[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
EXPLORING ALTERNATIVE SOLUTIONS ON
THE INTERNET SALES TAX ISSUE
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
MARCH 12, 2014
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Serial No. 113-65
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Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin JERROLD NADLER, New York
HOWARD COBLE, North Carolina ROBERT C. ``BOBBY'' SCOTT,
LAMAR SMITH, Texas Virginia
STEVE CHABOT, Ohio ZOE LOFGREN, California
SPENCER BACHUS, Alabama SHEILA JACKSON LEE, Texas
DARRELL E. ISSA, California STEVE COHEN, Tennessee
J. RANDY FORBES, Virginia HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE KING, Iowa Georgia
TRENT FRANKS, Arizona PEDRO R. PIERLUISI, Puerto Rico
LOUIE GOHMERT, Texas JUDY CHU, California
JIM JORDAN, Ohio TED DEUTCH, Florida
TED POE, Texas LUIS V. GUTIERREZ, Illinois
JASON CHAFFETZ, Utah KAREN BASS, California
TOM MARINO, Pennsylvania CEDRIC RICHMOND, Louisiana
TREY GOWDY, South Carolina SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho JOE GARCIA, Florida
BLAKE FARENTHOLD, Texas HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina DAVID N. CICILLINE, Rhode Island
DOUG COLLINS, Georgia
RON DeSANTIS, Florida
JASON T. SMITH, Missouri
[Vacant]
Shelley Husband, Chief of Staff & General Counsel
Perry Apelbaum, Minority Staff Director & Chief Counsel
C O N T E N T S
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MARCH 12, 2014
Page
OPENING STATEMENTS
The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Chairman, Committee on the Judiciary 1
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, and Ranking Member, Committee on
the Judiciary.................................................. 3
WITNESSES
Stephen P. Kranz, Partner, McDermott Will & Emery, LLP
Oral Testimony................................................. 27
Prepared Statement............................................. 30
William E. Moschella, Shareholder, Brownstein Hyatt Farber
Schreck, LLP
Oral Testimony................................................. 63
Prepared Statement............................................. 65
James H. Sutton, Jr., CPA, ESQ., Moffa, Gainor, & Sutton, PA
Oral Testimony................................................. 72
Prepared Statement............................................. 74
Joseph R. Crosby, Principal, Multistate Associates Incorporated
Oral Testimony................................................. 96
Prepared Statement............................................. 98
Andrew Moylan, Senior Fellow and Outreach Director, R Street
Institute
Oral Testimony................................................. 117
Prepared Statement............................................. 119
The Honorable Chris Cox, Counsel, NetChoice, Partner, BIngham
McCutchen LLP
Oral Testimony................................................. 135
Prepared Statement............................................. 137
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Material submitted by the Honorable Bob Goodlatte, a
Representative in Congress from the State of Virginia, and
Chairman, Committee on the Judiciary........................... 5
Material submitted by the Honorable Henry C. ``Hank'' Johnson,
Jr., a Representative in Congress from the State of Georgia,
and Member, Committee on the Judiciary......................... 181
Material submitted by the Honorable Steve King, a Representative
in Congress from the State of Iowa, and Member, Committee on
the Judiciary.................................................. 191
Material submitted by the Honorable Suzan DelBene, a
Representative in Congress from the State of Washington, and
Member, Committee on the Judiciary............................. 208
EXPLORING ALTERNATIVE SOLUTIONS ON THE INTERNET SALES TAX ISSUE
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WEDNESDAY, MARCH 12, 2014
House of Representatives
Committee on the Judiciary
Washington, DC.
The Committee met, pursuant to call, at 10:08 a.m., in room
2141, Rayburn Office Building, the Honorable Bob Goodlatte
(Chairman of the Committee) presiding.
Present: Representatives Goodlatte, Coble, Smith of Texas,
Chabot, Bachus, Issa, Forbes, King, Franks, Gohmert, Jordan,
Poe, Chaffetz, Marino, Gowdy, Labrador, Farenthold, Holding,
Collins, DeSantis, Smith of Missouri, Conyers, Nadler, Scott,
Lofgren, Jackson Lee, Cohen, Johnson, Pierluisi, Chu, Deutch,
Bass, Richmond, DelBene, Garcia, Jeffries, and Cicilline.
Staff present: (Majority) Shelley Husband, Chief of Staff &
General Counsel; Branden Ritchie, Deputy Chief of Staff & Chief
Counsel; Allison Halataei, Parliamentarian and General Counsel;
Daniel Huff, Counsel; Kelsey Deterding, Clerk; (Minority) Perry
Apelbaum, Minority Staff Director & Chief Counsel; Danielle
Brown, Parliamentarian; and Norberto Salinas, Counsel.
Mr. Goodlatte. Good morning. The Judiciary Committee will
come to order. And without objection, the Chair is authorized
to declare recesses of the Committee at any time.
We welcome everyone to this morning's hearing on exploring
alternative solutions on the internet sales tax issue. And we
will take note that this morning Sir Tim Berners-Lee, who is
widely credited as being the inventor of the worldwide web,
announced that today is the 25th anniversary of the internet,
so we will take note of that as well. I think Sir Tim Berners-
Lee has more credibility on the issue.
I will recognize myself for an opening statement.
Over the last 3 years, shopping center foot traffic has
fallen 50 percent. In January, JC Penney announced it would
close 33 stores and cut 2,000 positions. Radio Shack is
shuttering about 500 retail stores nationwide. Most recently,
Staples announced that it will close 225 stores over the next
year.
Meanwhile, internet commerce is booming. Fourth quarter
U.S. retail e-commerce sales were $69.2 billion, up 16 percent
from the same period in 2012. With e-commerce just 6 percent of
total retail sales, there is much room for continued rapid
growth. In part, these trends reflect structural advantages
internet retailers enjoy, like lower store overhead.
Congress should not interfere in the natural evolution of
the markets. However, many argue that unfair sales tax laws are
contributing to these trends. Congress should examine this
problem and potential solutions.
In Quill v. North Dakota, the Supreme Court reaffirmed a
longstanding rule: sellers cannot be forced to collect sales
taxes for States in which they have no physical presence
because compliance would unduly burden interstate commerce. The
commerce clause requires physical presence in order to address
structural concerns about the effects of State regulation on
the national economy.
Under the Articles of Confederation, State taxes had
hindered interstate commerce, and the commerce clause sought to
remedy such burdensome State laws. However, the Supreme Court
has also indicated that Congress has the ability to relax the
physical presence test if Congress determines that there is no
longer a burden on interstate commerce by the State activity in
question.
Traditional retailers argue that the physical presence test
puts them at a distinct disadvantage to their online
counterparts who do not collect sales tax. Numerous retailers
have brought Congress personal examples of what they call show
rooming. Consumers go to a store, draw on the retailer's
knowledge, and then buy the item online specifically to save
the sales tax.
Technically, consumers in the 45 States with a sales tax
still owe it if it is not collected by the seller. This nearly
identical obligation is known as a use tax. However, it is
widely ignored by consumers and unenforced by States for both
practical and political reasons. States estimate the annual
lost revenue at $23 billion.
The Senate solution to this problem, the Marketplace
Fairness Act, ostensibly lets states that simplify their tax
rules force remote sellers to collect. In practice, the bill
suffers from fundamental defects in 3 categories. First, the
tax is already owed, but the public still views the bill as
Congress taxing the internet. In a June 2013 Gallup poll, 57
percent of Americans opposed it. Opposition among young voters
was 73 percent.
Second, compliance was not sufficiently simple. The bill
required states to provide free software, but did not address
integration costs. Furthermore, compliance software does not
help the direct mail industry, and the bill provides no method
for handling use-based exemptions common in agriculture and
medical device sales.
Other complications abound. Compliance costs estimates vary
widely. There are over 9,600 taxing jurisdiction, and the
Affordable Care Act experience has left voters wary of highly-
touted software solutions.
One of the most significant defects is that the bill
exposes remote sellers to multiple audits in jurisdictions in
which they have no voice. Legislators prefer to impose taxing
burdens on those least able to hold them accountable. That is
why hotel taxes are so high--18.27 percent in Manhattan. These
taxes fall primarily on out of towners who cannot vote.
Similarly, remote sellers have no direct recourse to protest
unfair or unwise enforcement, making them prime targets.
That said, the Committee is sympathetic to the plight of
traditional retailers. It is serious about searching for a
solution that the various parties can accept. The issue is just
far more complex than it seems at first glance. If Congress is
to act, it must do so deliberately and precisely to avoid a
cacophony of 9,600 taxing jurisdictions fighting over what is
required.
Accordingly, on September 18, 2013, the Judiciary Committee
published seven principles regarding remote sales tax. The
principles were intended to spark fresh, creative solutions. In
the months following, the Committee received a number of ideas
in response to the principles.
This hearing will examine these ideas in depth. One witness
representing each idea the Committee would like to explore will
advocate for it and defend it against criticisms from fellow
panelists. The merits and shortcomings of each approach will be
exposed. The aim is to start winnowing down the proposals to
see if there are any that can garner support from all sides.
There have been more than 30 congressional hearings on this
issue since 1994. New approaches are needed, and these
witnesses will present some today. I look forward to their
testimony and ask everyone to keep an open mind, and hope no
one finds today's proceedings too taxing. [Laughter.]
And it is now my pleasure to recognize the gentleman from
Michigan, the Ranking Member of the Committee, Mr. Conyers, for
his opening statement.
Mr. Conyers. Thank you, Chairman Goodlatte, and Members of
the Committee, and our distinguished witnesses, including a
former Member. Today's hearing focuses on alternatives to those
prior legislative initiatives, and I welcome the discussion on
these ideas.
State governments rely on sales and use taxes for nearly
one-third of their total tax revenue. Yet as more Americans
purchase more of their goods on the internet, the State
receives less in sales tax revenue. For example, in my State of
Michigan, the Department of Treasury estimates the total
revenue lost to remote sales will total $290 million this
Fiscal Year.
Lost tax revenues mean that State and local governments
will have fewer resources to provide their residents essential
services, like education, and police, and fire protection. It
also means fewer funds to pay for basic necessities, like salt
to melt the ice and snow and asphalt to fill the potholes.
Uncollected sales taxes also have a negative impact on our
local communities. Fewer purchases at local retailers obviously
translate to fewer local jobs, and eventually the closing of
stores. The unfair advantage that remote sellers have by not
collecting sales taxes hurts us all.
Congress should not delay any further.
In its 1992 Quill decision already referred to by the
Chairman, the Supreme Court recognized that Congress is best
suited to determine whether a remote seller must collect sales
taxes. Congress has yet to make that critical determination.
And so we owe it to our local communities, our local retailers,
and State and local governments to act before the end of this
year.
I am pleased that today's hearing provides us the
opportunity to take that next step toward resolving this issue.
Although I would prefer to mark up the Senate-passed
Marketplace Fairness Act and to consider amendments to further
improve it, I welcome the opportunity to hear workable
alternative proposals. This issue is a prime opportunity for
all of us to work on a bipartisan basis on legislation, but it
is imperative that we do so this year.
So I thank Chairman Goodlatte for holding this hearing
today, and I stand ready to work with him and all Members of
this Committee to move legislation through this Congress. But
we should not delay any further. Thank you. That concludes my
statement.
Mr. Goodlatte. Thank you, Mr. Conyers. I appreciate the
good bipartisan work that has gone into this effort thus far,
and we look forward to continuing that.
Before we hear from our witnesses, I am going to ask
unanimous consent to insert in the record a series of letters
sent to the Committee in advance of the hearing. Many folks
have wanted to testify. There are limits on the numbers who
could. Some of these letters are in favor of particular
approaches, others are opposed, but all are generally
supportive of the process the Committee has put in place.
They are from the Cigar Association of America; the
Consumer Electronics Association; the International Council of
Shopping Centers; the Streamline Sales Tax Governing Board; the
National Association of Electrical Distributors; the National
Association of Realtors; the Agricultural Retailers Association
and National Council of Farmers Cooperatives; Amazon.com; the
City of Plano; National Association of Real Estate Investment
Trusts; and the National Retail Federation.
Without objection, they will all be inserted into the
record.
[The information referred to follows:]
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Mr. Goodlatte. We welcome our distinguished panel today,
and if you would all rise, we will begin, as is the custom of
this Committee, by swearing you in.
[Witnesses sworn.]
Mr. Goodlatte. Let the record reflect that all of the
witnesses responded in the affirmative. Thank you. And I will
begin by introducing Mr. Stephen Kranz, a partner at McDermott
Will & Emery in Washington, D.C. He engages in all forms of
taxpayer advocacy, including audit, defense, and litigation,
legislative monitoring, and formation and leadership of
taxpayer coalitions.
Steve is at the forefront of State and local issues,
including developments arising in the world of cloud computing
and digital goods and services. Mr. Kranz was recognized by
State Tax Notes as one of the top 10 tax lawyers and as one of
the top 10 individuals who influenced tax policy and practice
for 2011.
Mr. Kranz received his B.A. magna cum laude from the
University of North Dakota and his J.D. with honors from Drake
University Law School.
Mr. Will Moschella is a shareholder at Brownstein Hyatt
Farber & Schreck. He previously served as principal associate
deputy attorney general for the Department of Justice, advising
the deputy attorney general on a range of law enforcement,
national security, and general administrative matters. In 2003,
the Senate confirmed him as assistant attorney general for the
Office of Legislative Affairs.
Mr. Moschella has also served in a number of high-profile
Capitol Hill positions, including chief counsel to the House
Judiciary Committee and general counsel to the House Committee
on Rules. Mr. Moschella received his B.A. from the University
of Virginia and his J.D. from George Mason University School of
Law.
Mr. James H. Sutton, Jr. is a shareholder at Moffa, Gainor
& Sutton. He concentrates on Florida tax matters with an almost
exclusive focus on Florida's sales and use tax. He has been a
licensed certified public accountant since 1994 and a licensed
member of the Florida Bar since 1998. Mr. Sutton has 8 years of
experience handling a wide variety of State tax planning and
consulting work for Fortune 1000 companies.
Mr. Sutton is an adjunct professor of law at Boston
University and Stetson University College of Law, where he
teaches State and local tax, accounting for lawyers, and sales
and use tax law.
Mr. Sutton is a graduate of Stetson University, received a
master's from Mississippi State University, his J.D. from
Stetson University College of Law, and his master of laws in
taxation from the University of Florida, Levin College of Law.
Mr. Joe Crosby is a principal at MultiState Associates
Incorporated. Previously he spent 11 years as chief operating
officer and senior director on policy with the Council on State
Taxation, an association representing 600 of the Nation's
largest companies on State and local business tax issues. He is
a nationally recognized expert on State on local business tax
policy.
Prior to his work with the Council on State Taxation, Mr.
Crosby was national director of State Legislative Services for
Ernst & Young. He is past president of the State Government
Affairs Council, the premiere national association for
multistate government affairs executives.
He earned his B.A. from Loyola-Marymount University in Los
Angeles, and completed graduated coursework in economic policy
at American University here in Washington.
Andrew Moylan is outreach director and senior fellow for R
Street where he heads coalition efforts, conducts policy
analysis, and serves as the organization's lead voice on tax
issues.
Prior to joining R Street, Mr. Moylan was vice president of
government affairs for the National Taxpayers Union, a
grassroots taxpayer advocacy organization. He previously served
with the Center for Educational Freedom at the Cato Institute
and completed internships in the U.S. Senate and the House of
Representatives with members from his home State of Michigan.
Mr. Moylan's writings have appears in such publications as the
Wall Street Journal, the New York Times, and the Weekly
Standard.
He holds a degree in political science from the University
of Michigan.
Mr. Chris Cox appears today as counsel for NetChoice. He is
also a partner at Bingham McCutchen, LLP, where he is focused
on Federal and State governments, cross-border investment,
homeland security, and multistate litigation.
During a 23-year Washington career, Mr. Cox was chairman of
the U.S. Securities and Exchange Commission, Chairman of the
House Committee on Homeland Security, the 5th ranking elected
member in the House, and a 17-year Member of the House from
California.
Mr. Cox received his B.A. from the University of Southern
California. He is a graduate of Harvard Law School, where he
was an editor of the Law Review. After graduating, he clerked
for Judge Choy in the United States Court of Appeals for the
9th Circuit. Mr. Cox also holds an M.B.A. from Harvard Business
School where he later taught corporate and individual income
tax.
Welcome to all of you, and a special welcome to our former
colleague, Congressman Cox.
I ask that each summarize his or her testimony in 5 minutes
or less. To help you stay within that time, there is a timing
light on your table. When the light switches from green to
yellow, you will have 1 minute to conclude your testimony. When
the light turns red, that is it. It is done. And it signals the
witness' 5 minutes have expired.
We welcome all of you again, and we will begin now with Mr.
Kranz.
TESTIMONY OF STEPHEN P. KRANZ, PARTNER,
McDERMOTT WILL & EMERY, LLP
Mr. Kranz. Good morning, Mr. Chairman, Mr. Conyers, and
Members of the Committee. I am Steve Kranz, a partner with
McDermott Will & Emery, the law firm that litigated Quill v.
North Dakota in 1992. I have a personal 15-year history with
this issue. I was general counsel of COST, participated in the
Advisory Commission on Electronic Commerce, spent 15 years that
I will never get back attending meetings of the Streamline
Sales Tax Project, the Streamline Sales Tax Implementing
States, and now the Streamline Sales Tax Governing Board, where
I still serve as an ex officio member on behalf of the business
community. So I have a 15-year history, but this issue goes
back much further, and a little bit of it is worth repeating
today because I am concerned history is repeating itself.
In 1967, the U.S. Supreme Court decided National Bellas
Hess, gave us the physical presence rule. The States
immediately became concerned about what that meant for the
stability of their sales tax. In 1973, the first legislation
was introduced in Congress to overturn not Quill, but National
Bellas Hess. After about 10 years of trying to get Congress to
act, the States were tired of waiting for a Federal solution
and created something called the National Bellas Hess Project.
It sounds a little familiar, but it is different than the
Streamline Sales Tax Project.
In the 80's, the National Bellas Hess Project worked to
force remote sellers to collect tax and, in fact, was able to
pressure many of them to do so until they ran into Quill. Quill
litigated the case to the U.S. Supreme Court and reaffirmed the
National Bellas Hess case. That history is being repeated
today, and I am not going to talk about the Streamline Project
and what they are doing in trying to create a path forward. I
am going to talk about the 17 States that have passed
legislation going a different route.
There are 17 States that have passed one of three types of
legislation. My favorite is the legislation that we call
``Quill is dead,'' simply articulating a new rule at the State
level without Federal involvement that Quill is no longer good
law. Now, the State has not sought to enforce that legislation,
but it is easy to see a path forward for the States if Congress
does not act to solve this problem where they simply begin
assessing enforcing remote sellers to either collect tax or
litigate in many states at the same time. That is not a good
recipe for remote commerce or for the economy.
The 113th Congress has made unprecedented progress. We had
a bill pass the Senate last year. This hearing, looking at
alternatives and the principles that have been put forward by
the Chairman, is unprecedented in the history of this issue,
and we applaud the effort and the progress.
I would offer you three points. One, only Congress can
create a Federal framework that ensures remote sales tax
collection is governed by common sense rules that protect
remote sellers, that give them technology, and the tools, and
the protection that they need to do the job States are going to
ask them to do. Second, without a Federal framework, it is
clear that the States are moving to declare Quill no longer
good law. And third, should you decide to adopt a Federal
framework, do so by modifying our existing State and local
sales tax structure, not by upending sales tax as we know it
today and adopting a new form of taxation or a new data
reporting regime.
Now, I will comment briefly on some of the alternatives
that will be discussed today, in particular the origin sourcing
and the reporting regime proposals.
On the origin regime proposals that you will hear, both of
them would tax not based on a buyer's location, but based on
where the seller is located, and I am not sure what ``located''
means. Both of them would result in tax being imposed on
Virginia consumers based on the location of the vendor. If the
vendor was in D.C., D.C.'s tax would apply to that transaction.
Both of them would create exemptions for foreign sellers
carving them out of the sales tax collection obligation
absolutely unless they had physical presence in a jurisdiction,
while requiring domestic sellers to deal with the tax burden.
Both of them would harm State sovereignty by eliminating the
option of States imposing taxes on consumption. Both of them
are easily manipulated, making our State and local sales tax
system essentially voluntary. No other country in the world
uses this type of approach for obvious reasons. Origin is an
alternative to remote sales tax collection in the same way that
the VAT is an alternative. It is simply a different form of
taxation.
On the reporting regime, obviously any regime mandated by
Congress that would require retailers and States to capture
consumer purchase information and report it raises concerns
about big government, big data, and privacy. More importantly,
though, I think for consumers, this is an effort that would
simply shift all tax responsibility from business to
purchasers. Purchasers would have the obligation to deal with
compliance and audits. It is not a viable alternative in that
it creates a whole new regime outside the tax system.
Now, in closing, Congress is the only one who can solve
this problem. If it is not solved here, the States will do so.
[The prepared statement of Mr. Kranz follows:]
APPENDIX
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Mr. Goodlatte. Thank you, Mr. Kranz.
Mr. Moschella, welcome. Welcome back to the Committee.
TESTIMONY OF WILLIAM E. MOSCHELLA, SHAREHOLDER, BROWNSTEIN
HYATT FARBER SCHRECK, LLP
Mr. Moschella. Mr. Chairman, Ranking Member Conyers,
Members of the Committee, I appreciate the opportunity to
testify and to come back before the committee that I was so
privileged to serve for so many years.
We represent Simon Property Group, the largest owner/
operator of shopping malls in the United States. The Simon
Property Group stands with the broad coalition that supports
the Marketplace Fairness Act. However, when Chairman Goodlatte
indicated concerns about the Senate-passed version of the bill,
Simon Property wanted to be responsive. In that spirit, we
offer our idea to assist the Committee as it considers remedies
for what most agree is a fundamental unfairness.
At its core, the Marketplace Fairness Act would authorize
States to require remote sellers to collect and remit State
sales taxes to the receiving State. Another option would be to
enact a Federal law prohibiting the shipment of goods in
violation of the sales tax laws of the receiving State. This is
very similar to what Congress did in the 1913 Webb-Kenyon Act
concerning the regulation and taxation of alcohol. In 2000,
Congress reaffirmed and strengthened Webb-Kenyon by enacting an
enforcement provision giving States the ability to seek
injunctive relief in Federal court for violations of Webb-
Kenyon, including the failure of remote sellers of alcohol to
collect State sales and excise taxes.
The Webb-Kenyon model is simple. It is constitutional. It
authorizes no new taxes. It recognizes the sovereign nature of
State taxing decisions. It would not allow discriminatory State
sales taxes. And this concept was reaffirmed by wide bipartisan
majorities approximately 14 years ago.
In my written statement, I detail the history of Webb-
Kenyon, which was a response to the changing commerce clause
jurisprudence of the time. What is important to note from that
recitation is as follows: State regulation of alcohol was not
always the norm. The ability of States to regulate alcohol has
ebbed and flowed between the States and the Federal Government
as the Supreme Court's commerce clause jurisprudence has
changed.
Prior to the enactment of Webb-Kenyon, the Supreme Court in
Leisy v. Hardin would not even allow a facially-neutral Iowa
dry State statute to prevent the direct shipment of beer to an
Iowa consumer. I thought that would interest Mr. King. In
response, the politically powerful temperance movement moved to
convince Congress to pass Webb-Kenyon, which filled what was
regarded as a direct shipment loophole. In holding that Webb-
Kenyon was constitutional, the Supreme Court observed that the
act prevented ``the immunity characteristic of interstate
commerce from being used to permit the receipt of liquor
through such commerce in States contrary to their laws.''
In the same way that Webb-Kenyon eliminated the regulatory
advantage obtained through the immunity characteristic of the
commerce clause, this Committee is considering ways to
eliminate the regulatory advantage enjoyed by remote sellers
under contemporary commerce clause jurisprudence. In 2000,
Congress reaffirmed and enhanced Webb-Kenyon when it enacted
the 21st Amendment Enforcement Act. Congress permitted a State
attorney general to seek injunctive relief against anyone the
State had reasonable cause to believe violated that State's
liquor laws. This, of course, includes State tax laws. Today's
debate about how best to help States enforce their sales tax
laws is reminiscent of the debate over the Enforcement Act.
The House Committee on the Judiciary's report on the bill
observed that with the advent of the internet, numerous direct
sellers had entered the alcohol market. In addition to the
concern about underage purchasers receiving direct shipments of
alcohol, the Committee report emphasized concern that direct
shippers of alcohol were avoiding State taxes. ``Illegal direct
shipments also deprive the State of the excise and sales tax
revenue that would otherwise be generated by a regulated
sale.''
In fact, one of the key Federal court cases cited by the
Committee in its report justifying the need for the Enforcement
Act involved the State of Florida's allegations that an out-of-
State direct shipper failed to pay excise taxes, sales taxes,
and license fees. During a hearing on a similar bill in 1997,
Members of this Committee heard testimony from the sponsor of
the legislation, State officials, and industry supporters who
all agreed that circumvention of State tax laws were a driving
concern justifying the act.
Likewise during floor debate, Members of the House raised
these same State tax collection concerns. In addition, the
chief Senate sponsor of the Enforcement Act, Senator Hatch,
discussed the lost tax revenue generated by the sale of liquor
from out-of-State direct shippers.
The record could not be any clearer that one of the primary
drivers of the Enforcement Act was the inability of States to
enforce their rights under Webb-Kenyon to collect State taxes
from out-of-State shippers. Interestingly, all of the elements
of that debate--internet retailers, direct shipments, the
failure to collect State taxes--are all at work here. That is
why Webb-Kenyon and the Enforcement Act are an applicable
precedent upon which to build a solution.
Mr. Chairman and Members of the Committee, we hope this
idea helps generate thought and discussion about the best way
forward to solve the critical disparate tax treatment of remote
and in-State sales. I look forward to your questions.
[The prepared statement of Mr. Moschella follows:]
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Mr. Goodlatte. Thank you, Mr. Moschella.
Mr. Sutton, welcome.
TESTIMONY OF JAMES H. SUTTON, JR., CPA, ESQ.,
MOFFA, GAINOR, & SUTTON, PA
Mr. Sutton. Thank you. I am here before you today to
speak----
Mr. Goodlatte. You may want to turn that microphone on and
pull it close to you.
Mr. Sutton. I am here before you today----
Mr. Goodlatte. Pull it closer.
Mr. Sutton. Is that on now?
Mr. Goodlatte. That is it.
Mr. Sutton. Okay. Thank you. I am here before you today to
speak against my own personal interest. As a CPN attorney whose
practice is devoted almost entirely to the State and local use
tax controversy, if the Marketplace Fairness Act were to pass,
my law practice would explode from clients all over the
country. So when I say to you today that the Marketplace
Fairness Act is a bad idea, it is because I truly believe it
will cripple thousands of businesses and hurt our economy
overall.
I handle tax audits, protests, litigation, collections,
revocations, voluntary disclosures, and even criminal defense,
all for sales tax every day. Each year my firm represents
hundreds of people, business owners, who feel that they are not
being treated fairly by the Florida Department of Revenue, just
one State. I see firsthand how aggressive a State tax
department can be and how time consuming and expensive it is
for honest business owners to defend themselves.
Software solutions can make filing tax returns possible.
But the complications for audits, collections, investigations,
and criminal prosecutions will not be handled by the software.
In my written testimony starting on page 4 is a listing of
sales tax horror stories and other issues registered voters in
your State will be facing if the Marketplace Fairness Act
passes. For example, are you ready to explain to the registered
voters in your State how they face 100 years of potential jail
time spread between 45 States because only a month or two of
use tax was not reported when their business went under? Are
you ready for citizens of your State to be extradited to
Florida or to other States because that State perceives that a
business owner in your State owes use tax? Are you ready for
Florida and other States to completely ignore your State's
corporate liability shell protection to impose personal
liabilities of the business owners in your State? These are
only some of the many problems that will ensue if the
Marketplace Fairness Act passes.
The purpose of the commerce clause is to ensure commerce
flows freely between the States without overly burdensome State
regulation. The Marketplace Fairness Act would literally
obliterate the purpose of the commerce clause. We need a
solution to the State tax problem, but forcing remote sellers
to collect tax gives the States jurisdiction over those remote
sellers, which causes a whirlwind of problems I see every day
in just one State.
Consider that every State with a sales tax and a use tax
already has all the laws, the rules, and the procedures in
place for use taxes. The problem is no one has the information
to enforce it. So the solution is simple: taxable remote sales
information needs to be made available to the purchasers and
the States.
I commend the great State of Colorado for trying something
very similar to this idea. However, under the commerce clause,
only the Federal Government has the authority to do this
similar to the reporting that is being done in the EU for more
than 10 years. Therefore, I propose a consumer private
reporting, CPR system, in which a vendor would utilize the
software that everybody else is proposing to use to accumulate
information for 1099 style reporting to the purchasers and the
States, but without the private information of what is actually
purchased. A database will be created at the Federal level to
accumulate that information to report. Self-reporting would
become commonplace, and enforcement made easy for the States
with no new State use tax laws needed.
Finally, the law should establish a simplified nexus rule
for sales and tax use tax purposes. I believe consumer private
reporting is your answer. It places the least amount of burden
on interstate commerce. It compensates remote sellers for their
time and expense. It allows the States the sovereign right to
enforce their own use tax laws without impeding on the personal
privacy of the purchaser.
Sales and tax reporting in this country needs Federal CPR.
Thank you.
[The prepared statement of Mr. Sutton follows:]
__________
Mr. Goodlatte. Thank you, Mr. Sutton.
Mr. Crosby, welcome.
TESTIMONY OF JOSEPH R. CROSBY, PRINCIPAL,
MULTISTATE ASSOCIATES INCORPORATED
Mr. Crosby. Chairman Goodlatte, Ranking Member Conyers, and
Members of the Committee, I applaud you for taking the time
today to shine light on this important and critical issue of
leveling the playing field between remote and Main Street
commerce. Fifteen years ago I testified before the Federal
Advisory Commission on electronic commerce. In reviewing that
testimony, I was struck by the fact in many ways how little
changed in the intervening period.
My comments from 1999 still ring true. Simplification is
the only solution that removes an objectionable burden from
vendors without shifting the burden to other parties.
Simplification is the only solution that can lead to a level
playing field.
In the wake of the Commission's work, the States came
together with vendors, both online and offline, state tax
experts, and other interested parties to develop the Streamline
Sales and Use Tax Agreement. The benefits of that agreement--a
simplified and more uniform sales tax system--accrues almost
exclusively to sellers. Viewed from that perspective, it is
astonishing in some ways that 24 States actually adopted the
agreement in whole.
There are two main stumbling blocks for the remaining
States in adopting the agreement. The first and most obvious is
that there is no guarantee that it will lead to collection
authority. Again, as I testified to in 1999, States may be
unwilling to embark on radical change without a clear idea of
the exact level of change that the Congress will demand.
The other stumbling block is the agreement requires States
to make changes that apply both to remote and intrastate
commerce. As noted in the staff summary for this hearing, many
States are hesitant to surrender their autonomy over internal
taxing policy.
The decision to apply the agreement both to remote and
intrastate activity was well considered. The goal of the
agreement was not merely to obtain collection authority for the
States, but also to simplify sales tax collection for all
sellers, both remote and Main Street sellers. That was and is a
laudable goal, but it has proved too ambitious for many States
in the absence of congressional authority.
An alternative framework would be to fashion an interstate
agreement that focused exclusively on remote sellers and remote
sales. Such an agreement would allow States to retain full
autonomy over intrastate sales while providing sufficient
simplification and uniformity to minimize the sales tax
collection burden on remote sellers.
If such an alternative framework is to be pursued, it must
be defined by Congress. States within the existing streamlined
agreement would be unwilling to make further changes without
certainty that those changes will lead to collection authority.
States outside the agreement are unlikely to adopt something in
the absence of congressional action because it would simply
prove the position that they have taken today.
Like the existing streamlined agreement, an alternative
framework would require numerous specific elements, but those
elements would only apply to remote sellers in remote commerce.
My written statement includes a detailed discussion of the
elements that should be incorporated into an alternative
framework.
One caveat is that the alternative framework would create
two separate sets of sales tax rules with which most sellers
would be required to comply. We tend to think that remote
sellers and Main Street sellers are in their own categories. In
reality, every seller, with very few exceptions, is a nexus
seller in one or more States and a remote seller in other
States. A Federal law that differentiates between nexus and
remote commerce will require sellers to comply with two
different sets of sales tax rules based on their status as a
nexus seller or a remote seller.
Several other options are being presented to you today.
With the exception of Mr. Moschella's proposal, all of them
were considered and rejected as unworkable by State tax policy
experts, even before the Advisory Commission concluded its
work. The new veneers applied to these concepts and presented
today cannot remedy their fundamental flaws.
I began my testimony by noting that in many ways, little
has changed in the past 15 years. In other ways, however, the
environment we live in today is dramatically different. Fifteen
years ago, sales tax simplification was just an idea. Today 24
States have adopted it. Fifteen years ago, very few governors
were engaged on this issue. Today governors across the country
are calling upon you to act.
Sales tax collection software is no longer just a concept.
It is working today for thousands of online sellers. E-commerce
itself has grown dramatically. Seven percent of all retail
sales are now comprised of e-commerce, which is a tenfold
increase over 15 years ago. And there have been 17 consecutive
quarters of double digit increases in remote commerce.
Finally, elected State leaders across this country are
proposing bold tax reforms that would help create jobs,
increase investment, and lead to higher wages. Those reforms
are imperiled by an eroding sales tax base resulting from e-
commerce.
Some have asked why there is an urgency to address this
issue now. There is an urgency because retailers who have
invested in your communities are at a disadvantage because of
governmental policies. The urgency is about government picking
winners and losers in the marketplace. The urgency is because
State and local governments, as you know, do not have the
luxury of borrowing to balance their budgets or the time to
kick the can down the road.
This is not about retailers with outdated business models
not wanting to compete. This is about businesses that have made
investments in your communities and their inability to compete
on a level playing field. It is not about State and local
governments asking for new revenue. It is about elected State
and local leaders who have made tough decisions to reform their
sales tax systems, but have been hamstrung in imposing those
new changes because of congressional inaction.
It is not about protecting consumers who knowingly or not
are evading existing sales tax laws. It is about helping those
of your constituents who are currently doing their honest best
to comply with the existing sales tax laws and taxes that are
owed.
Mr. Chairman, Members of the Committee, thank you for your
time. I look forward to any questions you may have.
[The prepared statement of Mr. Crosby follows:]
__________
Mr. Goodlatte. Thank you, Mr. Crosby.
Mr. Moylan, welcome.
TESTIMONY OF ANDREW MOYLAN, SENIOR FELLOW AND OUTREACH
DIRECTOR, R STREET INSTITUTE
Mr. Moylan. Thank you. Chairman Goodlatte, Ranking Member
Conyers, and Members of the Committee, thank you for the
invitation to testify today. My name is Andrew Moylan. I am
senior fellow and outreach director for the R Street Institute.
R Street is a pragmatic, non-profit, nonpartisan think tank
that operates on the motto, ``Free markets, real solutions.''
While we believe passionately in limited government, we
also want constructive solutions to our most pressing public
policy concerns. And it is in that spirit today that I ask you
to consider an alternative solution to the internet sales tax
issue, origin sourcing.
They say that taxes are the fine you pay for thriving too
fast. And some clearly have an impulse to penalize the thriving
of the internet by giving State tax collectors power as big as
the internet itself. What I propose to you today is not to give
internet retail a free pass or special treatment, but to truly
level the playing field by specifying unified origin sourcing
as the only permissible standard for taxation of remote retail
sales.
In laymen's terms, what that means is origin sourcing
establishing a source of an item for tax purposes as the
physical location of the business making the sale while a
destination sourcing scheme, like the Marketplace Fairness Act,
compels tax collection based on the physical location of the
buyer making the purchase. This seemingly small discrepancy
makes a world of difference.
To illustrate, consider if I were to make a purchase at one
of the Capitol gift shops today. Though I am an Arlington,
Virginia resident, they would charge me the District sales tax,
not Virginia's, on any item that I purchase because they
effectively operate on an origin sourcing system. They collect
based on where their business is physically located for every
sale, regardless of where their customer comes from.
And what I propose is for Congress to extend its use to
remote retail sales as well, yielding several important
benefits. The first is that it would truly level the playing
field by ensuring that all sales have tax collected on them,
and that the collection standard for in-person versus remote
sales is identical. As such, it would be radically simpler to
administer. Businesses would only be required to comply with
the tax code of their home jurisdiction, and any disputes
associated with collection could be settled with local tax
authorities. Finally, it would preserve important taxpayer
safeguards, like the physical presence standard, ensuring that
Congress does not inadvertently establish a slippery slope
toward a system of State tax powers unbounded by geography.
Some might have you believe that origin sourcing is a
radical departure, but the truth is that it is the
overwhelmingly dominant mode of sales tax collection today.
Greater than 90 percent of all retail purchases have tax
collected under such a rule since it governs substantially all
brick and mortar sales, and roughly half the country utilizes
it for remote sales made inside a State.
Nonetheless, you have heard from some of my panelists that
origin sourcing is a bad idea. They might claim that it would
encourage a so-called race to the bottom where businesses would
rush to locate non-sales tax States, like Montana, to avoid
collection. Taxes do indeed influence firm behavior, but the
incentive to escape to a non-sales tax State already exists
under current law, and there has not yet been a stampede that I
have seen. That is because businesses tend not to make location
decisions on the basis of one tax alone. They weigh property,
sales, and business taxes, as well as factors like available
labor pool, access to suppliers, transportation infrastructure,
and so on.
Others might say that it constitutes taxation without
representation, but this misunderstands who the taxpayer is for
sales tax purposes. Though the levy is theoretically passed on
to the consumer, the reality is that the business bears all
legal responsibility for complying with the tax. If tax is not
collected on an item where it should have been, revenue agents
do not approach the consumer to make up the shortfall. They
audit the business. And, in fact, most States define ``sales
taxes'' as ``privilege taxes'' that are levied on businesses as
opposed to on individuals.
You might also hear that origin sourcing is incompatible
with States' rights, but a federalist system cannot survive if
States are granted the authority to exercise power beyond their
borders. The commerce clause of the Constitution and subsequent
jurisprudence give Congress the clear power to preempt State
actions that impede the flow of interstate commerce.
What an origin sourcing rule would do is reaffirm that
States are sovereign within their borders, but not beyond them.
And finally a Federal origin sourcing rule would be no more
prescriptive to States than would the Marketplace Fairness Act
or any of the other alternatives you are considering today.
To conclude, this hearing is taking place in no small part
due to the complete and utter failure of the use tax system in
America. Ever since the Supreme Court affirmed the
constitutionality of use taxes in 1937, States have tried in
vain to concoct viable systems. But the simple reality is that
use taxes are effectively not administrable.
In origin sourcing, I offer up a solution that is easily
administrable, that is already used for 9 out of every 10
retail sales made today, and does not trample on important
taxpayer principles the way the Marketplace Fairness Act does.
I do hope you will give the concept due consideration, and I
look forward to your questions.
[The prepared statement of Mr. Moylan follows:]
__________
Mr. Goodlatte. Thank you, Mr. Moylan.
Mr. Cox, welcome back to the House.
TESTIMONY OF THE HONORABLE CHRIS COX, COUNSEL, NETCHOICE,
PARTNER, BINGHAM McCUTCHEN LLP
Mr. Cox. Thank you very much, Mr. Chairman, Ranking Member
Conyers, Members of the Committee. I am here today as counsel
to NetChoice, which is a coalition of leading e-commerce and
online businesses. And as you know, in the past it has been my
privilege to work with many Members of this Committee on
important internet legislation, including the Internet Tax
Freedom Act, which this Committee under both Republican and
Democratic leadership has repeatedly voted to extend.
When I first introduced the Internet Tax Freedom Act in the
late 1990's, it was with concern that the very nature of the
internet exposes it uniquely to multiple and discriminatory
taxation. Sixteen years after its enactment, we now know that
the Internet Tax Freedom Act has worked in preventing those
kinds of discriminatory burdens. On behalf of NetChoice and all
of our members, we hope that you soon send to the President
legislation to permanently extend the Internet Tax Freedom Act.
As you consider the much more difficult question of
internet sales taxes, the basic principle of the Internet Tax
Freedom Act should be your guide, this principle of non-
discrimination, of not placing burdens on one form of commerce
that does not exist on the other. And this Committee and your
very excellent principles have listed that under the heading of
tech neutrality. As explained by the Committee, ``tech
neutrality'' means that the tax compliance burden on online
sellers should be no more or no less than that on brick and
mortar sellers.
MFA rather obviously fails this test. Were it to become
law, a brick and mortar business would have to comply with the
tax laws and filing requirements of the State where it is
located. But the online business right next door immediately
would have to comply with those laws and the laws of 45 other
States. That is the very definition of discriminatory burden.
There is a better way. In your home State of Virginia, Mr.
Chairman, many residents of D.C., of Delaware, and of Maryland
shop at Pentagon City. And what happens when they go to a
clothing store in Pentagon City? Does the store clerk ask the
customer when she is buying a shirt, ``What State are you
from?'' or ``what county or what city are you from, so that I
can charge the correct sales tax?'' That is not what happens.
We all know the answer. The store clerk charges the sales tax
for Arlington, Virginia, independent of where the customer
lives. That is the way it works all across America today in
every State that has a sales tax.
And that is how the Pentagon City store owner and how brick
and mortar store owners everywhere across the country are
themselves protected from having to comply with 45 State laws
all at once. Yet this is the same protection that would
immediately be denied to online sellers if MFA were to become
the law.
The way to level the playing field is to make sure that
every business--brick and mortar or online--is required to do
things the same way, to follow the same rules. And that is what
we call home rule. Under home rule, every business would
continue to file monthly sales tax returns, continue to report
taxes in the States where it is located. And it would continue
to face sales tax audits in all of those States just as today.
Congress can authorize this home rule arrangement by
legislation approving a voluntary multistate compact. It is
voluntary in support of the Committee's principle of States'
rights.
Joining the compact, however, would be advantageous for
States because they would immediately begin to receive sales
tax revenue that today they do not get at all. Sales taxes on
purchases by catalog or by internet would now have to be paid
to the purchaser State for all the States that are in the
compact. And we call this feature revenue return. The home rule
and revenue return approach guarantees not only relative ease
of tax collection and filing, but a single source of audit of
remote sales.
So consider a small business. Once the State where it is
located joins the compact, that State becomes the law's home
jurisdiction. The home jurisdiction is then the single auditor
for all sales into other States. Now, consider a bigger
business with multiple locations in several States. The State
where it has the most employees would typically become its home
jurisdiction. And once again, that home jurisdiction then
becomes the single auditor for all sales into other States
where the business has no physical presence.
This overall approach of home rule and revenue return meets
every one of the Committee's 7 principles. It is a way to level
the playing field without undue burden, complexity, expense,
and the unconstitutionality of MFA.
If I may, Mr. Chairman, may I close on a note of caution?
You have called for alternatives to MFA, and NetChoice has been
happy to comply. But if MFA were the only option, NetChoice
would strongly prefer today's system. From the standpoint of a
small business, MFA is fundamentally unfair. It erects
intolerable new compliance burdens on e-commerce. And so, we
applaud your efforts to take care that things are not made
worse in the name of making them better.
I look forward to your questions.
[The prepared statement of Mr. Cox follows:]
__________
Mr. Goodlatte. Thank you, Mr. Cox. Thank you all for
excellent testimony. We will now begin our round of
questioning, and I will recognize myself for that purpose.
Mr. Kranz, you have been involved in the Streamline Sales
Project process for many years. There was a time when the
congressional sales tax bills required States to join the SSTP,
to join the system. In addition, the SSTP regime in the early
years was less flexible than now. Now States have more
flexibility in the SSTP, and States can gain the collection
authority without even joining them. Why has simplification
been abandoned to such a degree?
Mr. Kranz. Mr. Chairman, I do not think simplification has
been abandoned, and the rules for joining SST remain the same.
What I think we are seeing is that the States over 15 years of
trying to simplify and gain congressional authority to require
remote sellers are wearing tired of living by those rules. And
so they are relaxing enforcement of the compliance standard,
and by that, they are holding certain members to be out of
compliance with certain provisions of the agreement and giving
them time to get back into compliance.
It is a natural ebb and flow at the State level of the law
in response to the agreement's requirements. But I do not think
that they are abandoning simplification by any stretch.
Mr. Goodlatte. Thank you. Mr. Cox, some of today's
proposals seem to suffer from privacy concerns, others from the
burdens of compliance and cross-border audits. Is it fair to
say your proposal dodges both those major pitfalls, and if you
think that is the case, please explain why.
Mr. Cox. Yes, and those are two very serious problems. I
think we all know with the Target data breach as a leading
example what can happen if information about customers is now,
in a more granular way, collected by purchase. If appointed
officials, elected officials in every one of the 9,600
jurisdictions around America have a right to demand what you
bought at a particular store to find out if it was taxable in
their State, that creates opportunities for mischief that I
think ought to frighten us. That is the kind of big government
threat that we do not want, and so, avoiding that is very
important. And that is not at all an element of home rule and
revenue return.
The other problem, the basic problem, that has challenged
this simplification effort for so many years since I began
talking about it with Governor Leavitt back in the 1990's is
the idea that you have the many against the one. You have got a
business that is in one place, and yet now it is exposed to
regulation by at least 45 other States and possibly thousands
of different individual jurisdictions.
And so, you see that problem at its worst when it comes to
audit. If you never get audited, maybe there is a way for
computers to help us out here. But if you have to face
compliance demands from all these places, if they have personal
jurisdiction over you in an International Shoe sense and they
can compel you to show up there (which definitionally they
would--if they can tax you, they can regulate you, and they can
make you personally appear, as was pointed out earlier in
testimony)--you know, that is a horrific problem. And so
avoiding that problem also is very important.
Mr. Goodlatte. Thank you. Mr. Crosby, the Streamline Sales
Project originally sought one tax rate per State. Too many
States were unwilling to do it, and it was abandoned. With a
narrower focus on remote sales only, do you think a single rate
might be achievable?
Mr. Crosby. Mr. Chairman, in the early days of the
discussion, one rate per State was certainly talked about with
the National Tax Association Advisory Commission on Electronic
Commerce. When the Streamline Project came together, the focus
was on administrative simplification, looking at those aspects
of the sales tax system that truly bring burdens to sellers and
simplifying those.
The rate issue is radically diminished from 20 years ago
because software actually can handle that very well. If there
is something that software can do well, it is look up rate
tables and apply those rates. So that issue I think is not as
important.
Also in the Streamline Project, what came to the fore is
that we frequently think only of business to consumer sales.
Business to business sales are, in fact, more than 90 percent
of e-commerce. Many States provide preferential rates or
exemptions for business to business purchases, for example, on
aviation fuel. If there were a mandate to require one rate per
State, it could jeopardize those existing preferences the State
provides to encourage business activity.
Mr. Goodlatte. Mr. Moylan, Salem County, New Jersey is
exempt from collecting the 7 percent Statewide sales tax.
Instead, it collects just 3 and a half percent local tax. The
reason is that Delaware is next door, and Delaware has a sales
tax of zero. Is the lesson that tax competition is a real
phenomenon, and to what extent do you think that is true?
Mr. Moylan. I think, yes, that is the lesson that tax
competition is a real phenomenon, and I think that it is a
beneficial element for taxpayers. It is interesting that you
bring that up, however. I think that, and I wrote this in my
written testimony, that the more likely manifestation of that
sort of tax competition is in those sorts of marginal decisions
in a given area. And I use the example of the D.C. metro area
that you might see businesses deciding to locate on the
Virginia side of the border rather than the Maryland side of
the border to take advantage of Virginia's somewhat more
beneficial business and tax climate.
I do not think that you are likely to see some sort of
wholesale stampede to New Hampshire or Montana. And, in fact,
any sort of Federal rule on origin sourcing should establish
clear protections to make sure that businesses cannot game the
system. We, of course, would not want a situation where people
can set up a mailbox in New Hampshire and avoid collection
forever more.
And so I think that there are ways appropriately to protect
against that while encouraging the kind of beneficial
competition that you point out happening in New Jersey.
Mr. Goodlatte. Thank you. My time has actually expired, and
the Chair recognizes the gentleman from Michigan, Mr. Conyers,
for his questions.
Mr. Conyers. Thank you. I appreciate the witnesses'
testimony. It is quite varied. I would like to begin with Mr.
Kranz. What, in your view, is the risk of Congress not acting
on the remote sales tax issue? And in the absence of
congressional action, what will States do moving forward?
Mr. Kranz. Thank you, Ranking Member. The risk of Congress
not acting is that the States will continue their onslaught
attack against remote commerce. And as I mentioned earlier,
there are already 17 States that have tried a variety of
approaches to attack remote commerce imposing complicated
administrative burdens, audit risk, liability, and potential
litigation on those remote sellers.
So if Congress does not act, my prediction is that the
States will continue that attack on remote commerce. And we are
seeing it today. There were four cases decided last year, two
in New York, one in Illinois, and one in Colorado, all related
to these State attacks against remote commerce.
Mr. Conyers. Thank you. Mr. Crosby, regarding the idea that
one rate per State would enable more simplification, has it
been contemplated before, and what are the challenges with
that? Is it fair to jurisdictions with lower rates?
Mr. Crosby. Mr. Conyers, I think that the focus on one rate
per State reflects a misunderstanding of the complexity that is
associated with sales taxes. Complexity is driven by things
other than the rate calculation. As I mentioned before,
software is capable of doing that sort of thing.
If the Congress were to impose one rate per State, it would
likely lead to a leveling up of taxes in States that have lower
rates. So where you have local jurisdictions with lower rates,
a mandate of one rate per State would likely result in a tax
increase in those States. It would also, of course, be a
reduction in State sovereignty by reducing the flexibility they
have to set their own tax rates on their basis.
Mr. Conyers. Thank you. Mr. Kranz, you stated in your
testimony that some proposals that you will hear today will
trample State tax policy decisions and have far-reaching
economic impacts. You give examples of origin sourcing. Please
expand on how origin sourcing would create economic hindrances
by turning what is now a consumption tax into a production tax.
And also how would such a proceeding be constitutionally
impaired?
Mr. Kranz. The proposals we have heard today for origin-
based taxing would eliminate what we now know as our sales tax
system in this country. When someone in Virginia buys at a
Virginia store, they pay Virginia tax and it funds Virginia
government services. When someone with a Virginia address buys
from a vendor located in California, and that California
company has an obligation to collect tax, they collect
Virginia's tax, and that money gets remitted to Virginia to
fund Virginia government services.
An origin regime for remote sellers would turn that on its
head and have far-reaching economic implications. Under an
origin regime, the remote seller would collect California's tax
rate and would collect tax based on California's rules. The two
proposals you have heard today for origin sourcing, one of them
would allow California to keep the money, and the other one
would say, no, the vendor in California has to collect
California's tax rate, collect under California's rules, but we
will redistribute that money to Virginia.
Ultimately, both of the origin proposals, though, impose a
different State's tax rules on a Virginia consumer. So
consumers in your State would be subject to the tax laws of the
location where the seller is located. Now, as a tax lawyer, I
can easily come up with a vehicle to get out of that, and I
would inform any company to create a new entity in Delaware, or
in New Hampshire, or in Montana, one of the non-sales tax
States. That entity becomes the seller of record. You can have
all your operations somewhere else, but the seller of record is
located in a non-sales tax State.
Mr. Conyers. Let me get this in before our time runs out.
Some are concerned that the due process clause would be
offended by Federal legislation to authorize remote sales tax
collection. What are your thoughts? Did Quill not address this?
Mr. Kranz. Quill did address the question. Congress has
commerce clause authority to pass a Federal framework. There is
nothing that Congress can do to remove the due process
protections. Whether you address the issue or not, taxpayers
and businesses have their due process rights. Passing
legislation to deal with this issue does not touch those
rights. They would still exist and be fully protected.
Mr. Conyers. Thank you so much. I return any time that may
be left.
Mr. Goodlatte. The Chair thanks the gentleman and
recognizes the gentleman from North Carolina, Mr. Coble.
Mr. Coble. Thank you, Mr. Chairman. Good to have you all
with us this morning. Mr. Sutton, under the hybrid origin
regime, taxpayers would pay the sales tax rates based upon from
where they ought to be shipped rather than where the taxpayer
resides. In many instances, this could be viewed as a tax
increase if the item is shipped from a high sales tax State to
a low State tax State. What say you to that?
Mr. Sutton. It absolutely could be perceived by the
consumer, who is the ultimate bearer of the tax, whether it is
based on the business or not. The businesses have to raise the
tax, have to raise their price to account for that tax, whether
it is a separate line item or not. So the consumer is the one
that ultimately pays for it, so, yes, I believe that would be
perceived as an increase by many consumers out there.
I also believe that the great State of Montana would
probably have to be some movement to be renamed as Amazon-tana
before long for the sheer volume of companies that would start
moving there to base their retail sales, both remote and on the
internet.
Mr. Coble. I thank you, sir. Mr. Moschella, how could the
Congress define the origin from where it originates? For
example, would the rate be determined where the company's
physical headquarters are located, A, or, B, the warehouse from
where the item is shipped, or even C, where the corporation is
incorporated?
Mr. Moschella. Well, it is a good question. I think Mr.
Kranz may be in a better position to answer that question.
Mr. Coble. I will be glad to hear from Mr. Kranz.
Mr. Kranz. Well, the proposals we have heard do not give an
answer to that question. They leave it open-ended. There is one
possibility that it would be based on the number of employees
in the company. But again, I could very easily create a
Delaware entity with one employee. That is the only employee,
and it is a Delaware company or a Montana company. The seller
of record can easily have a no sales tax collection obligation
under the origin regime. It is a simple game that could be used
to avoid these proposals.
Mr. Moylan. Congressman, may I respond to that----
Mr. Coble. Sure.
Mr. Moylan [continuing]. Because I did cover it in my
testimony. Several of the States that utilize origin sourcing
for intrastate sales have answers to this question that I think
can be effective guidance for Congress. The Chairman's home
State of Virginia is an example, Texas another. What they do
is, one utilizes the place at which an order was received and
processed. Others have utilized the location from which the
item was shipped. You could explore some version of either of
those, some sort of combination.
I think that there are ways that you can appropriately
structure the rules so that you do not have the sort of gaming
that Mr. Kranz is referring to and that you have a legitimate
rule, much the way that the 17 States that utilize origin
sourcing intrastate do.
Mr. Coble. I thank you, sir. I am going to try to get one
more question. Mr. Cox, as has been said, welcome back to the
Hill. This may be portrayed, Mr. Cox, as an off the wall
question, but let us give it a try. Suppose France dispatched
auditors to one of our States demanding access to local
business records to ensure it properly collected French sales
tax on items that were shipped to the country of France? Do you
think most Americans would view that as protecting U.S.
sovereignty, and if not, distinguish between that and when
States are doing it to one another.
Mr. Cox. Well, I do not think that is an off the wall
question at all. I think that is a very pertinent question
because the internet cannot be restricted to the 50 U.S. States
and six territories. It is global. It is called the worldwide
web for a reason.
And when a business that wishes to serve its customers in
the neighborhood goes on the web, you know, they are up in
Italy. They are up in France. They are up in Russia. It is not
untoward to think that Vladimir Putin might decide, you know,
hey, we have got YouTube here, we are going to put a franchise
tax on it.
We do not want that to be the norm. Because the United
States was the leader in the internet--we can go all the way
back to the 90's--the norms that we established in this country
about relatively light regulation; in some areas, no
regulation; no special taxation; no discrimination--have been
the norm worldwide. There is no UN rule. There is no global
compact that makes this the case. But it is U.S. leadership
that has made this the case.
So if we establish a new norm through congressional
enactment that nexus is created, that jurisdiction is created
in a due process, International Shoe sense over someone because
their website is visible in your jurisdiction, or because an
incidental purchase or transaction was made over the worldwide
web, then we had better get ready for France to make that
demand on us.
Mr. Coble. I thank you, sir. I see my red light has
illuminated. I yield back.
Mr. Goodlatte. I thank the gentleman. The Chair recognizes
the gentleman from New York, Mr. Nadler, for 5 minutes.
Mr. Nadler. Thank you, Mr. Chairman. Let me start by making
a few observations. It has been said repeatedly at this hearing
that the question of enabling States to collect their use taxes
is about the fairness for brick and mortar stores, brick and
mortar merchants vis-a-vis online sellers.
I agree with that, but I think it is also about a far
broader principle. It is about not destroying the sovereignty
of the States, that enabling the people of the several States
to continue to decide whether, how, and how much, whether to
tax themselves, how much to tax themselves, and how to tax
themselves, and those who do business in their States, that is
a fundamental right of a State government. It has been greatly
compromised by the development of the internet and the
inability to collect use taxes for products sold over it. And
we ought to be looking to protect the sovereignty and ability
of the States and the people of the States to decide their own
policies. That is point number one.
Point number two, and in connection with that, I should say
that I support the Marketplace Fairness Act, which has passed
the Senate. And I have heard some of the criticisms here, and
we will address them in a minute. But I would hope that the
Committee would hold a hearing on the Marketplace Fairness Act,
which has passed the Senate, on possible amendments and
possible changes to address some of the criticisms to see if it
is possible to address adequately the criticisms that have been
leveled at it.
Third, it is nice that we are holding this hearing on other
approaches, as long as it does not substitute for a hearing on
the Marketplace Fairness Act. And I commend the Chairman for
putting out a statement of principles, but I must say I
disagree with one of them. One of the principles says,
``Government should be encouraged to compete with another to
keep tax rates low.'' I disagree with that. You might want to
keep tax rates low, or high, or middling. That is a decision.
It is a political decision. It is an ideological decision. But
it is a decision for the States and for the State electorates.
The Federal Government should be neutral on State tax
policy, and the Federal Government should simply protect the
State sovereignty and the ability of the States to decide for
themselves what their sales tax and use tax policies ought to
be. We ought to protect their ability, and they should decide
whether tax rates are low or high and let local electorates
vote for or against State candidates on that basis or any other
basis they want to.
Now, I want to make one other observation and then go to
questions, and that is on a couple of the proposals here for
origin sourcing--in effect, that the tax rate would be decided
by the State law, the State where it sold from--people have
said that would release our rates to the bottom, and I think it
would, and we have an example of that. In 1978, the Supreme
Court decided that regulations of credit cards would be based
on the law of the State from which issued, not of the State to
which issued. So if in New York can get a credit card from a
bank based in South Dakota, South Dakota's law governs.
What happens? Every bank moved its credit card division to
South Dakota or Delaware where essentially they have no
regulations so that every other State was forced to eliminate
their usury laws. We used to have laws that said you could not
charge more than X percent interest. They have all been
eliminated. All the regulations have been eliminated in just
about every State because they are totally unenforceable.
I was in the State legislature in the 80's when we heard
this threat in New York: if you do not repeal these laws, we
will move our jobs to South Dakota. We repealed the laws, and
they moved anyway, and, therefore, I oppose this kind of
proceeding.
Let me ask a question of Mr. Kranz. How would you reply to
the various criticisms that we have heard today of the
Marketplace Fairness Act, that it would lead to problems of
enforcement, to audits of people out-of-State? And secondly,
should the SSUTA, which is a basis of the Marketplace Fairness
Act, apply only to interstate sales, not to intrastate sales,
and with that eliminate the reticence of some States to join
up?
Mr. Kranz. So, on the enforcement side, the way that SSUTA
and earlier versions of the Marketplace Fairness Act were put
together, there was an intention and an effort by the States
and the businesses involved to shift the compliance burden from
remote sellers to software companies. Make the software
companies responsible for tax calculation and compliance. Shift
that burden. It still exists in the SSUTA and in versions of
the Marketplace Fairness Act.
On interstate versus intrastate, when the SSUTA originally
started, the goal was to simplify the sales tax system so that
it applied to Main Street sellers and remote sellers. Give them
all the simple set of rules. Earlier versions of legislation in
Congress required the States to simplify their sales tax for
all sellers, Main Street and remote. More recent versions are
limited to just remote sellers, giving them and only them the
benefit of the simplification.
Whether Congress decides that the simplifications should
apply to everyone or not is a question for this body. The
earlier versions of the effort tried to get there, and the more
recent versions do not go there. They simply apply the
simplifications to remote sellers.
Mr. Nadler. I see that my time has expired. I yield back.
Thank you.
Mr. Goodlatte. The Chair thanks the gentleman and
recognizes the gentleman from Texas, Mr. Smith, for 5 minutes.
Mr. Smith of Texas. Thank you, Mr. Chairman. It is nice to
see two long-time friends here, former Congressman Chris Cox
and Will Moschella, whom I know you pointed out used to be a
staff member of the Judiciary Committee.
I have kind of distilled all my questions down to one that
I would like to address to Mr. Moschella, Mr. Sutton, Mr.
Moylan, and perhaps Mr. Kranz as well. And it is this, that you
all have somewhat different solutions, different proposals. But
I would like to know whether you consider your proposal to be
an increase in taxes or not. If so, how do you justify it, and
if not, why not? And, Will, could we start with you?
Mr. Moschella. Thank you, Mr. Smith. No, our proposal is
not an increase in taxes. Our proposal defers to the sovereign
State decisions with regard to taxing authority. It merely
would say that it would be a violation of Federal law just like
the Webb-Kenyon Act. It would be a violation of Federal law for
a remote or direct shipper to send into that State goods in
violation of the State's tax laws. And then it would be
enforceable by injunction.
Mr. Smith of Texas. Okay. Thank you. Mr. Sutton?
Mr. Sutton. Thank you. No, it definitely would not be an
increase in tax. My system does not does not collect any tax.
All it does is report private information completely sanitized
from the vendor level into a database so the State and the
purchasers have it. The States enforce their own existing use
laws. That is it. They are use laws that have been in place for
decades. Thank you.
Mr. Smith of Texas. Okay. Thank you, Mr. Sutton. Mr.
Moylan, you feel differently about your proposal.
Mr. Moylan. Well, I would say the answer is no, and nor
should it be, that the intention of an origin sourcing system
is, and this goes back to something that Mr. Nadler pointed
out, that I think we often look at this in sort of a binary
fashion. We think of brick and mortar and online as being two
totally separate things when in reality the vast majority of
businesses are what we would call brick and click, that they
have physical presence in some place and they sell online as
well.
And so, what origin sourcing is about is about ensuring
that they collect on the same standard for all of those sales.
And to the extent that there is any revenue that is associated
with that, you know, my intention would be to use that to
reduce tax rates in States to make sure that there are not any
net burdens on consumers. And I think that when you compare
that to the alternatives, like the Marketplace Fairness Act or
some of the others that you are hearing today, that the result
would be much better for taxpayers.
Mr. Smith of Texas. Do you consider the Marketplace
Fairness Act to be an increase in taxes?
Mr. Moylan. I think that the Marketplace Fairness Act, as
many of my fellow panelists will point out, is about collecting
taxes that are theoretically owed. I think in reality what any
of these would do is, you know, is to put tax collection on the
front burner. And when you do that, it often seems like a tax
increase to people.
Now, what I would intend to do, as I pointed out, is to
ensure that are not any increases in net burdens on people. I
think that there are many States that have pointed out ways in
which they would do that. Scott Walker in Wisconsin is one
example of somebody who said that any changes in Federal law
relating to internet sales taxes would be utilized to reduce
tax rates, and I think that that is the right approach.
Mr. Smith of Texas. Okay. Thank you, Mr. Moylan. Mr. Kranz?
Mr. Kranz. What we are talking about here is the tax gap
for use tax collection, and one of the proposals would try to
capture data and force consumers to pay their use tax. I used
to give speeches about tax, and I would ask for a show of hands
how many of you file your use tax reports annually. I stopped
doing that because it was only me and one other person in the
audience. It is a tax gap that is not being collected today.
On the question of is there more money, sure. If you create
an enforcement vehicle, it will collect more money. What is
going to happen with that money? Ten States have already
introduced and are considering legislation--some have passed
it--that would say if we get this money, we will reduce our
income tax rates. We will reduce our sales tax rates. We want
the money not because we want more money. We want it to have a
balanced system.
Mr. Smith of Texas. Okay. Thank you, Mr. Kranz. Let me go
back to Mr. Moschella and Mr. Sutton and ask you about the
Marketplace Fairness Act. Do you consider that to be an actual
increase in tax or, as Mr. Moylan suggested, just the
perception of an increase?
Mr. Moschella. We do not, and our client, Simon Properties,
fully supports the Marketplace Fairness Act.
Mr. Smith of Texas. Okay. Mr. Sutton?
Mr. Sutton. I give extreme credit to everybody that has
worked on the Marketplace Fairness Act. It has been an
extremely well-drafted form of legislation to try to address
this problem. There are definitely quirks that happen in sales
tax everywhere, and there are quirks under the Marketplace
Fairness Act that would increase tax, yes.
Mr. Smith of Texas. Okay. Thank you. Thank you, Mr.
Chairman.
Mr. Goodlatte. Thank you, and the Chair recognizes the
gentleman from Virginia, Mr. Scott, for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman. I was in the State
legislature, too, in the mid-80's, and a local credit card
company told us of the advantages of going to South Dakota. We
had to change our laws, too. They did not move.
I have a question on this. In your choice of laws, would
you get to choose based on where you are incorporated, where
your warehouse is, or where your corporate headquarters is, or
where you ship it from? Where would you choose, or do you just
get to pick the lowest tax State? Mr. Cox?
Mr. Cox. Thank you. I think you have heard from several
panelists that it is very important for the Federal legislation
to be clear on this. I think that you have every opportunity in
writing a Federal law that blesses a voluntary compact to do
that. If you left it open to gaming, I think you would get
rather obvious consequences.
I think you could do the same thing with respect to nexus
and ought to for reasons that are laid out in bloody
technicolor in Mr. Kranz's testimony. If we do not have a very,
very firm preemption in whatever law we write here, and we let
States continue with their aggressive push on nexus, then we
will also get what we deserve.
So we recommend in the home rule and revenue return
proposal that we use the BATSA definition for nexus because it
will answer all of those problems.
Mr. Scott. Okay. Well, one of the complications of this is
the ability to calculate and pay the tax. I have been told that
there is software that can calculate for you very easily what
the tax is and a service that if you pay them one check, that
they will distribute it to everywhere it goes, and that the
service is free. Is that accurate or not?
Mr. Cox. Well, I think I am stealing a line here, but it is
free like a puppy. You get the free tax software, but then you
have to pay to integrate with your other systems. And e-
commerce businesses or brick and click businesses have multiple
systems, not just one front end because they have got product
returns, they have got, you know, out-of-State, in-State, other
kinds of inventory systems. And each one, each separate module,
has to have this software integrated into it.
Mr. Scott. Well, they have to do that for shipping.
Mr. Cox. Yes. So what I am saying is that these are
presently existing software modules. Now when you give me free
software, I have to integrate it with my proprietary system,
and that costs hundreds of thousands of dollars on average for
a medium-sized business. One other thing is that----
Mr. Scott. Well, let me because I am running out of time.
Mr. Cox. Sure.
Mr. Scott. A lot of companies have a presence in a lot of
different States, some in all 50 States. So presumably they are
collecting the tax now. Do they have audit and regulatory
complications?
Mr. Cox. Well, the larger a business is, obviously the
larger its sales tax compliance burden. And a State that is in
all 50 States it seems to me is relatively better situated in
contending with these problems. No question about that.
Mr. Crosby. Mr. Scott?
Mr. Scott. Yes?
Mr. Crosby. Under the Streamline Sales Agreement, part of
that is to certify and provide to sellers software that will
calculate, collect, and remit tax freely to the vendor for all
the States that are in the Streamline Agreement. More than
2,000----
Mr. Scott. Is that in existence now?
Mr. Crosby. It is in existence now, and more than 2,000
sellers have volunteered to do that. So if the burdens were
that great, they would have never volunteered to collect tax in
States where they were not required to.
Mr. Scott. Now does that software calculate things like
exemptions, food tax exemptions, and all that?
Mr. Crosby. Absolutely.
Mr. Scott. And like I said, it was free. What are the costs
involved in getting the software?
Mr. Crosby. And under the Streamline Sales Tax Agreement,
the States actually pay the vendors of the software to provide
the software to the sellers. There may be some integration
costs, but in most cases, most online vendors use commercially-
available front end shopping carts. And all of the software
solutions that are out there today integrate with, you know,
the top 100 or 200 of the most common systems.
For some larger retailers, they may have legacy or
proprietary systems, and integration costs might be higher for
those. But certainly this Committee and the Congress has wide
latitude to offset or mitigate those costs were it to move
forward.
Mr. Scott. Mr. Kranz, can you say a word about what
implication all of this has on foreign sellers, whether or not
they would be collecting the tax whether or not they have a
presence in the United States?
Mr. Kranz. So in terms of foreign sellers, right now the
States have no ability to impose their sales tax on those
companies unless they are physically present. The Marketplace
Fairness Act, the Main Street Fairness Act, every version of
Federal legislation that has been introduced to deal with this
issue would require remote sellers located in a foreign country
to collect State sales tax, just like our domestic companies
do, unless you go to an origin regime. And then you are saying
if you are located in France or in Russia, you do not have to
collect our State sales tax.
So setting aside the origin proposal, every Federal
framework that has ever been discussed on this issue would
close a foreign loophole that exists today.
Mr. Scott. Thank you, Mr. Chairman.
Mr. Goodlatte. Thank you. The time of the gentleman has
expired. The Chair recognizes the gentleman from Ohio, Mr.
Chabot, for 5 minutes.
Mr. Chabot. Thank you, Mr. Chairman. First of all, just
again to make sure that I understand, all the witnesses here
have a version or have their own plan for their taxation of the
internet proposals here. I do not think anybody is actually
opposed to taxing the internet. Is that correct? Does anybody
have the position here that we should not tax the internet at
all?
Mr. Crosby. Mr. Chabot, I might just clarify that. We are
not suggesting taxation----
Mr. Chabot. I am not talking access or anything like that.
I am talking about sales only, sales tax. Does anybody have a
position we should not tax sales on the internet? Okay.
Mr. Sutton. Just about everybody at the table, if I may
speak, feels that----
Mr. Chabot. Okay. I just wanted to make that point, because
we do not really have anybody here who has the position that we
should not have internet sales taxes period. That is not the
position of anybody here. I just wanted to clarify that.
Now, you hear the number of probably 99 percent of the
internet sales taxes that are supposed to be taxed and be
collected are not taxed. Does anybody refute that that is not
even close, or anybody want to comment on that figure? In other
words, people are supposed to pay this internet tax, they just
do not. Something like 99 percent do not pay it. Does anybody
say that is not accurate or not true, or we are way off there?
Mr. Cox. I think that is preposterous. It is not even close
to true. Seventeen of the top 20 e-retailers already collect
sales taxes in 38 States, and the largest e-retailer is very
soon to be collecting for two-thirds of the American
population.
Mr. Chabot. So you are saying that a lot more internet tax
is collected than what people generally say.
Mr. Cox. Yes, for the simple reason that you have a
physical nexus rule, and the larger these internet sellers
become, the more places they are. By the way, that goes to the
race to the bottom question. You know, why in the world would
newegg.com be in New Jersey and in California with all those
people so that they have a nexus automatically and have to
collect those high in-State taxes, in those very high-tax
States?
Mr. Chabot. Mr. Crosby and Mr. Kranz, I think you want to
testify. If you could make it quick because I have a couple of
questions.
Mr. Crosby. Sure, Mr. Chabot. To the extent that sales tax
is not collected at the time of transaction, then you are
correct. It is not collected from the consumer in almost every
case. So unless the retailer is collecting the tax on the
transaction, whether it occurs over the internet, catalog, or
otherwise, then the use tax is unlikely to be collected unless
it is a business that is involved.
Mr. Chabot. Okay. Mr. Kranz?
Mr. Kranz. That was my same point.
Mr. Chabot. Okay. Thank you very much. I appreciate it.
Now, the idea that I think a couple of you mentioned, the idea
that the States, they would collect or it would be collected,
but then they would just lower taxes in an equal amount or an
equivalent amount. I find it very hard to believe that that
would actually happen with the States espousing, you know,
their concerns about having all kinds of things they have to
pay for. And to me, this looks like another revenue source that
is not being collected for the most part now. And I find it
just not credible that States are going to lower taxes by the
amount they collect here. Does somebody want to refute that,
Mr. Moylan, because I think you were the one that said it.
Mr. Moylan. Well, I think I would to respond to it, that it
sounds as though what you might prefer then is current law, and
what current law says is if you have a physical presence in a
State, you must collect its sales tax. If you do not, you do
not. And, you know, personally, I do not have tremendously
large problems with current law. I recognize that there are
issues with it, that none of these solutions are without their
potential pitfalls, and current law is no different. But I
agree with you that the impulse of some States might be to try
to use this as a new revenue source.
The challenge is, what is the Federal nexus with that? To
what extent can the Federal Government, can Congress dictate to
States what they do with their rates, and that is a very
limited extent. Congress can tell them that they cannot do
things that are a burden to interstate commerce, and that is
what we are talking about here is trying to establish the rules
on which States must operate, and then they can determine rates
for themselves. But I will be right there fighting with you to
make sure that they are lower than higher.
Mr. Chabot. Thank you. I have a constituent, Allen Finer,
who owns and operates a small jewelry store business. He works
out of a store, and he also sells online. He sells
approximately 600 items a month. According to Mr. Finer, the
Marketplace Fairness Act--and again, he is talking about that,
not necessarily your plans here--would force him to hire an
accountant to keep up with the ever-changing nature of each
State's multiple tax jurisdictions, and he says he cannot
afford that time. And he says I am a small businessman. How am
I supposed to handle paperwork for 9,600 different tax
jurisdictions in the country? Who will pay the postage for all
the forms? The extra tax I would have to collect for this
legislation is unfair. He has six employees. He would have to
let one go to hire an accountant.
Would somebody address the concern? Mr. Crosby?
Mr. Crosby. Mr. Chabot, yes. I understand the trepidation
for him because it is not something he is dealing with today.
But this Committee has great authority to craft a bill that
would ameliorate those concerns or eliminate them entirely. As
a jewelry store owner, jewelry is taxable in almost every
State, I think probably every State that opposed the sales tax.
So there is very little question as to whether the items that
he is selling are taxable. So there is no taxability
determination. It is very easy. It is taxable at the rate that
applies.
The software that is available today, to the extent that he
is selling on the internet, would be able to be integrated with
a shopping cart system, would calculate the tax, would remit it
to the States, could file all tax returns. And you have the
ability to provide immunity for audit if he is using certified
software. That is one of the things I mentioned in my written
testimony.
So I think that we should not be necessarily weighed down
by what is or is not in the Senate bill. You have great ability
to improve that Senate product and make it work for retailers
like the one you have in your district.
Mr. Chabot. Thank you. My time is up----
Mr. Cox. If I may, Mr. Chairman? Mr. Chabot, if I might
just----
Mr. Chabot. Yes, go ahead. My time has expired.
Mr. Cox. I think what the jewelry store is telling you, the
600 items a month jeweler, is that it is not the tax that he is
worried about as a merchant. It is the compliance burden, which
we should also think of as a tax, and it is a much bigger
problem. That is what is at issue here, and I think you tee'd
that up with your first question. It is not really about the
competitive differential of collecting the tax. There is much
less objection to that than there is to taking on this
compliance burden.
And with respect to how the software is going to make all
of this so simple, it is easy unless it is not. I was just
speaking with a merchant in Philadelphia who sells American
flags. And this is like the Florida stories you were telling.
This is just intrastate. This is not even, you know, having to
deal with the whole country.
So they came after him for back taxes for sales taxes
because he thought there was an exemption for American flags.
They said, how many stars on this flag? And he said 48. How
many stars are on this flag? And he said 13. They said, well,
you know that the exemption is only for 50-State flags. And he
said, no, how am I supposed to know this? And they said, well,
you know, it is your responsibility as the taxpayer. He said,
is it in the published regs? No. Well, where is it? It is in
decisional law. Well, can I look that up? Well, no, but you can
subscribe to a service and then you would know. And he said,
well, thank you. Now I know and I will do it right next time,
and they said, oh, no, no, no, you owe all of these back taxes,
and it almost bankrupted his business.
Now, if the software vendor does not have that in its list,
and I am sure they do not, then they are going to say, well, it
is not our fault, and then you get the right to litigate, and
how expensive is that? So those are the burdens we are talking
about, and those are the burdens that we have to worry about.
Mr. Moschella. Mr. Chairman, can I----
Mr. Goodlatte. The time of the gentleman has expired. We
will allow Mr. Moschella----
Mr. Moschella. Just 15 seconds.
Mr. Goodlatte. Very brief.
Mr. Moschella. These same arguments were made when Congress
considered the 21st Amendment Enforcement Act in 2000. And you
know what? The vendors and others who are concerned changed and
adapted and are complying and remitting State sales taxes all
over the United States.
Mr. Goodlatte. The gentlewoman from California, Ms.
Lofgren, is recognized for 5 minutes.
Ms. Lofgren. Thank you, Mr. Chairman, and thanks for having
this hearing. I think as we listen to this, it becomes clear
that this is not a simple issue. And if it were, it would have
been solved a long time ago. Looking at the audience here
today, I see Randy Fries, and I mentioned him because one of my
favorite stores in the entire world is Fries. I was there over
the weekend.
And, you know, that is an example of why this is important
to brick and mortar stores because we want to make sure that
there is an even playing field so that stores like that can
flourish. I am actually of the belief that in order to have a
tech economy, you have to have Fries in your county.
On the other hand, I have recently talked to a woman who is
a former tech worker, engineer, who retired. And before the
Affordable Care Act, her 20-something son got cancer, and she
ended up spending every penny she had, everything she had
saved. She sold her house to get medical care to save her son's
life, and she actually succeeded in that. But she ended up
being, you know, in her late 60's with not a dime to her name.
And she ended up starting a little small business. It is an e-
business. And she is, you know, very concerned that, you know,
with the kind of small margin she has and just barely supports
herself that she would have something complicated that she
could not survive in her e-business. And that is important,
too.
So, you know, as I am thinking about this, I had just
thought all along that if we did something, that we should have
a huge, you know, robust exemption for small businesses to take
care of ladies like that woman who saved her son. But there has
now been this discussion of having something that is so simple
that you would not even need a small business exemption.
But it turns out that is not so simple either, I think. You
know, as I am thinking about having one rate per State, you
know, I was in county government, as was the gentleman from
Ohio. And one of the things that we did in Santa Clara, or
actually our voters did, was to repeatedly increase their own
sales tax by a vote of the people for various projects--for
public health, for the county hospital, to improve rail
transit, to build highways.
How would you deal with voter approved sales tax in cities
or counties if you had one rate per State on these sales taxes?
How would that work? Does anybody have some guidance on that?
Mr. Kranz. Well, I think it creates a practical legal
process problem for States to participate. A one rate proposal
was discussed long, long ago, and rejected not only because of
that practical legal process problem, but as Mr. Crosby
testified earlier, a one rate proposal forces a tax increase in
at least half of the jurisdictions. You have got to get to a
common denominator.
So unless you want to force a tax increase, a one rate
proposal is dead on arrival before you even get to the legal
process questions about how to implement it at the local
government level when those decisions about tax rates are made
either by votes of people, or city councils, or county boards,
or other process problems that would be faced. So it was
considered and rejected very early on in the last 15-year
discussion.
Ms. Lofgren. But it is being discussed again today. And,
you know, I really want to do something that works. I
understand that the growth of online retail is far exceeding
the growth of brick and mortar retail. That is important to me,
and I think it is important to the commercial sector of the
United States.
On the other hand, I really am very skeptical that it is
possible to control choosing jurisdictions to avoid tax. I
mean, if you are an e-retailer, you have a lot of options to
locate and to avoid retail tax. Would that not essentially
create incentives for businesses to move to sales tax
jurisdictions, and would that not actually further impede the
growth or the prosperity of brick and mortar businesses? Mr.
Kranz, do you have a comment on that?
Mr. Kranz. Well, I think an origin system would cause a
complete upheaval in the retail community because it is so
easily manipulated. I am not an economist, and I cannot predict
exactly what that upheaval would look like. An origin system
taxes production and says we want to tax you if you are
producing and selling from here. Well, who wants to locate
their business there?
Ms. Lofgren. Right.
Mr. Kranz. They are going to move. Our sales tax system in
this country has always been a tax on consumption and the
proposals----
Ms. Lofgren. If I may, and I know my time is up, but this
is complicated. Recently somebody said in addition to the voter
approved sales tax, I mean, you have got, like, Monday is a
holiday for school clothes in county X. I mean, to say that we
are going to be able to accommodate all of that stuff by
software, I am sorry, I am pretty skeptical. And it is not just
the software, it is the audit exceptions that need to be
accommodated especially for small retailers.
I see my time is up, Mr. Chairman. I yield back.
Mr. Goodlatte. The Chair thanks the gentlewoman, and
recognizes the gentleman from Alabama, Mr. Bachus, for 5
minutes.
Mr. Bachus. How many of you all agree with the term or the
statement that ``the best government is a government closest to
the people?'' Could we just have a show of hands?
[Hands raised.]
Mr. Bachus. All right. So that is unanimous. I agree with
you that the best government is a government closest to the
people. When I look at services that I absolutely have to have,
other than national defense, it is schools, it is police
protection, fire protection, sanitation, water, roads. And that
is State and local government.
Since I have been a Member of Congress, I have State and
local governments come to me and say we need a new fire truck.
We need some help paying our police officers. We cannot afford
to bring water to this community. And, you know, I have
thought, you know, there is something wrong with this.
Why have we made them dependent on the Federal Government?
Why do they have to come 700 miles to get funding? And I will
tell you what it is. The same thing. I was a State senator, and
I was on the State school board, and I ran for Congress for one
reason. Two-thirds of the money when Harry Truman was President
stayed in the local communities and the States. Less than a
third came to Washington. Today two-thirds of the money comes
up here, so everybody has to come up with their hand out, and
that is demeaning. And I said we ought to reverse that. Ronald
Reagan campaigned on that. Barry Goldwater campaigned. Let us
put these things back in the States. Both recognized we have to
allow them to collect the taxes there.
Now, Mr. Malone?
Mr. Moylan. Moylan.
Mr. Bachus. Moylan. You have actually almost, to me,
proposed a system that is totally backwards. First of all, you
said they were theoretical taxes. Is that what your testimony
was?
Mr. Moylan. The testimony is that it theoretically falls on
the individual, but that the administrative burden, the legal
burdens, falls on the business.
Mr. Bachus. Well, if I buy a new car over the internet and
I do not pay sales tax, and the State of Alabama comes to me
and says you did not pay the tax, could I say that was
theoretical?
Mr. Moylan. Well, no. That would actually be enforced when
you register and title the vehicle. That is one area where
business tax works quite well.
Mr. Bachus. But could I hide behind that? If I did not pay
taxes on something I bought out-of-State, could I assert that
in court that it really was not legally owed?
Mr. Moylan. No, and actually you make a very good point
that use tax really is an individual tax. Use taxes are due
from the individual, and that is the problem is that they are
not administered----
Mr. Bachus. A sales tax is not on the seller. It is on the
buyer.
Mr. Sutton. That is not correct in most States. Sales tax
is an excise tax. It is imposed in most States on the right to
exercise your right to sell property.
Mr. Bachus. Well, what I am saying, if I buy something on
the internet, do I not pay the tax?
Mr. Crosby. In all of those States it is also mandated to
be passed through to the consumer. So certainly the business
collects, but, you know, my employer collects----
Mr. Bachus. They are a conduit.
Mr. Crosby [continuing]. Social security tax, my personal
income tax, my Federal income tax. My mortgage company collects
my property tax.
Mr. Bachus. Sure.
Mr. Crosby. I am paying those taxes.
Mr. Bachus. Sure. I mean, this idea that the seller is
paying is just--I mean, I am responsible for them.
Mr. Moylan. It is a question of who the legal burden to
comply with that obligation falls on.
Mr. Bachus. Well, okay, let me ask you----
Mr. Moylan. And all of the ones that Joe just pointed out,
the burden falls on the individual.
Mr. Bachus. Let me say this. Everybody here has got a
different plan. You have got a plan, you know. Mr. Moschella,
you have got a plan. But why would we as the Federal Government
try to make that decision for every city and every county and
every State? Is that not kind of arrogant?
Mr. Sutton. That is the beauty of the consumer private
reporting system. We let them make those decisions. We give
them the information, and then we let them do with it what they
will.
Mr. Bachus. Well, Mr. Moylan, he is actually proposing
something that would prevent them from collecting their own
taxes. I mean, that is pretty radical. I have never----
Mr. Moylan. If I may speak for myself.
Mr. Bachus. Has the Congress of the United States ever
passed a law prohibiting a local government from charging a
sales tax?
Mr. Moylan. What I am proposing----
Mr. Bachus. No, I am just asking have they ever done that.
Do you know of one case?
Mr. Moylan. The point of your question, it seems to me, is
to get at----
Mr. Bachus. No, no, the point--I am just saying, I mean, is
that not a pretty radical idea for me as a congressman to pass
your origin sourcing and tell every city, and every county, and
every State that they could not collect a sales tax?
Mr. Moylan. It is only as revolutionary as what already
exists for the vast majority of sales today.
Mr. Bachus. Well, I am saying we have never done it before.
Has any State or any other country, to your knowledge, ever,
ever proposed this on a cross-border sale?
Mr. Moylan. Has any place used origin sourcing? Certainly.
Mr. Bachus. In cross-border. Texas you said, but they do
not do it on interstate----
Mr. Moylan. There is one example that I utilized in my
written testimony, that the European Union utilizes origin
sourcing for business to consumer sales.
Mr. Bachus. Okay. So you want to go to that. You want to go
to that.
Mr. Moylan. Well, they did it for administrative
simplicity.
Mr. Bachus. No, that is all right.
Mr. Moylan. But I wanted to respond to----
Mr. Bachus. We do not do that in the United States.
Mr. Moylan. I wanted to respond to one point that you were
getting at earlier, and it sounded like you were expressing
concern about the erosion of the sales tax base. And I do not
think that it is wrong to have concerns about the erosion of
the sales tax base. What I would say is that----
Mr. Bachus. Well, actually what I am concerned about----
Mr. Goodlatte. The time of the gentleman has expired. We
will allow the gentleman to answer the question. The time of
the gentleman has expired.
Mr. Bachus. And could I tell him--well, actually we have
gone over 10 minutes on----
Mr. Goodlatte. No, we have not gone over anywhere close to
10 minutes. We have been watching very closely.
Mr. Bachus. Oh, okay. Well, I will let him answer.
Mr. Goodlatte. The gentleman is over a minute now. But I
would want him to answer the question.
Mr. Bachus. But that is not my concern. My concern is that
if I buy something in Washington, I do not want to pay
Washington State. I want to pay, you know, Homewood where I
live.
Mr. Moylan. Well, then it sounds like----
Mr. Bachus. Because that is where my kids go to school.
That is who----
Mr. Goodlatte. The time of the gentleman has expired. The
Chair recognizes the gentleman from Georgia, Mr. Johnson, for 5
minutes.
Mr. Johnson. Thank you. Thank you, Mr. Chairman. I would
ask unanimous consent to place into the record the following
materials in support of collecting online sales taxes. One is a
letter from the Streamline Sales Tax Governing Board*
explaining the key components of the Streamline Sales and Use
Tax Agreement. Also resolutions from the cities of Cave Spring,
Rome, Thomson, and Vienna, Georgia describing the positive
impact of remote sales tax collection on local economies in
Georgia. And last, but not least, a letter from the Liberty
County Chamber of Commerce noting that the Marketplace Fairness
Act would strengthen the economy and allow greater transparency
with the tax code. I would ask that these be considered and put
into the record.
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*Material previously submitted, see page 9.
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Mr. Goodlatte. Without objection, they will be made a part
of the record.
[The information referred to follows:]
__________
__________
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----------
----------
Mr. Johnson. And, Mr. Chairman, I thank you for holding
this hearing today. Uncollected tax sales are costing us
billions of dollars at a time when States' budgets are slimmer
than ever. According to a study from the University of
Tennessee, States sustained over $52 billion in losses from
uncollected taxes on e-commerce sales between 2007 and 2012.
In 2012 alone, the most difficult budget on record for many
States, roughly $23 billion in State sales taxes were
uncollected. I imagine that is really tough on those States
that have no income tax and rely largely on sales taxes for
their revenues. And according to conservative economic
theorist, Arthur Laffer, closing the online sales tax loophole
in my State of Georgia would generate over $50,000 new jobs and
over $15 billion in additional GDP by 2022.
Passing common sense legislation like the Marketplace
Fairness Act would result in lower taxes as it in has in
Georgia. What is more, States across the country could expand
social programs to help our hungry, sick, and poor while also
having much needed revenue to build countless schools, roads,
bridges, and other infrastructural projects that put Americans
back to work.
Mr. Chairman, we need a solution to this tax loophole that
needs to be closed. An even-handed approach like the
Marketplace Fairness Act would protect consumers' privacy,
avoid headaches and consumer surprise, and ensure compliance
costs are minimal. Unlike some alternatives that this Committee
will contemplate in today's hearing, internet sales tax
legislation would make sales and use taxes more efficient and
avoid program administration problems. But I am open to new
proposals that tackle this issue in an even-handed way because
it is time that we solve this crisis.
The Committee has held numerous hearings on the issue. We
understand the problem, and we know that we need to fix it. The
Senate has already reported legislation that is overwhelmingly
bipartisan, and it is time for this Committee to follow suit.
As the Ranking Member of the Subcommittee, I look forward to
working together with you to get this done.
Now, I would say that State governments rely on sales and
use taxes for nearly 31 percent of their total revenue. And
most of this revenue is collected by retailers at the point of
sale in the form of a sales tax based on the retailer's
presence in the State. For sales, when the retailer is not
present in the State, a use tax would be owed by the consumer.
But that places undue burdens on the consumer to pay the tax,
and at this point, only 1 percent of those taxes are collected.
And so, this Marketplace Fairness Act would make it simple
for consumers to be able to contribute to the economies of
their States and their local governments as well. And so, for
the things that my Chairman, Mr. Bachus, mentioned--police,
fire, hospitals, roads, education--those things, those are
State expenditures that are hurt. We cannot provide those
services if the revenues are not there. And if we let this play
out to its logical extreme, brick and mortar will go away, and
all transactions will be done via internet. And if we do not
correct this right now, there will be no taxes collected on
transactions.
So with that, I will yield back, Mr. Chairman.
Mr. Goodlatte. The Chair thanks the gentleman, and
recognizes the gentleman from Iowa, Mr. King, for 5 minutes.
Mr. King. Thank you, Mr. Chairman. I thank you and the
witnesses for this hearing we are having today. It looks to me
like there are several of you that have lived this for a long
time, and there is a lot of expertise at the table.
I am curious. First, I would turn to Mr. Crosby. In your
testimony you said there are 17 consecutive double digit
quarters of e-commerce increase. And so, can you tell me at
this point then what percentage of the taxable commerce goes to
e-commerce?
Mr. Crosby. According to the most recent census, the
unadjusted figures are that 7 percent of all retail commerce is
now e-commerce.
Mr. King. Seven percent.
Mr. Crosby. Correct.
Mr. King. And 10 years ago, what was that?
Mr. Crosby. .7 percent.
Mr. King. Okay. And is there a projection on where that
takes us in 10 years?
Mr. Crosby. It will continue to increase. I do not think--
-- [Laughter.]
Mr. King. Okay. We can project out however we like at that
percentage a year. That is a smaller number than I expected. I
expected it would give me a little bit more heartburn than it
actually does. But can you tell us how many different sales tax
districts there are in the United States?
Mr. Crosby. Sure. There are about 9,600 sales taxing
districts in the United States. Many of those are local
governments, county governments, or different districts for
special purposes, as Ms. Lofgren talked about.
Mr. King. And it was curious to me that some of her track
of thought was tracking the same path that I was following on
that. And so, when you look at all of these districts, I mean,
how often do you anticipate one would need to upgrade their
software with these 9,600 districts that could potentially be
changing their tax rates at any time?
Mr. Crosby. One of the components of most of the pieces of
legislation that have been introduced would restrict how
frequently State and local governments could change their tax
rates or their tax bases to a calendar quarter to make it
easier for software companies to keep up. They do so today.
Mr. King. They could upgrade once a quarter under that
proposal?
Mr. Crosby. Correct, and they do so today. They can keep
up. Certainly it would be easier if it were restricted to
quarterly.
Mr. King. I would like to mention to the Committee my view
on this. But first, before I forget to do so, I have a letter
from Governor Terry Brandstad that essentially says that he is
in general support of the Senate version of the bill, and he
would take any tax revenue that came to Iowa and convert that
into tax deductions, similar to Governor Scott Walker. I would
ask unanimous consent to introduce this letter into the record.
Mr. Goodlatte. Without objection, it will be made a part of
the record.
[The information referred to follows:]
__________
Mr. King. Thank you, Mr. Chairman. And then just to lay out
my position here is that I believe that it is just and it is
equity to collect sales tax for sales, whether they are brick
and mortar, or whether they are click, and whether they are
foreign sale as well. And I would like to see a balance and a
level playing field, and I would like to see equity in this
text, but I have got to have the simplicity that is there, too.
And the one thing that came to me that impressed me more
than anything else was the complexity that could be visited
upon someone who was in internet sales and catalog sales that
had multiple sales in a higher percentage of these 9,600 taxing
districts. I mean, it looks to me like that complexity and the
changing notion of that, even though we have software, gets to
be too high a burden on our retailers.
I would go back to Mr. Kranz and say I did not quite
understand with full clarity your response to Ms. Lofgren. If
the Federal Government engaged in this regulation only with
regard to a single tax rate for each State and let the States
then figure out the distribution within their borders, was that
part of the discussion that 15 years ago was rejected?
Mr. Kranz. It was, and, again, it was because of the fear
that it forces a tax rate increase for all the lower
jurisdictions. So the conclusion at the end of the debate of is
one rate per State the right answer was, no, in today's modern
economy there should be an app for that. There should be
software that can do it. And, in fact, there----
Mr. King. But how does it force a tax rate on a State? I
mean, I was in the State legislature. All taxing jurisdiction
that is inside the State of Iowa is authorized by the Iowa
General Assembly. And so, they have that choice, but they grant
the taxing authority to the jurisdictions. So it really does
not exist unless it is granted by the State. Would you respond
to that?
Mr. Kranz. In some States, that is right. The local ability
to impose tax and determine tax rates is granted by the State
legislature. In other States, in Colorado, for example, the
locals have what is called home rule authority. They have
Colorado constitutional rights to set their own rates. They do
not need the legislature's approval.
Mr. King. My time is running out, and so I would like to
say this. I want to thank Mr. Moschella for giving me the
Bowman case. I think I can find another case that that is on
point on. I will catch up with you on that a little bit later.
But I wanted to let the Committee know that I am concerned
about how we get this right because one day I want to abolish
the entire Federal income tax code and replace it with a
national consumption tax. And if we get this right, it helps
lay the foundation for H.R. 25, the Fair Tax Act. And so, I am
focused on this more than I might otherwise, but it is very
important to this country to get this right. And I want to
protect our brick and mortar people, and I want to allow e-
commerce to expand. I want to do it with simplicity and not
with over-burdened Federal regulations.
So thanks for all your efforts and your focus on this. It
has been an excellent panel. Mr. Chairman, I yield back.
Mr. Goodlatte. The Chair thanks the gentleman, and
recognizes the gentlewoman from California, Ms. Chu, for 5
minutes.
Ms. Chu. Thank you, Mr. Chair. Mr. Kranz, I have a question
for you, but I would like to make some comments first. Before I
came to Congress, I was on the California Board of
Equalization, which is our country's only elected tax board,
and administered the sales and use tax. So I can personally
speak to the dramatic decline of sales tax revenue due to the
increase in sales online which go uncollected.
And in my State of California, it is estimated that over $1
billion of use tax remains uncollected. The figure is expected
to grow. I felt that the current system for collecting use tax
was one of the most inefficient that I have ever seen. Very few
people know that such an obligation even exists. In fact, they
are downright shocked when you talk about it. And at the Board
of Equalization, we had an army of auditors hunting for use tax
obligation. But with all our efforts, we only collected 1
percent of the entire use tax owed.
And in addition, we see more businesses closing their doors
on Main Street. Radio Shack is closing 1,100 stores throughout
the country. We just cannot wait to pass legislation. And, in
fact, I am an original co-sponsor of the Marketplace Fairness
Act.
And so, Mr. Kranz, we have heard five proposals today.
Could you please rate them from the least to the most viable
and explain why? [Laughter.]
Mr. Kranz. That is your job. [Laughter.]
Well, I would say that my view of the two origin sourcing
proposals and the reporting regime, they should be non-starters
because they really are not efforts to fix our country's sales
tax system. They are efforts to go in an entirely different
direction and create a whole new burden and regime, and create
all kinds of problems as a result.
Mr. Moschella's proposal is a novel proposal. It says,
okay, if you do not want to collect sales tax, we are putting a
fence around each State. There is a border that you cannot
cross unless you collect the tax. It is novel, but I do not
think Congress should be in the job of putting fences around
the States.
The only real alternative is as Mr. Crosby suggested, a
Federal framework that provides simplification, uniformity, and
technology, and protects remote sellers from what is happening
at the State level, and the attacks that remote sellers are
under.
It is your job to decide how much simplification, how much
uniformity, and what kind of technology that bill would
include. The Marketplace Fairness Act in the Senate is a
version. Earlier versions of the bill had lots of different
requirements, and a bill could be fashioned that provided the
right level of protection to remote sellers while guaranteeing
a level playing for brick and mortars and a stable revenue
source for the States.
Ms. Chu. And there was another proposal that you did not
mention, which had to do with the reporting. Why is that not as
viable of a way of collecting the use tax?
Mr. Kranz. Well, again, it is not a tax regime. It is an
obligation on sellers saying, well, you do not have to collect
sales tax or use tax, but you need to build in a whole new type
of software that does not exist today. There needs to be a
federally created database and repository for all of this
information about what consumers are purchasing in each State.
And then there needs to be a mechanism to share that
information with the States to allow them to go out and audit
consumers.
Now, do we really want to walk away from our sales tax
system and create this burdensome new regime to capture data,
and store it somewhere, and transmit it to the States, and
allow them to audit consumers instead of simply requiring
remote sellers to collect tax under a logical set of rules? I
do not think that that is what is in our economy's best
interest.
Ms. Chu. You talk in your testimony about the consequences
of inaction. You talk about increased litigation and increase
on certainty for remote sellers and consumers. Could you expand
on that?
Mr. Kranz. The consequences of inaction, we saw this in the
1980's with the National Bellas Hess Project. The States got
tired of waiting for Congress. They are getting tired again
today. And rather than focusing on simplification and
streamline and uniformity, as the Chairman asked me at the very
beginning, are they walking away from simplification? Well, 17
States have said if Congress is not going to reward us for
simplification, we are going to fix this on our own. That to me
is the real threat to the economy is State by State
inconsistency and burdensome approaches targeting very
specifically e-commerce business models.
And when you have that kind of approach, it raises
constitutional questions. There will be litigation, and there
is already litigation popping up around the country as a result
of that State self-help. I do not think it is healthy for our
economy as well.
Ms. Chu. Thank you, and I yield back.
Mr. Goodlatte. The Chair thanks the gentlewoman, and
recognizes the gentleman from Utah, Mr. Chaffetz, for 5
minutes.
Mr. Chaffetz. Thank you. Thank you, Chairman, and thank you
for taking----
Mr. Goodlatte. I apologize. I did not see that Mr. Franks
had arrived back, and so I am going to go to him first. Last
week I overlooked him all together. So today he goes first, and
then we will come back to you after we go to him. [Laughter.]
Mr. Franks. I will assure you----
Mr. Goodlatte. I apologize to both of you.
Mr. Franks [continuing]. It is definitely a plot, and so--
-- [Laughter.]
No, I appreciate it so much, and sorry about that, Jason.
The people probably would have appreciated your questions more,
so you will probably be next.
But in any case, Mr. Chairman, I think all of us on this
Committee recognize that the sales tax that should be collected
by internet providers or companies on the internet sometimes is
not done as consistently as it should be. And we recognize that
there is an inequity there, that some of the brick and mortar
companies do have an inequitable situation. We want to try to
find the best way to address that. The challenge, of course, is
finding a way to do it that does not create more inequity and
more complexity than it solves. And that is always the
challenge.
And let me, if I could, start with Mr. Cox. You know, there
are a lot of smart guys around and a lot of nice guys around
here, but it does not happen so often that they come in the
same package. In your case, Chris, it did, and we appreciate
you being here.
And I know that others have already described this, but as
you know, some suggested that there is a software that can help
businesses facilitate tax collection on remote purchases. Can
you clarify to the Committee if you think the improved
technology fully alleviates the collection burden, especially
for these small businesses?
Mr. Cox. Well, it is an important question because one
might think there is an app for that and that we can then
assume the problem away. But, in fact, in addition to the
integration costs, which we discussed earlier, that are
substantial even for businesses of, you know, say $5 million,
we are talking about tens of thousands of dollars of
integration costs that are not accounted for in the ``free
software.''
But more important than that, because this analysis is
really all about burden, the liability for getting it wrong
always is going to rest with the taxpayer because if you write
in the legislation that for software errors the software
company is responsible, well, what will happen in real life?
What will happen is that when a mistake is made, the software
vendor is going to say it was not my fault, and then what do
you do?
Then you get a right to litigate, and that is enormously
expensive. There is not time, there are not resources in the
Federal system usually to contend with the long wait to trial
before a judge, where you put facts to the law. And that is why
over 90 percent of cases in the Federal system settle. So you
are not really giving people what they need, which is the
comfort that it is not their responsibility.
And as I mentioned earlier, sometimes these laws, not the
rates, but the laws about, you know, what is and what is not
taxable are exceptionally densely reticulated. They are very
complicated. And the software might or might not get it right.
But as I say, if the software does not satisfy the tax
collector, then you will certainly hear about it as the
taxpayers.
Mr. Franks. Mr. Chairman, it is my opinion that if we do
have some kind of a mechanism, as you suggested, that States
compete, that it not only incents productivity and serves the
buyer and the seller the best, but that it de-complicates the
situation. So I guess my next question is for Mr. Crosby. How
would the MFA need to be amended or other remote seller
legislation be written to make the collection process so simple
and expensive as to render a small business exemption
unnecessary, as suggested by Chairman Goodlatte in his
principles? Is there a way to do that?
Mr. Crosby. Certainly, Mr. Franks. Thank you for the
question. Your home State of Arizona is a good example of a
State that has worked diligently over the past few years to
simplify their own sales taxes for sellers that are already
collecting the tax. The Marketplace Fairness Act included a
number of simplifications. In my testimony I lay out several
more that could be considered by this Committee to make it
simpler for remote sellers.
To your previous question about software, software
certainly cannot do everything, but it can do a lot, especially
if it is combined with a rational framework that this Committee
and this Congress could set, such as providing for audit
protection for remote sellers; for those who are larger to
provide a consolidated audit so they would be only audited one
time; a single point of collection or a single point of
remittance so that they only remit to one place; a single point
of registration. All the sorts of things that relatively easily
done and that are part of the Streamline Sales and Use Tax
Agreement right now could be extended to sellers across the
country to minimize the risk that Mr. Cox identified of
litigation.
As Mr. Kranz has noted, without congressional action, that
litigation is likely to be much more diverse and much more
burdensome on businesses as States are increasingly looking to
make sure that the taxes that are legally owed are collected.
Mr. Franks. Well, thank you, Mr. Chairman. I guess I am
pretty much out of time here, but it just goes to show you that
if you just do it like Arizona does it, most of these problems
would go away. [Laughter.]
And I appreciate you all coming.
Mr. Goodlatte. I am glad to hear that. And the Chair now
recognizes the gentleman from Florida, Mr. Deutch, for 5
minutes.
Mr. Deutch. Thanks, Mr. Chairman. And, Mr. Chairman, I am
pleased the Committee is holding a hearing on the pressing
matter of remote sales taxes. As a former State senator, I
dealt with the issue extensively in Florida, and I understand
how crucial the loss of revenue for States and local
governments. Twenty-three billion dollars in State sales were
uncollected in 2012. We can imagine the impact that those
dollars would have in meeting the needs of State and local
governments, an important point, I think, for all of us to
consider as we are having this important discussion about taxes
and about tax law.
First, before I go any further, I would like to request,
Mr. Chairman, a letter from the International Council of
Shopping Centers** be submitted for the record. Mr. Chairman,
if we could ask that this be submitted for the record.
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**Material previously submitted, see page 8.
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Mr. Goodlatte. Without objection, it will be made a part of
the record.
Mr. Deutch. I appreciate it. I think the letter highlights
the importance of returning parity between internet and brick
and mortar sales, the urgent need for action, and, most
importantly, the desire to find a workable solution, which is
really what this hearing is about, without getting bogged down
in unnecessary partisanship.
And, Mr. Cox, I would just like to take a step back from,
again, what is an important discussion with tax law and focus
on some of the bigger issues for a minute. You said a minute
ago that the analysis is really all about the burden, and I
completely agree. And I guess I would ask you and I would ask
the panelists, when we think about the burden that we are
imposing, should we not also be thinking about the burden that
we are imposing currently on business owners in very corner of
this country by allowing a system to continue where independent
retailers, retailers who play crucial roles in our communities,
find themselves at a disadvantage.
I will not ask any of the panelists to raise their hands
and tell me if they have ever gone onto their iPhone in a store
to check prices, or whether you have then taken the next step
of purchasing something online because it is less expensive and
you can avoid sales tax. I will not do that. But I would
suggest it is happening a lot.
And when we talk about the burdens that are imposed, the
burdens that are imposed are not just imposed on large
retailers. And by the way, they are not just imposed on mom and
pops. The burdens that are imposed are imposed on entire
communities. And when this situation is allowed to continue and
stores close, when those stores close, it is not just because
the burden on the store owner was too much. The burden then
winds up being shared, a concern of yours, Mr. Cox, in this
other context. But it is a burden that winds up being shared,
and it is a burden that winds up being shared not just by the
owner, but by those employees who are out of work.
And when that store, when that retailer closed because they
could no longer compete, it is a burden that is imposed on that
community. If that store is in a shopping center, we know that
if one store closes, others may close as well. And when large
portions of a shopping center go dark, that impacts the
community. Fewer people come. It makes it more unsafe. It means
that more resources at the local level have to be expended in
keeping that area safe.
When that burden is imposed on those stores that close, it
is, again, not just those stores, but if those stores are
downtown, it means fewer people are coming into town. It winds
up changing the way that people behave in those communities,
and ultimately winds up changing demographics. It can wind up
changing demographics of the community, all because of
decisions that are made stemming from a tax system that treats
different businesses differently.
So I am concerned about protecting small sellers from an
overly burdensome tax regime. I am concerned about that. I am
also concerned about protecting small sellers from a tax regime
that treats them differently. And what I worry about is
different tax policies, one, and from some of what we have
heard here today, one for traditional retailers that have no
online presence, one from brick and click retailers, another
one for purely online retailers.
I do not, and I am confident saying that my colleagues here
do not believe the government should be in the business of
picking winners and losers. That is not something that we
should do. And do you not believe, and, Mr. Kranz, I guess I
will ask you the question. This current system that we have
that places the sales tax compliance burdens on consumers, I
mean, ultimately the first question is whether that is fair to
consumers, asking consumers to figure out the sales tax for
their location and where to send it, to calculate the amount,
to send it into the appropriate authority. It is not fair to
consumers, is it?
And ultimately, if it is not fair to consumers and it is
not fair to the business owners, and we are looking at all of
these possibilities that may wind up favoring one business over
another, should we not actually move forward with legislation
that does what the Marketplace Fairness Act does, which is
create a system that is fair to consumers and fair for all
business?
Mr. Goodlatte. The time of the gentleman has expired. We
will allow the gentleman to answer the question.
Mr. Kranz. I think you are exactly right. And what the
rules are for that system, what the framework looks like, it is
Congress' job to decide. You have the ability to say how much
simplification, how much uniformity, what kind of technology
should be deployed. The job should be easy enough that it can
be done without unduly burdening remote sellers in any commerce
world. And it should not be done by placing the burden on
consumers.
I have a couple of tax lawyer friends who actually track
all their purchases and calculate their use tax liability. I do
not. I file every year, but I just put a round number on the
return because I am not going to take the time to do that. It
is an unreasonable burden to put on consumers.
Mr. Goodlatte. The Chair recognizes the gentleman from
Texas, Mr. Poe, for 5 minutes.
Mr. Poe. Thank you, Mr. Chairman. Thank all of you all for
being here today. Appreciate the testimony. The way I look at
this situation being from Texas is the fact that Texas should
be able to tax people who do business in the State of Texas. So
it is a States' rights issue as far as I am concerned on this
issue, and the Federal Government is getting in the way of
that.
We do not have a personal income tax in Texas or a business
income tax, and I think that is the primary reason why we are
doing real well, which is a different issue completely. But our
source of revenue to the State is primarily the sales tax
concept and property taxes. And I would like to just be clear
on the issue as it is today. The fact whether or not under
current law a company is doing business out of the State,
selling a product in the State, consumer buys product, is there
a tax that is owed already under current law, but just not
collected?
Mr. Sutton. Yes, Mr. Poe, that is correct.
Mr. Poe. So I get an amen from all six of you on that one?
Voice. Yes, absolutely.
Mr. Poe. Okay. To those people who say that it is a new
tax--oh, this is a new tax--if we allow States to collect a tax
that is already owed, it is not a new tax unless I am missing
something. It is a tax that the consumer, the buyer now is
supposed to pay, but because there is not enough red tape to
make it work, it is not collected by the State. I mean, I guess
I am saying the same thing I already said. Is that kind of the
same----
Mr. Moylan. Mr. Poe, if I may respond.
Mr. Poe. You can make it clearer.
Mr. Moylan. It is a new administrative burden, and Texas is
an interesting example. So the solution that I put forth,
origin sourcing, is something that is already employed in Texas
for intrastate sales today. And in terms of----
Mr. Poe. But it is a tax authority owed.
Mr. Moylan. Yes.
Mr. Poe. I mean, there is a cost to set the thing up.
Mr. Moylan. And I think that the issue with the Marketplace
Fairness Act and proposals similar to it is that if you are
supporting that, what you are supporting is Ms. Chu's friends
from the California Board of Equalization coming to your
businesses in Texas and requiring collection and remittance of
their sales tax. And that is a very serious concern from my
perspective. It is an interstate commerce concern. It is a
burden on those businesses.
And so, I do not think there is a question about whether or
not the taxes are collected. It is clear that the use tax
system has failed. The question is whether or not something
like the Marketplace Fairness Act or the proposal that I
forward or what have you is a way to address that without
violating those principles of States' rights being important,
but ending at the State border. And that is something that I
suspect you probably agree with generally. And I would put
forth to you that the Marketplace Fairness Act fails that test.
Mr. Crosby. Mr. Poe, if you would not mind if I respond.
What Mr. Moylan's proposal would try to do is have Texas
residents pay tax to another State, and that is clearly
taxation without representation. The money would go to the
other State. The other State would use it.
People who move to Texas, as you say, many of them move
because there is no personal income tax. They know when they
live there, their sales tax funds government. If they make a
choice to purchase online under an origin sourcing system to
avoid that tax, that is not tax competition. That is tax
arbitrage, and it is something that the Congress certainly
should not endorse.
Mr. Poe. Mr. Cox, did you want to say something on that?
Mr. Cox. Yes. It just occurred to me that Mr. Crosby
probably does not live in the District of Columbia.
Mr. Crosby. I live in the State of Maine.
Mr. Cox. Right. So when he buys lunch here and pays sales
tax to the District of Columbia, is that something that is----
Mr. Crosby. I think that is perfectly fair. I am here using
the services. I am physically present here. It is a destination
basis. Destination basis does not mean where I live. It means
where I purchase the good, where I take possession of the good,
where I consume the good.
Mr. Cox. So I am happy to hear that you are in support of
the District of Columbia collecting tax on you even though you
live in Maine and you are the customer.
Mr. Poe. Just a second. Wait a minute. I am reclaiming my
time. [Laughter.]
This is not a debate format. I am in charge for another
minute and a half anyway, but I appreciate it. Mr. Cox, let me
specifically ask you really the same issue. Is your concern the
way this problem is solved, or do you think that this is a new
tax completely, and we are just raising taxes on folks?
Mr. Cox. It is absolutely a question of how to solve this
problem. You know, the art of taxation is like plucking a
goose. The object is to get the most amount of feathers with
the least amount of squawking. And the squawking is related
to----
Mr. Poe. Would you say that one more time? [Laughter.]
Mr. Cox. The squawking is related in large measure to the
burden, the compliance burden, because, you know, if your
object is to collect the tax, if you could do it in an
absolutely frictionless way, that would be ideal. If you did
not want any squawking, you would collect no taxes, but, of
course, that is off the table because we are trying to raise
revenue. That is the object.
So the next best thing is minimize that compliance burden.
And the trouble with MFA and the trouble with any system that
sets 46 different taxing jurisdictions against one business or
9,600 taxing jurisdictions against one business or a business
with locations in 4 or 5 States, what have you, is that there
is innately a compliance burden.
And it has been very, very carefully laid out here this
morning with the State of Florida as an example, you know, just
in one State, complying with these laws is very, very
difficult. And nothing that Congress can do, no matter how you
write the law, is going to take away the ultimate liability
that the business bears. And it is particularly burdensome for
a small business.
Mr. Goodlatte. The time of the gentleman----
Mr. Cox. One other thing about the compliance burden that I
want to say----
Mr. Goodlatte. We are very short of time. I just want to--
--
Mr. Poe. I yield back.
Mr. Goodlatte [continuing]. Remind all Members that we have
votes. We are now told they could occur as early as 1. And if
that occurs, some of our Members are going to get short-
changed.
Mr. Cox. Mr. Chairman, I just wanted to add that nobody has
mentioned: catalogs. There is no app for that. The compliance
for catalogs is you manually do it, and that is really hard.
Mr. Goodlatte. Got it. The Chair recognizes the gentlewoman
from Texas for 5 minutes.
Ms. Jackson Lee. Mr. Chairman, thank you so very much. It
is good to see you, Congressman Cox. Thank you all for your
testimony. Just for the record, I was the Ranking Member on the
Homeland Security Committee, and so I was delayed. I thank the
Chairman very much and my Members.
In a hearing some while back, Representative John Otto of
the Texas State House of Representatives in a question that I
asked regarding--the hearing was on a different topic--
regarding the fairness and exemptions for online small
businesses, not for the bricks and mortar. But the point that
he made, I think, is relevant for this particular hearing. And
he made the point that out of the State of Texas, that an
estimated $600 to $800 per year in sales and use taxes goes
uncollected from out-of-State sales. With that premise, I want
to raise my questions.
I also want to put on the record that unfortunately many of
our State elected officials think that it is attractive to
continue to reduce corporate property, personal income taxes.
Certainly we are sympathetic to those who pay it, but at the
same time, the education of our children goes lacking. The need
for water reform and for issues dealing with the environment,
issues dealing with healthcare, State healthcare in particular,
the bricks and mortar that they need to have goes lacking.
So this is not an attempt to punish any industry as much as
it is to recognize there is some relevance, very strong
relevance, to fairness. And certainly I want to put on the
record that I believe that the investment that is made in
bricks in mortar in particular, even though there are also
small proprietorships that may be worked from their home. But
the input that they have on the infrastructure is crucial to be
able to be responsive, too.
Now, we are looking at what kind of construct can we have.
So I want to ask Mr. Moylan, can you explain the--and this is
in the backdrop of the Senate-passed bill that is now looming
large in front of us. Can you explain the origin sourcing and
its potential effects on State revenue?
Mr. Moylan. Sure. Origin sourcing is, as I mentioned
earlier, already in effect in your home State of Texas for
intrastate remote sales. So if somebody from Austin purchases
something from Houston, the business in Houston would collect
that tax and remit it to the appropriate authority.
And so, what I am suggesting is that Federal Government
take the standard that already covers some, you know, 92 to 94
percent of all commerce today--business to consumer, retail
commerce--and extend it to that last 6 to 8 percent, which
exists online for remote sales--online and catalog, as Mr. Cox
pointed out. And so, I think that that is a much simpler
solution. It is certainly dramatically simpler in terms of
collection for the business.
And what it is based in is the notion that the taxpayer for
purposes of sales tax is the business rather than the
individual. Certainly it is a complicated issue that, you know,
there is no sort of obvious answer to any of these things. But
in terms of who has the legal burden of complying with that tax
in terms of who would face audit and enforcement action, it is
the business. And in that case, I think it is reasonable to
have the business collector remit that tax based on where they
are selling from. And that is the idea behind origin sourcing.
Ms. Jackson Lee. It certainly is a very fair system to the
extent that it is logical. The question would be whether or not
we have a landscape in America where nobody in some
jurisdictions are selling anything. What you are suggesting is
if Houston sells it, wherever it goes, Houston collects it, and
Houston gives it to the State or to the local jurisdiction. But
do we have the potential of some areas where, you know, where
there is not that kind of commerce going back and forth? Do you
see any inequities there?
Mr. Moylan. Yes. If I take your question correctly, what
you are referring to is this concern that there would sort of a
race the bottom, that people would move to States like New
Hampshire or Montana that do not have sales tax in order to
avoid collection. And what I stated in my written testimony is
that Congress can and should make sure that any Federal rule
restricts a business' ability to do that so that we do not have
them gaming the system. I think that is an important----
Ms. Jackson Lee. Mr. Kranz, I am coming to you, but let me
pose a question, and then you can expand. Can you touch on the
problem as you see with the origin sourcing approach, and then
maybe you want to expand on that question?
Mr. Kranz. Well, I will tie it back to the question you
asked earlier, which is what is the impact on State revenue. So
in Texas, you have an origin system for intrastate sales,
inside the State from one county to another. What Mr. Moylan
and Mr. Cox are suggesting is that we use an origin system
between States in interstate commerce.
Well, it would be very easy for me to consult with Texas
businesses and say, here is how you can avoid collecting Texas
tax at all. And while I respect that they think there are ways
to prohibit it, great tax lawyers other than myself will help
companies figure out how to game an origin system very easily.
It is why no country in the world has adopted one. So the
impact on Texas revenue----
Ms. Jackson Lee. And what would you offer then?
Mr. Kranz. What would I offer? I think the origin sourcing
is dead on arrival, and cannot be considered as an alternative.
So whatever the framework is that Congress adopts if it adopts
any framework, it has to have a destination regime. All 45
States that have a sales tax use destination sourcing today. It
is only in intrastate sales where we see origin sourcing. And
if you took it out of the intrastate environment and forced it
on the States in an interstate environment, you would have
dramatic revenue impacts.
Ms. Jackson Lee. And you believe no State would be left
out?
Mr. Goodlatte. The time of the gentlewoman has expired.
Ms. Jackson Lee. I thank the gentleman. I will look forward
to adding any questions. Thank you, Mr. Chairman.
Mr. Goodlatte. The Chair recognizes the gentleman from
Utah, Mr. Chaffetz, who has been exceedingly patient, for 5
minutes.
Mr. Chaffetz. Thank you, Mr. Chairman. And thank you for
tackling a tough issue, but something that the States are
clearly scrambling for and wishing to have. I would draw
attention, for instance, in my own State of Utah, the joint
resolution. We are a fairly conservative State in Utah.
Overwhelmingly passed a resolution saying that we have to deal
with this, and allow the State of Utah to do what the State of
Utah wants to do. That is why I think this bill, the MFA, was
not referred to the Ways and Means Committee. It was referred
to the Judiciary Committee because it is an issue that we
should be dealing with in States' rights. And I think that is
right.
I also want to thank Congressman Womack, who I think got us
off on the right foot in moving in the right direction. I do
see that there are a number of things that I think the e-
tailers, if you will, have pointed out that need to be
addressed, that can be addressed, to make it a better bill. As
you know, I am working to try to get the disparate groups
together to try to tackle the audit provisions, the integration
costs, the compliance burdens, particularly that a small
upstart that would have to deal with. How do we phase this in?
But I think if the Congress will--and we will--tackle those
issues, we can create what I think is the right principle here,
and that is one of parity. I think every one of you have said
that parity is an important principle and an issue.
Mr. Moylan, would you disagree that parity is an important
issue?
Mr. Moylan. It is very clearly an important issue, and that
is why I put forward an origin sourcing solution that I think
does that.
Mr. Chaffetz. Okay. Hold on. If you agree with parity, I do
not see how you can ever get to parity under an origin-based
system ever because if you are in Oregon and you have no sales
tax burden, and you buy something from, say, the State of New
York, you are going to have to pay that sales tax, correct?
Mr. Moylan. That is correct, yes.
Mr. Chaffetz. Okay. So if you are standing there in Oregon
buying the exact same thing, and you are paying zero sales tax
by buying it there locally, but if you go over to the internet
and buy it out of New York, suddenly you have got to pay a
double digit percentage sales tax, correct? That is not parity.
Mr. Moylan. Well, I would respond by saying this, that what
you are pointing to gets back to the original point that I made
about who the taxpayer is for the purposes of sales taxes. It
sounds like you are saying that the individual is what you are
looking at. What I am suggesting is that because the business
has the legal and administrative burden of the tax----
Mr. Chaffetz. Hold on. Hold on. Let us tackle that issue
right there. When I go to buy something, I get a receipt,
whether it is online or I am there in person. And it is going
to have a couple of line items: cost of the good, the sales
tax, and the shipping if there is shipping. I pay that. It is
not the company that pays that.
What I am trying to say, and I think you make a good point
in one regard, if we can diminish the integration, the audit,
the compliance, and the integration costs, and smooth those
lines so that whether it is the mom and pop who is trying to do
this out of New Hampshire or Virginia or Utah, wherever it
might be, so the big, big company that does may not have
physical presence in every State. If we can soften that burden,
then I think we are onto something, and we can get to actual
parity.
But the problem I have with origin-based is that you never,
ever get to parity. You just do not.
Mr. Moylan. I think what we are getting at is the
difference between the legal incidence of a tax and the
economic incidence of the tax. And what you are referring to,
the economic incidence, who bears the financial costs, so to
speak, absolutely it falls on individuals, just as every tax
under the sun does. The corporate income tax, as we well know,
falls either on workers, on shareholders, or on customers.
Mr. Chaffetz. We are on a different tax. We are talking
about sales tax. When I go and I purchase an item, there is a
line item for sales tax. And what I am saying is, if they are
going to truly have parity, that person in Oregon who chooses
to live there, and maybe they are taxed a different way like in
Texas. But if they are choosing to live in a State that has no
sales tax, I think they should have that parity. Let me go on.
Mr. Moylan. May I respond quickly on the parity concern?
Mr. Chaffetz. I would just as soon put a knife in the
middle of the room and let you all scramble and fight for it,
and I think that would be much more interesting. But maybe Mr.
Kranz can tackle this one in the comments that we are talking
about here.
Mr. Kranz. Yes. I think Mr. Moylan would be happiest if we
went to a VAT, if we adopted a system of tax that truly and
unequivocally taxed production. That is different than what we
do in the U.S. today and at the State and local level. We tax
consumption. We know where consumption occurs. Mr. Crosby gets
his lunch here in D.C. He is consuming the lunch in D.C. He
should pay tax here because that is where the consumption
occurred. That is how we tax today.
Mr. Moylan and Mr. Cox's proposal would upend that and
would impose tax on production, which I think most of us would
agree is not now we want to grow our economy.
Mr. Chaffetz. And I do agree. I think taxing based on
consumption as opposed to production is something that we ought
to be deeply concerned about.
I have purchased things here in Washington, D.C., and I
have said, you know what? I am a resident in Utah. I should not
have to pay that. I have them actually ship it to Utah, the
exact same good I could buy in Utah, and avoid the sales tax. I
do not think that is right. That does not meet the principle
and the standard that I think we are all trying to get to,
which is one of parity.
I do hope, Mr. Chairman, we can bring the disparate groups
together. I do think we can tackle these things as I have
highlighted here. We have to deal with this. Everybody here is
trying to do that. I appreciate that. The States are clamoring
for it, and I do hope, Mr. Chairman, that we deal with this
sooner rather than later, and appreciate this hearing. Yield
back.
Mr. Goodlatte. The Chair thanks the gentleman, and
recognizes the gentleman from Tennessee, Mr. Cohen, for 5
minutes.
Mr. Cohen. Thank you, Mr. Chairman. I thank you for having
this hearing, and I have read your principles, and I agree with
most of them, in particular the tax relief idea. It is similar
to the idea that I have had on a prohibition on discriminatory
tax on rental cars and automobiles, not having new or
discriminatory taxes in a certain area. And we should make sure
we do not have discriminatory taxes where we tax people in ways
that are not really fair to them.
This hearing is important, and we need to take up the issue
of online sales tax. The State of Tennessee does not have an
income tax, at least on earned income, and is reliant on the
sales tax for services. At one point, other than Mayor
Cicilline, everybody here was from a State--Texas, Florida, who
may have just evaded or avoided us now, and Washington State
and Tennessee--that are non-income tax States. No surprise, I
guess, that we are here.
We are losing millions of dollars in revenue that the State
needs to provide services, which they can. So the average
citizens are being heard as well as mainline businesses, which
have to compete with this new technology and a way to buy
products that takes away from their opportunity compete in
commerce. This is, of course, not a new tax. It is just simply
collecting taxes that are already owed, and they are paid by
our hometown retail folks, brick and mortar stores, that have a
competitive disadvantage.
I have been a strong supporter of this for many years. I
was on the Executive Committee of the National Conference of
State Legislatures for 6 years, and I enjoyed my service as a
State senator from some of the 24 years that I was in the State
senate. But I enjoyed all 6 years of being on the NCSL
Executive Committee, and that was one of the major issues the
NCSL had for that time, which goes back over a dozen years,
give or take now.
A former colleague of mine, Republican State Senator Bill
Clabough, was a leader working on this issue. And the governor
of our State, Republican Bill Haslam, has been an outspoken
advocate for the Marketplace Fairness Act, which would allow
the collection of online sales tax to help our State.
I am a proud sponsor of this bill, and it passed the Senate
in a bipartisan fashion last year. And I would have thought the
next logical would be to bring it for a markup, but I
understand that we have to go through the process. And I hope
that Chairman Goodlatte will see the process does go through,
and we can pass this bill. There are concerns, of course, on
how it might affect small business, but I think we can work
those out.
Today we have got some new proposals, and I do not know if
it was Jason or whoever it was who wanted to see a knife fight
out here. Well, I am not for a knife fight. I am against dog
fights, and animal fights, and cock fights, and knife fights.
But I hope we can work out these five different principles in a
more conciliatory fashion, and come together with a bipartisan
solution and legislation on this problem.
As we are discussing this issue of taxes on remote sales
today, Mr. Chairman, we also need, I think, to examine the
issue of sales tax on digital goods, like downloaded music or
apps. There are significant changes about which jurisdiction
has the right or questions about which jurisdiction has the
right to tax digital goods, which can lead to substantial
confusion and multiple or discriminatory taxes, which we both
oppose.
The former Chairman of this Committee, my good friend, Mr.
Lamar Smith, has a bill which I support called the Digital
Goods Tax Fairness Act. We have a youthful Chairman this year,
but I hope he can remember his senior predecessor and give some
allowance and remembrance and give him a little, I guess,
feedback and allow that bill to come up for a vote, and give us
a uniform national framework on that issue, too.
Understanding votes are coming and lunch is in the offing,
I give back the remainder of my time.
Mr. Goodlatte. The Chair appreciates the gentleman, and
recognizes the gentleman from Pennsylvania, Mr. Marino, for 5
minutes.
Mr. Marino. Thank you, Chairman. Good afternoon, gentlemen.
Thank you for being here. First of all, let me clearly state I
am a States' rights guy. I think the less Federal Government in
my life, in our lives, the better off we are. But with that
said, I am extremely concerned about the uneven playing field
that currently exists between brick and mortar stores and
online retailers.
However, I think it is critically important that any
legislative solution to this disparity be very narrowly
focused. As we all know, Congress has a history of trying to
fix a problem, and in the process creates a dozen new ones.
This is a new tax to those from whom the tax has never been
collected. It is a new tax on them if it has never been
collected. And I am one to not support an increase in taxes.
So with that said, Mr. Kranz, could you please give me a
brief sundry list of the complications involved in enforcing
the internet tax, because there is always a complication
involved.
Mr. Kranz. Well, you know, tax lawyers need to do something
and so do tax accountants. Fortunately, the world has changed,
and we now have software. I do not sit down with paper forms
and do my income tax return anymore. There is software to do
that. People do not sit down and do sales tax returns on paper
anymore. There is software to do that.
So the burden has shifted, and I think what is being
discussed is should it shift more. Should it shift to the
States and the software companies, because right now software
is out that is available. In the streamline States they are
paying for it, and retailers do not have to.
Mr. Marino. Let me stop you there, if I may. I could not
agree with you more. However, many of the small businesses in
my district in Pennsylvania are owned and operated by family
members, generations, many seniors. And I have seen in numerous
situations where--my mother is 82 years old, and she gets on
the internet and does her tweeting with people. But I have been
on the internet and purchased things here and there.
It is not as simple as just saying there is software out
there to take care of these issues because it is not a one-two
step. And if you are not use to doing something like that, I
think it is going to be quite shocking to the business people
and they'll just throw their hands up and say we have got a
problem here if we cannot do this. Sir?
Mr. Moschella. Mr. Marino, I understand that there are over
43,000 zip codes in this country, and if your small businesses
are shipping to locations all around the United States, they
are integrating the shipping prices from the common carriers
for the post office. So, you know, if they are able to collect
payment electronically, if they are able to integrate their
shipping data electronically, the State taxes can be done
electronically as well.
Mr. Moylan. Can I respond to the software issue briefly?
Mr. Marino. Sure, go ahead, please.
Mr. Moylan. The problem with software is that it is all
dependent on humans at some level.
Mr. Marino. Sure.
Mr. Moylan. And I pointed this out in my written testimony,
the example in Wisconsin. In that case, it was about the
taxability of ice cream cake and the enormous complexity. There
was a 1,400-word memo about the taxability of ice cream case,
the number of layers of this versus that, whether it is served
with utensils.
Ultimately, this is just one example of how humans have to
decide is this item taxable, is this in the base or not. And
then you put it into the software, and the software does
calculations for you. But software cannot figure out whether or
not ice cream cake is taxable----
Mr. Marino. I do not dispute that it can be done. I just
dispute that it can be done as simply as we think it can be.
Mr. Moylan. I am agreeing with you wholeheartedly, yes.
Mr. Sutton. That is absolutely right. The software side of
it, if you read the Marketplace Fairness Act, which I am sure
everyone here has, you will see there are some beautiful
exemptions in there. There are exemptions for the software
providers, and there is what appears to be an exemption for the
retailers, the remote sellers, but it only exempts them if
their software provider made a mistake. But it is the retailer
that keys it in, just like Mr. Moylan said. So they are not
exempted from those mistakes.
Mr. Crosby. And I think the biggest problem is the ice
cream cake would be melted by the time it arrived.
Mr. Marino. Not with me around. In the interest of time, I
am going to yield back the balance of my time, Chairman.
Mr. Goodlatte. The Chair thanks the gentleman, and
recognizes the very patient gentlewoman from Washington, Ms.
DelBene, for 5 minutes.
Ms. DelBene. Thank you, Mr. Chairman. First, I would ask
unanimous consent to submit two letters for the record
supporting remote collection authority legislation, one from
the Federation of Tax Administrators and another from the
National Governors Association, the National Conference of
State Legislatures, the Council of State Governments, the
National Association of Counties, the National League of
Cities, the United States Conference of Mayors, and the
International City-County Management Association.
Mr. Goodlatte. Without objection, they will be made a part
of the record.
[The information referred to follows:]
__________
__________
Ms. DelBene. Thank you. I just want to thank all of you for
being here today. This is an incredibly important issue, one
that I have also worked on as former director of the Department
of Revenue for the State of Washington, which is an original
streamline State and has been very engaged in this for a long,
long time. And I want to highlight how important it is for
small businesses that we address this.
We talk about burden, but if you walk down the street in
many towns in my district, for example, there is a running
store in Mill Creek, Washington called Run 26. The owner there
has talked about many examples of people coming in, trying on
shoes, talking to sales associates there about what they need,
and in the end buying something online so they can avoid paying
that 9.6 percent sales tax. And that difference is an unfair
difference. That 9.6 is the incentive for someone to buy
online.
And in many cases, this concept of what people call show
rooming is the idea that people are actually looking for help
on products to make decisions on products. And they are using
local retailers to get information and then buying online. And
that disparity is a huge disparity. It is decreasing not only
sales tax revenue collections, but it is also hitting our small
Main Street businesses. And I hear these stories over and over.
And so, it is incredibly important that we address that and
make sure we have an equal playing field.
Some of the things that have been talked about are
compliance and complications of using software. I can say as a
former entrepreneur who actually helped start up an e-commerce
company that there is technology out there that many small
businesses actually use technology provided by others to do
this work today.
But I did want to ask Mr. Crosby, you talked about a
consolidated audit agreement in your testimony and in your
written statement. And I wanted you to describe in more detail
how you think that would work.
Mr. Crosby. Thank you. One of the problems that has been
raised with the Marketplace Fairness Act is a concern that
remote sellers would be subject to audit by multiple States.
And so, the easiest way to address that is to simply limit the
number of States that could audit a remote seller. And one
concept is to require the States to enter into an agreement so
that a remote seller would only be audited by one State or a
delegate of a State, something that might be set up by the
States together. And then, for each audit period, which, as you
know, is normally 3 years, a remote seller would at most be
subject to audit by one State.
The other option in there is simply to eliminate the audit
burden completely for smaller remote sellers who use certified
software so that the audit liability would fall there.
There have been questions raised on this panel about
whether that is possible. Certainly can write those liability
provisions to protect remote sellers from unnecessary audit,
and I think it is fairly simple to do if this Committee chooses
to go in that direction.
Ms. DelBene. And, Mr. Kranz, how do you feel about that
type of idea, consolidation audit agreement?
Mr. Kranz. I think it is exactly the direction that
Congress should be going. You know, there is software that is
in existence today. Making sure that it works, making sure that
companies can use it, that everybody is held harmless, that the
States provide the information on a timely basis so that the
software works, and that we all get to the right answer from a
tax collection standpoint. Those are things that can and should
be ironed out in the Federal legislative process. Some of it is
in the Marketplace Fairness Act in the Senate. If you look at
earlier versions of the bill from previous sessions of
Congress, there were different things in there.
So all of the guarantees to make certain that our State and
local sales tax regime works properly in an e-commerce
environment can be addressed by Congress.
Ms. DelBene. And one more question for you. Some folks had
brought up earlier this idea of one rate per State, yet that
would create a differential between local sales tax and what
people did online. So we have a difference right now where
people might have sales tax collected if they buy at a local
store, but not if they buy online. Would that not also be a
problem if there was one rate per State? Would each still have
a difference between what people pay locally and what they pay
online?
Mr. Kranz. There would be, and, you know, presumably it
would be a smaller tax differential. I do not know if you were
here earlier when I was saying that the one rate proposal
really does force a tax increase in the lower tax
jurisdictions. That to me is the biggest problem with it.
Even it were only applied to remote sales and you narrow
the scope of the problem, it is a rate difference. It does have
economic impacts, and I do not think it is the right answer for
the larger problem we are facing today. The right answer really
is making sure that software technology information and a
system is in place to deal with the burden.
Ms. DelBene. I agree. I think we are trying to get to
parity where there is an equal playing field.
Mr. Goodlatte. The time of the gentlewoman has expired.
Ms. DelBene. Thank you, Mr. Chairman. I yield back.
Mr. Goodlatte. The Chair recognizes the gentleman from
Idaho, Mr. Labrador, for 5 minutes.
Mr. Labrador. Thank you, Mr. Chairman. Mr. Crosby, I have
heard you say a couple of times, and I am confused by it. You
claim that Mr. Moylan's idea is taxation without
representation. That analogy just does not make any sense to
me. If you choose to go on the internet and you choose to deal
with an out-of-State business, you are choosing to do business
with that person, just like you do when you walk to a
Washington, D.C. sub shop or when you walk to a Virginia tire
store. So I am not really understanding your taxation without
representation argument.
Mr. Crosby. Well, Congressman Labrador, let me explain it a
little bit further. I think there are sort of two aspects to
it. The first is that you are paying tax to a jurisdiction in
which you may never set foot, a State in which you may never
visit.
Mr. Labrador. But you have chosen to do business with that
jurisdiction.
Mr. Crosby. Certainly, but you have no representation
there. I think under----
Mr. Labrador. But I have no representation in Washington,
D.C. I have no representation in Virginia, and I choose to go
to those places to do business when I am here in Washington,
D.C. And I do not worry about whether I have representation in
their city council or anything like that.
Mr. Crosby. That leads me to the second problem. If you go
to this origin sourcing type of system, it is not at all
obvious to the purchaser at the time of the transaction what
tax rate will be applied. And that is because the concept of
origin sourcing requires you to fix in a specific place where
that retailer is.
When someone is looking online, shopping online, they are
usually considering a variety of retailers. It will be
impossible at that point in time to know which retailer is
located where. You may think, for example, that Amazon is
located in Washington, and you would be paying a Washington tax
rate. But what if, because Amazon has employees across this
country, instead the decision is where the good is shipped
from? You may not know this, but at the time the transaction
occurs, Amazon does not necessarily know where it is going to
be shipped from. That is a separate process that occurs after
the transaction.
Mr. Labrador. But they are going to tell you, right, when
you are making the purchase your sales tax is going to be X
amount. Before you hit the send button, you are going to know
what tax rate you are going to be paying, and you may choose to
go to a different jurisdiction that does not charge as high a
tax.
Mr. Crosby. The point I am making is that Amazon itself may
not know at the time you complete transaction where it is
shipped from. And so, if the basis is shipping, you cannot use
that. As Mr. Kranz pointed out, if you do something like
incorporation domicile, number of employees, or any other sort
of standard, then you create a system whereby sellers can
incorporate entities and put employees in them in States that
do not have sales taxes, and avoid sales tax collection all
together. So I think----
Mr. Labrador. And what is wrong with that? I mean, we have
a competitive environment. It seems to me that we are all
sitting here worried about people actually reducing the taxes
at the State level. And I think we should be for reducing taxes
at the State level and making business more competitive. I am
worried that this is actually going to make business less
competitive.
If you listen to what the Chairman said in the beginning is
that where the growth is happening right now is on internet
sales. Every time that we choose to tax something, we kill it.
Every time we choose to tax something less or not tax it, we
actually allow it to grow. Why should that not be what we are
actually encouraging here in Congress?
Mr. Crosby. It may be that you and I have a difference of
opinion over what tax competition. I think when I choose to
come to D.C. and do something here that I am participating in
this economy here. When I choose to reside in my home State of
Maine, I am subject to the tax laws there. When I choose to
invest in the business that I own part of here in Virginia,
then I am subject to the tax laws there.
I do not believe by clicking a button online I am fostering
tax competition. I simply think that is tax arbitrage. And if
you go to an origin sourcing regime, what you are certainly
doing is encouraging non-U.S. commerce because you are
exempting all foreign companies from collection of any taxes
here in the United States.
Mr. Labrador. Mr. Cox, what do you think about that?
Mr. Cox. Well, you know, our system at present is one in
which an enormous amount of retail commerce takes place as you
described; that is, you know, people who buy things in other
States. One of our constitutional rights is the freedom to
travel, and people travel all over the place. They travel in
their cars. They travel on airplanes. You know, in places like
this where States are so compact they can walk across State
borders. And I have never heard anyone complain about the
existing system.
And so, you have to ask yourself, should we upend it? Is it
somehow offensive to our American values? You know, I happen to
be here in D.C. It is not like I have a choice of buying lunch
in Maryland today. I mean, I am going to pay the taxes here
whether I like it or not, and I am not represented here. That
is not the issue. That is a red herring.
The question is, is it a straightforward tax on my
consumption, and the answer is, yes, it is. It gives me the
opportunity to put to rest another canard because I think I
heard Mr. Kranz earlier suggest that the idea of home rule and
revenue return is somehow a tax on production and not on
consumption, and that is absolutely false. It is a sales tax.
The tax and the economic incidence of the tax is on the
consumer. The money goes to the State where the consumer lives.
That is a consumption tax period. It is not at all a tax on
production.
Mr. Labrador. That actually was going to be my follow-up
question. And my time has expired, so thank you very much for
your time.
Mr. Goodlatte. The Chair thanks the gentleman, and
recognizes the gentleman from Rhode Island, Mr. Cicilline, for
5 minutes.
Mr. Cicilline. Thank you, Mr. Chairman. I would first ask
unanimous consent that the statement of the National Conference
of State Legislatures*** issued today in response to this
hearing be made part of the record.
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***Material previously submitted, see page 212.
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Mr. Goodlatte. I apologize----
Mr. Cicilline. No. I am not just asking unanimous consent
that it----
Mr. Goodlatte. Without objection, it will be put in the
record.
Mr. Cicilline. Thank you, Mr. Chairman. I thank the
witnesses for being here. And I am new to this Committee, but
not completely new to this issue. And frankly, as I listen to
the testimony and review the materials over the last several
days, I am not sure why we are not acting on the Marketplace
Fairness Act. It seems as if this has been a very long
discussion by this Committee. I served as mayor of a city
before I came to Congress, and I have seen in my home State the
impact of the loss of revenue because of online sales escaping
State sales taxes.
The National Conference of State Legislatures estimates
that States have lost $23.3 billion in uncollected tax sales
tax from online and catalog purchases in 2002. And my State
during that same time period lost $70.4 million and for all the
reasons Congressman Deutch spoke about. That has an impact not
just on revenues and services in cities and in States, but on
services in cities and in States, but on quality of life, on
the prosperity of Main Street, on the ability of retailers and
small businesses to compete. And it is, frankly, a system that
is just not fair to our small business, and retail districts,
and commercial districts, which are the heart and soul of
neighborhoods in many instances at a competitive disadvantage.
So I hope we can move on this. I am a proud sponsor of the
Marketplace Fairness Act. I want to ask Mr. Kranz, you said
many of these proposals were considered and rejected already,
so this is not a new discussion. Could you just describe that
process for a moment?
Mr. Kranz. Sure. This discussion has been going on for
decades really, and legislation was introduced for the first
time in Congress in 1973, more than 40 years ago, to deal with
it. So throughout the last 40-plus years, there have been
discussions about origin sourcing. There have been discussions
about reporting regimes.
All of these ideas are not new. And much of the discussion
that has taken place was a collaborative effort between
businesses, both Main Street business and dot.com, and State
government representatives, both governors, legislatures,
cities, counties. They were all at the table trying to come up
with a solution to this problem. The solution that they have
gotten behind has been the Streamline Sales and Use Tax
Agreement and the Senate Marketplace Fairness Act and earlier
versions of that legislation.
It really represents an effort by the State government
community to reach their hand out to Congress not for a
handout, but to shake hands and say let us partner, let us
solve this problem with a Federal and State solution that
fairly deals with remote commerce.
Mr. Cicilline. And I hope we can get to that point because
I know it is very important for my State, and I know it is very
important for many communities.
And I just want to ask, Mr. Moylan, because it seems as if
there had been some discussions as to whether or not this is a
new tax or enforcing an old tax. It clearly it is about
enforcing existing responsibilities in terms of sales tax. I
think the only place that it is actually a new tax is the
origin sourcing system because you have those five States that
currently pay no sales tax, and under your proposal, they would
then become taxpayers of sales tax for the first time. So those
are actually new taxes.
Mr. Moylan. I would say quite the contrary. What something
like the Marketplace Fairness Act would do is require
businesses in States like New Hampshire and Montana that have
chosen to locate in non-sales tax States to collect and remit
sales taxes to every other State that does have a sales tax. So
it takes away from them a choice that they have made.
And again, this gets back to the issue of who is the
taxpayer for this, and my response to it is that the legal and
administrative burden falls on the business----
Mr. Cicilline. Well, that is your description of who the
taxpayer is, but the person who is actually paying the tax is
going to be the individual purchaser, correct?
Mr. Sutton. I will tell you----
Mr. Cicilline. I would like to ask Mr. Moylan that
question.
Mr. Moylan. We have gotten to this discussion somewhat
before, the difference between the legal incidence of a tax and
the economic incidence. And I would stipulate that, yes, the
economic incidence of every tax under the sun falls on
individuals. In this case, the legal incidence of the tax falls
on the business, and so for me, I think that is the right frame
of reference. And in that case, that is why I support origin
sourcing.
Mr. Cicilline. Mr. Kranz, it looks like you want to respond
to that.
Mr. Kranz. That is just a misrepresentation of the law
across the country. In a majority of States, the legal
incidence is imposed on the consumer, and where it is imposed
on the business, they are required to pass it through to the
consumer. So it is a mischaracterization of what is out there
legally. And it ignores the reality of the economics, which is
only the consumer is is responsible for the tax burden.
Mr. Cicilline. Thank you. I thank you, Mr. Chairman. I
yield back.
Mr. Goodlatte. I thank the gentleman. The gentleman
recognizes the gentleman from Texas, Mr. Farenthold, for 5
minutes.
Mr. Farenthold. Thank you very much. And I think Mr. Cox
hit the nail on the head in answer to a question from Judge
Poe. This whole thing is about getting the most down with the
least squawking and plucking a goose. And I think legislatures
and States see this is an opportunity to say, oh, well, we did
not raise taxes. We just started collecting more taxes. But I
kind of agree with Mr. Marino who said, you know, this tax was
not being collected before and is being collected now. It sure
smells like a new tax to those of us who pay it.
And I have sat here. You know, I am familiar with the
Marketplace Fairness Act, not a big fan of that. I have heard
numerous different proposals here, and it is like we can just
punch holes in each one of them. I still have not particularly
heard one that I like. I mean, I understand the problem, and we
are talking about the administrative burdens of collecting it.
And the current system is kind of fair with that respect.
Mr. Moschella, your mall folks, if there is a fire, they
are going to call the fire department, and in exchange for the
administrative burden of collecting that local sales tax, the
fire department is going to respond. The police are going to
come out when there is a shoplifter, for crowd control on black
Friday. The internet retailers are not getting the advantages
of any of those services.
So, I mean, yours kind of falls apart on that one to some
degree.
Mr. Moschella. I do not think so. I mean, as I said before,
I want to make two points, one a constitutional one, and then
on a practical one. On the practical side, the Congress----
Mr. Farenthold. Quickly because I have got a lot to do.
Mr. Moschella. Congress did this in 2000. It has worked
with regard to alcohol, and it could work under my proposal.
Mr. Farenthold. All right.
Mr. Moschella. But your question raises an interesting
constitutional point of why we are here.
Mr. Farenthold. All right. And I am interested in the
Constitution, but I want to get to the nitty gritty on these.
We can talk a little bit about the Constitution. Mr. Moylan, I
think in the answer to some of your questions you said you
should prohibit a business from relocating to a tax
jurisdiction or a lower tax jurisdiction. I mean, what about,
you know, somebody who is selling something on Etsy in Texas,
and their spouse gets transferred to Oregon? I mean, are you
going to shut that business down? I mean, yours falls apart
there.
Mr. Moylan. No, certainly not. I did not mean to suggest
that we should prohibit businesses from moving. What I meant to
suggest is that we should prohibit businesses from setting up
fake operations in States like New Hampshire to avoid
collection.
Mr. Farenthold. And we have all pretty much agreed we
cannot tax on a foreign jurisdiction. I ordered a computer for
my wife for Christmas. I bought her what I wanted, I confess.
But it shipped from Juarez, Mexico. What is to stop a retailer
from setting up just across the border shipping in? We have got
some great border crossings in Texas, does not cost a whole lot
more to ship. You completely avoid taxes that way. I mean, you
could fall apart that way just on the international end.
And, Mr. Crosby, you talked a lot about building this
database with all these----
Mr. Crosby. No, not me. I am not a fan of----
Mr. Farenthold. Mr. Sutton, I am sorry. Mr. Sutton, of
these databases with all these safe harbor provisions in them.
To me, that is a massive creation of Federal regulation. And
then if we have the government build that reporting database,
we see how good the government is with databases with
healthcare.gov. I mean, we cannot compute our way out of a
paper bag here in Washington. Go ahead.
Mr. Sutton. I do not disagree that there is definitely
complications, and I got invited to this hearing about 10 days
ago and put that together in the last 10 days.
Mr. Farenthold. And I appreciate that.
Mr. Sutton. So I understand it has been done before. But I
have been very much an opponent against the Marketplace
Fairness Act for a long time, and something big picture wise. I
do not think anybody in here has grasped, because I have heard
a bunch of people talk about this is not a new tax. Well, if a
business is selling remotely to Florida right now, the business
does not have physical presence, it is not subject to sales
tax, and it is not subject to use tax because both of those
taxes are based on things that happened in Florida.
If this law passes, all of a sudden that business is going
to be subject to the sales tax in Florida. So it is going to
have an incident of tax where it did not have before. And if it
does not pass it onto the consumer, it is liable for it. If it
makes a mistake in calculation, it is liable.
Mr. Farenthold. And I understand that. Again, I also remain
concerned about the database of stuff going and what is going
to be taxed. I mean, in Texas, potato chips are not taxable if
you buy them at a grocery store, but are taxable if you buy
them in a vending machine. Is the internet more like a vending
machine or is it more like a grocery store?
Mr. Sutton. The complications on the software side are
unbelievable, and it is in the Marketplace Fairness Act, and it
is in my idea. It is on both sides. But I have talked to two
different software providers, one of them who is in this room
right now and a huge proponent of the Marketplace Fairness Act,
who says their databases, their software, already sanitizes
private information out of when it comes out of the vendor.
They already do it.
Mr. Goodlatte. The time of the gentleman has expired.
Mr. Farenthold. I see I am expired, and I appreciate it.
And we did not even get into the privacy concerns----
Mr. Goodlatte. The time of the gentleman has expired, and
the Chair recognizes the gentleman from Georgia, Mr. Collins,
for 5 minutes.
Mr. Collins. Thank you, Mr. Chairman. I think this has been
one of the more interesting debates, proposals. It is something
that I have heard since I have been up here, and also one of
the most interesting things from my district in which I have
small business owners and which I have known and loved. I grew
up in my hometown, and I have been in my office, and I have
almost as many small businesses who did different things come
into my office and say we love this, this is the greatest
things since sliced bread. They read their talking points and
they love it. And then I have had almost as many businesses
come in and basically say this is the worst thing in the world,
and if you do this, the world will end. Both sides seeming to
go to the extremes here.
I think some of the things that I want to go back to,
because we have really killed a lot of these issues, origins
and different things, on how we look at it. I am thankful that
the Chairman is taking this on and presenting principles on
what we have to look at because it is an issue that needs to be
solved. Our marketplaces are changing, in the way of
distribution and in the way of a person is changing.
I think it is also a little hyperbole to talk about
companies, and we have named several here today that are
closing stores and doing things like that. Some of that could
just be because they have a bad sales model, okay? They have
never updated. They are not selling like they should, retail.
And there is some of that that needs to be taken into account
here. It is not all, but it is some.
The other question that I have in this really, and I was
talking to my legislative director about this today. What
bothers me the most about this issue right now is that we
cannot solve it. But my issue is that we are so headlong into
solving it, which I believe we need to do because government
has got out of picking winners and losers, which we are doing
here, is that we are going to close one Pandora's box and open
another.
And that is the question that I think I want to talk about.
One is the question of jurisdiction. Anybody wants to take this
on. But when you deal with jurisdictional issues in the Main
Street Fairness Act, you know, is the taxing State's
jurisdiction over a remote seller a choice of venue to enforce
an action? Where is that going to be a process here? Is there
an enforcement action based on the point of sale or the point
of consumption? Where would be a jurisdictional question?
Mr. Crosby. Mr. Collins, in my proposal I address that. It
is part of the consolidated audit provision that the remote
seller would have choice of venue. So it would enable them to
choose the venue so that they could adjudicate any dispute over
uncollected sales taxes in their home State or in another State
in which they do business.
Mr. Sutton. Well, that addresses the civil side, but what
about the criminal side? They are holding trust funds for those
businesses. They are subject to all the criminal laws in
Florida. And by creating this law, did you just allow personal
jurisdiction over those business owners on the criminal side?
Mr. Collins. Well, someone just said earlier concerning,
you know, just making it click, I do not believe brings any
jurisdiction. I am not sure that is true, Mr. Crosby,
especially if you deal in other areas of the criminal code and
other areas where if you clock to a site you are not supposed
to be on, you have claimed jurisdiction. They can go after you
because you have been on the site.
We are going into an area here that I think is, I almost
agree completely with the gentleman from Utah. Have all of you
here, which I have all been watching and I can see sort of the
pattern going, yes, no, yes, no. It is the faces out here. Is
just throw it in the middle and say fight it, who comes out on
top wins. The problem here is that the bottom line is for all
the interest in this room, it is about the consumer. It is
about the American populace.
And I understand State and local governments. I served in
the State legislature in Georgia in which we took this on, and
we passed it. Basically we put the nexus in with the brick and
mortars which took out a lot of our ``retail internet stores''
where they were simply just ordering for folks, avoiding the
tax, sitting next door to a place that actually had to charge
the tax. We provided the nexus to a building.
And there has been a lot of conversation, well, Georgia did
it, so we can apply this to the Nation. The nexus was applied
to a brick and mortar. The nexus was not applied to an
amorphous, which is something which is already supposed to have
been collected anyway. We have all talked about that.
All your proposals are interesting. I think, Mr. Chairman,
the question that I have, and maybe just to end it with this.
What are the consequences, and I think we probably need to act
here. What are the consequences if we do not act?
Mr. Kranz. It is covered in my testimony at length. But I
think the consequences of congressional inaction are that the
States will attack remote commerce on their own. Seventeen
States have already passed legislation to do that. And there is
a discussion in the State tax policy taking place about the
States working together as a group to really coerce remote
sellers to collect.
Mr. Collins. And I agree with you, and I want to get this
basically. Another thing that is going on here is if the States
and local governments receive this, then there is some kind of
tax, you know, that we can offset that. And I know some States
will say, well, if we get this, we will offset our own tax
rate. I find that very hard to believe. If you get something
that you have not been having, why move your bottom line? There
is going to be a move to try and do that, but the actual
reality there is probably not true.
And with that, Mr. Chairman, I yield.
Mr. Crosby. Mr. Collins, if you do not mind. A number of
States have already done that. In Ohio, it is unfortunate that
Mr. Chabot left because he asked this question earlier. In
their budget last year, they actually passed a provision that
creates a special fund so that any monies that would come in
from remote sales are automatically diverted to that, and those
monies are then used exclusively for a reduction in the
personal income tax rate. Whether that is the right answer for
all States I do not know, but it certainly is for Ohio.
Mr. Goodlatte. The time of the gentleman has expired. The
Chair recognizes the gentleman from Missouri, Mr. Smith, for 5
minutes.
Mr. Smith of Missouri. Thank you, Mr. Chairman. Thank you
all for being here, and I am glad to ask a few questions.
Mr. Crosby, my first question is to you. What do you think
are some of the difficulties of integrating the sales tax
collection software in the existing programs? And also, are
there enough providers of software to efficiently handle
collecting and remitting to customers in other States?
Mr. Crosby. Thank you, Mr. Smith. I will take the second
question first. Yes, there are enough software providers doing
this today, ranging from startup businesses to very large
businesses that have been handling payroll in this country for
Fortune 500 companies for decades now.
Certainly, if and when the Marketplace Fairness Act or
something else like it passes, that market will grow, and there
will be more providers that enter into it and that are looking
to assist retailers in collecting sales taxes.
To the first question about integration, for the
overwhelming majority, probably 99 plus percent of online
sellers, the small mom and pops, very few of them hire their
own computer consultants to design shopping carts. Almost all
of them use off the shelf solutions provided by third parties,
whether they are online marketplaces that are out there or
third party software providers. To the best of my knowledge,
all of the certified sales tax collection software providers
that are out there today integrate with hundreds of the most
popular shopping carts. So for those businesses, integration is
relatively simple. And I have seen demonstrations for a number
of different providers where they actually do the integration
right in front of you.
For larger businesses, maybe the top 500 online sellers in
this country that may have developed their own software to deal
with shipping and orders, there may be additional compliance.
But in my testimony, I have laid out, I think, that the
Committee in the Congress can handle that by providing some
allowances for integration costs.
Mr. Smith of Missouri. Okay. Thank you. Mr. Cox, in your
portion of some written testimony, when you were discussing the
principles the Chairman released, you have talked about the
idea of fairness. Would you mind elaborating on the issue of
fairness when discussing the different proposals we have heard
today?
Mr. Cox. Yes, thank you. And if I might just on
integration, in my written testimony there is data from a
recent study of integration costs for medium-sized businesses
with revenues between $5 and $50 million, and the integration
costs range from $80,000 up front to $290,000 up front for
these businesses. So it is a real issue.
The fairness question is shot through this whole
discussion. There are constitutional issues because we are
talking about jurisdiction and the extent of States' power, and
some of those constitutional issues are due process issues. And
as all the lawyers on this Committee well know, due process at
its core is about fundamental fairness. So it is both the
political question and it is the technical legal question that
we have to resolve.
And we have to ask ourselves at one level is it fair to
have a patchwork system in which brick and mortar sales and
online sales from somebody right next door are in all senses
equal, except one. The answer is no, so here we all are trying
to find a solution. Then when you come to solutions, we have to
ask ourselves, all right, how are we going to get the
administrative burdens and the compliance costs down so it is
not unfair in that sense?
And what we have found in the deep dive, not just through
the iterations of the Marketplace Fairness Act, but going all
the way back to when we first passed the Internet Tax Freedom
Act and set up the Advisory Commission on Electronic Commerce,
is that while the sales tax itself is part of a competitive
differential, the bigger variable in that equation is the
compliance costs. And so, we are going to have to make some
tradeoffs here. There is no perfect system, as surely this
hearing abundantly displays, that neatly solves every problem
and makes everybody walk away with a smile.
It is difficult to collect taxes. It is especially
difficult with the challenges that catalog sales present, which
has not gotten much discussion here because they do not get the
advantage of all the computer wizardry that we might bring to
bear. But that is the definition, I think, of the fairness
problem.
Mr. Smith of Missouri. Okay. Mr. Cox, would your proposal
return the sales tax to the customer State so that it would be
used to pay for the benefits, like schools and first
responders, that other Members have mentioned?
Mr. Cox. Yes. That is a key feature of it. The money is
returned to the State of residence of the purchaser.
Mr. Smith of Missouri. Okay. But to that local
jurisdiction.
Mr. Cox. Yes. The tax money is treated as would any tax be
treated within that State. So if there is a local piece of it,
then the local piece would go where it belongs.
Mr. Smith of Missouri. Okay. Thank you, Mr. Chairman.
Mr. Goodlatte. Thank you. The Chair recognizes the
gentleman from Florida, Mr. DeSantis, for 5 minutes.
Mr. DeSantis. Thank you, Mr. Chairman. Thank the witnesses.
First, I just think some of the arguments that are put forward
I may not agree with, but I say they are credible. Some do not
strike me as credible. I mean, this idea that States are just
going to reduce taxes to account for the increased revenue they
get here. I think some States may do that. I mean, I agree
probably Scott Walker will try to do that. But ultimately the
legislature has got to agree to that. And here you would
basically be having Congress imposing a regime that is leading
to higher taxes and more revenue for them, so they would be
getting the revenue without having to pay the political price
of having voted to implement that. And I just think politicians
are not going to want free money basically, and so if they have
that, they can spend it. So I do not think that is really a
good argument for it.
In terms of the representation, I know, Mr. Crosby, you had
a colloquy with Raul Labrador. And it seems to me that if I am
here in Washington and I pay sales tax for lunch is the example
that has been, yes, I am not represented in Washington, but if
someone were to mug me, the cops would come. The taxes I am
paying actually I am somewhat consuming services by being here.
But, yes, you think that that is, I guess, somehow--I mean,
for example, the Marketplace Fairness Act. You do not think
that that would be taxation without representation, because it
seems to me that if I am a business in Florida and the only
thing I do is ship a product to California, if I have no
physical presence, I am not stepping foot there, I am not
consuming any services. All I am doing is shipping something
presumably through U.S. mail or a private carrier. Yet somehow
I would be commandeered to be a tax collector for that
jurisdiction. So that strikes me as much more in terms of a
taxation without representation problem.
And we can sit here and say the regulatory burdens
essentially cost these businesses money. So how would you
respond to that?
Mr. Crosby. I think your first point I would agree with in
terms of, you know, here in D.C. you are certainly getting the
benefits and protections of police, fire, whatever it might be,
and so it is not really a question of taxation without
representation.
To your second your point of the Florida business who is
shipping to a consumer in California where the business has no
physical presence, unlike Mr. Moylan, I mean, I agree with Mr.
Kranz. The tax burden actually falls on the person in
California. So what we are talking about is the regulatory
burden or the administrative burden of tax collection.
And having been involved in this for nearly 2 decades now,
I am more than convinced that this Committee can craft this
legislation that will dramatically reduce, if not eliminate,
that burden. I have seen the software work. I know businesses--
--
Mr. DeSantis. Do you believe that the Marketplace Fairness
Act created a substantial burden for those retailers in that
situation, or do you think that that was acceptable?
Mr. Crosby. So the Marketplace Fairness Act, you know, to
your point about sort of State action, would require a State to
do something before it would be able to authorize the authority
and require remote sellers to collect. In those things that it
would be required to do, there are some substantial
simplifications in there. Is it enough? Probably not. There are
things that this Committee can do that could strengthen it.
So, no, I think certainly there is no burden less than
doing nothing. Remote sellers are not collecting now. Anything
you do that requires collection is more than what they are
doing now because they are currently doing nothing. So there
will be some burden. The question is, can you balance the
burden on them with the burden on the consumer currently who is
required, if they are being diligent about their taxes, to pay
their use taxes, and the State and local governments who are
currently, because of a Federal preference, unable to collect
that revenue?
Mr. DeSantis. So I take that point, but I do think there is
still a lack of a political accountability because if you are
being audited by somebody in another State, or even if they do
not even get that far. Even if there are just requests for
payments or people are pinging you, ultimately how you are
treated by them, you are not going to really have a direct way
to affect that.
Now, in terms of the advantage from kind of a remote retail
model, Mr. Kranz, how would you respond because it seems to me
just looking at what has happened recently, you do have
actually a lot of online retailers who have actually expanded
their physical presence into additional States. And so, if that
is true, then why have we seen that behavior? Would the idea
that this is such a boon to be an online retailer not have
incentivized them to contract?
Mr. Kranz. I think what we are seeing throughout the retail
world is a recognition that consumers want what is called
bricks and clicks. They want retail stores. They want to be
able to order online 24/7 when the retail store is not open. So
it is not surprising that business models have changed over the
last decade, and we went from pure brick Main Street retailers
and pure online retailers to a world where often companies have
both a physical presence in some States, maybe stores or
warehouses, distribution centers, and an online presence that
is available to consumers 24/7.
Mr. DeSantis. So there must have been something about doing
that in spite of how the tax would be treated if they were to
remain in one jurisdiction that incentivized them to do it. In
other words, the tax was not the only issue. There were
consumer demands or whatnot, so I appreciate that.
Am I out of time?
Mr. Goodlatte. Your time has expired.
Mr. DeSantis. I am out of time, so I will yield back to the
Chairman. Thank you.
Mr. Goodlatte. The Chair recognizes the gentleman from
Texas for 5 minutes. I would note that if he is brief, we might
get both remaining Members in for a few minutes.
Mr. Gohmert. Okay. We will try to accommodate that.
Appreciate everybody's testimony here today. And there has been
a lot of discussion about avoiding penalizing brick and mortar.
That is a huge problem I hear about in the district. But
instead of getting the Federal Government so much more
involved, which is a huge concern of mine. I know some people
think, yes, if we just get the Federal Government involved,
that will solve our problems. And they learn too late that that
is not the solution--hello, Obamacare.
But is there a way to just encourage more collection of
current use taxes without getting the Federal Government so
involved? Anyone who cares to interject.
Mr. Kranz. I will jump in here because over the last 15
years there were discussions that said Congress could pass a
one-sentence bill that simply overturned the Quill decision,
and left it to the States to figure it out from there.
Mr. Gohmert. What do you think of that?
Mr. Kranz. Well, it is a solution, but it is a fairly
dramatic one that does not give remote sellers any protection.
It does not guarantee that software will be available. It does
not solve the burden question. It leaves that question entirely
to the States.
We have seen the States working to solve the burden problem
for 15 years in the streamline effort. It is really up to you,
though. Do you want to just turn it over to them entirely? And
if you do nothing, I think you are turning it over to the
States entirely. They will figure out how to attack this one
way or another.
If you think that that is not the right approach to protect
sellers, then you need to do a framework. You need to have a
framework that is put together by the Federal Government.
Mr. Gohmert. And, of course, another problem is, and it has
been discussed. But if you have an origin tax, I did not hear
any solutions, but what is to stop people from moving out of
the country where there is no tax, and then they do not have an
origin problem? And my friends across the aisle love to talk
about penalizing people that move businesses out of the country
and then create systems where it completely encourages the very
thing they decry.
But one other quick thing. Is there a solution for origin
tax that would not drive businesses out of the country?
Mr. Moylan. Mr. Gohmert, if I could respond to that. I
think that the first thing to point out is that that incentive
already exists under current law, that if you are a business
that is located overseas, or inside the country to move to New
Hampshire or whatever to avoid sales tax collection. Mr.
DeSantis pointed out that the experience has actually been that
businesses have been expanding their physical presence and
building more in the United States precisely because of Mr.
Kranz's point that it seems as though the model of the future
will be a kind of brick and click hybrid.
And so, there is one point I wanted to make on complexity
that I think is important. There is new data out this morning
actually from the Tax Foundation that says that the number is
not 9,600 tax jurisdictions. It is $9,998, so we are almost at
the magic 10,000 mark. And what that says is that all of these
suggestions that software can just solve that problem I think
are overblown. And I always point to the example of Turbo Tax.
If you think that Turbo Tax has solved income tax complexity,
then you must think that software can solve sales tax
complexity. And personally, I do not think that Turbo Tax has
solved income tax complexity.
Mr. Gohmert. But is that not what our Secretary of the
Treasury was using when he could not figure out the----
Mr. Moylan. A perfect example of somebody who ought to know
better who did not, and there are many of those in the sales
tax world as well where you have sometimes honest mistakes.
Surely there are fraudulent examples as well. And this is very
difficult to----
Mr. Gohmert. I would ask that anybody that has any further
input. I know you guys have been going for a long time, but
would welcome any proposals in writing. I know you have
provided written testimony, but I would yield back.
Mr. Goodlatte. The Chair thanks the gentleman for yielding
back, and recognizes the gentleman from California for whatever
time we can squeeze out.
Mr. Issa. Thank you, Mr. Chairman. When Henry Hyde chaired
this Committee, he often said that even though, you know,
somebody goes last, it does not mean they cannot come up with
an original question. I am going to try to live up to that
Henry Hyde expectation.
Mr. Cox, you and I served together, and a lot of these
things do go back to that assumption that we had to not tax the
internet for it to prosper. So let me ask a couple of quick
questions, and I will accept, unless somebody has an absolute
no, that everyone I saying yes. Mr. Cox, is it not true that we
are supposed to regulate interstate commerce?
Mr. Cox. Yes.
Mr. Issa. And by definition, interstate sales are
interstate commerce. So we have a mandate that we are not
living up to by not dealing with this problem, would you not
agree?
Mr. Cox. Yes.
Mr. Issa. And is it not true that as a California resident
now, or always been a California resident, but back in
California if you order something from out-of-State and have it
shipped to your home in Orange County, and you do not pay sales
tax, you are violating California law. Is that not true?
Mr. Cox. That is correct. Our laws are enforced about the
same as our immigration laws. [Laughter.]
Mr. Issa. So I will mention that if my old company were to
order something from out-of-State, they get audited every
single year by multiple jurisdictions, including California, to
see if we bought anything and had it shipped to California. So
there is some when it is more feasible.
So just a quick question. Since you would be breaking the
law if you do not pay the tax, part of what we are considering
is relieving the burden on whatever portion of $318 million who
live in the 45 States in which they would be breaking the law
if they do not pay tax. In a sense, we are fixing a problem of
some large portion, nearly 300 million lawbreakers. Is that not
true?
Mr. Cox. Yes. Mr. Crosby just mentioned this, you know.
Because in theory, and it is mostly theory, everybody in
America in a sales tax State owes use tax. When they do not pay
the sales tax on out-of-State purchases, we are relieving them
of their theoretical sin.
Mr. Issa. So I am going to ask you a rhetorical question.
If we simply made interstate commerce report out-of-State sales
to the State in which it was sent to, meaning we send the data
on 10 million sales from Florida or Oregon, require they be
sent to California's Sacramento, you know, Ouija room, and they
had the names, the addresses of all these shipments, in a
sense, would we not almost guarantee that the residents of
every State would say, please, stop burdening me. Find a
solution. I do not want to get this, so I want my vendor to
collect this tax because I sure as heck do not want to have to
deal with 45 different purchases I made.
I mean, in a sense we are dealing with if the American
public were forced to recognize the law that they are not
supporting in their own State, we would have an outcry of
hundreds of millions of people asking us to fix this, would we
not?
Mr. Cox. Well, I think it is fair to say that if you take a
look at the behavior of the State legislatures and governors,
that the last thing they want to do is enforce use taxes on
their own citizens. And so, what they would much prefer to do
is impose those burdens on people that do not live in their
State.
Mr. Issa. Well, there is no question that the State of
California has been very good at finding ways to try to get
other people. They are currently trying to say if you sell a
building in California in a 1031 exchange, they would like to
tax that 20 years later if you sell the building. And we are
very aware of California's long arm.
Mr. Sutton. You asked the question----
Mr. Issa. Yes.
Mr. Sutton [continuing]. That if we disagreed with your
first comment to speak up. I do not believe Congress has the
obligation to interfere with State commerce. I believe it has
got the power to do it, and it was given to it by the States
because the States when this country was founded knew that the
States were not good at doing this. It was a horrible mess in
the Articles of Confederation.
Mr. Issa. Okay. Well, let me ask one exit question because
my time is expiring. Does anyone on this panel, are they
willing to say here sort of under oath that if we fail to fix
this, we are not, in fact, dooming brick and mortar shops who
find themselves in California at over 8 percent disadvantage to
the person that walks into the shop, looks at that TV, and then
buys it on the internet and has an 8 percent advantage to
somebody who is not paying the tax? Is there anyone that
actually would tell me that we are not dealing with an inequity
that is adversely affecting the normal flow of competitive
commerce?
Mr. Moylan. I would respond briefly and say I think
``doom'' is perhaps a strong word. But you are getting at the
issue of show rooming.
Mr. Issa. Is it not unfair competition?
Mr. Moylan. Right, the inequity of the sort of show rooming
issue. And this is something that I think is really important
to point out that we have not yet in this hearing, which is
that the show rooming concept----
Mr. Issa. Is that not part of our----
Mr. Goodlatte. The time of the gentleman has expired. All
time has expired.
Mr. Issa. Thank you, Mr. Chairman.
Mr. Goodlatte. There is 1 minute and 56 seconds left in
this vote. I apologize I will not be able to get down and say
hello to the panelists. You all did a great job.
This concludes today's hearing, and I thank you all and
everyone for attending.
Without objection, all Members will have 5 legislative days
to submit additional written questions for the witnesses or
additional materials for the record.
The hearing is adjourned.
[Whereupon, at 1:34 p.m., the Committee was adjourned.]