Copyright 2000 Federal News Service, Inc.
Federal News Service
May 17, 2000, Wednesday
SECTION: PREPARED TESTIMONY
LENGTH: 1159 words
HEADLINE:
PREPARED TESTIMONY OF STANLEY S. SOKUL DAVIDSON & COMPANY, INC.
BEFORE THE HOUSE COMMITTEE ON THE JUDICIARY SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
SUBJECT - H.R. 4267: INTERNET
TAX REFORM AND REDUCTION ACT OF 2000
BODY:
Thank you for inviting me to testify today concerning the work of the
Advisory Commission on Electronic Commerce. As you know, I was appointed to the
Advisory Commission by Senator Lott, and represented electronic commerce
companies through the Association for Interactive Media, a trade association of
firms that do business on the Web.
I will focus my remarks on the
Internet sales tax question, which involves the nature and
scope of state powers. First, I would like to point out that states can and do
compel in-state businesses collect sales taxes on in-state sales, including
Internet sales. So please understand that while the media and others often couch
this issue as whether to "tax or not tax" the Internet, that is not the
question.
The Internet sales tax issue exists because
the states believe their taxing authority should mirror the Internet's
borderless nature. This belief, however, goes against the U.S. Supreme Court
ruling in the Quill case, that states lack the power to force out-of-state
sellers to collect sales (or "use") taxes, unless a seller has a physical
presence or "nexus" in the taxing state. The Supreme Court concluded that to
impose every state's sales tax system upon a multi-state seller would unduly
burden interstate commerce.
Thus, the Internet sales
tax issue is actually an out-of-state tax collection issue. In the
post-Quill context, the issue involves whether and under what circumstances
states should receive national tax collection powers.
The states and
cities support their pursuit of new national tax collection powers with doomsday
scenarios - the destruction of state and local revenue bases and the demise of
Main Street businesses. Contrary to these claims, recent Commerce Department
data showed Internet retail comprised just 0.6 percent of total retail sales.
Furthermore, state coffers and retail sales have been surging due, in large
part, to the economy's Internet engine. The majority of the Commission therefore
concluded that no dire need existed to rush to provide states with national tax
collection powers based on doom and gloom predictions.
The costs
Congress should examine include fairness costs, privacy costs, international
costs, and protectionism costs. First, the states argue it is unfair that
out-of-state companies do not confront the same tax obligations as in-state
retailers. The Supreme Court in Quill, however, found greater unfairness would
exist should the states get their way. The Supreme Court ruled it would be
unconstitutionally unfair for every state to burden out-of-state businesses with
disparate tax collection and auditing regimes. Congress' dilemma is to determine
which is more unfair- a single state imposing tax burdens on its own businesses,
or every state imposing tax burdens on out-of- state businesses.
Privacy
is another cost of expanded tax authority that Congress must address. When I go
into a Wal-Mart and buy something, I do not have to identify myself and my
purchase for the government. Some type of individualized tracking system would
be required for a multi-state Internet sales tax regime to
collect and remit taxes for the proper jurisdictions. Consumers are already
fearful enough of their privacy on the Web. If consumers feel that the
government will violate their privacy when they shop online, they are less
likely to utilize electronic commerce. The privacy implications of Internet
taxation remain largely unexplored. For this reason, the Commission adopted a
resolution I offered that urges Congress to study the privacy ramifications very
carefully. This resolution was one of the very few to gain the two-thirds
supermajority required to be considered a formal recommendation to Congress. (A
copy of this recommendation is attached.)
Third, a state
Internet sales tax system could have detrimental international
ramifications as well. Unless Congress approves an international tax collection
treaty - a tax WTO - a new state Internet tax system could not be enforced
internationally. For example, Mr. Chairman, Pennsylvania will most likely never
gain the power to compel European businesses to collect the Pennsylvania sales
tax on Internet sales to Pennsylvania consumers. As such, imposing a web of new
sales tax collection burdens on U.S. companies would disadvantage U.S. firms as
they sell to the domestic market (and could encourage them to move off shore).
This would be a perverse result.
The costs of using tax policy as a
protectionist competitive weapon also exist. Entrenched interests will use every
means possible to stamp out the new competition that the Internet empowers. It
should come as no surprise that the nation's major retail chains are spending
millions to back the state governments' national tax collection power quest. The
major retailers know that when the states gain national tax powers, new burdens,
and new barriers to entry, will be imposed on their electronic commerce
competition.
All of these concerns - fairness, privacy, international,
and protectionism - lead to a potential significant discrimination against
electronic commerce. For all these reasons, the majority of the Commission
believed that before granting states the national tax power they seek, Congress
should know the costs involved. A majority felt strongly that these costs cannot
be known and judged until the states demonstrate in detail how their new
national tax powers will be used. Our report therefore urges the states to
actually undertake their promised simplification effort first. Only after that
occurs, and the operational details of the states' Internet sales
tax plans are fully known, will Congress be positioned to judiciously
consider their desire to gain expanded tax authority and all of its
ramifications.
Finally, I believe this subcommittee should consider that
the Internet tax issue is a subset of a larger federalism issue that Congress,
and particularly this subcommittee, will repeatedly confront as the Internet
continues to mature: Under what circumstances should Congress give state laws
national effect in the borderless Internet environment? Should the states'
harmonizing their disparate regulatory regimes provide sufficient reason for
Congress to grant each regime national reach? The states' response to the
Internet thus far trends toward seeking expanded national power, not toward
undertaking internal reforms to maintain control within their borders. Does the
Internet mean the end of competition among the states - tax competition,
regulatory competition, policy competition - through Congress providing states
with national powers in exchange for implementing harmonized rules? The key
public policy question of the Internet era is not one of taxes, or privacy, or a
whole host of other issues - but rather one of the future of federalism.
Thank you again for the opportunity to testify, and I would be pleased
to answer any questions you may have.
END
LOAD-DATE: May 24, 2000 
