Copyright 2000 Federal News Service, Inc.
Federal News Service
February 2, 2000, Wednesday
SECTION: PREPARED TESTIMONY
LENGTH: 1332 words
HEADLINE:
PREPARED TESTIMONY OF CHARLES E. MCLURE, JR. HOOVER INSTITUTION STANFORD
UNIVERSITY
BEFORE THE SENATE COMMITTEE ON BUDGET
BODY:
I am pleased to have the opportunity to
appear before you this morning to discuss this important issue, about which a
great deal of misinformation has been disseminated. In my remarks I will
distinguish between the sales tax on intrastate
sales and the use tax on interstate
sales, including those made over the Internet.
Electronic Commerce Must Not Be Exempt from State and Local
Sales Taxes
Consider two scenarios for exemption of
electronic commerce from sales tax. Permanent sales tar
exemption for electronic commerce. A sales tax exemption for electronic commerce
would virtually eliminate the sales tax and centralize taxing power in
Washington, as virtually all sales could be structured as electronic commerce.
Since the sales tax accounts for nearly a third of the tax revenues of state
governments (and more than 10 percent of the tax revenues of local governments),
states would need to do one of three things: make massive reductions in
expenditures, increase other taxes dramatically, or petition the federal
government for financial assistance. I doubt that the American public wants any
of these changes. In particular, I doubt that they desire greater reliance on
state income taxes or on hand-outs from Washington. Temporary sales tax
exemption for electronic commerce. Some argue that electronic commerce should be
tax-exempt temporarily, in order to encourage its development. I disagree with
this position on philosophical grounds. As Ronald Reagan said in 1981, "The
taxing power of government must be used to provide revenues for legitimate
government purposes. It must not be used to regulate the economy or bring about
social change." Moreover, the days when a discriminatory tax-subsidy to
electronic commerce might have been justified are behind us. Why should we give
even a temporary tax break to an industry that is growing faster -- and creating
billionaires more rapidly -- than any in recorded history? History suggests,
that once granted, tax benefits are hard to eliminate.
Interstate
Electronic Commerce Should Not Be Permanently Exempt from Use Tax
A
permanent use tax exemption for interstate electronic commerce would have at
least four adverse effects. It would reduce revenues of state and local
governments; it would worsen the competitive disadvantage of Main Street
merchants, relative to out-of state vendors, it would discriminate against poor
consumers who do not participate in electronic commerce; and it would distort
the way business is done, and thus waste the nation's resources. Note
especially:
-- Assertions that revenue effects would be small are
ill-founded, because they overlook the possibility of establishing separate
entities for the conduct of e-commerce across state lines in order to benefit
from the tax exemption.
-- Exempting e-commerce would encourage
artificial choices of distribution channels -- including home delivery of goods
in individual packages that could more efficiently be delivered in bulk to Main
Street stores and sold there.
A Temporary but Non-statutory Use Tax
Exemption Would be Appropriate
A temporary exemption for interstate
electronic commerce -- but not a statutory exemption would be desirable. The
Supreme Court has rightly ruled that the state and local sales taxes are so
complicated that out-of-state vendors should not be required to collect use
taxes unless they have a physical presence in the state. Such vendors should
have an expanded duty to collect use tax only if the sales and use taxes are
simplified radically -- a process that will not be achieved quickly. A temporary
exemption would allow time for this simplification to occur. Moreover, because
of the potential growth in revenue loss, a temporary exemption would keep
pressure on state and local governments to simplify. A statutory exemption would
be a mistake.
-- It would be unnecessary because Quill provides a de
facto exemption. -- It would be unwise because of the risk of unintended results
-- that an exemption intended to be temporary would become permanent or be badly
drafted.
Academic Tax Experts Oppose Exemption of Electronic Commerce
Over 170 academic tax policy specialists -- economists and professors of
tax law -- as well as two winners of the Nobel Prize in Economics (Kenneth Arrow
and James Tobin) have endorsed the"Appeal for Fair and Equal Taxation of
Electronic Commerce" attached to this statement. (See Attachment 1.) I would
urge governors and state legislators, as well as members of Congress, also to
endorse this "Appeal." Let me read four key sentences from it:
1.
Electronic commerce should not permanently be treated differently from other
commerce. 2. Remote sales, including electronic commerce, should, to the extent
possible, be taxed by the state of destination of sales, regardless of whether
the vendor has a physical presence in the state. 3. There must be enough
simplification of sales and use taxes to make destination-based taxation of
sales feasible. 4. A means must be found to eliminate burdens of compliance on
sellers making only small amounts of sales in a state.
I call your
attention especially to those signatories whose affiliations include more than
an academic position. Note especially that, with three exceptions, all easily
explained, every Deputy Assistant Secretary of the Treasury for Tax Analysis
(the top tax policy position in the government commonly held by economists)
since 1975, as well as one former Assistant Secretary and two former Deputy
Assistant Secretaries for Tax Analysis have endorsed the Appeal.
The
View from Silicon Valley
These are not just the views of academics. At
least two high-tech California business groups, the Electronic Commerce Advisory
Council appointed by Governor Wilson and a group of top officers of high-tech
companies and venture capitalists meeting at the Hoover Institution in October
1999 reached similar conclusions, that remote vendors should be required to
collect use tax on interstate sales of tangible property. Of course, this would
require simplification.
Invalid Arguments for Exemption
Many
invalid arguments are being advanced for exemption of electronic commerce. Here
are several, with rebuttals.
First, "Remote vendors incur transportation
costs not borne by local merchants," and "States do not provide services to
remote vendors." To see that these two arguments are nonsense, consider remote
vendors located in a foreign country. Would anyone seriously suggest that
imports should not be subject to sales tax, just because foreign vendors bear
costs of transportation and do not benefit from state services?
Second,
"Electronic commerce stimulates economic activity" Advocates of exemption cite
increased truck traffic (and lunches eaten by truck drivers) as a benefit of
e-commerce. In fact, this activity could be evidence of inefficiency. If
increased use of parcel delivery is such a good idea, why not prohibit all sales
not made by vendors located in another state? Who needs local merchants?
What Kind of Simplification Is Required?
The required
simplification falls into three categories: First, tax bases must be made much
more nearly uniform; at the very least, states must adopt uniform definitions
(menus) of what might be taxable or exempt, including the conditions under which
sales to business are exempt. Second, it maybe necessary to limit use taxes to
one rate per state and to limit tracing of sales only to the state level.
Finally, compliance (for example, registration, filing payment of taxes, audit,
and appeals) must be simplified. Attachment 2 explains my view that fundamental
reform of the state sales and use tax is needed.
What Should the
Congress Do?
The Congress should do nothing now. Quill provides a de
facto exemption for electronic commerce. The immediate task is for the states to
simplify the sales and use taxes, as they should have a quarter century ago.
Quill also provides pressure for simplification.
Thank you.
END
LOAD-DATE: February 3, 2000 
