Copyright 2000 Federal News Service, Inc.
Federal News Service
April 12, 2000, Wednesday
SECTION: PREPARED TESTIMONY
LENGTH: 2955 words
HEADLINE:
PREPARED TESTIMONY OF MICHAEL LEAVITT GOVERNOR OF UTAH MEMBER OF THE ADVISORY
COMMISSION ON ELECTRONIC COMMERCE ON BEHALF OF THE NATIONAL GOVERNORS'
ASSOCIATION
BEFORE THE SENATE COMMERCE, SCIENCE
AND TRANSPORTATION COMMITTEE
BODY:
Mr.
Chairman and members of the committee, I am Michael Leavitt, Governor of Utah. I
am here today not only as a member of the Advisory Commission on Electronic
Commerce, but also on behalf of the National Governors' Association. Thank you
very much for the courtesy that's been extended to me this morning.
No
other innovation -- no other way of doing business has revolutionized our
nation's economy faster than the Internet. It took generations for the
Industrial Revolution to play out around the world. The Internet Revolution has
unfolded before our eyes, in less than a decade. The speed of this change has
been astounding. In the Industrial Age, as change took place, governments were
able to react accordingly. In the Internet Age, today's innovation is tomorrow's
standard. Government must act on Internet time.
Congress, as well as
state and local governments, need to function in this new economy by
facilitating its continued expansion. In one area, we have an opportunity, if
unencumbered by the federal government, to do just that-to create a radically
simplified and streamlined sales tax system that eliminates the burdens from our
current horse and buggy system. And I believe we came dose in the commission to
achieving a balanced approach, a fair approach with a level playing field. I
remain convinced that the states are already moving rapidly in the fight
direction, and I remain convinced that the high tech industry, the nation's
retailers, and states and local governments could reach consensus amongst
ourselves.
Any thoughtful discussion on e-commerce must include the
following key issues:
1. The proper relationship between the federal
government and the states on issues of taxation, and which levels of government
ought to bear the responsibility for determining and financing the needs of
their citizens and businesses;
2. The necessity of keeping tax policy
neutral so that neither traditional retailers nor remote sellers (catalog,
Internet, or similar enterprises) are given an advantage based on tax policy;
3. The need to stop erosion of essential revenue streams that support
education and other key public services at the local level.
Governors
are vitally concerned about any action that could negatively affect the vast
majority of retailers most of them small businesses, by the way -- as well as
their employees in our states, and erode the revenue source most important to
the provision of education, public safety, and transportation services to the
American people and businesses.
Extending the Moratorium
On
behalf of the National Governors' Association, we oppose S. 2255, which would
extend the provisions of the Internet Tax Freedom Act (ITFA) for an additional
five years. Since the current moratorium does not expire until October of 2001,
there is no compelling need to act at this time. This is particularly true since
the technology is changing rapidly and creates substantial uncertainty with
regard to unintended consequences. A rush to judgment on this matter could be
detrimental to the Internet and electronic commerce industry, to Main Street
America, as well as to state and local governments and all of our citizens who
rely on government services every day.
Some of the technology issues
that create uncertainty with respect to impacts include: Bundled services;
Discriminatory Tax Definition; and Internet
Telephony.
These issues have little or nothing to do with the
sales tax collection issue that has dominated debate on
extension of the ITFA. They are, instead, the result of the rapid pace of
technological change and developments since the ITFA was originally enacted. We
believe it is important to the Internet industry as well as state and local
governments that you address these issues as part of any extension of the ITFA.
Failure to address them is likely to mean that the ITFA does not meet the
expectations of Congress.
Future of the Sales Tax
The Advisory
Commission report very directly raises the issue of the future of the sales tax
in our country--the single most important source of revenue in America for
public education, and which level of government ought to be responsible for
determining and meeting the education, public safety,transportation, and
infrastructure needs of our citizens. The central issue between the states and
federal government as it relates to e-commerce is not about new taxes on the
Internet, but rather how the states will collect taxes already on the books, and
whether states will remain sovereign in their right to collect those taxes.
In Utah and other states, we strongly oppose any new taxes on the
Internet. We should not seek to enrich our state or federal coffers with new
taxes just because of new technology and new methods of delivering goods.
There is no more fundamental responsibility for any of us elected to
office than to that of representing our respective constituents and taxpayers.
The concept of reciprocal immunity is an inherent part of our federal system,
consistent with the basic sovereignty states retain under the 10th amendment to
the constitution. For decades the states have had the authority to enact and
modify sales tax laws and their complement use tax laws. Use tax laws have been
effectively enforced for decades as it relates to business purchases.
The ACEC report asking Congress to impose unfounded mandates on states
and local governments in excess of $30 billion annually through
the preemption of existing taxes and creation of special privileges for certain
kinds of companies through changes in state and local income, business activity,
property, and sales and use taxes simply boggles any concept of our appropriate
responsibilities to our respective citizens.Is it possible that the federal
government will override long-standing state policies in each of these areas
that vary so dynamically from one state to the next? Once successful in this
regard, will we see additional actions of the federal government? Will the
federal government declare that income taxes can no longer be applied to the
software engineers who build the websites involved? Will dot. com firms'
warehouses be exempted from property taxes by action of the federal government?
Such an action would clearly violate the sovereignty of the states to
enact and enforce sales and use taxes.
Imagine where that slippery slope
leads in the years ahead -- congressional tax cuts imposed by eliminating state
taxes! The taste of enacting tax cuts that don't reduce federal revenue could,
of course, easily prove to be addictive.
What about the elimination of
state use tax on equipment necessary to reduce environmental emissions? Why not
override states authority to tax diesel fuel that is used to transport goods
across state lines? How about an end to income taxes for teachers? Or firemen?
The opportunity for mischief is unlimited.
Only with state action to
efficiently collect existing taxes will our traditional main-street retailers
compete with the new world of e- commerce on a level playing field, and will our
funding base for critical services be preserved for the years to come.
There is no question that the federal government has the right to
regulate interstate commerce. But it would be virtually unprecedented for the
federal government to stomp on the most basic rights of the citizens and
taxpayers of each and every state by determining how they may or may not raise
revenues.
Creating a Level Playing Field
Any action taken by
this committee should guarantee assistance towards achieving a streamlined sales
tax system for the 21st century, a level playing field for all businesses, and
no special privileges. In the face of the impending transformation of retail
shopping, government tax policy must remain neutral. It is not the time to have
government tilt competitive forces in favor of either traditional retailers or
emerging electronic retailers. Unfortunately, without the states effective
enforcement of our current laws -and with the passage of proposals like that
proposed by the Commission -such government- sponsored special privileges will
result
We nineteen members of the Advisory Commission on Electronic
Commerce (ACEC) gathered research, heating and reviewing testimony from
interested parties, sifting through proposals and debating varying perspectives;
all in an attempt to form the basis of a balanced recommendation that addresses
the most pressing issues raised by all parties and therefore could gamer the
requisite support of the Commission necessary to make a formal recommendation to
Congress. We did not succeed.
Throughout the process some broadly held
general views emerged and deserve to be articulated. They are the core concepts
upon which any federal policies should be based.Clearly our main task was
intended to be the issue of the collection of taxes on remote
sales over the Internet. We encountered a
great degree of confusion about the current state of play in this area. The
current rules for remote sales tax collection are guided primarily by the set of
interpretations and practices emanating from the U.S. Supreme Court Quill
decision, which essentially said that remote sellers are not responsible for
collecting sales taxes for taxing jurisdictions where they do not have physical
nexus. We have lived with this construct for decades and it has guided the
tax policy of direct merchants and catalogue sellers for years.
The reality is that sales taxes apply to electronic commerce
conducted over the Internet and any seller that has nexus with
a taxing jurisdiction is required to collect and remit such
taxes today.
So why the current great debate? Today
there is a view that the world is largely made up of electronic commerce
companies and traditional brick and mortar companies. Inevitably, however,
somewhere down the road, in 3, 5 or 10 years, take your pick, commerce will be
intertwined with the cyber space and physical worlds will merge and interact to
meet the increasing demands of consumers. "Bricks and mortar" retailers will
pour millions into their online shopping offerings as they morph into "dicks and
mortar" retailers. Clients will browse at home and order direct or head down to
the store to "feel the fabric" or "swing the golf club". Remote sellers will
have contracts with local providers (who may or may not be legally affiliated
entities) to provide service or accept returns.In a world like this, if remote
sales over the Internet are taxed differently than intra state sales we will
have a system based upon a tangle of legal maneuvering that will create
separations between local merchant and their Internet counterparts and a playing
field that will be viewed as inherently unfair. Such unfairness, if left to
fester, will bring contempt and noncompliance. It is hard to argue with the need
for an enormous simplification of state and local sales taxes that can pave the
way toward a level playing field that does not discriminate between methods of
access.
In reality, of course, taxes on remote sales are already due.
They are called use taxes and the obligation falls on the consumers to calculate
and pay them. While they exist in most states, with respect to individual
consumers they are collected more by exception than by the rule. So while any
new system that implements a way to collect remote sales taxes would not
increase the theoretical taxes on the books of government, it would undoubtedly
lead to increased revenues collected. This raises its own issues.
I am
pleased to report to you this morning that we, the states, have already achieved
substantial progress in moving to radically simplify state and local sales
taxes. For those of you that remember the efforts of former President Reagan,
Senator Packwood, and Rep. Rostenkowski; you can well understand and appreciate
the challenge we have undertaken. I can report to you that substantial progress
was made as 26 States gathered in a cooperative effort in Denver, Colorado on
March 30-31, 2000, to continue discussions focusing on the implementation of a
revolutionary streamlined sales and use tax system. The Streamlined Sales Tax
System Project is a comprehensive undertaking in direct response to the
widespread call for simplifying the sales tax. The States have enthusiastically
embraced this unique opportunity to attain the fundamental simplification
measures needed to maintain a viable sales tax system.
The States
embarked on this mission in September 1999, by initiating discussions to develop
and implement a simplified sales tax system. Two subsequent meetings were held
prior to this most recent Denver meeting and continuing discussions are being
conducted to resolve integrating the design elements of the new system. It is
anticipated that a pilot project of the new system will be in place in Fall
2000.
Work Groups were established and charged with addressing a
multitude of issues essential to successfully implementing the new system. The
Work Groups are: Paying for the System, Technology, Audit, and Privacy Issues;
Sourcing and Other Simplification Issues; Tax Rate, Registration, Returns, and
Other Remittances; and Tax Base and Exemption Processing.
Several key
issues received attention from the Work Groups, including: Ensuring that the use
of technology does not breach the basic tenets of consumer privacy while
simultaneously establishing a new benchmark of security measures designed to
preserve the integrity of transactions;- Developing straight-forward sourcing
rules that can be easily implemented and adapted to an electronic environment;
Implementing the use of existing technology that provides for the accurate
mapping of tax rates to the appropriate taxing jurisdiction; Consideration of
one local use tax rate for remote sellers and exploration of the available
technology that will facilitate the administration of multiple tax rates; and
Drafting uniform definitions, standardizing exemption processing procedures for
use- and entity-based exemptions, and arranging for the use of a product coding
mechanism that will provide a bridge between the tax base and the use of
technology.
The Project States seek the input of both public and private
sector groups, in addition to those companies and individuals willing to provide
technical assistance to the Work Groups. A public comment period will be
provided at each Project Meeting during which interested parties may comment on
the Project' s design initiatives and accompanying issues with the Project
States.
Electronic commerce is growing exponentially and only if we
start the process today of developing a tax system that contemplates the burdens
the new economy will place on our existing structures will we be prepared to
face the challenge.The burden and responsibility of reform lies with the state
and local governments. Clearly, any tax system must not disproportionately
burden remote sellers. However, if a system can be established that equates the
burden of inter- and intra- state sellers, a level playing field could exist.
Finally, in designing a process to produce this system, we, as Commissioners,
recognized that while there is a national interest in creating an environment
that fosters growth of electronic commerce and ensuring any taxing system does
not unduly burden interstate commerce, we also recognize the need to be mindful
of the sovereignty of state and local officials in setting policies for their
electorate.
Closing
Last week, Congress sent the President the
Airport Investment and Reform Act for the 21st Century. That legislation is a
tribute to you, Mr. Chairman, and the members of this committee. It is another
important step to deal with not only critical safety issues, but also expanding
the nation's ability to compete globally in this new economy.
The new
legislation provides for an increase in taxes on the Internet. Not a single
member of the House or Senate offered an amendment to exempt airline tickets
purchased over the Internet from this tax increase. I believe we all understand
how self-defeating such an amendment or policy would have been. It would have
been terribly imbalanced. It would have sanctioned a double standard. And it
most certainly would have led to significant erosion of the very funds this
committee has made such a leadership effort to ensure are available to meet the
nation's needs.Let us be dear. No Governor is looking to tax the Internet, any
more than any Senator is trying to impose a special, discriminatory
tax on the Internet.
The states'
sales and use taxes are existing
taxes, not new taxes.
All we are
asking is to keep the right we now have as a state to determine our own revenue
policies under the laws the people of our state have adopted and we are elected
to implement. Most of these sales and use taxes have been in place for at least
50 years.
The largest revenue collections in the nation, even in the
income tax states, are through state sales taxes. If Congress overrides states'
tax policies by cutting our tax base, it will fundamentally upset both the
states' and the nation's capacity to provide critical services to the people.
The sales and use tax revenues belong to people and taxpayers of the states, not
the federal government.
Finally, if we gravitate towards a tax system
that creates a specific loophole for retailers that use the Internet, we risk
creation of a federal policy that favors Internet vendors at the expense of Main
Street stores and home-town merchants. We cannot adopt a tax policy in America
that assists in harming traditional Main Street retailers.
Thank you for
the opportunity you've given me to testify, Mr. Chairman.
END
LOAD-DATE: April 18, 2000