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S. HRG. 107–1134

EXTENSION OF THE INTERNET TAX MORATORIUM

HEARING

BEFORE THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MARCH 14, 2001

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

(

(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

JOHN MCCAIN, Arizona, Chairman 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

SAM BROWNBACK, Kansas 

GORDON SMITH, Oregon 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

ERNEST F. HOLLINGS, South Carolina 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

MAX CLELAND, Georgia 

BARBARA BOXER, California 

JOHN EDWARDS, North Carolina 

JEAN CARNAHAN, Missouri 

MARK BUSE, Republican Staff Director 

ANN CHOINIERE, Republican General Counsel 

KEVIN D. KAYES, Democratic Staff Director 

MOSES BOYD, Democratic Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on March 14, 2001 ............................................................................ 1

Statement of Senator Allen ..................................................................................... 23

Statement of Senator Dorgan ................................................................................. 4

Statement of Senator Hutchison ............................................................................ 29

Statement of Senator Kerry .................................................................................... 3

Statement of Senator McCain ................................................................................. 1

Prepared statement .......................................................................................... 2

Statement of Senator Stevens ................................................................................ 6

Statement of Senator Wyden .................................................................................. 5

WITNESSES

Comfort, Robert D., Vice President of Tax and Tax Policy, Amazon.com ........... 53

Prepared statement .......................................................................................... 55

Dircksen, Jeff, Director of Congressional Analysis, National Taxpayers Union 65

Prepared statement .......................................................................................... 68

Geringer, Hon. Jim, Governor, State of Wyoming ................................................ 6

Prepared statement .......................................................................................... 11

Harchenko, Elizabeth, Director, Oregon Department of Revenue ....................... 56

Prepared statement .......................................................................................... 59

Julian, Frank G., Operating Vice President and Tax Counsel, Federated Department Stores, Inc. ........................................................................................... 33

Prepared statement .......................................................................................... 35

Lowy, Peter, CEO, Westfield America; Founding Chairman, e-Fairness Coalition ........................................................................................................................ 45

Prepared statement .......................................................................................... 46

Swift, Hon. Jane, Lieutenant Governor, Commonwealth of Massachusetts ....... 17

Prepared statement .......................................................................................... 20

APPENDIX

Anderson, Christopher, President, Massachusetts High Technology Council, 

letter to Hon. John McCain ................................................................................. 86

Electronic Commerce Association, prepared statement ........................................ 83

Norquist, Grover G., President, Americans for Tax Reform, prepared statement ...................................................................................................................... 84

Response to Written Questions Submitted by Hon. John McCain: 

Hon. Jim Geringer ............................................................................................ 86

Jane Swift ......................................................................................................... 88

Elizabeth Harchenko ........................................................................................ 89

Rosen, Arthur R., on Behalf of the Coalition for Rational and Fair Taxation, 

prepared statement .............................................................................................. 81

(1)

EXTENSION OF THE INTERNET TAX 

MORATORIUM 

WEDNESDAY, MARCH 14, 2001

U.S. SENATE, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, Washington, DC. 

The Committee met, pursuant to notice, at 9:30 a.m. in room SR–

253, Russell Senate Office Building, Hon. John McCain, Chairman 

of the Committee, presiding. 

OPENING STATEMENT OF HON. JOHN MCCAIN,

U.S. SENATOR FROM ARIZONA 

The CHAIRMAN. Good morning. First let me thank the witnesses 

for being here today. This hearing is similar to one held by the 

Committee nearly a year ago to examine whether to extend the 

Internet Tax Freedom Act’s moratorium on the ability of state or 

local governments to impose new sales taxes on Internet access 

services, or to impose any multiple or discriminatory taxes on electronic commerce. 

Opponents of the extension of this limited tax moratorium succeeded in postponing its consideration last year. We face different 

circumstances now. Foremost, the Internet Tax Freedom Act expires this October. I believe the Congress will and must act before 

then to renew its objections to multiple and discriminatory taxes on 

the Internet as well as to taxes that inhibit Internet access. 

One needs only to turn on the news or glance at the front page 

of the paper to know that the Internet economy is not bullet-proof. 

The plunge in the NASDAQ is a clear sign that we need to be 

mindful of the economic effects of our tax policy decisions as we 

move forward on this issue, and we must move forward. Several 

states and localities, as well as the majority of the so-called brickand-mortar retailers, have asked that we consider legislation in addition to just the extension of the Internet tax moratorium. Principally, they have asked Congress to authorize them to require all 

remote sellers to collect and remit sales taxes on deliveries into 

their states, provided that the states and localities dramatically 

simplify their sales and use tax systems. 

I have met frequently with Members of Congress, including several on this Committee, who are interested in joining me to extend 

the Internet tax moratorium, but only as long as we take action to 

broaden the state’s authority to collect sales taxes from remote sellers, including those conducting business on the Internet. We pledge 

to work together on a consensus proposal that we can put in place 

before the moratorium expires in October. 

2

Personally, I have not seen evidence of the sales tax revenue 

losses predicted by the states and local governments when we took 

up this issue a few years ago. Even so, the Main Street retailers 

have a legitimate fairness argument when they see customers come 

to the store to locate items they want to purchase, only to leave 

and order the items over the Internet just to escape the sales tax. 

I want to emphasize again, Congress must act before the Internet tax moratorium expires in October. Reaching its consensus by 

then on the broader issues that we will hear more about today will 

be difficult. All interested parties must be willing to make significant sacrifices. The states and localities in particular must be able 

to make some tough decisions now to advance true sales tax simplification before Congress will consider subjecting remote sellers to 

the reach of more than 7,000 taxing jurisdictions in the United 

States. I do not think that is too much to ask. 

The states and localities are asking us to overturn longstanding 

limits on their ability to tax out-of-state businesses and transactions put in place to ensure that myriad taxes do not create an 

undue burden on interstate commerce. 

Thanks again to our witnesses, and I look forward to hearing testimony today from Governor Geringer and Lieutenant Governor 

Swift. Opening statements. Senator Kerry. 

[The prepared statement of Senator McCain follows:]

PREPARED STATEMENT OF HON. JOHN MCCAIN, U.S. SENATOR FROM ARIZONA

First, let me thank the witnesses for being here today. This hearing is similar to 

one held by the Committee nearly a year ago to examine whether to extend the 

Internet Tax Freedom Act’s moratorium on the ability of state or local governments 

to impose new sales taxes on ‘‘Internet access services,’’ or to impose any ‘‘multiple 

or discriminatory taxes’’ on electronic commerce. 

Opponents of the extension of this limited tax moratorium succeeded in postponing its consideration last year. We face different circumstances now. Foremost, 

the Internet Tax Freedom Act expires this October. I believe that Congress will and 

must act before then to renew its objections to multiple and discriminatory taxes 

on the Internet, as well as to taxes that inhibit Internet access. 

One needs only to turn on the news or glance at the front page of the paper to 

know that the Internet economy is not bulletproof. The plunge in the NASDAQ is 

a clear sign that we need to be mindful of the economic effects of our tax policy decisions as we move forward on this issue, and that we must move forward. 

Several states and localities, as well as the majority of the so-called brick and 

mortar retailers, have asked that we consider legislation in addition to just the extension of the Internet tax moratorium. Principally, they have asked Congress to authorize them to require all remote sellers to collect and remit sales taxes on deliveries into their states, provided that the states and localities dramatically simplify 

their sales and use tax systems. 

I have met frequently with members of Congress, including several on this Committee, who are interested in joining me to extend the Internet tax moratorium, but 

only as long as we take action to broaden the states’ authority to collect sales taxes 

from remote sellers, including those conducting business on the Internet. We have 

pledged to work together on a consensus proposal that we can put in place before 

the moratorium expires in October. 

Personally, I have not seen evidence of the sales tax revenue losses predicted by 

the states and local governments when we took up this issue a few years ago. Even 

so, the Main Street retailers have a legitimate fairness argument, when they see 

customers come to the store to locate items they want to purchase, only to leave 

and order the items over the Internet just to escape the sales tax. 

I want to emphasize again. Congress must act before the Internet tax moratorium 

expires in October. Reaching a consensus by then on the broader issues that we will 

hear more about today will be difficult. All interested parties must be willing to 

make significant sacrifices. 

3

The states and localities in particular must be able to make some tough decisions 

now to advance true sales tax simplification before Congress will consider subjecting 

remote sellers to the reach of more than 7,000 taxing jurisdictions in the United 

States. I do not think that is too much to ask. The states and localities are asking 

us to overturn longstanding limits on their ability to tax out-of-state businesses and 

transactions, put in place to ensure that myriad taxes do not create an undue burden on interstate commerce. 

Thanks again to our witnesses. I look forward to hearing your testimony today. 

Governor Geringer, welcome to the Committee. Would you like to begin?

STATEMENT OF HON. JOHN F. KERRY,

U.S. SENATOR FROM MASSACHUSETTS 

Senator KERRY. Mr. Chairman, thank you very much. I will be 

very brief. Let me take this opportunity to welcome our Lieutenant 

Governor here, all three of you. We are delighted to have you here 

and look forward to your testimony. She has been involved in our 

state on the electronic signature and the Internet tax issue, and we 

certainly welcome her opinion today, and Governor, also, thank you 

for being here with us. 

Mr. Chairman, we have had a number of meetings, one most recently, I guess about 3 weeks ago, a month ago, where a number 

of us on this Committee sat down and tried to come to grips with 

this issue. We have been working on it for some period of time now. 

It is good that we are here to followup with another hearing, but 

my hope is, and I have expressed this to you personally, that we 

are going to be able to move very soon to a markup on this. 

I think most people understand that we want to continue to have 

a moratorium on any kind of discriminatory taxation whatsoever. 

I think that is good for the Internet, that is good policy, and we 

want to try to continue that. But there is also, I think, a growing 

consensus now among many Internet, most Internet providers, 

service providers, and certainly business people, that we have got 

to have a playing field that makes sense. You cannot have sort of 

a Cayman Island situation in cyberspace to the disadvantage of 

bricks and mortar, and you cannot create a loophole where people 

can just sort of set up some kind of quick-buy Internet capacity 

right outside the store they visit to pick all the items they want 

and avoid taxation as a result. 

Communities all across this country depend on that. Certainly 

we can come up with a structure that encourages all of the states 

to figure out for themselves what the best method is for each state, 

but we cannot have thousands of jurisdictions competing. We cannot have people absolutely incapable of figuring out what tax they 

owe and how, and to which jurisdiction. It seems to me that everybody has an obligation to come up with a sensible way of mixing 

the national interest here and the local interest, and prerogatives 

of determining locally how they would like to treat their own uniformity within a state. 

So my hope is that this hearing will really sort of set us on the 

road to a relatively imminent markup so we could proceed forward. 

This is an important piece of legislation, and we need to clarify for 

many users how this playing field is going to be equalized and fair. 

Thank you. 

4

The CHAIRMAN. Thank you, Senator Kerry. It is interesting that 

the three most active Senators on this issue are here with us this 

morning. Senator Dorgan. 

STATEMENT OF HON. BYRON L. DORGAN,

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. Chairman, thank you very much. This is clearly a complicated issue, but yet a very important issue, and I would 

agree with the chairman and with Senator Kerry that we should 

and we will extend the moratorium. No one supports punitive 

taxes, discriminatory taxes on Internet transactions, so we will extend the moratorium. 

My hope, however, is that while we do that we will also take the 

time and make the effort to fix some of the other problems that 

exist with remote sales. It is important for everyone to understand 

that a tax already exists on almost all of these transactions, with 

the exception of the few states that do not have a sales tax. In 

other circumstances the tax always exists. If it is not collected by 

the seller, it then exists in the form of a use tax which is then 

never paid to the state governments, and that is the issue. 

The question is, could we find a way to require state and local 

governments to substantially simplify the collection requirements 

for remote sellers? I believe we should. We ought not ask a remote 

seller to comply with thousands and thousands of different jurisdictions with different rates and different bases, but if we are able to 

do that, to provide substantial simplification, then can we and 

should we not ask remote sellers to collect the tax. The answer to 

that ought to be yes, but we ought to do it in a thoughtful manner. 

The discussions many of us have had I think would allow us to 

reach agreement on that. There are different opinions here, but we 

ought to, in my judgment, be able to come together to fix it. 

The Commerce Clause requires that the Congress make this 

judgment. I know some feel the states can do it by themselves. I 

do not share that judgment. I do not believe the federal courts are 

going to allow the states to solve this problem. I think Congress 

must address it, and we must do it in the right way. 

Mr. Chairman, one final point. We had testimony at that table 

by one of our country’s largest merchandisers, who described the 

need to set up a separate corporation to be able to make a remote 

sale of that which someone wants to purchase from their store so 

that they can sell it without the collection requirement of a tax. 

That clearly, in my judgment, in the future will dissipate the 

amount of revenues that are used, and it is probably just coincidence, but roughly $160 billion is collected by the sales and use 

taxes by the states, and roughly $160 billion is spent on and elementary and secondary education. It is probably a coincidence, but 

it is very important to understand the consequences of this issue 

and our need to respond to the growth of remote sales and the lack 

of collection of the central tax that underscores the funding requirement for elementary and secondary education. 

Having said all that, I thank you for holding the hearing. This 

is a tough issue, and you have been neck-deep in this issue because 

you care about solving it, and I think that is something that we 

are all grateful for, Mr. Chairman. 

5

Thank you very much. 

The CHAIRMAN. Thank you, Senator Dorgan. Senator Wyden. 

STATEMENT OF HON. RON WYDEN,

U.S. SENATOR FROM OREGON 

Senator WYDEN. Thank you, and I share, Mr. Chairman, your 

views and those of our colleagues. I think it is clear we are going 

to work very hard and cooperatively to come up with a solution 

here. Having been the original sponsor of the Internet Tax Freedom Act I would just offer the judgment that I do not see what the 

significant problems are with the bill as written. It is a straightforward ban on discriminatory taxes on e-commerce, and that just 

means if you buy your local newspaper and there is no tax on the 

local newspaper when you buy it the traditional way, you do not 

pay a tax if you read it online. 

A local jurisdiction can impose a variety of taxes on Internet 

commerce as long as it does to the offline world what it does to the 

online world, so we ought to be clear, there is no Cayman Islands 

today with respect to Internet sales. You can tax the Internet, you 

have got to just treat the offline world like you do the online world. 

Two other points are significant. First, there has not been a jurisdiction in this country that has been able to show that they have 

been hurt by their inability to impose discriminatory taxes on electronic commerce, so this bill, which bars discriminatory taxes on 

electronic commerce and which has generated considerable discussion on the part of local officials, in my view requires that somebody, if they want to turn this thing on its head, come forward and 

show that they have actually been hurt by their inability to impose 

a discriminatory tax on electronic commerce. I have been unable to 

find a jurisdiction in this country that has been hurt by their inability to impose discriminatory taxes. 

The last point I would mention involves a Supreme Court case, 

which is really what is at issue with respect to these remote sellers. The question is, should you tax one of these remote sellers, 

who has got no presence in a local jurisdiction other than a 

website? The U.S. Supreme Court has said, and this is really what 

is at issue in our efforts to work all this out and produce a bipartisan and cooperative bill, the Supreme Court has said, you do not 

tax somebody unless they have got physical presence somewhere, 

and for fairly obvious reasons, they are using roads, and water, and 

sewers, and the like. 

That is not what is going on with these remote sellers, and I 

would only say, because I am anxious to work with our friends 

here, and we have had very good discussions, that at a time when 

the technology sector is very fragile, and we see that in the newspaper every day, I would just hope that we are very careful in 

terms of how we proceed here. 

There has not been evidence that somebody has hurt. You have 

got the technology sector fragile—and we are talking about throwing a Supreme Court decision out the window, and taxing folks who 

have no physical presence somewhere, and that is the case. 

If you have got physical presence somewhere, kiosks, and the 

like, then it is a different story, but what concerns me is people 

who have no physical presence somewhere, and I, as you have said 

6

and our colleagues have said, believe that we are going to work 

very constructively to get at this, and time, of course, is of the essence, and I thank you. 

The CHAIRMAN. Thank you, Senator Wyden. 

Senator Stevens. 

STATEMENT OF HON. TED STEVENS,

U.S. SENATOR FROM ALASKA 

Senator STEVENS. I have no comments this morning. 

The CHAIRMAN. Thank you, sir. 

We would like to welcome Hon. Jim Geringer, the Governor of 

the State of Wyoming, and Hon. Jane Swift, the Lieutenant Governor of the Commonwealth of Massachusetts. Governor Geringer, 

we would like to begin with you. Thank you for taking the time to 

appear before our Committee, and we appreciate your involvement 

in this very important issue. 

STATEMENT OF HON. JIM GERINGER, GOVERNOR,

STATE OF WYOMING 

Governor GERINGER. Thank you, Chairman McCain, and thank 

you to the Members of the Committee who are here today to participate in this hearing. I am Jim Geringer. I am here as Governor 

of Wyoming, but I am also here to speak on behalf of the National 

Governors’ Association, who just recently overwhelmingly reaffirmed their approach to working for a simplified tax system for 

our states to adopt, and working through the states. We are here 

to ask for your partnership to help enable that. 

Last night, as I was flipping through the channels, one of the 

meeting notices that came up on the hotel marquee where I was 

staying provided a notice there is a meeting coming up today to 

ban land mines, and I thought of that as I thought of this meeting 

this morning. Land mines, those unexpected things that pop up 

here and there. 

Today’s discussion ought to be defined in terms of what it is or 

is not, and I would like to start with that. Today’s discussion is not 

about taxing the Internet. Obviously, there have been statements 

already made about extending the moratorium, which the NGA, 

the National Governors’ Association supports. Today’s discussion is 

not about new taxes on the Internet. 

Today’s discussion is about whether our states and cities, our 

local governments, will be able to collect currently authorized 

taxes, and several of you this morning have already made reference 

to the shift in how e-tailing, or retailing, or e-commerce, or business-to-business transactions are shifting toward an Internet-based 

transaction, and the uncertainty that was created by the previous 

Internet Tax Freedom Act, definitions that are there that are unclear as to whether something is or is not a remote sale or an 

Internet-only sale. 

This is also not about whose state is most friendly toward high 

technology, or the new economy businesses. In fact, if I were to 

gauge which state is most friendly in terms of the cost of doing 

business, I would say Wyoming. Come on down. We can treat you 

well. We do not have tax rebates because we do not tax it to begin 

with. We leave the money in your pocket. 

7

But we do need to talk about the nature of business transactions 

in the new economy, and much of our discussion this morning will 

be for us to understand just the nature of how business transactions are occurring, and financial transactions are occurring over 

the Internet, and what it does to our states. Again, we are here to 

ask for your partnership to simplify the sales and use tax collections. Let me emphasize that point again. It is collections. It is not 

to impose taxes. It is whether or not we will be enabled. 

So I come back, Mr. Chairman, to your invitation to appear 

today, as to whether Congress should allow states to require all remote sellers to collect and remit sales taxes. I would say, Mr. 

Chairman, that the issue is not whether Congress should allow, but 

whether Congress should enable the collection of such taxes, and 

the answer is yes. 

Electronic commerce is not new. Electronic commerce has been 

around for sometime. I look back to my own experience with technology. I worked in the Air Force Space Program, worked with 

NASA. I can still recall when fax machines came along, and we had 

this marvelous new thing that could transmit one page in 7 minutes, just a remarkable invention at the time, but that must have 

been the same feeling as when Marconi invented the telegraph, or 

Alexander Graham Bell invented the telephone. They initiated electronic commerce, so it is not new. 

The new economy is not new, either. It is just more noticeable, 

and what is most noticeable about the new economy is productivity, 

and that is what we are talking about today. How can we foster 

the continuing and sustainability of the new economy through productivity increases? That is what the new economy has fostered. 

That is what technology has enabled. 

Our citizens are accustomed to access to the Internet, and they 

will continue to demand access through the Internet for everything 

in their lives. What we want to talk about today is what businesses 

want. Businesses want from the states predictability, particularly 

in taxes. They want uniformity, and our choices today would be 

that we impose no tax at all for anything that is done for a business transaction, or we could propose that the Congress mandate 

a tax, or a tax approach, or we could say to the states, if you could 

come up with a way to develop a uniform system to taxation and 

its collection, then we can work to eliminate the existing patchwork 

of state and local laws, and enable the growth in the new economy 

that we all desire. 

The Internet Tax and Freedom Act, Senator Wyden, that you 

sponsored, has a statement associated with it that information 

should not be taxed, and we agree. Commerce conducted over the 

Internet should not be taxed in new and creative ways. We agree. 

The question is, what happens to state revenue sources that currently depend on sales taxes as they shift? What we are talking 

about, Mr. Chairman, is, today’s taxes are authorized at this level. 

Transactions on the Internet are fairly low, and what we are seeing 

is a trend that is causing the balance to shift, and what we are 

looking for is the ability of the states to collect the same taxes that 

would already be due them, but they cannot reach them because 

their jurisdiction does not apply. 

8

The reason it is important is because of the 45 states who levy 

sales and use taxes in some form—and use tax is due, as Senator 

Dorgan said. Even though it may not be collected, it is still due. 

How do we collect it? Forty-five states impose some sort of a sales 

and use tax, and nationwide about 40 percent of all state revenues 

do depend on sales and use taxes, and where does that money go? 

In Wyoming over 50 percent of it goes to education, so as we talk 

about the impact on the states, and it is real, we do have forecasts 

of the growth that will happen, the real issue is, how much will be 

shifted away from education? How much will be shifted away from 

health care, prescription drugs, or other things that the states are 

currently engaged in helping to fund, and how much will have to 

shift to other tax areas or shift away from providing these vital 

services? 

The issues today include energy, and I will talk a little bit more 

about that later, because Wyoming is quite an energy-producing 

state, and I will talk about the impact that may come about. 

The reason sales tax is important to the state, probably more so 

than the Federal Government, is that the Federal Government generates its revenues almost entirely from income tax. Income tax is 

only one leg of a three-legged stool for the states. 

Our message today should be fairly simple. By the rule of unintended consequences, Congress should not preempt the state prerogatives on tax issues. You should enable, and can enable the 

states to come up with their own approach that will lead to uniformity, and how current authorized taxes may be collected in the 

future. 

Our states have already begun to cooperate and simplify local tax 

systems, and state tax systems. We have a number of states who 

are participating, and Mr. Chairman, I would make reference to 

the last page of the testimony that has been provided. There is a 

map that shows the United States, the 50 states and their participation in the simplified tax approach that we are taking through 

our own initiative. 

If you look at the chart, it shows a variety of colors, and let me 

point out that the blue, the red, and the green states are all involved in our simplified tax project. The light blue in Wyoming indicates that Wyoming was the first state to adopt model legislation 

to enable the compact that would allow our states to work together. 

The darker blue, legislation has been introduced and is pending approval. Several states are anticipating signature within the week. 

The states that are red, they are official participants, but have not 

yet introduced legislation to develop the project. We believe we can 

easily reach 20 states to provide a multistate agreement on a compact that we would ask the Congress——

The CHAIRMAN. How many, Governor? 

Governor GERINGER. Pardon me? 

The CHAIRMAN. How many did you say? 

Governor GERINGER. There are 32. 

The CHAIRMAN. And you said you could easily reach——

Governor GERINGER. We think we could reach 20, easily, of those 

32. 

The CHAIRMAN. Thank you. 

Governor GERINGER. Thank you, Mr. Chairman. 

9

The states that are in green are observers to the process. They 

have taken a wait-and-see approach as to how this works out. 

There are states that are indicated in beige that collect no sales tax 

and then, of course, the ones that are listed in gray have indicated 

their—I am not sure what their opposition is to, because I think 

uniformly all the states agree that we do not want to tax new. We 

want to adjust how we collect, and enforce the tax collection. 

Let me talk a minute, though, about tax and revenue systems at 

the federal level. When it comes to the shift to the Internet purchase of any kind of product or service, there are federal Internet 

taxes today, where the states have been somewhat—at least, it is 

hazy as to whether or not the states are prohibited. I do not know 

how we would clarify that except through your hand and through 

your adoption of legislation. 

While states have been precluded from taxing Internet transactions, the Federal Government imposes many federal taxes that 

are being conducted over the Internet. For example, airline tickets, 

liquor, tires, tobacco. In fact, I have a list of all the federal excise 

taxes that, as any product that is listed on here shifts to Internet 

purchase, the Federal Government still collects the excise tax, and 

you have the enforceability to do it, and the system engaged to do 

it. The states are asking for an even playing field to do the same. 

Fair is fair. If the states are prohibited, the Federal Government 

ought to examine its own approach and prohibit the same collection. 

The difference is, the states cannot reach beyond their own jurisdiction, and that is the authority that we are asking for, is the simplification through the adoption of technology, through the use of 

the Internet, and through the use of standardized software that 

will allow us to extend our jurisdiction to collect taxes. 

The estimate that was given to me is that there is $90 billion a 

year in a variety of federal excise taxes, many of which are over 

the Internet. The equivalent would be, over time, the erosion of 

that $90 billion if the Federal Government were in the same situation as the states currently find themselves in. That is evidence, I 

believe, Mr. Chairman, that we ought to do something to assure 

the idea of fairness. It is not just a matter of resident merchants 

and nonresident merchants. It is a matter of fairness as to how excise taxes are collected, regardless. 

The most significant unintended consequence is that traditional 

business transactions that are taxable today can completely avoid 

paying taxes in the future by simply setting up an electronic means 

to complete a transaction that fits the current definition under the 

Internet Tax Freedom Act, but the need for simplification goes beyond that for our small businesses. 

In Wyoming—I believe that the SBA defines a small business as 

anything under 500 employees. That is a big business in Wyoming, 

Mr. Chairman. Unequal taxation between in-state merchants and 

out-of-state merchants means that you will be driving out more and 

more of our small businesses, particularly those in our smaller 

states, but in the rural areas of any of our states, for those who 

can transact remote or electronic sales, and you will force people 

to migrate to the Internet. 

10

In terms of the impact, Mr. Chairman, the report that I make 

reference to today is the Forest report of November 2000. They are 

based in Massachusetts. They estimate that the sales tax losses, 

just to states, not counting local governments, will total $13.7 billion by 2004, and the most significant sales tax loss could be business-to-business, where today most everyone thinks in terms of the 

retailing of business to consumer. 

Many have suggested that we should just eliminate all sales 

taxes, and that is certainly very appealing. Let me give you an example now of why energy is a significant issue to Wyoming. We are 

probably the BTU capital of North America, if all of our energy 

were developed at one time. Many of our western states are. The 

difference in Wyoming is, as we shift tax burdens from one to another, we will probably shift it to energy, and if we shift it to energy, it will be the energy that is exported to the rest of the country, and as we talk about the high impact of energy costs today, 

and the impact on our individual citizens’ pocketbooks and what 

they can and cannot afford, mostly cannot, it would force Wyoming, 

just to support its current education and health programs, to shift 

more of its income revenue-raising to energy, and we would export 

that to others, whereas today our philosophy is, it ought to be user 

pay. We would be left with fewer options if we are not able to guide 

our own destiny, if you will. 

The Governors recognize the need to simplify the current sales 

and use tax collection system, and so we support the effort that is 

being proposed particularly in Senator Dorgan’s bill, cosponsored 

by our own Senator Enzi. We would ask that any extension of the 

moratorium connect those two concepts: simplification initiated by 

the states, a compact that could be approved by Congress, and 

should be, to set up centralized one-stop multistate registration, 

adopt uniform definitions, relieve sellers from liability on any 

states errors that might be introduced, use information that is provided by the states—in other words, have a state-level administration of state-level taxes, and we would take care of the local option 

taxes. 

The Dorgan-Enzi bill, sponsored by others, also contains a provision that says first of all there would be a single blended rate to 

simplify even further anything that might be applicable to remote 

commerce. The states then would also in that bill have the alternative of requiring collection at the actual rate should they enact 

all the simplification measures that are enumerated. 

So Mr. Chairman, in summary, we are asking for a partnership. 

We are asking first of all that we clarify the issue to say this is 

not about new taxes. It is not about taxing access. It is about simplifying our current system, which you have aptly pointed out, is 

well over 7,000 jurisdictions. We need to simplify. The nature of 

business today requires it. It is time it were done, regardless, but 

let us not let the unintended consequence of letting everything shift 

to the Internet simply to avoid paying of taxes be the way it is 

done. 

We need your partnership. What we do not need is that the marketplace would make its decisions based on arbitrary tax policies. 

Business ought to be in the true sense of entrepreneurship, where 

11

they make their decisions based on the free enterprise system, not 

on some taxing scheme. 

Mr. Chairman, I thank you again for your courtesies extended. 

I look forward to your questions. 

[The prepared statement of Governor Geringer follows:]

PREPARED STATEMENT OF HON. JIM GERINGER, GOVERNOR, STATE OF WYOMING

Chairman McCain, Senator Hollings, and Members of the Commerce Committee, 

thank you for your invitation to address issues of state and local taxation authority 

on behalf of the National Governors Association. I am here today both as the Governor of Wyoming and as the co-chair of the E-Governance Task Force for the National Governors Association. 

The hearing notice on your Committee’s web page indicated that the purpose of 

this hearing is ‘‘whether Congress should allow states to require all remote sellers 

to collect and remit sales taxes on deliveries into that state, provided that states 

and localities dramatically simplify their sales and use tax systems.’’ I suggest Mr. 

Chairman, that the issue is not whether the Congress should allow states and local 

governing bodies, but whether the Congress should enable such actions. The answer is ‘‘yes.’’

Since their initial meeting in 1908 to discuss interstate water problems, the Governors have worked through the National Governors Association to deal collectively 

with issues of public policy and governance. The Association’s ongoing mission is to 

provide a bipartisan forum to help shape and implement national policy and to solve 

state problems. Today we ask your participation as we begin the process of simplification of taxation at the state, local and federal levels of government. 

There’s an old saying that ‘‘he who defines the issue wins the argument.’’ Part 

of our work today then, is to decide who has the responsibility and authority to implement new approaches to tax and revenue solutions in the age of the New Economy. I submit that taxation is and should be, the primary responsibility of the 

states. Preservation of state and local sovereignty is the cornerstone of our government. 

Today’s Situation 

Congress, the states and local governments need to function in the new economy 

without hindering its continuing expansion. Our economy is changing in fundamental ways and much more rapidly than government’s ability to react to it, particularly with regard to taxation. 

Electronic commerce is not new. When Marconi invented the telegraph, when Alexander Graham Bell invented the telephone, they initiated electronic commerce. 

Nobody suggested then that there was something unique that ought to lead the Federal Government to prohibit the states from imposing taxes on transactions conducted using these new industries or later ones such as fax machines. 

Likewise, the ‘‘New Economy’’ is not new. It’s just more noticeable. It has taken 

many of our traditional approaches to governing and service delivery by surprise. 

Each of us in our respective states wants a piece of the new economy and all that 

it implies—innovation, productivity, enhanced opportunity and income. Technology 

and globalization are changing the rules in the economy and the traditional domains 

of federal, state and local governments, particularly in tax and revenue systems. 

Our citizens have become so accustomed to access to the Internet for business 

transactions that they now expect the same from government programs and services. They want to make purchases and to access services independently of time and 

place. Our citizens want government to be more accountable and responsive to their 

needs. That expectation has led to more programs being brought back to the states. 

That’s what citizens want. Now, what do our businesses want? They want uniformity, particularly when it comes to tax and revenue systems. In order to be competitive, businesses don’t want to accommodate the existing patchwork quilt of state 

laws, regulations and tax programs. How can they achieve uniformity? They might 

ask the states to develop a uniform approach to taxation, or go to the Federal Government to ask for uniform standards or a federally imposed tax. Another option 

would be to not have any tax on any transaction. What we have today is a blend 

of all—some transactions with a patchwork quilt of laws and regulations, some with 

simplified taxes and, the newest one, some with no tax at all. The no-tax-at-all 

transactions are very appealing, both to the on-line retailer and to the on-line customer. This last category is the result of the Internet Tax Freedom Act, which is 

currently being interpreted to allow any transaction to be conducted electronically 

and thus avoid the collection of state or local sales and use taxes. 

12

The Internet Tax and Freedom Act 

The Internet Tax Freedom Act (Pub. L. 105–277) was passed in October 1998 to 

provide the new electronic commerce industry with short-term protection from a 

burdensome and discriminatory system of state and local taxation. In March 1998, 

one of the primary sponsors, Rep. Cox (California) held a news conference to announce the support of the National Governors Association, the U.S. Conference of 

Mayors, the National Conference of State Legislatures, the National Association of 

Counties, and the National League of Cities for the legislation. Several changes had 

been made to ease state and local government concerns, including: shortening the 

moratorium to three years; providing for what was seen as a targeted moratorium 

instead of a blanket prohibition on all Internet-related taxes; and creating a temporary commission to study the complex state and local tax issues relating to electronic commerce. 

State Revenue Sources Focus on Sales Tax 

The National Conference of State Legislatures indicates that states collect revenue from three primary sources: sales tax, income tax and property tax. The sales 

and use taxes dominate, representing anywhere from 27 to 45 percent of state revenues in the 45 states and the District of Columbia that impose transaction taxes. 

Collectively, approximately 40 percent of all state revenues come from sales and use 

taxes. Similarly, our cities and other local governing bodies obtain significant revenue from local option taxes. 

Our states through our legislatures have figured out how to cut $25 billion worth 

of taxes over the course of the last decade. How we have cut those taxes has been 

different in every state, because the people and businesses of each state have different needs and priorities. Many states have shifted reliance away from property 

tax and broadened (while reducing the rate) the sales tax base in order to provide 

a much fairer system to invest in public education. 

The Federal Government is empowered to regulate interstate commerce, but it 

would be unwise to usurp the most basic rights reserved to the states as to how 

they may or may not raise, or lower, revenues. 

State Spending Patterns Focus on Children 

Taxes finance the highest priority programs for state and local government. The 

latest survey of state spending patterns shows that states’ highest single priority 

for spending is education, followed by health care and family services. In Wyoming, 

nearly 90 percent of our budget is allocated to four main areas: education, health, 

family services and public safety. Any tinkering with our primary source of income 

will dramatically affect our top spending programs, particularly those that affect 

children. Actions or even specific inactions on tax issues by the Congress then, can 

and will dramatically affect our Wyoming priorities. 

Federal Revenue 

Contrasted to the states, the Federal Government generates revenues almost exclusively from income tax. That makes decisions easy from your Congressional point 

of view. No harm, no foul. No tax, no problem, since no federal revenue comes from 

sales or use taxes. Our state and local taxes differ by the choices of those who are 

governed. Five states do not impose any sales tax. A different number of states do 

not impose an income tax. My message is simple: the Congress should not dictate 

an absolute pre-emption of state prerogatives on tax issues. You can and should enable the states to come up with their own approach that will lead to uniformity. 

Tax Simplification Criteria 

The states have already begun to cooperate to simplify state and local tax systems. Restructuring will enable citizens and businesses to understand which level 

of government imposes taxes and which provides services. We can and will craft a 

simplified tax structure that is close to the people, fair to both businesses and customers and equally applicable to all transactions. 

Any remedy must be equitable, uniform and non-discriminatory. Proper authority 

of the states must be preserved. Tax policy should not play favorites, whether between and among states or between and among economic activities. Education, 

health and public safety issues should not be put at risk. 

Tax and revenue systems for the new economy should be cost-effective and customer-friendly, afford flexibility in how standards are met and provide transition as 

states and locals adapt. Today 7,500 different state and local tax jurisdictions are 

a nightmare for the private sector. Given this mish-mash, federal standards might 

be appropriate. However, if we are to lower the cost of tax administration as well 

as of doing business, we need local innovation. That tips the scale toward state reVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
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sponsibility. The solution rests with nationally developed standards, not federally 

mandated systems. 

Federal Internet Taxes 

No one has clean hands when it comes to electronic transaction taxes. While 

states have been precluded from taxing electronic transactions, the Federal Government imposes many federal taxes on Internet transactions or businesses, including 

excise taxes as well as individual and corporate income taxes. The airline ticket tax 

increase was a critical part of the Balanced Budget Act of 1997, a tax that was increased again last year. No member offered an amendment to exempt from those 

federal taxes, domestic or international tickets purchased on the Internet, perhaps 

because such an exemption would have accelerated the migration of ticket purchases 

to the Internet. That might have eroded a critical source of revenues to the Airport 

and Airway Trust Fund. Airport and aviation safety in this country and around the 

world are dependent upon a reliable source of trust fund revenues. Today, Northwest Airlines reports that 65 percent of its customers use E-tickets with little 

thought given to the taxes that are collected. Do consumers have to pay a federal 

excise tax when buying tires, airline tickets, liquor or cigarettes over the Internet? 

Should we propose federal legislation to not tax the income of any person or corporation which makes its money over the Internet as an incentive to boost Internet activity? 

Fair is fair. No state taxes, no federal taxes. 

Avoiding Unintended Consequences 

The argument that Internet-based fledgling businesses need to be nurtured is not 

a relevant argument. Electronic commerce has become a mature and important part 

of the U.S. and international economy. Since the moratorium imposed three years 

ago, much has come to light on the intended as well as the unintended consequences 

of the Act. The most significant unintended consequence is that traditional business 

transactions that are taxable today can completely avoid paying taxes in the future 

simply by setting up an electronic means to complete a transaction. 

Any extension of the Internet Tax Freedom Act must modify the definition of 

Internet access as contained in the Act. Internet and electronic commerce technologies are experiencing a convergence and becoming indistinguishable from other 

related communications technologies and media. 

The Act protects against the imposition of new tax liability for consumers and 

vendors involved in commercial transactions over the Internet, including the application of discriminatory tax collection requirements imposed on out-of-state businesses through interpretations of ‘nexus.’ It also protects from taxation, for the duration of the moratorium, goods or services that are sold exclusively over the Internet with no comparable offline equivalent. 

This effectively allows a broad range of content and other services to be bundled 

with Internet access and to potentially be considered as protected under the prohibition on the imposition of new taxes on Internet access. The range of content, services and even goods that can be bundled with Internet access is virtually unlimited. 

It includes all manner of printed material, video material, voice communications 

and other services. As the Internet technology converges with services such as telecommunications and cable television, it will become increasingly difficult to distinguish one from another. Today, one out of every 33 international long distance calls 

is handled over the Internet. A draft report from Geneva last week projects this 

level to increase from 3 percent today to between 25–40 percent over the next five 

years. Yet, different service providers could be subject to widely different tax regimes because of the intervention of the Internet Tax Freedom Act. 

The Need for Simplification 

The states recognize the problem of unequal taxation between in-state merchants 

and out-of-state merchants, nearly all of whom now use the Internet for a variety 

of business practices. 

In-state merchants who must collect sales/use taxes are at a disadvantage with 

merchants who transact remote or electronic sales. It’s not that the remote or electronic sale is exempt. It is not. Every state that levies sales taxes requires a use 

tax to be paid if a customer purchase is made on-line or out of state. It is a consumption tax on the consumer, not the vendor. Under current legal standards, a 

state may only impose sales and use tax collection requirements on sellers with a 

physical presence, or nexus, in the state whether the transaction is over the Internet or not. This means that remote sellers (i.e., sellers outside the state without a 

physical presence in the state) are able to fully exploit the market in that state—

whether by mail, telephone or the Internet—without being required to collect or 

14

remit tax on their sales into the state. Sellers that are physically present in the 

state are required to collect and remit the tax. 

The remote merchants are quick to point out that they have to charge shipping 

and handling and that cancels their advantage over the in-state merchants. That 

ignores the fact that in-state vendors have already included shipping and handling 

in their pricing. The in-state merchant not only has to charge and collect the tax 

but is also responsible for reporting and remitting it and becomes liable for the tax 

if an audit indicates inadequate collection and remittance. We fully support unfettered interstate commerce but as a matter of basic fairness, similar transactions of 

goods and services should be treated similarly no matter what means are used to 

effect the transaction. 

Not collecting the use tax on electronic transactions would be an incentive for 

merchants to use electronic or Internet transactions. States are concerned that Congress’ actions or inaction could lead to accelerating the erosion of sales and use tax 

revenues as the nature of the retail industry evolves. We have learned that one of 

the nation’s largest retailers has entered into an agreement with one of the nation’s 

largest e-tailers. This arrangement could permit a means to avoid sales taxes. For 

example, Mr. Chairman, someone in Arizona might wander into a store, pick out 

a nice pair of Levis, and instead of pulling them off the rack and paying for them 

at the counter, might now use an in-store Internet kiosk to place an order. Then 

he could go to the counter and pick up his purchase with no liability for state or 

local tax, since under the Internet Tax Freedom Act definition, it would be a remote 

sale. Under such a system, one can imagine just how long it would take for every 

brick and mortar retailer in America to migrate to some form of in-store system simply to compete. 

If such a scenario were to play itself out, state sales and use tax systems would 

become obsolete and inefficient for raising revenue for the state and local governments. While the prospect of no taxes at all is certainly appealing, we are prepared 

to offer a more pragmatic alternative. 

The definition of discriminatory taxes contained in the Act provides that certain 

activities when performed by an Internet service provider on behalf of a retailer will 

not be considered in determining substantial nexus for tax collection purposes. 

When enacted as part of a short-term Act, these provisions were not considered 

problematic. If the Internet Tax Freedom Act is to be extended, however, these provisions should be examined carefully. The provisions could be interpreted to allow 

a seller to avoid a collection obligation even though the seller has substantial activities and presence in the state. 

The Growth of eCommerce 

We support the free flow of commerce and equal competition in the marketplace. 

The accounting firm Ernst & Young predicts that consumers will use e-commerce 

for five to ten percent of retail sales in the next five years. Goldman Sachs predicts 

inroads of 25 percent in ten years. Even these could be significant underestimates. 

Business-to-business e-commerce is growing far faster than popular on-line consumer purchases. Business-to-business e-commerce is expected to reach $1.3 trillion 

in annual revenue by 2003, ten times the projected size of the business-to-consumer 

market. That’s very much why the National Retail Federation, representing some 

1.5 million members and nearly one in every five workers, voted last week for fairness. 

It’s also why my distinguished colleague Governor Gilmore’s proposal would preserve business-to-business use taxes on Internet transactions. He clearly understands the enormity of the adverse impact on his budget and education and transportation commitments to the high tech businesses in Virginia were he to lose this 

critical source of revenues. This tax is too important not to work hard to save it 

in its broad application. 

The Governors recognize the need to simplify the current sales and use tax collection systems to benefit the national economy through the removal of unnecessary 

complexity. We now have agreement by some 32 states on model state legislation 

and an interstate agreement through the Streamlined Sales Tax Project. States and 

their local government partners have taken the initiative to fashion a solution. 

Tax Simplification Recommendations 

States that enact the model legislation and that dramatically simplify their sales 

tax systems should have the authority to require out-of-state sellers to collect and 

remit sales and use taxes. States that do not enact model legislation would be stuck 

with the old ways. The fact that we have 40 states that are willing to simplify their 

systems and dramatically reduce the complexity and cost of collection for all sellers 

is evidence of our commitment to adapt to the new economy. While the project still 

15

has work to do, a model Administrative Act was completed with Wyoming the first 

state to approve it last month. The project will continue to refine the terms in its 

second phase this year. 

The Wyoming simplifications, which are the same as recommended by the 

Streamlined Project include:

• centralized, one-stop multi-state registration;

• uniform definitions for goods and services;

• uniform rules for attributing transactions to particular taxing jurisdictions;

• uniform and simplified rules for dealing with exempt transactions;

• procedures for relieving sellers from liability to the state for errors resulting 

from use of information provided by states;

• certification of software that sellers may use to determine tax due on transactions;

• uniform rules for claiming bad debts;

• uniform formats for returns and remittances, including electronic filing and remittances;

• state-level administration of all state and local sales and use taxes; and,

• uniform audit procedures, including the option for a single, multi-state audit.

The Streamlined Sales Tax Project has even developed a system that would accommodate local option tax rates but, at the same time, reduce the burden of administering those rates for remote sellers and other retailers. The streamlined system 

would require each state participating in the system to provide sellers with a database that assigns nine-digit zip codes to taxing jurisdictions and to relieve sellers 

from liability for any tax not collected due to a seller’s reliance on the information 

provided by the state. The system would also limit the frequency with which local 

tax rates may be changed and requires advance notice of these changes. 

Wyoming Senator Mike Enzi has advocated a single blended rate for each state 

that would be applicable to remote commerce only. States would also have the alternative of requiring collection of the actual rate rather than the blended rate when 

a state has enacted all simplification measures enumerated in the bill. We support 

this two part approach. 

The states are working to implement these simplification measures. When an appropriate number of states do agree to a common approach through an interstate 

compact, we expect Congress to grant states the authority to impose the duty to collect on remote vendors. 

Partnerships 

We propose a partnership between the states and the Federal Government to authorize the states to mandate collection and remittance of use tax by remote sellers 

but only for those states that have enacted the radical simplification measures recommended by the Streamlined Sales Tax Project. The Governors would favor a sales 

threshold below which remote sellers could not be required to collect use taxes, otherwise known as the de minimis provision. Collection duty would then be tied to 

volume of business rather than location, which is more in keeping with a free market economy. 

We recommend that Internet access be defined in a fashion that achieves the Congressional goal of protecting basic access to the medium and services of the Internet 

without being so broad as to create inequities and distortions. The Governors recommend that the Committee establish some mechanism to examine and address the 

issue of bundling and convergence in the near future. 

The Governors recommend that Congress should use any extension of the Internet 

Tax Freedom Act as an important opportunity to enact legislation establishing a 

procedure that would encourage states and localities to continue their initiative to 

develop and implement a simplified and streamlined sales tax system. Those states 

that do simplify their sales tax systems to require remote sellers could then collect 

sales and use taxes on sales into a state. 

The Governors support the simplifications contained in S. 521 introduced in the 

U.S. Senate on March 9 to reduce the burden of state and local sales tax compliance 

and to save the nation’s economy millions of dollars through streamlining our current horse and buggy tax system. The simplifications in the bill are consistent with 

many of the efforts now being undertaken by the Streamlined Sales Tax Project. 

The project has completed what it considers the first phase of its task with the development of a model statute and accompanying agreement that states would enact 

16

to implement a much simpler multistate sales tax system. The system provides all 

of the simplifications contained in S. 521. 

Congress should support and encourage this extraordinary effort by the states and 

local governments. We recommend that you authorize an interstate compact that extends the authority to require collection only to those states that simplify their tax 

systems. The structure embodied in S. 521 is appropriate for accomplishing this. 

The authority to require collection would be automatic for those states enacting the 

compact with the simplified structure. 

Conclusion 

States must be allowed to determine our own revenue policies under the laws the 

people of our state have adopted and we are elected to implement. Most sales taxes 

have been in place for at least 50 years. The system is an unwieldy horse and buggy 

system of another age. We are moving to fix it, to radically simplify the system so 

that it works. 

Federal Reserve Board Chairman Alan Greenspan in his remarks to the Committee on the Budget, U.S. House of Representatives, March 2, 2001 spoke of the 

unusually long period of economic growth in America. He spoke of technical innovation and structural productivity growth driven by individual creativity, of how the 

rate of growth of productivity in the past five years has far exceeded the growth 

rate of the previous twenty years. Much of that growth has been fueled by activity 

through the Internet. Chairman Greenspan pointed to the sustainability of our economic growth as being tied to Internet activity. He warned against actions by government that would discourage innovation and stifle productivity growth. Likewise, 

I caution this Committee against recommending an approach that would stifle the 

states by prohibiting certain taxes and forcing the imposition of others. 

We need to let the marketplace make the decisions of which businesses succeed 

and which businesses fail. Let us not set arbitrary tax policies for the states at a 

federal level. That is wrong and unfair. That would only force people to make their 

decisions based on the taxing scheme and not the free enterprise system. 

Thank you, Mr. Chairman, and Members of the Committee for your courtesy. I 

would be pleased to respond to any questions or comments. 

17

The CHAIRMAN. Thank you, Governor, and I would like to congratulate you on being one of the first states, I believe the first to 

pass a uniform sales tax proposal, and I think it is a very commendable and laudable action on the part of you and the Wyoming 

State legislature. Thank you, Governor. 

Lieutenant Governor Swift, welcome. 

STATEMENT OF HON. JANE SWIFT, LIEUTENANT GOVERNOR, 

COMMONWEALTH OF MASSACHUSETTS 

Ms. SWIFT. Thank you very much, Mr. Chairman, and thank you 

to the Members of the Committee for giving me this opportunity to 

speak with you today on this very important issue. I am Jane 

Swift. I am the Lieutenant Governor of Massachusetts, and this is 

an issue of particular importance to my home state, and that is 

why I am so glad to be able to be here today to speak on behalf 

of our residents. 

Massachusetts has been at the leading edge of the high technology revolution, and our residents have been the ones that have 

benefited tremendously from the infusion of high tech jobs into our 

state. Currently, there are 185,000 nonmanufacturing high techVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00021 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF

314gerin.eps
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nology jobs in Massachusetts, an increase of roughly 20,000 such 

jobs since last year. 

These positions represent well-paying, quality jobs that allow 

people truly to live the American Dream, to support their families, 

and to enjoy a quality of life that no numbers could readily quantify. 

Over the past decade, these types of companies have brought 

new life to aging mill towns throughout our state, like North 

Adams, and Lowell, and have helped drive the longest economic expansion in American history. I am deeply concerned, as is our Governor, Paul Cellucci, that attacks on Internet growth will serve to 

hinder the very growth in this very important sector at a time, as 

you reference, Mr. Chairman, that it can least afford it. 

The proper role of government in this emerging industry is to encourage its growth. It would be a grave mistake on our part to 

start taxing Internet commerce before it has had even a chance to 

establish itself. We have seen a precipitous decline in the NASDAQ 

over the past year, and as I am sure everyone here is aware, just 

this week it dipped below the 2000 mark for the first time since 

1998, and we do not see signs of recovery in that industry in the 

near future. 

Some dot coms that were once the toast of Wall Street are now 

auctioning off the remains of their companies and the imagined 

threat to brick-and-mortar stores has all but disappeared. While 

other segments of the high tech sector have been able to offset 

these company closings, it would be a mistake to drive remaining 

businesses out of business through added taxes. That would be the 

equivalent of tossing them an anchor at a time when they need a 

life vest. 

Passing a tax on Internet sales will put people in my state out 

of work. The reality is that the impact of Internet sales on current 

state revenues has been negligible. In Massachusetts, the impact 

of Internet commerce on traditional retailers has been nearly insignificant. Retail sales this past holiday season and sales tax collections held steady, despite some signs of a slowing economy. We 

found that the positive effects of high technology sectors have far 

outweighed the perceived detriment to local retailers or to state 

sales tax revenues. 

These firms have rejuvenated crumbling cities and have provided 

high quality high-paying jobs to thousands. This is the kind of economic activity we need to develop across the country, and I fail to 

see how taxing that activity will provide that needed encouragement. 

Most of the concern I think has been widely recognized. The concern behind the push for Internet taxation came from state fears 

that dot com companies were taking over the economy and that 

there would be no traditional sales tax revenues left. This has just 

not been the case. Despite the Internet, people still leave their 

homes to go shopping. Brick-and-mortar stores will always have 

their place in our communities. They also provide jobs, and they 

also provide the personal touch that people will always desire, as 

well as the immediacy of not having to wait for a purchase to be 

delivered. 

19

Beyond the detrimental effect that Internet taxation will have on 

this growing segment of the high tech economy, I also question the 

wisdom of plans that are as complex as those proposed by the 

NGA. The complexity of these interstate sales taxes is something 

that I do not believe the government should be undertaking. With 

all due respect to my colleagues from the NGA, I am not sure that 

establishing a large bureaucracy to deal with online sales taxes is 

what this country needs. It seems to me that one IRS in Washington is enough, and we do not need a second. 

The necessity of federal bureaucracy or online taxation also, I believe, raises another important issue that I hope your Committee 

will consider as you look at this issue, which is the issue of privacy. 

I do not believe that people want the government keeping track of 

every item they purchase online, nor do I believe that this Orwellian oversight would encourage the sales of current electronic retailers. Internet companies have to address privacy and security concerns, and big government involvement I believe would make that 

considerably more difficult. 

Customers who may not be driven away by the tax complexity 

may, in fact, then be driven away by their concerns for their personal privacy. I would just request that all of the Members of this 

Committee look at the long-range benefits of growing our high tech 

economy, consider the ramifications of burdening that sector with 

this complex tax system, and I hope you will come to the conclusion 

that Governor Cellucci and I have, that any short-term revenues do 

not make up for the economic costs of restricting Internet growth. 

Governor Cellucci and I have, I think, been very public in stating 

we believe there should be a permanent ban on Internet taxation. 

Let me, if I may, just also address this issue of a level playing 

field for out-of-state sales transactions. It would seem to me that 

were we to adopt this system on remote sellers that is being discussed and is being put forward by many of the national Governors, that a level playing field would dictate that it apply not just 

to remote sellers, not just to online sellers, but offline, or brick-andmortar companies as well. 

The truth is that today, particularly maybe more in states like 

Massachusetts, that are relatively small geographically and have 

borders that people cross quite easily, we do not place the burden 

of sales tax collection on the seller. If a state resident of Massachusetts crosses the border into another state, whether it be New 

Hampshire or Vermont, Connecticut, New York, Rhode Island, it is 

not the small company there who is asked to determine where that 

person’s residence is and to determine what the applicable sales 

tax collection should be. It is, in fact, the responsibility of the 

buyer, through use taxes, and it is the complexity of trying to enforce that has, in fact, made, as Governor Geringer said, the collection of use taxes widely unenforceable. 

If we are talking about a truly level playing field, then when a 

Massachusetts resident would travel to Jackson Hole, Wyoming, 

and purchase an item in a small brick-and-mortar retail establishment that would be subject to Massachusetts taxes, then the logical 

extension of this argument would be, it would be the responsibility 

of the retailer in Wyoming to collect the appropriate Massachusetts 

sales tax. I do not believe that is something that would be supVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00023 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
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ported by a majority of small employers and small brick-and-mortar businesses across the country. We are talking about shifting the 

responsibility to remote sellers, to those sellers rather than to the 

buyer and, in fact, subjecting businesses in our state to burdensome tax regulation that we have found would be a detriment to 

the growth of our economy, and we think it should be our prerogative to reject that type of system. Thank you. 

[The prepared statement of Lieutenant Governor Swift follows:]

PREPARED STATEMENT OF HON. JANE SWIFT, LIEUTENANT GOVERNOR, 

COMMONWEALTH OF MASSACHUSETTS

Thank you, Chairman McCain and Members of the Committee for giving me this 

opportunity to speak with you on the important issue of Internet taxation. This is 

an issue of particular importance to my home State of Massachusetts, and I am glad 

to have the chance to speak here on behalf of our residents. 

Massachusetts has been at the leading edge of the high-technology revolution, and 

our residents have benefited tremendously from the infusion of high-tech jobs into 

the state. Currently there are 185,000 non-manufacturing high technology jobs in 

Massachusetts, an increase of roughly 20,000 since last year. These positions represent well-paying, quality jobs; jobs that allow people to live the American dream, 

support their families, and enjoy a quality of life that no numbers can quantify. 

Over the past decade, the presence of these companies has brought new life to aging 

mill towns like North Adams and Lowell, and has helped drive the longest economic 

expansion in American history. 

I am deeply concerned that a tax on the Internet will serve to hinder growth in 

this important sector at the time when it can least afford it. The proper role of government in this emerging industry is to encourage its growth. It would be a grave 

mistake on our part to start taxing Internet commerce before it has even had a 

chance to establish itself. 

We have seen a precipitous decline in the NASDAQ over the past year. This week 

it dipped below the 2000 mark for the first time since 1998, and has shown no signs 

of recovery in the near future. Some dot-coms that were once the toast of Wall 

Street are now auctioning off the remains of their companies, and the imagined 

threat to traditional brick and mortar stores has all but disappeared. 

While other segments of the high tech sector have been able to absorb some of 

these company closings, it would be a mistake to drive remaining businesses out of 

business through added taxes we don’t need. That would be the equivalent of tossing them an anchor when they need a life vest. Passing a tax on Internet sales will 

put people in my state out of work; and they would be losing their jobs just because 

government can’t keep its hand out of the cookie jar. 

The impact of Internet sales on current revenues is negligible. We have found in 

Massachusetts that the impact of Internet commerce on traditional retailers has in 

reality been nearly insignificant. Retail sales this past holiday season held steady, 

despite some signs of a slowing economy. 

We have found that the positive effects of high technology sectors have far outweighed any perceived detriment to local retailers or to state sales tax revenues. 

These firms have rejuvenated crumbling cities, and have provided high-quality, 

high-paying jobs to thousands. This is the kind of economic activity we need to develop across the country, and I fail to see how taxing that activity will provide the 

needed encouragement. 

I am especially skeptical of the need for increased taxes at a time when state revenues have been reaching record highs. I believe now is the time to lower the tax 

burden on our citizens, not raise it. Republican Governors have worked hard over 

the last decade to cut tax rates for the citizens of Massachusetts, and I would encourage the Senate to act to cut federal taxes as well. 

Most of the concern behind the push for Internet taxation came from state fears 

that dot-com companies were taking over the economy, and that there would be no 

traditional sales revenues left. This has not been the case. Despite the Internet, people still leave their homes to go shopping. The new economy juggernaut has slowed 

to a walk, and most people have realized that previous fears of an economic revolution were unfounded. Brick and mortar stores still have their place in our communities. They also provide jobs and they provide the personal touch that people will 

always need, as well as the immediacy of not having to wait for a purchase to be 

delivered. 

21

Beyond the detrimental effect that Internet taxation will have on this growing 

segment of our high-tech economy, I also question the wisdom of plans that are as 

complex as that proposed by the NGA. The complexity of these interstate sales taxes 

is something that the government should not be undertaking. With all due respect 

to my colleagues, I am not certain that establishing a large bureaucracy to deal with 

online sales taxes is what this country needs. It seems to me that one IRS is enough 

for Washington. We don’t need a second. 

The necessity of federal bureaucracy for online taxation also raises substantial 

concerns over privacy issues. I do not believe that people want the government keeping track of every item they purchase online, nor do I believe that this Orwellian 

oversight would encourage the sales of current electronic retailers. Internet companies have to address privacy and security concerns, and big government involvement 

makes that considerably more difficult. Customers who aren’t driven away by the 

tax, may be driven away by their concerns for privacy. 

I would encourage all the Members of this Committee to look at the long-range 

benefits of growing our high-tech economy, and consider the ramifications of burdening that sector with further taxes. I hope that you will come to the conclusion, 

as I have, that any short-term revenues do not make up for the economic cost of 

restricting Internet growth. I would encourage you to enact a permanent ban on 

Internet taxation.

The CHAIRMAN. Thank you very much. We obviously have a significant difference of opinion here between the two witnesses. We 

do have another panel, and we have a vote at 10:45. If there are 

questions for the Governor and Lieutenant Governor we would be 

glad to entertain them, recognizing Senator Dorgan first, and I 

would ask the members to make the questions fairly brief, because 

we have a whole other panel. We are going to have to break at 

10:45 and that is going to extend the hearing for a significantly 

long time. 

Senator Dorgan. 

Senator DORGAN. Mr. Chairman, I understand that, and we want 

to make sure we hear the other panel, so I will be brief. 

Let me ask Governor Swift, you indicated, I quote, ‘‘passing a tax 

on Internet sellers would be a death knell, et cetera.’’ You understand that the discussion and debate and legislation here is not 

about passing a tax on Internet sellers, do you not? 

Ms. SWIFT. Well, what I understand is that it would subject those 

sellers who may have a physical location in my state to a complex 

tax system that they would then be required to implement that we 

think would restrict their growth, as is not currently the case in 

most jurisdictions for brick-and-mortar businesses. We do not subject that person who is selling the product to determine the residency of the person who is purchasing it. 

Senator DORGAN. But, so you do understand, we are not talking 

about passing a tax on the Internet, which is your testimony. We 

are talking about requiring a collection on behalf of sellers. 

Ms. SWIFT. I think it does give new authority. I do understand 

that it would give new authority to the states to require companies 

who do not have a physical presence in their state to become the 

collector, and while you may say that is not a specific tax on the 

Internet, it would subject those companies to all the tax regulations, to the audits, and to the complexity of a system that I think 

would be detrimental to their growth. 

Senator DORGAN. I understand your point. I just want the language to be accurate. The tax already exists. You understand that. 

The tax exists. It is not collected. I do not want people to talk about 

Congress talking about imposing some new tax, which was in your 

22

testimony, passing a tax on Internet sales. That is not what this 

discussion is about. Enforcing the collection of a tax that already 

exists. 

Second, let me ask——

Ms. SWIFT. But I do think it would extend taxing authority that 

does not currently exist. 

Senator DORGAN. Well, let me—that is not the case at all. The 

taxing authority exists. It is a use tax authority that exists on the 

transaction of those sales. The question is, is it collected? Governor 

Geringer said no. He is accurate about that. It is almost never collected. 

So this is not a new tax. The tax already exists. It is about collection of tax. 

But let me ask one additional question on the issue of, you talked 

about the necessity for a federal bureaucracy and big government 

involvement. Could you describe that, because that is—you are 

winning a debate we are not having. 

[Laughter.] 

Ms. SWIFT. Well, I think the concern is, while we talk about simplification of the tax system, we have yet to see evidence that 

would happen and, in fact——

Senator DORGAN. I am talking about the federal bureaucracy. 

Could you describe what that bureaucracy——

Ms. SWIFT. Well, my concern is who would ultimately—if Congress makes the decision that, in fact, they are going to allow 

through interstate commerce there to be a taxing authority, a tax 

collection authority for states, with states that do not have a physical presence, then whose responsibility would it be to do the enforcement? 

Senator DORGAN. The states. 

Ms. SWIFT. Whose responsibility would it—so Massachusetts 

could be told by Congress that we have to enforce—I mean, I think 

that is the essence of the debate. 

Senator DORGAN. Well, you are misunderstanding—Governor 

Swift, with due respect you are misunderstanding this issue. No 

one is telling Massachusetts you have to do anything. The question 

is, will the Congress allow Massachusetts to be able to effect collections. It is the testimony of Governor Geringer—you apparently oppose it, but it is not enforcing anything on anybody with respect 

to the state governments, and I only raise this question because 

when you talk about the establishment of a new federal bureaucracy, no one is talking about anything that remotely resembles 

some sort of bureaucracy of the Federal Government. This would 

only empower the state revenue agencies. 

Ms. SWIFT. Let me just be very clear. I think the threat of that 

is a real one. For example, if Massachusetts chose not to enforce, 

for their businesses that are located there, the remote sellers who 

have a physical presence in our state, that we were not going to 

go out and use our Department of Revenue to enforce collections 

that were supposed to be made in Wyoming, then who would have 

jurisdiction? Would the Department of Revenue, or whatever their 

name is in Wyoming, have then jurisdiction to come into Massachusetts, to Massachusetts businesses, not to Massachusetts buyers, but to Massachusetts businesses, and if not, then it would be 

23

unenforceable. There has to be some entity that would have to be 

created to make it enforceable, particularly if not every state 

agreed with the premise. 

Senator DORGAN. Governor Swift, the State of Massachusetts has 

a right to decide not to enforce any tax laws you enact. You can 

do that. I assume your constituents would not like it very well, but 

this issue is not about forcing Massachusetts or any state to do 

anything. The issue here is about a tax that currently exists and 

is not collected, and the proposition that we are making is, if we 

require the states to substantially simplify the requirements here, 

should we then require the collection of those taxes. 

It would be up to the state to effect those collections, not some 

federal bureaucracy, and I just object to this issue of big government involvement, quote, federal bureaucracy, because as I said, 

you are winning a debate we have never had and will not have, because that is not what we are discussing today. 

Ms. SWIFT. I think—and I take your point, Senator. I think it is 

important to point out that as we enter into what would establish 

new taxing authority that there are a variety of threats that all 

should be considered, because we have not previously had to deal 

with this issue, and as the complexity of commerce changes, we 

want to make sure there are not unintended consequences to the 

decisions that we make today, so that was the intention of my remarks. 

The CHAIRMAN. As I feared, we are about to begin a debate that 

may best be suited for the floor of the Senate, but Governor, former 

Governor, Senator Allen. 

[Laughter.] 

STATEMENT OF HON. GEORGE ALLEN,

U.S. SENATOR FROM VIRGINIA 

Senator ALLEN. Mr. Chairman, thank you. It is good to see my 

former colleague, Governor Geringer here, and they have some 

great stores there in Jackson Hole, Wyoming, and my wife has 

some beautiful clothes from there, good prices, and we like Cheyenne Outfitters as well. 

The CHAIRMAN. Senator Allen, we are going to restrain you to 3 

minutes. 

[Laughter.] 

Senator ALLEN. The great thing about Cheyenne Outfitters, even 

though you do not buy things over the Internet, it is a catalogue, 

and they are not compelled by Virginians to collect sales taxes. 

I think the issue, Mr. Chairman, as I understand this Committee, is not all—and I enjoyed listening to Governor Swift’s remarks, and generally my view is similar to that of Governor 

Cellucci’s, and his predecessor, Governor Weld. The issue I think, 

Mr. Chairman, before this Committee is whether or not to extend 

the moratorium on access taxes on the Internet. That advisory 

commission fought over this issue for a long time, and the one 

thing that they could agree on was extending the Internet moratorium, first and foremost. 

In my view, it should not be a moratorium extended for 5 years. 

I think the moratorium on taxing access to the Internet should be 

made permanent. We do not need to create another Spanish AmerVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00027 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
24

ican War luxury tax which would impede the ability of people to 

get access to the Internet, especially when people think of 

broadband access, or high-speed access. 

To me, increasing, or allowing further taxes by states, municipalities, or other entities I think would be very harmful for the expansion of the Internet, which I look at as the modern-day Gutenberg Press for the dispersement of ideas and beliefs and commerce 

and education, so in my view we ought to have a permanent extension on the moratorium. 

Now, the issue of getting into simplicity as far as the harmonization of various sales tax laws in the nation, implicitly says if the 

states and localities could get together and get a similar sales tax 

regime, then the issue of the nexus or the physical presence does 

not matter so much, and it seems to me that does still matter, and 

I think it will be a very long day before you can get all the states, 

whether it is Wyoming, or Tennessee, or Texas, or California, or 

Virginia to agree on the same sort of tax policies. 

So I would ask the two witnesses, the issue before this Committee is whether to extend the moratorium on access taxes. In my 

view, it ought to be extended permanently, and we ought to repeal 

the Spanish American War telephone tax. 

The issue of simplification ought to be completely separate from 

this, and would you all agree that the issue of simplification could 

go forward as an independent matter for the states to determine 

from the issue of whether or not the moratorium, which is going 

to expire in October of this year, should be made either permanent 

or extended for 5 or 6 years? 

I would first go to Governor Geringer. 

Governor GERINGER. Mr. Chairman—and thank you, SenatorGovernor Allen. 

[Laughter.] 

Governor GERINGER. What you may have missed is that my testimony implied, if it did not outright state, yes, we agree with the 

extension of the moratorium on access. The question is, how will 

the states be able to continue their current system of taxation, 

which they rely on heavily, or will be able to simplify it as they 

go along so they can modernize government approaches at the 

same time business is modernizing its approaches, so what I have 

advocated is less government, lower taxes, and simpler ways of 

doing business. 

It is a pretty neat package. There would be less bureaucracy at 

the state level. There would be no federal bureaucracy. It would all 

work out in the end because the states would get together and 

make it work. 

The thing that seems to be missed here is, why we are coupling 

the issues together of allowing the states to determine what a remote sale is, and to be able to collect a tax that is already due. It 

is a use tax that already needs to be paid, just as Virginia collects 

business-to-business sales taxes today, even those done over the 

Internet. We are talking about those that are eroding, if you can 

package it correctly and be in compliance with the current Internet 

Tax Freedom Act. That needs to be clarified. 

If you are going to extend the moratorium, extend the Wyden 

bill, whether it be 5 years or indefinitely, you have to clarify this 

25

misunderstanding, or misinterpretation that is allowing retailing 

today and business transactions to migrate to the Internet and 

avoid currently obligated taxes. 

Senator ALLEN. But there is—I would say to the Governor, they 

are still subject to the use tax, and what the issue here is whether 

or not we are going to impede Internet transactions simply to make 

it convenient for the government, or should the government adapt 

to new technology? 

Governor GERINGER. What I would suggest, then, is that you also 

extend that same authority to repeal all the federal excise taxes. 

Here is the document that documents them all, $90 billion a year. 

$90 billion a year that you would give up. In the current debate 

over the sales tax, or the tax cut, the package from the White 

House, this over 10 years would be $900 billion. The debate today 

is even far less than that. 

What is the difference between the Federal Government, that allows the collection and enforcement of taxes on the Internet for 

their purposes, but will not permit or enable the states to do the 

same on their own, so if a remote sale is transacted, and the use 

tax is due in Wyoming, we cannot collect it, just as the other 32 

states who have already signed on, they say they believe in this 

simplified approach, another eight in May, that is pretty popular 

right there. They have already worked out a simplified approach. 

We are asking you to engage in prevention. The crisis is not 

here. The crisis could be coming. I guess there is more credit given 

to recovering from a disaster than from preventing it in the first 

place, but we are asking for some judicious partnership up-front to 

allow the states to proceed on their own, which is a good idea. 

Senator ALLEN. Well, I would like to get rid of the federal telecommunications tax. I see the red light is on, so I want to respect 

that. 

The CHAIRMAN. I think perhaps we would give the Lieutenant 

Governor a chance to comment. 

Ms. SWIFT. I would just say, we would absolutely support an extension or a permanent ban, preferably, on the moratorium on the 

access tax, and I would agree with you, Senator, that it should be 

up to the states, not an act of Congress, to have the states 

proactively act as I understand is probably the intent of Senator 

Wyden’s bill to achieve simplification, although I hate to be a skeptic, but I have my doubts that it would happen, but that does seem 

to be the fairer way to proceed than to shift the burden of collection 

to a technology entity that I think has provided great benefits, at 

least for the economy in Massachusetts. 

The CHAIRMAN. Further questions? Senator Wyden. Oh, Senator 

Kerry, did you want to make any——

Senator KERRY. Thank you, Mr. Chairman. Let me just say, I 

guess this is part of the debate we are having on this Committee 

with my colleagues here as we have been trying to sit down privately to work through this, but I guess Senator Wyden and I have 

a disagreement over the interpretation of the Supreme Court decision, which is really why we are here. 

There were two components of the decision. One, I agree with my 

colleague, talks about the nexus necessary in a taxing state in 

order to collect sales and use tax, but it says very clearly—let me 

26

just read from it—it says, Congress is free to disagree with the Supreme Court’s evaluation of the burdens that use taxes impose on 

interstate commerce, and Congress remained free to decide whether, when, and to what extent the states may burden interstate mail 

order concerns with a duty to collect use taxes. 

So I think, you know, the question here is, what can the states 

do in order to remedy what they perceive, maybe not every state, 

but most states are currently perceiving as an inequity in the marketplace? 

I have personally walked into some stores where the owners of 

the stores have said to me, you know, Senator, I got people coming 

in here now, and what they do is, they go through all my stuff in 

the store and they use my salesman, and they figure out exactly 

what works for them best and what they want, then they go out—

they do not buy here. They go out and they use the Internet, and 

they buy it on the Internet, and this store owner was actually complaining to me personally about this inequity, replicated, I have 

heard, many times in many places. 

Now, the obvious question is, what happens if all of a sudden 

Congress embraces this concept of permanency, and a tax that already exists, a sales tax, suddenly finds a kind of haven, if you 

will, the kiosks that we have heard about? 

Some people have talked about going to Wal-Mart, setting up a 

separate Wal-Mart kiosk, you go in, you look at all the things you 

want to do, then you come out and you pump it in on a computer, 

and you pump it into a remote selling place where they fill the 

order and you do not pay a use tax, a sales tax on that. 

If we entered into this so-called notion of permanency, we would 

be creating a sort of institutionalized divide between ways in which 

people can choose to buy, and I think, Governor Swift, you would 

agree with me that we already have a lot of people in Lowell, and 

Lawrence, and Haverhill and elsewhere who take advantage of the 

proximity to the border. One of the complaints I have heard for 

years in that northern sector of Massachusetts is, you know, sort 

of the differential between New Hampshire and the incentive to 

buy elsewhere. What we are trying to do, I think, is see if we cannot even this out. 

Now, Governor Geringer, share with me in the simplest form 

possible what you see here as the issue of fairness, and how this 

has impacted your state. Why do you think we need some sort of 

remedy to adjust this if, as Governor Swift suggests, it is not that 

serious a problem? 

Governor GERINGER. Mr. Chairman and Senator, the impact to 

any small business is very much as you described it, except it 

would be magnified significantly more. Wyoming is very well-connected to the Internet. It has been one of the chief things I have 

advocated, so people all across the state are very connected. Our 

schools are not only connected to the Internet, they are connected 

to each other so we can do a lot of teaching. It is inoculated into 

our whole society. We advocate that because of the productivity it 

brings. 

It has been a disadvantage where it is hard to the businesses 

that would engage in any kind of a transaction, particularly of 

goods, but even of services, where, as you describe, somebody comes 

27

into the store, they browse through everything—in fact, even after 

they have bought it off the Internet, they try to return it to a local 

retailer. When you talk about, even the larger retailers, who look 

at a 2-percent profit margin overall, and in our state they might 

be able to save 5 percent by not being able to charge taxes, that 

is a very significant purchase. 

The current federal excise taxes would allow for tractors—and 

our state has a few tractors out there in some of the rural areas. 

You could buy your tractor over the Internet and avoid paying 5 

percent on a tractor that probably costs $100,000. That is a very 

significant impact to a small implement dealer, and that might be 

his entire week’s income. 

That is the type of thing that we are looking at, and that is the 

same person who is expected, then, to help maintain that tractor 

when the person brings it in for servicing or repair. 

So it is a question not of, how do we create a bizarre, perverse 

incentive by allowing people to avoid paying taxes through an 

Internet transaction or remote sale, any electronic means of transaction versus what they would pay otherwise. We have to even it 

out for any small business. 

As far as collecting that tax, if the vendor is small and they are 

engaged in business, the concept that the NGA supports would be 

the de minimis rule, where if you have sales below a certain 

amount, a certain threshold, you would not be required to track 

and help collect that same tax that is done in-state now, so there 

are some practical limits to what we are proposing here in order 

to achieve simplification. 

Senator KERRY. Thank you. My time is up. 

The CHAIRMAN. Thank you, Senator Kerry. Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. 

First, Governor Geringer, let me say again, as the Senate sponsor of the Internet Tax Freedom Act, I am very anxious to work 

with you and the Governors and our colleagues to try to come up 

with a sensible approach to this area, and let me offer what I think 

is the central question in terms of our being actually able to work 

out a bill and work with all of you in a cooperative fashion. 

We have now talked about the two elements in the Supreme 

Court case. I do not quarrel with Senator Kerry’s analysis in the 

least. The Court said you have got to have physical presence to impose a tax, and they said Congress through the Commerce Clause 

can make decisions in this area as well. 

What concerns me is the process wherein in effect the states 

would let the horses out of the barn here at a time when the technology economy is very fragile, and Congress would then have to 

come back and disapprove your plan. What I call for in my legislation is essentially the opposite. We give you all the tools you need, 

and the time you need to go out and put your plan together and 

address these uniformity and simplification issues, and then when 

you have done it, we would have an up or down vote on the floor 

of the U.S. Congress. 

What is the problem with going the route that I envisage in the 

legislation I proposed, rather than the situation where, without a 

vote of the Congress, we in effect overturn a Supreme Court deciVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00031 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
28

sion as it relates to the physical presence issue? Could you give us 

your thoughts on that? 

Governor GERINGER. Mr. Chairman, it reminds me of a cartoon 

I saw once where an individual standing in the middle of Wyoming 

prairie, and he is holding a rope in his hand, and he said, let me 

see now, did I lose my horse or find the rope? I think that may be 

part of the question here. I do not think the horses are out. 

What we are asking for is a partnership. The question you 

phrased is, should we let the states come forward with a plan that 

could be rejected or accepted by the Congress, but by what criteria? 

What criteria would we work against? 

Senator WYDEN. We are happy—and that is one of the things 

that has been so good about the progress with Senator Kerry and 

Senator Dorgan and the chairman, I think we are very willing to 

work with you on those criteria so you are not just flailing around 

in the dark. The difference, though, is that before it kicks in at a 

time when the technology economy is so fragile, we would first 

have to have a vote. We are happy to work with you, to make sure 

that the criteria are fair. 

Governor GERINGER. But I think you take that vote when you 

pass either your bill or the Dorgan bill, or whatever bill comes 

along, which outlines a one-stop system definition for how you describe a sale, which could be exempt, what software could be adopted, so you have standardized approaches, simplified, less expensive, 

uniform tax returns, the use of the Internet for electronic filing, 

uniform auditing procedures—those are criteria that could be used, 

but the extension without further definition is risky. 

And here is another example that we have not talked about yet. 

With the emergence of what is called convergence, where you can 

package up all types of things to offer online, items that are currently taxed and offered for sale as a taxable item are going to be 

packaged as part of an Internet service. Now, how do you differentiate between what is sold as merchandise over the Internet now, 

and what is included as an overall package, such as staying in a 

hotel here in Washington and avoiding the tax, because you bought 

it online? That is the difference that we have not even talked about 

yet. How do you even describe that? 

The states have already developed a simplified taxing approach. 

That policy is already in place. Why not make the states an equal 

partner, rather than subservient to the final approval by the government? 

Senator WYDEN. Governor, I just want to make it clear, I am 

anxious to work with you. That, to me, is the central question. I 

cannot support something, at a time when the technology sector is 

so fragile, that would put in place a new taxing regime before we 

have been out on the floor of the U.S. Senate and debate it, and 

the fact is that this is an important question for the U.S. Senate. 

The Senate has voted twice on the question of whether to set aside 

that Supreme Court decision. More than 60 Senators on each occasion said no, so we are going to work with you, and it is an important process question. 

The second question I want to ask real quickly is, could you tell 

us what provisions in the Internet Tax Freedom Act as written now 

are unfair? 

29

The CHAIRMAN. Would you tell us briefly? 

[Laughter.] 

Governor GERINGER. I cannot quote you the section, Mr. Chairman, Senator, but it is the portion that describes the arbitrary or—

and I cannot remember the terminology that is there, but it is the 

discriminatory taxes. It would appear to disallow any current state 

tax that is collected as being a new tax. That is unclear in the current act. 

Senator WYDEN. We will work with you on that. We have always 

said that we are interested in technological neutrality, treat the offline world like you treat the online world. We will work with you. 

My time is up, and I thank you, Mr. Chairman. 

The CHAIRMAN. Any other questions? 

STATEMENT OF HON. KAY BAILEY HUTCHISON,

U.S. SENATOR FROM TEXAS 

Senator HUTCHISON. Mr. Chairman, thank you. I will be brief. I 

know that time is of the essence, but I do appreciate so much your 

holding this hearing, because I am very concerned about two 

issues. 

I come from a state that has no state income tax. 40 percent of 

our state revenue comes from sales and use taxes. We do not want 

to tax access to the Internet, but we do want a fair and level playing field for the Main Street businesses that operate and contribute 

to our communities, and we do not want a huge deficit to form in 

our state revenues because there is an unlevel competition. 

So I am signed on with Senator Dorgan and Senator Enzi to encourage states, and I have written to the National Governors Association and the National Council of State Legislatures today asking 

that they come up with a model law immediately. Let Congress 

look at it so that we would have the comfort that states who 

wished to create the level playing field would be able to do that on 

an expedited basis, and those states which do not would certainly 

not have to join the compact. 

But I think we are coming to some agreements, and I hope that 

with your testimony and the next panel that we will be able to create a level playing field, give states some options where they need 

it, but not in any way keep from allowing the states to do what 

they need to do and certainly keep the strength of the Internet and 

what it has provided for consumers in our country. 

Thank you. 

The CHAIRMAN. Thank you, Senator Hutchison. 

Senator EDWARDS. Senator Fitzgerald. 

Senator DORGAN. Mr. Chairman, might I ask consent to put a 

letter in the record? 

The CHAIRMAN. Without objection. 

[The information referred to follows:]

30

Hon. JOHN MCCAIN, 

Chairman, 

Senate Committee on Commerce, Science, and Transportation, 

Washington, DC.

Hon. ERNEST F. HOLLINGS, 

Ranking Member, 

Senate Committee on Commerce, Science, and Transportation, 

Washington, DC.

Dear Chairman McCain and Ranking Member Hollings:

We are writing to outline the importance of our legislation, the Internet Tax Moratorium and Equity Act (S. 512), and specific legislative provisions in the Internet 

Tax Freedom Act of 1998 that should be further discussed during the first session 

of the 107th Congress. We believe that it is absolutely imperative that Congress 

move quickly this year to consider this legislation and the difficult tax issues relating to Internet sales that it seeks to address. 

First, most everyone who is familiar with this issue knows that the current expiration date for the moratorium on Internet access and discriminatory taxes is fast 

approaching. We believe the moratorium should be extended. That’s why S. 512 

would extend the current moratorium for an additional four years. Also, this legislation moves toward a solution to the growing web of tax compliance problems that 

faces virtually everyone who would do business across state lines—sellers and customers alike. 

Despite some setbacks, Internet technology and commerce will continue to be a 

real growth engine for our economy. The past holiday season, retail sales over the 

Internet jumped 76 percent from the same period a year earlier. A recent University 

of Texas study estimated that $830 billion in revenues were generated by the Internet economy in 2000, up 58 percent from 1999 levels. Together, this information 

suggests that Internet sales are not going to be either temporary or insignificant, 

and neither are the compliance problems. 

We believe that the approach embraced in our bill would help create a climate 

in which web-based firms and Main Street businesses can co-exist and compete on 

fair and even terms. Any new form of commerce presents a challenge to the rules 

and structures that have grown up around the old. The automobile required the reform of traffic-control rules designed for the horse-and-buggy era. And the Internet 

is no exception. The Internet has raised vexing questions about privacy and property rights. It has raised similarly vexing questions regarding the revenue systems 

of the states and localities of this nation. Clearly, the Internet does not fit neatly 

into these systems as they have evolved over the last two hundred years. This disconnect has created tensions between vital new businesses (Internet service providers and web-based businesses), state and local governments, and Main Street 

merchants, which is understandable and valid. Our job in Congress is to try to address the problem in a fair and constructive way. 

The solution begins with a recognition of the problem. Collecting a sales tax in 

a face-to-face transaction on Main Street or at the mall is a relatively simple process. The seller collects the tax and remits it to the state or local government. But 

with remote sales—such as catalog and Internet sales—it’s more difficult. States 

cannot require a seller to collect a sales tax unless the business has an actual location or sales people in the state. So most states, and many localities, have laws that 

require the local buyer to send an equivalent ‘‘use tax’’ to the state or local government when he or she did not pay taxes at the time of purchase. 

The reality, of course, is that customers almost never do that, and in many cases 

are unaware of their obligation to pay a use tax. It would be a major inconvenience, 

and people are not accustomed to paying sales taxes in that way. So, despite the 

requirement in the law, most simply don’t do it. This tax, which is already owed, 

is not paid. For years, state and local governments could accept this loss because 

catalog sales were a relatively minor portion of overall commerce. The rapid growth 

of Internet sales is changing all that. 

Internet and catalog sellers correctly argue that collecting sales taxes would be 

a significant burden for them. Understandably, they contend that it would be difficult for them to have to comply with tax laws from thousands of different jurisdictions—46 states and thousands of local governments have sales taxes with different 

tax rates and all of the idiosyncrasies regarding what is taxable and what is nontaxable. However, there are some remote sellers who know they enjoy an advantage 

over Main Street businesses and simply do not want to lose it. They can sell a product without collecting the tax, whereas Main Street businesses must collect the local 

sales tax. Main Street businesses claim that is unfair, and they have a point, too. 

31

There are three basic principles underlying the Internet Tax Moratorium and Equity Act. First, we believe that this new Internet technology will remain a real 

growth engine for our economy, and the solution must begin by putting the worries 

of web-based entrepreneurs to rest. They should not be concerned about new and 

discriminatory tax burdens, and they should not be singled out as cash cows. Congress should make this clear. That’s why our bill would extend the existing moratorium, which is set to expire on October 21st, through December 31, 2005, That will 

help remove some of the anxiety about the approaching expiration date, while giving 

all stakeholders—state and local governments, Internet sellers, and the bricks and 

mortar retail community—time to work together to develop a real solution for the 

sales and use tax compliance problems now facing many businesses and their customers. 

Second, state and local governments should be encouraged to simplify their sales 

tax systems as they apply to remote sellers. And third, once states have reduced 

the burden on sellers by simplifying their sales and use tax systems, then it is only 

fair that remote sellers do their part and collect any use tax that is owed, just as 

local merchants collect sales taxes. This simple step would free the consumer from 

the burden of having to report such taxes individually. It would level the playing 

field for local retailers and others that already collect and remit such taxes, and it 

would protect the ability of state and local governments to provide necessary services for their residents in the future. 

Further, additional concerns have been raised by interested parties that the definition of Internet access and ambiguous provisions in the definition of discriminatory taxes in the Internet Tax Freedom Act as passed by Congress in 1998 may be 

used inappropriately by some retailers to avoid collection responsibilities in a manner never intended by Congress. Their concerns stem from the fear that as Internet 

and electronic commerce technologies continue to develop they may converge with 

other related communications technologies and media. Yet, these service providers 

could be subject to widely different tax regimes because of the intervention of the 

Internet Tax Freedom Act. As a consequence, the current definition of Internet access in the Act could have large, unintended consequences if the definition is not 

changed. Also, there is a concern that some sellers will try to inappropriately use 

ambiguous provisions in the definition of discriminatory taxes to avoid collecting 

sales taxes even though the seller uses Internet kiosks or Internet cash registers 

physically located in a state as a means of making sales. The attempts to use ambiguous language as a potential loophole will only exacerbate the inequity between retailers that collect the tax and those who don’t. 

In our judgment, it would be a serious mistake for Congress to adopt a lengthy 

extension of the current Internet tax moratorium without addressing these underlying problems. If we do not address the problems, then the growth of the Internet, 

which should be a benefit to Americans, will instead mean a major erosion of funds 

available to build and maintain schools and roads, finance police departments and 

garbage collection, and all the other services that citizens in this country want and 

need. 

There is no question that left unchanged the current collection system will have 

a significant impact on the ability of states and local governments to fund their core 

responsibilities. States and local jurisdictions rely on sales taxes to fund a host of 

community services. Permanently exempting Internet sales from state and local taxation would lead to one of two bad outcomes: higher state and local taxes in other 

areas to compensate for a devastating loss of sales tax revenue, or a greater reliance 

on the Federal Government for even the most basic community services. The slowing economy has already reduced tax revenue in many states, and as many as 15 

states that depend on sales and manufacturing taxes are facing spending cuts as 

high as 15 percent. Further, federal preemption in this area erodes the ability of 

state and local taxpayers to shape the policies that affect their lives. 

Moreover, the competitive crisis facing local retailers is also growing more urgent. 

In testimony before the Commerce Committee in the last Congress, a representative 

from a large retailer testified that his company is incorporating a separate business 

to put the business on the Internet. It will do so in a manner that will enable them 

to avoid sales and use taxes. Even though the retailer has locations in every state 

and therefore would be required to collect such taxes on Internet sales, it believes 

that such avoidance is needed to compete with other large competitors that will be 

making those sales tax-free. This scenario could play out over and over again unless 

we act quickly and decisively. If we do not act, the large retailers will survive, the 

small Main Street businesses will continue to struggle, and there will be a massive 

loss of revenues to fund schools and other basic services.

32

It is important for Congress to begin the process of finding a long-term solution 

to the problem this year before the moratorium expires. We believe that our legislation strikes a proper balance between the interests of the Internet industry, state 

and local governments, local retailers and remote sellers. We look forward to working with you in an efficient and effective manner to achieve the best outcome for 

all involved parties. 

Sincerely, 

BYRON L. DORGAN, 

U.S. Senator. 

MICHAEL B. ENZI, 

U.S. Senator. 

BOB GRAHAM, 

U.S. Senator. 

GEORGE VOINOVICH, 

U.S. Senator. 

JOHN BREAUX, 

U.S. Senator.

The CHAIRMAN. Well, Governor and Lieutenant Governor, obviously we have a very interesting issue here. I want to thank you. 

We have two major Internet issues facing the Congress and the 

American people. One is this issue, and the other is the issue of 

Internet privacy. We would also appreciate your input on the issue 

of Internet privacy as well, as we try to address that very important issue. 

Governor. 

Governor GERINGER. Just a brief comment, Mr. Chairman. I am 

the chairman of the Task Force on Technology and E-Governance. 

We have privacy at the top of our list. We would be pleased to work 

with you on that. 

The CHAIRMAN. We will look forward to it, and we will invite you 

back to another hearing in order to be able to hear your views and 

communicate with you frequently. 

Thank you very much. Thank you, Governor. 

Governor GERINGER. Thank you. 

The CHAIRMAN. And Lieutenant Governor Swift, we all hope that 

the ensuing weeks proceed very well for you. 

Ms. SWIFT. Thank you. 

The CHAIRMAN. We will be watching the media. 

[Laughter.] 

Ms. SWIFT. Hopefully not too much of it. 

The CHAIRMAN. And congratulations. 

Ms. SWIFT. Thank you. 

The CHAIRMAN. Our next panel is Mr. Frank Julian, the operating vice president and tax counsel of Federated Department 

Stores, Incorporated, Mr. Peter Lowy, who is the chief executive officer, Westfield America, Mr. Robert Comfort, the vice president of 

tax and tax policy of Amazon.com, Ms. Elizabeth Harchenko, who 

is the Director of the Oregon Department of Revenue, Mr. Jeff 

Dircksen, director of congressional analysis of the National Taxpayers Union. 

Senator DORGAN. Mr. Chairman, while the panel is forming, 

might I ask that you send a letter to all the stakeholders. We have 

gotten a lot of letters back from them on this issue. I wonder if I 

could ask the Senator if you felt it appropriate that we include 

those letters in the Committee hearing record for today. 

33

The CHAIRMAN. Without objection. I think it would be very beneficial. Mr. Julian. 

STATEMENT OF FRANK G. JULIAN, OPERATING VICE

PRESIDENT AND TAX COUNSEL, FEDERATED DEPARTMENT 

STORES, INC. 

Mr. JULIAN. Good morning, Mr. Chairman. My name is Frank 

Julian, and I am operating vice president of the Federated Department Stores. 

The CHAIRMAN. Before you begin, Mr. Julian, I am told that we 

have a vote in about 5 minutes. We would like to get through a 

couple of the opening statements. We may have to take a break 

and then the Members will return for the rest of the hearing, and 

I am told that there are three votes, so there may be a lengthy 

break here and not a short one. 

Thank you, Mr. Julian. 

Mr. JULIAN. Yes, sir. I will proceed and I am here all day, so I 

am at your disposal. 

My name is Frank Julian. I am operating vice president of Federated Department Stores in Cincinnati. Federated operates 400 

department stores in 33 states under the names of Macy’s, 

Bloomingdale’s, the Bon Marche, and others, and a significant direct consumer business with its Fingerhut, Bloomingdale’s by Mail, 

and Macy’s.com subsidiaries. I am here today on behalf of the 

Internet Tax Fairness Coalition, an alliance of retail, technology, 

and communications companies. 

As the Supreme Court has recognized, the myriad of complex 

state and local sales tax systems in existence today places intolerable burdens on interstate commerce. Federated collects and remits 

over $1 billion per year in sales tax for the states where we do 

business. I can assure you that the burdens of collecting this tax 

are very real. Sales taxes must be simplified if they are to survive. 

S. 288, introduced by Senators Wyden and Leahy, establishes a 

solid framework for the needed simplification. 

As noted in my written testimony, the ITFC developed a list of 

19 essential simplification parameters, virtually all of which are included in the Wyden-Leahy bill. Of these 19 principles, however, 

two that are among the most important to business are the two 

that state and local governments have opposed the most. Only one 

sales and use tax rate and base per state, and bright line nexus 

standards for business activity taxes. 

A third important principle, uniform definitions, also seems to be 

a difficult pill for the state and local governments to swallow. 

There are over 7,600 sales tax jurisdictions in the U.S. There are 

1,296 in the State of Texas alone. Is it fair to require a direct marketer with residence only in Oregon to know which combination of 

these 1,296 rates applies to every item of merchandise it sends to 

a customer in Texas, and then to collect and remit the proper 

amount of tax to the Texas authorities, when that same direct marketer is not required to collect any sales tax on behalf of its home 

State of Oregon? 

There should only be one tax base per state. Allowing local jurisdictions to separately determine the taxability of items shipped to 

their residents adds immeasurable complexity. If the State of ColoVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00037 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
34

rado exempts widgets from sales tax, the city of Denver should not 

be allowed to impose a sales or use tax on that same widget. Businesses should not be required to pay a business activity tax to jurisdictions in which they are not physically present, and thus not 

receiving significant tangible benefits. 

If Congress is going to exercise its Commerce Clause authority 

to require remote sellers to collect sales tax, then Congress should 

at the same time protect those sellers from being subjected to business activity taxes in those foreign states. We urge Congress to 

enact a bright line nexus standard that requires physical presence 

in a state before a company can be subjected to a business activity 

tax. 

The Commerce Clause vests in Congress the authority to protect 

interstate commerce. This is a serious responsibility that Congress 

should not abdicate to the states. For this reason, Congress must 

establish the parameters of simplification and uniformity and 

evaluate the states’ efforts before granting them extended tax collection authority. The states have begun simplification efforts 

through the streamlined sales tax project. In December, the SSTP 

released a model act that it encouraged its member states to adopt. 

The SSTP model includes some of the important simplification 

standards included in S. 288. 

I applaud the states’ efforts. In the final analysis, however, their 

proposal falls into the category of simplification light. In January, 

the NCSL created its own version of the model. If the SSTP’s model 

is simplification light, the NCSL’s version is simplification ultra 

light. As a result, there are now competing simplification bills 

pending in several state legislatures. As of March 1, eight states 

were considering the SSTP’s model, eight were considering the 

NCSL version, and two states created their own proposal. For a 

topic in which the goal is tax uniformity, this smacks of chaos, and 

clearly underscores the need for congressional oversight. 

The ITFC strongly supports Senators Wyden and Leahy in their 

efforts to extend the moratorium and to permanently ban sales tax 

on Internet access charges. Elimination of sales taxes on Internet 

access will help to close the so-called digital divide. 

Many of my fellow retailers have argued that they cannot compete against the dot coms, and that if e-commerce is not saddled 

with complex tax collection burdens, it could spell the end of traditional brick-and-mortar retail. Some of the most passionate testimony in this regard was delivered to this very Committee in its 

hearings last April. 

Although I have a lot of respect and admiration for my fellow retailers, this is one instance where they were wrong. The sky is not 

falling on brick-and-mortar retail. Many of the once-feared dot 

coms have become dot bombs. Our weakening economy is having a 

profound negative impact on the fledgling e-commerce sector. Allowing state and local governments to unleash economic anarchy in 

the current environment could have long-term devastating effects 

on the economy, business, and employment. 

It is critical for Congress to protect this vital segment of our 

economy from potentially failed tax burdens by extending the moratorium and by demanding that the states significantly simplify 

their sales tax systems. Only after the states prove that they have 

35

met the high bar for simplification established by Congress should 

they be granted the broad tax collection powers they now seek. 

Mr. Chairman, I thank you very much for the opportunity to testify and, as I said, I am here all day to answer your questions. 

[The prepared statement of Mr. Julian follows:]

PREPARED STATEMENT OF FRANK G. JULIAN, OPERATING VICE PRESIDENT AND TAX

COUNSEL, FEDERATED DEPARTMENT STORES, INC. 

Introduction 

Good Morning. My name is Frank Julian. I am Operating Vice President and Tax 

Counsel for Federated Department Stores, Inc. in Cincinnati, Ohio. Federated is one 

of the nation’s leading department store retailers. We operate more than 400 department stores in 33 states under the names of Bloomingdale’s, Macy’s, Rich’s, The Bon 

Marche ́ and others. Federated also has a significant direct mail catalog and electronic commerce business with its Fingerhut, Bloomingdale’s By Mail, 

bloomingdales.com and Macys.com subsidiaries. 

Although Bloomingdale’s By Mail, bloomingdales.com and Macys.com are each 

separate subsidiaries, they collect sales tax on sales into any state where 

Bloomingdale’s and Macy’s, respectively, have department stores. 

I am here today on behalf of the Internet Tax Fairness Coalition (‘‘ITFC’’). The 

ITFC is an alliance of business, consumer, retail, technology and communications 

companies and industry groups that promote clear and simple tax rules for the borderless marketplace. I also chair the Tax Committee of The Direct Marketing Association. The DMA is one of the members of the ITFC. 

Summary of Position 

The myriad of confusing and inconsistent state and local sales tax systems in existence today places tremendous burdens interstate commerce and the economy. The 

ITFC believes that S. 288, introduced by Senators Wyden and Leahy, represents a 

significant first step toward unraveling this confusion. The ITFC supports the following objectives for reducing the tax burdens imposed on interstate commerce that 

thwart the development of a borderless marketplace:

• Establish simple and uniform sales and use tax rules that reduce compliance 

burdens for all taxpayers, and provide a reasonable collection allowance to compensate all sellers for the burdens they must incur in collecting the tax.

• Enact nexus standards for business activity taxes that eliminate uncertainty 

and the potential for double taxation.

• Promote availability of the Internet to all by prohibiting taxes on access fees.

• Prevent multiple and discriminatory taxation by extending the application of established nexus rules to remote commerce.

The ITFC supports neutral tax treatment of electronic commerce; it does not support the creation of a ‘‘tax-free’’ zone for electronic commerce. ITFC believes it is also 

critical to enact appropriate bright-line nexus standards for business activity tax 

nexus purposes in conjunction with an extension of the moratorium and development of uniform and clear rules for the taxation of all commerce. 

Moreover, the ITFC believes that Congress should not pass any legislation that 

would give states ‘‘prior approval’’ to a simplification compact before the details of 

the simplification are known and evaluated. 

Discussion 

The burdens that the current sales tax systems place on interstate commerce have 

been well documented. The Supreme Court recognized these intolerable burdens on 

interstate commerce in its 1967 decision in National Bellas Hess v. Department of 

Revenue, and again in 1992 in Quill Corp. v. North Dakota. In National Bellas Hess,

the Court found that the ‘‘many variations in rates of tax, in allowable exemptions, 

and in administrative and record keeping requirements could entangle . . . interstate business in a virtual welter of complicated obligations to local jurisdictions 

with no legitimate claim to impose ‘a fair share of the cost of the local government.’’’

The hearings conducted by the Advisory Commission on Electronic Commerce 

(‘‘ACEC’’) raised an awareness, in an unprecedented manner, of the level of complexity and burdens imposed by the current sales tax systems. By the time the 

ACEC completed its work, there was near universal agreement that the disparate 

36

state sales tax systems in place today must be substantially simplified and unified—

as they apply to all sellers—if they are to survive. 

Federated collects and remits more than $1 billion per year in sales tax for the 

state and local governments where we do business. We incur substantial costs in 

collecting and remitting these taxes, and in administering the many audits that follow. 

While this is a steep burden for us, it is not one that will put us out of business. 

The same may not be said, however, for some smaller companies or those less financially stable. In those cases, such a burden could put them out of business. 

Substantial simplification of the sales tax systems will make it much easier for 

the states to administer and enforce the tax, and will make it much easier for sellers to comply with tax collection requirements. 

Guidelines for Simplification and Uniformity 

ITFC believes that simplification and uniformity must be at a level that eliminates undue and discriminatory burdens on interstate commerce. The ITFC has 

spent considerable time developing draft federal legislation that it believes would 

encourage the states to simplify and unify their sales and use tax systems so as to 

eliminate undue burdens on interstate commerce. Some of the specific items in that 

draft that we believe are crucial to achieving such a goal include:

1. A centralized, one-stop, multi-state registration system for sellers.

2. Uniform definitions for goods or services that could be included in the tax 

base.

3. Uniform and simple rules for attributing transactions to particular taxing 

jurisdictions.

4. Uniform rules for the designation and identification of purchasers and 

transactions exempt from sales and use taxes, including a database of all 

exempt entities and a rule ensuring that reliance on such a database shall 

immunize sellers from liability for both under-collection and over-collection 

of tax.

5. Uniform procedures for the certification of software upon which sellers may 

rely to determine applicable sales and use tax rates and taxability, and immunity from liability for under-collection and over-collection of tax for sellers who rely on such software.

6. Uniform bad debt rules.

7. Uniform tax returns, remittance forms, and filing and remittance dates.

8. Uniform electronic filing and remittance methods.

9. State administration of all sales and use taxes in such state.

10. Uniform audit procedures, including a provision giving a seller the option 

to be subject to no more than a single audit per year using those procedures; provided that if the seller does not comply with the procedures to 

elect a single audit, any state can conduct an audit using those procedures. 

If elected, however, the single audit binds other states.

11. Reasonable compensation for tax collection by all sellers.

12. Exemption from use tax collection requirements for remote sellers falling 

below a specified de minimis threshold of less than $5,000,000 in prior-year 

gross annual sales, or less than $100,000 in any state during that prioryear. This exemption would not, however, operate to exempt a seller with 

less than $5,000,000 in prior-year gross annual sales for any obligation to 

collect and remit sales or use taxes imposed by the state in which that seller is located.

13. Appropriate protections for consumer privacy.

14. A single, uniform statewide sales and use tax rate and base on all transactions on which a sales or use tax is imposed.

15. For those states that impose a sales or use tax on digital products, an origin 

state default rule, for transactions where the location of the customer is not 

disclosed during the transaction, that permits the seller to rely upon information given by the customer during the transaction.

16. Appropriate bright-line nexus standards for business activity tax nexus purposes that limit business activity tax nexus to sellers that lease or own substantial tangible personal property, or have a number of employees or actual 

agents, in the taxing jurisdiction for more than 30 days during the taxable 

year.

37

1 Although Texas was used for illustration purposes here, there are several states in which 

the burdens imposed by the local taxing jurisdictions are significantly greater than in Texas. 2Oregon is one of five states in the country that does not have a sales tax. 

3For example, a remote seller sending merchandise to a customer who lives in the Dripping 

Springs Community Library District in Texas would need to know that the customer lives in 

Tax Jurisdiction Number 48DLI21424. 

17. Uniform dates, not to exceed two (2) in any calendar year, on which changes 

to sales and use tax rates may become effective, and a requirement that a 

state give at least 120 days’ notice before any change in its sales or use tax 

rate becomes effective.

18. Allows the Untied States Court of Federal Claims to resolve conflicts that 

arise with regard to interpretation of similar sales and use tax provisions 

of the different states.

19. Such other features that will achieve a simplified and uniform sales and use 

tax system.

The ITFC is very pleased that virtually all of these simplification points are included in the Wyden-Leahy Bill (S. 288). 

Of these 19 principles of simplification, two that are among the most important 

to the business community are the two that state and local governments have opposed the most: One sales and use tax rate and base per state, and nexus standards 

for business activity taxes. A third very important principle, uniform definitions for 

goods and services, also seems to be a very difficult pill for state and local governments to swallow. 

One Rate and One Base Per State 

There are more than 7,600 different sales tax jurisdictions in the United States 

today, each with its own tax rate, and many with their own tax base and rules and 

regulations. I should also note that in 1967, when the Supreme Court ruled in National Bellas Hess that it was an unconstitutional burden on interstate commerce 

to require sales tax collection in states where the seller did not have a physical presence, there were ‘‘only’’ 2,300 jurisdictions to deal with. This proliferation of taxing 

jurisdictions is symbolic of the ever-increasing complexity of the existing sales and 

use tax systems. 

In the State of Texas alone there are 1,109 separate city tax rates and 119 county 

tax rates. In addition, there are 67 ‘‘special’’ tax jurisdictions, ranging from crime 

control districts to library districts; 27 of these special jurisdictions have geographical boundaries that do not correspond to any city or county boundary. When 

combined with the state rate, this results in 1,296 different taxing jurisdictions in 

the State of Texas.1

Is it fair to require a direct marketer with presence only in Oregon to know which 

combination of these 1,296 rates applies to every item of merchandise it sends to 

a customer in Texas, and then to collect and remit the proper amount of tax to the 

Texas authorities, when that same direct marketer is not required to collect any 

sales tax on behalf of its home State of Oregon? 2 Add to this the fact that there 

is a zero margin of error for the seller: If the seller under-collects the tax from its 

customer, the seller must pay the tax out of its pocket and is subject to interest and 

penalties by the taxing authorities. If the seller over-collects the tax, it is subject 

to class action law suits from its customers, as well as consumer fraud actions from 

state attorneys general. This puts the seller in an untenable position. 

The states will argue that this problem can be fixed by using software that calculates the applicable sales tax rate by ZIP Code. We submit that this is not an 

acceptable solution. There are hundreds of five digit ZIP Codes across the country 

in which there are multiple taxing jurisdictions; moreover, there are scores of nine 

digit ZIP Codes in which there is more than one taxing jurisdiction. Thus, even if 

software existed that could provide an accurate nine digit ZIP Code for every order 

placed with a remote seller, the seller still might not be able to accurately collect 

the proper amount of sales tax. 

It should also be noted that none of the proposed ‘‘software solutions’’ will alleviate the problems faced by sellers whose customers pay by check. 

The states have suggested alternatives that would use the Census Bureau’s 

‘‘FIPS’’ Code, or would create a unique 10-character coding scheme for each separate 

taxing jurisdiction.3 None of this very sophisticated technology exists today. However, under the best of circumstances, forcing remote sellers to collect tax for 7,600 

different taxing jurisdictions will saddle interstate commerce with substantial burdens. The ITFC believes that Congress should do everything in its power to eliminate undue burdens on this vital segment of America’s economy. 

38

4 ‘‘Business activity tax’’ refers to tax imposed directly on businesses and not generally passed 

directly on to consumers. These include corporate income taxes, franchise taxes, single business 

taxes, capital stock taxes, net worth taxes, gross receipts taxes, use taxes and business and occupational taxes. 

In 1999, the National Tax Association (‘‘NTA’’) conducted a Communications and 

Electronic Commerce Tax Project, the precursor to the ACEC, which included all the 

major state and local government organizations and electronic commerce industry 

trade associations. The only tax reform measure to receive unanimous agreement 

from the Project’s participants was ‘‘There should be one rate per state which would 

apply to all commerce involving goods or services that are taxable in that state.’’

Some have recommended that there be one rate per state for remote commerce 

only, and that in-state businesses continue to collect all of the local jurisdictions’ 

taxes. The NTA Project participants considered, and rejected, this proposal. The 

ITFC agrees that such a proposal is ill-advised for the following reasons: 

The ITFC strongly advocates ‘‘channel neutrality’’ in the treatment of commerce. 

To achieve channel neutrality, and to avoid favoring one business medium over another, the sales tax rate applicable to a particular item must be the same regardless 

of whether the purchase was made from an Internet vendor or from an in-state 

brick and mortar store. 

The ITFC also strongly believes that there should only be one tax base per state. 

Allowing local jurisdictions within a state to separately determine the taxability of 

items sold in, or shipped to, their jurisdictions adds immeasurable confusion and 

complexity. If the State of Colorado exempts widgets from sales tax, the City of Denver should not be allowed to impose a sales or use tax on that same widget. 

Congress has a duty under the Commerce Clause to facilitate the flow of commerce among the states. Incorporated in this duty is Congress’ responsibility to limit 

the imposition of barriers to the free flow of commerce. Insisting that there be no 

more than one tax rate and one tax base per state, for all types of commerce, before 

requiring remote sellers to collect sales tax in states where they lack a physical 

presence is wholly consistent with Congress’ duty under the Commerce Clause. 

Business Activity Tax Nexus 

Determinations of the jurisdiction to impose a tax should be governed by one fundamental principle: a government has the right to impose economic and administrative burdens only on taxpayers that receive meaningful benefits or protections from 

that government. In the context of business activity taxes,4 this guiding principle 

means that businesses that are not physically present in a jurisdiction, and are 

therefore not receiving significant tangible benefits or protections from the jurisdiction, should not be required to pay a business activity tax to that jurisdiction. 

In its Commerce Clause jurisprudence, the Supreme Court has ruled that a business must have ‘‘substantial nexus’’ in a state before a state can constitutionally 

subject that business to its taxing power. For purposes of requiring a business to 

collect a state’s sales and use tax, the Supreme Court has ruled that substantial 

nexus requires ‘‘physical presence’’ in the state. 

Although the Supreme Court has not had occasion to address the requisite level 

of nexus for a state to impose a business activity tax, several state courts have addressed the issue. Many of these state courts have affirmed that the nexus standard 

for business activity taxes can be no less than the ‘‘physical presence’’ standard for 

collection of sales and use taxes. For example, one state court has held that the retention of credit cards by an out-of-state credit card issuer was insufficient to give 

the issuer physical presence for state income tax purposes. Unfortunately, courts in 

some states have reached the opposite conclusion. 

Litigation and uncertainty in this area continue to proliferate. If remote sellers 

are required to begin collecting and remitting sales tax in every state, then those 

states will have a road map by which to aggressively pursue these same sellers for 

business activity taxes. Many small and medium-sized sellers lack the resources to 

challenge spurious claims for state income taxes. 

If Congress is going to exercise its authority under the Commerce Clause to require remote sellers to collect sales tax in states where they have no physical presence, then Congress should, at the same time, protect those sellers from being subjected to business activity taxes in those same states. The manner in which to provide this protection to business, and to put and end to the litigation and uncertainty, is for Congress to enact a bright line nexus standard that requires physical 

presence in a state before a company can be subjected to a state’s business activity 

tax. 

39

5The SSTP calls for one tax base per state beginning in 2006. 

All Sellers Should Receive a Reasonable Collection Allowance 

We believe that all sellers should receive a reasonable collection allowance to compensate them for the costs they incur in collecting sales tax. 

Obviously, the more simplification measures that are enacted, the more the collection costs incurred by sellers will be reduced, thus reducing the amount of collection 

allowance that will be required. 

Studies have shown that the average cost to collect sales tax exceeds 3 percent 

of the amount of tax collected. Of the 45 states with a sales tax, however, only seven 

provide for an uncapped collection allowance of greater than 1 percent. For a company like Federated, this amounts to tens of millions of dollars a year in expenses 

we incur to serve as a tax collector for the states. This number will clearly grow 

if we are forced to collect tax on behalf of every state in the country. For smaller 

businesses, and for those with tight budgets, the unreimbursed cost of collecting 

sales tax is yet one more large straw on the camel’s back. In today’s economic times, 

it could be the fatal straw for many companies. 

Several members of the business community have approached representatives 

from state and local government about jointly commissioning a new, independent 

study to determine the cost of collecting sales tax. We are hopeful that the public 

sector will join us so that we may quickly get this study underway. Such a study 

should prove very helpful to Congress in determining the amount of collection allowance to which sellers are entitled. 

Congress Must Provide the Framework for Simplification 

The Commerce Clause vests in Congress the authority to regulate interstate commerce, and to guard against interference with interstate commerce. This is a serious 

responsibility that Congress should not abdicate to the states. 

For this reason, ITFC believes it is incumbent upon Congress to (1) establish the 

parameters of simplification and uniformity that must be enacted before states are 

given the right to require remote sellers to collect their tax, and (2) review and 

evaluate the measures which the states enact—before granting them extended tax 

collection authority—to ensure that the states actually have met the Congressionally mandated standards. 

The states have begun efforts to simplify their sales tax systems. Beginning in 

March, 2000, an ever-growing number of state tax administrators has been working 

on the Streamlined Sales Tax Project (‘‘SSTP’’). The SSTP was formed to develop 

measures to design, test and implement a sales and use tax system that radically 

simplifies sales and use taxes. The ultimate goal of the Project is to develop a simplified sales tax under which remote sellers without a presence in a state will voluntarily agree to collect sales tax on their sales into that state. In December, 2000, 

the SSTP released a model act and model agreement that it encouraged its member 

states to adopt. 

The various state tax administrators who have been involved in the Project have 

worked tirelessly to accomplish their goal. They have included in their work product 

some of the important tax simplification standards that are included in S. 288. 

Moreover, the SSTP proposals include many elements of tax simplification that will 

be beneficial to brick and mortar sellers in collecting the tax in the states where 

they do business. On behalf of the ITFC, I applaud them for their efforts. 

Before Congress authorizes the states to require remote sellers to collect tax in 

states where they lack a physical presence, the sales and use tax laws must be substantially simplified and made more uniform. The sales tax system developed by the 

SSTP, however, falls into the category of ‘‘simplification light.’’ While it alleviates 

some burdens on all sellers, it would nonetheless result in undue burdens on interstate commerce if all sellers were required to collect in every state under this system. 

Some of the particular shortfalls of the SSTP proposal include: (1) failure to require only one tax rate per state,5 (2) failure to call for business activity tax nexus 

standards, and (3) failure to provide simple definitions for items like ‘‘clothing.’’

In January, 2001, the National Conference of State Legislatures (‘‘NCSL’’) met to 

discuss the legislation proposed by the SSTP. The NCSL was unhappy with several 

provisions in the SSTP’s final proposals, so it made several significant modifications 

and created its own version of a model act and agreement. In particular, the NCSL 

version does not call for one tax base per state, and eliminated virtually all of the 

common definitions included in the SSTP model. 

40

6This includes Wyoming, which enacted the SSTP version. 

If the SSTP’s proposal represented a first step toward the kind of simplification 

the business community believes could lead to a reduction in compliance burdens, 

the NCSL’s proposal represents a step backwards. 

The stated purpose for the NCSL’s actions was to be able to have model legislation that would be likely to pass in many state legislatures this year. In our view, 

the goal should not be to propose legislation that will pass just for the sake of passing. The goal must be to achieve simplification and uniformity that will substantially reduce, not merely maintain, the current undue burdens on interstate commerce. The result is that there are now competing versions of sales tax simplification 

bills pending in several state legislatures. According to the SSTP’s website, as of 

March 1, 2001, eight 6 states were considering the SSTP’s model legislation, eight 

states were considering the NCSL version, and two states were considering separate 

modified legislation. (A printout of this portion of the SSTP’s website is attached 

as Exhibit A.) 

For a topic in which the goal is tax uniformity, this smacks of chaos, and in our 

opinion clearly underscores the need for Congressional oversight of this process. 

Congress Should Extend the Moratorium and Ban Taxes on Internet Access 

As Senators Wyden and Leahy have proposed in S. 288, the moratorium contained 

in the Internet Tax Freedom Act on multiple and discriminatory taxes on electronic 

commerce should be extended, and taxes on Internet access should be permanently 

banned. 

The purposes of the moratorium were to (1) ensure that the rules that apply to 

other forms of remote commerce also applied to electronic commerce, and (2) allow 

time for the ACEC to study ways to simplify the current complex state sales and 

use tax systems. The Internet Tax Freedom Act has never prevented the states from 

collecting sales and use tax otherwise due on goods and services purchased over the 

Internet. 

Allowing the moratorium to expire would send a signal to the states that it is now 

permissible for them to treat electronic commerce differently from transactions 

using other channels. Extending the moratorium on discriminatory taxes thus is essential to ensuring neutral tax treatment for electronic commerce going forward. 

The fact that state and local government groups oppose the moratorium suggests 

that they are poised to assert that the nexus rules that apply to mail order transactions do not apply to Internet transactions. If this is not the position of the state 

and local governments, then they have nothing to fear from an extension of the moratorium. 

The ITFC also supports Senators Wyden and Leahy in their efforts to permanently ban sales tax on Internet access charges. A majority of the ACEC recommended a similar ban. 

The Internet has been a tremendous growth engine for our economy. Access to 

this very important medium should not be burdened with taxes. Moreover, imposition of sales taxes on Internet access will have a deterrent effect on the ability of 

lower income families to use the Internet. Elimination of these taxes will help to 

close the so-called digital divide. 

The Sky Is Not Falling 

During the past three years, many of my fellow retailers, as well as representatives from the shopping center industry, state and local government and others, predicted that there would be an explosive growth of electronic commerce, and that it 

would be detrimental to their interests. Remarkably, they argued to the ACEC and 

to Congress that if electronic commerce were not saddled with the complex tax collection burdens, it could spell the end of traditional brick and mortar retail as we 

know it today. Some of the most passionate testimony in this regard was delivered 

to this very Committee in its hearing last April. 

Although I have a lot of respect and admiration for my fellow retailers, this is 

one instance where they were wrong: The sky is not falling on brick and mortar retailers. Many of the once feared ‘‘dot-com’s’’ have become ‘‘dot-bombs.’’ The demise 

of E-Toys is just one example of many recent failures in the electronic commerce 

world. Our weakening economy is having a profound negative impact on the fledgling electronic commerce sector. 

Allowing state and local governments to unleash economic anarchy in the current 

environment could have long term, devastating effects on the economy, business and 

employment. We believe it is critical for Congress to protect this vital segment of 

our economy from potentially fatal tax burdens by extending the moratorium 

41

against discriminatory taxes, and by demanding that the states significantly simplify their sales tax systems before being allowed to require remote sellers to collect 

their tax. 

Conclusion 

The labyrinth of sales and use tax systems in existence today is entirely too complex. State and local governments should not be permitted to export their burdensome tax collection obligations on remote sellers that do not have a physical presence in the state. The states should only be granted the authority to require remote 

sellers to collect their sales and use tax in a manner that does not interfere with, 

or place undue or discriminatory burdens on, interstate commerce. 

To achieve this result, Congress must establish the parameters under which the 

state sales and use tax systems should be substantially simplified and made more 

uniform. Congress must then evaluate the states’ efforts to be sure that the requisite level of simplification and uniformity has been attained. Only then should 

Congress grant the states the broad tax collection powers they now seek. 

In addition, Congress should act now to extend the moratorium and to permanently ban Internet access charges. 

I sincerely appreciate the opportunity to testify before you today, and I will be 

happy to answer any questions.

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The CHAIRMAN. Thank you very much. 

Mr. Lowy, I think we have time for your statement, and then we 

will probably have to take a break here. 

STATEMENT OF PETER LOWY, CEO, WESTFIELD AMERICA; 

FOUNDING CHAIRMAN, E–FAIRNESS COALITION 

Mr. LOWY. Thank you, Mr. Chairman. Good morning, Mr. Chairman, and distinguished Members of the Committee. First of all, I 

thank you for inviting me here this morning. I am the CEO of 

Westfield America, and am also the Founding Chairman of the eFairness Coalition, which represents the retail and real estate industries on this issue. 

The CHAIRMAN. I retract. The vote has not been called yet, so we 

will probably be able to continue. Go ahead, Mr. Lowy. I am sorry. 

Mr. LOWY. That is Okay. 

The e-Fairness Coalition advocates a level playing field for sales 

and use tax collection for all retailers. We also support the continued growth of the Internet, and firmly oppose any form of discriminatory taxes and taxes on Internet access. The equitable collection 

of sales tax needs to be addressed concurrently with an extension 

of the current moratorium. 

Congress must take action to level the retail playing field for 

three reasons: (1) the current sales tax system is broken. It simply 

does not work in the clicks and bricks environment; (2) equity or 

fairness, and (3) states rights, that is, the right of states to set 

their own tax policy. 

The most urgent issue facing the Senate is the viability of the 

current consumption tax system. No longer are we looking at catalogue sellers who own a small percentage of the marketplace. We 

are discussing the ability of states to maintain their revenues and 

to provide a level of services needed within the current system. 

The current sales tax system does not work in today’s business 

environment. Due to market realities, brick-and-mortar retailers 

are forced to respond to their online tax-free competitors by setting 

up their own online stores as separate subsidies. A number of retailers, including K Mart, The Gap, Barnes & Noble, are installing 

systems in their stores connected to the Internet and their Internet 

retailing sites. Under this structure, companies then avoid physical 

nexus. 

For instance, K Mart’s online store, Bluelight.com, only collects 

sales taxes in California and Ohio. These are states where they 

have warehouses or headquarters. As long as this system is in 

place, more and more retailers will do the same. 

As Internet kiosks are placed into physical stores, a customer can 

enter the store, sample or try on the merchandise, have the sales 

person order the merchandise over the Internet, have it delivered 

to the consumer, and avoid charging and collecting the sales tax. 

The lack of clarity in the current law, especially with regard to 

returns, is preventing the natural convergence of these two systems. Convergence benefits business, consumers, and economic 

growth. Most of the country’s largest retailers, who, in order to 

compete in the Internet economy, are forming these subsidiaries, 

would rather not be forced to do so. In fact, many are members of 

46

the e-Fairness Coalition, and strongly advocate a level playing 

field. 

The question is, where will states go to make up for the loss of 

revenue due to the advent of the dot com subsidiary? The issue of 

equity or fairness is not a question of whether there should be a 

consumption tax on goods and services but, rather, if a state chooses to have a consumption tax, should it be implemented equally? 

There is no logical argument that supports taxing the same retail 

transaction differently, depending on the delivery system. The marketplace should determine sales decisions, not discriminatory tax 

policies. The states, not the Federal Government, should have the 

right to impose or not impose consumption taxes as they see fit. 

The reality is that education and other essential services are 

funded largely by the states, especially through sales taxes. Passing extension of the moratorium without taking steps toward a 

comprehensive solution would send a clear signal that Congress is 

willing to ignore a major national inequity in order to provide some 

businesses with preferential tax treatment. This could halt the substantial progress that states have made in simplifying and unifying 

their sales tax systems, and may force states to consider raising 

property or income taxes to make up for the revenues lost to remote sales. 

I firmly believe that Congress should allow states to require all 

remote sellers to collect sales taxes on deliveries in that state, provided they dramatically simplify the sales tax system. As Amazon 

agreed in their letter to the Commerce Committee, once states simplify, thereby lifting administrative burdens off retailers, there is 

no reason to provide remote sellers with an exemption from collecting sales taxes. 

The e-Fairness Coalition supports the Internet Tax Moratorium 

and Equity Act, which is introduced by Senators Dorgan, Enzi, 

Breaux, Chafee, Durbin, Hutchison, Graham, Lincoln, Rockefeller, 

Thomas, and Voinivich. The legislation will promote the growth of 

the Internet, and will allow states to ultimately require that remote sellers collect sales and use taxes just as traditional retailers 

do today. It promotes startup Internet retailers by having a de 

minimis threshold of $5 million in gross annual sales, has reasonable compensation for tax collection by sellers, and uniform order 

procedures. 

The e-Fairness Coalition opposes S. 288, the Wyden-Leahy bill, 

primarily because it would impose unreasonable burdens on the 

states during the simplification process without ultimately providing them with a mandate to require that remote sellers collect. 

Thank you, Mr. Chairman, and I welcome any questions. 

[The prepared statement of Mr. Lowy follows:]

PREPARED STATEMENT OF PETER LOWY, CEO, WESTFIELD AMERICA; FOUNDING

CHAIRMAN, E-FAIRNESS COALITION

Introduction 

Good morning Mr. Chairman, Mr. Ranking Member and Distinguished Members 

of the Committee. Thank you for inviting me to discuss with you the issues surrounding Internet taxation and specifically whether Congress should extend the 

Internet Tax Freedom Act, and if so, what changes may be needed. I appreciate this 

opportunity and commend your efforts to include diverse views in the Senate’s consideration of these important issues. 

47

I am the CEO of Westfield America, which owns a portfolio of 39 super regional 

and regional shopping centers across the country. I am also the Founding Chairman 

of the e-Fairness Coalition, which includes brick-and-mortar and online retailers, realtors, retail and real estate associations, as well as publicly and privately owned 

shopping centers. The e-Fairness Coalition also includes high tech related companies such as Gateway and Vertical Net. Through these companies and associations 

our Coalition represents 1 in 5 American workers on this issue. 

Let me be clear. The e-Fairness Coalition advocates a level playing field for sales 

and use tax collection for all retailers. We also support the continued growth of the 

Internet and do not support any form of discriminatory taxes or taxes on Internet 

access. However, the government should not provide preferential sales tax treatment based solely upon the distribution system used to sell goods. Requiring brick 

and mortar retailers to collect sales taxes while exempting their online competitors 

is fundamentally unfair, and presents a glaring national problem that requires Congressional action. Therefore, equitable collection of the sales tax needs to be addressed concurrently with an extension of a moratorium on discriminatory taxes and 

taxes on Internet access. 

Supreme Court Invites Congressional Action 

In 1992, the Supreme Court ruled in Quill v. North Dakota (504 U.S. 298) that 

the Due Process Clause of the United States Constitution did not bar enforcement 

of the state’s use tax if the vendor purposefully directed its activity toward the 

state, even if the vendor had no physical presence in the state. At the same time, 

however, the Court reaffirmed the Commerce Clause rule of National Bellas Hess

that an out-of-state vendor must have a physical presence in the state in order to 

be required to collect use taxes on sales into the state. In the decision, the Court 

reasoned, ‘‘the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve.’’ To 

date, the Quill decision’s invitation for Congressional action has been unanswered.

Under Quill, the Court indicated that any further refinements of the Commerce 

Clause rule of physical presence must emanate from Congress in light of its authority to ‘‘regulate Commerce with foreign nations, and among the several states.’’ Justice Stevens addressed this in his opinion in Quill:

‘‘No matter how we evaluate the burdens that use taxes impose on interstate 

commerce, Congress remains free to disagree with our conclusions. See Prudential Insurance Co. v. Benjamin, 328 U.S. 408 (1946). Indeed, in recent years 

Congress has considered legislation that would ‘‘overrule’’ the Bellas Hess rule. 

Its decision not to take action in this direction may, of course, have been dictated by respect for our holding in Bellas Hess that the Due Process Clause prohibits states from imposing such taxes, but today we have put that problem to 

rest. Accordingly, Congress is now free to decide whether, when, and to what 

extent the states may burden interstate mail-order concerns with a duty to collect use taxes.’’

Therefore, the e-Fairness Coalition urges Congress to use its Commerce Clause 

authority, to which the Supreme Court emphatically deferred, to assist states by enacting federal legislation to ensure a level playing field. 

Need for a Level Playing Field 

I believe we must have a level playing field for three reasons: (1) the current sales 

tax system is broken—it simply does not work in the ‘‘clicks and bricks’’ environment; (2) equity or ‘‘fairness’’; and (3) states rights—that is the rights of states to 

set their own tax policy. 

Closing the Loophole: The Current Consumption Tax System is Broken 

The most urgent issue facing the Senate is the viability of the current consumption tax system. No longer are we looking at catalog sellers who owned a small percentage of the marketplace, we are discussing the ability of states to maintain their 

revenues and to provide needed services within the current system. The General Accounting Office (GAO) estimated in June 2000 that state and local revenue losses 

from remote sales could be as much as $20 billion by 2003. 

The current sales tax system does not work in today’s competitive business environment. Due to market realities, brick-and-mortar retailers are forced to respond 

to their online, tax-free competitors by setting up their online stores as separate 

subsidiaries. This corporate structure allows the online store to avoid physical nexus 

rules and the corresponding sales tax collection responsibilities. These ‘‘dot.com’’ 

subsidiaries only collect sales taxes in states where they have a warehouse or a 

headquarters. For example, K-Mart’s online store, bluelight.com, only collects sales 

taxes in California and Ohio; Barnes and Noble.com only collects in New Jersey, NeVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00051 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
48

vada, New York, Tennessee and Virginia; Wal-Mart.com only collects in Arkansas, 

California, Ohio and Utah. As long as this system is in place, more and more retailers will do the same. 

I have attached two items, which discuss this very subject. The first, an E-Commerce Tax Alert article from March 2000, describes how to set up a subsidiary to 

avoid sales tax collection responsibilities. The articles states that, ‘‘Internet tax 

headaches and the accompanying competitive disadvantages may be avoided by setting up a nexus-breaking subsidiary to shield transactions from sales tax collection 

duties in all but a few instances.’’ The second attachment is drawn from the 

www.thewebstoreguide.com. That piece outlines for consumers how to avoid paying 

sales tax and also refers to the growing practice of setting up separate Internet entities ‘‘just to avoid having to charge customers sales tax.’’

Another tactic currently employed by a number of retailers is the installation of 

kiosks with Internet terminals in their physical stores. A customer can today enter 

the store, sample or try on the merchandise, have the sales person order the merchandise over the Internet, and have it delivered to the consumer and avoid charging and collecting the sales tax. While the law is still unclear on this issue, it is 

possible that a consumer may also purchase goods on the Internet and then return 

those items to a physical store. Those retailers may argue that this would not establish nexus as the Internet business has contracted with the physical store to accept 

returns. As more and more retailers place internet kiosks in their physical stores, 

states will have to rely on the consumer to voluntarily pay the use tax owed, devise 

a system to track the sale or delivery of remote sales, or forego the sales tax. This, 

I believe, is the major risk that Internet retailing presents for state and local revenues. 

However, I would like to note that most of the country’s largest retailers, who—

in order to compete in the Internet economy—are forming these subsidiaries under 

the current law, would rather not be forced to do so. In fact, many are members 

of the e-Fairness Coalition. They recognize that the current consumption tax system 

is inequitable and support providing a level playing field for all retailers. The nation’s largest on-line retailers, such as Wal-Mart, are also the nation’s largest physical retailers—and they are willing to forsake short-term advantages for a collection 

system that is fair for all. 

Since even in-store sales can now be set-up to avoid sales tax collection, the question is no longer whether pure Internet sellers should collect sales taxes; the question is where will states go to make up for the loss of revenue due to the explosion 

of the dot.com subsidiary. Will it be increased personal or commercial property 

taxes—or will states cut funds for education, police, and roads? 

Fairness in the Consumption Tax System 

The issue of equity—or ‘‘fairness ‘‘ is not a question of whether there should be 

a consumption tax on goods and services, but rather, if a state chooses to have a 

consumption tax, should it be implemented equally. Simply put, there is no logical 

argument that supports taxing the same retail transaction differently depending on 

the delivery system. The market place should determine sales decisions, not discriminatory tax policies. 

It is bad policy and bad economics to have a tax policy that favors one group of 

businesses over another when both groups are selling the same products to the 

same consumers into the same localities. Tax policy should not distort the free enterprise system by picking winners and losers in the marketplace. Consumers 

should make their buying decisions based on price, availability, service and convenience. They should not be influenced by discriminatory tax policy. 

States Rights 

The states, and not the Federal Government, should have the right to impose, or 

not impose, consumption taxes as they see fit. The reality is that education and 

other essential services are funded largely by the states, especially through sales 

taxes. Passing an extension of the moratorium without taking steps toward a comprehensive solution would send a clear signal to the states that Congress is willing 

to ignore a major, national inequity in order to provide some businesses with preferential tax treatment. This would halt the substantial progress the states have 

made in simplifying and unifying their sales tax systems, and may force states to 

consider raising property or income taxes to make up for the lost revenues. 

I firmly believe that Congress should allow states to require all remote sellers to 

collect and remit sales taxes on deliveries in that state provided that states and localities dramatically simplify their sales and use tax systems. Simply put, remote 

retailers—that is Internet and catalog retailers—should be subject to the same sales 

tax collection responsibilities as traditional or Main Street retailers, if the states are 

49

successful in simplifying their sales tax systems. Once the states simplify, thereby 

lifting administrative burdens off of retailers, there is no reason to provide remote 

sellers with an exemption from collecting sales taxes. 

The e-Fairness Coalition believes that states should have the right to either opt 

in—or not opt in—to a compact that would require simplification and decide for 

themselves whether or not to require collection. If a Governor of a state believes 

that remote sellers should be exempt from having to collect use taxes—they will 

maintain their right to not collect taxes. However, if another state chooses to require collection and meets simplification criteria set out by the Congress, that state 

should be given the mandate to require collection. Further, if a state does not currently collect sales tax, they would not be required to do so. Pure and simple, this 

is an issue of federalism and of states’ rights. 

Support for the ‘‘Internet Tax Moratorium and Equity Act’’

That is why the e-Fairness Coalition supports a comprehensive solution to this 

issue. We support the ‘‘Internet Tax Moratorium and Equity Act,’’ which was introduced last week by Senators Dorgan, Enzi, Breaux, Chafee, Durbin, Hutchison, 

Graham, Lincoln, Rockefeller, Thomas, and Voinovich. This legislation will (1) promote the continued growth of the Internet and (2) will allow states to ultimately 

require that remote sellers collect and transmit sales and use taxes just as traditional retailers do today. 

I would also like to note that the ‘‘Internet Tax Moratorium and Equity Act’’ promotes the growth of Internet-related entities through such provisions as an exemption from use tax collection requirements for remote sellers falling below a de minimus threshold of $5 million in gross annual sales; reasonable compensation for tax 

collection by sellers; and uniform audit procedures. 

Opposition to S. 288

The e-Fairness Coalition opposes the language found in S. 288, introduced by Senators Wyden and Leahy. Our opposition to this bill is based on a number of specific 

factors, the most basic of which is that this bill would impose unreasonable burdens 

on the states during the simplification process without ultimately providing them 

with the authority to require that remote sellers collect sales taxes. 

Section 4(b)(1)(B) of the Wyden bill requires uniformity among all states ‘‘in which 

a seller is located or does business.’’ In other words, under the Wyden bill, no state 

could require a seller to collect use taxes if any single state in which that seller ‘‘is 

located or does business’’ had a dissimilar ‘‘tax, procedure, standard, or system.’’ 

Thus, for any state to institute a comprehensive collection system, uniformity would 

be required in all 50 states. Any requirement that all, or almost all, the states adopt 

uniform measures as an initial threshold before any collection authority is granted 

is unduly onerous and will likely never be met. 

Second, unlike the Internet Tax Moratorium and Equity Act, S. 288 requires any 

‘‘simplified sales and use tax system for remote sales’’ to have a single statewide 

rate for all sales subject to use tax. While the Coalition may ultimately agree to support legislation (such as S. 2775 introduced in the 106th Congress) that includes one 

use tax rate per state, we do not deem it necessary to limit states to one rate per 

state as a prerequisite to a grant of authority to require collection by remote sellers. 

Third, the e-Fairness Coalition considers it absolutely essential that states be 

given some assurance that if they enact extensive sales and use tax simplifications 

specified by Congress, they will receive authority to require remote sellers to collect 

use taxes. Without at least the ‘‘sense of the Congress’’ that compliance with Congressional criteria should result in the grant of such authority, state lawmakers will 

have great difficulty enacting any meaningful simplification. 

There is no such assurance in the Wyden bill. This means that under the Wyden 

bill, states would have less incentive to enact controversial simplification measures. 

Proponents of simplification may have difficulty getting such measures passed by 

state legislatures when critics would complain that simplification and conformity 

with federal guidelines might well go entirely unrewarded. 

Fourth, the Wyden bill would expressly preclude the overruling of Quill corp. v. 

North Dakota. Section 5(a) reserves to the Congress the exclusive authority to 

change existing nexus law for the collection of sales and use taxes. This provision 

would be effective even if Congress did not grant any collection authority over remote sales. It would therefore freeze current nexus law with no chance of redress 

in the Supreme Court, even if the states simplified their sales and use tax systems 

to the point that the Court might otherwise find that they did not burden interstate 

commerce. 

Finally, we oppose S. 288 because the Wyden bill includes a provision regarding 

business activity taxes—an issue that is not addressed in the current Dorgan, Enzi 

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et al bill. The e-Fairness Coalition does not believe that restrictions on the application of business activity taxes should be imposed as a precondition to a grant of 

broader collection authority for sales and use taxes. These two issues are unrelated 

and should not be linked together. S. 288 would require as part of any ‘‘simplified 

sales and use tax system for remote sales’’ a restriction that is not related to sales 

and use taxes: a nexus standard for corporate income taxes and similar levies that 

is significantly narrower than the existing standard. The Wyden bill would exempt 

businesses from any business activity taxes in states where they do not own or lease 

property or have employees or agents more than 30 days a year. If this provision 

were applicable, it would almost certainly force many states to choose between continuing to lose use tax revenues and giving up a portion of the business activity 

taxes that they are currently collecting. It would be extremely unfortunate to create 

a situation where states that are willing to simplify their sales and use taxes are 

discouraged from doing so because of the possible curtailment of their ability to collect corporate income and franchise taxes. 

Thank you for the opportunity to provide input on these important policy questions. I look forward to continuing to work with you to provide an equitable and 

streamlined sales tax collection system and I welcome any questions you may have 

for me today. 

E-Commerce Tax Alert Vol 1 Issue 1 (March 2000) 

Separate incorporation for e-commerce boosts tax planning strategies 

As more established companies move on to the Internet, competitiveness with 

smaller dot-com operations creates questions over how to avoid sales and use tax 

nexus and keep the playing field level. While most large companies have nexus nationwide, small web-based upstarts often carefully choose where they locate with 

avoiding nexus in mind. 

How can your company meet this challenge? Some experts advocate having an affiliate conduct your e-commerce operations. It sounds radical, but it represents solid 

tax-planning advice for some companies selling goods on the web. Internet tax headaches and the accompanying competitive disadvantages may be avoided by setting 

up a nexus-breaking subsidiary to shield transactions from sales tax collection duties in all but a few instances. 

Perhaps the next memo you write should be addressed to those in charge of your 

company’s electronic sales operation. Before they start selling, explore the possibility 

of creating a new subsidiary or affiliate to handle Internet sales and separate those 

sales from the nexus-creating activity your company already conducts. 

Learn by example 

Traditional businesses can learn from upstart cyberspace operations, which offer 

the convenience of shopping online and not collecting sales tax, suggests Jeremiah 

Lynch, a partner with Ernst & Young LLP in New York. Just as mail-order sellers 

avoid collecting sales or use taxes in most states, companies that rely on the Internet instead of a sales staff establish nexus only in states where they have offices, 

staff or property. 

While brick and mortar businesses race to set up electronic commerce operations, 

many don’t realize that a traditional structure establishes nexus for online transactions as well. Lynch says they miss an opportunity to reduce the number of states 

in which they must collect tax. 

Just as companies once limited nexus through mail-order affiliates (Saks Holdings 

Inc., for example, set up Folio to handle its mail-order sales), they can establish affiliates to handle electronic sales. Lynch says the tactic limits nexus-creating activities to traditional transactions and offers customers a lower overall price-a necessity 

in a world where smaller competitors are selling the same goods with no sales taxes 

applied. 

Amazon.com founder Jeff Bezos has said many times that he chose Washington 

state because it would not account for a large number of sales, thus allowing the 

bookseller to avoid nexus in major markets nationwide. When Amazon built an East 

Coast distribution center, it chose Delaware because that state has no sales tax. 

Though Amazon’s competitor, barnes-andnoble.com, was not created solely with 

tax considerations in mind, the online bookstore has nexus only in New Jersey, New 

York and Virginia, where it has a distribution center, its headquarters and its online site, respectively, explains Ben Boyd, vice president of communications for the 

online bookseller. 

51

A competitive issue 

Traditional companies must consider such factors because upstart competitors 

that sell exclusively on the Internet offer the same products without charging tax. 

Though consumers who purchase goods free of sales tax are supposed to remit use 

tax, most never do, and states rarely press the issue unless it involves business-tobusiness transactions. 

If sales tax is a competitive issue for booksellers, imagine the implications of purchasing large-ticket items tax-free. When an online customer faces the choice of purchasing a $2,000 computer from a vendor who charges sales tax or one who doesn’t, 

the decision is obvious, Lynch says. 

Internet sales continue to climb, and whenever sales tax is a competitive issue, 

traditional retailers should at least consider setting up a separate affiliate for online 

transactions. ‘‘Too many businesses are not taking advantage of this,’’ Lynch says. 

‘‘There would be no reason not to form a separate company for electronic commerce.’’

Internet Sales Tax Guide 

Ever wondered why only some online stores charge sales tax? 

Never pay tax again! Simply follow these principles below to save! 

1. If an Internet Store has a physical presence in the state that you are buying 

from, you will be charged that state’s local sales tax. 

2. If you buy from an internet store that isn’t based in the state you are buying 

from, you will not be charged sales tax—great huh? 

3. Even bricks and mortar stores count as a physical presence. Therefore it is 

much more likely that online sellers like Borders and Barnes&Noble will 

charge you sales tax because they have retail stores in most states 

4. As a result of number 3, some companies are now even setting up separate 

internet divisions of there company, just to avoid having to charge customers 

sales tax. Good news for internet shoppers then! 

Examples of taxing: 

1. If you live in New York and buy from Bigwords.com, they do not have a physical presence in that state, so you won’t be charged any sales tax. 

2. If you live in New Jersey and buy from CDNOW, they have a physical presence 

in that state so they will charge you New Jersey’s sales tax—currently 3 percent. 

TheWebStoreGuide Sales Tax Advice 

Take a look at the table below to see whether you will be charged sales tax, as 

this can save you extra dollars. This is especially true when the product you want 

to purchase costs the same price in more than one online store—pick the store that 

won’t charge you sales tax. Or buy from 800.com, they are based in Oregon which 

has no sales tax! Tough luck if you live in California—its the worst state to live in 

for being taxed in—many online stores have a physical presence there! Basically, 

if you buy from a store that has a presence in the same state as you, you will always pay the local sales tax.

52

Members of the e-Fairness Coalition include: 

Alabama Retail Association 

American Booksellers Association 

American Jewelers Association 

Ames Department Stores 

Atlantic Independent Booksellers Association 

CBL & Associates Properties, Inc. 

Circuit City Stores, Inc. 

Electronic Commerce Association 

First Washington Realty Trust, Inc. 

Florida Retail Federation 

Gateway Companies, Inc. 

General Growth Properties, Inc. 

Georgia Retail Association 

Great Lakes Booksellers Association 

Home Depot 

Illinois Retail Merchants Association 

International Council of Shopping Centers (ICSC) 

International Mass Retail Association (IMRA) 

Kentucky Retail Association 

Kimco Realty Corporation 

K-Mart Corporation 

Lowe’s Corporation, Inc. 

The Macerich Company 

Michigan Retailers Association 

Mid-South Booksellers Association 

Missouri Retailers Association 

Mountains & Plains Booksellers Association 

National Association of College Stores 

National Association of Convenience Stores 

National Association of Industrial and Office Properties (NAIOP) 

National Association of Real Estate Investment Trusts (NAREIT) 

National Association of Realtors (NAR) 

National Community Pharmacists Association 

National Retail Federation 

New England Booksellers Association 

Newspaper Association of America 

North American Retail Dealers Association 


314lowy.eps
53

Northern California Independent Booksellers 

Pacific Northwest Booksellers Association 

Performance Warehouse Association 

RadioShack Corporation 

Regency Realty Corporation 

Retailers Association of Massachusetts (RAM) 

ShopKo 

Simon Property Group 

Southeast Booksellers Association 

Southern California Booksellers Association 

South Carolina Merchants Association (SCMA) 

Target, Inc. 

Taubman Centers, Inc. 

The Gap, Inc. 

The Macerich Company 

The Musicland Group, Inc. 

The Real Estate Roundtable 

The Rouse Company 

Variety Wholesalers 

VerticalNet, Inc. 

Virginia Retail Merchants Association 

Wal-Mart 

Weingarten Realty Investors 

Westfield America, Inc. 

(As of March 13, 2001)

The CHAIRMAN. Thank you, Mr. Lowy. 

Mr. Comfort, welcome. 

STATEMENT OF ROBERT D. COMFORT, VICE PRESIDENT OF 

TAX AND TAX POLICY, AMAZON.COM 

Mr. COMFORT. Thank you, Mr. Chairman, Members of the Committee. My name is Bob Comfort, and on behalf of all my colleagues 

at Amazon.com I would like to express our gratitude at being invited here to testify before this Committee. 

I am Amazon.com’s vice president of tax and tax policy. Amazon 

opened its virtual doors in 1995 on a mission to use the Internet 

to transform book-buying into the easiest, most enjoyable shopping 

experience possible. Some 30 million customers today in more than 

160 countries have made us the Internet’s number one retailer, offering a wide array of consumer products. 

As a proponent of widespread, low-cost access to the Internet and 

the opportunities it offers to Americans, Amazon fully supports 

congressional action to extend the Internet Tax Freedom Act’s moratorium on multiple or discriminatory taxes. Extending the moratorium for a few years would be helpful, but a permanent moratorium would be preferable. 

Although it is not directly related to the moratorium, it has been 

suggested here today that Congress should take this opportunity to 

define the circumstances in which states could require all remote 

sellers to collect sales taxes without imposing an unreasonable burden upon interstate commerce. 

This would require the states to simplify their sales and use tax 

regimes and to achieve some degree of uniformity from state to 

state. If substantial simplification and uniformity were not 

achieved, imposition of a collection obligation in the absence of judicially defined nexus would continue to impose an unreasonable 

burden upon Internet sellers, as described in the Supreme Court’s 

decisions, National Bellas Hess and Quill. 

54

Amazon would support a properly focused effort among the states 

to bring their sales tax systems into conformity within the Constitution, as applicable to remote sellers. Amazon is quite concerned, however, that over the life of the streamlined sales tax 

project, most of the difficult decisions required to achieve substantial simplification and uniformity have either been deferred or completely removed from consideration. 

Given this history, Amazon strongly believes that Congress must 

not authorize states to require all remote sellers to collect sales 

taxes based solely upon representations that the states will address 

somewhere down the road a variety of criteria for simplification. 

To this end, Congress should provide the states with specific 

guidance about the criteria that Congress deems necessary for acceptable simplification of the current sales tax system. Each state 

would be free to decide whether or not it wished to make these 

changes to its sales tax systems in exchange for subsequent congressional approval. This process would respect state sovereignty, 

while providing motivation and a clear road map for simplification, 

and it would allow Congress to conduct a followup review to ensure 

that the states have indeed genuinely simplified their sales and use 

tax systems in order to eliminate the unreasonable burden on 

interstate commerce. I cannot emphasize this last point strongly 

enough, Mr. Chairman. 

The states have repeatedly demonstrated inability or unwillingness to grapple with the issues that must be resolved in order to 

achieve genuine simplification. The streamlined sales tax project is 

only the most recent example. If the states are free to leave uniformity, sourcing, and compensation issues for future consideration 

while proclaiming that their systems have been streamlined, they 

will do just that. 

Congress must review their actions at the end of the simplification process, not approve them in advance, otherwise, Amazon and 

all other remote sellers will lose their Commerce Clause protections, even though the unreasonable burden imposed upon our 

businesses by the crazy quilt of sales and use tax regimes would 

remain. 

Congress must also provide a mechanism to ensure that states 

that are permitted to require remote sellers to collect tax will continue to comply with a congressionally mandated criteria for simplification and uniformity. If, in the future, a state chooses to diverge from these criteria, then the constitutional limitation set 

forth in National Bellas Hess and Quill will once again apply to 

that state. 

Amazon believes that, at a minimum, states and localities must 

meet and maintain the following requirements for simplification 

and uniformity. Sales tax rates on remote sales must be determinable based solely on the geographic area information included 

in a customer’s address. 

Although a single, nationwide rate applicable to all remote sales 

would be the simplest approach, one rate per state would also 

work. Five-digit zip codes would be the smallest acceptable sales 

tax rate area, because consumers do not know, and remote sellers 

have no way of determining any smaller or different tax rate areas 

within those five-digit zones. 

55

Uniform definitions and rules must define the sales tax base and 

provide specific rules regarding allocation of shipping and handling 

charges, coupons, discounts, and other charges to orders that contain both taxable and nontaxable goods. Uniform rules must also 

cover the refund of sales taxes in the case of customer returns 

where the seller retains shipping charges. 

Uniform definitions and sourcing rules must be developed for the 

sale of digital goods such as downloaded music and software. 

States must provide reasonable compensation to remote sellers 

for collecting the taxes. At a minimum, this compensation must encompass the cost incurred by remote sellers for credit card processing fees which are assessed as a percentage of the total amount 

of both the price of the item sold and the applicable sales tax. 

Last, Mr. Chairman, state and local governments should be required to assist remote sellers in educating consumers on this issue 

by, for example, establishing a toll-free phone number and Internet 

website, and a direct mailing effort. 

Mr. Chairman, Amazon.com appreciates your invitation to provide its views on this important public policy matter, and would 

welcome the opportunity to elaborate further. 

Thank you. 

[The prepared statement of Mr. Comfort follows:]

PREPARED STATEMENT OF ROBERT D. COMFORT, VICE PRESIDENT OF TAX AND TAX

POLICY, AMAZON.COM

Mr. Chairman, Senator Hollings, and Members of the Committee, my name is 

Robert Comfort. I am Amazon.com’s Vice President for Tax and Tax Policy. A pioneer in electronic commerce, Amazon.com opened its virtual doors in July 1995 with 

a mission to use the Internet to transform book buying into the easiest and most 

enjoyable shopping experience possible. Today, Amazon.com also offers consumer 

electronics, toys, CDs, videos, DVDs, kitchenware, tools, and much more. Some 30 

million customers in more than 160 countries have made us the Internet’s number 

one retailer. 

Amazon.com is grateful for this opportunity to address the issue of Internet taxation. As a proponent of widespread, low-cost access to the Internet and the opportunities it offers Americans and the American economy, Amazon.com fully supports 

Congressional action to extend the Internet Tax Freedom Act’s moratorium on multiple or discriminatory taxes on the Internet. Extending the moratorium for a few 

years would be helpful, but a permanent moratorium would be preferable. 

Although not directly related to the moratorium, it has been suggested that Congress should simultaneously define the circumstances in which states could require 

all remote sellers to collect sales taxes, without imposing an unconstitutional burden 

upon interstate commerce. It is widely agreed that this would require the states to 

simplify their sales and use tax regimes and to achieve some degree of uniformity 

from state to state. If substantial simplification and uniformity were not achieved, 

any imposition of a collection obligation in the absence of judicially defined ‘‘nexus’’ 

would continue to impose an unconstitutional burden upon remote sellers, as described in the Supreme Court’s decisions in National Bellas Hess and Quill. 

Consequently, Mr. Chairman, Amazon.com urges Congress, should it decide to address the sales tax collection issue, to establish clearly defined goals for the states 

to achieve, and to scrutinize with care the results of their efforts, in order to assure 

Congress and the American people of adherence to the strictures of the Commerce 

Clause. 

Amazon.com would support any properly focused effort among the states to bring 

their sales tax systems into conformity with the Constitution as applicable to remote 

sellers. Amazon.com is quite concerned, however, that over the life of the Streamlined Sales Tax Project, most of the politically difficult decisions required to achieve 

substantial simplification and uniformity have either been deferred or completely removed from consideration. Given this history, Amazon.com strongly believes that 

Congress must not authorize states to require all remote sellers to collect sales tax 

56

based solely upon representations that the states will address, somewhere down the 

road, a variety of criteria for simplification. 

Instead, Congress should provide the states with specific guidance about the criteria that Congress deems necessary for constitutionally acceptable simplification of 

the current sales tax system. The states should be free to decide whether or not they 

wish to make these changes to their sales tax systems, in exchange for subsequent 

Congressional approval. This process would respect state sovereignty while providing motivation and a clear roadmap for simplification. And it would allow Congress to conduct a follow-up review to ensure that the states have indeed genuinely 

simplified their sales and use tax systems in order to eliminate the unconstitutional 

burden on interstate commerce. 

I cannot emphasize this point too strongly, Mr. Chairman. The states have repeatedly demonstrated inability or unwillingness to grapple with the issues that must 

be resolved in order to achieve genuine simplification. The Streamlined Sales Tax 

Project is only the most recent example. If the states are free to leave uniformity, 

sourcing, and compensation issues for ‘‘future consideration,’’ while proclaiming that 

their systems have been streamlined, they will do just that. Congress must review 

their actions at the end of the simplification process, not approve them in advance. 

Otherwise, Amazon.com and all other remote sellers would lose our Commerce 

Clause protections, even though the unreasonable burdens imposed upon our businesses by the crazy-quilt sales and use tax regimes would remain. 

Congress must also provide a mechanism to ensure that states that are permitted 

to require all remote sellers to collect sales tax will continue to comply with the 

Congressionally mandated, constitutionally required criteria for simplification and 

uniformity. If, in the future, a state chooses to diverge from these criteria, then the 

constitutional limitations set forth in National Bellas Hess and Quill must once 

again apply to that state. 

Amazon.com believes that, at a minimum, states and localities must meet and 

maintain the following requirements for simplification and uniformity:

• Sales tax rates applicable to remote sales must be determinable based solely on 

the geographic area information included in a customer’s address. Thus, although a single, nationwide rate applicable to all remote sales would be the 

simplest approach, Amazon.com does not believe it would be necessary; one rate 

per state would work very well. Five-digit zip codes would be the smallest acceptable sales tax jurisdiction areas, because consumers don’t know—and remote sellers would have no way of determining—any smaller or different tax 

rate areas.

• Uniform definitions and rules must define what is includable in the sales tax 

base, and provide specific rules regarding the allocation of shipping and handling charges, coupons, discounts, and other charges to orders that contain both 

taxable and nontaxable goods. Uniform rules also must cover the refund of sales 

taxes in the case of customer returns where the seller retains shipping charges.

• Uniform definitions and sourcing rules must be developed for the sale of digital 

goods, such as downloaded music and software.

• States must provide reasonable compensation to remote sellers for collecting 

sales tax. At a minimum, such compensation must encompass the cost incurred 

by remote sellers for credit card processing fees assessed as a percentage of the 

total amount of both the price of the item sold and the applicable sales tax.

• Lastly, state and local governments should be required to assist remote sellers 

in educating consumers on this issue by, for example, establishing a toll free 

phone number, an Internet website, and a direct mailing effort.

Mr. Chairman, Amazon.com appreciates your invitation to provide its views on 

this important public policy matter and would welcome the opportunity to elaborate 

further on these comments.

The CHAIRMAN. Thank you. 

Ms. Harchenko, welcome. 

STATEMENT OF ELIZABETH HARCHENKO, DIRECTOR, 

OREGON DEPARTMENT OF REVENUE 

Ms. HARCHENKO. Thank you, Mr. Chairman, and Members of the 

Committee. I am Elizabeth Harchenko, Director of the Oregon DeVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00060 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
57

partment of Revenue and chair of the Multistate Tax Commission. 

It is an honor for me to be here before this Committee today. 

The Multistate Tax Commission is an interstate compact agency 

with 45 participating states, including the District of Columbia. 

The commission works to preserve federalism and to promote fairness, uniformity, and simplification in state and local tax systems. 

I thank you for the opportunity to address the most important 

issue of federalism facing our nation today. 

That issue is whether Congress will join in partnership with the 

states to support their efforts to ensure that all commerce, from 

local to global, is treated in an equal, uniform, and nondiscriminatory manner by state and local tax systems. A federal-state 

partnership is essential to support the free flow of commerce and 

fair competition in the national marketplace. Forging this partnership will influence the speed and the extent to which the benefits 

of modern technology and economic prosperity spread from one 

state and region to another. 

Finally, developing this partnership will shape the future of federalism. It will determine whether states and local governments 

will be able to perform the role and functions that the nation, including the Congress, expects them to perform in supporting the 

national economy and ensuring the quality of life for all citizens, 

and doing so efficiently and effectively. 

Why is it so critically important that Congress join the states in 

this partnership? Because the principles on which our nation was 

founded recognized that the states would work cooperatively 

through our National government, and that the National Government has the power and resources to support and participate in 

these joint efforts. 

All states and local governments tax their own residents and 

nonresidents who engage in local and interstate business through 

different mixes of income taxes, business activity taxes, sales and 

use taxes, excise taxes, and other kinds of taxes, depending upon 

local circumstances and needs. 

Regardless of the types of taxes state and local governments 

choose to levy, those taxes must apply fairly to all forms of commerce. In this regard, we should all understand it was never the 

constitutional intent of the Commerce Clause to deprive the states 

of the ability to ask for a fair share contribution from interstate 

businesses to support government service. 

Tax policy should not play favorites. Similar economic activity 

should be taxed in similar ways to support the free flow of commerce and equal competition, so balance and equity in taxation between local and interstate commerce is economically essential and 

constitutionally appropriate. 

The greatest imbalance in state and local taxation arises in the 

area of collection of sales and use taxes. There is no sound tax policy that supports a tax being collected on a shirt, or a music recording, or a computer sold through a local store but not collected when 

the same product is sold by mail order, or through the Internet. 

States recognize that we must do our part to correct this imbalance by simplifying state and local tax structures so that the collection of the taxes does not create an undue burden on interstate 

commerce. 

58

Through the streamlined sales tax project the states, working 

side by side with business, have developed measures that will radically simplify sales and use taxes and eliminate undue burdens 

that may be associated with their collection. In light of this development, Congress should join in partnership with the states and 

act to level the playing field between local and remote commerce 

by requiring remote sellers with sales greater than a national 

threshold amount to collect sales and use taxes for those states implementing the streamlined sales tax project recommendations. 

Doing so will achieve fundamental fairness and nondiscrimination 

in the application of sales and use taxes between local business and 

interstate commerce. 

Within the context of this partnership, Congress also needs to examine the technical language in the Internet Tax Freedom Act 

should Congress choose to extend the Act, which may exacerbate 

existing inequities in sales and use taxation. Governor Geringer described those in a little more particularity during his testimony, 

and they have been referred to specifically in the written submissions. 

In addition to encouraging a federal-state partnership, we ask 

Congress to refrain from making any of the current inequities 

worse. In particular, Congress should not enact new restrictions on 

the ability of states to tax a fair share of the income of multistate 

enterprises. 

Proposals advanced by some business interests would dramatically change current law, and would simply create and multiply 

within the business activity tax realm the same problems that have 

existed for sales and use taxes. These proposals would allow a select group of companies to avoid their fair share of state and local 

taxes and to create a resulting shift in that burden to wage-earners, small businesses, traditional manufacturing and natural resource industries, those who are captive within the taxing state, 

and cannot avoid taxation. 

Congress should recognize that in an era when companies can 

make substantial quantities of sales and earn substantial income 

within a state from outside that state, the concept of physical activity as a standard for state taxing authority is inappropriate. 

Among other problems, this concept discourages the free flow of 

investment across state boundaries, and restricts the spread of economic prosperity from areas of initial investment to all states and 

regions. If a company is subject to state and local taxes only when 

it creates jobs or facilities in a state, then many companies will 

choose not to do so. They will stay where they are, and the states 

that would like to attract them will lose the opportunity for additional jobs in their states. Instead, companies will choose to make 

sales into our states and earn income from them without investing 

in them. 

If Congress ties states to a physical activity concept for a business activity taxing jurisdiction, Congress will be choosing to freeze 

investments in some areas and prevent the flow of new technology 

and economic prosperity in a balanced way across the entire nation. Congress should recognize that a standard of physical activity 

for tax nexus is not in the best interests of our nation, and that 

sound economic policy requires adoption of practical concepts of 

59

economic nexus as a standard for the application of state and local 

taxes. 

Finally, let me address how the nation as a whole, its corporate 

citizens, and its taxpayers, benefit from strong state and local governments and a strong federal-state partnership. The nation relies 

on states and local governments to educate our citizens for a modern economy and society. It relies on states and local governments 

for civil order, and a framework of commercial law that supports 

orderly commerce. 

The nation relies on states and local governments to provide the 

infrastructure over which commerce flows. It relies on states and 

local governments to adopt policies that ensure the flow of electrical energy across state boundaries so that the new technologybased economy can flourish. 

The genius of our system of federalism is that our nation relies 

on states and local governments to tailor vital services of national 

benefit to fit local circumstances. If this system of federalism is to 

continue to serve this nation well in the new century, then Congress and states must form a partnership to ensure that interstate 

commerce participates on a full and equal basis to help finance the 

state and local services that benefit the entire nation. 

Mr. Chairman, thank you very much for the opportunity to address the Committee. I am happy to answer any questions that you 

or the Members may have. 

[The prepared statement of Ms. Harchenko follows:]

PREPARED STATEMENT OF ELIZABETH HARCHENKO, DIRECTOR, OREGON DEPARTMENT OF REVENUE

The Multistate Tax Commission is an organization of state governments that 

works with taxpayers to administer, equitably and efficiently, tax laws that apply 

to multistate and multinational enterprises. Created by an interstate compact, the 

Commission:

• encourages tax practices that reduce administrative costs for taxpayers and 

states alike;

• develops and recommends uniform laws and regulations that promote proper 

state taxation of multistate and multinational enterprises;

• encourages business compliance with state tax laws through education, negotiation and enforcement, and

• protects state fiscal authority in Congress and the courts.

Forty-five states (including the District of Columbia) participate in the Commission, as Compact Members (21), Sovereignty Members (3), Associate Members (18), 

and Project Members (3). 

On February 26, 2001, Senators McCain, Dorgan, Enzi, Hollings, Kerry, Wyden, 

and Voinovich requested input from interest groups on issues relating to the potential extension of the Internet Tax Freedom Act and simplification of sales and use 

taxes in general. The Commission is committed to achieving equitable, uniform and 

non-discriminatory taxation and to securing the benefits of federalism that arise 

from preserving the proper authority of the states within our nation. The Commission strongly supports state efforts to streamline and simplify sales and use tax 

laws to alleviate undue administrative burdens on interstate sellers. In the context 

of simplification of sales and use taxes, the Commission supports the equitable collection of sales and use taxes on remote sales by sellers exceeding a threshold level 

of sales. The Commission supports the development of a partnership between Congress and the states to accomplish the equitable collection of sale and use taxes. The 

Commission opposes new federal restrictions on state authority to levy business activity taxes because the proposed restrictions would diminish the proper authority 

of states in our federal system and would undermine equity in taxation by allowing 

a select group of companies to avoid their fair share of taxes. These proposals would 

60

unfairly shift the state and local tax burden to wage-earners, small businesses and 

traditional manufacturing and natural resource firms. As a membership body, the 

Commission has not taken a position on extension of the Internet Tax Freedom Act. 

However, the Commission recognizes certain technical difficulties with legislative 

language in the Act that appears to undermine the goals of equity, uniformity and 

non-discrimination and asks Congress to examine that language if it considers extension of the Act in any form. 

Attached is the response from the Multistate Tax Commission to the Senators on 

issues related to the taxation of remote commerce, the simplification of sales and 

use tax laws, and technical issues relating to the Internet Tax Freedom Act. 

March 6, 2001

Hon. JOHN MCCAIN, U.S. Senate, 

Washington, DC.

Hon. ERNEST HOLLINGS, U.S. Senate, 

Washington, DC.

Dear Senators McCain and Hollings:

Thank you for your letter of February 26, 2001, in which you request input from 

the Multistate Tax Commission (MTC) on issues related to the potential extension 

of the Internet Tax Freedom Act. The Multistate Tax Commission appreciates the 

opportunity to provide you with its position on issues of state and local taxation of 

interstate commerce raised in your letter. These views are based on a fundamental 

commitment to achieving equitable, uniform and non-discriminatory taxation and to 

securing the benefits of federalism that arise from preserving the proper authority 

of the states within our nation. 

Tax neutrality is essential to achieving equity, uniformity and non-discrimination. 

Tax policy should not play favorites: similar economic activities should be taxed in 

similar ways to support the free flow of commerce and equal competition in the national marketplace. States within our nation should be treated in an equal and 

even-handed manner in support of the economic health, fiscal stability and governmental authority of all. The national economy and the free flow of commerce benefit 

from the services and laws provided by state and local governments and the efficient 

tailoring of those services to fit local circumstances. That is the genius of our federal 

system: by preserving state sovereignty, flexible federalism efficiently supports the 

national economy. 

The MTC provides here a summary response to the points raised in your letter. 

We will supplement this summary within a few days with a white paper discussing 

these issues in greater detail. 

Should Congress allow states to require all remote sellers to collect and 

remit sales taxes on deliveries into that state provided that states and 

localities dramatically simplify their sales and use tax systems?

Yes, provided that remote sellers whose sales do not exceed a specified level of 

de minimis national sales (a ‘‘sales threshold standard’’) be exempt from the requirement to collect and remit state sales or use taxes. The recommendations of the 

Streamlined Sales Tax Project will dramatically simplify sales and use taxes to a 

degree sufficient to require remote sellers above a sales threshhold to collect those 

taxes. Congress should level the playing field between local and remote sellers to 

advance tax fairness, increase national economic efficiency and growth, and provide 

for more balanced economic development among states and communities. Congress 

should form a partnership between the states and the Federal Government and require remote sellers to collect sales and use taxes once the specified minimum of 

states have enacted the simplifications recommended by the Streamlined Sales Tax 

Project. Finally, in light of newly emerging business operations and technologies, 

Congress should revisit certain provisions in the ‘‘multiple and discriminatory’’ definitions in the Internet Tax Freedom Act if that act is extended. Those provisions, 

ironically, may increase tax discrimination against local retailers, instead of eliminating that discrimination. 

There is no dispute that sales and use taxes are an indispensable element of state 

and local government finances. No one seriously disputes that such a tax, to be efficient and effective, is best collected at the retailer level—just as federal and state 

individual income taxes are most efficiently collected through employer withholding. 

The inability of the states to require collection of sales and use taxes on remote 

sales subjects local retailers to unfair competition from remote sellers. Moreover, 

61

this substantial inequity violates the standards of tax neutrality and thereby reduces overall economic efficiency and national growth by diverting the allocation of 

capital away from its most efficient uses. In practical terms, this inequity is a source 

of additional pressure on the viability of local businesses in communities across the 

nation—businesses that the marketplace would treat more kindly if only the rules 

were fair and even-handed. 

The inability of the states to require collection of sales and use taxes on remote 

sales creates a second inequity. It allows remote sellers to benefit from state and 

local services without helping to collect the taxes that finance those services. The 

state and local services that benefit remote sellers and, indeed, the national economy are extensive and include: education, university research, state and local infrastructure, public safety, commercial laws, the state court systems, environmental 

management and energy conservation and development, among others. A sampling 

of just some of these benefits includes: states and localities provide the roads used 

by the contract carrier to deliver goods purchased by remote commerce; states provide the courts that enforce the security interest of the remote seller in an installment sale to ensure proper payment; states finance the schools and universities that 

educate workers for the high technology industry and provide markets for computers and software . . . and the examples go on. Thus, remote sellers should bear 

the responsibility of participating in the process of financing these services. 

The inability of the states to require collection of sales and use taxes on remote 

sales leads to yet a third inequity. The failure of a large portion of remote sellers 

to collect sales and use taxes typically allows their customers to escape paying sales 

and use taxes they owe. In the case of Internet purchases that require ready access 

to a properly connected computer, these customers tend to have higher incomes than 

the general population. The ability of higher income individuals to avoid the sales 

and use tax on purchases from remote sellers puts pressure on state and local governments to keep the rates of sales taxes artificially high to support needed services. 

This shifts the tax burden to those with the least ability to pay and increases the 

regressive nature of the sales tax. 

In addition, the failure of remote sellers to collect sales and use taxes confuses 

the public into believing that tax is not due on remote sales. Accordingly, when 

states attempt—as they increasingly have in recent years—to collect from purchasers the lawfully due use tax, the state is wrongfully accused of imposing a new 

tax when, in fact, the state is only seeking to collect a tax that has been on the 

books for decades. By failing to collect the tax, remote sellers first create a collection 

problem for the states and then make it more difficult for states to solve that problem. 

Finally, the current judicial interpretation of nexus for use tax—so-called ‘‘physical presence nexus’’—actually prevents the free flow of interstate commerce and detracts from balanced economic development by acting as a barrier to capital investment flowing from one state into another. Companies have a disincentive to create 

jobs and invest in facilities in different states because once they establish facilities 

in the state they will be subject to a sales and use tax collection requirement. The 

ability of companies to make substantial sales into a state, but not collect that 

state’s sales and use taxes, distorts investment decisions. This circumstance tends 

to ‘‘freeze’’ economic development in states where certain activities originate and 

prevents the flow of investment into other states in a balanced manner. Thus, the 

current state of case law, absent congressional action, unwittingly favors some 

states and regions and prevents investment and prosperity from flowing evenly to 

all areas of the nation. 

Congress can remedy this state of affairs by adopting—consistent with the nature 

of the modern economy and the principle of tax neutrality—a practical sales threshold standard requiring remote sellers with sufficient sales to collect sales and use 

taxes. Companies exceeding the sales threshold would no longer refrain from investing in a state out of a fear the investment would trigger a new collection requirement. Instead, the investment would be evaluated entirely on its free market merits. Moving to a sales threshhold standard for sales and use tax collection for remote 

commerce will eliminate a barrier to the free flow of investment across state boundaries and help generate more balanced economic development across the nation. 

In summary, the states’ inability to require the collection of sales and use taxes 

on remote sales constitutes bad tax policy, is inequitable and causes real economic 

damage. It is unfair to ask local retailers to compete with remote sellers who do 

not collect tax on identical sales, and that unfair competition creates economic pressures on local businesses and the communities that rely on them. It is unfair for 

remote sellers to escape collecting the taxes that finance state and local services 

from which they benefit, and that failure impairs the proper financing of those services. It is unfair that higher income taxpayers can disproportionately avoid sales 

62

and use taxes, and that shift in the tax burden makes it harder for lower income 

families to make ends meet. It is unfair that current standards of sales and use tax 

nexus tend to freeze economic development in the places of initial investment and 

prevent prosperity from flowing evenly to all states and regions of the nation. Congress as a matter of equity and sound economic policy should require remote sellers 

with sales above a certain threshhold to collect sales and use taxes in conjunction 

with state efforts to streamline the administration of those taxes. 

States recognize that the current sales and use taxes need to be updated to fit 

with the modern economy. Forty states—thirty-two voting states and eight observers—have undertaken the Streamlined Sales Tax Project with the active involvement of the multistate business community. The project’s work is described in greater detail below. At this point it is sufficient to note that the project has identified 

the critical areas of change needed to make existing sales and use taxes work efficiently in the modern national economy. Congress should enact a ‘‘sales threshhold’’ 

remote sales collection requirement—subject only to a subsequent congressional 

veto—when a sufficient number of states have adopted an interstate compact implementing simplification in the areas identified by the Streamlined Sales Tax Project. 

The federal-state partnership approach will achieve a level playing field in sales and 

use tax collection based on dramatic simplification of those taxes. Such a role for 

Congress was clearly envisioned by the framers of our Constitution. If Congress is 

not prepared to enter into this partnership with the states, it should refrain from 

specifying the details of simplification and should not preempt the sovereign right 

of states to have full and fair access to the courts to secure judicial approval of simplifications they may enact. 

One final point. The combination of two obscure, ambiguous provisions in the definition of ‘‘discriminatory taxes’’ in the Internet Tax Freedom Act [Section 1104 

(A)(iii) and (B)(ii)(II)] may be inadvertently encouraging new inequities among retailers. Some retailers are placing Internet kiosks in local stores, making sales 

through those kiosks and allowing customers to return goods to those local stores. 

A portion of these retailers collect sales and use taxes on their Internet sales. Other 

retailers employing this practice do not. States find no legal justification for the retailers that fail to collect the sales taxes, despite their physical presence, other than 

the possibility of an ill-advised reading of the two provisions cited above whose language is manifestly unclear. While states would dispute this unfortunate reading of 

these provisions, their ambiguity should not be creating new discrimination in the 

marketplace. They should simply be eliminated if Congress chooses to extend the 

Internet Tax Freedom Act. 

Should goods purchased from remote sellers be taxed at the same rate as 

goods purchased through more traditional means (e.g., in-store sales)?

Yes, it is sound tax policy for the same goods to be taxed at the same rate within 

any given jurisdiction. Further, the U.S. Constitution requires that goods sold by 

remote means be taxed at a rate no higher than goods sold locally, and many state 

constitutions effectively require goods sold by different means to be taxed equally. 

Applying the same rate to different modes of selling fulfills the fundamental economic precept that taxes should operate neutrally. Otherwise a tax system in effect 

chooses winners and losers and displaces the free market determination of efficient 

and viable economic activity. Once the law selects economic favorites, the interests 

that benefit from the favored treatment work to preserve their privileged status to 

the detriment of non-favored players without regard to any underlying need for such 

protection. Taxing the same good at different rates based on delivery would perpetuate all of the inequities and problems associated with the present circumstance 

where many remote sales are taxed at a zero rate while local sales of the same 

goods are taxed at a full rate. 

Furthermore, the U.S. Constitution requires that tax rates on products sold in 

interstate commerce be no higher than on products sold locally. The states accept 

this fundamental understanding of non-discrimination that supports the national 

market in our federal union. Traditional local commerce must bear its fair share of 

taxation as much as interstate commerce, including electronic commerce. The rule 

is well established that the tax rate imposed on sales by remote sellers not exceed 

the rate that is imposed on goods sold through the more traditional means. Thus, 

no further congressional action is needed to ensure equity in tax rates applied to 

both local and remote sales. 

What simplifications in state and local sales and use tax laws would you 

consider important to reduce the burden of compliance?

The recommendations of the Streamlined Sales Tax Project will dramatically simplify the sales and use tax and will reduce compliance burdens for multistate busiVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00066 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
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nesses sufficiently to support Congress allowing states to require remote sellers exceeding a specified sales threshhold to collect state and local sales taxes. The work 

of having multistate businesses identify the areas of simplification actually began 

over six years ago with the industry-led MTC Sales Tax Simplification Committee 

created by the Multistate Tax Commission. Business representatives on that Committee from the American Institute of Certified Public Accountants (AICPA), the 

Committee on State Taxation (COST), the National Tax Association (NTA), the Tax 

Executives Institute (TEI) and the Institute for Professionals in Taxation (IPT) completed an inventory of desired areas of simplification in 1997. That process has continued through several other regional and national projects and studies involving 

multistate businesses, including the National Tax Association Communications and 

Electronic Commerce Tax Project cited in the Internet Tax Freedom Act. This extensive process of multiple state-industry consultation has reached a sound conclusion 

in the recommendations of the Streamlined Sales Tax Project. Congress can with 

confidence endorse—as a complete, comprehensive and sufficient package—the areas 

of simplification addressed by the project in legislation authorizing states to require 

collection of sales and use taxes by remote sellers. 

Perhaps the most significant area in which simplification is required—and is 

being addressed effectively by the Streamlined Sales Tax Project—is in reducing the 

number of sales and use tax returns and reducing the number of tax bases in each 

state and all of its local entities. Using the benefits of statewide administration, the 

number of returns a retailer is required to file can be reduced from hundreds nationwide to one per state. Concurrently, the number of tax bases should be reduced 

so that retailers will be required to keep track of one tax base per period for each 

state into which it makes sales. These changes radically reduce the compliance burden of multistate retailers. A few dozen returns will suffice for even the largest retailers where hundreds of returns were required before. Smaller retailers will see 

comparable reductions. 

The other areas of simplification being addressed by the Streamlined Project include:

• a centralized, one-stop, multistate registration system for participating sellers;

• uniform definitions for goods or services;

• uniform rules for attributing transactions to particular taxing jurisdictions;

• uniform procedures for handling sales that are exempt from sales and use taxes 

by virtue of the nature of the purchaser or the use of the purchased item and 

relief from liability to the states for sellers that rely on such state procedures;

• uniform procedures for certifying software that sellers may elect to determine 

applicable taxes and relief from liability to the state for sellers that rely on such 

software;

• simplified, uniform procedures for claiming bad debts;

• a uniform format for tax returns and remittances; consistent electronic filing 

and remittance methods;

• uniform audit procedures;

• appropriate protections for consumer privacy;

• limitations on the frequency with which local units of government may change 

their sales and use tax rate and the provision of adequate notice to sellers of 

the effective dates of such changes;

• standardized procedures requiring each state to provide sellers with the information necessary to assign the appropriate sales and use tax rate to any transaction attributed to the state and relief from liability to the states for sellers 

relying on such information provided by a state;

• and a study of the cost of collection by retailers before and after simplification.

In total, the elements addressed by the Streamlined Sales Tax Project are the 

areas of simplification most important to reducing burdens of compliance with sales 

and use taxes. 

Does simplification necessarily mean that states will have to develop one 

tax rate per state to apply to a certain taxable good?

No. All of the simplification benefits of one rate per state can be achieved largely 

through the approach developed by the Streamlined Sales Tax Project. That approach combines uniform, strategic simplifications in tax policy with technology. 

Those simplifications include: (a) limiting rate changes to quarterly periods, (b) proVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00067 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
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viding uniform advance public notice of the changes, and (c) relieving enterprises 

of liability for errors in local rates if they use databases of local rates provided by 

states. Congress, in the Mobile Telecommunications Sourcing Act, Pub. L. 106–252, 

114 Stat. 626 (2000), has already endorsed the use of governmentally supplied tax 

rate databases. The advantage of the Streamlined Sales Tax Project approach is 

that it achieves efficiency and simplification for interstate commerce, while allowing 

states and localities to tailor fiscal policy to fit local needs. It avoids, in particular, 

the problem of raising taxes in rural areas to finance services in urban areas that 

is inherent in requiring ‘‘one rate per state.’’

The latter portion of the question appears to raise the question whether Congress 

should require states to eliminate different state tax rates for different goods, such 

as lower rates on food or electricity than on other items. The states in the Streamlined Sales Tax Project chose wisely to develop a proposal for the phase-out of most 

of the differential state tax rates that apply to different items of personal property 

or services. Although current computer technology is sufficiently advanced to be able 

to assign different rates to different taxable items accurately, having one state rate 

for most taxable goods certainly is more easily administered. However, the states 

recognized that a simplified sales tax system could accommodate multiple rates for 

high value, durable goods such as motor vehicles, aircraft, watercraft, modular 

homes, manufactured homes and mobile homes—goods that are typically subject to 

either registration requirements or property taxation. Accordingly, the states did not 

adopt a phase-out for multiple rates on these enumerated items. 

Should Congress reconsider the definition of Internet access, and if so, how 

would you propose defining Internet access?

If Congress extends the moratorium on state and local taxes on Internet access, 

it should re-evaluate the definition of Internet access within the moratorium to account for the increasing variety and extent of services that are ‘‘bundled’’ with access. 

Since Congress wrote the original definition, changes in technology and corporate 

business structures have made it clear that it is now possible for large enterprises 

to bundle a broad array of otherwise taxable services with Internet access. The current definition appears to create the potential for discrimination in tax policy that 

would stifle competition and increase consumer costs, provide financial advantages 

to large enterprises, and erode state and local tax bases. Services delivered by large 

enterprises that can assemble the capital, technological, information and entertainment resources to bundle an array of services with Internet access would appear to 

be granted a tax exemption under the current language of the moratorium. The 

same services delivered through the Internet by smaller enterprises without the 

bundling capability or by non-electronic means would remain taxable. There is no 

economic or tax policy justification for Congress to create this disparity. Expanded 

bundling by large enterprises can substantially erode the tax bases of state and 

local governments that tax services. 

The definition of Internet access should cover only access to the Internet. Because 

of the increasing problems in distinguishing between pure access and other services, 

Congress should explore a quantitative approach to defining access, such as was enacted by the State of Texas in the last few years. 

The Commission has a neutral position on the question of whether or not Congress should extend a moratorium on state and local taxes of the Internet. We oppose removing, however, the ‘‘grandfather protection’’ in the Internet Tax Freedom 

Act for state and local governments levying taxes prior to the original moratorium 

as an unacceptable preemption of existing state and local tax policy. 

Again, this list is not exhaustive. We welcome any and all comments. Our 

expectation is that the Commerce Committee will conduct a hearing on 

the Internet tax issue soon after we receive your policy recommendations.

The questions you raise in the letter of February 26, 2001, reflect a proper focus 

by the Senate Commerce Committee on sales and use taxes. The U.S. Supreme 

Court in its Quill decision invited Congress to address the issue of use tax collection 

by remote sellers. We are aware that some interests have sought to burden the sales 

and use tax issue with unrelated topics, especially the question of the authority of 

states to levy business activity taxes. Action by Congress to extend the authority 

of states to require the equitable collection of sales and use taxes will not result in 

a change in the authority of state and local governments to levy business activity 

taxes. Claims to the contrary are simply false. 

The proposals advocated by some with regard to business activity taxes would 

dramatically change existing law. Typically the proposals would impose new restricVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00068 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
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tions on state authority in the form of physical activity standards of nexus for business activity taxes (including corporate income taxes, gross income or gross receipts 

taxes, and capital stock and franchise taxes). The imposition of these new standards 

would simply create and multiply within the business activity tax realm many of 

the problems that have existed in the context of sales and use taxes. Again, tax equity would suffer. Companies earning income from within a state and benefiting 

from state and local services would be excused from paying their fair share of the 

cost of those services. These proposals would elevate corporate form over economic 

substance and allow companies, through sophisticated tax strategies, to shift income 

unfairly away from where it was earned to tax haven locations. In terms of tax equity, the net result of the proposals would be to allow a select group of corporations 

to escape their fair share of state and local taxes and to shift that burden to wageearners, small businesses and traditional manufacturing and natural resource industries—all of which are ‘‘captive’’ within the taxing state. 

These proposals for new restrictions on state authority to levy business activity 

taxes would also detract from economic efficiency and balanced economic development by, again, discouraging the flow of investment across state boundaries. The 

physical activity approach to state authority is really an anachronism arising out 

of 17th and 18th century mercantilism. Centuries ago, the only way enterprises 

could earn income from a territory would be to undertake physical activities there. 

Today, companies can earn substantial income from a state—and in the process benefit from the services of a state—with only minimal activities that might traditionally be labeled ‘‘physical.’’ To achieve tax neutrality—taxing the same income earned 

in the same state to the same degree—concepts of physical activity as a standard 

for state taxing authority need to be assigned to the dustbin of history. If companies 

can earn income from within a state, but escape taxation by keeping their activities 

within the boundaries of certain physical activities defined in a new federal law, 

then companies will be discouraged from going beyond those physical activities and 

making new and more substantial investments in that state. Thus, the proposals 

for new federal laws restricting state business activity taxes will only interfere with 

the free flow of commerce and balanced economic growth across the nation. 

Thank you again for providing an opportunity for the Multistate Tax Commission 

to offer information and perspective on this important issue. The MTC would be 

glad to provide you with any further information or to answer any questions you 

may have. Please feel free to contact Dan Bucks, MTC Executive Director concerning these issues at 202–624–8699. 

Sincerely, 

ELIZABETH HARCHENKO, 

Director, Oregon Department of Revenue, 

Chairman, Multistate Tax Commission. 

cc: 

Hon. Ron Wyden, U.S. Senator 

Hon. Byron Dorgan, U.S. Senator 

Hon. George Voinovich, U.S. Senator 

Hon. Mike Enzi, U.S. Senator 

Hon. John Kerry, U.S. Senator

The CHAIRMAN. Thank you. 

Mr. Dircksen, we will see if we can get in your statement before 

we take a break here. 

STATEMENT OF JEFF DIRCKSEN, DIRECTOR OF 

CONGRESSIONAL ANALYSIS, NATIONAL TAXPAYERS UNION 

Mr. DIRCKSEN. Thank you, Mr. Chairman. 

The CHAIRMAN. Take the microphone if you would, please. 

Mr. DIRCKSEN. Mr. Chairman, Members of the Committee, I appreciate the opportunity to testify today on such a critical issue. I 

am the director of congressional analysis for the National Taxpayers’ Union Foundation, the education and research arm of the 

National Taxpayers Union. NTU is America’s oldest and largest 

grassroots taxpayers’ organization, with over 300,000 members in 

all 50 states. I am here on behalf of NTU and its members to urge 

66

you to extend the Internet tax moratorium, and to ensure that the 

Internet and online transactions remain tax-free. 

Today, I want to briefly share three taxpayer concerns about increasing taxes on Internet usage and applying additional tax structures to Internet transactions. First, taxpayers are already burdened with heavy taxes, fees, and other charges on telecom services, and adding more would be headed in the wrong direction. 

Second, concerns that essential government services will disappear because certain online transactions are not taxable are 

false. 

Third, the imposition of taxes on Internet sales will make life for 

taxpayers and retailers far too complicated. 

First, there are enough taxes and other fees on telecom services. 

Both the public and private sectors have benefited significantly 

from the deregulation of the telecom industry and from the productivity gains made possible by telecom products and the Internet, 

yet the National Conference of State Legislatures reported last 

February that state governments and local governments, nearly 

11,000 of them, levy taxes or fees on telecommunications activities, 

including franchise taxes, utility taxes, line access, and right-ofway charges, 911 fees, relay charges, and maintenance surcharges. 

As has been highlighted already, this past Monday, the NASDAQ 

composite index dipped below the 2000 point level for the first time 

since December 1998. The last thing that a slumping technology 

sector needs is higher taxes on the industry and on its consumers. 

I must admit that I now have a personal stake in this issue. I 

found out on Sunday evening that my brother-in-law, who farms 

near Gann Valley, South Dakota, will be leaving agriculture to 

begin working for an ISP in Woonsocket, where my sister has been 

working for a mail order firm. The Internet touches the lives of 

people from all across the globe, including those on the Great 

Plains. Extending the Internet tax moratorium will help technology 

firms both large and small, including one in Woonsocket, South Dakota. 

Rather than placing hurdles in front of telecom and e-commerce 

industries, Congress should consider instead reducing or eliminating barriers. Last year’s attempt to repeal the phone excise tax 

was a good start, as mentioned by Senator Allen earlier. 

Two, concern that essential government services will disappear 

are false. This scare tactic serves the interest of those who wish to 

raise taxes and extend government, yet the U.S. Department of 

Commerce reports that retail e-commerce sales in calendar year 

2000 totaled $25.8 billion, or just 0.8 percent of all retail transactions. State government coffers are actually flush with cash. 

The Nelson A. Rockefeller Institute of government reports that 

the growth in state tax revenues is at a record high. While states 

believe the information superhighway to be paved with gold, many 

online transactions such as online services or business-to-business 

transactions may not be subject to sales taxes in all states, resulting in far lower revenue gains than expected. 

As Senator Wyden correctly observed, quote, not a single community has come forward and proved that it is being injured by its inability to impose discriminatory taxes on electronic commerce. 

There is no evidence that the states have lost revenues by techVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00070 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
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nology-driven economic activities, and despite the argument to the 

contrary, where individuals go into retailers, kick the tires of the 

merchandise and then leave, most people I have talked with actually use the Internet to research available products and then go to 

their local retailer to buy. 

Three, attempts to simplify and harmonize sales tax codes will 

make life far too complicated for taxpayers and retailers. The ensuing debate among the 7,500 entities that levy a sales tax will make 

past attempts by the European Union to define what constitutes 

marmalade, mayonnaise, or a cucumber seem like a pleasant tea 

party in comparison. 

Variances in statutory definitions will force states to develop a 

new common definition for all goods available on the Internet, leading to questions about whether chocolate candies are a food, and 

whether they should be taxed as such. One hesitates to ponder the 

amount of time and taxpayer money that will be consumed in this 

endless wrangling. Taxpayers should be concerned that efforts to 

simplify and harmonize tax rates will run roughshod over the Supreme Court’s 1992 Quill decision. 

Once tax officials have simplified the system of Internet sales 

taxes, the next step is to impose the structure on mail order and 

phone orders, and then expand it to all retail purchases. This last 

step is the ultimate goal of NGA’s simplification proposal. It is conceivable that under the simplified tax scheme Equal Protection and 

Commerce Clause concerns will arise, and local merchants will be 

required to collect and remit out-of-state sales taxes when selling 

goods across the counter to a customer from another state. 

Additionally, we believe tax competition is a good thing. Before 

joining NTUF, I worked as a revenue analyst for the Commonwealth of Pennsylvania’s Department of Revenue. The Commonwealth provides sales tax exemptions to people who purchase tangible personal property that is to be used in the production of feature-length films, as well as to bakers, horse breeders, and numerous others. Adopting this scheme to harmonize and simplify taxes 

will kill a state’s competitive tax advantage, trample that state’s 

sovereignty, remove incentives to keep taxes low, and hurt taxpayers in the process. 

Should anyone actually believe this process will be either simple 

or easy, I would point out the difficulties that have been faced in 

revamping the Internal Revenue Service. By our account, the IRS 

has reorganized itself 29 times since 1952, and has spent billions 

of dollars on tax administration systems and computer networks 

that simply do not work. When you add the economic impact and 

the uncertainty that brings from Internet taxes, we believe that 

this dynamic sector should be left tax-free. The message cannot be 

more clear. Congress should declare this tax territory off-limits by 

extending the Internet tax moratorium and preventing states from 

imposing sales taxes on online transactions. 

I thank the Committee, and I look forward to your questions. 

[The prepared statement of Mr. Dircksen follows:]

68

1Scott Mackey, ‘‘Telecommunications and the Tangle of Taxes,’’ State Legislatures, February 

2000, http://www.ncsl.org/programs/pubs/200TELE.HTM. 2David Runk, ‘‘Nasdaq Drops 2.9 percent as Outlook Worries Drag Down Market,’’ The Wall 

Street Journal, WSJ.com, March 12, 2001. 3 Austan Goolsbee, ‘‘In a World Without Borders: The Impact of Taxes on Internet Commerce,’’ 

National Bureau of Economic Research, Working Paper No. W6863, December 1998. 4David Muhlbaum, ‘‘AOL Members Say No New Net Taxes,’’ CBS MarketWatch, March 20, 

2000, http://netscape.marketwatch.com/source/blq/netscape/archive/20000320/news/current/

cbsmwaollpoll.nsp. 

PREPARED STATEMENT OF JEFF DIRCKSEN, DIRECTOR OF CONGRESSIONAL ANALYSIS, NATIONAL TAXPAYERS UNION

Mr. Chairman, Senator Hollings, Members of the Committee, I appreciate the opportunity to testify today on such a critical technological and economic issue facing 

America. I am the Director of Congressional Analysis for National Taxpayers Union 

Foundation, the education and research arm of the National Taxpayers Union 

(NTU). NTU is America’s oldest and largest grassroots taxpayer organization with 

over 300,000 members in all 50 states. I am here on behalf of NTU and its membership to urge you to extend the Internet Tax Moratorium and to ensure that the 

Internet and online transactions remain tax-free. 

Today, I want to share three taxpayer concerns about increasing taxes on Internet 

usage and applying additional tax structures to Internet transactions. First, taxpayers are already burdened with heavy taxes, fees, and other charges on telecommunications services, and adding more is moving in a counterproductive direction. Second, concerns that essential government services will disappear, because 

certain online transactions are not taxable, are false. Actually, state tax revenues 

are growing at a near record pace. Third, the imposition of taxes on Internet sales 

will make life for taxpayers and retailers far too complicated. 

1. There are enough taxes, fees, and other charges on telecommunications 

services and adding more is heading in a counterproductive direction. 

Cutting taxes, especially those levied on telecommunications and e-commerce activities, is beneficial to consumers. Both the public and private sectors have benefited significantly from the deregulation of the telecommunications industry and 

from the productivity gains made possible by telecom products and the Internet. 

Yet, the National Conference of State Legislatures reported last February that nearly 11,000 state and local governments levy taxes or fees on telecommunication activities, including franchise taxes, utility taxes, line access and right-of-way charges, 

911 fees, relay charges, and maintenance surcharges.1 A Federal Communications 

Commission survey of 95 metropolitan areas determined that the average tax rate 

levied by all governments on a phone bill was 15.7 percent. In Richmond, Virginia, 

the highest-taxing jurisdiction in the analysis, the rate approached 36 percent. 

In early trading this past Monday, the Nasdaq Composite Index was down 2.9 

percent, sinking below the 2,000-point level for the first time since December 16, 

1998.2 In the last twelve months, the Nasdaq has fallen nearly 60 percent. The last 

thing that a slumping technology sector needs is higher taxes on the industry and 

its consumers. In the interest of full disclosure, I must admit that I now have a personal stake in this issue. I learned late Sunday night that my brother-in-law who 

farms near Gann Valley, South Dakota, has decided to leave farming and will begin 

working for an ISP—which is probably not listed on the Nasdaq—in nearby 

Woonsocket, where my sister has been working for a mail order firm that sells duck 

decoys. The Internet touches the lives of people from all across the globe, including 

those on the Great Plains. Extending the Internet Moratorium will help technology 

firms, both large and small, including one in Woonsocket, South Dakota. 

Rather than placing hurdles in front of the telecommunications and e-commerce 

industries, Congress should instead consider reducing or eliminating tax barriers. 

Last year’s attempt to repeal the 103-year old telephone excise tax was a step in 

the right direction. NTU endorsed the Portman-Matsui bill, H.R. 3916, which the 

House passed 420 to 2 on May 25, 2000. Congress should move beyond the simple 

repeal of the 3 percent phone excise tax, and make the current moratorium on Internet taxes permanent, as well as establish the Internet as a tax-free zone for the sale 

of goods and services in perpetuity. 

Moving in the wrong direction will have significant consequences. In 1998, economist Austan Goolsbee found that the number of online shoppers would fall by 25 

percent, and the amount of dollars spent would plunge by 30 percent, if existing 

sales taxes were applied to Internet purchases.3 Last year, a poll of 1,016 America 

Online subscribers found that two-thirds said ‘‘they’d be a lot or a little less likely 

to shop online if their purchases were subject to a uniform sales tax.’’ 4 The Internet 

69

5 Nicholas W. Jenny and Elizabeth I. Davis, ‘‘Fiscal 2000 Tax Revenue Growth: Strongest of 

the Last Decade,’’ State Fiscal Brief, No. 61, The Nelson A. Rockefeller Institute of Government, 

February 2001.

is a shopper’s dream. In addition to offering just about every product imaginable, 

it allows consumers to compare prices, products, and providers quickly and easily 

with little out-of-pocket expense. Consumers no longer need to spend time driving 

from mall to mall looking for the best possible deal since the deals literally come 

to them—a definite benefit to those who may be homebound or may have difficulty 

traveling to shopping centers. Haggling is virtually eliminated because a better 

price is just a click away. Shackling the Internet with additional taxes will push 

many consumers offline, and for those who are able, back into their cars. 

Any scheme that intends to simplify, streamline, or to make sales taxes ‘‘fairer’’ 

online is just one step away from trampling the Supreme Court’s 1992 Quill ruling. 

Consumers should be wary of this backdoor attempt to run roughshod over the 

Court’s restrictions on taxing phone and catalog sales. If such a system of 

extraterritorial collection is allowed, Congress will have opened the door to any 

number of potential tax cartels that will eventually harm rather than help taxpayers. 

2. The argument that state revenue coffers will be devastated is bogus. 

Despite assertions to the contrary, taxpayers are already chipping in more than 

their fair share, and state government coffers are flush with cash. According to The 

Nelson A. Rockefeller Institute of Government, state tax revenues grew 8.7 percent 

in Fiscal Year 2000. This represents the second largest year-over-year increase in 

the last decade, after adjusting for inflation.5 Even when adjusting for the impact 

of legislated tax cuts, states have continued to see strong year-over-year revenue 

growth for the last eight fiscal years (See Figure 1). 

Those who support broadening the ability of states to collect sales taxes on remote 

retailers suggest that the potential rise in e-commerce will deprive states of billions 

of dollars in needed revenue and that essential government services will suddenly 


314dir1.eps
70

6 Andrew Caffrey, ‘‘States at Odds Over Web Taxes,’’ The Wall Street Journal, March 7, 2001, 

p. B3. 7 United States Department of Commerce, ‘‘Retail E-commerce Sales in Fourth Quarter 2000 Were $8.7 Billion, Up 67.1 Percent from Fourth Quarter 1999, Census Bureau Reports,’’ Press 

Release, February 16, 2001, http://www.census.gov/mrts/www/current.html. 8 United States General Accounting Office, Sales Taxes: Electronic Commerce Growth Presents 

Challenges; Revenue Losses Are Uncertain, June 2000, p. 3. 9 John Connor, ‘‘‘Internet Tax Freedom’ Bill Proposed in U.S. House, Senate,’’ Dow Jones 

Newswires, February 8, 2001. 10 National Governors Association, ‘‘Streamlined Sales Tax Project Gains Momentum,’’ Press 

Release, March 8, 2001. http://www.nga.org/nga/newsRoom/

1,1169,ClPRESSlRELEASE^Dl1453,00.html 

disappear.6 This scare tactic serves the interests of those who wish to raise taxes 

and expand government, yet the Department of Commerce reports that retail e-commerce sales in calendar year 2000 totaled $25.8 billion, or just 0.8 percent of all retail sales.7 While states believe the information super-highway to be paved with 

gold, it is important to remember that many online transactions, such as businessto-business sales and online services, would not be taxable in most states, resulting 

in far lower revenue gains than expected. In its report from last year, the General 

Accounting Office noted, ‘‘Little empirical data exist on the key factors needed to 

calculate the amount of sales and use tax revenues that state and local governments 

lose on Internet and other remote sales. What information does exist is often of unknown accuracy.’’ 8 As Senator Wyden correctly observed when introducing the 

Internet Tax Nondiscrimination Act, ‘‘Not a single community has come forward and 

proved that it is being injured by its inability to impose discriminatory taxes on 

electronic commerce. There is no evidence that the states have lost revenue by technology-driven economic activity.’’ 9

3. Attempts to simplify and harmonize sales tax codes will make life far too 

complicated for taxpayers and retailers. 

Any tax simplification scheme will require an extremely large table to ensure that 

everyone who has an interest in the discussion has a seat. If an agreement among 

the 46 states that impose a sales tax was all that was needed, the process might 

only be somewhat painful. However, there are an estimated 7,458 entities, including 

cities, counties, and other jurisdictions, that impose a sales tax (See Figure 2). Obtaining agreement among all jurisdictions would seem virtually impossible.

The ensuing debate among these entities will make past attempts by the European Union to set standards for what constitutes ‘‘marmalade,’’ ‘‘mayonnaise,’’ or a 

‘‘cucumber’’ seem like a pleasant tea party in comparison. Variances in statutory 

definitions will force states to develop a new common definition for all goods available on the Internet, leading to questions about whether chocolate candies are a 

food and should be taxed as such. Ironically, a press release from the National Governors Association (NGA) expresses their support for a simplified sales tax structure 

by highlighting the difficulties associated with taxing a marshmallow. NGA argues 

that the definitional differences across various states make it ‘‘very difficult for retailers to calculate, collect, and remit taxes on transactions that are done in multiple locations.’’ 10 Actually, there is a very simple way to avoid this problem: do not 

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314dir2.eps
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11 Adam D. Thierer, ‘‘The NGA’s Misguided Plan to Tax the Internet and Create a New National Sales Tax,’’ The Heritage Foundation Backgrounder No. 1343, February 4, 2000. 12Governor’s Executive Budget 2001–2002, Commonwealth of Pennsylvania, p. D42. 13 Ibid. 14Peter J. Sepp, ‘‘NTU Official Serves on IRS Reform Panel,’’ Dollars & Sense, August 7, 1996, 

p. 4. 15 Cited in Shelley L. Davis, Unbridled Power (HarperBusiness) 1997, p. 48. 16 Ibid.

payer money that will be consumed by endless wrangling over definitions for 

candies and marshmallows. 

Again, taxpayers should be wary of attempts to harmonize or simplify tax structures across state boundaries. Once tax officials have ‘‘simplified’’ the system for 

Internet sales, then the next step is to impose the structure on mail order sales, 

and then extend it to all retail purchases. This last step is the ultimate goal of 

NGA’s simplification proposal. It is conceivable that under this simplified tax 

scheme, Equal Protection and Commerce Clause concerns will arise, and local merchants will be required to collect and remit out-of-state sales taxes when selling 

goods across the counter to customers from another state.11 Creating more paperwork and headaches for all business owners is not our idea of making something 

simple. 

Additionally, one must ask whether it is wise to end tax competition among 

states. The current sales tax structure allows states and localities to determine taxing priorities, allowing tax bases and rates to vary as legislative bodies see fit. Before joining NTUF, I worked as a Revenue Analyst for the Commonwealth of Pennsylvania’s Department of Revenue, which like many states, has chosen to exempt 

certain activities or industries from sales and use taxes. For example, ‘‘Tangible personal properly used directly in the production of a feature-length commercial motion 

picture distributed to a national audience is exempt from taxation.’’ 12 Why does the 

Commonwealth provide this exemption? It wants to encourage commercial films to 

be made in Pennsylvania. Via another exclusion, the Commonwealth exempts foundations for machinery and equipment in an attempt to prevent multiple taxation 

‘‘which could occur in the production of a finished good for consumption.’’ 13 The 

Commonwealth also provides sales tax exemptions for bakers and horse breeders, 

in addition to numerous others. NTU frequently receives letters and email messages 

from individuals who are considering relocating and want to find information on 

state and local tax burdens. These individuals see tax competition among states as 

extremely beneficial. Adopting a scheme to harmonize and simplify sales taxes 

structures would kill a state’s competitive tax advantage, trample that state’s sovereignty, remove incentives to keep taxes low, and hurt taxpayers in the process. 

Even if a consensus agreement on what constitutes a marshmallow and how it 

should be treated under a simplified system does emerge, new software to track, collect, and remit revenues will be required. Should anyone believe that this process 

would be simple or smooth, I would point out the difficulties in revamping the Internal Revenue Service (IRS). By our count, the IRS has reorganized itself 29 times 

since 1952.14 According to the Service’s 1984 annual report, ‘‘Within the next five 

to ten years we will have a totally redesigned tax administration system. Paper tax 

returns can largely be a thing of the past.’’ 15 Yet, in 1996, the IRS announced that 

after having spent more than $4 billion to modernize its computer systems that its 

efforts were ‘‘badly off track.’’ 16 During my time as a Department of Revenue employee, the Department contracted with a private consulting firm to develop a Pennsylvania sales and use tax model to aid in forecasting tax collections. After nearly 

two years of development and testing the model, the Department was still not satisfied that the package could accurately model sales transactions in the Commonwealth. Writing software to address the collection and remittance needs of 7,500 

governmental entities will be a programmer’s nightmare and a potential taxpayerfunded boondoggle. 

Add the uncertain economic impact that blanket Internet taxes could have on this 

dynamic sector, and the message to Congress could not be more clear. Congress 

should declare this tax territory ‘‘off limits’’ by extending the Internet Tax Moratorium and preventing states from imposing sales taxes on online transactions.

The CHAIRMAN. Thank you very much. We will take a break. We 

are not sure whether we have two votes or three votes, but we will 

be back as soon as possible to have questions for the panel, and we 

thank you for your patience. We will take a brief recess. 

[Recess.] 

72

The CHAIRMAN. We will resume. Would the witnesses please regain their seats. 

Mr. Julian, what costs should be considered in determining 

whether various modes of retail transactions are on a level playing 

field? 

Mr. JULIAN. What costs should be considered? I think, Senator, 

it is the entirety of the cost of collection, which is not only the cost 

of the software, but the cost of employees in the company’s tax department to file tax returns, the cost of companies involved in 

training their sales associates to deal with tax issues as they arise 

on the sales floor, or if it is a remote seller, to train their telephone 

operators and so forth, in the cost of administering the audits and 

litigation that follow from the tax collection. 

The CHAIRMAN. Mr. Lowy, if it is so easy for mainline retailers 

to set up subsidiaries to avoid sales tax responsibilities, why is this 

option not their principle pursuit, rather than one of arguing for 

the states’ abilities to broaden their sales tax collections? 

Mr. LOWY. Well, if you look at it, Mr. Chairman, a number of the 

major retailers who have dot com subsidiaries were previously collecting sales taxes on some of those subsidiaries, and Wal-Mart, 

which is a member of ours, was one. They are now moving to a position where they are setting up their dot com subsidiaries and separate subsidiaries, the dot com retailers, and starting to go into the 

system of not collecting sales taxes. 

The CHAIRMAN. Mr. Comfort, is it imperative that Congress act 

to extend the moratorium imposed by the Internet Tax Freedom 

Act before it expires in October? 

Mr. COMFORT. Yes, sir, Mr. Chairman. Amazon.com would 

strongly endorse the extension or permanency of the moratorium. 

The CHAIRMAN. Ms. Harchenko, what do you think of the proposal for one tax rate and one tax base per state for all types of 

commerce? 

Ms. HARCHENKO. Mr. Chair, we believe that retailers should not 

have to figure out rates, but the work in the streamline sales tax 

project is designed to eliminate the need for retailers to figure that 

out by having the states provide them a database that will deal 

with those rate issues and if the retailers rely on the database they 

will be held harmless from any errors. 

The CHAIRMAN. Mr. Dircksen, some of the state and local government officials argue that Internet sales will eventually force their 

sales tax systems to become obsolete, and inefficient for raising revenue for state and local governments. Besides your inherent opposition to taxes per se, what is your response to that? 

Mr. DIRCKSEN. Thank you, Mr. Chairman. We would argue that 

primarily what you will see, the concern is, as the Governor said 

this morning, is balance, that you will see a dramatic shift, and 

there will be virtually ghost towns on Main Street and everyone 

will be purchasing online. 

We do not believe that to be true. Primarily what we suspect will 

be that e-commerce sales, online transactions will replace most of 

the catalogue sales, and so states will be no worse off than they 

currently are. 

The CHAIRMAN. Would you agree that we are in a, quote, worsening economy right now? 

73

Mr. DIRCKSEN. I would, Mr. Chairman, yes. 

The CHAIRMAN. That means that retail stales, in a worsening 

economy, none of us know whether it is a V or a U or an L, but 

would you agree that there will be a reduction in retail sales as 

part of this, at least temporarily, we all pray, temporarily worsening economy? 

Mr. DIRCKSEN. That would seem most likely, yes. 

The CHAIRMAN. And if I was a smart shopper and I had less 

money, and I went into Wal-Mart and I saw a piece of whatever 

it is I wanted to buy, and I knew that very close by there is a computer, would you not see an increase in this activity, coupled with 

the continuing forever increase in computer usage on the part of 

American citizens? 

Mr. DIRCKSEN. That may be a possibility, and states can look 

into collecting use taxes. However, one thing to keep in mind is 

that there is an additional cost to most online transactions, in 

terms of, you may not pay direct sales tax, but few companies deliver it to your door without charging you shipping and freight, so 

the difference between sales tax and your total bill when you include shipping may be extremely negligible, so that it really does 

not affect or distort customer behavior that significantly. 

The CHAIRMAN. Mr. Lowy, I am on vacation in California, which 

a lot of my constituents have a habit of doing in the summer, given 

the mild climate in Arizona in the months of June, July, and August, but I still maintain my residence in the State of Arizona, so 

I get on the Internet and I order something over the Internet from 

L. L. Bean, which is delivered to me in California. What is the tax 

situation there? 

Mr. LOWY. Well, if you order it over the Internet, obviously you 

use a credit card to pay for it. That credit card will have a billing 

address, and if that billing address is your home address in Arizona, then they should charge you Arizona use taxes for that purchase. 

The CHAIRMAN. Then why have we had so much trouble with 

catalogues, with mail order catalogues? 

Mr. LOWY. I think the issue, when you look at it, is that before 

the states had started going into the simplification process, the argument of complexity was a very legitimate argument to use at the 

time, but as with the states moving to their simplification process, 

if you simplify the system, and then you use the technology that 

is in place today, that the burden on the retailers, both online and 

physical retailers can be lessened substantially so that the burden 

will be, not zero, but almost de minimis for them to be able to collect those sales and use taxes. 

The CHAIRMAN. Mr. Comfort, do you have a different view? 

Mr. COMFORT. Senator, I do not know that I have a different 

view of the general statement, but we have a concern about what 

it means to achieve simplification. 

I would also suggest that the use of the billing address raises 

other concerns that Members of the Committee have expressed 

about creating Cayman Islands problems. It is not terribly difficult 

to get a credit card with a billing address at a post office box in 

the Cayman Islands, so I am not sure that the billing address 

would be the right way to go. I think a five-digit zip code for the 

74

shipping address might be the better way, if you were going to do 

it. 

Our concern is that we not be put in the position of having to 

deal with the same regime under a new name, be it streamlined, 

or simplified, or whatever, and that Congress clearly establish the 

criteria it needs before the approval for remote sales collections is 

provided. 

The CHAIRMAN. Well, I want to apologize to the panel for having 

to leave. I will, however, turn you over to the tender mercies of 

Senator Dorgan, who is the—perhaps the single most knowledgeable—he and Senator Wyden and Senator Kerry are the most 

knowledgeable on this issue. 

I want to thank you for your patience today. I want to thank you 

for your testimony, and as I mentioned earlier there are two major 

issues that face this Committee and this Congress on the Internet, 

and both are very difficult. One is Internet tax and the other is 

Internet privacy, and we thank you for your contributions and continued communications with us as we work our way through this 

particular issue. 

Senator Dorgan. 

Senator DORGAN. Mr. Chairman, thank you very much. I will ask 

questions and then adjourn the hearing, and let me again thank 

you for the courtesy of having the hearing. 

Mr. Lowy, some witnesses have said that this issue of fairness 

is really pretty irrelevant, and the issue of the impact on brick-andmortar sellers is irrelevant. Characterizing their argument, there is 

really nothing happening here. There are not lost sales. In fact, 

people are shopping on the Internet and then going and buying in 

brick-and-mortar stores. 

Mr. Comfort I am sure was gritting his teeth when he heard that 

statement, but nonetheless, people are saying that this is all—this 

fairness and lost sales, this is all a mirage. 

Can you respond to that? 

Mr. LOWY. Yes. I think if you look at the issue, we have never 

come into the argument saying that the brick-and-mortar retailers 

are going to be devastated by the online retailers. What we did say 

is that the online retailers compete with brick-and-mortar retailers, 

and that competition is unfairly influenced by the lack of collection 

of sales taxes over Internet sales. 

But I think if you look at where the business model has gone 

today, I think the arguments and the discussion needs to change, 

because with the advent of the dot com subsidiary, and the ability 

to avoid nexus by having a physical retailer who has an online 

store actually have a screen in their store, with the ability to bypass the sales tax system, creates issues that need to be dealt with. 

Senator DORGAN. Ms. Harchenko, your state does not have a 

sales tax, and so some would say you really probably have less at 

stake as a state. However, you are chairman of the Multistate Tax 

Commission, and I know you speak for a number of states, and the 

interests of a number of states on tax enforcement issues. 

The suggestion has been made by Mr. Julian that there needs to 

be dramatic simplification, and if we move down this road, and I 

frankly have some sympathy with that. I think it was Mr. Comfort, 

in discussions we had previously, who said to me—or his staff, one 

75

or the two, said to me that in one zip code in Colorado there are 

five separate sales tax rates, in one zip code. Now, that is complexity, so we do not want someone mailing a product into that zip 

code as a part of a remote sale to have to try to figure out which 

one of the five rates do I apply, and if they make the wrong decision, be held accountable for it. 

Do you generally agree that there needs to be substantial simplification here if the Congress is going to proceed to allow the 

states to force a collection on use taxes? 

Ms. HARCHENKO. Yes, Senator, and that is one of the objectives 

of the streamline sales tax project, is to be able to provide a database so that the retailer does not have to sort their way through 

it. 

We have precedent that the Congress has already enacted in the 

Mobile Telecommunications Sourcing Act, whereby the states agree 

to provide databases to the industry so that industry people do not 

have to be concerned about guessing and guessing wrong, and that 

is one of the fundamental objectives of the streamline project as 

well, is to take that risk of not knowing away from the retailers, 

put it on the states, and hold the retailers harmless if they use the 

state database. 

Senator DORGAN. You notice that in the legislation my colleagues 

and I have introduced we have a study dealing with the issue of 

compensation to retailers, not just remote sellers, especially remote 

sellers, but all sellers. How do you feel about that? 

Ms. HARCHENKO. Senator, the Multistate Tax Commission voted 

at a recent meeting to engage and financially report such a study, 

so we are ready to be full participants. 

Senator DORGAN. I think it is fair. I mean, there clearly are compliance issues. There are costs that businesses have, and it is one 

of the reasons we have a de minimis in the legislation I have introduced. I do not want someone who starts up and is only selling a 

couple of hundred thousand dollars worth of goods to be confronted 

with the requirement to comply with a wide range of tax authorities. 

But in any event, I just wanted to make the point that the work 

the Multistate Tax Commission does is good work. I appreciate 

their leadership, but I want you to know that as a supporter of 

your work I also feel strongly that if the Congress is going to do 

something that extends their reach with respect to the collection of 

use taxes upon remote sellers, then we must require simplification, 

real simplification, not simplification in name, but real simplification. In my judgment, that is a requirement. 

Mr. Dircksen, you testified that the technology sector is weak, 

and I agree that is the case. Would that have altered your testimony, however? I mean, would you, a year-and-a-half ago when the 

technology sector was strong, have said anything that is at odds 

with what you have just described today? 

Mr. DIRCKSEN. Not likely, Senator. 

Senator DORGAN. That is just an observation? 

Mr. DIRCKSEN. It is an observation. It is a concern, though, that 

a struggling technology sector that is based on business-to-business 

transactions, or business-to-consumer retail transactions, needs not 

76

to be shackled with additional taxes, or additional requirements 

such as the Internet. 

Senator DORGAN. In your statement you did something similar to 

the Lieutenant Governor of Massachusetts. I again want to make 

sure you understand, the issue is not about any new taxes. There 

is nothing that was discussed here today that represents a new tax. 

A tax exists on the transaction. Do you agree with that? 

Mr. DIRCKSEN. That is correct, Senator. That is true, and it is up 

to states to collect and enforce their own use tax, and if they decide 

not to enforce that, then we do not believe it is appropriate for 

states to come to the Federal Government and say, force us, or 

force our taxpayers to pay us what they owe us. It should be up 

to the states. 

Senator DORGAN. Do you believe those use—well, states, actually 

no state that I am aware of—I would ask you, I guess. Are you 

aware of a state that has decided not to enforce their use tax? No 

state that I am aware of has made that decision. 

Mr. DIRCKSEN. I do not believe any state that has a use tax on 

the books has repealed a use tax. 

Senator DORGAN. But are you aware of any that have decided 

they will not enforce it? 

Mr. DIRCKSEN. Other than South Dakota, where Governor 

Janklow has suggested stopping all the UPS trucks coming into the 

state and examining them for possible use tax collections, I do not 

know that any state really makes a significant effort to really track 

down use tax collections. 

Senator DORGAN. Right, and the point I am making is they have 

not made an affirmative decision not to collect use taxes. The reason use taxes are not collected is because it is impossible to collect 

use taxes against millions and millions of purchasers on individual 

purchases. 

I will not ask you whether you have shopped on the Internet and 

whether you filed a use tax report with a state. 

Mr. DIRCKSEN. Thank you, Senator. I appreciate that. 

[Laughter.] 

Mr. DIRCKSEN. But I would point out in terms of fairness and 

simplification, you know, the concern is, again, from when I was 

with the Commonwealth of Pennsylvania, when is a phone tax calling card taxable and when is it not taxable? For the Commonwealth of Pennsylvania, phone tax cards are not subject to sales 

tax, except when maybe they are a collectible item because all the 

taxes are based into your using the minutes on the card, but if it 

has Michael Jordan on the cover, and you may never open the 

package, and you may never use the time, and you may never pay 

the taxes, well then, should that item be subject to sales tax? 

These are the types of discussion that go on within state government about, well, how do you define what is taxable, what is not 

taxable, and the idea that, well, we need to streamline and simplify 

and get all taxing jurisdictions to agree to a common standard, I 

think is going to be extremely difficult, and will represent burdens 

for both taxpayers and for businesses. 

Senator DORGAN. I agree if you go over to the edge and start 

spending all of your day defining the edge issues, you can have 

that kind of discussion, but if you go to the middle and describe 

77

the purchase of something that is more common, and which is 

taxed in every jurisdiction, and which the application of the tax is 

pretty straightforward, you will not have that kind of discussion, 

but the point is, to the extent that we move in this direction, we 

should require simplification. 

Mr. Julian, your testimony sort of straddles both sides of this 

issue, and I thought it was interesting testimony. You are representing a corporation that I assume does business as a brick-andmortar seller and also does business with respect to remote sales, 

is that correct? 

Mr. JULIAN. The vast majority of business, Senator, is brick-andmortar department stores, but we do have a growing direct-to-consumer business. In terms of, to address the issue of competitive advantage, we were one of the first companies to have a catalogue 

subsidiary with Bloomingdales by Mail, and back in the eighties, 

states were aggressively going after the catalogue subsidiaries to 

try to require them to collect tax. 

At that point in time, our business belief was that it was best 

for that Bloomingdales by Mail subsidiary not to have to collect 

tax, so we structured that business in a very precise manner so 

that we did things that would not create nexus in other states. 

We spent literally over $1 million litigating that issue in states 

that came after us. We succeeded in the litigation. The supreme 

courts of two states ruled that we did not have nexus and therefore 

were not required to collect tax in those states. 

As time went on, from a business standpoint our management 

wanted to do some things like put the catalogues in stores, things 

that would have created nexus. They were concerned about the effect that would have on the sales of the Bloomingdale’s by Mail 

subsidiary, so we did it, we put the catalogues in the stores, we 

registered to collect tax in every state where there is a 

Bloomingdale’s store. 

We looked at it very closely, and we were surprised on two accounts. Number one, we thought that we would see a decrease in 

sales because we were now collecting tax in those states. We did 

not see that decrease in sales, but the bigger surprise was, we 

grossly underestimated the cost of collecting the tax in those states, 

and there we are only talking 10 states. 

Senator DORGAN. And that is the point that Mr. Comfort, testifying on behalf of Amazon and others make, and I think it is a fair 

point. 

Mr. Comfort, I happen to be a customer, and I like the one click, 

and you know, there is a convenience. I also shop at bookstores and 

other outlets that sell the merchandise you sell, but I shop online 

as well, and I recognize that your testimony, your company’s representation, at least to me, has been you do not object to being required to collect taxes that are owed on a transaction, but you do 

not want to be in a position as a company of having to deal with 

thousands and thousands of different jurisdictions that have a different base, different rates, in some circumstances multiple rates 

where you really cannot determine exactly what rate should be applied, and you want to be held harmless in circumstances where 

you have that uncertainty. 

78

I agree with all of that. I understand all of that, and I think your 

position is a very responsible position for the company to take, and 

I believe very strongly that we will reach some kind of an agreement on this Committee. I do not know exactly where it goes from 

there, but we will reach an agreement by which the extension of 

the moratorium, which I support, which prohibits taxing access, 

prohibits punitive and discriminatory taxes, will be accompanied by 

a mechanism that mandates and requires a simplification process 

that is real, number 1, and then number 2, the requirement for collection of taxes that are already owed as a result of that simplification. 

I want to make one additional point, because I do not know that 

it has been made here this morning. The streamlining process I 

think is encouraging. I think states are moving in a way that is 

encouraging, Ms. Harchenko, but I also must tell you that there 

are some discouraging signs from time to time. 

There are groups and local governments who say, do not tread 

on me, do not do anything that will make me uncomfortable, and 

so you have got five or six different organizations and groups representing local governments—I will not mention them all, but having different positions on simplification. 

That cannot be the case. Ultimately they are all going to have 

to come to the same conclusion. All the spotlights are going to have 

to shine on the same spot with respect to simplification, and not 

everyone is going to get what they want with respect to local governments, and I am a big supporter of the local prerogatives of 

state and local governments, but I am also going to insist as we 

proceed here that we proceed in a way that requires fairness, and 

requires also simplification. Those are twins that must move together. 

So I wanted to say that there is a lot of misinformation about 

this, the issue of new tax and all of these issues. The one piece of 

misinformation that I think existed at this hearing again today and 

traditionally exists is the Supreme Court has ruled a certain way 

and what Congress is trying to do is overturn the Supreme Court 

ruling. In fact, that has been said again today. 

That is fundamentally wrong. It is unsound and in my judgment 

uninformed reading of the Supreme Court decision. The Commerce 

Clause gives Congress, and only the Congress, the opportunity to 

say to the courts, or say to the states, rather, here is the basis on 

which you are able to describe nexus. Only the Congress can give 

that opportunity to the states. 

Now, some state and local folks will disagree with me. They believe the courts have said that they do certain things, mind their 

manners, and make their changes, that they eventually will be able 

to get through that door by themselves. I do not think there is a 

chance of that happening. I disagree with them. But Congress does 

have the requirement, if it chooses, to say to the states, here is how 

we describe nexus for you. 

So that is what the Supreme Court issue was. It is not overturning the Supreme Court. It is simply saying to the states, this 

is not your prerogative. It is the prerogative of the U.S. Congress 

and only the U.S. Congress. That is why we have a hearing, that 

is why we have legislation. 

79

Your testimony is very important to us, those who support and 

those oppose these issues. It is very important to get a full record 

established, and the chairman and I and Senator Wyden and Senator Kerry and others have been meeting, and we will meet some 

more as a result of this hearing, and I do remain hopeful that we 

will find a way to solve several issues, 1) simplicity. I do not want 

in any way to injure those who are involved in Internet commerce. 

I think it is a wonderful new way to extend and to provide outreach 

and give the American people new opportunities. 

I also do not want in any way to have a tax system that is unfair 

to Main Street. A lot of mom and pops across this country have 

risked their all and have their entire investment in their business, 

and there is enough of a Jeffersonian Democrat in me to believe 

that broadbased economic ownership in this country still represents 

the hallmark of both economic freedom and political freedom, and 

so I want to be sure that we are fair to Main Street businesses. 

Then I want to be sure that we are fair to the states to have an 

opportunity to collect the revenues that are owed, to be able to support state and local education initiatives that are very important 

to me. 

So with that, let me thank all of you very much. Your testimony 

was very informed and interesting, and this hearing is adjourned. 

[Whereupon, at 12 noon the Committee adjourned.] 

(81)

APPENDIX

PREPARED STATEMENT OF ARTHUR R. ROSEN ON BEHALF OF THE COALITION FOR

RATIONAL AND FAIR TAXATION

Thank you for this opportunity to address certain issues of state taxation that 

have reached critical importance due to the expansion of electronic commerce. I am 

Arthur Rosen and am a member of the international law firm of McDermott, Will 

& Emery. I respectfully submit this testimony on behalf of the Coalition for Rational 

and Fair Taxation (‘‘CRAFT’’), a diverse coalition of some of America’s major corporations involved in interstate commerce, including Internet companies such as 

Cisco, Microsoft, and America Online; broadcasters such as ABC/Disney and CBS/

Viacom, electronics manufacturers such as Sony Corporation of America, interstate 

retailers such as J. Crew Group and Sara Lee Corporation, publishers, financial 

services businesses, and other major businesses engaged in interstate commerce, 

such as Eastman Kodak. Many of my partners and I at McDermott, Will & Emery 

have been deeply involved in many of the relevant state tax issues, having successfully represented the taxpayer in such landmark Supreme Court cases as Quill, 

ASARCO, and Woolworth.

CRAFT urges that you not attempt to address Internet-related taxation issues 

without establishing national standards for when a state or locality can impose business activity taxes, such as income and franchise taxes, on businesses located in 

other states. 

One of the principal recommendations of the Advisory Commission on Electronic 

Commerce majority report was that business activity tax nexus issues be addressed, 

along with the moratorium on Internet access taxes and sales tax simplification. We 

applaud Senator Gregg and Senator Kohl for their leadership in this effort, by introducing the New Economy Tax Simplification Act last Congress. We understand that 

they plan to re-introduce similar legislation shortly. We strongly urge the Members 

of this Committee to consider their legislation before acting in this area. 

Constitutional Framework 

The principal motivation for our adoption of the Constitution to replace the Articles of Confederation was a desire to establish and ensure the maintenance of a single, integrated, robust American economy. This is reflected in the Commerce Clause, 

which, as you know, provides Congress with the authority—and the responsibility—

to safeguard this principle. Perhaps the hallmark of American federalism is this assignment to the Federal Government (along with responsibility for foreign affairs 

and the national monetary/fiscal system). Accordingly, legislation regarding imposing, regulating, or removing tax burdens placed on transactions in interstate commerce is not only within Congress’ realm of authority, it is also Congress’ responsibility. Thus, there is absolutely no validity to the argument raised by some state 

and local tax officials to the effect that Congress should abdicate its responsibility 

and leave these issues to the states. Those who claim that congressional activity in 

this area violates the principles of federalism are simply wrong. 

As a second point in the context of the fundamental principles to be considered, 

it is important to remember that while Congress has Constitutional authority and 

responsibility under the Commerce Clause, it may be constrained by the confines 

of the Fourteenth Amendment’s Due Process Clause. While it is far from clear, most 

commentators believe that Congress cannot permit states to violate the protections 

afforded by that clause. In the context of state taxation, the Supreme Court has determined that Due Process means that ‘‘the simple but controlling question is 

whether the state has given anything for which it can ask return. ’’ Wisconsin v. 

J. C. Penney Co., 311 U. S. 435 (1940). 

Policy Concerns 

Turning to the overarching, fundamental, crucial policy issues, there is one that 

I believe warrants substantial, focused congressional consideration. 

This policy issue relates to business activity taxes. There has been a great amount 

of discussion and publicity regarding sales and use tax nexus issues. These, howVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00085 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
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ever, are merely ‘‘the tip of the iceberg. ’’ While collecting tax from customers and 

remitting it to governmental units pursuant to numerous inconsistent laws is quite 

a burden, it pales in comparison to the immense burden that is faced by a remote 

seller that must compute and pay income, franchise and license taxes to every jurisdiction where it has a customer. Such a situation not only causes huge administrative burdens as with the sales tax, but also imposes true, substantial economic hardship for interstate businesses. 

As background, it should be noted that states, like governments worldwide, have 

traditionally imposed their corporate income and/or franchise taxes (‘‘business activity taxes’’) only upon businesses that receive governmental benefits and protections 

afforded by the jurisdiction. This has meant that businesses maintaining offices, inventory, employees or agents in a state would be subject to business activity taxes 

in return for the benefits and protections afforded by the taxing state to the businesses’ people and their property. Corporations could develop and carry on interstate business knowing that only their activities and presence in a state would incur 

a business activity tax liability, fostering a business environment without artificial 

market barriers that would retard economic growth. 

Over 40 years ago, Congress passed legislation to ensure that states could not tax 

the income of out-of-state corporations whose in-state presence was minimal. Public 

Law 86–272 set uniform, national standards for when states could and could not impose such taxes. However, like the economy of the time, Public Law 86–272 was directed at sales of tangible personal property. 

Recently, however, a large number of states have been alarmingly aggressive and 

‘‘creative’’ in attempting to expand the reach of their business activity taxes to burden those businesses that are not provided with any measurable governmental protections or benefits by the taxing state. These states are seeking to tax the income 

of out-of-state corporations carrying on virtually no income-producing activity in 

those jurisdictions, for activities involving intangible property and services. 

For example, these efforts have resulted in the imposition of business activity 

taxes by several states on out-of-state corporations that merely licensed trademarks 

to another corporation for use in the state, but itself carried on no activity and had 

no tangible property or personnel there. Another state attempted to impose business 

activity taxes on an out-of-state bank issuing credit cards to residents based largely 

upon the possession of the plastic credit cards by the state’s residents. In yet another instance, a state Comptroller attempted to impose the state franchise tax upon 

a company whose only contact with the state was its possession of a certificate of 

authority to do business within the state. In other instances, states have attempted 

to impose business activity taxes when corporations merely have held passive investments in operating businesses, owned accounts receivable payable by residents, 

and performed services for residents even though the services were performed in another jurisdiction. 

In this period where the rapid growth of e-commerce will shape the economy of 

the 21st century, these efforts by states to expand their taxing jurisdiction to cover 

activities conducted in other jurisdictions will constitute an even greater burden on 

the business community’s ability to carry on business. Left unchecked, this expansion of the states’ power to impose business activity taxes will have a chilling effect 

on the entire economy as tax burdens, compliance costs, litigation, and uncertainty 

escalate. 

Consequently, a large portion of the business community is asking Congress to 

consider when state and local governments should and should not be permitted to 

require out-of-state businesses to pay income and/or franchise tax (‘‘business activity 

taxes’’). It appears eminently fair and reasonable for Congress to provide relief from 

unfair and unreasonable imposition of income and franchise taxes on out-of-state 

businesses that have little or no physical connection with the state or locality. 

The time has come to update Public Law 86–272 for the digital age. Ours has become a more service-oriented economy, and intangible property such as intellectual 

property now plays a much greater role in our economic output. Public Law 86–272 

must be modernized to include coverage of services and intangible property, and 

other refinements. 

The report of the majority of the Advisory Commission on Electronic Commerce 

agreed with the importance of accomplishing this goal. Those suggestions, if augmented by certain additional items that are set forth below, would establish a clear, 

understandable, administerable demarcation of taxation that is extremely less restrictive on the governments than the ‘‘permanent establishment’’ rule that the 

United States and most other countries have imposed on themselves in the context 

of international tax treaties. 

We strongly urge Congress to adopt the Advisory Commission on Electronic Commerce’s recommendation, and further suggest that Congress consider adding proviVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00086 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
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sions that would permit states and localities to impose tax only on companies that 

have either or both of the following types of presence in the taxing jurisdiction during the taxable year:

• Leasing or owning substantial tangible property in the jurisdiction for more 

than 30 days.

For purposes of this 30-day property rule, property in the taxing jurisdiction 

for purposes of being assembled, manufactured, processed, or tested by in-jurisdiction persons for the benefit of the owner or lessee, or used to furnish 

a service by in-jurisdiction persons to the owner or lessee, would be disregarded.

• Any number of employees or actual agents in the taxing jurisdiction for more 

than 30 days.

For purposes of this 30-day employee rule, presence of employees for purposes 

of purchasing goods or services, gathering news and covering events, meeting 

with government officials, attending conferences, seminars and similar functions, and participating in charitable activities would be disregarded. In addition, solicitation activities would be disregarded, as they are under current 

law.

It would appear that these business activity tax provisions warrant your support 

because:

• States have, in recent years, sought to expand their imposition of business activity taxes in an apparent challenge to generally understood Constitutional 

principles. Permitting such expansion would dampen business innovation and 

expansion, thus bringing harm to the American economy. The imposition of 

new, expanded tax liabilities on the business community would seriously undermine the ability of the U. S. economy to remain robust. Removing this contentious thorn from the American business community can only be beneficial to the 

economy.

• When a company’s presence in a state is minimal, it is not deriving material 

or meaningful protections or benefits from that state. The fact that a business 

may have customers in a state, or is itself a customer in a state, is a benefit 

to in-state persons who are already subject to tax. To assert, as some state officials have, that sellers reap an economic benefit from market states and thus 

should pay taxes there, flies in the face of an extremely elementary economic 

principle. That principle recognizes that a buyer in any market situation is, in 

his or her or its value system, obtaining more than is being given. Someone 

buys an item for $3 because the item is worth more than retaining the $3; the 

seller believes that the $3 is more valuable than the item. While this may sound 

somewhat academic and theoretical, it is how we all actually operate. Consequently, the seller is no more ‘‘taking advantage of’’ the buyer and the market 

state than the buyer is ‘‘taking advantage of’’ the seller and the production 

state.

• This proposal would have a de minimis fiscal effect. This is because state and 

local governments are currently collecting very little through their relatively 

new, but aggressive, attempts at expanding their tax jurisdiction over business 

activity taxes. All major attempts by states at doing so are currently the subject 

of intensive litigation.

These changes will remove impediments to the growth of e-commerce and interstate commerce generally, provide certainty to states and businesses and reduce 

wasteful litigation, and ensure that states which provide services to in-state businesses receive the income tax revenue which should rightly go to them. We look forward to working with the Committee to achieve these goals. 

PREPARED STATEMENT FOR THE RECORD BY THE

ELECTRONIC COMMERCE ASSOCIATION

In assessing and guiding the states’ effort to simplify their sales tax systems, it 

is important to recognize what is possible and efficient for technology to accomplish, 

on the one hand, and for the states to accomplish, on the other. For instance, it is 

tempting to define simplification by the standard of one tax rate per state, and to 

compel states to meet that standard. Yet overcoming the political hurdles of achieving one rate per state would be more difficult than overcoming the technological 

hurdles of calculating varying tax rates in a simple and cost effective manner. ComVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00087 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
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panies that create software to calculate sales taxes in various states soon will demonstrate that they have overcome the technological hurdles. 

That does not mean that state governments can or should let technology do all 

the work. The states need to agree on certain standards to avoid burdening merchants and the technology that they use. Participating states should simplify and 

standardize their sales tax systems by implementing the following:

• uniform product definitions

• simplified exemptions procedures for retailers

• uniform, electronic tax filing forms

• standard format for remittances

• statewide audits

• uniform rounding rules

• a central database for tax rates of all jurisdictions, which each state will maintain

• uniform and electronic registration for out-of-state retailers

• restrictions on frequency of rate changes and common start dates for changes

• elimination of or limitation on caps and thresholds for imposition of tax on certain items

The recommendations of the Streamlined Sales Tax Project incorporated most of 

these simplifications. 

The Electronic Commerce Association represents service providers for online merchants. The ECA has a task force composed of payment processing companies and 

other companies providing services to online merchants. The task force advises state 

organizations about potential problems they need to address in streamlining their 

sales tax system. 

PREPARED STATEMENT OF GROVER G. NORQUIST, PRESIDENT,

AMERICANS FOR TAX REFORM

Thank you for this opportunity to offer my testimony. I offer this testimony on 

behalf of our individual members, our network of over 3,000 state and local taxpayer 

groups nationally and taxpayers in general. As you may know, I was one of 19 members of the Advisory Commission on Electronic Commerce. This Commission was authorized by Congress to study federal, state, local and international taxation and 

tariffs on transactions using the Internet and Internet access. Our goal as appointed 

Commissioners was to bring each of our unique views and experiences to the table, 

to learn how other industries, representatives and groups utilize the Internet and 

the issues surrounding interstate commerce. These issues included the barriers to 

growing and cultivating this new marketplace and ways to eliminate these barriers. 

Policy proposals from the Commission to Congress required a two-thirds majority. 

Our discussions during this Commission are of merit now because we had before 

us the same questions you have before your Committee. Should the Internet be 

taxed? What should the Congress do in order to make taxing the Internet, and taxing sales over the Internet, easier or more difficult? Is there a role? Should taxing 

be easier? Can taxing possibly get more complicated? These are the questions I 

would like to respond to today. 

Others represent their company industry perspectives, and by extension what effects changes of law will have on them and how they will pass this on to consumers. 

For instance, the 3 percent federal luxury tax on telephone service—which is no 

longer a luxury—is passed directly through to the taxpayer. Telephone companies 

add an additional line item onto telephone bills, and while these companies shoulder 

the burden of charging and collecting these fees, it falls to working Americans to 

pay the tax. Telephone companies expend resources having to collect these fees, but 

on behalf of the taxpayer, I believe the bigger issue is that this is a tax, and every 

American will realize the benefit when Congress again votes to repeal it. I look forward to that vote again this year. 

Today, as a representative of the taxpayer I’m speaking against an additional tax 

on Americans. Extending unfettered state and local sales taxes to the Internet is 

a tax. This Committee is entertaining ways to take more money out of the pockets 

of hard working Americans rather than finding ways to return it, in light of the 

growing surplus. 

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The Federal Government is not the only governmental entity with a surplus. The 

states that will come before you and demand federal intervention in their laws so 

that they may add more money to their growing budgets also have surpluses. In addition, because most e-commerce is business-to-business or other exempt products 

not subject to sales taxes, the actual ‘‘loss’’ to state and local sales tax collection was 

one percent of sales taxes collected in 2000. There is certainly no shortage of tax 

revenues entering the budgets of the government on any level. And yet we’re discussing a tax increase. We should not be taxing Americans again. 

Furthermore, not only do state and local governments want to add additional 

taxes onto working Americans, they want Congress to devise a plan for them to implement it. Congress would in effect be the proponent of this additional tax. Local 

governments, storefront associations and tax commissioners have not been able to 

develop a plan they all can agree on, so they are now asking Congress to formulate 

it for them. Congress should resist these efforts and instead retain its sole ability 

to regulate interstate commerce as provided under the Constitution. State and local 

governments should not tax Internet transactions. 

The Internet’s most fascinating effect on America has been the nationwide marketplace that has developed. It is interstate commerce on a scale never imagined. 

The Internet and taxes placed upon this marketplace are directly within the realm 

of Congress and the Commerce Committee specifically. The Congress should monitor 

the system and ensure that no goods or services are unfairly taxed or discriminated 

against, in order to ensure regulatory certainty for new innovation and growth. 

Rather than implement an additional sales tax over the Internet, Congress should 

focus on the regulatory burden on sellers over the Internet. They are required to 

know the unique sales tax laws in each state and local jurisdiction that levies a tax 

and how to file and remit taxes to each of those jurisdictions. According to the Congressional Research Services, forty-five states and the District of Columbia have 

some type of sales tax. Additionally, of the 30,000 local jurisdictions that can levy 

taxes, approximately 25 percent have done so. 

In addition to simplifying sales taxes, Congress should demand that states simplify their business compliance taxes (e.g., income, gross receipts, and franchise 

taxes). In many cases, the myriad taxes placed upon telecommunications companies 

and the companies that supply the Internet backbone are discriminatory in nature. 

For instance, property taxes placed upon a neighboring business should be the same 

as those on telecommunications carriers. Sales taxes on phone bills should be no 

higher than the local sales tax. Gross receipts taxes should also not be taxed higher, 

or more often, than any other business in the state. As was provided for railroads, 

airlines, and trucking companies, telecommunications carriers who provide the backbone for interstate commerce should also not have discriminatory tax burdens. 

Finally, Congress ought to look at the definition of nexus. Defining this word in 

the new Internet marketplace would help alleviate the bureaucratic burden that 

some companies suffer under, especially those who only have a server or other computer equipment in certain areas, but nothing that under common sense definitions 

could be construed as ‘‘nexus.’’ Last Congress Senator Judd Gregg introduced a bill 

to this effect that could serve as a starting point for discussion this Congress. 

Contrary to what some tax hungry politicians will try to tell you, the Internet is 

not a threat to Main Street bricks-and-mortar businesses. It is a tremendous opportunity. The Internet allows businesses to offer more choices to a larger number of 

consumers than ever before. It also offers rural customers convenience and a broader selection. 

The Internet economy accounts for nearly one-third of our nation’s economic 

growth. As recent stock market fluctuations have amply demonstrated, government 

intervention in the high-tech marketplace creates fear and uncertainty among investors. We must stop tax hungry politicians from concocting a scheme to tax to death 

the goose that laid the golden egg and destroying our high-tech economy. 

As we enter the 21st century we have the opportunity and the ability to give consumers the full benefits of high technology without harming Main Street or state 

governments. The Advisory Commission on Electronic Commerce has pointed us in 

that direction, but we must all to our part to make sure that the Internet will remain free from the heavy hand of government taxation. 

Again, thank you for this opportunity. 

86

Massachussetts High Technology Council 

Hon. JOHN MCCAIN, 

Chairman, 

Committee on Commerce, Science, and Technology, 

U.S. Senate, 

Washington, DC.

Dear Senator McCain:

In 1997, the Massachusetts High Technology Council strongly supported passage 

of the Internet Tax Freedom Act. Today, the High Tech Council supports keeping 

the Internet as a tax-free zone in order to allow the growth of a high potential 

growth industry that has experienced setbacks in recent months. Therefore, we join 

Massachusetts Lt. Governor Jane Swift in urging Congress to extend the federal 

Internet tax moratorium set to expire this year. 

The Massachusetts High Technology Council is a non-profit, non-partisan corporation made up of 200 entrepreneurial and respected chief executive officers of Massachusetts high technology companies employing more than 200,000 people. Its goal 

is to help make Massachusetts the world’s most attractive place in which to live and 

work, and in which to create, operate and expand high technology businesses. 

It is essential that the Net not be tangled in a web of taxation. This is especially 

important to allow for the growth of an industry still in its infancy. Imposing taxes 

on the Internet, whether by the Federal Government or any of the 30,000 taxing 

jurisdictions around the country, would have grave consequences for many high tech 

employers in Massachusetts and across the nation. 

The High Tech Council also opposes a nationwide sales tax collection system, offered under the guise of ‘‘tax simplification,’’ because of its potential negative impact 

on businesses and consumers. Not only will it increase the costs of goods for consumers and prove a logistical nightmare for businesses (particularly small companies), the plan proposed by the National Governors Association would create another 

massive, intrusive tax collecting bureaucracy. As Lt. Governor Swift said in her testimony, ‘‘One IRS is enough for Washington.’’

Thank you for your consideration of this matter of the utmost importance to the 

nation’s economy. 

Sincerely, 

CHRISTOPHER ANDERSON, 

President. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. JOHN MCCAIN TO

HON. JIM GERINGER

Question 1. Governor Geringer, your testimony says that ‘‘the states have already 

begun to cooperate to simplify state and local tax systems.’’ I assume you are referring to the efforts of the Streamlined Sales Tax Project, which has developed model 

legislation for states to adopt. I am told, however, that some of the adopting states 

have chosen not to enact uniform definitions for taxable goods—a simple and basic 

piece of the package—much less simplify the myriad tax rates among taxing jurisdictions without their state. 

If the states cannot even agree to adopt uniform definitions for taxable goods, 

what assurance does Congress have that the states and localities can act on their 

own to truly simplify their sales tax structures? 

Answer. Mr. Chairman, the Streamlined Sales Tax Project has been working hard 

to radically streamline and simplify the nation’s myriad state and local sales and 

use tax systems. That effort is ongoing and significant progress has been achieved. 

The project includes two parts: model state legislation and an interstate agreement. 

No state will be able to join as a fully participating state unless and until these simplifications, including uniform definitions for taxable goods, have been adopted. We 

can give no assurance to Congress that all states will adopt the simplifications recommended by the Streamlined Sales Tax Project. However, if Congress would grant 

the states the authority to mandate collection by remote vendors and specify that 

this authority was contingent upon adoption of all simplification measures, only 

those states that have complied would benefit from the authority. This may be exactly the incentive the states and localities need to act positively on the Project recommendations. 

Just as Congress has found that simplification of the federal income tax system 

and campaign finance laws are inherently exceptionally complex and difficult to reform without strong leadership, so too here the complexity is not just daunting, but 

87

involves multiple jurisdictions. The Governors undertook this effort to achieve 

meaningful change. Any action that Congress can take to provide incentives to assist in our efforts would be invaluable.

Question 2. Your testimony states that the Internet Tax Freedom Act is ‘‘being 

interpreted to allow any transaction to be conducted electronically and thus avoid 

the collection of state or local sales and use taxes.’’

Even without the Internet Tax Freedom Act in place, according to the Supreme 

Court Quill decision, aren’t states and localities prevented from requiring remote 

sellers to collect sales taxes because the requirement would be an undue burden on 

interstate commerce? 

Answer. Mr. Chairman, the Quill decision bars states from requiring remote sellers to collect and remit sales and use taxes. Some remote sellers do voluntarily, and 

we applaud them. Other vendors which do have nexus are, understandably, concerned about federally conferred advantages or economic benefits which discriminate 

against them relative to their non-nexus competitors. This has increased pressure 

to avoid tax collection responsibilities by means of exploring loopholes in the Internet Tax Freedom Act (ITFA) and to explore the use of subsidiaries or affiliates to 

operate kiosks or electronic cash registers in order to claim that the in-store purchase was made via a company which has no nexus. 

Moreover, with the accelerating changes in technology, the ability to distinguish 

between the kinds of services entering a home or business through a wire or wirelessly is constantly eroding. As Senator Steven’s staff expert indicated when the Act 

was first considered, ‘If I represented the electric, telecommunications, or cable industry; I would be working very hard to define my business as Internet access because of the enormous federal incentives.’

Question 3. Have the Governors who are concerned about lost tax revenues associated with Internet sales explored alternative ways to collect the corresponding use 

taxes from people who make purchases over the Internet? 

Answer. Mr. Chairman, every state conducts audits, just as the Federal Government does, in an effort to ensure compliance. While this is more effective with large 

businesses with regard to business-to-business Internet sales, it is far more difficult 

with regard to business-to-consumer sales. States have stepped up notice efforts to 

advise consumers of their responsibilities and to attempt to undo misleading information that such transactions are tax-free. But, as you can imagine, there are serious privacy issues and enormous enforcement costs to effective collections on individuals. I would venture that if Congress were to eliminate the collection and remittance requirement of the federal airline ticket taxes on the purchase of domestic and 

international airline tickets purchased over the Internet, Congress and the U.S. Department of Transportation would experience singular difficulties in enforcing the 

responsibility of individual travelers to voluntarily remit. At the least, it would create an exceptionally cumbersome and intrusive federal bureaucracy just to collect 

the taxes that were owed.

Question 4. Your testimony states that ‘‘the Federal Government is empowered to 

regulate interstate commerce, but it would be unwise to usurp the most basic rights 

reserved to the states as to how they may or may not raise or lower revenues.’’

Given the states’ current tax structures, how is Congress proposing to usurp 

states’ rights to raise or lower the tax rates? 

Answer. Mr. Chairman, there is no more basic right or responsibility of any level 

of government than to determine what revenues to reduce or raise in order to meet 

the needs and priorities of its citizens. As our global economy has become more and 

more borderless, and as our national economy has shifted more and more to services 

and technology—and away from manufacturing—the base for the most important 

source of revenue for states—and for public education in America—has eroded. 

Some experts project the erosion to be as much as 60 percent. 

Much of that is the nature of the economy. But two federal issues arise—action 

and inaction. The Quill decision invited Congress to step up to the plate and help 

ensure an equitable system for commerce. Unless and until Congress acts, there will 

be a continuing and accelerating erosion of state and local sales and use tax revenues. There is no shortage of evidence—from the General Accounting Office, 

Forrester Research, etc.—of the erosion. Because of the interstate nature of the 

emerging economy, federal inaction exacerbates this erosion and consequent erosion 

of state and local rights to determine their taxpayers’ and citizens’ wishes in this 

fundamental arena. 

Second, the enactment of the ITFA specifically preempted state and local—but not 

federal—taxation of Internet access and multiple and discriminatory taxes. That is 

a direct preemption or usurpation of states’ rights. In addition, the definitions of 

88

‘‘Internet access’’ and ‘‘multiple and discriminatory’’ taxes creates avenues to evade 

or avoid existing state and local taxes. The federal insistence in applying these restrictions on state and local governments, but not on the Federal Government, can 

only appear to be intended as a direct intrusion into the rights of Wyoming taxpayers to be able to make their own decisions and choices about who and what 

ought to be subject to the taxes necessary to balance our budget. 

Finally, there is legislation pending before the Senate to preempt existing grandfathered states—in violation of Congress’ own Unfunded Mandates Reform Act—and 

to alter existing federal laws in a way that would usurp existing state business activity revenues. These are pending, proposed intrusions that would take away or 

usurp basic decisions of Governors, state legislators, and municipal elected leaders 

with regard to our own responsibilities to guard our respective governments’ fiscs 

and to respect the right and will of our own citizens. 

We fully respect the right and authority of Congress to eliminate or restrict federal taxes on the Internet. Congress could eliminate federal excise taxes on Internet 

transactions, federal income taxes on Internet transactions and businesses, etc. We 

would note that in considering some $1.6 trillion in federal tax relief, however, there 

has—as yet—been no proposal to provide special tax relief or benefits unique to the 

Internet or Internet transactions. The only proposals pending in the House and Senate to provide special tax treatment and benefits to the Internet would instead 

apply only to state and local governments. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. JOHN MCCAIN TO

HON. JANE SWIFT

Question 1. What is your response to what appears to be a legitimate concern, 

that traditional business transactions that are taxable today can avoid sales taxes 

altogether simply by sellers’ setting up an electronic means to complete a transaction? 

Answer. This ‘‘Kiosk Theory’’ is simply not true. Some people have mistakenly argued that retail sellers will circumvent current sales tax collection obligations by diverting sales to Internet ready kiosks located inside (or outside) their stores. For 

example, Consumer X will enter brick and mortar Store Y, and test items before 

using an in-store kiosk to purchase those very items through Store Y’s website, to 

be delivered either to the store or to the consumer’s home, tax-free. The theory is 

that by using an Internet server located in another state, or by shipping the goods 

from out of state, a ‘‘tax-free Internet’’ provides an uneven playing field for merchants to exploit the tax code and provide goods more cheaply than competitors, because no tax is assessed and collected. 

However, this ‘‘tax-free kiosk’’ assumption is wrong. Under Quill Corp. v. North 

Dakota. 112 S. Ct 1904 (1992), stores which have a substantial physical presence 

in a state, and thus ‘‘nexus’’ in that state, must subject their sales transactions to 

a sales tax (and collect that tax on behalf of the state). Orders taken at in-store kiosks will not allow any store to escape being the location of the sale, because the 

kiosks themselves will provide physical presence, or nexus. Regardless of the location of the Internet server and location from which the goods are shipped, if the 

transaction occurs at an Internet terminal located within a retail store, a sales tax 

must be imposed and collected. Simply put, merchants who have such a physical 

presence in a state cannot avoid an obligation to collect taxes simply by setting up 

an electronic means to do business. 

If this inquiry involves a traditional retailer establishing a separate corporate entity ‘‘to complete a transaction,’’ then the ability of the retailer ‘‘to avoid sales taxes’’ 

by redirecting sales does not really exist. In order to avoid sales tax obligations in 

a state, the corporate entity must not have nexus with the state. Generally, a retailer directing a customer to a website, of a separate corporate entity, to complete 

a particular transaction would vitiate the separation and establish nexus. Furthermore, even if such affirmative redirection could occur, the average shipping charge 

exceeds the average sales tax. Thus, particularly when coupled with the consumer 

having to delay receipt, the consumer benefit to such a tax avoidance scenario is 

vastly overstated.

Question 2. Please be more specific in your critique of the interstate sales tax proposal of the National Governors Association and the proposal itself. 

Answer. The National Governors Association has a general policy in support of 

Congress granting states remote sales tax collection authority. The NGA also has 

been involved in supporting the Streamlined Sales Tax Project, and has endorsed 

Senator Dorgan’s legislation. Because the NGA itself has not put forward a highly 

specific proposal, specific critiques are difficult. Philosophically, however, the NGA 

89

approaches this issue with a tax collectors’ mentality, and we place a higher priority 

on maintaining the integrity of the commerce clause, limiting the states’ tax powers, 

and not imposing undue burdens on interstate entrepreneurs. While the NGA believes the states should receive new national tax powers, we believe other values 

are more important than helping every states’ tax bureaucracy achieve revenue collection perfection. 

We object to any needless federal, state, or local bureaucracy. We particularly object to an unaccountable bureaucracy. We believe that a compact of the states with 

an exceptionally broad mandate to collect sales tax on all sales of tangible real property would be accountable to the electorate in no one state and thus be prone to 

overstep its powers. In any case, we believe it is unlikely Congress would give its 

sanction to such a compact without including a federal oversight role that we believe 

would unnecessarily complicate federal/state relations. Regardless of how such a 

compact is structured, we believe the ultimate impact will be to weaken the sovereignty of individual states not strengthen it. 

There is also the issue of enforcement and compliance. Although currently as written, a vote of member states is required to admit a new state to the compact, we 

do not see adequate safeguards to ensure that (1) a state admitted to the compact 

is in full compliance with the simplification requirements and (2) it stays in compliance with the simplification requirements. We are very concerned that tax paying 

Massachusetts businesses that disagree with any ruling by the compact have no 

means of recourse. 

Finally, and perhaps most importantly, the Streamlined Sales Tax Proposal does 

not close the door on future taxes. Massachusetts companies who could register as 

tax collectors under the plan have no assurance that, upon assuming the obligation 

to collect sales tax, they will not themselves be subject to new forms of taxes. States 

and localities might seek to impose business license or business income taxes on 

non-present sellers (or at least force such businesses to defend multiple tax audits 

seeking to impose such taxes). For example, Alabama just enacted a law (SB 806) 

that would require the state finance department to provide the address of all businesses collecting sales tax to the local jurisdiction for which the tax was collected. 

Such reports are then used to identify out-of-jurisdiction businesses in order to impose other taxes on them. Thus, the simplification project is just a mechanism for 

state and local governments to force all businesses to register in every state so that 

they can impose a multitude of business taxes on them. Small businesses, in particular, will be overly burdened under such a system and often times be forced to 

pay illegitimate tax assessments, if not put out of business because they do not possess the wherewithal to fight. It is no surprise that large ‘‘box’’ retailers like WalMart are spending millions to lobby Congress to support the NGA’s tax power quest. 

While there are many other concerns, such as privacy, lack of documentation, and 

a host of technical administrative issues that remain to be resolved, we believe that 

an open door to nexus creep is the worst aspect of the NGA’s remote tax position. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. JOHN MCCAIN TO

ELIZABETH HARCHENKO

Question 1. What do you think of the proposal for one tax rate and one tax base 

per state, for all types of commerce? 

Answer. We believe that it is not necessary to impose a strict one-rate or one-base 

limit on states in order to eliminate unreasonable administrative burdens on interstate commerce arising from sales and use taxes. Current complexity arises from the 

administrative functions-including reporting functions, rate changes, and liabilitywith which sellers must comply, rather than from the number of tax rates or differences in tax bases. The Streamlined Sales Tax Project (SSTP) has developed a 

reasonable and responsible approach to resolving the issue of sales and use tax complexity through statewide administration by participating states and simplification 

of state and local tax rates and base in a manner consistent with state and local 

fiscalstability. 

The SSTP recommendations would substantially eliminate unreasonable burdens 

on interstate commerce through statewide administration by participating states. 

Under the SSTP, the number of returns per tax period can be reduced from hundreds nationwide to just one per state-a dramatic, cost-saving simplification as compared to the current system. 

With regard to tax rates, the SSTP recommendations will actually achieve more 

simplification than would a one-rate-per-state system. States would provide companies with free software that will calculate the tax automatically for each transaction, risk free to the seller. This approach builds on recent advances in informaVerDate 0ct 09 2002 11:34 Sep 01, 2005 Jkt 090544 PO 00000 Frm 00093 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\90544.TXT JACK PsN: JACKF
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tion technology that make it possible for sellers to know and automatically calculate 

the actual rate applicable to each transaction. Sellers would be relieved of liability 

for errors incurring in tax rate information provided by states. Further, states would 

be required to limit changes in tax rates to occur only quarterly, with a uniform 

60-day advance notice of changes in tax rates so that sellers can incorporate the 

rate changes into their sales software. An automated, simplified and risk-free ‘‘one 

rate per transaction’’ system will achieve an extraordinary level of simplification 

without disrupting systems of state and local finance. 

The SSTP effort to simplify administrative and tax rate functions goes hand-inhand with the rationale for allowing states and localities to retain their tax rate 

structures to enable them to tailor their fiscal policies to fit local needs. Congressional attempts to require states to adopt a one-rate-per-state methodology would 

dramatically upset the revenue balance within individual states and greatly skew 

the distribution of revenue within states toward urban areas. For instance, rural 

areas, with lower populations, demand a lesser share of state and locally funded 

services-such as education and mass transit-than densely populated urban areas. As 

such, tax rates in rural areas are generally lower. In contrast, more densely populated areas demand a larger share of these types of services and, thus, routinely 

assume a higher level of taxation to support those services. If states are forced to 

accept a one-rate-per-state methodology, then taxpayers in rural areas may be 

forced to assume a higher level of taxation to fund services in other parts of the 

states from which they receive no benefit. 

With regard to tax bases, the SSTP recommendations would eliminate administrative burdens for interstate sellers through uniform definitions of major items in the 

tax base and a process of phasing out major variations within each participating 

state between state and local bases. Variations in tax bases within a state would 

occur only for large items subject to registration or property taxes-vehicles, boats, 

manufactured homes and similar items. Consistent with principles of federalism, 

each state would retain the full sovereign right to determine the taxability of items 

within their tax base. Thus, tax bases would continue to differ between states. 

These base simplifications are a common sense approach to easing administrative 

burdens for all sellers, especially those engaged in interstate commerce.

Question 2. What is your view on the proposal for a bright-line nexus standard 

that requires physical presence in a state before a company can be subjected to a 

state’s business activity tax? 

Answer. Two thoughts come to mind when this suggestion is made-‘‘tax havens’’ 

and ‘‘litigation.’’ A number of groups are actively seeking to muddy the debate on 

sales and use tax simplification by inserting the unrelated issue of requiring states 

to adopt a new and restrictive nexus standards for business activity taxes. The MTC 

firmly believes these actions and proposals are detrimental to reaching consensus 

on sales and use taxes, would create ‘‘tax havens’’ that would serve to shift income 

away from jurisdictions in which it is earned, and would dramatically increase litigation in the corporate tax arena. 

The U.S. Supreme Court has established the nexus standard for business activity 

taxes in a series of corporate income tax cases. For corporate income tax purposes, 

‘‘nexus is established if the corporation avails itself of the ’substantial privilege of 

carrying on business’ within the state.’ Exxon Corp. v. Wisconsin Dept. of Revenue; 

International Shoe Co. v. Schactel; Ford Motor Company v. Beauchamp; Colonial 

Pipeline Co. v. Traigle; Memphis Natural Gas Co. v. Beeler; International Harvester 

Co. v. Wisconsin Dept. of Taxation; and New York ex rel. Whitney v. Graves. These 

cases clearly establish that physical presence is not required for the imposition of 

a business activity tax. In this regard, it is important to understand the Quill case 

applies only to the imposition of a sales and use tax collection obligation and not 

to business activity taxes. 

There is good reason for the current business activity standard. Unlike sales tax 

collection obligations under which the states ask sellers to serve as collection agents, 

business activity taxes are the quid pro quo imposed on those who take advantage 

of the benefits of doing business within the states. Does the company take advantage of the consumer market by selling goods or services; does the company take 

advantage of the infrastructure—transportation systems, telecommunications networks, labor force, raw materials; does the company enjoy the protection of the court 

system to enforce its contracts and collect debts? These are the questions the court 

asks when determining whether a business organization is ‘‘doing business’’ sufficiently to justify the states asking for a contribution toward the cost of maintaining 

the infrastructure that affords that organization the opportunity to earn income 

from its activities within the state. The states must afford interstate business the 

same benefits that it affords their own resident businesses. The states cannot keep 

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interstate business out; the states must scale the measure of their business activity 

taxes to the level of the business activity that occurs. And the states should be able 

to ask fair return for maintaining their markets and infrastructure for the benefit 

of interstate business enterprises. 

The proposals advocated by some groups would dramatically change current law 

by replacing the constitutional ‘‘substantial privilege of doing business’’ standard 

with physical activity standards. We addressed the problems that would arise from 

imposing these new and excessive restrictions on state business activity tax authority in our letter of March 6, 2001 to Senators McCain and Hollings. 

The proposals advocated by some with regard to business activity taxes would 

dramatically change existing law. Typically the proposals would impose new restrictions on state authority in the form of physical activity standards of nexus for business activity taxes (including corporate income taxes, gross income or gross receipts 

taxes, and capital stock and franchise taxes). The imposition of these new standards 

would simply create and multiply within the business activity tax realm many of 

the problems that have existed in the context of sales and use taxes. Again, tax equity would suffer. Companies earning income from within a state and benefiting 

from state and local services would be excused from paying their fair share of the 

cost of those services. These proposals would elevate corporate form over economic 

substance and allow companies, through sophisticated tax strategies, to shift income 

unfairly away from where it was earned to tax haven locations. In terms of tax equity, the net result of the proposals would be to allow a select group of corporations 

to escape their fair share of state and local taxes and to shift that burden to wageearners, small businesses and traditional manufacturing and natural resource industries-all of which are ‘‘captive’’ within the taxing state. 

These proposals for new restrictions on state authority to levy business activity 

taxes would also detract from economic efficiency and balanced economic development by, again, discouraging the flow of investment across state boundaries. The 

physical activity approach to state authority is really an anachronism arising out 

of 17th and 18th century mercantilism. Centuries ago, the only way enterprises 

could earn income from a territory would be to undertake physical activities there. 

Today, companies can earn substantial income from a state-and in the process benefit from the services of a state-with only minimal activities that might traditionally 

be labeled ‘‘physical.’’ To achieve tax neutrality-taxing the same income earned in 

the same state to the same degree-concepts of physical activity as a standard for 

state taxing authority need to be assigned to the dustbin of history. If companies 

can earn income from within a state, but escape taxation by keeping their activities 

within the boundaries of certain physical activities defined in a new federal law, 

then companies will be discouraged from going beyond those physical activities and 

making new and more substantial investments in that state. Thus, the proposals 

for new federal laws restricting state business activity taxes will only interfere with 

the free flow of commerce and balanced economic growth across the nation. 

Further, a federal statute that revises the current standard for business activity 

tax nexus could increase the amount of litigation in this area of tax law several fold. 

Today, sophisticated tax strategies are being developed that would appear to anticipate these proposed changes in federal law. These strategies would allow companies 

to shift income away from where it is earned into tax havens-both domestic and 

international. If a federal statute is enacted and these strategies are implemented, 

states and localities will be forced to audit and legally challenge the validity of such 

arrangements (in order to protect the integrity of their tax systems vis a vis their 

own local industry)-forcing companies to reveal the origin of their income and instigating what surely would constitute decades of legal entanglement. Effectively, 

these complex tax strategies and the resulting litigation would adversely affect the 

revenue streams of many state and local governments-forcing many jurisdictions to 

pursue cutbacks in services or a shift of the tax burden to wage-earners, small business and traditional manufacturing and natural resource industries. 

Finally, we doubt that it is possible to define by law a true ‘‘bright line’’ test. The 

proposed ‘‘tests’’ we have seen are unclear and subject to widely varying interpretations. Several of the ‘‘tests’’ seem to invite creation of separate corporate entities, 

not because there is a business purpose but solely in order to avoid paying state 

taxes. These conditions invite the kind of uncertainty and litigation that the proponents decry. 

Thus, the MTC urges Congress to reject proposals that pursue creation of a new 

and restrictive nexus standard that requires physical presence for the application 

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of state business activity taxes. Such a standard would ultimately result in more 

litigation, greater costs of administration and an unfair system of state taxation.

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