BANKRUPTCY REFORM
Personal bankruptcies leveled out last year at approximately 1.3 million. This is four times higher than back in the economically tough early 1980’s. An unprecedented number of Americans are choosing to walk away from their debts. Consequently, consumer bankruptcies and the costs associated with them are skyrocketing. The National Bankruptcy Review Commission failed to make consensus recommendations, so Congress tackled the issue on its own.
While the retail industry supports providing deserving debtors with a fresh start, legislative reform is needed because many consumers are misusing the bankruptcy system. Nationally, Chapter 7 filings, under which individuals wipe out virtually all unsecured debt, rose by more than 60 percent over the past three years. Studies indicate that many of these filings are by individuals who could afford to repay some or all of what they owe, but choose not to do so. This phenomenal rise in consumer bankruptcy filings, and misuse of the system by some filers, is making it clear to Congress that the status quo is unacceptable.
In the 106th Congress, both bodies introduced legislation in March of 1999. The first of these, H.R. 833, is virtually identical to the Conference bill produced in the final days of the 105th Congress. It provided that filers who made more than the median income and could repay 20 percent or more of what they owed — after allowing for living expenses, secured debts (such as car and home loans) and priority payments (such as child support and back taxes) — would file under a wage earner plan in Chapter 13. Studies showed that 11 percent of filers would have been affected; resulting in potential savings of $4 billion dollars annually in otherwise discharged debt. The Senate alternative, S. 625, is a substantially watered down version of the Conference bill. The Senate bill contains numerous provisions that would make it less likely that the needs-based provisions would work as intended. It also contains provisions that would reduce creditor recoveries and other changes seriously undercutting provisions of the bill designed to increase the accountability and integrity of the consumer bankruptcy system.
The House bill passed by an extremely strong 313 to 108 vote on May 5, 1999. NRF was forced to accept some unfavorable amendments, including two new Truth-in-Lending Act requirements and explicit exceptions to the needs-based test for social security income and for continuing secondary school expenses. However, the bill preserved the vast majority of the needs-based formula, garnered strong bipartisan support and placed the White House squarely on the defensive.
After fitful starts and withdrawals, floor action on the Senate bill, pending since last October, was completed on February 2, 2000, with an overwhelmingly favorable 83 to 14 vote. To achieve this vote additional consumer provisions, relating to credit card issuance and terms had to be accepted. Extraneous amendments, dealing with minimum wage, with school vouchers, with bankruptcy filings by abortion protesters, and with drug policy were added. The White House also insisted on new requirements related to the ability of retailers to obtain reaffirmations. We have worked to keep those provisions within reasonable bounds and are continuing to seek means to protect the ability of retailers filing commercial bankruptcy to reorganize.
Final passage of bankruptcy legislation has been hampered by minimum wage provisions attached shortly during Senate deliberations. Senate Democrats had sought to attach a one-dollar rise over two years to the bankruptcy bill. Senate Republicans instead adopted a one-dollar rise over three years along with a tax package designed to offset some of the wage hike’s increased costs.
Senate and House staff “pre-conferenced” most of the bills’ provisions without impaneling a formal conference. The focus in recent months has been on removing extraneous issues from the bill (such as provisions dealing with the treatment of abortion protesters) added to it by the bill’s opponents. Unable to attack the legislation on its merits, they have raised procedural roadblocks to its final passage by the Senate and launched campaigns to publicly distort the bill’s provisions. The White House has issued various veto threats.
Efforts to attach the bankruptcy bill to other “must pass” legislation failed when word of those attempts leaked to Senate opponents. Accordingly, in October proponents used a surprise procedure to incorporate the “conferenced” package into the shell of a ready-to-be-conferenced House embassy bill. It passed handily on October 12 and was promptly forwarded to the Senate for a final conference vote. Under the Senate’s rules, such votes are subject to fewer procedural delays. At this point, just prior to adjournment, if bankruptcy reform legislation is to pass it either will be attached to an omnibus budget bill or separately approved in its embassy guise during the closing hours of the 106th Congress.
HEALTH REFORM INITIATIVES
Managed care reform legislation continues to be one of the most high profile and controversial issues in the second Session of the 106th Congress. During the first session, both the House and Senate passed differing versions of comprehensive managed care reform legislation. Much of the activity in the new session has centered around the joint House-Senate Conference that is attempting to work out the differences between the two versions, and produce a final conference product.
In the first session, several managed care bills emerged in the House. Representatives Norwood (R-GA) and Dingell (D-MI) teamed up to introduce H.R. 2723 – a bill which, among other things, would allow individuals to sue health plans and employers in state courts for economic, non-economic and potentially punitive damages. This bill was introduced with 21 Republican cosponsors, and was endorsed by both the Democratic leadership in the House and President Clinton.
In a surprisingly strong vote, the House passed H.R. 2723, commonly known as the “Dingell-Norwood bill,” by a margin of 275 to 151 in October 1999. The bill, which was strongly opposed by NRF and the business community, drastically expands liability, allowing employers and health plans to be sued in state courts. The vote came after a long day of heated debate and votes on three substitute bills. In the final tally, 68 Republicans crossed party lines to vote in favor of Dingell-Norwood.
Much of the debate over patient protections this year continues to focus on the liability issue. The Senate legislation (S. 1344) does not include any expanded liability, but instead relies on an internal and external appeals process to resolve and grievances. The House bill (H.R. 2723), on the other hand, includes a provision that would allow health plans, and the employers which sponsor them, to be sued in state court by jury trials for uncapped damages. NRF strongly opposes the House liability provision.
Throughout the spring and summer months, Conference Members held several meetings in an effort to produce a compromise product. Although Republican Conference Members were able to achieve general consensus on what a final version of patient protection legislation could look like, Democrats and maverick Charlie Norwood outright rejected their offer. During the summer, Senate Democrats attempted on two occasions to attach the Dingell-Norwood legislation to other non-relevant legislative vehicles. Republicans, under the leadership of Senate Assistant Majority Leader Don Nickles (R-OK), successfully defeated these efforts – albeit by a narrow margin of one vote. Four Republicans – Senators Chaffee, Specter, Fitzgerald and McCain – continued to cross party lines to vote with the Democrats on both occasions.
As the election nears, tension continues to escalate over Patients Bill of Rights legislation. Supporters of the legislation, led by the American Medical Association, along with Democratic leadership in both Chambers and Republican dentist Charlie Norwood, have been vigorously working to garner enough support to push the legislation through in the Senate. In recent weeks, Norwood introduced a new version of his House-passed measure falsely asserting that it represented significant compromise. However, under “Dingell-Norwood II,” employers would continue to be subjected to massive liability. Although Members in both the House and Senate are working to achieve an 11th hour compromise, it is increasingly unlikely that they will be able to reach consensus prior to adjournment of the 106th Congress. NRF will continue to oppose any expanded liability provision, and will work closely with Policy Council should any further developments occur.
TAXATION OF REMOTE COMMERCE/INTERNET SALES
The growth of consumer shopping on the Internet is expanding at a rapid rate. In 1999, almost 40 million Americans shopped online, with the total value of goods and services traded on the Internet expected to reach $300 billion by 2002. The unique nature of the Internet, including the lack of physical stores and the ability to sell intangible goods, will dramatically change the way in which future transactions are conducted.
NRF believes tax policy should be channel-neutral. NRF feels that all retailers, regardless of the channel, or channels, in which they do business, should be treated equally with respect to collection obligations required by state sales and use taxes. NRF does not support any new taxes on remote commerce or the Internet.
Under current law, 45 states and the District of Columbia impose sales and use taxes on purchases of tangible goods. Due to the complexity of these sales and use taxes, the states and local governments that imposed these taxes require retailers to collect them at the point of sales from consumers. Retailers must then remit these taxes back to the state or local governments immediately. Based on two separate Supreme Court rulings, the Court held that retailers cannot be required by a state or local government to collect sales and use taxes from the purchaser unless the retailer has a “physical presence” within the state of the purchaser. Although the retailer is not required to collect the sales tax in these instances, the consumer (i.e. the taxpayer) is required by state law to remit a “use” tax (i.e. the sales tax) to their home state. Many states include a line at the bottom of their state income tax returns for taxpayers to disclose if they made any out-of-state purchases. If sales taxes were not paid on these out-of-state purchases at the time of sale, the taxpayer must voluntarily remit these taxes to the state. States use revenue from the sales and “use” taxes to provide government services to its taxpayers.
Though consumers are required to remit use taxes on out-of-state sales, historically states have not enforced collection of the use tax claiming significant compliance burdens or for political reasons. However, given the explosion of Internet sales, states are concerned with future revenue loss as consumers buy more over the Internet. Instead of relying on taxpayers to remit “use” taxes on the backend, States want to require retailers to collect sales taxes on out-of-state purchases on the front end. NRF is only asking that retailers have the same collection obligations regardless of how a product is delivered. NRF’s position supporting equal collection obligations for retailers across all channels does not constitute support for new taxes on the Internet. In fact, retailers oppose any new “access” or “bit” taxes as well as the existing telephone excise tax.
In moving toward a system in which purchases through all channels of commerce are taxed the same (i.e. tax equity), retailers agree that their must be dramatic restructuring of existing state sales and use tax systems, compensation to retailers by States for collecting their sales and use taxes, and State and local assistance in educating consumers of their responsibility to remit existing state use taxes.
On January 18, 2000, the National Retail Federation (NRF) Board of Directors adopted a policy statement calling for equitable collection of state sales and use taxes across all distribution channels. To coordinate industry activities, NRF has created a Coalition of leading retail companies in support of a “level tax playing field.” This retail-only group developed and is implementing NRF’s multiyear lobbying strategy, with participation contingent on adherence to a predetermined financial commitment. The Coalition includes company representatives from NRF’s Policy Council and Taxation Committee and has developed a lobbying strategy that seeks to achieve Congressional authority for states to expand their collection authority if states adequately simplify their sales and use tax systems. The NRF retail-only coalition has been working closely with state and local authorities to develop a uniform simplified sales and use tax system that will ultimately be adopted by the states. In this effort, NRF has worked intimately with the Streamlined Sales and use Tax Project (SSTP) to achieve this simplification, providing both retail tax expertise and testimony on retail requirements for any new tax system. NRF priorities for any new sales and use tax system are included in a retail industry White Paper delivered to the SSTP by NRF at a public hearing on September 15, 2000 in Nashville, TN. NRF also plays a leadership role in the E-Fairness Coalition, a multi-industry group consisting of developers, real estate interests, retailers, and other trade associations.
DATA PRIVACY
A great deal of the information collected and stored by retailers as part of their customer service, marketing, loss prevention or other business operations is considered by some individuals and government officials to be “private.” Various governmental and public interest groups have focused on the issue of personal privacy. They would like to limit the data’s use. The coalescing of these interests is likely to result in legitimate business uses of data becoming subject to increased public scrutiny and debate.
There is growing interest in privacy issues among consumers, government officials, and the media. Numerous privacy-oriented bills have been introduced in Congress and in the state legislatures. The privacy of medical and financial data that is collected from or about children continues to be a potent issue, especially with respect to data collected on-line.
Effective October 26, 1998, the European Union required the U.S. (and other nations) to develop “adequate” data privacy protections or risk losing the ability to capture and use data on European citizens. The U.S. and the Europeans have agreed an overarching set of “safe harbor” principles that would allow U.S. companies to continue to do business with Europe without the necessity of entering into very explicit privacy contracts with each of the European nations. In September 2000, the data commissioners formally adopted the safe harbor even as it was coming under question by other parts of the EU. Effective November 1, 2000, U.S. companies may begin signing up to participate in the safe harbor.
The agreement contains far more extensive privacy protections than are currently required under any U.S. laws. It is likely that the requirements, though primarily aimed at electronic data transmissions between nations, will be extended by argument to other business activities. The effect may be to prohibit long-standing legitimate practices in a non-on-line environment.
Many states have already limited the collection of information needed for loss prevention activities. The FTC and Treasury have held hearings and workshops on identity fraud and on whether new, broad privacy protections should be adopted with respect to marketing data collected on the Internet or other databases. NRF has participated in the FTC activities. In addition, the FTC is regularly surveying web sites, to determine the breadth and adequacy of their privacy disclosures. In January 1998, the NRF Board of Directors adopted Consumer Data Privacy Principles as a guideline for retailers seeking to adopt privacy policies. NRF and other groups strongly encouraged its members to develop and post on-line privacy policies consistent with those principles. In a report to Congress last year, the Commission testified that in view of the tremendous strides the industry has made in terms of self-regulation, it recommended that no new laws regulating on-line privacy be adopted at this time. This effort demonstrates that industry self-regulation can be effective and helped bolster the U.S. case with the European Union. A more recent study by the Commission indicated that privacy notices were even more widespread now than they were two years ago. Nevertheless, surprisingly, by a very narrow vote, suggested that Congress place even greater burdens on companies’ use of data. In doing so it raised the bar on privacy notices to suggest that they should offer additional “protections” – specifically, some level of data security and customer access to and the ability to “correct” data files about them. This move by the Commission has been exacerbated by an agreement reached with interactive advertisers, which voluntarily agreed to adopt the Commission’s privacy principles as a way of forestalling legislation. As a result, the Commission is now asking Congress to place all interactive advertisers under the same rules. In addition, the FTC has recently intervened in the Toysmart bankruptcy, restricting the ability of a company to dispose of a “private” customer list when selling off its assets.
Continued increased attention to data privacy issues is expected. Extensive new privacy provisions were added to the Gramm-Leach-Bliley Financial Modernization bill passed at the end of the first session of the 106th Congress. The new law requires notice and opt-out or express customer consent, for “financial institutions” (which includes retailers who offer credit) to share information with unaffiliated companies. Indeed, the provisions are so broad, that companies who never imagined they would be covered by a banking bill (such as travel agencies) will find that they must comply with extraordinarily complex new privacy regulations. At its members' direction, NRF obtained two important carve outs in the legislation for retailers who offer credit. Nevertheless, needlessly ambiguous provisions elsewhere in the massive new law could severely restrict the ability of retailers to track their customers’ purchases. NRF successfully convinced the federal agencies writing the new privacy regulations mandated by the new law to make several essential modifications, including a significant extension of time in which to comply.
The Gramm-Leach-Bliley Act does not preempt state passed legislation that is more protective of consumer privacy. This is creating an unprecedented wave of state bills that could seriously undermine retail operations. NRF is coordinating a program to assist the State Retail Associations in their efforts to fight unfavorable state privacy legislation.
The federal banking agencies, the Securities and Exchange Commission, and the Federal Trade Commission drafted regulations implementing the new law. NRF established a group to draft comments and final rules, issued in May, were much improved as a result.
Several privacy bills were considered during the final days of the 106th Congress. Among them were restrictions on the sale of social security numbers and the establishment of a privacy commission to make recommendations to Congress. The latter failed to muster the 2/3’s majority needed to pass the House under expedited procedures. It is not likely to move independently in the few remaining days. Congressman Tauzin (R-LA) held a hearing in the House Commerce Committee highlighting those privacy issues he hopes to raise next session.
NRF participated in a two-day privacy workshop held by the FTC on the Telemarketing Sales Rule, leading to possible revisions of the rule early next year. NRF is also scheduled to participate in Identity Theft Workshops sponsored by the Social Security Administration and the FTC.
FY 2001 BUDGET / TAX RECONCILIATION
The annual federal budget cycle begins with the preparation and submission to Congress of the President’s budget. The President’s budget is only a request; Congress is not required to adopt his recommendations. Congress prepares its own budget setting aggregate budget policies and functional priorities for a multiyear period. While not law, the purpose of the budget is to establish the framework on how Congress considers revenue, spending, and other legislation. The budget also initiates the reconciliation process for balancing existing revenue and spending laws with congressional priorities. Congress must pass its own budget resolution by April 15 every year. Congress then implements budget policies through enactment of annual appropriations, revenue measures, debt-limit legislation, etc. When Congress and the President are unable to complete all 13 appropriation bills by the end of the fiscal year (October 1), passage of a continuing resolution will keep unfunded agencies operating until the cycle is completed.
As directed by law, President Clinton submitted his FY 2001 Budget proposal to Congress on Monday, February 7, 2000. The President proposed a $1.84 trillion budget plan, providing $351 billion in tax cuts over 10 years. The majority of this relief is designed to make health care, education, and retirement savings more affordable for middle-income families. However, the President proposes increasing taxes by $180 billion as well, by eliminating so-called loopholes, shutting down corporate tax shelters and hiking other taxes. Specifically, the Clinton budget would raise $96.5 billion from corporations, and another $85 billion from new cigarette, Superfund, and airway taxes.
In April, Congress approved budget that would provide $150 billion in tax cuts over five years. Last year’s vetoed tax bill would have cut taxes $156 billion over five years and $792 billion over 10 years. The budget provided for two “protected” tax reconciliation bills this year. It appears unlikely that Congress will consider a large-scale tax cut package this year, focusing rather on smaller, theme-based tax bills that emphasize politically popular issues such as marriage penalty relief and estate tax relief. While several of these bills have passed Congress, President Clinton has unfortunately vetoed them. Republicans may wait until next year to pursue broader tax cuts in hopes that the next President will be a Republican. The Clinton Administration and Congressional Democrats generally remain opposed to Republican tax-cut proposals. They continue to focus on the need to strengthen Social Security and Medicare and to reduce the national debt before providing tax relief.
To date, Congress has passed, and the President has signed into law, legislation to repeal the Social Security earnings limit, to require Sec. 527 political organizations to disclose their contributions and expenditures, and a trade bill. These include marriage penalty relief, estate tax relief, extension of the current Internet Tax moratorium, a taxpayer bill of rights, a community renewal tax bill for economically distressed urban areas, pension reform legislation to expand pensions and IRA’s, an education tax package, repeal of the 3% federal communications excise tax, health care tax incentives, and a minimum wage tax package. Legislation is also expected to replace the Foreign Sales Corporation tax regime. At this time, any tax legislation will likely be included in a last minute “omnibus” spending package that keeps the government from shutting down. The amount of tax cuts in this package could range from $15-50 billion, depending on the types of tax cuts included.
MINIMUM WAGE
Legislation to further increase the minimum wage is a major element of the Democratic agenda in the 106th Congress. Given the narrow margins in the House and Senate, coupled with the pressures in a presidential election cycle, the business community faces a major threat on the minimum wage front this year.
In the 104th Congress, legislation was enacted to increase the minimum wage by 90 cents over two years — a 22 percent increase. This increase was fully implemented on September 1, 1997 bringing the federal minimum wage to $5.15 per hour. Attempts in further increase the minimum wage in the past two years have fallen short.
During consideration of bankruptcy reform legislation (S. 625) last November, the Senate successfully defeated the Kennedy minimum wage increase of $1 in two-steps by a vote of 50-48. Four Republicans – Chafee (RI), Snowe (ME), Specter (PA) and Jeffords (VT) joined every Democrat in supporting Kennedy’s amendment.
After defeat of the Kennedy minimum wage amendment, the Senate passed a Republican alternative minimum wage and tax package by a vote of 54-44. The vote fell largely along party lines, with the exception of Senator Voinovich (R-OH) who opposed the measure and Senator Cleland (D-GA) who supported it. Under the Republican alternative, the minimum wage would be increase by $1 in three annual steps beginning March 1, 2000. In addition, the package included several tax relief provisions totaling nearly $18 billion over five-years, including: a five-year extension of the Work Opportunity Tax Credit; a reduction in FUTA tax; an increase in business meal deduction, and an increase in the phase in for full deductibility for health insurance for the self employed. The package also included a labor reform provision strongly supported by NRF that would allow employers to provide incentive-based bonuses to their non-exempt employees without having to include the bonus in the regular rate of pay when determining overtime.
In the late spring, the House took up legislation to increase the minimum wage, and combined it with a tax relief package designed to offset the wage increases that businesses would have to sustain. During the wage portion of the debate, the more moderate increase of $1 spread over three years was defeated, and replaced with a Democratic substitute that would phase in the $1 increase in two $.50 increments. Although NRF and the business community vigorously opposed the more rapid phase in, the measure passed by a vote of 257 to 169.
Minimum wage legislation received little attention after House consideration of the measure until last month. At the end of the August recess, Speaker Hastert sent a letter to the President offering a deal on minimum wage. In short, the Speaker suggested that he would be willing to accept a $1 increase in the minimum wage, with a 50-cent increase taking effect January 1, 2001 and a second 50-cent increase in January 1, 2002. In exchange for agreeing to the increase, the Speaker outlined a “sweetener” package including various tax cuts largely targeted towards the industries most affected by the increase as well as several narrowly drawn Fair Labor Standards Act reform provisions. Of significance to the retail industry, the offer not included the bonus gainsharing provision, but also included a five-year extension of the Work Opportunity Tax Credit, a repeal of the .2% FUTA surtax, and new health care deductions (summary attached). Although several meetings between Republican House and Senate leadership and the White House have occurred over the past month, no consensus has been achieved. However, it does appear likely that a final minimum wage/ tax package will be sent to the President’s desk prior to the adjournment of the 106th Congress.
WORK OPPORTUNITY TAX CREDIT (WOTC)
The Work Opportunity Tax Credit provides tax incentives for employers to hire disadvantaged or handicapped individuals. Retailers use this important employment credit to hire thousands of persons who may not otherwise be employed, helping to move many Americans from welfare to the workforce. Based on an informal NRF survey, U.S. retailers have hired more than 100,000 persons as a result of WOTC since 1996. A top NRF priority, this critical program was extended for 30 months (2.5 years) last year. It will now expire on December 31, 2001.
Unfortunately, retailers are unable to use this program fully because it continually expires, preventing them from using it as part of a legitimate long-term business strategy. WOTC expands on Congressionally mandated welfare-to-work reforms, providing incentive for businesses to hire and train individuals in customer relations, marketing, sales, and other disciplines required before entering the workforce. The skills taught by retailers are then portable to other sectors of the labor market such as manufacturing or other service positions.
Under current law, employees who work 120 to 400 hours will be eligible for a 25 percent credit, and over 400 hours a 40 percent credit, on the first $6,000 in wages paid to eligible persons. Another category of eligible participants (SSI recipients) was enacted in 1997. WOTC was initiated in 1996 as a temporary measure intended to encourage for-profit employers to hire members of specifically designated groups who experience employment problems in the labor market. Rather than a direct payment to employers, WOTC credit is provided against an employer’s federal income tax liability, narrowing the gap between the productivity of these persons and the going wage for a certain job.
In November of 1999, Congress and the President passed an “extenders” tax bill, reauthorizing several expired business related revenue provisions, including a 2.5 year extension of the Work Opportunity Tax Credit (WOTC) and Welfare-to-Work Tax Credit (WWTC), both important retail industry programs. This was a tremendous victory for NRF and the retail industry. Throughout 1999 budget negotiations, NRF advocated and lobbied for a long-term extension of WOTC. With passage of this—the longest WOTC extensions since its inception in 1996—retailers will be able to better utilize this valuable tax credit and incorporate it into part of a sound business strategy.
With WOTC and WWTC extended until December 31, 2001, President Clinton did not include a long-term extension of the WOTC in his FY 2001 Budget proposal. NRF efforts continue on Capital Hill to have a WOTC extension and expansion included in any minimum wage tax package. Currently, eligibility for WOTC is strictly limited. Notwithstanding the considerable success of WOTC, there are many other individuals facing significant barriers to employment who need help in finding work. Proposed NRF program changes which would expand employment opportunities and enhance program stability include; 1) eliminate the age eligibility ceiling (currently 24) for members of food stamp households and individual residing in EZ/ECs and 2) and make the program permanent.
On another note, the Treasury Department has issued an advance copy of Notice 99-51, describing the credits and clarifying their operation when a person is employed by more than one employer in the process of moving from welfare to work.
More important, the IRS has finally reached a settlement with employers over long-standing refund claims involving WOTC’s predecessor, the Target Jobs Tax Credits (TJTC). The settlement would cover those businesses claiming the TJTC for employees hired before 1995, despite the businesses being unable to obtain that state certification required for the credit. However, if retailers agree to this settlement, they will only receive 50% of the credit claimed. The application details are in Announcement 2000-58, published in the Internal Revenue Bulletin 2000-30, dated July 24, 2000. Affected employers MUST contact the IRS within 120 days of publication to be eligible.
Another extension of WOTC has been included in minimum wage tax legislation. NRF and other proponents continue to push for another five year extension of WOTC beyond it current December 31, 2001 expiration date. Moreover, NRF is working with Hill leaders to eliminate the age eligibility for members of food stamp households.
TENANT / CONSTRUCTION ALLOWANCES
The retail industry is currently under attack from the IRS with respect to two issues affecting construction/tenant allowances. The first issue affects primarily in-line stores (Sec. 110); the second affects primarily anchor stores (Sec. 118). Addressing these discrepancies is one of NRF’s top legislative priorities.
While the law is well settled in favor of retailers, the IRS continues to pursue these issues, forcing retailers to engage in protracted and costly defense. Proposed NRF legislative language will clarify tax treatment of allowances, reducing unnecessary tax and accounting burdens on retailers.
NRF has developed a legislative proposal to amend Sec. 110 of the Code and remove the 15-year “short-term” lease requirement — thus expanding the statutory safe harbor Sec. 110 provided in the 1997 Taxpayer Relief Act. Sec. 110 was intended to provide retailers a safe harbor from protracted controversy with the IRS. While beneficial, Sec. 110, as currently written, does not help those retailers who have leases longer than 15 years. The “short-term” lease requirement was included in Sec. 110 for revenue purposes in last year’s tax bill; however, since that time, the IRS has settled with several retailers based not on the length of the lease, but on other factors. The NRF amendment irrors recent settlements between the IRS and retailers in which the IRS concluded there is no income to the retailer if the amount received by the retailer did not exceed the amount spent on long-term leasehold improvements — without regard to lease term.
NRF is also working on legislation to codify the Federated and May cases — two circuit court cases whereby payments made by a developer to an anchor store in exchange for a commitment by the store to operate a retail business at that location are considered contributions to capital under Sec. 118, and not income to the taxpayer. Although the law in this area is well established, the IRS continues to challenge taxpayers resulting in expensive and wasteful litigation by retailers and the IRS. NRF and various retail companies worked extensively with the Joint Taxation Committee (JTC) to achieve a favorable revenue impact on this proposal. In the end, JTC determined that H.R. 1986 would result in a federal revenue loss of $140 million over five years. While a somewhat higher than expected revenue score, NRF would like to thank those companies who assisted in the numerous redrafts of H.R. 1986 leading up to inclusion in the House-passed tax bill.
After more than two years of hard work, NRF and industry efforts to provide retailers additional protection from unnecessary Internal Revenue Service (IRS) scrutiny over tenant/construction allowances has received a tremendous push forward. The Sec. 118 provision of NRF’s legislative proposal H.R. 1986 was included in the final $792 billion Congressional tax cut package. Unfortunately, President Clinton vetoed this historic tax package on September 23, 1999. NRF and the retail industry made significant progress this year, and will make this one of its top priorities in 2000. In November, the IRS issued a notice of proposed rulemaking and public hearing dealing with qualified lessee construction allowances for short-term leases under Sec. 110 of the Code. The rule provides guidance on the exclusion of qualified lessee construction allowances from gross income, outlines the information that must be furnished by the lessor and lessee, and explains how this information should be provided to IRS. NRF drafted and submitted extensive comments to the IRS in December. A hearing was held on January 19, 2000. NRF will be meeting with Service staff prior to issuance of these regulations later this year.
Efforts continue to have these provisions included in whatever revenue vehicles are considered in the 2nd session of the 106th Congress, including the minimum wage tax package. However, with only five weeks of legislative business remaining and the likelihood of a large tax cut proposal slim, an adequate revenue vehicle may not become available this year.
INVENTORY SHRINKAGE RESERVES
Inventory shrinkage is inventory loss due to theft, breakage, or bookkeeping errors. The question of whether an estimate of inventory shrinkage can be deducted has long been an issue of controversy between taxpayers and the Internal Revenue Service (IRS). Despite several tax court rulings otherwise, the IRS continues to question retailers who use methods of accounting that estimate for inventory shrinkage.
Retailers were spending millions in court and administrative costs dealing with the IRS. An NRF provision included in the Taxpayer Relief Act of 1997 should provide retailers who estimate for shrinkage protection from unnecessary and unwarranted audit by the IRS. However, in order to ensure a broad application of Congress’ intent, the NRF has provided comment and is monitoring the issuance of Treasury guidance.
In January 1997, the U.S. Tax Court handed taxpayer’s estimating shrinkage victories in Kroger and Wal-Mart v. Richardson. NRF drafted legislation based on these court victories and began lining up support on Capitol Hill. Efforts to reach a solution with the IRS continued, but the IRS refused to cooperate as it had done for almost a decade. After months of negotiation, an NRF “safe harbor” proposal and procedures for an “automatic election” for estimating shrinkage were incorporated into the tax bill, as well as clarifying language in the Joint Tax Committee’s 1998 Blue Book. Section 961 of the Taxpayer Relief Act of 1997 provided that taxpayers can deduct an estimate of inventory shrinkage so long as the method for determining the estimate clearly reflects income.
On March 30, 1998, the Internal Revenue Service, as directed by the Taxpayers Relief Act of 1997, issued Rev. Proc. 98-29, providing procedural guidance for taxpayers to change to a method of deducting estimated inventory shrinkage including guidance on electing the retailer safe harbor method. After intense NRF lobbying, Rev. Proc. 98-29 provided for a broad application of the safe harbor, allowing even those taxpayers currently under audit by the IRS eligibility to use the “automatic election.”
The Treasury Department has asked for taxpayer comment before issuing its guidance for estimating inventory shrinkage, which will likely be issued in 2000. NRF has submitted retail industry comment and will continue to monitor Treasury actions to provide retailers who estimate for shrinkage the protection they deserve.
LOWER OF COST OR MARKET (LCM)
President Clinton’s FY 2001 budget proposal once again proposes repeal of the “lower of cost or market” (LCM) inventory accounting method in an effort to raise federal revenue. Although similar proposals have been rejected by Congress before, NRF remains concerned that Members of Congress, in an attempt to generate additional revenue, may include repeal of LCM or offer an amendment to repeal LCM in their FY 2001 budget resolution. In addition, Congress made two other attempts to repeal the LCM accounting method during Senate Finance Committee tax mark ups last year.
LCM is a well-established accounting method. It is unfair to change long-standing rules and impose additional costs on retailers, and consumers, based on which bookkeeping method they use to track their inventory. The LCM method of accounting has been part of U.S. tax law since 1917 and is consistent with the Generally Accepted Accounting Principles (GAAP). Under LCM, retailers and other taxpayers may write down items in their inventory that are unsaleable at normal prices or are otherwise damaged to reflect the fact that the market value of the goods has dropped below their cost. LCM allows retailers to write down their inventories at the time the value of the goods drops — either because a newer product has been introduced or the old product has been permanently put on sale (like outdated computers or seasonal clothing). Once the price of a product is permanently marked down, retailers are never able to sell it for more again.
Repeal of LCM would cause inventory books to be overvalued compared to the market value of the inventory on the sales floor. Many taxpayers would be forced to keep two sets of books — one for accounting and the other for taxes. Retailers, whose inventory value has been drastically and permanently reduced, would not be able to deduct the lost value until the goods are finally sold or they are determined to be worthless — which could be months, even years. Therefore, retailers who are suffering because their goods are worth less would also be socked with a tax increase, which could ultimately result in higher shelf prices. Repeal of LCM would also require retailers to change the way they do business — forcing them to take significant economic and tax losses by selling clearance items to liquidators and forcing customers to shop at a liquidator if they want to take advantage of these sale prices.
Congress has rejected several attempts in the past to repeal LCM, and to date has dismissed the President’s repeated recommendation for its repeal. Last year, Senator Chuck Robb (D-VA) and Senator Kent Conrad (D-ND) offered an amendment during a Senate Finance Committee mark up of the Education Savings Tax Package. This amendment, which was defeated, would have used repeal of LCM to pay for approximately $1.5 billion in new educational tax incentives. In addition, the Senate Finance Committee Democrats included repeal of LCM in their alternative tax relief proposal. This substitute tax package was also defeated. A final attempt to repeal LCM was included as a revenue raiser in a Democratic proposal to increase the federal minimum wage. This proposal, and repeal of the LCM, was defeated in the Senate largely along party lines.
NRF has launched an educational campaign on Capitol Hill, with more Members and their staffs understanding the negative effects repeal would have on retailing and consumers. On March 22, NRF sent a team of tax experts to meet with the minority tax staff of the Senate Finance Committee. The meeting provided retailers an opportunity to explain the implications of LCM repeal to Congressional staff and will hopefully curtail efforts to repeal LCM in revenue vehicles being offered by Senate Democrats. Unfortunately, this issue will continue to be raised whenever new revenue is required. Due to the significant federal budget surplus, attempts to use LCM as a revenue raiser have somewhat diminished. Unfortunately, the new budget surpluses can disappear as quickly and easily as they came about.
ALTERNATIVE TAX SYSTEM LEGISLATION
Proposals to scrap the current federal tax system and replace it with a national sales tax (NST) or flat tax continue to enjoy widespread populist support and are likely to take center stage, with Congressional backing, before the 2000 presidential elections. The retail industry has historically disputed the wisdom of any consumption-based tax system.
Until recently, the majority of this opposition was founded in the retail industry’s aversion to any proposal that could drastically affect consumption, upon which two-thirds of U.S. economic growth is based. To supplant this industry-wide fear with fact, last May the NRF Board of Directors commissioned PriceWaterhouseCoopers (PWC) to undertake a long-term study of leading tax reform proposals using a one-of-a-kind dynamic economic model to determine the impact on retailers, consumers, and the national economy. This PWC model has been recognized by the Congressional Joint Committee on Taxation. Based on preliminary findings, the NRF Board of Directors passed a motion in opposition to a proposed NST in January.
The PWC report suggests that imposition of a NST or flat tax would cause significant economic disruptions, slowing down – if not stopping altogether – the longest peacetime economic expansion on record. Under a budget-neutral NST, the U.S. economy would suffer a severe economic recession, with real GDP down $180 billion, personal consumption down $385 billion, and annual employment off by 1.5 million jobs. The economy as a whole would not recover until year five, and economic growth would not return to its current level for many years. Personal consumption, which accounts for two-thirds of U.S. economic growth, would remain depressed through year eight. A budget-neutral flat tax would also cause economic recession. Real GDP would be down $180 billion, and annual employment would dip by more than 1.2 million jobs. The economy as a whole would not recover until year six of a flat tax, and economic growth would not return to its current level for many years.
The PWC study also concludes that a NST tax rate of 30-67 percent (not 15 percent as purported by NST proponents), and a flat tax rate of 21-33 percent (not 17 percent as purported by flat tax proponents) would be necessary for budget-neutrality depending on the level of exemptions and taxpayer compliance. Think about it, every time you rent a movie, buy a book, eat in a restaurant, visit a doctor, take a cab ride, or get a hair cut, the federal government could add from 30-67 percent to your bill.
The additional economic growth achieved by either proposal is quite modest given the serious short-term damage to the economy. Given real growth is expected to average about 2.3 percent per year during the next decade, neither proposal would provide more than a 9-month speedup in economic growth over a ten-year period.
Congressional hearings on tax reform are expected this year, driven by reform advocates including House Ways and Means Committee Chairman Bill Archer (R-TX), who supports a consumption-based, border adjustable tax and House Majority Leader Dick Armey (R-TX), who supports a flat tax. It is important to recognize that the PWC report does not include the all-too-costly transition rules for the NST or flat tax, making the initial PWC conclusions even more disturbing. NRF encourages Congress to take a go-slow measured approach on tax reform in order to grasp the implications of their actions on consumers, retailers, the market, and the economy.
On April 15, 1999, Representative Billy Tauzin (R-LA) reintroduced legislation to replace the income, corporate, gift, estate, and certain excise taxes with a 15 percent national sales tax. Purporting to abolish the IRS, this legislation would use retailers and state agencies as primary tax collectors. In addition, Reps. John Linder (R-GA) and Representative Collin Peterson (D-MN) have introduced H.R. 2525, NRST legislation based on a proposal developed by the Americans for Fair Taxation (AFT), based out of Houston, Texas. AFT will reportedly spend more than $20 million in the next 24 months on grassroots and political campaigns in support of this NRST proposal.
After two years in the works, the PWC was completed in time for a series of House Ways and Means Committee hearings on the national retail sales tax and consumption-based taxes the week of April 10, leading up to April 15 – tax day. NRF testified at these hearings, providing Members with findings from the PWC report as well as retail concerns over the implementation of an NRST. Retail companies should expect significant news coverage of these hearings.
While a NRST is unlikely this Congress, proponents have raised more than $70 million dollars in an effort to build momentum for reform over the next several years. Prior to these hearings, NRST proponents spent $1.9 million on paid media in 34 separate Congressional districts, urging taxpayers to call their representatives and replace the income tax with a NRST. NRF was able to effectively target W&M Committee members with letters and phone calls this time. However, if NRST proponents keep this issue in the public eye, retailers will need to launch a full-scale grassroots campaign or face the prospect of becoming the nation’s primary tax collector. The extensive NRF/PWC report is available for purchase from the NRF Bookstore at (202) 626-8177.
TAX TREATMENT OF ADVERTISING COSTS
The pressure for maintaining a balanced budget makes limiting the tax deductibility of advertising a perennial favorite and a so-called “corporate welfare” target.
A limitation on the current tax treatment of retail advertising costs would reduce the amount of advertising and increase the amount of time consumers would need to spend searching for reasonably priced products and services. Further, a reduction in the amount of advertising would result in a corresponding negative impact on retail industry sales which would adversely impact those segments of the economy that rely on retail industry business.
At both the state and federal levels, there have been periodic efforts to tax advertising as a means of raising revenue. Several years ago, the House Ways and Means Subcommittee on Select Revenue Measures explored the prospect of requiring that a portion of advertising expenses be capitalized and amortized over a period of years. The Subcommittee dropped the proposal after NRF and others testified against the plan. Three years ago former Labor Secretary Reich identified the tax deductibility of advertising as one example of “corporate welfare.” Some Republicans also raised limitations on advertising deductibility, as part of a corporate welfare reform package, as an option. As a result of intense business community opposition by NRF members and others, limited advertising deductibility has been taken “off the table” for now.
On June 15, 1998 the Senate passed by voice vote an amendment to a proposed tobacco settlement (S. 1415) offered by Senator Jack Reed (D-RI) disallowing advertising tax deductions to any tobacco company that continues marketing to children. Specifically, the amendment would disallow deductions to tobacco companies for advertising, promoting, and marketing expenses if the manufacturer fails to comply with advertising restrictions established by the Food and Drug Administration. With the tobacco settlement postponed until this year, the Reed amendment received no further consideration last Congress. However, it is likely to be offered again during tobacco settlement legislation this year.
This issue is unlikely to remain quiet. Recently, Republican presidential candidate Sen. John McCain (AZ) included a repeal of this deduction in his proposed tax relief package. Renewed talk of corporate welfare suggests that more targeted efforts to limit this deduction are possible. Given the Administration’s prior actions, one could reasonably expect restrictions on the deductibility of tobacco advertising to be an opening salvo. While dormant in the 105th Congress, NRF will continue to monitor Administration and Congressional action on this important retail issue in the 106th Congress.
ESTATE TAXES
The first significant estate tax relief in over a decade was signed into law in 1997. Repealing or significantly reducing estate taxes will make it easier for the principals in family-owned and closely held businesses to leave a viable business to their heirs or employees. Because of the “death tax,” 70 percent of family-owned businesses do not survive in the second generation and 87 percent do not make it to the third generation. Today’s tax code is unfair to family business owners, assessing a tax of up to 55 percent on the value of the business when the head of the family dies. The result is inefficient allocation of resources, discouraging saving and investment and lowering the after-tax return on investments. According to a new Congressional Joint Economic Committee report, the estate tax “results in a number of destructive outcomes in terms of slower economic growth, reduced social mobility and wasted productive activity.”
As part of the Taxpayer Relief Act of 1997, long awaited estate tax relief was signed into law. NRF efforts to increase the unified credit and give family businesses additional relief were successful. Under this Act, the $600,000 exemption will be phased up to $1 million by 2006. An immediate $1.3 million family business exemption was also created for qualified family business estates — bringing total relief for a husband and wife to $2.6 million of assets. This will provide immediate and direct relief to many family-owned retailers.
Representatives Jennifer Dunn (R-WA) and John Tanner (D-TN) have introduced legislation (H.R. 8) last year to eliminate these onerous “death taxes.” Their proposal would reduce estate taxes by 5 percent each year until the rate reaches zero in 2010. Several other proposals have also been introduced, including bills by Representatives Chris Cox (R-CA) and Bob Stump (R-AZ). Representative Cox’s proposal includes the support of several House Republican leaders, and has more than 195 House sponsors.
NRF is pleased to report that one of the association’s top legislative priorities for the 106th Congress, repeal of the federal estate and gift taxes, known as “death taxes,” was included in the $792 billion tax cut package recently passed by Congress. The proposal would step down estate and gift tax rates over a 10-year period, ultimately repealing the federal estate, gift, and generation-skipping transfer (GST) taxes by 2009. Unfortunately, President Clinton vetoed this historic tax cut legislation on September 23, 1999.
In June, the House passed a bill (H.R. 8) to phase in repeal of the estate, gift, and generation-skipping transfer taxes by 2010 by phasing down rates. The bill would also simplify the generation-skipping transfer tax rules and expand the estate tax rules for conservation easements prior to appeal. Sixty-five House Democrats joined most Republicans to pass this legislation be a veto-proof margin. The Senate passed the measure in July by a 59 to 39 margin. Unfortunately, President Clinton vetoed this legislation claiming it only helps the wealthy. An override attempt in the House failed to reverse the President’s decision.
As a Steering Committee member of the Family Business Estate Tax Coalition, NRF continues to actively support elimination of the “death tax,” promoting efforts to lower the marginal tax rates and further increase the unified credit in 2000. In addition, NRF has contacted the White House and urged them to support estate tax repeal in whatever revenue package is ultimately signed into law.
SOCIAL SECURITY REFORM
The Social Security system faces a projected $9 trillion shortfall by 2013, at which time the money raised by the Social Security payroll tax will no longer suffice to pay benefits promised by the federal government. The current Social Security system limits economic growth and needs to be reformed. Critics argue that it not only reduces national savings and investment, it has a very low amount of return, underutilizing its ability to become more self-sufficient. Both Congress and the President promised to address this issue in the 106th Congress.
Social Security reform affects retail businesses in several ways, including at the macroeconomic level, the cost of payroll taxes to the employer, and the effect of reform on corporate retirement benefits. Whatever reforms are adopted, they should not penalize or devalue corporate pension plans, or place onerous administrative burdens on employers. Increasing payroll taxes or the devaluation of corporate pension plans is unacceptable. Specific retail industry concerns include: the impact of reform on the economy (consumption, sales, etc); the cost of increased or broadened payroll taxes; and the effect of benefit adjustments on corporate pension plans (e.g. raising the retirement age). Significant changes to benefit formulas or increasing the retirement age could have serious consequences on the benefits paid by corporate pension plans.
In his 1999 State of the Union address, President Clinton finally unveiled tenets of his reform proposal. The President proposed devoting $2.7 trillion (62 percent) of budget surpluses over the next 15 years to shore up Social Security, earmarking 25 percent of that, or $700 billion, for investment in the stock market. It would devote an additional $33 billion (11 percent of projected budget surpluses) a year in surpluses to fund “universal savings accounts”—individual savings accounts that would be subsidized by the government. Reaction to the President’s proposal was mixed. While supportive of shoring up Social Security, Republicans, as well as Federal Reserve Chairman Alan Greenspan, are concerned that government involvement and influence in the stock market would likely politicize the investment process. Unfortunately, the President’s proposal does not make the structural changes to the Social Security system that are necessary for long-term solvency. Rather, he uses accounting gimmicks to extend the date the Social Security Trust Fund goes bust from 2032 to 2055, claiming he has solved the Social Security crisis.
Washington has four solutions to solve this crisis. The first is to do nothing. By the time the baby boomers retire, there will be almost $3 trillion in the system, the so-called Social Security “Trust Fund.” Unfortunately, the “trust fund” does not really exist; it is merely accounting sleight-of-hand. The Treasury has already spent the supposed surplus on other items, such as aircraft carriers and welfare programs. Another solution, a favorite of liberal Democrats, is to readjust the benefit formulas by raising the payroll tax, eliminating some benefits, or broadening the tax base. Today, the payroll tax is 12.4 percent on the first $68,400 of wages. A third solution would be to invest the system’s funds into stock markets, capturing the higher returns of financial markets while keeping the collective risk at a minimum. Rerouting this money into the stock market instead of the Treasury, however, would significantly increase the size of the federal deficit. The final solution to solving this crisis is privatization, whereby the government requires everyone to save a minimum amount in tax-sheltered accounts, regulates them for unsophisticated investors, and guarantees a certain minimum pension regardless of investment returns. These pensions would be based on real assets, delivering much higher rate returns than the current Social Security system. The majority of plans being discussed at this time would provide a mix of these proposals, maintaining the current system of payroll taxes with worker payments into voluntary or mandatory private accounts, funded through general revenues, regulated by either the government or private sector.
Real Social Security reform is less likely this Congress now that projected budget surpluses will allow Congress to provide tax cuts using non-Social Security monies. Several proposals have been introduced including one by Ways and Means Chairman Bill Archer (R-TX) and Representative Clay Shaw (R-FL). This proposal would create personal retirement accounts that would be invested in the market by providing individuals with a 2 percent tax credit. Critics of this program argue that it merely creates another entitlement program using future budget surpluses that may not materialize, and that it does not make “structural” changes in benefits required to keep the program solvent. Another proposal, introduced by Representatives Jim Kolbe (R-AZ) and Charlie Stenholm (D-TX) would create private retirement accounts funded by “carving out” 2 percent of the existing 12.4. A similar bipartisan proposal has been introduced in the Senate by Senators Gregg (R-NH), Kerrey (D-NE), Breaux (D-LA), and Grassley (R-IA). This proposal would let workers invest 2 percent of their Social Security payroll taxes into their own individual retirement accounts, for investment into stocks, bonds or other investments. The accounts would be administered by the government, managed by private fund managers, and owned and controlled by individual workers who could leave their accumulated proceeds to their heirs.
To date, Congress has held more than ten hearings in this session on Social Security reform. NRF is one of four steering committee members of the Alliance for Worker Retirement Security (AWRS), a broad-based business coalition dedicated to reforming Social Security. Other steering committee members include the U.S. Chamber of Commerce, the National Federation of Independent Businesses (NFIB), the Business Round Table (BRT), and the National Association of Manufacturers (NAM). In July, NRF President Tracy Mullin met with leading Senate reform proponents to discuss the retail industry’s position and involvement in the Social Security reform debate.
NRF supports several Social Security reform principles, including: 1) a guaranteed “safety-net” for all retirees, fulfilling its promises to current retirees and providing the necessary support for future retirees; 2) opposition to any payroll tax increases or expansion of the wage base on American workers; 3) the preservation of benefits for current and near-retirees; 4) realistic financing and accounting procedures, free market principles, and individual choice, including the creation of individual personal accounts; and 5) individual personal accounts should be funded through existing payroll taxes, with assets controlled by the individual under direction from non-government investment managers. While several days of hearings were held prior to adjournment of the first session of the 106th Congress, no legislation action took place in 1999. Hearings are expected in 2000, however, the White House has been unwilling to push for necessary structural changes to the current program, relying more on accounting gimmicks, making significant reform unlikely in 2000.
In March, the House and Senate passed legislation to repeal the Social Security earnings limit. The current limit penalized more than 800,000 working senior citizens between the ages of 65-69 by eliminating some Social Security benefits for those seniors who earned more than $17,000 in 1999. The president signed the measure into law on April 7. Both Governor George W. Bush and Vice President Gore have begun highlighting their plans for Social Security Reform. The Gore strategy relies more on throwing additional money into the current system than making any real reforms to this failing system, allowing him to claim that he will keep the system solvent beyond its 2032 bust date. The Bush proposal is more substantive, though it is politically risky. Mr. Bush supports the creation of individual retirement accounts that would be used by individuals to subsidize their usual SS benefits. Most observers agree that no real reform will take place until a President is actually willing to take on the “third” rail of American politics and work with Congress to that end.
CHINA – NORMAL TRADE RELATIONS AND
WORLD TRADE ORGANIZATION MEMBERSHIP
On May 24, 2000, the U.S. House of Representatives passed legislation (H.R. 4444) to grant China permanent normal trade relations (PNTR) status upon China’s accession to the World Trade Organization (WTO) by a surprisingly strong vote of 237 to 197. On September 19, 2000, the Senate passed the House bill by an overwhelming vote of 83 to 15. The Senate managed to beat back all amendments, including one offered by Senator Thompson to sanction Chinese proliferation of weapons of mass destruction. Senate passage of a clean bill avoided the difficult scenario of a House-Senate conference on the bill and a second vote on a conference report. The strong House and Senate votes was a huge setback for organized labor, which undertook a scorched-earth campaign to defeat PNTR. The bill now goes to the President for signature.
H.R. 4444 includes language added by Congressman Sander Levin (D-MI), the ranking member of the Ways and Means Trade Subcommittee, and Congressman Doug Bereuter (R-NE), chairman of the International Relations Asia Subcommittee. Among other things, the Levin-Bereuter amendment will impact retailers and other importers of Chinese products by codifying in statutory language the so-called “product-specific safeguard” contained in the U.S.-Chinese bilateral trade agreement.[1] NRF worked with the Ways and Means staff to ensure that the language was acceptable and that problems were ironed out. In the end, the addition of the Levin-Bereuter language helped ensure final passage of PNTR in the House, and was a big improvement over the Administration’s proposal on implementation of the safeguards provisions.
The bill gives the President authority to proclaim PNTR status for China only after it becomes a member of the WTO. At this juncture it is still uncertain whether China will actually join the WTO before the end of the year due the time needed for the Chinese to complete outstanding bilateral negotiations with two other countries and finish the work on the accession protocol at the WTO. Due to this lag, the Congress had to deal, once again, with the issue of renewing China’s annual NTR status, which was assured when, on July 18, an overwhelming majority of 281 Members of the House voted against a resolution disapproving the renewal.
Another issue created by the delay in China’s joining the WTO is the status of the current textile bilateral agreement, which expires the end of 2000. If China has not become a WTO member by then, USTR should agree to roll over the current agreement until China has completed its accession to the WTO and the U.S.-China bilateral trade agreement becomes effective, rather than attempt to negotiate a new interim textile agreement.
THE TRADE AND DEVELOPMENT ACT OF 2000 (H.R. 434):
CARIBBEAN BASIN INITIATIVE TRADE ENHANCEMENT,
AND THE AFRICA GROWTH AND OPPORTUNITY ACT
On May 18, 2000, the President signed into law H.R. 434 – the “Trade and Development Act of 2000” – which included both the “Africa Growth and Opportunity Act” (“AGOA”) and the Caribbean Basin Initiative (CBI) Trade Enhancement Act.” NRF efforts helped secure completion a protracted House-Senate conference and final passage of the resulting conference report in the House and Senate by wide margins (309 to 110 and 77 to 19 respectively).
Although the final versions of both AGOA and CBI were not as expansive as hoped, the consensus is that the two initiatives in the bill are “commercially viable.” Consequently, retailers will have additional opportunities for sourcing many apparel products in the sub-Saharan and CBI regions without duty and quota restrictions. The result will be the lower costs and prices to American consumers and expanded trade, investment, and economic development in the respective regions. Below is a short summary of both AGOA and CBI. Now that the bill has been signed into law, the only remaining issues are questions of implementation. These issues are also summarized below.
AGOA
The trade benefits in AGOA are effective from October 1, 2000 through September 30, 2008. These benefits include duty free and quota free treatment for: (1) apparel assembled in sub-Saharan African (SSA) countries from U.S. fabric, made with U.S. yarn and cut in the U.S.; (2) apparel cut and assembled in SSA countries from U.S. fabric, made with U.S. yarn, and sewn with U.S. thread; (3) knit to shape sweaters made from cashmere or merino wool; (4) apparel assembled in SSA countries from fabrics unavailable in commercial quantities from the United States; (5) and handloomed, handmade and folklore items. In addition, duty-free and quota free treatment is also available up to a capped amount for: (1) apparel made in SSA countries from SSA fabrics produced from U.S. or SSA yarn; and (2) apparel assembled in least developed SSA countries from third country fabric or yarn and imported into the U.S. before October 1, 2004. The cap on these products will be set initially at 1.5 percent of total U.S. apparel imports and rise to 3.5 percent over eight years. Least developed countries are defined as those with per capita income below $1,500 a year (which would include most SSA countries).
Regarding implementation issues, comments have been taken regarding which products should be eligible with the only adverse comments received on consumer products being stainless tableware and watches. USTR is preparing to make recommendations a month ahead of the October 1 implementation date, regarding which countries will have beneficiary status under the country eligibility criteria. NRF’s comments on country eligibility urged USTR to focus on those countries (South Africa and Mauritius) whose participation is critical to the success of the initiative and those countries that are current suppliers to the U.S. market and can immediately use the trade benefits in the program. As to allocation of trade in those products subject to the quantitative cap, Customs prefers a “first to the border” rule with the use of an export certificate similar to a NAFTA certificate to ensure the product is of African origin. NRF’s comments argued against a USTR proposal that would reserve a portion of trade under the cap for countries that become eligible to participate in the initiative after October 1.
CBI
The effective dates of the trade benefits in CBI are also October 1, 2000 through September 30, 2008. These benefits include duty free and quota free treatment for: (1) apparel and textile luggage assembled in CBI countries from U.S. fabric, made with U.S. yarn and cut in the U.S.; (2) apparel and textile luggage assembled in CBI countries from U.S. fabric, made with U.S. yarn, cut in the CBI, and sewn with U.S. thread; (3) bras cut in the U.S. or the CI and sewn in the CBI using largely U.S. fabric woven in the U.S.; (4) apparel assembled in CBI countries from fabrics not available in the U.S.; and (5) handloomed, handmade and folklore items. In addition, duty-free and quota free treatment is also available up to a capped amount for: (1) knit apparel made from fabric produced in the CBI from U.S. yarn up to a cap of 250 million square meter equivalents (SMEs) a year; and (2) outerwear T-shirts made from fabric produced in the CBI from U.S. yarn ups to a cap of 4.2 million dozen per year. The caps would rise 16 percent each year for four years. All apparel meeting the above criteria but with foreign findings, trimmings, and certain interlinings, would retain eligibility under the NAFTA 7 percent de minimis rule.
A number of the implementation issues for CBI are the same as with AGOA. Due to legal questions regarding its authority to divide up trade under the regional fabric caps, the Administration has decided that, as with AGOA, trade will be on a first-to-the-border basis.
On the matter of Customs’ implementing regulations and interpretations, there is concern that Customs will construe a number of the CBI product eligibility provisions very narrowly. For example, 807A and 809 technically require cutting. However, with some eligible products, such as socks and other knit to shape, there is no cutting in the technical sense. Also the legislation is unclear about the treatment of those products that are a mix of components made from U.S. yarn, but cut in both the U.S. and the Caribbean. It is also unclear whether the requirement that apparel claiming preferences under 807A and 809 be produced from fabric “wholly assembled” in the U.S. would preclude dyeing and finishing of such fabric in the Caribbean. The CBI coalition argues the underlying purpose of the legislation is to encourage the expansion of trade, particularly those made with U.S. inputs. Therefore, Customs should interpret the legislative language in a way that will permit such products to enter under 807A and 809 as long as they are made with U.S. yarn and fabric.
The CBI coalition also agrees that it is important that all CBI countries be certified as eligible before the initiative comes into effect on Oct. 1. According to USTR, there should be “no surprises” regarding country eligibility.
Some other product eligibility issues may not be resolved by the October 1 deadline, which raises the question about retroactivity. The CBI Coalition argues that because Congress provided for funding for the CBI initiative as of October 1, any eligible product entered on or after that date should receive the trade preferences even if it is retroactive.
Finally, there is a question how the 16 percent growth rates for capped products will be calculated. NRF has argued that the growth in the caps should be calculated each year to equal the annual average growth of all apparel imports from the CBI over the previous five years.
In 1998, the United States won dispute settlement cases against the European Union (EU) at the World Trade Organization (WTO) in the so-called bananas and beef disputes. Notwithstanding these losses, the EU refused to implement the recommendations of the WTO dispute settlement panels and the WTO authorized the United States to undertake trade retaliation against selected European products. All of the products initially considered for retaliation in the bananas case were consumer products sold by retailers in the United States. NRF was successful in excluding certain key products from the final retaliation list, including European cashmere sweaters.
As a result of political pressure from Chiquita Bananas and the U.S. beef industry, Congress included a so-called carousel sanctions provision on H.R. 434 – the “Trade and Development Act of 2000.” This provision is intended to ratchet up the pressure on the EU in the bananas and beef cases, by requiring the U.S. Trade Representative to revise the list of products subject to retaliation every six months.
Following passage of the carousel sanctions provision, NRF again argued against the inclusion of cashmere sweaters, as well as candles, on any revised retaliation list. Notwithstanding pressure from Congressional leadership to publish the list and include cashmere sweaters on it, USTR has, so far, delayed action. Cashmere sweaters are reportedly on the revised list that has been sent to the President for final approval, but British Prime Minister, Tony Blair has, so far, successfully persuaded his friend Bill Clinton, not to hit Scottish Cashmere. There are rumors that if retaliation were taken against cashmere, its effective date would be delayed until the end of November 2000, which would avoid the prime holiday sourcing season.
CUSTOMS AUTOMATION
Securing sufficient funding the Automated Commercial Environment (ACE), which will allow importers to continue to file import documents electronically with the Customs Service, has continued to be a thorny problem. The current, outmoded Automated Commercial System (ACS) is currently running at over 95% capacity and, having already crashed several times, is a time bomb waiting to go off.
ACE will take at least four years to implement at a current estimated cost of $1.2 - $1.4 billion. However, Congressional appropriations for the current fiscal year provided only $35 million to keep ACS running and no money for ACE. Moreover, the Administration’s FY 2000 budget includes $338 million for ACE. However, the budget did not request any appropriated funding for the program, but rather, proposed to pay for it with a substantial increase in user fees levied on importers.
NRF has worked with Customs, Congress, and the Coalition for Customs Automation Funding (CCAF) to try to resolve the funding problem and ensure that ACE is implemented in a timely manner. In 1999, NRF and CCAF succeeded in persuading the Senate Finance and House Ways and Means Committees to reject funding ACE through a user fee and to pass an authorization to appropriate the money needed to pay for it.
In 2000, significant progress was made when House and Senate conferees to the Treasury/Postal appropriations bill agreed the end of July to provide a total of $258 million for customs automation -- $130 million for ACE, $123 million for ACS, and $5 million for the International Trade Data System (ITDS). The House passed the conference report on September 14 and it is expected that the Senate will vote on it sometime after the vote on China PNTR on September 19. Senate Minority Leader Tom Daschle (D-SD) has said he would not seek to block a Senate vote on the conference report. Although it is unclear whether the President will sign the bill, the White House has not said he would veto it. NRF and the importing community will continue to wage this appropriations fight until the entire amount for ACE has been funded.
After four years of negotiations, the U.S. and Vietnam signed a bilateral trade agreement on July 13, completion of which had been stalled since last year. Conclusion of this agreement is a necessary step to Vietnam attaining normal trade relations status (NTR) with the U.S., which, as a communist country, Vietnam would receive on a conditional basis as currently is the case with China. Before that happens, the agreement must be approved by Congress, which will likely consider the matter in the first half of next year. Congressional approval of the agreement would include authority for the President to waive the immigration requirements of Title IV of the Trade Act of 1974 (also known as Jackson-Vanik) and extend NTR to Vietnam annually. Vietnam will most likely not receive permanent normal trade relations (PNTR) status until it joins the World Trade Organization, which could take several years.
Conclusion of the trade agreement is an extremely good development for retailers. Once Vietnam receives conditional NTR status, the duties the U.S. assesses on imports from Vietnam will drop from the extremely high column 2 rates in the Harmonized Tariff Schedule (HTS) to the much lower MFN rates under column 1. Lower duties will make Vietnam a much more attractive place to source consumer products, such as textiles, apparel, footwear, and consumer electronics.
It is expected that sometime after Congressional consideration of the bilateral trade agreement, that the United States and Vietnam will negotiate a bilateral textile and apparel agreement to set quotas on U.S. imports of these products from Vietnam
In the meantime, on July 26, the House of Representatives overwhelmingly defeated H.J.Res. 99, a resolution to disapprove the President’s waiver of the Jackson-Vanik amendment for Vietnam, by a vote of 91 for the resolution and 332 against. The margin in favor of the waiver for Vietnam was substantially higher than last year’s vote (130 to 297). Until Congress approves the trade agreement, the Jackson-Vanik waiver affects only Vietnam’s eligibility for export financing -- not its status with respect to normal trade relations.
JORDAN
Following King Abdullah’s visit to the United States earlier this summer, the United States and Jordan have agreed to enter into a free trade agreement (FTA). Negotiations have already begun and could be completed as early as September, with Congressional vote on approval of an agreement sometime in 2001. NRF submitted comments in support of a U.S.-Jordan FTA.
The total value of trade between the U.S. and Jordan was approximately $287 million in 1999, which placed Jordan 176th among U.S. trading partners. In textiles and apparel, Jordanian exports fall mainly into two categories -- men’s and boys’ wool suits (category 443), which totaled a mere 10,106 suits or 38,000 square metre equivalents (SMEs) in 1999, and other man-made fibre products, which totaled only 861,000 SMEs in 1999. Given this comparatively miniscule level of trade, NRF argued that a free trade agreement should:
U.S. negotiators appear to favor the so-called Breaux-Cardin rule of origin for textiles and apparel, which is the rule in the U.S.-Israel FTA with respect to duty and quota treatment. However, the U.S. negotiators also favor a phaseout of tariffs, with higher tariff items subject to phaseout timetables of as long as ten years. Such a phaseout schedule would pose problems for textile and apparel products and footwear, which are subject to some of the highest duty rates in the U.S. Harmonized Tariff Schedule.
On a related point, 26 Senators have called on the President to begin negotiations of a free trade agreement with Egypt.
COLOMBIA AND ANDEAN PACT COUNTRIES
Since passage of the Caribbean Basin Initiative (CBI) Trade Enhancement Act, Colombia, which is not a CBI beneficiary country, has argued that the initiative will effectively destroy its 807 production and its apparel industry. As a result, the Colombians are pressing Congress to give them the same 807A and 809 benefits for apparel production that their competitors in the CBI region now have. The Colombians believe that ATMI will agree to this limited proposal, which would not include any preferences for apparel made from Colombian fabric, and that Congress will be able to approve it quickly before the end of the year.
In the meantime, the Andean Trade Preferences Act (ATPA), of which Colombia is a beneficiary country, is up for renewal next year. Other ATPA beneficiary countries (Peru, Ecuador, Bolivia) are concerned about extending any trade benefits only to Colombia. The ATPA does not currently provide special trade preferences for textiles and apparel.
NRF’s position has been that we would not stand in the way of additional benefits for Colombia if ATMI agrees to it and Congressional champions can be found in the House and Senate to push for it, both of which are questionable at this juncture. However, we have expressed our concern that limiting the benefits to 807A and 809 would set a de facto ceiling on benefits in apparel trade for other countries and could slow down our larger goal – to get all the ATPA countries the same textile and apparel trade benefits as were given the CBI countries. ATPA renewal will be a major item on the trade agenda next year. We can expect significant opposition from ATMI and the textile industry to any expansion of trade preferences to the ATPA countries.
NATIONAL LABOR RELATIONS ACT (NLRA) REFORM /
“TEAM ACT”
In the 104th Congress, legislation was introduced in the House and Senate to amend Sec. 8(a)(2) of the National Labor Relations Act, which currently prohibits what are viewed as “employer dominated” labor organizations. Adoption of the legislation would allow flexible employee involvement structures to flourish outside formal collective bargaining arrangements, and legally address issues such as productivity, safety, and other terms and conditions of employment.
The retail industry would benefit from legislation allowing the establishment of workplace teams consisting of labor and management to address and resolve critical workplace issues.
In the 105th Congress, similar measures were introduced and given a high priority for action by Congressional Republican leaders. In the Senate, Labor Committee Chairman Jim Jeffords (R-VT) introduced S. 295. In March 1998, the full Labor Committee approved the measure on a 10-8 party line vote after rejecting a series of weakening amendments. Senate Majority Leader Trent Lott (R-MS) placed the measure on the Senate calendar, but no further action occurred.
In the House, similar legislation, H.R. 634, was introduced in February 1998 by Employer-Employee Relations Subcommittee Chairman Harris Fawell (R-IL), and subsequently referred to his subcommittee where there has been no action.
In the 105th Congress, “Team Act” and other labor-management issues were highly contentious in light of the highly visible, but largely unsuccessful, effort of organized labor to wrest back control of Congress. NRF will continue to participate in business community activities in support of the legislation in the 106th Congress and seek input from the Committee on Employment Law as developments warrant.
NATIONAL LABOR RELATIONS BOARD (NLRB) RULEMAKING -
“Single Site Bargaining Units”
On September 28, 1995, the National Labor Relations Board published a notice of proposed rulemaking which would provide that employees at a single location automatically form an appropriate bargaining unit when: 1) 15 or more employees work at the under-represented location; 2) no other location is within one mile of the proposed site; and 3) at least one supervisor is present on site. Current law favors union organizing because of the presumption that employees at a single location form an appropriate unit. However, decades of case-by-case adjudication allowed employers the opportunity to rebut that presumption and show that a multi-facility unit is appropriate.
The retail industry would be severely impacted by promulgation of a new rule that would automatically give unions the ability to organize separate facilities, superseding decades of case-by-case adjudication with respect to multi-facility units.
Congress has refused to fund the development and implementation of the proposed single-site regulation in fiscal years 1996, 1997, and 1998. On February 23, 1998, the NLRB voted by a 4-1 margin to table this ill-conceived regulation.
Although the single-site regulation has been tabled, the Board can continue to implement the policies of the proposed regulation on a case-by-case basis. It appears that this occurred in 1997 in at least two identified cases. Therefore, a statutory fix remains necessary. Last year, Rep. Fawell (R-IL) introduced an omnibus NLRB reform bill, entitled the “Fairness for Small Business and Employees Act” (H.R. 3246), which included a provision to prevent the promulgation of the single-site rule. H.R. 3246, which was passed by the House of Representatives in March, would simply codify current case law and permanently guarantee the right to a fair hearing when there is a dispute over the appropriateness of a bargaining unit. Although companion legislation was introduced in the Senate by Sen. Tim Hutchinson (R-AR), the Senate was not able to obtain the 60 votes needed to consider the legislation on the floor.
Although the single site issue appears to be largely resolved for the time being, NRF will continue to monitor the actions of the National Labor Relations Board and work in the 106th Congress to ensure that the previous draft single site rule does not move forward.
FAIR LABOR STANDARDS ACT (FLSA): REFORM/EXPANSION
The FLSA governs payment of wages, hours of work, record-keeping requirements and child labor restrictions. While the Act has been amended several times, many provisions in the Act do not accommodate the changing needs in the workforce of the 1990s.
The retail industry may benefit from needed changes in the FLSA to reflect the needs of a changing and dynamic workforce. However, it is imperative that any changes provide adequate statutory and regulatory employer protections.
Following passage of “comp time” legislation in the 104th Congress, the Republican majorities in the House and Senate have kept FLSA revisions a top legislative priority. In the 105th Congress, House Workforce Protections Subcommittee Chairman Cass Ballenger (R-NC) introduced H.R. 1, the “Working Families Flexibility Act of 1997,” which passed the full House by a vote of 222-210. Specifically, the legislation provides for compensatory time instead of over time for employees in the private sector. In the Senate, Sen. John Ashcroft (R-MO) introduced S. 4, the “Family Friendly Workplace Act,” which was marked up in the Senate Labor Committee, and seeks to provide broader FLSA reforms focusing on employee flexibility in the workplace, including comp time and flexible scheduling. However, Senate Republicans failed twice in their efforts to secure the 60 votes needed to invoke cloture and vote on S. 4.
There were also efforts to expand the Family and Medical Leave Act (FMLA). Rep. Bill Clay (D-MO) introduced H.R. 109, the “Family and Medical Leave Improvement Act,” which would lower the employee threshold and broaden the Act. The “Family and Medical Leave Fairness Act,” introduced by Sen. Chris Dodd (D-CT), would lower the coverage threshold from 50 employees to 25.
The 105th Congress adjourned without taking any action on broader FLSA reforms. The Senate leadership was not able to secure the 60 votes needed to move forward with consideration of the “Family Friendly Workplace Act,” thereby causing the legislation to die. NRF has encouraged GOP leaders to ensure that these proposals are not significantly broadened to the point of being unworkable in a business environment.
In the 106th Congress, NRF will continue to work through its Committee on Employment Law to identify retail concerns on FLSA reform and take any appropriate and necessary actions.
SUPPLIER COMPLIANCE ISSUES
An ongoing aggressive government, media, and activist campaign has focused on the issue of domestic and international “sweatshops” and has prompted the introduction of state and federal legislation that would impose joint legal liability on manufacturers and retailers for the transgressions of their garment contractors as well as law suits targeted at retailers.
In January 1999, UNITE and several NGOs filed class-action suits in federal and state courts in California against a number of retailers and apparel manufacturers over labor conditions in Saipan. The federal case is a novel civil action under the Racketeering Influenced Corrupt Organizations (RICO) Act, which alleges that retailers, manufacturers, and subcontractors conspired to violate federal labor and human rights laws in Saipan. The State case alleges that the retailers engaged in fraudulent and illegal business practices with respect to the sale of products sourced in Saipan. In addition, several bills in Congress would place the Northern Marianas under Federal minimum wage laws, revoke the territory’s duty-free and quota-free status, and prohibit products made in the Commonwealth from using a “Made in USA” label.
The Trade and Development Act of 2000 (H.R. 434) that was recently signed into law, also contains a provision added by Senator Harkin (D-IA) denying trade benefits under to the Africa and Caribbean trade initiatives, as well as the Generalized System of Preferences to countries that are not meeting and effectively enforcing the standards set in the recently-concluded International Labor Organization (ILO) convention on Elimination of the Worst Forms of Child Labor (i.e., prostitution, slave and indentured labor, etc.).
NRF is monitoring the activities of UNITE and its political allies with respect to legislation at the state and federal level. In addition, NRF formed the Sweatshop Education Taskforce in 1999 to tackle the problem of anti-sweatshop campaigns organized by UNITE on college campus and directed against retailers. The taskforce has put together an Internet website (http://www.sweatshops-retail.org/) that provides students and the public information on the sweatshop issue as it affects retailers and efforts by the industry to address the problem. Finally, NRF has participated in the Treasury Department’s Child Labor Advisory Committee, which was formed to advise the U.S. Customs Service on how to enforce the ban on the importation of products made with forced and indentured child labor. NRF’s activities have been focused on trying to form a more cooperative relationship between importers and Customs in addressing this issue.
OSHA - ERGONOMICS
After years of relatively little formal action on ergonomics, OSHA published their proposed ergonomics regulation in November 1999 for public comment. NRF strongly opposes this far-reaching, vague, and onerous new proposed rule. NRF submitted comments on behalf of the retail industry.
In November 1994, the Occupational Safety and Health Administration (OSHA) released a draft regulation known as the “Ergonomic Protection Standard.” Under the proposed standard, businesses would be required to implement comprehensive medical management programs for jobs with high “signal risk factors,” such as lifting 25 pounds or more, repetition (such as typing on a computer keyboard), pushing or pulling, using equipment that vibrates, and sitting or standing in an awkward position. The regulation would also require employees to continuously change their work practices to keep up with ergonomics developments.
Because retail employees often engage in several of the “risk factors” outlined by OSHA, the proposed ergonomics regulation could prove to be extremely costly and burdensome for retail businesses with more than 10 employees.
Since 1995, Congress has attempted to prevent OSHA from issuing the broad and far-reaching ergonomics regulation through the appropriations process. In FY1995 and FY1996, language was included in the annual spending bills to prevent the Department of Labor (DOL) from spending any appropriated funds on further development of the ergonomics standard. However, an amendment offered by Representative Nancy Pelosi (D-CA) stripped this limitation language out of the FY1997 Labor-HHS spending bill on the House floor. Fortunately, language was added to the FY1998 Labor appropriations bill prohibiting DOL from moving forward with the proposed regulation.
The NRF and the National Ergonomics Coalition were successful in including a provision in the FY 1999 Omnibus Spending bill that would require and fund a study by the National Academy of Sciences (NAS) on ergonomics before the DOL can issue an ergonomics rule.
Efforts continue in the House and Senate to prevent OSHA from issuing a final ergonomics rule. In the first session, Rep. Roy Blunt (R-MO) introduced bipartisan legislation entitled the “Workplace Preservation Act” (HR 987) that would prohibit OSHA from releasing a final rule until the NAS study has been completed. This legislation passed the House of Representatives on August 4, 1999, by a narrow vote of 217-209. Fifteen Democrats supported the bill, and seventeen Republicans opposed the measure. NRF strongly supported and actively lobbied on behalf of Rep. Blunt’s legislation, and believes that it is premature for OSHA to move forward with such a comprehensive regulation without any scientific factual basis.
In the Senate, Kit Bond has introduced a companion ergonomics bill (S. 1070), and the measure currently has 43 cosponsors. At this point, no formal schedule has been set for the legislation, although Senate Republican leadership has said that they intend to bring up the measure. Currently, it does not appear that they have the 60 votes needed to break a filibuster, and the President has issued a veto threat on the measure.
Over the past few months, the business community has enjoyed a major success on the ergonomics front. Both the House and Senate have attached language to the FY 2001 Labor-HHS appropriations bill that would prevent the Department of Labor from issuing a final ergonomics rule before the end of FY 2001. Although this appropriations measure will likely be vetoed by the President, it is expected that the rider will be a major part of the negotiations on any final omnibus package passed at the end of the year. NRF will continue to work with the House and Senate to ensure that this critical provision will implemented prior to adjournment this year so that the onerous ergonomics regulation cannot take effect in the final months of the Clinton Administration.
REGULATORY REFORM
Over the past decade, the private sector has been inundated by onerous federal regulations that have been extremely ineffective. Under the current regulatory scheme, decisions are based upon policy judgments without risk or cost analysis and have resulted in extremely costly and burdensome over-regulation.
While the retail community supports a clean and healthy environment and a safe workplace for employees, it is imperative that the federal government address the most serious problems in the most cost-effective manner possible. Government mandates cost the public nearly $700 billion each year.
On February 10, 1999 the House of Representatives passed H.R. 350, the “Mandates Information Act” by a vote of 274 to 149. The bill will make it harder for Congress to impose unfunded mandates on the private sector. The key provision calls for the Congressional Budget Office (CBO) to determine the impact of legislation on the private sector. If the mandate exceeds $100 million, an automatic point of order would be raised. Each side would then have ten minutes to debate the point of order if the CBO has not provided an estimate of costs. If the point of order is defeated, consideration of the bill will continue. It is hoped that with passage of this bill, Congress will be forced to focus greater attention on the burden government mandates impose on the private sector. Support for the legislation in the Senate is less solid. The strategy in the Senate will be to engage Democratic members to cosponsor the measure, thus encouraging stronger Democratic support chamber-wide.
On February 11, 1999, the House passed the “Small Business Paperwork Reduction Act Amendments of 1999” by a vote of 274 to 151. The bill builds on past efforts to reduce the paperwork burden for small businesses without compromising safety and health protections. The bill also requires federal agencies to waive civil fines for first time paperwork violations if the small business corrects them. Small businesses that are trying to comply with the myriad complex rules and regulations deserve to be rewarded and not penalized for making a mistake that does not harm their employees or the surrounding community.
On July 26, 1999, the House passed H.R. 1074, the “Regulatory Right-to-Know Act.” The bill directs the President to submit annually to Congress an accounting statement and associated report containing an estimate of the total annual costs and benefits of Federal regulatory programs in the aggregate, and an analysis of direct and indirect impacts of Federal rules and paperwork on Federal, State, and local government, the private sector, small business, wages, consumer prices, productivity, and economic growth. The vote of 254 to 157 fell short of a veto-proof majority, and the President has indicated he will veto the bill.
Passage of these bills in the House is an important step forward. The Senate has yet to schedule floor activity on any of these measures. NRF will continue to lobby for passage of this bill and broad regulatory relief in the 107th Congress.
MUSIC LICENSING AMENDMENTS
Legislation to expand the current music licensing exemption for businesses and address unfair practices of music licensing organizations was introduced in the House and Senate.
The enactment of legislation to expand current music licensing regulations freed retailers from numerous regulatory and financial burdens.
NRF, in conjunction with members of the Music Licensing Fairness Coalition, worked to move legislation in the House and Senate that expanded the “homestyle” exemption and alleviated some of the abusive tactics used by music licensing companies such as BMI, SESAC, and ASCAP.
NRF was instrumental in drafting the proposal, “Fairness in Musical Licensing Act of 1997” (H.R. 789 and S. 28), which expanded current law to allow for all forms of performance broadcasts, cable or satellite, so long as they are incidental to the main purpose of the establishment. The bill also called for the creation of binding local arbitration to resolve licensing disputes between music users and licensing organizations. Other provisions in the proposal required music licensing organizations to provide detailed information on their service offerings and required the Justice Department to report all business complaints against licensing companies to Congress. The legislation also exempted sellers of audio or visual equipment from having to pay music royalties. Although this bill passed the House, Senator Orrin Hatch (R-UT), who is an ally of the music licensing agencies, prevented the bill from moving forward in the legislative process.
In the final days of the 105th Congress, an eleventh hour deal was reached that would provide an exemption for retailers that are less than 1,750 square feet, or have less than 6 speakers and 4 televisions (only one per room). Both Chambers passed the legislation with strong bipartisan support, and the bill was signed into law. It went into effect on January 25, 1999.
ENCRYPTION
Encryption is technology that “encodes” computer files and communications to protect peoples’ privacy, much like a combination lock secures a filing cabinet. Encryption is the best way to protect information communicated over the Internet. It is also the most effective way to protect sensitive personal information and confidential business data stored on computer systems. Currently, Americans can purchase and use products with the strongest encryption available on the market, without providing the federal government access to “encrypted” information. Internationally, the Administration’s policy prohibits U.S. companies from exporting products with strong security features, limiting their encryption strength to a “56 bit” key. However, much stronger products are available from foreign competitors in the U.S. and around the world. U.S. made “128 bit” products are prohibited from competing in the global marketplace. Year after year, Members of Congress have introduced legislation to allow for relaxed export controls on American encryption products.
As end users of encryption products, retailers want to ensure that online transactions with worldwide suppliers are absolutely secure. Concern over security is also one of the top reasons consumers hesitate to make purchases online. With the U.S. businesses having the highest market share on the Internet worldwide, the availability of stronger encryption will supplement the growth of privacy and commerce on the Internet, whether through business to business or business to consumer transactions.
For nearly ten years, various members of Congress have attempted to pass legislation that would relax export control on encryption products. The efforts have been fruitless with strong opposition from the Administration over concerns that it would the products could get into the hands of terrorist countries. This year, though, has been an especially successful year with increasing momentum. H.R. 850, the Security and Freedom through Encryption Act (SAFE), introduced by Representatives Bob Goodlatte (R-VA) and Zoe Lofgren (D-CA) has garnered 258 cosponsors. The bill sailed through the five committees that had jurisdiction over the legislation. In the Senate, Senator John McCain introduced S. 798, the Protect Act, a much weaker version that would only allow export of 64 bits. The bill has been reported out favorably from the Senate Commerce Committee.
In a surprise move in September 1999, the Administration moved to reverse its position on exporting encryption technology. The reversal would allow the export of unlimited strength encryption and rests on three principals. It would require a one-time technical review of encryption products in advance of sale, a streamlined post-export reporting system, and a process that permits the government to review exports of strong encryption to foreign government and military organizations and to nations of concern. The Administration intended to implement this by updating current export regulations by December 15, 1999. In addition, the President proposed legislation that would give law enforcement officials the legal tools necessary to investigate crime in an “encrypted world.” The legislation is entitled “The Cyberspace Electronic Security Act of 1999” (CESA).
With the Administrations insistence that the federal government have the ability to access decryption information (key recovery), NRF will continue to oppose the Administration proposal.
H.R. 850 had been scheduled for House floor action in late September, but was set aside in light of the Administration’s move. On January 14th, the Administration dramatically revised its encryption export controls to permit American companies to export unlimited strength encryption products worldwide. The process companies must go through, however, to comply with government regulations is extremely confusing and complicated. The Administration has recognized these concerns and continues to review its new regulations to full industry demands.
DIGITAL SIGNATURES
The Electronic Signatures in Global and National Commerce Act (S. 761) grants electronic contracts and signatures the same legal status as handwritten signatures. The act also allows transactions that are currently provided in writing to be made available via electronic record if the consumer first provides consent. The legislation provides federal preemption over a myriad of conflicting state laws, making the use of electronic documents and signatures more viable for businesses and consumers. The language is also technology neutral- barring any state from favoring any specific technology for transmitting and receiving electronic signatures and records.
With consumers making purchases on-line of everything from cars to stocks and the majority of transactions being conducted on-line are business to business, retailers would benefit in all business relationships, whether with customers or with suppliers, from legally valid electronic signatures.
The Senate approved S. 761 by an overwhelming margin of 87 to 0 on June 16, 2000. This came days after the House of Representatives voted 426 to 4 to approve the bill. President Clinton signed the bill into law on July 2, 2000. The E-SIGN Act, which has taken several years to craft, will allow retailers to sign deals and contracts with suppliers online. It will also allow consumers to apply for credit cards online, sign service contracts, and receive records, such as bills and bank statements, electronically. The law is also expected to save businesses billions of dollars in productivity.
The E-sign Act sets national standards for electronic signatures and records, and gives them the same legal validity as written contracts and documents. It not only authorizes digital signatures, but also allows the use of online contracts and notices for legal purposes. Section 101(a) provides that any signature, contract or other record relating to a transaction in or affecting interstate or foreign commerce “may not be denied legal effect, validity or enforceability solely because an electronic signature or electronic record was used in formation.” However, the legal effect of an electronic record of a contract can be denied if an electronic record is not in a form that is capable of being retained and accurately reproduced. Consumers must be given access to records. If a statute requires the retention of a check, the requirement will be satisfied by retention of an electronic record of the information on the front and back of the check.
There are numerous consumer disclosure and consent provisions in the legislation. Electronic records may be used only if the consumer has affirmatively consented to such use and has not withdrawn consent and the consumer has been provided with a clear and conspicuous statement informing the consumer of the right to have the record provided in a non-electronic format, and the right to withdraw consent. The consumer must also be provided with a statement of the hardware and software requirements for access and retention of electronic records. In section 101(c)(1)C(ii), there is also a requirement that the consumer must consent electronically or confirm that consent electronically in a manner that the consumer can access the information in the electronic form that will be used to provide the information that is subject to the consent. It is unclear how this requirement will impact the use of electronic signatures and records. It is possible that this provision could burden companies with additional requirements that would make completing a transaction in person less burdensome.
The Act provides uniformity in digital signature laws across the United States. Much of the obstruction to using electronic signatures in the past has resided within the difficulty of complying with a myriad of inconsistent state laws. The Act, however, does exempt states that have enacted the Uniform Electronic Transactions Act (UETA) as drafted, from the federal law. The UETA is model (not mandatory) legislation drafted by the National Conference of Commissioners on Uniform State Law (NCCUSL).
There are a number of exclusions to the bill, and most do not apply to the retail industry. These exclusions include wills, codicils, testamentary trusts, and laws governing adoption, divorce or other family law matters. It also excludes: court orders or notices or official documents in connection with court proceedings; a notice of cancellation or termination of utility services; default, foreclosure or eviction notices under any credit agreement secured by a primary residence; the cancellation or termination of health benefits or insurance; the recall of any product or material failure of a product that risks endangering health or safety; and, any document required to accompany the transportation or handling of hazardous materials.
The law requires that any state law not preempted by this Act be technology neutral. This allows for the development of future technology, and does not limit to usage of digital signature technology.
The effective date of the E-Sign Act is October 1, 2000. However, for any records required to be retained under federal law, the effective date is March 1, 2001. This is to allow a longer transition period for law enforcement agencies
FEDERALISM
Federal preemption rests on the Supremacy Clause of the United States Constitution, which argues that “This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” The doctrine protects the supremacy of the laws Congress passes and ensures that businesses and the public comply with only one set of regulations rather than 51 different sets of laws. When Congress legislates in an area of federal concern, it may specifically preempt all state legislation or may bar only inconsistent legislation. Some members of Congress have introduced bills in both the House and the Senate that would “protect the reserved powers of the States and impose accountability for Federal preemption of State and local laws.”
Without the primacy of federal law, enforced through preemption, businesses will lose the competitive advantage of a large United States market with uniform law and be forced to tailor their manufacturing and marketing to the demands of 51 individual jurisdictions. The costs imposed on businesses in order to comply with innumerable state laws would be exorbitant. It could also lead to a windfall of litigation.
Reps. David McIntosh (R-IN) and Jim Moran (D-VA) introduced H.R. 2245, “The Federalism Act of 1999.” In the Senate, Fred Thompson (R-TN) and Carl Levin (D-MI) have introduced S. 1214, “The Federalism Accountability Act of 1999.” The bills would change the law dealing with federal preemption, making it more difficult to craft and enact meaningful legislation that addresses national problems. The bills would require a detailed statement and list that explicitly describes the state regulations and ordinances that would be preempted by any federal legislation or regulation. The result would be situations where a state law or regulation should be preempted but is not, or where a state law or regulation should not be preempted but is.
Examples of federally preemptive legislation that could have been or may be affected by this legislation are:
> The Y2K Act > The Telecommunications Act
> Internet Tax Freedom Act > National Product Liability
> Workplace Safety and Ergonomic Standard > Medical Records Privacy
> Financial Records Privacy
States rights is an issue traditionally supported by Republicans. This bill is being forcefully pushed on Capitol Hill by Republican members of Congress and the Republican Governors Association. Because of the potential onslaught of litigation, the trial lawyers are also actively supporting this legislation with the Republican governors, making a very formidable and unlikely coalition. The business community, environmental groups and labor unions are opposed to the legislation.
H.R. 2245 was effectively killed in House Committees in July 1999. There is only small hope that the meat of the bill can actually be gutted to prevent the detrimental effects of the bill as it now stands. It is expected that when the Administration weighs in on the issue, because of its support for both trial lawyers who support the bill and environmental and labor groups who oppose the bill, there will effectively be a carve-out for the environmental and labor groups, leaving the business community in the cold. NRF will continue to actively oppose the legislation and will keep members updated as events warrant, but with only a few days remaining the legislative session, Congress is not expected to complete work on the bill.
PRODUCT LIABILITY / TORT REFORM
Product liability reform, as the first step in systematic tort (i.e. general liability) reform, remains a goal of the retail industry.
Legislation discouraging both the number and size of product liability lawsuits could reduce insurance premiums and limit the resources retailers expend fighting cases in court. Extension of these principles to general tort actions would have an even greater bottom line benefit by reducing the likelihood that individuals could extract significant “nuisance” settlements in premises liability and other such cases.
For two decades, product liability reform has been a regular congressional issue. In each Congress, during every administration, the House, Senate or White House has blocked its adoption. In recent years, the White House has been the chief opponent, and the threat of a veto has encouraged filibuster efforts in the Senate.
For example, in the 105th Congress, a somewhat diluted product liability reform bill was introduced and approved 11-9 by the Senate Commerce, Science, and Transportation Committee. S. 648, the “Product Liability Reform Act of 1997,” mirrors previous efforts at product liability reform in many regards, yet was seen by traditional supporters of product liability reform as not broad enough. Although the Senate did attempt to bring the bill to the floor during July 1997, supporters of the legislation were not able to obtain the 60 votes needed for cloture. Therefore, the initiative again died in the 105th Congress.
This perennial issue has returned as the “Small Business Liability Reform Act of 1999.” The Senate version, S. 1125, sponsored by Senator Spencer Abraham (R-MI) was introduced in May 1999. Subsequently, the House version was introduced in June by Representative Jim Rogan (R-CA). The legislation provides small businesses certain protections from litigation excesses and limits the product liability of non-manufacturer product sellers. Specifically, the bill limits punitive damages to three times the total amount awarded to the claimant for economic and non-economic losses or $250,000. It also provides limitations on joint and several liability for non-economic losses for small businesses.
The bill passed the House on February 16, 2000. The bill will face a showdown in the Senate over whether it will face floor action. With few legislative days this year, Senate Majority Leader Trent Lott has indicated this bill as the legal reform measure he would like to move this year. However, many members also support passage of class action legislation this session, making the fate of small business liability legislation this year unlikely. Although not as comprehensive as we would like, NRF supports its enactment.
ELECTRICITY DEREGULATION
In most states, electricity is currently sold by monopoly suppliers, who sell electricity, and all services required to deliver that electricity, to the ultimate consumer as a bundled package. The trend is to unbundle those services and allow customers to purchase generated electricity, and some services such as billing and meter reading, competitively.
The cost of electricity is often one of a retailer’s highest operating expenses. Competition could save retailers an estimated 20-60 percent.
A number of bills dealing with electricity issues were introduced in the 105th Congress. In the House, the primary comprehensive bill was Energy and Power Subcommittee Chairman Dan Schaefer’s H. R. 655. The Schaefer bill required competition by December 15, 2000, and left stranded cost recovery to the states. NRF lead an amendment effort that would have limited stranded cost recovery. Although a mark up of H. R. 655 was not scheduled last year, retail industry efforts on behalf of H.R. 655 have laid the groundwork for possible legislation in the 106th Congress. There was no activity on any of the bills introduced in the Senate.
A number of states have pending legislation requiring competition for commercial users. Almost every state is currently studying the issue, or is actively moving legislation or regulations that would bring competition. A major issue for retailers is the date by which competition becomes available to all retailers. A phase-in is a delaying tactic. Competition should be available to all classes of customers at the same time. Another major issue is stranded cost recovery. Stranded costs should not be automatically recoverable by the utility. One hundred percent stranded cost recovery will chill competition. A third major issue is aggregation. Retailers want the ability to voluntarily aggregate their purchases of electricity, in order to increase their buying power.
House Commerce Committee Chairman Tom Bliley (R-VA) has indicated electricity deregulation is a top priority for the 106th Congress. In May, Bliley and House Commerce Subcommittee on Energy and Power Chairman Joe Barton (R-TX) introduced H.R. 1828, the “Comprehensive Electricity Competition Act.” Steve Largent (R-OK) has also introduced a bill, H.R. 2050, the “Electric Consumers’ Power To Choose Act of 1999.” Neither measure includes a date certain provision or aggregation. On October 27, 1999, the House Commerce Committee Subcommittee on Energy and Power began markup of HR 1828. The subcommittee did not complete action on the markup, but vow to bring it up again early in next session.
Retail wheeling continued to be a top legislative priority for NRF. While major inroads were reached with the introduction and markup of electricity deregulation legislation in the House Commerce Committee Subcommittee on Energy and Power, the retail industry continues to face significant challenges in achieving important consumer provisions in electricity deregulation legislation.
Despite a year long campaign by NRF and other industry groups attempting to include federal date certain and aggregation provisions in the legislation, key members of the House Commerce Committee made it clear this language will not be included in a final version of the bill next year. The legislation being considered by the subcommittee is currently drafted in favor of the electric industry, not power consumers.
Chairman Bliley (R-VA) has announced electricity deregulation legislation as a top priority for this session. In the Senate, Energy Committee Chairman Frank Murkowski (R-AK) has also put deregulation legislation on the committee’s agenda this year. However, Senate leadership indicated that while work may be done on the legislation, action will not be completed this year, and may take several years before the legislation is signed into law.
CENSUS LONG FORM
On March 31, 1997, the Census Bureau submitted to Congress the subject matters to be asked on the short and long forms in the 2000 census. Under the Bureau’s recommendations, all American households will receive a short form in 2000 that is the shortest version since 1820. In addition, one in six households will receive the “long form,” which will cover topics such as education, ancestry, income, transportation, employment, and housing. The questions on the proposed long form have been simplified to cover fewer topics than in the 1990 census. Despite this simplification, some Members of Congress are working to eliminate the census long form, claiming that it is too costly, burdensome, and serves to decrease overall participation rates.
The data generated from the census long form is an important comprehensive source of information for the retail industry. Data from the long form is used to allocate resources and develop investment strategies, to determine the location of new stores and plants, and to meet customer needs and practices. It would be extremely difficult for the private sector to replicate the wealth and reliability of data collected in the census.
As in every year, the Appropriations and Budget battles have caused potential problems for funding of discretionary programs such as the Census. The House and Senate Conference report approved full funding for the program at $4.5 billion. The strong advertising campaign of the 2000 Census proved successful, leading to a record response by the American public. However, the census long form is facing increasing scrutiny because of the public backlash over questions deemed unnecessary and intrusive. In July, the House Government Reform Subcommittee on the Census held a hearing to review the 2000 Census. Some groups are beginning to advocate conducting a survey rather than the census long form.
NRF has been actively working with others who have a shared interest in seeing that the long form is preserved, including representatives from the communications, housing, transportation and marketing industries. While its fate is unclear, NRF will continue to advocate in the 107th Congress continued use of the long form as it provides significant data that the retail industry uses as an information resource and will work to ensure that Congress understands the importance of the census long form to the growth and development of the American economy.
[1] Safeguards measures allow for the temporary imposition of trade restrictions on fairly traded products when there is rapid increase in imports