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CONSTITUTIONAL LIMITATIONS ON STATES’ 

AUTHORITY TO COLLECT SALES TAXES 

IN E-COMMERCE 

HEARING 

BEFORE THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

NOVEMBER 30, 2011 

Serial No. 112–89 

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 

[Vacant] 

SEAN MCLAUGHLIN, Majority Chief of Staff and General Counsel 

PERRY APELBAUM, Minority Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

NOVEMBER 30, 2011 

Page 

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 ......... 33 

WITNESSES 

Dan Marshall, Marshall Music Company, on behalf of himself and the Michigan Retailers Association 

Oral Testimony ..................................................................................................... 36 

Prepared Statement ............................................................................................. 39 

Patrick M. Byrne, Chairman & CEO, Overstock.com, Inc. 

Oral Testimony ..................................................................................................... 52 

Prepared Statement ............................................................................................. 54 

The Honorable John Otto, Texas State House of Representatives 

Oral Testimony ..................................................................................................... 58 

Prepared Statement ............................................................................................. 61 

Tod Cohen, Vice President and Deputy General Counsel, Global Government 

Relations, Intellectual Property, Regulatory and Asset Protection, eBay Inc. 

Oral Testimony ..................................................................................................... 65 

Prepared Statement ............................................................................................. 67 

The Honorable Luke Kenley, Indiana State Senate, on behalf of Streamlined 

Sales Tax Governing Board, Inc. 

Oral Testimony ..................................................................................................... 76 

Prepared Statement ............................................................................................. 78 

Paul Misener, Vice President of World-Wide Public Policy, Amazon.Com, Inc. 

Oral Testimony ..................................................................................................... 79 

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

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Material submitted by the Honorable Daniel E. Lungren, a Representative 

in Congress, from the State of California, and Member, Committee on 

the Judiciary ......................................................................................................... 4 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Prepared Statement of Jeffrey A. Eisenach, and Robert E. Litan, Empiris 

LLC ........................................................................................................................ 124

Letter of opposition to S. 1452/H.R. 2701 .............................................................. 161 

Letter from Steven Bercu, President, Austin Independent Business Alliance 

(AIBA) ................................................................................................................... 163 

Material submitted by the Hudson Institute ........................................................ 164 

Prepared Statement of David French, Senior Vice President, Government 

Relations, National Retail Federation ................................................................ 181 

Prepared Statement of the National Governors Association (NGA) .................... 187 

Prepared Statement of the Federation of Tax Administrators (FTA) ................. 192 

Page

IV 

Letter from the National Association of Counties, the National League of 

Cities, the United States Conference of Mayors, and the Government Finance Officers Association ................................................................................... 199 

Letter from Toby Lenk, President, Gap Inc. Direct .............................................. 201 

Prepared Statement of the International Council of Shopping Centers ............. 203 

Prepared Statement of R. David L. Campbell, Chief Executive Officer, the 

Federal Tax Authority, LLC ................................................................................ 208 

Prepared Statement of Joseph Henchman, Vice President, Legal & State 

Projects, Tax Foundation ..................................................................................... 211 

Prepared Statement of Rebecca Madigan, Executive Director, Performance 

Marketing Association, Inc. (PMA) ..................................................................... 221 

Letter of support from labor unions ....................................................................... 224 

(1) 

CONSTITUTIONAL LIMITATIONS ON STATES’ 

AUTHORITY TO COLLECT SALES TAXES IN 

E-COMMERCE 

WEDNESDAY, NOVEMBER 30, 2011 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:09 a.m., in room 

2141, Rayburn House Office Building, the Honorable Lamar Smith 

(Chairman of the Committee) presiding. 

Present: Representatives Smith, Sensenbrenner, Coble, Goodlatte, Lungren, Chabot, Issa, Pence, Forbes, King, Franks, 

Gohmert, Jordan, Poe, Chaffetz, Griffin, Ross, Adams, Quayle, 

Amodei, Conyers, Scott, Lofgren, Jackson Lee, Johnson, Quigley, 

Chu, Deutch, and Sa ́nchez. 

Staff present: (Majority) Travis Norton, Counsel; Ashley Lewis, 

Clerk; and (Minority) 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 any time. 

We welcome everyone here. We knew this subject was going to 

have and be of great interest and that is clearly reflected in the audience that we have here too. I will recognize myself an opening 

statement, then the Ranking Member. Then I will introduce the 

witnesses and then we will proceed to questions. 

Black Friday marks the unofficial beginning of the holiday shopping season. But over the past few years many Americans have 

begun to wait until the Monday after Thanksgiving to shop. 

On Cyber Monday, online merchants offer deals similar to the 

promotions shoppers find in Brick and Mortar stores on Black Friday with one exception. Online merchants usually do not collect a 

sales tax. 

The Constitution grants Congress the exclusive power to regulate 

interstate commerce. By negative inference, a state may not unduly 

burden interstate commerce, a constitutional principle commonly 

referred to as the dormant Commerce Clause. 

As applied to state tax policy, the dormant Commerce Clause 

prohibits a state from taxing a person with whom it lacks a substantial nexus. In tax terminology, nexus refers to the relationship 

between the taxing authority and the taxpayer. 

In its 1992 decision in Quill Corporation v. North Dakota 19 

years ago, the Supreme Court held that at least for purposes of colVerDate Aug 31 2005 10:09 Apr 19, 2012 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6601 H:\WORK\FULL\113011\71403.000 HJUD1 PsN: 71403
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lecting sales tax a state lacks substantial nexus over a taxpayer 

that has no physical presence in the state. 

The Quill court thus established a bright-line physical presence 

rule for sales tax nexus. In the Quill decision, the Supreme Court 

was concerned with burdens to America’s small businesses. 

It reasoned that without a bright-line physical presence rule for 

nexus, thousands of state and local taxing jurisdictions across 

America, each with their own unique tax bases and rates, would 

use vague concepts like economic nexus to impose sales tax collection requirements on businesses. 

In the court’s view, uncertainty about what jurisdiction has 

power to tax as well as compliance with numerous and difficult tax 

policies would place an undue burden on interstate commerce. 

Today, we will hear testimony from online retailers, Brick and 

Mortar retailers and state governments about the impact of Quill 

on their operations. 

This hearing will explore two issues—first, whether Congress 

should exercise its Commerce Clause power to enact sales tax reform legislation, and second, if Congress should act, how we can do 

so in a manner that does not increase administrative and compliance burdens on America’s small businesses. 

Some in the online retail community believe that physical presence is a fine rule for sales tax nexus. Online retailers typically 

maintain physical presence in only a handful of states and rely on 

common carriers to transport purchased goods to customers. 

Most states, therefore, cannot require those online retailers to 

collect and remit sales tax. 

Some argue that shielding businesses from the complex patchwork of sales tax laws was precisely the benefit of Quill and that 

Congress should take no action. But it is precisely this reality that 

frustrates Brick and Mortar retailers who claim to suffer a competitive disadvantage compared to their online counterparts. 

State revenues are also affected by the Quill rule. Forty-five 

states and the District of Columbia have a sales tax. 

Those jurisdictions also have a use tax equal to the sales tax rate 

which residents must pay for the usage, consumption or storage of 

goods purchased in a non-resident state and brought into the resident state. 

For example, a shopper in Austin, Texas, who buys goods online 

from a retailer that lacks a physical presence in Texas is responsible to pay Texas use tax even though he or she pays no sales tax 

on his—on his transaction. 

But states rely on taxpayers to self-report their purchases in 

other states, and states lack the resources and means to effectively 

police use tax avoidance. So online purchases usually escape taxation altogether. 

Some believe that Congress should not come to the states’ assistance. If a state chooses to impose a use tax it should also find a 

way to enforce it. Others would like to see Congress help states collect sales taxes on all transactions, thereby eliminating the need 

for use taxes. 

I am aware of three legislative proposals that could give states 

nexus over online and other remote sellers. Ranking Member Conyers has reintroduced the Main Street Fairness Act this Congress. 

3 

Representative Steve Womack and Jackie Speier have introduced 

the Marketplace Equity Act, and most recently, Senators Enzi and 

Durbin introduced the Marketplace Fairness Act. 

Although this is an oversight hearing, I invite our witnesses to 

comment on any of these three bills and I look forward to hearing 

from our distinguished panel of witnesses today and thank them in 

advance for their testimony. 

Before I recognize the Ranking Member with his agreement, I 

would like to recognize a Member of the Committee for a unanimous consent request and the gentleman from California, Mr. Lungren, is recognized for that purpose. 

Mr. LUNGREN. Thank you, Mr. Chairman. I am sorry I have to 

go to a hearing on the House Administration to decide how much 

we are going to cut every Committee and I can’t miss that. [Laughter.] 

Mr. SMITH. Maybe we don’t—maybe we don’t want you to go. 

[Laughter.] 

Mr. LUNGREN. Well, if the gentleman won’t allow me to go. No, 

what I asked unanimous consent that a constitutional analysis by 

Paul Clement on the proposed Streamlined Sales Tax legislation be 

made a part of the record. 

Mr. SMITH. Without objection, so ordered. 

[The information referred to follows:] 

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Mr. SMITH. Thank you, Mr. Lungren. 

The gentleman from Michigan, the Ranking Member of the Judiciary Committee, Mr. Conyers, is recognized for an opening statement. 

Mr. CONYERS. Thank you, Chairman Smith, and Members of the 

Committee and the distinguished witnesses here. 

I want to associate myself with the Chairman’s opening statement and description of why we are here this morning and I am 

glad that he mentioned my bill. 

The only thing I regretted was that he is not a co-sponsor of it 

yet. So we will see how this hearing proceeds and whether we can 

enjoy the benefit of his support. 

Now, we all know about the Quill decision. But since the Quill 

decision there has been a tremendous growth in online commerce. 

The number and diversity of goods purchased from large online 

retailers with little physical presence in the buyer’s state has dramatically increased. What is it, up to 36 percent now, 38 percent 

over the weekend—38 percent is now online. 

The result, of course, is that online retailers have, let’s face it, 

an unfair advantage over local and small businesses who are required to collect sales taxes and so what we are doing today is exploring the need for legislation to level the playing field between 

small businesses and online retailers. Main Street retailers, local 

mom-and-pop stores in many instances, and even some of the bigbox retailers suffer when they have to collect a sales tax but online 

retailers don’t, and fewer purchases at local retailers means less 

local jobs. 

And I might suggest to you that that 38 percent retail number 

is going up. The number of people purchasing over the Internet is 

going up and it is at 38 percent already. Lower sales at local retailers means lower revenue for local and state governments as sales 

taxes constitute a significant revenue source in each and every 

state. 

With ever increasing online sales, the state and local governments anticipate larger and larger revenue losses as a result of uncollected sales and use taxes. Michigan, my state, for example, estimates that it has lost around $368 million each fiscal year and that 

it will lose more than $450 million in the fiscal year 2013. 

The impact of such lost revenue is reflected in reduced school 

programs, extracurricular activities at the public—in the public 

school systems across the state, bridges and roads in need of critical repairs are neglected and reduced services even for police and 

firefighter protection sometimes occurs. 

And so H.R. 2701, the Main Street Fairness Act, would grant the 

consent of Congress to the Streamlined Sales and Use Tax agreement drafted by local and state governments and then business 

community to simplify sales tax rules and administrative requirements, making it easier for businesses to collect sales taxes across 

state lines. 

Already, 24 states have changed their laws to comply with this 

agreement and I await your consideration of your—the great witnesses we have, Mr. Chairman, and we urge that we consider the 

relative merits of all the bills that are before this Committee and 

I thank you. 

34 

Mr. SMITH. Thank you, Mr. Conyers. 

I would also like to recognize Congressman Steve Womack sitting 

in the front row over here. He is the author of the Marketplace Equity Act. We appreciate your introducing that, Steve. Thank you. 

We will now go to the introduction of our witnesses and actually 

the Ranking Member, Mr. Conyers, will introduce going from left 

to right, our first witness. 

Mr. CONYERS. Thank you. 

I am happy to introduce our first witness at this hearing because 

he is a small-business owner from Lansing, Michigan, Dan Marshall, the second-generation operator of a family-owned chain of 

music stores called Marshall Music with seven stores located 

throughout Michigan. 

As a failed musician himself, I should visit you as often as I can 

when we have the time in this busy Congress. 

But his parents founded the store in 1948 and it has grown and 

is doing well and he has got now 300 full-time and part-time employees, music instruments and offers performance space and lessons to shoppers and musicians. I am doing quite a bit of advertising for you today, sir. [Laughter.] 

But I am glad that you are here to tell your story on behalf of 

many of the small-business owners in the country. 

Thank you, Mr. Chairman. 

Mr. SMITH. Thank you, Mr. Conyers. 

Our next witness is Dr. Patrick Byrne. Dr. Byrne is the chairman and CEO of Overstock.com, a Utah-based Internet retailer 

that has been publicly traded since 2002. Like many so-called etailers, Overstock takes orders over the Internet from customers 

and relies on common carriers to deliver purchased merchandise. In 2010, Overstock reported approximately $1.2 billion in revenue. Dr. Byrne received a Bachelor’s degree in philosophy and 

Asian studies from Dartmouth College, a Master’s in philosophy 

from Cambridge University as a Marshall Scholar and a doctorate 

in philosophy from Stanford University. 

He has taught at the university level and frequently guest lectures on business, the Internet, leadership and ethics. 

Our next witness will be introduced by the gentleman from Indiana, Mr. Pence. 

Voice. From Texas, Mr. Poe. 

Mr. SMITH. Oh, I am sorry. Jumping ahead. The next witness 

will be introduced by the gentleman from Texas, Mr. Poe. 

Mr. POE. Thank you, Mr. Chairman. 

Our next witness is my friend, John Otto, who is my state representative in Texas. He was elected to the House of Representatives in 2004. He is from small-town America, Dayton, Texas. 

Mr. Chairman, you may not know this but this is important. 

Dayton, Texas has a population of about 5,000. They have a high 

school football stadium that seats 7,000 and it is always full on Friday night. 

But by trade John Otto is a CPA. He has served on the Texas 

House Appropriations Committee and he serves as Vice-Chairman 

of the House Committee on Ways and Means. In 2008, he was chosen to Chair the House Select Committee on property tax relief and 

appraisal reform. 

35 

In 2005, he was named the Republican Freshman of the Year in 

the Texas House of Representatives and Texas Monthly has named 

him one of the ten best legislators in Texas. 

He is a graduate of Texas A & M and a BBA from that university. 

John, in your Honor I have worn orange today to celebrate last 

week’s Thanksgiving Day game. [Laughter.] 

Where Texas won. 

I yield back, Mr. Chairman. Thank you. [Laughter.] 

Mr. SMITH. Thank you, Mr. Poe. 

Our next witness is Tod Cohen. Mr. Cohen is the vice president 

of government relations for eBay. Since 2000, Mr. Cohen has been 

responsible for global public policy for eBay including adding 

PayPal when it was acquired in 2002. 2006 he became responsible 

for eBay’s legal, regulatory and intellectual property work as well 

as law enforcement affairs and global investigation teams. 

Mr. Cohen received his B.A. from the University of Utah in 1985 

and his J.D. with highest honors from the George Washington University Law School in 1992. Before law school, Mr. Cohen worked 

as a congressional aide for 4 years. 

Founded in 1995, eBay’s website facilitates private transactions 

between private buyers and sellers. It currently boasts about 100 

million users worldwide. Many are small business owners who 

maintain a virtual storefront on the eBay platform. 2010, the total 

value of goods sold on eBay was $62 billion, which is more than 

$2,000 every second. 

The next witness will be introduced by the gentleman from Indiana, Mr. Pence. 

Mr. PENCE. Thank you, Chairman. Thanks for the courtesy of 

having a chance to introduce and welcome my friend and a fellow 

Hoosier to testify before the Judiciary Committee today in what, 

after a long and distinguished career of public service in Indiana, 

I am pleased to say is his first opportunity to testify before Congress and I am privileged to be here. 

Senator Luke Kenley is from Noblesville, Indiana. He is a fiveterm Indiana state senator. 

He has provided exceptional leadership on fiscal responsibility 

and pro-growth policies in Indiana throughout his career. 

He is Chairman of the Senate Committee on Appropriations at 

the State House in Indianapolis and I hasten to add, since we are 

doing a little bit of trash talk between states, Indiana has found 

a way even in these difficult economic times to balance our budgets 

without raising taxes and Senator Kenley has been a driving force 

in making Indiana the fiscal envy of the Nation. 

His career spans several decades, involves several different disciplines. After completing his undergraduate degree at Miami University of Ohio and 2 years of law school at Harvard University, 

he answered the call of his country, enrolled in Officer Candidate 

School for the U.S. Army, graduated first in his class, served as an 

Army lieutenant, returned to Harvard to complete his law degree 

and then returned to the Hoosier State to develop and operate 

Kenley Supermarkets and serve as Nobleville’s city judge. 

Senator Kenley comes before us today though on behalf of the 

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dent of that organization. The Streamlined Sales Tax Governing 

Board has been a leading advocate for fair and effective collection 

of online sales taxes. 

I am confident that his experience in this area and his testimony 

today will be of great benefit to the Committee as we work toward 

an equitable and common sense solution for all parties concerned. 

So thank you, Mr. Chairman, for the courtesy of allowing me to 

introduce this esteemed fellow Hoosier, Senator Luke Kenley, to 

the Committee’s hearing today and I yield back. 

Mr. SMITH. Thank you, Mr. Pence. 

Our final witness is Paul Misener. Mr. Misener is the vice president of worldwide public policy for Amazon.com where he has 

worked for over a decade. He holds an engineering degree from 

Princeton and earned his law degree from George Mason. 

At Amazon, he is responsible for formulating and representing 

the company’s public policy positions worldwide as well as for managing policy specialists in Asia, Europe and North America. 

Jeff Bezos founded Amazon in 1995. According to Amazon’s 

website, during the first 30 days of business Amazon.com fulfilled 

orders for customers in 50 states and 45 countries, all shipped from 

Mr. Bezos’ home garage near Seattle. 

Today, Amazon is one of the largest e-tailers. It offers customers 

the ability to purchase everything from books to electronics and 

now even prepared gourmet foods over the Internet. 

We appreciate the witnesses who are here today and Mr. Marshall, we will begin with you. 

TESTIMONY OF DAN MARSHALL, MARSHALL MUSIC COMPANY, 

ON BEHALF OF HIMSELF AND THE MICHIGAN RETAILERS 

ASSOCIATION 

Mr. MARSHALL. Good morning, Chairman Smith and—— 

Mr. SMITH. Make sure your mike is on there. If you will—— 

Mr. MARSHALL. I am sorry? 

Mr. SMITH. Is your mike on? Push the—there. There we go. 

Mr. MARSHALL. Thank you. 

Good morning, Chairman Smith, Ranking Member Congress— 

Conyers and Members of the Committee. 

My name is Dan Marshall. I represent Marshall Music Company, 

a Michigan-based chain of retail music stores and I am also here 

to speak on behalf of the Michigan Retailers Association, an association of small-business entities totaling roughly 4,800 individual 

businesses, and I am here to speak on behalf of small-business 

Main Street retailers in connection with what we see as an unlevel 

playing field relating to all of us as retailers being required to collect sales tax and having customers every day, every hour that we 

operate coming in and price shopping and comparing our price with 

Internet retailers that do not collect the Michigan sales tax. 

Marshall Music was started in 1948 by my mother and father, 

Bill and Mary Marshall. I am the second-generation family leadership of the business. We have seven locations throughout the state 

of Michigan. 

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out the state of Michigan and rent and sell band and orchestra instruments to beginning music participants. 

I can’t begin to tell you what challenges retailing in a state like 

Michigan have presented to Marshall Music but myself and other 

Main Street retailers have adjusted to the economic realities that 

a fiercely competitive environment present and we are perfectly 

comfortable with that. 

In the absence of competition, I suppose we would all become 

complacent. That is certainly not the case with Marshall Music and 

my fellow retailers. 

The size of small business I think is something that somehow 

gets lost in the shuffle sometimes. Michigan retailers of 4,800 individual members, a casual measurement, you know, roughly 70 percent of those members are doing less than $300,000 a year in business. 

You know, in many cases it is a husband and a wife, maybe a 

part-time employee. So, you know, Main Street retailing is not a 

big numbers game but, you know, every strip mall and shopping 

center and downtown shopping district is replete with retailers just 

like my family who every day employ, you know, significant numbers of people for services and support. 

Illustrative of that would be today in Michigan we got eight 

inches of snow overnight so there is snow removal, small-business 

snow removal companies removing snow from all of our parking 

lots and, you know, helping us get our doors open for business 

today. 

We have been selling on the Internet through eBay for some time 

now and Internet retailing is just a wonderful opportunity for 

small-business people. 

You know, it allows us not necessarily to sell everything that we 

have in inventory, you know, and in many cases we are just not 

prepared or capable of providing the support and fulfillment and 

having the computer systems to effectively represent our entire 

product mix on the Internet. 

But in virtually every instance there are some products or some 

area of expertise, whether it is oddball, obsolete or used merchandise that—to promote that, you know, on the World Wide Web to 

a much larger market is very beneficial. 

In our case, that is exactly what we do. A product that we have 

had in inventory too long or is used or unique we will put in on 

the Internet and find a buyer in a larger market than our area 

markets. 

I understand and accept that, you know, we have to be competitive and we are. We price match every day. We price our products, 

you know, according to what the marketplace dictates. 

But to have that additional 6 percent sales tax differential is 

something that just creates an unlevel playing field and doesn’t 

really make sense to me or other retailers why a Michigan resident 

has to pay sales tax if they buy from a local merchant or buy from 

an Internet site that has a presence in Michigan whereas if they 

do business with somebody that is not employing people or supporting the Michigan economy they don’t have to—that retailer 

doesn’t have to collect sales tax. 

38 

As far as requiring us to collect sales tax from out-of-state sales, 

I see that as an entirely doable endeavor. You know, clearly, capitalism—people, you know, if they perceive a need people are going 

to flock to fill that need and the resources that are available today 

make the collection of that sales tax possible and I am sure it will 

only get easier and more streamlined if, in fact, you provide states 

like Michigan enabling legislation to allow us to have all Internet 

retailers collect tax. 

[The prepared statement of Mr. Marshall follows:] 

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Mr. SMITH. Thank you, Mr. Marshall. 

Mr. MARSHALL. Thank you. 

Mr. Byrne? 


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TESTIMONY OF PATRICK M. BYRNE, CHAIRMAN & CEO, 

OVERSTOCK.com, INC. 

Mr. BYRNE. Thank you. Good morning, Chairman Smith, Ranking Member Conyers and Members of the Committee. 

My name is Patrick Byrne. I am the chairman and CEO of Overstock.com. Thanks for this opportunity to share my views on the 

question of state authority to collect sales tax on e-commerce. 

My basic view is that Brick and Mortar has become 87 percent— 

I am sorry, big-box has become 87 percent of Brick and Mortar and 

what is going on here is they are trying to pull up the drawbridge 

after them. They are trying to get a law passed that will suppress 

competition from small remote sellers and just Internet sellers in 

general. 

For that reason, Overstock supports the current law as supported 

in the Supreme Court’s Quill decision because it facilitated the advent of vibrant innovative e-retailers like Overstock, Newegg, eBay 

and Amazon. 

We oppose the bills now pending in Congress that would empower states to conscript remote retailers to become sales tax collectors and believe that had such remote sales obligations existed 

when we launched in 1999 we would not be here today. 

In 1999, we had 18 employees, carried 100 products and had $1.8 

million in revenue. If we had been required to administer and collect sales tax on behalf of remote state governments without meaningful simplification, indemnity and compensation, our chances of 

becoming an employer of 1,500 American workers that we are 

today would have been small. 

Too high a hurdle would have been established by the cost of 

compliance in 9,746 taxing jurisdictions—the unavailability—the 

unavailability of affordable off-the-shelf software solutions, the cost 

of employing people to implement and manage the software, the 

Administration and resolution of state audits and resulting assessments and the risk of penalties and lawsuits by plaintiff or attorneys for software errors and omissions. 

The question the Committee must consider is whether this innovation will continue if Congress alters current law by allowing 

states to burden interstate commerce. In my opinion, the pending 

bills allow states to shirk their responsibilities to collect taxes that 

they impose on consumers; instead, enforce that burden onto nonresident and nonvoting businesses. Passage of such legislation 

would poison the Internet’s fertile ground for new innovative ecommerce firms. 

More specifically, we oppose the pending bills because we believe 

the taxing jurisdiction should be responsible for collecting taxes 

from residents and should not unilaterally outsource to retailers 

without compensation for the burden of collecting taxes from residents of states where those retailers have no presence. 

The absence of any nexus threshold in the pending bills makes 

remote sales tax collection a burden on innovation, entry and commerce. 

However, if a majority in Congress is determined to replace current law, Overstock believes that a fair legislative solution must include three essential elements. 

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First, because tax collection is really a function of states and not 

retailers, the states should be required to provide a truly plug-andplay software solution. 

Supporters of the pending bill claim such solutions are readily 

available in the marketplace but the fact is they are not. For example, we have been considering opening a warehouse in Kentucky. 

In preparation, we acquired what was described as an affordable 

plug-and-play software package that would ensure we were in compliance with the tax collection obligations for sales to Kentucky 

residents. 

The reality is that the so-called off-the-shelf software required 

$300,000 of investment and months of man hours of our developers 

to build. 

Implementation for the Nation’s nearly 10,000 different taxing 

jurisdictions would be extraordinarily costly for companies like 

mine, not to mention companies with fewer resources. 

So if states want us to collect tax on our sales to their residents 

when we have no presence there, they should supply software that 

makes it possible to do so and I believe such software today is 

vaporware, by the way. They tell you this exists. It is vaporware. 

Second, retailers should be liable to state or—should not be liable 

to state or plaintiff lawsuits if errors arise from use of such software like missing a tax holiday or a new tax rate, the fact that one 

city in a state taxes the sale of a product one way while another 

exempts it from taxation. 

And third, taxing authorities should compensate all retailers 

asked to implement state software and to collect sales tax on their 

behalf. It is expensive to implement software and expensive to collect and remit the tax to the jurisdiction. 

Just as I cannot force other parties to work for free, states should 

not be permitted to compel companies to do their work without reimbursement and without some degree of revenue sharing. 

I have attached to my written testimony a draft bill incorporating these principles. I believe it will garner support from the 

majority of e-commerce companies as well as many Brick and Mortar and Brick and Click retailers, particularly smaller and midsized Main Street retailers who would otherwise be hurt by the 

pending bills. 

Thank you for the opportunity to share my views and I look forward to answering your questions. 

[The prepared statement of Mr. Byrne follows:] 

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Mr. SMITH. Thank you, Mr. Byrnes. 

Mr. Otto? 

TESTIMONY OF THE HONORABLE JOHN OTTO, 

TEXAS STATE HOUSE OF REPRESENTATIVES 

Mr. OTTO. Thank you, Chairman Smith and Ranking Member 

Conyers and Members of the Committee. 


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Since 1992, the Quill decision has been the law of the land and 

physical presence has been the measuring stick for whether or not 

a retailer has to collect sales tax. 

Over the last 19 years, technology has advanced in the marketplace to the point that a physical presence can largely be controlled 

and isolated to a few states while selling into many states. 

If you doubt that, you have two online retailers here would be— 

I would be curious to know how many states they sell into versus 

how many that are actually claiming a physical presence and collecting tax in. 

If action is not taken and Quill is allowed to remain the law of 

the land, then are we not picking winners and losers within the retail sector? 

H.R. 3179, in my opinion, levels the playing field while protecting 

states’ rights, and that is very important here on the protection of 

states’ rights. Previous legislation that has been introduced in Congress has contained the requirement that a state join the Streamlined Sales Tax compact in order to receive the benefits of that legislation. 

While I fully support the rights of states to join the compact, I 

do not believe a state should be forced into joining the compact in 

order to receive the benefit of such legislation. H.R. 3179 leaves it 

up to each state whether they wish to join the compact or not. 

Let me also point out that, in my opinion, the Streamlined states 

will comply with the requirements of H.R. 3179 as soon as they 

adopt a small-business exemption. So they are at a distinct advantage in regards to how quickly they could implement H.R. 3179. 

Now, let me address briefly why I think H.R. 3179 best serves 

the interest of states. It requires a small-business exemption, it requires a uniform tax base rules within a state, i.e., what is and is 

not taxable, it requires for centralized filing and remitting within 

a state and it also offers options on the tax rates. 

It can be a state-only rate. If you cannot get your local jurisdictions to comply with these other three requirements then the state 

could implement a state-only rate. 

It also has a blended rate possibility as well as an address-based 

rate with software made available to the retail sector. In my opinion, the requirement for a uniform tax base within a state is desirable. It may cause delays in implementing the provisions of H.R. 

3179 in some states. 

This is going to be the biggest issue if legislation is passed is how 

can states implement this and over what time period. 

In Texas, we don’t meet again until 2013. It will take several legislative sessions in order to bring about the changes to get to a uniform tax base if we wanted to go down to collecting the local taxing 

jurisdictions as well. 

So, therefore, I believe that the flexibility that is provided in 

H.R. 3179 best serves the interest of the states in allowing us to 

level this playing field. 

You know, I don’t fault anybody that is taking advantage of 

Quill. They fall within the law. 

The problem is the marketplace has changed in 19 years and we 

have not. And if we are going to be fair, you know, what encourageVerDate Aug 31 2005 10:09 Apr 19, 2012 Jkt 000000 PO 00000 Frm 00063 Fmt 6633 Sfmt 6601 H:\WORK\FULL\113011\71403.000 HJUD1 PsN: 71403
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ment am I offering to my local business in Dayton, Texas, to build 

a storefront as opposed to strictly putting his business online? 

And those are the—those are the kinds of businesses that support the local community. They have a physical presence there. 

They are the contributors to the Little League, the PTA. They are 

the people—they are also the ones that employ my local people and 

my local citizens. 

So that is why it is most important to me that a bill that would 

follow the guidelines as set out in H.R. 3179 that if Congress is 

going to take action this is by far, in my opinion, the best legislation I have seen proposed to assist the states in addressing this 

issue. 

Thank you. 

[The prepared statement of Mr. Otto follows:] 

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Mr. SMITH. Thank you, Mr. Otto. 

Mr. Cohen? 


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TESTIMONY OF TOD COHEN, VICE PRESIDENT AND DEPUTY 

GENERAL COUNSEL, GLOBAL GOVERNMENT RELATIONS, INTELLECTUAL PROPERTY, REGULATORY AND ASSET PROTECTION, eBAY INC. 

Mr. COHEN. Chairman Smith, Ranking Member Conyers and 

Members of the Committee, my name is Tod Cohen and I am the 

vice president of global government relations and deputy general 

counsel of eBay, Inc. 

eBay empowers and connects millions of buyers and sellers 

across the globe. Ebay’s priority on remote sales tax policies has always been the treatment of small-business retailers. Hundreds of 

thousands of small businesses and entrepreneurs across America 

use eBay to engage in commerce. 

Protecting the ability of small-business retailers to play a meaningful role in the 21st-century marketplace creates jobs, fosters 

competition and promotes innovation. The Internet and mobile 

technology is, clearly, a part of every retail business model going 

forward. This is true for small, mid-size and giant retailers. 

Small-business retailers have used the Internet to survive and 

grow outside of their traditional markets. The remote sales tax debate is decades old. While the pro-tax rhetoric largely stays the 

same, the world of retail has changed around it. 

The idea that this debate is about the Internet versus offline 

stores is a false paradigm. All retail business models large and 

small use the Internet. They also involve physical facilities like 

stores, warehouses, management offices or distribution centers. 

A term you should be comfortable using is Brick and Click retail. 

It means a network of stores, Web and technology services all combined in a single retail business model. Large in-store retailers in 

America operate Brick and Click businesses. 

To give some perspective, 93 percent of retail goes on in stores 

while 7 percent is exclusively online. But almost 45 percent of instore sales are Web enabled and that is exploding. Big and small 

retailers offer consumers different benefits on different scales and 

their models come with different costs. 

Giant billion-dollar retailers with national store or distribution 

networks offer services like same-day delivery, lower cost shipping 

and in-store returns of items bought online. Being giant creates an 

economy of scale that has advantages. 

The largest retailers on the Internet including Bricks and Clicks 

are growing their market share. In fact, national Brick and Click 

retailers are 18 of the top 25 retail websites. Amazon’s version of 

a Brick and Click is based on its distribution centers. 

Small-business retailers are losing market share even under the 

sales tax status quo. As has been the case for decades, the fundamental threat to small independent retailers is coming from billiondollar competitors, not other small businesses. You hear a lot about 

fairness in this debate as if sameness is equal to fairness. It is not. 

Different sized businesses face very different conditions and different rules. In retail, small businesses on the Internet face higher 

shipping costs, higher product costs and difficulties dealing with returns. Retail competition is about more than remote sales taxes. 

Today, the benefits of local presence come with a tax cost. Honestly, that is fair. If remote sales tax laws changed without proVerDate Aug 31 2005 10:09 Apr 19, 2012 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6601 H:\WORK\FULL\113011\71403.000 HJUD1 PsN: 71403
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tecting small businesses, consumers will face a new tax cost on 

goods purchased from small remote retailers. 

But the consumer will not gain any retail benefits tied to physical presence. Without a small-business exemption, remote sales 

taxes will tip the scales further against small-business retailers 

and benefit the largest retailers that have the most facilities. 

That is why retailers with national store or distribution networks 

support changing current law. Current law regarding remote sales 

tax authority is not perfect. 

A few large retailers, Amazon, for example, have not operated in 

the spirit of the law and link sales tax collection to physical presence. 

Some states have used tax-related incentives to encourage largeretailer investments without offering similar investments incentives to small businesses that fulfill their in-state tax obligations. 

That is not fair. 

Congress has the power to address inequities among a few giant 

retailers without putting a new tax barrier in front of small-business retailers. A real small-business exemption and a Federal law 

reversing the Quill decision would meet that goal. 

Remember, there will always be small-business retailers that you 

want to protect and you want to grow. It is where tomorrow’s big 

retailers come from. Protecting small businesses from regulatory 

and tax burdens is not a new concept. 

This is a traditional bipartisan legislative goal. House Resolution 

95, sponsored by Representatives Lungren and Lofgren, is in that 

spirit. They are championing small-business retailers with their 

resolution. It retains an aspect of current law that works. 

eBay stands willing to work with the Committee to ensure that 

any changes in remote sales tax law include meaningful small-business protections that create an opening for small retailers to grow 

into the next billion-dollar businesses. 

I appreciate the opportunity to testify before the Committee and 

I look forward to your questions. 

[The prepared statement of Mr. Cohen follows:] 

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Mr. SMITH. Thank you, Mr. Cohen. 

Mr. Kenley? 


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TESTIMONY OF THE HONORABLE LUKE KENLEY, INDIANA 

STATE SENATE, ON BEHALF OF STREAMLINED SALES TAX 

GOVERNING BOARD, INC. 

Mr. KENLEY. Thank you, Mr. Chairman Smith and Ranking 

Member Conyers and Members of the Judiciary Committee for the 

invitation to talk to you today. 

I chair the Senate Appropriations Committee in Indiana and I 

am a long-time retailer. I come before you today in my role as 

someone responsible for producing a balanced state budget, which 

we do every year in Indiana, for developing a fair and sensible tax 

policy to support that budget, and as president of the Streamlined 

Sales Tax Governing Board, the country’s most successful business 

tax simplification initiative, with 24 fully-qualified member states 

and, I might add, interestingly, about three-fourths of the legislators on that board are Republicans because this is such a pro-business activity. 

As a law student at Harvard, when I studied the Bellas Hess 

case, I never imagined I would be testifying before Congress about 

the court’s interpretation of the Constitution’s limits on state sales 

taxes. 

But with the development of the Internet and e-commerce, both 

wonderful developments for consumers, serious issues for state 

budgets and for retailers have come to the fore. 

Today, local retailers compete with Internet retailers, a development good for consumers, but must do so at a 6 to 10 percent government-mandated price disadvantage through no fault of their 

own. 

In Quill, the U.S. Supreme Court made it clear that a state’s 

ability to employ an effective 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 authority. 

In several other cases, the U.S. Supreme Court has made it clear 

that voluntary agreements among states such as the Streamlined 

Sales Tax Agreement are constitutional exercises of state authority. 

According to the Department of Commerce, e-commerce sales in 2005 were $87 billion. This year, they will total more than $175 billion, more than twice that amount. The quarterly sales of e-commerce have increased on the average 17 percent above last year’s 

figures. Sales on Cyber Monday 2 days ago increased 22 percent 

over last year. 

Retailers across this country often find themselves acting as the 

display case for consumers who come in, try out the product, solicit 

information and product comparisons from the local retailer, then 

go home and buy it online. 

In fact, the amazing power of mobile phones allows consumers to 

scan product codes, check prices and buy a product from online 

business before they even leave the local store. 

Today’s technology, with the tremendous advances made in recent years, makes tax collection simple, cheap and reliable. Streamlined, with its uniformity of definitions and procedures, has further 

enhanced the ease of collection. 

We provide free software for companies and our certified service 

provider system with six qualified providers will provide for free to 

the small Internet retailer collection and remission services. 

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In many ways, the Internet is the perfect environment in which 

to collect sales tax because it is something that can be automated. 

Any small-business exemption for small Internet retailers will further discriminate against the local small Brick and Mortar businesses who do not receive the exemption. 

In any case, with the free collection service offered by Streamlined, the perceived burden is removed. The only remaining burden 

is that 6 to 10 percent government-mandated price disadvantage 

placed on local retailers. 

Is this a tax increase? Paying a tax you legally owe but were not 

previously paying is not a tax increase. 

This tax is already owed as a use tax in every state with a sales 

tax by the same thinking. If you refuse to pay or fail to pay a tax 

already owed, for example, Federal income tax, that would be a tax 

decrease. 

None of us elected officials who have sworn to uphold the Constitution and the laws of the United States are likely to run a campaign on the platform of don’t pay your taxes and get a tax decrease. 

The obligation to pay exists today, and asking one retailer to collect without asking the same of all retailers doesn’t seem like equal 

protection under the law. 

Some say that we should use other ways to collect the tax with 

a tighter audit system. To me, this feels like overzealous enforcement, practices which seem to invade the consumers’ privacy and 

fails to adhere to our standard belief that most people file their returns with integrity and we trust them to do so. 

Three bills have been filed on this subject. There are some differences among the bills that affect businesses in very different 

ways. The original bill filed by Senator Durbin is the most business 

friendly in terms of the simplicity and uniformity. 

But that bill does not offer an alternative to non-Streamlined 

states which Streamlined agrees should be available to other 

states, and we agree with Mr. Otto on that point. 

Through the advancement of supporting technology and the work 

of business and states together, much progress has already been 

made. The differences reflected in the bills are about the only serious issues left to resolve and those issues are clearly identified. 

I come before you today as a state legislator who develops budget 

and tax policy as a retailer seeking a level playing field to ask you 

to exercise your authority under the Commerce Clause and grant 

states the ability to solve these problems. 

[The prepared statement of Mr. Kenley follows:] 

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Mr. SMITH. Thank you, Mr. Kenley. 

Mr. Misener? 

TESTIMONY OF PAUL MISENER, VICE PRESIDENT OF 

WORLD-WIDE PUBLIC POLICY, AMAZON.COM, INC. 

Mr. MISENER. Thank you, Chairman Smith and Ranking Member 

Conyers, for inviting me to testify. 


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Amazon has long supported an even-handed Federal approach for 

sales tax collection and to that end we have participated in the 

Streamlined Sales Tax project for over a decade and we are very 

pleased to participate in this hearing. Amazon strongly supports 

enactment of a Federal bill with appropriate provisions. 

Mr. Chairman, Congress should authorize the states to require 

collection with the great objects of protecting states’ rights, addressing states’ needs and leveling the playing field for all sellers. 

Congress should protect the states’ rights and authorize them to 

require collection of sales tax revenue already owed, and doing so 

would not violate pledges that are limited to questions of income 

tax rates and deductions. 

Congress should help address the states’ budget shortfalls without spending Federal funds by authorizing the states to require collection of the billions of revenue dollars already owed. 

Congress should not exempt too many sellers from collection, for 

these sellers will obtain a lasting unlevel playing field versus Main 

Street and other retailers. 

Mr. Chairman, Congress feasibly can authorize the states to require collection. With today’s computing and communications technology, widespread collection no longer would be an unconstitutional burden on interstate commerce and Congress feasibly can 

authorize the states to require all but the very smallest-volume 

sellers to collect. 

Much attention has been paid to the size of a small-seller exception threshold in Federal legislation, and rightfully so. Such a 

threshold, which would exempt some sellers from a collection requirement, must be kept very low to attain the objection—the objectives of protecting states’ rights, addressing the states’ needs 

and creating fairness among sellers. 

In this context, several kinds of small volume sellers must be 

considered. Foremost are the Main Street small-business retailers 

who, unless the small-seller exception threshold is kept very low, 

will forever face an unlevel playing field compared to a newly-created exempt class of out-of-state sellers. 

Small-volume online sellers have received most of the attention 

and not without reason. No one wants these sellers to shoulder 

alone burdens compared to those faced by the small-business retailers who already collect sales tax in our local communities. 

Yet, no one should want these online sellers to take advantage 

of a newly-created unlevel playing field over small Main Street 

businesses and no one should want government to pick business 

model winners and losers this way. 

The consequences of a threshold’s level to states’ rights, the 

states’ needs and fairness are very significant because a surprisingly large fraction of e-commerce is conducted by smaller-volume 

sellers. 

For example, nearly 30 percent of uncollected sales tax revenue 

today is attributable to sellers with annual online sales below 

$150,000 and only 1 percent of online sellers sell more than this 

amount. 

In other words, a $150,000 exception would deny the states nearly 30 percent of the newly available yet already owed revenue but 

would exempt from collection 99 percent of online sellers. 

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Any higher threshold would deny the states even more revenue 

and keep the playing field even more unlevel. 

Fortunately, today’s computing and communications technology 

will allow all—excuse me, all online sellers to collect and remit tax 

like Main Street retailers. The technology is not limited to large 

sellers. 

Rather, service providers also make the technology available to 

medium- and small-volume sellers. Thus, collection is either by 

sellers or for sellers. 

There are many such service providers today—ADP, Avalara and 

FedTax, for example. Two other examples come to mind, Amazon 

and eBay. 

Both companies use sophisticated computing and communications technology to serve their seller customers. But while Amazon 

is prepared to make its technology available as a service to help 

sellers by collecting tax for them, eBay seeks to avoid any role in 

collection, claiming that small-volume sellers will be burdened and 

implicitly that eBay’s technology is not capable of helping its larger 

sellers to collect. 

And these claims are made despite the fact that eBay manages 

to collect the transaction fees it charges its sellers and despite the 

fact that eBay already calculates state sales tax for eBay sellers all 

the way down to the local jurisdiction level. 

Amazon and many other service providers will help smaller online sellers collect and, surely, eBay can as well. 

In conclusion, Mr. Chairman, Congress may, should and feasibly 

can attain the objectives of protecting states’ rights, addressing the 

rights—the needs of states without Federal spending and leveling 

the playing field for all sellers but only if any, quote, ‘‘small-seller 

exception’’ is kept very low. 

The time to act is nigh. Amazon is grateful for this hearing and 

we look forward to working with you and your colleagues in Congress to pass appropriate legislation as soon as possible. 

I look forward to your questions. 

[The prepared statement of Mr. Misener follows:] 

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Mr. SMITH. Thank you, Mr. Misener. 

Let me recognize myself for questions and let me address my 

first question to Mr. Byrne and Mr. Cohen, and it is this. 

If states already have the authority to collect sales tax from remote sellers, why shouldn’t they also have the means to collect 

sales taxes from the remote sellers? 

Mr. BYRNE. Thank you—— 


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Mr. SMITH. Go on, Mr. Byrne, first, if you will. 

Mr. BYRNE. Mr. Chairman, the Quill decision establishes that it 

would be that the states can go up to a certain line and no further, 

and that line is drawn by the Supreme Court at—— 

Mr. SMITH. But Congress could change that line and in fact the 

Supreme Court almost invited us to, didn’t it? 

Mr. BYRNE. No question, and they did. No question you have the 

power to. No question that per the Quill decision you have the 

power to change it. 

Mr. SMITH. Again, if states can collect it why shouldn’t they have 

the means to collect it? 

Mr. BYRNE. I am sorry, sir? 

Mr. SMITH. If states have the authority to collect a sales tax from 

remote sellers, why shouldn’t they also be given the means to do 

so? 

Mr. BYRNE. Well, so states have the authority—actually, the U.S. 

Congress has the authority to empower the states to but they 

shouldn’t because at this point it is—what it is really going to be 

about is Amazon and the big-box—big-box retailers having a way 

to draw the drawbridge up after them. 

It is very burdensome and it will be very burdensome for companies like mine to establish databases or plug in to databases and 

keep—charge appropriate taxes on every kind of product in 10,000 

jurisdictions. 

Mr. SMITH. Okay. 

Mr. BYRNE. You know, in some—in some jurisdiction candy is 

taxed like a candy and some is taxed like food, a gift basket. It will 

be extraordinarily complex for us to implement. 

Mr. SMITH. Okay. Thank you. 

Mr. Cohen? 

Mr. COHEN. Well, Mr. Chairman, we agree that not only do you 

have the power but the means should be provided to the states. It 

is just a question of small business and small-business protection 

that we believe is where the issue lies, not whether the states have 

the—should be given the right and the means to collect. 

Mr. SMITH. Okay. Thank you, Mr. Cohen. 

Mr. Misener, which of the three bills under consideration would 

you support? 

Mr. MISENER. Well, I think there has been—there have been 

three breakthroughs this year, Mr. Chairman. The first breakthrough was when Mr. Conyers and his colleague, Senator Durbin, 

introduced a bill in July which gave to the Governing Board of the 

Streamlined Sales Tax Project the right to decide the correct 

threshold for a small-seller exception. 

The next breakthrough is Mr. Womack’s bill, which recognized 

that not all states will be able to make the changes required by 

Streamlined. And the third breakthrough was the Senate bill introduced a few weeks ago which would—— 

Mr. SMITH. Would you—would you support any of those breakthroughs? 

Mr. MISENER. Yes, sir. All three. 

Mr. SMITH. All of them? 

Mr. MISENER. All three. 

Mr. SMITH. Would you? Okay. 

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Mr. MISENER. We were concerned about the size of the small-seller carve-out in Mr. Womack’s bill but we believe that that is a subject for discussion here today. 

Mr. SMITH. Okay. Okay. Thank you, Mr. Misener. 

Mr. Marshall, Mr. Otto and Mr. Kenley, if we were to enable 

states to collect a sales tax from remote sellers, wouldn’t that increase the cost of merchandise to consumers? And if so, is that justified or not justified? Mr. Marshall? 

Mr. MARSHALL. Well, I don’t—I certainly can’t speak as an expert 

on that topic but my understanding is that sales tax is or use tax 

is owed by Michigan residents on all their purchases. 

So it is not a new tax. It is simply leveling the playing field as 

it relates to who is required to collect it and who is required to voluntarily disclose it in their tax return. 

Mr. SMITH. Right. That was my point. They had the authority 

and they can impose a tax. It is just right now most states do not 

actually collect it. But that is my—Mr. Otto? 

Mr. OTTO. I would agree with what he says. 

Here is one interesting point, though. If you are a business and 

you hold a sales tax permit in the state of Texas, you go through 

audit you are going to be found if you have not remitted use tax 

you should have. 

So in those instances, there is some. But in Texas we have no 

way for a household to remit use tax. There is no state income tax. 

There is no form for anybody to remit the use tax. 

Mr. SMITH. So you are saying the taxes are owed anyway, they 

might as well be collected? 

Mr. OTTO. They are owed. 

Mr. SMITH. Okay. Mr. Kenley? 

Mr. KENLEY. Thank you, Mr. Chairman. 

My perspective is that the only disparity in the competitive world 

that we have today in this arena is the 6 to 10 percent sales tax 

that is being imposed on some retailers and not on others. 

I think if you eliminate that and level the playing field, I think 

you are going to see more competition. So I don’t think the consumer is necessarily going to suffer in that—in that situation, Mr. 

Chairman. 

Mr. CHAIRMAN. Okay. Thank you, Mr. Kenley. 

The gentleman from Michigan, Mr. Conyers, is recognized for his 

questions. 

Mr. CONYERS. Thank you, Chairman Smith, and I want to thank 

the witnesses for their individual contributions to this subject. 

Now that we have established that Quill gives us the authority, 

as a matter of fact we are encouraged to take some action in this, 

I think the question really is how do we do it as fairly as we can. 

Now, ironically, as our witness, Mr. Marshall, has pointed out, 

there is already a tax on Internet transactions but nobody is paying it any attention. 

Am I correct that Michigan is in that posture, Mr. Marshall? 

Mr. MARSHALL. Yes, you are. We are required to report our Internet sales, purchases and pay—remit a use tax on that. But there 

is just no way for the state of Michigan to know what transactions 

are occurring. 

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Mr. CONYERS. I wonder how many other states are like that. 

Does anybody know how many states might be in the same position 

that the state of Michigan is in? Namely, that there is a tax already existing and that, by the way, there is a 6 percent sales tax 

in Michigan and there should be a Internet tax and it is being ignored. 

So couldn’t someone argue, Mr. Marshall, that we don’t need to 

do anything, just if everyone followed the law we would be better 

off? What do you say to that? 

Mr. MARSHALL. Well, I just think collection ought to be uniform. 

If some retailers are required to collect then all retailers should be 

required to collect. I think it is just the unfairness of some of us 

being required by law to collect sales tax and other retailers that 

are selling product in our state are not. 

Mr. CONYERS. Well, suppose we passed a law and everybody did 

what Michigan does is ignore it. What would you say to that? 

Mr. COHEN. Mr. Conyers, the current law in the 45 states that 

have sales tax plus the District of Columbia is that there is a concurrent use tax obligation for a purchaser who does not pay the 

sales tax when they purchase the item. Some states, like Texas, 

don’t have a way in which that can be remitted. 

Other states, like California, have a line on the income taxes, 

state income taxes, for use tax collection. It is done. It is the law. 

It is very difficult and I do respect the tax collection efforts by 

many states that it is very hard to do and it will cost a significant 

amount of money to do that, and therefore it does seem to make 

a lot more sense that on large retailers you impose a burden that 

they collect and remit sales taxes across all 45 states. 

Mr. CONYERS. So you support my legislation? 

Mr. COHEN. As currently written, we do not support the legislation, Mr. Conyers. 

Mr. CONYERS. Well, that—— 

Mr. COHEN. Because of the lack of a sufficiently high small-business exemption. 

Mr. CONYERS. So that is your main reservation about it? 

Mr. COHEN. Yes, sir. 

Mr. CONYERS. Well, let me ask you this. Is it fair for some witnesses—some businesses to have a sales tax advantage by not having to collect sales taxes, which is why you are for this bill if we 

could get that small-business exception straightened out. 

Mr. COHEN. Yes, sir. And let me quote Jeff Bezos from 1996: ‘‘In 

the mail order business, you have to charge sales tax to customers 

who live in any state where you have a business presence. We 

thought about the Bay Area, which is the single best source for 

technical talent, but it didn’t pass the small state test.’’ 

So there was an advantage that he chose for his company to 

place it in Washington State to take advantage of the distant state 

sales tax exclusion. 

Mr. CONYERS. Thank you very much. 

Mr. MISENER. If I may, since my CEO was just mentioned, I 

think we have to recognize something here that that choice was 

made under current law. What we are proposing today is to change 

the current law. Congress has this authority very clearly. 

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Let’s recall, of course, that eBay has facilities in 20 states around 

the country. They have fulfillment centers in eight states around 

the country. It is not a isolated business, as they would suggest. 

They also, of course, are a multi-billion-dollar company. Sales 

through eBay exceed Amazon’s retail sales. So doing something to 

carve out eBay from collection will have significant ramifications to 

the states and for fairness. 

Mr. CONYERS. Mr. Chairman, could I ask my friend here if he 

has any rebuttal comment to that statement? 

Mr. COHEN. If eBay was a retailer, of course, eBay, where it had 

physical presence, would have an obligation to collect and remit 

sales taxes in those states. But eBay is not a retailer. 

eBay is a marketplace in which people offer items for sale and 

are the sellers, and the sellers have the obligations. And one of the 

things we are quite proud of is that our sellers that are in the 45 

states and the District of Columbia that remit and owe sales taxes 

collect and remit them. 

Mr. CONYERS. Yeah. 

Mr. COHEN. So our small sellers, including Mr. Marshall, pays 

his sales tax in Michigan for his sales in the state of Michigan online. Amazon—— 

Mr. CONYERS. Mr. Chairman, could I get a rebuttal to the rebuttal, please? 

Mr. SMITH. The gentleman from Michigan is recognized for an 

additional minute. 

Mr. MISENER. Yes, sir. Thank you very much, both of you. 

Amazon also has a platform for sellers and we have over 2 million sellers that sell through our sites. We will make a service of 

tax collection or remittance available to our sellers. We only ask 

that eBay do the same. 

Mr. SMITH. Thank you, Mr. Conyers. 

The gentleman from North Carolina, Mr. Coble, is recognized. 

Mr. COBLE. Thank you, Mr. Chairman. 

Gentlemen, good to have you all with us today. Mr. Otto, the 

Committee—this Committee recently passed H.R. 1439, the Business Activity Tax Simplification Act, which confirms Quill’s physical presence standard for collection of corporate income and other 

business activity taxes. 

Would your bill apply just—the nexus just for the sales tax or 

would it reach into other business taxes as well? 

Mr. OTTO. No. It is my understanding that all we are dealing 

with here is sales and use tax. We are not trying to change nexus 

statutes for any other tax. 

Mr. COBLE. That was my thinking. I wanted to hear it from you 

to be sure. What do you believe, Mr. Otto, is an appropriate smallseller exemption threshold? 

Mr. OTTO. Well, you are asking me to get into a battle I am not 

sure I am willing to get into. [Laughter.] 

Without looking—I mean, I am only familiar with my state. 

Without looking, and you are talking about a bill here that is going 

to affect 45 states and the District of Columbia, that is something 

I understand from the testimony that has been given here today 

that is going to be an important issue. 

92 

I don’t have a preconceived idea. I can’t pick a number out of the 

air and tell you this should be the small-business exemption. I 

think it is going to require some study on this Committee’s part in 

order to come up with what is fair. I do support a small-business 

exemption. It is just in defining what is small business. 

Mr. COBLE. I didn’t intend to have you to put your oars into troublesome waters, Mr. Otto. 

Mr. Misener, I am getting involved in some hearsay evidence 

here. Last week, a constituent of mine told me that he heard on 

the radio an ad for Blinds.com. The gist, he tells me, was that 

they—was to buy blinds from Blinds.com because there is no sales 

tax in most states. 

Is it true, in fact, that there is no sales tax in most states for 

Internet sales, and if so, would you agree that that could very well 

present a competitive edge over the Brick and Mortar sellers? 

Mr. MISENER. Thank you, Mr. Coble. 

We collect—in the four states where our retail business has a 

physical presence we already do that. What we are seeking today 

is congressional legislation that would authorize the states to require all out-of-state sellers including Amazon and Blinds.com to 

collect regardless of whether their retail business has a physical 

presence in a state. 

Mr. COBLE. Mr. Bryne—where is Mr. Bryne? I don’t see Mr. 

Bryne. Byrne—Mr. Byrne. 

Mr. BYRNE. I am sorry. 

Mr. COBLE. Mr. Byrne, Brick and Mortar retailers characterize 

the Marketplace Equity Act as restoring fairness to the retail industry. How do you respond to that? 

Mr. BYRNE. I would say that there is—it cuts both ways. Brick 

and Mortars also have advantages over us. They get to—over Internet companies. They get to interact directly. They get to hand over 

the goods immediately. Customers get to, you know, touch them before they buy them. They can return them right there. 

So there is—so there is advantages and disadvantages that cut 

both ways. We wouldn’t—we wouldn’t come and say gee, Congress 

has to do something in order to level the playing field on Brick and 

Mortars to take away those advantages. So I will stop there. 

Mr. COBLE. Mr. Cohen, advocates of sales tax reform legislation 

insist that technology can easily calculate and collect sales tax— 

taxes at the destination rate. If this be the case, what would be the 

burden on eBay’s small-business customers if such technology were 

made available to them? 

Mr. COHEN. Mr. Coble, we have been very clear for at least the 

11 years I have been working with the company that this is not a 

technologically difficult thing to accomplish. It is burdensome. 

It is a morass of many, many different state laws with 9,647 different taxing jurisdictions. But that does not make it impossible for 

people to collect and remit. 

Our basic point of view is that it would be much more fair if all 

small businesses were to receive the same fairness that a large retailer were to get—lower shipping costs, economies of scale—and 

that this is a place in which tax policy can be used to make sure 

that small businesses have an opportunity to participate in the 

global market. 

93 

Mr. COBLE. I got you. Thank you, sir. 

Mr. Chairman, I am going to try to beat that red light before it 

illuminates by putting a question to Mr. Misener. 

How have states’ affiliate nexus statutes affected your business 

and how does Amazon use affiliates? What toll has the ensuing litigation had on your—on your operation? 

Mr. MISENER. Thank you, Mr. Coble. 

Affiliates are small websites within states around the country, 

around the world that place links on their site to a variety of retailers including Amazon, and when a consumer clicks on that link 

and ends up buying something at the retailer, the website gets a 

commission. 

It is a great advertising model. It is a great business model. A 

lot of small businesses have benefited. There have been counterproductive bills enacted around the country—I think a half dozen 

now—where states have tried to describe those advertising activities as giving an out-of-state retailer nexus. 

We completely reject it but at the same time these laws have 

passed and so we simply have stopped advertising. It is unfortunate. 

We certainly wish we could get those advertisers back, and in 

North Carolina included we would love to be able to welcome back 

our Amazon.com associates and we would do so when Federal legislation is enacted. 

Mr. COBLE. I thank you. Mr. Chairman, I lost the race with the 

red light. I yield back. 

Mr. SMITH. Thank you, Mr. Coble. 

The gentleman from Virginia, Mr. Scott, is recognized. 

Mr. SCOTT. Thank you, Mr. Chairman. 

I yield to the gentleman from Michigan. 

Mr. CONYERS. Thanks, Mr. Scott. 

I just want to ask Mr. Misener, who represents Amazon, you are 

one of the big guys but yet you are supporting a fair tax, a balanced tax, with the little guys like Marshall. 

Is there some explanation for your extraordinary good moral 

bearing that you bring to this hearing today? 

Mr. MISENER. Well, personally, it is worthy of question with me 

but we have long supported Federal legislation. In fact, we made 

this decision right after I joined the company a dozen years ago. 

At the time we faced a choice. Could we draft off of the Internet 

Tax Freedom Act moratorium and somehow claim that the Internet 

deserved a privileged non-tax position. We have never taken that 

position. 

We have participated constructively in the Streamlined Sales 

Tax Project as a way to work with the states to get the—eventually 

get to the point of Federal legislation. The three breakthroughs 

that I mentioned this year starting with your—with your bill in 

July really, I think, are breaking the logjam. 

So we are to the point of actually recognizing the fruits of our 

labor all these years. 

Mr. CONYERS. Let the record show that there are corporate good 

guys in this world. Thanks, Mr. Scott. 

Mr. SCOTT. Thank you. 

94 

Senator Kenley, if somebody in Washington, D.C., goes to a Brick 

and Mortar store in Virginia and buys something, do they pay the 

Virginia sales tax? 

Mr. KENLEY. If they go to the Virginia store they do and the 

basis of the tax is on the destination—in other words, where the 

transaction takes place, and it is normally where the consumer is. 

Mr. SCOTT. And if the Virginia store delivered it in Washington, 

D.C., a washing machine, for example, where would—who would 

pay the tax? 

Mr. KENLEY. Well, we spend a lot of hours arguing those points 

in Streamlined and we have refined that so that in some cases it 

would be in Washington, D.C., where the sales takes place and in 

some places it could be in Virginia. 

Mr. SCOTT. Well, if the sale took place in Virginia and they delivered the washing machine to the residents in D.C.—— 

Mr. KENLEY. Okay. If they deliver it, it is taxable in Washington, 

D.C. 

Mr. SCOTT. Okay. Now, are you aware—is there any small-business exemption to the local sales tax? 

Mr. KENLEY. No, not in—I don’t think there is in any of the 

states. Everybody is on the level playing field there. 

Mr. SCOTT. If the tax is due but not collected by the business, 

do you have an estimate of how often it is actually collected, some 

kind of way? 

Mr. KENLEY. You mean how often it is paid through the use tax 

system? 

Mr. SCOTT. Right. 

Mr. KENLEY. In Indiana, we have less than 1 percent of our filers 

who actually fill out a use tax return and remit a use tax based 

on remote purchases. 

Mr. SCOTT. If the business were to actually collect the tax, what 

would they do with the money? How would they get it to the various states and localities? 

Mr. KENLEY. Well, the service—first off, the small business can 

use a certified service provider and we actually have one small 

business in New Hampshire of less than $50,000 in sales that 

signed up for this in 18 minutes and that is all it took, and they 

are not charged anything to be a participant, and the certified service provider—the retailer collects the tax when they bill the customer. 

They then turn it over to the service provider. They fill out all 

the returns necessary in the 45 states that have sales tax and 

remit it appropriately in a very seamless proposition. 

Mr. SCOTT. Now, who pays for that service? 

Mr. KENLEY. The states pay for it and then the certified service 

providers take the amount of compensation that Streamlined offers 

or that those states offered in addition to the regular compensation 

package. 

Mr. SCOTT. Now, is that service actually available to everybody 

now? 

Mr. KENLEY. Yes. We have six certified service providers who can 

do this. Many of the larger companies have chosen to just implement their own system, and Amazon has developed a system where 

95 

they are a certified service provider for their retailers that participate on their platform. 

Mr. SCOTT. Does that include the—some localities have a local 

sales tax. 

Mr. KENLEY. That is correct. It includes all of those jurisdictions 

with local sales tax as well, no problem. 

Mr. SCOTT. And so a small business can sign up for the service, 

no cost—— 

Mr. KENLEY. That’s right. 

Mr. SCOTT. Assess the tax. Do you have some software to tell 

them how much to charge? 

Mr. KENLEY. No cost on the software. 

Mr. SCOTT. So the software tells them how much to charge so 

they add it to the bill. They collect it and then they send in the 

aggregate amount collected to some service who will distribute the 

money—— 

Mr. KENLEY. To the—right. 

Mr. SCOTT. At no cost. 

Mr. KENLEY. That is right. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Mr. SMITH. Thank you, Mr. Scott. 

The gentleman from Indiana, Mr. Pence, is recognized. 

Mr. PENCE. Thank you, Chairman. 

Thanks for holding this hearing and I am grateful for the testimony of all the participants but I particularly want to acknowledge 

not only Senator Kenley that I had the opportunity to introduce, 

who is a leader in Indiana, a man I greatly admire but also I want 

to appreciate two other of the witnesses. 

Mr. Misener with Amazon—Amazon is a great corporate citizen 

in Indiana and we are—appreciate the tone and tenor of your testimony and your remarks today. 

And I also want to acknowledge Mr. Byrne, who I have had the 

pleasure to meet because of his association with education reform 

at the Milton and Rose Friedman Foundation that is proudly located in Indianapolis, Indiana. So this is a distinguished panel, to 

say the least. 

I find this discussion enormously helpful, Mr. Chairman. It is— 

it is clear that since the advent of not the Quill decision but the 

Commerce Clause itself that under our form of government we 

have—the Congress has essentially granted exclusive power to regulate interstate commerce at the national level. 

I have, as you know, Mr. Chairman, and other Members on this 

end of this Committee I have long opposed taxing the Internet. I 

greatly associate myself with comments that were made about the 

extraordinary innovation that has occurred in e-commerce in this 

country and I believe it represents a bulwark of American prosperity in the last 20 years. 

I believe the moratorium on Internet taxation has been prudent 

and I have strongly supported it. It does strike me, though, that 

as this marketplace has matured that there is an argument as has 

been made eloquently by several on the panel for us to consider letting states decide. 

But it—but it strikes me that we ought to follow—at least this 

conservative is committed to following a couple basic principles. 

96 

Number one is no new taxes. My colleague from Texas and I, I 

feel instinctively share a particular view of taxes. Maybe I am presuming but I—we ought to make sure there is no new taxes on the 

people of the several states. 

Secondly, I do—I do acknowledge that there ought to be no 

undue burden on commerce, particularly e-commerce in this case. 

I am also very interested in the—in what would be the recommendation of members of the panel about the proper small-business exemption. 

I think the two large principles here for me is I don’t think Congress should be in the business of picking winners and losers, and 

inaction by Congress today results in a system that does pick winners and losers. 

I also—I am a very strong advocate of federalism, as you are, Mr. 

Chairman, and it is my judgment that having Congress continue 

to stand in the way of letting states decide if we can meet these 

other criteria is worthy of our deliberations here as we preserve 

and promote and seek to invigorate the principles and the practice 

of federalism across this country. 

Let me ask this question, though. I will direct this to Senator 

Kenley in the time that is remaining, that we just heard Mr. Coble 

speak about a Blinds.com radio ad, the tagline of which—well, I 

will just quote him and paraphrase him, I don’t accuse the company of any particular distortion—but we have all heard ads like 

this, saying that in most states no sales tax. There is no sales tax 

on Internet sales. 

Let me ask you, Senator Kenley, as—in a point of fact is it that 

there is no sales tax on Internet sales or is it simply that states 

do not have the authority to collect taxes that are owed? 

Because this, to me, is a very—in our very first conversation 

about this, Senator Kenley, you know, I am someone who believes 

if you owe taxes pay taxes. But maybe you can address that. Is it— 

what is the situation in America today, first, in Indiana and all 

over the country? 

Is there no sales tax on Internet sales or is there in fact a sales 

tax, it just simply—Indiana and other states do not have the ability 

or capacity to collect it under the law? 

Mr. KENLEY. Thank you for the question, Congressman Pence. 

First off, I would say that this is not a tax on the Internet. This 

is a tax on the consumer who is going to receive the government 

services that are provided in whatever state that is. 

As to your question about whether or not there is a tax or whether the tax is collected, we have noticeably been unable to collect the 

tax other than by having the retailer remit, and so that is why we 

have gone to these great lengths to make it cost effective or cost 

free, particularly for small retailers, to be able to have a collection 

and remission process. 

If we didn’t do this, I am afraid we would end up like Greece and 

nobody would pay their taxes. But—and we don’t want to go there. 

So it has just been a difficult proposition to work it out. 

I think once you start down other paths of trying to find ways 

to collect that use tax, which is already due and owed, then you 

get into things that you are trying to get information about consumers, are you participating in invasion of privacy, are we using 

97 

the heavy hand of government and the tax collector to beat on people unduly. 

And the sales tax system, which historically has been, as Mr. 

Marshall states, that the retailer collects and remits the tax, that 

is the historical precedent and we could make that work in this 

system due to the advances in technology even since the Internet 

age of commerce started. 

Mr. PENCE. But the tax under Indiana law, and I will only ask 

you this, the tax is owed. 

Mr. KENLEY. The tax is owed. 

Mr. PENCE. It is owed by the consumer. 

Mr. KENLEY. It is owed in all 45 states. They all have the same 

situation in that regard. 

Mr. PENCE. Thank you. 

Thank you, Chairman. 

Mr. SMITH. Thank you, Mr. Pence. 

On the way to recognizing the gentlewoman from California, I 

would like to recognize Congresswoman Jackie Speier who, along 

with Congressman Womack, is a sponsor of the Marketplace Equity 

Act and who has just come into the room. Does she—there she is. 

Okay. Good. 

The gentlewoman from California, Ms. Lofgren, is recognized. 

Ms. LOFGREN. Well, thank you, Mr. Chairman, and for this useful and interesting panel. I didn’t have the chance to introduce Mr. 

Cohen but eBay is actually headquartered in San Jose. So welcome, 

San Jose-based eBay. 

You know, one of the things that I am listening here is to try 

and identify we want to stand with the little guys because small 

businesses are the engine for the American economy. They are the 

ones that are creating the jobs and the difficulty is who is that. 

You know, who is standing up for the little guys, and I guess the 

question I have for you, Mr. Cohen, is I know eBay is an entity but 

you don’t sell stuff. I mean, it is your—it is a platform and people 

are selling. 

When I go on eBay, it looks like it is mainly small guys. When 

I go on Amazon, which I do a lot and thank you for having your 

service, especially when we are in Washington and Christmas is 

coming up, you know, sometimes there are small guys, like especially for specialty books, but it is mainly larger retailers that you 

get to through your site. 

What percentage of eBay’s users are what you would consider 

small business and how would you define that, Mr. Cohen? And 

then I would like to ask the same question of the Amazon witness. 

Mr. COHEN. Congressman Lofgren, for many of our sellers eBay 

is only one channel that they use. So whatever statistics we know 

of their use of our platform, like Mr. Marshall, eBay is one part of 

his business. 

Ms. LOFGREN. I see. 

Mr. COHEN. He has a significant portion of his business, a much 

larger portion of his business, in the state of Michigan. 

What is important, though, what we believe is important is how 

do you define what the size of a small business should be to take 

advantage of an exemption, and we have recommended and enVerDate Aug 31 2005 10:09 Apr 19, 2012 Jkt 000000 PO 00000 Frm 00101 Fmt 6633 Sfmt 6601 H:\WORK\FULL\113011\71403.000 HJUD1 PsN: 71403
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dorsed bills that have included the Small Business Administration’s determination of what is an electronic retailer. 

That is what determines whether a small business qualifies for 

SBA loans and other assistance, and the number, which is reset 

annually to determine what is the appropriate size, the last year 

was approximately $30 million in distance sales. That is what we 

would—— 

Ms. LOFGREN. Now, that sounds like a lot but for—that is gross, 

correct? What would that usually—if you had that kind of gross 

sales what would that really net you as a business, ordinarily? 

Mr. COHEN. Well, if you live in the state of Texas, where they 

don’t have a personal income tax, it may make a lot more money 

than in the state of California or in other states. 

But our general impression is that most of those sellers, even up 

to a $30 million in sales, are having very, very tiny margins and 

that what they are making and netting out from that is significantly less than what their large retailer competitors can be. 

For one example, our estimate is that $30 million number we believe that would be the amount of sales on Amazon since the beginning of this hearing today. 

Mr. MISENER. Thank you, Ms. Lofgren. 

First of all, on Mr. Cohen’s Small Business Administration number, we just need to debunk that right from the start. It has absolutely nothing to do with the conversation today which is about 

burden on small businesses for collecting sales tax. 

It has everything to do about set-asides for small business in government contracting context. Absolutely nothing to do with remote 

sale collection. 

Mr. Cohen’s company has told Wall Street, at least, that they 

have something over 25 million sellers. I assume that is a worldwide number so, forgivingly, that is probably about 10 million domestically. We have analyzed it with just as few as 5 million sellers 

so really cutting off a large part of the long tail that exists. Analyzing at $5 million, only 1 percent of those sellers sell more than 

$150,000—— 

Ms. LOFGREN. But my question to you was what percentage of 

your sellers are small businesses as compared to big, you know, 

larger retailers? 

Mr. MISENER. Yeah. Our retail business, which clearly is not a 

small seller, is still the bulk of the sales at Amazon.com. We have 

only 2 million sellers, additional sellers, the vast majority of which 

are small. But that pales in comparison—— 

Ms. LOFGREN. But that is a number. In terms of dollar amount, 

I mean—— 

Mr. MISENER. We don’t—— 

Ms. LOFGREN. A little book seller—I sometimes get my husband 

the books. I mean, they are not doing big volumes, it doesn’t look 

like, in terms of money. 

Mr. MISENER. Yeah. I am sorry. We have not released that 

amount in our SEC filings. But just for scaling it, it is important 

to recognize that the sales through eBay still exceed the sales by 

Amazon retail and the number of small sellers at eBay is many 

times as—— 

99 

Ms. LOFGREN. Well, that is really not—that doesn’t tell us anything. 

Let me ask you this, Mr. Cohen. If we did not have an exemption 

for small businesses, what would the impact be? I mean, you have 

got small businesses all over the United States, people that are actually supporting themselves in these tough economic times by having, you know, helping to sell stuff, I mean, including Mr. Marshall. 

What would the impact be, do you think, on those small businesses across the country? 

Mr. COHEN. Without a robust small-business exemption you put 

an artificial limit on the size and impose the costs immediately 

upon those people, and we think that the cost on the economy 

would be fairly significant. 

There is an enormous amount of income generated by the eBay 

platform, by the use of ad words through Google for many different 

small businesses through the Amazon marketplace to have an opportunity to compete on a global marketplace. 

So we think our estimate is that there would be significant job 

losses with low small-business exemptions. 

Ms. LOFGREN. My time is up, Mr. Chairman. I thank you and 

thanks to the panel. 

Mr. GOODLATTE [presiding]. I thank the gentlewoman and the 

Chair is now pleased to recognize the gentleman from Utah, Mr. 

Chaffetz, for 5 minutes. 

Mr. CHAFFETZ. And thank you. This has been a great discussion. 

I appreciate the panel and all of your participation. 

Does everybody agree there should be some exemption for small 

business or is anybody advocating that there—we should actually 

get to be at zero? 

Mr. KENLEY. The Streamlined organization in their plan has a $500,000 small-business exemption. Speaking for myself as a retailer, I think that the—there should be no small-seller exemption 

and I say that because the minute you give a small-seller exemption to the Internet retailer you are then discriminating against the 

small-seller of the Bricks and Mortar type. 

Mr. CHAFFETZ. Okay, but everybody else is agreeing that—in my 

mind, one of the big questions is what should be that threshold. 

Mr. KENLEY. Right. 

Mr. CHAFFETZ. What is the threshold by which small—what is a 

small business and what threshold should it be? 

Mr. Byrne, I would like to start with you, if I could. Let’s talk 

about the difference in the modeling and how that affects what you 

are doing, what eBay is doing, what Amazon is doing and what advantages, disadvantages. 

I mean, we are really trying to empower small businesses in this 

country. Some may say oh, you get an advantage but the others say 

it is a terrible burden when you are trying to start a new business 

or supplement your income and do it part time. 

Can you just go a little bit deeper into that, please? 

Mr. BYRNE. Yes. Sure. In the bill as we have proposed the smallbusiness exemption is up to $20 million. I think that may be the 

highest of any proposed cap. But as far as the models, if I understood your question correctly, what is really going on is this. 

100 

If we open a warehouse in Indiana, as we did once, we interpret 

the law to be that we have to pay taxes in Indiana. 

My fine competitor down at the end of the table, Amazon, they 

have done—taken a much more aggressive tax position historically 

where they open a new warehouse in a state, they put it in as a 

subsidiary and they say oh, you see, we don’t own that warehouse, 

we just own a subsidiary which owns the warehouse. So we don’t 

owe taxes. 

They have been doing that from the beginning. Our tax accountants would never let me try something so aggressive. What has 

happened is the ground is dissolving under their feet on that position and so now they are jumping on this, which is really giving 

the sleeves out of their vest because Amazon is essentially turning 

into a big-box retailer, not in the sense of having storefronts everywhere but in the sense of having warehouses. 

Mr. CHAFFETZ. Mr. Misener, how many distribution centers do 

you have across the country? 

Mr. MISENER. A couple dozen. 

Mr. CHAFFETZ. A couple dozen? 

Mr. MISENER. Yes, sir. 

Mr. CHAFFETZ. And do you pay taxes on those or don’t pay taxes 

on it? 

Mr. MISENER. It is not a tax on Amazon that we are talking 

about. It is a collection responsibility. 

Mr. CHAFFETZ. Right. 

Mr. MISENER. We collect where we are legally required, which is 

in the four states where we have a retail presence. 

Mr. CHAFFETZ. I know you—I mean, you got a nice compliment 

shout-out from Mr. Conyers there but you have also taken a fairly 

aggressive tax position in saying well, we have no physical presence because it is supposedly—but it is under your control, is it 

not? 

Mr. MISENER. No. These are separate corporations. I don’t think 

anybody on this Committee want to start—— 

Mr. CHAFFETZ. Let me go back to Mr.—let me go back to—my 

time is real short. Let me go back to Mr. Byrne here. 

Finish that thought. I interrupted you. 

Mr. BYRNE. You see my point. 

Mr. CHAFFETZ. Yes. 

Mr. BYRNE. You see my point. Okay. So because—but that 

ground is eroding from beneath their feet so they are looking more 

and more like a big-box and therefore they are jumping on, well— 

they are jumping on let’s get this tax reform. But it is the sleeves 

out of the vest. 

All this tax reform is sleeves out of the vest for big-boxes because 

they already have—they already have nexus everywhere. So there 

is—so they are already charging tax anywhere so—everywhere so 

they don’t have to pay any new tax through this, and Amazon is 

in exactly the same boat. 

Mr. CHAFFETZ. Mr. Cohen, let’s—eBay is so pervasive everywhere. We are talking about the exemption threshold. 

Where do you see that line? I happen to think it should be higher 

rather than lower but where—what number do you like and what 

is your perspective on it? 

101 

*Mr. Cohen changed this figure to $30 million. 

Mr. COHEN. Mr. Chaffetz, we do support the Small Business Administration’s calculation for the size of small businesses but we 

are also open to a discussion that makes it relevant to trying to determine what the appropriate level is. 

But our general viewpoint is that if a small business qualifies to 

obtain loans or if it qualifies as a small business by the people that 

we entrust to determine the size of small businesses, that it makes 

a lot more sense than handing the power over to the tax collector 

who has an interest in trying to maximize every single possible dollar and does not have any interest whatsoever in determining how 

you create more jobs. 

Mr. CHAFFETZ. What is that threshold number? I forget. 

Mr. COHEN. Thirty-one—it is approximately $31 million right 

now.* 

Mr. CHAFFETZ. Okay. Thanks to the Chairman. I yield back. 

Mr. GOODLATTE. I thank the gentleman. 

The Chair recognizes the gentlewoman from Texas, Ms. Jackson 

Lee, for 5 minutes. 

Ms. JACKSON LEE. Mr. Chairman, thank you very much and let 

me thank a number of Members who have legislative initiatives including—certainly all are my friend but my dear friend and the 

Ranking Member, Mr. Conyers. And I think it generates or it 

speaks to the emerging reconsideration of where we are today in 

2011 as where we might have been a decade ago or 15 years ago 

and I believe this issue was before this Committee. 

I am delighted to see my colleague from the state of Texas and 

listen to testimony. So I—let me just show my cards. I think compromise and the recognition of changing times is vital, and all of 

us have heard the refrain of creating jobs. 

Jobs can be created, maybe, if you are a small business and you 

are using online sales and maybe you have one or two persons in 

your home or one or two persons in their homes working with you 

and we don’t want to disrespect that level of jobs. 

But we also know that the idea of building Bricks and Mortar, 

persons working in a place, creates a stream of jobs—those who are 

building, those who pave the parking lot, those who have worked 

on the roads to get you to the location and, certainly, those who 

work in the facility, and maybe if we had a number of Black Fridays you would have people working the midnight shift in retail. 

So I have to be very concerned about how we bring about this 

balance and I want to go to my friend from Texas, Representative 

Otto, and tell me, frame for me, that story you were saying about 

your town and stores and how much of a difference that makes. 

I would then like to follow up with Mr. Misener, excuse me, who 

has a little twist on this issue. You are the famous Amazon with 

all of its attractiveness but I hope that you are also in the realistic 

world that can help us be part of the solution. 

Let me go to Mr.—Representative Otto at this time. 

Mr. OTTO. Thank you, Congresswoman. The—thank you. 

It is estimated currently in the state of Texas that there is between $600 million and $800 million a year in sales and use tax 

102 

that is not collected on out-of-state sales. That is a tremendous 

amount of money. 

That points out to me the unfair competition that my storefronts 

are competing with. If I am a retailer going into business, certainly 

I am going to take advantage of the Internet and selling over the 

Internet. No one here is discouraging that. No one here is wanting 

to tax the Internet. 

But in leveling the playing field to make sure that my local 

stores will continue to be developed, you know, my concern is are 

we migrating to an economy, and it appears that way if you look 

at the growth. Not where we are in total dollars but if you look at 

where the growth is, the growth is definitely to entice people to go 

to the Internet. 

Anybody that thinks they are not going to take an 8 to 10 percent discount into consideration on a big-ticket item such as a camera or something or a computer or a television set, I just don’t believe that. 

Ms. JACKSON LEE. Let me, because my time is short—you have 

eloquently stated that. Speak quickly to the issue of it is too complex if you begin to tax, and my point would be we have migrated 

or moved to a level of technology that it is probably less complex 

than it might have been 10 or 15 years ago. 

Mr. OTTO. All of the bills, as I understand, that are before Congress right now call for the very simplification. For example, if we 

take H.R. 3179 and allow states to do a states-only, you could end 

up with as few as 25 jurisdictions because Streamlined has got 24 

already in one. 

There is 21 states not in Streamlined that have a sales tax and 

all of these provide that the states have to provide the software if 

they are going to get down to the local area. 

Ms. JACKSON LEE. One quick question and then I would like the 

gentleman from Amazon. It would probably be unfair competition 

if we left—I know there is an opt-in scenario but if we left some 

states out I think we are at a point now where we need to look at 

whether or not all 50 states need to be under that umbrella. 

Mr. OTTO. I agree. I think that whatever is passed it needs to 

be made available not only to the compact states but the other 

states as well that will comply. 

Ms. JACKSON LEE. Thank you, sir. 

Mr. Misener, thank you. 

The question is you are the mother of all. What could you live 

with, and as you look at this legislation do you see the complexity 

of trying to deal with helping communities, taxation for education 

and the online marketplace? 

Mr. MISENER. Yes, ma’am, Ms. Jackson Lee. We want—— 

Ms. JACKSON LEE. And you have compacts with New York and 

California. 

Mr. MISENER. Yes. What we are trying to do here is to get Congress to authorize all the sales tax state to require out-of-state sellers like Amazon to collect. 

We believe it is imminently feasible. We have come out in strong 

support of a bill that has a $500,000 small-business exception in 

it. 

103 

It seems very reasonable to us. We wanted one much lower. We 

really think that if 1 percent is at $150,000 we are talking about 

a fraction of 1 percent of online sellers would be required to collect 

under a $500,000 exception. That seems to be a decent compromise 

to us. 

Ms. JACKSON LEE. So your issue is to make it all the states in 

a compact and you believe that there can be a system, a technology 

system, that would not be complex to collect those taxes for the 

states. Is that what you are saying? 

Mr. MISENER. Yes, ma’am. I actually feel very badly for Mr. 

Cohen because he is in a position of having to try to prove a negative, that it can’t be done or they don’t want to do it. We are saying 

we can do it and we will do it for our sellers. 

Ms. JACKSON LEE. Well, I think we have come to some means of 

collaboration here and I hope for those who oppose it we will find 

a common ground for them as well. 

But I think the economy is such, Mr. Chairman, that we need to 

do that. 

Mr. Chairman, may I just get a yes or no answer from Mr. Marshall? 

I am not sure if—it looks as if he has a different perspective but, 

Mr. Marshall, would you be willing to engage in compromise and 

discussion, listening to the testimony not only that you have given 

but to others on the—on the panel here, recognizing the loss of resources and revenue that states are losing under the present 

scheme? 

Mr. MARSHALL. Well, if I—if I understand your question correctly, indeed, and as it relates to the small-business exemption, 

you know, I have small retail stores and I am not exempt. 

I collect sales tax on the very first dollar of my sales and, quite 

frankly, you know, any level of exemption is still picking winners 

and losers. All you are doing is changing the measure of which are 

winners and which are losers. 

But I would still be competing with some online retailers that 

wouldn’t be obligated to charge that same sales tax that I have to 

charge. 

Ms. JACKSON LEE. Well—— 

Mr. GOODLATTE. The time—the time of the gentlewoman has expired. 

Ms. JACKSON LEE. We will work through that for the gentleman. 

Thank you. I yield—I yield back. Thank you. 

Mr. GOODLATTE. The gentleman from Arizona, Mr. Quayle, is 

recognized for 5 minutes. 

Mr. QUAYLE. Thank you, Mr. Chairman. 

My first question is to Mr. Byrne and Mr. Kenley because I want 

to get kind of opposing views on this. Now, the U.S. Supreme Court 

has interpreted the due process clause of the 14th Amendment to 

require that a minimum connection between a state and the person, property or transaction it seeks to tax. 

Now, I want to talk about a different avenue that raises some 

concern. Each of the three bills actually has a clause that says that 

this doesn’t establish a nexus for any other type of tax or payment 

that is required. 

104 

But my concern is since we are kind of getting rid of that minimum connection are we opening the door for other states to actually apply their regulatory environment onto companies who have 

no physical presence within that state, whether it be they pass a 

law that bases it if you do not have a physical presence and you 

meet some sort of threshold with annual revenue, which will be 

easily ascertained via the sales tax, then they meet that threshold 

and then they have to actually abide by the regulatory environment in said state. 

I will give just a specific example of this, is that Arizona is right 

next to California, and California and Arizona have very different 

overtime rules. We have overtime that kicks in a 40-hour work 

week. Once you go over 40 hours a week, overtime kicks in. However, in California, it kicks in also at the 8-hour day. 

Now, are we opening a Pandora’s Box where we are actually— 

since we are getting rid of this connection that we are actually 

going to allow a court to interpret what Congress has done and also 

the ability for the state to regulate within its own—within its own 

environment but since we got rid of that specific connection are we 

not opening the door to the fact that states will be able to regulate 

companies that have no connection besides the actual sales into 

their state? 

I will start with you, Mr. Byrne. 

Mr. BYRNE. I would think that doing so is—would be a direct insult to the dormant Commerce Clause so I would think it wouldn’t 

be capable of being done. But I have been surprised before. 

Mr. QUAYLE. As have I. 

Mr. Kenley, do you see any danger of that? That is one of my 

chief concerns of opening this—opening this door. I understand 

what we are trying—what is trying to be accomplished by this, 

these pieces of legislation. 

However, if we are not looking at the unintended consequences 

of this are we opening this door, which would basically eviscerate, 

you know, a company’s ability to kind of look at the states and 

what their regulations are, to move their facilities there? 

Mr. KENLEY. That’s a very legitimate question. It is a very legitimate question and one that needs to be carefully considered as we 

do this because I agree with your fear if that were to happen that 

that would be totally inappropriate. 

There are two things that protect you on this. The first thing is 

that Congress has the authority and that is why you see the language in the bill that says Congress has the authority to define 

how you can regulate the interstate commerce. 

So if they restrict it to the sales tax instance it is only Congress 

that can change that and enlarge that and make it be further. 

Now, secondly—— 

Mr. QUAYLE. But in each of the three bills it only talks about the 

nexus that is established only for state and sales tax and only in 

terms of the cost, not in terms of regulations or those types of 

things moving forward. That is where my concern is. Do we need 

to actually broaden that, the language there, to—— 

Mr. KENLEY. I think the language could be broadened and I 

think it should be. I think we—before we pass a bill I think we 

should look at that carefully. I think the language needs to be 

105 

broadened to the point where we feel more confident that it will not 

do that. 

Now, the second backup you have in addition to the fact that 

Congress gets to set the rules as to what will be happening in 

interstate commerce is you still have the 14th Amendment due 

process clause which allows any individual to go to court and say 

look, this has gone beyond that and it is a due process question too. 

So but I agree with your thoughts that this needs to be handled 

very carefully. 

Mr. QUAYLE. Okay. Thank you. 

Mr. COHEN. Mr. Quayle, can I add to that? 

Mr. QUAYLE. Absolutely. 

Mr. COHEN. Because the due process question is particularly important for small businesses who are not necessarily in a position 

to advocate on their behalf that there would be a due process violation—the lower the small-business exemption is. 

So you are exactly along the right lines that it is not simply that 

just for their sales alone that they may be subject to different state 

laws but also the collection. 

Mr. QUAYLE. Well, one thing, and since we are talking about the 

small-business exemption I wanted to ask you about this as well 

is we have different numbers—$150,000, $500,000, $1 million. 

I just want to know on eBay, at eBay what percentage of your 

sellers are—have annual revenues via eBay of $150,000 or over 

$150,000? Do you—do you know offhand? 

Mr. COHEN. So like I said to Congresswoman Lofgren, we have 

a significant number of sellers that are below that and we have a 

significant number of sellers that are above that. 

But we have very few sellers that only use eBay—they are multichannel retailers in which they use many, many other places. And 

so therefore they may use eBay for sales. Many of them use Amazon for sales. That’s why it makes much more sense to say for each 

retailer what their obligation is across their entire portfolio of business. 

Mr. QUAYLE. Okay. Mr. Misener, do you want to respond to that 

real quick? 

Mr. MISENER. Yes, sir, if you don’t mind, Mr. Quayle. 

First of all, that means that the sellers are actually smaller than 

Mr. Cohen is alleging—larger than Mr. Cohen is alleging. They 

look unnaturally small if you are only counting how they look as 

an online channel. 

But back to the due process point, Mr. Cohen is right except that 

the Quill court already decided that the due process clause does 

not apply in the context of sales tax collection by—in interstate 

sales. That was part of the difference between the national Bellas 

Hess decision and the Quill decision. They actually dropped out the 

due process concern and left only the Commerce Clause concern. 

Mr. QUAYLE. All right. Thank you, Mr. Chairman. I yield back. 

Mr. GOODLATTE. The gentleman from Georgia, Mr. Johnson, is 

recognized for 5 minutes. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

Is there anyone on the panel who disagrees with the thought 

that government facilitates the ability of Brick and Click or just 

106 

Click as well as Brick and Mortar businesses to actually do business? 

Is there anyone who disagrees with that, government enables or 

facilitates your ability to do business whether or not you do it just 

over the Internet, whether or not you do it over the Internet and 

you have a Brick and—you have a Brick and Mortar distribution 

facility or if you are just Brick and Mortar? Mr. Cohen, you? 

Mr. COHEN. No, we don’t, and—— 

Mr. JOHNSON. You don’t—— 

Mr. COHEN. We’re thankful that the government helped to create 

the Internet. 

Mr. JOHNSON. Okay. All right. Okay. 

So now, state and local governments facilitate your ability, your 

company’s ability, Mr. Cohen, to deliver your merchandise. Isn’t 

that correct? 

Mr. COHEN. Yes, sir. 

Mr. JOHNSON. Yeah. I mean, you got to—somebody has to drive 

it down a road that was maintained or built by state or local government, the road is laned, it is properly maintained, traffic signals, police officers to enforce the rules of the road, a court system 

for those who may be accused of—those delivery drivers who may 

get accused of speeding or something like that they have a right 

to go to court. 

And even if eBay is unable to obtain payment from someone, 

they may have to depend on the local police or the court system 

funded by the local government or the state government in order 

to collect. Is that not correct? 

Mr. COHEN. That is correct. 

Mr. JOHNSON. Okay. So is there anybody on the panel who 

thinks that we should do away with state and local sales taxes? 

Mr. COHEN. Mr. Johnson, can I continue though? But 2 years—— 

Mr. JOHNSON. Well, no. I just want to answer that particular 

question. Sales tax revenues, should they be outlawed so that we 

can level the playing field between Brick and Mortar and Brick and 

Click? 

Because I am assuming everybody believes that there should 

be—there should not be a difference in treatment between Brick 

and Mortar and Brick and Click. 

Mr. COHEN. We don’t object to that. We think it makes perfect 

sense. 

Mr. JOHNSON. Yeah. So—yeah. So you got to pay the sales tax 

in order to do the business and so the question is how do we go 

about collecting the sales tax. That is what we are here for today. 

It is not so much, I don’t think, that we should not have an obligation by Internet retailers to collect the sales tax. Is that correct? 

Mr. Byrne? 

Mr. MISENER. If I may, Mr. Johnson, I could—quick answer. I 

think that you are absolutely right that it should be a matter of 

state choice. States can choose whether or not to have a sales tax. 

Mr. JOHNSON. Yeah. And if they—yeah. This just—this—— 

Mr. MISENER. Texas—yeah. Texas, for example, chose not to 

have a personal income tax and they—so they rely heavily on a 

sales tax, and so a company like eBay, which just opened a facility 

in Austin with a nearly $3 million Texas Enterprise Fund grant, 

107 

they are taking advantage, clearly, of Texas’ hospitality yet at the 

same time have not done anything to help with the sales tax collection in the state. 

Mr. COHEN. Mr. Johnson, I appreciate the need for state sales 

taxes in the states that choose to do it. What I do find remarkable, 

though, is that just 2 years ago Mr. Bezos, when describing what 

the obligations were for Amazon in states around the country, said, 

‘‘In Washington State where we have a presence we get police protection. We get fire protection. We send our kids to local schools. 

I don’t see why, since we get no services in North Carolina, that 

they should be able to force us to collect sales tax.’’ 

Mr. JOHNSON. Well, because you do have to—you do have to use 

the police and the fire and the roads and drainage and that kind 

of thing. You use that. 

Mr. COHEN. No, no. That’s what Mr. Bezos from Amazon’s position 2 years ago—— 

Mr. JOHNSON. Well—— 

Mr. COHEN. Was that he didn’t want to have to collect and remit 

in North Carolina. 

Mr. JOHNSON. Okay. All right. Well, things change. [Laughter.] 

Things happen. But let me ask this question. 

Why is it that we would need a carve-out for small Internet businesses from collecting sales taxes on Internet sales when we don’t 

have an exemption for small businesses Brick and Mortar? 

Why should we have one for Brick and Click? 

Mr. BYRNE. Congressman, well one reason is there is an implementation cost for the software and there is a friction cost, and if 

you did a cost benefit analysis you would see that the cost for a—— 

Mr. JOHNSON. Well, why—how about making it—subsidizing it 

for small businesses? 

Mr. BYRNE. I am all for that. 

Mr. JOHNSON. The cost. 

Mr. BYRNE. I am all for that. But as long as there is some cost, 

which there is always going to be, then at some point if you are— 

if you are having people who sell $10,000 or $20,000 on the Internet have to pick up that cost in order to integrate, that cost is 

going to be higher than the taxes they actually remit. So it is actually a net loss to society. 

Mr. JOHNSON. Okay. Thank you. And you all have been excellent 

spokespersons for the need for government. 

Mr. GOODLATTE. On that note, the time of the gentleman has expired. [Laughter.] 

I am going to recognize myself and take us back here. 

The history of this is not that this originated with the Internet. 

In fact, the Quill decision was a decision based on a mail order 

case and the principle—the Chairman asked earlier what was the 

reason for not giving to the states the ability to collect the money. 

Well, the reason, of course, was delved into somewhat by the gentleman from Arizona but the principle is that those states who 

want to impose this collection requirement on taxes have jurisdiction over their citizens. 

They don’t have jurisdiction over the citizens of other states and 

therefore those citizens of other states engaged in various business 

108 

activities don’t have any say in how the laws are constructed in 

those states that they are going to then be forced to comply with. 

So the court ruled that that was the province of the Congress 

under the Commerce Clause and here we are today and have been 

for the last at least decade that we have been dealing with this 

issue. 

So the question really becomes one, not only of fairness but also 

of practicality for those businesses. So my first question for you, 

Mr. Kenley, is why should the Congress cede the authority, as 

some of these bills apparently do, to your organization to determine 

what is the standard for out-of-state businesses to collect these 

taxes rather than set a standard ourselves and allow that to take 

place that way? 

Mr. KENLEY. The reason that we had originally put forth in having Congress cede the authority with the proviso that you could always appeal anything determined by the Governing Board to the 

Federal courts, which is the normal process through the interstate 

Commerce Clause was—— 

Mr. GOODLATTE. But you would be effectively a legislative body 

that would set the, for example, size of a small business that would 

be exempt from having to comply with the collection of the taxes. 

Mr. KENLEY. The whole premise of the thing had been with the— 

when the legislators went to the Governing Board and from their 

respective states and then they had to go back to their state and 

then pass their state laws in compliance was that they were acting 

as agents of the state. And so it was really the states doing it, not 

the Governing Board itself. 

Mr. GOODLATTE. What about the five states that don’t collect 

sales taxes now? How would they fit into this? 

Those states would be burdened. In other words, businesses that 

do business online in those states would be burdened but there 

would be no benefit to those states because they don’t have a sales 

tax. 

Mr. KENLEY. Well, Mr. Chairman, let me go back first and say 

that the Streamlined organization recognizes that there needs to be 

an avenue for the states who do not want to join Streamlined and 

do not want to adhere to those rules. 

Mr. GOODLATTE. Would their—would their businesses in those 

states—if they don’t want to have a sales tax collected would they 

be allowed to exempt those businesses from having to collect state 

taxes for other states that do? 

Mr. KENLEY. I am not sure I follow that question. 

Mr. GOODLATTE. Well, if you are in Delaware and you don’t have 

a state sales tax but you have a business in Delaware that is engaged in online businesses and making sales, that business is going 

to be burdened by having to collect sales taxes for other states, 

even though Delaware hasn’t for all time as I understand it not collected sales tax. 

Mr. KENLEY. Well, first off, I would argue that there is no burden 

on the business because there is no cost to the business to do that. 

Mr. GOODLATTE. Let me—let me get to that question. You indicated that you had software that would work for the Streamlined 

businesses—states, the states that have participated in this. 

109 

What about a state that wants to collect this tax but wants to 

continue its own unique definition of what is subject to tax and 

what the tax rate is, and do you make a difference between the 

rates of these 10,000 jurisdictions? Do you have one unified rate or 

do you have a different rate for each jurisdiction? 

Mr. KENLEY. Well, the Streamlined software allows you to handle 

every jurisdiction in the United States and sort out the rates as 

well as any other. We have—— 

Mr. GOODLATTE. So if a state collects—has a local grocery store 

collect a sales tax—— 

Mr. KENLEY. Which is my business, yeah. 

Mr. GOODLATTE. On potato chips and another state makes a distinction between the size of the bag, and different jurisdictions in 

different states do that, this software will make that distinction? 

It will say this is a 5-ounce bag so we are going to not impose the 

tax but the 12-ounce bag, that is subject to the tax? 

Mr. KENLEY. Within the Streamlined rules and definitions we 

have toggle switches that allow you to exercise choices. 

But to go back to your basic question, we do feel that it is appropriate for Congress to enact a bill which allows states not to join 

Streamlined but to have their own systems and to make some of 

the—— 

Mr. GOODLATTE. That complicates the matter for that small business, particularly in a state that—— 

Mr. KENLEY. Not really. 

Mr. GOODLATTE. Doesn’t even have a sales tax. 

Mr. KENLEY. Not really. 

Mr. GOODLATTE. Well, I think the—I will ask Mr. Byrne to respond since he had a very different experience with the cost of the 

software implementation for his business. 

Mr. BYRNE. Yes. I don’t believe the software is, at least as of a 

year ago, it is not—it is what they call in the industry vaporware. 

It is not as advertised. It is expensive and so forth. However, that 

is a technical problem that could be solved probably in a year or 

two. 

They could—software could be created that does this smoothly. 

I still—I think that there is not quite the range of disagreement 

among us as may first appear, although I would prefer you didn’t 

change anything at all. If you—— 

Mr. GOODLATTE. But you want a small-business exemption. He 

says you don’t need a small-business exemption. 

Mr. BYRNE. Okay. 

Mr. GOODLATTE. Tell me why you do need a small-business exemption. 

Mr. BYRNE. Well, I think you need a small-business exemption 

to reflect the fact that there will be implementation and costs for 

any business. I think the states who want to do this should be providing it for free but there is still going to be an implementation 

cost and that—for really small sellers that implementation cost is 

going to be higher than the tax this—— 

Mr. GOODLATTE. Let me ask both of you this question. 

If we are doing this for interstate sales, and I assume you are 

going to do this for not only online businesses but also mail order 

businesses, telephonic businesses and so on, if you are going to do 

110 

it, why not have one uniform interstate definition of what the tax 

is? 

If a state wants to collect some different formula with different 

conditions in its state, great. But if it is going to collect sales taxes, 

require a business out of state to collect taxes, why not have one 

uniform definition of what is subject to the tax and one uniform 

interstate tax? Some states that have a very high sales tax, well, 

they may lose a point or two. 

Some states with a low sales tax, they might gain a point or two. 

But for the business doing business online, it would seem to me a 

lot more practical and a lot more fair to say this is the rate that 

you have to pursue if you are going to do business online. 

Mr. BYRNE. Sir, I agree. That is very much in the direction of the 

bill that we are proposing. What we are saying is don’t do it but 

if you are going to do it don’t go with the Streamlined project, 

which will end up—it doesn’t create a uniform system. 

It is still a complicated system. Go with a much simpler uniform 

system but where the states are—the bill as we propose it would 

still allow the states to keep their individual rates but they would 

have to provide the software and the interface but it would be uniform. What you are proposing is going a step further where even 

the rates get unified, which I would applaud. 

Mr. GOODLATTE. Mr. Kenley, I want to give you an opportunity 

to respond to that but my time has expired so be brief. 

Mr. KENLEY. I struggle with—I struggle with your—the thing 

that you posit there because it intrudes so much on the federalism 

and the state sovereignty side of the issue. And so I think—— 

Mr. GOODLATTE. It is interstate commerce. It is—it is business 

being conducted across state lines. It is not something that is confined within the jurisdiction of a state. That is why we are here. 

That is why the court ruled as it did in Quill. 

Mr. KENLEY. Well, I—I will have to think that through and I am 

not sure if I can buy that on that basis. But let me think about 

that. 

But, secondly, let me say that the technology that we have today, 

even within Streamlined, allows those toggle switches to be developed to allow states to have different choices both as to rates and 

both as to the—your example on the bag of potato chips, which is 

taxable and which is not taxable. 

So those are things that are being done within that realm. 

Mr. GOODLATTE. Anybody else want—— 

Mr. KENLEY. And I think the technology allows us to solve that 

without it being a problem. 

Mr. GOODLATTE. Anyone else want to comment on this point? Mr. 

Otto? 

Mr. OTTO. I think—I am okay with the states having to provide 

the solution and hold the retailer harmless as long as they are 

using it. I mean, there is nothing wrong with that. 

The same thing that the Streamlined compact has done why 

couldn’t the states that maybe don’t want to join Streamlined, don’t 

want to change their definitions, but maintain the definitions uniformly throughout their state be allowed to develop the software to 

give to the retailer? 

111 

Mr. GOODLATTE. But now you are talking about having a small 

business having to deal with a variety of different software programs. 

They have got one program for the Streamlined folks and then 

you have got 20 other—— 

Mr. OTTO. Most of these are going to end up in—— 

Mr. GOODLATTE. States with different definitions and you got 20 

different software programs that—— 

Mr. OTTO. Not if the states go together to form a compact to develop it. 

Mr. GOODLATTE. Right. But that is—but that is why the suggestion that you have one definition and one rate—— 

Mr. OTTO. But are you talking about one definition for all the 

states or a definition within each state? 

Mr. GOODLATTE. No, no. One definition for all the states and one 

flat rate. 

Mr. OTTO. Then I have to agree on the—on the, you know, from 

a federalism standpoint I am not—the reasons Texas doesn’t belong 

to the Streamlined sales compact is we are not willing to give up 

that right to determine what is taxable and what is not taxable. 

Mr. GOODLATTE. I understand, but you are making it harder to 

get to where you want to go in terms of collecting sales taxes 

through businesses that are not under your jurisdiction in your 

state. 

Mr. OTTO. Then what we are going to end up with is what we 

have today, which is states going out on their own to try to define 

physical presence in all kinds of ways. 

Mr. GOODLATTE. Well, I think we need to develop more consensus here. That would be my observation. 

Ms. Chu, the gentlewoman from California, is recognized for 5 

minutes. 

Ms. CHU. Thank you, Mr. Chair. 

Well, before I came to Congress I was elected to the California 

State Board of Equalization, whose main responsibility it was to 

collect the state sales tax as well as the use tax, and I can attest 

to the dramatic decline of sales tax revenue as a proportion of the 

state budget revenue because of online sales and I can also attest 

to the complete lack of compliance with use tax obligations despite 

the fact that we have a line on our income tax forms reminding 

people of their use tax obligation. 

And besides that, what I found was that few people even know 

what a use tax is and are shocked to find that they actually owe 

that tax regardless of whether they buy online or not. 

So I would like to ask our two state representatives, Senator 

Kenley and Representative Otto, why are the current methods of 

collecting the use tax such as auditing not an effective way to collect use tax? 

Mr. OTTO. In Texas, because we do not have a personal income 

tax, the only audit provision you have on use tax is a business that 

holds a sales and use tax permit. 

Those are the only people that would be buying across state lines 

that would be subject to audit for the purposes of determining 

whether they had paid the appropriate amount of use tax. 

112 

We have no form. We have no reporting system for individuals 

or anybody else unless they hold a permit to comply with paying 

the use tax. 

Ms. CHU. Do you even have auditors that do such things? 

Mr. OTTO. Yes. We have auditors. The comptroller, you know, because sales and use tax makes up a very large portion of our state 

budget and from the revenue standpoint we have auditors that are 

very aggressive. 

Ms. CHU. And Senator Kenley? 

Mr. KENLEY. Well, in Indiana we do have an income tax. Certainly, what you are suggesting would be a Full Employment for 

Auditors Act. 

It would require an awful lot of auditors, and I pointed out earlier in the testimony that it seems that traditionally sales tax has 

been administered by the retailer doing the collection and being 

given an allowance to do so to try to cover their cost of doing that, 

and it is the most efficient way of doing—making the collection. 

Now, a secondary problem, and we have talked about this in 

Streamlined, is once you start trying to find ways other than hiring 

legions of auditors to do this to make this work out, then you for 

example, you might say somehow or other we are going to demand 

that all the credit card companies send us a cross-reference file on 

all the purchases by a consumer and then so you get into that and 

then all of a sudden with a married couple you have a discussion 

about well, gee, what was this purchase from Victoria’s Secret, I 

don’t remember that. 

And so there is a element of privacy intrusion there that we are 

uncomfortable with, I think, as public officials to go too far on that 

point. 

So that is—those are the concerns that we have discovered in 

that audit process. It may be over time that people will declare and 

pay use tax because it is becoming more a phenomenon that we are 

all shopping over the Internet in one way, shape or form. 

So maybe it is a experiential factor. But I think there are some 

barriers to going a different way than we have in the past traditionally, which is that the retailer does the collection and the remission. 

Ms. CHU. In other words, it is expensive and inefficient to use 

auditors to collect the use tax. 

Mr. KENLEY. Right. Since you are doing it at the time of the 

transaction with the retailer it just kind of fits within the flow of 

the commerce system. 

Ms. CHU. And what would it mean to your states, to your respective states, if you were able to collect the remote sales tax? 

Mr. KENLEY. What would it mean to the states to—— 

Ms. CHU. For your—for your state budget. 

Mr. KENLEY. The estimates in Indiana run anywhere from $150 

million a year to $400 million a year under the current situation. 

I think the bigger issue that we need to think about here today 

in Congress is that this is a growing part of our commercial environment so it is probably going to be a growing number regardless 

of what number you project or settle on. 

Mr. OTTO. In Texas, the current estimates are $600 million to 

$800 million per year. 

113 

Ms. CHU. And finally, I would like to ask Mr. Misener of Amazon, Mr. Byrne said that it was very onerous to have a software 

to collect sales tax revenue and that it cost $300,000 and many 

man hours of the IT staff. But you seem to have a different view 

regarding the type of technology that is available to help collect the 

sales tax. 

Can you talk more about that and about the purchasing of software to remit sales tax in locations where you do have nexus, and 

does the technology exist? 

Mr. MISENER. Thank you, Representative Chu. Thank you very 

much. 

Yes, we do collect, as I mentioned before, in the four states where 

we have—our retail business has a physical presence and thus we 

have nexus there, and so it is possible. You only need to look 

around and see all the multi-channel retailers who also are collecting nationwide in 46 states. 

So it is absolutely doable. Now, you might say, well, those are 

only big companies like Amazon and the multi-channels—what 

about the little guy. 

Well, the little guy will get services provided for him or her. 

Those small sellers won’t have to create the software from whole 

cloth. They will obtain it as a service from service providers and 

it certainly is something that we plan to do. 

I certainly hope eBay does it and maybe our friends at Overstock 

will sell through Amazon and take advantage of our service as well. 

Ms. CHU. Thank you. I yield back. 

Mr. GOODLATTE. The gentleman from Florida, Mr. Ross, is recognized. 

Mr. ROSS. Thank you, Mr. Chairman. 

Mr. MARSHALL, DR. Byrne indicates in his written testimony that 

based on the Quill decision the status quo is a success. Would you 

agree? 

Mr. MARSHALL. No. I don’t agree at all. You know, I feel the current situation is picking winners and losers, and retailers incur expenses and benefits in all types of sale endeavors and if I choose 

to sell nationwide I am perfectly comfortable incurring the responsibility of collecting and remitting the sales tax for those purchases 

just as I do at my retail stores for state of Michigan residents. 

It is—any level of consideration for a certain size or a certain 

type of retailer is creating a unlevel playing field and that is what 

is difficult is not to be able to compete on a level playing field with 

all other players in the retail Internet or retail—— 

Mr. ROSS. With your customer base. 

Dr. Byrne, you indicated in your opening testimony, of course, 

that the cost of compliance is rather significant. I mean, you have 

got over 9,000 taxing districts I think you alluded to. Wouldn’t this 

legislation, the Marketplace Equity Act, quite frankly, you know, 

bolster your concern and even give an argument that we need this 

because we would have uniformity in the taxing laws? 

Mr. BYRNE. Well, I think that the bills as proposed would not— 

the Streamlined initiative would not create uniformity but that is 

why we have proposed a bill that says if you are going to do this, 

this is the way to do it. 

114 

It really does create uniformity. It lets the—where the states indemnify. But it also has a provision where there is a small reimbursement of—— 

Mr. ROSS. And that is what I want to talk to you about because 

I think that that is important, and when you talk about cost of 

compliance it doesn’t matter whether you are a small Bricks and 

Mortar retailer or an e-tailer. The cost of compliance is something 

that you have to face as a cost of doing business. 

So would you propose and what would you propose a cost of collection that would be—that would be adequate compensation for 

your business if you were to do this? 

Mr. BYRNE. Two to 3 percent of the taxes that we collected on 

behalf of the state would be our fee and that would be—that would 

not just be Internet people. That would be for Brick and Mortar 

people. So it would create a truly level playing field. 

Mr. ROSS. And Mr. Otto, I—when I served on the floor of the legislature I was an advocate of and sponsor of the Streamlined Sales 

Tax initiative. It got nowhere, I mean, and I understand that. 

But would you not agree then that maybe as an—as an inducement for these online companies that they should be compensated 

at least to cover the cost of their collection from an administrative—— 

Mr. OTTO. Texas currently has a collection allowance of 1⁄2 percent that we grant but not all states do. Again, this is a question 

of—you know, I agree. The reason we have left it in our law is to 

try to compensate retailers in our state that collect and remit the 

sales tax. 

Mr. ROSS. Senator Kenley, would you agree, I mean, that there 

ought to be some compensation at least to cover the cost of collection? 

Mr. KENLEY. Yes, and within the Streamlined agreement we 

struggled and worked to reach a compensation agreement that’s a 

three-tiered compensation agreement with a higher level of compensation for the smaller retailer, and it moves down as you get 

larger and we think that provides adequate compensation. Plus, we 

have the free software and the certified service provider system. 

Mr. ROSS. Mr. Cohen, you were asked this question and I am not 

sure I got the answer. How many of your members would be affected by the exemption that is currently being proposed in the 

Marketplace Equity Act? Do you know? 

Mr. COHEN. The Marketplace Equity Act is—— 

Mr. ROSS. As Representative Womack’s and Speier’s bill. It is 

the—— 

Mr. COHEN. The $1 million? 

Mr. ROSS. Yes, $1,100,000. 

Mr. COHEN. Like I said, we can’t determine the users that go 

outside of our system and use others. There are a significant number that would be above the threshold. 

Mr. ROSS. Dr. Byrne or Mr. Misener, did you want to speak to 

that? 

Mr. MISENER. I am pleased to be called Doctor. 

Mr. ROSS. I am sorry. I was just—thank you. [Laughter.] 

Dr. Byrne, let me ask you a question because this is something 

that is—in my position back home, I have a couple, married couple, 

115 

Ron and Nancy, put their life savings in a small retail boutique retail out—a store. 

They sell barbecue grills, they sell smokers and accessories, and 

they constantly have open houses. They are a great corporate partner for the community, doing fundraisers. 

But people come in and try their products. They try their spices 

that they buy through a distribution center. They try their products. They measure them. But when it comes to purchase, and this 

is their complaint to me, is that they as a retailer are now having 

to negotiate with the consumer whether they will discount at 6 percent, which is our state sales tax there, and they say they can’t do 

it. 

My question to you is how do I respond to them? I mean, there 

is a—there is a desperate need there for community partners in the 

retail establishment, those who invest their life savings in Bricks 

and Mortar to make sure that their livelihoods are not only maintained and fulfilled but also that their communities are better off 

because of their investment. 

How do I respond to them when I say, I am sorry, we don’t have 

any enforcement jurisdiction to allow you to have an even playing 

field in the retail environment with online retailers? 

Mr. BYRNE. Well, Congressman, I love the Brick and Mortars. I 

have been a Brick and Mortar guy myself. There are advantages 

and disadvantages of being Brick and Mortar. But what I would 

really say is that their pressure came from the big-boxes. 

It is the big-boxes who have taken over 87 percent of retail and 

so that is really where their competition has come from. There is 

other small retailers in some other state than yours who is maybe 

selling their barbecues online and so it creates winners and losers. 

The issue is, I think, as Mr. Cohen said, it is a false dichotomy 

to view this as Internet players versus small Brick and Mortars. 

It really is the big-box retailers versus small entrepreneurs. 

Mr. ROSS. But the small entrepreneurs are the ones who make 

the investment to allow the consumer to see the product and then 

the consumer makes the choice to buy it online because they don’t 

have to pay sales tax. And I see my time is up and I yield back. 

Mr. AMODEI [presiding]. Thank you, Mr. Ross. 

The gentleman from Florida is recognized. 

Mr. DEUTCH. Thank you, Mr. Chairman. 

I would just like to follow up on that point, Mr. Byrne. I don’t— 

I don’t know that it is entirely accurate to try to couch this in 

terms of—to shift the debate to a battle between smaller retailers 

like Mr. Marshall and the bigger retailers. 

The fact is in many ways some of the smaller retailers—correct 

me if I am wrong—who have specialized products sell those products. 

That is—those are the products where the consumer has to go 

online if they want to try to find a lower price and often does, and 

when you speak about the benefits, and this is a question I would 

like to put to you and to Mr. Marshall because you spoke, Mr. 

Byrne, about the benefits that Brick—that Brick and Mortar retailers have and the advantages they have and people being able to 

go in and touch the product, people being able to go in and interact 

116 

with someone directly, to have questions answered about the product. 

What are the—what are the benefits? Let me start with you, Mr. 

Marshall. What are the benefits, given all those wonderful benefits 

that you have, why would anyone go online ever to buy a product? 

Mr. MARSHALL. Well, in many cases, that purchase decision, in 

a final analysis, is based on price. Every hour of every day our 

sales associates entertain customers’ questions, provide demonstrations, allow them to evaluate different instruments and then they 

are confronted with okay, now, you know, here is the best price I 

can get on the Internet, can you match that. 

And with our 6 percent sales tax we could and we comfortably 

do with Internet retailers that also charge sales tax. But those that 

have that competitive advantage it is just a burden that we cannot 

overcome. 

It is an unlevel playing field and there is just no logical sense 

to it, and engaging that customer and saying well, you understand 

that this 6 percent that we have in our price we are not taking 

that, we are giving it to the state, you know, the customer doesn’t 

care. You know, the bottom line is price in so many cases, and in 

this unlevel playing field we cannot compete with that. 

Mr. DEUTCH. Mr. Byrne? 

Mr. BYRNE. Well, that is why the bill that we have proposed totally eliminates the tax benefit. What we are saying is if you are 

going to do something don’t—you know, you can level a playing 

field by either, you know, filling in dirt on one side or scraping it 

off the other. 

Our bill says if you are going—if you are going to do this it totally eliminates the tax—the tax benefit of shopping online versus 

Brick and Mortar and it says let us—since the states are now deputizing or not just deputizing, conscripting retailers to do their 

work for them as tax collectors, there should be a—they should be 

providing the software. They should be indemnifying us and Mr. 

Marshall against mistakes and they should be reimbursing us as 

well. 

Mr. DEUTCH. All right. So let me—since Mr. Womack and Ms. 

Speier are so committed to this issue that they have sat through 

this hearing, let’s assume for a moment that the legislation that 

they have introduced passed the Congress and was signed into law 

by the President tomorrow. 

What would—in the—as you talk about all of the potential costs, 

and I would like to actually open this question to Mr. Misener and 

Mr. Cohen as well as Mr. Byrne, what would you have to do? How 

much would it actually cost? What would the burden be to you? 

Mr. BYRNE. Myself first? 

Mr. DEUTCH. Mm-hmm. 

Mr. BYRNE. On the—right now would be fairly cost, I would 

imagine, a couple of million dollars and a year of sort of integration 

to the different commercial packages that are available and there 

would still be a liability because no one is yet guaranteeing that 

if we use the package—— 

Mr. DEUTCH. I understand. 

Mr. Cohen? 

117 

Mr. COHEN. We believe there would be a significant loss of sales 

from a significant number of sellers who would leave online platforms and go to either using places in which it would be much 

harder to collect from, use other types of services where they 

wouldn’t, for example, ad words or other systems in which the auditing of different states would not apply to them. 

That is why we are so adamant that we would like a significant 

small-business exemption so that they are not driven from the 

Internet. We think the cost will go up, absolutely. 

Mr. DEUTCH. Well, I understand you think the costs will go up 

and Mr. Marshall’s argument is the cost is going to go up. You are 

going to bear some additional cost. He bears an inordinate amount 

of additional costs by having his store open so the customers can 

come in and look at the products before going online. What—I don’t 

understand. The customers are going to be driven where? 

Mr. COHEN. To larger retailers. Just to larger retailers. I mean, 

the cost advantage that Amazon has right now will be magnified 

without—some pushback on small businesses who have a sales tax 

advantage, no question. 

Mr. DEUTCH. Mr. Marshall, is that a battle you are willing to engage in? Do you think that is right that everyone—— 

Mr. MARSHALL. We do every day. 

Mr. DEUTCH. Everyone is going to leave and run off to the larger 

retailers? 

Mr. MARSHALL. Well, that is a battle that retailers, small retailers, are joined every day and comfortably joined. You know, it is 

a competitive world and, you know, if you can’t stand the heat you 

shouldn’t be in retailing. But as long as the field is level, you know, 

we will battle the big retailers. 

We have advantages over them. You know, we have a connection 

with the community. You know, our—you know, it is a level playing field and there is benefits and drawbacks to being a big-box 

and being a small retailer. That is just fine. 

Mr. DEUTCH. But at that point—at that point, the big-box retailer, the smaller retailer, the online, at least at that point there 

is a level playing field to engage in that. 

Mr. MARSHALL. Absolutely. 

Mr. DEUTCH. Thank you. Thank you, Mr. Chairman. 

Mr. AMODEI. Thank you, Mr. Deutch. 

The gentleman from Texas is recognized, Judge Poe. 

Mr. POE. Thank you, Mr. Chairman. 

I want to start with you, Mr. Otto. Just so everyone on the panel 

or the Committee understands, the Texas legislature meets every 

2 years for 5 months. Is that correct? 

Mr. OTTO. That is correct. 

Mr. POE. And yet Texas is, what, the 13th largest economy in the 

world, something like that. And your primary source of revenue for 

the state is—— 

Mr. OTTO. Sales and use tax. 

Mr. POE. Sales tax and use tax. It seems to me—let’s talk about 

Dayton, Texas. People who build a building and sell a product take 

a greater risk than someone that is somewhere else in the fruited 

plain selling through the Internet. 

118 

In Dayton, just since you have been elected, you have had Hurricane Katrina, Hurricane Rita, Hurricane Humbert, Hurricane Gustav and Hurricane Rita all hit Dayton, Texas. Some of those Main 

Street businesses were destroyed, rebuilt, destroyed, rebuilt, destroyed, rebuilt. 

It seems to me that that is a risk they take yet they have a disadvantage with the Internet service retail. Do you agree with that 

or not? 

Mr. OTTO. That is true in Dayton, Texas. That is true anywhere 

in the state of Texas. 

Mr. POE. Yeah, I know. The whole state, whether it is fires or 

hurricanes or droughts, all of that has, you know, occurred since 

recently. 

Tell me about your concept that this is not a new tax. You know, 

nobody wants new taxes on anybody. Well, most people don’t want 

new taxes. 

Mr. OTTO. I, for one—— 

Mr. POE. Tell me—explain that to me. Make it simple. 

Mr. OTTO. Right. I don’t—this is not a new tax. 

Mr. POE. Yeah. You are a CPA but keep it simple. 

Mr. OTTO. All right. This is a tax that, when the sales tax laws 

were passed decades ago, the use tax was put into existence. This 

is not a tax that the business pays. This is a tax on the consumer 

that the businesses that retail collect on behalf of the states. 

So this is not a new tax we are imposing. It is a tax we have 

been unable to collect partly because of the line drawn in the Quill 

decision. But even in that, we have—I mean, Amazon, we had a— 

we had a battle with them this session. 

They have a distribution center in Irving, Texas, owned by a 

wholly-owned subsidiary and are not collecting the Texas sales tax. 

I have read Quill over and over and I can’t find where that is 

not physical presence but—and before we went into session the 

comptroller sent them a tax due notice for $269 million that should 

have been collected over a 4-year period. 

Mr. POE. Has that tax been paid? 

Mr. OTTO. Not to my knowledge. So what we are looking at is 

in order to avoid—what I don’t like seeing on the landscape right 

now for Texas and for any other state is what states are trying to 

do to, in my way, Mickey Mouse the definition of physical presence, 

all right, and that is not a desired outcome. 

We need to create a level playing field where everybody understands the rules and they are very clear. This bill that has been 

introduced in the House calls for simplification. It calls for software 

to be provided. All of these additional costs the states are going to 

have to front that. 

If we want to take advantage of the—of the provisions that are 

going to be made available to us in this legislation, we are going 

to have to come up with the money to provide that software. 

Mr. POE. Sales tax revenue in the state of Texas, has it been 

going up? Has it been going down? Is it about the same? 

Mr. OTTO. Well, when I first got to the legislature in 2005, the— 

our sales tax revenues were growing at double-digit percentages 

until we hit the current recession. We have just now become where 

our August sales tax collections for 2011 got back to the level the 

119 

were at at 2008 pre-recession but they are not back to the 2006- 

2007 levels that they were at and what I would call our peak economy. 

Mr. POE. There are a lot of factors, of course, involved in that. 

Is one factor or not the fact of consumers buying online? 

Mr. OTTO. That is correct. I will tell you what is driving our recovery right now is the oil and gas sector down in the Eagle Ford 

formation in south Texas. We have got an oil and gas boom going 

on that is driving most of the sales tax. Our housing sector has not 

come back, which is a big driver in sales tax in the state. 

Mr. POE. One other question. What is the biggest store in Dayton, Texas? It is not Sonic but what is it? 

Mr. OTTO. Oh, wow. 

Mr. POE. Well, let’s go to Houston. Here is an example. 

Mr. OTTO. Probably Western Auto. 

Mr. POE. Western Auto. I have seen this and I have heard about 

this phenomena where a consumer goes into, let’s use Best Buy, 

finds the TV they want and while they are there, they are ordering 

it on the Internet right there in the store, the Main Street store— 

ordering it on the Internet because they can get a, you know, no 

sales tax. Texas 81⁄2 percent, 81⁄4? 

Mr. OTTO. 81⁄4. 

Mr. POE. So they can save that 81⁄4 percent by ordering it in 

Main Street business the same TV set. That jus doesn’t seem right 

to me. 

Mr. OTTO. It doesn’t. We had the same kind of testimony before 

the House Ways and Means Committee this last session that that 

was occurring on big-ticket items. 

Mr. POE. All right. Thank you, Mr. Chairman. I will yield back. 

Mr. AMODEI. Thanks, Judge. 

The lady from California, Ms. Sa ́nchez. 

Ms. SA ́ NCHEZ. Thank you. I feel like the last person who gets to 

go at a roast and all the best lines are already taken. [Laughter.] 

I appreciate your patience in hanging in here and I have listened 

to all of the testimony and the questions with a lot of care. So, 

hopefully, I won’t be repeating some of the points that some of my 

colleagues made. 

I want to start with Mr. Marshall. Mr. Marshall, I understand 

you are a family-owned business. It is second generation. 

Mr. MARSHALL. Correct. 

Ms. SA ́ NCHEZ. And that you have seven physical stores. Didn’t 

start out that way, did it? 

Mr. MARSHALL. No. It was just in the last 15 or 20 years that 

we expanded from a single location to seven. 

Ms. SA ́ NCHEZ. When you opened that single location, did the government help you with any of the costs of collecting sales tax on 

the items you sold in that Brick and Mortar store? 

Mr. MARSHALL. Well, it—— 

Ms. SA ́ NCHEZ. Did they subsidize any of that for you? 

Mr. MARSHALL. It predates my time but to my knowledge, no. 

The system that exists within the state of Michigan for collection 

of sales tax, you know, seems reasonable and there are—there are 

considerations shown for the burden that we incur collecting it. 

120 

The government did assist in the creation of Marshall Music because my father was a pilot in World War II and my mother 

worked for the government during World War II, and it was savings that they accumulated during that time that made the down 

payment on their first music store. 

Ms. SA ́ NCHEZ. Okay. I am somewhat facetiously highlighting that 

point because there seems to be a lot of consternation about the 

cost of implementing, you know, compliance with collecting sales 

tax revenue through online purchases. 

Now, you have admitted that you also sell products online. Is 

that correct? 

Mr. MARSHALL. Correct. 

Ms. SA ́ NCHEZ. And what percentage, just roughly, can you give 

me a ballpark, of your business is done through online sales versus 

the Brick and Mortars that you own? 

Mr. MARSHALL. Less than 1, 11⁄2 percent online. 

Ms. SA ́ NCHEZ. Okay. So if you were—if we were viewing you 

strictly through the lens of your online sales and what you take in 

on a yearly basis through those online sales, under some of the 

definitions that people have proposed for the small-business exemption you might look like you actually were a small business that 

qualified for that exemption, would you not, if we were strictly 

looking through the prism of what a small business does in online 

sales? 

Mr. MARSHALL. Indeed, and I apparently would not have to collect sales tax and would have a competitive advantage over those 

that do. You are—it would—you know, it would still be picking 

winners and losers. 

Ms. SA ́ NCHEZ. And so, you know, with some of these, you know, 

proposed limits for what a small-business online retailer is, and I 

believe, Mr. Cohen, and you can correct me if I am wrong, you don’t 

know exactly what percentage of people strictly sell online but very 

well could be a situation like Mr. Marshall’s situation in which part 

of their portfolio of sales is online but, you know, you could—and 

they could look strictly through that prism like a small-business 

entity but in fact they could be doing millions or billions of dollars 

worth of business through other, you know, platforms from which 

they sell. 

Is that correct, Mr. Cohen? 

Mr. COHEN. Yeah, and for many online and for many Main 

Street retailers we think the Internet is a great way for them to 

expand their business. Exactly. 

Ms. SA ́ NCHEZ. I understand but, you know, again, the—you 

know, creating these artificial distinctions between Brick and Mortar and online sales and small-business versus—you know, what is 

the definition of small business. 

I have listened with a lot of attention to the small business discussion because I used to serve on the Small Business Committee, 

and the definition of small business pretty much is in the eye of 

the beholder because if you look at SBA, government entity, you 

know, their definition in some instances is 500 or fewer employees. 

And if you asked the average person out on the street does 500 

employees sound like a small business to you I think most people 

would say no. If you look at the IRS and the filings that they reVerDate Aug 31 2005 10:09 Apr 19, 2012 Jkt 000000 PO 00000 Frm 00124 Fmt 6633 Sfmt 6601 H:\WORK\FULL\113011\71403.000 HJUD1 PsN: 71403
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ceive, in the IRS’s eyes—most businesses in the United States employ five or fewer people, and if you asked the average man out on 

the street does five or fewer people sound like a small business to 

you I imagine most people would say yes. And yet, you have these 

huge disparities in what the definition for small business is. 

So with respect to the small-business exemption and with all due 

respect to the idea that there are some start-up costs to starting 

a new system and to implementing it and to recouping those sales 

taxes, you know, those are—those are expenses that Brick and 

Mortars incur and nobody is—nobody helps them with the cost of 

that transition or the cost of that—doing business that way. 

And so I think we need to be very careful in terms of when we 

talk about small-business exemption what exactly the criteria 

should be because something that looks like a small business 

through small-business online sales could actually be somebody 

that does a lot of—generates a lot of sales in another context. 

And I see that my time has expired. I thank you all for your participation and for your patience and I yield back my time. 

Mr. AMODEI. Thank you, Ms. Sa ́nchez. 

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 witnesses or additional materials for the record. The hearing is adjourned. 

[Whereupon, at 12:42 p.m., the Committee was adjourned.] 

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173 


71403E2-8.eps
174 


71403E2-9.eps
175 


71403E2-10.eps
176 


71403E2-11.eps
177 


71403E2-12.eps
178 


71403E2-13.eps
179 


71403E2-14.eps
180 

f 


71403E2-15.eps
181 


71403F-1.eps
182 


71403F-2.eps
183 


71403F-3.eps
184 


71403F-4.eps
185 


71403F-5.eps
186 

f 


71403F-6.eps
187 


71403G-1.eps
188 


71403G-2.eps
189 


71403G-3.eps
190 


71403G-4.eps
191 

f 


71403G-5.eps
192 


71403H-2.eps
193 


71403H-3.eps
194 


71403H-4.eps
195 


71403H-5.eps
196 


71403H-6.eps
197 


71403H-7.eps
198 

f 


71403H-8.eps
199 


71403I-1.eps
200 

f 


71403I-2.eps
201 


71403J-1.eps
202 

f 


71403J-2.eps
203 


71403K-1.eps
204 


71403K-2.eps
205 


71403K-3.eps
206 


71403K-4.eps
207 

f 


71403K-5.eps
208 


71403L-1.eps
209 


71403L-2.eps
210 

f 


71403L-3.eps
211 


71403M-1.eps
212 


71403M-2.eps
213 


71403M-3.eps
214 


71403M-4.eps
215 


71403M-5.eps
216 


71403M-6.eps
217 


71403M-7.eps
218 


71403M-8.eps
219 


71403M-9.eps
220 

f 


71403M-10.eps
221 


71403N-1.eps
222 


71403N-2.eps
223 

f 


71403N-3.eps
224 

Æ 


71403O.eps