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Document 3 of 142.

June 29, 2000, Thursday

SECTION: PREPARED TESTIMONY

LENGTH: 4098 words

HEADLINE: PREPARED TESTIMONY OF SENATOR STEPHEN SALAND NEW YORK SENATE VICE PRESIDENT NATIONAL CONFERENCE OF STATE LEGISLATURES

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

SUBJECT - H.R. 4267, H.R. 4460, H.R. 4462

BODY:
Chairman Gekas, Ranking Member Nadler and members of the Subcommittee on Commercial and Administrative Law, I appreciate the invitation to testify before you today on behalf of the National Conference of State Legislatures. The National Conference of State Legislatures is a bi- partisan organization representing every state legislator from all fifty states and our nation's commonwealths, territories, possessions and the District of Columbia.

I am pleased to have the opportunity to speak to you about state and local taxation of electronic commerce, particularly, the ability of state and local governments to collect the sales and use tax presently owed on transactions which occur on the Internet through remote sellers. Let me make clear, state legislators are not advocating any new taxes on electronic commerce. We desire, however, to create a streamlined sales and tax collection system to more efficiently collect the transactional taxes legally imposed by our states.

Electronic Commerce and the States

Let me first acknowledge that there is much misinformation being disseminated that state governments view the Internet and Electronic Commerce as a "cash cow" and we, as state officials, are salivating for our prime cut. This is simply not true. Speaking for my colleagues, we recognize the vital economic force that the Internet and advanced telecommunications services will be for our states and our nation. We also are as concerned as you are about the unintended consequences of obsolete, discriminatory or multiple taxes on this vital new technology.

It is important to note for the record that no state has enacted any Internet specific taxes. In some states where a tax on Internet access was grandfathered by the Internet Tax Freedom Act of 1998, state legislatures have worked to repeal those taxes. For example, the state legislatures in Connecticut, Iowa and the Wisconsin state Assembly have voted to do so With that said, we need to make clear that state legislatures are equally concerned about the impact that sales tax free electronic commerce transactions will have on state revenues and the unfair competitive burden it will have on small main street businesses, the life blood of many of our small towns and communities. I am sure many of you each year are asked to help sponsor a little league team or take an ad in a high school yearbook somewhere in your district. Your hometown brick and mortar store does that every year. Will America Online, Time Warner, Amazon.com, Microsoft, or Cisco sponsor the little league team next year or support your local boy and girl scout troop? I think you know the answer.

For the record, let me state that, State legislators recognize the role that a strong telecommunications infrastructure will play in future economic growth In the last five years state legislatures and governors have reduced taxes by over $25 billion. And as long as the economy remains strong, tax reductions will continue Most states do not tax Internet access charges and the trend is to exempt them. And even in states that do tax Internet access, a 5% to 8% tax imposed on the customer is not going to measurably affect demand for Internet access. America Online increased prices by 10% in 1998 and its revenue base, stock price, and market position remain strong If business is concerned about taxes on the "Internet," they should be talking to Congress. Most of the current taxes on the "Internet"

are federal excise taxes, access charges, and other taxes and "fees" on the telecommunications providers that are the backbone of the Internet -- not state and local sales and use taxes.

Our concern at the state level is the future of our primary consumption tax -- the general sales and use tax. This tax provides about one-third of state revenue -- over $150 billion in 1998 -- with most of the funds used to finance K-12 education.

Sales Tax Popularity

As we all know, taxes are not very popular. However, if state and local governments are to provide necessary services, like education and public safety, then we need to maintain our ability to levy taxes. In surveys of taxpayers as to which tax of all the major federal, state and local taxes they dislike the least, the surprising answer has been the sales tax. Voters all over the country have approved local sales taxes to pay for sports stadiums, added police protection, land acquisition for open space, and transportation improvements. The taxpayers of the state of Michigan overwhelming voted to use the sales tax as opposed to property tax as the major source of revenue for education and then the next year, they voted to increase the sales tax.

As you know, the sales tax is imposed on the customer, not the seller. Sellers collect the tax on behalf of state and local governments and pass this money along to them. Many states pay merchants for this service, typically allowing them to keep between 1 and 3 percent of what they collect to offset the administrative cost.

Sales Tax and Electronic Commerce

The problem states have with the sales tax is that the base keeps shrinking. In the 1930s, when the sales tax was first imposed, consumers bought goods from the local merchant and it was not that difficult for the merchant to collect a few cents on the dollar. Also, most Americans spent very little on services -- they spent most of their money on taxable goods. And there were very few "remote sellers."

In the 1970s and 1980s, the share of personal consumption expenditures began to shift from taxable goods to services -- things like medical care, health clubs, legal and accounting services. So the sales tax was applied on a smaller and smaller share of tangible products. This was compounded on the goods side by mail order outlets selling goods without collecting sales taxes from their customers -- a practice sanctioned by the U.S. Supreme Court in the National Bellas Hess case in 1967 and reaffirmed in the Quill decision in 1992.

Today, states face a new threat to sales tax revenue, electronic commerce, with the potential to dramatically expand the volume of goods sold to customers without collection of a sales or use tax. The combined weight of the shift to services and the tax erosion due to electronic commerce threatens the future viability of the sales tax and essential governmental services such as education and public safety.

According to the Center for Business and Economic Research at the University of Tennessee, by 2003 states will lose $ 11 billion in sales tax revenue due to the emergence and growth of electronic commerce.

This amount will continue to grow each year. The following is a list of the revenue losses for those states which have a member serving on this Subcommittee:

State 2003

Pennsylvania $ 358 Million

New York $ 849 Million Alabama $ 145 Million California $ 1.493 Billion Florida $ 754 Million Illinois $ 454 Million Louisiana $ 244 Million Massachusetts $ 163 Million Michigan $ 407 Million North Carolina $ 239 Million Ohio $ 361 Million South Carolina $ 124 Million Wisconsin $ 172 Million

Let me pose a hypothetical question. What would happen if the federal government allowed customers to avoid paying federal airline ticket excise taxes if travelers purchased their tickets over the Internet, but kept the tax in place on purchases from travel agents? That would give air travelers with access to the Internet a 10% price discount and provide a tremendous incentive to buy over the Internet. Obviously, travel agents would disappear and federal revenues would dry up in a hurry. To some extent, this is the same situation that state and local governments face with the sales and use tax on Internet purchases.

As state legislators, we recognize that we have been part of this problem. We have created a confusing, administratively burdensome tax system with very little regard for the compliance burden placed on multi-state businesses. Last year, NCSL passed a resolution, written by NCSL's Task Force on State and Local Taxation of Telecommunications and Electronic Commerce, that acknowledged that states need to simplify their sales and use taxes and telecommunications taxes for the 21st Century. We recognize that we have been a key part of the problem -- and we also are the solution In our resolution, we formulated a set of seven principles that we used to develop a proposal for simplifying and streamlining state and local sales and use tax collection systems. These principles are:

First, that state and local tax systems should treat transactions involving goods and services, including telecommunications and electronic commerce, in a competitively neutral manner; and

Second, that a simplified sales and use tax system that treats all transactions in a competitively neutral manner will strengthen and preserve the sales and use tax as vital state and local revenue sources and preserve state fiscal sovereignty; and

Third, that the Internet and Internet vendors should not receive preferential tax treatment at the expense of local "main street" merchants, nor should such vendors be burdened with special, discriminatory or multiple taxes; and

Fourth, that states recognize the need to undertake significant simplification of state and local sales and use taxes to reduce the administrative burden of collection; and

Fifth, that under such a simplified system remote sellers, without regard to physical presence in the purchaser's state, should be required to collect sales and use taxes from the purchaser and remit such taxes to the purchaser's state; and

Sixth, that NCSL encourages current and future cooperative efforts by states to simplify the operation and administration of sales and use taxes; and

Seventh, that NCSL will continue to oppose any federal action to preempt the sovereign and Constitutional right of the states to determine their own tax policies in all areas, including telecommunications and electronic commerce.

Streamlined Sales Tax Project

Since September of 1999, state legislators, governors, local elected officials and state tax administrators have worked to develop the Streamlined Sales Tax Collection System for the 21st Century. I am pleased by our progress, and I would like to take a few minutes to tell you the status of the Project.

The Streamlined Sales Tax Collection System will allow state and local governments to reduce or eliminate the costs and burdens of sales tax compliance, especially for remote sellers.

The key features of the Streamlined Sales Tax System are SIMPLIFICATION of sales and use tax laws and administration; the use of TECHNOLOGY for calculating, collecting, reporting and/or paying the tax through "certified" tax calculation service providers; and the STATE ASSUMPTION of the COSTS of the system for remote sellers.

Participation in the Streamlined Sales Tax Collection System is VOLUNTARY both for the vendors and for the states.

Simplifications being drafted by the Streamlined Sales Tax Project: Uniform product codes; Uniform sourcing rule; Uniform procedures for exempt transactions; Uniform definitions for use; Uniform deduction for bad debts; Central, one-stop registration system; Limits on the frequency when rate changes may be made; Required advanced notice of changes; Remittance of tax to state level only, states to remit to the local governments

State Involvement in the Streamlined Sales Tax Project

In January of this year, the NCSL Task Force on State and Local Taxation of Telecommunications and Electronic Commerce drafted and along with NCSL's full Executive Committee unanimously approved model legislation to authorize a state's participation in multi-state discussions. These discussions will lead to the development of a more simple, uniform, and fair system of state and use taxation that removes the burden imposed on retailers, preserves state sovereignty, and enhances the ability of U. S. firms to compete in the global and information economy.

It was the only second time in NCSL history that NCSL produced and advocated the passage of model legislation in the states. In January we anticipated that if six to eight states authorized the multi-state discussions by the end of this year's legislative session, we would be able to declare solid movement by the states to streamline their sales tax systems. Instead 18 states have formally joined the multi-state discussions either through enactment of legislation or an executive order by the Governor and action is still pending in another five states.

As of June 29, 2000: Florida, Iowa, Kansas, Kentucky, Maryland, Minnesota, Oklahoma, South Dakota, Tennessee, and Wyoming enacted legislation to enter into multi-state discussions. In Louisiana, Michigan, Missouri, Nebraska, North Carolina, South Carolina, Utah and Wisconsin, the governors issued Executive orders including their states in these discussions, though legislators in Missouri, Nebraska and North Carolina are moving resolutions endorsing their governor's action. The authorization legislation is currently pending in California (passed Senate), Illinois, (Passed both Houses), Ohio (Passed both Houses), Pennsylvania and Rhode Island (Passed Senate). Legislatures in Alabama, New Mexico and West Virginia also introduced the legislation, but were unable to enact the bills before their adjournment. We expect to have 23 states as active participants in the project by the end of this year.

A number of states wishing to observe the discussions and are awaiting possible action within their respective state legislatures or executive action are: Arkansas, Colorado, Connecticut, Idaho, New Jersey, New Mexico, North Dakota, Texas and Washington.

The quick response to NCSL's model legislation by the state legislatures is unprecedented. The current activity by 23 states is a sign that state legislatures are serious about taking action to streamline and simplify their sales tax collection systems.

The tax and revenue commissioners from the states listed above have been meeting since February and are moving quickly to have draft legislative proposals ready to submit to NCSL's Task Force on State and Local Taxation of Telecommunications and Electronic Commerce by November of this year. It is our hope that the Task Force and our Executive Committee will be able to recommend these model bills to our colleagues for consideration as early as January 2001. The members of the Streamlined Sales Tax Project are meeting as we speak in Chicago, and will continue to meet on a monthly basis.

The Streamlined Sales Tax Project also will have a pilot project in the field by October of this year and will run through the Christmas season. The pilot project will include four or five states, and four and five retailers. The retailers will include at least one brick and mortar vendor, one click and mortar vendor and one vendor who conducts business solely online. The pilot project will test the technology that has been developed to determine the proper sales tax rate based upon the destination of the product and even collect the sales tax if the vendor so chooses.

The Streamlined Sales Tax Collection System is moving successfully. We would urge the Congress to let the states fix their sales and use tax systems without any interference or mandates.

Both President Clinton and Congressman Christopher Cox of California have said that the sales and use tax system should be simplified at the state and local level, not in Washington, and especially not by Congress We would recommend to Congress that it not rush to consider or approve legislation incorporating either the majority report, H.R. 4267 or the minority report, H.R. 4460, of the Advisory Commission.

INTERNET TAX MORATORIUM

First, let me make clear, NCSL opposes the extension of the current moratorium on state and local taxes applied to Internet access The current moratorium on Internet access taxes as established in the Internet Tax Freedom Act of 1998, does not expire until October 21, 2001, some 16 months from now. Not one of the sponsors or advocates of this legislation has put forward a sound public policy explanation as to why a moratorium which does not expire until late next year, needs to be extended this year. We are disappointed that this Committee and the House Commerce Committee have failed to hold a single public hearing this year on the need to extend the moratorium, almost a year and a half before it expires Today, we know Internet access generally refers to the $19.95 (+/-) consumers pay for their monthly access to the "net" through America Online, Mindspring, Microsoft and so on. However, as we witness the convergence of technologies and industry giants, what will Internet access mean in three years, or five years and so on. For example, telephony technology is quickly improving to allow consumers to actually make telephone calls and speak over the Internet. Thus, consumers may soon be able to make long distance or local calls while online at no additional cost, other than the fee paid for Internet access. You can already download free service from such sites as "freephone.com," "Net2phone.com," or "MediaRing.com." Current state revenues will decline, as states will be unable to tax these long distance or even local telephone calls. This also would put telephone companies at a competitive disadvantage to Internet service providers As the industry mergers continue, consumers will soon be receiving their telephone, cable television and Internet service from the same vendor. The vendor will be able to bundle all these services for one price under the banner of Internet access. If states and local governments are prohibited from ever taxing Internet access, then states and localities would have to find new revenue sources to make up for the loss from not being able to tax telephone and/or cable services.

H.R. 4267 also would repeal the grandfather clause enacted in the original Internet Tax Freedom Act, as does H.R. 3709 approved by the House last month. The grandfather clause allowed those states presently collecting a tax on Internet access the ability to continue to do so. If either of these bills became law, the states of Connecticut, Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington and Wisconsin would face a reduction in current revenues. Total loss in 2000 to the listed states over $ 75 million. This loss combined with future revenue decreases from the prohibition on Internet access has been determined by the Congressional Budget Office to be an unfunded federal mandate on state and local governments under the provisions of the Unfunded Mandates Relief Act of 1995.

Advisory Commission Report - H.R. 4267

Finally, let me briefly discuss our concerns and opposition to H.R. 4267, which contains the majority report of the federal Advisory Commission on Electronic Commerce.

If adopted by the Congress, this proposal by the business members on the Advisory Commission would result in an immediate loss of over $30 billion in "current" state and local tax collections. Furthermore, according to Charles McClure, former tax policy expert in the Reagan administration, the loopholes created under this proposal would permanently eviscerate the sales and use tax as a future state and local revenue source. Here are some of the most egregious provisions of the proposal:

H.R. 4267 would impose a five year moratorium on sales and use taxes on digitized products and their "non-digitized counterparts." In effect, any sales and use tax on products that could be sold in digital form -- books, compact disks, newspapers, magazines, and so on would be prohibited by federal law. This provision strikes at the very heart of states' ability to determine their own tax base and will reduce existing state revenues by at least $6 billion per year. This provision should really be called the "Pornography Growth Initiative" as the one of leading digitized products being downloaded everyday, tax free, are pornographic pictures, and movies. Why Congress or the Advisory Commission would want to give the pornography industry a competitive economic advantage is something few if any of your colleagues in the state legislatures can understand.

Additional loopholes for sales tax avoidance. The proposal would allow companies to set up tax-free kiosks in their brick and mortar stores. Companies that shipped goods to customers ordering from these kiosks would not be required to collect sales and use taxes. Over time, sales tax collections from "Main Street" stores would be severely eroded as companies encouraged customers to order "tax free" from their web sites. This proposal would result in a $15 billion per year reduction for state and local governments.

New loopholes for corporate income tax avoidance. Under this proposal companies could perform numerous activities in a state without creating nexus for corporation income taxes. Estimated loss of revenue to states, at least $10 billion.

Creates federal government oversight and possible pre-emption of state and local telecommunications taxes. Requires states to reduce taxes on telecommunications companies and shift to a single statewide tax, or face federal sanctions, including pre-emption of telecommunications taxes. NCSL and our Task Force have been working closely with the telecommunications industry to develop model legislation to reform our state and local telecommunications taxes.

Mandates one sales and use tax rate per state for all remote commerce. A single rate -- even if it only applies to remote sales -- is a deal killer in a dozen or more states and raises a host of problems. First, it preserves a dual system for nexus and non-nexus merchants that will prevent states from simplifying the sales and use tax system for "clicks and mortar" retailers. Sellers with physical stores and remote operations will face two sets of tax rates, frustrating efforts at simplification for all types of retailers. The Streamlined System being developed by the states would create a single system for all retailers. Businesses and technology companies tell us that the rate issue is the easiest one to overcome with technology. It is not necessary to mandate a single rate in a simplified system.

- Second, the dual system will lead to continued litigation over nexus because different rates will be charged based upon the seller's nexus status. The Streamlined Sales Tax System being developed by the states would make nexus irrelevant and treat all sellers the same. Finally, we anticipate that some state legislatures could not support a blended rate that would increase tax rates for some taxpayers. The alternative -- choosing the lowest rate in the state -- could cause powerful cities to oppose such a system. Businesses located in areas with high tax rates that now "self-report" use taxes would have incentives to buy from remote vendors.

This industry tax grab, if adopted, would permanently erode states' sovereign power to control their own tax policies and place Congress in the position of dictating state sales and use, corporation income, and telecommunications tax policies.

The National Conference of State Legislatures encourages you and your colleagues in the 106th Congress to do no further harm this year to your state and local governments. We would urge you to let the states proceed with the Streamlined Sales Tax Project. If by this time next year, we have failed to make real progress in simplifying our sales and use tax system, then we would be willing to work you on a reasonable Congressional solution. We respectfully request that you take no further action on extending the moratorium or on the legislation before this Subcommittee this morning.

Finally, with only good thoughts for the work you do here in our nation's capitol, let me remind you that the state legislatures in the next two years will be spending some time in a once in a decade event, redistricting congressional districts based on the this year's Census count. We would remind the honorable members of the House of Representatives that though you may send most of your time here in Washington, I am sure you still want your state legislature to make sure that you have some nexus back home Thank you for this opportunity to discuss the state legislative viewpoint on state and local taxation of electronic commerce and telecommunications.

END

LOAD-DATE: June 30, 2000

Document 3 of 142.


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