[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

                               __________

                           Serial No. 113-65

                               __________

         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

                              ----------                              

                             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

                              ----------                              


                       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
























                               __________
    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:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    


                               __________
    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.
---------------------------------------------------------------------------
    **Material previously submitted, see page 8.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    ***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.]

                                 
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