Testimony of Senator Steven
Rauschenberger Illinois Senate
Co-Chair: National Conference of State Legislatures'
Task Force on State and Local Taxation of Telecommunications and
Electronic Commerce
on behalf of the National Conference of State
Legislatures
before the Steering Committee of
the Streamlines Sales Tax Project
October 26, 2000
Good morning. I appreciate the opportunity to appear before you today
on behalf of the National Conference of State Legislatures. I am here this
morning in my capacity as the Co-Chair of NCSL's Executive Committee Task
Force on State and Local Taxation of Telecommunications and Electronic
Commerce. The National Conference of State Legislatures is a bi-partisan
organization representing every state legislator from all fifty states and
our nation's commonwealths, territories, possessions and the District of
Columbia.
On behalf of my colleagues, I would like to commend Charles Collins and
Diane Hardt, the Co-Chairs of the Streamlined Sales Tax Project, the
members of the Project's Steering Committee and all the representatives of
the Project's participating states for their diligence in endeavoring to
produce a comprehensive set of recommendations for the streamlining and
simplification of our sales and use tax collection systems.
The ability of state and local governments to collect the sales and use
tax currently owed on transactions which occur through remote sellers,
particularly through electronic commerce is a major priority for the
National Conference of State Legislatures as well as state legislatures
across the country. For the record, let me make clear, state legislators
are not advocating any new taxes on electronic commerce. We desire,
however, to create a streamlined sales and tax collection system to more
efficiently collect the transactional taxes legally imposed by our states.

Electronic Commerce and the States
Let me also acknowledge that there is much misinformation
being disseminated that state governments view the Internet and Electronic
Commerce as a "cash cow" and we, as state officials, are salivating for
our prime cut. This is simply not true.
Speaking for my colleagues, we recognize the vital
economic force that the Internet and advanced telecommunications services
will be for our states and our nation. We are as concerned about the
unintended consequences of obsolete, discriminatory or multiple taxes on
this vital new technology.
With that said, I also want to make clear that state
legislatures are equally concerned about the impact that sales tax free
electronic commerce transactions will have on state revenues. The growing
inability of states to collect sales and use taxes from remote sales
impacts the future of states' primary consumption tax. The general sales
and use tax provides about one-third of state revenue - over $150 billion
in 1998 - with most of the funds dedicated to finance K-12 education. For
six states, sales tax revenues account for over 50 percent of all state
revenues.
According to the Center for Business and Economic
Research at the University of Tennessee, by 2003 states will lose $ 11
billion in sales tax revenue due to the emergence and growth of electronic
commerce. This amount will continue to grow each year. For my own state of
Illinois, it is projected that we will lose $454 million in sales tax
revenues in 2003. As the Chairman of the Senate Appropriations Committee,
I have the reputation as being a fiscal conservative. Each year during our
budget process, I endeavor to ensure that the taxpayers of Illinois are
not burdened by overspending. However, I also realize the drastic cuts in
state services that I would have to make if we face a $454 million
shortfall in revenues in any one year.

Sales Tax Popularity
As we all know, taxes are not very popular. However, if
state and local governments are to provide necessary services, like
education and public safety, then we need to maintain our ability to levy
taxes. In surveys of taxpayers as to which tax of all the major federal,
state and local taxes they dislike the least, the surprising answer has
been the sales tax.
Voters all over the country have approved local sales
taxes to pay for sports stadiums, added police protection, land
acquisition for open space, and transportation improvements. The taxpayers
of the state of Michigan overwhelmingly voted to use the sales tax as
opposed to property tax as the major source of revenue for education and
then the next year, they voted to increase the sales tax.
The inability of states to collect the sales and use
taxes for remote transactions also places an unfair competitive burden on
small main street businesses, the lifeblood of many of our small towns and
communities. Having been a retailer here in Illinois prior to service in
the State Senate, I know what it is like to have to collect sales tax. I
can appreciate the concerns of many brick and mortar retailers that if
their on-line competitors escape collection responsibilities, than they
face two burdens. First they face a cost difference for products and the
second, possibly more onerous burden of complying with sales tax
collection rules and regulations.
As state legislators, we recognize that we have been part
of this problem. Over the last seventy years, we have created a confusing,
administratively burdensome tax system with very little regard for the
compliance burden placed on multi-state businesses. Last year, NCSL passed
a resolution, written by NCSL's Task Force on State and Local Taxation of
Telecommunications and Electronic Commerce, that acknowledged that states
need to simplify their sales and use taxes and telecommunications taxes
for the 21st Century. We recognize that we have been a key part
of the problem - and we also are the solution.
In our resolution, The Task Force formulated a set of
seven principles that guided NCSL in its deliberations with the National
Governors' Association to develop a proposal for simplifying and
streamlining state and local sales and use tax collection systems. These
principles are:
First, that state and local tax systems should treat
transactions involving goods and services, including telecommunications
and electronic commerce, in a competitively neutral manner; and
Second, that a simplified sales and use tax system that treats all
transactions in a competitively neutral manner will strengthen and
preserve the sales and use tax as vital state and local revenue sources
and preserve state fiscal sovereignty; and
Third, that the Internet and Internet vendors should not receive
preferential tax treatment at the expense of local "main street"
merchants, nor should such vendors be burdened with special,
discriminatory or multiple taxes; and
Fourth, that states recognize the need to undertake significant
simplification of state and local sales and use taxes to reduce the
administrative burden of collection; and
Fifth, that under such a simplified system remote sellers, without
regard to physical presence in the purchaser's state, should be required
to collect sales and use taxes from the purchaser and remit such taxes to
the purchaser's state; and
Sixth, that NCSL encourages current and future cooperative efforts
by states to simplify the operation and administration of sales and use
taxes; and
Seventh, that NCSL will continue to oppose any federal action to
preempt the sovereign and Constitutional right of the states to determine
their own tax policies in all areas, including telecommunications and
electronic commerce.

State Involvement in the Streamlined Sales Tax Project
In January of this year, the NCSL Task Force on State and Local
Taxation of Telecommunications and Electronic Commerce drafted and along
with NCSL's full Executive Committee unanimously approved model
legislation to authorize a state's participation in multi-state
discussions to develop a more simple, uniform, and fair system of state
and use taxation. Such a collection system would remove the burden imposed
on all retailers, preserves state sovereignty, and enhances the ability of
U. S. firms to compete in the global and information economy.
It was the only second time in NCSL history that NCSL produced and
advocated the passage of model legislation in the states. In January we
anticipated that if six to eight states authorized the multi-state
discussions by the end of this year's legislative session, we would be
able to declare solid movement by the states to streamline their sales tax
systems. Instead 27 states have formally joined the multi-state
discussions either through enactment of legislation or an executive order
by the Governor. We also are pleased that at least 12 other states have
been sending "observers" to participate in the Project's
deliberations.
The quick response to NCSL's model legislation by the state
legislatures is unprecedented. The current activity by 39 of the 45 states
that impose a sales tax is a sign that elected state officials are serious
about taking action to streamline and simplify their sales tax collection
systems.
A little over nine months ago, you held your first meeting as the
Streamlined Sales Tax Project, with little fanfare or public attention.
Since that time you have endeavored to meet the directives of your
governors and state legislators to develop that streamlined and simplified
sales and use tax collection system. Over the last few months as the
skeptics realized that the Project was real and going to produce viable
recommendations, your deliberations became the subject of much scrutiny
and attention. You can be proud of this development as it means you must
be on the right track.
On behalf of many of my colleagues, particularly those from states with
local option sales taxes, I would like to commend the Project for its
support of technology as a major component of a streamlined sales tax
collection system. We applaud the discussion of the need to use technology
in rate simplification as opposed to the adoption of a mandatory one sale
and use tax rate per state for remote commerce.
We find a single rate - even if it only applies to remote sales - is a
deal killer in a dozen or more states and raises a host of problems.
- First, it preserves a dual system for nexus and non-nexus merchants
that will prevent states from simplifying the sales and use tax system
for "clicks and mortar" retailers. Sellers with physical stores and
remote operations will face two sets of tax rates, frustrating efforts
at simplification for all types of retailers. The Project's
recommendations to use technology to determine the correct rate to apply
to transactions would create a single system for all retailers.
Businesses and technology companies tell us that the rate issue is the
easiest one to overcome with technology. It is not necessary to mandate
a single rate in a simplified system.
- Second, the dual system will lead to continued litigation over nexus
because different rates will be charged based upon the seller's nexus
status. The Project's recommendations would make nexus irrelevant and
treat all sellers the same.
- Finally, we anticipate that some state legislatures could not
support a blended rate that would increase tax rates for some taxpayers.
The alternative - choosing the lowest rate in the state - could cause
powerful cities to oppose such a system. Businesses located in areas
with high tax rates that now "self-report" use taxes would have
incentives to buy from remote vendors.
Once again, I would like to express NCSL's appreciation for this
opportunity this morning, as well as for your dedication and hard work in
producing viable recommendations for state legislatures to consider in
streamlining our sales tax systems. The Task Force is impressed by the
number of disparate issues the Project has been able to address thus far,
and looks forward to further Project recommendations as to how the
components should be implemented over time. I would urge you to maintain
your efforts over the next few months in producing model legislation that
we will be able to bring before our legislative chamber in 2001. The
National Conference of State Legislatures will continue to monitor and
support your deliberations and we look forward reviewing your
recommendations for legislative action.

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