[Congressional Record Volume 146, Number 45 (Tuesday, April 11, 2000)]
[Senate]
[Pages S2542-S2544]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GREGG (for himself and Mr. Kohl):
  S. 2401. A bill to provide jurisdictional standards for imposition of 
State and local business activity, sales, and use tax obligations on 
interstate commerce, and for other purposes; to the Committee on 
Finance.


                 the new economy tax simplification act

 Mr. GREGG. Mr. President, I rise today with Senator Kohl to 
introduce the New Economy Tax Simplification Act or NETSA. Electronic 
commerce is reshaping our society. In many ways, the strong economic 
conditions we currently enjoy are a result of the convenience, lower 
costs, and global connections provided by the internet. The question 
for us as a nation is how to manage this new enterprise so that it 
continues to benefit our nation's economy, particularly in regard to 
the taxation of e-commerce.
  So far, the government's hands-off approach is working. Our nation's 
unemployment and inflation rates are at record lows and higher paying 
jobs are being created at a tremendous rate. Many financial experts 
attribute the record low inflation rates to the Internet. A University 
of Texas study found that the Internet economy grew an astounding 68% 
rate in the past 12 months.
  Another sign of the good times is the surplus revenue flowing into 
federal and state treasuries all over the nation. The federal 
government's budget is balanced for the first time in a generation and 
the 50 states ended 1998 with a collective surplus of $11 billion. 
States are seeing revenue increases of more than 5 percent a year 
through the 1990's. This hardly seems like a compelling rationale for 
levying taxes on the Internet. Yet a heated debate is raging between 
those who want to keep the internet free of taxes and state and local 
governments who seek to impose widespread taxes on internet sales.
  The Advisory Commission on Electronic Commerce (ACEC), set up by 
Congress last year to develop recommendations on Internet taxes, 
recently concluded its final meeting but failed to reach the required 
supermajority to make any formal recommendations. Notably, it did agree 
by a simple majority vote to extend the current moratorium on Internet 
taxes for five years.
  The Commission is set to deliver it's report to Congress tomorrow. It 
will recommend that we extend the internet tax moratorium for another 
five years and I fully support this. The Commission will also ask 
Congress to establish nexus safeguards--to make clear when a State or 
municipality has the power to levy taxes. Our legislation establishes 
these important nexus safeguards.
  Currently, online sales are governed by the very same tax rules that 
govern mail order sales. The existing rules of the road are based upon 
two prior Supreme Court decisions--National Bellas Hess case in 1967, 
and the Quill case in 1992. Both decisions established the power of 
state tax authority to be limited by nexus--or the scope of a company's 
connection to the taxing state.
  Local sales taxes are incredibly complex. There are 7,600 different 
tax jurisdictions across the country--within these systems about 600-
700 rate changes occur per year. There are 46 different sets of rules 
(45 states and the District of Columbia have state sales tax). If 
forced to comply with these rules, companies would be filing 425 tax 
returns each month or 5,100 a year.
  The Gregg/Kohl bill, the New Economy Tax Simplification Act (NETSA), 
codifies these mail order tax rules as outlined in the Quill decision, 
updating this decision for the 21st century.
  Sales/use tax nexus rules are court-based, and income tax nexus rules 
are based upon a 1950s federal statute that applies only to tangible 
goods. The Gregg/Kohl plan would codify nexus standards across the 
board. This legislation would update and strengthen the nexus standards 
for the 21st Century economy--ensuring that intangible sales, web pages 
and servers do not cause nexus. It maintains current constitutional 
principles and keeps state powers within their jurisdictions, and does 
not try to pre-empt a state's tax authority within its own borders.
  I ask unanimous consent that the full text of the bill be printed in 
the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2401

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``The New Economy Tax 
     Simplification Act (NETSA)''.

     SEC. 2. JURISDICTIONAL STANDARDS FOR THE IMPOSITION OF STATE 
                   AND LOCAL BUSINESS ACTIVITY, SALES, AND USE TAX 
                   OBLIGATIONS ON INTERSTATE COMMERCE.

       Title I of the Act entitled ``An Act relating to the power 
     of the States to impose net income taxes on income derived 
     from interstate commerce, and authorizing studies by 
     congressional committees of matters pertaining thereto'', 
     approved on September 14, 1959 (15 U.S.C. 381 et seq.), is 
     amended to read as follows:
                  ``TITLE I--JURISDICTIONAL STANDARDS

     ``SEC. 101. IMPOSITION OF STATE AND LOCAL BUSINESS ACTIVITY, 
                   SALES, AND USE TAX OBLIGATIONS ON INTERSTATE 
                   COMMERCE.

       ``(a) In General.--No State shall have power to impose, for 
     any taxable year ending after the date of enactment of this 
     title, a business activity tax or a duty to collect and remit 
     a sales or use tax on the income derived within such State by 
     any person from interstate commerce, unless such person has a 
     substantial physical presence in such State. A substantial 
     physical presence is not established if the only business 
     activities within such State by or on behalf of such person 
     during such taxable year are any or all of the following:
       ``(1) The solicitation of orders or contracts by such 
     person or such person's representative in such State for 
     sales of tangible or intangible personal property or 
     services, which orders or contracts are approved or rejected 
     outside the State, and, if approved, are fulfilled by 
     shipment or delivery of such property from a point outside 
     the State or the performance of such services outside the 
     State.
       ``(2) The solicitation of orders or contracts by such 
     person or such person's representative in such State in the 
     name of or for the benefit of a prospective customer of such 
     person, if orders or contracts by such customer to such 
     person to enable such customer to fill orders or contracts 
     resulting from such solicitation are orders or contracts 
     described in paragraph (1).
       ``(3) The presence or use of intangible personal property 
     in such State, including patents, copyrights, trademarks, 
     logos, securities, contracts, money, deposits, loans, 
     electronic or digital signals, and web pages, whether or not 
     subject to licenses, franchises, or other agreements.
       ``(4) The use of the Internet to create or maintain a World 
     Wide Web site accessible by persons in such State.
       ``(5) The use of an Internet service provider, on-line 
     service provider, internetwork communication service 
     provider, or other Internet access service provider, or World 
     Wide Web hosting services to maintain or take and process 
     orders via a web page or site on a computer that is 
     physically located in such State.
       ``(6) The use of any service provider for transmission of 
     communications, whether by cable, satellite, radio, 
     telecommunications, or other similar system.
       ``(7) The affiliation with a person located in the State, 
     unless--
       ``(A) the person located in the State is the person's agent 
     under the terms and conditions of subsection (d); and
       ``(B) the activity of the agent in the State constitutes 
     substantial physical presence under this subsection.

[[Page S2543]]

       ``(8) The use of an unaffiliated representative or 
     independent contractor in such State for the purpose of 
     performing warranty or repair services with respect to 
     tangible or intangible personal property sold by a person 
     located outside the State.
       ``(b) Domestic Corporations; Persons Domiciled in or 
     Residents of a State.--The provisions of subsection (a) shall 
     not apply to the imposition of a business activity tax or a 
     duty to collect and remit a sales or use tax by any State 
     with respect to--
       ``(1) any corporation which is incorporated under the laws 
     of such State; or
       ``(2) any individual who, under the laws of such State, is 
     domiciled in, or a resident of, such State.
       ``(c) Sales or Solicitation of Orders or Contracts for 
     Sales by Independent Contractors.--For purposes of subsection 
     (a), a person shall not be considered to have engaged in 
     business activities within a State during any taxable year 
     merely by reason of sales of tangible or intangible personal 
     property or services in such State, or the solicitation of 
     orders or contracts for such sales in such State, on behalf 
     of such person by one or more independent contractors, or by 
     reason of the maintenance of an office in such State by one 
     or more independent contractors whose activities on behalf of 
     such person in such State consist solely of making such 
     sales, or soliciting orders or contracts for such sales.
       ``(d) Attribution of Activities and Presence.--For purposes 
     of this section, the substantial physical presence of any 
     person shall not be attributed to any other person absent the 
     establishment of an agency relationship between such persons 
     that--
       ``(1) results from the consent by both persons that one 
     person act on behalf and subject to the control of the other; 
     and
       ``(2) relates to the activities of the person within the 
     State.
       ``(e) Definitions.--For purposes of this title--
       ``(1) Business activity tax.--The term `business activity 
     tax' means a tax imposed on, or measured by, net income, a 
     business license tax, a business and occupation tax, a 
     franchise tax, a single business tax or a capital stock tax, 
     or any similar tax or fee imposed by a State.
       ``(2) Independent contractor.--The term `independent 
     contractor' means a commission agent, broker, or other 
     independent contractor who is engaged in selling, or 
     soliciting orders or contracts for the sale of, tangible or 
     intangible personal property or services for more than one 
     principal and who holds himself or herself out as such in the 
     regular course of his or her business activities.
       ``(3) Internet.--The term `Internet' means collectively the 
     myriad of computer and telecommunications facilities, 
     including equipment and operating software, which comprise 
     the interconnected world-wide network of networks that employ 
     the Transmission Control Protocol/Internet Protocol, or any 
     predecessor or successor protocols to such Protocol.
       ``(4) Internet access.--The term `Internet access' means a 
     service that enables users to access content, information, 
     electronic mail, or other services offered over the Internet, 
     and may also include access to proprietary content, 
     information, and other services as a part of a package of 
     services offered to users.
       ``(5) Representative.--The term `representative' does not 
     include an independent contractor.
       ``(6) Sales tax.--The term `sales tax' means a tax that 
     is--
       ``(A) imposed on or incident to the sale of tangible or 
     intangible personal property or services as may be defined or 
     specified under the laws imposing such tax; and
       ``(B) measured by the amount of the sales price, cost, 
     charge, or other value of or for such property or services.
       ``(7) Solicitation of orders or contracts.--The term 
     `solicitation of orders or contracts' includes activities 
     normally ancillary to such solicitation.
       ``(8) State.--The term `State' means any of the several 
     States, the District of Columbia, or any territory or 
     possession of the United States, or any political subdivision 
     thereof.
       ``(9) Use tax.--The term `use tax' means a tax that is--
       ``(A) imposed on the purchase, storage, consumption, 
     distribution, or other use of tangible or intangible personal 
     property or services as may be defined or specified under the 
     laws imposing such tax; and
       ``(B) measured by the purchase price of such property or 
     services.
       ``(10) World wide web.--The term `World Wide Web' means a 
     computer server-based file archive accessible, over the 
     Internet, using a hypertext transfer protocol, file transfer 
     protocol, or other similar protocols.
       ``(f) Application of Section.--This section shall not be 
     construed to limit, in any way, constitutional restrictions 
     otherwise existing on State taxing authority.

     ``SEC. 102. ASSESSMENT OF BUSINESS ACTIVITY TAXES.

       ``(a) Limitations.--No State shall have power to assess 
     after the date of enactment of this title any business 
     activity tax which was imposed by such State or political 
     subdivision for any taxable year ending on or before such 
     date, on the income derived for activities within such State 
     that affect interstate commerce, if the imposition of such 
     tax for a taxable year ending after such date is prohibited 
     by section 101.
       ``(b) Collections.--The provisions of subsection (a) shall 
     not be construed--
       ``(1) to invalidate the collection on or before the date of 
     enactment of this title of any business activity tax imposed 
     for a taxable year ending on or before such date; or
       ``(2) to prohibit the collection after such date of any 
     business activity tax which was assessed on or before such 
     date for a taxable year ending on or before such date.

     ``SEC. 103. TERMINATION OF SUBSTANTIAL PHYSICAL PRESENCE.

       ``If a State has imposed a business activity tax or a duty 
     to collect and remit a sales or use tax on a person as 
     described in section 101, and the person so obligated no 
     longer has a substantial physical presence in that State, the 
     obligation to pay a business activity tax or to collect and 
     remit a sales or use tax on behalf of that State applies only 
     for the period in which the person has a substantial physical 
     presence.

     ``SEC. 104. SEPARABILITY.

       ``If any provision of this title or the application of such 
     provision to any person or circumstance is held invalid, the 
     remainder of this title or the application of such provision 
     to persons or circumstances other than those to which it is 
     held invalid, shall not be affected thereby.''.
  Mr. KOHL. Mr. President, today Senator Gregg and I are introducing 
legislation, the New Economy Tax Simplification Act, to ask government 
to step out of the way of the growing Internet economy and take a 
middle ground approach to taxation of Internet commerce. Our 
legislation does not stop any one State from forcing Internet companies 
within its borders to collect the sales taxes collected by any other 
business within its borders. But it does stop every one of the over 
7000 local taxing jurisdictions from imposing every one of their unique 
rules, regulations, and rates on every business that sells over the 
Internet or through the mail.
  We are not here today to ask for special treatment for companies that 
sell on the Internet. We simply want to make sure that businesses that 
are tackling the market with 21st century technology are not bled to 
death by the Byzantine local tax system.
  All companies--regardless of whether they now sell over the Internet 
or not--benefit from the economic boom and consumer convenience 
provided by computer commerce. If you don't sell over the Internet now; 
you probably buy there. If you don't work for a company whose economic 
fortune is tied to Internet sales or information, your spouse, child, 
or neighbor probably does. If you haven't invested in one of these 
successful Internet businesses, they have probably invested in you: in 
the charities in your community, in the jobs that are growing our 
economy everywhere; in the State programs financed by the taxes these 
companies rightly pay to the States in which they have a physical 
presence.
  Our bill provides a clear set of standards for businesses operating 
across state lines through mail-order sales or the Internet. And--very 
significantly--it also protects the rights of state and local officials 
to determine tax policy within their own jurisdictions.
  Some have called for a complete ban on sales taxes on Internet goods. 
Still others have claimed that companies should collect sales taxes on 
all of their products without regard to the point of sale or the state 
or residence of the consumer.
  We strike a balance between these two extremes. Just as my Wisconsin 
constituents should not have to pay local sales taxes for schools and 
sewers in Texas, Nebraska, or New York; it also makes sense that a 
Wisconsin business should not be forced to collect taxes to support 
fire and police protection in the other states. Businesses should 
collect the sales taxes that support the government services they 
receive.
  But the main reason I am here today is to protect against a Federal 
red tape nightmare that would prevent the very growth that we all wish 
to promote. There are over 7,000 tax jurisdictions in this country, all 
with their own tax rates, exemptions, audit requirements and appeals 
procedures. Requiring compliance with all those jurisdictions would 
mean learning and complying with 46 sets of rules. Under this scenario, 
companies would have to file more than 425 tax returns every month. 
That amounts to approximately 5100 tax returns every year.
  Internet and mail order companies, as well as traditional main street 
stores who are developing or using Internet services, serve consumers 
who like the convenience of phone or Internet shopping or who are 
unable to leave their homes to shop. They offer

[[Page S2544]]

greater convenience and greater choice. And they offer small specialty 
businesses the chance to grow into successful big businesses.
  Our bill will allow these vital markets to continue to flourish--free 
from a tangle of tax red tape. It will also allow state and local 
officials to continue to collect taxes as they see fit within their own 
jurisdictions. We believe it strikes the proper balance, and we look 
forward to convincing our colleagues that it is worthy of their 
support.
                                 ______