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Search Terms: internet W/10 sales W/10 tax, House or Senate or Joint

Document 4 of 142.

June 29, 2000, Thursday

SECTION: PREPARED TESTIMONY

LENGTH: 2488 words

HEADLINE: PREPARED TESTIMONY OF KATRINA DOERFLER CISCO SYSTEMS INC. ON BEHALF OF THE AMERICAN ELECTRONICS ASSOCIATION

BEFORE THE HOUSE COMMITTEE ON THE JUDICIARY SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

BODY:
HEARING ON H.R. 4267, THE "INTERNET TAX REFORM AND REDUCTION ACT OF 2000," H.R. 4460, THE "INTERNET TAX SIMPLIFICATION ACT OF 2000," AND H.R. 4462, THE "FAIR AND EQUITABLE INTERSTATE TAX COMPACT SIMPLIFICATION ACT OF 2000"

STATEMENT SUMMARY

The member companies of the American Electronics Association (AEA) strongly support Internet Tax Simplification. AEA supports the following broad E-commerce tax principles as Congress looks to whether and how to tax Internet sales: One, impose no greater tax burden on electronic commerce than other traditional means of commerce. Two, support simplicity in administration. Three, retain and clarify nexus standards. Four, avoid new taxes on the Internet. And, five, consider tax issues in a global context.

AEA companies firmly believe that similar transactions ought to be taxed similarly. That is why achieving meaningful and uniform simplification of the sales and use tax rules across the 50 States is so important. All three of the bills before the Subcommittee today focus on the importance of simplification and AEA believes Congress should direct the States on this important matter of simplification. I will focus my testimony on the three most important components that should be included in any Internet Tax Simplification legislation:

1) Creation of Model Uniform and Simplified Act The National Conference on Commissioners on Uniform State Laws (NCCUSL), with the advice of and in consultation with representatives of State and local governments, business, and taxpayers, should develop a simplified and uniform sales and use tax system that would be adopted by the States. Once drafted by NCCUSL, the Uniform and Simplified Model Act should be adopted by a majority of the States without revision.

2) Congressional Approval of Uniform and Simplified System

AEA supports simplification first and then congressional consideration. AEA supports expedited consideration and voting on this matter by Congress. However, AEA strongly opposes the notion of Congress granting prior approval for an expanded duty to collect on business prior to simplification.

3) Business Activity Tax Nexus Clarification

Clarity of the nexus standards goes hand-in-hand with simplification and compliance. Business needs a bright line test in the business activity tax nexus area because the States have increasingly used new and novel nexus theories to assert jurisdiction over out-of-state companies.

*****************

Thank you for inviting me to testify before the Commercial and Administrative Law Subcommittee today to testify on the Internet Tax Simplification bills before the House Judiciary Committee.

I am Katrina Doerfler, Manager for Tax Policy & Analysis for Cisco Systems. As you may know, Cisco is the world's largest manufacturer of equipment that connects people and businesses to the Internet. Cisco employs over 30,000 people, is headquartered in San Jose, California, and also has significant operations in Massachusetts, North Carolina, and Texas.

Today, however, I am representing the American Electronics Association (AEA), where I serve as Chair of the AEA E-Commerce Taxation Task Force. AEA is the nation's largest high-tech trade group, representing more than 3,000 U.S.-based technology companies. Membership spans the industry product and service spectrum, from semiconductors and software to computers, Internet and telecommunications systems and services. For 56 years, AEA has been the accepted voice of the U.S. technology community. While Cisco is an active and enthusiastic member company of the AEA, the views I offer here today are those of AEA and not necessarily Cisco as well.

AEA is a strong proponent of achieving Internet Tax Simplification. This simplification is one of a very few issues that all AEA companies will benefit from - the large companies desperately need the relief from the administrative burden of sales tax collection across the country, and the small companies which make up the bulk of AEA's membership need simplicity in order to break into the multistate sales environment. The three bills before the Subcommittee today, H.R. 4267, H.R. 4460, and H.R. 4462, all address the important issue of providing for simplification of sales and use taxes on interstate commerce, but each do so in a slightly different fashion. As introduced, none of these bills is "perfect" in the opinion of AEA, but each contains important policy objectives. My comments today will focus on the component parts AEA believes are essential to the legislation Congress will ideally enact.

AEA supports the following broad E-commerce tax principles as Congress looks to whether and how to tax Internet sales: One, impose no greater tax burden on electronic commerce than other traditional means of commerce. Two, support simplicity in administration. Three, retain and clarify nexus standards. Four, avoid new taxes on the Internet. And, five, consider tax issues in a global context.

Although not the direct focus of the Subcommittee today, AEA thanks the House Judiciary Committee for quickly approving and sending to the full House for their overwhelming vote of 352-75 in support of H.R. 3709, the Internet Nondiscrimination Act. AEA supports the five-year moratorium extension included in H.R. 3709, which also provides for a permanent ban on Internet access taxes and repeals the previous State grandfather provision included in the original Internet Tax Fairness Act, enacted in 1998. Although this moratorium extension does not directly impact State sales and use taxes, AEA believes a five-year moratorium extension is important because it will allow the time sufficient for the States to achieve sales tax simplification. Both H.R. 4267 and H.R. 4460 include a moratorium extension.

AEA companies firmly believe that similar transactions ought to be taxed similarly. That is why achieving meaningful and uniform simplification of the sales and use tax rules across the 50 States is so important. All three of the bills before the Subcommittee today focus on the importance of simplification and AEA believes Congress should direct the States on this important matter of simplification. I will focus my testimony on the three most important components that should be included in any Internet Tax Simplification legislation:

1) Creation of Model Uniform and Simplified Act 2) Congressional Approval of Uniform and Simplified System 3) Business Activity Tax Nexus Clarification Creation of Model Uniform and Simplified Act:

The issue of taxing interstate commerce is an issue appropriate for congressional consideration.

AEA believes Congress should direct the States on the process for developing a uniform and simple sales and use tax system. Specifically, AEA supports the National Conference of Commissioners on Uniform State Laws (NCCUSL) undertaking the task of drafting this uniform and simple sales and use tax act. NCCUSL should work jointly with State and local government, business and taxpayers in the drafting process. NCCUSL's drafting process is open to the public and their participation in the drafting process is encouraged. AEA believes this open process ensures the participation of all interested parties and leaves the ultimate drafting decision making regarding the details to the NCCUSL drafters. We believe the insertion of a neutral third party between the various business and government groups will facilitate the drafting process.

Both H.R. 4267 and H.R. 4460 reference NCCUSL in the drafting process and H.R. 4462 only references the States. AEA believes each could be improved by specifically stating that "it is the sense of the Congress that the National Conference of Commissioners on Uniform State Laws, with the advice of and in consultation with representatives of State and local governments, business, and taxpayers, should develop a simplified and uniform sales and use tax system that would be adopted by the States." AEA believes all three bills include an appropriate the itemized list of appropriate simplification points to be included in the uniform and simple model act.

Once drafted by NCCUSL, the Uniform and Simplified Model Act should be adopted by a majority of the States without revision. This consistency across the country is an element of importance to creating a meaningful simplified system. If the NCCUSL process is properly utilized, AEA does not believe that a successor commission to the Advisory Commission on Electronic Commerce, as envisioned is H.R. 4267, is necessary.

Congressional Approval of Uniform and Simplified System

AEA understands that the State and local governments are reluctant to simplify their sales and use tax rules without the guarantee that they will ultimately benefit from an expanded duty to collect on remote sales made by business. However, this expanded duty to collect cannot be imposed on out-of-state businesses until simplification is achieved. Therefore, because this issue is one that involves both interstate commerce and State taxes, it is appropriate for Congress to carefully review the envisioned uniform and simplified sales and use tax system. After this review, then Congress should vote on whether or not the uniform and simplified system presents a burden on interstate commerce. If the finding is no, then Congress should approve the system and if the finding is yes, that a burden still remains because it system is not appropriately simplified, then Congress should vote to disapprove the system. AEA supports simplification first and then congressional consideration. AEA supports expedited consideration and voting on this matter by Congress. However, AEA strongly opposes the notion of Congress granting prior approval for an expanded duty to collect on business prior to simplification.

As introduced, all three bills before the Subcommittee could be improved on this point. AEA believes the vote by Congress should be an affirmative vote at a specific time following creation and implementation in a majority of the States of the model uniform and simplified act.

Business Activity Tax Nexus Clarification

Once a majority of States has enacted this model uniform and simplified sales tax system, a very important related issue involving business activity tax nexus comes into play. Therefore, any legislation directing State sales and use taxation simplification should also address clarification of the business activity tax nexus standards too. The phrase business activity tax collectively refers to a State's corporate income tax, franchise tax or business licensing tax. Under the model uniform and simplified sales tax system, States will now know to the dollar how many sales a particular out-of-state vendor is making into each of the States. Since the rules vary significantly State to State as to what constitutes physical presence for business activity tax purposes, AEA supports Congress creating bright line clarifications of the nexus standards in order to give business the certainty they need.

AEA believes that this clarification of the nexus standards for all types of taxes is a good idea for both State tax authorities as well as business. It will result in litigation and audit cost savings for both government and business. It creates certainty in the marketplace, which is good for all business, including E-commerce. Without this clarity, there will continue to be differing interpretations by different States as to the type and quality of nexus standards to apply.

It is important for Congress to understand that there is a whole other area of taxes out there that affect business and are just as important and costly to business as sales and use tax compliance that should also be considered. Clarity of the nexus standards goes hand-in-hand with simplification and compliance. Business needs a bright line test in the business activity tax nexus area because the States have increasingly used new and novel nexus theories to assert jurisdiction over out-of-state companies.

Some of the State nexus theories include such things as agency nexus: the theory that unrelated parties can somehow create nexus for each other, because of the type and quality of business relationships that they have. Affiliate nexus is another area: the theory that a subsidiary of a company would have traditional nexus in a State, and therefore creates nexus for all other legal entities in a business structure. And finally there is the economic nexus theory that States if a business has a certain level of economic activity in a State, then that business must have nexus for income tax purposes. Court cases involving these varying theories abound across the country and nexus clarification is definitely needed.

States have aggressively tried to use these theories to pull more businesses into their State for income tax purposes. Permitting such expansion would dampen business innovation and expansion and, thus, bring harm, we believe, to the American economy. When a company's presence in a State is minimal, it is not deriving material or meaningful protections or benefits from a State.

A whole body of case law that underpins and defines what is a constitutional tax with respect to a multi-state business currently exists. Most of this case law revolves around a four-prong test to determine if a tax is constitutional. The most important prong being is the tax fairly related to the benefits received in a State? AEA does not believe that happens with economic, affiliate, or agency nexus theories. However, States are aggressively using those theories to pull companies in.

Only H.R. 4267 sets out the issue of nexus clarification, and AEA supports that section. It is important for Congress to recognize that the imposition of new and expanded income tax liabilities by the States on business could undermine the ability of the US economy to remain robust. E-commerce is changing business-to-business relationships in a profound way. Many unrelated companies are going to market together to jointly exploit technology or they are creating Internet ecosystems, where many businesses in a particular industry or niche work together to create a market for products and services. Businesses should not be hampered or penalized in this new world by business activity tax nexus standards that are confusing and inconsistent between jurisdictions. There should be clearly defined and uniform safe harbors for business activity tax nexus. The business community fears that any expansion of State tax jurisdiction rules in the area of sales and use taxes may have an unintended effect on business activity tax nexus standards. We would urge Congress to clarify the nexus standards at the same time Congress directs the States to simplify the current sales tax administration system.

Thank you for inviting me to testify today and I will be happy to answer any questions.

END

LOAD-DATE: June 30, 2000

Document 4 of 142.


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