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

Document 8 of 142.

June 29, 2000, Thursday

SECTION: PREPARED TESTIMONY

LENGTH: 1127 words

HEADLINE: PREPARED TESTIMONY OF LARRY I. GOOD SENIOR VICE PRESIDENT ELECTRONIC COMMERCE ASSOCIATION

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

BODY:
The Electronic Commerce Association is a Washington, D.C.-based association representing online merchants and their service providers. ECA applauds the effort of various states to simplify state sales taxes, especially the plan's goal to eliminate collection burdens on merchants. The ECA has a task force composed of payment processing companies and other companies providing services to online merchants, to provide information to state groups about potential problems they need to address.

Background

For the past 20 years, state governments have searched for ways to collect sales taxes due on purchases by their residents from out-of- state catalog companies. The mail order companies argue that collecting sales taxes on behalf of consumers in the 46 states that charge sales taxes is overly burdensome. Tax rates, exemptions, and items subject to the sales taxes differ among the states. In many states, local governments add their own varying rates of tax to an array of products. A total of 7,000 taxing jurisdictions can lay claim to sales taxes. The Supreme Court in 1992 agreed with the mail order companies that the collection of the sales taxes is an undue burden if the companies have no nexus, or direct investment, in the state. In Quill Corp. v. North Dakota, the Supreme Court cited constitutional grounds in deciding states may not force out-of-state merchants to collect sales taxes. But the court invited Congress to consider legislation that would establish the states' rights to collect sales taxes on interstate commerce even if the merchant has no nexus in the taxing state.

In 1998, Congress passed legislation imposing a three-year moratorium on (1) new state taxes on Internet access, and (2) multiple or discriminatory taxes on electronic commerce. Contrary to widespread belief, the current moratorium in the Internet Tax Freedom Act does not apply to the application of existing sales and use taxes to purchases on the Internet. Those purchases are subject to the same rules as out-of-state phone and mail orders. States cannot obligate retailers to collect sales taxes in jurisdictions where they have no stores or other nexus. Consumers technically owe use taxes on purchases when the retailer does not collect the sales tax, but that rule is unenforceable.

The following factors will drive the issue of applying state sales and use taxes to Internet purchases:

Some states depend on sales taxes for over 40% of their revenues. State and local governments estimate they will lose a combined $10 billion per year in revenues by 2003, and a multiple of that amount by 2010, because they are not collecting taxes on Internet purchases.

Internet sales as a percentage of total retail sales are growing rapidly. In 1998, Internet sales amounted to less than 0.4% of total retail sales. According to recent projections by Forrester Research, Internet sales will grow to $184 billion annually by 2004, or over 7% of retail sales. Soon thereafter, Internet sales will amount to over 10% of retail sales. Mail order sales amount to just 2.7% of total retail sales.

Consumers will not lose interest in shopping online if they have to pay sales taxes. Internet consumers report in surveys they like the idea of avoiding taxes, but they tend to cite other advantages when asked the main reason they shop online. In a survey of 5,800 adults by Harris Interactive in August 1999, respondents cited the following leading reasons for online shopping: (1) convenience, (2) obtaining a product/service not available locally, (3) lower prices, (4) avoiding crowds, and (5) use of automated shopping searches, including price comparisons. Sales tax advantage did not make the list of leading reasons to shop online.

The States' Challenge

In assessing and guiding the states' effort to simplify their sales tax systems, it is important to recognize what is possible and efficient for technology to accomplish, on the one hand, and for the states to accomplish, on the other. For instance, it is tempting to define simplification by the standard of one tax rate per state, and to compel states to meet that standard. Yet overcoming the political hurdles of achieving one rate per state would be more difficult than overcoming the technological hurdles of calculating varying tax rates in a simple and cost effective manner.

That does not mean that state governments can or should let technology do all the work. The states need to agree to certain standards to avoid burdening merchants and the technology that they use. For example, states should limit the frequency of changes in their tax rates and tax base. Furthermore, states should establish safe harbor treatment for certain combinations of goods, such as food baskets with a mix of taxable and nontaxable items.

The states should adhere to the following minimum criteria in simplifying their sales taxes: Sales tax collection should not discriminate based on the medium used to conduct commerce Any new system should rely on private enterprise to the extent possible Any entity that participates in any state plan should receive adequate compensation to offset the cost of implementing new technological systems and collecting taxes No new nexus burdens for sales tax or other taxes should apply to any entity that participates in any state plan

- Consumer privacy protection must be a top priority of the tax collection system design. The states should assemble a panel of expert privacy advocates to review current and proposed sales tax collection plans. That panel will recommend ways to ensure the sales tax collection process does not diminish consumer privacy compared to the current system of collecting sales taxes. The states' goal should be to increase the protection of consumer privacy to an unprecedented level. Certification of software to calculate applicable state taxes should be centralized. Participating states should simplify and standardize the following:

product definitions exemptions filing forms remittances audits

Conclusion

The future of e-commerce is likely to include state sales tax collection on Internet sales. The major questions are when and in what form. Difficult technical and political issues remain for the states to solve, but they have enormous incentive to solve those issues.

Technology can help the states simplify their sales tax collection systems and reduce the burden on merchants. But technological solutions cannot replace common sense simplifications the states should enact. Before the states ask Congress to consider legislation that removes the nexus barrier for tax collection on remote sales, they should demonstrate that they can create a simple, cost effective tax collection system.

END

LOAD-DATE: June 30, 2000

Document 8 of 142.


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