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87–150 PDF 2014

EXPLORING ALTERNATIVE SOLUTIONS ON 

THE INTERNET SALES TAX ISSUE 

HEARING 

BEFORE THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

MARCH 12, 2014 

Serial No. 113–65 

Printed for the use of the Committee on the Judiciary 

( 

Available via the World Wide Web: http://judiciary.house.gov 
(II) 

COMMITTEE ON THE JUDICIARY 

BOB GOODLATTE, Virginia, Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

STEVE CHABOT, Ohio 

SPENCER BACHUS, Alabama 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TOM MARINO, Pennsylvania 

TREY GOWDY, South Carolina 

RAU ́ L LABRADOR, Idaho 

BLAKE FARENTHOLD, Texas 

GEORGE HOLDING, North Carolina 

DOUG COLLINS, Georgia 

RON DeSANTIS, Florida 

JASON T. SMITH, Missouri 

[Vacant] 

JOHN CONYERS, JR., Michigan 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO R. PIERLUISI, Puerto Rico 

JUDY CHU, California 

TED DEUTCH, Florida 

LUIS V. GUTIERREZ, Illinois 

KAREN BASS, California 

CEDRIC RICHMOND, Louisiana 

SUZAN DelBENE, Washington 

JOE GARCIA, Florida 

HAKEEM JEFFRIES, New York 

DAVID N. CICILLINE, Rhode Island 

SHELLEY HUSBAND, Chief of Staff & General Counsel 

PERRY APELBAUM, Minority Staff Director & Chief Counsel 
(III) 

C O N T E N T S 

MARCH 12, 2014 

Page 

OPENING STATEMENTS 

The Honorable Bob Goodlatte, a Representative in Congress from the State 

of Virginia, and Chairman, Committee on the Judiciary ................................. 1 

The Honorable John Conyers, Jr., a Representative in Congress from the 

State of Michigan, and Ranking Member, Committee on the Judiciary ......... 3 

WITNESSES 

Stephen P. Kranz, Partner, McDermott Will & Emery, LLP 

Oral Testimony ..................................................................................................... 27 

Prepared Statement ............................................................................................. 30 

William E. Moschella, Shareholder, Brownstein Hyatt Farber Schreck, LLP 

Oral Testimony ..................................................................................................... 63 

Prepared Statement ............................................................................................. 65 

James H. Sutton, Jr., CPA, ESQ., Moffa, Gainor, & Sutton, PA 

Oral Testimony ..................................................................................................... 72 

Prepared Statement ............................................................................................. 74 

Joseph R. Crosby, Principal, Multistate Associates Incorporated 

Oral Testimony ..................................................................................................... 96 

Prepared Statement ............................................................................................. 98 

Andrew Moylan, Senior Fellow and Outreach Director, R Street Institute 

Oral Testimony ..................................................................................................... 117 

Prepared Statement ............................................................................................. 119 

The Honorable Chris Cox, Counsel, NetChoice, Partner, BIngham McCutchen 

LLP 

Oral Testimony ..................................................................................................... 135 

Prepared Statement ............................................................................................. 137 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Material submitted by the Honorable Bob Goodlatte, a Representative in 

Congress from the State of Virginia, and Chairman, Committee on the 

Judiciary ............................................................................................................... 5 

Material submitted by the Honorable Henry C. ‘‘Hank’’ Johnson, Jr., a Representative in Congress from the State of Georgia, and Member, Committee 

on the Judiciary ................................................................................................... 181 

Material submitted by the Honorable Steve King, a Representative in Congress from the State of Iowa, and Member, Committee on the Judiciary ....... 191 

Material submitted by the Honorable Suzan DelBene, a Representative in 

Congress from the State of Washington, and Member, Committee on the 

Judiciary ............................................................................................................... 208 

(1) 

EXPLORING ALTERNATIVE SOLUTIONS ON 

THE INTERNET SALES TAX ISSUE 

WEDNESDAY, MARCH 12, 2014 

HOUSE OF REPRESENTATIVES

COMMITTEE ON THE JUDICIARY

Washington, DC. 

The Committee met, pursuant to call, at 10:08 a.m., in room 

2141, Rayburn Office Building, the Honorable Bob Goodlatte 

(Chairman of the Committee) presiding. 

Present: Representatives Goodlatte, Coble, Smith of Texas, 

Chabot, Bachus, Issa, Forbes, King, Franks, Gohmert, Jordan, Poe, 

Chaffetz, Marino, Gowdy, Labrador, Farenthold, Holding, Collins, 

DeSantis, Smith of Missouri, Conyers, Nadler, Scott, Lofgren, Jackson Lee, Cohen, Johnson, Pierluisi, Chu, Deutch, Bass, Richmond, 

DelBene, Garcia, Jeffries, and Cicilline. 

Staff present: (Majority) Shelley Husband, Chief of Staff & General Counsel; Branden Ritchie, Deputy Chief of Staff & Chief Counsel; Allison Halataei, Parliamentarian and General Counsel; Daniel 

Huff, Counsel; Kelsey Deterding, Clerk; (Minority) Perry 

Apelbaum, Minority Staff Director & Chief Counsel; Danielle 

Brown, Parliamentarian; and Norberto Salinas, Counsel. 

Mr. GOODLATTE. Good morning. The Judiciary Committee will 

come to order. And without objection, the Chair is authorized to declare recesses of the Committee at any time. 

We welcome everyone to this morning’s hearing on exploring alternative solutions on the internet sales tax issue. And we will take 

note that this morning Sir Tim Berners-Lee, who is widely credited 

as being the inventor of the worldwide web, announced that today 

is the 25th anniversary of the internet, so we will take note of that 

as well. I think Sir Tim Berners-Lee has more credibility on the 

issue. 

I will recognize myself for an opening statement. 

Over the last 3 years, shopping center foot traffic has fallen 50 

percent. In January, JC Penney announced it would close 33 stores 

and cut 2,000 positions. Radio Shack is shuttering about 500 retail 

stores nationwide. Most recently, Staples announced that it will 

close 225 stores over the next year. 

Meanwhile, internet commerce is booming. Fourth quarter U.S. 

retail e-commerce sales were $69.2 billion, up 16 percent from the 

same period in 2012. With e-commerce just 6 percent of total retail 

sales, there is much room for continued rapid growth. In part, 
2 

these trends reflect structural advantages internet retailers enjoy, 

like lower store overhead. 

Congress should not interfere in the natural evolution of the 

markets. However, many argue that unfair sales tax laws are contributing to these trends. Congress should examine this problem 

and potential solutions. 

In Quill v. North Dakota, the Supreme Court reaffirmed a longstanding rule: sellers cannot be forced to collect sales taxes for 

States in which they have no physical presence because compliance 

would unduly burden interstate commerce. The commerce clause 

requires physical presence in order to address structural concerns 

about the effects of State regulation on the national economy. 

Under the Articles of Confederation, State taxes had hindered 

interstate commerce, and the commerce clause sought to remedy 

such burdensome State laws. However, the Supreme Court has also 

indicated that Congress has the ability to relax the physical presence test if Congress determines that there is no longer a burden 

on interstate commerce by the State activity in question. 

Traditional retailers argue that the physical presence test puts 

them at a distinct disadvantage to their online counterparts who 

do not collect sales tax. Numerous retailers have brought Congress 

personal examples of what they call show rooming. Consumers go 

to a store, draw on the retailer’s knowledge, and then buy the item 

online specifically to save the sales tax. 

Technically, consumers in the 45 States with a sales tax still owe 

it if it is not collected by the seller. This nearly identical obligation 

is known as a use tax. However, it is widely ignored by consumers 

and unenforced by States for both practical and political reasons. 

States estimate the annual lost revenue at $23 billion. 

The Senate solution to this problem, the Marketplace Fairness 

Act, ostensibly lets states that simplify their tax rules force remote 

sellers to collect. In practice, the bill suffers from fundamental defects in 3 categories. First, the tax is already owed, but the public 

still views the bill as Congress taxing the internet. In a June 2013 

Gallup poll, 57 percent of Americans opposed it. Opposition among 

young voters was 73 percent. 

Second, compliance was not sufficiently simple. The bill required 

states to provide free software, but did not address integration 

costs. Furthermore, compliance software does not help the direct 

mail industry, and the bill provides no method for handling usebased exemptions common in agriculture and medical device sales. 

Other complications abound. Compliance costs estimates vary 

widely. There are over 9,600 taxing jurisdiction, and the Affordable 

Care Act experience has left voters wary of highly-touted software 

solutions. 

One of the most significant defects is that the bill exposes remote 

sellers to multiple audits in jurisdictions in which they have no 

voice. Legislators prefer to impose taxing burdens on those least 

able to hold them accountable. That is why hotel taxes are so 

high—18.27 percent in Manhattan. These taxes fall primarily on 

out of towners who cannot vote. Similarly, remote sellers have no 

direct recourse to protest unfair or unwise enforcement, making 

them prime targets. 
3 

That said, the Committee is sympathetic to the plight of traditional retailers. It is serious about searching for a solution that the 

various parties can accept. The issue is just far more complex than 

it seems at first glance. If Congress is to act, it must do so deliberately and precisely to avoid a cacophony of 9,600 taxing jurisdictions fighting over what is required. 

Accordingly, on September 18, 2013, the Judiciary Committee 

published seven principles regarding remote sales tax. The principles were intended to spark fresh, creative solutions. In the 

months following, the Committee received a number of ideas in response to the principles. 

This hearing will examine these ideas in depth. One witness representing each idea the Committee would like to explore will advocate for it and defend it against criticisms from fellow panelists. 

The merits and shortcomings of each approach will be exposed. The 

aim is to start winnowing down the proposals to see if there are 

any that can garner support from all sides. 

There have been more than 30 congressional hearings on this 

issue since 1994. New approaches are needed, and these witnesses 

will present some today. I look forward to their testimony and ask 

everyone to keep an open mind, and hope no one finds today’s proceedings too taxing. [Laughter.] 

And it is now my pleasure to recognize the gentleman from 

Michigan, the Ranking Member of the Committee, Mr. Conyers, for 

his opening statement. 

Mr. CONYERS. Thank you, Chairman Goodlatte, and Members of 

the Committee, and our distinguished witnesses, including a 

former Member. Today’s hearing focuses on alternatives to those 

prior legislative initiatives, and I welcome the discussion on these 

ideas. 

State governments rely on sales and use taxes for nearly onethird of their total tax revenue. Yet as more Americans purchase 

more of their goods on the internet, the State receives less in sales 

tax revenue. For example, in my State of Michigan, the Department of Treasury estimates the total revenue lost to remote sales 

will total $290 million this Fiscal Year. 

Lost tax revenues mean that State and local governments will 

have fewer resources to provide their residents essential services, 

like education, and police, and fire protection. It also means fewer 

funds to pay for basic necessities, like salt to melt the ice and snow 

and asphalt to fill the potholes. 

Uncollected sales taxes also have a negative impact on our local 

communities. Fewer purchases at local retailers obviously translate 

to fewer local jobs, and eventually the closing of stores. The unfair 

advantage that remote sellers have by not collecting sales taxes 

hurts us all. 

Congress should not delay any further. 

In its 1992 Quill decision already referred to by the Chairman, 

the Supreme Court recognized that Congress is best suited to determine whether a remote seller must collect sales taxes. Congress 

has yet to make that critical determination. And so we owe it to 

our local communities, our local retailers, and State and local governments to act before the end of this year. 
4 

I am pleased that today’s hearing provides us the opportunity to 

take that next step toward resolving this issue. Although I would 

prefer to mark up the Senate-passed Marketplace Fairness Act and 

to consider amendments to further improve it, I welcome the opportunity to hear workable alternative proposals. This issue is a prime 

opportunity for all of us to work on a bipartisan basis on legislation, but it is imperative that we do so this year. 

So I thank Chairman Goodlatte for holding this hearing today, 

and I stand ready to work with him and all Members of this Committee to move legislation through this Congress. But we should 

not delay any further. Thank you. That concludes my statement. 

Mr. GOODLATTE. Thank you, Mr. Conyers. I appreciate the good 

bipartisan work that has gone into this effort thus far, and we look 

forward to continuing that. 

Before we hear from our witnesses, I am going to ask unanimous 

consent to insert in the record a series of letters sent to the Committee in advance of the hearing. Many folks have wanted to testify. There are limits on the numbers who could. Some of these letters are in favor of particular approaches, others are opposed, but 

all are generally supportive of the process the Committee has put 

in place. 

They are from the Cigar Association of America; the Consumer 

Electronics Association; the International Council of Shopping Centers; the Streamline Sales Tax Governing Board; the National Association of Electrical Distributors; the National Association of Realtors; the Agricultural Retailers Association and National Council 

of Farmers Cooperatives; Amazon.com; the City of Plano; National 

Association of Real Estate Investment Trusts; and the National Retail Federation. 

Without objection, they will all be inserted into the record. 

[The information referred to follows:] 
5 

CIGAR ASSOCIATION OF AMERICA, INC. 

" .... _- _00_ ~ 

--

_ ........... 

111< HO"<lT;,ble Robert WilliiIIU Goodlall~ 

Ch:linnan, HW'" Judiciary Cnmmiu,,", 

t;.S. !!ouseofReprescmLllI;""" 

W""lIing'.oIl. DC 20515 

March 5.2U 14 

[Jar Mr. Chainnan: 

I am ",ri(i n8 on bohllif oflhe Cigar AMOciaiioo of America. B MUOrulI 

organization reprcscnlii'll dwu- manuracl\lfttl<. importen. dimibu\{)<S, and olher 

major industry !upp i~r!'. \0 as!.: In.l)oo ~ H.R..684.ltIe Mnrltel 8C~ 

Faimcss A<1. We believe Ihp tb ~blU. ",iljcb !S!!M 'fII<' mulli-millh)!! doll ar 

lax hik ""O\lld ,kat!!" IInprw:dcpled 1!!w In !Ylh d!edglil iudY-_1n i!!!d (he 

e£~"""'Y 3limc, 

Online cunmwrtc if I vilall"uel :hal bclP'l fII' '''eT tlleArneri""" """n=y. The 

,\taIt.,p1ace fllimcs.!I Act would hu\'o • di=L aoo ~gative .!T':<:l 00 ~ 

profitabilily of oolill<' busilleo.ses. fOJciIlll ,hem 10 ,,>ale ma;;si"" inYt:$lmtnIJ !O 

comply with ,"" law Illbc ""me lime the)' are 1000inil sales IIDd jobs. 

llricWnd·I:J\t.Of1lIr,;lOJl'<'l heow bet. ... ...tyocatins (Of Ihe MlV1i;clplacc Faim.."SSAc\ 

bccaw<: lhey claim = 1 ta;\ laws offer online """'ltTS an "" rai, """!lO!8g(. 

Yet IlIIdcr the ar~lac:e Fai0><!5S AC!, ooline retIlil. n would fllCC ;,:j ~ilieant 

compliarn:c bwdm. that ",il! 00\ arrt:Ctl""'itional retailers. For <"lII t,Ih~'" 

<in' m<l1'f.lh:ul 10,000 SUllO and local raxingjun8diotiOlIll in America, which 

would creare III elCuemc!)' rostly and oomplicaicd g~\lIIaf<' of rr<i ta~ /l;I1 

online ,\;\ailffl\. 10 odd;li"", onl ine retail"" "",,,Id fa.x <o/ls.wu , hn:Bt:; of 

audits. fin ... 1Uld I"'nA1\;"" r,OOI muhiple !lale!<. 

If~, ~ !>l arlttIpllltt FWr1IeM At\ "wit! d;~l y oPf!O'" the Conu)'=c 

II!ld OueProc.,.,. Cl .... so, in the IJ.S. CO/lS.lilulion. which rohibj 1S oen ain nale 

aaillllS thai jnt.e rfc ~with intm<Uue oom~e.~ In the: U,S. Su ~mcCourt ca.e 

of Quill v, N/J/'/h DIlhJI" (1992). lh~ Supn:mc Coon :rlftm1<>d 11\31 " ale aucmp1!i 

to WI: b\I,in..sses " itb no subsumtiw physical ese oe within lheir borders 

constituted eu illegal interfere",..." 
6 

rhe Marketplace Fairness Act would place crippling burdens on interstate commerce, and would 

negatively affect thousands of businesses. The bill would be especially danlaging to the 56 

billion cigar industry, which employs tens of thousands of workers in America and abroad. If the 

iY1~_<e!nlace Faim" .. , Ai.'jjJ£~Q..lll,,~_law~we ,~~to lose 50 percent of our sales of premium 

f.ill-a;-" an<imany job"-1!lo))R-'l':i1lli\'. 

For mallY online busi.nesses. the Marketplace Fairness Act will mean the difference between 

opeTating profilably anu closing shop. We are asking you to stand up for real fairness for 

business U\Nners and consumers and to defeat this blatant attack on American online commerce. 

Sincerel~, 

.'W~ amsotl 

Pre. dent, C' gar Association of ,L'\merica 
7 

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8 

MJr<:h 12.2014 

InterT1ationul Covndl of Shopping Centers, Inc. 

555 12th Street, NW, Suite660, Washington DC 20004-1200 

+ 1 202626 1<100 · Fax: + 1 202626 14 16 . www.lcsc.org 

eh~"n13n Robe" Goodlnuc 

eOlnmltl~ on I~e Jud,,,,al)' 

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\V~sbing!(m. DC 20005 

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fur SO rnan~ ~C~J'5 

While We ha"c been .trong suppa"o ... orll,e Markclplace FalnICU Act.passcd lIith ~lOn8 blp;ln",an s"p""n II) 

the Sen"", In I>b~ 2013. lit ""nsido, other IIorkabl¢o",lullons 10 till! probkm 10 I>C pa"thle and lIonh 

WI",,"'n"g 

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truly come to do rhe righl thillll ""d prondc $.1ieland uSC \:I~ p3nl JCIOS$~1I ch""lI(l~afSlll~ _ II IS 'ime to r",,:11 

"s.>lc '" l sale "" m"ncr whcfIl n L1k .. pla:e.. 

~IS} Lcurd 

SenIor Vi", p", .. d"nL Giolmi P"lIlic Poli<) 

lI1i ~ma"ona1 Council orShopplng Centcn 
9 

Th~ Honorable !lob Goodl.ne 

OllO""",' 

Hoose ludlc'ary Co",n"n~e 

2109 Ray"'"m Ho ..... Offore Bu,ld,n~ 

\\'ash'n~!O<I, DC 20S15 

Th. Honorable John COIl)'n" Jr. 

Ran k,ng M~"'ller 

(I~ ludic'ary Comm,n"" 

1~Z6 Rtybum Bu,ld,n>: 

Wa'/"ngron. DC ZGSI5 

Dear Cloa,mlan Goodl.ne and Rankin!; Mem~ Conyers. 

Th:uok yO" for hold>nS may's lI""nng on po>5Slble soiuO()JIS III ,he remole sales 'lI>< oolie<"1;oll ,ssue 

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KI c""liIder ,,,n<>llS ol,e",a"v", 10 ""al me Sln,an~,n«l S~ .. T U Go'ien,,,,g Board (SSTG8 ) I>a> 

already dev~loped. Wi'- botl,,,,'. iIIal a compic1e "'01)1$11 oftl," "mole WO$ ,n 0011""1001\ ''';U~ $houJd 

indude*" """",i"alloo ohh. SltI.'omlonod Salesand Use To.. AIlf"Om<.'OIISSUTAI. S.ple<iln 2002. 

Ihe SSIJ[A i~'~ oollabo .. I,,·. ell"" betw""" rhe"",,<'$. hxal b"<l".m",.,,'s.ih. b"'l,nOSll comn,,,,,,,>" 

ond olher sW.ohol~llllo ,·olunwir.,· Streamt,,,,, ou,. onoll",,~ ... Ies aod """ .. , !lJJ1e~, Th~",for~ 

>Of. ore ,<lenl'fy,"~ Iho ro",pOI''''''' <r,ucallt> o,·.,all " mpl,r.c:onoo of ><alts II,,, ooll,'<lIOn and 

:wm,noSlrotl<)n "moh theS~"GB. "",k'ng ,,-ith ""' 11lIkcholders. has ",-",·dopedo,·., the las' In-. 

)'e:w.l Webd,evo ,11_ COOlponefllS$hould bo """"dered ,n >Ill>" (0:<1=1 sol" .. "" 

The go.1 of,h .. SSTG8 "'0 ");Ike the <<>II",,,,,,, of .. I"" and use ,n"" 'n ,,101 ...... ere . .. 11..-""", 

no, 11..-. I ph~ .. <.1 p,eseoc< a, SImple .IId b~rden·f."" IS possible Tho l ll«e .. or,h. ·S'tI.'amhuc-d" 

dfon h .. b«o Ih ....... 1' ofcoo,"don"£ n~"""o"s ahemal,"" and tile" ..e,ting ,110« 1li10l"'''_ 

a'''''''l>''Ic~.I'''''rs. lax odm .. "'tr3'o/s' Io<:al g!l\'Cn"I!e",omCl.ls. la. _crow"""", attorneys .lId 

m.",bers of tho b ... ;noss coll"m.lI'Y ,,00 Iud • 1V~ r deal of ~-'!'Cri"'t<c .nd understood tile pm •• lId 

con. of the alrematm,. botnt ConSld.o,e<l "f1k";,, OIa1:dIol.t.,. developed or., best 001"""",, Ihmugh 

d<libor>J"'" ""d romp""'u" TIle ,,{fon h'" ,,,,ul,ed '" all)'",em "fSlmrhr.'.tlon atld "",f"I1My 

ih~ 1 0""' 2.1 00 ""lie,. h,,",,- ,,,I"lIlanly '"11'.<1,,0:<1 and "!I,ud 10 coil.." the .pprt)!I"'1e ....r .. lllId """ 

'l~i<S 'n IIlI 24 ofour ,nemt>er SUIlt5 - resard lo .. ofphySt<.1 prese=e on ,lte- state 

AS)"ou prop.v. fOr the upCOm'ng he"',"g "b plon,'8 Ahema"'·. Sol"""". IQ ,he Int'meI Sales Tax 

1 .. "".- WI: .... "", 10 expla,n ro"'~ of me key e01nf";ltl<'T1t$ of ohe SSIJ[ A thaI til. SSTGB b¢j,,,ws on> 

c"!leal OR c .. f,in,g,t-.eble.al."IUI,,,,,. and 'n 110 .... case&. h;lw aJ",~d)- Ix."'" adopted b)' 24 " .. "' 

Th()' "re-o 

III"~\ .... '"",,,,, _,.t," ", ... ,., w' ,,,., p~ .. ", .... ,.<J>'''' ",,~ ." .. "'JI ................ , . " 
10 

rl" lmlll"gmm';"" ~y$"W' ~ A uo,rsI "'S'Sl18'IO<l5)'SI<'I11 fO,.1I oflhe stOlC$IM' Itt~"" 

0011""'1)11 au,honLy WIder 1M f.,dorsl :IOl u"orr $liQuid ~ pUI in pl.co to nuk~ i, lery "npl~ ... d 

~Q)' fo, ~1I.r.; 10 r.!>"IN lQ 0:011"" and ,,",,'Ilhe laxe$, Th~ SSTGlI hO! ~"",pJlshed Ihi, 

,.roup, Our ~~mral r~l!ISIr1U")" >r>1~m. whl<h w •• '" 'n I~ prO<"<SS "r UpgrlIdlng ... <1 h.". 

""he lied '''pUI fmm non-SSTGB SHII ... and "",I.:orne the" conll"u~ IOput and p.me'poll'on 

("<r1ifo'd A"'(IIr,,'~'I.,,>'~Iii''''' ~ ('~'" ro.d AUIOn,are<! SY'i'efll$ !har Irandle Ine selle, 't a~ 

calculation ..,d ",pon'n~ If. lvallabl •• nd p",,,,dOO al 1)0 charS" 10 Ih~ .ell ... for d"",,·sta'e,o; 

" here ~.II_ .. do not oll\etl.o.,se hOI" a letal roq .. rem.." 10 .:011..",h. la~ , 

The person, pro, ,d,"~ Ihose .LltOr",ued sy>1<m' Ire roqU,w:l1O Include !h_ 50ft" .. ", and .. ,.,.,ee.-

""''''''''rylO ... upand 'nl~gI"'C Ih. so/lwore ""iI I"" sclld. "Y,'.on, 11,. SSTG6 cUrremly 

«)0'18<" fo, Ihe n.=SIII)' .soil""" .. arid "'''''us 'hrough QU' "~ cen,foed s<:tV1CO proVIders 

SInce !he ... Me 011 differ.1II S'= <WI Iy'pe! ofbLd.lnes5e$1ha1 'L'i< 'hi5 oo(,w",e. II IS impollOl'll1O 

off., mMy diffe",,,, ",,"0'» ood 10 cenif}' " ",lillY differe", provr&rsos pO>Sible. 

{I",,,,m, Comfi""';'''' /'ro<.eJw,",,' 1I«10","~, 1M C.r1ifi~dA "w_"""\)"" n .. ~ Un,/bnn 

p_odu"" "'" in plM;e 10 oertify "'" "",om .. "" 0)'''""1<. Cenrf)',ng!h~ .yste"" hleal\. ,ha, 1/It 

states ha ..... ,n,~oIty re"ewod ,he $Ysrerns 10 rua ~$Ur~ t/w:y un lICOOI!1phsh the follo",~ ", 

lire "me of,he S3le. 

° De\em>,nt the location oh sat~ - ~ on ad\!ressh,p C<J<l<, 

o Detemllne the approp,nte ".,. and'or locol saJ .. t.~ ra'" lhal opply 'n the JunsdtCIJon 10 

'IiI'<n Ih ~ uan,..,,1OIl ""'" soul«d: IIIId 

o De .. ,"",n .. whether 1Ir"'Nal$&OI''''' is W1.>bIeOl ~empl 

l 'h_ $)1$,0-"" oIso 

Q ('I)mp". the <h,. ~IY to pr<"p>r~ "'" apprcpn3'~ sales arid...., la, ,etunl! tOre..,h 

of Ihe ' '''IeI>: 

" Fil~ h~ no<;<$SOry t~lums; and 

Q M"k. lhe O!1Pfopn ... I.~ r.min""< .... 

Once on aUlomau,d ')"liItm ,s r",';e"...-dand .. rti~od by the SI~ ", there' ~OI1gu'ng t.iII,"g tl) 

hI.,kt ,u'. tho AU10m .. od 'I)·stem IS kept III"to-daleand .."".".,...", fUllCl'On pmpcfly. The 

S:>rG6 o<cun'phlhes "'15 by h.v'n~Slal"llI"'.',do les, dech(, e.. "Umero..,; 'O!;II'on'>l:U""') 

lira' me "",,",ee PlIII·"I<"., nut IIrroulJ,h th." O)' ... mo and !he st",os "'a~e " "e lite ptl)P<1 ..... 1,. 

ore reMnOO 

I.,iabi/'IJ' Ii~f - The ~a>Oll fo, cen'tY'"a "'= SJI"""" Ii ,., !hal !he ,tat", C3Il 'nd,eare 'ha)' 

ha,·. r.v,ewed 1M system and lO """ure !ha, the s:r~ '''''' s arc mal'"lf Ihe proper ta~ 

d",erm,,,,,"on •• , Lhetl""'oflh~ &al e.. If on e,ro, ,smade! ..,dlh~l.OIk"'!prO\'ide, did "itollhe 

1 .... ''''" ... ,~·I;)ri < ." ... "' .... " .... 1 ~ •• p, ...... ,., ... ,\.l.J", .. 

,,\'~ ,<,,,,"",,,,",,-,,,""'10.,,," 
11 

",."0 ICld "'em 10 do th",uj,;/1 'he """; f •• 3hun p'o«ss, Iha "31",, prov,dt! l.ablilty .oIief IlIlh~ 

.. lIor;and !S •• ,\",,~ pm" .... , "'lh resper! '0 ,h_ orml'$ 

O!ltt'rC"""~",,,,,, , - In add,uon 10 Ih~ pOln,soi>ow. 'h~ SSurA abo odd, .... '''' h~folluwmg; 

II I'<l\'"bil"ymum,< - In forma""" "" whal ,slhable a"d ""al """"niP' II pr!!\'Idc><l ,n • 

. ",.,,,t.,di.ed. do,,'OI<>adabI~ fllm~" "" lhal !I01I.1S k,.,,, ... nal" and "II., .. nil! , ..... 1>1. '" 

• .,ale. The 55TGB acoo",pl,.III'" I!U' fhfOUgll 1110' lUlIl"I,!)' ,,,a1n~ , 

II n<ll .. ",>1 J,,,;.'JI<'ri,,,,,kI,,,b,,,,,,,,- TIles. do,.I>"" .. ale 'equi'ed 1<> hoe p"",id<d 'n " 

.undofdized. d""",lood,bl. flln,,,,, 

tl S;lfI!.lr ",/PIm "ilh,,,,, ~'I<' -Th~ "to,. '" 'eq",,«I1O adm",","", lhe . ,,,, •• "d l""aI ,.x .. 

th3L...., ""1",,«110 lit collected "'th," lhal ""to undo"f thIS foo. .. I .. "hority. In"ead IIf 

",,11.1'$ "''''"1: 10 fit. nw .... "' ... sal"" ""d use In ..... urru ""th," • ';nsl.~I(IO" ~"''''' sell..,.,; 

ilk only feq ....... d 10 file .~,n!'Jc "'fum ",(h",. ''"' '''' 

II Unifvnn U.f bill~ - A unifonn "c<"baJ;o for &fO,e ""d I""al taX!l'U"JlII<'.'S 's ~\lI....t 

II ! 'n,fim" '''''''''''8 ",I~ <- Un,fom, sourc."S rules are req,ured So) lh., a lr;1nsacllOn I. ()<Ily 

soun:«IIC. ;"SI~ 10<81,0" 

AldlOlOgh lIJere are numerous other requuements th.t sta,,,,, must "'Ilow 'n order to J",n Ihe SSTGII. 

"'" i>ehe.e Ih31 any federal S11lu""" should C!IIl,,,jer •• , • "H" ,mum. 'he .bo>. ... 'dcntlfie<i 

",,",pononts W. ","ould welCQ01le furlh ... d,llogue "" ,h. ,nf",ma""" pro",dod ob<we ond at. 

a" .. dableat OIl,. ~m. to pro"d~ addi 11Q~31 detruls and ........ ," a"y'!u"""",,syou may 11.0, .... 

Th:on~ IIlU ago:"" fur Mld'"1: \hll heann!13"d m<lVlng lb,s 'mportlUll pe.hoy .s:su_ f_d '"you, 

( " mminee TheSSTGB loo~ , r"rwa,d 10 ...., rk,n~ ,,,,h}'lIu W f.nd 'he m<>S1 eff'~I" soJu"On w 

"""'='omol< sal ... tax ooll«IIIIH fo, ",>I. ""d 1<><,01 b'P,·t'rnm","'. b"",,, ...... ..,d com"mo .. al,ke, 

SHlceroly. 

Dill". L. HWI. f'r ~d.rll 

Sutamhu"q Sill<:sT ~ Govtm'll!\ Boa,,!, I"". 

""J~,,, .. , .. l.>ri" ~'.I'"' II.,..'" Wi .... · p~ .. "."~.\.j-l>I'" 

",,~ ..... ,"J ..... L,. ..... , •• oj 
12 

TESTkMONY TO THE UNITED ST,6,TES !KlUSE Of REPRESENT,6,TIVES 

CQMMlTIEE ON THE JUDICIARY 

Elcp\orinR Altern~t;ve SOM;ons on the Internet S<lle:; Tax l~:;ue 

Slbmitted by: 

Edw~rd M. Orlet, \lice PresIdent forGo-.emment Alf"il> 

N~tionill Msoci~t1oo of Electrlc;J1 Oinrlb\ltor~ 

1181 Corporate L.Jke Orive 

St, Louis, Missouri 63132 

M;Jrch 12 , 201~ 

Cl\airm~n Goodlattc , Rankins Membef Cooyel>, e!ll!(>ffied Memt)(!fS of the Committee, 

the National A1SOCiation 01 Electrical O'iuributel>lNAEDj appreciates this owortuo1ty 

to prewnt this wriUt'I1 testimony to the House Judldary Committee- concerning tile 

Mar1<etplace Fairness Act tMFA), and describe how onlill<'! rellllle .. ' ability to dodge 

\aIM ta.es unlairl.y harms traditional oosinesses. 

tWO il one of America', oldest pro(=fQnal assodatioo •. FOIJ01<k>d In 1908 a~ the 

Electric Supply J~ Ao;sodatloo, HAEC has .. ""lv.-.d "" .. r time to become th .. prot. 

"",Inent voice for' tl>!! $90 biUionelectrical wholer .. llinR industry. 10 1%9, we created 

the NAW Rewarch and Education Foundation to pro>,\d .. the highest QU<lUty traininll 

and inlonnalfoo to our memlle ... NAED is proud to represent mor .. than 400 ~ber 

companl'" with more than 5,000 1000liom nationwide. employins more than 180,000 

people Indudi!>i s.alespeople, product experts. slimed and tl'Ctmkal 

professionals, warehouse associates, and drivers that brin\! the latest ted1r>01ogy to 

0Uf commU(lities. NAEO is a 501 (C)(6) . 

In the fait of 101 1, you releared severt "basic pril\Clples pertaining to tile Issue 01 

Internet \.ales tilJO, ._ to guide di5ClJ$sioll on this issue a!>d spar~ creative sotutions." 

We applaud your leadership In ~ro"'dlnS "a startinB point for dlscussioofn the House 

of Reprl!SelltaUves," and utie you to now move this dl5C\Jsslon forward with t he 

development and advancement of leslslallon based on the-se basic principles. 

M you know, it has been morl' than two decade!; sloce the United States Supreml' 

Court's ruling In QuIll v. North Dakota effl'Ctively eXl'fTlpt~ reroote SO'i.lel> from the 

~Ies ta~ Colll'Ction obliBUiO!> nates impose on their local briel< a!>d mortar 

com~llOl>. Thl' Court's opinion did !d<nowl!'dge ConBr~s' authority in thjs matter: 

"(T)he underlyl!>B im~ is not only one that Congress may be bo,mer ~alified to 

resotve, but atloO ""'" that Congress has the ultimate powl'r to resolve ... ACcordingly, 

Congress is now fr@ol'todeddewhether, whl'!1, 3!'1d to what extend till' State-s may 

burdt'tl intl'rstate. mail ordl'r concerns with a duty to collect tlse taxes." 
13 

N ..... rly 22 year. later. the dynamIc; of the marl<.etplace ha~ ~ub't ntia(ly chitnied 

with the advent Q/ th ~ internet and !lrowth of e·comm~ce. Ar'ld tMoe dynamiC!;, 

whidllnitlally manifested themselves In the relall5E'Ctor. have more recently arrived 

00 the ~ In the bl/slness-tQ-oo.ine;, (628, ... tes 'P"U' In whidl whoLeloillerdistributo .... "ll~e". According to the 201] mJdy of tre0d-5ln wholesale di,triblitlon 

conducted by lhe Natioool A~a ion of \'IIholesaler·Dimlblltor, Inuilllte for 

Oiwiblltion Excellence {"HAW Iffilltllte") aod IBM titled facing the Force, of h<I~e: 

f!eimatlninR Dimiblit;on in a Coonec:ted World®. In the \.ame way that the ~if~ 

toward e·commerce IS "rapidly trilllsfonnl"j. lhe retalllarKkc.Jpe ... e'alIllrnerl:e will 

noW continlle to transform Wtlolesaledislrlbotion ... by 1017. a 1111192" of distriblltors 

su.-.eyed will offer ... commerce ... On aver<lte. online orden ma~e liP ~ of distributor 

revenue-; today, but that proportion is expected to ""lIe to ~ by 2017, an Increase 

of 13~." fourth quarter 201] w.-.ey data reported In Modem Dinriblltlon 

Management (MOM) earlier this y ..... r revea15 that 21 ~ of re\POOdent> see otHlne only 

plaY"'rI as a larfll'f competitive threat than the ir "traditional" competiton. Our 

expectation that e·comml'fce will contlnlle to flrow In the B2B space Is reflecled in 

MDM's "'1"\It'!y fiodintlhat 7O\L of their "''''''Y's distriblltor (ffipondem..'i will invest in e· rommen;e thi' ye8r, aod Is fllrthe r L<\der';Cored by the HAW Institllte / IBM Uudy finding 

reported In fadns the FOrcffi® that 781 of dhlribulOr. pLan 10 InW'st in thIs area 

through 2017. ConSf:'qlJl'fltly, our wholesall'r-distribulor membl.'rships are Incrl'aslngly 

coocerned about thl' dear advantasl': enjoyed by .... ·lIne remole selle .. at the 

competitive expense of local brick and morlar sellen and convOn<:ed of the need for 

federallegislalion to add=~ thi, inl'Quity. 

last Spri~, the Senate P'lssed the Mat'ketplacl' faiml'S, Act with OO)r "'ppQrt. This 

Il'!Ii~lalion empower. Ihe stales to fllily enforce tIleif sales and .... e WI laW'; by 

rl.'qOlri"ll re<!lOle selle .... to collect a rid reonlt !ales alld lise tao ... that are alre<>dy 

owro by purchasers, just as local brick and mortar businesses m .... t do. We IIlje Ihe 

Jlldlclary Committee, '-"'00 )'OUr leadef'lhlp, 10 quickly develop Inleroe1. saIl'S tax 

Il'!Ii~latjon Msed on yoor basic principiI'S to empower tile states to treal aU seller.. 

l'Qwlly as to lhelr obUsaUon 10 collect and remit Slate sales and use taxes. We look 

fDf"Ward 10 wor\IlnS with you is the Il'!ll5Lallvoe process IInfold~ on Ihls Importint 

matler. 

We respectfully rl'Q~1 that this leiter be added 10 the officiaillearing record. 

Sincerely, 

~ National Association of Eieoctrical Distributor'! 
14 

NATIONAL 

IAT ON ~/ 

REA LTORS' 

,., ~ .• , '"01."""0;" .... ,, .. "-" 

...... ,,,,.,

_ c..-._ '.MIl,,,,' "'''''''''"'''''' ,. __ '' C'_ "'_ 

"""-

... 

_"""",,"~Qo "~­

~ ... - ,lo'><~ .. 

""_"""" 'w .. ".· "--",,,,,"',.JIQt, "'" ... "", ...... u '\<,· .... 

.\I,odo ".;,;1!~ 

n ... ' ............ IloJ<,""' .. , .... 

d.oomuoo., ,~_ J..J.o.o., ,H.",,,,,, .. ~ 11. .. ;"' ... 11_ orr"e 8'i,loloog 

\\ .. 100,,_. !)C :l! m~ 

, .. ,~ .. , ... h"J"hn o"'",,,.j' ~~,I~ .... J..&...,. """"""' .. JI:l(i 11..,""'" l~ _ ~1 ffi<. Ilu*'"'tl 1I',,"""'''''''.OC:!l)5I~ 

Do., u."'n'" "" ..... , ........ 1Ioo''''l<.\I,,,''1>« 0 ",)<1'. 

""b<Io~t "I' 1o, 1 ..ur1M>o. , ..... ,I"". "(,10,,,_ .... """"""","I~ PAI nll(S-NAR)...,J 0), .ffilo-.,", CCIIl ~ .. """.I"'l ... " .... o(R< .. Iio .... M",,,,,, .. , .. , (Ot ,;''). ,j" S<_<;,uf 

I.,.n."",,, " .. Off", RIc. II.TQIIS" (S1OIt) ......... 1U ~1.1"O!<S" 1.-1 ","''" .. (l/1J1. """'" 

",.. k"_,&_,,,"'~ ... ~ ... ,,1Itd '''~AI''''''''' ... ,.,.,.,""" ,~'"' ,""""",,... T .. ),,"' . ""11.'"1'1"">"'1"'0.1'" ..... "'" ...... <0',,1.0 .... '" OM~ ~ ~"' '~"'I'P'"' 

';'1. ) ..... ··M ..... ,pIo« I""""" .... , "r 3>1 J." ",1_""'''' >'1 "'", ..... """ (I! \\1'), ~"', .. ""', 

(Il·Th) . """~_? (l>. "D) .... """"~ (l'>-Il.). .. "Ii" .,,""' .... bOIl .. ,I>< 1--". 11 .11. 08<. 

",,,,,"",,,oJ I .. R.<,-_ ... ,., w .. , ... !I. ~I ...u ~,.. ())~:p~ ,,1 •• w., ...... 01 h, .... 

s...... ........ _.1 ....... r"",d ... tIw It.. ... j..bc~ c-""', ..... 

Ithi!. ,,,,,, ",,,,,,, _ """" ........... , ..... ,."_' ... 'k' I"'r·,1« ........ _, "" , ..... 1"'"'~ .... , 

<>nIin< .............. """'nut "'l""'" ",,011«, ,b. .... , ,b. , .. ", ..... thot IocoI """,,,,,., 01(; 

'I"" -'1"'" ..... ""'"' r'''' b,'01 '''-.......... ''' .... 1 ... _,,... '" . .... 'f""" .. ~, ... ~ 

10, ","1""3 r~ '"" ."ohI;",'" ..... ol",,,,, ....... Iuo. __ ,,,.,,,,,, no ""'mdy.1k<.o 

,, ~ ...-..,~ .", ... "_~. "' . ' _"'''''').-' """ J..> ..... 1..0<.0111"'''''''''''' .. "_p' .' -. "" ,,.. ....... ,,"'" ""_""""! !"VI'<~ ''''''' ''' f( ..... l»'~"""~ ..... ........ ,,-

I ....... ' ...!"' .... '""""'- .......... , ........ _ 'll"'"fi, ri', ...... y ..... TnI C" r""" ..... , 

, .. ....,... ........ do .. ~ I") ~! "'" .-..".. , .... '" hoi" '"PI"'" Iu<oI ",r",,,,,,,,,,,, • .t 

the ,_" .. ' .. "h",h tit.,. <In ............ 1Snd· .... ·,"''''''' "'"." do; roy <h<o< ""'. ""'" ... 

u." "." ... ''''''!'<""'' ... , ....... ,'11"-

'1M ~lo,wpl"'" 1',",0<>' '\<' .• I.,..,", ... po«<~f"""I .. """ .• _IJ .,,,"""'" ,, ~< Il:"''<-'' 

"'~ .... _ ..... " ... _,.;,It.'_""'a ...... " .... '.t.!l"<>'h ............... · .... ""h," " ... , . n,~ ....... '" ..,.wo h.1 "'" .... '''''11 r~1d I~,"",u h"'*'''''', .. ,n" .. .1.~,"'" 

"' .... bu .... _ •. o'!ok • .., .... , ..... ............. ong"l'l"""'m.!dr i2l I ........ "",01.<1<01 

" ......... .. ILl ......... ,h ..... ,_ut~"" ., I.,,""' ..... """"", .. 110<" 

" .\R ' ....... ' , ... '-''''''''"'', ............ " ... ~ .. ""' .... .., 11m ",,.. It"._ f • ......."t., ... ~ o',oh Co"p" '" "''''' ...... """",y,,'" ........... ",,.0,,,,,,' oI", ... ;"",,~ Ix,d._...,!_ 

"" .. " I ........ ,. _1 • • ..-"" ,,'~"n . 

,",,,- _'n 

2&" . .......... <>\./0, . ........ \.~" .. ,_ "r ~~" uu"' 
15 

The Honorable Robert Goodlatte 

Chainnan 

House Judiciary Committee 

2138 Rayburn House Office Building 

Washington, DC 20515 

Cc:The Honorable Jim Sensenbrenner 

The Honorable Howard Coble 

The Honorable Lamar Smith 

The Honorable Steve Chabot 

The Honorable Spencer Bachus 

The Honorable Darrell Issa 

The Honorable Randy Forbes 

The Honorable Steve King 

The Honorable Trent Franks 

The Honorable Louie Gohmcrt 

The Honorable Jim Jordan 

The Honorable Ted Poe 

The Honorable Jason ChafTetz 

The Honorable Tom Marino 

The Honorable Trey Gowdy 

The Honorable Raul Labrador 

The Honorable Blake Farenthold 

The Honorable George Holding 

The Honorable Doug Collins 

The Honorable Ron DeSantis 

The Honorable Jason Smith 

The Honorable Jolm Conyers 

Ranking Member 

House Judiciary Committee 

2138 Rayburn House Office Building 

Washington, DC 20515 

The Honorable Jerry Nadler 

The Honorable Bobby Scott 

The Honorable Zoe Lofgren 

The Honorable Sheila Jackson Lee 

The Honorable Steve Cohen 

The Honorable Hank Johnson 

The Honorable Pedro Pierluisi 

The Honorable Judy Chu 

The Honorable Ted Deutch 

The Honorable Luis Gutierrez 

The Honorable Karen Bass 

The Honorable Cedric. Richmond 

The Honorable Suzan DelBene 

The Honorable Joe Garcia 

The Honorable Hakeem Jeffries 

The Honorable David Cicilline 

Dcar Chairman Goodlatte, Ranking Member Conyers, and distinguished Judiciary Committee 

members: 

As the members of this Committee well know, requiring out-of-state retailers to collect sales 

taxes for products sold over the Internet, in catalogs, and through radio and TV ads and sent to 

the state where a shopper lives, is an issue of great interest and contention. States and localities 

certainly have a rightful claim to collect revenue that is generated in their state; however, a major 

question before your committee is whether is it lawful to force businesses to collect sales tax for 

other states, counties and cities. The Marketplace Fairness Act (H.R. 684) that currently resides 

in your commillee'sjurisdiction seems to be the legislation that will deliver the mechanisms to 

collect sales and use taxes generated through E-Commerce and other remote sales. 

There have been many voices heard on whether H.R. 684 should be enacted into law as written. 

The Agricultural Retailers Association (ARA) and the National Council ofFarnler Cooperatives 

(NCFC) would like to bring to your attention an issue within the underlying bill that potentially 

could be a big problem for many industries if not favorably resolved. Agricultural retailers play 

a vital role in the agricultural community. Our members supply fanners and ranchers with 
16 

essential crop inputs such as seed, feed, fertilizer, crop protection products and the agronomic 

counsel to accompany those products. Given the nature of their day to day transactions, our 

members encounter a great deal of tax exemptions due to the products we sell and to whom we 

are selling these products. One of the most common "product-use" exemptions applies to 

products used in agricultural production (farming). Most states provide an exemption for 

products used in falming; however, state laws vary dramatically in the extent to which the 

exemption applies to the myriad of products, equipment, supplies, fuels, repair parts and other 

items used in farming and typically found on our shelves. Furthemlore, published guidance on 

eligibility for the faml exemption (to specific products) is often difficult for even the most 

diligent of faml suppliers to find. 

As you are aware, H.R. 684 provides two paths for sales and use tax collection. Those states that 

are streamlined will function within that capacity and un-streamlined states will adhere to 

minimum simplification requirements. In its current form, H.R. 684 does not provide 

simplification for "product use" exemptions. As a result, this legislation will dramatically 

increase the burden on remote sellers whose products are subject to "product-use" exemptions. 

Currently, the Marketplace Fairness Act would require remote sellers of agricultural products to: 

• Obtain a properly completed and signed sales ta,,{ exemption certificate /Tom each 

purchaser claiming the famling exemption /Tom sales tax. Such certj ficates must be 

retained and produced years later for sales tax audits. 

• Many states require agricultural exemption certificates that are unique to their state 

(There is very little uniformity among states with agricultural exemptions). 

• A number of states require famlers to register with the state, as /Tcquently as annually, to 

obtain a numbered permit allowing them to claim the agricultural exemption. The seller 

must then obtain a copy of the permit (and renewals) to defend against sales tax audits 

which may occur years later. 

• In addition to the burdens arising from obtaining and retaining proper exemption 

certificates, remote sellers of agricultural products would also be required to perform 

detailed analyses of each state's laws to detennine which products would or would not 

qualify for the farming exemption in each state. Remote sellers would also have to 

constantly monitor each state for excmption changes resulting from new laws, 

regulations, court cases, and/or rulings issues by each state's tax authorities. 

Additionally, the notion that free software is the solution to fix all of the issues within this 

legislation is troubling to agricultural retailers. Agricultural retailers, like many other businesses, 

have deeply personalized sottware programs they have used over many years to accommodate 

their individual business needs. Many hours of high-waged labor would be required to 

implement and care for this "free" software that would in no-way address our concerns regarding 

product-use exemptions. Simply put, this software would not be the easy fix for the agricultural 

retail industry and it seems that others who have to deal with product use exemptions would feel 

the same. 

In summary, H.R. 684 would place heavy burdens on agricultural retailers if enacted "as is." 

Agribusinesses will have to study the laws of all states that impose sales tax, detemline 
17 

application ofthose laws to the seller's product line, and obtain and retain exemption certificates, 

All of these additional efforts and expenses will be necessary solely for the purpose of defending 

agribusincsses from state tax audits, where the majority of such sales would have been eligible 

for an exemption in the first place, If this existing language becomes law, the transaction 

reporting requirements and matrix updating responsibilities of these product use tax exemptions 

would fall upon the retailers, The costs associated with these obligations would be a major 

deterrent for agricultural retailers currently involved in E-Commeree and it will also likely 

prevent other agribusinesses from expanding into an online model in the future, lbis law should 

provide for appropriate and lawful tax collection within the existing framework, not become a 

barrier to interstate commerce, While our members appreciate the concerns of the States and 

"Main Street," ARA and NCFC cannot support the Marketplace Fairness Act as written, 

However, as the process moves forwards, we hope to work with the members of this Committee 

and others within the sales and use community to find a workable solution, 

Thank you for your consideration of our views, Should you have any comments or concerns, 

please contact Jeff Sands, Director of Public Policy for the Agricultural Retailers Association at 

jeIT(m,aradc,org or 202-595-1705, 

Sincerely, 

Agricultural Retailers Association 

National Council of Farmer Cooperatives 
18 

amazon.com. 

March 10. 2014 

The Honorable Bob GoodlaU~ 

Chairman. Committee on the Judidary 

U.S. HOUle of Representatives 

2138 Rayburn House Office Buildll\g 

w~,h n&ton, DC 20515 

The Honorable John Conyer. 

---.... 

Ranking M .. mb~r. Committee on the Judiciary 

U.S. floureof Rep'l!'Sentatives 

B-3~1 Rayburn House OffICe Building 

Washington, DC 20S15 

Re: Hearing Of! e~ptorinl!. Alternative SQlutlonsOfl the Internet 5al<>$ Ta~ Issue 

DearC/lairman G"odlan .. and Ranking Member COll'leu: 

Than~ you for calling a tlNring to discuss the collectJon of state tax on intema!e sales. Amazen ,. 

grateful lor your attention 10 thi, Important i .. "e, and we fook forward 10 enactment of a lederallaw 

",othortl;ng Iiale, 10 require all but the $IYlall~t-volume Internale sellers to col~cl. 

The polky reamn. for enacting such leg;,lall"" a,e well known: .Iale" fight. to make ,,,venue policy 

chokes: fairnen among sellen: fede,~1 help fo' stale budget. witkout /e<leral spending. elc. Mo,e 

fundamentallV, this legistatlon I. sorel~ netffied 10 remove the cOrl!trajnts on commerce Imposed ~ a 

1992 Supreme Court decision. In thol deci,lon, the Court upheld iI 1961 ruling In which the Court had 

SUMliluled for Congress the Court's eva u~lion of sales laX on ;nle'513Ie commerce. The 1992 Cour! 

Ihen inviled Cong,ess 10 assert lIS supeflOr conuilul;onal aUlhority under Ihe Commerce Clause. 

Amazon believe. that C""greS' should accept the Court's invitation and act now to supplant the Court's 

woefu lly outdaled surrogate judgment. which is InconSistent willi the ,ealities of modE'fn commerce. 

AmalDn stronglv supports enactment of the Mar~etplace Fairness Ac! (MfA). whkh Is before your 

Committee as H.R. 61W, and Was pa"ed bv Ihe Senate last spring as S. 143, Compared 10 similar bill' 

introduced over Ihe preceding decade, Ihe MFA's greal advanlage is Ihat ;1 does not require Slates 10 

adoplall the tax law simplifiCllUons 0/ 1m. multista!e Sl,eamlioed Sal~ and Use Tax Agreement (SSUTA). 

Flalher, It provides states an allemative to make only a limit!>d set of simplifications. Thi. advantage Is a 

tacit acknowledgement Ih:al automation nas eased the abllily of sellers to complv Wilh sale~ til~ laws 

since the 5SUTA WiS adopted a de.:ade ago, and It also lacilitales inclusion of rwn·SSUTA states, 

gener~lIy the more populous ones. 

We acknowledge, of cou,se. Ihat despite tM MfA's Virtues, it p,obabiV ;s not perfect. Indeed, Ihe MFA 

could be tweaked 01 , for Ihat maller, ''''''ritten entirely, and the Ii"" alternativ .... that will be discussed 

at you. Comm~tee's upcoming hearing represent se""ra! ways the MFA could be modified. 
19 

The Honorable Bob Goodlatte 

The Honorable John Conyers 

Marchl0,1014 

Pagp] 

Nonethel ess, we believe it Is ,mpor~ant IOf the Comm'tlee to recognile th;1! such modifications are 

unnecessary lor one key reaSOn: tooay's technology and se,-vites that automat!! sales t~x caltulaUon, 

colleolon, i1nd rematance m"ke oomp;iance wilh the M~A as easy and cheap as compliance with a 

modified or ~Itern,ltive MFA, whether or not additionalsimpli!ication of stilte tax laws is required. 

For comeot. recall that in il' 1992 ded.ion, the Court opined that requiring complianc~ with the 

comple. lty of state 531es ta~ laws would imoDie an unconstitutlooa l burd~1} on interstate oommerce. 

SutlsequenUy, roughly half the states (generlHy the less populous ones) tried for years to abate that 

compl~ity Ihe only way possible at the time: by simplifying the rta~ laws, culminating In the SSUTA. 

Now, however, dramatic Simplification of tax law is nO longer necess~ry because current automation 

technology and servkes can handle the ex","ng complully of various I"" rates, local jurisdktional 

boundaries. etc. Thls's particularly true 01 doud-based computing serv,ces. f.Q., Av .. l~ra's AvaTa~.· 

which '!ntail little Ot no start ..... o cost and charge sellers only for the ta ~ cakulatiol1, collecl.iol1, and 

remittance service; they actually use, at pennies per transaction. In other words, today·s automation 

alreadv - withoul any rOlf low 5imp/i/korlon 0/ of! - ma~es compliance u<>complicated and inexpensive 

lor all but the very smallest·volume ;ntemate sellers. Thus, there is little need for Congress to require 

Simplification 01 current state law, and abrolutely no need lor Congre .. to require simplifocation beyond 

thestrlcture-s of the current MFA bill whkh. al!hough likeiV Imperfect, cer1ainlv ismore than sufficient 

Yet, althaush today's 5CphisUcated automation can elifTIinate legal comp/~x;ty, it cannot resol..e legal 

Ul1("er/oinly - espedallv the uncertainty about where particular interstate >etlers must collect sa les taK. 

This uncer1.linty hJS increased dr.tmatically OVer the past fiV<! years as th e states have glown impatient 

anri have attempted to take interstate tax oolleC1ion matte,.., into their awn hands, constitutionally Or 

not. No matter how capable automation may be. It i. impossible to write ';Oftware to resolve the 

inCfeaS,nS uncertainty 3bo<Jt where sellers must collect. To ma~e matters worse. In December rol3 tile 

Supreme Court rejected a petition to rei!stablish some semblance of nationWide certainty on this 

question. After tv<o decades, the Court Is allowing its 1992 "bright line test" to blur, to the detriment 01 

interstilte commerce. 

With the Supreme Court apparently uninterested in yet again substituting its eva luation for C0nt:ress', 

constitutional authou,y, only Congress can address the £rowi~£ le£a! uncellainty about where $ellers 

have a responsibility 10 oollect tax on interstate sa l~ s. Therelote. Congress should enact 3 law 

authOfi,ing states 10 require all but the smallest·volume selieH to collect, and the MFA belore your 

Commil1ee would suffice, with or WitMout modificat ion. 

Thank you again for <~lIing a hearing to ~ddress this imporumt is ...... Please ler me know if Amazoo may 

assist the Committee in anv way. 

Sincerely yours, 

Paul Misener 

Vice President for Global Public Policy 

cc Mem\lers of the Committee optheJudicJ arV 
20 

Feon,ary 26, 20H 

Hous .. Judicio,), Committee 

U~'ted StelU House ol Represenlatilles 

2138 R .. ~bum HOUse Office Bldg. 

Washington, DC 20515 

Dear Oll.irman GOOIII811" -

~·- ,.,........... 1'·O.b- ...... "'.~ 

_ ."' l"XI7, "' .n ... , 1'000 

~-~ 

The City of Plane supports p .... il1!llh .. Marl\etplace FaimeuACI (MFA) which Is sd1eQ'uled to be heard 

by the House Jud,,:lary CommiN&e on March 4"'. 2014, .nd req..ests you, $Uppol1 in p.asS'1\II Inls 

important pi""" 01 "'gi.'auoo I strongly beli"~,, tha t Itt;" legislation wili l"V<!"he ~yi"ll ~ .. 'd lor "main_ 

street" P1800 by USllfing Ihal 8~ companies domg bUliness in ~all<> play by 1111 same rules 

PI3<1O nas strong reputation lor ~,,"g pro-busIness 35 e'<IO'ellcea Dy the 6 IOfIune 1,000 MMquaners 

lhal clIoo .... to call Plano hom ... Plano hilS 14 =poralions with more than 1,000 IImploye ... and mo,e 

than 147.000 people COme to Plano 10 wall< each day. 

OL>r De~eljs any comP8llY who does bll5lneu in Texu Should ,bide by the laws and r&gul.lio<)s 

astablished In OIlr state II bus"'e.5es who resida In another state 8"'n't held 10 the .8ma staNlMd, it 

couki n.gali •• ~ all.a ouf local bUirnes.u, 

We S1rOog~ u~e you 10 supparl the proposed Mark.lplace Faimess Ad, aNllhank you for your SIJpporl 

Sincen!!ry. 

Harry LaR05n<are 

Mayor 

CC: Rapre5enlalN" Sam johnson 

Repre'entab" K.enny Mafttoanl 

--

- 1--_ ... ___ 1-"- "'" _ 1--_ , 1--_, '--_. 1---., 1--'_ . 1--'-0Ir_ 
21 

," 

.UII) 

March II. 2014 

The Honorable Robl'11 \II Good ~ue 

Chainnan. Committl'e!Jl1 the Judiciary 

Unite'll Stale;: House ufRcprcsemativcs 

Washington, D.C 20515 

0 .... , Chaimlan Goodlaue: 

The National Association of R<'81 E.OlaIC Invesrmenl TrustS® (NAREIT®)' 

commends the HooS<! Judiciary Committee for hOlding ~ March 12 hearing 

regarding " E>lploring Allemative Solution! on the Imernel Sales Ta.' Issue " We 

are hopeful thal lhe infonnBlion developed &t the hearing will exp • .'dite Ihe 

Commiuee'5 considen\lion crlhc imcmel sales and use la.~ issue. Bnd help move 

thema!l!!.l 10 a salisfaCiOl)' resohnion 

NARErr not only supports the Marke1place Fairness ACI 1hal passed the Senate 

wilh strong bipaf1 i$an up~ last May. bill we arc also in favOJ ofany OIher 

reason~ble and workable solution which may be developt:d by your Cummine .. 

Simply put. NAREIT urges ~naclmem Ihis year oflegislation prov iding a 

bipa"isan solution 10 Ihe u"s slain~b e and i"""luituble dilled"l1 ..ales ta~ and 

use tax t<)lI..ction requirements thai ~urremly ....:ist bMwe.:n r~mQ\e" and 

"bric~-and·tllo"ar" retailers, Such a step would provide a level playing field fur 

ofT-site, out-of-state and on·site, in-slate sellers, and would assiSl states in 

collecting billions of dollars of currently owed hot unpaid Silles and uSC taxes, 

Absent COn!!ressional act;on,th~ current :;ales price discrimination against Main 

Str~'t' l r~aill.'r'S stemming from ~ ill~'(\ playl ng f,eld in ellect today IIill be only 

ma!9'ifi ed as remote sales continue 10 increase relative 10 on-.lle sales 

Plai nly sialoo. remote vendors should not beall'orded by Congress "ith nn 

economic advanta!je over brick and mOl1llr businesses that ne Ihe lif.!blood of 

our rommunilies 

I NARElTi.lbc! "llI'ld",","",PfC'ClU>u,,, ,·o~ for .... l ... au: "".stmetll """,(REITI):wd 

p"blid) uadcd ",.1 CSUll<:compmlCS '"Ih ... ",ICI'CS1 AI U.S, ""I c .. ,1<: .nd .lpu,1 mllrl;cts, 

NAREIT'SlTICIllbcri ,n: REtTlIIIId olhc:r buSlnCSSC$ thrwtll>Out the lIort<llllJt 0"0, operate, 

_nd nUl>«> lIl<On'l<l1'f"ld"";1\g re.ll estotc:. as ~..,Jt .. ~"'-'" nnns and illd"id1"'l. \\110 ad";,.,, 

study •• rId Si;mcc!1xJ$o! bu$l~s NAREtT', """nl>l:r$ "'elude Ibetesstnor$ll<)pp"'gmu<:rS. 

n:gi"".t n,.n, and free 51.IId"" reI.,t pmpcrt~ ",hose 1.","IlI"", 1<:p11) obt,,:IIN",od<!r 

"",",011." 10 w l!cct tb< .. 11:.1" "Ppl,c.bll: 10 'n ~OIc rurch ..... "hilc m,") ""hlll::md otb<:r 

"'11'1010 "",,,1= ''''Il0l$0 obli",tcd 

t~ 75 t S'"~·'.NW,S.,,. (IJt~ W.,honpvn,!JCJo ' \l(,.j,1l1 

r'I""", ~:l.7}'}-9.1i" 1' .. 3:J!.7J')-~"\1 REt r,c"", 
22 

The Honorable Roben \II. Goodlalte 

March 11 , 2014 

r_ge 2 

Thanl: roo for your I~adcrship on thi& i65ue nnd fnr rour efforts to achieve a workllbl~ sallliion 

forall interested partit'S. NAREIT beriev~ now i~ the time_ for Congre~s 10 approve parity 

btlW«fJ renlote and OIl-location seJlcr$ with ~pe(1 It> :>ales and !I.e ta~ rollecliml 

rt5l)Onsibi litie-!. 

Rl.'Spe~1flllly subrnined. 

Steven A. Wechsler 

President and CEO 
23 

) National Retail Federation· 

The Voice of Retail Worldwide 

March 12. 2014 

The Honorable Bob Goodl~tte 

Chaim,an 

QU,';C' Judiciary Comminee 

U S liouse ofRep~efltatives 

W~shinstOl1. D.C. 2051 5 

Dear ChBimlan Goodlauc and Ranking "m""r Conyers. 

The HOllorable John Conyers 

Ranking Member 

liousc Judiciary Comminee 

ll ou~of cpresenlali\'es 

WishinS1011, D.C 20515 

Thank you for holding this hearing c.xam' n;"l! SOIUliol1~ to the Internet sales la' 

COHe<;lioll issue The National Retail FederatiOIl (NRF) i~ the wO<1d "slargesl retail trooe 

associatioll, represcming diSC<)\.lIll and d~panmem slIlres, home goods and s~iahy stores. Mairl 

Sirm merchants, grocers, wholesalers, chain restaurants and Internet retailers from the United 

Siaies and more than 45 t;(Mllllries Retail is the nation"s largest private sector employer. 

5upPQninl:! une in four U,S jobs _ 42 million working ,\mericans, ContribuTins-S2,s trillion 10 

annual GOP, retail i~ a daily barometer for the nation '$ economy. I\'RF ~ This is Rel~il camllll;gn 

highlights the indusuy's opponunitie~ for life--I(')I1g careers, how retailers 51rtngthen 

commltnities, and the critical role Ihat ~o;1 play~ in driving innovaTion ww\V"nd',n llll 

Mem~rs of the National Retail Federation ~11~e that ConSress must resolv~ the 

Constitutional questiona posed by the (Jllill decision in a fashion which promotes a level playinJ:! 

field bem-een relail competiIQr$_ As retailing evolves and Imemo'l saJ~ b«:ome a more 

prominenl portion of IoU I retlIil sales'. ,I is critical thaT Co ~sli addr~s the sales 1a" col ll!CTioll 

di5CriminatiOl1lhat e"isls ~twct:n brick-alld-monar and ",.,note retailers 

Brick-snd-mortar retailers compt'le l'igOfQUsly with eaclt other Knd with remele Mailers 

for market share. Oi/Terelll rctailers have din"'renl strategies for going to mllrket, bUI une feature 

j~ beyond a retlliler-s control. only ~ume compelilon Kle compelled by Ihe l:!'Y"emment 10 collect 

S8 e~ lase$, hi~ situation is nOi created by Ihe m~rhlplacl'_ bUI fillher'l is a di,..d~ snlalle 

imposed by the current ~Iate oflhe law follo ..... ing the Ql/1ll deCi~ion, stining retailers- across the 

CQUntry, 

tfCOII!;fCSl; permilS th~ slate to DIlly col!c.ct th~ ~Ies 1'1:< 011 SlIle~ that ocelli In ~lOr~s 'n ~,al 

stale 3l1d not all sales madeOTllin~ into Ih~t Slale, then Cong(fSS is cfeatios an uniewl play, liS field to 

the d,sadvall1<1ge of local stores in congre$lonal d'slncls. Given lhe rise ill OTlline sales. contllluation 

Oflhls system WIll cr'-':lte uch [Il\ unfa" bl.lrden Oil tll<JS<'. consumerslhal actually pay ta"es due and 

Slales will hilVl' 10 Il'I11W aWly !Tom sales 1a.'O( J)'~,en1S and fmd other sources ofrevet\lIe (e.g. more 

reiialleD on ,ncome ta:<"'l) 

, "",,,d"lIIlO Iii" tJ,S C ...... Bu,~~ ... 0"1I",, .. 1os ac O"'~cd ro, "pl""~l"lalcl} 61J PC:'<:<"~ "r ""oIlfl~iI .. les j" 

,I., faun!> qu,m<r ~r lI) D hue hI'" ~ c£!iW> ",lb<l~ ,I m",," ''',' ....... · ... u'/t& o<,m.l j pdr 
24 

('Cln~umpiion t~~es ~re illlpo~d on !he.snle or use of ll00ds and some services t~at are 

subjeclto the ta~ _ A sales tax is i lax 01'1 the cOIlsumer and is imposed where the con$IJmptiOIl 

takes pla~_ So all sales in a given state are subjeclto the sales t8X, regardless ofwhether the 

sale occurs-in a Slure in the state or in the home ofa r~sidem of the state throosh their computer 

or telephone If Congress pennits the state III only collect the sales lax OIl sales. that QCCUr in 

stores in thai Slat.., and nOi sales 011 a computer in that Slate. !h..,,, Congress would be discouraging 

inlfll-S\aIC COOlmerce because rdailer~ !hat sell 800ds within the Slatl' are al. con'p¢titive 

disadvantage vis-a-vis rCllIOte scllC1"S Some proposals have cncoufll!!ed changing the s~ll'S and 

usc laxes enact~-d by Statl'S rrom cott$IJmption 13;';CS on OOnSUml'l"S to prOOu~'ion iaxes on n.1ailers 

through an origin bared sourcin", system NRF;s opposed to such K schMle and Ihe necessary 

impliCltlion; of such a scheme creates a new tax 

In addi\ioo to Ihc perceived pricing disadvantage caused by sales ta~ being included in 

Ihecost of the purchase fronl the hrkk-and·monar store, local stores also bear a signiiicant 

compliance burden for colll!l:ting the lax Compli~ncc cOSts fOf small retailers are high. placing 

Ihem al more ofa competitive. disadvant8j!e? We are CllCouragcd thallhe Commillce;5 

principles indude recognition of the cost ofconlpliancc and hope that the Cotl1mitlce nlso 

revI"ws the impact of curren I complianc", cOStS 00 retailers ofal! type> and sizes_ 

LitigaTion ri~ks abound fOf retaikrs in Ihi5 ar~a. particularly fOf retailers ,,;th a significant 

remote SIIles opcl'luioll In the VOId of Congressional action, stales have taken it upon !hemsclv~ 

to act in the area with a myriad of proposals These Siale actions IlInge from ~Jlanding the 

definition of nexus' (0 e. physical presence in a sta te) 10 reporting requirements fur' retailers to 

lum overCU$tom~ purchase data TO state ta~ depanlllent~ " NRF believ~ it is imperative for 

Congress to address this uncenainly in the marketplace by setting the rull-s oflhc rood thaI place 

reTailen on a level playing field for the future. Congress can ensure Ihal both small brick-and· 

mOllar reTailers and small online sellers have a dear and competitive path fnrward withoulthe 

government exacerbatillg a preference for one retail business mood overanOlher ~ 

Simplification is a key componenl for reform of !he sales tax collet:lioo 5~StCI1l for both 

hric~·and·monar sellers and remote sellers who "~llntAril y coil eel sales- ta.~ Tile Supreme Coon 

in V"i/! produced a road map for Con.gr~$ional action in thi, area Illat ... ill address many 

cOOCCrnS raised by .some I'PpOnenti of$ales ta.x faimt'ss legts\Btion Many mL>ffibcrs (lflhe NRf 

volunlaril~ COllect $ales tall' on remote sales into Stales wherelhey do \lot have a physical 

presence III tlIa~y i~stanCt's , the retailers thai volunlarily collCCt sales tall' do so only I;urll states 

that have adopted the Slreamlined Sales and Use Tax Agreemenl ("SSUTA") lk.'Cause or the 

Aglt.'ement's simplif,ed coIlectiou requiremeUls. 

o P,"""· .. ..,IDU....coopc:r.<; LLP, ,~.I .,""os T<<r C""'l'/I",,,,,, Or'l< ' A \mi",,,,1 Ii<!",,,,,, 'i> I~m<I 0 "", M~'" If,,,.,,.,. ",,,,,I 2IJOtj TI ... 'hodl' dor"otd •· . .... 11 r«tIik::,,- '" I"" "'1l t • ..- lh." \ 1 "ulboo.n ~".",I ,woil .... 1 .. 

J S'" o. .. r.,·,oa.MIH, 1= ... NI JOlt ,, o.p ... ,nr.", o>/J'IrA>IIIJ<I ..,,_1 Nn,~I01'_ No 11_152 r211U) (l"'"hO" 

dorucd Doce"u" 1. 20 D). s"., ub>, b)lp-h·" '''' rOID< .. co n~ 't sO """'my!!<W2fI ! JIIMll.tlWf!) 5 , !>ot-n""wI!'·-

~"iffiI!I '. "" "" II.""" ~ .. IoI'!M " !B!.I! 

J/,... If,,,*""ng A_""" "" v. IJ",III. No 12·tl15 l'~h e" :roUt 

'St"a,,,,,,,. o..""ld ond W,II""" Fa, -... " ...... t) ... afh.""",,!We. .~"'IIl d"" S"",U 5<11", E.~~"""k>n . 

S""II au."as R •• ",,,d, S'''''''''!} N<>. ,ill>, ~8'" Off",,' of Am'OCIIC} . N",,,,,!bc/ lUI) ,di ... " .. ,o"oh" .. U 

b ... ,ooss "'rpoc1 of p~ kgi>lohon "l<lud'~8 . 110", of Q,d",. "'1,,,1.,.. cotk<:l'nj; ",b 1M In ,,,,1\1.,,,,, fl"I"). 

, 
25 

Sine\: late 19QQ, and the Supreme COO,,'! decision in Q""", states and the business 

community. induding NRf'. began the Streamli ned Sal",~ Tv Project with an aim toward 

significam §implific~tion ofst!le sales ta ~ systems SiJlCe Ihell. a baseline multi -stale agreement.. 

Ihe ssm A. which includes common defmitions, unifonn processes and procedures. and 

~gni fi mly sinl plified dminis rali~e fealures ha~e been passed by Iwenty·four statf":l", 

establishing th e n~<!Ssal)' !:lfOUndwork for action by COIlUC'SS The progren oflhi~ B!"oup 

should t' ak n seriously by the Comminet.' in their examination of solutions 10 the remote sales 

a~ ~olleetion issoo!. 

NRF strongly be!ie"cs that action by Congress to address the CUlTCTll discriminatioll 

againsl brick-Ind-mortar retailers should not illlPOSC any new tMCS on thc use of the Inteme! or 

;l!l~' other channel of distribution All retailers, rcgMdless of the channel of sale, shoold be 

lreated equally w;lh re-peel 10 collection oblillalions re<jl1ircd by slat<" and local ta'( jurisdictions 

The sales tax collection prore.s sh()u ld nO! significamly impactlhe customer'$ experience 

purchasing from r-emote sellers. Rnd th", oollecliOll of saJ;:,j and U54: la~cs under fetl r~1 legislative 

authority does nO! create n~"Xu s with Slale$ for other purposes 

NRF is et\cou!'l1b't'd by Ibis Comminee's interest in address the ]nt~met sales la~ issueas 

\\-ell as th e recent bipartisan pllSSl1 ~ of Ih~ Marketpl3ce Fa;mes~ Act, S 743, by the U.S, Senale 

on May 6, 2013 .

7 NRf' has long supponed Congrt'Ss wanting ~Ia t~ s rertlQ\e collection authority 

with required simplifrcations 10 en~ure all retailers are not undul y burdened hy coI!tttinll and 

remittinll5a e~ taX"es. We look forward to wo(\:ing with Ihe Committee on legislation 10 ensulteiftttive and fair sales tax" col!«tion whil~ relievi ng burdens placed Oil B growing :leCtor of the 

economy 

Sincerely. 

Da"id French 

Senior Vic~ Presidenl 

GQv~mmem ~lations 

National Retail Federatiorl 

" P,l.Q "II"", ""'11)' ... 1<$ ... ~ possc<llog!.I>IIolI conr<>m"/lll'o ,I., .... p n.,",./" tmo.o'~"", s.,1e< Ta~ ond 

90'''''"''$ Board, he. h!1p'1/!\" " ,S/,£!IUlhnMwbl", Ot l'tudCl ~ (Itit ~ M"",J, ;' !I~ ) 

SI>,.,,~ ft,:,:,ord Var~ _I I 3. I Dtl, C"''P'" (;!'IO·2rl ~\ . AgJC"Cd ~69 10 -27 
26 

Mr. GOODLATTE. We welcome our distinguished panel today, and 

if you would all rise, we will begin, as is the custom of this Committee, by swearing you in. 

[Witnesses sworn.] 

Mr. GOODLATTE. Let the record reflect that all of the witnesses 

responded in the affirmative. Thank you. And I will begin by introducing Mr. Stephen Kranz, a partner at McDermott Will & Emery 

in Washington, D.C. He engages in all forms of taxpayer advocacy, 

including audit, defense, and litigation, legislative monitoring, and 

formation and leadership of taxpayer coalitions. 

Steve is at the forefront of State and local issues, including developments arising in the world of cloud computing and digital 

goods and services. Mr. Kranz was recognized by State Tax Notes 

as one of the top 10 tax lawyers and as one of the top 10 individuals who influenced tax policy and practice for 2011. 

Mr. Kranz received his B.A. magna cum laude from the University of North Dakota and his J.D. with honors from Drake University Law School. 

Mr. Will Moschella is a shareholder at Brownstein Hyatt Farber 

& Schreck. He previously served as principal associate deputy attorney general for the Department of Justice, advising the deputy 

attorney general on a range of law enforcement, national security, 

and general administrative matters. In 2003, the Senate confirmed 

him as assistant attorney general for the Office of Legislative Affairs. 

Mr. Moschella has also served in a number of high-profile Capitol 

Hill positions, including chief counsel to the House Judiciary Committee and general counsel to the House Committee on Rules. Mr. 

Moschella received his B.A. from the University of Virginia and his 

J.D. from George Mason University School of Law. 

Mr. JAMES H. Sutton, Jr. is a shareholder at Moffa, Gainor & 

Sutton. He concentrates on Florida tax matters with an almost exclusive focus on Florida’s sales and use tax. He has been a licensed 

certified public accountant since 1994 and a licensed member of the 

Florida Bar since 1998. Mr. Sutton has 8 years of experience handling a wide variety of State tax planning and consulting work for 

Fortune 1000 companies. 

Mr. Sutton is an adjunct professor of law at Boston University 

and Stetson University College of Law, where he teaches State and 

local tax, accounting for lawyers, and sales and use tax law. 

Mr. Sutton is a graduate of Stetson University, received a master’s from Mississippi State University, his J.D. from Stetson University College of Law, and his master of laws in taxation from the 

University of Florida, Levin College of Law. 

Mr. Joe Crosby is a principal at MultiState Associates Incorporated. Previously he spent 11 years as chief operating officer and 

senior director on policy with the Council on State Taxation, an association representing 600 of the Nation’s largest companies on 

State and local business tax issues. He is a nationally recognized 

expert on State on local business tax policy. 

Prior to his work with the Council on State Taxation, Mr. Crosby 

was national director of State Legislative Services for Ernst & 

Young. He is past president of the State Government Affairs Coun-
27 

cil, the premiere national association for multistate government affairs executives. 

He earned his B.A. from Loyola-Marymount University in Los 

Angeles, and completed graduated coursework in economic policy at 

American University here in Washington. 

Andrew Moylan is outreach director and senior fellow for R 

Street where he heads coalition efforts, conducts policy analysis, 

and serves as the organization’s lead voice on tax issues. 

Prior to joining R Street, Mr. Moylan was vice president of government affairs for the National Taxpayers Union, a grassroots 

taxpayer advocacy organization. He previously served with the 

Center for Educational Freedom at the Cato Institute and completed internships in the U.S. Senate and the House of Representatives with members from his home State of Michigan. Mr. Moylan’s 

writings have appears in such publications as the Wall Street Journal, the New York Times, and the Weekly Standard. 

He holds a degree in political science from the University of 

Michigan. 

Mr. Chris Cox appears today as counsel for NetChoice. He is also 

a partner at Bingham McCutchen, LLP, where he is focused on 

Federal and State governments, cross-border investment, homeland 

security, and multistate litigation. 

During a 23-year Washington career, Mr. Cox was chairman of 

the U.S. Securities and Exchange Commission, Chairman of the 

House Committee on Homeland Security, the 5th ranking elected 

member in the House, and a 17-year Member of the House from 

California. 

Mr. Cox received his B.A. from the University of Southern California. He is a graduate of Harvard Law School, where he was an 

editor of the Law Review. After graduating, he clerked for Judge 

Choy in the United States Court of Appeals for the 9th Circuit. Mr. 

Cox also holds an M.B.A. from Harvard Business School where he 

later taught corporate and individual income tax. 

Welcome to all of you, and a special welcome to our former colleague, Congressman Cox. 

I ask that each summarize his or her testimony in 5 minutes or 

less. To help you stay within that time, there is a timing light on 

your table. When the light switches from green to yellow, you will 

have 1 minute to conclude your testimony. When the light turns 

red, that is it. It is done. And it signals the witness’ 5 minutes have 

expired. 

We welcome all of you again, and we will begin now with Mr. 

Kranz. 

TESTIMONY OF STEPHEN P. KRANZ, PARTNER, 

McDERMOTT WILL & EMERY, LLP 

Mr. KRANZ. Good morning, Mr. Chairman, Mr. Conyers, and 

Members of the Committee. I am Steve Kranz, a partner with 

McDermott Will & Emery, the law firm that litigated Quill v. 

North Dakota in 1992. I have a personal 15-year history with this 

issue. I was general counsel of COST, participated in the Advisory 

Commission on Electronic Commerce, spent 15 years that I will 

never get back attending meetings of the Streamline Sales Tax 

Project, the Streamline Sales Tax Implementing States, and now 
28 

the Streamline Sales Tax Governing Board, where I still serve as 

an ex officio member on behalf of the business community. So I 

have a 15-year history, but this issue goes back much further, and 

a little bit of it is worth repeating today because I am concerned 

history is repeating itself. 

In 1967, the U.S. Supreme Court decided National Bellas Hess, 

gave us the physical presence rule. The States immediately became 

concerned about what that meant for the stability of their sales 

tax. In 1973, the first legislation was introduced in Congress to 

overturn not Quill, but National Bellas Hess. After about 10 years 

of trying to get Congress to act, the States were tired of waiting 

for a Federal solution and created something called the National 

Bellas Hess Project. It sounds a little familiar, but it is different 

than the Streamline Sales Tax Project. 

In the 80’s, the National Bellas Hess Project worked to force remote sellers to collect tax and, in fact, was able to pressure many 

of them to do so until they ran into Quill. Quill litigated the case 

to the U.S. Supreme Court and reaffirmed the National Bellas 

Hess case. That history is being repeated today, and I am not going 

to talk about the Streamline Project and what they are doing in 

trying to create a path forward. I am going to talk about the 17 

States that have passed legislation going a different route. 

There are 17 States that have passed one of three types of legislation. My favorite is the legislation that we call ‘‘Quill is dead,’’ 

simply articulating a new rule at the State level without Federal 

involvement that Quill is no longer good law. Now, the State has 

not sought to enforce that legislation, but it is easy to see a path 

forward for the States if Congress does not act to solve this problem where they simply begin assessing enforcing remote sellers to 

either collect tax or litigate in many states at the same time. That 

is not a good recipe for remote commerce or for the economy. 

The 113th Congress has made unprecedented progress. We had 

a bill pass the Senate last year. This hearing, looking at alternatives and the principles that have been put forward by the 

Chairman, is unprecedented in the history of this issue, and we applaud the effort and the progress. 

I would offer you three points. One, only Congress can create a 

Federal framework that ensures remote sales tax collection is governed by common sense rules that protect remote sellers, that give 

them technology, and the tools, and the protection that they need 

to do the job States are going to ask them to do. Second, without 

a Federal framework, it is clear that the States are moving to declare Quill no longer good law. And third, should you decide to 

adopt a Federal framework, do so by modifying our existing State 

and local sales tax structure, not by upending sales tax as we know 

it today and adopting a new form of taxation or a new data reporting regime. 

Now, I will comment briefly on some of the alternatives that will 

be discussed today, in particular the origin sourcing and the reporting regime proposals. 

On the origin regime proposals that you will hear, both of them 

would tax not based on a buyer’s location, but based on where the 

seller is located, and I am not sure what ‘‘located’’ means. Both of 

them would result in tax being imposed on Virginia consumers 
29 

based on the location of the vendor. If the vendor was in D.C., 

D.C.’s tax would apply to that transaction. 

Both of them would create exemptions for foreign sellers carving 

them out of the sales tax collection obligation absolutely unless 

they had physical presence in a jurisdiction, while requiring domestic sellers to deal with the tax burden. Both of them would harm 

State sovereignty by eliminating the option of States imposing 

taxes on consumption. Both of them are easily manipulated, making our State and local sales tax system essentially voluntary. No 

other country in the world uses this type of approach for obvious 

reasons. Origin is an alternative to remote sales tax collection in 

the same way that the VAT is an alternative. It is simply a different form of taxation. 

On the reporting regime, obviously any regime mandated by Congress that would require retailers and States to capture consumer 

purchase information and report it raises concerns about big government, big data, and privacy. More importantly, though, I think 

for consumers, this is an effort that would simply shift all tax responsibility from business to purchasers. Purchasers would have 

the obligation to deal with compliance and audits. It is not a viable 

alternative in that it creates a whole new regime outside the tax 

system. 

Now, in closing, Congress is the only one who can solve this 

problem. If it is not solved here, the States will do so. 

[The prepared statement of Mr. Kranz follows:] 
30 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

Testimony of 

Stephen P. Kranz 

Partner 

McDermott Will & Emery, LLP 

500 North Capitol Street, N.W. 

Washington, DC 20001 

Before the 

Committee on the Judiciary 

Of the 

United States House of Representatives 

Hearing on 

Exploring Alternative Solutions on the Internet Sales Tax Issue 

March 12,2014 
31 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

I. Introduction 

Chairman Good1atte, Ranking Member Conyers, members of the Committee on the 

Judiciary, I am Stephen Kranz, a Partner at the law firm of McDermott Will & Emery in the 

t1nn's Washington, D.C. otlice, and a member of its State and Local Tax Practice GrOUpl 

I am honored by the Chairman's invitation to testify today. I have spent most of my 

professional career dealing with state and local tax issues and welcome the opportunity to share 

my views with the Committee 

Prior to entering private practice I served as the General Counsel to the Council On State 

Taxation (COST), a trade association that represents the interests of more than 600 of the 

nation's largest taxpayers on issues of state and local taxation. I started my career as a tax 

litigator for the U.S. Department of Justice. Since then 1 have focused entirely on state tax 

matters and in particular the issues surrounding taxation of sales made over the Internet. 

With respect to the issue before the Committee today, my role at COST allowed me to 

participate in the Congressionally-organized Advisory Commission on Electronic Commerce and 

to represent the COST membership in the Streamlined Sales Tax Project and Implementing 

States. T helped found, and served as the President of, the Business Advisory Council to the 

Streamlined Sales Tax Governing Board, and I now sit as an ex officio member of the Governing 

Board itself My role as an advocate for simplitlcation, uniformity and a national framework to 

address this issue spans more than 15 years. Outside of this issue I help companies large and 

small understand, comply with, and, when warranted, contest state and local tax laws 2 

n. Summary 

Since Quill v. North !Jakola was decided in 1992, remote sales have risen signitlcantly 

both in absolute dollars and as a percentage of total sales. Although catalog sales have long been 

1 I note with great pride that Quill Corporation ,,,as represented in its suit against North Dakota before the U.S. 

Supreme Comt by John E. (Jack) Gaggini, a pattner at McDcnllott Will & EmcIY, who spent 37 years handling state 

Lax litigation before he retired in December of 2013. QUill C01pol'atiol1 v. lVo1'th Dakota, 540 U.S. 298 (1992). 

~ I note that my testimony today consists of my opinions and tIIOUghts on this issue. None of my statements me 

made OIl behalf of my finn or any of my clients or clients of my finn. 

2 
32 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

part of the American retail system and have always raised sales tax issues,3 the rise of the 

Internet has drastically changed the face of commerce. As members of this committee know, in 

Quill, the US Supreme Court reaffirmed the rule that a state may not require remote sellers to 

collect sales tax 4 unless the remote sellers have physical presence in the state. As commerce 

continues to shift to the Internet, states have looked for ways to force remote sellers to collect 

tax, despite the Court's holding. Although one of the hallmarks of our federal system is to allow 

states to experiment with different ways to govern themselves and raise revenue, in this case the 

states have in some cases adopted wildly divergent, contradictory and burdensome laws that have 

harmed businesses and imposed an undue burden on interstate commerce. As the US. Supreme 

Court noted in Quill, Congress is expressly authorized to deal with this problem, and is better 

qualified to deal with this problem than the courts. 

Congress has two choices regarding how it will react to the problems of collecting sales 

tax on remote sales: Congress can either (1) exercise its authority under the Commerce Clause to 

provide a framework under which states can enforce collection by remote sellers, or (2) Congress 

can do nothing. There is no question that states will continue to try forcing remote sellers to 

collect their sales taxes regardless of Congress' action or inaction. The question is whether 

Congress will provide the necessary framework to ensure that state collection efforts will be 

uniform, clear, predictable and fair or, in the alternative, Congress will remain silent and allow 

state collection efforts to be confusing, unpredictable, burdensome, and potentially 

discriminatory. 

A radical departure from the existing sales tax regimes is not needed. Businesses, 

commerce, consumers and, perhaps most important, the United States economic system would 

be greatly enhanced if Congress were to fix the problem by exercising its Commerce Clause 

authority and provide a uniform structure for the state enforcement of sales tax collection on 

remote sales, a structure that will provide the simplifications, technoIOb'Y, and protections needed 

to eliminate any undue burden. 

1 Nelsoll v. Sears. Roebuck & Co .. 312 U.S 359 (1941); Nelsoll v. Montgomerv frard & Co .. 312 U.S. 373 (1941). 

4 I usc the tCTIn "sales tax' to include both the sales tax and the complimcntmy usc tax 

3 
33 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

ITT. Congressional Inaction Has Resulted in Burdensome State Self-Help 

In the past decade, individual states have adopted aggressive, dissimilar, and burdensome 

laws attempting to impose sales tax collection obligations on remote sellers. Although twentyfour states' have implemented simplification provisions under the Streamlined Sales and Use 

Tax Agreement, Congress has shown no inclination to reward those states for their efforts, and 

Quill still prevents the states from imposing sales tax collection obligations on remote sellers. If 

Congress does not overturn the Qui11 physical presence requirement and establish a framework 

for imposition of collection obligations on remote sellers, states will undoubtedly continue taking 

action that is constitutionally questionable, creates additional burdens on remote sellers, and 

invites litigation. 

A. Historical F:fforts to Simp1i6' 

The Quill physical presence requirement goes back at least as far as 1967, when the US 

Supreme Court decided Bellas Hess and established the rule underlying the Quill decision'" In 

1973 Congress introduced the first legislation seeking to eliminate the physical presence rule. 7 

Since then no fewer than twenty-five bills have been introduced in Congress to address the 

issue. 8 None of these efforts have been successful. In the absence of a federal solution states 

5 The full member states arc: Arkansas, Georgia, Indiana, 10\\'a, Kansas, Kentucky, Michigan, Minnesota, Nebraska, 

Nevada, New Jersey. North Carolina. North Dakota, Ohio. Oklahoma. Rhode Island. South Dakota, Utah. Vennont, 

Washington, West Virhrlllia, Wisconsin, and Wyoming. Tennessee is an associate member. 

http);'Y"\H\'.stremnlined<;alestax.orgiindcx.php?page-==stn[e-tnfo (last ·visited Feb. 27, 2014). 

G National Bellas Hess, Inc. v. Department olRevenue olIllinois. 386 U.S. 753 (1967) 

. Interslale Sales and Use Ta, Acl, S. 282, 93d Congo (1973). 

x See Mmketpl1ce Fairness Act, S. 743, 113th C.ong. (2013): Marketplace Fairness Act. S. 1832, 112th Congo 

(2011): Marketplacc Equitv Act of 2011, H.R. 3179, 112th Congo (2011); Main Street Fairness Act, S. 1452, 112th 

Congo (2011): Main Street Faimess Act, H.R. 270 I, 112th Congo (20 II); Main Street Faillless Act, H.R. 5660, Illth 

Congo (2010): Sales Tax Faimess and Simpliliealion Acl, H.R. 33%. 110lh Congo (2007): Sales Tax Fairness and 

Simplification Act, S. 34. 110th Congo (2007): Streamlined Sales Tax Simplification Act, S. 2153, 109th Congo 

(2005): Sales Tax Faimess and Simplification Act, S. 2152, 109th Congo (2005); Streamlined Sales and Usc Tax 

Act, S. 1736, 108th Congo (2003); Streamlined Sales and Usc Tax Act, H.R. 3184, 108th Congo (2003); Intemet Tax 

Moralorillm and Equily Act, S. 1542, l07lh Congo (2001); Inlernet Tax MoralorilL1l1 and Eqllily Acl, S. 2775, 106[h 

Congo (2000): Fair and Equitable Interstate Tax Compact Simplification Act of 2000, H.R. 4462, 106th Cong 

(2000): Internet Tax Simplification Act of 2000, H.R. 4460, IOGth Cong. (2000); Consumer and Main Street 

Protection Act of 1995, S. 545, 104th Congo (1995): Tax Faimess for Main Street Business Act of 1994, S. 1825, 

l03d Congo (1994): Equity in lillerslale Competition Acl of 1989, H. R. 2230, 101st Cong .. Isl Sess. (1989): Equily 

in Interstate Competition Act of 1989, S. 480, IOlst Cong., 1st Sess. (1989); M1m Street Fair Competition Act of 

1988. S. 2368. 100th Cong., 2d Sess. (1988); Equity in Interstate Competition Act of 1987, H. R. 3521. 100th Cong., 

4 
34 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

have been working to solve the issue on their own. In 1999 Utah Governor Michael O. Leavitt 

asked the states to begin an dIort to simplify their sales tax regimes to address the remote seller 

question. In March of 2000 the states held the first meeting of the Streamlined Sales Tax 

Project, an effort aimed at reducing the sales tax collection burden such that Congress would 

reward the states by giving them collection authority or that the states themselves could feel 

comfortable that their sub-national sales tax regime no longer imposed an undue burden on 

interstate commerce, therefore satisfying the Quill standard (even though the Supreme Court's 

Quill opinion states that such an imposition requires physical presence). Over the last 15 years, 

the Streamlined Sales Tax Proj ect gave rise to the Streamlined Sales Tax Implementing States 

which gave rise to the Streamlined Sales and Use Tax Governing Board which oversees state 

implementation and participation in the Streamlined Sales and Use Tax Agreement ("SSUTA"). 

Each iteration of the effort has involved collaboration between states, local governments, main 

street retailers, and online retailers. While not all involved were supportive of the effort, the 

SSUTA attempted to develop a rational set of rules that, if applied to remote commerce, would 

reduce the burden of tax collection. Even today, additional states are considering legislation to 

become part of the SSUTA effort'" 

In 2001, the first piece oflegislation that would reward the SSUTA member states with 

an overturn of Quill was introduced in Congress. 10 In every session of Congress since then, 

similar legislation has been considered." 

1st Sess. (1987); Equity in Interstate Competition Act of 1987, S. 1099, 1 OOth Cong., 1 st Sess. (1987); H. R. )549. 

99lh Cong., 1 sl Sess. (1985); Inlerslale Ta,alion Acl of 1979, S. 983. 96lh Cong .. 1 sl Sess. (1979). 

9 See, e.g., H.B. 857.2014 Leg. (Fla. 2014): H.B. 2135, 27th Leg. (Haw. 2014). H.B 1477. 1654 and 1721, 97th 

Gen. Asselll., 2nd Reg. Sess. (Mo. 2014) 

to See Tntemet Tax Moratorium and Equity Act, S. 1542, 107th Congo (2001) 

II See. e.g. Markelplace Fairness Acl, S. 743, 113lh Congo (2013); MaIkelplace Fairness Acl, S. 1832. 112lh Congo 

(2011): Main Street Fairness Act. S. 1452. 112th Congo (2011): Main Street Fairness Act. H.R. 2701, ll2th Congo 

(2011); Main Street Fairness Act, H.R. 5660, lllth Congo (2010); Sales Tax Fairness and Simphfieation Act, H.R. 

))96, I 10th Congo (2007); Sales Tax Faimess and Simplification Act S.14, 1 10th Congo (2007); Streamlined Sales 

Tax Simplification Act. S. 2153, 109th Congo (200S); Sales Tax Fairness and Simphfieation Act. S. 2152. 109th 

Congo (2005); Streamlined Sales and Use Tax Act, S. 1736, 108th Congo (2003); Streamlined Sales and Use Tax 

Act, H.R. 3184, 108th Congo (2003). 
35 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

The SSUT A itself seeks to reduce the burden of collection by requiring its participating 

states to adopt uniform definitions and administrative rules and by also providing commercial 

software that is certified for use in the tax collection process. SSUTA does not dictate what is 

taxable or the tax rates; it leaves those decisions to the sovereign states. The SSUTA has many 

other provisions too numerous to detail here, such as a centralized registration system, a uniform 

tax return, and a uniform rounding rule, all of which seek to reduce disparity among the states 

while respecting their sovereignty. 

Although the SSUTA effort has improved tax collection practices and uniformity, it has 

not led to Congressional action. States, whether members of SSUTA or not, have responded to 

the lack offederal involvement by pursuing alternatives to SSUTA in an effort to expand their 

jurisdiction over remote sellers. The alternatives, while demonstrating creativity, push the edge 

of constitutional1imits and cause increasing problems for all businesses. 

H. Inconsistent and Unpredictahle State-hv-State Actiollto Address Collection 

Problem 

In the last decade, states have enacted at least three types of legislation as self-help to 

address the lack of a federal solution. 12 The three types oflegislation include: (i) click-through 

nexus legislation; (ii) use tax reporting legislation; and (iii) unilateral "Quill is dead" legislation. 

1. Legislation 

a. Click-through nexus laws 

A click-through nexus law was first passed by New York in 200S13 and at least twelve 

states14 have subsequently enacted laws with similar approaches, but with slightly ditIerent terms 

and applicability. These laws typically provide that in-state website operators create a sales tax 

12 Effolis arc ulldc!1;vay by the Multistatc Tax COlllmission C:MTC") to draft yet another version of ncxus-cx-pandillg 

legislation, even in the face of ongoing litigation over the validity of slLch legislation. See the MTC's Sales and Use 

To" Nexus Model Statute Project, hltp'llwww.llltc.gov/Unifonnity.ospx?id~5890 (lost oecessed Mmch2. 2014). 

11 NY. Tax Law § 1l01(b)(S)(vi). 

14 See Ark. Code Ann. § 26-52-117; Cal. Rev. & Tax. § 6203(e)(5); Conn. Gen. Stat. § 12-.407(a)(12)(L); Ga. Stat 

Ann. ~ 48-8-2(8)(M): 35 lLCS ~~ 10512 and 11012: Kan. Stat ~ 79-3702(h)(2)(C); Me. Rev. Stat. Ann. ~ 1754-B(IA)(C); Minn. Stat. § 297A66, Subd. 40; Mo. Rev. Stat. § 144.605(2)(e); NY. ToxLaw § 1l01(b)(S)(vi); N.C. Gen. 

Stat § 10S-IM.S; R.I. Gell. Laws § 44-IS-IS, Vt. Stat. Anll. tit. 32. § 9701(9)(1) (RE. 436) 

6 
36 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

collection obligation for remote sellers if all operators in the state collectively refer a threshold 

amount of sales (usually $10,000 over a calendar year) to the remote seller through links on their 

web sites and are paid by commission. Once the obligation is triggered, the seller must collect 

tax on all sales into the state, not just on the sales resulting from the website operators' referrals 

The click-through legislation attempted to work within the framework set by QUilf, in that 

it was an attempt to further define what physical presence consisted of in a state, in this case, that 

in-state web operators created physical presence for remote sellers. However, the precedent set 

by this legislation is somewhat disturbing in that it targeted an innovative marketing arrangement 

that helped compensate self-made bloggers and website operators which very often are small 

businesses and startups. The response by remote sellers in some jurisdictions was to end these 

marketing arrangements, harming an important nascent industry. The click-through legislation 

clearly demonstrates what happens without a Congressional framework, in that states undermine, 

or at least add burdens to, creative business ideas unique to remote sellers and impose tax 

obligations based on those ideas without any accompanying reforms to simplifY the tax law or 

protect businesses 

b. Use Tax Reporting Requirements 

The next evolution in anti-Q1lilf legislation did not even attempt to work within the 

framework of QUilf, and instead attempted an end-run around the case. Use tax reporting 

requirements were t1rst passed by Colorado in 2010" and at least four states!6 subsequently 

enacted similar laws, again with varying terms and scope. The use tax reporting legislation was 

an attempt to address the issue of collecting use tax from consumers. As members of this 

committee are aware, the question of sales tax collection by remote sellers is not a question of 

whether the tax is owed or not, but rather whether the remote seller is required to collect the tax 

from the consumer. Under state sales and use tax laws, the consumers still owe the tax, though 

enforcement of that liability against individual consumers is extremely difficult. 

15 Colo. Rev. Stat. ~ 39-21-112(3.5)(d). 

"Kv. Rev. Slot. Ann. § 139.450; 68 Oklo. Slot. § 1406.1; S.c. Code Ann. §§ 12-36-269l(E), -2692; S.D. Codified 

Laws § 10-63-2. 

7 
37 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

The use tax reporting laws are purportedly designed to give states the tools and 

infonnation needed to collect the use tax from consumers. The laws require remote sellers to 

provide a number of tax notifications and reports to their consumers and the states, and impose 

penalties if those notifications and reports are not filed. For example, Colorado's law requires 

notifications to be provided to consumers regarding the consumers' use tax obligations each time 

sales are made, as well as annual reports to be provided to consumers and to the state setting 

forth the amount of taxable products sold to consumers during the course of the preceding year. 

In reality, although the law might appear to be designed to gather information on consumers for 

purposes of enforcing use tax, in practice it makes compliance so onerous that companies will 

simply surrender their constitutional right and begin collecting sales and use taxes rather than 

dealing with the reporting requirements17 

c. "Quill is Dead" Legislation 

If click-through legislation attempted to work within the Qui11 framework and use tax 

reporting legislation attempted to bypass the Qui11 framework, then the third type of anti-Quill 

legislation attempts to run through Quill as ifit no longer exists. In 2010, Oklahoma passed 

legislation that listed all of the steps it had taken to simplify its sales and use tax system, and 

declared that its tax system no longer presented an "undue burden" on interstate commerce and 

that any and all remote sellers are required to collect sales and use tax on sales made into the 

state." 

As background, under the U.S Supreme Court's "Donnant Commerce Clause" 

jurisprudence, absent specific Congressional action a state may not take action that imposes an 

undue burden on interstate commerce.!'! Under Quill and related decisions, the U.S. Supreme 

Court has held that the imposition of a sales and use tax collection obligation on remote sellers 

1"/ Even Phil Hon:vitz, the Colorado Department of Revenue -s tax policy director said he "t11i11].;:S most retailers '''QuId 

simply choose to collect the tax to avoid the more unpleasant option of having to send tax notices to their 

customers." Colleen Slevin, Colorado Considers ,"\lew Tac/ie 10 Tax Online .)'ales, The Denver Post, Fcbnuuy 8, 

2010. 3\·ailable <It htlp:l/\\'\\'\\.denverposLcom/ci_14359737. 

1R 68 Okla. Stat. § 1407.5. 

[" See. e.g. Quill Corp., 540 U.S. at 305-6 
38 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

with no physical presence was such an undue burden. Under its 20 I 0 legislation, Oklahoma has 

declared that its sales and use tax law is so simple that sales tax can be imposed on any interstate 

sales without creating an undue burden. This is, of course, unconstitutional because the Supreme 

Court has routinely held that taxation of remote sellers requires physical presence. 20 Under stare 

decisis, the imposition of Oklahoma's sales tax collection obligation on remote sellers is 

unconstitutional, even if it had the simplest sales tax in the world. Furthermore, the U.S. 

Supreme Court's decision in Quill was based on the complexity inherent in complying with 

differing rules in multiple jurisdictions; a single state cannot unilaterally simplify a multi state 

system. 

Fortunately, Oklahoma has not yet attempted to enforce this law Unfortunately, 

Oklahoma is not the only state that could take this position. Oklahoma is one oftwenty four 

SSUTA member states. Oklahoma's statutory claim is based, in part, on its implementation of 

simplification provisions under the SSUTA. Other states that are parties to the Agreement could 

similarly argue, even without a relevant statute, that their sales and use tax regimes do not create 

undue burdens on interstate commerce 

State tax policy discussions oflate have included observations regarding states pursuing a 

strategy of assessing and litigating. If no federal framework is adopted it should come as no 

surprise when the SSUTA states collectively act as if Quill is no longer a restriction. Remote 

sellers facing assessment by twenty-four states with similar statutes will be forced to either 

commence litigation or surrender their constitutional rights and begin collecting tax on remote 

sales. Non-SSUTA states could also take the position that their sales tax is "simple enough" and 

begin assessing remote sellers. Only Congressional action can prevent the parade of horribles 

that would follow. TfCongress does not act there will be little protection for businesses and 

much of the American economy: no guarantee of protection from aggressive audits; no provision 

requiring certification of commercial software as able to assist in collecting tax for all states; and 

~o Stephen P. Kranz, Lisbeth A. FreenKJfl, Mark W. Yopp, Is Quill Dead? At Least Olle /)'tate Has Written the 

Obi/limy, 2010 STT 147-1. pp. 307-JJ (August 2, 2010) 

9 
39 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

nothing to prevent the states from rolling back the simplifications that have already been 

achieved. 

2. Aggressive State Policy and Remote Seller Audit Risk 

Outside of the legislative arena, many state revenue agencies take aggressive policy and 

audit positions regarding what activity meets the Quill physical presence test. These positions 

are often not documented or set forth in written b'Uidance, which makes it easy for states revenue 

agencies to adjust and modify these positions as needed to fit them under existing statutes. For 

example, a revenue authority in a state that has not expressly adopted click-through nexus 

legislation may nevertheless take the position that general case law is sufficient to require clickthrough based collection. Such ad hoc policy and audit decisions catch both large and small 

vendors in the compliance and liability risk net and cause confusion for consumers 

The Bloomberg BNA Annual Survey of State Tax Departments contains examples of the 

theories that various state tax departments have considered when arguing a remote seller has 

nexus, even in the absence of an explicit statutory provision21 The Survey demonstrates the 

varied, inconsistent, and confusing positions taken by states, compounding the burden on remote 

sellers. For example, Florida says that selling gift cards in the state creates nexus, while Texas 

does not. On the other hand, Texas says that a remote seller has nexus if it attends a trade show 

in the state, even if no sales are made at the show and no orders are taken, but Florida says that 

trade show activity does not create nexus22 Facing the possibility that it may have liability for 

failing to collect tax under these wildly inconsistent and varied theories, what should a remote 

seller do? 

'I Bloomberg BNA, 2013 Survey olSlale Tux Deparlmenls ax Management Multistate Tax Report, Vol. 20, No. 

(April 26, 2(13) 

221d. A pemsal of the survey exposes nlm~v additional vie\ys on \"hat constitutes ne~"11s-creating activity. Some 

states have indicated in the SUIYCY response that the following activities create a sales ta'( collection requirement for 

remote sellers: making "sales to customers In [the] state by means of an SOO telephone order number and 

adverlislillgl in Ithel stale": "the corporation is listed in the local telephone books of cities in Ithel slate'": 

·'1l1:1intaining a banI.;: account in the st1te--; and --the corpo.rntion makes remote sales into [the] state and hires a third 

party to post infollllational content on in-state \yebsites or blogs " 

10 
40 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

C. Consequences of COil gressional Inaction and Stare-Specific Legislarion 

If Congress does not act, states will surely continue to pursue constitutionally suspect 

attacks on remote sellers. This trend will accordingly cause increasing problems and burden on 

business. First, the threat of assessment and litigation results in uncertainty, audit exposure, and 

direct cost to business and much of the American economy. Second, the evolution and disparity 

in state approaches makes it nearly impossible for businesses to understand their tax obligation 

Finally, consumers will face a growing risk of state use tax enforcement. 

I. Increased Litigation 

The states' varying responses to the sales tax collection problem for remote sales have 

generated, and will continue to generate, a significant amount oflitigation. Remote sellers are at 

an inherent disadvantage in litigating these issues. This litigation creates signiticant costs for 

those who choose to fight and creates significant uncertainty for all businesses while the 

litigation and any subsequent appeals are ongoing. 

The click-through nexus laws have been challenged in New York and lIIinois. In New 

York, two companies, Amazon.com and Overstock.com, 23 litigated the validity of the law and 

lost in the New York Court of Appeals (New York's highest court), and were turned away by the 

U.S. Supreme Court when it denied a petition for certiorari. In so doing, the U.S Supreme Court 

implicitly reaffirmed its long-held position on this matter: it has addressed the issue twice, in 

Bel/as Hess and again in Quill, and any additional action should be taken by Congress. The 

court in lllinois on the other hand held in favor of remote sellers and invalidated a similar, yet 

different,law24 Given the uncertainty and the possibility ofinconsistent decisions in many 

states over the validity of similar laws, what should remote sellers do~ 

The use tax reporting laws have also led to litigation. In Colorado, the Direct Marketing 

Association (DMA) filed suit in federal court challenging the reporting regime. The DMA was 

23 Ovcrstock.c011l, inc. v. New York State LJept. a/Tax. and Fin., 987 N.E.2d 621, 20 N.Y.3d 586 (2013), eert. denied 

134 S.O. 682 (2013) 

C4 Performance Marketing Association v. Hamer. 998 N.E.2d 54, 375 IllDcc. 762 (20U). 

11 
41 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

successful in obtaining an injunction against the law from the federal district court, but the Tenth 

Circuit ruled that federal courts did not have authority to hear the case 2 ' The DMA subsequently 

re-filed the case in state court and obtained an injunction at the state court level 26 The state 

court litigation and a potential appeal of the Tenth Circuit decision are ongoing. This litigation 

has taken more than three years so far with no resolution apparent in the near tenn. In the 

meantime, every decision by a court has required vendors to determine whether they need to start 

complying with the law and how fast such compliance must be accomplished. Compliance 

requires significant system changes to collect and turn over the data required by statute; it is not 

merely flipping a switch. 

If Congress continues to allow states to act with no h'llidance, states can, and ultimately 

will, continue to enact legislation and adopt policies that will seek to require remote sellers with 

limited resources to collect sales tax. Not everyone has the resources to challenge the 

constitutionality of such legislation and policies. The result will be more litigation, more costs 

for those that cannot litigate, and more uncertainty for everyone. 

2. Increasing Uncertainty for Remote Sellers and Consumers 

The absence of Congressional action addressing sales tax collection obligations on 

remote sellers is resulting, and will increasingly result, in frustrating uncertainty for remote 

sellers and consumers. The areas in which this uncertainty will manifest are myriad. For 

example, as noted above, the Colorado use tax reporting regime litigation has led to repeated 

questions as to when and if remote sellers must start complying. The same can be said of the 

click-through legislation. Their scope, applicability, and constitutionality are the subject of 

weekly client inquiries, from companies large and small, seeking to know whether they have tax 

obligations that must be met. There are rarely easy answers to such questions and the 

uncertainty inevitably inhibits business decision making and expansion and imposes 

unpredictable audit exposure. 

~'i D;rectJfarketillg Assoc '/1 v. Brohl, 735 F.3d 904 (loth 2013) 

cc, DireC! Markeling Assoc'n v. Colo. Dept. o(Rev .. Col. Dist. Ct.-Denver, Dkt. IJCVJ~855 (Feb. 18,2014) 

12 
42 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

Consumers are also hanned by the lack of clarity regarding their tax obligations. While 

legally it is clear that consumers owe tax on purchases when the seller does not collect tax at the 

time of sale, consumers often do not understand that they are not following the law by failing to 

remit such tax. Those that try to comply are faced with a complicated, time consuming, and 

inetllcient task - tracking all of their purchases where tax was not collected, determining 

whether each item purchased was in fact taxable, determining the appropriate tax rate, 

calculating and remitting the proper amount of tax Tax friends of mine keep spreadsheets of 

their individual purchases to do the math. It's absurd that in today' s modern economy we don't 

have an App for that. In reality, we do have a solution, and it is being used by companies that 

collect tax today, but without a uniform requirement of collection, consumers are faced with the 

tax calculation burden 

Without Congressional intervention in the issue consumers also face a growing risk that 

their personal information will be the subject of government inquiry. While states today do not 

routinely audit consumer buying to determine whether tax was paid, states have the authority to 

do so. Whether obtained by auditing an individual or, as in the case of Colorado, by mandating 

that sellers disclose their consumers and their consumers' purchases, it is clear that consumer 

infonnation we all expect to be kept pri vate is considered necessary by states for their use tax 

enforcement efforts. Consumer privacy should not be allowed to be imperiled by states driven to 

action in the absence of a federal solution. 

IV. Congressional Action Is Needed to Protect Businesses, Consumers, and the States 

In addition to avoiding the problems identified above, Congressional action establishing a 

framework for collection of state and local sales tax within the existing sales tax system would 

promote additional important policy benefits. One of those benefits is the preservation of state 

sovereignty. Another benefit is that Congress can create a framework designed to ensure that 

remote sellers have the information and certified commercial sofrniare needed to comply with all 

states sales tax laws, thus keeping the burden of tax compliance from being placed on 

consumers. Despite what some have argued, the technology and software that is available today 

13 
43 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

offers remote sellers the ability to collect and remit sales and use taxes in an efficient, seamless 

manner. 

A. Preservation of State Sovereignty 

Forty-five states have made the sovereign choice to fund government by imposing a sales 

tax on consumption by their residents. As Internet sales continue to erode the sales tax base, 

those states that have relied on a consumption tax regime are at risk of losing the ability to 

continue that policy choice. To maintain even a steady level of funding, states are being forced 

to rely instead on taxing income and property. 

As Congress considers whether to act to address the issue of sales tax collection by 

remote sellers, some states have passed legislation that is at least partially contingent on revenue 

that would arise from federal legislation to overturn Quill.]; For instance, in 2013 Virginia 

enacted a transportation funding bill that, among other actions, altered the state's tax on fuel. If 

federal legislation is not enacted to enable sales tax collection from remote sellers by January 1, 

2015, then there is an automatic increase to the Virginia fuel tax rate. The 2013 Ohio and 

Wisconsin budget bills would direct revenue received as a result offederallegislation to reduce 

those states' income taxes. A bill is currently pending in the Idaho House of Representatives that 

would fund a tax relief fund with tax collected as a result of passage of the Marketplace Fairness 

Act2X In 2013, a Utah bill was enacted that would create a restricted account for sales tax 

revenue from remote sellers, and provides that the legislature may reduce local and state sales 

and use tax rates based on the revenue collected in the account29 Furthennore, in other states, 

state legislators have proposed similar billsJO and governorsJ

! are signaling that they would use 

"H.B. 1515.2013 Gen. Assem., Reg. Sess. (Md. 2013) (emeted): H.B. 59, 130th Gen. Assem.. (Ohio 2013) 

(enacted); H.B. 2313, 2013 Gen. Assem. (Va. 2013) (enacted): A.B. 40, 2013 Leg., (Wis. 2013) (enacted). 

"H.B. 593, 62nd Leg., 2nd Reg. Sess. (Idaho 2014). 

29 S.B. 5X, 2013 Leg., Gen. Sess. (Utah 2(13) (enacted). 

'" H.B. 2465. 51st Leg .. 2nd Reg. Sess. (Ariz. 2014); H.B. 2730, 2014 Leg .. 2014 Sess. (Kan. 2014): H.B. 137,2014 

Leg., Reg. Sess. (Ky. 2014); S.B. 1424, 108th Gen. Assem. (Tenn. 2014); H.B. 224, 2014 Leg., Gen. Sess. (Utah 

2(14): H.B. 218, 2014 Leg., Gen. Sess. (Utah 20 14). Note that as ofthis miting, the Alizona bill and Utah H.B. 

224 failed to pass their respective legislative bodies. 

~1 The governors from Iowa, Maine, and Rhode Island have all indicated they intend to reduce taxes once their states 

receive revenue from sales tax imposed on remote sales See hrtpPthchiH.cOHl!blo2S/011-thc-lllOllCyldoUlCStic14 
44 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

revenue from federal legislation to decrease taxes. Tn particular, Tennessee Governor Bill 

Haslam, along with Tennessee House Speaker Beth Harwell and Tennessee Senate Speaker Ron 

Ramsey, have expressed support for the Marketplace Fairness Act and indicated that the revenue 

generated from federal legislation would be used to reduce current state taxesn 

Only Congress can prevent the erosion of the states' sovereign ability to make tax policy 

decisions by creating a framework for sales tax collection in the modern era. In creating a 

framework for sales tax collection Congress should similarly shy away from those alternatives 

that would cause a radical departure from existing state consumption tax systems. Some of the 

proposals you will hear today would trample state tax policy decisions put in place by 

Legislatures and Governors in each state and have far-reaching economic impacts. 

Origin sourcing, with or without a redistribution compact, turns our state consumption tax 

system into a tax on production and suffers from constitutional infirmity. A 1 099-style reporting 

regime for consumer purchases threatens consumer privacy in a manner that I hope you find as 

unappealing as the option of banning interstate commerce altogether. These are not alternative 

solutions to the Internet sales tax issue - they are proposals that would undermine state 

sovereignty and wreak havoc on business and consumers alike. 

Congress' role under its Commerce Clause authority should acknowledge and preserve 

state sovereignty. Only by ailirmatively addressing the remote sales tax authority question can 

Congress sustain the ability of states - like Texas, Tennessee, Florida, South Dakota, and 

Washington - to choose to rely on the sales tax so heavily. Without it those states should be 

preparing to impose an income tax. 

t~~~~OQ~2)_3~~Q\~~<I~gQP-g9Y_~IJ1QX-J9bl?i~_~-f9J::-OlWJLe-5Ql~5:t_w·d.)llJ (lnst visited M1fCh 9,2014) and 

http:/hv\Yw.rila.oro/nc\Y:-!topncws/Pagcs;ThchbrkctplaccFaim.cssActIsPw-Grm-,thLcoislatiolLnSDx (last visited 

March 9,2014); Lctlerfrom Gov. Branstad to Rep. Steve King (June 12, 20lJ) available al 

hLtp://\vv,.\,.slaJld\\ithlnaiuslreeLcom/geLobjecLasp,\.?ri[e--::I~Uertohollsedd~Q!L Letter rrom Gov. LePage to Sells. 

Snmve and C..ollins (Mar. 11. 2012) avm/able at hltp:I/'n",y.st[jnd"yit]ullail~street.corl1.'gctohiect.aspx?Ji1e=Lepng-e. 

~2 Afarketplace Eqlfi~v Act af2011: Hearing Before the Call1lll. On the Judicim:v, House of Representatives, One 

Hundred Tlve!fih Congress, .)'econd Session on HR. 3179, Ilih Congo (2012) (statement of The Honorable Bill 

Haslam, Governor of Tennessee, on behalf of the National GO\'enlors Association); Tom HLUl1phrey, Passage of 

Afarketplace Act A1a.v Lead to Lmv'er ,')'tate T ax"Cs ill Tenllessee, KnoxNe"\ys, June 3, 2013, available at 

http://\y\yw.knoxnc\ys. com/llcws/20 13~jUll/0 3/passagc-of-markctplacc-act -lIlay -lcad -to-Io\ycr-in/?print= 1 

15 
45 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

B. Creation of Congressional Framework 

I applaud the principles issued by the Chair that provide guidance related to the 

imposition of tax on remote sales. Those principles outline a path for Congress to create a 

workable framework for collection of sales tax. By acting to establish a framework, Congress 

can ensure not only that state laws as applied to remote sellers do not become overly 

complicated, but also that states are required to give remote sellers the tools they need to comply 

wi th those laws. 

A framework is needed. A framework that provides certainty to business, consumers, 

and the states. A framework that relies on state-provided information, certified commercial 

software, and protections for business. A framework that preserves state sovereignty. And, 

perhaps most important, a framework that protects the American economy and American jobs 

All of these are achievable, and only by Congress. 

V. Alternative Proposals 

Below I briefly address each of the alternative solutions proposed today to address the 

Internet sales tax issue. Additional thoughts on some of the alternative proposals and other 

concepts related to the remote collection issue can be found in the Appendix to this testimony. 

A. Option 1: SSUTA-Type Compact Governing Interstate Transactions Only 

The only viable alternative being discussed today is one in which Congress creates a 

federal framework to address the Internet sales tax issue based on a compact among the states but 

which leaves intact the general ability of states to decide whether, and on what, to impose a sales 

tax. Whether that compact ties directly to the existing Streamlined Sales and Use Tax 

Agreement or offers a difIerent set of simplifications, and whether the solution applies only to 

remote sales or to all sales are questions Congress can and should address. The question as to 

what are the best details of such a compact, however, does not alter the inherent reasonableness 

of adopting a system that provides simplification and protection to remote sellers, protection of 

states' revenue streams, and continued recognition of state sovereignty. 

16 
46 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

B. Option 2: Multistate Compact to Collect & Redistribute Sales Tax 

You have been presented with a proposal that would have Congress develop and approve 

a compact based on an origin sourcing regime for remote sales coupled with administrative and 

redistribution provisions adopted from the International Fuel Tax Agreement CTFTA"). This 

proposal sutfers from all of the problems of an origin system and inherent in IFTA with the 

additional problems created by merging the two and limiting the rules to remote sellers 

In particular the proposal would, quite surprisingly, decouple the choice of how to tax a 

transaction from the jurisdiction recei ving the benefit of the tax. It is the equivalent ofletting 

France unilaterally decide whether the US will get tax revenue from a phone call between a 

woman in Ohio and her friend in Paris 

The proposal not only fails to fix the jurisdictional uncertainties currently faced by 

remote sellers, it aggravates them. This origin system would apply only in states where a 

particular remote seller does not have physical presence under Quill. As we know, it is 

frequently not clear whether a vendor has the requisite physical presence in a state. If a seller 

has physical presence, the proposal would leave the existing destination based tax calculation 

and remittance system in place. Tfthe seller does not have the requisite physical presence, the 

origin state's rules will apply. As such, remote sellers operating in the all too frequent nexus 

gray area would be at risk that they collected an origin tax when they were obligated to collect 

the destination state's tax rate and apply the destination state's rules. 

Furthennore, consumers will be confused because they will be subject to ditferent tax 

rates based not only on where the vendor is located but also on whether the vendor is physically 

present in the state in which the consumer is located. Asking consumers to pay tax based on the 

proposed basis is no less absurd than asking them facts that are not under their control or 

understood to them is tantamount to asking them to pay tax 

17 
47 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

For remote sellers and their consumers, this proposal fundamentally changes the 

economic etIect of the traditional state sales tax because the proposal converts a consumption tax 

regime into a production tax regime 

Finally, the proposal suffers from serious constitutional problems and would be 

inconsistent with the protections Congress afforded sellers in the Internet Tax Freedom Act, 

which prohibits states from imposing discriminatory tax rates on Internet-based commerce 33 

C. Option 3: Require Reporting, Not Collection 

If a national reporting regime for purchases is enacted, either remote sellers will 

acquiesce and collect tax to avoid the reporting burden or consumers \vill shoulder the burden of 

tax compliance. A national reporting regime would be more burdensome than today's sales tax 

collection obligation. While there are various alternative reporting regime concepts being 

discussed, each of them would cause signiticant problems. Whether the proposal considered 

utilizes a Colorado-type approach where vendors turn over data about consumers directly to the 

government or an approach where the vendor and software companies work to turn over data to 

the government, each approach shares fundamental problems. 

Any reporting regime would create signitlcant privacy concerns as remote sellers would 

be required to provide detailed information about each of their consumers and their purchases to 

allow states to enforce use tax. Whether this information is maintained in a national database or 

by individual states, the threat to privacy is clear. 

To defend the proposal by arguing that it would not be necessary to capture and maintain 

information about specitlc purchases undermines the \vorkability of the proposal. Without that 

information, it will be impossible for consumers to comply with their use tax obligation or for 

states to enforce it. Under a reporting regime, if a state audited a consumer for use tax 

compliance, the state and the consumer \vould have to know what items were purchased by the 

consumer (and the dollars spent), \vhether those items were taxable, and whether the vendor had 

3.' ~7 U.S.c. § 151.notc 

18 
48 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

charged tax. Tn current audits, because the audit is of a seller, the identity of purchasers is not 

typically needed to audit the seller's taxability determination. The only information needed is 

whether the seller appropriately treated the product as taxable or not. The reporting regime 

approach thus threatens to expose personal consumer purchasing information in an 

unprecedented manner. 

Concerns over the capture, transmittal, and maintenance of data regarding consumer 

purchases speak against the regime as a solution to the Internet sales tax issue. Whether the 

reporting captures individual items purchased by consumers, or vendor names that are selling to 

consumers, the potential for harm is clear. Again, it is important to note that without capturing 

that sensitive information, the regime would not work to allow use tax enforcement. 

A version of the reporting regime proposal indicates that it would not be necessary to 

capture detailed information about consumer purchases. Instead, the proposal would require new 

software be developed to interface between vendors and the government to sanitize data such 

that the government did not receive detailed information. 34 It is unclear why sellers or the states 

would fund the software and integration costs for a system that did not result in tax being 

collected. It is also unclear how such an expense is justified under a system that still leaves tax 

compliance incomplete while threatening disclosure of consumer purchase infonnation. 

Rather than face the consumer privacy concerns and costs of a new reporting regime, 

some sellers are likely to choose to collect tax, doing so without any of the protections, 

uniformity and technology that would be addressed by a compact or framework that sets rules for 

sales tax administration. 

Although consumers today have liability for use tax, states have not widely enforced the 

obligation because of auditing inefficiencies and/or political concerns; the reporting regime 

approach would unequivocally place the tax compliance burden on consumers. Should the 

proposal require sellers to report only gross sales, the taxability determination would be left up to 

14 http'i iwww.floridnsolesto ... com/Flonda-T ax-Lnw-Blogi20 14'M.1IC Iv U S-SA.LES-Al\Tl-l'~ E-TAX -SYSTEMN~EDS-FEDERAL-C-P-R-.asp;; (last visited March 7,2014). 

19 
49 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

the consumer. For exempt purchases, consumers would have the burden of documenting and 

proving that they were not subject to tax. Even ifthe states were to offer a theoretically standard 

exemption,35 a consumer wanting to claim actual exempt purchases would have the burden to 

prove the exempt amount. This approach would burden all consumers and would significantly 

disadvantage the unsophisticated consumer. For instance, if a consumer makes signiticant 

purchases of exempt items such as clothing or food (frequently exempt in states), then that 

consumer would have to take the following steps: receive the report of their gross purchases, 

calculate the standard exemption, calculate her actual exempt purchases based on individual 

receipts and knowledge of the state's tax law, compare the two exemption amounts, tile a return 

remitting use tax based on the greater of the two exemption amounts, and maintain all receipts 

and documentation to prove the exemption claimed for a potential future audit 

While the reporting regime approach would lead to audits of consumers, such 

enforcement of consumer liability would be inconsistent at best. Limited state resources would 

inevitably prevent states from effectively enforcing the law against all consumers. An additional 

consideration is that while some states require consumers to pay use tax in conjunction with their 

income tax filing obligation, not all consumers are required to tile income tax returns. 36 These 

consumers would be forced instead to tile a use tax return to report their liability or risk the 

threat of audit, interest and penalties. Budgeting and paying use tax annually may also be 

difficult for certain taxpayers that have historically relied on our federal and state tax 

withholding systems to ensure their compliance with the law. The approach erodes government 

efficiency by forcing states to audit individuals rather than making the seller responsible for tax 

collection 

D. Option 4: Grant States the Power to Exclude Instead of the Power to Tax 

Congress' role should be to facilitate interstate commerce and ease the burden of tax 

collection on interstate sales, not to set up barriers to commerce and therefore impose harm on 

"Jd. 

~r; A taxpayer could be not required to file an income tax return because his or her state does not have an income tax 

or because the taxpayc{ s taxable income docs not exceed a certain threshold. 

20 
50 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

our country's economy. Even if such an approach were adopted there are serious questions 

about how it would be enforced. Would states be authorized to stop deliveries by common 

carriers and the US Post Office? Buyers would be confused by their inability to buy from a 

company located outside their state. And for vendors who decided to collect tax, rather than 

suffer the prohibition on making sales, there would be no simplification, uniformity, protections 

or software tools made available to facilitate the effort. The harm to interstate commerce would 

be much more dramatic than a simple requirement to collect tax 

E. Option 5: Origin-based Collection 

An origin-based collection regime would constitute a complete overhaul of the nation's 

existing sales tax system. This approach is so dramatic that it would likely result in the 

elimination of sales tax as a funding option for states. States that did not eliminate their sales tax 

would lose their business base as remote sellers set up operations in states without a sales tax. 

The threat of such economic disruption would likely convince most, if not all states to eliminate 

their sales taxes. No other country in the world uses origin sourcing for consumption tax 

purposes. I would also note that U.S. companies would be forced to collect sales tax on sales 

made to customers outside the US. and imports would be exempt from sales tax under such a 

proposal- obviously creating competitive problems for US. based businesses and an incentive 

for businesses to move off-shore. 

VI. Conclusion 

Congressional action creating a framework for remote sellers to collect sales tax is 

required to truly solve the Internet sales tax issue. In the absence of Congressional involvement, 

states have shown they will certainly try to solve the issue on their own; because their authority 

regarding interstate commerce is limited, their approaches will create even more problems for 

Internet vendors and consumers. Should Congress choose to squarely address the Internet sales 

tax issue, its framework should be built around existing state tax policy decisions and should not 

radically upend the sales tax regime as others would propose. 

21 
51 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

Mr. Chainnan, I again thank you for the opportunity to speak before this Committee 

today. I welcome questions from you and the Committee. 

22 
52 

APPENDIX 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

Additional Analysis of 

Option 2: Compact to Collect & Redistribute Sales Tax 

A hybrid approach that combines the redistribution and some of the administrative 

concepts of the International Fuel Tax Agreement CIFTA") with origin based imposition 

and collection, and applies such a system solely to remote sales, is an approach with 

serious infirmities. 

o Even though IFTA contains admirable concepts (e.g., a single return, 

redistribution and credits, a home state for registration), it still contains 

compliance and efficiency challenges 

IFTA requires customers, i.e. the truckers and trucking companies, to 

self-assess each state's tax based on the consumption that occurs in 

that state. A credit is given for any taxes paid to a vendor. 

Thus, lFTA's concepts are not scalable from the limited-vendor, 

single-product environment of fuel sales where returns are filed by 

customers to the extensive economy of all types of remote sales and 

sellers where returns are not filed by customers but by the sellers. 

o Collecting tax based on the state of origin's laws creates harmful economic 

distortions by incentivizing businesses to make geographical decisions based 

solely on taxes 

o Combining IFTA and origin-based collection only creates additional problems not 

intrinsic to each system on a stand-alone basis. 

The proposal would still have most of the problems associated with an origin based 

system, including the following that deserve particular note 

o Under the proposed approach, taxability and tax rate would be detennined based 

on where a seller's "home state" is located. When the seller's home state does not 

impose sales tax, the seller would charge no tax on the transaction even if one of 

the following is true: (1) the product was delivered to a purchaser in a state that 

would tax the purchase or (2) the purchased product would be used in a state that 

would tax use of the product 

o Sellers in a state with a sales tax could decrease the total cost of their products to 

all consumers merely by relocating the location of their "home state." The 

proposed hybrid approach would allow remote sellers to easily manipulate their 

business model to ensure that the home state is a state without a sales tax. 

If home state is based on state of incorporation, then retailers will just 

reincorporate in a state with no sales tax. 

If home state is based on where products are shipped from, then retailers 

will locate or use warehouses in a state with no sales tax. 

o Companies could easily manipulate the home state by simply creating a separate 

entity in a home state that has no sales tax, to operate as the seller of record while 

other operations are carried on outside that state. 

2 
53 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

o The economic incentive on sellers to relocate to states without a sales tax would 

in reality force states to eliminate their sales taxes altogether, or accept harm to 

their economic climate and competitive disadvantage for in-state businesses 

Coupling an origin collection rule with an IFTA redistribution arrangement adds 

additional problems to already undesirable options 

o The proposal bifurcates the jurisdiction deciding whether and how to impose the 

tax from the jurisdiction that receives the financial benefits of the tax. Why 

would any jurisdiction that does not receive the benefit decide to impose a tax? 

o Under the hybrid approach, not only the tax rate, but also taxability is determined 

by the home state's laws. This strange approach would lead to confusion for 

consumers. Instead of consumers being subject solely to the laws of their own 

jurisdiction, they would be subj ect to the laws of every jurisdiction from which 

their purchases originate For example, consumers used to buying clothing or 

food items tax free, because their state of residence allows an exemption for such 

goods, would lose this exemption when purchasing from a remote seller located in 

a state that taxes such goods 

o The proposal is not consistent with sound economic theories because it imposes a 

tax based on production but distributes the benefits of the tax based on 

consumption 

The hybrid approach does not follow the policies supporting IFTA IFTA 

is based on a theory that tax should be paid to the state where a product is 

consumed, which is why the tax is structured as an imposition on the 

customers who have knowledge of the consumption and not the vendors. 

o The hybrid approach only applies to remote sales, i.e., sales made into a state by a 

seller without physical presence in that state. It thus perpetuates the jurisdictional 

issues of the current system caused by the physical presence rule and piles on 

confusion for the consumer. 

Based on experience with the current system, it is frequently unclear 

whether a vendor has the requisite physical presence in a state. If a seller 

has physical presence, the proposal would leave the existing destination 

based tax calculation and remittance system in place. If the seller does not 

have the requisite physical presence, the origin state's rules will apply. As 

such, remote sellers operating in the all too frequent nexus grey area 

would be at risk that they collected an origin tax when they were obligated 

to collect the destination state's tax rate and apply the destination state's 

tax rules 

This approach will create confusion for consumers as some sellers will 

collect on a destination basis - if they have physical presence in the 

destination state; and some sellers will collect on an origin basis. 

Consumers will not know what tax will be collected on any given 

purchase until they checkout. Consumers will have no way to know 
54 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

whether the purchase is subject to tax in the origin jurisdiction, or whether 

the tax rate being charged is correct. 

o The hybrid approach will further complicate consumer use tax compliance. 

While the approach provides that the seller will collect tax on the 

transaction, it appears that sellers would not be collecting the tax that is 

owed by the consumer and consumers would remain liable for any use tax 

differential. If the home state applies a tax rate that is lower than the rate 

imposed by the destination state, or the product is exempt in the home 

state, the consumer will continue to owe use tax on the transaction. 

Calculating the remaining use tax differential will be a tremendous burden 

on consumers. 

o The hybrid approach will cause a tax increase for consumers. 

Consumers would be liable for the greater of the tax charged on an origin 

basis or the use tax applicable in their state of residence As a result, the 

consumers would face an increase in tax liability compared to their use tax 

exposure under the current system 

4 
55 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

Additional Analysis of 

Option 3: Require Reporting, Not Collection 

A federally-mandated use tax reporting regime, such as the one adopted by Colorado, 

would: force remote sellers to collect sales tax without the protections of a Congressional 

sales tax collection framework; raise privacy questions; fail to prevent state anti-Quill 

legislation; require a massive new federal infrastructure; and impose a tremendous 

burden not only on consumers but also on all vendors. 

At least one version of the reporting regime proposals has preliminarily suggested the 

following elements: 37 

o Remote sellers would be required to report sales information to a federal database, 

either directly or through software vendors. 

o The remote sellers and software vendors would deternline the taxability of 

categori es of products. 

Alternatively, remote sellers and software vendors would provide gross 

sales, and each state would set a standard exemption for consumers to use 

based on the state's exemption laws. Consumers could tile a return 

claiming a larger exemption and support it on audit 

o The database would generate 1099-style reports that aggregate all remote sales 

information for a consumer. Information would be aggregated based on federal 

tax ID number, credit card number, and a new optional US sales tax identitication 

number. It is not clear whether each vendor would generate a separate 1099-style 

report or whether all vendors would somehow be aggregated 

o The information would be sent to the consumer and to the state. 

o If a consumer does not file a use tax return, states could send audit letters to those 

taxpayers 

o Consumers could access their purchasing history, and provide that data only when 

needed to prove an exempt sale. 

o The federal government would set up standard infornlation reporting for software 

vendors. The software vendors would be funded by the states, based on the 

volume of sales processed through the reporting system. 

o States would be able to audit software vendors and remote sellers to determine the 

accuracy of their taxability decisions. 

o Remote sellers with nexus would be required to collect tax; if a remote seller 

follows the reporting requirements while under the mistalcen belief that it does not 

have nexus, once the mistake is discovered, the seller would only have a 

prospective obligation to collect tax and could not be held liable for tax on past 

sales. 

o Quill would be codified in statute. 

17 http'i iwww.f1ori<lnsolesto ... com/Flonda-T ax-Law-Blogi20 14'M.1rc Iv U S-SA.LES-Al\Tl-l'~ E-TAX -SYSTEMN~EDS-FEDERA.L-C-P-R-.a,p" (Last visited March 7,2014) 

5 
56 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

o There could potentially be a small seller exception 

This reporting regime proposal is problematic for many reasons: 

o Whatever the intention behind the proposal, it would likely result in remote sellers 

being forced to collect sales tax without the protections of a Congressional sales 

tax collection framework. Remote sellers would be faced with a choice: either 

provide annual (and probably per-transaction) notices to consumers informing 

them of use tax obligations, or collect tax from those consumers at the time of 

sale. 

o Consumers would be faced with a choice: either find a retailer that will collect 

sales tax at the time of purchase, or be forced to file use tax returns at the end of 

the year and be subj ect to audit. 

o To implement this reporting regime would require a massive new federal 

infrastructure. 

o To implement this reporting regime would require businesses to invest in new 

software and systems to track the necessary data. To the extent that states are 

required to fund the software, the proposal would raise unfunded mandate 

concerns 

o To implement this reporting regime would require states to build out a 

sophisticated and expensive use tax enforcement program. To the extent that 

states are required to participate, such a requirement would raise unfunded 

mandate concerns. 

o The reporting regime proposal makes no allowance for exempt sales for resale; 

failing to exclude the resale transaction data from the database or reporting 

provision makes the data largely unusable and dramatically increases the 

likelihood that businesses buying for resale will be subjected to audit scrutiny 

unnecessarily. 

o The prospective-only correction mechanism included in the proposal is an 

invitation to game the system. 

o For consumers who buy from remote sellers operating under the reporting regime, 

this proposal has serious privacy implications. Although the proposal makes an 

attempt to sanitize information given to the states and federal government, it leads 

to a clear threat that consumer purchasing information will be disclosed to the 

government. Even if information on a product is sanitized, there could still be 

privacy issues that arise from identifying which vendors are making sales to a 

particular consumer. 

o The proposal would either require that consumer purchases be reported to the 

government or would require that they be disclosed on audit as states sought to 

enforce their use tax. Without information about individual purchases, the 

proposed regime would not be helpful to use tax enforcement. 

o Under current audits, states do not need, nor do they obtain, information on 

purchases by individual consumers. A vendor indicates whether it collected tax 

or not on sales of an item, and the state then determines if that taxability decision 

6 
57 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

is correct A state typically has no need to determine what items were bought by 

an individual, just if tax was collected on those items by the vendor. 

o The proposal increases the potential for identity theft by gathering tax 10 

information along with credit card information for every remote transaction 

While the details of the proposal are not complete one can hardly imagine that 

mandating the accumulation of data in this manner would not make it susceptible 

to identity theft. 

o Even if a reporting regime is in place, states will continue to push for an overturn 

of Quill or push for remote sellers to be deemed to have a physical presence in the 

state so that the remote sellers remit the tax and can be audited. Such an 

arrangement is much more palatable politically and economically for a state than 

enforcing a use tax obligation against its citizens. 

o State enforcement of the use tax through a reporting regime approach would shift 

the full burden of tax compliance to consumers In addition, the regime would 

create a new reporting burden on vendors. 

7 
58 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

Additional Analysis of 

Option 5: Origin-Based Collection 

Origin sourcing for a consumption tax is a quintessential example of taxation without 

representation. Under an origin regime, a purchaser pays tax to the jurisdiction of the 

seller - a jurisdiction with which the purchaser has no connection or representation 

Purchasers would be paying to fund services that they would never recei ve and would 

I ack the ab ili ty to affect that j uri sdi cti on's tax Ie gi sl ati on through el ected re presentati ves. 

As Professor Walter Hellerstein notes in his treatise, consumption taxes using destination 

sourcing promote neutrality by treating all goods consumed in a state in the same way, 

regardless of the shipment origination location. Hellerstein, Stale 'f'axatiofl, ~ 18.02[ I]. 

Origin sourcing is the nuclear bomb version of tax competition - it will in practice 

eliminate the sales tax as a source of state revenue. If origin sourcing is implemented, 

purchasers will have the immediate option of buying tax free from sellers in no-tax states. 

To compete, businesses located in states that impose a sales tax will demand that their 

states eliminate sales taxes, or the sellers will relocate to a state with no sales tax, or to 

another country. States will be forced to eliminate sales and use tax as a vehicle for 

government funding to "compete" with the states that have designed their tax system 

without a sales tax. 

No country in the world that imposes tax on consumption uses an origin sourcing 

approach, in part because origin sourcing gives a clear tax preference to imports from 

foreign sellers. These sellers will not have to collect sales tax, and, as noted, domestic 

companies will be forced to relocate to compete. U.S. companies will still have to collect 

tax on sales made to foreign jurisdictions, which all use destination sourcing. 

Origin sourcing is tantamount to a federal mandate to eliminate sales and use tax, 

impinging on important sovereign state tax policy choices. Every state and locality has 

made very specific decisions on how to fund government services, using many different 

tax and fee options. State and local governments would no longer be able to choose to 

tax consumption. Congress will have stripped them of that possibility by making it 

economically disastrous to do so. Further, to offset for lost revenue, states will increase 

other taxes imposed on their residents, such as property taxes and personal income taxes 

Origin sourcing would result in chaos and confusion for purchasers. Instead of a 

purchaser paying one tax rate based on where he or she lives, the purchaser would pay 

tax based on the rate applicable in the shipped-from location, over which the purchaser 

has no control and no understanding. 

Origin sourcing will either violate the Due Process Clause or will require a massive 

restructuring of the existing sales and use tax system. If Congress only requires that 

8 
59 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

states use origin sourcing without mandating a fundamental change in state sales and use 

tax imposition, this will result in the vast majority of states sales and use tax statutes 

being in violation ofthe minimum contacts requirement of the Due Process Clause. See 

Daimler AG v. Ballman, 571 US _ (2014); International Shoe Co. v. Washington, 326 

U.S. 310 (1945). Most states place the legal incidence of the sales tax on the purchaser; 

the seller is only required to collect the tax from the purchaser and remit it to the state. 

Mandated origin sourcing, without changing the legal incidence of the tax from the 

purchaser to the seller, would violate the Due Process Clause because in most cases the 

purchaser would not have the necessary connection with the state of origin for that state 

to exert its taxing jurisdiction over the purchaser. The purchaser would merely be 

ordering something with no knowledge or interest in what state the product would 

originate - and thus be taxed. The only other option is, in the wake of a Congressional 

origin sourcing mandate, for every state to change its use tax statute imposed on the 

purchaser to a sales tax statute imposing the tax on the seller. This not only raises 

signitlcant logistical legislative challenges, but also raises issues regarding to what extent 

could a seller specifically pass-through the tax to a purchaser. Thus, absent a mandate 

that states legislatively alter the party on which the tax is legally imposed, a 

congressionally mandated origin sourcing regime would be constitutionally infirm. 

9 
60 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

Additional Discussion: 

Due Process Issues 

Any legislation, regardless of its subject matter, is subject to Due Process protections. 

There is nothing about legislation overturning Qliill that raises unique Due Process 

problems. 

o Qliill Corporation v. North Dakota, 504 US. 298, 305 (1992). 

As Professor Walter Hellerstein noted in his treatise, "Congress possesses unquestioned 

power under the Commerce Clause to regulate state taxation of interstate commerce." 

Hellerstein, State lclXation, ~424. The US. Supreme Court invited Congress to act on 

this issue, and noted that while Congress had full power to regulate interstate commerce, 

Due Process protections would remain, regardless of Congressional action. Q1lill 

Corporation v. North /)akota, 504 US. 298 (1992). Congress has the ability to establish 

the framework necessary to ensure remote sellers are able to collect all state's sales and 

use taxes, while minimizing any undue tax burdens of complying with such system based 

upon the simplifications and protections set forth in the federal legislation. 

The Due Process Clause requires a person to purposefully avail themselves of a forum 

state before being subject to personal jurisdiction (or taxes) in the state. international 

Shoe Co. 1'. Washington, 326 U.S. 310 (1945). The Third Circuit has held that "mere 

operation of a commercially available web site" does not show that an operator 

purposefully availed itselfofa forum state. Toys ,oR" [J.~, lnc. v. Step lil'O, SA, 318 F. 3d 

446,454 (2003). However, in the same case the Third Circuit held that "[ilf a defendant 

web site operator ... knowingly conducts business with forum state residents via the site, 

then the "purposeful availment" requirement is satisfied." l(i)JS 'R" Us, inc., 318 F. 3d 

at 452. 

o If a remote seller is operating a website accessible in a state and transacting 

business with a purchaser, then the remote seller has likely purposefully availed 

themselves of the jurisdiction. 

A congressional grant under the Commerce Clause of jurisdictional authority to states is 

not a new concept and has been successfully implemented in the past - with few due 

process problems. 

o McCarran-Ferguson Act - removes Commerce Clause restrictions on interstate 

regulation of insurance, including state taxation of insurance companies. 

o Mobile Telecommunications Sourcing Act - establishes the jurisdiction able to 

tax cell phone usage and related services 

When it comes to Congressional regulation of state taxes, a Due Process violation could 

occur only if a state improperly exercised the authority allowed by Congress. The risk of 

state Due Process violations exists today and is not exacerbated or enhanced by 

Congressional action. 

10 
61 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

The PACT Act is not analogous to the existing proposals for Congress to overturn Quill's 

Commerce Clause limitations. Unlike proposals to overturn Quill, the PACT Act placed 

an affirmative burden on businesses by requiring them to comply with state and local 

tobacco tax laws on remote sales as if the sales occurred in a state. 15 U.S.c. § 376a. 

The PACT Act created a jurisdictional fiction; this jurisdictional fiction is what created 

the Due Process problems and that fiction does not exist in the etforts to have Congress 

overturn Quill 

o Furthermore, the PACT Act litigation arose in a ditferent context than the 

hypotheticals used against legislation to overturn QUill. The PACT Act litigation 

involved businesses seeking to enjoin the federal statute from deeming a sale to 

have occurred in a state regardless of the actual contacts with the state. I am 

unaware of any examples where a state has sought to justify enforcement of its 

tobacco tax laws on a remote seller in violation of Due Process by invoking the 

PACT Act. 

11 
62 

Testimony of Stephen P. Kranz 

United States House of Representatives 

Committee on the Judiciary 

March 12,2014 

Additional Discussion: 

One Rate Per State for Remote Sales 

A one-tax-rate-per-state requirement would force at least half of al1local governments to 

raise their tax rates. In states that allow localities to impose local sales tax, each locality 

chooses the tax rate applicable to consumers in that jurisdiction. Requiring localities to all 

adopt the same tax rate (the implicit mandate of a one rate tax system) would force localities 

with a lower tax rate to raise their rate such that all localities had the same tax rate, leading to 

a rate that equaled the "highest common denominator." 

Tax rates applicable to consumers who live in a city, county or other jurisdiction should not 

be determined by federal legislation. Local political processes are in place to establish tax 

rates applicable to constituents who live in those jurisdictions. It is those constituents who 

rely on government services and who should have a say in the rate applicable to their 

purchases. Congressional interference with state and local tax rates would impinge on the 

political sovereignty of state and local governments in a way that disrupts decision-making 

for important local programs. 

A one-tax-rate-per-state requirement would impose a new burden on purchasers to track the 

ditIerence between the rate collected by a remote vendor and the actual combined state and 

local rate applicable to the transaction. If the actual combined state and local tax rate 

exceeds the rate collected by a remote vendor, the purchasers would have an obligation to 

pay the difference as a use tax liability on their purchase - unless Congress also mandated the 

elimination of use tax as it is known today. The additional tax obligation would require 

purchasers to track whether their vendors were collecting the actual state and local tax rate or 

were collecting under the one rate regime. Purchases made from remote sellers operating 

under the one rate regime would be subject to additional use tax exposure analysis. 

Purchases made from sellers that had pre-existing nexus would be taxed at the actual state 

and local rates. Consumers would have to track each purchase to determine which method 

was used and whether additional use tax was owed. 

Imposing two different tax rate rules on a vendor based on whether that vendor had nexus in 

the destination jurisdiction would be more administratively burdensome than today's tax 

regime - it would require vendors to maintain two types of tax collection, reporting, and 

remittance. 

12 
63 

Mr. GOODLATTE. Thank you, Mr. Kranz. 

Mr. Moschella, welcome. Welcome back to the Committee. 

TESTIMONY OF WILLIAM E. MOSCHELLA, SHAREHOLDER, 

BROWNSTEIN HYATT FARBER SCHRECK, LLP 

Mr. MOSCHELLA. Mr. Chairman, Ranking Member Conyers, 

Members of the Committee, I appreciate the opportunity to testify 

and to come back before the committee that I was so privileged to 

serve for so many years. 

We represent Simon Property Group, the largest owner/operator 

of shopping malls in the United States. The Simon Property Group 

stands with the broad coalition that supports the Marketplace Fairness Act. However, when Chairman Goodlatte indicated concerns 

about the Senate-passed version of the bill, Simon Property wanted 

to be responsive. In that spirit, we offer our idea to assist the Committee as it considers remedies for what most agree is a fundamental unfairness. 

At its core, the Marketplace Fairness Act would authorize States 

to require remote sellers to collect and remit State sales taxes to 

the receiving State. Another option would be to enact a Federal law 

prohibiting the shipment of goods in violation of the sales tax laws 

of the receiving State. This is very similar to what Congress did in 

the 1913 Webb-Kenyon Act concerning the regulation and taxation 

of alcohol. In 2000, Congress reaffirmed and strengthened WebbKenyon by enacting an enforcement provision giving States the 

ability to seek injunctive relief in Federal court for violations of 

Webb-Kenyon, including the failure of remote sellers of alcohol to 

collect State sales and excise taxes. 

The Webb-Kenyon model is simple. It is constitutional. It authorizes no new taxes. It recognizes the sovereign nature of State taxing decisions. It would not allow discriminatory State sales taxes. 

And this concept was reaffirmed by wide bipartisan majorities approximately 14 years ago. 

In my written statement, I detail the history of Webb-Kenyon, 

which was a response to the changing commerce clause jurisprudence of the time. What is important to note from that recitation 

is as follows: State regulation of alcohol was not always the norm. 

The ability of States to regulate alcohol has ebbed and flowed between the States and the Federal Government as the Supreme 

Court’s commerce clause jurisprudence has changed. 

Prior to the enactment of Webb-Kenyon, the Supreme Court in 

Leisy v. Hardin would not even allow a facially-neutral Iowa dry 

State statute to prevent the direct shipment of beer to an Iowa consumer. I thought that would interest Mr. King. In response, the politically powerful temperance movement moved to convince Congress to pass Webb-Kenyon, which filled what was regarded as a 

direct shipment loophole. In holding that Webb-Kenyon was constitutional, the Supreme Court observed that the act prevented 

‘‘the immunity characteristic of interstate commerce from being 

used to permit the receipt of liquor through such commerce in 

States contrary to their laws.’’ 

In the same way that Webb-Kenyon eliminated the regulatory 

advantage obtained through the immunity characteristic of the 

commerce clause, this Committee is considering ways to eliminate 
64 

the regulatory advantage enjoyed by remote sellers under contemporary commerce clause jurisprudence. In 2000, Congress reaffirmed and enhanced Webb-Kenyon when it enacted the 21st 

Amendment Enforcement Act. Congress permitted a State attorney 

general to seek injunctive relief against anyone the State had reasonable cause to believe violated that State’s liquor laws. This, of 

course, includes State tax laws. Today’s debate about how best to 

help States enforce their sales tax laws is reminiscent of the debate 

over the Enforcement Act. 

The House Committee on the Judiciary’s report on the bill observed that with the advent of the internet, numerous direct sellers 

had entered the alcohol market. In addition to the concern about 

underage purchasers receiving direct shipments of alcohol, the 

Committee report emphasized concern that direct shippers of alcohol were avoiding State taxes. ‘‘Illegal direct shipments also deprive the State of the excise and sales tax revenue that would otherwise be generated by a regulated sale.’’ 

In fact, one of the key Federal court cases cited by the Committee in its report justifying the need for the Enforcement Act involved the State of Florida’s allegations that an out-of-State direct 

shipper failed to pay excise taxes, sales taxes, and license fees. 

During a hearing on a similar bill in 1997, Members of this Committee heard testimony from the sponsor of the legislation, State 

officials, and industry supporters who all agreed that circumvention of State tax laws were a driving concern justifying the act. 

Likewise during floor debate, Members of the House raised these 

same State tax collection concerns. In addition, the chief Senate 

sponsor of the Enforcement Act, Senator Hatch, discussed the lost 

tax revenue generated by the sale of liquor from out-of-State direct 

shippers. 

The record could not be any clearer that one of the primary drivers of the Enforcement Act was the inability of States to enforce 

their rights under Webb-Kenyon to collect State taxes from out-ofState shippers. Interestingly, all of the elements of that debate— 

internet retailers, direct shipments, the failure to collect State 

taxes—are all at work here. That is why Webb-Kenyon and the Enforcement Act are an applicable precedent upon which to build a 

solution. 

Mr. Chairman and Members of the Committee, we hope this idea 

helps generate thought and discussion about the best way forward 

to solve the critical disparate tax treatment of remote and in-State 

sales. I look forward to your questions. 

[The prepared statement of Mr. Moschella follows:] 
65 

I Brownstein Hyatt Farber Schreck 

'Testimony of 

Mr. William E. Moschella, Shareho lder 

Brownstein Hyatt Farber Schreck, LLP 

on behalf of 

Simon Propeny Group 

I-Iollse Committee on the Judiciary 

/-I,caring on 

"'Exploring Alternative Solutions on the IJltcrncl Sales Ta.x 

Issue" 

March 12,201 4 

- ... _ ......... 1-.,.,. 

-

-.~ ____ ... ~ .. ,'IIII> wo 
66 

Mr. Chairman, Ranking Member Conyers, and Members of the Committcc, my 

name is Will Moschella,l and I appreciate the invitation to testify today as you continue 

to explore ways in which Congress can assist states collect sales and use taxes that are 

due under current state law. 

11 

We represent Simon Propcrty Group, the largest owner/operator of shopping malls 

in the United States with 351 properties in 38 states and Pucrto Rico. Over 420,000 

employees work at Simon Property shopping malls and Simon tenants remit $4.6 billion 

in sales taxes and $608 million in property taxes to support the local economies where 

Simon properties are located. It is the firm opinion of David Simon, CEO of Simon 

Property Group, that congressional inaction on this issue will cause a serious downturn in 

the U.S. economy and that it is oftantamount importance to find a solution that can pass 

the Congress and be signed into law. He bclicves that there must be a level playing ficld 

regarding the tax treatment of internet sales and brick-and-mortar salcs. The current 

situation; in his opinion, is absolutely untenable and Congress must enact a remedy. 

The Simon Property Group fully supports the Markctplace Fairness Act as passed 

by the Senate. Simon Property is a member of the Marketplace Fairness Coalition, the 

International Council of Shopping Centers, and the National Association of Real Estate 

Investment Trusts, all of which support the Marketplacc Fairness Act. The Marketplace 

Fairness Act is a well-considered, bipartisan proposal which enjoys the support of a wide 

coalition, including Governors, brick-and-mortar retailers, and Internet-based retailers. 

However, when Chairman Goodlatle indicated conccrns with the Senate-passed version 

of the Marketplace Fairness Act, Simon Property endeavored to fInd other approaches 

that could address those concerns and still achieve the fundamental purpose of the 

Markctplace Fairness Act. If othcr effective ways to address the incquity in the current 

systcm can be supported by the vast stakeholders in this mattcr, Simon Properties will 

help lead the effort to forge consensus and move it forward. We offer our idea to bc 

constructivc and to assist the Committee as it considers remedics for what most agree is a 

problem that must be solved. In that spirit, Simon thanks the Chairman for calling this 

hearing to explore alternatives, and we are pleased to discuss an idea we think could 

satisfy thc principles the Chairman released in 2013. 

Injunctive Relieffor Failurc to Comply with State Sales Tax Laws 

At its corc, the Marketplace Fairness Act would authorizc states to require remote 

scllers to collect and remit states sales taxes to thc state to which goods are scnt. Such 

legislation is needed because the Supreme Court has interpreted thc Commerce Clause to 

prevent states from doing this on their own. 

L Mr. Moschella is a Shareholder at Brownstein Hyatt Farber Schreck LLP. Before joining the firm in 2008, Mr. 

Moschella served at the Department of Justice as the Principal Associate Deputy Attorney General and Assistant 

Attorney General for Dol's Office of Legislative Affairs. Prior to that, he served in a number of capacities on 

Capitol Hill, including as the Chief Legisiative Counsel and Parliamentarian of the lIouse Committee on the 

Judiciary. 
67 

Another option would be to cnact a federal law pursuant to Congress' Commerce 

Clause jurisdiction prohibiting the shipment of goods in violation ofthe sales tax laws of 

the state to which the goods are shipped. This is very similar to what Congress did in the 

1913 W cbb-Kenyon Act concerning the regulation and taxation of intoxicating liquors. 

In 2000, Congress reaftinned and strengthened Webb-Kenyon by enacting an 

enforcement provision giving states the ability to seek injunctivc relief in federal court 

for violations of Webb-Kenyon, including the failure of remote sellers of intoxicating 

liquors to collect state sales and excise taxes. 

The Webb-Kenyon model is simple: it authorizes no new taxcs; it recognizes the 

sovereign naturc of state taxing decisions; it would not allow discriminatory sales taxes; 

and it should be politically acceptable because the Wcbb-Kenyon enforcement 

amendments garncred the support ofthis Committee and 310 Ayc votes in the House of 

Representatives on August 3, 1999. 

A briefrcview orthe Webb-Kenyon Act and related Commerce Clause 

jurisprudence regarding the rcgulation of intoxicating liquors demonstrates how this 

model could apply to remote Internet sales. 

BricfHistory of the Webb-Kenyon Act 

Today, most regulation of alcohol occurs at the state level; howevcr, state 

regulation of alcohol has not always been thc norm in the U.S. 2 The ability of states to 

regulate alcohol has change as the Supreme Court's Commerce Clause jurisprudence has 

developed over the years and as Congress has responded to those changes.3 for example, 

in the mid_19th century, states were understood to enjoy broad authority to regulatc 

alcohol based on a series of highly contested cases in which the Supremc Court held that, 

unless there was a fedcral statute to the contrary, states were not constrained from what 

we refer to today as dormant or negative commerce clause restrictions.4 

The temperance movement successfully sought to curb the sale and distribution of 

alcoholic beverages one state at a time. However, by the 1880's and 1890's, the Supreme 

Court became less accepting of state laws targeting imports. During this time, the 

Supreme Court began to recognize the implied restrictions inherent in the Commerce 

Clause; i.e. the donnant Commerce Clause restrictions on state action that discriminate 

against out-of-state products.s 

furthermorc, and more instructive to today's topic, the Court held that the 

Commerce Clause prevented states from passing facially neutral laws that placed an 

2/1. complete explanation of this fascinating history is recounted in Granholm. v. Heald, 544 U.S. 460, 476 - 485 

(2005). 

3 See Castlewood lnt'! Corp. v. Simon, 596 F.2d 638, 641 (5th Cir. 1979) ("Since the founding of our Republic, 

power over regulalion ofliquor has ebbed and flowed between the federal govemment and the states.") 

4 The License Cases, 46 U.S. (5 How.) 504, 579 (1947). 

5 Wallingv. Michigan, 116 U.S. 446 (1886) (invalidating a Michigan tax that burdened only liquor imports). 
68 

I' a 13 

impermissible burden on interstate commerce. 6 For example, the Supreme Court in 

Bowman v. Chicago & Northwestern Rail Co. invalidated an Iowa statutc requiring all 

liquor importers to have a permit. 7 In Leisy v. Hardin, 8 the Supreme Court held that, 

notwithstanding the fact that the statute in question did not discriminate against out-ofstatc scllers, Iowa could not prevent the importation of beer "until it became comingled in 

the common mass of property within the State. Up to that point of time," the Court 

reasoned, "in the absence of congressional permission to do so, the State had no power to 

interfcrc by seizure, or any other action, in prohibition of importation and sale by the 

foreign or non-resident importer.,,9 

Because the Commerce Clause pendulum had swung so far away from the 

doctrine annunciated in The License Cases, the temperance movcmcnt took its case to the 

U.S. Congress. To address Bowman and Leisy, Congress enacted the Wilson Act which 

empowered the states to regulatc imported liquor "to the same extent and in thc same 

manner as though such liquids or liquors had been produced in such State or Territory ... ,,10 

Thc Wilson Act was challenged under a number of legal theories. In response to a 

Commerce Clause challenge, the Supreme Court avoided the constitutional issue by 

construing the Act narrowly, holding that the Act did not permit states to regulate 

alcoholic beverages shipped in interstate commerce for personal use, II which many 

viewed as a direct-shipment loophole. 

Tn order to close this dircct-shipment loophole, in 1913 Congress enacted the 

Webb-Kenyon ActI2 over President Taft's veto. 13 The Supreme Court held WebbKenyon to be constitutional and obscrved that the Act prevented "the immunity 

characteristic of interstate commerce from being used to pcrmit the receipt of liquor 

through such commerce in States contrary to their laws, and thus in effect afford a means 

by subterfuge and indirection to set such laws at naught.',14 

In the same way that the Webb-Kenyon Act eliminated the regulatory advantage 

obtained through the "immunity characteristic" of the Commerce Clause, today this 

Committee and Congress are considering ways to eliminate the regulatory advantage 

6 Granholm at 476-477 (citations omitted). 

7125 U.S. 465 (1888). 

• 135 U.S. 100 (1890). 

9 Id at 124-125. It should be noted that "Bowman and its progeny rested in part on the since rejected originalpackage doctrine. Under this doctrine goods shipped in interstate commerce were immune from state regulation 

while in their original package." Granholm at 477. 

10 27 U.S.C. § 121. 

II Rhodes v. Iowa, 170 U.S. 412, 421 (1898). 

1227 U .S.C., § 122. 

13 Interestingly, President Taft vetoed Webb-Kenyon based on Attorney General Wickersham advice that "any law 

authorizing the States to regulate direct shipments for personal use would be an unlawful delegation of Congress' 

Commerce Clause powers." Granholm at 481. 

14 Clark Distilling Co. V. Western Maryland R. Co, 242 U.S. 311, 324 (1917). 
69 

c 14 

enjoyed by remote sellers under contemporary Commerce Clause jurisprudence to avoid 

adhering to state tax law. 

Some may argue that the Webb-Kenyon modcl is an inapt solution to the 

collection of state sales taxes by remote sellers because alcohol is "different" due to the 

history of state regulation and because the 21 st Amendment repealed the 18th Amendment 

(Prohibition) and vested in the states the ability to regulate alcohol. 

As already demonstrated, however, alcohol has not always been regulated at the 

state level, and at times in our history, states could not even rcgulate alcohol "in its 

original packaging" because that was understood to mean that the alcohol was still in 

interstate commerce and not subject to state regulation, including taxation. A strong 

argument could be made that the only reason alcohol is treated differently is because a 

powerful political movement- the tempcranee movement - had great support in 

Congress and across the nation. 

Second, it would be incorrect to argue that Section 2 ofthc Twenty-tirst 

Amendment, which authorizes states to regulate alcohol, sets alcohol apart from other 

goods. The Supreme Court has noted that § 2 of the Twenty-first amendment expresses 

"the framers' clear intention of eonstitutionalizing the Commerec Clause framework 

established under [thc Wilson and Webb-Kcnyon Actsj.,,15 In other words, the goals of 

section 2 of the Twenty-tirst Amendmcnt had already been achieved by Congress in 

enacting Webb-Kenyon. Webb-Kenyon was a valid exercise of Congress' Commercc 

Clause authority. Furthermore, contemporary § 2 eases have found that the Twenty-first 

Amendment will not save "state laws that violate other provisions ofthe constitution"; "§ 

2 does not abrogate Congress' Commerce Clause powers with regard to liquor"; and 

"state regulation of alcohol is limited by the nondiscrimination principle of the 

Commerce Clause." 16 In sum, § 2 did not expand states' authority beyond that which 

thcy already enjoyed under Webb-Kenyon. I? Congress can exercisc the same authority 

with regard to all goods subject to state tax laws. 18 

Congress Reaffirms and Enhances Webb-Kenyon in 2000 

In 2000, Congress enacted the Twenty-first Amendment Enforcement Act 

("Enforcement Act"), which amended Webb-Kenyon to provide states a means of 

enforcement (injunctive relief) when a state attorney general "has rcasonable cause to 

believe that a person is engaged in, or has engaged in, any act that would constitute a 

violation of a State law regulating the importation or transportation of any intoxicating 

!5 429 U.S. 190,205-206 (1976) (footnote omitted). See also. Florida Depatment of Business Regulation v. Zachy's 

Wine & liquors. Inc., 125 F.3d 1399,1402 (1997) ("In addition to repealing prohibition, !he Twenty-first 

Amendment in effect constitutionaiizes the Webb-Kenyon Act."). 

16 Granholm at 486-487. 

17 Congress reenacted Webb-Kenyon in 1935 after the ratification of the 21;t Amendment. 

18 Quill Corp. v. North Dakota, 504 U.S. 298, 318 (1992) 
70 

P ,: 15 

liquor. ... ,,19 Congress took this action because direct shipments of alcohol in 

contravention of state law was a growing problem. The House Committee on the 

judiciary's report on the bill observed that "several new players have entered the 

alcoholic beverage industry" and noted that "[w]ith the advent of the Internet, they have 

been able to advertise their product nationally and have been able to widely expand their 

market access." 20 The Committee report makes clear that the absence of an enforcement 

mechanism will hamper states' "ability to police sales to underage purchasers.,,21 

Moreover, of concern to the Committee and to Congress was thal direct shippers of 

alcohol were avoiding state sales and excise tax laws: "Illegal direct shipments also 

deprive the state of the excise and sales tax revenue that would otherwise be generated by 

a regulated sale."n In fact, one ofthe key cases cited by the Committee in its report 

justifYing the need for the Enforcement Act involved the State of Florida's allegations 

that an out-of-state direct shipper had failed to pay "excise taxes, sales taxes, and license 

fees.,,23 During a hearing on a similar bill in 1997, Members ofthc House Judiciary 

Committee heard testimony from the sponsors of the legislation/4 state 0l1icials,25 and 

industry supporters?6 Among the reasons cited for supporting the Enforcement Act, were 

that direct sales over the Internet, through catalogues, and other means, circumvenled 

state sales and excise taxes. In his opening statement, Chairman Coble summed up the 

concern: "In recent years, improved methods of shipment and the advent of the Internet 

have made it possible for small wineries and breweries to reach a much broader market." 

lIe noted that "[ s ]tates also claim that direct shipment of alcoholic beverages to 

consumers deprives a state of tax revenues .... ,,27 When the Enforcement Acl was 

19 27 U.S.C. § 122a. 

20 H. Rep!. 106-265, 106th Cong., 1st. Sess. at 5 (July 27,1999). 

21 Ihid. 

22 Ibid. 

23 norida Department of Business Regulation v. Zachy's Wine and Liquor, Inc., 125 F.3d 1399, 1400 (1997). 

24 Rep. Robert Ehrlich, the sponsor of the legislation, testified that "Illegal interstate shipping of alcohol not only 

violates a state's ability to regulate incoming alcohol beverages, it also bypasses state excise taxes. The companies 

that obey current law and ship alcohol beverages in accordance with existing state laws pay a significant amount of 

money in taxes. Illegal shippers deprive states of excise and state sales tax revenue which is generated from sales of 

alcohol beverages. The tax revenue lost to states due to illegal shipments is estimated between $200 and $600 

million a year." Statement of Representative Bob Ehrlich, Hearing on Amendment to the Webb-Kenyon Act; and 

The Private Property hnplementation Act of 1997, Subcommittee on Courts and Intellectual Property, 1st Sess., 

1 05th Congo (Sept. 25, 1997). 

25 James M. Goldberg, on behalf of the .Toint COllll1littee of States, complained: "Out-of-state sellers shipping 

illegally into a state deprive the state of the excise tax revenue which is generated from in~state sales of beer, wine 

and distilled spirits, not to mention the sales tax revenue which goes uncollected from an illegal interstate sale. 

Statement of James M. Goldberg, Hearing on Amendment to the Webb-Kenyon Act; and The Private Property 

Implementation Act of 1997, Subcommittee on Courts and Intellectual Propelty, 1st Sess., 105th Cong., at 45 (Sept. 

25, 1997) (footnote omitted). 

26 Jim Simpson, on behalf of the National Licensed Beverage Association, complained that "NLBA memhers have 

become greatly alanned at the increasing frequency of consumers being solicited to buy beverage alcohol directly 

through catalogs, magazines, direct mail and the lutemel." He noted that, among other problems, "[d]irect sales, in 

most cases, avoid State excise and sales taxes .... H After providing estimates of the lost state tax revenue, Mr. 

Simpson concluded that "[t]his hemorrhage of tax revenue will only increase as mail order, telephone, and Internet 

sales become more popular," Statement ofMr. Jim Simpson, Hearing on Amendment to the Webb-Kenyon Act; and 

The Private Property Implementation Act of 1997, Subcollll1littee on Courts and Intellectual Property, I"' Scss., 1051h 

Coug., at 33 (Sept. 25, 1997). 

27/dat2&5. 
71 

considered by the full House, debate on the floor reflected the interest in helping slates 

enforce thcir state sales and excise taxes.z8 Indeed, the Chief Senate sponsor of the 

Enforcement Act, Senator Hatch, noted the lost tax revenue generated by the sale of 

liquor from out-of-state direct shippers?9 The record could not be any clearer that one of 

the primary reasons justifYing the enactment of the Enforcement Act was the inability of 

states to enforce their rights under Webb-Kenyon to collect states sales and excise taxes 

from out-of-state direct shippers. That conclusion is extremely similar to the facts that 

gave rise to the Marketplace Fairness Act. All the elements discussed in 2000 - Internet 

retailers, direct shipments, and failure to collect state taxes - are all at work here, creating 

an uneven playing Held for retailers. That is why the Webb-Kenyon and the Enforcement 

Act are an applicable precedent upon which to build a solution. 

Conclusion 

Congress could pass a one sentence statute modeled after the 1913 Webb-Kenyon 

Act prohibiting the direct or remote shipment of goods in violation of the tax laws of the 

receiving state. And, using the Enforcement Act as a guide, Congress could add several 

more sentences outlining the application of injunctive relief. This would provide an 

effective alternative solution. 

Mr. Chairman and Members of the COlmnittee, wc hope this idea helps generate 

thought and discussion about the best way forward to solve the critical disparate tax 

treatment of remote and in-state sales. 

1 look forward to your questions. 

28 See e.g., Statement of Rep. Delahunt, 145 Congo Rec 112, H6858 (Aug. 3, 1999) ("The bill is necessary not only 

to prevent illegal shipments to minors, but to enable States to police licensing standards, track sale, and collect taxes 

on those sales. Last year, illegal alcohol shipments cost States some $600 million in lost revenues, State taxes on 

alcohol are an important source of support for State programs, and protecting that funding stream is a legitimate 

State objective."); Statement orRep. Sensenbrenncr, Ed at H6860 ("These illegal direct shippers arc bypassing State 

excise and sales taxes, operating without required licenses, and most appallingly, illegally selling alcohol to 

underage persons." Rep. Sen sen brenner emphasized that the Enforcement Act "does not change existing State laws, 

and makes no restrictions on legal Internet or catalog sales. It does not open the door to Intemet taxation. "); 

Statement of Rep. Barrett, Id. at H6865 (After noting that diTect sales of alcohol "drain needed tax revenue," Rep. 

Barrett concluded that "companies in one State should not be able to disregard the laws of another State in an etforl 

to reach new customers. 

"Statement of Sen. Orrin Hatch, 145 Congo Rec. 38, S2509 (March 10, 1999). 
72 

Mr. GOODLATTE. Thank you, Mr. Moschella. 

Mr. Sutton, welcome. 

TESTIMONY OF JAMES H. SUTTON, JR., CPA, ESQ., 

MOFFA, GAINOR, & SUTTON, PA 

Mr. SUTTON. Thank you. I am here before you today to speak—— 

Mr. GOODLATTE. You may want to turn that microphone on and 

pull it close to you. 

Mr. SUTTON. I am here before you today—— 

Mr. GOODLATTE. Pull it closer. 

Mr. SUTTON. Is that on now? 

Mr. GOODLATTE. That is it. 

Mr. SUTTON. Okay. Thank you. I am here before you today to 

speak against my own personal interest. As a CPN attorney whose 

practice is devoted almost entirely to the State and local use tax 

controversy, if the Marketplace Fairness Act were to pass, my law 

practice would explode from clients all over the country. So when 

I say to you today that the Marketplace Fairness Act is a bad idea, 

it is because I truly believe it will cripple thousands of businesses 

and hurt our economy overall. 

I handle tax audits, protests, litigation, collections, revocations, 

voluntary disclosures, and even criminal defense, all for sales tax 

every day. Each year my firm represents hundreds of people, business owners, who feel that they are not being treated fairly by the 

Florida Department of Revenue, just one State. I see firsthand how 

aggressive a State tax department can be and how time consuming 

and expensive it is for honest business owners to defend themselves. 

Software solutions can make filing tax returns possible. But the 

complications for audits, collections, investigations, and criminal 

prosecutions will not be handled by the software. 

In my written testimony starting on page 4 is a listing of sales 

tax horror stories and other issues registered voters in your State 

will be facing if the Marketplace Fairness Act passes. For example, 

are you ready to explain to the registered voters in your State how 

they face 100 years of potential jail time spread between 45 States 

because only a month or two of use tax was not reported when 

their business went under? Are you ready for citizens of your State 

to be extradited to Florida or to other States because that State 

perceives that a business owner in your State owes use tax? Are 

you ready for Florida and other States to completely ignore your 

State’s corporate liability shell protection to impose personal liabilities of the business owners in your State? These are only some of 

the many problems that will ensue if the Marketplace Fairness Act 

passes. 

The purpose of the commerce clause is to ensure commerce flows 

freely between the States without overly burdensome State regulation. The Marketplace Fairness Act would literally obliterate the 

purpose of the commerce clause. We need a solution to the State 

tax problem, but forcing remote sellers to collect tax gives the 

States jurisdiction over those remote sellers, which causes a whirlwind of problems I see every day in just one State. 

Consider that every State with a sales tax and a use tax already 

has all the laws, the rules, and the procedures in place for use 
73 

taxes. The problem is no one has the information to enforce it. So 

the solution is simple: taxable remote sales information needs to be 

made available to the purchasers and the States. 

I commend the great State of Colorado for trying something very 

similar to this idea. However, under the commerce clause, only the 

Federal Government has the authority to do this similar to the reporting that is being done in the EU for more than 10 years. Therefore, I propose a consumer private reporting, CPR system, in which 

a vendor would utilize the software that everybody else is proposing to use to accumulate information for 1099 style reporting to 

the purchasers and the States, but without the private information 

of what is actually purchased. A database will be created at the 

Federal level to accumulate that information to report. Self-reporting would become commonplace, and enforcement made easy for 

the States with no new State use tax laws needed. 

Finally, the law should establish a simplified nexus rule for sales 

and tax use tax purposes. I believe consumer private reporting is 

your answer. It places the least amount of burden on interstate 

commerce. It compensates remote sellers for their time and expense. It allows the States the sovereign right to enforce their own 

use tax laws without impeding on the personal privacy of the purchaser. 

Sales and tax reporting in this country needs Federal CPR. 

Thank you. 

[The prepared statement of Mr. Sutton follows:] 
74 

Written Submission of 

James H Sutton Jr, CPA, Esq. 

Moffa, Gainor, & Sutton, P.A. 

Hearing 011 

Exploring Alternativ'es on the Internet Sales Tax Issue 

Before the Judiciary Committee 

March 12,2014 

.. , 

CPR 

Consumer Private Reporting 
75 

Exploring Alternatives Solutions on the Tnternet Sales Tax Issue 

Testimony of James Sutton. CPA, E'q. 

March 12,20]4 

Page 3 

Exploring Alternative Solutions on the Illternet Sales Tax Issu. 

Testimony and Additional Materials rrom: 

James H Sutton, Jr., CPA, Esq. 

The Law om.es of MolTa, Gainor, & Sutton, PA 

n. WRITTEN STATEMENT 

Mr. Chairman, Mr. Ranking Memher, and members of the Committee: 

I appreciate the opportnnity to submit this statement on alternatives to the remote sales and use tax 

problem that we are facing in this country. I applaud the efforts oflhis committee for taking the time to 

explore not only the alternatives to taxing internet-based transactions, but also all remote sales between 

states. The implications for this country are vastly complex. As a CPA and Attorney that does almost 

nothing but sales and use tax controversy, I hope to provide valuable insight into how your alternative 

solutiolls will impact remote sellers. J believe that this country needs the federal government to intervene 

to con'ect the sales and use tax problems we are facing, 

a. Executive Summary 

I am here before you today because I am a Florida CPA and Attorney whose law practice is 

devoted almost entirely to sales and use lax controversy in a slate with projected sales tax 

revenues of over $22 billion this fiscal year. ! handle audits, protests, litigations, collections, 

revocations, and even criminal defense - all from a sales tax perspective. I'm not taking about a 

few of tile Fortune 1,000 companies. Each year my firm represents hundreds of small, medium, 

8nd large businesses as well as individuals who all feel they are not being treated fairly by the 

Florida Department of Revenue. As a result, I see firsthand every single day how a Slate tax 

department can walk all over the rights of business owners. I could tell you hundreds ofhon'or 

stories, but included herein are summaries of examples of (1) states ignoring taxpayer rights and 

(2) simple areas of statutory Cons[TUction that leave small business owners hdpless against the 

slate taxing authority. 

Based on my experience and the many examples provided herein, I can tell you unequivocally 

that you do not want to give state tax departments free reign to regulale remote sellers throughOlll 

this country, It would be devasmting to businesses both large and smaIL Perhaps software 

solutions can make filling tax returns possihle, but the complications for audits, collections, 

investigations, and criminal prosecutions will not be handled by software and will threaten to 

cripple our interstate commerce economy. 

Both sales tax and use tax arc excise taxes - a tax all the right to do something. Sales tax is on the 

right to sell (or in some states, buy) a good or service within lhe borders of a state, Use tax is " 

tax on the right (0 lise Ihat good or service in the state, if sales tax has not already been paid, 

There must either be a sale or a use in the borders of the state for either tax to apply. Therefore, a 

remote seller is subject to tax in the state of its customer. The remote seller is not doing anything 

that would subject it to tax in that remote state, Only the purchaser is engaging in a taxable event 

- exercising some type control over the problem in the state that is subject to use tax. 

There is something unfair happening to brick and mortar local businesses in this country, but it is 

no! remote sellers hurting these local businesses, The pain is caused by the lack of use tax 

enforcement by the state tax departments on the state's own citizens. There is something unfair 

happening TO the states, but it is not remote sellers hUl1ing the slates. Again, it is the inability of 

state tax departments to enforce use tax laws on the state's own citizens. The solution to both of 

these problems is clear. We need to figure out a way for the states to be able to enforce existing 

use tax laws. The amazing thing is that each and every state with a sales tax already has every 
76 

Exploring Alternatives Solutions on the Internet Sales Tax Issue 

Testimony of James Sulton, CPA, Esq, 

March 12, 2014 

Page 4 

Jaw, every rule, the tax form, collection procedure, and weB testeu case law in place to enforce 

their own lise tax laws, They only thing missing is the remote sales information, 

I am proposing that the saJes and use lax system ;s not working and it needs CPR- federal 

Consumer Private Reporting legislation that wil1 require remote sellers to provide sales 

information to the stales and to purchasers so self-reporting of use taxes can become common 

place in this country, The reporting would be done on an aggregate basis through a federal 

database so the private information of what consumers purchased stays between the purchaser 

and the remote ,eller. The remote vendors could either use state-funded software to report the 

saJes or they could use their own software to provide the sales information, The details of the 

Consumer Private Reporting system and alternalive means of implementing it are provided 

herein, The proposal meets all 7 of the Goodlatte Principles, without placing extreme bW'dens on 

remote seHers and the national economy, It also resembles a reporting system being used in the 

EU, 

Colorado should be commended for attempting a similar statute, However, under the commerce 

clause, no state has the power to force remote sellers 10 report Only the federal government has 

this authority. The C.P,R, system is similar to the reporting done in the European Union for more 

than a decade, 

Finally, any federallcgislalion must simplify the nexus rules for sales and use tax in this country, 

with a codification of the Quilll "physical presence" standard, Failure to do so will result in the 

state continuing their expansive laws that continually ignore the Supreme Court's ruling in Quill, 

The U,S, Supreme Court has abstained from taking a single sales and use tax nexus case foJ' over 

20 years, after mging Congress to address the nexus issue, Now is the time to do so and create 

simplified certainty for interstate commerce with regard to sales lax nexus, 

b, Examples of Sales ami Use Tax Creating Hardship. for Bus'n.ss •• 

Below are examples of how sales and nse tax statntes, rules, and state tax department procedures are all 

weighted against vendors, For the most part, these examples just take into consideration the complexities 

of one statc's laws, Imagine the variety of complexities that would result in 45 state's laws applying to a 

remote vendor, As you consider these stories, please also realize that these are but a drop in a sea of 

turmoil happening right now to small business owners in this country who don'! have a high powered 

lobbyist to light for them, These business owners rely on you to protect them, !fyou pass federal 

legislation that gives states the right to reach across state lines, this turmoil will be nnleashed on business 

owners allover the country, So I ask you to remember that by creating the commerce clause - the 

founders ofthis country trusted you, members of Congress, to stop the states from putting lheir own 

revenue needs ahead ofthe good of this counlly and the free flow of commerce among the states, 

Arrested for Sale Tax: Would it surprise you to Jearn that in Florida it only takes $301 of 

unremitted sales lax over a 5 year period to become 3'" degree felony punishable by up to 5 years 

in jail and $5,000 in fines? If the tax due crosses $20,000, it is punishable hy up to 15 years in 

jail, Stmggling business owners are shocked to find out that the Florida Depat1ment of Revenue 

has an investigation unit whose job is to see the business owner arrested because they paid 

employees instead oflhe state, 

1110+ Years in Jail for a Failed Business Owing Sales Tax: According to the Small Business 

Administration, 30% of businesses fail after two years and 50% of businesses fail after five 

years.2 1\105t businesses go under owing money and, in my experience a shocking number of 

1 Quill vs, North Dakota, 504 U,S, 298 (1992) (physical presence required for nexus), 

'SBA Office of Advocacy, Frequently Asked Questions, Updated January 2011 

( http://www,sba ,gOY Isites/ defau Itlfi les! sbfaq, pdf) 
77 

Exploring Alternatives Solutions on lhe lnternct Sales Tax Issue 

Testimony of James Sutton, CPA, Esq. 

March 12,2014 

Page 5 

them will have two or three months of collected, but not remitted, sales lax. If a statllte like the 

MFA passes, then 50% of new companies collecting sales tax on behalf of 45 states will fail, 

many owing sales tax to 45 states. lfthe average minimum criminal sales!use tax fraud statute in 

this country is the length of Florida's, 5 years for $301 oftax, then a failed business owner (and 

all responsible parties in the business) could be facing up to 225 years in prison (5 years times 45 

states with a sales/use tax). Thi., i" one "fa hum/red unintended consequences of/he 

,Marketplace Fairness Act. 

Extradition: I know an 80+ year old woman who was taking care ofa terminally ill family 

member in Illinois when the police came to alTestcd her. This poor woman, whose restaurant was 

believed to owe sales tax when it closed, spent 4 days in a van with 10 others, chained to her seat, 

with no sleep, no showers, no heat, and $1 sandwiches and a cup of water for breakfast, lunch, 

and dinner. Do you wilnl Florida extraditing your citizens for perceived sllles lax problems? 

Debtor's Prisoll: If a business owes sales tax and simply cannot afford to pay the tax, then the 

owner faces serious prison terms under Florida's sales tax fraud statutes. However, if the 

business owner can pay the tax back, invariably, the business owner can avoid jail time. Howare 

you going to expluin 10 citizens ;nY0l<' district the fact that they ore going 10 jailfor .. ales tax 

deb/they can nol a not 11 debtors prison constitutional violation? 

Guilty IIntil Prove" Innoc.n!: j know just how overwhelming it is for a business owner to find 

out that Florida has the power to estimate sales taxes with the presumption of accuracy, placing 

the burden on the business to prove the state wrong, What is worse is that Florida often estimates 

twice the historical average of tax due, and then the taxpayer owes that amount if the taxpayer 

does not have the proper paperwork or the help of a good professional help prove the state wrong. 

This is effective a gUilty until proven innocent statute akin to legalized extOltion. Do you want 

Florida's Iilclics un/eashe{/ on business owners ofyaur slale? 

Automated Collection Process: The states are moving towards automated collections, taking the 

human element out of the collection process. Automated bank freezes, robotic calls hamssing for 

late retut11, and tax liens filed with no human intervention. This is when mistakes happen - such 

as the tax warrant apparently being issued against the Florida Supreme COllrt in Febmary 2012.' 

What are )'OU going to tell registered voters in your districl when they complain to you thllt 

remote stale tax departments are freezing their business's bank IlCcOimt over mis/Ilkes made by 

au/omaled computer ,<ystems? 

200% of Tax Personal Liability - Piercing tlte Corporate Veil: Many states have very nasty 

statutes that allow the state to completely ignore corporate shell liability protection to come after 

the officers, directors, and shareholders for sales tax liability. Flmida has a 200'1', oftax penalty 

on each responsible party lhat gets used regularly or agent business owners whose tailing 

business may have owned sales and/or use taxo4 Are you ready to explain ;0 your stale's 

business owners how you aI/owed them to become peJ'.I'fJIlully liablefor use lax thallheir 

business may have owed other stales? 

, Florida Tax Warrant # 10000002.50554, Issued February 9,2012 in Leon County, Florida. (It turned out the 

warrant was intended to be ftled on the Florida Supreme Court Historicill Society, but the computer system 

truncated the name. The Florida Supreme Court Historlca! SocIety gives tours of the florida Supreme Court and 

the board of Directors are all former presidents of the Florida Bar). 

'See, Sec. 213.29 .. Fla. Stat. 
78 

Exploring Alternatives Solutions on the Internet Sales Tax Issue 

Testimony of James Sutton, CPA, Esq, 

March 12,2014 

Page 6 

Wavier of Rights for Payment Plan: III Florida, a taxpayer has the stalutory right to be 

considered for a payment plan under the Taxpayer Bill of Rights,' However, the Florida 

Department afRevonuc decided that taxpayers should be required to give up all appeal rights and 

personally guarantee not only the past tax liability but also the next 12 months of future liabilities 

- just !O enter a payment plan that they have the right to under the law, If a business owner ill 

your dis/ricl gels behind in remitting use IIIX, whicll mlllly will, tllen can you imagine tllem 

entering persollai guarantees with 45 slates? 

Auditors Not Trained on Taxpayer Rigbts': I have personally been through Florida's certified 

sales tax auditor training -, and there was no training on the Florida Taxpayer Bill afRights. I 

have asked many Cllrrent and former Florida sales and use tax auditors if they were trained in the 

Taxpayer Bill of Rights, Would you believe that I have been consistently told that the 

Department ofRevonue does no! even bother to teach auditors about the Florida Taxpayer Dill of 

Rights? Perhaps your slale revenue department re.~pects lax payer rights, hut uniler the 

Marketplace Fairness Act, business owners itl your slale will be subject 10 Ihe rules, 

regula/ions, and enforcement lIetions of 45 sill/es and will n,,/ be able to availlhemselves of the 

taxpayer rights in your Slate when dealing witll oilier slales. 

Sale. Tax Audits Take (; to 12 Months: The typical sales lax audit takes between 6 and 12 

months to complete (presuming an administrative challenge is not necessary). If fedeml 

legislation allows remote sellers to have nexus everywhere, then the "free" software will not 

manage these audits. The remote seller will have to bear the time and expense to manage 

approximately 8 audits 7 a year and be liable for the mistakes. Do you wont 10 explain 10 business 

owners in your stale why they have 10 bear Ihe cost ofpossiMy eigfll sales lax audils ayear? 

Appeal Rights Lost Before Evell Gettillg the Notice: A taxpayer has a limited time frames a 

taxpayer has to respolld or challenge a position of any state tax depaltment. Sometimes that time 

frame is as sh011 as 20 days in Florida. The date is determined based all the date on the letter 

giving the notice. However, the Florida Department of Revenue will wait days to mail the letter, 

sometimes up to a week. Considering that the letter might also take several days to arrive at the 

taxpayer's location then the taxpayer has almost 110 time 10 respond and loses their appeal rights. 

Leflers with Ia..ypayer deadlines 10 respond sent across tile country coultleasily miss dealilines 

(mdforj'eilllppeal rights, which would be II common place if the Marketplace Fairness Act i .• 

entlc/!!tl. 

Pay 10 Play: Many states will not Jet a taxpayer challenge the state taxing authority in court 

unless the taxpayer has paid the tax in fulL Small business wilh limited capital resources could be 

at a complete disadvantage when dealing with remote states - and have no representation in the 

state legislature to seek relief. 

Contract Audito ... : If you have been given the impression that states will not audit remote 

sellers very often under the Marketplace Faimess Act, then you are not aware of "contract 

auditors." Many states contact with third parties to perform sales tax audits, The states may not 

have enough statc auditors to audit in 45 slates. but you can guarantee that ifit is profitable for 

the state, they will hire an endless supply of contact auditors to perform sales and use tax audits 

everywhere, including your state. 

5 See, Sec. 213,015(10), Fla, Stat, 

S See, Sec. 213,015, Fla. Stat" also known as the Florida Taxpayer Bill of Rights, 

'If a company is audited on average every 5 years by 45 states, then the company will be a little over 8 audits a 

year on average. 
79 

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Testimony ofl.mes Sutton, CPA, Esq, 

March 12,2014 

Page 7 

Lack ofUnifoTmity oj' Enforcement: Florida, similar to most states, gives taxpayers "the right 

to fair and consistent application of the tax laws."" In all too many circumstances, local Revenue 

offices have completely different procedures and rules. For example, one local omee wilinot 

enter any installment agreements for a period more than 6 months. The remaining revenue 

offices will offer 12 month installment agreements. So taxpayers that have to request installment 

agreements ill that olle local revenue office are treated differently than the taxpayers elsewhere in 

the state. ~(slale lox depart",,,,,/ .. cannol treat their (lWI! residenls uni(ormly, do you re(ll(y 

expect remote sillte II/X departments to treat your residents (Jill/local businesses with the silme 

fairness as the..V treat their own in .... tdate companies? 

Revenue Agents Ignore Tax ProfcssiOlmls: At almost all local levels ofthe Florida Deprnimcnt 

of Revenue, there are agents that helieve that they can talk to the taxpayer anytime they want, 

even if the taxpayer has a power' ofattomey representing them" This is a clear violation of 

Florida's Taxpayer Bill of Rights.' This happens in audits, collections, and criminal 

investigations, the latter of which has US constitutional issues. The DOR added a line to the 

power of attorney trying to say that they don't have to cOlltact the taxpayer'" representative at all 

times if it is inconvenient. J)o you wlJnt to explain to the tax professionals in your .• tale why 

you voted for the llfllrkelplllce Fairness Act alUi allowed your in-slale /IIx professiollals 10 be 

complelely ignored by oul of state laxing authorities? 

Waive 5th Amendment Rights Just to Pay Tax: One afmy "favorite" stories involves a 

business owner who came into a local revenue office to pay late taxes, The local collection agent 

refused to accept the payment unless the taxpayer signed a sworn statement that he was 

committing sales tax lraud for nol paying on time. When the taxpayer refused, the collections 

agent escOlted the taxpayer to a window with no windows where the collection agent and his 

supervisor berated the taxpayer with claims that he had to sign what amounted to a criminal 

confession. Neither the procedure by the local collection agents nor the form the taxpayer was 

asked to sign was approved by the Florida Department of Revenue, both of which are considered 

illegal, unpromulgated procedures under Florida law. 

Unlawful Threats ofEmb.rrassrnent, Anes!, ami Closing Business: Collection agents have 

been known to greatly exceed any authority granted under Florida law to harass taxpayers 

because the collect agent gets ted up with or upset with the taxpayer. For example, a law suit 

against the Florida Depmtment of Revenue in February 2014, seeking emergency and temporary 

injunctive reliefto stop a Florida Department of Revenue agent from harassing the business 

owner.'O The suit was filed alleging a local revenue agent was belligerent, aggressive, strongarmed, and vindictive, lhreating lo emban"ass the taxpayer in front of all his customers, lock his 

doors, close down his business, and have him arrested. A collection agent does not have the 

authority to do any of these things. Jt takes a full revocation proceeding, with due process rights 

and hearings, to close down a business for sales tax in Florida. Only a state attorney, not a 

collection agent, can file criminal charges against an individual for sales tax fraud, and only after 

an investigation. Imagine what collection agents from Florida would do to remole selle",' 

loc{f/ed in YOllr slale if a statute like tile ,"'larketplace Fairness Act is passed. 

8 Sec 213,015(21), Fla Stat ("The right to fair and consistent application of the tax laws ofthis state by the 

Department of Revenue"), 

9 Sec 213,015(3). Fla, Stat, (,The right to be represented or advised by counselor other qualified representatives 

at any time in adrnlnistratlve interactions with the department ... "'). 

10 Roya! Trade investments of Sarasota, Inc. v. State of Florida Department of Revenue, (Case No, 2014 CA 001082 

NC, 12th Cir, Ct. Fla,) complaint filed February 21, 2014. 
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Testimony of James Sutton, CPA, Esq. 

March 12,2014 

Page 8 

Everyone ofthe issues listed above will be avoided if remote sellers are merely reqllired to report sales, 

instead of becoming use tax collection agents Jor the states. This is wby I believe tbat Consumer Private 

Reporting legislation - modified to completely protect consumers privacy - is the most simple and cost 

effective solution, while not overburdening remote sellers or our national economy. 

c. The Hasics ofSal.s Tax vs Use Tax That Few People Understand 

Most people do not i\l1ly understand the sales and use tax issues for remote transactions. Both sales tax 

and use tax are excise taxes - a tax on the right to do something. Sales tax is on the right to sell (or in 

some states, buy) a good or service within the borders ofa state. In-slate vendors charge saJes tEL", 

because under most state laws, it is a tax on theirright to sell. Yes, they have to pass the tax on to their 

customers - but the taxable activity is the business selling. This is why brick and mortar companies 

collect sales lax. 

Use tax is a tax on the right to use that good or service in the state, if sales tax has not already been paid. 

Use tax is not the obligation of an out of state selicI' because they have not done a taxable activity in the 

destination state. Selling something; in Georgia to someone in Florida simply is !lot a taxable event for 

Florida. There is no legal mechanism in place to tax the Georgia seller for sales tax or use tax purposes in 

Florida (as long as the Georgia company does not have nexus with Florida). The taxable event in Florida 

is (he purchaser using the good or service in Florida. Now Florida would love to rorcc the Georgia seller 

to act as a collection agent for Florida's usc lax that tbe purchaser owes. But the Georgia seller literally 

has not done anything that would subject the Georgia seller to (ax. 

This is a very real distinction that almost no one outside the full time state and local tax (SALT) 

profession knows. It is why the remote seller is not getting away with anything. They simply are not 

doing a tauble activity. 

The in slate brick and mortar company is disadvantaged not because remote sellers are not collecting use 

tax. Instead, it is because their own state tax department is not enforcing their use tax Jaws on people 

purchasing goods remotely. The statc is disadvantaged no! because remote sellers are not collecting use 

tax. Instead, it is hecause the state tax department docs not have an easy means of obtaining the 

infonnation on remote purchases subject to use tax in the state. 
81 

Exploring Alternatives Solutions on the Internet Sales Tax lssue 

Testimony ofJames Sullon, CPA, Esq. 

Ivlarch 12. 2014 

Page 9 

d. CONSUMER PRIVATE REPORTING 

COMPLIES WITH ALL SEVEN GOODLATTE PRINCIPLES l'OR TAXING REMOTE SALES 

WHILF: PROTECTING CONSUMER'S PRIVACY 

The biggest concern with any proposed legislation aimed at repOIiing remole sales to the purchaser'S state 

is that doing so would be a violation of the consumer's right to privacy.ll There is a simple way to 

alleviate the privacy concerns with a modified consumer repoliing system that proiec!s the purchaser's 

privacy - alld does so in a way that burdens the free flow of interstate commerce in the least way possible. 

The Bas;cs or a Consumer Priv.te Reporting System 

Federally require remote seller to report remote sales. The reporting would either be done by the 

company itself (if approved to do so) or through approved <Onwafe vendors that specialize in 

heJping sellers detennine which goods afe taxable in which states. The specifics of what exactly 

is purchased never leaves the remote vendor's system, so the purchaser's private information stays 

betwcen the vendor and the purchaser. 

Approved software vendors (or companies that self-report) would then report to a newly created 

federal dambase that would combine sales infonnotion in a 1099 style lormat for each state and 

each purchaser. 

The purchasers would then have the information to file their own use tax returns with the state 

and remit the use tax that has always been due. Because the purchaser mows the state has the 

information, filing use tax returns will be encouraged. 

If a purchaser does not file a use tax return, then every state that has a salcs tax already has a 

process in place to send a friendJy letter to the resident purchaser reminding them to pay the use 

tax. Each slale could choose to be strict or lax about the use tax compliance, but the people being 

taxed would have a vote on the government officials representing them. 

The purchaser would have the right to reveal the specifics of a purchase to the state to prove that 

an item should 110t be taxed. Otherwise, the state would not have the specifics of what was 

purchased. 

Addition.l Details of the Consume<' Private Reporting System 

Set federal standards for the minimum information and a standard fOlmatl2 of that information 

that needs to be provided to the software vendors and to the lederal database. This will allow 

standardization for the whole industry. 

Approved software vendors will be funded hy the states, not the remote vendors, potentially 

based on a percentage of (taxable and exempt) sales reported through the system (by state). 

Companies that are approved to self-report into the federal dalabase would also be reimbursed for 

the cost of implementation. 

States would have the right to audit the sonware companies for compliance with the individual 

staters 1a WS. 

11 It should be noted that if a taxing authority has jurisdiction over a vendor, remote or othervJise, then the notion 

of consumer privacy 1s a complete fiction. A state tax auditor has the right to inspect each and every customer 

purchase record during a saJes and use tax audit - regardless of whether the information is reported to the state, 

So, the proposed Marketplace Fairness Act (and any similar collecting and remitting legislation) would give the 

states the authority to review every singie purchase record during an audit of an out of state vendor. 

12 The format should be ubiquitous and scalable, so it can be used everyone ,md installed on one machine or 300 

different types of hardware. 
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Testimony ofJames Sutton, CPA, Esq. 

March 12,2014 

Page 10 

For approved remote vendors that choose 10 selt~reporl into the federal database, the states would 

have the right to review the remote vendor's tax coding process for good faith compliance. The 

remote sellers would not be liable for mistakes in taxability coding, but substantial noncompliance based on a reasonable standard could result in the remote seller being required to use 

an approved third party software vendor for tax determination and reporting, 

If a vendor elects to use an approved third party software provider, remote vendors could apply 

for reimbursement of expenses to upgrade software to account for the new reporting system 

during the first year - to be funded by the states. 

If a remote seller has nexus with a stale, then normal sales/use tax collection rules would apply. 

If a remote seller is discovered to have nexus, then the remote seller would be pardoned for all 

periods reported to the states through the new federal system, but then normal sales and \ISe tax 

rules would appJy. 

The federal law would create a bright lille nexus standard at the federal level for sales and use tax 

purposes similar to the mles established in Quill vs. North Dakota, 504 U.S. 298 (1992) (physical 

presence required). Ifuse taxes are being collected via seli~reporting, then the state will not have 

a need to push for nexus of remote sellers. Create a bright line test at the federal level to creale 

certainty for businesses. 

Purchaser's information would be accumulated based on several sourees: federal tax identification 

number, credit card number, and/or, if opted by the purchaser, a completely separate US sales tax 

identification number issued by the authority overseeing this process, 

Controversial Possible Additions/Alternatives 

A small seller exemption could be part of the legislation, such that businesses with a minimum 

number of remote sales or a minimum dollar of remote sales would be exempt. Otherwise, the 

expense to occasional sellers and low dollar volume sellers would be 100 high and would keep 

these husinesses from engaging in interstale commerce. For example, if a brick and mortar 

company ships a good to an out of state customer, then that would be a remote sale. For 

illustration purposes, an exemption might be available for a brick and mortar company that only 

does 50 or less of these a year or less than $100,000 a year. The srune exemption, whatever it was 

determined to be, would apply to all remole sellers. Iflbe sales tax rate across the country is 6%, 

then the unreported remote sales could result in $6,000 of use tax going unreported to a1l45 states 

($133 per state). The threshold for the exemption could be set at the estimated cost (time/labor) to 

implement the system versus the average unreported use tax potentially lost related to those sales. 

Instead of tasking remote sellers to detennine taxability of remote sales state by state, have the 

remote sellers simply report gross remote sales by person, by state. The process would still need 

some type of federal datahase for accumulating the infOlmatiol1 so that the states do not receive 

any details all what was purchased. The federal database would issue a ! 099 style repOlt to the 

stale and the purchaser so self-reporting of use tax would be easy and commonplace. To account 

for a pOl1ion ofthe sales that would be exempt under state law, each consumer would be allowed 

to elect a celtain percentage be exempt. If the purchaser wanted to claim more exemptions, then 

the purchaser has the right to prove a higher exemption level. Each state could set their own 

exemption percentage to account for the typical exemptiolls available ill that state. Remote sellers 

would be subject to the federal repOlting requirements, not the remote state's jurisdiction. 
83 

Exploring Alternatives Solutions on the Internet Sales Tax Issue 

Testimony of James Sutton, CPA, Esq, 

March 12, 20J 4 

Page 11 

e. BENEFITS OF A CONSUMER PRlV A TE REPORTING SYSTEM 

Slates Collect Use Taxes: Consumer Private Reporting legislation would allow the states to iinally 

enforce the use tax laws that have been in force for decades, and mostly through a means of consumer 

self-repoliing, Even in states, such as Florida, with no personal income tax return - accountants and 

CPA's would incorporate use tax return filing with their normal federal income tax return services, With 

the 1099 style reporling information readily ayailable to purchasers - the returns would be very simple tor 

taxpayers to fill out on their own, For the few purchasers who don't report, all states already have a letter 

audit process in place to notifY their citizens ofthe use tax obligation. The states would coHect billions of 

dollars of use tax revenue through a self-repmiing under a Consumer Private Repolting system, 

Brick and mortar vs Remote Sener - Take Sales alld Use Tax Out ofthe Equation: Consumer 

Private Reporting Legislation would make every purchase subject to sales and usc tax regardless of 

whether from a remote seller or a brick-and-mortar retailer. Doth remote sellers al1d brick and mortar 

retailers would be required to comply with the sales and use tax laws of their state of domicile and 

anywhere that they have nexus, Remote sellers would have a small additional burden of utilizing the 

reporting software tor remote sales, However, (his small burden on remote selierR is nothing compared 

to keeping up with the sales tax laws in 45 states and 9,600+ local sales tax jurisdictions as well as going 

through sales and use tax audits for 45 states. Even if the remote vendor is only audited by the states 

every 5 years, that would still be an average of 8 sales and use tax audits a year, each of which can last 

anywhere li'om a few months to a couple of years, A Consumer Private Reporting system would remove 

these extreme burdens on remote sellers, allowing both the remote seller and the briek and mOliar retailer 

to only have to deal with sales tax compliancelaudit burdens in their nexus states - a true level playing 

field. 

Purchaser Private Information Is Protect: If someone purchases a good or service trom a remote seller, 

then that person is trusting that vendor with their private information. Under a Consumer Private 

Reporting system, the individual's private infOlmation stays between the customer and the vendoL All 

that gets reported to the state is the fact the instate customer purchased $x amounl oftaxable 

goods/service per month from all remote vendors, No additional information is reported to the state 

UNLESS the in-state purchaser wishes to disclose information to show that certain purchases were 

somehow exempt or othelwise not taxable, In fact, a remote purchase will protect customer private 

information more than an in state purchase - but a slate tax auditor would have the right to review all 

customer purchasc records on an in-state retailer. However, that will not be the case for remole purchases 

under a Consumer Private Reporting system. 

Simplification of Sales and Use Tax Stale Laws In This Country: Consumer Private Reporting 

legislation would not turn state sales and use tax laws and 80+ years of case law precedent on its head, 

The realm of state and localtaxalion is complicated enough as it is. Instead the proposed legislation 

would simply make onc small extension offcderallaw to require rep0l1ing of remole sellers through 

approved software vendors thelluse the existing usc tax laws with every state that docs not have a sales 

tax, As noted in 10Dtnote 2 above, the legislation might also be lhe perfect place to simplify the sales tax 

nexus rules, such as codifYing the Quill decision,13 If a state is already collecting the tax through all 

effective self-reporting system, then the state will have much less incentive to chase after remote sellers 

for sales tax collection responsibilities. The legislation could also provide some type of limited indemnity 

for a remote vendor if it is later discovered to have nexus'" but only if that vendor can show that it was 

properly reporting sales througb the Consumer Private Rep0!1ing system, Similarly, the legislation could 

allow a statute oflimitatiol1s for remote sellers found to have nexus, but only iftllat vendor was already 

properiy reporting sales, 

13 Quill Corp, v, North Dakota, 504 U.S. 298 (1992) (requiring physical presence;n state before the state can force 

use tax collection requirements on a remote scHer). 

14 Such as an employee moves into another state/ without the remote vendor realizing the sales tax nexus 

implications. 
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Testimony of James Sutton, CPA, Esg, 

March 12,2014 

Page 12 

f, REVIEW OF GOODLATTE PRINCIPLES OF TAXING REMOTE SALES 

UNDER PRVATE CONSUMER REPORTING LEGISLATION 

1. Tax ReHef - Using the Internet should not create 

new or discrimi natory taxes not faced in the offline 

~-~ -A-Consumer Private 'Report;;,g(CPR) statute would I' 

110t create any new tax) but would merely allow the 

I 

world, Nor should any [r""h precedent be created for 

c~. O,'~" .. "~oo " '-'~_ 

1

2, Teeh Neutrality - Brick & Mortar, Exclusively 

Online, and Brick & Click businesses should all be on 

equal footing, The sales tax compHance burden on 

online Internet sellers should not be less, but neither 

should it be greater than that on similarly situ.ted 

offline businesses. 

3. No Regulation Without Representation -~ Tliose 

who would bear state taxation, regulation and 

compliance burdens should have direct recourse to 

protest unfair, unwise or discriminatmy rates and 

enforcement. 

not stifle 

businesses shifling onerous compliance 

I requirements onto them~ laws should be so Simple and 

I compliance so inexpensive and reliable as to render a 

I small business exemption unnecessaty. 

states to enforce their existing use tax laws .. Remote I sales would be slJbjec.t to the same use tux rate as the Iii 

sales tax rate for purchasing the same good OJ' selvice 

from an in-state retailer. The same previous nexus 

laws would still apply, but perhaps with statute of 

limitations and relief for vendors who were already I 

re ortin thro~1b~.rB._~:.stem. I A Consumer Private Reporting statute would allow II 

both Brick and mortar retailers as well as remote 

seilers to focus on the sales and use tax rules and 

compliance burdens in their s.tate of domicile. Remote I 

~~~;~f~~;1~~~:"" 'II 

the sofhvare provider to make sure their software 

rroperly accounts for taxability ofthe sales and I 

properly reports that information, without private I 

consumer jnfo11!!atio~~~_~~!~~~.' ___ " ____ ~~"_.~~~t 

Under Consumer Private Reporting legislation remote I sellers would only be subject to the federal rep0l1ing 

Jaw in the state for which they will have a vote in the 

state senators. representatIves, and president. 

Businesses that coHectiremit sales tax on in state sales I and citizens that pay use tax on remote sales - wouJd 

be subject to laws of their domicile state~ for which I 

they have a vote in thelr state governmentY II 

Businesses will not be forced to collect and remit for 

distant st3tes without a legislative voice, State cit[zens t 

will not be forced (directly or indirectly) to pay sales or I use tax to distant states just because the vendor I' 

ha ens to be located in that stat,,,e:,-' _____ -:-~ 

Linder a Consumer Private Reporting system) once the 

taxability ofa remote seller's particular goods and 

services are determined, tracking and reporting sales to 

the software vendors would be llteraUy effOIt-free. 

Software providers would be tasked with helring 

vendors determine what is and what is not taxable. ' 

Companies like Ehay and Amazon COUld have the I' 

remote vendor software provided to them by the states 

and integrated seamlessly into the on-line sales 

J2!S)~_~_~s. _~_cn:?te_~~~dors ~~~.l~.!!2.tJ?£!~,9.~l~~~~ 

15 Note: There will be circumstances, just 35 there are now, in which a purchaser will receive a good or service in a 

state otherthan their domicile and be taxed in that st.ate with no vote in that state's government, The same could 

be true of businesses that opE!rate in mu!tiple states, but have no owners or employees that are domiciled in more 

th8n the home state of the company, ThiS situation is limited to rare exception in both the current situation and 

under the proposed legislation, 
85 

Exploring Alternatives Solutions on the Internet Sales Tax Issue 

Testimony aflames Sutton, CPA, Esq. 

March 12,20]4 

Page 13 

'.---'-n~~-'·-''''~'-'~"---------rI-c-077lle-ct and-;;7i;{t;i~~"~mption certificate infi.orm;ti.~~~ 

.~ as long as the sales information is provided through i the CPR software. Also wurth noting is the slmpl!crty 1 

for purchasers to usc a simple tax report to complete a i 

simple use tax return - or place the taxable purchase I amount and tax due On their personal state income tax 

retum~ sllch as CaJifomin. This system is hy far the ! 

s.implest of legislative proposals on remote vendors. If 1 

the alternative gross repolting system is considered, I ___ ~_J!~~even determjI1i~~~~~m1Y.J.s no~necessmy. I 5. Tax Competition - Governments should be I Under a Consumer Private RepOliing system, the : 

encouraged to compete wIth olle another to keep tax inclusion of hundreds ofmHllons of dollars of extra use 

rates low and American businesses should not be ta.x n~yenuc should make lowering sales tax rates 

I disadvantaged vis-a-vis their foreign competitors. I feasible. I\1ore and more we hear of citizens choosing 

I I to move trom high (ax stales (0 lower tax states. States 

that want to increase the number of residents, potential 

employees, potential business creators, and individual 

tax payers should feel even more encouraged to 

I con.sider lowering their state sales tax rate. It is also I '~orth noting that the choice oflocai for a remote seller 

is not a tax neutral decision because their custQm .. crs 

_ will ~ying sales tax ill their state. . __ 1 

6. States' Rigllts - States should be sovereign within Under a Consumer Private Reporting system, the states 

their physical boundaries. In addition, the federal will be empowered with the intormation 10 enforce 

government should not mandate tl,at States impose any their own use tax laws and will not be mandated in any 

sales tax complhmcc burdens. wa.y to impose any sales tax compliance burdens. The 

states can even choose not to impose any usc taxes on 

its citizens and businesses. Under a CPR system, state 

sovereignty over the state's own citizens and business 

is of the utmost importance. However, the states will 

not be granted sales tax jurisdiction over businesses 

domiciled in other sovereign states unless the company 

~_.~~~_~~. deemed to have nexus in that state. 

7. Privacy Rigbts - Sensiti';e customer data must be Under a Consum~r Private Reporting system, customer 

protected. sensitive data would stay between the remote seller and 

the customer. Uthe remote seller uses a third party 

like EBay Of Amazon to consummate the transaction~ 

then the customer information would stay between the 

customer, tbe remote seller and the third party 

facilitator, jllst as it does under the current sihmtion. 

The states will only receive a cunm]ati ve repmi jj"om 

the software company that provides customer 

information for all taxab1e n:mote purchases from all 

remote vendors during the specified time from. The 

name of1he vendors would even be withheld - bv the 

software provider. Only the customer would ha~e the 

right to disclose private transaction details if the 

customer wanted to challenge the taxability ofa 

transaction or provide evidence of all exemption 
86 

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Testimony of .lames Sutton, CPA, Esq. 

March 12,20J4 

Page 14 

g. SlImmary ofConsllmer Private Reporting 

The explosion of interstate commerce of the second halfofthe last century created some truly 

difficult prohlems in our state sales and lise tax legal system. From carpet baggers to mail order 

catalog companies, everyone felt the strain of uncertainty - including our court system with over 

300 full dress COlirt opinions dealing with the Commerce Clause by 1959. The explosion of 

electronic commerce exponentially deteriorated the condition ofthe U.S. sales and lise tax 

system. There is a growing injustice to brick and mortar vendors that operate purely inside a 

state's borders because their own state tax department cannot or will not enforce the Slate's use 

tax laws. There are also billions of dollars of use tax going unreported and uncollected by the 

states, because the states do not have the information to enforce the use tax laws on their own 

citizens. The Marketplace Fairness Act, which generally requires remote sellers to collect and 

remit use tax for the states, seems to solve the issues for brick and mortar vendors and the states, 

but does so in a way that allows 45 states to have extreme power over remote vendors 

everywhere. The compliance burdens alone are crippling for remote vendors, even with lecierally 

funded software to assist. Combine this with all the additional audit, collection, and criminal 

issues - by 45 different states - that remote vendors would face under the Marketplace Fairness 

Act, and the eventual burden on interstate commerce is truly impossible to even fathom. 

The sales and use tax system in this country is stmggling and it needs help. Only the federal 

govemment has the power to legislate in a way thaI can assist, bllt it must do so in a way that 

interferes with interstate commerce the least.! propose the Consumer Private Reporting system 

is that solution. It takes sales and use tax out of the competitive equation between brick and 

mortar vendors and remote sellers. It also allows the state to realize the dream 0 f regular and 

systematic usc tax reporting by its own citizens. However, the proposed Conslimer Private 

Reporting legislation does so in a way that places the least amount of burden on remote sellers 

and interstate commerce, which is the ultimate purpose ofthe commerce clallse in the first place, 

In my humble opinion, the US Sales and Use Tax system is sick and needs Federal C.P.R. 
87 

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Testimony oflames Sutton, CPA, Esq. 

March 12,2014 

Page 15 

h. CONCERNS OVER OTHER IDEAS 

SSUTA: The SSUTA agreement is very well intended. However, sales taxes are simply too diverse 

among the states and quite often too complicated in even one stale. The horror stories I have described 

herein are taxpayers dealing with only the sales and use tax laws of their own state. The SSUTA tends to 

deal with issues faced by bigger companies and does not address really address the nee us of the small 

business. Nor does it comprehend the collection issues or criminal aspects of sales tax. It fails to address 

intrastate transactions, so we would effectively have two sets ofmles for multistate versus in-state 

transactions. Although a good concept in theOlY, the prevalence orthe internet has given rise for a need 

for federal legislation to assist in achieving a common solution among all tbe states. 

Muitistate Compact - Collect and Redistribute: This is one of the more interesting ofthe nonconsumer reporting proposals. My biggest COllcem is thai it would creale a "tax wagging the dog" 

situation. Remote selling businesses would migrate to states that did no. tax their good or service. A 

state that exempts clothing would become the hub for clothing remote sellers. Companies th.t sell food 

remotely would all locate their companies to stales that exempt food. There is a fundamental problem 

when a sales tax law encourages businesses to treat this country like a checker board. Worse yet - in slate 

retailers that sell those particular goods or services would be at a permanent disadvantage on sales tax 

because the in slate retailer would still bave to charge sales lax. This violates one ofGoodlatle's Seven 

Principles of for Taxing Remo!e Sales. The states with no sales tax create a myriad additional problems. 

Within a few years - we would bave much the same problems with do now, hecause of the ease of 

planning to achieve for 100% tax avoidance. 

Grant States U,e Power 10 Exclude Instead of the Power 10 Ta,,: [Forgive me for sounding like a law 

p"?fessor on this topic.] While I believe that the Commerce Clause would allow Congress the power to 

grant the states the right to exclude interstate transactions, I believe doing so would be fundamentally 

against what the Commerce Clause was intended to do in the first place. The Commerce Clause is in 

place to ensure the free flow of commerce between the stales. Prior to the Constitution, we had the 

Al1icles of Confederation. One of the biggest problems with the Articles of Con I"deration was that it did 

nothing to stop states from indirectly taxing each other through transactions flowing through their states. 

For example, the sea port sLates would heavily tax goods an-iving from the sea for destinations in non-sea 

port states. The founders of our country created the Commerce Clause specifically to prevent lax hungry 

slates from putting their individual state needs ahead ofthe good of the country. In doing so, the founders 

of this country trusted you, members of Congress, to pllt the free !low of commerce among the states 

above the need of the individual states. Therefore, ill my humble opinion, this proposal violates the 

fundamental purpose orlhe commerce clause. 

Origin Base Collection: TI,e origin based lax system is the most theoretically interesting suggestion on 

the table. III theory, it is amazing. However, the devil is in the details and unfortunately the details reveal 

that an origin based system would create many of the same major problems we have today. (I) Any 

origin based system would encourage remoie sellers to migrate into states with no sales tax, completely 

avoiding sales tax 011 all sales to anywhere in the country. I could foresee Montana, with no ,ales tax, 

being renamed Amazonlana. In other words, this does not fix the dilemma ofBricklMortar companies 

having to charge sales tal( versus on-line transactions (violating one of the Goodlatte Principles). 

Furthermore, any federal sales and use tax lew sbould encourage husinesses to treat this country like a 

checkerboard - hoping from stale to state just to avoid getting captured by a state tax. The law should be 

tax neutral at the business icvel, in my humble opinion. (2) I do not believe the commerce clause gives the 

federal government the abiiity to regulate" purely in-state activity. Therefore, even in an origin based 

system, the destination state would still have the sovereign right to tax the purely in-state use oftbe 

property - i.e. a use tax. This could result in sales tax in the origin ,tale and usc tax in the destination 

state. J could predict the courts getting involved to require the destination state to provide a credit to the 
88 

Exploring Alternatives Solutions on the Internet Sales Tax Issue 

Testimony oLlames Sutton, CPA, Esqo 

March 12,2014 

Page 16 

purchaser for sales (ax paid at the origin stateo llowever, the use tax problem would still exist in high tax 

states even if a credit is allowed for sales taxo (4) A federal required origin base sales/use tax system 

would encourage rmnpan! state tax lobbying so ce.1ain products produced in the seller's state would be 

exempt !1"om saJes tax, exasperating the tlse tax problem in issue 2 aboveo (3) History tells us that states 

can be just as ,'realive in ways to increase taxes as taxpayers are in avoiding taxes." The federal 

government would have no authority to stop a state frorn slightly changing the nature oflheir in state tax 

on in state property so a credit for sales tax paid to another state would not be availableo 

15 There are a number of states that switches to a modified gross receipts tax to avoid the state income tax 

jurisdictional limits of Public law 86-2720 
89 

Exploring Altematives Solu1iOO! O!l the 1 ntem~t Sale5T3lI Issu~ 

Tcstimony of )ame5 S\I\tO'l. CPA. Esq. 

Ma.ch)2, 2014 

PAge 17 

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90 

I'Jrplo"nK Ah~matives Solutio". on !he tnlemt1 S~les Tax IsslJI: 

Test;mnny (If li1mt::l Sulton. CPA. Esq. 

M~",h 11.2014 

~ge 18 

MAAKrTPLoU rO NIS! IIC'f OY(U~QI)('" INTU.lUI toMMlltO 

~Ir.wrl "'liS ~' F'O lrr_:A "MPURloOlllTlON TO AtHlIYI JAMI GOAL5 

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91 

Explor,~g Altemlltives SolYlion, on Ihe 1 nl~met Sales Tax Iss\l~ 

Testimony of J~mes SUllon, CPA, Eoq, 

March 11.2014 

I'ai:e 19 

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92 

uplo,;nll Allcrnaliv"3 Soluti .... ,$ on the 1111"~1 S.I"li Ta~ ,,<."", 

fUlimony of !~m"" Sunon. CPA, Esq. 

Murd1 12.201 4 

l'Alle20 

1~ .. 0 or ... " .. <of><t .... ""'~ nd!.il'lO ....,_.""'non ~ .... ~., 1~' .. _ .. 01 "'. Mi""o~<II"_" KlOO 

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93 

E.~p!ofing Ah~malives SolUlion~ on llle 1.,lt""'1 Sales Tax ISSI,e 

Testimony of Jln,cs Sunon. CPA. f:.aq. 

Mpr(h 12,20 14 

I'a~c 21 

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,-,_.w_~"" .... ,,,, '''''''''''~~EIoU>\II''''''Jo.lOll l , 
94 

E><pl .... ing Allcrnali.,," Sulmiuns on I~~ lnt~mel S,I"" TIL~ '''''1''' 

Tt:$limony Of J8~ Sunlln, CPA, £~q, 

M,,,,h 12,"20 ~ 

Pa&~ 22 

_"""' .... IIY_"' ...... ,oo~ .. _ -._ .... om~ 

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96 

Mr. GOODLATTE. Thank you, Mr. Sutton. 

Mr. Crosby, welcome. 

TESTIMONY OF JOSEPH R. CROSBY, PRINCIPAL, 

MULTISTATE ASSOCIATES INCORPORATED 

Mr. CROSBY. Chairman Goodlatte, Ranking Member Conyers, 

and Members of the Committee, I applaud you for taking the time 

today to shine light on this important and critical issue of leveling 

the playing field between remote and Main Street commerce. Fifteen years ago I testified before the Federal Advisory Commission 

on electronic commerce. In reviewing that testimony, I was struck 

by the fact in many ways how little changed in the intervening period. 

My comments from 1999 still ring true. Simplification is the only 

solution that removes an objectionable burden from vendors without shifting the burden to other parties. Simplification is the only 

solution that can lead to a level playing field. 

In the wake of the Commission’s work, the States came together 

with vendors, both online and offline, state tax experts, and other 

interested parties to develop the Streamline Sales and Use Tax 

Agreement. The benefits of that agreement—a simplified and more 

uniform sales tax system—accrues almost exclusively to sellers. 

Viewed from that perspective, it is astonishing in some ways that 

24 States actually adopted the agreement in whole. 

There are two main stumbling blocks for the remaining States in 

adopting the agreement. The first and most obvious is that there 

is no guarantee that it will lead to collection authority. Again, as 

I testified to in 1999, States may be unwilling to embark on radical 

change without a clear idea of the exact level of change that the 

Congress will demand. 

The other stumbling block is the agreement requires States to 

make changes that apply both to remote and intrastate commerce. 

As noted in the staff summary for this hearing, many States are 

hesitant to surrender their autonomy over internal taxing policy. 

The decision to apply the agreement both to remote and intrastate activity was well considered. The goal of the agreement was 

not merely to obtain collection authority for the States, but also to 

simplify sales tax collection for all sellers, both remote and Main 

Street sellers. That was and is a laudable goal, but it has proved 

too ambitious for many States in the absence of congressional authority. 

An alternative framework would be to fashion an interstate 

agreement that focused exclusively on remote sellers and remote 

sales. Such an agreement would allow States to retain full autonomy over intrastate sales while providing sufficient simplification 

and uniformity to minimize the sales tax collection burden on remote sellers. 

If such an alternative framework is to be pursued, it must be defined by Congress. States within the existing streamlined agreement would be unwilling to make further changes without certainty that those changes will lead to collection authority. States 

outside the agreement are unlikely to adopt something in the absence of congressional action because it would simply prove the position that they have taken today. 
97 

Like the existing streamlined agreement, an alternative framework would require numerous specific elements, but those elements 

would only apply to remote sellers in remote commerce. My written 

statement includes a detailed discussion of the elements that 

should be incorporated into an alternative framework. 

One caveat is that the alternative framework would create two 

separate sets of sales tax rules with which most sellers would be 

required to comply. We tend to think that remote sellers and Main 

Street sellers are in their own categories. In reality, every seller, 

with very few exceptions, is a nexus seller in one or more States 

and a remote seller in other States. A Federal law that differentiates between nexus and remote commerce will require sellers to 

comply with two different sets of sales tax rules based on their status as a nexus seller or a remote seller. 

Several other options are being presented to you today. With the 

exception of Mr. Moschella’s proposal, all of them were considered 

and rejected as unworkable by State tax policy experts, even before 

the Advisory Commission concluded its work. The new veneers applied to these concepts and presented today cannot remedy their 

fundamental flaws. 

I began my testimony by noting that in many ways, little has 

changed in the past 15 years. In other ways, however, the environment we live in today is dramatically different. Fifteen years ago, 

sales tax simplification was just an idea. Today 24 States have 

adopted it. Fifteen years ago, very few governors were engaged on 

this issue. Today governors across the country are calling upon you 

to act. 

Sales tax collection software is no longer just a concept. It is 

working today for thousands of online sellers. E-commerce itself 

has grown dramatically. Seven percent of all retail sales are now 

comprised of e-commerce, which is a tenfold increase over 15 years 

ago. And there have been 17 consecutive quarters of double digit 

increases in remote commerce. 

Finally, elected State leaders across this country are proposing 

bold tax reforms that would help create jobs, increase investment, 

and lead to higher wages. Those reforms are imperiled by an eroding sales tax base resulting from e-commerce. 

Some have asked why there is an urgency to address this issue 

now. There is an urgency because retailers who have invested in 

your communities are at a disadvantage because of governmental 

policies. The urgency is about government picking winners and losers in the marketplace. The urgency is because State and local governments, as you know, do not have the luxury of borrowing to balance their budgets or the time to kick the can down the road. 

This is not about retailers with outdated business models not 

wanting to compete. This is about businesses that have made investments in your communities and their inability to compete on 

a level playing field. It is not about State and local governments 

asking for new revenue. It is about elected State and local leaders 

who have made tough decisions to reform their sales tax systems, 

but have been hamstrung in imposing those new changes because 

of congressional inaction. 

It is not about protecting consumers who knowingly or not are 

evading existing sales tax laws. It is about helping those of your 
98 

constituents who are currently doing their honest best to comply 

with the existing sales tax laws and taxes that are owed. 

Mr. Chairman, Members of the Committee, thank you for your 

time. I look forward to any questions you may have. 

[The prepared statement of Mr. Crosby follows:] 
99 

Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 1 

Chairman Goodlatte, Ranking Member Conyers and Members of the Committee, I am 

Joe Crosby, a principal with MultiState Associates. I have devoted most of my 

professional life to state tax policy questions, and in particular, to state taxation of 

interstate commerce. 

I appreciate the opportunity to testify today. I advise many businesses and trade 

associations on state tax policy issues, and my firm works closely on sales tax collection 

issues with several large retailers and their associations. However, I do not appear here 

on behalf of any client. The views I will express reflect my independent professional 

judgment. 

Advisorv Commission on Electronic Commerce 

Fifteen years ago, I testified before the federal Advisory Commission on Electronic 

Commerce. In reviewing that testimony in preparation for today, I was struck by the fact 

that, in many ways, little has changed in the intervening period with regard to the issue 

before you, which is how best to facilitate collection of sales taxes on remote sales. 

My comments from 1999 still ring true: 

Simplification of the sales and use tax system is the only solution. Simplification is 

the only solution that removes an objectionable burden from vendors without 

shifting a burden to other parties. Simplification is the only solution that can lead to 

a level playing field, which I define as an equitable, consistent, easily administered, 

and technologically-neutral sales and use tax system 

If, as I contend, my assertion was correct then and remains correct now, why has 

simplification failed to take root in all sales tax states? Why have many of the sales tax 

states declined to adopt the Streamlined Sales and Use Tax Agreement? 

Streamlined Sales and Use Tax Agreement 

Today, the benefits of the Streamlined Agreement today accrue primarily to sellers. The 

sales tax simplifications within the Streamlined Agreement benefit sellers by reducing the 

administrative costs and uncertainty associated with sales tax collection. The mere fact 

that 24 states now have identical administrative provisions and definitions also drives 

reduced costs for sellers. The only direct benefit for states that are party to the 

Streamlined Agreement is a modest revenue stream from approximately 2,000 sellers 

who have volunteered to collect sales taxes in all Streamlined states. The real potential 
100 

Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 2 

benefit to states, gaining from Congress the authority to require remote sellers to collect 

legally owed sales taxes, has yet to be realized. 

Viewed from that perspective, it is surprising that 24 states have simplified and made 

uniform their sales tax systems despite receiving little direct benefit. For the states that 

have not adopted the Streamlined Agreement, the pain of simplification today is greater 

than the potential future benefit of federal authorization of remote sales tax collection. 

There are two main stumbling blocks to the remaining states adopting the Streamlined 

Agreement. The first, and most obvious, is that there is no guarantee that adopting the 

Streamlined Agreement will lead to collection of legally due sale taxes by remote sellers. 

As I testified fifteen years ago, "States may be unwilling to embark on such a radical 

change to any major component of their revenue systems without a clear idea of the exact 

level of change [that the Congress will demand]." Unless and until the Congress sets forth 

a clear path by which states can obtain the authority to require remote sales tax collection, 

there is no incentive for the remaining states to simplify their sales tax systems. 

The other stumbling block is that the Streamlined Agreement requires states to make 

changes to their sales tax systems that apply both to remote and intrastate activity. As 

noted in the hearing summary, "many states .. are hesitant to surrender autonomy over 

their internal taxing policy." 

The initial decision for the Streamlined Agreement to apply both to remote and intrastate 

activity was well considered. From many perspectives, it remains the correct decision. 

The goal of the Streamlined Agreement was not merely to obtain authority to require 

remote sellers to collect tax, but also to make the sales tax system less burdensome and 

more efficient for all sellers. That was and is a laudable goal, but it has proved thus far too 

ambitious for many states in the absence of a Congressional guarantee that the effort will 

be rewarded. 

An Alternative Framework: Simplification for Remote Sellers and Remote Sales 

An alternative framework would be to fashion an interstate agreement that applied only to 

remote sellers and remote sales. Such an agreement would allow states to retain full 

autonomy over intrastate sales while providing sufficient simplification and uniformity to 

minimize the sales tax collection burden on remote sellers. 

Such an alternative framework must be defined by Congress. After fifteen years of difficult 

substantive and political discussions among state and local governments, the existing 

Streamlined Agreement states would have no inclination to make further changes to their 
101 

Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 3 

sales tax systems without certainty that those changes would automatically provide 

authority to require remote sales tax collection. And the states that never adopted the 

Streamlined Agreement because of skepticism that Congress would ever grant such 

authority will undoubtedly take continued Congressional inaction as proof of their 

position. 

Like the existing Streamlined Agreement, the alternative framework would require 

numerous, specific elements, but those elements would be directed at remote sellers and 

remote sales only. The necessary elements fall into three buckets. 

The first bucket includes substantive simplifications to minimize the burden of tax 

administration. Examples of these simplifications include a single point of registration for 

sales tax collection in all states, a single uniform sales tax return, and a single point of 

remittance for sales taxes for all states. 

Theoretically, this bucket could also include simplifications to sales tax bases, rates and 

sourcing regimes for remote sales but not for intrastate transactions. Addressing bases, 

rates and sourcing, however, would create challenges for taxpayers (purchasers) and 

nexus (in-state) sellers. A taxpayer could be placed in the position of having a tax liability 

in a state different than the tax collected by the remote seller because of base, rate or 

sourcing differences between the federal standards and state law. Similarly, sellers would 

carefully need to determine, for each state, whether they are "remote" or "nexus" sellers 

and follow the appropriate federal or state rules. Such a determination is not easily made, 

and the status of a seller as "remote" or "nexus" in a state is subject to change based on 

the activity of a single employee (where such activity is unlikely to be known by those in 

the company required to comply with sales tax laws). 

The second bucket addresses software and related services to facilitate the collection of 

tax under a simplified system. Remote sellers would have the option to choose from 

different software and service providers whose programs work in all sales tax states, and 

that software and related services would be provided free of charge to the remote seller. 

The software would be required to be capable of calculating sales and use taxes due on 

each sale at the time the sale is completed, filing sales and use tax returns and being 

updated to reflect tax rate changes or tax base changes. It may also be advisable to 

include provisions to address the costs remote sellers will face to integrate such software 

into their existing systems. 

The final bucket deals with sales tax audits and enforcement. The alternative framework 

should include a "consolidated audit agreement" among the states that provides that one 

state shall have the authority to audit a remote seller on behalf of all states. The remote 

seller should have the option to challenge the findings of such an audit in the state of its 
102 

Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 4 

choosing. The alternative framework should also exempt smaller sellers that use certified 

software from being subject to audit at all. 

The appropriate level at which to set the small seller audit exemption is a purely a 

question for the Congress, but recent research from the Small Business Administration 

(SBA) is helpful in this regard. According to the SBA study, there are more than 5 million 

online sellers. The vast majority of those sellers are very small; if the threshold for audit 

exemption was set at $5 million in annual sales, then, according to the SBA, only 750 

online sellers would be subject to audit. In other words, a $5 million threshold would 

exempt 99.99% of all online sellers from audit. A threshold of $1 million would exempt 

99.96% of all online sellers; $500,000 would exempt 99.93% of online sellers; and a 

threshold as low as $150,000 would still exempt 99.76% of all online sellers. 

Last year, the Committee on the Judiciary released a set of seven principles by which it 

would evaluate proposals to facilitate the collection of sales taxes on remote sales. I have 

attached at the end of my testimony an evaluation showing how this alternative 

framework adheres to the principles along with a discussion of various options to 

implement the principles in a legislative proposal. This alternative framework should be 

designed to dovetail with the existing Streamlined Agreement wherever possible. 

Although the alternative framework is limited to remote sales, it would act as a floor, not a 

ceiling, for state simplification efforts. In other words, it would not prevent a state from 

extending the benefits and protections for remote sales and remote sellers to intrastate 

sales and nexus sellers, if the state so chooses to do so. 

One caveat to this alternative framework, which I alluded to previously, is that it would 

create, de facto, two different sets of sales tax rules with which most sellers would be 

required to comply. The vast majority of sellers, both online and offline, are nexus sellers 

in some states and remote sellers in others. According to the aforementioned SBA report, 

large internet sellers-the top 750-currently collect sales tax in an average of 18 states. 

A federal law that differentiates between nexus and remote commerce will require sellers 

to comply with two different sets of sales tax rules depending upon their status as a nexus 

seller or remote seller. If the alternative framework is limited to administrative 

simplifications and protections for remote sellers, compliance with two sets of rules will be 

less difficult for such "dual status" sellers than if the alternative framework implicates the 

imposition of tax and taxability determinations (product definitions, sourcing, tax rates, 

etc.). 

A second caveat to the alternative framework is that it creates an incentive for states to 

narrow the pool of remote sellers to the greatest extent possible. In other words, if the 

simplifications and protections are only afforded to sellers defined in federal law as 

"remote sellers," states will have an intrinsic interest in stretching the concept of nexus as 
103 

Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 5 

much as possible and to assert that sellers are "nexus" and not "remote." This is not a 

trivial issue: distinguishing between nexus and remote sellers essentially guarantees, 

over time, that the simplifications and protections provided by federal legislation will be 

enjoyed by an ever diminishing set of sellers. 

Other Options 

Four other options are being presented to you today. Interestingly, three of them are not 

the least bit novel. Origin sourcing, reporting by remote sellers to facilitate use tax 

collection and the International Fuels Tax Agreement model were all discussed and 

debated during the proceedings of the Advisory Commission on Electronic Commerce. In 

fact, all three concepts had been considered and rejected as incomplete solutions by 

state tax policy experts, economists and legal scholars even before that Commission 

began its work. The final concept-banning interstate commerce-is indeed new and 

speaks for itself. 

Origin Sourcing 

Origin sourcing is peddled as the simplest of all solutions: retailers must know and comply 

with only one set of sales tax rules. It avoids requiring a retailer to comply with a "foreign" 

state's tax laws. It is also alleged to promote tax competition. 

It is true that origin sourcing is simple, but it is better characterized as simplistic In return 

for simplifying tax collection for sellers and ensuring that they are required to comply only 

with tax laws in states in which they have a physical presence, origin sourcing requires 

your constituents to pay taxes to other states, states in which they may never set foot and 

have no vote. The only way a taxpayer can avoid paying taxes to another state under 

origin sourcing is to never purchase goods from an out of state seller. Origin sourcing is 

the ultimate manifestation of taxation without representation 

The flaws of origin sourcing do not stop there. It also acts as a de facto tax on exports and 

a complete tax exemption on imports. To be clear, origin sourcing would exempt all 

foreign sales into the United States from sales tax and would impose sales tax on many 

exports from the United States to foreign countries. This is but one of the many reasons 

that no modern economy employs origin sourcing for cross border sales (or consumption) 

taxes. 

Finally, the assertion that origin sourcing promotes tax competition is misguided at best. 

States like Florida and Texas attract residents for many reasons, one of which is the lack 

of a personal income tax. That is tax competition: people move to those states to benefit 
104 

Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 6 

from what they perceive to be a superior tax system. Residents of those states are well 

aware that the government they demand requires a certain level of resources, and, 

consequently, sales taxes in those states are above the national average. Suggesting 

that tax competition is furthered when a Florida or Texas resident places an order from an 

online company whose "origin" is in a state without sales tax is farcical. That is not tax 

competition; it is tax arbitrage and should not be encouraged by the federal government. 

For these reasons, Professor Charles McLure, a senior fellow with the Hoover Institution 

and former official in the Treasury Department under President Reagan, testified against 

origin sourcing for state sales taxes in a hearing before the Senate Committee on the 

Budget 14 years ago. He also presented at that time an "Appeal for Fair and Equal 

Taxation of Electronic Commerce," which opposed origin sourcing and was signed by 

more than 170 tax economists and professors of law. 

Reporting and Use Tax Collection 

A second concept is to require remote sellers to report sales to the purchaser's home 

state. The state would then use this information to enforce its use tax. This approach has 

been attempted by states before, both cooperatively and by mandate. In the late 1990s, 

groups of states in both the Northwest and Northeast entered into agreements with each 

other and with businesses to share information that would facilitate use tax collection. The 

results of these efforts were not encouraging. More recently, Colorado and a few other 

states have attempted to mandate different types of notification and reporting. 

Congress has authority to make some type of reporting mandatory. At best, however, 

mandatory reporting and use tax collection is a poor alternative to collecting the 

appropriate tax at the time a transaction is completed. Taxpayers would be required 

annually, or perhaps more frequently, to compile all of the notifications they receive from 

all remote sellers they patronize and complete a use tax return reporting-and 

paying-unpaid taxes. In aggregate, taxpayers would be required to file hundreds of 

millions of additional tax returns annually, and states would be required to process and 

audit those returns. Some consumers may endeavor to avoid making purchases from 

remote sellers in an effort to avoid the filing burden and need to make payment in a lump 

sum rather than on each transaction. 

The larger concern with this approach relates to those audits. A remote seller would not 

simply be able to report to states the total amount of purchases made by a taxpayer in a 

year, or even the amount of each transaction made in a year. That information would be 

useless from a tax compliance perspective, because not all sales are taxable. Indeed, a 

remote seller would be required to report line item detail of each and every item a 

taxpayer purchased. One need not be a privacy expert to appreciate the implications of 
105 

Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 7 

such reporting. Consumers are unlikely to be comfortable with tax administrators having 

detailed information about their purchases of books, movies, medical devices, 

prescription drugs, entertainment products, etc. In fact, a federal district court, in a case 

involving North Carolina, held that such detailed reporting violates the First Amendment 

of the United States Constitution and the federal Video Privacy Protection Act. 

The Congress has authority under the Commerce Clause to mandate some type of 

reporting. However, the First Amendment may bar the Congress from requiring the type 

of reporting sufficient for tax administrators to determine whether an item that has been 

purchased from a remote seller is taxable. Without that information, there can be no 

enforcement of the use tax, placing us back in exactly the position we are today. 

Some have suggested these privacy concerns can be avoided by creating a federal 

database, or imposing an unfunded mandate on states by compelling them to fund 

reporting regimes run by third parties without providing the states with the authority to 

require collection at the time of sale. These are desperate efforts to overcome the 

fundamental flaws with such a regime. Clearly, the concept of reporting alone is no 

solution to the problem at all. 

International Fuels Tax Agreement 

Finally, I turn to the International Fuels Tax Agreement (IFTA) as a model for remote sales 

tax collection. 

The IFTA was initiated in 1983 by Arizona, Iowa and Washington as an effort to ease fuel 

tax compliance for states and interstate commercial motor vehicles. In 1984, the 

Congress supported a National Governors Association (NGA) working group that 

incorporated IFTA and a regional fuels tax agreement between northeastern states. By 

1990,16 states had adopted the model created through the NGA process. IFTA became 

mandatory through the 1991 enactment of the Intermodal Surface Transportation 

Efficiency Act (ISTEA). ISTEA prohibited states from enforcing fuel taxes on interstate 

carriers after 1996 unless the state complied with IFTA. 

IFTA operates on a "base jurisdiction" model. The base jurisdiction is the state where the 

qualified motor vehicle (QMV) is registered. Under the model, QMVs continue to pay fuel 

taxes at the time of purchase. QMVs also track miles traveled in each jurisdiction. QMVs 

file a quarterly return with the base jurisdiction indicating taxes paid in each jurisdiction 

and miles traveled in each jurisdiction. The base jurisdiction collects additional taxes due 

from, or pays refunds owed to (in aggregate) the QMV. The base jurisdiction, operating 

through a clearinghouse maintained by the International Fuel Tax Association, Inc., 

distributes revenue owed to/from the various states in which the QMV operated during the 
106 

Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 8 

preceding quarter. Finally, the base jurisdiction has responsibility for auditing QMVs on 

behalf of alllFTA jurisdictions. 

The Streamlined Agreement was initiated by the NGA and the National Conference of 

State Legislatures (NCSL). Given those organizations' roles in developing and 

implementing IFTA, there has been discussion since the beginning of the Streamlined 

Agreement regarding the IFTA model and its applicability to sales taxes. In many ways, 

the Streamlined Agreement mirrors IFTA (uniform definitions, Streamlined Sales Tax 

Governing Board, Inc. to administer the agreement, a single system to register sellers in 

all jurisdictions, certified software providers for sales tax compliance, etc.). 

Despite these similarities, there are fundamental political and substantive considerations 

that work against the base jurisdiction concept for remote sales tax collection. 

The first political consideration is that the IFTA was broadly supported by the affected 

industry. In the sales tax arena, there are deep differences within the remote seller 

community. IFTA is also targeted at taxpayers; QMVs had nexus and an obligation to pay, 

and taxes were being collected. The only question was administrative simplification for 

taxpayers and states. Finally, fuel taxes, although an important source of revenue, are 

dwarfed by sales tax revenues. Fuel taxes are a dedicated revenue source more akin to a 

user fee, while sales taxes are general fund revenue sources in nearly every state (and 

locality) in which they are levied. States (and localities) will be very reluctant to relinquish 

control over a significant portion of their first or second largest general revenue source to 

their sister states 

From a substantive perspective, as is the case with QMVs, remote sellers currently must 

register to collect sales tax in their "base jurisdiction." Unlike QMVs, sellers with 

operations in multiple states cannot choose a single jurisdiction as a base jurisdiction; 

they must register to collect in each state in which they have a store or operation. Thus, 

for sellers who have a location in more than one state and sell remotely into other states, 

there is an initial question regarding which jurisdiction is the base jurisdiction. Perhaps it 

could be the jurisdiction where orders for remote sales are received, accepted and/or 

shipped, but for larger remote sellers those activities are likely geographically distributed 

as well. 

Along the same lines, a seller will be a nexus seller in some states and a remote seller in 

others. How is the base state auditor easily to distinguish between nexus sales, on which 

tax should have been collected and remitted to the destination state, and remote sales, 

on which taxes should have been collected and remitted to the base state for further 

distribution to the destination states? The status of a seller in each state (as nexus or 

remote) will also change over time, perhaps frequently. That would require the seller to 
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Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 9 

register and terminate registration in nexus states and shift tax collection to/from the base 

jurisdiction. 

Assuming these hurdles are crossed, the next one up is sheer number of taxable goods 

and services and the lack of uniformity among the states with regard to defining those 

goods and services. With IFTA, there is essentially only one product being sold: diesel 

fuel. There is one rate per state (there are no local rates or base differences). There are 

also no exempt goods or services or exempt purchasers (QMVs are by definition not 

exempt from fuels taxes). Thus, there are no real questions on audit regarding whether 

the good or service being sold was subject to tax, or whether the purchaser buying the 

good or service was subject to tax. In other words, the IFTA audit function is essentially an 

audit of the QMV's records of miles traveled and taxes paid. 

Furthermore, all states participating in IFTA levy fuel taxes. If a base jurisdiction model 

were applied to sales tax, states without a sales tax, and thus no competency to audit 

sales tax, would be required to audit sales tax. Even states with sales taxes would be hard 

pressed to fairly audit based on the laws of other states. Finally, it could be argued that 

imposing a base state model, particularly on a state that does not have a sales tax, is an 

unfunded federal mandate. 

Some of these hurdles may be able to be overcome, especially in the context of seller use 

of certified service providers (CSPs). With a CSP model, the audit could be limited to the 

CSP rather than the seller. However, absent a mandate that sellers use a CSP, or seek 

certification of their own compliance systems, a base jurisdiction model would require 

states to audit based on laws they are unfamiliar with, which could be a detriment to 

sellers. 

The IFTA model is valuable and has informed the Streamlined Agreement as well as the 

alternative framework I have presented here. However, the IFTA cannot simply be bolted 

on as a solution to the problem of remote sales tax collection. 

Conclusion 

I began my testimony noting that, in many ways, little has changed with regard to this 

debate in the past fifteen years. In other ways, however, the differences between then 

and now are stark. 

• State Legislatures: Fifteen years ago, sales tax simplification was only an idea. 

Now, 24 states have implemented significant simplifications and harmonized 

definitions, administrative provisions and other critical features of sales taxes while 
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Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 10 

maintaining sovereignty over fundamental aspects of their tax systems. This is a 

better track record than the IFTA had before it was mandated by Congress. 

• State Governors: Governors across the country strongly support Congressional 

action to authorize remote sales tax collection. Governors who have spoken or 

acted in favor of a level playing field for all sellers include Paul LePage (ME), Mike 

Pence (IN), Chris Christie (NJ), Rick Snyder (MI), Robert Bentley (AL), Gary 

Herbert (UT), Butch Otter (10), Nathan Deal (GA), Bill Haslam (TN) and Dennis 

Daugaard (SO). 

• Technology: Software to calculate sales taxes due, remit taxes collected and file 

tax returns has advanced dramatically. For several years now, remote sellers who 

have volunteered to collect under the simplified system in the Streamlined states 

have had access to several software and service providers, free of charge, to 

handle sales tax administration. 

• Ecommerce: According to the Census Bureau, ecommerce is ten times larger as 

a percentage of retail sales than it was fifteen years ago, rising from 0.7% of total 

retail sales in 04 1999 to 7.0% of total retail sales in 042013. Ecommerce has 

grown at double digit rates for 17 consecutive quarters and for all but six quarters 

since records were first kept. 

• State Tax Reform and Tax Reductions: The two worst state fiscal recessions 

since the end of World War II have occurred in the past fifteen years. In response 

to revenue volatility, expected reductions in future federal revenue sharing and 

changes in the economy, elected state leaders are proposing bold reforms to 

make their economies, and our country, more competitive. In the past year alone, 

more than 10 states have debated extensive reforms that would decrease taxes on 

returns to investments in people, property and capital and instead relied more 

heavily on consumption taxes. These proposals all are projected to increase 

employment, raise wages and attract investment. Erosion of the sales tax base 

from uncollected taxes on remote sales seriously undermines these efforts. 

Already, eleven states have adopted or are considering proposals dedicating new 

revenues from remote sales tax collection to cuts in other taxes. 

Some have asked why there is urgency to address this issue. There is urgency because 

retailers who have invested in your communities are at a severe disadvantage to those 

who have not because of government policies. The urgency is about government picking 

winners and losers in the marketplace which results in actual job losses in your districts. 

There is urgency because state and local governments do not have the luxury of 

borrowing to balance budgets or of time to kick problems down the road. 
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Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 11 

This is not about retailers with outdated business models not wanting to compete. This is 

about businesses that have made investments in your communities and their inability to 

compete on a level playing field in terms of tax policy with their online only counterparts 

who have not made a similar investment. It is not about state and local governments 

asking for new revenue. It is about elected state and local leaders who have made tough 

decisions to reform their sales tax systems but are hamstrung in their efforts by 

Congressional inaction. It is not about protecting consumers who, knowingly or not, 

evade tax laws. It is about easing the tax compliance burden on your constituents who 

make an honest effort to fulfill their duty as citizens and pay taxes they legally owe. 

Mr. Chairman, I again thank you for the opportunity to speak before this Committee today. 

I welcome any questions that you or the Committee members may wish to pose. 
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Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 12 

Appendix: Comparison of Alternative Framework to 

Committee on Judiciary Principles on Internet Sales Tax 

Tax Relief 

Principle: Using the Internet should not create new or discriminatory taxes not faced in the 

offline world. Nor should any fresh precedent be created for other areas of interstate 

taxation by States. 

Discussion: The Internet Tax Freedom Act, which expires in 2014 and which prohibits 

new or discriminatory taxes on online commerce, addresses the first sentence of this 

principle. 

Under the Commerce Clause, as interpreted by the US Supreme Court, sellers that do 

not have substantial nexus with a State-Remote Sellers-are not required to collect 

sales tax due on transactions with customers in the State. Any federal legislation seeking 

to rectify the disparity between Remote Sellers and those who are required to 

collect-Nexus Sellers-must, by definition, grant authority to the States to compel 

Remote Sellers to collect tax. To satisfy this principle, that grant of authority must be 

narrowly construed so that it applies only to the collection of State and local sales and use 

taxes and not to other taxes. 

Implementation Options: 

1. Provide that the Act shall not be construed as authorizing a State to subject a 

Remote Seller or any other person to franchise, income, occupation, or any 

other type of taxes other than sales and use taxes, affecting the application of 

such taxes, or enlarging or reducing State authority to impose such taxes. 

2. Provide that the Act shall not be construed to create taxable nexus or alter the 

standards for determining taxable nexus between a person and a State or local 

jurisdiction. 

3. Provide that nothing in the Act shall be construed as encouraging a State to 

impose sales and use taxes on any products or services not subject to taxation 

prior to the date of the enactment of the Act. 

4. Provide that the sole recourse for States to require Remote Sellers to collect 

sales tax is to meet the requirements of the Act ("field preemption"). 
111 

Testimony of Joseph R. Crosby 

Committee on the Judiciary 

Tech Neutrality 

March 12, 2014 

Page 13 

Principle: Brick & Mortar, Exclusively Online, and Brick & Click businesses should all be 

on equal footing. The sales tax compliance burden on online Internet sellers should not 

be less, but neither should it be greater than that on similarly situated offline businesses. 

Discussion: As a result of the U.S. Supreme Court's interpretation of the Commerce 

Clause, Remote Sellers have two distinct advantages over Nexus Sellers. First, Remote 

Sellers cannot be legally required to collect tax, and thus Remote Sellers do not bear the 

administrative burden of sales tax collection that Nexus Sellers bear. Second, because 

few taxpayers actually pay use tax where sales tax is not collected, Remote Sellers also 

enjoy, in most of the country, a non-trivial price advantage over Nexus Sellers. It is worth 

noting that only non-U.S. businesses can be a Remote Seller in every State (U.S. 

businesses have substantial nexus with at least one State even if that State does not 

impose a sales tax) and that only some businesses are Nexus Sellers everywhere. Most 

businesses are Remote Sellers in some States and Nexus Sellers in others. 

Implementation Options: The alternative framework would authorize States to require all 

sellers to collect sales tax on Remote Sales. To address the burden the may place on 

Remote Sellers, the Act would require States to simplify the administration of sales tax as 

a precondition for being granted the authority to require Remote Sellers to collect tax. 

There are nearly as many opinions as to what constitutes "true simplification" as there are 

people involved in the debate. The following list focuses on the simplifications that are 

most meaningful to Remote Sellers. It is worth noting that simplifying collection for all 

sellers has value in and of itself and benefits the economy overall. 

1. Authorize States to require all sellers to collect and remit sales and use taxes, 

but only as long as the State implements legislation that includes certain 

Minimum Simplification Requirements. 

2. Allow sellers to challenge a State's assertion that it has met the Minimum 

Simplification Requirements and incorporate provisions to terminate a State's 

authorization if it no longer satisfies the Minimum Simplification Requirements. 

3. Require States to publish notice of intent to exercise authority under the Act, 

with a sufficient minimum period (e.g., 180 days) following the enactment of this 

Act and the publishing of such notice. 

4. Require States to adopt, via legislation, the "Minimum Simplification 

Requirement" that: 

a. specifies the tax or taxes to which the authority granted by the Act 

applies and specifies any products or services otherwise subject to the 

tax or taxes identified by the State to which the authority of this Act shall 

not apply; 
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Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 14 

b. provides for a single, central registration system for all States; 

c. identifies a single entity within the State responsible for all State and 

local taxing jurisdiction, sales and use tax administration and return 

processing; 

d. provides for a single, uniform sales and use tax return for use in all 

States, including and all local taxing jurisdictions within the States, and 

provides that a Remote Seller is not required to file sales and use tax 

returns any more frequently than non-Remote Sellers; 

e. provides for a single point of remittance (which could be a single State) 

for Remote Sellers for all States in which the Remote Seller makes 

Remote Sales; 

f. provides that a Remote Seller is not subject to any requirements that the 

State does not impose on non-Remote Sellers; 

g. provides a uniform sales and use tax base among the State and local 

taxing jurisdictions within the State; 

h. provides for the sourcing of Remote Sales consistent with the Act; 

defines a ''Taxability Matrix" as a publication indicating what sales of 

tangible or intangible products or services are subject to or exempt from 

the sales and use tax; 

j. provides a Taxability Matrix, and provides that sellers shall have no 

liability to the State for an error was the result of any reasonable 

interpretation by the seller of the State's Taxability Matrix; 

k. provides for the publication of a rate and boundary database by each 

State, and provides that any person relying on such database shall have 

no liability to the State or local taxing jurisdictions within the State for the 

incorrect collection, remittance, or noncollection of sales and use taxes, 

including any penalties or interest; and, 

provides at least 90 days notice of a rate or base change by the State or 

any local taxing jurisdictions within the State and provides that sellers 

shall have no liability to the State or local taxing jurisdictions within the 

State for the incorrect collection, remittance, or noncollection of sales 

and use taxes if sufficient notice of a rate or base change was not 

provided. 

5. Require States to provide certified software free of charge to Remote Sellers 

that calculates taxes and files returns in all States authorized under the Act, 

provides all sellers using certified software with protection from liability, and 

provides transitional assistance to Remote Sellers to offset implementation 

costs associated with such software. 
113 

Testimony of Joseph R. Crosby 

Committee on the Judiciary 

No Regulation without Representation 

March 12, 2014 

Page 15 

Principle: Those who would bear State taxation, regulation and compliance burdens 

should have direct recourse to protest unfair, unwise or discriminatory rates and 

enforcement. 

Discussion: Under current law, taxpayers-consumers-have direct recourse to protest 

unfair, unwise or discriminatory sales tax rates and enforcement through their State 

legislatures and courts. That right remains unaffected by any proposed Congressional 

response to this issue. 

A Congressional grant of authority to the States permitting them to require Remote 

Sellers to collect tax heightens the Remote Seller's exposure to potential audits or other 

enforcement actions by States in which the Remote Seller has no physical presence. 

To minimize this potential burden, the Remote Seller should benefit from: 1) a single audit 

for all jurisdictions in which the Remote Seller makes Remote Sales; 2) the right to protest 

any assessment arising from such an audit in the jurisdiction of the Remote Seller's 

choosing; and 3) a small seller exemption for Remote Sellers using a certified software 

provider. 

Together, these provisions would minimize the audit burden on a Remote Seller and 

ensure that the Remote Seller has recourse to its State courts in the event of a disputed 

audit finding. 

Additionally, it may be appropriate to exempt certain remote sellers, as discussed below, 

from audits and other enforcement actions. 

Implementation Options: 

1. Provide for a "Consolidated Audit Agreement" among the States that provides 

that one State shall have the authority to audit a Remote Seller on behalf of all 

States under the authority granted by the Act. States which choose not to enter 

the agreement are prohibited from auditing the Remote Seller. 

2. Provide that the result of any audit conducted under the Consolidated Audit 

Agreement is binding on the State and local taxing jurisdictions within that 

State, unless such results are challenged by the Remote Seller. 

3. Provide that assessments based upon an audit conducted pursuant to a 

Consolidated Audit Agreement shall be reviewable by a court of competent 

jurisdiction in any State which is a party to the Consolidated Audit Agreement 

upon the consolidated appeal by the Remote Seller. 
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Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 16 

4. Exempt Remote Sellers which use certified software and which fall below a 

certain sales threshold from audit. According to a Small Business 

Administration (SBA) study, there are more than 5 million online sellers. The 

vast majority of those sellers are very small; if the threshold for audit exemption 

was set at $5 million in annual sales, then, according to the SBA, only 750 

online sellers would be subject to audit. 

Simplicity 

Principle: Governments should not stifle businesses by shifting onerous compliance 

requirements onto them; laws should be so simple and compliance so inexpensive and 

reliable as to render a small business exemption unnecessary. 

Discussion: As discussed under ''Tech Neutrality" (above), reducing compliance burdens 

will benefit Remote Sellers large and small. In addition to providing equal footing for all 

sellers, reducing the administrative burden imposed by State and local sales taxes 

reduces deadweight loss in the economy and frees up those resources for productive 

investments. 

Implementation Options: see implementation options under Tech Neutrality. 

Tax Competition 

Principle: Governments should be encouraged to compete with one another to keep tax 

rates low and American businesses should not be disadvantaged vis-a-vis their foreign 

competitors. 

Discussion: The current State and local sales and use tax system encourages 

competition between the States for residents. Individuals are free to choose between 

governments that impose no or low sales taxes or higher sales taxes (perhaps in lieu of 

other taxes, such as income taxes). 

On a more granular level, State and local governments compete by exempting whole 

segments of commerce (e.g., excluding services from the sales tax base) or specific 

areas to encourage investment (e.g., exempting manufacturing machinery and 

equipment from sales tax). 

Finally, all States incorporate destination based sourcing for Interstate Sales, which 

ensures that exports are free from sales tax and imports (either from another State or 
115 

Testimony of Joseph R. Crosby 

Committee on the Judiciary 

March 12, 2014 

Page 17 

another country) are on equal footing, from a sales tax perspective, with domestically 

produced goods or provided services. 

Implementation Options: The alternative framework is open to, but does not require, a 

uniform tax base among all the States and a single tax rate per State. Those elements 

tend to diminish tax competition between State-and local-governments. The following 

options to promote tax competition are limited by the simplification concepts enumerated 

previously; in other words, States' flexibility in this area should not trump the need for a 

reduced compliance burden. 

1. Allow States to define their own tax bases (i.e., to determine whether a product 

or service should be taxable or exempt). 

2. Allow States to set their own tax rates 

3. Avoid sourcing regimes or other provisions which would effectively exempt 

from tax foreign commerce (e.g., a pure origin sourcing regime would impose 

tax on exports but make imports tax exempt). 

States' Rights 

Principle: States should be sovereign within their physical boundaries. In addition, the 

federal government should not mandate that States impose any sales tax compliance 

burdens. 

Discussion: Tax Competition and States' Rights are related, and the implementation 

options under Tax Competition fit equally well here. The principle of States Rights' brings 

into consideration two additional issues: 1) the treatment of intrastate sales; and, 2) an 

overarching concern that the Act not tread on State and local governments beyond that 

which is required to solve the current problem. 

Implementation Options: 

1. Provide that the Act does not affect intrastate sales. 

2. Provide that the Act does not impose any new taxes or regulatory requirements 

and does not require States to impose any new taxes or regulatory 

requirements. 
116 

Testimony of Joseph R. Crosby 

Committee on the Judiciary 

Privacy Rights 

Principle: Sensitive customer data must be protected. 

March 12, 2014 

Page 18 

Discussion: Federal and State laws currently provide for the protection of sensitive 

taxpayer (i.e., customer) data. Those laws generally extend not only to federal and State 

employees who have access to sensitive taxpayer data, but also to third party contractors 

and others, such as sellers and employers, who may be compelled by governments to 

participate in the tax collection structure. 

Implementation Options: Presuming that existing federal and State laws protecting 

sensitive taxpayer data are sufficient, the Act could simply refer to those laws. 

Alternatively, the Act could set a standard for the protection of sensitive taxpayer data that 

States must meet in order to exercise the authority granted in the Act (similar to the grant 

of authority being conditioned on adoption of the Minimum Simplification Requirements). 
117 

Mr. GOODLATTE. Thank you, Mr. Crosby. 

Mr. Moylan, welcome. 

TESTIMONY OF ANDREW MOYLAN, SENIOR FELLOW AND 

OUTREACH DIRECTOR, R STREET INSTITUTE 

Mr. MOYLAN. Thank you. Chairman Goodlatte, Ranking Member 

Conyers, and Members of the Committee, thank you for the invitation to testify today. My name is Andrew Moylan. I am senior fellow and outreach director for the R Street Institute. R Street is a 

pragmatic, non-profit, nonpartisan think tank that operates on the 

motto, ‘‘Free markets, real solutions.’’ 

While we believe passionately in limited government, we also 

want constructive solutions to our most pressing public policy concerns. And it is in that spirit today that I ask you to consider an 

alternative solution to the internet sales tax issue, origin sourcing. 

They say that taxes are the fine you pay for thriving too fast. 

And some clearly have an impulse to penalize the thriving of the 

internet by giving State tax collectors power as big as the internet 

itself. What I propose to you today is not to give internet retail a 

free pass or special treatment, but to truly level the playing field 

by specifying unified origin sourcing as the only permissible standard for taxation of remote retail sales. 

In laymen’s terms, what that means is origin sourcing establishing a source of an item for tax purposes as the physical location 

of the business making the sale while a destination sourcing 

scheme, like the Marketplace Fairness Act, compels tax collection 

based on the physical location of the buyer making the purchase. 

This seemingly small discrepancy makes a world of difference. 

To illustrate, consider if I were to make a purchase at one of the 

Capitol gift shops today. Though I am an Arlington, Virginia resident, they would charge me the District sales tax, not Virginia’s, 

on any item that I purchase because they effectively operate on an 

origin sourcing system. They collect based on where their business 

is physically located for every sale, regardless of where their customer comes from. 

And what I propose is for Congress to extend its use to remote 

retail sales as well, yielding several important benefits. The first 

is that it would truly level the playing field by ensuring that all 

sales have tax collected on them, and that the collection standard 

for in-person versus remote sales is identical. As such, it would be 

radically simpler to administer. Businesses would only be required 

to comply with the tax code of their home jurisdiction, and any disputes associated with collection could be settled with local tax authorities. Finally, it would preserve important taxpayer safeguards, 

like the physical presence standard, ensuring that Congress does 

not inadvertently establish a slippery slope toward a system of 

State tax powers unbounded by geography. 

Some might have you believe that origin sourcing is a radical departure, but the truth is that it is the overwhelmingly dominant 

mode of sales tax collection today. Greater than 90 percent of all 

retail purchases have tax collected under such a rule since it governs substantially all brick and mortar sales, and roughly half the 

country utilizes it for remote sales made inside a State. 
118 

Nonetheless, you have heard from some of my panelists that origin sourcing is a bad idea. They might claim that it would encourage a so-called race to the bottom where businesses would rush to 

locate non-sales tax States, like Montana, to avoid collection. Taxes 

do indeed influence firm behavior, but the incentive to escape to a 

non-sales tax State already exists under current law, and there has 

not yet been a stampede that I have seen. That is because businesses tend not to make location decisions on the basis of one tax 

alone. They weigh property, sales, and business taxes, as well as 

factors like available labor pool, access to suppliers, transportation 

infrastructure, and so on. 

Others might say that it constitutes taxation without representation, but this misunderstands who the taxpayer is for sales tax purposes. Though the levy is theoretically passed on to the consumer, 

the reality is that the business bears all legal responsibility for 

complying with the tax. If tax is not collected on an item where it 

should have been, revenue agents do not approach the consumer to 

make up the shortfall. They audit the business. And, in fact, most 

States define ‘‘sales taxes’’ as ‘‘privilege taxes’’ that are levied on 

businesses as opposed to on individuals. 

You might also hear that origin sourcing is incompatible with 

States’ rights, but a federalist system cannot survive if States are 

granted the authority to exercise power beyond their borders. The 

commerce clause of the Constitution and subsequent jurisprudence 

give Congress the clear power to preempt State actions that impede 

the flow of interstate commerce. 

What an origin sourcing rule would do is reaffirm that States are 

sovereign within their borders, but not beyond them. And finally a 

Federal origin sourcing rule would be no more prescriptive to 

States than would the Marketplace Fairness Act or any of the 

other alternatives you are considering today. 

To conclude, this hearing is taking place in no small part due to 

the complete and utter failure of the use tax system in America. 

Ever since the Supreme Court affirmed the constitutionality of use 

taxes in 1937, States have tried in vain to concoct viable systems. 

But the simple reality is that use taxes are effectively not administrable. 

In origin sourcing, I offer up a solution that is easily administrable, that is already used for 9 out of every 10 retail sales made 

today, and does not trample on important taxpayer principles the 

way the Marketplace Fairness Act does. I do hope you will give the 

concept due consideration, and I look forward to your questions. 

[The prepared statement of Mr. Moylan follows:] 
119 

Free mclrkets. Real solutions. 

Statement of 

Andrew Moylan 

Senior lIow and Outreach Director 

R Street Institute 

Prepared for 

The Co mmittee on the Judiciary 

United States House of Representatives 

Regarding the Committee's Hearing on 

Inlternet Sales Taxation 

Submitted March 10, 2014 

COrltact Information: 

Andrew Movlan 

Senior f ellow and Outreach Director 

R Street Instill/te 

1015 y. 7''' Street Northwest, 3'· Floor 

Washington, OC 20001 

amoylan@rstre;et.QrR 
120 

Introduction 

Chairman Goodlatte, Ranking Member Conyers, and distinguished members ofthe committee, 

thank you for the opportunity to submit testimony regarding the issue of Internet sales tax 

collection. My name is Andrew Moylan and I am senior fellow and outreach director for the R 

Street Institute, a relatively new free market think tank with offices in Washington; Tallahassee, 

Fla.; Austin, Tex.; and Columbus, Ohio. R Street supports free markets; limited, effective 

government; and responsible environmental stewardship. It strives to craft pragmatic solutions 

to domestic policy challenges involving regulation, public health, the environment, tax reform 

and the federal budget. 

I have spent a great deal of time in recent years working on Internet sales tax issues, both at R 

Street and with my previous employer, the National Taxpayers Union. I believe strongly that 

passage of legislation like S. 743, the so-called Marketplace Fairness Act (MFA), would 

undermine basic principles of sound tax policy, impose unequal collection burdens on 

businesses and constitute a substantial burden on interstate commerce 

However, I also believe there is a solution to address the concern that current law is inadeq uate 

while maintaining important tax policy protections. It also meets Internet sales tax principles 

laid out by Chairman Goodlatte late last year. The solution is to extend the simple "origin 

sourcing" collection standards already in use nationwide for brick-and-mortar sales to all 

remote sales as well. This would ensure that all retail sales are governed by the same 

straightforward rules, requiring tax collection based on the physical location of the business, 

not the residence of the buyer. 

Current law 

Before discussing the failures of the Marketplace Fairness Act and the contours of an originsourcing solution, I'd like to summarize the law as it stands today. Current law prevents tax 

authorities from forcing a retailer of any type to collect and remit its sales tax unless it has a 

tangible physical presence in the state. In other words, only a legitimate physical presence in a 

state triggers collection requirements. This rule applies equally to traditional brick-and-mortar 

sellers as well as online-only and so-called "brick-and-click" businesses that sell through retail 

locations and over the Web. 

The rule is the result of a 1992 Supreme Court case, Quill v. North Dakota, where a Delawareincorporated office supplier with no presence in North Dakota was found to have no obligation 

to collect and remit on the latter state's behalf. The court held that extraordinary sales tax 

complexity would render the interstate commerce burden of mandatory collection on out-ofstate businesses too great to be constitutionally permissible. 

Though states cannot compel non-resident businesses to collect and remit their sales tax, 

individual customers who reside in states with a sales tax are required to pay "use tax" in lieu of 

conventional sales tax on items purchased in other states. The use tax regime, which relies on 

self-reporting, is seen as ineffective, in part because most taxpayers are simply unaware of their 

obligations. This makes enforcement of use tax difficult, expensive and hugely unpopular, since 

2 
121 

it would require intrusive audits of a state's residents to determine legitimate use tax 

obligations. As a result, states have been clamoring for the federal government's permission to 

instead allow them to force out-of-state businesses to collect their sales taxes, a change that 

would represent a dramatic expansion of state taxing authority and would untether tax policy 

from the basic limiting principle of physical presence. Quill has served to protect consumers and 

businesses on whom the legal requirement to collect and remit sales taxes would be placed 

from substantial compliance burdens imposed by overeager revenue agents in "foreign" states. 

Passage of the MFA or similar legislation would enhance states' audit and enforcement power 

such that it would no longer end at their borders. It would give states license to enforce tax 

rules on businesses outside their jurisdiction, resulting not just in damage to Internet-based 

businesses but substantial compliance and interstate commerce burdens that could threaten to 

dent our fragile economic recovery. 

To understand why origin sourcing is a superior solution, however, requires a discussion of the 

many problems inherent in the MFA. 

Marketplace Fairness Act Dismantles Vital Taxpayer Safeguard 

Contrary to the claims of proponents, current law is not a "loophole" implemented in a 

deliberate attempt to advantage Internet retailers. Instead, the Quill decision drew on and 

emphasized a bedrock foundational principle of tax policy: the physical presence standard. 

Simply stated, this standard generally prevents tax entities from extending their authority 

beyond their physical borders. As a result, businesses and taxpayers alike are shielded from 

predatory tax administration ploys that might seek to target non-residents for revenue. 

The physical presence standard is a strong protection from overzealous tax collection tactics 

and a fundamental safeguard in American tax policy. It is broadly accepted as the appropriate 

boundary which states must observe when asserting tax prerogatives. Physical presence is a 

constraint on tax collectors that applies to most areas of tax policy, including business earnings 

and individual income taxes. 

As but one example of the wide-ranging relevance and respect given to the physical presence 

standard, in the 112'h Congress, the House unanimously passed H.R 1864, the Mobile 

Workforce State Income Tax Simplification Act. This legislation, which unfortunately never 

received Senate consideration, would have prevented states from requiring income tax filing or 

withholding from workers unless they reside or work in a given state for more than 30 days in a 

calendar year. This common sense criterion would prohibit unfair income tax filing 

requirements on non-residents and at its core is the wise counsel of the physical presence 

standard. 

Another example of the importance of physical presence in tax policy is H.R. 2992, Chairman 

Goodlatte's Business Activity Tax Simplification Act. He has for years championed this important 

legislation, on which this committee held a hearing just two weeks ago, that would strengthen 

definitions of what constitutes a physical presence in direct response to overly-aggressive state 

efforts to assert tax authority over companies that do not have substantial nexus. 
122 

The MFA would erase the physical presence standard for remote retail sales, while ostensibly 

maintaining it for brick-and-mortar sales. The result, as outlined further in this testimony, 

would be an abandonment of limits on taxing powers that have served our federal system so 

well for decades, even centuries. 

In fact, S. 743's language makes very clear how it would place the physical presence standard 

on the slippery slope to extinction. Section 3 ofthe bill reads like an admission that the 

legislation could have grave implications for taxpayers, insisting that it is not intended to affect 

tax, nexus or licensing and regulatory requirements, respectively, in subsections (a) - (c). In 

other words, the bill's authors promise that its language strips away the physical presence 

protection only for sales taxes and not for other levies and that it doesn't open businesses up to 

regulatory interventions in states where they have no physical presence. 

While it is true that the bill's plain language does not empower states to untether other policies 

from the physical presence protection, the bill does establish a precedent that aggressive states 

could use to expand their reach. If states were empowered to enforce their sales tax obligations 

on non-resident businesses, it seems just a matter of time before some will attempt to enforce 

other tax obligations on non-resident businesses, as well. 

For example, if Utah-based Overstock.com does 15 percent of its sales to California residents, 

the state might well argue that it is entitled to impose California business tax obligations on an 

equivalent share of Overstock's profits. A state like New York could assert that, if non-resident 

businesses must collect sales tax for items sold to New Yorkers, they also should comply with 

New York consumer product and labor regulations for items sold to New Yorkers. The slope 

toward state power unbounded by geography the MFA would create is slippery indeed. 

Marketplace Fairness Act Would Yield "Unlevel" Playing Field 

MFA proponents argue their bill is intended to "level the playing field" between brick-andmortar and remote retailers. In reality, it would do the opposite. While the legislation would 

require sellers to collect sales tax on every remote sale, it would do so with a different and 

unequivocally harsher set of rules than exist for brick-and-mortar sales. 

Passage of the MFA would mean states could strong-arm remote sellers into complying with 

the more than 9,600 separate sales tax rates that exist across the country, not to mention the 

46 states with sales taxes that can issue their own unique set of edicts and definitions.' S. 743 

would concoct a "destination-based" sourcing regime that compels sales tax collection based 

on the location of its customer. An online business would have no choice but to quiz each and 

every customer on their residence, decipher the appropriate rates for their locality and remit 

what is collected to a distant tax agency. 

1 Tax Foundation, --Sales Tax Rates inMajorU.S. Cities," Accessed March 2,2014 

hllp://laAfoundalion.org/arlicle/sales-t.a.\.-rates-major-us-cilies 

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But when a brick-and-mortar retailer makes a sale in one of its stores, it doesn't have to jump 

through any of those hoops. When a customer checks out at a register, they are not quizzed 

about their residence and then charged the prevailing rate in that locality. That's because brickand-mortar retailers effectively operate on an "origin-based" sourcing rule, one that collects tax 

based upon the location ofthe business rather than the location ofthe consumer. Even states 

that technically operate their tax regimes under destination-based sourcing rules for traditional 

retail sales tend to short-circuit them: they attempt to mimic origin-based sourcing by assuming 

that the "point of delivery" of an item is not where its customer lives but where it gets handed 

back to the customer at the cash register. 

This clever bit of maneuvering allows brick-and-mortar retailers across the country to operate 

on a system whose compliance, at least as far as tax laws are concerned, can be relatively 

straightforward. Each business charges the prevailing sales tax where it is located to all of its 

customers, regardless of their eventual destinations. The MFA would deny that administrative 

convenience to remote retailers by pressing them into a cross-examination process for each 

and every customer. 

S. 743 Imposes Tremendous Compliance and Interstate Commerce Burdens 

Because they would now answer to 9,600 tax jurisdictions across the country, remote retailers 

would have to shoulder heavy overhead costs just to meet their new tax-collection liabilities. In 

fact, the MFA essentially acknowledges its imposition of major expenses and complexity by 

including an exemption for businesses that have less than $1 million of annual remote sales. 

This provision makes clear that even sponsors and supporters feel compliance would exact an 

unbearable toll on small sellers. 

Unfortunately, S. 743's paltry exem ption level (by comparison, the Small Business 

Administration threshold for defining a small business is $30 million in sales) would do little to 

ease the suffering of smaller businesses, which would face greater relative competitive 

disadvantages as a result of the bill. A PricewaterhouseCoopers study found that businesses 

with between $1 million and $10 million in sales would face compliance costs nearly 2.5 times 

larger than those endured by firms with more than $10 million in sales. 2 The smaller the 

business, the greater the proportion of sales siphoned off just to navigate this maze of 

extremely complicated sales taxes. 

Industry data suggests the specialty retail sector (which includes businesses like Bed, Bath & 

Beyond and Amazon.com) enjoys an average net profit margin of just 4 percene, while catalog 

and mail-order retailers (which include eBay and Overstock.com) average 2 percent4

. A 

hypothetical business with $1 million of remote sales would earn $20,000 to $40,000 of profits 

on those sales. A business with a $20,000 operating margin would be hard-pressed to comply 

with rates from thousands of tax jurisdictions without severe damage to their business. 

2 PriccWatcrhollscCOOPCIS, -'Retail Sales Tax Compliance Costs: A National Estimate;" Accessed March 2, 20U-. 

http://nelcllOice. org!\\'P-conlentl uplonds/cosl-o[ -collection-study -sstp. pdf 

3 Yahoo! Finance, "Industry Center - Specialty Retail,.- Accessed March 2, 201.:1.. http://biz.yahoo.comlic!745.html 

'Yahoo! Finance, "Industrv Center - Catalog & Mail Order Houses," Accessed March 2.2014 

http://biL. yahoo .com/icl73 9 .hlml 
124 

Some companies would collapse under the weight of these compliance loads, and others would 

either have to raise prices substantially (which is difficult to impossible to do in any competitive 

market) or find other ways to cut costs, such as through layoffs, in order to make ends meet. 

Congress has the duty and authority to prevent states from enacting policies that significantly 

harm interstate commerce. Paradoxically, S. 743, would encourage such damage at an 

especially fragile time for our economy. 

Tax Simplification Efforts Have Largely Failed 

Much ofthe movement behind the MFA has been justified by the argument that sales tax codes 

are being simplified across the country. While the Streamlined Sales Tax Project (SSTP) and 

other efforts have expended much energy on this worthy task, the sad fact is that state sales 

taxes today are more complex than ever. The number of tax jurisdictions has steadily risen in 

the years since SSTP's inception and our nation is nowhere close to the sort of uniformity and 

ease of administration the project sought to create. 

For a glimpse into the reality of sales tax complexity, consider the dilemma of determining 

when ice cream is a baked good for Wisconsin's tax purposes. Former Forbes.com writer Josh 

Barro discussed a bulletin from the Wisconsin Department of Revenue seeking to clarify the tax 

treatment of ice cream cakes 

If I understand the memo correctly, the rules are as follows. Ice cream cake is a 

taxable prepared food if you make it yourself, but not if you're just reselling the 

cake. However, if the cake contains real cake layers, it's a non-taxable baked 

good no matter who made it, so long as the amount of cake exceeds the amount 

of ice cream. (No, really: Example 9 is a cake with two cake layers and one ice 

cream layer, which is tax exempt; Example 10 is a cake with one cake layer and 

two ice cream layers, which is taxable because it doesn't contain enough cake.) If 

you buy a cake from someone and then decorate it yourself, it's taxable no 

matter how much flour it contains. And if you slice any cake and serve it in 

individual servings, or if the cake consists of fewer than four servings, or if the 

customer is going to eat the cake on the premises at your business, or if you give 

the customer utensils with his cake, it's a taxable prepared food, though you may 

be exempt from that last one ifthe sale of prepared foods is incidental to your 

business. 

This offers a vivid illustration of the challenge of tax complexity: the exceedingly difficult work 

of establishing how a given item is defined. Different localities have different answers, each of 

which may yield different tax obligations. MFA proponents claim there are modern software 

solutions to address the difficulties of compliance, but that is like saying that TurboTax has 

solved our mind-numbingly complex federal income tax code. The computing power to do the 

math has existed for decades but the ice cream cake conundrum can't be solved with software 

alone. 

'Foroes.com. "Want to Sell an Icc Cream Coke" Just Fill Out These Simple Forms," Accessed March 2,2014 

hllp://v'f'\"w.[orbes.com/sites/joshbarroI2012/04/03/wanl-1o-sell-an-ice-cream-cake-just-fill-out-lhese-simple-forrnsl 

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Marketplace Fairness Act Violates All of Chairman Goodlatte's Principles 

Last year, Chairman Goodlatte released a commendable list of seven important principles to 

guide any future action on Internet sales taxation: tax relief, tech neutrality, no regulation 

without representation, simplicity, tax competition, states' rights and privacy rights. Sadly, the 

MFA violates everyone ofthese principles. 

Goodlatte Principle Marketplace Fairness Act 

1. Tax relief - Using the Internet should Businesses would face new and more 

not create new or discriminatory taxes burdensome tax collection requirements for 

not faced in the offline world. Nor online sales. MFA would constitute precedent 

should any fresh precedent be created for undermining or eliminating the physical 

for other areas of interstate taxation presence standard in other areas of taxation 

by states. and regulation. 

2. Tech Neutrality - Brick & mortar, MFA would deliberately advantage brick-andonline and brick & click businesses mortar over remote sales by allowing inshould on equal footing. The sales tax person transactions to have tax collected 

compliance burden on online Internet under dramatically simpler origin-sourcing 

sellers should not be less, but neither rule, while online transactions would have tax 

should it be greater than that on collected under an extremely complex 

similarly situated offline businesses. destination-sourcing rule. 

3. No Regulation Without Under MFA, businesses would be subject to 

Representation - Those who would regulation, audit and enforcement actions in 

bear state taxation, regulation and states where they have no presence 

compliance burdens should have direct whatsoever, constituting regulation without 

recourse to protest unfair, unwise or representation. 

discriminatory rates and enforcement. 

4. Simplicity - Governments should not MFA entails enormous complexity, forcing 

stifle busi nesses by shifting onerous businesses to comply with thousands of 

compliance requirements onto them; complex and ever-changing sales tax rates. Its 

laws should be so simple and small business exemption, though paltry, is 

compliance so inexpensive and reliable evidence that sponsors recognize the burden 

as to render a small business and wish to protect smaller operations from 

exemption unnecessary. its ravages. 

s. Tax Competition - Governments Because it would allow states to target nonshould be encouraged to compete with resident businesses, MFA encourages higher 

one another to keep tax rates low and rates that can be extracted from entities with 

American businesses should not be no recourse to challenge or lower them. 

disadvantaged vis-a-vis their foreign 

competitors. 

6. States' Rights - States should be MFA obliterates the concept of state powers 

sovereign within their physical limited by geographical borders, allowing 

boundaries. In addition, the federal them to extend their tax authority into any 

government should not mandate that state in the nation, including those without 

states impose any sales tax compliance sales taxes. 

burdens. 

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7. Privacy Rights - Sensitive customer 

data must be protected. 

Where MFA Fails, Origin Sourcing Succeeds 

MFA requires exchanging enormous amounts 

of personal data to enable auditing and 

enforcement, raising the prospect of privacy 

violations and leaks of sensitive information. 

The MFA guts an important limiting principle that a state may tax and audit only those entities 

within its borders; imposes an unlevel playing field for brick-and-mortar and remote sales; 

creates substantial compliance and interstate commerce burdens; and relies on the flawed 

notion that software can allow for easy compliance with thousands of ever-changing sales tax 

codes nationwide. 

An origin-sourcing rule, however, affirms the physical presence standard by clarifying that 

states can only enforce tax collection and audit obligations on resident businesses, imposes 

precisely the same collection standard on remote sales as it does on brick-and-mortar sales, 

entails minimal compliance obligations and eliminates the need for complex software 

integration by specifying that collection and remittance for a given business will only be for the 

tax authorities in that locality. 

Comparing a federal origin sourcing rule to the seven Goodlatte principles yields a very 

different story indeed. 

Goodlatte Principle Origin Sourcing 

l. Tax relief - Using the Internet should Businesses would face the same collection 

not create new or discriminatory taxes standard for all sales, whether in-person, via 

not faced in the offline world. Nor Internet or mail-order. Physical presence 

should any fresh precedent be created standard would be affirmed as the appropriate 

for other areas of interstate taxation rubric for imposing tax-collection obligations. 

by states. 

2. Tech Neutrality - Brick & mortar, Origin sourcing would not punish a business 

online and brick & click businesses for availing itself of the Internet with a more 

should on equal footing. The sales tax burdensome collection standard. Instead, it 

compliance burden on online Internet would ensure that all sales are treated 

sellers should not be less, but neither precisely the same for tax-collection purposes, 

should it be greater than that on leveling the playing field between 

similarly situated offline businesses. technologies and business models. 

3. No Regulation Without Rej2resentation Because it affirms the physical presence 

- Those who would bear state standard, origin sourcing would ensure that no 

taxation, regulation and compliance business faced regulation without 

burdens should have direct recourse to representation. The only tax authorities to 

protest unfair, unwise or which a business would be liable would be 

discriminatory rates and enforcement. those for its physical location, where they 

have administrative and political recourse. 
127 

4. Simplicity - Governments should not Origin sourcing is radically simple, allowing 

stifle businesses by shifting onerous most businesses to seamlessly comply sim ply 

compliance requirements onto them; by running remote sales through the same 

laws should be so simple and system as in-person sales. The burden of doing 

compliance so inexpensive and reliable so would be so minimal that a small business 

as to render a small business exemption would not be necessary. 

exemption unnecessary. 

5. Tax Competition - Governments Origin sourcing provides for healthy tax 

should be encouraged to compete with competition between states, encouraging 

one another to keep tax rates low and them to compete with one another to create 

American businesses should not be and maintain attractive climates for business 

disadvantaged vis-a-vis their foreign location. 

competitors. 

6. States' Rights - States should be Origin sourcing affirms appropriate limits on 

sovereign within their physical state taxing power, ensuring that only the 

boundaries. In addition, the federal home state has authority to enforce tax 

government should not mandate that collection obligations on its businesses. 

states impose any sales tax compliance 

burdens. 

7. Privacy Rights - Sensitive customer Origin sourcing entails fewer exchanges of 

data must be protected. sensitive information with fewer entities, since 

each business would deal just with its local tax 

authorities, not dozens across the country 

where data might become compromised. 

How Origin Sourcing Rules Work 

As mentioned, an origin sourcing rule requires collection of applicable sales tax based on the 

physical location ofthe seller, as opposed to requiring collection based on the physical location 

of the buyer. 

Imagine that a Texas resident makes a purchase over the Internet from a single-location 

Massachusetts-based retailer. Because the business does not have a physical presence in Texas, 

current law does not require any sales tax be collected on the item (though the buyer will owe 

use tax directly to Texas). This is relatively simple for the business to administer, since their lack 

of storefront, distribution or staff in Texas makes clear they have no substantial nexus with the 

state that would trigger any collection requirement. It does, however, raise concerns for some 

policymakers, since the use tax the individual owes is almost certainly not going to be paid. 

Under a destination sourcing rule, such as that effectively countenanced by the MFA, the 

Massachusetts business would be required to quiz the customer as to their residence, look up 

and accurately apply the appropriate Texas tax rate for the item, and then remit the collected 

dollars to the appropriate tax authority, despite the fact that they have no presence themselves 

in the Lone Star State. It would also open them up to audit and enforcement actions from that 

distant tax authority. 

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Under an origin-sourcing rule, the Massachusetts company would simply collect tax based on 

the Bay State jurisdiction where their business is located, regardless of where the customer 

resides. As a result, the seller need only be familiar with and accountable to the rules and 

enforcement actions of the jurisdiction in which they're located. 

Where Origin Sourcing Already Applies 

Origin sourcing is not at all a novel concept. In fact, it governs the vast majority of retail sales 

today. Virtually all state laws are structured so that collection on in-person sales effectively 

mimics an origin-sourcing rule. As previously mentioned, they do this by assuming that the 

"destination" of the good for purposes of sourcing is the counter at which the customer 

receives it. Brick and mortar retail businesses are not asked to interrogate their customers to 

determine whether they reside in a different state or locality. The simplicity inherent in this rule 

means that there are no hoops to jump through to determine in which of America's many 

taxing jurisdictions the customer resides and how to apply its unique code to the sale. 

Though it surprises some to hear, this structure governs more than than nine out of every 10 

sales made from businesses to consumers in the United States today. Despite popular 

perception of Web dominance, u.s. Census Bureau data shows that only 6 percent of all sales 

are currently transacted over the Internet.6 Mail-order sales represent an even smaller share. 

Though the segment is clearly growing at a rapid rate, the reality is that retail is still 

predominantly conducted in stores across the country and that will remain the case for years, 

perhaps decades, to come. 

In addition to all brick-and-mortar retail sales, origin sourcing prevails to one degree or another 

for intrastate remote sales in at least 17 states that contain more than half of America's 

population: Arkansas, Arizona, California, Iowa, Illinois, Missouri, North Carolina, Ohio, 

Oklahoma, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Virginia, and Washington. In 

each of these jurisdictions, most remote transactions completed between a resident and a 

business located in the same state will have tax collected based on the seller's location, not the 

buyer's. 

In other words, origin sourcing is already the overwhelmingly dominant mode of sales tax 

collection in the United States, covering substantially all transactions conducted in physical 

retail outlets (which themselves comprise more 90 percent of total retail sales) as well as 

intrastate remote retail sales for roughly half the country. As such, the "universe" of businessto-consumer sales for which destination sourcing reigns is really quite small. In seeking to 

expand its use to cover all remote interstate sales, the MFA relies on an outmoded collection 

standard that is unworkable on a national scale. 

The United States is by no means alone in its extensive reliance on origin sourcing. The 

European Union also takes advantage of its simplicity by employing it for value-added tax 

collection on business-to-consumer services performed across member-country borders, in 

"u.s. Census Bureau, "Quarterly Retail E-Collunerce Sales, 4'" Quarter 2013." Accessed March 2.2014. 

http://v .. ,\-,, w .census. go\' Iretaillmrts/w \\ vdda la/pdI/ec _ C LJITenL pdf 

10 
129 

order to ease the burden of collection and remittance obligations. The same is true of tangible 

goods sold from business-to-consumer, below certain sales thresholds J The American 

Enterprise Institute's Michael Greve covers the E.U.'s grappling with cross border taxation 

policy extensively in his brilliant book, Sell Globally, Tax Locally. 8 

Interestingly, E.U. countries use destination sourcing as something of a protective measure 

against non-E.U. countries that sell services to consumers that reside in the union. A U.S. 

business selling to a consumer in the European Union would be required to collect and remit 

the value-added tax on a complex destination sourcing rule, forcing them to comply with 

dozens of different rates, while an E.U. business selling to the very same consumer would 

simply collect the rate for its home country. This makes collection simpler for E.U. businesses, 

turning destination sourcing into a sort of protectionist cudgel used against foreign 

competitors. 

The Federal Role in Origin Sourcing 

If this committee or this Congress considers any changes to federal law relating to Internet sales 

tax collection, I believe it should do one simple thing: pass legislation stating clearly that an 

origin-sourcing rule is the only permissible standard for state taxation of interstate remote 

sales. All other methods, including the destination-sourcing scheme embodied in the MFA, 

would be effectively pre-empted. 

Structured in such a way, a federal origin-sourcing rule contemplates a role for Congress not at 

all dissimilar to the one laid out in the Marketplace Fairness Act, though the policies themselves 

are of course quite different. What MFA does is set out the conditions under which states may 

assert authority to tax remote interstate sales, as well as the conditions under which they may 

not assert that authority. 

The MFA's federal intervention would empower states to assert their tax power on remote 

interstate sales if they become members of the Streamlined Sales and Use Tax Agreement or if 

they abide by a separate set of minimum simplifications. However, it also sets out conditions 

under which states would not be permitted to do so, indicating that taxation of remote 

interstate sales would be impermissible if they failed to meet either of the aforementioned 

standards. Even if they do indeed meet one of the standards, taxation of businesses with 

remote sales less than $1 million would be impermissible in any case. 

An origin-sourcing rule would actually be much less prescriptive for states than would MFA. It 

would simply say that states may only tax interstate remote sales if they do so on an originsourced basis. If a state meets that standard, it may apply tax to interstate transactions, but it 

would be under no other obligations to the federal government beyond existing laws and 

regulations. 

European ConmnsslOll TaxatIOn and Customs Umon "Where to tax?," Accessed March 2,201.:1-

http://cc.cufopa.cu/taxation _ customs/taxati owvatlho\,,_ ·vat_ works/yat_ 011_ services/ 

8 Mich"el Greve. Sell Global/v, 1 ,'x Local/v (Washington. DC' The AEI Press. 2(03) 

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For example, states would be perfectly free to define a sales tax base as wide or narrow as they 

please. Similarly, they would be perfectly free to set sales tax rates as high or low as they 

please, including the freedom to choose not to have a sales tax at all. In fact, states could 

decide to use destination sourcing for intrastate sales if they felt it was best. The only 

constraint on state tax power in a federal origin sourcing rule would be on states seeking to 

assert tax authority over interstate remote sales, which would have to operate on an origin 

basis in orderto avoid the compliance and interstate commerce nightmare of a destination 

regime for such transactions. 

Importantly, any federal legislation specifying origin sourcing as the appropriate standard 

should establish some baseline protections against manipulation or deception from businesses 

that might seek to avoid tax collection. For example, the language should establish basic 

definitions of origin that prevent companies from setting up shell operations. 

Guidance can be found in states where origin sourcing exists for intrastate remote sales. 

Virginia specifies that the origin of an item is the "location at which the order was first taken9

," 

while Texas establishes origin at the location from which the item is shipped'D Congress might 

consider blending these approaches or perhaps seeking input from other areas of tax law, Ii ke 

business activity taxes, which establish clear rules for defining origin. 

A federal rule should also specify that items on which sales tax has been collected, regardless of 

origin, may not also be subjected to duplicative use tax. It is highly unlikely that states would 

choose to aggressively enforce use taxes in such a way given that the failures of that system 

have led to this very hearing, but federal gUidance would be helpful in preventing potential 

abuses. The only reason a state might attempt to employ a redundant use tax is as a form of 

protectionism against out-of-state businesses and products and thus Congress has a clear role 

in pre-empting such behavior. 

It also may be necessary for an origin-sourcing law to specify that legal proceedings related to 

the matter be handled in federal court, as opposed to on the state level. 

Why the Case Against Origin Sourcing is Weak 

I believe strongly that origin sourcing is the appropriate frame for Internet sales taxation, but it 

is not without its detractors. Some big-box retailers, in particular, have waged a subtle lobbying 

battle against it for months. Though they mount occasionally vigorous opposition to the 

concept, their arguments simply don't hold up to scrutiny. 

The first and most important defense against attacks on origin sourcing is to point to the fact 

that it already applies to the overwhelming majority of retail sales in the country, including 

substantially all brick-and-mortar sales. While no system is perfect, origin sourcing has served 

brick-and-mortar retail just fine for decades. 

';) Virgini<1 Deparlment ofT'L\..:1tioll, "Guidelines for the Retail S[lles <1nd Use Ta~ Cl:wnges Enacted in the 2013 

General Assembly Sessioll," Accessed March 2,2014. http://goo.gllXOTvzC 

10 Texas Comptroller of Public Accounts, "Guidelines for Collecting Local Sales and Usc Tax," Accessed March 2, 

2014. hllp:liwindow .slale.IA.llsilaAinfoilaApllbsil,,94 _IlIS.pdf 

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In other words, origin sourcing is either inherently problematic or it's not. If it is, then 

intellectual consistency dictates that we must scrap virtually the entire retail sales tax collection 

structure in place today in favor of a destination rule requiring retailers to quiz their customers 

and comply with far-away tax authorities. If it's not, opponents must articulate why it works 

perfectly well for in-person sales but somehow won't for remote sales. 

Race to the Bottom 

Opponents of origin sourcing claim it would set off a "race to the bottom," whereby businesses 

would rush to locate in non-sales tax states (or foreign countries) in order to avoid having to 

collect. This is unlikely for a host of reasons. First, sales tax collection is but one burden faced by 

a business. While taxes clearly have strong influence on both individual and firm behavior, any 

company must weigh its sales tax burden against other levies, like income and property taxes. 

In addition, it must consider factors like a quality labor pool, access to transportation 

infrastructure, proximity to suppliers and many others. Any location decision is likely to balance 

all of the aforementioned factors. 

Consider a business in the Pacific Northwest. It could decide between two very different tax 

systems in Washington state, which has no income tax and high sales taxes in some areas, and 

Oregon, which has no sales tax and high income taxes. It is not at all obvious that every rational 

firm would choose to locate in Oregon, given the choice, because their business model may 

benefit more from Washington's climate. 

In addition, there's nothing stopping the race to the bottom today. An online retailer wishing to 

avoid collection obligations under current law has the same incentive today to locate in a nonsales tax state as they would under a federal origin sourcing rule. It could escape collection in 

other states without triggering any in its new home state, since the one place where it would 

have physical presence has no sales tax at all. In reality, however, relatively few businesses have 

done so, precisely because location decisions are much more complicated. 

Furthermore, to the extent that businesses do decide to make location decisions on the basis of 

beneficial tax climates, that's a good thing. Consumers and taxpayers benefit from states 

competing with one another to attract businesses, jobs and economic activity with modest and 

comprehensible tax burdens. Congress should encourage tax competition because it disciplines 

state budgeting and allows the "laboratories of democracy" concept to flourish. 

In my view, the much more likely scenario than the wholesale flight of retailers to New 

Hampshire or Montana is that sales tax issues could affect location decisions on the margin in a 

given region. For example, in the Washington, D.C, metro area, one might see businesses 

deciding to locate in relatively lower-tax Virginia over Maryland. 

Taxation Without Representation 

A criticism often heard of origin sourcing is that it amounts to taxation without representation. 

This stems from a fundamental confusion about who, exactly, bears the burden of sales taxes. 

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Though the levy is ostensibly tied to an individual's purchase and theoretically gets passed on to 

the consumer, the reality is that businesses are, for all intents and purposes, the "taxpayer" as 

it relates to sales tax. 

Consider what happens if a state believes there is a shortfall in sales tax collections. In such a 

case, that state will not come to the consumerto recoup the dollars, it will come to the seller. 

The business is legally liable for all sales tax collection, regardless of whether or not they 

collected enough from their customers, and any shortfall would be adjudicated through an 

audit on and be paid for by said business. So while it's true that the economic incidence of sales 

tax is borne by the individual, the legal incidence is borne entirely by businesses. 

In fact, in many places, the sales tax is defined as a "business privilege" or "transaction 

privilege" tax. Arizona's Department of Revenue describes their sales tax thusly: 

The Arizona transaction privilege tax is commonly referred to as a sales tax; 

however, the tax is on the privilege of doing business in Arizona and is not a true 

sales tax. Although the transaction privilege tax is usually passed on to the 

consumer, it is actually a tax on the vendor11 

The sales tax is a tax administered by business in much the same way corporate income tax is. 

In both cases, the economic burden is borne entirely by individuals. With sales tax, that 

economic burden is passed on directly when an item is paid for. With corporate taxes, the 

burden manifests itself either in the form of higher prices, lower wages or fewer jobs for 

workers or reduced returns for shareholders. And in both cases, the legal incidence of the tax is 

borne entirely by the business, on which all requirements for compliance fall. 

States' Rights 

Another common refrain is that origin sourcing violates fundamental concepts of states' rights 

by undermining their ability to tax purchases made by their residents. This, too, is rooted in the 

aforementioned misunderstanding of who the "taxpayer" really is. Though a state's resident 

may make a purchase, it is another state's business that has the legal obligation to collect and 

remit the sales tax and be subject to audit and enforcement actions. 

What this criticism attempts to defend is the notion that states should have the unfettered 

right to tax businesses in any state across the country. In effect, it yearns for the days of the 

Articles of Confederation, when states were empowered to enact deleterious protectionism in 

the form of unbounded tax and regulatory authority. The result of that failed experiment was a 

new federal charter which explicitly empowered the federal government to head off such 

actions. 

The Commerce Clause of the Constitution and subsequent jurisprudence gives Congress the 

clear power to pre-empt state actions that impede the flow of interstate commerce. Though 

11 State of Arizona Department of Revenue, "Transaction Privilege Tax Licensing;- Accessed March 2. 2014 

http://v .. ,\-,, w .azdor.gov IB usinesslTral1sactionPri vilege T ax.asp>.. 

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Congress must take care to exercise this power judiciously, it is my view that an origin-sourcing 

rule is fully consistent with its precepts. A destination-sourcing rule, such as that embodied in 

the MFA, would entail such disruption and cost to interstate commerce that Congress would be 

justified in pre-empting such rules by passing a law establishing origin sourcing as the only 

acceptable means of tax collection on interstate remote sales. 

A perfect example of Congress exercising this power is the Internet Tax Freedom Act. Originally 

passed in 1998 and most recently renewed by unanimous votes in both the House and Senate 

in 2007, this legislation acts as a federal prohibition on any state or local taxation of Internet 

access or imposition of discriminatory Internet-only taxes, such as a levy on bandwidth. 

Congress recognized the danger inherent in states singling out the Internet for harsh tax 

treatment and moved to foreclose their legal authority to do so, lest such efforts stifle the 

flourishing of a technology that has since provided incalculable benefits to the economy and 

standards of living. 

A more recent example is the Wireless Tax Fairness Act, H.R. 2309 in this current Congress. This 

legislation has been sponsored by 219 Members, including many on this committee, and passed 

the House by a voice vote in 2011. It would establish a five-year moratorium on state 

imposition of discriminatory tax rates on wireless phone and data services. This too is a federal 

pre-emption of state law in service ofthe higher goal of preventing harm to interstate 

commerce, as few markets are more interstate in nature than wireless service. 

States' rights are important and all-too-often trampled by an overzealous federal government. 

They should indeed be sovereign entities free of unnecessary federal meddling. But the 

Constitution made clear that their rights, especially as it relates to taxation, end at the border 

and an origin-sourcing rule would underscore that protection. 

Conclusion 

S. 743, the Marketplace Fairness Act, is detrimental to the interests of taxpayers, businesses 

and sound tax policy. There are other ways, like uniform origin-based sourcing, to address this 

matter without trampling on vital pro-taxpayer checks and balances and without burdening 

interstate commerce by foisting unworkable schemes on remote sellers. Simply treating remote 

sales in the same way that we already treat brick-and-mortar sales would level the playing field 

in an honest way. 

While the policy points away from the MFA and in the direction of origin sourcing, it is worth 

mentioning the politics of the issue do much the same. Last year, the R Street Institute joined 

with the National Taxpayers Union to commission a poll testing public attitudes on Internet 

sales tax issues, where we found strong and surprisingly widespread 57 percent opposition to 

an MFA-like scheme. 12 

l~ R Street Institute and National Taxpayers Union, "Is Congress Listening? The Peril of Tgnoring Public Opinion on 

the Internet Sales Tax Issue," Accessed March 2, 2014. http://www.rstreet.org/wp-eontentiuploads/2013/09/IntcrnetSales-Tax-Ts-Congress-Listening.pdf 

15 
134 

Republicans were opposed by a 39-point margin, independents by a 22-point margin, and even 

Democrats by a four-point margin. Virtually every demographic, region, income level and vote 

behavior showed strong margins of dislike for the plan. And it wasn't just knee-jerk reaction to 

the "T" word; by better than a 3-to-1 margin, respondents correctly identified current law and 

by roughly 2-to-1 margins, they gravitated toward anti-MFA arguments when put head-to-head 

in a neutral manner against pro-MFA statements. 

No Congress should govern by poll alone, but this data proves that not only is a destinationsourcing scheme like the MFA bad policy, it is profoundly bad politics as well. That should send 

a strong message to this committee that America is engaged on this issue and that only 

something like an origin-sourcing rule to truly level the playing field can pass muster with them. 

Thank you for the opportunity to submit this testimony today and I welcome any questions 

from members. 

16 
135 

Mr. GOODLATTE. Thank you, Mr. Moylan. 

Mr. Cox, welcome back to the House. 

TESTIMONY OF THE HONORABLE CHRIS COX, COUNSEL, 

NETCHOICE, PARTNER, BINGHAM McCUTCHEN LLP 

Mr. COX. Thank you very much, Mr. Chairman, Ranking Member 

Conyers, Members of the Committee. I am here today as counsel 

to NetChoice, which is a coalition of leading e-commerce and online 

businesses. And as you know, in the past it has been my privilege 

to work with many Members of this Committee on important internet legislation, including the Internet Tax Freedom Act, which this 

Committee under both Republican and Democratic leadership has 

repeatedly voted to extend. 

When I first introduced the Internet Tax Freedom Act in the late 

1990’s, it was with concern that the very nature of the internet exposes it uniquely to multiple and discriminatory taxation. Sixteen 

years after its enactment, we now know that the Internet Tax 

Freedom Act has worked in preventing those kinds of discriminatory burdens. On behalf of NetChoice and all of our members, we 

hope that you soon send to the President legislation to permanently 

extend the Internet Tax Freedom Act. 

As you consider the much more difficult question of internet 

sales taxes, the basic principle of the Internet Tax Freedom Act 

should be your guide, this principle of non-discrimination, of not 

placing burdens on one form of commerce that does not exist on the 

other. And this Committee and your very excellent principles have 

listed that under the heading of tech neutrality. As explained by 

the Committee, ‘‘tech neutrality’’ means that the tax compliance 

burden on online sellers should be no more or no less than that on 

brick and mortar sellers. 

MFA rather obviously fails this test. Were it to become law, a 

brick and mortar business would have to comply with the tax laws 

and filing requirements of the State where it is located. But the online business right next door immediately would have to comply 

with those laws and the laws of 45 other States. That is the very 

definition of discriminatory burden. 

There is a better way. In your home State of Virginia, Mr. Chairman, many residents of D.C., of Delaware, and of Maryland shop 

at Pentagon City. And what happens when they go to a clothing 

store in Pentagon City? Does the store clerk ask the customer 

when she is buying a shirt, ‘‘What State are you from?’’ or ‘‘what 

county or what city are you from, so that I can charge the correct 

sales tax?’’ That is not what happens. We all know the answer. The 

store clerk charges the sales tax for Arlington, Virginia, independent of where the customer lives. That is the way it works all 

across America today in every State that has a sales tax. 

And that is how the Pentagon City store owner and how brick 

and mortar store owners everywhere across the country are themselves protected from having to comply with 45 State laws all at 

once. Yet this is the same protection that would immediately be denied to online sellers if MFA were to become the law. 

The way to level the playing field is to make sure that every 

business—brick and mortar or online—is required to do things the 

same way, to follow the same rules. And that is what we call home 
136 

rule. Under home rule, every business would continue to file 

monthly sales tax returns, continue to report taxes in the States 

where it is located. And it would continue to face sales tax audits 

in all of those States just as today. Congress can authorize this 

home rule arrangement by legislation approving a voluntary 

multistate compact. It is voluntary in support of the Committee’s 

principle of States’ rights. 

Joining the compact, however, would be advantageous for States 

because they would immediately begin to receive sales tax revenue 

that today they do not get at all. Sales taxes on purchases by catalog or by internet would now have to be paid to the purchaser State 

for all the States that are in the compact. And we call this feature 

revenue return. The home rule and revenue return approach guarantees not only relative ease of tax collection and filing, but a single source of audit of remote sales. 

So consider a small business. Once the State where it is located 

joins the compact, that State becomes the law’s home jurisdiction. 

The home jurisdiction is then the single auditor for all sales into 

other States. Now, consider a bigger business with multiple locations in several States. The State where it has the most employees 

would typically become its home jurisdiction. And once again, that 

home jurisdiction then becomes the single auditor for all sales into 

other States where the business has no physical presence. 

This overall approach of home rule and revenue return meets 

every one of the Committee’s 7 principles. It is a way to level the 

playing field without undue burden, complexity, expense, and the 

unconstitutionality of MFA. 

If I may, Mr. Chairman, may I close on a note of caution? You 

have called for alternatives to MFA, and NetChoice has been happy 

to comply. But if MFA were the only option, NetChoice would 

strongly prefer today’s system. From the standpoint of a small 

business, MFA is fundamentally unfair. It erects intolerable new 

compliance burdens on e-commerce. And so, we applaud your efforts to take care that things are not made worse in the name of 

making them better. 

I look forward to your questions. 

[The prepared statement of Mr. Cox follows:] 
137 

Statement of Christopher CO)( 

on behalf of 

NetChoice 

T'i!stimony before the 

United States House of Representatives Committee on the Judiciary 

Hearing on: 

Exploring Alternatfve Solutions on the Internet Sales Tax Issue 

March 12, 2014 
138 

Chairman Goodlatte, Ranking Member Conyers, and members of the Committee: 

Thank you for holding a hearing on Exploring Alternative Solutions on the Internet Sales 

Tax Issue. As you know, I have worked with many of you on this Committee on Internet 

legislation over the last 20 years, and in particular the Internet Tax Freedom Act, which I coauthored with Sen. Ron Wyden in 1998. 

I serve as tax policy advisor to NetChoice, a coalition of leading e-commerce and online 

companies promoting the value, convenience, and choice of Internet business models. 

NetChoice has been deeply engaged on Internet tax issues for 14 years, including 

testimony before this committee and policy debates in the Wall Street Journal, on CNBC, CSPAN, 

CNN, and PBS. Since 2004, we have participated in meetings of the Streamlined Sales Tax 

Project (SSTP), a long-term effort to simplify state sales tax systems in response to the Quill 

ruling of the U.S. Supreme Court. 

NetChoice is a founding member of TruST, the coalition for True Simplification of 

Taxation (www.TrueSimplification.org), a group whose association members also include the 

American Catalog Mailers Association, the Direct Marketing Association, and the Electronic 

Retailing Association. Coalition members submitted written statements for today's hearing, and 

we respectfully ask that their statements be included as part of the hearing record. 

The yardstick for measuring the strength or weakness of various approaches to taxing 

remote transactions on the Internet must be the Basic Principles on Remote Sales Taxes put 

forth by this Committee. We fully support these common-sense Principles, which are necessary 

to guarantee fundamental fairness to all marketplace participants. This hearing is focused on 

exploring alternatives to the Senate-passed Marketplace Fairness Act (MFA), and it should be 

clearly stated before moving to discussion of those alternatives that the MFA itself fails to satisfy 

any of the Principles. Achieving everyone of the Principles is a challenge even when one starts 

from a blank slate. Attempting to contort and stretch the pre-conceived MFA approach to fit 

the Principles is an undertaking worthy of Procrustes. But is ultimately impossible. 

If one begins with the Principles as the blueprint, the task - while still difficultbecomes more rational. The Principles themselves suggest the way forward. Building on the 

fundamental concepts in the Principles, we have conceptualized an alternative to the 

fundamentally flawed MFA that enables states to collect sales tax on remote transactions. This 

approach, best described as Home Rule & Revenue Return, has three main characteristics: 
139 

1. Fairness. Unlike the MFA, our alternative imposes the same tax compliance burdens 

on all retailers, whether brick-and-mortar, online, or catalog. 

2. Simplicity. In contrast to the complexity and costs created by MFA that requires 

expensive and potentially flawed software integration, our alternative is workable for 

the smallest of businesses. Brick-and-mortar and e-businesses alike, no matter their 

size, would use the tax rates and rules of their home state-just like they do today. 

3. States' Rights. Serious constitutional problems arise when states attempt to impose 

tax collection and compliance burdens on out-of-state businesses. This is the central 

design flaw of the MFA. Our proposed alternative is built on the constitutional principle 

that each state is sovereign over the regulation and taxation of businesses in that state. 

Each state will have the choice whether to join a multi-state compact, pursuant to which 

taxes on out-of-state sales would be collected. 

The Judiciary Committee has a unique role, given your responsibilities to protect interstate 

commerce, and to protect states' rights to make their own tax policies within a federal system. 

Successfully achieving both of these objectives is central to resolving the debate over Internet 

sales tax collection. To understand how these potentially conflicting objectives can be 

reconciled begins with the answers to three key questions: 

Why don't online and catalog retailers poy sales tax to every state? 

Haven't states simplified their sales tax systems through the SSTP initiative? 

Isn't this debate fundamentally about 'Jairness"? 

Why don't online and catalog retailers pay sales tax to every state? 

The editors of the Wall Street Journal asked NetChoice to provide the opposing side in a 

debate over internet sales tax. Our published article began with this question and answer: 

Should online retailers have to collect sales tax? 

Yes, and they already do. Just like all retailers, online stores must collect sales 

tax for every state where they have a physical presence. That's why 

Amazon.com adds sales tax to orders from customers in the 5 states where it has 

facilities. But Amazon and online retailers aren't required to collect tax for other 

states, leaving those customers to pay a "use tax" that states rarely enforce 

against individual taxpayers. This framework frustrates state tax collectors and 

businesses that compete with online retailers. But when we learn how this 

2 
140 

phy>ic.1 ff'''''nc~ ~quir~m~nt evol~~ d, it becomeoclear why we . hould relain 

\h I. "~ndard for impo, ing new lax colleu lon b",d~ns on online relailers.1 

A, member. of thi, Commlnee know, todav', physical pre""nce .tandard i. based on 

Artlde I of the ConstiWtlon. It I. designed lor the ~ery purpose 01 preventing Indwldual states 

from impeding commerce amonilihe . tale,. The Commerce Clau,e was necessary 10 restrain 

stUes tha t had been Imposlne taxes, dutle •. and other trad e barriers on each other in way. that 

fallored In·stale businesses and unlairlv burdened oUI --of-state bu,lnuse._ It isJ ust as 

necesSilry now • • It was wh en wrinen. 

Ouring lhe 1960., ""me .tale ta" co.tlec tors a llempted 10 forte out·ol·state tala log 

retailers to collect In-state rHlles taxes. The U.s. Supreme Courl, relVing on Ihe Commerce 

Oau"", held th ill .lates canoollmpose taxes on out--o!-state bu.incs""s ' who"" on~ connection 

with customers In Ihe 5tate is bV Common ca rrier Or the United 5tale. ma~ "~ 

In 1992. the Su preme Court revi!:lted the issue of remote 

lalallon, \hi, tIme ,n the ca,e of an offic" produc" cat alog ""lIer, 

Quil1.1 In Quill, the 5upreme Court wa'!l~ movl"d by the 5Iate's 

a r,ument thaI compute r technoloi'/ c,e:lIed th e necc.,ary 

slmpHfieation. While acknowledging Ihe lowe, cou rt's linding 

that advance, in computer technology h.,d ea""d the burdens 01 

t~x collection, the Coon still ou~d the !!Quir ~m l!nt of t~x 

collection unduly burden<orne.' Ob,...,'inll the ~td!work of 

.-.Ie< and rutl!t for sellera l thousand rHll/!. tax jurIsdictions. th e 

Court again held that requi' lltR out·of·sl<tte companies to pa~ Silles u~es would place an 

unrea. onable burden on Imcr$lale Commerce. ' 

'Slelll' DeI81,,",,0, 5hauld5tat~ qul'" Onl'M raUe" To CrJlh;" SNI!$1ax~, Wall S<re~' Joumal1N"" 

14,1011). 

Nat'lklkl!d~b$; Inc. v. Dl!pt. "'RI'\!. o/W., ]8fi U. S. 7~], 7SB (1961). 

'QuU! Co'P. ' . NrJlth o..~afO, S04 U.s. 29811992 ). 

' W. at 113 . 

• Mo",,,,,~r, Quill w", nol rnnrer""dwilh "f"lrneu" 10 Indi.;du.1 ta. ""Oe,II'l.It " ales, a, <Ome halle 

'i~. bill w~h tile burd .. n on Inl .... t.l .. <0"''''''1t~ thaI re.ults I,,,,,, multiple,. , collection and 

compliance bur<len •. (T]~c Comme'ce O.u"" and ~ n""", ,,,,,,,,i,,,menl." .he (ourt ... Id. '.re inle><med 

3 
141 

Quill has served to protect local businesses that maintain websites from overbearing tax 

compliance burdens imposed by scores of foreign states where the business has no physical 

presence. At the same time, it requires every business, large or small, to collect and report sales 

tax in the same way in every state where the business does have a physical presence. 

Understanding why the Quill standard exists - to protect local businesses engaged in 

out-of-state commerce from the burdens of multiple and discriminatory taxation - is essential 

to the consideration of any alternative approach. 

Haven't states simplified their sales tax systems through their SSTP initiative? 

In 1998 when Congress enacted, and President Bill Clinton signed, the Internet Tax 

Freedom Act, we deliberately chose not to exercise the legislative power under the so-called 

"dormant Commerce Clause" to authorize the states to impose their sales tax collection and 

compliance burdens on out-of-state retailers. Instead, the law established a Commission to 

study those and related issues. The transmittal of the final report of the Advisory Commission 

on Electronic Commerce in April 2000 recommended to Congress as follows: 

"Place the burden on states to simplify their own labyrinthine telecommunications tax 

systems as well as sales and use tax systems to ease burdens on interstate commerce. 

Radical simplification will be necessary in the New Economy if small and medium-sized 

businesses are to succeed."o 

Thus began the effort that became the Streamlined Sales Tax Project (SSTP). Several 

individuals who were members of the Advisory Commission supported the effort. Its purpose 

was to create a sufficiently simple nationwide system of sales and use tax rules, definitions, 

audit authorities, filing requirements, and compliance regimes that could persuade Congress to 

exercise its power under the dormant Commerce Clause. The idea was that a simple one-sizefits-all system of uniform sales tax rules would remove the burden of what the Supreme Court 

called "a virtual welter of complicated obligations,,,7 inspiring Congress to authorize each state 

to force its tax compliance obligations on sellers in every other state. 

not so much by concerns about fairness for the individual [state] as by structural concerns about the 

effects of state regulation on the national economy." 

6 Letterto Congress from Advisory Commission on Electronic Commerce (Apr. 2000) (emphasis added). 

7 See Quill, supra, n.3. 

4 
142 

tne •. Bullhus far, Ihe SSTP has failed to come e~e" close 10 lis ~uled obieclive. Despite a 

decade 01 t",lng, Ihe actual slmplillallonsathlcyc<! by Ihe SSTP a.e few ~ and nOI nearlv 

sulfidenllo justl,... Congre .. ab.ndonlns Its o~ II) prolectlng il)l .... 131 .. comm",'''. 

Unfortunately, forthe SSTP sfmpiif.utlorl has becomcjuSI -a Ilogan - nOI a siandard. 

The SSTP ori8!nally soughl one "u •• ale pe!" Unique Tax Jurisdictions 

Slat ... whi<h would rep.e,en t lru .. ,implirt<:ation. Too 

man~ stales were unwilling 10 do Ihis,.so Ihe SSTP o 0 96 ~ 

';mplyabandoned Ih .. eflort. The SSTO'I. "s.mpllfication" now arcommodal,," OYN 9,600 loul 

jurisdictions,' each wl1h Its own la~ rate!: and nles la~ holldaV'!. That Is actua lly a substanllal 

Increose Irom the 7.800 jurisdktiOfls that eKtsted al tile time of Quill. And Ihe number IS s(ill 

g.owing, making 111 .. u.s. 3 true ollllie •. The f uropt'an Union has onlV 27 jur;'dicliOfl' for ils 

Value Added Ta. (VA T). India lets each slale have but a .insle taK rate. We are the onlV reuntfY 

In Ihe world in which !.ales taxes on national commerce .re allowed to prolife.a te at the local 

government leve!. 

The SSTP has abandoned too many of its original limplifocatian requi.ements. For 

e_ample. the SSTP no longer ell~l re s th'" .etaile •• be compensated by fo.el8n Slates lOt the 

[an of out·ol·state compliance. II has all bul elimin.,ed the sm.lI,elle. nc"ption. In an ellort 

til ~tlracl Ilatei with origin slIurcing, tile SS"TP abandlln~d a iingle ~Ilur.;:ing nJl .. ilnd nllW allows 

for multiple soyrdng schemes. To entlc.! Mas~chusens lojoin SSTP, the Go~emlnS BGilld 

all owed thr .. sholds lor certain dothing It"ms, even though thresholds we.e one ol th" Hlreme 

complu,"e~ it> founde.s plOO8"d to eliminate. 

I't'rllaJl1' the n'O<l glaring "gn 01 all~.e is Ihat despit .. th .. SSTP's many conr;essions ta 

.. ach stale'. deif.ed ptions from th e rul .. of simplicity, less than half of cllglbl .. sla te. have 

joined. Todav, the majority 01 states".e not members of the Streamlined Sales and Use Ta~ 

Agreement jSSUTA). (The.e " .e only 22 full member states In the SSUTA) . 

• · V<trl .... p~" Rein . ,. (Ma. 21 . 20121. av"iL",,' ' 

hllp:/ /WwW wn. I .... com/~.ffIOm/PO /.l012/ .... r.e~·~drMH.Ie.Mlns pd. (",0,1 Ihe end of 2011, 

the.~ w~re ....... .9,600 Idoing Ju".dlction. au<>''' ~ u.s. with an aver".e 01 6S I n"w and , honged , •• 

nd~ .... !u '~'Pf" yut.-) 

5 
143 

Isn't this debate fundamentally about '1airness"? 

Yes. 

The seven elements in this Committee's Basic Principles on Remote Sales Taxes all 

ultimately relate to fairness to the many stakeholders in this debate. The Committee's cardinal 

Principle, the first of the seven, is "Tax Relief" - in recognition of the fact that the interests of 

individual citizens are paramount to those of state governments and businesses. Under this 

heading the Committee has also warned against placing discriminatory tax compliance burdens 

on Internet retailers that brick-and-mortar businesses do not bear in the offline world. 

The second Principle, "Tech Neutrality," is about horizontal equity. Brick-and-mortar, ecommerce, and "brick-and-click" businesses should all be on equal footing. Under this heading, 

the Committee explicitly states that tax compliance burdens should not be greater for any 

category of business. 

The third Principle, "No Regulation Without Representation," recognizes that fairness 

dictates that those who would bear the tax, regulatory, and compliance burdens of a state 

should have the rights every citizen deserves to protest against unfairness in the imposition of 

those burdens. Citizens of a state have such recourse against their government, but out-of-state 

businesses normally do not. 

The fourth Principle, ltSimplicity,J/ is aimed at ensuring fairness in state governments' 

treatment of small business. The Committee has recognized that when governments place 

onerous compliance requirements on businesses, the large ones can more easily comply than 

the small ones, which gives big business an unfair advantage. In this way the complexity of MFA 

discriminates against small business. 

The fifth Principle is also about fairness to individual taxpayers. "Tax Competition," 

which exists when state governments are required to bear the costs as well as reap the benefits 

of high-tax policies, helps consumers. 

The penultimate Principal, "States' Rights," is about fairness to each state government. 

In enunciating this Principle, the Committee recognized that no state can exercise its 

sovereignty beyond its borders without intruding on the sovereign prerogatives of another 

state. The Committee explicitly noted that were the federal government to mandate that states 

impose sales tax compliance burdens on out-of-state sellers, this principle of fairness to every 

state would be violated. 

6 
144 

The final Principle, like all the others, is also focused on fairness. "Privacy Rights" must 

be at the forefront of any discussion of remote sales tax collection, because robbing consumers 

of their privacy in the name of tax collection is fundamentally unfair. Proposals to enforce a 

state's sales tax regime that entail keeping computer records of what each of us buys fail to 

satisfy this critical principle. 

The existing system of sales tax collection fairly meets everyone of the Principles -- with 

one exception. Similarly situated businesses do not collect taxes from out-of-state purchasers 

in the same way. But already today, all retailers -- large and small, brick-and-mortar, and ecommerce alike -- do collect sales tax in every state where that business is located. The current 

"physical presence" standard protects all businesses, large and small, from the unreasonable 

compliance burdens they would face if forced to collect for thousands of state and local tax 

jurisdictions within the United States. If this protective standard is to be changed in order to 

ensure that all businesses collect taxes from out-of-state purchasers, it must be accomplished in 

such a way that maintains this protection. 

Even now, not only Internet retailers but brick-and-mortar retailers are protected by the 

physical presence standard. This standard guarantees that both brick-and-mortar and Internet 

businesses do not have to assume the burden of complying with the tax rules of all the states of 

residence of everyone of their customers. 

Imagine if a retail store on Main Street, which today collects sales tax for just the one 

jurisdiction where it is located, were required to collect and file tax according to the rules of the 

states of everyone of its customers. Here's how NetChoice put it when the editors of USA 

Today invited us to give our view on MFA: 

Imagine if the cashiers handling your Black Friday checkouts asked to see 

your driver's license so they could look up sales tax rates and rules for the 

town where you live, then file returns and face tax audits for every state 

their customers came from. That sounds crazy, but it's exactly what the latest 

Internet sales tax bill would require for any business that sells through a 

catalog or website9 

Fundamental fairness is not just a good idea; it is a bedrock Constitutional principle. It is 

the basic test of due process. For this reason, proposals for states to exert their regulatory and 

9 Steve DelBianco, Internet sales tax would level start-ups: Opposing view, USA Today (Nov 28,2013). 

7 
145 

tax powers over out-of-state small businesses are not just bad ideas, but potentially 

unconstitutional. 

The very same Supreme Court decision that confirmed the current "physical presence" 

standard under the Commerce Clause, Quill Corp. v. North Dakota, also held that a state's ability 

to impose tax collection burdens on an out-of-state business must comply with the Due Process 

Clause. That is because, the Court said, the Commerce Clause and the Due Process Clause 

Itpose distinct limits on the taxing powers of the States," Moreover, Itthe two constitutional 

requirements differ fundamentally," because they "reflect different constitutional concerns." 

While the Commerce Clause test is a bright line - does the business have a physical 

presence in the state? - the Due Process test is one of fundamental fairness. Are the business's 

contacts with a foreign state deep enough and substantial enough so that it would be fair to 

expect the owner of the business to have to personally appear in court in the foreign state? 

Quill makes it clear that if a state can require an out-of-state seller to collect its taxes and 

comply with its tax laws, it can also make that person appear in its courts to defend against 

lawsuits in that state. The Due Process test first set out in International Shoe Co. v. 

Washington'O is the same for taxation, regu lation, and personal jurisdiction. 

Most would agree it is fundamentally unfair to force a local retailer, with only one place 

of business in a single state, to be subject to tax compliance burdens, including the requirement 

to appear in person to defend a lawsuit, in each of the 46 states that have sales taxes. If the 

same local retailer with only one place of business has a website, does this change the analysis? 

Any small business that has a website is perforce exposed to the entire world. If the 

small business, let us say a bookseller, receives an order from a customer in North Dakota -- or 

even from a customer in Japan -- should fulfilling the order automatically subject it to direct 

regulation and taxation by that foreign government? Should this automatically make it subject 

to the regulation, taxation, and judicial reach of every u.s. jurisdiction? 

It is virtually impossible for the bookseller in Vermont to have a website that is 

accessible everywhere except, say, North Dakota. Should the owner of a that small business in 

Vermont be required to refuse all Web sales from North Dakota, or else automatically be 

required to travel to North Dakota when commanded by that state to do so? That is the due 

10 Int'l Shoe Co. v. Washington, 326 U.s. 310 (1945). 

8 
146 

process question posed by the MFA and similar schemes. The Supreme Court in Quill effectively 

has answered it. To subject itself to the tax and regulatory jurisdiction of another state, a 

business must engage in "continuous and widespread solicitation of business" there. Only then 

will a business have "fair warning" that its activities will subject it "to the jurisdiction of a foreign 

sovereign.,,11 

Mere maintenance of a website hardly amounts to "continuous and widespread 

solicitation." To argue that it does would require one to deem it "fair" for every business with a 

website to be regulated by every jurisdiction on Earth with access to the worldwide web. That is 

why, as former Solicitor General Paul Clement has written, "due process problems are 

particularly likely with respect to taxation of online sales." As he explains, "when a seller offers 

an item for sale on a website, customers from aliSO states may purchase that item -- whether 

or not the retailer takes conscious steps to target consumers from aliSO states." In the case of 

the local business that maintains a website, he wrote, "a court would likely find a due process 

violation" if a distant state sought to tax isolated transactions there. 12 

Today's approach to the taxation of Internet sales is consistent with due process. All 

retailers collect sales tax for every state where they choose to have a physical presence. 

Because a business can choose whether to open a store or send sales representatives to another 

state, it can be fairly said that the business has elected to subject itself to that state's laws, 

including those governing sales taxes. In return, the business can take advantage of stateprovided benefits including roads and infrastructure, police and fire protection, utilities, etc.. 

Today, large national retail chains and big-box stores have retail outlets or distribution 

centers in almost every state, along with websites that let online customers arrange pickups and 

returns at their local stores. These businesses use many local public services wherever they 

have stores, and thereby reap benefits that out-of-state retailers do not. In return, these large, 

nationally active businesses are required to collect sales tax in the states where they are 

11 Quin supra, at 308 note 3. 

12 Paul D. Clement and Erin E Murphy, Constitutional Limits on the Ability of States to Tax Residents of 

Other States, Bancroft PLLC (Nov. 13, 2012). 

9 
147 

located. The out-of-state online retailers do not use local public services, and they do not have 

to collect sales taxes because they have no physical presence. This is fundamentally fair." 

Today, Amazon is adding distribution centers to enable faster delivery to customers 

around the country, which will require Amazon to collect sales tax for two-thirds of all 

Americans by 2016. 14 Like the big-box stores, Amazon would cut its tax compliance costs if 

states adopted even tiny steps toward simplification. More important, Amazon wins if MFA 

forces more small businesses to move their online sales onto Amazon's platform, where Amazon 

charges a 3% fee to collect sales tax, Amazon keeps up to 15% of every sales dollar, and Amazon 

sees 100% of the data on customer searches and purchases. 

Other Constitutional Concerns with MFA and SSTP 

In addition to the due process concerns raised by the MFA, the Senate-passed bill 

suffers from two other significant constitutional infirmities. First, the SSUTA is not an 

approvable interstate compact under the Compact Clause.'5 Second, the MFA purport5 to 

delegate significant federal power to the Governing Board of the SSTP, in violation of the 

Appoi ntm ents Clau5e. 16 

The Compact Clau5e and its constitutional complement, the State Treaty Clause," 

together ensure that a minority of states cannot band together to make national policy that 

directly affects all states. Interstate compacts are permissible where they treat discrete 

regional issues, such as boundary disputes, that directly affect the compacting states but not all 

others; but such compacts require congressional approval. On the other hand, purported state 

alliances that are national in scope and treat ongoing issues cannot be the subject of a 

Bin Quill, the Supreme Court expressly considered and rejected the argument that it is unfair to give outof-state sellers "a significant competitive advantage over local retailers" by permitting them to be exempt 

from foreign state sales tax collection burdens. QuiIJ~ supra, at 304 n. 2. The Court obviously believed it of 

greatest importance to protect both in-state and out-of-state businesses equally from unfair burdens 

imposed by foreign jurisdictions. 

14 State5 where Amazon is now (or 5cheduled) to collect 5ale5 tax: AZ, CA, CT, FL (2016), GA, IN, KS, KY, 

MA, ND, NJ, NV, NY, PA, SC (2016), TN, TX, VA, WA, WI, WV 

15 U.S. CONST. art. I, §10, cl. 3. 

1G U.S. CONST. art. II, §2. 

17 U.S. CONST. art. I, §10, cI. 1 prohibits states from entering into a "Treaty, Alliance, or Confederation"-

even with congressional approval. 

10 
148 

"compact," but rather would constitute an impermissible "treaty, alliance, or confederation." 

The Constitution plainly forbids such arrangements among states. 18 In contrast to interstate 

compacts, which may be given validity if Congress approves, the Constitution pointedly 

withholds from Congress the authority to approve such forbidden multistate alliances. 

MFA by its terms purports to delegate to the SSTP Governing Board the ongoing 

authority to exercise federal power throughout the United States. In particular, MFA effectively 

gives the Governing Board carte blanche to prescribe and to change tax rules for member states 

on an ongoing basis. Moreover, under MFA, a state's membership in the SSTP gives that state 

the power to impose tax collection burdens and audit sellers in every other state. This power 

would extend even to states that do not join the SSTP. Even if this authority were exercised only 

in member states, its impact would clearly be national in scope, and its exercise would be 

continuous. 

This indefinite and ongoing power to interpret and redefine the SSUTA, which MFA 

delegates to the SSTP's Governing Board, is the reason the arrangement also violates the 

Appointments Clause.'9 Under the Appointments Clause, only those officers of the United 

States properly appointed within the executive or judicial branches can "exercise[e] significant 

authority pursuant to the laws of the United States.,,20 But under MFA, the SSTP Governing 

Board, consisting of officials appointed not by the President but by member states, would wield 

extensive influence throughout the nation. Specifically, MFA would delegate to these 

individuals (who by definition are not duly appointed "officers of the United States") the 

uniquely federal power to decide when and under what circumstances SSTP member states 

would be authorized to engage in activity otherwise in violation of the Commerce Clause. The 

Governing Board could decide which states may tax remote sales, promulgate rules governing 

inter-state sales and use taxation, and interpret what is and is not subject tax. Such an 

18 As noted in Paul Clement, Patricia Maher, and Zachary Tripp, Constitutional Difficulties of Proposed 

Streamlined Sales Tax Legislation (King & Spaulding, Oct. 2009), p. 1 (accessible 

at http://netchoice org/c:ement2l "The Framers understood the Compact Clause to playa limited role 

relating to the resolution of regional disputes, not to be a mechanism by which a minority of states could 

make and execute national policy." 

19 U.s. CONST. art. II, §2, d. 2. 

20 Buckley v. Valeo, 424 U.S. 1, 126 (1976). 

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149 

arrangement would amount to Congress handing over to the Governing Board "the keys to the 

Commerce Clause itself.,,21 

Principles to Guide Congressional Action 

A first principle in drafting legislation, just as in medicine, is "do no harm." Today's 

system of sales taxation is fundamentally fair to interstate commerce and to all stakeholders, 

because brick-and-mortar, brick-and-click, and e-commerce businesses alike are protected from 

unfair out-of-state tax compliance burdens. When a customer walks into a hardware store in 

Tucson, the clerk does not ask what state and county the customer lives in, so the clerk may 

compute sales tax accordingly. Instead, the Tucson clerk always charges the local tax rate, no 

matter where the customer lives. In this way, the brick-and-mortar business is protected from 

having to comply with the tax laws and filing requirements of 46 other states. This is the same 

protection that an e-commerce business enjoys. 

It is important to note that this is the exception, not the rule. Even without any change 

in federal law, most sales taxes on e-commerce are already being collected. As of 2013,17 of 

the top 20 e-retailers were already collecting sales taxes in at least 38 of the 46 sales tax states. 

It has been publicly reported that within two years, Amazon will have physical presence in states 

that are home to two-thirds of all Americans. With no change in federal law, therefore, the lion's 

share of sales tax from Internet retail is already being collected. 

It is also important to note that the competitive threat to brick-and-mortar retail from ecommerce comes largely from factors other than sales taxes. There is abundant evidence for 

why people shop online and through catalogs: they are looking for convenience, selection, and 

lower prices. Indeed, there is no persuasive data showing that avoidance of sales tax is a 

principal motivation of online and catalog shoppers. To the contrary, all the evidence suggests 

that shoppers seek a good value by comparing prices before tax is added at checkout. 

Moreover, shipping and handling charges for remote sales frequently exceed any sales tax 

avoided. Finally, Amazon posted impressive year-over-year sales gains in 2013 in states where it 

added sales tax collection for its customers. 

21 Clement, Maher, and Tripp, supra, at 15. 

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150 

Still, there is a deeply held belief that current law is unfair to brick-and-mortar stores. If 

Congress is committed to overrule the Supreme Court's decision in Quill in pursuit of fairness 

and tax revenue, it must do so with great caution so as to maintain the current protections 

against out-of-state regulation and taxation that are enjoyed broadly by all retailers. My 

testimony on how this Committee might find a better way than MFA should be understood in 

this vein. 

Once resolved to "first, do no harm," this Committee can do no better than to follow the 

Basic Principles on Remote Sales Taxes that Chairman Goodlatte has announced. NetChoice 

supports these Principles entirely, and appreciates the specific explanations and contextual 

meanings provided for such essential terms as fairness, simplicity, and states' rights. 

As a first step, it is useful to compare the Principles to the MFA as it passed the Senate 

in March 2013. As will be seen in the table below, the MFA fails across the board to achieve the 

objectives of the Principles. 

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151 

Judiciary Committee Principles 

1. Tax Relief - Using the Internet should not 

create new or discriminatory taxes not faced 

in the offline world. No fresh precedent for 

other areas of interstate taxation by States. 

2. Tech Neutrality - The tax compliance burden on 

online sellers should not be less, but neither 

should it be greater than for similarly situated 

offline businesses. 

Marketplace Fairness Act of 2013 

Fails. Only businesses selling online or via 

catalog would face new requirements to collect taxes 

based on where the purchaser lives, as well as 

compliance and audit demands from 46 states - each 

with its own rates and rules. 

MFA MFA forces internet and catalog sellers to 

file in and comply with the differing rules of 46 states 

- plus up to SSG Indian tribes in the Senate-passed 

version. Brick-and-mortar businesses would comply 

only with the rules of the states where they are 

located. 

3. No Regulation Without Representation - Those MFA There is no recourse for Internet sellers 

who would bear state taxation, regulation and 

compliance burdens should have direct recourse 

to protest unfair, unwise or discriminatory rates 

and enforcement. 

4. Simplicity- So simple and compliance so 

inexpensive and reliable as to render a small 

business exemption unnecessary. 

5. Tax Competition - Governments should be 

encouraged to compete to keep tax rates low and 

American businesses should not be disadvantaged 

vis-a-vis foreign competitors. 

6. States' Rights - States should be sovereign 

within their physical boundaries. Congress should 

not mandate that States impose any sales tax 

compliance burdens. 

7. Privacy Rights - Sensitive customer data must 

be protected. 

when out-of-state tax authorities make unreasonable 

demands for taxes, paperwork, and audits. Internet 

sellers must travel to foreign states and face foreign 

courts. 

MFA States were not required to have 

common rules and definitions. Lacking true 

simplification, and offering no help with software 

integration, MFA purports to exempt small 

businesses but fails even to do that. 

Mr;a States were not required to have 

common rules and definitions. Lacking true 

simplification, and offering no help with software 

integration, MFA purports to exempt small 

businesses but fails even to do that. 

Mft.. Falls. MFA gives new tax and audit powers to 

every state, allowing them to reach across their 

borders. This threatens the sovereignty of every 

other state. Other states would not be able to opt 

out of MFA; rather Congress would mandate their 

submission to other states' business activity taxes 

and regulations. 

MFA has no privacy protections 

whatsoever. Worse, it incentivizes out-of-state tax 

collectors to demand customer information from 

retailers. 

The most significant reason that MFA fails all seven of the Principles is that it would 

force catalog and Internet sellers to incur significant new tax compliance costs that are not 

borne by brick-and-mortar retailers. Instead of leveling the playing field, MFA would heavily 

discriminate against e-commerce. Under MFA, brick-and-mortar stores would not have to 

14 
152 

comply with out-of-state tax rules where they have no physical presence, but e-commerce 

stores would. Moreover, because these costs are disproportionately expensive for small 

businesses, the small e-commerce firms would be hardest hit. 

The SSTP's own Cost of Collection" study found that the smallest businesses spend 17 

cents for every tax dollar they collect for states. That is vastly more than their large-scale 

competitors. Even if the "free" tax software were to work as advertised (and as explained later, 

it will not), that would help eliminate only two cents of the extra costs. So a small business with 

annual revenues of $1 million would still incur a new cost burden equal to 15 cents on every 

dollar it collects, for tasks such as: 

Computer consultants to integrate new tax software into their home-grown or 

customized systems for point-of-sale, web shopping cart, fulfillment, and accounting 

Training customer support and back-office staff 

Answering customer questions about entity and use exemptions and sales tax holidays 

Responding to audit demands from 46 states - plus up to 550 Indian Tribes, per S.743 

Accountants and IT consultants to help with all of the above 

These collection burdens will impose impossibly high costs on small catalog and online 

businesses. Ask any small business - a brick-and-mortar store on Main Street, or an online 

store - and you'll hear it's hard enough to collect sales tax for one state. It would be a 

nightmare for a small business to have to comply with the rules of all 46 states, each with sales 

tax rates, regulations, and unique filing burdens of its own. 

The most significant of these costs is the expense of integrating tax rate lookup software 

into the business's in-house information systems. The cost is high not only because the 

software integration requires specialized skills, but also because it must be done at multiple 

integration points. Last year, the True Simplification of Taxation (TruST) coalition commissioned 

a study to precisely measure both the upfront and ongoing software integration costs. The 

study examined both catalog and online retailers in the mid-market bracket ($5 - $50 million in 

annual sales).23 The study found that such mid-market online and catalog retailers would have 

11 Available at http://www .netchoice.org/wp-content/uploads/cost-of-collection-study-sstp. pdf. 

23 Larry Kavanagh and AI Bessin, The Real-World Challenges in ColJecting Multi-State Sales Tax, September 

2013. 

15 
153 

to .pend $80,000 to $290,000 in M'lIlp all1d Imeg.a tion cost, in o.de. to u ... Ih ",·call...! "f.ee" 

iIlftwa.e proml ... d by advocales of Ihe MFA. 

Beyond the ave.age $185,000 ~ti31 cost, every year the.e relailen would also ha~e to 

.pend between $57,500 and $2&0,000 011 maintenance, IIpdates, .IIdit'. and .ervice fe es 

cha'ged by roftwa .e provide ... Th~e findings explode Ihe m\'lh of plug·and·play Inl('g.allon; 

Most mid-m<lr~el relallers have modified third party order management software 

10 fil Ihei. businn, proce .... ' or h.'. e de~eloped Ihel. oWn softwa.e. Th ..... uSe 

the ... order-management systems for ull cenler order enlry, cuSlome' service, 

'eturnsand .efund processing, InwmlOry management and more. In many cascs, 

Ihe ... systems al.o inleg"'l" 10 .ep,,,ate acrountlng .yslem •. In order to 

Inleg ... te with a CSP [CenifiM Saft",a.e Provide'l, the ,etaUermU<I ma~e 

3. clllt&lu. al modifh:alion. 10 map to th(' codinS syst('m of Ihe CSP, e.tabllsh .eallime communication, jnd Cleale pr,otocols to handle transactions when Ihe .ealllme "'''''ce fails to return. valid H,ply_ 

For. visual explan~lion of Ihe iIlftwa,e Inleg ration challenge., see th e diagram below: 

Integrating Online & Catalog Retailer Systems 

with Certified Solution Providers(CSP) 

R"' .... SlOAP 0It1lffl CilU,1lOfrI OROut FUlflUMlHT "",,-0_ 

""'"' ,="' SYSll"MS' 

""'~ -- _. -- -- --._-

Ot><EfI wn5'IU - -, --- --- M.o. .. o.o_" --- --- -- I --- -- II -_. -- -- P"""'O'-.... - _ 

I r ... - --- ---.. - ... _-- ..... "'- -- ._- -- --

MfA's carve-oUI fo. sma!! bus;ne'ssdoes not besin to addres. Ih l. problem. fhe 

c~emp!lon of busincnes with yp to $1 million In annUllI remote sal~ stili leaves many ¥cry 

.mall firms unprotl!Cted from Ihe outsllCcd new C"'its .nd burden, Iha\ MFA would impo .... A 

company with $1 million In sales oYl!. a l.2·monlh period l~ typlull~ lust a one Or two pefSOll 

" 
154 

business. As NetChoice has explained in previous testimony, an exemption of at least $15 

million in annual sales would be needed to achieve the intended purpose of protecting small 

businesses whose scale would not permit them to absorb MFA's exorbitant costS.'4 

A recent study claiming that a $1 million small business exemption would protect all but 

about 1,000 online businesses from MFA is grossly inaccurate. The study commissioned by the 

U.S. Small Business Administration (SBA)," inexplicably chose to rely upon the same University 

of Tennessee professors who admitted their earlier estimate of uncollected sales tax, overstated 

by 70%.'6 In the SBA November 2013 report, the professors advance the demonstrably false 

assertion that MFA would affect only 974 online sellers. 

There are several reasons this estimate should not be relied upon when considering 

legislation. First, the authors heavily rely on calculations from a 2008 study that found that 

there were in fact 28,628 online sellers with sales over $1 million" -- significantly more than the 

974 found by the SBA study. Second, the SBA study's authors based their study on the patently 

false assumption that anyone who ever sold any item on eBay is an online business." This 

became the basis for their claim that "99% of online businesses are less than $1 million." It is 

preposterous to include an individual who sells a used bicycle on eBay, Craigslist, or a 

newspaper classified ad web page within the definition of "online businesses." Third, the study 

relied on the Internet Retailer Top 1000 to identify the universe of online sellers with over $1 

million in sales, even though that publication explains that its listing of websites in the top 1,000 

is based solely on web traffic." This definition does not even purport to be a fair proxy for 

online sellers with more than $1 million in revenue. A few examples will quickly illustrate: 

24 NetChoice Testimony for House Judiciary hearing, H.R. 3179, the "Marketplace Equity Act of 2011" (July 

7, 2012) 

25 Bruce & Fox, An Analysis of Internet Sales Taxation and the SmaJ/ Seller Exemption, Nov. 2013 

26 See~ Donald Bruce, William F. Fox, & LeAnn Luna, State and Local Government Sales Tax Revenue Losses 

from Electronic Commerce, University of Tennessee Working Paper (Apr. 13, 2009), Donald Bruce & 

William F. Fox, State and Local Sales Tax Revenue Losses/rom E-Commerce: Updated Estimates, University 

ofTennessee (Sept. 2001) 

27 Bailey, Gao, Jank, lin, licas, Viswanathan, The Log Tail is Longer than You Think, May 2008 

lB Fox at 28. 

29 Internet Retailer, Top SOO, 2012 p. 105 ("The starting point for the data gathering was the rankings of 

retailers' web traffic.") 

17 
155 

SchreinersGardens.cam in Salem, Oregon - Sixty-five years ago, Schreiners Gardens 

opened its first flower store. Later it added a catalog and eventually a web store. 

Schreiners now exceeds $1 million in remote sales. As a specialty store, it is highly 

unlikely it will ever make the top 1000 in web traffic. 

MissouriQuiltCo.com in Hamilton, Missouri - This business opened a store in 2008 

but soon "it soon became apparent that in a town of 1100 people it would be 

difficult to produce enough revenue to employ our parents and also make a decent 

profit. This was the impetus behind growing [their] business online."'o After 

opening its online store, MissouriQuilt grew into the largest employer in Caldwell 

County. It has boosted local tourism as quilters from around the world come to 

meet the owners and take quilting lessons. MissouriQuilt does over $1 million in 

sales. Again, as a specialty store, it did not make the top 1000 in web traffic. 

For these reasons, it is difficult to give any credence whatever to the SBA report. In fact, 

sampling in Oregon alone, NetChoice found 60 small e-commerce businesses with over $1 

million that were overlooked in the SBA report. 

The conclusion one must draw from this is that MFA is fundamentally flawed. Even the 

purported carve-out for small business would prove woefully inadequate - it would need to be 

at least $15 million in annual sales, as we testified in 2012. 

Once it is understood that MFA's approach is fundamentally costly, discriminatory, and 

potentially unconstitutional, the door is opened to consider other approaches. 

There's a better way than MFA: Home Rule and Revenue Return 

NetChoice accepted Chairman Goodlatte's challenge to develop alternatives to MFA. 

Beginning with the Principles, and being especially mindful of the due process limitations on the 

states' power to force tax compliance burdens on out-of-state businesses, we have 

conceptualized the approach of Home Rule and Revenue Return, by which Congress could 

authorize states to collect taxes when their residents purchase from out-of-state sellers. 

The central concept is a voluntary multi-state Compact that would establish clear rules 

for interstate purchases on which sales tax currently is not being collected. States participating 

in the Compact would realize sales tax on purchases their residents make from remote 

businesses located in other Compact states. 

30 http://MissouriQuiltCo.com/Content/ AboutUs 

18 
156 

This concept treats catalog, online, and brick-and-mortar sellers the same. Every 

business would use the tax rates and rules that apply where it is located - not where the 

customer resides. This approach involves no new complications, because most retail business 

already takes place this way. Using the tax rates and rules where the business is located is 

already the rule for all brick-and-mortar sales. When a customer from Maryland buys a tool at a 

hardware store in Virginia, the store clerk does not inquire what state and county the customer 

is from. The clerk simply rings up the sale and applies the local Virginia sales tax. This is also the 

existing rule for all intrastate catalog and online sales in 17 states representing over half the 

nation's population. 31 Because of its inherent simplicity, both SSTP and MFA allow these states 

to retain this rule for intrastate sales by catalogs and websites, since trying to use the 

customer's residence as the source of tax rates and rules in each case would be too complex and 

expensive. 

Unlike an origin-based system, which leaves tax money in the business's state even 

though the purchaser is from another state, the Home Rule and Revenue Return concept would 

distribute taxes received from out-af-state purchasers to their home states. This results in 

states receiving sales tax revenue from their residents' out-of-state purchases, without imposing 

massive new compliance burdens. 

The table below summarizes how the Home Rule and Revenue Return concept meets 

each of the Committee's Principles. Details of the concept are more fully explained in the 

following section. 

31 AR AZ CA IA IL MO NC OH OK PA RI TN TX UT VA VT WA (SSTP member states in bold) 

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157 

Judiciary Committee Principles 

1. Tax Relief- Using the Internet should 

not create new or discriminatory taxes 

not faced in the offline world. No fresh 

precedent for other areas of interstate 

taxation by States. 

2. Tech Neutrality - The tax compliance 

burden on online sellers should not be 

less, but neither should it be greater 

than for similarly situated offline 

businesses. 

3. No Regulation Without 

Representation - Those who would bear 

state taxation, regulation and 

compliance burdens should have direct 

recourse to protest unfair, unwise or 

discriminatory rates and enforcement. 

4. Simplicity - So simple and compliance 

so inexpensive and reliable as to render 

a small business exemption unnecessary. 

5. Tax Competition - Governments 

should be encouraged to compete to 

keep tax rates low and American 

businesses should not be disadvantaged 

vis-a-vis foreign competitors. 

6. States' Rights - States should be 

sovereign within their physical 

boundaries. Congress should not 

mandate that States impose any sales 

tax compliance burdens. 

7. Privacy Rights - Sensitive customer 

data must be protected. 

Home Rule & Revenue Return 

States can join a multi-state compact to collect and distribute 

sales tax on remote purchases where tax is not now being paid. 

Treats remote sellers and brick-and-mortar businesses the same 

- using tax rates and rules for where the business is locatednot where the customer resides. 

Establishes national standard, preempting state laws that 

purport to authorize alternative means to go beyond physical 

presence for tax imposition. 

Creates no new or discriminatory tax burdens. 

Just like brick-and-mortar businesses, all online and catalog 

sellers file and pay taxes in states where they're located. 

All businesses are subject to sales tax audits only from those 

states where the business has a physical presence. 

Businesses are accountable only to the states where they are 

located for tax payments and audits, and for court appearances. 

States seeking to bring businesses in other states into court must 

adjudicate in the business's home state or in federal district 

Court. 

States may quit the compact if new tax burdens exceed the 

benefits. 

Whether online or offline, small businesses pay sales tax the 

same way they do now: based on rates and rules of their home 

state. But now they would do this on sales to customers in all 

compact states. 

Simple and equal treatment: online and brick-and-mortar stores 

follow the tax regimes where they are located. 

A business in a compact state must collect tax on sales to 

customers in other compact states 

A compact state has incentive to keep its tax rates low, since 

high taxes may discourage business from locating there. 

States maintain control over tax burdens imposed on any 

business located in the state. 

Compact participation is decided by state legislatures, which can 

also decide to quit the compact if new tax burdens exceed the 

benefits. 

Compact states must implement privacy and security protections 

for all personal data on customer purchases. 

20 
158 

Details af the Harne Rule & Revenue Return Cancept 

1. Establish a multistate compact. New federal legislation would authorize a multistate 

compact (the "Compact") to enable collection of taxes on remote sales between sellers and 

purchasers in Compact states. A member state of the Compact would require its in-state 

businesses to collect and remit sales tax on sales to purchasers located in other Compact states. 

2. Uniform national standard. The federal legislation would point states to the Compact as the 

sole method for imposing tax on sales made by a business to purchasers located in states where 

the business has no physical presence. This legislation would codify the physical presence 

standard similar to HR 2992, which requires: an employee assigned to the state; services of an 

exclusive agent necessary to maintain the market in a state; or lease/ownership of tangible or 

real property in a state". As in HR 2992, this physical presence standard would exclude de 

minimis presence of less than 15 days in a state during a taxable year, or presence to conduct 

limited or transient business activity. 

A statutory physical presence standard would prevent states from attempting to impose 

sales tax liability based on advertising arrangements, commonly controlled groups, or other 

means to reach businesses that lack a physical presence in the taxing state. The Compact would 

be the only means for a state to impose sales tax liability on businesses without physical 

presence in that state. 

3. State sovereignty and optional participation. Each state could choose whether to join the 

Compact. If a state joins, then businesses in that state would continue to apply the same tax 

rates and rules as before. In addition, a business in that state would also collect tax on sales to 

purchasers in other Compact states where the business does not have a physical presence. If a 

state chose not to join the Compact, businesses in that state would continue collecting sales tax 

on sales to purchasers in other states where the business also had a physical presence. 

Each state, not the federal government, should determine the extent to which it wishes 

to rely on sales tax. Being faithful to this principle means respecting the sovereign rights of 

32 HR 2992, "Business Activity Tax Simplification Act of 2013", August 2, 2013, with sponsors Mr. 

Sensenbrenner, Mr. Goodlatte, Mr. Scott of Virginia, Mr. Bachus, Mr. Chabot, Mr. Duncan, Mr. Jordan, 

Mr. Jones of North Carolina, and Mr. Hastings. http://thomas.loc.gov/cgi-bin/query/z?cl13:H.R.2992: 

21 
159 

those few states that have no sales tax. In allowing each state to decide whether it wishes to 

join the Compact, the concept respects this principle. 

Neither fairness nor revenue generation justifies violating this principle. The argument 

that Internet businesses will move to jurisdictions with no sales tax is spurious. Businesses are 

free to move today, but we have not witnessed this phenomenon. Businesses select their 

jurisdiction for a host of reasons: quality of life; business incentives; income and property taxes; 

quality of work force; etc. For example, online seller NewEgg.com chose to base its operations in 

New Jersey, just 80 miles from tax-free Delaware. Amazon chose Seattle, when it could have 

chosen Portland, just a couple of hours to the south - in a state that has no sales tax. 

4. Home Jurisdiction. Since the fundamental principle of the concept is that every businesswhether brick-and-mortar, online, or catalog - will collect and file taxes in the state where it is 

located, the legislation must clearly define where a business is "located" for this purpose. Once 

a state joins the Compact, each business with a physical presence in that state would designate 

one principal place of business in the United States. This will be its "Home Jurisdiction." The 

designation could not be manipulated: the seller's Home Jurisdiction would be the Compact 

state in which its greatest number of employees works, per payroll tax records. The federal 

legislation would also describe instances where the "number of employees" would not be an 

appropriate measure, and prescribe methods to use, as alternative means of designating Home 

Jurisdiction, either the state where most physical assets are located or the state designated as 

the principal place of business for federal income tax purposes. 

Federal legislation would also describe instances where the "number of employees" 

may not be an appropriate measure, and prescribe methods to use an alternative means of 

designating Base Jurisdiction, such as where most physical assets are located or the principal 

place of business for federal income tax purposes. 

Home Jurisdiction is a proven method of taxation in multistate compacts. The 

International Fuel Tax Agreemene3 allows truckers to file in their "Base Jurisdiction" instead of 

filing taxes in every single state they drive through. Similarly, the European Union uses a similar 

33 International Fuel Tax Association, Inc.} http://www.iftach.orgf 

22 
160 

concept of "home juri,dkHon" to lax oU~"" country ""IllS involvlnB customer. in other £U 

member states." 

Notwithstanding the Home Juris.:llction designated by a Compact state seller, i bUliness 

muOl fulfill s~le, tox oblig~tlon. for any Slate where It has a physical pre",nce, according 10 Ihe 

rates, ful!!s, and taX holidays for those stalt's, whenew:r .... llIng to custom!!r. in those ,tate!;. 

Nothing In Ihls concept would (bange the collection of ,lie. tax at the CiSh register. In· 

store purwas ... will <Iill con""l al the <lure's 10CiI1 raIn and rul .... Home jurisdiclion only 

apples to sellers in compact st essellin!~ into another compact Slates where the selier has no 

ph~I(~1 pre",nce. 

Dl:PT Of REVENUE 

US[ HOMt STAn 

TIolC RAm & RUlH FOIl 

IN·STOR{ MO ONLIN( SAlES 

\ 

I 

" {""" t>do~ .. com""'rt~, tl>o EU r""osnl"od ~. burden. pt;o;od on bu,i""''''' lhat rna"" •• Ie.lnlo EU 

.t.l", wh .. re Ih<'Yt..'e flO phYllc.1 pre.O!rIt •. The eu .nd UK pr""ldQ. home "ale rule fo< any remole 

",II " below. Pl!r·n.'i ..... ""Ie. Ihl1!.nold. At thA .. me lime. 11>0 fIJ and UK allow bu$lne>\e, tooPl ln\o 

coHI!<linland r.,.,ftlin.'ot a Io<el,n statelntowhkh the., ",It. Under this ' I"tem the ,"ojar it~ 01 

"dO>lRnt:l! sale " ..,n ... colleu alld file VAl p"'r tl>ol' home .tate 

rul..... http'II@r:..e" rop •. u/'iI>! tl",, ,u~ ~t.o.al ;on/ /how _ '''I...W<>rlrt/val_""_''''''';"",, 

23 
161 

5. One simple rule for tax collection. Once a business in a Compact state designates its Home 

Jurisdiction, it will be required to collect sales tax on any sale to residents of other Compact 

states where it has no physical presence, subject to these simple rules: 

Regardless of where the purchaser resides, the business will use the tax rates, 

definitions of taxable goods and services, and tax holidays that apply to the Home 

Jurisdiction. 

The business is required to file tax returns and remittances only in its Home Jurisdiction. 

The business is subject to aud its only by the state tax authorities of its Home 

Jurisdiction. 

No state, whether or not it has joined the Compact, could demand payments or audits from a 

business that has no physical presence in that state. 

6. One source of audit for remote sales. Every business will be subject to audit only by the 

state and local tax authorities where it has a physical presence, just as occurs now. A business 

that sells to customers in states where it has no physical presence would be subject to audit on 

those sales only by its Home Jurisdiction. 

Under the Compact, no other Compact state may demand payments or audits, except 

by submitting those demands to the business's Home Jurisdiction. Businesses would therefore 

not be required to respond to audit demands from a state where the business has no physical 

presence or representation. 

7. Legal challenges to state tax authorities. Business taxpayers would have the right to enforce 

the Principles of the federal legislation in reply to legal demands from Compact states. For this 

purpose, business taxpayers would be entitled to use the federal district courts - instead of 

litigating in the courts of the foreign state in question. This would require amendment of the 

Tax Injunction Act,35 which presently bars federal court jurisdiction. 

8. No multiple taxation. Compact states would not impose additional tax liability on their 

residents who purchase from out-of-state sellers, beyond what is collected from the purchaser 

under the terms of the Compact. A purchaser would therefore not be liable for additional "use 

tax" if the out-of-state seller's Home Jurisdiction tax rate were less than the purchasers' state 

and local sales tax rate. 

35 Compact states would also be required to waive their 10th and 11th amendment immunity for suits 

brought under the Tax Injunction Act. 

24 
162 

9. Privacy rights protected. The federal legislation would require all Compact states to adopt 

privacy and data security safeguards for any purchaser information they collect in the course of 

administering sales tax filing or use tax reporting. For this purpose, the Payment Card Industry 

Data Security Standard could be required as a data security safeguard. In addition, the 

legislation would require independent audits of state data security practices. 

For states that gather specific purchaser data for purposes of use tax compliance, the 

federal legislation would require that an independent clearinghouse first strip-off any data 

identifying the vendor and the goods or services that were purchased. 

10. Revenue return. The federal legislation would require Compact states to periodically 

forward sales tax revenue paid by out-of-state purchasers to the states where the purchasers 

reside. This is similar to the clearinghouse approach that allocates tax revenue under the 

International Fuel Tax Agreement. Revenue return would require that businesses in Compact 

states include in their tax filing the amount of aggregate sales to purchasers from each state, but 

would not require reporting of the identities of purchasers or the nature of their purchases. 

Conclusion 

Quill's physical presence standard remains a principled and practical way to limit states' 

imposition of tax and audit burdens on out-of-state businesses. Congress should follow the 

principle of "first, do no harm" in considering whether to discard Quill. Should the Congress 

choose to exercise its power under the dormant Commerce Clause, it is essential that you 

observe the constraints on state taxing power imposed by the Due Process Clause. 

The Home Rule and Revenue Return plan is an alternative to MFA that achieves this 

objective. It is sufficiently simple that small businesses may not need an exemption. All 

businesses would use the same tax rates and rules they already use today for in-state sales. 

There would be little new compliance burden. There would be no need to integrate new 

software to look up rates and rules for the other 45 taxing states. Retailers could continue filing 

tax returns and facing audits only in their home states. Such a system would fully comply with 

the Basic Principles on Remote Sales Taxes established by this Committee. 

25 
163 

Mr. GOODLATTE. Thank you, Mr. Cox. Thank you all for excellent 

testimony. We will now begin our round of questioning, and I will 

recognize myself for that purpose. 

Mr. Kranz, you have been involved in the Streamline Sales 

Project process for many years. There was a time when the congressional sales tax bills required States to join the SSTP, to join 

the system. In addition, the SSTP regime in the early years was 

less flexible than now. Now States have more flexibility in the 

SSTP, and States can gain the collection authority without even 

joining them. Why has simplification been abandoned to such a degree? 

Mr. KRANZ. Mr. Chairman, I do not think simplification has been 

abandoned, and the rules for joining SST remain the same. What 

I think we are seeing is that the States over 15 years of trying to 

simplify and gain congressional authority to require remote sellers 

are wearing tired of living by those rules. And so they are relaxing 

enforcement of the compliance standard, and by that, they are 

holding certain members to be out of compliance with certain provisions of the agreement and giving them time to get back into compliance. 

It is a natural ebb and flow at the State level of the law in response to the agreement’s requirements. But I do not think that 

they are abandoning simplification by any stretch. 

Mr. GOODLATTE. Thank you. Mr. Cox, some of today’s proposals 

seem to suffer from privacy concerns, others from the burdens of 

compliance and cross-border audits. Is it fair to say your proposal 

dodges both those major pitfalls, and if you think that is the case, 

please explain why. 

Mr. COX. Yes, and those are two very serious problems. I think 

we all know with the Target data breach as a leading example 

what can happen if information about customers is now, in a more 

granular way, collected by purchase. If appointed officials, elected 

officials in every one of the 9,600 jurisdictions around America 

have a right to demand what you bought at a particular store to 

find out if it was taxable in their State, that creates opportunities 

for mischief that I think ought to frighten us. That is the kind of 

big government threat that we do not want, and so, avoiding that 

is very important. And that is not at all an element of home rule 

and revenue return. 

The other problem, the basic problem, that has challenged this 

simplification effort for so many years since I began talking about 

it with Governor Leavitt back in the 1990’s is the idea that you 

have the many against the one. You have got a business that is in 

one place, and yet now it is exposed to regulation by at least 45 

other States and possibly thousands of different individual jurisdictions. 

And so, you see that problem at its worst when it comes to audit. 

If you never get audited, maybe there is a way for computers to 

help us out here. But if you have to face compliance demands from 

all these places, if they have personal jurisdiction over you in an 

International Shoe sense and they can compel you to show up there 

(which definitionally they would—if they can tax you, they can regulate you, and they can make you personally appear, as was point-
164 

ed out earlier in testimony)—you know, that is a horrific problem. 

And so avoiding that problem also is very important. 

Mr. GOODLATTE. Thank you. Mr. Crosby, the Streamline Sales 

Project originally sought one tax rate per State. Too many States 

were unwilling to do it, and it was abandoned. With a narrower 

focus on remote sales only, do you think a single rate might be 

achievable? 

Mr. CROSBY. Mr. Chairman, in the early days of the discussion, 

one rate per State was certainly talked about with the National 

Tax Association Advisory Commission on Electronic Commerce. 

When the Streamline Project came together, the focus was on administrative simplification, looking at those aspects of the sales tax 

system that truly bring burdens to sellers and simplifying those. 

The rate issue is radically diminished from 20 years ago because 

software actually can handle that very well. If there is something 

that software can do well, it is look up rate tables and apply those 

rates. So that issue I think is not as important. 

Also in the Streamline Project, what came to the fore is that we 

frequently think only of business to consumer sales. Business to 

business sales are, in fact, more than 90 percent of e-commerce. 

Many States provide preferential rates or exemptions for business 

to business purchases, for example, on aviation fuel. If there were 

a mandate to require one rate per State, it could jeopardize those 

existing preferences the State provides to encourage business activity. 

Mr. GOODLATTE. Mr. Moylan, Salem County, New Jersey is exempt from collecting the 7 percent Statewide sales tax. Instead, it 

collects just 3 and a half percent local tax. The reason is that Delaware is next door, and Delaware has a sales tax of zero. Is the lesson that tax competition is a real phenomenon, and to what extent 

do you think that is true? 

Mr. MOYLAN. I think, yes, that is the lesson that tax competition 

is a real phenomenon, and I think that it is a beneficial element 

for taxpayers. It is interesting that you bring that up, however. I 

think that, and I wrote this in my written testimony, that the more 

likely manifestation of that sort of tax competition is in those sorts 

of marginal decisions in a given area. And I use the example of the 

D.C. metro area that you might see businesses deciding to locate 

on the Virginia side of the border rather than the Maryland side 

of the border to take advantage of Virginia’s somewhat more beneficial business and tax climate. 

I do not think that you are likely to see some sort of wholesale 

stampede to New Hampshire or Montana. And, in fact, any sort of 

Federal rule on origin sourcing should establish clear protections to 

make sure that businesses cannot game the system. We, of course, 

would not want a situation where people can set up a mailbox in 

New Hampshire and avoid collection forever more. 

And so I think that there are ways appropriately to protect 

against that while encouraging the kind of beneficial competition 

that you point out happening in New Jersey. 

Mr. GOODLATTE. Thank you. My time has actually expired, and 

the Chair recognizes the gentleman from Michigan, Mr. Conyers, 

for his questions. 
165 

Mr. CONYERS. Thank you. I appreciate the witnesses’ testimony. 

It is quite varied. I would like to begin with Mr. Kranz. What, in 

your view, is the risk of Congress not acting on the remote sales 

tax issue? And in the absence of congressional action, what will 

States do moving forward? 

Mr. KRANZ. Thank you, Ranking Member. The risk of Congress 

not acting is that the States will continue their onslaught attack 

against remote commerce. And as I mentioned earlier, there are already 17 States that have tried a variety of approaches to attack 

remote commerce imposing complicated administrative burdens, 

audit risk, liability, and potential litigation on those remote sellers. 

So if Congress does not act, my prediction is that the States will 

continue that attack on remote commerce. And we are seeing it 

today. There were four cases decided last year, two in New York, 

one in Illinois, and one in Colorado, all related to these State attacks against remote commerce. 

Mr. CONYERS. Thank you. Mr. Crosby, regarding the idea that 

one rate per State would enable more simplification, has it been 

contemplated before, and what are the challenges with that? Is it 

fair to jurisdictions with lower rates? 

Mr. CROSBY. Mr. Conyers, I think that the focus on one rate per 

State reflects a misunderstanding of the complexity that is associated with sales taxes. Complexity is driven by things other than 

the rate calculation. As I mentioned before, software is capable of 

doing that sort of thing. 

If the Congress were to impose one rate per State, it would likely 

lead to a leveling up of taxes in States that have lower rates. So 

where you have local jurisdictions with lower rates, a mandate of 

one rate per State would likely result in a tax increase in those 

States. It would also, of course, be a reduction in State sovereignty 

by reducing the flexibility they have to set their own tax rates on 

their basis. 

Mr. CONYERS. Thank you. Mr. Kranz, you stated in your testimony that some proposals that you will hear today will trample 

State tax policy decisions and have far-reaching economic impacts. 

You give examples of origin sourcing. Please expand on how origin 

sourcing would create economic hindrances by turning what is now 

a consumption tax into a production tax. And also how would such 

a proceeding be constitutionally impaired? 

Mr. KRANZ. The proposals we have heard today for origin-based 

taxing would eliminate what we now know as our sales tax system 

in this country. When someone in Virginia buys at a Virginia store, 

they pay Virginia tax and it funds Virginia government services. 

When someone with a Virginia address buys from a vendor located 

in California, and that California company has an obligation to collect tax, they collect Virginia’s tax, and that money gets remitted 

to Virginia to fund Virginia government services. 

An origin regime for remote sellers would turn that on its head 

and have far-reaching economic implications. Under an origin regime, the remote seller would collect California’s tax rate and 

would collect tax based on California’s rules. The two proposals you 

have heard today for origin sourcing, one of them would allow California to keep the money, and the other one would say, no, the ven-
166 

dor in California has to collect California’s tax rate, collect under 

California’s rules, but we will redistribute that money to Virginia. 

Ultimately, both of the origin proposals, though, impose a different State’s tax rules on a Virginia consumer. So consumers in 

your State would be subject to the tax laws of the location where 

the seller is located. Now, as a tax lawyer, I can easily come up 

with a vehicle to get out of that, and I would inform any company 

to create a new entity in Delaware, or in New Hampshire, or in 

Montana, one of the non-sales tax States. That entity becomes the 

seller of record. You can have all your operations somewhere else, 

but the seller of record is located in a non-sales tax State. 

Mr. CONYERS. Let me get this in before our time runs out. Some 

are concerned that the due process clause would be offended by 

Federal legislation to authorize remote sales tax collection. What 

are your thoughts? Did Quill not address this? 

Mr. KRANZ. Quill did address the question. Congress has commerce clause authority to pass a Federal framework. There is nothing that Congress can do to remove the due process protections. 

Whether you address the issue or not, taxpayers and businesses 

have their due process rights. Passing legislation to deal with this 

issue does not touch those rights. They would still exist and be 

fully protected. 

Mr. CONYERS. Thank you so much. I return any time that may 

be left. 

Mr. GOODLATTE. The Chair thanks the gentleman and recognizes 

the gentleman from North Carolina, Mr. Coble. 

Mr. COBLE. Thank you, Mr. Chairman. Good to have you all with 

us this morning. Mr. Sutton, under the hybrid origin regime, taxpayers would pay the sales tax rates based upon from where they 

ought to be shipped rather than where the taxpayer resides. In 

many instances, this could be viewed as a tax increase if the item 

is shipped from a high sales tax State to a low State tax State. 

What say you to that? 

Mr. SUTTON. It absolutely could be perceived by the consumer, 

who is the ultimate bearer of the tax, whether it is based on the 

business or not. The businesses have to raise the tax, have to raise 

their price to account for that tax, whether it is a separate line 

item or not. So the consumer is the one that ultimately pays for 

it, so, yes, I believe that would be perceived as an increase by many 

consumers out there. 

I also believe that the great State of Montana would probably 

have to be some movement to be renamed as Amazon-tana before 

long for the sheer volume of companies that would start moving 

there to base their retail sales, both remote and on the internet. 

Mr. COBLE. I thank you, sir. Mr. Moschella, how could the Congress define the origin from where it originates? For example, 

would the rate be determined where the company’s physical headquarters are located, A, or, B, the warehouse from where the item 

is shipped, or even C, where the corporation is incorporated? 

Mr. MOSCHELLA. Well, it is a good question. I think Mr. Kranz 

may be in a better position to answer that question. 

Mr. COBLE. I will be glad to hear from Mr. Kranz. 

Mr. KRANZ. Well, the proposals we have heard do not give an answer to that question. They leave it open-ended. There is one possi-
167 

bility that it would be based on the number of employees in the 

company. But again, I could very easily create a Delaware entity 

with one employee. That is the only employee, and it is a Delaware 

company or a Montana company. The seller of record can easily 

have a no sales tax collection obligation under the origin regime. 

It is a simple game that could be used to avoid these proposals. 

Mr. MOYLAN. Congressman, may I respond to that—— 

Mr. COBLE. Sure. 

Mr. MOYLAN [continuing]. Because I did cover it in my testimony. 

Several of the States that utilize origin sourcing for intrastate sales 

have answers to this question that I think can be effective guidance 

for Congress. The Chairman’s home State of Virginia is an example, Texas another. What they do is, one utilizes the place at which 

an order was received and processed. Others have utilized the location from which the item was shipped. You could explore some 

version of either of those, some sort of combination. 

I think that there are ways that you can appropriately structure 

the rules so that you do not have the sort of gaming that Mr. 

Kranz is referring to and that you have a legitimate rule, much the 

way that the 17 States that utilize origin sourcing intrastate do. 

Mr. COBLE. I thank you, sir. I am going to try to get one more 

question. Mr. Cox, as has been said, welcome back to the Hill. This 

may be portrayed, Mr. Cox, as an off the wall question, but let us 

give it a try. Suppose France dispatched auditors to one of our 

States demanding access to local business records to ensure it properly collected French sales tax on items that were shipped to the 

country of France? Do you think most Americans would view that 

as protecting U.S. sovereignty, and if not, distinguish between that 

and when States are doing it to one another. 

Mr. COX. Well, I do not think that is an off the wall question at 

all. I think that is a very pertinent question because the internet 

cannot be restricted to the 50 U.S. States and six territories. It is 

global. It is called the worldwide web for a reason. 

And when a business that wishes to serve its customers in the 

neighborhood goes on the web, you know, they are up in Italy. They 

are up in France. They are up in Russia. It is not untoward to 

think that Vladimir Putin might decide, you know, hey, we have 

got YouTube here, we are going to put a franchise tax on it. 

We do not want that to be the norm. Because the United States 

was the leader in the internet—we can go all the way back to the 

90’s—the norms that we established in this country about relatively light regulation; in some areas, no regulation; no special 

taxation; no discrimination—have been the norm worldwide. There 

is no UN rule. There is no global compact that makes this the case. 

But it is U.S. leadership that has made this the case. 

So if we establish a new norm through congressional enactment 

that nexus is created, that jurisdiction is created in a due process, 

International Shoe sense over someone because their website is 

visible in your jurisdiction, or because an incidental purchase or 

transaction was made over the worldwide web, then we had better 

get ready for France to make that demand on us. 

Mr. COBLE. I thank you, sir. I see my red light has illuminated. 

I yield back. 
168 

Mr. GOODLATTE. I thank the gentleman. The Chair recognizes 

the gentleman from New York, Mr. Nadler, for 5 minutes. 

Mr. NADLER. Thank you, Mr. Chairman. Let me start by making 

a few observations. It has been said repeatedly at this hearing that 

the question of enabling States to collect their use taxes is about 

the fairness for brick and mortar stores, brick and mortar merchants vis-a-vis online sellers. 

I agree with that, but I think it is also about a far broader principle. It is about not destroying the sovereignty of the States, that 

enabling the people of the several States to continue to decide 

whether, how, and how much, whether to tax themselves, how 

much to tax themselves, and how to tax themselves, and those who 

do business in their States, that is a fundamental right of a State 

government. It has been greatly compromised by the development 

of the internet and the inability to collect use taxes for products 

sold over it. And we ought to be looking to protect the sovereignty 

and ability of the States and the people of the States to decide their 

own policies. That is point number one. 

Point number two, and in connection with that, I should say that 

I support the Marketplace Fairness Act, which has passed the Senate. And I have heard some of the criticisms here, and we will address them in a minute. But I would hope that the Committee 

would hold a hearing on the Marketplace Fairness Act, which has 

passed the Senate, on possible amendments and possible changes 

to address some of the criticisms to see if it is possible to address 

adequately the criticisms that have been leveled at it. 

Third, it is nice that we are holding this hearing on other approaches, as long as it does not substitute for a hearing on the 

Marketplace Fairness Act. And I commend the Chairman for putting out a statement of principles, but I must say I disagree with 

one of them. One of the principles says, ‘‘Government should be encouraged to compete with another to keep tax rates low.’’ I disagree 

with that. You might want to keep tax rates low, or high, or middling. That is a decision. It is a political decision. It is an ideological decision. But it is a decision for the States and for the State 

electorates. 

The Federal Government should be neutral on State tax policy, 

and the Federal Government should simply protect the State sovereignty and the ability of the States to decide for themselves what 

their sales tax and use tax policies ought to be. We ought to protect 

their ability, and they should decide whether tax rates are low or 

high and let local electorates vote for or against State candidates 

on that basis or any other basis they want to. 

Now, I want to make one other observation and then go to questions, and that is on a couple of the proposals here for origin 

sourcing—in effect, that the tax rate would be decided by the State 

law, the State where it sold from—people have said that would release our rates to the bottom, and I think it would, and we have 

an example of that. In 1978, the Supreme Court decided that regulations of credit cards would be based on the law of the State from 

which issued, not of the State to which issued. So if in New York 

can get a credit card from a bank based in South Dakota, South 

Dakota’s law governs. 
169 

What happens? Every bank moved its credit card division to 

South Dakota or Delaware where essentially they have no regulations so that every other State was forced to eliminate their usury 

laws. We used to have laws that said you could not charge more 

than X percent interest. They have all been eliminated. All the regulations have been eliminated in just about every State because 

they are totally unenforceable. 

I was in the State legislature in the 80’s when we heard this 

threat in New York: if you do not repeal these laws, we will move 

our jobs to South Dakota. We repealed the laws, and they moved 

anyway, and, therefore, I oppose this kind of proceeding. 

Let me ask a question of Mr. Kranz. How would you reply to the 

various criticisms that we have heard today of the Marketplace 

Fairness Act, that it would lead to problems of enforcement, to audits of people out-of-State? And secondly, should the SSUTA, which 

is a basis of the Marketplace Fairness Act, apply only to interstate 

sales, not to intrastate sales, and with that eliminate the reticence 

of some States to join up? 

Mr. KRANZ. So, on the enforcement side, the way that SSUTA 

and earlier versions of the Marketplace Fairness Act were put together, there was an intention and an effort by the States and the 

businesses involved to shift the compliance burden from remote 

sellers to software companies. Make the software companies responsible for tax calculation and compliance. Shift that burden. It 

still exists in the SSUTA and in versions of the Marketplace Fairness Act. 

On interstate versus intrastate, when the SSUTA originally 

started, the goal was to simplify the sales tax system so that it applied to Main Street sellers and remote sellers. Give them all the 

simple set of rules. Earlier versions of legislation in Congress required the States to simplify their sales tax for all sellers, Main 

Street and remote. More recent versions are limited to just remote 

sellers, giving them and only them the benefit of the simplification. 

Whether Congress decides that the simplifications should apply 

to everyone or not is a question for this body. The earlier versions 

of the effort tried to get there, and the more recent versions do not 

go there. They simply apply the simplifications to remote sellers. 

Mr. NADLER. I see that my time has expired. I yield back. Thank 

you. 

Mr. GOODLATTE. The Chair thanks the gentleman and recognizes 

the gentleman from Texas, Mr. Smith, for 5 minutes. 

Mr. SMITH OF TEXAS. Thank you, Mr. Chairman. It is nice to see 

two long-time friends here, former Congressman Chris Cox and 

Will Moschella, whom I know you pointed out used to be a staff 

member of the Judiciary Committee. 

I have kind of distilled all my questions down to one that I would 

like to address to Mr. Moschella, Mr. Sutton, Mr. Moylan, and perhaps Mr. Kranz as well. And it is this, that you all have somewhat 

different solutions, different proposals. But I would like to know 

whether you consider your proposal to be an increase in taxes or 

not. If so, how do you justify it, and if not, why not? And, Will, 

could we start with you? 

Mr. MOSCHELLA. Thank you, Mr. Smith. No, our proposal is not 

an increase in taxes. Our proposal defers to the sovereign State de-
170 

cisions with regard to taxing authority. It merely would say that 

it would be a violation of Federal law just like the Webb-Kenyon 

Act. It would be a violation of Federal law for a remote or direct 

shipper to send into that State goods in violation of the State’s tax 

laws. And then it would be enforceable by injunction. 

Mr. SMITH OF TEXAS. Okay. Thank you. Mr. Sutton? 

Mr. SUTTON. Thank you. No, it definitely would not be an increase in tax. My system does not does not collect any tax. All it 

does is report private information completely sanitized from the 

vendor level into a database so the State and the purchasers have 

it. The States enforce their own existing use laws. That is it. They 

are use laws that have been in place for decades. Thank you. 

Mr. SMITH OF TEXAS. Okay. Thank you, Mr. Sutton. Mr. Moylan, 

you feel differently about your proposal. 

Mr. MOYLAN. Well, I would say the answer is no, and nor should 

it be, that the intention of an origin sourcing system is, and this 

goes back to something that Mr. Nadler pointed out, that I think 

we often look at this in sort of a binary fashion. We think of brick 

and mortar and online as being two totally separate things when 

in reality the vast majority of businesses are what we would call 

brick and click, that they have physical presence in some place and 

they sell online as well. 

And so, what origin sourcing is about is about ensuring that they 

collect on the same standard for all of those sales. And to the extent that there is any revenue that is associated with that, you 

know, my intention would be to use that to reduce tax rates in 

States to make sure that there are not any net burdens on consumers. And I think that when you compare that to the alternatives, like the Marketplace Fairness Act or some of the others 

that you are hearing today, that the result would be much better 

for taxpayers. 

Mr. SMITH OF TEXAS. Do you consider the Marketplace Fairness 

Act to be an increase in taxes? 

Mr. MOYLAN. I think that the Marketplace Fairness Act, as many 

of my fellow panelists will point out, is about collecting taxes that 

are theoretically owed. I think in reality what any of these would 

do is, you know, is to put tax collection on the front burner. And 

when you do that, it often seems like a tax increase to people. 

Now, what I would intend to do, as I pointed out, is to ensure 

that are not any increases in net burdens on people. I think that 

there are many States that have pointed out ways in which they 

would do that. Scott Walker in Wisconsin is one example of somebody who said that any changes in Federal law relating to internet 

sales taxes would be utilized to reduce tax rates, and I think that 

that is the right approach. 

Mr. SMITH OF TEXAS. Okay. Thank you, Mr. Moylan. Mr. Kranz? 

Mr. KRANZ. What we are talking about here is the tax gap for 

use tax collection, and one of the proposals would try to capture 

data and force consumers to pay their use tax. I used to give 

speeches about tax, and I would ask for a show of hands how many 

of you file your use tax reports annually. I stopped doing that because it was only me and one other person in the audience. It is 

a tax gap that is not being collected today. 
171 

On the question of is there more money, sure. If you create an 

enforcement vehicle, it will collect more money. What is going to 

happen with that money? Ten States have already introduced and 

are considering legislation—some have passed it—that would say if 

we get this money, we will reduce our income tax rates. We will 

reduce our sales tax rates. We want the money not because we 

want more money. We want it to have a balanced system. 

Mr. SMITH OF TEXAS. Okay. Thank you, Mr. Kranz. Let me go 

back to Mr. Moschella and Mr. Sutton and ask you about the Marketplace Fairness Act. Do you consider that to be an actual increase in tax or, as Mr. Moylan suggested, just the perception of 

an increase? 

Mr. MOSCHELLA. We do not, and our client, Simon Properties, 

fully supports the Marketplace Fairness Act. 

Mr. SMITH OF TEXAS. Okay. Mr. Sutton? 

Mr. SUTTON. I give extreme credit to everybody that has worked 

on the Marketplace Fairness Act. It has been an extremely welldrafted form of legislation to try to address this problem. There are 

definitely quirks that happen in sales tax everywhere, and there 

are quirks under the Marketplace Fairness Act that would increase 

tax, yes. 

Mr. SMITH OF TEXAS. Okay. Thank you. Thank you, Mr. Chairman. 

Mr. GOODLATTE. Thank you, and the Chair recognizes the gentleman from Virginia, Mr. Scott, for 5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. I was in the State legislature, too, in the mid-80’s, and a local credit card company told us 

of the advantages of going to South Dakota. We had to change our 

laws, too. They did not move. 

I have a question on this. In your choice of laws, would you get 

to choose based on where you are incorporated, where your warehouse is, or where your corporate headquarters is, or where you 

ship it from? Where would you choose, or do you just get to pick 

the lowest tax State? Mr. Cox? 

Mr. COX. Thank you. I think you have heard from several panelists that it is very important for the Federal legislation to be clear 

on this. I think that you have every opportunity in writing a Federal law that blesses a voluntary compact to do that. If you left it 

open to gaming, I think you would get rather obvious consequences. 

I think you could do the same thing with respect to nexus and 

ought to for reasons that are laid out in bloody technicolor in Mr. 

Kranz’s testimony. If we do not have a very, very firm preemption 

in whatever law we write here, and we let States continue with 

their aggressive push on nexus, then we will also get what we deserve. 

So we recommend in the home rule and revenue return proposal 

that we use the BATSA definition for nexus because it will answer 

all of those problems. 

Mr. SCOTT. Okay. Well, one of the complications of this is the 

ability to calculate and pay the tax. I have been told that there is 

software that can calculate for you very easily what the tax is and 

a service that if you pay them one check, that they will distribute 

it to everywhere it goes, and that the service is free. Is that accurate or not? 
172 

Mr. COX. Well, I think I am stealing a line here, but it is free 

like a puppy. You get the free tax software, but then you have to 

pay to integrate with your other systems. And e-commerce businesses or brick and click businesses have multiple systems, not just 

one front end because they have got product returns, they have got, 

you know, out-of-State, in-State, other kinds of inventory systems. 

And each one, each separate module, has to have this software integrated into it. 

Mr. SCOTT. Well, they have to do that for shipping. 

Mr. COX. Yes. So what I am saying is that these are presently 

existing software modules. Now when you give me free software, I 

have to integrate it with my proprietary system, and that costs 

hundreds of thousands of dollars on average for a medium-sized 

business. One other thing is that—— 

Mr. SCOTT. Well, let me because I am running out of time. 

Mr. COX. Sure. 

Mr. SCOTT. A lot of companies have a presence in a lot of different States, some in all 50 States. So presumably they are collecting the tax now. Do they have audit and regulatory complications? 

Mr. COX. Well, the larger a business is, obviously the larger its 

sales tax compliance burden. And a State that is in all 50 States 

it seems to me is relatively better situated in contending with these 

problems. No question about that. 

Mr. CROSBY. Mr. Scott? 

Mr. SCOTT. Yes? 

Mr. CROSBY. Under the Streamline Sales Agreement, part of that 

is to certify and provide to sellers software that will calculate, collect, and remit tax freely to the vendor for all the States that are 

in the Streamline Agreement. More than 2,000—— 

Mr. SCOTT. Is that in existence now? 

Mr. CROSBY. It is in existence now, and more than 2,000 sellers 

have volunteered to do that. So if the burdens were that great, they 

would have never volunteered to collect tax in States where they 

were not required to. 

Mr. SCOTT. Now does that software calculate things like exemptions, food tax exemptions, and all that? 

Mr. CROSBY. Absolutely. 

Mr. SCOTT. And like I said, it was free. What are the costs involved in getting the software? 

Mr. CROSBY. And under the Streamline Sales Tax Agreement, 

the States actually pay the vendors of the software to provide the 

software to the sellers. There may be some integration costs, but 

in most cases, most online vendors use commercially-available front 

end shopping carts. And all of the software solutions that are out 

there today integrate with, you know, the top 100 or 200 of the 

most common systems. 

For some larger retailers, they may have legacy or proprietary 

systems, and integration costs might be higher for those. But certainly this Committee and the Congress has wide latitude to offset 

or mitigate those costs were it to move forward. 

Mr. SCOTT. Mr. Kranz, can you say a word about what implication all of this has on foreign sellers, whether or not they would 
173 

be collecting the tax whether or not they have a presence in the 

United States? 

Mr. KRANZ. So in terms of foreign sellers, right now the States 

have no ability to impose their sales tax on those companies unless 

they are physically present. The Marketplace Fairness Act, the 

Main Street Fairness Act, every version of Federal legislation that 

has been introduced to deal with this issue would require remote 

sellers located in a foreign country to collect State sales tax, just 

like our domestic companies do, unless you go to an origin regime. 

And then you are saying if you are located in France or in Russia, 

you do not have to collect our State sales tax. 

So setting aside the origin proposal, every Federal framework 

that has ever been discussed on this issue would close a foreign 

loophole that exists today. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Mr. GOODLATTE. Thank you. The time of the gentleman has expired. The Chair recognizes the gentleman from Ohio, Mr. Chabot, 

for 5 minutes. 

Mr. CHABOT. Thank you, Mr. Chairman. First of all, just again 

to make sure that I understand, all the witnesses here have a 

version or have their own plan for their taxation of the internet 

proposals here. I do not think anybody is actually opposed to taxing 

the internet. Is that correct? Does anybody have the position here 

that we should not tax the internet at all? 

Mr. CROSBY. Mr. Chabot, I might just clarify that. We are not 

suggesting taxation—— 

Mr. CHABOT. I am not talking access or anything like that. I am 

talking about sales only, sales tax. Does anybody have a position 

we should not tax sales on the internet? Okay. 

Mr. SUTTON. Just about everybody at the table, if I may speak, 

feels that—— 

Mr. CHABOT. Okay. I just wanted to make that point, because we 

do not really have anybody here who has the position that we 

should not have internet sales taxes period. That is not the position 

of anybody here. I just wanted to clarify that. 

Now, you hear the number of probably 99 percent of the internet 

sales taxes that are supposed to be taxed and be collected are not 

taxed. Does anybody refute that that is not even close, or anybody 

want to comment on that figure? In other words, people are supposed to pay this internet tax, they just do not. Something like 99 

percent do not pay it. Does anybody say that is not accurate or not 

true, or we are way off there? 

Mr. COX. I think that is preposterous. It is not even close to true. 

Seventeen of the top 20 e-retailers already collect sales taxes in 38 

States, and the largest e-retailer is very soon to be collecting for 

two-thirds of the American population. 

Mr. CHABOT. So you are saying that a lot more internet tax is 

collected than what people generally say. 

Mr. COX. Yes, for the simple reason that you have a physical 

nexus rule, and the larger these internet sellers become, the more 

places they are. By the way, that goes to the race to the bottom 

question. You know, why in the world would newegg.com be in 

New Jersey and in California with all those people so that they 
174 

have a nexus automatically and have to collect those high in-State 

taxes, in those very high-tax States? 

Mr. CHABOT. Mr. Crosby and Mr. Kranz, I think you want to testify. If you could make it quick because I have a couple of questions. 

Mr. CROSBY. Sure, Mr. Chabot. To the extent that sales tax is 

not collected at the time of transaction, then you are correct. It is 

not collected from the consumer in almost every case. So unless the 

retailer is collecting the tax on the transaction, whether it occurs 

over the internet, catalog, or otherwise, then the use tax is unlikely 

to be collected unless it is a business that is involved. 

Mr. CHABOT. Okay. Mr. Kranz? 

Mr. KRANZ. That was my same point. 

Mr. CHABOT. Okay. Thank you very much. I appreciate it. Now, 

the idea that I think a couple of you mentioned, the idea that the 

States, they would collect or it would be collected, but then they 

would just lower taxes in an equal amount or an equivalent 

amount. I find it very hard to believe that that would actually happen with the States espousing, you know, their concerns about having all kinds of things they have to pay for. And to me, this looks 

like another revenue source that is not being collected for the most 

part now. And I find it just not credible that States are going to 

lower taxes by the amount they collect here. Does somebody want 

to refute that, Mr. Moylan, because I think you were the one that 

said it. 

Mr. MOYLAN. Well, I think I would to respond to it, that it 

sounds as though what you might prefer then is current law, and 

what current law says is if you have a physical presence in a State, 

you must collect its sales tax. If you do not, you do not. And, you 

know, personally, I do not have tremendously large problems with 

current law. I recognize that there are issues with it, that none of 

these solutions are without their potential pitfalls, and current law 

is no different. But I agree with you that the impulse of some 

States might be to try to use this as a new revenue source. 

The challenge is, what is the Federal nexus with that? To what 

extent can the Federal Government, can Congress dictate to States 

what they do with their rates, and that is a very limited extent. 

Congress can tell them that they cannot do things that are a burden to interstate commerce, and that is what we are talking about 

here is trying to establish the rules on which States must operate, 

and then they can determine rates for themselves. But I will be 

right there fighting with you to make sure that they are lower than 

higher. 

Mr. CHABOT. Thank you. I have a constituent, Allen Finer, who 

owns and operates a small jewelry store business. He works out of 

a store, and he also sells online. He sells approximately 600 items 

a month. According to Mr. Finer, the Marketplace Fairness Act— 

and again, he is talking about that, not necessarily your plans 

here—would force him to hire an accountant to keep up with the 

ever-changing nature of each State’s multiple tax jurisdictions, and 

he says he cannot afford that time. And he says I am a small businessman. How am I supposed to handle paperwork for 9,600 different tax jurisdictions in the country? Who will pay the postage 

for all the forms? The extra tax I would have to collect for this leg-
175 

islation is unfair. He has six employees. He would have to let one 

go to hire an accountant. 

Would somebody address the concern? Mr. Crosby? 

Mr. CROSBY. Mr. Chabot, yes. I understand the trepidation for 

him because it is not something he is dealing with today. But this 

Committee has great authority to craft a bill that would ameliorate 

those concerns or eliminate them entirely. As a jewelry store 

owner, jewelry is taxable in almost every State, I think probably 

every State that opposed the sales tax. So there is very little question as to whether the items that he is selling are taxable. So there 

is no taxability determination. It is very easy. It is taxable at the 

rate that applies. 

The software that is available today, to the extent that he is selling on the internet, would be able to be integrated with a shopping 

cart system, would calculate the tax, would remit it to the States, 

could file all tax returns. And you have the ability to provide immunity for audit if he is using certified software. That is one of the 

things I mentioned in my written testimony. 

So I think that we should not be necessarily weighed down by 

what is or is not in the Senate bill. You have great ability to improve that Senate product and make it work for retailers like the 

one you have in your district. 

Mr. CHABOT. Thank you. My time is up—— 

Mr. COX. If I may, Mr. Chairman? Mr. Chabot, if I might 

just—— 

Mr. CHABOT. Yes, go ahead. My time has expired. 

Mr. COX. I think what the jewelry store is telling you, the 600 

items a month jeweler, is that it is not the tax that he is worried 

about as a merchant. It is the compliance burden, which we should 

also think of as a tax, and it is a much bigger problem. That is 

what is at issue here, and I think you tee’d that up with your first 

question. It is not really about the competitive differential of collecting the tax. There is much less objection to that than there is 

to taking on this compliance burden. 

And with respect to how the software is going to make all of this 

so simple, it is easy unless it is not. I was just speaking with a 

merchant in Philadelphia who sells American flags. And this is like 

the Florida stories you were telling. This is just intrastate. This is 

not even, you know, having to deal with the whole country. 

So they came after him for back taxes for sales taxes because he 

thought there was an exemption for American flags. They said, how 

many stars on this flag? And he said 48. How many stars are on 

this flag? And he said 13. They said, well, you know that the exemption is only for 50-State flags. And he said, no, how am I supposed to know this? And they said, well, you know, it is your responsibility as the taxpayer. He said, is it in the published regs? 

No. Well, where is it? It is in decisional law. Well, can I look that 

up? Well, no, but you can subscribe to a service and then you would 

know. And he said, well, thank you. Now I know and I will do it 

right next time, and they said, oh, no, no, no, you owe all of these 

back taxes, and it almost bankrupted his business. 

Now, if the software vendor does not have that in its list, and 

I am sure they do not, then they are going to say, well, it is not 

our fault, and then you get the right to litigate, and how expensive 
176 

is that? So those are the burdens we are talking about, and those 

are the burdens that we have to worry about. 

Mr. MOSCHELLA. Mr. Chairman, can I—— 

Mr. GOODLATTE. The time of the gentleman has expired. We will 

allow Mr. Moschella—— 

Mr. MOSCHELLA. Just 15 seconds. 

Mr. GOODLATTE. Very brief. 

Mr. MOSCHELLA. These same arguments were made when Congress considered the 21st Amendment Enforcement Act in 2000. 

And you know what? The vendors and others who are concerned 

changed and adapted and are complying and remitting State sales 

taxes all over the United States. 

Mr. GOODLATTE. The gentlewoman from California, Ms. Lofgren, 

is recognized for 5 minutes. 

Ms. LOFGREN. Thank you, Mr. Chairman, and thanks for having 

this hearing. I think as we listen to this, it becomes clear that this 

is not a simple issue. And if it were, it would have been solved a 

long time ago. Looking at the audience here today, I see Randy 

Fries, and I mentioned him because one of my favorite stores in the 

entire world is Fries. I was there over the weekend. 

And, you know, that is an example of why this is important to 

brick and mortar stores because we want to make sure that there 

is an even playing field so that stores like that can flourish. I am 

actually of the belief that in order to have a tech economy, you 

have to have Fries in your county. 

On the other hand, I have recently talked to a woman who is a 

former tech worker, engineer, who retired. And before the Affordable Care Act, her 20-something son got cancer, and she ended up 

spending every penny she had, everything she had saved. She sold 

her house to get medical care to save her son’s life, and she actually succeeded in that. But she ended up being, you know, in her 

late 60’s with not a dime to her name. And she ended up starting 

a little small business. It is an e-business. And she is, you know, 

very concerned that, you know, with the kind of small margin she 

has and just barely supports herself that she would have something complicated that she could not survive in her e-business. And 

that is important, too. 

So, you know, as I am thinking about this, I had just thought 

all along that if we did something, that we should have a huge, you 

know, robust exemption for small businesses to take care of ladies 

like that woman who saved her son. But there has now been this 

discussion of having something that is so simple that you would 

not even need a small business exemption. 

But it turns out that is not so simple either, I think. You know, 

as I am thinking about having one rate per State, you know, I was 

in county government, as was the gentleman from Ohio. And one 

of the things that we did in Santa Clara, or actually our voters did, 

was to repeatedly increase their own sales tax by a vote of the people for various projects—for public health, for the county hospital, 

to improve rail transit, to build highways. 

How would you deal with voter approved sales tax in cities or 

counties if you had one rate per State on these sales taxes? How 

would that work? Does anybody have some guidance on that? 
177 

Mr. KRANZ. Well, I think it creates a practical legal process problem for States to participate. A one rate proposal was discussed 

long, long ago, and rejected not only because of that practical legal 

process problem, but as Mr. Crosby testified earlier, a one rate proposal forces a tax increase in at least half of the jurisdictions. You 

have got to get to a common denominator. 

So unless you want to force a tax increase, a one rate proposal 

is dead on arrival before you even get to the legal process questions 

about how to implement it at the local government level when 

those decisions about tax rates are made either by votes of people, 

or city councils, or county boards, or other process problems that 

would be faced. So it was considered and rejected very early on in 

the last 15-year discussion. 

Ms. LOFGREN. But it is being discussed again today. And, you 

know, I really want to do something that works. I understand that 

the growth of online retail is far exceeding the growth of brick and 

mortar retail. That is important to me, and I think it is important 

to the commercial sector of the United States. 

On the other hand, I really am very skeptical that it is possible 

to control choosing jurisdictions to avoid tax. I mean, if you are an 

e-retailer, you have a lot of options to locate and to avoid retail tax. 

Would that not essentially create incentives for businesses to move 

to sales tax jurisdictions, and would that not actually further impede the growth or the prosperity of brick and mortar businesses? 

Mr. Kranz, do you have a comment on that? 

Mr. KRANZ. Well, I think an origin system would cause a complete upheaval in the retail community because it is so easily manipulated. I am not an economist, and I cannot predict exactly 

what that upheaval would look like. An origin system taxes production and says we want to tax you if you are producing and selling 

from here. Well, who wants to locate their business there? 

Ms. LOFGREN. Right. 

Mr. KRANZ. They are going to move. Our sales tax system in this 

country has always been a tax on consumption and the proposals—— 

Ms. LOFGREN. If I may, and I know my time is up, but this is 

complicated. Recently somebody said in addition to the voter approved sales tax, I mean, you have got, like, Monday is a holiday 

for school clothes in county X. I mean, to say that we are going to 

be able to accommodate all of that stuff by software, I am sorry, 

I am pretty skeptical. And it is not just the software, it is the audit 

exceptions that need to be accommodated especially for small retailers. 

I see my time is up, Mr. Chairman. I yield back. 

Mr. GOODLATTE. The Chair thanks the gentlewoman, and recognizes the gentleman from Alabama, Mr. Bachus, for 5 minutes. 

Mr. BACHUS. How many of you all agree with the term or the 

statement that ‘‘the best government is a government closest to the 

people?’’ Could we just have a show of hands? 

[Hands raised.] 

Mr. BACHUS. All right. So that is unanimous. I agree with you 

that the best government is a government closest to the people. 

When I look at services that I absolutely have to have, other than 
178 

national defense, it is schools, it is police protection, fire protection, 

sanitation, water, roads. And that is State and local government. 

Since I have been a Member of Congress, I have State and local 

governments come to me and say we need a new fire truck. We 

need some help paying our police officers. We cannot afford to bring 

water to this community. And, you know, I have thought, you 

know, there is something wrong with this. 

Why have we made them dependent on the Federal Government? 

Why do they have to come 700 miles to get funding? And I will tell 

you what it is. The same thing. I was a State senator, and I was 

on the State school board, and I ran for Congress for one reason. 

Two-thirds of the money when Harry Truman was President stayed 

in the local communities and the States. Less than a third came 

to Washington. Today two-thirds of the money comes up here, so 

everybody has to come up with their hand out, and that is demeaning. And I said we ought to reverse that. Ronald Reagan campaigned on that. Barry Goldwater campaigned. Let us put these 

things back in the States. Both recognized we have to allow them 

to collect the taxes there. 

Now, Mr. Malone? 

Mr. MOYLAN. Moylan. 

Mr. BACHUS. Moylan. You have actually almost, to me, proposed 

a system that is totally backwards. First of all, you said they were 

theoretical taxes. Is that what your testimony was? 

Mr. MOYLAN. The testimony is that it theoretically falls on the 

individual, but that the administrative burden, the legal burdens, 

falls on the business. 

Mr. BACHUS. Well, if I buy a new car over the internet and I do 

not pay sales tax, and the State of Alabama comes to me and says 

you did not pay the tax, could I say that was theoretical? 

Mr. MOYLAN. Well, no. That would actually be enforced when you 

register and title the vehicle. That is one area where business tax 

works quite well. 

Mr. BACHUS. But could I hide behind that? If I did not pay taxes 

on something I bought out-of-State, could I assert that in court that 

it really was not legally owed? 

Mr. MOYLAN. No, and actually you make a very good point that 

use tax really is an individual tax. Use taxes are due from the individual, and that is the problem is that they are not administered—— 

Mr. BACHUS. A sales tax is not on the seller. It is on the buyer. 

Mr. SUTTON. That is not correct in most States. Sales tax is an 

excise tax. It is imposed in most States on the right to exercise 

your right to sell property. 

Mr. BACHUS. Well, what I am saying, if I buy something on the 

internet, do I not pay the tax? 

Mr. CROSBY. In all of those States it is also mandated to be 

passed through to the consumer. So certainly the business collects, 

but, you know, my employer collects—— 

Mr. BACHUS. They are a conduit. 

Mr. CROSBY [continuing]. Social security tax, my personal income 

tax, my Federal income tax. My mortgage company collects my 

property tax. 

Mr. BACHUS. Sure. 
179 

Mr. CROSBY. I am paying those taxes. 

Mr. BACHUS. Sure. I mean, this idea that the seller is paying is 

just—I mean, I am responsible for them. 

Mr. MOYLAN. It is a question of who the legal burden to comply 

with that obligation falls on. 

Mr. BACHUS. Well, okay, let me ask you—— 

Mr. MOYLAN. And all of the ones that Joe just pointed out, the 

burden falls on the individual. 

Mr. BACHUS. Let me say this. Everybody here has got a different 

plan. You have got a plan, you know. Mr. Moschella, you have got 

a plan. But why would we as the Federal Government try to make 

that decision for every city and every county and every State? Is 

that not kind of arrogant? 

Mr. SUTTON. That is the beauty of the consumer private reporting system. We let them make those decisions. We give them the 

information, and then we let them do with it what they will. 

Mr. BACHUS. Well, Mr. Moylan, he is actually proposing something that would prevent them from collecting their own taxes. I 

mean, that is pretty radical. I have never—— 

Mr. MOYLAN. If I may speak for myself. 

Mr. BACHUS. Has the Congress of the United States ever passed 

a law prohibiting a local government from charging a sales tax? 

Mr. MOYLAN. What I am proposing—— 

Mr. BACHUS. No, I am just asking have they ever done that. Do 

you know of one case? 

Mr. MOYLAN. The point of your question, it seems to me, is to 

get at—— 

Mr. BACHUS. No, no, the point—I am just saying, I mean, is that 

not a pretty radical idea for me as a congressman to pass your origin sourcing and tell every city, and every county, and every State 

that they could not collect a sales tax? 

Mr. MOYLAN. It is only as revolutionary as what already exists 

for the vast majority of sales today. 

Mr. BACHUS. Well, I am saying we have never done it before. Has 

any State or any other country, to your knowledge, ever, ever proposed this on a cross-border sale? 

Mr. MOYLAN. Has any place used origin sourcing? Certainly. 

Mr. BACHUS. In cross-border. Texas you said, but they do not do 

it on interstate—— 

Mr. MOYLAN. There is one example that I utilized in my written 

testimony, that the European Union utilizes origin sourcing for 

business to consumer sales. 

Mr. BACHUS. Okay. So you want to go to that. You want to go 

to that. 

Mr. MOYLAN. Well, they did it for administrative simplicity. 

Mr. BACHUS. No, that is all right. 

Mr. MOYLAN. But I wanted to respond to—— 

Mr. BACHUS. We do not do that in the United States. 

Mr. MOYLAN. I wanted to respond to one point that you were getting at earlier, and it sounded like you were expressing concern 

about the erosion of the sales tax base. And I do not think that it 

is wrong to have concerns about the erosion of the sales tax base. 

What I would say is that—— 

Mr. BACHUS. Well, actually what I am concerned about—— 
180 

*Material previously submitted, see page 9. 

Mr. GOODLATTE. The time of the gentleman has expired. We will 

allow the gentleman to answer the question. The time of the gentleman has expired. 

Mr. BACHUS. And could I tell him—well, actually we have gone 

over 10 minutes on—— 

Mr. GOODLATTE. No, we have not gone over anywhere close to 10 

minutes. We have been watching very closely. 

Mr. BACHUS. Oh, okay. Well, I will let him answer. 

Mr. GOODLATTE. The gentleman is over a minute now. But I 

would want him to answer the question. 

Mr. BACHUS. But that is not my concern. My concern is that if 

I buy something in Washington, I do not want to pay Washington 

State. I want to pay, you know, Homewood where I live. 

Mr. MOYLAN. Well, then it sounds like—— 

Mr. BACHUS. Because that is where my kids go to school. That 

is who—— 

Mr. GOODLATTE. The time of the gentleman has expired. The 

Chair recognizes the gentleman from Georgia, Mr. Johnson, for 5 

minutes. 

Mr. JOHNSON. Thank you. Thank you, Mr. Chairman. I would 

ask unanimous consent to place into the record the following materials in support of collecting online sales taxes. One is a letter from 

the Streamline Sales Tax Governing Board* explaining the key 

components of the Streamline Sales and Use Tax Agreement. Also 

resolutions from the cities of Cave Spring, Rome, Thomson, and Vienna, Georgia describing the positive impact of remote sales tax 

collection on local economies in Georgia. And last, but not least, a 

letter from the Liberty County Chamber of Commerce noting that 

the Marketplace Fairness Act would strengthen the economy and 

allow greater transparency with the tax code. I would ask that 

these be considered and put into the record. 

Mr. GOODLATTE. Without objection, they will be made a part of 

the record. 

[The information referred to follows:] 
181 

CITY OF CAVE SPRING, GEORGIA 

Resolution for Marketplace Fairness Act (5336 and HR684) 

Wherellf, strons loe,1 t!ConO(nles ilre bullion siron, locallK1slnenes; ilnd 

WIIereof, Geor,I .. 's IOC::ill btislnenes crelle j()bs ~nd economic IICtlvity Ihlll generate $<lies tues 

to pay for sch()Ots, public safety, ind public Infrutructure whUe.llelpln, to keep property taus 

low: and 

Whltfeos, Milln Street relille.s In Georgi. IIlye been hun In recent years by online. and c'I,loB 

purchases by customers who belleye the-y rec eive I dlSl:ount by not pr,'ln, sales ~x: Ind 

Wherells, th. brld'lnd'mort" retailer collects the 5i1les lax at Ihl time ()f porchue 1f\ I store, 

but the responsibility for payln, the tn from in onl1ne purchase shifts to the Internet customer 

who should ply the silles tax When fllln, 1'11$ ilnnuillincome tax returns; Ind 

Whereos. most tixpayers are nOI aware ofthe responslbllitylO remillhese lues; and 

Where.IS, local buSinesses in Ihe al,. of (ave Sprlna and floyd County, Georgia Ire il l I 6" 

competitive price dlsadyantage 10 remote sellers; and 

Wherell$, the Supreme Coun dl'(mon In Quill Corp. y. North CokOfll,SOil U.S. 298 (19921.lefl 

nate and localgovemmenu unable to adeqult!'ly enforce their exlstina sales tu laws on sales 

by lIut-of·stale Cltalo, and onnne sellers: Ind 

Whl!!reos, the Coun did state that Congress hid t he onslltut!on~1 authority to pass le,lslation 

overrulin, 11$ decision: If Congress acts to re,ulate l(lterstlle commerce, slale and local 

governments could collect taxes owed 0(1 Inlernet and mall order nle5 amouJ)tln, to $23 

bltllo(1; Ind 

Whereos. In Georgi~, the e5l.lm~led uncollected state al'lci local n les ~nd use Ii~es from all 

remote u lesln 2012 was $837,610,389; and 

Whereos, the Act would only grant authority 10 collect taxes on remOIt! ~ales 10 stales that 

simplify their sales IIX law-sin order to use compliance; alld 

Wllerl!!os, .he State of Georgia Is rl'(oanlled U II Streamlined Sales h~ stale and IS • full 

member of the Streamlined Sales Tax Govemi(lg Board: and 

Whereas. economic rese~rth has show" Ihilt Ihe elimination of Ihe turrent In loophole OIl 

(nternet !lIes wollid create Jobs .and uute economIc activity natlonl'J1de. crutln. an 

estimated 31.000 nllw Jobs I" Geofllla: and . 
182 

WhtftOS, by ending this unequal tu Irnlment, which tends to distort market forces, ii more 

competltiye, pro-growth and level playIng field would be created; and 

Whutos, I" addition to leveling the playing field between onUnt me/chanU and brlck_and_ 

morta r retailers, passage of the MFA would also help Georgia and Its communities make 

needed Investments In schools, infrastructure, publlc safety and other quaiity-of-life issues that 

help create II heallhy ecol'1Omlc environment. 

Now, thtrefore, Be It Resolved thai the City Council of Cave Spring, Georgia does hereby urge 

all members of the Georgia Congressional delegation to lake action In 2013 to approve the 

Marketplace Falmen Act (S336 and H1I684) which will level the plilylng field for local buslness!s 

by ~lIowing Individual ~tates the authority to collect ,ales taxes directly lorm online retailers. 

Be It So e:wl d, thl5 L day of ~l(mfx.(, 2013. 

R 8 WARE, Mayor 

AnfST: 

JoOVOtNSON, Clerk 
183 

City of Rome 

WIl(I'(III, !lrong local COOllOmles l\I'e bui!1 on ~trol\g loeal bU5inestes; and 

WII(re(u, Gwrgia., local busincs5C.!l ercate job~ and economic ootlvity IhIIl generate sales tan, 

10 pay for schooIJ, public Sllfety, and public infrlStruclure while ~Iping 10 keep property taxes 

loW; lind 

WfU/ ~rr.J, Main Sireet retailer! in Oeorgia have been hun io recent yean by onflue and eatnloa 

purehscs by eUSlomcr& who be!illvo they receiu. discounl by 1'101 [XIying$!liestlX; and 

H'lIeniu, tbe bridc-and-mortar retailer oollee~ the .. Ie. tax althe time ofpurchue ill _store. but 

tile responsibility for pa.ying lhe tn from an online purcllase shift! 10 the lntcmct c~omer who 

should pay the SIIlcs tax when filing his anllual iIKome tax letums; and 

1"II(r(II', nwstlaxpilyers are notawareof the ''e$ponlribility 10 remit Ihc~c taxel; and 

WhI!NItI, local busi/ICS~ in the City of Rollle and Floyd County, Geor&ia ~ ,t a 6% 

oompelitivc priu disadvantage 10 remote selJmI; and 

WII(I'I!(U, the Supreme Court dc:cirion in Qrrill Corp. Y. North Dakoto,50<! U.S. 298 (1992),left 

.sflte and Iotalgovcmmentl UMble to adequately enforce (heir tltis,ing .u1eslu laWl! 01\ sales by 

OIlt-of-state catalog and on/ine sellen: uK! 

Wfll:rt:nS, Ihe Court did Slale that COUlllll.'lll had the conslituliOllol authority to pass legislation 

owrruUng il9 dC(:i!ion: if Congre.u acts 10 regulate intOlSlale commerce, sllltc and local 

governments ooilld colled t/PIe! owed on Internet and mail order sales 8Il\O\Jntin,g 10 sn billion; ,,'" 

Wllerens,in OCOlllil, the estimllted unoollC(:ted stllte and loeB! sates aM usc tallC:S from all 

remote sales in 2012 was S837 610,3~9: lind 

Whenns, th= Act would only gnlnt aulhorily to eolled tll)l.C:S 011 rc:m01e sales to Slates Ihat 

aimplify their $&ICli t8ll1aws in order III ease compHIIICC:; IlIKI 

""lImml, the Slate of Georgia is recognized as a StrellmJined Salel To !l4tc lind is a full 

member of the Streall1lined Sales Tlx Oovcming Board; and 

JIIhQ'fl1l, economic re.~eateh has shown that the eliminatiou of the current tax loophole on 

inlemet ~ Wl)uld create jobs and create economic ICtnrlly natiuowide, c.reat;ug an estimated 

31,000 new jobs in Georgia; and 

WhenU/s, by endillg Ihi~ unequal IIIX treatment, which tcndll to distol1 mnrke! fOlees, I more 

competitive, pro-groWlh and level playing field would be crca.led; and 
184 

WIIUI!(lS, in add ilion 10 leveling the pl.ying field betwcen online 1l)ercl1a.nl$ and brick-andmOl1ar retailc . pnsS/lge ofthe MPA would also belp Georgia nnd its communities mllke nocdcd 

investments in schools, in(raslrUClure, public $ftfety and Gther qua lity-of-life issues tbat help 

CTeIIle. healthy economic environment. 

Now. ,lttln.!ore, Be It tlSoI~d thaI City CorZlrnlss;oo of Rome. Georgia do hereby urge aU 

memben of the Oeorgia Congreuional dc.Ieption to take acliOlI in 2013 to ~pprovc the 

M8.Tketpl!~ Fairness Act (S336 Md HR684) which will level the playing field rot local 

businessea by allowing individual ItDIeS the DUlbority to collect sales taxes directly Corm online 

retailer'S. 

Evie McNieee 
185 

The McDuffie Progress 

Wednesday, September 4, 2013 

City council approve:! n,:,olUliuh to collect gales lIIX from onlillc retailers 

Tbc I.aek ofpllying $Illes tall by COIlSWners makin& online pl1l"Chases h&$ become problematic for 

nunu:roU! rClolitcr1I1CIUSS GeorgiL 

II hIlS been estimated that in 2012 u0.::0llected stste lind local sales and usc taxes from aU remOle 

snles 1ICI'05S the liMe was $8)7,61 0,389. 

AccorWh@1O I resolution approved by Ibe Thonuon City Council Thlll'Sday, buline:sses in 

Thomson and McDuffie County life at. seven pc.rcent competitive price disadvantage \0 remote 

or online retailers. 

lbe I'e$()Jution, CIllled the Marlcctplacc Fairness Act, en<!Ouragcs the passage of. federal law thaI 

will flliow individUll Slates 111 collect u.les!J\X hom onliru: merchant>. 

"We in this coUll!y ~ missing some: SIlks we cklllars. ~ said ThOIllson Mayor Kl-nneth U$l')', 

lidding Ilud legislalanl who represent McDuffie County have been made 8wate of the resolution. 

GeorWl passed II lsw in 2012 in an IIttnnpl \0 fOKe wc:b sellers \0 collect sales ux on putc:bascs 

The Georgia.Depvtment ofRcw.nuc .clmowlCllaes thaI a Ulle Tu VIould be received on 

pLlrchases made through the: internet, via mail order, or from an out-or-5ta~ c:omJ"llY when 

Georgia s:alcs ta.~ is not oolkcted by tlfe selling eotnpany. The u.5e tn rille is-!be same lIS lhe 

Sdlo::~ 1llI\.11I\" unposed in the Georgi,! county of delivery. 

Usry, who sc:rvt:!!" Ol'i the Georgia Municipll.! AS$OCi&,iOll's policy tIIld legislative oomminees, said 

ihefe is an effort underway to gel ,II sulles ID push for fnimess in sales tax collections het\\Ull 

online retailers and brick and m(\fIlIf rnerclHlIIb. 

The onIine gi:Ult Amuo .~om, mponding to the Georgia'S lftw began collecting soJes \lI.IC on 

pllrchucs from Georgia residents on Sept I. 

The Thomson City Council uMIlimously approved the resolution Uliinll GeollPft', 

Congte3SiunaJ Dclelt4lion to approve the ACI, which b 5336 anU HR6S4 10 ftllow St!ltes the 

IlIIhority to collect SlIJCli tax directly from online retllil~. 
186 

Ci'l/ of -Vi.nnR 

201 \V~.t Cnllon Stout 

POOl Office Box <1036 

Vi~lmll. Goo,~ia 

(229)268-4144 

Reso!ution for Marke!pJacc Fairness Act (S336 and HR684) 

Wlurf!(u, strong local economic! """ built on strong local busines$ea; and 

Where,,;r, G~org;lI" locQi bl,lsirll.':ISC5 "",ale job9pnd e~nomio;:.lIc\ivily tl ~\ generale; sales ~ 

to pay for 

.schools, public safety, and public infrastructure while helping (0 keep property taxes low; and 

Whet4!u, Main SlIeet re ~ilers in Georgill. have been hurr in !"Cecm years by online and catalog 

purcllllS!!S by t!\lS!omcl'!i who believe they receive a disCQunl by nOt paying :;ales tax; and 

Wherells, the brick-and-mortar [l:lailer collects the sales IlIx at the time of purchase in a store, but 

the rtsponsibility for paying the tax from an online purtlhll$c !hifts to the internet CWMmcr who 

should pay Ihe s!tlt:S \81{ when filling his annual income tax returns; and 

Whereas, mOSI taxpayers are not aware of the respon~ibiJity to remit Ihese taxes; and 

Wllereas, local businesses in the City of Vieno.a and Dooly County. Georgia are at a 8% 

competitive price disadvantage to remote sellerl; ond 

WhcrI':as, tile Supreme Court decision in Quill Corp. v. North Dakma, 504 U.S. 29S (1992). lell 

state and local govemment3 wloble to adequately enforce theIr exi$tinl: sales ta:or laws on sales by 

oul-or-slate catalog and online sellers; and 

Whereas, the Court did slate the Congress had the constitutional authority \0 pass legislation 

overrulins its decision; if Congress acts to regulate iltterstatc commerce. state· and local 

government! could collect taxe, owed on inl~rnd and mail order s ales amounting 10 S2J Billion: 

Md 

Whereas, in Georgia, the estimated uncollected state· and ]ooal sales and use taxes from all 

~mote sales in 2012 were $837.610,389; and 

WherfllJ, the Act would only grant authority to collect taxes all remote sales to states that 

simplify their sales ta~ laws in order \0 ease cOlllpliancc; and 

Wllerl!as, the Stale of Georgia is n:COgJIiud as a Streamlined Sale Tax stllte IlI\d is a fuU member 

orthe Strtamhned Sales Tnx Governing Board; and 
187 

Wherells, economic rcsearch has shown dlat the elimindtion of the current tax. loophole on 

internet sales would cr~a\c jobs and create ~nomit IIctivi!y nationwide, creating IUId e~til!laled 

3 t,OOO new jobli in Gcorgill; IlfId 

wr,,!relJ.S, by ending the uncquilitax fre~tment, which tend~ 10 distort mark.et forces, 11 more 

oompc!i1ive, pro-growth 11')(\ I~vel pluyinll field would be created; Dnd 

WhtrcllS, in additiol1to leveling the playinll fi eld between online mel'thants and brick-andmonar retailen. passage of the MFA would also help Owrgja and its communities make I\tedcd 

investments in sellools, infrastructure; public Xlfety and olher quality-of-life issues lhat help 

create a healthy economic-environment. 

No ~, I/"" .,/ort, ~ il R" J'ol"," 1 IMI \he. MRYor ru,d c.,uncil oflh .. City or Vienna. Georgia do 

herby lillie all members of lhe Georgia Congressional dell: gation to lak.e pelion i02013 II:) 

appron the M~rk"lplace Fairness Act (S336 and HR684) which will level the playing field for 

local bWlincsscs by allowi ng individual 5tllte.:I the authority \(l colleC1lll1les taxes directly form 

ollline retailers. 

Be It So RUQlved. tbis~day of .J.,d,,~ 2013 

Mayor 
188 

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189 

Mr. JOHNSON. And, Mr. Chairman, I thank you for holding this 

hearing today. Uncollected tax sales are costing us billions of dollars at a time when States’ budgets are slimmer than ever. According to a study from the University of Tennessee, States sustained 

over $52 billion in losses from uncollected taxes on e-commerce 

sales between 2007 and 2012. 

In 2012 alone, the most difficult budget on record for many 

States, roughly $23 billion in State sales taxes were uncollected. I 

imagine that is really tough on those States that have no income 

tax and rely largely on sales taxes for their revenues. And according to conservative economic theorist, Arthur Laffer, closing the online sales tax loophole in my State of Georgia would generate over 

$50,000 new jobs and over $15 billion in additional GDP by 2022. 

Passing common sense legislation like the Marketplace Fairness 

Act would result in lower taxes as it in has in Georgia. What is 

more, States across the country could expand social programs to 

help our hungry, sick, and poor while also having much needed 

revenue to build countless schools, roads, bridges, and other 

infrastructural projects that put Americans back to work. 

Mr. Chairman, we need a solution to this tax loophole that needs 

to be closed. An even-handed approach like the Marketplace Fairness Act would protect consumers’ privacy, avoid headaches and 

consumer surprise, and ensure compliance costs are minimal. Unlike some alternatives that this Committee will contemplate in today’s hearing, internet sales tax legislation would make sales and 

use taxes more efficient and avoid program administration problems. But I am open to new proposals that tackle this issue in an 

even-handed way because it is time that we solve this crisis. 

The Committee has held numerous hearings on the issue. We understand the problem, and we know that we need to fix it. The Senate has already reported legislation that is overwhelmingly bipartisan, and it is time for this Committee to follow suit. As the Ranking Member of the Subcommittee, I look forward to working together with you to get this done. 

Now, I would say that State governments rely on sales and use 

taxes for nearly 31 percent of their total revenue. And most of this 

revenue is collected by retailers at the point of sale in the form of 

a sales tax based on the retailer’s presence in the State. For sales, 

when the retailer is not present in the State, a use tax would be 

owed by the consumer. But that places undue burdens on the consumer to pay the tax, and at this point, only 1 percent of those 

taxes are collected. 

And so, this Marketplace Fairness Act would make it simple for 

consumers to be able to contribute to the economies of their States 

and their local governments as well. And so, for the things that my 

Chairman, Mr. Bachus, mentioned—police, fire, hospitals, roads, 

education—those things, those are State expenditures that are 

hurt. We cannot provide those services if the revenues are not 

there. And if we let this play out to its logical extreme, brick and 

mortar will go away, and all transactions will be done via internet. 

And if we do not correct this right now, there will be no taxes collected on transactions. 

So with that, I will yield back, Mr. Chairman. 
190 

Mr. GOODLATTE. The Chair thanks the gentleman, and recognizes the gentleman from Iowa, Mr. King, for 5 minutes. 

Mr. KING. Thank you, Mr. Chairman. I thank you and the witnesses for this hearing we are having today. It looks to me like 

there are several of you that have lived this for a long time, and 

there is a lot of expertise at the table. 

I am curious. First, I would turn to Mr. Crosby. In your testimony you said there are 17 consecutive double digit quarters of ecommerce increase. And so, can you tell me at this point then what 

percentage of the taxable commerce goes to e-commerce? 

Mr. CROSBY. According to the most recent census, the unadjusted 

figures are that 7 percent of all retail commerce is now e-commerce. 

Mr. KING. Seven percent. 

Mr. CROSBY. Correct. 

Mr. KING. And 10 years ago, what was that? 

Mr. CROSBY. .7 percent. 

Mr. KING. Okay. And is there a projection on where that takes 

us in 10 years? 

Mr. CROSBY. It will continue to increase. I do not think—— 

[Laughter.] 

Mr. KING. Okay. We can project out however we like at that percentage a year. That is a smaller number than I expected. I expected it would give me a little bit more heartburn than it actually 

does. But can you tell us how many different sales tax districts 

there are in the United States? 

Mr. CROSBY. Sure. There are about 9,600 sales taxing districts in 

the United States. Many of those are local governments, county 

governments, or different districts for special purposes, as Ms. 

Lofgren talked about. 

Mr. KING. And it was curious to me that some of her track of 

thought was tracking the same path that I was following on that. 

And so, when you look at all of these districts, I mean, how often 

do you anticipate one would need to upgrade their software with 

these 9,600 districts that could potentially be changing their tax 

rates at any time? 

Mr. CROSBY. One of the components of most of the pieces of legislation that have been introduced would restrict how frequently 

State and local governments could change their tax rates or their 

tax bases to a calendar quarter to make it easier for software companies to keep up. They do so today. 

Mr. KING. They could upgrade once a quarter under that proposal? 

Mr. CROSBY. Correct, and they do so today. They can keep up. 

Certainly it would be easier if it were restricted to quarterly. 

Mr. KING. I would like to mention to the Committee my view on 

this. But first, before I forget to do so, I have a letter from Governor Terry Brandstad that essentially says that he is in general 

support of the Senate version of the bill, and he would take any 

tax revenue that came to Iowa and convert that into tax deductions, similar to Governor Scott Walker. I would ask unanimous 

consent to introduce this letter into the record. 

Mr. GOODLATTE. Without objection, it will be made a part of the 

record. 
191 

[The information referred to follows:] 

Te<ry E. RranSlad 

GOV[ANOII 

[~l1'I' 12, 2013 

Th~ HOIIQI~b/(. Sle"" KIng 

2210 R.yb"", OlTo« BUIld",! 

W .. bi~~I"", DC lQSI 5-

Oear C""grcs!ln .. n Kin,: 

OFFICE OF THE GOVERNOR Kim IIevoold. 

LT, GovtRNOR 

ThI: U.¥. Sel,"l" rec.nlly pqWed The Malhtplfto<> Fl in.,... Act or20l3, S. 743 (M.'kolpl.c~ F.' ...... ). by . 

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r.liof. 

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.... I'(>0Il of "'i. itgisl",lon, 

Ifl .. " pro_ide.n)' otldi,j""AI .",s'"""., ille_eM'",,,,,,. or Doug llool .. l>or. Di1octorofSI-'",F«Ienl 

Rel.liono (or Ihe Slo,e o( luw. 

~~~ lerry E. Bran'tad 

GoverOlllcflo ... 

STATE CAPITOl OE.SMOINE5, IOWA 50119 SIS-18l-5211 ffll(; SlS·72S·1Slg 
192 

Mr. KING. Thank you, Mr. Chairman. And then just to lay out 

my position here is that I believe that it is just and it is equity to 

collect sales tax for sales, whether they are brick and mortar, or 

whether they are click, and whether they are foreign sale as well. 

And I would like to see a balance and a level playing field, and I 

would like to see equity in this text, but I have got to have the simplicity that is there, too. 

And the one thing that came to me that impressed me more than 

anything else was the complexity that could be visited upon someone who was in internet sales and catalog sales that had multiple 

sales in a higher percentage of these 9,600 taxing districts. I mean, 

it looks to me like that complexity and the changing notion of that, 

even though we have software, gets to be too high a burden on our 

retailers. 

I would go back to Mr. Kranz and say I did not quite understand 

with full clarity your response to Ms. Lofgren. If the Federal Government engaged in this regulation only with regard to a single tax 

rate for each State and let the States then figure out the distribution within their borders, was that part of the discussion that 15 

years ago was rejected? 

Mr. KRANZ. It was, and, again, it was because of the fear that 

it forces a tax rate increase for all the lower jurisdictions. So the 

conclusion at the end of the debate of is one rate per State the 

right answer was, no, in today’s modern economy there should be 

an app for that. There should be software that can do it. And, in 

fact, there—— 

Mr. KING. But how does it force a tax rate on a State? I mean, 

I was in the State legislature. All taxing jurisdiction that is inside 

the State of Iowa is authorized by the Iowa General Assembly. And 

so, they have that choice, but they grant the taxing authority to the 

jurisdictions. So it really does not exist unless it is granted by the 

State. Would you respond to that? 

Mr. KRANZ. In some States, that is right. The local ability to impose tax and determine tax rates is granted by the State legislature. In other States, in Colorado, for example, the locals have 

what is called home rule authority. They have Colorado constitutional rights to set their own rates. They do not need the legislature’s approval. 

Mr. KING. My time is running out, and so I would like to say 

this. I want to thank Mr. Moschella for giving me the Bowman 

case. I think I can find another case that that is on point on. I will 

catch up with you on that a little bit later. 

But I wanted to let the Committee know that I am concerned 

about how we get this right because one day I want to abolish the 

entire Federal income tax code and replace it with a national consumption tax. And if we get this right, it helps lay the foundation 

for H.R. 25, the Fair Tax Act. And so, I am focused on this more 

than I might otherwise, but it is very important to this country to 

get this right. And I want to protect our brick and mortar people, 

and I want to allow e-commerce to expand. I want to do it with 

simplicity and not with over-burdened Federal regulations. 

So thanks for all your efforts and your focus on this. It has been 

an excellent panel. Mr. Chairman, I yield back. 
193 

Mr. GOODLATTE. The Chair thanks the gentleman, and recognizes the gentlewoman from California, Ms. Chu, for 5 minutes. 

Ms. CHU. Thank you, Mr. Chair. Mr. Kranz, I have a question 

for you, but I would like to make some comments first. Before I 

came to Congress, I was on the California Board of Equalization, 

which is our country’s only elected tax board, and administered the 

sales and use tax. So I can personally speak to the dramatic decline 

of sales tax revenue due to the increase in sales online which go 

uncollected. 

And in my State of California, it is estimated that over $1 billion 

of use tax remains uncollected. The figure is expected to grow. I felt 

that the current system for collecting use tax was one of the most 

inefficient that I have ever seen. Very few people know that such 

an obligation even exists. In fact, they are downright shocked when 

you talk about it. And at the Board of Equalization, we had an 

army of auditors hunting for use tax obligation. But with all our 

efforts, we only collected 1 percent of the entire use tax owed. 

And in addition, we see more businesses closing their doors on 

Main Street. Radio Shack is closing 1,100 stores throughout the 

country. We just cannot wait to pass legislation. And, in fact, I am 

an original co-sponsor of the Marketplace Fairness Act. 

And so, Mr. Kranz, we have heard five proposals today. Could 

you please rate them from the least to the most viable and explain 

why? [Laughter.] 

Mr. KRANZ. That is your job. [Laughter.] 

Well, I would say that my view of the two origin sourcing proposals and the reporting regime, they should be non-starters because they really are not efforts to fix our country’s sales tax system. They are efforts to go in an entirely different direction and 

create a whole new burden and regime, and create all kinds of 

problems as a result. 

Mr. Moschella’s proposal is a novel proposal. It says, okay, if you 

do not want to collect sales tax, we are putting a fence around each 

State. There is a border that you cannot cross unless you collect 

the tax. It is novel, but I do not think Congress should be in the 

job of putting fences around the States. 

The only real alternative is as Mr. Crosby suggested, a Federal 

framework that provides simplification, uniformity, and technology, 

and protects remote sellers from what is happening at the State 

level, and the attacks that remote sellers are under. 

It is your job to decide how much simplification, how much uniformity, and what kind of technology that bill would include. The 

Marketplace Fairness Act in the Senate is a version. Earlier 

versions of the bill had lots of different requirements, and a bill 

could be fashioned that provided the right level of protection to remote sellers while guaranteeing a level playing for brick and mortars and a stable revenue source for the States. 

Ms. CHU. And there was another proposal that you did not mention, which had to do with the reporting. Why is that not as viable 

of a way of collecting the use tax? 

Mr. KRANZ. Well, again, it is not a tax regime. It is an obligation 

on sellers saying, well, you do not have to collect sales tax or use 

tax, but you need to build in a whole new type of software that 

does not exist today. There needs to be a federally created database 
194 

and repository for all of this information about what consumers are 

purchasing in each State. And then there needs to be a mechanism 

to share that information with the States to allow them to go out 

and audit consumers. 

Now, do we really want to walk away from our sales tax system 

and create this burdensome new regime to capture data, and store 

it somewhere, and transmit it to the States, and allow them to 

audit consumers instead of simply requiring remote sellers to collect tax under a logical set of rules? I do not think that that is 

what is in our economy’s best interest. 

Ms. CHU. You talk in your testimony about the consequences of 

inaction. You talk about increased litigation and increase on certainty for remote sellers and consumers. Could you expand on that? 

Mr. KRANZ. The consequences of inaction, we saw this in the 

1980’s with the National Bellas Hess Project. The States got tired 

of waiting for Congress. They are getting tired again today. And 

rather than focusing on simplification and streamline and uniformity, as the Chairman asked me at the very beginning, are they 

walking away from simplification? Well, 17 States have said if Congress is not going to reward us for simplification, we are going to 

fix this on our own. That to me is the real threat to the economy 

is State by State inconsistency and burdensome approaches targeting very specifically e-commerce business models. 

And when you have that kind of approach, it raises constitutional questions. There will be litigation, and there is already litigation popping up around the country as a result of that State selfhelp. I do not think it is healthy for our economy as well. 

Ms. CHU. Thank you, and I yield back. 

Mr. GOODLATTE. The Chair thanks the gentlewoman, and recognizes the gentleman from Utah, Mr. Chaffetz, for 5 minutes. 

Mr. CHAFFETZ. Thank you. Thank you, Chairman, and thank you 

for taking—— 

Mr. GOODLATTE. I apologize. I did not see that Mr. Franks had 

arrived back, and so I am going to go to him first. Last week I 

overlooked him all together. So today he goes first, and then we 

will come back to you after we go to him. [Laughter.] 

Mr. FRANKS. I will assure you—— 

Mr. GOODLATTE. I apologize to both of you. 

Mr. FRANKS [continuing]. It is definitely a plot, and so—— 

[Laughter.] 

No, I appreciate it so much, and sorry about that, Jason. The 

people probably would have appreciated your questions more, so 

you will probably be next. 

But in any case, Mr. Chairman, I think all of us on this Committee recognize that the sales tax that should be collected by 

internet providers or companies on the internet sometimes is not 

done as consistently as it should be. And we recognize that there 

is an inequity there, that some of the brick and mortar companies 

do have an inequitable situation. We want to try to find the best 

way to address that. The challenge, of course, is finding a way to 

do it that does not create more inequity and more complexity than 

it solves. And that is always the challenge. 

And let me, if I could, start with Mr. Cox. You know, there are 

a lot of smart guys around and a lot of nice guys around here, but 
195 

it does not happen so often that they come in the same package. 

In your case, Chris, it did, and we appreciate you being here. 

And I know that others have already described this, but as you 

know, some suggested that there is a software that can help businesses facilitate tax collection on remote purchases. Can you clarify 

to the Committee if you think the improved technology fully alleviates the collection burden, especially for these small businesses? 

Mr. COX. Well, it is an important question because one might 

think there is an app for that and that we can then assume the 

problem away. But, in fact, in addition to the integration costs, 

which we discussed earlier, that are substantial even for businesses 

of, you know, say $5 million, we are talking about tens of thousands of dollars of integration costs that are not accounted for in 

the ‘‘free software.’’ 

But more important than that, because this analysis is really all 

about burden, the liability for getting it wrong always is going to 

rest with the taxpayer because if you write in the legislation that 

for software errors the software company is responsible, well, what 

will happen in real life? What will happen is that when a mistake 

is made, the software vendor is going to say it was not my fault, 

and then what do you do? 

Then you get a right to litigate, and that is enormously expensive. There is not time, there are not resources in the Federal system usually to contend with the long wait to trial before a judge, 

where you put facts to the law. And that is why over 90 percent 

of cases in the Federal system settle. So you are not really giving 

people what they need, which is the comfort that it is not their responsibility. 

And as I mentioned earlier, sometimes these laws, not the rates, 

but the laws about, you know, what is and what is not taxable are 

exceptionally densely reticulated. They are very complicated. And 

the software might or might not get it right. But as I say, if the 

software does not satisfy the tax collector, then you will certainly 

hear about it as the taxpayers. 

Mr. FRANKS. Mr. Chairman, it is my opinion that if we do have 

some kind of a mechanism, as you suggested, that States compete, 

that it not only incents productivity and serves the buyer and the 

seller the best, but that it de-complicates the situation. So I guess 

my next question is for Mr. Crosby. How would the MFA need to 

be amended or other remote seller legislation be written to make 

the collection process so simple and expensive as to render a small 

business exemption unnecessary, as suggested by Chairman Goodlatte in his principles? Is there a way to do that? 

Mr. CROSBY. Certainly, Mr. Franks. Thank you for the question. 

Your home State of Arizona is a good example of a State that has 

worked diligently over the past few years to simplify their own 

sales taxes for sellers that are already collecting the tax. The Marketplace Fairness Act included a number of simplifications. In my 

testimony I lay out several more that could be considered by this 

Committee to make it simpler for remote sellers. 

To your previous question about software, software certainly cannot do everything, but it can do a lot, especially if it is combined 

with a rational framework that this Committee and this Congress 

could set, such as providing for audit protection for remote sellers; 
196 

**Material previously submitted, see page 8. 

for those who are larger to provide a consolidated audit so they 

would be only audited one time; a single point of collection or a single point of remittance so that they only remit to one place; a single 

point of registration. All the sorts of things that relatively easily 

done and that are part of the Streamline Sales and Use Tax Agreement right now could be extended to sellers across the country to 

minimize the risk that Mr. Cox identified of litigation. 

As Mr. Kranz has noted, without congressional action, that litigation is likely to be much more diverse and much more burdensome on businesses as States are increasingly looking to make sure 

that the taxes that are legally owed are collected. 

Mr. FRANKS. Well, thank you, Mr. Chairman. I guess I am pretty 

much out of time here, but it just goes to show you that if you just 

do it like Arizona does it, most of these problems would go away. 

[Laughter.] 

And I appreciate you all coming. 

Mr. GOODLATTE. I am glad to hear that. And the Chair now recognizes the gentleman from Florida, Mr. Deutch, for 5 minutes. 

Mr. DEUTCH. Thanks, Mr. Chairman. And, Mr. Chairman, I am 

pleased the Committee is holding a hearing on the pressing matter 

of remote sales taxes. As a former State senator, I dealt with the 

issue extensively in Florida, and I understand how crucial the loss 

of revenue for States and local governments. Twenty-three billion 

dollars in State sales were uncollected in 2012. We can imagine the 

impact that those dollars would have in meeting the needs of State 

and local governments, an important point, I think, for all of us to 

consider as we are having this important discussion about taxes 

and about tax law. 

First, before I go any further, I would like to request, Mr. Chairman, a letter from the International Council of Shopping Centers** 

be submitted for the record. Mr. Chairman, if we could ask that 

this be submitted for the record. 

Mr. GOODLATTE. Without objection, it will be made a part of the 

record. 

Mr. DEUTCH. I appreciate it. I think the letter highlights the importance of returning parity between internet and brick and mortar 

sales, the urgent need for action, and, most importantly, the desire 

to find a workable solution, which is really what this hearing is 

about, without getting bogged down in unnecessary partisanship. 

And, Mr. Cox, I would just like to take a step back from, again, 

what is an important discussion with tax law and focus on some 

of the bigger issues for a minute. You said a minute ago that the 

analysis is really all about the burden, and I completely agree. And 

I guess I would ask you and I would ask the panelists, when we 

think about the burden that we are imposing, should we not also 

be thinking about the burden that we are imposing currently on 

business owners in very corner of this country by allowing a system 

to continue where independent retailers, retailers who play crucial 

roles in our communities, find themselves at a disadvantage. 

I will not ask any of the panelists to raise their hands and tell 

me if they have ever gone onto their iPhone in a store to check 

prices, or whether you have then taken the next step of purchasing 
197 

something online because it is less expensive and you can avoid 

sales tax. I will not do that. But I would suggest it is happening 

a lot. 

And when we talk about the burdens that are imposed, the burdens that are imposed are not just imposed on large retailers. And 

by the way, they are not just imposed on mom and pops. The burdens that are imposed are imposed on entire communities. And 

when this situation is allowed to continue and stores close, when 

those stores close, it is not just because the burden on the store 

owner was too much. The burden then winds up being shared, a 

concern of yours, Mr. Cox, in this other context. But it is a burden 

that winds up being shared, and it is a burden that winds up being 

shared not just by the owner, but by those employees who are out 

of work. 

And when that store, when that retailer closed because they 

could no longer compete, it is a burden that is imposed on that 

community. If that store is in a shopping center, we know that if 

one store closes, others may close as well. And when large portions 

of a shopping center go dark, that impacts the community. Fewer 

people come. It makes it more unsafe. It means that more resources at the local level have to be expended in keeping that area 

safe. 

When that burden is imposed on those stores that close, it is, 

again, not just those stores, but if those stores are downtown, it 

means fewer people are coming into town. It winds up changing the 

way that people behave in those communities, and ultimately 

winds up changing demographics. It can wind up changing demographics of the community, all because of decisions that are made 

stemming from a tax system that treats different businesses differently. 

So I am concerned about protecting small sellers from an overly 

burdensome tax regime. I am concerned about that. I am also concerned about protecting small sellers from a tax regime that treats 

them differently. And what I worry about is different tax policies, 

one, and from some of what we have heard here today, one for traditional retailers that have no online presence, one from brick and 

click retailers, another one for purely online retailers. 

I do not, and I am confident saying that my colleagues here do 

not believe the government should be in the business of picking 

winners and losers. That is not something that we should do. And 

do you not believe, and, Mr. Kranz, I guess I will ask you the question. This current system that we have that places the sales tax 

compliance burdens on consumers, I mean, ultimately the first 

question is whether that is fair to consumers, asking consumers to 

figure out the sales tax for their location and where to send it, to 

calculate the amount, to send it into the appropriate authority. It 

is not fair to consumers, is it? 

And ultimately, if it is not fair to consumers and it is not fair 

to the business owners, and we are looking at all of these possibilities that may wind up favoring one business over another, should 

we not actually move forward with legislation that does what the 

Marketplace Fairness Act does, which is create a system that is 

fair to consumers and fair for all business? 
198 

Mr. GOODLATTE. The time of the gentleman has expired. We will 

allow the gentleman to answer the question. 

Mr. KRANZ. I think you are exactly right. And what the rules are 

for that system, what the framework looks like, it is Congress’ job 

to decide. You have the ability to say how much simplification, how 

much uniformity, what kind of technology should be deployed. The 

job should be easy enough that it can be done without unduly burdening remote sellers in any commerce world. And it should not be 

done by placing the burden on consumers. 

I have a couple of tax lawyer friends who actually track all their 

purchases and calculate their use tax liability. I do not. I file every 

year, but I just put a round number on the return because I am 

not going to take the time to do that. It is an unreasonable burden 

to put on consumers. 

Mr. GOODLATTE. The Chair recognizes the gentleman from Texas, 

Mr. Poe, for 5 minutes. 

Mr. POE. Thank you, Mr. Chairman. Thank all of you all for 

being here today. Appreciate the testimony. The way I look at this 

situation being from Texas is the fact that Texas should be able to 

tax people who do business in the State of Texas. So it is a States’ 

rights issue as far as I am concerned on this issue, and the Federal 

Government is getting in the way of that. 

We do not have a personal income tax in Texas or a business income tax, and I think that is the primary reason why we are doing 

real well, which is a different issue completely. But our source of 

revenue to the State is primarily the sales tax concept and property 

taxes. And I would like to just be clear on the issue as it is today. 

The fact whether or not under current law a company is doing 

business out of the State, selling a product in the State, consumer 

buys product, is there a tax that is owed already under current 

law, but just not collected? 

Mr. SUTTON. Yes, Mr. Poe, that is correct. 

Mr. POE. So I get an amen from all six of you on that one? 

Voice. Yes, absolutely. 

Mr. POE. Okay. To those people who say that it is a new tax— 

oh, this is a new tax—if we allow States to collect a tax that is already owed, it is not a new tax unless I am missing something. It 

is a tax that the consumer, the buyer now is supposed to pay, but 

because there is not enough red tape to make it work, it is not collected by the State. I mean, I guess I am saying the same thing 

I already said. Is that kind of the same—— 

Mr. MOYLAN. Mr. Poe, if I may respond. 

Mr. POE. You can make it clearer. 

Mr. MOYLAN. It is a new administrative burden, and Texas is an 

interesting example. So the solution that I put forth, origin 

sourcing, is something that is already employed in Texas for intrastate sales today. And in terms of—— 

Mr. POE. But it is a tax authority owed. 

Mr. MOYLAN. Yes. 

Mr. POE. I mean, there is a cost to set the thing up. 

Mr. MOYLAN. And I think that the issue with the Marketplace 

Fairness Act and proposals similar to it is that if you are supporting that, what you are supporting is Ms. Chu’s friends from the 

California Board of Equalization coming to your businesses in 
199 

Texas and requiring collection and remittance of their sales tax. 

And that is a very serious concern from my perspective. It is an 

interstate commerce concern. It is a burden on those businesses. 

And so, I do not think there is a question about whether or not 

the taxes are collected. It is clear that the use tax system has 

failed. The question is whether or not something like the Marketplace Fairness Act or the proposal that I forward or what have you 

is a way to address that without violating those principles of 

States’ rights being important, but ending at the State border. And 

that is something that I suspect you probably agree with generally. 

And I would put forth to you that the Marketplace Fairness Act 

fails that test. 

Mr. CROSBY. Mr. Poe, if you would not mind if I respond. What 

Mr. Moylan’s proposal would try to do is have Texas residents pay 

tax to another State, and that is clearly taxation without representation. The money would go to the other State. The other State 

would use it. 

People who move to Texas, as you say, many of them move because there is no personal income tax. They know when they live 

there, their sales tax funds government. If they make a choice to 

purchase online under an origin sourcing system to avoid that tax, 

that is not tax competition. That is tax arbitrage, and it is something that the Congress certainly should not endorse. 

Mr. POE. Mr. Cox, did you want to say something on that? 

Mr. COX. Yes. It just occurred to me that Mr. Crosby probably 

does not live in the District of Columbia. 

Mr. CROSBY. I live in the State of Maine. 

Mr. COX. Right. So when he buys lunch here and pays sales tax 

to the District of Columbia, is that something that is—— 

Mr. CROSBY. I think that is perfectly fair. I am here using the 

services. I am physically present here. It is a destination basis. 

Destination basis does not mean where I live. It means where I 

purchase the good, where I take possession of the good, where I 

consume the good. 

Mr. COX. So I am happy to hear that you are in support of the 

District of Columbia collecting tax on you even though you live in 

Maine and you are the customer. 

Mr. POE. Just a second. Wait a minute. I am reclaiming my time. 

[Laughter.] 

This is not a debate format. I am in charge for another minute 

and a half anyway, but I appreciate it. Mr. Cox, let me specifically 

ask you really the same issue. Is your concern the way this problem is solved, or do you think that this is a new tax completely, 

and we are just raising taxes on folks? 

Mr. COX. It is absolutely a question of how to solve this problem. 

You know, the art of taxation is like plucking a goose. The object 

is to get the most amount of feathers with the least amount of 

squawking. And the squawking is related to—— 

Mr. POE. Would you say that one more time? [Laughter.] 

Mr. COX. The squawking is related in large measure to the burden, the compliance burden, because, you know, if your object is to 

collect the tax, if you could do it in an absolutely frictionless way, 

that would be ideal. If you did not want any squawking, you would 
200 

collect no taxes, but, of course, that is off the table because we are 

trying to raise revenue. That is the object. 

So the next best thing is minimize that compliance burden. And 

the trouble with MFA and the trouble with any system that sets 

46 different taxing jurisdictions against one business or 9,600 taxing jurisdictions against one business or a business with locations 

in 4 or 5 States, what have you, is that there is innately a compliance burden. 

And it has been very, very carefully laid out here this morning 

with the State of Florida as an example, you know, just in one 

State, complying with these laws is very, very difficult. And nothing that Congress can do, no matter how you write the law, is 

going to take away the ultimate liability that the business bears. 

And it is particularly burdensome for a small business. 

Mr. GOODLATTE. The time of the gentleman—— 

Mr. COX. One other thing about the compliance burden that I 

want to say—— 

Mr. GOODLATTE. We are very short of time. I just want to—— 

Mr. POE. I yield back. 

Mr. GOODLATTE [continuing]. Remind all Members that we have 

votes. We are now told they could occur as early as 1. And if that 

occurs, some of our Members are going to get short-changed. 

Mr. COX. Mr. Chairman, I just wanted to add that nobody has 

mentioned: catalogs. There is no app for that. The compliance for 

catalogs is you manually do it, and that is really hard. 

Mr. GOODLATTE. Got it. The Chair recognizes the gentlewoman 

from Texas for 5 minutes. 

Ms. JACKSON LEE. Mr. Chairman, thank you so very much. It is 

good to see you, Congressman Cox. Thank you all for your testimony. Just for the record, I was the Ranking Member on the 

Homeland Security Committee, and so I was delayed. I thank the 

Chairman very much and my Members. 

In a hearing some while back, Representative John Otto of the 

Texas State House of Representatives in a question that I asked regarding—the hearing was on a different topic—regarding the fairness and exemptions for online small businesses, not for the bricks 

and mortar. But the point that he made, I think, is relevant for 

this particular hearing. And he made the point that out of the 

State of Texas, that an estimated $600 to $800 per year in sales 

and use taxes goes uncollected from out-of-State sales. With that 

premise, I want to raise my questions. 

I also want to put on the record that unfortunately many of our 

State elected officials think that it is attractive to continue to reduce corporate property, personal income taxes. Certainly we are 

sympathetic to those who pay it, but at the same time, the education of our children goes lacking. The need for water reform and 

for issues dealing with the environment, issues dealing with 

healthcare, State healthcare in particular, the bricks and mortar 

that they need to have goes lacking. 

So this is not an attempt to punish any industry as much as it 

is to recognize there is some relevance, very strong relevance, to 

fairness. And certainly I want to put on the record that I believe 

that the investment that is made in bricks in mortar in particular, 

even though there are also small proprietorships that may be 
201 

worked from their home. But the input that they have on the infrastructure is crucial to be able to be responsive, too. 

Now, we are looking at what kind of construct can we have. So 

I want to ask Mr. Moylan, can you explain the—and this is in the 

backdrop of the Senate-passed bill that is now looming large in 

front of us. Can you explain the origin sourcing and its potential 

effects on State revenue? 

Mr. MOYLAN. Sure. Origin sourcing is, as I mentioned earlier, already in effect in your home State of Texas for intrastate remote 

sales. So if somebody from Austin purchases something from Houston, the business in Houston would collect that tax and remit it to 

the appropriate authority. 

And so, what I am suggesting is that Federal Government take 

the standard that already covers some, you know, 92 to 94 percent 

of all commerce today—business to consumer, retail commerce— 

and extend it to that last 6 to 8 percent, which exists online for 

remote sales—online and catalog, as Mr. Cox pointed out. And so, 

I think that that is a much simpler solution. It is certainly dramatically simpler in terms of collection for the business. 

And what it is based in is the notion that the taxpayer for purposes of sales tax is the business rather than the individual. Certainly it is a complicated issue that, you know, there is no sort of 

obvious answer to any of these things. But in terms of who has the 

legal burden of complying with that tax in terms of who would face 

audit and enforcement action, it is the business. And in that case, 

I think it is reasonable to have the business collector remit that tax 

based on where they are selling from. And that is the idea behind 

origin sourcing. 

Ms. JACKSON LEE. It certainly is a very fair system to the extent 

that it is logical. The question would be whether or not we have 

a landscape in America where nobody in some jurisdictions are selling anything. What you are suggesting is if Houston sells it, wherever it goes, Houston collects it, and Houston gives it to the State 

or to the local jurisdiction. But do we have the potential of some 

areas where, you know, where there is not that kind of commerce 

going back and forth? Do you see any inequities there? 

Mr. MOYLAN. Yes. If I take your question correctly, what you are 

referring to is this concern that there would sort of a race the bottom, that people would move to States like New Hampshire or 

Montana that do not have sales tax in order to avoid collection. 

And what I stated in my written testimony is that Congress can 

and should make sure that any Federal rule restricts a business’ 

ability to do that so that we do not have them gaming the system. 

I think that is an important—— 

Ms. JACKSON LEE. Mr. Kranz, I am coming to you, but let me 

pose a question, and then you can expand. Can you touch on the 

problem as you see with the origin sourcing approach, and then 

maybe you want to expand on that question? 

Mr. KRANZ. Well, I will tie it back to the question you asked earlier, which is what is the impact on State revenue. So in Texas, you 

have an origin system for intrastate sales, inside the State from 

one county to another. What Mr. Moylan and Mr. Cox are suggesting is that we use an origin system between States in interstate commerce. 
202 

Well, it would be very easy for me to consult with Texas businesses and say, here is how you can avoid collecting Texas tax at 

all. And while I respect that they think there are ways to prohibit 

it, great tax lawyers other than myself will help companies figure 

out how to game an origin system very easily. It is why no country 

in the world has adopted one. So the impact on Texas revenue—— 

Ms. JACKSON LEE. And what would you offer then? 

Mr. KRANZ. What would I offer? I think the origin sourcing is 

dead on arrival, and cannot be considered as an alternative. So 

whatever the framework is that Congress adopts if it adopts any 

framework, it has to have a destination regime. All 45 States that 

have a sales tax use destination sourcing today. It is only in intrastate sales where we see origin sourcing. And if you took it out of 

the intrastate environment and forced it on the States in an interstate environment, you would have dramatic revenue impacts. 

Ms. JACKSON LEE. And you believe no State would be left out? 

Mr. GOODLATTE. The time of the gentlewoman has expired. 

Ms. JACKSON LEE. I thank the gentleman. I will look forward to 

adding any questions. Thank you, Mr. Chairman. 

Mr. GOODLATTE. The Chair recognizes the gentleman from Utah, 

Mr. Chaffetz, who has been exceedingly patient, for 5 minutes. 

Mr. CHAFFETZ. Thank you, Mr. Chairman. And thank you for 

tackling a tough issue, but something that the States are clearly 

scrambling for and wishing to have. I would draw attention, for instance, in my own State of Utah, the joint resolution. We are a fairly conservative State in Utah. Overwhelmingly passed a resolution 

saying that we have to deal with this, and allow the State of Utah 

to do what the State of Utah wants to do. That is why I think this 

bill, the MFA, was not referred to the Ways and Means Committee. 

It was referred to the Judiciary Committee because it is an issue 

that we should be dealing with in States’ rights. And I think that 

is right. 

I also want to thank Congressman Womack, who I think got us 

off on the right foot in moving in the right direction. I do see that 

there are a number of things that I think the e-tailers, if you will, 

have pointed out that need to be addressed, that can be addressed, 

to make it a better bill. As you know, I am working to try to get 

the disparate groups together to try to tackle the audit provisions, 

the integration costs, the compliance burdens, particularly that a 

small upstart that would have to deal with. How do we phase this 

in? 

But I think if the Congress will—and we will—tackle those 

issues, we can create what I think is the right principle here, and 

that is one of parity. I think every one of you have said that parity 

is an important principle and an issue. 

Mr. Moylan, would you disagree that parity is an important 

issue? 

Mr. MOYLAN. It is very clearly an important issue, and that is 

why I put forward an origin sourcing solution that I think does 

that. 

Mr. CHAFFETZ. Okay. Hold on. If you agree with parity, I do not 

see how you can ever get to parity under an origin-based system 

ever because if you are in Oregon and you have no sales tax bur-
203 

den, and you buy something from, say, the State of New York, you 

are going to have to pay that sales tax, correct? 

Mr. MOYLAN. That is correct, yes. 

Mr. CHAFFETZ. Okay. So if you are standing there in Oregon buying the exact same thing, and you are paying zero sales tax by buying it there locally, but if you go over to the internet and buy it 

out of New York, suddenly you have got to pay a double digit percentage sales tax, correct? That is not parity. 

Mr. MOYLAN. Well, I would respond by saying this, that what you 

are pointing to gets back to the original point that I made about 

who the taxpayer is for the purposes of sales taxes. It sounds like 

you are saying that the individual is what you are looking at. What 

I am suggesting is that because the business has the legal and administrative burden of the tax—— 

Mr. CHAFFETZ. Hold on. Hold on. Let us tackle that issue right 

there. When I go to buy something, I get a receipt, whether it is 

online or I am there in person. And it is going to have a couple of 

line items: cost of the good, the sales tax, and the shipping if there 

is shipping. I pay that. It is not the company that pays that. 

What I am trying to say, and I think you make a good point in 

one regard, if we can diminish the integration, the audit, the compliance, and the integration costs, and smooth those lines so that 

whether it is the mom and pop who is trying to do this out of New 

Hampshire or Virginia or Utah, wherever it might be, so the big, 

big company that does may not have physical presence in every 

State. If we can soften that burden, then I think we are onto something, and we can get to actual parity. 

But the problem I have with origin-based is that you never, ever 

get to parity. You just do not. 

Mr. MOYLAN. I think what we are getting at is the difference between the legal incidence of a tax and the economic incidence of the 

tax. And what you are referring to, the economic incidence, who 

bears the financial costs, so to speak, absolutely it falls on individuals, just as every tax under the sun does. The corporate income 

tax, as we well know, falls either on workers, on shareholders, or 

on customers. 

Mr. CHAFFETZ. We are on a different tax. We are talking about 

sales tax. When I go and I purchase an item, there is a line item 

for sales tax. And what I am saying is, if they are going to truly 

have parity, that person in Oregon who chooses to live there, and 

maybe they are taxed a different way like in Texas. But if they are 

choosing to live in a State that has no sales tax, I think they 

should have that parity. Let me go on. 

Mr. MOYLAN. May I respond quickly on the parity concern? 

Mr. CHAFFETZ. I would just as soon put a knife in the middle of 

the room and let you all scramble and fight for it, and I think that 

would be much more interesting. But maybe Mr. Kranz can tackle 

this one in the comments that we are talking about here. 

Mr. KRANZ. Yes. I think Mr. Moylan would be happiest if we 

went to a VAT, if we adopted a system of tax that truly and unequivocally taxed production. That is different than what we do in 

the U.S. today and at the State and local level. We tax consumption. We know where consumption occurs. Mr. Crosby gets his 

lunch here in D.C. He is consuming the lunch in D.C. He should 
204 

pay tax here because that is where the consumption occurred. That 

is how we tax today. 

Mr. Moylan and Mr. Cox’s proposal would upend that and would 

impose tax on production, which I think most of us would agree is 

not now we want to grow our economy. 

Mr. CHAFFETZ. And I do agree. I think taxing based on consumption as opposed to production is something that we ought to be 

deeply concerned about. 

I have purchased things here in Washington, D.C., and I have 

said, you know what? I am a resident in Utah. I should not have 

to pay that. I have them actually ship it to Utah, the exact same 

good I could buy in Utah, and avoid the sales tax. I do not think 

that is right. That does not meet the principle and the standard 

that I think we are all trying to get to, which is one of parity. 

I do hope, Mr. Chairman, we can bring the disparate groups together. I do think we can tackle these things as I have highlighted 

here. We have to deal with this. Everybody here is trying to do 

that. I appreciate that. The States are clamoring for it, and I do 

hope, Mr. Chairman, that we deal with this sooner rather than 

later, and appreciate this hearing. Yield back. 

Mr. GOODLATTE. The Chair thanks the gentleman, and recognizes the gentleman from Tennessee, Mr. Cohen, for 5 minutes. 

Mr. COHEN. Thank you, Mr. Chairman. I thank you for having 

this hearing, and I have read your principles, and I agree with 

most of them, in particular the tax relief idea. It is similar to the 

idea that I have had on a prohibition on discriminatory tax on rental cars and automobiles, not having new or discriminatory taxes in 

a certain area. And we should make sure we do not have discriminatory taxes where we tax people in ways that are not really fair 

to them. 

This hearing is important, and we need to take up the issue of 

online sales tax. The State of Tennessee does not have an income 

tax, at least on earned income, and is reliant on the sales tax for 

services. At one point, other than Mayor Cicilline, everybody here 

was from a State—Texas, Florida, who may have just evaded or 

avoided us now, and Washington State and Tennessee—that are 

non-income tax States. No surprise, I guess, that we are here. 

We are losing millions of dollars in revenue that the State needs 

to provide services, which they can. So the average citizens are 

being heard as well as mainline businesses, which have to compete 

with this new technology and a way to buy products that takes 

away from their opportunity compete in commerce. This is, of 

course, not a new tax. It is just simply collecting taxes that are already owed, and they are paid by our hometown retail folks, brick 

and mortar stores, that have a competitive disadvantage. 

I have been a strong supporter of this for many years. I was on 

the Executive Committee of the National Conference of State Legislatures for 6 years, and I enjoyed my service as a State senator 

from some of the 24 years that I was in the State senate. But I 

enjoyed all 6 years of being on the NCSL Executive Committee, 

and that was one of the major issues the NCSL had for that time, 

which goes back over a dozen years, give or take now. 

A former colleague of mine, Republican State Senator Bill 

Clabough, was a leader working on this issue. And the governor of 
205 

our State, Republican Bill Haslam, has been an outspoken advocate 

for the Marketplace Fairness Act, which would allow the collection 

of online sales tax to help our State. 

I am a proud sponsor of this bill, and it passed the Senate in a 

bipartisan fashion last year. And I would have thought the next 

logical would be to bring it for a markup, but I understand that 

we have to go through the process. And I hope that Chairman 

Goodlatte will see the process does go through, and we can pass 

this bill. There are concerns, of course, on how it might affect small 

business, but I think we can work those out. 

Today we have got some new proposals, and I do not know if it 

was Jason or whoever it was who wanted to see a knife fight out 

here. Well, I am not for a knife fight. I am against dog fights, and 

animal fights, and cock fights, and knife fights. But I hope we can 

work out these five different principles in a more conciliatory fashion, and come together with a bipartisan solution and legislation on 

this problem. 

As we are discussing this issue of taxes on remote sales today, 

Mr. Chairman, we also need, I think, to examine the issue of sales 

tax on digital goods, like downloaded music or apps. There are significant changes about which jurisdiction has the right or questions 

about which jurisdiction has the right to tax digital goods, which 

can lead to substantial confusion and multiple or discriminatory 

taxes, which we both oppose. 

The former Chairman of this Committee, my good friend, Mr. 

Lamar Smith, has a bill which I support called the Digital Goods 

Tax Fairness Act. We have a youthful Chairman this year, but I 

hope he can remember his senior predecessor and give some allowance and remembrance and give him a little, I guess, feedback and 

allow that bill to come up for a vote, and give us a uniform national 

framework on that issue, too. 

Understanding votes are coming and lunch is in the offing, I give 

back the remainder of my time. 

Mr. GOODLATTE. The Chair appreciates the gentleman, and recognizes the gentleman from Pennsylvania, Mr. Marino, for 5 minutes. 

Mr. MARINO. Thank you, Chairman. Good afternoon, gentlemen. 

Thank you for being here. First of all, let me clearly state I am a 

States’ rights guy. I think the less Federal Government in my life, 

in our lives, the better off we are. But with that said, I am extremely concerned about the uneven playing field that currently exists between brick and mortar stores and online retailers. 

However, I think it is critically important that any legislative solution to this disparity be very narrowly focused. As we all know, 

Congress has a history of trying to fix a problem, and in the process creates a dozen new ones. This is a new tax to those from 

whom the tax has never been collected. It is a new tax on them 

if it has never been collected. And I am one to not support an increase in taxes. 

So with that said, Mr. Kranz, could you please give me a brief 

sundry list of the complications involved in enforcing the internet 

tax, because there is always a complication involved. 

Mr. KRANZ. Well, you know, tax lawyers need to do something 

and so do tax accountants. Fortunately, the world has changed, and 
206 

we now have software. I do not sit down with paper forms and do 

my income tax return anymore. There is software to do that. People do not sit down and do sales tax returns on paper anymore. 

There is software to do that. 

So the burden has shifted, and I think what is being discussed 

is should it shift more. Should it shift to the States and the software companies, because right now software is out that is available. In the streamline States they are paying for it, and retailers 

do not have to. 

Mr. MARINO. Let me stop you there, if I may. I could not agree 

with you more. However, many of the small businesses in my district in Pennsylvania are owned and operated by family members, 

generations, many seniors. And I have seen in numerous situations 

where—my mother is 82 years old, and she gets on the internet 

and does her tweeting with people. But I have been on the internet 

and purchased things here and there. 

It is not as simple as just saying there is software out there to 

take care of these issues because it is not a one-two step. And if 

you are not use to doing something like that, I think it is going to 

be quite shocking to the business people and they’ll just throw 

their hands up and say we have got a problem here if we cannot 

do this. Sir? 

Mr. MOSCHELLA. Mr. Marino, I understand that there are over 

43,000 zip codes in this country, and if your small businesses are 

shipping to locations all around the United States, they are integrating the shipping prices from the common carriers for the post 

office. So, you know, if they are able to collect payment electronically, if they are able to integrate their shipping data electronically, 

the State taxes can be done electronically as well. 

Mr. MOYLAN. Can I respond to the software issue briefly? 

Mr. MARINO. Sure, go ahead, please. 

Mr. MOYLAN. The problem with software is that it is all dependent on humans at some level. 

Mr. MARINO. Sure. 

Mr. MOYLAN. And I pointed this out in my written testimony, the 

example in Wisconsin. In that case, it was about the taxability of 

ice cream cake and the enormous complexity. There was a 1,400- 

word memo about the taxability of ice cream case, the number of 

layers of this versus that, whether it is served with utensils. 

Ultimately, this is just one example of how humans have to decide is this item taxable, is this in the base or not. And then you 

put it into the software, and the software does calculations for you. 

But software cannot figure out whether or not ice cream cake is 

taxable—— 

Mr. MARINO. I do not dispute that it can be done. I just dispute 

that it can be done as simply as we think it can be. 

Mr. MOYLAN. I am agreeing with you wholeheartedly, yes. 

Mr. SUTTON. That is absolutely right. The software side of it, if 

you read the Marketplace Fairness Act, which I am sure everyone 

here has, you will see there are some beautiful exemptions in 

there. There are exemptions for the software providers, and there 

is what appears to be an exemption for the retailers, the remote 

sellers, but it only exempts them if their software provider made 
207 

a mistake. But it is the retailer that keys it in, just like Mr. 

Moylan said. So they are not exempted from those mistakes. 

Mr. CROSBY. And I think the biggest problem is the ice cream 

cake would be melted by the time it arrived. 

Mr. MARINO. Not with me around. In the interest of time, I am 

going to yield back the balance of my time, Chairman. 

Mr. GOODLATTE. The Chair thanks the gentleman, and recognizes the very patient gentlewoman from Washington, Ms. 

DelBene, for 5 minutes. 

Ms. DELBENE. Thank you, Mr. Chairman. First, I would ask 

unanimous consent to submit two letters for the record supporting 

remote collection authority legislation, one from the Federation of 

Tax Administrators and another from the National Governors Association, the National Conference of State Legislatures, the Council of State Governments, the National Association of Counties, the 

National League of Cities, the United States Conference of Mayors, 

and the International City-County Management Association. 

Mr. GOODLATTE. Without objection, they will be made a part of 

the record. 

[The information referred to follows:] 
208 

Statement of the 

Federation of Tax Administrators 

Submitted to the 

Judiciary Committee 

of the 

u.s. House of Representatives 

On the Subject of 

Exploring Alternative Solutions on the 

Internet Sales Tax Issue 

March 12, 2014 

Gale Garriott 

Executive Director 

Federation of Tax Administrators 

202-624-5891 

Gale.Garriott@taxadmin.org 
209 

Introduction 

The Federation of Tax Administrators (FTA) is an association ofthe tax 

agencies in the 50 states, the District of Columbia, New York City and the city of 

Philadelphia. 

We very much appreciate the Judiciary Committee's interest in this issue. 

The most critical tax issue facing states is the enforcement of sales and use taxes. 

Granting states the authority to require so-called "remote sellers," including 

Internet sellers, to collect sales taxes will level the playing field for competing 

businesses, improve compliance with taxes that are already owed and remove 

artificial restrictions that inhibit business investment. 

Background 

The need for a solution to the state sales and use tax collection problem 

results from U.S. Supreme Court rulings under the dormant commerce clause 

doctrine. The Supreme Court held in National Bellas Hess, Inc. v. Illinois Dep't of 

Revenue, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992) 

that a state may not require a seller that does not have a physical presence in the 

state to collect sales or use tax on sales into the state. The decision was based in part 

on the complexity of the sales tax system for so-called remote sellers (nonresident 

sellers without a physical presence in the state of purchase). While the Court 

recognized that this rule would effectively exclude an ever-growing segment of the 

retail economy from sales tax, it also noted that Congress could address the issue 

through its power under the Commerce Clause. 

Since the Quill decision, online retailing and remote sales have exploded as 

the Internet has become the preferred way of doing business for many U.S. 

individuals and companies. To address the issue of complexity for multistate sellers, 

states worked closely with the business community for almost a dozen years to 

2 
210 

simplify administration of sales and use taxes for traditional fixed-base retailers as 

well as for remote sellers. A major goal of the Streamlined Sales Tax Project was to 

reduce the compliance burden for multistate sellers. 

The Project created the Streamlined Sales and Use Tax Agreement. The 

Agreement sets out sales tax simplifications states must adopt in order to be 

members of the Streamlined Sales Tax Governing Board. The Agreement was 

created in November 2003 and became effective on October 1, 2005, when the 

requisite number of states simplified their sales and use taxes in accordance with 

the requirements of the Agreement. Key simplifications addressed by the 

Agreement include state-level administration of all local sales taxes, greater use of 

technology, safe harbors for sellers, and uniform definitions. 

Additionally, a number of states participated in the Streamlined Sales Tax 

Project but, for various reasons, chose not to conform to the Streamlined Sales and 

Use Tax Agreement. These states have also been very active in the discussion to 

simplify the process for remote-sellers to accurately report sales and use tax. The 

issues and concerns raised by the non-Streamlined Agreement states, in part, 

resulted in the dual qualification methods included in the current Marketplace 

Fairness Act. 

Position ofthe Federation of Tax Administrators 

The FTA has long regarded this issue to be a matter of the highest 

importance. Legislation passed in the Senate would significantly improve tax 

compliance for both large and small states, as well as local governments. At the 

same time, such legislation will create a level playing field for the "brick-andmortar" businesses and their out-of-state competitors selling to customers in the 

state. 

FTA therefore supports the enactment of federal legislation that would 

authorize states to require remote sellers to collect sales and use taxes on goods and 

services sold into the state. A significant number of states have simplified their sales 
211 

taxes and it is time for Congress to act on remote sales legislation. Remote sales 

legislation should be self-activating and not require additional federal 

authorizations or rulemaking, and it should respect the authority of the states to 

govern their own laws, regulations and requirements. Federal legislation should not 

incorporate any language that limits state taxing authority. 

The most important elements of a bill that would assure the participation of 

the greatest number of states under the Act are: 

',.- Authority granted to states that are either: 

o Members of the Streamlined Sales and Use Tax Agreement, or 

o Choose to conform their laws to federal statutory standards; 

',.- Authority for states to continue to impose origin sourcing for intrastate 

sales or sales by non-remote sellers; 

',.- Recognition that states may have additional ways oflowering burdens on 

remote sellers and the retention of authority for states to use these 

approaches as well; 

',.- Ability for states to designate the specific taxes covered by the generic 

phrase "sales and use taxes;" 

';. Flexibility to recognize exceptions from uniform rate and base 

requirements; 

',.- A related recognition of the need for a state to have the flexibility to 

structure its taxes in a simplified system that reflects the needs of its 

citizens; 

',.- Preservation of state authority to require sellers to maintain necessary 

records; and 

',.- Exclusion of any mandatory vendor compensation provision. 

The FTA urges the House Judiciary Committee to give serious consideration 

to legislation that would address the problem of enforcing the sales and use tax, 

giving states the ability to collect the revenues already due and retailers the ability 

to compete on a level playing field. 

4 
212 

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Ms. DELBENE. Thank you. I just want to thank all of you for 

being here today. This is an incredibly important issue, one that 

I have also worked on as former director of the Department of Revenue for the State of Washington, which is an original streamline 

State and has been very engaged in this for a long, long time. And 

I want to highlight how important it is for small businesses that 

we address this. 

We talk about burden, but if you walk down the street in many 

towns in my district, for example, there is a running store in Mill 

Creek, Washington called Run 26. The owner there has talked 
214 

about many examples of people coming in, trying on shoes, talking 

to sales associates there about what they need, and in the end buying something online so they can avoid paying that 9.6 percent 

sales tax. And that difference is an unfair difference. That 9.6 is 

the incentive for someone to buy online. 

And in many cases, this concept of what people call show rooming is the idea that people are actually looking for help on products 

to make decisions on products. And they are using local retailers 

to get information and then buying online. And that disparity is a 

huge disparity. It is decreasing not only sales tax revenue collections, but it is also hitting our small Main Street businesses. And 

I hear these stories over and over. And so, it is incredibly important that we address that and make sure we have an equal playing 

field. 

Some of the things that have been talked about are compliance 

and complications of using software. I can say as a former entrepreneur who actually helped start up an e-commerce company that 

there is technology out there that many small businesses actually 

use technology provided by others to do this work today. 

But I did want to ask Mr. Crosby, you talked about a consolidated audit agreement in your testimony and in your written statement. And I wanted you to describe in more detail how you think 

that would work. 

Mr. CROSBY. Thank you. One of the problems that has been 

raised with the Marketplace Fairness Act is a concern that remote 

sellers would be subject to audit by multiple States. And so, the 

easiest way to address that is to simply limit the number of States 

that could audit a remote seller. And one concept is to require the 

States to enter into an agreement so that a remote seller would 

only be audited by one State or a delegate of a State, something 

that might be set up by the States together. And then, for each 

audit period, which, as you know, is normally 3 years, a remote 

seller would at most be subject to audit by one State. 

The other option in there is simply to eliminate the audit burden 

completely for smaller remote sellers who use certified software so 

that the audit liability would fall there. 

There have been questions raised on this panel about whether 

that is possible. Certainly can write those liability provisions to 

protect remote sellers from unnecessary audit, and I think it is 

fairly simple to do if this Committee chooses to go in that direction. 

Ms. DELBENE. And, Mr. Kranz, how do you feel about that type 

of idea, consolidation audit agreement? 

Mr. KRANZ. I think it is exactly the direction that Congress 

should be going. You know, there is software that is in existence 

today. Making sure that it works, making sure that companies can 

use it, that everybody is held harmless, that the States provide the 

information on a timely basis so that the software works, and that 

we all get to the right answer from a tax collection standpoint. 

Those are things that can and should be ironed out in the Federal 

legislative process. Some of it is in the Marketplace Fairness Act 

in the Senate. If you look at earlier versions of the bill from previous sessions of Congress, there were different things in there. 
215 

So all of the guarantees to make certain that our State and local 

sales tax regime works properly in an e-commerce environment can 

be addressed by Congress. 

Ms. DELBENE. And one more question for you. Some folks had 

brought up earlier this idea of one rate per State, yet that would 

create a differential between local sales tax and what people did 

online. So we have a difference right now where people might have 

sales tax collected if they buy at a local store, but not if they buy 

online. Would that not also be a problem if there was one rate per 

State? Would each still have a difference between what people pay 

locally and what they pay online? 

Mr. KRANZ. There would be, and, you know, presumably it would 

be a smaller tax differential. I do not know if you were here earlier 

when I was saying that the one rate proposal really does force a 

tax increase in the lower tax jurisdictions. That to me is the biggest problem with it. 

Even it were only applied to remote sales and you narrow the 

scope of the problem, it is a rate difference. It does have economic 

impacts, and I do not think it is the right answer for the larger 

problem we are facing today. The right answer really is making 

sure that software technology information and a system is in place 

to deal with the burden. 

Ms. DELBENE. I agree. I think we are trying to get to parity 

where there is an equal playing field. 

Mr. GOODLATTE. The time of the gentlewoman has expired. 

Ms. DELBENE. Thank you, Mr. Chairman. I yield back. 

Mr. GOODLATTE. The Chair recognizes the gentleman from Idaho, 

Mr. Labrador, for 5 minutes. 

Mr. LABRADOR. Thank you, Mr. Chairman. Mr. Crosby, I have 

heard you say a couple of times, and I am confused by it. You claim 

that Mr. Moylan’s idea is taxation without representation. That 

analogy just does not make any sense to me. If you choose to go 

on the internet and you choose to deal with an out-of-State business, you are choosing to do business with that person, just like 

you do when you walk to a Washington, D.C. sub shop or when you 

walk to a Virginia tire store. So I am not really understanding your 

taxation without representation argument. 

Mr. CROSBY. Well, Congressman Labrador, let me explain it a little bit further. I think there are sort of two aspects to it. The first 

is that you are paying tax to a jurisdiction in which you may never 

set foot, a State in which you may never visit. 

Mr. LABRADOR. But you have chosen to do business with that jurisdiction. 

Mr. CROSBY. Certainly, but you have no representation there. I 

think under—— 

Mr. LABRADOR. But I have no representation in Washington, D.C. 

I have no representation in Virginia, and I choose to go to those 

places to do business when I am here in Washington, D.C. And I 

do not worry about whether I have representation in their city 

council or anything like that. 

Mr. CROSBY. That leads me to the second problem. If you go to 

this origin sourcing type of system, it is not at all obvious to the 

purchaser at the time of the transaction what tax rate will be ap-
216 

plied. And that is because the concept of origin sourcing requires 

you to fix in a specific place where that retailer is. 

When someone is looking online, shopping online, they are usually considering a variety of retailers. It will be impossible at that 

point in time to know which retailer is located where. You may 

think, for example, that Amazon is located in Washington, and you 

would be paying a Washington tax rate. But what if, because Amazon has employees across this country, instead the decision is 

where the good is shipped from? You may not know this, but at the 

time the transaction occurs, Amazon does not necessarily know 

where it is going to be shipped from. That is a separate process 

that occurs after the transaction. 

Mr. LABRADOR. But they are going to tell you, right, when you 

are making the purchase your sales tax is going to be X amount. 

Before you hit the send button, you are going to know what tax 

rate you are going to be paying, and you may choose to go to a different jurisdiction that does not charge as high a tax. 

Mr. CROSBY. The point I am making is that Amazon itself may 

not know at the time you complete transaction where it is shipped 

from. And so, if the basis is shipping, you cannot use that. As Mr. 

Kranz pointed out, if you do something like incorporation domicile, 

number of employees, or any other sort of standard, then you create a system whereby sellers can incorporate entities and put employees in them in States that do not have sales taxes, and avoid 

sales tax collection all together. So I think—— 

Mr. LABRADOR. And what is wrong with that? I mean, we have 

a competitive environment. It seems to me that we are all sitting 

here worried about people actually reducing the taxes at the State 

level. And I think we should be for reducing taxes at the State 

level and making business more competitive. I am worried that this 

is actually going to make business less competitive. 

If you listen to what the Chairman said in the beginning is that 

where the growth is happening right now is on internet sales. 

Every time that we choose to tax something, we kill it. Every time 

we choose to tax something less or not tax it, we actually allow it 

to grow. Why should that not be what we are actually encouraging 

here in Congress? 

Mr. CROSBY. It may be that you and I have a difference of opinion over what tax competition. I think when I choose to come to 

D.C. and do something here that I am participating in this economy here. When I choose to reside in my home State of Maine, I 

am subject to the tax laws there. When I choose to invest in the 

business that I own part of here in Virginia, then I am subject to 

the tax laws there. 

I do not believe by clicking a button online I am fostering tax 

competition. I simply think that is tax arbitrage. And if you go to 

an origin sourcing regime, what you are certainly doing is encouraging non-U.S. commerce because you are exempting all foreign 

companies from collection of any taxes here in the United States. 

Mr. LABRADOR. Mr. Cox, what do you think about that? 

Mr. COX. Well, you know, our system at present is one in which 

an enormous amount of retail commerce takes place as you described; that is, you know, people who buy things in other States. 

One of our constitutional rights is the freedom to travel, and people 
217 

***Material previously submitted, see page 212. 

travel all over the place. They travel in their cars. They travel on 

airplanes. You know, in places like this where States are so compact they can walk across State borders. And I have never heard 

anyone complain about the existing system. 

And so, you have to ask yourself, should we upend it? Is it somehow offensive to our American values? You know, I happen to be 

here in D.C. It is not like I have a choice of buying lunch in Maryland today. I mean, I am going to pay the taxes here whether I like 

it or not, and I am not represented here. That is not the issue. 

That is a red herring. 

The question is, is it a straightforward tax on my consumption, 

and the answer is, yes, it is. It gives me the opportunity to put to 

rest another canard because I think I heard Mr. Kranz earlier suggest that the idea of home rule and revenue return is somehow a 

tax on production and not on consumption, and that is absolutely 

false. It is a sales tax. The tax and the economic incidence of the 

tax is on the consumer. The money goes to the State where the consumer lives. That is a consumption tax period. It is not at all a tax 

on production. 

Mr. LABRADOR. That actually was going to be my follow-up question. And my time has expired, so thank you very much for your 

time. 

Mr. GOODLATTE. The Chair thanks the gentleman, and recognizes the gentleman from Rhode Island, Mr. Cicilline, for 5 minutes. 

Mr. CICILLINE. Thank you, Mr. Chairman. I would first ask 

unanimous consent that the statement of the National Conference 

of State Legislatures*** issued today in response to this hearing be 

made part of the record. 

Mr. GOODLATTE. I apologize—— 

Mr. CICILLINE. No. I am not just asking unanimous consent that 

it—— 

Mr. GOODLATTE. Without objection, it will be put in the record. 

Mr. CICILLINE. Thank you, Mr. Chairman. I thank the witnesses 

for being here. And I am new to this Committee, but not completely 

new to this issue. And frankly, as I listen to the testimony and review the materials over the last several days, I am not sure why 

we are not acting on the Marketplace Fairness Act. It seems as if 

this has been a very long discussion by this Committee. I served 

as mayor of a city before I came to Congress, and I have seen in 

my home State the impact of the loss of revenue because of online 

sales escaping State sales taxes. 

The National Conference of State Legislatures estimates that 

States have lost $23.3 billion in uncollected tax sales tax from online and catalog purchases in 2002. And my State during that same 

time period lost $70.4 million and for all the reasons Congressman 

Deutch spoke about. That has an impact not just on revenues and 

services in cities and in States, but on services in cities and in 

States, but on quality of life, on the prosperity of Main Street, on 

the ability of retailers and small businesses to compete. And it is, 

frankly, a system that is just not fair to our small business, and 

retail districts, and commercial districts, which are the heart and 
218 

soul of neighborhoods in many instances at a competitive disadvantage. 

So I hope we can move on this. I am a proud sponsor of the Marketplace Fairness Act. I want to ask Mr. Kranz, you said many of 

these proposals were considered and rejected already, so this is not 

a new discussion. Could you just describe that process for a moment? 

Mr. KRANZ. Sure. This discussion has been going on for decades 

really, and legislation was introduced for the first time in Congress 

in 1973, more than 40 years ago, to deal with it. So throughout the 

last 40-plus years, there have been discussions about origin 

sourcing. There have been discussions about reporting regimes. 

All of these ideas are not new. And much of the discussion that 

has taken place was a collaborative effort between businesses, both 

Main Street business and dot.com, and State government representatives, both governors, legislatures, cities, counties. They 

were all at the table trying to come up with a solution to this problem. The solution that they have gotten behind has been the 

Streamline Sales and Use Tax Agreement and the Senate Marketplace Fairness Act and earlier versions of that legislation. 

It really represents an effort by the State government community 

to reach their hand out to Congress not for a handout, but to shake 

hands and say let us partner, let us solve this problem with a Federal and State solution that fairly deals with remote commerce. 

Mr. CICILLINE. And I hope we can get to that point because I 

know it is very important for my State, and I know it is very important for many communities. 

And I just want to ask, Mr. Moylan, because it seems as if there 

had been some discussions as to whether or not this is a new tax 

or enforcing an old tax. It clearly it is about enforcing existing responsibilities in terms of sales tax. I think the only place that it 

is actually a new tax is the origin sourcing system because you 

have those five States that currently pay no sales tax, and under 

your proposal, they would then become taxpayers of sales tax for 

the first time. So those are actually new taxes. 

Mr. MOYLAN. I would say quite the contrary. What something 

like the Marketplace Fairness Act would do is require businesses 

in States like New Hampshire and Montana that have chosen to 

locate in non-sales tax States to collect and remit sales taxes to 

every other State that does have a sales tax. So it takes away from 

them a choice that they have made. 

And again, this gets back to the issue of who is the taxpayer for 

this, and my response to it is that the legal and administrative 

burden falls on the business—— 

Mr. CICILLINE. Well, that is your description of who the taxpayer 

is, but the person who is actually paying the tax is going to be the 

individual purchaser, correct? 

Mr. SUTTON. I will tell you—— 

Mr. CICILLINE. I would like to ask Mr. Moylan that question. 

Mr. MOYLAN. We have gotten to this discussion somewhat before, 

the difference between the legal incidence of a tax and the economic incidence. And I would stipulate that, yes, the economic incidence of every tax under the sun falls on individuals. In this case, 

the legal incidence of the tax falls on the business, and so for me, 
219 

I think that is the right frame of reference. And in that case, that 

is why I support origin sourcing. 

Mr. CICILLINE. Mr. Kranz, it looks like you want to respond to 

that. 

Mr. KRANZ. That is just a misrepresentation of the law across the 

country. In a majority of States, the legal incidence is imposed on 

the consumer, and where it is imposed on the business, they are 

required to pass it through to the consumer. So it is a 

mischaracterization of what is out there legally. And it ignores the 

reality of the economics, which is only the consumer is is responsible for the tax burden. 

Mr. CICILLINE. Thank you. I thank you, Mr. Chairman. I yield 

back. 

Mr. GOODLATTE. I thank the gentleman. The gentleman recognizes the gentleman from Texas, Mr. Farenthold, for 5 minutes. 

Mr. FARENTHOLD. Thank you very much. And I think Mr. Cox hit 

the nail on the head in answer to a question from Judge Poe. This 

whole thing is about getting the most down with the least squawking and plucking a goose. And I think legislatures and States see 

this is an opportunity to say, oh, well, we did not raise taxes. We 

just started collecting more taxes. But I kind of agree with Mr. 

Marino who said, you know, this tax was not being collected before 

and is being collected now. It sure smells like a new tax to those 

of us who pay it. 

And I have sat here. You know, I am familiar with the Marketplace Fairness Act, not a big fan of that. I have heard numerous 

different proposals here, and it is like we can just punch holes in 

each one of them. I still have not particularly heard one that I like. 

I mean, I understand the problem, and we are talking about the 

administrative burdens of collecting it. And the current system is 

kind of fair with that respect. 

Mr. Moschella, your mall folks, if there is a fire, they are going 

to call the fire department, and in exchange for the administrative 

burden of collecting that local sales tax, the fire department is 

going to respond. The police are going to come out when there is 

a shoplifter, for crowd control on black Friday. The internet retailers are not getting the advantages of any of those services. 

So, I mean, yours kind of falls apart on that one to some degree. 

Mr. MOSCHELLA. I do not think so. I mean, as I said before, I 

want to make two points, one a constitutional one, and then on a 

practical one. On the practical side, the Congress—— 

Mr. FARENTHOLD. Quickly because I have got a lot to do. 

Mr. MOSCHELLA. Congress did this in 2000. It has worked with 

regard to alcohol, and it could work under my proposal. 

Mr. FARENTHOLD. All right. 

Mr. MOSCHELLA. But your question raises an interesting constitutional point of why we are here. 

Mr. FARENTHOLD. All right. And I am interested in the Constitution, but I want to get to the nitty gritty on these. We can talk a 

little bit about the Constitution. Mr. Moylan, I think in the answer 

to some of your questions you said you should prohibit a business 

from relocating to a tax jurisdiction or a lower tax jurisdiction. I 

mean, what about, you know, somebody who is selling something 

on Etsy in Texas, and their spouse gets transferred to Oregon? I 
220 

mean, are you going to shut that business down? I mean, yours 

falls apart there. 

Mr. MOYLAN. No, certainly not. I did not mean to suggest that 

we should prohibit businesses from moving. What I meant to suggest is that we should prohibit businesses from setting up fake operations in States like New Hampshire to avoid collection. 

Mr. FARENTHOLD. And we have all pretty much agreed we cannot 

tax on a foreign jurisdiction. I ordered a computer for my wife for 

Christmas. I bought her what I wanted, I confess. But it shipped 

from Juarez, Mexico. What is to stop a retailer from setting up just 

across the border shipping in? We have got some great border 

crossings in Texas, does not cost a whole lot more to ship. You completely avoid taxes that way. I mean, you could fall apart that way 

just on the international end. 

And, Mr. Crosby, you talked a lot about building this database 

with all these—— 

Mr. CROSBY. No, not me. I am not a fan of—— 

Mr. FARENTHOLD. Mr. Sutton, I am sorry. Mr. Sutton, of these 

databases with all these safe harbor provisions in them. To me, 

that is a massive creation of Federal regulation. And then if we 

have the government build that reporting database, we see how 

good the government is with databases with healthcare.gov. I 

mean, we cannot compute our way out of a paper bag here in 

Washington. Go ahead. 

Mr. SUTTON. I do not disagree that there is definitely complications, and I got invited to this hearing about 10 days ago and put 

that together in the last 10 days. 

Mr. FARENTHOLD. And I appreciate that. 

Mr. SUTTON. So I understand it has been done before. But I have 

been very much an opponent against the Marketplace Fairness Act 

for a long time, and something big picture wise. I do not think anybody in here has grasped, because I have heard a bunch of people 

talk about this is not a new tax. Well, if a business is selling remotely to Florida right now, the business does not have physical 

presence, it is not subject to sales tax, and it is not subject to use 

tax because both of those taxes are based on things that happened 

in Florida. 

If this law passes, all of a sudden that business is going to be 

subject to the sales tax in Florida. So it is going to have an incident 

of tax where it did not have before. And if it does not pass it onto 

the consumer, it is liable for it. If it makes a mistake in calculation, 

it is liable. 

Mr. FARENTHOLD. And I understand that. Again, I also remain 

concerned about the database of stuff going and what is going to 

be taxed. I mean, in Texas, potato chips are not taxable if you buy 

them at a grocery store, but are taxable if you buy them in a vending machine. Is the internet more like a vending machine or is it 

more like a grocery store? 

Mr. SUTTON. The complications on the software side are unbelievable, and it is in the Marketplace Fairness Act, and it is in my 

idea. It is on both sides. But I have talked to two different software 

providers, one of them who is in this room right now and a huge 

proponent of the Marketplace Fairness Act, who says their data-
221 

bases, their software, already sanitizes private information out of 

when it comes out of the vendor. They already do it. 

Mr. GOODLATTE. The time of the gentleman has expired. 

Mr. FARENTHOLD. I see I am expired, and I appreciate it. And we 

did not even get into the privacy concerns—— 

Mr. GOODLATTE. The time of the gentleman has expired, and the 

Chair recognizes the gentleman from Georgia, Mr. Collins, for 5 

minutes. 

Mr. COLLINS. Thank you, Mr. Chairman. I think this has been 

one of the more interesting debates, proposals. It is something that 

I have heard since I have been up here, and also one of the most 

interesting things from my district in which I have small business 

owners and which I have known and loved. I grew up in my hometown, and I have been in my office, and I have almost as many 

small businesses who did different things come into my office and 

say we love this, this is the greatest things since sliced bread. They 

read their talking points and they love it. And then I have had almost as many businesses come in and basically say this is the 

worst thing in the world, and if you do this, the world will end. 

Both sides seeming to go to the extremes here. 

I think some of the things that I want to go back to, because we 

have really killed a lot of these issues, origins and different things, 

on how we look at it. I am thankful that the Chairman is taking 

this on and presenting principles on what we have to look at because it is an issue that needs to be solved. Our marketplaces are 

changing, in the way of distribution and in the way of a person is 

changing. 

I think it is also a little hyperbole to talk about companies, and 

we have named several here today that are closing stores and 

doing things like that. Some of that could just be because they have 

a bad sales model, okay? They have never updated. They are not 

selling like they should, retail. And there is some of that that needs 

to be taken into account here. It is not all, but it is some. 

The other question that I have in this really, and I was talking 

to my legislative director about this today. What bothers me the 

most about this issue right now is that we cannot solve it. But my 

issue is that we are so headlong into solving it, which I believe we 

need to do because government has got out of picking winners and 

losers, which we are doing here, is that we are going to close one 

Pandora’s box and open another. 

And that is the question that I think I want to talk about. One 

is the question of jurisdiction. Anybody wants to take this on. But 

when you deal with jurisdictional issues in the Main Street Fairness Act, you know, is the taxing State’s jurisdiction over a remote 

seller a choice of venue to enforce an action? Where is that going 

to be a process here? Is there an enforcement action based on the 

point of sale or the point of consumption? Where would be a jurisdictional question? 

Mr. CROSBY. Mr. Collins, in my proposal I address that. It is part 

of the consolidated audit provision that the remote seller would 

have choice of venue. So it would enable them to choose the venue 

so that they could adjudicate any dispute over uncollected sales 

taxes in their home State or in another State in which they do 

business. 
222 

Mr. SUTTON. Well, that addresses the civil side, but what about 

the criminal side? They are holding trust funds for those businesses. They are subject to all the criminal laws in Florida. And 

by creating this law, did you just allow personal jurisdiction over 

those business owners on the criminal side? 

Mr. COLLINS. Well, someone just said earlier concerning, you 

know, just making it click, I do not believe brings any jurisdiction. 

I am not sure that is true, Mr. Crosby, especially if you deal in 

other areas of the criminal code and other areas where if you clock 

to a site you are not supposed to be on, you have claimed jurisdiction. They can go after you because you have been on the site. 

We are going into an area here that I think is, I almost agree 

completely with the gentleman from Utah. Have all of you here, 

which I have all been watching and I can see sort of the pattern 

going, yes, no, yes, no. It is the faces out here. Is just throw it in 

the middle and say fight it, who comes out on top wins. The problem here is that the bottom line is for all the interest in this room, 

it is about the consumer. It is about the American populace. 

And I understand State and local governments. I served in the 

State legislature in Georgia in which we took this on, and we 

passed it. Basically we put the nexus in with the brick and mortars 

which took out a lot of our ‘‘retail internet stores’’ where they were 

simply just ordering for folks, avoiding the tax, sitting next door to 

a place that actually had to charge the tax. We provided the nexus 

to a building. 

And there has been a lot of conversation, well, Georgia did it, so 

we can apply this to the Nation. The nexus was applied to a brick 

and mortar. The nexus was not applied to an amorphous, which is 

something which is already supposed to have been collected anyway. We have all talked about that. 

All your proposals are interesting. I think, Mr. Chairman, the 

question that I have, and maybe just to end it with this. What are 

the consequences, and I think we probably need to act here. What 

are the consequences if we do not act? 

Mr. KRANZ. It is covered in my testimony at length. But I think 

the consequences of congressional inaction are that the States will 

attack remote commerce on their own. Seventeen States have already passed legislation to do that. And there is a discussion in the 

State tax policy taking place about the States working together as 

a group to really coerce remote sellers to collect. 

Mr. COLLINS. And I agree with you, and I want to get this basically. Another thing that is going on here is if the States and local 

governments receive this, then there is some kind of tax, you know, 

that we can offset that. And I know some States will say, well, if 

we get this, we will offset our own tax rate. I find that very hard 

to believe. If you get something that you have not been having, 

why move your bottom line? There is going to be a move to try and 

do that, but the actual reality there is probably not true. 

And with that, Mr. Chairman, I yield. 

Mr. CROSBY. Mr. Collins, if you do not mind. A number of States 

have already done that. In Ohio, it is unfortunate that Mr. Chabot 

left because he asked this question earlier. In their budget last 

year, they actually passed a provision that creates a special fund 

so that any monies that would come in from remote sales are auto-
223 

matically diverted to that, and those monies are then used exclusively for a reduction in the personal income tax rate. Whether that 

is the right answer for all States I do not know, but it certainly 

is for Ohio. 

Mr. GOODLATTE. The time of the gentleman has expired. The 

Chair recognizes the gentleman from Missouri, Mr. Smith, for 5 

minutes. 

Mr. SMITH OF MISSOURI. Thank you, Mr. Chairman. Thank you 

all for being here, and I am glad to ask a few questions. 

Mr. Crosby, my first question is to you. What do you think are 

some of the difficulties of integrating the sales tax collection software in the existing programs? And also, are there enough providers of software to efficiently handle collecting and remitting to 

customers in other States? 

Mr. CROSBY. Thank you, Mr. Smith. I will take the second question first. Yes, there are enough software providers doing this 

today, ranging from startup businesses to very large businesses 

that have been handling payroll in this country for Fortune 500 

companies for decades now. 

Certainly, if and when the Marketplace Fairness Act or something else like it passes, that market will grow, and there will be 

more providers that enter into it and that are looking to assist retailers in collecting sales taxes. 

To the first question about integration, for the overwhelming majority, probably 99 plus percent of online sellers, the small mom 

and pops, very few of them hire their own computer consultants to 

design shopping carts. Almost all of them use off the shelf solutions 

provided by third parties, whether they are online marketplaces 

that are out there or third party software providers. To the best of 

my knowledge, all of the certified sales tax collection software providers that are out there today integrate with hundreds of the most 

popular shopping carts. So for those businesses, integration is relatively simple. And I have seen demonstrations for a number of different providers where they actually do the integration right in 

front of you. 

For larger businesses, maybe the top 500 online sellers in this 

country that may have developed their own software to deal with 

shipping and orders, there may be additional compliance. But in 

my testimony, I have laid out, I think, that the Committee in the 

Congress can handle that by providing some allowances for integration costs. 

Mr. SMITH OF MISSOURI. Okay. Thank you. Mr. Cox, in your portion of some written testimony, when you were discussing the principles the Chairman released, you have talked about the idea of 

fairness. Would you mind elaborating on the issue of fairness when 

discussing the different proposals we have heard today? 

Mr. COX. Yes, thank you. And if I might just on integration, in 

my written testimony there is data from a recent study of integration costs for medium-sized businesses with revenues between $5 

and $50 million, and the integration costs range from $80,000 up 

front to $290,000 up front for these businesses. So it is a real issue. 

The fairness question is shot through this whole discussion. 

There are constitutional issues because we are talking about jurisdiction and the extent of States’ power, and some of those constitu-
224 

tional issues are due process issues. And as all the lawyers on this 

Committee well know, due process at its core is about fundamental 

fairness. So it is both the political question and it is the technical 

legal question that we have to resolve. 

And we have to ask ourselves at one level is it fair to have a 

patchwork system in which brick and mortar sales and online sales 

from somebody right next door are in all senses equal, except one. 

The answer is no, so here we all are trying to find a solution. Then 

when you come to solutions, we have to ask ourselves, all right, 

how are we going to get the administrative burdens and the compliance costs down so it is not unfair in that sense? 

And what we have found in the deep dive, not just through the 

iterations of the Marketplace Fairness Act, but going all the way 

back to when we first passed the Internet Tax Freedom Act and 

set up the Advisory Commission on Electronic Commerce, is that 

while the sales tax itself is part of a competitive differential, the 

bigger variable in that equation is the compliance costs. And so, we 

are going to have to make some tradeoffs here. There is no perfect 

system, as surely this hearing abundantly displays, that neatly 

solves every problem and makes everybody walk away with a 

smile. 

It is difficult to collect taxes. It is especially difficult with the 

challenges that catalog sales present, which has not gotten much 

discussion here because they do not get the advantage of all the 

computer wizardry that we might bring to bear. But that is the definition, I think, of the fairness problem. 

Mr. SMITH OF MISSOURI. Okay. Mr. Cox, would your proposal return the sales tax to the customer State so that it would be used 

to pay for the benefits, like schools and first responders, that other 

Members have mentioned? 

Mr. COX. Yes. That is a key feature of it. The money is returned 

to the State of residence of the purchaser. 

Mr. SMITH OF MISSOURI. Okay. But to that local jurisdiction. 

Mr. COX. Yes. The tax money is treated as would any tax be 

treated within that State. So if there is a local piece of it, then the 

local piece would go where it belongs. 

Mr. SMITH OF MISSOURI. Okay. Thank you, Mr. Chairman. 

Mr. GOODLATTE. Thank you. The Chair recognizes the gentleman 

from Florida, Mr. DeSantis, for 5 minutes. 

Mr. DESANTIS. Thank you, Mr. Chairman. Thank the witnesses. 

First, I just think some of the arguments that are put forward I 

may not agree with, but I say they are credible. Some do not strike 

me as credible. I mean, this idea that States are just going to reduce taxes to account for the increased revenue they get here. I 

think some States may do that. I mean, I agree probably Scott 

Walker will try to do that. But ultimately the legislature has got 

to agree to that. And here you would basically be having Congress 

imposing a regime that is leading to higher taxes and more revenue for them, so they would be getting the revenue without having to pay the political price of having voted to implement that. 

And I just think politicians are not going to want free money basically, and so if they have that, they can spend it. So I do not think 

that is really a good argument for it. 
225 

In terms of the representation, I know, Mr. Crosby, you had a 

colloquy with Raul Labrador. And it seems to me that if I am here 

in Washington and I pay sales tax for lunch is the example that 

has been, yes, I am not represented in Washington, but if someone 

were to mug me, the cops would come. The taxes I am paying actually I am somewhat consuming services by being here. 

But, yes, you think that that is, I guess, somehow—I mean, for 

example, the Marketplace Fairness Act. You do not think that that 

would be taxation without representation, because it seems to me 

that if I am a business in Florida and the only thing I do is ship 

a product to California, if I have no physical presence, I am not 

stepping foot there, I am not consuming any services. All I am 

doing is shipping something presumably through U.S. mail or a 

private carrier. Yet somehow I would be commandeered to be a tax 

collector for that jurisdiction. So that strikes me as much more in 

terms of a taxation without representation problem. 

And we can sit here and say the regulatory burdens essentially 

cost these businesses money. So how would you respond to that? 

Mr. CROSBY. I think your first point I would agree with in terms 

of, you know, here in D.C. you are certainly getting the benefits 

and protections of police, fire, whatever it might be, and so it is not 

really a question of taxation without representation. 

To your second your point of the Florida business who is shipping to a consumer in California where the business has no physical presence, unlike Mr. Moylan, I mean, I agree with Mr. Kranz. 

The tax burden actually falls on the person in California. So what 

we are talking about is the regulatory burden or the administrative 

burden of tax collection. 

And having been involved in this for nearly 2 decades now, I am 

more than convinced that this Committee can craft this legislation 

that will dramatically reduce, if not eliminate, that burden. I have 

seen the software work. I know businesses—— 

Mr. DESANTIS. Do you believe that the Marketplace Fairness Act 

created a substantial burden for those retailers in that situation, 

or do you think that that was acceptable? 

Mr. CROSBY. So the Marketplace Fairness Act, you know, to your 

point about sort of State action, would require a State to do something before it would be able to authorize the authority and require 

remote sellers to collect. In those things that it would be required 

to do, there are some substantial simplifications in there. Is it 

enough? Probably not. There are things that this Committee can do 

that could strengthen it. 

So, no, I think certainly there is no burden less than doing nothing. Remote sellers are not collecting now. Anything you do that requires collection is more than what they are doing now because 

they are currently doing nothing. So there will be some burden. 

The question is, can you balance the burden on them with the burden on the consumer currently who is required, if they are being 

diligent about their taxes, to pay their use taxes, and the State and 

local governments who are currently, because of a Federal preference, unable to collect that revenue? 

Mr. DESANTIS. So I take that point, but I do think there is still 

a lack of a political accountability because if you are being audited 

by somebody in another State, or even if they do not even get that 
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far. Even if there are just requests for payments or people are 

pinging you, ultimately how you are treated by them, you are not 

going to really have a direct way to affect that. 

Now, in terms of the advantage from kind of a remote retail 

model, Mr. Kranz, how would you respond because it seems to me 

just looking at what has happened recently, you do have actually 

a lot of online retailers who have actually expanded their physical 

presence into additional States. And so, if that is true, then why 

have we seen that behavior? Would the idea that this is such a 

boon to be an online retailer not have incentivized them to contract? 

Mr. KRANZ. I think what we are seeing throughout the retail 

world is a recognition that consumers want what is called bricks 

and clicks. They want retail stores. They want to be able to order 

online 24/7 when the retail store is not open. So it is not surprising 

that business models have changed over the last decade, and we 

went from pure brick Main Street retailers and pure online retailers to a world where often companies have both a physical presence 

in some States, maybe stores or warehouses, distribution centers, 

and an online presence that is available to consumers 24/7. 

Mr. DESANTIS. So there must have been something about doing 

that in spite of how the tax would be treated if they were to remain 

in one jurisdiction that incentivized them to do it. In other words, 

the tax was not the only issue. There were consumer demands or 

whatnot, so I appreciate that. 

Am I out of time? 

Mr. GOODLATTE. Your time has expired. 

Mr. DESANTIS. I am out of time, so I will yield back to the Chairman. Thank you. 

Mr. GOODLATTE. The Chair recognizes the gentleman from Texas 

for 5 minutes. I would note that if he is brief, we might get both 

remaining Members in for a few minutes. 

Mr. GOHMERT. Okay. We will try to accommodate that. Appreciate everybody’s testimony here today. And there has been a lot 

of discussion about avoiding penalizing brick and mortar. That is 

a huge problem I hear about in the district. But instead of getting 

the Federal Government so much more involved, which is a huge 

concern of mine. I know some people think, yes, if we just get the 

Federal Government involved, that will solve our problems. And 

they learn too late that that is not the solution—hello, Obamacare. 

But is there a way to just encourage more collection of current 

use taxes without getting the Federal Government so involved? 

Anyone who cares to interject. 

Mr. KRANZ. I will jump in here because over the last 15 years 

there were discussions that said Congress could pass a one-sentence bill that simply overturned the Quill decision, and left it to 

the States to figure it out from there. 

Mr. GOHMERT. What do you think of that? 

Mr. KRANZ. Well, it is a solution, but it is a fairly dramatic one 

that does not give remote sellers any protection. It does not guarantee that software will be available. It does not solve the burden 

question. It leaves that question entirely to the States. 

We have seen the States working to solve the burden problem for 

15 years in the streamline effort. It is really up to you, though. Do 
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you want to just turn it over to them entirely? And if you do nothing, I think you are turning it over to the States entirely. They will 

figure out how to attack this one way or another. 

If you think that that is not the right approach to protect sellers, 

then you need to do a framework. You need to have a framework 

that is put together by the Federal Government. 

Mr. GOHMERT. And, of course, another problem is, and it has 

been discussed. But if you have an origin tax, I did not hear any 

solutions, but what is to stop people from moving out of the country 

where there is no tax, and then they do not have an origin problem? And my friends across the aisle love to talk about penalizing 

people that move businesses out of the country and then create systems where it completely encourages the very thing they decry. 

But one other quick thing. Is there a solution for origin tax that 

would not drive businesses out of the country? 

Mr. MOYLAN. Mr. Gohmert, if I could respond to that. I think 

that the first thing to point out is that that incentive already exists 

under current law, that if you are a business that is located overseas, or inside the country to move to New Hampshire or whatever 

to avoid sales tax collection. Mr. DeSantis pointed out that the experience has actually been that businesses have been expanding 

their physical presence and building more in the United States precisely because of Mr. Kranz’s point that it seems as though the 

model of the future will be a kind of brick and click hybrid. 

And so, there is one point I wanted to make on complexity that 

I think is important. There is new data out this morning actually 

from the Tax Foundation that says that the number is not 9,600 

tax jurisdictions. It is $9,998, so we are almost at the magic 10,000 

mark. And what that says is that all of these suggestions that software can just solve that problem I think are overblown. And I always point to the example of Turbo Tax. If you think that Turbo 

Tax has solved income tax complexity, then you must think that 

software can solve sales tax complexity. And personally, I do not 

think that Turbo Tax has solved income tax complexity. 

Mr. GOHMERT. But is that not what our Secretary of the Treasury was using when he could not figure out the—— 

Mr. MOYLAN. A perfect example of somebody who ought to know 

better who did not, and there are many of those in the sales tax 

world as well where you have sometimes honest mistakes. Surely 

there are fraudulent examples as well. And this is very difficult 

to—— 

Mr. GOHMERT. I would ask that anybody that has any further 

input. I know you guys have been going for a long time, but would 

welcome any proposals in writing. I know you have provided written testimony, but I would yield back. 

Mr. GOODLATTE. The Chair thanks the gentleman for yielding 

back, and recognizes the gentleman from California for whatever 

time we can squeeze out. 

Mr. ISSA. Thank you, Mr. Chairman. When Henry Hyde chaired 

this Committee, he often said that even though, you know, somebody goes last, it does not mean they cannot come up with an original question. I am going to try to live up to that Henry Hyde expectation. 
228 

Mr. Cox, you and I served together, and a lot of these things do 

go back to that assumption that we had to not tax the internet for 

it to prosper. So let me ask a couple of quick questions, and I will 

accept, unless somebody has an absolute no, that everyone I saying 

yes. Mr. Cox, is it not true that we are supposed to regulate interstate commerce? 

Mr. COX. Yes. 

Mr. ISSA. And by definition, interstate sales are interstate commerce. So we have a mandate that we are not living up to by not 

dealing with this problem, would you not agree? 

Mr. COX. Yes. 

Mr. ISSA. And is it not true that as a California resident now, 

or always been a California resident, but back in California if you 

order something from out-of-State and have it shipped to your 

home in Orange County, and you do not pay sales tax, you are violating California law. Is that not true? 

Mr. COX. That is correct. Our laws are enforced about the same 

as our immigration laws. [Laughter.] 

Mr. ISSA. So I will mention that if my old company were to order 

something from out-of-State, they get audited every single year by 

multiple jurisdictions, including California, to see if we bought anything and had it shipped to California. So there is some when it 

is more feasible. 

So just a quick question. Since you would be breaking the law 

if you do not pay the tax, part of what we are considering is relieving the burden on whatever portion of $318 million who live in the 

45 States in which they would be breaking the law if they do not 

pay tax. In a sense, we are fixing a problem of some large portion, 

nearly 300 million lawbreakers. Is that not true? 

Mr. COX. Yes. Mr. Crosby just mentioned this, you know. Because in theory, and it is mostly theory, everybody in America in 

a sales tax State owes use tax. When they do not pay the sales tax 

on out-of-State purchases, we are relieving them of their theoretical 

sin. 

Mr. ISSA. So I am going to ask you a rhetorical question. If we 

simply made interstate commerce report out-of-State sales to the 

State in which it was sent to, meaning we send the data on 10 million sales from Florida or Oregon, require they be sent to California’s Sacramento, you know, Ouija room, and they had the names, 

the addresses of all these shipments, in a sense, would we not almost guarantee that the residents of every State would say, please, 

stop burdening me. Find a solution. I do not want to get this, so 

I want my vendor to collect this tax because I sure as heck do not 

want to have to deal with 45 different purchases I made. 

I mean, in a sense we are dealing with if the American public 

were forced to recognize the law that they are not supporting in 

their own State, we would have an outcry of hundreds of millions 

of people asking us to fix this, would we not? 

Mr. COX. Well, I think it is fair to say that if you take a look 

at the behavior of the State legislatures and governors, that the 

last thing they want to do is enforce use taxes on their own citizens. And so, what they would much prefer to do is impose those 

burdens on people that do not live in their State. 
229 

Mr. ISSA. Well, there is no question that the State of California 

has been very good at finding ways to try to get other people. They 

are currently trying to say if you sell a building in California in a 

1031 exchange, they would like to tax that 20 years later if you sell 

the building. And we are very aware of California’s long arm. 

Mr. SUTTON. You asked the question—— 

Mr. ISSA. Yes. 

Mr. SUTTON [continuing]. That if we disagreed with your first 

comment to speak up. I do not believe Congress has the obligation 

to interfere with State commerce. I believe it has got the power to 

do it, and it was given to it by the States because the States when 

this country was founded knew that the States were not good at 

doing this. It was a horrible mess in the Articles of Confederation. 

Mr. ISSA. Okay. Well, let me ask one exit question because my 

time is expiring. Does anyone on this panel, are they willing to say 

here sort of under oath that if we fail to fix this, we are not, in 

fact, dooming brick and mortar shops who find themselves in California at over 8 percent disadvantage to the person that walks into 

the shop, looks at that TV, and then buys it on the internet and 

has an 8 percent advantage to somebody who is not paying the tax? 

Is there anyone that actually would tell me that we are not dealing 

with an inequity that is adversely affecting the normal flow of competitive commerce? 

Mr. MOYLAN. I would respond briefly and say I think ‘‘doom’’ is 

perhaps a strong word. But you are getting at the issue of show 

rooming. 

Mr. ISSA. Is it not unfair competition? 

Mr. MOYLAN. Right, the inequity of the sort of show rooming 

issue. And this is something that I think is really important to 

point out that we have not yet in this hearing, which is that the 

show rooming concept—— 

Mr. ISSA. Is that not part of our—— 

Mr. GOODLATTE. The time of the gentleman has expired. All time 

has expired. 

Mr. ISSA. Thank you, Mr. Chairman. 

Mr. GOODLATTE. There is 1 minute and 56 seconds left in this 

vote. I apologize I will not be able to get down and say hello to the 

panelists. You all did a great job. 

This concludes today’s hearing, and I thank you all and everyone 

for attending. 

Without objection, all Members will have 5 legislative days to 

submit additional written questions for the witnesses or additional 

materials for the record. 

The hearing is adjourned. 

[Whereupon, at 1:34 p.m., the Committee was adjourned.] 

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