Copyright 2000 Federal News Service, Inc.
Federal News Service
April 12, 2000, Wednesday
SECTION: PREPARED TESTIMONY
LENGTH: 1188 words
HEADLINE:
PREPARED TESTIMONY OF DONALD BRUCE ASSISTANT PROFESSOR AND WILLIAM F. FOX
PROFESSOR CENTER FOR BUSINESS AND ECONOMIC RESEARCH THE UNIVERSITY OF TENNESSEE
BEFORE THE SENATE COMMITTEE ON COMMERCE, SCIENCE
AND TRANSPORTATION
SUBJECT - S. 2255, A BILL TO EXTEND THE
INTERNET TAX FREEDOM ACT THROUGH 2006
BODY:
Introduction
Good morning, and thank you for this opportunity
to address whether the Internet Tax Freedom Act (henceforth referred to as the
Act) should be extended through 2006. Let me begin by stating that we are in
agreement with the basic theme of the Act. That taxes should be levied in a
nondiscriminatory way is absolutely fundamental.
Our objection to the
Act's extension is that it represents the failure to act on an issue of
monumental importance. It places us on a policy trajectory that prevents
meaningful cooperative action to solve the problems at hand. First, such a
policy erodes the ideal of tax neutrality--the notion that decisions to produce
or purchase a particular good or service should not be made on the basis of
differential tax treatment. Second, extending the Act perpetuates reliance on
the Court-determined standard of nexus that is based on physical rather than
economic presence. A consequence of this is that future effort toward
simplification and improvement of sales and use taxes becomes even more
difficult, and state and local governments lose significant amounts of tax
revenue. Tax Neutrality
The primary issue in the greater debate is that
of tax neutrality. Essentially, the tax treatment of a particular good or
service should not depend on how that good or service is obtained for final
consumption. Differential taxation affects not only consumer decisions of where
to buy, but also business decisions of where to produce. In this electronic
world, both sides will go wherever they get the best deal--and taxes can make
the difference, thereby disadvantaging many regions of the country and many
traditional businesses.
This idea is presumably at the heart of the
original Act--- discriminatory taxes on internet
sales should be prohibited. However, nondiscrimination must go in both
directions. In other words, the tax treatment of
internet sales must not discriminate against local
bricks-and-mortar establishments.
To illustrate, consider the following
parallel with local infrastructure investments. A city that decides to renovate
a downtown street will inevitably subject a number of businesses--and their
customers--to tremendous inconvenience. Potential patrons will be less likely to
visit these establishments during the construction period, and the businesses
may have to close their doors as a result. These businesses probably will not
reopen after the completion of the construction.
In a similar manner,
the Act represents an investment in the internet as a transaction mechanism.
Nonetheless, subsidizing internet firms (through non-taxation) places a direct
comparative disadvantage on local retailers, inevitably forcing some of them out
of business forever.
Nexus and Revenue Implications
A key
component of the Act is its implicit acceptance of a definition of nexus that is
based on physical presence--effectively limiting each state's ability to enforce
collection of use taxes on remote sales. Extending the moratorium through 2006,
while delaying any cooperative effort between the Federal and state governments
toward sales and use tax simplification, will only make it more difficult for
states to collect sales and use taxes.Our research shows that revenue losses to
state and local governments, while not particularly large in the immediate term,
will grow dramatically under the status quo.
Admittedly, state and local
sales tax bases were already eroding as a result of the growth of all types of
remote sales, greater consumption of untaxed services relative to taxed goods,
and the continuation of legislated exemptions, long before the development of
the internet. E- commerce will only accelerate this historical trend, and will
result in an additional revenue loss of $10.8 billion by 2003.1
It has been argued in defense of this Act that states have enjoyed
strong revenue growth in recent years. It should be noted, however, that this is
a cyclical phenomenon--long-term revenue growth is not excessive. Similarly, the
robust growth of e-commerce is a result of convenience, price, quality of
service, and the like, and cannot be attributed solely to this Act. Taxing
remote sales like their local counterparts would certainly not kill the "golden
goose." To be clear, our position is neither for nor against larger
government--we are merely advocating the neutral, nondiscriminatory tax
treatment of all types of commerce such that state and local governments can
finance their activities as they see fit.
Policy Options
The
primary question, then, seems to be whether or not the sales tax should be
preserved as a source of state and local revenue. Extending this Act will permit
the continued erosion of sales and use tax bases due to the expansion of
e-commerce, and state and local governments will have no choice but to turn away
from our nation's primary consumption-based tax toward higher taxes on income
and wealth. As it generates nearly one-third of all state tax revenues, we are
of the opinion that the sales tax should be preserved, with the following
general modifications.2
First, Congress should replace the outdated
definition of nexus with one that is more in line with the modem economy--nexus
should be based on economic rather than physical presence. Firms that
significantly exploit a particular state's market should be expected to withhold
sales and use taxes for that state, regardless of whether or not the firm has
physical presence.
Second, in exchange for this broader definition of
nexus, states should be expected to implement substantial simplification
measures. Included in this would be each state's adoption of a single sales and
use tax rate and a state-specific definition of the set of taxable goods and
services, presumably drawn from a set of uniform product definitions. Whether a
bag of honey-roasted peanuts is "food" should be determined by a national
standard, while the decision of whether or not it is taxable (and at what rate)
should still be left to each individual state.
These simplification
measures would, in the process of restoring significant lost revenues, enable a
more streamlined and less burdensome collection process for remote vendors. More
importantly, production and purchasing decisions would then be based on
economically relevant factors rather than on differential sales and use tax
treatment.
Conclusion
It has been said that the sales tax is a
dying tax, and that e- commerce is just the thing to push it toward an early
grave. Our belief is that e-commerce can provide the incentive for Congress to
work with the states to improve our system of consumption taxation, such that
sales and use taxes can continue to be stable and significant sources of
revenue.
FOOTNOTES:
1 Donald Bruce and William F. Fox,
"E-Commerce in the Context of Declining State Sales Tax Bases," Center for
Business and Economic Research, University of Tennessee, April 2000.
2
For a broader discussion of these issues, see William F. Fox and Matthew N.
Murray, "The Sales Tax and Electronic Commerce: So What's New?" National Tax
Journal 50(3): 573-592.
END
LOAD-DATE: April
13, 2000 
