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MARKETPLACE EQUITY ACT OF 2011 

HEARING 

BEFORE THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

ON

H.R. 3179 

JULY 24, 2012 

Serial No. 112–157 

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 

LAMAR SMITH, Texas, Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

TREY GOWDY, South Carolina 

DENNIS ROSS, Florida 

SANDY ADAMS, Florida 

BEN QUAYLE, Arizona 

MARK AMODEI, Nevada 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO R. PIERLUISI, Puerto Rico 

MIKE QUIGLEY, Illinois 

JUDY CHU, California 

TED DEUTCH, Florida 

LINDA T. SA ́ NCHEZ, California 

JARED POLIS, Colorado 

RICHARD HERTLING, Staff Director and Chief Counsel 

PERRY APELBAUM, Minority Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

JULY 24, 2012 

Page 

THE BILL 

H.R. 3179, the ‘‘Marketplace Equity Act of 2011’’ ................................................. 3 

OPENING STATEMENTS 

The Honorable Lamar Smith, a Representative in Congress from the State 

of Texas, 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 ......... 13 

WITNESSES 

The Honorable Steve Womack, a Representative in Congress from the State 

of Arkansas 

Oral Testimony ..................................................................................................... 15 

Prepared Statement ............................................................................................. 18 

The Honorable Jackie Speier, a Representative in Congress from the State 

of California 

Oral Testimony ..................................................................................................... 20 

Prepared Statement ............................................................................................. 23 

The Honorable Bill Haslam, Governor of Tennessee, on behalf of the National 

Governors Association 

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

Prepared Statement ............................................................................................. 29 

The Honorable Wayne Harper, Utah House of Representatives, on behalf 

of the Streamlined Sales Tax Governing Board 

Oral Testimony ..................................................................................................... 32 

Prepared Statement ............................................................................................. 34 

Hanns Kuttner, Visiting Fellow, Hudson Institute 

Oral Testimony ..................................................................................................... 38 

Prepared Statement ............................................................................................. 75 

Joseph Henchman, Vice President, Legal & State Projects, Vice President, 

Operations, Tax Foundation 

Oral Testimony ..................................................................................................... 80 

Prepared Statement ............................................................................................. 82 

Steve DelBianco, Executive Director, NetChoice 

Oral Testimony ..................................................................................................... 102 

Prepared Statement ............................................................................................. 105 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, and Ranking Member, Committee 

on the Judiciary ................................................................................................... 13 

Material submitted by Hanns Kuttner, Visiting Fellow, Hudson Institute ........ 39 

Material submitted by the Honorable Zoe Lofgren, a Representative in Congress from the State of California, and Member, Committee on the Judiciary ......................................................................................................................... 135 

Material submitted by the Honorable Steve King, a Representative in Congress from the State of Iowa, and Member, Committee on the Judiciary ....... 144 

Page

IV 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Questions for the Record submitted by the Honorable Jason Chaffetz, a Representative in Congress from the State of Utah, and the Honorable Melvin 

L. Watt, a Representative in Congress from the State of North Carolina ...... 158 

Response to Questions for the Record from the Honorable Bill Haslam, Governor of Tennessee ............................................................................................... 160 

Response to Questions for the Record from the Honorable Wayne Harper, 

Utah House of Representatives ........................................................................... 161 

Response to Questions for the Record from Hanns Kuttner, Visiting Fellow, 

Hudson Institute .................................................................................................. 162 

Response to Questions for the Record from Joseph Henchman, Vice President, 

Legal & State Projects, Vice President, Operations, Tax Foundation ............. 165 

Response to Questions for the Record from Steve DelBianco, Executive Director, NetChoice ....................................................................................................... 168 

Additional Material submitted for the Record ...................................................... 179 

(1) 

MARKETPLACE EQUITY ACT OF 2011 

TUESDAY, JULY 24, 2012 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Committee met, pursuant to call, at 10:06 a.m., in room 

2141, Rayburn House Office Building, the Honorable Lamar Smith 

(Chairman of the Committee) presiding. 

Present: Representatives Smith, Coble, Gallegly, Goodlatte, 

Chabot, Pence, Forbes, King, Franks, Jordan, Poe, Griffin, Marino, 

Adams, Amodei, Conyers, Scott, Watt, Lofgren, Jackson Lee, 

Cohen, Johnson, Chu, Deutch, Sa ́nchez, and Polis. 

Staff Present: (Majority) Richard Hertling, Staff Director and 

Chief Counsel; Travis Norton, Counsel; David Lazar, Clerk; (Minority) Perry Apelbaum, Staff Director and Chief Counsel; Danielle 

Brown, Counsel; and Norberto Salinas, Counsel. 

Mr. SMITH. The Judiciary Committee will come to order. Without 

objection, the Chair is authorized to declare recesses of the Committee at anytime. We welcome our witnesses, and we welcome the 

large amount of interest today in the subject as well. I am going 

to recognize myself for an opening statement and then the Ranking 

Member. 

Last November, the Judiciary Committee held a hearing to explore whether Congress should enable States to collect sales taxes 

from retailers who lack a physical presence in the State. Today we 

will consider a legislative proposal authored by our colleagues Congressman Steve Womack of Arkansas and Congresswoman Jackie 

Speier of California. Their bill, H.R. 3179, the ‘‘Marketplace Equity 

Act of 2011,’’ has bipartisan support from Members both on and off 

this Committee. 

In the 1992 case Quill v. North Dakota, the Supreme Court held 

that under the Dormant Commerce Clause, a State may not compel 

a retailer to collect and remit the State’s sales tax if the retailer 

lacks a physical presence in the State. In the Supreme Court’s 

view, to force a retailer to collect and remit taxes to more than 

9,000 State, county, and local taxing jurisdictions throughout the 

country places a serious burden on the retailer’s ability to sell in 

interstate commerce. Quill’s bright-line ‘‘physical presence’’ rule for 

tax collection makes sense for small businesses that cannot afford 

to track and comply with 9,000 different tax codes as a cost of 

doing business throughout the country. 

The Constitution does not allow one State to reach into the pockets of another State’s retailers to exact taxation without represenVerDate Aug 31 2005 13:24 Jan 08, 2013 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6601 H:\WORK\FULL\072412\75308.000 HJUD1 PsN: DOUGA
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tation. But brick-and-mortar retailers claim that the physical presence rule creates an unlevel playing field between them and their 

online retailer counterparts. Online retailers, who maintain a very 

limited physical presence and use common carriers to fill orders, 

enjoy a competitive advantage over traditional retailers. This is because most States cannot compel the online retailer to collect and 

remit its sales tax. Neighborhood brick and mortar stores, meanwhile, must collect and remit taxes on all purchases. 

Moreover, State and local governments view the taxes they cannot collect on most online sales as lost revenue. It is true that online consumers owe a use tax to the State in which they reside, but 

data show that use taxes are easily avoided, rarely paid, and difficult to enforce. 

The Court’s decision in Quill was based on the observation that 

compliance with numerous taxing jurisdictions’ laws would be burdensome and confusing. The Constitution does not require a physical presence standard as a tax collection criterion. Congress may 

pass legislation that uses a different standard under its power to 

regulate interstate commerce. The Marketplace Equity Act replaces 

the physical presence requirement with a requirement that State 

and local governments significantly simplify their tax policies if 

they want to collect sales taxes from out-of-State retailers. 

It also contains an exception from the tax collection duty for 

small sellers. Any bill to enable sales tax collection from remote 

vendors should contain a robust small seller exception. This way 

America’s job-creating small businesses do not become mere tax 

collection agencies for those 45 States with a sales tax. 

While today’s hearing is on the Marketplace Equity Act, at least 

two other similar bills have been introduced this Congress: one by 

Senators Enzi, Durbin, and Alexander called the Marketplace Fairness Act, and one by the Ranking Member of this Committee, Mr. 

Conyers, called the Main Street Fairness Act. 

We look forward to hearing from our witnesses today and appreciate their testifying, and the Ranking Member, the gentleman 

from Michigan, Mr. Conyers, is recognized for his opening statement. 

[The bill, H.R. 3179, follows:] 

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112,],HCONORBSS H R 3179 1sT SESSION 

• • 

To improve the Stales' rights to enforce the collection or State sales and 

use tax laws, and for other purposes. 

IN THE HOUSE 0j11 REPRESEl\TATIVES 

OCTOBER 1:3, 2011 

Mr. WOMACK (for himself, lVIs. SPEIER, Mr. POE of Texas, lVIr. DIAZ-BALART, 

lVIr. Ross of Florida, ::VIn:. lVL:WONEY, Mr. WELCH, Ms. lVICCOLLUlVI, lVIr. 

DUNCAN of Tennessee, and :VII' l\fTLT,ER of Kortll Carolina) introduced 

the follov\~ng bill; which was referred to the Committee on the .Judiciary 

A BILL 

To improve the States' rights to enforce the collection of 

State sales and use tax and for other purposes. 

Be z:t enacted the Senate and House of Representa2 hves of the United States 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the "Marketplace Equity 

5 Act of 2011". 

6 SEC. 2. AUTHORIZATION FOR STATES TO REQUIRE COLLEC· 

7 TION OF SAI.ES AND USE TAXES. 

8 GH.AN'l' ell" AU'l'HOHI'l'Y.-Kotwithstanding any 

9 otlwr provision of law, a State electing, indi,~dually or 
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1 through an agreement with one or more of the several 

2 States, to satisfy the requirements of subsection (b) is au3 thorized to require all sellers not qualifying for the small 

4 seller exception to collect and remit sales and use taxes 

5 with respect to remote sales into the State ,vithout regard 

6 to the location of the seller. 

7 (b) HEQUIBK\iENTS FOR AUTHORITY.-The author8 ization provided under paragraph (1) shall be granted 

9 once the State implements a simplified system for admin10 istration of sales and use tax collection vvith respect to 

11 remote seners, which includes the following minimum re12 quirements: 

13 (1) SMALL SELLER EXCEPTION.-An exception 

14 for remote sellers with gross annual receipts in the 

15 preceding calendar year from remote sales of items, 

16 services, and other products in the C nited States not 

17 exceeding $1,000,000 (or such greater amount as 

18 determined by the State involved) or in the State not 

19 exceeding $100,000 (or such greater amount as de20 termined hy the State). 

21 (2) FOK\1 A..~D FILINO.-A sales and use tax re22 turn for use by remote sellers and a single revenue 

23 authority ,vithin the State ,,,,ith which remote sellers 

24 are required to file the return. A State may not re25 quire that remote sellers submit any other sales and 

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1 use tax return other than the sales and use tax re2 turn applicable to remote sellers. A remote seller 

3 may not be required to file sales and use tax returns 

4 any more frequently than returns are required for 

5 other sellers. No local jurisdiction may require a re6 mote seller to submit a sales and use tax return or 

7 to collect sales and use tax other than as provided 

8 by this paragTaph. 

9 (3) DEFI~ITIOX OF T~-L",{ BASE.-\Vith respect 

10 to remote sellers11 (A) products and serVlCes subject to tax 

12 must be identical throughout the State, and 

13 (B) any exemptions must be identical 

14 throughout the State and may not include ex15 emptions for products and services that are not 

16 exempt when sold by other than remote sellers. 

17 ('1) SALES ~~ND USE TAX RATE STRUCTLRE.-

18 (A) Except as provided in subparagraph 

19 (B) of this paragraph, remote sellers must col20 lect sales and use tax under one of three rate 

21 structures22 (i) a single State-wide blended rate 

23 that includes both the State rate and a}l24 plicable rates of local jurisdictions, as de25 termined by the State; 

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(ii) the maximum State rate, whirh is 

the highest rate at which sellers are required by the State to collect tax, exclusive 

of tax imposed by or for the specific benefit of local jurisdictions; or 

(iii) the applicable destination rate, 

,vhich is the sum of the State rate and any 

applicable rate for the local jurisdiction 

into which the sale was made. If a State 

requires that remote sellers collect at the 

applicable destination rate, the State must 

make available adequate software to remote sellers that substantially eases the 

burden of collecting at multiple rates within the State, and any State providing such 

software must relieve remote sellers from 

liability to that State for collection of the 

incorrect amount of sales or use tax, including any penalties or interest, pmvided 

that collection of the improper amount is 

the result of rel:ying on information pro-

'Tided by that State. 

(B) A State that generally imposes a lower 

sales and use tax rate for sales of food or drugs 

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1 and me(licine, or hoth, may require remote Rell2 ers to collect sales and use tax at such rates. 

3 (C) The rates described in clause (i) and 

4 (ii) must not exceed the respective average 

5 State and locality rates applicable to sellers 

6 other than remote sellers. 

7 (c) COlVD1ENCEMENT OF AUTHORITY.-

8 (1) L'I GEl\""EKA.L.-A State satisfying the re9 quirements of subsection (h) may exercise the au10 thority granted in subsection (a) beginning on the 

11 first day of the calendar quarter at least six months 

12 after the date that the State publishes the public no13 tice described in paragraph (2). 

14 (2) )JOTICE REQUIBK'vIENTS.-The public notice 

15 required in paragraph (1) must include the following 

16 information for remote sellers: 

17 (A) The title and reference to the legisla18 tion that the State has enacted requiring re19 mote sellers to collect sales and use tax. 

20 (B) The criteria under which remote Rell21 ers are required to collect sales and use tax 

22 under the State legislation. 

23 The rate or rateR at vvhirh afferted re24 mote sellers vvill be required to collect sales and 

25 use tax . 

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1 (D) The date upon which affected remote 

2 sellers "vill be required to begin collecting sales 

3 and use tax. 

4 (E) Heferences to compliance information 

5 and the form to be filed by remote sellers. 

6 (d) TERMINATIOK OF AUTHORITY.-The authoriza7 tion provided under subsection (a) shall terminate for a 

8 State that no longer satisfies the requirements of sub9 section (b) on the date that10 ( 1) a court of competent jurisdiction determines 

11 that the State's simplified system of administration 

12 no longer meets the minimum requirements set forth 

13 in subsection (b); and 

14 (2) the determination of such court is no longer 

15 subject to appeal. 

16 SEC. 3. PREEMPTION. 

17 Except as otherv,ise provided in this Act. this Act 

18 shall not be construed to preempt or limit any power exer19 cised or to be exercised by a State or local jurisdiction 

20 under the law of such State or local jurisdiction or under 

21 any other Federal law. 

22 SEC. 4. LIMITATIONS. 

23 (a) IN GE.t\""EKA.L.-Nothing in this Act shall he ('on24 stmed as-

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1 (1) subjecting a seller to franchise taxes, in2 come taxes, or licensing requirements of a State or 

3 political subdivision thereof; 

4 (2) affecting the application of such taxes or re5 quirements or enlarging or reducing the authority of 

6 any State to impose such taxes or requirements; 

7 (3) requiring any State or any local taxing ju8 risdiction to exempt, or to impose a tax on any prod9 uct, or to adopt any particular t:ype of tax, or to im10 pose the same rate of tax as any other taxing juris11 diction; or 

12 (4) permitting or prohibiting a State from13 (A) licensing or regl1lating any person; 

14 (B) requiring any person to qualify to 

15 transact intrastate business; 

16 (C) subjecting any person to State taxes 

17 not related to the sale of goods or services; or 

18 (D) exercising authority over matters of 

19 interstate commerce. 

20 (h) No EFFECT o~ NEXUS.-No ohligation imposed 

21 by virtue of the authority granted by section 2 shall be 

22 considered in determining whether a seller has a neA'llS 

23 ~with any State for any other tax purpose . 

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1 SEC. 5. DEFINITIONS. 

2 For pUl1)()ses of this Act, the following definitions 

3 shall apply: 

4 (1) STATE.-The term "State" means each of 

5 the several States, the District of Columbia, the 

6 Commonwealth of Puerto Rico, Guam, Alnerican 

7 Samoa, the United States Virgin Islands, the Com8 monwealth of the Northern Mariana Islands, any 

9 other territory or possession of the United States, 

10 and any Indian country as defined in section 1151 

11 of title 18 of the United States Code. 

12 (2) LOCAL ,JlTmSDlc'l'lo~.-The term "local.iu13 risdiction" means any political subdivision of a 

14 State. 

15 (;3) PBW30N.-The terrn "person" means an in16 dividual, trust, estate, fiduciary, partnership, cor17 poration, limited liability company, or any other 

18 legal entity, and ineludes a State or local govern19 ment. 

20 (4) SALE LNTO TIlE STATE.-The term "sale 

21 into the State" means a sale where the item sold is 

22 received by the purchaser in the State, based on the 

23 location indicated by instructions for delivery that 

24 the purchaser furnishes to the seller. \Vhen no deliv25 ery location is specified, the sale occurs in the State 

26 if the customer's billing address is in the State . 

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1 (5) REMOTE s",\LE.-The term "remote sale" 

2 means a sale of goods or services attributed to a 

3 State with respect to ,'vhich a seller does not have 

4 adequate physical presence to establish neAllS under 

5 the law existing on the day before the date of the 

6 enactment of this Act so as to allow such State to 

7 require, without regard to the authority granted by 

8 this Act. the seller to collect and remit taxes covered 

9 by this Act with respect to such sale. 

10 ((j) REMOTE SELLER.-The term "remote sell11 er" means a person that makes remote sales. 

12 (7) SALES TAX.-The term "sales tax" means 

13 a tax that is14 (A) imposed on or incident to the sale of 

15 tangible or intangible personal property or serv16 ices as may be defined or specified under the 

17 laws imposing such tax; and 

18 (B) measured by the amount of the sales 

19 price, cost, charge, or other value of or for such 

20 property or services. 

21 (8) USE T~~"'{.-The term "use tax" means a 

22 tax that is23 (A) imposed on the purchase, storage, con24 sumption. distribution, or other use of tangible 

25 or intangible personal property or services as 

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may he defined or specified under the laws imposing such tax; and 

(B) measured by the purchase price of 

4 such property or services. 

5 SEC. 6. SEVERABILITY. 

6 If any provision of this Act or the application of such 

7 provision to any person or circumstance is held to be un8 constitutionaL the remainder of this Act and the applica9 tion of the provisions of such to any person or cir10 cum stance shall not be affected thereby. 

C 

.MR 3179 1M 
13 

Mr. CONYERS. Thank you, Chairman Smith, for a very excellent 

description of the issue that brings us here today. I have been 

working on this since 1998 with Spencer Bachus and then with Bill 

Delahunt of Massachusetts, and I have a bill of my own, H.R. 2701, 

but I want to announce today that I am going to ask all of my cosponsors to join me with the measure that is before the House 

today. I think this is an excellent resolution of what you have 

been—we have all been working on for a number of years. 

This matter comes to the House Judiciary Committee because of 

the Commerce Clause, Article I—the commerce section, Article I, 

clause 3, and what we try to do is follow the advice of the Quill 

decision, and I think by addressing it we will bring about a more 

competitive equity among retailers. Now, I think the bottom line is 

simply this: Tax-free sales on the Internet may be coming to an 

end, and this could mean a very large boost in revenue. I think it 

would help the economy, and I suggest it would probably also help 

create more jobs. 

Now, the competitors should compete on things other than sales 

tax policy, and so for those arguing for more of a free market, they 

should support eliminating any competitive advantage based on 

sales tax policy. In addition, uncollected sales taxes have a negative impact on local communities, including retailers and local and 

State governments. Now that our technology has eliminated much 

of the difficulty that we had experienced before with ever-increasing online sales, we can anticipate significant losses as a result of 

uncollected sales and use taxes. In my State I have an example 

that we could lose as much as $872 million during the fiscal years 

2012 and 2013. Fortunately, the Federal legislature can assure a 

level playing field and address State revenue issues by passing this 

bipartisan-supported legislation that allows States to require remote sellers to collect and remit sales tax. 

So with that, I join the Chairman in welcoming our two colleagues to describe their bill, and I would ask unanimous consent 

to put the remainder of my statement in the record. 

[The prepared statement of Mr. Conyers follows:] 

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, and Ranking Member, Committee on the Judiciary 

Twenty years ago, the Supreme Court decided in Quill Corp. v. North Dakota that 

it was too difficult for a remote seller to comprehend every tax law in every state 

and locality in which it may sell something. In its view, states needed to simplify 

their sales tax laws so remote sellers could understand them easily. Otherwise, 

these complicated sales tax laws burdened interstate commerce. 

The Supreme Court decided that without simplification, a remote seller would not 

have to collect sales taxes in a state in which it does not have a substantial presence, or in its view, a physical presence. 

But the court did clearly state that Congress is better suited to determine whether a remote seller must collect and remit sales taxes. 

It is past time for Congress to make that determination and we should do so now 

particularly in light of the many technological advances that have occurred since the 

Court rendered its decision 20 years ago. 

For example, because of these technological advances, smartphones can tag a 

photo with the date, time, and most relevant, the precise location through GPS, 

where the photo was taken, no matter where it was taken. 

Clearly, technology has eliminated the burdens a remote seller would have had 

in 1992. And technology has made it easier for Congress to act now. Doing so will 

accomplish several important goals. 

14 

By addressing the Quill decision, Congress will ensure competitive equity among 

retailers. 

The Internet allows consumers to comparison shop quickly before making a final 

purchase. Oftentimes, a consumer can walk into a brick and mortar store, check the 

price of the item, ask the salesperson a few questions, and then take out a 

smartphone to find a cheaper price online. 

The online retail price is generally lower because many Americans do not have 

to pay any sales tax, which can make a significant difference in the final purchase 

price, ranging anywhere from 3 to 12% of the price of the item. 

This gives out-of-state retailers who operate online a clear advantage. They can 

charge the same basic pre-tax price as a local retailer for a pair of designer jeans 

or a video game console, but the price the consumer actually pays is lower because 

they do not collect a sales tax. 

It is obvious why savvy consumers, especially in this cost-conscience environment, 

would take advantage of such considerable savings. 

This also explains why the percentage of online sales and the total amount of online sales continue to increase. 

Competitors should compete on things other than sales tax policy. For those arguing for more of a free market, they should support eliminating any competitive advantage based on sales tax policy. 

Uncollected sales taxes also have a negative impact on local communities, including retailers, and local and state governments. 

Fewer purchases at local retailers translate to fewer local jobs. Main Street retailers, local mom-and-pop stores, and even big-box retailers suffer when they lose customers because they have to collect a sales tax while online retailers do not. 

Lower sales at local retailers also translate to lower revenue for local and state 

governments. Sales taxes constitute a significant state and local revenue source. 

For example, the Census Bureau estimates that nearly one third of state and local 

revenues are derived from general sales and use taxes. 

With ever increasing online sales, states and local governments anticipate huge 

revenue losses as a result of uncollected sales and use taxes. 

For example, the Michigan Department of Treasury estimates that total revenue 

lost to e-commerce and mail order purchases will total $872 million during fiscal 

years 2012 and 2013. 

The impact of such lost revenue is reflected in 

• forced cutbacks to public education programs, such as sports, after-school enrichment programs, and extracurricular activities, 

• delapidated roads and bridges not being repaired, and 

• reductions in critical services, such as police and firefighter protection. 

Just last week, the State Budget Crisis Task Force, which is led by Paul Volcker 

and Richard Ravitch, released a report on the plight of states. 

In its report, the task force recommended that Congress should grant states the 

authority to collect sales taxes on online sales. Doing so would help states address 

their budgetary problems. 

Otherwise, states will have to cut services further. Or, replace the erosion of sales 

taxes by increasing taxes in other areas, something anti-tax advocates would surely 

oppose. 

Fortunately, Congress can ensure a level playing field and address state revenue 

issues by passing bipartisan supported legislation that would allow states to require 

remote sellers to collect and remit sales taxes. 

H.R. 3179, the ‘‘Marketplace Equity Act of 2011,’’ introduced by my colleagues, 

Representatives Steve Womack and Jackie Speier would grant that much-needed 

authority. 

I introduced similar legislation, H.R. 2701, the ‘‘Main Street Fairness Act.’’ 

Our colleagues on the other side of the Capitol, Senators Mike Enzi, Dick Durbin, 

and Lamar Alexander, introduced S. 1832, the ‘‘Marketplace Fairness Act.’’ 

Although each of the three bills take different approaches, they each would accomplish the same goal: leveling the playing field between retailers and online sellers 

by granting that essential authority. 

Today’s hearing focuses on H.R. 3179, a bipartisan bill that would simplify collection rules and increase compliance. As a result, it would ensure fairness and provide 

a national solution. 

This bill would neither impose a national sales tax nor lead to any new taxes. 

Consumers already owe sales and use taxes on the goods and services they purchase; however, many do not pay it voluntarily. 

15 

The business community has worked tirelessly on this issue and supports this bill. 

Big-box retailers, such as Walmart, Best Buy, and JC Penney, and small businesses, 

such as Michigan-based Marshall Music and the National Association of College 

Stores, are urging Congress to act and pass much-needed legislation. 

Even giant online retailer Amazon.com, which has benefitted from not having to 

collect sales taxes in many states, supports Congress acting. 

Other supporters of this legislation include at least a dozen governors—both 

Democratic and Republican—as well as the National Governors Association. In addition, the National Conference of State Legislatures, and the National League of Cities, along with many organizations also urge Congress to pass legislation addressing 

this issue. 

I believe that Congress should pass legislation that promotes economic efficiency 

and helps our states and local governments maintain financial support for public 

education, health, and safety. 

The Marketplace Equity Act and the other legislative proposals that I mentioned 

accomplish these goals. 

I thank Chairman Smith for holding this very important hearing and I urge the 

Chairman to markup this bill at the next scheduled markup. 

Mr. SMITH. Without objection, thank you for your comments, Mr. 

Conyers. 

Our first panel consists of two of our colleagues, and they happen 

to be the authors of the piece of legislation that this hearing is 

about. 

Our first witness is Congressman Steve Womack, who represents 

the 3rd District of Arkansas. Prior to his election to the House this 

Congress, he served as the mayor of Rogers, Arkansas. Congressman Womack is the sponsor of H.R. 3179, the ‘‘Marketplace Equity 

Act of 2011,’’ and he is a Member of the Appropriations Committee. 

We welcome you here today, Steve. 

Our next witness is Congresswoman Jackie Speier, who has represented the 12th District of California since 2008. She previously 

served on the San Mateo County Board of Supervisors and in the 

California State Assembly and State Senate. In the House, Congresswoman Speier serves on the Oversight and Government Reform Committee and the Armed Services Committee. She is the 

lead Democratic cosponsor of H.R. 3179. We welcome her today as 

well. 

And, Mr. Womack, we will begin with you. 

TESTIMONY OF THE HONORABLE STEVE WOMACK, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ARKANSAS 

Mr. WOMACK. Thank you, Mr. Chairman, Ranking Member Conyers, and Members of the Judiciary Committee. Let me take this 

opportunity to thank you for allowing us to have this discussion 

today regarding an issue that Congress and only Congress can resolve. I would also like to thank my colleague and cosponsor, Jackie 

Speier, for her hard work and dedication to the bill before you. 

In short, this bill levels the playing field in the world of retail 

sales. Currently, as I trust most of you now understand, traditional 

retailers—I will refer to them as brick and mortar retailers—collect 

sales taxes on purchases made in their respective stores. These 

taxes are remitted to the political subdivisions who levy them, typically by the State Department of Finance and Administration. This 

is not an option for the retailer; it is a requirement. 

16 

There is no requirement, however, for online remote retailers 

with no presence in a given State to collect such a tax. The United 

States Supreme Court in a 1992 decision, Quill v. North Dakota, ruled that pursuant to the Commerce Clause, States cannot make 

such a requirement on businesses that do not have a nexus or a 

presence in the State. The burden of remitting these use taxes falls 

on the consumer, not the retailer, and the realistic effect of this situation is bad for our traditional retailers, bad for cities, counties, 

and States who levy sales taxes, and bad for consumers who are 

unwittingly exposed to potentially incriminating audit issues. 

Mr. Chairman, in short, the Quill decision explicitly says that 

only Congress can remedy this terrible disparity, and it is my 

strong belief that Congress should intercede. 

Prior to serving in Congress I had the honor of serving as mayor 

of a city in northwest Arkansas that has become a premier destination for retail shopping. A revitalized Main Street and new outdoor 

lifestyle center in Rogers, Arkansas, were the basis for more than 

a billion dollars in local development during my tenure. We created 

thousands of jobs; revenue generated through retail sales growth 

lifted our city, our county, and our State. These retailers in my district and retailers across America are crying out for help to eliminate the loophole that chases more and more discriminate shoppers 

away from Main Street and to the Internet, where the feeling of 

buying something tax free is all too often a major factor for shopping online. 

Small retail stores have become showrooms for their online counterparts. Merchants have intimated to me the stories of would-be 

consumers in growing numbers visiting their stores to get a firsthand look at the merchandise under consideration for purchase, 

and once committed to purchasing simply use their smartphone to 

purchase it online—there is an app for that—having it delivered to 

their home, and motivated by the opportunity to save the tax. 

I do very little online shopping, but recently having made a purchase from a well known online retailer without a presence in Arkansas, I realized the burden of remitting the tax was on me. So 

I downloaded the proper form, filled it out, and enclosed a check 

to my State’s Department of Finance. This is the form I used for 

the State of Arkansas. And there are other forms I have with me, 

just a sample. Three-page form from the State of Florida. Here is 

a form from Indiana, Virginia, Ohio, and still another from Tennessee. It occurred to me, Mr. Chairman, that a lot of my constituents don’t know this is a requirement, and when told of the requirement would not know how to process that payment. These 

transactions, millions of them every day, are simply going without 

proper tax treatment, and with the exponential growth of Internet 

retailing, the result to traditional retailers, not to mention critical 

local services, is devastating. 

It is time this loophole was closed. Our bill, H.R. 3179, is 

purposed in doing just that. It is simple and straightforward. It is 

not instructive, it is permissive legislation, just like the Quill decision invited us to do, and our bill is based on three conservative 

values: States’ rights, allowing States to decide whether or not to 

compel remote sellers to collect and remit, to determine the rate 

and the method of remittance; promoting free market competition, 

17 

allowing the discerning shopper to make decisions on price, convenience, service, not on an outdated tax policy weighted to one business model; and keeping taxes low, helping our cities, counties, and 

States meet their growing demands by avoiding the certain reality 

of raising other taxes to offset the exponential loss of sales tax revenue. 

I have heard the arguments against the legislation: It is too complicated, too many rates, punitive to small online retailers, the notion of this involving a new tax. It is not complicated. There is existing off-the-shelf software to make the necessary reports, and our 

bill requires the States to provide that software, and just as it is 

easy to track in real time approaching storms or traffic congestion, 

even the activities of this institution, it is also very easy for online 

merchants to provide the necessary documentation and payment of 

taxes just as their Main Street counterparts do. Plus our bill has 

a small business exemption to lessen the burden on the small operators and the newly formed e-retailers. And, Mr. Chairman, this is 

not a new tax. This is an existing lawfully due tax imposed on consumers. The difference is that it is paid to the traditional retailer 

at the time of purchase and the remittance is handled by the retailer, but for the online shopper, the obligation is on them. 

The traditional brick and mortar retailer is not asking for special 

treatment. They know they have to compete against a number of 

consumer criterion. What they don’t want and should not compete 

against is a disadvantage based on a tax loophole. With simple legislation, we can finally address an issue that has been 20-plus 

years in the making. I plead with this Committee to give favorable 

support to bringing this bill to the floor, and I thank you for your 

time. 

[The prepared statement of Mr. Womack follows:] 

18 

Prepared Statement of the Honorable Steve Womack, 

a Representative in Congress from the State of Arkansas 


Womack-1.eps

Testimony on H.R. 3179, the "Marketplace Equity Act" 

24 July 2012 

Steve Womack, Me, AR03 

Mr. Chairman and Members of the Judiciary Committee, let me take this opportunity to thank you for 

allowing us to have this discussion today regarding an issue that Congress-and only Congress-can 

resolve, I'd also like to thank my colleague and co-sponsor, Jackie Speier, for her hard work and 

dedication to the bill before you, 

In short, this bill levels the "playing field" In the world of retail sales, 

Currently, as I trust most of you now understand, traditional retailers-I'll refer to them as "brick and 

mortar" retailers-collect sales taxes on purchases made in their respective stores, These taxes are 

remitted to the political subdivisions who levy them-typically by the state department of finance and 

administration, This is not an option for the retailer. It is a requirement. 

There is no requirement, however, for online, remote retailers-with no presence in a given state-to 

collect such a tax, The United States Supreme Courl, in a 1992 decision IQui11 v, North Dakota), ruled 

that pursuant to the Commerce Clause, states cannot ma ke such a requirement on businesses that do 

not have a "nexus" or presence In the state, The burden of remitting these "use" taxes falls on the 

consumer-not the retailer-and the realistic effect of this situation Is bad for our ~raditional retailers, 

bad for cities, counties and states who levy sales taxes, and bad for consumers who are unwittingly 

exposed to potential tax evasion issues, 

Mr, Chairman, in short, the Quill Decision expiicitly says that only Congress can remedy this terrible 

disparity-and it is my strong belief that Congress should intercede, 

Prior to serving in Congress, I had the honor of serving as Mayor of a city in northwest Arkansas that has 

become a premier destination for retail shopping, A revitalized Main Street and new outdoor lifestyle 

center In Rogers, Arkansas was the basis for more than $1 billion in local development during my tenure, 

We created thousands of jobs, Revenue generated through retail sales growth lifted our city, county, 

and state, These retailers In my district-and retailers across America-are crying out for help to 

eliminate the loophole that chases more and more discriminate shoppers away from Main Street and to 

the Internet, where the feeling of buying something "tax free" is all-too-often a major factor for 

shopping online, 

Small retail stores have become "show rooms" for their online counterparts, Merchants have intimated 

to me the stories of would-be consumers, In growing numbers, visiting their stores to get a first-hand 

look at the merchandise under consideration for purchase. And once committed to purchasing, simply 

use their smart phone to purchase it online-there's an APP for that-having it delivered to their home, 

and motivated by the opportunity to "save the tax," 

Page I 1 
19 


Womack-2.eps

I do very little online shopping. But recently, having made a purchase from a well-known online retailer 

without a presence in Arkansas, I realized the burden of remitting the use tax was on me-so I 

downloaded the proper form, filled it out, and enclosed a check to my state's Department of Finance, It 

occurred to me, Mr. Chairman, that a lot of my constituents don't know this is a requirement. And 

when told of the requirement, would not know how to process the payment. These transaclionsmilliDns of them everyday-are simply going without proper tax treatment. And with the exponential 

growth of internet retailing, the result to traditional retailers-not to mention critical local services-Is 

devastating. 

it is time this loophole Is closed. OUf bill, HR 3179, Is purposed in doing just that. It is simple and 

straight-forward. It is not Instructive-It is permissive legislation, just like the Quill Decision invited us to 

do. And our bill is based on three conservative values: 

States Rights-allowing states to decide whether Dr not to compel remote sellers to 

collect/remit; the rate; and the method of remittance 

Promoting free-market competition-allowing the discerning shopper to make decisions on 

price, convenience, service, etc-NOT on an outdated tax policy weighted to one business 

modell 

Keeping taxes low-helping our Cities, counties, and states meet their demands by aVOiding the 

certain reality of raising other taxes to offset the exponential loss of sales tax revenue, 

I've heard the arguments against this legislation. It's 100 complicated, Too many rates, Punitive to 

small, online retailers, The notion of this involving a "new" tax. 

It's not complicated. There is existing off-the-shelf software to make the necessary reports and our bill 

requires the states to provide that software. And just as it is easy to track, in real time, approaching 

storms, traffic congestion, and the activities of this institution, it is aiso very easy for online merchants to 

provide the necessary documentation and payment of taxes-just as their Main Street counterparts do. 

Plus, our bill has a smail-business exemption to lessen the burden on the small operators and newly 

formed E-retailers. 

And Mr. Chairman, this is NOT a new tax. This is an existing, lawfully due tax imposed on consumers. 

The difference is that it is paid to the traditional retailer at the time 01 purchase and the remittance is 

handled by the retailer. But for the online shopper, the obligation falls on him/her. 

The traditional. brick and mortar retailer is not asking for speciai treatment, They know they have to 

compete against a number of consumer criterion. What they don't want-and should not compete 

against-is a disadvantage based on a tax loophole. 

With simple legislation, we can finally address an issue that has been 2D-plus years in the making. 

plead with this committee to give favorable support to bringing this bill to the floor. 

Thank you for your time, 

Page I 2 
20 

Mr. SMITH. Thank you, Mr. Womack. 

Congresswoman Speier. 

TESTIMONY OF THE HONORABLE JACKIE SPEIER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Ms. SPEIER. Mr. Chairman and Ranking Member Conyers and 

Members, thank you for giving us the opportunity to discuss this 

important issue in H.R. 3179, the ‘‘Marketplace Equity Act of 

2011.’’ Now, I am very proud to have partnered with Congressman 

Womack on this truly bipartisan effort. If a Republican from Arkansas and a Democrat from California can come together on a bill 

that deals with tax issues, then the time has really come to finally 

resolve this issue. And this is an issue that only Congress can resolve. 

The fundamental unfairness in the marketplace and in our communities that this bill addresses has grown dramatically over the 

past few years. When Quill was decided by the Supreme Court in 

1992, the Internet and the World Wide Web did not even exist. 

Sales taxes were collected on almost all retail sales. But according 

to the Commerce Department, online retail sales have increased 

300 percent to $224 billion over the past 8 years, and they are expected to almost triple again over the next 8 to more than $600 billion. And this chart over here makes the case. And this is the key. 

It will overtake, overtake the sales at brick and mortar stores by 

the year 2020. This is clearly not a business model in its infancy, 

and there should be no doubt that this is not a new tax. 

Consumers owe sales and use tax for these purchases in all 

States with a sales tax, but only about 1 percent actually pay them. 

This is an issue of collection and fairness. Some retailers have to 

collect the tax from the consumer and some don’t for the very same 

product. That is just not fair. 

Now, a poll commissioned by Amazon that just was released 

makes the case that 72 percent of respondents believe it is the seller’s responsibility, not the purchaser’s to collect that tax. 

State and local governments impose sales tax to help pay for essential public services, such as police, firefighters, and teachers. As 

online sales grow, the financial hit to our communities gets more 

severe. Each sales tax dollar not collected is a service not provided 

and a possible job lost. These are cuts to police, to fire, to schools. 

I have seen it happen in my district, and I am sure it is happening 

in all of your districts as well. 

Compounding the problem to our communities, the brick and 

mortar stores that can’t compete with tax-free online sales are closing. Seven dollars out of every $10 spent at a local retailer stays 

local. Here is a chart over here that makes that case. More than 

$4 out of every $10 spent at a national retailer stays local. But 

none, zero of the money spent at an online retailer stays in the 

community. That means that with a local retailer or national retailer, they are paying their employees, they are paying rent, they 

are paying local taxes, but the online retailer is paying none of 

that. 

We have all seen it, large, online-only retailers have been able 

to use the small retailers as their virtual showrooms. In a State 

21 

like California, that hit has been huge, particularly at a time when 

financially strapped consumers are looking for ways to stretch their 

dollars as far as possible. Technology has now made it possible for 

consumers to shop for goods in brick and mortar stores, get advice, 

kick the tires on products like TVs, computers, cameras, and bicycles and then find and buy the item online, sometimes right on 

their mobile phone while standing in the store. 

Eric McCrystal, who runs a small power tools company in my 

district in San Carlos, told me it happens regularly, people come 

in and test his power tools, and then go online to buy because they 

can escape the sales tax, even though it is still owed. This simply 

isn’t fair to the merchants like Eric who have invested in a storefront and hired employees to provide a service, and ultimately it 

isn’t fair to the taxpayer who has the legal obligation to pay but 

isn’t able to easily fulfill it or doesn’t even know that they owe the 

tax and could be subject to audit and penalties for failure to pay. 

As Ranking Member Conyers said, this is also about jobs. Brick 

and mortar retailers create four jobs for every one job created by 

an online retailer, and they participate in our communities. They 

sponsor the little league teams, they join the local Chamber of 

Commerce, they join the Rotary Clubs and the Lion Clubs, they are 

engaged in our communities. So why should we be creating an environment that places them at such a disadvantage? Why are we 

picking winners and losers in this particular setting? 

The same way technology has made it easy for online shopping, 

technology has made it much simpler for online retailers to collect 

sales tax, and since Congress must grant this authority to the 

State, our bills provide a simple framework for States to opt in. It 

also requires States to provide cost-free the software and services 

to figure out the sales tax required to comply to online retailers. 

This is certainly more than brick and mortar retailers get. 

Once upon a time there was a valid argument that the Internet 

marketplace was in its infancy and we didn’t want to stifle its development. Those days are gone. Companies like Amazon and Overstock.com are proof of it. California is expected to lose more than 

$1.8 billion in uncollected tax revenues this year alone. 

Now, this chart up here has every State represented by you as 

Members of this Committee, and you have a handout that will provide you with this data that shows an incredible loss of State revenue, State taxes, sales tax that should have been paid that was 

not paid, and the number is growing exponentially. 

The failure of Congress to address this issue has led to more, not 

less, confusion in the marketplace. Instead of a national approach, 

desperate States are taking their own actions in response to this 

problem. There are the streamlining States, the Amazon deals, and 

the States that have expanded the reach of nexus. At least 30 

States have taken some action to try and collect the sales tax owed 

from online sales. 

Rather than hide its head in the sand, Congress could solve this 

issue for all States by allowing States to require online sellers to 

collect tax even if they do not meet a physical presence test. It 

could set the conditions that States must satisfy if they wish to do 

so, ensuring that it is simple and not unduly burdensome while at 

the same time respecting States’ rights. That is what the Quill deVerDate Aug 31 2005 13:24 Jan 08, 2013 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6601 H:\WORK\FULL\072412\75308.000 HJUD1 PsN: DOUGA
22 

cision urged Congress to do 20 years ago. That is precisely what 

the Marketplace Equity Act does. It is not perfect, but it is headed 

in the right direction, and I urge you to recognize this opportunity 

as one that a bipartisan Congress can fix. Thank you for the opportunity. 

[The prepared statement of Ms. Speier follows:] 

23 

Prepared Statement of the Honorable Jackie Speier, 

a Representative in Congress from the State of California 


Speier-1.eps
24 


Speier-2.eps

fire departments and schools. I have seen it happen in my district, and I am sure it 

is happening in all of your districts. Almost $7 out of every $10 spent at a local 

brick and mortar retailer stays local. More than $4 out of every $10 spent at a 

national retailer stays local. But none of the money spent at an online-only retailer 

stays in the community. The only option left to state and local governments facing 

even greater loses as more retail shifts to the internet will be to raise taxes. 

We have all seen it--Iarge online-only retailers have been able to trample the small 

retailers in all of our communities through the big price advantage of not charging 

sales tax. Across the United States, the brick and mortar stores who can compete 

on price but can't compete with tax-free online sales are closing, and jobs are being 

lost. Brick and mortar retailers create four jobs for every one job created by an 

online retailer. 

In a state like California, that sales tax price advantage is huge, particularly at a 

time when financially strapped conSlUllers are looking for ways to stretch their 

dollars as far as possible. Technology has now made it possible for them to shop 

for goods in brick and mortar stores, get advice and kick the tires on products like 

TVs and computers and cameras and bicycles, and then find and buy the item 

online-sometimes right on their mobile phone while still standing in the store. 

Eric McCrystal, who nUlS a small powertools company in my district in San 

Carlos, told me it happens regularly-people come in and test his power tools and 

then go online to buy because they can escape the sales tax--even though it is 

owed. This simply isn't fair to the merchants like Eric who have invested in a 

storefront and hired employees to provide a service. And ultimately it isn't fair to 

the taxpayer who has a legal obligation to pay but isn't able to easily fulfill it or 

doesn't even know they owe the tax, and could be subject to audit and penalties for 

failure to pay. 

But there are also lots of people turning to the online marketplace to expand their 

small businesses or to reinvent themselves after losing their job. Those legitimately 

small online businesses are exempted from having to collect sales taxes under this 

bill -but only until they too become sophisticated marketplace actors. 

2 
25 

Mr. SMITH. Thank you. 

Thank you both for your testimony. Appreciate your comments. 

And then we will move on to the next panel. 

Mr. COHEN. Mr. Chairman. 

Mr. SMITH. Our first witness is the Governor of Tennessee who 

is on his way, and when he arrives he will be introduced by the 


Speier-3.eps
26 

gentleman from Tennessee, Mr. Cohen, and I will proceed to introduce the other witnesses who are here, and we will look forward 

to the Governor’s testimony when he arrives. 

Mr. COHEN. I was just wondering, until he comes could I be Alexander Haig? 

Mr. SMITH. No. After the Governor, our next witness is the Honorable Wayne Harper. Mr. Harper is a member of the House of 

Representatives in the State of Utah and is the incoming President 

of the Streamlined Sales Tax Governing Board on whose behalf he 

is here to testify. The SSTGB was started 12 years ago with the 

goal of finding solutions to the complexity in State sales tax systems that resulted in the Supreme Court’s holding in Quill v. 

North Dakota. Today 24 States have subscribed to its simplification 

principles. Representative Harper holds both a Bachelor’s and Master’s Degree in history from Brigham Young University. His business background is in real estate development and consulting. 

Our next witness is Hanns Kuttner. Mr. Kuttner is a Visiting 

Fellow at the Hudson Institute, where he contributes to the Future 

of Innovation Initiative. He served during the George H. W. Bush 

administration on the White House’s domestic policy staff. More recently he was a research associate at the University of Michigan’s 

Economic Research Initiative. He is the author of many recent articles on sales taxes, including a recent article comparing origin and 

destination-based tax models. Mr. Kuttner holds a Bachelor’s Degree from Princeton University and a Master’s Degree from the 

Graduate School of Public Policy Studies at the University of Chicago. 

Our next witness is Joseph Henchman. Mr. Henchman is Vice 

President of Legal and State Projects at the Tax Foundation, a 

nonprofit organization dedicated to educating taxpayers about all 

aspects of tax policy. He joined the Tax Foundation in 2005. Mr. 

Henchman’s analysis of fiscal trends, constitutional issues, and tax 

law developments has been featured in numerous print and electronic media, including the New York Times, the Wall Street Journal, CNN and Fortune magazine. Relevant to this hearing, in 2007 

Mr. Henchman published an article in a popular State tax periodical entitled Why the Quill Physical Presence Standard Shouldn’t 

Go the Way of Personal Jurisdiction. Mr. Henchman graduated 

from the University of California at Berkeley with a degree in political science and a law degree from George Washington University. 

Our last witness is Steve DelBianco. Mr. DelBianco is the Executive Director of NetChoice, a coalition of trade associations, e-commerce businesses, and online consumers, all of whom share the 

goal of promoting convenience, choice, and commerce on the Internet. Mr. DelBianco is well known for his expertise on Internet taxation. We look forward to his testimony on that subject today. Mr. 

DelBianco holds degrees in engineering and economics from the 

University of Pennsylvania and a business degree from Wharton. 

We welcome you. 

Oh, the Governor has arrived and the gentleman from Tennessee, Mr. Cohen, is recognized to introduce his Governor. 

Mr. COHEN. Thank you, Mr. Chairman. It is indeed my privilege 

to introduce our 49th Governor of the State of Tennessee, the HonVerDate Aug 31 2005 13:24 Jan 08, 2013 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6601 H:\WORK\FULL\072412\75308.000 HJUD1 PsN: DOUGA
27 

orable Bill Haslam. Governor Haslam is a native Knoxvillian, and 

I think that may be why the orange is in his tie, and is also—but 

he also represents the western part of the State, marrying a young 

lady from Memphis, Crissy, and that is why I wore my blue tie 

today, so we are well represented from Memphis to Knoxville. He 

is a graduate of Emory University, was very successful in his family business, won the governorship with the largest plurality of any 

Governor in the history of the State of Tennessee and probably has 

the highest approval ratings of any politician in the State of Tennessee. He is part of a mainstream Republican tradition in Tennessee that goes through Howard Baker, Lamar Alexander, Bob 

Corker, and others that have kept Tennessee in the mainstream of 

America. It is my honor to work with Governor Haslam. I sponsored this bill at his request early, we have worked together on 

other issues. Senator Alexander and Senator Corker are also sponsors, and I reflect back on his father, who was on the board here 

of the Kennedy Center and is a leading business person who joined 

with me in helping pass one of the finest lotteries in the history 

of this Nation and that is continually bringing in more and more 

money that the Governor will, I am sure, spend in a good fashion 

to bring back more and better educated and college graduates in 

Tennessee. 

With that, I am especially appreciative of the Governor being 

here and looking forward to his testimony. I yield back the balance 

of my time. 

Mr. SMITH. Thank you, Mr. Cohen. Governor Haslam, if you will 

begin. 

TESTIMONY OF THE HONORABLE BILL HASLAM, GOVERNOR 

OF TENNESSEE, ON BEHALF OF THE NATIONAL GOVERNORS 

ASSOCIATION 

Governor HASLAM. I will. Thank you, Congressman Cohen, we 

appreciate the introduction and despite occasional political differences, we appreciate your services in the State of Tennessee. Mr. 

Chairman, thank you very much, Ranking Member Conyers, and I 

appreciate you accommodating my schedule. I apologize for being 

a little late. 

I am here to testify on behalf of the National Governors’ Association, but I also think I am maybe uniquely qualified to testify on 

this. My family business started out with one retail store 54 years 

ago, has grown to have locations, 450 locations all across the U.S. 

and Canada. I also served as the Chief Executive Officer of Saks 

Direct, that is the online arm of Saks Fifth Avenue, so I understand the Internet retail business as well. I was the mayor of 

Knoxville for 7 years where we rely on property tax, property taxes 

paid not just by residents but businesses, and the critical role that 

having vital, healthy real life businesses matter to a city and to all 

of our local governments, and finally I am the Governor of a State 

that relies heavily on sales tax collections. 

Let me be clear, I am a Republican Governor that does not believe in increasing taxes. We are a low tax State to begin with, and 

we have been able to cut taxes over the last 2 years. This discussion isn’t about raising taxes or adding new taxes. This discussion 

is about States having the flexibility and authority to collect taxes 

28 

that are already owed by in-State residents. The discussion is 

about leveling the playing field for local brick and mortar businesses and communities across Tennessee and across the community. 

I have heard Senator Alexander, as Congressman Cohen mentioned, talk about the national boot company where owners talk 

about customers who come in the store, try on a pair of boots, ask 

the employee questions about the boots, and then go home and 

order them online to avoid paying sales tax. As I was coming up 

here, I got an email from someone who heard I was coming to testify. They are a supplier to mom and pop truck accessory companies, and they said whatever you do, please tell them our story, because those mom and pop businesses that sell truck accessories are 

all going out of business to folks who can compete online and not 

have to collect the State and local sales tax. 

This is an issue of fairness, comparable businesses that sell the 

same things that are not being treated the same. Most people that 

I talk to understand and agree that isn’t fair. So why is it happening? Twenty years ago the Supreme Court said that States 

couldn’t require out-of-State catalogs for online businesses to collect 

sales tax; it was too complicated to calculate the sales tax in each 

State, much less in local communities. But in the past 2 decades, 

technology has advanced more than anyone could have believed. It 

is not only possible but it is now easy for those businesses to collect 

the taxes that they are owed, just like local businesses with cash 

registers do. Current software available today, you can go find it 

from eight different companies, that compete to provide software 

that covers over 12,000 different—12,000 State and local tax rates. 

But this isn’t only an issue that affects businesses. As State budgets are stretched and State leaders are working to provide services 

to taxpayers at the lowest cost, we are talking about real dollars. 

The current estimate of sales tax that goes uncollected each year 

in the U.S. is more than $20 billion. In Tennessee we believe that 

number to be $400 million. Where we are from, that is still real 

money. That money could fund critical programs that vulnerable 

citizens rely on, it could cover Federal mandates that States face 

or it could go back to the taxpayers in the form of further tax relief. 

We can certainly have a healthy discussion in Tennessee about how 

to allocate those dollars, but that is for another time. My point 

today is that States should have the authority to collect that 

money, which is already owed, and to be able to make budgeting 

decisions that include those dollars. 

We probably all know that intuitively Internet shopping is a 

trend that is on the rise. My daughter-in-law buys her dishwashing 

detergent online. We are no longer just talking about books and 

scarves and a few other items. Dishwashing detergent. According 

to the U.S. Census Bureau, e-commerce is now 16.6 percent of all 

retail sales, one out of every six retail dollars happens online. It is 

not a small business. Retail sales grew four times faster online 

than they did in brick and mortar last year. Next year 25 million 

more—in the next 4 years 25 million more Americans are expected 

to shop online. The argument that this is a small piece of the economy just doesn’t hold up. This is the right time for Congress to act. 

29 

Let me make a final note. As Governors and mayors, we understand that regardless of how the budget discussions come out, there 

will probably be less money coming out of Washington to fund 

State and local governments. As a Republican, I support that, and 

I understand that. But if that is true, then let States have the authority to collect the State sales tax that is already owed us. This 

is an issue of fairness, and I urge you to take up this issue at this 

time. Thank you very much. 

[The prepared statement of Governor Haslam follows:] 


Haslam-1.eps
30 


Haslam-2.eps

Chairman Smith, Ranking Member Conyers and members of the committee, I am grateful 

to be here to testify on behalf of the National Governors Association. T believe T am 

uniquely positioned to be before you to talk on this issue today. 

I come from a family that founded and operates a national retail business based in 

Tennessee. I have served as chief executive officer of Saks Direct, Saks Fifth Avenue's 

online and catalog retailer. I was Mayor of Knoxville, a city that's budget depends on 

property taxes from both businesses and residents. And now I'm governor of a state 

that's budget relies heavily on sales tax collections. 

Let me be clear - I am a Republican governor that does not believe in increasing taxes. 

Tennessee is a low tax state to begin with, and we've been able to cut taxes over the past 

two years. This discussion isn't about raising taxes or adding new taxes. This is about 

states having the tlexibility and authority to collect taxes that are already owed by their 

own in-state residents. 

This discussion is also about leveling the playing field for local brick and mortar 

businesses in communities across Tennessee and across the country 

For example, I've heard Senator Alexander talk about the Nashville Boot Company 

where the owner tells about a customer who came into the store, tried on a pair of boots, 

asked the employees questions about the boots and then went home and ordered them 

online to keep from paying state sales tax, which we need to remember that state law 

already says the customer owes. 

When you buy something at the Nashville Boot Company, or any other local store, the 

tax you owe is calculated with your purchase, they add it to your bill, and then send the 

taxes owed to the state for you. 

This is an issue of fairness. Comparable businesses that sell the same things are not 

being treated the same. Most people T talk to understand that and agree that isn't fair. 

So why is this happening today? 

Because 20 years ago the Supreme Court said that states couldn't require out-of-state 

catalogs or online businesses to collect sales tax because it was too complicated for them 

to calculate the sales tax in each state, much less in local communities. But in the past 

two decades, technology has advanced more than almost anyone could have believed, and 

it is not only possible, but it is easy, for these businesses to collect the taxes owed just 

like local businesses with cash registers do. 

Current software covers over 12,000 state and local tax rates, and there are at least eight 

companies already competing to provide software that is affordable to even the smallest 

businesses. 

But this isn't only an issue that impacts business. As state budgets are stretched and state 

leaders are working to provide services to taxpayers at the lowest cost in the most 

efficient and eiTective way, we are talking about real dollars. 
31 


Haslam-3.eps

The current estimate of sales tax that goes uncollected each year in the United States is 

more than 20 billion dollars. Tn Tennessee, we believe that number to be 400 million 

dollars. That money could fund critical state programs that vulnerable citizens rely on; it 

could help cover federal mandates that states face; or it could go back to the taxpayers in 

the form of further tax relief. 

We would certainly have healthy discussions in Tennessee about how to allocate those 

dollars, but that is for another time. My point today is that states should have the 

authority to collect that money, which is already owed, and to be able to make budgeting 

decisions that include those dollars. 

We probably all know this intuitively - Internet shopping is a trend that is on the rise. 

When my daughter-in-law buys her laundry detergent online, that tells you something 

According to the U.S. Census Bureau, e-commerce represented 16.6 percent of retail 

sales in 2011, and online sales grew 16.1 percent compared to overall retail sales which 

grew 4.7 percent. 

More and more people are doing their shopping online and are expected to spend more 

money. 

According to Forrester Research, 25 million more Americans are expected to shop online 

in four years, and each shopper will spend an average of $530 more (up from $1,207 in 

2012 to $1,738 in 2016) fForrester Research: u.s. Online Retaif Forecast, 2011 ro 

2016]. 

The arb'llment that this is a small part of the economy doesn't hold up. 

This is the right time for Congress to act. 

As a governor, I realize in the coming years that Washington is going to be sending states 

and local governments less and less money as you taclde the nation's debt. And as a 

Republican, I am proud of you for doing that. But if that is the case, then you should also 

allow each state to have the flexibility to make decisions about this issue and to collect 

taxes that are already owed. 

This is a conversation about fairness Fairness to states in allowing them to manage their 

own budgets, and fairness to local businesses that are part of the fabric of this country, 

are vital to our economy and our entrepreneurial identity. 

Thank you. 

2 
32 

Mr. SMITH. Thank you, Governor. 

Mr. COBLE [presiding]. Thank you, Governor. Mr. Harper, you 

are next in line. 

TESTIMONY OF THE HONORABLE WAYNE HARPER, UTAH 

HOUSE OF REPRESENTATIVES, ON BEHALF OF THE STREAMLINED SALES TAX GOVERNING BOARD 

Mr. HARPER. Thank you. Thank you, Chairman, Ranking Member Conyers, and Members of the Judiciary Committee, for the opportunity to present today. 

Today Congress is facing one of the most challenging issues regarding State authority over their taxes and also one of the most 

challenging issues for our retailing community. I am a Republican 

State representative from Utah, and I chair the House Rules Committee. I come before you today in my role as someone who is responsible for producing a balanced State budget, reducing government’s burden on business, and is the incoming President of the 

Streamlined Sales Tax Governing Board. 

I appreciate the title of today’s hearing. That subject is of paramount urgency and importance. As you know, two U.S. Supreme 

Court decisions of the previous century are the basis of this hearing. The crux of the issue Congress is addressing, why we are here, 

is the competitive advantage government grants certain retailers 

over others. The bottom line problem that exists today is the 6 to 

10 percent government-mandated price difference. Remote businesses selling the same product as a retailer in your hometown has 

an inherently lower end-transaction price. Government is picking 

winners and losers under the current court decision. I come before 

you today to ask you to exercise your congressional authority and 

end the current government sanctioned tax in business inequality. 

According to the Department of Commerce, e-commerce sales in 2005 were $87 billion. This year e-sales will total more than twice 

that amount. The stark truth, as has been stated before, is that 

local retailers across the country often find themselves acting as 

the display case for consumers who come in and try out the product 

but then go home and buy it online. Why? Because there is a court 

and government sanctioned incentive to buy remotely as remote 

sellers are not required to collect sales tax, as are stores in your 

hometowns. Also States are not receiving the taxes they need to either provide services or cut their tax rates. 

Let’s investigate some of the arguments regarding tax parity and 

simplification. First, some argue that it is impossible or expensive 

to collect online or catalog sales tax. In many ways the Internet is 

the perfect environment in which to collect sales taxes. The consumer is already supplying to the vendor in their shopping cart all 

data that is needed to collect due sales tax. Existing technology 

available from over eight companies allow for the easy collection of 

the due sales tax. For example, eBay is currently doing a pilot program with two companies that, and I quote, deliver small and midsized businesses a fast, easy, accurate, and affordable solution for 

achieving sales and use tax compliance. 

Second, some opponents will argue against placing another burden on business, and especially on small business. Unfortunately, 

today the real burden is on those retailers who are trying to comVerDate Aug 31 2005 13:24 Jan 08, 2013 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6601 H:\WORK\FULL\072412\75308.000 HJUD1 PsN: DOUGA
33 

pete against someone who isn’t collecting due sales tax. Your hometown retailers are at the mercy of a 6 to 10 percent governmentmandated price disadvantage. That I submit is the real burden on 

small business. 

Third, some groups will ask you, will tell you that these bills are 

a tax increase. That is not true. How, may I ask, is collecting a tax 

you owe but are not paying a tax increase? Asking one retailer to 

collect sales tax simply because they have a store in your hometown without asking the same of all retailers doesn’t seem like 

equal protection under the law. 

Four, some groups claim that States don’t do a good enough job 

collecting the use tax. Under current court rulings there are basically only two ways to collect the use tax, have the retailer collect 

it or educate, then audit consumers. To those who argue that 

States should engage in more audits, I would ask if they really 

think we should have a more intrusive collection system in which 

the average consumer will be made to feel as if they have a resident auditor at their kitchen table. I resoundingly say no. 

Fifth, some opponents will say that the States have not simplified their tax systems enough to warrant congressional authority. What the Supreme Court didn’t answer in 1967 was how much 

simpler the State sales tax system would have to be and what technology would have to exist to rule differently. The debate since 

Bellas Hess decision is how much simplification must be done. 

In conclusion, I would submit that technology has so radically 

improved that the challenge issued by the Supreme Court has been 

answered. Resolving a 50-year-old tax inequity will ensure fairness 

for all. With this bill, Congress is authorizing a collection tool, not 

a new tax nor is it a tax on retailers. It is time now to eliminate 

the government-sanctioned competitive advantage some retailers 

have over your hometown businesses. It is time to end government 

picking winners and losers in the retail community. It is time to 

treat all retail businesses the same. I believe Congress has the 

ability to balance appropriately the needs for simplification, State 

sovereignty in tax matters and equity. I encourage you to make 

that decision and to act now. Thank you. 

[The prepared statement of Mr. Harper follows:] 

34 


Harper-1.eps

Testimony of Utah State Rl'IJrcscntativl' Wayne Har"pcl' before the Jndiciary Committee of 

the United Slales House of Representatives 011 ,July 24, 2012: 

Thank you Chainnan Smith, Ranking Member Conyers and Members of the Judiciary 

Committee for the invitation to talk to today. Today, Congress is focusing on one of the 

most serious issues facing state over their taxes, and also one of the most challenging 

issues for our retailing community. 

Introduction: 

T am a Republican Slate Representative from Utah. T chair of the House Rules Committee. I 

come before you today in my role as someone responsible tor producing a balanced state budget. 

reducing government's burden on business and as the in-coming president of the country's most 

successful business tax simplification initiative 

Background: 

I appreciate the title oftoday's hearing: "H.R. 3179, the "Marketplace Equity Act of2011." That 

subject is of paramount urgency and importance. As you know, two US Supreme COUJi 

decisions of the previous century are the basis oflhis hearing and the situation ill which states 

and business tlnd themselves in this century. Since Bellas Hess was decided in the 1960's, 1 

don't believe that anyone could have imagined how that Court's interpretation of the 

Constitution's limitations on state taxes would produce such an ominous etreet tor state budgets 

and for retailers that exist today. When the Court decided Bellas Hess over four decades ago, 

this focus and issue was on catalog sales. While catalogs ollered greater vaJiety lhan many 

stores at that time, catalogs could not compete with local customer service and immediate 

availability. Tn conlrast, today, one day and two day delivery of ordered goods is normal, and 

same day is possible. Retailers are accustomed to competition and business 

and delivery However, the crux of the issue Congress is addressing, we are, is the 

competitive advaJltage government grants certain retailers over others. The bottom line problem 

that exists today is the 6-1 ory" government mandated price difference. Remote business selling 

the same product as a retailer in your home town has an inherently lower end transaction price. 

Government is picking retail winners and losers under the curren! COUll decision. 

The second case, Quill, circumscribed the state's authOlity over its own tax codes Tn QuilL the 

US Supreme Court made it clear that a state's ability to employ an etTective sales tax was going 

to depend on the authority granted by Congress under the Commerce Clause. I come before you 

today to ask you to exercise that autllOrity and cnd the current government sanctioned business 

inequality. 

E-commel'ce Sales: 

According to the Department ofCommc[ce c-commerce sales in 2005 were $87 billion This 

year e-sales will total more than twice that amount. The quarterly e-commercc sales in 2011 

increased on average 17% more than the same quarters in 2010, while total sales increased less 

than 8%. \Vhile that difference may seem great, it actually below normal ror e-commerce 

sales. Prior to this year e-commerce sales increased a! a much greater rme than did total sales. II' 

e-commerce sales are increasing at a rate greater than total sales, the difference must be sales thm 

would have otherwise gone 10 a local retailer. The stark truth is that local retailers across this 
35 


Harper-2.eps

countly often find themselves acting as the display case for consumers who come in and tryout 

the product but tllen go home and buy it on-line. vVhf) Because people want to save money on 

purchases and because there is a Comt and govemment. sanctioned incentive to buy remotely due 

to the nearly 50 old Bellas Hess decision that remote sellers are not required to coll(~Gt sales 

tax as are stores your home towns. Bottom line is that states fund critical govemmental 

services with sales tax. Certain retailers are not collecting due sales and use taxes on 

transactions. taxpayers generally are not remitting use taxes and states are not receiving the taxes 

needed to either provide services or cut their tax rates 

Lefs investigate some orthe arguments against parity and simplification 

FiI"st, Collecting is too complex; 

Some continue to argue that it is impossible or expensive 10 collect sales tax on-line or via a 

catalog. Every retailer today looks to automate everything that can be automated. Sales tax 

collection sothvare exists, it works, and it is affordable. Computer technology and supply chain 

management have changed rctaili ng. ln lllany ways the Internet is the perfect 

environment in vvhich to sales taxes because sales tax collection can be automated. The 

customer is already supplying to the vendor in their shopping cart, all data that is needed to 

collect due sales tax. Existing technology available from over 8 companies allow for the easy 

collection of due sales tax. For examplc_ E-Bay is currently doing a pilot program with two 

companies that, and 1 quote· "delivers small alld mid-si::cd business afasi. easJ. accurate and 

ajJordahle sO/Ulionji)f- achieving safes and lise lax compliance." 

Seroml, ImlJact on small business: 

Some opponents will argue against placing another burden on businesses, and especially on 

small business. Unfommately. today the real burden is on those retailers who are trying to 

compete against someone who isn't collecting due sales tax. Your home town retailers arc at the 

of a 6-10% government mandated price disadvantage. That is the real burden on most 

business. The mom and businesses in each of your distIicts are fighting to survive. 

and are being discriminated by lasl century's Coun decisions and technology. For tmly 

small businesses for which collecting sales tax truly could be a burden. Congress protects them 

wilh a small sellers exemption threshllid in all of the bill s introduced. That exemption is for 

REMOTE sales. Congress also helps businesses that exceed the threshold and v,ould be required 

to collect by I) requiring states to simp1i fy their laws and processes, and:!) by requiting slates to 

provide software. These and other safeguards. I support 

Third, Coil4'ctiIlg II tax that is aln~ady due is a tax increase: 

Some groups \vill telt you that these bills are a tax increase. That is not tm~ How. may I ask, is 

collecting a tax you owe. but are not paying. is a tax increase') Use tax is on the books of state 

in thi S coulltly If this theory were taken to its logical extreme, every audit assessment would be 

a tax increase since someolle is being forced to pay a tax they hadn·t paid. The obligation to pay 

sales tax on retail sales, regardless of transactional location, exists today. 

collect sales lax, simply because they have a store in your home town without "d,;"(1 thp 

all retailers doesn't seem like equal protection under the law. 
36 


Harper-3.eps

Fum-th, States have not dont' enough to collect the tax owed today: 

Some groups claim thar states don't do a good enoughjob collecting the use tax Under current 

Court rulings, there are basically only (wo ways to collect use la:<: have the retailer collect it, or 

educate and then audit consumers. There is nothing more inefficient. onerous or agitating than 

conducting an audit on individual consumers. To those who aq,,'1le that states shoul d engage in 

morc audils. l would ask if they rcally think we should have a more intrusive collection system 

in which the average consumer wiH be made to feel as if they have a resident auditor at their 

kitchen table? 1 resoundingly say nol 

Fifth, States have not cnough: 

Some opponents will say states have not simplified their tax systems enough to warrant 

Congressional authority. ln 1967, the Supreme Court said that the various sales tax and 

the very limited technology thal then existed there was too great of a burden on to allow 

states to require business to collect. What the Supreme Coun didn't answer was how 

much simpler the tax system would have to be and vyhat technology would have to exist to 

rule Technology has changed in every possible way' since 1967 The debate since 

the Supreme decision is how much simplification must be done. 

Sixth, Business has not been involved: 

In the vein of business simplification and parity, states and the business community have been 

cooperatively working for over 10 years to simplify sales tax collection and administration. In 

addition to the decade long streamlined sales tax elTon, states and the business community have 

been working on documents and Resohltions thai specify principles and elements that should be 

in the federallegislalion. For example, l]lah adopted HJR 14 this which is a list or 

simplillcatiol1s principles that should be included in federal addressing Quill and 

Bellas Hess. That Resolution ,;vas a cooperative etrort between the Utah's Jegislature, retail 

community and l'tah based on-line retailer Overstoclccom. Additionally, national organizations. 

on-line fetailefs, brick and mortaf fetailers and elected officials have been working on pfinciples 

and areas of simplit1cations that should be in a federal bill. Significant progfess and agreements 

have been made. 

Tn conclusion. I submit that technology has so radically improved that the challenge issued by the 

Supreme Coun has been answered and successfully resolved. It is time now to eliminate the 

government sanctioned competitive advantage some retailers have over our local retailers. It is 

time to end government picking winners and losers in the retail community. It is time to treat all 

retail businesses the same. I believe Congress has the ability to baJance appropriately the needs 

for simplitkatioll, state sovereignty in tax matters, and equity I encourage you to mal,e that 

decision and act now. 
37 

Mr. COBLE. Thank you, Mr. Harper. 

Gentlemen, we try to work within the 5-minute rule if possible, 

so if you could, when the red light appears on your panel that says 

to you that the ice is getting thin upon which you are skating, but 

you won’t be keelhauled for violating it. 

Mr. Kuttner, we are glad to have you next in line. 


Harper-4.eps
38 

TESTIMONY OF HANNS KUTTNER, VISITING FELLOW, 

HUDSON INSTITUTE 

Mr. KUTTNER. Thanks so much, and I have been forewarned. 

Well, as part of what we are doing at Hudson Institute looking at 

innovation, I would be very interested in innovation in buying and 

selling, and I have prepared two reports in this area. 

Mr. WATT. Could the witness pull the mike closer to him? 

Mr. KUTTNER. One entitled Future Marketplace Free and Fair, 

another about some of the issues that have come up in thinking 

about an origin-based versus destination-based sales tax, and I 

would be very appreciative if they could be made a part of the 

record of this hearing. 

[The information referred to follows:] 

39 


75308D1-1.eps
40 


75308D1-2.eps

Future 

Marketplace: 

Free and 

Fair 

by Hanns Kuttner 

HUDSON INSTITUTE 
41 


75308D1-4.eps

New " technologies have 

brought broader choices 

and more competition. 

They have expanded the 

scope orlhe market. But 

when these technologies 

allow turning the sales tax 

difference into II price 

advantage that tips the 

scates from one seller to 

another, Ihey confer 

spedal treatment, 

Future 

Marketplace: 

Free and 

Fair 

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THE SALES AND USE TAX: 

A CONSUMPTION TAX, Al\JlERICAN STYLE 

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uI ........ ....,d.. ... ~ purity 01 _ .. I .... r~ .. p joln 

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Potentia l for Remote Sales 

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Medium 

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Co'1liu"'~ r electfQuics 

Music reoordinss 

Offir.e supplies 
46 


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TABLE2 

SALES VENUE " ...... ' ....... , .~~ 1OoI ... ..,u... 

IN PLAY ........ &1 ... ,_ -r..""I" ' .... 1111 .... ' (>,Mllk""'l 

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47 


75308D1-10.eps

Electronic " interchange 

has made tremendous 

inroads in ho\\' businesses come together 

to buy und sel\. Thl: 

purchasing agent 

working with a stack 

of product catalogs on 

his or her desk has given 

way to a purchasing agent 

going to a web site, 

perusing the electronic 

version of the paper 

catalog, !lnd placing 

an order. 

""MI(~I"t ;""""_' ... .......,,4 ........... ' ... ,-....". __ ., ...... h .... -,.n.,""thoO 

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" .... ,--<>opOhI'" ... 

How Much Subsidy 

is There" 

Tho "'>oW)' ko .... ""'"'.,. "'" ,...,. ..... ""'" w, .... · ",_ ,.,11 ... 8'\ fMn 1..;. "'* •. ,,",,, pri<>oo "'" Jo 

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48 


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Changing Technology and 

Effi cienl Division belween 

in Person and Rcmotc Sales 

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50 


75308D1-13.eps

Currenl 

" 

policy has Ullj 

t;lffect of giving l1;l[[Jole 

sellers a price odvnnlage, 

1I 1lowing liwm to sell their 

goods and !'>ervices wi thout col le(:ting the sales 

Inx owed by the purchaser. 

This prict.! diffenmce 

funr.tions like a subsidy. 

It distorts the allocation 

between the two forills 

of selling. 

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51 


75308D1-14.eps

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Why is There an 

Oul-or-Slale Sales 

Tax Loophole? 

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Why Don't Sta tes Fix 

the Loophole? 

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" 
52 


75308D1-15.eps

" 

THE SUPREME COURT ANI) STATE POWER. ro TAX 

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53 


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Future Directions 

in the Technology that 

Bring Together Buyers 

and Sellers 

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" 

75308D1-17.eps

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55 


75308D1-18.eps

Ibo ...... 1"' ............ _ .... -._ 10m \I>.ltl .... ""-.- """' .. ""''''1'''''''''',''01/._,, __ ..... '''''' ~"'"'''*'''''~''''.''''''Il<1''' I. oM,,",,,,,,!. Th~ .... t... lurn _, IIIW ~ I ...... ""'pllo".,. b 

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A ... "", Modo..",." ........ lor. I.1 f"!'<"'" .. ... 

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louroJoolo .f """"IyI"~ """ "'" """" .... ","".""" .. .., Itr-ol ""' ....... A dl)'O< "",,,"',,fWIm- ...... '<I» ......... JI/kononl;".""',, ....... """" ...... , • 

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Policy OpliOIl$ 

~1.o"yk"" ..... MI .. ""'., ..... '''''''_~ 

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"",,ido to> f1<iIiq' ""'" .... <I;';"'" ~ OW&)' ''''''' 11>0 ""'" ,.""",, _,~". 

_rodor. I;"", So _~",,,, "" ..... , d ... !I.. IodooaI 

,., ... """""'noI .. "" ...... "'-....n...yl""'",I ....... . <lIng ,ho ployl .... lI<-id , ..... !WI t«IO<lO\: "" ..... '" 

~ ........ , .. ""' ... "'"'"-, ...... """, ... In,,"'" "" .. ...J ,...~"""'''''' .. . ""'" ,...-k: ..... ,""""''"'"'''''' ............... CM ... 'OC''' ""orig/~"',.. .... , .. , r .. """",,,, •• -...1<1""1""" 

"" .... 1 ,...."plU u ..... "'_ .... 1"" ' ..... "" ,,_ """'o ...... !."' .. ''"", ............ "'""~ •• «1,"'" .... _""".,.,",,. ol...,..l .. "oJoI"""''1!1!W 

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oI.9"'>do_""'_'i"-"l· .... """ .. ~!Nwo-

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.... n., ,-"""", I;.. 01 "~...",.."--- '''II h"",. __ 

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"" .r,...,...;""''' .. "' ........... "' •.• "'-01 '"' "'. "'" """""_U""""""""" 

" 
56 


75308D1-19.eps

.. !"" ....... ""' ..... n .. ,\Ir"" 
57 


75308D1-20.eps

111112: TUE MOST RECENT' WORD FROM THE SUPREME COURT 

A qua .... ....,."lU<y aft« 11,. N"'lI>nnlllella. U"'S.,.... lh<. SuP""''' Co"n ""nrned 10 lb • 

..... i>Mo .. in Quill . , ,\vnJr lI<,kOfu. Tho Coun .mrmtd il< brigh' lin" 10<1. ~iri"l 

....... phyal<.lll ""'''''''''(on beI ..... n .... 1 • • "" ... 11.' __ .... klltd orl,byolu l "'" ..... in lbe ",.,. OT .mJlln~ bo ..... in tho ... ,o--bo(o"", ..... mWd .. qui .. lh ... Il., ,. ""II ... 

,be ... It " .. I .. ' 

"'nllb I"~". b.,1 ..... """.. II> ~l!Ilnlli." <>f.,;o\"" .. Ion lOW .. ,lied 1110 ".1 . .... 1 .. ' .. '" 

I""'lid. " .. 'tf'}' ....... "".~ In "'8""< 0' OJ'>l ..... ~c solicitation" oIbu>in ... Ill,,,,, ... , .. Quill .... ,""" . atol"!; .. II ...... lIi"8 0/6,., _""pi;'" ... p"nlod """"'s> .... i~IIO 

bustn.,.. in 1\:0<1" 0.1<01 •• ,," Of"'" ... , ... II h.~ ... .. """-In illl",,'" Oolir_ •• 1,,01 

G«I~ .. 11 bod "" IOcUlli .. In )1:01110 1hl:0l1. _ di~ ~ to .. ·• ,0J .",plor_~. 

TIIo "' .... "1' .... '. "'''u, H1II't'I ,110, "Iho ".m."d .... """",I. """""obio;. "","n.,,,,,,,1 . nd I.-

[1>1 in"" .. I1""""";"",, ,b. SU",,"'''' Cour1 h.d <\eD.ltd lb. Nl!li"",,'lIeIiR< II .... caoo ' n 

"'''' nlOon' tb .. tho d..:lol"" wa< 01""'1 .... 

1'10. U,'>. s.p"' .... C<nu1 <lift ..... L TI,$I"i&'U Ii .. In ...... I1"""III<!/J".,I.,.. .. ""I~ ..... In I .. 

.. , nd.", for !nt"'1_~ tho «IU .... noo d ..... ... Dd "" 1 .... w,. )l:orth ThlkOiO ..... Id 001 ..... 

qul", QulII to colltcl ,h. Mlllh O.t ..... lOS I .. OIl (0.16,., .. ppli .. lbipped '0 /"Qrlb 1.Ia1o:6l •• 

Tho "".11 lIOI"" Ihol Ii~ ~ "*~ ... bri~ Ii ... I ..... '110 /h11"'11 .... ",I ~ . r" ..... lImdo' 0' 

ilS odgoo. • b", il .. ,obIWoed <:lou lMlndari ... 51_ c._ Ud 00' "look, •• tho s.pmne 

Court wo"ld, 

11wo ""lU1 IKJln,"" to Congreos ho provld •• .,.. B"id. """. "OliOS !hOI "t"" Wldorlyi"3 ""'''0 

q .." onl, .... 1110, ~ -r "" bdlo' q.oli6od to .....01 •• but .1 .. ~"' "'I ~ 

loa, llot .1';"'0" puwer I. """'I .... " 

... , ''''' ,i.,.. ,b. id .. of ..... phi\:al ......-I"'.~ ",oJ • wO,ld .. 1d. ",ob ... '" I .. ,h&n 

11>0« )'Un old a nd the _ O&<oII nled rue Ie.>- I""n , I"'=n' of Inl''''''' ' nomo:. 

Tho world lou cbongod .• ot only fO, ."" .""'''pl..,.. tou, fO, (juiU i,,.IL QWII "" 1_ 

""ntfil> fnoo" ''''' Sup ....... Cooort\ om",,",i ... of~. position. Tho """'p.ny ~ ""I,,;!'ed 

by SI."I .. I. Ill'IIIond _ ,("" .. ,oo,y " Q";II.o;o". Beo;.ou .. S..ploo b"l,bl~kol "''''''' 

""'_ tho ""."toy. (julllmm "_ coIlott . .. I"" I .. "n ..... u. all ""I ... (,,"',,/I;"lI ~'WI~ 

llo~Ol ' 

,,,.,',11';,,,,,,,.. " 
58 


75308D1-21.eps

NOTI!S II ANNS KUT"l'NI!R 

, ...... __ ...... """"' .. ,, __ ...... ... .- _._ ... \ ....... r~ .. ~ ...................... , .. _ ,_ rto ___ ,,~_ , _ _ ...,_ .. ,'"'''' __ ... _., ..... _ .... ........ _ ....... _, 

....... __ ....... ..-................ " ..... ,.... ..,:-;.".w,-. .. _.-" ......... __ ~ 

..... """"' .. __ ... _ ............ ",""' .... .. ..... , ........ -..,. .......... -, ..... ~ .. -- ... , ... ~, ... "'"' .... ~ .... ___ ...... bot_ .-.... _ _,. ... h.- ---..... , __ .:-........... _,......,._.m.Io.Jo_ .... _ ......... , .. _._ ........ ~ ......... ''''_ .r~ .. .. t_'_ .. _·~__ , ............................ ___ ... ...... ..,.,_ ..... ...,.-• • ,. ,,,,,, ...... -''' .. k . .. __ .... .... -' ...... ~ .. t ...... 

.. _"",_._-....... -....... ,_ ... L<"" ~_"'4-',.!''''''''''''-_ .. -..., .... __ "'-.. A_._· ..... __ . 0--""'.-""" '" _ ...... "",OU "'" ,,,,_,_ _ ...... _ .. _ ... A_ .......... . _ .... __ "'_'....,..+<'a _~,.."........ ., .... _ .. __ , ...... t .. _ ...... ~ ....... . ~, • __ .... .,. .. .. _ .. .. ..... w.,.,," .. , ...... , .... .................... _-- _ ...... -_ .... . .... 

........... ~-__ 

.. -..... .,.""' -'_l .

_- _ ..... _ 

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-,. ................ --_ ...... .... ..... , ..... .. -... -...... _ ..... ,-_ ..... II UI}SON LNSTITUn: 

~"' ... -..... "'--..... --....... .

....... ... _-__ .... "", .......... ", ....... _-, .... -- ..... "-''''-''.-.'--' "' .... -.... .. _ .....,-" ..... _,,.... -~ ... , 

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.. 

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--. ... .....,............ "-

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,.~h ........ '" 

" 
59 


75308D1-22.eps

• HUDSON 

INSTITUTE 

lrUJ.~'~' ..... " " ... """JH""" ~.("". 
60 


75308D2-1.eps

• 

.. 

Hudson InsOlufC 

101515th Stlfft, NW 

6th Roor 

Washington, DC 20005 

www.hudson.ullI 

I.COXO~II( 1'01.1("'1" I BRIElIN(, 1'.\1'[ R 

Hudson Institute 
61 


75308D2-2.eps

Taxing Sales 

Comparing the Origin-Based and 

Destination-Based Models 

Hanns Kuttner 

June 2012 
62 


75308D2-3.eps

,\ boLLf th t' Auf hor: 

Bann' K,n,nor i, . \~"'ti"g Follow •• I Iuds"" . worl:jn~ !)II th~ ns"'u'~·. Fu,ure of nnov~rion 

Initi.,iv" and <>In .... e<onomio Pft'i"'''' I Ii. car<et $pal" ,h .. poIi.:;' and '.....rth ... 'tlI1d Durinll 

(k. p.esid."C)' ofGcor1l" II W Bush, h. w ... p.noflh~ While !I[,,,,,, don ,,"icp<~iC)' .tlffwith 

respooslbltiry for llulln ."d .odol service J>fOW1lm. ,\ 1<1>1 ,=mly, hoe w •• I ,.",ard ••• ""';Ite 

at the Uni .... '[,.;!}' ofMich,gan', £cum",,,c Rcsea,eh "ili~i~. "" lhoe Ilnin ... ""d He ha> 1,,0 

wu,t.-d ,'''' Ih. r~dinJ '~cn;:y which run •• h~ Medi"",. and Modi<.,d P'I>!!.amSood I(hi!\<'d Ih,' 

slit< of Ill inoi~ on 1'ef.l1\iC1~rin8 11$ h~m.n ....-vioe JII'O!II'IIm~ 

Kunnt< h .. on A II from !'rincerO<1 Un,"e.~ 1) Ih ~ ~d ale , ... imllS wa:. II ,he Un" ~"';ry or Ch"'~lI<), """'" h .. ,,,,,,,ived,n M A ~ from lh~ '''"'"H 8 Ih"';s(',raduale SchOCol ofl'ubh<: 

Policy S,udies. 

Abuuf lIullSlln Institute: 

Ilodson In'li'\ll~ " • """pI"i .. " poIiC)' ,ese.o,ct. "'lI"n; .. ,;[", dedicOlw 'n in"",'oliv< ",sl:B' ch 

and .",lJ~ ... 1""">Otln!:\ ",''''''''1)', l"ospef1ly, a<rd frl.",don, 

F<>WIded in 1<,161 by Hmnon Klhn, HucI_ chlliMSes con"."';/'I!Iallhin~in!l.nd helj.>S manage. 

.slfJlt<gie If1lll>ilions 10 Ihe futu,"" lhn:lt!8h in l~i.tipli"'ry I nd cotllbora.i"t IlUdi ... in defen~. 

in""".ti""al ,,,!aliOll" "'011",">1', .,Id ,,,,de, philllnthtQlly, """''''Y and eullUll', ,echl1'l>l'*Y, 

.den"" and h .. lth, ud law With offjc .... in Washinglon aOO N"", VOfI;, liud'lOfl sukslO gUide 

public policy m.k ..... nd 11!lb .II~aders in J!<I\,emmem ond ",,,;,,,,,,. 'hmug/1 I ,igOlIl<O' l""!!l1Im 

of publi<01ion., conr ... m<n,;md poolicy bri~r.!IgJ.nd ,""""'me"d.,,,,", 
63 


75308D2-4.eps

Origill-Ba l.'d and Oestioalion-Ba$ed Sll ies Tu MlJ{lcis 

0'1 ;<II.', 'a .. ,,~I "" <lIlh'r Ol'lelll '" " • .'.",,' j/) , "",:d. 1/1 tlo.! ''''idt;.lxl>ld ""Jolt/. lhe IU1' " tlo! 1iI"' ' 

~~1 n'kJ /l11~ ' ,,41.r'> h --.ni"". ",ol,r. ,/", I. lj,~"''''' .. h<,s ... J ",, . II~' hl~ MI ... ,,' I (/II.', <II . ,hi",· III I1M' hH\" ""''''' . lh«'''',liJrl m,,""~ · II" .. '" ~ """I.·l~ 

/"" diffrr~' IU$ /Jt' /Vi't't!III/I" """ "'~ hoIh <'<H"" 'fII~ " "' II""""''OI. III II~' [/ml!q/ l!"" ~ 1/'" ,,",' 

' "JI''YIN''''' "iffr, K:tS ",,'OJ,.., .frJ<',IIIi"'" '" ,,,.. d" )'WOII,,,,.JJ(,m) ttIOII."- 11"',fo<kru/ !;O '~"'~U'''I ' 

m lr ro. m ""<$1. II> }lilY WI' .... '" Ifl MUI,' mlltlOOnIlI'"'' IIII/~' ,,,,glll-h<.,,v ",,""-I. I"" ./t<l.w" /lO""""""'" "',," 1"""'-''''''' 1/(1/(' "' !1"' '''' '~9' !l II' ,',m,,,,, '''<II ''N"e~ C'If>Ip/y ~' "Ir ,It.· ",,~H. 

Th-e impKt of moving ttl an origl n-bnad model 

The '!lain bodr or Ihis PilPlif c~ares b]e 0'YI00/lI crI (/Ie ~ and 0Il9!f'-based (rIQ(IeIs lor iI ~ 

~d Sales I.lL What \he lkli\IId Stale\; has today rellecls $lll(8 decision. I:) adOpt 1M destin;(ion.-

based model lor SiIIes across stale lnes 

ThUi, two ~iri5ons Garo be 1IIilde. 0!II15 between Ihe \WQ rollCeOlS, origin based ;nil OOsIiniliion ~.:.s.ed , The Q!tIer is belWeen tIlII world we I'I;Jve (de$~1\itioo ~ased) a'lIllhe 'MlI1II WII \IIOUkI hal'!! ij!he 

lhIiled States moved to an ongjn·baseO taL WIliIe III! rest 0I111if. Pap!!( compares II\!! 00fICeIlt>. un 

section ~are& \he ~ ~ 01 rT'IJWo!! from the oestJnalioli-basetI model ilhlildy 11\ p~ kl 

\he orIgI,..biIsed!l"lOOel 

WIllI ttl!! CIIIfeII! desrilla1ioo-based sales W. each ;tJte se1S it! own &ales Ia< rae, F.w StaleS hil'/e 8 0 

perrent sales 00 (AIasi:a. OeI~n. Montana. New ~shile. and Oregon), Residents 01 Jhes1I! staleS. 

urM:e!he rtWe"t1i 01 othef ~ 00 !lOt fa« a 'use Ia<' OIl ow;hnes rnaoe from WI rJ st.IIe. SIilIeS 

~ a U~ IlIJI on gooos \ISM ~, Of corn.umed in ~ State where tall has not been pad ttlrOUglll!Ie 

saies tall. Most use 1iI~ iIfIp\ies kI putIIases maoe !rom out It S!iIIe. While seIers c.oIIed &ales IlIJI on 

beh .. r Qf purdlaoe<s. b\l)'elS are responSIble for mal:il'l!j use ta.~. for pm:hase<s '" StaleS 

wilhout a I;a~ Of 1I5i'I tal. bo!h ~ 0011 OIII-Of,SIa\e p ... chaoeo.; ..... fI'e<.l 01 WII:~ .aes tiI'-

FO' residen!& 0/ ItIe ~.talI Slates. !he origin-based sales!i!>; WWd be a fleW 1iI.<. \kieler ill origI,.. 

bi\.ed system. reOOeIlls oIlhew ~I '/I'Quid begin!Q pay saes till M\en ~ PlWChal5eS from 001 01 

Slate. II ,esident 01 ~Iontlna. 101 eJ(~, WIlQ preloiQoJsly Md r"(I oblfgiilPorl to pay a sales 0' lISe tI): on 

metCha/lClise O'Gered 0Yef 1M Internet ~om a seIIeI ~ trodlana. WOIIod IICM' pay !he 7 peroeI1llf1dia/la S/aIe "" ... FO' relidelltll o/!hI! s\aIe!Ilhai '"lr" j~ have a sales tal. !lie origill-M."d tax wotJId mean a COI\Muing 

obIiga6;>n 10 pay sales tax. but at ! 1MIeren! rae. Considef!he CBSe 0/ ~ and sellers in KenllJ: ~Y and 

T enne:;see. Ken!ud<, h;r.; a 6 ween! ges talC Tennessee's iII'I!f~ rate 15 9.45 P9own! (!lis /rodtldes 

the st3!e's 7 perWII sille-s ta>; and the !'oII!rltge D:aI rate 0/ 2.45 pefCefI\. illS c*uI;JIed ~ the Sales Till! 

CieOlif'l\lnouse. hQp:IIUleSIC,comISTrates.stm), FOf Kerrtudl1 JeSidents. II)e oOgiMme(l sales W \IIOUkI 

lI'I!an a liIil lllCft!ilS! on purcflases from Tenl)!56ee. fOl Tennessee resMlents. ~ WOIAcl mean a ~., 

saes tal: lor purcllilses from ~eJlIl.II;ky , 
64 


75308D2-5.eps

,,' calu ns a nd InCt nli"es 

·me ""lPn, and de!.linal'on·bIuod ~ppn>l1eb es . ' • .wbs"n,iaUy si",'I., wn~" buy'" nd 1<:11.,. I~ ,n th • 

.<lllI1e . U"e ,. in oliffn"'" .,.,"" "illt 'he """~ s.oll"$ ''''' nu ... In ,n""" c.--. the $.ll", ''''' "It. is 1M 

""'''0 under""'h model. rite Iw".pproodl ... can h.ov~ diff", •• 11 , .... 11. """" buyn ~nd .. II ... "", in 

difl, ... m .... ",. w',h diIT",~"' oaj"'a, ntcs. 

Th~ di ffe"-"'t ~te. mean _ dilTe",n~" In price for ,he I"',<ha..,. and in a m,;.I1<'" iY.>t,,,,. b~y ..... 

....,p.l<I<110 such di"'<'rMcc~ This pri<~d1ff tent. (<11&l la~ pj)iky. I\Ot ditl" .... ntt; in i01"'1 <<»I~ or 

.me,,,,,,y ·fable I compo"-,, th. m<Khan,,,, and fultl" .. ,. of lhe 1"'-" modtl. 

Th. ""'"""'ic. ..... ly .. ~ Df1J..' l!on dt$trl~ "'~ IOW5 Ilt"' ltad 10 • <:hang. ,n bM1 ·' or 10 t,., "~""p ", 

of hn,," In I"'li<y prn'hlCe.' ffi, torti"" " nd I"", of """,,"""C officienoy The price i. differntt no! 

J.<o one sell .. is "" .. " ... leu eflk,,,"~ 00, heu" .. tho sell ..,; ~ localed in a "at< with I hill.h ...... 

I""",,, .. 1 .. 10;; """. 

Studentl off'<lli~. IlI "'onomrS<.~ diff~." in WI 11Ile. as", OI'Pi>"unil)· rOO" tal< """'l"'Iio"" 

betwe<:\1 goyernm .. m . Ifth. dilferenoo in 1 ... "''',~ i. large en""!;il .... """,ho", deci,; .. ,. $!Itliri.ntly 

.ensi!lv. ", p<i« dlIT.~"",. p,jfchast<s .... ill swjt,h to sellen in • '1". wi,1t . I"""er ""I .. '"~ rate. 

~.l "' s who th ... eby 1_ wn h.~ 1n incenllve Ii) mobili>.e 1\l onc""!11~ their ~tatt '" I" .... ·.,. '15 '11.' r~'. "" th" prodUCt .... ~te titer <ell 

Thc ""'1>" .". '''''''''''''' tn 1><>1'I;<.1II".""r. tn 1",,'eO I ".tc·, ",,1~ tax in .n oriW,,·b.oed ",otIei 

include. 

Low. r ,he5ales <ax on ~II g(>Qds .nd~'<:C IO whi~h lhe ...,l~ "'lapp)'''' 

u,werth • ....t ... ,11< !III th_~. IlrId 5<\n',t ... thal = ~"ily tot >Old acrm, ""ar~ li,,~s . OOt 

1"3V" 'he .. Ies to., """hanged on gund •• nd ><fVic",. that ~nllot eMily be iOId ac~ >IlIt"I'".. 

/wctl as 1' .... ""'", mea l<) 

~bke $''''lcgic ov~' 10 ""port th. >1at~'s ,..It ,,~ OOrden In I poI;".al OC<>oomy model. 

rallon.1 stale.pj)iirid.n; _~ tQ c.,potlth .. ta ~ burden 10 C"iti=> of01~r .lOt.sond <<J<fmries 

TtoJ'i olin"''' ro"tk'.ns 10 deli vto- I"'Uli. , 1 ....... ® withool impoSing COSI, on .helr 01 .... ".1"1". An ""'"'pie nflhis beba'1()r is New Hamp>hire" IOO'ni &nd meab 'ox. tit («<'pt;"" t1.' "' .... 

H .. npshlre', ' no <.ale> 'ox' "","co, bUla ll.~ more lihly t1.' be.pald b}· tIt~ frnm oul (If A'.,,, 

,h,n • ~""" .. raI We> 'ox An ""gin.~a1-ed .. Ie> '"' woold "'''''Ie. !l<:w m""n; for poIi" "",,, '0 ."porI th~ ' '''' OOrd." 10 ' .... d ... I' nr ,~lIer st.l .. Pol'I'ci.,,, ... ""Id f ... .., in.en, ~", to ltV t" 

le·,,,,oge. ,I", '!>englh of" c.ompaoi •• in Ib,;, il"'" F ... . UIlIpie, W, ,,,ini!l1'"' State. wIl ie!! h"" , 

"., ~ lax hUI "" ineQrn" tax, 1/I",ld ,...no,·c ... ",mpti",," r", c~p1,"1 i/OOOs 10 tap Ih~ ""bStanti.1 

out·Q/··ilaleand out..;:rf-cwntry SlII .. ofMirrO>Of\ "d B"";nl! Whil,tl"\e ri9l<Ibat bu,i_"" 

.... wld I ... ,,, lh .. SIll" "o~ld tempe' Stat. cff,,", tn laX II""'is sold .... t of >1ote. , ·01." " 'oold 

<>Iltt",1 .. prefe, t.~ reg;meslhal "Pi>" Inc t~, bunkt1 to ta pa~en; '" "'~ Sla,es or.d 

OOIlolnrs 

Th •• ",lysi. up to ,h,. point h'$ .. .."ncd Iballh .... is no """ tn m""it\!! Woodo and """,ice< .em .. 

<t ... loMS Oi'.[3"«' beTween buyer Ind selt .. "oJ the ""IU," of Ilt~ produ", I"'"pr.... tire impact of 

.. I .. t.~ diITc,",""c, Th~ impo", i. greal'" "hetc ,h~ .at .. ta., diff."",ee h" ' !!In ter tnOu ... u PI! 

l(JIai co;;( F", som. PfOOUC1>. ,uch •• Sltnd and !!Iavtl. oddil;onll Jnipp1ng <:<IS" woutd OOI_'!!It .. I", 

13]( savongs. 001 ... 1 ... tl, dilfrrcnC<I """Id hov • • larger import"" the .. I~ oflu~ul)I $OOd •• fQf 

«ampk ... h.", >hipping i •• JIllolI., ,Itore 1.'f ,,,,.1 rost. 

, 

75308D2-6.eps

" 

UH --

,ga l 

• 

u 

.. "'; 31 i, 

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, 

H '. a, 

. 

, 

o 

;i3" 

[ 

! i' • 

1

6E> 

.1 1 - .',iI "i q i!"' 

Q.!l. .... ," ." 

., ", 

• 

i"t 

gz 

!irE 

! 

6 

I" * I 

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ii 1.1i: 

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r-"' ii .. ", * .. 

i;!t 

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lIn 

.; h .. " "" !l!1"", 

.. iI.,!; , .. !"!i. "''''<D ! :> - "" 

m 

"i 

• 

, 

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Iii." l -'I •• !C.§"3 - _<Do> 

- 1< ! 

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!!3 i': "'.!'l, ::I 

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66 


75308D2-7.eps

Usi Tax 

£""" ~t:llewllll. d~un.li"".bu.d ... 1"" ... , iml""''1; I u"" ill' <)II ~ Inll<k fmm ~I.", "hl>dn 

III>! c:<>Ill:C1 tIM> ... IC'."""" I." The U!<e"" IlCUltalizt'S IWIit'S I&>. dirT.r""".I •. Wh""' .... llIc I"""'h ...... 

bLl~f,,"n"n in -Sl.te ,;ol ler-,,, ""I-<>f· ... ,e ..01 .. , I~ lax "lie i. 'he .. ,,,. While •• :I1.", <oil""lllle SlI .. 

'"., In.- ~ .. I." ,,,,,,,i, ... purcha ...... lo .,se5J; lhe l'~ . ro le r~um., .,I<! """il1he 'as C'omplianoeby 

lndividlJ.lIJ I~ I" ... Con,pli.no~ by bu;inoS>e'" muoh hilrher' 

In on origin-ba"'" ,"ooei. a ,Iale Ihal ""'Iinued 10 imP"'"' a ust I.x woul d undei'1niM Ih. 5ole. I.~ 

differe~li.1 Th. la~ b....cfil 10. b<olcr ,,110 ml~.'" 1'11«"",, fran. odie. in • 518te "lib a lower ... 1 .... 

I •• or nn ",los IllX "wid di ,..ppnr if Illtn.' " .... . U" IlI' Al I>lo$l, Ill .. ,,«, ..... woold n""".,.liu th • 

..,1." I!LX differenti.!. .lIowLns Ihe IOCl tion nOlJlnoli,y of tlte d<"ll;n."",,-hO«d <1110< ... ' 10 pt:r~"t . Thi, 

WOI, ld ""'I' only WhOfe die oeIICf', ... ,e hod !KI ""I", lox lIT n" (0)1 OII lhBI i,em 1IT .. ",i« If Ih. 

,ell.,', SI.I. ;ml~ 1ft oogin-m .. d .. Ies 11.". I'IIrcha5el, in ,,, ... 10>. !.tales would fae • • hii:!fu:< oVCfllll 

10K ra',' b«lur;c lilI:y .. ould p.o.y booh lke,fllt."·' SI.I,,'J .. I", !aX I nd Ih .. r ",,·n '~Ibu>e-I" . Thu .. 

wilh""'l f<'\l..-al pre.emplion 0(,1.,. uSC I""". ,h.Ilri!lin-ha"'" mlld.1 .... ,.,Id III"", SlI' 'S I" pI";l II,. 

WI' lOX '" o",alt 1""""1;.· .. '0 t>u~ In Jlale 

Indi.iduai ....... swnen would be unh~el y IQ t>e Ifl'e<.~ed by the disin~~I\I"'" b.uuj<: ,h,ly h" '8 19'" ""-=-

<!i"U$< tU "",npli~. Il ow"" .... <;Orpl""UOIl<, llId e<re<'i.lly v!>",~oru. "h,th <,,",ply.t. 

mJllt.., ... ,. 'han ;ndi.iduol!l, wOtJld t>c: mOle likd y In oc, Oft Ih. tnc"Ill;I'eln buy in .... te nod.". .. 

,oigin-b."", "",<Jolin .. all"".d >(" .. II, .""t;n,.., to impose. u .. I., 

III/prms 

Unde. th • ...-i!li"·b. "", mode!. l1li ol-1-le .. I .. I", "'''IOld he d«<, 00 impon ... ~ Ih~r origin i. ""tside Ift~ 

IlaiC. 

In lhe fur"""." Uni"". Ih. Vllue-,\dded Tax (VA 1'). impoocd by.1I !iL' n,Of!1!>m;. i. Stlterally 

ddti " " 'M b~ r.". ,ml""'-' IJl t3ch """ntry ('-di""""t <al .. "). F...- ..tIe ... wll<> dn relali"cly . "uJi 

.m"",nl, orbltsi"os! in " panicular """"H)' in . gi,,'"') .... - m05' to"tlnonly up 'nfH.OOO. or 

SlS.SOO-th. II~ i. ""gilt bued.' 1'", "nj><l<U. ",Itioh.n: 1II.lngoos to ',..,"", .... I~ .. • or ... 1., f'''''' sell .... in ""e EUl'Of'<l" c""""y In bu)'ft. in "",~hn. lile &troflt'"" C,",,"tI.sion'. VAT Diru:livt 

,,,,,,,i, .. EU """nlri •• ln impose Ih~ VAT in Ille'''''nlry "hon: the g<Xld ,,,h .. Thi. i •• ill 

",,",,,,,rily lhe oounlry lhmu,!!h "hkh Ih" go<>d fim en' .... tit. EO. for e,ampl~.l!""'l' Ih., emer ,be 

ElJ du1ll.1j!h Poio"o !)ul .... dOSlinod fOl tit ... N.lherllftd • • re lIxN in lhe NOIhtrlalld. I 

" 'he Un"od Sl~'C> could '"'~ In ""S'.-bi<e<l ... Ies la, for dOlueslio salos and I dC$l 'nau",,·based 

sal .. I.' foo- ''''pons. Ho",cw,.. odmm,S,"rinl' 1"'0 ~'SI""'S ~I Ihe Ume "me ",ouJd in~rea~ ,he b...-dl'tl 

ond """'pl"';ly vf 10K "","pliane", An ~d\'lll1tag. of "'''''OllIO th. origin.b_"", mOOel . which fteC!l 

bu~c", f,pm c,,""plillltt 001;11>';""'- """Id b< I""l .. b~y"", wDUld IIill have 10 !Itli",,;n n. .... 'Ord$ I" 

COOl,"V wi,h 10:< oolill>li .... oo imp"''' 

" f~nol ~I~ II~ "" Impo<lOO ~()Ods" one ,.oy I",k.." imPOll> ft"'" 'S<'"p'n~ Iny salts 11< uoo", 

Ihe OI'I!!in-bastd mod<.1 . Th. '"' 11ll".:wld !>ell\r aV"'"8 •. 1JI~-ba~"oiJlltI<:d sal"l'~ flIle ocr(J6S. 011 

5taitS .. ,tit .. I •• lax. ~p" rfOOl 'he l<:d~ ",I.s laX could be distt;!)uled 10sialeS and localities in 

1'fOIIOI1''''' II;> lhoi,. oI~m. qf domCSl[c sol .... "III.'W burellucrallc ~lIucture "'OIlld be mtu" cd II;> 

• 
67 


75308D2-8.eps

odm;O,"",,-lhe fw.r.d .. I .. 1.', IS """"Id. new fNt-ra1 policy IK' "hI' 8"od".'eoubj..a 10 .. 1 .. ,"" 

.nd "h., arec,'emp! "1~IIt" ,I\a,c cfimpc,U.," f(.or ",>ItI ... C;It<"l!Qr)' u>u:.Ily .''''''1'1 ('OOl .1"e 

,.,1 .. (a, e:; •• oJ \fl~, Th.,.., WOuld bo·. rg~ am",,,,, of p.>polrWO\'k iIl'lQl,'t!d in 1.linS """",prj"" 

,enilieates. r.lative '0 'he anl()U,lI of '''~ "" .<'tIIi<:. ' !'<)lie) nlOk .. s '";!!h' h~j dodd<, 1M' ,h. oompliao"" cOJ,( is 100 hig!>. "~ impOrtS miJ!hl ,cn,.in unllL~<d 

.' iscn l FcderalislII 

n . orijjln. ~"J dosbna'iQn·ba>"d m<)(lc·jf ore LwQ m!>rlo" of/iocal fcdo.T/I]iSm Each ''''l ~i'''. diff.,.."L 

roles for,hefedCfllI !I(wcrnmen, 

As Tobie I ~owl, I'e I"," ,nod", """,'e difl ....... ' ,nc.",,,..., for <I~ t .. '0 "oopt'I' .... The origin-blS<'ll 

mood LllIl b< undenn,nod by. """In .. ;mp<>1C1 ' u.le la' Un~m,ning the d""".'ion.bU«l "'0<1<1 

"<>.old mean adopti ng an origin-b.sed .. I .. ,ax mi$ ",,,,,Id n,.k. J!<>Ods and • .,.\,itfl more "~n.i\'c 

in d""nlri",,-baso:<l ... ,es, I. bUJ'" would 1'")' both ,h. origin-bl 5ed .. les w; tof the ",,1I0r'0 <laIc and 

,he d">li"a"",,·h. ,od sal ... , ... ef,he bUY .... ·f$1Ule. S,ald hive no incomi,-. not ,o~le wiln ,h. 

d.o>(inaU()n-ba.t'Il O\"d~ . "hirh. ~nlih Ihe ...-i!!in·b.~ modr!. il ~If·ranr",ciflll ' (ik." Ih' l 

hl""",,,,1 f<>rce, produced a d<S1in. lioo-ba>t!d ,.,1 .. la ~ in d><- Unlted SUles. Ihi • • Wllln! ,,·hy 1111 ".le 

hIS ",(fled '0 an origin-b • ...J sol .. La\. Tile oriain-bosro model mjU'res an oo1>id. f"""'-- Ihe ftd",ai 

,\IO"om ,n~n' (o fo« .. '''Ie OOOJI<'faliQfl 

I" Ihe dr~';M,j",, -b a..oo ""ldel, 'ha frd.".1 Ho,'ern",.,,1 II .. at onrnl • """,din.,;ng roi", gI,i"ll its 

co".,,,ll III "'"'t eIT"", to COI~"""" An ""gin-bo.."j ",odel "'qui, .. fedt ll"~"ln;"" or o.,lt 

""""",iw,t)" 

Ikcar..,.. ~I<s ta'r.; In ,lie Uniled Stal"" ,anI. abo<ll as .. at. '"i'i'li,es. their f~ "u .. ""'«:1 de<;,;()ns 

made by fla,e •• t Ih" Ijt~ Ih"1 we,. adopt"'. .~ CQII1flCliljQn had [mpllclli"", r", Ih~~esiBn oftht 

r""" sen.,.al $1lle sale.; lAW. (Kentu;;/(y and Mi>Si$Jippi 3ppe.1f 10 ha,'. been Ihe (,rs, >1alO1 10 impOoS<' 

1-100101 ' "X. in 19JOI > Hid i"' ~iJ>Pi, ... , .dopted an origin--bosed sall'$lu. it woold h.". di .. d'·' "1J~ Missiuippi bu.i _ _ 

c",,';<I< .. ",·!utl ""'tid ha,·. happe<led lOan om"" supply dcal...-wboop.,.,"'" ,n north"'" M'"i"';wi. 

j uS' ",,"II oiMemphi,. itMi.si"iwi hi1d l1li'...:1 rorM origin-b.1sro ",I"" I"" The ok.ler', <"$1"", ... , 'n 

M.",phi ~ would ha~ebeSun 1<1 ~ Ih. Mi>li!s>ppi , • .k, 10.' on IhelT'i"voic"" Man", f()rce, ",o,rld 

ha,'" mea", lwo <hoi",," for Ih» "'~ier .. ,h.r ,«l"< ~ hi. prices I>tl<>w tile pri<~ chorS<d by 

Tenn.""...,.l>uo<j :<uppli..". ",I_lhe-sale 10 lhem If tile ma"'et wti oornp<ljtj,·~. mtA"'ngp<ices had 

~ ]lIl,hed down '" Ih. CQ.<I of,nl'l't<, t"".ri~pri_ ",,,,,Id h."e m...,,, I~"!! m",,"Y "" ."~_ 

.uJ« The ",m<!1 "o,rld "".,old the Mi,:;i,-"PJ'l ~uppl c" to,","I' $dh"!! in Tcn" ~ In .. ,her,_. 

Ie<iUC"'!!P';'''" 01 ""Iopin/! .. I .. , 'he """ It ",,,old "",'e b ... , lhe. .. ",C the orisin.blsed .. I .. 1 .... in 

M'ss' '''ppi woold h •• e-on ... "llowtr .. I.., by Miss>ssiwl finn. '" bu) eno in r""" .. see 

Thi~ ",om,," .ho",~ Ih. nalu,e of 'h~ chC)i<~ , j;\alC' ".reo:! in lhe .ar1y da}'> of >\a1,,;.1.,·"1 We"> I'~ All}' 

".n. lllal a.JoplO<i an OIisjn·b. sed ... 1.Slax ",culd ha.ed; .. .n t~ In ·,tal. bu;in", ... (While 

e<:<IIIomic model~\lIlefl ... y Ih'l !jOin~ flm b,;'I8' o.n .. h 'ont3l!ic there """Id h.a,~bc ... . "flut m<l\tI 

di sad"Anlage" i~ t!>is ..... ) Thu~. 'heprocl$$ by "h""" ,h •• lal<,-I .. , ... I We. lax b.,>,w> on Ihe Un,tt'(] 

S,",,,,,. as • ,Mn nf ind,~idu.1 d«;<t1lr1< by "'''_ onil\!lll""", ""pl.in, why Ihey OI"cd f<K a 

de<'iMl;on.b4sod. ""h., th"" ~ otigon-lwtd .. I", lax 
68 


75308D2-9.eps

For the "'''''' .eISlK" IMI stotes cUd nm 01101" Ih • .,..;gin4>.>e<I mood <";~io.II~ . • ,1010 111" ehanlle"! to 

,""en a model w<lUld di .. d".m.ge i.""lf ,,111.,.'1 """Id t>. ... ;n~ all"."", "",e. llI.~ ...... tv Ch~M<"~ 

11 ... r,tare urn. Tile ~",,~, ' S<'If.in!on>$I ranfore'S <ht e."SlinS. d"'~n.ali",,-ba;od nlQdol and helpso~pI':;n "hy no sto,e Iw """need from <h. d~li"31l .".,. 10 the origin-bl...,.J model 

F<denl pr~ption lXlU ld rcqui~ .1I.sults that all sales to-' St.t .... use!he onw ~ <nod", Thi.s 

.<lOp wOIllll be ""bjc-cllo .""-"iluli""a1 o!llll n~e in m. fedetal courts n. tlaim ,h a~lk r«kllli 

J!:IM'mon..,,, bas ,h. """.uwliotUJ outbooly to fCtjuiIC slat. sal ... 1~'" tob< orij::'" bll....t re.pl'fH an 

""f>ln";H in'''l''<101'oo o(lh. C<)mmort< ",au" n ... wooid beli" l. ec<!oomjc Activity bI.'}'OOd 'he 

fed .... 1 lI"'-ommcm' •• """h "nde. I ",.ding of Ill. 0001""""" c1 ... "" INI allowed Ih. federal 

S<)l'om''''''II" di<1""lh '.rm~ (J/". Ill' ",ithi" • . " " 'e, 

A federal law thaI ~-a),pted Slate authoti ly 10 impn!< <ies1illlti",,·bdSed .. Ies II,.,; 1.I",dd "I", h.,.., 

10 d""ide. lbe file "nhe use IIX WitMuI 1000mi p.e-~tPtioo Of "Joe II~ IlIJIfIority, St"" eould 

,,"<Im"i •• til. P'l'~"i>l r",. , •• oqn,p.,ution In th e"";t;'n-ba>«l y, .. m They wuld do till, by 

in1l""ing I ui.< ,a~"" oil "",-<)f.".te p",eh~. ""bj""~ng th"''' IU dOllbl,. t, .. u"", "" by impo&ing I 

" ... \,1x "h.." lhe .... Ier'. "Ole "" •• I"""" .. I .. 'BX ", •• which ",,,"old b.ing the flit<: paid by !he 

1'1,"'10 . .... up 10 Ih~ .. t~ in ,"" l''''cJ .. ,"~, st",e Tabl. ~ "'OIm""" ,"" r~eraJiSlll imph""i"". 'lOdCl 

Ih" 'wo ",I..., '11.~ .W~ 

Table 2. Fiscal Federalism ISSlJes fn Origin· and Destlnation·Based 

Sales Taxes 

.... OI1gtne.ect 

F&deralism burden Pre-Gmpt Slale law Historicallv

--, none. 

FederallXlOs.en1 required 

to a llow stalM to m j:>OSe 

tax collection obl<9lltlOf1 O!! 

remote selJers. 

Federal gavemm"",'s role Deftne key terms sud1 as ,,~ 

"origin" 

P,*$ible ,ole tn collecting 

sale s tax on tmport~. 

Ince<111\1i15 Buy from the slate With Neutral, if use lax I, 

lowest tax, collected, 

Incent've to ouy in Slate ~ Inoont,ve to bu~ cui ~ 

state]"\as use tlt~ $\<Ila w~h imperf&CIu"Oe laK COU"",,,,,, 

Inc:&ntivfl to buy foreign 

produc:I.s, not cIomestic. if 

no sales tax on imPOrts, 

, 
69 


75308D2-10.eps

TJl ~ Competition 

Inh"",", in ,I>., 1lfl,gin~ mod.II, 'h~ pll.",,,iol f",....,.,oonk CIlf1,,,,,,,,jon """",,,,n ..... .,. ba-l"" 

, •• 1 .. ,n difT .. t"Il,iol. Th~ dOSli"."on-.based m<KId, 00 'he "'~" ... 11.,,01, prodUCts n~ '"' compeli"o" 

Ih. e,"nbinot"lIIofSlI ... "d u.., .. xu m." .. lhll il n .. l~, ""diff.m,te.10m. bu~'et ",t...1h .. 

IJ'I'teha .... '" ",.d. in .,alo Of ,"" ';I'o'&'e.' T1I<>buYe>" Pl'l" .he in-ll,alesolC!l tv: Me 00' in· .... I~ .. Ie. 

Ind .he .. mc,.,.,., th,augh Iholl"" Iii:<. "" IPI'rthaw> made fl\"" ,,,,, QfMI'", 

lJnden h. <rI,!jin-bO!i<-..1 model. I~ sales 10j( I'IIle in Ih • ..,lId. juriodiCliOll beeonle. one of lilt f'C1.)r$ 

Ih. , intlU'""ce the buy.~5 docl.$ioo' Eve!)'thi"!! 01 .. 1>6111\ C<jual , • buyer ",II prefer 10 ~lJy fro,," a seller 

,n til_ s,". w"n Ibe lowest Qrrg;n-t>a;.:d sal"" laX 

AI "DIed earlier. mony fot''''. CilIl k«p ""<'Ylni1lg<I •• ffOO1 bnnge<!ull Tno"sl"" ,.,jon <<l:m am 

arr>Cl .. I., .. ~ sninp for """'. pllfehn .. Purch."", orhelvy or bul~'Y prOOllc,". Whol. 

lrilll>!ll>fllhDfl eO>1. ore • 11'11" ,hi,., uf 10111 com. are Ie., li~cly 1<' be 'nfluenoN by .. I., Ia ~ 

dlnh<,,'i l~ 

SIal" <oold ~C! "noles!c~lI~ 10 rounl<'f;lCl >lIes ~ differen,ial •. lhoug/1lhiJ """Id depend OIIlhe 

$COpe of lMe<a1 p<e-e",p(lon of their .biT;I~ ,0 desijp> Inc f.alu, •• of their sale5 1"-' ".5I,,-'e wilb • 

,d.';vely high .. I ... , •• no'" wulcl dN:i<l<." hovel lown Ill".,.. no Wl"UI1 ~rod' wll""" .<hiWin,!!""", 

i. a ,"",II >II.~of"'lli pri«', bOI ",ainl,,;n il<,,",,~'" ,," ""' .. ,!!OO<l~ ... d .""';0 .. ClOlllinl! ""Wn be 

on .,."mple. (Sla' ... iI-•• dy ongag<" in Ihi. ~",cg<>ry-'I'"cific COIII!"";,i"" IhfOOgil •• 1., II X hoIidoy"l 

."eh .. n" ",I.,. I,,", '" f.d.>te.d ... 1 .. I,,", on dOl",," during.he blc~·'o-""hooi ... 000 ) Slral<gie 

'~fi><'>1'" could l"¥e Ihe~lal .'$ !!,<'tI<,,1 »I<"-la~ "'" unoh&n~ but p«w,d. more 1Ilt11l<'1"f)u, 

"',,",pli<)n,. 

M""nlllfOOl " desli".tion·b.~ to an origin-t>Uo:d .sales I.~ would m ... o s/],ftjn$ the Wlllpl'.nte 

bu'den f""c~ernp! .. I .. Sial .. e~emp' e1_Sof"bosineS>'-,o-bu5ine!<i salt> '" " -':';0 "l'inga .,,,,, on 

• '"'. II< good.' "'''' . ., 10 final ."","umenl, whidl would IICCUf if SOOd' w= ,"-,~ 0,,11. lime of 

"'hol .... l. w< o"d again at ,e,,,;1 F ... . .. rnple . .saI".f .... ,...aI • .• "ch OJ b) wllolesol ... '" ,-..";1."" a,,, 

"."n']>I T1Ic .ttifl ,..",dd me.n "- n~'" eoo'pl;. ,,« bunion f.,.- ,II.,.., who rna , . eselllp' p .. "iIa ... ocr.,... ,I.," 1ill<"S Undn 'he ~es';na(i",,-blI,<d ",odd, "',mh .... r,oo' ,.,n"le .dl.Ii. IlIat ", .. II.,. in OIhn 

>lal .... til" o()l'Il.<c.,j •• 'belt'''"' C1f'S/llc, R~!h"'. I/le)" arc ,,,,,cd b} cha'l!rnll Ihe pltrcll.o>cr a "w (" 

Wi'h ~II",", oollMin~ .. I.~ 1.0, on.11 $III"'! l)/"gO!.Xl. J.U~j""'I(' Ll. , po«h.a ..... "auld hII,e1() file .... I~' 

lu exemption ""nifleal'" "jlh all .sell.",. IlOl jU>I til,,,,, who aro in "ale lfbu';Il." I"lrcllu/:fS did IlOI. 

l1Ie Ihe ~emp1lon ce<1,fic~le, they "",,10 find '''''ms.'h-es pl)"ing sales la, on • p",';OU>!) unl~'cd 

.<.Ole. I!ilhn r~~ull ",wId "'PM<Cll" new burd"" "" b"~;ne\$OS that buy ftOrll (Xl,..<!f-slOle .. lien. T""I~ 

j aIIo",. hu,,' >.Illes 1,,-, III1d Use t.~ " ".,I1 ... ,ed fur .""!OJn'tt" oM bu,""", ... putcl1a.<'S 

, 
70 


75308D2-11.eps

Table 3. Sales and Use Tax Collection: Consumer and Business Purchases 

seller's stale'S la. sellar's Slala'S la,c. 

Origin-nllsed and est iilalion 8a ~td Sliles Tn: TrMl.le-offs 

ovi1\il frorn • de<I n~"i;Jfl-\l.'<"d SlIII'\. IIX I" ene-illal ,~ origin b~ bnnlJ." 'f3d<\-()fij Some prOOlem. 

1!"I.0I,,00. {)1h .. ~ aeal..! 

I. oyoflh",e prohl=1 ,...,Ii from fc<lcr.lism cach ""'c Kll o~'ISII"'" ",t., odd, cnmpl~")· Tile 

ooly WIly 111 I;mpliry ,he .<ale, lox ,I f.Jeral octioo- hl""ooi.iol! • de.rioarioo·b .. cd .. Ie. I .. ~ Ihmugh 

an Iw-cnt ,uoh as Ihr. ~,lined Sale, ILnd Usc T.~ A!P'<'<"rncol-or on 1$> .. ,i"" ofl~1 

.u'~1)' In,Qi'''';,,s " m""~ 'Oln ori!!in-bo~ I"" 

I-o "y-I·" 'I!- SlaW /rules . ... dellln.Ii",, ~ ",le,11X places,h. bu,dtn of"~ " .. i~I;M' from 

11~le10 ".,e M ""II .. ! In Ihefoo),.'heSlOIO) .. ilk 'itl1.>aI<SIa,., 11._011., "',," to"", wi)B.ll~to oJ 

;n one .,Ate bu. nOi uOIher 

A ",ow 10 "" OI'Jl,in ....... td .. I .. ,!IX """dd rdieve ""lion ~f'lIt burden ofb<inl' ramili .. with'M nole. 

I~n <ki .... ,ine tho sales I"" bu.," .. d, uflh. SlOin "h.", Ihry k",'. cu"'''''' .... "'.lhe lIigltli.!!lued 

cell in ,.bl. j .ko"",. il woold .1.., ",eal' • ncwb..,\Jcn 00 bus>nns", bu)'io~ &<rolloI ".,e "or.. "h«h 

wwld II< rt<i""ed til sIIow Iha, ,h",·.", ~~.'~jN r,OOI ,h. ",h..- SIal.·, nrisin·b.std .. 1e.1~' Thi, 

.. U<Jld r"'lui'~ ~nowing Ih_ nultl<C> of"h~I " and ,,·h., i, <11110" t":<cm pl HI. on ~.h nrth~ Slale. 

.. h~le II" buy'" m.ke. purd' ..... 

LIH:uriuli ~ IHffmOlces <~OI fuej..,.,.,,,,,,lco,,,'rl"P,,cnl. l"""tloo. "illl 10","'- laS fll ... le 

....... -anlcd "llh m.:)fe .... ...",00'1. &<:Ii";IY. meR job •.• ,«1 """. lnl't$lm .... l, 

Wuh ; n O<igin-b.:t~ lIIIles ra . sellers 11ko do wsinffi in nwl"ple Jlall1li might h, .e Ile~ibiluy l(l 

e1 ~ rheirO<iW" .<lale r"'''''''''' pl ... m~"r~"'1'llf"JJ "'1> na.'c o.l.w~,-"ltich It.S M "lIes Ill<_ !l$ 

• 
71 


75308D2-12.eps

Ihei, eo<porale .... nicile, lile "'Ole in "hieh Ihey .fe inc<><JII>f1I'oo If ..,11." w ... " free: '0 na",. 1M "o,e 

"(ool1,in, many ",.Iid ""m" . M-.. le.·,O)( Itale.....:h os Del aware "ilhoo, havinl! I"eh~"g~thc 

pIlysicall",""lioo o/"llIlY ~ic..:1i hy TIlt '<§lilt " (llJld be lorl!echong .. In "hef ... Ies origi nale 

fOl sale, I'~ jl<IrP'*"~ 

'I'he location I"oole,., has IWO possible ;ojuuons- One ' $ '0 .llow ~Im .... no do bU$inC>1 in ",ulllple 

"'0'" I<> cl!ooot.lhe .<10'. <'Ii ori!j:in for oo,-<If. "", • ..., ... The oth., is 10 inlp<>U "rut .. of origilt." To b. 

wmoble. rules of <>ri g; n ,"wid h .. " 10 boo n.t;onally unif""" If ... clt ,t.to had it. awn, .. II ..... could 

be .... bjOCl1<> muhiple ".1." .. Ies I"",eson lh ~m . .. Ie. For.".mpl .. if""" ... Ie .aid mat Ihe 

shiprinll " ·.rclt,,,.sc WlU 'be ori!;!n Md . secood s;oid thol'heorigin " .,,, Ihe 5Iale ",he", Ih. proouCl 

.. ·as mode, a ~ell"' ~tlUld be :IUbj"''"IIO ori!!i n~ .. IO'S IIIXOS in btKh >!31" 

An Ulhoti~ Iha, had Ihe arnl;~ 10 coer« 'talcll'.nl "lie!> ",wid bel't<luj~ Son,. ~ oftbe 

l"edffill SO"emmtlll could bellivtll respottSibilily !oMr.". rulO'S ()f"";lIin An allema!i ". ",,,,,Id boo a 

f""~II.w In .. ,,,,,,,ired ",a'eS to rollow rul ... « t by Ji)rltt .ntiryoouilk ,he r"".1'lI! fO"M\m.n~ 

";,hC! I new, ;"gle,pu'~"'8an; .. tion '" 'IOIne ""i";"g ,~W'ni""li"" d .... gno..m w .... """h rul .... 

'"" <:<, ......... ....,_'"""""""i ..... """"" ........... """"'r""" ""' ...... ,.WiOlt ~~..,,,~ ''''' •• ,H~ """"" j-t "I"olu.! '. < ~1"<...r or""",» ... ,'OJ so ... of w ...... ""'" u.,.... .. '''' ~ M",,,...,. '1 .. ,..,., .. 1 of 1\<;'""", 

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~ .. ilil. :!t.",. "' .... '~utk~,.,.,'""".......,Wt;).f'olf 

, ':" " tho: ..,. .... , r, ~ 'llin>bo>lJ r", IIJ'\~"''''''''' '" "'" sr--:," '!<11m .. r", j~~~_ """ ,,,,' to r __ 'f'<"'" lhwr>, ./1 .... , 

, r~ ...... >IJ.(Mar<b 111m: ~ MOl'" ;!O ~. 

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72 


75308D2-13.eps

BACKGROIJ~O; Why I, til, uln ~ mod91 ,n issue? 

The sales laKeS irroposecl b1 American sillies Inflow IIltI desIi~d rrooeI. Tllis fact reflects how tlle saleS 

lao _ in Ihe IJribed States. 

WI'IIe Stales nOKI ~ t;Ue~ ~ gooas, trley olOOpIeC geoer.Jl s.JIe1.l.W!$ appkable!O DroaCI Classes 01 

~ as a response 10 the fiscal emls duI\rIg \lie. GIeal DepressioII in 1M t9.l:ls. TIl! !iIIUCtUIe of mesa w.es 

fellecled lto! Jedersksm oIlhe US Coos/iMoDrI. ,."... naleS haw SIMr8I!I" power \0 iIIpose ~ withtn tile 

slaTe, (~ Conslit\lliQt1'$ <:OnlllerI:e ~ 0XlfISlrlI0nS slate S<.lIIeI'e9W/. (ArIe.., I. Section 8 efIllJ1lefatllS the 

pOWer!; of~. a'OOO\I which is "10 fE\I\l!<II~ ~ce witt. IGreign Nations. atld MlOqg!he several STa!2S. 

and witt. IIle Indian Tribes 'j 

I~ sown.iog a>eir ules lares. sliltes ~ lo!lie lederal \Iovenvllenhpower o~ c;oorr,efte ~ 5IiIIe 

lirles, orJ1)OSIrtg a ~ fa< 00i'I ~<lenIs 0I1Ile stale 01Il(l reqlM\tlCJ sBlle!s Tn !heir $lair! 10 ooIIecIlhe tal. For ~ 

!rom OU\-OI-st3Ie seiet!. stales placed !he buI'deI1 rI roIecIirtg io1d renilbng tile t;U 00i'I 00\'81$ ar.a t*d ~ a "'lise; 

.... litigation soon as/;ed tho! !ede!aI oourrs 10 ctarify who Mel 10 colee!. sa'&!: tal. In !he ea.1ieSi cases, 1M CO!rt! 

Imetp«!lIld IIle coomefCl! clause 10 mean thai ;tales cO'Jd noI reqUIre ou!-ol·stalemail ocder caIaIog seIefs to 

roIIect the :;ales lao: doo un SiIIeo to ~tate resillents Urksi th8 rrIo1iI order company aI!;(I had a ph)'Sltai pre>enre 

illllle ~tate . nvs meal! ttIo1! sen RooD\JI:II & CO. aI(I ~ W;wrJ CO~ be reqUffil to ~!,<IIeS tali. 

01' caIaiog &ales in all tile staleS wherllhey had stores, &Yen ~ tne goods were sentm an OUI,o/·Staie 

.... arenouse. 

Moce recent/r. tI>e possiflilies for Ierro!e &ales haw e,.,anded \31' beyond mail order ~ 10 ondude 1-300 

nunbers. direct etec~onic data Interchange bet..'eeI1 bu)'e<s and seIers, IICId tlle IrJleroet. The,PldlO!I braoch's 

i!l!eIP'etalloo of !he COfI"fI1eIce clause hilS!Teio1t lila! Slates caMOl 'eQUOt selIet5 11'00 use t!Iese new metnod5 

01 remote &ales \0 collect tile .state', ~ 1M UfWl>S U16 remote selle< nilS a ph~ presence in trIe state, 

Sirlc:e 1999. a 'IOOlberol st.\II.es have WOOced tilrouglllhe Slr~ Sales iI!)II Use Ti~ /q!e'nenI (SSUT/lj1O 

s/rrcllify sales Iao:us. ~ ",io1t Congress 10 Miirl toe desti~ sales lao: and 10 g1Ve \!Ie{n!tll! ablil'1 !O 

feq\WtI 0UI-d-$t;l1i! seIer.;!O coIed IheO- (destm,,'oo.b..sed) sales 1$l Gn sale!; 10 Iheo 1PIsper::tjVl! StaleS. 

Th& ori;ir>-ba&ed sales aa. marIaI oIIef5 an 3lemaIiwilpPl.OaCll.1I. !hi5 orodel. \he !all WOIJki be owed rlOI bV IN! 

O~, bUt by II1eseller, Who'/IVUI~ ~1Ile sales lao: UIiII~ple!l n ~ stall, The tao: would beirrwsed 

Do!I\ Qr1 wabII! sale!; to blJyers in IM!dIIt SIaI& as \he SIllier arICI bUyeI~ wI'IO Ii.-ed in _ Stale~ (as, lor 

e~, 'II1tf1lnteroel.&ates.) 

In \he ~b3sed~, tile saieswis 31alon sales made bytne seJeI In tne~base<l~ tne 

sales ta. Is a tal: 011 poo:Mses rmdr! b, tI1e b\IyeIoYId coIectl!d b, tIIo seller. 

,,> 
73 

Mr. COBLE. Without objection. You may continue, Mr. Kuttner. 

Mr. KUTTNER. Thank you. I am reminded as I thought about this 

today about Charlie Schultze, who had been the Chair of the Council of Economic Advisers in the Johnson administration, and 

Schultze said that it was very simple to be an economist in the 

Federal Government, which was you just leaned forward every so 

often and say marginal cost, remember marginal cost. Well, my little contribution today is to lean forward and say remember the declining cost of information and the cost of gathering information 

and putting information together and making information useful. 


75308D2-14.eps
74 

In this area that you are looking at today, information is described by the world of 1992 when the Quill decision was rendered, 

a time when there weren’t any smartphones and looking something 

up meant getting out some paper document and turning to a particular page and having your fingers run down the column. 

In talking about the issues that you are looking at today with 

one of my most junior colleagues at Hudson, he said to me, Well, 

why just can’t you Google that or why isn’t there a smartphone app 

for that? And so that is the world, how much the world has 

changed since 1992. And the thing I would lean forward and remind you is that information’s cost is declining, and that is going 

to both change this marketplace and change the challenge of what 

does it mean to be an undue burden in this area. 

Thank you. 

[The prepared statement of Mr. Kuttner follows:] 

75 


Kuttner-1.eps

HUDSON 

li\o"T Tli ~ 

Statement of 

Hanns Kuttner 

Visiting Fellow 

Hudson Institute 

before the 

House Committee on the Jl.ldic~ry 

00 

HR 3179, "Mar!(elplace Equity Act of 2011 " 

July 24, 2012 
76 


Kuttner-2.eps

I'm Hanns Kuttner, a Visiting Fellow at Hudson Institute. From Hudson's founding in 1961, it 

has been an organization of people with an interest in the nature of the future. I appreciate this 

opportunity to offer a perspective on the future of buying and selling. 

Within the past year we provided a view of the future of buying and selling with a focus on 

issues that relate to today' s hearing: how advances in technology will change the role of place in 

where buyers and sellers are located. We gave this report the title, "Future Marketplace: Free 

and Fair" because that title retlects how technology and the sales tax are one force giving shape 

to the future of the marketplace. 

Before turning to some of the details of the report, let me start with a discussion of innovation, 

something that might be seen as a digression, but to me is essential to understanding the issues 

you are sorting through. 

Innovation is the source of improvement in our standard of living. We live different lives than 

those who came before us because of innovations in technology and how technology gets put to 

use. 

In the late 1960's, Herman Kahn, who founded the Hudson Institute, along with Hudson 

colleagues, published a look at the future entitled, "The Year 2000: A Framework for 

Speculation on the Next Thirty Three Years." Now that it is past the year 2000, we have the 

ability to look back and see what they got right and what didn't turn out as they expected. They 

made it easy to assess their work by including a list of 100 innovations they thought possible. 

Looking over the list, the ones that were most likely to be realized were those that had to do with 

communications and information technology. "Personalized pagers" have both come about and 

been surpassed. Similarly with "home computers." Those that have not turned out as expected 

are in such categories as energy and transportation. 

One thing I see in looking at the list of innovations realized and not is how important changes in 

relative prices are for innovations that have come about and those that have not. 

The whole world of information technology and its role in our economy is overshadowed by 

Moore's Law. When first propounded in the 1960's, it expressed a relationship between the 

number of transistors on integrated circuits and the time it takes to develop a circuit with twice as 

many transistors. For our purposes, what is important is the impact on prices. When you can 

double capacity without increasing price, there is a strong effect on relative prices. Whatever gets 

made cheaper, you'll buy more of; what's been made relatively more expensive, you'll buy less. 

The areas where the possibilities seen in the late 1960s have been realized have been those where 

the changes in relative prices have been the greatest. We got the "personal pagers," and a lot 

more. We didn't get the innovations in sources of energy because changes in relative prices have 

not occurred. Had improvements in solar collectors occurred at the same pace as integrated 

circuits, we would have been more likely to be a world in which solar power dominated 

electricity generation. 
77 


Kuttner-3.eps

Developments in technology determine what is possible; changes in relative prices determine 

how extensively those technologies get used. 

Today I can use a search engine to find more references in a second than I could in a whole year 

in a library a generation ago. I used Google to search for "relative prices" and got 714,000 

results in .45 seconds. And the cost to me was free. Lewis Strauss, who chaired the Atomic 

Energy Commission in the 1950s, got it right with his formulation that the children of that 

generation would experience a world with something that would be "too cheap to meter," except 

it would tum out to be information, not electricity. 

It is change in relative prices which is behind the degree to which we adopt new technologies. 

Many generations of integrated circuits ago, a smart phone would have cost $2,500 rather than a 

tenth or less of that price. At that price, many fewer people would have adopted this technology. 

Were my Hudson colleagues and I to revisit Herman Kahn's 1967 project and offer our musings 

about the world 33 years hence, many of the possibilities would no doubt embody an element of 

information technology. While one reason to do that would be seeing the potential for new 

technologies, the more important reason would be changes in relative prices. Technology that 

involves information will be both quicker and faster, but more importantly, cheaper. 

Concepts that require vast amounts of information are at the core of many of the most interesting 

innovations of our time. The challenge for thinking about what might be possible in the future is 

thinking through how those vast amounts can be put together in a way that users find simple and 

attracti ve. 

This brings me back to the topic of your hearing today. 

Like all other sectors, the buying and selling of services has felt the impact of the change in 

relative prices of information. The early innovations reflected the technological possibilities of 

the times. Benj amin Franklin is said to have been America's first catalog seller. Catalogs made 

it possible to sell things to people without buyer and seller meeting up, either via a buyer coming 

into a store or a seller, such as the country peddler, knocking on the buyer's door. 

It's easier to adapt existing categories to explain a new innovation. The use of the Internet to 

bring buyers and sellers together through that medium could initially have been described as 

"electronic catalogs," buy anyone who has bought something via a catalog and looked at what is 

possible through the Internet now would find "electronic catalog" an inadequate way to describe 

what is possible through the Internet. 

We have the same challenge in thinking about what is yet to come. Information technology is 

making physical location less important across many domains. Buying and selling is one of 

those. In our report, we offered some possibilities. Beyond those, there are possibilities whose 

shape is yet difficult to discern that involve the implications of "big data" and monitors and 

sensors. While all is in the range of speculation, an example could involve methods that learn 

how fast we use up household commodities and automatically order more. Running out of toilet 

paper would then be a thing of the past. These kinds of purchases would be made possible by 

3 
78 


Kuttner-4.eps

information technology, but in ways very ditferent from the idea of someone going to a web site 

and following a process to make a purchase. 

This notion of changes in relative prices and how infonnation in particular has a relatively lower 

price is central to the issues you are grappling with today. 

Differences in relative prices can be seen in the structure of the sales tax that states adopted in 

the 1930s. In the throes of the Depression, state governments began to introduce a general sales 

tax. 

While the tax is a tax on those who purchase goods and services, the structure of the tax reflects 

the fact that the sellers have much larger scale and hence could collect and remit the sales tax 

much more efficiently. While lowe tax, the seller collects it and sends it to the state. 

One could imagine a sales tax collected in a much different way. This alternative sales tax 

would be collected via returns completed by buyers. This alternative would be much more 

administratively burdensome than the sales tax we actually have. Buyers would be responsible 

for keeping receipts and periodically totaling up receipts and remitting the tax owed. The yield 

trom the same tax rate would be much lower as individuals didn't remember all their purchases; 

to produce the same amount of revenue would require a higher tax rate. Enforcing the tax might 

involve individual audits that would be intrusive and not produce much revenue per return 

audited. 

Comparing this version of the sales tax to the version we have, we can see how much more 

efficient it is to have sellers keep track of sales and remit the sales tax amount on behalf of 

purchasers. The society-wide burden of administering the current tax is much lower than the 

alternative way of administering the sales tax I've described. 

For reasons relating to the history of the Supreme Court's interpretation of the Commerce 

Clause, the presence or absence of a state line between the location of the buyer and seller has 

become important for the administration of the sales tax. 

States felt they could not use the same approach for collecting the sales tax when buyer and 

seller were in different states. Rather than favor out-of-state sellers, they adopted a use tax 

which follows the less-etllcient "buyer collects" approach. 

The weaknesses of the use tax include the higher burden on the taxpayer per unit of revenue 

collected and the spotty pattern of tax collection. Corporations which have tax departments 

staffed with skilled professionals carefully monitor tax obligation and pay taxes owed. 

Individuals are not much bothered to pay the tax nor do they appear to invest much etlart in 

trying to comply. 

As we noted in our report on the future of the marketplace for goods and services, in a market 

that is both free and fair, everybody plays by the same rules. The effect ofthe history of the 

Commerce Clause has been to create two sets of rules, one for sales where the sellers are in the 

same state and another where they are in different states. 

4 
79 

Mr. COBLE. You were indeed forewarned, Mr. Kuttner. You done 

good, as we say in the rural South. Thank you, Mr. Kuttner. 

Mr. Henchman. 


Kuttner-5.eps
80 

TESTIMONY OF JOSEPH HENCHMAN, VICE PRESIDENT, LEGAL 

& STATE PROJECTS, VICE PRESIDENT, OPERATIONS, TAX 

FOUNDATION 

Mr. HENCHMAN. Thank you, Mr. Chairman, Mr. Ranking Member, Members of the Committee. Thank you for the opportunity to 

testify today on Congress’ role in authorizing States to expand 

their sales tax authority to out-of-State sellers. 

In the 75 years since our founding we at the Tax Foundation 

have monitored tax policy trends at the Federal and State levels 

and our analysis is guided by the principles of economically sound 

tax policy: Simplicity, neutrality, transparency, and stability. 

To be American is to be a believer in Federalism, and that means 

Congress has its area and the States have their areas. Most of the 

time Congress should let the States do their thing, even if it is bad 

policy. But in a few very important situations, Congress has the 

power and the responsibility to get involved in State tax policy. 

This history is important because it is the original understanding 

of the Commerce Clause. The Constitution was adopted in part to 

give a Federal entity, the Congress, the power to rein in State tax 

authority when it threatens to do harm to the national economy. 

This is a power you have exercised in the past. Page 6 of my testimony gives some examples. In those cases you balanced, on one 

hand, letting the States have the ability to set tax policies in line 

with their interests so that citizens have choices of different baskets of goods and taxes and services with, on the other hand, ensuring that State tax power does not reach so far as to harm the 

free flow of commerce in the national economy. Indeed, from the 

founding all the way until the 1950’s the rule was simple: States 

cannot tax interstate commerce. We are more nuanced now. Congress and the courts permit State taxation of interstate commerce 

where it is nondiscriminatory, fairly apportioned, related to services, and imposed on one with substantial presence in the State, 

nexus. 

Now, as I am sure you know, and we have talked about already, 

States have use taxes. These taxes are imposed on items used within a State upon which sales tax has not been paid. So if I, as a 

D.C. resident, go up to Pennsylvania and buy a pair of blue jeans 

there where they are tax free and bring them back here to D.C. 

where I live, I owe a D.C. use tax of 6 percent and, yes, I owe it, 

not the seller. An economist will argue that I bear the economic 

burden of it, not the seller. 

Now, while the purpose of use taxes is to equalize tax burdens 

and thwart tax competition between States, the issue you are dealing with today is about purchases made in the same State. Brick 

and mortar retailers rightly point out that when someone buys 

from them they usually pay tax, and when someone buys from an 

Internet retailer, they often don’t pay tax. So perhaps you just let 

the States tax whomever they want. Well, that is the other extreme 

that the Supreme Court warned about in Quill. There are, as we 

have mentioned already, approximately 9,600 sales tax jurisdictions in the United States, a number that grows by several hundred each year. There is a chart on page 9 of my written testimony 

that shows that. States have different taxes on different items, 

sometimes even different times of year. Now, I have sat down and 

81 

read the sales tax statutes for the 46 States that have them, try 

to figure out what they tax and what they don’t, a lot of the revenue rulings that try to parse out the things that aren’t clear, plus 

there is seven States that let local government set their own sales 

tax basis. We at the Tax Foundation subscribe to a number of the 

sales tax systems and calculation software that we talk about here, 

and it is tough for us to keep up, and we are not also trying to run 

a small business, a small business that needs to know that on August 7th of this year computer microphones in the State of New 

Mexico are not taxed but computer headsets are, that painting canvas is exempt from tax but dry erase boards are taxed, and that 

the rules are completely different the next day on August 8th. 

Now, if you want to do something about that disparity between 

Internet and brick and mortar, while making sure that States cannot foist their burdensome and complicated tax systems on out-ofState sellers the world over, there are options. I run through them 

on page 15 of my testimony. One of those options, the third one on 

my list, is the bill before you and its companions. On page 16, and 

if you look at anything in my testimony, it is the chart on page 16, 

I list features of effective simplification that should be part of any 

bill authorizing greater State tax power over out-of-State sellers. 

As you can see, this bill before you now comes a lot closer than previous efforts. However, there are some things left unchecked 

though. If Congress decides to modify the physical presence rule in 

the limited context of State taxation of use tax from out-of-State 

sellers, Federal standards for simplified sales tax must be an effective bulwark against aggressive State tax overreaching. Today with 

new technologies, even the smallest business can sell their products 

and services in all 50 States. The temptation is great to treat interstate commerce like a golden goose to be squeezed. When this behavior is not prevented by Congress or the courts, the results will 

be taxpayer uncertainty, incompatible standards, and harm to national economic growth. This temptation can only be countered by 

well thought out, uniform rules imposed at the Federal level. 

Thank you. 

[The prepared statement of Mr. Henchman follows:] 

82 


JH-1.eps

Prepared Statement of 

Joseph Henchman 

Vice President, Legal & State Projects 

Tax Foundation 

Hearing on 

H.R. 3179, the Marketplace Equity Act of 20 11 

Before the Committee on the Judiciary, 

u.S. House of Representatives 

July 23,2012 
83 


JH-2.eps

The Proper Role of Cong ress in State Taxation: 

Ensuring the [nterstate Reach of Stale Ta.xes 

Does Not Harm the National Economy 

J<»q>h H~nchnun 

Vie< P""id<n<, tq.1 & S ... < I'wi"">' T .... Found,nwn 

H=!"~on H.Il .H7'l. 11 ... \( .. Io.~p"" E<io,oyA<lollQ! 1 

I!m.I< ,I>< "'''til''''''' on ,h< Iud.,,,,'!'. u.s. t1~u ... oiR.<p-.."" .... 

Mr. Ch~inna , Mr. R.nking M~n,tx,r, and "'~mb.-r$ "r th<- Culnmiuu, 

! ~Pf'm:u .. dK "fll">lmni,y," ,,,,,if)" '9'h)" on COngrn. ... t<>Io in ,I~ dro..,c 0W"f .. " • .uJ ... WLl,ion 

of ~n i"",, p"", "",~ In Ih. 7S yc .... in«eOll, fo~ndin~ in 1937. ,he Tu.l'Qo,.J,,"'" b" m<m;,aR-J 

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roli<}·n,.ken. ,he mNt... . nd ,h. gt'n«.! publi<:- Our .~.!y>i' 11 gLlidN by ,h< ide. ,ll" ttn; ,),,,,,IJ 

Ix .. ,;mrl •. "ru,~,1. '''''''I'"''''n', . nJ .'1'\,.1. "I""'I;LI~ .• nd ... 501(<)13) noo"pnlll(. nun-p..",i ... , 

org,niu,>on, we,.1cc no I""i<i~n on .ny p<nJing l<giohliQl1 . 

b«uti ...... Sunu",ry 

Mi~, ,b.: 1»11« '""'I"'rl<n' ~ ~f ,1." AnldCl or c.mf«!<""ion, ,b.: Comd'U,;oll <ml""'~,,-J 

willY'" wilh ,h. I('f"'n.i ~li'r ~, .. in in ... ,. ,." .,.,..,11 .... hi,,~ wi .. " " th .. ,,<n.d '" do 

110m, '" th" n.,inn.! «o""n,)". 

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rounding unrll pp'Q>.,m .. dy rhe 195(1,. 

5;,,« ,hen. ,.. fi,,,,,.l1~ .<dop,..J by the U.S. S"r""ne c...urr ,<1 Ih< (A",~ Au,. tk<ioi"" 

(l'J7?). ,..,,~ n ... y to. inrtm.ue <on"",,= '" 1Qng .... ,h. "'" i$ Mn-Ji<c.lmlru,ory. f.1r11 
84 


JH-3.eps

apportioned, related to selvices, and applies only to businesses with subscantial presence 

(nexus). 

In a series of decisions, most recently the Quill decision of 1992, the U.S. Supreme Court 

explained that "substantial nexus" for sales/use tax purposes means physical presence of 

property or employees. The Court ruled dlat it exceeds to stale powers for them to be able to 

demand use tax collection from companies rhat arc not physically present in tho;: state. 

States have sought to oyerrule the Quilt deci::.ion, either legislatively ("Streamlined") or 

through defiance ("Amazon" ta.x statutes). The defiance approach in particular has caused 

significant disruprion and uncertainty to the economy. 

Every srate with a sales tax also imposes a use tax, levied on taxable items upon which no 

sales tax has been paid. ] n other words, use taxes seek ro thwart competitive pressure from 

other states with lower tax: rates. Taxpayer compliance with these pro[cctionist usc taxes is 

minimal. (Usc tax, with a few cxceptions, is imposed on the comurner and not the seller.) 

Congress has passed a number of starmcs limiting the scope of state tax authority on 

intcrst..lte activities ("preemption"), carefully balancing (1) the abiliry of StelteS to set (ax 

policies in line with thcit interests and thdt allow interstate competition fi:}r citizens over 

haskets of taxes and services and (2) limiting state tax power to export tax hurdem to nonresidents or out-ofstate companies, or policies that would excessively harm the free-How of 

commerce in the national economy. 

• When a resident of a state purchases from a brick-and-monar retailet, they generally must 

pay sales tax. When the S.l.me residem in the samc state pl1l'cluscs the same product from an 

online retailer, they often do not pay sales tax. 

Many latge Internet retailers ate expanding the numhcr of statcs in which thcy have physical 

presence, to enable next-day delivelY, but that is not the ca~e for many smaller sellers rhat 

remain in just one location and llse common carriers to deliver purchases. 

There are approximately 9,600 jurisdictions in rhe Unired States that collect sales tax, a 

number that grows by several hundred each year. Subscription tax software is inadequate and 

can be expensive for occasional sellers, and fe\-v states provide adequate tax lookup or 

consolidated (ax Hling options. Sales tax can vary by product, by tirne, and by location in thc 

state. In 7 states, local governments can have a different sale~ tax hasc from the state tax base. 
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Congress has five basic option~ on how it may proceed: 

o Ret/jIlrm the physical presence rule for sales I';nation, and by implication, the disparity 

of treatment bet.veen brick-anti-mortar sales and Internet ~ales. 

o Retiffirm the ph),sicl1ll'resence rule bur adopt a new tax approach that mitigates the 

disparity of treatment bcrnrcen brick-and-morur sales and Intcrnct sales (such as an 

origin-based system or a national sales tax on online purchases). 

o lviodiJj the ph)'Sical presence rule in the limited context of state collection of usc (ax 

from out-of-state sellers, by those states !lut have adopted Simplified sales tax sy"'tems 

under minimal federal standards, to reduce the harm to interstate commerce. This 

trade-ofF wOlJd replace the check on state power provided at present by the physical 

presence rule. 

o Repeal the physical presence rule without conditions on the states, granting states 

unchecked authority to export tax burdens and damage interstate commerce. 

o Do nothing and risk rhe continlled growth of unchecked and fragmented sratc 

authority to export tax burJens and damage interstate commerce. 

The Constitution Empowers Congress to Limit State Tax Pow~r ~'i/hen It Seeks to 

Shift Tax Burdens to Non-Residents or Do Harm the National Economy 

What you have before you is not a new issue. Absent congressional or judicial checks, states have an 

incentive to shift tax burdens from physically present individuals and businesses, to those who are 

beyonJ their borders. Indeed, it wa!:> the states' unchecked behavior in this regard that led to rhe 

Constitutional Convention in the first place. Under the Articles of Confederation, states with ports 

taxed commerce bound for interior states, tariff wars proliferated, and the national economy was 

imperiled. As Justice Johnson described in 1824, these actions were "destructive to the harmony of 

the states, and fatal to theit commercial interests abroad. This was the immediate cause that led to 

the forming of a convention.'" 

And so the Constitution was adopted, and through that document, the Congress was granted the 

power to restrain states from enacting la-..vs that harm the national economy hy dhcrirninating 

I S{'f, e.g., Gibbons v. Ogden, 22 lJ.S. (9 \Vheal.) 1,224 (1821) Oohnsoll, J., concurring). 
86 


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against interstate commerce.) James Madison noced that these powers would check the "damors of 

impaticnt avidity for immedia[c and. immoderate gain" Lilat drive staEc legislation discriminating 

against non-residems. j Justice Story later praised the ''-vvisdom and policy in restraining the state~ 

themselves from the exercise of ltaxationJ injuriously to the inrerests of each other. A petty war£1.re of 

rcgllbtion is thus prevented, which would rouse resentments, and create dissensions, TO the ruin of 

the harmony and amity of the states.,,-I 

So strong was this concern thar the rule for a century and a half was that states could not tax 

interstate commerce at all. ~ This eroded in the 19')Os and 19605 as it was recognized that those 

engaged in interstate commerce do enjoy benefits in states where they arc present, so it is not unfair 

to have them support tho~e services with taxes. The complete ban on state taxation of interstate 

commerce was abandoned in 1977, replaced by a recognition that resident businesses engaged in 

interstate commerce should pelY for the fair share of the state services rhey consume. In Compfete 

Auto TrtJnsit, Inc. v, Brady!, the U,S. Supreme Court held that sl"ales may lax interstate commerce if 

the fax meets a follI' part test:G 

• nexus, a sufficient connection between the state lInd the taxptlJ1er; 

• fair apportionment, the state cannot tt1X beyond its filir share ~f the taxpayer's in{'ome; 

• nondiscrimination, the sttlte must not burden out-ofsttlte taxpa)lers whife exempting in-state 

tax:payers; 

• fairly related, the tax must he fair(y related to services provided to the taxpayer. 

Bch)tc and since Complete Auto, the COUTts have routinely exerci.;;ed this pO\vcr TO restrain state tax 

infringements on interstate: commerce, and these decisions are one of thr: more non-controversial 

aspects of constitutionallaw.7 Congress has also been active in this area, legislating limits on state tax 

2 Sf{' U.S. CO~ST. an. 1, § 8. d .. ) (Intel',<,tate Commerce C1au~e): U.S. CO,,{':lT. art. 1, § 10, cL 2 (Tmpo]'r-Exporr 

Clause): U.S. CONS"!'. <In. J, § 10. d. 3 Clause); U.S. CO"NST. art. IV. § 2. d. I (Privileges and Immunities 

CLlIlse); U.S. CONS r., amend. XIV, § 1 Immunities Clause). 

MadisoH, THE FEDl-,R;\lJ.~T No. 42 (I7RR). 

1 'sTORY COl\'')T § 197. 

"Sec, (.g., FrCemi{1/ v. Hell/it, 529 U.S. 249, 252-')3 (1916) ("j\ State is ... precluded from takillg any action which may 

hirly be deemed to have the effecf ofimpl'ding the frn.~ flow of trade betv.recn States"): f.f!otlp Il. Port of Mobile, 127 U.S. 

640,648 (1888) ("No St<lte has the right to lay a tax all interstate mmmerce ill any form."). 

'. 430 U.S. 274 (1977). 

~ The power of rhe federal COUITS to act when Congrc~s i~ ~Jcnt i., inferred as an implicatioIl of the COlIlmerce Clame, a 

doctrine o[[en referred to a~ lhe "dormalll" or Commerce Clause. See, e.g., V?i!!son /'. The BUick Bird Creek 

Affirsh Co., 27 e.s. 215 (1829). The Commerce tax on activhy oUl-of-smte 

while leaving idencicai.1Clillily in-Slale LllHdxed. See Boston Stock .Exch{lnge 1). Sfdte T{lX Comrn'n.129 U.S. 318 (1977) 
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po\ver where states are incapable of achieving a simplified, uniform system that restrain each state 

from claiming more than its fair share of Laxcs on interstate commerce. These have included 

prohibiring srate taxes on food stamps, Federal Reserve banks, interstate airline and bus travel, 

satellite services, and nonresident members of the military and nonresident members of Congress. 

Congress has also banned discriminatory srate taxes on federal employees, interstate clecrricity 

transmission, and interstate railroads (sec Table 1). 

This power-co limit state tax authority-is not a pm-ver to use lightly. There are m;U1Y components 

of state tax sysrems that, frankly, arc none of Congress's business, even if they arc good or bad public 

policy. Those aspects of state tax systems that arc neither motivated by protectionism nor have the 

effect of raiding revenue from out-of-.':>taters should be left alone as pan of our commitment ro fifty 

(inyalidating a Xt'W York ta'\( solely on actiyiry our-of-state while leaving: idemica1 acriviry in-sr<lTt' unuxed); 

\VestinghottJe Eiee. Co. l'. 3HH (1984) (invalidating a New York ~cheme exempting activity in-state while 

,imnitaneol1sly imposed.l tdA OIl identicJ activily out-or-SLHe); Bacc/;1fJ Import" Ltd. Il. Did<" 1o~ U.S. 203 (I 9~4) 

(illYalidalinE; a Ha\vaii lax imposed on a Gllegory of prodLl([~ hut exempting acti\'ity in-stale); Am. Trucking AH '1'1 Ii. 

Schemer, 183 U.S. 266 (1987) (invalidadng a Pennsylvania schemt' imposing fees on all Hucks while reducing olher ldXes 

tor truck, in-sratc only); NelD Fnfl6Y Co. Ii. Umhruh, 4RG U.S. 269 (1988) (invali(1<!ting <In Ohio t<lX crediT TO all crh<lnol 

producers hut di~allowed for lHlIl-Ohio producers); Wiest lynn Crnmmy, Inc. 1'. 512 C.S. 1 R(J (1994) 

(invalidating a tax on (biry prOdllCt:r, v.rilefe the fleVe£11le """a~ di'.rribnted to domle~ric dairy 

prodncer~); 1m·. 11. Town (JfHi1rriwtl, 520 U.S. 564 (1997) (invalicLning Mainc\ denial of 

the general [0 organizations that primarily serve nOll-.Maine reside11ls). But )CC Dep 'to oJRewnue of 

Ky. N. DIl/lIs, 5'53 U.S. 328 (2008) (upholding Kentucky's cxclusion from lax Ofint(TCSI. earned from its Slate honds, blll 

not olher slates bonds, on rhe grounds that K~ntuckT is acting as a markel participant no dHTerclll from ~Uly other bond 

issuer). 

'I he Import-Export Clause prohibits Sf;]tes from penali7:ing acrivity that crosses srare lines, p<lrricubrly imports. 

SrI', v. \.f'agf's, 423 U.S. 27(). 295 (197(1) 

L:.S. at 610 (Thomas, j., dissenting) CTbat the f'Xpan.'>ion eHected by to day's decision finds sOlne supporr in the morass 

of"nur negative Commerce Clause case law nnly seryt'.'> to highlight the need to abandon that failed jurisprudence and to 

consider restoring the original Imporr-Fxpon CiJuse check on discriminatory STate taxation ro \'i'hat appears to be its 

proper role."). 

The TOIlllJge Clause pwhibit~ cilarges on shipping freight. 

rhe Privilege, and lmmunitic~ Cbme o[Artick IV and the PriYi!eg-c~ or lllllllullitie~ Clause or the Fourreenth 

Amendmelll protects the righL of dtiLcns to crass state linr:s in See. e.g., United Bldg d~ 

Tradl'.( v. Mll),or, 465 U.S. 208, 219 (1984) "pursuit of a common 3.'> <I pt·ivikgc of 

489 (1999) (invaJicbting a law that did not restrict 

a pnllitive and di~(Jilllillarory law): irl af 511 

travel dearly cmbrace~ the right to go froIll one plael: to another, and prohibit~ 

of citizens); Erwin Chemerillsky, CONSTITUTIOKAL LAW 150 (2d. cd. 2002) 

IArticle IVI privileges and immllnities clausc involve SlalCS discriminating against 

out-or-staters ",ilh regdl'(.i to their ability to earn a livelihood."). 
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simulcaneOLLs laboratories for policy experiments, co paraphrase Justice Brandeis.:-I If bad state policy 

can be corrected by the political pressure of vOLing resident taxpayers or by lhe economic pressure of 

tbe om-migration of people and dollars, it ought to be left- to the state~ to handle. 

Table I: Examples of Congressional Preemption of State Tax Authority 

4 U.S.c. § I I I Preempting discriminatory state taxation of federal employees 

4 U.s.c. § 113 Preempting state taxation of nonresident members of Congress 

4 U.s.c. § 114 Preempting discriminatory state taxation of nonresident pensions 

7 U.s.c. § 2013 Preempting state taxation of food stamps 

12 U.S.C.§531 Preempting state taxation of Federal Reserve banks, other than real estate 

taxes 

15 U.S.c. § 381 et seq. Preempting state and local income taxes on a business if the business's instate activity is limited to soliciting sales of tangible personal property, with 

orders accepted outside the state and goods shipped into the state. 

(Often referred to as Public L. 86-272.) 

15 U.s.c. § 391 Preempting discriminatory state taxes on electricity generation or 

transmission 

3 I U.S.c. § 3124 Preempting state taxation of federal debt obligations 

43 U.s.c. § 1333 (2)(A) Preempting state taxation of the outer continental shelf 

45 U.s.c. § 101 Preempting state income taxation of nonresident water carrier employees 

45 U.S.c. § 50 I Preempting state income taxation of nonresident employees of interstate 

railroads and motor carriers, and Amtrak ticket sales 

45 U.S.c. § 80 I et seq. Preempting discriminatory state taxation of interstate railroads 

47U.S.C.§ 151 Preempting state taxation of Internet access, aside from grandfathered taxes 

47 U.S.c. § 152 Preempting local but not state taxation of satellite telecommunications 

services 

49 U.s.c. § 101 Preempting state taxation of interstate bus and motor carrier transportation 

tickets 

49 U.S.c. § 1513 et seq. Preempting state taxation of interstate air carriers and air transportation 

tickets 

49 U.S.c. § 40101 Preempting state income taxation of nonresident airline employees 

49 U.S.c. § 40 116(b) Preempting state taxation of air passengers 

49 U.s.c. § 40 116(c) Preempting state taxation of flights unless they take off or land in the state 

50 U.S.c. § 574 Preempting state taxation of nonresident members of the military stationed 

temporarily in the state 

Source. Tax Foundation compilation. 

However, there are situations where it is yiral that Congress use this power, where rhe alternative is 

the probJem we experienced as a young counny under the Articles of Confederation. "While everyone 

is for simple taxes and fair laxcs, in practice states look [or any advantage or opportunity EO shift tax 

burdens from voring residents to non-voring non-residents, to benefh in-sta(C' businesses and 

~ See New StI1te Ie" CO. I!, Liebmdfln, 2!:l5 U.S, 262, 311 (1932) (Brandeis, ]., dissenting) ("It is one of the happy 

incidents of the federal s)'scem [hat a single coLUageom Stalc may, if its citizens choose, servc as a laboraLOry: and try 

novel social and economic experiments without risk La the rest of the country. '). 
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individuals by adopting tax policies that discriminate against out-oF-state businesses and individuals. 

For all the discussion abouT how nonresidem companies benefit irom state services, the real issue 

usually is shifting tax burdens away from voting fesiJents to someone else. As Profeswr Daniel 

Shadro has put it, "Perceived tax exportation is a valuable political tool for state legislators, 

permitting thcm to claim that they provide government selviccs for free."') Without court 

intervemion or congressional action (or the threat of congressional action), dForts to get states to 

solve interstate tax issues have historically failed, because as soon as a state thinks they can ger a 

bigger share of the pie by breaking the agreement, they do so, and the whole thing unravels. 

As one example, the threat of congressional action by the Willis Commission in 1959 led to the 

adoption of uniform state corporate income tax apportionment rules. This standardization, however, 

only lasted twenty years before Iowa deviated from it to gain an advantage for itself Many other 

states have followed, and raday, only 11 states still adhere to the uniform rule. The trend continues 

to move away from uniformity, not towards it, despite 1he existence of voluntary org;HltZattons like 

the Multistate Tax COJ11mission (MTC) and the Pederation of Tax Administrators (PTA) that exist 

[0 advance uniformity in such rules. 

Nexus Based 011 Physical Presence 

We at the Tax Foundation haye monitored the increasing use of tax policy by states to do precisely 

what I have described: shift tax burdens from out-of-state businesses and individuals to benefit inSLUe businesses and individuals, through discriminatory tax policy. These generally involve disputes 

over "nexus" st~lIldards: the proper scope of state tax pmver over non-resident individuals and 

businesses, 

Generally, the hisLOrical standard is that sta(es may tax. [hose physically presell[ in the jurisdiction, 

and may nor tax those not physically present. This is premised on a vie ... v known as the "benefit 

principle"; that the taxes you pay should roughly approximate the ~eryices you consLUne. State 

spending oyenvhelmingly, if not completely, is meant to henefiT the people who liye and work in the 

jurisdiction. EducJtion, health cafe, roads, police protection, broadband access, etc.: the prim'lty 

benefkiarie ... are state residents. The "benefit principle" thus means tbat residents should be paying 

taxes \vhere they work and live, and jurisdictions should nor tax chose who don't work dnd live there. 

c, Daniel Sha\'iro, "An Economic and Political Look al Federalism in TaHtion," 90 MidI. L. Rev. 895, 957 

(1992). 
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A physical presence standard for stare tax:arion is in line with this fundamental view of taxation. 

Developments have arisen in the three major state tax area.";. (corpofare income tax, individual income 

tax and sales tax), as ,veIl as with some other state taxes (such as telecommunications taxes, taxes on 

digiuJ goods, car rental taxes, and so forth). Bills have been introduccd in the Congress that seck to 

reaffirm the physical presence rule in these areas (such as BATSA with corporate income tax, Mohile 

Workforce wirh individual income tax). 

Recent Developments in State Sales Tax: Overview 

There are a number of proposals co reverse a series ofV.S. Supreme Court decisions (most recently 

the Quill decision of 1992) dMe prohibit states from imposing sales tax collection obligations on 

businesses with no property or employee in the state. This "physical presence" stanJard is meant to 

prevent states from shifting tax burdens to non-residents away from residents who are the primaly 

beneficiary of state services, while also protecting the free flmv of interstate commerce from the 

compliance costs of non-uniform and numerous (9,600+) sales tax jurisdictions in the United States 

(see figure 1, figure 2, Table 2, and Table 3), 

The steadily increasing growth of Internet-based commerce has however led to frustration with this 

standard, primarily due to disparate sales tax treatment of similar gooJs within states that has no 

economic basis. This can be adJressed while also ensuring that some stanJard exist~ to restrain states 

from engaging in destructive hehavior, such as tax exporting to non-voters or imposing heavy 

compliance costs on interstate businesses, [hat the Congress is empowered to prevent. Further, 

because economic integrarion is greater now than it has ever been before, rhe economic cost" of 

nexus ullcertaimy arc also greater today and can ripple through the economy much more quickly. 

These actions are only the latest duptet in a long saga over the proper tax treatment of sale ... made 

over the Internet, and an even longer saga over the proper scope of state taxing authority. At its core 

is a dispute over v .. rhich is more important: limiting state power to tax nonresidents and thus harm 

the national economy, or ensuring that some transactions do not escape tax because they are 

conducted online. Discussions follO\ving a recent compromise in California, driven by the desire of 

large Imernct retailers to expand their physical presence to enable ncxr-day delivcIY, suggest thar 

there arc policy options that could achieve both ends. 
91 


JH-10.eps

~(''' '''''~'' ,,1,_ 

New State/Local SalesTax Jurisdictions 

JI~~ te ==~;:===== =t 

"'" Noce: .... off<J!)-lO 11,.no.-. ....... tool of 9,MIi .. ~ ax 

)urtulktloM ....... linn'" ""' ... . Source:V"""", 

Fl&u .... 1: Sale. Tax Juri.dictions with Chan&u Each Ye ar 

Sale s Tax Changes Each Year 

~ 

~, "' ". "' ~ I- ~ ~ 

r I- I-

• ~ "'" - "'" ~, 

Note, All <iI>"I'" by »Irl>dIctJ ..... 1<><IIId< ... "... 

jLJl1odlctlonl. 

s....r.:.:v.""'. 

Z21 

'" e- - sss 

e- - - I-- - -

- - "" 

- '" 

- ~ 

I 

"" 
92 


JH-11.eps

Table 2: Example of Sales Tax Complexity: Taxation of a Bottled Frappuccino® 

Beverage Under Current and Proposed State Legislation 

I State I Tax on Bottled 

Frappuccino®? 

Enacted 

Arkansas No 

Tennessee Yes 

Virginia No 

West Virginia Yes 

Proposed 

Arizona No 

California No 

Connecticut Unclear 

Hawaii Yes 

Illinois Yes 

Mississippi Yes 

Montana Yes 

New Mexico Yes 

Oregon No 

Rhode Island No 

Tennessee Yes 

Texas Yes 

Utah Yes 

Vermont Yes 

Source: Scott Drenkard, Overreaching on Obesity: Governments Consider New Taxes on Soda and Candy, Tax 

Foundation Special Report No. 196 (Oct 20 II) 

Table 3: Other Examples of Contributors to Sales Tax Complexity 

States With Local Option Sales Taxes: 

States That Permit Local Government to Define 

A Separate Sales Tax Base: '1 

States With Sales Tax Holidays: 1'1 

10 
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The QuiliDedsion: Not a Loophole, But a Check on State Power to Export Tax 

Burdens and Do Harm Interstate Commerce 

What is nexus for a remote seller? In 1967, the U.S. Supreme Coun held that a business does not 

have nexus with a state if the business has no retail outlets, solicico[s, or property in the state, and 

communicates wilh customers only by mail or common carrier as part of a general interstate 

business,JO Otherwise, the Court concluded, states could "entangle National's interstate business in a 

virtual welter of complicated obligations to local jurisdictions "\vith no legitimate claim to impose a 

fair share of the cost of the local government." This decision WelS reaffirmed .lftcr the Complete Auto 

tcst wa~ announced in 1977. 11 

During tbe 19805, some academics and many states criticized tlarional Bellas lJess as archaic, 

formalistic, and outmoded. Officials were encouraged to ignore dle decision, and some state courts 

disregarded it, even as the numbtT of sak~ taxes rose from 2,300 to 6,000. Diffetent murky 

definitions of economic nexus have been proposed: 

Engaged in exploiting the local market on a regular, systematic, large-scale basis. 

Presence ofilltangiblc properry or affiliates 

N umber of customers in srate, value of assets or deposits in the srare, and receipts 

attriburable to sources in rhe state 

• Analysi~ of frequency, quantity, and systematic nature of taxpayer's economic contacts with 

the state 

Derivation of economic benefits from state's residents 

DefYing the Court rulings, North Dakota enacted a law requiring the out-of-state Quill Corp. to 

collect sales t<L",{ on its sales to 3,000 in-state customers. Any state that advertised three times in the 

SC1(e was liable. Tn the case, [he U.S. Supreme Court rcafHrmcd .Natiof"d Bellas Hess and Complete 

Auto. U There they stated that the physical presence rule "firmly establishe~ the boundaries of 

legitimate sore amhoriry to impose a dury TO collect sales and use taxes and reduces litigation 

concerning those taxes." Justice Byron White dissenred, atguing rwo points that continue ro be made 

today: (1) injmtice that some sales c.:scape taL"1tion and (2) arguing that technological change had 

made discriminatory compliance costs no longer burdensome. 

1G See Nationd! Be!/{J:j He}}, Inr, Il, Dept. o!Rfllenuf of Ill. , 386 C.S, 7'53, 759-60 (l~67). 

j, Sfe Nat'! Geo,Rrtlphu' Society v. Cfl. Ed. OjEqttd!izrttlOn, 430 C.S. 551, 559 (1977). 

1.' !c,ee Quill Corp. // . .i.Vorth Ddkottl, 501 U.S. 298 (1992). 
94 


JH-13.eps

The Streamlined Sales Tax Project Has Watered Down Membership Standards in 

an Unsuccessful Effort to Entice More State Members in Its Effort to Change Quill 

Today, there are over 9,600 state and local sale~ tax jurisdictions in the Vnited States. There are 

different rates on differenc items, they change frequently, and are not even aligned to 9-digit zip 

codes. States arc reluctant to cooperate on even hasic rules and definitions. 

The Streamlined Sales Tax Project (SSTP) was launched in 2000 with the mission of getting states 

to adopt changes to their sales taxes to make them simple and uniform. SSTP then hopes to 

convince Congress or the courts to overrule Quill and allow usc tax collection ohlig;uions on out-ofstare companies ("Main Street Fairness Act"), 

However, the SSTP has abandoned simplificarion effof(s and any Jltempl to reduce lhe number of 

sales tax jurisdictions, instead focusing on uniformity efforts. In many cases, the Project has enabled. 

state sales tax complexity by permitting separate tax rates for certain goods. States generally arc 

reluctant to yield parochial advantages, even with the possibility of online sales tax revenue in rerurn, 

undermining their argument to Congress as part of the Main Street Fairness Act that they have 

succeeded in their mission. Large states have generally avoided the SSTP, and membership has been 

stuck at ,..,20 ,o"tates for some time. This in turn has led to impatience from states and others, 

Some States Have Sought to Defy Quill through Unconstitutional Legislation 

In 2008, New York adopted an "Amazon" tax, nicknamed after the Internet retailer as the most 

visihle urget. The law held thar c1 pcrson or business with no physicc11 prescnce in the surc 

nevertheless has nexus if it (1) enters into agreement with in-stdte residenr involving commissions For 

referring porential cusromers; and (2) has gross receipts from sales by om-of-sute company from 

refcrr,lls within the state arc more than $10,000 in a 12-month period. 

Amazon. com & Overstock.com responded by terminating affiliate programs in New York, and 

Amazon.com filed a lawsuit in state court. The law "\vaii upheld by a trial judge (New York\. trial 

courts are called the "New Yark Supreme Court," causing confUsion aboUT who upheld the Amazon 

tax as constirutional); the judge concluded that Amazon.eom's in-state afHliates arc necessary and 

significant TO esrablishing :llld maintaining out-of-stare compooy's market in the stote. But because 

they make up only 1.5% of sales, that was the basis for the appeal. The New York Supreme Court, 

Appellate Division ruled in late 2010 that law is not facially unconstitutional but may be 

12 
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JH-14.eps

ullconscicutional for Amazon. The case v"'as remanded to the lower court, but Amazon is appealing 

to state's highest coun, the New York Court of Appeals. The case is ongoing. 

In 2009, Rhode Island and North Carolina adopted identical New York-style laws, Neither ha,o:, ~een 

any revenue and Rhode Island has actually scen revenue loss due to reduced income trr collections 

from terminated in-state affiliates. Laws were also passed in California and Haw,;di but vetoed. (See 

Table 4 for a status of all state efforts to def)· Quililegislarively.) 

Table 4: Status of State Efforts to Defy Quill Legislatively 

Arkansas Enacted mid-20 II. 

California Enacted mid-20 II but effective date postponed after agreement reached with state. 

Colorado Enacted 20 I O. Ruled unconstitutional. 

Connecticut Enacted mid-20 II. 

Illinois Enacted 20 I I. Ruled unconstitutional. 

New York Enacted 2008. In litigation. 

North Carolina Enacted 2009. Ruled unconstitutional. 

Rhode Island Enacted 2009. Officials report that the law has reduced state tax collections. May be 

repealed. 

Source. Tax Foundation compilation. Does not Include states where legislation was proposed but not adopted. 

In 2010, Colorado considered the same Imv but faced opposition from in-state affiliates, Instead it 

adopled a law (H.B. 10-1193) designed to push Amd'lon inro collecting use taxes without" expliciLly 

requiring it. Any out-of-state retaih:r that is part of "a controlled group of corporation::." with at least 

one member\vith physical presence in Colorado, all the retailers in the group have nexus with 

Colorado. However, (he "only" obligadon wirh lhis nexus is notification: 

"[Nlotify Colorado purchasers [hal sales or use Lax is due on ccrt<lin purch,lses made from the 

retailer and that the State of Colorado requirc:~ the PU[Ch;LSer to ftle a sales or use tax return." 

Penalty of $5 per failure per customer, plus criminal penalties. 

"[Noti(y] all Colorado purchasers by January 31 of each year showing such informarion as the 

Colorado Department of Revenue shall require by rule and the (Oral amount paid by the 

purchaser for Colorado purchase~ made from the retailer in the previou~ calendar year. Such 

notification shall include, if available, the dates of purcha,o:,es, rhe amounts of each purchase, and 

the categoty of the purchase, including, if known by the retailer, whecher the purchase is exempt 

or not exempt from ldxation." Must he sent separately from shipmenls and be by first-class maiL 

CC to Stare. Pena!ry of $1 0 per failure per customer, plus criminal penalties. 
96 


JH-15.eps

Amazon.com terminated affiliate programs in Colorado. In January 2010, a federal judge stayed the 

Imv stayed as probably unconstitutional on FirSl A.mcndmcl1l grounds, and the law was thrown out 

completely in April 2012.11 

North Carolina follo ... ved Colorado by adopting regulation with similar/notifkation requirements. 

They demanded out-of-state companies provide them with all customer purcl1a~e information dating 

from 2003, by April 19, 2010. Amazon.com and the AClU filed lawsuit in fcderal court, arguing 

that "[clach order ofa book, movie, CD or mher expressive work potcntially reveals an intimate fact 

ahour an Amazon cw;tomer" (see Table 5). 

Table 5: Examples of Purchases Required to Be Disclosed to State Officials under 

the North Carolina Law 

Bipolar Disorder: A Guide for Parents and Families 

He Had It Coming: How to Outsmart Your Husband and Win Your Divorce 

Living with Alcoholism: Your Guide to Dealing with Alcohol Abuse and Addiction While Getting the Alcoholism 

Treatment You Need 

What to Do When You Can't Get Pregnant: The Complete Guide to All the Technologies for Couples facing 

fertility Problems 

Outing Yourself: How to Come out as Lesbian or Gay to Your family, friends, and Coworkers 

lolita (1962) 

Brokeback Mountain (2005) 

Fahrenheit 9111 (2004) 

Source. ACLU brief In the North Carolina case. 

A federal judge struck duwn the North Carolina regulation as violating First Amendment in October 

2010. In 2011, Illinois and Ark.1nsas enacted New York-style laws (the Illinois law was subsequently 

ruled unconstitutional). C.llifornia elucted one but after a possible repeal referendum WelS proposed, 

the state and Amazon.com reached an agreemenr whereby Ama7on.com will develop .1 physical 

presence in the sure (i.e., build warehouses). 

\X!hile for the most part unsuccessful, these state efforts have highlighted the desire to modifY the 

Quill holding in some way. This pressure is likely to continue, 

(Apc. 1, 2012). 

14 
97 


JH-16.eps

Possible Solutions 

Substantial progress has been made in recent months toward possible solutions that could (1) 

simplify sales tax: systems and avoid discriminatory compliance costs, (2) eliminate non-neutell tax 

rates on similar proJucts t-olJ by online and brick-and-mortar businesses, (3) limit taxation in a state 

TO those residents who enjoy (he benefits of sure services, (4) prevent multiple taxation of interstate 

commerce, and (5) prevent unconstitutional and fragmented state attempts to impose such tax 

burdens in a destructive manner. 

Congress has five basic options on how it may proceed: 

Reaffirm the physical presence rule for sales taxadon, and by implication, the disparity of 

treatment berween brick-and-mottar sales and Internet sales. 

Reaffinn the physical presence rule bu"( adopt a new "(ax approach that mitigates the disparity of 

treatment between brick-and-mortar sales and Internet sales (such as an origin-based system 

or a national sales tax on online purchases). 

Modify the ph)lsical presence rule in the limh:ed conrext of state collection of use tax from outof.-state sellers, by those states that have adopted simplifIed sales lax systems under minimal 

federal standards, ro reduce the harm to interstate commerce. This trade-off would teplace 

the check on state power provided at present by the phy.<.ical presence rule. 

Repeal the phJ1sicrti presence rule -without conditions on the states, granting states unchecked 

authority to export tax butdens and damage interstate commerce. 

Do nothing and risk the continued gruwth of uncheckc:d and fragmented state authority to 

export tax burdens and damage interstate commerce. 

I'll f(KUS the remainder of my analy.<.is on the third option, which vmuld allow the states to collect 

use tax fl'om remote ~clJefs on condition that they ~implif)r their sales tax systems in accordance with 

minimum federal specifications. If the Committee is interested in further discussion of the other 

J.lternativcs, we will he happy to do so. 

The Marketplace Equity Act (H.R. 3179) and Markerplace Fairness Act (S. 1832) are two recent 

proposals that would climinare the physical presence rule but othelwise make advances rowards 

ensuring that states reduce the burdens associated with collecting their sales taxes. Example 

provisions include requirements that states have a Single state-level agency that administer all s~Jes 
98 


JH-17.eps

teU rules, offer one tax rerum and audit for the entire state, reguire one uniform ta.x base for the 

entire sLate, provide software Ellat identifIes the applicable tax rate for a sale, including local rates and 

hold sellers harmless for any soft-ware errors or mistakes by the state, provide 30 days' narice of any 

local sales tax rate change, and exempt sellers with a de minimis level of collections. (See Table 6 for a 

comparison.) 

Effective simplification is a necessity for any federal proposal. 

Table 6: Provisions of Current Pending Federal Legislation 

Before Collecting Remote Use Tax, State 

Must •.• 

Marketplace Marketplace Main Street 

DeSignate one state entity to collect, process, and 

audit returns for all tax jurisdictions in the state. 

Establish unified audit of remote sellers for all taxing 

jurisdictions in the state. 

Establish a single tax return for all taxing jurisdictions 

in the state. 

Provide or certify tax collection and remittance 

software. (Note: Not necessarily free software) 

Hold remote sellers harmless for errors in stateprovided software. 

Adopt standardized definitions of commonly taxed 

goods. 

Offer immunity to remote sellers who misapply sales 

tax holidays. 

Compensate vendors. 

Offer a single statewide blended rate as an option. 

ReqUire local jurisdictions to use the state's sales tax 

base. 

ReqUire local jurisdictions to align geographically with 

5-digit zip codes 

Legislation explicitly preempts other state efforts to 

force use tax collection by tax out-of-state sellers. 

"Small seller exception" 

Legislation establishes federal court jurisdiction for 

enforCing simplification standards. 

Equity Act 

.,/ 

$Im in U.S., 

$IOOk in state 

... 

Fairness Act Fairness Act 

" 

" 

.1' «' 

" I' 

l< ,/ 

" " 

,; .,/ 

" l< 

$500k in U.S. To be set 

y' 

Source. Tax Foundation review of legislation. Mam Street Fairness Act review Includes only provIsions 

incorporated in federal law, not those merely adopted by its Governing Board. 

16 
99 


JH-18.eps

All ,,,- .implW,utlons ~rc desi"bk, ond 'OS,,1wT would pr,,,.id. , .... Ilki",,, <h«i: on ".," ' u 

uvcnnching whik k.';ng ~mpl".pace f", ""'" ''''''''''ture their ... ,y.rcm •• nd "u'" In line wi,h 

,hd, own p,ck«n«f. Th. on ly inr""b~m"'" 0" " ... """,,,,ign,y iI.n inf,ill!!",,""" on " ... p",.,.." 

to burden in'mu,e rommer<'C wi,h pmble"",,,, u" poli.:y. 

Con§'e» h .. p..,.,w • numbe, "f 'u,mes Ilmi"ng ,h~ sc,,~ of ,m" =: aUlnor1'y on ;n«"",,, 

..,,' .. i,i« .... rd"uily h.l.ndng (I) tn. ability of ...... [(, ,." , .. I"'lici<:! in lin. wi,l, ,h.ir in'.t ..... nd 

,h., oJl,.,.. ;n,.", ... ""mpr,i,ion fO, d,i ...... 0\", b>skcn of,~ and ><rv;q, 'and (2) limiting ,ur. 

t .. 1"''''''' ," <"ltpon lax burden, to IlQn ·mtidcnl> <>r ou,..,r·" ... <omp.rua.. "r pcli..ic> th .. WQllld 

=."i""ly Jut"' <I .. [,..,.fIow o[ ""m'n<f<X in til(" n,,;,,n,1 ="""'y." !,,<k,S' spo<i~ying. 11"". ,,[ 

.11 tn. .implific'''"n. listed in T.bk 6 would "" wc\romc;>nJ would g", .. ly reducc <"""run" "" 

.....,nomic g"'MIt. 

Salu Tax: Combined SUite and Av ra~ Local RalU 

T .. ' · ... lCIl1 

IoIC'O".'.....,. 

..... ,_,_..., ..... __ r-._ n ... -.. ..... '-0 ~_ ...... .. _0, _ ...... I~~,_~!.!~~_~I_~_j~ii,1_~ __ .. ___ ............ _ ~~ 1»_ ...... _, • ___ ... ___ ...... """""""'(I'<).!-.II.l1~). .....,..( '~J w· __ .. _ ..... .-.... I'Ir>. ..... ......... """' __ Q .... ~O"- ............ _ ... , _ -., ........ .,_ ..... __ ........ _ .. _ ....... \4IO"' .. _______ ............. '-' ... ~_\·I ...... _ ... ~_""" 

... ""_ ......... _ ........ ___ ...... _ .. , .... n-._ ..... ...... __ _ 'u_ ... ~ ... 
100 


JH-19.eps

,.,,,,,",,, , •• 1" t. h· "·.L,, " 

State and Lou1 Sales Tax Rates 

As of January I, 2012 

S"",,, T.x •••• l<><ol c"mb .... d 

s ... ,. Ro" . T .. R.te (0) R.t. . .. . ..,. " ".llll 8,11ll. 

,~ • "- .. "'" In'" .. "" 6,;MO J U" ~Il~ -, ~ .- " un .- • M1' ,,~ , u~" 1.11 " ,~ ,.- " <.5<'" 7,"" ~ 0" " " 1'1 .... 6,lSit , . "- .. " .. 0,00:0; 

~ " ."" " o.nll 6.61'" 

~ .- " " , 6,8<11 

Ho...lI@ .- " " "" '-:15" " - 6,001. " o.on .. 02'" 

... = " " 19S5 l,lO'" " - ,..,. , "- ,..,. " ~ 6:cmc-16 UI Uill , 

"" " 1.96:0; 8,26" • " . ..,. " "- .. '" c- .- " " •. KS" 8,1.1:0; 

.- ,- " ..... ,." 

., " .'" " "- .. '" "", ,= " " .... l 

.~. ( 00lI " "- .. '" .~ U' 1 I&'" " ." " ''''' , O.OCH" ,..,. " .,. UZSJ' " U6li 

M_l'!) "- .. "'" " "- .. '" " ,,~ ,- " f::z7t. .= • "- .n, 0 ,- 1,U " " "". "- .. "- .= I'I~ . (0) " '''' , ..o.OJ% U~ 

N.H. «) f.UW- " " "" 7,2"" " "' '.'" " .. '" .'" , "C .n" " ~" '.KS" " "" '''' " 1.1"' .,.. """ " US'll, 

m • . .= .. <.16l1 

""'-.... .. ". .. '" "- " " C l.", 6,14);; " " ''''' , "~, 

,.C '''' .'" " 1.11% 

"" " ,n "'" '" ,~ un;, .1 

.- ,m' 1.4.1" 9, •• :0; , •• •. = ,~ a HS 

LIIoIIlbJ US'll " " 0.7)% .~ 

~ " "'" " 0.14'" ,,f.,, V •• (b) " ''''' "1>. • "- '''' " '."" " .", .. "" • ~ .. •. - " "- Mil" .. "" sOOlli " Mtl' Hlj"" ~ 

Wyo. .- " U<S !.l'" o.c " .. " '" ",,' "" " 
101 


JH-20.eps

Conclusion 

Businesses throughout our nation's his[QIT have plied their trade across state lines. Today, with new 

technologies, even the smallest businesses can sell their products and services in all fifty states 

through the Tnternet and through the mail. Bu~iness tf<lVe\ h easier than ever before. If ~ucb sales, 

travel, or activity can now expose these businesses to tax compliance and liability risks in states where 

they merely have customers, they \",ill be less likely to expand their reach into those states. Interstdtc 

commerce is not a golden goose that can be squeezed without advetse effects on economic grmvth. 

Unless a single uniform nexus ~randard is established, the conflicting standards will impede the 

desire and rhe ability of businesses to expand, .... vhich harms the nation's economic growth potential. 

We at the Tax Foundation track the numerous rates, bases, exemptions, credits, adjustments, 

phaseouts, exclusions, and deductions that litter our federal and state tax codes. Frequent and 

ambiguous alterations of tax codes dnd the confusion the:y cause arc a key source of the growing tax 

compliance burden. \X'e haye severJ.l staffers as well JS computer-based and publication subscriptions 

dedicated to being up to clate and accurate on the frequenr ch::mges to the many taxes in our 

country, but even we have trouble doing it. It would be extremely difficult for individuals and 

businesses who arc in business to sell a good or service, not to conduC[ lax policy research. 

Congress can obtain e\Tidence from interested stakeholders and take political and t:conomic factors 

into consideration when developing new rules of taxation. The Supreme Coun, by contrast, must 

develop broad doctrine in a case-by-case fashion, based on the facts of the pJrticular case before 

them. (Additionally, the Court seems to have an aversion to tax cases in general and these type of tax 

cases in particular.) This is why congressional action, which can be more comprehensive and 

accountable dun judicial action, and can benee address issues of transition, retroactivity, and de 

minimis exemptions, may now be the best vehicle t()( preventing burdens to intet~tate commerce. It 

is up to Congre~s to exercise its power to protect interstate commerce. 

We now live in :1 world of iPods, telecommuting, and Amazon.com. It is a testament to the Framers 

that theit warnings about states' incentives to hinder the national economy remain true today. 

Some may argue that faster roads and powerful computers mean that sutes should now be able to 

tax cvetything cvc1)n,.vhere. \'Vhile some constitutional prinCiples surely must be revisited to he 

applied to new circumstances, the idea that parochial state interests should not he permitted to 
102 

Mr. COBLE. Thank you, Mr. Henchman. 

Mr. DelBianco. 

TESTIMONY OF STEVE DelBIANCO, EXECUTIVE DIRECTOR, 

NetCHOICE 

Mr. DELBIANCO. Thank you, Mr. Chairman, Ranking Member 

Conyers, Members of the Committee. I also speak today for members of a new coalition, the True Simplification of Taxation, which 


JH-21.eps
103 

includes the American Catalog Mailers, the Direct Marketing, and 

the Electronic Retailing associations. It must be incredibly hard to 

get a handle on this issue when you hear such contradictory facts 

and counter arguments. I personally have really enjoyed debating 

this on some of the TV talk shows, but I have to admit it is not 

very enlightening to anybody who watches it. You deserve some 

straight answers today. 

So, first, is this legislation really about equity and fairness? Equity is when everyone plays by the same rules, and that is the situation today. Every online and catalog retailer, just like every store, 

collects sales tax for every place they have a physical presence, but 

this bill requires remote businesses to pay sales tax based on 

where the customer lives. Now, if you really wanted equity, let’s 

force all stores to do sales tax that same way. So think about the 

outlet malls on I-95 or the souvenir shops in downtown Washington 

where nearly all the customers come from out of State. Equity 

would mean, what, requiring their customers to show an ID so the 

clerk could figure out the sales tax where they live and file a return where they live? No, that is ridiculous. You wouldn’t do that. 

But that is the unfair burden this legislation would impose on online and catalog sellers in other States. 

We talked a lot about Quill, and in Quill the Court said it was 

concerned not so much by fairness as by, quote, concerns about the 

effects of State regulation on the national economy, end quote. 

Well, our national economy is an area where the U.S. leads the 

world, but we are also number one when it comes to the complexity 

of our State sales taxes. Number two is the European Union, who 

has just 27 VATs, but our 46 States are approaching 10,000 jurisdictions, and each gets to have up to two different tax rates, yet 

this legislation endorses this State tax disaster and it forces businesses in other States to comply. 

Question, would it be fair and equitable if Congress passed this 

Marketplace Equity Act? First, would it be fair to senior citizens 

who use catalogs and mail checks with their orders? Here is a catalog, Mr. Chairman, from National Wholesale established in 1952 in 

North Carolina, and with 200 employees today. They sell sensible 

clothing and shoes for senior women. The average age of their customer is 70years old, and 40 percent of them pay by check with a 

mail-in. National collects sales tax for North Carolina but not for 

customers in other States. It just isn’t fair to ask a grandmother 

to fill out this form in a way that causes her to search through 46 

different States and thousands of jurisdictions to find the tax rate 

applying to her and put it on her form. 

Second, would this bill be fair to a small business? This bill has 

a $1 million small seller exception, but that is not nearly high 

enough since $1 million is just a tiny little operation, and let me 

explain. Out of a million in gross sales, that business is going to 

pay $750,000 or so for cost of sales, they will pay $70,000 more for 

marketing, advertising, travel to trade shows, 60K for computers 

and programming and web site, another $50,000 for supplies, insurance, shipping, and accounting. If there is anything left, they 

might be able to pay an employee or two. A million retail sales is 

still just a mom and pop operation, and it is not fair to hit them 

with new costs for software, customer support, and accounting. 

104 

What is a more reasonable small business exception? Take a look 

at the top 500 e-retailers. They account for 90 percent of the uncollected sales tax last year. Number one was Amazon at nearly $50 

billion, number 500 was a small firm at $15 million. You could 

spare businesses on that long tail to the left of the $15 million and 

still let the States collect 90 percent of their tax. 

So, third, would it be fair to a business who is just big enough 

to get over the small threshold? A one-State business would be 

forced to pay for all States. They need radical simplification and 

they need reduced administrative burdens, but this bill leaves out 

true simplification. It is not fair, for instance, for a business in your 

State to have to file 46 different tax returns every quarter and be 

subject to 46 separate audits every year. These are just two of the 

eleven missing simplifications that we detail in our testimony. 

So to conclude, really, these tax fairness bills aren’t so fair after 

all, and they would unmistakably create a new tax on America’s 

businesses. State sales tax is due from the business who made the 

sale, whether or not they pass the tax on to the consumers. Most 

States call it a business privilege tax for the privilege of doing business in their State. It is due from the business. So for businesses 

in every State, even States that don’t have a sales tax of their own, 

this bill would authorize a uniquely complex and new tax burden. 

So, in closing, please keep in mind the costs on American businesses if you were to empower States to export their tax burdens 

to external businesses. And please compare that to the potential 

new taxes which, at most, would be less than 1 percent of total 

State and local tax revenue. Compare those two, and I think you 

will conclude that the juice just isn’t worth the squeeze, and I sincerely look forward to your questions. 

[The prepared statement of Mr. DelBianco follows:] 

105 


DB-1.eps

S!3!emel'll of 

Steve DelBianco 

Executive DIrector 

NetChoice 

TE~stimony before the 

United States House of RI!presentatives, CommiUee on the Judiciary 

Hearing on: HR 3179, the "Marketplace Equity Act 012011" 

July 24, 2012 
106 


DB-2.eps

Chairman Smith, Ranking Member Conyers, and members of the committee: thank you for holding this 

hearing on HR 3179 and the "internet tax" debate. My name is Steve DelBianco, and I serve as Executive 

Director of NetChoice, a coalition of leading e-commerce and online companies promoting the value, 

convenience, and choice of Internet business models. NetChoice members include industry leaders such 

as eBay, Expedia, Facebook, LivingSocial, NewsCorp, Overstock, VeriSign, and Yahoo, plus several 

thousand small businesses that go online to reach their customers. 

NetChoice has been deeply engaged on Internet tax issues for over a decade, including recent media 

debates in the Wall StreetJournal and on CNBC, Marketplace radio, CNN, and PBS. Since 2004, we have 

participated in meetings of the Streamlined Sales Tax Project (SSTP), a long-term effort that HR 3179 

seeks to sweep aside. 

NetChoice is a founding member of TruST, the coalition forTrue Simplification of Taxation, a new group 

whose association members also include: the American Catalog Mailers Association; the Direct 

Marketing Association; and the Electronic Retailing Association. (wVJ-",;,I[UeS_"l1pii[ir:-!tiQn,_ocg) Each 

coalition member has submitted written statements for today's hearing, and we respectfully ask that 

their statements be included as part of the hearing record. 

In this testimony we are discussing legislation that would authorize states to impose sales tax 

obligations on out-of-state businesses (HR 3179). Our major points are: 

1. For businesses without stores or distribution centers in multiple states, HR 3179 would allow 

states to impose a new tax with uniquely complex burdens of nearly 10,000 tax jurisdictions in 

46 states. 

2. HR 3179 does not require nearly enough sales tax simplification to justify imposing significant 

new burdens on out-of-state businesses. 

3. The new tax burdens imposed by HR 3179 are not justified by anticipated revenue, since total 

potential sales tax on all consumer e-commerce is well below one percent of total state & local 

tax revenue. 

4. H R 3179 does not adequately protect America's small businesses for whom new collection 

burdens would be disproportionately complex and expensive. 
107 


DB-3.eps

The House Judiciary committee is ideally positioned to deliberate whether to expand state taxing 

powers to include out-af-state businesses and citizens. To help with that deliberation, we begin with 

some straight answers to critical questions. 

Why don't online retailers pay sales tax to every state? 

Last November, the editors of the Wall Street Journal asked NetChoice whether all online retailers 

should have to pay sales tax to every state. My argument in the published debate began with this: 

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 "vhy Amazon.com adds sales tax to orders from customers 

in the 5 Slates \vhcrc it has facilities. But Amazon and online retailers aren't required Lu 

collect tax for other stones, leaving those customers to pay <'I "use t8x" that st8tes rarely 

enforce against individual taxpayers. This framc,\vork frustrates state tax collectors and 

businesses that compete with onl ine retailers. But when we learn how this physical 

presence requirement evolved, it beeumes clear why \ve should retain this ~1andard ror 

imposing ne\\T t8X collection burdens on online retailers. 1 

As members of this committee know, today's physical presence standard is based on Article 1 of the US 

Constitution, designed 225 years ago to stop states from impeding interstate commerce. The 

Commerce Clause was a necessary condition to unite the independent colonies, since they had a legacy 

of imposing customs duties and trade barriers to favor in-state businesses. 

Fast-forward to the 1960s, when state tax collectors wanted catalog retailers to collect their sales taxes, 

even where those catalogs had no operations in the state. The US Supreme Court relied on the 

Commerce Clause in deciding that states could not impose tax collection requirements on catalogs 

"whose only connection with customers in the State is by common carrier or the United States mail." 2 

In 1992, the Supreme Court took another look at tax collection by an office products catalog company by 

the name of Quil1. 3 Seeing a patchwork of rates and rules for several thousand sales tax jurisdictions, 

1 Steve DelBianco, Should States Require Online Retailers To Caffect Sales Tax?, Wall Street Journal (Nov. 14, 2011) (emphasis 

added). 

2 Nat" Bellas Hess, Inc. v. Dept. of Rev. of 111.,386 U. S. 753 at 758 (1967). 

3 Quill Corp. v. North Dakota, 504 U.s. 298 (1992). 

2 
108 


DB-4.eps

the Coun again held that requiring out·o ·~ tatecompan"" to collect and remit ta.e. Wa s ro complk~te d 

that it p,e.cnted an unrearonablc burde" on Inte .. tate commerce. 

Moreover, the Supreme Court wa. not moved by Ihe Slate', .,gumenl 

thaI compute, technology cruted th e necessary IlmpHflcatJon. Instead. 

the Supl1<me Court "<knowledge<! the 10Yier court', finding th.t advance~ 

in compute, INhnology had ea.ed the burden. of tax coll",,\ion, but stili 

found Ihe requirement of u. COllection undulY burden rome.' 

Quill Was nOt concerned with "fairness" While rome "gUt!<l fa;m~. a. 

justlf<ullon for tax coUectJon, "(11n contr<IS!. th e Commerce a.u,e and Its 

nnu. requirement are Informed not SD n.uch by conC~'M abouljolmpu for Ihe individuaI1".tel a. 

by structural conce.ns oboul Ihe elf« l< "f<">1~ uhJllon on Ihe nolionol economy.'S 

QujU I' the law of the I.nd today. protecting bu.I".. .. ". from •• Ie. la. impo.itlon by stales where Ihat 

bu,lne .. ha. no physical pre,ence. while .equirlnl bu.in",.e, to pay .. Ie. I.x for e""ry state whe", they 

do have I pltylkal pre.enee. 

Would HR 3119 creole 0 new lox? 

St.le ule, tao law, put oblig.tlon. on both buve .. and ... lIers in order to ma,imize tax reven"" 

collection. Slates ~yv ~ $3les t~x on sellen within Ihelr Ju rlsdiCl!(ll', and It's up to Ihe .cllcr whelhl'f' to 

pass that laX 310ng to buyers. Most sellen do pa55lhe tJO along 10 buyers. whelhe. at Ihe cash . eglster. 

onllne. Dr ove, Ihe phone. Bul . flcr an ilJdil, I seller Is liable for any roil", tu th"" w .. r~ obligcd to 

collect but failed 10 do '0. ""en whrn the seller can't recover the tax from tho.e prevlou. Clmome ... 

For example. Michigan ' ",Ie' lax" II ~ctu;.IIV a IU on Ihe prIVIlege Dr doins business In Ihe ,tale: 

". there 'hall be collected from all pe .. cn. eniagO'd In the bu.lnl''' 01 maklnll.ale. al relall. bV 

which ownership of langlble penon.1 property I. t.an,fCfrO'd for considerallol'. in innuil In 

• s... Q<HjfC .. p • . _r~ "',,- $00 U.s. m.llJ3 FN 6119911 . 

• r.J •• r III (."'" ..... """.dj. 

3 
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DB-5.eps

for the privilege of engaging in that business equal to 6% of the gross proceeds of the business, 

plus the penalty and interest if applicable ... 6 

As in all state sales tax statutes, the Michigan sales tax is the personal liability of the seller. The seller is 

allowed, but not obligated, to pass the tax along to the consumer. Today, only businesses that have 

presence in Michigan are required to pay a tax for the privilege of engaging in business there. HR 3179 

would enable Michigan to impose its flprivilege" tax on businesses with no facilities, no vote, and no 

voice in Michigan. The fact that the tax can be passed on to Michigan consumers does not make it any 

less a new tax burden for businesses allover the country. 

Arizona and California use the same approach, imposing their sales tax for the "privilege" of selling 

goods to state residents, even if shipped via common carriers: 

"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 vendor." 7 

California: "The sales tax portion of any sales and use tax ordinance adopted under this part 

shall be imposed for the privilege of selling tangible personal property at retail" 8 

Clearly, sales tax is due from sellers whose activities or locations create enough of a physical presence 

for a state to impose collection obligations. But if Congress overturns the Quill standard, businesses 

would be forced to pay a new tax to states where they have no physical presence. Most of those 

businesses would pass the tax along to their customers, but make no mistake about it - the states will 

demand that businesses pay the new tax - whether or not their customers were charged. 

Haven't states simplified their sales tax systems? What about the SSTP initiative? 

The Supreme Court's Quill decision also made it clear that states could simplify their sales tax systems 

and come back to the Supreme Court and show that they have truly eliminated the unreasonable 

burden on interstate commerce. 

6 Michigan Compiled Laws Of 1979, Chapter 20S Taxation, General Sales Tax Act, § 20S.52] 

7 hJtf]~ll\,\,_'-:'(,!~,~l_cLQU;oyjt!.!:F,'l!.1<:!?5i~c::ul~~~tjc~n2xl".::L~hS'I.~~,--c-""2_~ 

8 rLt~:jl'!L~~'{,qQ~-,-@gp_vllii~Jli~~lg~1!lQ!-!s_l~~~~sJl~(~Qli~lliiLygJJ!~J,?l~,-lLI~iJl,lJlro) 

4 
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DB-6.eps

8uI in"e~d, a handful of .rail" cho,e 10 "kip the hanhjud,,,,,,m of Ih .. (OUf! and ,0 dire ctly 10 

Congress to reQuest lhe power 10 impose these bllrdens on OIlI-ol-'late businesses, ,hel' effot\! beg~n 

~ de<:ad .. ago wllh Ihe tre ~mllned s,;,,,,. fa ~ Project (SSTPj. 

Despite ~ deade of COnCelled effo'i. Ihe aChj j simplification, .cl1ieved by Ihe SST1' a'e not nea.ly 

il/Hident 10 justify ConC'"'' abandonin, II. ,ole In prole<:ling int"rstate COmm~rU!, Rather, th" SSTP 

has ,hown th.,.lmplif/cD/ion hOJ becom!' jUlio .Iogon -nD/ 0 nondord. 

Flm, critics cile Ih .. lactlhal SSTP ",1,lnally proml.ed JuS! one 

I •• ,al .. p'" n.le, but now accommodatE,. over 9,600 local 

jll.,.diction.,9 each with 11.5 own laX rale. and . ale. la. 

Unique Tax Jurisdictions 

00 9 1~ 

holiday •. Tha!', up f.om 7,800 Jurisdiction, In th e 20 yea" SOn"" Quill, and " ill ,rowing. Thi' mak .. , Ihe 

US a trlle olltlier when I, (Ome.10 'ales ~~' \lr 'dic:llon •. The European Union has Z7 Jurisdiction. for 

Value lidded la. (VIIT) '/ld India lets ead l st.t ehave a ,Ingle ux ,ate, bUI we a re the ontv coontry 

whe,e .... 11" la. i. cont,olled at the local i:OY lnm~nt level. 

Second. the SSlP has abandonlNl many of ;tS o,igina l simplification ,eQulrement •. Forexample, th e SSTP 

no lonler conlalMs reQui,1>d compen .... lion for all ,etall",. and h .. ~II bllt eliminaled th e .mall ",lIer 

e~ccption . In In effort to a ttract Slate. wilh origin sourcing, the SSTP abandoned one soortlng /ule nd 

now allow. bOlh o,igln and deslination·b ... "d ,eHim" •. To entia. Mus"hu", u . to join SSlP, the 

GovNnlnl: Board ~Oled to aHow th,e,hold, lor certain clothing item', ellen Iholl,h thre.holds were one 

of Ih~ mOSI comple. elemen!sl! pled,ed to <Implifv. (NO!Wltmlanain, thiS allowance, Ma .. arhll"'tr. 

has not jel Jo;ned SSTP.I 

Oe.pTlc Ih ..... concesslonl, less than half of ell81ble states ha~e joined SSlP (only 22 luU member "laiC' 

in SSTP. out 0146 .Idtes th at haYe .... Iesl;,x) . 

• 

~ 

..... "0 P,,,, ~'_IM ... 21, 2012). .. ai lob~ I. ~\lP·Ifvo:!<w ... " ....... '!Io'!lI.'t'!rOO!!Vft)f/20lJfy O!!~ 

I'.' I"" """ 01 2011 , I~ ,. we,. ~)< 9,600 I~""'" ur,;d ~", "''''', INo u.s. ~ 0" _,~ 1)16)1 "ew ond 

,.,..""" om. .,., ..... 1 •• ,",, "'" " "I. 

, 
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DB-7.eps

Why is SSTP losing momentum when states expect to receive billions of dollars in new tax revenue? 

Some argue that SSTP is losing momentum because non-member states are reluctant to let unelected 

tax administrators make decisions about tax rules and determine compliance. More likely however, 

SSTP is losing momentum because states began to see the revenue estimates as wildly inflated. 

A simple calculation using government data shows that the maximum sales tax potential for consumer 

e-commerce is less than one percent of total state and local tax revenue: 

Start with the US Department of Commerce's 2010 Electronic Commerce Industry Assessment, 

which reported total retail e-commerce of $169 billion"o 

Apply an average tax rate of 7 percent, giving total potential sales tax of $11.8 billion. 

Divide that by total state and local tax revenue in 2010, reported as $1.3 trillion by the 

Commerce Department. 11 

The result is clear: the maximum potential sales tax on all e-commerce is less than one percent of state 

& local tax revenue -- assuming that no sales taxes are collected bye-retailers. 

'Company Stat.es: 

But under Quill, e-retailers already collect sales tax for states where they have 

physical presence, as seen in the table at right. NetChoice commissioned a 

study by economists Robert Litan and Jeffrey Eisenach to determine where eretailers were already collecting sales tax for web sales. 

They concluded that uncollected sales tax on e-commerce in 2010 was $4.2 

billion nationwide, or less than one-third of one percent of total state and 

local tax revenue. 12 This relatively small incremental revenue does not 

justify a dramatic expansion of state taxing powers and new collection 

burdens on remote businesses. 

10 US Census Bureau E-Stats, b1J_Q;LL'!i,!!_~~e_n~!!s.,Z9_' .. !Lf~,;~'JLg_?lqt~L~!!_JQj?-QJ9re.2oJ:J ___ Er).9lP_fJf 

11 US Census Bureau E-Stats, bJ~b1;lL~\~'N~.S~Di1l_·~gQ_'!:.~L1dt~l~!l1,.llQ2Jl,p_dl 

'Amazon.com 

:Staples 

D~II 

,Office Depot 

'Apple 

OfficeMax 

Sears 

cow 

Ne'",'egg 

Best Buy 

,QVe 

SonyStyle.com 

Walmart.com 

Costco Wholesale 

J.e Penney 

HPOffiee 

'Circuit City Stores 

Victoria's secret 

Target 

Systemax 

12 Eisenach & Litan, Uncollected Sales Taxes On Electronic Commerce: A Reality Check, Empiris LLC (Feb. 2010), available at 

http://bit.ly/Eise nStudy. 

6 

5 

44 

4& 

4& 

46 

46 

45 

46 

~ 

46 

46 

46 

46 

38' 

46 

46 

29 

4S 

4& 

5 
112 


DB-8.eps

Isn't there increased momentum to overturn Quill? 

Recently, despite flagging momentum and diminishing revenue estimates, members of this committee 

have surely noticed increased lobbying efforts to overturn Quill's physical presence test and authorize 

states to collect from remote retailers. Aside from the usual tax proponents in state government, the 

renewed push is coming from big-box retailers. 

Big-box retail chains are pushing hard for federal legislation for a simple and predictable reason: it 

serves their interests. Even a little simplification helps a big-box retailer who must already collect tax for 

most states, as seen in this list. Big-box retailers now have expansive web-stores of their own and give 

customers the convenience of doing pickups and returns at their local stores. These chains use plenty of 

local public services wherever they have stores, 50 they must collect sales tax in all their states - as 

required under current law. The Eisenach study looked at sales collection practices for the top 500 eretailers, and found that 17 of the top 20 already collect in at least 38 of the 46 sales tax states. 

Another way that overturning Quill would also help big-box retailers is that it would force tax collection 

costs on their biggest online competitor, Amazon. 

Why would Amazon.com support overturning Quill? 

Big-box retailers have aggressively gone after Amazon in the states, lobbying for new "Amazon Tax" laws 

declaring that Amazon already has physical presence by virtue of its advertising affiliates, distribution 

centers, or other subsidiaries in the state. The big-box retailers also lobbied for a new tax reporting law 

in Colorado, which was enjoined by a federal court as a violation of the Commerce Clause.13 Despite the 

setback in Colorado and pending court challenges of the "Amazon Tax" in New York and Illinois, this 

aggressive and expensive state lobbying campaign has succeeded in creating well-publicized tax 

compliance problems for Amazon. Those problems have helped to drive Amazon to support federal 

legislation to overturn Quill. 

But there's another reason for Amazon's about-face: the company is changing its business model by 

adding distribution centers in new states to enable faster delivery to customers. Amazon is also adding 

13 See Order of Ct., The Direct Marketing Ass'n v. Huber (U.S. Dist. ct. Colo. Mar. 30, 2012 ), and see 1 Colo. Code Regs. § 201-

1:39-21-112.3.5 (2010). 

7 
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DB-9.eps

drop-boxes in convenience stores and marketing daily deals to local merchants. As a result, Amazon will 

have physical presence in 14 states by 201414 - requiring Amazon to collect sales tax for more than half 

oroll Americans. And as Amazon opens more distribution centers across the country they will continue 

to increase their tax collection requirements. 

Like the big-box stores, Amazon would reduce its tax compliance costs if states adopted even tiny steps 

toward simplification. Moreover, Amazon and big-box chains benefit if Congress allows states to impose 

new tax collection burdens on their smaller online-only competitors. 

To impose expensive collection burdens on small sellers would be grossly unfair, which brings us to the 

aspect of "fairness" in the debate over new Internet sales taxes. 

Is this debate really about 'Jaimess"? 

The Constitution's Commerce clause is not about ensuring fairness. As explained above, it was all about 

preventing unreasonable barriers to interstate commerce, such as the customs duties imposed by the 

independent states before they united. In fact, Quill explicitly dismissed the fairness argument, saying 

the "Commerce Clause and its nexus requirement are informed not so much by concerns about fairness" 

but rather lithe effects of state regulation on the national economy. illS 

"Fairness" is what you get when everyone plays by the same rules. And today, with Quill in place, all 

online and offline businesses play by exactly the same rule: all retailers collect sales tax for every state 

where they choose to have a physical presence. 

Ironically, in many states the fairness argument cuts the other way. A retail store on main street collects 

sales tax for just the one jurisdiction where it's located. But an online retailer operating right upstairs 

must collect and remit for each of the local towns and counties whenever it ships within the state. In 

some states that means collecting for several hundred local tax jurisdictions, each with its own rates and 

rules. Yet when customers from surrounding towns walk in the door, the store collects and files only in 

the local jurisdiction. 

14 By 2014 Amazon will collect and remit sales taxes in the following states California, Indiana, Kansas, Kentucky, North Dakota, 

New York, Pennsylvania, South Carolina, Tennessee, Virginia, and Vermont. 

15 Quill, 504 U.S. at 312. 

8 
114 


DB-10.eps

Again, all retailers collect sales tax for every state where they choose to have a physical presence. I say, 

"choose" because it is the business that chooses whether to be just an online retailer or to operate 

physically in multiple states. When a business chooses to open stores or put sales reps in another state, 

it accepts the obligation to collect that state's sales tax. 

And there's actually little evidence that retailers who do callect sales tax are losing significant sales to 

catalog and online retailers who collect sales tax only for their home state customers. 

That makes sense, since sales tax and shipping costs aren't added until a consumer's online shopping 

cart goes to checkout. So comparison shoppers are usually comparing prices before adding any tax and 

shipping charges. Moreover, online shoppers usually pay shipping and handling charges that offset any 

tax that's not collected on most commodities. Most shoppers go online for the convenience and 

selection availability, not to avoid taxes. And while small and expensive electronics are a notable 

exception, tax proponents have shown no data indicating that significant numbers of electronics 

shoppers deliberately choose out-of-state online retailers just so they can avoid paying sales tax. 

The argument that remote sellers have an unfair advantage just doesn't hold up. Paying sales tax for 

thousands of jurisdictions in 46 states is far more expensive and complex than paying sales tax for a 

single jurisdiction on over-the-counter purchases. Moreover, state and local governments often 

provide incentives and benefits to in-state retailers, such as tax increment financing, transportation 

improvements, worker training subsidies, grants, tax credits, etc. None of these benefits are available 

to out-of-state businesses. 

e-Commerce is the best hope for Main Street to compete with Big-Box Stores 

Those who make the fairness claim about online versus offline are missing the far greater fairness 

concern of smaller retailers competing against big-box chain stores. 

For decades, "main street" retailers have been getting battered by Walmart and other national chains. 

To survive, many main street retailers have gone online with their own web stores or with e-commerce 

platforms to serve repeat customers and to find new customers across the country. For example, the 

specialty retailer SilverGallery.com has a warehouse and store-located on Main Street-in 

Waynesboro, Virginia. SilverGaliery, which was featured in a Wall Street Journal article last year, does 

9 
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DB-11.eps

some walk-in trade, but most sales come from their web store and other online channels. 16 Online sales 

growth enabled SilverGallery to buy their building and increase employment, right there on Main Street. 

The last decade has seen another body blow delivered by big-box chains, who integrated their website 

operation with their stores in every city and town. Customers love the savings of doing in-store pickups 

to avoid shipping charges. And they love the convenience of returning online purchases to stores for 

exchange or credit - instead of packaging returns and standing in line at the post office. But small 

sellers like SilverGallery can't afford to open stores in every state. It's yet another advantage that big 

retailers have over small businesses with web sites. The big chains also negotiate much lower rates for 

advertising, shipping costs, and health insurance, too. 

Next comes the knockout punch for small retailers. Overturning Quill may be good news for big-box 

retailers with websites, since they already have to collect in nearly all states. But overturning Quill will 

definitely raise costs and prices for small businesses that compete - and survive - via their web and 

catalog sales. 

What is the impact on small businesses if they are required to pay sales tax to 46 states? 

What costs would a small business face if Congress forced them to pay sales tax to al146 states? The 

SST's own Cost of Collection '7 study found that a small business (under $lM in annual sales) spends 17 

cents for every tax dollar it collects for states. And even if tax software works as promised, that only 

helps with 2 cents of the 17 cents in costs per dollar collected. That leaves small businesses with a 15% 

cost burden on every dollar they collect for things such as: 

Paying 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 taxability of items, or sales tax holidays in remote 

jurisdictions 

Handling audit questions from 46 states 

Paying accountants and computer consultants to answer all these questions 

IG See Angus Liten, Sales-Tax Measures 'to Cost Us Big', Wall. St. Jo. (Dec. 1, 2011). 

17 Available at http://www.netchoice.orgJwp-cor.tent/uploads/cost-of-collection-study-sstp.pdf 

10 
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DB-12.eps

These collection burdens will be a big problem for small catalog and online businesses that collect only 

their home-state sales tax today. Ask any small business, on Main Street or online, and you'll learn it's 

hard enough to collect sales tax for one state, let alone all 46 states with sales tax laws of their own. 

With that understanding of what small online businesses would face from overturning Quill, it's easy to 

see why House Judiciary Committee members Coble, Griffin, Lundgren, Lofgren, Marino, and 

Sensenbrenner co-sponsored a resolution to protect our nation's Internet entrepreneurs from new tax 

collection burdens. H. Res. 95 is titled "Supporting the Preservation of Internet Entrepreneurs and Small 

Businesses," and its main point is this simple pledge: 

Congress should not enact any legislation that would grant State governments the authority 

to impose any new burdensome or unfair tax colfecting requirements on small online 

businesses and entrepreneurs, which would ultimately hurt the economy and consumers in 

the United States l8 

The bottom line on "fairness" is that big-box retailers have wielded that term for their own benefit, to 

the detriment of any small retailers they haven't already extinguished. 

HR 3179 is not an improvement on Quill's physical presence standard. 

The actual simplification required in HR 3179 is not nearly sufficient to convince Congress that it should 

abandon its Constitutional role in protecting interstate commerce. 

Fortunately, Congress can afford to take the time to design legislation that requires real simplification 

and makes states accountable to these requirements. As noted above, the uncollected taxes are far 

lower than tax advocates have claimed: uncollected sales tax on consumer e-commerce is under one 

percent of all state and local taxes. And the uncollected amounts are not growing as fast as tax 

advocates have claimed, since the fastest growth in e-commerce is among multi-channel retailers who 

already collect for states where they have stores - 17 of the top 20 e-retailers collect for at least 38 of 

the 46 sales tax statesl9 And Amazon.com will collect for over half the US population by 2014 - under 

the Quill standard of physical presence. 

IS H. Res. 95, 112th Congo (2011) (emphasis added) 

19 Eisenach & Litan, Uncollected Sales Taxes On Electronic Commerce: A Reality Check, Empiris LLC (Feb. 20lO), available at 

http://bit.ly/Eise nStudy. 

11 
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DB-13.eps

However, if Congress is determined to overturn Constitutional protections for interstate commerce, it 

must exempt small businesses, require states to adopt minimum simplification requirements, and create 

fair procedures to resolve sales tax disputes between states and taxpayers. Each of these points are 

covered below. 

HR 3179 does not include adequate protection for small businesses 

HR 3179 includes a small seller exception that is appropriately mandated by Congress, as opposed to 

other legislation that leaves it to state tax administrators to set the exception level. But HR 3179 sets 

the exception threshold at just $1 million in annual remote sales, a number that is far too low for 

retailers, whose entire expense and payroll must be paid from the margin on sales: 

$1 million in gross sales times 25% average gross margin leaves just $250,000 to cover all costs 

of running the entire business. 

Those costs include advertising, rent, supplies, insurance, shipping, computers and 

programming, website, accounting, communications, travel, etc. 

If there's anything left after paying those costs, this business might be able to pay an employee 

or two. 

Make no mistake about it -- $1 million in retail sales is still just a "mom and pop" operation. The Small 

Business Administration says a "small" retailer is one with annual sales 20 to 30 times larger than the 

threshold in HR 3179. The small business tax bill recently passed by the house set a small business 

threshold at 500 employees, whereas only a few employees could be carried by a retailer with just $1 

million in sales. 

One way to set a more realistic small seller exception is to exempt all businesses that are out on the 

"long tail" in terms of e-retail sales. For example, Internet Retailer publishes a Top 500 Guide each year, 

ranking the nation's largest retailers on their US e-commerce sales. For 2011, the #1 e-retailer was 

Amazon.com, at $48 billion in e-retail sales. Number 500 had just $15 million in remote e-retail sales. 

In total, the Top 500 had $181 billion in e-retail sales. 

Economists Eisenach and Litan started with this Top 500 Guide when analyzing where each retailer 

already collected sales tax under Quill's existing physical presence standard. Using their analysis, we 

12 
118 


DB-14.eps

e.lln"t~d H"t the Top 500 wt'.~ re,po""bfe for 93" of the ~"<o!lec ed .~If' la. on US e·comm~,.e In 

2011. auhown in I~ e graph tHok>wlllln "I<"" "e.orelto p~<oll<'< . 

• 

Top 500 .·Retallers 

Account for ~ of 

coJleeted sel88 taxes from 

.commerce In 2011 

''10 >CIO .,.. 1000 ". Natic'naUv Ranked e-Retailers 

selle" Iw~w the rop 500 cytoff from the p'ev,,,,,.~ ear. Unde, thl. m.t~od , I~e small Sl!11e. eocep1>on 

lo! ltlll wou ld h."e been $15 m,lhon NI annuals. les. Tn>! would lu ..... . .. mpted reu,I ... with a mo,e 

••• ",nabl. 8tO" mati ,n 10 ,ovet e.pem ... whl/e ollowlng 5lQleo 10 '«ove, over 9tJ pe,eefl! of /he 

HR Jag folio /0 'equlre true few .Impl j~<" flo n "r reduce .. dminlom.llve burden. 

Cons,.nshoold require .obu" minimum "mpl,lk.1Ion. befo.e overtu,n 'ng 1M Quill >tandard of 

ph~. al ts ~n(e 10 •• tales lO impo,e .. Ie, 10. On .~mole bu,I" .... .. P.ev,ou. Cong.e.,ional 

leg/,lal1o" to overlu." QuiN ,ncluded.s m' ~"il mln.mum <lmplrf".t1o" requlremen" !ha! .... STP 

lIa\e< would have to honor. Bu! HR 1119 .equire' onlv 1 mn,u.el ~nd n,ev ~ck e«enhill p,o .. s/o~" 

" ,,,,,!oOO •. ""' .... " .... , .... HO ....... ~ _., ""'" In, • .,.., A ... ".,. '0<> WOG ..... P 1111011 Ed " .... , '.0 ~OO .... 

,.,olIo, ... ,_«:o." ".." Ek • ....., 1 1/0 ..... ""' .... "e<lSoio, , ... ,00 E't<"onotCom .... '''' ~ _ tvCht<<'p.l'. B!' oto 

}(fIQ) ... ol .. blo., "' 'I'.llbol ~1[I .. n\t"l!Y 

13 
119 


DB-15.eps

Minimum Simplification Requirements lacking in HR 3179: 

Remote retailers should not be subject to audits from 46 separate state tax authorities. 

States should respect the outcome of a single audit by any state, on behalf of eli states. 

Remote retailers should be allowed to use a single sales tax rate for remote sales made into 

each state, which was the original goal of the SSTP. State lawmakers would, of course, be 

able to allocate sales tax proceeds among local jurisdictions. 

States should be required to adopt a single set of definitions for taxable and exempt 

products across eli states. HR 3179 allows each state to have its own unique definitions: 

"products and services subject to tax must be identical throughout the state" 

States should compensate all businesses for the fair and reasonable cost of collecting sales 

taxes, taking into account such elements as credit card fees and costs of software 

implementation and maintenance. Compensation was required in previous federal 

legislation to overturn the Quill physical presence standard, but was dropped in recent 

versions. 

Remote businesses should not be required to file sales tax returns for all 46 states. All 

states should accept a single sales tax return filed with a business' home state. The home 

state revenue department would be responsible for distributing funds to remote states. 

Remote retailers should not be required to honor, but may observe, caps and thresholds for 

sales tax calculation. (an example of a threshold is Massachusetts, where the first $175 of 

any clothing item is exempt from sales tail) 

Remote retailers should not be required to honor state-specific sales tax holidays. 

States should be required to adopt a single rule for sourcing sales. The SSTP originally 

maintained destination sourcing for all sales tax transactions. But to accommodate originbased states, SSTP's Governing Board voted to allow origin sourcing for in-state sales while 

requiring destination sourcing for remote sales. Such fldual sourcing" should not be 

permitted as part of any federal legislation overturning the physical presence standard. 

States must provide certified software for collection, filing, and remittance. Users of the 

software would be immune from civil liability for errors in taxes collected. HR 3179 

requires software and liability protection only for states that demand remote businesses 

collect at the local destination rates. 

These minimum simplifications should be required for any state that seeks collection authority outside 

of Quill's physical presence standard, whether as part of HR 3179 or in legislation authorizing collection 

by SSTP member states. 

And if Congress were to grant states taxing powers over out-of-state businesses, it should explicitly 

prohibit states from otherwise attempting to stretch the definition of physical presence, such as many 

states have attempted through laws asserting that advertising alone creates nexus. 

14 
120 

Mr. SMITH [presiding]. Thank you, Mr. DelBianco. 

Governor Haslam, let me direct my first question to you. And it 

is this: If this bill, H.R. 3179, were to be enacted, it is obviously 

going to generate a lot of additional revenue for a lot of States. 

What do you think is going to happen to that revenue? Is it going 


DB-16.eps
121 

to in some form be passed along to consumers—perhaps a lower 

sales tax—or is it simply going to be spent by elected officials? 

Governor HASLAM. That is a great question. It is one of the beauties of the State systems. I think you will see 50 different answers 

to that question. In our State, I think we would use it to do a variety of things. I think our history has been since we have been in 

office we have cut taxes both years. And so we would probably lead 

with that. That being said, would we apply some to infrastructure, 

yes? Would we look at trying to mitigate some of the rising costs 

of higher ed? I know you all have looked at that in Congress in 

very serious ways. My sense is the honest answer is there would 

be a myriad of ways that money would be used. I think, in our 

State, part of that would be used to cut taxes. 

Mr. SMITH. Thank you, Governor. 

Mr. Harper, the SSTGB that you represent has done good work 

to make taxes simpler and easier to comply with. Do you believe 

the simplification requirements built into this bill comport with 

SSTGB’s benchmarks? 

Mr. HARPER. I do. There are a lot of good safeguards that are 

built into this bill. I would like to see some additional ones that 

would provide the security and the surety to small businesses and 

retailers. But I think this goes a long way to addressing the issues. 

If I may follow up on Governor Haslam’s comment to your first 

question, I have a bill file opened in the State of Utah, with the 

anticipation that this bill or the Senate bill will pass that will go 

through and reduce the State sales tax rate and basically have this 

as a revenue-neutral impact to the State of Utah. 

Mr. SMITH. Thank you, Mr. Harper. 

Mr. Kuttner, do you have any alternative ideas—and I regret I 

missed your testimony. You may have mentioned them in your testimony. Do you have any alternative ideas to level the playing field 

between the online and the bricks and mortar retailers that are not 

in the bill that we are considering today? 

Mr. KUTTNER. Well, it would bother Governor Haslam here a lot, 

but a different way to approach the problem would be to say that 

there are certain categories where online sales have become so 

great or that the competition is so intense it is only unfair that the 

State should just not tax those categories. But I think that is going 

to make his life a little more difficult. But it does answer your 

question about another way you can get at this, which is to narrow 

the sales tax base to exclude certain categories. 

Mr. SMITH. Thank you, Mr. Kuttner. 

Mr. Henchman, many proponents of this legislation claim that 

there is software available to facilitate tax collection by remote sellers, thereby alleviating the burden on interstate commerce that 

concerned the Supreme Court in Quill. What is your opinion as to 

how well that software works? 

Mr. HENCHMAN. It can facilitate the lookup of rates. But rates 

aren’t everything. Indeed, generally zip codes do not align with 

sales tax jurisdictions. So that is a problem. Just as one example, 

there is a zip code that straddles the line between California and 

Oregon. Oregon has no sales tax. California has very high sales 

tax. If you put in the zip code, that is not going to tell you the complete story. 

122 

But even putting aside just rates, the question of what is taxed 

and what is not is often a question of reading the revenue rulings 

and trying to figure it out. It is often unclear. Just as one example, 

in my testimony I pull from a colleague’s work who tried to see 

whether a bottled Frappuccino drink will be taxed under sales tax 

statutes. Some States they are, sometimes they are not. Some 

States it is unclear. There is a lot of work that can be done to simplify that software isn’t going to solve. This is a legislative problem 

at the State level. 

Mr. SMITH. Mr. DelBianco, that is your question, too. 

Mr. DELBIANCO. I am amazed at the claims of software making 

everything so simple. I made my living building software, a lot of 

it point of sale and back office systems. 

The Governing Board of the Streamlined Sales Tax paid a million dollars for PricewaterhouseCoopers to do a study of what does 

it cost American businesses today, under the current rules, to collect sales tax. They concluded the businesses at a billion dollars in 

sales were spending 17 cents of their own money to collect the sales 

tax for the one or two States they collect in. And of that 17 cents 

of their own cost, only 2 cents had anything to do with software. 

The rest is for the cost of handling exceptions and problems and 

questions, following up on audits that are done, following up on 

questions from consumers about nontaxable items. 

There is nothing to the beauty of software for doing a lookup. 

But let’s not kid ourselves. Software doesn’t plug and play into 

some back-office system or custom fulfillment system. 

There is a Virginia seller called The Silver Gallery, who studied 

what it would cost them to modify their fulfillment system. They 

are about a $3 million seller of jewelry and a lot of engraved items 

and pewter. They have a custom system to allow the consumer to 

specify their order. They will spend $15,000 to $20,000 to integrate 

free software into their existing systems. 

Mr. SMITH. Thank you, Mr. DelBianco. 

Mr. Harper, do you want to comment on the software question? 

Mr. HARPER. Yes. Since that PricewaterhouseCoopers study was 

done a number of years ago, there has been a number of additional 

players who have come to the table with software. Back then, I 

think there was two or three. There are at least eight that are on 

the table today. The software has vastly improved. 

Some of the things that are being worked on through the 

Streamlined Sales Tax is a jurisdictional database, a State certified 

collection of software, vendor compensation, things of that nature, 

that will go through and ameliorate the burden that can placed on 

business. So I think some of those issues are truly answered today. 

Mr. SMITH. Thank you, Mr. Harper. That concludes my questions, and the gentleman from Michigan, Mr. Conyers, is recognized for his. 

Mr. CONYERS. Thank you, Chairman Smith. 

This seems to be a question that starts off with a great deal of 

excitement about us finally dealing with our obligation in Quill, 

but then it comes down to whether there is technology sufficient to 

make this practical. How can, I ask Governor Haslam and Governor Harper—wait a minute, Harper is not a Governor. 

Mr. HARPER. Representative, please. 

123 

Mr. CONYERS. Yes. Not yet. But how can we accommodate the 

particularly practical objections that have already been raised by 

Mr. Henchman and Mr. DelBianco? How do we deal with that end 

of the table of witnesses? 

Governor HASLAM. I would say a couple of things. First of all, 

that is what American industry does best. The progress we have 

made on being able to track those sales from when the Supreme 

Court decision was made is night and day. That is the first thing. 

The second thing, I do come back, despite some of the testimony, 

it is really not fair. We are saying it is fair for everybody that has 

a retail presence. But everyone doesn’t have a retail presence. The 

reality of the fact is you have local businesses contributing property 

tax and sales tax and jobs that are having to play on an unlevel 

playing field. We have to figure out a way to make it work. 

Mr. CONYERS. Yes, sir. 

Mr. HARPER. Thank you. And I think the question and the response from my two other witnesses over here is exactly why we 

want to have this legislation passed. We have nearly 10,000 jurisdictions in the country. If we go through and require one return in 

each State and one audit in each State, as is what is being promulgated by the Streamlined Sales Tax Organization, that is a significant reduction on business. 

J.C. Penney has hundreds and hundreds of accountants that respond today to sales tax returns and sales tax audits from thousands of jurisdictions across this country. Imagine what they and 

other retailers could do if we had a single audit, a single return 

each month, that could be reduced and they could focus on the core 

business of developing and designing and selling goods. 

Mr. CONYERS. Thank you. 

Mr. Kuttner. 

Mr. KUTTNER. I guess I am the man in the middle here between 

the two sides. 

The emphasis I would have is on the innovation and this very 

steep curve we are on here where we have gotten since 1992, since 

Quill and where we have yet to go. So the fact that this technology 

isn’t quite there, there are going to be new entrants into this field. 

And as an associate of mine put it to me, Isn’t there an app for 

this yet? If not yet, there will soon be a group of folks sitting down 

trying to get the app worked out that will make the solution on 

somebody’s iPhone. 

Mr. CONYERS. Well, this can be improved. The bill isn’t perfect. 

Most bills, when they are finished, they are not perfect, much less 

when they start out. 

But, Mr. Henchman, do you have any suggestions about where 

we might start in on the improvement of this measure before us? 

Mr. HENCHMAN. Certainly. I agree with you that technology is a 

concern, but also how far States have to simplify under this legislation is important, too. Maybe the two can meet in the middle. 

One example in this bill that I think is a great feature is the option of using a blended rate, a combined State and average local 

rate. That way, retailers are just dealing with 46 different jurisdictions rather than 9,600. That is a feature unique to this bill, not 

in some of the other competing legislation. There are, however, 

some features that are not in this bill that are in some of the other 

124 

bills. I go through those on page 16. Maybe including some of those 

might further make sure that the system that we foist on online 

retailers and that national retailers currently have to deal with can 

be a lot simpler. 

Mr. CONYERS. I think that this Committee and another Committee in the Congress have a lot of work to do. I am willing to 

begin that because I think the fairness issue 

overrides everything that we are here for. There are problems, 

and I would like to invite all of you to help us work them out. 

Thank you, Chairman Smith. 

Mr. SMITH. Thank you, Mr. Conyers. 

The gentleman from North Carolina, Mr. Coble, is recognized for 

his questions. 

Mr. COBLE. Thank you, Mr. Chairman. 

Gentlemen, good to have you all with us this morning. As the 

distinguished Ranking Member pointed out, we have been kicking 

this issue around in excess of a decade. And we may be standing 

in the shadow of being close to a resolution. I hope so. 

Governor, let me start with you and work our way down the 

table with a two-part question. Rhetorical question, I think, but I 

still would like them on the record. 

Will this bill create a new tax, A? 

Governor HASLAM. No. 

Mr. COBLE. And B, is it feasible for Internet retailers to collect 

and remit State sales tax? 

Governor HASLAM. No, it won’t bring a new tax. It is a tax that 

is already owed. It is a sales tax that is paid—when businesses put 

their P&Ls together they don’t show sales tax owed and sales tax 

paid. It is due from the buyer. That is number one. 

Number two is the capacity to do this. I really do. I understand 

there are issues and I understand different jurisdictions, I understand there are sales tax holidays in different places. But given the 

capacity that we have today, I am very confident that we can solve 

these issues. 

Mr. COBLE. Thank you, Governor. 

Mr. Harper. 

Mr. HARPER. No, this is not a new tax. What we are asking for 

is Congress to authorize a collection tool. Is the software perfect 

out there? No. As we continue on, improvements will be made. 

Bright eyes and bright minds will see things and make changes 

that will facilitate the improvement in the software. But it has 

come a long ways, and I think it is really for trial and for congressional authorization now. 

Mr. COBLE. You think it, therefore, is feasible for Internet retailers to collect and remit? 

Mr. HARPER. Yes. Because everything that is needed to be told 

to a State tax authority is already being provided by the consumer 

in their shopping cart. 

Mr. COBLE. Thank you, sir. 

Mr. Kuttner. 

Mr. KUTTNER. Is it a new tax? No. It is an 

uncollected tax often, but it is not a new tax. Is it feasible? Yes. 

Is it a burden for some small entities? Perhaps. That is a question 

125 

to be decided on. It is an empirical question, not a question of feasibility. 

Mr. COBLE. Thank you, sir. 

Mr. Henchman. 

Mr. HENCHMAN. On the question of whether it is a new tax, it 

is an existing tax that is not paid by the vast majority of people 

who should be paying it. Whether that is a new tax or not I think 

is in the eye of the beholder. I think a lot of people will see it as 

a new tax. 

As for the question of whether it is feasible, I would agree with 

Mr. Kuttner’s point. The question is not really feasibility but how 

burdensome will it be and how much can congressional legislation 

reduce that burden. 

Mr. COBLE. Mr. DelBianco. 

Mr. DELBIANCO. Thank you, Representative Coble. On the first 

question, it is absolutely a new tax. It is the use tax of consumers 

that isn’t being paid. And what they want you to do is to allow the 

States to force sellers to pay a sales tax. Sales tax is the flip side 

of the use tax. And when a sales tax is due, it is due from the business, it isn’t due from the consumer. The business has to pay it, 

whether they collected it or not. 

In your State, National Wholesale has a line item on their order 

form to put in the sale tax. If grandma puts the wrong amount in 

or leaves it blank, National Wholesale pays the sales tax. They 

can’t tell the State that, I’m sorry, she didn’t pay her tax. It is due 

and payable with penalties and interest from the sellers. That is 

why it is called a sales tax or a privilege tax. It is not called a consumer tax. 

Mr. COBLE. This is obviously subject to interpretation. I, again, 

thank you all for being with us. 

I yield back, Mr. Chairman. 

Mr. SMITH. Thank you, Mr. Coble. 

The gentleman from Virginia, Mr. Scott, is recognized. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Mr. Chairman, I think we have heard comments and your questions pointed this out, the logistics of collecting this tax can be absolutely impossible, particularly if people are coming in and mailing in orders from all over the country. You may owe tax to one 

little jurisdiction and have to account for all of that. 

But, Mr. Harper, the last time we had a hearing like this did I 

understand that there is a service that can be provided that would 

assess and calculate the tax, just like it is done now on shipping, 

just stuff where it does it for you and the business can collect the 

tax and send one check to the service and the service will figure 

out who gets what? Was it you that testified the last time we had 

a hearing like this? 

Mr. HARPER. No, it was Senator Luke Kenley from Indiana. 

Mr. SCOTT. Did I describe it right, where you just get the software, put it on, and it does all the calculation for you. You write 

one check to the service. 

Mr. HARPER. There are certified service providers that do have 

and do offer software that can go through and you can use them 

as a third-party, if you choose, and they will go through and remit. 

So you can just run it all through them. Or, some of the larger 

126 

companies will do it on their own. But there are existing software 

companies who will handle it for you. 

Mr. SCOTT. And what is the cost of that service? 

Mr. HARPER. The cost of the service depends on the company. 

The intent through the Streamlined Sales Tax is that vendor compensation will be provided so that the company will not have to pay 

for that. 

Mr. SCOTT. Say that again. 

Mr. HARPER. Okay. The intent of the Streamline Sales Tax is 

that there will be vendor compensation so that the retailer will not 

have to pay for it. It will come out of the tax that is collected as 

a compensation tool. 

Mr. SCOTT. So that just like you collect the handling and shipping and the software plugs in the number, for no cost to the business you can get the software that will provide the calculation of 

the tax and you write one check to the service and they will figure 

out where it goes? 

Mr. HARPER. Yes. 

Mr. SCOTT. And it is not cost to the business. Is that right? 

Mr. HARPER. Yes. That is correct. 

Mr. SCOTT. Now if there are problems with what is taxable and 

what is not taxable, does the software deal with that, too? 

Mr. HARPER. Yes. For those members of the Streamlined Sales 

Tax project or program there are definitions of every product that 

is out there and then States will choose what is taxable and not 

taxable based on the definitions that exist. 

Mr. SCOTT. Is this by product code? 

Mr. HARPER. It could be by product code or by product type, yes. 

There is a whole bunch of data that you can turn on and on off. 

Yes. 

Mr. SCOTT. Thank you. 

Mr. DelBianco, you indicated that if your Internet is based on 

the person’s residence of bricks and mortar based on this location— 

and the last time had this hearing we also had another category— 

if the product was purchased from a brick and mortar but delivered 

somewhere else; if you buy it in D.C. and deliver a washing machine to Virginia, that Virginia can get a tax. Is that right? 

Mr. DELBIANCO. In a situation like that, if their own delivery 

trucks are delivering the good to Virginia and the purchaser lived 

in Virginia, well, then the D.C. company would have to collect or 

remit the Virginia sales tax. That isn’t the situation, though, that 

we are talking about here, because you compared the ease of calculating shipping and handling suggesting that makes it easy to do 

sales tax. But it isn’t the case. Think about when a sales tax comes 

in on an address, the seller has to know is there a sales tax holiday 

in this day in that State. 

Mr. SCOTT. I totally agree with you if the seller was actually 

making the calculation. Mr. Harper has suggested that the software would figure that out for you. And it plugs in just like the 

shipping fee. 

Mr. DELBIANCO. May I follow up on that? Let’s assume that free 

software, if I put in an address and a product code, can return a 

rate. But that is where my problems just begin. Because I now 

need to know was the payer, the person that bought it, a tax exVerDate Aug 31 2005 13:24 Jan 08, 2013 Jkt 000000 PO 00000 Frm 00130 Fmt 6633 Sfmt 6601 H:\WORK\FULL\072412\75308.000 HJUD1 PsN: DOUGA
127 

empt person. Their own study shows that a lot of the costs of collecting sales tax has to do with figuring out whether the person 

purchasing it is an exempt purchaser. What about whether the 

item is taxable or not? Consumers get on the phone and call and 

say, Why is this item being taxed in my State? 

Refunds and exchanges are the beginning of the expense because 

every time a product is changed out in a refund or an exchange or 

a back order, that has to make adjustments to the system, and finally the audits; 46 State audits. 

Mr. SCOTT. Let me let Mr. Harper respond to what that software 

does with people who may be taxable or not taxable. 

Mr. HARPER. There is a taxability matrix in there and yes, you 

can go from, say, this is taxable, it is not taxable, we have got jurisdictions, we have got sales tax holidays, all those things built 

into the software. So I believe that have there is the functionality 

to address the issues which cause you concern. 

Mr. SMITH. Thank you, Mr. Scott. 

The gentleman from California, Mr. Gallegly, is recognized for 

his questions. 

Mr. GALLEGLY. I thank the Chairman very much. I have to commend the Committee on putting together what I think is one of the 

more balanced panels that we have had in a long time. There has 

certainly been an interesting diversity in the testimony. And like 

so many cases, we always kind of get back to this fairness issue. 

Clearly, fairness, when you put five political people together—or 

variations of political people together—the fairness sometimes becomes a tad subjective. 

I am a Republican. I was a former mayor. And I have been a 

member of the Chamber of Commerce for over 40 years. I am having a little problem with the Governor’s assessment of it not being 

a new tax. When you have to pass a law to tax somebody, a tax 

they are not paying, to me that seems as though it is a new tax. 

Is it a fair tax? Well, that is where the subjectivity comes. 

Now, I would like to ask Mr. Henchman a question, maybe Mr. 

DelBianco or maybe even the Governor would like to respond to 

this. The source, the provider has got a business set up. Pays for 

the business. The State, county, also local jurisdictions get a percentage of sales tax. These are the folks that are providing the 

service in the State where this product is made. It would seem to 

me that if we had a uniform tax on this type of a transaction, 

States that are charging 2 percent would charge 2 percent to every 

consumer; a State that charges 8 percent would charge 8 percent 

to every consumer that opts to buy in that State. The provider 

would only have one sales tax percentage to work with. 

I would like to get a response from Mr. Henchman first, and then 

perhaps Mr. DelBianco, about the point of origin, maybe, if we are 

going to go this direction. I am still wrestling. It has been a topic 

of discussion for a long time. 

Mr. HENCHMAN. I think you might mean Mr. Kuttner. He has 

written papers on it. But it is not the approach taken by this bill, 

though. 

Mr. GALLEGLY. Well, I understand that, but that doesn’t mean 

that there might not be amendments during the course of it. 

128 

Mr. HENCHMAN. Sure. The issue you might be concerned about, 

at least when I describe it to other people, is: Are all Internet businesses going to flee to States with no sales tax. We don’t all flee 

to States with no individual income tax. Businesses don’t all flee 

to States with no corporate income tax. But maybe it is different 

for this. 

Mr. GALLEGLY. Well, it might not be a bad idea for people to do 

things to create business in their States to lower the taxes. I would 

vote for that. 

Mr. DelBianco, your assessment? 

Mr. DELBIANCO. Thank you, Congressman. 

What you described, the notion of assessing the taxes strictly 

based on where the item is sold from, is essentially what brick-andmortar stores do today. They don’t have to ask where you live, even 

though you are taking the item home with you; they don’t have to 

calculate the rates where you live, they don’t have to file returns 

for other jurisdictions. They all presume that you are using it right 

where you bought it. And that simplicity is the same simplicity 

that ought to be applied if we decide to force 

out-of-State sellers to collect. So I think you are on to something 

there. We may need to turn this destination-based system upside 

down and take a hard look at an origin-based tax system. 

Mr. GALLEGLY. Mr. Kuttner, you have written on this. So if you 

could be brief enough that I could hear from the good Governor 

over there. 

Mr. KUTTNER. An origin-based approach is much more complex. 

It has a lot of added complexities that need to be thought through. 

Where is the origin? Is the origin for a company going to be where 

the good is shipped from, is it going to be where that corporation’s 

headquarters are located, if it happens to be in a different State. 

And the question of imports. Is anything that is imported to the 

U.S. sold from outside the U.S. therefore going to become 

tax-free because it does not have any origin inside the United 

States. That is the kind of questions that come up as one thinks 

about origin. 

Mr. GALLEGLY. But it would appear that the challenges that you 

have just presented might be a little simpler to work with than 48 

different taxes from 48 different States, just my own assessment of 

that, which I stay open with. 

Governor. 

Governor HASLAM. While I very much appreciate and sympathize 

with your view that let’s incentivize people to go to where the taxes 

are lowest, remember, States have a different mix of taxes. Some, 

like us, have no income tax so they rely more on sales tax. There 

is a variety of different approaches so you are going to be 

incentivizing folks to locate one place due to one particular tax. 

Mr. GALLEGLY. Thank you, Governor. 

I see my time has expired. Just a brief response to the Governor. 

Unlike California, we have got high taxes on everything—income 

tax, sales tax, property tax. You name it, we got it. 

Governor HASLAM. We find your State to be a great place to recruit. 

Mr. GALLEGLY. And many have been doing just that. 

Thank you. I yield back. 

129 

Mr. SMITH. Thank you, Mr. Gallegly. 

The gentleman from North Carolina, Mr. Watt, is recognized. 

Mr. WATT. Thank you, Mr. Chairman. I keep wondering when 

my friend from California is going to export himself from California. 

Mr. Kuttner, listening to your testimony, at least before I heard 

Mr. Henchman and Mr. DelBianco, I was tempted to think that 

maybe innovation is taking place so rapidly that you wouldn’t need 

the $1 million exemption or the hundred thousand dollar exemption that this bill does because you could just pull up an app and 

it would be done pretty simply. That is where we are headed, isn’t 

that right? 

Mr. KUTTNER. The technology is going to reduce the cost over 

time. As to where the threshold goes, that is a question for you to 

decide. 

Mr. WATT. Well, this is a good panel because you have got divisions. Mr. Kuttner doesn’t seem to have a dog in this fight. He can 

go either way. 

Mr. HENCHMAN. We sat in the right order, too. 

Mr. WATT. Mr. Henchman seems like he could go either way if 

you simplified the tax. You are not saying this is a bad idea. You 

are just saying it would be a lot simpler if you simplified the tax. 

Mr. HENCHMAN. It would be simpler if you simplify, yes. 

Mr. WATT. Mr. DelBianco says he doesn’t want this I don’t care 

what—even if you simplified the tax I guess you think this is a bad 

idea. 

Am I misstating where you are? You think it is fair the way it 

is? 

Mr. DELBIANCO. Congressman, I have done I think what I hope 

to be a thorough job explaining how unfair it will be to collect. And 

that is why at the end of my testimony I burned two pages describing the minimum simplifications, the true simplifications under 

which it makes sense to require remote companies to collect. 

Mr. WATT. All right. Well, let’s look at some of those simplifications. I guess some of these are on page 16 of Mr. Henchman’s testimony. You are talking about offering immunity to remote sellers 

who misapply sales tax holidays. Do we offer immunity to local 

sellers who miscalculate? I mean, we hold them responsible. Why 

wouldn’t we hold remote sellers equally responsible if we are trying 

to apply the law to everybody? 

Mr. HENCHMAN. Is that directed to me, Congressman? 

Mr. WATT. Yes. 

Mr. HENCHMAN. The rationale for that would be brick and mortar retailers just have to deal with the sale tax holiday that they 

are dealing with in their jurisdiction, whereas an online seller 

would have to deal with this year 17 State sales tax holidays. 

Mr. WATT. What I am trying to get to is an equal application of 

tax, regardless of who is responsible for it. I don’t think I would 

be more interested in giving somebody immunity from something 

that I am not giving, because then you are creating another disparity between in-State and 

out-of-State collectors, it seems to me. 

Do we compensate brick-and-mortar retailers for collecting the 

tax? 

130 

*Mr. Harper edited his response as follows: The figure I stated was, ‘‘It is 3.12 percent of what 

is collected.’’ That was an incorrect figure. The current rate for vendor reimbursement to collect 

sales tax is 1.31 percent. That reimbursement is available only to businesses that file a monthly 

sales tax return. 

Mr. HENCHMAN. Many States do, yes. 

Mr. WATT. You do. Do you compensate brick-and-mortar vendors 

in your State, Governor? 

Governor HASLAM. Compensate in which way? 

Mr. WATT. Compensate brick-and-mortar vendors who collect 

your tax; for collecting your tax. 

Governor HASLAM. No, we do not. 

Mr. WATT. Do you, Mr. Harper? 

Mr. HARPER. Yes, we do. 

Mr. WATT. How do you do that? 

Mr. HARPER. We had a study that was done, cost of collection, 

and the businesses in the State agreed to it and we put it in the 

State Code. It is 3.12 percent of what is collected.* 

Mr. WATT. So you think that would be a fair addition to this bill? 

Mr. HARPER. Yes. There are some other things I would like to see 

in this bill for safeguards. But yes, vendor compensation as agreed 

to between the business community and the States would be good. 

Mr. WATT. What about require local jurisdictions to align geographically with five-digit zip codes? Do you require that of brickand-mortar retailers? 

Mr. HARPER. In the State of Utah, we have a jurisdictional database, yes, and you go through and based on where the transaction 

occurs, that is where the tax is imposed. And I think that would 

be another safeguard for all States to have. 

Mr. WATT. But if you are going to a State opting for one of these 

three options, as I understand this bill to do, what sense would 

that make? 

Mr. HARPER. What it does is it allows each State to maintain 

control of their own State tax policy and to choose one of the options that best fits their State. 

Mr. WATT. But once they choose one of those three options, aren’t 

they basically foregoing all of the other variables within the State? 

Mr. HARPER. It depends on what amendments are made, but in 

the present form they could be locked in. But I think that is still 

an item for discussion. 

Mr. WATT. All right. I think I am confused enough, and I will 

yield back. 

Mr. GOODLATTE [presiding]. The gentleman yields back, and the 

Chair recognizes the gentleman from Virginia, Mr. Forbes, for 5 

minutes. 

Mr. FORBES. Thank you, Mr. Chairman, and thank all of you for 

being here. This is a very important issue, and we appreciate your 

expertise. 

Governor, we are all sympathetic with this issue. We are trying 

to work through the logistics with the best piece of legislation. One 

of the questions we have is I know that your State is one of a few 

States that uses the physical presence standard also for the imposition of business activities taxes. This Committee lauded that approach last year when it voted favorably for H.R. 1439, which was 

the Business Activity Simplification Act. That confirms the Quill’s 

131 

holding and applies to corporate income and other business activities tax. I don’t know if you had time to review that bill before coming or not to see if how we reconcile that with this particular piece 

of legislation. 

Governor HASLAM. I am sorry, Congressman, I have not. 

Mr. FORBES. And I wouldn’t expect you to. 

Mr. Henchman, I think you testified on that bill when it was 

here. Can you reconcile the two, this legislation with that? 

Mr. HENCHMAN. Sure. Although it is an issue that you should be 

thinking about, the physical presence standard, as I mentioned in 

my testimony, is a cornerstone of State taxation, not just for sales 

tax but for individual income tax and corporate income tax for a 

long time, and the BASA bill and the Mobile Workforce bill seek 

to enshrine different components of physical presence for those two 

tax standards. 

The way I, at least for myself, relate it to sales tax is the tax 

that we are dealing with here is one that is imposed on and has 

to be paid by the consumer, which does have a physical presence 

in the State, and the economists who work in my office tell me that 

they bear the economic burden of the tax, that while businesses 

collect it and they bear some administrative costs associated with 

it, the economic burden is passed forward to the consumer. The 

consumers do have physical presence in their State. So that is how 

I would reconcile it. 

Mr. FORBES. Mr. Harper, what do you believe is the appropriate 

small seller exception threshold? Does this bill get it right? And is 

that something that we have pulled out because it is politically acceptable or is there some substantive reason why we would pick 

that particular dollar amount? 

Mr. HARPER. This bill has a million dollar small seller exemption. 

The Senate bill has a $500,000. As we have talked about it with 

Streamlined Sales Tax, we believe that for the remote sales 

$500,000 is probably appropriate. But it is up to Congress to go 

through and weigh that out and come up with the final factor. 

Mr. FORBES. Mr. Henchman, one of the concerns that some people have about this bill is that the small seller exemption carves 

out remote small businesses with less than a million dollars in 

sales into the State. It actually treats out-of-State small businesses 

much better than in-State because the in-State business still has 

to collect and remit the tax while the out-of-State seller does not. 

Is this a problem to you or how do you reconcile that? 

Mr. HENCHMAN. Well, that is non-neutral treatment. Maybe if 

Mr. Watt had more time, that is what he might go to next, because 

that is a differential treatment between remote sellers and people 

within the State. 

The list of possible simplifications, of course, don’t all need to be 

done. Adopting one might obviate the need for another. So if we 

have a really simplified system, maybe we don’t need a small seller 

exception. But if we are to punt on simplification, maybe we would 

need a really high level for a small seller exception. However, I 

don’t know what the magic number is. There is no economic policy 

that dictates what the magic number is, but I think that is the balancing approaching the Congress should use. 

132 

Mr. FORBES. Mr. DelBianco, I am going to let you address any 

of those questions in your response, but also I would like for you 

to address—there is a concern that this is putting small mom-andpop businesses in a very difficult position and that they are going 

to go out of business. How do you address that concern if we don’t 

do something to 

offset this? 

Mr. DELBIANCO. I couldn’t agree more. Small 

mom-and-pop businesses on Main Street have been getting clobbered by Wal-Mart, Target, Amazon for over a decade now. And 

that impact has driven them as the last best hope to turn to the 

Internet to try to sell excess inventory, to try to reach customers 

that maybe never darken their doorstep or customers that bought 

once in their store and then traveled home. So the Internet turns 

outs for small business to be perhaps the only way they can survive 

against the competition that I spoke of. 

Just as we are counting on those small businesses to create the 

jobs and help our economy recover, this bill would impose on those 

small businesses the obligation to collect not just for the only State 

that they are in now, but for all 46 States and all 9,600 jurisdictions. That, to me, is the ultimate opposite thing we should do to 

small businesses who use the Internet to compete and survive. 

Mr. FORBES. Mr. Chairman, my time is out, and I yield back. 

Thank you, gentlemen, for your expertise. 

Mr. GOODLATTE. I thank the gentleman. 

The gentlewoman from California, Ms. Lofgren, is recognized for 

5 minutes. 

Ms. LOFGREN. Thank you, Mr. Chairman. This is a very helpful 

hearing. I think all of us want to make sure that we nurture small 

businesses, whether they are on Main Street or whether they are 

an Internet company. 

I met recently with a woman who lives in my district who had 

retired from the tech industry she worked for. Her early twenties 

son got cancer and he didn’t have any health insurance. She spent 

everything she had to save his life. And now she is running a little 

small business out of her living room. She thought she would be 

retired, but she used all her retirement to save her son’s life. So 

I am thinking of her and people like her that are running little 

businesses out of their living rooms to get by and how is this going 

to impact them, as well as the empty store fronts that I also worry 

about. But I am mindful that I think the Big Box stores have done 

more to the little small businesses on Main Street probably than 

the little tiny Internet businesses. The Big Box stores, along with 

Amazon. 

As I look through this, page 14, Mr. DelBianco, and page 16, Mr. 

Henchman, are very helpful because they are giving us things to 

think about if we are going to move forward on this. And you are 

right, maybe we don’t have to do all of them. 

But here is one question I had, Mr. Henchman, on your suggestion that we establish a single tax return for all taxing jurisdictions. With that are you suggesting that if it is 8 percent in California, it should be 8 percent in every city and county? What is 

your suggestion? 

133 

Mr. HENCHMAN. No. Just that there be one return that you have 

to fill out. 

Ms. LOFGREN. I see. 

Mr. HENCHMAN. So, for instance, California, where I think—- I 

am originally from California—maybe just shy of 100 different 

sales tax jurisdiction, rather than somebody selling into California 

repeatedly having to fill out a hundred different forms for all 

those—— 

Ms. LOFGREN. I see. Because our voters have approved sales tax 

increases, primarily for transportation. Also, our county hospital. 

And we can’t overturn what the voters did. 

Mr. HENCHMAN. Each one of those is a new tax jurisdiction in 

California. 

Ms. LOFGREN. Have you looked at the software that Mr. Harper 

described? 

Mr. HENCHMAN. Yes. It is expensive. I don’t know how much of 

a budget your constituent with the living room business has for 

software. 

Ms. LOFGREN. None. 

Mr. HENCHMAN. But it is expensive. Now that may change as 

technology goes forward but, of course, the simpler we make sales 

tax systems by setting Federal standards, the cheaper that would 

be. 

Ms. LOFGREN. We could make that available for free. We could 

require the State to make that available for free. 

Mr. HENCHMAN. Right. 

Ms. LOFGREN. Mr. Harper, is this software available 

online so that the Members of the Committee can go try it out 

and see for ourselves? 

Mr. HARPER. Yes. We have also had a number of demonstrations 

here on Capitol Hill. 

Ms. LOFGREN. But we are all busy. We don’t necessarily go to 

those. Can you give us the sites so we can play with it and look 

at it? 

Mr. HARPER. I can provide that to you for each of the different 

companies. 

Ms. LOFGREN. Thank you very much. 

I am also interested in how we arrive at, as other members have 

mentioned, the small business exemption. And I think that the dollar amounts in the bills are somewhat arbitrary. Why wouldn’t we 

use what the Small Business Administration says, for example, or 

what the IRS says is a small business instead of just the sort of 

arbitrary numbers? 

Mr. HARPER. I think, if I may, the reason for the $500,000 and 

the million is because that is what Members of Congress, both of 

the House and Senate, have come up with. So we have responded 

to that rather than the other standards that are out. 

Ms. LOFGREN. I guess if we are going to move forward on any 

of this, I would want to have some further examination of that because it seems to me the SBA’s whole reason for living, I mean existence, is small businesses. And they have studied what is a small 

business in a particular type of field. We should be guided I think 

by that or maybe the IRS. I am not critical of my colleagues who 

have introduced these bills, but I think, as Mr. Conyers said, these 

134 

are starting points not ending points when a bill is introduced and 

maybe we should get some guidance from either the IRS or from 

the SBA on what in fact is a small business for the exemption. 

And I would just close, sometimes we think a solution is going 

to solve problems and it won’t. I was in local government for 14 

years and I know that revenue is a problem. At the time I was in 

local government we talked a lot about catalog sales more than 

Internet sales. But when you buy something online, you have to 

pay postage. And if it is not a high-dollar item, the postage is probably as much as the sales tax would be in a lot of these States. So 

to think that the sales tax application is somehow going to—it is 

not just the sales tax. It is the availability of inventory in some 

cases. 

It upsets me so much that brick-and-mortar book stores are closing. I love to go to book stores. And yet if you go, you can’t get the 

book you want because the inventory is insufficient and you end up 

buying things online because as retail gets hit, the inventory decreases and it is sort of a death spiral. So it is not just Internet 

sales. 

Anyhow my time is up, Mr. Chairman. I thank you for this hearing. And I think this is the beginning, not the end, of our inquiry. 

Mr. GOODLATTE. I thank the gentlewoman. It may not be the beginning of the end, but it may be the end of the beginning. 

Ms. LOFGREN. I meant the beginning of the inquiry. 

I ask unanimous consent, Mr. Chairman, to put into the record 

a listing of the businesses who sent us letters—the letters are too 

voluminous—in opposition to the bill. 

Mr. GOODLATTE. Without objection, the listing will be made part 

of the record. 

[The information referred to follows:] 

135 

Mr. GOODLATTE. And the Chair will recognize himself for 5 minutes to say that the gentlewoman is quite right, this issue did not 

start with the Internet. In fact, the Supreme Court decision that 

articulates the standard was a mail order case that pretty much 

predated any significant business being transacted on the Internet. 

And there are also telephone sales. 


75308A.eps
136 

So it raise a question here that hasn’t been addressed by any of 

you yet and I am wondering if any of you are concerned about the 

fact that this advantages foreign businesses. We talk about States 

not collecting sales taxes for businesses in other States, but what 

about Canada, Mexico, Caribbean Islands, Hong Kong, China, 

India? You can buy goods from a couple hundred different countries 

around the world and those countries, to my knowledge, are not 

going to be required and this law is not going to reach a requirement that they have to collect sales tax for the State in which the 

consumer is receiving the product. 

Do any of you have a comment on that? 

Mr. DelBianco. 

Mr. DELBIANCO. Thank you, Mr. Chairman. You are absolutely 

true. If a consumer were bound and determined to find a way to 

avoid paying sales tax on that digital camera—— 

Mr. GOODLATTE. He doesn’t have to be bound and determined. 

He could be going on the Internet and seeing an ad from a company in Canada and saying, Hey, I like their price and I am going 

to buy it from them. 

Mr. DELBIANCO. So it is absolutely true, consumers, as Congressman Lofgren said, consumers go online for the variable choices 

they get, the lower prices, completely aside from sales tax. They 

don’t actually go online to save sales taxes. There is no data that 

show that. In fact, there is more data to support the fact that people go online to research their purchases and then use that online 

research—— 

Mr. GOODLATTE. Anybody want to respond? I have got a limited 

amount of time. 

Mr. Harper? 

Mr. HARPER. Yes. This bill deals with State tax authority and the 

10th Amendment. What you are talking about is a very valid issue 

but it is one that Congress has authority to deal with tariffs and 

imports and all the other dealings. 

Mr. GOODLATTE. Absolutely right, but it may have the unintended consequence of enhancing—if you think a business outside 

a State isn’t required under current law to collect sales taxes for 

that State, it may have the unintended consequence of enhancing 

the competitiveness of businesses outside of the United States. 

Mr. HARPER. I am not going to disagree with that. 

Mr. GOODLATTE. Let me ask you this. One of the concerns I 

have—and I am completely sold on the fairness issue. The gentlewoman from California makes a good point about offsetting cost of 

the shipping and handling charges that you encounter often on the 

Internet, but there are lots of different advantages and disadvantages of each type of way of doing business. And the fact that a 

brick-and-mortar business is required because they have a nexus 

with the State to collect that tax and a business outside of the 

State selling into the State doesn’t have that nexus and therefore 

isn’t required to collect it is unfair, and finding a way to address 

that is a desirable thing. 

On the other hand, that business outside of the State—and I will 

direct this to Governor Haslam—it doesn’t have any representation 

in the State in terms of the whole process that one undergoes to 

collect the tax. And I am not sure we have enough uniformity in 

137 

the legislation that we are holding this hearing on to say with confidence that a small business outside of your State could, A, feel 

confident they were going to be treated fairly by a State that might 

be aggressive in pursuing collection of taxes. 

We encounter this with business activity taxes and other things 

all the time, States making businesses out-of-State having to dance 

on the head of a pin to comply with their laws. What recourse do 

these out-of-State businesses have if they don’t like the particular 

laws that your legislature or a legislature of another State might 

enact which would require them to comply with that requirement? 

Governor HASLAM. Ultimately, it is the free-market system. And 

they have customers in those States who are saying we desire their 

product. 

Mr. GOODLATTE. But the businesses in Tennessee aren’t operating under the free-market system. They are operating under the 

fact that they are represented by a local member of the State legislature who goes to Nashville and casts a vote on whether or not 

it is a fair way to make that business in Cookeville or wherever 

collect taxes for them. They don’t have that representation if they 

are in Richmond, Virginia, or Indianapolis, Indiana, or anywhere 

else in the country. 

Governor HASLAM. And I appreciate the shout out for Cookeville. 

I would say that is not really an Internet versus retail issue. That 

same thing could be true of a retail chain that had one store in a 

State and their headquarters are somewhere else. I don’t know 

that that changes with this argument. 

Mr. GOODLATTE. Well, the other concern I have about this is that 

I think we are on a road toward making progress on cooperation, 

but I don’t think we are there yet. We have some States that have 

joined together with the Streamlined Sales Tax provision. But this 

law apparently lets a State that doesn’t join into the Streamlined 

Sales Tax, which may have one definition of what is taxable, to 

nonetheless step in. And some of the largest States in the country 

are sort of flexing their muscles with this legislation—California, 

Texas, New York, saying, We want to able to do this, but we also 

don’t want to change our sales tax rules to have some kind of uniformity for these interstate transactions that are taking place. And 

that is what comes back on the shoulders of the Congress, because 

we have the ultimate responsibility for writing laws related to 

Internet commerce, and doing so in a fair manner not only for 

those brick-and-mortar businesses but also for those small businesses that are at this point in time I think still confronted with 

a very complex, many thousands of multitudes more complex than 

a business in your State or another State knowing what that 

State’s requirements and only having to meet the requirements of 

that State. 

So I commend the author of the legislation and I commend all 

of you who are trying to find a way to simplify it, but I would urge 

you to work further to bring about more simplification in terms of 

a definition. Any State that wants to participate in this, they ought 

to agree on one definition. I would prefer to see one rate. Three 

rates is better than 9,000-some rates. But I would prefer to see 

something that made it simpler. 

138 

And let me say this with regard to small businesses. I am concerned about exempting them from this. Your local small businesses in Tennessee are not exempt from collecting the tax. And 

businesses out of State, if there is a million dollar-cap, or some 

other cap, why would you not want to grow your business beyond 

that. And when you do that, you are going to face an artificial penalty for doing so and having to change your system and collect a 

tax that you weren’t having to collect before. 

If we are going to do this, I think we ought to find a way to make 

it work and make it work for everybody. 

At this time the Chair would recognize the gentlewoman from 

Texas, Ms. Jackson Lee, for 5 minutes. 

Ms. JACKSON LEE. Mr. Chairman and the Ranking Member, I am 

thankful for this hearing and thankful to have the opportunity to 

plunge into I think an issue, as the gentleman from Virginia has 

mentioned, has been discussed for a number of years. Many of us 

come with backgrounds from local government, the city council in 

the City of Houston, after serving as a municipal judge. It is not 

a city manager form of government so in fact we write budgets and 

seek opportunities for providing revenue to our constituents or for 

services. Likewise, the State of Texas has a unique structure as 

well. And I think it is important, Governor, to note that Texas 

brags that it does not have an income tax and therefore is in the 

recruiting business. 

But I would make the statement as well that States, except for 

the politics of it, have other unique measures. There are individual 

States with casino gambling of all forms, and certainly that goes 

to the nature of the constituency. There are lotteries that have exploded across America. And certainly there are opportunities there 

where States continue to look. It is a curious situation for me because I come from a State where we have had the opportunity to 

receive $40 million in Medicaid dollars that were rejected. So it 

makes it very difficult when you think of opportunities to secure 

moneys that are rejected, that you want to do something that may 

cause some concerns among your small businesses. 

So in order to educate myself a little better, I am going to ask 

Mr. DelBianco and I will ask some of the other members as well 

an extensive question, if I might. First of all, I think it is important 

that we argue for tax simplification. And the underlying bill seems 

to strike a cord of possible overlapping confusion. And I think it is 

correct that we need to find a way to handle this, if by chance this 

bill passed and it is making it way through the deliberative process. 

But the current State system is a morass of over 9,600 taxing jurisdictions. Many zip codes cover multitude taxing entities. An op 

ed in today’s Wall Street Journal cites the Dallas-Forth Worth airport that in the State of Texas as being in six separate taxing jurisdictions. In addition, the definition of taxable goods varies from jurisdiction to jurisdiction. In one, a Snicker’s bar is taxed as a candy 

while in another it is taxed as food because it contains peanuts. 

It is obvious to me that even if we were to adopt the bill before 

us, we would still have a long way to go. What responsibility does 

the Federal Government have to businesses to ensure a seamless 

and inexpensive transition to this new tax collection system, if 

139 

adopted? And then would you also comment on the fact is this a 

new tax and would the Quill case be overturned. I hope others are 

listening because I am going to go to some others for that question. 

I think my last point that I would like you to comment on is as 

I read the bill, it seems like it says $100,000 dollars in sales inState, and collectively, a million dollars. 

I would raise the concern of the lady in the living room with her 

business, but also a sufficiently small business that may have $1.2 

million in business and is a small business and it would be an 

enormous burden to try and keep up with this new structure. 

Would you comment, my friend? Thank you. 

Mr. DELBIANCO. Thank you, Congresswoman. First, you asked 

about the path on simplification. As Chairman Goodlatte pointed 

out, the bill before you only has three elements of simplification, 

whereas Congress has considered as many as 16 minimum requirements. And it is Congress’ job to impose bold and robust minimum 

simplification requirements before it sweeps away the protection of 

physical presence. 

Within this bill, two of them are fundamentally flawed. On definitions, this bill permits each State to have its own definitions. It 

doesn’t even require all the States to use the same. This bill also 

says that each State can provide its own software to each and 

every seller. So imagine the seller having to take 46 different 

pieces of software, because this bill doesn’t require that they all be 

the same. 

You also asked about is it a new tax. As we have discussed earlier in this hearing, it is absolutely a new tax burden on businesses 

to collect it. The tax is due and payable from the business. It isn’t 

due and payable from the consumer. In your State of Texas, your 

State tax collectors boldly said that Amazon has had a physical 

presence in Texas. So therefore you should have been collecting for 

the past couple of years. Your State sued Amazon for $290 million. 

Amazon couldn’t turn around to you and say, Well, the consumers 

didn’t pay it so we don’t have to pay it. Because the tax is due from 

the retailer, in all cases, with penalties and interest. 

Fortunately, your State used that as a bargaining chip to get 

Amazon to keep its distribution center in Texas. So under the physical presence rule we have today, Amazon will begin collecting in 

Texas next year, and there goes a lot of what you thought was the 

uncollected sales tax. 

So does it overturn Quill? In a way, it completely blows away 

Quill’s physical presence standard. Quill always said that Congress 

has the right to do that. We know you have the right to do it, but 

is it the right thing to do. 

Ms. JACKSON LEE. Can I just ask the Governor, do you think the 

exemption is high enough for small businesses and do you hear my 

underlying premise that it is a strange number because you could 

be small and go over the limit? 

Governor HASLAM. Right. I don’t know that I am qualified to define what that is. Like I said, one bill said $500,000. One is at a 

million. I do hear your underlying premise. It is worthy of discussion. Obviously, 

140 

Internet-based businesses are a little less labor intensive. So you 

have to be a pretty large Internet business to be over a million because of the smaller size of employees. 

Ms. JACKSON LEE. Just a tiny question. You believe in states’ 

rights. Isn’t this a case of nullifying State laws? 

Governor HASLAM. No. Actually it is just the opposite. I think 

what you are doing is giving States the rights to force businesses 

to collect that tax that is already due them. 

Ms. JACKSON LEE. Well, I thank the Chairman for his indulgence. I read it differently. And I think we will have a long time 

for discussing and reviewing this matter, Mr. Chairman. 

Mr. GOODLATTE. I thank the gentlewoman. 

The gentleman from Texas, Mr. Poe, is recognized for 5 minutes. 

Mr. POE. Thank you, Mr. Chairman. Gentlemen, thank you for 

being here. 

As mentioned by my colleague, Ms. Jackson Lee, in Texas we 

don’t have an income tax. We are proud of it. And if any public official advocates an income tax, they are a former public official. Republican, Democrat, or Independent. So our main source of revenue 

is property taxes and the sales tax. Businesses collect sales tax. We 

have a pretty good system, I believe. It has been worked on for a 

great number of years as to the exemption, the exceptions, and who 

pays and how it is collected. 

I think States ought to have the right to collect a sales tax. And 

the Federal Government should not prevent them from collecting 

a sales tax. I think it is a states’ rights issue, as you mentioned, 

Governor. 

We have heard the stories about Best Buy. So this weekend I 

went to a Best Buy in Houston, Texas, and talked to the folks that 

worked there. I learned a lot of things. First of all, unfortunately 

50 Best Buy stores have gone out of business this year. One of the 

reasons, they say, is because they are competing with someone that 

is not in Texas. And they pointed out the fact that customers come 

in, they get this free advice about all these electronic gizmos that 

I know nothing about, and as they are walking out the store they 

order it online and reap the benefits of the expertise of the store 

that is in Houston and they get this big monster TV sent to them. 

There are other stories about—because they don’t pay the tax. 

They save that 81⁄4 percent and they aren’t paying that tax and 

they get it for a bargain. That kind of bothers me that people 

would do that, but they do. 

And we have the problem also of small businesses. I mean, am 

talking about small business. It is one store, mom and dad or cousins or whatever own one store. 

And they have to compete with people online. It costs more to 

run a one-business store operation than it does a chain, of course, 

and there are events that take place with these small businesses 

that are out of everybody’s control, including the government. We 

call them hurricanes. Just since I have been a Member of Congress 

in my congressional district, we have had the experience of 

Katrina, Rita, Humberto, Gustav, and Ike. When Ike came through 

Dayton, Texas, it destroyed, eliminated businesses to the ground 

because of the winds and the rain. It is an expense that they have 

to incur to rebuild that small business. Western Auto in Dayton, 

141 

Texas, is a perfect example. I don’t know how many Western Autos 

there are in the country, but there is one less in Dayton, Texas, 

until they rebuild it. All of those are because they have a presence 

in the community. Going back to Best Buy, they have a community 

outreach employee that is working with the community, doing 

things for the community, donating money and time to Big Brothers, Big Sisters, all these organizations because there is a presence. 

So but I understand the online operation and why it works and 

why it is successful, so, Governor, I want you to, if you would, before you drink that glass of water, expand on why you think we 

need to have the ability, States need to have the ability to collect 

a tax that is already due the State as opposed to, as some have 

said, this is a new tax. Can you explain the difference between the 

concept this is a new tax versus States are just collecting the tax 

that hadn’t been paid for years because they weren’t allowed to collect it. Can you expand on that please, sir? 

Governor HASLAM. Right. Well, I mean, as we have said, it is a 

tax that is due, and I respect the gentleman on the other end, but 

when Amazon is sued, I don’t remember the exact, sued by the 

State of Texas, I am betting that they sued them for not collecting 

that tax, I am betting that is what they sued them for. So it wasn’t 

the tax that they were due, it was that they weren’t collecting that 

tax. The Quill decision gave Congress the right to specifically address that, and to your point, you know, I keep coming back, it is 

basically an issue of fairness. It is some people pay it and some 

don’t, and, again, as a former mayor, when that Western Auto went 

away, you didn’t just lose the sales tax, you lost the property tax 

that it is paying—— 

Mr. POE. And jobs. 

Governor HASLAM [continuing]. For basic services, and jobs. The 

same thing with that Best Buy. It ultimately comes down—I understand all the issues that have been talked about. It is very complex. But it is too big of an issue of fairness not to address. 

Mr. POE. And you don’t buy your boots online? 

Governor HASLAM. I don’t buy my boots online. 

Mr. POE. Neither do I. 

Governor HASLAM. We have a lot of great stores in Nashville, 

though, come on down. 

Mr. POE. So do we in Texas. Mr. Chairman, I will yield back the 

balance of my time. Thank you. 

Mr. MARINO [presiding]. Thank you. The Chair recognizes the 

gentleman from Georgia, Congressman Johnson, for 5 minutes. 

Mr. JOHNSON. Thank you, Mr. Chairman. I would respectfully 

disagree. I think this is a new tax, and it is not simply a tax that 

is due. I think technically what we are doing here is imposing or 

we are seeking the ability of States to have the authority to impose 

a sales tax on Internet, on the sale of Internet goods. So it is a new 

tax for those who purchase their goods on the Internet and who 

don’t, up to this point, have to pay taxes on that. I don’t think 

there should be any disagreement with that. 

Am I correct? Anybody disagree? Yes or no. 

Governor HASLAM. I disagree. 

Mr. JOHNSON. You disagree, okay. Well, I tell you. I want to say 

right now that I am in favor of the Marketplace Equity Act of 2011. 

142 

Having been a local elected official, a county commissioner, Chair 

of the Budget Committee, you know, I understand the unfunded 

mandates that have to be met that are imposed by the Federal 

Government, I understand the dwindling amounts that are collected through property taxes and also sales taxes on brick and 

mortar, and so as a fundamental issue of fairness I think it is only 

right that our, everywhere from our big box retailers down to our 

small mom and pop operations should be treated fairly, should not 

be discriminated against in tax law based on the fact that they 

have a brick and mortar location and a presence in a particular location. So I am in favor of this legislation, but I feel the specter 

of Grover Norquist in the room, and so therefore I feel compelled 

to ask, Governor and Representative Harper, whether or not you, 

too, as Republican State elected officials have signed on to the Grover Norquist ‘‘read my lips no tax’’ pledge? Have you signed on to 

it, Governor Haslam? 

Governor HASLAM. I have not. 

Mr. JOHNSON. Okay. And how about you, Mr. Harper? 

Mr. HARPER. I have not because I am accountable to the people 

who elect me, not to Grover Norquist. 

Mr. JOHNSON. Well, I fully agree. 

Mr. Haslam, how come you didn’t sign? 

Governor HASLAM. In the end I think people judge you by what 

you do. In the State of Tennessee since I have been Governor we 

have cut taxes four times. I think actions speak louder than words. 

Mr. JOHNSON. And, Governor, I know that you have said you disagree with me that this is not a new tax, and we could get caught 

up in semantics, but you did say that $400 million in lost tax revenue—— 

Governor HASLAM. Right. 

Mr. JOHNSON [continuing]. Is incurred by the State of Tennessee. 

$20 billion for the Nation. 

Governor HASLAM. Right. 

Mr. JOHNSON. I can think of a whole lot of great things like police, fire, public safety, these kinds of needs that local governments 

are deprived of that tax money because of our inability, your inability to tax Internet sales, and that is why I support this legislation, 

but, you know, if Grover Norquist were to be sitting right here and 

he made the observation that, you know, by aiding or by supporting this act that you would be aiding and abetting the States 

in their ability to impose a tax increase on people who are not used 

to paying taxes on Internet sales, and therefore it is against the 

pledge, how would you respond to that? 

Governor HASLAM. I would say to Mr. Norquist, I respect—I don’t 

know what he would say on this, so I won’t put words in his 

mouth, but my answer to that from whoever said it would be, no, 

we are trying to help a Nation of people right now that are breaking the law by not paying the taxes that they owe. 

Mr. JOHNSON. Is it breaking the law? 

Governor HASLAM. You don’t pay a tax that is owed. 

Mr. JOHNSON. Or is it skirting the law that there is? 

Governor HASLAM. Well, we will quibble about that later, but—— 

Mr. JOHNSON. Okay. Yes, sir? 

143 

Mr. HARPER. And in that same vein, we have done surveys in the 

State of Utah, nearly three-quarters of the people in the State of 

Utah when they buy online or via catalog believe that they are already paying the sales tax, the use tax that is due. They are unaware of the fact that it is not being collected. 

Mr. JOHNSON. Well, I guess when they become aware of it they 

will probably say read my lips, no new taxes. But maybe not. 

I will yield back. 

Mr. MARINO. Thank you, sir. The Chair now recognizes the gentleman from Iowa, Congressman King, for 5 minutes. 

Mr. KING. Thank you, Mr. Chairman. So I am here listening to 

the testimony, and particularly that of Judge Poe from Texas, and 

he said do you buy your boots over the Internet. I had to stop and 

think for a minute, and I looked at the label of my jacket on the 

suit I have on, and I thought, well, I really do. Actually every suit 

in my closet is from Tennessee, and what I do is I go on the Internet, and I look at the inventory down at my local clothing store in 

Dennison, Iowa, Reynold’s Clothing Store, and I call them up and 

say can you get me a couple of suits that meet this, and they have 

got my measurements and they order them out of Tennessee, and 

they do whatever tailoring is necessary to fit my figure, and they 

put it on UPS and ship it on up to Kiron, Iowa. Now, so I think 

I met all those standards, and I hope I pleased the Governor of 

Tennessee in the process. 

Governor HASLAM. We are very grateful. 

Mr. KING. And so this picture of what is going on with the free 

enterprise side of this, I have a letter that I am going to ask to be 

introduced into the record, but it is from Mark Jorgensen, and he 

is a co-owner of Carpet World Flooring in Fort Dodge, Iowa. There 

are many statements that have been made about brick and mortar 

and retail businesses and the costs and the point of the property 

tax that gets paid because of Main Street businesses. And he goes 

through that argument as well, like we have heard from the witnesses and other narratives. But he puts it in a fairly compressed 

way. He says the customer comes into my store to buy some hardwood and he wants to install it himself. We show him the samples 

and quote him $3 per square foot. He goes home and gets on the 

Internet and he is quoted $3.15, a higher price, but he buys it online anyway because the sales tax takes the price that he has to 

charge at the brick and mortar store to $3.21. I don’t know what 

the freight works out, that is not in this narrative, but this little 

margin that turns out to be a 7 percent advantage that he has because of the sales tax in Iowa is generally 7 percent, and here is 

where he makes the point. He says my competition has not used 

his money to compete with me, he has used State of Iowa sales tax 

money to compete with me. That is the point I would like to emphasize here at this hearing is that we are all about competition, 

competition has made America great, free enterprise is one of the 

essential pillars of American exceptionalism. But when government 

competes or if you are in a position where you can use sales tax 

money as a competitive or comparative advantage, then you end up 

with people buying things over the Internet to avoid the tax purposes. So I just—but this has been examined really well by the witnesses and by the other members of this panel. So I have this other 

144 

thought that I wanted to inject into this, and I want to pose a question to the panel. 

First, Mr. Chairman, I should ask unanimous consent to introduce this letter into the record. 

Mr. MARINO. Without objection. 

[The information referred to follows:] 


75308B.eps
145 

Mr. KING. Thank you, Mr. Chairman. 

This other thought is this, that I am one of those people that believes that I want the IRS out of my life. I want them out of the 

interference business of free enterprise decisions completely. I don’t 

want to have to look at some corporate structure and see they have 

a whole floor of tax lawyers up there. I don’t want to hear again 

from my oldest son who owns the second generation now of King 

Construction tell me the narrative about talking about a business 

proposal with an individual whose business background complements his very well, for 90 minutes they discussed a business 

proposal that at the end of that time David King said do you realize our entire discussion about this business venture has been 

about taxes, the IRS, tax avoidance, and how we are going to incorporate it into our business model? Couldn’t we have spent that 

time a lot better planning business and figuring out how to provide 

a profit or service or good that has a marketable advantage? And 

so you will all know then by now that I am for a national sales tax, 

that I want to eliminate the Federal income tax, and in doing so 

there is no necessity for the IRS. We can find a way to collect this 

Internet sales tax without the IRS, and—but here is the problem 

I have. If we go forward with a tax situation as some of the opponents of this bill have and if we are not able to collect the simplest 

thing, which is the sales tax on Internet sales, how in the world 

could we ever, then, have an Internet sales in the world of a national sales tax? And I turn to the Governor to see if he would like 

to respond to that because you are a State that has a version of 

the income tax, and I appreciate it. 

Governor HASLAM. Right. I mean, that—I won’t go into the whole 

national sales tax debate, but I think that, I mean, if you were 

there, obviously that would make, that would prove, that would 

make this argument even more sensitive. So I do think, you know, 

your basic argument about the retailers who are using the States’ 

money to compete is really what we are talking about. 

Mr. KING. I thank you, Governor. I turn to Representative Harper and ask if he would have a comment on the point that I made. 

Mr. HARPER. Yeah. I personally am in favor of a consumption or 

national sales tax and, you know, doing away with the others, but 

that is just my opinion, not speaking for Streamlined Sales Tax. In 

some of the versions of the national sales tax it appears, though, 

that the States would be collecting on behalf of the Federal Government, remitting to the Federal Government. That is just an observation that I have. 

Mr. KING. Of course there would be a fee that would go back to 

the States that would compensate them for their trouble, and we 

would make sure that that was there. 

Mr. HARPER. There would be collection compensation. 

Mr. KING. Pardon me? 

Mr. HARPER. There would be a collection compensation. 

Mr. KING. Yes. That is my plan anyway. I thank all the witnesses. I see the light has turned red, and so I would yield back 

the balance of my time. 

Mr. MARINO. Thank you. The Chair recognizes the gentlewoman 

from California, Congresswoman Chu, for 5 minutes. 

146 

Ms. CHU. Thank you, Mr. Chair. Before I came to Congress I was 

on the California Board of Equalization, which is the Nation’s only 

elected tax board, and our primary responsibility was, in fact, to 

collect sales tax. During the years I was on this board I saw a 

steady decline in sales tax revenue, and today this loss will cost 

our State $1.9 billion at a time when the State is facing a potential 

$6.1 billion in cuts in November, most of which would be absorbed 

by K-12 and higher education. So this is serious business. 

And one thing I know is that the current system doesn’t work. 

The current system relies on individual compliance to pay their use 

tax or for the State entities to do auditing. A very inadequate 

means to address this. So it is clear that we must pass legislation 

such as the Marketplace Equity Act, of which I am a cosponsor, so 

that States can collect all the sales tax they are owed, and I want 

to commend Chairman Smith for calling today’s Judiciary hearing 

on this bill, but I hope we can work to get this bipartisan bill to 

the floor before the end of the year. 

Let me first talk about the tactic of getting individuals to try to 

pay their use tax. Some panelists have talked about the burden for 

small remote sellers of collecting the sales tax for the consumer, 

but under current law the burden falls on the individual. To ensure 

compliance, a consumer would have to keep a running list of all the 

online or catalog purchases they make in an entire year, from a 

pair of cheap flip flops to diamond earrings. They would have to 

record the description of the purchase, the price and the date of the 

purchase. In many situations consumers have to submit an additional form and a separate payment to ensure compliance. 

Mr. Kuttner, can you explain in more detail why businesses, 

even small businesses, are able to do this more efficiently than individuals can? 

Mr. KUTTNER. It goes back to what you started off with, which 

is how—— 

Mr. MARINO. Sir, is your microphone on? Could you pull it a little 

bit closer? 

Mr. KUTTNER. It is, but my voice isn’t on. The current sales tax, 

your board, your predecessors on it years and years ago could have 

started off with the idea of not having businesses do it, they could 

have had the idea of every taxpayer keep track of these things, but 

that would have been an incredibly inefficient approach, and so 

that is what the notion of having the businesses doing the collection does. It brings in a degree of efficiency and it makes it easier, 

and that is why from the little data that we have about, only about 

in those States which do have an effort to try to put sales tax on 

their, use tax on their income tax returns, only about 1.1 percent 

of households are going ahead and doing it. So clearly at the household level it is an incredibly burdensome tax, and so the efficient 

solution regardless of whether, how you want, what the tax should 

be, the efficient solution is to get the companies, the sellers which 

have scale economy to use that scale economy to realize the efficient result. 

Ms. CHU. Right. Governor Haslam and Representative Harper, I 

wanted to talk for a moment about the inefficiencies of auditing, 

and you may have encountered that. Of course, we call this tax 

that people owe use tax, but I can attest to the fact that there is 

147 

a complete lack of compliance with this use tax obligation by State 

residents, and even though in our State of California we actually 

have a line on the income tax form that says that people have a 

use tax obligation, people still ignore it. Few people even know 

what a use tax is, and then they are shocked to find out that they 

even owe it, which leaves auditing as our only alternative. But why 

is auditing more burdensome both for the State and for the consumer? 

Governor HASLAM. I think just the sheer number of individual 

audits that would have to happen in this case makes it, you know, 

particularly in a State as large as yours, makes it incredibly difficult. One anecdotal piece of evidence, we did have one of our retailers put on its yearly statements to folks saying you bought this 

much, you owe this much to the State. Now, there was no, you 

know, threat of enforcement anywhere, but once people were notified, we actually saw the amount we collected off of that go up like 

tenfold. But it is still, you know, the ability to audit that for the 

State would require an incredible amount of work. 

Mr. HARPER. And I think, if I may, the Governor is correct. As 

we have looked at it, you know, there are two ways to go through 

and collect the use tax, either a business does it or an individual 

does it, and by having the additional auditors come in, people 

would feel like they have an auditor sitting at their kitchen table 

which would be very onerous and irritating. Granted in Utah we 

only have 1.6 percent compliance with the use tax, we have a line 

on our income tax return. Most people don’t even think about it. 

But I think some people more and more are thinking about it and 

are intentionally saying, hey, I can save a little bit because of this 

government inequality that is on the books. 

Ms. CHU. Thank you. I yield back. 

Mr. MARINO. Thank you. The Chair now recognizes the gentleman from Arkansas, Congressman Griffin. 

Mr. GRIFFIN. Thank you, Mr. Chairman. Thank you all for coming. I appreciate your time. I first want to say that I am—I want 

to congratulate my colleague from Arkansas, Congressman 

Womack, Steve Womack, for all the work that he has done on this 

particular issue. 

I have studied this issue quite closely, and I would first like to 

just mention that if you take a look at the pledge that we have 

talked about, the gentleman that is leaving has talked about, it 

clearly is dealing with marginal tax rates, which this does not. 

Second of all, I am a pledge signer, and I signed that pledge not 

because of what Grover Norquist, says but because that indicates 

in a formal way my position to my constituents, and so I want to 

just make that very clear. 

I also want to talk about something, I support the bill, I am a 

cosponsor, so I want to say that, and I support it because of fairness. I support it because of the current unfairness, the way that 

brick and mortar are treated versus Internet businesses. I do not 

support it because I am worried or feel sorry for governments not 

collecting more money. That is not why I support it. I support it 

because I want a level playing field, because I hear from my constituents back home who have businesses like Hank’s Fine Furniture in Little Rock and around, and they talk about the different 

148 

folks who may come in and shop and then buy elsewhere, and 

there is an unlevel playing field there. They are very involved in 

the community. They give to a lot of charities. They have a $4.7 

million payroll. I asked them this morning before this hearing to 

give me some stats. They have 250 employees, and of course they 

have to hire people to fix their air conditioner and take care of 

their physical plant. So I support this because of fairness. 

One of the things that I never hear discussed hardly at all in this 

context, though, is what the States are going to do with the money, 

okay? So I am on the record of supporting this, and a lot of money 

will go back to the States and others. I think that every Governor 

in the country, every State representative in the country, every 

State senator in the country ought to go on record and tell constituents what they are going to do with the money that they are going 

to get as a result of this. 

My personal view is that we should reduce taxes commensurate 

with the additional revenue that comes in. That is what I believe. 

Why do I say that? That way you get fairness between the Internet 

and bricks and mortar, but you are not raising the tax burden. I 

understand you are not increasing taxes here. These are taxes on 

the books. But you do have some people who will pay taxes that 

didn’t pay before. And so I think it is fair to say we have ensured 

fairness with this bill, it is up to the States, but every State rep, 

State senator and Governor ought to tell us what they will do with 

that money, and I personally believe they ought to return it to the 

taxpayer. Then if they think they need additional revenue, they 

can make the case, they can make the case to people. 

That is the way I would like to see it play out. Obviously that 

is going to be up to the States. That is not something the Federal 

Government will decide. Some States will say, man, we are enjoying all this extra money, and we are going to spend it this way. 

Other States are going to say, we are going to have conservative 

leadership, you know, I have heard that there is a gentleman on 

this Committee who is going to be Governor of a midwestern State, 

and I think, I don’t want to steal his thunder, but, you know, I 

think he has indicated that he would like to take the additional 

revenue and return it by lowering some of the tax rates. So that 

is going to be up to the States to decide. But with this microphone 

I am going to preach that my opinion is we need to pass this, we 

need to have the fairness as a result, but we need to return the 

extra money to the taxpayers. 

Governor HASLAM. Thank you, Congressman, I will take that as 

a question maybe and—— 

Mr. GRIFFIN. What do you think? 

Governor HASLAM. Right now we are proud in Tennessee. 

Mr. GRIFFIN. My time is up but—— 

Governor HASLAM. We have the second or third lowest combined 

State and local tax rate in the Nation right now. So, believe me, 

we are tracking with you. 

Mr. GRIFFIN. Yes, sir. 

Governor HASLAM. We have cut rates two or three times. Here 

is the message that I would bring back to Washington, and I know 

you agree with it. We understand there is going to be less money 

coming from Washington in the future. I don’t know how the budgVerDate Aug 31 2005 13:24 Jan 08, 2013 Jkt 000000 PO 00000 Frm 00152 Fmt 6633 Sfmt 6601 H:\WORK\FULL\072412\75308.000 HJUD1 PsN: DOUGA
149 

et battle, but somehow it has got to get solved, and as a Republican 

I am encouraging you to get it solved. We understand there will be 

less money coming from Washington, and like I said, we will live 

with that. You have to let us then go through our budget process 

as well and then judge us by our records. Like I said, we have cut 

taxes three times since I have been Tennessee’s Governor, a year 

and a half. 

Mr. GRIFFIN. Mr. Chairman, may I have 15 more seconds? 

Mr. MARINO. Yes. 

Mr. GRIFFIN. One thing, I agree with you, and one thing I would 

add to that is I think we are over the coming decades going to be 

living in a world where less money will come up here, and that 

makes more sense. When you have got small town mayors asking, 

begging for Federal money to build something completely unrelated 

to anything in the Federal Government, it is because we have 

taken so much of their money in the first place, and we have created dependency with those mayors and those city councilmen, so 

they come begging us for money. I would much rather that money 

stay in the States and we take less of it up here. 

Thank you. 

Mr. MARINO. The Chair now recognizes the gentleman from Florida, Congressman Deutch. 

Mr. DEUTCH. Thank you, Mr. Chairman. Mr. Chairman, my 

friend from Arkansas suggested what he might like to hear some 

of the State representatives and State senators and Governors say. 

I would take this opportunity to point out that I would like to hear 

every one of my colleagues that I serve with in this body say exactly what Mr. Harper said quite heroically earlier, and that he is 

and everyone who serves in this body is accountable to the people 

who elect them and not to Grover Norquist. So thank you, Mr. 

Harper, for that statement, and I wanted to be on the record with 

that as well. 

Now, let me talk about this legislation, and I would like to broaden the discussion a bit. We talk a lot about fairness, and my colleagues have talked about it, and they are right to do it, but I want 

to talk about the impact that goes beyond that mom and pop retailer who is at a significant competitive disadvantage today and 

talk about the other retailers who may not be impacted directly but 

are impacted very significantly by this unlevel playing field that we 

have today, and here is how, and I would love to hear from the 

panelists about this. 

We know about, we have heard lots of examples about the individual retailers who have a customer come in, someone they think 

is going to be a customer, and they ask questions, they take advantage of all that retailer’s expertise, then they may leave and buy 

the product online or they may ask the retailer to match the price. 

Often the retailer can’t, and they will buy it online. But what we 

don’t—what we haven’t talked about this entire day is the role that 

not just that retailer but that that entire Main Street block or that 

that entire shopping center plays in the community and what happens because of this system is not just because—not just that small 

retailers can’t compete and may have to close but, yes, there are 

some larger retailers as well that can’t compete and have to close, 

and let’s talk about what happens when they do. If that larger reVerDate Aug 31 2005 13:24 Jan 08, 2013 Jkt 000000 PO 00000 Frm 00153 Fmt 6633 Sfmt 6601 H:\WORK\FULL\072412\75308.000 HJUD1 PsN: DOUGA
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tailer closes, the larger retailer that has been blamed so often for 

all of the ills of these small mom and pops, when that larger retailer closes, all of the employees of that larger retailer lose their 

job, and that has an impact on the community, and when that larger retailer and the small mom and pop, when they all start to close, 

there are other businesses on that block or in that shopping center 

who are also impacted. The nail salons, the barbershops, the restaurants. When you have part of Main Street that goes dark, then 

suddenly you are not drawing as many consumers. There aren’t as 

many people from the community who are coming to shop there. It 

is true on Main Street, and for those of us who represent suburban 

areas, it is true for a shopping center. And when there are lots of 

vacancies, it is a lot harder for those other service providers who 

don’t pay sales tax often, not in my State, but it is harder for those 

service providers then to have that flow of customers, people who 

come to see that they are there when they are out purchasing 

something in a store, and then they are impacted. And what is the 

impact then? They lay people off, they shut their doors. And suddenly you are in a situation where half or three-quarters or all of 

Main Street is dark, not just that mom and pop retailer who 

couldn’t compete as a result of this unlevel playing field. And the 

same thing is true when the shopping center goes dark. When half 

of it or three-quarters of it goes dark, there are a lot of people who 

lose their jobs beyond, as I pointed out, beyond just the individual 

mom and pop retailer that has been the focus of this hearing. 

There are a lot of people who lose their jobs, and for people who 

live in the communities near these shopping centers or for people 

who live downtown near Main Street, they lose the ability to go out 

and pick something up in those stores that could no longer survive. 

They lose the ability to go out and spend time with their community members in those shopping centers, and the community loses 

corporate citizens who contribute to the baseball teams, who contribute to the Boy Scouts, who contribute to making that community great. There is a lot more at stake here than just the issue 

of fairness for one particular retailer. There is a community at 

stake here. And I think that is what we have to realize, that is why 

I am supportive of these efforts, and I don’t know if—I guess I 

would turn to our local elected officials first to see if they have anything to add to what I have just said. 

Governor HASLAM. Amen. 

Mr. HARPER. Total agreement. 

Mr. DEUTCH. Mr. Chairman, I hope as we have an opportunity 

to move forward that, yeah, we continue to figure out the best ways 

to do this and how the technology, and I hope we have another 

chance to talk about the technology that exists now that actually 

makes this collection I think easier than it has been suggested at 

some point earlier today. I hope we can talk about that, I hope we 

can talk about the broader issues having to do with this legislation, 

but let’s not lose track of what is happening in our communities 

today because of a playing field that makes it too hard for too 

many to compete on. 

I appreciate it, Mr. Chairman. I yield back. 

Mr. MARINO. Thank you. The Chair now recognizes the gentleman from Nevada, Congressman Amodei. 

151 

Mr. AMODEI. Thanks, Mr. Chairman. I want to thank, first of all, 

Ms. Sa ́nchez for being here because usually I am the last guy, and 

so thanks for taking the anchor for me today. I appreciate that. 

Mr. DelBianco, I have listened to most of this stuff and I get 

that, and I have looked through the testimony, and some of the 

gentlemen say we think this ought to be origin based, and obviously the gentlemen from the Beehive State and the Volunteer 

State are in favor of it, that sort of thing. Is it your position that 

Internet sales should not be taxed, either sales or use or are they 

tax exempt in your organization’s view? 

And since I waited a long time, I won’t do something like Mr. 

Griffin did, but please be crisp in your response since you are probably having as much fun as I am at this point. 

Mr. DELBIANCO. Thank you, Congressman, and as all of us know, 

although it has been glossed over today, all Internet sales are 

taxed exactly the same as brick and mortar sales, every single 

catalog company, online company in Nevada collects in Nevada, 17 

of the top 20 e-retailers already collect for everything they sell in 

Nevada because they have stores. There has never been and no one 

has ever asked for some exemption for the Internet. The Quill case 

was written in catalog. Internet sales are all subject to sales tax, 

and they are today. 

Mr. AMODEI. So your answer to my question is yes, they should 

be taxed? 

Mr. DELBIANCO. And they are. 

Mr. AMODEI. Okay. So that is yes in my view, and you can say 

they are, and we won’t spend time on that. 

Now, having said that, I have listened to your testimony about 

10,000 different taxing jurisdictions. With the alternative being, as 

I believe the gentleman from Utah indicated, it is like, well, we 

have got a form on our State income tax and we can do that. I don’t 

know how many customers you have, but I am guessing it is a bit 

north of 10,000 when you talk nationwide, and God forbid we use 

the word efficiency in anything we should do in a policy sense at 

this level, but—and I understand 10,000 is a big number, but relying upon even the, you know, number of people that shop online 

or in catalogs in Nevada to fill that out, although we don’t have 

an income tax, we do have a use tax, it is like, I mean, seriously 

at some point in time efficiency has got to come into play and 

where is the best spot for this? You indicated the Texas example 

with Amazon. It is not that Amazon had to pay the tax, it is that 

Amazon decided not to charge the tax, and I guess whatever happened in the Lone Star State didn’t go their way, so they were liable for it. That is that way everywhere. But when we talk about 

the dents in the bill because it is not perfect, surely we are not 

going to rely upon the tens of or hundreds of millions of customers 

nationwide to file those documents as opposed to using it at point 

of sale, whether it is at the origin rate or at different rates depending on the jurisdiction? 

Mr. DELBIANCO. You are absolutely right, it would be crazy for 

us to expect individual consumers to start to remit use tax. I think 

that what will happen is that we need a bill that forces the States 

to truly simplify the way they set out after the Quill ruling, where 

there is one rate per State for the remote companies, where venVerDate Aug 31 2005 13:24 Jan 08, 2013 Jkt 000000 PO 00000 Frm 00155 Fmt 6633 Sfmt 6601 H:\WORK\FULL\072412\75308.000 HJUD1 PsN: DOUGA
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dors are compensated for the cost of collection, just like in-State 

vendors are compensated. One audit for all 46 States, one set of 

definitions and a small seller exception that protects that small 

company in your State who is just trying to satisfy customer orders 

outside of Nevada. 

Mr. AMODEI. Okay, and I get that, but then we get back into the 

fairness stuff that Mr. Deutch, so it is like so if I have to be doing 

business in Truckee, California, into Nevada I get a $500,000 exemption, but if I am in Reno selling into Nevada I don’t. That bothers me a little bit on the general fairness stuff, but—and I appreciate that you have thought about things, saying here is what we 

recommend. So is your alternative you want an exemption and you 

want to simplify to one return per State, and then it is okay to do 

use or sales tax? 

Mr. DELBIANCO. If we implemented all the simplifications in 

here, and they are very similar to what Mr. Henchman has articulated, with those in place we then turn to a small seller exception, 

and the small seller exception can’t be anything as low as a million 

dollars. As I explained earlier, that is a one- or two-person company at most, and you talk about fairness, is it fair for that oneor two-person Nevada company shipping their specialty items 

around the country to collect for all those jurisdictions? It isn’t. The 

small seller exception needs to be high enough and yet still allow 

the States to collect 90 percent of what they claim they are not getting, and a level of $15 million in sales gets them 90 percent. 

Mr. AMODEI. Are you aware of anywhere in the Nation where 

there is a small seller exemption under State law right now? 

Mr. DELBIANCO. Under Federal law, the Small Business Administration says a retailer is small when they are under $20 million. 

This Congress has passed—— 

Mr. AMODEI. No, the question is, the question is, is there an existing exemption in State law anywhere that you are aware of that 

says if your sales are below X amount a year, you don’t have to collect State sales or use tax? 

Mr. DELBIANCO. Of course not, and every online seller already 

collects. 

Mr. AMODEI. Why would we do it now? 

Mr. DELBIANCO. There’s no small seller exception. 

Mr. AMODEI. So why would we create one in this context? 

Mr. DELBIANCO. The Federal Government has plenty of small 

seller exceptions, recognizing the burdens in Quill. You should 

probably enact a similar small seller exception. The States can’t do 

this on their own, they need Congress to force businesses to comply, and Congress ordinarily, like the bill you just passed this year 

on the small business tax cut, said that a small business was under 

500 employees. That may not be appropriate for retail, but you 

need a small seller exception. 

Mr. AMODEI. You have exhausted my time, and thank you for 

doing so, and thank you for your responses. 

Mr. MARINO. Thank you. The Chair now recognizes the gentleman from Colorado, Congressman Polis. 

Mr. POLIS. Thank you, Mr. Chair. I would also like to engage 

with Mr. DelBianco. I want to understand taking away sort of 

breaking out how many small businesses work, sales and margins. 

153 

What would a typical, if there is a small company, it could be a 

vintner, it could be anything, and their sales are a million, two million. What would be typical of the margins, you know, how much 

more they are selling a good for than what they purchase it for for 

a small business like that? 

Mr. DELBIANCO. Thank you for the question. We look at gross 

margins, which is the cost of sales as a percentage of the retail 

price. 

Mr. POLIS. And what do you find? 

Mr. DELBIANCO. And they range anywhere from 30 percent down 

to as low as 20 percent in the data that I looked at. So I used 25 

percent for the example I articulated earlier today, that a million 

dollar seller right away loses $750,000 for cost of sales, and then 

has to cover all those other expenses from marketing, distribution, 

web site, accounting, computer programming. 

Mr. POLIS. And your estimates further show that the cost of collection, I believe this was from the Streamlined Sales Tax estimates, that it would cost about 17 cents for every tax dollar it collects for the States? 

Mr. DELBIANCO. That is the data that Streamlined Sales Tax collected. 

Mr. POLIS. So again that would effectively in many cases wipe 

out the margin for a hypothetical million dollar business. Coupled 

with the gross margin and the cost of compliance and all their 

other costs, it might have been a business that previously had a 

small profit, but after this additional burden it would cause it to 

go into the red. Is that possible? 

Mr. DELBIANCO. Yeah, absolutely. 

Mr. POLIS. And I think the concern there is that in that situation 

where you have a business that can no longer exist profitably, they 

are not going to exist. Therefore, they are not going to pay any 

taxes to the government. It is a very hypothetical tax when you are 

talking about imposing it on businesses at the $500,000 or million 

dollar in gross sales level where in many cases these taxes would 

be a deterrent to even having that sort of business. They would be 

very difficult, the under $150,000 which is being talked about, and 

then once you are several million, you know, whether, you know, 

five, 10, 20, whatever it is you might be able to absorb some compliance costs, but there is very little margin to spare for many of 

these businesses in that middle realm that we hope that job growth 

emerges from. These are not, you know, in many cases terribly 

profitable businesses. As you mentioned, they might be purchasing 

something for $7.50 and selling it for $10, some of them are even 

less than that. In fact, the more competition we have in the marketplace, and the Internet obviously encourages and makes it easier, reduces barriers to competition, the more squeeze on the margins there will be in general, and that is obviously a good thing for 

consumers, and the more efficiently retailers are able to turn 

around products and operate, consumers will benefit from that. 

Now, again, the flip side is that this is both a compliance cost 

and a tax on the gross sales, not on the margin. So when you have 

a particularly low margin product, you are effectively taxing the 

gross sales, which will make it very difficult to profitably sell low 

margin products, which are equally as important to the economy as 

154 

high margin products. Therefore that makes, you know, again some 

of the estimates of the taxes that would be collected hypothetical 

in the sense that many businesses that they would be collected 

from would actually be driven out of business or uneconomical by 

having to both comply with and pay these taxes which would otherwise obliterate any margin that they have. 

I was also wondering, Mr. DelBianco, if you could address briefly 

now, mail order has existed for, you know, certainly as long as I 

have been alive, Sears catalog, all those days. This has always existed, and we have had the issue of doing the nexus, and why is 

this any different today other than is it any different than just basically having more volume going through mail order channels 

which, by the way, was the case in the Sears catalog height days. 

It probably—you know, that was a big deal on where you could get 

things. Is there really any difference in the landscape or is it just 

an order sort of the volume coming through these channels? 

Mr. DELBIANCO. You are absolutely correct, it is just the volume. 

The Quill ruling was with respect to a catalog company and had 

to do with remote burdens on businesses to have to collect and 

remit taxes for places where they had no physical presence at all. 

Mr. POLIS. And, you know, many of these e-commerce companies 

as they grow actually establish nexuses in many different States 

for logistical reasons, for business reasons. As they do so, they of 

course fully contribute to those States as well, sort of one of the 

natural cycles of growing. That is why many of the large e-commerce companies operate and pay taxes in a number of States that 

they operate in as well. 

So I think as we look at small business, to a lot of people a million dollars a year sounds like a lot of business, a lot of money. It 

is important to point out this is not somebody who is going to the 

bank with a million dollars a year. They may be earning $50,000 

a year, they may be earning $75,000 a year, their earnings may be 

wiped out entirely if they have to hire accountants and implement 

software and take their time away from selling their product to 

manage the compliance of this until they get to a size where truly 

they can absorb any of those additional costs, and I yield back. 

Mr. MARINO. Thank you, Mr. Polis, and I might add the only 

ballplayer this season when we played the congressional baseball 

game to get an inside-the-park home run. 

Mr. POLIS. Which I thank the Chair for the credit. It was officially scored as a double and a two-base error, but I will take the 

home run. 

Mr. MARINO. It was still a run, so we will chalk it up to that. 

The Chair now recognizes the woman from California and, I 

might add also, the only woman to be drafted in the congressional 

baseball team this year, Congresswoman Sa ́nchez. 

Ms. SA ́ NCHEZ. Thank you, Mr. Chairman. And thank all the gentlemen on the panel for being so patient, and I was not here for 

much of the hearing, so I apologize if I will cover territory that has 

already been covered. But I am a big fan of H.R. 3179, the ‘‘Marketplace Equity Act of 2011,’’ and I think it is a great bill, and I 

applaud the Committee for discussing it today. I probably don’t 

need to remind my colleagues from California and probably anybody else here about the need for State governments to receive the 

155 

entirety of taxes that are due to them. The State of California, 

which is undergoing tremendous budget shortfalls, is expected to 

lose nearly $1.8 billion in uncollected revenue alone, and that 

would go a large way toward helping us with our budget woes. You 

know, and not trying to place blame because many consumers just 

aren’t aware of their responsibility to pay their use tax from online 

payments. And furthermore because remote sellers aren’t required 

to collect sales tax, it puts them, as many of the witnesses noted 

in their written testimony, at a distinct advantage to the brick and 

mortar businesses that exist in all of our districts and that we 

want to see survive and thrive. 

The Internet undoubtedly has changed many sections of our 

economy, particularly how we treat remote sellers. It is my humble 

opinion that we no longer live in an era when the complications 

that the Supreme Court acknowledged in the Quill decision continue to be an obstacle to the collection and the remission of sales 

tax by remote sellers. At a time when many local governments and 

States are struggling and many people are out of work and looking 

for work, I think that H.R. 3179 is a common sense solution that 

helps level the playing field for retailers and provides States with 

the tax dollars they deserve and also allows States the flexibility 

to address taxation in a way that best fits their unique situation. 

So I have given my opinion, but I would like to just touch on a 

couple of questions, and I would like to start with Governor 

Haslam. 

Your State, I understand, is not a full member of the Streamlined Sales Tax Agreement; is that correct? 

Governor HASLAM. Currently, right. 

Ms. SA ́ NCHEZ. Okay, and neither is my home State of California. 

Can you reiterate in your opinion why we need the national solution outlined in the Marketplace Fairness Act? 

Governor HASLAM. Well, I think without it the Quill decision 

stays in effect, and Quill specifically said it was up to Congress to 

change the thing, Congress had the ability to do that. 

Ms. SA ́ NCHEZ. Great. And you noted in your testimony that you 

don’t believe in increasing taxes, so when your constituents in Tennessee ask you about the collection of online sales tax, how do you 

explain it to them in a way that reassures them that it is, in fact, 

not a new tax? 

Governor HASLAM. Well, not always easy, but I think the reality 

is what I firmly believe, it is a tax that is currently due and not 

collected, and so we have a situation where we are enabling a lot 

of people out there to break the law. 

Ms. SA ́ NCHEZ. Thank you. Representative Harper, as many witnesses and Members of the Committee have acknowledged today, 

consumers just aren’t paying the use tax. Do you think that that 

system is fair to consumers? 

Mr. HARPER. Which system, the one in this bill? 

Ms. SA ́ NCHEZ. No, the status quo right now that many people 

aren’t paying the use tax. 

Mr. HARPER. I think it advantages wise consumers who go out 

there and specifically try to avoid paying a sales tax based on the 

government inequity that is on the books, and I think it disadvanVerDate Aug 31 2005 13:24 Jan 08, 2013 Jkt 000000 PO 00000 Frm 00159 Fmt 6633 Sfmt 6601 H:\WORK\FULL\072412\75308.000 HJUD1 PsN: DOUGA
156 

tages local businesses who are required to pay a—to collect a sales 

tax and not those who are remote. 

Ms. SA ́ NCHEZ. Would it also disadvantage consumers that perhaps aren’t technologically sophisticated or don’t even have a computer or access to the Internet in their home? 

Mr. HARPER. Yeah, it creates an unlevel playing field. 

Ms. SA ́ NCHEZ. Thank you. You also spoke in your testimony to 

a point that technology currently exists to collect sales tax; is that 

correct? 

Mr. HARPER. Yes. 

Ms. SA ́ NCHEZ. And you noted that eight companies currently 

have the technology to collect that tax. Do you have a sense of 

what it costs to have that technology in order to do that? 

Mr. HARPER. It depends on the size of the company and how you 

handle it. I have met with a number of small businesses who say 

it is very simple, cheap, they can afford it, they have, you know, 

just a single product that they sell online, they use it. I am concerned with statements that have been made that, you know, the 

cost of collection or the collection of the tax would be an undue burden on business and would drive them out of business. What we 

are promulgating is the fact that there will be a vendor—there can 

be a vendor compensation, and it will not increase the cost on a 

business. 

Ms. SA ́ NCHEZ. Would it be accurate to make the assumption that 

if the burden of collecting sales tax was placed on the remote seller, 

companies would look into developing that kind of technology and 

that the price for remote sellers would be lowered eventually? 

Mr. HARPER. Absolutely. 

Ms. SA ́ NCHEZ. Great. Those are the points that I was interested 

in hearing testimony on. I thank you for your answers, and I yield 

back. 

Mr. MARINO. Thank you. Seeing no additional colleagues for 

questioning, and in the interest of our guests in the gallery and our 

distinguished panel, I will not tax you with any questions, and I 

would like to thank our witnesses for their testimony today. 

Without objection, all Members will have 5 legislative days to 

submit additional written questions for the witnesses or additional 

materials for the record. This hearing is adjourned. Thank you. 

[Whereupon, at 12:52 p.m., the Committee was adjourned.] 

(157) 

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

158 

Questions for the Record submitted by the Honorable Jason Chaffetz, a 

Representative in Congress from the State of Utah, and the Honorable 

Melvin L. Watt, a Representative in Congress from the State of North 

Carolina 


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159 

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company sells. The company calculated that the total cost of just the start-up phase was 

nearly $1.3 million for this ONE state, including the first year software license fcc, employee 

and contractor time, and use of existing IT hardware dedicated to the collection of the tax in 

the new state. While there would be some economies of scale expanding to 50 states and the 

9,600 taxing jurisdictions throughout the country, would you agree that the cost for a remote 

seller (0 become the sales tax collector for all or some pOltion ofthe 50 states is very high 

and that the states should fairly compensate remote sellers for these costs? 

Questiolls from Representative Melvin L. Watt 

I. If services exist or arc developed that sufficiently simplify the tax collection process for 

vendors, is or will a small business exemption be necessary? 

2. Proponents of H.R. 3179 argue that a $1 million small business exemption threshold 

would exclude more than 90 percent of online retailers thus denying States of much of 

the uncollected sales and use tax revenue that the bill is designed to help them secure. 

Opponents ofILR. 3179 advocate for a higher small business exemption threshold ($ I 0 -

$15 million) because they argue that a lower threshold would cripple sm;U businesses 

and, because the top 10 percent of online retailers are responsible [or the majority of 

uncollected sales and usc tax revenue, a higher threshold would still capture the majority 

of uncollected sales and use (a." revenue that the bill is designed to help States secure. 

What is the appropriate small business exemption threshold? 'Arhy? 

Questiolls for the Record 

House Judiciary Committee Hearing - July 24, 2012 (Page 2) 
160 

Response to Questions for the Record from the Honorable Bill Haslam, 

Governor of Tennessee 

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Responses to Questions submitted for the Record by 

the Honorable Bill Haslam, Governor of Tennessee: 

Questions from Representative Jason Chaffetz: 

Answer: TIle availability of software to help remote sellers calculate and collect sales taxes is an 

important clement of the Marketplace Equity Act. Several vendors arc currently marketing software 

solutions for all sizes of business to allow sellers to collect and remit sales taxes. many at costs far below 

the example you sited for Overstock-com. \Vhilc I cannot speak to details of Overstock-com 's 

experience, retailers in Tennessee stress the importance ofleveling the playing field between online and 

Main Street retailers. While tI,ey arc aware that software will be necessary to comply with the law, their 

focus has been on creating equity in the marketplace so they can compcte on cqual footing. 

Questions from Representative Melvin Wat!: 

I. Answer: Scrviees tI,at simplifY the collection process for vendors will make it significantly easier 

for vendors of all sizes to collect and remit sales taxes. It may also decrease thc arguments in 

favor of a small business exception. TIlat being said, NGA has long supported a small business 

exception as an important component of federal legislation. 

2. NGA has long supported a small busincss exception as part offederallegislation to providc statcs 

the authority to require remote vendors to collect and remit state and local sales taxes. TIle level 

of such an exception should be determined by Congress, and should be set at a level sufficient to 

protect tndy small sellers without undcllllining the intent of the bill to authorize the collection of 

sales taxes ou all applicable sales. 
161 

Response to Questions for the Record from the Honorable Wayne Harper, 

Utah House of Representatives 

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162 

Response to Questions for the Record from Hanns Kuttner, Visiting Fellow, 

Hudson Institute 


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Responses to Questions submitted for the Record by 

Mr. Hanns Kuttner 

QUESTION FROM REP. JASON CHAFFETZ 

Question: While there would be some economies of scale expanding to 50 states and the 9,600 

taxing jurisdictions throughout the country, would you agree that the cost for a remote seller to 

become the sales tax collector for all or some portion of the 50 states is very high and that the 

states should fairly compensate remote sellers for these costs? 

Answer: Sellers provide a valuable service to state and local government when they collect the 

sales tax. Some states recognize this fact and pay retailers through what are called "vendor 

discounts" As of January 1,2012,26 states allowed vendor discounts and 20 states did not, 

according to the Federation of Tax Administrators 

(http/lwww.taxadmin.org/ftalrate/vendors.pdf) New York provides the largest vendor 

discount, 3.5 percent of the state sales tax collected, although Alabama allows 5 percent on the 

first $100 collected. Among the states not offering vendor discounts, California is the largest. 

The best evidence about whether the vendor discounts are enough to cover the cost of collection 

comes from the Joint Cost of Collection Study (JCCS), available at 

http/lwww.bacssuta.org/Cost%200fOIo20Collection%20Study%20-%2OSSTP.pdf JCCS was a 

public· private partnership that included the Council on State Taxation, the Federation of Tax 

Administrators, and the National Retail Federation. The JCCS fielded a survey in 2004 and 

2005. It is only study which is national in scope. The sample included both single state and 

multi-state retailers and store and non·store (i.e., remote) sellers. The survey asked about such 

costs as training personnel on the sales tax, documenting exempt sales, programming and 

servicing cash registers, filing returns, and handling audits and appeals. 

The most striking finding from the ICCS may be the relationship between a seller's size, 

measured by the dollar volume of its sales, and the cost of collecting the sales tax. For sellers 

with annual sales of between $150,000 and $1,000,000, the cost of collecting the sales tax 

equaled 13.47 percent of the tax collected; for sellers with annual sales in excess of $10 million, 

costs were 2.17 percent of the tax collected. Across retailers of all sizes, costs averaged 3.09 

percent of the sales tax collected (representing .19 percent of the sales amount.) With few 

exceptions, states do not recognize that smaller sellers have higher costs, and those exceptions do 

not reflect the full variation in the cost of collecting the sales tax across different sizes of 

retailers, a six-fold difference between small and larger sellers. 

One way of thinking about this data is to conclude that many states choose to be neutral between 

sellers, preferring a level playing field to one that recognizes that smaller sellers face higher costs 

per dollar of sales tax collected. 

Whatever level vendor discounts should be to cover the cost of sales tax collection, the 20 states 

which do not offer any compensation for collecting the sales tax are below it. (The lag time 

between when sellers collect the tax from purchasers and the seller remits the tax to the state 
163 


75308C4-2.eps

creates a no cost source of funds ("float") for sellers. While this once had value, at current 

interest rates it is a very small compensation in the 20 "no vendor discount" states.) 

QUESTIONS FROM REP. MELVIN L. WATT 

1. If services exist or are developed that sufficiently simplify the tax collection process for 

vendors, is or will a small business exemption be necessary~ 

AI/SIver: The costs that sellers face for collecting the sales tax vary according to seller size. In 

the best study of these costs, the Joint Cost of Collection Study (JCCS)(available at 

http.llwww.bacssuta.org/Cost%200fUIo20Collection%20Study%20-%20SSTP.pdf) found that the 

cost of collecting the sales tax decreased by .53 percent as seller size increased by 1 percent 

Comparing sellers with sales less than $1 million (in 2005) to those with sales over $10 million 

found a six-fold difference in the cost of complying with the sales tax. 

I would suggest that a small business exemption involves a trade-off between simplicity and 

fairness. Fairness would focus on the amount states pay sellers to collect the sales tax on their 

behalf. States make these payments in the form of "vendor discounts," an allowance calculated 

when a seller remits sales tax to the state. Not all states do this; 26 states do and 20 do not A 

fair vendor discount would vary with the size of the seller. A seller with relatively low sales 

would receive a larger vendor discount than a larger seller. The fairest approach would use data 

from a study like JCCS and set the vendor discount on a sliding scale. A series of brackets 

would be simplest (annual sales less than $100,000, $100,000 to $500,000, etc.) 

The beauty of this approach is that there would be no need to draw a single line for a small 

business exemption. However, it is not helpful to legislators at the national level grappling with 

this issue because vendor discounts are set in state sales tax laws. 

Thus we are back to the trade-off between simplicity and fairness, and the fact that the tool most 

easily available at the federal level is setting an amount that exempts sellers with sales below 

some threshold. An exemption level is a simpler approach. 

One suggestion T would make for line drawing is to draw a line that declines over time. This 

would recognize that the cost of collecting the sales tax in multiple states will likely decline over 

time. Better and cheaper information technology will make this happen. It also recognizes that 

the burden is larger for smaller tlrms and gives progressively smaller firms more time to develop 

or acquire the systems they will need. (Given that some of the cost is associated with computer 

systems changes, having more time makes it likely that the systems changes could be 

accomplished as part of a larger, periodic overhaul, further reducing the sales-tax-specific 

systems cost Computer systems costs will likely be lower if they are part of the original design. 

Setting an exemption over time would put new entrants on notice that this is something they will 

face if and when they grow, making it more likely that more new entrants have systems that do 

not require re-engineering to do sales tax calculations for multiple states.) This could be done 

directly, by setting an initial high threshold in statute and in statute setting a path for the 
164 

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threshold to decline over time. It could also be done indirectly by setting a statute expressed in 

nominal dollars whose real value would decline over time by the rate of int1ation. 

2. Proponents ofHR. 3179 argue that a $1 million small business exemption threshold would 

exclude more than 90 percent of online retailers thus denying States of much of the uncollected 

sales and use tax revenue that the bill is designed to help them secure. Opponents of H.R. 3179 

advocate for a higher small business exemption threshold ($10-$15 million) because they argue 

that a lower threshold would cripple small businesses and, because the top 10 percent of online 

retailers are responsible for the maj ority of uncollected sales and use tax revenue, a higher 

threshold would still capture the majority of uncollected sales and use tax revenue that the bill is 

designed to help States secure. What is the appropriate small business exemption threshold? 

Why? 

Answer: Government should be neutral between in the marketplace, allowing buyers and sellers 

to arrive at the most efficient pairing up of buyers and sellers. A free and fair market will 

achieve that efficient combination. A free and fair market requires treating all sellers the same, 

regardless of size or physical location. From these first principles one can infer that the best 

solution would be no preference for firms above or below some threshold, nor different treatment 

of firms that are within a state versus those outside the state. 

A size-related exemption is a way to recognize that the fixed costs of sales tax administration 

mean that the cost, measured as a percent of sales, is larger for smaller firms than larger firms. A 

small business exemption draws a single line. Finns below the size have no costs; firms above 

the line have all the costs. The firms that will be worst off are those with sales just above the 

line, unable to benefit from the exemption for smaller finns but without the scale economies that 

benefit much larger firms. This will be true no matter where a line is drawn. 

I would suggest that the best approach is not to set an exemption level that holds for all time but 

one that declines over time. This would be a way of balancing equity and fairness, beginning 

with a higher threshold and then becoming lower over time. A nominal dollar amount written in 

statute will realize this result as int1ation reduces the real value of the exemption. 

There is no evidence that shows one approach is surely better than another. To take two dollar 

amounts mentioned in your question, one could start with an exemption that began with sales at 

$10 to $15 million that declined over time, say over the course of a decade, to $1 million orless. 
165 

Response to Questions for the Record from Joseph Henchman, Vice President, Legal & State Projects, Vice President, Operations, Tax Foundation 


75308C5A-1.eps
166 


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rhroughout soml! the country. :;~~~~:~~:~~~~;:~!;;i:'~~~n~~;t::~:~:~!: .~ 

collector for SO""e11Orlion 50 swtes is very high and that states shouldfairly 

compensate rernoie ,'iellersjbr these costs'! 

I agree that collection and compliance costs arc high and that this fact is not sppreciated by those 

who do not \"('Irk with state sales taxes (£is I do). Rather than figurin}; oui how to pay for an 

unnecessarily complicated and ec.onomicaHy wasteful enterprise, my position is t~at a better 

avenue \vould be to require s1mplification of sales lax systems as a condition of states gaining the 

power to i.;oilcct from out-of-state vendors. No more vague definitions No more having 

hundreds of differcnljuth;dlctions in your state. No mon,' taxing food seven different ways. No 

more haying everyone do f(IlIDS and audits and payments diflerently :liorn everyone else. 

If,ve can do that, the waste of time and resources that goes into all that tlonsense can he 

redirecTed into more pmductive avenues, ,"vithout reul1cing the revenue that states and localities 

get As the SSTP experience shows. only Congress will be able to get that set as a stumlard, 

either by enacting simplificatlcm requirements or credibly threatening to enact simpliiic,ntion 

requirements. 
167 

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168 

Response to Questions for the Record from Steve DelBianco, 

Executive Director, NetChoice 


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169 


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j . II smgle 3udit on behalfofal.l Stales ~nd ocaIJUli~i<lillns I;Onducled by a single Slale whefe 

the seller hos physical nexus, or. designaled slllle on eas~ where a ~elle, lacks phYIiIc~1 

nuu~ in Rny ulf 5 lax S(3(e. (OvCf~IOCk ilcm d. o]lplicd 10 ~ single nallonwide ~ud'l> 

6. There should be. eilmmon sales Ulx rClUm for ~11I0 ~ ~lIcr$lo file. \Remote relll,lers should 

nOI be forced III file 46 ""parate $t3te lax retum. eIIch month) 

1. A ,ingle ".110nal rule for sourc,ng sales. (O verslock l1em ej 

S. l'iarmoniu sa les tax holidaY'_ Md thresholds, Or give ",mole sellers ao oplional exemption 

from ""ni.ipation in :<ales Ia. boliday& and thresholds. (Overstock item c) 

9. 1I11<)W rem01e .ellen 10 ehallenge .lates in federal dislricl eoon for disputes on salo:!: tu 

collection, lncludinll whclher a SUIie' is following congre50Sionally required simplifications. 

(Ovnstock ilem g) 

10. Pro,cmpt and p=lude SI31e IlIW$ impoliUlg s31es taX oblil(atJon.s on busioesses wilh no 

physical presenoe In Ihal S!.ale. (Once Cong""s <r.al~S Ibi. palh I() IU COllection. the S!.ale> 

musl follow this lint palh, u.d stop l/)'in(j: (0 .nelcl! the definition ofne~us llI'yond physical 

pre.lcncc) 

II. ColI~tion of sales IIlK under fcdcnllleglslal!Gn ~i nOI CleMe nexus for My other bUllne5$ 

purpose. lOvcntock ;Iem f) 

12. A congreuiona lly detcnn"led e~ccrlion f{lr small bIlSIHessC5. (HCUlllers Ih31 are much 

un.ller thMl Overstock must be. prDlI,eted from ,mpossible new burdens of In administnl!ion 

for up 10 46 s!.ales) 

TruST bt'lievcSlhat all oflhe 12 Prine.iple.l are necessary for Cong'ess 10 "'qu're troci'mplific31ion and 

holJ slates accounlllble 10 Ihe new sunda,tlls. T",ST members have mel wilh stvc ra l Congr("lSional 

offices and wOl/ld be willing 111 discuss tbese principles a\ an~ lime. 

Quesl'on 2. Whtle therc would be some c:co nomies of ~"" lc exp4ndinglO 30 stale! and the 9,600 laxing 

juriWictiQns Ihroughout the <ounlfy. would you agree lhat Ih. COSI for a "'0101. seller 10 become Ih. lax 

collector for all or some ponion of III. j{j slales i. "cry hiSh and lhal lhe S\ales should fairly cllmpensale 

""note sellers for Ihese costs? 

AM"'"' from Stcve ~lBiaoso' 

Yes, lag,..,. IhAt "'ta,lers face higb CostS 10 coll~1 for up 10 4t>sla\cs. alld Ih31 at~s should fairly 

comJ'lt'nl3lc retailers for acting as their UI·x collector,. 

Refallc" mOki~g J·"lcs /l} remotM cuslom",,' uwurMgher /iu l'OJIl'CllI)II COSU Ihun rl!wlleuunnng 

CUSlomErs at 0 tngf~ /oOOliI1ll. 

Today. under the Q~III physical prescnce rule. all online and omine bw;in<Sst:s play by coactly Ibesamt 

rule : ~n ",cule", collecl sales tax for every state wh .. e they choose to have a ph~,cal presence 

A wail slon: on Msin Stree! coileel.:l salt" ta~ fOf JUSI Ine one jurisdieuon where irs located. BUI In most 

SillIes. lUI .. nline rellliler operal"'g rlghl upnai .. is eurr.~tly "''1utted 10 collect 3nd r.mil for each orthe 

locallowns and counlies when it shipi ",nhin lhe stnle. That meanJ collecting for hundreds of local lilA 

Ju. iid,clions, eac h w,th its OWn ralC$ Ind rules. Yel wh~n cUSlomCfl from surrounding rowns walk in lhe 

door. the 5101. collec15 and files (lnlyfor iIJ IOCI>IJurl$dictlo~ . 

, 
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75308C6A-3.eps

Again, all retailer~ collect sales ta~ for c~cry sute whert they choose to ha~e a physical presence. r say. 

"choose" bocausc it is the busmess that choor.es whelher to be JUSI an online retailer Or to operat.e 

physicall~ in multiple stales. When a business chooS(:s to open stores or ~nd sales rcp,sIQ another slllIC, 

il acc~plS the obligation ro follect Ibat Stale's $3les tax. alQIIC with slale-provided benefits of 

infrastructure. public safety, elC. 

Paying sales Ia~ for Ihousands of jurisdictions in 46 SillIes is rar more .'pensl>'. and complex th.n payIng 

sales tax for a single jurisdiction Qn O>,er-Ihe-<:ounler purchases Moreover, state and local govtrnrnenl$ 

ollen provide incentives and benefits to in-Stale retailers, such as tax increment fmancing. Il1Inspona lion 

imprevements. worker training subsidies, gTants. taJt credits, property and income tax incentives. elc. 

None ofthes. beMfilS are available 10 c UI-of-stat. businesses. 

£mp,ro'cal s/wdy .hnws Iha/ small buxinel$flS spend 17 cen/'fo~~ery lax dollor Ihey col/ec/. 

Whal costs would a small bu.i"" •• face ifCongrct;. forced them to pay saics tax 10 all 46 slates? The 

Streamlined Sa les Tax Prejec!'s (SSTP) own CO.I ofColleclion' srudy found thaI a small busines1 (under 

SI M in aMual sales) spends 17 cents fQr every tax dollar it toll...,u for Ihe One Or few staIn where il must 

.Iready pay sales Ial<, as shown in Ihe table bolow: 

~W,r"I Otia l co.t per "" lie. 'II tilIo w llfctMi ". U 

Tnolnin8 01 peuIIMel ". 0.' Ooc~f)lentln t"_","'1I .. I~, ,. , .. slOmtr !(I!f\I~e n!lallnsto sales IU Issues '" ,., 

Salff t.1!, rellted .af\wan! " 'ft , .. , .• 

Prostlmmlns Ind nrvttlo, 'il~ rtllSlers U " 

r 

Returns, ...... rtt.1IC!S, refunds, ules I" 5 .. ... ,. U 

Sales t .. audit> and Ippeal. ,., '5 

OI~ tomplI.~'8 tom 10n 0" 

You may be thInking that legislation ~fort Congress would requ ire states to prevlde ioftware that make, 

it free and easy for retai!crs to tollect taxes, BUI even ;f"free" tax software were Ivailable, it would only 

help to !educe one element of costs documenled abo,·,,·- "Sales tax rela ted software" At most, f,,,,,, 

software could th.refore relieve only 2 cenl.! of the 17 Cenl.! in costs th"l retailen incur for every ta~ 

dollar colleeled, 

Thotlea"1!S smol/ busfnl!.fsl!S with a 15% co.t/mrdm on £"e,y dollar they CI>/Iect,!orthfngs .filch as: 

Paying wnlputer consultants to ,nlegrale new lax &aftware into their home_grown orcU&lOm;z.:d 

lIystems for poinl·of-sale, web sbQPpillg can, fulfillment. and accoun\;ng 

TrainIng customer &Uppol1 and back·office slaff 

Answering custome, queSl;Q/IJ aboUI tltXab!l;ty of;tems, or sales tax holiday~ 

, 
171 


75308C6A-4.eps

IloMdlinG audi, queslioll£ from 46 sta tes 

Paying sales sraff. accou"tants and conlputer cOllSllhants 10 answer .llthes.: questions 

These colleclion burde ns will be a big prohlem for small husinesses that collect only lheir home-slIIle 

sales ta~ loday. Ask any of your small businesses, on main SUCtt or online, and you'l! learn how hard it 

would be for them to beGin ccllecting IOIles a~ for al1 46 SUles. 

So, yes, fair compensation for Ihe admln;SD'allve e05IS and burdens is essenti al for aJi relailers, nOI sl 

those seUing 10 CUSIcmefS in remole Slal(:$. 

COJl:sjo' ~oj/ll,'(Jrr (ltlrgrori,m ond ",mn/coonce "'~SI be CI>I'I!n:d. o~ 

Even if there we'e an "app" that could look-up a tu r.ue fOI an item il/Id shipping address. retailers would 

still be faced w,th signifIcant COSts 10 ;ot,:grate that app inlo existing systems, many ofwhi~h indude 

c ustomlud software. 

Th is point was dcmOnStr.llCd when a sma.Il business called the Si/,'u G"II ry explained 10 th~ tr eamJjn~d 

Sales Ta~ Gov~m ng Board how they w(",ld incur nearly 522.000 in cOSts fQr d~sign. programming. 

integration, lesling, and employee tra;nwg. This cost eslimate was developed fllr the task of in te grating 

"frec" softwa", in to Silver Gallery's c.isting mfonnalion systems. at each Oflhe integration llOints shown 

in their diagl1lm below. 

- " __ 'I OMI ~ • 

-~ [-_ .. _ ..... •• j 4 --,- -- I .'! ..... I ~ _.- ._- '.-

I I _. ,- -- h 

I ! , ....... --- , - -, "'-""''' it= 1 ___ "''''"'_ 

Il=:: 1--' ..--. --.- 11= ,-- - ,- , - ,_. 

r- ~ - f ,-"" ... , I C _""" ",,,,,w,,,,,,_ 

........ _- , .. ".- .... -~-... 

~ ~l Cttll'l' .... SoIuOOh _ t($ll 

ThaI SlO.OOO represents jU.ltlhe up-fronl COSI of software int~gratlon and testing. There would a~1o benew co~ts fllr personnel 10 aru;wer'luest;oons from customers and from the company's accounling and lU 

profeSSionals. 

As pan of any federal mandale 10 colieci sales tax fOI all sta tes. Congress should reqUtre stales 10 

compensate businesses fllr rusanable CIISI! of coil cering sales [.;IXC$, including pur<:ha.sc and 

Implemenl:l!iOfl ofsof\w3l . This compensation c~ n most e<l5i1y be Icccmphshed by a1)ow;n8 ~tajlers 10 

, 
172 


75308C6A-5.eps

k~ p a pe«:enl~ge ofla e5Ihcy collect On behllf Of SlIIlC.. The highe, cosl.llha! are Incumd in the firs! 

YUT JUgge>llh~1 compcnsallon PCrcrn\.i'lllC"i $lIould begin 113 highcr Ille, alld d«huc ovc/ lime 10 a rile 

[)fruughly 5~. a$ suggesled by Overstock 

Thank yo~ for pIllIing Incsc additional quest;on •. 1 an! happy I[) anSWer lUIy othe, question. ym! may bave 

on this is,ue. 

Since,ely, 

Sieve DelBianco 

ExeCUHve nUCClOr, NtlChlller 
173 


75308C6B-1.eps

United SIUH House of Represo nlarivt! 

Co,.,,,,;lIee on Ihe Judic;Q'Y 

llearing On HR 3179, Ihe ··Markelplace Equity Act of2011" 

July 24. 2012 

Quellion~ For The Record 

(Panel Two) 

Que,tions from RC!!Ic§cntarin Melvin L, Wart, 

I. If services exist Or are developed Ihat sufficiently simplify the I.U coll«tion process for vendors. will a 

small business exemption be necessary'! 

Answer [mill Sreve DelBianco' 

Rep,..,senlali"e Wart. even wilh significant simplifio.tioru \0 stale sales ta~ systems, a robust 

congr<:ssionally mandaled small business exemption 15 still absolutely necessary. 

Whal COSIS would a small businen face ifConlll"CSS fOlced them to pay sales tax to all 46 .tall:s? Tbe 

Streamlined Sa les Tax Project·s (SST!') own Cost of Collection' study found thar a small business (under 

SIM in annual sales) spends 17 cents fOf e"cry 1lI ~ dollar it colleclS for the one Or few states where ,t must 

already pay sales tax, as shown in th e table below; 

Ilnnull,"",to;aIM 

'" ., 

'" .. ,.. ,•. , 

Slies , •• ,elated software ,., ••• 

PtC8'ammln&and 5erviclng(nh ret'S!e .. ,., ••• 

lI,etums. remittentes. r1!"Iunds. $O(es tel! 

If-fear'" 

Sales ta. aud it. in<! appeals ,. .., 

Oth" c.omp/lBnce ams •. l 

You mlly be thinking Ihalleg,slalion befare Congress would ~quj", states 10 provide softw.,.., that mal:es 

it free and easy for retailer!; to collect salts ta~es_ Bur even if"frec·· tax software we .. available, it would 

only help reduce one element of cos IS documented abo". -- "Sales tax related software"· At most, fiee 

soft"".re could relieve anly 2 cenlS of the 17 cents in cOOlS that rCllIilers already incur for every tax dollar 

collected. 
174 


75308C6B-2.eps

Thatleavu s",all bu.messe~ .wlh a IJ% e",t burden on e""rydoll(l~ I"~y Colltcl./o~ thmgs such <1.1 : 

hyin& Compuler con5u1!anlS to i.nlcg r.tl~ new lax softwa~ inlo their home·grown or cuslOmiz~d 

$ysttms for point·of·lal~. web shoPPing eart. fulfillment. and accounting 

Training customer support and blll'k·office slllff 

Answering custolntl questions about ta~ab;1iry (If ilems. (llsak! tax holidays 

Handlin& audit questions from 46 state' 

Payin& sales staff. accounlana lnd computer consultants to answer all the.o;e qucsllono 

Th~se collection burdens will he 3 big pmblem for small buslnes,ses (MI COlleCI only Ihe" home·stlte 

I'lles tax Iod;!y. Ask any oryour small busin.",.s. On main streel or online. and you'III'am how hard il 

would be for lhem to begm collc.:tin& sal •• 13>1 for .1146 states. 

Costs/or ~Dfn.'ore Integration und m/llnl'."""~ m .. s/ be oo~rtd. /0() 

Even if th ... were an Mapp" Iha\ could kook·up a tax rate fotan item and shipping address. reUlilw; would 

still j)., faced with significant COSls to integrnle tliat app into existing systtms, many of which indude 

cuslomized software:. 

This point was demonw"\cd when . smull businus called the Silvt~ Gullery e~plained (0 thc Streamlined 

S~IC$ Tax Gov~minK Board how they would incur nearly $12.000 in tOSlS for de.ign. ptOlramming, 

inte&rati<>n, It'Sting. ""d empluyee training_ This COSI estimate WM devduped for Ihc wk of in/epaling 

"frec" software into Silvct Ganery's exi,;lm& information systems. at each of the inte&l1Ilion pOmtl shown 

in their diagram j).,low. 

CU\lom 511"""'"1 ~ II M.io<d .. Mtfl .... IMO"') A«_~"ISv> ...... 

..... >OS 

<- G _ .... ttY, 1 il _ ... u,o;o<M<l ,~--. _ .. , =':'I~ ~- .1 ",eo!it<><d 

.. ,-- 1=.:1 ..t;'''',-",~ '"- , -,-- ,I .... _ ...... -, ...... I:::.: t l""'''''.'' ....... 'u ....... 1 

-- -" _., .. &u",,, 

---, '"-.- l & ~-.... .. ' 

"'_ ...... 

-- - _ .. . - - ,--_ .. .. .. .. -- . - .. • , 1 ..-;"",...... 1 c::; ...... ' .,., ............. ,.- '"u_ .... _ '"'''''''''' -"""',or", ..... 

<- :j~rtI~ Solu~"" ...... _laP) 

, 
175 


75308C6B-3.eps

Ouffle Rlarterp/ocq W<Ju/d im(J<Js(midiJionIJ/ co<1J 10 help ",111r /'lXf!lI/PCI;'>11 -- "II 1<> 1m o(sa/es 

Ama>.on ~om is «:lIiog Congress !h~ltbe company would c~lrt:e only about J% fl)r n~ tax collection 

.~,..,.iceJ. Bu! Amll!on won'! colle~! 1lI':f& fot a bUllinelli u"less the b\lllio~S5 (lINl(ldy pays AmnQl1to 

hosl ils w~b siore __ fOt Ihal, Amazon ~h,,'1!f!S (I r~fim'"lf~e of la-11tH. oflMlol~p,oceetis ph" 

Odd'I/llllOlfees.' 

So ~maH bU.lmCl.cs u~iog Amal.on·s IU eollecllon sc,..,.[ces might pay up IU 20% ufthe" ule proeceds. 

Itavm, little 10 pay tmpluy«s and ."p&nd their bUSmClS, And il inc"'ases Ih. &mall busines,' .eliam:e <>II 

.xp"lIsive and .established online marketplaces. 

QUC!;lion 2. What is the appmpnatc "nail bUlines •• xemption threshold? Why'/ 

AnSWer f'l)m Steve DelBianco: 

CI) "llrnsm~lI Wan. you are fiSbl tl) wOTry about the man}' ,mall Nonh Cam1in~ busin""se:s !II.t usr the 

Internet 10 rtach new cuslom .... These new tax cullecllon burdenJ would rall hardest on small 

bUSinesses. whl> tack tbe personnel lit sy~temi 10 ~oll.tt !II IeS ta~c~ ro. 9.600 jurisdlctiont in 46 states, 

As you say. lhc qU""lioll is what would b. Un apprQpnate ,mall businc~ exemption threshold. 

As I noted In answering your 11", question (~bov.) ... t~ilets undtt SI million in ~"nuaj sal.s art .I.eady 

srendins 17 cents on eVery dollar Ihc~ colleel for Ih e one Ot few SllItes where they arc already c<lnt.tin~ 

'~Ics ta~ . BUI an Qnline bUSIlles,s dQil'I :1 I milllon In ~nnu~1 ~ales is typically JUSt I 50Je proprielOr ur 

work..at-home entrep'eneur_ 

So. thequ~ti"" remains. how nigb mUil we set Ihe small busine<s exemplion 10 proteel most small 

relotHers. while slill empowering statc. t'J coU""lthe vasl majority ofunco!1ecled saks tax? 

OUlre u'fCO/lecled ~o/ •• lares fro", e·m,"'m~rc~ lit lOll /1r.lo~500 r-,,,,,,,Ip,s atcl>ult/.d for owr wm lite nan-w/lffr"" I<uf.!". 

h IS lIw;s ...... alld unn'~Cgury-IO burd.n small bu.", ... wltb new ~0ll1S ornUl' compliAnce. glllee mQSI of 

the ",ncollecled sales ta~e.I clIIlle from Ill. top-500 . -,ctallers - presenlly Ihose with mo~ th~n SI S million 

In ~nnU3\ rcv nu~.' 

Thl~ ;s ~specially important when yuu C<)IIsider thal &ma\l bU$tnesses arc tbe 100M vulntfllbk tu thc:;c new 

~O~IS of collet liOn, I nd Ihis "rrcc" wnw.re comes with addilional ~Ol;" and oOen docs nOI work as 

~dvertL.ltd . 

By fOCUSIng on thOSt "' ~ilcfl; al the lOp end of the liale~ c~an.s. SIllICS SCI mOSI of lhe ~~ I1:venuc wh ile 

allowing smallcr bu.liocssesru conllnue tryLng 10 gruw InlU I~,,¥cr one~. 

COng~fS .<lIa~1d Itl'e,npl b"","~ssu wII/, I~.ss ,hem Slj million /n o""un/ sales trw nMV new'nx wl/relion 

"'a.odalt (or oU!-I'ESI<III: sales, 

One """Y 10 sot l reslistksmallsellcr ucCplLt>O is 10 ex~mpl all busrneucs Ibat are OUt on Ihc "Ions tail" 

in tenns ofc-retail sales. For example, hwrn~/ Relnller publishes a Top 50t) C",da each ~ar> '8nking 

I ,,, ... "'" So",,.;. fffi. nltpJIww .... "N ,,!ls,, '~ ... ,'o""""II-m .. 'W"""""" .. ~f:"Inb 1101; »)Ii'l4JIQJ 1~#,,,f '" .... HC""KMUigiXM!p( '" plOp1&'L"U 115~TI.XVltC~R~!!!!l4Kf:lK~u;:l..z.m '<l\l1P~IO!<h( to! ~::<kt'~~~..,.s 

''''TIIly ... b.> .. ~ ... _ Top500<·R ... ilt<>lIIIl 'ou,l...-mm." ... '" (1Om .. 1emtI RoLan ... r"" JQ(I(;..w". p.12 (2012 Ed,1I01')' 

.... "OP jQ() .·",IIiI., I .. ,,'I~"1on r""" b ...... o~ 6< ..... ", U<>roI/«w s../u T" .. ~ 0.. EIKt,gPk. c~,., .. "co ,( ~N/lry 

o..-t. p.n. lS (f<b 2010) •• w"labl~ '" bil.l)'lEloqISl'ud1 

, 
176 


75308C6B-4.eps

the nalton'siargesl ,ctailers <)II their US e.commerce sales. For 2011. the I e·retailer was Amazon.tom, 

al S4S hilli;)n in .,..ctail salts. Numbe, SOIl hldjuSI S15 million in remote e·retail sales. In total, lhe 

Tup 500 had SI81 billion in Nttail SlII"'I. 

EconomiSt.! Eisena<:h and Lilan started with thi. Top 500 Guide wh~n analyzing where elch I"<'tail .. 

already collected !Ules taX under Quill'~ physical ptc~ence standard, Using thcir analysis, We estrmated 

that Ih.Top 500 were responsible for 93% of the uneallected ~Ies tax Un US C-CUIIUncn:e tn 10) I, as 

shawn in the graph boolaw' (nttcho'Ce.urg/IOp500cull.crl. 

• l!>O soo 150 'OOD 

NatiCinally Ranked e-Retallers 

COInS ...... could sct a small sdlcr except .on lItat adjusts wilh rnnaltGn and retail lI"<'nds by e~empting 

sdlers below Ihe Top 500 cUlofffrom tt'e previou~ year. Under Ihts method. lite snlaU selle ••• ,~ptjon 

ror 2012 would have been SIS million in annual •• les. 

Thai would leave e~.mpted retailers wiln 9 more n:asonable gross margin to cO"'er e~penses . .. hi/~ 

o/lO"''''K ItQ/U II) rtC(}ver Ol'er 9() ptrl:tnl ojlhr uncollected .ales rax on e.relall. 

elm!!,"," "'1«/ ois" Prol~fl Bf'!IinCSStl (hOI tufted the Small SeNfr I:"c,/)/'o" o(S I J ",Ut,,,, 

However. : .. en I SI5 milliGn ~mall busine$!; exc.plion won't be aoy help 10 a business ppra~ch,"g or 

uceedin8th~t IItmhold. This includes bu~ine5Ses like NOr1h Carolina's Nalicnal Whoksale 

Natiunal Wholesale ..... a~ staned in \952 by Eddie Smith 11\ Le~ingt\ln, NOr1h CarOlina. Today, National 

Wholesale primarily serves ddetly Americans, and has growo 10 O\ler 200 employees and annual "les 

well abo ... e lite SJS m.llion small business ... emption le~.11 sullgested . 

• Tolp 500 •• R ... ilc ... 1><1 tOloI • ....."III<I<'< .. 1eo rtom 1.1Ome< R.u;'". Top5OOG.'dc, p. U (20tZ Ed"~). Top '100 ...... ;1<, 

'" .011«""" r""" E..."., o &: Li ..... UII<OIl""l<d 5.1<, T .... On Et"""""i. C"", .. .....: " R.,.I'I) Cbock. p.17. 25 (Feb 2010) • 

... illbl ... hIlQ·/iI»lly.E",;nSn..d. 

• 
177 


75308C6B-5.eps

P~5~nlly. Nalional Wholesale collcclS sn esUl~es for aU ilS sales 

in North Carolina SInce thai is wh~", thc~ have ph~sital !,,~nce. 

Bul this is a h~lIenge even in NOMh Carolin because of the m.ny 

differenl local lax rilleS: 6.7S% In 76 So.rth Calolin~ counlies. 7% 

In 24 c01Jnlies. and 7.'2S% in MNklcnberg. 

National Whol~,;"lc Ilies 10 I;«p lUes simple fur jlS ulany ddcrly 

customers who pay by check wilh a mlil-in order form. So 

National kls lu North Carolinll CUSlomers use just a singk rate to 

figure IU on Iheir mail orders - Ihe 10w".1 ralc in Ihe stale. or 

6.1S%. This mtans thai for sales inlo 2~· eounhes and 

Mecklcnbcrg. National WholeSlile pays !.he e~tr;I ta~ out of ill own 

pockel. While Na1i01Ul1 can . fford to do this for ils North C~,olln. 

5810.1. it w01Jld be far 100 expensive 10 absorb these e.trII l~xe5 for 

an additional4S Slales. 

Catalogs like National Wholesale - along with Iheir loyal .olalo& 

CuStomers - noed a single tax rale per Siale 10 ma\::e salcs ta~ 

.dmm;slrallon IOU .. manlguble. Imagine the complu;ly and 

COSIS i{talalogs h.d \0 lisl thous.ands of localities Ihat hne their 

OWn sales I.~ rates, and ~II the dates, nrles, and thr~halds for ~Ios t.1x holidays in 4611ates. One catalog 

cornp.ny estimaled II would take 26 pages to li,llax rates .~d ta .• holiday inform.lion. 

It·s critIcal to nole Ihal lion. of the federallegislalion before Congre .. loday would fo", I(;IIOS to 

ellminale the oompkxity of local Bits and nfspecial nrks for salos IU holidays. 

To help bllSines.ses like National Whol.,;ale wba would nOl be protected by. $Il1aU busone .. exemplion, 

Cong,..,ss mUSI require Sl.tes 10 .dopt Bo:Iic81 simplifications 10 redu« adrninistrntive burden~. 

As [nOled to my hearing leslimony. 1M Tnre Simplir,e.lion of Tax aU on (TnrS'n coal ilion developed a 

lisl ofll minimnm sIInplificalions. TnrST is a coalilion thar includes NclChoice, the American Call1log 

Mailers A$$DClilion. Ihe Direel Markeli"g Associ"lIon. and the Ele(:tronlc Relailing Associalion. 

T ... e/'·f! Key Simplifi'(J/j~1I P'fJ"u{mu r", Federll/ ug<.!lcwoll ~ Rmro/e $nlu TIU C(}I/«/"", 

I. Sllles must provide c(nifled soilwarc for rate lookup. collection. electronic filinS. and funds 

tunsfer. Users oflhesoftwa«: would be Immune from slale nd civil liability far rror~ in ta~es 

collected. 

2. A smgle sales In rale per State for remme sales. (Required for CU~tom.rs who USC m~iI -o rder 

cat.olags and $end checks with Ihtlr orders) 

3. SIAles should compensal e buStn,osses for rcaso~able com of collecling saln 1a~.5. mcluding 

purchase and implcmcnUllioll rsoflwa~. 

4. A single ,.! of defimhOnS fo, tuable alld eXempl producls for all StalC!l. 

S. A sill&l. audit On Mhalfofall Slate~ and jacalJurisdictions condutled by a single stale where Ih. 

seller has physical onus. or a d,:.i&nalcd Siale in cases where a seller lacks physical nexus in an~ 

sales taX Slate. 

6. Thcr.should bc a cotomon salt:; tax UNm for remOle &<:lIcrs 10 fIle. (Remote re1.3ileu should nOI 

he forced 10 file 46 separale stale lax relum~ each month) 

7. A singk Mliona l nrle for sourcing sales. 

8. HarmonIze nics taX holidJys ar.d threshold~. ar gi~c remme sellers an ap!Ional c~.mplion nom 

plnlcipation in .. Ie$ tax hohda)'1 and thresholds. 
178 

f 


75308C6B-6.eps

9, Allow remme sellers to .hallenr .• states In federal distrtct (oyn for dISputes on sales la,Il 

C\!1I~ction. including "hether a !'late is following congrc~ion lIy mjuired ~implir.ca1mns. 

10. Preempt anrlprcdudt ltat. I~w$ imJlOsing sales laX obligations on buslnc!i.5C5 with no physical 

prC5C ~ in IhM state. (Once Ce>ngll'ss c. ealCS Ihli path 10 tu colle~lion, lhe states must follow 

this one p3th, ~nd SlOp trying 10 streIch the definitIon of nexus beyond physieal presence) 

II. Collection of sales laX und.r feil.eralle~ill~l;on d.,.,. not crcate n.~U5 for any olher business 

pU'1'ose. 

11. A cOIlg.esslonaily·dctermined excepllon fm smail business .. 

TruST bellevel lhal 01/ ofth~ 12 Pti cipl~ au, necessary fOl Congre$S 10 requite \nItslmphr.c~IIOI' .nd 

hold Slate~ accounlablc to IlIel.w. TruST members have mel WIth sev.,~1 Congr.,Slnnal offices and 

wOllld be willing tl! d i,euss Ihese prmell,l"" al a~y lime. 

Thank )'ou for JIOsing th= additiooal q:~nr;oM_ I ~m happy 10 answer .oy oth.r qU~<liollS you ma~ h,ve 

on Ihis isst'c. 

S;~ccrel~. 

Steve DelBio.to 

E~ccutlvc Director. NcrCholcc 

(. 
179 

Additional Material submitted for the Record 


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AME~~ICAN CATALOG 

MAILERS ASSOCIATION 

Wrinen Testimony of tl1e American Catalog Mailers Association 

Regarding the Committee on Finance of the U.S. Hoose Committee On The 

Judiciary 

Hearing on llI1arketplace Equity Act of 2011 

July 24, 2012 

HAMILTON DAVISON 

PRESIDENT & EXECUTIVE D IRECTOR 

AMERICAN C ATALOG M AILERS ASSOCIATION 

WASHINGTON, DC 

1-80CJ..509-9514 

WlWI.catalogmailers.ora 

The American Catalog Mailers Association (ACMA) thank.s Chairman Smith, Ranking 

Member Conyefs, andlhe Hoose ,Judiciary Committee for this opportunity 10 presE!f11 its 

views on the efforts of states to impose ta){ and tax collection obligations on retailers 

located outside of their states and who have no physical presence in those states, all 

per theMal1\etplaceEquityActof:2011 . H R. 3179. The bill would give stales the 

authority to require out-of-state businesses to collect sales or use taxes. Such efforts 

represent neither federal nor state ta~ reform, txJt merely stales seeking to impose a 

1930s la){ regime on 21 · Century ,:ommerce rather than reformfng thelr tax regimes and 

seeking Congressional help. Effectively, states impose business activity la~es on 

companies with no physical presence, no employees, and no political voice in the state 

Such a move is bad for the econolny. hurtfuilo the affected companies, moves the 

marketplace toward less equity, and fails to solve acute revenue issues for stales and 

municipalities. 

Foonded in 2007, ACMA is the only industry association that advocales specifically for 

catalog marketefs. As the primary voice of the Catalog Industry, ACMA repl"esef1ts its 

members on issues that directly concern their immediate and long term commercial 

interests such as tax Issues, posta.! rates, regulalioos and technical matters; 

environmental issues; and regulatory and govemmE!f1t relations 

ACMA is also a member of TruST. the coalition for True Simplification of Ta~ation. a 

recenlly-formed group whose assclCiation members are all filing written testimony that 
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ACMA has read and concurs with. More information on TruST can be found at 

www.TrueSimplification.org. 

As part of this written testimony and our presence at the hearing, ACMA would like to 

respond to a the charge that "real companies do not care about this issue." To illustrate 

how erroneous a claim this is, ACMA has gathered nearly six dozen letters from remote 

marketers - primarily companies that sell via catalogs - all of whom explain in specific 

detail the harm this bill would cause their companies, growth, and most notably their 

employment. It is notable that this quantity of letters was assembled in only a few 

business workdays between the notice of this hearing and the deadline to submit 

testimony This underscores the veracity of opposition to H.R. 3179 and clearly 

addresses concerns that no real opposition to this change exists. 

1. BACKGROUND 

ACMA would like to address the current movement rallying behind the so-called 

Marketplace Fairness Act. The bill is hardly fair and would do much harm to the 

marketplace. It presents a serious threat to catalog, online, and other direct marketers 

because it would require the collection of sales taxes in more than 9,600 state and local 

tax jurisdictions, with differing rates, taxable product categories, definitions, sales tax 

holidays, and reporting and audit requirements. If enacted, it would result in lost sales, 

confused customers, daunting administrative burdens, repetitive audits, and expensive 

assessments without impartial recourse. The market value of direct marketing 

businesses would be similarly affected.' 

The argument that current nexus standards result in an "uneven playing field" is patently 

false. National retail chains receive many state and local tax benefits and other 

incentives to locate stores in particular areas. These include rebates of property and 

sales tax (TIFs), subsidies for utility lines, training allowances and tax deductions for 

new hires, etc. Employees of business located within a jurisdiction use education and 

public services. Remote sellers get none of these government benefits, yet would be 

burdened with collection of the tax to fund these subsidies. In fact, remote sellers are 

obliged to pay these taxes whether or not they collect them from customers, effectively 

making this a new tax on remote marketers. 

The U.S. Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), ruled that 

without specific authorization from Congress, states could not impose tax collection 

burdens upon remote sellers that have no "physical presence" as this would interfere 

with interstate commerce. Moreover, if allowed by Congress, the myriad of state tax 

jurisdictions with resulting variance in rates, definitions, and audits would create a 

complex and administratively costly nationwide sales tax collection system. The costs of 

that collection are a tax on the out-of-state business 

1 Abe Garver, Focus Investment Bankers as originally published on Seeking Alpha on October 9, 

20 I I and al so found at 

Mp-.1!~'~"YJ~QJ5bQ!1ke[s .c~mhllbJl<:ill:iQl1;;LlllliclSl~t"'"l!mtiQl}si111ticl"-'--lV~bon]YJ:"t<liWlilliiQ 
181 


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2. HARDSHIPS ON BUSINESSES 

Consider the potential situation of one ACMA member, National Wholesale, which is 

based in Lexington, N.C. This 60-year-old, family-owned and operated company is very 

much the catalog mail order equivalent of a main street store. National Wholesale 

provides a full line of clothing, undergarments and shoes tailored to meet the special 

needs of mature female customers from across the country. A sizable number of 

National Wholesale's customers are in their 70s, 80s and even their 90s. More than 

one-third of the company's orders still come in an envelope with check enclosed. Many 

of their customers rely on mail order purchases of products from National Wholesale 

that are simply not available locally, and a large majority of their customers do not have 

access or are not comfortable using a computer or the internet to order 

Like many catalog marketers that operate out of a single state, on the order form of all 

National Wholesale catalogs is a note indicating "North Carolina residents please add 

6.75% sales tax." (See Appendix I for a picture of a National Wholesale order form.) 

Despite this simple directive, many of National Wholesale's customers still get this 

wrong either by paying the wrong rate or not paying the tax at all. Imagine if the 

company's catalog order form had to have a list with the tax rates from more than 9,600 

taxing jurisdictions for customers to decipher. It would be impossible for National 

Wholesale to explain the taxing across all the different jurisdictions in the limited space 

available on a printed order form. And if the older consumers the company serves are 

confused on how to calculate the tax, or which rate should apply, there's a very good 

chance they just won't order at all. 

For the elderly ladies who are confused with what's going on with sales tax, National 

Wholesale would end up absorbing the unpaid tax rather than chasing after customers 

for the unpaid or under-paid tax. The significant harm to their business in chasing after 

customers over unpaid or incorrectly remitted sales tax would be twofold: the cost 

burden of collecting from their customers would be substantial and unsustainable, and 

the confusion, irritation and negative feelings their customers would have toward the 

company over their shipments being held up pending payment of sales taxes would cost 

the company many of its customers. 

As a small company, National Wholesale would also face the tremendous burdens of 

trying to figure out whether the tax is correct or not, remitting it to all these jurisdictions, 

and being subject to sales tax audits from all those different taxing jurisdictions. 

Also consider the hardship another ACMA member, the Miles Kimball Company 

catalog, based in Oshkosh, WI, would face. Nearly two-thirds of this company's 

customers are 65 years of age or older; in fact, almost half its customers are 70 or 

older. Among all its customers, one-third of them still make their catalog purchases by 

mailed-in orders using personal checks. Needless to say, Miles Kimball faces the same 

impossible task of having to explain the assorted taxing jurisdictions as National 

Wholesale does. 
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Although a majority of catalog customers pay by credit card and another majority of 

such customers order online, the education and conversion processes for collecting 

from so many taxing jurisdictions around the country are almost as difficult as the two 

ACMA members referenced here. 

Some seeking to overturn the Quill precedent legislatively claim that this matter can be 

handled quickly and efficiently with free look up software, or that concerns of complexity 

and cost are overstated. This simply is not the case. Each remote marketer has 

invested substantial resources to build enterprise software systems that run their 

businesses. Everything that touches or relates to the order flow or the revenue flow of 

the business is affected including those modules that track inventory, take orders and 

maintain order history, and bill customers to collect revenues. All company legacy 

systems need to be modified to account for this change, imposing a significant 

conversion burden on remote marketers. Also required are ongoing maintenance costs 

to keep descriptions and tax requirements up to date, ongoing training of customer 

service personnel, and additional financial reporting and compliance. 

If the benefit were significant for the states and municipalities involved, then perhaps 

this extra cost might be justifiable. The reality is that forcing remote marketers to collect 

and remit sales and use taxes will add less than 1 % to the total current tax collections 

for states and municipalities nationwide. 

H.R. 3179 puts tens of thousands of remote marketing companies at risk of failure. A 

perusal of the letters assembled in short order and submitted to the House Judiciary 

Committee bear this out as owners and executives document the specific harm the 

collection of sales and use taxes represents to their businesses. 

Remote marketing also supports a large supply chain of "mom & pop" businesses, 

inventors, artists and artisans, manufacturers, distributors and importers who often lack 

the scale necessary to distribute via large national retail chains. Moreover, remote 

marketers necessarily draw on a large variety of vendors and supply chain partners in 

the creating of catalogs, design of websites, and operation of businesses that would 

also be adversely affected by H. R. 3179. 

Should H.R. 3179 be put into law, many smaller catalogers will find it almost impossible 

to compete as already thin profit margins erode further. Putting an entire sector of the 

economy and the many jobs they represent at risk for such a small change in tax 

collections simply is not cost justifiable. 

3. HARDSHIP ON CONSUMERS 

In addition to their positive impact on the national economy, it should be noted that 

remote marketers play an important role in meeting distinct consumer needs and 

requirements, needs that are not generally met by large, sophisticated retail chains. 
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Catalog and internet sales allow consumers to efficiently select goods that may not be 

readily available in their local market. They allow convenient shopping for single parent 

households or dual income families where the adults have precious little free time 

during typical store hours. They bring a variety of hard to get or unique products to the 

market that do not have large enough demand to be carried in traditional "brick and 

mortar" retail store locations. They provide privacy to purchase merchandise that is 

embarrassing or uncomfortable to purchase in a retail shopping environment. Remote 

sellers cater to the needs of rural Americans, disabled consumers and older shoppers 

who may have difficulty driving or walking 

In fact, remote marketing and catalogs specifically bring a wide variety of social, cultural 

and economic benefits to Americans that are not otherwise available. See ACMA's 

white paper "The American Catalog Experience.· Catalog Marketing's Social Importance 

to American Consumers & Culture," attached herein as Appendix II. We ask that this be 

incorporated into the hearing record. 

4. CONCLUSION 

The physical presence requirement from the Quill law must remain for the collection of 

sales and use taxes. If that law is to be changed, it must not be done so without 

significant simplification reform of state sales tax regimes and the establishment of a fair 

and impartial dispute resolution mechanism. Our national economy is in no position to 

afford such a burden absent statutorily-mandated simplification and dispute resolution 

provisions also being included in the law. 

ACMA urges Congress to uphold both the current status quo of the twice-tested Quill 

precedent and to take the time to investigate the implications on all remote marketers 

prior to making any change to the existing laws. 
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APPENDIX I: 

.. 

THANK 
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AMERICAN CATALOG 

M AI LERS AS SOCI ATION 

Catalogs Brtnlil A Variety 01 Goodto Americans 

Ovel"llJew 

APPENDIX II : 

lIlAA.mtiK!l~J..C.I~~~d'!IJ1" 

Cal<W9 M9/~e''''9. $«;Jal 1"Ip(I(1~ IP A/rIer..:;,'i/! 

C()tI$UfI\Gf$ oS CIlII!/ffl 

The catalog industry has a wide-sweEfping impact on Amencan culture. well beyond the 

economic b',lnefits 01 employ;ng millions of people. paying millions ,n federal. state and local 

taxes. and conserving energy and na'iural resources. The American catalog expenance has 

significant and Imporlan! social benefits to American cutture and consumers, 

~s srn Good for American Consumers and Our Quality 01 Lile 

Catalog shopping Is CO!1~enlen! and available 24nl365 from one location accessed by mall , 

telephone or online. on consumption, traffiC congestion, and parking are not factors. 

Catalog shopping is unconstrainedl by geograpny, thus eliminaling phySical and distance 

boundaries. Catalogs put a world of products in the hands of Americans. 

Catalogs allow inslant service wh ne~ r and wherever people wish to shop. They are 

accessed anywhere, home or business. 

Catalogs deline ' unlversal aceass' for mercf1andise and commerce. 

Catalog ShOPpers consistently repOri il is easier to get detailed product knowledge and 

excellent customer service over th', phone than elsewhere (or even to lind a sale, 

associate). There is usually' no or lillie waiting time to gel help 

Catalogs f,ghlthe homogenization of prod<lcts driven by retail consolidation ("the Will-MartIzatlon of America-). Relail economics force aggressive rationalization of merchandise 

assortment. If retailers do nOI sell iJ high nllmber of pieces per ndi~idual store, they cannot 

ex,st. If catalogers, who <lslIally offer iI m<lcf1 broader assortment. do not sell iI high nllmber 

of piecas f1.S~onwide , they cannot '~xisl. Retail and cataloo are different business modets and 

both are Important for the growth e,f the American economy. 

Catalogs create an easy way to comparisoo shop withol.lt necessitating mul~ple trips to 

different stores, 

Catalogs make sending a birlhday , hO!jday or special oCC8sion presef1l 10 anyooe, anyv.i'tere 

a convBrllent pleas<lfe, helping Americans stay connected in an Increasingly mobite soclely', 

Catalogs allow people to shop lor potentially embaO'ass,ng prod<lcts in the privacy 01 their 

own home without worrying about being out ln p<lbllc -for instance, a cancer patient buyl/1g 

a wig , or con'<lmers buying unusual or plus·siZed clothing in the privacy of their home rather 

than in p<lblic al stores. Persooal t1lygiene, medical and disability-relatad products are 

freq<lently purchased from catalogs for enhanced privacy. 

Some of the specially products sold by catalogs includes diabetes-related products, organic 

prod<lCi5, business productivity 10(:,15, pharmaceutical$, and other specialiled goods for which 

a ready retail markel might no! Olherwise e)(ist. 

Catalogs contrib<lte to ttle q<l8lity elf life by pro~,d'ng a convenient, fun, compellingleis<lre 

time experience. Recreational stlopplog is an Imperlant pastime for many Americans. 

Catalogs remain pari Of a shared E'xperience in America rhat remains relevant, humao aod 

enjoysble in Ihe Increasingly' impefsooal age of ecommerce snd eledronic media, 

, 
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• Catalogs form part of our collective experience. Who doesn't remember the childhood 

pleasure of paging through the often-remembered Sears Wishbook catalog? 

Catalogs are Good for the Environment 

• Catalogs may be America's biggest carpool. 

• Catalogs have a low carbon footprint and are becoming more environmentally friendly every 

year. Yes, catalogs use paper, but the modern advances in forestry management have made 

trees a sustainable crop. In fact, there are more trees in North America today than there were 

at the time of Columbus's voyage. Plus, advances in the recycling of paper continue to 

develop and it takes 60% less water and energy to make recycled paper than to break lignin 

into virgin fiber. Please see www.cataloqrnaiiers.ora for more information on «Catalogs and 

the Environmenl». 

• Catalogs make the phone ring, a nearly environmentally neutral communications method in a 

society increasingly aware about ways to cut our carbon footprint. 

• With very few exceptions, catalog companies demonstrate responsible mailing practices, 

honoring consumer demands concerning mailing frequency, contact methods, and individual 

consumer needs and wishes. Catalogers are, by the precise and stringent economics of 

cataloging, self-regulating, and cannot afford to do otherwise. 

Catalogs are Good for the Economy 

• Catalogs stimulate consumer demand, both for direct and retail, fuelling the largest engine of 

economic activity we have. 

• Catalogs are highly targeted and merchandised to meet specific consumer interests and 

needs, thus representing an effective and efficient marketing channel to maintain and 

strengthen American competitiveness. 

• Catalog brands have a long-term relationship with Americans that is part of the shared 

American experience. The ability to come back to trusted brands and companies for the 

things we need, knowing the consistency and helpfulness we will find as consumers can be 

relied upon again and again. This is a high ideal of American commerce. 

• The robust American catalog shopping experience allows for a shift in power from the retailer 

to the consumer. 

• Catalogs are mailed predominately to willing customers who may have a pre-existing 

relationship with retailers, or to those consumers who have requested a catalog from a 

company they are interested in shopping with, or to other "opted-in" consumers who have 

expressed interest in receiving marketing information or specific offers 

• Catalogs help small businesses succeed 

Catalogs Encourage Small Business 

• Catalogs allow many small businesses to quickly and efficiently access specialized products 

that keep them competitive despite their niche focus, small scale or remote location. 

• Catalogs efficiently and effectively serve niche avocations and vocations, serving Americans 

and allowing these businesses to be productive at a lower cost of operations. They help 

"level the playing field" with larger companies that have more extensive sourcing operations. 

• Catalogs provide an important distribution option for small- and medium-sized 

manufacturers, importers, wholesalers, inventors and designers, all of whom do not have the 

scale, sophistication or capital to sell their products to the "Big Box" retail giants, which 

demand prices that are impossible to meet. 
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• Catalogs provide a national market test for new products and the discovery of small niche 

market opportunities that would otherwise require large budgets and sophisticated 

deployment. This creates greater innovation and broader consumer solutions than would be 

possible otherwise. For example, the electronic thermometer, which is now a standard for 

families with newborns, was developed in exactly this manner. 

• Catalogs provide a national audience for small companies and start-up operations, helping 

keep small business as the largest creator of jobs in our economy. 

Catalogs are Good for Disadvantaged and Rural Americans 

• Catalogs can be the only alternative for shut-ins, infirmed, handicapped, elderly or those with 

limited mobility. 

• Catalogs provide viable shopping venues for rural citizens who live too far from stores. 

• Catalogs provide the older population with well-being benefits. The regular contact with letter 

carriers and delivery service providers who deliver packages to the home reduce the sense 

of isolation and provide beneficial human contact and a "safety-net," helping seniors stay 

connected to the community and creating a sense of normalcy so critical to well-being and 

mental health. 

• Catalogs enable people to lend a helping hand to those they do not know, including the poor, 

destitute or imperiled throughout the world (consider, for example, Heifer International, 

CARE, NWF or other nonprofits that have catalog businesses). 

• Catalog companies do not have to be located in urban centers and can instead create quality 

jobs for rural America. High-employment catalog companies are found in locations such as 

Freeport, Maine; Dodgeville, Wisconsin; Dyersville, Iowa; and many other remote locations. 

Catalogs Their History and Their Role in American Commerce 

• Interstate commerce developed because of catalogs. 

• Rural free delivery was spurred on by catalogs. 

• Parcel Post developed the required scale due to catalog shipments. 

• Early catalog brands were among the first to have a national identity. 

• More than half of America shops via catalogs. 

• Catalogs allow marketers to have a national footprint without being a mass merchant, having 

helped develop the idea that we can have national brands without the requirement to open 

stores in every state. 

• Baby Boomers buy more from catalogs - per capita - than any other generation. 

• Catalog use increases with the age of the consumer, particularly pertinent in "the graying of 

America." 

• Catalogs provide important content to keep mail relevant and welcome in the household. 

• Cataloging did $270 billion in sales in 2006 and supported more than 20,000 different firms, 

as well as thousands of supplier companies and service vendors. 

• Cataloging economics fundamentally changed in 2007 and have spurred industry-wide 

experimentation to reduce mail volumes, down 35% two short years later. That's a figure that 

will likely continue to grow once catalogers perfect non-mail marketing techniques. 

Catalogs and the Internet 

• As a whole, catalogers were pioneers in the use of the Internet for the sale of products and 

services to consumers and businesses. 

• By in large, catalogers receive about half their orders online depending on the product 

category and demographic they serve-yet the paper catalog is responsible for generating 
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more than half a company's online sales (some companies report it is upwards of 90%). The 

symbiotic relationship between the paper catalog and online technology yields greater 

convenience for everyone from single, working moms to full families, to the elderly, to the 

physically handicapped, further driving social and environmental benefits, time and 

efficiency. 

• Catalogs are also drivers of retail traffic, promoting commerce, jobs, and convenience for 

brick and mortar retailers. 

• With rare exception, every cataloger has sophisticated e-commerce deployment, making full 

use of all established and most emerging, technologies. 

• Catalogers largely do not distinguish between mail and Internet as business objectives. They 

see it as being about communicating with people in the way they want to be reached via 

media consumers already use. It is also about using the most efficient and desirable means 

possible to stay in touch with customers. The combination of the catalog plus the Internet 

creates a very powerful marketing and distribution system that impacts and improves lives. 

• Catalogs establish brands then extend those brands' reach to the Internet, offering 

Americans hard-to-find products at value-based pricing. 

• Catalogs help consumers feel confident about online purchases. Catalog merchants have a 

long and protected tradition of honoring their commitments as responsible, customeroriented, integrity-driven businesses. 

• Catalogs prompt people to tell others through social media (i.e., blogs, Twitter and 

Facebook) about the products that inspire. This "viral" effect of community and commerce 

has multiplicative financial and emotional benefits. It also increases consumer satisfaction 

and marketer responsiveness by providing a ready forum for customer comments, reviews 

and feedback. 

• Catalogs provide an alternative transactional method for those Americans concerned about 

online privacy or transactional safety. 

• Catalogs still have the highest order response of any vehicle available to direct marketing 

Consumers "vote with their feet." This indicates that a great deal of value is put on the receipt 

of a catalog that creates a residual benefit for both online commerce and the American 

economy. 

Conclusion 

Since the mid-1990s, many experts have predicted the extinction of the printed catalog. 

However, until the double-whammy of the huge postage increase of 2007 and the Great 

Recession of 2008-2009, catalogs in America continued to thrive, aided and enhanced by the 

maturation of Internet marketing. As both the general economy and postal rates settle down, it 

will be proven that "rumors of catalogs' demise" continue to be over-stated. 

With catalogers' continuously responsive use of recycled paper and tree replanting, as well as 

their close attention to self-regulation, this responsible industry is primed for greater growth 

going forward. 

Last revised July222012 

10 
189 


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THE 

AMERICAN 

CONSERVATIVE 

UNION 

July 17,2012 

Chainnan La.'llSf Smith 

House Committee on the Judiciary 

2138 Raybum House Office Building 

Washington, D.C. 20515 

Dear Chairman Smith: 

When government picks winners and losers in the private sector, more often than not, the,e are a 

lot ofloser8. 

In the case oflhe solar energy company Sol}lldra, the _American taxpayers lost the most. After 

receiving a $535 million iOl.ln guarantee gift from the Obama Administration, Solyndra famously 

went bankrupt and was raided by the FBI. Last November Mother energy (",ompany -- Beacon 

Power CO!lJ. - filed for bankruptcy after receiving a $43 million government loan guarantee. So 

much for p]ckin!!. winners. 

Good conservatives have been unrelenting ill their efforts to end the practice of picking willllel'll 

and losers in the federal appropriations process, but inequities remain throughout the budget. The 

United Stares Tax Code is even worse, al) antiquated mess oflaws difficult to understand and 

even h!llder 10 navigate, for both families and businesses alike. As our nation faces grave 

economic challenges, we must t~e action now not only to spur private sector growth in the 

immediate future, but ensure our economic security and dominance for generations to come .. 

Just as government must discontinue asserting bias in the marketplace, it is also necessary to end 

tills practice in our tax policy. SpecifiC<llly, it is time to address the area where prejudice is most 

blatant - our sales tax policy toward Internet sales. At issue is the federal government eXemllljng 

~.me Internet tr>m§!lCljons I:l:Qm sill¢s tllX¢S whil.;: r~1iring the l"Wlittaooe of .~ales ~",~[Q[ 

identioal sales made at brick and mortar looations, It is an outdated set ofpolides in today's 

super infurmation age, when families every day make decisions to purchase goods and service5 

online or in person. Moreover, for a free marke.t economy, it's unfair, punitive to some small 

businesses and corporatioos ond a boon for others. 

This is why the American Conservative Union applauds Rep. Sieve Womack's leadership with 

the introduction of the Marketplace Equity Act of201!. Let lIIe be clear: it is NOT a tax 

increase. Rather, these are sales taxes owed but not presently collected. The government sbould 

not be in the business of picking winners and losers, and punishing brick and mortar businesses 

in favor oflnternet sales. 

In the words ofilldiana Governor Mitch Daniels, "{Sjalcs taxes that [slates} impose oughi to be 

paid. and paid by everybody equa/(v and coll",cted by evmybody in the retail busi1U!sS ,., We 're 

not lalking about an additional or /lew tax here - we 're talking about the col/ection of a tax 

that's existed a long time . .. (Marketplace BUSiness, 1112112) 

American CQnSelVl,\iv<> Union 

1331 H Stroot NW, S~ite 500 I Wa.hington, DC 20005 

(P) 202.347,g:leal (F) 202.347.9389 

www.oQ,'iservative,org 
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THE 

AMERICAN 

CONSERVATIVE 

UNION 

As conservatives we know that governmental power can be used to destroy entrepreneurship, 

innovatiOli and the free market. There is no more egregious example of misguided government 

power then when taxes or regulations affect two similar businesses completely differently. 

Over time the company that has to comply v.ii:h a tax or a regulation will lose market share to its 

competitor who is Calved out from this government interference. In these cases the winner is not 

the company who outcompetes, but the one who gets special privileges from the government. 

At its inception, the Internet was everyone's darling, the latest example of American innovation 

11.110 ingenuity. Internet sales represented a miniscule portion of the lotal retail market, snd the 

!Iovelty led to lax loopholes and unintended consequences. Now, accQrding 10 Forrester 

Research, Internet sales account for nearly 10 perrent of all sales of products and services in 

America, with an annual growth rate of about 9 percent. 

If Congress does not confront this issue, slate and local governments dependent on sales taxes 

willnood to look for other sources of revenues as Internet sales continue to e}:pand. Policy which 

allows for both online and brick and mortar retailers to be susceptible to the same taxes will --

and should - allow for commensurate reduetiOils in sales tax rates. For instance, if Internet sales 

tax revenues will add 10 percent in revenue to a governing body's coffers, then, at a minimum, a 

corresponding overall reduction in rates should apply. 

There is also the question of empowering ollr states plJl"suant to their lOth Amendment rights. 

The ClIITenl system is inconsistent with state.' rights, and the Congress ought to carefully 

consider enacting revenue neutral tax refonn policies consistent with the 10lh Amendment. 

It is the cruelest fonn of economic discrimination when the government looks at two similar 

economic transactions and ariJittmly d""loes to saddJe one with a tax. At the same time, froeral 

and state authorities need 10 slop playing favorites when it comes to the treatment of identical 

goods and services. 

This tax discrimination should be vetted more thoroughly, because the government should not be 

picking winners and losers in the marketplace through the power of taxation. We need to ensure 

entrepreneurs can operate in an economy where the rules are deal' and no one perllon or company 

gets special treatment from the government. 

The free market system can only operate effectively on a level playing field of free and fair 

competition. Whether it's Solyndrn, or sale$ tax, or a multitude of other policy decisions that 

impact the private sector, the government piclcing winners and lo_s is a perverskm ofthe free 

market system. Lawmakers on Capitol Hil1 - especially conservatives - oUght to at least 

acknowledge this when considering important Tefonna to the tax oode. 

The Marketplace Equity Act of2011 begins this cO!1versation. It's not a perfect bill, but it's a 

critical beginning to this dialogue. And, rest assured, we will not be party to or stand for Trojan 

Horse legislation that claims to strive for equity in the law merely to serve as a cloak for secret 

tax increases. 

Amerk!an Conservative Union 

1331 H SI, •• ! NW. Suite 500lWashinQlon. DC 20005 

(P) 2Q2.347.9388 I (F) 202.347.9389 

W\NVII,c;onservative,org 
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75308E2-3.eps

THE 

AMERICAN 

CONSERVATIVE 

UNION 

We know as conservativtes that it is time for our country to tighten our beltg, be honest with the 

American people and fundamentally change ollr tax sJIlltem. We have a great opportunity to 

drastically lower rates, especially the corporate rates, and eliminate esoteric tax preferences. We 

need a flatter, fairer tax code. One that doesn 'I pick favorites. 

Sincerely, 

Al Cardenas 

Chairman, The American Conservative Union 

Amerieel'l Cons€:lV!ltive Union 

1331 H StreetNW. Sulls 500IW •• hingtoc, DC 2COOS 

(P) 202.347 .• 3881\") 202.~47.~369 

'.JtIWW.eon~rvatlva.org 
192 


75308E3-1.eps

JUl 24,2012 245PM Ai RGAS NO, 741 P 2 

July 24,2012 

House Committee on tue Judlcia\')' 

2133 Raybum House Office Building 

Washington, DC 20515 

Submission of Comments for the Record 

United States House ofRepreseutatives 

Committee ou the Judiciary 

Hearing on: RR. 3179, the "Marketplace Equity Act of2011" 

Tuesday 7/24/2012·10:00 am. 

2141 Rayburn House Office BUilding 

Submitted by: 

Carey Verger, Vice President of Tax, Airgas, Inc. 

Ail'g;!'$,trl<;. 

~9 Ncrih Ro:d1\ON~I'lI;$I~ Roed 

""1>100 

R9dnor,PA 19091-0263 

j:gx;fflQ.Se7·S932 

~np:f!wY!w.airgl'!l,~om 

Airgas, Inc. is the largest U.s. diomibutor of industrial, medical, and specialty gases, and 

l:Jardgoods such as welding equipment an.d safety supplies. Airgas is also a major producer of 

certain industrial gases and a leading distributor ofproce$$ chemicals, refrigerants, an.d ammonia 

products. Radnor, FA·based Airgas is proud to employ more than 15,000 people at over 1,100 

locations in the U.S. We support H.R. 3179, the Marketplace Equity Act of2011, as necessary 

legislatJon to strellgt!ren our economic policies and achieve basic principlas of fairness. 

Airgas is a growing company with a physical "brick and mortar" presence across the U.S . (a 

local presence, nationally). Although we collect sales and use ta.", from OUI: customers in nearly 

evety rax jUrisdiction lll. America., some of Oll,!; competitors don't because they sell their products 

through remote channels - by telephone., :mail, and online, into states wb.el'e they have no 

physical presence. This is a clear inequity that leads to lost rax revenue to states. It hurts 

businesses that have invested in communities, giving rem.ote sellers a 5 pel'cent to 10 percent 

price advantage. 

We believe federal legislation is needed to require equitable sales and'use tax collection for all 

retmlers, regardless oflocatlon. States should halfe 1he ability to enforoe their existing sales and 

use tax laws and be able to decide whether or not to collect t31l;es that are already owed to them 

under state law. This is a key issue oistales' rights and it has important economic implications 

for the health ofloeal governance and mai.n street businesses. 

GASES, WELDING & SAFETY PRODUCTS 
193 


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24. 20; 2 NO. /41 P. 3 

Thc $u,prtme Court, in its 1992 QUill decision, ruled !hpj remote sellers, who did,l'! have a 

physical ptestnce:in !be P1lfcI1&S~4' $ stat~, CQuld not be required 10 collect state sales t.-x The 

elqllos:i()I1oflhdntern''! over the last 20 yc~rs, and iml'rQye!l1~!'tts in expr~ss mail delivery have 

made (emote .,elling of ~orom.o&ties nearly a~ common as lOGal selling. TIiings llftVe changed 

qll.\te a bit sinGe tl,,, l"temeT. and oh-lmr; shopping c;lIlle OItto U\e scene, and COXlgre~k" !leeds to 

address those cha.'lge'llow. 

In response to the Supreme Court's conce'Jl.S, the Streamii.'l.ed Sales and Use Tax Agreement 

(SSm A) was developed to assist states in administering a silT-pIer and more uniform sales and 

use tax sY\lt"m. Twenty four states have already enacted legislation to implement the terms of 

the ssm A. However, some states appear to be unwillhg to implement the, I_un. of SSUTA 

lll1tH federal legislation is enacted to require out-of-st,,!e sellers to collect existing sales or use 

taxes, 

State taxotion of all remote sales would help level the domestic playing field between large 

national businesses sellinli remotely aud small local traditioIlll.l businesses. Providing for state 

taxation on all end Ii d:ianrL'111l111to:l1 Ill."! practice. T:1e current system centralizes retail 

sales ,,,,,if rBj;nl\s ill. s:tJ:uggllilll, JQ,eal economies. Equalization would also increase state 

government tax revenues - as much as $23 billion in 2012 - a sign:ficallt factor in It period of 

tight bw;!gels. 

Straighten'illg up this outdiited $)'stem if. a clew, simple step to help restore fairness in 0117 

~ountry's fiscal policy. Airga& provides bllllding blocks for the American economy. We supply 

the COnsll1.1ction, health 0_, energy, ttansportarJQu, and otbedndustries ",ith critical products· 

and services, We am proud to have 10!:al pl:"=sl:nce throughout the United States a.,d look 

f{)fwaxo to cotJwuing Our work in prom"ting l(>cal, regional, and natioIlll.l econom:c 

develo,pment. Ac<:ordi.ngly, WG encourage Congress to onact legislation for state ta.xation of 

remote transactions, like Internet sales, that reflects the realities ofmod= commerce and helpS 

enS1l1'e that all U.S. compauies are treated equally, and fairly. 
194 


75308E4.eps

Before ihe House Judicim) Committee 

Hearing on H.R. 3179, the "Marketplace Equity Act of 2011" 

Statement of the 

Consumer Electronics Association (CEA) 

July 24,2012 

Chairman Lamar Smith, Ranking Member John Conyers and members ofthe Committee, on 

behalf of the Consumer Electronics Association (CEA), thank you for the opportunity to submit a 

written statement for today's hearing on HK 3179, the "Marketplace Equity Act of2011." 

CEA is the preeminent trade association representing American innovators and entrepreneurs, 

both large and small, who are consumer technology companies. CEA's over 2,000 corporate members 

include manufacturers, Internet providers and retailers. Our members design, produce and sell products 

and provide services that enable millions upon millions of consumers every day to access the wonders of 

the Internet. 

As you know, there is currently a large loophole impacting the collection of state sales tax on 

products bought online from out of state remote sellers, which is harming traditional brick-and-mortar 

retail businesses. We believe that H.R. 3179, the "Marketplace Equity Act of2011", a bipartisan bill 

with 48 cosponsors, is an effective solution to rectify this inequity in today' s marketplace while assisting 

US. states in collecting approximately $23 billion in uncollected state sales taxes. 

First, let it be clear that the "Marketplace Equity Act" would not enact new taxes. The 

legislation simply closes a loophole created by a decades-old Supreme Court ruling, issued in 1992 

before the pervasiveness of Internet commerce. The ruling prohibits states from requiring remote sellers 

to collect sales and use taxes owed on purchases from out-of-state vendors. 

This loophole has created an unfair price disadvantage for brick-and-mortar retail businesses and 

has placed an undue burden on consumers who do not realize they owe the sales tax ifit is not collected 

by the seller. It has cost the retail sector thousands of jobs. Additionally, in the year 2012, this loophole 

will cost state and local governments $23 billion in uncollected sales and use taxes. 

We believe that the Marketplace Equity Act represents the best thinking of all the stakeholders 

by providing a roadmap forward for states to collect sales taxes, simplify their sales tax statutes, and 

assist vendors with compliance, while providing for a robust small business exemption. 

To put it simply, it is common sense legislation that will help states with their own budget 

shortfalls without increasing the federal deficit, help curb retail job loss and close a decade old loophole 

that will level the playing Held for all online retailers. 
195 


75308E5.eps

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75308E6-1.eps

STATEMENT OF THE 

DIRECT MARKETING ASSOCIA TlON 

REGARDING THE 

COMMITTEE ON JUDICIARY 

OFTRE 

UNITED STATES HOUSE OF REPRESENTATIVES 

HEARlNGON 

MARKETPLACE EQUITY ACT OF 2011 

July 24, 2012 

Jl!RRY CERASALl! 

SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS 

DIRECT MARKETING ASSOCIATION, INc:. 

1615 L STRl!LI, NW SUlll! 1100 

WASHINGTON, DC 20036 

202-861-2423 

I. INTRODUCTION 

The Direct Marketing Association (DMA) thanks Chainnan Smith and Ranking Member 

Conyers for this opportunity to present its views on the Marketplace Equity Act of 2011, H.R. 

3179, which would allow states to impose tax and tax collection obligations on retailers located 

outside of those states and that have no physical presence in those states. The bill would grant 

states the authority to conscript non-citizen businesses to become their tax collectors. These 

efforts are not federal tax reform-they are not state tax refonn. These efforts represent a 

request from states that Congress impose a 1930's tax regime on 21" Century commerce rather 

than refonning their tax regimes. 

DMA is the leading global trade association of businesses and nonprofit organizations using and 

supporting direct marketing via channels including mail, telephone, direct TV, radio and the 

Internet. Founded in 1917, the DMA currently has over 2,000 member companies across the 

United States and 53 foreign countries. 

DMA would like to discuss the history of state efforts to require remote (out-of-state) sellers to 

become unpaid tax collectors for states, including the Streamlined Sales and Use Tax Agreement 

(SSUTA), and HR. 3179. 

n. HISTORY: STREAMLINED SALES AND USE TAX AGREEMENT (SSUTA) 

The U.S. Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), ruled that without 

specitlc authorization from Congress, states could not impose tax collection burdens upon 

remote sellers that have no "physical presence" as this would interfere with interstate commerce. 

Moreover, if allowed by Congress, the myriad of state tax jurisdictions with resulting variance in 

rates, detlnitions, and audits would create a complex and administratively costly nationwide sales 

tax collection system. The costs of that collection are a tax on the out-of-state business. It is 

significant that these remote sellers' businesses do not receive police or fire protection from 
197 


75308E6-2.eps

those states-they are not present in them. Their employees and their families do not receive 

educational or social services from those states-the businesses have no employees located in 

those states. 

Governments, as well as businesses, face challenging financial decisions in these economic 

times. State legislatures have very difficult budget detenninations and are looking at both cutting 

costs and increasing revenues. However, proponents of the SSUTA have cited grossly 

exaggerated revenue estimates of uncollected sales and use taxes due to remote sales. In 

particular, proponents have cited a University of Tennessee study conducted in 2000 that 

includes unbelievable estimates as to the amount of the uncollected sales tax. A revised 

Tennessee study lowered its initial estimate from $45 billion to $24 billion-even the revised 

estimates will not be realized. 

It is important to note that the Tennessee study rests on a number of faulty assumptions and is 

not based on US. Government data. Further, the study's implication that states are "losing" a 

substantial portion of their sales tax revenues to electronic commerce is simply false. The vast 

majority of e-commerce transactions are not with consumers, but rather with businesses, and 

such business transactions almost always are subject to tax collection or direct payment of use 

taxes by the purchaser. Moreover, the marketplace is demanding more rapid delivery of 

purchased goods. To keep those sales, marketers are establishing more and more distribution 

centers throughout the country establishing nexus under Quilf in more and more states. The 

"lost" tax revenue is shrinking-not growing-due to market demand 

In contrast to the Tennessee study, the independent finn, Forrester Research, has estimated that 

the loss of tax revenue due to state residents not paying use taxes for remote sales is $3 billion 

nationwide-a fraction of the $24 billion estimated in the revised Tennessee study. A 2007 

DMA-commissioned study, based on u.s. Commerce Department data, estimates that in 2006 

uncollected sales tax nationally totaled $4.2 billion. A 2010 study by Eisenach-Litan found that 

uncollected taxes in 2008 totaled $3.9 billion. There is no $24 billion pot of gold. 

Tn light of the Quilf decision, the states began a project to simplify the sales tax regimes that a 

remote seller would face if required to become the foreign state's tax collector. The SSUTA goal 

was to remove that complexity and create a 21,t century, Internet-friendly tax regime to 

encourage economic growth throughout the national marketplace. However, the SSUTA has 

failed to either remove complexity or create that 2Lt century tax policy standard. To be blunt, the 

SSUTA is a document drafted by tax administrators, and, as might be expected, it has resulted in 

little in the way of tax simplification. 

Specitically, the SSUT A 

Has not reduced the number of sales tax jurisdictions in the Nation, which currently 

number over 9,600; 

Has not reduced the number of state and local sales tax rates; 

Has not reduced the number of audits to which an interstate seller would be subject (each 

state revenue department would still conduct its own independent audit); 

Has not established a long-promised uniform vendor compensation to cover the 
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75308E6-3.eps

substantial cost of tax collection; and 

Has not established a single remittance procedure 

Moreover, the Governing Board of SSUTA has granted exceptions to its feeble simplitlcation 

initiatives to win approval of the states. Recently, the Board granted an exception from the 

SSUTA-defined rule for Massachusetts when calculating the sales tax on articles of clothing over 

$100. SSUTA will continue to grant exceptions that will increase the complexity of sales tax 

collection. States are enacting sales tax holidays-some for all purchases under a capped price; 

others for specific products (such as hunicane preparedness) on a specitlc date. Those actions, 

while important for the state and its citizens, further complicate a nationwide sales tax collection 

regime 

As you can see, tax collection has not been simplitled since the inception of SSUTA. In fact, 

SSUTA is "streamlined" in name only 

To better appreciate the failings of the SSUTA, it is instructive to consider its history. The 

Streamlined Sales Tax Project was launched in 2000 on the heels of two earlier joint 

government/industry initiatives: the National Tax Association (NTA) Communications and 

Electronic Commerce Tax Project, and the Congressionally-established Advisory Commission 

on Electronic Commerce. Both projects had concluded that the existing state sales tax system 

was one of daunting complexity, and that true simplitlcation would require sweeping reforms. 

Perhaps most emblematic of the SSUTA's failure to achieve genuine sales tax reform was the 

early demise of the single-most important step toward simplitlcation: the adoption of a single 

sales tax rate per state for all commerce (both over-the-counter sales and interstate sales). Had 

the SSUTA adopted this so-called "one rate per state" proposal, this single act could have 

eliminated the problem of merchant compliance with thousands of local tax jurisdictions with 

different tax rates. 

To put this "one rate per state" issue in perspective, the United States is the only economically 

developed country in the world with a system of sub-state transaction taxes, not only for counties 

and municipalities, but also for school districts, transportation districts, sanitation districts, sports 

arena districts, and other local jurisdictions. In light of this wildly complex system, the adoption 

of the "one rate per state" standard was the unanimous recommendation of the NTA's ECommerce Project (which included delegates of the National Conference of State Legislatures, 

National Governors Association, and US Conference of Mayors) and was in the majority report 

recommendation of the Congressional Advisory Commission. 

Those failings increase the burden on out-of-state sellers. Being subject to 45 separate state 

audits requires a tax department. Those businesses would be required to have multiple state 

registrations and multiple remittance procedures. The cost stemming from tax collection would 

be passed to consumers, constituting an anti -stimulus at a time when our nation is working to 

stimulate the economy. Moreover, remote sellers with locations only in states that do not impose 

sales taxes, and that, in turn, have no process in place to collect any sales taxes, would be 

required to create an entirely new tax department within their company and establish entirely 

new accounting and ordering protocols. Those remote sellers would face even greater burdens. 
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Any discussion of tax refonn concerning non-citizen companies becoming tax collectors for 

states, should require tax refonn in terms of simplification of state sales tax regimes. Only after 

that refonn should Congress consider granting additional interstate taxing authority to the states 

with the prm'iso that the tax regime simplitlcation must remain in place. 

III.H.R. 3179: THE MARKETPLACE EQUITY ACT 

The Marketplace Equity Act attempts to mitigate the significant burden forced sales and use tax 

collection places upon non-citizens of a state. It fails to reduce the tax burden placed upon 

remote sellers. The bill grants states three "simplified" alternatives: 

Require collection of a single blended sales tax rate for use in remote commerce; or 

Require collection of the highest sales tax rate in the state exclusive oflocal tax rates; or 

Require collection of the applicable state and local sales taxes with the state making 

available adequate computer software to the remote seller and exempting a seller using 

the software from state liability for incorrect collection. 

Experience with the Streamline Sales Tax Agreement indicates that states will choose the latter 

alternative. States have failed for the past 10 years to reach agreement on single tax rates within 

a state. With the alternative to require collection for 9,600 tax jurisdictions on the table, that will 

be the option of choice. 

Even the Streamline Sales Tax Agreement calls for states to provide collection software to 

remote sellers. This represents a cavalier conclusion that providing software is the answer to the 

tax burden imposed when states conscript non-citizen remote sellers to become their tax 

collectors (unpaid collectors under H.R. 3179). Tax collection software is not a simple plug-in. 

Many remote sellers use specialized software for order, fulfillment, billing and inventory control. 

That software must be up and running 2417. Adding additional tax collection software cannot 

cause any down-time for the seller. This adds significant cost to implement any software. 

Moreover, the tax collection software must be continually updated as states consistently 

throughout the year tweak their sales tax laws. One Internet based company has testified that the 

cost to implement sales tax collection in one state cost over $1 million, including work hours. 

Marketers cannot afford that cost. Thus, the requirement that states make available adequate 

software does not signiticantly reduce the burden on interstate commerce notwithstanding what 

proponents of H.R 3179 claim In addition, each state could make available different 

software-a true administrative nightmare. 

HK 3179 also fails to address the burden of 46 potential audits (45 states and the District of 

Columbia). Remote sellers would be required to have a tax audit department and legal counsel at 

the ready for auditors representing 9,600 taxing jurisdictions. Unlike citizen companies, noncitizen remote sellers would be required to go to courts in states where they have no political 

voice to resolve any disagreements with state auditors over their tax collection. H.R 3179 

should, at least, repeal the Tax Injunction Act as it applies to disputes on tax collection with noncitizen remote sellers. 
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H.R 3179 also fails to address other administrative burdens for non-citizen conscripted tax 

collectors: 

There is no provision concerning tax holidays that many states have for specific 

items, such as back-to-school and hurricane preparedness. 

There is no single, unifonn rule for sourcing all transactions in a state. 

There is no mechanism to prevent caps and thresholds on taxable items. 

The bill does relieve remote sellers from liability of state claims if the seller uses the state 

"available" software. However, remote sellers are liable for consumer claims (some coming as 

class action claims) for errors in sales tax collection. H.R 3179 provides no shield from those 

claims for remote sellers even when using state "available" software. 

The t1rst two alternatives in H.R. 3179, although DMA believes states will not choose them, 

create for the first time a different legal sales tax rate for remote sales vis-d-vis retail sales. 

Although today non-citizen remote sellers are not required to collect sales tax, the consumer is 

liable for that tax-the same tax that is applied to retail sales in the consumer's jurisdiction. 

H.R 3179 would create a different tax rate-some higher than the retail tax rate and some lower. 

To DMA's knowledge, this is a t1rst-with its own legal considerations. 

H.R 3179 assumes that the seller calculates the tax for the consumer and includes the tax in the 

amount charged. DMA has many members whose customers still pay by check and calculate the 

shipping and would calculate the sales tax themselves. In practice it is impossible for a remote 

seller to provide the check payer (who likely orders via the U.S. Mail) with the tax rates for 

9,600 jurisdictions. Moreover, when faced with an incorrectly calculated tax on a check order, 

the seller faced with an overpayment must either provide a refund or credit and contact the 

customer with that infonnation and choice which is very costly. With an underpayment of tax 

the seller is faced with an even more difficult and costly choice. The seller may hold the order 

and request further payment from the customer or may simple pay the additional tax itself (a new 

tax burden). DMA knows of a company located in a state with numerous local sales tax rates 

that simply asks consumers paying by check to remit the state sales tax and it pays the local sales 

tax to avoid customer confusion. Administrative burden is not washed away by computer 

software. 

The Marketplace Equity Act does not provide for any compensation for non-citizen remote 

sellers. Passage of the Act would eliminate any further discussion on compensation. It is 

important to remember that these sellers are non-citizens of the state and are being conscripted to 

become tax collectors for that state. Compensation would be one facet of equity. 

IV. CONCLUSION 

The bright-line physical presence test in Quill should remain for collection of sales and use taxes 

without signitlcant simplitlcation refonn of state sales tax regimes. The burden of each on 

interstate commerce is large, and this is a time when our economy can ill afford such a burden. 
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DMA urges Congress both to uphold the physical nexus standard of Quill rather than extending 

taxing authority of states to include the collection of sales and use tax beyond their borders 

without significant simplification reform by the states. 
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Written Testimony of the 

Electronic Retailing Association 

Before the 

United States House of Representatives 

Committee on the Judiciary 

Hearing on 

Marketplace Equity Act of 2011 

July 24, 2012 

Bill McClellan 

Vice President, Government Affairs 

Electronic Retailing Association 

607 14th Street, NW 

Suite 530 

Washington, DC 20005 

703.908.1032 
203 


75308E7-2.eps

Introduction 

Chainnan Smith, Ranking Member Conyers and Members of the Committee, the Electronic 

Retailing Association ("ERA") thanks you for the opportunity to submit this written testimony 

on the impact of remote sales tax policies for electronic retailers. We believe that the 

Marketplace Equity Act of 2011, H.R. 3179, would significantly hann American businesses, 

their employees and the customers who rely on a healthy and vibrant marketplace. Forcing 

remote sellers to collect and remit sales tax in jurisdictions in which they do not have physical 

presence or "nexus" will create a new tax burden resulting in considerable economic harm. It is 

our view that new and misb'llided remote tax schemes will materially affect electronic retailers 

working to survive in these harsh economic times. Massive cost increases and new regulatory 

burdens will result damaging consumers and the marketplace on which they rely. ERA urges 

you to protect electronic retailers, both large and small, from this new tax burden and continue 

supporting entrepreneurial efforts that createjobs and help stabilize the economy. 

The Electronic Retailing Association is the trade association in the U.S. and internationally that 

represents leaders of the direct-to-consumer marketplace, which includes members that utilize 

electronic retailing on television and online to engage with consumers. Today, ERA proudly 

represents more than 450 companies in 45 countries including many of the industry's most 

prominent retail merchants. ERA's membership consists ofa diverse ecosystem ofbusinesses 

and entrepreneurs operating at the cutting edge of innovation who have adapted to the rapidly 

evolving challenges found in the current retail landscape. 
204 


75308E7-3.eps

Background 

For decades state governments have wrestled with the challenges of collecting sales and use tax 

on purchases for out-of-state retailers. What began with mail-order catalogs and telephone 

orders has increasingly moved online and now state collectors are blaming online commerce for 

uncollected sales taxes and the decline of Main Street businesses. But the tax loss numbers do 

not add-up. Main Street retailers use remote selling techniques to compete with mass "brick and 

mortar" retailers, and upon second glance proposals to simplify tax systems is not so simple and 

create a new tax burden for affected remote sellers. 

The Streamlined Sales Tax Project (SSTP) began in response to the 1992 U.S. Supreme Court 

decision Quill Corp. 1'. North Dakota, 504 U. S. 298 for a catalog business that sold office 

supplies -long before the modern era of online commerce. This ruling affirmed a 1967 Supreme 

Court decision National Hellas Hess I'. J)eparlmenl of Revenue, 386 U.S. 753 that state sales tax 

systems are so complex that no retailer - whether storefront, catalog, or online - should have to 

collect sales tax for states where they have no physical presence or "nexus". The new tax burden 

of compliance would be too high. That left the states with two options - radically simplify sales 

tax systems and come back to the Courts for another look, or persuade Congress to force remote 

retailers to collect sales taxes, whether the systems are simple or not. States pleading for more 

taxing authority as the first dot-com bubble expanded, and then cried louder as the U.S. economy 

slowed and spending by states outpaced revenues. State tax officials blamed online commerce 

for their fiscal problems based on forecasts of growth in e-commerce. A short time later state 

sales tax revenue had recovered. Despite minimal progress in simplifying sales tax systems 

again Congress finds itself petitioned to impose new tax burdens on remote sellers as state tax 

coffers run low. 
205 


75308E7-4.eps

The Numbers 

States, "brick and mortar" retailers and other advocates of the Streamlined Sales Tax Project 

(SSTP) continue to use estimates that just don't add up. They cite a University of Tennessee 

study that blames online commerce for $24 billion in lost sales tax revenue a drastic reduction 

from the study's prior estimate of $45 billion in 2000. An independent review from Forrester 

Research estimates that unrealized revenue from uncollected sales tax equates to $3 billion 

nationwide. Similarly, the Direct Marketing Association (DMA) conducted a study in 2006 

based upon U.S. Commerce Department data that supports this level tinding that the total amount 

of uncollected sales tax nationwide totaled $4.2 billion. Even ifnone of that sales tax were 

collected, the loss would be significantly less than the Tennessee estimates. Despite these 

findings proponents of SSTP continue to cite questionable estimates from the University of 

Tennessee study. As Congress debates this issue, it is clearly in the public interest that an 

accurate portrayal of estimates are provided as members conduct their cost benefit analysis and 

weigh imposing a new tax burden upon remote sellers. 

The Facts 

Remote Retailers Collect Sales Tax Today. All online sales already are subject to tax. All 

retailers whether "brick and mortar" or remote retailer are required to collect sales tax on goods 

delivered in any state where the retailer has a physical presence or "nexus". Consumers are 

obligated to pay a "use tax" on all purchases even if the seller is not required to collect the sales 

tax. States have done little to educate consumers about their use tax obligation or to provide 

them with any easy way to comply. 
206 


75308E7-5.eps

New Tax Burdens would harm American Business. Tax collection under this new taxing 

scheme would cause thousands of American businesses to be confronted with entirely new tax 

obligations of collecting and remitting taxes for over 9,600 taxing jurisdictions throughout the 

country. This new tax burden would include school districts, transportation districts, sanitation 

districts and sports arena districts among others. This will dramatically increases the complexity 

of remote commerce as a viable medium for business activity. State tax collectors have failed in 

their original mission to reduce the number of tax jurisdictions. Similarly, State tax collectors 

have failed to reach its goal of uniform definitions for taxable products. Instead, each state is 

allowed to create its own "gray area" with respect to every term defined in the Agreement. 

Individual states only have to use "substantially the same language" a recipe for confusion and 

litigation from businesses forced to comply with this new tax burden. For consumers, the 

confusion and complexity are even more problematic. Shoppers who pay by check for catalog 

purchases (a common form of payment among the elderly and low income wage earners) must 

self-compute the applicable state and local sales tax for each jurisdiction to which a mail order 

purchase is sent. Again, these are major new tax burdens - not simplitication. 

The inability of "brick and mortar" big box retailers to compete is overstated. Often "brick 

and mortar" retailers imply that e-commerce is hurting their business and they cannot compete. 

Nothing could be further from reality. Despite collecting sales tax for online purchases "brick 

and mortar" retailers dominate the Internet Retailer Top 500 List of the most successful online 

retail businesses. The reality is for decades small retailers (online and off) have lost sales to bigbox stores. In recent years, the Internet has offered the best hope for success of Main Street 

retailers to compete. 
207 


75308E7-6.eps

Efforts to enact online sales tax collection by "big box" retailers represent an attempt to alter the 

playing field in their favor by unfairly discriminating against remote sellers. Online, burdens are 

much greater for remote sellers who must compute, collect and remit tax for thousands of 

jurisdictions, as compared to an in-state retailer who collects at just one tax rate. Remote 

retailers are also responsible for the ditTerence if a customer fails to remit the correct tax when 

paying by check - a problem that traditional retailers do not confront. Delivery charges usually 

exceed the amount of sales tax on those same goods -leaving remote sellers with no price 

advantage over their "brick and mortar" peers. Competitive claims aside, the evidence clearly 

show that "brick and mortar" big box retailers enjoy an overwhelming advantage both online and 

otT for the foreseeable future. 

Conclusion 

The Electronic Retailing Association strongly contests etforts to force a new tax burden upon 

electronic retailers called for by the Marketplace Equity Act (H.R. 3179). While the bill grants 

states three "simplified" alternatives industry experience with the Streamlined Sales Tax 

Agreement dictate that states will opt to require collection of the applicable state and local sales 

taxes with the state making available adequate computer software to the remote seller. This 

system does not currently exist in the marketplace today. Nor can software been seen as a simple 

fix as all electronic retailers use specialized software for order, fulfillment, billing and inventory 

control. The chilling effects of software as a "magic" solution cannot be overstated. One 

Internet based company recently testified that integrating its systems cost $1 million for one state 

alone. This new tax burden alone would force many members of the Electronic Retailing 

Association out of business. 
208 


75308E7-7.eps

While the bill does relieve remote sellers from liability of state claims if the state's "available" 

software is used it does not address remote seller liability from class action claims for errors in 

sales tax collection nor address the new tax burden of 46 potential audits for the 9,600 taxing 

jurisdictions. These new tax burdens will require Electronic Retailers to maintain both tax audit 

services as well as substantial legal resources to respond to issues as they arise. 

Therefore we believe that HR 3179 will devastate electronic retailers working to survive in 

these harsh economic times. A growing number of industry participants tell us that in recent 

years they have seen a decrease of up to 40% in their sales and that the worst affected are 

"hanging by a thread." Participants also report being grateful that they have survived the recent 

economic downturn. Enactment ofHR 3179 would call into question their survival with new 

regulatory requirements and new tax burdens. We urge you to support Electronic Retailers as the 

industry recovers and resist the urge to hamper budding entrepreneurial efforts to create good 

jobs that help stabilize the economy. 

75308E8-1.eps

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75308E8-2.eps

BJ GLOBAL DIKECt 

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211 


75308E9.eps

July 24,2012 

The Honorable Lamar Smith 

Chainnan 

Committee on the Judiciary 

United States House of Representatives 

213 8 Rayburn House Office Building 

Washington, DC 20515 

The Honorable John Conyers 

Ranking Member 

Committee on the Judiciary 

United States House of Representatives 

2138 Rayburn House Office Building 

Washington, DC 20515 

Dear Chairman Smith and Ranking Member Conyers: 

We, the undersigned organizations, write to express our strong opposition to H.R. 3179, the 

Marketplace Equity Act, which would impose significant cost burdens on Internet-enabled 

businesses across the nation. 

If enacted, this bill would overturn the Supreme Court's decision in the Quill case and allow a 

group of states to impose new and onerous tax burdens on Internet-enabled retailers and 

entrepreneurs that do not reside in their states. Not onl y will this give a group of state 

governments far-reaching and ground-breaking tax collection authority, but it will also 

undoubtedly impede the growth and development of interstate commerce. 

Over the past decade, Internet-enabled businesses and entrepreneurs have become an integral 

part of our nation's economy and have produced hundreds of thousands of jobs. There is no 

doubt that the Internet has been an engine for innovation, empowerment and economic 

development, especially in the world of retail. The Internet has connected entrepreneurs across 

America, including individuals in rural and disadvantaged communities, with consumers in every 

corner of the world. This "global market" has provided businesses the opportunities to grow and 

expand and has enabled consumers to access quality goods and services. 

At a time when our nation is recovering from challenging economic times, we believe Congress 

should be enacting pro-growth policies that encourage and increase economic activity, not 

increase costs and burdens on our nation's businesses. We also feel that H.R. 3179 does not 

adequately address several of the discriminatory actions surrounding interstate taxation that 

directly affect innovation, such as business activity and the disparate treatment of digital 

offerings. The new burdens that H.R. 3179 would impose on our nation's online entrepreneurs 

will not only adversely impact hundreds of thousands of jobs, but would undennine the robust ecommerce market that consumers across the world currently enjoy. 

We appreciate your consideration. 

Sincerely, 

Computer & Communications Industry Association 

Direct Marketing Association, Inc. 

Electronic Retailing Association 

Information Technology Industry Council 

NetChoice 

TechAmerica 

TechNet 
212 


75308E10-1.eps

II A CO-_.- 11tt.._ 

~ ... _-

July 23, 2012 

ne HonOl1lhle Lamar Smith 

Chaim18n 

Commin~ 0/1 the Judiciary 

U.S liouseofRepresenlalivcs 

Wa,hingtOll. DC 20S 15 

NATIONAL 

L.EAGUE 

"CITIES iliIiW 

Dear Chairman Smith and Ranking r.. lember Conycn: 

The Honorable John Conyers 

Ranking ~mber 

Commiucc on the Judiciar), 

U S House of Representatives 

Washington, DC 20515 

On behalf orlhe organiZlltions1isted above representing our natlon ~ cities., towns and counties, 

we appredalc the opp·ortunity \0 ~bnlillhe following conlnHo'!It~ on lheMllfk~lplm'i! f;qrufy AI'I 

(H.II. 31 7'1), which will assure a simpler system ofla ~alion and hdp our members recovo:r tax 

revenues Lhat are due from purchases madtl by remote means. The M<II'itl1//I/(I('<I Elfllll), Ac/ does 

110\ impose 11 new tall, but wOlJld pro\~de Stales and localities wilh a mechanism 10 requir'e the 

colll"clion of sale5 and use ta~es un Internet and mail-{lrder !lale~. ThiJ WQuid help IU level the 

playing field between thuS<': remote sdlers and bri ck and monar stores on Main Street 

While thl" incrtasing strength of eil"ctronic curnl11erw creales e)tciling new ntarketplaces, il h/ls 

also put traditional retail OI.ltlets It an unfair disadvarnage because of QUtdared and inequirable 

tll.~ and regulatury environments. Th(' Supr~me Coun·s decision in Quill Corp. t'. Norlh /)ak/l/(I, 

504 U.S. 298 (1992), lef1 stare and local governments unable to adequately enforce their existins 

sales t/lX laws on sales by oUI·of-statt: catalog alld online sellers. Rut Congress; with it5 c-1e~r 

constitutional 8uthority to regulate interSUIlt: commerce, can give SlIllC$ and local govemmenl' 

the option 10 require seller5 who do nOI havea physical presence in Iheir jurisdiction 10 chnrge 

and collect sales 1a'<cs from IheircuSl.omers 

TtJeMarioelp/<lct' fil,,;lyA('1 would g;tve state and Io.:al govemmenl3 the oplion 10 collecl Ihe 

sales ta.~es Ihat art' already owed und·er currenl law from our·of-slale busines,es, mlher Ihan rely 

on customers 10 pa)' those laxes to th,~ Slates when filing their annual state tax rcorms While 

brick-and-mortar retailcrs direclly co11ecl sales laxes from cuslomers who make purchases in 

thcir stOles. many online and catalog retailers do n01 colil'Cl Ihese SlIme ta ~es, This puts main 

Stree.1 retailers al 11 no,Je to ten percent competitive price disad"anlagc to remote sellers, II is 

signi!icant to note that cu,tomers arc already required 10 pay la~f'S when they make online 

purchases.jusl like "hen they make purchases in 11 slore: ho"ever. most la~payers ale nOI aware 

ol" lhis re~ponsibility. and SHUes alld lucalities do 1101 have the rcwurces 10 enfOfl":e paymelll 

We nOle, however, two concerns with theMlIrkelp/m:"';qmlY Al'l First. as il1lmduced, the 

legislation allows Stales 10 exdude local sales and use tases (rom being collecled This is done 

in Section 4 {A I(i) and (ii). by allowing stlltes to administer a lax system on remote ~Ies Ihat 

"'QUid usc a sinslc ta" ralC for the emjre state or 11 blcnded rate. nl1hcr than the third option Ihal 
213 


75308E10-2.eps

July 23, 2012 

Page 2 

preserves local sales and use taxes Both the single and blended rate options would pre-empt 

local sales and use tax statutes by not allowing the full sales tax rate to be collected on remote 

sales. This would obviously undennine the legislation's objective to develop an equal playing 

field for all sales, as one (lower) tax could be charged for remote sales through a single or 

blended tax rate, and another (higher) tax, which includes the state and full local sales tax rate, 

would be collected on sales made in physical stores. We respectfully suggest the Markelpface 

Fquily Aci be amended to preserve the ability oflocal governments to maintain their own tax 

rates, and impose that same tax rate on both remote and brick and mortar sales. 

We would like the bill to also recognize the important and longstanding Streamlined Sales and 

Use Tax Agreement that twenty-four states have adopted. The Agreement provides important 

administrative, definitional and procedural guidance for states and retailers alike to follow, and 

should be relied upon as the legislation hopefully becomes law and is implemented at the state 

level. 

There is no time better than now for this legislation to move forward, as local governments face 

the fifth straight year of declines in revenue with probable further declines in 2013. We look 

forward to working with Representative Womack and other Congressional leaders to address the 

concerns of local governments, and support efforts to enact sales and use tax simplification 

Thank you again for the Committee's attention to this hearing. 

Sincerely, 

~r()cwJuLarry E. Naake, Executive Director 

National Association of Counties 

r~~ 

Tom Cochran, CEO and Executive Director 

United States Conference of Mayors 

Donald J. Bornt, Executive Director 

National League of Cities 

Jeffrey L. Esser, Executive Director and 

CEO Government Finance Officers 

Association 
214 


75308E11-1.eps

/ National Retail Federation· Th6 ~/Ce of Relllil WDr/wMc 

Submission of Ihe Na tion:.1 Retll il Fcdenllion 

10 t he 

J-Iouse Commillel' on rhe .Judiciary 

Hearing on H.R. 3179, Ihe "Ma rketplace Elluity Act onO l1 " 

LiDertv PIaOII 

325 7110 SItfIIIt NW. So,1e 1100 WallWlglDn, DC _ 

IOO,NRF.H0W2I800.613,.692) 

2OZ.783,T97 ' III. 202131.28019 

_ .,,".com 

July 24, 201 2 

David f'rtnc b 

Sellior I"C(' Pn'5id"I/1, GO' 't'rllmi!/11 /(1:1(llirHl~ 

N~tiol1al Retail Federntlon 

325 7'~ Street, 1'1 W. 

Suile 11 00 

W~sbinglon, DC. 2()()()..1 

(202) 783- 797 1 

fn:nchd@nrfcom 
215 


75308E11-2.eps

As the world's largest retail trade association and the voice of retail worldwide, NRF 

represents retailers of all types and sizes, including chain restaurants and industry partners, from 

the United States and more than 45 countries abroad. Retailers operate more than 3.6 million 

U.S. establishments that support one in four U.S. jobs - 42 million working Americans. 

Contributing $2.5 trillion to annual GDP, retail is a daily barometer for the nation's economy. 

NRF's RelAilMeans JQ~ campaign emphasizes the economic importance of retail and 

encourages policymakers to support a Jobs Innovation and ClJHSUm,)f Value Al!cnda aimed at 

boosting economic grow1h and job creation. \vww.nrfcom 

Summary of Comments 

Members of the National Retail Federation believe that Congress must resolve the 

Constitutional questions posed by the Quill decision in a fashion which promotes a level playing 

iield among retail competitors. As retailing evolves and Internet sales become a more prominent 

portion of total retail sales, it is critical that Congress support pro-small business reform of a 

broken sales and use tax collection system. 

Brick-and-mortar retailers compete vigorously with each other and with remote retailers for 

market share. Different retailers have different strategies for going to market, but one feature is 

beyond a retailer's control: only some competitors are compelled by the government to collect sales 

taxes. This situation is not created by the marketplace, but rather it is a disadvantage imposed by the 

current state of the law following the Quil! decision, stifling retailers across the country. 

In addition to the perceived pricing disadvantage caused by sales tax being included in the 

cost ofthe purchase from the brick-and-mortar store, local stores also bear a significant compliance 

burden for collecting the tax. Compliance costs for small retailers are high, placing them at more 

of a competitive disadvantage.' 

Simpliiication is a key component for refonn of the sales tax collection system for both 

brick-and-mortar sellers and remote sellers who voluntarily collect sales tax. Many members of 

the NRF voluntarily collect sales tax on remote sales into states where they do not have a 

physical presence. In many instances, the retailers that voluntarily collect sales tax do so only 

from states that have adopted the Streamlined Sales and Use Tax Agreement ("SSUTA") 

because of the Agreement's simplified collection requirements. 

Granting states the authority to collect sales tax from remote sellers will add significant 

resources to state budgets to support essential local services including teachers, police officers, 

iirefighters and ambulance crews and reduce pressure to seek alternative sources of revenue from 

already burdened businesses within their borders. Remote sales include e-commerce, mail order 

sales, telephone orders, and deliveries made across state lines. By 2012, total e-commerce sales 

are estimated to reach $4 trillion dollars. 2 Annual national state and local sales tax losses on e1 Pncc\Valcrhou~cC()opLrs LT.P, Rerai/ :)'ales Tax Compliance lostS: .'/ ,?I/ational Ksrimare fTolume One: Alain 

T?epori, Apnl 2006. That study defIned "small retmlers" as havIng less than $1 mIllIon ttl annual retail sales 

: Don<lld Brw .. :e, William F. Fox, and LeAnn Luna, State and Local Ci-ovemll/em ,Sales l'a'C Revel/ue Losses ji'om 

Electronic Commerce, Uni\'cr~ily of Tennessee, April 2009, aV<iilablc at hUp:l/cb(;r.utk.cdukcol1unkcom0409.pJI. 
216 


75308E11-3.eps

commerce alone are conservatively expected to grow to $23.3 billion by 2012 for a six-year total 

loss of $52 billion.' 

NRF is encouraged by this Committee's interest in this issue as well as the several 

legislative proposals that have been introduced this Congress to address sales tax fairness, 

including the Marketplace Equity Act, HR. 3179, introduced by Representatives Womack and 

Representative Speier. NRF supports Congress granting states remote collection authority with 

simplifications that ensure all retailers are not unduly burdened by collecting and remitting sales 

taxes. 

The Impact of 0Ili// on Small Local Retailers 

The current sales tax collection system ignores the realities of how today's technology driven 

economy hurts local small businesses. 4 No matter how local retailers refine their business model, 

they cannot decrease the amount of sales tax they are legally required to collect from their customers. 

This places small local retailers at a competitive disadvantage if certain remote sellers are allowed to 

escape from this requirement. This competitive disadvantage must be cured with Congressional 

action. 

A sales tax is a tax on the consumer and is imposed where the consumption or use takes 

place. Alternatively, the use tax is assessed by a state for use, storage, or consumption of goods 

when a sales tax is not collected. So all sales in a given state are subject to the sales or use tax, 

regardless of whether the sale occurs in a store in the state or in the home of a resident of the state 

through their computer or telephone. 

If Congress permits the state to only collect the sales tax on sales that occur in stores in that 

state and not sales made online in that state, then Congress is creating an unlevel playing field to the 

disadvantage oflocal stores in congressional districts. Given the rise in online sales, continuation of 

this system will create such an unfair burden on those consumers that actually pay taxes due that 

states will have to move away from sales tax systems and find other sources of revenue (e.g. more 

reliance on income taxes). 

A federal solution to the Quill decision will allow states to broaden the base and apply their 

taxes equally to all items sold promoting an efficient sales tax system. Allowing states to capture 

remote sales tax revenue equitably regardless of a retailer's business model is meaningful pro-small 

business reform of a broken collection system. This reform is necessary to reduce the uncertainty 

currently rampant as shown by state-by-state attempts to establish nexus for collection purposes 

artificially stifling the growth and expansion of small and medium sized businesses across the 

country5 

:3 "Collecting E-Commerce Taxes" National Conference of State Leglslatures. available at 

http://y,,,·\vY',;.ncsl.orglissues-research/budgeticollecting-e-co111l11erce-taxes-an-interactive-map.aspx (last accessed 

July 23, 2012) 

'1 ·''1'hl.: lime: ha::; come for ::;alcs La:"\. fmilless: Hear Their Stories:" July 2011. available at 

I,v\v\v.rctai11llLan~iobs.co11l/salcsLa:\raimcss/storics (last accessed July 23, 20 [2). 

5 ,)'ee Jordan Kmg & Joseph Henchman "Scholastlc nooks Paces St~te Tax Oveneachmg" May 15. 2012, Tax 

Foundation, a\ailable at http.l/l<L'{foundation.org/artide/scholastic-books-faces-stale-ta:-..-overreaching (lasl accessed 

July 23. 2012) 

2 
217 


75308E11-4.eps

The Effect of Simplification on All Retailers 

Simplification of the current sales tax system will reduce the burdens highlighted in the 

Quill decision and benefit all retailers." Through adoption of the SSUTA, 24 states have already 

implemented significant simplification of their sales tax laws for all retailers. This simplification 

has incentivized collection of sales tax by many remote sellers that currently are not required to 

collect sales taxes. Many regional retailers with significant national business through their 

Internet channels collect sales tax on remote sales but only in states that have adopted the 

SSUTA. 

Collecting sales taxes from all retailers is a more efficient approach to dealing with the 

realities of e-commerce's constantly evolving business model. However, small businesses' good 

faith etfort to collect sales tax will be undermined by a grant of collection authority to the states 

that does not include simplification steps and liability protection. Technology allows for 

meaningful simplification in a way that was not possible at the time Quill was decided. In fact, 

groups who argue against reform in this area acknowledge that simplification through technology 

is possible. The combination of software solutions and liability protection recognizes the 

collection challenges for all retailers and reduces burdens imposed by the state. 

While NRF believes that a modest small seller exemption for remote sales is appropriate, 

raising the level too high will only exacerbate the potential for inequity between a small remote 

retailer that does not have to collect any taxes and a local small retail competitor who must 

collect sales taxes on the first dollar of sales. Congress should resist the temptation to envision 

that a small seller exemption is the easy answer to meaningful small business regulatory relief. 

Background 

In 1992, the U.S. Supreme Court ruled in Quill v. North Dakota that "remote sellers" - a 

category that includes mail-order, telephone and Internet merchants - cannot be required to 

collect sales tax from customers in states where the merchant does not have a physical presence 

or "nexus." The court reasoned that the sales tax system was too complex for a merchant to know 

what sales tax to charge an out-ot:state customer - 45 states and 7,600 local jurisdictions collect 

sales tax, each with its own rates, lists of taxable items and definitions of taxable items. But the 

justices suggested that sales tax collection could be required if the system were simplified and 

Congress authorized the collection authority because remote sellers are "purposely availing" 

themselves to a jurisdiction's authority by engaging in commerce. 

In late 1999, in response to the Supreme Court ruling, states and the business community, 

including NRF, began the Streamlined Sales Tax Project, with an aim toward significant 

simplification of state sales tax systems. Since then, a baseline multi -state agreement, the 

SSUTA, which includes common definitions, uniform processes and procedures, and 

significantly simplified administrative features has been passed by 24 states (21 full member 

states and 3 associate member states), establishing the necessary groundwork for action by 

Congress. The 21 full member states with voting rights include: Arkansas, Iowa, Indiana, 

('; The complHlllce cost:.. for retmlers responsIhle for sale:.. tax collectIon \\lthout snnphflcatlOll IS detmled m the 

submission or the National Ret(Jil .b'ederallonlo this COllllllittee'>j he.::mng on No\ember 30, 2011 entitled '-lle(Jrillg 

on Conslitutional Limitations on Stal(;s· Authorily [0 Colkcl Sales Taxes in E-CClll1lllCrcc.·· 

3 
218 


75308E11-5.eps

Georgia, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North 

Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont, Washington, West 

Virginia, Wisconsin and Wyoming. Three associate member states with negotiating authority but 

delayed voting rights are Ohio, Tennessee and Utah. Utah was recently granted full Member 

State status etfective October I, 20127 Delegates from the 24 states administer the SSUTA 

through the Streamlined Sales Tax Governing Board. 

As electronic commerce continues to grow, so will the losses to state and local revenues. 8 

In fiscal year 2012, it is conservatively estimated that state and local governments stand to lose at 

least $23.2 billion in uncollected sales and use taxes from remote transactions, with over $11.6 

billion uncollected trom e-commerce transactions 9 General sales taxes make up roughly one 

third of state tax revenue. 10 Sales tax is primarily collected by the retail industry, and the retail 

industry continues to bear the compliance burden for this critical portion of state and local 

government budgetsll 

Current Sales Tax Fairness Legislation before Congress 

The two leading bills introduced this Congress to address the issue of sales tax fairness 

are the Marketplace Fairness Act and the Marketplace Equity Act 

(1) Marketplace Equity Act of2011, HR. 3179, sponsored by Representatives Womack 

and Speier allows states to collect sales taxes trom remote sellers if they meet three 

minimum simplification requirements. These three simplification requirements may 

be met in an interstate agreement, presumably including the SSUT A. Sellers with 

less than $1 million in remote U.S. sales or $100,000 in remote sales into a particular 

state are exempted. The three simplification steps are: (1) a single revenue authority 

within a state for submission of a return; (2) a single tax base set by the state; and (3) 

the state must choose a single tax rate trom three choices: a blended rate of state and 

locality rates, the maximum state rate, or the destination rate. 

(2) Marketplace Fairness Act of 20l1, S.1832, sponsored by Senators Enzi, Durbin, 

Alexander and Tim Johnson provides a path for states to collect sales tax that 

incorporates a combination of either nine simplification steps or adoption of the 

SSUTA. The Marketplace Fairness Act exempts remote sellers with less than 

$500,000 in remote US sales, requires a single audit by states and localities within a 

state, requires a single state tax rate based on the destination ofthe sale, states must 

-, Press Release, -:Utah Accepted as Full Member State." Streamlined Sales and Use Tax Govel11ing Board, Inc. June 

27,2012, available at 

hl Ip: / I\-\ \v\-\ . ~In;amlincdsah::slax. orglindc:-... php '?macl = Nc\vs,cntnlO 1.dctail.O&cntnlO 1 (lrliclcid= 12 7 &cntnl 0 1 origiJ = 1 

5&cntntO1 n::tllmid=74 (last accessed .Tuly 23, 2012). 

8 Donald nnlce, 'yhlliam l'. Po:\:, and LeAnn T.una, /",'wle and TJ)cu/ Clovernment .. ')'ales Tax Revenue J.ossesjimn 

Electronic Commerce, Uniyersity of Tennessee, April 2009, available at http://cber.utk.edu/econml/ecom0409.pdf. 

';I ld. 

]0 LLley Dadayan and Robert B. v·/ ard, State Revenue Report, rhe Nelson A. Rockefeller Institute of GovemmenL 

OeL. 2011, No. R5, availahlc at htLp:ll\vw\v.rockin~Lorg/pdr/govemm(,·nt_finanee/stale _revcnuc JeporL/20 I 1-10-26-

SRR_85.pdf. 

11 Friee\valerhouseCoopers LLF, Retail Sales Tax Compliance Costs: A Nationall!.'stimate J 'olume One: l\iain 

Report, April 2006, available at htlp:llv'iw\v.baessuta.org/Cost%20oftlIo20Colleclion%20Study%20-%20SSTP.pdl'. 

4 
219 


75308E11-6.eps

establish certification procedures for software and service providers (to calculate 

rates), and gives remote sellers liability protection for relying on incorrect 

information supplied by service providers. 

Each bill grants states the authority to require remote sellers to collect sales tax on 

transactions into their respective state if simplification steps are adopted. The varying 

simplification requirements include tax base, tax rate, and collection software requirements. 

Conclusion 

The National Retail Federation has long supported sales tax fairness legislation, and we 

are encouraged by the momentum that is building toward a solution. We look forward to 

working with the Committee on legislation to ensure etTective and fair sales tax collection while 

relieving burdens placed on a growing sector of the economy. 

5 
220 


75308E12.eps

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,~" --. -_ ... ,- ...... -- (!1011grttls of tltt Nnitrb .@Itllt.es 

Bouar af Etpnarnlatillu; -""'- --

The HOllOl'llbie Lam .. Smith 

Chairman 

Committee on the Judicial)' 

21]8 Ra)'bum Itemsc Ofli<:c Duilding 

near ChtUnmln Smith, 

July 25, 2012 

_ coo.ou.nlf (\W 

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I r.:eently n>ecl,'cd thc~nached com:sponder.ce from, bu,ineos lo<ated in my 

DislriCl!Uld wonted 10 s!we il with yo~ and your staff. 

We know all to well the burtl.:n. placed un our llIuion5 burinc~~ loday by the 

ovem:a<:h of the federal ~ov=cnt and as .""It, r would caution OUr Iri>dership from 

mo~;ng. bill that could ;ncr.: .... OO'IS, cause sales 10105 and ultimately lead 10 lo.tjobs. 

AI a time when our frogilc economy _<15 all !hi: help il can gel, I ask that yon 

cOMidor Iho follo"ing COOCCTrul raised by my o:amtituCtlI ttJl~rding the Markelplace 

Equity Ac!. 

Enclosed: 

7120112 Oriental Tr>KIing: ComjJMly. 11K:. 
222 


75308E13-2.eps

The Honorable Lee Terry 

2331 Rayburn Ho".e Oflice Bldg. 

Washington, DC 20515-2702 

Dear Repre."Icntatlve Terry: 

GENERAL COUNSEL'S OFFICE 

Tolef .. , (402) 829-4489 

July 20, 2012 

We understand thot the Hou,. Judiciary Committee is holding a bellTlng on July 24, 2012 on H.P., 3179, the 

«Marketpiace Equity Act." We are concerned tha.t this bill ha.~ not been well thought out, wHl hate disastrous 

unintended consequences and is being decepttvely pmJllOted as a way to achieve "fairness" and $'~lve state tax 

collection problems. 

First. the bill purport3 to require non~StreamUned Sales Tax Agreement states to adoprf uminirnulil 

simplification requirements." However, tbere are no deB]' standal'd5 as to what these s~m[lIiJ]~tiol1 

requirements mean or how they must be met, and no oversight to eJ1Sure such simpliflcmlon isldoue. As a 

result, the biU virtually etlSures litigation, 

Second, such IIsimplification" does natlllng to resolve the patchwOl'k of existing state ta."t laws O'D=1111 fact, may 

make it worse 'With ench state eoacting its own measure of "si.mpltfication'i, Ra1her than allow st to export 

the complexity of the!l' sales tax. laws, Congress. should requke them to first refonn their tax 1;)1 terns before 

CVetl considering granting authority to impose mJ( coltec.t1on obligations on out ofstIJte retoUers. 

Finally. the burdens dliit trus bill wHt I,m pose lIre enormQus, It is not as simple as just installing tI~e software. 

Software must be integrated with ordei\ fulfillment and inventory aystcms. Moreover, our *~sjn@s, for 

.xample, can'i., more than 30,000 diffe,'.nl item., integration ofta.~ collection sot\ware will requ"" mo"ual 

data input and maintenance to ensure proper designation of wh.ether eoch item is taxable or not ani ot what tax 

rate 1n oach of more Ihan 9,600 taxing jurl,dlctlon" That is • costly bUl'dell fuJi! bricks and m,*"" .. etailers 

don't-have. 

H.R. 3179 wiIl result ill increased cosrn, lost sales, and lost jobs. It wil1 illcrease regulatory burd~nll 011 310aH 

and medium. sized businesses which cun iii-afford it. 

1110ae are among the refl3011B why we oppose H.R. 3179 in its cun'ent fann. We urge you to nntisuppoft that 

bill, 

ffwe enn be of.e.nsistance to answej' questions you may have, please do not hesitate to COD1BCt me. 

-.-'-------------------------t--

Corpal"". OfJl<es 4206 SOll~' I OS.h Sm. 

Omaha, NcbJ'ask1l68137 

402-331-5511 
223 


75308E14-1.eps

.................. 

~RILA ..-............... EdUC&ta.lnnDvaILAdvocat .. 

July 23, 2012 

The H"""",ble tamar Smith 

Chairman 

Judiciary [ommiU~., 

U.S. Hou.., 0/ lIept""'"lati"'8 

Washing' on. D.C. 20S15 

Dea. Chairman Smith and Ranking en\~' [onV'"'' 

'IOO_ _ ,,_, "",.""" _,_""moo 

, (1011 ... • ....... " .. '1 ....... 

-~ 

Th~ Hooo ... ble john Coo~e,s 

~.nl(ing Member 

Judiciary [ommitl~ 

U.S. Hoose rn "p'l'S~ ati"e< 

WJ!hington. D.c.. 20515 

On ~h.1f of the Relaillndu<lfy In';'',, Asood"U,," (RILA), we commend the judiciary Committee for holding. 

1"gi<lali ~ he.ring Ihl. w",,~on H.II. 317, II", Marketplace Eq";ty AU, wh,ch j~oflhe Illmo" Importance to the 

,et.~ Industry~. "'ell •• many othe, <lakeholder group., The bipartl"," Marketplace Equity Act correrua 

critical fiaw ln our .rale '.""I"In polki ... thallodav pUI!; bra and moria. <10'''' ala cDmPl'lltive dim"amag" 

to Dnll""""nly com""nips thai a,en'( ,e qu, .. l'd 10 COIiKI ,tall! ",I ... la ...... RILA hope. that after Ihi. Wi"ek'. 

legtslati ... heari"s D" lhe Ma,k~pla.ce fqull~ Art \hal all ,emain;ns is.u" can headdr~ .. "d and thaI the 

Committ..., will be able la move farward an IMlesidation In ,hatt order. 

By WWi af ba.ckgrOllnd, RILA i. Ihe trade a"",cialion <If the world',la,se<l and mo<l in""vaI"'e retail companie •. 

RILA promat'" con.umer <hoke and KC"cltnk frePdom through PIl~i< palicy and i"du'tr~ aperational 

~IIeMce. ~ mM1ber<lr1dude ml)le than 200 ,etaiief., prodl>Cl manufacture ... and "'Ni~ "'Pf>lle ... whidl 

t<>;lether a.crnunl fl)l more than SI.S trillian in ann".1 ,a .. " mililen. a f American jeb!; and aperate more Ih.n 

100,000 store., manufa.cturlng facll it ie. and diOlributlan cent" .. dom"llcally and ,DrDild. 

AI ,,,lie Il. a decade,-old loophole that 'e<!ul",. that bricl< and ml)lta, retaUe" collect .a'" ta.e. if II>ey Ilo ... a 

physical p'~nc<'ln a <lale, while anline-onlv compani" aren'l held to 1M ",me <landa,d. Thl. palky ha, Ihe 

effect of pUltinSlocal brick and monar , to,," whata ke the time 10 bund. 'lore, hl,e locally, contribute Ie the 

community, and pay properly tan. at a ·]~ compelitive di",dvantase on price. Tax policy thaI lrealllwD 

compelilO" differenlly 1. inheremly unlair" and the Markelplace EQuity Act before this Commit,..., lak ... a 

ru",,,able approa.ch toward leveling the playina field while pr",,'dins protection fo, ..... U u'I'~\"'. and 

,,,,,uiring'I'le' 10 "m pl~v their rollecdon reQuiremenl' on remole ""lIers. Thi. i, nolo new t ... nor a la. on 

remole .elle r.: 11 i. simply a quel;lion 01 whether .lI l'/pe.oI bur.ln~ss w,1I collecl. on beh311 of lhe con.umer. 3 

la.lhal l. al ... ally owed. 

In ctD'Oing, RILA aPPfl!'Cial~ thaI lhe Judici.:ory Commltlee I. giving the i>.u~ 01 "·Iaim .... and the Markelplace 

Equily Act lhe ppropri3le anenlion it de ......... , The growing bipartisan support fo, e·lairn .... IesisJalion over 
224 


75308E14-2.eps

the past few months has become evident, with governors, editorial boards and businesses all calling on Congress 

to take action this year. RILA urges the Committee to favorably report the Marketplace Equity Act so that the 

government gets out of the business of picking winners and losers in the marketplace, and so that our members 

can get back to the business of serving our customers and helping to grow the economy. 

SincerelYI 

Bill Hughes 

Senior Vice President, Government Affairs 

Cc: Members of the HouseJudiciary Committee 
225 


75308E15-1.eps

B"JPnsc 

Software Finance &. Tax Executives Council 

July 24, 2012 

Via Email 

Hon. Lamar Smith 

Chairman 

Hon. John Conyers, Jr. 

Ranking Member 

Committee on the Judiciary 

U.S House of Representatives 

www,softwarefinance.org 

2138 Rayburn House Office Building 

Washington, DC 20515 

Re: Hearing on H.R. 3179 

The Marketplace Equity Act of 2011 

Dear Chairman Smith and Ranking Member Conyers: 

I write on behalf of the Software Finance and Tax Executives Council (SoFTEC) to 

express the views of the software industry on H.R. 3179, the "Marketplace Equity Act of 2011." 

If enacted, this legislation would give states the power to require that out-of-state sellers collect 

and remit state sales and use taxes owed by consumers who purchase goods and services from 

such sellers; in essence, a legislative overturn of the Supreme Court's decision in Quill v. North 

Dakota. SoFTEC strongly believes that any legislation making such significant changes must 

also (1) require that a state first adopt "radical simplification" of its sales and use tax laws and 

(2) resolve uncertainty regarding the appropriate nexus standard for imposition of state income 

and other business activities on out-of-state businesses. Because H.R. 3179 lacks such 

provisions, SoFTEC does not support this legislation in its current form. We ask that you make 

this letter a part of the record of the hearing on this matter. 

SoFTEC is a trade association providing software industry focused public policy 

advocacy in the areas of tax, finance and accounting. SoFTEC's members sell their products in 

many states and must maintain an infrastructure that handles the administrative burden 

associated with collecting and remitting sales and use taxes for those states in which they have 

physical presence. SoFTEC's members have an interest in this legislation because its enactment 

would expand the number of states for which they must collect and remit sales taxes and would 

require significant investment to expand their infrastructure devoted to sales and use tax 

compliance. Enactment of the bill also could lead to an inference that the physical presence 

nexus standard has been repealed not only for sales and use taxes but for state income and other 

business activity taxes as well, significantly increasing their exposure to such taxes. 
226 


75308E15-2.eps

Radical Simplification: 

SoFTEC does not support the bill because it would not require that states radically 

simplify their sales and use tax systems as a prerequisite to the grant of expanded collection and 

remittance authority. In deciding that the physical presence nexus standard was appropriate to 

protect remote sellers from the burdens of administering myriad state and local sales and use 

taxes, the Supreme Court in Quill pointed to the nation's 7800 plus taxing jurisdictions at the 

time. Quill was decided in 1992 and the number of taxing jurisdictions has grown to 9,600 in the 

meantime. In short, since Quill was decided, the burden has grown significantly with a nearly 

than 20% increase in the number of taxing jurisdictions. 

The bill seeks to address this problem by requiring states seeking collection authority to 

adopt one of three approaches to the state's tax rate. A state could adopt either (1) a single 

statewide rate for remote sales that blended the state and local rate, (2) the highest rate in the 

state exclusive of local rate, or (3) the applicable destination rate in the state, so long as tbe state 

provided adequate software that eased the burden of collecting at multiple rates. 

We believe the single rate per state for remote sales is the proper approach; the other two 

approaches should be deleted. In a single stroke, such a change would reduce from 9,600 to 45 

the number of state and local taxing jurisdictions a remote seller would be faced with. States 

could use their internal political processes to resolve ditferences with local jurisdictions with 

regard to setting the rate and distributing the collected taxes to the individual localities. Coupled 

with the single form and filing and uniform state tax base components of the bill, this approach 

would cause much of the current complexity to recede into the background. One-rate-per-state 

for remote sales represents the main ingredient in the sort of "radical simplification" needed to 

justify repealing the physical presence nexus standard for sales and use taxes of the Quill 

decision. But, even more simplification should be required before expanded collection authority 

is granted. 

Other Simplification Ingredients: 

The only sales and use tax simplifications in the bill required of a state, in order to qualify 

for sales and use tax collection authority, are the exception for small sellers, the use of a special 

tax form for remote sales, a single authority within the state for filing the form and a single tax 

base for the state. While these simplifications would be welcome, they do not go nearly far 

enough nor do they require any sort of uniformity among the states. They would do little to 

reduce the remaining administrative burden on sellers required to comply with 45 state sales and 

use tax regimes. 

There is a plethora of other simplification areas that could be required of states before 

anyone of them is given collection authority. For instance, all states should be required to use 

the same tax reporting form. Having a single form would aid automation of the return 

preparation. In addition, there should be uniform electronic filing and payment methods. The 

same is true of administration of exemptions. There are many purchasers who are exempt from 

sales and use tax and they typically supply the seller with a fonn or provide data allowing the 

seller to prove on audit that a sale was exempt. Having a uniform exemption form or required 

Page 2 of3 
227 


75308E15-3.eps

data elements for all states would ease the administration burden on sellers. Mandating 

"destination sourcing" for remote sales would foster consistency of treatment among the states. 

There are many other simplification criteria and we point to the good work the Streamlined Sales 

Tax Governing Board has done in this area (although their work is inadequate and incomplete, it 

is a step in the right direction) 

In short, the bill's requirements for state simplification of sales and use taxes should be 

expanded to mandate greater uniformity and simplification among the states as a prerequisite to 

any grant of sales and use tax collection authority. 

Physical Presence Nexus for State Income and other Business Activity Taxes: 

Disputes between states and businesses over the appropriate nexus standard for imposing 

state taxes on out-of-state businesses are not limited to sales and use taxes. Many states point to 

the fact the Quill case only involved sales and use taxes as a reason for using a different nexus 

standard for other types of state taxes, such as income and other taxes based on business activity. 

The business community, on the other hand, believes the Commerce Clause of the Constitution 

does not impose different nexus standards depending on the type of tax involved and the physical 

presence nexus standard of Q1IiII applies to all types of taxes. It would be inappropriate to 

eliminate the physical presence nexus requirement for sales and use taxes but leave unresolved 

the existing uncertainty regarding its application to other types of taxes. 

In October of2011, your Committee reported H.R. 1439, the Business Activity Tax 

Simplification Act of 20 II (BATSA). This bill would resolve the uncertainty regarding the 

appropriate nexus standard for state income and other business activity taxes by codifying the 

physical presence standard of Quill for those types of taxes. SoFTEC supports BA TSA and 

believes Congress should pass it before (or at the same time as) it passes any legislation 

impacting the physical presence nexus standard for sales and use taxes. 

Conclusion: 

For the reasons stated above, SoFTEC does not support H.R 3179, The Marketplace 

Equity Act of2011, in its current form We thank you for the opportunity to provide these 

comments. Any questions regarding them should be directed to Mark E. Nebergall who can be 

reached at (202) 486-3725 or mnebergaiVaJsofrNarefinance.org. 

Respectfully submitted, 

Mark E. Nebergall 

President 

Software Finance & Tax Executives Council 

Page 3 of3 
228 


75308E16-1.eps

Statement 

of the 

Federation of Tax Administrators 

On the Topic of 

Remote Sales Tax Collection Authority 

Committee On the Judiciary 

United States House of Representatives 

July 24, 2012 

For additional infonnation call: 

Marty Morris 

202.301.7296 
229 


75308E16-2.eps

Introduction 

The Federation of Tax Administrators (FTA) is an association of the tax agencies in the 50 

states, District of Columbia and New York City. FTA has long supported legislation to require 

remote sellers to collect sales taxes. Granting states the authority to require all sellers to collect 

sales taxes from all customers will level the playing field for competing businesses, improve 

compliance with taxes that are already owed, and remove artificial restrictions that inhibit 

business investment. 

Leveling the Playing Field for Sellers 

FTA supports the objectives ofHR 3179, The Market Place Equity Act. The establishment and 

explosion of the Internet as a marketplace has redefined the world of commerce forever. At one 

time considered principally an enforcement problem for the states, the disparate tax treatment 

between remote and local sales, which has existed for many decades, now poses challenges for 

local "bricks and mortar" and Internet businesses alike. This legislation should not be delayed or 

encumbered by special preemption legislation. 

The Marketplace Equity Act and related bills respond to the U.S. Supreme Court's decisions in 

National Bellas Hess and Quill. j These decisions are widely read to exempt sellers from 

collecting sales tax from customers who are in a state where a seller has no physical presence. 

These taxes are owed but frequently go unpaid, giving the seller in that case an unfair 

competitive advantage over traditional local retailers. 

We have provided technical comments on elements in any legislation that would assure the 

maximum participation of the states under the Act. The most important ofthese elements are: 

• Authority granted to states that are either members of the Streamlined Sales and Use Tax 

Agreement (SSUTA) or that choose to conform their laws to federal statutory standards. 

• 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 that have 

already been agreed to between states and industry groups under SSUTA. 

• 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. 

• Preservation of state authority to require sellers to maintain necessary records. 

• Exclusion of any mandatory vendor compensation provision, as this requirement would 

significantly reduce state participation. 

FTA believes that legislation that does not have a demonstrable need or share the joint support of 

businesses and states should not be considered when enacting remote seller sales tax collection 

1 National Bellas Hess, Illc. v. 11linois Del' 't (~tR(,VI!n1fl!, 386 U.S. 753 (1967) and Qui11 Corp. v. ;.\'orfll Dakota, 504 

US 298 (1992). 

1 
230 


75308E16-3.eps

legislation. The clearest example of the type oflegislation that should not encumber the sales tax 

legislation is the Digital Goods and Services Tax Fairness Act of 20 11 (RR 1860). There is no 

discernible, let alone pressing, need for the legislation because states do not widely subject 

digital goods or services to taxation (with the long-standing exception of software). Furthermore, 

discriminating against digital goods and services is already illegal under the Internet Tax 

Freedom Act (ITFA), which specifically prohibits multiple or discriminatory taxes on electronic 

commerce. In addition, the states that have closely examined RR 1860 believe they would 

suffer significant revenue losses. 

Finally, states have identitied numerous technical deficiencies with HR 1860, which will create 

uncertainty, unnecessarily disrupt tax administration, and lead to years oflitigation. Until 

businesses and states can reach a consensus on how to address these technical deficiencies, the 

Digital goods and Services Tax Fairness Act or any other preemptive legislation like it should 

not be considered when enacting remote seller sales tax collection legislation. 

Again, we thank the Committee for the opportunity to present our views on the important topic 

of remote seller sales tax collection legislation. We urge Congress to enact legislation like HR 

3179 this year. 

2 
231 


75308E17.eps

-,-.......-'--

11IO_00/I0~ o._ 

, • .".. ........ ='.051 1 

The I'Iunonbie Jo/ln C<>O\'f'I'I 

US HOuse 01 Re1)I'i!HntltiYu 

14O! R~'" I10UM Offici Ujkll~. 

WI~DClOS1S 

DII' CDnI1t1Jl'Nn C.onV1UT. 

'I1le H_ J\ldi,,""1 Commitlee " 1101"'''1 I helrl"l II>tv 2'" to dltcIIU cwenumlro:ll lW\ca.yetted Su_ 

COlIn dKIs10niL967', M1tfMoJ 8trlkH'~ rul ..... 11lII1.991·, Quill d~'lon thl! upht!ld tilt 1967 "wj !hll 

noId"he ""posIlIon of CIoaotoc sUII! lInd Ioul .. la. Uoe. constItUte, • Ilc ~fficln. ba,Iie, to 1n! ~nl'liI 

"""",",eI. TIlls COt''' MlooItllVlIro t~1d rilhl l$ wIIIIl ~blirs OIl' MUDflal ~noony to lrow, 

It ......... I'otttd to o;omply with 11\.1 I)<1IlI1sIoIu: .... islonfd In H_M. U 79, our b<.I.inc~. kluwd In ll rl.~ , VI, 

will be _elf MrmecI. W!1!IItn!)llcltlonl fo( OUI Im~nl ouIloG"- ~""I howl our 110 .mjl~ 

coml)ll!l'/ WOIIld IfKU" , .. ,,' tdmlnilV-1IYt loci "nl nO.I bvrd", '" I"'" I nd mm bTlplemenll", I IJ~ 

ccljectlOn rq .... for 9,600 tI~\nl J""scllcI'oM. to crttle • II' d'PIInmen\ t,. ll\II le 1II\I11S lrom 45 11"6 

and DC, .,-.d 11tS.\ IHm . ,. hlndle lilY I.w sulu 01 ..ornlnlslrnlW d.l<ml """" IIIlt • • nd 

,onw .... ,.. 1140_. our C""'f'Iny ~ .1. _ r of dltdo; l>I.,.....,nl1. tolfnlni 9,600 ~ 

Ju,Iodlcllc nl on OU' webllfll', IlfC'ItIt .. or fNrullllA mlllo1allltlrcon.umers toQ1cula1l! tIM! JM'OIIf' ta. l. 

II!lpOI.Sible and will 'Ulln In _r Ind' undet~V'"Inll 01 til whlctJ ...... -..111 hive to rHOIvt 10 mlQ the 

.0. 

We would Uke to f1!&lit" our 111001 01)pos/tlor1 to lU I. J I 79 In ~. Currrnt Iofm. We Ihln~ t~ Ire toun~ 

policy rnsoolS 10 "'_~ I~ 5111 .... Q\IO, but _n If ....... dlOo" 10 d>If'CI' ,"- QIIIN decision, we urae VOl' 

10 wrIIt .. 1 .... lf'dI inlO SUM. 10 " ... D-Ind IMdlu(J'-ohltd b\nInt!_~ Ufl CO" WIlt! thl _Je..~ .1'11, 

brlnas. 

We (In d~trltc rlLll Atqul<l<\r ". ~ " lief!, to coIIea uIr, IU WI. odd IHs !han Ui 10 toll l $IIt~ 

Inc! ~I I&II n"",. We "n POln'l 10 thl Com_ral De1)l.tmellt'l own 5IltliIDIO show tllI.1 """,e thn 

9O% oflhe 6oI11"lrln .. tted on lhe In "'ellre 81.8 forwNrl> mo5lWIry doni. 1$III'i!IdV beinJI mll ~ 

'" UK 110. T1lIs II nol I (Ule ~ fo< rll" .nc! IoCII ~""I Ihortflns. ILltne .... ry lelll, tlN ~ IlIlrne to"" 

rhis rll~1 wiltrout unlnh!nded mMO!~uet'ICe .. ThI.1I ml lhe Ii"", 10 be PLlttI",lIIOrljoDS" Nk.l1pem'lv 

ill smlJl.- Ind me l~"l·lIz,d butl""~IeS, which mike up Ihe b.ltl<bGnIollhe 'm~lo~mttll m "merl.,.. 

"/}--

c~ .. I'rtll4rll1 

OfnoCi l10IcIinp "mtrlel' Inc:. 

DIRECTHOLDING$ ':' ME."~':::~.s: ;I,;C ...."' .. _--------- ....... __ ... _. __ .. __ ... 
232 


75308E18-1.eps

The Hono,-"blc Lamar Smith 

Chairman 

Judi~ilu)' CommlHe<! 

U.S. HOll$(' of Rep,..,scfllllti"", 

Wash'ngton. D.C. 20151 

Dear Chainnsn Smith, 

July 2 .. , 2012 

On behalf or the T~xas Reinlie ... Assoeiation, I write 10 1hank theJudi"ja'Y 

Committe<! f<>r holding today'" huring on !LR. J 179. Ihe Marke~placc &]uity 

Act. Previous h"""ngs have dcm<m.1r.ned nol only the undeniable <leed for 

th'. Ieg(.latlo<l bu~ also the broacl biparti .... n support thi~ Itgi$lntion eu"...nUl' 

enjoys. We <lOW u'll<" the commil1tt to proc~d WIth thc mark-up oflhl. 

legishltion thaI is vitally important to Main Streel ,..,u.ile", and the 

communities they sen.oe 

The current tax .y.lem puts brick-and_mortar m(J"ehanLS ala distinct 

disadvantage t<I online odic ..... II allows internet ""llers withouI" physical 

pre""nce in a given .tale 10 """"PC sale$ IWle. collcedon. ellen when lhox 

taxu " ,.., o~ 10 the 5\ale. This unfairness comes at Ihe O:Xp"noc: of iQcal 

bU$incucs. which arc required 10 ool1ect taxes lind fo=d to ch"'1:" highu 

prices to consumers as a resulL That's not Rood f<>r consume ... or for healthy 

market comp"ti\ion in the retail 'ndllst'}'. 

In 2011, Texas (ook ... b'g step to p"",lde for a greater dcR"'t' or sal.,. lax 

faimcs5 as it applies 10 bu~inesses with n<:xus in our "tDl~_ Coura~u, "\Bu. 

legi.lato .... like John OnO) pa.sed l~giaLation eilui/ying our .Iate la\\"s on ne"us. 

No longer Can an out·of.5tale company whh a ph~ical presence In Tc~"'" play 

corporate games 10 avoid our 1""'8. 

Unfortun8tdy, in thi, c~"" ... Tt"'-IU IIOlutlon is insuJT"'icnt to address that 

whkh i!I a n"tional '..,...c. Opportunities r~ma'n for online sellcrs 10 operate 

without collecting and remitling the sales taxes that ...... rightfully owed. It ,. 

~stjmatcd Ihal stales and ~omm llnitl es 1011<: $24 billion " Y""r in uncoll""ted 

... Ies taxu on ,."mote saIc •. State-b)l .• tate attempls to c!o"t. thi. coll"",tion 

loophok has only increased the confusion and complexity for "'\Btle", 

.. nemp~lng 10 comply with sales I».>; collecl;nn laws. 
233 


75308E18-2.eps

Th<: Markelpia(.:e EqL.iL) Ad is :lOt a bill to crentc yet another tax on ret5.ilers or 

on confiurncrs. This 1cgi:il;-!1iun only- set'ks to pTo\'ide '>tates the mechanism 

and authoritj,. to collect sales taxes r.h8:1 Rrc dt~t-; consistent, 

uniforrri rules for aB busir:'f'sses a-s it n-.;{ntes to all. behalf 

of the Texas Retaile:/:'s Association, \"e thc:mk 

respectfully r8qucstyou inJrTlcdi'ildy 

legislation. 

Very truly yours, 

Ronnie Volkenil1g 

President 

Texas Reta.ilers Association 

The Voice of Texas Retail 

rvolkeningl~1txretailcr5.(Jrg 
234 

Æ 


75308E19.eps

Tk~ Hono"ble Joh!1 COOVers, Jr. 

US Houle: of lIepresenUtlvu 

2426 ~.ybu(n House Office. Bulldll"fl 

Wnhi"l' .... DC 205!S 

,2 

Jul'f 18, 2012 

The House JIJdkI.IV Committee Is: l'IoIllin, I Iluring Ju'V 24'" to dl5als:!i 1Nt!" wnl ... ~ twic:eIIf!tted Supreme Coun decision (1961's Nflti""IJ/f)eIlM H,u rulinS .ndl1!191', Quill deds/on thilt 

upheldlhe 1967 ralll) lhal h"leI, tile ImpOsition of chotk: stile lind loul sales tuu tonnllutes 

;t slgnlllc.nt barrier to Interstate commeIW. Tills COnSljlut llly -pro ~tted .IgM ~ wh;n 

llroablel otJr natlon.1 ecooomv togrow. 

If~ ~Ie forced \0 comply wit" the prolllsions mlslo~ed In H.R. 3179,io.....-bullness 1oC3led In 

Neenah, WI Will be seY~t,r harmed, with Implications for our i!n'ljlloyment outlook. Hell!'s IIow: 

our _.It mmp.i"Y would ineur ~ huge idmlm tratNe.1Id ftnltl'ldll burden In tlm\!.PCI costs 

implllmemlnC iI wcollectlon reaime for ' ,600 tlXlllI turl!idICllons, \0 C7N1l! IiIlllldepartment 

to Mndl. audits In:Irn 45 ~lles .nd DC, and a legal tum to h'ndle il nV 18w lultso. 

IdmlnlstrJlNe cl.inu fromstlte$ .. nd cons\ltTM!r5. Moreover, 01.1' awnpany reott.>esa swn1tlcant 

all'lOllnl of tiled!; (layments.1oO 'htlns 9,600 tuJuri5dlalonson 0<1' web$ltes, ~u~ o.r 

rnarllttJnc mattr1llf 'or consumer1 to "Iwlate Ihe proper In Is irrtpossibleana will resull l" 

OVf!!t .na \lndetp~ymellts ofnx whldl WI waulll ~ ... e to resol'ie 10 mah the sale. 

We would lI ~e to tlliste,CU" S~oppositlOf1 10 H.R. 3 119 In Its CI.Ir~t form. We thln~ t"'l1' 

arw sound porlql re.sons to ptese~ thl st~IY5 quo. but even i'you thoose 10 dIoInge the aI/III 

dedslon, we urge you to write wl'Iyards Into 5tetute so sm.lI- I t'Id medlufT\ooslred bw.inesJes 

can tope wl1l'1 the complexity thh brings. 

We un lIemonrtnlle tNl requiring aM ,emolt .tellers to tOUect Sllell .. will add le5$ man 1" to 

total "Ut and IOtal tax revenuu. We CiI~ point to the COmmerce Department's own statlslb 

10 $~wlhll fl\(Jte Il'1ln 9O%0fthe dolt,.s tnns.act~cI on I!le Intemet Ire 828 for whk:h mon 

ellery dot\;!r Is "tready beirc collected in use tax. This Is not I CUI' at! (or,Stltl Ind Iocall1!venue 

shortfa"s.. At Ihe very least. there 15 time tv dotllis riaht wllho",t unintended consequef\CeJ. lnls 

Is not Ih tlme 10 be pUIl1r~ mOrl jobs al mit, especially .II smal!· I nd medlum·slzed busI!Ie$Ses. 

whlth mike "'P the b.ckbone of the employment In Amer1c:i. 

/'j;," 

~ President 

xse. R.spon$f', 'tlCQrpo •• d 

48 Jewelers Park Drive. Suillll200, Neelllh, wr 54956 - 800.5 10·8010 

Scort..swansoD@Xlellreaponsc..c:(lm .