 Second Meeting:
Transcript of September 15
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7 ADVISORY COMMISSION ON ELECTRONIC COMMERCE
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18 New York, New York
19 September 15, 1999
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1 P R O C E E D I N G S
2 CHAIRMAN GILMORE: Welcome to the second
3 full meeting of the Advisory Commission on
4 Electronic Commerce here in New York City.
5 It's a pleasure to be with all of you, and
6 I'm pleased to introduce Brian Horey. Where
7 is Brian? Is he here in the room? Yes, sir.
8 A member of the New York New Media Association.
9 I'm going to call on him in just a moment for
10 some opening remarks, but first let me say a
11 few words if I could.
12 We had our opening session
13 yesterday in which we had an opportunity to
14 deal with some of the telecommunications
15 access issues, and I think we had a good and
16 fair discussion under the format that we have
17 been working, and I'm pretty happy about
18 that. Just to sum up where we have been, the
19 first meeting of course was held in
20 Williamsburg, Virginia. In that meeting we
21 went through many of the organizational
22 issues at length. We had the opportunity to
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1 listen to a broad range of policy data
2 together with written materials which we have
3 had now for several months, and that laid a
4 foundation.
5 Since that time we've had a work
6 plan subcommittee headed by David Pottruck
7 who is here with us today. David, thank you
8 very much for your work on that. Two
9 subcommittee meetings were held by
10 teleconference very successfully. The work
11 plan has come forward which has defined
12 what we're doing here today.
13 We've also had an extensive work
14 going on by the financing subcommittee headed
15 by Mike Armstrong. That I think has made
16 considerable progress, and we're very hopeful
17 that the Congress will come forward and
18 appropriate for us the funds that we need to
19 keep going.
20 Otherwise, we will do what we have
21 been doing, and that is rely upon the good
22 offices of certain members of the Commission
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1 who have come forward to keep us moving
2 ahead. As I said yesterday afternoon, we had
3 the opportunity to deal with the issues on
4 access and telecommunications, access type of
5 issues. There was a full discussion.
6 Now, the format that we have agreed
7 to under our work plan is to ask our
8 presenters to present in 5 minutes. The
9 reason of this is that it is the will of this
10 Commission that we do most of our business,
11 or virtually all of our business by way of
12 interaction with you and with each other so
13 that we can argue back and forth, we can
14 discuss the issues in a debate type of
15 fashion, and particularly utilize our
16 speakers in a capacity that I think is
17 constructive.
18 Now, we have that process that is
19 available. I might mention that everyone in
20 the room is aware that we have a major
21 hurricane that is approaching the coast of
22 the United States. I in Virginia have
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1 declared a disaster declaration there, a
2 state of emergency, if you will. Excuse me.
3 Not a disaster declaration. State of
4 emergency in preparation for this storm which
5 is already beginning to create some rain in
6 the Commonwealth, not to mention the states
7 south of us which is a matter of some
8 concern.
9 Many of the Commissioners have
10 expressed to me that they may have to get out
11 in time to be able to get back down into the
12 Washington area, the Virginia area, and so
13 on, and this is a significant issue for us
14 today and we should remember that as we go
15 on.
16 Just a couple of housekeeping
17 things. I will call time pretty close on
18 the 5 minutes as we go through the day, and
19 that maximizes the opportunity for the debate
20 format to go on. We would ask that each
21 person identify themselves. This is being
22 Webcast and transcribed, and we would ask
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1 that each person that speaks here today
2 identify themselves for the record. I know
3 that when we get into the give and take it's
4 hard for us, the Commissioners to do that,
5 but do the best you can. Meanwhile, the
6 presenters should always give us your name
7 and who you're with before you proceed on and
8 that way we have that.
9 Just a small little housekeeping
10 thing, if everybody can remember to turn
11 these off when you're done speaking, it'll
12 help a lot with the Webcast and with other
13 types of the difficulties of the Webcast
14 efforts that we're working on. These are
15 small matters, but they help us all a great
16 deal.
17 I want to thank the Commission. I
18 certainly want to express my appreciation to
19 the fine owners of this building here for
20 providing us the space for the eCommerce
21 Commission to meet. Now we shall turn our
22 attention to Mr. Brian Horey who is a board
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1 member of the New York New Media Association, and
2 one of our hosts for this meeting for some
3 opening remarks. Mr. Horey?
4 MR. HOREY: Thank you. On behalf
5 of the New York New Media Association I would
6 like to welcome Governor Gilmore, the members
7 of the Commission, and our distinguished
8 speakers and guests to Silicon Alley.
9 For those of you watching and
10 listening in cyberspace, we are in real space
11 at the Global Digital Community Sand Box
12 at the New York Information
13 Technology Center at 55 Broad Street in Lower
14 Manhattan.
15 We are pleased that these important
16 topics are being debated here in New York and
17 feel that it quite appropriate that these
18 discussions take place here. In the last 5
19 year, New York has emerged as a leading
20 center of Internet activity. Silicon Alley
21 is now home to over 2,000 new media companies
22 with an employee base approaching 100,000
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1 people, and e-commerce is the primary focus
2 of many of these companies and their
3 employees. Silicon Alley is showing
4 unmistakable signs of success.
5 In the last year, New York has had
6 more Internet-related IPOs than any other
7 city in the country, and these newly public
8 companies have created over $35 billion of
9 wealth in the process. The rate of new media
10 company formation in New York has accelerated
11 in the last year, ensuring a steady stream of
12 future IPO prospects down the road.
13 While the entrepreneurs of New York
14 have been busy building their companies, the
15 State of New York has taken a leadership
16 position in the area of Internet taxation.
17 Or I should say, the lack thereof. Thanks to
18 the efforts of Governor Pataki and the State
19 Legislature, New York was the first state to
20 create a sales tax exemption specifically for
21 ISP services.
22 Additional tax incentives for the
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1 new media industry were enacted this year,
2 putting New York in the vanguard of
3 legislative efforts to support the industry.
4 The New York New Media Association
5 is very pleased to play host for these
6 hearings. The association was formed a
7 little over 5 years ago to foster the growth
8 of the new media industry in New York and to
9 serve the entrepreneurs and creative and
10 business professionals that comprise the new
11 media community here. From an initial
12 gathering of 20 people at our first cybersuds
13 event, the association has grown to become
14 the largest new media trade association in
15 the country with over 5,200 members,
16 representing 1,900 companies, and Blue Chip
17 corporate sponsors including IBM, Sun Micro
18 Systems, Intel, Lucent, and Microsoft --
19 supports a wide range of programs including
20 panel discussions, an annual trade show, an
21 annual venture capital conference, an angel
22 investor program, internships, industry
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1 surveys, state and local lobbying, and work
2 shops for entrepreneurs. You can learn more
3 about NYNMA at www.nynma.org.
4 Let me conclude by thanking on
5 behalf of Silicon Alley the members of the
6 Commission and their staff for taking on the
7 important issues surrounding electronic
8 commerce and taxation. Your deliberations
9 and conclusions will have a lasting effect on
10 the industry, and we look forward to
11 supporting your efforts to create a robust
12 e-commerce marketplace. Thank you, Governor.
13 CHAIRMAN GILMORE: Thank you, Mr. Horey.
14 As I've said, this meeting is Webcast and
15 transcribed. We have microphones throughout
16 the room for people who are presenters or any
17 experts that want to speak. You just have to
18 remember to get to a microphone at all times
19 when you're speaking.
20 Today we are listening to
21 presentations on the central issue
22 surrounding the Commission; by no means not
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1 the only issue, but certainly a central
2 issue, and that is regarding local, state,
3 and federal tax issues associated with
4 electronic commerce. After the presentations
5 we'll being our deliberations and questioning
6 of the speakers and members of the expert
7 panel.
8 This ought to go until about 3:30
9 this afternoon, including a break in the
10 middle for about an hour and a half for
11 lunch. Following that topic, the Commission
12 will hear from speakers concerning
13 international taxes and tariff issues, and
14 there are some resolutions involved with that
15 as well. My best guess is that that may not
16 take the full time, and that's considering
17 that we have to get out because of the storm
18 situation.
19 That's not necessarily a bad thing,
20 and we find an opportunity I think to address
21 that in more depth at a later time. We have
22 limited presenters on that issue anyway.
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1 So, we're I think prepared to
2 proceed. We have many interesting and
3 knowledgeable speakers who are here today who
4 will make presentations and talk with us. We
5 would ask the speakers, when we get through
6 the speakers, we would you go stand by nearby
7 though. We have more speakers on this issue
8 than we typically would, and more have been
9 offered by members of the panel than were on
10 any of the other issues.
11 So, we have broadened this out
12 considerably, and we would ask you all to
13 stand by nearby in case there are questions
14 to be had from the Commission after your
15 presentations.
16 We are interested not only in
17 hearing from as many organizations as
18 possible, but also of course debating and
19 discussion of these issues among ourselves.
20 Following the speakers, we'll open up the
21 discussion for deliberation just as we did
22 yesterday. I thought it was a format, ladies
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1 and gentlemen, that worked pretty well
2 yesterday.
3 We'll break this into several
4 panels because of space concerns, of course.
5 The first panel that is here with us today is
6 Charles Bayless Dan Bucks, Kaye Caldwell, and
7 Harley Duncan. We'll begin with Mr. Bayless.
8 I understand you are the president and CEO
9 of Illinova Power. Is that correct?
10 MR. BAYLESS: Yes, sir. That is
11 correct.
12 CHAIRMAN GILMORE: Please proceed.
13 MR. BAYLESS: Thank you. I have a
14 presentation which I hope will be appearing
15 on the screens in just a minute. The main
16 purpose of my topic today is to tell you that
17 there are many industries out there that are
18 not what are normally considered e-commerce
19 industries -- beginning to explode into
20 electronic commerce in the next couple of
21 years.
22 On the way down here I just was
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1 reading a couple of magazines. I always
2 throw my magazines under the desk and read
3 them on airplanes. "Utility Business," the
4 lead article, "The Approaching Internet Tidal
5 Wave": "By the year 2003, only one other
6 major sector of the economy, computers and
7 electronics, will be more Internet dependent
8 than utilities." "American Gas," two
9 articles, one entitled, "The Mighty Mouse,"
10 "The Internet now offers natural gas
11 customers a new way to pay their bills." So,
12 our industry is going to explode.
13 Historically, our industry was made
14 up of four segments: generation;
15 transmission; distribution; and customer
16 service. Two of these are being deregulated,
17 generation and customer service. Customers
18 will have the opportunity to choose their
19 generation supplier, and local facilities
20 will still perform transmission and
21 distribution. Now, this is going to lead to
22 Internet -- it's one of those unintended
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1 consequences, but it will. Electricity is
2 the ultimate commodity. It is totally
3 indifferentiated. If the president of
4 Consolidated Edison were here today, he could
5 not tell you where the electricity in this
6 building is coming from. It is coming from
7 every supplier in the Eastern United States.
8 The transmission system is like a
9 large lake. There are a couple thousand
10 electric plants pouring electric into the
11 lake; there are millions of customers taking
12 electric out of the lake. You cannot tell
13 which water or in this case electric
14 molecules are going to which customer. It's
15 totally indifferentiated. It goes into a
16 common carrier, and who knows what comes out
17 the other end.
18 All we can do is an accounting
19 treatment that we call ACE. ACE stands for
20 area control error. It's really a fairly
21 simple concept. We put a boundary around our
22 service territory and every transmission line
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1 that come in, we meter it, and we meter
2 everything. We monitor about 2,000 data
3 points a second to look at ACE. We take our
4 generation plus our imports, that's what
5 we've got available.
6 We support from that our load, our
7 losses, our exports. That's what we're
8 using. They better be equal. As long as
9 every utility keeps ACE equal, then the
10 system is balanced.
11 We can buy power from New York. If
12 we buy power from New York, Con Ed simply
13 raises their generation 100 megawatts and
14 their raise their exports 100. The PJM,
15 Pennsylvania, Jersey, Maryland, raises their
16 imports 100, raises their exports, 100.
17 Everybody does that down the way.
18 It finally gets to Illinois. We've
19 got our 100. There aren't line losses. Did
20 we actually get that power? No. No way. No
21 one knows where the power went, but it's
22 accounted for that way.
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1 Now, you notice in there that I
2 said load. You notice that blue dot. That's
3 where the Internet comes in. Right now we
4 measure load at major substations, and we may
5 measure load going out of a substation and
6 there may be 10,000 customers on that line,
7 but they're all hours. So, we can measure
8 that one load point. At Illinois Power we
9 only monitor about 800 load points
10 for 550,000 customers. You can see that in
11 the next graph, that pink dot. That's all we
12 have to do is measure there.
13 In this graph, I've shown that new
14 energy ventures, Con Ed, Duke -- we can no
15 longer measure at the pink dot. We now have
16 to go right to the customer to measure the
17 load to see what every person is using. So
18 they have a computer system. We are
19 currently in the process of installing
20 real-time reporting meters that will report
21 back every 15 minutes to Illinois Power what
22 every customer is using.
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1 People are using Internet for this.
2 NEV uses Internet. They're using radio;
3 they're using telephone; they're using
4 anything you can think of. One that NEV, for
5 instance, new energy ventures data gets back
6 to our computer, we will have to aggregate
7 that and send the packet to NEV to say here's
8 what you're using in our territory at this
9 time. Then they have to schedule that much
10 in so that they have enough power in our
11 territory.
12 You'll notice I've drawn the
13 packets differently. Everybody wants
14 different information so we're going to have
15 to go to something like XML so we can tag the
16 data and say this is first name, this is last
17 name, we want this, you want that, here it
18 is.
19 So once this connection is made,
20 then it's a two-way connection. The next
21 step which many are already doing is that a
22 customer in Montana for instance will be able
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1 to log onto a supplier's server, Duke in
2 North Carolina, and say that looks good.
3 I'll buy that 100 megawatts or I'll buy
4 that 10 megawatts or whatever.
5 The Duke computer in North Carolina
6 will then tell the local utility in Montana
7 this is my customer. I'm selling at 100
8 megawatts. You note that in your ACE to keep
9 track of it, and we're going to be getting
10 hundreds of such messages. The local utility
11 in Montana will do that.
12 They'll also notify the existing
13 supplier, I'm taking over, you're out. Sort
14 of like if AT&T/MCI. There has to be a
15 cutoff point so that they'll know when to
16 stop reading the meter every 15 minutes for
17 Duke.
18 CHAIRMAN GILMORE: Mr. Bayless, I think
19 this is it. But what we'll do is come back
20 to you for some questions and answers and go
21 ahead and pursue this a little bit further.
22 MR. BAYLESS: Thank you.
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1 CHAIRMAN GILMORE: But we appreciate
2 very much your insight.
3 MR. BAYLESS: Thank you.
4 CHAIRMAN GILMORE: The second speaker is
5 Mr. Dan Bucks. He is the director of the
6 Multi-State Tax Commission. Appreciate your
7 initial presentation before Q&A, Mr. Bucks.
8 MR. BUCKS: Mister Chairman and
9 members of the Commission, it is indeed a
10 pleasure and an honor to be here. I want to
11 thank you very much for this opportunity.
12 The issue of the sales and use tax collection
13 on remote sales at the time of sale has been
14 a matter of controversy and conflict for
15 over 40 years.
16 If you look back at this period of
17 time which stretches over really a fifth of
18 this nation's history, you can think about
19 the other kinds of conflicts that have been
20 resolved in this period of time.
21 President Nixon went to China, and
22 today China is a major trading partner. The
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1 Cold War is over, the Berlin Wall fell, and
2 Germany was reunited; and Israel has signed
3 peace treaties with Egypt and Jordan and the
4 Palestinians; and yet we're here in the
5 United States in this period of time still
6 arguing about whether or not the sales and
7 use tax will be collected on remote sales at
8 the time that the sales are made. It's time
9 to bring this conflict to an end, and it's
10 possible to bring this conflict to an end,
11 and this Commission, your Commission, can
12 play a critical role in finally bringing
13 this 40-year battle to a close.
14 Now, the costs of conflict have
15 been very high. It's included local
16 businesses closed because of unfair
17 competition from those who do not collect the
18 tax. It includes public dollars spent on tax
19 audits and litigation and costly after-sale
20 methods of collecting use taxes. It includes
21 money spent by remote sellers on endless
22 legal advice and limitations on their
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1 business flexibility in efforts to try their
2 way through NEXUS mind fields so that they
3 don't have to collect the tax. It includes
4 reduced customer satisfaction because
5 businesses restrict the way they serve
6 consumers, again, to avoid the taxes.
7 These costs have been high, but
8 they will get higher still if the problem is
9 not resolved. The costs won't rise so much
10 in the next couple of years, but out there
11 further, 5, 10, 12 years out, if e-commerce
12 sales continue to grow and if they begin to
13 erode the sales and use tax base, states are
14 going to be faced with difficult choices.
15 Now, please remember that the sales
16 tax raises a lot of revenue. The amount of
17 state sales taxes alone is nearly equal to
18 all state aid to elementary and secondary
19 education, about 93 percent in 1997. It
20 exceeds the total amount spent by states on
21 higher education.
22 It's two-and-a-half times that
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1 which has been spent on roads and highways by
2 states. So, you can a measure of the size of
3 this tax. If it begins to falter, states
4 besides being faced with choices about
5 cutting services may also be looking at
6 shifting taxes to production taxes on
7 business income or property taxes that
8 disproportionately affect certain business
9 sectors such as manufacturing and natural
10 resource sectors that require high physical
11 capital inputs.
12 The costs are going to rise if this
13 problem is not solved, and this Commission
14 though can play a critical role in bringing
15 the conflict to an end and can play the role
16 of peacemaker. I suggest you can do so in
17 very simple ways: By following a strategy, a
18 general approach, of asking the warring
19 parties here to resolve the conflict on the
20 basis of goals that you set for those
21 parties.
22 I would suggest in particular, and
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1 this could be part of a resolution that,
2 number one, you declare both sides to be
3 right. It's not fair that the tax is not
4 collected on sales at the time of sale. It's
5 not fair to the local business. So, that
6 side is right. The other side is also right,
7 that it costs too much under current
8 arrangements and it's too burdensome to
9 collect the tax on remote sales.
10 So, what is needed is a system of
11 tax collection that places minimal burden, if
12 any burden at all, on the remote seller,
13 which leads to the second step: Ask state
14 and local officials to develop a plan
15 precisely to meet that goal, to collect the
16 tax without placing a burden on remote
17 sellers.
18 Third, ask technology companies to
19 assist state and local officials in
20 developing that plan if state and local
21 officials ask that it be done. Fourth, the
22 further steps will fall into place after the
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1 plan is developed, because I think that there
2 are fair-minded people in both the public and
3 private sectors who will support the kind of
4 plan that meets the goal of collecting the
5 tax at the time of sale without placing a
6 burden on remote sellers.
7 The plan will be a combination of
8 advanced technology. There's already a
9 system like this operating in Europe
10 developed by a major U.S. Corporation. It
11 will be a combination of advanced technology
12 of certain strategic simplifications in state
13 and local taxes combined with a willingness
14 by state and local governments to pay for the
15 cost of collection. That's the outlines of
16 the solution, and the leader though for this
17 would rest with the Commission. Thank you
18 very much for the opportunity to address you.
19 CHAIRMAN GILMORE: Mr. Bucks, thank you
20 very much, and we'll be coming back to you
21 also in a little while I think to examine
22 some of those premises. We appreciate it.
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1 The next person who is going to speak to us
2 is Kaye Caldwell of CommerceNet.
3 Ms. Caldwell, thank you very much for being
4 here.
5 MS. CALDWELL: Thank you very much.
6 I certainly appreciate this opportunity to
7 present our views on this subject.
8 CommerceNet is a nonprofit organization of
9 about 200 companies with the goal of
10 promoting the growth of electronic commerce.
11 CommerceNet's written comments which I think
12 you have either before you or in the
13 materials somewhere are much more extensive,
14 but today I'd like to focus on the need to
15 solve our state and local tax collection
16 problems without subjecting millions of small
17 and medium businesses to thousands of tax
18 collecting jurisdictions.
19 Today I'm hearing this week that
20 over half U.S. small businesses are now on
21 the Internet in some form or another.
22 Both history and recent events have
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1 shown that when states can discriminate
2 against interstate commerce, they'll do it.
3 In fact, it was the extensive array of state
4 lawyers that arose under the Articles of
5 Confederation, not 40 years ago, but 225
6 years ago, that was the motivation for
7 including the Commerce Clause in the U.S.
8 Constitution.
9 More recently, when states have
10 been granted the right to regulate certain
11 areas of interstate commerce, they've
12 continued to create both taxed-based and
13 nontax trade barriers. Details of these
14 barriers can be found in our written comments
15 and in the documents that are cited in those
16 comments.
17 So, the real issue before the
18 Commission is whether or not this country
19 should continue to ensure the existence of a
20 robust national marketplace accessible by all
21 businesses and consumers alike or, rather,
22 instead, we will now allow the states to
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1 impose protectionist tax systems that
2 discriminate against interstate commerce.
3 Even today, multi-state taxpayers
4 are routinely subjected to unconstitutional
5 discriminatory taxes for which there is
6 really no effective remedy except perhaps 10
7 or 20 years of litigation, all the way to the
8 U.S. Supreme Court.
9 It would be extremely unwise to
10 subject the millions of small and medium
11 businesses in the new Internet marketplace to
12 taxing jurisdictions where they have no
13 governmental representation.
14 Furthermore, if we require every
15 business in the United States to register as
16 a tax collector in every state and local
17 jurisdiction, there is nothing to stop those
18 jurisdictions from imposing all kinds of
19 additional taxes on them.
20 Instead of abandoning our national
21 marketplace to the whims of the states,
22 Congress should protect our national
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1 marketplace by taking three steps. First of
2 all, Congress should provide a timely and
3 effective mechanism for redress for
4 multi-state taxpayers that have
5 unconstitutional taxes imposed on them.
6 There are several suggested mechanisms for
7 doing this in our written comments.
8 Secondly, in 1998 Congress
9 strengthened the role of the national
10 taxpayer advocate within the IRS. It may be
11 time to create a position in the federal
12 government of a multi-state taxpayer advocate
13 to provide for federal oversight of state tax
14 policies that affect interstate commerce.
15 Finally, Congress should redirect
16 the states to a workable solution for the
17 collection of use taxes on transactions in
18 interstate commerce by making it clear that
19 the states will not be allowed to impose tax
20 collection obligations extraterritorially.
21 Fortunately, the Commission has before it an
22 excellent proposal by Commissioner Andal that
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1 would redirect the states to find a workable
2 solution for the collection of these use
3 taxes.
4 Mr. Andal's proposal would not
5 prevent the states from imposing use taxes on
6 transactions in interstate commerce. It
7 would merely require the states to find other
8 ways of collecting those taxes besides
9 imposing tax collections on businesses that
10 have no governmental representation in their
11 jurisdiction.
12 While there are several possible
13 mechanisms that the states could use, one of
14 them has already been proven to work. That
15 mechanism is that the states could collect
16 sales taxes on all the retail sales that take
17 place within their borders regardless of
18 whether the product is delivered in the state
19 or out of the state, setting the tax rate to
20 the same rate as that of the buyer's state.
21 Essentially, this means the states could
22 repeal their export exemptions from sales
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1 tax.
2 Sellers could the remit all the tax
3 they collect to their own state, and the
4 states would be free to agree with other
5 states to exchange that tax money collected
6 on those sales to those states' residents.
7 The system has already been proven
8 to work. We have a working example of this.
9 It's the International Fuel Tax Agreement.
10 There a similar system was created that
11 currently collects fuel use taxes for all the
12 continental states from multi- state
13 truckers. Further details on this system is
14 available in our written comments.
15 The American economy, fueled by the
16 efficiencies technology has brought us is the
17 envy of the world. Let's not jeopardize our
18 continued success by choking small and medium
19 businesses with tax burdens that threaten
20 their new-found access to national
21 marketplaces that the Internet gives us.
22 The three actions mentioned above
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1 would ensure that the U.S. maintains and
2 further promotes a free, open marketplace
3 that benefits both businesses and consumers
4 in all areas of our nation. I'd like to
5 thank the Commission again for this
6 opportunity to speak, and I would welcome
7 questions on this.
8 CHAIRMAN GILMORE: Ms. Caldwell is very
9 effective and efficient, and I appreciate it
10 very much. Each of the Commissioners, by the
11 way, has had an opportunity to offer
12 presenters to this panel, and we have
13 accommodated to the greatest extent to
14 eliminate duplication, but basically to
15 accommodate every Commissioner. We haven't
16 said which Commissioner is offering which
17 person, but Dean, I think you might have
18 blown your cover on this one.
19 MS. CALDWELL: I don't think that's
20 true.
21 CHAIRMAN GILMORE: But nevertheless,
22 this was very, very effective, and we thank
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1 you.
2 MR. ANDAL: I thought she was very
3 effective.
4 CHAIRMAN GILMORE: Yeah. I thought you
5 might. The next speaker is Harley Duncan.
6 He is the director of the Federation of Tax
7 Administrators. Mr. Duncan?
8 MR. DUNCAN: Thank you, Mister
9 Chairman and members of the Commission. My
10 name is Harley Duncan. I'm the executive
11 director of the Federation of Tax
12 Administrators which is an association of
13 state tax administration agencies in the 50
14 states, the District of Columbia, and New
15 York City.
16 It's a pleasure to be here with
17 you. The work that you have before you on
18 the application of sales and use tax to
19 electronic commerce as well as other state
20 and local taxes is of profound importance to
21 the states.
22 Based on estimates of electronic
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1 commerce that reach consumer sales, using
2 electronic commerce and the Internet of $100
3 billion by the year 2003, we estimate that
4 the revenue consequences to the state of
5 uncollected use tax could reach as much as $4
6 billion in that year alone of 2003. When
7 combined with other direct marketing, could
8 reach as much as $10 billion in the 5-year
9 period.
10 That's of course of great
11 importance to state and local governments,
12 and we're willing and pleased to work with
13 you in trying to address that particular
14 issue.
15 I was asked and will direct my
16 comments particularly to technologies that
17 are used today to help administer sales and
18 use tax and simplify sales and use tax
19 administration at the seller level. I think
20 the punch line is essentially this, that
21 there are several technologies and software
22 packages that are used today that can
35
1 effectively deal with much of the complexity
2 that is there.
3 The states are also taking steps to
4 help reduce use technology to reduce that
5 complexity, and that they provide a
6 foundation for which we can build what some
7 would refer to as a 21st century tax system
8 to deal with electronic commerce.
9 Technology alone is not a
10 sufficient answer. There's no sense of just
11 automating the complexity. We really do need
12 to think about ways to simplify the system so
13 that sellers can operate at a reasonable cost
14 and that there are strategic simplifications
15 that are necessary.
16 The final point is that I think the
17 leadership of this particular Commission can
18 get us to a system that adapts both strategic
19 simplifications and advanced technologies to
20 reduce the burden and, hopefully, as much as
21 possible, take the seller out of the
22 collection responsibility entirely.
36
1 When one looks to existing
2 technologies, there are at least three firms
3 out there today that purport to have a
4 comprehensive system of sales tax
5 administration that they offer. Their
6 publicly available information talks about
7 their ability to make taxability
8 determinations by product; to make tax rate
9 determinations by location; to deal with
10 exempt questions of exempt uses, exempt
11 products, and exempt entities; as well as to
12 offer filing and returns and remittance
13 services.
14 In the area of assigning tax rates,
15 these packages generally work from an
16 individual address, add to it some public
17 information from the Postal Service, and then
18 are required to use proprietary techniques
19 and software to get to an actual tax rate
20 determination. In the area of exemptions,
21 they deal with certificates, the processing
22 and administration of those, as well as
37
1 product codes to deal with exempt products.
2 As far as returns and remittances, they all
3 have a fairly robust package of those.
4 States are taking steps in each of
5 these areas as well of using geographic
6 information systems to assign tax rates; of
7 offering electronic filing alternatives,
8 electronic payment alternatives; and other
9 approaches to it.
10 As I said, technology alone is not
11 the only answer. We need to deal with
12 simplifications. There are two types that I
13 would suggest. Rates and exemption
14 administration are exceedingly important.
15 Most importantly, we need to really re-look
16 at the relationship between the seller and
17 the state and offer hold harmless and safe
18 harbor so that good- faith efforts to comply
19 with the tax law aren't unreasonably
20 penalized, and if you take steps to do it
21 right, you're not punished on audit.
22 I think if we could combine these
38
1 simplifications along with advanced
2 technologies, we can develop a system that
3 really does take the seller out of it and
4 deal with it in a third-party situation where
5 the states are involved and the sellers are
6 involved, but take the seller out of it.
7 It's really the political leadership of this
8 group and the technology leadership of this
9 group that can us there. Thank you very
10 much.
11 CHAIRMAN GILMORE: Mr. Duncan, thank you
12 very much, and I think there will be
13 extensive questions and answers and
14 interactions with you all as we proceed on
15 further. The will of the Commission is to
16 get through the presenters first and then
17 leave a broad amount of time for the rest of
18 the day to in fact interact with you and with
19 each other.
20 So, thank you very much. Please
21 standby not too far away, and we then move to
22 our second panel, and they are Jim Eads,
39
1 George Isaacson, Randy Johnson, and Joe
2 Brooks. If you would all please come forward
3 and take your seats, and we will begin.
4 Gentlemen, welcome to the second
5 panel to be presented today. We appreciate
6 your willingness to be here at the call of
7 the Commission, and we're looking forward to
8 this. The first presenter on our second
9 panel, second group that is coming forward,
10 is Jim Eads. He is a partner Ernest & Young.
11 Mr. Eads, thank you very much.
12 MR. EADS: Thank you, Mister
13 Chairman. I appreciate the invitation to
14 appear before you today. As you have
15 indicated, I am Jim Eads. I am a partner
16 with the public accounting firm of Ernst &
17 Young. I practice in the area of state and
18 local taxes dealing with telecommunications
19 and electronic commerce.
20 I know we have a brief period of
21 time to present to you today, and so I would
22 like to begin by no doubt dealing with an
40
1 issue that's uppermost in your mind, that
2 being highway safety.
3 As you know, there are accidents
4 occurring on the streets and highways of this
5 country every day that cause death and
6 destruction. State and local governments are
7 attempting to ameliorate that by passing laws
8 and having enforcement agents out there, but
9 they're not able to do it completely.
10 So perhaps one solution to that
11 problem could be to require every seller of
12 automobiles everywhere in the country to know
13 what the speed limit is wherever the buyer is
14 going to garage that car and install a device
15 on that vehicle so that it doesn't exceed
16 that posted speed limit.
17 Now, if you think that is an
18 impractical solution, my purpose in using
19 that analogy is to suggest to you that the
20 imposition of the current sales and use tax
21 system to electronic commerce in remote sales
22 makes as much sense as that analogy. It is
41
1 simply too complex to overlay that system
2 onto the kind of commerce in this country
3 today.
4 You asked me in your invitation to
5 come to you with a solution. Obviously, my
6 solution depends upon how I define the
7 problem. I have defined the problem as you
8 might expect to be the complex state and
9 local tax system that exists today that
10 encourages avoidance of tax collection
11 responsibilities and places an unreasonable
12 burden on all forms of interstate commerce.
13 My solution: Simplify, simplify,
14 simplify. Pervasive simplification of the
15 state and local tax system is necessary if
16 this Commission is to be successful in
17 achieving its mandate and is an essential
18 prerequisite to all of your discussions of
19 all of the issues that you're going to
20 debate.
21 The issue that I am going to
22 discuss is not whether or not certain things
42
1 should be taxed, and not whether or not
2 governments have a need for revenues to
3 provide essential services to citizens, but
4 the cost and the process by which those taxes
5 are collected and the persons on whom those
6 costs fall. You have in your packet of
7 materials a study that Ernst & Young has
8 recently done measuring the cost of
9 compliance of sellers.
10 The primary conclusion of that
11 study is that the cost of collecting sales
12 tax falls on retailers, small business,
13 medium size, and large, and is a cost that is
14 out of line with the amount of revenue that
15 has actually been collected.
16 To address the question of whether
17 or not simplification is within your purview,
18 it clearly is within the purview of the
19 Commission to suggest these areas. Not only
20 that. It is clearly within the purview of
21 Congress to take some action in response to
22 recommendations that you might make. You
43
1 heard yesterday about the 4-R Act (Railroad Revitalization and Regulatory Reform Act of 1976 – prohibited states from taxing railroad property more heavily than other industrial and commercial property)
2 You heard yesterday about Public Law 86272.
3 Congress has acted in the past to
4 circumscribe the instances of state and local
5 taxation when it determined that state and
6 local taxation constituted a burden on
7 interstate commerce. I suggest to you that
8 the complexity of state and local sales and
9 use taxes today constitute that kind of
10 burden and is a legitimate issue for this
11 Commission to address, and for Congress in
12 turn to act.
13 It is not to say that there not
14 worthy efforts going on in the state area
15 dealing with simplification. Certainly, in
16 Utah, and Washington, and Idaho, there is a
17 three-state effort going on to try to
18 simplify taxes in those jurisdictions for
19 multi-state sellers. Other studies are
20 underway in individual states to deal with
21 that.
22 But I suggest to you that
44
1 simplification cannot be left to state and
2 local governments alone. Guidance must come,
3 first, from this Commission, and I think
4 ultimately from Congress.
5 The complexity of state taxes has
6 already been recognized. I have read an
7 interview given by Governor Leavitt in which
8 he uses a wonderful illustration about taxing
9 peanuts and how the sale of peanuts is taxed
10 in the different state and local
11 jurisdictions.
12 I have read comments from
13 Mr. Pottruck about the complexity of this
14 system that he did not realize existed prior
15 to his service on this Commission. I know
16 that of course Mr. Armstrong's comments in
17 his opening remarks at the first Commission
18 meeting in which he noted that the AT&T
19 enterprise is forced to file 39,812 state and
20 local tax reports a year.
21 I've done that math on that. If
22 you divide that number of returns
45
1 by 52, 40-hour weeks, it's a state and local
2 tax report every 3.12 minutes. That
3 constitutes my definition of a burden on
4 interstate commerce.
5 Now, as to the suggestions you've
6 already heard, I think some very meaningful
7 comments from the earlier panel, but clearly
8 a single rate per state would go a long way
9 towards addressing some of these problems. I
10 think also there needs to be a sufficient
11 amount of lead time when changes are made.
12 One of the difficulties of interstate
13 businesses today is knowing when changes
14 occur.
15 If a city council acts tonight in
16 its meeting to change a tax rate, how is a
17 multi-state business across the country to
18 know when that happened, when it's effective,
19 and what they should do to comply. Quite
20 frankly, forcing retailers to collect the tax
21 is an act that requires some compensation.
22 Retailers are absorbing a great deal of
46
1 governmental cost in order to do this, and
2 they should be compensated for that.
3 Finally, I should say that there
4 are issues of sovereignty obviously in this
5 matter. What I suggest to you is that no
6 state or local government can act alone.
7 They need to see their tax law as a part of a
8 cumulative burden, and this Commission, if it
9 is to fulfill its mandate, should recommend
10 simplification.
11 CHAIRMAN GILMORE: Mr. Eads, thank you
12 very much. We appreciate that. The next
13 speaker is George Isaacson from the Direct
14 Marketer's Association. Mr. Isaacson?
15 MR. ISAACSON: Thank you, Governor
16 Gilmore. My name is George Isaacson. I'm
17 tax counsel for the Direct Marketing
18 Association. I was a member of the NTA
19 project steering committee, and also a member
20 of its drafting committee. Perhaps,
21 Governor, one of the advantages of being in
22 the second wave of speakers is that I can
47
1 focus my remarks on some of the issues which
2 my good friends from the state side of this
3 issue presented in the first wave.
4 If you listen to state and local
5 government speakers on this subject, you
6 would believe that there are basically two
7 problems that we have in this country. One
8 of them is the United States Constitution,
9 and the other is electronic commerce. I'm
10 concerned that this is a great misperception
11 of the issue.
12 It's a frequent that the Commerce
13 Clause is presented as being an anachronism,
14 a constitutional loophole. Much the
15 contrary, the Commerce Clause of the
16 Constitution was the Founding Fathers'
17 efforts to create a common market among the
18 states, and they did so 200 years before the
19 Europeans got the idea. Perhaps the best
20 example of the success of that common market
21 has been electronic commerce.
22 The fact that a merchant anywhere
48
1 in this country with a good idea can have the
2 temerity to believe that he can market to
3 America is made real because of the Commerce
4 Clause. I think it would be very dangerous
5 for us to sweep Commerce Clause protections
6 aside because we think that they interfere
7 with state tax administration.
8 The second issue that would seem to
9 be the problem in listening to my friends on
10 the state and local side is electronic
11 commerce. The growth of electronic commerce
12 is going to hinder the states in their tax
13 collection efforts, and there was the
14 suggestion during the first wave of speakers
15 that somehow schools will go unfunded.
16 The fact of the matter is that
17 information technology and electronic
18 commerce have been the greatest economic
19 engine of the 20th century. It has created a
20 rising tide in which not only the American
21 economy has prospered, but state revenues
22 have prospered.
49
1 USA Today reports that the states
2 can't spend fast enough as they racked up $33
3 billion in surpluses this year. The fact of
4 the matter is that a healthy economy is good
5 for state revenues, and there would probably
6 be no faster way to arrest the growth of
7 electronic commerce than to remove
8 constitutional protections and impose tax
9 collection obligations for 7,000 different
10 sales and use tax jurisdictions on remote
11 sellers.
12 The important issue I think that's
13 presented for this Commission is separating
14 fact from reality, and that's why in my
15 written submission to the Commission which is
16 entitled "Exploding NEXUS Myths," why
17 existing constitutional standards are both
18 fair and good national policy, I attempt to
19 walk through what I think are the mythical
20 elements.
21 For example, there's this notion
22 that there's not an even playing field, that
50
1 somehow there is unfair competition in the
2 marketplace because of current constitutional
3 standards, and that it's the fault of
4 electronic commerce. Well, in fact, local
5 merchants, Main Street merchants, have been
6 riding the electronic highway. It is the
7 Internet which has made it possible for
8 small, regional merchants to access a
9 national market, to do so quickly, and to do
10 so in an unfettered fashion.
11 It is going to be small companies,
12 it is going to be local merchants, who are
13 hampered if their ticket to that electronic
14 highway is an obligation to collect taxes on
15 behalf of 7,000 jurisdictions, or even on
16 behalf of 45 jurisdictions. The current
17 economic reality is that the electronic
18 highway is good for the states, it's good for
19 small merchants, and it's good for national
20 merchants.
21 Now, I was encouraged by Mr. Bucks'
22 and Mr. Duncan's suggestion that the first
51
1 order of business really needs to be to have
2 substantial simplification of existing state
3 sales and use tax systems and, in fact, even
4 the suggestion that there may be
5 technological alternatives that could take
6 the merchant out of the process altogether.
7 Those are constructive and positive
8 statements.
9 The reality is that that plan has
10 not taken shape. Despite the fact that the
11 National Tax Association Project spent more
12 than 2 years on it, we were not able to
13 discover any existing technology that
14 resolves that issue. We were not able to
15 discover a format yet that takes the merchant
16 out of the process.
17 So, the real question is what's the
18 first order of business, and I believe that
19 the first order of business is to reform
20 existing state tax systems before we talk
21 about expanding or exporting those tax
22 systems across state boundaries.
52
1 It's important for the members of
2 this Commission to recognize that the sales
3 and use tax system that we have in this
4 country was developed during the Depression.
5 It was developed at a time when because of
6 massive unemployment and bankruptcies, state
7 income taxes did not produce sufficient state
8 revenue in order to support government
9 services. It was developed at a time when
10 the customer, the retailer, the product, and
11 the cash register were all at the same place
12 at the same time in conducting a transaction.
13 It was conducted at a time when the
14 average tax rate was 1 or 2 percent. The
15 notion of taking this antiquated tax system
16 and exporting it across state boundaries and
17 imposing it on a new technology and believing
18 that that can be done so in an innocuous and
19 harmless fashion is unrealistic.
20 CHAIRMAN GILMORE: Thank you,
21 Mr. Isaacson. We'll be back to you in the
22 immediate future, and we appreciate this.
53
1 The next person to speak is Commissioner
2 Randy Johnson. He is the chair of the
3 Hinnepin, Minnesota County Board.
4 Mr. Johnson?
5 MR. JOHNSON: Thank you, Mister
6 Chairman, and thank you for this opportunity.
7 As you said, I chair the Hinnepin County,
8 Minnesota, Board of Commissioners, that's
9 Minneapolis and suburbs. I'm also the past
10 president of the National Association of
11 Counties.
12 Mr. Isaacson on behalf of the
13 Direct Merchants said that state and local
14 government officials seem to see two problems
15 with society today, the U.S. Constitution and
16 e-commerce. I think he has it backwards.
17 The e-merchants seem to see two problems in
18 society today as perhaps two opportunities.
19 One, they would see the U.S.
20 Constitution as an opportunity to shield them
21 and make them a special class of merchants
22 selling. Second, they see the Internet as
54
1 such a magical, mystical tool that they can
2 use that as another way to make them a
3 special class of merchants.
4 I'm going to read my remarks.
5 You've all received them. There are four
6 principles. Number one is there should be a
7 level playing field in commerce. The federal
8 government should not create an elite class
9 of merchants that Congress exempts from
10 collecting transaction taxes just because
11 some part of that transaction takes place on
12 the Internet, and it really is that simple.
13 Second, the federal government
14 should enable and certainly should not impede
15 efficient enforcement of the existing laws on
16 taxes on sales. One of the great myths about
17 the Internet, it's an urban legend now and
18 I'm sure we'll hear it over and over again
19 here and you've all heard it over and over
20 again, that myth is that the Internet
21 transactions are tax free, and some merchants
22 perpetuate that myth over and over and over
55
1 again with the slogan and the seductively
2 simplistic idea, "Don't tax the Internet."
3 Wrong.
4 Every state that has a general
5 sales tax also has a use tax to cover
6 purchases of the goods and services from
7 out-of-state merchants. But use taxes are
8 costly and inefficient, and inefficient to
9 collect, but it can be done.
10 Use taxes can be collected, and if
11 Congress should persist in protecting
12 Internet merchants, there are other ways of
13 collecting use taxes.
14 For example, those who deliver
15 goods using state and local roads and
16 highways and facilities could become the tax
17 collectors. Is that inefficient?
18 Absolutely. Is it constitutional and legal?
19 You bet. Is that right route to go? I don't
20 think so.
21 Now, because I'm a conservative and
22 a Republican, I believe that the government
56
1 that's closest to the people generally
2 governs best, but local government and state
3 government cannot run on an empty tank.
4 There are only three real sources of revenue:
5 Taxes on property; taxes on income; and taxes
6 on sales. As a conservative, I don't like
7 taxes on income.
8 I believe people ought to be
9 encouraged to work and keep the fruits of
10 their labor. Property taxes are almost
11 inherently regressive and have little to do
12 with the value of services delivered.
13 However, taxes on sales, even though I don't
14 like any kinds of taxes, if we want to tax
15 behavior we want to discourage and not tax
16 behavior we want to encourage, well, it's
17 been a long time since anybody has said
18 Americans consume much too little and save
19 far too much.
20 The fourth principle of sales taxes
21 can be calculated with the software that
22 exists today. It's a myth that it can't be
57
1 done. Mr. Duncan who spoke who earlier, the
2 director of the Federation of Tax
3 Administrators, explained what can be done.
4 It can be updated. It can deal with special
5 situations. It's a myth that it can't be
6 done.
7 In conclusion, let me just say
8 state and local governments do not create
9 poor people by collecting taxes. That's a
10 myth. That's some sort of nostalgic,
11 romantic nonsense.
12 Second, it is very inconsistent, it
13 is very inconsistent, to devolve
14 responsibilities to state and local
15 governments and then remove the ability of
16 these governments to pay for the
17 responsibilities that have been devolved unto
18 them. You can't have it both ways.
19 Third, it just plain unfair for
20 Congress, the federal government, to
21 intervene in the marketplace and create an
22 elite class of merchants just because those
58
1 merchants happen to use the Internet for some
2 part of their transactions. It's that
3 simple. It's that fair. We can use
4 e-commerce, we can use this great economic
5 engine, and we can use it without reducing
6 state and local governments. Thank you.
7 CHAIRMAN GILMORE: Thank you,
8 Mr. Johnson. Very effective. I appreciate
9 that. The next speaker is Councilman Joe
10 Brooks. He is representing the Council of
11 State Governments, the International and
12 County Management Association, the National
13 Conference of State Legislators, the National
14 Association of Counties, the National
15 Governor's Association, the National League
16 of Cities, the U.S. Conference on Mayors. By
17 coincidence, he is from my hometown,
18 Richmond, Virginia. Welcome, Mr. Brooks.
19 MR. BROOKS: Thank you, Governor.
20 In additional to the list that the Governor
21 has listed, we do have letters of support
22 from the National School Boards Association,
59
1 the American Association of School
2 Administrators, and the American Book
3 Seller's Association.
4 Mister Chairman and members of the
5 Commission, it is an opportunity that I have
6 should I say looked forward to speak to you
7 today. Isn't it wonderful to be a locally
8 elected official at a time like this? You
9 just really enjoy being involved in this kind
10 of discussion.
11 Combined as a group of people who
12 represent states, cities, and counties of all
13 sizes, we represent thousands and thousands
14 of elected and appointed officials who run
15 these governments. Let me assure you that
16 the work of this Commission is and will
17 continue to be our highest joint priority for
18 the immediate future.
19 The recommendations that you make
20 to the Congress next spring will have an
21 enormous impact on our ability as locally
22 elected officials to deliver public services
60
1 to our shared constituencies. You definitely
2 have our undivided attention.
3 In addition to serving as a council
4 member in Richmond, I chair the National
5 League of Cities Finance, Administration, and
6 Inter-Governmental Relations Committee which
7 has been charged with developing the National
8 League's policy on remote commerce.
9 Also I represented NLC on the
10 National Tax Association, Communications and
11 Electronic Commerce Tax Project. In the
12 past, I was chairman of the Finance Policy
13 Committee for the Virginia Municipal League.
14 So, my public service has involved me a great
15 deal in the financial area of local
16 government.
17 You have a copy of the state and
18 local association statement of principles for
19 marketing, for making electronic commerce
20 fair, and modernizing the state tax system.
21 I will not repeat what is in that statement,
22 but I will emphasize three key points that I
61
1 hope will help shape your thinking on this
2 important issue.
3 First point, a permanently tax-free
4 electronic marketplace would have a
5 significant impact on our ability to deliver
6 essential public services. We are not
7 talking about singling out the Internet for
8 additional taxation or adding new tax burdens
9 to the American consumer.
10 As other speakers have said, we are
11 talking about collecting legally due sales
12 and use taxes on goods and services based on
13 existing law regardless of how those
14 purchases are made. We believe the lost
15 revenue from tax-free online shopping will be
16 material. That has already been alluded to.
17 In Richmond, the state-shared
18 revenue from sales tax comprises 6.84 percent
19 of the general fund budget of the city of
20 Richmond. It comprises 8.83 percent of our
21 school budget. The state-shared portion of
22 sales tax. If our sales tax basis shrinks
62
1 dramatically or even disappears because of
2 tax-free online shopping, we will be forced
3 to seek revenues, and I like to think in
4 terms of revenues because taxes carries a
5 connotation, but it includes taxes in other
6 areas to provide essential public services
7 like police, fire protection, public
8 education.
9 No elected official wants to raise
10 taxes, increase user fees, or eliminate
11 fundamental services because of a reliable
12 and reasonably well- accepted revenue source
13 is shut down.
14 Point two. Giving online vendors a
15 competitive advantage over local merchants is
16 just plain unfair. I hope you read the story
17 in the June 27th edition of "The New York
18 Times" about the River Gate Books in
19 Lambertville, New Jersey. Closed after 10
20 years because the owner says she could not
21 compete with online book sellers.
22 Yes, it is only one book store, and
63
1 it might have happened anyway because of the
2 convenience of online shopping. But this
3 Commission should not endorse actions that
4 will make it even easier for amazon.com and
5 other online sellers to overwhelm the Main
6 Street merchant or the Main Street business
7 because online sellers offer consumers a tax
8 break.
9 The third point is dealing
10 with 7,400 taxing jurisdictions with
11 different bases and rates will be challenging
12 to national vendors, but the software to do
13 the job has already been alluded to and it's
14 already available. It is unreasonable to
15 suggest that the high-tech minds that have
16 made it possible to buy anything anytime from
17 anywhere online could not design software to
18 apply state and local taxes to those
19 purchases.
20 We know of many vendors who've said
21 they can provide the resources to online
22 businesses at reasonable prices to minimize
64
1 the burden of collecting legally due sales
2 taxes. At the same time, we support and
3 encourage voluntary efforts to simplify the
4 tax system. Already alluded to is the
5 Northwest regional sales tax pilot which is
6 bringing together state, local, and business
7 leaders in Utah, Idaho, and Washington, to
8 explore these ways.
9 Having participated in the work of
10 the National Tax Association's project, I am
11 well aware of the complexity of our tax
12 structure and the challenges that lie ahead
13 as the Internet changes the way we do
14 business.
15 There are so many other examples of
16 inventions and technological advances that
17 dramatically changed our day-to-day lives and
18 required major adjustment in public policy to
19 meet these changes. We've adjusted to these
20 changes.
21 As leaders of the nation's states,
22 counties, citizen towns, we urge you to pay
65
1 close attention to the principles we have
2 outlined in our statement which focuses on
3 the importance of equity, fairness, and
4 partnerships as we shape this new
5 marketplace.
6 CHAIRMAN GILMORE: Thank you,
7 Mr. Brooks. We appreciate the benefit of
8 this, and we will look forward to interacting
9 with you on some of the Q&A in just a few
10 minutes.
11 MR. BROOKS: Okay. Thank you.
12 CHAIRMAN GILMORE: The next panel that
13 is to come forward is Bruce Josten, State
14 Representative Matthew Kisber, State Senator
15 Steve Rauschenberger, and Terrence Ryan.
16 Gentlemen, good morning. We thank you very
17 much for being here. Bruce Josten is a
18 representative of the United States Chamber
19 of Commerce. Welcome, and thank you for your
20 comments.
21 MR. JOSTEN: I'm Bruce Josten. I'm
22 executive vice president for government
66
1 affairs at the U.S. Chamber of Commerce, and
2 the chamber does greatly appreciate the
3 opportunity to be here today.
4 The Internet has begun to
5 dramatically change the way America does
6 business, and if the projections of future
7 growth are even remotely accurate, these
8 changes will only intensify. In fact, change
9 is the only constant with respect to the
10 Internet. These changes go on to question
11 certainly the way we raise tax revenue.
12 Broad issues of tax fairness, state revenues
13 and macroeconomic impacts raise concerns over
14 whether we should tax the Internet.
15 The characteristics that define the
16 Internet raise questions and concerns over
17 whether we could effectively tax it if we
18 choose to. However, I believe we have an
19 obligation to seek answers before we move too
20 precipitously.
21 Rather than viewing these
22 challenges as a threat, we would suggest we
67
1 view them as an opportunity, an opportunity
2 to rethink our current tax system and create
3 a system that is simpler and fairer with
4 minimal compliance costs, a system that will
5 in fact complement the economy of the 21st
6 century.
7 Internet growth projections are
8 startling. This growth will not only
9 contribute directly to GDP, but it has the
10 beneficial by-product of fostering
11 productivity growth across most sectors of
12 the economy.
13 Our recent unprecedented run of
14 strong economic growth and low inflation
15 would have been impossible without a surge in
16 productivity and nurtured by technology and
17 use of the Internet. Taxing this wellspring
18 of economic activity may not be the best way
19 to raise needed tax revenue.
20 Taxation of the Internet also
21 raises questions of tax fairness and state
22 tax revenue needs. Although it is unfair to
68
1 tax traditional retail vendors while allowing
2 virtually online sellers to operate tax free,
3 placing a tax in Internet sales may not be
4 the best way to achieve fairness. Because
5 the Internet provides a marketplace far
6 beyond a company's physical location, many
7 entrepreneurs are finding that they can
8 operate a business nationally and even
9 internationally from small-town America.
10 Interestingly, this past Saturday
11 "The Washington Post" reported that the
12 National Trust for Historic Preservation says
13 that this very technology is now contributing
14 to a revival along the nation's Main Streets,
15 and its executive director for the Main
16 Street Center says he sees massive growth of
17 location-neutral businesses on Main Street.
18 The impact of potential impact of
19 e-commerce on state and local governments to
20 raise revenues has been cited repeatedly as a
21 reason to tax the Internet. However, even
22 though sales taxes are a very import source
69
1 of state revenue, we do have time to examine
2 the repercussions before we act. The
3 combined 1997 fiscal balance across all 50
4 states was in surplus by some $19 billion,
5 and recent upward revisions to our economic
6 growth potential over the coming decade
7 suggests the states' ability to collect tax
8 revenues will be increased substantially.
9 Even if the decision were made to
10 tax the Internet, its very nature raises
11 questions as to whether it could be taxed.
12 To impose a tax, a taxing authority must be
13 able to identify, measure, and verify the
14 occurrence of a taxable event. Many of the
15 characteristics of the Internet make it
16 difficult if not impossible to identify the
17 who, what, and where of e-commerce
18 transactions.
19 Central to that difficulty is the
20 tension between the government's right to
21 verify transactions for taxability, and an
22 individual's constitutional rights to
70
1 privacy. Verification would necessitate the
2 monitoring and decrypting of personal
3 transmissions, a chilling prospect. Privacy
4 and liberty cannot and should not take a back
5 seat to taxability.
6 In addition, the mobility of
7 parties to Internet transactions and their
8 ability to relocate to other jurisdictions
9 offer opportunities for tax shifting,
10 minimization, and evasion. Likewise, the use
11 of electronic cash further erodes the ability
12 of tax authorities to monitor transactions by
13 allowing the easy transfer of digital phones
14 offshore.
15 The tax system we have now is
16 clearly a mess. Internet taxation is not the
17 problem. It is instead a chance to rethink
18 the way we do the taxes. Internet provides
19 us with an opportunity to create a new system
20 of taxing for a new economy, one that is not
21 only consistent with economic growth but, in
22 fact, conducive to that very growth. Thank
71
1 you.
2 CHAIRMAN GILMORE: Thank you,
3 Mr. Josten, very much. Our next speaker is
4 Representative Matthew Kisber, State of
5 Tennessee. Is it State Representative?
6 MR. KISBER: Yes, sir.
7 CHAIRMAN GILMORE: Thank you for being
8 here, Mr. Kisber.
9 MR. KISBER: I am Matthew Kisber, a
10 member of the Tennessee House of
11 Representatives, where I serve as chairman of
12 the Finance, Ways and Means Committee. I'll
13 add that Tennessee is a state that depends
14 upon the sales tax for some 60-some percent
15 of our general fund revenues.
16 I'm joined this morning by Senator
17 Steven Rauschenberger, chairman of the
18 Illinois State Appropriations Committee. We
19 both serve as co- chairs of the National
20 Conference of State Legislatures, Executive
21 Committee Task Force on State and Local
22 Taxation of Telecommunications and Electronic
72
1 Commerce.
2 On behalf of Steve and myself, I
3 would like to thank you, Governor Gilmore,
4 and the members of the Commission for the
5 opportunity to address the Commission. We
6 speak on behalf of NCSL, a bipartisan
7 organization representing all elected state
8 legislators from the 50 states, our nation's
9 commonwealths, territories, and possessions.
10 We recognize the vital economic
11 force that the Internet and advanced
12 telecommunications services will be for our
13 state and our nation. We are as concerned as
14 you about the unintended consequences of
15 obsolete, discriminatory, or multiple taxes
16 on this vital new technology.
17 With that said, we need to make
18 clear that state legislatures are equally
19 concerned about the impact that our inability
20 to collect sales and use taxes on electronic
21 commerce transactions will have on state
22 revenues, and the unfair competitive burden
73
1 it could have on small Main Street businesses
2 in our communities.
3 As we all know, taxes are not very
4 popular. However, if state and local
5 governments are to provide basic necessary
6 services like education and public safety,
7 then we need to have the ability to levy
8 taxes. When you ask taxpayers which of all
9 the major federal, state, and local taxes is
10 the least unpopular or onerous, sales and use
11 tax is the big winner.
12 In some states like Michigan, the
13 voters by a comfortable margin chose to
14 finance their state's educational
15 improvements through the imposition of a
16 sales tax rather than relying on the property
17 tax, and then voted to increase the sales tax
18 that they'd pay. We understand that the
19 voters in Arkansas may soon be asked to
20 approve a similar referendum.
21 As state legislators, we recognize
22 the problem. Over the last 60 years, some
74
1 states have created a confusing,
2 administratively burdensome tax system with
3 very little regard for the compliance burden
4 placed on multi-state businesses. The NCSL
5 task force that we chair has identified six
6 principles to govern the reform and
7 modernization of state and local sales and
8 use and telecommunications taxes.
9 These principles are, first, state
10 and local sales and use taxes and
11 telecommunication taxes should treat market
12 participants in a competitively neutral
13 manner.
14 Second, sales and use taxes are
15 vital to states' sovereignty and autonomy, an
16 important strength in our federal system.
17 Third, participants in electronic
18 commerce should not receive preferential
19 treatment. Nor should they be subject to
20 special, discriminatory, or multiple taxes.
21 Fourth, states recognize the need
22 to undertake significant simplification of
75
1 state and local sales and use taxes to reduce
2 the administrative burden of collection.
3 Fifth, under a simplified system,
4 remote sellers without regard to physical
5 presence in the purchaser's state should be
6 required to collect and remit sales and use
7 taxes.
8 Sixth, NCSL encourages current and
9 future cooperative efforts by states to
10 simplify the operation and administration of
11 sales and use taxes.
12 We also include in our statement of
13 principles the reaffirmation of a
14 long-standing policy that NCSL would continue
15 to oppose any federal action to preempt the
16 sovereign and constitutional right of the
17 states to determine their own tax policy in
18 all areas including telecommunications and
19 electronic commerce.
20 The state of principles was
21 unanimously endorsed by NCSL's membership
22 during our annual meeting this summer in
76
1 Indianapolis.
2 I wish to close by saying that not
3 only am I a citizen legislator. I'm a
4 small-business owner as well. I understand
5 the complexities which are involved in this
6 issue and appreciate your thoughtful and
7 careful examination. At this time, I would
8 like to ask Steve to address the three
9 options that we believe the Commission has in
10 making their recommendations.
11 CHAIRMAN GILMORE: Representative
12 Kisber, thank you very much, and we will now
13 hear from Steve Rauschenberger.
14 MR. RAUSCHENBERGER: We provided
15 prepared remarks to all of the Commissioners,
16 and I would refer you to those for a copy of
17 the six principles that were adopted by NCSL.
18 I'll just make a few comments to try to move
19 you along because I know people want to fly
20 out. I'm used to being on the other side of
21 the microphone as the appropriations chairman
22 in Illinois. We have a $43 billion state
77
1 budget that is approximately 40 percent
2 dependent on sales tax revenues in the State
3 of Illinois.
4 I was also an impress tax collector
5 for the State of Illinois for more than 15
6 years. I ran three home furnishing stores
7 into the ground prior to my election to the
8 State Senate. I'm a third-generation
9 retailer, and I know the frustrations both of
10 collecting taxes for states, as well as in
11 the home furnishings industry we were one of
12 the first to materially feel market effects
13 of out-of-state transactions and
14 transshipping and a number of other issues.
15 So, I come to this discussion with some
16 familiarity.
17 I think the credibility of the
18 report that you gentlemen and ladies agree to
19 is going to be dependent on recognition of
20 some important points that I haven't heard
21 discussed with a lot of frequency yet. If
22 your report doesn't recognize state
78
1 sovereignty, I think that there's a
2 credibility issue. If your report doesn't
3 recognize the federalism model that has been
4 operative in the United States for more
5 than 200 years where states in effect act as
6 laboratories of democracy and provide most of
7 the policy innovation that takes place in the
8 United States, I think you're missing a major
9 point of your work.
10 I believe states need to be
11 encouraged, and I think properly encouraged,
12 states will move to a zero-burden collection
13 system and to standardization of both rates
14 and definitions. We didn't build a sales tax
15 and use tax system overnight, and we wont'
16 change it overnight, and we do need some
17 incentives to do that, and we need leadership
18 and that's what I hope this Commission moves
19 toward.
20 I also think there's a good chance
21 that states will carefully examine modified
22 consumption taxes as a replacement for sales
79
1 taxes where we can take a look at net income
2 and take nonconsumption uses and apply a much
3 lower rate.
4 State taxation should be broad
5 based and low rate and it works effectively
6 across the 50 states. The 50 states are the
7 ones with the balanced budget and without the
8 long-term liabilities or obligations, and
9 generally without the swirling political
10 tensions that Congress and the federal
11 government are frequently subject to.
12 A couple of quick comments. Those
13 who argue that for creation of electronic
14 Cayman Islands for the Internet are both
15 unrealistic and naive and should recognize
16 that the public will not support or stand for
17 two-tiered treatment of transactions over
18 time. Physical NEXUS as a concept is a --
19 interim compromise to give policy makers in
20 the legislative branches time to make the
21 right decision.
22 Don't hold to NEXUS as a solution.
80
1 NEXUS is an explanation by the courts based
2 on flaws in the current statutes, and I think
3 you need to recognize that.
4 I was very surprised briefly to
5 hear Ernst & Young, an accountant make a
6 lawyer's argument about vehicle
7 complications. We do require vehicles to
8 comply with 50 separate state regulations and
9 the regulations in more than 90 different
10 countries, and they manage to do that.
11 We manage to title those vehicles
12 effectively and act in the public safety by
13 making sure they're equipped with the safety
14 equipment that we believe that is socially
15 acceptable and reasonable.
16 Four quick things. I hope this
17 Commission does its work and recommends
18 equitable treatment of all participants in
19 transactional sales in electronic commerce.
20 I hope that you recommend reasonable time
21 lines for state and local reforms. I hope
22 that you make an attempt to define the scope
81
1 of acceptable burdens that remote sellers
2 should have to accept. I hope that you
3 recommend standardized rates and standardized
4 definitions.
5 There are some U.N. as I understand
6 commerce definitions that are perhaps
7 adaptable by states to try to come up with
8 common definitions. I hope that you
9 recommend reform of the multiple audit risk
10 that remote sellers are exposed to currently.
11 So, I really hope that you give us
12 an opportunity to move the ball forward and
13 to define some of the leadership issues, but
14 we hope that you're not precipitous in your
15 action and you take your time. We're
16 encouraged by the number of Governors on this
17 panel and legislators and the high-quality
18 people represented in the private sector.
19 Thank you.
20 CHAIRMAN GILMORE: Thank you very much.
21 I don't think we're precipitous anyway I can
22 say. But we appreciate very much what you
82
1 have offered to us today and together with
2 the state representative as well.
3 The next individual to speak to us
4 is Terrence Ryan, the director of state and
5 local taxes, Apple Computer.
6 MR. RYAN: Thank you. I'm here
7 today because you asked for some solutions.
8 I listened to Dan Bucks earlier, and Dan said
9 we need objectives to more forward, and I'm
10 going to first offer four objectives that I
11 think you guys should have.
12 The first one we can all agree on,
13 simplicity. The second objective is
14 scalability. It needs to be scalable.
15 Because no one is really talking about the
16 problems here.
17 The problems are going to get
18 bigger in the future. We're going to have
19 cybercash. We're going to have anonymous
20 cybercash. We're not going to know where the
21 buyer is. So this solution that we comes up
22 with needs to be scalable.
83
1 The third objective is that the
2 system needs to harmonize with the other
3 industrial nations. If we don't have
4 harmonization then we're going to have more
5 problems. Number four, we need to preserve
6 the physical-presence standard.
7 The only system that accomplishes
8 these four goals is the origin-based system
9 that I'm going to talk about today. The
10 origin-based system is one rate, one set of
11 rules, based on where you're located, where
12 your Internet business is located. You'll
13 like this. There's no state sovereignty
14 issues.
15 There's no NEXUS problems because
16 you're there. You have a physical presence
17 there. There's no question about NEXUS.
18 You'll have to collect tax on all your sales.
19 It'll be based on the rate where you're
20 located. So, hopefully the revenue will be
21 there.
22 I'm not here looking for a tax
84
1 break. We collect the taxes at Apple. We do
2 a lot of business over the Internet, but
3 we're collecting the taxes. I just don't
4 like the system. In terms of harmonization,
5 Europe is going to an origin-based system.
6 You know what?
7 Those folks in Europe, they're
8 competing with us. They're competing with
9 the U.S. What they've done is they've
10 adopted the things that they felt worked in
11 the -- for example, one currency. They've
12 also broke down the barriers for trade. If
13 you've been to Europe lately, you can move
14 around without being stopped. You can go
15 from Paris all the way to Amsterdam and not
16 even know you've gone through Belgium.
17 These are important changes. But
18 what didn't they do? They didn't adopt our
19 tax system. In fact, they used to have one
20 rate per country. Some people are talking
21 about one rate per state. Well, that just
22 doesn't cut it. The European commissioners
85
1 looked at that. That was their system and
2 they said no, this isn't working. So,
3 they're going to an origin-based system.
4 I don't think they're worried about
5 companies picking up and going to the
6 lowest-rate country because the only
7 objection to this plan is the uncertainty
8 that the states and that local governments
9 have about this fear that companies are going
10 to pick up and move to the Cayman Islands or
11 Oregon. I just don't believe that's going to
12 happen. If it does, then we need to deal
13 with it. If it does happen, we need to deal
14 with it.
15 CHAIRMAN GILMORE: Mr. Ryan, I think
16 that's very interesting, and I think there's
17 going to be a lot of questions about that as
18 we go forward, and I'm looking forward to
19 that. Thank you all very much.
20 The final panel before we just move
21 into questions of discussion and debate is
22 Fran Smith, William Gregory Turner, Gary
86
1 Cornia, Kendall Houghton who I believe would
2 like to participate by phone, and I think she
3 has suffered an injury -- National Tax
4 Association, Communications and Electronic
5 Commerce Tax Project.
6 I think she's suffered an injury
7 and there have been arrangements for her to
8 do this by phone. Then finally, I propose to
9 add one person, a name that did not get
10 submitted to my attention that I think should
11 be heard, and that is an offering by Michael
12 Mazerov, Center on Budget and Policy
13 Priorities who we will add to the panel
14 without objection to discuss the digital
15 divide, and one Commissioner particularly has
16 requested that.
17 We will take then in about that
18 order if that's all right, and we will then
19 be concluded. I will introduce the
20 Commission, and then we will either move
21 straight ahead either after a break or we
22 will just not break and go straight into
87
1 discussion at the will of the Commissioners.
2 But first, our final panel, Fran Smith of
3 Consumer Alert.
4 MS. SMITH: Thank you Governor, and
5 I'm very pleased to be here. Consumer Alert
6 is a market-oriented consumer group that
7 promotes consumer choice and competition and
8 how market economies can produce advances in
9 technology that can reduce costs for
10 consumers, improve choices, and sometimes
11 improve health and safety. So, I'm here
12 looking at the tax issues and looking at some
13 of the other issues from that perspective.
14 Today my comments are going to
15 focus on what I think are some overlooked
16 benefits of competition and choice in tax
17 jurisdictions. Essentially, consumers as
18 taxpayers consider tax costs of jurisdictions
19 and respond accordingly. We know that some
20 jurisdictions can lose sales, but the can
21 also lose citizens if they overtax, just as
22 producers if they overcharge can lose
88
1 customers.
2 So, I think some of that tension
3 between jurisdictions in increasing taxes or
4 their tax base so that they can provide
5 services to its citizens is also balanced by
6 taxpayers who look at the tax base and see if
7 indeed they're getting services or whether
8 they might find them better elsewhere.
9 I live in the District of Columbia,
10 and we have three tax jurisdictions very
11 close-by, Virginia and Maryland, and people
12 make those choices on a range of issues,
13 whether to buy property, the schooling
14 issues, et cetera.
15 But today I wanted to make that
16 point about consumer choice and competition,
17 and I think state jurisdictions should look
18 at that. We support this creative tension.
19 We support the fact that as someone earlier
20 said, that states are the laboratories.
21 That's where experimentation occurs. That's
22 where we find some of the new and better
89
1 approaches.
2 We often I think in looking at tax
3 issues look at the business point of view,
4 and we look at the tax jurisdiction point of
5 view. What I think today we're not looking
6 at is the taxpayer point of view, the
7 consumer point of view, and how many of the
8 schemes for simplification, many of the
9 schemes to impose some sort of software
10 requirements on vendors, verification schemes
11 for customers and such, what that means for
12 consumers' right to privacy.
13 We have seen just recently the
14 federal government regulators in the
15 financial area imposing without much
16 knowledge of consumers massive collection
17 activities at people's banks for the public
18 good, public benefits, of getting more money
19 launderers in jail.
20 However, there was a huge outcry
21 when people realized that that meant that
22 they would be treated as criminals and that
90
1 they would be viewed by their banks as
2 potential criminals and that the data would
3 be collected in central points and could be
4 accessed by federal, state, local government
5 law enforcement.
6 That know your consumer, those
7 proposals, were quickly pulled by the
8 regulators when 250,000 consumers were in to
9 question them.
10 I would expect that some soft of
11 outcry similar to this if consumers did
12 realize that some of these proposals for
13 simplification and proposals for uniformity
14 might have some of the same consequences.
15 Therefore, I urge this Commission
16 that consumer privacy issues have to be
17 paramount. Consumers are the ones who are
18 buying the Internet, they're the ones paying
19 the taxes, and they're the ones who stand the
20 risk of having their privacy invaded by
21 having their transactions tracked and
22 monitored. Thank you.
91
1 CHAIRMAN GILMORE: Thank you very much,
2 Ms. Smith. The next speaker is Gregory
3 Turner of the California Taxpayer's
4 Association.
5 MR. TURNER: Thank you very much,
6 Mister Chairman, and members. I wanted to
7 thank you first of all thank you for the
8 gracious invitation for allowing me to come
9 and participate in this process.
10 The California Taxpayer's
11 Association is a nonprofit, nonpartisan
12 research and advocacy organization. We
13 represent businesses large and small in
14 California on tax policy matters, and with
15 the production of the Internet Tax Freedom
16 Act, we have participated in that process as
17 well. We were one of the lead advocates for
18 business in the California version of the
19 Internet Tax Freedom Act.
20 Our association generally has a
21 goal of promoting the economy in general, and
22 particularly in the nature of electronic
92
1 commerce because we think that it has so many
2 benefits for California in particular.
3 We have been very fortunate in
4 California to have had record surpluses at
5 state and local government levels for the
6 last several years. A lot of that has been
7 attributed to the growth in electronic
8 commerce. We are the home to the Internet.
9 It was invented in California. We are the
10 home of the entertainment industry that
11 provides content. We are Silicon Valley,
12 just so we get the competition rolling
13 between the states.
14 But I make that point because as an
15 association we have not come up with a
16 solution to the problem as an association,
17 but I want to provide you what I think are
18 some of the issues that this Commission needs
19 to address, and we will certainly consider
20 when recommendations are made by the
21 Commission. So, the comments I have in terms
22 of an actual solution are my own, and I
93
1 wanted you to know that up front.
2 A lot has been said so far on
3 simplicity and automation and uniformity, and
4 those are all good things, but I think that
5 they exist independent of the central
6 question which I think faces the Commission
7 which is the obligation to collect.
8 At some point the question for
9 Congress and the question for the Commission
10 is at what point of activity does a person
11 become subjected to taxes in another
12 jurisdiction. Right now we work off of
13 roughly 150 years of Supreme Court decisions
14 trying to define at what point the taxpayer
15 becomes obligated to pay tax in that
16 jurisdiction.
17 Simplicity alone does not result
18 necessarily in the obligation to collect, and
19 it is that question I think that maybe the
20 Commission can consider specifically as to at
21 what point do we force the book seller -- and
22 for every book seller that has suggested that
94
1 they've gone out of business, I've heard the
2 same from those who have found a new business
3 as a small entrepreneur who has a unique
4 business finds a market on the Internet.
5 That is the beauty of the Internet,
6 is that it's finding a market for small- and
7 mid-sized businesses. So the obligation that
8 we impose upon them to collect and remit
9 taxes to various jurisdictions can be a
10 burdensome one, but at some level it does
11 become a question of federalism as someone
12 else has suggested. That is, at what point
13 do we obligate that person as a matter of
14 public policy to collect and remit from
15 another state. So, I hope you will address
16 that question.
17 I think in terms of specific
18 proposals, the problems that have come about
19 because of electronic commerce or electronic
20 commerce is facing by state and local
21 taxation have been clearly addressed I think.
22 I think the solution actually can be fairly
95
1 simple, and that is to pursue an effort of
2 codifying existing standards for NEXUS.
3 I think that one of the biggest
4 problems facing business right now is the
5 uncertainty of independent jurisdictions
6 interpreting Supreme Court cases in different
7 manners and applying them differently to
8 different industries based on either the
9 sales and use tax or income tax which is
10 another big issue.
11 We tend to focus on sales and use
12 taxes in our comments so far, but the income
13 tax is as big an issue I think as the use tax
14 is.
15 Just one final point I want to make
16 is in our solution let us not forget the
17 ability of the states to implement the grand
18 solution. One thing I know we face in
19 California which I have yet to get an answer
20 to is the fact that -- state concept I don't
21 think is practically implementable in
22 California.
96
1 That would be something that would
2 require our constitution and a vote of the
3 people. Not to mention probably a two-thirds
4 vote of our legislature. So in some
5 respects, we need to keep a practical eye on
6 what outcome we propose. So, thank you very
7 much.
8 CHAIRMAN GILMORE: Thank you,
9 Mr. Turner. Next speaker is Gary Cornia.
10 Mr. Cornia?
11 MR. CORNIA: Thank you. My name is
12 Gary Cornia, co-chair of the National Tax
13 Association's Communication and Electronic
14 Commerce Tax Project.
15 Kendall Houghton, the other
16 co-chair, will participate via teleconference
17 with us on this statement. You have in front
18 of you copies of our statement as well as the
19 final report.
20 Electronic commerce has significant
21 implications for state and local taxation,
22 and it raises a number of questions as to
97
1 whether and how state and local taxes should
2 be applied to such commerce.
3 The National Tax Association's
4 Electronic Tax Policy Project was organized
5 to identify possible solutions to state and
6 local tax issues that may have existed in the
7 context of more traditional commerce that are
8 and have been magnified by electronic
9 commerce.
10 The project's initial work embraced
11 all types of state and local taxes. However,
12 the project's participants agreed that the
13 first set of discussions should focus on
14 sales use and telecommunications taxes.
15 Further on in the project, however, it was
16 agreed that any recommendation made with
17 respect to electronic commerce would also
18 have to be considered in the context of other
19 forms of commerce.
20 The following categories and issues
21 were addressed in the report: Sales and use
22 tax rates including the question of one rate
98
1 per state -- collect sales and use taxes and
2 other taxing jurisdiction issues; sales and
3 use tax base; sourcing of transactions;
4 simplification of tax administration -- and
5 implementation issues.
6 For many of those topics, no
7 substantial agreement on the proper
8 modification of the sales and use tax system
9 was reached.
10 However, with respect to certain
11 issues considered in isolation, the project
12 members did tentatively define a consensus
13 viewpoint. All such consensus viewpoints
14 were recorded by the projects and are noted
15 in the context of the report.
16 Nevertheless, we cannot present
17 this report without impressing upon our
18 audience the central working tenet of the
19 project: Namely, that nothing is agreed to
20 until everything is agreed to.
21 This caveat means simply that it
22 would seriously misrepresent the work of the
99
1 project to pluck any of the tentative and
2 preliminary conclusions including those
3 specifically reached by a formal vote out of
4 context and present them as a conclusion of
5 the project. Ms. Houghton will now continue
6 with the statement.
7 MS. HOUGHTON: Thank you, Gary, and
8 thank you to the Commission for accommodating
9 my situation. Gary Cornia having noted this
10 caveat, we encourage the Commission members
11 and other interested parties to review the
12 entire report at to consider ways in which
13 this concept can spur and form continued
14 examination of the critical state tax issues.
15 Each facet of the report presents -- and a
16 number of the proposals to improve the taxing
17 system -- electronic commerce --
18 CHAIRMAN GILMORE: Ms. Houghton, we're
19 having a problem hearing you over the phone.
20 I'm not sure what that is.
21 MR. CORNIA: Perhaps I should just
22 jump in and finish the statement.
100
1 CHAIRMAN GILMORE: Unless Ms. Houghton
2 is able to speak into the phone, we'd sure
3 like to hear her. But if it can't work any
4 better, Gary, you may have to finish.
5 MR. CORNIA: Thank you.
6 MS. HOUGHTON: Is this any better?
7 CHAIRMAN GILMORE: Yes, that is better.
8 Go ahead.
9 MS. HOUGHTON: I will start a
10 sentence back. Where consensus was not
11 obtained which is admittedly the case in a
12 majority of situations, our -- and the
13 resulting report still offer -- to groups and
14 individuals concerned about state and local
15 taxes. A brief overview of select -- of the
16 report serves to underscore the incredible --
17 efforts of -- members --
18 CHAIRMAN GILMORE: Ms. Houghton, I'm
19 sorry, it just isn't working. The phone is
20 cutting out. We're going to call on
21 Mr. Cornia to go ahead and complete the work,
22 but we appreciate your with us and we will be
101
1 calling you on for your written materials as
2 well.
3 MS. HOUGHTON: Well, thank you.
4 CHAIRMAN GILMORE: Gary, if you could
5 complete the presentation.
6 MR. CORNIA: Thank you. A
7 discussion of sales and use tax rates focused
8 on a dual challenge. One, developing one
9 rate per state applicable to all commerce
10 involving goods or services that are taxable
11 in that state. Two, ensuring the protection
12 and equitable distribution of revenues to
13 local jurisdictions.
14 Discussions of sourcing tackled the
15 complex questions of whether to source
16 transaction to the state level only, and
17 whether to source transactions uniformly or
18 by reference to predefined but very low
19 criteria which could include default rules
20 for transactions that were difficult or
21 impossible to source under general rules.
22 The jurisdictional tax issues are
102
1 difficult to describe succinctly, but they
2 merit here close review as they present
3 questions of tremendous practical and
4 constitutional import. Significant questions
5 were also devoted to the topic of
6 simplification of tax administration and
7 compliance. There is no question, as you
8 have heard, that the current system is
9 complex -- involved in the context of state
10 physical sovereignty.
11 The projects examined how the
12 system could be made less complex and
13 burdensome, particularly for multi-state
14 businesses. A general conclusion is that
15 many improvements could be made in the
16 current system. Such improvements might
17 include a uniform process of vendor
18 registration, uniform sales and use tax
19 returns, uniform laws permitting bad debt,
20 and et cetera.
21 There would undoubtedly be
22 something for everyone in this report. On
103
1 the other hand, no one will agree with each
2 proposal in the report. Indeed, this will be
3 impossible, for we have endeavored to present
4 every conflicting point of view and competing
5 rationales articulated in the context of each
6 issue explored by the project.
7 The National Tax Association -- and
8 I do believe that this report represents an
9 excellent first step towards the meaningful
10 exploration and potential resolution of
11 numerous tax policy issues that have been
12 highlighted by electronic commerce, issues
13 that may in turn meaningfully impact the
14 future shape and development of electronic
15 commerce.
16 We defer to the Commission and
17 others to determine whether and how to
18 implement the various proposals contained
19 therein. Ms. Houghton and I welcome your
20 questions about the NTA project and the
21 project report. Thank you.
22 CHAIRMAN GILMORE: Mr. Cornia, thank you
104
1 very much. You, sir, I believe you are
2 Mr. Michael Mazerov. Is that correct?
3 MR. MAZEROV: Correct.
4 CHAIRMAN GILMORE: We welcome you here
5 as an additional speaker and our last
6 presenter before we move into general
7 discussion. You're with the Center on Budget
8 and Policy Priorities. Welcome.
9 MR. MAZEROV: Thank you, Governor
10 Gilmore, members of the Commission. My name
11 is Michael Mazerov. I'm a senior policy
12 analyst with the Center on Budget and Policy
13 Priorities, and we very much appreciate the
14 opportunity to give testimony this morning
15 and to have been added to the list of
16 speakers this morning.
17 The Center on Budget and Policy
18 Priorities is a nonprofit research institute
19 that studies government programs and public
20 policy issues that have an impact on
21 low-income Americans. The single most
22 important decision confronting this
105
1 commission I believe is whether to recommend
2 federal legislation empowering states to
3 require all large businesses to charge
4 applicable state and local sales taxes on
5 Internet, mail order, and other remote sales,
6 and remit the taxes to the states in which
7 the business's customers are located.
8 In other words, that's the issue
9 we've been talking about this morning,
10 whether as a matter of public policy we are
11 going to preserve a physical presence NEXUS
12 standard or whether there is going to be a
13 deal between the Internet industry and remote
14 sellers and state and local governments to
15 trade off abandonment of the physical
16 presence NEXUS standard for substantial
17 simplification and standardization of state
18 and local sales and use taxes. I think
19 that's the central issue facing the
20 Commission.
21 The enactment of such legislation
22 would eliminate the current de facto sales
106
1 tax exemption that applies to most Internet
2 and mail order purchases made by both
3 businesses and individuals. Failure to close
4 this obsolete loophole would have three
5 profoundly negative impacts on low-income
6 Americans.
7 If the de facto sales tax exemption
8 for Internet and mail order sales is not
9 eliminated, low-income consumers without the
10 resources or the desire to shop online or by
11 mail will continue to pay a disproportionate
12 share of state and local sales taxes.
13 Businesses in affluent households
14 increasingly will avoid sales taxes that
15 low-income households consigned to shopping
16 in stores will continue to pay.
17 At present, the de facto sales tax
18 exemption that applies to mail order and
19 Internet purchases already provides
20 disproportionate tax savings to the more
21 affluent households and businesses most
22 likely to shop through these mechanisms.
107
1 Households with incomes
2 above $80,000 are more than twice as likely
3 to shop from catalogues as households with
4 incomes below $25,000, and businesses account
5 for approximately 40 percent of catalogue
6 purchases.
7 Internet purchasing is even more
8 skewed toward relatively affluent households
9 and businesses. Owning Internet-equipped
10 computer is the price of admission to the
11 cybermall, and households with incomes
12 over $75,000 remain more than eight times as
13 likely to have home Internet access as
14 households with incomes between $10-
15 and $15,000. That data is provided by the
16 Commerce Department's recent study on the
17 digital divide.
18 So it's not surprising that
19 Forrester Research, an
20 Internet-commerce consulting firm, estimated
21 that households with incomes below $25,000
22 made 25 percent of all retail purchases last
108
1 year, but they made only 6 percent of online
2 purchases. Then in addition to affluent
3 households disproportionately benefiting, of
4 course, businesses purchases made the
5 predominant share of purchases on the
6 Internet.
7 The second consequence of
8 preserving the de facto sales tax exemption
9 for state and local purchases on Internet and
10 catalogue sales would be that there's great
11 potential in the future for state and local
12 governments to seek to preserve a target
13 level of sales tax revenue as their sale tax
14 base has eroded in the future by raising
15 sales tax rates across the board. If they do
16 so, state and local governments will not only
17 be imposing a disproportionate share of sales
18 and use tax liability on low-income
19 households, but their liability in absolute
20 terms will go up as well.
21 Finally, state and local
22 governments which will may already be losing
109
1 on the order of $5 billion in sales tax
2 revenues annually from their inability to tax
3 most mail order sales could be losing an
4 additional $10 billion annually in just a few
5 years if Internet purchases remain
6 effectively tax exempt.
7 This loss of revenue could
8 significantly impair the ability of some
9 states and localities to meet demands for
10 education funding and other services that
11 enable the disadvantaged to get ahead in an
12 increasingly technology-oriented economy.
13 Therefore, I think it is essential
14 that the Commission seriously consider
15 whether as a matter of policy we can any
16 longer maintain a physical presence NEXUS
17 standard which is at heart the reason why we
18 have this de facto sales tax exemption for
19 Internet mail order purchases. Thank you.
20 CHAIRMAN GILMORE: Thank you,
21 Mr. Mazerov. I appreciate that. Ladies and
22 gentlemen, I had suggested that we might just
110
1 proceed, but we have to take a break, and
2 there are three reasons. I'm going to
3 introduce the members of the Commission, but
4 the two principal reasons are that the staff
5 would like to get some chairs and get people
6 up at the front of the room so that they are
7 available for our Q&A.
8 The second reason is that I have
9 now a note that's been handed to me that I
10 have to go and confer on the hurricane
11 situation in Virginia and see what I have to
12 do for the rest of the day. So, we'll be
13 back though within 5 minutes. It's 11:10.
14 Let's see if we can't get back in 5 minutes
15 and then proceed on, and then I'll introduce
16 the Commissioners.
17 (Recess)
18 CHAIRMAN GILMORE: Let me just speak
19 about the schedule for just a moment. We're
20 scheduled for another good hour here of the
21 discussion back and forth. Then lunch. I
22 believe sustenance demands that we still do
111
1 lunch, although there's no formal program
2 connected with it. We probably ought to go
3 into the 2-minute warning on some of this,
4 and the reason is that the information I have
5 from the Richmond is that the hurricane is a
6 significant problem that we have got to
7 address.
8 I've issued some additional
9 declarations over the phone just a few
10 minutes ago regarding evacuations and even
11 dealing with closure of state government.
12 So, we have to do something. I may have to
13 return to Richmond earlier in the day. I'm
14 not aware of what the situation is with the
15 other Commissioners and what you're able to
16 do.
17 I think we ought to see if we can't
18 get in as much discussion as we can. It
19 looks to me like that the international
20 aspects of this are not extensive, and it may
21 be that we're able to take those matters up
22 in San Francisco. We have plenty of time I
112
1 think there on that agenda. We ought to get
2 into as much of this discussion as we
3 reasonably can before Commissioners have to
4 leave. Again, I certainly have to return to
5 Richmond earlier than I had projected.
6 MR. GUTTENTAG: Mister Chairman, I
7 don't want to speak, Mr. Novick is across
8 there and he can say it, but I think since
9 I'm involved in the international and
10 Mr. Novick is involved; we also have
11 Mr. Smith here. As far as Mr. Novick and I
12 are concerned, I think it would be fine with
13 us.
14 CHAIRMAN GILMORE: To defer to San
15 Francisco?
16 MR. GUTTENTAG: Yes.
17 MR. SOKUL: Governor Gilmore?
18 CHAIRMAN GILMORE: Yes, sir, Mr. Sokul?
19 MR. SOKUL: I was going to do this
20 later, but I'll do it now. I was going to
21 recommend something similar to that. There
22 were two international witnesses that we
113
1 invited but had to back out either because of
2 the short time frame they had to rearrange
3 their schedules, and I was going to recommend
4 that the Commission reinvite them for the San
5 Francisco meeting. So what we're talking
6 about kind of falls in line with that.
7 CHAIRMAN GILMORE: Well, I think it
8 gives us an opportunity to sharpen up that
9 side of it and discuss it particularly with
10 our fellow representatives and other
11 presenters and work that out. That would
12 save us some additional time and give us
13 certainly our discussion time also to the
14 extent that we have it on the state and tax
15 issues. I might say this.
16 Since this is a very central part
17 of our discussions, there's no reason why we
18 can't reawaken some of those discussions also
19 in San Francisco. There's nothing to prevent
20 this Commission from doing anything it wants
21 to do, quite frankly, in terms of addressing
22 these issues.
114
1 I do want to take a quick moment
2 and just in terms of particularly for our
3 Webcast viewers and others who are listening
4 to us in other ways just to simply identify
5 the members of this Commission very quickly,
6 and I will just simply run through their
7 names.
8 I will not ask everyone to stand
9 and take a bow or anything like that, but I
10 do think it is important that the citizens of
11 the United States who is in fact on this
12 Commission. Dean Andal, the chairman of the
13 California Board of Equalization; C. Micheal
14 Armstrong, the chairman and chief executive
15 officer of AT&T; myself, the Governor of
16 Virginia serving as chairman of this
17 Commission; Joe Guttentag, senior adviser,
18 Office of Tax Policy, U.S. Department of
19 Treasury; Paul Harris, Delegate, Virginia
20 House of Delegates; Delna Jones, County
21 Commissioner, Washington County, Oregon; Ron
22 Kirk, the Mayor of the City of Dallas, Texas;
115
1 Mike Leavitt, the Governor of the State of
2 Utah; Gene Lebrun, the president of the
3 National Conference of Commissioners on
4 Uniform State Laws; Gary Locke who was not
5 able to be with us today, but Gary Locke is
6 the Governor of the State of Washington;
7 Grover Norquist, the president of Americans
8 for Tax Reform; Robert Novick.
9 He is the general counsel, office
10 of the United States Trade Representative,
11 Charlene Barshevsky. Richard Parsons, the
12 president of Time Warner, Incorporated;
13 Andrew Pincus, the general counsel, the
14 United States Department of Commerce here for
15 William Daley; Robert Pittman, the president
16 and chief operating officer of America
17 Online; David Pottruck, the president and
18 co-chief executive officer of Charles Schwab
19 Corporation; John Sidgmore, the vice chairman
20 of MCI WorldCom and chairman of UUNET; Stan
21 Sokul, independent consultant for the
22 Association for Interactive Media; and Ted
116
1 Waitt, the chairman and CEO of Gateway,
2 Incorporated. These Commissioners have done
3 wonderful work, and we appreciate this very,
4 very much.
5 I also want to mention, by the way,
6 that we have together expert panelists who
7 are in the room as well. This is a rather
8 cozy setting, I must say, and we appreciate
9 the flexibility of the presenters who are
10 here with us today as well as the
11 Commissioners.
12 We also have a group of expert
13 panelists. If you all would raise your hands
14 so that we're aware of your presence, I'm
15 going to read your names. That doesn't look
16 like the whole crowd, but I'm advised that we
17 have Larry DeFranco, InContext; Peter Grey of
18 Internet Consumers Association; Walter
19 Hellerstein, the University of Georgia School
20 of Law; Brian Horey who has spoken today, the
21 New York New Media Association; Jim Johnson,
22 EIKON Strategies, Incorporated; Aaron Lukas
117
1 of CATO institute; Michael Mazerov who has
2 spoken, the Center on Budget and Policy
3 Priorities; Peter McGeough, Seaman Furniture
4 Company, representing the National Home
5 Furnishings Association; Charles McLure of
6 the Hoover Institution; Brian Hanson of
7 Hanson Brothers Fresh Seafood; Mark
8 Nebergall, Software Finance Executive
9 Council; Mark Rhoads, U.S. Internet Council;
10 Frank Shafroth, National Governors
11 Association; Joseph Taricani, Interstate
12 Solutions, LLC; Oren Teicher, American
13 Booksellers Association; and Bill Townsend of
14 Holland Knight, LLP.
15 All of these ladies and gentlemen
16 are in the room and are available to us.
17 Some have presented, but most are available
18 to us for any information that we may wish to
19 inquire about.
20 I offer this to the people of the
21 country who are listening to this. All of
22 the names that I have read, Commission
118
1 members, presenters and experts who are here,
2 begin to demonstrate the level of complexity,
3 the level of attention that is being paid to
4 this and the remarkable diversity of
5 interests and concerns that are involved in
6 this entire process. So, it is a great
7 challenge, and I certainly appreciate the
8 commitment of the Commissioners in the work
9 that they are doing.
10 We now have a good hour, and then
11 at least probably another hour after lunch.
12 Then we will make some decisions after that,
13 depending on what our hurricane looks like or
14 other things that are going on and the needs
15 of the Commissioners as they need to depart.
16 We have put in a number of
17 questions. The Commissioners have asked
18 questions and they have been submitted in a
19 list. I'm going to begin with one question
20 and then begin to open it up to the
21 Commissioners as well. The first question
22 that a Commissioner has submitted to us is
119
1 given that after 2 years the NTA was unable
2 to resolve any issues, what evidence is there
3 to suggest that there are any satisfactory
4 answers to -- the duty to collect and remit
5 sales and use taxes on electronic commerce.
6 Are there Commissioners that would like to
7 speak to an issue like this?
8 MR. ANDAL: Yes.
9 CHAIRMAN GILMORE: Mr. Andal, you
10 probably submitted this question, so please
11 proceed.
12 MR. ANDAL: Actually, I've be happy
13 to take credit for it because I agree with
14 it, but it wasn't mine. You're going to have
15 to bear with me. For the Commissioners, I
16 think we passed out another copy of this
17 proposal that I'd like to offer today. It is
18 a new way of dealing with some of these
19 difficulties.
20 It is in direct conflict with I
21 know some of the views of some Commissioners,
22 Governor Leavitt and some of the others on
120
1 the Commission, but I don't believe this
2 Commission is going to advance unless we
3 start talking substantive proposals.
4 Therefore I'm going to offer this one today,
5 and if you bear with me, I'll give an
6 introduction to it.
7 I don't agree with two of the
8 claims that I heard today, and I've heard
9 endlessly to be honest with you, that state
10 and local governmental officials offer as
11 problems with the growth of electronic
12 commerce in America. Those two claims put
13 shortly is that state and local governmental
14 revenues are in decline as a result of
15 electronic commerce and therefore services
16 are affected, and the most often heard
17 criticism is that school revenues are at
18 stake. I don't agree with that. I guess
19 first the facts. There is no decline right
20 now in sales tax across America.
21 In virtually every state, sales tax
22 revenue stream over the last 5 years has
121
1 increased at record levels. In California
2 where we have the most Internet tax friendly
3 laws as it relates to sales tax, our rate of
4 increase in sales tax revenue from
5 traditional retailers and our use tax
6 collections is exceeding population growth
7 plus inflation for the last 5 years. It's at
8 historic rates of increase. So the facts
9 right up front belie the case that there's
10 been any loss of revenue to date.
11 The next question is will there be
12 in the future. That's something we can all
13 argue about because the future is not here
14 yet. Those that disagree with me argue that
15 there will be, and it's certain. I argue
16 that there won't be, and I am prepared to
17 tell you why I believe that. In California
18 we have a use tax.
19 It is not true that sales of
20 tangible personal property over the Internet
21 are not taxed when they're sold by an out-
22 of-state retailer. They are taxed. That's
122
1 what the use tax does. It is true that some
2 of that is not collected, but let me tell you
3 why I think that is a very minuscule amount
4 of money.
5 First of all, we had testimony here
6 both here today and at our last meeting in
7 Virginia that suggests two big reasons for
8 the lack of a drain of state revenue based
9 upon use tax. The first big reason is that
10 the Internet commerce transactions on the Net
11 are heavily service related.
12 In fact, at our meeting in Virginia
13 we had testimony that travel tickets and
14 stock trades accounted for almost half of all
15 the electronic commerce that we have now.
16 Neither ticket sales nor stock trades are
17 taxable in California under the sales tax
18 law, and I don't think they're taxable in
19 most states. Therefore, even if you didn't
20 have Quill (phonetic), and even if the states
21 had the right to assert tax collection, that
22 half would not be collectable because it's
123
1 not taxed under current sales tax law.
2 Then you make another screen. The
3 other screen is that over 80 percent of the
4 electronic commerce transactions are business
5 to business, not business to consumer.
6 In California we audit heavily. We
7 have over 4,000 people who work for the
8 agency I head up, and those 4,000 people work
9 very hard every day making sure everybody
10 pays their tax. They audit an enormous
11 amount of people. As a matter of fact, our
12 audit rate in California much to my dismay I
13 might add is twice the percentage of the IRS.
14 We audit any business of any size
15 in California every 3 years. Most of the
16 business representatives here can attest to
17 the fact that we visit you often.
18 The reason that's important is that
19 when we audit these businesses we look at
20 their whole range of books. That includes
21 use tax. If they bought something from an
22 out-of-state retailer, we find it and we make
124
1 them pay. So, you get that screening coming
2 off, the 80 percent and the 50 percent coming
3 down and you can see this whittling down to a
4 fairly manageable problem.
5 Then you get to the more modest
6 stuff, planes, boats, cars, all have to be
7 registered in virtually every state, and
8 almost every state has figured out that if
9 you tie use tax collection to the
10 registration of the boats and the planes and
11 the automobiles, that you can force the
12 person to pay the use tax or otherwise you
13 don't license their vehicle.
14 So, we're getting down to
15 relatively modest purchases by individuals.
16 We could still collect that if we wanted to
17 invest the resources in chasing them down,
18 but it is a very modest amount of money. In
19 California it is less than $100 million that
20 we anticipate that we're losing, and that's
21 on a base of $26 billion in annual sales tax
22 revenue. We don't view it as a problem now,
125
1 and I don't view it as a problem in the
2 future.
3 I want to give you an example that
4 makes my philosophical commitment to this
5 very apparent. In 1991 I was a state
6 legislator in California during the economic
7 decline. We had a series of tax increases
8 that added up to $7 billion at the time. The
9 worst one was what we called the Bunker Fuel
10 Tax.
11 The Bunker Fuel Tax was a tax on
12 these huge tankers that come into Los Angeles
13 loaded with oil. They're several times the
14 size of a football field, and they come in.
15 Over 17,000 people were employed taking the
16 oil off the tanker. We had a bunker fuel tax
17 on that oil, and it wasn't taxed previously.
18 The result was not only did we not
19 get the tax that was anticipated, but we lost
20 about 85 percent of the traffic because they
21 fueled up in Seattle and they fueled up in
22 Mexico and other places to avoid the tax. My
126
1 point is, some tax is not worth collecting.
2 It's not worth the administrative costs, it's
3 ont worth the audit time, and it's not worth
4 the money, and I think that's where we are
5 right now on some of these use tax
6 collections that are not taking place on the
7 Net.
8 CHAIRMAN GILMORE: If you can expedite,
9 Dean, we need to try to get as many people in
10 as we can.
11 MR. ANDAL: I have a lot to say,
12 and I've listened to quite a bit, so I really
13 would like to say it. I enjoyed coming to
14 New York to argue over bylaws, but I want to
15 talk about something real here, and this is
16 what I'm offering.
17 The other argument is Main Street
18 merchants, and the examples are given like
19 bookstores being run out of business.
20 Independent bookstores are not being run out
21 of business by the Net. They're being run
22 out of business by big Main Street merchants
127
1 like Barnes & Noble and Wal-Mart. They're
2 not being run out of business by the Net. In
3 fact, a lot of bookstores are competing with
4 Wal- Mart and Barnes & Noble by use of the
5 Net.
6 That leaves us with a real problem,
7 confusion, litigation, administrative costs,
8 all revolving around NEXUS issues. We have
9 three options to deal with it. One a lot of
10 people have tried. That is, a compromise
11 between the business community, a uniformed
12 rate on the one side, and an overturning of
13 Quill on the other.
14 I point you to the NTA's final
15 report on page 10, and I want to read this
16 because I think it's critical to what we're
17 talking about: "For the business
18 representatives, one sales tax rate per state
19 was an essential ingredient in any sales tax
20 simplification project."
21 Midway through the project endorsed
22 the principle that there should be one sales
128
1 tax rate. For the government
2 representatives, an expanded duty to collect
3 sales and use tax on remote sales was the --
4 ingredient. The project, however, was never
5 able to reach a consensus on expanding the
6 duty to collect.
7 That deal has been shot for years.
8 It doesn't work. In fact, it's been
9 introduced in Congress many times and it
10 hasn't achieved even getting out of
11 committee.
12 I think we are going to be left
13 with three options whether we like it or not
14 in the end of this as Commissioners. We can
15 try to work that deal again, and you can try
16 to achieve two-thirds vote here and then you
17 can send it over to Congress and see if it
18 has any better success than it's had for the
19 last 10 years.
20 We can do nothing, and we can allow
21 the litigation and administrative costs and
22 burdensome costs of confusion and
129
1 complication to continue. Or we can do what
2 I've offered here. This is the proposal.
3 I've actually put it into words.
4 The legislation is in here. But the basic
5 thematic part of it is I deal with two pieces
6 of existing law. Quill, the Supreme Court
7 case, and Public Law 86272 that involves
8 income tax apportionment NEXUS liabilities
9 that's put into the deal.
10 I merged those together and I
11 provided safe harbor for various forms of
12 electronic commerce. Short, I codified Quill
13 and I expand the protections of 86272 on
14 income tax to electronically based products.
15 I have it here on paper, I'm
16 willing to defend it, and I welcome my
17 opponents to do the same. We're not going to
18 get anywhere if we just keep giving ourselves
19 a list of problems. Somebody is going to
20 have to put their solution on paper. I've
21 tried to do that with my view, and I welcome
22 that from my opponents on the Commission.
130
1 Thanks for the time.
2 CHAIRMAN GILMORE: Dean, thank you, and
3 we also will of course be sure that the
4 matter gets a thorough review also in San
5 Francisco when we're there. Governor
6 Leavitt?
7 GOVERNOR LEAVITT: I'd like to ask the
8 panel a question. As I listened as carefully
9 as I could, and I've really enjoyed the
10 discussion, there were a number of themes
11 that I heard reoccurring in every
12 presentation, and I'd like to bounce my sense
13 off of what I heard as reoccurring themes.
14 One is that the existing system is
15 a mess I think was the best way I heard it
16 described; that it needs to be radically
17 simplified. We're not talking just about
18 remote sales here. We're talking about the
19 entire system of sales tax adjudication in
20 the country.
21 The second thing I heard is there
22 really ought be no new tax imposed on the
131
1 Internet at all. I heard that reoccurring
2 over and over among all the presentations.
3 Third, that any system we would have that is
4 a burden to the seller is a nonstarter; that
5 the system, whatever we do, has to be no
6 burden to the seller.
7 Fourth, that anything that
8 compromises privacy and requires an
9 identification of the sellers goes too far
10 and therefore is an unnecessary complication.
11 Fifth, and some acknowledgement of the fact
12 that we have a country here that recognizes
13 the sovereignty of states and the ability for
14 them to do different things in different
15 states different ways, and we've got this
16 problem of commerce we've got to work
17 through, of interstate commerce, but that was
18 a principle.
19 Next, there shouldn't be any
20 special classes necessarily of taxpayers;
21 that if we have more revenue, we ought to cut
22 taxes then as a means of solving that. I
132
1 heard over and over the statement that there
2 was technology that could solve these
3 problems. I guess the question I'd like to
4 ask is, number one, do any of you disagree
5 with the principles that I've laid out there
6 that I heard you say, or at least that I
7 interpreted to say, number one.
8 Number two, does it not seem to you
9 that the business of this Commission ought to
10 be at least partially about figuring out
11 whether such a system that could be radically
12 simplified that would have no new taxes, that
13 would remove the burden from sellers, that
14 would not compromise privacy, that would in
15 fact not create special classes, and would
16 protect the sovereignty of states, isn't the
17 responsibility of this Commission, and I'd
18 ask this to my fellow Commissioners, to
19 figure out if a system like that can work?
20 I think it was Henry Kissinger who
21 once said it's a amazing how absence of
22 alternative clears the mind. If we can't
133
1 find a system that does those things, it
2 seems to me we ought to go on to a much
3 broader question and that is if it doesn't
4 work, let's figure out a system that does,
5 and let's get away from sales tax generally.
6 But part of our discussion here
7 ought to be revolving around whether or not
8 we can make a system like that work, and I
9 would like to ask your response to that, and
10 then I would like to have some discussion in
11 the Commission about whether or not that's a
12 reasonable goal for us to undertake in the
13 very short time we have to continue.
14 CHAIRMAN GILMORE: I believe that that
15 question may have been generally directed
16 towards the panelists. We can't have every
17 answer for 5 minutes or we'll be here all
18 day, but if you could be brief, and then any
19 Commissioner that wishes to address that, of
20 course also has top priority. Yes, ma'am?
21 MS. CALDWELL: Kaye Caldwell with
22 CommerceNet. I also found this concept of a
134
1 technology solution fairly attractive and
2 created a working group within CommerceNet to
3 take a look at it several years ago. I have
4 become convinced that that not actually work.
5 I think there are enormous issues there. I
6 would encourage people who are looking at it
7 to continue to look at it, but I don't think
8 that we can rely on that solution being
9 productive.
10 It would be nice if it was, but I
11 don't think it's technically feasible.
12 There's an enormous infrastructure problem
13 there that you're going to have to deal with
14 I think that's going to be a problem.
15 As far as the level playing field
16 issue is concerned, one of the things that we
17 really have to keep in mind is that you are
18 correct, there is ont a level playing field.
19 You give local merchants all sorts of
20 exemptions to this system that you are trying
21 to impose on electronic commerce, and that is
22 where the level playing field problems come
135
1 in.
2 The local merchants get to find in
3 one place with one jurisdiction, and you
4 don't ask them to ask them to ask everyone
5 who comes into their store where are you
6 from, we have to collect the tax based on
7 where you live. That is what you're asking
8 of remote merchants. Thank you.
9 CHAIRMAN GILMORE: Presumably of bricks-
10 and-mortar merchants also I suppose if we're
11 going to level the playing field.
12 MS. CALDWELL: Presumably?
13 CHAIRMAN GILMORE: Bricks-and-mortar
14 merchants also if we're going to level the
15 playing field. Is that right?
16 MS. CALDWELL: Well, exactly.
17 Exactly. If you're going to ask Internet and
18 remote merchants to identify where everyone
19 is coming from, I think you have to ask that
20 of local merchants, and that's where we get
21 into severe privacy problems.
22 CHAIRMAN GILMORE: Yes, sir?
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1 MR. CORNIA: Governor, if I may
2 respond to your initial question about the
3 NTA project not reaching a conclusion, I
4 think that Governor Leavitt has outlined very
5 succinctly the issues that we've heard from
6 the panelists this morning.
7 While it is true the NTA report did
8 not come to a specific recommendation on each
9 of these issues, as you read the report,
10 particularly in the area of simplification,
11 you will find that we have addressed a number
12 of areas where exploration and study I
13 believe will lead to ways where
14 simplification will come about.
15 So, while conclusions were not
16 reached on many issues, we have articulated a
17 number of very important points where this
18 Commission I think should take the time to
19 examine those things and flesh out those
20 answers or have others help you flesh them
21 out.
22 CHAIRMAN GILMORE: It seems to me that
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1 we can do a follow-on and come at it from a
2 much different perspective, quite frankly,
3 the members of this Commission. We're all so
4 balanced and have such different points of
5 view that we can do that. I was struck by
6 the report's position that nothing is decided
7 unless everything is decided.
8 That may be just too high a
9 standard in this debate, and it may be that
10 we should decide what we can talk to the
11 congressmen and not pretend that we ourselves
12 are the congressional leaders likely to make
13 policy, but instead offer them what guidance
14 that we can in accord with the issues that we
15 have laid down.
16 MR. CORNIA: I don't work on many
17 commissions accused of too high a standards.
18 Thank you.
19 CHAIRMAN GILMORE: Sort of a back-handed
20 suggestion, high standards. Are there others
21 that wish to make brief comments? Yes, sir.
22 MR. RAUSCHENBERGER: Senator
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1 Rauschenberger from Illinois, and I just want
2 to point out I think that the Governor
3 essentially defined the problem very
4 succinctly. The argument that it's
5 impossible to electronically or to use
6 software to overcome some of these problems
7 is probably valid if you agree that you're
8 going to sustain 7,000 separate rates in 190
9 different jurisdictions and no
10 standardization or definitions.
11 If, however, you make the
12 assumption that you can and will standardize
13 both rate and definition, it is clearly a
14 solvable problem. To argue that we lost our
15 bulk oil tankers because we had a tax
16 differential and then to flip the argument on
17 its head and say but it's not going to affect
18 Internet growth seems to buy both sides of
19 question from Commissioner Andal.
20 CHAIRMAN GILMORE: Let's take one or two
21 more from the panel and then get back to our
22 Commissioners, I believe. Yes, ma'am?
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1 MS. SMITH: I'm Fran Smith. I
2 appreciate Governor Leavitt's synopsis as he
3 saw it, but I think some important issues
4 that were brought up by panelists were not
5 considered. One, that there does not seem to
6 be a major problem.
7 Two, that states are important
8 laboratories of experimentation, and one fix
9 may not be the right answer, that we may want
10 to look and see how the evolution of how
11 states approach some of the tax issues.
12 I think the other one you had
13 mentioned, the privacy of vendors, I guess,
14 and I think the privacy of customers. So, I
15 would approach that.
16 CHAIRMAN GILMORE: Let's take one or two
17 more. Yes, sir?
18 MR. BAYLESS: Illinois Power. The
19 point I would like to make, I would say that
20 right now it is a possibility that it hasn't
21 affected commerce. Main-line industries like
22 ours -- industry hit the Internet which we
140
1 are doing rapidly. Last year we paid in our
2 industry $5 billion of sales tax, not
3 property tax income, pure sales tax. One of
4 the companies that I helped form when I was
5 at another company, New Energy Ventures, is
6 doing quite well in New York because we found
7 a way to get around the 8 percent gross
8 receipts tax. In an industry where margins
9 are 1 percent, that gives us an incredible
10 cost advantage.
11 I would say that our position
12 though as an industry, that everyone is a
13 customer and we'll have the opportunity
14 within years to log on and buy power. It is
15 keep it simple.
16 Our industry would not oppose any
17 type of a tax. That's up to the local
18 jurisdictions. But we simply do not want to
19 make us subject to thousands of sales taxes
20 and potential audits from those people. We
21 would be selling nationwide power from all
22 over. What we need is certainty that we know
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1 what we're doing, and when we do it it's
2 done; we're not going to be audited by
3 hundreds of people.
4 I think if you can devise a system
5 that's either national or state by state or
6 whatever so that if we sell power -- we have
7 a pretty large office in Utah -- if we sell
8 power in Utah in Salt Lake, we know it's a 4
9 percent tax rather than have to figure out
10 each jurisdiction.
11 I think if you could do that, much
12 of the opposition from main-line I'll call us
13 industries would fall way because we have no
14 bone to pick on whether there should or
15 should not be Internet taxation, but we do
16 not want to descend into a morass of 7,000
17 different jurisdictions.
18 We will have millions of
19 transactions a day, I believe, in 10 years,
20 and we are a major sales tax payer in the
21 United States. Thank you.
22 CHAIRMAN GILMORE: That point is clear.
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1 Let me come back to the Commissioners, and if
2 we need to we'll come back into the panel at
3 a later time. David Pottruck has had his
4 hand up.
5 MR. POTTRUCK: Thank you, Governor.
6 Governor Leavitt, I would agree with the
7 observations that you had. I think you have
8 laid out many of the issues, but I think it's
9 just a start.
10 I disagree with Commissioner Andal
11 that the problem is small and staying small.
12 I think it's going to get very large. I
13 think that we believe at our firm that the
14 winning strategy on the Net is going to be
15 what we call clicks and mortar which is
16 really the combination of online and physical
17 presence.
18 We're going to be in a world where
19 people are going to go to a store and try on
20 a suit that's $1,000 and then go home and
21 order it over the Internet to save $70 in
22 tax. I think we're going to see a fair
143
1 amount of that.
2 We already see that kind of
3 behavior of people going over state lines to
4 buy things that is nontaxed. It's going to
5 motivate that kind of behavior. The issue of
6 NEXUS and collecting these sales taxes is
7 going to even more complicated when you have
8 this intersection of the physical world and
9 the cyberworld.
10 Governor Leavitt also said at our
11 last meeting, and I remember this, there's a
12 point in time where a problem is big enough
13 to see, but small enough to solve. The good
14 news is we have an opportunity to think about
15 this and not have to solve it tomorrow. We
16 can recommend to Congress a process that can
17 take 3 or 4 years to methodically approach
18 changes because it's not yet the huge burden
19 that it is likely to be later, but it is not
20 today.
21 I grant you that it's not a big
22 problem today, and that's the good news. We
144
1 do have an opportunity to make a huge
2 difference. But I think the notion that this
3 will not inevitably go from a $100 million
4 issue in California to $500 million issue,
5 and $500 million stuff sounds like real money
6 to me.
7 That's something we have to face up
8 to. So, I think we have before us an
9 opportunity to look at what we have, make
10 some recommendations for change and deal with
11 some of the problems with today's system.
12 This has been fascinating to me because
13 unlike most of the people here from
14 government, I'm sure many of us from the
15 private sector really had not been focused on
16 issues of NEXUS and state taxes and use
17 taxes. These are all new issues me, and it's
18 fascinating how incredibly complicated our
19 system is.
20 Usually things like this that have
21 evolved over many years become so difficult
22 to change. I think Commissioner Andal
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1 suggested that we've been working at this for
2 years. There were several comments from the
3 panel about how this problem has been
4 addressed with no solution. Usually a
5 solution to a problem like this comes when
6 there's a galvanizing event, something that
7 creates the necessity to do it now.
8 E-commerce has happened so fast
9 that we again have the notion where we could
10 get our congresspeople to take a look at the
11 problem and say now is the time to do
12 something that will achieve simplification,
13 achieve fairness, be revenue neutral, and
14 create a level playing field and be better
15 for all Americans and all businesses.
16 I would just add one more comment,
17 and that is that many people have said today
18 that the Internet is fueling our economy and
19 it's creating a boom in America. I think in
20 reality competition and innovation is what's
21 creating the boom in America. The Internet
22 is simply a great vehicle, and we have to
146
1 seize upon the benefits of competition and
2 innovation to also use that as an opportunity
3 to fix our tax system.
4 CHAIRMAN GILMORE: Mr. Kirk?
5 MAYOR KIRK: Governor, with the risk
6 at this point, I'm reluctant to speak because
7 someone came up from the back and told me how
8 impressed they were with my performance today
9 and I reminded them I hadn't said anything,
10 that that was yesterday. I'm at the risk of
11 eroding that every second, I guess.
12 First I wanted to thank all of the
13 speakers. It was a learning process for me
14 as a mayor as well. Even though obviously I
15 agreed with some speakers more than others, I
16 appreciate you taking the time to come and
17 distill what I know.
18 Secondly, I think Governor Leavitt
19 has outlined broadly what I think is and has
20 been sort of a central I think emerging thing
21 among this Congress which is to try to fix
22 the problem while it is small and have state
147
1 and local governments have the comfort that
2 this is not a wholesale attack on the way we
3 fund those things that are part of a social
4 compact that we expect.
5 But also accept the real challenge
6 that we've got a system that's a mess and
7 that we have a responsibility to say to the
8 industry if they're going to say look we
9 don't mind paying our fair share, that we're
10 willing to rethink differently how we apply
11 those taxes so that we achieve these goals of
12 simplicity, fairness, uniformity, protection
13 of consumer privacy, and I believe if we
14 could focus on those we can get there.
15 Then third, I greatly thank David
16 for your observation in terms of how you look
17 at this from the private sector and those of
18 us who do it in the public sector. It's not
19 any better the fact that we go through this
20 routinely than you do.
21 My dad used to always have a
22 favorite saying that God so loved the world,
148
1 he didn't send a committee. I don't know how
2 that speaks to our efforts or not, but I am
3 confident that we can do -- there were a
4 couple of things that I wanted to -- because
5 we've heard again and again, and I do think
6 the Governors -- we've heard so many people
7 come talk about that we don't need to do
8 anything because there are these billions of
9 dollars that states are flush with.
10 Yesterday it was 8 billion, this
11 morning it was I heard 19. By the end of the
12 day it was 33 billion. The only thing I
13 would challenge those same people doing those
14 statistics, go back and find out what those
15 states' unfunded needs are.
16 I will tell you I'm very proud of
17 the fact that as a mayor and like others --
18 and I'm a Democrat, and I can tell you I've
19 cut taxes which some people an anachronism.
20 We've cut taxes. We just passed the most
21 progressive bond program and the biggest bond
22 program in our city's history, $546 million,
149
1 but we went to the public and the citizens we
2 care about, said tell us what you think.
3 They gave us a list of $3« billion.
4 Now, some people would look at us and way,
5 boy, your city is going and my city looks
6 just like what Dean says. Our sales tax
7 revenues are up. But I've still got streets
8 with potholes, and my streets look just like
9 New York.
10 They're clogged and they're
11 crowded. You're going to rush out of here
12 and try to get to the airport and sit in
13 traffic in for 2 hours and then find out
14 they've cancelled the flights anyway. Then
15 you're either going to cuss the mayor or
16 you're going to fuss at the FAA or the
17 airlines.
18 All I would say in this cyberworld,
19 until you get to the point that you make that
20 purchase and the book magically materializes
21 out of your computer, they're still going to
22 be delivered over city streets, over
150
1 airports, over resources that we collectively
2 come together and say we need to do this as a
3 community because that stuff is expensive to
4 build.
5 I've been trying to find some --
6 for common ground for Dean and Grover and I.
7 Grover, I guess you won't be surprised to
8 know I too am a product of the public school
9 system. For me still this all goes about
10 making sure that we have schools that work
11 because this whole industry, this incredible,
12 wonderful industry is based on intellectual
13 power at the end of the day.
14 My biggest concern in all of this
15 is that schools, universities, research
16 centers, are expensive as heck, and we cannot
17 continue to rely on imported talent.
18 I think if all the Commissioners
19 want to do something instructive between now
20 and San Francisco, go to any advanced applied
21 science, engineering, mathematics program in
22 the United States and don't even get into the
151
1 issue of how many women and minorities you
2 see. Look at how many American students you
3 see.
4 Look how small they are. We have
5 to have I think a national focus on how we
6 need to focus on math and sciences and fund
7 public education. Whether it's $100 million
8 or $5 million, I don't want to do anything to
9 diminish our states' abilities to supply the
10 intellectual fuel that's going to really feed
11 this industry.
12 CHAIRMAN GILMORE: Members of the
13 Commission, I've asked my time keeper to
14 restart my clock, and if I start fidgeting it
15 means that we're close to 5 minutes per
16 speaker. But there are no limits on this
17 Commission technically, so we'll just do the
18 best we can with the time that we have.
19 Before I call on Mr. Norquist who
20 had his hand up next, let me mention two
21 things. We're focusing on two costs here.
22 One is the recognition that businesses are
152
1 not paying this tax. Consumers are paying
2 this tax. The people of the United States
3 are paying these taxes on commerce on the
4 Internet, and their voice of course has to be
5 spoken out among these Commissioners as well.
6 The second is that business is
7 paying a cost, however, and that is the cost
8 of compliance, and there is a recognition
9 that there is an expense involved with that.
10 So, the simplification issue goes
11 to the questions of whether or not business
12 can in fact impose a tax policy. The
13 underlying question is, what should a tax
14 policy be, and that I think is validly before
15 this Commission. Mr. Norquist, you had your
16 hand up?
17 MR. NORQUIST: I just found missing
18 from the list that Governor Leavitt put
19 together is what I took away from yesterday
20 and this morning, that this industry,
21 telecommunications and the building blocks of
22 e-commerce, is an overly taxed industry now
153
1 and the idea that we should be for revenue
2 neutrality meaning maintain present levels of
3 taxation, I don't think is necessarily a
4 position the American people share. Taxes
5 are too high; they should come down. We've
6 been seeing that in the polls over the last
7 several months.
8 People want lower taxes, but I
9 think particularly one of the things our
10 Commission has been asked for in a letter we
11 got from the leadership of the House of
12 Representatives asked to focus on as well is
13 the present level of taxes and the damage
14 that's presently doing as has been mentioned
15 on the digital divide.
16 I mean, one of the things that
17 hopefully the political leaders will do is
18 stop damaging things. Reduce the taxes that
19 they now at the state and local level and at
20 the federal level with this 3 percent tax and
21 other taxes, the damage they're now doing to
22 America's children and to our future by
154
1 taxing telecommunications and access.
2 So, I certainly have been hearing
3 yesterday and today that this is an overly
4 taxed industry now, and we ought to be
5 looking for ways to reduce the tax burden on
6 telecommunications and the Internet for now
7 and into the future.
8 CHAIRMAN GILMORE: I have a list of
9 people who wish to speak. I'm placing my
10 name third. Mr.Lebrun, I think you were
11 next.
12 MR. LEBRUN: Thank you, Governor --
13 listed some issues and ask can it be fixed.
14 I think it can be fixed, and I think all we
15 have to do is look at the model of commerce
16 in general in this country over the last 100
17 years.
18 One hundred years ago the states
19 were going in various directions in the law
20 of sales, the law of secured transactions,
21 you name it. The Uniform Commercial Code was
22 drafted about 50 years and enacted by every
155
1 one of the 50 states, and it has enabled
2 commerce to flourish in this country. The
3 UCC is the envy, I believe, of most countries
4 in the world today, and that was done at the
5 state level.
6 It didn't have to be done at the
7 federal level, and I would suggest that the
8 states can again get together and adopt a
9 uniform sales tax law, whatever you want to
10 call it. It won't happen overnight, but it
11 can be done because it's been done before.
12 That type of uniformity can flourish the
13 Internet just like it has general commerce
14 over the last 50 years.
15 CHAIRMAN GILMORE: Paul Harris?
16 MR. HARRIS: Thank you, Governor.
17 I wanted to thank the panelists for their
18 excellent presentations this morning as well.
19 I've certainly learned a lot this morning and
20 throughout this process. I listened to
21 Governor Leavitt's summary of recurrent
22 themes that we heard this morning, and I
156
1 agree with just about all of them. But I
2 heard some themes that I had taken down in my
3 notes that were not emphasized.
4 There are some questions about the
5 constitutionality of some of the taxation
6 that we currently have. Someone even
7 mentioned taxation without representation
8 which I thought was interesting.
9 We talked about a digital divide in
10 our country which I think is something that
11 all of us ought to be concerned about. We
12 should be concerned about that from the
13 perspective of how we close the digital
14 divide and making sure that we don't
15 recommend any policies that might exacerbate
16 that divide.
17 We heard about arresting the growth
18 of the Internet and related technologies
19 through taxation. I heard individuals talk
20 about the effects of taxation on Main Street
21 businesses. Some say Main Street businesses
22 will not be affected, others say they will be
157
1 severely affected, and there are other
2 opinions. We heard talk about states serving
3 in an historic role as laboratories for
4 experimentation. We heard federalism
5 concerns.
6 These are some of the issues that I
7 think we need to focus on, as opposed to how
8 we fix it. When I hear how we fix it, I hear
9 that some people have already concluded that
10 we need to tax e-commerce. That's what I
11 hear. Inherent in the discussion about what
12 we can do to simplify it and make sure it's
13 tax neutral, et cetera.
14 These all seem to be buzz words and
15 code words: Well, we're going to e-commerce.
16 It's just a question of how we do it. I
17 think if these discussions at this level are
18 going to be meaningful that we just need to
19 be straight up and honest. I'm a little bit
20 uncomfortable about going down the road to
21 fixing the problem because what I hear is
22 that we're going to tax it, and I don't know
158
1 that we've made that decision as a
2 Commission.
3 Before we get too far afield on
4 some of the principles that Governor Leavitt
5 highlighted, I thought I would suggest some
6 of the themes that I heard as well because I
7 think they're equally as substantive and
8 relevant to our conversations.
9 CHAIRMAN GILMORE: I have my list and
10 I'm next on it, and I have numerous questions
11 that I've thought about since I've been
12 chairman of this Commission for a long time,
13 and I'm going to toss two of them very
14 quickly out there for anybody to respond to
15 either out of the panels or out of the
16 Commission, or even maybe an ongoing
17 discussion about this.
18 Number one, as I reviewed the
19 charter, the command from the Congress on
20 this, and they have commented on it now by
21 letter to this Commission that I think has
22 been distributed to all the Commission
159
1 members, but it is that they expect that
2 remote sales whether it's by Internet or by
3 mail order will be treated similarly in the
4 future. That seems to be what is under
5 discussion.
6 Sometime back there was a
7 discussion about remote sales through
8 catalogue sales. The remote collection has
9 not occurred in the United States. Has this
10 meant that the streets are torn up, that the
11 fire departments are no longer working, the
12 police are out in the widows are in the
13 streets? It hasn't.
14 So, I guess the question I think we
15 have is, is this qualitatively different,
16 because I think that people will be treated
17 the same no matter what. So that's the
18 question. Since remote sales has not
19 demonstrated as a matter of history that the
20 catastrophe has occurred, does Internet mean
21 that, or do we even know yet.
22 The second question that I have is
160
1 I have been just fascinated with and I
2 suspect our fellow guys and gals might be
3 able to answer this one, or comment on it,
4 and that is what to prevent if we decide to
5 set up a national regime, simple,
6 complicated, or whatever we decide to do,
7 what is to prevent people from simply selling
8 from offshore where they can evade our laws?
9 Evade is not the right word. Avoid is the
10 right word. Tax avoidance.
11 I just read an article which I hope
12 has been distributed, if not we will get it
13 to you, where some sophisticated servers and
14 entrepreneurs are now setting up Bermuda
15 precisely for the purpose of setting up
16 virtual sales operations in Bermuda.
17 It can't be for any other reason
18 other than to get it out of the jurisdiction
19 of the United States, but Bermuda is not
20 necessary. It could be Moscow or any place
21 else. So, I'm interested in the
22 international implications of this and just
161
1 whether technically we can do this. Are we
2 going to it by closing our borders? Are we
3 going to do it by invading the privacy of the
4 Net? I just don't know the answer to that.
5 That's a genuine, honest question, and I
6 would like to get some commentary on it.
7 If anybody would like to talk about
8 it now, that would be great. I do have a
9 list of two more Commissioners at least who
10 want to speak. Governor Leavitt?
11 GOVERNOR LEAVITT: I'd actually just
12 like to ask the question whether or not the
13 Commission views its role in part as to
14 figure out if technologically such a system
15 can work. If it can't work, then we've got
16 an entirely different set of problems to
17 solve.
18 If it does work, then we can get
19 down the policy question of whether it should
20 or it shouldn't. But I firmly believe that
21 one of the things that needs to come out of
22 this Commission's meeting today is some
162
1 direction as to determine with all of the
2 technology fire power sitting around this
3 table; now, I'm guessing that's one of the
4 reasons they put the head of AT&T and MCI and
5 Charles Schwab and AOL others. Let's figure
6 out of this thing can work. Let's go out and
7 find the expertise that exists in the world
8 and find out if you can make this system
9 work.
10 CHAIRMAN GILMORE: Let me go on to the
11 list in the interests of fairness, and we'll
12 get everybody in. Delna Jones is next.
13 MS. JONES: I think in the process
14 that we've been going through, there's a
15 couple of issues that I'd like to focus on.
16 First of all, I think we're mixing the issue
17 of fairness and rate of tax, because I think
18 in many people's minds the question of
19 whether I order a suit over the Internet
20 through a catalogue or purchase it next door
21 at the retailer is not really clear as to
22 whether I should pay the tax one place and
163
1 not another.
2 But when the issue is not just
3 fairness, but it is also the rate mixed in,
4 then you have a complication of the problem I
5 think we need to separate. Maybe our rates
6 are too high. But if that's the case, then
7 we shouldn't be discussing it in a
8 relationship of who pays the tax and when.
9 I haven't heard local retailers.
10 I've heard people tell me what they think
11 local retailers are going to have in terms of
12 the impact of the Net, that they're going to
13 be in a better position. I've heard others
14 say that they are really going to use the Net
15 and they're going to find better ways to
16 expand their businesses in that regard; and
17 some have said they're going to go broke.
18 But I haven't heard any real retailers tell
19 us anything that is really the reality of
20 where they sit.
21 I also have a question, and that
22 would be probably some of our folks either on
164
1 the Commission or in the experts, and that is
2 how many of our sellers today are already
3 collecting a tax even though not required,
4 because I believe that is happening in many
5 cases.
6 CHAIRMAN GILMORE: Let me follow-up on
7 Delna's question, and it's a question of one
8 of rate and whether or not there are policy
9 reasons why there should be different rates.
10 In Virginia, and I think in other states as
11 well, and also by the way at the national
12 level, there are certain areas that are
13 designated as Enterprise Zones.
14 Businesses located in those
15 Enterprise Zones get a favorable tax
16 treatment. They get a better rate, or they
17 get a better situation, and we do it because
18 we either want to put them in inner cities or
19 we want to encourage import and export. They
20 get tax breaks on income taxes for each
21 employee that they hire.
22 They get tax breaks for
165
1 rehabilitating buildings in blighted areas.
2 Suburban malls sometimes receive tax
3 subsidies in the form of public expenditures
4 on road access, construction of new off
5 ramps. Each one of those imposes a different
6 kind of discriminatory tax rate or different
7 kind of opportunity.
8 So, Delna, I think you're right.
9 Sometimes we do favor some industries and
10 some people, and sometimes we don't,
11 depending on what kind of social policy that
12 we're trying to do. I think Joe Guttentag
13 was next.
14 MR. GUTTENTAG: Thank you, Mister
15 Chairman. First, let me just comment briefly
16 on the question which you've raised regarding
17 the international aspects of these issues.
18 Certainly that is a concern. It's an issue
19 which might be usefully addressed in
20 connection with the international discussion
21 at the next session.
22 It's an issue which we are
166
1 discussing in international fora because in
2 many cases you can see this requires
3 cooperation as opposed to problems which our
4 Congress can deal with or state legislators
5 can deal with; in many cases this can only be
6 dealt with internationally.
7 Sometimes it's not a question of
8 where the seller is. It may be more
9 important where are the goods. Are the goods
10 in the U.S., and are they being delivered
11 from a U.S. source.
12 But me just turn for a minute to
13 another aspect of this, Mister Chairman, not
14 the substantive issues, but the process of
15 how we move and to discuss and resolve the
16 issues which Governor Leavitt and others have
17 raised and which seem to be at a consensus at
18 least as to these issues.
19 We have over eight of our speakers
20 today I believe who have been involved in the
21 National Tax Association project on the
22 steering committee which provided this report
167
1 to us, and they are a diverse group.
2 I would hope that we could devise a
3 process whereby they could inform us in
4 addition to the report, the process which
5 they went through, how that could help us
6 with our process. They could advise us of
7 the issues which they think there is
8 agreement between the various sectors
9 represented on the Commission of the hard
10 issues which need to be decided and which
11 they couldn't reach agreement. I think it
12 would help us focus our issues.
13 Obviously there are other issues
14 that we want to deal with besides those
15 involving the project of the National Tax
16 Association. But I would hope that we could
17 learn as much as possible.
18 This is obviously not the time, nor
19 do we have the time to do that, but possibly
20 we could figure out a way to take advantage
21 of their expertise and what they have done
22 over the past 2 years.
168
1 This really goes to the question
2 which you asked at the beginning: If they
3 couldn't reach agreement over 2 years, how
4 can we do it. Well, they did reach agreement
5 on a lot of different matters, and we've
6 heard from them as to some of those issues.
7 They've also advanced the ball to the point
8 where I think we could find it very useful.
9 So, I hope we can take advantage of that,
10 Mister Chairman.
11 CHAIRMAN GILMORE: Would any of the
12 members or the people out here like to
13 address that? I see three hands, and that's
14 what we're going to do, and that's all.
15 Since you have spoken previously, I'll come
16 to you second. Joe, why don't you go first?
17 MR. BROOKS: That's a very valuable
18 question from the standpoint of the process
19 that we are going through. Let me preface
20 what I'm going to say very quickly that in no
21 way do I intend to make any disparaging
22 remarks about anyone or look down from the
169
1 standpoint of process. The dynamics of a
2 group is tough to work with. I have heard
3 some comments today which bother me.
4 This Commission has one of the
5 greatest opportunities of any Commission from
6 the standpoint of tax structure and the way
7 you put together a tax program, and I have
8 heard the comment, and Mr. Andal, you made
9 this comment, "My opponents on this
10 Commission." This Commission was not
11 designed to be opponents.
12 MR. ANDAL: Can I correct you? I
13 did say my opponents. I didn't say on this
14 Commission. Those that disagree with me.
15 MR. BROOKS: Well, okay. Fine. I
16 understood it to be --
17 CHAIRMAN GILMORE: Mr. Brooks, direct
18 your comments to the question that was asked
19 by Mr. Guttentag, and that is, do you have a
20 recommendation for any ability to do a
21 process, to reach any sort of agreement on
22 any issues.
170
1 MR. BROOKS: Yes, I do.
2 CHAIRMAN GILMORE: Please, we have other
3 people that need to speak before lunch.
4 MR. BROOKS: I understand. I
5 understand. But the process is that normally
6 in a group of this size you will find a few
7 people, this is true of most any group, that
8 will continue to bring up subjects that you
9 are not going to solve. You should be
10 working on the issues that you can come to a
11 solution on.
12 One of the comments that was made
13 in our first meeting, do not let the desire
14 for perfection destroy that which is good.
15 That's a tough statement.
16 If I might have the floor for just
17 a moment having to do with this economic
18 growth, the cities of America have not
19 participated in the great economic growth
20 that has taken place. A good example, the
21 city of Richmond's growth per year for the
22 last 5 years has been 1.2 percent.
171
1 The average growth in the state has
2 been something above 6 percent over the
3 last 5 years. When you look at surrounding
4 areas in Virginia, because we are independent
5 of counties, when you look at that, that
6 growth is has been much more than your
7 central cities. Mr. Kirk, I think you led to
8 this, and I would hope that as this
9 Commission works, that you will realize that
10 all segments of our economy, particularly the
11 local segments, are not participating in the
12 economic growth at the same level.
13 CHAIRMAN GILMORE: Mr. Brooks, the
14 Internet might in fact enable people in the
15 central cities to begin to participate, might
16 it not?
17 MR. BROOKS: It might if the
18 structure is set up that is in the right way.
19 I agree with you. This is where the
20 Commission has a great opportunity to do
21 that.
22 CHAIRMAN GILMORE: Was there another
172
1 comment from the panel? Yes, ma'am.
2 MS. CALDWELL: I was also a member
3 of the National Tax Association project, and
4 I think one of the messages that you need to
5 get from that report is that we did focus
6 almost exclusively on what it would take to
7 make a universal obligation to collect by all
8 businesses workable, and I think that is the
9 primary reason why we were unable to come to
10 a solution that everyone agreed on.
11 So, my message from that project to
12 this Commission would be that you do need to
13 look seriously at other possibilities, the
14 possibility that Mr. Ryan mentioned and the
15 one that I mentioned which are relatively
16 similar; Commission Andal's proposal needs
17 very, very consideration -- because going
18 down another path has been done many, many
19 times before and it has not led to success.
20 CHAIRMAN GILMORE: One more and then
21 back to the Commissioners' list. Yes, sir.
22 MR. CORNIA: I would like to say that
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1 this Commission had some of the best and
2 brightest minds, the NTA Commission, in the
3 entire country on state and local tax issues.
4 I might be speaking out of school here, but I
5 believe members of that commission would be
6 more than happy in response to your question
7 to help you solve and understand these issues
8 that we went through.
9 We spent hundreds of hours,
10 thousands of hours, in conference calls and
11 meetings, and I believe that you would find a
12 number of the members of the commission who
13 would be more than happy to respond and help
14 and understand the issues we raised and
15 discussed.
16 CHAIRMAN GILMORE: Thank you.
17 Commissioner Dick Parsons of Time Warner?
18 MR. PARSONS: I would just like to
19 go back to an issue that Governor Leavitt
20 raised. Referring to my notes, what I heard
21 or what I made note of what I heard the panel
22 say was that currently there are sort of
174
1 three bases for state and local taxation or
2 taxation at the local level: Property tax,
3 income tax, sales tax.
4 Now, that's not because those are
5 inherently the most logical or sort of only
6 bases on taxes. I mean, we used to tax
7 people on the basis of how many cattle they
8 owned. Then they stopped owning cattle, so
9 that wasn't very good. Or you could have a
10 head tax. You can do a lot of things.
11 The reason we picked those three
12 was because there's ease of identification of
13 a basis for levying a tax. The property is
14 in the state. The income is earned in the
15 state. That's gotten more complicated. Or
16 the sales transaction took place in the
17 state.
18 The other thing I heard was someone
19 I think put the real question before this
20 Commission, I mean, there are lots of
21 subdivisions of it, but the fundamental
22 question is whether we preserve this sort of
175
1 physical presence NEXUS standard as a basis
2 for taxing remote sales. I mean, that's what
3 it comes down to at the end of the day.
4 The issue it seems to me as just
5 listening to the debate, the first place you
6 have to start is can you really do that with
7 cyberspace sales. I don't know, and I'll be
8 interested to hear what people from AOL and
9 UUNET and AT&T and MCI have to say. My
10 instinct is not.
11 My instinct is that you would have
12 to create -- talk about anti- simplification.
13 You would have to create something so
14 complicated to try and track Internet sales
15 or electronic commerce back to some source
16 and define where does this sale take place.
17 Does it take place on the server;
18 in my home because I have a computer; at the
19 offices; wherever they may be of whoever the
20 vendor is; and how do I find out who that is
21 and all that. I mean, I'm not sure that
22 there is a solution here that simply would
176
1 allow us to say let's treat e-commerce like
2 other remote sales and use the same standards
3 and that's the principle we proceed on.
4 What I'd like to suggest is that in
5 addition to having these distinguished
6 panelists come and tell us their views on
7 sort of the economic impact and the fairness
8 or unfairness of it, have some discussion
9 around that issue; around the issue of,
10 frankly, are e-commerce sales or electronic
11 commerce, is that a sensible basis for
12 levying a tax?
13 Because it may not be. It may not
14 be any more sensible than taxing how many
15 cattle you own anymore because it's too
16 complicated, it's too impossible to track, it
17 doesn't make sense. We'll have to think
18 about other things to tax to raise revenues
19 and let this develop and it's going to
20 develop. But at least I'd like to have some
21 discussion around it because I don't know the
22 answer to the question, and I think the
177
1 Governor's sort of base line inquiry is a
2 fair one.
3 CHAIRMAN GILMORE: Bob Pittman from AOL?
4 MR. PITTMAN: Well, it seem to me
5 listening to it, and there's been a lot of
6 information here that's been very valuable,
7 but there are a couple of pieces of
8 information which we probably need, and I
9 don't know if we'll collect it today. But
10 there seems to be this distinction between
11 Main Street merchant and Internet merchants.
12 If you go on the Internet you
13 actually find an enormous number of the
14 merchants are Main Street merchants who now
15 have a Web site, and I think it would be
16 instructive and interesting to look at how
17 many of those Main Street merchants have Web
18 sites; how much of their business not only
19 are they doing today, but are they expecting
20 to do; and how are they expecting to segment
21 their business between physical presence and
22 online. So, I think probably we eventually
178
1 look at every merchant in one form or another
2 as being an Internet merchant as well, some
3 exclusively, some not.
4 The second issues is we've talked
5 some about technology and technological
6 solutions. Actually before I came here I
7 asked our technology folks, I said, I keep
8 hearing all these ideas about we've got this
9 piece of technology we can just plug in. I
10 said, have you heard of any of them, and they
11 said no.
12 I would think it would be helpful
13 if all of you have heard of it for us to get
14 the names of those pieces of software because
15 it is an onerous task. It does take a lot of
16 time. It doesn't always work as you expect
17 it to.
18 It gets easy in certain situations,
19 but the bigger you get and the more complex
20 you get, the more difficult it gets. Those
21 are precious resources because developers can
22 only develop one thing at a time, and they
179
1 either develop your next product or they
2 develop your technology to handle
3 administration of something which doesn't
4 improve the bottom line.
5 I think if there are those
6 existing, I think that influences decisions
7 people make in terms of what it is. So, I
8 think if we could get those two pieces of
9 information it would be very helpful in the
10 deliberation of this process and actually
11 trying to put together some ideas.
12 CHAIRMAN GILMORE: Four more
13 Commissioners are on those list, and then
14 we're going to discuss lunch, and we still
15 have a little time after lunch to take up
16 some additional matters also. Stan Sokul was
17 next.
18 MR. SOKUL: Thank you.
19 MAYOR KIRK: Just in response to
20 Mr. Pittman's question, there is a handout
21 that was on your tables yesterday from the
22 Conference of Mayors, and it has several
180
1 different software packages that are
2 available that we specifically reference.
3 You might want to look at those. That's at
4 your desk.
5 CHAIRMAN GILMORE: Stan Sokul, Direct
6 Marketers.
7 MR. SOKUL: Thank you. I want to
8 respond to a lot of what's said including the
9 basic fundamental question posed by Governor
10 Leavitt is one of the most fundamental
11 questions we have, as he pointed out, is to
12 ask is the sales tax system salvageable, and
13 if it's not, shouldn't we start -- isn't one
14 of the most important things we can do is to
15 send out to Congress and to the states the
16 signal that in our opinion saving a
17 Depression Era system and trying to impose
18 that on our 21st century economy isn't the
19 way to go.
20 I mean, I noticed our motto, I
21 guess, "Shaping the Future of the Internet."
22 I would hope that our motto is, "Ensuring
181
1 Taxes Don't Shape the Future of the
2 Internet." I hope economics and business
3 shapes the future of the Internet, not our
4 decisions on taxes.
5 But in Governor Leavitt's list, I
6 didn't hear, and I wasn't quite sure, whether
7 a federal law to overturn Quill was part of
8 your -- and that again gets to the basic
9 question for us, and it's a question that
10 Gene raised, in terms of what we recommend to
11 Congress, is it a federal-level solution, a
12 federally imposed solution, or is it a
13 state-driven solution from the bottom up.
14 I'm going to end up with a question
15 here for Kaye Caldwell or George Isaacson.
16 In Kaye's paper she made the point that the
17 current system where the state and local
18 governments since the -- case was decided,
19 they've been striving for the deal -- the NTA
20 project was striving for the deal, trading,
21 simplification, for overturning Quill, and
22 the prospect of overturning Quill, if you
182
1 will, for 30 years has been the Holy Grail of
2 many state and local officials.
3 As long as that process and that
4 hope is there, their incentive is not to
5 simplify. They don't have any incentive to
6 simplify because the collection burden isn't
7 on the tax authority; it's not on the local
8 officials or the state officials; it's on
9 business.
10 Now, why is this current system
11 such a mess? It's because the people who
12 create it generally don't have to deal with
13 it. It's the businesses that have to deal
14 with it. The thing that I like about the
15 Andal proposal is it says we recommend to
16 Congress you're not going to get the deal.
17 It's up to you to simplify your systems.
18 Whether it's a software solution, or as time
19 goes on that becomes more -- if it works, if
20 it doesn't work, maybe in years it will work.
21 If we can just change the incentive structure
22 of what created this mess, I think that would
183
1 be an important effort.
2 This comes to my question. A point
3 in Kaye Caldwell's paper is if states impose
4 an unconstitutional tax that's challenged by
5 business and they win, it's virtually
6 impossible for them to get their money, and I
7 think that raises the issue in terms of
8 incentives and what we recommend to Congress.
9 I think that an important thing is
10 when states behave badly there should be a
11 sure remedy for business, swift and sure. I
12 know that George Isaacson is a tax
13 practitioner, a tax litigator who I think has
14 dealt with this, and if he had any comments
15 on the need for such a law for a swift and
16 sure remedy when states impose clearly
17 unconstitutional taxes, I'd like to hear
18 them.
19 CHAIRMAN GILMORE: Why don't we take up
20 Mr. Isaacson right after lunch and finish the
21 Commissioners and then bring you in first
22 right after lunch. We'll do that. If there
184
1 is going to be a lunch, we'll see about that.
2 But let me just finish this. I think my list
3 shows Mr. Pincus, Mr. Armstrong,
4 Mr. Sidgmore, and Mr. Norquist.
5 Then we're going to make a lunch
6 decision and close from there. I might
7 mention, by the way, for the people who are
8 on our Webcast, that the Quill decision was a
9 court decision that stated recently, or not
10 so recently, that remote sellers do not have
11 to collect taxes on behalf of states with
12 which they do not have NEXUS or some
13 operating connection, and that is the
14 decision that is driving much I think of the
15 Commission's work and the Congress's interest
16 in the issue. Mr. Pincus, of the Department
17 of Commerce.
18 MR. PINCUS: Thank you, Mister
19 Chairman. I have a concern similar to a
20 question that several other Commissioners
21 have mentioned, and I thought that some of
22 the people, our expert panelists -- and it
185
1 relates to the question of Main Street
2 businesses and where are they really, if they
3 exist, if there is such a differentiated
4 category anymore; what is their view of this
5 issue.
6 I noticed that on our expert
7 panelists list just by looking at some of the
8 identifications there are some people that
9 seem to be perhaps representatives of Main
10 Street businesses and since they've been good
11 enough to come, I thought maybe we could give
12 them an opportunity -- the people who spoke
13 who wanted to speak to that issue, and I
14 wondered if we could ask whether any of the
15 people on the expert panel feel that they
16 represent those interests and would like to
17 speak to that issue.
18 CHAIRMAN GILMORE: We have one, and we
19 ought to take you up after lunch shouldn't
20 we? I think that would be the better thing
21 to do, and give me your name, please.
22 MR. McGEOUGH: Peter McGeough,
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1 Seaman Furniture Company. Very good. We'll
2 take you up right after lunch in response to
3 Mr. Pincus's question. Let me complete my
4 list here. Mr. Armstrong?
5 MR. ARMSTRONG: Thank you, Mister
6 Chairman. I believe that Governor Leavitt
7 asked a very direct question and I'd like to
8 give him a very direct answer, and his direct
9 question was can a system work technically.
10 Did I get it right, Mike? The answer is
11 absolutely yes. Yes, on three levels.
12 First, the system can work better
13 than the system we have to live with today
14 technically. AT&T as somebody testified
15 fills out 39,912 forms, and that's a low-ball
16 number because it does not include our cable
17 forms and our wireless forms.
18 So, we're probably in the 50
19 to 60,000 form bucket and growing, and so
20 today's system has got to be fixed. But if
21 technically we can do it with this kind of
22 less, we can probably sit around here and
187
1 create a bigger mess that we can technically
2 do as well.
3 Second, somebody testified that the
4 average bill in I think it was Richmond,
5 Virginia, had a 35 percent tax burden on it.
6 That's not fair. Access to the Internet
7 shouldn't carry that kind of a burden on it.
8 Finally, to the retailer, to the collector,
9 to the seller, it's too costly.
10 It's a big bill to big business,
11 and it's a bill that can make the difference
12 to the bottom line to a little business. The
13 other thing, Mike, that I would add is that
14 all this can be done, but what ought to be
15 done is that somebody mentioned earlier, a
16 common definition and a common structure.
17 Then what I'm saying can be technically done
18 practically also.
19 CHAIRMAN GILMORE: Mr. Sidgmore?
20 MR. SIDGMORE: Well, I just want to
21 reiterate what Mike said, but I guess the
22 reason why I put my hand up here is I wanted
188
1 to agree with Governor Leavitt because I
2 think the primary focus, at least the first
3 focus of the Commission, really should be to
4 figure out whether there's a practical
5 solution to this problem.
6 Because like Mike said, if there's
7 not a practical solution to the problem, then
8 we're stuck with moral, religious, and other
9 views on taxation which could take the rest
10 of our lives.
11 From my standpoint as a
12 businessman, and I've talked to many of the
13 other businessmen here, I think there is a
14 practical solution here given that the
15 technology will follow, and I believe that
16 there will be a technical solution here if
17 tax simplification is a given. So to me the
18 question we need to focus on is whether it's
19 practical to achieve tax simplification.
20 I heard a lot of comments before
21 that indicated that there may not be a way to
22 do it, that others have tried for centuries
189
1 and we haven't achieved it. To me, that's
2 the primary issue. I think once we can show
3 that it is feasible, then we have options.
4 If it's not feasible, we don't have a
5 practical option and we should move on.
6 CHAIRMAN GILMORE: Mr. Norquist?
7 MR. NORQUIST: Michigan does not
8 have a death penalty and they don't have a
9 lot of people in Michigan lobbying the
10 legislature about how nifty their guillotine
11 is or the electric chair. They don't sit
12 there and wonder if something is technically
13 feasible before asking the question of do you
14 want to do it.
15 The question of do you want the
16 state of Alabama to be able to tax amazon.com
17 or to levy taxes on people in other states,
18 that's a political decision. It's not a
19 technical decision. We've had some big hints
20 from Congress. We got a letter from the
21 leadership saying we don't want to go down
22 that road. The Senate voted three to one
190
1 rejecting that idea when Mr. Bumpers put it
2 forward.
3 So, for us to get hung up on, gee,
4 what if Quill went away when the Senate said
5 three to one it's not going away and the
6 House leadership just sent us a letter on the
7 same, is not necessarily putting our time as
8 well spent.
9 But the challenges with allowing
10 Alabama to tax businesses in Maine is not a
11 technical problem, it's a political problem,
12 because politicians love the idea of taxing
13 people who don't vote. The abuses that we
14 have now in tort law that all of you suffer
15 from where a jury in Alabama decides to whack
16 General Motors because it's for free, you
17 will have again and again and again with tax
18 collectors at the state level and at the
19 local level.
20 I've talked to some businesses who
21 have horror stories about out-of-state tax
22 collectors going after them, hiring bounty
191
1 hunters to go after them and so on. It's a
2 political problem. That's what the Commerce
3 Clause was designed by the Founders for.
4 So, it's not a technical question
5 of, gee, could you do it, although that's an
6 interesting one, it's possible, it's not
7 possible to do. It's a political question of
8 do you really want to give politicians in one
9 city the ability to reach out and threaten
10 audits to businessmen all around the country
11 in other states who don't get to vote for
12 them.
13 Maine doesn't beat up on L.L.
14 Bean more than they do is because people in
15 L.L. Bean live in Maine. They have no
16 protection against Mississippi or Alabama.
17 CHAIRMAN GILMORE: I think that
18 concludes this particular presentation,
19 although we will be coming back.
20 MR. SIDGMORE: Is it possible to
21 respond to that?
22 CHAIRMAN GILMORE: Sure.
192
1 MR. SIDGMORE: Because my only
2 response, Grover, is very simple. I do not
3 believe we're going to accomplish anything if
4 we start with the question of whether it's
5 moral, religiously appropriate, or
6 politically astute to tax people on the
7 Internet.
8 The question really, and I think
9 what we were charged to do, is to examine the
10 issue, and most of the issues against
11 taxation that I've heard so far are that it's
12 impractical. Most of the businessmen are
13 concerned that it's too complex, we'll spend
14 the rest of our time in our businesses
15 writing systems to support taxation, 39,000
16 or 50,000 tax forms or whatever Mike has.
17 Those have been most of the issues.
18 To me we ought to get through that issue
19 first and then decide whether it's even
20 possible to do it. Then we can move on to
21 the religious issue.
22 MR. NORQUIST: We can do
193
1 simplification and reduction without dealing
2 with the question the House and the Senate
3 have already repeatedly told us they don't
4 want to change, which is Quill. The
5 simplification and the reduction of taxes on
6 telecommunications, that can happen now
7 without any sort of leap of faith.
8 My point was this is not a
9 technical question about how Alabama could
10 tax people in Maine. It's a political
11 question that our Forefathers set up that
12 said we don't want people doing that, we are
13 one country and states' rights does not allow
14 you to do this.
15 CHAIRMAN GILMORE: Well, I certainly
16 don't think that the question of whether or
17 not taxes ought to be imposed is a religious
18 or mystical one. It is a policy question.
19 It is a legitimate question to find
20 out whether technically it can be done or not
21 at all, in which case then maybe that drives
22 a different policy. But it is a legitimate
194
1 question also to ask what we do with the
2 consumers and the users of the Internet
3 across the United States of America.
4 I also want to say one more thing
5 before we break, and that is I think I want
6 to put this process in just 30 seconds into
7 some perspective here. I don't think at all
8 else suggests that because the eCommerce
9 Advisory Commission meets that the sky is
10 going to open up, that an angel is going to
11 descend and is going to tell everybody here
12 today or in any other meeting the answer to
13 all of these questions. It is not realistic
14 and it is not reasonable to engage in fantasy
15 thinking.
16 Instead, we should recognize what
17 these meetings do.
18 They are here for the purpose of
19 educating the Commissioners, allow give and
20 take of discussing the issues, and allowing
21 the formation of clear thought in the minds
22 of the Commissioners so that as we go forward
195
1 we know how to talk about this with staffs,
2 with each other, between meetings as we move
3 ahead towards drafting and trying to
4 understand can achieve a majority or a
5 consensus and what cannot, or whether or not
6 in fact all these ideas have to be presented
7 to the Congress.
8 But let us not dream that all of a
9 sudden the magic answer is going to appear.
10 It is, however, a way of sharpening the minds
11 of the Commissioners so that we can make some
12 decisions.
13 On the lunch situation,
14 Commissioners, I have two choices we'll give
15 you. We had arranged for lunch some place
16 else so we could get off by ourselves, eat
17 lunch and talk over these issues during
18 lunch. That's obviously along the same path,
19 and we can do that. We don't have to stop
20 engaging with each other just because we're
21 going to go to a different place and have a
22 sit-down lunch. Or, if you prefer to
196
1 continue this to its fullest extent, there
2 are box lunches available for the
3 Commissioners.
4 We can take 15 minutes now, eat box
5 lunches, we're right back in here and keep on
6 going promptly and immediately. So, those
7 are the two choices that I think that we
8 have, based upon our knowledge, of course, of
9 the weather situation that we have.
10 Mr. Armstrong?
11 MR. ARMSTRONG: I think there's a
12 lot of people that would say a lot of things
13 and we've got a hurricane on the way, and
14 let's get a box lunch.
15 CHAIRMAN GILMORE: Box lunches?
16 MR. ARMSTRONG: That's why they
17 invented the term "New York minute."
18 CHAIRMAN GILMORE: "New York Minute."
19 We'll reconvene at 1:15.
20 (Recess)
21 CHAIRMAN GILMORE: The issue that is on
22 the area for discussion now is the federal
197
1 tax and electronic commerce tax issues
2 continued from this morning's session. We
3 did go through all of the Commissioners who
4 wanted to speak prior to. We will continue
5 on. I must say to you that my goal would be
6 to try to conclude in the range of 2:30 if we
7 can.
8 The information from Virginia, and
9 I think the Carolinas is even more serious
10 than it was when I spoke earlier. So, I've
11 issued some new directives, but I got to get
12 back to Virginia. I think people here from
13 the District, the report we have is heavy
14 rain already in Northern Virginia and in the
15 District area. So, we'll just have to do the
16 best we can.
17 GOVERNOR LEAVITT: Mister Chairman, I don't
18 think I'm on your list, but I would like to
19 be recognized when it's appropriate to make a
20 motion as to how we spend some of our time
21 during the next minutes. So, I'll let you
22 conduct it as you will, but if you would
198
1 recognize me as soon as possible.
2 CHAIRMAN GILMORE: Very good. I believe
3 that first of all we had two Commissioners
4 who wanted to direct some attention back to
5 the panel members which we deferred until
6 right after lunch, and one was Stan Sokul.
7 Stan?
8 MR. SOKUL: Thank you. My question
9 was for George Isaacson. As you recall, we
10 were talking about simplicity, the mess of
11 the current sales tax system, and the burdens
12 that imposes on business. I think it was
13 Kaye Caldwell's testimony brought up a whole
14 other aspect of this system and burdens, and
15 that was that when a state imposes an
16 unconstitutional tax, it's virtually
17 impossible for a business to obtain a remedy
18 for that because of the machinations the
19 states go through as you're going through the
20 system.
21 I know Mr. Isaacson is a tax
22 practitioner that litigates these matters,
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1 and I thought he might have some comments on
2 that.
3 Then just real quickly because I
4 know he's so articulate, I was going to ask
5 just real quick a second question which goes
6 to the issue of the software solution that
7 we've discussed. Because in your testimony
8 you had a comment about the poor and the
9 elderly pay by check, and do you have any
10 comments on the software and does that depend
11 upon a credit card transaction, and how does
12 that affect the poor and the elderly.
13 MR. ISAACSON: I'll be brief and
14 handle them in reverse order. We've been
15 talking about electronic commerce, and one of
16 the comments that was made earlier is that
17 all forms of remote selling should be treated
18 equally. I think it was Governor Gilmore and
19 Governor Leavitt who pointed that out.
20 The majority of remote selling is
21 not being handled by electronic commerce.
22 It's in fact still catalogue sales, and much
200
1 of the purchasing that's being done in
2 catalogue sales especially by the elderly and
3 poor is done by use of payment of check, not
4 by credit card. In other words, the consumer
5 self-computes the applicable tax.
6 In a destination-based system, if
7 that purchaser had to make the computation, a
8 gift buyer which is much of the
9 direct-marketing industry is seasonal gift
10 giving, would have to be self- computing what
11 the applicable tax would be for all the
12 destinations to which gifts were being sent.
13 It would make Christmas time like
14 tax time, and filling out a catalogue order
15 form like filling out a 1040. A very
16 complicated task.
17 Moving in reverse order and further
18 on the issue of burdens that you were
19 discussing, the question of offsetting
20 burdens, how do you move burdens from the
21 state to retailers for collection purposes
22 or, as Governor Leavitt was saying, not
201
1 adding any additional burdens on to new
2 sellers as a result of any suggestions or
3 recommendations that should come of this
4 Commission, there was an incident that
5 occurred during the course of the NTA project
6 that I think is very telling and illustrative
7 of this issue.
8 When looking at all sorts of
9 different alternatives, one suggestion was
10 how about a base state system. How about a
11 system in which merchants collect for
12 destination states, but you have the home
13 state conduct the audit. There was nobody
14 specifically who was recommending it, but it
15 was simply one alternative that should be
16 looked at: Have the base state conduct the
17 audit for all the states.
18 The reaction that the states had to
19 that suggestion was would be impossible: How
20 could you ever expect a state revenue
21 department to learn all about the tax laws
22 and procedures of all the other states.
202
1 That's exactly the burden that is being
2 suggested for electronic merchants, that they
3 have to learn the tax laws and procedures for
4 all the states.
5 Lastly was the issue that you were
6 discussing about the problem of insufficient
7 remedies being available. Without going into
8 a lot of detail about the statutory or case
9 law framework, the effect of a federal law
10 called the Tax Injunction Act is that if you
11 are going to challenge a tax assessment or a
12 state tax law in a declaration judgment
13 action, you have to go to state court. You
14 cannot bring that kind of lawsuit in federal
15 court because of the Tax Injunction Act.
16 That made good sense back in the
17 days when the tax issues were really confined
18 within the single borders of a state, let
19 their courts take the first crack at it.
20 But the effect of that when you're
21 trying to protect interstate commerce,
22 international commerce, is that you're forced
203
1 to go before state court judges even on such
2 federal constitutional issues as equal
3 protection, due process, and Commerce Clause.
4 Unfortunately there's been a
5 pattern of the number of state supreme courts
6 to be disrespectful of these federal
7 constitutional protections, or to say we
8 goofed, the state is wrong. This is
9 unconstitutional, but the remedy is going to
10 be limited to prospective application. You
11 don't get your money back for the
12 unconstitutional tax that was imposed.
13 So that one of the things which I
14 would hope this Commission would be looking
15 at would be the possibility of protecting
16 electronic commerce which is so dependent
17 upon these federal constitutional guarantees
18 by either providing recourse to federal
19 courts when there have been federal
20 constitutional violations, or otherwise
21 instructing state courts that they have an
22 obligation to provide a meaningful remedy to
204
1 taxpayers when they find that there's been an
2 unconstitutional assessment.
3 CHAIRMAN GILMORE: Mr. Pincus, I believe
4 that you had someone that you wished to
5 present to the Commission.
6 MR. PINCUS: Yes. I had a
7 question. I actually don't know the
8 gentleman's name. My question was about the
9 views of Main Street.
10 CHAIRMAN GILMORE: Sir, if you'll just
11 identify yourself and the proceed.
12 MR. McGEOUGH: Yes. My name is
13 Peter McGeough. I'm an executive vice
14 president with Seaman Furniture Company. We
15 are the largest consumer furniture retailer
16 in the metropolitan New York area. I'm also
17 here on behalf of the National Home
18 Furnishings Association which represents
19 approximately 50,000 home furnishing
20 retailers throughout the country. I'd like
21 to thank the Chairman and the Commission for
22 allowing me to speak this afternoon. I
205
1 recognize you have time constraints, and I
2 will not overburden them.
3 What I would like to say is,
4 firstly, that we are not opposed to
5 e-commerce. We recognize that sales over the
6 Internet are here and are here to stay. We
7 believe strongly that sales over the Internet
8 will grow significantly in the future.
9 However, what we would like is a level
10 playing field.
11 One of the Commissioners earlier
12 this morning talked about buying $1,000
13 suits. Seaman Furniture customers generally
14 are middle-income consumers, and there's not
15 too many of them buying $1,000 suits.
16 Perhaps it was because they didn't benefit
17 from an IPO with a .com after its name.
18 However, they are buying $1,000 suites of
19 furniture, and if you were to compare
20 a $1,000 of furniture to a book for $20 that
21 you buy from Amazon, the tax differential
22 regardless of what the rate is has a much
206
1 greater incentive on the consumer buying the
2 big-ticket item from an Internet retailer as
3 opposed to a retailer who is the old bricks
4 and mortar. That is not fair.
5 Also, is one to look at the profit
6 margins in our industry, on average the
7 EBITA profit margins in our
8 industry run in the high single digits. (EBITA is Earnings Before Interest, Taxes, Depreciation, and Amortization)
9 Those are EBITA margins before net profits
10 and before taxes are taken out. Income
11 taxes, that is.
12 If you were to take the net profit
13 margins in the furniture industry, they run
14 significantly less than the tax rates that
15 are being applied by the states and the
16 localities on average. So, it is not fair
17 for a bricks and mortar retailer. We do not
18 have the capacity to give back the sales tax
19 to the consumer who's comparison shopping
20 with us.
21 I would go back to the $1,000 suit
22 again and look at the example that was given
207
1 this morning of a customer who will go to a
2 retailer to try on a suit, and then go back
3 their home and in the comfort of their home
4 will buy it over the Internet. That is
5 happening today in the furniture industry.
6 The problem is, is that the
7 furniture retailer on the street where the
8 customer is going out and sitting on the
9 sofa, and we are the largest furniture
10 retailer in the New York area, and we've made
11 zero sales to virtual homes, with sales to
12 real homes they are sitting on furniture and
13 they want to test it and feel if the texture
14 of it is good, the sit of it is good. They
15 cannot do that over the Internet.
16 So, they're coming into our stores,
17 sitting in our stores and then going back to
18 another retailer who's an e-commerce retailer
19 and buying, and the advantage is the 8
20 percent differential.
21 I know again you have time
22 constraints and I don't want to overburden
208
1 them. However, what I would like to say is
2 all we are asking for is a level playing
3 field. I have not come here today with a
4 solution, but I will tell you that a solution
5 that is not acceptable to the bricks and
6 mortar retailers is where the Internet
7 retailers do not have to collect sales and
8 use taxes, and the retailers who have existed
9 for a long time do have to collect the tax.
10 I thank you.
11 CHAIRMAN GILMORE: I believe that
12 Mr. Andal has a question for you.
13 MR. ANDAL: I'm interested in this
14 subject of economic differential, especially
15 in furniture. Say you sold products to a
16 Californian, for instance, and you shipped it
17 all the way across the country. Wouldn't the
18 shipping costs be significant, and wouldn't
19 the shipping costs make up the economic
20 differential that you say the sales tax
21 creates an economic disadvantage to you? I
22 guess my second question is, why don't you
209
1 put a Web page up?
2 MR. McGEOUGH: Well, we do have a
3 Web page up, but the problem is I think
4 relative to your first question, as a
5 industry retailer, the easy task is putting
6 up a Web page and putting up pictures of the
7 furniture on it. The problem is fulfilling
8 the sale when the customer wants to do it.
9 So, if we have a customer in California, it's
10 very difficult for us to deliver that
11 furniture to the customer in California. You
12 basically need to have a site or a
13 distribution center there to deliver it to
14 the consumer.
15 The issue I think with furniture as
16 opposed to just going into a --
17 MR. ANDAL: Before you go on, if
18 you need a distribution center to the place
19 where you expect to distribute your products
20 as a result of Web page orders, does not the
21 distribution center then give you physical
22 presence in that state and subject to tax?
210
1 MR. McGEOUGH: That is one way of
2 doing it. The way we would do it is have a
3 distribution center. However, you could also
4 contract with manufacturers to drop ship
5 directly to the consumers. I mean, the point
6 I think that I'm trying to make is that you
7 had made an example earlier that it is easy
8 for a local retailer to establish a Web site
9 and to ship and deliver to wherever in the
10 country.
11 That is not so easy for furniture
12 because there's so much handling of it
13 afterwards, and the disadvantage in the small
14 profit margins of not having sales tax on
15 Internet users is egregious for us.
16 MAYOR KIRK: Mister Chairman, I just
17 wanted to observe, and Mr. Andal and the
18 speakers, a hypothetical that Dallas is about
19 halfway between New York and California if
20 you got to have a central distribution place.
21 Just making that observation.
22 On a less humorous note because
211
1 this is -- I would hope no one out there
2 seriously would believe that someone
3 Christmas shopping would pay a sales tax
4 based on the recipient of the gifts as
5 opposed to if you walked into a Nieman Marcus
6 or Saks or Target and buy all your Christmas
7 shopping and you pay for it and then you send
8 the gifts.
9 I hope you didn't imply that making
10 Christmas like tax time because you were
11 sending gifts to people all over the country
12 you'd be calculating different sales taxes.
13 I find that hard to believe.
14 MR. ISAACSON: No.
15 MAYOR KIRK: But that's the inference
16 that you made.
17 MR. ISAACSON: Let me just clarify
18 what I was saying. If you were requiring
19 consumers who are purchasing from mail order
20 companies to have to pay the sales tax and
21 they have to self-compute it because they're
22 paying by check, under the current system,
212
1 the tax is determined based upon the
2 destination where the goods are being sent.
3 So, if a grandmother in New York were sending
4 a set of L.L.
5 Bean boots to her to a grandchild
6 in California and a grandchild in Texas, the
7 Texas tax would be due on the grandchild's
8 gift, and the California tax would be due on
9 the other grandchild's tax. That self-
10 computation exercise would be the effect of
11 legislatively requiring that.
12 MAYOR KIRK: Well, that can be fairly
13 easily cured by just having the sales tax
14 computed on the basis of who bought it. I
15 just didn't want to leave that out there.
16 Thank you.
17 CHAIRMAN GILMORE: Let's go to Governor
18 Leavitt.
19 GOVERNOR LEAVITT: Thank you, Governor
20 Gilmore. About 30 days ago Governor Gilmore
21 and I met with the Governors of this country
22 at the National Governor's Association. One
213
1 of the rituals of that event is that we have
2 on two or three occasions opportunity to sit
3 down with all of the Governors in a
4 closed-door meeting to talk about the things
5 that are most on our mind. One of those
6 meetings revolved almost entirely around this
7 issue.
8 The discussion was not directed
9 toward we've got to get out there because
10 we're losing our revenue. The issue was we
11 need to figure out whether or not we can make
12 sales tax work for the 21st century, and
13 there was a substantial amount of urgency in
14 the need for us to conclude whether or not it
15 could be done.
16 As chairman of the organization, I
17 asked if there would be a handful of states
18 that would be willing to begin looking at the
19 technical question can we make this work,
20 hoping I would get eight or ten who would
21 send their best technical people and their
22 best policy people to a meeting. It turns
214
1 out we had 30 Governors who said this is a
2 serious matter, we've got to deal with it,
3 and they have volunteered to send their best
4 policy and technical people to a meeting that
5 will coincidentally occur in Atlanta on
6 the 22nd and 23rd of September.
7 Our discussion today calls to my
8 mind that if any one of us, and many of you
9 are, many of us are, were a chief executive
10 officer of a company, the way we would deal
11 with this problem is we would call the
12 functional equivalent of those people into
13 our office and we would say to them, look, we
14 have a problem.
15 We don't know for sure if this is
16 the direction we want to go or if we want to
17 go this direction, but we've got t figure out
18 if this direction even works.
19 So I'd like to give you some basic
20 specifications of a system, and I want you to
21 go back and figure out whether you can make
22 it work. I want you to do it 24 hours a day
215
1 if you have to because we're dealing with
2 Internet years here. We don't have a lot of
3 time.
4 You come back, give me a proposal,
5 and tell me whether or not you can make this
6 thing work, and I'll be the judge. If you
7 make it work, we may go into business. If
8 you can't, you're out of the deal.
9 Now, we've spent a lot of time
10 talking today, but I'd like to suggest that
11 it would be very fruitful whether or not
12 we're going to make a policy decision to do
13 this or not in the future, to figure out
14 whether one is an option of not. Because I'd
15 like to tell you as a Governor who is very
16 concerned about this, if we can't make a
17 functional system work, I don't want to do
18 it.
19 I'd like to suggest that we
20 spend 30 minutes in this meeting today
21 deciding what we want if we are going to do
22 it. My own sense, we ought to have a system
216
1 that's radically simplified. The current
2 system is a mess. We ought to have no new
3 taxes.
4 We ought to have no new taxes. We
5 ought to remove all burdens from sellers. We
6 ought to be saying no compromise of anyone's
7 privacy who's making a purchase. We ought to
8 be talking about the need for states to be
9 able to reflect their own values in all of
10 this, and there may be others.
11 I'd like to propose that this group
12 take 30 minutes and just hypothesize if we
13 were to do this, what would the system need
14 to look like. Then I would like to send that
15 list of specifications to this group who are
16 only going to have to execute this or get out
17 of the way, and that's the tax professionals
18 and the policy people in the states.
19 Then I would like us to act as a
20 CEO. Have them bring it back to our next
21 meeting. Let them show us, here's the way it
22 meets the specifications. If it doesn't meet
217
1 the specifications, if they can't satisfy the
2 chief executives around this table, we need
3 to get on to the next discussion. But if
4 they can, we're now making serious progress.
5 Mister Chairman, I'd like to
6 recognize that it may short-circuit some of
7 the discussion that would occur here, but I
8 think it would be very productive if we could
9 list up five or six or seven things, whatever
10 the number would be, that such a system would
11 need to satisfy and then ask them to come
12 back to us in San Francisco and give us their
13 best shot.
14 CHAIRMAN GILMORE: Governor Leavitt has
15 made a motion that we spend the duration of
16 our time here today to set up some concepts
17 about what we would want to do if in fact
18 taxes were to be imposed on the Internet, and
19 if so, technically what would be an approach
20 that would be done, that we do that.
21 MAYOR KIRK: Second.
22 CHAIRMAN GILMORE: Mayor Kirk has
218
1 seconded that we do that, and we can do that,
2 and then we can talk over what role we want
3 to play or what value we want to play in
4 whether or not we feel like we want to send a
5 direction to some other group somewhere or
6 not. We can talk those matters over.
7 Without objection, we'll just proceed to any
8 further discussion on this matter. Does
9 anybody have an opinion that they wish to add
10 on this?
11 MR. NORQUIST: I mean, we had sort
12 of an agenda and I was hoping we were going
13 to deal with the international aspects prior
14 to Bill Clinton being out in Seattle and
15 meeting with people. I got my resolutions in
16 weeks in advance that I want to talk about,
17 and I appreciate that, but there was another
18 one on international electronic commerce, and
19 this is an idea, but it's something we can
20 walk through in San Francisco.
21 CHAIRMAN GILMORE: In fairness, you have
22 offered a resolution I guess you want to
219
1 bring forward for discussion and I think
2 you're entitled to do that, and I think we
3 can take up Governor Leavitt's issue within
4 the 30 minutes also. Yours is the only
5 resolution I believe that we have. Mr. Sokul
6 has a resolution also. Let's do those and
7 then take up Governor Leavitt's issue and see
8 if we can't get something together and
9 proceed.
10 GOVERNOR LEAVITT: I think we have a
11 motion on the table.
12 CHAIRMAN GILMORE: We have a motion on
13 the table to spend the time, but we also have
14 resolutions that have been presented in
15 proper order under our other rules as well.
16 GOVERNOR LEAVITT: Well, I think that we
17 need to act on this motion. I have no
18 objection to our dealing with Commission
19 Norquist's proposal.
20 CHAIRMAN GILMORE: Your motion is not to
21 utilize all the remaining time.
22 GOVERNOR LEAVITT: No. It is that we
220
1 set aside today and not that we could
2 formulate what it was. No. It doesn't have
3 to be now.
4 MR. ANDAL: How about an amendment
5 just to get these resolutions out of the way
6 and then go to 30 minutes? Can you accept
7 that? I can't imagine a vote on the
8 resolution as taking more than about 5
9 minutes. Let's go.
10 GOVERNOR LEAVITT: Mister Chairman, I
11 have no objection to Mr. Norquist's -- if
12 you'd like me to withdraw my motion, I'd be
13 happy to do it, and I'm sure the seconder
14 will do the same. Then if you'd like to go
15 in that order, I have no objection.
16 CHAIRMAN GILMORE: I don't think anybody
17 wants to prevent us from going to that kind
18 of issue. I think we're prepared to do that.
19 But I feel uncomfortable in not allowing
20 people who've operated under the rules to be
21 able to proceed. But I think we can do it
22 all, and let's just move along very quickly.
221
1 Grover, you present your resolution and you
2 present -- pardon me? You're just going to
3 withdraw yours? Good.
4 MR. SOKUL: I think our two are the
5 same, if I just might briefly. Our two are
6 basically the same resolutions. I see no
7 need to do them both. The point of mine as I
8 explained in my letters to the Commissioners
9 was to buttress the position of Mr. Novick
10 and the USTR when they're going into the
11 Seattle ministerial meeting of the World
12 Trade Organization.
13 I was speaking at dinner last night
14 with the head of the Direct Marketing
15 Association. He was in China recently
16 talking to the postmaster general of China in
17 a big room and they had a translator,
18 conversations are going back and forth.
19 Suddenly there's a lull in the
20 conversation and the translator says to him,
21 "He wants to know if you're going to tax the
22 Internet," and the room was hushed, and of
222
1 course he said, "Absolutely not." Then they
2 went on to discuss the issue more. But my
3 point is, the world is watching what this
4 country is doing. We're the acknowledged
5 world leaders on this issue.
6 China's notion was are you going to
7 tax it in order to pay for it because their
8 government runs things and that's what they
9 were thinking. But basically the world is
10 watching us, so I introduced my resolution to
11 send a signal to the world that we support
12 USTR. I withdraw my resolution because it's
13 virtually identical to Grover, and as I said,
14 there's no reason to do both.
15 CHAIRMAN GILMORE: Grover, if you'd like
16 to present your resolution.
17 MR. NORQUIST: People have a copy
18 of the resolution. It's a statement of
19 support for the present administration, the
20 Clinton Administration's advocacy of a
21 standstill on tariffs on the Internet, and
22 it's a resolution in support of the
223
1 administration's position, and I think it
2 would be helpful if we could adopt it here.
3 The other two resolutions that I had sent in
4 a month or so ago that we talked about
5 yesterday were eliminating the 3 percent
6 federal excise tax and not taxing access.
7 I appreciate the support and the
8 super majority support that that has received
9 from you all, but we can put that into the
10 report at another time when we put other
11 things together. But I do think it's
12 important for this Commission to state its
13 support for a standstill on tariffs prior to
14 the Clinton Administration meeting with other
15 countries in Seattle later this fall.
16 I think that would be helpful and
17 strengthen their hand, particularly since
18 it's been unfortunate that the House and the
19 Senate have not been able to pass fast-track.
20 That's the motion.
21 CHAIRMAN GILMORE: It's been -- Grover's
22 motion has proposed and seconded by Mayor
224
1 Kirk. Is there further discussion on the
2 motion?
3 MS. JONES: I have a question.
4 CHAIRMAN GILMORE: Delna, you ask your
5 question, then I'll come back to whoever was
6 over here. Yes, sir. I'll be right with
7 you, Robert. Go ahead, Delna.
8 MS. JONES: We have two pieces of
9 information in the book, and I just want to
10 clarify. Are we looking at the modifications
11 that have been made by Bob Novick?
12 MR. NORQUIST: Yes. Those were
13 friendly amendments. Those were friendly.
14 MS. JONES: So, those are accepted,
15 and so the proposal is to include those?
16 MR. NORQUIST: Right.
17 MS. JONES: Okay.
18 CHAIRMAN GILMORE: Bob Novick?
19 MR. NOVICK: Thank you, Governor.
20 Just as a practical matter, the
21 administration is concerned about the
22 Commission adopting resolutions before it
225
1 studies issues. In this case, however, this
2 resolution goes to a long-standing U.S.
3 government position that's been vetted,
4 that's been discussed with Congress, it's
5 been discussed with the private sector and
6 represents the U.S. government's position in
7 the World Trade Organization.
8 As such, we're appreciative of
9 Mr. Norquist's and Mr. Sokul's efforts to
10 support the administration and would support
11 the passage of this resolution.
12 CHAIRMAN GILMORE: Further discussion?
13 MR. LEBRUN: Mister Chairman?
14 CHAIRMAN GILMORE: Yes, sir. Gene
15 Lebrun?
16 MR. LEBRUN: Although I support the
17 position of the resolution, I don't think
18 it's the role of this Commission to be taking
19 positions on such resolutions. I don't think
20 that's without our charge. I'm afraid that
21 once we start down this road, where do we
22 stop? What other resolutions are going to be
226
1 submitted and asking us to vote on? For that
2 reason I'm going to vote against the
3 resolution, not because I'm against the
4 policy of it. But I'm against this
5 Commission voting on such resolutions at this
6 time.
7 MR. NORQUIST: If I could address
8 that, we aren't actually flooded with
9 resolutions or measures to be voted on.
10 There were three I put forward, two of which
11 were consensus items, but we needn't note on
12 them. The second is similar in intent to
13 this one. So, basically three proposals. If
14 somebody shows up with 25 in San Francisco,
15 we can just say thank you, no.
16 I mean, this is not something we
17 have to be overly concerned about. But I do
18 think it's very important because we've been
19 asked to speak to the issue of taxation of
20 the Internet at the national, international,
21 state, and local level, and so we're going to
22 be making recommendations to state and local
227
1 governments as well as to the Congress and
2 the President.
3 I think it is important because the
4 U.S. government has a correct and good
5 position on not taxing electronic commerce at
6 the border, but I think we should support
7 that and point out that they're right, that
8 they're doing the right thing. It's not just
9 to make Bill Clinton feel good. I want the
10 rest of the world to hear that President
11 Clinton has broad-based support from the
12 country on this.
13 CHAIRMAN GILMORE: There is a resolution
14 that has been submitted in accordance with
15 the rules prior to the meeting: Resolved
16 that a moratorium on tariffs should be
17 implemented and made permanent at the
18 earliest possible date. What did I say?
19 Moratorium on tariffs? Is that
20 what I said? It should be implemented and
21 made permanent at the earliest possible date,
22 endorsed, and worked with by Robert Novick,
228
1 the representative for international trade.
2 Motion has been made to call the question on
3 this by Mr. Andal. Second on calling the
4 question?
5 SPEAKER: Second.
6 CHAIRMAN GILMORE: All in favor of
7 calling the question say aye.
8 COMMISSIONERS: Aye.
9 CHAIRMAN GILMORE: All opposed nay. All
10 in favor of the resolution please say aye.
11 COMMISSIONERS: Aye.
12 CHAIRMAN GILMORE: All opposed? The
13 resolution passes. Excuse me. I think I'm
14 supposed to do a roll call on this in order
15 to fulfill the rules, but I believe it's
16 unanimous with Mr. Lebrun dissenting, I
17 believe. Is that the record of where we are?
18 Very good. Now let me turn our attention back
19 to the other issue at hand which is the one
20 of setting down I suppose criteria for what a
21 tax system ought to be if one should be
22 imposed, and whether or not one is workable.
229
1 Why don't I just give the floor back to
2 Governor Leavitt or Mayor Kirk as necessary?
3 I beg your pardon? Did someone speak?
4 MR. SOKUL: Just to save time, I'd
5 like to ask Governor Leavitt a question. Are
6 you talking about a tax system in general, or
7 a software package?
8 GOVERNOR LEAVITT: I'm talking about two
9 phases of this. One, remote sales to begin
10 with. Then second of all, what can we learn
11 from our experience in our discussion on
12 remote salves about the entire system,
13 because I personally believe the entire
14 system is a mess as it was earlier
15 characterized.
16 Now, whether this Commission will
17 have to make a decision as to, (A), whether
18 you want to do that at all -- want to deal
19 with this issue at all; or whether we want to
20 deal with it just as remote sales or the
21 entire system. I think that's a decision for
22 the Commission on a later date.
230
1 MR. NORQUIST: I'm concerned.
2 We're going to ask a taxpayer-funded group,
3 the National Governor's Association, to
4 present what to us, and why don't they do it
5 the way everybody else who's presented today?
6 GOVERNOR LEAVITT: Thank you. First of
7 all, I'd like to suggest that I would not
8 like this to be viewed as a resolution. This
9 is a motion in routine business. But this
10 would not be the National Governor's
11 Association. It happened the meeting under
12 that auspices.
13 But what happened was, we sat in a
14 meeting with the Governors and talked about
15 this issue and concluded that we really have
16 an obligation to put a proposal together that
17 determines whether this is going to work or
18 not -- this same question, and who would we
19 logically turn to.
20 Well, we would logically turn to
21 people who have to run the systems of
22 taxation in this country, and at least in the
231
1 states. First of all, because they
2 understand the nature of the policy issues.
3 Second of all, they understand the technical
4 challenges.
5 Now, if I were a CEO of a company
6 and I were trying to decide whether to do
7 something or not, and I've been in this
8 position, I'd call them in and say I'm trying
9 to make a decision here. I'd like you to
10 take the following general criteria. I want
11 you to go out and take all of the barriers
12 down.
13 Forget about guarding all of the
14 sacred things that are in your past, forget
15 about protecting this and protecting that,
16 and come up with a system that will work and
17 bring it back to me and I'll decide whether
18 or not it meets the criteria.
19 If it does, then we'll go to future
20 discussions. If it doesn't, you're out of a
21 deal and I'm going to a different direction,
22 and we may want to tax cattle or something.
232
1 Worked once.
2 So, I'm proposing that we say to
3 the states you have to solve this problem.
4 We're going to be the executives here. We'll
5 give you a criteria. We'll give you a
6 hurdle. You bring it back and we'll decide,
7 and I propose we do that in San Francisco.
8 Furthermore, I'd lay out at least
9 what I heard this panel saying, and I
10 recognize that I didn't have a complete list,
11 but I would offer as a beginning point that a
12 system out to have -- we ought to give them
13 the following criteria. One, radically
14 simplify.
15 This has to be a radically
16 simplified system. You can't have 32,000
17 taxing jurisdictions. You can't have a
18 million different definitions. You've got to
19 have a radically simplified system.
20 Second of all, no new taxes. Don't
21 want any more taxes being raised by being
22 imposed on the Internet itself.
233
1 MR. NORQUIST: Does that mean no
2 net tax increase on the citizens?
3 GOVERNOR LEAVITT: No. What it means is
4 that no new taxes being imposed on sales over
5 the Internet.
6 MR. NORQUIST: You understand that
7 as a representative of taxpayers and
8 consumers, if we were to collect taxes that
9 are not presently taxed, that is viewed as a
10 tax increase?
11 GOVERNOR LEAVITT: Yeah, that's a fair
12 way to look at it. I will tell you what we
13 do in our state when we have that happen. We
14 do what we've done 29 times. We cut taxes.
15 There are other states that may make a
16 different decision, but that's what we do, is
17 we cut taxes. So, I'm interested in
18 saying --
19 MR. NORQUIST: But on your list of
20 criteria, are you then arguing that there
21 should be no net tax increase?
22 GOVERNOR LEAVITT: No. I'm arguing that
234
1 there are no new taxes imposed. We have a
2 sales tax in 45 states are now owed on goods
3 that are transacted on a remote basis.
4 They're not paid, but they're owed.
5 MR. NORQUIST: But if you figured
6 out how to raise it, that would be a tax
7 increase on the citizens.
8 GOVERNOR LEAVITT: Well, this Commission
9 will need to make the decision on whether or
10 not it meets that criteria. I think it would
11 be unrealistic for us to say no net taxes
12 given that we're dealing with 50 different
13 states. But the third criteria would be
14 remove the burden from the seller.
15 If we produce a system that becomes
16 a burden to the seller like they have now --
17 we haven't moved this process forward. That
18 should likely be no financial burden, and it
19 should be no logistic burden.
20 Fourth, that it does not compromise
21 the privacy of the purchaser. Fifth, that we
22 would acknowledge the role of states as
235
1 sovereign taxing authorities, and that they
2 should have some means of creating options on
3 the part of the state to play out their best
4 tax judgment. Next, that it should treat
5 purchasers as close to equal as possible.
6 MAYOR KIRK: I'm sorry. Could you
7 repeat that last one?
8 GOVERNOR LEAVITT: The level playing
9 field that Main Street was looking for, as
10 close to equal as possible.
11 MAYOR KIRK: Is that treating
12 purchasers or is that treating vendors?
13 GOVERNOR LEAVITT: No, I was talking
14 about purchasers. That goes back to the
15 issue of who pays it. The sellers, we
16 decided no burden there. So, it should not
17 be a burden to sellers, and it should be
18 neutral in terms of who pays the tax. Well,
19 let me just state it another way. As close
20 as we can, we ought to have a policy or
21 system that will not discriminate on the
22 basis of how people buy, but if they buy.
236
1 Now, there may be others. I think
2 there were others that were mentioned, and
3 I'm very open to these being changed or
4 others. But I would like to lay out what a
5 system would look like.
6 MAYOR KIRK: I was just wondering
7 with there being one more criteria, and I
8 think Mr. Novick that you had something
9 related to it being technologically feasible
10 or --
11 GOVERNOR LEAVITT: I would say that's
12 the whole question: Can you technologically
13 make a system like this work. Now, there may
14 be other suggestions.
15 CHAIRMAN GILMORE: I'm sorry. Who was
16 next? David, you go first. Then we'll get
17 Stan.
18 MR. POTTRUCK: Mike, I think this
19 is a good list. A good place to start. The
20 only comment I would have though on your
21 proposal is sending this last to the state
22 tax collectors sort of creates a closed loop.
237
1 They're the people who have to implement it.
2 They're the people whose systems have to be
3 changed. I'm not sure if they're the only
4 ones who ought to comment on whether it's
5 feasible or not. There might be lots of
6 other people who might comment on whether
7 it's feasible. That's number one.
8 GOVERNOR LEAVITT: David, I would really
9 like to have this group be the judge as to
10 whether or not they meet that criteria. I
11 mean, other groups may want to take a whirl
12 at this, but what I'd like to this group
13 doing is let's set some hurdles up for
14 whoever wants to weigh in on this system.
15 MR. POTTRUCK: Yeah, I would love
16 to hear their point of view, but I would love
17 to hear others. Maybe one of the challenges
18 here would be to take a group of
19 Commissioners who would like to volunteer to
20 rise to the challenge of coming up with a
21 recommendation that meets this list and an
22 expanded list with the provision of no new
238
1 taxes on the Internet which obviously an
2 underlying foundation of this; if we had a
3 few more items, maybe we could as a working
4 committee a group that would try to create a
5 recommendation that would somehow embody this
6 kind of thing.
7 Because one of the problems we have
8 with the issue of a technological solution is
9 there may be any number of different ways to
10 functionally and structurally approach this
11 problem, and sometimes I'm sure my colleagues
12 here would say is that the more involved you
13 are with the details, the more knowledge you
14 have, the more impossible the problem always
15 is to solve, and sometimes rising above it
16 you can some up with some idea that somehow
17 make it more simplified and make it easier to
18 do.
19 GOVERNOR LEAVITT: I would amend my
20 proposal if the Commission was inclined to
21 include the appointment of -- and
22 particularly I'd be interested in having some
239
1 of the major technology players that sit at
2 this table work as a part of that group to
3 help conclude it.
4 CHAIRMAN GILMORE: Sounds like we got a
5 different group right there that wants to
6 compete with our Commission doesn't it?
7 Grover?
8 MR. NORQUIST: Yeah, I had that
9 concern. Everybody came here and told us how
10 messed up the present sales tax system is at
11 the state level. The Governors are the
12 people who designed this system. I'm sorry.
13 It wasn't the business community, and it
14 wasn't taxpayers, and it wasn't consumers.
15 GOVERNOR LEAVITT: Well, it wasn't the
16 sitting Governors now. There's 100 years of
17 history in the system.
18 MR. NORQUIST: But the interests
19 represented by the tax collectors are the
20 Governors who collect the taxes, and the
21 state legislators as well. The purpose of
22 this Commission and why it was so balanced
240
1 was we had some Governors, some state
2 legislators, some locally elected officials,
3 one taxpayer representative, and business
4 leaders as well, so that we could take all of
5 the different attitudes to subcontract to one
6 of the interested parties.
7 I'd love to have the National
8 Governor's Association come and give a
9 presentation or give us material as any other
10 group has, and I don't think it makes any
11 sense to give them any sort of special
12 status.
13 I mean, have the taxpayer groups
14 all get together and come up with an
15 explanation of what taxpayers think this
16 ought to be treated, and I would ask that
17 they come and present it or just as anyone
18 else would at the next meeting or in writing.
19 Any Governor can put together anything he
20 wants and send it to us.
21 GOVERNOR LEAVITT: Grover, I think this
22 would be the chance of a lifetime for a
241
1 taxpayer organization to say to the tax
2 collectors fix the system or get out of the
3 way. I would think that would be a very good
4 thing. I guess I'd also suggest that I don't
5 know how many taxpayers -- how many voters
6 aren't taxpayers.
7 I don't know exactly who it is I
8 represent if it isn't taxpayers. That's who
9 pays my salary. That's who I work for every
10 day. That's who all 50 Governors work for.
11 In terms of who represents taxpayers at this
12 table --
13 MR. NORQUIST: If the Governors
14 were as solicitous of taxpayers as they ought
15 to be, we wouldn't be having this discussion
16 obviously.
17 GOVERNOR LEAVITT: Well, the Governors
18 have got religion I guess, Grover.
19 CHAIRMAN GILMORE: Instead of a lot of
20 berating going on back and forth, let's move
21 on to something that begins to answer the
22 question of whether or not this panel wants
242
1 to put together something here in the next
2 few minutes which they want to communicate
3 the -- group of 30 Governors, or at least
4 their representatives in their evaluations,
5 and we'll come back to that. Go ahead. Dick
6 Parsons, you had your hand up. I'm sorry. I
7 beg your pardon, Dick. I asked Stan Sokul to
8 go next. I beg your pardon. I missed you.
9 MR. SOKUL: Just real quickly, I
10 had an addition to the list. When we're
11 talking about electronic commerce, I've said
12 this before yesterday and today, and I think
13 an important issue is the international
14 perspective. So I would add to your list
15 international scalability or effect on global
16 competitiveness or something like that.
17 GOVERNOR LEAVITT: I accept that as a
18 good addition.
19 MR. SOKUL: But then just also real
20 briefly in terms of the process, I would echo
21 Mr. Pottruck's comment. I used to work for a
22 senator, and if senators got together and
243
1 wanted to decide is senate staff still
2 necessary, I think the answer would be yes.
3 Assigning this task to the tax collectors who
4 have a protectionist interest in the results,
5 I think that's something we ought to discuss
6 and consider.
7 CHAIRMAN GILMORE: Dick Parsons?
8 MR. PARSONS: I guess this isn't so
9 much a question as it is an observation, but
10 I want to make sure I understand what your
11 proposal really means. As I understand the
12 issue, Mr. Pottruck said at the 100,000 foot
13 level, it's do we continue in the modality
14 that we're in now with Quill which says you
15 have to have a NEXUS of physical presence
16 before you have taxes which means essentially
17 that a lot of this Internet commerce is going
18 to escape taxation.
19 Or do we go with what some people
20 have called the level playing field, I'm not
21 sure that's really it, but where we basically
22 try and change Quill for all remote sales to
244
1 bring them within the structure of a state
2 sales tax, and how do we do that.
3 What your proposal says is in
4 effect without addressing the question of
5 whether we decide to do it or not, let's at
6 least come up with a model or framework or
7 set of criteria or specifications that says
8 in order to change from the system we have
9 now, we would need to have something that was
10 much simpler, that didn't impose new taxes,
11 just made it possible -- redefined on what
12 transactions taxes would fall; remove the
13 burdens from the sellers; didn't compromise
14 privacy; acknowledge state sovereignty; and
15 was technically feasible; and treated
16 transactions neutrally or transparently so
17 that it's irrelevant whether you do the
18 transaction over the Net or in a bricks and
19 mortar place.
20 Let's develop that set of criteria
21 and then let's ask at least one group but not
22 necessarily one group, this group of 30
245
1 that's meeting in Atlanta, let's ask them if
2 they think they could come up with something
3 that fills that bill and then we have
4 something to look at and compare to the
5 status quo and say do we like this better or
6 do we like that better.
7 You're not suggesting that we're
8 making a decision to go in this direction.
9 We're just trying to find out if there's
10 something that this group in Atlanta or any
11 other group could construct that would be
12 attractive or at least evaluatable. If
13 that's the context, it seems to me that's
14 sort of what this Commission is supposed to
15 be doing.
16 We're supposed to be kind of
17 saying, look, here are some guidelines.
18 That's why we have these people here today.
19 Come back to us and tell us what you think do
20 against this and then we make a judgment as
21 to how that compares to the status quo.
22 Because, again, I'm not sure as I
246
1 look at this list, somebody can actually fill
2 out all these boxes. It would be a hell of a
3 deal. My personal view is that -- those
4 people down in Atlanta, but I could buy off
5 on something like that as I understand it.
6 CHAIRMAN GILMORE: I think one question
7 is whether or not we want to give criteria to
8 an outside group or whether we want to hear
9 back from them as to what at appropriate time
10 in San Francisco is to what they propose. I
11 think that's the issue.
12 The question is, does this
13 Commission want to send criteria as opposed
14 to simply listening back to what they come up
15 with, and I think that's the question. The
16 proposal is that we in fact develop some sort
17 of criteria here in the remaining time and
18 send that down to them in some way.
19 I don't know how that would be
20 interpreted around the country, but it's a
21 proposal on the table and seconded by Mayor
22 Kirk. Gene Lebrun first, and then we'll come
247
1 back to David Pottruck.
2 MR. LEBRUN: I would support Mister
3 Governor Leavitt's proposal. I think
4 regardless of what this Commission
5 recommends, we have to not only recommend
6 something that's acceptable to Congress, but
7 it has to be acceptable to state and local
8 governments because it's their tax laws we're
9 talking about.
10 It's their tax laws that we're
11 talking about messing with, even though it
12 may be a mess. So, I think it is important
13 that we get the Governor's association, I
14 think it's important that we get the NCSL and
15 the mayors and the counties to at least
16 accept or be neutral in whatever we come up
17 with.
18 In terms of the mess that our tax
19 laws are, in my earlier life I was in state
20 legislature, and the lot of the mess that we
21 see as a result of private interest groups
22 lobbying changes in the lax law: We want an
248
1 exemption for the farmers; we want an
2 exemption for this; we want this change. It
3 didn't happen all at once.
4 Every year somebody has got a bill
5 in to change something to help their
6 particular interests. That's fine. That's
7 the way democracy works. I don't think we
8 should put the blame of the mess on any one
9 particular group. There's enough to go
10 around.
11 GOVERNOR LEAVITT: Your suggestion is a
12 great one. Somebody said it's not the
13 Internet, it's competition. If we could lay
14 a criteria out, we ought to see if we can
15 find a dozen groups that will take this on
16 and come back and see who can best come up
17 with this criteria.
18 CHAIRMAN GILMORE: Mike, I don't recall
19 the NGA meeting that discussed this and
20 Governors only. This may have been on the
21 last day. Is this position from the National
22 Governor's Association proposal?
249
1 GOVERNOR LEAVITT: Well, the point is
2 we're not representing a position. I think
3 what I'm proposing is that this group remain
4 a policy body and that we go out to
5 individual groups. It can be the taxpayers,
6 it can be the Governors, and they bring it
7 back and in San Francisco we hear, we listen
8 to real proposals against a real criteria
9 that we think has to be satisfied.
10 CHAIRMAN GILMORE: Let me ask again. Is
11 this the NGA proposal?
12 GOVERNOR LEAVITT: No.
13 CHAIRMAN GILMORE: This is not the same
14 as the NGA proposal?
15 GOVERNOR LEAVITT: No, it is not. Well,
16 it may bear some recollection or some
17 resemblance, but it is not being represented
18 at this table. You don't see single rate
19 here. You don't see anything dealing with
20 NEXUS here. Those are all part of the NGA
21 proposal. I'm just suggesting what would a
22 system look like.
250
1 MR. LEBRUN: Do we have a copy of
2 the NGA proposal? Was that passed out?
3 CHAIRMAN GILMORE: I don't think that
4 it's among the materials, but it can be such.
5 GOVERNOR LEAVITT: This is not the NGA
6 proposal.
7 MR. LEBRUN: There's a second
8 question. Does it exist, and can we have a
9 copy?
10 GOVERNOR LEAVITT: You're certainly
11 welcome to have it. It's on the Web.
12 CHAIRMAN GILMORE: Indeed it is.
13 MR. LEBRUN: But it wasn't
14 presented here? No.
15 CHAIRMAN GILMORE: The NGA position is
16 not unanimous adopted. It was not supported
17 by California, Iowa, Massachusetts, Colorado,
18 and certainly as Chairman of this Commission
19 I myself abstained from the most recent
20 version of that. But there is a proposal out
21 there to be sure. David Pottruck, I think
22 you wanted yours.
251
1 MR. POTTRUCK: I think that we had
2 a proposal to create a list down that road.
3 I have a couple of suggestions to add to the
4 list based upon some things I heard, and I'm
5 not to state these very articulately, but I
6 think they're principles we talked about
7 today, that we have a system that avoids
8 out-of-state discrimination. This is the
9 notion where a state discriminates against
10 businesses and tries to collect on the people
11 who can't defend themselves.
12 Also some sort of a safe haven from
13 oppressive auditors, where we have a system
14 that doesn't allow state auditors to become
15 police that beat up on out-of-state retailers
16 in some sort.
17 GOVERNOR LEAVITT: David, would you
18 suggest a suggestion that we go beyond that
19 and tell them we'd like to eliminate to the
20 extent possible multiple audits?
21 MR. POTTRUCK: Sure, if we could
22 get there. I don't know if that's possible.
252
1 GOVERNOR LEAVITT: I don't either.
2 MR. POTTRUCK: But let me make a
3 change since I was the chairperson of the
4 work plan committee. I'd like to put a
5 proposal even at this late hour in front of
6 the Commissioners, because I think this is at
7 the heart of what we're supposed to be doing,
8 and this is the outcome of what we heard
9 today.
10 We've come together. We've
11 listened to a lot of testimony. We've had a
12 lot of ideas, problems, issues, put on the
13 table. This is reflective of what we've
14 heard. So, here's an idea. The idea is the
15 following, that we challenge any organization
16 to put a plan together, an outline together,
17 that meets these criteria. We require the
18 following.
19 We require the outline to be let's
20 say five pages or less. So, it can't
21 be 1,000 pages. It hits the high points. Or
22 whatever the list is. Ten pages. I don't
253
1 care. Then it has to get the support of any
2 three or four Commissioners, and if we can
3 get three or four Commissioners, whatever we
4 believe in, it gets presented to all of us
5 and we have an open discussion of these
6 alternatives.
7 The other alternative is do
8 nothing. We have that alternative. We can't
9 come up with a solution, our view is either
10 do nothing at all which stands out as an
11 alternative, or a permanent moratorium is
12 another very simple alternative. So, those
13 sort of stand there.
14 Then we have any number of good
15 ideas that could meet all these criteria, and
16 we have a threshold of a certain number of
17 supporters around the Commission and we maybe
18 say no Commissioner can support any more than
19 two ideas so we won't be flooded with a
20 zillion ideas.
21 Then based upon our discussion in
22 San Francisco, we try to see if we have some
254
1 coalition around a couple. Then we have
2 between San Francisco and Dallas an
3 opportunity to forge a solution.
4 CHAIRMAN GILMORE: We've got a few
5 people who want to speak in addition to I
6 know Mike Armstrong and Mr. Sokul and
7 Mr. Waitt as well. We're now discussing
8 although we haven't moved it into formally
9 yet the idea of a simple call for people
10 across the country to put forward their ideas
11 I believe on this or some other criteria.
12 But let's go down very quickly, and
13 then I'm going to have to go to Virginia
14 pretty soon, but let's go down a few of these
15 and then see what we can do. Ted Waitt, I
16 believe, is on the list.
17 MR. WAITT: Thanks, Governor. Just
18 real quickly because I know we're running out
19 of time here. From my perspective, we've
20 dealt with all this complexity of the tax
21 system. We collect taxes in multiple states.
22 We collect taxes over the Internet.
255
1 We collect taxes over our phone
2 catalogue sales. I think it is prudent for
3 this Commission to go off and look at real
4 solutions to the problems before we say we're
5 not going to do something or we're going to
6 do something.
7 I think it is our role, and I
8 definitely think we need to consider it
9 because we have to look at solutions and we
10 have to at least look at something before we
11 decide to do something or to do nothing. So,
12 I think it's absolutely prudent that we do
13 that, and I would support Governor Leavitt's
14 proposal as modified by Mr. Pottruck over
15 there as well.
16 CHAIRMAN GILMORE: Mr. Armstrong?
17 MR. ARMSTRONG: I very much support
18 both David's contributions and Governor
19 Leavitt's proposal. I think that not to take
20 advantage of the Governors who rule the roost
21 when it comes to state taxes and sales taxes,
22 and sales taxes are what we're talking about,
256
1 would be irresponsible of us.
2 The coincidence that the Governors
3 have delegated some authority to the people
4 that work for them in order to consider this
5 issue and that we might form some criteria, I
6 would suggest that rather than try to in the
7 face of a hurricane in 30 minutes get all the
8 criteria correct, that Mister Chairman we
9 have fax machines and telephones that we
10 might use 48 hours in which to conclude and
11 confirm that we got the criteria that we want
12 on there.
13 I also absolutely support that any
14 other body that can give as good input on
15 this issue, this shouldn't be Governors only.
16 I stressed Governors versus tax collectors
17 because I agree with the comments about tax
18 collectors.
19 Finally, something that's not in
20 there, Mike, one of the biggest problems is
21 not just a simplified rate structure and how
22 to collect it efficiently. But having lived
257
1 through the homologation efforts over in
2 Europe when we're going to a common market
3 and a single system and trying to call a
4 vacuum cleaner and vacuum cleaner, we have
5 got that problem in the United States, and a
6 common definition has to be given to them as
7 well as a simplified tax structure and
8 efficient collection, and then a time frame
9 in which to deliver that because this could
10 be a virtual answer that we get.
11 CHAIRMAN GILMORE: Mr. Sokul, you're the
12 last one I think.
13 MR. SOKUL: Well, I think
14 Mr. Novick is also in line. I have just a
15 couple points and a suggestion as to where we
16 are. I think we have adopted as a Commission
17 Mr. Pottruck's work plan which set out thee
18 type of process we were going to follow going
19 to San Francisco. We also have a motion on
20 the table which kinds of deputizes 30 or so
21 tax collectors of 30 or so states as almost
22 an official Commission body.
258
1 I would suggest that we follow our
2 work plan on the Commission staff level, we
3 go on to develop and work on the issues and
4 options paper as was originally envisioned,
5 and then rather than maybe the specifics of
6 Governor Leavitt's proposal, we kind of mold
7 what you had suggested and others have
8 suggested and put out a general call for
9 people to come forth with ideas. Certainly I
10 think the 30 or so should be first in line,
11 and guarantee a panel on that issue in San
12 Francisco. I think that would be maybe a
13 quick way to reach consensus on this.
14 But one final comment. I have a
15 problem with us right now setting the
16 criteria. I think it would be very helpful
17 to all of us. What's been thrown up on us in
18 the last second, we all have things to do.
19 Let the people who are coming set forth what
20 criteria they think are important. There
21 might be several that we haven't even thought
22 of and wouldn't think of today.
259
1 CHAIRMAN GILMORE: Mr. Novick, and then
2 Mr. Norquist.
3 MR. NOVICK: It seems to me that
4 both the objectives we have on the work plan
5 and the proposal of Governor Leavitt can be
6 complemented. The work plan ought to go
7 forward. It seems to me that we've got a
8 list that we can give to the group that
9 Governor Leavitt refers to, and the other
10 groups, let them begin work on this.
11 We're looking for any input that we
12 can get from experts in the field. As the
13 work plan effort goes forward, we'll probably
14 develop other criteria and identify other
15 issues that we may want to add to a list, it
16 would be an evolving list, and we'll send it
17 back and we'll modify it.
18 But our time is short, and we ought
19 to take advantage of any expertise that's
20 available to look at what is beginning to
21 form around the deliberations of this
22 Commission.
260
1 I don't think one has to wait for
2 the other. Nor should the other be affected
3 Governor Leavitt's plan. I think we can move
4 forward on both tracks simultaneously and
5 without prejudice to the outcome of either.
6 CHAIRMAN GILMORE: Mr. Norquist?
7 MR. NORQUIST: I like the idea of
8 asking the Governors and other interested
9 parties to come up with suggestions to us
10 that we can look at in San Francisco. While
11 we can informally give them some guidelines,
12 I think we're still trying to decide what
13 some of those are.
14 I would certainly hope that what we
15 come up with, and I would challenge the
16 Governors who come up with plans, that what
17 they come up with would fall under the
18 category of being constitutional; that while
19 they look after states' rights, that they not
20 trample on Indian sovereignty; and that I
21 would insist, and I'm going to ask the
22 Governors, to come up with a no net tax
261
1 increase plan nationally.
2 Also the eighth point which you
3 accepted as a friendly amendment earlier in
4 the day but didn't mention when you revisited
5 it, and I hope it's still on your agenda,
6 that we ask the Governors to come up with how
7 to reduce state and local taxes on
8 telecommunications, that we recognize that
9 the telecommunications industry is an
10 overtaxed industry now.
11 I'll send a letter to all the
12 Governors looking for how they might be able
13 to reduce telecommunications taxes in their
14 state, but I'd certainly hope that that's one
15 of the criteria that they would use.
16 MR. ANDAL: I have a quick question
17 of Governor Leavitt. One of the problems in
18 serving on this Commission is reading all the
19 material without enough time to really review
20 it. Do you have a deadline before San
21 Francisco that you can envision that we would
22 be able to review it?
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1 GOVERNOR LEAVITT: I feel confident they
2 could get it to us in more advanced time than
3 we've had in other situations.
4 CHAIRMAN GILMORE: Would you say
5 about 45 days before, or something like that?
6 GOVERNOR LEAVITT: No. When did we get
7 the budget? Friday?
8 MR. ANDAL: I don't mean to suggest
9 a specific date, but whatever would be
10 reasonable. A couple of weeks before maybe?
11 CHAIRMAN GILMORE: Actually, that's not
12 right.
13 GOVERNOR LEAVITT: I think so.
14 CHAIRMAN GILMORE: The budget was out on
15 August the 11th, I believe.
16 GOVERNOR LEAVITT: I don't think -- 2
17 weeks in advance.
18 CHAIRMAN GILMORE: I'm going to try to
19 synthesize the discussion here in just a
20 minute and see if we've got a motion we want
21 to vote on, but I do want to give everybody a
22 chance to speak before we have our hurricane.
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1 Mr. Pottruck?
2 MR. POTTRUCK: Governor, let me see
3 if I can place this a little context. I
4 actually think as I thought about this and
5 listened to what people have said that
6 everything we're talking about is within our
7 work plan. We're just talking about a
8 process. We have a drafting committee.
9 Where were the ideas from that drafting
10 committee supposed to come from?
11 So, arguably everything we've
12 talked about, a sense of a beginning list of
13 criteria that we want to work further on; the
14 process of the drafting committee sending
15 those criteria out and see if we have a good
16 list that we can have a consensus around; the
17 process of challenging the tax collectors and
18 others to offer suggestions to the committee;
19 a process by which the committee would
20 understand which of the alternatives seem to
21 have support of at least some of our
22 Commissioners so we know as a set of
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1 alternatives, here are our set of
2 alternatives.
3 All that seems to me to be
4 inclusive within the work plan that we have.
5 So, I think that we can pursue what Mike has
6 suggested and that different people have
7 commented on within the plan that we have.
8 CHAIRMAN GILMORE: Well, I agree with
9 that, and I think it ought to be directed
10 into the drafting subcommittee that was set
11 up, and we are prepared to move I think in
12 that direction.
13 MR. SOKUL: I was going to just to
14 try to close this out just offer an amendment
15 to Governor Leavitt's motion, that we have a
16 panel on this issue in San Francisco.
17 CHAIRMAN GILMORE: I think you would --
18 amendment on that?
19 GOVERNOR LEAVITT: I would hope that
20 we'd devote a substantial amount of our time
21 in San Francisco to receiving whatever
22 proposals come forward from whatever
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1 disparate groups.
2 CHAIRMAN GILMORE: Is there any
3 objection to that type of proposal? Seeing
4 none, that that's adopted. Ladies and
5 gentlemen, I would propose that we adjourn
6 our meeting. Is there objection to that?
7 GOVERNOR LEAVITT: Mister Chairman,
8 could I add to the list of criteria that
9 we've developed just one other category, and
10 it would be any other ideas that you have
11 that would improve this system?
12 CHAIRMAN GILMORE: I think that that
13 goes without saying within the discussion.
14 GOVERNOR LEAVITT: Do we need to vote on
15 this, Mister Chairman?
16 CHAIRMAN GILMORE: I think we don't. Is
17 there an objection?
18 MR. NORQUIST: Just one second.
19 Let me be clear. The list that was put
20 together by Governor Leavitt is an informal
21 list. This is not a list we voted on.
22 GOVERNOR LEAVITT: Mister Chairman, that
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1 is not the proposal. The proposal is that we
2 as a Commission need to establish some
3 formalized benchmarks that are subject to
4 change at any time this Commission chooses
5 to, but any group that goes forward needs to
6 have something against which they are
7 comparing and we are operating. My motion is
8 that we formalize the group as they have been
9 specified.
10 MR. NORQUIST: Well, then I'm going
11 to insist on a vote on the no net tax
12 increase position if it's going to be formal.
13 GOVERNOR LEAVITT: That's fine. That's
14 what this is about.
15 CHAIRMAN GILMORE: Listen. The
16 challenge here is does this Commission want
17 to establish these criteria as being the
18 position of this Commission on the basis of
19 this type of discussion we've had here today.
20 I'm not going to vote for that, but if the
21 Commission wants to do that, that's fine.
22 I think it's got a looseness about
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1 it where other people can come in with
2 different kind of criteria, different kind of
3 ideas, and I think that's supported. I don't
4 think there's any difficulty with that. But
5 if we're going to nail that down, I'm going
6 to vote no, but let's vote. Okay?
7 MR. NORQUIST: I would argue that
8 we keep the criteria open because we're going
9 to have other criteria that come up.
10 CHAIRMAN GILMORE: Well, there are.
11 MR. NORQUIST: The Governors can
12 come back and give us the list of criteria
13 that they use.
14 CHAIRMAN GILMORE: I think the tenth
15 position was anything else anybody else wants
16 to put in as well.
17 MR. ARMSTRONG: I thought we were
18 going to take a couple days to go over the
19 criteria, and the last thing that Mike said
20 is that I'm open to anything new that might
21 come. So, I'm not sure.
22 CHAIRMAN GILMORE: Let's formalize this.
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1 Mike Armstrong has moved that we instead take
2 a couple of days and deal with the criteria
3 in a more thorough way. That is his motion
4 to amend Mike Leavitt's motion. Now, is
5 there a second to Mr. Armstrong?
6 MR. NORQUIST: Second.
7 CHAIRMAN GILMORE: Seconded by Grover
8 Norquist.
9 MR. PARSONS: So that we know
10 because I'm lost right now, can we have the
11 criteria that are consistent with Governor
12 Leavitt's motion? Can you just review so
13 that we have them?
14 GOVERNOR LEAVITT: Yes. Mike, with your
15 permission, I will do my best to solidify
16 what I am saying and add to what I think
17 you're saying. I am proposing that we
18 establish as at least a beginning position
19 subject to the change of this Commission a
20 criteria for evaluation of various groups who
21 will come and present, among them being the
22 one that's been spoken of, and that the
269
1 beginning criteria would be, one, a radically
2 simplified system.
3 Two, no new taxes. Three, remove
4 the burden from sellers. Four, does not
5 compromise the privacy of purchasers. Is
6 that four?
7 Five, acknowledging the role of
8 states as sovereign taxing entities. Six,
9 transparency as to purchasers. Thank you.
10 Seven, would avoid out-of-state
11 discrimination. Eight was one that I
12 suggested, international -- that it would be
13 scalable I think was the word on an
14 international basis.
15 MR. NORQUIST: International
16 scalability and not adverse to local
17 competitors.
18 GOVERNOR LEAVITT: Grover, yours was?
19 MR. NORQUIST: Eliminate multiple
20 audits.
21 GOVERNOR LEAVITT: Eliminate multiple
22 audits.
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1 MR. NORQUIST: The other one was
2 reduce overall taxation on
3 telecommunications.
4 GOVERNOR LEAVITT: I'd like to suggest
5 that I am a supporter of reducing taxation --
6 but I may believe that may run to a different
7 issue, and I'm prepared to --
8 MR. NORQUIST: A different issue
9 than what?
10 MAYOR KIRK: Can we finish this?
11 MR. NORQUIST: We are. We're going
12 through the list.
13 MAYOR KIRK: Mr. Pottruck had three
14 that we had some protection against
15 out-of-state audits and out-of-state
16 discrimination.
17 CHAIRMAN GILMORE: Go to your
18 microphone, please, Ron.
19 GOVERNOR LEAVITT: That was one that I
20 meant to say about out of state --
21 CHAIRMAN GILMORE: Go to your
22 microphone, please, Ron.
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1 MAYOR KIRK: Mr. Pottruck had added
2 that there be some safeguards against
3 out-of-state discrimination both in terms of
4 audit and oversight. I thought that
5 Mr. Armstrong raised two issues further, that
6 there be some attempt to some up with some
7 common definitions, and a reasonable time
8 frame for development and implementation.
9 GOVERNOR LEAVITT: Could I suggest, Mike
10 Armstrong, that the simplification on
11 definitions, I would personally include that
12 into just the radical simplification of the
13 system. I would see that not just as rate,
14 but also as definitions. But if you'd like
15 to list it separately --
16 MR. ARMSTRONG: Why don't you
17 combine them?
18 GOVERNOR LEAVITT: Radical
19 simplification of the system.
20 CHAIRMAN GILMORE: We've got a proposal.
21 MR. NORQUIST: I'd recommended also
22 that recommendations be constitutional and
272
1 that they not undermine Indian sovereignty
2 which is an important issue. Right?
3 GOVERNOR LEAVITT: I can't haggle with
4 that. Then as to respect to Mike Armstrong's
5 suggestion that there may be other thoughts
6 that come to us that improve this, I'd like
7 to propose that we create an authorization
8 for a mail ballot that could be sent out
9 e-mail and fax if there are other items that
10 should be added and that that be done in the
11 next 72 hours or whatever. A week as far as
12 I'm concerned.
13 MR. ARMSTRONG: That's perfectly
14 acceptable.
15 CHAIRMAN GILMORE: Well, we've got some
16 kind of proposal on the table. I think we
17 don't have a proposal to defer it for 48
18 hours now do we, Mike.
19 MR. ARMSTRONG: I've withdrawn that
20 because Michael included that any other ideas
21 that we had -- a ballot by e-mail?
22 GOVERNOR LEAVITT: Yeah. Some
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1 electronic ballot where if somebody's got an
2 idea we can circulate it, and then if it gets
3 whatever the requirement is of the Commission
4 that it be added to the criteria.
5 CHAIRMAN GILMORE: Yes, Delna?
6 MS. JONES: We have a committee
7 already, and David chairs that committee.
8 Could that not be the focus for getting these
9 ideas and formulate them, because there's
10 already a committee structure there to do
11 that. The work plan committee.
12 CHAIRMAN GILMORE: Well, there is that,
13 but we were also discussing sending all these
14 things over to the drafting subcommittee
15 which we can do.
16 SPEAKER: In order to get the
17 Governor on his way back to Virginia before
18 the hurricane, I move the question.
19 MR. HARRIS: If I could ask one
20 question.
21 CHAIRMAN GILMORE: Quickly, yes. One
22 question.
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1 MR. HARRIS: I'm not sure. One of
2 the principles that was listed was no new
3 taxes I believe was how it was phrased. I'm
4 just not sure what you mean by that.
5 GOVERNOR LEAVITT: Well, as simply as I
6 can put it, that there is no new tax placed
7 on access or by this whatever system; that
8 we're dealing with existing tax structures;
9 that we're not in any way trying to impose
10 any new tax on the Internet.
11 CHAIRMAN GILMORE: Well, I think that
12 what we're doing is a general call to people
13 within these types of confined to go forward
14 and to submit us information. Submit it into
15 the drafting subcommittee and then we'll go
16 from there. All in favor please say aye.
17 COMMISSIONERS: Aye.
18 CHAIRMAN GILMORE: All opposed say no.
19 We're not going to call the roll on that.
20 SPEAKER: Governor, do we know
21 who's on the drafting subcommittee?
22 CHAIRMAN GILMORE: We can't name
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1 everybody. In fact, I think this thing is
2 too big as it is, but I'm going to go ahead
3 and name myself, Dean Andal, Richard Parsons,
4 David Pottruck, Gary Locke, Andrew Pincus,
5 Delna Jones, Robert Pittman, and Stan Sokul.
6 But as I said, this is not going to be
7 exclusive of anyone's ideas or commitments.
8 It's trying to put pencil to paper. I think
9 it's too big now, but we'll go with it. All
10 in favor of adjournment, please say aye.
11 COMMISSIONERS: Aye.
12 CHAIRMAN GILMORE: All opposed, nay.
13 We're in adjournment.
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On this page: transcript of September 15 |
