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Document 15 of 142.

June 29, 2000, Thursday

SECTION: PREPARED TESTIMONY

LENGTH: 1862 words

HEADLINE: PREPARED STATEMENT OF FRANK G. JULIAN

BEFORE THE HOUSE COMMITTEE ON JUDICIARY COMMERCIAL AND ADMINISTRATIVE LAW SUBCOMMITTEE

BODY:
Federated Department Stores, Inc. supports the "Majority Policy Proposal" contained in the April, 2000 Report to Congress submitted by the Advisory Commission on Electronic Commerce (the "ACEC"), which has been incorporated in H.R. 4267. Accordingly, we strongly support this bill.

The myriad of state and local sales tax systems that are in place today are too complex; these systems should be substantially simplified and made more uniform. In addition, we believe that all sellers that are required to collect sales tax should receive a meaningful collection allowance from the respective states to compensate them for the costs of collecting sales tax.

Finally, Federated believes that Congress should not pass any legislation that would give states the right to require sellers without physical presence in a state to collect that state's sales tax unless and until (i) the states substantially simplify their sales tax systems and make them more uniform, (ii) such simplification has been fully and fairly evaluated by an objective group, and (iii) all sellers are assured that they will receive a reasonable collection allowance for collecting sales tax. We believe it would be a big mistake for Congress to give prior approval to a simplification compact before the details of the simplification are known and evaluated. For that reason, we oppose H.R. 4460 and H.R. 4462. ****

United States House of Representatives Committee on Judiciary Commercial and Administrative Law Subcommittee Presentation of Frank G. Julian Operating Vice President/Tax Counsel Federated Department Stores, Inc. 7 West Seventh Street Cincinnati, Ohio 45202 (513) 579-7337 Regarding H.R. 4267, H.R. 4460 and H.R. 4462 June 29, 2000

Introduction

Good Morning. My name is Frank Julian. I am Operating Vice President and Tax Counsel for Federated Department Stores, Inc. in Cincinnati, Ohio. Federated is one of the nation's leading department store retailers. We operate more than 400 department stores in 33 states under the names of Bloomingdale's, Macy's, Lazarus, The Bon Marche and others. Federated also has a significant direct mail catalog and electronic commerce business with its Fingerhut, Bloomingdale's By Mail, Macy's By Mail and Macys.com subsidiaries.

Although Bloomingdale's By Mail, Macy's By Mail and Macys.com are each separate subsidiaries, they collect sales tax on sales into any state where Bloomingdale's and Macy's, respectively, have department stores.

Summary of Position

Federated supports the "Majority Policy Proposal" contained in the April, 2000 Report to Congress submitted by the Advisory Commission on Electronic Commerce (the "ACEC"), which has been incorporated in H.R. 4267. Accordingly, we strongly support this bill.

The myriad of state and local sales tax systems that are in place today are too complex; these systems should be substantially simplified and made more uniform. In addition, we believe that all sellers that are required to collect sales tax should receive a meaningful collection allowance from the respective states to compensate them for the costs of collecting sales tax.

Finally, Federated believes that Congress should not pass any legislation that would give states the right to require sellers without physical presence in a state to collect that state's sales tax unless and until (i) the states substantially simplify their sales tax systems and make them more uniform, (ii) such simplification has been fully and fairly evaluated by an objective group, and (iii) all sellers are assured that they will receive a reasonable collection allowance for collecting sales tax. We believe it would be a big mistake for Congress to give prior approval to a simplification compact before the details of the simplification are known and evaluated. For that reason, we oppose H.R. 4460 and H.R. 4462.

Discussion

The ACEC hearings raised an awareness, in an unprecedented manner, of the level of complexity burdening the current sales tax system. Even though the ACEC could not reach a two-thirds majority on the nexus issue, there was near universal agreement that the 46 different state sales tax systems are in dire need of substantial simplification.

Federated collects and remits over $1 billion per year in sales tax for the state and local governments where we do business. We incur substantial costs in collecting and remitting these taxes, and in administering the many audits that follow. Substantial simplification of the sales tax systems will make it much easier for the states to administer and enforce the tax, and will make it much easier for sellers to comply with the tax.

I would like to give you just a few examples of some of the burdensome complications and complexities of the current system:

1. Determination of Taxable Items. Determining the taxability of certain categories of products, such as clothing, food and medicine, is extremely complicated for a multi-state business. Several states exempt these items, in whole or in part, but the states all have different definitions and/or interpretations for the same general exemption. As a leader in the apparel industry, Federated is most familiar with the challenges imposed by the clothing exemptions. There are nine states with permanent or temporary clothing exemptions. Handkerchiefs, for example, are considered clothing, and thus exempt, in five of these states, but are not considered "clothing," and thus taxable, in the remaining four. Despite what you are likely to hear from others testifying today, the software that is currently available cannot accurately determine the taxability of all articles of clothing in these nine states, because each state has its own set of peculiar rules. To accurately tax an article of clothing in a multi-state environment, the retailer must assign one of dozens of "clothing product codes" to each and every item, or SKU, which that retailer sells. Whether you are an e-commerce retailer with 30,000 SKU's, or a department store with 3 million SKU's, the current compliance burdens are overwhelming. It is critical for the states to adopt single, uniform definitions of food, clothing and medicine, so that the "product code" decision is a simple choice. Although development of new software is also important, the key to success lies in simplification and uniformity.

2. State and Local Tax Rates. There are currently over 7,000 different state and local jurisdictions across the country that impose a sales tax. Although there is software available that can determine, with a reasonable degree of accuracy, the tax rate by Zip Code, there are many Zip Codes in which more than one sales tax rate applies. Before states are permitted to require remote sellers to collect sales tax, there should only be one sales tax rate per state. Moreover, as a matter of fairness and equity, this rate should apply to in-state sales as well as to remote sales. It would be grossly unfair to consumers as well as sellers if the states are permitted to impose one rate for sales made by remote commerce and another rate for sales made in local stores.

3. Collection Allowance. It is extremely expensive for sellers to collect and remit sales tax. Studies have shown that the cost to collect sales tax is typically greater than 3% of the tax collected. However, of the 45 states with a sales tax, only seven provide for an uncapped collection allowance of over 1%. As a matter of fundamental fairness, all sellers should receive a reasonable and adequate collection allowance for the sales taxes they are required to collect.

4. Exempt Customers. The sales tax systems should be able to accommodate purchases by customers that are entitled to various types of exemptions in a manner that does not impose burdens on either the seller or the customer. A non-exhaustive list of these exemptions includes: purchasers with resale certificates, purchasers with direct pay permits, sales to charitable organizations, sales to religious organizations, sales to foreign diplomats, certain sales to Native Americans, sales to governmental agencies, etc.

5. Privacy of Customers. Maintaining customer privacy will be critical to the success of a sales tax system, particularly for sales made over the Internet. Under no circumstances should a retailer ever be required to disclose the name and/or address of its customers to the states or to any agent of the states.

6. Third Party Gift Sends. Under current law, if a person who lives in California, for example, orders a gift to be sent directly to a third party in New York, neither state may impose a sales or use tax on the transaction. California has no authority to tax the transaction because neither title nor possession of the merchandise was transferred to the buyer in California. New York cannot impose its tax on the buyer because the buyer lacks nexus in that state, and it cannot impose its tax on the recipient of the gift since the recipient did not pay any consideration for the merchandise. A sales tax system will be constitutionally flawed if it is unable to recognize this type of transaction.

7. Applicability to Mail Order and Check Sales. The position of many who have commented on this issue presumes that all payments are by credit card, which, in fact, is not the case. A substantial portion of direct marketing customers pay by check, and for certain market segments, checks and money orders remain the preferred method of payment for a majority of customers. Sales tax systems must address the many difficulties associated with these type of sales.

This is far from an exhaustive list of the problems sellers face under the current sales tax systems or of the elements that need to be implemented before "substantial simplification" can be deemed to have occurred. These examples, however, make it clear that the existing sales tax systems are in dire need of substantial simplification.

The states have begun a process of developing a simplification model. To a large degree, however, they are working under a shroud of secrecy. Despite their good intentions, we believe that it will be virtually impossible for the states to successfully develop a truly simplified tax system without significant input and participation from several types of affected taxpayers, including direct mail and e- commerce vendors.

Moreover, Federated very strongly believes that there should be an independent, objective evaluation of any simplification adopted by the states before Congress passes any legislation that would permit states to require sellers without physical presence in a state to collect that state's sales tax. The language in H.R. 4460 and H.R. 4462 that gives prior authorization to the states' simplification program amounts to buying a pig in a poke. For these reasons, we oppose H.R. 4460 and H.R. 4462.

Finally, the states should not be permitted to require sales tax collection unless they provide for a reasonable and meaningful collection allowance to the sellers that collect the tax.

I sincerely appreciate the opportunity to testify before you today, and I will be happy to answer any questions.

END

LOAD-DATE: July 6, 2000

Document 15 of 142.


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