Copyright 2000 Federal News Service, Inc.
Federal News Service
February 2, 2000, Wednesday
SECTION: PREPARED TESTIMONY
LENGTH: 1043 words
HEADLINE:
PREPARED TESTIMONY BY AARON LUKAS ANALYST, CENTER FOR TRADE POLICY STUDIES CATO
INSTITUTE
BEFORE THE SENATE COMMITTEE ON BUDGET
BODY:
First, let me thank the committee for
the leadership it is showing on the Internet tax issue, and also for allowing me
to testify at this morning's hearing.
Electronic commerce has exploded
over the past several years. In the United States alone, approximately 39
million people made a purchase online last year--double the number of 1998
Internet shoppers. Total sales may reach $50 billion this year.
Such astonishing growth has many state and local governments worried that they
are not adequately prepared to tax this flood of new commerce. Contrary to the
claims of those governments, however, the current federal rules do not exempt
electronic commerce from taxation; they simply prohibit certain means of
collection. The federal government should continue to prohibit states from
imposing tax collection duties on out-of-state businesses by establishing a
uniform national jurisdictional standard for taxing e-commerce based on the
substantial physical presence test. Such a standard would reaffirm traditional
principles of tax fairness, preserve rate competition among states, and avoid
years of contentious litigation.
But before discussing what should be
done, let me state what should be avoided: Congress should reject any option
that effectively raises taxes---that results in more money for states and less
for taxpayers. In other words, simply authorizing states to compel use tax
collection from out-of-state businesses should be rejected out of hand.
Under the 1992 Quill Supreme Court decision, states can't compel sales
tax collection by an out-of-state business unless that business has a
significant connection to the taxing state--a legal concept known as nexus.
There are at least three important reasons to retain and perhaps strengthen the
current nexus standard.
First, there is no hint of a revenue crisis
facing states. The roughly $20 billion in 1999
business-to-consumer online sales represented less than 0.3% of total consumer
spending.
In an era of almost no inflation, state budgets grew by 5% in
FY97 and nearly 6% in FY98. Over the past four years, state tax collections have
exceeded expectations by about $25 billion. In addition, all
states will split $246 billion over 25 years from the 1998
tobacco settlement. With revenues pouring in so rapidly, it cannot credibly be
argued that electronic commerce is currently undermining the ability of states
to provide legitimate government services.
And in-state
sales will continue to be a dependable source of
tax revenue. Despite the growth of Internet
shopping, traditional retailers had a fantastic Christmas in 1999, enjoying a
healthy 7.7% increase in sales over the year before.
Why is that?
Because local stores cater to a customer's desire for a hands-on experience,
offer immediate gratification, and do not charge for shipping, they will
probably always dominate retailing. In addition, shopping is for many people a
pleasurable social experience that cannot be duplicated online. Thus, Internet
sales won't destroy "real" retailers, just as catalog sales haven't. The human
factor still drives shopping and that will likely always be true.
The
second and most important reason to limit state taxing authority over remote
transactions, however, is fairness. When a local business collects sales taxes,
there is a clear link among taxes paid, services provided and legislative
representation. Local firms benefit from police and fire protection, roads,
waste collection and other services, so it's proper that they help cover those
costs. Remote sellers don't enjoy any of those services, and shipping companies
already pay taxes to cover their use of public goods. To force a wholly
out-of-state business to collect taxes would be "taxation without
representation," pure and simple.
It is also important to note that
local businesses are tasked only with collecting taxes for the state where they
are physically located (origin-based taxation), while e-commerce firms are being
asked to collect taxes for every state when their customers live (destination-
based taxation). Ernst & Young has estimated that while collecting
$1 in taxes costs traditional retailers 7 cents, it could cost
Internet retailers as much as 87 cents. How is that a level playing field? The
bottom line is that only a state where a business is located should have the
right to compel sales tax collection.
Third, the current nexus standard
promotes tax competition among the states. Electronic commerce gives everyone
the opportunity to live on a virtual border-- o take advantage of the fact that
no state, although it is free to do so, currently taxes its exports or
voluntarily collects use taxes for other states. Like a real border, the
Internet can be a potent safety valve that guards against excessive taxation.
E-commerce allows consumers who have found it difficult to travel out of
state--the poor, the elderly, and the infirm to take advantage of tax
competition for the first time.
Remember that nothing currently prevents
a state from instructing e- commerce retailers within its borders to collect
sales taxes on all sales, regardless of the ultimate destination of the
product--exactly as brick-and-mortar sellers do. State officials are hesitant to
do this because they fear that businesses might decide to locate in other states
with lower taxes. They call that a "race to the bottom," but it's really just
healthy tax competition.
So what, if anything, should Congress do?
Legislation to codify and clarify the Quill nexus standard would help businesses
to know exactly when they are liable for sales taxes, just as federal law now
does for income taxes. Greater certainty would help to avoid years of pointless
lawsuits. Moreover, a uniform nexus standard would not adversely impact state
efforts to simplify their tax systems or encourage voluntary collection by
businesses.
Ultimately, there should be more equal tax treatment among
all forms of commerce, but that does not mean abandoning traditional principles
of tax fairness. Congress must not allow a phony revenue crisis to justify quick
passage of new taxing authority for states that would achieve fairness only by
treating all businesses badly.
Thank you.
END
LOAD-DATE: February 3, 2000