers and magazines. They can also use 
Littleton's ``coins on approval'' service where the company mails 
customers coins for them to review at their leisure at home and then 
decide whether to buy them or send them back to the company.
    Littleton's customers have aged with the company. More than one-
third of its customers are 65 or older. More than two-thirds of 
Littleton's orders come through in the mail. And more than two-thirds 
of the mailed-in orders are paid by check.
    This would be impossible for Littleton Coin to properly explain the 
tax calculation in its print advertisements, for which space is at even 
more of a premium than on its catalog order forms. This is a critical 
part of Littleton's business and any customer confusion in this area 
would severely damage its business, and its relationships with 
customers.
    3. National Wholesale, based in Lexington, N.C. This 60-year-old, 
family-owned and operated company that provides a full line of 
clothing, undergarments and shoes tailored to meet the special needs of 
mature female customers from across the country. A sizable number of 
National Wholesale's customers are in their 70s, 80s and even their 
90s. More than one-third of the company's orders still come in an 
envelope with check enclosed. Many of its customers rely on mail order 
purchases of products from National Wholesale that are simply not 
available locally, and a large majority of their customers do not have 
access or are not comfortable using a computer or the Internet to 
order.
    Like many catalog marketers that operate out of a single state, on 
the order form of all National Wholesale catalogs is a note indicating 
``North Carolina residents please add 6.75 percent sales tax.'' (See 
Appendix I for a picture of a National Wholesale order form.) Despite 
this simple directive, many of National Wholesale's customers still get 
this wrong either by paying the wrong rate or not paying the tax at 
all. Imagine if the company's catalog order form had to have a list 
with the tax rates from more than 9,600 taxing jurisdictions for 
customers to decipher. It would be impossible for National Wholesale to 
explain the tax instructions across all the different jurisdictions in 
the limited space available on a printed order form. And if the older 
consumers the company serves are confused on how to calculate the tax, 
or which rate should apply, there's a very good chance they just won't 
order at all.
    For the elderly ladies who are confused with what's going on with 
sales tax, National Wholesale would end up absorbing the unpaid tax 
rather than chasing after customers for the unpaid or under-paid tax. 
Like Dr. Leonard's and Littleton Coin above, attempting to chase 
customers for the correct tax amount or delaying shipments while 
discrepancies are resolved is not feasible. Thus, collecting and 
remitting the complex tax schemes of over nine thousand jurisdictions 
will cause significant harm to their business and customer 
relationship.
    4. The Country Store, based in Chelmsford, MA. The Country Store 
catalog contains clothing, jewelry, and home goods all uniquely 
targeted at an older clientele with merchandise not available in 
stores. More than 66 percent of The Country Store's customers are over 
65 years of age, and 32 percent of its customers place mail orders with 
checks enclosed. Similarly, The Country Store also would have to either 
simply pay the sales taxes it would be unable to collect from its 
customers or risk confusing or losing its customers altogether.
    5. Miles Kimball Company, based in Oshkosh, WI. Nearly two-thirds 
of this company's customers are 65 years of age or older; in fact, 
almost half its customers are 70 or older. Among all its customers, 
one-third of them still make their catalog purchases by mailed-in 
orders using personal checks. Needless to say, Miles Kimball faces the 
same impossible task of having to explain the assorted taxing 
jurisdictions as National Wholesale does.
3. Puts an Entire Market Sector At Risk of Failure
    Although a majority of catalog customers pay by credit card and a 
significant number of such customers order online, the education and 
conversion processes for collecting from so many taxing jurisdictions 
around the country are almost as difficult as the ACMA members 
referenced here.
    Some seeking to overturn the Quill precedent legislatively claim 
that this matter can be handled quickly and efficiently with free look 
up software, or that concerns of complexity and cost are overstated. 
This simply is not the case. Each remote marketer has invested 
substantial resources to build enterprise software systems that run 
their businesses. Everything that touches or relates to the order flow 
or the revenue flow of the business is affected including those modules 
that track inventory, take orders and maintain order history, and bill 
customers to collect revenues. All company legacy systems need to be 
modified to account for this change, imposing a significant conversion 
burden on remote marketers. Also required are ongoing maintenance costs 
to keep descriptions and tax requirements up to date, ongoing training 
of customer service personnel, and additional financial reporting and 
compliance.
    If the benefit were significant for the states and municipalities 
involved, then perhaps this extra cost might be justifiable. The 
reality is that forcing remote marketers to collect and remit sales and 
use taxes will add less than 1 percent to the total current tax 
collections for states and municipalities nationwide.
    S. 1832 puts tens of thousands of remote marketing companies at 
risk of failure. A perusal of the letters ACMA has assembled bears this 
out as owners and executives document the specific harm the collection 
of sales and use taxes represents to their businesses.
    Remote marketing also supports a large supply chain of ``mom & 
pop'' businesses, inventors, artists and artisans, manufacturers, 
distributors and importers who often lack the scale necessary to 
distribute via large national retail chains. Moreover, remote marketers 
necessarily draw on a large variety of vendors and supply chain 
partners in the creating of catalogs, design of websites, and operation 
of businesses that would also be adversely affected by S. 1832.
    Should S. 1832 be put into law, many smaller catalogers will find 
it almost impossible to compete as already thin profit margins erode 
further. Putting an entire sector of the economy and the many jobs they 
represent at risk for such a small change in tax collections simply is 
not cost justifiable.

4. Hardship on Consumers
    In addition to their positive impact on the national economy, it 
should be noted that remote marketers play an important role in meeting 
distinct consumer needs and requirements, needs that are not generally 
met by large, sophisticated retail chains.
    Catalog and Internet sales allow consumers to efficiently select 
goods that may not be readily available in their local market. They 
allow convenient shopping for single parent households or dual income 
families where the adults have precious little free time during typical 
store hours. They bring a variety of hard to get or unique products to 
the market that do not have large enough demand to be carried in 
traditional ``brick and mortar'' retail store locations. They provide 
privacy to purchase merchandise that is embarrassing or uncomfortable 
to purchase in a retail shopping environment. Remote sellers cater to 
the needs of rural Americans, disabled consumers and older shoppers who 
may have difficulty driving or walking.
    In fact, remote marketing and catalogs specifically bring a wide 
variety of social, cultural and economic benefits to Americans that are 
not otherwise available. See ACMA's white paper ``The American Catalog 
Experience: Catalog Marketing's Social Importance to American Consumers 
& Culture,'' attached herein as Appendix II. We ask that this be 
incorporated into the hearing record.

5. Conclusion
    The physical presence requirement from the Quill law must remain 
for the collection of sales and use taxes. If that law is to be 
changed, it must not be done so without significant simplification 
reform of state sales tax regimes and the establishment of a fair and 
impartial dispute resolution mechanism. Our national economy is in no 
position to afford such a burden absent statutorily-mandated 
simplification and dispute resolution provisions also being included in 
the law.
    ACMA urges Congress to uphold both the current status quo of the 
twice-tested Quill precedent as, in fact, fair and equitable, or to 
take the time to investigate the implications on all remote marketers 
prior to making any change to the existing laws.
                                 ______
                                 
                                 
                                 
                                 
                                 
   APPENDIX II: The American Catalog Experience: Catalog Marketing's 
           Social Importance to American Consumers & Culture

             Catalogs Bring A Variety of Good to Americans

Overview
    The catalog industry has a wide-sweeping impact on American 
culture, well beyond the economic benefits of employing millions of 
people, paying millions in federal, state and local taxes, and 
conserving energy and natural resources. The American catalog 
experience has significant and important social benefits to American 
culture and consumers.

Catalogs are Good for American Consumers and Our Quality of Life
   Catalog shopping is convenient and available 24/7/365 from 
        one location accessed by mail, telephone or online. Oil 
        consumption, traffic congestion, and parking are not factors.

   Catalog shopping is unconstrained by geography, thus 
        eliminating physical and distance boundaries. Catalogs put a 
        world of products in the hands of Americans.

   Catalogs allow instant service whenever and wherever people 
        wish to shop. They are accessed anywhere, home or business.

   Catalogs define ``universal access'' for merchandise and 
        commerce.

   Catalog shoppers consistently report it is easier to get 
        detailed product knowledge and excellent customer service over 
        the phone than elsewhere (or even to find a sales associate). 
        There is usually no or little waiting time to get help.

   Catalogs fight the homogenization of products driven by 
        retail consolidation (``the Wal-Martization of America''). 
        Retail economics force aggressive rationalization of 
        merchandise assortment. If retailers do not sell a high number 
        of pieces per individual store, they cannot exist. If 
        catalogers, who usually offer a much broader assortment, do not 
        sell a high number of pieces nationwide, they cannot exist. 
        Retail and catalog are different business models and both are 
        important for the growth of the American economy.

   Catalogs create an easy way to comparison shop without 
        necessitating multiple trips to different stores.

   Catalogs make sending a birthday, holiday or special 
        occasion present to anyone, anywhere a convenient pleasure, 
        helping Americans stay connected in an increasingly mobile 
        society.

   Catalogs allow people to shop for potentially embarrassing 
        products in the privacy of their own home without worrying 
        about being out in public--for instance, a cancer patient 
        buying a wig, or consumers buying unusual or plus-sized 
        clothing in the privacy of their home rather than in public at 
        stores. Personal hygiene, medical and disability-related 
        products are frequently purchased from catalogs for enhanced 
        privacy.

   Some of the specialty products sold by catalogs includes 
        diabetes-related products, organic products, business 
        productivity tools, pharmaceuticals, and other specialized 
        goods for which a ready retail market might not otherwise 
        exist.

   Catalogs contribute to the quality of life by providing a 
        convenient, fun, compelling leisure time experience. 
        Recreational shopping is an important pastime for many 
        Americans.

   Catalogs remain part of a shared experience in America that 
        remains relevant, human and enjoyable in the increasingly 
        impersonal age of ecommerce and electronic media.

   Catalogs form part of our collective experience. Who doesn't 
        remember the childhood pleasure of paging through the often-
        remembered Sears Wishbook catalog?

Catalogs are Good for the Environment
   Catalogs may be America's biggest carpool.

   Catalogs have a low carbon footprint and are becoming more 
        environmentally friendly every year. Yes, catalogs use paper, 
        but the modern advances in forestry management have made trees 
        a sustainable crop. In fact, there are more trees in North 
        America today than there were at the time of Columbus's voyage. 
        Plus, advances in the recycling of paper continue to develop 
        and it takes 60 percent less water and energy to make recycled 
        paper than to break lignin into virgin fiber. Please see 
        www.catalogmailers.org for more information on Catalogs and the 
        Environment.

   Catalogs make the phone ring, a nearly environmentally 
        neutral communications method in a society increasingly aware 
        about ways to cut our carbon footprint.

   With very few exceptions, catalog companies demonstrate 
        responsible mailing practices, honoring consumer demands 
        concerning mailing frequency, contact methods, and individual 
        consumer needs and wishes. Catalogers are, by the precise and 
        stringent economics of cataloging, self-regulating, and cannot 
        afford to do otherwise.

Catalogs are Good for the Economy
   Catalogs stimulate consumer demand, both for direct and 
        retail, fuelling the largest engine of economic activity we 
        have.

   Catalogs are highly targeted and merchandised to meet 
        specific consumer interests and needs, thus representing an 
        effective and efficient marketing channel to maintain and 
        strengthen American competitiveness.

   Catalog brands have a long-term relationship with Americans 
        that is part of the shared American experience. The ability to 
        come back to trusted brands and companies for the things we 
        need, knowing the consistency and helpfulness we will find as 
        consumers can be relied upon again and again. This is a high 
        ideal of American commerce.

   The robust American catalog shopping experience allows for a 
        shift in power from the retailer to the consumer.

   Catalogs are mailed predominately to willing customers who 
        may have a pre-existing relationship with retailers, or to 
        those consumers who have requested a catalog from a company 
        they are interested in shopping with, or to other ``opted-in'' 
        consumers who have expressed interest in receiving marketing 
        information or specific offers.

   Catalogs help small businesses succeed.

Catalogs Encourage Small Business
   Catalogs allow many small businesses to quickly and 
        efficiently access specialized products that keep them 
        competitive despite their niche focus, small scale or remote 
        location.

   Catalogs efficiently and effectively serve niche avocations 
        and vocations, serving Americans and allowing these businesses 
        to be productive at a lower cost of operations. They help 
        ``level the playing field'' with larger companies that have 
        more extensive sourcing operations.

   Catalogs provide an important distribution option for small-
        and medium-sized manufacturers, importers, wholesalers, 
        inventors and designers, all of whom do not have the scale, 
        sophistication or capital to sell their products to the ``Big 
        Box'' retail giants, which demand prices that are impossible to 
        meet.

   Catalogs provide a national market test for new products and 
        the discovery of small niche market opportunities that would 
        otherwise require large budgets and sophisticated deployment. 
        This creates greater innovation and broader consumer solutions 
        than would be possible otherwise. For example, the electronic 
        thermometer, which is now a standard for families with 
        newborns, was developed in exactly this manner.

   Catalogs provide a national audience for small companies and 
        start-up operations, helping keep small business as the largest 
        creator of jobs in our economy.

Catalogs are Good for Disadvantaged and Rural Americans
   Catalogs can be the only alternative for shut-ins, infirmed, 
        handicapped, elderly or those with limited mobility.

   Catalogs provide viable shopping venues for rural citizens 
        who live too far from stores.

   Catalogs provide the older population with well-being 
        benefits. The regular contact with letter carriers and delivery 
        service providers who deliver packages to the home reduce the 
        sense of isolation and provide beneficial human contact and a 
        ``safety-net,'' helping seniors stay connected to the community 
        and creating a sense of normalcy so critical to well-being and 
        mental health.

   Catalogs enable people to lend a helping hand to those they 
        do not know, including the poor, destitute or imperiled 
        throughout the world (consider, for example, Heifer 
        International, CARE, NWF or other nonprofits that have catalog 
        businesses).

   Catalog companies do not have to be located in urban centers 
        and can instead create quality jobs for rural America. High-
        employment catalog companies are found in locations such as 
        Freeport, Maine; Dodgeville, Wisconsin; Dyersville, Iowa; and 
        many other remote locations.

Catalogs, Their History, and Their Role in American Commerce
   Interstate commerce developed because of catalogs.

   Rural free delivery was spurred on by catalogs.

   Parcel Post developed the required scale due to catalog 
        shipments.

   Early catalog brands were among the first to have a national 
        identity.

   More than half of America shops via catalogs.

   Catalogs allow marketers to have a national footprint 
        without being a mass merchant, having helped develop the idea 
        that we can have national brands without the requirement to 
        open stores in every state.

   Baby Boomers buy more from catalogs--per capita--than any 
        other generation.

   Catalog use increases with the age of the consumer, 
        particularly pertinent in ``the graying of America.''

   Catalogs provide important content to keep mail relevant and 
        welcome in the household.

   Cataloging did $270 billion in sales in 2006 and supported 
        more than 20,000 different firms, as well as thousands of 
        supplier companies and service vendors.

   Cataloging economics fundamentally changed in 2007 and have 
        spurred industry-wide experimentation to reduce mail volumes, 
        down 35 percent two short years later. That's a figure that 
        will likely continue to grow once catalogers perfect non-mail 
        marketing techniques.

Catalogs and the Internet
   As a whole, catalogers were pioneers in the use of the 
        Internet for the sale of products and services to consumers and 
        businesses.

   By in large, catalogers receive about half their orders 
        online depending on the product category and demographic they 
        serve--yet the paper catalog is responsible for generating more 
        than half a company's online sales (some companies report it is 
        upwards of 90 percent). The symbiotic relationship between the 
        paper catalog and online technology yields greater convenience 
        for everyone from single, working moms to full families, to the 
        elderly, to the physically handicapped, further driving social 
        and environmental benefits, time and efficiency.

   Catalogs are also drivers of retail traffic, promoting 
        commerce, jobs, and convenience for brick and mortar retailers.

   With rare exception, every cataloger has sophisticated e-
        commerce deployment, making full use of all established and 
        most emerging, technologies.

   Catalogers largely do not distinguish between mail and 
        Internet as business objectives. They see it as being about 
        communicating with people in the way they want to be reached 
        via media consumers already use. It is also about using the 
        most efficient and desirable means possible to stay in touch 
        with customers. The combination of the catalog plus the 
        Internet creates a very powerful marketing and distribution 
        system that impacts and improves lives.

   Catalogs establish brands then extend those brands' reach to 
        the Internet, offering Americans hard-to-find products at 
        value-based pricing.

   Catalogs help consumers feel confident about online 
        purchases. Catalog merchants have a long and protected 
        tradition of honoring their commitments as responsible, 
        customer-oriented, integrity-driven businesses.

   Catalogs prompt people to tell others through social media 
        (i.e., blogs, Twitter and Facebook) about the products that 
        inspire. This ``viral'' effect of community and commerce has 
        multiplicative financial and emotional benefits. It also 
        increases consumer satisfaction and marketer responsiveness by 
        providing a ready forum for customer comments, reviews and 
        feedback.

   Catalogs provide an alternative transactional method for 
        those Americans concerned about online privacy or transactional 
        safety.

   Catalogs still have the highest order response of any 
        vehicle available to direct marketing. Consumers ``vote with 
        their feet.'' This indicates that a great deal of value is put 
        on the receipt of a catalog that creates a residual benefit for 
        both online commerce and the American economy.

Conclusion
    Since the mid-1990s, many experts have predicted the extinction of 
the printed catalog. However, until the double-whammy of the huge 
postage increase of 2007 and the Great Recession of 2008-2009, catalogs 
in America continued to thrive, aided and enhanced by the maturation of 
Internet marketing. As both the general economy and postal rates settle 
down, it will be proven that ``rumors of catalogs' demise'' continue to 
be over-stated.
    With catalogers' continuously responsive use of recycled paper and 
tree replanting, as well as their close attention to self-regulation, 
this responsible industry is primed for greater growth going forward.
                                 ______
                                 
Prepared Statement of Jerry Cerasale, Senior Vice President, Government 
              Affairs, Direct Marketing Association, Inc.

I. Introduction
    The Direct Marketing Association (DMA) thanks Senators Rockefeller 
and Hutchinson and the Members of the Committee for this opportunity to 
present its views on the Marketplace Fairness Act (S. 1832) and the 
authority of states to require remote sellers to become their tax 
collectors. There are several bills in Congress that would allow states 
to conscript non-citizen remote sellers that have no physical presence 
in the state to become its tax collectors. These efforts are not 
Federal tax reform--they are not state tax reform. These efforts 
represent a request from states that Congress impose a 1930s tax regime 
on 21st Century commerce rather than reforming their tax regimes.
    DMA is the leading global trade association of businesses and 
nonprofit organizations using and supporting direct marketing via 
channels including mail, telephone, direct TV, radio and the Internet. 
Founded in 1917, the DMA currently has over 2,000 member companies 
across the United States and 53 foreign countries.
    DMA would like to discuss the history of state efforts to require 
remote (out-of-state) sellers to become unpaid tax collectors for 
states, including the Streamlined Sales and Use Tax Agreement (SSUTA).

II. History: Streamlined Sales and Use Tax Agreement (SSUTA)
    The U.S. Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 
(1992), ruled that without specific authorization from Congress, states 
could not impose tax collection burdens upon remote sellers that have 
no ``physical presence'' as this would interfere with interstate 
commerce. Moreover, if allowed by Congress, the myriad of state tax 
jurisdictions with resulting variance in rates, definitions, and audits 
would create a complex and administratively costly nationwide sales tax 
collection system. The costs of that collection are a tax on the out-
of-state business. It is significant that these remote sellers' 
businesses do not receive police or fire protection from those states--
they are not present in them. Their employees and their families do not 
receive educational or social services from those states--the 
businesses have no employees located in those states.
    Governments, as well as businesses, face challenging financial 
decisions in these economic times. State legislatures have very 
difficult budget determinations and are looking at both cutting costs 
and increasing revenues. However, proponents of the SSUTA have cited 
grossly exaggerated revenue estimates of uncollected sales and use 
taxes due to remote sales. In particular, proponents have cited a 2000 
University of Tennessee study that includes unbelievable estimates as 
to the amount of the uncollected sales tax. A revised Tennessee study 
lowered its initial estimate from $45 billion to $24 billion--even the 
revised estimates will not be realized.
    It is important to note that the Tennessee study rests on a number 
of faulty assumptions and is not based on U.S. Government data. 
Further, the study's implication that states are ``losing'' a 
substantial portion of their sales tax revenues to electronic commerce 
is simply false. The vast majority of e-commerce transactions are not 
with consumers, but rather with businesses, and such business 
transactions almost always are subject to tax collection or direct 
payment of use taxes by the purchaser. Moreover, the marketplace is 
demanding more rapid delivery of purchased goods. To keep those sales, 
marketers are establishing more and more distribution centers 
throughout the country establishing nexus under Quill in more and more 
states. The ``lost'' tax revenue is shrinking--not growing--due to 
market demand.
    In contrast to the Tennessee study, the independent firm, Forrester 
Research, has estimated that the loss of tax revenue due to state 
residents not paying use taxes for remote sales is $3 billion 
nationwide--a fraction of the $24 billion estimated in the revised 
Tennessee study. A 2007 DMA-commissioned study, based on U.S. Commerce 
Department data, estimates that in 2006 uncollected sales tax 
nationally totaled $4.2 billion. A 2010 study by Eisenach-Litan found 
that uncollected taxes in 2008 totaled $3.9 billion. There is no $24 
billion pot of gold.
    In light of the Quill decision, the states began a project to 
simplify the sales tax regimes that a remote seller would face if 
required to become the foreign state's tax collector. The SSUTA goal 
was to remove that complexity and create a 21st century, Internet-
friendly tax regime to encourage economic growth throughout the 
national marketplace. However, the SSUTA has failed to either remove 
complexity or create that 21st century tax policy standard. To be 
blunt, the SSUTA is a document drafted by tax administrators, and, as 
might be expected, it has resulted in little in the way of tax 
simplification.
    Specifically, the SSUTA:

   Has not reduced the number of sales tax jurisdictions in the 
        Nation, which currently number over 9,600;

   Has not reduced the number of state and local sales tax 
        rates;

   Has not reduced the number of audits to which an interstate 
        seller would be subject (each state revenue department would 
        still conduct its own independent audit);

   Has not established a long-promised uniform vendor 
        compensation to cover the substantial cost of tax collection; 
        and

   Has not established a single remittance procedure.

    Moreover, the Governing Board of SSUTA has granted exceptions to 
its feeble simplification initiatives to win approval of the states. 
Recently, the Board granted an exception from the SSUTA-defined rule 
for Massachusetts when calculating the sales tax on articles of 
clothing over $175. SSUTA will continue to grant exceptions that will 
increase the complexity of sales tax collection. States are enacting 
sales tax holidays--some for all purchases under a capped price; others 
for specific products (such as hurricane preparedness) on a specific 
date. Those actions, while important for the state and its citizens, 
further complicate a nationwide sales tax collection regime.
    As you can see, tax collection has not been simplified since the 
inception of SSUTA. In fact, SSUTA is ``streamlined'' in name only.
    To better appreciate the failings of the SSUTA, it is instructive 
to consider its history. The Streamlined Sales Tax Project was launched 
in 2000 on the heels of two earlier joint government/industry 
initiatives: the National Tax Association (NTA) Communications and 
Electronic Commerce Tax Project, and the Congressionally-established 
Advisory Commission on Electronic Commerce. Both projects had concluded 
that the existing state sales tax system was one of daunting 
complexity, and that true simplification would require sweeping 
reforms.
    Perhaps most emblematic of the SSUTA's failure to achieve genuine 
sales tax reform was the early demise of the single-most important step 
toward simplification: the adoption of a single sales tax rate per 
state for all commerce (both over-the-counter sales and interstate 
sales). Had the SSUTA adopted this so-called ``one rate per state'' 
proposal, this single act could have eliminated the problem of merchant 
compliance with thousands of local tax jurisdictions with different tax 
rates.
    To put this ``one rate per state'' issue in perspective, the United 
States is the only economically developed country in the world with a 
system of sub-state transaction taxes, not only for counties and 
municipalities, but also for school districts, transportation 
districts, sanitation districts, sports arena districts, and other 
local jurisdictions. In light of this wildly complex system, the 
adoption of the ``one rate per state'' standard was the unanimous 
recommendation of the NTA's E-Commerce Project (which included 
delegates of the National Conference of State Legislatures, National 
Governors Association, and U.S. Conference of Mayors) and was in the 
majority report recommendation of the Congressional Advisory 
Commission.
    Those failings increase the burden on out-of-state sellers. Being 
subject to 45 separate state audits requires a tax department. Those 
businesses would be required to have multiple state registrations and 
multiple remittance procedures. The cost stemming from tax collection 
would be passed to consumers, constituting an anti-stimulus at a time 
when our Nation is working to stimulate the economy. Moreover, remote 
sellers with locations only in states that do not impose sales taxes, 
and that, in turn, have no process in place to collect any sales taxes, 
would be required to create an entirely new tax department within their 
company and establish entirely new accounting and ordering protocols. 
Those remote sellers would face even greater burdens.
    Any discussion of tax reform concerning non-citizen companies 
becoming tax collectors for states, should require tax reform in terms 
of simplification of state sales tax regimes. Only after that reform 
should Congress consider granting additional interstate taxing 
authority to the states with the proviso that the tax regime 
simplification must remain in place.

III. The Marketplace Equity Act; The Marketplace Fairness Act; The Main 
        Street Fairness Act
    The bills attempt to mitigate the significant burden forced sales 
and use tax collection places upon non-citizens of a state. Sadly, they 
fail to reduce the tax burden placed upon remote sellers.
    The Marketplace Equity Act grants states three ``simplified'' 
alternatives:

   Require collection of a single blended sales tax rate for 
        use in remote commerce; or

   Require collection of the highest sales tax rate in the 
        state exclusive of local tax rates; or

   Require collection of the applicable state and local sales 
        taxes with the state making available adequate computer 
        software to the remote seller and exempting a seller using the 
        software from state liability for incorrect collection.

    Experience with the Streamline Sales Tax Agreement indicates that 
states will choose the latter alternative. States have failed for the 
past 10 years to reach agreement on single tax rates within a state. 
With the alternative to require collection for 9,600 tax jurisdictions 
on the table, that will be the option of choice.
    The Main Street Fairness Act grants authority to states that join 
the SSUTA. It corrects none of the problems with SSUTA discussed above. 
The bill would grant carte blanche authority to a governing board of 
tax administrators, and as explained above, the governing board has 
shown no restraint amending its system to become more complicated.
    The Marketplace Fairness Act combines elements of the Marketplace 
Equity and Main Street Fairness Acts. It also would grant carte blanch 
authority to a tax administrator governing board and would grant states 
not joining the SSUTA authority to conscript non-citizen businesses by 
simply providing software to the remote vendors.
    Even the SSUTA calls for states to provide collection software to 
remote sellers. This represents a cavalier conclusion that providing 
software is the answer to the tax burden imposed when states conscript 
non-citizen remote sellers to become their tax collectors (unpaid 
collectors under the bills). Tax collection software is not a simple 
plug-in. Many remote sellers use specialized software for order, 
fulfillment, billing and inventory control. That software must be up 
and running 24/7. Adding additional tax collection software cannot 
cause any down-time for the seller. This adds significant cost to 
implement any software. Moreover, the tax collection software must be 
continually updated as states consistently throughout the year tweak 
their sales tax laws. One Internet based company has testified that the 
cost to implement sales tax collection in one state cost over $1 
million, including work hours. Marketers cannot afford that cost. Thus, 
the requirement that states make available adequate software does not 
significantly reduce the burden on interstate commerce notwithstanding 
what proponents of S. 1832 claim. In addition, each state could make 
available different software--a true administrative nightmare.
    Moreover, the Tax Foundation testified before the House Judiciary 
Committee on July 24, 2012 that it had purchased tax collection 
software that was expensive, difficult to use, and found the applicable 
tax rate but failed to determine what was and was not taxable in the 
jurisdiction. In addition, the software failed to include tax holidays 
in its calculations. In essence the software does less than half the 
job. Technology may well be the solution to this issue, but it is not 
ready for prime time at the moment.
    The bills fail to address the burden of 46 potential audits (45 
states and the District of Columbia). Remote sellers would be required 
to have a tax audit department and legal counsel at the ready for 
auditors representing 9,600 taxing jurisdictions. Unlike citizen 
companies, non-citizen remote sellers would be required to go to courts 
in states where they have no political voice to resolve any 
disagreements with state auditors over their tax collection. Any bill 
overturning the physical presence requirement of Quill should, at 
least, repeal the Tax Injunction Act as it applies to disputes on tax 
collection with non-citizen remote sellers.
    The bills fail to address other administrative burdens for non-
citizen conscripted tax collectors:

   There is no provision concerning tax holidays that many 
        states have for specific items, such as back-to-school and 
        hurricane preparedness.

   There is no single, uniform rule for sourcing all 
        transactions in a state.

   There is no mechanism to prevent caps and thresholds on 
        taxable items.

    The bills should relieve remote sellers from liability of state 
claims if the seller uses the state ``available'' software (when that 
software is perfected and ready for prime time). In addition, remote 
sellers should be shielded from liability for consumer claims (some 
coming as class action claims) for errors in sales tax collection when 
using the state provided software. S. 1832 provides no shield from 
those claims for remote sellers even when using state ``available'' 
software.
    The first two alternatives in the Marketplace Equity Act, although 
DMA believes states will not choose them, create for the first time a 
different legal sales tax rate for remote sales vis-a-vis retail sales. 
Although today non-citizen remote sellers are not required to collect 
sales tax, the consumer is liable for that tax--the same tax that is 
applied to retail sales in the consumer's jurisdiction. This bill would 
create a different tax rate--some higher than the retail tax rate and 
some lower. To DMA's knowledge, this is a first--with its own legal 
considerations.
    All three bills assume that the seller calculates the tax for the 
consumer and includes the tax in the amount charged. DMA has many 
members whose customers still pay by check and calculate the shipping 
and would calculate the sales tax themselves. In practice it is 
impossible for a remote seller to provide the check payer (who likely 
orders via the U.S. Mail) with the tax rates for 9,600 jurisdictions. 
Moreover, when faced with an incorrectly calculated tax on a check 
order, the seller faced with an overpayment must either provide a 
refund or credit and contact the customer with that information and 
choice which is very costly. With an underpayment of tax the seller is 
faced with an even more difficult and costly choice. The seller may 
hold the order and request further payment from the customer or may 
simple pay the additional tax itself (a new tax burden). DMA knows of a 
company located in a state with numerous local sales tax rates that 
simply asks consumers paying by check to remit the state sales tax and 
it pays the local sales tax to avoid customer confusion. Administrative 
burden is not washed away by computer software.
    None of the bills provide for any compensation for non-citizen 
remote sellers. The House Judiciary Committee heard from the SSUTA 
witness that the Agreement does provide for vendor compensation. It 
does and has for 10 years. However, the governing board of SSUTA has 
failed for the past 10 years to establish that vendor compensation. 
Vendor compensation in the SSUTA has become an hollow promise--one in 
which businesses have no confidence. We have heard the statements made 
at the July 24th Judiciary Committee before--they are empty and not 
believable. Passage of any Act, without specific compensation in 
statute, would eliminate any further discussion on compensation. It is 
important to remember that these sellers are noncitizens of the state 
and are being conscripted to become tax collectors for that state. 
Compensation would be one facet of equity and fairness.

IV. Conclusion
    The bright-line physical presence test in Quill should remain for 
collection of sales and use taxes without significant simplification 
reform of state sales tax regimes. The burden of each on interstate 
commerce is large, and this is a time when our economy can ill afford 
such a burden.
    DMA urges Congress both to uphold the physical nexus standard of 
Quill rather than extending taxing authority of states to include the 
collection of sales and use tax beyond their borders without 
significant simplification reform by the states.
                                 ______
                                 
   Prepared Statement of Bill McClellan, Vice President, Government 
               Affairs, Electronic Retailing Association

Introduction
    Chairman Rockefeller, Ranking Member Hutchinson and members of the 
Committee, the Electronic Retailing Association (``ERA'') thanks you 
for the opportunity to submit this written testimony on the impact of 
remote sales tax policies for electronic retailers. We believe that the 
Marketplace Fairness Act, S. 1832, would significantly harm American 
businesses, their employees and the customers who rely on a healthy and 
vibrant marketplace. Forcing remote sellers to collect and remit sales 
tax in jurisdictions in which they do not have physical presence or 
``nexus'' will create a new tax burden resulting in considerable 
economic harm. It is our view that new and misguided remote tax schemes 
will materially affect electronic retailers working to survive in these 
harsh economic times. Massive cost increases and new regulatory burdens 
will result damaging consumers and the marketplace on which they rely. 
ERA urges you to protect electronic retailers, both large and small, 
from this new tax burden and continue supporting entrepreneurial 
efforts that create jobs and help stabilize the economy.
    The Electronic Retailing Association is the trade association in 
the U.S. and internationally that represents leaders of the direct-to-
consumer marketplace, which includes members that utilize electronic 
retailing on television and online to engage with consumers. Today, ERA 
proudly represents more than 450 companies in 45 countries including 
many of the industry's most prominent retail merchants. ERA's 
membership consists of a diverse ecosystem of businesses and 
entrepreneurs operating at the cutting edge of innovation who have 
adapted to the rapidly evolving challenges found in the current retail 
landscape.

Background
    For decades state governments have wrestled with the challenges of 
collecting sales and use tax on purchases for out-of-state retailers. 
What began with mail-order catalogs and telephone orders has 
increasingly moved online and now state collectors are blaming online 
commerce for uncollected sales taxes and the decline of Main Street 
businesses. But the tax loss numbers do not add-up. Main Street 
retailers use remote selling techniques to compete with mass ``brick 
and mortar'' retailers, and upon second glance proposals to simplify 
tax systems is not so simple and create a new tax burden for affected 
remote sellers.
    The Streamlined Sales Tax Project (SSTP) began in response to the 
1992 U.S. Supreme Court decision Quill Corp. v. North Dakota, 504 U.S. 
298 for a catalog business that sold office supplies--long before the 
modern era of online commerce. This ruling affirmed a 1967 Supreme 
Court decision National Bellas Hess v. Department of Revenue, 386 U.S. 
753 that state sales tax systems are so complex that no retailer--
whether storefront, catalog, or online--should have to collect sales 
tax for states where they have no physical presence or ``nexus''. The 
new tax burden of compliance would be too high. That left the states 
with two options--radically simplify sales tax systems and come back to 
the Courts for another look, or persuade Congress to force remote 
retailers to collect sales taxes, whether the systems are simple or 
not. States pleading for more taxing authority as the first dot-com 
bubble expanded, and then cried louder as the U.S. economy slowed and 
spending by states outpaced revenues. State tax officials blamed online 
commerce for their fiscal problems based on forecasts of growth in e-
commerce. A short time later state sales tax revenue had recovered. 
Despite minimal progress in simplifying sales tax systems again 
Congress finds itself petitioned to impose new tax burdens on remote 
sellers as state tax coffers run low.

The Numbers
    States, ``brick and mortar'' retailers and other advocates of the 
Streamlined Sales Tax Project (SSTP) continue to use estimates that 
just don't add up. They cite a University of Tennessee study that 
blames online commerce for $23 billion in lost sales tax revenue a 
drastic reduction from the study's prior estimate of $45 billion in 
2000. An independent review from Forrester Research estimates that 
unrealized revenue from uncollected sales tax equates to $3 billion 
nationwide. Similarly, the Direct Marketing Association (DMA) conducted 
a study in 2006 based upon U.S. Commerce Department data that supports 
this level finding that the total amount of uncollected sales tax 
nationwide totaled $4.2 billion. Even if none of that sales tax were 
collected, the loss would be significantly less than the Tennessee 
estimates. Despite these findings proponents of SSTP continue to cite 
questionable estimates from the University of Tennessee study. As 
Congress debates this issue, it is clearly in the public interest that 
an accurate portrayal of estimates are provided as members conduct 
their cost benefit analysis and weigh imposing a new tax burden upon 
remote sellers.

The Facts
    Remote Retailers Collect Sales Tax Today. All online sales already 
are subject to tax. All retailers whether ``brick and mortar'' or 
remote retailer are required to collect sales tax on goods delivered in 
any state where the retailer has a physical presence or ``nexus''. 
Consumers are obligated to pay a ``use tax'' on all purchases even if 
the seller is not required to collect the sales tax. States have done 
little to educate consumers about their use tax obligation or to 
provide them with any easy way to comply.
    New Tax Burdens would harm American Business. Tax collection under 
this new taxing scheme would cause thousands of American businesses to 
be confronted with entirely new tax obligations of collecting and 
remitting taxes for over 9,600 taxing jurisdictions throughout the 
country. This new tax burden would include school districts, 
transportation districts, sanitation districts and sports arena 
districts among others. This will dramatically increases the complexity 
of remote commerce as a viable medium for business activity. State tax 
collectors have failed in their original mission to reduce the number 
of tax jurisdictions. Similarly, State tax collectors have failed to 
reach its goal of uniform definitions for taxable products. Instead, 
each state is allowed to create its own ``gray area'' with respect to 
every term defined in the Agreement. Individual states only have to use 
``substantially the same language'' a recipe for confusion and 
litigation from businesses forced to comply with this new tax burden. 
For consumers, the confusion and complexity are even more problematic. 
Shoppers who pay by check for catalog purchases (a common form of 
payment among the elderly and low income wage earners) must self-
compute the applicable state and local sales tax for each jurisdiction 
to which a mail order purchase is sent. Again, these are major new tax 
burdens--not simplification.
    The inability of ``brick and mortar'' big box retailers to compete 
is overstated. Often ``brick and mortar'' retailers imply that e-
commerce is hurting their business and they cannot compete. Nothing 
could be further from reality. Despite collecting sales tax for online 
purchases ``brick and mortar'' retailers dominate the Internet Retailer 
Top 500 List of the most successful online retail businesses. The 
reality is for decades small retailers (online and off) have lost sales 
to big-box stores. In recent years, the Internet has offered the best 
hope for success of Main Street retailers to compete.
    Efforts to enact online sales tax collection by ``big box'' 
retailers represent an attempt to alter the playing field in their 
favor by unfairly discriminating against remote sellers. Online, 
burdens are much greater for remote sellers who must compute, collect 
and remit tax for thousands of jurisdictions, as compared to an in-
state retailer who collects at just one tax rate. Remote retailers are 
also responsible for the difference if a customer fails to remit the 
correct tax when paying by check--a problem that traditional retailers 
do not confront. Delivery charges usually exceed the amount of sales 
tax on those same goods--leaving remote sellers with no price advantage 
over their ``brick and mortar'' peers. Competitive claims aside, the 
evidence clearly show that ``brick and mortar'' big box retailers enjoy 
an overwhelming advantage both online and off for the foreseeable 
future.

Conclusion
    The Electronic Retailing Association strongly contests efforts to 
force a new tax burden upon electronic retailers called for by the 
Marketplace Fairness Act (S. 1832). Previous Congressional legislation 
has had significantly more simplification requirements that SSTP states 
would have to meet. Industry experience with the Streamlined Sales Tax 
Agreement, dictate that states have not met the minimum standards of 
true tax simplification or reduce the associated administrative burdens 
of this new tax burden for remote retailers. At minimum Congress should 
require robust simplification that ensures a single sales tax rate for 
each state, requires states to adopt a set of single definitions for 
taxable and exempt products, reasonably compensates those asked to 
collect, and provide for adequate liability protection both from state 
tax collectors as well as from class action lawsuits.
    It is also of great concern that software solutions are being 
championed as a solution to this problem without adequate computer 
software solutions available in the marketplace. These systems do not 
currently exist in the marketplace today. Nor can software been seen as 
a simple fix as all electronic retailers use specialized software for 
order, fulfillment, billing and inventory control. The chilling effects 
of software as a ``magic'' solution cannot be overstated. One Internet 
based company recently testified that integrating its systems cost $1 
million for one state alone. This new tax burden alone would force many 
members of the Electronic Retailing Association out of business.
    Therefore we believe that S. 1832 will devastate electronic 
retailers working to survive in these harsh economic times. A growing 
number of industry participants tell us that in recent years they have 
seen a decrease of up to 40 percent in their sales and that the worst 
affected are ``hanging by a thread.'' Participants also report being 
grateful that they have survived the recent economic downturn. 
Enactment of S. 1832 would call into question their survival with new 
regulatory requirements and new tax burdens. We urge you to support 
Electronic Retailers as the industry recovers and resist the urge to 
hamper budding entrepreneurial efforts to create good jobs that help 
stabilize the economy.
                                 ______
                                 
    Prepared Statement of Andrew Moylan, Vice President, Government 
                   Affairs, National Taxpayers Union

Introduction
    Chairman Rockefeller, Ranking Member Hutchison, and distinguished 
Members of the Committee, thank you for the opportunity to submit 
testimony on behalf of the American Taxpayer regarding the issue of 
``marketplace fairness'' in state sales tax collection. My name is 
Andrew Moylan and I am Vice President of Government Affairs for the 
National Taxpayers Union (NTU), a non-partisan citizen group founded in 
1969 to work for lower taxes and smaller government at all levels. NTU 
is America's oldest non-profit grassroots taxpayer organization, with 
362,000 members nationwide.
    Few citizen groups in Washington can match NTU's 43-year history of 
principled advocacy on behalf of taxpayers, which is why I hope you 
will find these comments expressing our serious concerns with S. 1832 
(the ``Marketplace Fairness Act'') and other similar bills helpful in 
the Committee's vital work. You can also find further research into 
these topics on our website at www.ntu.org.
    In short, we believe that such legislation would be profoundly 
detrimental for taxpayers and remote retailers both large and small 
because it would dismantle a vital safeguard in the tax policymaking 
process, create a decidedly ``unlevel'' playing field, impose enormous 
compliance burdens on businesses, and harm beneficial economic 
competition among states by reducing incentives to simplify sales 
taxes.

Current Law and the Marketplace Fairness Act
    Current law prevents tax authorities from forcing a retailer of any 
type to collect and remit its sales tax unless it has a tangible 
physical presence in the state. This is a result of the 1992 Supreme 
Court case, Quill v. North Dakota, where a Delaware-incorporated office 
supplier with no presence in North Dakota was found to not be obligated 
to collect and remit on the latter state's behalf. The Court held that 
extraordinary sales tax complexity rendered the interstate commerce 
burden of mandatory collection on out-of-state businesses too great to 
be constitutionally permissible.
    Though states cannot compel non-resident businesses to collect and 
remit their sales tax, customers are still required to pay ``use tax'' 
in lieu of conventional sales tax on an item. The use tax regime, 
however, is largely ineffectual because it requires self-reporting of 
which most taxpayers are simply unaware and is difficult to enforce. As 
a result, states (and competitors to remote retailers) have been 
clamoring for the Federal Government to override established 
protections by ordaining a dramatic expansion of their tax authority.
    S. 1832 would change current law by allowing states to enforce tax 
collection and remittance obligations on businesses regardless of 
physical presence. This would give states licenses to effectively 
substitute new sales tax requirements on businesses in the place of 
their current use tax systems. The end result would be more sweeping 
tax powers, huge new compliance burdens for businesses, and millions 
(or billions) of new dollars flowing out of the pockets of taxpayers 
and into the hands of state and local governments, many of which have 
failed to control their spendthrift proclivities.

S. 1832 Dismantles Vital Taxpayer Safeguard
    Contrary to the claims of many Marketplace Fairness Act proponents, 
current law is not a ``loophole'' that was implemented as some sort of 
deliberate attempt to advantage Internet retailers in the World Wide 
Web's infancy. Instead, the Court's decision drew on and emphasized a 
bedrock foundational principle of tax policy: the physical presence 
standard. Simply stated, this standard generally prevents tax entities 
from extending their authority beyond their physical borders. As a 
result, businesses and taxpayers alike are shielded from predatory tax 
administration ploys that might seek to target non-residents for 
revenue.
    The physical presence standard is a strong protection from 
overzealous tax collection tactics and a fundamental safeguard in 
American tax policy that is broadly applied as the appropriate boundary 
which states must observe when asserting tax prerogatives. Physical 
presence is a constraint on tax collectors that exists in many other 
areas of tax policy, including business earnings and individual income 
taxes.
    As but one example of the wide-ranging relevance and respect given 
to the physical presence standard, in May of this year the House 
unanimously passed H.R 1864, the ``Mobile Workforce State Income Tax 
Simplification Act.'' This critical legislation, which NTU strongly 
supported, prevents states from requiring income tax filing or 
withholding from workers unless they reside in the state or work there 
for more than 30 days in a calendar year. This common sense criterion 
will prohibit unfair income tax filing requirements on non-residents 
and it has at its core the wise counsel of the physical presence 
standard.
    What the Marketplace Fairness Act would do is erase the physical 
presence standard for the purposes of remote retail sales (but of 
course maintain it for brick-and-mortar sales). The result, as outlined 
further in this testimony, would be an abandonment of the limits on 
taxing powers that have served our Federal system so well for decades--
even centuries--on end.
    In fact, S. 1832's language makes very clear the slippery slope to 
extinction on which it would place the physical presence standard. 
Section 5(b) of the bill reads like an admission that the legislation 
could have grave implications for taxpayers: ``No obligation imposed by 
virtue of the authority granted by this Act shall be considered in 
determining whether a seller or any other person has a nexus with any 
State for any tax purpose other than sales and use taxes.'' In other 
words, the bill's authors are attempting to promise that its language 
strips away the physical presence protection only for sales taxes and 
not with individual or business income levies, for example.
    This is about as comforting to taxpayers as the claims from its 
inception that the income tax would apply single-digit rates to only 
the wealthiest of filers. True, the Sixteenth Amendment and subsequent 
Revenue Act of 1913 didn't expand the tax to its current levels right 
away, but it blew the levee protecting ordinary taxpayers wide open and 
subjected them to a century of ever-creeping taxation. The Marketplace 
Fairness Act would similarly dismantle one of the few strong taxpayer 
protections left: the physical presence standard.

Marketplace Fairness Act Would Yield Distinctly ``Unlevel'' Playing 
        Field
    Proponents of S. 1832 argue that their bill is intended to ``level 
the playing field'' between brick-and-mortar and remote retailers, but 
in reality it would do the exact opposite. While the legislation would 
require remote sellers to collect sales tax on every item, it would 
force them to do so by a completely different and unequivocally harsher 
set of rules than exist for brick-and-mortar sales.
    If the Marketplace Fairness Act were to pass, states could strong-
arm remote sellers into complying with more than 9,600 separate sales 
tax jurisdictions across the country, each of which can issue its own 
unique set of edicts and definitions. The reason is that S. 1832 would 
concoct a ``destination-based'' sourcing regime which compels a 
business to collect sales tax based not on its own physical location, 
but on the location of its customer. An online business would, in turn, 
have no choice but to quiz each and every customer on their residence, 
look up the appropriate rate for their locality, and then remit what is 
collected to a distant tax agency.
    Meanwhile, when a brick-and-mortar retailer makes a sale in one of 
its stores, it doesn't have to jump through any of those hoops. When a 
customer checks out at a register, they are not interrogated about 
their residence and then charged the prevailing rate in that locality. 
This is because brick-and-mortar retailers effectively operate on an 
``origin-based'' sourcing rule, one that collects tax based upon the 
actual location of the business rather than the consumer. Even states 
that technically operate their tax regimes under destination-based 
sourcing rules for traditional retail sales tend to short-circuit them: 
they attempt to mimic origin-based sourcing by simply assuming that the 
``point of delivery'' of an item is not where its customer lives but 
where it gets handed back to the customer at the cash register.
    This clever bit of maneuvering allows brick-and-mortar retailers 
across the country to operate on a system whose compliance, at least as 
far as tax laws are concerned, can be relatively straightforward. Each 
business determines the prevailing sales tax where it is located and 
charges that to all of its customers, regardless of their eventual 
destinations. The Marketplace Fairness Act would deny that 
administrative convenience to remote retailers by pressing them into a 
cross-examination process for each and every customer--in the end, 
decreeing submission to thousands of different sales tax codes.

S. 1832 Imposes Tremendous Compliance and Interstate Commerce 
        Burdens
    Because they would now answer to 9,600 tax jurisdictions across the 
country, remote retailers would have to shoulder heavy overhead costs 
just to meet their new tax collection liabilities. In fact, the 
Marketplace Fairness Act essentially acknowledges its imposition of 
major expenses and complexity by including an exemption for businesses 
that have remote sales of $500,000 or less per year. The very existence 
of this provision makes it clear that even sponsors and supporters feel 
compliance would exact an unbearable toll upon small sellers.
    Unfortunately, S. 1832's paltry exemption level (the Small Business 
Administration threshold for defining a small business is $30 million 
in sales, while the Marketplace Fairness Act's exemption is only 
$500,000) would do little to ease the suffering of smaller businesses, 
which would be afflicted with even greater competitive disadvantages 
compared to larger ones as a result of the bill's passage. A 2006 
PricewaterhouseCoopers study provides some instructive, eye-opening 
guidance in this regard. Based on their findings, businesses with 
between $1 million and $10 million in sales would face compliance costs 
nearly 2.5 times those endured by larger firms (above $10 million in 
sales). The smaller the business, the bigger a share of its sales 
siphoned off just to navigate the maze of our extremely complicated 
sales taxes.
    Some businesses would collapse under the weight of these compliance 
loads, and others would have to raise their prices substantially in 
order to make ends meet. As a result, the Marketplace Fairness Act 
would raise serious impediments to interstate commerce due to its 
misguided approach toward this issue. Congress has the duty and 
authority to prevent states from enacting policies that significantly 
harm interstate commerce, and yet paradoxically S. 1832 would encourage 
such damage at an especially fragile time for our economy.
Tax Simplification Efforts Have Largely Failed
    Much of the movement behind the Marketplace Fairness Act is 
justified by notions of simplifying sales tax codes across the country. 
While the Streamlined Sales Tax Project (SSTP) and other efforts have 
expended much energy on this worthy task, the sad fact is that state 
sales taxes today are more complex than ever. The number of tax 
jurisdictions has steadily risen in the 12 years since SSTP's inception 
and our Nation is nowhere close to the sort of uniformity and ease of 
administration the project sought to create.
    For a glimpse into the reality of sales tax complexity, consider 
the dilemma of determining when ice cream is a baked good for 
Wisconsin's tax purposes. Forbes.com writer Josh Barro recently 
discussed a bulletin from the Wisconsin Department of Revenue seeking 
to clarify the tax treatment of ice cream cake.

        ``The memo goes through ten different examples of cake sales, 
        of which seven are taxable and three are not. Here's an 
        excerpt:

                Example 4--Same as Example 1, except that Restaurant A 
                does not make the ice cream cake. However, after 
                purchasing the ice cream cake from its supplier, 
                Restaurant A decorates the ice cream cake according to 
                instructions received from its customer. It adds 
                designs and words made from frosting and edible gels. 
                Since the retailer mixed or combined two or more foods 
                or food ingredients (i.e., the ice cream cake and the 
                frosting and edible gels) for sale as a single item, 
                the ice cream cake sold by the retailer is `prepared 
                food' and subject to Wisconsin sales or use tax.

        The key issue here is that ``prepared foods'' are taxable, but 
        foods that are simply bought and resold are generally not 
        prepared foods, and baked goods are not ``prepared'' even if 
        you bake them yourself, though they may be prepared if you 
        don't bake them but do decorate them.

        If I understand the memo correctly, the rules are as follows. 
        Ice cream cake is a taxable prepared food if you make it 
        yourself, but not if you're just reselling the cake. However, 
        if the cake contains real cake layers, it's a non-taxable baked 
        good no matter who made it, so long as the amount of cake 
        exceeds the amount of ice cream. (No, really: Example 9 is a 
        cake with two cake layers and one ice cream layer, which is tax 
        exempt; Example 10 is a cake with one cake layer and two ice 
        cream layers, which is taxable because it doesn't contain 
        enough cake.) If you buy a cake from someone and then decorate 
        it yourself, it's taxable no matter how much flour it contains. 
        And if you slice any cake and serve it in individual servings, 
        or if the cake consists of fewer than four servings, or if the 
        customer is going to eat the cake on the premises at your 
        business, or if you give the customer utensils with his cake, 
        it's a taxable prepared food, though you may be exempt from 
        that last one if the sale of prepared foods is incidental to 
        your business.''

    This is a vivid illustration of the true challenge of tax 
complexity: how a given item is defined. For instance, is a granola bar 
candy or food? Different states have different answers, each of which 
may yield different tax obligations. Marketplace Fairness Act 
proponents claim that there are modern software solutions to address 
the difficulties of compliance, but that is like saying that TurboTax 
has solved our mind-numbingly complex Federal income tax code. The 
computing power to do the basic math involved has existed for decades, 
but software alone simply cannot solve the ice cream cake conundrum.

Conclusion
    The debate over S. 1832 and similar forms of legislation boils down 
to differences in business models and how governments ought to respond 
to them. When big-box retail began to threaten true ``Main Street,'' 
``Mom and Pop'' businesses, neither Federal nor state officials took 
substantial action to ``level the playing field'' between the two 
beyond treating them fairly before the law. Nobody suggested 
legislation to grant Main Street businesses the same deals with 
suppliers that higher-volume big-box stores could negotiate. No one 
insisted on a law evening out potential price differences because 
ultimately competition is beneficial for consumers.
    Now Internet retail is beginning to provide a counterweight to 
brick-and-mortar retail of all types. Even still, only about $7 of 
every $100 in retail spending occurs online. The Internet will 
undoubtedly continue to grow, but it has a long way to go before truly 
threatening the dominance of local retail. Indeed, for all the supposed 
dangers that the ``e-fairness'' lobby conjures up in support of its 
position, there are benefits that have flowed to ``Main Street'' 
retailers from the advent of the Internet, including online consulting 
services, streamlined inventory management, and the ease of ``B2B'' 
transactions at the wholesale level. Ultimately, however, the online 
model of utilizing a smaller physical footprint and relying on 
technology to reach customers is much like any other throughout the 
history of commerce: it has advantages and disadvantages that are 
judged in the marketplace--which is precisely why brick-and-mortar 
retailers aren't rushing to close down their physical storefront 
infrastructure.
    This competition between business strategies will likewise benefit 
consumers in the long run. Instead of attempting to equalize outcomes 
by imposing upon remote sales (and not brick-and-mortar sales) an 
onerous tax-compliance structure, governments should endeavor to 
protect taxpayers and treat all businesses fairly by maintaining the 
physical presence standard of taxation.
    S. 1832, the Marketplace Fairness Act, is detrimental to the 
interests of taxpayers, businesses, and sound tax policy. There are 
other ways, like uniform origin-based sourcing, to address this matter 
without trampling on vital pro-taxpayer checks and balances, and 
without foisting unworkable schemes on remote sellers as well as 
interstate commerce. Simply treating remote sales in the same way that 
we already treat brick-and-mortar sales today and devoting any 
additional revenue to tax rate reductions could level the playing field 
in an honest way without burying taxpayers in the process.
    Over the past year NTU has extensively examined the origin-based 
sourcing concept and would look forward to constructive discussions 
with Committee staff to explore further legislative options. In the 
meantime, NTU urges you to oppose this bill and any other variants that 
rely on the same destructive destination-based sourcing approach. Thank 
you for the opportunity to submit this testimony to the Committee today 
and we would be honored to work with you on this highly consequential 
issue in the future.
                                 ______
                                 
                State of Washington--Office of the Governor
                                      Olympia, WA, October 26, 2011
Hon. Patty Murray, Co-Chair,
Joint Select Committee on Deficit Reduction,
Washington, DC.

Dear Senator Murray,

    As you and I have discussed, with the ongoing uncertainties of the 
national and global economies and with consumer confidence as low as it 
is, Washington State faces severe reductions in our sales tax 
collections, resulting in the special session that I called for 
beginning on November 28.
    The task before the Legislature and me is to find $2 billion, out 
of $8.7B, in reductions in the remaining 18 months of the 2011-2013 
operating budget that, unfortunately, will disproportionately hit the 
very people and programs you and I have fought so hard for in our 
public careers. The $2 billion in cuts can only be taken out of a total 
of $8.7B because two-thirds of our remaining budget is protected by 
state and Federal constitutional and statutory requirements. The 
impacts to children, veterans, the working poor, and others who most 
need a hand, and to our educational system, will be far reaching. To 
the degree that the Joint Select Committee on Deficit Reduction takes 
up tax issues, I urge you to focus on those issues that help states--
not hurt them--and to that end, I offer some recommendations below, and 
include more specific information on the recommendations (see 
enclosure).
    One key tax matter that would be of tremendous benefit to the state 
is adopting language to address Quill v. North Dakota and give states 
remote collection authority for sales tax from sellers that are not 
physically present in a state. In July, Senator Durbin introduced the 
Main Street Fairness Act to give states this authority; and since then, 
he has continued working with Senators Alexander and Enzi on similar, 
compromise legislation to gamer the support of a majority of Congress. 
There is bipartisan gubernatorial support for the Durbin bill through 
the National Governors Association, and given drafts of the Alexander-
Enzi-Durbin proposal that have been shared with states, there will 
continue to be bipartisan gubernatorial support. Based on the Main 
Street Fairness Act, Washington State could see tax collections in 
2011-2013 estimated at $170.3 million and of $483 million for the 2013-
2015 biennium--a tremendous help in the current biennium and in the out 
years. The state Department of Revenue is working on estimates based on 
the Alexander-Enzi-Durbin draft.
    While the Main Street Fairness Act would be positive for the State 
of Washington, there are other tax issues that I ask you and your 
Committee members to strongly resist--issues that would severely limit 
or eliminate state taxing authorities. Specifically, these issues 
include the Business Activity Tax Simplification Act (BATSA) and the 
Digital Goods and Services Tax Fairness Act. The state Department of 
Revenue estimates state and local revenue losses from BATSA would be 
$302 million for the 2011-2013 biennium and $1.3 billion for the 2013-
2015 biennium. Given the economic climate we find ourselves, preemption 
of state laws that would result in such losses of revenue is 
unthinkable.
    Thanks again for your consideration of these tax issues in your 
work on the Joint Select Committee. If you have any questions or 
concerns, please let me know. And, as always, Mark Rupp in my 
Washington, DC office is also available to help and reachable at (202) 
624-3691.
            Sincerely,
                                     Christine O. Gregoire,
                                                          Governor.
Enclosure
                                 ______
                                 
    Recommend enactment the Federal Main Street Fairness Act (MSFA) or 
the alternative measure being developed by Senators Alexander, Enzi and 
Durbin: Currently, state sales taxing authority is limited by the 
Supreme Court holding in Quill v. North Dakota. This holding prohibits 
states from imposing sales or use tax on a seller unless that seller 
has a physical presence in the taxing state. The MSFA would eliminate 
this physical presence limitation for those states that have 
significantly reduced the burden on interstate commerce by simplifying 
their sales taxes consistent with the Streamlined Sales and Use Tax 
Agreement (SSUTA). The Quill decision noted, ``Congress is now free to 
decide whether, when, and to what extent the States may burden 
interstate [commerce] . . . [.]'' Quill Corp. v. North Dakota, 504 U.S. 
298 (1992). This is Congress's opportunity to accept the Court's 
invitation. The MSFA embodies sound tax policy, and the Committee 
should consider and recommend enactment of this bill. The bill:

   Requires no Federal spending and no tax increase. The MSFA 
        is a win-win proposition from a fiscal perspective. It would 
        provide state and local governments tax revenue in a time of 
        declining Federal assistance and yet require no actual Federal 
        spending. Moreover, this bill creates no new tax, but rather 
        closes a loophole limiting collection of sales tax from certain 
        sellers.

   Provides needed tax revenues to the states. After adjusting 
        for compliance factors and the small seller exception, and 
        vendor compensation pieces of the MSFA, Washington estimates 
        the bill would generate state and local tax revenues of:

      $170.3 million for the 2011-2013 biennium;
      $483. million for the 2013-2015 biennium; and
      $640.9 million for the 2015-2017 biennium.

    The Department of Revenue is working on revenue estimates for the 
        AlexanderEnzi-Durbin compromise bill.

   Strikes a fair compromise. The MSFA strikes a fair 
        compromise, providing concessions to minimize the burdens on 
        commerce in exchange for state sales tax collection authority. 
        First, the states must reduce the burden on commerce by 
        simplifying their sales taxes through uniform definitions, 
        sourcing provisions, and administrative practices. Second, the 
        bill excludes small sellers, for whom tax collection may be 
        unreasonable or impractical. Third, retailers must receive 
        compensation under the bill in exchange for the new state 
        taxing authority.

   Promotes local job creation. Currently, retailers physically 
        present in a state must collect sales tax, while retailers 
        without physical presence need not. This places in-state 
        retailers at a competitive disadvantage and fails to distribute 
        tax burdens evenly among all the sellers that consume state 
        services. The MSFA addresses these inequities, which would help 
        in-state retailers to continue to thrive and serve as an engine 
        for job creation in communities across the country.

   Is broadly supported. The MSFA enjoys broad support, 
        including the National Conference of State Legislators, the 
        National Governors Association, the Federation of Tax 
        Administrators, and over twenty SSUTA member states. The MSFA 
        is also supported by representatives from the business 
        community.

    Decline consideration of Federal preemptions that impair states' 
ability to govern effectively: Proponents may ask the Committee to 
consider Federal preemptions of state taxing authority as a 
deregulatory stimulus. The Committee should not consider any preemption 
that significantly impairs the states' ability to raise the revenue 
needed to govern effectively. Two proposed preemption bills stand out 
in this regard as outlined below. Some proponents argue that these 
items should be combined with the MSFA in some manner. The states 
uniformly oppose such combinations as they will outweigh the benefits 
to be gained through the MSFA and are unwarranted preemptions of state 
authority.

   The Business Activity Tax Simplification Act (BATSA). This 
        bill purports to create a standard for determining when a 
        seller can be required to pay income and other business 
        activities taxes to a state. The bill would impose a broader 
        physical presence (``nexus'') standard than that which 
        currently exists for sales taxes and one that businesses could 
        use as a shield to avoid state taxes that they currently pay. 
        Washington estimates state and local revenue losses from the 
        BATSA would be:

      $302 million for the 2011-2013 biennium;
      $1.3 billion for the 2013-2015 biennium; and
      $2.25 billion for the 2015-2017 biennium.

    Losses of this magnitude would simply devastate state and local 
        governments and impair their ability to govern effectively. If 
        there is a need for a Federal nexus solution, there are other 
        options with fewer negative impacts available.

   The Digital Goods and Services Tax Fairness Act 
        (``DGSTFA''). The DGSTFA is a bill purporting to promote 
        neutrality, simplicity, and fairness in the taxation of digital 
        goods and services. The DGSTFA suffers from many deficiencies 
        that would contribute to tax avoidance. Without significant 
        amendment and absent a grant of collection authority over 
        sellers that receive the benefits of the DGSTFA, this bill 
        would be a vehicle for tax avoidance and hurt the states' 
        ability to effectively raise tax revenue now and in the years 
        to come. The bill would also give the Federal Government 
        unprecedented authority over the administration of state taxes 
        through concurrent Federal jurisdiction and its related costs. 
        Washington preliminarily estimates state revenue losses from 
        the DGSTFA to be $140 million per biennium. This figure is 
        likely to rise significantly as the economy advances into the 
        digital age and more transactions are covered.
                                 ______
                                 
                                                Bill Haslam
                                    Nashville, TN, November 8, 2011
Senator Lamar Alexander,
United States Senate,
Washington, DC.

Dear Senator Alexander,

    I am writing to thank you for your leadership in helping to advance 
a Federal solution to a problem states need Congress to address: the 
preservation of their own right to enforce their own tax laws and 
returning fairness to the marketplace.
    The Marketplace Fairness Act will bring much needed and long 
overdue relief to the State of Tennessee. Tennessee and other states 
are currently unable to compel out-of-state businesses to collect sales 
taxes the same way local businesses do. It is important for states to 
determine their own tax policy and have the ability to collect the 
revenues they are already owed. This is why your legislation is so 
important.
    The Internet has changed the way we do business and provides small 
businesses the opportunity to grow, but we need our laws to adapt to 
this new marketplace. Our state relies on sales taxes for the majority 
of its revenue, and each year we are losing hundreds of millions of 
dollars that could be used to benefit Tennessee. What cannot happen is 
for Congress to do nothing, which will prevent states from enforcing 
their own laws.
    Your legislation gives states the flexibility to determine what 
works best for them, and I am grateful that you are putting states' 
rights first and closing this online sales-tax loophole. The 
Marketplace Fairness Act strikes the right balance for Tennessee, and I 
fully support your efforts.
            Warmest regards,
                                               Bill Haslam.
                                 ______
                                 
                  State of Maryland--Office of the Governor
                                   Annapolis, MD, December 21, 2011

Hon. Barbara Mikulski
Hon. Benjamin L. Cardin
Hon. Andy Harris
Hon. C. A. ``Dutch'' Ruppersberger
Hon. John Sarbanes
Hon. Donna Edwards
Hon. Steny H. Hoyer
Hon. Roscoe G. Bartlett
Hon. Elijah E. Cummings
Hon. Chris Van Hollen

Dear Members of the Maryland Congressional Delegation:

    I strongly urge your support for the Marketplace Fairness Act, and 
similar proposals that provide a mechanism for states to simplify their 
sales tax systems and instill parity for in-state businesses--whether 
they conduct their transactions in person or online. This important 
legislation, that has bipartisan support among Governors and members of 
Congress alike, could help ease the burden on state budgets while 
imposing no new taxes.
    As you are well aware, Maryland loses millions of dollars every 
year in uncollected revenues on purchases made online by Maryland 
consumers. Additionally, the current situation puts our instate 
businesses, which make valuable investments in Maryland through jobs 
and economic activity, at a competitive disadvantage with their remote 
and online competitors.
    In fact, a recent study indicates that the lack of Federal action 
on this issue will result in Maryland losing $173 million in sales and 
use revenues this year, a figure that continues to grow as more and 
more transactions are conducted over the internet. Recouping this lost 
revenue will help us make investments that continue moving Maryland 
forward and address the priorities of our people.
    Thank you for your consideration and continued hard work on behalf 
of Maryland families and businesses. Please call on us if we can be of 
any assistance.
            Sincerely,
                                           Martin O'Malley,
                                                          Governor.
                                 ______
                                 
                   State of Indiana--Office of the Governor
                                    Indianapolis, IN, March 7, 2012
Hon. Dan Coats,
Washington, DC.

Dear Senator Coats:

    Please consider joining those who are supporting legislation 
enabling states to enforce full collection of their sales taxes by 
remote vendors, generally Internet and catalogue retailers. These taxes 
are already owed but, in most cases, are being unknowingly evaded by 
the citizens who should be paying them.
    In Indiana's case, the best independent analyses place the 
uncollected revenue at $70-120 million per year. While this is less 
than one per cent of total revenue, it is still a material amount in a 
difficult economy facing uncertain growth prospects. Moreover, there is 
a serious fairness issue involved, as those retailers now collecting 
the sales tax are placed at a competitive disadvantage.
    I hope you will cosponsor and advocate for S. 1832, The Marketplace 
Fairness Act, in the interest of both marketplace equity and the 
continued fiscal soundness of our state.
    Sincerely,
                                  Mitchell E. Daniels, Jr.,
                                                          Governor.
                                 ______
                                 
                     State of Maine--Office of the Governor
                                         Augusta, ME, 12 March 2012

Hon. Olympia Snowe,
United States Senate,
Washington, DC.
Hon. Susan Collins,
United States Senate,
Washington, DC.

Dear Senator Snowe and Senator Collins:

    I would like to respectfully call on you both to lend your strong 
support to the Marketplace Fairness Act.
    Maine's economy is in transition. Although we still want to attract 
large manufacturers, we also need to recognize that our economy is 
increasingly reliant on small businesses and start-ups. That includes a 
healthy concentration of retail businesses. They are the backbone of 
our economy and our communities. That is why I believe this piece of 
legislation has particular merit for the people of Maine.
    From my experience in the retail world, I can assure you that Maine 
retailers love competition. They know competition sharpens their 
services and products, and keeps customers coming back. But the rules 
need to be fair and applied equally. Give Maine people a chance to 
compete on a level playing field and they will shine.
    Unfortunately, a damaging inequity exists in the retail marketplace 
because some online retailers are not required to collect Maine sales 
tax, but Maine retailers are. Not only does this hurt Maine businesses, 
it hurts the State. If the handcuffs on these small retailers were 
removed, they could compete on equal terms. They would generate more 
sales, pay more sales tax to the state treasury, hire more local 
retailers, and pump more money into local economies throughout Maine.
    As you know, the Marketplace Fairness Act does not raise taxes. It 
simply provides for the collection of sales tax already due. State 
budget deliberations are well under way, and it would be quite helpful 
to have certainty about our future revenue streams. I have pledged to 
lower Maine income taxes and stop wasteful government spending. One 
powerful tool in achieving these goals would be to have the ability to 
collect taxes that are due.
    There's no denying that passing the bill would give thousands of 
small Maine businesses a real boost. Through no fault of their own, 
Federal policy now gives some out-of-state corporations an unfair 
advantage over other Maine retailers. Our citizens have been patient as 
Congress tended to the needs of Wall Street. Having studied this bill, 
I feel that it is now time for Congress to tend to the needs of Main 
Street. I urge you to vote in favor of the Marketplace Fairness Act.
            Sincerely,
                                            Paul R. LePage,
                                                          Governor.
                                 ______
                                 
                   State of Alabama--Office of the Governor
                                     Montgomery, AL, April 19, 2012

Hon. Richard C. Shelby
Hon. Jeff Sessions
Hon. Jo Bonner
Hon. Martha Roby
Hon. Mike D. Rogers
Hon. Robert B. Aderholt
Hon. Mo Brooks
Hon. Spencer Bachus
Hon. Terri Sewell

Dear Members of the Alabama Congressional Delegation:

    As we discussed during our visit in Washington a few weeks ago, an 
important issue is before the U.S. Congress relating to the collection 
of online sales taxes and leveling the playing field for our Main 
Street Alabama merchants. Senators Mike Enzi, Lamar Alexander, and 
Richard Durbin have introduced S. 1832, the Marketplace Fairness Act, 
and Representatives Steve Womack and Jackie Speier have introduced H.R. 
3179, the Marketplace Equity Act. I commend the members of the Alabama 
Delegation who have already expressed your support for these bills, and 
I urge the rest of the Alabama Delegation to cosponsor the legislation 
or support it when it comes up for a vote.
    As you know, I promised to oppose any tax increase on Alabama 
families, and my support of these bills is consistent with that 
promise. The bills will not create a new tax, nor will they require 
states to raise taxes. Rather, the bills will give Alabama the 
authority to collect sales taxes--as we currently do from local brick-
and-mortar retailers--that are already owed from online retailers. The 
bills will make it easier for businesses to comply with the law and 
will provide a special exemption for small businesses. Allowing us to 
effectively close this sales tax loophole would help both our state's 
finances and our state's small businesses.
    Passage of the Marketplace Fairness Act and the Marketplace Equity 
Act would allow states to bring equity to our sales tax laws. Whether 
they operate online or in a local retail establishment, any business 
that sells to a resident of our state should collect and remit 
Alabama's sales tax. Doing so relieves the consumer of the burden of 
having to calculate and remit the owed tax, and levels the playing 
field for all retailers. Current law, which only applies to retailers 
with a physical presence in the state, gives Internet stores a 
significant competitive advantage, taking away business from our local 
retailers and reducing state tax revenue. As more commerce shifts 
online, our sales tax base is further eroded, which is unsustainable 
over the long term.
    When local retailers lose business, jobs are threatened, 
communities that depend on the businesses suffer, and our state's 
economy pays the price. The time has come for Congress to close this 
loophole by providing Alabama with the necessary tools to update our 
laws to conform to the reality of today's marketplace.
    Given the state's tough fiscal situation, there has never been a 
better time to enact the Marketplace Fairness Act and the Marketplace 
Equity Act. E-fairness legislation has been endorsed by the National 
Governors Association, the U.S. Conference of Mayors, the Alabama 
Retail Association, and many other groups and individuals throughout 
the country. I hope we will have your support for this much-needed 
legislation.
            Sincerely,
                                         Robert J. Bentley,
                                                          Governor.
                                 ______
                                 
                        State of Michigan--Executive Office
                                           Lansing, MI, May 9, 2012

Hon. Harry Reid,
Office of Senate Majority Leader,
United States Senate,
Washington, DC.

Hon. Mitch McConnell,
Office of Senate Minority Leader,
United States Senate,
Washington, DC.

Dear Majority Leader Reid and Minority Leader McConnell:

    I am writing in support of S. 1832, the Marketplace Fairness Act 
and to express my hope for its passage in 2012. As I continue to look 
for fair and responsible solutions that support economic growth in 
Michigan, I encourage the Senate to level the playing field for all 
retailers by establishing a simple, streamlined Federal approach for 
states to consistently enforce sales and use tax laws.
    I support the Marketplace Fairness Act because it would enable 
states to collect sales taxes evenly and fairly across the retail 
spectrum. ``Brick-and-mortar'' retailers throughout the state are 
currently required to collect sales taxes at the point of sale. By 
enabling remote sellers to ignore the collection of sales and use 
taxes, it provides them an unfair competitive advantage and threatens 
the viability of retailers throughout our communities, many of which 
are locally-owned small businesses that reflect the unique character 
and culture of the Great Lakes State.
    Technology currently exists to quickly and effectively calculate 
taxes due on sales and can easily be integrated into online retailers' 
operations. It is time for Congress to grant states the authority to 
enforce sales tax and use laws on all retailers doing business in their 
state.
    In fact, the Michigan Department of Treasury estimates that total 
revenue lost to e-commerce and mail order purchases will amount to $872 
million during Fiscal Years 2012 and 2013. As we continue to work to 
improve the quality and efficiency of services throughout the state, it 
is crucial that the state has the tools to fairly collect the revenue 
that it is owed. The Marketplace Fairness Act would provide states with 
the authority to do just that.
    Once again, I encourage the Senate to implement a fair and 
reasonable solution to address this issue. I look forward to working 
with you as we continue to strive for policies that support fiscal 
responsibility and fair competition in the marketplace.
            Sincerely,
                                               Rick Snyder,
                                                          Governor.
CC: Senator Michael Enzi
Senator Lamar Alexander
Senator Roy Blunt
Senator Dick Durbin
Senator Tim Johnson
Senator Mark Pryor
Senator Jack Reed
Senator Sheldon Whitehouse
Senator Carl Levin
Senator Debbie Stabenow
                                 ______
                                 
                      State of Iowa--Office of the Governor
                                       Des Moines, IA, June 7, 2012

Hon. Charles Grassley,
U.S. Senator,
Washington, DC.

Hon. Tom Harkin,
U.S. Senator,
Washington, DC.

Dear Senator Grassley and Senator Harkin:

    I am writing to encourage passage of S. 1832, the Marketplace 
Fairness Act. I understand that the coalition supporting this 
legislation is now very broad which gives me hope that, under your 
leadership, this legislation can be passed yet this year. S. 1832 
provides an opportunity for Federal leaders to enact an equitable 
solution that allows for a predictable, simple, and streamlined 
approach for Iowa and other states to consistently enforce sales tax 
laws. I join governors of both parties and a bipartisan group of U.S. 
Senators in support of this legislation. Simply put, S. 1832 allows for 
Main Street Iowa businesses to be treated more fairly, recognizes the 
states' rights to enforce their own tax laws and provides a solution to 
a long-standing issue and tax loophole.
    The Marketplace Fairness Act would level the playing field and 
fairly apply sales tax laws across every type of retailer. There has 
been an inconsistent application of sales tax laws since the Quill v. 
North Dakota case in 1992. Since then, the distortion of the 
marketplace has only compounded with the growth of Internet sales. The 
Internet is now a robust, mature, and dynamic marketplace that does not 
warrant special protections. The application of sales taxes only to 
``brick-and-mortar'' retailers, many of which are small businesses, 
puts those very entities at a competitive disadvantage.
    When this issue first arose in the 1990s, there were legitimate 
concerns about technological capabilities to calculate sales taxes for 
online retailers, but through technological advancements, those 
concerns are no longer applicable. Quite simply, technology exists to 
enforce sales tax laws without over-burdening online retailers with 
significant sales. The legislation also includes an important exemption 
for businesses that do not exceed $500,000 in remote sales. In 
addition, Amazon, which initially opposed solutions like S. 1832, now 
supports this legislative fix, because it would allow for a predictable 
path forward that reflects the realities of the current marketplace.
    I know that you welcome opportunities to embrace solutions that 
enact equitable policies and attract a broad and bipartisan coalition 
of supporters. The Marketplace Fairness Act is one such opportunity and 
I hope the U.S. Congress seizes it in 2012.
    Since returning to the Governor's Office, I have proposed property 
tax relief for all classes of property and a reduction to our highest 
in the Nation corporate income tax rate. Both of those proposals are 
part of a comprehensive and long-term approach to equitable tax policy 
that supports job creation and increasing family incomes. I believe 
passage of S. 1832 will level the playing field for Iowa businesses and 
lessens the tax compliance burden for all citizens. Passage of S. 1832 
will be a positive step by the Federal Government recognizing states' 
rights to control their own fiscal destinies and restoring fairness for 
Main Street businesses.
    Thank you for your time and consideration.
            Sincerely,
                                         Terry E. Branstad,
                                                  Governor of Iowa.
cc: U.S. Senate Majority Leader Harry Reid
U.S. Senate Minority Leader Mitch McConnell
Iowa Members of the U.S. House
                                 ______
                                 
                                      State of South Dakota
                                          Pierre, SD, June 26, 2012
Hon. Mike Enzi,
United State Senate,
Washington, DC.

Hon. Lamar Alexander,
United States Senate,
Washington, DC.

Dear Senator Enzi and Senator Alexander:

    I am writing to thank you for the introduction of S. 1832, the 
Market Place Fairness Act and offer my support for its timely passage. 
South Dakota has been a long-time leader in the Streamlined Sales Tax 
project and has worked diligently to make our laws simplified and 
uniform in order to seek Congressional Authority to require remote 
sellers to collect tax in South Dakota and other states.
    The passage of this bill by Congress will remove a competitive 
disadvantage faced by main street businesses which are now required to 
collect tax and help enable South Dakota to continue to provide the 
services our citizens need and require.
    In 2011, e-commerce in the United States totaled $194.3 billion, up 
16.1 percent from 2010, according to an estimate released by the United 
States Commerce Department (source Internet Retailer 2/16/2012). It is 
very clear that e-commerce will continue to take a bigger portion of 
overall U.S. retail sales. In fact, South Dakota estimates that total 
revenue lost to e-commerce this past year was $58 million. That may 
seem like a small amount compared to other states, but it has a large 
impact on our budget.
    In the early days of online sales, technology did not exist to 
allow for easy collection of taxes in every part of the country. But 
today technology has been developed to quickly and effectively 
calculate taxes due on sales and can easily be integrated into online 
retailer's operations.
    With your help, we can make great strides to ensure equitable 
collection and payment of sales taxes. This legislation is crucial for 
allowing South Dakota's main street businesses to remain viable and 
competitive in difficult economic times.
    I encourage the Senate to implement a fair and reasonable solution 
to address this issue by passing the Market Place Fairness Act. I look 
forward to working with you to support fiscal responsibility and fair 
competition in the marketplace.
            Sincerely,
                                           Dennis Daugaard,
                                                          Governor.
cc: Senator Tim Johnson
Senator John Thune
Representative Kristi Noem
                                 ______
                                 
           Commonwealth of Kentucky--Office of the Governor
                                       Frankfort, KY, July 19, 2012
Hon. Mitch McConnell,
United States Senate,
Washington, DC.

Dear Senator McConnell:

    Since I took office over four years ago, 11 budget reductions 
totaling over $1.3 billion have been enacted to handle the national 
recession. Although we are seeing some modest growth in General Fund 
revenues, Kentucky, like many other states, continues to face difficult 
budget decisions.
    Our most recent budget includes a focus on improving collection of 
existing taxes through implementation of a tax amnesty program in 
Fiscal Year 2013. In addition, our plan calls for increased collection 
efforts after the amnesty period to improve taxpayer fairness by 
ensuring that all taxpayers are held to the same standard of 
compliance.
    We strongly believe in tax fairness, and your assistance is needed 
to resolve the inequity. Because of a 1992 U.S. Supreme court decision 
(Quill v. North Dakota), states are prohibited from requiring remote 
sellers, those retail businesses that do not have a physical presence 
within the state, to collect the sales tax on goods they sell to 
customers within the state. The Court cited the variation and 
complexity of sales tax laws and regulations in the various states in 
its ruling but specifically noted that Congress has the authority to 
enact Federal legislation authorizing mandatory collection of sales 
taxes by all retailers.
    I write you to request your support for Federal legislation that 
will give Kentucky and other states the authority to close the sales 
tax loophole on online and catalog sales. Three bills to fix the 
problem have been introduced in Congress--the Main Street Fairness Act, 
the Marketplace Fairness Act and the Marketplace Equity Act. While each 
takes a slightly different approach, they all would allow Kentucky to 
require sales tax collection by remote sellers just as we require of 
our Main Street retailers.
    Currently, remote sellers have a significant advantage when they 
compete with retailers with stores in Kentucky. They are not required 
to either collect state sales taxes on the goods they sell to 
Kentuckians or to incur the expense of collection that Kentucky 
businesses must bear. The playing field must be leveled if we want 
businesses located in Kentucky to stay in business, These are the 
businesses that pay property taxes; that provide jobs for our citizens 
and that are part of our communities throughout the Commonwealth. To 
put them in the position of serving as a showroom for out-of-state 
retailers who use the six percent-plus advantage they enjoy by not 
collecting Kentucky's sales tax to market their products Is simply not 
fair.
    Beyond that, sales tax revenue Is a key component of Kentucky's 
General Fund receipts. In FY 2011, sales and use tax receipts totaled 
almost $2.9 billion of Kentucky's nearly $8.8 billion total General 
Fund revenues. Requiring collection of the sales tax by all retailers 
would enhance collection of the taxes due and Is estimated to increase 
Kentucky's sales and use tax revenues by approximately $200 million 
each year. That amount would certainly help to provide the resources we 
need to move Kentucky forward so I hope you will support Federal 
legislation to resolve the problems created by the Quill decision.
    Please contact my office if you have further questions.
            Sincerely,
                                         Steven L. Beshear,
                                                          Governor.
                                 ______
                                 
 Prepared Statement of David French, Senior Vice President, Government 
                 Relations, National Retail Federation

    As the world's largest retail trade association and the voice of 
retail worldwide, NRF represents retailers of all types and sizes, 
including chain restaurants and industry partners, from the United 
States and more than 45 countries abroad. Retailers operate more than 
3.6 million U.S. establishments that support one in four U.S. jobs--42 
million working Americans. Contributing $2.5 trillion to annual GDP, 
retail is a daily barometer for the Nation's economy. NRF's Retail 
Means Jobs campaign emphasizes the economic importance of retail and 
encourages policymakers to support a Jobs, Innovation and Consumer 
Value Agenda aimed at boosting economic growth and job creation. 
www.nrf.com

Summary of Comments
    Members of the National Retail Federation believe that Congress 
must resolve the issues presented by the Quill decision in order to 
allow for a level playing field among retail competitors. As retailing 
evolves and Internet sales become a more prominent portion of total 
retail sales, it is critical that Congress eliminate the sales tax 
collection discrimination that exists between brick-and-mortar and 
remote retailers and allow the free market to operate so all retailers 
can compete on a level playing field.
    Brick-and-mortar retailers compete vigorously with each other and 
with remote retailers for market share. Different retailers have 
different strategies for going to market, but one feature is beyond a 
retailer's control: only some competitors are required to collect sales 
taxes.\1\ This disadvantage is not created by the marketplace, but 
rather it is imposed by the current state of the law following the 
Quill decision, stifling retailers across the country.
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    \1\ State sales and use taxes are a form of consumption tax and are 
imposed on the sale or use of goods and some services that are subject 
to tax. It is a tax on the consumer and is imposed where the 
consumption takes place. So if a state imposes sales and use taxes on 
certain goods or services all sales or use of those types of goods or 
services in that state are subject to the tax, regardless of whether 
the purchase is made in a store in the state or in the home of a 
resident of the state through their computer or telephone. States 
require that retailers collect and remit the sales tax on purchases 
made in states where they have a physical presence, but the consumer is 
required to remit the use tax on remote purchases that he makes. There 
is widespread lack of compliance with use tax laws.
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    In addition to the pricing disadvantage caused by sales tax being 
included in the cost of the purchase from the brick-and-mortar store, 
local stores also bear a significant compliance burden for collecting 
the tax. Compliance costs for small retailers are extremely high, 
placing them at more of a competitive disadvantage.\2\
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    \2\ The national average annual state and local retail compliance 
cost in 2003 was 3 percent of sales tax collected for all retailers: 
13.47 percent for small retailers, 5.20 percent for medium retailers, 
and 2.17 percent for large retailers. PricewaterhouseCoopers LLP, 
Retail Sales Tax Compliance Costs: A National Estimate Volume One: Main 
Report, April 2006. That study defined ``small retailers'' as having 
less than $1 million in annual retail sales.
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    Brick-and-mortar retailers are major contributors to the health of 
local communities and should not be placed at a disadvantage compared 
to remote sellers that have no local presence. Brick-and-mortar sellers 
employ people in the community, pay state and local income taxes, as 
well as property taxes. They sponsor local causes like the Little 
League, soccer, and Booster Clubs.
    Simplification is a key component for reform of the sales tax 
collection system for both brick-and-mortar sellers and remote sellers 
who voluntarily collect sales tax. Many members of the NRF voluntarily 
collect sales tax on remote sales into states where they do not have a 
physical presence. In many instances, the retailers that voluntarily 
collect sales tax do so only from states that have adopted the 
Streamlined Sales and Use Tax Agreement (``SSUTA'') because of the 
Agreement's simplified collection requirements.
    Granting states the authority to collect sales tax from remote 
sellers will add significant resources to state budgets to support 
essential local services including teachers, police officers, 
firefighters and ambulance crews. Remote sales include e-commerce, mail 
order sales, telephone orders, and deliveries made across state lines. 
By 2012, total e-commerce sales are estimated to reach $4 trillion 
dollars.\3\
---------------------------------------------------------------------------
    \3\ Donald Bruce, William F. Fox, and LeAnn Luna, State and Local 
Government Sales Tax Revenue Losses from Electronic Commerce, 
University of Tennessee, April 2009, available at http://cber.utk.edu/
ecomm/ecom0409.pdf.
---------------------------------------------------------------------------
    If a state chooses to raise revenue through the imposition of a tax 
on goods that are consumed in that state, then there must be a means to 
apply the tax to all such goods without substantial evasion. If there 
is no way to do that, then the tax burden will rise to unfair levels on 
consumers that comply with the law. The Marketplace Fairness Act (S. 
1832) resolves this issue, providing fairness to both consumers and 
retailers, and maintaining the sales tax base for the 45 states that 
rely on a sales tax system.
    NRF is encouraged by this Committee's interest in this issue as 
well as the several legislative proposals that have been introduced 
this Congress to address sales tax fairness, especially the Marketplace 
Fairness Act, introduced by Senator Enzi, Senator Durbin, Senator 
Alexander, and Senator Johnson. NRF supports Congress granting states 
remote collection authority with simplifications that ensure retailers 
are not unduly burdened by collecting and remitting sales taxes. 
Congress needs to pass S. 1832 this year.

Background
    In 1992, the U.S. Supreme Court ruled in Quill v. North Dakota that 
``remote sellers''--a category that includes mail-order, telephone and 
Internet merchants--cannot be required to collect sales tax from 
customers in states where the merchant does not have a physical 
presence or ``nexus.'' The court reasoned that the sales tax system was 
too complex for a merchant to know what sales tax to charge an out-of-
state customer--45 states and 7,600 local jurisdictions collect sales 
tax, each with its own rates, lists of taxable items and definitions of 
taxable items. But the justices suggested that sales tax collection 
could be required if the system were simplified and Congress authorized 
the collection authority because remote sellers are ``purposely 
availing'' themselves to a jurisdiction's authority by engaging in 
commerce.
    In late 1999, in response to the Supreme Court ruling, states and 
the business community, including NRF, began the Streamlined Sales Tax 
Project, with an aim toward significant simplification of state sales 
tax systems. Since then, a baseline multi-state agreement, the SSUTA, 
which includes common definitions, uniform processes and procedures, 
and significantly simplified administrative features has been passed by 
24 states (21 full member states and 3 associate member states), 
establishing the necessary groundwork for action by Congress. The 21 
full member states with voting rights include: Arkansas, Iowa, Indiana, 
Georgia, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New 
Jersey, North Carolina, North Dakota, Oklahoma, Rhode Island, South 
Dakota, Vermont, Washington, West Virginia, Wisconsin and Wyoming. 
Three associate member states with negotiating authority but delayed 
voting rights are Ohio, Tennessee and Utah. Delegates from the 24 
states administer the SSUTA through the Streamlined Sales Tax Governing 
Board.
    As electronic commerce continues to grow, so will the losses to 
state and local revenues.\4\ In Fiscal Year 2012, it is conservatively 
estimated that state and local governments stand to lose at least $23.2 
billion in uncollected sales and use taxes from remote transactions, 
with over $11.4 billion uncollected from e-commerce transactions.\5\ 
General sales taxes make up roughly one third of state tax revenue.\6\
---------------------------------------------------------------------------
    \4\ Id.
    \5\ Id.
    \6\ Lucy Dadayan and Robert B. Ward, State Revenue Report, The 
Nelson A. Rockefeller Institute of Government, Oct. 2011, No. 85, 
available at http://www.rockinst.org/pdf/government_finance/
state_revenue_report/2011-10-26-SRR_85.pdf.
---------------------------------------------------------------------------
The Effect of Simplification on Retailers
    Through adoption of the SSUTA, 24 states have already implemented 
significant simplification of their sales tax laws. This simplification 
has incentivized collection of sales tax by many remote sellers that 
currently are not required to collect sales taxes. Many remote sellers 
recognize that collecting sales taxes may be a more efficient approach 
to dealing with the realities of their constantly evolving business 
model. Nonetheless, their good faith effort to collect sales tax would 
be undermined by collection authority that did not include significant 
simplification steps.
    While NRF believes that a modest small seller exemption for remote 
sales is appropriate, raising the level too high will only exacerbate 
the potential for inequity between a small remote retailer that does 
not have to collect any taxes and a local small retail competitor who 
must collect sales taxes on the first dollar of sales. Congress should 
resist the temptation to envision that a small seller exemption is the 
easy answer to meaningful small business regulatory relief.

Current Sales Tax Fairness Legislation before Congress
    The two leading bills introduced this Congress to address the issue 
of sales tax fairness are the Marketplace Fairness Act and the 
Marketplace Equity Act.

  (1)  Marketplace Fairness Act of 2011, S.1832, sponsored by Senators 
        Enzi, Durbin, Alexander and Tim Johnson provides a path for 
        states to collect sales tax that incorporates a combination of 
        either nine simplification steps or adoption of the SSUTA. The 
        Marketplace Fairness Act exempts remote sellers with less than 
        $500,000 in remote U.S. sales, requires a single audit by 
        states and localities within a state, requires a single state 
        tax rate based on the destination of the sale, states must 
        establish certification procedures for software and service 
        providers (to calculate rates), and gives remote sellers 
        liability protection for relying on incorrect information 
        supplied by service providers.

  (2)  Marketplace Equity Act of 2011, H.R. 3179, sponsored by 
        Representatives Womack and Speier allows states to collect 
        sales taxes from remote sellers if they meet three minimum 
        simplification requirements. These three simplification 
        requirements may be met in an interstate agreement, presumably 
        including the SSUTA. Sellers with less than $1 million in 
        remote U.S. sales or $100,000 in remote sales into a particular 
        state are exempted. The three simplification steps are: (1) a 
        single revenue authority within a state for submission of a 
        return; (2) a single tax base set by the state; and (3) the 
        state must choose a single tax rate from three choices: a 
        blended rate of state and locality rates, the maximum state 
        rate, or the destination rate.

    Each bill grants states the authority to require remote sellers to 
collect sales tax on transactions into their respective state if 
simplification steps are adopted. The varying simplification 
requirements include tax base, tax rate, and collection software 
requirements. We generally prefer the ``hybrid'' structure of the 
Marketplace Fairness Act, which will allow states to choose between a 
state-based solution like the SSUTA or a set of federally mandated 
minimum simplification steps before gaining collection authority on 
remote sales.

Conclusion
    The National Retail Federation has long supported sales tax 
fairness legislation, and we are encouraged by the momentum that is 
building toward a solution. We look forward to working with the 
Committee on legislation to ensure effective and fair sales tax 
collection while relieving burdens placed on a growing sector of the 
economy.
                                 ______
                                 
   Prepared Statement of Harold A. Schaitberger, General President, 
               International Association of Fire Fighters

    Chairman Rockefeller, Ranking Member Hutchison, and all the 
distinguished Senators on this committee, I would like to thank you for 
holding this important hearing on how certain online retailers are 
exempt from state sales tax law. As the General President of the 
International Association of Fire Fighters (IAFF), I speak today on 
behalf of the nearly 300,000 men and women who risk their lives to 
provide fire, rescue and emergency medical services protection to over 
85 percent of our nation's population.
    Although IAFF members are committed first and foremost to 
protecting their communities, they are not immune to the fiscal 
challenges posed by these difficult economic times. As employees of 
state and local governments, their livelihoods and their ability to 
respond effectively to the next house fire or the next heart attack is 
linked to the budget shortfalls facing far too many governmental 
jurisdictions.
    The stark reality is that the Great Recession has decimated state 
and local government budgets. According to the Center on Budget and 
Policy Priorities, state and local governments have closed shortfalls 
amounting to over $530 billion over the last four years. Despite an 
improving economic outlook, budget shortfalls still persist. Thirty 
states have either projected shortfalls or have accounted for 
shortfalls that total $49 billion for FY 2013. Without additional 
revenue to balance their budgets, state and local governments will be 
forced to cut back on essential services, possibly leading to layoffs, 
station closings and brownouts for the fire service. Additional cuts to 
the fire service will only exacerbate the dire jobs picture for state 
and local governments. Since 2009, 611,000 public sector jobs have been 
lost as a result of the Great Recession.
    That is why today's hearing is so important. One factor 
contributing to budget shortfalls both at the state and local level is 
the dramatic increase of online sales. Many e-retailers are not 
required to charge sales and use taxes because they do not have a 
physical presence in the state where the purchase is made. This special 
tax preference gives e-retailers an unfair competitive advantage over 
traditional ``brick and mortar'' businesses, which must charge sales 
taxes on almost every item sold, from a pack of gum to a new car.
    As more consumers have chosen to buy goods and services online, 
total sales tax receipts for state and local governments have 
plummeted. A recent University of Tennessee study found that state and 
local governments are losing $23 billion each year due to e-commerce. 
In addition, property tax receipts, which help fund municipal fire 
departments and school districts, have also been affected as more brick 
and mortar stores go out of business due to the unfair competition from 
out-of-state e-retailers.
    To address this problem, Congress should pass S. 1832, the 
``Marketplace Fairness Act.'' This bipartisan legislation would allow 
local main street retailers to compete more effectively against out-of-
state e-retailers, give states the ability to enforce their own sales 
and use tax laws, relieve consumers of the legal burden to report to 
state tax departments the sales and use taxes they owe for online 
purchases, and help governors and mayors collect taxes already owed, 
reducing the need to raise new taxes.
    Importantly, this bill does not create new taxes or increase 
existing taxes. Under current law, consumers living in states with a 
sales tax are required to remit use taxes for online purchases. 
Compliance with the law is poor, because most consumers are unaware of 
their tax obligations. The ``Marketplace Fairness Act'' simply gives 
states a way to enforce existing sales and use tax laws while 
eliminating the competitive advantage currently enjoyed by remote 
retailers at the expense of local businesses. For states without a 
sales tax, nothing would change. The ``Marketplace Fairness Act'' does 
not require a state to adopt a sales tax. That decision will still rest 
with the citizens of each state.
    In addition to bipartisan support in Congress, a large coalition of 
organizations has formed to urge passage of the ``Marketplace Fairness 
Act.'' Government representatives such as the National Governors 
Association and the U.S. Conference of Mayors, business groups such as 
the National Retail Federation and the International Council of 
Shopping Centers, Fortune 500 companies such as Amazon and Best Buy, 
and labor unions all support this important legislation. At a time when 
business and labor are often at odds, I hope that this committee will 
take special note of this unique coalition.
    In closing, I would like to again thank the distinguished chairman 
and ranking member for holding this important hearing, and respectfully 
request that you keep in mind the views of the IAFF. Our members' 
ability to respond swiftly to any and all threats to our great country 
hinges on the most fundamental compact between the individual and 
society; that is, the ability to raise revenue to fund essential 
government services. In this regard, I urge you to pass S. 1832, the 
``Marketplace Fairness Act,'' so states can have the means, if they so 
choose, to collect unpaid sales taxes on online and remote purchases.
                                 ______
                                 
        Prepared Statement of the National Governors Association

    The nation's governors call on Congress to help states modernize 
sales tax systems and encourage greater marketplace competition by 
taking up and passing legislation like S. 1832, the ``Marketplace 
Fairness Act.''
    The Marketplace Fairness Act, along with similar bills such as the 
``Marketplace Equity Act'' (H.R. 3179) and the ``Main Street Fairness 
Act'', (S. 1542 and H.R. 2071), would remove the barrier preventing 
states from collecting sales taxes in exchange for states simplifying 
their sales tax laws. For states, this represents the opportunity to 
collect more than $23 billion in foregone sales taxes incurred by 
consumers each year, but cannot be collected.
    This collection gap was created by decades-old U.S. Supreme Court 
rulings in National Bellas Hess v. Illinois, 386 U.S. 753 (1967) and 
Quill Corp. v. North Dakota, 504 U.S. 298 (1992), where the Court held 
that, absent Congressional authorization, no state may require a seller 
to collect tax on sales into the state if the seller lacks a physical 
presence in the state. As a result of that barrier, local brick-and-
mortar stores required to collect the tax operate at a competitive 
disadvantage with remote sellers that do not. Local stores find 
themselves serving as showrooms for the same products sold by Internet 
and catalog sellers. Prospective customers examine the merchandise 
locally then buy the product online or through a catalog to avoid 
paying sales tax.
    To address this problem, the National Governors Association (NGA) 
and the National Conference of State Legislatures initiated the 
Streamlined Sales and Use Tax Project (Project) in the fall of 1999. 
The Project, in turn, generated the Streamlined Sales and Use Tax 
Agreement (SSUTA), a cooperative effort by the business community, 
states and local governments to simplify sales and use tax collection 
and administration. The SSUTA reduces costs and administrative burdens 
on retailers operating in multiple states. In return, those retailers 
voluntarily collect tax on sales to customers living in states that 
comply with the SSUTA.
    To date, more than 1,700 retailers have volunteered to collect 
sales tax in Streamlined states and have remitted more than $900 
million in sales taxes that would previously have gone uncollected. 
This amount, however, pales in comparison to what could be collected 
under a nationwide system authorized by Congress through Federal 
legislation.
    NGA supports congressional efforts to remove the current barrier to 
the collection of sales tax, help small businesses expand and assist 
consumers through fair competition.
    For states, the legislation would help reverse the erosion of 
states' sales tax base due to increasing Internet sales. States closed 
budget gaps of $325 billion from Fiscal Years 2009 through 2012 and 
will continue to face gaps for Fiscal Year 2013. Rather than asking for 
one-time relief, which the Federal Government cannot afford and states 
do not seek, S. 1832 provides a common-sense structural solution that 
will strengthen states' fiscal condition without adding to the Federal 
debt.
    For business, it means that the corner store is on the same footing 
with the online retailer. In other words, the local sporting goods 
store that employs our neighbors and sponsors the little league team 
has the same requirement to collect sales taxes as the online merchant. 
It also means that corner store can grow its business more easily. 
Simplified tax requirements and the availability of easy to use 
technology make doing business easier by reducing risk and creating 
opportunity.
    The legislation also helps consumers. Fair competition means more 
choice. The success of electronic commerce should not mean the death of 
Main Street. Instead, our laws should set the stage for all businesses 
to compete and succeed.

Federal Legislation
    NGA calls on Congress to take up the proposals pending before it 
and move ahead with legislation that will modernize the state sales tax 
system and bring it into the 21st century. Specifically, NGA recommends 
that several core elements be part of any bill.
    First, Federal legislation must clearly authorize states to require 
the collection of sales and use taxes on sales of taxable products and 
services into their jurisdictions by remote sellers. More important, 
since authorization is tied to meeting certain simplifications, the 
legislation should recognize the efforts of states that are compliant 
with the SSUTA by granting them the authority to collect immediately. 
If an alternate path is offered for non-SSUTA states, the requirements 
must be clear to avoid litigation when a state makes changes to gain 
collection authority.
    Second, the legislation should include a de minimis or small 
business exception that exempts qualifying businesses from the 
collection requirements. While governors have never specified a level 
for the small business exception, the size of the exception should be 
sufficient to relieve the smallest businesses from collection 
responsibility, but small enough to ensure the exception does not 
swallow the rule. Any exception will preserve a portion of the tax 
collection gap states are working to close. NGA encourages Congress to 
set a low small business exception while allowing states to increase 
the exception as appropriate.
    Third, the legislation should not dictate rates or mandate the 
imposition or elimination of sales taxes. Our Federal system depends on 
states retaining the responsibility and authority to manage their 
taxing policies to meet fiscal requirements. Unless states retain 
flexibility in conforming to any simplification requirements, they 
cannot properly ensure the efficiency and administration of the 
resulting tax system.
    Fourth, governors strongly oppose any suggestion that sales tax 
collection authority be combined with limits or restrictions on state 
taxing authority in other areas. For example, bills such as the 
Business Activity Tax Simplification Act (H.R. 1439) are antithetical 
to efforts by states to modernize their tax systems because they seek 
to revert back to a ``physical presence'' standard from which state 
sales taxes are trying to evolve. Federal legislative proposals like 
H.R. 1439, which would effectively reduce state taxes through Federal 
legislation, should not be combined with Marketplace Fairness as the 
``cost-of-doing-business'' for modernizing state sales tax systems.

Conclusion
    The time has come for Congress to join with states to improve our 
laws and ensure government is not picking winners and losers in 
interstate commerce. S. 1832 represents thoughtful structural change 
that will help bridge the gap between the physical economy of the 20th 
century and the digital economy of the 21st century. We encourage the 
Committee to support efforts to pass legislation this year to promote 
competition and level the playing field for all retailers.
                                 ______
                                 
                                                      July 24, 2012
Hon. John Boehner,
Hon. Nancy Pelosi,
Hon. Harry Reid,
Hon. Mitch McConnell,
United States Congress,
Washington, DC.

Dear Speaker Boehner, Representative Pelosi, Senators Reid and 
            McConnell:

    We are writing to request your support for enactment of S. 1832 
this summer. S. 1832 is the Marketplace Fairness Act, sponsored by 
Senators Enzi, Durbin, Alexander, and others.
    This legislation will protect the rights of our states to determine 
state fiscal policies and establish a level playing field for all 
retailers, both on Main Street and online. This bill will not create a 
new tax. Nor will it require our states to raise taxes. Rather, it will 
permit states to require the largest one percent of out of-state 
sellers to collect an existing tax on sales to in-state buyers. 
Although buyers already owe this state tax, they rarely even know about 
it. The Supreme Court has explicitly held that Congress has the 
authority to grant the states this permission.
    The bill will not apply to the smallest 99 percent of sellers 
online. Only the largest one percent of sellers--those with interstate 
sales over $500,000 per year--will be affected. These sellers easily 
can use already-available computing technology and services to comply. 
If any sellers, even larger sellers, were exempted, fairness to all 
retailers would diminish. So we ask that you support the exemption in 
S. 1832.
    We believe that the time to act is now and, respectfully, request 
your support for enactment of S. 1832 as soon as possible,hopefully by 
August. Please let us know if you need additional information.
            Sincerely,

Robert Bentley
Governor of Alabama

Dennis Daugaard
Governor of South Dakota

Paul LePage
Governor of Maine

Tom Corbett
Governor of Pennsylvania
  

Mitch Daniels
Governor of Indiana

Bill Haslam
Governor of Tennessee

Rick Snyder
Governor of Michigan
      
                                 ______
                                 
       Prepared Statement of the Federation of Tax Administrators

Introduction
    The Federation of Tax Administrators (FTA) is an association of the 
tax agencies in the 50 states, District of Columbia and New York City. 
FTA has long supported legislation to require remote sellers to collect 
sales taxes. Granting states the authority to require all sellers to 
collect sales taxes from all customers will level the playing field for 
competing businesses, improve compliance with taxes that are already 
owed, and remove artificial restrictions that inhibit business 
investment.

Leveling the Playing Field for Sellers
    FTA supports the objectives of S. 1832, The Marketplace Fairness 
Act. The establishment and explosion of the Internet as a marketplace 
has redefined the world of commerce forever. At one time considered 
principally an enforcement problem for the states, the disparate tax 
treatment between remote and local sales, which has existed for many 
decades, now poses challenges for local ``bricks and mortar'' and 
Internet businesses alike. This legislation should not be delayed or 
encumbered by special preemption legislation.
    The Marketplace Fairness Act and related bills respond to the U.S. 
Supreme Court's decisions in National Bellas Hess and Quill.\1\ These 
decisions are widely read to exempt sellers from collecting sales tax 
from customers who are in a state where a seller has no physical 
presence. These taxes are owed but frequently go unpaid, giving the 
seller in that case an unfair competitive advantage over traditional 
local retailers.
---------------------------------------------------------------------------
    \1\ National Bellas Hess, Inc. v. Illinois Dep't of Revenue, 386 
U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
---------------------------------------------------------------------------
    We have provided technical comments on elements in any legislation 
that would assure the maximum participation of the states under the 
Act. The most important of these elements are:

   Authority granted to states that are either members of the 
        Streamlined Sales and Use Tax Agreement (SSUTA) or that choose 
        to conform their laws to Federal statutory standards.

   Ability for states to designate the specific taxes covered 
        by the generic phrase ``sales and use taxes.''

   Flexibility to recognize exceptions from uniform rate and 
        base requirements that have already been agreed to between 
        states and industry groups under SSUTA.

   Authority for states to continue to impose origin sourcing 
        for intrastate sales or sales by non-remote sellers.

   Recognition that states may have additional ways of lowering 
        burdens on remote sellers and the retention of authority for 
        states to use these approaches as well.

   Preservation of state authority to require sellers to 
        maintain necessary records.

   Exclusion of any mandatory vendor compensation provision, as 
        this requirement would significantly reduce state 
        participation.

    FTA believes that legislation that does not have a demonstrable 
need or share the joint support of businesses and states should not be 
considered when enacting remote seller sales tax collection 
legislation. The clearest example of the type of legislation that 
should not encumber the sales tax legislation is the Digital Goods and 
Services Tax Fairness Act of 2011 (S. 971). There is no discernible, 
let alone pressing, need for the legislation because states do not 
widely subject digital goods or services to taxation (with the long-
standing exception of software). Furthermore, discriminating against 
digital goods and services is already illegal under the Internet Tax 
Freedom Act (ITFA), which specifically prohibits multiple or 
discriminatory taxes on electronic commerce. In addition, the states 
that have closely examined S. 971 believe they would suffer significant 
revenue losses.
    Finally, states have identified numerous technical deficiencies 
with S. 971, which will create uncertainty, unnecessarily disrupt tax 
administration, and lead to years of litigation. Until businesses and 
states can reach a consensus on how to address these technical 
deficiencies, the Digital goods and Services Tax Fairness Act or any 
other preemptive legislation like it should not be considered when 
enacting remote seller sales tax collection legislation.
    Again, we thank the Committee for the opportunity to present our 
views on the important topic of remote seller sales tax collection 
legislation. We urge Congress to enact legislation like S. 971 this 
year.
                                 ______
                                 
                                  National League of Cities
                                      Washington, DC, July 31, 2012

Hon. John D. Rockefeller IV,
Chairman,
Commerce, Science, and Transportation Committee,
United States Senate,
Washington, DC.

Hon. Kay Bailey Hutchison,
Ranking Member,
Commerce, Science, and Transportation Committee,
United States Senate,
Washington, DC.

Dear Chairman Rockefeller and Senator Hutchison:

    On behalf of the 19,000 cities and towns represented by the 
National League of Cities (NLC), I write to applaud you for holding a 
hearing on the sales tax fairness issue. Legislation such as the Market 
Place Fairness Act (S. 1832) will assure a simpler system of taxation 
and help our members recover tax revenues that are due from purchases 
made by remote means. Importantly, the Market Place Fairness Act does 
not impose a new tax, but would provide states and localities with a 
mechanism to require the collection of existing sales and use taxes on 
Internet and mail-order sales. As you know, this is legislation NLC has 
long supported.
    In 1992, the United States Supreme Court ruled in Quill Corp. v. 
North Dakota, 504 U.S. 298, that states cannot require retailers to 
collect sales taxes from purchasers who are not located in the same 
state as the seller. As a consequence, local retailers who compete with 
online companies are at a 6 to 10 percent price disadvantage, and state 
and local governments are deprived of billions of dollars in revenue. 
It is significant to note that consumers are already required to pay 
taxes when they make online purchases, just like when they make 
purchases in a store; however, most taxpayers are not aware of this 
responsibility, and states and localities cannot enforce payment.
    In its decision, the Court explicitly stated that Congress, with 
its clear constitutional authority to regulate interstate commerce, can 
grant states and local governments the option to require sellers who do 
not have a physical presence in their jurisdiction to charge and 
collect sales taxes from their customers. The Market Place Fairness Act 
simply provides such authority. This year alone, states and local 
governments stand to lose an estimated $23.3 billion, according to a 
University of Tennessee study.
    Again, thank you for recognizing the importance of the Market Place 
Fairness Act. As local governments continue to face the fifth straight 
year of declines in local revenues with further declines projected in 
2013 and continuing cutbacks in Federal aid, we ask for passage of this 
legislation as soon as possible. Our ability to preserve needed 
infrastructure investments and essential services in our communities 
rests on it.
            Sincerely,
                                           Donald J. Borut,
                                                Executive Director.
                                 ______
                                 
                        Retail Industry Leaders Association
                                        Arington, VA, July 31, 2012
Hon. John D. Rockefeller IV,
Chairman,
Hon. Kay Bailey Hutchison,
Ranking Member,
U.S. Senate Committee on Commerce, Science, and Transportation,

Dear Chairman Rockefeller and Ranking Member Hutchison:

    On behalf of the Retail Industry Leaders Association (RILA), we 
commend the Senate Commerce, Science, and Transportation Committee for 
holding an informational hearing this week on the issue of e-fairness 
and S. 1832, the Marketplace Fairness Act, legislation introduced by 
Senators Mike Enzi, Dick Durbin and Lamar Alexander. The bipartisan 
Marketplace Fairness Act corrects a critical flaw in our state taxation 
policies that today puts brick and mortar stores at a competitive 
disadvantage to online-only companies that aren't required to collect 
state sales taxes. RILA thanks the Committee for brining greater 
attention to this issue and urges Congress to enact the Marketplace 
Equity Act this year.
    By way of background, RILA is the trade association of the world's 
largest and most innovative retail companies. RILA promotes consumer 
choice and economic freedom through public policy and industry 
operational excellence. Its members include more than 200 retailers, 
product manufacturers, and service suppliers, which together account 
for more than $1.5 trillion in annual sales, millions of American jobs 
and operate more than 100,000 stores, manufacturing facilities and 
distribution centers domestically and abroad.
    At issue is a decades-old loophole that requires that brick and 
mortar retailers collect sales taxes if they have a physical presence 
in a state, while online-only companies aren't held to the same 
standard. This policy has the effect of putting local brick and mortar 
stores, who take the time to build a store, hire locally, contribute to 
the community, and pay property taxes, at a 5-10 percent competitive 
disadvantage on price. Tax policy that treats two competitors 
differently is inherently unfair, and the Marketplace Fairness Act 
pending before Congress takes a reasonable approach toward leveling the 
playing field while providing protection for small businesses and 
requiring states to simplify their collection requirements on remote 
sellers. To be clear, this is not a new tax or a tax on remote sellers; 
it is simply a question of whether all types of business will collect, 
on behalf of the consumer, a tax that is already owed.
    In closing, RILA appreciates that the Committee is giving the issue 
of e-fairness and the Marketplace Fairness Act the appropriate 
attention it deserves. The growing bipartisan support for e-fairness 
legislation over the past few months has become evident, with 
governors, editorial boards and businesses all calling on Congress to 
take action this year. RILA urges Congress to take action on the 
Marketplace Fairness Act this year so that the government gets out of 
the business of picking winners and losers in the marketplace, and so 
that our members can get back to the business of serving our customers 
and helping to grow the economy.
            Sincerely,
                                               Bill Hughes,
                                            Senior Vice President, 
                                                Government Affairs.

Cc: Members of the Senate Commerce, Science, and Transportation 
            Committee
                                 ______
                                 
Hon. John D, Rockefeller IV,
Chairman,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC.

Dear Chairman Rockefeller:

    Thank you for holding a hearing on the critical issue of the 
disparity in sales tax collection between brick-and-mortar retailers 
and online sellers.
    As Chairman of the West Virginia Retailers Association and owner of 
two local jewelry stores in South Charleston and Hurricane, I know 
firsthand how the inequity in our current sales tax collection 
structure can affect retailers.
    I am proud to make a contribution to the economy of our state. My 
business provides employment for sixteen West Virginians, does business 
with local suppliers and vendors wherever possible, and pays taxes that 
support local government services, Those expenditures ripple throughout 
the local economy, and we are enthusiastic supporters of community 
activities in non-economic ways as well.
    But Main Street stores like mine that support local jobs are under 
attack. The reason: big, out-of-state sellers on the Internet don't 
have to collect sales tax on most of their sales, giving them a 
significant pricing advantage on top of the benefits of working with 
high volume, law overhead and outsourced customer ``service.'' For me 
in West Virginia, that means an out-of-state ``e-tailer'' can 
automatically undercut my best price just by virtue of not having to 
collect our state's six percent sales tax.
    This disparity has forced me to cut margins on the merchandise and 
services I sell just in order to compete with Internet sellers who are 
able to offer jewelry with no sales tax. I have no problem with 
competing for customers and business; in fact, I welcome it. I want to 
compete with other businesses to give consumers the best experience 
they can get. But I should be competing among all the factors that 
define healthy competition--customer service, product offerings, and 
even price--not sales tax. It's an unfair and unequal system that 
forces me to compete on our current sales tax collection system, which 
favors an Internet seller over a local retailer.
    With this current system, it's not only my local stores that 
suffer. Lost sales or lost margin d disparity on sales tax collection 
means less money for employee wages, less money for inves into my store 
and my community, and fewer taxes that support local government 
services. online sales tax collection is about more than just fairness 
among retailers. West Virginia is o many states losing out on more than 
$23 billion a year nationwide in uncollected sales tax re Those tax 
dollars are badly needed to pay the salaries of essential government 
workers like officers, firefighters, ambulance crews and 
schoolteachers.
    Federal legislation like the Marketplace Fairness Act law would 
finally level the sales tax play allowing all merchants to play under 
the same rules regardless of whether they sell their me online, through 
the mail or in a traditional bricks-and-mortar store. l strongly urge 
you and the Committee to work towards a level playing field for all 
merchants--local and online.
            Sincerely,
                                             David Broyles,
                                                          Chairman,
                                   West Virginia Retailers Association.
                                                             Owner,
                                               Calvin Broyles Jewelers.
                                 ______
                                 
 Prepared Statement of Joseph Henchman, Vice President, Legal & State 
                        Projects, Tax Foundation

The Proper Role of Congress in State Taxation: Ensuring the Interstate 
        Reach of State Taxes Does Not Harm the National Economy

    Mr. Chairman, Mr. Ranking Member, and members of the Committee:

    I appreciate the opportunity to submit this statement on Congress's 
role in the debate over state sales taxation of online purchases. In 
the 75 years since our founding in 1937, the Tax Foundation has 
monitored tax policy trends at the Federal and state levels, and our 
data and research is heavily relied upon by policymakers, the media, 
and the general public. Our analysis is guided by the idea that taxes 
should be as simple, neutral, transparent, and stable as possible, and 
as a 501(c)(3) non-profit, non-partisan organization, we take no 
position on any pending legislation.
    We hope that the material we provide will be helpful in the 
Committee's consideration of the issue.

Executive Summary
   After the bitter experience of the Articles of 
        Confederation, the Constitution empowered Congress with the 
        responsibility to rein in state tax overreaching when it 
        threatened to do harm to the national economy.

   Consequently, states were not permitted to tax items in 
        interstate commerce at all, from the Founding until 
        approximately the 1950s.

   Since then, as formally adopted by the U.S. Supreme Court in 
        the Complete Auto decision (1977), states may tax interstate 
        commerce so long as the tax is non-discriminatory, fairly 
        apportioned, related to services, and applies only to 
        businesses with substantial presence (nexus).

   In a series of decisions, most recently the Quill decision 
        of 1992, the U.S. Supreme Court explained that ``substantial 
        nexus'' for sales/use tax purposes means physical presence of 
        property or employees. The Court ruled that it exceeds to state 
        powers for them to be able to demand use tax collection from 
        companies that are not physically present in the state.

   States have sought to overrule the Quill decision, either 
        legislatively (``Streamlined'') or through defiance (``Amazon'' 
        tax statutes). The defiance approach in particular has caused 
        significant disruption and uncertainty to the economy.

   Every state with a sales tax also imposes a use tax, levied 
        on taxable items upon which no sales tax has been paid. In 
        other words, use taxes seek to thwart competitive pressure from 
        other states with lower tax rates. Taxpayer compliance with 
        these protectionist use taxes is minimal. (Use tax, with a few 
        exceptions, is imposed on the consumer and not the seller.)

   Congress has passed a number of statutes limiting the scope 
        of state tax authority on interstate activities 
        (``preemption''), carefully balancing (1) the ability of states 
        to set tax policies in line with their interests and that allow 
        interstate competition for citizens over baskets of taxes and 
        services and (2) limiting state tax power to export tax burdens 
        to non-residents or out-of-state companies, or policies that 
        would excessively harm the free-flow of commerce in the 
        national economy.

   When a resident of a state purchases from a brick-and-mortar 
        retailer, they generally must pay sales tax. When the same 
        resident in the same state purchases the same product from an 
        online retailer, they often do not pay sales tax.

   Many large Internet retailers are expanding the number of 
        states in which they have physical presence, to enable next-day 
        delivery, but that is not the case for many smaller sellers 
        that remain in just one location and use common carriers to 
        deliver purchases.

   There are approximately 9,600 jurisdictions in the United 
        States that collect sales tax, a number that grows by several 
        hundred each year. Subscription tax software is inadequate and 
        can be expensive for occasional sellers, and few states provide 
        adequate tax lookup or consolidated tax filing options. Sales 
        tax can vary by product, by time, and by location in the state. 
        In 7 states, local governments can have a different sales tax 
        base from the state tax base.

   Congress has five basic options on how it may proceed:

     Reaffirm the physical presence rule for sales 
            taxation, and by implication, the disparity of treatment 
            between brick-and-mortar sales and Internet sales.

     Reaffirm the physical presence rule but adopt a new 
            tax approach that mitigates the disparity of treatment 
            between brick-and-mortar sales and Internet sales (such as 
            an origin-based system or a national sales tax on online 
            purchases).

     Modify the physical presence rule in the limited 
            context of state collection of use tax from out-of-state 
            sellers, by those states that have adopted simplified sales 
            tax systems under minimal Federal standards, to reduce the 
            harm to interstate commerce. This trade-off would replace 
            the check on state power provided at present by the 
            physical presence rule.

     Repeal the physical presence rule without conditions 
            on the states, granting states unchecked authority to 
            export tax burdens and damage interstate commerce.

     Do nothing and risk the continued growth of unchecked 
            and fragmented state authority to export tax burdens and 
            damage interstate commerce.

The Constitution Empowers Congress to Limit State Tax Power When It 
        Seeks to Shift Tax Burdens to Non-Residents or Do Harm the 
        National Economy
    What you have before you is not a new issue. Absent congressional 
or judicial checks, states have an incentive to shift tax burdens from 
physically present individuals and businesses, to those who are beyond 
their borders. Indeed, it was the states' unchecked behavior in this 
regard that led to the Constitutional Convention in the first place. 
Under the Articles of Confederation, states with ports taxed commerce 
bound for interior states, tariff wars proliferated, and the national 
economy was imperiled. As Justice Johnson described in 1824, these 
actions were ``destructive to the harmony of the states, and fatal to 
their commercial interests abroad. This was the immediate cause that 
led to the forming of a convention.'' \1\
---------------------------------------------------------------------------
    \1\ See, e.g., Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 224 (1824) 
(Johnson, J., concurring).
---------------------------------------------------------------------------
    And so the Constitution was adopted, and through that document, the 
Congress was granted the power to restrain states from enacting laws 
that harm the national economy by discriminating against interstate 
commerce.\2\ James Madison noted that these powers would check the 
``clamors of impatient avidity for immediate and immoderate gain'' that 
drive state legislation discriminating against non-residents.\3\ 
Justice Story later praised the ``wisdom and policy in restraining the 
states themselves from the exercise of [taxation] injuriously to the 
interests of each other.'' \4\
---------------------------------------------------------------------------
    \2\ See U.S. Const. art. I, Sec. 8, cl. 3 (Interstate Commerce 
Clause); U.S. Const. art. I, Sec. 10, cl. 2 (Import-Export Clause); 
U.S. Const. art. I, Sec. 10, cl. 3 (Tonnage Clause); U.S. Const. art. 
IV, Sec. 2, cl. 1 (Privileges and Immunities Clause); U.S. Const., 
amend. XIV, Sec. 1 (Privileges or Immunities Clause).
    \3\ James Madison, The Federalist No. 42 (1788).
    \4\ 1 Story Const Sec. 497.
---------------------------------------------------------------------------
    So strong was this concern that the rule for a century and a half 
was that states could not tax interstate commerce at all.\5\ This 
eroded in the 1950s and 1960s as it was recognized that those engaged 
in interstate commerce do enjoy benefits in states where they are 
present, so it is not unfair to have them support those services with 
taxes. The complete ban on state taxation of interstate commerce was 
abandoned in 1977, replaced by a recognition that resident businesses 
engaged in interstate commerce should pay for the fair share of the 
state services they consume. In Complete Auto Transit, Inc. v. Brady, 
the U.S. Supreme Court held that states may tax interstate commerce if 
the tax meets a four part test: \6\
---------------------------------------------------------------------------
    \5\ See, e.g., Freeman v. Hewit, 329 U.S. 249, 252-53 (1946) (``A 
State is . . . precluded from taking any action which may fairly be 
deemed to have the effect of impeding the free flow of trade between 
States''); Leloup v. Port of Mobile, 127 U.S. 640, 648 (1888) (``No 
State has the right to lay a tax on interstate commerce in any 
form.'').
    \6\ 430 U.S. 274 (1977).

   nexus, a sufficient connection between the state and the 
---------------------------------------------------------------------------
        taxpayer;

   fair apportionment, the state cannot tax beyond its fair 
        share of the taxpayer's income;

   nondiscrimination, the state must not burden out-of-state 
        taxpayers while exempting in-state taxpayers;

   fairly related, the tax must be fairly related to services 
        provided to the taxpayer.

    Before and since Complete Auto, the courts have routinely exercised 
this power to restrain state tax infringements on interstate commerce, 
and these decisions are one of the more non-controversial aspects of 
constitutional law. Congress has also been active in this area, 
legislating limits on state tax power where states are incapable of 
achieving a simplified, uniform system that restrain each state from 
claiming more than its fair share of taxes on interstate commerce. 
These have included prohibiting state taxes on food stamps, Federal 
Reserve banks, interstate airline and bus travel, satellite services, 
and nonresident members of the military and nonresident members of 
Congress. Congress has also banned discriminatory state taxes on 
Federal employees, interstate electricity transmission, and interstate 
railroads.

Nexus Based on Physical Presence
    Generally, the historical standard is that states may tax those 
physically present in the jurisdiction, and may not tax those not 
physically present. This is premised on a view known as the ``benefit 
principle'': that the taxes you pay should roughly approximate the 
services you consume. State spending overwhelmingly, if not completely, 
is meant to benefit the people who live and work in the jurisdiction. 
Education, health care, roads, police protection, broadband access, 
etc.: the primary beneficiaries are state residents. The ``benefit 
principle'' thus means that residents should be paying taxes where they 
work and live, and jurisdictions should not tax those who don't work 
and live there.
    A physical presence standard for state taxation is in line with 
this fundamental view of taxation. Developments have arisen in the 
three major state tax areas (corporate income tax, individual income 
tax and sales tax), as well as with some other state taxes (such as 
telecommunications taxes, taxes on digital goods, car rental taxes, and 
so forth). Bills have been introduced in the Congress that seek to 
reaffirm the physical presence rule in these areas (such as BATSA with 
corporate income tax, Mobile Workforce with individual income tax).

Recent Developments in State Sales Tax: Overview
    There are a number of proposals to reverse a series of U.S. Supreme 
Court decisions (most recently the Quill decision of 1992) that 
prohibit states from imposing sales tax collection obligations on 
businesses with no property or employee in the state. This ``physical 
presence'' standard is meant to prevent states from shifting tax 
burdens to non-residents away from residents who are the primary 
beneficiary of state services, while also protecting the free flow of 
interstate commerce from the compliance costs of non-uniform and 
numerous (9,600+) sales tax jurisdictions in the United States (see 
Figure 1, Figure 2, and Table 2).
    The steadily increasing growth of Internet-based commerce has 
however led to frustration with this standard, primarily due to 
disparate sales tax treatment of similar goods within states that has 
no economic basis. This can be addressed while also ensuring that some 
standard exists to restrain states from engaging in destructive 
behavior, such as tax exporting to non-voters or imposing heavy 
compliance costs on interstate businesses, that the Congress is 
empowered to prevent. Further, because economic integration is greater 
now than it has ever been before, the economic costs of nexus 
uncertainty are also greater today and can ripple through the economy 
much more quickly. These actions are only the latest chapter in a long 
saga over the proper tax treatment of sales made over the Internet, and 
an even longer saga over the proper scope of state taxing authority. At 
its core is a dispute over which is more important: limiting state 
power to tax nonresidents and thus harm the national economy, or 
ensuring that some transactions do not escape tax because they are 
conducted online. Discussions following a recent compromise in 
California, driven by the desire of large Internet retailers to expand 
their physical presence to enable next-day delivery, suggest that there 
are policy options that could achieve both ends.

Figure 1: New State/Local Sales Tax Jurisdictions Created Each Year



Figure 2: Sales Tax Jurisdictions with Changes Each Year



Table 2: Other Examples of Contributors to Sales Tax Complexity



The Quill Decision: Not a Loophole, But a Check on State Power to 
        Export Tax Burdens and Do Harm Interstate Commerce
    What is nexus for a remote seller? In 1967, the U.S. Supreme Court 
held that a business does not have nexus with a state if the business 
has no retail outlets, solicitors, or property in the state, and 
communicates with customers only by mail or common carrier as part of a 
general interstate business.\7\ Otherwise, the Court concluded, states 
could ``entangle National's interstate business in a virtual welter of 
complicated obligations to local jurisdictions with no legitimate claim 
to impose a fair share of the cost of the local government.'' This 
decision was reaffirmed after the Complete Auto test was announced in 
1977.\8\
---------------------------------------------------------------------------
    \7\ See National Bellas Hess, Inc. v. Dept. of Revenue of Ill., 386 
U.S. 753, 759-60 (1967).
    \8\ See Nat'l Geographic Society v. Ca. Bd. Of Equalization, 430 
U.S. 551, 559 (1977).
---------------------------------------------------------------------------
    During the 1980s, some academics and many states criticized 
National Bellas Hess as archaic, formalistic, and outmoded. Officials 
were encouraged to ignore the decision, and some state courts 
disregarded it, even as the number of sales taxes rose from 2,300 to 
6,000. Different murky definitions of economic nexus have been 
proposed:

   Engaged in exploiting the local market on a regular, 
        systematic, large-scale basis.

   Presence of intangible property or affiliates

   Number of customers in state, value of assets or deposits in 
        the state, and receipts attributable to sources in the state

   Analysis of frequency, quantity, and systematic nature of 
        economic contacts with the state

   Derivation of economic benefits from state's residents

    Defying the Court rulings, North Dakota enacted a law requiring the 
out-of-state Quill Corp. to collect sales tax on its sales to 3,000 in-
state customers. Any state that advertised three times in the state was 
liable. In the case, the U.S. Supreme Court reaffirmed National Bellas 
Hess and Complete Auto.\9\ There they stated that the physical presence 
rule ``firmly establishes the boundaries of legitimate state authority 
to impose a duty to collect sales and use taxes and reduces litigation 
concerning those taxes.''
---------------------------------------------------------------------------
    \9\ See Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
---------------------------------------------------------------------------
The Streamlined Sales Tax Project Has Watered Down Membership 
        Standards in an Unsuccessful Effort to Entice More State 
        Members in Its Effort to Change Quill
    Today, there are over 9,600 state and local sales tax jurisdictions 
in the United States. There are different rates on different items, 
they change frequently, and are not even aligned to 9-digit zip codes. 
States are reluctant to cooperate on even basic rules and definitions.
    The Streamlined Sales Tax Project (SSTP) was launched in 2000 with 
the mission of getting states to adopt changes to their sales taxes to 
make them simple and uniform. SSTP then hopes to convince Congress or 
the courts to overrule Quill and allow use tax collection obligations 
on out-of-state companies (``Main Street Fairness Act'').
    However, the SSTP has abandoned simplification efforts and any 
attempt to reduce the number of sales tax jurisdictions, instead 
focusing on uniformity efforts. In many cases, the Project has enabled 
state sales tax complexity by permitting separate tax rates for certain 
goods. States generally are reluctant to yield parochial advantages, 
even with the possibility of online sales tax revenue in return, 
undermining their argument to Congress as part of the Main Street 
Fairness Act that they have succeeded in their mission. Large states 
have generally avoided the SSTP, and membership has been stuck at 20 
states for some time. This in turn has led to impatience from states 
and others.

Some States Have Sought to Defy Quill through Unconstitutional 
        Legislation
    In 2008, New York adopted an ``Amazon'' tax, nicknamed after the 
Internet retailer as the most visible target. The law held that a 
person or business with no physical presence in the state nevertheless 
has nexus if it (1) enters into agreement with in-state resident 
involving commissions for referring potential customers; and (2) has 
gross receipts from sales by out-of-state company from referrals within 
the state are more than $10,000 in a 12-month period.
    Amazon.com & Overstock.com responded by terminating affiliate 
programs in New York, and Amazon.com filed a lawsuit in state court. 
The law was upheld by a trial judge (New York's trial courts are called 
the ``New York Supreme Court,'' causing confusion about who upheld the 
Amazon tax as constitutional); the judge concluded that Amazon.com's 
in-state affiliates are necessary and significant to establishing and 
maintaining out-of-state company's market in the state. But because 
they make up only 1.5 percent of sales, that was the basis for the 
appeal. The New York Supreme Court, Appellate Division ruled in late 
2010 that law is not facially unconstitutional but may be 
unconstitutional for Amazon. The case was remanded to the lower court, 
but Amazon is appealing to state's highest court, the New York Court of 
Appeals. The case is ongoing.
    In 2009, Rhode Island and North Carolina adopted identical New 
York-style laws. Neither has seen any revenue and Rhode Island has 
actually seen revenue loss due to reduced income tax collections from 
terminated in-state affiliates. Laws were also passed in California and 
Hawaii but vetoed. (See Table 3 for a status of all state efforts to 
defy Quill legislatively.)

Table 3: Status of State Efforts to Defy Quill Legislatively



    In 2010, Colorado considered the same law but faced opposition from 
in-state affiliates. Instead it adopted a law (H.B. 10-1193) designed 
to push Amazon into collecting use taxes without explicitly requiring 
it. In January 2010, a Federal judge stayed the law stayed as probably 
unconstitutional on First Amendment grounds, and the law was thrown out 
completely in April 2012.\10\ A similar law in North Carolina was also 
struck down as violating the First Amendment in October 2010.
---------------------------------------------------------------------------
    \10\ See Mark Robyn, ``Colorado Amazon Regulations Ruled 
Unconstitutional,'' (Apr. 4, 2012), http://www.taxfoundation.org/blog/
show/28111.html
---------------------------------------------------------------------------
    In 2011, Illinois and Arkansas enacted New York-style laws (the 
Illinois law was subsequently ruled unconstitutional). California 
enacted one but after a possible repeal referendum was proposed, the 
state and Amazon.com reached an agreement whereby Amazon.com will 
develop a physical presence in the state (i.e., build warehouses).
    While for the most part unsuccessful, these state efforts have 
highlighted the desire to modify the Quill holding in some way. This 
pressure is likely to continue.

Possible Solutions
    Substantial progress has been made in recent months toward possible 
solutions that could (1) simplify sales tax systems and avoid 
discriminatory compliance costs, (2) eliminate non-neutral tax rates on 
similar products sold by online and brick-and-mortar businesses, (3) 
limit taxation in a state to those residents who enjoy the benefits of 
state services, (4) prevent multiple taxation of interstate commerce, 
and (5) prevent unconstitutional and fragmented state attempts to 
impose such tax burdens in a destructive manner.
    Congress has five basic options on how it may proceed:

   Reaffirm the physical presence rule for sales taxation, and 
        by implication, the disparity of treatment between brick-and-
        mortar sales and Internet sales.

   Reaffirm the physical presence rule but adopt a new tax 
        approach that mitigates the disparity of treatment between 
        brick-and-mortar sales and Internet sales (such as an origin-
        based system or a national sales tax on online purchases).

   Modify the physical presence rule in the limited context of 
        state collection of use tax from out-of-state sellers, by those 
        states that have adopted simplified sales tax systems under 
        minimal Federal standards, to reduce the harm to interstate 
        commerce. This trade-off would replace the check on state power 
        provided at present by the physical presence rule.

   Repeal the physical presence rule without conditions on the 
        states, granting states unchecked authority to export tax 
        burdens and damage interstate commerce.

   Do nothing and risk the continued growth of unchecked and 
        fragmented state authority to export tax burdens and damage 
        interstate commerce.

    The third option is the basis for several pending pieces of 
legislation; this would allow the states to collect use tax from remote 
sellers on condition that they simplify their sales tax systems in 
accordance with minimum Federal specifications. The Marketplace Equity 
Act (H.R. 3179) and Marketplace Fairness Act (S. 1832) are two recent 
proposals that would eliminate the physical presence rule but otherwise 
make advances towards ensuring that states reduce the burdens 
associated with collecting their sales taxes. Example provisions 
include requirements that states have a single state-level agency that 
administer all sales tax rules, offer one tax return and audit for the 
entire state, require one uniform tax base for the entire state, 
provide software that identifies the applicable tax rate for a sale, 
including local rates and hold sellers harmless for any software errors 
or mistakes by the state, provide 30 days' notice of any local sales 
tax rate change, and exempt sellers with a de minimis level of 
collections. (See Table 4 for a comparison.) Effective simplification 
is a necessity for any Federal proposal.

Table 4: Provisions of Current Pending Federal Legislation



    All these simplifications are desirable, and together would provide 
a sufficient check on state tax overreaching while leaving ample space 
for states to structure their tax systems and rates in line with their 
own preferences. The only infringement on state sovereignty is an 
infringement on state power to burden interstate commerce with 
problematic tax policy.
    Congress has passed a number of statutes limiting the scope of 
state tax authority on interstate activities, carefully balancing (1) 
the ability of states to set tax policies in line with their interests 
and that allow interstate competition for citizens over baskets of 
taxes and services and (2) limiting state tax power to export tax 
burdens to non-residents or out-of-state companies, or policies that 
would excessively harm the free-flow of commerce in the national 
economy. A package specifying a floor of all the simplifications listed 
in Table 5 would be welcome and would greatly reduce constraints on 
economic growth.

Conclusion
    Businesses throughout our Nation's history have plied their trade 
across state lines. Today, with new technologies, even the smallest 
businesses can sell their products and services in all fifty states 
through the Internet and through the mail. We at the Tax Foundation 
track the numerous rates, bases, and exemptions that litter our state 
sales tax codes. Frequent and ambiguous alterations of tax codes and 
the confusion they cause are a key source of the growing tax compliance 
burden. We have several staffers as well as computer-based and 
publication subscriptions dedicated to being up to date and accurate on 
the frequent changes, but even we have trouble doing it. It would be 
extremely difficult for those in business to do business, not conduct 
tax policy research.
    We now live in a world of iPods, telecommuting, and Amazon.com. It 
is a testament to the Framers that their warnings about states' 
incentives to hinder the national economy remain true today. Some may 
argue that faster roads and powerful computers mean that states should 
now be able to tax everything everywhere. While some constitutional 
principles surely must be revisited to be applied to new circumstances, 
the idea that parochial state interests should not be permitted to 
burden interstate commerce remains a timeless principle regardless of 
how sophisticated technology may become.

About the Tax Foundation
    The Tax Foundation is a non-partisan, non-profit research 
institution founded in 1937 to educate taxpayers on tax policy. Based 
in Washington, D.C., our economic and policy analysis is guided by the 
principles of sound tax policy: simplicity, neutrality, transparency, 
and stability.

About the Center for Legal Reform at the Tax Foundation
    The Tax Foundation's Center for Legal Reform educates the legal 
community and the general public about economics and principled tax 
policy. Our research efforts focus on the scope of taxing authority, 
the definition of tax, economic incidence, and taxpayer protections.
                                 ______
                                 
                           The Council of State Governments
                                                     August 1, 2012

Senator Jay Rockefeller,
Chairman,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

Senator Kay Bailey Hutchison,
Ranking Member,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Senator Rockefeller and Senator Hutchison:

    On behalf of the Council of State Governments (CSG), the Nation's 
only association serving all three branches of state government, we 
want to express CSG's support for the Marketplace Fairness Act and 
commend you for highlighting the importance of tax fairness at your 
upcoming hearing. This legislation is essential both for establishing a 
level playing field for America's retail employers and ensuring that 
states and territories have the legal authority they need to collect 
revenues that are already owed to them.
    Governors and legislators appreciate that our country faces a 
fiscal crisis. We have first-hand experience in meeting this challenge 
having collectively addressed over $500 billion in budget gaps since 
the beginning of this recession.
    However, it is this very fiscal challenge that underpins the 
importance of Congress passing the Marketplace Fairness Act. In an era 
of decreasing revenues and stark economic challenges, we can't afford 
to maintain revenue systems which advantage one sector of our retail 
community over another while depriving our jurisdictions of revenue 
which could be used to lower tax burdens for all, make needed 
investments in infrastructure, or pursue any other number of policy 
options that states and territories are best equipped to identify.
    Given the long list of issues currently before the Senate, we thank 
you both for choosing to draw attention to this important issue. If we 
can be of assistance to you and your staff as you pursue the impact of 
this important legislation please do not hesitate to contact ourselves 
or CSG's Washington Office Director, Chris Whatley, at (202) 624-5460 
or [email protected]
            Sincerely,
                           State Senator Jay Emler, Kansas,
                                                      CSG Chairman.
                         Governor Luis Fortuno, Puerto Rico
                                                     CSG President.
                                 ______
                                 
                                                     August 1, 2012
Hon. John D. Rockefeller IV,
Senate Commerce, Science, Transportation Committee.

Hon. Kay Bailey Hutchison,
Senate Commerce, Science, Transportation Committee.

Dear Chairman John D. Rockefeller and Ranking Member Kay Bailey 
            Hutchison:

    Our undersigned labor unions thank you for your leadership in 
convening the Commerce Committee August 1 hearing, ``Marketplace 
Fairness: Leveling the Playing Field for Small Business'', on the 
bipartisan Enzi Durbin-Alexander ``Marketplace Fairness Act'' (S. 
1832). Our unions strongly support S. 1832 and this hearing is an 
excellent opportunity to demonstrate its broad and bi-partisan support. 
We support S. 1832 because it would grant states, which streamline 
their sales tax systems, the authority needed to collect the sales and 
use taxes they are owed. As sales increasingly move to the internet, it 
is vital to highlight the resulting problems and S. 1832's potential 
benefits.
    Our unions have long supported constructive Congressional proposals 
that enable state and local governments to collect sales and use tax 
from remote and online sellers of goods and services. University of 
Tennessee economics professor Dr. William Fox estimates uncollected use 
tax from all remote sales in 2012 will cost state and local governments 
a cumulative $23 billion. While the loopholes are always problematic, 
they are very troubling now because states and localities suffer from 
years of broadly reduced revenues. In addition, out of state and online 
sales are skyrocketing along with uncollected sales and use taxes. 
Together, these loopholes inflict unfair competitive disadvantages on 
Main Street and mom-and-pop retailers.
    Now is the time to enact S. 1832. First, Congress has clear 
constitutional authority to act to regulate interstate commerce of 
online and remote sales. Second, state and local governments support S. 
1832 and urge Congress to act on this issue. Their ongoing work to 
develop the Streamlined Sales and Use Tax Agreement demonstrates they 
could implement effective and efficient solutions. Third, both large 
and small businesses also support S. 1832 and urge Congress to act. 
They are supportive because it levels the playing field for all 
businesses and streamlines sales tax systems. Finally, many experts 
have demonstrated that small business remote sellers can relatively 
easily collect sales and use taxes. Accurate, affordable, and user-
friendly software now provides automatic computation, compilation, and 
collection of sales taxes.
    We must note that S. 1832 would not enact new taxes. The affected 
taxes already exist under current law in all45 states (and the District 
of Columbia), which impose a sales and use tax. Unfortunately, millions 
of U.S. consumers either unknowingly or purposely do not pay existing 
use taxes on their remote and online purchases. S. 1832 merely provides 
states the authority and ability to collect these existing uncollected 
taxes. It is also important to note that S. 1832 would have no cost to 
the Federal Government.
    We thank your Committee for convening this important hearing and 
providing Senators Enzi, Durbin, and Alexander with an opportunity to 
discuss the ``Marketplace Fairness Act''. We strongly support their 
bill.
            Sincerely,

American Federation of Labor and Congress of lndustrial Organizations 
(AFL-CIO)

American Federation of State, County and Municipal Employees (AFSCME)

American Federation of Teachers (AFT)

Department for Professional Employees, AFL-CIO (OPE)

International Association of Fire Fighters (IAFF)

International Federation of Professional and Technical Engineers 
(IFPTE)

National Education Association (NEA)

Service Employees International Union (SEIU)

The International Union, United Automobile, Aerospace and Agricultural 
Implement Workers of America (UAW)
                                 ______
                                 
                Software Finance and Tax Executives Council
                                                     August 1, 2012
Via E-mail
Hon. John D. Rockefeller, IV,
Chairman
Hon. Kay Bailey Hutchison,
Ranking Member,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC.
       Re: Hearing on S. 1832--The Marketplace Fairness Act

Dear Chairman Rockefeller and Ranking Member Hutchison:

    I write on behalf of the Software Finance and Tax Executives 
Council (SoFTEC) to express the views of the software industry on S. 
1832, the Marketplace Equity Act. If enacted, this legislation would 
give states the power to require that out-of-state sellers collect and 
remit state sales and use taxes owed by consumers who purchases goods 
and services from such sellers; in essence, a legislative overturn of 
the Supreme Court's decision in Quill v. North Dakota. SoFTEC strongly 
believes that any legislation making such significant changes must also 
(1) require that a state first adopt ``radical simplification'' of its 
sales and use tax laws and (2) resolve uncertainty regarding the 
appropriate nexus standard for imposition of state income and other 
business activities on out-of-state businesses. Because S. 1832 lacks 
such provisions, SoFTEC does not support this legislation in its 
current form. We ask that you make this letter a part of the record of 
the hearing on this matter.
    SoFTEC is a trade association providing software industry focused 
public policy advocacy in the areas of tax, finance and accounting. 
SoFTEC's members sell their products in many states and must maintain 
an infrastructure that handles the administrative burden associated 
with collecting and remitting sales and use taxes for those states in 
which they have physical presence. SoFTEC's members have an interest in 
this legislation because enactment of it would expand the number of 
states for which they must collect and remit sales taxes and would 
require significant investment to expand their infrastructure devoted 
to sales and use tax compliance. Enactment of the bill also could lead 
to an inference that the physical presence nexus standard has been 
repealed not only for sales and use taxes but for state income and 
other business activity taxes as well, significantly increasing their 
exposure to such taxes.

Radical Simplification
    One reason SoFTEC does not support the bill is that it would not 
require that states radically simplify their sales and use tax systems 
as a prerequisite to the grant of collection and remittance authority. 
In deciding the physical presence nexus standard was appropriate to 
protect remote sellers from the burdens of administering myriad state 
and local sales and use taxes, the Supreme Court in Quill pointed to 
the Nation's 7,800 plus taxing jurisdictions at the time. Quill was 
decided in 1992 and the number of taxing jurisdictions has grown to 
9,600 in the meantime. In short, since Quill was decided, the burden 
has grown significantly with a nearly increase in the number of taxing 
jurisdictions.
    The bill does nothing to reduce the number of tax jurisdictions for 
which remote sellers would have to collect and remit sales and use 
taxes. The bill, instead, seeks to address this problem by mandating 
that states furnish ``adequate'' software that would identify the 
applicable rate. This seems to suggest a ``one-size-fits-all'' software 
solution to the problem. But there are states and the District of 
Columbia and there is no suggestion that they all provide the same or 
similar software. Nor is there any requirement that the states provide 
versions of the software compatible with the myriad computer-based 
billing systems used by remote sellers. We alsonote that such software 
is expensive to integrate into existing systems and maintain. Requiring 
that states provide software as a prerequisite to obtaining collection 
authority is not a solution to the problem.
    We believe mandating a single rate per state for remote sales is 
the solution to the problem. In a single stroke, such a mandate would 
reduce from 9,600 to 46 the number of state and local taxing 
jurisdictions a remote seller would be faced with. States could use 
their internal political processes to resolve differences with local 
jurisdictions with regard to setting the rate and distributing 
collected taxes to the individual localities. Coupled with the single 
form and filing and uniform state tax base components of the bill, this 
approach would cause much of the existing complexity to recede into the 
background. One-rate-per-state for remote sales represents the main 
ingredient in the sort of ``radical simplification'' needed to justify 
repealing the physical presence nexus standard for sales and use taxes 
of the Quill decision. But, even more simplification should be required 
before expanded collection authority is granted.

Alternative to Streamlined Sales and Use Tax Agreement
    The bill allows two paths to collection authority. First, states 
that are members of the Streamlined Sales and Use Tax Agreement will 
obtain collection authority roughly three months after the bill is 
enacted. Other states that adopt a modicum of sales and use tax 
simplification must wait six months after their legislatures adopt the 
simplification package. We are concerned that the simplification 
adopted by the Streamlined states is more rigorous than the other non-
members states would have to adopt in order to obtain the same expanded 
collection authority. We are concerned the availability of this easier 
path to collection authority will serve as a disincentive for those 
states to join the Streamlined Agreement and could provide an incentive 
for current Streamlined states to drop out of the Agreement.
    The easier path to collection authority should be dropped from the 
bill and collection authority should be conferred only upon states that 
are, or later become, members of the Streamlined Agreement, provided 
additional simplification requirements added to the bill. Specifically:

   Collection authority should be withheld for states that have 
        not adopted the one-rate-per-state proposal suggested above,

   Destination sourcing for all remote sales should be another 
        condition for collection authority.

   Federal court jurisdiction should be expanded to include 
        cases or controversies involving the Streamlined Agreement (see 
        below).

Federal Court Jurisdiction
    SoFTEC also does not support the bill because it would not permit 
Federal courts the power to interpret and enforce state compliance with 
the Federal requirements for expanded collection authority. The 
processes and remedies available at the state level are inadequate, 
expensive, time consuming and biased. Additionally, the interpretation 
and enforcement of the Streamlined Agreement by its own Governing Board 
makes the administrators of the Agreement also the judges and the jury. 
Having Federal courts interpret and administer the requirements for 
expanded collection authority would foster both fairness and trust in 
the system.

Physical Presence Nexus for State Income and other Business Activity 
        Taxes
    Disputes between states and businesses over the appropriate nexus 
standard for imposing state taxes on out-of-state businesses are not 
limited to sales and use taxes. Many states point to the fact the Quill 
case only involved sales and use taxes as a reason for using a 
different nexus standard for other types of state taxes, such as income 
and other taxes based on business activity. The business community, on 
the other hand, believes the Commerce Clause of the Constitution does 
not impose different nexus standards depending on the type of tax 
involved and the physical presence nexus standard of Quill applies to 
all types of taxes. It would be inappropriate to eliminate the physical 
presence nexus requirement for sales and use taxes but leave unresolved 
the existing uncertainty regarding its application to other types of 
taxes.
    In October of 2011, the House Judiciary Committee reported H.R. 
1439, the Business Activity Tax Simplification Act of 2011 (BATSA). 
This bill would resolve the uncertainty regarding the appropriate nexus 
standard for state income and other business activity taxes by 
codifying the physical presence standard of Quill for those types of 
taxes. SoFTEC supports BATSA and believes Congress should pass it 
before (or at the same time as) it passes any legislation impacting the 
physical presence nexus standard for sales and use taxes.

Conclusion
    For the reasons stated above, SoFTEC does not support S. 1832, The 
Marketplace Fairness Act, in its current form. We thank you for the 
opportunity to provide these comments. Any questions regarding them 
should be directed to Mark E. Nebergall who can be reached at (202) 
486-3725 or [email protected]
            Respectfully submitted,
                                         Mark E. Nebergall,
                                                         President,
                             Software Finance & Tax Executives Council.
CC: Senator Michael B. Enzi
                                 ______
                                 
Prepared Statement of Senator Pamela Althoff, Illinois; Delegate Sheila 
 Hixson, Maryland; and Senator Curt Bramble, Utah; Executive Committee 
 Task Force on State and Local Taxation, National Conference of State 
                              Legislatures

    Chairman Rockefeller, Ranking Member Hutchinson and members of the 
Commerce Committee, we are pleased to submit this statement on behalf 
of the National Conference of State Legislatures and respectfully 
request that you submit it for the record. The National Conference of 
State Legislatures is the bipartisan national organization representing 
every state legislator from all fifty states and our Nation's 
commonwealths, territories, possessions and the District of Columbia.
    We are pleased to have the opportunity to inform you of the 
concerns of state legislators about state and local taxation in the new 
economy, specifically, the ability of state and local governments to 
collect the sales and use tax presently owed on transactions with 
remote sellers, which occur primarily through electronic commerce. We 
want to express our full support for the Marketplace Fairness Act, S. 
1832 as introduced by Senators Mike Enzi of Wyoming, Richard Durbin of 
Illinois, Lamar Alexander of Tennessee and 17 other of your colleagues 
from both parties. The Marketplace Fairness Act will provide those 
states that comply with the simplification requirements outlined in the 
legislation, the authority to require remote sellers to collect those 
states' sales taxes.
    Let us make this very clear, state legislators are not advocating 
any new or discriminatory taxes on electronic commerce. We desire, 
however, to establish a simplified sales and use tax collection system 
that allows sellers regardless of where they are located to collect and 
remit the legally owed sales and use taxes.
    The new economy or if you prefer, electronic commerce, which is not 
bound by state and local borders makes it critical to simplify the 
collection state and local taxes to ensure a level playing field for 
all sellers, to enhance economic development, and to avoid 
discrimination based upon how a sale may be transacted. Government can 
not allow a tax system that was designed for an economy that existed 
almost 80 years ago, to be the deciding factor as to where our 
constituents make a transaction.
    As many of you may know, state legislators and governors have been 
seeking the ability to collect sales taxes on out of state transactions 
for many years. With the growth of electronic commerce, the current 
financial and economic situation, and the effort to address the Federal 
deficit, the urgency to act is even more immediate.
    As you know, the recent recession has had a debilitating impact on 
state budgets. According to NCSL's survey of state legislative fiscal 
officers, between FY 2008-FY 2013, states closed a cumulative $527.7 
billion budget gap, primarily through program reductions. While some 
states have showed a slight increase in revenues, other states are 
still facing budget deficits and sluggish revenues. For FY 2012, states 
have closed over $72 billion in state budget deficits.
    With the enactment of the Federal Budget Control Act and the 
resulting sequestration, states are preparing for additional reductions 
to many state Federal programs. The likely $400-$500 billion in 
reductions in Federal funds as a result of deficit reduction coupled 
with the over $500 billion in state budget reductions during the 
recession will mean that states have $1 trillion less for many 
essential programs than states had only five years ago. Raising taxes 
in sluggish economy is not a viable option for most states, and closing 
the loophole on sales tax collection will provide states with 
additional revenue without having to raise new taxes.
    According to the Center for Business and Economic Research at the 
University of Tennessee, in 2003, the estimated combined state and 
local revenue loss due to remote sales was between $15.5 billion and 
$16.1 billion. For electronic commerce sales alone, the estimated 
revenue loss was between $8.2 billion and $8.5 billion. The report from 
the University of Tennessee further estimates that the revenue loss 
will grow and that this year, 2012, the revenue loss for state and 
local governments could be as high as $23 billion, of which it is 
estimated that $11.4 billion would be from sales over the Internet. 
(See Table 1)

 Table 1.--Combined State & Local Revenue Losses from E-Commerce and All
                          Remote Commerce--2012
    Source: Dr. Donald Bruce & Dr. William Fox, Center for Business &
                Economic Research University of Tennessee

                                   Total All Out of
                                   State Electronic    Total All Out of
                                         Sales            State Sales

Alabama                                  170,400,000         347,734,399
Alaska                                     1,500,000           3,035,981
Arizona                                  369,800,000         708,628,254
Arkansas                                 113,900,000         236,311,930
California                             1,904,500,000       4,159,667,947
Colorado                                 172,700,000         352,563,574
Connecticut                               63,800,000         152,367,405
District of Columbia                      35,500,000          72,517,182
Florida                                  803,800,000       1,483,690,010
Georgia                                  410,300,000         837,610,389
Hawaii                                    60,000,000         122,514,495
Idaho                                     46,400,000         103,120,482
Illinois                                 506,800,000       1,058,849,588
Indiana                                  195,300,000         398,817,708
Iowa                                      88,700,000         181,012,560
Kansas                                   142,900,000         279,224,028
Kentucky                                 109,900,000         224,484,309
Louisiana                                395,900,000         808,311,357
Maine                                     32,100,000          65,430,824
Maryland                                 184,100,000         375,944,240
Massachusetts                            131,300,000         268,002,460
Michigan                                 141,500,000         288,954,339
Minnesota                                235,300,000         455,219,250
Mississippi                              134,900,000         303,286,360
Missouri                                 210,700,000         430,191,928
Nebraska                                  61,300,000         118,052,068
Nevada                                   168,900,000         344,923,618
New Jersey                               202,500,000         413,390,425
New Mexico                               120,500,000         245,989,786
New York                                 865,500,000       1,766,968,251
North Carolina                           213,800,000         436,517,492
North Dakota                              15,300,000          31,274,219
Ohio                                     307,900,000         628,613,189
Oklahoma                                 140,800,000         296,348,658
Pennsylvania                             345,900,000         706,241,542
Rhode Island                              29,000,000          70,436,458
South Carolina                           124,500,000         254,290,538
South Dakota                              29,800,000          60,826,849
Tennessee                                410,800,000         748,480,889
Texas                                    870,400,000       1,777,090,593
Utah                                      88,500,000         180,658,961
Vermont                                   25,100,000          44,759,329
Virginia                                 207,000,000         422,651,971
Washington                               281,900,000         540,968,704
West Virginia                             50,600,000         103,284,206
Wisconsin                                142,100,000         289,006,114
Wyoming                                   28,600,000          61,744,705
------------------------------------------------------------------------
Total                                 11,392,700,000      23,260,009,564
========================================================================


    We believe that the Marketplace Fairness Act would allow the states 
to close this significant and growing loophole in our sales tax revenue 
and level the playing field for all sellers regardless of the medium 
used to conduct a transaction. S. 1832 also ensures that our 
constituents do not fall guilty to tax avoidance. While the $23.3 
billion in uncollected sales taxes will not much any funding reductions 
from the Federal Government, it will provide state with some fiscal 
relief. In the words of Senator Roy Blunt, a sponsor of this 
legislation, it is ``fiscal relief for the states that does not cost 
the Federal Government a single dime.''
    Thank you.
                                 ______
                                 
  Prepared Statement of The National Association of Chain Drug Stores

    Chairman Rockefeller, Ranking Member Hutchison, the National 
Association of Chain Drug Stores (NACDS) thanks you for the opportunity 
to provide a written statement to the Committee on Commerce, Science & 
Transportation hearing on, ``Marketplace Fairness: Leveling the Playing 
Field for Small Businesses.''
    NACDS represents traditional drug stores, supermarkets, and mass 
merchants with pharmacies--from regional chains with four stores to 
national companies. Chains operate more than 40,000 pharmacies and 
employ more than 3.5 million employees, including 130,000 pharmacists. 
They fill over 2.6 billion prescriptions annually, which is more than 
72 percent of annual prescriptions in the United States. The total 
economic impact of all retail stores with pharmacies transcends their 
$900 billion in annual sales. Every $1 spent in these stores creates a 
ripple effect of $1.81 in other industries, for a total economic impact 
of $1.76 trillion, equal to 12 percent of GDP.
    We applaud the Committee for holding this hearing to examine the 
loophole that prohibits states from requiring Internet and other remote 
sellers to collect sales and use taxes. This loophole, created in 1992 
by the Supreme Court opinion in Quill Corp. v. North Dakota, has 
resulted in an uneven playing field for local businesses such as chain 
pharmacies.
    The retail pharmacy industry is highly competitive, with an average 
profit margin of 2 percent. Chain pharmacies compete in the marketplace 
aggressively, offering competitive prices on a wide variety of 
products, ensuring convenience for their customers, and providing 
prescription drugs and important healthcare services such as 
immunizations. Chain pharmacies are under constant market pressure to 
deliver a competitive value.
    However, chain pharmacies, like other brick-and-mortar retailers, 
are at a competitive disadvantage, since the Quill decision provides 
online-only companies with a price advantage of as much as 10 percent. 
This inequity threatens the ability of Main Street businesses, which 
are so critical to the economic vitality of their communities, to 
compete.
    Local businesses are not alone in the competitive disadvantage 
created by the Quill decision. States, struggling to address budget 
challenges in this difficult economy without raising taxes, are denied 
the ability to collect sales taxes that are already owed to them. In 
testimony on behalf of the National Governors Association, Tennessee 
Governor Bill Haslam estimated his state is unable to collect $400 
million in sales tax annually--nationally an estimated $20 billion in 
sales tax goes uncollected each year (Statement of Governor Bill 
Haslam, U.S. House of Representatives, Committee on the Judiciary, July 
24, 2012).
    The inability of states to collect sales taxes owed to them has a 
direct impact on communities, limiting funding for roads, schools, 
healthcare services, law enforcement and other basic services. As 
Congress grapples with reducing the deficit, Federal funding to the 
states is likely to be reduced. This makes it even more critical to 
provide states with the ability to collect the taxes owed by their 
residents.
    The problem of uncollected sales taxes will only increase as e-
commerce grows. Forrester Research estimates Americans will spend $327 
billion in 2016 shopping online, an increase of 45 percent from 2012 
and a 62 percent increase from 2011 (Forrester Research, U.S. Online 
Retail Forecast, 2011 to 2016). Action is needed by Congress now to 
level the playing field for states and Main Street businesses.
    NACDS supports, S. 1832, the Marketplace Equity Act, introduced by 
Senator Mike Enzi, as a means to address the growing problems of 
uncollected sales tax. We thank Chairman Rockefeller for co-sponsoring 
this important legislation, as well as other Committee on Commerce, 
Science & Transportation members Senators Blunt, Boozman, Inouye, 
Klobuchar, and Pryor. This bipartisan legislation would give states the 
authority to manage their sales tax laws, providing a path forward for 
states to collect sales taxes, simplify their sales tax statutes, and 
assist vendors with compliance, while providing for a robust small 
business exemption. Enactment of S. 1832 would help preserve Main 
Street businesses that are critical to the economic vitality of their 
communities and empower states to address their budget challenges 
without raising taxes, or adding to the Federal deficit. We urge all 
members of the Committee to co-sponsor S. 1832, report it favorably, 
and work towards its passage by the full Senate.
    Thank you for the opportunity to share our views. We look forward 
to working with you on this important legislation.
                                 ______
                                 
Prepared Statement of R. David L. Campbell,\1\ Chief Executive Officer 
     and Joan Wagnon,\2\ Executive Vice President, The Federal Tax 
                             Authority, LLC
---------------------------------------------------------------------------
    \1\ David Campbell, Chief Executive Officer of The Federal Tax 
Authority (FedTax), founded the company in 2008. FedTax is a Washington 
State Limited Liability Company with operations in Washington, 
Connecticut, and Kansas. Its management team includes highly 
experienced professionals who have been directly involved in building 
some of the most recognizable brands in e-commerce, including 
MasterCard, Google, WebMD, Microsoft, Expedia, and American Express.
    \2\ Joan Wagnon served as Secretary of Revenue in Kansas from 2003 
to 2011. She also chaired the Streamlined Sales Tax Governing Board in 
2008-9 and the Multistate Tax Commission from 2006 to 2008. She served 
on the Board of Directors of the Federation of Tax Administrators for 8 
years before joining FedTax to work toward the passage of Federal 
legislation granting states' collection authority over remote sales.
---------------------------------------------------------------------------
    Alexander Hamilton wrote in The Federalist in 1788 that 
``individual States should possess an independent and uncontrollable 
authority to raise their own revenues for the support of their own 
wants.''
    Today the discussion about state sovereignty over matters of 
taxation continues unabated. State revenue directors have seen 
firsthand how the actions of the Federal Government have affected state 
and local revenues. Members of Congress are increasingly bombarded by 
requests for action because state laws are restrictive to business or 
seen as unfair. There are any numbers of examples where congressional 
action has been beneficial or harmful to states.
    But the issue that has been most devastating to state and local 
government has resulted from Congressional inaction, rather than 
action: the failure of Congress to overturn Quill v. North Dakota.\3\
---------------------------------------------------------------------------
    \3\ The notion that out-of-state retailers would find it overly 
burdensome to keep track of every state's sales tax rules can be traced 
directly to the 1967 Supreme Court ruling in National Bellas Hess v. 
Illinois Department of Revenue. In its majority opinion, the court 
ruled that ``the many variations in rates of tax, in allowable 
exemptions, and in administrative and record-keeping requirements could 
entangle National's interstate business in a virtual welter of 
complicated obligations to local jurisdictions'' (emphasis added).
    In 1992, the matter of remote sales tax collection came before the 
Supreme Court again in Quill v. North Dakota. This time, the court 
reaffirmed the earlier Bellas Hess decision by a ruling of 8 to 1, 
primarily on the basis of stare decisis. The ruling went on to state, 
``[O]ur decision is made easier by the fact that the underlying issue 
is not only one that Congress may be better qualified to resolve, but 
also one that Congress has the ultimate power to resolve.''
    FedTax frequently cites the earlier Bellas Hess quote because it 
summarizes the ruling's basis in complexity and burden, which has 
rippled forward to the present day and created a tidal wave of 
unintended consequences. This ruling has shielded all out-of-state 
retailers from the obligation to collect sales tax, based on the notion 
that it would place too much of a burden on businesses. Perhaps it 
would have, in 1967. That was the year the floppy disk was invented at 
IBM.
---------------------------------------------------------------------------
    The Marketplace Fairness Act (MFA), S. 1832, sponsored by a 
bipartisan group of senators (Enzi, Durbin, Alexander, et. al.) is a 
good solution to the revenue problems of states, but more importantly, 
it gives states a better mechanism than they have now to collect the 
taxes they already levy.\4\
---------------------------------------------------------------------------
    \4\ States typically depend on voluntary means of collecting from 
individuals, such as a voluntary line on the income tax form. Audit 
procedures, which are used for businesses, are ineffective for 
consumers.
---------------------------------------------------------------------------
    The MFA also corrects a growing imbalance between groups of 
retailers. Under the current court ruling, tax is collected on some 
sales and not on other sales of the exact same items. Why should tax be 
collected on a book or camera purchased from a local business and not 
on an identical item purchased from a mail order or Internet business?
    Remote sales are growing at double digit rates.\5\ However, states' 
inability to collect sales tax on these sales results in the erosion of 
the states' tax bases. Certainly this unfairness is not the hallmark of 
good tax policy! Congress is creating winners and losers among the 
retail community by its inaction.
---------------------------------------------------------------------------
    \5\ On Cyber Monday (the first Monday after Thanksgiving) in 2011, 
over $1.2 billion in sales were transacted online. On that day alone, 
approximately $58 million in sales tax went uncollected.
---------------------------------------------------------------------------
    Opponents cite two specific reasons for allowing this unfair 
situation to continue: (a) that remote collection would be overly 
burdensome and complex, and (b) that any systems necessary for remote 
collection would be prohibitively costly. This testimony will provide 
technical information for Congress to consider when evaluating those 
arguments.

I. The Complexity Argument
    Technology has advanced considerably since the 1967 and 1992 
Supreme Court rulings that created the current sales tax situation. 
Even the more recent of these, Quill, occurred before the first 
graphical browser was invented, before most homes had Internet 
connections, and long before e-commerce forever changed the retail 
landscape. Today, forty-five years after Bellas Hess and twenty years 
after Quill, online marketplaces and auction sites easily manage 
millions of items for sale at any given moment.
    Today, keeping track of a few thousand local tax rates and filing 
requirements is not an insurmountable technical, administrative, or 
financial burden. TaxCloud, the sales tax management system created by 
FedTax, proves this point by calculating and collecting sales tax on 
any purchase for any tax jurisdiction in the United States in less than 
one second. The service is free to all retailers.
    The technologies necessary to create such a system are not new; 
they are well-established. In fact, they are currently being used 
throughout e-commerce. They are Application Programming Interfaces and 
Web Services. An Application Programming Interface (API) allows 
dissimilar and unrelated systems to communicate with each other using 
pre-established syntax and structure. Web Services allow APIs to be 
used for machine-to-machine interactions over the internet. Both are 
now commonly used in e-commerce--for example, in real-time-shipping, 
which allows a retailer to provide its customers with accurate, real-
time quotes for shipping costs based on at least five variables, 
including weight, size, delivery speed, origin, and destination. Often 
customers can even compare shipping costs among multiple shippers.
    With APIs, Web Services, and other technological advances of the 
past twenty years, it is now possible for remote retailers to easily 
keep track of every state's tax laws.
    To minimize or completely eliminate the undue burdens cited in 
Bellas Hess and Quill, more than half of the states with sales tax have 
worked together for twelve years to create the Streamlined Sales and 
Use Tax Agreement (SSUTA). These states provide free rates and 
boundaries databases for all of their respective taxing jurisdictions, 
and regularly issue updates when rules, rates, or boundaries change. In 
addition these states also certify and pay for software and service 
providers to manage sales tax compliance on behalf of retailers.\6\ The 
Marketplace Fairness Act requires that any states seeking remote 
collection authority shall comply with SSUTA or provide comparable 
rates and boundaries information as well as certified software and 
services that retailers can rely upon to achieve compliance with 
minimal burden.\7\
---------------------------------------------------------------------------
    \6\ FedTax has been designated a Certified Service Provider (CSP) 
by the Streamlined Sales Tax Governing Board specifically for its 
TaxCloud service. There are six CSPs and 24 member and associate member 
states.
    \7\ Although ``software and services'' is not defined in the 
Marketplace Fairness Act, likely it will include Application 
Programming Interfaces (APIs), Web Services, rates and boundaries 
databases, and a process for certifying service providers to process 
returns accurately under state laws.
---------------------------------------------------------------------------
    Ironically, those who argue most strenuously that remote collection 
would be too complex are a few large online businesses that already 
rely on these same technologies every day, in every transaction. The 
plain fact is that eBay operates the largest marketplace in the history 
of the world by relying on technology to simplify and automate a host 
of historically burdensome chores, including payment automation, 
location-specific marketing, personalized recommendations, and for 
foreign governments, they even help their sellers manage Duties and 
Value Added Tax--Why don't they help their sellers manage sales tax in 
the United States? Simply put, because they don't have to.

II. The Costs-of-Compliance or Undue Burden Argument
    Opponents also argue that even if technology can solve the 
technical burden of keeping track of rates, jurisdictions, and filing 
complexities, such software would be prohibitively costly, particularly 
for small businesses. TaxCloud is provided to retailers at no cost--so 
the argument that such software would be prohibitively costly should be 
flatly disregarded. However, the costs-of-compliance argument also 
maintains that even if the software is free, businesses will still be 
burdened with the cost of integrating such software into their existing 
systems.
    This line of argument ignores the reality that all but the very 
largest retailers rely upon pre-written software and/or online hosted 
platforms for e-commerce and order management. Retailers rely upon 
these systems to avoid the costs of developing, managing, and 
maintaining such systems on their own, costs that are magnified by the 
changing nature of e-commerce. It is no secret that e-commerce is 
constantly changing to respond to evolving cyber-crime threats, 
payments and security industry best-practices, and, yes, legislative 
requirements. When their retailer clients need to collect sales tax, 
platform vendors will provide ways for them to do so, embedded within 
the platforms that retailers already use.
    E-commerce platform vendors are intensely competitive and focused; 
they take pride in not only complying with evolving requirements but 
often surpassing them, occasionally with stunning results. For example, 
much of the cloud computing infrastructure now transforming every 
corner of the technology sector can be traced to several of the largest 
e-commerce companies adapting to comply with the Sarbanes Oxley Act of 
2002. Most platforms already provide basic sales tax management 
features for their clients. Upon enactment of MFA, these existing 
systems will quickly be adapted to ensure compliance.
    An analogy can be made to the automotive industry. There are many 
cars on the road today, but almost all of them were produced by an 
easily identifiable group of manufacturers. In 1968, a Federal law was 
enacted requiring seatbelts in cars. Ignoring the role of 
manufacturers, proponents of the cost-of-compliance argument would have 
portrayed a situation in which every car operator in the United States 
had to pay for and install seatbelts in their cars. Obviously that's 
not the case; nor is it the case that retailers will need to pay for 
and install their own systems to handle sales tax collection.
    To conclude, modern technology has made it easy for retailers to 
collect sales tax for any address in the United States. TaxCloud 
enables retailers of any size to easily collect sales tax and comply 
with the provisions of The Marketplace Fairness Act--for free. More 
information is available at TaxCloud.net.
    And in addition to TaxCloud, five other companies are certified by 
the Streamlined Sales Tax Governing Board and ready to assist when 
Congress authorizes collection--and no doubt hundreds more will emerge 
soon after legislation is passed, because the free-market system will 
provide the incentive for entrepreneurs and innovators to develop these 
products.
    Please enact the Marketplace Fairness Act. Passing this bill can be 
the foundation for future reform as well as provide great benefit to 
both state and local governments. Passing this bill benefits consumers, 
by shielding them from inadvertent tax evasion due to the unreasonable 
expectation of voluntary self-reporting and remittance of use taxes. 
Finally, passing this bill will benefit business large and small, by 
incentivizing states to modernize and simplify their sometimes arcane 
and incomprehensible sales tax rules. Congressional action is needed 
now more than ever to restore balance to the retail industry by guiding 
states to enact forum-neutral sales tax policies and ensure equal 
justice under law.
                                      R. David L. Campbell,
                                           Chief Executive Officer.

                                               Joan Wagnon,
                                          Executive Vice President.
                                 ______
                                 
     Statement of Kelly William Cobb, Government Affairs Manager, 
                        Americans for Tax Reform

Introduction
    Chairman Rockefeller, Ranking Member Hutchison, and Members of the 
Senate Commerce, Science, and Transportation Committee, thank you for 
the opportunity to submit written testimony on behalf of Americans for 
Tax Reform on the issue of remote state sales tax collection and 
physical presence.
    Americans for Tax Reform advocates for a system in which taxes are 
simpler, flatter, more visible, and lower than they are today. However, 
ATR is concerned that the Marketplace Fairness Act (S. 1832), sponsored 
by Sens. Dick Durbin (D-Ill.) and Mike Enzi (R-Wyo.), would not only 
raise tax revenue on net for states, but also fail to adequately 
simplify the tax code and erode the physical nexus standard that 
protects Americans from the tax laws of other states.
    Under the U.S. Supreme Court's ruling in Quill v. North Dakota, it 
is a violation of the Commerce Clause for a state to require an online 
or remote retailer without a physical presence in that state to collect 
and remit the sales tax. This is not a ``tax loophole'' as some would 
suggest, but law derived directly from the U.S. Constitution. The 
Marketplace Fairness Act would overturn the Quill decision, permitting 
overzealous state tax collectors to reach well outside their borders to 
force online and other out-of-state retailers to collect their state's 
sales tax.
    The effects on taxpayers of the Marketplace Fairness Act and 
similar legislation would be dramatic. From a taxpayer perspective, any 
bill that touches remote sales taxes must preserve the physical 
presence standard and protect consumers on net from a higher tax 
burden. Unfortunately, the Federal online sales tax bills miss the mark 
widely on both fronts.

State-level Tax Burden Will Increase
    Proponents of Federal Internet tax legislation repeatedly claim 
that the measure is not about new taxes. The Marketplace Fairness Act 
even includes a section called ``No New Taxes,'' which enshrines little 
into law except rhetoric. Yet, proponents are also quick to point out 
that it would raise as much as $23 billion in tax revenue from 
consumers at the state level.
    While consumers do currently owe ``use tax'' on products they 
purchase online and out-of-state, compliance is scant and most states 
have failed to even undertake basic enforcement mechanisms, such as 
including use tax collection on income tax forms.
    Yet, use tax is simply not the same as a sales tax, which is 
actually owed by retailers that may legally pass the tax liability onto 
consumers. Where they do find common ground is their basis in the 
current physical nexus standard: businesses with a physical footprint 
in a state remit ``sales tax,'' and consumers with footprint remit 
``use tax.''
    The Marketplace Fairness Act would force out-of-state retailers to 
collect and remit sales taxes--to say nothing of consumer-paid use 
taxes. This is a fundamental change in tax law and certainly a new form 
of taxation. Furthermore, for the numerous retailers who do not pass 
sales tax liability onto their consumers at the register, this 
legislation amounts to a new out-of-state tax that will come directly 
out of a business's bottom line.
    Proponents also claim remote sales are ``eroding'' the sales tax 
base and without Federal action states will raise other taxes to 
compensate for a drop in revenues. First, this grossly overstates 
whatever problem might exist. According to one study, this so-called 
erosion amounts to ``less than three-tenths of one percent of state and 
local tax revenues.''
    Second, it ignores that states can also solve budget shortfalls by 
cutting spending. As GDP plummeted during the last recession, states 
increased spending by 8.4 percent. Fiscally responsible lawmakers 
should not be encouraging states to engage in such profligate spending 
by pushing for a measure that will raise as much as $23 billion in tax 
revenue at the state level.

Dissolving Physical Nexus Weakens a Fundamental Taxpayer Protection
    The physical nexus standard is a staple of our tax code, preventing 
states from reaching across their borders to force out-of-state 
businesses or individuals to comply with their tax codes--whether it be 
collecting, remitting, or even paying taxes. The Marketplace Fairness 
Act will dissolve this physical nexus requirement for collecting sales 
taxes.
    The Marketplace Fairness Act also opens the door--at least to 
conversation--about other forms of ``economic nexus'' standards that 
would permit states to apply their tax codes to non-residents with mere 
economic presence in the state. Codified in many different forms across 
the country, the economic standard grants nebulous authority to force 
out-of-state, non-residents to comply with a state's tax code. The 
gradual shift to economic nexus is an attempt by states to raise tax 
revenue beyond what their own economies and taxpayers can sustain.
    Economic nexus poses a direct threat to the principle of republican 
governance by the people, shifting the cost of government to non-
residents. It also violates the ``benefits principle'' by pushing the 
tax burden onto those that receive no direct benefit from the state.
    To put it simply, measures to dissolve the physical presence 
standard have the potential to usher in the second coming of taxation 
without representation in America.

Outsources State Tax Rules to an Unelected Body
    Under the Marketplace Fairness Act, twenty-four states operating 
under the Streamlined Sales and Use Tax Agreement (SSUTA) would be able 
to tax remote sales almost automatically. Remaining states would have 
to comply with a number of requirements or choose to join the 
Streamlined Sales Tax Project (SSTP).
    Reliance on SSUTA allows a handful of tax administrators and state 
lawmakers on the Streamlined Sales Tax Governing Board--which has long 
advocated for tearing down the physical nexus standard for sales 
taxes--to control remote sales tax decisions for states and incents the 
states that are not part of SSUTA to join. Non-SSUTA states will watch 
helplessly as the ``streamline states'' hassle their resident 
businesses to collect more tax revenue.

Tax Code Complexity Will Increase
    The Marketplace Fairness Act will force online, catalog, TV and 
other remote retailers to comply with over 9,600 sales tax 
jurisdictions across the country. First, whatever un-level playing 
field for tax collection does exist would be perpetuated--not 
resolved--by the Marketplace Fairness Act. In fact, the scales would be 
tipped against remote retailers, who would have to comply with the 
9,646 tax jurisdictions across the country, while brick-and-mortar 
stores would comply with only the one where they are located.
    While SSTP purports to simplify the tax code, the Marketplace 
Fairness Act's reliance on it will further increase complexity. Since 
SSTP's creation over a decade ago, the number of sales tax 
jurisdictions across the country has skyrocketed. The roughly 8,000 tax 
jurisdictions in existence in 2009 have risen to 9,646 today--with an 
average of 651 new or different sales tax rates or jurisdictions every 
year.
    Additionally, by attempting to define very specific goods and 
services, SSTP's pursuit of uniformity between state tax codes has 
created even worse complexity. For example, SSTP has long struggled 
with defining specific products, such as ``candy'' and ``cereal'' that 
can both contain very similar ingredients. Such Platonic collection-
and-division-style tactics by SSTP to create uniformity and simplicity 
not only create enormous complications in our tax codes but also are by 
design destined for failure. Instead, states should work toward the 
opposite end: scrapping definitions for individualized goods and 
services.
    SSTP also allows for diverse and discriminatory tax rates on 
various goods, even to the point of carving out exceptions for various 
member states. Defining goods more generally instead of individually 
would also help to eliminate discriminatory state and local tax rates 
on specific goods.
    While it is true that software--if frequently updated--could 
calculate the sales tax rate for each jurisdiction, software cannot 
keep track of the varied definitions for taxing goods and can hardly 
advise a retailer of these complex determinations. A computer cannot, 
for example, determine if a KitKat bar should be considered ``candy'' 
or more generally as ``food,'' since items that contain flour under 
SSTUA are not considered candy. This is but one example of 
controversial determinations made by SSTP.

Preserving Physical Nexus and Preventing a Higher Tax Burden
    Instead of pursuing the Marketplace Fairness Act, Congress should 
look toward strengthening the physical presence standard, which is 
being slowly eroded by revenue-hungry states. With regard to remote 
sales, origin-based sourcing--whereby tax is based on the jurisdiction 
of the seller rather than the buyer--is one option to preserve the 
physical nexus standard while addressing remote sales.
    Regardless of the path, any effort to tax remote sales must 
preserve physical nexus and be made revenue neutral at the state level 
to ensure that the net tax burden on consumers does not rise.
    The Senate should also take up legislation that would help to 
strengthen the physical presence standard in other ways. Lawmakers 
should consider the Business Activity Tax Simplification Act, or BATSA 
(H.R. 1439), which has been introduced in the U.S. House of 
Representatives by Rep. Bob Goodlatte (R-Va.).
    BATSA establishes a clear physical presence standard for taxing 
multistate businesses engaged in cross-border transactions. The bill 
will help to foster inter-state economic activity by eliminating the 
burden for businesses of having to comply with varying and complex 
state income tax laws. As Congress considers measures like the 
Marketplace Fairness Act and as nearly half of states have already 
sought to loosen their physical nexus standard, BATSA could not come at 
a more critical juncture.

Conclusion
    Congress has well-established Constitutional authority to regulate 
interstate commerce and related tax laws. However, with that tool in 
mind, it is critically important that Congress work toward lowering the 
tax burden and strengthening the physical nexus standard that was 
reaffirmed in Quill v. North Dakota. Unfortunately, the Marketplace 
Fairness Act and similar measures under consideration by Congress today 
would do the opposite.
                                 ______
                                 
           State of Rhode Island and Providence Plantations
                                     Providence, RI, August 1, 2012

Hon. John D. Rockefeller IV,
Chairman
Committee on Commerce, Science, and Transportation,
U.S. Senate
Washington, DC.

Hon. Kay Bailey Hutchison,
Ranking Member,
Committee on Commerce, Science, and Transportation,
U.S. Senate
Washington, DC.

Dear Chairman Rockefeller and Senator Hutchison:

    Thank you for scheduling a hearing on an important piece of 
legislation for all states, S. 1832, The Marketplace Fairness Act. This 
bipartisan bill, introduced by Senators Alexander (R-TN), Durbin (D-
IL), Enzi (R-WY), and Johnson (D-SD) would authorize states that are 
members of the Streamlined Sales and Use Tax Agreement to collect state 
sales taxes from online remote vendors on transactions into their 
states that are already owed to state governments.
    I have long advocated for passage of Main Street fairness 
legislation, and last year I sent letters to every Governor encouraging 
their support of Federal legislation. This bill presents an opportunity 
for states to modernize their tax systems and perhaps more importantly 
to the business owner, helps level the playing field between Main 
Street stores and online retailers.
    While it is estimated that Rhode Island would collect an additional 
$70.4 million in sales and use tax remittance from remote sellers in 
the first year after passage of Federal legislation, my commitment to 
fairness between bricks and mortar retailers and online sellers runs 
deeper than that. The Fiscal Year 2012 state budget that I signed into 
law included a provision that would trigger a reduction of the state 
sales tax from 7 percent to 6.5 percent if Federal Main Street fairness 
legislation passed; and this Fiscal Year 2013 budget that I approved 
includes an elimination trigger of an expanded sales tax on clothing 
purchases greater than $250 that would exempt state sales tax 
collection on clothing purchases. With those two provisions in Rhode 
Island state statute, passage of The Marketplace Fairness Act would 
have a net impact of $457,854 in increased revenue. However, at the end 
of the day, Rhode Island businesses will be able to compete on a level 
playing field with online sellers, and Rhode Island consumers will 
benefit from a reduced state sales tax burden.
    As I have traveled across my state visiting communities and talking 
to businesses, this topic of fairness often comes up. A bookstore owner 
in Middletown tells me about patrons browsing books in the store, only 
to leave without making a purchase. Is it fair for that Main Street 
store to lose business to online companies just because online 
retailers are not collecting state sales tax? Internet shopping is not 
going away, and it is clearly time to treat similar sales transactions 
equally.
    As many states and businesses continue to struggle in this economy, 
I encourage you to authorize states to collect sales and use taxes on 
online sales and give local businesses the opportunity to compete 
fairly with online retailers. I urge you to support The Marketplace 
Fairness Act and act swiftly to markup and ultimately pass this 
legislation.
            Sincerely,
                                         Lincoln D. Chafee,
                                                          Governor.

cc: Members of the Senate Commerce, Science, and Transportation 
            Committee
                                 ______
                                 
                                                     August 1, 2012
Hon. John D. Rockefeller IV,
Chairman,
United States Senate Committee on Commerce, Science, and 
Transportation,
Washington, DC.

Hon. Kay Bailey Hutchison,
Ranking Member
United States Senate Committee on Commerce, Science, and 
Transportation,
Washington, DC.

Dear Chairman Rockefeller and Ranking Member Hutchison:

    Thank you for convening a hearing to explore changes to Federal 
policy that would require U.S. businesses to collect and remit sales 
taxes for purchases made by remote customers. Changes to Internet sales 
tax law have long been of importance to the eBay Marketplace and the 
hundreds of thousands of small businesses and entrepreneurs that use 
our platform.
    While eBay Inc. is a large company, we have an interest in small 
retail businesses' success and growth. For the past 16 years, the eBay 
Marketplace has served as a platform for small business retailers and a 
tool to encourage small business development and entrepreneurship. We 
are a facilitator for small business retailers--not a competitor--and 
we have experienced firsthand the challenges that small retailers face 
in the current retail environment.
    In November 2011, I appeared before the U.S. House Committee on the 
Judiciary to testify on the issue of sales taxes on the Internet, 
representing the interests of our company and the small businesses we 
serve. At the November 2011 hearing, I shared eBay's concerns that 
proposed Internet sales tax policies, including the Marketplace 
Fairness Act (S. 1832), would negatively impact small business 
retailers in every state.
    The ability of small business retail to play a meaningful role in 
the 21st Century retail marketplace is critical for expanding retail 
competition, developing new businesses and better serving consumers. I 
would like to reaffirm our support for small business protections and 
reiterate three of eBay's major concerns with the current Internet 
sales tax debate:

   Big Retail v. Small Retail: Multi-billion-dollar retailers 
        increasingly dominate online retail, just as they do ``in-
        store'' retail. Even under current sales tax law, small online 
        retailers have lost 11 percent of their share of the U.S. e-
        commerce market in just two years. What would happen when they 
        would be forced to collect and remit in over 9,600 tax 
        jurisdictions, driving up the costs of their products in states 
        where they do not have stores and distribution centers to use 
        to serve customers locally?

   Fairness and Sameness: Many have claimed that ``fairness'' 
        means that all retailers using the Internet should be held to 
        the same remote sales tax standard. Under the status quo, small 
        businesses are not treated the same as their larger 
        competitors. For example, small businesses do not benefit from 
        volume-driven pricing or shipping prices, and small businesses 
        do not benefit from local and/or state tax deals that the large 
        national retailers often receive. Is it really fair that small 
        businesses should be held to the same tax collection standard 
        as mega-retailers?

   Misleading Data: There are those that believe small 
        businesses should not be protected from new sales tax burdens. 
        In an effort to sway policymakers, Amazon and other supporters 
        of the Marketplace Equity Act have publicized a study entitled, 
        Online Retail Sellers and Sales Volume Thresholds, which 
        suggests a majority of small businesses would be protected by 
        the small seller threshold contained in the dominant House and 
        Senate Internet sales tax bills. The study is deeply 
        misleading, as it distorts retailer data by including millions 
        of consumers who occasionally sell on the Internet in its data. 
        In short, very small volume casual sellers (the Internet-
        enabled equivalent of garage sales) are counted as retailers in 
        that study in an attempt to validate imposing tax burdens on 
        retailers that are very small businesses.

The Internet and Small Business Growth
    eBay Inc. connects millions of buyers and sellers across the globe 
everyday through the eBay platform, which is the world's largest online 
marketplace and through PayPal, which enables individuals and 
businesses to securely, easily and quickly send and receive online 
payments. We also reach millions of consumers through specialized 
marketplaces such as StubHub, the world's largest resale ticket 
marketplace, and eBay Classifieds sites, which, together, are available 
in more than 1,000 cities around the world.
    Among those that use the eBay platform are hundreds of thousands of 
U.S. small businesses and entrepreneurs who are located in every state 
and congressional district in the country. The Internet and the eBay 
marketplace provide these small businesses and entrepreneurs with 
relatively low-cost access to potential buyers far outside the limits 
of their traditional geographic footprint. Small business retailers 
have always been at the heart of the eBay business model, and eBay 
cares about how Federal legislation impacts them.
    Regardless of the size of a retailer, technology and the Internet 
are now central to almost every retail business model. By opening up 
new markets, the Internet empowers particularly small businesses to 
reach a global consumer base, opening up international markets to small 
business retailers in ways unimaginable just fifteen years ago. So, the 
very idea that this debate is about ``Online Retail'' v. ``Offline 
Retail'' is a false paradigm. All 21st Century retail business models 
have some physical facilities, whether stores, management offices, 
warehouses or distribution centers, and use the Internet alongside 
other technology tools.

Big Retail v. Small Retail
    The sales tax debate has really come down to ``Big Retail'' v. 
``Small Retail'' and whether or not it is smart public policy to treat 
a small business retailer the same as a multi-billion dollar retailer. 
Over the past 30 years, giant retailers have grown more dominant, while 
small independent retailers have been pushed to the edges. As I 
testified in November 2011, big-box retailers accounted for 42 percent 
of total retail sales in 1987. As of July 2010, their market share had 
jumped to 87 percent.\1\ In addition, retail giants make up 18 of the 
Top 25 retail websites today. eBay is not calling on the Congress to 
change laws to turn this trend around, but we do oppose changes in law 
that would disadvantage small retailers online.
---------------------------------------------------------------------------
    \1\ ConsumerReports.org. (July 2010). America's Top Stores: 30,000 
Readers Reveal the Best Places to Shop for Practically Anything. 
Consumer Reports
---------------------------------------------------------------------------
    Retail giants are trying to use a bill named the Marketplace 
Fairness Act (S. 1832) to disadvantage small businesses and require 
them to have the same tax burden, even though they do not have the 
physical presence or other benefits that larger retailers enjoy. For 
example, Amazon has been a retailer with facilities in the state of 
Tennessee, along with over 20 other states, for many years and, yet, 
has not been required to collect sales taxes in the state. Amazon has 
successfully leveraged its size in states across the country to receive 
an exemption from collecting sales taxes for several years in exchange 
for adding to their in-state facilities. Interestingly, these same 
deals have not been applied to the small businesses that use their 
platform.
    The small business retailer, when using the Internet to compete for 
sales with customers who are far away, does not benefit from local 
facilities. They enter the fray without the benefit of stores, 
distribution centers and other local facilities that can help serve 
customers. On the other hand, the largest retailers have national store 
or distribution networks and can offer key services like in-store pick 
up, fast and free shipping, and in-store returns of items bought 
online. Consumers value those features, and as a result, large 
retailers are commanding more and more market share year over year.
    While small business retailers are active online and are adopting 
technology, they do not enjoy any particular advantage, as previously 
stated, and, instead, face significant competition from large retailers 
that are also adopting the full range of technologies. Small business 
retailers using the Internet face meaningful threats. In fact, market 
share data helps cut through the rhetoric and illustrates that small 
business retailers face meaningful challenges today without a new tax 
burden being placed on them by the U.S. Congress.



    Moreover, if small business retailers using the Internet were 
gaining unfair advantages from current remote sales tax laws, one would 
expect that their share of Internet sales would be growing. As you can 
see from the chart on the previous page, that is not the case. Just as 
importantly, the idea that small business retailers on the Internet are 
a threat to the survival of small business store fronts is ridiculous. 
The threat to small independent retailers is coming from giant multi-
billion-dollar competitors online and offline, which has been the case 
for nearly half a century. Taking the tax burden that comes with those 
local services and applying them to a remote small business will 
further tip the playing field against the small business retailer.

Fairness and Sameness
    Some have claimed that a ``level playing field'' means all 
retailers, big and small, remote and in state, should collect the same 
sales taxes. However, it is important to keep in mind that the retail 
playing field is already un-level. We all know that small business 
retailers have proportionally higher costs of doing business. As 
previously mentioned, there are also many direct tax benefits enjoyed 
by the largest retailers that never flow down to their small business 
competitors. These include state and local property tax breaks and 
sales tax exclusions, like the Amazon example outlined above.
    There has also been discussion about how the current remote sales 
tax structure is unfair for state and local governments that face 
financial challenges in this current economic environment. eBay is 
sympathetic to states' budget difficulties; however it is important to 
point out that recent reports have indicated that with the rise of the 
``Brick and Click'' retailers who are now collecting and remitting in 
most tax jurisdictions, the amount of uncollected revenue has actually 
been dramatically reduced. In fact, according to a study by economists 
Jeffrey Eisenach and Robert Litan, uncollected revenues (from firms 
with more than $5 million in remote sales) will average approximately 
$2.67 billion over the 2008-2012 period, or about two-tenths of one 
percent of total state and local tax revenues.\2\ Is it really fair to 
adopt a blanket sales tax law that would disadvantage small business 
retailers using the Internet for about two-tenths of one percent of 
total state and local tax revenues?
---------------------------------------------------------------------------
    \2\ Uncollected Sales Taxes on Electronic Commerce: A Reality 
Check''; Eisenach and Litan: 2010.
---------------------------------------------------------------------------
    In addition, in a recent report by the National Governors 
Association and the National Association of State Budget Officers, it 
appears state revenues are starting to improve, and 38 states reported 
that they had higher general fund spending in fiscal 2011 compared to 
fiscal 2010.\3\ While the recovery is ongoing, states are rebounding 
from the recession. Should we be placing additional burdens on small 
business job creators and jeopardizing their continued ability to 
contribute to state coffers through economic growth?
---------------------------------------------------------------------------
    \3\ ``The Fiscal survey of States: 2011'': http://www.nasbo.org/
sites/default/files/2011%20Fall
%20Fiscal%20Survey%20of%20States.pdf
---------------------------------------------------------------------------
    Also, many states have chosen not to enforce their consumer Use Tax 
laws and have, instead, opted for an approach that would burden out-of-
state businesses. Certainly, the Marketplace Fairness Act is a 
politically expedient alternative for state officials that are 
uninterested in enforcing their own laws. However, is it fair to 
authorize state tax commissioners to enforce their tax laws on non-
resident businesses and jeopardize small businesses development with 
unforeseen costs?
    At eBay, we believe that if fairness truly is the goal of policy 
proposals, then current remote sales tax policies should be preserved 
for small businesses. Unfortunately, the Marketplace Fairness Act walks 
away from small business protections by dropping the ``small business 
exemption'' included in previous legislation and replacing it with a 
``small seller exception'' that protects the Internet version of garage 
sales and hobby sellers. It is entirely fair to allow small business 
retailers to collect taxes only where they operate their business.

Misleading Data
    There have been studies that claim that current Internet sales tax 
proposals protect over 99 percent of online sellers.\4\ The members of 
the Committee should be wary of these claims since the relied upon 
study does not differentiate between casual sellers who occasionally 
sell on the Internet and actual small business retailers that use the 
Internet as an integral part of their business.
---------------------------------------------------------------------------
    \4\ Malowane, Laura and Stephen Siwek. Online Retail Sellers and 
Sales Volume Thresholds. Washington, D.C.: Economists Incorporated, 
2010.
---------------------------------------------------------------------------
    It is misleading to include occasional sellers in studies that 
claim to illustrate the impact of a tax increase on small businesses. 
No one expects an individual that casually sells their unwanted stuff 
online to collect and remit sales taxes the same way no one expects a 
garage sale to collect sales taxes. Distorting retailer data by 
including millions of consumers who occasionally sell on the Internet 
is an effort to hide the real negative impact on real small business 
retailers who are working to provide meaningful competition to 
established retail giants.

Real Small Business Protection
    If you believe that real small businesses should not be harmed by a 
change in remote sales tax law, then the definition of a small business 
is an important one. Congress traditionally delegates authority to the 
Small Business Administration (SBA) to set small business size 
standards. The SBA's unique position allows it to take into account the 
intricate differences in diverse business models.\5\ While eBay does 
not think the SBA should blindly adopt otherwise developed small 
business definitions (namely the SBA lending standards), we do think 
that the SBA could fairly define the profile of the small business that 
should be exempt from sales tax collection burdens.
---------------------------------------------------------------------------
    \5\ Small Business Administration 2012 size standards: http://
www.sba.gov/content/table-small-business-sizestandards
---------------------------------------------------------------------------
    It is important to note that every previous remote sales tax 
proposal until the 111th Congress has included small businesses 
protections, recognizing the playing field is unequal for small 
businesses. More specifically, proposals introduced in the 107th 
through the 110th Congresses included a small business exemption of at 
least $5 million, or authorized the SBA to establish the exemption 
threshold.
    The current small seller exemption in the legislation being 
considered today is not only arbitrary and significantly below SBA 
levels, it is well below other small business definitions, such as the 
single $10 million in revenue level proposed last year by the U.S. 
Department of the Treasury. Tax legislation passed in both chambers has 
included an employee threshold to protect small businesses, and an 
employee threshold could offer a good method of setting an appropriate 
small business exemption in this context as well.
    There will always be retail small businesses and emerging small 
businesses, and they will always be deserving of relief from national-
level tax collection in order to promote their growth into major retail 
businesses. For all of these reasons, eBay strongly supports S. Res. 
309. This bipartisan resolution opposes new tax collection requirements 
for small online businesses and entrepreneurs. The Resolution, which 
was introduced by Senator Wyden and Senator Ayotte, calls for policies 
to maintain the principle that small businesses should not be held to 
the same standard as large retail businesses with significant presence.
    To conclude, eBay's business is to help the small businesses that 
use our platform succeed in a challenging and rapidly changing retail 
world. Not surprisingly, our focus has been to protect small business 
retailers using the Internet. eBay strongly supports a robust small 
business exemption being included in any new remote sales tax regime 
and will continue to urge members of the Committee to do the same.
            Sincerely,
                                                 Tad Cohen,
                        Vice President and Deputy General Counsel, 
                                              Government Relations,
                                                              eBay Inc.
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 

        Competitive Enterprise Institute--July 30, 2012--No. 180

The Marketplace Fairness Act Would Create a State Sales Tax Cartel and 
                             Hurt Consumers

          An Origin-based System Offers an Alternative Forward

                    By Jessica Melugin *
---------------------------------------------------------------------------

    \*\ Jessica Melugin is an Adjunct Analyst at the Competitive 
Enterprise Institute in Washington, D.C.
---------------------------------------------------------------------------
    The rapid growth of online retailing has been accompanied by 
increasing calls by state and local officials to allow them to capture 
more sales tax revenue and by brick-and-mortar retailers to ``level the 
playing field.'' The Marketplace Fairness Act (S. 1832) seeks to 
capture more tax revenue for states on Internet purchases.\1\ 
Traditional retailers, states, and localities have urged Congress to 
act in the name of ``fairness,'' but for consumers, this will only mean 
a tax increase. There certainly are inequities in the way online sales 
are taxed, but in the case of S. 1832, the cure is worse than the 
disease. If Congress is to consider Internet sales tax policy as part 
of broader tax reform efforts, an origin-based approach would address 
the legitimate need for sales tax reform and avoid the Marketplace 
Fairness Act's harmful consequences.\2\
    Quill--Not too Shabby. The Internet is not a tax-free zone. At the 
Federal level, the Internet Tax Freedom Act of 1998 banned ``special 
and discriminatory taxes'' which states might impose, especially for 
transactions conducted over the Internet. State and local sales tax 
restrictions are dictated by a 1992 Supreme Court decision, Quill 
Corporation v. North Dakota.\3\ In its Quill decision, the Court held 
that a state may not collect sales tax from retailers that have no 
physical presence, or nexus, within its borders unless Congress uses 
its Interstate Commerce powers to grant it explicit permission to do 
so; S. 1832 gives this consent.
    Under current law, for example, when a Virginia resident buys a 
book online from a retailer in Oklahoma, Virginia may not collect sales 
tax on the purchase unless that Sooner bookseller has a nexus--such as 
a warehouse, store, or sales representative--in the Commonwealth. 
Technically, the Virginia resident may owe a use tax on the purchase, 
but these taxes are seldom enforced or collected. When proponents of 
remote Internet sales taxing argue that they are not calling for 
``new'' taxes, they are referring to these obscure use taxes. For 
consumers who face increased costs for their online purchases, it is 
little consolation that those costs are not the result of new taxes, 
but of existing taxes newly collected.
    The current arrangement is not an arbitrary loophole of tax law, 
but instead a manifestation of the principle of ``no taxation without 
representation.'' It is vendors, not customers, who remit the sales tax 
to governments. And, much to the advantage of consumers, it is vendors, 
with their trade associations and eyes on the bottom line, who often 
put more organized pressure on politicians to keep tax rates low.
    The principles articulated in Quill also promote tax competition 
between jurisdictions. If state governments were allowed to tax vendors 
in other states, to whom they are not accountable, that would result in 
substantially less downward pressure on tax rates. Consumers would wear 
their states' tax burden like an albatross even when buying from 
companies on the other side of the country. When there is no exit for 
consumers, there is little incentive for politicians to keep tax rates 
reasonable.
    The Quill decision also protects the free flow of interstate 
commerce. It spares sellers the burdensome task of remitting sales 
taxes to the approximately 7,400 different state and local taxing 
jurisdictions across the country. The Dallas-Fort Worth Airport has 
more than a dozen distinct jurisdictions alone.\4\ The cost of these 
calculations would doubtless be passed along to customers and 
taxpayers.
    The Marketplace Fairness Act would do away with all these benefits.
    The Marketplace Fairness Act--the Good, the Bad, and the Really 
Bad. States and localities can already tax in-state sellers, to whom 
they are accountable, but S. 1832 seeks Congress' permission to tax 
those outside of their jurisdiction, to whom they are not accountable.
    Specifically, the proposed legislation codifies into law the 
Streamlined Sales and Use Tax Agreement (SSUTA).\5\ The stated goal of 
the SSUTA is to ``simplify and modernize sales and use tax 
administration,'' and ``substantially reduce the burden of tax 
compliance.'' \6\ But the agreement also calls for Congress to overturn 
Quill and allow remote taxation, so the unarticulated goal of the SSUTA 
is to form a de facto state tax cartel.\7\ In practice, that means that 
member states agree to simplify their sales tax rates and bases, but 
only in exchange for the lucrative privilege of reaching beyond their 
borders to tax business in other states. So far, 21 states have joined 
the SSUTA as full members and tens of others are at various stages of 
compliance.
    The above example of a Virginia resident buying a book online from 
an Oklahoma retailer would look very different under the SSUTA scheme. 
Virginia would be able to collect tax from the Oklahoma-based retailer 
despite the Oklahoma retailer having no physical presence in Virginia. 
Never mind that the company being taxed has absolutely no voice in what 
items Virginia decides to tax or at what rates it does so. And never 
mind that the company receives no benefit from any services Virginia 
provides with its tax dollars.
    Even more alarming is a scenario where both the seller's state and 
the vendor's state may collect tax on the same transaction. The SSUTA 
agreement permits states that join and simplify their tax rates to 
periodically change their sourcing rules. This opens the door for 
double taxation. The Internet Tax Freedom Act currently prohibits this, 
but that protection expires in November 2014.
    In any case, consumers will experience remote taxation as a tax 
hike. It is true that use taxes are already on the books--though, 
again, seldom collected and remitted--but that tax law technicality 
will be cold comfort to consumers paying more online for their 
purchases. Extracting more money from taxpayers to put in state and 
local tax coffers is, in plain fact, the objective of this legislation. 
The National Conference of State Legislatures itself has pointed out in 
a letter to Senators, ``[i]n 2012, states will collectively lose an 
estimated $23.3 billion in uncollected sales taxes from out-of-state 
sales.'' \8\ While that's not enough money to make up for state and 
local budget shortfalls, it's more than enough for voters to take 
notice.
    Aside from raising tax revenue, proponents of this legislation also 
argue it will usher in an era of ``fairness'' in sales taxes between 
traditional brick-and-mortar retailers and remote sellers.\9\ However, 
tax fairness is only one of many desirable characteristics of sound tax 
policy. Efficiency, preservation of federalism, privacy, and 
accountability all must be valued and balanced with an even playing 
field.
    Despite the fairness mantra, S. 1832 sacrifices the goal of 
fairness with an exemption for smaller online sellers.\10\ It would 
excuse sellers with less than $500,000 in gross receipts on remote 
sales in the preceding calendar year from having to calculate, collect, 
and remit sales taxes on remote transactions. Hence, the inequity 
between small bricks-and-mortar sellers and small online retailers will 
continue.
    Moreover, the legislation is not particularly fair to the 
localities that will be forced to align their tax rates and base 
statewide. The Founders imagined many small policy laboratories in 
states, wisely acknowledging that governments closer to the people 
would be more responsive to those they served. Surely this idea also 
applies to localities within states. The language in the agreement 
requiring all localities to be homogenous in their sales tax policy 
flies in the face of this idea. It is, quite simply, an assault on 
local sovereignty.
    Simplification is not all good news for taxpayers, either. A 
simplified tax base will inevitably involve an across-the-board 
expansion of what gets taxed. Currently, only about 40 percent of sales 
that could be taxed are taxed. Certain items enjoy exemptions for a 
variety of reasons. Foods are frequently viewed as staples. Similarly, 
a town might exempt the product of its local industry. In the 
simplification process, each area's exemptions can't be made universal 
without narrowing the tax base to the vanishing point. Since that would 
defeat the whole point of increasing states revenue, states will have 
to take the opposite tack and harmonize upward. Items subject to tax 
anywhere will be subject to tax everywhere.
    The legislation is not fair to the online retailers that will have 
to calculate an amount based on approximately 7,400 local and 45 state 
tax jurisdictions and remit accordingly, while bricks-and-mortar 
retailers continue to tax at the point of sale. Imagine requiring every 
clerk behind a counter to ask their customers to prove where they live 
and wait around while they calculate the applicable tax rate! That 
would certainly be fair, but it would also be invasive, inefficient, 
costly, and irritating for all parties involved.
    The tax maze is too complex and varied to burden retailers with 
remote collection and remittance. Tax cartel proponents argue that 
simplification will ease this burden, but the ``simplified'' agreement 
is still 200 pages long and full of loopholes and exceptions.\11\
    Supporters of the legislation also argue that software will make 
all of the tax calculations, thus sparing businesses the burden of 
doing so. Unfortunately, this technology will have a cost that most 
likely will be passed along to consumers. It also raises as many 
concerns as it purports to resolve. The potential for privacy problems 
when state and local governments gather this amount of personal 
information is alarming--especially if they store the information.\12\ 
Handing over all that information to a third party to calculate tax 
obligations creates another opening for potential security breaches. 
Putting aside the larger question of whether government should be able 
to track who buys what, where, and when, the practical potential for 
identity theft, stolen credit card information, and general 
embarrassment should give legislators pause.
    Businesses will not benefit from S. 1832's brand of fairness--with 
the exception of a few large online retailers who have already cut 
rent-seeking incentive deals with states in exchange for collecting and 
remitting remote taxes. It is not fair to company owners taxed by 
remote, politically unaccountable authorities who provide them no 
public services. If someone is going to tax you, shouldn't you at least 
be able to vote for, or against, them? For businesses that decided to 
locate in low sales tax jurisdictions, this amounts to changing the 
rules mid-play. That is not part of anyone's idea of fairness.
    The proposed legislation is also unfair in that it creates 
inequities of taxing authority among states, depending on their degree 
of compliance with the SSUTA.\13\ Full membership allows tax collection 
on remote sellers and some flexibility with sourcing and exemptions, 
while partial compliance without full SSUTA membership empowers states 
to collect on remote sales, but denies them the flexibility full member 
states will enjoy. States that neither join nor comply with SSUTA will 
not be able to collect on remote sales, but their businesses (even in 
sales tax-free states) will be subject to other states remote taxation.
    Granting states permission to tax remote sellers also undermines 
federalism. The Founding Fathers understood that, necessarily, one 
state's autonomy must end where another's begins. They sought to 
preserve the beneficial tension between states when they are forced to 
compete for citizens and commerce. For this reason, they granted 
Congress authority to protect the free flow of interstate commerce. The 
proposed legislation's request for Congress' blessing of interstate tax 
collusion flies in the face of this principle of competitive 
federalism. We have seen what happens when states' rights include 
protectionism and discrimination against out-of-state entities; it was 
called the Articles of Confederation, and we all know how that ended. 
The SSUTA's vagueness in how auditing and court jurisdiction would work 
will result in further questions of state sovereignty.
    An Origin-Based Alternative. If Congress intends to tackle Internet 
sales tax policy as part of broader tax reform efforts, it should 
consider an origin-based tax regime, where the tax rate is assessed for 
the vendor's principal place of business instead of the buyer's 
location. An origin-based approach will address the problems of the 
current system and avoid the drawbacks of S. 1832 and the SSUTA plan by 
treating all retailers the same and helping preserve federalism, tax 
competition, political accountability, and consumer privacy.
    Here is how our same online book purchase example would look under 
an origin-based regime: Regardless of whether the Oklahoma retailer has 
a store or warehouse in Virginia, the purchase will incur Oklahoma 
sales tax and perhaps any local taxes on where the bookseller is 
located. The retailer will remit the sales tax to his tax jurisdiction 
only.

   An origin-based approach would address the ``fairness'' 
        issue by treat all retailers the same. For walk-in stores sales 
        tax is calculated at the point of sale, not by the residency of 
        the customer--who may be crossing state lines or city limits 
        for better deals or tourism. Expanding this origin-based 
        principle to all retailers will ensure that online, catalogue, 
        phone, and yet-to-be-invented sales platforms all will be 
        treated the same as purchases on Main Street.

   An origin-based system would help preserve federalism and 
        put downward pressure on taxes. It would allow customers to 
        ``vote with their wallets'' and gravitate towards lower tax-
        rate jurisdictions when shopping online or by mail. Citizens 
        benefit when states and localities are free to act as policy 
        laboratories, not when they are forced into a one-size-fits-all 
        national scheme like the one S. 1832 would create.

   The accounting burden would be minimal. Retailers of every 
        sort would only have to calculate and remit the taxes 
        applicable to their primary place of business. Their rate and 
        base stays constant whether they sell an item in the store or 
        mail it across the country. This efficiency benefits the 
        economy at large (with the possible exception of sales tax 
        software companies).

   An origin-based regime preserves consumer privacy. The tax 
        calculations are based on the seller's location only, so there 
        is no need to collect, store, or share any location information 
        of the buyer. No databases to fill or maintain, no third 
        parties to calculate rates and no audits to verify accuracy are 
        needed under an origin-based approach.

   An origin-based sales tax keeps political authorities 
        accountable to those they tax, namely, businesses in their own 
        jurisdictions. This is an especially important consideration 
        for the maintenance of democratic governance. It is simply too 
        easy to tax those who lack a political voice. Therefore, it 
        should be avoided at all costs.

    Conclusion. The tax-cartel approach in S. 1832 raises the question: 
Fairness at what cost? Sacrificing the principles of ``no taxation 
without representation,'' healthy state and local tax competition, 
consumer privacy, and economic efficiency is too high a price to pay in 
order to boost state revenues and appease the special interest group of 
bricks-and-mortar sellers.
    Moreover, it is unnecessary, as there is an alternative approach 
that brings equity among retailers and preserves the benefits of the 
current system. If Congress is to act, it should exercise its authority 
over interstate commerce to produce legislation that fundamentally 
reforms sales taxes by shifting to an origin-based regime.

Notes
    \1\ Marketplace Fairness Act (S. 1832), 112th Congress, 1st 
Session, http://www.gpo.gov/fdsys/pkg/BILLS-112s1832is/pdf/BILLS-
112s1832is.pdf.
    \2\ Michael Greve, Testimony Submitted the United States Senate 
Committee on Finance, August 1, 2001, http://www.finance.senate.gov/
imo/media/doc/080101mgtest.pdf. See also Veronique de Rugy and Adam 
Thierer, ``The Internet, Sales Taxes, & Tax Competition,'' Mercatus on 
Policy No. 98, Mercatus Center October 2011, http://mercatus.org/
publication/internet-sales-taxes-and-tax-competition.
    \3\ Quill Corp. v. North Dakota, 504 U.S. 298 (1992) No. 91-194, 
United States Supreme Court, argued January 22, 1992, decided May 26, 
1992, http://scholar.google.com/scholar_case?case
=3434104472675031870&q=quill+v.+north+dakota&hl=en&as_sdt=2,9&as_vis=1.
    \4\ Michael Greve, States Already Can Tax Out-of-State Purchases, 
But Rarely Enforce Those Laws, McClatchy Newspapers, June 21, 2012, 
http://www.aei.org/article/economics/fiscal-policy/taxes/states-
already-can-tax-out-of-state-purchases-but-rarely-enforce-those-laws/.
    \5\ Streamlines Sales Tax Governing Board, Inc., Streamlines Sales 
Tax Agreement (SSUTA), http://www.streamlinedsalestax.org/
index.php?page=modules.
    \6\ SSUTA, Sec. 102.
    \7\ SSUTA, Art IV.
    \8\ National Conference of State Legislatures, Letter to Sens. 
Richard Durbin, Michael Enzi, Lamar Alexander, and Tim Johnson, 
November 9, 2011, http://www.ncsl.org/documents/statefed/
LetterofSupportMarketplaceFairnessAct.pdf.
    \9\ National Retail Federation, ``NRF Lobbies for Sales Tax 
Fairness,'' news release, May 22, 2012, http://
www.progressivegrocer.com/top-stories/headlines/industry-intelligence/
id35471/nrf-lobbies-for-sales-tax-fairness/.
    \10\ Market Place Fairness Act S. 1832, Section 3 (c), http://
www.gpo.gov/fdsys/pkg/BILLS
112s1832is/pdf/BILLS-112s1832is.pdf.
    \11\ SSUTA.
    \12\ See Daniel Mitchell, ``Should You Pay Sales Tax on Amazon?'' 
The New York Times, July 29, 2011, available at http://www.cato.org/
publications/commentary/should-you-pay-sales-tax-amazon.
    \13\ SSUTA.
                                 ______
                                 

Mercatus on Policy--No. 98, October 2011--Mercatus Center, George Mason 
                               University

              The Internet, Sales Taxes, & Tax Competition

                 By Veronique de Rugy and Adam Thierer

    With most state lawmakers facing large budget deficits, they have 
become more aggressive about collecting online sales taxes. And now, 
Congress is considering blessing a multistate compact that would permit 
states to impose such taxes on interstate commerce, ending a 15-year 
long debate. To that end, Senator Dick Durbin (D-IL) recently 
introduced S. 1452, ``The Main Street Fairness Act,'' which would force 
retailers to collect sales tax for states that join a formal tax 
compact.\1\
    Apart from getting chronic state overspending under control,\2\ a 
better solution to the states' fiscal problems than a tax cartel that 
imposes burdensome tax collection obligations on out-of-state vendors 
would be tax competition.\3\ Congress should adopt an ``origin-based'' 
sourcing rule for any states seeking to impose sales tax collection 
obligations on interstate vendors. This rule would be in line with 
Constitutional protections for interstate commerce, allow for the 
continued growth of the digital economy, and ensure excessive, 
inefficient taxes do not burden companies and consumers.

Background
    While the United States does not have a national sales tax, 45 
states and approximately 7,400 local jurisdictions impose sales taxes. 
State and local governments have the power to require retailers within 
their borders to collect these consumption taxes at the point of sale 
in the government's name, but they do not have the authority to require 
businesses outside of their jurisdictions to collect taxes for them.
    Starting in the 1960s, a string of Supreme Court decisions 
restricted state efforts to impose tax collection requirements on 
interstate, or ``remote,'' mail order and catalog vendors.\4\ The Court 
held that states could only require firms with a physical presence--or 
``nexus''--in their jurisdictions to collect sales taxes on their 
behalf. Applying the timeless principle of ``no taxation without 
representation,'' these rulings extended sensible Commerce Clause 
protections to interstate activities. In addition, the Court has ruled 
that the complexity of state sales tax laws represents an undue burden 
on interstate commerce because it would be too difficult for out-of-
state vendors to comply with those 7,400 local tax systems.\5\
Figure 1: Sales Tax Rate Changes, 2003-2010



    Source: Vertex Inc., Berwyn, PA, vertexinc.com

    Though the Court will not let the states collect taxes from out-of-
state sellers, it will let them tax in-state buyers through ``use 
taxes.'' But, because few people voluntarily compute and pay use 
taxes,\6\ states want online retailers to collect the taxes. States 
then have turned to counting in-state ``affiliates'' of online 
retailers as a sufficient nexus to impose sales-tax collection 
obligations, arguing that the presence of an affiliate in a state is 
sufficient cause for an Internet company to collect the sales taxes for 
that state.\7\
    Companies, however, are as eager to avoid taxes as states are to 
impose them. In states that have imposed affiliate taxes, online 
vendors have canceled commission arrangements, destroying in-state jobs 
and tax revenues. Amazon.com and Overstock.com recently cancelled 
affiliate contracts in Connecticut and California, for example, and 
Amazon has threatened to cut ties with other states. Amazon is also 
negotiating with states where it has a nexus, such as Texas and South 
Carolina, for tax-exempt status in exchange for the promise of jobs and 
investment in those states.\8\ If Amazon succeeds in its negotiation, 
the resulting agreements would not only give the company special 
treatment compared to other businesses, but it would also would create 
a vicious cycle in which large companies could get ``tax-free'' 
treatment in exchange for promises of jobs, while medium-sized to 
smaller companies would bear the heavy burden of tax compliance.

Complicated ``Simplification''
    States are now attempting to circumvent Supreme Court rulings 
through the ``Streamlined Sales and Use Tax Agreement'' (SSUTA).\9\ The 
SSUTA seeks to minimize the burden associated with multiple sales tax 
rates and definitions and, in the process, overcome the constitutional 
prohibition on the taxation of remote vendors.
    Different definitions and exemptions greatly complicate the sales 
tax codes, as do constant revisions to the sales tax rates (see Figure 
1). For example, is a cookie a ``candy,'' which is taxed in most 
jurisdictions, or a ``baked good,'' which is typically tax-exempt? What 
type of clothing is ``essential'' and, therefore, untaxed? When should 
sales tax holidays be allowed and for what goods? The SSUTA is a good-
faith effort to answer such questions. However, the latest incarnation 
of this constantly changing ``simplification'' effort runs over 200 
pages. Even if states adopted SSUTA, the sales tax base would remain 
riddled with definitional loopholes and complexities that could burden 
vendors, especially mom-and-pop operators.\10\
    A 2006 PricewaterhouseCoopers study found that sales tax compliance 
costs for small retailers (with less than $1 million in sales) equaled 
almost 17 cents of every dollar they collected for states.\11\ Expanded 
tax collection obligations could increase that economic burden and 
discourage marketplace innovation and new entry. To remedy that, states 
have considered a ``small seller'' exemption, but piling exemption on 
exemption would undermine the goal of simplifying the sales tax system.
    Nonetheless, 24 states already have signed on to the SSUTA. It is 
unclear whether all states will join the effort, meaning complexity 
will persist if multiple tax rules remain in place. If all states did 
join the effort, however, it would be the equivalent of a de facto 
national sales tax system, led by the states. It would discourage 
beneficial tax competition among governments and likely lead to 
increased taxes for consumers.

On ``Fairness''
    States insist the SSUTA is needed to ``level the playing field'' 
between online and main street retailers. ``Main Street'' vendors--
whether the mom-and-pop retailers or larger companies, such as Walmart 
or Target--are clearly burdened with significant tax collection 
responsibilities. The difference in tax treatment is what animates 
Senator Durbin's ``Main Street Fairness Act.''
    But fairness cuts many ways. Requiring out-of-state vendors to 
collect sales taxes on behalf of jurisdictions where they have no 
physical presence remains unfair and unconstitutional, especially when 
there are other ways states could promote fairness. One way to level 
the playing field would be to cut or eliminate sales taxes on in-state 
vendors. Another alternative would be a national Internet sales tax 
that would avoid the complexity problem by imposing a single rate and 
set of definitions on all vendors. But that solution opens the door to 
a new Federal tax base, which would grow to be burdensome in other ways 
at a time when American consumers and companies are already over-taxed.
    The third and best option might be to clarify tax sourcing rules by 
implementing an ``origin-based'' tax system. In this system, states 
would tax all sales inside their borders equally, regardless of the 
buyer's residence or the ultimate location of consumption. Under that 
model, all sales would be ``sourced'' to the seller's principal place 
of business and taxed accordingly.
    This is, after all, how sales taxes have traditionally worked. A 
Washington, DC, resident who buys a televison in Virginia, for 
instance, is taxed at the origin of sale in Virginia regardless of 
whether he brings the television back into the District. Each day in 
America, there are millions of cross-border transactions that are taxed 
only at the origin of the sale; no questions are asked about where the 
buyer will consume the good. Policy makers should extend the same 
principle to cross-border sales involving mail order and the Internet. 
Under this approach, Internet shoppers would pay the sales tax of the 
state where the online retailer is based.
    An origin-based sourcing rule would have many advantages over the 
``destination-based'' sourcing rule that state officials are pushing. 
It would eliminate constitutional concerns because only companies 
within a state or local government's borders would be taxed. An origin-
based system would do away with the need for prohibitively complex 
multistate collection arrangements such as the SSUTA because states 
would tax transactions at the source, not at the final point of 
consumption.
    An origin-based system also would protect buyers' privacy rights, 
eliminating the need to collect any special or unique information about 
a buyer and to use third-party tax collectors to gather such 
information. Additionally, it would also preserve local jurisdictional 
tax authority whereas a harmonization proposal like the SSUTA plans 
would create a de facto national sales tax system that would exclude 
local governments.



    Finally, because it is more politically and constitutionally 
feasible, an origin tax may actually maximize the amount of tax 
collected for states by making compliance easier and incorporating 
currently untaxed activities.

Conclusion
    If Congress feels the need to take action on this front, it should 
implement an origin-based sourcing rule for the taxation of interstate 
commerce and make it clear to the states that they are free to impose 
sales tax on vendors whose principle place of business is within their 
borders, but not on imports from other states. State officials might 
protest the vigorous tax competition such a sourcing rule would spawn 
since some companies might locate their business in more hospitable tax 
environments. But that is real federalism at work. Federal lawmakers 
should favor it over tax cartels.

Endnotes
    1. S. 1452, ``The Main Street Fairness Act,'' 112th Congress, July 
29, 2011, http://www.govtrack.us/congress/billtext.xpd?bill=s112-1452; 
See also Mark Hachman, ``Democrats Introduce Federal Bill to Collect 
Online Sales Tax,'' PCMag.com, August 1, 2011, http://www.pcmag.com/
article2/0,2817,2389490,00.asp.
    2. Matthew Mitchell, ``State Spending Restraint: An Analysis of the 
Path Not Taken'' (working paper, Mercatus Center at George Mason 
University, 2010), http://mercatus.org/publication/state-spending-
restraint.
    3. Adam Thierer and Veronique de Rugy, ``The Internet Tax Solution: 
Tax Competition, Not Tax Collusion,'' Policy Analysis 49, Cato 
Institute, October 23, 2003, http://www.cato.org/
pub_display.php?pub_id=1353.
    4. National Bellas Hess, Inc. v. Department of Revenue of State of 
Illinois 386 U.S. 753 (1967), Complete Auto Transit, Inc. v. Brady 430 
U.S. 274 (1977), and Quill Corporation v. North Dakota 504 U.S. 298 
(1992).
    5. Thierer and de Rugy.
    6. Nina Manzi, ``Use Tax Collection on Income Tax Returns in Other 
States,'' Policy Brief Research Department, Minnesota House of 
Representatives, June 2010, http://www.house
.leg.state.mn.us/hrd/pubs/usetax.pdf.
    7. This tax is known as the ``Amazon tax,'' after Amazon's popular 
affiliate program that allows websites--from personal blogs to 
enthusiast discussion forums--to generate revenue by promoting Amazon 
products on their sites. See Justin Pratt, ``On Sales and Use Tax, 
Nexus and Affiliates,'' Mobile Evolution, July 10, 2011, http://
creativealgorithms.com/blog/ content/sales-and-use-tax-nexus-and-
affiliates.
    8. Ross Ramsey, ``Let's Make a Deal, Amazon Tells Texas,'' New York 
Times, June 23, 2011, http://www.nytimes.com/2011/06/24/us/
24ttramsey.html.
    9. Streamlined Sales Tax Governing Board, Inc., ``Streamlined Sales 
and Use Tax Agreement,'' November 12, 2002 [as amended through May 19, 
2011], http://www.streamlinedsalestax.org/index.php?page=modules.
    10. A lengthy ``Library of Interpretations'' is also included in 
the appendix of the Streamlined Sales and Use Tax Agreement (SSTUA) 
explaining how SSTUA officials answered questions such as what is 
``food sold with eating utensils?'' and ``do articles of human wearing 
apparel suitable for general use that are made from fur or hide on the 
pelt (i.e., animal skins with hair, fleece or fur fibers attached) 
constitute `clothing' within the meaning of the Agreement?'' Another 
debate dealt with the question of whether Jose Cuervo Margarita Mix and 
other ``fruit flavored cocktail mixes'' were ``soft drinks.'' In 
another section, it is determined that ``breakfast cereals are not 
candy because they are not sold in the form of bars, drops or pieces,'' 
but ``natural or artificially sweetened breakfast bars, Carmel Corn 
Rice Cakes, and Rice Krispie Treats that do not have ingredient 
labeling specifying flour and do not require refrigeration are candy.'' 
See Ibid., 167-8, 171, 189-90, 193.
    11. PricewaterhouseCoopers, Retail Sales Tax Compliance Costs: A 
National Estimate, Joint Cost of Collection Study, April 7, 2006, 
http://www.bacssuta.org/Cost%20of%20Collection%20
Study%20-%20SSTP.pdf.

    The Mercatus Center at George Mason University is a research, 
education, and outreach organization that works with scholars, policy 
experts, and government officials to connect academic learning and real 
world practice.

    The mission of Mercatus is to promote sound inter disciplinary 
research and application in the humane sciences that integrates theory 
and practice to produce solutions that advance in a sustainable way a 
free, prosperous, and civil society.

    Veronique de Rugy is a senior research fellow at the Mercatus 
Center at George Mason University. Her primary research interests 
include the Federal budget, homeland security, taxation, tax 
competition, and financial privacy issues.

    Adam Thierer is a senior research fellow at the Mercatus Center at 
George Mason University. His primary research interests are technology, 
media, Internet, and free speech policy issues, with a particular focus 
in online child safety and digital privacy policy issues.
                                 ______
                                 

                    July 19, 2012--Policy Tip Sheet

                     Myth vs. Fact--Internet Taxes

Myth 1: A tax on Internet sales just enables states to collect taxes 
        they are already legally entitled to collect.
Fact: A state is not legally entitled to collect taxes from Internet 
        sellers with no physical presence in that state.
    In Quill Corp. v. North Dakota, the U.S. Supreme Court ruled in 
1992 that a mail-order or Internet business must have a physical 
presence in a state for that state to require it to collect sales or 
use taxes, affirming the ruling in a 1967 case. While individuals may 
be legally obligated to report purchases they make out-of-state or from 
online sellers and then pay a ``use'' tax to the taxing jurisdiction in 
which they live, the Supreme Court has said states legally cannot 
compel out-of-state businesses to collect and pay such taxes to states 
where the sellers have no physical presence.
    More than 9,600 government units levy sales taxes, making 
compliance with an Internet sales tax incredibly difficult. For each 
state in which a business has a physical presence, a business already 
needs to collect accurate information on a buyer's home or place of 
business, access online databases to calculate the tax due, collect the 
tax, and then arrange for it to be sent to the taxing body. North 
Dakota argued for a flexible test under which sellers with certain 
contacts with a state or buyers residing in that state (though lacking 
physical presence in it) would also be required to collect and pay the 
tax. The Supreme Court recognized this burden was unreasonable.

Myth 2: An Internet tax would level the playing field between online 
        and bricks-and-mortar businesses.
Fact: A new tax is not necessary to ``level the playing field,'' and in 
        fact 
        introduces new distortions and unfairness.
    Businesses that maintain bricks-and-mortar stores are free to sell 
their products online, and in fact many or most do. So if the playing 
field isn't already level, a retailer can make it so by launching a 
website. A tax on Internet sales is really just a subsidy to businesses 
that refuse to make the transition to a blended retail model of bricks-
and-mortar store with Internet sales.
    Local businesses benefit from federal, state, and local 
expenditures related to a business district, including roads, water, 
sewers, lights, and police and fire protection. The taxes they pay go 
to pay for those services, and arguably are the price of those 
services. The only cost an out-of-state Internet seller imposes is the 
use of roads by a FedEx or UPS truck delivering the product from a 
warehouse to a customer's home. UPS and FedEx pay hundreds of millions 
of dollars a year in motor fuel taxes to pay for roads.
    The current arrangement, in short, accurately allocates the 
responsibility to collect taxes to the use of public services.

Myth 3: Compliance will be easy and inexpensive due to software.
Fact: The cost of compliance would be unduly burdensome for small 
        businesses despite advances in software.
    Currently there are more than 9,600 state and local sales tax 
jurisdictions in the United States. An Internet sales tax would require 
online retailers to comply with the detailed, conflicting, ever-
changing, and often-ambiguous requirements of those 9,600 taxing 
jurisdictions. A 2006 PricewaterhouseCoopers study found small 
retailers (less than $1 million in sales) already have compliance costs 
of 17 cents for every dollar they collect in tax revenue for states.
    Mail and Internet use allow even the smallest businesses to sell 
their products or services all over the country, giving them enormous 
opportunities to expand their reach and grow while at the same time 
giving customers the greater choice and cheaper prices increased market 
competition provides. With increased compliance costs and liability 
risks, small businesses and entrepreneurs are less likely to expand 
their reach into other states.

Myth 4: States are missing out on a massive amount of revenue.
Fact: This tax would kill jobs and not be the revenue windfall 
        advocates are claiming.
    The total potential uncollected sales tax revenues in 2008 would 
have been ``less than three-tenths of one percent of state and local 
tax revenues,'' according to a study by Jeffrey A. Eisenach, an adjunct 
professor at George Mason University Law School, and Dr. Robert Litan, 
a senior fellow at The Brookings Institution.
    To date very little revenue has been actually collected in states 
that have passed so-called ``Amazon taxes.'' Revenues from Internet 
taxes are likely to be curbed from economic losses as a result of small 
businesses and affiliate programs being no longer able to compete.
    According to the Tax Foundation, ``Contrary to the claims of 
supporters, Amazon taxes do not provide easy revenue. In fact, the 
Nation's first few Amazon taxes have not produced any revenue at all, 
and there is some evidence of lost revenue. For instance, Rhode Island 
has seen no additional sales tax revenue from its Amazon tax, and 
because Amazon reacted by discontinuing its affiliate program, Rhode 
Islanders are earning less income and paying less income tax.''

Myth 5: The taxing powers offered by the Marketplace Fairness Act (MFA) 
        are limited in scope.
Fact: The MFA would open the door to state taxes on digital products, 
        such as iTunes, and on other transactions outside their 
        borders.
    Allowing states to collect taxes on transactions occurring outside 
their borders is fundamentally unfair and threatens basic economic 
liberties. The persons paying and collecting the taxes do not have an 
opportunity to vote or otherwise participate in the government process 
that creates the tax or sets its rate. This ``taxation without 
representation'' is compounded by the fact that those paying the taxes 
receive no public goods or services in return for their payment--
``taxation without benefits.'' The incentive structure created by 
allowing such taxation will lead to ever-rising taxes and government 
spending, since the victims have no way to vote against higher taxes.
    Once the online sale of real goods is taxed, it will be only a 
matter of time before digital products, such as iTunes, apps, ring-
tones, digital books, and movies will also be taxed. States will see 
the Internet as a practically unlimited source of tax income by 
charging low rates on large numbers of transactions.
    According to a study by the Mercatus Center, ``Requiring out-of-
state vendors to collect sales taxes on behalf of jurisdictions where 
they have no physical presence remains unfair and unconstitutional, 
especially when there are other ways states could promote fairness. One 
way to level the playing field would be to cut or eliminate sales taxes 
on in-state vendors. Another alternative would be a national Internet 
sales tax that would avoid the complexity problem by imposing a single 
rate and set of definitions on all vendors. But that solution opens the 
door to a new Federal tax base, which would grow to be burdensome in 
other ways at a time when American consumers and companies are already 
over-taxed.''

Conclusion
    An origin-based tax system for online purchases is simpler and more 
taxpayer-friendly than a destination-based tax system.
    In a destination-based tax system, a customer is charged at the 
rate where the customer is located or is expected to use the product. 
The increase in the number of intangible services and property sold 
over the Internet makes it extremely difficult to determine where the 
product will be used, since computer programs and digital property such 
as music files can be downloaded all over the country.
    There are three problems with a destination-based tax on the 
Internet. Tax competition among the states would be hindered, it would 
undercut federalism, and it would push tax rates up.
    In comparison, states currently tax sales using an origin-based tax 
system. A consumer buys a product in a store or from a remote business, 
and he or she is taxed at the rate where the business is physically 
located.
    So while destination-based taxation requires reporting to multiple 
governmental jurisdictions and creating substantial business costs for 
small start-up companies and Internet entrepreneurs, origin-based 
taxation would foster competition among the states and would be simpler 
for businesses to comply with.
    Nothing in this report is intended to influence the passage of 
legislation, and it does not necessarily represent the views of The 
Heartland Institute. If you have any questions about this issue or The 
Heartland Institute, contact Heartland Government Relations Director 
John Nothdurft at 312/377-4000 or jnothdurft
@heartland.org.
                                 ______
                                 

                       Empiris LLC--February 2010

    Uncollected Sales Taxes On Electronic Commerce: A Reality Check

      Jeffrey A. Eisenach and Robert E. Litan 
---------------------------------------------------------------------------

    \\ The authors are, respectively, Chairman, Empiris LLC and 
Adjunct Professor, George Mason University School of Law; and Senior 
Fellow, Economic Studies and Global Economics Programs, The Brookings 
Institution and Vice President, Research and Policy, The Kauffman 
Foundation. We are grateful to Allan Ingraham, Robert Kulick, Molly 
Wells and Billy Schwartz for assistance, though any errors or omissions 
are our own. The views here are those of the authors, and should not be 
attributed to any of the institutions with which they are affiliated, 
or to the trustees, officers, or employees of those institutions. 
Support for this study was provided by NetChoice.
---------------------------------------------------------------------------
Executive Summary
    Under the Supreme Court's 1992 Quill decision, online retailers are 
not required to collect sales taxes in states where they do not have a 
physical presence, or ``nexus.'' As a result, state and local sales 
taxes are not collected on some proportion of interstate sales. Since 
the early days of the Internet, state and local governments have 
lobbied Congress to overturn Quill and force e-retailers to collect 
taxes on all sales, regardless of whether they have nexus.
    The amount of uncollected taxes involved is central to the debate. 
Overturning Quill would impose significant administrative costs, 
especially on small businesses (where administrative costs account for 
as much as 13.5 percent of taxes collected), and would have other 
negative consequences as well. If, the resulting tax collections would 
be too small to materially affect state and local government finances, 
then governments arguably should look elsewhere for a solution to their 
fiscal difficulties.
    In this study, we present an estimate of the amount of potential 
uncollected sales tax revenues for 2008, and a forecast of uncollected 
revenues through 2012. Our primary findings are:

   Total potential uncollected sales tax revenues in 2008 were 
        approximately $3.9 billion, or less than three-tenths of one 
        percent of state and local tax revenues.

   More than one third of uncollected revenues are associated 
        with small businesses. If firms with less than $5 million in 
        remote sales were exempt (as proposed by legislation introduced 
        in recent Congresses), potential uncollected revenues fall to 
        approximately $2.45 billion, or less than two-tenths of one 
        percent of state and local tax revenues.

   Uncollected revenues are not rising rapidly. Uncollected 
        revenues (from firms with more than $5 million in remote sales) 
        will average approximately $2.67 billion over the 2008-2012 
        period, or about two tenths of one percent of total state and 
        local tax revenues.

   The growth of ``brick and click'' retailing (i.e., brick and 
        mortar retailers with substantial online sales) is likely to 
        reduce the proportion of online sales on which taxes are not 
        collected. In addition, states are using various tactics to 
        promote tax collection by ``out-of-state'' firms. These two 
        trends suggest that uncollected revenues are likely to fall 
        over time--i.e., that the uncollected revenue problem is 
        ``solving itself.''

   A few large firms account for the bulk of uncollected tax 
        revenues. For example, the top 10 firms (ranked by uncollected 
        taxes) account for approximately 47 percent of total 
        uncollected revenues. This finding provides some support for 
        those who have argued that the states should focus their 
        efforts on firms with large uncollected tax revenues.

    Our findings differ markedly from those of a recent study by a 
group at the University of Tennessee (the Fox Study), which estimated 
uncollected tax revenues associated with Quill at over $7.7 billion in 
2008, rising to as much as $12.7 billion in 2012. The differences can 
be attributed to three primary factors:

   First, the Fox Study substantially overstates uncollected 
        taxes associated with business-to-business (B2B) online sales.

   Second, the Fox Study understates tax collections by small 
        firms.

   Third, with respect to ``out-year'' projections, the Fox 
        Study assumes an unrealistically high and unsustainable growth 
        rate for online sales, especially considering the fact that the 
        growth of broadband penetration among U.S. households--one of 
        the primary drivers of online sales growth--is slowing as 
        household broadband penetration approaches saturation.

    The differences between our results and those of the Fox Study are 
summarized in the figure below. In our view, the most significant 
difference is in the rates of growth: Rather than growing rapidly, as 
the Fox Study suggests, our analysis demonstrates that uncollected 
revenues are, at most, growing slowly. Given that uncollected revenues 
account for such a small proportion of revenues, our assessment is that 
state and local tax collectors would be best served by focusing their 
efforts on other potential revenue sources.

Potential Uncollected Revenue Forecasts, 2008-2012



                                Contents
    I. Introduction

    II. Data, Methodology and Assumptions

      A. Estimating the Tax Base

      B. Establishing Nexus

      C. Apportioning Sales Among States

    III. Estimates of Uncollected Taxes

      A. Uncollected Revenues in 2008

      B. Forecast of Uncollected Revenues, 2009-2012

    IV. Discussion and Implications

    V. Conclusions

    Appendix: State-by-State Estimates of Potential Uncollected Revenue

I. Introduction
    In its 1992 Quill decision,\1\ the Supreme Court affirmed prior 
holdings that state sales tax regimes were so complex that forcing out-
of-state firms to collect taxes would present an unreasonable burden on 
interstate commerce. Consequently, the court ruled that retailers could 
not be forced to collect sales taxes for states where they do not have 
a physical presence, or ``nexus.'' While states also require buyers to 
pay ``use taxes'' in lieu of unpaid sales taxes, and businesses 
generally do so, use tax compliance is generally agreed to be 
relatively low among consumers. As a result, states and localities have 
long complained that the growth of e-commerce--a portion of which is 
comprised of remote sales--is depriving them of significant tax 
revenues, and have sought legislation that would overturn Quill and 
force online retailers to collect and remit state and local sales taxes 
on remote sales. Retailers, on the other hand, argue that the 
administrative costs of collecting taxes for several thousand state and 
local sales tax jurisdictions would be overly burdensome, especially 
for small businesses that likely have de minimis sales in many states.
---------------------------------------------------------------------------
    \1\ 504 U.S. 298, 112 S.Ct. 1904.
---------------------------------------------------------------------------
    Whether it makes sense to overturn Quill depends in part on how 
much additional tax revenue would actually be generated. If the 
potential increase in tax revenues is sufficiently large, some would 
argue that it would be worthwhile to incur the administrative costs 
(both public and private) required for collection; otherwise, the 
government should look elsewhere for revenue sources that involve lower 
welfare costs to society (as a share of taxes collected).\2\
---------------------------------------------------------------------------
    \2\ Of course, administrative costs are not the only consideration. 
In general, the most efficient taxes are those which generate the 
lowest deadweight losses, including the costs of economic distortions 
as well as administrative costs. See e.g., Edgar K. Browning and 
Jacqueline M. Browning, Public Finance and the Price System (New York: 
MacMillan Publishing, 1979) at 288-294.
---------------------------------------------------------------------------
    Several studies have attempted to estimate the magnitude of 
uncollected sales taxes associated with out-of-state online sales. The 
most widely cited analysis, by Donald Bruce, William F. Fox, and LeAnn 
Luna at the University of Tennessee (the ``Fox Study''), estimates that 
state and local governments will fail to collect between $44.8 billion 
and $49.1 billion in tax revenues on online sales over the five-year 
period between 2008 and 2012.\3\ While these estimates are still quite 
low as a proportion of total state and local tax revenues (about 0.6 
percent), or even state and local sales tax revenues (about 2.5 
percent),\4\ they are sufficiently large that states and localities 
have cited them in support of their efforts to promote Federal 
legislation. Other analysts have suggested these estimates are too 
high, that the actual amount of tax revenues foregone is much lower, 
and that the amount of additional taxes that might plausibly be 
collected is lower still, especially since Congressional proposals to 
mandate collection of remote sales tax have exempted small business 
retailers.\5\
---------------------------------------------------------------------------
    \3\ Donald Bruce, William F. Fox, and LeAnn Luna, State and Local 
Government Sales Tax Revenue Losses from Electronic Commerce, 
University of Tennessee Working Paper (April 13, 2009) (hereafter Fox 
Study).
    \4\ For example, the Fox Study estimates uncollected revenues of 
$7.26 billion in 2008. The Census Bureau reports total state and local 
tax revenues for the 12 months ended December 2008 were $1.304 
trillion, and state and local sales and gross receipts taxes for this 
period were $305 billion. See U.S. Census Bureau, Federal, State and 
Local Governments: Quarterly Summary of State and Local Government Tax 
Revenue (http://www.census.gov/govs/www/qtax.html, viewed August 31, 
2009).
    \5\ See, e.g., Billy Hamilton, ``Internet Sales Tax: What If 
There's No There There,'' State Tax Notes 49 (September 1, 2008) at 627 
and Peter A. Johnson, Setting the Record Straight: The Modest Effect of 
Ecommerce on State and Local Sales Tax Collection (Direct Marketing 
Association, January 19, 2008).
---------------------------------------------------------------------------
    In this study, we provide estimates of the potential state and 
local sales tax revenues from Internet retailers, using data from a 
range of sources, including a recent comprehensive survey of retailers 
doing business both on and off the Net (both pure Net retailers and 
those using the ``bricks and clicks'' model). Our estimates of lost 
revenue are far lower than those in the Fox Study--at $3.9 billion for 
2008, slightly more than half. Moreover, assuming--as seemsextremely 
likely--that a sales tax collection mandate would include an exemption 
for small businesses, the amount would be even less: Approximately $2.4 
billion, or less than two-tenths of one percent of state and local 
government tax revenues. In the balance of this introductory section we 
explain why our estimates differ from the Fox Study, and in the rest of 
the paper, we provide the details.
    The amount of revenue that would be generated by a mandate to 
collect remote sales tax depends on three primary factors: (1) The 
dollar amount of taxable e-commerce sales on which taxes currently are 
due, but not collected; (2) the applicable tax rates on these sales; 
and, (3) the ``reach'' of the mandate, i.e., the revenues that would be 
exempted if, for example, small businesses were not covered (or, 
realistically, if there was a significant amount of noncompliance). 
Unfortunately, none of these three magnitudes is directly observable, 
and it is therefore necessary to develop estimates. For example, while 
there are both public and private estimates of the total amount of 
retail online sales, it is necessary to estimate the proportion of 
these sales accounted for by products (e.g., food products, 
intangibles) that are exempt from state and local sales taxes. Of the 
remainder, it is necessary to estimate the proportion of sales for 
which taxes are already collected, either because they are made to 
customers in states where the seller has nexus, or because the buyer 
pays use taxes, which is typical for most business-to-business (B2B) 
sales. Once an estimate of untaxed sales is developed, the overall 
sales figure must be allocated across jurisdictions in order to apply 
the appropriate tax rates. Finally, in order to make going-forward 
projections of lost tax revenues, it is necessary forecast the key 
underlying variables for future periods.
    In this study, we utilize data from a variety of sources to 
estimate the amount of uncollected sales taxes on electronic sales for 
2008-2012. The starting point for our analysis is a survey of sales tax 
collection practices of the largest online retailers as reported by 
Internet Retailer, which reports annual online sales revenues for the 
500 largest Internet retailers, including both ``pure play'' online 
retailers (like Amazon.com) and ``brick-and-click'' or ``multichannel'' 
retailers (like Target and Wal-Mart). To ascertain the extent to which 
these firms collect sales taxes on online sales, we went beyond the 
data in the Internet Retailer report to survey the sales tax collection 
practices of 250 firms (including the top 150, the bottom 50 firms and 
50 from the ``middle'' of the distribution) to ascertain the states in 
which sales taxes are already collected on online sales by the top 500 
firms. We also develop estimates for uncollected taxes by smaller 
firms, which represent about $28 billion, or 21 percent, of 2008 online 
sales. Finally, we also forecast online sales and uncollected revenues 
for the five-year period 2008-2012.
    As indicated, we estimate that uncollected sales taxes on state and 
local sales in 2008 totaled approximately $3.9 billion, slightly more 
than half of what is estimated by the Fox Study. Over the course of the 
five-year period from 2008-2012, our estimates diverge still further 
from those of the Fox Study. For example, the Fox Study estimates 
uncollected revenues could be as high as $12.7 billion in 2012, 
compared with our estimate of $4.7 billion. As we explain below, there 
are three major reasons for the differences between our estimates and 
those of the Fox Study: First, the Fox Study substantially overstates 
uncollected taxes associated with businessto-business (B2B) online 
sales; second, the Fox Study understates tax collections by small 
firms; third, with respect to ``out-year'' projections, the Fox Study 
assumes what we regard as an unrealistically high and unsustainable 
growth rate for online sales, especially considering the fact that the 
growth of broadband penetration among U.S. households--one of the 
primary drivers of online sales growth--is slowing as household 
broadband penetration approaches saturation.
    The remainder of this paper is organized as follows. Section II 
describes our approach and key assumptions, and describes our data set 
and survey methodology. Section III presents our results for both the 
baseline (2008) estimate of uncollected taxes and our five-year (2008-
2012) forecast. Section IV puts our results in context and briefly 
discusses policy implications. Section V presents a brief summary of 
our findings.

II. Data, Methodology and Assumptions
    Our central objective is to estimate the amount of online retail 
sales made by firms in states where they are not required to collect 
sales taxes, and then to estimate the taxes not being collected on 
those sales. To do so, we begin by establishing the size of the overall 
tax base (i.e., the universe of taxable online sales). Next, we 
estimate the proportion of sales that occur in states where the seller 
lacks nexus (and therefore is assumed not to collect sales taxes). 
Third, we distribute these sales across states, and multiply by the 
appropriate tax rates. In this section, we describe the data, 
methodology and assumptions we used in conducting each step. Where 
appropriate, we note where our approach differs from that adopted in 
the Fox Study and explain why we believe our approach is more 
appropriate for evaluating alternative sales tax policies.

A. Estimating the Tax Base
    Our first step is to estimate total retail e-commerce sales which 
are subject to state and local sales and use taxes. The authoritative 
source of such data is the U.S. Census Bureau, which conducts both 
monthly and annual surveys of retail trade and, on the basis of those 
surveys, reports retail e-commerce on both a quarterly and annual 
basis. Quarterly reports are based on the Monthly Retail Trade Survey 
(MRTS), and annual reports are based on the Annual Retail Trade Survey 
(ARTS).\6\ While the Census publishes separate estimates for B2B and 
B2C e-commerce, its B2C estimates in fact count all retail e-commerce, 
including retail e-commerce involving sales from one business to 
another.\7\ The Census online sales data are also comprehensive with 
respect to types of sellers, as they include ``catalog and mail order 
operations, many of which sell through multiple channels; ``pure 
plays'' (i.e., retail businesses selling solely over the Internet); and 
e-commerce units of traditional brick-and-mortar retailers (i.e., 
`brick and click').'' \8\ Thus, we believe the Census Bureau data 
represents the best estimate of the total amount of e-commerce 
potentially subject to sales tax, although, as we explain below, there 
are some reasons to believe it represents an overestimate of the 
overall tax base. Table 1 below shows the Census Bureau's estimates of 
retail e-commerce from 1999 through the second quarter of 2009.
---------------------------------------------------------------------------
    \6\ See http://www.census.gov/retail/mrts/www/data/pdf/09Q2.pdf and 
http://www.census
.gov/econ/estats/2007/2007reportfinal.pdf.
    \7\ See http://www.census.gov/econ/estats/2007/2007reportfinal.pdf 
at 2 (``We estimate business-to-business (B-to-B) and business-to-
consumer (B-to-C) e-commerce by making several simplifying assumptions: 
manufacturing and wholesale e-commerce is entirely B-to-B, and retail 
and service e-commerce is entirely B-to-C.'')
    \8\ http://www.census.gov/econ/estats/2007/2007reportfinal.pdf at 
3.

                                                          Table 1.--Retail E-Commerce 1999-2009
                                                                      [$ billions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         1999     2000     2001     2002     2003     2004     2005     2006     2007    2008*    2009**
--------------------------------------------------------------------------------------------------------------------------------------------------------
E-Retail Sales                                            $15      $28      $34      $45      $57      $76      $87     $107     $127     $133      $128
------------------------------------------------------
% of Total Retail                                        0.5%     0.9%     1.1%     1.4%     1.8%     2.2%     2.4%     2.8%     3.2%     3.4%      3.6%
------------------------------------------------------
YOY % Change                                               --    86.7%    21.4%    32.4%    26.7%    33.3%    14.5%    23.0%    18.7%     4.7%     -3.8%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: U.S. Census Bureau/E-Stats
* Based on most recent revised quarterly reports.
** Annual rate based on Q1, Q2.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Our estimate of retail e-commerce differs from the one advanced by 
the Fox Study, which takes a very different approach. For reasons which 
are not apparent (given that the Census Bureau retail sales data 
include B2B as well as B2C sales), the Fox Study begins by including 
all e-commerce sales, including sales classified by the Census Bureau 
as B2B sales. These sales have little or no potential for uncollected 
sales tax, for two reasons: First, wholesale sales or ``inputs-to-
production'' generally are exempt from sales and use taxes.\9\ Second, 
even if some retail sales are captured in the Census Bureau's B2B 
category, nearly all businesses file and pay the use tax due on their 
retail purchases, largely because state tax auditors can readily close 
use tax compliance gaps by examining business records.
---------------------------------------------------------------------------
    \9\ For example, the Census Bureau's definition of ``wholesale'' 
establishments clearly excludes retailers, yet the Fox Study includes 
sales by such establishments in the tax base for retail commerce. See 
U.S. Census Bureau, 2002 NAICS Definitions, 42 Wholesale Trade (at 
http://www.census.gov/epcd/naics02/def/NDEF42.HTM).
---------------------------------------------------------------------------
    Recognizing that its approach is over-inclusive, the Fox Study next 
attempts to exclude some B2B sales, based in part on a survey the 
authors conducted of state sales tax personnel, who were asked to 
estimate the proportion of various categories of B2B sales which might 
be subject to sales tax. Having conducted the survey, however, the Fox 
Study concludes that the results are unreliable, and discards many of 
the responses in favor of ad hoc corrections based on a subset of the 
data which more closely match the authors' a priori expectations.
    The ultimate effect of the Fox Study's approach is to inflate the 
taxable base by including a substantial amount of B2B sales which are 
not subject to sales and use taxes, and then to apply an ad hoc and 
arbitrary approach to correcting the error.\10\ In our view, the entire 
exercise is both unnecessary and inappropriate: While the Census Bureau 
data are labeled ``B2C,'' they in fact include all retail sales, that 
is, all sales that are potentially subject to state and local sales and 
use taxes. There is no valid basis for adding in additional B2B sales.
---------------------------------------------------------------------------
    \10\ The Fox Study does not document the methodology by which it 
arrives at its baseline estimates of the electronic commerce. Moreover, 
the study provides only an unlabelled bar graph showing historical 
electronic commerce data, making it impossible to compare the 
underlying data used in the study to actual data from the Census 
Bureau. As a result, it is not possible to estimate the precise amount 
by which the Fox Study overstates the tax base.
---------------------------------------------------------------------------
    In fact, there at least three good reasons for believing the Census 
Bureau retail e-commerce estimates are over-inclusive with respect to 
taxable sales, even without adding in additional B2B sales. First, the 
Census Bureau's retail e-commerce data include sales by motor vehicle 
and parts dealers, which comprise 19 percent ($24 billion in 2007) of 
total retail e-commerce. Including these sales in the total likely 
overstates the potential tax base both because automobile sales--
regardless of how they are conducted--are subject to taxation at the 
time of registration, and because many sales of automobile parts are 
likely B2B sales which are not subject to sales or use taxes in the 
first instance.
    Second, while the Census Bureau data exclude online travel 
services, financial brokers and ticket sales agencies, they include 
sales of at least three types of items--food, clothing, and intangibles 
(e.g., downloaded software,)--which often are not subject to sales tax. 
The Fox Study attempts, through its survey of state finance department 
personnel, to estimate the proportion of B2C sales that are subject to 
taxation, and ultimately concludes that about 30 percent of B2C sales 
are exempt from sales and use taxes. While we agree that many B2C sales 
are not taxable, we do not believe the Fox Study's survey results are 
sufficiently reliable to form the basis for such a precise estimate.
    Third, to the extent the Census Bureau data include B2B sales, it 
is likely that the purchasing businesses pay use taxes on purchases for 
which sales tax is not collected by the seller. Past research suggests 
that the use tax compliance rate among businesses is between 85 and 100 
percent.\11\
---------------------------------------------------------------------------
    \11\ See e.g., Johnson at 6.
---------------------------------------------------------------------------
    We considered various approaches to adjusting for these issues of 
over-inclusion, including--for example--excluding e-commerce sales by 
automobile dealers, supermarkets andonline music services), but we 
ultimately chose not to make such adjustments because we lack the 
underlying data needed to do so with precision. As a result, our 
estimate of the overall retail e-commerce tax base is likely to be 
significantly above the true amount, meaning that our estimates of 
uncollected taxes are likely also biased upwards relative to the actual 
amount.

B. Establishing Nexus
    The second step in our analysis is to ascertain the extent to which 
sales taxes are already being collected on retail e-commerce sales, 
that is, to determine the extent to which retail e-commerce involves 
sales to customers in states where the seller has nexus or is, for 
whatever reason, collecting sales taxes.\12\ To do so, we began by 
researching the firms listed in the 2009 edition of Internet Retailer 
Top 500 Guide, which provides data on 2008 retail e-commerce sales by 
the largest online retailers, or all those with annual online sales 
exceeding $9 million.\13\ Specifically, for 250 of the 495 U.S. firms 
listed in the guide,\14\ we ascertained the states in which each firm 
collected sales taxes on online sales. For each firm, we followed the 
following sequence: First, we visited the firm's website and searched 
for a listing of states in which tax was collected; second, if the 
website data was inconclusive, we contacted the firm's customer service 
department; third, if customer service was unable or unwilling to 
provide the information, we researched the firm's website, its 
Securities and Exchange Commission filings, and other public data, for 
a list of states in which the firm in has a retail store or other 
physical presence.\15\
---------------------------------------------------------------------------
    \12\ As we discuss further below, ``nexus'' is an inexact and 
evolving concept. For example, New York has recently passed legislation 
defining nexus as including a situation where an online retailer has 
sales affiliates in the state (e.g., an Amazon advertisng partner). 
Amazon has sued the state over this law, and is collecting sales tax on 
sales to New York residents, pending the outcome of its lawsuit.
    \13\ Information on the Guide is available at 
www.internetretailer.com/top500.
    \14\ Five firms are Canadian and thus not subject to U.S. sales 
taxes or included in the U.S. Census Bureau data. Of the remainder, we 
surveyed each of the top 150 firms and bottom 50 firms, and an 
additional 50 firms ranked between 150 and 450.
    \15\ When no determination could be made, we assumed that the firm 
in question did not collect sales taxes in any state. Our approach was 
similar to that used by the Fox Study, though their data was based on 
the 2007 edition of Internet Retailer, and they surveyed only 100 firms 
(the top 50 plus 50 more chosen at random). See Fox Study at 20. Note 
that, like the Census Bureau data, the Internet Retailer guide excludes 
online travel agents and brokerages, but includes several categories of 
sellers (e.g., music and game download sites, grocery stores) whose 
sales are likely largely exempt from sales taxes.
---------------------------------------------------------------------------
    Several findings from this portion of our analysis are worth 
highlighting. First, there is an extremely wide variance in the number 
of states where firms collect taxes. For the top 150 Internet Retailer 
firms, for example, 77 collect in 10 states or fewer, and 62 collect in 
30 or more; only 11 collect in 11 or more states but fewer than 30. 
This bi-polar distribution reflects the distinction between ``pure 
play'' retailers (such as Amazon.com) which have nexus in very few 
states, and ``brick and click'' retailers (such as Staples) which 
collect taxes in most or all states. As shown in Table 2, most of the 
largest online retailers (ranked by 2008 U.S. online sales) are ``brick 
and click'' firms which collect taxes in most or all of the states with 
sales taxes.

  Table 2.--States Where Sales Taxes Are Collected, Top 20 E-Retailers
------------------------------------------------------------------------
                                                      States Where Taxes
               Firm                2008 Online Sales     Are Collected
------------------------------------------------------------------------
Amazon.com\16\                       $10,228,000,000                  5
Staples                               $7,700,000,000                 44
Dell                                  $4,830,000,000                 47
Office Depot                          $4,800,000,000                 47
Apple                                 $3,642,118,080                 47
OfficeMax                             $3,083,730,683                 47
Sears Holdings                        $2,693,433,600                 47
CDW                                   $2,600,122,100                 47
Newegg                                $2,100,000,000                  3
Best Buy                              $2,015,183,282                 47
QVC                                   $1,993,361,800                 47
SonyStyle.com                         $1,827,577,534                 47
Walmart.com                           $1,740,000,000                 47
Costco                                $1,700,000,000                 38
J.C. Penney Co.                       $1,500,000,000                 47
HP Home & Home Office Store           $1,497,000,000                 47
Circuit City Stores*                  $1,414,000,000                 29
Victoria's Secret                     $1,333,000,320                 45
Target                                $1,209,208,320                 46
Systemax                              $1,072,071,000                  5
------------------------------------------------------------------------
Source: Internet Retailer
*Circuit City Stores went through Chapter 7 in 2008
Note: While it does not have a state sales tax, we count Alaska as a
 sales tax state, given that multiple local jurisdiction levy sales and
 use taxes.
------------------------------------------------------------------------

    Second, as shown in Figure 1, the distribution of e-retail sales is 
heavily skewed towards the largest retailers. Overall, we found that 
the top 20 Internet retailers accounted for nearly $59 billion in 2008 
sales (44 percent of the $133 billion total), and the top 495 firms 
accounted for approximately $105 billion in sales, or 79 percent of all 
sales. The remaining retail e-commerce sales ($28 billion) are 
associated with smaller firms, i.e., those with less than $9 million in 
online sales.\17\
---------------------------------------------------------------------------
    \16\ We adjusted Amazon's total sales to reflect the fact that 
approximately 47 percent of its $19 billion in sales (about $9 billion) 
are made outside the United States. See Amazon.Com, Inc., Form 10-K for 
the Fiscal Year Ended December 31, 2008 at 30.
    \17\ As we discuss further below, the Fox Study cites a recent 
draft working paper which argues that the Census Bureau data 
underestimates sales by small firms. (See Joe Bailey et. al, ``The Long 
Tail is Longer than You Think: The Surprisingly Large Extent of Online 
Sales by Small Volume Sellers,'' Draft, University of Maryland, May 12, 
2008.) While a complete critique of that paper is beyond the scope of 
this study, it is clear that it suffers from numerous methodological 
problems which make its results unreliable. (To cite just one example, 
the Bailey paper relies on comScore data on web sales by the top 140 
online retailers (with average annual online sales of $675 million) to 
estimate sales by firms with sales below $1 million.) While the Fox 
Study relies on the Bailey paper to estimate the distribution of sales 
by firm size, it does not embrace the Bailey paper's contention that 
the Census Bureau underestimates overall e-commerce sales and does not 
rely on the Bailey paper for its estimate of total online sales.
---------------------------------------------------------------------------
Figure 1: Distribution of Retail E-Commerce by Firm Size, 2008



C. Apportioning Sales Among States
    Uncollected tax revenues in any given state are the product of 
online sales in the state upon which taxes are not collected and the 
applicable tax rate. Thus, the next step in our analysis is to 
apportion each company's sales among the states. We do so by assuming 
that individual firm e-commerce revenues are distributed across the 50 
U.S. states (and Washington D.C.) in the same proportions as overall 
2008 total retail sales, as reported by the Census Bureau. That is, for 
example, if a particular state accounts for five percent of retail 
commerce in the United States, we attribute five percent of each firm's 
online sales to that state.\18\
---------------------------------------------------------------------------
    \18\ We deviated from this method in the case of only three firms 
in our sample: Peapod, Safeway, and FreshDirect. These three firms are 
brick and click grocers with very specific areas of operations. We 
contacted these firms and determined the states in which they provide 
their online grocery service and applied their total online sales, as 
listed in Internet Retailer, only to those states.
---------------------------------------------------------------------------
    We considered other approaches to apportioning sales across states. 
The Fox Study, for example, apportions sales on the basis of total 
state and local sales tax collections, thus weighting sales towards 
states with higher tax rates. The authors defend this approach on the 
basis of studies which show that consumers in high tax states are more 
likely to shop online than consumers in low tax states, presumably to 
avoid paying sales taxes.\19\ One problem with this approach is that 
tax rates are only one of many factors that affect the geographic 
distribution of online sales, including (for example) the proximity of 
the retailer to the buyer,\20\ and demographic factors such as personal 
income, Internet penetration and broadband adoption.\21\ Thus, while 
there is some evidence that people in high tax states are more likely 
to shop online other things equal, there is no evidence we are aware of 
that suggests that differences in tax rates explain a significant 
portion of the variation in online retail sales across states. 
Moreover, we suspect one of the strongest determinants of the 
distribution of firm sales across states is domicile--that is, given 
the growing significance of ``brick and click'' retailing, we suspect 
many retailers' online sales are concentrated in states where customers 
can visit their affiliated retail stores to preview items and seek the 
convenience of returning or exchanging items they havepurchased online. 
This phenomenon which would tend to work against the Fox Study's bias 
of allocating more sale to high-tax states. In the end, rather than 
introducing spurious (or even biased) variation into our data set (as 
we believe the approach taken by the Fox Study does), we elected to 
simply apportion online sales according to overall retail sales.
---------------------------------------------------------------------------
    \19\ See, e.g., Austan Goolsbee, 2000. ``In a World Without 
Borders: The Impact of Taxes on Internet Commerce,'' Quarterly Journal 
of Economics 115; 2 (May 2000) 561-576.
    \20\ See, e.g., Glenn Ellison and Sara Ellison. ``Internet Retail 
Demand: Taxes, Geography, and Online-Offline Competition,'' 
(Massachusetts Institute of Technology Department of Economics Working 
Paper Series, May 2006).
    \21\ See e.g., John Horrigan, Online Shopping (Pew Project on the 
Internet and American Life, February 2008) (available at http://
www.pewinternet.org/Reports/2008/Online-Shopping/01-Summary-of-
Findings.aspx?r=1).
---------------------------------------------------------------------------
III. Estimates of Uncollected Taxes
    The next steps in our analysis are to calculate estimates of 
uncollected taxes for 2008, based on the estimates of underlying 
variables discussed above, and then to forecast uncollected taxes into 
the future, i.e., for the period from 2009-2012.

A. Uncollected Revenues in 2008
    To estimate uncollected revenues for 2008, we begin by estimating 
uncollected revenues for the large firms covered in the Internet 
Retailer report, and then add an estimate for smaller firms (those with 
revenues below $9 million). We note, however, that the estimate for 
smaller firms is, in a sense, less significant, as there appears to be 
general agreement that the administrative costs of collecting from 
smaller firms is much higher than for larger firms (For example, a 
survey commissioned by the Streamlined Sales Tax Project found that 
firms with annual retail sales of between $150,000 and $1 million incur 
collection costs averaging 13.5 cents for every dollar of sales tax 
they collect.\22\), and that even if larger firms were to be required 
to collect taxes on out-of-state sales, smaller firms would be 
exempted.
---------------------------------------------------------------------------
    \22\ See PriceWaterhouseCoopers, Retail Sales Tax Compliance Costs: 
A National Estimate (April 7, 2006) at 18 (available at http://
www.netchoice.org/library/cost-of-collection-study-sstp.pdf).
---------------------------------------------------------------------------
    To estimate uncollected revenues for large firms, we multiplied 
state-specific retail e-commerce revenues for each firm by the 
applicable sales tax rates for each state.\23\ Thus, for each firm, we 
calculated the amount of taxes that would be owed in each state, if the 
firm had nexus in that state. Next, for each firm, we sum this amount 
across all states in which the firm does not collect sales taxes. As 
shown in Table 3 below, the total for the top 150 firms in 2008 was 
$1.985 billion; for the bottom 50 firms, the total was $27 million. For 
the middle group of 300 firms, we first calculated the average ratio of 
taxes collected to potential taxes due for the 50 firms whose tax 
collection practices we sampled from this group, and applied this ratio 
to all 300 firms. On that basis, we estimate the total for the 300 
middle firms at $418 million.
---------------------------------------------------------------------------
    \23\ We utilized the same source for sales tax rates as in the Fox 
Study, namely the Sales Tax Clearinghouse. Rates represent statewide 
rates plus local tax rates divided by the state sales tax base, i.e., 
they represent blended state and local sales tax rates for each state. 
See http://www.thestc.com/STrates.stm.
---------------------------------------------------------------------------
    The last step in our analysis was estimate the ratio of taxes 
collected to potential taxes for smaller firms, or those not included 
in the Internet Retailer 500 survey. As noted above, we estimate these 
firms constitute approximately 21 percent (or $28 billion in 2008) of 
retail e-commerce sales.
    We considered but rejected the approach adopted in the Fox Study, 
which was to simply assume extremely small tax compliance rates for 
small firms. Specifically, the Fox Study assumes, without any empirical 
basis, that ``medium-sized firms'' (those with online revenues of less 
than $10 million) pay taxes only in their home states, and thus 
(dividing 1 by 50) the Fox Study assigns these firms a two-percent 
compliance rate--even if their home state is California; and, it 
assumes that ``small'' firms (online revenues less than $1 million) 
only pay half of the taxes due even in their home states (on average), 
and hence have a compliance rate of one percent. In our view, these 
assumptions are arbitrary and unsupportable, and at odds with our 
research on states where the top 500 e-retailers already collect sales 
tax.
    We believe the Fox Study errs in this regard primarily by assuming 
(or seeming to assume) that all or almost all firms with relatively low 
online sales fit some combination of two criteria: (a) they are 
exclusively or almost exclusively ``pure play'' online retailers, with 
few if any brick and mortar retail outlets; or (b) they are small firms 
that lack rigorous tax compliance programs, and/or are not subject to 
tax audits by state governments. This characterization, however, simply 
does not comport with the data. While some firms with small online 
revenues meet these criteria, others are actually large, multi-state 
brick-and-click retailers that collect taxes in multiple jurisdictions. 
For example, both Hancock Fabrics and Sur La Table have less than $10 
million in online sales, as reported by Internet Retailer. Yet, Hancock 
Fabrics collects taxes in 36 states, and on 92 percent of its sales, 
while Sur La Table collects taxes in 21 states, and on 73 percent of 
its sales. To assume, as the Fox Study does, that both of these firms 
collect taxes on only two percent of sales clearly biases upward their 
estimate of uncollected sales tax.
    Upon examination of the data, we found only a weak correlation 
between online sales revenues and the proportion of taxes collected. 
Accordingly, we assumed that the ratio of taxes collected to potential 
tax collections for smaller firms (those with revenues less than $9 
million) is the same as for the ``bottom 50'' firms in the Internet 
Retail 500 (firms with online sales of between $9 million and $11.8 
million in 2008 online sales), or approximately 26 percent. On that 
basis, as shown in Table 3, we estimate uncollected taxes among these 
firms at less than $1.5 billion, assuming no de minimis exemption.

                   Table 3.--Retail Sales and Potential Uncollected Taxes, By Firm Size, 2008
----------------------------------------------------------------------------------------------------------------
                                                                                                   Potential
             Size Category  (Ranked by 2008 E-Retail Sales)                 e-Retail Sales    Uncollected  Sales
                                                                              ($millions)      Tax  ($millions)
----------------------------------------------------------------------------------------------------------------
Large (Top 150)                                                                     $95,145              $1,985
Middle (Next 300)                                                                    $9,351                $418
Small (Bottom 50)                                                                      $514                 $27
Subtotal (Internet Retailer 500)                                                   $105,010              $2,430
----------------------------------------------------------------------------------------------------------------
Micro (Sales under $9 million)                                                      $27,990              $1,477
----------------------------------------------------------------------------------------------------------------
Total                                                                              $133,000              $3,907
----------------------------------------------------------------------------------------------------------------

    As the table indicates, summing across these four classes of firms, 
we estimate total uncollected revenues for 2008 at $3.9 billion.
    The last step is to estimate the impact of applying a de minimis 
exemption. As noted above, even proponents of overturning Quill 
recognize that the administrative burdens placed on small sellers (and 
tax collection agencies) would be very high relative to the amount of 
taxes collected; and, since some proposals contemplate reimbursing 
businesses for the collection charges, at least some of those 
collection costs would have the effect ultimately of reducing net tax 
collections, thus defeating the purpose altogether. Accordingly, most 
proposals would create a small business exemption which, for example, 
would exempt all firms with gross remote (i.e., out-of-state) sales of 
less than $5 million.\24\
---------------------------------------------------------------------------
    \24\ See, e.g., H.R. 3184, 108th Congress, 1st Session, Sec. 4(b).
---------------------------------------------------------------------------
    To estimate the impact of such an exemption, we first estimated the 
amount of remote sales for each firm on the Internet Retailer 500 list. 
Then, for firms with less than $5 million in remote sales, we summed 
our firm-specific estimates of uncollected sales taxes across the firms 
with less than $5 million in sales. We identified 39 firms out of the 
top 500 that (a) had less than $5 million in remote sales and (b) did 
not collect taxes in one or more states.\25\ The estimated uncollected 
taxes for these 39 firms totaled only $4 million.
---------------------------------------------------------------------------
    \25\ Note that these firms include both ``large'' and ``small'' 
firms as ranked by overall sales, since the criterion for exemption is 
that a firm have less than $5 million in remote sales.
---------------------------------------------------------------------------
    To assess the impact of a $5 million exemption for those retailers 
which are not on the Internet Retailer 500 list, we first estimated the 
shape of the size distribution (based on online sales) for smaller 
firms. To do so, we fitted an exponential curve (i.e., a regression 
equation) based on the bottom 100 firms in the Internet Retailer 500, 
and used the regression coefficients to estimate the sales revenues of 
the next 500 firms. The results of the regression analysis are shown in 
Figure 2, which demonstrates that our regression model is an excellent 
fit, with the R-squared statistic indicating we have explained 
approximately 99 percent of the variation in firm size over the 
relevant range.

Figure 2: Regression Analysis of Firm Size



    The results of applying the regression coefficients in Figure 2 to 
estimate the size of the ``next 500'' online retailers are shown in 
Table 4. As the table indicates, the bottom 500 firms on the Internet 
Retailer 500 list (firms ranked 401-500) have average e-commerce sales 
of $12.1 million; the next 100 (ranked 501-600) have estimated average 
sales of $7.2 million; the next 100 (601-700) have estimated average 
sales of $4.1 million, and so forth.

                            Table 4.--Estimated Retail E-Commerce Sales by Firm Size
----------------------------------------------------------------------------------------------------------------
                     Firm Rank                          Total e-Commerce Sales        Average e-Commerce Sales
----------------------------------------------------------------------------------------------------------------
401-500                                                           $1,208,032,677                    $12,080,327
----------------------------------------------------------------------------------------------------------------
501-600 (est.)                                                      $717,102,300                     $7,171,023
----------------------------------------------------------------------------------------------------------------
601-700 (est.)                                                      $413,539,010                     $4,135,390
----------------------------------------------------------------------------------------------------------------
701-800 (est.)                                                      $243,411,117                     $2,434,111
----------------------------------------------------------------------------------------------------------------
801-900 (est.)                                                      $143,272,993                     $1,432,730
----------------------------------------------------------------------------------------------------------------
901-1,000 (est.)                                                     $84,977,289                       $849,773
----------------------------------------------------------------------------------------------------------------
Total (501-1,000) (est.)                                          $1,602,302,708                     $3,204,605
----------------------------------------------------------------------------------------------------------------

    One important implication of the data in Table 4 is the fact that 
estimated retail e-commerce sales for the ``second 500''--firms ranked 
501-1000 in online sales--total only about $1.6 billion annually, 
accounting for only 5.7 percent of the $28 billion in online sales we 
attribute to firms with less than $9 million in sales, based on the 
Census Bureau and Internet Retailer data. Thus, our estimates are 
consistent with the notion that there is indeed a ``long tail'' of 
small online retailers, for example, a tail consisting of five million 
sellers averaging $5,280 in online sales per year, or a total of $26.4 
billion for all firms outside the top 1,000.\26\
---------------------------------------------------------------------------
    \26\ Indeed, projecting our results to the next 1,000 firms 
suggests the average online sales of firms ranked 1,001-2,000 are only 
$120,000, with the 2000th firm having less than $35,000 in sales; total 
sales in this group are only about $120 million.
---------------------------------------------------------------------------
    To assess the impact of a small business exemption on this group of 
firms, we assumed that small retailers had the same ratio of in-state 
to out-of-state sales as the bottom 50 in the Internet Retailer list 
(that is that remote sales accounted for 74 percent of total sales), 
and on that basis estimate that firms with more than $6.76 million in 
online sales (= $5 million/0.74) would be required to collect sales 
taxes and all others would be exempt. There are 58 such firms, with 
estimated remote sales revenues of $339 million. Applying the national 
average tax rate (7.13 percent) to these sales yields potential 
uncollected revenues from these firms of approximately $24 million.
    With these estimates in hand, we can now calculate the impact of a 
$5 million small business exemption. We begin with our total estimate 
of potential uncollected revenues of $3.9 billion, which includes $2.4 
billion from the top 500 firms and $1.5 billion from all other firms. 
As explained above, we estimate that a small business exemption would 
reduce collections from the top 500 firms by only $4 million. For all 
other firms it would reduce collections by $1.477 billion minus $24 
million, or $1.453 billion. Thus, for 2008, we estimate a small 
business exemption would reduce potential collections by a total of 
$1.457 billion. Accordingly, we estimate that the maximum amount of 
additional revenue that would result from overturning Quill, assuming a 
small business exemption is adopted, is $2.45 billion.\27\
---------------------------------------------------------------------------
    \27\ The Fox Study also calculates the effect of a de minimis 
exemption. While it takes a very different approach (for example, it 
appears to base its exemption thresholds on total online sales rather 
than remote online sales), the effect is, coincidentally, entirely 
consistent with our estimate: Both methods find that a $5 million de 
minimis exemption would reduce collections by 37 percent of total 
uncollected revenues.
---------------------------------------------------------------------------
B. Forecast of Uncollected Revenues, 2009-2012
    We developed two forecasts for uncollected revenues for the period 
2009-2012. The first (baseline) forecast is based on the projected 
growth of online sales over this period, assuming all other variables 
remain unchanged. The second (adjusted) forecast is based on the 
assumption that current trends with respect to collection rates 
continue--that is, that the proportion of online sales for which firms 
collect and remit state and local sales taxes continues to increase.
    To arrive at our baseline projection, we estimated a simple model 
of the level of retail e-commerce, variations in which we hypothesize 
can be explained by (a) overall retail sales and (b) the level of 
household broadband penetration. Accordingly, we collected data 
quarterly data on retail e-commerce, total retail commerce, and 
broadband penetration from 2000 through 2009. We acquired the e-
commerce data and total retail commerce data from the Census Bureau's 
Quarterly E-Commerce Reports.\28\ We acquired household broadband 
penetration data from the Pew Internet & American Life Project's 
Broadband at Home Survey.\29\ Using these data, we specified a 
regression model where retail e-commerce was the dependent variable and 
total retail commerce and broadband penetration were the independent 
variables. Table 5 depicts the results of this analysis:
---------------------------------------------------------------------------
    \28\ U.S Census Bureau, Quarterly Retail E-Commerce Sales, Q1 
2000--Q2 2009. We note that data for prior years are often restated in 
subsequent reports. In these cases, we used the data reported in the 
most recent available E-commerce report.
    \29\ Pew Internet & American Life Project, Broadband at Home, 2000-
2009. The Pew survey data is reported in different months across 
different years. Thus, we used a two step algorithm to match the Pew 
broadband survey data to the census bureau's quarterly e-commerce 
reports. First, we looked to see if for each quarter there was a survey 
date that was within that quarter. If there was we assigned that value 
to the quarter. If there were two surveys within a quarter, we assigned 
the later survey date. For quarters that were missing survey data, we 
used the value of the next quarter with available data.

                               Table 5.--Regression Analysis of Retail E-Commerce
----------------------------------------------------------------------------------------------------------------
                            Variable                                  Coefficient        T-Stat        P-Value
----------------------------------------------------------------------------------------------------------------
Constant                                                                    17396.6          3.47          0.00
----------------------------------------------------------------------------------------------------------------
Retail Commerce                                                               0.029          4.45         0.000
----------------------------------------------------------------------------------------------------------------
Broadband Penetration                                                       37110.7         11.54         0.000
----------------------------------------------------------------------------------------------------------------
Adjusted R-Squared                                                      0.95
Observations                                                             38
----------------------------------------------------------------------------------------------------------------

    As the data in Table 5 indicate, our two-variable regression 
analysis explains approximately 95 percent of the variation in retail 
e-commerce over the nine-year period. Regression coefficients on both 
of the explanatory variables are, as expected, positive, and t-
statistics indicate that they are significantly different from zero at 
a confidence level of greater than 99 percent. In short, our model is 
statistically robust and explains nearly all of the variation in retail 
e-commerce over the sample period.
    We then used this model to forecast retail e-commerce sales for 
each quarter from Q2 2009 to Q4 2012, using forecasted broadband growth 
data from Gartner Research and forecasted nominal GDP growth data from 
the Congressional Budget Office (CBO). With respect to broadband 
adoption, our forecasts--from the Gartner Group--are consistent with 
the slowing growth of broadband penetration in recent years. For 
example, the latest data from the Pew Project on the Internet and 
American Life, shown in Figure 3, shows that the average annual growth 
in broadband penetration has fell by nearly 50 percent between 2005-6 
and 2008-9, from 28 percent to only 15 percent.
Figure 3: Growth in Broadband Penetration, 2004-2009\30\
---------------------------------------------------------------------------
    \30\ Source: Pew Project on the Internet and American Life.

    
    
    Specifically, we based our estimates of broadband penetration on 
forecasts from Gartner Research, which predicts that U.S. household 
broadband penetration in 2012 will be 77 percent.\31\ Thus, for the 
purposes of projecting broadband growth we assigned Gartner's 
penetration estimate of 77 percent to Q4 2012, and allocated the 
difference between this final projection and Pew's Q2 2009 survey 
estimate of 63 percent linearly across the remaining quarters.
---------------------------------------------------------------------------
    \31\ Gartner Research, Gartner Says 17 Countries to Surpass 60 
Percent Broadband Penetration into the Home by 2012, Jul. 24, 2008, 
available at http://www.gartner.com/it/page
.jsp?id=729907 (Last visited Aug. 31, 2009).
---------------------------------------------------------------------------
    To project total Retail Commerce through Q4 2012 we simply grew 
total retail commerce in each quarter by the nominal GDP growth rate 
projected by the CBO relative to the same quarter in the previous 
year.\32\ Thus, Q3 2009 would simply be total retail sales in Q3 2008 
plus the projected 2009 CBO growth rate times total retail sales in Q3 
2008. Our projections for 2009-2012 are shown in Table 6.
---------------------------------------------------------------------------
    \32\ Congressional Budget Office, Table 2.1: CBO's Economic 
Projections for Calendar Years 2009 to 2019, available at http://
www.cbo.gov/doc.cfm?index=10521 (Last visited Aug. 31, 2009).

                            Table 6.--Retail E-Commerce Baseline Forecast, 2008-2012
                                                  [$ billions]
----------------------------------------------------------------------------------------------------------------
                                                          2008        2009        2010        2011        2012
----------------------------------------------------------------------------------------------------------------
Retail Commerce
Level                                                     $3,973      $3,726      $3,834      $3,988      $4,199
YOY percent Change                                                     -6.2%        2.9%        4.0%        5.3%
----------------------------------------------------------------------------------------------------------------
Broadband
Penetration
Level*                                                     57.3%       63.8%       67.5%       71.5%       75.5%
YOY % Change                                               11.3%        5.8%        5.9%        5.6%
----------------------------------------------------------------------------------------------------------------
Retail E-Commerce
Level                                                       $133      $131**        $142        $152        $164
YOY % Change                                                           -1.5%        8.4%        7.0%        7.9%
----------------------------------------------------------------------------------------------------------------
*  Note that annual BB penetration represents the average value for the year based on our estimates derived from
 Pew and Gartner.
** Note that this figure differs from the 2009 value given in Table 1 because the retail e-commerce figure
 listed in this table was predicted based on our model's estimates for Q3 and Q4, 2009, while in Table 1 the
 2009 projection was created by multiplying the sum of e-retail sales in Q1 and Q2, 2009 by two. The close
 proximity of the two values serves as a good robustness check on accuracy of our model.
----------------------------------------------------------------------------------------------------------------

    Table 7 compares our projections for e-commerce growth with those 
used in the Fox Study. Our projections vary substantially, but we 
believe appropriately, from those advanced in the Fox Study, which 
projects dramatically higher growth in retail e-commerce.

                 Table 7.--Comparison of Fox vs. Eisenach-Litan Projected E-Retail Growth Rates
----------------------------------------------------------------------------------------------------------------
                                                                                                     CAGR  (2008-
                                                 2008       2009       2010       2011       2012       2012)
----------------------------------------------------------------------------------------------------------------
Fox Baseline                                       6.6%     -10.0%      24.0%      17.6%      12.4%        10.2%
----------------------------------------------------------------------------------------------------------------
Fox Optimistic                                     6.9%      -3.1%      32.2%      14.1%      11.7%        13.0%
----------------------------------------------------------------------------------------------------------------
Eisenach-Litan                                    3.9%*      -1.3%       8.4%       7.3%       7.9%         5.5%
----------------------------------------------------------------------------------------------------------------
*Actual, as reported by Bureau of the Census, E-Stats
----------------------------------------------------------------------------------------------------------------

    The Fox estimates are based on a regression model which the authors 
develop by ``regressing the log of e-commerce shipments on the log of 
nominal GDP and the real GDP growth rate for 1999 through 2006,'' and 
then applying projections for GDP growth from a private forecaster, 
Global Insight, to forecast e-commerce from 2007 through 2012. The 
result, as shown in Figure 4, is a ``hockey-stick'' shaped forecast, 
with a dramatic and unexplained surge in growth in 2010 and beyond. We 
find no basis for projecting such high growth rates into the future, 
especially given the slowdown in broadband penetration growth, which 
effectively limits the growth of ``new shoppers'' entering the online 
marketplace.\33\
---------------------------------------------------------------------------
    \33\ We also note that the Fox Study authors have dramatically 
overestimated e-commerce growth rates in their previous studies. See, 
e.g., Johnson at 2.
---------------------------------------------------------------------------
    Applying our projected growth rates to our baseline estimate of 
$3.9 billion in uncollected 2008 revenues, and assuming no other 
changes in the makeup of online sales, tax policy, or otherwise, we 
estimate potential uncollected revenues for the period 2008-2012 will 
average approximately $4.24 billion annually. Assuming enactment of a 
small business exemption, however, reduces the figure to an average of 
$2.67 billion annually. As shown in Table 8, our estimates are 
substantially less than the Fox Study's forecasts over the same period.

                   Table 8.--Comparison of Eisenach-Litan vs. Fox Projected Uncollected Taxes
                                             [$ billions, 2008-2012]
----------------------------------------------------------------------------------------------------------------
                                                 2008       2009       2010       2011       2012      Average
----------------------------------------------------------------------------------------------------------------
                                        Without Small Business Exemption
----------------------------------------------------------------------------------------------------------------
Eisenach-Litan                                    $3.91      $3.85      $4.17      $4.48      $4.83        $4.25
----------------------------------------------------------------------------------------------------------------
Fox Baseline                                      $7.73      $6.95      $8.62     $10.14     $11.39        $8.97
----------------------------------------------------------------------------------------------------------------
Fox Optimistic                                    $7.75      $7.50      $9.92     $11.32     $12.65        $9.83
----------------------------------------------------------------------------------------------------------------
                                          With Small Business Exemption
----------------------------------------------------------------------------------------------------------------
Eisenach-Litan                                    $2.45      $2.42      $2.62      $2.81      $3.04        $2.67
----------------------------------------------------------------------------------------------------------------
Fox Baseline                                      $4.88      $4.39      $5.44      $6.40      $7.19        $5.66
----------------------------------------------------------------------------------------------------------------
Fox Optimistic                                    $4.88      $4.73      $6.25      $7.13      $7.97        $6.19
----------------------------------------------------------------------------------------------------------------

    The differences in these projections are both quantitative and 
qualitative in nature. As shown in Figure 5, the Fox Study--based on 
its ``hockey stick'' forecast for the growth of electronic commerce--
forecasts that uncollected tax revenues will grow rapidly in the 
future. Our forecast, which is based on what we believe to be a far 
more realistic forecast for e-commerce growth, shows uncollected 
revenues growing only modestly. Indeed, our five-year forecast shows 
nominal uncollected revenues growing at only about 5.2 percent per 
year, only slightly higher than recent inflation rates--that is, in 
real terms, uncollected revenues are growing very slowly, if at all. 
Perhaps most importantly, our estimates show uncollected revenues--
assuming no changes in either state tax collection policies or in the 
makeup of online sales--remaining nearly constant as a proportion of 
state and local revenues, remaining below 0.22 percent (one quarter of 
one percent) of total state and local revenues, and below one percent 
of sales and use tax revenues, throughout the projection period.\34\
---------------------------------------------------------------------------
    \34\ These ratios assume state and local taxes grow at the same 
rate as Gross Domestic Product throughout the period, i.e., at the same 
rate assumed in our e-commerce forecast for total retail sales.
---------------------------------------------------------------------------
Figure 5: Potential Uncollected Revenue Forecasts, 2008-2012 (assuming 
        De Minimis Exemption)

        
        
IV. Discussion and Implications
    Our results have several important policy implications.
    Most importantly, our results suggest that uncollected sales taxes 
are much smaller than previously thought, and that they are growing, if 
at all, at a much slower rate. Indeed, two factors we have not yet 
mentioned suggest uncollected sales tax revenues are likely to fall 
over time, at least as a proportion of all taxes. First, there is some 
evidence that the online sales of the brick-and-click retail model are 
growing more rapidly than those of ``pure play'' purveyors such as 
Amazon.com. For example, according to a survey conducted by the 
LakeWest Group, nearly three quarters of the top 100 retailers have 
embraced multichannel retailing and that ``[o]f retailers who operate 
websites, 60 percent have at least some integration between store and 
site, and more than half allow returns to cross channel.''\35\ To 
confirm this trend, we analyzed the growth of sales by ``pure play'' 
versus ``brick and click'' retailers in the Internet Retailer 500 list, 
and found that firms that paid taxes on more than 50 percent of their 
online sales did indeed grow faster between 2007 and 2008 than firms 
that paid taxes on less than 50 percent of their online sales. These 
results are consistent with other research suggesting that online sales 
growth is occurring most rapidly among firms that collect sales taxes 
on large proportions of their sales. Johnson, for example, concludes 
that ``the future of Internet growth has been shown to be in multi-
channel, clicks and bricks,''\36\ citing studies performed by Forrester 
Research that demonstrate ``consumers' desire to couple `clicks'-based 
shopping with `bricks'-based merchandise pick-ups and returns.''\37\ 
Thus, there are strong reasons to believe that the proportion of online 
commerce associated with out-of-state sales is falling and will 
continue to fall over time.
---------------------------------------------------------------------------
    \35\ See Hamilton at 4.
    \36\ Johnson at 6.
    \37\ Id.
---------------------------------------------------------------------------
    Second, states are not standing still waiting for Quill to be 
overturned, but instead are moving aggressively to use the tools at 
their disposal. For example, in April 2008, New York State passed 
legislation asserting nexus for any retailer that has sales affiliates 
in the state that generate a combined total of $10,000 or more annually 
in revenues for the retailer.\38\ In 2009, at least two state 
legislatures (Rhode Island and North Carolina) have enacted laws that 
assert nexus when remote retailers compensate in-state websites for 
displaying the retailer's advertisements.\39\ In July 2009, California 
Governor Arnold Schwarzenegger signed legislation to improve business 
compliance with the state's use tax. The California Board of 
Equalization estimated the new legislation, along with ongoing measures 
aimed at shrinking the ``tax gap,'' would reduce uncollected revenues 
from businesses by over 60 percent in the next two years.\40\ 
Furthermore, in recent years, some states have used their leverage as 
large purchasers to force sales tax collection by online retailers.\41\
---------------------------------------------------------------------------
    \38\ See Hamilton at 5.
    \39\ See North Carolina GEN. STAT. Sec. 105-164.8, as amended 7-
Aug-2009. See also North Carolina Departmetn of Revenue, Form E-505 (9-
09) at 2-3 (available at at http://www.dornc.com/downloads/e505_8-
09.pdf), and Rhode Island Division of Revenue, Department of Taxation, 
``Important Notice: Definition of Sales Tax `Retailer' Amended'' 
(available at http://www
.tax.state.ri.us/notice/Retailer_definition_NoticeC.pdf).
    \40\ State of California, Board of Equalization, Electronic 
Commerce and Mail Order Sales (November 3, 2009) (available at http://
www.boe.ca.gov/legdiv/pdf/e-commerce-11-09.pdf). The Board of 
Equalization estimates uncollected revenues in 2012 at $1.0 billion, 
far below the Fox Study's baseline estimate of $1.9 billion.
    \41\ See, e.g., Institute for Local Self-Reliance, ``Internet Sales 
Tax Fairness--State Purchasing Provision--North Carolina'' (available 
at http://www.newrules.org/retail/rules/internet-sales-tax-fairness/
internet-sales-tax-fairnessstate-purchasing-provision-north-carolina).
---------------------------------------------------------------------------
    Taken together, these two factors suggest that, rather than growing 
very slowly, as our uncorrected baseline estimates suggest, uncollected 
sales tax revenues may actually be declining as a proportion of state 
and local tax revenues, as illustrated in Figure 6.
Figure 6: Potential Uncollected Revenue as a Proportion of State and 
        Local Tax Collections, 2008-2012 (Assuming Small Business 
        Exemption)

        
        
    A second implication of our research is to provide some support for 
those who have suggested imposing a collection obligation on only those 
e-retailers with the highest amounts of uncollected sales tax. Our 
analysis of 2008 data shows that the ten firms with the largest amounts 
of uncollected taxes account for 47.3 percent of all uncollected taxes 
for the Internet Retailer 500 e-retailers, and 46.9 percent of 
uncollected revenues for all firms not subject to a $5 million small 
business exemption.

V. Conclusions
    Taxation of remote sales is a hotly debated issue, and as states 
and localities experience the fiscal stresses associated with the 
current economic downturn, it is not surprising to hear renewed calls 
for overturning Quill and forcing e-retailers to collect taxes on out-
of-state sales. However, a decision to impose such an mandate would 
have costs as well as benefits. The costs would include increased 
compliance costs for businesses, increased administrative costs for tax 
collection agencies, higher vendor compensation payments, and, of 
course, higher taxes for price-sensitive consumers who rely on online 
shopping. On the other side of the scale, state and local tax 
collections would increase. From the perspective of state and local 
governments, the relevant question is whether the increase in 
collections would more than outweigh the higher costs. Our research 
suggests that the increased collections associated with overturning 
Quill would be substantially lower than previously thought--
approximately $2.5 billion annually rather than the $7 billion or more 
estimated in the Fox Study. Moreover, our analysis shows that 
uncollected taxes are not growing rapidly and, indeed, are likely 
constant or even shrinking as a proportion of state and local tax 
revenues. With this data in mind, policymakers should consider 
carefully whether the benefits of overturning Quill would exceed the 
costs.

Appendix: State-By-State Estimates of Potential Uncollected Revenue
    In addition to the national estimates presented in the text, we 
also estimated potential uncollected revenues on a state-by-state 
basis. As explained in the text, our survey of firms' tax collection 
practices in each state allowed us, for the firms surveyed, to directly 
estimate uncollected taxes on a firm-by-firm basis. (Indeed, our 
national estimates for these firms represent the summation of 
uncollected taxes across states and firms.) For firms not surveyed, 
i.e., un-surveyed firms from the Internet Retailer 500 and firms in the 
``tail,'' we estimated potential uncollected revenues though a two-step 
process. First, we applied our sampling methodology for estimating the 
taxes avoided for the middle 300 Internet Retailer firms on a state-by-
state basis.\42\ The reason for applying this state-by-state method was 
that it allowed for variation in each state's ratio of sample avoided 
taxes to sample total taxes, creating a more accurate portrayal of the 
each state's estimated avoided taxes. Adding the estimated avoided 
taxes for the middle 300 firms to the avoided taxes for the top 150 and 
bottom 50 firms within each state yielded the total avoided tax for the 
top 500 Internet retailers in each state. Second, we then distributed 
the avoided taxes attributable to firms in the ``tail'' by allocating 
the total estimated avoided taxes for firms in the tail on a pro-rata 
basis according to each state's proportion of taxes avoided by the top 
500 Internet retailers.
---------------------------------------------------------------------------
    \42\ That is, for the 50 firms we surveyed in the middle 300, we 
calculated for each state the proportion of those firms' sales upon 
which they collected taxes, and then applied that percentage to the 
estimated state-by-state sales of all 300 firms.
---------------------------------------------------------------------------
    Having arrived at baseline estimates for 2008, we next calculated 
an estimate of the impact of applying the small business exemption 
(SBE). To do so, we first adjusted potential uncollected taxes on a 
state-by-state basis to omit the surveyed firms in the Internet 
Retailer Top 500 from the state-by-state calculation, and then 
calculated potential uncollected taxes for the ``tail'' by allocating 
to the states only those potential revenues that would not be affected 
by the SBE.
    Finally, we calculated estimated uncollected revenues for 2012 by 
applying our national projected growth rate for uncollected revenues to 
the 2008 estimate for each state.
    Our estimates, as well as the 2008 and 2012 baseline estimates from 
the Fox Study, are presented in Table A-1. As the data there indicate, 
our estimates are substantially below those of the Fox Study for every 
state other than Alaska; and, for some key states, they are 
dramatically lower. For example, the Fox Study's baseline estimate 
suggests that uncollected revenues in California could reach $1.9 
billion by 2012, whereas our estimate of less than $390 million 
(assuming an SBE) is only one fifth as high. Similarly, the Fox Study's 
baseline estimate indicates state and local governments in New York 
State could lose as much as $865 million, while our SBE-adjusted 
results show the correct figure is approximately $105 million. To the 
extent state revenue collectors and fiscal authorities have viewed the 
repeal of Quill as a ``silver bullet'' that would make up for a 
significant portion of current budget shortfalls, the figures in Table 
A-1 clearly demonstrate otherwise.

                     Table A-1.--State-by-State Estimates of Potential Uncollected Revenues
                                            [$ Millions, 2008, 2012]
----------------------------------------------------------------------------------------------------------------
                                          2008                                          2012
----------------------------------------------------------------------------------------------------------------
                                        Eisenach-   Eisenach-Litan                    Eisenach-   Eisenach-Litan
        State          Fox (baseline)     Litan        with SBE      Fox (baseline)     Litan        with SBE
----------------------------------------------------------------------------------------------------------------
Alabama                       $115.5        $75.3            $46.8          $170.4        $92.8            $57.8
Alaska                          $1.0         $3.6             $2.0            $1.5         $4.4             $2.4
Arizona                       $250.8        $79.3            $49.5          $369.8        $97.8            $61.1
Arkansas                       $77.2        $49.6            $30.6          $113.9        $61.2            $37.7
California                  $1,291.6       $503.9           $316.1        $1,904.5       $621.4           $389.8
Colorado                      $117.1        $67.8            $42.4          $172.7        $83.6            $52.2
Connecticut                    $43.2        $48.2            $30.1           $63.8        $59.4            $37.1
DC                             $24.1         $3.5             $2.2           $35.5         $4.4             $2.7
Florida                       $545.1       $227.7           $142.9          $803.8       $280.8           $176.2
Georgia                       $278.2       $117.2            $73.5          $410.3       $144.5            $90.6
Hawaii                         $40.7        $16.2             $9.6           $60.0        $19.9            $11.8
Idaho                          $31.4        $17.8            $11.1           $46.4        $21.9            $13.7
Illinois                      $343.7       $196.1           $123.0          $506.8       $241.8           $151.7
Indiana                       $132.5        $95.9            $59.9          $195.3       $118.2            $73.8
Iowa                           $60.1        $48.7            $30.1           $88.7        $60.1            $37.1
Kansas                         $96.9        $29.5            $18.4          $142.9        $36.3            $22.6
Kentucky                       $74.6        $36.0            $22.4          $109.9        $44.4            $27.6
Louisiana                     $268.5        $95.9            $60.1          $395.9       $118.2            $74.1
Maine                          $21.7        $18.3            $11.2           $32.1        $22.6            $13.8
Maryland                      $124.9        $69.4            $43.5          $184.1        $85.6            $53.6
Mass.                          $89.0        $87.9            $55.1          $131.3       $108.4            $68.0
Michigan                       $96.0       $134.0            $83.9          $141.5       $165.2           $103.4
Minnesota                     $159.6        $86.2            $54.0          $235.3       $106.2            $66.5
Miss.                          $91.5        $40.6            $24.9          $134.9        $50.1            $30.8
Missouri                      $142.9        $87.6            $54.7          $210.7       $108.0            $67.4
Nebraska                       $41.6        $28.5            $17.5           $61.3        $35.1            $21.6
Nevada                        $114.6        $40.6            $25.4          $168.9        $50.0            $31.3
New Jersey                    $137.3       $123.0            $77.0          $202.5       $151.7            $94.9
New Mexico                     $81.7        $26.4            $16.5          $120.5        $32.6            $20.3
New York                      $586.9       $135.3            $84.8          $865.5       $166.8           $104.6
N. Carolina                   $145.0       $112.4            $70.2          $213.8       $138.6            $86.6
N. Dakota                      $10.4         $9.0             $5.5           $15.3        $11.1             $6.7
Ohio                          $208.8       $156.1            $97.7          $307.9       $192.5           $120.4
Oklahoma                       $95.5        $60.4            $37.4          $140.8        $74.5            $46.1
Pennsylvania                  $234.6       $157.0            $98.5          $345.9       $193.6           $121.4
Rhode Island                   $19.7        $16.8            $10.5           $29.0        $20.7            $12.9
S. Carolina                    $84.5        $63.6            $39.7          $124.5        $78.4            $49.0
S. Dakota                      $20.2        $13.2             $8.1           $29.8        $16.2            $10.0
Tennessee                     $278.6       $105.1            $65.7          $410.8       $129.6            $81.0
Texas                         $590.3       $319.6           $200.4          $870.4       $394.1           $247.2
Utah                           $60.0        $35.3            $21.8           $88.5        $43.5            $26.8
Vermont                        $17.0        $11.3             $6.8           $25.1        $13.9             $8.3
Virginia                      $140.4        $71.9            $45.1          $207.0        $88.7            $55.6
Washington                    $191.2        $78.3            $49.1          $281.9        $96.5            $60.6
W. Virginia                    $34.3        $24.2            $14.8           $50.6        $29.9            $18.3
Wisconsin                      $96.4        $66.9            $41.9          $142.1        $82.5            $51.7
Wyoming                        $19.4         $7.9             $4.8           $28.6         $9.8             $5.9
----------------------------------------------------------------------------------------------------------------

                                 ______
                                 
                                            Purple Bomb LLC
                                     Hilton Head, SC, July 31, 2012
Hon. Jim DeMint,
United States Senate,
Washington, DC.

Dear Senator DeMint,

    As a longtime resident of South Carolina and the owner of a small 
business, I wish to express my concerns surrounding Internet Sales Tax 
legislation that has been introduced to the Congress, namely the 
Marketplace Fairness Act and the Marketplace Equity Act.
    I have been in the retail and wholesale business for over 25 years 
and started a store on eBay--purplebombauctions--in 1999 to augment my 
retail presence. Today, my wife and I employee four people that help us 
market our antiques and artwork including home and commercial bars and 
supplies, cigars as well as espresso and coffee machines. We have one 
small brick and mortar store, but the Internet is our main platform. We 
have used the Internet to grow and expand our business, and we plan to 
do so for many years to come. Using our own money makes it almost 
impossible to compete with the giant retail firms. So our only viable 
avenue of making a living with specialty home decor is online.
    However, we are concerned that proposed Internet sales tax 
legislation would impede our ability to grow our business. The thought 
of complying with the new, heavy tax burdens that this legislation is 
trying to impose is truly frightening. Collecting and remitting sales 
taxes in the two states where we have presence is burdensome, yet we 
understand that it is our duty as small business owners and citizens of 
South Carolina. However we simply can't wrap our heads around having to 
collect taxes for an additional 45 states and what we know to be over 
9,000 tax jurisdictions. We previously owned a mail order firm which 
was entangled in a real situation with small counties asking us to 
remit to them forms if whether or not we sold anything into that 
county. It was an accounting nightmare for my wife.
    This legislation creates uncertainty and just the discussion of new 
taxes on my business has jeopardized our business' growth. I had scoped 
out plans to double the size of my business over the next 6-8 months, 
but with the unforeseen costs of out-of-state audits, software 
integration, and filing fees, how can I possibly gain the certainty I 
need to grow my small business and create jobs?
    Additionally, it hardly seems fair that my small business in Hilton 
Head should be held to the same requirements as super-stores that have 
accountants, lawyers, and the financial resources to deal with new 
legislation. While I oppose this legislation outright, at the very 
least a small business exemption must be included to protect real small 
business job creators (and not just ``small sellers'') like me from 
additional tax burdens. Also, there must be a better way to assign an 
Internet tax (possibly at the Federal level) with one remittance 
government department instead of multiple state tax auditors.
    I have long supported your work in the Senate and very much 
appreciate your work to try to bring common sense to Washington. 
Hopefully you can bring some more sense to Washington by urging your 
colleagues to oppose this anti-small business bill.
    Thank you again for all you do.
            Sincerely,
                                          Timothy P. Judge,
                                                             Owner.
                                 ______
                                 

                 Backgrounder--No. 2676, April 6, 2012

 Congress Should Not Authorize States to Expand Collection of Taxes on 
                     Internet and Mail Order Sales

                           David S. Addington

Abstract

        The U.S. Supreme Court's landmark 1992 decision in Quill 
        Corporation v. North Dakota protects out-of-state businesses in 
        the Internet era from overreaching by revenue-hungry states. 
        The Court's decision prevents a state from forcing an out-of-
        state business to serve as the state's sales tax collector if 
        the business has no physical presence in the state and simply 
        takes sales orders by Internet, catalog, or telephone. Congress 
        has under consideration legislation (S. 1832) to overturn the 
        Quill Corporation decision. To support a strong national 
        economy and encourage fiscal responsibility among the states, 
        Congress should reject the legislation.

    Congress has under consideration legislation (S. 1832 of the 112th 
Congress) to allow states to require out-of-state businesses that have 
no connection to the state, other than taking orders over the Internet, 
by mail, or by telephone from in-state customers and sending the 
ordered goods by common carrier or U.S. mail, to become sales tax 
collection agents for the states. Enactment of such legislation would 
increase the amount of tax dollars millions of Americans pay, encourage 
states to increase the size and scope of their governments, favor some 
states over others in granting Federal authority, and discourage free-
market competition in interstate commerce. Accordingly, Congress should 
not enact the legislation.
    The legislation overrules the U.S. Supreme Court's decision in 
Quill Corporation v. North Dakota.\1\ The Quill decision protects out-
of-state businesses that have no facilities or personnel in a state, 
but that receive orders by Internet, mail order catalog, or telephone 
from in-state customers (called ``remote sales''), from the state's 
desire to force the out-of-state businesses to serve as tax collectors.

   Current law protects out-of-state businesses that take 
        orders by Internet, mail order catalog, or telephone and that 
        have no physical presence in the state from a state government 
        that wants to force them to serve as the state's sales tax 
        collectors, but Congress is considering legislation (S. 1832) 
        to override that protection.

   Under S. 1832, state governments would take more tax dollars 
        from millions of Americans, further intrude into free-market 
        competition in interstate commerce, and increase the propensity 
        for more government spending.

   Hobbling out-of-state businesses that sell through the 
        Internet or mail order catalogs does not help the national 
        economy.

   To avoid weakening the national economy, Congress should 
        preserve existing protections for out-of-state businesses from 
        state governments that want to reach outside their states for 
        new revenue for governments to spend.
   Congress should therefore reject S. 1832.

    Many state governments have budgetary and political interests in 
maximizing the revenues they obtain from out-of-state businesses 
through sales and use taxes.\2\ Many in-state businesses have an 
economic interest in increasing the costs of doing business for their 
out-of-state competitors to gain a marketplace advantage.
    Thus, it is unsurprising that state governments and their national 
associations,\3\ and brick-and-mortar instate retailers and their trade 
associations,\4\ have endorsed enactment of Federal legislation to 
override the Quill decision and allow state governments to require out-
of-state businesses to collect and remit state sales and use taxes on 
remote sales. Associations representing companies that conduct or 
facilitate remote selling that is protected under the Quill decision 
from state compulsion to collect and remit sales taxes oppose the 
legislation.\5\

Congress should reject S. 1832 so that it does not discourage spending 
        restraint in the states and free enterprise in the economy.
    In enacting S. 1832, Congress would use its power under the 
Commerce Clause to regulate interstate commerce, and perhaps its power 
under the Compact Clause to consent to compacts or agreements among the 
states, to override the Quill decision and allow state governments to 
increase revenues by requiring out-of-state sellers to collect state 
sales or use taxes on remote sales.\6\ Congress should reject S. 1832 
so that it does not discourage spending restraint in the states and 
free enterprise in the economy.

Quill Decision Protected Out-of-State Sellers from Undue State Burdens 
        on Interstate Commerce
    In 1992, the U.S. Supreme Court faced the Quill case involving a 
North Dakota statute that imposed a tax on property purchased for 
storage, use, or consumption in North Dakota and required retailers to 
collect the tax from consumers and remit the revenue to North Dakota. 
North Dakota regulations implementing the statute made clear that 
retailers covered by the statute included those who engaged in 
``regular or systematic solicitation of a consumer market in this 
state.''
    Quill Corporation (``Quill'') was an office supply business 
incorporated in Delaware, with offices and warehouses in Illinois, 
California, and Georgia but with no employees, sales representatives, 
or significant property in North Dakota. Quill solicited sales from 
North Dakota residents by mail order catalog, advertisements and 
flyers, and telephone calls. Quill sent the purchased products to 
customers in North Dakota by U.S. mail or common carrier. Quill had 
about 3,000 customers in North Dakota and about $1 million in annual 
sales to them. Quill did not collect and remit the North Dakota use tax 
on its sales to North Dakota residents. North Dakota sued Quill in 
state courts for the taxes not remitted, and the case ultimately 
reached the U.S. Supreme Court.
    Quill maintained that the Due Process Clause of the Fourteenth 
Amendment to the U.S. Constitution (``nor shall any State deprive any 
person of . . . property, without due process of law'') and the 
Commerce Clause (``The Congress shall have Power . . . To regulate 
Commerce . . . among the several States'') barred North Dakota from 
imposing the use tax on property purchased from Quill for storage, use, 
or consumption in North Dakota and from requiring Quill to collect the 
use tax from customers and remit the collections to North Dakota.
    In its decision, the U.S. Supreme Court determined that ``there is 
no question that Quill has purposefully directed its activities at 
North Dakota residents, that the magnitude of those contacts is more 
than sufficient for due process purposes, and that the use tax is 
related to the benefits Quill receives from access to the State'' and 
agreed with the ``conclusion that the Due Process Clause does not bar 
enforcement of that State's use tax against Quill.'' \7\ However, the 
Court held that the Commerce Clause barred North Dakota from enforcing 
the state's use tax against Quill.
    In discussing the impact of the Commerce Clause with respect to 
state taxes, the Court noted that ``we will sustain a tax against a 
Commerce Clause challenge so long as the `tax [1] is applied to an 
activity with a substantial nexus with the taxing State, [2] is fairly 
apportioned, [3] does not discriminate against interstate commerce, and 
[4] is fairly related to the services provided by the State.' '' \8\ 
The Court noted with respect to the first requirement that ``the 
Commerce Clause and its nexus requirement are informed not so much by 
concerns about fairness for the individual defendant as by structural 
concerns about the effects of state regulation on the national 
economy.'' \9\
    The Supreme Court adopted in Quill a bright-line rule that the 
``negative'' or ``dormant'' aspect of the Commerce Clause, which 
protects against imposition by a state of unreasonable burdens on 
interstate commerce even in the absence of congressional exercise of 
power under the Commerce Clause, does not allow North Dakota to require 
collection and remittance of the state use tax revenue by a corporation 
whose only connection with customers in the state is by common carrier 
or U.S. mail.\10\ The Court noted, however, that Congress remains free, 
by an affirmative exercise of its power under the Commerce Clause, to 
change that rule.\11\
    State supreme courts have generally construed the Quill decision 
narrowly and state taxing power broadly,\12\ but states remain bound by 
the Commerce Clause holding in Quill that a state cannot require 
collection and remittance of a sales or use tax on remote sales by an 
out-of-state seller who has no connection to the state other than by 
common carrier or U.S. mail.\13\ Thus, the holding in Quill continues 
to protect an out-of-state company that has no facilities, personnel, 
or other connection to a state, other than a common carrier or the U.S. 
mail, from a requirement to collect and remit the state's sales or use 
tax on remote sales. Congress, however, has the authority under the 
Commerce Clause to take away that protection from the out-of-state 
businesses, as S. 1832 would do.

Overriding Quill Would Cause American Businesses and Individuals to Pay 
        Much More to States in Taxes
    Enactment of S. 1832 will increase the amount of tax dollars 
Americans pay to state governments. Although proponents claim that the 
legislation causes no ``tax increase'' because state laws imposing 
sales and use taxes are already on the statute books and S. 1832 does 
not itself change those state statutes, there is no denying that 
businesses and individuals will pay more in taxes out of their pockets 
as a result of enactment of S. 1832. Indeed, that increase in what 
remote sellers will collect from businesses and individuals and remit 
to the state in tax revenues is precisely why many state governments 
want Congress to enact S. 1832.

Enactment of S. 1832 will increase the amount of tax dollars Americans 
        pay to state governments.
    The National Conference of State Legislatures (NCSL) has noted with 
respect to S. 1832 that ``[t]here will be some who claim that this is a 
new tax'' and that ``[t]his legislation will not require any state to 
levy a sales tax on any product or means of buying a product.'' Both 
claims miss the point. As a direct result of enactment of S. 1832, 
which allows states to require out-of-state remote sellers to collect 
state sales and use taxes that the Quill case currently prevents states 
from requiring, businesses and individuals will pay much more money to 
states in sales taxes. Indeed, the NCSL states that, ``[a]t a time when 
states continue to face severe budget gaps states closed shortfalls 
totaling $72 billion leading into the FY 2012 budget process--it is 
essential states be allowed to collect the revenue generated by 
uncollected sales taxes,'' noting further that ``[i]n 2012, states will 
collectively lose an estimated $23.3 billion in uncollected sales taxes 
from out-of-state sales, with more than $11.3 billion alone from 
electronic commerce transactions. . . .''\14\
    The NCSL could not have made clearer that its objective in asking 
Congress to enact S. 1832 is to change Federal law to authorize states 
to force remote-selling businesses and individuals to pay more money as 
sales and use taxes to the states, which want more revenue.

Overriding Quill Would Give States An Incentive to Increase Revenues 
        Instead of Cutting the Size, Scope, and Cost of State 
        Governments
    Although many state governments have faced difficulty with their 
budgets, especially in a weak economy, slow improvement of state 
finances has begun.\15\ As a general proposition, states should focus 
on cutting their spending rather than seeking more money in taxes as 
the means to balance their budgets. Especially in a weak economy, state 
governments should generally pursue pro-growth, job-creating tax 
policies rather than taking more money out of the private economy in 
sales tax collection.
    Whether the NCSL-cited estimate of $11.3 billion in additional 
money that would be paid to states in sales taxes on electronic remote 
sales is precise or not, it is clear that businesses and individuals 
will pay more money to states in such taxes as a result of enactment of 
S. 1832.\16\ The Federal Government should not enact legislation such 
as S. 1832, whose principal purpose is to allow states to reach out of 
the state and take in yet more tax money from businesses and 
individuals.

Enactment of S. 1832 Would Favor Some States over Others
    The proposed Federal legislation fails to respect the traditional 
roles of the states as equal sovereign actors in the Federal system and 
instead has Congress, using its power under the Commerce Clause, 
favoring some states over others. The Federal legislation has the 
effect of dividing the states into three classes and gives different 
federally granted, tax-related authority to the three classes, with 
some states receiving more than others.
    The first class consists of a minority of states, currently 
numbering 21, that have joined as full members of the multi-state 
Streamlined Sales and Use Tax Agreement (SSUTA or Agreement), 
administered by an organization called the Streamlined Sales Tax 
Governing Board, Inc.\17\ The laudable stated purpose of the SSUTA is 
``to simplify and modernize sales and use tax administration in the 
member states in order to substantially reduce the burden of tax 
compliance.'' \18\ Article VI of the SSUTA, however, goes beyond the 
stated tax-simplification purpose of the agreement and encourages 
enactment of Federal legislation to overrule Quill and authorize states 
to collect sales or use taxes on ``remote sales.''
    The SSUTA defines ``Remote sales'' as ``sales into a state in which 
the seller would not legally be required to collect sales or use tax, 
but for the ability of that state to require such `remote seller' to 
collect sales or use tax under Federal authority,'' the latter 
referring to the Federal legislation under the Commerce Clause to 
overrule the Quill decision that the SSUTA member states seek.\19\ The 
first class of states gets Federal authority to collect its sales or 
use tax on remote sales under subsection 3(a) of S. 1832, which 
provides that ``Each Member State under the Streamlined Sales and Use 
Tax Agreement is authorized to require all sellers not qualifying for a 
small seller exception to collect and remit sales and use taxes with 
respect to remote sales sourced to that Member State pursuant to the 
provisions of the Streamlined Sales and Use Tax Agreement.''

Especially in a weak economy, state governments should generally pursue 
        pro-growth, job-creating tax policies rather than taking more 
        money out of the private economy in sales tax collection.
    The second class of states consists of states that are not full 
members of the SSUTA but that adopt state laws that impose SSUTA-like 
``minimum simplification requirements.'' Subsection 3(b) of S. 1832 
provides that ``[a] State that is not a Member State under the 
Streamlined Sales and Use Tax Agreement is authorized to require all 
sellers not qualifying for the small seller exception to collect and 
remit sales and use taxes with respect to remote sales sourced to that 
State, but only if the State adopts and implements minimum 
simplification requirements.'' Under subsection 3(b), the ``minimum 
simplification requirements'' are:

    A ``single State-level agency to administer all sales and 
        use tax laws'';

    A ``single audit for all State and local taxing 
        jurisdictions within that State'';

    A ``single sales and use tax return'';

    A ``uniform sales and use tax base among the State and the 
        local taxing jurisdictions within the State'';

    A requirement that ``remote sellers . . . collect sales and 
        use taxes pursuant to the applicable destination rate, which is 
        the sum of the applicable State rate and any applicable rate 
        for the local jurisdiction into which the sale is made''; and

    Various requirements concerning software, certification of 
        service providers remote sellers can use to remit the taxes 
        collected, relief from liability for mistakes not caused by the 
        remote sellers, and 30-day notice of local tax rate changes.

    The ``minimum simplification requirements'' parallel to some extent 
SSUTA requirements.\20\
    The third class of states under the proposed Federal legislation 
are those that neither wish to join the SSUTA nor wish to adopt the 
SSUTA-like minimum simplification requirements. Examples of states 
likely to fall into the third class are Delaware, Montana, New 
Hampshire, and Oregon, which do not levy general sales taxes. If S. 
1832 were enacted, other states could collect sales taxes on remote 
sales by remote sellers located in those four states even though those 
four states do not impose general sales taxes on anyone, either in-
state or out-of-state. As a result, any remote-seller businesses in 
Delaware, Montana, New Hampshire, and Oregon, whose state legislatures 
have made conscious decisions not to impose a general state sales tax, 
would nevertheless have to collect and remit such sales taxes to other 
states.
    Under S. 1832, the first class of states and the second class of 
states get Federal authority, the Quill decision notwithstanding, to 
require remote sellers--that is, out-of-state businesses that obtain 
sales in a state by Internet, mail order, or telephone without having 
any facilities or personnel in the state--to collect and remit the 
state's sales or use tax on remote sales. The first class of states 
that is, the SSUTA full members--get greater flexibility, however, than 
the second class of states. States in the first class can, acting in 
concert through the SSUTA governing board, establish their own 
alternative small seller exceptions, but the second class of states 
must follow the small seller exception specified in the Federal 
legislation.\21\ Also, states in the first class can, again acting in 
concert through the SSUTA governing board, change their rules with 
respect to ``sourcing'' remote sales (that is, deciding where to treat 
the sale as having occurred, such as at the point of a product's origin 
or at its destination, and therefore what state will tax the sale), 
whereas the other states must follow the sourcing rules set forth in S. 
1832.\22\
    The third class of states remains covered by the Quill decision 
unless they enact the ``minimum simplification requirements'' to enter 
the second class of states or decide to become full members of the 
SSUTA to enter the first class of states. Clearly, enactment of S. 1832 
would pressure the current majority of states that have stayed out of 
the SSUTA to join the minority of states that are members of the SSUTA.
    Enactment of S. 1832 to override Quill, authorize state governments 
to require out-of-state remote sellers to collect sales taxes, and 
allow SSUTA full member states to have the power to change their 
sourcing rules from time to time, creates the potential for multiple 
taxation of the remote sellers in some circumstances, with the same 
sales transactions taxed by the state of the customer who used the 
Internet to place the order and the state in which the remote seller is 
located. Current law prohibits such multiple taxation, but that 
prohibition expires on November 1, 2014.\23\

As the U.S. Supreme Court has stated, ``[P]reservation of local 
        industry by protecting it from the rigors of interstate 
        competition is the hallmark of the economic protectionism that 
        the commerce clause prohibits.''

Enactment of S. 1832 Would Discourage Free-Market Competition
    The National Conference of State Legislatures has said with respect 
to state sales taxes that ``[a]llowing some remote sellers to avoid 
collecting this tax is unfair to the main street merchants that make up 
the lifeblood of our local communities.'' \24\ The SSUTA member states 
complain that ``[a]t a time when Main Street retailers face enormous 
competitive challenges it is appropriate for Congress to end this 
unfair treatment.'' \25\ The Federation of Tax Administrators believes 
``the current system disadvantages `bricks and mortar' stores to the 
advantage of out-of-state businesses and this Act will help improve 
business activities in our states and the employment these in-state 
businesses generate.'' \26\
    From these statements, it appears that these organizations seek 
enactment of S. 1832 so that states can prefer in-state businesses over 
out-of-state businesses in the kind of anti-competitive economic 
discrimination the U.S. Constitution was in part adopted to prevent. As 
the U.S. Supreme Court has stated, ``[p]reservation of local industry 
by protecting it from the rigors of interstate competition is the 
hallmark of the economic protectionism that the Commerce Clause 
prohibits.'' \27\
    The Constitution of the United States has set the legal baseline--
the level playing field--around which the American free-market economy 
has built itself. The Constitution, as reflected in the Quill decision, 
is the source of the present arrangement regarding collection of state 
sales and use taxes by remote sellers. Ever since the Supreme Court 
decided Quill in 1992, American businesses have made millions of 
business decisions in the competitive marketplace based in part on 
settled expectations regarding state taxation affecting their sales 
transactions. The states and businesses advocating S. 1832 seek to 
change the current, constitutionally prescribed playing field. They 
seek to use governmental power to intervene in the economy to help in-
state, store-based businesses by imposing a new tax-collection burden 
on out-of-state competitors who sell over the Internet, through mail 
order catalogs, or by telephone. Free-market principles generally 
discourage such government intervention in the economy to pick winners 
and losers based on legislative policy preferences.
    The Constitution has not set up a system that is ``unfair'' to 
``Main Street'' or ``brick and mortar'' retailers. The issue is not 
``taxable'' instate businesses selling from stores competing with 
``untaxable'' out-of-state businesses selling through the Internet. 
Both types of businesses are taxable through some form of tax in some 
state (or in many states).
    Every sale of goods, whether to a business consumer or an 
individual consumer, has an order (``I'll take it''), payment (``Cash, 
check, debit, or credit?''), and a delivery (``Here you go; have a nice 
day''). If a consumer chooses to go to a store to buy a product, the 
ordering and delivery typically occur in the seller's physical facility 
(the store) in a state. If the consumer chooses to go online to buy the 
product, the ordering occurs online without the involvement of a 
physical facility of the seller (i.e., the order does not occur in a 
store), but the sale and delivery require that the seller (directly or 
through agents) have a physical facility (for example, a warehouse) in 
some state from which the seller sends goods via common carrier or U.S. 
mail to the consumer who ordered them online.
    Thus, every sale of goods involves at least one physical facility 
located in one state or another, which provides a basis for taxation by 
that state. No one has become completely ``untaxable.''
    A consumer's preference between two methods of purchase, such as 
buying in a store or buying over the Internet, on a given occasion may 
involve consumer thoughts about price, quality, commercial loyalty, 
geographical convenience, temporal convenience, perceived pleasantness 
of the sales method chosen, other reasons, or not much thought at all. 
A consumer's choice between buying in a store or buying online does not 
necessarily mean a conscious choice between an in-state and an out-of-
state seller, as consumers rarely know the state in which an Internet 
operation is located. The consumer's choice between buying in a store 
or buying online does not necessarily even mean a choice between two 
different sellers. Many companies sell both from stores and through the 
Internet.\28\ Consumers should be free to choose how and where they 
will buy goods they seek without interference from a state trying to 
steer that purchase to a local store.
    In the long run, the national economy as a whole benefits from 
allowing consumers to choose freely what they wish to buy, of whatever 
quality they wish, at whatever prices they choose to pay, and from 
whatever seller they wish, whether in the same state as the consumer or 
not. Intervention by the Federal Government and the states in the 
consumers' choices by enactment and implementation of S. 1832 would 
increase the revenues of states, but hobbling out-of-state businesses 
that sell through the Internet or mail order catalogs does not help the 
national economy.

Conclusion
    Congress should not override the Supreme Court's decision in Quill 
Corporation v. North Dakota that the Commerce Clause prohibits a state 
from requiring out-of-state sellers over the Internet, by catalog, or 
by telephone that have no connection to a state other than a common 
carrier or the U.S. mail to collect and remit the state's sales and use 
taxes. Enactment of S. 1832 would simply encourage state governments to 
take more money from taxpayers and spend it instead of getting the 
size, scope, and cost of state governments under control.
    The independent decisions of millions of consumers in the free 
marketplace should decide the appropriate allocation of sales between 
the store-based model of selling and the non-store-based model of 
selling, such as Internet sales, and between sellers who are local and 
sellers who are elsewhere in America. To support a stronger national 
economy, Congress should reject economic protectionism for local 
businesses, reject state government bloat, and reject S. 1832.

    --David S. Addington is Vice President for Domestic and Economic 
Policy at The Heritage Foundation.

End Notes
    1. Quill Corporation v. North Dakota, 504 U.S. 298 (1992).
    2. A useful definition of ``sales or use tax'' is ``a tax that is 
imposed on or incident to the sale, purchase, storage, consumption, 
distribution, or other use of tangible personal property or services as 
may be defined by laws imposing such tax and which is measured by the 
amount of the sales price or other charge for such property or 
service.'' Section 1105(6)(C) of the Internet Tax Freedom Act (47 
U.S.C. 151 note).
    3. See letters, all dated November 9, 2011, from the National 
Conference of State Legislatures, Streamlined Sales Tax Governing 
Board, Inc., National Association of Counties, Federation of Tax 
Administrators, and heads of the National League of Cities, United 
States Conference of Mayors, and Government Finance Officers 
Association to Senators Durbin (D-IL), Alexander (R-TN), Enzi (R-WY), 
and Johnson (D-SD), available as inserted in the Congressional Record 
at http://thomas.loc.gov/cgi-bin/query/C?r112:./temp/r112MkIcsa.
    4. See letter dated November 7, 2011, from the International 
Council of Shopping Centers, Inc., to Senators Alexander, Durbin, and 
Enzi; letter dated November 8, 2011, from the National Retail 
Federation to Senators Durbin, Alexander, Enzi, and Johnson; and letter 
dated November 9, 2011, from the Retail Industry Leaders Association to 
Senator Enzi, available as inserted in the Congressional Record at 
http://thomas.loc.gov/cgi-bin/query/C?r112:./temp/r112MkIcsa.
    5. See, for example, Direct Marketing Association, statement of 
November 9, 2011, available at http://www.the-dma.org/cgi/
disppressrelease?article=1521; Computer & Communications Industry 
Association, statement of November 9, 2011, available at http://
www.ccianet.org/index.asp?sid=5&artid=270&evtflg=False.
    6. The Commerce Clause of the Constitution (art. I, sec. 8) 
provides that ``The Congress shall have Power . . . To regulate 
Commerce with foreign Nations, and among the several States, and with 
the Indian Tribes. . . .'' The Compact Clause (art. I, sec. 10) 
provides that ``No State shall, without the Consent of Congress . . . 
enter into any Agreement or Compact with another State. . . .'' The 
Compact Clause ``does not require congressional approval of every 
agreement between or among States.'' Star Scientific, Inc. v. Beales, 
278 F. 3d 339, 359 (4th Cir. 2002), cert. denied sub nomine Star 
Scientific, Inc. v. Kilgore, 537 U.S. 818 (2002). In United States 
Steel Corporation v. Multistate Tax Commission, 434 U.S. 452, 468 
(1978), the U.S. Supreme Court adopted the standard, first stated in 
Virginia v. Tennessee, 148 U.S. 503, 519 (1893), that interstate 
agreements requiring congressional consent are those ``which may 
encroach upon or interfere with the just supremacy of the United 
States.'' Courts might find that the Streamlined Sales and Use Tax 
Agreement (SSUTA), to which S. 1832 refers, does not encroach upon or 
interfere with just Federal supremacy and therefore does not require 
congressional approval under the Compact Clause.
    7. Quill Corporation, 504 U.S. at 308.
    8. Quill Corporation, 504 U.S. at 311, quoting Complete Auto 
Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).
    9. Quill Corporation, 504 U.S. at 312. James Madison, writing near 
the end of his life, looked back and identified state tax 
discrimination against interstate commerce as one of the sources of 
dissatisfaction with the Articles of Confederation: ``The other source 
of dissatisfaction was the peculiar situation of some of the States, 
which having no convenient ports for foreign commerce, were subject to 
be taxed by their neighbors, thro whose ports, their commerce was 
carryed on. New Jersey, placed between Phila & N. York, was likened to 
a cask tapped at both ends; and N. Carolina, between Virga & S. 
Carolina to a patient bleeding at both arms. The Articles of 
Confederation provided no remedy for the complaint: which produced a 
strong protest on the part of N. Jersey; and never ceased to be a 
source of dissatisfaction & discord, until the new Constitution, 
superseded the old.'' James Madison, Debates in the Federal Convention 
of 1787, ``Preface to Debates in the Convention: A Sketch Never 
Finished Nor Applied'' (New York: Prometheus Books, 1987), p. 5, also 
available at http://www. teachingamericanhistory.org/convention/
debates/preface.html.
    10. The Court has stated succinctly the nature of the ``dormant'' 
or ``negative'' Commerce Clause: ``The Commerce Clause provides that 
`Congress shall have Power . . . [t]o regulate Commerce with foreign 
Nations, and among the several States.' Although the Constitution does 
not in terms limit the power of States to regulate commerce, we have 
long interpreted the Commerce Clause as an implicit restraint on state 
authority, even in the absence of a conflicting Federal statute.'' 
United Haulers Association, Inc. v. Oneida-Herkimer Solid Waste 
Management Authority, 550 U.S. 330, 338 (2007) (citations omitted). The 
Court has made clear that ``[p]reservation of local industry by 
protecting it from the rigors of interstate competition is the hallmark 
of the economic protectionism that the Commerce Clause prohibits.'' 
West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 205 (1994). The 
interpretation that the clause imposes an implicit restraint on states, 
although long-standing, is not without critics. Justice Thomas has said 
that ``[t]he negative Commerce Clause has no basis in the Constitution 
and has proved unworkable in practice. . .. Because this Court has no 
policy role in regulating interstate commerce, I would discard the 
Court's negative Commerce Clause jurisprudence.'' United Haulers 
Association, 550 U.S. 349 (Thomas, J., dissenting) (citations omitted). 
Justice Scalia has said that ``[t]he historical record provides no 
grounds for reading the Commerce Clause to be other than what it says--
an authorization for Congress to regulate Commerce.'' Tyler Pipe 
Industries, Inc. v. Washington State Department of Revenue, 483 U.S. 
232, 263 (1987) (Scalia, J., concurring in part and dissenting in 
part).
    11. Quill Corporation, 504 U.S. at 318.
    12. See, for example, Lamtec Corporation v. Department of Revenue, 
170 Wash. 2d 838, 851 (Washington 2011)(en banc), cert. denied, 132 S. 
Ct. 95 (2011) (business and occupation tax) (``Although Lamtec did not 
have a permanent presence within the state, by regularly sending sales 
representatives into the state to maintain its market, Lamtec satisfied 
the nexus requirement. We . . . hold that the Department had authority 
under the commerce clause to impose a B & O tax.''); KFC Corporation v. 
Iowa Department of Revenue, 792 N.W. 2d 308, 328 (Iowa 2010), cert. 
denied 132 S. Ct. 97 (2011) (``. . . we hold that a physical presence 
is not required under the dormant Commerce Clause of the United States 
Constitution in order for the Iowa legislature to impose an income tax 
on revenue earned by an out-of-state corporation arising from the use 
of its intangibles by franchisees located within the State of Iowa. We 
hold that, by licensing franchisees within Iowa, KFC has received the 
benefit of an orderly society within the state and, as a result, is 
subject to the payment of income taxes that otherwise meet the 
requirements of the dormant Commerce Clause.''); Truck Renting and 
Leasing Association v. Commissioner of Revenue, 433 Mass. 733 (2001) 
(state corporate excise tax applies because Commerce Clause nexus 
exists when out-of-state truck-leasing company rents out vehicles, 
knowing that they will enter Massachusetts, and they do, in fact, enter 
Massachusetts); Tax Commissioner of the State of West Virginia v. MBNA 
America Bank, N.A., 220 W. Va. 163, 171 (2007), cert. denied sub nomine 
FIA Card Services, N.A. v. Tax Commissioner of West Virginia, 551 U.S. 
1141 (2007) (``. . . we now hold that the United States Supreme Court's 
determination in Quill Corp v. North Dakota, 504 U.S. 298 (1992), that 
an entity's physical presence in a state is required to meet the 
`substantial nexus' prong of Complete Auto Transit, Inc. v. Brady, 430 
U.S. 274 (1977), applies only to state sales and use taxes and not to 
state business franchise and corporation net income taxes.'' (parallel 
citations omitted)).
    13. As a practical matter, many of the decisions construing or 
applying the U.S. Supreme Court's Quill decision occur in the courts of 
the several states, because Federal law (28 U.S.C. 1341) prevents 
Federal courts from issuing injunctive remedies against state tax 
collection in many cases. The law states: ``The district courts shall 
not enjoin, suspend or restrain the assessment, levy or collection of 
any tax under State law where a plain, speedy and efficient remedy may 
be had in the courts of such State.'' Decisions of state supreme courts 
construing or applying the Quill decision may reach the U.S. Supreme 
Court under the statute that permits the Court to review by writ of 
certiorari final decisions of the highest courts of a state in which a 
decision could be had in a case in which ``the validity of a statute of 
any State is drawn in question on the ground of its being repugnant to 
the Constitution, treaties, or laws of the United States.'' 28 U.S.C. 
1257(a).
    14. Letter dated November 9, 2011, from the National Conference of 
State Legislatures to Senators Durbin, Alexander, Enzi, and Johnson, 
available as inserted in the Congressional Record at http://
thomas.loc.gov/cgi-bin/query/C?r112:./temp/r112MkIcsa.
    15. See ``The Fiscal Survey of States: Fall 2011, Executive 
Summary,'' National Governors Association and National Association of 
State Budget Officers (``The slow improvement in state finances began 
in 2011 as highlighted by 38 states reporting that they had higher 
general fund spending in fiscal 2011 compared to fiscal 2010 and 
continued with 43 states enacting fiscal 2012 budgets with increasing 
general fund expenditures as compared to fiscal 2011. However, 29 
states still have lower general fund spending in fiscal 2012 compared 
to the pre-recession levels of fiscal 2008, illustrating how 
significantly state fiscal conditions were affected by the 
recession.''), available at http://www.nasbo.org/sites/default/files/
2011%20Fall%20Fis
cal%20Survey%20of%20States.pdf.
    16. For the details of the NCSL-cited estimate, see Donald Bruce, 
William F. Fox, and LeAnn Luna, ``State and Local Government Sales Tax 
Revenue Losses from Electronic Commerce,'' The University of Tennessee 
(April 13, 2009), available at http://cber.bus.utk.edu/ecomm/
ecom0409.pdf. Note that inclusion in the study title of the phrase 
``Tax Revenue Losses'' reveals a certain mindset about the issue: The 
inability to have a remote seller collect state sales tax on remote 
sales is a ``loss'' of revenue to the state only if one assumes that 
the state is entitled in the first place to force a remote seller to 
collect and remit such money. But the Quill decision holds plainly that 
a state is prohibited by the Commerce Clause of the U.S. Constitution 
from forcing the remote seller to do so (absent enactment of Federal 
legislation authorizing it). Thus, the question involved in considering 
S. 1832 is not whether a state is ``losing'' revenue absent Federal 
legislation, but rather whether Congress should pass such legislation 
to allow the state to ``gain'' revenue that the Constitution, as 
construed in Quill, does not now allow the state to require the remote 
seller to provide. Note also that the University of Tennessee's study 
bears on its cover page the note that ``the authors are grateful to 
[name of the Executive Director] of the Streamlined States Governing 
Board.''
    17. Streamlined Sales and Use Tax Agreement, adopted November 12, 
2002, and amended through December 19, 2011, available at http://
www.streamlined
salestax.org/index.php?page=modules. The Streamlined Sales Tax 
Governing Board, Inc., headquartered in Nashville, Tennessee, lists 21 
states as members (Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, 
Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, 
North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont, 
Washington, West Virginia, Wisconsin, and Wyoming) and three states as 
associate members (Ohio, Tennessee, and Utah). Section 801.1 of the 
SSUTA defines a ``full member'' as ``a state that has been found in 
compliance pursuant to Sections 804 and 805 and the changes to their 
statutes, rules, regulations or other authorities necessary to bring 
them into compliance are in effect.'' Section 801.3 of the SSUTA 
defines ``associate state'' as ``a state that has achieved substantial 
compliance with the terms of the Agreement taken as a whole, but not 
necessarily each provision as required by section 805, measured 
qualitatively.'' Section 804 of the SSUTA provides that the ``governing 
board shall determine if a petitioning state is in compliance with the 
Agreement'' and that ``[a] three-fourths vote of the entire governing 
board is required to approve a state's petition for membership.'' 
Section 805 states in full: ``A state is in compliance with the 
Agreement if the effect of the state's laws, rules, regulations, and 
policies is substantially compliant with each of the requirements set 
forth in the Agreement.'' The Internet website address of the 
corporation known as the Streamlined Sales Tax Governing Board, Inc., 
is http://www.streamlinedsalestax.org. Under section 3(a) of S. 1832 
and the definition of ``Member State'' in section 6(3) of the 
legislation, the Federal authority granted by section 3(a) extends only 
to full members of the SSUTA and not to associate states. For an early 
discussion of concerns with the idea of a state sales tax cartel, see 
``Why Congress Should Not Authorize a State Sales Tax Cartel,'' The 
Heritage Foundation, Executive Memorandum No. 778 (September 26, 2001), 
available at http://s3.amazonaws.com/thf_media/2001/pdf/em778.pdf.
    18. SSUTA, section 102.
    19. SSUTA, section 605. The definition of ``Remote sales'' applies 
to sections 606 to 613 in Article VI of the SSUTA.
    20. See, for example, SSUTA sections 301 (single agency), 302 
(uniform tax base), and 318 (single tax return).
    21. Subsection 3(a) of S. 1832 excludes SSUTA member states from 
collecting sales and use taxes under the legislation from sellers ``not 
qualifying for a small seller exception.'' Subsection 3(b) excludes 
SSUTA non-member states from such collection from sellers ``not 
qualifying for the small seller exception'' (italics added to emphasize 
the distinction between the articles ``a'' and ``the''). Courts assume 
that the use of different terms within related provisions in a statute 
generally implies that different meanings were intended. See Russello 
v. United States, 464 U.S. 16, 23 (1983) (``We refrain from concluding 
here that the differing language in the two subsections has the same 
meaning in each. We would not presume to ascribe this difference to a 
simple mistake in draftsmanship.'') Subsection 3(c) of the bill, 
captioned ``SMALL SELLER EXCEPTION,'' protects small businesses from 
having to collect state sales and use taxes on remote sales if they do 
not have ``gross annual receipts in total remote sales in the United 
States in the preceding calendar year exceeding $500,000.'' The most 
reasonable construction of the phrase ``the small seller exception'' in 
subsection 3(b) is that it refers to the small seller exception set 
forth in subsection 3(c). In contrast, the most reasonable construction 
of the phrase ``a small seller exception'' in subsection 3(a) is that 
it refers to the small seller exception set forth in subsection 3(c) or 
a present or potential alternative small seller exception. The 
alternative small seller exception may be that contemplated by section 
610 of the SSUTA. Section 610 of the SSUTA states that, taking various 
factors into account, the SSUTA governing board ``shall develop a sales 
volume threshold for determining which small `remote sellers' qualify 
for an exemption from the requirement to collect sales or use taxes on 
`remote sales'.'' Section 610 of the SSUTA gives a further instruction 
that ``[t]he exemption threshold shall be set at a relatively low level 
and over time adjusted downward so that only sellers making isolated or 
occasional sales are excluded from the collection requirement.'' In 
light of subsections 3(a) and 3(b) of S. 1832 and section 610 of the 
SSUTA, courts may well construe the reference to ``a small seller 
exception'' in subsection 3(a) as indicating that the SSUTA member 
states could, if they wish, adopt (through concerted action in a vote 
of the SSUTA governing board) a small seller exception of whatever 
sales volume threshold and follow that state law-based small seller 
exception instead of following the small seller exception in subsection 
3(a) of S. 1832. Under that construction of S. 1832, SSUTA member 
states would be free under subsection 3(a), by acting in concert in a 
vote of the SSUTA governing board, to require remote sellers with total 
U.S. remote sales gross annual receipts under $500,000 to collect and 
remit state sales and use taxes, but SSUTA non-member states could not 
do so under subsection 3(b).
    22. Subsection 3(a) of S. 1832 grants authority to require sellers 
(excluding those within the small seller exception) to collect and 
remit sales and use taxes with respect to remote sales ``sourced to 
that Member State pursuant to the provisions of the Streamlined Sales 
and Use Tax Agreement.'' Then subsection 6(8) of the bill repeats that 
``[a] State granted authority under section 3(a) shall comply with the 
sourcing provisions of the Streamlined Sales and Use Tax Agreement.'' 
Lastly, section 6(10) defines the term ``Streamlined Sales and Use Tax 
Agreement'' to mean ``the multi-State agreement with that title adopted 
on November 12, 2002, as in effect on the date of enactment of this Act 
and as further amended from time to time.'' Subsections 6(8) and 6(10), 
including the phrase ``as further amended from time to time,'' read 
with the text of section 3(a), allow SSUTA member states, acting in 
concert through a vote of the SSUTA governing board, to change sourcing 
rules applicable to them under S. 1832 by making changes (without any 
involvement by Congress or any of the rest of the Federal Government) 
in the SSUTA sourcing rules. In contrast, states in the second class 
are bound by the unchanging sourcing rules set forth in section 6(8) of 
S. 1832. Courts might not uphold the congressional delegation to the 
private party Streamlined Sales Tax Governing Board, Inc., which by 
three-fourths vote has the power to amend the SSUTA under section 901 
of the SSUTA, of legislative power to change the sourcing rules 
applicable under Federal law (S. 1832 if enacted) for SSUTA member 
states. The ability of the Streamlined Sales Tax Governing Board, Inc., 
to change from time to time the Federal law rule on sourcing applicable 
to SSUTA member states might be construed as creating Federal law 
without following the constitutional requirements of bicameral passage 
by the Houses of Congress and presentment to the President required for 
the making of a Federal law. For an early recommendation on sourcing, 
see ``After the Net Tax Commission: The Gregg-Kohl Nexus Solution,'' 
The Heritage Foundation, Backgrounder No. 1363 (April 25, 2000) (``. . 
. by making it clear that extraterritorial taxation would be prohibited 
in virtually all cases, S. 2401 would encourage state and local 
governments to adopt an `origin-based' tax methodology under which they 
would levy sales taxes only on companies whose principal place of 
business resided within their taxing jurisdiction. Sourcing all sales 
to the location of origin instead of the destination of sale would 
enable state and local governments to impose taxes on Internet (and 
catalog) sales in the same way they impose them on traditional Main 
Street retail sales.''), available at http://www.heritage.org/re
search/reports/2000/04/after-the-net-tax-
commission?query=After+the+Net+Tax+Co
mmission:+The+Gregg-Kohl+Nexus+Solution.
    23. Section 1101 of the Internet Freedom Tax Act (47 U.S.C. 151 
note) provides that ``[n]o State or political subdivision thereof shall 
impose any of the following taxes during the period beginning November 
1, 2003 and ending November 1, 2014: . . . (2) Multiple or 
discriminatory taxes on electronic commerce.'' Section 1105 of the Act 
defines ``discriminatory tax'' and ``multiple tax'' for purposes of the 
Act. A ``multiple tax'' is ``any tax that is imposed by one State . . . 
on the same . . . electronic commerce that is also subject to another 
tax imposed by another State . . ., without a credit . . . for taxes 
paid in other jurisdictions.''
    24. See letter dated November 9, 2011, from National Conference of 
State Legislatures to Senators Durbin, Alexander, Enzi, and Johnson, 
available as inserted in the Congressional Record at http://
thomas.loc.gov/cgi-bin/query/C?r112:./temp/r112
MkIcsa.
    25. See letter dated November 9, 2011, from Streamlined Sales Tax 
Governing Board, Inc. to Senators Durbin, Alexander, Enzi, and Johnson, 
available as inserted in the Congressional Record at http://
thomas.loc.gov/cgi-bin/query/C?r112:./temp/r112MkIcsa.
    26. See letter dated November 9, 2011, from Federation of Tax 
Administrators to Senators Durbin, Alexander, Enzi, and Johnson, 
available as inserted in the Congressional Record at http://
thomas.loc.gov/cgi-bin/query/C?r112:./temp/r112
MkIcsa.
    27. West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 205 (1994).
    28. For example, the well-known retailers Wal-Mart Stores, Inc., 
and Target Corporation sell from stores in nearly every state (all 
states in the case of Wal-Mart as of December 31, 2010, and all but 
Vermont in the case of Target Corporation as of January 29, 2011) and 
also accept customer orders electronically over the Internet at the 
company sites on the World Wide Web at www.walmart.com and 
www.target.com. Wal-Mart Stores, Inc., ``Fiscal 2011 Unit Count,'' 
available at http://walmartstores.com/sites/annualreport/2011/
financials/Fiscal2011_Unit_
Count.pdf; Target Corporation, Annual Report for 2010, Securities and 
Exchange Commission Form 10-K, Item 2. Properties, available at http://
www.sec.gov/Archives/edgar/data/27419/000104746911002032/a2201861z10-
k.htm.
                                 ______
                                 
                                             Tiki Pug Music
                                                      July 30, 2012
Hon. Dean Heller,
United States Senate,
Washington, DC.

Dear Senator Heller,

    I understand that the Senate Commerce Committee has scheduled a 
hearing later this week to examine legislation that would impose new 
taxes on sales made over the Internet. We have met previously to 
discuss this issue when I was in Washington, DC, but since you are a 
member of the Commerce Committee, I wanted to restate my continued 
opposition to the Marketplace Fairness Act.
    First, I must thank you for your leadership on this issue. I know 
you are a small business supporter and understand the challenges this 
legislation would create for start-up entrepreneurs, including me. You 
have been a solid advocate for small businesses that use the Internet, 
and I appreciate your forward-looking perspective on this issue.
    I started using the Internet to sell my wares about 13 years ago, 
focusing on selling CO's through eBay.com. Then, about four years ago, 
an illness prompted me to change my course and pursue my dream of 
becoming my own boss. I ramped up my activity on eBay, and today I have 
a business partner, employ an assistant, and use my expertise to teach 
my fellow eBay sellers how to successfully thrift and profit from it.
    I have plans to bring my business to the next level, but worry that 
new sales tax requirements would block my ability to grow my store. As 
you know, small businesses are less capable of dealing with sales tax 
collection requirements that would be imposed on them under the 
Marketplace Fairness Act. I don't have a fulltime accountant, and I 
can't afford to hire someone. And while I know that the bill would 
require states to help small businesses afford sales tax collection 
costs, I sincerely question whether Nevada--with its record budget 
deficits--will be able to help me manage the costs associated with the 
new tax.
    This is also a competition issue. Small businesses will always be 
smaller than the super retailers that do the vast majority of all 
retail sales in this country and abroad. It hardly seems fair that a 
small business like mine should be held to the exact same 9,500+ sales 
tax laws as really large businesses that have stores in almost every 
American city. Plus, protecting small businesses from sales tax 
collection liabilities would give them just a little bit of room to 
grow their operations, and when they get big enough, they too would 
take on the collection requirements.
    Lastly, I appreciate your view that Internet sales tax legislation 
would increase taxes. The Marketplace Fairness Act's collection 
requirement means that ultimately small businesses would be subject to 
a new tax. I know that use tax has always been payable and small 
businesses have to collect in states where they have locations. But 
make no mistake about it--the proposed law would be a tax on my 
business and I would have to endure a new burden.
    In conclusion, I want to again thank you for your leadership and 
foresight on this issue. It's good to know that there are some Members 
of Congress that truly seek to do the right thing. Thank you for all 
you do.
            Sincerely,
                                            Jason T. Smith,
                                                             Owner,
                                                         TikiPug Music.

cc: The Honorable John D.Rockefeller, Chairman,Senate Committee on 
            Commerce, Science, and Transportation

The Honorable Kay Bailey Hutchison, Ranking Member, Senate Committee on 
            Commerce, Science, and Transportation
                                 ______
                                 
                    Conservatives Support E-Fairness
New Jersey Governor Chris Christie:
    Governor Chris Christie. ``I just want to make clear that I have 
been working on this issue in my role on the executive committee of the 
National Governors Association because it is an important issue to all 
the Nation's governors. And I too--along with governors like Governor 
Daniels and others--urge the Federal Government and the Congress in 
particular to get behind Senator Lamar Alexander's legislation to allow 
states to be able to make these choices for themselves. And I think 
Senator Alexander's legislation would be a great step forward in that 
regard. It would give states options to decide how they want to deal 
with this and not have to any longer deal with the Federal prohibition 
on dealing with it. So, it would allow us to do it in a much more 
uniform and broader way. So, I'm with Governor Daniels on this and 
other Republican governors--Governor Snyder of Michigan and others who 
feel strongly about it. And we've been working on it at the National 
Governors Association and I know we will continue to and hope to get 
some type of resolution to it by the end of this year.'' (Press 
Conference, Governor Chris Christie, 5/31/12)
Maine Governor Paul LePage:
    ``Last week, Gov. Paul LePage, R-Maine, wrote his state's two U.S. 
Senators, Republicans Susan Collins and Olympia Snowe, to urge them to 
back legislation introduced by Sens. Mike Enzi, R-Wyo., Dick Durbin, D-
Ill., and Lamar Alexander, R-Tenn., that would close a loophole left by 
a 1992 Supreme Court decision. The high court ruled that states can't 
require retailers such as catalog and now online retailers to collect 
sales taxes from customers in states where those companies have no 
physical presence. `There's no denying that passing the bill would give 
thousands of small Maine businesses a real boost,' LePage wrote. 
`Through no fault of their own, Federal policy now gives some out-of-
state corporations an unfair advantage over other Maine retailers.' '' 
(Juliana Gruenwald, ``Tea Party Governor Is Backing Net Sales Tax 
Bill,'' National Journal, 3/20/12)
Tennessee Governor Bill Haslam:
    ``The National Governors Association applauds your efforts to level 
the playing field between Main Street retailers and online sellers by 
introducing S. 1832, the `Marketplace Fairness Act.' This common sense 
approach will allow states to collect the taxes they are owed, help 
businesses comply with different state laws, and provide fair 
competition between retailers that will benefit consumers.'' (National 
Governors Association Letter To Sens. Durbin, Enzi, Tim Johnson And 
Alexander Endorsing S. 1832, The Marketplace Fairness Act, 11/28/11)
Al Cardenas, Chairman, American Conservative Union (ACU):
    ``When it comes to sales tax, it is time to address the area where 
prejudice is most egregious--our policy towards Internet sales. At 
issue is the Federal Government exempting some Internet transactions 
from sales taxes while requiring the remittance of sales taxes for 
identical sales made at brick and mortar locations. It is an outdated 
set of policies in today's super information age, when families every 
day make decisions to purchase goods and services online or in person. 
Moreover, it's unfair, punitive to some small businesses and 
corporations and a boon for others.'' (Al Cardenas, ``The Chief Threat 
To American Competitiveness: Our Tax Code,'' National Review Online, 
11/8/11)
William F. Buckley, Editor At Large, National Review:
    ``The mattress maker in Connecticut is willing to compete with the 
company in Massachusetts, but does not like it if out-of-state 
businesses are, in practical terms, subsidized; that's what the non-tax 
amounts to. Local concerns are complaining about traffic in mattresses 
and books and records and computer equipment which, ordered through the 
Internet, come in, so to speak, duty free.'' (William F. Buckley, ``Get 
That Internet Tax Right,'' National Review Online, 10/19/01)
Indiana Governor Mitch Daniels:
    ``[S]ales taxes that [states] impose ought to be paid, and paid by 
everybody equally and collected by everybody in the retail business . . 
. We're not talking about an additional or new tax here--we're talking 
about the collection of a tax that's existed a long time.'' (Jeremy 
Hobson, ``Indiana Makes A Deal With Amazon On Sales Taxes,'' 
Marketplace Business, 1/12/12)
Former Mississippi Governor Haley Barbour:
    ``. . . [E]-commerce has grown, and there is simply no longer a 
compelling reason for government to continue giving online retailers 
special treatment over small businesses who reside on the Main Streets 
across Mississippi and the country. The time to level the playing field 
is now . . .'' (Letter To Sens. Enzi And Alexander Endorsing S. 1832, 
The Marketplace Fairness Act, 11/29/11)
Former Florida Governor Jeb Bush:
    ``It seems to me there has to be a way to tax sales done online in 
the same way that sales are taxed in brick and mortar establishments. 
My guess is that there would be hundreds of millions of dollars that 
then could be used to reduce taxes to fulfill campaign promises.'' 
(Letter To Florida Governor Rick Scott, 1/2/11)
Indiana Representative Mike Pence:
    ``I don't think Congress should be in the business of picking 
winners and losers. Inaction by Congress today results in a system 
today that does pick winners and losers.'' (House Judiciary Committee, 
Hearing On ``Constitutional Limitations On States' Authority To Collect 
Sales Taxes In E-Commerce,'' 11/30/11)
Virginia Governor Bob McDonnell:
    `` `This bill helps to ensure that online retailers with a physical 
presence in Virginia are treated the same as traditional brick-and-
mortar retailers who are already required to collect and remit existing 
sales taxes on goods sold in the commonwealth.' '' (Press Release, 
``Governor McDonnell Announces Agreement Reached On Tax Fairness 
Bill,'' Governor Bob McDonnell, 2/22/12)
Michigan Governor Rick Snyder:
    ``Technology currently exists to quickly and effectively calculate 
taxes due on sales and can be easily be integrated into online 
retailers' operations,'' wrote Snyder, a onetime venture capitalist and 
former executive at the computer company Gateway. ``It is time for 
Congress to grant states the authority to enforce sales tax and use 
laws on all retailers doing business in their state.'' (Bernie Becker, 
``Michigan Governor Joins Online Sales Tax Chorus,'' The Hill, 5/11/12)
Alabama Governor Robert Bentley:
    ``Alabama's Republican governor has urged lawmakers from his state 
to support online sales tax legislation, adding to the growing roster 
of GOP officials who are on board with the idea. Gov. Robert Bentley 
told Alabama's two senators and seven House members the online sales 
tax bills would improve the state's fiscal situation, and stressed that 
the legislation would not create a new tax. `The bills will give 
Alabama the authority to collect sales taxes--as we currently do from 
local brick-and-mortar retailers--that are already owed from online 
retailers,' Bentley wrote in a letter dated April 19. `Allowing us to 
effectively close this sales tax loophole would help both our state's 
finances and our state's small businesses.' '' (Bernie Becker, 
``Alabama Governor Gets Behind Online Sales Tax Push,'' The Hill, 4/25/
12)
South Dakota Governor Dennis Daugaard:
    ``On March 11, South Dakota enacted S.B. 146, sales tax legislation 
that requires out-of-state retailers that sell to in-state residents to 
notify their customers of their personal use tax obligation. Under the 
law, online sellers are required to provide clear notice to consumers 
during the checkout process that a South Dakota use tax is due.'' 
(Rosemary Hawkins, ``Sales Tax Bills Pass In Arkansas And South 
Dakota,'' American Booksellers Association, 3/3/11)
Georgia Governor Nathan Deal:
    ``Gov. Nathan Deal is considering extending the state sales tax to 
online purchases, he told newspaper publishers Thursday morning . . . 
`In the absence of congressional activity on that . . . I think there 
will be some appetite to act on that in the legislature,' he said.'' 
(Walter C. Jones, ``Ga. Considers Online Sales Tax,'' The Augusta 
Chronicle, 1/12/12)
Nevada Governor Brian Sandoval:
    `` `The only way to completely resolve this issue is for Congress 
to enact legislation that, within a simplified nationwide framework, 
grants states the right to require collection by all sellers,' Sandoval 
said in a statement.'' (Ed Vogel, ``Gov. Sandoval Reaches Sales Tax 
Deal With Amazon,'' Las Vegas Review-Journal, 4/24/12)
Idaho Governor C.L. ``Butch'' Otter:
    ``Gov. C.L. `Butch' Otter backs taxing Internet sales to level the 
playing field between virtual businesses and brick-and-mortar 
establishments on Idaho's Main Street. Otter made the remarks to Idaho 
chamber of commerce leaders meeting in Boise on Monday.'' (``Idaho 
Governor Supports Internet Sales Tax,'' The Associated Press, 1/30/12)
South Carolina Governor Nikki Haley:
    `` `And I will tell you regardless of what happens with Amazon, we 
want them. I have told them we want you to do business in this state, 
but we want you to do it on a level playing field. They got free 
property, they got tax incentives, they got plenty of things. Don't ask 
us to give you sales tax relief when we're not giving it to the book 
store down the street or we're not giving it to the other stores on the 
other side of town, it's just not a level playing field.' '' (Press 
Conference, Governor Nikki Haley, 4/28/11)
Iowa Governor Terry Branstad Supports Federal E-Fairness Legislation:
    ``Gov. Terry Branstad of Iowa this week became the latest in a 
string of top Republican state officials to back Federal legislation 
giving states more freedom to collect online sales taxes. Branstad's 
letter of support, obtained exclusively by The Hill, comes not long 
after another prominent Republican governor, Chris Christie of New 
Jersey, also urged Congress to get moving on sales tax legislation . . 
. In a letter sent Thursday, Branstad encouraged his home-state 
senators to support a solution that he said would close a longstanding 
loophole. `I understand that the coalition supporting this legislation 
is now very broad which gives me hope that, under your leadership, this 
legislation can be passed yet this year,' Branstad wrote to Sens. Chuck 
Grassley (R) and Tom Harkin (D). `The Internet is now a robust, mature 
and dynamic marketplace that does not warrant special protections,' he 
added. `The application of sales taxes only to `brick-and-mortar' 
retailers, many of which are small businesses, puts those very entities 
at a competitive disadvantage.' '' (Bernie Becker & Kevin Bogardus, 
``GOP Governors Bolster Sales Tax Push,'' The Hill, 6/10/12)
Christopher Caldwell, Senior Editor, The Weekly Standard:
    ``California governor Jerry Brown killed two birds with one stone 
last month when he signed a law that would require Internet retailers 
to collect the state's 7.25 per cent sales tax. He was raising needed 
revenue. And he was addressing a great injustice of the information 
age. State and Federal legislators made a big mistake when they 
exempted e-commerce from taxes in the 1990s. They were giddy with the 
rhetoric of cyberanarchism and inspired by anti-tax yahoos convinced 
raising revenue is an optional part of running a government. The 
kindest thing one can say about the policy is that it constituted an 
overgenerous subsidy to an infant industry.'' (Christopher Caldwell, 
``Why Amazon's Tax-Free Landscape Needs Bulldozing,'' Financial Times, 
7/15/11)
                                 ______
                                 
 Response to Written Question Submitted by Hon. Frank R. Lautenberg to 
                              Paul Misener
    Question. Senator Enzi's bill would exempt businesses with less 
than five hundred thousand (500,000) dollars in out-of-state sales 
nationally. An alternative would be to exempt businesses from having to 
collect in a given state if their sales in that state are below a 
certain level. Based on your experience with Amazon Marketplace 
sellers, would they prefer such a state-by-state exemption?
    Answer. We believe that mid-sized sellers--those with about five 
hundred thousand dollars of annual interstate sales--want simplicity, 
including a small seller exception (SSE) threshold that is easy to 
understand and implement. A national threshold for the SSE would be 
easiest for these sellers to administer.
                                 ______
                                 
     Response to Written Question Submitted by Hon. Mark Begich to 
                              Paul Misener
    Question. We have heard small brick-and-mortar stores raise 
concerns about how customers come into their store, look around for a 
particular item, ask for advice from retail associates and then take 
that information and buy the same product online to evade paying the 
sales tax. Do you think evading sales taxes is one of the primary 
reasons customers choose to shop online? Do you believe that the 
Internet marketplace has negatively impacted Main Street America? Do 
you think that the customers, when they buy online, are buying from 
small businesses or mainly large businesses?
    Answer. We believe that customers choose to shop at Amazon because 
of our low prices, vast selection and fast delivery. As analysts have 
noted, we offer customers the best prices with or without sales tax.
    Further, we believe that the Internet has empowered consumers and 
Main Street retailers alike. At Amazon, we help over two million 
sellers (most of them small and medium sized) grow and reach customers 
across the globe. Forty percent of the items purchased by Amazon 
customers are sold by these small businesses and independent sellers. 
Also, a recent study reported by the National Retail Federation shows 
that ``the percentage of shoppers who research products before 
purchasing them is considerable: 91 percent regularly or occasionally 
turn to the Internet to do some investigating before heading out to the 
store to make a purchase.'' (BIGinsight, Media Behaviors and influence 
Survey, June 2012.)
                                 ______
                                 
     Written Questions Submitted by Hon. Jim DeMint to Paul Misener
    As of September 27, 2013, the date the record for this hearing 
closed, Mr. Misener had not responded to the following questions which 
Senator DeMint submitted to Mr. Misener more than one year previous.

    Question 1. Does Amazon collect sales taxes for third parties that 
use its platform to make sales? Does Amazon receive any compensation 
for providing this service? Would the use of this service increase if 
the Marketplace Fairness Act were enacted?

    Question 2. How many third party sellers sell exclusively through 
the Amazon platform? Will Amazon's sales tax collection services apply 
to third party vendor sales on other web platforms? Will such vendors 
have to acquire [and presumably pay for] another service and/or 
software to comply with sales tax laws for transactions not made on the 
Amazon platform?

    Question 3. In testimony before the Committee, one of the sponsors 
of the Marketplace Fairness Act indicated that taxation would be 
applied based on the credit card billing address of a purchaser. Do you 
believe this is accurate, and that the question of appropriate tax 
application is that simple?

    Question 4. We have heard the term ``showrooming'' often spoken of 
in a negative way. It has been stated that consumers ``showroom'' in 
order to purchase from online sources primarily or exclusively to 
``avoid'' paying sales tax. Do you think it is wrong that consumers are 
empowered by technology and retail competition to locate what they 
consider the best price for the product they seek? How often does 
``showrooming'' lead to a purchase being made online, but from a source 
required to collect sales tax? Do you believe there are reasons other 
than sales tax collection that lead consumers to purchase from an 
online source versus a physical retailer?

    Question 5. It has been stated that, without the interstate 
regulatory authority granted to states by the MFA, income and/or 
property taxes will likely be increased by states. Has Amazon received 
any property tax or sales tax collection incentives from state and/or 
local governments? If so, could you provide the Committee with the 
estimated value of those incentives?
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Jim DeMint to 
                              Steve Bercu

    Question 1. You write in your testimony that, ``A sale is a sale no 
matter where it takes place.'' The MFA, however, does not treat all 
sales equally. In fact, it applies a wholly different taxation regime 
to remote sales versus what is applied to brick and mortar sales. If 
the goal of the MFA is fairness, shouldn't the outcome be to tax all 
sales under the same regime?
    Answer. I believe that the question of sales tax fairness should be 
left to the states. I also believe that the residence of the consumer 
should control the sales tax. So fairness dictates that the rate in 
each consumer's state of residence would apply.

    Question 2. In your testimony you state, ``. . . BookPeople already 
collects for every jurisdiction that has a sales tax. . . . We do so 
because it is the right thing to do. . . .''

    Question 2a. Do you believe it would be fair for other states to 
require you to obtain their business licenses, comply with their labor 
laws, or pay them income taxes in order to sell products to consumers 
in those states?
    Answer. As I understand it I am required to obtain business 
licenses, comply with labor laws and pay income taxes in states where I 
conduct business. I am not required to comply when consumers come to my 
state to do business with me. However it makes sense for me to act as a 
collection agent for remote states just as I do for Texas when someone 
buys something from me.

    Question 2b. Do you believe states should be prohibited from 
imposing any taxes and regulations outside of their own borders? If 
not, which ones should be allowed?
    Answer. I agree that states should not impose any taxes and 
regulations outside of their own borders. Getting help collecting sales 
tax due from their own residents is something very different.

    Question 3. In testimony before the Committee, one of the sponsors 
of the Marketplace Fairness Act indicated that taxation would be 
applied based on the credit card billing address of a purchaser. Do you 
believe this is accurate, and that the question of appropriate tax 
application is that simple?
    Answer. I believe that the credit card billing address is the 
appropriate address for sales tax purposes.

    Question 4. We have heard the term ``showrooming'' often spoken of 
in a negative way. It has been stated that consumers ``showroom'' in 
order to purchase from online sources primarily or exclusively to 
``avoid'' paying sales tax.

    Question 4a. Do you think it is wrong that consumers are empowered 
by technology and retail competition to locate what they consider the 
best price for the product they seek?
    Answer. I believe that consumers should use whatever tools they 
have at hand to get the best deal they can, but I do not believe that 
they should be able to use those tools to avoid paying sales tax in 
their home states.

    Question 4b. How often does ``showrooming'' lead to a purchase 
being made online, but from a source required to collect sales tax?
    Answer. I do not have the data necessary to answer this question.

    Question 4c. Do you believe there are reasons other than sales tax 
collection that lead consumers to purchase from an online source versus 
a physical retailer?
    Answer. Yes and as I noted in Q.4A above I agree with their ability 
to do so if sales tax avoidance is not the reason.

    Question 5. It has been stated that, without the interstate 
regulatory authority granted to states by the MFA, income and/or 
property taxes will likely be increased by states. Are you aware of any 
property tax exemptions received by your competitors (or your 
business), if so how much revenue has been ``lost'' by Texas and its 
local governments from those exemptions?
    Answer. I am unclear about this question because it is internally 
inconsistent.
    I am unaware of property tax exemptions received by anyone in 
particular, but that has nothing to do with sales tax collection. The 
Texas Comptroller of Public Accounts has stated that Texas is losing 
about $750,000,000 a year in uncollected sales tax for Internet 
purchases.
                                 ______
                                 
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to 
                             Scott Peterson

    Question 1. This year, my state of New Jersey will lose out on an 
estimated two hundred million dollars of sales taxes owed but not 
collected on out-of-state purchases. Do you believe it's feasible to 
collect sales taxes directly from residents who owe but haven't paid 
them?
    Answer. No unless New Jersey imposes extraordinary requirements on 
its citizens. Because only the retailer and the consumer know anything 
about a purchase, New Jersey will have to presume that every citizen 
makes untaxed purchases. To collect that tax New Jersey will have to 
presume that every consumer filing an income tax owes use tax. Anyone 
who hasn't made an untaxed purchase will have to prove the negative. In 
addition to imposing this burden on its citizens it will not be able to 
collect the tax owed by people who do not file income tax returns as 
there is no feasible way of collecting from them. This will be the case 
for states without an income tax that have no feasible way of 
collecting their use tax.

    Question 2. Of the forty-five states that levy sales taxes, only 
twenty have simplified their sales taxation by adopting the 
``Streamline Agreement.'' Why have so many states been unwilling to 
adopt these uniform standards?
    Answer. Twenty-three have enacted all the simplifications. The 
others haven't for reasons that vary from old fashion politics to 
changes that would reduce current tax collections. Not every state is 
impacted the same from the Streamline simplification requirements and 
in a couple states adopting all the changes would reduce their current 
tax collections.

    Question 3. My state of New Jersey has simplified its sales tax 
system to fully comply with the Streamline Agreement. But Senator 
Enzi's bill would authorize states that haven't met the Streamline 
Agreement standards to require New Jersey businesses to collect sales 
taxes for them. Could this uneven treatment put my state's businesses 
at a disadvantage?
    Answer. The non-Streamline ``alternative path'' in Senator Enzi's 
legislation includes many of the critical simplifications found in the 
Streamline Agreement. Clearly, the more simplification requirements in 
the legislation the better it will be for New Jersey businesses as they 
start to collect sales tax in other states.

    Question 4. I am concerned that the current approach to collecting 
sales taxes unfairly discriminates against low income individuals and 
the elderly. These individuals often lack Internet access, and cannot 
take advantage of online purchasing that is in effect tax-free. Would 
you agree that this makes our tax system more regressive?
    Answer. Yes. Those without broadband Internet access or a credit 
card are at a serious disadvantage shopping on the Internet. It follows 
that those folks must make a greater percentage of their purchases 
locally, and all of those purchases will be fully taxed. Future sales 
tax regressivity studies will have to include access to broadband 
Internet service and access to a credit card, both of which are 
required for Internet shopping and less prevalent with the low income 
and the elderly.
                                 ______
                                 
    Written Questions Submitted by Hon. Jim DeMint to Scott Peterson

    Mr. Peterson is no longer employed with the Streamlined Sales Tax 
Governing Board, Inc., and did not respond to the Senator's written 
questions, submitted to Mr. Peterson after the hearing.

    Question 1. The MFA would potentially subject South Carolina 
retailers to audits and tax enforcement actions by any state that 
complies with its criteria, even if South Carolina chooses not to. The 
MFA would therefore definitively increase regulation and impose new tax 
obligations on South Carolina businesses by states in which they have 
no physical presence or--more importantly--representation in 
government. Why do you think so many governors support legislation that 
allows the intrusion of other states' tax policies into their own? Do 
you believe states should be prohibited from imposing any taxes and 
regulations outside of their own borders? If not, which ones should be 
allowed?

    Question 2. Aside from adding a line item on their tax forms, could 
you describe the efforts by state governments in the last year to 
improve enforcement of their use tax laws and the increased revenue 
from such efforts?

    Question 3. What recourse will a South Carolina business have if 
they find themselves in a dispute with another states' department of 
revenue?

    Question 4. Have you considered the option of allowing remote 
taxation only among and between those states that choose to comply with 
the MFA's criteria?

    Question 5. In testimony before the Committee, one of the sponsors 
of the Marketplace Fairness Act indicated that taxation would be 
applied based on the credit card billing address of a purchaser. Do you 
believe this is accurate, and that the question of appropriate tax 
application is that simple?

    Question 6. We have heard the term ``showrooming'' often spoken of 
in a negative way. It has been stated that consumers ``showroom'' in 
order to purchase from online sources primarily or exclusively to 
``avoid'' paying sales tax. Do you think it is wrong that consumers are 
empowered by technology and retail competition to locate what they 
consider the best price for the product they seek? How often does 
``showrooming'' lead to a purchase being made online, but from a source 
required to collect sales tax? Do you believe there are reasons other 
than sales tax collection that lead consumers to purchase from an 
online source versus a physical retailer?

    Question 7. It has been stated that, without the interstate 
regulatory authority granted to states by the MFA, income and/or 
property taxes will likely be increased by states. Can you provide the 
Committee an idea of the aggregate amount of property tax exemptions 
received by retail establishments and commercial developers over the 
last decade and the related ``lost'' revenue to states and localities?
                                 ______
                                 
 Response to Written Question Submitted by Hon. Frank R. Lautenberg to 
                            Steve DelBianco

    Question. This year, my state of New Jersey will lose out on an 
estimated two hundred million dollars of sales taxes owed but not 
collected on out-of-state purchases. Do you believe it's feasible to 
collect sales taxes directly from residents who owe but haven't paid 
them?
    Answer. New Jersey already makes it easy for taxpayers to self-
report their unpaid sales tax on out-of-state purchases, as I describe 
below.
    But even if taxpayers fail to comply, the good news is that New 
Jersey already collects a majority of sales taxes generated from e-
commerce, and all of the top twenty e-retailers will be collecting for 
New Jersey by 2014, including Amazon. Of those companies who do not yet 
collect for New Jersey, the state need only focus on the top 500 e-
retailers to capture over 90 percent of the uncollected tax revenue 
from e-commerce. That way, New Jersey businesses that sell to customers 
around the country could be protected from the high costs of collecting 
and filing taxes for up to 45 additional states.
New Jersey already makes it easy for residents to self-report their 
        unpaid sales tax on out-of-state purchases.
    New Jersey added a line on its individual tax return reminding 
taxpayers about their obligation to pay Use Tax on out-of-state 
purchases:




    In addition, New Jersey gives residents instructions when filling 
out their tax returns.\1\ The tax form assists taxpayers by offering 
estimated Use Tax amounts for purchases made out of state, based on 
annual gross income. (see figure at right)
---------------------------------------------------------------------------
    \1\ State Of New Jersey Income Tax-Resident Return Instruction 
Booklet p.38-39



New Jersey already collects sales taxes on most e-commerce.
    If self-reporting fails to capture most uncollected sales tax, New 
Jersey will soon be collecting the majority of sales taxes from e-
commerce, as Amazon begins collecting sales taxes in 2014.
    In fact, by 2014 all of the top 20 e-retailers will be collecting 
sales taxes for New Jersey. These businesses alone account for nearly 
60 percent of all e-commerce. (see table at right)



Amazon will soon collect in New Jersey--covering two-thirds of all the 
        state's uncollected sales taxes from e-commerce
    Amazon, which accounted for nearly two-thirds of all uncollected 
sales taxes from e-commerce in 2011, will begin collecting for New 
Jersey in 2014, since it will be opening a distribution center in the 
state.
    Economists Eisenach and Litan \2\ researched online sales tax 
collections and found that New Jersey's uncollected sales tax from e-
commerce in 2012 is $152 million.
---------------------------------------------------------------------------
    \2\ Eisenach & Litan, Uncollected Sales Taxes On Electronic 
Commerce: A Reality Check, Empiris LLC (Feb. 2010), available at http:/
/bit.ly/EisenStudy.
---------------------------------------------------------------------------
    Of this $152 million, we estimate that Amazon constitutes almost 
two-thirds of those uncollected sales taxes.
    This means that when Amazon begins collecting sales taxes in New 
Jersey, they will collect $101 million of the $152 million leaving only 
$51 million in uncollected sales taxes.\3\ Without any change in 
Federal law, New Jersey is already solving much of its uncollected 
sales tax problem.
---------------------------------------------------------------------------
    \3\ This calculation is based on 2011 e-commerce figures. However, 
since Amazon's rate of growth was 41 percent in 2011, the amount of 
sales taxes that Amazon collects in 2014 will likely be much more than 
$101 million.
---------------------------------------------------------------------------
Of the uncollected sales taxes from e-commerce in 2011, the top-500 e-
        retailers accounted for over 90 percent the non-collected 
        taxes.
    As I discussed in the hearing, it is unwise--and unnecessary--to 
burden small business with new costs of tax compliance, since most of 
the uncollected sales taxes come from the top-500 e-retailers--those 
with more than $15 million in annual revenue.\4\
---------------------------------------------------------------------------
    \4\ Analysis based on: Top 500 e-Retailers and total e-commerce 
sales from Internet Retailer, Top 500 Guide, p. 32 (2012 Edition), and 
Top 500 e-retailer tax collection from Eisenach & Litan, Uncollected 
Sales Taxes On Electronic Commerce: A Reality Check, p.17, 25 (Feb. 
2010), available at bit.ly/EisenStudy.
---------------------------------------------------------------------------
    This is especially important when you consider that small 
businesses are the most vulnerable to these new costs of collection, 
and as I showed in my testimony, this ``free'' software comes with 
additional costs and often does not work as advertised.
    By focusing on those retailers at the top end of the graph below, 
states get most of the tax revenue while allowing smaller businesses to 
continue growing into larger ones.



The Internet is all of us, including small main street businesses in 
        New Jersey
    A ``main street'' store and a ``remote seller'' are often one in 
the same. Take for example Montclair Book Center in Montclair New 
Jersey.
    This main street store is ``one of the largest independent 
bookstores in New Jersey, with more than 15,000 square feet.''
    Montclair specializes in rare and out-of-print books and vinyl 
records.
    Beyond its main street presence, Montclair Book Center's website 
reaches customers from all states. And when fulfilling its online 
orders, Montclair Book Center does not collect sales taxes for any 
state other than New Jersey.



    This is the type of business that would be most hurt if Congress 
forced all remote sellers to collect for all 46 states.
    So when you think of ``online sellers'' please understand that term 
encompasses far more than just the top 20 e-retailers, all of whom will 
soon collect for New Jersey. Online sellers also include small New 
Jersey businesses like Montclair Book Center, who use the Internet to 
build their in-state income and employment.

Twelve Key Simplification Provisions For Federal Legislation on Remote 
        Sales Tax Collection
    If Congress were to force remote sellers to collect sales tax for 
all jurisdictions, any such legislation should contain the following 
simplifications:

   1.  States must provide certified software for rate lookup, 
        collection, electronic filing, and funds transfer. Users of the 
        software would be immune from state and civil liability for 
        errors in taxes collected.

   2.  A single sales tax rate per state for remote sales, as was the 
        original goal of the SSTP.

   3.  States should compensate businesses for reasonable costs of 
        collecting sales taxes, including purchase and implementation 
        of software.

   4.  A single set of definitions for taxable and exempt products for 
        all states.

   5.  A single audit conducted by the retailer's home state on behalf 
        of all states and local jurisdictions.

   6.  There should be a common sales tax return for remote sellers to 
        file.

   7.  A single national rule for sourcing sales.

   8.  Harmonization of sales tax holidays and thresholds or optional 
        remote seller exemption from participation in sales tax 
        holidays and thresholds.

   9.  Allow remote sellers to challenge states in Federal district 
        court for disputes on sales tax collection, including whether a 
        state is following congressionally required simplifications.

  10.  Preemption and preclusion of state laws dealing with nexus for 
        remote sellers.

  11.  Collection of sales tax under Federal legislation does not 
        create nexus for any other business purpose.

  12.  A congressionally-determined exception for small businesses.

Summary
    To summarize,

   New Jersey already takes steps to encourage and assist 
        residents in remitting sales taxes on out-of-state purchases;

   New Jersey already collects a majority of sales taxes from 
        e-commerce with all of the top twenty e-retailers collecting 
        for New Jersey by 2014;

   Amazon will soon collect sales taxes for New Jersey; and

   Since over 90 percent of all uncollected sales taxes from e-
        retail sales come the largest of businesses it is unnecessary 
        to saddle small businesses with the big costs of collecting 
        sales taxes.

    I am happy to answer any other questions you may have on this 
issue.
                                 ______
                                 
     Response to Written Question Submitted by Hon. Mark Begich to 
                            Steve DelBianco

    Question. As a Senator of a rural state, I am truly amazed by the 
new opportunities Alaska businesses are able to enjoy through the use 
of the Internet. The Internet allows small businesses all across the 
country to access the global market and reach consumers in any corner 
of the world. For decades, only large businesses and corporations had 
access to the global market, but now small businesses have the 
opportunity to compete for those sales. However, I am concerned that 
the Internet sales tax proposal currently before the U.S. Senate might 
make it harder for small businesses to access these global 
opportunities. Forcing small businesses to collect in 9,600 tax 
jurisdictions nationwide will undoubtedly come with increased costs and 
legal liability. Can you elaborate on the potential costs and 
competitive disadvantages that would be associated with this type of 
change in law?
    Answer. Senator, you are right to worry about the many small Alaska 
businesses that use the Internet to reach new customers. And a new tax 
collection burden falls hardest on small businesses--especially those 
in non-sales tax states like Alaska, where most businesses don't have 
the experience or systems to collect any sales taxes, let alone for 
9,600 jurisdictions.

Examples of Challenges faced by Alaska businesses
    Consider the example of Alaska Photo Graphics of Fairbanks. Created 
by an Alaskan photographer, this website sells large prints and 
beautiful calendars featuring Alaskan landscapes.



    Another example is Oomingmak of Anchorage, who has been selling 
hand-knit Alaskan qiviut scarves and clothes since 1969.



    Both these Alaskan businesses make their products available to 
customers in all fifty states via their online stores. However, neither 
business collects sales taxes for sales to any of these remote states.
    Moreover, neither business collects for online sales shipped to 
customers in Alaskan cities that have a sales tax. This makes the 
burden of collecting for remote states even greater for Alaska Photo 
Graphics and Oomingmak, since they don't have the experience and 
systems to collect any sales taxes, let alone sales taxes for all 9,600 
jurisdictions in 46 states.

Empirical study shows that small businesses spend 17 cents for every 
        tax dollar they collect.
    Aside from such anecdotal evidence, the Streamlined Sales Tax 
Project's own Cost of Collection \5\ study found that a small business 
(under $1M in annual sales) spends 17 cents for every tax dollar it 
collects for states. And even if tax software works as promised, that 
only helps with 2 cents of the 17 cents in costs per dollar collected. 
That leaves small businesses with a 15 percent cost burden on every 
dollar they collect, for things such as:
---------------------------------------------------------------------------
    \5\ Available at http://www.netchoice.org/wp-content/uploads/cost-
of-collection-study-sstp.pdf

   Paying computer consultants to integrate new tax software 
        into their home-grown or customized systems for point-of-sale, 
---------------------------------------------------------------------------
        web shopping cart, fulfillment, and accounting

   Training customer support and back-office staff

   Answering customer questions about taxability of items, or 
        sales tax holidays

   Handling audit questions from 46 states

   Paying accountants and computer consultants to answer all 
        these questions

    These collection burdens will be a big problem for small businesses 
that collect only their home-state sales tax today. Ask any of your 
small business, on main street or online, and you'll learn how hard it 
would be for them to create systems to begin collecting sales tax all 
46 states.

Online marketplaces may impose additional costs, up to 20 percent of 
        sales
    While Amazon says it will charge only about 3 percent for its tax 
collection services, Amazon won't collect taxes for a business unless 
the business already pays Amazon to host its web store--for that, 
Amazon charges a referral fee of 10-20 percent of the sale proceeds, 
plus additional fees.\6\
---------------------------------------------------------------------------
    \6\ Amazon Service Fees, http://www.amazonservices.com/sell-on-
amazon/media-fees.htm/ref
=amb_link_356743102_18?ie=UTF8&pf_rd_m=A2CA1KKALKCX2O&pf_rd_s=top-1&pf_
rd_r=11SNTTXVHCER4S0J4KNK&pf_rd_p=1328499722&pf_rd_t=101&pf_rd_i=soa-
faq
-detail&ld=AZFSSOAAS
---------------------------------------------------------------------------
    So small businesses using Amazon's tax collection services might 
pay up to 20 percent of their sale proceeds, leaving little to pay 
employees and expand their business. And it increases the small 
business' reliance on expensive and established online marketplaces.

Congress should exempt businesses with less than $15 million in annual 
        sales from any new tax collection mandate for out-of-state 
        sales.
    One way to set a realistic small seller exception is to exempt all 
businesses that are out on the ``long tail'' in terms of e-retail 
sales. For example, Internet Retailer publishes a Top 500 Guide each 
year, ranking the Nation's largest retailers on their U.S. e-commerce 
sales. For 2011, the #1 e-retailer was Amazon.com, at $48 billion in e-
retail sales. Number 500 had just $15 million in remote e-retail sales. 
In total, the Top 500 had $181 billion in e-retail sales.
    Economists Eisenach and Litan started with this Top 500 Guide when 
analyzing where each retailer already collected sales tax under Quill's 
physical presence standard. Using their analysis, we estimated that the 
Top 500 were responsible for 93 percent of the uncollected sales tax on 
U.S. e-commerce in 2011, as shown in the graph below \7\ 
(netchoice.org/top500collect).
---------------------------------------------------------------------------
    \7\ Top 500 e-Retailers and total e-commerce sales from Internet 
Retailer, Top 500 Guide, p. 32 (2012 Edition). Top 500 e-retailer tax 
collection from Eisenach & Litan, Uncollected Sales Taxes On Electronic 
Commerce: A Reality Check, p. 17, 25 (Feb. 2010), available at http://
bit.ly/EisenStudy



    Congress could set a small seller exception that adjusts with 
inflation and retail trends by exempting sellers below the Top 500 
cutoff from the previous year. Under this method, the small seller 
exception for 2012 would have been $15 million in annual sales. That 
would leave exempted retailers with a more reasonable gross margin to 
cover expenses, while allowing states to recover over 90 percent of the 
uncollected sales tax on e-retail.

Twelve Key Simplification Provisions For Federal Legislation on Remote 
        Sales Tax Collection
    If Congress were to force remote sellers to collect sales tax for 
all jurisdictions, any such legislation should contain the following 
simplifications:

   1.  States must provide certified software for rate lookup, 
        collection, electronic filing, and funds transfer. Users of the 
        software would be immune from state and civil liability for 
        errors in taxes collected.

   2.  A single sales tax rate per state for remote sales, as was the 
        original goal of the SSTP.

   3.  States should compensate businesses for reasonable costs of 
        collecting sales taxes, including purchase and implementation 
        of software.

   4.  A single set of definitions for taxable and exempt products for 
        all states.

   5.  A single audit conducted by the retailer's home state on behalf 
        of all states and local jurisdictions.

   6.  There should be a common sales tax return for remote sellers to 
        file.

   7.  A single national rule for sourcing sales.

   8.  Harmonization of sales tax holidays and thresholds or optional 
        remote seller exemption from participation in sales tax 
        holidays and thresholds.

   9.  Allow remote sellers to challenge states in Federal district 
        court for disputes on sales tax collection, including whether a 
        state is following congressionally required simplifications.

  10.  Preemption and preclusion of state laws dealing with nexus for 
        remote sellers.

  11.  Collection of sales tax under Federal legislation does not 
        create nexus for any other business purpose.

  12.  A congressionally-determined exception for small businesses.

Summary
    Senator, you are right to be concerned about the small businesses 
that will be hit hardest by these new tax collection burdens. And we 
should also consider the anti-competitive nature of forcing small 
growing businesses to rely on their large and established competitors 
for tax collection services. However, by setting a robust 
Congressionally-mandated small seller threshold along with the other 
minimum simplifications listed here, we can protect all Alaska 
businesses from the high burdens of collection.
    I am happy to answer any other questions you may have on this 
issue.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Jim DeMint to 
                            Steve DelBianco

    Question 1. If we give states this new taxing power on the basis 
that they simplify their tax codes, how do we make sure states stick to 
the simplification, and what do we do if the costs to businesses turn 
out to be much higher than we're being told today?
    Answer. Naturally, state tax collectors would prefer new tax 
revenue without undertaking any simplification or standardization of 
their tax systems. This is why, as you correctly identified, there are 
two necessary components to legislation that grants new taxing powers: 
simplicity and accountability.

Minimum Simplifications
    Because of the new tax burdens of compliance, previous 
congressional legislation to overturn Quill included as many as 16 
minimum simplification requirements that SSTP states would have to 
honor. Congress should continue to mandate simplification in any bill 
that overturns Quill.
    To that end, we developed the following list of minimum 
simplifications that mitigates some of the new tax burdens imposed by 
legislation such as the MFA.

   Remote retailers should not be subject to audits from 46 
        separate state tax authorities. States should respect the 
        outcome of a single audit by any state, on behalf of all 
        states.

   Remote retailers should be allowed to use a single sales tax 
        rate for remote sales made into each state, which was the 
        original goal of the SSTP. State lawmakers would, of course, be 
        able to allocate sales tax proceeds among local jurisdictions.

   States should be required to adopt a single set of 
        definitions for taxable and exempt products across all states.

   States should compensate all businesses for the fair and 
        reasonable cost of collecting sales taxes, taking into account 
        such elements as credit card fees and costs of software 
        implementation and maintenance. Compensation was required in 
        previous Federal legislation to overturn the Quill physical 
        presence standard, but was dropped in recent versions.

   Remote businesses should not be required to file sales tax 
        returns for all 46 states. All states should accept a single 
        sales tax return filed with a business' home state. The home 
        state revenue department would be responsible for distributing 
        funds to remote states.

   Remote retailers should not be required to honor, but may 
        observe, thresholds for sales tax calculation. (an example of a 
        threshold is Massachusetts, where the first $175 of any 
        clothing item is exempt from sales tax.\1\)
---------------------------------------------------------------------------
    \1\ Mass. Dept. of Revenue, A Guide to Sales and Use Tax, http://
www.mass.gov/dor/individuals/taxpayer-help-and-resources/tax-guides/
salesuse-tax-guide.html#apparel

   Remote retailers should not be required to honor state-
---------------------------------------------------------------------------
        specific sales tax holidays.

   States should be required to adopt a single rule for 
        sourcing sales. The SSTP originally maintained destination 
        sourcing for all sales tax transactions. But to accommodate 
        origin-based states, SSTP's Governing Board voted to allow 
        origin sourcing for in-state sales while requiring destination 
        sourcing for remote sales. Such ``dual sourcing'' should not be 
        permitted as part of any Federal legislation overturning the 
        physical presence standard.

   States must provide certified software for collection, 
        filing, and remittance of taxes. Some proposed legislation 
        requires only that states provide software ``that identifies 
        the applicable destination rate''. That leaves remote 
        businesses to bear the full cost of integrating the rate lookup 
        into their in-house systems and processes. And the business 
        would also have to pay for software to handle filing and 
        remittance in 46 different states.

    Once Congress has dictated the minimum simplifications, the next 
challenge is how to hold participating states accountable for 
compliance. We recommend two ways to achieve compliance: the ability to 
challenge states in Federal district court; and creating a multi-state 
compact instead of a nationwide tax mandate.

Challenges in Federal District Court
    Remote-seller tax legislation must include a mechanism for 
businesses to challenge a state in Federal district court if the state 
fails to comply with the statutory minimum simplifications. But under 
the Tax Injunction Act (28 U.S.C. Sec. 1341), taxpayers are forced to 
use state courts to litigate disputes with state tax collection 
authorities, even on questions of whether a remote state is following 
Federal law.
    To ensure that states stick with required simplifications, Federal 
district courts should have jurisdiction over disputes arising between 
states and remote businesses regarding a state's compliance with 
Federal law.

Multi-State Compact
    Congress should retain the benefits of market discipline to 
restrain states from expanding the complexity of their sales tax 
systems and skirting the minimum simplification requirements. 
Fortunately, Congress has a simple way to enforce ``tax competition'' 
as part of any legislation that overturns the physical presence 
standard: Congress could authorize remote collections through a multi-
state compact instead of a national mandate on all businesses.
    Proposed legislation to overturn Quill would impose collection 
burdens on businesses in all 50 states--including businesses in states 
that don't even have a sales tax. Lawmakers in all 50 states would lose 
the sovereign right to protect their citizens and businesses from tax 
burdens imposed by other states.
    If these new collection burdens are hurting businesses in a state, 
their own legislators won't be able to rescue those businesses if 
Congress makes collection mandatory for all. This comes as a surprise 
to many lawmakers who are beginning to understand the impact of a 
national mandate ironically described by advocates as supporting 
states' rights.
    Contrast the national mandate in S. 1832 with a multi-state 
compact, where states could opt-in if they believed new tax revenues 
justified forcing their in-state business collect taxes for other 
states in the compact. By the same token, states could opt-out of the 
compact if remote state tax burdens were excessive. States opting-out 
would lose the power to force remote sellers to pay their sales tax, 
but at least states could protect their own businesses from 
unreasonable burdens on interstate commerce.

    Question 2. Have you considered the option of allowing remote 
taxation only among and between those states that choose to comply with 
the MFA's criteria?
    Answer. We support a multi-state compact as the best way to ensure 
compliance and preserve states' rights. By treating the MFA as a multi-
state compact as opposed to a mandate, states maintain sovereignty over 
their taxes and protect their own businesses from tax collection 
obligations imposed by other states. In addition, states within the 
compact must achieve and maintain simplicity to encourage adoption and 
continued membership in the compact.
    With a multi-state compact, Congress can maintain states' rights 
while retaining the benefits of market discipline to restrain states 
from expanding the complexity of their sales tax systems. To that end, 
Congress has a simple way to enforce ``tax competition'' as part of any 
legislation that overturns the physical presence standard: Congress 
could authorize remote collections through a multi-state compact 
instead of a national mandate on all businesses.
    Proposed legislation would impose collection burdens on businesses 
in all 50 states--including those in states that don't even have a 
sales tax. Lawmakers in all 50 states would lose the sovereign right to 
protect their citizens and businesses from tax burdens imposed by other 
states.
    If these new collection burdens are hurting businesses in a state, 
their own legislators won't be able to rescue those businesses if 
Congress makes collection mandatory for all. This comes as a surprise 
to many lawmakers who are beginning to understand the impact of a 
national mandate ironically described by advocates as supporting 
states' rights.
    Contrast the national mandate in S. 1832 with a multi-state 
compact, where states could opt-in if they believed new tax revenues 
justified having their in-state business collect taxes for other states 
in the compact. By the same token, states could opt-out of the compact 
if remote state tax burdens were excessive. States opting-out would 
lose the power to force remote sellers to pay their sales tax, but at 
least states could protect their own businesses from unreasonable 
burdens on interstate commerce.
    For example, suppose South Carolina decided to opt-in to a multi-
state tax compact. If, after many months of collecting new taxes, South 
Carolina businesses begin complaining of the costs of collecting and 
filing for 45 other states, South Carolina can then opt-out of the 
compact. South Carolina would no longer receive the additional tax 
revenue, but it would retain its sovereign right to protect its in-
state businesses from other states' tax collectors.
    Moreover, the multi-state compact becomes a test of whether the 
benefits of new taxes outweigh the compliance costs on local 
businesses. If MFA advocates are correct in their belief that 
compliance costs will be minimal, states would rush to join a 
Congressionally-endorsed tax compact. In the end, if the MFA advocates 
are correct, all 46 tax states would join the compact thereby requiring 
their states' businesses to collect and remit to the other compact 
states.

    Question 3. In testimony before the Committee, one of the sponsors 
of the Marketplace Fairness Act indicated that taxation would be 
applied based on the credit card billing address of a purchaser. Do you 
believe this is accurate, and that the question of appropriate tax 
application is that simple?
    Answer. The Marketplace Fairness Act uses a layered approach in 
determining the appropriate tax jurisdiction. However, the steps of 
determining tax jurisdiction and rate are only a small part of the 
costs of compliance for businesses.
    The MFA first attempts to apply taxes based on the shipping 
address, or destination. If shipping address is not applicable (such as 
for digital media delivered by download), the tax is sourced to the 
customer's billing address. Finally, if billing address is unknown, the 
transaction is sourced to the shipper's address.\2\
---------------------------------------------------------------------------
    \2\ Marketplace Fairness Act Sec. 6(8).
---------------------------------------------------------------------------
    Once sourcing is determined, the applicable tax rate can be found 
through a database lookup function, taking into account the date, sale 
amount, and product/service category. If the lookup software works as 
advertised, determining the appropriate tax rate is relatively easy. 
But identifying the applicable tax rates is only a small part of the 
new costs that a business would face under the MFA or similar 
legislation.
    The SST's own Cost of Collection \3\ study found that a small 
business (under $1 million in annual sales) currently spends 17 cents 
for every tax dollar it collects for states. And even if tax software 
works as promised, that only helps with 2 cents of the 17 cents in 
costs per dollar collected. That leaves small businesses with a 15 
percent cost burden on every dollar they collect for things such as:
---------------------------------------------------------------------------
    \3\ Price Waterhouse Coopers, Retail Sales Tax Compliance Costs: A 
National Estimate, available at http://www.netchoice.org/wp-content/
uploads/cost-of-collection-study-sstp.pdf.

   Paying computer consultants to integrate new tax software 
        into their home-grown or customized systems for point-of-sale, 
---------------------------------------------------------------------------
        web shopping cart, fulfillment, and accounting

   Training customer support and back-office staff

   Answering customer questions about taxability of items or 
        sales tax holidays

   Handling audit questions from 46 states

   Paying accountants and computer consultants to answer all 
        these questions

    These collection burdens will be a big problem for small catalog 
and online businesses that collect only their home state sales tax 
today. Ask any small business, on Main Street or online, and you'll 
learn it's hard enough to collect sales tax for one state, let alone 
all 46 states with sales tax laws of their own.
    One of the most significant costs and challenges for remote 
retailers is integrating tax rate lookup software into their in-house 
information systems. This point was demonstrated when the Silver 
Gallery explained to the Streamlined Sales Tax Governing Board how they 
would incur nearly $22,000 in costs for design, programming, 
integration, testing, and employee training. This cost estimate was 
developed for the task of integrating ``free'' software into Silver 
Gallery's existing information systems.
    Sourcing and rate lookup are only a small part of the costs of 
compliance imposed by the MFA.

    Question 4. We have heard the term ``showrooming'' often spoken of 
in a negative way. It has been stated that consumers ``showroom'' in 
order to purchase from online sources primarily or exclusively to 
``avoid'' paying sales tax.

    Question 4a. Do you think it is wrong that consumers are empowered 
by technology and retail competition to locate what they consider the 
best price for the product they seek?
    Answer. Empowering consumers through technology is a net positive, 
since it encourages competition among businesses and saves consumers 
money.
    However, shoppers don't always walk out of a store just to get a 
lower price at a different store or website. Many other factors come 
into play, including convenience, features, color, size, and service.
    For example, surveys show that the top consideration for people 
shopping online is free shipping,\4\ so consumers are not likely to 
leave a store and buy online if they have to pay additional costs for 
shipping.
---------------------------------------------------------------------------
    \4\ Kantar Media Complete, The State of Online Retail (Sept. 13, 
2011)
---------------------------------------------------------------------------
    Even when prices are lower online, sixty percent of Americans still 
prefer to make purchases in-store rather than go online.\5\ And it's 
essential to remember that 93 percent of retail sales are still done in 
stores.\6\
---------------------------------------------------------------------------
    \5\ MarketingCharts (Dec. 6, 2012), available at Khttp://
www.marketingcharts.com/wp/interactive/6-in-10-americans-prefer-
shopping-in-store-to-buying-online-25244
    \6\ Forrester Research: Web-Influenced Retail Sales Forecast, 2010-
2015 (US).
---------------------------------------------------------------------------
    This makes sense, since shoppers buying in stores enjoy the instant 
gratification of taking the item home instead of waiting for a delivery 
to arrive days later. And of course, returns and exchanges are far 
easier in store, compared to having to package and stand in line at the 
post-office to return items bought online.
    For American consumers who prefer online shopping, retailers are 
offering a ``brick and click'' model that provides the benefits of 
online research and selection along with the convenience of in-store 
pickups, exchanges, and returns. Under this new model, Wal-Mart allows 
customers to buy online at WalMart.com and then pick-up and return in 
store (WalMart.com is now the Nation's fourth largest e-retailer \7\). 
Many other retail stores set-up in-store kiosks so shoppers can easily 
order online products that may be unavailable in the store.
---------------------------------------------------------------------------
    \7\ Top 500 e-Retailers and total e-commerce sales from Internet 
Retailer, Top 500 Guide, p. 32 (2012 Edition).
---------------------------------------------------------------------------
    While it is beneficial to empower consumers and encourage price 
competition, businesses are not competing on price alone.

    Question 4b. How often does ``showrooming'' lead to a purchase 
being made online, but from a source required to collect sales tax?
    Answer. Evidence of showrooming is anecdotal and we have not yet 
seen any data indicate the frequency with which it occurs.
    But when showrooming does happen, buyers are increasingly turning 
to an e-retailer that already collects taxes. In 2011, 18 of the top 20 
e-retailers collected for 38 states.\8\ These top e-retailers included 
many big box stores: Staples.com Walmart.com, OfficeDepot.com and 
BestBuy.com.
---------------------------------------------------------------------------
    \8\ Id.
---------------------------------------------------------------------------
    At the top of the list is Amazon.com with 25 percent of total U.S. 
e-commerce.\9\ However, by the end of next year, Amazon will be 
collecting for over half the country. And as Amazon moves to a same 
day-delivery model, it will continue increasing the number of states in 
which it has a distribution center and thus increasing the number of 
states for whom Amazon must collect.
---------------------------------------------------------------------------
    \9\ Id.
---------------------------------------------------------------------------
    An often-ignored aspect of online retail is ``reverse showrooming'' 
where online stores influence in-store purchases. More and more 
shoppers are doing Internet research before their in-store purchases--
relying on online retail sites' descriptions and reviews. Over the next 
year, in-store sales influenced by online research is expected to rise 
by $120 billion to $1.2 trillion.\10\
---------------------------------------------------------------------------
    \10\ Forrester Research: Web-Influenced Retail Sales Forecast, 
2010-2015 (U.S.).
---------------------------------------------------------------------------
    It would seem that in the end, most taxes from online sales, 
whether compelled by showrooming or not, will be collected.

    Question 4c. Do you believe there are reasons other than sales tax 
collection that lead consumers to purchase from an online source versus 
a physical retailer?
    Answer. There are many factors that lead a consumer to shop online, 
such as convenience, selection, lower prices, and the ease of finding 
research and reviews. Online shopping provides in-depth product 
information and reviews, eliminates having to drive to the store or 
deal with long checkout lines, and lets buyers have hard-to-carry items 
delivered to their doorstep.
    While sales taxes may be a factor, we have not seen any data 
showing that consumers shop online in order to avoid paying sales 
taxes. Taxes are just part of the total cost of a product, and only one 
factor among many that would lead a consumer to shop online.
    These non-price factors are driving more and more people to shop 
online. More and more sales are occurring through e-retailers who 
already collect sales taxes, including Staples.com Walmart.com, 
OfficeDepot.com and BestBuy.com.\11\
---------------------------------------------------------------------------
    \11\ Top 500 e-Retailers and total e-commerce sales from Internet 
Retailer, Top 500 Guide, p. 32 (2012 Edition).
---------------------------------------------------------------------------
    As evidence that sales tax avoidance is not a major driver of 
online sales, consider the case of Amazon.com in the growing list of 
states where it collects sales tax.
    In a conference call with equity analysts on July 26, 2012, Amazon 
executives fielded questions about the sales impact of collecting sales 
tax in more and more states. The company's CFO said:

        ``We have also certainly added some new geographies or new 
        jurisdictions that we clocked during that time period. But you 
        see that we have seen very very strong growth even while 
        collecting.'' \12\
---------------------------------------------------------------------------
    \12\ Tom Szkutak, CFO, in a transcript of Amazon's Q2 2012 Earnings 
Call, http://seek
ingalpha.com/article/754571-amazon-com-s-management-discusses-q2-2012-
results-earnings-call
-transcript?part=single

    There's additional evidence that sales tax is not the driving 
factor for buying on Amzon.com. Amazon began collecting sales tax in 
California on September 15, 2012 because it has physical presence there 
with its Kindle labs and new distribution centers. Even though 
customers in one of Amazon's largest markets saw an 8 percent effective 
price increase, the company did not warn analysts about any impending 
drop in sales.
    On Amazon's October 25, 2012 conference call to discuss Q3 results, 
an analyst asked,

        ``I know it's early, but is there a noticeable impact on sales 
        of having to collect sales tax in California?''

    Amazon's CFO replied,

        ``You're right that it's early. The only thing I can say is 
        that we collect sales tax or value-added tax on over 50 percent 
        of our revenue today. We have very good businesses in those 
        states and geographies where we do collect.'' \13\
---------------------------------------------------------------------------
    \13\ Amazon, Q3 2012 Amazon.com Inc Earnings Conference Call, 
available at http://phx
.corporate-ir.net/phoenix.zhtml?p=irol-
eventDetails&c=97664&eventID=4849777

    This helps demonstrate our contention that American consumers go 
online seeking better selection, convenience, and lower prices--they 
---------------------------------------------------------------------------
don't shop online to avoid paying sales taxes.

    Question 5. It has been stated that, without the interstate 
regulatory authority granted to states by the MFA, income and/or 
property taxes will likely be increased by states. Can you provide the 
Committee an idea of the aggregate amount of property tax exemptions 
received by retail establishments and commercial developers over the 
last decade and the related ``lost'' revenue to states and localities?
    Answer. It should first be noted that the amount of new tax revenue 
that would come from bills like the MFA is grossly over-stated. A 
simple calculation using government data shows that the maximum sales 
tax potential for consumer e-commerce is less than one percent of total 
state and local tax revenue:

        Start with the U.S. Department of Commerce's 2010 Electronic 
        Commerce Industry Assessment, which reported total retail e-
        commerce of $169 billion.\14\
---------------------------------------------------------------------------
    \14\ U.S. Census Bureau E-Stats, http://www.census.gov/econ/estats/
2010/2010reportfinal.pdf

        Apply an average tax rate of 7 percent, giving total potential 
---------------------------------------------------------------------------
        sales tax of $11.8 billion.

        Divide that by total state and local tax revenue in 2010, 
        reported as $1.3 trillion by the Commerce Department.\15\
---------------------------------------------------------------------------
    \15\ Id.

    The result is clear: the maximum potential sales tax on all e-
commerce is less than one percent of state & local tax revenue--
assuming that no sales taxes are collected by e-retailers.
    But under today's Quill standard, e-retailers already collect sales 
tax for states where they have physical presence. NetChoice 
commissioned a study by economists Robert Litan and Jeffrey Eisenach to 
determine where e-retailers were already collecting sales tax for web 
sales.
    They concluded that uncollected sales tax on e-commerce in 2010 was 
$4.2 billion nationwide, or less than one-third of one percent of total 
state and local tax revenue.\16\ This relatively small incremental 
revenue does not justify a dramatic expansion of state taxing powers 
and new collection burdens on remote businesses.
---------------------------------------------------------------------------
    \16\ Eisenach & Litan, Uncollected Sales Taxes On Electronic 
Commerce: A Reality Check, Empiris LLC (Feb. 2010), available at http:/
/bit.ly/EisenStudy
---------------------------------------------------------------------------
    Second, as you correctly noted, state and local governments often 
provide incentives and benefits to in-state retailers, such as tax 
increment financing, transportation improvements, worker training 
subsidies, grants, tax credits, property and income tax incentives, 
etc. None of these benefits are available to out-of-state businesses.
    While we do not have specific data on the total ``lost'' revenue, 
we can provide the following examples of state benefits:

   In January 2002, the State of Maine agreed to provide Wal-
        Mart with $16.7 million in subsidies. In return, Wal-Mart 
        decided to build a 480,000 square foot distribution center in 
        Lewiston.

   In 2003, Millerville, NJ agreed to provide Target with $1 
        million toward the costs of improving existing infrastructures 
        for the under-developed area for a new Target store.

   And most recently we have seen examples of tax forgiveness 
        and deferrals of tax obligations given to Amazon for the 
        construction and continued operation of distribution centers in 
        Pennsylvania, Virginia, and Texas.

    Please note that NetChoice respects the rights of states to offer 
incentives to businesses as the states expect to gain new jobs and 
associated tax revenue.
    Nonetheless, when weighing benefits and burdens of Main Street 
versus the Internet, we ask Congress remember that brick-and-mortar 
stores enjoy significant service and tax benefits--benefits not 
available to out-of-state retailers.