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Document 12 of 142.

June 29, 2000, Thursday

SECTION: PREPARED TESTIMONY

LENGTH: 1703 words

HEADLINE: PREPARED TESTIMONY OF R. MICHAEL SOUTHCOMBE CHAIRMAN, IDAHO STATE TAX COMMISSION AND CHAIRMAN, MULTISTATE TAX COMMISSION

BEFORE THE HOUSE JUDICIARY COMMITTEE SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

BODY:
Good morning Mr. Chairman and members of the Committee. My name is Mike Southcombe. Since 1995 I have served as Chairman of the Idaho Tax Commission. In addition, I currently serve as Chairman of the Multistate Tax Commission, an organization of state governments committed to simplification of and compliance with state tax laws. Thank you giving me the opportunity to appear before you today to discuss the importance, complexities, and competitive nature of sales tax collection for states, brick and mortar retailers, and the burgeoning e-commerce industry. While I may paraphrase my statement at times, I ask that my complete remarks be entered into the record of this hearing.

It is without dispute that sales and use taxes are too disparate and complex. It is equally without dispute that the substantial problem of collecting sales or use tax from remote sellers is exacerbated by the speed of light expansion of the Internet and the incredible commercial opportunities it allows. To better illustrate the situation, the difficulties, and the ramifications, I would like to describe a situation that has occurred in my own state. This is an example that is very familiar to me--but you can see it happening in towns and states all across the country. Unfortunately, it is a situation that shows no bias -- it affects towns both large and small, and the damage inflicted upon Main Street businesses comes not just from other retail businesses located close by but also from remote vendors including catalog companies and Internet vendors that may operate out of a neighboring state or thousands of miles away.

In Idaho, we have several small towns bordering Oregon, a state that has no sales tax. When Idaho adopted the sales tax of 3% in 1965, the population of Payette County was 12,402, and the population of Washington County was 8,033. Most of the sales tax permits for these two counties were issued in the small, but vibrant, towns of Payette and Weiser.

Today, the population of Payette County is 20,846, up 68%; Washington County is 10,298, up 28%. However, the number of businesses catering to the retail customer has faded away. The sales tax has increased to a statewide rate of 5% while the base to which it is applied has decreased. Payette and Weiser are a reflection of this and a reflection of a national trend -- a decrease in the tax base that results in an increase in the tax rate.

Where did all the retail business in Payette and Weiser go? To the tax-free shopping in Oregon. In essence, Oregon has become Idaho's remote seller. Through advertising, retail establishments located across the border in Oregon have lured Idaho residents to their stores. However, because these Oregon businesses do not have a "physical presence" in Idaho, they have not created nexus with the state that would require them to collect and remit sales taxes on sales to Idaho residents. As a result of this type of activity, the retail business in Payette and Weiser and many other small towns like them has dried up.

The demise of the retail community in Payette and Weiser due to the competition of untaxed sales foreshadows what may well happen to Main Street businesses across America. Companies using electronic means to sell to consumers are implementing corporate structures that are intended to avoid the taxing jurisdiction of the states in all but the most obvious cases. Increasingly, goods and services are being sold without the applicable state and local sales taxes being collected with Main Street businesses facing a rising tide of unfair competition from remote sales. Tax-free remote sales will inevitably undermine local retail businesses and will threaten the viability of the sales tax that finances one-third of state and local services -- including services that substantially benefit interstate commerce.

The problem of tax-free remote sales arises from the concepts of physical presence nexus that currently limit state taxing jurisdiction. In an electronic, borderless world, physical presence standards of nexus are obsolete and unfair. Physical presence standards allow companies to make huge sales into states and to benefit from state and local services without having to participate on a fair and equitable basis in the tax systems that help finance those same services. Our federal system relies on state and local governments for a host of services that benefit the national economy. State and local governments provide the streets and roads over which commerce flows, including the goods sold by the remote seller. They provide the landfills that dispose of the packaging for those same goods. State and local governments provide remote sellers a system of laws and courts that protect the sales from beginning to end, including the safe and secure delivery of goods and services and the means of ensuring payment to the remote seller. Most importantly, for electronic commerce, state and local governments provide the educational systems from kindergarten through the university levels that have substantially contributed to this marvelous electronically connected economy. The physical presence standards of nexus prevent states and localities from being fairly reimbursed for the services they provide to interstate commerce -- including electronic commerce and results in discrimination against local businesses.

While the current circumstances surrounding the application of nexus standards are unacceptable, the majority report of the Advisory Commission on Electronic Commerce and the legislative language contained in HR 4267 will make the current situation even worse. These proposals provide special tax privileges to remote vendors -- and, if enacted, will cement in place obsolete concepts of nexus and will expand opportunities for remote sellers to capture market share based on an unfair tax advantage. If the majority report is enacted, traditional Main Street businesses will be unable to compete in the marketplace -- and the sales tax itself could be in danger of becoming a relic of the past.

Thus, I believe there are two core principles that should drive the debate on this issue.

First, fairness. Tax policy governing the application of nexus and sales and use tax laws must be fashioned in a manner that is fair to all retailers -- both brick and mortar retailers and all remote vendors. When the Supreme Court decided Quill in 1992, the World Wide Web was still a year away, and office supplies were still purchased in Main Street businesses and through catalogs. The Internet and electronic commerce were not even mentioned in the Court's decision. Today, if you log-on to the Internet and type the words "office supplies and equipment" you are referred to a listing of 3,173 websites offering merchandise for sale.

Thus, as we welcome a new participant into the retail arena, states and the courts need to reexamine the fundamental tax policy principles that have guided the marketplace thus far and consider readjusting those principles to insure that the retail arena remains a competitive and fair place to do business.

Second, simplification. The sales and use tax system must be streamlined and simplified. The need for this simplification has been magnified in the past several years with the advent of electronic commerce and the move by Main Street businesses to incorporate e- commerce operations into their business structures. State and local governments are best equipped to handle the task of simplifying their tax laws--and should be encouraged, not hindered, by Congress in their efforts.

States are involved in numerous efforts to simplify the sales tax. For the past couple of years, I have been involved in two sales tax simplification initiatives -- the Northwest Project and the Multistate Tax Commission's Sales Tax Simplification Committee. These projects are working on many issues, including common definitions of products in the tax base, a centralized vendor registration process, and uniform exemption administration procedures. Technology is also being examined. Washington State, for example, has developed a Geographic Information System (GIS) that provides a merchant hooked up to the Internet the ability to determine the precise tax applicable to a street address.

These various projects focus on different elements of the sales tax system -- but all are compatible and share a common goal. In fact, the recommendations of these projects are now being brought together into one effort, the Streamlined Sales Tax Project. As we sit here today, more than 30 states involved in the Project are meeting in Chicago discussing and drafting proposed statutory changes to the sales and use tax laws -- some of which are modeled after recommendations of the aforementioned efforts. These proposed changes will bring radical simplification and uniformity to the current out-moded sales and use tax system. Technology will also play a key role in the development of a new system. However, states are adamant that technology will not be a substitute for simplification.

Finally, as Members of the Committee depart for your districts and the upcoming recess, I urge you to pull out the Skymall catalog that will probably be in the seat-pocket on your next airplane ride. Many of the merchants participating in Skymall do not collect sales or use tax on their remote sales through their own catalogues. However, if you order something from the same merchant via the Skymall catalog, Skymall will collect and remit sales tax on your purchase to the proper jurisdiction. I ask, if companies like Skymall -- and organizations like the Boy Scouts of America -- have found a way to collect sales tax on remote sales, can't everyone?

Members of the Committee, the thought I want to leave you with today is simple: Congress should support and protect the sovereignty of the states to formulate their sales and use tax laws. In turn, the states will abide by the fundamental principles of good tax policy -- that is, implement a system that is fair to both businesses and consumers and insures continued vibrancy in the retail marketplace.

Thank you and I would be happy to answer any questions you have.

END

LOAD-DATE: July 1, 2000

Document 12 of 142.


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