Written Statement to the
Advisory Commission on
Electronic Commerce
by
Representative Matthew Kisber, Tennessee
Chairman,
House Finance, Ways and Means Committee
Senator Steven Rauschenberger, Illinois
Chairman,
Senate Appropriations Committee
Co-Chairs, NCSL Task Force on State and Local Taxation
of
Telecommunications and Electronic Commerce
on behalf of the
National Conference of State
Legislatures
September 15, 1999
Thank you Governor Gilmore and members of the Commission for the
opportunity to address the Commission. We speak on behalf of the National
Conference of State Legislatures, the bipartisan national organization
representing every state legislator from all 50 states, our nation's
commonwealths, territories and possessions.
We would like to begin by acknowledging the role that the industries
represented on this Commission have played in this incredibly robust
economic expansion. Your firms have helped to create the tools that have
allowed our businesses - and governments - to be more efficient, more
productive, and more responsive to our customers. As a result, our nation
has enjoyed phenomenal economic growth - without much inflation. This
economic environment has dramatically increased household wealth and left
state governments in their best fiscal position ever.
States and Electronic Commerce
Unfortunately, we also need to 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 our colleagues, we know that they recognize the vital
economic force that the Internet and advanced telecommunications services
will be for our states and our nation. We also are as concerned as you are
about the unintended consequences of obsolete, discriminatory or multiple
taxes on this vital new technology.
It also is important to note for the record that no state has enacted
any Internet specific taxes. In some states where a tax on Internet access
was grandfathered by the Internet Tax Freedom Act, states legislatures
have worked to repeal those taxes.
With that said, we need to make clear that state legislatures are
equally concerned about the impact that sales tax free electronic commerce
transactions will have on state revenues and the unfair competitive burden
it will have on small main street businesses in our communities.
We have some additional points to make on this issue:
- State leaders recognize the role that a strong telecommunications
infrastructure will play in future economic growth.
- In the last five years state legislatures and governors have
reduced taxes by over $25 billion. And as long as the economy remains
strong, tax reductions will continue.
- Most states do not tax Internet access charges and the trend is to
exempt them. And even in states that do tax Internet access, a 5% to
8% tax imposed on the customer is not going to measurably affect
demand for Internet access. AOL increased prices by 10% in 1998 and
its revenue base, stock price, and market position remain strong.
- If business is concerned about taxes on the "Internet," they
should be talking to Congress. Most of the current taxes on the
"Internet" are federal excise taxes, access charges, and other taxes
and "fees" on the telecommunications providers that are the backbone
of the Internet - not state and local sales and use taxes.
Our concern at the state level is the future of our primary consumption
tax - the general sales and use tax. This tax provides about one-third of
state revenue - over $150 billion in 1998 - with most of the funds used to
finance K-12 education.
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
overwhelming 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. How many federal taxes have been enacted by a
direct vote of the people?
As you know, the sales tax is imposed on the customer, not the seller.
Sellers collect the tax on behalf of state and local governments and pass
this money along to them. Many states pay merchants for this service,
typically allowing them to keep between 1 and 3 percent of what they
collect to offset the administrative cost.
Sales Tax and Electronic Commerce
The problem states have with the sales tax is that the base keeps
shrinking. In the 1930s, when the sales tax was first imposed, consumers
bought goods from the local merchant and it was not that difficult for the
merchant to collect a few cents on the dollar. Also, most Americans spent
very little on services - they spent most of their money on taxable goods.
And there were very few "remote sellers."
In the 1970s and 1980s, the share of personal consumption expenditures
began to shift from taxable goods to services - things like medical care,
health clubs, legal and accounting services. So the sales tax was applied
on a smaller and smaller share of tangible products. This was compounded
on the goods side by mail order outlets selling goods without collecting
sales taxes from their customers - a practice sanctioned by the US Supreme
Court in the National Bellas Hess case in 1967 and reaffirmed in
the Quill decision in 1992.
Today, states face a new threat to sales tax revenue, electronic
commerce, with the potential to dramatically expand the volume of goods
sold to customers without collection of a sales or use tax. The combined
weight of the shift to services and the tax erosion due to electronic
commerce threatens the future viability of the sales tax.
Let us pose a hypothetical question. What would happen if the federal
government allowed customers to avoid paying federal airline ticket excise
taxes if travelers purchased their tickets over the Internet, but kept the
tax in place on purchases from travel agents? That would give us - and
other air travelers - a 10% price discount and provide a tremendous
incentive to buy over the Internet. Obviously, travel agents would
disappear and federal revenues would dry up in a hurry. To some extent,
this is the same situation that state and local governments face with the
sales and use tax on Internet purchases.
As state legislators, we recognize that we have been part of this
problem. We have created a confusing, administratively burdensome tax
system with very little regard for the compliance burden placed on
multi-state businesses. The NCSL passed a resolution this summer - written
by the Task Force that we chair - acknowledging for the first time that
states need to simplify their sales and use taxes and telecommunications
taxes for the 21st Century. We recognize that we are a key part
of the problem - and the solution.
So the remainder of our comments focus on options for state
legislatures and for this Commission. As we see it, there are really only
three options.
Option 1 - the Status Quo
Under this scenario, we keep the current system as it is. Remote
sellers without a physical presence would continue to be protected from
the "undue burden" of use tax collection under the current Supreme Court
decisions in National Bellas Hess and Quill. Sellers that
are physically present would continue to have a sales tax collection
obligation.
There are two primary reasons to be concerned about the status quo.
First, states and local governments would continue to see erosion of the
tax base as electronic commerce vendors gain market share. Second, it is
just not fair to treat sellers of the same product differently by making
one vendor collect a tax while a competitor does not.
We do not support continuation of this unfair system.
Option 2 - the Internet as a Tax Free Zone
Some have suggested that the Internet should be preserved as a tax free
zone, with a permanent moratorium on taxes on Internet access as well as a
moratorium on sales and use taxes on goods and services sold over the
Internet.
We do not support this option.
Creating a tax free zone on the Internet would be the beginning
of the end of the state and local sales tax. Entire retail sectors would
argue for sales tax exemptions, lest electronic commerce vendors drive
them out of business. In essence, Congress would be choosing the "winners"
in our economy, choosing e-businesses in competition with other taxpaying
interests. This would not be an appropriate role for the federal
government to play. States would be forced to either grant these
exemptions or watch main street and mall retailers lose market share. Not
all retail sectors would ultimately fail, but many would.
With a declining consumption tax base, states would be forced to rely
on income taxes, property taxes, and other excise taxes that target
specific "captive" goods like gasoline.
Constitutional limitations on the property tax in many states would
preclude this as a revenue option, forcing the income tax to shoulder a
larger burden. This would have significant implications for savings and
investment, potentially reducing our already meager national savings rate.
Federal marginal tax rates are already at 40%, not including payroll
taxes. Replacing the sales and use tax, just at the state level, would
require a doubling of the state income tax burden. This is neither
desirable nor economically viable.
Sound state tax policy dictates the broadest possible base, the lowest
possible rates, and a diversification of reliance on income, property, and
consumption taxes. Taking consumption taxes off the table is just not good
policy.
States' Fiscal Requirements
Some people argue that states should just cut spending. But our states'
Supreme Courts, and the voters, are saying we need to spend more on
education to provide the educated workers that CEOs - some sitting at this
table - tell us that our e-commerce firms need to be competitive. Voters
are telling us to spend more on our transportation systems so they can get
to work - and home to their families - in a reasonable amount of time.
States also must have the fiscal resources to administer the programs,
which have been devolved from the federal government to the states by
Congress. While the Congress has provided fixed or capped funding formulas
to the states to operate some of these former federal programs, states
realize that permanent federal funding is not a life time guarantee nor is
it always sufficient to meet all the costs associated in the
administration of these programs. Should our national economy begin to
falter, states may find themselves left holding the bag on all these
former federal programs now operated by State Government.
States are very concerned that the decline or demise of the state sales
tax as a viable revenue option would lead to a federal sales or
consumption tax, like the one proposed by Senator Hollings last month. We
think a federal consumption tax would be a disaster for the states - and
for our business community. Current state and local sales taxes are only
about 2.4 percent of personal consumption expenditures in the US, a
relatively modest burden compared to the European Community's value-added
taxes.
From a purely administrative perspective, a national VAT or sales tax
would be very easy for businesses to comply with. But the tradeoff, in our
opinion, would be a higher tax burden. It is much simpler for Congress to
raise the tax rate than 50 states and another 6,000 local units of
government. And the money would be controlled at the federal level, not
the state and local level. Congress would be tempted - as in the Hollings
approach - to redistribute sales tax revenues not based on actual
consumption but on federal formulas, subject to political
manipulation.
So for these and many other reasons, we cannot support making the
Internet a tax free zone.
Option 3 - Modernize the State Sales and Use Tax
Another option is for states to preserve the sales tax - by modernizing
and simplifying it. The NCSL Task Force that we chair have been working
toward the following goals:
- Minimize or even eliminate the administrative burden on remote
sellers - or compensate them for it;
- Minimize or eliminate the audit exposure for firms that use
certified software;
- Create uniform definitions of goods and services that sellers can
rely upon.
Our Task Force will meet in two weeks in Nashville to hear about a
proposal that states fund a national, real time database that can be made
available to vendors free of charge that will automatically calculate the
sales tax due. There are other proposals as well. Before we foreclose our
options, we should examine whether technology can be brought to bear on
this problem.
These changes will take a few years, but we think states will move to
implement them. Therefore, we urge the Commission to avoid recommending
actions to Congress that will pre-empt the states and prematurely limit
our options to address these very important issues. During the period when
states move to modernize their tax systems, Internet vendors will continue
to operate under the current Supreme Court protections and the
provisions of the Internet Tax Freedom Act.
States are beginning to realize that businesses - especially remote
sellers - have legitimate concerns about state and local sales tax
complexity. Not only must they know the rates of the local jurisdiction,
they must make sure that they collect and remit the proper jurisdiction's
tax. They can be subjected to audits from multiple local jurisdictions.
And if they make a mistake, they are liable for back taxes and possible
class action lawsuits from taxpayers. Clearly, if states want remote
sellers to take on additional collection responsibilities, we must
simplify the system.
This would create a level playing field for all retailers. Sales taxes
would continue to be borne by customers, not sellers. And if it turns out
that under this level playing field, Internet sellers have a business
model that delivers goods to customers at lower cost than the traditional
retailers, they will prosper. If not, they will fail.
Ultimately, this is what our free enterprise system is all about. It is
not about government-protected advantages in the marketplace.
Telecommunications Taxes
States also need to address the administrative burden on our
telecommunications firms, and the fundamental unfairness caused by
outdated telecommunications tax systems in some states. It is not fair
that two firms selling the same service face different tax burdens based
upon the historical classification of one firm or another. Also, the
multitude of state taxes and local taxes and fees imposed on our
telecommunications providers are administratively costly and burdensome.
Our Task Force will be presenting policy options for states that will
build upon two fundamental principles: 1) Competitive neutrality; 2)
Reduced administrative burden.
Mr. Chairman, we have attached a copy of the Resolution formulated by
our Task Force and approved by NCSL's membership at our Annual Meeting
just two months ago. We would urge the Commission to consider these
principles and incorporate them into your recommendations to Congress.
On behalf of the National Conference of State Legislatures, we stand
ready to assist you and the members of the Commission in your
deliberations. We are available to answer any questions you may have as
well as discuss with you the role of state legislatures in the process to
reform state sales tax procedures and regulations.
We also would like to recognize the participation in our Task Force of
two Commission members, our colleague from the Commonwealth of Virginia,
Delegate Paul Harris, and a former colleague from the State of South
Dakota, Mr. Gene LeBrun. We look forward to their continued involvement
with our Task Force.
Mr. Chairman and members of the Commission, thank you again for the
opportunity to share our thoughts with the Commission today.
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