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

Document 6 of 142.

June 29, 2000, Thursday

SECTION: PREPARED TESTIMONY

LENGTH: 1996 words

HEADLINE: PREPARED TESTIMONY OF PETER LOWY CHIEF EXECUTIVE OFFICER WESTFIELD AMERICA AND FOUNDING CHAIRMAN THE E-FAIRNESS COALITION

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

BODY:
I am Peter Lowy, CEO of Westfield America, and Founding Chairman of the e-Fairness Coalition. I'd like to thank Chairman Gekas and Ranking Member Nadler for providing me the opportunity to speak on this important issue - and to discuss the legislation in front of this committee: specifically, H.R. 4462 which the e-Fairness Coalition supports and H.R. 4267 which we oppose.

Westfield America owns interests in 38 major shopping centers across the country, which are home to approximately 4,700 retail stores. In many communities, we are one of the largest contributors to the local tax base through the property taxes we pay and the sales taxes we generate.

The e-Fairness Coalition includes brick-and-mortar and online retailers, realtors, retail and real estate associations, and publicly- and privately owned shopping centers. Our Coalition represents 1.5 million retail stores ranging from Cody's Booksellers in San Francisco to national retailers such as Wal-Mart and Sears, as well as 1 out of every 5 American workers nationwide. Problems with Current Law

Currently, the law creates an unfair playing field where brick and mortar retailers collect sales taxes, but their on-line competitors are exempted from collection responsibility and unfortunately, HR 4267 aggravates this situation. Collecting a sales tax in a face-to-face transaction on Main Street or at the mall is a relatively simple process. The seller collects the tax and remits it to the state or local government.

But with remote sales, such as catalog and Internet sales, it's more difficult. Because of the Supreme Court's 1992 Quill decision, the states cannot require remote retailers to collect and remit sales tax when the seller does not have a physical presence in the state of the buyer. So states, and many localities, have laws that require the local buyer to send an equivalent "use tax" to the state or local government when he or she did not pay these taxes at the time of purchase.

The reality, of course, is that customers almost never do that. Firstly, most consumers don't even know that they owe this tax. Further, the way that collection occurs now is inconvenient for the customer. Finally, people aren't used to paying sales taxes in that way. So, despite the requirement in the law, this tax, which is already owed, is not paid. For years, state and local governments could accept this loss because catalog sales were a relatively minor portion of overall commerce. The Internet, however, has changed that.

As e-commerce grows - the loss of sales tax created by the transference of sales to the Internet will not be offset by use tax unless we make that collection system simpler and mandatory. Thus, the burden must be taken off of the consumer and replaced by the natural agent to collect these taxes -- the Internet retailer. Under a simplified tax system, this will need to amount to a virtually zero burden system for the remote retailer.

Otherwise, as tax-free online sales grow, estimated to be in excess of $100 billion in 2003, the states and cities will look for other revenue sources to offset uncollected sales and use tax from sales that have migrated to the Internet. By not allowing the collection of consumption taxes on remote sales, the sales tax base will shrink and lead to increases in other taxes - such as property or income taxes. Allowing sales tax collection on all sales will expand the tax base, which can lead to lower sales taxes for all consumers.

The Supreme Court's Quill decision stated that Congress has the authority to allow states to require the collection of sales and use taxes and that Congress should address the issue.

By taking no action on the issue of sales and use taxes, and instead, passing a 5-year moratorium extension that purposely avoids the real problem, Congress has encouraged companies to find ways to take advantage of the current loophole for online sales.

The Internet Loophole

Because of the business environment fostered by the current law, companies are being forced to find a way to compete with tax-free on- line retailers. That is, in order to compete, traditional retailers will need to find a way to avoid sales tax collection responsibilities. The solution to their problem is actually quite simple. Retailers with physical and online stores are setting up a corporate structure in a way that does not require the collection of sales or use taxes on on-line sales. In this arrangement, the online business is set up in a separate subsidiary that does not have a physical presence, or "nexus" in the state of the buyer, and is therefore not required to collect sales and use taxes.

Let me give you real world examples. Gateway competes with Dell Computer in the PC market. Gateway opened stores across the country to better serve their customers - this then forced them into a sales tax collection responsibility. However, Dell does not have to collect sales taxes because it does not have nexus in many states. Therefore, Gateway was at a competitive disadvantage. To compete, Gateway has set-up the online store as a separate subsidiary from the physical store and therefore does not have nexus, and now Gateway can avoid collecting sales tax also - thereby eliminating the competitive advantage that Dell had.

Barnes and Noble has physical stores all across the country. However, Barnes and Noble dot com (BarnesandNoble.com) collect sales taxes in only three states: New Jersey, New York and Virginia where it has a distribution center, its headquarters and its on-line site respectively.

Under the current system, retailers can set up terminals within their stores and encourage customers to come in, view merchandise, and then walk over to a terminal and make their purchase an Internet purchase right within the store. However, the terminal will be linked to a separate, wholly owned subsidiary of the company which owns the store, and will allow the customer to shop tax-free, with the merchandise shipped directly to the customer's doorstep. This will especially be true for high-ticket items such as refrigerators, electric appliances and computers.

Should Congress not address the current inequity in sales tax collection rules, more companies will create corporate structures that avoid sales tax collection responsibilities. While corporations would like to integrate their physical and online stores, discriminatory tax policies are forcing retailers to separate their on-line and in-store strategies.

In short, the current Internet business model has moved beyond the argument of pure e-tail versus brick and mortar stores. Successful companies are merging these channels of sales. However, our nation's discriminatory tax sales tax policies are hindering this integration.

The majority report of the Advisory Commission on Electronic Commerce, which is embodied in H.R. 4267, would exacerbate the problem by making it clear that online subsidiaries do not have nexus.

For example, an online buyer could return products to the physical store, and yet for tax purposes, the physical store would not create nexus for the online company. This proposal would encourage companies to contort their corporate structure for tax avoidance purposes. In our opinion, H.R. 4267 eliminates the need for nexus and will ultimately led to the disintegration of the states' sales tax system.

H.R. 4267 would also provide a tax exemption for all goods that could be sold in a digitized form. Therefore, all newspapers, CD's, movies, etc along with their digitized counterparts would be immune from state and local sales tax. This would clearly violate states' right. Thus, support for H.R. 4267 at its base level is support for the federal government interference in rights clearly given over to the states to raise revenue.

Support for a Level Playing Field

The message of the e-Fairness Coalition is simple: We support a "level playing field" so that all retailers - in-store, catalog, and online - all have the same sales and use tax collection responsibilities. Preferential tax policies and government subsidies for Internet retailers distort the market, and give Internet retailers an unfair competitive advantage.

Taxation of the Internet involves three interrelated issues.

1) Taxes on Internet access charges 2) Multiple and discriminatory taxes, and 3) Collection of sales and use taxes on retail sales made on the Internet.

We believe that there should be a fully integrated solution with regard to taxation and the Internet. While the House of Representatives has already passed a 5-year extension on the moratorium on internet access and on multiple or discriminatory taxes, the House has not dealt with the more important and more complex issue of sales and use taxes and e-commerce.

Therefore, the e-Fairness Coalition strongly supports the enactment of H.R. 4462, the "Fair and Equitable Interstate Tax Compact Simplification Act of 2000," introduced by Representative Spencer Bachus, and joined by Representatives Delahunt, Istook, and McCarthy as original cosponsors.

H.R. 4462 will provide a framework for simplification, and allow states to require collection when the simplification process is completed. The legislation authorizes the states to develop and enter into an Interstate Sales and Use Tax Compact. States that join the Compact would be required to adopt a simplified sales tax system. In turn, states adopting the simplified system would be authorized to require remote sellers above a sales volume threshold to collect use tax on all taxable sales into a state. The legislation provides Congress an expedited review procedure to consider the results of the Compact.

Congress must act to provide states the ability to lift the use tax burden off of consumers and provide all retailers with equal collection responsibilities. Allowing the states to require collection when the states meet the established criteria for simplification is a reasonable and necessary step for Congress to take.

The legislation is a necessary complement to the 5-year extension of the moratorium. Extending the existing moratorium without including language allowing the states to require collection from all retailers will mean at least five more years of tax free sales for internet retailers, and a strong likelihood that internet sales will be given permanent preferential treatment.

Extending the moratorium without addressing sales and use taxes will narrow the consumption tax base and lead to an increase in other taxes on businesses and individuals. Local and state governments may be forced to raise income, property, sales, or other taxes to make up for lost revenues. Without solving the sales and use tax issue, an extension of the moratorium could result in an increase in taxes to the consumer.

It is important to remember that sales and use taxes are consumption taxes paid by the consumer to fund schools, police, roads, and other services that benefit local consumers. The retailer is merely the collection agent. How a product is purchased - whether in a store or on-line - should not determine whether a consumption tax is paid. In either situation, the buyer receives a benefit from public services (like roads, police, and fire). Congress should support efforts to level the playing field and provide all retailers with equal sales tax collection responsibilities.

No one wants to "Tax the Internet" or provide discriminatory taxes on the Internet. Extending the moratorium without addressing the equitable collection of sales tax is an incomplete and counter- productive exercise. Congress must address all three issues: 1) Access taxes, 2) discriminatory taxes, and 3) sales taxes. Our nation's Internet tax policy should be fully integrated incorporating a permanent solution for all three issues. Therefore, the e-Fairness Coalition urges all Members of this Committee to co-sponsor and support Mr. Bachus' bill H.R. 4462

END

LOAD-DATE: June 30, 2000

Document 6 of 142.


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