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S. HRG. 109–925

HOW MUCH SHOULD BORDERS MATTER?

TAX JURISDICTION IN THE NEW ECONOMY

HEARING

BEFORE THE

SUBCOMMITTEE ON INTERNATIONAL TRADE

OF THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JULY 25, 2006

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

SUBCOMMITTEE ON INTERNATIONAL TRADE

CRAIG THOMAS, Wyoming, Chairman

MIKE CRAPO, Idaho

TRENT LOTT, Mississippi

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

BILL FRIST, Tennessee

JEFF BINGAMAN, New Mexico

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Thomas, Hon. Craig, a U.S. Senator from Wyoming, chairman, Subcommittee

on International Trade, Committee on Finance ................................................ 1

WITNESSES

Enzi, Hon. Michael B., a U.S. Senator from Wyoming ......................................... 2

Noble, Daniel W., Excise Tax Administrator, Wyoming Department of Revenue, Cheyenne, WY ............................................................................................ 4

Isaacson, George S., partner, Brann & Isaacson, Lewiston, ME ......................... 6

Rants, Hon. Christopher, Speaker, Iowa House of Representatives, Des

Moines, IA ............................................................................................................. 8

Benham, Robert, owner/proprietor, Balliet’s, LLC, Oklahoma City, OK ............ 10

Imig, Gary, executive vice president and chief financial officer, Sierra Trading

Post, Cheyenne, WY ............................................................................................. 12

Lindholm, Douglas L., president and executive director, Council on State

Taxation, Washington, DC .................................................................................. 22

Bucks, Dan, Director, Montana Department of Revenue, Helena, MT ............... 24

Mundaca, Michael, partner, Ernst & Young LLP, National Tax Department,

International Tax Services, Washington, DC .................................................... 26

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Benham, Robert:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 31

Responses to questions for the record from subcommittee members ........... 40

Bucks, Dan:

Testimony .......................................................................................................... 24

Prepared statement .......................................................................................... 41

Responses to questions for the record from subcommittee members ........... 58

Crapo, Hon. Mike:

Letters from:

American Electronics Association et al., dated May 4, 2006 ................. 89

Rants, Hon. Christopher and Hon. Chuck Gipp, dated May 16, 2006 .. 91

American Bankers Association et al., dated May 18, 2006 .................... 96

Software Association of Oregon, dated May 31, 2006 ............................ 99

ProHelp Systems, Inc., dated June 19, 2006 ........................................... 101

HSBC North America Holdings, Inc., dated July 17, 2006 .................... 104

Montana Taxpayers Association et al., dated July 18, 2006 ................. 105

American Hotel and Lodging Association, dated July 19, 2006 ............ 106

Financial Services Roundtable, dated July 24, 2006 .............................. 107

Dorgan, Hon. Byron:

Prepared statement .......................................................................................... 108

Enzi, Hon. Michael B.:

Testimony .......................................................................................................... 2

Prepared statement .......................................................................................... 110

Imig, Gary:

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 113

Responses to questions for the record from subcommittee members ........... 119

Page

IV

Isaacson, George S.:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 120

Responses to questions for the record from subcommittee members ........... 148

Lindholm, Douglas L.:

Testimony .......................................................................................................... 22

Prepared statement .......................................................................................... 150

Responses to questions for the record from subcommittee members ........... 160

Mundaca, Michael:

Testimony .......................................................................................................... 26

Prepared statement with attachment ............................................................. 167

Responses to questions for the record from subcommittee members ........... 190

Noble, Daniel W.:

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 192

Responses to questions for the record from subcommittee members ........... 201

Rants, Hon. Christopher:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 207

Responses to questions for the record from subcommittee members ........... 224

Rockefeller, Hon. John D., IV:

Prepared statement .......................................................................................... 226

Schumer, Hon. Charles E.:

Prepared statement .......................................................................................... 228

Snowe, Hon. Olympia J.:

Prepared statement .......................................................................................... 230

Thomas, Hon. Craig:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 231

COMMUNICATIONS

American Legislative Exchange Council ................................................................ 233

Center on Budget and Policy Priorities ................................................................. 239

Coalition for Rational and Fair Taxation .............................................................. 249

International Council of Shopping Centers ........................................................... 259

Iowa Taxpayers Association .................................................................................... 261

Multistate Tax Commission .................................................................................... 263

United States Council for International Business ................................................ 266

(1)

HOW MUCH SHOULD BORDERS MATTER?

TAX JURISDICTION IN THE NEW ECONOMY

TUESDAY, JULY 25, 2006

U.S. SENATE, SUBCOMMITTEE ON INTERNATIONAL TRADE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:34 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Craig Thomas,

(chairman of the subcommittee) presiding.

Present: Senators Snowe, Crapo, and Bingaman.

OPENING STATEMENT OF HON. CRAIG THOMAS, A U.S. SENATOR FROM WYOMING, CHAIRMAN, SUBCOMMITTEE ON

INTERNATIONAL TRADE, COMMITTEE ON FINANCE

Senator THOMAS. I call the meeting to order. Thank you all for

being here. I think it is an important issue we are talking about

this morning, so I am very pleased to have the opportunity to join

with you in examining some of the important and complicated tax

jurisdictional issues that are before us.

We have an outstanding slate of witnesses here today to share

their views regarding State tax jurisdiction and the impact of interstate and international commerce in the context of Internet tax and

business activity taxes. We will address both of these issues today.

We will handle these issues separately by devoting a separate

panel to each.

All witnesses will be limited to 5 minutes for their introductory

remarks, and your written statements will be included in the

record, without objection. I look forward to your comments.

We begin today with the issue of Internet taxation. The dramatic

rise in Internet sales over the last decade has called into question

the historic standard that a business must be located within the

State in order for the State to be able to require the business to

collect sales taxes on its behalf.

Currently, if a State resident makes a purchase from a remote

vendor and sales tax is not collected, the purchaser is required to

remit the tax directly to his home State. Of course, this is almost

impossible for the State to enforce.

The States have proposed shifting the collection burden to the remote seller in the case of Internet sales, but current law does not

allow this.

Additionally, Internet sellers have cried foul on the basis of complexity resulting from thousands of different tax jurisdictions within the various rates, definitions, and procedures.

2

The States have attempted to address these problems by coordinating, through the Streamlined Sales Tax Project, to try to

achieve some uniformity. The question we have today—or questions

we have—are: (1) is it appropriate to shift the sales tax collection

burden; (2) if so, how much simplification is enough so that the

sellers will not be unduly burdened in the conduct of their interstate commerce?

Kicking off the discussion, I am pleased to welcome my friend

and colleague from the great State of Wyoming, Senator Mike Enzi,

who has introduced a bill on this subject and of course has been

very involved in it.

So, Senator Enzi, welcome, friend. Please go ahead with your testimony.

STATEMENT OF HON. MICHAEL B. ENZI,

A U.S. SENATOR FROM WYOMING

Senator ENZI. Thank you very much, Chairman Thomas. I thank

you for allowing me to testify on this issue of the importance of imposing uniformity, simplification, and fairness concerning the taxation of remote sales over the Internet. I appreciate you and Senator Bingaman holding this hearing today to discuss this crucial

issue.

As a former small businessman and mayor, I have some definite

appreciation for this issue. Of course, small business throughout

the country already has to collect this tax.

People in small towns, and even large towns, rely on those businesses to contribute to the local charities, to buy the yearbook, to

pay for town events. That is something that the out-of-town folks

do not have to help on.

As a mayor, I also know that you cannot flush your toilet over

the Internet. I know that you cannot drive an automobile on the

Internet. I know that kids do not get much of a kick out of playing

in a virtual city park, and it is not quite the same atmosphere if

they are at a virtual picnic.

So, there are a lot of things that cannot be done over the Internet, and local governments rely on that revenue in order to be able

to provide the things you cannot do over the Internet.

Now, I know that local government has been a part of the problem because there are a lot of jurisdictions. That is what streamlining the sales tax is about, so there is not a rate for every single

community and every single county, and so you do not have to send

out thousands of checks every month.

The cities, towns, counties and States have done a marvelous job

of coming together to recognize that kind of a problem and put

some streamlining in there.

Now, I have worked on this issue since joining the U.S. Senate

in 1997. Most recently, in December of 2005, I introduced S. 2152,

the Sales Tax Fairness and Simplification Act, a bill that will level

the playing field for all retailers, in-store, catalog, and online so an

outdated rule for sales tax collection does not adversely impact

small businesses and Main Street retailers.

By addressing the collection inequity, the bill will also ensure the

viability of the sales tax as a major revenue source for State budgets by closing a growing loophole that encourages tax avoidance.

3

Now, this bill is not about new taxes. In fact, dependency on Federal dollars, as you said in your opening comments, would be offset

by increases in State revenue.

At a time when States increasingly turn to the Federal Government for financial support, Congress should authorize States to

systematically and fairly collect the taxes already owed them. This

is not a new tax.

As the Supreme Court identified in Quill vs. North Dakota, a

multitude of complicated and diverse State sales tax rules makes

it too onerous to require retailers to collect sales taxes unless they

have a physical presence in the State of the buyer.

So local brick-and-mortar retailers collect sales taxes, while

many online and catalog retailers are exempt from collecting the

same taxes. This is not only fundamentally unfair to Main Street

retailers, most of whom are small businesses, but it is costing

States and localities billions of dollars in lost revenue.

S. 2152 will help relieve this burden by requiring States to meet

the simplification standards outlined in the Streamlined Sales and

Use Tax Agreement. Working with the business community, the

States developed the agreement to harmonize State sales tax rules,

reduce the paperwork burden on retailers, and incorporate new

technology to modernize many administrative procedures.

Thirty-four States and the District of Columbia approved this

historic agreement on November 12, 2002. Already, 19 States have

enacted legislation to implement the agreement, and over 350 businesses—350 business—have signed up to collect sales tax voluntarily under the simplified set of rules.

Now, while the States have made great progress, the Quill decision held that allowing States to require collections is an issue that

‘‘Congress may be better qualified to resolve, and one that it has

the ultimate power to resolve.’’

The States have acted. It is now time for Congress to provide the

States that enact the Streamlined Sales and Use Tax Agreement

with authority to require remote retailers to collect sales taxes just

as Main Street retailers do today.

Senator Byron Dorgan of North Dakota and I worked tirelessly

to assist sellers and State and local governments to find true simplification in sales and use tax collection and administration.

Although Senator Dorgan and I introduced separate bills, we will

continue to work with each other and all interested parties to find

compromise on the outstanding policy issues. States need to have

the authority to collect sales or use taxes equally from all retailers.

Adoption of the agreement and Congressional authorization will

create a level playing field among all retailers.

Thank you again, Chairman Thomas, for the opportunity to outline the importance of S. 2152. I look forward to working with you,

your staff, and the rest of the Finance Committee on this policy initiative in the future to assure swift passing of S. 2152. Thank you.

Senator THOMAS. Thank you very much.

[The prepared statement of Senator Enzi appears in the appendix.]

Senator THOMAS. Senator Bingaman has joined us. I will see if

he has a comment before the Senator leaves.

4

Senator BINGAMAN. Let me just thank Senator Enzi for his leadership on this. I agree with the goal that he has outlined for this

legislation, which is to have the same rules with regard to collection of taxes apply to brick-and-mortar operations that apply to

people who are selling over the Internet. I think that is a worthy

goal, and I hope we can make progress here in Congress to assist

it in happening. Thank you.

Senator ENZI. Thank you very much.

Senator THOMAS. Thank you, Senator. We appreciate your efforts

and look forward to working with you.

Senator ENZI. Thank you.

Senator THOMAS. I will now turn to our second panel of experts

on the topic, two of whom, I am pleased to say, are from my home

State of Wyoming.

We have Mr. Daniel Noble, Excise Tax Administrator, Wyoming

Department of Revenue; Mr. George Isaacson, partner, Brian &

Isaacson, from Lewiston, ME; the Honorable Christopher Rants,

Speaker, Iowa House of Representatives; Robert Benham, owner

and proprietor, Balliet’s LLC, Oklahoma City; and Mr. Gary Imig,

executive vice president and chief financial officer, Sierra Trading

Post, Cheyenne, WY.

Gentlemen, thank you so much. We appreciate your being here.

Again, we ask that you try to summarize your statement if you can

within about 5 minutes, and your total statement will be put into

the record.

So we will begin right there. We will begin with you, Mr. Noble,

if we may.

STATEMENT OF DANIEL W. NOBLE, EXCISE TAX ADMINISTRATOR, WYOMING DEPARTMENT OF REVENUE, CHEYENNE,

WY

Mr. NOBLE. Thank you, Mr. Chairman.

My name is Dan Noble. I am the Administrator of the Sales and

Use Tax Division for the Wyoming Department of Revenue. I have

been a member, if you will, or a participant, in the Streamlined

Sales Tax project since its inception.

I think that at current standing there are 42 States and the District of Columbia that are attempting to adopt a simplification effort that involves both the modernization of the Sales Tax Code as

well as the simplification of the Sales Tax Code and provides some

common ground for all vendors, not just Internet vendors and not

just catalog vendors, but all vendors in this country.

To this date, we have achieved some of those goals, a majority

of them, actually. We have adopted an agreement, as of November

12, 2002, that basically provides some fairly radical simplifications

of different aspects of the Sales Tax Code in this country.

One of the issues that has been probably at the forefront of this

has been the issue associated with multiple rates and multiple jurisdictions within this country. There are, currently, roughly 7,500

different jurisdictions within the United States, each imposing potentially a separate tax, as it will, or a different rate.

The States, early on in the project, attempted to deal with the

issue of multiple rates and tried to basically come to some sort of

a compromise associated with this on how to minimize the number

5

of jurisdictions, but also remove the burden, if you will, on any remaining jurisdictions from the businesses that have to collect this

tax.

What we noted early on was that asking jurisdictions to give up

their authority to collect the tax not only created hardship for

them, but also dealt with some issues of autonomy as it relates to

their ability to impose a tax on their citizenry.

So what we felt was that it was important for the States to assume that burden. We turned to technology, if you will, to basically

deal with that issue. To date, there is a technological model in

place to deal with the multiple tax jurisdictions that are out there.

It has been a partnership between the States and what we call

certified service providers to develop a system that will provide accurate reporting of taxes to the vendors so they can collect this tax.

As of the 20th of July, the State of Wyoming received its first

simplified electronic tax return from a certified service provider.

Not a lot of money, but the fact is, it is up and it is running. There

are currently three vendors that have been certified by the States

to collect this tax.

But technology is not the only area where we have attempted to

deal with this. The States have taken it upon themselves, as one

of the requirements of this agreement, to ensure State-level administration of the tax. They have dealt with issues under audits to

try to simplify the audits that are out there.

One of the things that happened early on in this process that

really brought home to me the complexity that we have built into

this is, there is testimony that one of the major taxpayers in this

country was actually paying 600 different tax returns a month.

Now, that is burdensome. By adopting State-level administration

and consolidated returns, you reduce that burden from 600 to 46,

if this works in all States; major simplification for a lot of vendors

that relates to State-wide administration of the tax.

Currently, some States have local jurisdictions that each impose,

not only their own tax, but also impose their own administration

of that tax. Audits can come from everywhere. This agreement does

deal with that issue.

Sourcing rules. This was an issue that was raised by an awful

lot of businesses as a major complexity. They did not know what

rate to charge. The agreement has some very specific and detailed

sourcing rules in it that are being adopted by the States that are

out there that are members of the agreement.

Wyoming is an associate member. The reason we are an associate member is because I missed, in drafting the bad debt provisions, this one simple clause associated with when the sale occurs.

So we are being very strict about the adoption of those rules.

I guess what it all boils down to is, we have made significant

progress towards achieving these goals. But what really has to happen here, the States need guidance. We need to know, how simple

is simple enough?

Governor Freudenthal supports this project, but believes that we

need action from Congress to let us know how we are doing, number one. Is this simple enough in order to require collection of all

vendors? If not, we need guidance on what we need to do to reach

6

that goal because, frankly, there is a huge amount of revenue being

lost by the States.

The estimates vary widely as to how much that actually is, but

I think intuitively we should all recognize that there is a significant amount of revenue drain on the States based on conversion

from a brick-and-mortar economy to an electronic economy.

Thank you.

Senator THOMAS. Thank you very much, Mr. Noble.

[The prepared statement of Mr. Noble appears in the appendix.]

Senator THOMAS. Mr. Isaacson?

STATEMENT OF GEORGE S. ISAACSON, PARTNER,

BRANN & ISAACSON, LEWISTON, ME

Mr. ISAACSON. Thank you, Senator Thomas and Senator Bingaman. My name is George Isaacson. I am tax counsel for the Direct

Marketing Association, and I am also a professor of constitutional

law at Bowdoin College in Maine. I appreciate the opportunity to

speak to this very important issue today.

I think it may be useful to put a historical perspective on the

question that you teed up for us at the beginning of this hearing,

Mr. Chairman, which is: how much simplification is enough?

It is important to understand that the Streamlined Sales Tax

Project was built upon two prior projects that proceeded it. One of

them was the National Tax Association’s project on taxation of electronic commerce, and the other was the Advisory Commission on

Electronic Commerce that was appointed by Congress.

Both of those bodies decided that the key element for simplification of remote taxation is to have one tax rate per State for all commerce. Now, what is really significant about the National Tax Association project is that it consisted of a steering committee of 26

members, half of which were representatives of State government

organizations that included the National Conference of Mayors, it

included the National Governors Association, and it included the

National Conference of State Legislatures.

Unanimously, all of the representatives from industry and from

these State government organizations agreed—and passed as a resolution of that body—that any simplification should involve one tax

rate per State for all commerce to be divided then by the State as

it may choose between municipalities and the State government.

When the Streamlined Sales Tax Project began in 2000, it started out with very elevated objectives, very high ambitions, and even

included consideration of the issue of one tax rate per State for all

commerce. That was quickly rejected because it was opposed at

that time by the representatives to the project.

Suggestions, for example, that there should be a home State

audit similar to the International Fuel Tax Agreement, where a

company would be audited by its home State and would be remitting tax returns to its home State, was suggested, a real measure

for simplification. It was rejected.

The idea of having real uniformity of tax basis was presented

and proposed, including by the Direct Marketing Association, and

it was rejected.

So what really happened in the period of time between the beginning of the project in 2000 and the reaching of an agreement

7

among the States—not among the States and industry, but among

the States—was changing from the high-bar reform that the project

started out with to low-bar reform, procedures that have to do with

things like filing arrangements, but not dealing with the substantive issues.

The fact of the matter is, our Federal system of government

works very well as long as States restrict their taxation prerogatives to their own territorial borders. That is the subject of the

hearing today: do borders continue to matter?

Each State is an independent civic laboratory, including in the

tax field, as long as it stays within its borders in the exercise of

its jurisdiction. But when it exports its tax authority across State

jurisdiction lines, the result is that you have 50 different States applying their tax systems to companies located in 49 other States.

Not only is it chaotic, but it is unfair. It amounts to taxation without representation.

There is always the temptation on the part of State governments

to hit hardest taxpayers who do not vote. You see that in things

like high taxes on summer property, vacation homes, high taxes on

tourism, taxes on lodging, car rental, and meals. That is fine as

long as the State is restricting that exercise to its own territory.

But when a State exports its tax system across State lines to

companies that have no presence in that State, no political exercise

of authority within that State, the problem becomes much more difficult.

As an attorney who practices regularly in this field around the

country, there is a term that is associated with what happens when

an out-of-State company goes into a State and has an administrative appeal. It is referred to as ‘‘home cookin’.’’ You get a good dose

of ‘‘home cookin’ ’’ by those local State tax administrators who know

that it is extremely expensive and politically abandoned for a company to be contesting procedures.

Now, in regard to that issue, early in the process the proposal

was presented to the Streamlined Sales Tax Project that if a nonresident taxpayer objects to a tax on the basis that it violates Federal legislation, such as the legislation that you would be considering, or that it violates the taxpayer’s Federal constitutional

rights, they should be able to go into Federal court to protect their

interests to object to that taxation.

But because of the Tax Injunction Act, that is currently not possible. The suggestion was made that that should be repealed as

part of any such proposal, and the States loudly objected.

It follows a pattern, Mr. Chairman. The pattern is, when the

States are asked for true high-bar reform, such as one rate per

State for all taxes, or Federal court jurisdiction over constitutional

claims, the States shout that that is a violation of their tax sovereignty.

The problem, in my opinion, is that the States cannot have it

both ways. The States cannot shout ‘‘State sovereignty, State

rights’’ when the effort is to have true high-bar reform and Federal

review of unconstitutional assessments, and then at the same time

say, ‘‘We nonetheless want to expand our tax jurisdiction.’’

The final point that I want to make is that, even with the lowbar reform that is associated with the Streamlined Sales Tax

8

Agreement, what the States have done since its enactment is to

game the system.

So, for example, what States are doing is, they are simply renaming taxes that previously were sales taxes and calling them by a

different name. For example, both Minnesota and New Jersey are

both member States in the Streamlined Sales Tax Agreement and

have flagrantly violated the provision that clothing is either to be

taxed or not taxed.

That was supposedly one of the categorical goals of the project.

What they have simply done is, they have taken subcategories of

clothing and called them an excise tax and continue to apply that

tax on gross receipts in the same fashion.

The same thing is true in regard to tax rates. What the State of

Tennessee has done is to adopt special user privilege taxes on articles that previously were subject to sales and use tax.

The fact of the matter, Mr. Chairman, is that the States, even

in this early stage when they are coming before your committee

and asking for relief from existing constitutional restrictions, are

already gaming the system to get around the requirements of the

agreement. It would be dangerous to liberate the States to increase

that adventure in the future.

Senator THOMAS. Thank you, Mr. Isaacson.

[The prepared statement of Mr. Isaacson appears in the appendix.]

Senator THOMAS. We have been joined by Senator Snowe. Did

you have any statement, Senator, before we go on with questions?

Senator SNOWE. Thank you, Mr. Chairman. I will ask unanimous

consent to include my statement in the record.

But I want to welcome one of my constituents, George Isaacson,

who is also a friend who has had a distinguished legal career in

Maine, from my home town area of Lewiston, ME, who represents

the Direct Marketers Association. He is one of the legal experts—

an outstanding legal expert—on the use tax, sales tax, and all the

issues we are referring to and addressing here today.

So I want to welcome you, George.

Mr. ISAACSON. Thank you.

Senator SNOWE. Thank you.

[The prepared statement of Senator Snowe appears in the appendix.]

Senator THOMAS. All right. Thank you very much.

Mr. Rants?

STATEMENT OF HON. CHRISTOPHER RANTS, SPEAKER,

IOWA HOUSE OF REPRESENTATIVES, DES MOINES, IA

Mr. RANTS. Good morning, Chairman Thomas, Ranking Member

Bingaman, Senator Snowe. I am Christopher Rants. I am the

Speaker of the Iowa House of Representatives, and I serve as cochair of the National Conference of State Legislatures’ Executive

Committee Task Force on State and Local Taxation of Telecommunications and Electronic Commerce.

I am pleased to have the opportunity to speak with you this

morning about State and local taxation in the new economy, specifically the ability of State and local governments to collect the

sales and use taxes presently owed on transactions through remote

9

sellers—not taxes on remote sellers, but taxes through remote

sellers.

Let me make this very clear. State legislators are not advocating

any new or discriminatory taxes on electronic commerce. We desire,

however, to establish a streamlined sales and use tax collection

system that is seamless for sellers in the new economy and respects the sovereignty of States’ borders.

Today, States face a growing threat to sales tax revenue. It is an

important revenue source for State and local governments. The

growth of electronic commerce has the potential to dramatically expand the volumes of goods and services sold to customers without

the collection of a State sales or use tax that is presently owed.

According to the Center for Business and Economic Research at

the University of Tennessee, in 2003 the estimated combined State

and local revenue lost due to remote sales was about $16 billion.

For electronic commerce sales alone, the estimated revenue loss

was almost $8.5 billion.

The report further estimates that the revenue loss will grow, and

that by 2008, the revenue loss for State and local governments

could be as high as $33.6 billion, of which it is estimated $7.8 billion would be from sales over the Internet.

A recent national survey conducted by the Joint Cost of Collection Study, a public/private sector group, that was conducted by

PricewaterhouseCoopers has shown that, in fiscal year 2003, the

total cost to sellers to collect State and local sales tax was almost

$6.8 billion.

The burden on retailers to comply with the 46 different sales tax

systems and the monetary cost to retailers for compliance resulted

in two Supreme Court decisions: Bellas Hess in 1967, and Quill in

1992, that affirmed the States’ authority to tax transactions made

by the States’ residents through remote sellers, but prohibited a

State from requiring an out-of-State seller from collecting the sales

tax on a purchase made by a resident of the State.

Beginning in 2000, State legislators, Governors, and tax administrators, along with representatives of retailers and others in the

private sector, started the process to develop a simpler, uniform,

and fairer system of sales and use taxation that removes the burden imposed on retailers, preserves State sovereignty, and levels

the playing field for all retailers and enhances the ability of U.S.

companies to compete in today’s global economy.

By 2002, delegates from the States formulated and finalized the

Streamlined Sales and Use Tax Agreement. As of today, all of the

sales tax States, except for Colorado, are participating in the ongoing process to simplify sales tax collections.

The key features of the agreement are: simplification of sales and

use tax laws and administration; the use of technology for calculating, collecting, reporting, and remitting the tax; and the State

assumption of the cost of collection for remote sellers.

Some of the key simplifications contained in the agreement, as

adopted by the States, are: uniform product definitions, uniform

State and local tax bases, requirements for State central administration, central seller registrations, simplified exemption administration, uniform audit procedures (which we believe would reduce

the number of audits), and, of course, uniform sourcing.

10

Since the agreement was ratified in November of 2002, 21 States

have enacted legislation to bring their sales tax statutes’ administrative rulings into compliance with the agreement.

On October 1, 2005, 13 States, including my own State of Iowa,

were certified to be fully in compliance with the agreement, and

with this action the Streamlined Sales Tax system is operational.

Since that October 1 start date, my small State has already col- lected over $2.6 million in previously uncollected revenue that was

owed. The States, through the Streamlined Sales and Use Tax

Agreement, have provided Congress with the justification to allow

States that have complied with the agreement to require remote

sellers to collect those sales taxes as was intended in the Quill decision.

The Sales Tax Fairness and Simplification Act, S. 2152, as introduced by Senator Enzi of Wyoming, embodies the simplification requirements of the Streamlined Sales and Use Tax Agreement and

provides certainty for taxpayers, retailers, and other businesses

that the States cannot backtrack on simplification, but, if we do,

the prohibition of the Quill decision will be reinstated.

Our work to establish a truly seamless system is only half done.

It is now Congress’ turn to act. I believe we are at a point that,

if Congress fails to act soon on the Federal legislation, as envisioned in the Sales Tax Fairness and Simplification Act, the momentum in the remaining States will slow.

In some of those States, compliance to the agreement may require politically difficult changes to sales tax statutes. I can speak

first-hand to the difficulty of accomplishing that. Congressional approval of this legislation will help those legislatures and those

States make the necessary changes.

States have made unprecedented progress to eliminate the burdens and costs to retailers that the Quill decision outlined. It is

now Congress’ opportunity to ensure that the simplified system

that the States have developed for the seamless collection of transactional taxes in the new economy is not impeded by those who

merely try to avoid paying legally imposed taxes.

Thank you very much for the opportunity to present to you this

morning.

Senator THOMAS. Thank you, sir.

[The prepared statement of Mr. Rants appears in the appendix.]

Senator THOMAS. Mr. Benham?

STATEMENT OF ROBERT BENHAM, OWNER/PROPRIETOR,

BALLIET’S, LLC, OKLAHOMA CITY, OK

Mr. BENHAM. Thank you, Mr. Chairman.

My name is Robert Benham. I am an independent retailer from

Oklahoma City. I am the owner/proprietor of Balliet’s in Oklahoma

City. We are a bricks-and-mortar store, and we also have an Internet presence and are experiencing wonderful growth on the Internet.

I am here today on behalf of my business, and other small businesses like mine, as well as on behalf of the National Retail Federation.

I have served on the NRF board for 25 years, and I am here to

comment as a small business owner and to share my unified posiVerDate 11-MAY-2000 14:48 Jun 28, 2007 Jkt 095484 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 35879.000 SFIN1 PsN: SFIN1
11

tion with NRF’s in support of Senate bill 2152, the Sales Tax Fairness and Simplification Act introduced by Senator Enzi. We very

much appreciate your attention to this critical matter.

Many of the topics, the technical topics and the reasons for this,

the background, the history, have been covered. I would like to depart from my written testimony, which is a matter of record, to

talk more from out there on the front lines, from the battleground.

What do I think about when I go to work in the morning, what do

I see as the threats to our business?

First of all, there are stores like ours literally at every crossroads

in the United States. Senator Enzi mentioned, we are the backbone

of our communities in so many ways. I certainly do not need to review that in any detail. We are very much a part of the fabric of

our communities.

We see two major threats to our business as a small, independent retailer. Two strategic threats. One is the constantly escalating cost of health care, which is a separate, but somewhat related, subject. The second is the non-negotiable price disadvantage

we face against remote sellers from out of State.

I can tell that in terms of competing in the retail business, there

are no borders. We have competition from catalogs, Internet, telephone, from all over the United States. We did sales last year on

our website through our e-mail marketing program.

We sold to customers in 34 States last year, and we are a small

store in Oklahoma City. We see passage of this legislation enabling

us to unlock another whole path of growth for our business, and

that is through remote sales.

The subject that has been brought up is, is collecting the tax a

burden? Chairman Thomas, I believe you raised that. The answer

from my chair is, we do not see that as a burden.

Retailers like Balliet’s, in all the States that I know of that have

the sales tax, are the tax collectors for the State. We have been

doing that for years and years. We have the software to do that.

It is pretty seamless at this point. We know how to do that.

As long as we are provided with the software and there is simplification, I see no burden on the retailers in collecting this remote

commerce tax and remitting it to the taxing jurisdictions. We are

going to have certified software. We can download that certified

software.

If we are not able to do it, if a retailer is too small or does not

have that capability in-house, they can always out-source it to a

certified service provider. Provided that there is compensation for

the collection of these taxes, there will simply be a pass-through

cost for the retailer and we will be in compliance with the law.

What I love about this as a retailer is that this creates certainty.

If we can have legislative certainty and not have to resort to litigation to solve this on a State-by-State basis, I see Internet Commerce and other types of remote commerce as a tremendous commercial growth vehicle for my business.

It literally moves me outside the four walls of my store and enables me to compete on a national basis with certain rules of sales

taxation. Right now, we do not really push that because we are

concerned about our liability.

12

But once SST is in place and once the legislation is in place, I

see no problem with stores like Balliet’s becoming much more aggressive, and growing our business and collecting more sales taxes

that are remitted to our communities to support services in communities, and enable us to continue to be such an important part

of our communities.

We are very excited about the possibilities for our business, and

for many other small businesses. I know lots of other business owners. I am in touch with a lot of them.

I belong to two or three different comparison groups that meet

once a year. We are all very excited about the possibilities of this

type of commerce. We are not afraid of it.

We are not back in the horse-and-buggy age. We are on top of

our business. We are always looking to create new business models

that will enable us to compete successfully.

Balliet’s has been in business for 70 years this year; I have been

in the business for 40 years. I have been through floods, fires, tornadoes, business downturns, economic booms, economic busts, oil

booms, oil busts. If you constantly create your business model, if

you adapt and if you compete, you can do so very successfully.

The other thing I just want to mention, because I understand

there is some discussion about it or some disagreement about it, is

something called the small business exemption. I understand there

have been different numbers floated on the small business exemption.

Personally, as an operating proprietor of a retail business, I see

no need for the small business exemption beyond an introductory

period. We all either have the capability, or we will be provided

with the capability to collect and remit this tax.

Let us level the playing field. Let us eliminate the competitive

disadvantage that we all have, and let us compete. This is the

American free enterprise system. Small retailers understand that.

We are fierce competitors. So, please provide us with a legislative

solution so that we can get on with the business of our business.

Mr. Chairman, members, thank you very much.

Senator THOMAS. Thank you very much.

[The prepared statement of Mr. Benham appears in the appendix.]

Senator THOMAS. Mr. Imig?

STATEMENT OF GARY IMIG, EXECUTIVE VICE PRESIDENT AND

CHIEF FINANCIAL OFFICER, SIERRA TRADING POST, CHEYENNE, WY

Mr. IMIG. Good morning. It is an honor to submit my testimony

in regard to Internet taxation at the Subcommittee on International Trade.

I am Gary Imig, the executive vice president of the Sierra Trading Post. Sierra Trading Post is a 20-year-old direct marketing

company founded in 1986 by Keith and Roberta Richardson.

We currently employ 800 people in three separate locations in

Wyoming and Nevada. We have close to three million customers

across the U.S. We also sell our products in several foreign countries. We will mail approximately 60 million catalogues this year.

13

Our website, on average, gets close to 75,000 unique visitors per

day, and our revenue from the website ranks us as the 75th-largest

retail website, by revenue, in the Internet Retailer Top 500 Guide.

Even with all of this, we are a very typical mid-range small business.

I feel it is very important for me to be here today to present my

testimony to help protect and nurture the direct marketing industry, an industry that I deeply care about.

When I refer to the direct marketing industry, I am referring to

both sales through a catalog and sales through the Web. These two

areas have blended so much over the last several years that they

have become one in many ways.

I believe the direct marketing industry is one of the last truly

great industries that encourages entrepreneurial risk-taking. The

evolution of the Internet, in conjunction with catalog mailings, has

allowed many under-capitalized entrepreneurial people with good

ideas to form companies.

The good thing about these start-ups is they can happen anywhere, from the farms of Kansas to the inner city neighborhoods

of Detroit. The Internet has allowed many of these companies to

compete with much larger companies on a level playing field.

The creativity and imagination currently coming out of our industry is breathtaking. Almost daily, Sierra Trading Post is reinventing the way we sell to our customers. It is a very exciting, but

also very dangerous, time.

Many direct marketing start-ups occur every day. Sadly, many

also cease to exist every day. Several years ago, I had the pleasure

of listening to a speech that Mike Sullivan, a Governor in the State

of Wyoming, gave to a group that I was part of. This was right

after he had finished his two terms as Governor.

He talked about the homogenization of America. He and his wife

had recently taken some time off to travel America, and he was

shocked at how different areas of the country looked so much the

same.

From the Interstates, everything looked eerily similar. Of course,

there was always a McDonald’s. Also, there was always a Wal-Mart

around the corner, and all the usual examples. There were grocery

store chains, fast food chains, shoe store chains, discount store

chains. There were chains for everything.

Mike wondered what had happened to the uniqueness of America. I agree with him. America did not become great, and its economy did not become great, by being the same. This uniqueness is

what I believe our industry offers the consumer.

Our entrepreneurial thoughts encourage freshness and creative

product offerings. We would not exist as companies if we could not

somehow differentiate ourselves from the very large companies

that occupy the consumer retail space.

Sierra Trading Post could never compete with a Wal-Mart or

Target. Sierra competes by how we service our customers, the

uniqueness of our product offerings, and how our low-cost direct

marketing structure works.

This entrepreneurial explosion of the direct marketing business

on the Web has not been lost on the very large retail companies

in the retail space. All of a sudden, large retail chains which have

14

squeezed their markets to the point where small businesses can no

longer compete against them for a retail consumer are now faced

with a whole set of new competitors.

These competitors are quicker and more flexible. They take care

of their customer better, and in a lot of ways, pay much better attention to the needs of their customer. These new, quicker competitors have begun to take market share from these retailers.

So how did these large retail companies react to this competitor?

I submit to you that my being here in front of this committee is

one of the results of how big retail and its allies felt they needed

to address this competitor. The statement that is always made by

the retail industry is, you need to level the playing field. Make

them charge taxes like we do.

Of course, what these interests do not mention is that we charge

shipping charges, which in most instances are greater than sales

tax. We do not have a competitive advantage in this area, and they

know it. They know that if we have to charge sales tax up front,

we will probably have to cut our shipping charges to make our offerings attractive to the customer.

In this day and age of ever-rising fuel charges and postal rate increases, this substantially impacts our bottom line. This could also

have a significant impact on the new start-ups in our industry and

overall growth. They know this, and that is why they are pushing

it.

There is one significant fallacy in this debate about Internet taxation. Many people think that players in this debate are very large

companies. If you look at the top 500 retail websites in the U.S.,

you will see very quickly that this is not true.

This might be true with the top 50 sites, but after the top 50

sites you are getting into typical small business territory. If it is

not a small business, then it is probably a company that not only

has a website, but a lot of retail locations already paying sales tax.

A look at the top 50 sites would include such companies as Office

Depot, Staples, Office Max, Sears, K-Mart, Best Buy, Wal-Mart,

J.C. Penney, Target. All of these entities are probably paying sales

tax because of their physical locations.

It is very important to keep in mind, when anyone starts talking

about Internet taxation and its effects, they are not talking about

big business. Make no mistake, this is about small business.

This is about the creativity of small business and the development of jobs and small business. In fact, the 500th-largest retail

website on the Internet Retailer Top 500 website list has only $3

million in sales from the Web.

So how do we address the issue that is before us today? First and

foremost, I would suggest caution. This is not just about sales tax

leakage. In fact, in my opinion the leakage is overstated.

If you eliminate from the debate large retailers or a very large

Web peer place like Amazon or eBay, that leaves about $15 to $20

billion in sales a year generated by the remaining top 500 retail

websites.

This seems like a lot, but in my opinion it adds up to about $1

billion per year in sales tax revenue leakage. Dividing this up between all the U.S. tax authorities does not give much to each.

15

Instead, this discussion, and issue, is about small business. It is

about maturing, small entrepreneurial start-ups. This discussion is

about recognizing that we want unique offerings for consumers, not

to homogenize the offerings we as a country are quickly rushing toward.

This is about job creation. It is about creating jobs in areas

where job creation is hard to do. Sierra Trading Post is a good example of this. We have created 500 new jobs over the last 14 years

in Cheyenne, WY. We have added 150 new jobs in Cody, WY. Remember this: this industry levels the playing field. This industry

allows somebody with a bright idea and very little money to get in

the game. This drives big business crazy.

Finally, this discussion is about a still-fledgling industry. Direct

marketing, and especially selling over the Web, is still in its formative stages. Do not let people kid you. Selling over the Web is not

close to maturing. It has a bright future, but perils abound.

Significant additional financial and governmental red tape and

road blocks will dampen this entrepreneurial engine. I would not

like to see this happen, and I do not believe you would, either.

So what do I recommend? My recommendations on this issue are

two-fold. I believe the concept of nexus is paramount. If an entity

has physical presence in a State, then I believe that entity needs

to collect sales tax from that State.

Sierra Trading Post religiously adheres to that concept. I believe

nexus should be strictly enforced and defined further, if necessary.

This philosophy pre-dates the web and has worked well for years

with the direct marketing industry.

Secondly, I believe that we as an industry need to quit playing

shell games. Nexus is nexus. Setting up operations in separate

companies, holding companies, et cetera, does not negate nexus. We

need to be honest in this.

I know there is a significant rush towards tax simplification in

an effort to tax Internet sales. There is a lot of pressure on this

committee and this body to address these issues. Many governmental entities are clamoring for you to address this. This is all

being done in the guise of fairness and the belief that there is a

leakage of taxes.

I would urge you to be very cautious, however, before you rush

into a tax program. As already mentioned in this discussion, in my

opinion this is not about fairness or leakage, it is all about small

business and job creation.

I am afraid that people will rush to grab the gold ring of Internet

taxation, and when they grab it, discover the gold ring is not gold,

but dust, because of the burden of implementing, managing, and

collecting this tax revenue. This more burdened tax structure, I am

afraid, will also result in a loss of jobs and entrepreneurial activity.

Thank you.

Senator THOMAS. Thank you very much.

[The prepared statement of Mr. Imig appears in the appendix.]

Senator THOMAS. Thank you, gentlemen.

We will have short questions, and perhaps short answers.

Mr. Noble, you mentioned a number of things. Would you just select what you think is the most significant problem in terms of implementing the proposal that is out here?

16

Mr. NOBLE. The most significant problem facing the States at

this point?

Senator THOMAS. Well, in order to get your support to get done.

Mr. NOBLE. I think the largest challenge that is facing the States

today is, obviously, demonstrating to you folks, to the Congress,

that we can make this technological model work.

Senator THOMAS. I see.

Mr. NOBLE. I think it is critical for us to make that happen. I

think we are very close to being able to demonstrate that. The certified service providers are out trying to market their wares.

Senator THOMAS. So you can overcome 7,200 different jurisdictions?

Mr. NOBLE. I think that is the idea: to basically utilize technology to overcome that. This is a transaction that is very, very

similar to a credit card transaction. I guess I would say it is not

rocket science. This is something that involves the use of databases

and electronic technology to basically make this work.

Senator THOMAS. All right. Thank you.

Mr. Isaacson, you do some constitutional work. What is your impression as to the constitutionality of, for instance, the Enzi bill?

Mr. ISAACSON. One of the things that really concerns me, Mr.

Chairman, is the tendency of State tax administrators and the proponents of the SSTP to trivialize the constitutional issues that are

present here and to refer to the Quill case as a constitutional loophole.

In fact, when the Constitutional Convention was convened in

1787, the reason why it was convened was because the young Nation was being pushed into a depression because of the fact that

States were imposing tax on commerce between themselves. It has

been the Commerce Clause that created a common market on the

North American continent 200 years before the Europeans did it

with the EU.

The idea that we are going to disregard the standards of Federalism and the protections of interstate commerce that are associated with the Commerce Clause for the convenience of State tax

administrators being able to impose tax collection obligations irrespective of borders, I think, runs directly contrary to the principles

of Federalism and the principles of the Commerce Clause.

Senator THOMAS. I guess I do not quite understand. So are you

supportive of doing something to collect State taxes on these interstate transactions?

Mr. ISAACSON. States have done a great number of things already to collect State taxes. For example, California, Kentucky,

Maine all have lines on their State income tax returns. It is actually a very easy item to audit for States. Some States have been

more aggressive than others on educating their citizens on that

fact.

If you are going to engage in a much more substantial change

in standards of Federalism, then what the Congress should really

insist upon is high-bar reform, the kind of substantive reform that

is not going to result in the complexities that exist in the current

system.

That is what Congress’ commission was intended to address, the

Advisory Commission on Electronic Commerce. It was the advice of

17

the Advisory Commission that the Streamlined Sales Tax Project

simply rejected.

Senator THOMAS. All right.

Mr. ISAACSON. Just to comment, for example, on the technology

fix, because I think that relates to it. The Federal Reserve Bank

has indicated that 45 percent of consumer transactions are still

paid for by check.

Now, Mr. Noble suggested there is a technology fix. But for the

consumer who gets a catalog and is paying by check, I do not understand how a certified service provider or software helps the consumer compute that tax obligation that they are going to have to

a foreign jurisdiction. The issues of integration of software——

Senator THOMAS. What do you mean, to a foreign jurisdiction?

The consumer is paying the tax in his own jurisdiction, is he not?

Mr. ISAACSON. The consumer is paying the tax in their own jurisdiction and has to compute that tax based upon the demands that

are associated with 7,500 different jurisdictions.

Senator THOMAS. Yes. All right.

Mr. Rants, how do you deal with this jurisdictional issue? Just

very briefly, please.

Mr. RANTS. Senator, I do not think that there is a problem. I

truly believe there is a remedy to that with software. It is a database problem. If you are paying by check and you are living in

Sioux City, IA, you know that you are currently paying 7 percent

sales tax.

Remember, this is a tax on the consumer based on the tax rate

in their jurisdiction. It is only the remote seller that we are asking

to be the person to collect that tax.

Senator THOMAS. All right. Thank you.

Mr. Benham, I did not quite understand. What do you think is

going to help you expand your business, by having this tax or not

having it?

Mr. BENHAM. Well, two things will help it.

Senator THOMAS. What will?

Mr. BENHAM. By having the sales tax simplification.

Senator THOMAS. All right.

Mr. BENHAM. And by having us have the ability to have competing retail—let me give you a for example of what happens in our

store, if I may, please. I will be brief. We have a customer come

into our store. We have a substantial cosmetics business in our

store. The customer sits down in a chair at our counter.

Our expert sales associate, who has been trained, applies makeup, writes down all the products, and the customer says, thank you

very much, and actually will tell you they are going to order it on

the Internet. I am losing business, my girls are losing commissions,

and my city is losing the tax revenue. By having this legislation

passed, that will stop that practice. It will help my in-store sales

and it will help me expand my Internet sales.

Senator THOMAS. All right. Do you think the tax will keep people

from buying it on the Internet?

Mr. BENHAM. I think the equality of tax will keep people buying

it in my store, which is my primary interest.

Senator THOMAS. I understand that.

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Your business is fairly unique, Mr. Imig. Do you think, if this

were passed, it would change the way you do business?

Mr. IMIG. Yes, I do, Senator. I believe that we are close to a fairly

level playing field right now because of the shipping charges that

we have to charge as it is. The customer looks at their price of

entry, so to speak, on buying something. The reality is, they look

at shipping charges as a trade-off to sales tax. That is the reality

of it. I am not kidding you when I say that.

In my opinion, some of the small business retailers should really

be jumping on trying to support the Internet business, because in

the long run there are not going to be a lot of small business retailers left if they are not selling unique product because they are competing against big chains.

Senator THOMAS. Thank you.

Senator Bingaman?

Senator BINGAMAN. Let me just indicate, my own view on this is

that you can have small businesses that are local brick-and-mortar

operations competing against great, big companies on the Internet,

or you can have big businesses like the local Wal-Mart competing

against small companies on the Internet. So I do not really think,

Mr. Imig, your point is a valid one, that this is solely a question

of little guys versus big guys.

As I see it, in my State, if I have a guy in a town in my State

who is trying to run a bookstore and he is required to charge sales

tax on every book he sells, why should Barnes & Noble, or Borders,

or Amazon be able to sell that book without charging that same

sales tax?

Why don’t you tell me what your thought is on that? Why should

we be giving those large retailers an advantage over the small retailer that is a brick-and-mortar operation?

Mr. IMIG. Well, it depends upon the size of your community.

Probably a community of 30,000, 40,000 probably has a Barnes &

Noble already and they are paying sales tax.

Senator BINGAMAN. Well, there are about three communities in

my State that have a Barnes & Noble. The rest of my State does

not have a Barnes & Noble. There are a lot of small businesses still

in those communities that are trying to compete and sell their

products.

Mr. IMIG. I cannot speak for them, but I can speak for us. If somebody bought $50 worth of product from us, they are also going

to get charged a $10 shipping charge, which is more than the tax.

Senator BINGAMAN. But all you are saying there is, UPS may

make out like a bandit, or FedEx, but the State is getting no revenue, the local community is getting no revenue, the local retailer

is disadvantaged.

Mr. IMIG. That is the way the direct marketing business has

been for 100 years. So when you start applying these type of taxes,

it changes the dynamic of direct marketing.

Senator BINGAMAN. As I see it, the reality on the ground has

changed. The direct marketing business is growing like crazy because of the Internet, primarily. For other reasons, too, perhaps,

but primarily because of the Internet.

There are a lot of advantages. If I want to buy a book, there are

a lot of advantages to trying to do it on the Internet. It is easier

19

to find what is available. It is easier to find the cheapest copy anywhere in the country.

So, there are a lot of reasons why I would still buy over the

Internet instead of buying from my local bookstore. But I hate to

add to that problem for the local retailer.

That seems to me what we have in place right now, is a situation

where the local retailer, who is trying to keep his business open

and pay his employees and be a member of the community, is at

a substantial disadvantage.

I do not know. Maybe I am missing something in this analysis.

But I really do not see that there is much of an argument for saying we should have one set of rules for people who are trying to

operate in brick-and-mortar operations, and a different set of rules

if you just operate on the Internet. It just does not make any sense.

I will stop with that, Mr. Chairman.

Senator THOMAS. Senator Snowe?

Senator SNOWE. Thank you, Mr. Chairman.

I would be interested in hearing the views of the members of this

panel—and I will start with you, Mr. Isaacson—concerning the impact on small businesses. As chair of the Small Business Committee, this is obviously one of my concerns, because the Internet

does afford small retailers the opportunity to do business and to expand their businesses.

Yet, there is no question there is a disproportionate impact on

small retailers being able to, as Mr. Imig was mentioning, conform

to the collection of this tax.

In fact, Ernst & Young conducted a study. They reported, for

merchants selling in all 45 States having a sales tax, the cost of

compliance for large retailers was 14 percent of the tax collected

by the retailer. For small retailers, the cost of compliance was 87

percent of the tax collected.

Is there any way of leveling the playing field for this disparity

and making it easier for small retailers? Do you see any way in

which that can be accomplished?

Mr. ISAACSON. Senator Snowe, I think the problem for small retailers is serious. That study by Ernst & Young is scary, that it

costs 87 percent of the amount of tax that is collected for the small

retailer to be able to collect it.

As Mr. Imig has pointed out, the Internet has been a great opportunity for Main Street merchants like Mr. Benham to be able

to access national and international markets.

Anything that would throw a wet blanket on that is a matter of

great concern. Many small businesses, especially those in Maine,

for example, that have entered the area of direct marketing do so

in the gift field, that is, third-party transactions.

Senator Thomas was asking me about the problem that is associated with a purchaser computing their own tax. The Streamlined

Sales Tax Project has destination-based sourcing.

That means if a grandmother in Lewiston, ME is sending product to her grandchildren located in four different States, that

grandmother has to compute the tax in all of those four different

States, even though she is the purchaser. For an individual to be

confronting that, with the kind of niche markets that small businesses frequently inhabit, becomes a daunting task.

20

If the issue is one of level playing field, I think the real thing

to look at is the fact that big bucks retailers are the ones who get

enormous tax benefits, tax increment financing, subsidization of

utilities and access roads. Those are the companies that are putting

Main Street merchants out of business.

The Internet is the opportunity that is presented. Congress

should be very cautious about imposing burdens on retailers that

are disproportionately going to fall on small retailers. Small retailers are not just companies that are selling $5 million

a year, as Mr. Imig pointed out. If you are a small retailer in today’s world, if you are competing against big bucks retailers, you

are $40, $50, $60 million a year.

Senator SNOWE. Mr. Rants, would you care to comment?

Mr. RANTS. I would. Thank you, Senator. I think that the questions that small businesses probably are concerned about the most

fall into two categories, one being the cost of compliance.

The goal of the Streamlined Sales Tax Project is to have the

States begin to pick up that cost of compliance. That is a legitimate

concern they have. But the concern that I hear from small businesses who, in Iowa, are on our Private Sector Advisory Council

that we have, is the fear that they have that they are going to be

the ones left holding the bag.

The brick-and-mortar merchant who is left to pay the increase in

property taxes or other forms of taxation that continue, that still

remain for a State or a local government to impose to fund our

schools, to fund our police powers, to fund all the other things that

we expect in our community, it is the merchants that are left at

home that have to continue to pay that tax in some other form.

Sales tax is not the only form of taxation that we have. When

local governments are not able to recoup, whether it be for Medicaid at the State level or education at the local level, those costs

through their sales tax, they turn to other forms of taxation, like

property taxes.

That all falls on the brick-and-mortar merchant who is now collecting more in taxes, or in some cases paying more in taxes on

their own profits, while they see their sales being eroded to out-ofState merchants.

Senator SNOWE. I appreciate that.

Mr. Benham, you were talking about people coming into your

store, looking at cosmetics, and then saying they are going to purchase on the Internet. Do they indicate that it is because they will

be exempted from taxation? I mean, is that the most frequently

heard comment?

Mr. BENHAM. Yes. We know that is the case, Senator. In some

cases, people will actually—for example, we sell very nice things in

our store. For example, on a St. John outfit, St. John Knits, customers will actually bring in a print-out from a website of a major

out-of-State retailer with no nexus in Oklahoma.

They will come, they will try on the clothes, they will ask us to

write down the vendor style number, and in some cases they are

just very brazen about it. It is very destructive for morale in our

store, and very destructive to our business.

Senator SNOWE. Mr. Imig?

Mr. IMIG. Yes, ma’am?

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Senator SNOWE. You made reference to the impact on small businesses. Do you see any way of the U.S. Congress being able to establish a fair process that does not impose a disproportionate burden on small retailers?

Mr. IMIG. I would hope that we would be able to streamline it

if we have to march to something like this. I would hope that we

would be able to streamline it very substantially, almost to the

point of one tax per State. We have 300,000 customers in New York

and we have 350,000 customers in California.

Right now, we have trouble trying to keep track of the taxing authorities of Wyoming and Nevada, which obviously do not have a

lot of taxing authorities. So it is a tough issue.

From my perspective, I think the Internet is really one of the

great markets of small business creativity in the next 5 to 10 years,

and I would really hate to see us put a damper on that creativity.

Senator SNOWE. I appreciate that.

Thank you, Mr. Chairman.

Senator THOMAS. Senator Crapo?

Senator CRAPO. Thank you, Mr. Chairman.

I note that we are going to have a vote soon, and we have another panel. I am going to save my questions for the next panel.

Senator THOMAS. All right.

Well, thank you, gentlemen. We appreciate it very much. We look

forward to the next panel.

We will turn, now, to the issue of business activity taxes. The Supreme Court has stated that substantial nexus is required for the

State to impose business activity taxes on an entity. However, the

question of what constitutes a substantial nexus remains an open

one.

Consequently, each State is free to interpret this as it sees fit.

This has resulted in a rather haphazard and uncoordinated imposition of BAT by different jurisdictions, sometimes on the same income.

One of the questions we run into is, does the substantial nexus

standard need to be further clarified, and, if so, what is the proper

standard? My colleagues, Senator Crapo and Senator Schumer,

have introduced a bill that would establish physical presence as the

requirement of substantial nexus.

So we will now turn to that panel. While they are getting there,

Senator Crapo, would you care to make a comment on the proposed

legislation?

Senator CRAPO. Yes, Mr. Chairman. Thank you for holding this

hearing. I had a lengthy statement, but I will forego that because

of the shortness on time that we have here.

I do have a number of letters that I would like to make a part

of the record, if that would be without objection.

Senator THOMAS. They will be made a part of the record.

Senator CRAPO. Thank you, Mr. Chairman.

[The letters appear in the appendix on p. 89.]

Senator CRAPO. I will just simply say, the bottom line here is

that all income should be taxed, but it should be taxed only once.

The issues we are addressing with this legislation are interstate

commerce issues, which the Supreme Court and the Constitution

rightly say are up to Congress to develop.

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Senator Schumer and I want to ensure that the Federal Government, along with the State and local governments, retain the tools

that they need to ensure that income is not sheltered and that it

is appropriately taxed in the jurisdictions where it should be taxed.

At the same time, we want to assure that the same income is not

double- or triple-taxed in jurisdictions where the nexus is not sufficient. By creating a uniform bright line test, which has already

been upheld by the Supreme Court as appropriate for sales and use

taxes and is consistent with international tax policy, we are attempting to achieve these important goals.

With that, I would like to get on with the witnesses.

Senator THOMAS. Very good. Thank you.

Mr. Douglas Lindholm, president and executive director of the

Council on State Taxation; Dan Bucks, Director, Montana Department of Revenue; and Michael Mundaca, partner, Ernst & Young,

International Tax Services.

Gentlemen, welcome. We will start with you, Mr. Lindholm. We

are going to be pushed against a vote, so if you would try to consolidate your statements, we would appreciate it.

Mr. LINDHOLM. I will be as brief as possible. We do appreciate

the effort.

STATEMENT OF DOUGLAS L. LINDHOLM, PRESIDENT AND EXECUTIVE DIRECTOR, COUNCIL ON STATE TAXATION, WASHINGTON, DC

Mr. LINDHOLM. As you indicated, I am Doug Lindholm. I am the

president and executive director of the Council on State Taxation,

also known as COST. We represent nearly 600 of the Nation’s largest companies on State tax issues and on State tax policy matters.

I very much appreciate the opportunity to be here with you today

to discuss this issue, and that is the appropriate extent of State jurisdiction of tax, also known as nexus.

In my testimony today I want to touch on three questions. The

first question is, why does the issue of business activity tax nexus

warrant Congressional action? The second question: why is physical presence the appropriate standard for business activity tax

nexus? Finally, what impact would a physical presence standard

have on State revenues?

Question one. Why do we feel that Congress needs to act on BAT

nexus? The most fundamental determination that a business has to

make any time they assess a business activity tax is whether that

business is actually subject to that tax at all. The standard for

making that determination is also, not coincidentally, the single

greatest unanswered question in the State tax arena today.

We have numerous times tried to get this issue before the U.S.

Supreme Court, but they have not considered the issue in the context of business activity taxes, and results from State courts are,

predictably, mixed.

We do have some ancillary guidance, however. In the Bellas Hess

case in 1967, and the Quill case in 1992, the Supreme Court noted

that physical presence is required for nexus before a State can impose a sales tax collection duty.

They did not address the issue of business activity tax nexus, but

in that case they specifically invited Congress to legislate on the

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nexus question, and they specifically indicated that they felt that

Congress was the appropriate body to resolve this issue.

Now, I realize that you and your colleagues have been hearing

a great deal from the States about how unnecessary Congressional

action is on this issue. I think that is entirely appropriate. There

is a natural tension between States’ authority to tax and the authority of Congress to regulate interstate commerce.

But please recognize that, absent Congressional action, States

have every incentive to become more aggressive in asserting economic nexus over out-of-State businesses. I cannot say I blame

them. I mean, it is a great way to export their tax burden.

However, they do not have a similar incentive to assess the impact of their aggressiveness on the free flow of interstate commerce. That is clearly Congress’ purview, and that is why we are

here before you today.

My written testimony illustrates a number of reasons why the

current uncertainty in this area is creating real burdens for businesses and why we feel that Congress is the ultimate authority,

under the Commerce Clause, to address and resolve this issue.

Question two. Why is physical presence the appropriate standard? That question, we feel, should be guided by one fundamental

principle, and that is that a government has the right to impose

burdens only on businesses that receive meaningful benefits or protection from that government.

The physical presence standard is a clear, predictable, and enforceable standard, and it is based on where companies actually

earn their income, in other words, where they employ their labor

and their capital. It is the standard that most companies use today.

I would like to read to you some words of a former executive director of the Multistate Tax Commission, Gene Corrigan, who is arguing for a compromise on this issue: ‘‘The States need to face the

reality that most of them are generally incapable of enforcing the

doing business—that is the economic presence—standard anyway.

In almost all cases, they really fall back on the physical presence

test as a practical matter. To the extent that they try to go beyond

that test to reach out-of-State businesses, they spend inordinate

amounts of time and effort via bloated legal staffs that provide

grounds for criticism of government in general, and with mixed

success at best.’’

The States have had over 40 years, ever since the formation and

adoption of the Willis Commission and their report, to try to formulate a workable nexus standard, and they have been unable to do

so. Clearly, I think it is time for Congress to step forward and address this issue.

Finally, let me address the impact on State revenues of a physical presence test. We, several months ago, retained Ernst & Young

to prepare an independent estimate of the fiscal impact of the

House bill, H.R. 1956. The Senate bill, S. 2721, is identical.

According to that study, in the first year, the estimated revenue

loss for all States is $434 million. Now, that revenue loss is 0.8 percent of the total State and local business activity taxes covered by

the legislation. If you compare that to all State and local taxes paid

by business in 2005, the revenue loss is less than one-tenth of 1

percent.

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Now, even the CBO estimate of $1 billion in the first year is significantly less than 1 percent of total State tax collections. I realize

that you have gotten some conflicting revenue estimates here.

One of the things the E&Y study that we have put in the record

does is it explains the key differences between those studies. I

would encourage this committee to specifically evaluate those differences for both reasonableness and objectivity when you compare

the various fiscal estimates.

To conclude, we are very interested in working with this committee and other interested parties to develop a bright line physical

presence nexus standard. Again, I appreciate the opportunity to be

here and would be happy to answer questions.

Senator THOMAS. Thank you very much.

[The prepared statement of Mr. Lindholm appears in the appendix.]

Senator THOMAS. Mr. Bucks?

STATEMENT OF DAN BUCKS, DIRECTOR, MONTANA

DEPARTMENT OF REVENUE, HELENA, MT

Mr. BUCKS. Thank you, Mr. Chairman and members of the committee. I appreciate the opportunity to appear before the subcommittee on the issue of tax jurisdiction in the new economy.

I will address the topic generally, but will focus on S. 2721, the

so-called Business Activity Tax Simplification Act, because the legislation is actively before the committee.

I am Dan Bucks, Director of Revenue for the State of Montana.

I appear today at the request of the Ranking Member of the full

committee, Senator Baucus.

Montana is proud of the work that Senator Baucus has done, in

cooperation with the committee chair, Senator Grassley, and the

entire committee, in curbing abusive tax shelters. We thank this

committee for its leadership on this issue.

States are adding their own enforcement weight to the Federal

effort to clean up the abusive tax shelter mess, and this is one example of the mutually beneficial cooperation that can occur between the Federal and State governments to improve the equity

and integrity of our shared income tax system.

I appear in support of that kind of cooperation between the

States and the Federal Government, and in opposition to S. 2721

and the outmoded concepts underlying the bill.

S. 2721 is the antithesis of cooperation, because it would render

useless State business taxes and destroy their equity and integrity.

My arguments in opposition to this bill are consistent with the policy positions of the National Governors Association, the Federation

of Tax Administrators, and the Multistate Tax Commission.

States have long experience and knowledge to offer the Federal

Government in understanding how to make income taxes work in

the new economy. Because the U.S. is the world’s first modern common market, States have pioneered, over nearly a century, the

principles that make income taxes equitable and effective in an

open trade environment.

States have long applied economic presence nexus standards to

ensure that all who compete in their State’s marketplace pay equal

taxes. To use one example, this standard has been critical to efforts

25

of many States to prevent abusive income shifting by corporations

using intellectual property holding companies to improperly avoid

State taxes. The Federal Government now faces this very same

problem. States are solving this problem and can help the Federal

Government solve it as well.

So we urge Congress not to engage in conflict with the States

through preemption legislation such as S. 2721. Instead, we urge

you to recognize the value of State experience as laboratories of democracy and in shaping tax systems that work well in the new

economy.

More specifically, I ask you to reject S. 2721, for several reasons.

The bill will legalize tax shelters that States consider abusive and

would disallow under current law. The tax shelters blessed by this

bill will allow many large corporations to reduce their State tax liabilities to virtually zero.

Aiding and abetting improper corporate tax planning through

this bill is inconsistent with this committee’s efforts to reduce tax

sheltering at the Federal level.

As estimated by the Congressional Budget Office, the bill constitutes a huge unfunded mandate on the States which, if enacted,

would constitute the largest such mandate ever imposed by Congress on the States.

The CBO says that the bill will place at risk up to 75 percent

of the State business tax base. The revenue losses imposed by the

bill will shift the burden away from large, out-of-State companies

to smaller local businesses.

The bill distorts investment decisions and harms the economic

development of the States, especially in more rural States whose

local economies depend on local businesses that will bear the brunt

of the tax shift imposed by this bill.

Physical presence standards of nexus for tax purposes act as an

investment barrier that discourages companies from investing in

States where they market their goods and services and from which

they earn their profits. The bill simply undermines local economies

and local communities.

The bill does significant harm to our Federal system by undermining State sovereignty and overturns established constitutional

precedent on the jurisdiction of States to impose tax on entities

doing business in the State.

The States have developed a straightforward, bright line nexus

standard for business activity taxes that is consistent with existing

constitutional standards and is in tune with the 21st century economy.

Unfortunately, the business community has summarily rejected

that standard and continues, instead, to insist on an outdated

physical presence nexus standard that promotes inappropriate

State tax sheltering.

In short, this bill creates the world’s largest tax shelters available to the world’s largest corporations, and this is simply wrong.

Senator THOMAS. Thank you.

[The prepared statement of Mr. Bucks appears in the appendix.]

Senator THOMAS. Mr. Mundaca?

26

STATEMENT OF MICHAEL MUNDACA, PARTNER, ERNST &

YOUNG, LLP, NATIONAL TAX DEPARTMENT, INTERNATIONAL

TAX SERVICES, WASHINGTON, DC

Mr. MUNDACA. Thank you. Good morning. I am Michael

Mundaca. I am in the International Tax Services group of the accounting firm of Ernst & Young here in Washington, DC. I would

like to thank you, Mr. Chairman, for the opportunity to testify, and

Senator Crapo as well.

Although many of our clients are interested in the issue of tax

jurisdiction, I am not testifying on behalf of any clients or on behalf

of Ernst & Young, and the views expressed here are my own.

What I would like to discuss are the current U.S. Federal income

tax jurisdictional rules contained in the U.S. income tax treaty network, as well as the application and development of those rules

with respect to transactions in the new economy.

I hope this might provide some insight for the discussion of the

income tax jurisdictional rules that should apply to the U.S. States.

In addition, I would like to discuss some possible international effects of expanded State income tax jurisdiction.

Under our tax treaties, the limits of tax jurisdiction to tax business income are set out in the permanent establishment, or PE,

rules. Permanent establishment articles are found in every one of

the more than 60 U.S. income tax treaties, as well as in the thousands of bilateral income tax treaties in force around the globe.

I will describe the OECD model PE provision, as that provision

is the most widely used in the world and differs only in very minor

respects, if at all, from the provisions of U.S. income tax treaties.

Under the OECD model PE provision, the business profits of a

non-resident enterprise are taxable only if the enterprise has a PE.

The OECD defines a PE, in general, as a fixed place of business,

a physical presence, such as an office or a factory.

The OECD model also includes a list of so-called preparatory or

auxiliary activities that will not constitute a PE, even if conducted

through a fixed place of business.

Obviously, much has changed in the global economy and in business practices since the development of the PE concept over 80

years ago, and some have questioned whether a jurisdictional concept so reliant on physical presence makes sense in an economy

now so driven by services and intangibles.

It was just these sorts of questions that prompted the U.S. and

the OECD, in 1996, to consider the application of the current rules

to new business models. After years of study, discussion, and consultation with the business community and others, the OECD was

able, in 2000, to release consensus changes to the official interpretation of the PE rules, as applied to certain electronic commerce

business transactions. Those changes maintain the rule’s firm reliance on physical presence.

Strong arguments remain for keeping the PE physical presence,

even in the new global economy. An almost universal global consensus has been achieved regarding use of the PE standard to determine income tax jurisdiction, and this has created much-needed

uniformity, predictability, and certainty from multinational taxpayers and others, including the increasing number of smaller businesses that have gone global.

27

Now I would like to turn, briefly, to the current interaction of the

Federal income tax jurisdictional rules I have just described with

State income tax jurisdictional rules.

By their terms, U.S. income tax treaties do not, in general, apply

to State taxes, and therefore it is possible that a foreign corporation may be exempt from income taxation on the Federal level

under a treaty, but may nevertheless be subject to State income

taxation.

The limits on State taxing powers has been the subject of much

litigation, and the Supreme Court has spoken regarding the international interactions as recently as 1994.

In the Barclay’s Bank case, the U.S. Supreme Court held that

California’s worldwide apportionment system was constitutional,

even when applied to foreign corporations, and even though the

system was not in accord with our treaty obligations and could result in double taxation.

Interestingly, however, by the time the Barclay’s decision was

handed down, California had allowed taxpayers an election out of

the worldwide system. That change was made in response to

threats by foreign corporations to take their business elsewhere, as

well as by the threat of Federal legislation, which was itself

prompted by complaints from foreign governments.

I raise the Barclay’s case because I think it demonstrates not

only the limited effect of tax treaties on State tax authority, but

also the potential reaction of foreign corporations and governments

to expansive State taxation.

Coupled with the already increasing pressure on the PE standard

from countries that view the rules as inadequate, assertions of expansive tax jurisdiction by the U.S. States could prompt not only

protests or retaliation by foreign governments and corporations,

but also encourage foreign countries and international organizations to reevaluate the PE standard.

We have already seen in the European Union, in the context of

value added taxes, the EU placed tax collection obligations on corporations that have customers, but no physical presence, in the

EU.

To conclude, our experiences in the international tax area, using

the well-established PE concept, have demonstrated that a clear

physical presence standard has created uniformity, predictability,

and certainty. It has helped mitigate double taxation and prevent

tax jurisdictional disputes.

In addition, it has alleviated the administrative burden that

would be imposed if taxpayers were forced to file and pay income

tax in every jurisdiction in which they have customers or other

sources of business income. Multistate taxpayers, likewise, can benefit from a similarly clear consensus standard.

There is no argument that our economy has changed and our tax

rules need to reflect those changes. However, there should be no

argument that we should strive for uniformity.

Senator THOMAS. I am sorry to interrupt you, but we have a vote

pending and I know Senator Crapo has a couple of questions.

Mr. MUNDACA. Sure.

Senator THOMAS. So, thank you very much.

Mr. MUNDACA. Thanks.

28

[The prepared statement of Mr. Mundaca appears in the appendix.]

Senator THOMAS. Senator Crapo?

Senator CRAPO. Thank you very much. I think you were pretty

much wrapping up anyway there, Mr. Mundaca, so I appreciate

that. I apologize to the entire panel. We probably are not going to

have more than just 5 minutes or so for questions here because of

the vote that has been called, so I would ask you to keep your responses as brief as possible.

But let me just ask, generally to the entire panel, is there any

disagreement on the panel that, whatever our system of income

taxation should be, that we should strive to achieve one in which

we do not have different jurisdictions taxing this same income? Is

there any disagreement with that?

Mr. MUNDACA. None from me, Senator.

Mr. LINDHOLM. No.

Senator CRAPO. I will take that as no from the entire panel.

Mr. Bucks, you indicated that if this legislation were enacted into

law, that many corporations could reduce their State liability to

zero, I assume in certain States.

Now, I want to clarify, though. That does not mean that those

corporations would reduce their income tax liability to zero, but

that they would not be paying tax on that same income in multiple

jurisdictions. Is that not correct?

Mr. BUCKS. Senator, I would respectfully disagree. In fact, the

Congressional Research Service found, in its report on the issue of

a physical presence nexus standard, that in many instances corporations could in fact produce large quantities of nowhere income,

meaning that it is not taxed anywhere.

That is, in fact, the result, particularly in the case of the use of

intellectual property holding companies, where companies virtually

have eliminated their taxes to zero. The Federal Government is facing the same problem now with regard to offshore intellectual property holding companies.

In fact, through the physical presence standard, companies can

reduce their combined State corporate income tax liability to virtually zero.

Senator CRAPO. Mr. Lindholm, do you have a comment on that?

Mr. LINDHOLM. I certainly do. I think Mr. Bucks, when he mentions State tax liabilities, means income tax liability. That clearly

will not impact the amount of taxes companies are paying. Businesses are paying sales tax, payroll tax, excise taxes, franchise

taxes, et cetera.

Even on the income tax issue, I respectfully disagree with Dan.

To think that a company will be able to reduce their income tax

liability to zero is absolutely ludicrous. Even the estimates from the

States—and we think they are somewhat exaggerated—only range

from zero to 30 percent.

Senator CRAPO. Mr. Mundaca, do you have an opinion on that

question?

Mr. MUNDACA. Yes. On the international side, we do see some

corporations that are able to use tax planning to drive their income

tax liability down. But I do not see it so much as a jurisdictional

issue.

29

There are transfer pricing concerns, there are concerns with information exchange. But I think the jurisdictional rules have

served us well and have mitigated double taxation, and have not

created no taxation.

Senator CRAPO. Again, I apologize that we cannot spend the time

to explore some of these in this hearing to the depth that we need

to. I am probably going to have to just get into one more area, then

wrap it up. But we certainly will continue to explore the issues

that have been raised by the witnesses.

Mr. Lindholm, the next area I wanted to get into was the area

of revenue estimates, and I would welcome the input of others on

the panel on this.

The NGA has estimated the revenue lost to the States from this

legislation to be around $6 billion a year. The CBO has put that

cost at between $1 and $3 billion a year. Your own organization,

COST, has estimated that it will be even less, down around $300

million a year.

Can you explain why we have such significantly different estimates?

Mr. LINDHOLM. I certainly can. The NGA estimate was done on

an earlier version of the bill and it takes into account some items

and issues that are clearly not covered by the latest version. They

were not intended to be covered by the earlier version, but there

was some ambiguity there.

The NGA also, if you look at that study, it is reflective of the fact

that many of the States that responded to the survey disagreed on

the bill’s provisions. For example, one State thought that it might

impact their ability to even impose combined reporting. That is obviously not the case.

The CBO estimate is much closer to our estimate, but even then

we disagree with some of the methodologies and assumptions of the

CBO. For example, some of the restructuring that Mr. Bucks indicated may occur happens if a company then uses an independent

contractor in a State. The CBO estimate does not reflect the fact

that those independent contractors that are still operating in the

State would see a resulting increase in income as well.

There are some other issues that highlight the differences. They

are all very well spelled out in the E&Y study. I encourage, in the

interest of time, you to review that.

Senator CRAPO. Thank you.

Mr. Bucks, do you want to make a comment on that?

Mr. BUCKS. Yes, Senator. Just very simply, the CBO estimates

indicate that this bill, if enacted, would be the largest unfunded

mandate ever imposed on the States. Our perspective, the State tax

officials’ perspective, is very similar to CBO’s: the impact is large

and it will grow over time as companies restructure.

The difference is that when the States estimate their revenue impact, they uniquely have access to the actual tax returns of companies. That is how we estimated it in Montana. We have to advise,

as officials, our legislatures and Governors accurately because of

the balanced budget requirements of the States.

We stand behind our estimates because they are the only estimates that are based upon reviewing all of the major tax returns

that we received in the State that would be implicated by this bill,

30

and we think the CBO perspective generally confirms ours, although they did not have access to the tax returns.

Mr. LINDHOLM. If I may, Senator.

Senator CRAPO. Yes. Briefly.

Mr. LINDHOLM. E&Y had access to the same results, the survey

results, that the States provided to the NGA to formulate that

study.

Mr. BUCKS. Senator, if I could just comment. Survey results are

different from the actual tax returns and the actual tax records of

the companies. Those are different things. The E&Y study may

have drawn from summary results, but not from the actual tax returns.

Senator CRAPO. Well, thank you. I am looking at the clock here.

The time for the vote that just started is probably expiring on the

floor of the Senate right about now, so I am going to have to wrap

up this hearing. I have a whole folder full of materials and questions I wanted to get into with this panel.

But let me just say that one of the reasons that the other Senators had to leave was because of the vote as well. I am quite confident that you will receive some written questions, not only from

me, but some of the other Senators who were not able to be here

to ask their questions.

We will continue through that process, as well as through just

the general legislative process, to explore the issues that you have

all raised as we pursue this legislation.

I do apologize that we did not have time to get into these kinds

of issues with you in the question and answer period in this panel,

but nonetheless, your testimony is appreciated, well received, and

will be thoroughly reviewed and vetted.

With that, I guess I have been delegated the authority to conclude this hearing. This hearing is adjourned. Thank you.

[Whereupon, at 12:05 p.m., the hearing was concluded.]

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A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

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