EBay Rep Testifies on State Taxation of Internet Sales

My name is Brian Bieron, and I am the Senior Director for Federal Government Relations at eBay Inc. I would like to thank the committee for giving eBay this opportunity to discuss proposals to dramatically expand the authority of states to require out-of-state businesses to collect and remit sales taxes. eBay believes that this is a critically important issue for small business entrepreneurs across America who are increasingly using the Internet to compete in the 21^st Century economy. eBay shares this committee's ongoing interest in the economic success of small business. In the 10 years since our founding, eBay has become a premier destination for small businesses looking for a global marketplace. Small business sellers use eBay to reach customers across America and around the globe, and they care about proposals to expand sales tax collection and remittance duties across the Internet because they could dramatically and negatively impact their bottom line.

About eBay Inc.

I am sure many of you here today are familiar with eBay. Whether it was an experience selling or buying online, or purely "window-shopping," eBay has become the World's Online Marketplace, where anyone can buy or sell practically anything on earth. Started in 1995, eBay has now grown to over 180 million confirmed users worldwide, with more than 78 million items listed on any given day in over 50,000 different categories. Last year, eBay members transacted over $44 billion in annualized gross merchandise sales.

As vast and complex as this on-line marketplace may seem, eBay is actually a very easy and user-friendly website in which buyers and sellers are linked together through a variety of on-line offerings of goods and services ranging from books to automobiles. These buyers and sellers come from all across the United States and around the globe truly making eBay a worldwide marketplace.

Small Business as eBay Sellers

One of the most important developments on the eBay marketplace over the past few years has been the fact that so many small businesses in every State have discovered that the eBay marketplace is a vibrant and valuable place to "do business." As eBay has evolved and grown, it has created new and exciting opportunities for hard working entrepreneurs across America. Currently, over 700,000 U.S. small business people are using eBay today as their primary or a significant secondary marketing channel. We believe that nearly a half-million of these began off eBay, in many cases as brick-and- mortar stores, and they are using the Internet as a new way to compete and grow. Increasingly, Main Street and the Internet are not competing with each other, Main Street small businesses are using the eBay and other Internet channels to compete and survive against global retail companies. The success of these entrepreneurs is creating jobs and opportunities in communities across the nation.

Many small businesses, whether they are working out of their homes, back offices or in storefronts in towns and cities across America, have realized that eBay offers them a way to access an entirely new market of potential customers. They can get "on-line" without overturning their entire way of doing business, and the marginal costs are low.

Small businesspeople that use eBay to do business are just like all small business people everywhere -- they are entrepreneurs, risk takers, innovators and dreamers. They need to be resilient, because even successful small business people are not always successful. They are optimists who bank on the future and their ability to thrive in it. But most of all, everyone in this room recognizes that running a small business demands hard work.

We are proud that eBay can help America's small businesspeople reach 180 million potential customers, and provide the tools they need to successfully interact with those customers. That's something that was never possible in the pre-Internet world.

The SSTP

As many of you probably know, the stated goal of the Streamlined Sales Tax Project is to increase state tax revenues by simplifying the underlying sales tax laws enough to lift constitutional restrictions on taxing distant sellers. While true sales tax simplification would have real merit, we believe that the reality behind the SSTP is that it is a long way from true simplification. As currently structured, the "simplified" system would allow over 7,500 different sales tax jurisdictions and potentially 15,000 distinct rates across America. Businesses that use the Internet to reach customers would be required to comply with the collection, payment and tax filing obligations in all 45 states and the District of Columbia that have sales taxes, as well as the many local jurisdictions.

The SSTP -- Why Now?

Before we look behind the curtain at the complexities inherent in the SSTP, I believe that is important to look at the economic and business landscape. First, the economy is growing, and federal and state tax revenues are up. In fact, unlike a few years ago, the states are now flush with tax revenues, including sales tax revenue. They are at record levels. While there will always be state and local government officials who will desire more revenue, the SSTP is clearly not driven by state revenue needs.

How about the retail business? The latest figures from the Department of Commerce, available for the 3^rd Quarter of 2005, show that total retail sales for the quarter were $957 billion, an 8.5 percent increase over the 3^rd Quarter of 2004. This is strong growth.

(Source: US Census Bureau at http://www.census.gov/mrts/www/ecomm.html)

How about on-line retail compared to traditional off-line retail? Now, make no mistake, Internet retail is growing. It accounted for $22.3 billion in the 3^rd Quarter of 2005, up 26.7 percent from the 3^rd Quarter of 2004. But, the idea that on-retail is about to overtake off-line retail is simply not backed up by the facts.

Consider this: if you look at how much traditional off-line retail grew, the 3^rd Quarter of 2005 increased by $70.3 billion over the same quarter in 2004. On the on-line retail side of the equation, the 3^rd Quarter of 2005 increased by $4.7 billion over the same quarter in 2004. The numbers are clear. In terms of the actual retail sales, the total of off-line retail actually grew more than $65 billion more than on-line retail.

How can this be? Well, the fact is that 8 percent growth of over $900 billion in traditional retail dwarfs 26 percent growth of $22.3 billion in on-line retail. We know that on-line retail is a tremendous and growing business, but please don't believe anyone who says that on-line retail is putting traditional retail out of business anytime soon. After all, despite on-line growth, only a little more than two cents of every retail dollar was spent on-line last year.

The Burdens of the SSTP

I believe it is worth spending a moment to recognize the burdens that are implicit in the SSTP. Complying with the SSTP is about more than just calculating how much sales tax is required in each of the 7,500+ taxing jurisdictions. In fact, that might be the easiest part of the burden imposed on small businesses. The reality is that complying with the SSTP would require four phases: Calculation; Collection; Remittance; and Record Keeping.

As everyone here recognizes, small businesses across the country face numerous challenges. This is just as true for the small businesspeople that use eBay. On a day-to-day basis, our sellers must strive to succeed with a business model that requires new and innovative methods of communications, customer service and delivery over potentially long distances. In short, we believe that throwing a new administrative and tax collection burden onto their businesses will hurt their ability to succeed.

The fact that this is unquestionably too much for any small business to handle has essentially been admitted by the SSTP advocates from the beginning of the project. SSTP supporters know that a small business could never comply with calculation, collection, remittance and record-keeping on its own, so they presume that technology firms -- certified service providers (CSPs) -- will do the job for them.

I believe this is a critical point for everyone here to walk away with: SSTP supporters admit that their system won't work unless outside technology companies are involved. If small businesses can't (or don't) use an outside technology, then under the SSTP they basically need to get off the Internet. We think that is the wrong message to be sending small on-line businesses that are contributing so much to our nation's economic growth.

The SSTP advocates claim that they will cover the cost of the CSPs to help small businesses comply with a new complicated tax regime, but if you look at the fine print, there are glaring weaknesses. First, the level of compensation is unrealistically low. The states are talking about compensation on the range of 3 percent of the tax collected. Assuming a 7% sales tax rate, that works out to about 0.21 percent, one-fifth of one percent, of the price of the product. This level of long-term compensation is far below what service providers in the financial services field normally charge for this kind of complicated long-term service. It's not hard to figure who will be left holding the bag for additional costs: it won't be the state or the CSP, it will be the small business person.

In addition, the SSTP advocates ignore the range of costs a small business is likely to face in order to make its computer system work with the CSP solution -- these are integration, hardware and training costs. It is worth noting that some CSPs have said that they believe these "integration costs" will be their main line of business.

Finally, at the level of compensation being discussed, the level of service that small business will receive will likely be low. And one-size-fits-all is the opposite of the special needs of small businesses.

This compensation scheme has all the attributes of a classic bait-and-switch, or a "gotcha." The legal burdens will be placed on small businesses, and over time the costs imposed by the service providers go up. The states will refuse to pay -- they have no incentive to foot the bill -- and the costs are shifted to the small businesses.

Solution -- Small Business Exemption

As I have mentioned, the Internet is increasingly an important technology tool helping America's small business entrepreneurs survive and thrive in a dynamic and challenging global economy. We believe that changing federal law to impose a major new tax collection burden on them will hurt their chances for success. We think it would be bad for them, and we think it would be bad for the overall U.S. economy, killing jobs and hurting entrepreneurs in communities across the country. We believe that federal government policies to promote the growth and success of small businesses help the overall U.S. economy by promoting one of the primary engines of growth, innovation and job creation. That includes federal government policies to exempt small businesses from burdensome regulations and government mandates. With over 700,000 Americans using the eBay marketplace to help run successful small businesses, we believe that a workable and robust exemption for small business is an indispensable component of any Internet sales tax plan.

As you may know, SSTP legislation introduced in the House and Senate in recent Congresses included a "small business exemption." Unfortunately, bills in recent Congresses fell short of the mark, setting the exemption at a level that is arbitrary and far below established federal small business size standards. This is also the case with S. 2152 recently introduced by Senator Mike Enzi. eBay's view has been, and will continue to be, that if any SSTP is to be considered, the small business exemption must be strengthened so that it is reflective of today's thriving, Internet-enabled small business community.

Such an effort has been undertaken by Senator Byron Dorgan, a long-time advocate of the SSTP concept. His small business exemption proposal, included in S. 2153, is built on a process that eBay believes is fair and reasonable, and will protect small businesses.

The Small Business Administration is the federal agency with the mission to help promote America's small businesses and entrepreneurs, and the experience to do this job right. The Dorgan proposal would require the SBA to undertake a rule making to determine how the SSTP small business exemption would be structured and which businesses will be covered. The Congress would retain its critical role and be required to approve the SBA recommendation before the SSTP mandates went into effect. eBay believes this is one acceptable formulation for a small business exemption in any legislation that would implement the SSTP.

Conclusion

While this can be a somewhat complex issue, some things are clear:

1. The U.S. economy is strong and growing, and small business entrepreneurs and innovators, using new Internet technologies, are one of the most important engines of growth and job creation.

2. State tax revenues are up and at record levels.

3. Off-line and on-line retail are both growing, but there's no risk of on-line sales supplanting off-line retail anytime soon.

4. The SSTP is anything but streamlined. It is a very complex system and small businesses using the Internet could never comply without the paid help of technology service providers. The states claim that they will pay those providers, but the amount promised is likely to prove woefully insufficient and would put small business at the mercy of a very unreliable system.

5. A small business exemption to avoid placing a new and burdensome regulatory mandate on small businesses is entirely in keeping with federal precedents and is good policy and ought to be a prominent feature of any SSTP legislation.

And,

6. The level of an SSTP small business exemption should be based on the existing federal standards and the expertise of the federal agency empowered to protect and promote small businesses.

eBay will continue to work hand-in-hand with our army of small business entrepreneurs to ensure that if Congress acts to authorize the states to require out-of-state businesses to collect and remit sales taxes, it includes a small business exemption that is fair and reasonable and that protects this important engine of growth in our economy.

Thank you, and I am happy to answer questions.