NCSL Testimony at Hearing on Internet Sales Taxation

NATIONAL CONFERENCE OF STATE LEGISLATURES

[2] I am pleased to have the opportunity to speak to you about state and local taxation of electronic commerce, particularly, the ability of state and local governments to collect the sales and use tax presently owed on transactions which occur on the Internet through remote sellers. Let me make clear, state legislators are not advocating any new taxes on electronic commerce. We desire, however, to create a streamlined sales and use tax collection system to more efficiently collect the transactional taxes legally imposed by our states.

Electronic Commerce and the States

[3] Let me first 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.

[4] 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 also are as concerned as you are about the unintended consequences of obsolete, discriminatory or multiple taxes on this vital new technology.

[5] It 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 of 1998, state legislatures have worked to repeal those taxes. For example, the state legislatures in Connecticut and Iowa have voted to do so.

[6] 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, the life blood of many of our small towns and communities. We ask you to consider the words of one of the leading proponents of sales tax reform, Senator Richard Finan, President of the Ohio Senate, in a speech he made to state legislators from across the country, "I am sure many of you each year are asked to help sponsor a little league team or take an ad in a high school yearbook somewhere in your district. Your Main Street retailer does that everyday, every year." Senator Finan continued, "Will AOL-Time Warner, Amazon.com, Microsoft, or Cisco sponsor your son's or daughter's little league team or support your local Boy and Girl Scout troops? I think you know the answer."

[7] Furthermore, the general sales and use tax is our primary consumption 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. Of every dollar spent on education in this country, 93 cents come from state and local revenues, and only 7 cents comes from the federal government.

Sales Tax Popularity

[8] 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 consistently been the sales tax.

[9] 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.

[10] 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. Some have argued that requiring remote sellers to collect the state and local sales tax amounts to taxation without representation. This is a specious argument because it is the consumer that pays the sales and use tax to his or her state, not the seller. 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

[11] 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."

[12] 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 U.S. Supreme Court in the National Bellas Hess case in 1967 and reaffirmed in the Quill decision in 1992.

[13] 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 and essential governmental services such as education and public safety.

[14] According to the Center for Business and Economic Research at the University of Tennessee, in 2003 alone 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. The following is a list of the revenue losses for those states which have a member serving on this Committee:

State                              2003

[16] In our resolution, we formulated a set of seven principles that we used to develop a proposal for simplifying and streamlining state and local sales and use tax collection systems. The overriding theme of those seven principles is competitive neutrality. State legislators from across the country unanimously approved this resolution that declared, "state and local tax systems should treat transactions involving goods and services, including telecommunications and electronic commerce, in a competitively neutral manner." The resolution further stipulated, "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."

Streamlined Sales Tax Project

[17] In January of 2000, the NCSL Task Force drafted model legislation directing state revenue departments to join in multistate discussions to develop a simpler, uniform and fairer system of sales and use taxation, that removes the burden imposed on retailers, preserves state sovereignty and enhances the ability of U.S. firms to compete in the global economy. In only the second time in NCSL history, the NCSL Executive Committee approved the model legislation and sent it to the states for consideration in the 2000 legislative sessions. While drafting the model legislation, the Task Force members had felt that between five and ten states joining the multistate discussions would demonstrate a significant commitment on behalf of the states to simplify the admittedly complex sales and use tax systems from state to state. By the end of 2000, 32 states had joined what is now called the Streamlined Sales Tax Project (SSTP) through either legislative or executive action.

[18] The Streamlined Sales Tax Project has met almost monthly since February of 2000 working on recommendations to implement the key features of the Streamlined Sales Tax System. These key features are SIMPLIFICATION of sales and use tax laws and administration; the USE OF TECHNOLOGY for calculating, collecting, reporting and or paying the tax; and STATE ASSUMPTION of the COSTS of the system for remote sellers. Until Congress grants the states the authority to require collection of sales taxes on remote sales, the system will be voluntary to sellers.

[19] The simplifications of a streamlined sales tax system are:

o Uniform state and local sales tax base;

[21] We are pleased to report that these are the same simplifications that are embodied in S. 512, The Internet Tax Moratorium and Equity Act, sponsored by Senator Dorgan along with Senators Bennett, Breaux, Chafee, Cleland, Daschle, Durbin, Enzi, Graham, Hutchinson, Hutchison, Johnson, Lincoln, Nelson (Nebraska), Rockefeller, Thomas and Voinovich.

Simplification Process Moving Forward

[22] In January of this year the Streamlined Sales Tax Project issued its recommendations in the form of a model act and an interstate agreement. The NCSL Task Force modified the SSTP act and agreement to provide an alternate measure for legislatures to consider that would allow for greater participation for elected policymakers in the next round of negotiations of the final terms of simplification requirements in the interstate agreement.

[23] Some have portrayed the action by NCSL as a split with the SSTP. However, the changes made to the SSTP model act and agreement were only made to complement the decision making process as the simplification requirements are agreed upon. Let me make perfectly clear, states that acted on either version of the model act will come back to the same table to finalize the ground breaking work that has been done so far.

[24] In a letter to state leaders, signed by the Executive Directors of the National Conference of State Legislatures, the National Governors' Association, the Federation of Tax Administrators and the Multistate Tax Commission, the national organizations made clear the following points:

o "There is only one state and local sales and use tax

[26] Action is still pending this year in Michigan, Ohio, Pennsylvania, Massachusetts and Wisconsin.

[27] The NCSL, NGA, MTC and FTA will convene the representatives of the "governing states" for their inaugural meeting in late September or early October.

[28] Overcoming seventy-five years of modifications to 46 different sales tax systems will not be an easy task, however, the progress that the states have made collectively over the past two years should make clear my colleagues' level of commitment to simplifying the sales and use tax system.

INTERNET TAX MORATORIUM

[29] The current moratorium on Internet access taxes as established in the Internet Tax Freedom Act of 1998, will expire on October 21, 2001.

[30] Today, we know Internet access generally refers to the $22.95 (+/-) consumers pay for their monthly access to the "net" through America Online, Mindspring, Microsoft and so on. However, as we witness the convergence of technologies and industry giants, what will Internet access mean in three years, or five years and so on? For example, telephony technology is quickly improving to allow consumers to actually make telephone calls and speak over the Internet. Thus, consumers may soon be able to make long distance or local calls through a function of their Internet service provider at no additional cost, other than the fee paid for Internet access. You can already download free service from such sites as "dialpad.com," or "Net2phone.com." Current state revenues will decline, as states will be unable to tax these long distance or even local telephone calls. This also would put telephone companies at a competitive disadvantage to Internet service providers.

[31] As the industry mergers continue, consumers may soon be receiving their telephone, cable television and Internet service from the same vendor. The vendor will be able to bundle all these services for one price under the banner of Internet access, likewise for Internet service providers that merge with content providers of music or movies. Under the present definition of Internet access as contained in the Internet Tax Freedom Act of 1998, a permanent moratorium would force states and localities to fined new revenue sources to make up for the loss from not being able to tax telephone, cable services and/or downloaded movies, music, books, magazines and so on. Therefore, any extension of the moratorium using the current definition of Internet access must be short term, no more than three to four years with the grandfather clause maintained.

[32] The grandfather clause in the original Internet Tax Freedom Act of 1998 allowed those states presently collecting a tax on Internet access the ability to continue to do so. Presently, the states of Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington and Wisconsin would face a reduction in current revenues if the grandfather clause is repealed. Total loss in 2000 to the listed states would have been over $75 million. This loss combined with future revenue decreases from the prohibition on Internet access would lead the Congressional Budget Office to score a lengthy or permanent extension of the moratorium as an unfunded federal mandate on state and local governments under the provisions of the Unfunded Mandates Relief Act of 1995.

S. 512 -- THE INTERNET TAX MORATORIUM AND EQUITY ACT

[33] The National Conference of State Legislatures acknowledges that states need congressional approval for the authority to require remote sellers to collect our states' sales and use taxes, though at the same time, we have serious concerns about congressional interference with state tax policy. THEREFORE, WE SUPPORT S. 512, THE INTERNET TAX MORATORIUM AND EQUITY ACT, AS INTRODUCED BY SENATORS DORGAN, ENZI, AND 16 OF YOUR COLLEAGUES. I am pleased to testify before this Committee, as five of you are sponsors of this legislation; Senators Graham, Lincoln, Breaux, Rockefeller, and Daschle.

[34] NCSL supports federal legislation that ensures that any sales and use tax simplification process would be developed and implemented on the state and local level and grant to those states the authority to require out of state sellers to collect and remit sales and use taxes. Preservation of state sovereignty is a cornerstone of our federal system; S. 512 as introduced promises an important opportunity to secure our fiscal sovereignty.

[35] With that said, however, I want to make clear that NCSL will oppose any federal mandates that would bring to a halt the simplification process already moving forward in the states. NCSL WILL OPPOSE ANY CONGRESSIONAL LEGISLATION OR AMENDMENT THAT REQUIRES ONE SALES TAX RATE PER STATE FOR REMOTE COMMERCE, REQUIRES STATES TO ADDRESS NON-SALES TAX TELECOMMUNICATIONS TAXES AT THE SAME TIME THAT STATES ARE SIMPLIFYING SALES TAX SYSTEMS AND/OR RESTRICTS STATE NEXUS STANDARDS FOR BUSINESS ACTIVITY TAXES.

[36] It is our understanding that there are ongoing discussions to try to reach a consensus on a bill that would appear to grant states collection authority but only after the states met a new list of proposed federal mandates. Such new federal mandates as one rate per state, restrictions on state business activity taxes and telecommunications taxes would reduce state revenues substantially more than any offset from uncollected sales and use taxes, thus dooming state simplification efforts.

[37] I would briefly like to discuss the impact of a federal mandate for one rate per state.

ONE SALES AND USE TAX RATE PER STATE.

[38] A single rate -- even if it only applies to remote sales -- is unattainable in a dozen or more states and raises a host of problems.

o FIRST, IT PRESERVES A DUAL SYSTEM FOR NEXUS AND NON-NEXUS

Ballpark at Arlington (MLB), Dallas/Fort Worth, Texas, $153

[41] Thank you for this opportunity to discuss the state legislative viewpoint on state and local taxation of electronic commerce and telecommunications.