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

Document 13 of 142.

June 29, 2000, Thursday

SECTION: PREPARED TESTIMONY

LENGTH: 2477 words

HEADLINE: PREPARED TESTIMONY OF JAMES HUNT CEO, ERNST & YOUNG TECHNOLOGIES INC. THE COMPUTING TECHNOLOGY INDUSTRY ASSOCIATION

SUBJECT - INTERNET TAXATION

BEFORE THE HOUSE JUDICIARY COMMITTEE SUBCOMMITTEE COMMERCIAL AND ADMINISTRATIVE LAW

BODY:
Mr. Chairman and members of the Subcommittee, thank you for inviting me to testify here before you today on the very important issue of Internet Taxation. CompTIA, the Computing Technology Industry Association, represents over 8,000 computer hardware and sot)ware manufacturers, distributors, retailers, e-tailers, IT resellers, value-added resellers, systems integrators, computer training services, telecommunications providers, and Internet companies.

CompTIA supports Internet growth without burdensome government regulations and unfair taxation. CompTIA actively supported passage of the original "Internet Tax Freedom Act" which was signed into law the fall of 1998. CompTIA also actively supported passage of H.R. 3709, which recently was approved by the House by a wide margin, and would extend the moratorium of the Internet Tax Freedom Act for an additional 5 years. H.R. 3709 also would eliminate state Internet access charges as recommended by the Advisory Commission on Electronic Commerce (ACEC). CompTIA applauds your leadership, Chairman Gekas, and the support of the House Judiciary Committee in passing both important bills. The technological and legal complexities of the Interne have collided and now present Congress with an extremely challenging policy issue. The current IT revolution is vital to our national economic prosperity. It has been credited by Federal Reserve Board Chairman Alan Greenspan as the primary cause of our nation's sustained productivity and economic growth over the last decade. For that reason we respectfully caution Members of Congress not to take any rash actions that will threaten our continued prosperity.

I want to comment briefly on the three bills, which are the subject of today's hearing: H.R. 4267, H.R. 4460, and H.R. 4462, all of which address Internet taxation. The first bill, H.R. 4267, the "internet Tax Reform and Reduction Act of 2000" incorporates the ACEC "majority" recommendations. H.R. 4267 would extend the moratorium on Internet access and discriminatory and duplicative taxes until 2006. H.R. 4267 also includes a "sense of Congress" provision encouraging States to work cooperatively with the National Conference of Commissioners on Uniform State Laws to develop a simplified and uniform sales and use tax.

CompTIA supports H.R. 4267, which clearly recognizes the need to simplify the multijurisdictional state and local tax structures before moving ahead with any other Congressional action.

The second bill, H.R. 4460, the "Internet Tax Simplification Act of 2000," embodies the "minority" report of the ACEC. H.R. 4460 also provides for a five year moratorium on state and local taxes on Internet access, but limits for only two years the moratorium on multiple and discriminatory Internet taxes. H.R. 4460 also authorizes interstate sales and use tax "compact agreements" for states that adopted a simplified and uniform sales and use tax system.

The third bill, H.R. 4462, the "Fair and Equitable Interstate Tax Compact Simplification Act of 2000," also would authorize an interstate sales and use tax compact. States entering the compact would be required to enact a uniform sales tax law and would be authorized to require certain remote sellers to collect tax on all consumer sales into a state.I would like to comment briefly on both H.R. 4460, and H.R. 4462, in particular the interstate "compact" authority provisions, which addresses the mandatory interstate and multijurisdictional tax collection for remote sales. One of CompTIA's most fundamental objections to both bills is the interstate compact authority mandating remote tax collection. Particularly troubling is the fact that the eventual terms of the compact are completely unknown. Aside from a very broad and general outline specified in these bills, the details are unknown. Respectfully, I believe Congress would be grossly negligent in its duties to approve any interstate compact agreement without first knowing the terms of the compact.

CompTIA applauds provisions encouraging tax simplification in both bills. However, simplification can mean a lot of different things to a lot of different people. There are over 6,500 taxing jurisdictions in the United States, when all State, county and municipal authorities are included. In simple terms, these bills ask Congress and the industry to buy a car without first taking a test drive and knowing the sticker price. Until the specifics of the "new Internet tax simplification" plan are developed and available for review, CompTIA cannot support the legislation.

Another very serious CompTIA concern is the precedent that would be set by a Congressional pre-approval of a compact agreement in which e- vendors are held to other state's laws. If Congress were to approve such a radical and fundamental concept of tax obligation and collection, what is next? Will Internet vendors next be asked to make sure their businesses comply with all the thousands of different state and local environmental, work safety, health, criminal and other laws and regulations?

Admittedly those laws also tilt the playing field from one state to another. However, we believe that it is healthy for states to compete with each other in order to attract businesses to establish themselves there. Granting compact authority, in advance of the development of mandated provisions, is bad public policy and would upset our fundamental Constitutional principles of interstate commerce.

Also, I feel it is incumbent upon the states to develop and implement comprehensive consumer education programs regarding Interstate tax collection before asking Congress to move ahead with any radical propositions. Under current state laws, consumers are required to pay state and local sales and use taxes on purchases outside their state. Numerous surveys show many consumers are unaware of their obligation. Most states have not initiated any significant debt management programs to increase compliance with this requirement. This is equivalent to a business not having in place an on-going program and procedures for invoicing its customers.

State and local governments have at their disposal a variety of underutilized free and inexpensive tools they could use to increase taxpayer compliance. Existing state and local agency public relations staff could be directed to develop and implement an aggressive program to educate their taxpayers of then' responsibility to pay those taxes. Potential vehicles could include press releases to print and electronic media in the state, op-eds and interviews with state or local tax officials, and many other actions. Prominent stand-alone educational materials could bc included with statewide taxpayer mailings such as annual tax forms and other communications with taxpayers at no additional cost in postage and minimal cost of printing.Until such programs are implemented it is impossible to determine if there is an underlying tax compliance problem in this area. If substantial state efforts prove only partially successful, then we must then ask whether the problem is sufficiently serious as to justify major changes in the Interstate Commerce clause of the Constitution. State budgets ended 1999 with a $35 billion surplus. Moreover states with high levels of Internet use have the largest gains in tax revenue, so if there is a need to act, it is not pressing.

For these reasons Congress should not be in any haste to enact any legislation undermining the Interstate Commerce clause and current judicial interpretations of nexus.

CompTIA applauds the provisions in both bills (I-I.R. 4460, H.R. 4462), which exempt small business owners from mandatory tax collection. Protecting small businesses both on-line and off-line is important to the health of our economy. In the off-line world, small businesses make up 75 percent of the economy. With more than one million business web sites in this country, they are also the vast majority of online businesses.

There has been a lot of discussion regarding the use of computer software as a reliable and cost effective tool for online tax collection. There is a potential role for the use of such software combines with outside parties to provide voluntary assistance to states in collecting sales and use taxes on purechases made outside of the state by their residents. However in addition to the policy challenges there are also technical challenges to automated state and local sales tax collection software.

Web based technology and business processes are being developed at a very rapid rate. For instance, there are web sites, which will almost instantaneously check a customer's credit and create a loan for the consumer as a third party service. Some of these web companies will guarantee a merchant very fast response times - frequently less than a minute - to do an entire credit check on a client and offer an appropriate loan package for the consumer's purchase. These "on-the- fly" web services are, in theory, available to any merchant wanting to access the web site and pay a fee for each loan presented.

Clearly if the web technology exists to offer such services, it is conceivable that similar, webbased approaches could be developed for computation of taxes on a transaction-by-transaction basis. However, there are three additional relevant points to consider here:

A. Current estimates suggest that the number of mobile web users will surpass "fixed site" users mid-decade. That means that certainly millions and perhaps billions of Internet users will be accessing the net from their phones and other wireless devices. Individuals will have multiple e-mail addresses and the net will need to react much faster than it does today to orders placed from net-based purchasers.

Many progressive "net-merchants" expect to see millions of orders being placed from handheld devices by very mobile consumers. For instance, a traveling businesswoman may place an order for a book while in the airport in Chicago, knowing her next stop is Atlanta and have the book delivered to her when she arrives in Atlanta. However, Atlanta isn't where the woman lives - she lives in Minnesota. Another example of the mobile utility of the net is perhaps best brought to light by other recent technology directions. It is now thought that at least 25% of the computer printers in operation by 2005 will be net connected and have their own net address. These printers will also have wireless receivers that will take a command!

from a mobile device. The concept here is that a mobile consumer will be able to access intellectual property (books, etc.) while on the go. They will download the book order information on their phone and store only the address of that book and its unique identifier number. Then when they pass by any printer (perhaps set up as a kiosk in an airport for example), the user will be able to send a very small amount of stored data to the printer and the book will print out for the consumer. Attributing that purchase to any specific jurisdiction will be virtually impossible.

B. As outlined earlier, consumers have a very poor understanding of their obligation to pay "use taxes" if they do not pay sales taxes in their respective states. Even if you conclude that it is technically possible to "on-the-fly" collect sales tax data on the Internet for different transactions, why couldn't the states themselves pay third party, web based companies to compile purchase information and simply send a bill to the consumer at the end of the year for their use tax payments. The same technology that many groups want merchants to use to ease the computation process would work equally well for use tax tracking.

C. If state and local governments wished businesses in other jurisdictions to assist them in their tax collection responsibilities the program would have to be voluntary for the policy reasons previously stated. It would also be in the interest of state and local governments to allow for flexibility in incentives to participating Internet companies. It is no different than when a company goes to a debt collection service to assist it in collecting its bills. This will allow state and local governments to maximize their net revenues (no pun intended). The greater the incentives they offer to companies outside their jurisdiction to provide them tax collection services, the more will participate. At the same time, state and local governments should not pay more than necessary. The market will determine the revenue maximizing formula as is does with commercial debt collection services.

CompTIA is also concerned about the privacy issues surrounding this type of software. As we speak, Congress is poised to consider any number of online privacy bills, including a bill that will create a task force to study online privacy. What privacy consideration has been given with regard to these software tax collection programs in light of the current privacy debate before Congress?

I would also like to mention the liability concerns associated with the tax collection software program. This includes potential liability for unauthorized disclosure of private information by independent third parties, overcharges or mischarges to consumer's credit cards by those parties, etc. I recognize small business exemptions have been mentioned in many proposals, but until more details are available, I want to take a moment to respectfully remind members of the subcommittee of the business liability risk involved.

Particularly for a small business on the margins, a large legal bill can spell the end of their business. Certainly online companies are no different than traditional companies in that respect. What is more, the legal action does not need to be meritorious, even an unwarranted legal action requires legal representation and the costs involved. I know Congress is aware of the burden unwarranted legal action can have on a small business because as members of the House Judiciary Committee, you spent considerable tune on tort and liability reform.

One reason the online world has been so exciting for businesses, is that many traditional barriers to competition have been removed. Many of the barriers of the bricks and mortar model, such as the cost of prime retail space, and newspaper and radio advertising budgets, are a must and cost dearly. However in the on-line world anyone can establish a presence on the Internet and compete with modest capital.

In closing I would respectfully encourage members of this panel and the Congress to continue working to keep this revolutionary technology free of regulatory and taxing barriers. I would like to thank the panel for inviting me to testify on this very important issue of Internet taxation. I would be very happy to address any questions you might have.

END

LOAD-DATE: July 1, 2000

Document 13 of 142.


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