 Third Meeting:
Transcript of December 15 1999
ADVISORY COMMISSION ON ELECTRONIC COMMERCE
THIRD MEETING
Westin St. Francis Hotel
San Francisco, California
Wednesday, December 15, 1999
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1 PARTICIPANTS:
2 JAMES S. GILMORE III
3 JOSEPH H. GUTTENTAG
4 RON KIRK
5 JOHN W. SIDGMORE
6 MICHAEL O. LEAVITT
7 THEODORE WAITT
8 GARY LOCKE
9 DAVID POTTRUCK
10 DELNA JONES
11 RICHARD PARSONS
12 DEAN F. ANDAL
13 PAUL C. HARRIS, SR.
14 GROVER NORQUIST
15 GENE L. LEBRUN
16 ANDREW PINCUS
17 STAN SOKUL
18 ROBERT NOVICK
19 ANDREW MARSLAND
20 MICHEL AUJEAN
21 FRED SMITH
22 CHRIS WYSOCKI
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1 PARTICIPANTS (CONT'D)
2 ADAM THIERER
3 STACEY L. SPRINKLE
4 KEITH LANDRY
5 JOHN MORABITO
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1 P R O C E E D I N G S
2 CHAIRMAN GILMORE: Ladies and gentlemen,
3 we had some of the television glitches which
4 we have been waiting for, but I think that
5 they're all straight now, so that we can get
6 started once again.
7 Welcome to the third meeting of the
8 Advisory Commission on Electronic Commerce.
9 I'm Governor Jim Gilmore, Governor of the
10 Commonwealth of Virginia and chairman of the
11 Commission. And I would like to call the
12 meeting to order.
13 As yesterday, because we are on --
14 either on television or being taped on
15 television, I'm not sure which, it would be
16 desirable, I think, for the viewing audience
17 in the country to be acquainted with the
18 members of the Commission. So if you will
19 bear with me, I am still trying to make sure
20 I've got everybody's titles exactly right,
21 but I think it is good to introduce the
22 members of the Commission.
5
1 On my left, I begin with Delna
2 Jones. Delna Jones is the county
3 commissioner from the Washington County in
4 the State of Oregon.
5 Others are going to be coming in.
6 Mr. Pottruck is not yet here, so let me cross
7 by his seat for just a moment. In fact, I
8 believe he's in a meeting this morning and
9 will join us at a later time. David
10 Pottruck, who will be with us in a short
11 while, is the president and co-chief
12 executive officer of Charles Schwab
13 Corporation.
14 The third individual next over on
15 my left is -- just one moment here; let me
16 just make sure I know what I'm doing here --
17 Gary Locke, of course, the Governor of the
18 State of Washington.
19 The next is Mr. Ted Waitt. He is
20 chairman and founder of Gateway,
21 Incorporated.
22 The next is Michael Leavitt. He is
6
1 the Governor of the State of Utah.
2 The next is John Sidgmore. He is
3 the vice chairman of MCI Worldcom, and
4 chairman of UUNet.
5 The next is Ron Kirk. Ron is the
6 mayor of the City of Dallas, Texas.
7 The next is Joe Guitentag. He is
8 the senior advisor, the Office of Tax Policy
9 of the United States Treasury Department.
10 The next on this side of the room,
11 beginning to work our way back towards the
12 chair, at the end is Andre Pincus.
13 Mr. Pincus is the General Counsel of the
14 United States Department of Commerce.
15 Oh, excuse me. I passed by
16 Mr. Novick. At the very end is Mr. Robert
17 Novick. He is the General Counsel for the
18 Office of the United States Trade
19 Representative. Robert, thank you.
20 The next is Mr. Stan Sokul. He is
21 an independent consultant and represents the
22 Association for Interactive Media.
7
1 The next is Mr. Gene Lebrun. Mr.
2 Lebrun is president, from '97 to '99, of the
3 National Conference of Commissioners for
4 Uniform State Laws.
5 The next is Mr. Grover Norquist.
6 He is the president of Americans for Tax
7 Reform.
8 The next is Mr. Paul Harris. Is a
9 member of the state legislature. He is a
10 member of the House of Delegates, the
11 Commonwealth of Virginia, from
12 Charlottesville, Virginia.
13 Let's see. Who do we have here?
14 If I can find my list. Why am I having
15 trouble with this? Here we are. I just want
16 to make sure I get the title right. Yes,
17 he's President.
18 The next is Mr. Richard Parsons.
19 He is the president of Time Warner,
20 Incorporated.
21 And then seated to my immediate
22 right, the last individual to be named today
8
1 is Dean Andal. He is chairman of the
2 California Board of Equalization.
3 Absent from this meeting, but who
4 are members of the panel, as well, are
5 C. Michael Armstrong; he is the chairman and
6 chief executive officer of AT&T. He has been
7 in previous attendance, but is not able to be
8 here today.
9 And also, Robert Pittman, the
10 president and chief operating officer of
11 America Online. And as I indicated,
12 Mr. Pottruck, the chief of Charles Schwab,
13 will be with is and join us shortly. He has
14 a business meeting in San Francisco here this
15 morning.
16 So thank you all very much for
17 bearing with me as I get my titles right.
18 I would like to remind everyone
19 that this meeting is open to the public, and
20 is being Webcast over the Internet and can be
21 viewed on our Web site for the Commission.
22 And that Web site is
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1 www.ecommercecommission.org. That's
2 www.ecommercecommission, which is one long
3 word, -.org.
4 Today the agenda is to continue to
5 hear presentations of proposals that have
6 been submitted to the Commission. And we
7 have set aside a considerable amount of time
8 to discuss those proposals and to review the
9 Commission's issues and options paper, as
10 called for by the Commission's work plan.
11 We're going to take up several
12 resolutions also today that have been offered
13 by Commissioner Grover Norquist, and address
14 some of the administrative issues at the very
15 end of the day today as we conclude our
16 meeting at about 5:30, somewhere in that
17 area.
18 Following the presentations, we'll
19 entertain questions from the Commissioners.
20 The pattern seems to be working fairly well
21 to get the Commissioners' statements out and
22 then go to Q&A to the entire panel at the
10
1 end.
2 The first series of proposals,
3 which are intended to be presented as a
4 panel, include the following:
5 The first presented will present
6 "Streamlined Sales Tax System for the 21st
7 Century." This will be presented by Governor
8 Bill Janklow of South Dakota and Tennessee
9 State Representative Matthew Kisber and Chair
10 of the Hennepin County, Minnesota Board,
11 Mr. Randy Johnson, and on behalf of the
12 National Governors' Association, National
13 Conference of State Legislatures, the Council
14 on State Governments, the National
15 Association of Counties, the United States
16 Conference of Mayors, and the International
17 City-County Management Association. Welcome,
18 gentlemen. Thank you for being here.
19 Also a part of this panel for
20 presentation is a second topic, a proposal
21 that's been made. The proposal on "Taxation
22 of Electronic Commerce," by John Peha -- is
11
1 it Peha? Mr. Peha of the Carnegie-Mellon
2 University.
3 The third is "Adapting Tax
4 Technology to the Internet." And this is
5 "The E-Commerce Transaction Tax Server." And
6 the presenter is Mr. Daniel Sullivan of
7 Taxware International, Incorporated.
8 Now, gentlemen, I understand that
9 your presentations are intended to be a panel
10 presentation.
11 Governor Janklow, we're pleased and
12 honored to have you with us. And the panel
13 presentation would be about 30 minutes total,
14 although I think we could add a little more
15 time. There's an understanding, of course,
16 there will be time for Commissioners at the
17 end, at the conclusion of all presentations.
18 So I think that because of Governor
19 Janklow's position, I think that we want to
20 give him a little more time.
21 Governor Janklow, we would extend
22 to you 15 minutes for your opening remarks,
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1 as well, of course, adding some time, the
2 balance of the time to the members of the
3 Commission.
4 So with that I want to welcome
5 Governor Janklow. Governor, thank you for
6 being here with us today, and the floor is
7 yours.
8 GOVERNOR JANKLOW: Mr. Chairman and
9 members of the Commission, thank you very
10 much for the courtesy that's been extended to
11 me this morning. And I say that on behalf of
12 the National Governors' Association,
13 especially on behalf of the people in my
14 state.
15 I'd like to set out a couple
16 parameters as I start, if I could. One, in
17 this person's mind, in my mind, there's no
18 question that the federal government has the
19 right to regulate interstate commerce. And
20 there's no question that the taxation of
21 commerce is within the interstate commerce
22 sphere. So I don't dispute going all the way
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1 back to the Articles of Confederation that
2 Congress has this power. As a matter of
3 fact, as we all know from our history
4 lessons, after the Revolutionary War, when
5 the 13 original colonies entered into
6 business, they were taxing each other's
7 goods, they were sending ambassadors to
8 foreign countries, they were raising armies,
9 they even tried to run post offices. And the
10 net result was nothing worked.
11 So they had to meet and form the
12 United States of America. And that's how we
13 got the Constitution that we have. And in
14 that Constitution, they address the evils
15 they had found under the Articles of
16 Confederation. And in the Bill of Rights,
17 they address the evils they had found from
18 British colonial rule.
19 So between those two different
20 documents put together, we got this marvelous
21 Constitution.
22 So I don't dispute in any way that
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1 Congress has the power. The issue is, how
2 are we going to deal with the existing
3 framework of an America that's over 200 years
4 old, and certain things that have been left
5 throughout history to the purview of the
6 states?
7 When they invented the telephone,
8 it started commerce, electronic commerce.
9 Nobody thought that there was something
10 unique that ought to be prohibit -- prohibit
11 the states from doing. Over the decades,
12 they invented fax machines. Again, this
13 expanded greatly electronic commerce. Nobody
14 felt there was any necessity to screw around
15 with the state's ability to raise the funds
16 to carry out state functions.
17 Now we're into the multimedia
18 world, and now we're into the Internet, and
19 we're utilizing narrow-band, wide-band,
20 broadband technology, and it's exploding onto
21 the scene. None of us dispute that the
22 backbone of this, a significant portion of
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1 the backbone of this, is going to be commerce
2 into the future.
3 Some people say the states are
4 flush with cash. One, they aren't. But two,
5 that isn't the issue. This Commission wasn't
6 established. And the debate going on in
7 America isn't whether or not state's have
8 money. As a matter of fact, it's the states
9 of this union -- Mr. Chairman, you're a
10 classic example of that -- the states of this
11 union and its governors and legislatures are
12 the only people that have figured out how to
13 cut taxes in America. Congress and the
14 President haven't done it. They talk about
15 it, but they can't get it done. We on the
16 state level have cut $25 billion worth of
17 taxes over the course of the last decade.
18 And you, Mr. Chairman, have been a leader in
19 that in the short period of time that you've
20 been a chairman.
21 Let me say on my behalf, I've been
22 Governor for four -- I'm in my fourth terms
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1 as a governor. A split series. I was
2 Governor in 1979, '80, and '81. I lived
3 through that period of time when we had
4 18 percent interest rates and we had huge
5 unemployment in America. We had great
6 problems. And I was the first governor in
7 the nation to cut the state's spending across
8 the board. I cut everything but K-12
9 education. I cut the blind and the deaf and
10 the welfare crowd and the handicapped. I cut
11 the colleges and universities, the state
12 employees, the works, because we had to do it
13 to survive. The federal government could go
14 into debt to finance its problems. We
15 couldn't, because our state Constitution
16 prohibited going into debt.
17 But over the years, the last
18 decade, we've cut $25 billion worth of taxes.
19 As a matter of fact, in the last
20 five years, I have cut 8 percent of the
21 state's labor force. We do today, by
22 utilizing technology, and by working more
17
1 productive and smarter, all the state
2 employees and I are able to do the work with
3 8 percent less people that we had on the
4 state's payroll five years ago.
5 My state does not have a corporate
6 income tax. It doesn't have a personal
7 income tax. So I can't match some of my
8 colleagues who are talking about cutting
9 income taxes in their state, because our tax
10 rate is zero for income tax. So I can't cut
11 it in South Dakota, like you can cut at other
12 places and get political credit for it.
13 In addition to that, in my state,
14 we've cut personal property taxes, as of this
15 next January, 30 percent across the board for
16 every agriculture producer and every
17 homeowner in the state of South Dakota.
18 We've been able to do it within the framework
19 of the existing structure we have, which is a
20 backbone sales tax. Yes, we have the other
21 taxes: Liquor tax, inheritance tax, the
22 cigarette taxes and all of the vice taxes.
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1 But by and large, the sales tax -- a broad
2 based sales tax -- is where we get our money.
3 I'd like to do one thing and draw a
4 picture for you. Just visualize with me for
5 a moment all of you what my state looks like.
6 It's a remote, rural state. It's the 13th
7 largest land mass in America. It's 450 miles
8 long, it's 250 miles wide, it's 88 million
9 acres. It has 730,000 people. The
10 population of Minneapolis-Saint Paul, is
11 spread over 310 towns and cities in my state.
12 The largest one we think is huge; it's got a
13 110,000 people. Our second-largest city has
14 less than 60,000. Our third-largest has less
15 than 30,000. And our fourth largest has less
16 than 20,000. And the remaining -- and let me
17 put it this way. The 14th largest has less
18 than 5,000 people. 296 of our 310 towns and
19 cities have less than 5,000 people.
20 We become very small, very, very
21 quickly. Why is that important? It's
22 important because we have to maintain, to the
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1 extent we can -- and I'm a governor who
2 realizes that you can't stop change in the
3 world.
4 When I was a kid, my mom sent me to
5 the store. I went to the dairy and got the
6 milk. I went to the bakery and got the
7 bread. I went to the produce department and
8 I got the vegetables. And then somebody
9 figured out, why have we got all these
10 separate stores? Let's put them under one
11 roof. So they called it a supermarket. And
12 people passed laws trying to save all the
13 mom-and-pop grocery stores and dairies and
14 bakeries. We couldn't stop progress, because
15 the housewives of America went where they
16 could get convenience and products and price.
17 We couldn't stop progress. Nowadays, the
18 only ones who want to stop progress are
19 bankers. They talk free enterprise, but they
20 all come before the legislatures, trying to
21 prevent competition from coming into play
22 when you try to get a new bank in the
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1 community. Everybody else is for
2 competition.
3 But we can't have government policy
4 that works to the detriment of a certain
5 segment of our populations.
6 You know, if you're -- Ted Waitt
7 sits on this Commission. He's the founder of
8 Gateway. He's the chairman of the board of
9 Gateway. Do you know where he pays taxes?
10 Virginia and South Dakota, because he has
11 nexus in Virginia and South Dakota. And if I
12 buy a computer from him for $2,000 -- and
13 that's an expensive one from him -- but if I
14 buy a computer from him for $2,000, I will
15 pay him $120 tax in South Dakota at 6 percent
16 rate in one of our municipalities. But if I
17 buy a Dell computer from Austan, Texas, the
18 freight rate is going to be basically the
19 same, but I'm going to pay $120 less for the
20 identical Dell computer from Austan, Texas,
21 because they don't have nexus in my state.
22 Now, I'm not trying to change
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1 nexus. And I want you all to understand,
2 this Governor does not think that we ought to
3 change the nexus rules with anything we're
4 discussing right now. There is something
5 more fundamentally important that I am
6 talking about. I am talking about that we
7 are going to have to give a tax increase. If
8 we continue on the course that we're headed
9 on on the national level, we're going to have
10 to give a tax increase to citizens in my
11 state who are the most vulnerable.
12 A broad-based sales tax is the
13 backbone tax in every state. Who is going to
14 pay it? The people that deal with purchasing
15 the necessities of life. Because the reality
16 of the situation is that most of the things
17 that will be purchased over the Internet as
18 we move into the out years will not be the
19 convenience, day-to-day items. They'll be
20 the other things. Because convenient stuff,
21 you want to buy immediately and you want to
22 take delivery immediately.
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1 In my state where you've got
2 small-town Main Streets -- and I'd like to
3 emphasize this -- if I want to buy a suit, I
4 can go find a suit that I like, but they have
5 it in 44 and 46. I'm a 48. I can't get it.
6 I can go on the Internet and get it, but I
7 can't get it in a lot of the small-town Main
8 Street merchants in my state.
9 We cannot adopt a tax policy in
10 America -- we can't adopt a tax policy in
11 America that assists in wiping out these
12 small-town Main Streets. Now, the reality is
13 they may get wiped out. And the reality is
14 they may be on the way to being wiped out.
15 But the reality also is that we should not
16 adopt a government policy -- at the same time
17 our government is spending billions of
18 dollars a year trying to shore up rural
19 America, it shouldn't turn around on the
20 other hand and do things to deliberately
21 wreck rural America.
22 You know, we used to have a program
23
1 called the wool subsidy program because we
2 wanted to raise more sheep wool in America
3 during the war. We raised so much sheep wool
4 with the subsidy, we turned around and
5 started another program called the unshorn
6 lamb program. One time I had sheep and I got
7 paid from both programs, because some of them
8 I'd shorn and sold and the others, I didn't
9 shear them and sell them. Well, we found out
10 the ludicrousness in this.
11 The federal government doesn't have
12 any problem taxing the Internet. These
13 people that sit in Congress and talk about
14 changing the rules for the states have got to
15 change the rule nationally. Why, when I buy
16 tires over the Internet, do I have to pay a
17 federal excise tax? Why? For these folks
18 that don't think it ought to be taxed.
19 And I'll tell you, these folks that
20 don't like taxes on the Internet, I'll tell
21 you what they can do. Instead of fooling
22 around with the states and wrecking somebody
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1 else, there's an easy solution. Why don't
2 they propose tax -- passing a national law
3 that says we will not tax the income of
4 anybody who makes their money over
5 E-commerce? They would get laughed out of
6 America. If anybody proposed that, they
7 would get laughed out of America.
8 But these folks that are so
9 pernicious in pursuing these kinds of tax
10 policies should understand what do states do
11 with their money. We educate our citizens.
12 We take care of the blind and the deaf. As a
13 matter of fact, we pay for a hugely
14 disproportionate share of special education.
15 Congress passes law telling us we
16 have to do certain things in special ed, they
17 tell us they'll provide up to half the money,
18 and they provide about 12 percent of the
19 money, and we have to make up the difference.
20 We take care of -- in my state of 750,000, we
21 take care of 66,000 poor people for their
22 medical care. They're on Title 19. That's a
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1 huge expenditure for my state. And we get
2 that money, most of it to provide taking care
3 of them, through our sales tax.
4 So the point that I'm trying to
5 raise is that we should not be changing the
6 rules in the game. Let commerce take care of
7 itself.
8 But the last point that I'd like to
9 make, Mr. Chairman, because it's the most
10 important one to me, never in the history of
11 America have I been aware that the Congress
12 or a national administration has passed a set
13 of policies that deliberately set itself on a
14 course to wreck certain aspects of state
15 government. The largest tax collections in
16 the nation, even in the income tax states,
17 are the sales tax base.
18 And let's let the marketplace make
19 the decision of what businesses succeed and
20 what businesses fail. Let's not decide that
21 Gateway will win or lose based on the tax
22 policies that we adopt on a national level.
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1 That's unfair. What it will force people to
2 do is make their decisions based on the
3 taxing scheme and not the free enterprise
4 scheme.
5 And to the extent we do that in
6 America, we will be disproportionate in terms
7 of how we deal with the allocation of
8 development throughout America.
9 So Mr. Chairman, the last point
10 that I would like to make is what we are
11 doing right now with the suggestions being
12 made is creating a loophole, an unfair
13 loophole for a certain segment of people who
14 are late starters in the game of commerce.
15 The folks that are established and have a
16 capital base, it's at their expense for the
17 late starters to come into the game and take
18 advantage of a loophole. Success in America
19 cannot, should not, and should not allow to
20 be based upon loopholes.
21 So I want you to know I'm a person
22 that believes in cutting taxes. I'm a person
27
1 that believes in minimal government. I think
2 my actions in public life -- as the kids say,
3 I've walked the walk and I've talked the
4 talk. But the bottom line is we cannot and
5 we should not do anything that will disrupt
6 the commerce in the states.
7 The proposals to not allow taxation
8 of interstate sales -- and let's all
9 understand this. Let's please understand
10 this. We are not taxing the -- we are not
11 looking to tax the Internet in my state. All
12 I'm asking to be allowed to do is to collect
13 the tax that the people of my state will owe
14 under the laws of South Dakota that have been
15 in place for more than 50 years, where they
16 make purchases of goods or services like
17 everybody else in South Dakota makes -- and
18 to the extent that someone has nexus. If
19 they don't, we can't collect it. But to the
20 extent someone has nexus, we ought to be
21 allowed, and we have to be allowed, to
22 continue to get the revenues we need to carry
28
1 out the functions of government.
2 Thank you so much for the courtesy
3 you've given me, Mr. Chairman.
4 CHAIRMAN GILMORE: Governor, thank you
5 very much for your presentation, the eloquent
6 presentation. We appreciate it very much.
7 Would you like to floor manage the panel?
8 GOVERNOR JANKLOW: Oh, sure. We all
9 have our time limits and so we know what they
10 are.
11 CHAIRMAN GILMORE: All right. Then I
12 believe that we are back to a 10-minute
13 presentation. You can see these aids that
14 are before you here. Yesterday I made
15 reference to it, and it wasn't going on on
16 the other side. I was a little embarrassed.
17 But you should see a green dot there. And it
18 can be an assistance to you just to kind of
19 keep a feel for how much time that you're
20 able to have.
21 The next person on this panel is
22 Tennessee State Representative, Matthew
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1 Kisber.
2 Mr. Kisber, you're on.
3 MR. KISBER: Thank you, Governor
4 Gilmore and members of the Commission. It's
5 an honor for me to be here this morning as
6 one of the representatives of this proposal.
7 It's been called the NGA proposal. But in
8 reality, we're here today as representatives
9 of the major state and local government
10 organizations coming forth and with this
11 proposal. And I'd like to spend a few
12 minutes this morning sharing with you what we
13 believe are the important components of the
14 proposal.
15 The zero burden proposal, first and
16 foremost, provides an opportunity for all
17 vendors to be playing on a level playing
18 field. We have heard extensively, not only
19 yesterday but through the length of this
20 discussion, how important it is that people
21 who sell similar products be treated in a
22 similar manner under similar circumstances.
30
1 The distribution channel will not
2 determine the tax policy that will be
3 employed under the proposal that we bring
4 forward.
5 The zero burden proposal also
6 accommodates the bricks and mortar business
7 model. As E-commerce and Internet sellers
8 develop more fully, they'll want to add brick
9 and mortar to their electronic operations and
10 distribution warehouses. And this could be
11 done with an administrative ease and without
12 new additional collection requirements.
13 The zero burden proposal is
14 voluntary. It does not require Congress to
15 change the current nexus standards, but
16 rather it employs the current status quo on
17 nexus. We agree that there needs to be time
18 for the Internet to develop, and that we need
19 to work together to establish a system so
20 that the collection of taxes that are owed
21 and the development of new distribution
22 models through electronic commerce can
31
1 develop together and grow together. And we
2 believe that this proposal would do that.
3 And very importantly, it removes
4 costly administrative burdens from sellers
5 and shifts that responsibility to state
6 governments. Governments pay for the system
7 through a portion of the taxes which would be
8 collected and remitted, not through
9 additional levies that would be passed on to
10 the remote sellers. Just like the current
11 vendors' compensation works in the sales tax
12 scheme.
13 For those of us who have worked to
14 try to minimize the growth in government and
15 actually reduce the size of government, this
16 introduces an element of privatization into
17 the collection of sales taxes. It also --
18 and I believe this is very important to those
19 who are sellers -- this proposal eliminates
20 the audit risk for those firms which are
21 willing to participate. As long as vendors
22 use approved trusted third parties, or third
32
1 party processors or whatever you'd like to
2 call them, and the certified software that
3 they provide, they would be held harmless.
4 That, to us, is a very important
5 consideration and a very attractive element
6 of this proposal.
7 The zero burden proposal also
8 relies on a combination of technology and
9 state simplification to make the system work.
10 States will need to adopt uniformity in
11 definitions, exemption process, filing and
12 administration. Again, it will be the state
13 governments, not the sellers, responsible for
14 the outcomes in this proposed system. And as
15 we all have great concerns about, it respects
16 the privacy of buyers and sellers. No buyer
17 identification, except the taxing
18 jurisdiction, goes to the trusted third
19 party.
20 In a state with local option taxes,
21 the identifier would include the city, the
22 county, and any other taxing jurisdictional
33
1 information that's required to properly remit
2 that tax which is collected.
3 Let me tell you very quickly what
4 the zero burden system does not do. It does
5 not change the current nexus standard for any
6 tax. It is a strictly voluntary system.
7 States are faithfully following the court's
8 decision on Quill. We are not attempting to
9 change Quill, but rather use the technology
10 which has come forward with E-commerce, and
11 the opportunity to develop new systems to
12 collect, tax and to simplify our system in
13 order to comply with Quill.
14 The zero burden system does not
15 impose a duty to collect on remote sellers.
16 Instead, it provides a simple system that
17 makes it easy and inexpensive for vendors to
18 participate on a voluntary basis. And very
19 important to those of us who are proponents
20 of this measure, it does not require federal
21 legislation.
22 Sales and use taxes are state
34
1 taxes. Governor Janklow covered that very
2 well. We do not need nor request federal
3 interference in the establishment of our
4 state tax policies.
5 You've heard about the erosion of
6 state sovereignty in an area that has been
7 the province of state and local governments.
8 We believe that the erosion of state
9 sovereignty could lead, in many areas, to
10 very dire, unintended consequences.
11 What the zero burden system does
12 not do as well is invade the privacy of
13 buyers and sellers. Again, only the taxing
14 jurisdiction identifier is reported to the
15 trusted third party. And, again, it does not
16 cost remote sellers. The states will bear
17 the cost of implementing and developing this
18 system.
19 So in summary, when you look at the
20 proposal that is before you, I think it
21 marries two very important concepts, two
22 21st-century ideas: The development of
35
1 electronic commerce and the ability to
2 utilize that technology to develop a system
3 to collect the taxes that are owed under the
4 laws of each of the states that impose a
5 sales and use tax.
6 If you see a benefit, if you see
7 it's going to be good for your state, you can
8 adopt it. If you see that it's not going to
9 benefit your state, you can pass on it.
10 We believe that it's
11 technologically feasible, and we'll hear more
12 about that in a few minutes. We believe it
13 responds to the legitimate concerns of
14 multistate sellers about undue burdens. We
15 take the burden of compliance off the remote
16 seller and place it onto the trusted third
17 party and the states to work out their
18 simplification. And the proposal meets the
19 12-point criteria that you established in
20 your meeting in New York, the benchmarks by
21 which you're going to judge the proposals
22 which have been presented to you today.
36
1 So it is my pleasure to be with you
2 this morning and to tell you that on behalf
3 of the organizations which represent state
4 and local governments, we wholeheartedly
5 endorse and propose the zero burden proposal
6 to you.
7 Thank you.
8 CHAIRMAN GILMORE: Thank you,
9 Mr. Kisber.
10 The next presenter on this panel is
11 Mr. Randy Johnson on behalf of the National
12 Governors' Association. Oh, excuse me,
13 Mr. Randy -- let me be sure. Yes, Mr. Randy
14 Johnson. He's chair of the Hennepin County
15 Minnesota Board, I believe.
16 MR. KISBER: He's not Governor yet.
17 CHAIRMAN GILMORE: No, that's right.
18 And this group, once again, the entire panel
19 is speaking on behalf of the entire number of
20 associations involved.
21 Mr. Johnson?
22 MR. JOHNSON: Thank you very much.
37
1 I'm not sure I can run for Governor in my
2 state. I've never wrestled and I'm not a
3 Navy Seal.
4 CHAIRMAN JANKLOW: Apparently he isn't,
5 either.
6 MR. JOHNSON: I don't think I'm
7 going there. Mr. Chairman and members of the
8 Commission, again, thank you of this
9 opportunity to discuss this very important
10 issue. And I want to stress that, although
11 this has frequently been called the
12 Governors' proposal, this is the proposal
13 that has the support of city council members,
14 local officials, county commissioners
15 throughout the country, and specifically not
16 only the National Governors' Association, but
17 also the National Conference of State
18 Legislatures, the Council of State
19 Governments, the U.S. Conference of Mayors,
20 the International City-County Managers'
21 Association, and the organization which I
22 chaired two years ago, the National
38
1 Association of Counties, unanimously adopted
2 this support for this proposal at our board
3 of directors meeting last week.
4 This is a complex issue, and I
5 thought a lot about this issue since I put up
6 my Web page, which I think might be the first
7 Web page of any local official in the
8 country, about four years ago. And this
9 issue is a lot like unpeeling an onion.
10 Every time you think you understand the
11 complexities of the issues, there's another
12 layer of that onion to unpeel. But as we
13 look at this issue and as it develops and as
14 technology develops rapidly, there are
15 certain principles that we keep coming back
16 to.
17 The first principle is the
18 principle of fairness. Fairness for Main
19 Street merchants and fairness for E-commerce
20 merchants. Main Street merchants don't need
21 special protection. E-commerce merchants
22 don't need special protection from the
39
1 government.
2 Now, a few years ago there was a
3 wave of national fervor by some advocates for
4 a new industrial policy, that the federal
5 government should pick and choose winners.
6 Which industries ought to receive government
7 concessions. Which industries ought to
8 receive special subsidies. And that that was
9 the only way that industries could compete
10 with the Japanese, with the Asian economies,
11 with the emerging Euro economies. That was
12 bad policy then and it's bad policy now. The
13 federal government should not be in the
14 business of picking winners and subsidizing
15 them and giving special concessions.
16 Next, what keeps coming back is
17 that contrary to the bumper sticker slogan
18 of, "Keep the Internet Tax-Free," I have yet
19 to meet a state or local official who has
20 talked about taxing the Internet in any way
21 different than anything else.
22 As Governor Janklow has pointed out
40
1 and Senator Kisber, this is a matter of
2 taxing transactions. It's not a matter of
3 taxing the Internet. And it may be cool for
4 a lot of elected officials to say, "Keep the
5 Internet tax-free," because I run for office,
6 lowering taxes is very popular. Saying you
7 want something tax-free is. And if you throw
8 in the Internet besides, that shows you
9 understand technology. That's not the issue.
10 Next is an issue of basic public
11 policy. At the state and local level in most
12 states there are really only three
13 significant sources of revenue: Income tax,
14 property tax and sales tax. And as I told
15 you, I'm a pretty conservative political
16 person. I believe in the work ethic. I
17 think people ought to be able to keep just
18 about all the fruits of their labor, so I'm
19 not a big fan of increasing income taxes.
20 Next source of revenue is the
21 property tax. And I believe in private
22 ownership of property. I think we ought to
41
1 encourage that. I think private property is
2 taxed at exorbitant rates in most states
3 right now, certainly far beyond the services
4 that are provided to that property. And it's
5 a regressive tax, besides.
6 So we come to the third tax, the
7 sales tax, a tax on consumption. Now, I'm
8 not a fan of any of these taxes. But as a
9 matter of public policy, if we try to tax
10 activities we want to discourage and minimize
11 taxes on activities we want to encourage,
12 well, we want to encourage work, we want to
13 encourage property ownership. And I have yet
14 to read an article saying the American people
15 save and invest too much and consume too
16 little.
17 If we're looking at public policy
18 on taxes, the sales tax is the tax to look
19 at. If you say no to the sales tax, then you
20 are saying yes to higher income taxes and
21 higher property taxes. Government can't run
22 on an empty tank.
42
1 Finally, there's a principle of
2 simplification. I like to keep things
3 simple. I think our tax laws, income tax
4 laws, property tax laws, and sales tax laws
5 are absurdly complicated right now, and I say
6 that as somebody who used to be a tax lawyer.
7 There is virtue in simplification, and the
8 streamlined sales tax proposal simplifies --
9 radically simplifies sales taxes. There is
10 virtue in simplification.
11 Even if the Internet had never been
12 invented, the streamlined sales tax proposal
13 is good public policy for a variety of
14 reasons. It meets all of the criteria that
15 you set forth at New York City in August: No
16 new taxes, privacy. It's voluntary.
17 This would be good public policy
18 even if there was no Internet. I like it
19 because it requires little or no action by
20 the federal government. As a local official,
21 I like almost anything that requires little
22 or no action by the federal government.
43
1 Finally, as Senator Kisber and
2 Governor Janklow and I agree, let the free
3 markets work. That's what made this country
4 great.
5 CHAIRMAN GILMORE: Thank you very much,
6 Mr. Johnson. That, I think, concludes that
7 panel presentation on behalf of the NGA and
8 other of the national associations.
9 The next speaker's presentation is
10 on the proposal on taxation of electronic
11 commerce by Mr. John -- it's Peha, is that
12 correct? Mr. Peha of Carnegie-Mellon.
13 Mr. Peha, the floor is yours.
14 MR. PEHA: Thank you. My name is
15 John Peha. I'm a professor at
16 Carnegie-Mellon University and an independent
17 consultant. But today I am representing no
18 one's views but my own. In fact, I want to
19 commend the Commission for hearing a few
20 neutral parties here today. I think we can
21 add something.
22 I want to emphasize the importance
44
1 of a non-discriminatory tax policy, if we can
2 find one that's practical. By that, I mean,
3 I should pay the same tax rate if I buy a
4 piece of software at my local computer store
5 in a disk that I would pay if I download it
6 over the Internet from an out-of-state
7 vendor.
8 To make this work, tax rate has to
9 depend on the location of the buyer. Now, if
10 we tax E-commerce at a larger rate, then
11 we're impeding the growth of this new
12 marketplace. If we tax it at a smaller rate,
13 or we do not collect taxes, yes, we put
14 traditional vendors at a disadvantage, even
15 when they are the lowest-cost alternative, as
16 you've already heard. Also, we put a higher
17 tax burden on consumers who cannot afford
18 Internet access. It would be hard to find a
19 more regressive tax policy.
20 I want to emphasize, though, that I
21 am suggesting tax rates depends on the
22 buyer's location. I'm not necessarily
45
1 suggesting that that tax go to the buyer's
2 state. That's what most of the proposals
3 before this Commission have assumed, but in
4 fact the taxes could go to the buyer's state,
5 they could go to the seller's state, or they
6 could go to the federal government and still
7 be non-discriminatory. In fact, I'm not
8 going to take a position on that here today,
9 but I think it's worth your consideration.
10 What I do want to do today is
11 propose -- is to discuss what a practical
12 policy would look like. In particular, I
13 want to suggest three litmus tests that be
14 applied to all tax policy proposals. And the
15 slides are now up.
16 The first one is enforceability.
17 An unenforceable tax policy is worse than a
18 useless policy. It punishes honest vendors
19 who voluntarily choose to comply with the --
20 with the tax. And to have an enforceable
21 policy we have to have transaction records
22 that cannot be deleted or altered without
46
1 risk of detection from an auditor. That's
2 the first litmus test.
3 The second litmus test I would
4 propose is privacy. A lot of consumers are
5 already reluctant to engage in E-commerce
6 because of privacy concerns, and we do not
7 want a tax policy that makes matters worse.
8 The third is efficiency. We want
9 minimal cost and minimal delay.
10 Now, today we do not have a policy
11 that meets all three of these tests. And I
12 think in the proposals you're going to hear a
13 lot of suggestions on how to address the
14 third concern, how to simplify tax policies
15 to improve efficiency. Now, I wholeheartedly
16 support that effort, but I want to emphasize
17 that we need to worry about the first two
18 criteria as well, and I do not think that
19 they're getting the attention that they
20 desperately deserve. That is, enforceability
21 and privacy.
22 The heart of the problem is that a
47
1 vendor's electronic records can be altered
2 undetectably. Paper records are a lot harder
3 to manipulate, but a lot of electronic
4 commerce vendors are not going to have paper
5 records to corroborate their electronic
6 records. So if we want enforceability, we
7 need -- we need something that will produce
8 reliable records. The way to do that is to
9 involve trusted third parties. We must do
10 that in a way that meets our three litmus
11 tests.
12 First, enforceability. Auditors
13 should be able to retrieve all of the
14 transaction details from somewhere. From the
15 vendors, from the third parties or a
16 combination thereof.
17 Second, third parties cannot be
18 able to alter their records undetectably,
19 either. For privacy, we want to make sure
20 that the trusted third parties cannot examine
21 the contents of these records. And for
22 efficiency, among other things, we'd like to
48
1 have either a single agency that can audit,
2 with jurisdiction to audit, or they're
3 multiple agencies. That's okay as long as
4 they communicate, they share information, and
5 they have identical record keeping standards.
6 Now, we do have third parties today
7 in many transactions. We have credit card
8 companies. And this clearly does not meet
9 the enforceability test and this clearly does
10 not meet the privacy test. We need something
11 else.
12 We also have a number of proposals
13 to the Commission, including one we just
14 heard, suggesting the creation of new kinds
15 of trusted third parties. And I think some
16 of these ideas have great merit. I'd want to
17 suggest that just creating the trusted third
18 party, though, doesn't mean that you get out
19 of audits and trustworthy records if you want
20 to enforce that policy. And I would
21 encourage proponents of these policies to
22 think through these three issues, because I
49
1 think there are still some concerns to
2 address.
3 So how can we do this? Well, first
4 of all, I'd suggest that wherever possible,
5 competing commercial third parties are going
6 to be more effective than government or
7 government contractors. The private sector
8 will do it better and cheaper, if they can.
9 I think this can work with two kinds of new
10 commercial third parties. One of them is an
11 electronic notary. This would -- this is a
12 service that would create time-stamped and
13 tamper-proof records without looking at those
14 records. And they would also have to be able
15 to retrieve all notarized records that have
16 been submitted by a given vendor if that vendor
17 happens to get audited. And this is now --
18 this is technically possible.
19 Also we need verifiers. Verifiers
20 would present verifiable credentials on
21 either buyer or seller, such as, you know,
22 "This consumer is in Pennsylvania." They
50
1 present the information that is needed for
2 the transaction, and nothing more.
3 Now, how do we know that these new
4 commercial players are going to be operating
5 properly? Well, we need a government program
6 of voluntary accreditation. That is,
7 E-commerce records would be handled by
8 accredited third parties, and any commercial
9 firm that wants to can request accreditation.
10 Those that meet the requirements will be
11 accredited.
12 So to summarize, a
13 nondiscriminatory tax policy is desirable,
14 and it is possible, but three litmus tests
15 should be applied in all proposals for a tax
16 policy. It should be enforceable, which
17 means we have to have trustworthy records
18 that an auditor can access. It should not
19 compromise the privacy of the buyer or the
20 seller. And it should be efficient. To make
21 this work, we need trusted third parties,
22 such as commercial verifiers and notaries.
51
1 But merely having trusted third parties is
2 not enough.
3 Also, some of the key policy steps
4 to get us there: We need voluntary
5 accreditation of trusted third parties, and
6 we need to make sure that there is one set of
7 record keeping standards nationwide. Thank
8 you for your attention.
9 CHAIRMAN GILMORE: Okay. Thank you very
10 much, Mr. Peha. I appreciate your
11 presentation.
12 The third is, "Adopting Tax
13 Technology to the Internet from the
14 E-commerce Transaction Tax Server." This is
15 Mr. Daniel Sullivan of Taxware International,
16 Incorporated.
17 Mr. Sullivan, you're on.
18 MR. SULLIVAN: Thank you, Governor.
19 Thank you, members of the Commission, for
20 inviting me.
21 My job here is to show you what
22 technology exists. I'll give you a brief
52
1 overview of how it works and how it might be
2 applied to almost any of the solutions we've
3 talked about over the last couple of days,
4 but in particular the no-fault concept.
5 The system as it works today,
6 most -- we have, I should mention this,
7 thousands of users that use this system from
8 large companies, Fortune 100-type companies,
9 on down to small Internet merchants. In
10 fact, on the Commission there are seven
11 members who represent commercial interest,
12 and out of those seven members, five
13 represent companies who are currently using,
14 in one form or another, the Taxware system.
15 The only two that aren't are Andal and
16 Charles Schwab, and they don't have much of a
17 tax requirement, sales tax requirement.
18 Everybody else, in one form or another, is
19 using the system.
20 In the course of a transaction a
21 merchant, in processing a transaction, first
22 accesses our Verizip system, which is a
53
1 system of all the ZIP codes and addresses in
2 the United States to validate the address and
3 determine the tax jurisdiction.
4 Next, through a universal tax link,
5 the information is passed to the tax
6 calculation program. That could include
7 sales tax. We have a world tax system that's
8 being used on the Internet. The tax
9 calculation system then determines if the
10 merchant has nexus and any other relevant
11 information about the merchant, to make a
12 determination, using sales tax exemption
13 processing to determine if it's an exempt
14 sale because of the nature of the customer:
15 Purchase for resale, government, charity.
16 Next, we can make a determination
17 by product. Is it a product that's exempt in
18 that particular identified tax authority? It
19 might be clothing, which is exempt in one tax
20 authority, but not in another. We have
21 thousands of products and commodities that
22 we've researched over the years, and we can
54
1 automatically exempt or charge special rates
2 for these products.
3 And then finally, the standard tax
4 rates may be applied if none of these other
5 steps rule otherwise.
6 The tax is calculated, we pass the
7 results back to the merchant, and create an
8 audit record of the transaction, and then
9 finally, when tax returns are due, we have a
10 tax compliance system that actually produces
11 the tax reports. This is our remit system.
12 The platform independent supports
13 all our Taxware systems. It's Internet-ready
14 for E-commerce reporting. And it produces
15 the actual tax forms to be remitted to the
16 state, filled in with the data from the audit
17 files.
18 We've recently announced a
19 transaction tax server. In the past, the
20 software had to reside at the point of sale
21 or in-house for invoicing systems or
22 purchasing systems. Now we've developed a
55
1 transaction tax server concept so that it can
2 be a remote system. It means that there is
3 no longer any need for in-house systems,
4 in-house updates, maintenance, changing of
5 the software when tax laws change. It's all
6 remote and can be done by a central location
7 on the transaction tax server.
8 The same process occurs. The buyer
9 and the merchant complete a transaction. The
10 transaction data is transmitted to the
11 server. And the server does its thing, as
12 we've discussed, and passes the tax
13 information back to the merchant to complete
14 the transaction.
15 The server concept allows
16 processing from a variety of sources, using
17 either batch or real time processing. It can
18 be done with large scale computer systems.
19 You can use laptops, handhelds, desktops --
20 anything that can access the transaction
21 server through the Internet can be used as an
22 input device.
56
1 The transaction tax server can also
2 be used in conjunction with this proposal,
3 this no-fault trusted third party proposal.
4 In this case, the transaction data would be
5 passed to the transaction tax server. The
6 transaction tax server could pass back the
7 tax data and the merchandise amount to the
8 merchant, and forward the tax amount directly
9 to the tax parties. So it would relieve the
10 merchant of the necessity to collect and
11 remit taxes.
12 We would hope the tax authorities
13 would also cooperate and put together an
14 exempt certificate warehouse, so that we
15 could automatically exempt sales based on the
16 nature of the customer.
17 And, finally, we -- I'm going to
18 show you -- we're calling it the data
19 highway. This represents the transaction tax
20 server passing information to the tax remit
21 system which creates summary files, rather
22 than a tax form. The summary files could be
57
1 transmitted to the tax authorities.
2 We would provide the tax
3 authorities at no cost a copy of our
4 software, and the tax authorities could then
5 either load the transaction data into their
6 existing databases, or if they wanted to,
7 they could produce the actual tax reports.
8 This means that the tax authorities don't
9 have to make a big investment in changing
10 their systems. They're getting the same data
11 that they're getting now in pretty much the
12 same format.
13 Other tax systems could be used to
14 input to the data highway, whether it's an
15 in-house system or another tax system. We
16 could take their audit records, map them to
17 the correct format, and again pass them
18 through the data highway to the tax
19 authorities.
20 That's a quick overview. If there
21 are questions later on, we could flesh it out
22 a little bit. Thank you very much.
58
1 CHAIRMAN GILMORE: Thank you very much,
2 Mr. Sullivan. The -- I think that, according
3 to my notes, that is the conclusion of the
4 NGA et al. group that is offering their
5 alternative proposal. We do certainly want
6 to get into the questions and answers on
7 this, but under the agenda, frankly, if we
8 open it up now we'll never get to the other
9 people.
10 So let's do the other people, as
11 the agenda calls for, and then we can
12 question the entire panel as a group and have
13 the time to do that.
14 The next series of presenters are
15 "Radical Simplification of Sales Taxes and
16 Use Taxes: The Prerequisite For and Expanded
17 Duty to Collect Use Sales on Remote Sales."
18 This is by Mr. Charles McLure of the Hoover
19 Institute.
20 Mr. McLure, the time is yours.
21 Thank you.
22 MR. MCLURE: Thank you,
59
1 Mr. Chairman, Commissioners.
2 I have accepted the challenge for
3 radical simplification, so simplified you may
4 say it's totally unrealistic. But before you
5 dismiss it, I'd encourage you to think about
6 it because it is the conceptually correct
7 approach. It's also the simplest approach
8 that is conceptually sound.
9 Before I turn to the simplification
10 proposals, let me address the most important
11 issue facing the Commission, which is whether
12 or not there should be an exemption for
13 electronic commerce.
14 I believe there is absolutely no
15 principled reason for permanent exemption for
16 electronic commerce. And I would justify
17 that with two sources. I would quote Ronald
18 Reagan, who said, "The taxing power of
19 government must be used to provide revenues
20 for legitimate government purposes. It must
21 not be used to regulate the economy or bring
22 about social change."
60
1 And then second, I'd refer you to a
2 statement that I have asked the staff to
3 distribute. It's a statement signed by 55 --
4 actually, at this point, 55 academic tax
5 specialists. And I would just read you the
6 four points that are made there.
7 First, there is no principled
8 reason for a permanent exemption for
9 electronic commerce. Electronic commerce
10 should be taxed neither more nor less heavily
11 than other commerce.
12 Second, remote sales, including
13 electronic commerce, should to the extent
14 possible be taxed by the state of destination
15 of sales. That is where consumption occurs.
16 Third, there must be enough
17 simplification for sales and use taxes to
18 make a destination-based taxation of sales
19 feasible.
20 And, four, a means must be found to
21 eliminate burdens of compliance on sellers
22 making only small amounts of sales in a
61
1 state.
2 Now, in retrospect, I would have
3 added a fifth principle, which is that to the
4 extent the tax base is increased, there
5 should be a reduction in rates, because there
6 is no intent whatsoever to increase taxes.
7 The implication of this view, of
8 course, is that all commerce should be taxed
9 alike, whether it occurs on Main Street, via
10 electronic commerce, or via other forms of
11 remote commerce.
12 I think it's long been recognized
13 that if there's to be an expanded duty to
14 collect use tax, there has to be substantial
15 simplification. In my view, the key problem
16 is the lack of uniformity of the state sales
17 tax base. Among other things, there are
18 different coverages with tax base, different
19 definitions, different exemptions for
20 business purchases from state to state, and
21 of course different administrative procedures
22 and practice.
62
1 My view is that the key to
2 simplicity, so far as the tax base is
3 concerned, is to have the same tax base in
4 all states. Now, yes, that's extremely
5 radical, but it's not crazy. I might point
6 out that the European Union has been moving
7 in this direction and has largely achieved
8 it, beginning in 1973 with the sixth
9 directive. If separate nations can do that,
10 it seems to me that perhaps the states could.
11 The first issue in unifying the tax
12 base is to tax all sales to households,
13 including services and intangibles, and of
14 course cut the rates to maintain revenue
15 neutrality. If there are to be exemptions --
16 for example, fulfill your medicine -- those
17 should be uniform from state to state. The
18 purpose, of course, is that no matter where a
19 vendor is located, the vendor would be able
20 to know what the tax base is, because there's
21 only one to keep track of.
22 I think that the uniform menu of
63
1 what might or might not be taxable, which the
2 National Tax Association considered, simply
3 doesn't go far enough. The best guess we
4 have is that there might be a menu of 10,000
5 items. Yes, you can handle that with look-up
6 tables on the computer, but why would you
7 want to? There's nothing good to be said for
8 that solution, so why do it? Why not have a
9 uniform base.
10 Now, notice -- I won't go into
11 these -- but I believe that uniform base also
12 addresses many privacy issues. You don't
13 need to know what people are buying, just
14 that they bought something that's taxable.
15 And you need to know the state and perhaps
16 the locality where they make the purchases.
17 Also, of course, uniformity
18 alleviates compliance problems for firms
19 located in the states with no sales tax.
20 Somebody in those 5 states needs to know only
21 1 state sales tax base, not 46.
22 The second aspect of unifying the
64
1 tax base is perhaps even more radical, and
2 that is that you would exempt all sales to
3 business. That is since this is a
4 consumption based tax, you would tax only
5 consumption. That is, sales to households.
6 Again, this is what is being done in a
7 different way in the European Union, because
8 they allow a business a credit for any tax
9 that's been paid on their purchases.
10 With this system, the exemptions
11 certification would be uniform and very
12 simple. It would consist essentially of one
13 question. Is this or is this not something
14 that is allowable as a deduction or perhaps
15 depreciation allowance, various other
16 expenses of business, on your federal tax
17 return? If it is, you don't pay tax. If it
18 isn't, you pay tax. Yes, people can lie, but
19 they have to lie to the federal government,
20 too.
21 Let me say that besides simplicity,
22 this approach has other additional
65
1 advantages. First, it avoids hidden taxes.
2 Yes, we have 6 percent tax, perhaps, in some
3 state. But in fact, it may be more like nine
4 by the time you add in the tax on business
5 purchases. Good government requires that
6 people see the taxes they pay.
7 Second, it's an economic -- this is
8 an economically neutral tax; that is, it
9 applies to all consumption in the extreme
10 case, doesn't apply to business purchases.
11 It doesn't distort decisions of what to
12 produce, how to produce it, how to distribute
13 it.
14 I'd argue that for those governors
15 who are curious about this, it's obviously
16 more attractive to state economic development
17 to exempt business purchases than to tax
18 them. We heard yesterday about an exemption
19 for purchases of those wanting to set up Web
20 servers. Well, this would allow exemptions
21 for everything.
22 And of course, finally, something
66
1 that's done in Europe and is not done here is
2 that this proposal avoids all tax owned
3 exports. In the European Union, as we heard
4 yesterday, if you export, you don't pay tax
5 and you get any tax you've paid back. In
6 this case there would not be any tax that you
7 would need to get back. Exports would enter
8 commerce tax free. Currently, they don't.
9 They pay whatever tax is hidden in the price.
10 The second aspect is the question
11 of sourcing and situs of sales in the local
12 tax rates. In the ideal situation, sales
13 would be sourced to the local level. This
14 would allow states and local governments to
15 continue to determine the tax rates applied
16 to sales. It should be possible to use
17 software to determine the situs and the tax
18 rates, and we've heard something about that.
19 If it turns out that that's not possible, not
20 feasible, I would propose an alternative,
21 which is one rate per state for remote sales.
22 In other words, states and localities would
67
1 continue to choose the rate for local sales,
2 but for remote sales they would all have just
3 one rate. I think that's acceptable.
4 There may be some unallocable
5 sales. That is, it may not be possible to
6 know the location of someone making purchases
7 of digital content. And, of course, you
8 should also have a de minimis rule, which
9 exempts those making very small sales. I
10 would argue that there what you could do is
11 to have what we might call a national tax,
12 not administered by the federal government.
13 They have no business in this. But
14 administered jointly by the states.
15 In other words, this is kind of a
16 back-up tax that says, "Okay. We don't know
17 where that -- the digital content -- we don't
18 know where the digital content is going, we
19 don't know where people are making de minimis
20 sales. We will levy a uniform national tax,
21 again with our uniform rate, uniform base,
22 and divvy up the money on the basis of
68
1 estimates of consumption."
2 Notice I would not -- this would
3 not be an origin-based tax. I think an
4 origin-based tax is an invitation for a race
5 to the bottom in which states just cut rates
6 in order to attract electronic commerce
7 vendors.
8 Yes, it would be noted that -- that
9 there's a sacrifice of state sovereignty over
10 the tax base. To my view, that is a
11 reasonable compromise in order to retain
12 state control over the rates and perhaps even
13 local control.
14 Since my time is near -- is
15 ending -- I will not talk about the
16 administrative simplifications of the kind
17 we've heard, such as whether the base state
18 approach, trusted third parties software is
19 the best approach. I would say, though, that
20 something like zero cost compliance is
21 important.
22 That is, states should provide
69
1 software to vendors. There should be
2 realistic vendor discounts. And there should
3 be a de minimis rule.
4 In short, the proposal is to
5 eliminate distinctions that don't make any
6 sense and are indistinct, between, for
7 example, goods and services between local and
8 remote commerce. And also to limit --
9 emphasize and clarify the appropriate
10 distinctions; that is, between business and
11 consumers.
12 Ideally, this proposal would be
13 implemented by joint state action. As a
14 matter of fact, because of Quill, it probably
15 takes federal legislation. That legislation
16 should be bare bones, which says something
17 like this, it passes Constitutional muster.
18 Thank you.
19 CHAIRMAN GILMORE: Thank you very much,
20 Mr. McLure. The next presenter is a
21 "Proposal Related to Electronic Commerce
22 Taxes," by James Goldberg, who is General
70
1 Counsel of the National Retail Dealers
2 Association.
3 Mr. Goldberg?
4 MR. GOLDBERG: Good morning,
5 Governor Gilmore. I'm here this morning on
6 behalf of the North American Retail Dealers
7 Association, which represent more than 3,000
8 member companies that sell and service
9 consumer electronics, home compliances,
10 furniture, computers and other durable goods.
11 NARDA's members, for the most part,
12 they're traditional brick-and-mortar, small
13 businesses who must compete on a daily basis
14 with the so-called big box discount
15 retailers, and increasingly with out-of-state
16 sellers who transact business via toll-free
17 telephone numbers, catalogues, and Internet
18 Web sites.
19 Now, competition is the essence of
20 the retail business. It affords consumers a
21 wide choice of products and services. But
22 the basis of this competition must be, from
71
1 our perspective, a level playing field. That
2 is, a situation where all sellers start from
3 the same base and gain or loose market share
4 based on their ability at such things as
5 managing costs, providing unique products and
6 services, and offering consumer service.
7 The concept of a level playing
8 field has been reflected in the sales and use
9 tax regimen in place in the 45 states that
10 have decided to use the sales tax as a means
11 of raising revenue. The basic concept behind
12 this regimen is that once a state has
13 declared a transaction to be taxable,
14 consumers in that state must either pay a
15 sales tax which is collected by the vendor,
16 or the purchaser must pay a use tax directly
17 to the state in the same amount.
18 The unfortunate reality, as all of
19 you know, is that despite this concept, a
20 series of decisions by the Supreme Court,
21 beginning more than 30 years ago, and ending
22 with the Quill case less than 10 years ago,
72
1 have left state and local governments with an
2 ineffective means to collect sales and use
3 taxes that are lawfully owed today.
4 These decisions have also resulted
5 in the severely hampered ability of NARDA
6 members and other small businesses that
7 operate bricks-and-mortar outlets to compete
8 with those who are located in another state
9 who are not lawfully required to collect
10 state and local sales taxes and so choose not
11 to do so.
12 I would also add that this
13 situation has hampered the ability of those
14 retailers who want to get into the
15 clicks-and-mortar business -- that is, have
16 Web sites and stores. It has hampered their
17 ability to compete because they are being
18 forced, because of this competitive
19 situation, in many cases, to adopt two
20 corporate entities, two companies, two sets
21 of operations, one that collects sales tax,
22 one that doesn't, and, therefore, they're not
73
1 able to seamlessly integrate the selling
2 system that I think many of them would like
3 to be able to do.
4 In the highly competitive world of
5 consumer electronics retailing, for example,
6 where profit margins on individual products
7 are far below the norm for most retailers, a
8 difference of 5 to 8 percent, that is the
9 amount of the sales tax, is all to often the
10 difference between a sale consummated over
11 the counter and one concluded either online
12 or via a toll free telephone number.
13 As I've said, this problem is not a
14 new one. It's been around for over 30 years.
15 It began with the emergence of the catalogue
16 retailer in the '80s, but it's virtually
17 exploded in magnitude in the last few years
18 with the popularity of the Internet.
19 The magnitude of this problem was
20 evidenced several years ago when the Advisory
21 Commission on Intergovernmental Relations, as
22 part of an analysis of then-pending federal
74
1 legislation, concluded that state and local
2 governments were, at that time, losing more
3 than $3.3 billion each year in use tax
4 revenue that was lawfully owed, but which
5 went uncollected because of the current
6 system.
7 With the exponential growth of
8 Internet commerce since that time, I have no
9 doubt that that amount of uncollected revenue
10 has mushroomed accordingly.
11 Now, as I said, the inability of
12 state and local governments to collect sales
13 and use tax revenue has stifled the ability
14 of NARDA members and other small businesses
15 to compete. It's caused state and local
16 governments to turn to new ways of raising
17 funds, to think about imposing new taxes on
18 products and activities that have heretofore
19 remained untaxed, or increasing existing
20 taxes on in-state businesses that have no
21 choice but to pay them.
22 NARDA's position on these new and
75
1 increased taxes is simple, and I think it
2 reflects the position of most business
3 people. Government shouldn't be raising
4 additional revenue unless and until they've
5 been satisfied that all existing taxes are
6 efficiently and effectively collected, thus
7 assuring that all taxpayers who are similarly
8 situated are treated equally, and no one gets
9 a competitive or other advantage.
10 In the area of sales and use tax
11 collection, the Supreme Court has made it
12 abundantly clear that only Congress can
13 authorize the states to require out-of-state
14 retailers to collect applicable sales taxes
15 on goods or services sold into the state.
16 So it's for that reason that the
17 proposal that we have put forward to the
18 Commission is for the adoption of federal
19 legislation that would authorize states to
20 require remote sellers with no physical
21 presence -- as that term has been defined by
22 the Supreme Court -- to collect sales taxes
76
1 as follows:
2 The quid pro quo for the tax
3 collection requirement would be
4 simplification. States would be required to
5 establish uniform definitions for taxable
6 transactions, so that, for example, food is
7 food is food, clothing is clothing is
8 clothing, and the only distinction is whether
9 a state chooses to tax food or not tax food,
10 tax clothing or not tax clothing.
11 Remote sellers would only have to
12 collect sales taxes based on a single rate
13 per state. That simplifies the 7,500
14 jurisdictional rate issue down to 45. States
15 with varying rates would be required, if they
16 wanted to require out-of-state sellers to
17 collect taxes, to establish a mechanism by
18 which local governments would share in the
19 tax collected or would forgo their share of
20 taxes collected by remote sellers.
21 Remote sellers would remit taxes to
22 a single office within the state where the
77
1 tax payment is due.
2 States would be required to
3 maintain and establish toll-free telephone
4 numbers or interactive Internet sites so that
5 remote sellers could get answers to their
6 questions.
7 Audits would be conducted by the
8 state in which the seller is physically
9 located, so that these sellers would not be
10 subject to audits by 45 states.
11 And the requirement for collection
12 of sales taxes would not trigger nexus for
13 other tax purposes, such as income taxes, or
14 create nexus for such things as qualification
15 to do business and so on and so forth. It
16 would be a sales tax collection requirement
17 only.
18 Now, federal legislation, we
19 understand, is going to take time. I think
20 there are a number of things that can be done
21 in the interim, and we would urge state and
22 local governments to begin some of these
78
1 steps as soon as possible.
2 Number one, begin a program to
3 educate the citizens of states to understand
4 that there is a use tax obligation and that
5 sales made over the Internet or by catalogue
6 or by 800-number are not really tax-free
7 sales.
8 In that connection, I would note
9 that the State of Michigan, a few weeks ago,
10 announced a new program to add, I believe,
11 information to their existing income tax
12 return, notifying people that use tax
13 obligation is out there and providing a
14 mechanism by which it can be computed and
15 paid.
16 Second of all, I would urge the
17 states and local governments to begin to get
18 together now to start the process of
19 simplification, leading to common
20 definitions, leading perhaps to one rate per
21 state, so that this problem can be worked
22 out.
79
1 And third, we would urge the states
2 and local governments to resume their
3 negotiations and discussions with some of the
4 remote sellers in an effort to prod, if you
5 will, more voluntary compliance with the
6 current system.
7 I think there's a number of things
8 that need to be done, but in the interest of
9 fairness and equity, we think that
10 simplification is the quid pro quo for an
11 enhanced sales tax collection requirement.
12 Thank you.
13 CHAIRMAN GILMORE: Thank you very much,
14 Mr. Goldberg.
15 Before we go on, I might just
16 mention for everyone and for the record, if
17 you have to ask why so many presenters?
18 Because we asked of it. We in New York asked
19 for proposals from thoughtful people from
20 outside of the community and received quite a
21 large body of them.
22 My own proposal for no Internet tax
80
1 is included in this afternoon's policy and
2 issues paper, as opposed to being a separate
3 presentation. But we asked for a lot of
4 thoughtful people to come forward.
5 We got a lot of people and then
6 selected a representative group that the
7 panel wished to hear from, by committee.
8 It's a lot of information. But this is the
9 art of public policy making, to hear from
10 people and then to shape it up later with
11 questions and answers.
12 There are three more. The next one
13 is labeled, "A Modest Principle: No Net
14 Tax" -- "No Net Net Tax." Maybe that's
15 important, actually. "No Net Net Tax,"
16 submitted by Mr. William McArthur and
17 Mr. Peter Merrill of Price Waterhouse
18 Coopers.
19 Gentlemen, the two of you are here.
20 You have one proposal. I would ask you to
21 divide five minutes and five minutes, if you
22 please. Who shall begin?
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1 MR. MERRILL: I will begin,
2 Mr. Chairman.
3 CHAIRMAN GILMORE: Mr. Merrill?
4 MR. MERRILL: Mr. Chairman,
5 distinguished members of the Commission, my
6 name is Peter Merrill. I direct the National
7 Economic Consulting Group in the Washington
8 office of Price Waterhouse Coopers. I
9 appreciate the opportunity to be here to
10 testify a second time before the Commission.
11 At the Williamsburg meeting, I
12 focused my remarks on the international
13 aspects of electronic commerce. Today we
14 will be discussing a paper that we submitted
15 to the Commission regarding state and local
16 tax issues.
17 I'm accompanied by my co-author,
18 William McArthur. He is partner in charge of
19 the Knowledge Management Group for the State
20 Tax Consulting Practice. We are appearing
21 today before the Commission in our own
22 capacities. We've brought together a mix of
82
1 law and economic perspectives on this.
2 And although we're sitting at the
3 left end of the table, our goal is to come
4 right down the middle and try to give you a
5 proposal that really brings both sides of the
6 debate together.
7 MR. MCARTHUR: Mr. Chairman,
8 members of the Commission. On October 15th,
9 this Commission issued an invitation to the
10 public to submit proposals related to state
11 and local taxation of Internet transactions
12 and electronic commerce.
13 The Commission set forth 18
14 criteria by which it would consider each of
15 these proposals that are brought forward.
16 Those criteria present both admirable and
17 also certain prerequisite principles. Among
18 those set forth by this Commission is the
19 following query: Does this proposal leave
20 the net tax burden on consumers unchanged?
21 This criterion referred to as
22 revenue neutrality is the key that we would
83
1 like to talk about today in advancing the
2 debate over the appropriate sales tax
3 treatment across border E-commerce
4 transactions. We endorse imposition of the
5 discipline of revenue neutrality in the
6 Commission's consideration of the new tax
7 proposals. This will allow the Commission to
8 focus on the fundamental technical and policy
9 issues regarding the taxation of cross-border
10 sales, without getting bogged down in the
11 political charged allegations of tax increase
12 by some, tax erosion by others.
13 In addition, we discuss a mechanism
14 for enforcing revenue neutrality that should
15 Congress enact legislation in this area.
16 The effect of E-commerce on states'
17 current and future revenues is a very
18 contentious issue, as we well know. Some
19 state officials allege that the current sales
20 tax system is antiquated and that the
21 exponential growth in untaxed remote sales
22 will cripple the sales tax system.
84
1 In our view, proposals to ban
2 Internet sales taxation remain -- in their
3 view, proposals to ban Internet taxation
4 would mean fewer teachers and less law
5 enforcement. By contrast, remote sellers and
6 fiscal conservatives would view the state's
7 desired imposed use tax collection
8 responsibilities on remote sellers as a
9 thinly veiled attempt to increase revenues.
10 Meanwhile, the majority of American
11 taxpayers view proposals to collect sales
12 taxes on remote sales as new taxes, even
13 though consumers are legally obliged to pay
14 the virtually unenforced use tax on the
15 remote purchases.
16 Echoing this view, House Majority
17 Leader Dick Armey and 34 other members of
18 Congress recently sent a letter to this
19 Commission stating that any suggestion to
20 collect sales tax on Internet transactions
21 would not be viewed favorably by members of
22 the U.S. Congress.
85
1 We do not offer a legislative
2 proposal this morning regarding imposition of
3 use tax collection responsibilities on remote
4 sellers. Rather, our point is that an
5 agreement to hold sales tax revenue constant
6 would allow the debate to focus on more
7 fundamental questions, such as the high cost
8 of collection and remitting in thousands of
9 tax jurisdictions around the country, and the
10 legitimate privacy concerns of taxpayers and
11 consumers.
12 MR. MERRILL: As a practical
13 matter, revenue neutrality means that any
14 effective expansion of the tax base -- in
15 other words, more sales tax revenues
16 collected by state and local governments,
17 should be accompanied by a reduction in the
18 sales tax rate. This is precisely the
19 principle that President Reagan insisted upon
20 in drafting the tax reform proposals he sent
21 to Congress in 1985. Professor McLure, on
22 this panel, was instrumental, actually, in
86
1 drafting those proposals.
2 This was the precursor for the
3 landmark Tax Reform Act of '86 that broadened
4 the tax base of both the individual and
5 corporate income taxes, and at the same time
6 lowered the tax rate dramatically. The
7 principle of revenue neutrality was embraced
8 by the leadership in the House of
9 Representatives, and was key to a bipartisan
10 enactment of the legislation.
11 The '86 act was drafted under an
12 agreement that the bill should not shift the
13 tax burden to low-income taxpayers as well.
14 We believe that the principle of revenue
15 neutrality actually achieves this result, as
16 well. The reason is that any expansion of
17 duty to collect tax on remote sales would
18 have relatively little impact on low-income
19 households. The accompanying sales tax rate
20 reduction to keep the thing revenue-neutral
21 would benefit all consumers. Thus, the net
22 effect of a revenue neutrality principle
87
1 would also be to make certain that the tax
2 burden is not shifted to low-income
3 consumers.
4 Well, if Congress were to enact
5 such legislation -- again, we don't advocate
6 this, but if Congress were to get into the
7 fray here, how would the legislators ensure
8 themselves that this power that they would
9 potentially grant to states to impose tax on
10 remote sellers would not be used to increase
11 tax on their constituents? A satisfactory
12 answer to that question would be critical to
13 obtaining really any support in the U.S.
14 Congress.
15 While further economic and legal
16 research really would need to be done, we
17 believe that there is an enforcement
18 mechanism that could be drafted that would
19 provide an adequate comfort level to members
20 of Congress regarding revenue neutrality.
21 One approach for ensuring revenue
22 neutrality would be for Congress to condition
88
1 a state's authority to impose and expand a
2 duty to collect an agreement by the state to
3 limit the growth in sales tax revenues to the
4 growth in personal income. A similar
5 approach actually was adopted in Missouri
6 where, since 1980, the Hancock Amendment has
7 limited the growth in tax revenues to the
8 growth in personal income. There are a
9 variety of exceptions, including for an
10 emergency, and when the voters actually
11 improved such a tax increase.
12 Under this approach to revenue
13 neutrality, any increase in sales use tax
14 revenues attributed to an expanded duty to
15 collect, would be recycled back to consumers
16 in the form of lower rates. This sort of
17 sales tax cap mechanism should probably apply
18 for a reasonably long period of time, say 10
19 years, to allow consumers to fully benefit
20 from the sales and use tax rate reductions
21 that would occur from this dramatic
22 broadening, potentially, of the sales and use
89
1 tax base.
2 After this period of time the
3 voters could discipline politicians who, in
4 fact, increased sales tax rates after the
5 base was broadened. States that failed to
6 comply with this revenue neutrality principle
7 could be sanctioned by the federal government
8 by reducing various payments under federal
9 grant programs, so that there would be no
10 incentive for a state to raise its sales tax
11 revenues beyond this revenue neutrality
12 constraint, because they would lose the
13 corresponding amount of federal grant monies.
14 Even if there is no federal
15 legislation in the area, we suggest that the
16 states who are thinking about voluntary
17 mechanisms might also advocate the principle
18 of revenue neutrality in their own proposals.
19 MR. MCARTHUR: But what about
20 possible objections to this? Government
21 officials may object to these enforcement
22 mechanisms. And these are merely our
90
1 suggestions. There are a myriad of
2 alternatives that could be available to them
3 for ensuring Congress that an expanded duty
4 to collect use tax would not become a money
5 machine.
6 Another possible criticism is that
7 state governments might lose sales tax rates
8 at the end of the enforcement period. This
9 is indeed a risk. But at the end of the day,
10 state legislators who vote for tax increases
11 are ultimately accountable to their voters.
12 In conclusion, we believe the
13 discipline of revenue neutrality would lead
14 to more productive dialogue about improving
15 sales tax system to increase neutrality, low
16 compliance cost, and protection of privacy.
17 President Reagan's endorsement of revenue
18 neutrality principle was critical in
19 obtaining bipartisan support for tax reform,
20 and for convincing a skeptical American
21 public that tax reform was not a code word
22 for tax increase.
91
1 Linking base broadening to tax rate
2 reduction is good economics, as well as good
3 politics. Low tax rates encourage economic
4 growth and reduce possible incentives for tax
5 evasion and avoidance. While Congress can
6 certainly enforce revenue neutrality in the
7 federal system, a new approach is required
8 for state taxes. Our suggested mechanism
9 that Congress could use to reduce the risk
10 that providing state authority to impose use
11 tax collection on remote sellers would lead
12 to a net tax increase on consumers.
13 Thus we have subtitled our paper
14 "No Net Net Tax." While it is difficult for
15 the commission to find a consensus for a
16 legislative proposal, we hope that revenue
17 neutrality is one of the principles that the
18 Commission can broadly support and recommend
19 to Congress.
20 Thank you very much.
21 CHAIRMAN GILMORE: Gentlemen, thank you
22 very much. The next is the "Proposal from
92
1 the Committee on State Taxation to Increase
2 Voluntary Remittance of Sales and Use Tax."
3 This is by Ms. Diann Smith, the General
4 Counsel of the Committee on State Taxation.
5 Ms. Smith?
6 MS. SMITH: Good morning. Thank you very much. I'd like to first of
7 all tell you who is the Committee on State
8 Taxation and what gives us the moral
9 authority to talk about this issue and to try
10 and advise this Commission.
11 Secondly, I will discuss the
12 process that we went through in coming to
13 this proposal.
14 And, finally, I will discuss the
15 proposal itself. The Committee on State
16 Taxation is a trade organization that has
17 been around for 30 years. We have over 500
18 members that make up the Fortune 1000-size
19 companies. Our members are credit card
20 companies, they're telecom companies, they're
21 Main Street retailers, they're catalogue
22 companies, and they're banks. These are the
93
1 exact companies that right now are building
2 the infrastructure of the Internet and
3 creating the items that we're discussing
4 today.
5 They're buying business-to-business
6 transactions over the Internet. They're
7 selling to consumers over the Internet.
8 They're the telecom companies that are
9 providing the infrastructure for the
10 Internet. And they're the financial
11 institutions that are providing the
12 mechanisms so that purchases can be made over
13 the Internet.
14 It's these companies that were able
15 to come together and create what we see as a
16 truly practical proposal for this Commission
17 to consider.
18 In thinking about my testimony
19 today I tried to come up with come type of
20 catchy phrase, some type of elegant
21 description for the proposal. And finally I
22 decided that there really isn't one. It's
94
1 just a practical, straightforward and
2 realistic idea of what we can expect for the
3 sales and use tax system to handle at this
4 point in time.
5 In thinking about what COST could
6 propose, we looked at who the stakeholders
7 are and what the current state of the law is.
8 You've heard it time and time again, but it's
9 worth repeating. Currently the state of the
10 law is that if there is the requisite amount
11 of physical presence within a state, a vendor
12 must collect and remit sales and use tax on a
13 transaction. If the physical presence does
14 not exist, then the remote vendor does not
15 constitutionally have to collect and remit.
16 Finally, the consumer in the state
17 has the obligation on any transaction in
18 which sales tax has not been collected to
19 independently file and remit use tax to its
20 state. That's the state of the law.
21 This state of the law, however, has
22 created some significant concerns among the
95
1 stateholders in the process.
2 First of all, local vendors see
3 this as a competitive disadvantage. If they
4 have to go up against a remote vendor that
5 does not have collect sales tax, they see
6 this as a marketing issue. If the remote
7 vendor can say, look, we can put on our Web
8 page, "No sales tax collected," the local
9 vendor, they believe that this gives them a
10 competitive disadvantage in the marketplace.
11 Secondly, the remote vendors say,
12 we cannot be forced to be submitted to this
13 collection system. It's way too expensive.
14 It's way too cumbersome. It's way too
15 burdensome. And it puts us at risk of all
16 sorts of other taxes. If we're required to
17 collect and remit sales and use tax, what
18 does that mean for other types of taxes?
19 Does that mean that we have to be subject to
20 the income tax, to other types of business
21 activity tax?
22 So the remote vendors have a
96
1 significant concern about any type of
2 expansion in the sales and use tax system.
3 Finally, the states and the other
4 taxing jurisdictions have significant
5 concerns about their tax base, about the
6 erosion of the tax base, and about the loss
7 of their local retailers.
8 So this is the triangle that COST
9 was subjected to in trying to come up with a
10 practical solution. As a result of this
11 triangle, we came up with three ideas that we
12 think are the only practical solution to this
13 system.
14 First of all, any solution has to
15 be voluntary. It has to be voluntary because
16 this keeps the parties from being polarized
17 into extreme positions. As long as it is
18 voluntary, then all of the stakeholders, they
19 can decide just how much needs to be done to
20 make the system work.
21 Secondly, there has to be
22 significant incentives to get remote vendors
97
1 to voluntarily collect and remit. These
2 incentives include a whole myriad of
3 possibilities.
4 First of all, there has to be
5 simplification. And I'm talking about
6 radical simplification. The simplification
7 itself will drastically reduce the financial
8 burden and the risk on remote vendors and
9 local vendors on collecting in the current
10 sales and use tax system.
11 Secondly, there has to be some type
12 of vendor allowance. This is some type of
13 payment that the vendor gets because of the
14 cost of administrating this system. Right
15 now, I don't know exactly what that payment
16 would be. It would depend on how far the
17 simplification went. But it would be
18 basically a way to lower the cost on both the
19 remote vendors and the local vendors of
20 collecting the sales and use tax for the
21 state.
22 There would also be some type of
98
1 protections under this incentive system so
2 that there would not be increased risk of
3 other types of taxes, increased risk of
4 income taxes or other business activity
5 taxes.
6 Finally the system says we should
7 have some type of test period. This is a
8 voluntary program, and if we let it continue
9 forever, people can get caught up in the
10 minutiae. If there is a specific test period
11 in which the states and the vendors can come
12 together and say this is a system that we
13 think will work, and then give the system
14 three years to see how many vendors really
15 will participate, maybe 80 percent of the
16 vendors will participate, and maybe the
17 taxing jurisdictions will say, "You know,
18 that's good enough. We don't need that extra
19 20 percent." Maybe 60 percent will
20 participate and the states will say, "You
21 know, that's not enough. We have to increase
22 our incentives. We have to do something to
99
1 get more of the vendors to participate."
2 That's the best way to level the
3 playing field, to bring as many members
4 voluntarily into the system as possible until
5 some type of equilibrium is reached.
6 Now, there's been a lot of talk on
7 this panel about the technological solution.
8 We think technology is an important part of
9 this simplification and incentive concept.
10 However, we don't think that it can be a
11 significant part at this point in time. We
12 don't think it's a panacea, that it can in
13 any way be substituted for the simplification
14 and the other incentives.
15 The business community believes
16 that the technology itself could be very
17 expensive to implement by the vendors. Much
18 of this technology is itself some type of
19 bolt-on, so that it has to coexist with an
20 existing computer system, with existing
21 coding systems. We see that as an important
22 part, but not the entire system.
100
1 And finally, we have to have some
2 type of education and perhaps incentives for
3 the consumers. In this voluntary system,
4 it's possible that not all vendors are going
5 to voluntarily remit. There will be some
6 vendors who it's too expensive or they're
7 just not sophisticated enough or it's too
8 difficult to voluntarily remit. And in those
9 situations, consumers should be encouraged to
10 file their own use tax returns. It was
11 mentioned earlier about Michigan; Michigan is
12 going forward on this.
13 Education can do wonders for the
14 individual consumer. We have a whole history
15 in this country of voluntary compliance with
16 our tax systems. Other items can be created
17 to encourage consumers to comply, some type
18 of federal credit that consumers who
19 voluntarily remit. That would be the same as
20 a vendor allowance to compensate the consumer
21 for their filing costs.
22 And with that, I will end my
101
1 presentation. Thank you very much for
2 allowing COST to speak.
3 CHAIRMAN GILMORE: Thank you, Ms. Smith.
4 The last presentation is "Simplification of
5 the State and" -- last for this group.
6 There's still another panel left for this
7 morning's session after a break and after a
8 Q&A. But last on this group is,
9 "Simplification of the State and Local Sales
10 and Use Tax System," by Mr. Joseph Crosby of
11 Ernst & Young, the National Director of State
12 Tax Legislative Services on behalf of the
13 E-commerce Coalition."
14 Mr. Crosby?
15 MR. CROSBY: Chairman Gilmore,
16 Commissioners, thank you very much for the
17 opportunity to speak to you today. I'm going
18 to keep my remarks short, in small part
19 because you've heard a lot already and are
20 probably getting fairly tired of us speaking,
21 but in large part, because I'm afraid of
22 piquing Mayor Kirk's interest too much if I
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1 continue on for long.
2 The E-commerce Coalition is
3 comprised of businesses in the financial,
4 technology and retail sectors of the economy,
5 and the E-commerce Coalition is dedicated to
6 providing a sound tax policy on E-commerce
7 taxation issues.
8 As you're well aware, there's a
9 critical difference between taxation of the
10 Internet and taxation of transactions that
11 occur over the Internet. Of course, the
12 Internet itself is already taxed through a
13 variety of mechanisms, most notably taxes on
14 telecommunications, and in some locales,
15 taxes on Internet access.
16 The E-commerce Coalition is opposed
17 to taxes that are unique to or specifically
18 directed at the Internet, such as Internet
19 access taxes.
20 Transactions that occur over the
21 Internet, of course, are also taxed. All
22 transactions that are currently taxable in
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1 the real world are also taxable on the
2 Internet.
3 Of course, we're aware that remote
4 sellers, including some Internet vendors,
5 currently aren't required to collect those
6 taxes, and that individual consumers rarely
7 remit use taxes to their states, and states
8 rarely seek to enforce the use tax against
9 these consumers. So, for states and local
10 governments, it's clearly an issue of the
11 uncollected tax on remote and Internet sales.
12 The question is, is this
13 uncollected tax the fundamental problem? Is
14 that the issue that you've been asked to
15 address here? How to seek to get the monies
16 that go uncollected. Or is it, rather, that
17 this is the result of a more fundamental
18 problem, which is that the current sales and
19 use tax system, when taken collectively,
20 poses and objectionable burden upon
21 interstate commerce.
22 I would submit that, indeed, it is
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1 this that is the fundamental problem, that is
2 an objectionable burden on interstate
3 commerce, and that uncollected tax is merely
4 one result of this underlying problem.
5 There are numerous other results
6 from this, including when viewed from the
7 perspective of taxation strictly, a
8 competitive advantage provided to some
9 vendors vis-a-vis competitors.
10 This fundamental issue, that the
11 sales and use tax system is overburdensome is
12 not new to you. We've discussed it all
13 morning long. The fact bears repeating,
14 however, because you will hear and have
15 already heard from other presenters that will
16 suggest cures for this that are actually
17 worse than disease, that treating the
18 symptoms is not an appropriate approach, and
19 that it is simplification that is the key and
20 the only solution to this issue.
21 Simplification is the only solution
22 that removes this objectionable burden upon
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1 interstate commerce. It's the only solution
2 that can lead to a level playing field, which
3 I define as an equitable, consistent, easily
4 administered and technologically-neutral
5 sales and use tax system.
6 In our proposal, which you have
7 before you, we've identified a number of
8 simplifications, such as uniform definitions
9 or classifications for the tax base as
10 Charles McLure mentioned earlier today in his
11 presentation.
12 Some of these simplifications can
13 only occur though policy changes. Others can
14 be accomplished through technology, such as
15 calculation of tax rates. I heard the
16 discussion earlier from Taxware and Taxware,
17 indeed, is a vendor of tax software that
18 provides great benefit to many companies in
19 assisting them with sales and use tax
20 determinations, collections, remissions and
21 the like. Many other companies, including
22 Ernst & Young, do similar things for clients.
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1 I was interested, though, in the
2 last slide that we saw. There was what I
3 thought as a huge leap and, I think, an
4 important issue when discussing technology
5 generally, in that right now Taxware is
6 proposing and sells software to clients that
7 help them determine tax.
8 The merchant still collects all the
9 money. The merchant still remits the tax.
10 The last slide that was presented showed a
11 new line, and that new line is, all of a
12 sudden, Taxware is going to handle all of the
13 transactions, hundreds of millions of which
14 occur in a given week, and more importantly,
15 all the money is going to flow through
16 Taxware. I think that's an important thing
17 that needs to be considered before one tries
18 to bolt on a software solution to a trusted
19 third party.
20 Regardless, though, of the final
21 mix of statutory changes and software that is
22 adopted, efforts to simplify the system must
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1 be state led, as we've heard earlier today.
2 We commend members of the state and local
3 government community, which have started to
4 think constructively about this issue, and
5 indeed, many which have been thinking
6 constructively about this issue for some
7 time.
8 It may be desirable, however, for
9 the federal government to get involved, for
10 Congress for both the states and the business
11 community, for Congress to assist in the
12 effort by defining what true simplification
13 really is. That may not be the case, but we
14 think at this point in time that it might be
15 worthwhile for Congress to get involved in a
16 bare-bones level, again, as Dr. McLure
17 mentioned earlier today.
18 Having just commended those in
19 state and local government, however, I cannot
20 help but take this opportunity to provide a
21 criticism of the proposal that's been
22 developed by the National Governors'
108
1 Association and other members of the state
2 and local government community.
3 The basic premise of the NGA
4 proposal is that vendors should be removed
5 from the system altogether. Although this is
6 an admirable goal in and of itself, I think
7 it's fundamentally flawed. The vendor is
8 currently the only party to the transaction
9 that has the information that's necessary to
10 determine whether a transaction is taxable,
11 what the tax is that should be appropriately
12 determined, et cetera.
13 Removing the vendor from the
14 process requires that a brand new party, a
15 trusted third party, be inserted in the
16 middle of market-determined, rather than
17 government mandated processes. This new
18 entity adds not only complexity to the
19 system, but is, worse, distorting currently
20 efficient marketplaces solely for the purpose
21 of collecting, calculating, and remitting
22 tax.
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1 A far better approach would be
2 first to admit that the vendor has to play a
3 role in any tax collection scheme. Second,
4 to reduce the burden on the vendor to the
5 greatest extent possible by simplifying the
6 current burdensome system. Then, third,
7 compensating vendors with a meaningful vendor
8 compensation for whatever costs are left
9 over, whatever costs are incurred by the
10 vendor, in adopting such a system.
11 So long as the NGA proposal clings
12 to the premise that vendors need not play a
13 meaningful role in the system, it will
14 inevitably have an intrusive and, I believe,
15 detrimental effect on the existing market
16 processes and the parties involved in those
17 processes. Simplification, not market
18 distortion, is the solution to this issue.
19 I realize that some of you are not
20 satisfied with the discussion of simplifying
21 the current system. For some, this is a
22 broader debate concerning issues of state
110
1 power and federalism. For others, it's a
2 more fundamental question of whether or not
3 the Internet should be taxed.
4 Although the E-commerce Coalition
5 recognizes the saliency of these issues,
6 we've decided to focus on the present laws,
7 the laws which together constitute an
8 objectionable burden on interstate commerce.
9 Simplification is the key to
10 reducing that burden. It's the key to
11 providing a level playing field for all forms
12 of commerce and to ensuring the stability of
13 the state and local revenue structure. If
14 the laws were not as complex as they are, we
15 may never have had a decision in Bellas Hess;
16 we may never have had a decision in Quill.
17 We might no even have an advisory commission
18 on electronic commerce, and we probably
19 wouldn't be having this debate here today.
20 Simplification is the key to
21 solving the problem. Thank you very much.
22 CHAIRMAN GILMORE: Thank you,
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1 Mr. Crosby. Time now for questions and
2 answers and open discussion. Mr. Andal, you
3 begin.
4 MR. ANDAL: Yes, I'm going to
5 address, just for the sake of clarity, I'll
6 address my questions for the NGA to Governor
7 Janklow.
8 First thing I need to say is that I
9 love your state. I visited the first time
10 this year with my little boy. It was a
11 journey into the past. My great-grandfather
12 immigrated to Elm Springs, South Dakota,
13 years ago.
14 After listening to your remarks, I
15 wondered if we were in disagreement. My
16 proposal, which is different from some of the
17 others offered, deals almost exclusively with
18 the nexus question. You made the comment
19 that you only wanted to tax sales when you
20 had nexus, when you had nexus under current
21 standard.
22 I don't disagree that you ought to
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1 be able. At least, my proposal doesn't
2 disagree with the idea that if a sale occurs
3 in your state on the Internet, you can tax
4 it. My proposal doesn't exclude you from
5 doing that. My proposal only deals with the
6 nexus question.
7 I'm wondering if you agree with
8 Quill and my proposal pretty much just
9 codifies Quill. Do you agree with my
10 proposal?
11 GOVERNOR JANKLOW: One, I'm not familiar
12 with your proposal. Two, I'm willing to live
13 under Quill, but I don't agree with Quill.
14 MR. ANDAL: I see.
15 GOVERNOR JANKLOW: I don't agree with
16 it. I don't agree with Quill, but I'm
17 willing to live under that decision. I don't
18 think anything this Commission does or has
19 been charged with by Congress was to change
20 the substantive law that deals with Quill.
21 MR. ANDAL: Right.
22 GOVERNOR JANKLOW: I thought we were
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1 going to look at electronic commerce. Please
2 understand, sir and this is a slight
3 editorial but let me give you four
4 categories: K-12 education, higher
5 education, Title 19 for the people who can't
6 afford medical care, and the prison system,
7 take up 75 percent of my state's entire
8 budget. The general fund takes up 75
9 percent.
10 These aren't things that we can
11 fool around with.
12 MR. ANDAL: No, I'm very familiar
13 with those needs. I was a state legislator
14 in California, and so I've dealt with all
15 those questions before.
16 Interestingly enough, our tax
17 system is very different than yours. The
18 sales tax is our third tax. Property and
19 income taxes, in California, anyway, bring in
20 more than the sales tax.
21 GOVERNOR JANKLOW: The average farm
22 ground in my state for the whole state is
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1 worth $300 an acre. In this state, it's
2 probably $3,000 an acre.
3 MR. ANDAL: That's right. Let me
4 ask you: I think one of the fundamental
5 problems with your technological approach is
6 and maybe it's not. Maybe it's a matter of
7 timing. Maybe it's a lack of detail.
8 The real problem we face right now
9 with compliance is a uniform tax base. Do
10 you think your technological solution works
11 without having that uniform tax base? In
12 other words, every state agreeing on what's
13 taxable and not taxable? Or do you think
14 that your technological solution depends on
15 that uniform tax base being accomplished?
16 GOVERNOR JANKLOW: Sir, I believe it
17 could go either way. I'm a human being that
18 does not underestimate the ability of human
19 beings to sit down, utilizing technology to
20 solve problems. I really believe we don't
21 have an answer today, and some of these
22 software approaches that people talk about I
115
1 don't think really fit.
2 They'd like it to fit because
3 they'd like to sell a product, but it doesn't
4 really fit. But technology has never been
5 asked to solve this problem yet because of
6 the way we do business in America. If we
7 were to ever say, here's the problem,
8 software community. Go out and see if you
9 can bring a solution, I really believe they
10 could bring it very quickly, one. Two, I
11 think people like Sears have come a long ways
12 towards doing this.
13 In my state, Sears gets taxed on
14 sales three different ways. When I say
15 taxed, imposing the tax on citizens. We have
16 a 4 percent sales tax at the state level, and
17 communities can put up to two at their
18 option. Some communities have adopted one
19 cent, others have adopted the two.
20 So, three different Sears stores in
21 my state can have three different rates, and
22 they do it by zip code and they do it very
116
1 well. I don't know how Sears does it, but I
2 can tell you, sir, that the technology, we've
3 never asked the technological community to
4 solve this, and they've been able to solve
5 every problem we've ever had addressed to us.
6 I've got to believe that they could do this.
7 MR. ANDAL: Sears, of course, has
8 physical presence and nexus, and thus knows
9 where the sale takes place.
10 GOVERNOR JANKLOW: Sir, that honestly
11 isn't what's taking place any more. Let me
12 give you a classic example: Cabella's. Some
13 of you may be familiar. They mail out 66
14 million catalogues a year. Cabella's has two
15 operations.
16 They have a store operation, a
17 bricks and mortar operation, and they have a
18 catalogue operation, an Internet operation.
19 They are two separate corporations. You can
20 go into a Cabella's store and order off the
21 catalogue. If you buy something from the
22 catalogue, you can go into the Cabella's
117
1 store and return the merchandise and get a
2 credit for it or exchange it.
3 But they maintain two completely
4 separate legal entities. One has nexus, the
5 other doesn't. The names are slightly
6 different, but they have two different
7 nexuses when it comes to dealing with this
8 type of situation.
9 Michigan and Wisconsin, by the way,
10 and now Minnesota and Wisconsin tax one of
11 their deals, but not the other one.
12 MR. ANDAL: Again, I'd refer you to
13 my proposal, because under my proposal
14 returns would create physical presence and
15 nexus, and thus allow you to tax it.
16 But my fundamental question is,
17 what if you don't know where the customer is?
18 The Internet is significantly different from
19 other types of sales. In other words, you
20 don't require the Main Street merchant to
21 know where his customer is. They come in,
22 they buy it, they take it out. No obligation
118
1 is there. If you want an even playing field,
2 for instance, we don't ask Main Street
3 merchants to collect information on their
4 customers and where they live.
5 GOVERNOR JANKLOW: Look, sir. Even
6 though we have rules and referees, some
7 players still cheat. But when you have
8 referees and you have a good set of rules,
9 you eliminate a lot of cheating, one, and
10 two, you still have to deliver the goods. If
11 it's a physical sale, you still have to
12 deliver the goods.
13 Now, you may not get them all. But
14 the fact of the matter is we're not getting
15 any now. Under the proposal of some people,
16 we never would get any. All I'm suggesting
17 is we shouldn't wreck what's going on. Why
18 should somebody want to force my state into
19 an income tax? Isn't that our business in
20 South Dakota? I'm not saying you do.
21 MR. ANDAL: No, absolutely.
22 GOVERNOR JANKLOW: But I'm saying by
119
1 doing what some people are doing, you're
2 going to force us "you" plural, not singular,
3 are going to force us to do things my state,
4 as a matter of policy, doesn't want to do.
5 This is a state made up of 50 separate
6 laboratories, as Justice Brandeis said 80
7 years ago. We have 50 laboratories that
8 really, really bring about a lot of good
9 things. The states compete with each other.
10 MR. ANDAL: Yes, I have no
11 objection to South Dakota taxing South Dakota
12 residents.
13 GOVERNOR JANKLOW: That's all I want to
14 do, sir.
15 MR. ANDAL: Where I disagree is you
16 forcing California companies to collect your
17 sales tax for you. That's where our
18 disagreement lies.
19 Are you familiar with what a dock
20 sale is?
21 GOVERNOR JANKLOW: Spell the word. I
22 don't?
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1 MR. ANDAL: Yes.
2 GOVERNOR JANKLOW: D-o-c-k or d-o-t?
3 MR. ANDAL: D-o-c-k.
4 GOVERNOR JANKLOW: Yes, sir.
5 MR. ANDAL: A dock sale is pretty
6 much where you buy a product and it's not
7 delivered to your home or your business, but
8 it's delivered to a warehouse or somewhere
9 else, and you go pick it up.
10 It's the sale of tangible personal
11 property, but you do not have to give your
12 address. All you have to do is pay for it
13 and pick it up at the dock. That is a
14 tangible personal property sale where having
15 the address of the customer is not necessary.
16 These are the types of problems I
17 think you have in your technological
18 approach. It sounds to me like you're a
19 pretty straightforward fellow. It sounds to
20 me like you're saying that you believe a
21 technological solution will be possible in
22 the future, but it's not ready now.
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1 GOVERNOR JANKLOW: I don't think
2 technology can can solve everything. I don't
3 think we've been asked to do it. We never
4 approached the AIDS situation until it was a
5 panic. Look what has been discovered in
6 medical technology.
7 Look what has been discovered in
8 gene tapping and the human body, just in
9 doing that type of research on a crash basis.
10 Look at the spin-off that came from America's
11 spaceship program when we became afraid of
12 the Russians because they put up Sputnik.
13 Huge responses. I don't think this is all
14 that complex a problem. People haven't been
15 asked to solve it. Look, if they get asked
16 to solve it and can't, then we can always
17 say, don't do it. But let's give somebody a
18 chance before we say no.
19 MR. ANDAL: I'll cede my time, but
20 in your view, have you solved the problem?
21 GOVERNOR JANKLOW: Have we solved the
22 problem? No, because everybody says we can't
122
1 deal with it. I'm willing to live with
2 Quill, because there's another way,
3 ultimately, there's a way states can deal
4 with this, because frankly these proposals
5 that say no tax aren't going to get through
6 Congress, either. There's going to be a
7 stalemate. The bottom line is we're going to
8 start stopping little brown trucks, and we're
9 going to start examining the packages.
10 People can talk privacy all they
11 want, but there's nothing that stops, there's
12 nothing that stops our Highway Patrol from
13 stopping those white and brown trucks in my
14 state and going through the packages and then
15 just following them back. I'll tell you, we can
16 disrupt enough commerce so that there is an
17 interstate commerce problem, and you can
18 still prevent Congress from passing it,
19 because all it takes is one more than is
20 necessary to cut off cloture to stop
21 something in the Senate.
22 The Senate is the great equalizer
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1 because, frankly, my state doesn't have much
2 horsepower, but we've got two Senators, just
3 like California. We've got one Congressman,
4 and you've got 45.
5 CHAIRMAN GILMORE: Mr. Parsons?
6 MR. PARSONS: Just to be clear,
7 Governor Janklow, because I'm listening and
8 with so many presenters, one gets confused.
9 What are you proposing, other than a simple
10 lifting of the ban?
11 GOVERNOR JANKLOW: I'm here to prevent
12 what some people are talking about doing to
13 us with suggestions that may come out of this
14 Commission and go forward to Congress. There
15 are some people, frankly, in my party in the
16 Congress that are working very, very hard to
17 becoming a minority leadership. I want to
18 help. I want to help prevent that from
19 happening to them. I'm here to save them
20 from themselves.
21 MR. PARSONS: I'm sure they're
22 pleased to know that. But from the point of
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1 view of this Commission.
2 GOVERNOR JANKLOW: They don't know?
3 They don't know they're terminal yet.
4 MR. PARSONS: From the point of
5 view of the Commission, there right now is
6 sort of a temporary freeze on states, you
7 know, sort of taxing commerce on the
8 Internet.
9 As I listened to your proposal and
10 the colloquy we've had, I'm trying to figure
11 out what you're advocating beyond simply
12 letting that lapse and letting the states,
13 you know, under Quill do what they want to
14 do. Is that your proposal?
15 GOVERNOR JANKLOW: That's a fair
16 question, sir. I've got two objectives being
17 here. One, I'm concerned about what some
18 suggestions are for proposed legislation. I
19 want to stop some things bad from happening.
20 I may not like my current environment, but
21 it's better than what some people are
22 proposing to do in addition to it. That's
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1 the first thing.
2 The second thing, sir, that I'm
3 really concerned about, also, is that I think
4 that this is a developing area. The Quill
5 decision in nexus. I mean, the Supreme Court
6 did not say in Quill that you can't visit
7 this area again.
8 They invited the states to do
9 something. They invited the states to do
10 something in the Quill decision. In the
11 Bellas Hess decision they didn't say, no,
12 never, not ever. They left openings. So the
13 only point that I'm making is, as this
14 technology explosion continues, and it will,
15 and as it brings magnificent benefits to
16 everybody, and it frankly drives productivity
17 in America that continues in spite of a lot
18 of bad things we have going on to drive us
19 economically up, as all these things happen,
20 let's let the dust settle a little more
21 before we make dramatic changes.
22 I'm willing to live with the
126
1 existing Quill rules as things develop,
2 because I think over time a lot of this will
3 flesh out, and we should not rush into doing
4 something my way or somebody else's way.
5 MR. PARSONS: So, in effect, if the
6 net net result of all this was to simply let the
7 moratorium terminate with no additional
8 recommendations of legislation.
9 GOVERNOR JANKLOW: I'd be out of your
10 hair, sir. I'd be out let us do things our
11 own way in South Dakota.
12 CHAIRMAN GILMORE: Both Governor Locke
13 and Governor Leavit have questions, but I
14 have one, too.
15 Let me ask you, Governor Janklow.
16 With the idea here of stopping little brown
17 trucks and so on like that, surely that is
18 exactly why the Constitution was created,
19 wasn't it? So that we could avoid the
20 Articles of Confederation and get away from
21 the idea that each individual state would try
22 to impose its own system on interstate
127
1 commerce, isn't that right?
2 GOVERNOR JANKLOW: No, no.
3 CHAIRMAN GILMORE: It's not right?
4 GOVERNOR JANKLOW: With respect to the
5 interstate commerce was one of many problems
6 that there were with the Articles of
7 Confederation. States running post offices.
8 Sending ambassadors to France. Putting
9 duties on each other's goods. Raising
10 armies. There were a whole host of things.
11 Commerce, obviously, was one of them.
12 There's no question about that, one.
13 Two, we have always had the
14 authority to stop the little brown trucks.
15 What I may do in that regard is not new. All
16 I'm trying to do is to make sure that our
17 state has the ability to collect the taxes
18 from our citizens that are buying goods to be
19 delivered in South Dakota. That is not
20 interfering with interstate commerce at all.
21 Now, there are merchants out of my
22 state that don't like it. There are
128
1 merchants that don't like it. But that's not
2 interfering with interstate commerce.
3 CHAIRMAN GILMORE: We agree that the
4 Congress, if they think that the individual
5 action of the state is a burden on interstate
6 commerce, would have the ability to legislate
7 that.
8 GOVERNOR JANKLOW: Absolutely, sir.
9 CHAIRMAN GILMORE: Absolutely.
10 GOVERNOR JANKLOW: Absolutely. If they
11 can get 51 U.S. Senators, they can do it.
12 But they won't.
13 CHAIRMAN GILMORE: I think they would be
14 very interested in the idea that each
15 individual state has the ability to set up
16 barriers between states. I doubt seriously
17 that that's the law, and I doubt seriously
18 there's a need for a legislation, but if so,
19 I would imagine the Congress would act
20 decisively.
21 GOVERNOR JANKLOW: I agree. This isn't
22 a barrier in commerce between states, sir.
129
1 All it's doing is allow states to do what
2 they have to do to educate their kids, to
3 take care of the handicapped, to maintain the
4 public prisons, to maintain the public mental
5 health hospitals, deal with adjustment
6 training centers, and carry on state
7 functions without giving the shaft to a
8 portion of the citizens in the state at the
9 expense of others who choose to buy a
10 different way.
11 CHAIRMAN GILMORE: How are sales taxes
12 doing? How are sales taxes doing in South
13 Dakota? Are they up, down, level?
14 GOVERNOR JANKLOW: They're like every
15 place else in America, they're up, sir.
16 CHAIRMAN GILMORE: They're up.
17 E-commerce is going on and has been going on
18 and is rising. Do you have any empirical
19 evidence that says that the sales tax
20 collections in South Dakota or anywhere else
21 in America is going down as a result of
22 E-commerce.
130
1 GOVERNOR JANKLOW: That isn't the issue,
2 sir. That's not the issue.
3 CHAIRMAN GILMORE: I think it is the
4 issue, but go ahead.
5 GOVERNOR JANKLOW: I believe, sir, the
6 issue is not is it going down because of
7 E-commerce. Is it being stifled in its
8 collections and is it less than it should be
9 in going up because of E-commerce, and is
10 E-commerce giving an unfair advantage to
11 those people who are utilizing E-commerce at
12 the expense of other commerce? So the real
13 issue isn't are tax collections up 6 percent
14 in my state.
15 The question is would they have
16 gone up 9 percent if we had been getting the
17 money from E-commerce, which would have given
18 governors like you and I, because you're a
19 tax cutter and so am I, would it had given
20 you and I the ability to lower the overall
21 taxes for all our people?
22 CHAIRMAN GILMORE: The -- the discussion
131
1 that's gone on for the last two days has been
2 an assertion that if E-commerce is not taxed
3 and collected in an effective way, that it is
4 going to destroy the sales tax system. I
5 think you're alluding to that here today, as
6 well. Is there any evidence that that's
7 going on? Any empirical evidence at all?
8 GOVERNOR JANKLOW: Sir, I think the
9 answer to that is yes. Do you know what the
10 biggest example of it is? All these people
11 that are insisting that we shouldn't be able
12 to do it. They know where this freight train
13 is headed, and that's why they want to insist
14 that they not have to play by the rules
15 everybody else has to play by and they want a
16 special exemption carved out for themselves.
17 That's my empirical evidence.
18 It's not that I have a dollar
19 number, because, frankly, I can't get it. If
20 I want to go to Lands End and find out how
21 much they're not collecting and sending to my
22 state, they won't tell me. Under the Quill
132
1 decision, I can't make them tell me. So,
2 nobody can gather the empirical evidence for
3 those types of things under the current
4 circumstances. I accept that. But the fact
5 that all these people are insisting that they
6 don't want to collect the taxes from my
7 citizens and the other state citizens is
8 proof that they know where this is all
9 headed.
10 CHAIRMAN GILMORE: Let's go to Governor
11 Locke.
12 GOVERNOR LOCKE: I think Mr. Parsons
13 yesterday kind of asked a really good
14 question in terms of where is the Commission
15 headed and what are some of the choices that
16 we have before us. The moratorium prohibits
17 any new taxes on the Internet. The
18 moratorium will expire.
19 When the moratorium expires, unless
20 Congress does something, it appears that the
21 states' local jurisdictions could impose or
22 reimpose bit taxes or taxes just to get onto
133
1 the Internet. It appears now that states
2 will not be able to, or local governments,
3 given the Quill and Bellas Hess decision,
4 ever try to collect taxes on transactions
5 from remote sales, whether by catalogue or by
6 the Internet.
7 So, you know, I think we should
8 make it clear that if the moratorium expires
9 there will not and there cannot be a mad rush
10 to impose sales tax on transactions that are
11 from another state that are conducted by
12 E-commerce. There may be, however, attempts
13 by local jurisdictions, cities, counties,
14 utility districts or states, to impose
15 Internet access charges or taxes just to use
16 the Internet. I think many of the people on
17 this Commission are opposed to that type of
18 taxation.
19 The governor here, Governor Janklow
20 and others, are arguing that they want to
21 maintain the status quo with respect to
22 Internet commerce within their own states,
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1 and that if someone is using Internet
2 commerce within their state from a company
3 within the state, or where there is strong
4 physical nexus, that the state should be able
5 to continue taxing, which is right now the
6 law.
7 It seems that there are some
8 proposals to overturn Quill, and basically,
9 from some of the presentations, say that even
10 if it's a remote sales, and it's done by
11 electronic commerce, that that's
12 discriminatory against Main Street, and that
13 the states and local governments should have
14 the ability to extend sales tax to those
15 transactions.
16 Then there are others who have made
17 presentations who say that even if it's
18 within the state and even if it's truly nexus
19 within the state, a company is located in the
20 state, the consumer is within that same state
21 and that consumer wants to buy something
22 using electronic commerce, that there should
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1 be no tax on that.
2 But I've heard a lot of people here
3 saying, even with the governor's and the
4 local government's and the county's proposal,
5 that they're not seeking to overturn Quill,
6 but really seek the status quo and don't want
7 any changes from the status quo, other than,
8 for instance, prohibiting taxes on access to
9 the Internet.
10 I guess I have a question, then,
11 with respect to the notion of Quill, and I
12 think it deals with Mr. Andal's proposal to
13 codify Quill. If Quill is the law of the
14 land, and Bellas Hess is the law of the land,
15 which says that a remote seller, whether by
16 catalogue or by E-commerce, has no duty to
17 collect a tax on behalf of South Dakota,
18 selling into the state of South Dakota, do we
19 really need, number one, to codify Quill if
20 it's already the law of the land? Number
21 two, if we try to codify Quill, will not
22 there be some more litigation, more
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1 complexity, because you put on a different
2 word, you try to codify Quill, because the
3 states now know how to deal with Quill. We
4 know what we can or cannot tax. We know what
5 to try not to tax or what to try to tax and
6 what not to try to tax. If we put it in, try
7 to codify it, does that create even more
8 uncertainty, a whole new round of litigation,
9 and create more complexity within the
10 business community among those who are
11 arguing just for tax simplification?
12 So, I guess maybe I would ask the
13 question perhaps to Mr. McLure, others, or
14 Mr. Merrill and Mr. McArthur, who have been
15 working on these issues of just simply tax
16 simplification and whether or not trying to
17 codify Quill would open up a hornet's nest,
18 and whether or not Mr. Andal's proposal is
19 truly a codification of Quill or goes beyond,
20 and might interject a new round of
21 litigation, complexity and uncertainty?
22 CHAIRMAN GILMORE: Does anyone have a
137
1 comment on that question? Mr. McLure.
2 MR. MCLURE: From an economic point
3 of view, the Quill decision makes no sense.
4 It is perhaps necessary and appropriate,
5 given the complexity of this existing state
6 sales and use tax. If this Commission or
7 this nation doesn't have the will to address
8 the complexity and simplify the system to the
9 point that a destination-based tax is
10 feasible, that is, the placing of use taxes
11 by remote vendors, then yes, perhaps
12 codification of Quill would be appropriate.
13 But the bottom line is that's not
14 the right answer, because that still leaves
15 local merchants at a competitive
16 disadvantage, and also creates opportunities
17 for reducing sales taxes, collections. For
18 example, through the use of
19 separately-chartered out-of-state
20 subsidiaries that managed to walk the tight
21 rope and not establish nexus.
22 So, the short answer is if you're
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1 going to keep the mess we have, yeah, codify
2 it so that it becomes tax avoidance instead
3 of tax evasion.
4 On the other hand, what somebody
5 should do is to fix the system so that
6 everybody is treated the same, that the
7 system is simple enough to be enforced.
8 CHAIRMAN GILMORE: We have seven more
9 people who are on the list to ask questions
10 of the panel, so if the questions could be
11 expeditious, I think we'll be able to do this
12 a lot better and a lot more thoroughly.
13 Governor Leavitt is next.
14 GOVERNOR LEAVITT: Governor, with your
15 permission I'd like to ask two. One is I'd
16 like to hear, if I could, Dan Bucks’ and/or
17 Harley Duncan's opinion on Governor Locke's
18 question. I think that this is a critical
19 question.
20 Then I have a question I'd like to
21 ask Gene Lebrun about the -- the length of
22 time in which this kind of a system would
139
1 take to undertake. They are, I think,
2 qualified as experts on this point.
3 GOVERNOR JANKLOW: Mr. Chairman, may I
4 respond to one thing, please? I'll be very
5 brief. Governor Locke. Two things.
6 One: Nexus is different things for
7 different issues dealing with the Internet.
8 States are struggling to pass pornography
9 laws to deal with protecting citizens from
10 what's sent to them remotely from other
11 states. The criminal law is developing that
12 states that can get nexus very quickly and
13 very easily, or far more easily than they can
14 in a commercial sense.
15 The second thing is that Web pages
16 that go up and things that are transmitted
17 over the Internet, even from someone
18 remotely, are being subjected to libel laws
19 within states, even in changing international
20 shoe type decisions and their progeny, as
21 this stuff starts to expand. So, really it
22 depends on the issue as to how it's expanding
140
1 for nexus.
2 Quill is slightly different than
3 Bellas Hess. I mean, these things are
4 evolving. So, my only comment is that all
5 this electronic stuff, nexus is different
6 things for different issues, and it continues
7 to evolve, and that's healthy. We in
8 American can live with that.
9 GOVERNOR LEAVITT: Maybe I could
10 redirect my question. Maybe just one -- Dan,
11 maybe you could address it. I would like to
12 hear Wally Hellerstein's opinion on that, as
13 well.
14 Why don't we go ahead? Is he here?
15 GOVERNOR GILMORE: Governor, who is
16 Wally Hellerstein?
17 GOVERNOR LEAVITT: He's one of our
18 experts.
19 MR. HELLERSTEIN: Governor Leavitt,
20 you'd like the answer to the question as to
21 whether or not the proposal --
22 GOVERNOR LEAVITT: The question is would
141
1 it help to codify Quill?
2 MR. HELLERSTEIN: I don't think it
3 would be of any help to codify Quill if you
4 simply said Quill is the law of the land
5 because Quill still raises as many questions
6 as a statutory proposition as it does as a
7 constitutional proposition.
8 GOVERNOR LEAVITT: If we opened up a
9 whole new round of litigation it would not
10 help us with this?
11 MR. HELLERSTEIN: If you codified
12 the law as established by the Supreme Court
13 you would simply be making a statute out of
14 something that is not a rule of
15 constitutional law. I think you could
16 clarify the rules regarding nexus, and you
17 could do it perhaps the way Dean Andal has
18 suggested. You could do it in a way that
19 would level the playing field.
20 Instead of having a physical
21 presence test, you could have a test that
22 said a minimum amount of sales. I thing you
142
1 could come up with a better rule than Quill,
2 a more sensible rule. But certainly just
3 codifying Quill itself makes no sense at all
4 to me.
5 GOVERNOR LEAVITT: Dan?
6 MR. BUCKS: Yes, Governor Leavitt
7 and members of the Commission, just one
8 simple point. The proposal, with all due
9 respect, the proposal before you to codify
10 Quill illustrates the problems of any
11 legislative effort of doing so, because it
12 does not codify Quill.
13 Nowhere did the U.S. Supreme Court
14 in that decision say that the standard was
15 substantial physical presence. They said
16 that a company had to have substantial nexus,
17 and an indicator was physical presence.
18 There's a very great difference, because what
19 the concept of putting the words into federal
20 law of "substantial physical presence" means
21 is you begin to weigh whether or not there is
22 enough physical presence, in terms of the
143
1 weight or the quantity or what have you.
2 That opens the door to extensive
3 litigation. That's just one example of the
4 difficulty of trying to put into statute
5 words that theoretically or
6 hypothetically codify Supreme Court
7 standards.
8 GOVERNOR LEAVITT: Can I just ask the
9 second part of my question?
10 CHAIRMAN GILMORE: Governor, I'm okay
11 with this, except that it's taking a long
12 time. I certainly will call on Mr. Lebrun in
13 order, but go ahead, Gene, if you could.
14 MR. LEBRUN: Very briefly. The
15 Uniform Laws Conferences, made up of
16 Commissioners from all 50 states, Puerto
17 Rico, the U.S. Virgin Islands and the
18 District of Columbia, has been in the
19 business of drafting uniform laws for
20 over 100 years. It has no power of
21 enactment, all we can do is make
22 recommendations to the states.
144
1 However, or track record, I think,
2 is pretty good. I think all of you are
3 familiar with the Uniform Commercial Code.
4 The process is not real quick, but
5 I think it's good. But we can act quite
6 quickly. An example would be the recently
7 drafted and enacted Uniform Interstate Family
8 Support Act. From the time it came before
9 the conference to do a drafting prior to the
10 time that it's been enacted, I think now in
11 all 50 states, is probably only three to four
12 years.
13 I think in terms of getting the
14 backing of such organizations as NCSL and the
15 governors and the mayors and the counties and
16 the business community, a project could be
17 undertaken to draft the type of
18 simplification we're talking about, and it
19 could be done quickly, and it could be
20 prepared for states to start enacting in a
21 year or two. I think that's the time that
22 we're looking at.
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1 CHAIRMAN GILMORE: Mr. Lebrun, do you
2 have you any reason to believe that the
3 states, at this point, are prepared to
4 cooperate on an NGA-type of proposal like the
5 one that's being talked about this morning?
6 MR. LEBRUN: I think the proposal
7 was supported by not just the NGA but also
8 the NCSL, the counties and the cities, it's a
9 strong indication that we could get that type
10 of broad support, yes.
11 CHAIRMAN GILMORE: Voluntary system.
12 For a voluntary system?
13 MR. LEBRUN: Yes.
14 CHAIRMAN GILMORE: The next one in line
15 is Mr. Norquist.
16 MR. NORQUIST: Governor, I was very
17 pleased to hear you talking about savings and
18 reducing spending in South Dakota, because
19 sometimes political leaders focused on this
20 see every dollar not collected in taxes as
21 something that can't go towards increasing
22 efficiency, but rather is going to have to be
146
1 raised somewhere else, as if there was some
2 fixed level of taxes and spending that has to
3 continue forever.
4 The savings that you've been able
5 to make in South Dakota show the way for
6 other politicians to perhaps look at their
7 own spending levels rather than at the
8 pockets of their citizens.
9 I was concerned that in this
10 discussion we didn't hear about the present
11 high level of taxes already levied on the
12 parts of the Internet, on telecommunications,
13 on the local and state governments putting
14 taxes on cable, and so on. I think we need
15 to keep in mind that the Internet is one of
16 the most heavily taxed institutions already,
17 never mind the question of whether we're
18 going to overturn the commerce clause and
19 start taxing distance commerce on the
20 Internet.
21 The chart that we saw in New York,
22 that some people have forgotten about, is
147
1 that 14.1 percent is the average state tax.
2 South Dakota is below that, about 9 percent,
3 for state and local taxes on
4 telecommunications. So, if we're worried
5 about the digital divide, one of the things
6 that we have to do is reduce the taxes now on
7 people's access to the Internet, both taxes
8 on cable, but also on telecommunications
9 industry.
10 I am hoping your comment about
11 sending out the police and going after FedEx
12 efforts was in jest, but I am interested when
13 brown trucks, okay. That's UPS? You
14 mentioned the growing support?
15 GOVERNOR JANKLOW: I either have to buy
16 stock in them or stop them.
17 MR. NORQUIST: I really hope that's
18 a joke. I don't want to live in a country
19 where political leaders take that approach
20 seriously, and I realize you're jesting.
21 You are right that there is a
22 growing sense in the Senate and in Congress
148
1 against taxing. Senator Hatch in Iowa just
2 signed the E-Freedom Declaration, committing
3 himself to supporting the current ban on
4 Internet access and sales and use taxes, and
5 will work to reduce and ultimately eliminate
6 discriminatory taxation of telecommunication
7 services.
8 So, I want to commend Senator Hatch
9 of Utah for his leadership on this, along
10 with Senator McCain's, and the growing
11 support in Congress.
12 When you say the National
13 Governors' Association has put forward this
14 proposal that people talked about, does that
15 mean all 50 governors endorsed it, and if
16 not, which ones have?
17 GOVERNOR JANKLOW: Sir, I believe I've
18 seen a letter that had 16 signatures. I
19 don't know what the total number of people is
20 that have endorsed it. But you've got to
21 understand something, sir. This isn't carved
22 in concrete. It's a proposal. Proposals,
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1 once they're subjected to the democratic
2 process, evolve into a lot of things. We
3 call them bells and whistles that get added.
4 We call them Christmas tree ornaments. A lot
5 of changes take place. It's a starting
6 point, and that's all it is.
7 Let me also explain, sir, you talk
8 about discriminatory taxes. I want to assure
9 you of something. Telecommunications in my
10 state is taxed at exactly the same rate as
11 everything else. Exactly the same rate as
12 everything else. No more, no less.
13 MR. NORQUIST: One of the things
14 that has been discussed here is extending
15 the 4-R rule, which says you can't have
16 discriminatory taxes on railroads, to
17 telecommunications. There are other states
18 that aren't as prudent as South Dakota that
19 have very heavy discriminatory taxes on
20 telecommunications. Would you support
21 efforts to reduce those? I want to get back
22 to that question of if the NGA endorses
150
1 something, but not all the governors are for
2 it, how did the NGA endorse this, and which
3 governors are for it and which ones are
4 against it?
5 GOVERNOR JANKLOW: Sir, I don't know
6 that. I've got a list here of 16, I can pass
7 it up to you, of the governors that have
8 signed it, and I don't know if there's any
9 more since, oh, it's December 14th, so I
10 assume not. I think that's the 16 that have
11 signed it, one.
12 Two: Sir, I'm glad you analogized
13 this to railroads, because railroads pay
14 property taxes. They pay income taxes in
15 states and they pay sales taxes. They pay
16 all three taxes. Those are the three legs of
17 the taxes that states' governments live on.
18 So it's a perfectly analogue, sir. Just
19 treat us in E-commerce like the railroads are
20 treated and you'll have no objection from me.
21 MR. NORQUIST: Which would include
22 federal prohibition of discriminatory taxes?
151
1 GOVERNOR JANKLOW: Absolutely. I'm not
2 in favor of federal prohibition of
3 discriminatory taxes. I'm in favor of state
4 prohibition of discriminatory taxes.
5 America can't survive commercially
6 if we discriminate in our tax policy. What's
7 being discussed by some people for this
8 Commission is a discriminatory policy that
9 says, if you do business over the Internet,
10 you don't have to collect and pay. But if
11 you do it another way, you do. That's
12 discriminatory, sir, and I don't believe in
13 that.
14 You and I are on the same level
15 playing field with that.
16 MR. NORQUIST: If you could get us
17 the list of governors. I guess I'm still
18 confused as to how 16 governors are for
19 something, and the National Governors'
20 Association, which is supposed to
21 represent 50 governors, has endorsed a
22 position.
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1 GOVERNOR LEAVITT: Mr. Chair, I'm
2 probably able to respond to that.
3 GOVERNOR JANKLOW: I don't know. That
4 may be a distinction without a difference,
5 I'm not sure. I can just speak for me. In
6 all fairness, I just talk for myself. So I
7 think you and I are in agreement, we want
8 non-discriminatory taxes.
9 CHAIRMAN GILMORE: Governor Leavitt is
10 chairman of the National Governor's
11 Association and wishes to respond.
12 GOVERNOR LEAVITT: Yes, I'll probably be
13 able to respond to that. Each of the seven
14 organizations that are represented on this
15 panel have quite entailed and very
16 disciplined methods of being able to make
17 positions or take positions formally on
18 behalf of their organizations. Each of them
19 have gone through that process.
20 The National Governors' Association
21 does have a means by which that's done on an
22 interim basis in between our meetings. The
153
1 executive committee has passed this. It's
2 been passed by a bi-partisan group of nine
3 governors. Is it unanimous? No. We know of
4 at least four or five governors, some of
5 which are represented their own interest,
6 that don't. There have been policies
7 established by the NGA that have passed, not
8 with unanimous support, but with roughly 90
9 percent of 85 percent of the governors. So,
10 they're not united. This is not a policy
11 that we represent to be the mind and will of
12 every single governor.
13 But I think it's pretty clear that
14 this represents the attitude and direction of
15 those who have been elected by the people of
16 this country to represent state and local
17 governments.
18 CHAIRMAN GILMORE: Delegate Harris?
19 MR. HARRIS: When we left off
20 yesterday I expressed my concern that we were
21 not necessarily always conducting these
22 discussions within the proper constitutional
154
1 framework. As I listen to some of the
2 discussion today, I was at first excited that
3 some of the constitutional terms and
4 principles that are important in this
5 discussion were raised. Governor, you raised
6 a couple of those in your opening remarks. I
7 believe I heard you say that it is your
8 understanding that Internet commerce is
9 interstate commerce, is that correct?
10 GOVERNOR JANKLOW: I believe that, yes,
11 sir. I wouldn't want to argue against that.
12 MR. HARRIS: I also believe I heard
13 you say that you could live with the Quill
14 decision?
15 GOVERNOR JANKLOW: Yes, I don't like it,
16 but I live with it now, and I'm willing to
17 live with it.
18 MR. HARRIS: I also believe that
19 you stated that the Quill decision left it to
20 the states to resolve some of these issues
21 that we're discussing now, is that right?
22 GOVERNOR JANKLOW: No, I didn't say
155
1 that. What I said was the Supreme Court, in
2 Quill, has invited states to continue to
3 evolve and work within the framework of that
4 decision, advancing forward. There's just a
5 couple of sentences in there that deal with
6 that. But in that Quill decision they talk
7 about how this is an evolving thing.
8 Sir, one other thing I should have
9 added. In the U.S. Constitution, you can
10 have a burden on interstate commerce. What
11 the constitution prevents is an unreasonable
12 burden on interstate commerce. I mean, I
13 actually have argued a case in the U.S.
14 Supreme Court, the Reeve v. Stake
15 (phonetic), a commerce case in the U.S.
16 Supreme Court.
17 MR. HARRIS: I'm aware of that.
18 I'm an attorney, as well. I haven't argued
19 before the Supreme Court, but the other
20 problem is you can't discriminate against
21 interstate commerce, which would clearly
22 happen if you decided to stop UPS trucks.
156
1 GOVERNOR JANKLOW: No.
2 MR. HARRIS: My final question, if
3 I could.
4 GOVERNOR JANKLOW: Sir, the UPS trucks
5 would be subjected to the same type of thing
6 that I'm subjecting everybody to in South
7 Dakota. You see, we can walk into a person's
8 business and we can audit their books, we can
9 go check their records, we can go to people's
10 houses who make purchases and make them pay
11 the use tax. As a practical matter, we all
12 agree we don't do it because you couldn't do
13 it effectively. Taxing somebody for a dress
14 that comes in on a truck and going after the
15 person that bought the dress would cost far
16 more than the dress tax would gain. It's not
17 efficient, it's not effective, so no state
18 does it. But that doesn't mean we can't do
19 it, sir.
20 MR. HARRIS: I understand. There
21 was discussion earlier about -- with regard
22 to the Andal proposal about not passing
157
1 something that would invite litigation. I
2 think that's a clear invitation for
3 litigation should you, in all seriousness,
4 decide to pursue such a policy.
5 But the Quill decision, going back
6 to that, clearly makes the Court's case that
7 the Court defer to Congress to resolve some
8 of the issues that we're debating here,
9 notwithstanding your arguments about the
10 states playing a role in the evolution of
11 dealing with nexus and how we're going to tax
12 E-commerce in this situation.
13 Given the fact that you think
14 E-commerce is interstate commerce, and given
15 the fact that Congress has authority in the
16 constitution to regulate interstate commerce,
17 including taxation issues, and given the fact
18 that the Quill decision makes clear that the
19 Congress is institutionally more capable than
20 the courts to decide some of these issues,
21 where -- how does that stack up against some
22 of the proposals that you've suggested here
158
1 this morning?
2 GOVERNOR JANKLOW: Sir, I beg to differ
3 with you. That is not what the Supreme Court
4 said in Quill, and you and I as attorneys
5 know that. What the Supreme Court said in
6 Quill is we are not -- we see no reason now
7 to change the Bellas Hess decision. Because
8 we made the Bellas Hess decision a long time
9 ago and it stayed the law this period of
10 time, we are not going to embark now, even
11 though we are a different group of judges, in
12 changing that decision. But they didn't say
13 that it's absolutely exclusively -- they said
14 Congress can change it. They weren't going
15 to, but they recognized they had the power to
16 do it and that the world had evolved
17 commercially and electronically since the
18 Bellas Hess decision, but to stick with stari decisis they would go ahead and
19 not change their decision. That's what they
20 really, in effect, said in Quill, sir.
21 MR. HARRIS: I'm glad you brought
22 that up because I have a copy of Quill with
159
1 me. It reads:
2 "Congress may be better qualified
3 to resolve, but also when the Congress has
4 the ultimate power to resolve."
5 GOVERNOR JANKLOW: I agree with that.
6 MR. HARRIS: Okay.
7 GOVERNOR JANKLOW: That isn't what I
8 just said, though.
9 MR. HARRIS: I know that, which is
10 why I'm bringing this up. It also reads:
11 "Accordingly, Congress is now free
12 to decide whether, when and to what extent
13 the states may burden interstate mail order
14 concerns with the duty to collect use taxes."
15 GOVERNOR JANKLOW: Absolutely. I agree
16 with that. That's why I said I don't, as a
17 matter of policy, like Quill, but I'm willing
18 to live with it, sir. I just don't think
19 anything ought to be done. What people are
20 suggesting is legislation that changes Quill.
21 Now, one may suggest that they're
22 codifying Quill, but there's a lot of other
160
1 proposals that are being laid out that would
2 drastically alter the Quill decision.
3 CHAIRMAN GILMORE: I have placed myself
4 on the list last, but we will keep going down
5 the list.
6 Mr. Harris, are you completed for
7 the moment?
8 MR. HARRIS: Yes, sir.
9 CHAIRMAN GILMORE: Next is Mr. Sokul.
10 MR. SOKUL: Thank you, Governor. I
11 wanted to just briefly react on behalf of the
12 people I represent here, which are the, you
13 know, not hardware manufacturers or people
14 who link people up, but the online merchants,
15 the people who are selling online.
16 These people, their concern with
17 this issue is the cumulative burdens that
18 result from 50 states having tax authority.
19 So, when you said that the evidence that you
20 see of online companies wanting special
21 treatment is what proves your point, I think
22 what the evidence is that these people want
161
1 to stay in business. They don't want to deal
2 with 50, or they can't deal with 50 different
3 tax systems, 7,600 different tax systems. If
4 national tax authority, if Quill was
5 overturned, there's 30,000 potential tax
6 jurisdictions.
7 It's not just collection. Taxware
8 is good with collection, maybe, but under
9 current -- if Quill were to fall, these
10 businesses would confront enforcement
11 burdens, audits. There's a company, this is
12 a mail order company that had facilities
13 nexus in New York and Indiana. They moved
14 their collection operation from New York City
15 to Indianapolis, and their audits went
16 down 300 percent. I mean, tax auditors
17 didn't want to junket to Indianapolis, but
18 they enjoyed their junkets to New York City.
19 I mean, that's the real world that
20 online businesses are working in. I just
21 wanted to make that point that there's a
22 terrible system which Joel Crosby noted, and
162
1 I don't think I disagree with you. I think I
2 disagree with Mr. Goldberg, who just is
3 advocating overturning Quill.
4 Trying to turn this into a
5 question, I'll go back to what Mr. Parsons
6 brought up. What would you advocate the
7 deliverable of this Commission to be? Would
8 you advocate that zero burden needs our
9 sanction, this is the way to go? Or do you
10 just want to say to Congress, let the states
11 have the time to solve this?
12 GOVERNOR JANKLOW: Sir, I think it's one
13 and two, and there's a three. I think it's a
14 combination. This is an exploding area, as
15 we all agree. I think we also all agree that
16 E-commerce today, as big as it is, is just a
17 midget compared to what it's going to be
18 three, four, five, 10 years from now. It's
19 hard for us to understand the PC was only
20 invented nine years ago. I have at my desk
21 more computing power than sent Neal Armstrong
22 to the moon. I don't know how to use it, but
163
1 I've got more. But I've got more computing
2 power than sent Neil Armstrong to the moon.
3 So I realize that this is an exploding,
4 dynamic area.
5 But let me give you an example.
6 Congress may decide in its wisdom and look, I
7 poke at them, but they're elected officials
8 and they're responsible.
9 MR. SOKUL: I often wonder how
10 different the debate would be in Congress if
11 state legislators still appointed senators.
12 GOVERNOR JANKLOW: I'll tell you what
13 the difference is. When you want to go beat
14 up on your state legislator, you walk across
15 the street to do it. You've got to go all
16 the way to Washington to get them back there.
17 Virginia gets to go across the street, but
18 the rest of us have to travel a lot. They're
19 a long distance call, which we tax.
20 But let me give one suggestion. It
21 would be very easy for Congress to say, we're
22 not going to deal with 30,000 jurisdictions.
164
1 We are going to say that whatever the state's
2 taxes. In my state it happens to be four, in
3 another state it may be seven, whatever it
4 is. We're going to allow you to tax at the
5 state level. That's as far as we're going to
6 go. Anything more than that, we are going to
7 determine, as Congress, is an unreasonable
8 burden on interstate commerce.
9 Now, clearly it wouldn't be
10 difficult to come up with a software package,
11 even though not all states tax the same
12 thing. In my state we tax food and we tax
13 clothing. The neighboring state of Minnesota
14 doesn't tax clothing. I mean, they're all
15 different, I understand that. But we would
16 eliminate tens of thousands of combinations
17 if Congress were to say, we're going to allow
18 you to tax, but we're going to make it very
19 simple. That's one thing they could do.
20 The Uniform Commissioners could
21 really go work this out. The one thing about
22 the Uniform Commissioners they're not all of
165
1 us. They don't have a political agenda like
2 all of us that are elected. Whatever our
3 party is, we've got a political agenda. The
4 Uniform Commissioners don't. They've given
5 us everything from Uniform Probate laws to
6 Uniform Commercial Codes to Uniform Detainer
7 Acts and extradition acts and all kinds of
8 things.
9 MR. SOKUL: I also wanted just to
10 make the point that these are there seems to
11 be a framing of this debate as, you know,
12 online merchants versus Main Street, the
13 Internet economy versus Main Street economy.
14 Online merchants don't live in cyberspace.
15 They live in the real world. They're real
16 people. They're businesses. You can find
17 thousands of stories where selling online,
18 the access to the national market, is helping
19 a Main Street business survive.
20 GOVERNOR JANKLOW: I agree, no argument.
21 MR. SOKUL: Particularly in rural
22 areas, that is important.
166
1 I have just one other brief
2 question for Diann Smith.
3 CHAIRMAN GILMORE: If you could be
4 quick, Mr. Sokul.
5 MR. SOKUL: It will be really
6 quick. You submitted testimony. You talked
7 about unconstitutional taxes and the need for
8 allowing a federal court to hear
9 unconstitutional tax challenges. The point I
10 want to make is states are enacting
11 unconstitutional taxes that discriminate
12 against out-of-state commerce. How big of a
13 problem is that, and to what extent would
14 federal court review help?
15 MS. SMITH: It's a significant
16 problem. It's obviously not the only problem
17 in the electronic commerce area, but it is a
18 significant problem. Just over the last year
19 we saw Alabama, their franchise tax was ruled
20 unconstitutional by the U.S. Supreme Court.
21 Currently there are two rules that
22 are keeping taxpayers from getting into
167
1 federal court. One is state sovereign
2 immunity. For retroactive relief, refund of
3 taxes, you can't get into federal court on
4 that.
5 Also, under the Tax Injunction Act,
6 which is a federal statute, taxpayers can
7 also not get into federal court looking for
8 prospective relief. So, under the current
9 system, taxpayers cannot get into federal
10 court until they have gone through the state
11 court system, and then their only access is
12 an appeal to the U.S. Supreme Court.
13 The U.S. Supreme Court takes less
14 than 2 percent of all cases. So, the chances
15 of getting the U.S. Supreme Court to review a
16 case are very small.
17 One of the reasons that the federal
18 courts were set up was this concern that
19 local courts weren't necessarily going to
20 give full and adequate representation to
21 out-of-state plaintiffs or citizens of other
22 states. The federal court system can help
168
1 taxpayers from other states get the kind of
2 relief that they're looking for.
3 I know in the south there's a
4 phrase that when you go into state court and
5 an out-of-state company that feels it did not
6 get an adequate decision, they call it home
7 cooking. That's what we're trying to avoid
8 by allowing taxpayers to get into federal
9 court on these national constitutional
10 issues.
11 I think the question was as
12 electronic commerce explodes will the problem
13 get worse? To the extent that the nexus
14 rules remain the same, that I think the
15 problem can get worse. If the states see
16 their tax base being eroded, they may look at
17 other alternatives for finding income.
18 Also, under some of the voluntary
19 systems that my organization and several of
20 the other organizations have suggested, to
21 encourage out-of-state tax payers -- I'm
22 sorry, out-of-state-vendors -- to voluntarily
169
1 remit, they have to know that if they are
2 going to voluntarily remit, that the states
3 are not going to aggressively go after them
4 for other taxes, possibly unconstitutional
5 taxes. That's the reason that we would like
6 to see the federal court jurisdiction.
7 CHAIRMAN GILMORE: Andrew Pincus?
8 MR. PINCUS: Thank you, Governor.
9 A comment and a question. Mr. Parsons asked
10 a question of Governor Janklow earlier about
11 relating to the moratorium, and I think it's
12 an important point to clarify. The
13 moratorium does not apply to sales and use
14 taxes. So, right now the Internet is
15 operating under the rule of Quill today as it
16 applies to sale and use taxes. The
17 moratorium does apply to discriminatory
18 taxes, multiple taxes, and to taxes on
19 Internet access.
20 So, although that moratorium with
21 respect to those taxes is under a three-year
22 time table and will expire, Quill, which is
170
1 the rule today, as the Governor said, will
2 remain in place, and isn't subject to that
3 expiration date. So, it may provide for more
4 flexibility in addressing that issue, because
5 there's no drop dead date for when the rules
6 will otherwise change.
7 My question goes back to the issue
8 of simplification and uniformity, and it's to
9 you, Governor, or to any of your colleagues.
10 Ms. Smith and Mr. Crosby mentioned a number
11 of specific items in terms of what they would
12 suggest in terms of simplification. Are
13 those things that are on your list, or how do
14 your proposal refers to simplification, but
15 it doesn't exactly say which items you're
16 looking to simplify.
17 GOVERNOR JANKLOW: Sir, I think if
18 you're talking about the NGA proposal and all
19 of the other organizations, it's the starting
20 point. That's all it is. It's like
21 legislation you throw into the hopper the
22 first day of the legislative session. It's
171
1 got to go through the process, and the
2 process really will flesh it out. Frankly,
3 personally, I don't care if you take that one
4 or somebody else's as a starting point, I
5 think if we avoid two things: The argument
6 that says there will be no taxation and I'm
7 not trying to argue with the chairman right
8 now. I'm just saying that's one extreme
9 position. It's not unreasonable, but it's
10 extreme. The other side is that says, yes,
11 we will tax absolutely everything, no matter
12 what anybody's relationship is.
13 Within the framework of the middle,
14 I think reasonable people and I'm not saying
15 that on the other ends are unreasonable, I'm
16 just saying within the framework in the
17 middle, that's how legislation is made and
18 they'll come up with something, and your
19 point is well taken, sir.
20 I'm not here to suggest that I'm
21 concerned about the legislation the stay in
22 place legislation. I'm concerned about all
172
1 the other things I heard being discussed in
2 the Commission, there may be a recommendation
3 that goes to Congress and some leadership in
4 Congress who have already signed things
5 warning people 34 of us or 54 of us or
6 presidential candidates have already said
7 we're in favor of certain actions.
8 That's what bothers me, sir. This
9 has got to flesh itself out. I think what's
10 happening in E-commerce is no different than
11 would take place in the legislative process.
12 I don't agree with everything my
13 colleagues on this panel said, but I agree
14 with some of what everybody said. That's the
15 process.
16 MR. KISBER: Okay. If I may add,
17 it's part of your question. I think each of
18 the organizations involved have recognized
19 that simplification is a key component to
20 making this work. We've also passed policies
21 or principles that guide our policies, and
22 simplification is at the forefront of that.
173
1 We all believe and I'm a business
2 man as well as a legislator. We all believe
3 that incenting for good behavior is more
4 worthwhile than trying to beat with a whip.
5 If we can bring people together with the
6 incentive, getting back to the question about
7 undue burdens, that we can simplify, we can
8 take that burden away and put it on this
9 third party so that remote sellers do not
10 have to worry about 50 or 750 or 7,5000 tax
11 audits.
12 We can have a system where we've
13 already worked on some basic areas where
14 simplification could take place. I think
15 that we could find a way in which everybody
16 comes out a winner from the system.
17 MR. PINCUS: I think, as Mr. Sokul
18 said, you know, in thinking about this
19 Commission has to arrive at a report at some
20 point. If simplification is an element of
21 it, I think that people probably would want
22 to have, not just say simplification and
174
1 let's see how it works out, we'd probably
2 want to have some specific elements of what
3 simplification means. So maybe I don't know
4 if you want to do it right now, but at least
5 for me it would be useful to have your
6 reaction to the specific kinds of
7 simplification that Mr. Crosby and Ms. Smith
8 mentioned.
9 CHAIRMAN GILMORE: John Sidgmore?
10 MR. SIDGMORE: I have a real quick
11 question, I guess, for Governor Janklow. You
12 talked this morning, I think quite
13 persuasively, about leveling the playing
14 field and so forth, and yet your proposal is
15 to preserve Quill, as you've mentioned many
16 times. I'm just curious, because it sounds
17 to me like, you know, if you really were
18 starting with a clean sheet of paper you'd
19 rip it up and start over.
20 Is it solely for practical reasons
21 that you think it's impractical to overturn
22 and start over?
175
1 GOVERNOR JANKLOW: I understand, sir,
2 the political realities. One, the U.S.
3 Constitution, as we all know, was written
4 more than 200 years ago. A lot of water has
5 gone under the bridge since then.
6 They didn't have telephones and
7 computers and all kinds of things, but they
8 did a brilliant job of laying out those
9 documents. What they said was you can't put
10 an unreasonable restraint on interstate
11 commerce. You can put a restraint, you can
12 put a burden, it just can't be unreasonable.
13 It can't be substantial.
14 It's left to the courts to
15 determine or Congress if they want to, by
16 delineating factually, what does the word
17 "substantial" mean. Otherwise, it's left to
18 the courts. Remember, Bellas Hess is not --
19 it's not Congressional action, it was a court
20 action.
21 Sir, I'm living to live with Quill
22 because it's the supreme law of the land, and
176
1 I didn't think it was the charge of the
2 E-commerce Commission, when it was created,
3 to change Quill. What I'm concerned about is
4 that we would take drastic action in America
5 before this thing continues to flesh itself
6 out. The system works. Honest to God, I
7 believe, I may be wrong, but I'm sincerely
8 wrong if I am. I believe the system works.
9 Let the states do their thing.
10 Any state that screws up commerce
11 does it at their peril for their citizens.
12 That's what they do. What do states do? Why
13 do states cut taxes? Because we're competing
14 for jobs. We're trying to attract companies
15 to come in from out-of-state. Hey, we'll
16 give you a tax break, and we'll give you this
17 deal and we'll give you that deal. We're
18 competing with each other for jobs. Let's
19 let that competition continue to go forward
20 in E-commerce. It's going to be a winner for
21 America. It's going to be a winner for very
22 state.
177
1 MR. SIDGMORE: Could I just
2 follow-up for one second? I think everybody
3 agrees with that last comment. But a number
4 of the other proposals were different in that
5 they would overturn Quill. I think it's fair
6 to say that most people believe that
7 out-of-state sales are going to be
8 accelerated dramatically and exacerbated by
9 the Internet, and so you're going to have, I
10 think, this issue come up time and time
11 again.
12 GOVERNOR JANKLOW: I agree.
13 MR. SIDGMORE: So the question is
14 why. I'm just curious why you didn't address
15 it. It sounds like it was just solely for
16 practical reasons.
17 GOVERNOR JANKLOW: I just think as a
18 practical matter, proposing to get rid of
19 Quill there's enough political clout to stop
20 it. I also think there -- frankly, and
21 people disagree with me -- there's enough
22 political clout to prevent something from
178
1 going in the other direction. Sometimes we
2 pass legislation, even at the state level,
3 I've done it before, where we have to repeal
4 it a year or two later because we screwed
5 something up.
6 That's when we don't put enough
7 thought into it. We shouldn't rush in -- in
8 areas that -- I know it's taking time, but
9 let me tell you. My state is the only state
10 that ever legalized Laitril. We legalized
11 it. I vetoed it. It's the first time I was
12 ever written in a veto. Two-thirds of both
13 houses overrode me. Two years I proposed a
14 Governor's bill. Let's get rid of that
15 Laitril, sucking that apricot pit stuff.
16 Nobody fought it. They asked me, well, how
17 come Janklow and nobody is fighting it? I
18 said, everybody that was for it died of
19 cancer, so.
20 CHAIRMAN GILMORE: Mayor Kirk?
21 MAYOR KIRK: I'm going to make sure I
22 don't say anything to disagree with the
179
1 Governor. I don't even want to wish that.
2 I just wanted to make an
3 observation. First, I wanted to thank all of
4 the panelists for being here and the time
5 they put into their proposals. I think we
6 did hear a lot of common denominators. One
7 is that the taxes should be
8 nondiscriminatory. In that case, I think
9 Governor Janklow is very right and on point,
10 that nondiscrimination would ultimately
11 manifest itself by just arbitrarily saying
12 you're going to treat E-commerce different
13 than you treat everybody else.
14 Second, that we ought to simplify
15 and that Governor Leavitt and all of us that
16 support his proposal would agree that this is
17 a starting point. We ought to put some meat
18 on the bones.
19 But, third, I wanted to especially
20 just briefly, and it's more of an
21 observation, and Dr. McLure, you may want to
22 expand on that or not. But yesterday we just
180
1 heard a number of proposals that were telling
2 us that taxes were everything from immoral to
3 God awful and everything else, and they all
4 referenced a study by Dr. Goolsbee (?) from
5 the University of Chicago to purportedly show
6 that taxes on E-commerce would be
7 devastating.
8 Charles, is that the same Austan
9 Goolsbee that is a proponent of your proposal
10 that we, in fact, treat E-commerce the same
11 as everyone else?
12 MR. MC LURE: Yes, sir, it is.
13 CHAIRMAN GILMORE: Delna Jones?
14 MAYOR KIRK: I guess I did have
15 another question.
16 CHAIRMAN GILMORE: If you're not done,
17 proceed.
18 MAYOR KIRK: Well, one other question
19 that I had for Mr. Crosby was in -- in your
20 concern over -- I thought one of the -- well,
21 in my mind, I thought one of the real
22 attractive proponents of the governors --
181
1 we'll say the local and state and local
2 governments' position was removing all of the
3 burden from the vendor.
4 You seem to think differently, but
5 having heard from everyone from Ms. Smith and
6 almost every other vendor here that the one
7 cry they were saying was, get us out of this
8 mess. That the vendor having been necessary.
9 But it just seems, you know, to me as a
10 non-vendor, it just seems incredibly easy
11 that if right now -- I mean, vendors don't
12 collect money.
13 They don't go around and collect
14 money from everyone. They rely on Visa or
15 Mastercharge. They're relying on a trusted
16 third party now to complete that transaction.
17 Can you not envision that same third party
18 adding a component that they collect the tax
19 and remit it? Because vendors surely don't
20 go to all those people around the world and
21 collect the money from them.
22 MR. CROSBY: I would say first,
182
1 Mayor Kirk, that we do agree, you hear a lot
2 of similarity on this panel in terms of
3 simplification. You don't hear a lot of
4 people talking about keeping the Internet
5 tax-free forever on the panel we have here
6 today.
7 My point about the governors'
8 proposal and this, I think, goes to what
9 Governor Janklow was talking about. This is
10 the appropriate place for the legislative
11 process to hammer out the details on some of
12 these proposals.
13 I think it is a mistake to presume
14 that by eliminating the vendor from the
15 process you have eliminated the burden. What
16 you have done is effectively shifted the
17 burden to other parties that are in the
18 transaction, whether they be Internet service
19 providers, payment processors, credit card
20 companies, Visa or MasterCard. I think there
21 are a number of not only policy reasons not
22 to do that, but significant technological
183
1 burdens that are not addressed by solutions
2 like Taxware.
3 There is tax technology, which is a
4 minor part of the payment processing system.
5 Currently, payment processors don't get any
6 information that would allow them to even
7 determine tax, let alone collect and remit
8 tax. That is not the type of information
9 they have available to them. It's not the
10 deals that they have with their vendors.
11 If you insert a third party in the
12 middle of this process, you're disrupting
13 that marketplace and forcing those payment
14 processors, credit cards and other
15 intermediaries to enter into business
16 relationships with a trusted third party who
17 then may have control over where business
18 goes.
19 You're introducing a new? Well, if
20 you have, I'll explain that a little further.
21 MAYOR KIRK: I don't shop a lot on
22 the net, but I mean every day Americans will
184
1 give the most detailed information to
2 somebody they've never seen, because they go
3 through the little mouse thing and it says,
4 is your shopping cart full? Then it says,
5 tell us how you're going to pay for it. It
6 says, tell us whether it's Visa, MasterCard,
7 or whatever. You give them all that stuff.
8 You give them your address, because they're
9 going to send it to you, and then all they
10 want to know is how you're going to ship it.
11 GOVERNOR JANKLOW: You know a lot about
12 it for a guy that doesn't use it.
13 MAYOR KIRK: My wife. But I mean,
14 this is not rocket science. I mean, I'm
15 trying to understand where the difficulty is.
16 MR. CROSBY: I would agree, and I'm
17 happy to present to the Commission more
18 detailed information on this. The difference
19 is that the information that you present to
20 the vendor is not transmitted to the credit
21 card company.
22 They do not have all that
185
1 information. It is not transmitted in the
2 normal course of business. By introducing a
3 third party into the process to aggregate all
4 that information and to control the flow of
5 money, for example.
6 MAYOR KIRK: I'm just presuming that
7 third party, and I'm not advocating that, is
8 that same person, is the credit. In my mind,
9 the easiest third.
10 MR. CROSBY: Then you change from a
11 voluntary system to a mandatory system.
12 MAYOR KIRK: No, you don't.
13 MR. CROSBY: If you're presuming
14 that.
15 MAYOR KIRK: Visa, Mastercharge,
16 Discover Card, whoever else is out there. If
17 I'm leaving you out and you're upset. Credit
18 cards in general are going to go to states
19 and say, as Governor Leavitt said, we think
20 we can do a better job at this than the tax
21 collector for the State of Utah, South
22 Dakota, and they're going to compete for
186
1 that. They've already got the information,
2 because I'm their client and they know where
3 to find me. They bill me on a regular basis.
4 MR. CROSBY: Right. I work with
5 some of those companies and I think they
6 would disagree that they necessarily view
7 this as a tremendous business opportunity. I
8 only caution.
9 MAYOR KIRK: They're here. Ask them.
10 They came up here. Are you kidding? They're
11 going to get a break for collecting this
12 money and remitting it to the states. They
13 probably get to get a percentage. This is a
14 huge cash cow for them.
15 CHAIRMAN GILMORE: Whoa, whoa. We're
16 not going afield here. What we're going to
17 do is ask a question, get an answer and then
18 move on and be fair to the other
19 Commissioners. Do you have a question?
20 MR. CROSBY: My point is that in
21 the process that there is ample opportunity
22 to work out these kinks. The proposal, as it
187
1 currently stands, is not perfect, and I don't
2 think anybody would say that. My point was
3 just to raise one of the areas where there is
4 difficulty, and possibly put forward a
5 constructive criticism on ways that it could
6 be improved.
7 There are definitely members of the
8 audience that would be happy to come up here,
9 I'm sure, and address those points more
10 specifically and would probably disagree with
11 your contention that it's a wonderful
12 business opportunity.
13 CHAIRMAN GILMORE: Let's go to Delna
14 Jones and give her a chance.
15 MS. JONES: I'm one of those who
16 come from a state without a sales tax, and
17 I'm a little concerned about a couple of
18 things that I've heard. I'd certainly don't
19 want to see our state have to collect for
20 other people, where we don't benefit.
21 However, let me give you a couple of
22 thoughts.
188
1 First of all, I think the issue of
2 tax neutrality or reducing the burden on our
3 citizens. Let me just give you an example of
4 something our state does, since everybody
5 likes to brag about what we do when you're
6 trying to keep the citizens from paying more.
7 In our income tax system, if we collect more
8 than 2 percent over projection, and we have a
9 two-year budget, we actually send checks back
10 to everybody that paid the income tax and
11 those checks arrive the 1st of December.
12 Isn't that a nice benefit? Just thought I'd
13 like to let you know that.
14 Also, for Grover, I'd like to tell
15 you that I have a separate letter from my
16 Governor. He didn't sign the other one, he
17 happen to send a separate letter. So I think
18 that's kind of all over the map.
19 MR. NORQUIST: Endorsing the
20 proposal?
21 MS. JONES: Yes. The issue I keep
22 hearing that to me is more key than anything
189
1 else is even if we didn't have the Internet
2 issue today, the big issue is simplification.
3 Where I keep hearing over and over again, the
4 system is broke, this is giving us an
5 opportunity to try to find ways to fix a
6 system and at the same time keep the states
7 able to collect the tax that they legally
8 have the right to do.
9 Now my question, for anyone who
10 wishes to comment on it and I'll let the
11 Governor decide how many that is if in fact
12 simplification takes place, is there not
13 reason to believe that if challenged, Quill
14 would be overturned as we know it today,
15 because one of the burdens, and I'm not an
16 attorney, but one of the issues is that was
17 so difficult to comply that Quill became an
18 issue because of that lack of simplification
19 and collection process?
20 GOVERNOR JANKLOW: Ma'am, you hit the
21 nail on the head, and you say it far better
22 than Bill Janklow can.
190
1 Quill says, and so does Belles
2 Hess, right now there's an unreasonable
3 burden on interstate commerce, a substantial
4 burden. I don't know, it's the lawyer's
5 game, at what point does something not become
6 a burden?
7 But Quill would change if there was
8 no burden on commerce, or it was a
9 substantially less burden, or less than
10 substantial, let me put it that way. So that
11 could happen, but that wouldn't be bad. It
12 wouldn't be necessarily bad, because the key
13 is all Congress, all they did when they wrote
14 that U.S. Constitution is exactly what you're
15 saying. They just wanted to make sure that
16 there isn't a burden placed on commerce, so
17 there is this free flow of things between the
18 various states. No matter, whether it was 13
19 or now 50, or 500, whatever it is there would
20 be a free flow of commerce, because that's
21 what builds the dynamics of the economy.
22 So you're right; you're dead right.
191
1 MS. SMITH: Commissioner Jones, the
2 other side to that argument is that Quill, in
3 addition to talking about the burden on
4 interstate commerce, did discuss that it was
5 really a decision on stari decisis, that they
6 had addressed this issue before in Belles
7 Hess case.
8 So Quill also looked at the
9 reliance by the industries, specifically in
10 that case, the mail order industry. Thus,
11 there is an argument that even if the
12 simplification, in and of itself, occurs,
13 that it will not have an effect on the Quill
14 decision, because the industry has relied on
15 Quill and Belles Hess.
16 MR. GOLDBERG: Ms. Jones, I would
17 agree with that. I don't think Quill
18 necessarily goes away just because you
19 simplify a state sales tax computation issue.
20 I think the issue of burden on interstate
21 commerce is still there and the problem of
22 states being able to require tax collection
192
1 by out-of-state vendors remains.
2 MS. JONES: Let me just clarify. I
3 didn't say it went away. I said it would
4 reduce, I believe, reduce considerably the
5 issue that brought it to the court and might,
6 if challenged, change the outcome.
7 CHAIRMAN GILMORE: Let me ask one or two
8 questions, because I think we're a little bit
9 afield.
10 The objective here, I think, was to
11 determine whether the NGA proposal was
12 feasible. That's what we set up in New York
13 and we said, is this something that can work
14 today? Is this something that, in fact, we
15 can tell the Congress at the end that this is
16 something we want to do?
17 Governor Janklow, the NGA and any
18 of the others that are here presenting,
19 Mr. Kisber or any of the others, this
20 proposal calls for a third-party collector, a
21 trusted third-party. A vendor, a person who
22 is a seller, is going to have to make his
193
1 business system interface with the
2 third-party collector's interface system.
3 They're going to have to change their
4 software and their hardware to make that
5 work. Who's going to pay for that? Is that
6 going to be paid for by the third-party
7 collector or by the vendor?
8 GOVERNOR JANKLOW: Look, I sound like
9 I'm ducking you and I'm only half-ducking,
10 okay? It's a document that I'm willing to
11 work from. It's the beginning, it's the
12 openers in the game of legislation, is all it
13 is. I don't think that frankly, if you're
14 asking me personally, I don't think just
15 dealing with a third-party vendor solves the
16 problem, because I think it can get
17 prohibitively expensive for somebody starting
18 a new business on the net, and having to
19 purchase those kinds of things and deal with
20 people can be expensive. I understand that.
21 All I'm suggesting is everybody
22 needs a document to work from. This is a
194
1 starting point for me and I support it,
2 because it's a starting point that deals with
3 resolving it without destroying the states'
4 tax bases. So, my guess is, there's 16
5 Governors who signed it and 16 Governors
6 would be slightly different in their opinion
7 as to what they really support.
8 But I support it as a working
9 document. So I'm saying I'm ducking your
10 question a little. I just need a document to
11 work from and I'm willing to work on it with
12 people.
13 MR. KISBER: Governor, I think it's
14 important to recognize that as part of our
15 proposal the cost of development and
16 implementation is borne by the states. That
17 is a part of what we do to make this proposal
18 work: The simplification, the cost of
19 getting it up and running, and the incentives
20 to the remote sellers to participate in it.
21 That's the way in which a voluntary system
22 can bring sellers into it to make it
195
1 successful.
2 CHAIRMAN GILMORE: So if there's a
3 voluntary system where sellers are going to
4 voluntarily join up and agree to make their
5 software and hardware consistent with the
6 third- party, trusted third-party, the states
7 are going to pay for that expense?
8 MR. KISBER: The cost of
9 development would be borne by the states.
10 CHAIRMAN GILMORE: Okay, under the
11 program. Now, every state and locality has
12 different exemptions and different tax
13 applications and rates depending upon who's
14 buying and what the particular product is.
15 Now, I believe that you suggested in your
16 testimony today that has to be uniform across
17 the country. We have to begin to build a
18 uniform list. Is that right, Mr. Kisber?
19 MR. KISBER: It would have to be
20 part of the simplification. There would have
21 to be a greater definition given, but it can
22 be done, from the testimony we've heard in
196
1 our task force, and that it is something that
2 can be accomplished.
3 CHAIRMAN GILMORE: You believe that
4 all 50 states and the localities are prepared
5 to make their taxing authorities uniform
6 everywhere in order to cooperate with this
7 proposal?
8 MR. KISBER: I think when you talk
9 about definitions, when you talk about
10 whether clothing is going to be exempt or
11 not, would still be under the responsibility
12 of that particular state. But what is
13 clothing would then be part of the standard
14 definitions that we would be working as part
15 of the simplified system.
16 CHAIRMAN GILMORE: Then the uniform
17 system, at that point, would begin to dictate
18 the tax policy for every state and locality
19 in the United States. Is that right?
20 MR. KISBER: No, sir.
21 CHAIRMAN GILMORE: Why not?
22 MR. KISBER: No, because the states
197
1 would still have the responsibility for
2 deciding what they're going to exempt, what
3 they're going to tax. It is only in trying
4 to have from state-to-state common
5 definitions of what would be included.
6 If in Tennessee we do not tax
7 clothing, but in South Dakota they do, then
8 we would know, as well as whatever other
9 state does not tax clothing, what items of
10 clothing would mean. But it would still be
11 up to us to decide whether we're going to tax
12 that item or not under our sales and use tax.
13 CHAIRMAN GILMORE: Under the NGA
14 proposal, the list that would be created
15 defines closely that states and localities
16 don't have the freedom then to change those
17 exemptions or tax rates except in accord with
18 the plan. Is that right?
19 MR. KISBER: They would have the
20 ability to change on a timetable basis.
21 There would a certain number of times a year
22 in which they could make adjustments, either
198
1 in rates or what is exempt or what's not
2 exempt. There would be a period of time that
3 notice would have to be given so the software
4 companies could re-program the software and
5 third- parties could get the trusted
6 third-parties could get that into place.
7 CHAIRMAN GILMORE: But we would give up
8 any freedom to be able to do that on our
9 timetable under the legislatures of our
10 states and, instead, turn this over to a
11 national unified third-party organization,
12 right?
13 MR. KISBER: I disagree. I chair
14 the finance committee in Tennessee --
15 CHAIRMAN GILMORE: I'm not arguing with
16 you, I'm asking you.
17 MR. KISBER: No, what I would say
18 is that when we make tax changes, we do it in
19 most instances to begin at the start of the
20 fiscal year. We usually have, for the
21 purpose of notifying retailers and notifying
22 those who are impacted, a period of time by
199
1 which they have to adjust their own processes
2 to comply with the law. This would be done
3 in the same manner. It would just specify
4 that there would be once or twice a year,
5 three times, however many times everybody
6 would agree to and that there would be 90
7 or 120 days, however much time it takes,
8 notice in order to make it work.
9 CHAIRMAN GILMORE: What if the trusted
10 third-party organization at the national
11 level decides to set down a rule that is
12 inconsistent with Tennessee's rule, or any
13 other state?
14 MR. KISBER: It would be under the
15 contracts which would be entered into, would
16 define the way in which the trusted
17 third-party would operated, and the language
18 of the authorization that the states would
19 have to enact would cover how the trusted
20 third-party interacts with the states to
21 standardize that process.
22 CHAIRMAN GILMORE: How about private
200
1 communications between purchasers and
2 sellers, for example, on something like
3 digital goods? We had lengthy discussion
4 with the European community on this
5 yesterday. Under the NGA proposal, how are
6 digital goods going to identified and taxed?
7 MR. KISBER: I would have to yield
8 to Dan Bucks or Harley Duncan on that.
9 CHAIRMAN GILMORE: Okay.
10 MR. BUCKS: Mr. Chairman, the
11 proposal would call for digital goods to be
12 taxed, if that's taxed under the laws of any state,
13 in terms of how you identify what state a
14 transaction is to be sourced. Two, there
15 would be a uniform rule that would be
16 developed.
17 There has been discussion of what
18 that rule would look like. Probably at least
19 one component of it would look to the billing
20 address of the buyer. But the key component
21 or the sourcing rule would be, you'd look
22 only to information that's normally available
201
1 in the course of the transaction and not ask
2 for extra-ordinary steps on the part those
3 sellers of digital products.
4 CHAIRMAN GILMORE: So this assumes every
5 digital seller is going to cooperate with the
6 trusted third-party and pass that information
7 from their purchases on to that group on a
8 voluntary basis, right?
9 MR. BUCKS: The sellers that would
10 volunteer to participate in the system would
11 have the obligation to submit to the trusted
12 third-party information to make a taxability
13 determination. That would be a code as to
14 what's being bought, the cost of the item,
15 and the jurisdiction to which it's to be
16 sourced, so that the trusted third-party
17 knows what rules are to applied.
18 CHAIRMAN GILMORE: I'm going to ask
19 questions of the panel with respect to audit.
20 I believe that the NGA proposal says that if
21 you get engaged and you go with the software
22 and you conform everything and those expenses
202
1 are paid and the third -- trusted third-party
2 is with you and you're all together on this,
3 then there's no audit, right? I mean there's
4 not going to be any audits?
5 MR. KISBER: Audited by that home
6 state under the existing requirements of that
7 state. There would be only one audit.
8 CHAIRMAN GILMORE: So there would be an
9 audit, then. That is always available under
10 this proposal?
11 MR. KISBER: That home state would
12 be responsible for audit.
13 CHAIRMAN GILMORE: Okay, I
14 misunderstood.
15 MR. KISBER: As it is now.
16 MR. BUCK: There would be no audit
17 under the proposal. If they accepted the
18 software, then compliance would be assumed
19 and the risk of any miscalculation would be
20 assumed by the state.
21 CHAIRMAN GILMORE: Okay. Now, Mr. Peha,
22 I believe, said there would be an audit.
203
1 Didn't you, Mr. Peha?
2 MR. PEHA: Well, I don't speak for
3 the NGA. I can't tell you if there would be
4 an audit. I can tell you that I'd be very
5 worried if there isn't, because we've already
6 said that -- they've already said in the
7 proposal, as I understand it, that not enough
8 information has gone -- only the barest
9 details have gone to the trusted third-party
10 about the transaction. That's great. That
11 preserves privacy.
12 But that means the only one who has
13 enough information to stand up to an audit is
14 the vendor. So they'd better have to be
15 required to keep that information and they
16 better subject to audit, that would be one of
17 my concerns.
18 I guess the answer to that might be
19 that it's voluntary to pay the tax in the
20 first place, but that leaves me confused for
21 lots of other reasons to have a voluntary
22 tax.
204
1 CHAIRMAN GILMORE: Under my no-tax
2 proposal, Governor Janklow, mom and pop
3 operations would for the first time in
4 history be in a position to compete in the
5 marketplace with the big guys with all the
6 capital. Under this proposal, mom and pop
7 operations have got to buy the software and
8 -- no, I'm not sure that's right. I think
9 under Mr. Kisber, the states are going to buy
10 the software for all the mom and pop
11 operations in America; is that right?
12 MR. KISBER: The states would bear
13 the costs of development so that that could
14 be deployed to those who volunteer to
15 participate.
16 CHAIRMAN GILMORE: Do you know how much
17 that would cost?
18 MR. KISBER: No, sir, I don't.
19 CHAIRMAN GILMORE: No estimate?
20 GOVERNOR JANKLOW: Sir, mom and pop
21 operations will be able to compete with the
22 big boys in E-sales only. They wouldn't be
205
1 -- they would be unfairly competing with the
2 existing merchants that are on the ground
3 that have already invested their capital.
4 So it really wouldn't be mom and --
5 it would only be mom and pop operations that
6 are getting into E-commerce, because if their
7 not getting into E-commerce, they'd be
8 treated like all the other moms and pops.
9 CHAIRMAN GILMORE: That's true. Moms
10 and pops and small businesses out there --
11 we're using that term, but we're really
12 talking about small business associations.
13 They, at this point, are at a competitive
14 disadvantage in this country. E-commerce
15 gives them an opportunity to get back in the
16 game.
17 My question, I guess is, is this
18 going be -- is the NGA proposal going to put
19 an additional financial burden on small
20 business as opposed to liberating them?
21 GOVERNOR JANKLOW: They're not --
22 they're not paying anything now, so they're
206
1 liberated right now. A remote seller's
2 paying nothing if they have nexus, so they're
3 liberated.
4 CHAIRMAN GILMORE: Well, no --
5 GOVERNOR JANKLOW: The question is are
6 they being treated fairly vis-a-vis the other
7 people?
8 If I start E-commerce business in
9 California, I'm going to pay taxes on
10 everything I do in California. I'm just not
11 going to pay them on what I send to Virginia.
12 So I'm being treated very fairly in
13 California. And the merchants existing in
14 California are being treated fairly vis-a-vis
15 me. What's not happening is the Virginia
16 merchants are not being treated fairly, that
17 are on the ground in Virginia, when I just
18 send it though the wire or through the pipe.
19 CHAIRMAN GILMORE: Well, the small
20 business guy has an opportunity to get on the
21 Internet and to be in a position to be with a
22 burgeoning and growing opportunity to
207
1 society, whereas larger corporations that
2 have the major bricks and mortar and big
3 investments are gathering in most of the
4 customers. That's the phenomena that's going
5 on today, which is why most of the Main
6 Streets are not doing particularly well. So
7 is this not an opportunity for them to get
8 back on and to get in the game?
9 GOVERNOR JANKLOW: Sir, I'm going to
10 personalize this, if I can.
11 CHAIRMAN GILMORE: I wouldn't do that,
12 Bill.
13 GOVERNOR JANKLOW: No, Ted Waitt sits on
14 this panel. Ted Waitt is living proof that
15 in E-commerce you can be phenomenally
16 successful in America. He's living proof of
17 that. This isn't the guy that's got a lot of
18 R&D and has factories all over the place.
19 How does he really sell? He sold through
20 catalogues and through magazines and through
21 E-commerce. That's how Ted Waitt started.
22 That's how he continues, and he's been
208
1 phenomenally successful.
2 He's a little guy who figured out
3 how to go whip the big guys. I just want to
4 make sure everybody can still do that in
5 America, no matter where they're located and
6 not because of where they're located.
7 CHAIRMAN GILMORE: Last question from
8 Mr. Parsons and then I think we'll take a
9 break for lunch and then come back and pick
10 up the other panel.
11 Mr. Parsons?
12 MR. PARSONS: Just so that I can
13 understand this voluntary system. First of
14 all, it does appear to me that what is being
15 proposed -- if it's truly voluntary and it
16 doesn't affect Quill -- I guess you're right,
17 Governor, that you're just here saying don't
18 do something else while we put this voluntary
19 system in place.
20 But the question I have is why --
21 it's sort of a question that Mayor Kirk was
22 raising yesterday -- why -- take for example
209
1 of the guy in California who's sending goods
2 through the pipe to Virginia. Why does he
3 volunteer to now, you know, get himself in
4 the cue to start collecting taxes for
5 Virginia and that there instead of just doing
6 business like he's doing business now?
7 GOVERNOR JANKLOW: Sir, I think for only
8 one reason and I think most wouldn't. It
9 would give them protection from a subsequent
10 audit and a later determination that they may
11 have had nexus, and then they would have a
12 huge fiscal obligation. That is the only
13 thing that I see as I look at it. Now I
14 don't think that may be enough, but I do
15 think that's the only thing.
16 MR. PARSONS: If most wouldn't,
17 let's just assume that that's correct,
18 because I can't understand why, particularly
19 in E-commerce, a retailer would -- if most
20 wouldn't, is this really viable?
21 GOVERNOR JANKLOW: The bigger ones will.
22 My colleagues on either side of me are both
210
1 whispering in my ear, the bigger ones will.
2 Mom and pop won't.
3 GOVERNOR LEAVITT: Mr. Chairman, could I
4 just respond briefly to that? I recognize
5 you're trying to break, but --
6 CHAIRMAN GILMORE: Certainly.
7 GOVERNOR LEAVITT: It seems to me that
8 if you're a large vendor and you have nexus
9 in 30 states, and you're responding to tax
10 commissions from cities, counties, and
11 states, to audits, that you might say to
12 yourself, here's my choice. I can continue
13 down this mess or I can go to another system
14 and the system would provide me with no
15 audit, I'd be certified as having complied, I
16 would not have to have tax audits, and I
17 would be protected from anything in the past.
18 This sounds like a better system.
19 This is a remarkably good 21st
20 century idea. It's an opportunity for
21 vendors to be able to say, if I choose to do
22 this, because it's better for me, I can do
211
1 it. If I don't, I don't have to.
2 I can also say, you're fired, to my
3 tax administrator. You can't say that to the
4 Utah State Tax Commission today, but you
5 could under this system. Therefore, it might
6 have some advantages to me, because it might
7 be more efficient.
8 Now, we don't know how many will
9 and how many won't. And, as Governor Janklow
10 has suggested, this is just -- this is really
11 trying to put a concept on the table.
12 The standard that we ought to be
13 holding as a Commission to these proposals
14 isn't, will this exact proposal work? The
15 issue we're dealing with here is, is the
16 sales tax a viable tool for the 21st century?
17 Can it be fixed? If it can't, we ought to
18 scrap it and get on with the next discussion.
19 This is a question of, generally speaking,
20 can we use this in the 21st century, and if
21 so, what kind of criteria does it need to
22 meet and what kinds of things do we need to
212
1 do?
2 CHAIRMAN GILMORE: I don't think the
3 sales tax is broken, nor do I think it should
4 be scrapped. But the issue before the body
5 today is, is the NGA proposal feasible today
6 as a process? Is it?
7 GOVERNOR LEAVITT: I think you could
8 suggest that today, if you had to take this
9 exact proposal, we'd find some serious
10 problems in it. We had 45 days as a
11 community of state and local governments to
12 come up with an idea. Is it a good idea?
13 There's some very good ideas. Are there
14 things that can be improved? Yes. Is the
15 sales tax feasible? I believe it is. Is it
16 feasible in its current form? The answer is
17 no.
18 CHAIRMAN GILMORE: The Congress asked
19 this Commission to argue through the issues.
20 To address them, to bring them forward, to
21 have competent and sound people bring them
22 forward, so that we could argue through these
213
1 matters. This Commission is successfully
2 doing this and the members of the panel have,
3 today, immeasurably helped us do it.
4 And now we will continue for the
5 rest of the day. But, first, we will break
6 for lunch and come back at 12:30 and pick up
7 the other panel. Thank you.
8 GOVERNOR JANKLOW: Mr. Chairman, if I --
9 CHAIRMAN GILMORE: Governor Janklow?
10 GOVERNOR JANKLOW: If I may, Mr.
11 Chairman, I would like to say, realizing
12 where the Chairman is on this issue, you've
13 been incredibly fair to all of us today, and
14 I want you to know I really appreciate that.
15 Thank you.
16 CHAIRMAN GILMORE: Thank you.
17 (Whereupon, at 12:05 p.m., a
18 luncheon recess was taken.)
19
20
21
22
214
1 A F T E R N O O N S E S S I O N
2 (12:45 p.m.)
3 CHAIRMAN GILMORE: The system we have
4 set up here to listen to expert people who
5 are engaged in this industry or people from
6 think tanks is designed to create a vehicle
7 by which that the Commission people can argue
8 back and forth and to argue through you and
9 to have some discussions. And we have been
10 doing that so effectively that we're running
11 out of time.
12 We have asked you come because of
13 the extreme value that we see in people who
14 are standing here before this panel. I would
15 only ask that to the extent that you can save
16 some time for us, even a couple of minutes at
17 this point, so that we reduce the total
18 presentation of this rather broad panel --
19 from one, two, three, four, five, six, seven
20 -- 70 minutes -- to somewhat less in the
21 aggregate than 70 minutes, would be
22 appreciated.
215
1 So do the best you can and we're,
2 however, not disrespectful of the quality of
3 the material that you have to bring before
4 us.
5 These companies that are
6 represented here today include bricks and
7 mortar retailers, clicks and mortar retailers
8 -- as some people have worked their way
9 towards a hybrid or both -- virtual retailers
10 -- and we are offering this to understand the
11 perspectives on the proposals that we have
12 heard over the past day and a half. And, in
13 fact, all the people who are engaged in this
14 business -- there were members of the
15 Commission that requested the opportunity to
16 get some reaction from people who were
17 affected. This is the opportunity to do
18 that.
19 Mr. Peter -- is it Lowy? Is that
20 correctly pronounced? Mr. Lowy, who is of
21 Westfield American Incorporated, the
22 International Council of Shopping Centers.
216
1 Mr. David Bullington, the vice president of
2 Wal-Mart.
3 Mr. Bullington, thank you very
4 much. Mr. Frank Julian, operating vice
5 president and tax council, Federated
6 Department Stores, Incorporated; Mr. Craig
7 Winn, the chairman of ValueAmerica.Com, an
8 E-commerce retailer; Ms. Cindy Oakes of the
9 Dell Computing Company; Ms. Katrina -- I
10 believe it's Doerflerr -- Doerflerr, the senior
11 manager for planning and external tax
12 affairs, CISCO; and Mr. Dan Kostenbauder.
13 Mr. Kostenbauder is the tax council for
14 Hewlett Packard.
15 Again, I'm going to ask all of the
16 presenters to remember that time is tight. I
17 know it sounds sarcastic when we took a
18 little extra time to get started, but we're
19 trying to keep the panel together the best
20 way we can. So due to the schedule, I'm
21 going to ask of all you to try to condense
22 your remarks to about eight if you could,
217
1 please, and I think that would help us out a
2 great deal.
3 Mr. Lowy, if you would proceed,
4 please?
5 MR. LOWY: Mr. Chairman and members
6 of the Commission, thank you for the
7 opportunity to make some observations about
8 the issues before you. My name is Peter Lowy
9 and I'm co-president of Westfield America, a
10 New York Stock Exchange Company, which owns
11 interests in 38 major shopping centers across
12 the country that are home to approximately
13 4,700 specialty stores.
14 In many communities we are one of
15 the largest contributors to the local tax
16 base, through the property taxes we pay and
17 the sales taxes we generate. As an example,
18 we currently own two regional malls in the
19 city of San Jose: Westfield Shopping Town's
20 Valley Fair and Oakridge. In 1999, they will
21 generate combined sales and property taxes of
22 almost $66 million to the City of San Jose,
218
1 Santa Clara County, and the State of
2 California.
3 Of this, $60 million is produced
4 through sales tax. Sales tax revenue is the
5 largest single line item in San Jose's
6 general fund budget.
7 In the Town of Islip, on Long
8 Island, Westfield Shopping Town South Shore
9 produces $24 million in sales and property
10 taxes. Of this, $19 million is sales tax
11 which is shared by the town of Islip, Suffolk
12 County, and the State of New York. Sales tax
13 revenue is approximately 51 percent of
14 Suffolk County's budget.
15 I'm also here representing the
16 E-Fairness Coalition. We support a level
17 playing field that ensures consumers are
18 treated fairly, regardless of where they
19 choose to shop, in traditional or online
20 stores. The Coalition represents brick and
21 mortar and online retailers, retail
22 associations, public and privately-owned
219
1 shopping centers, outlet centers, Main Street
2 merchants and retailers. Our membership
3 represents a total of over 350,000 retail
4 stores nationwide.
5 We greatly appreciate the
6 opportunity to finally give our views on
7 these vital issues and look forward to an
8 on-going dialogue. We represent a major
9 sector of the economy that will be greatly
10 impacted by future Internet tax policy, and
11 we are eager to work with the Commission to
12 find solutions that work for everyone.
13 While we do not have official
14 positions on each of the proposals, I would
15 like to share with you the E-Fairness
16 Coalition's views on the issues before the
17 Commission and provide some basic principles
18 we support to help guide your consideration
19 of the various proposals.
20 We support a level playing field
21 that insures that consumers are treated
22 fairly regardless of where they choose to
220
1 shop, in brick and mortar stores or online.
2 Therefore, sales and use taxes from sales
3 made online should be charged just as sales
4 taxes from sales made by brick and mortar
5 retailers are today. To be clear, we oppose
6 creating new taxes on E-commerce, but favor
7 equal application of the law.
8 Preferential tax policies and
9 government subsidies for Internet retailers
10 would distort the free market and place brick
11 and mortar retailers at a competitive
12 disadvantage. Competition is the hallmark of
13 business and our tax policies should foster
14 competition in a new economy, not hinder it.
15 Therefore, any proposal you endorse should be
16 fair and it should promote a level playing
17 field.
18 We are also in favor of a workable
19 solution to ensure that sales and use taxes
20 can be collected in a simple and easy
21 fashion. As the proposal by ATRAX, Taxware
22 International and others indicate, the
221
1 technological capability exists to simplify
2 and securely collect sales and use tax on all
3 transactions. The E-Fairness Coalition
4 supports a simple, mutual, and clear tax
5 policy that can be easily implemented into
6 the current E-commerce infrastructure.
7 We also support proposals that
8 ensure revenue neutrality and consumer
9 privacy. We are for a system that simplifies
10 sales and use tax collection and eliminates
11 the cost of compliance. Once this zero
12 burden system is implemented and
13 administrative burdens of sales and use tax
14 collection are lifted, we feel there is no
15 logical argument for Internet retailers not
16 to charge sales and use taxes, just as Main
17 Street retailers do today.
18 While E-Fairness Coalition is not
19 taking an official position on the individual
20 proposals, we clearly oppose the proposals
21 that promote a permanent tax haven for
22 Internet sales. We oppose the tax haven for
222
1 a number of reasons, including, firstly,
2 retailers will be subject to an unfair
3 government-imposed competitive disadvantage.
4 A level playing field is what's best for the
5 new economy.
6 Secondly, this policy may lead to
7 higher property taxes for homeowners, higher
8 state income taxes, and/or higher sales tax
9 rights, as states and cities try to re-coop
10 lost revenue.
11 Thirdly, E-commerce is growing so
12 fast that it does not need preferential tax
13 treatment or government subsidies. As an
14 example, as of yesterday, Amazon.com's market
15 capitalization was $32.6 billion, twice that
16 of Sears and JC Penny's combined. E-toys,
17 which went public in 1999, has a market
18 capitalization of $5.6 billion, as opposed to
19 Toys-R-Us with a market capitalization of
20 $3.6 billion. Why would this industry need a
21 subsidy?
22 Brick and mortar retailers will
223
1 create separate online subsidiaries to take
2 advantage of the sales tax exemption for
3 online sales. This would distort integrated
4 business strategies that seek to include the
5 Internet as an important and complimentary
6 channel with brick and mortar for selling
7 goods.
8 We support proposals that have the
9 following criteria: Promote a level field,
10 simplify sales and use tax collections, a
11 zero burden system, uses technology to
12 simplify the collection of sales and use
13 taxes, and lastly, imposes no specific taxes
14 on Internet transmissions, network services,
15 or the medium itself.
16 E-commerce is growing faster than
17 even the optimists predicted. It does not
18 need a subsidy. The discriminatory tax
19 policies embodied in the proposals by
20 Governor Gilmore, Dean Andal, and others,
21 will have serious negative impacts on
22 traditional retailers who charge sales tax
224
1 and may force state and local governments to
2 raise other taxes to make up for lost
3 revenues. Traditional brick and mortar
4 retailers will be profoundly impacted by the
5 Commission's recommendations.
6 Therefore, we urge the Commission
7 to carefully consider the impact of your
8 recommendations on all segments of the
9 economy and to use great caution, so we will
10 not implement policies that could have a
11 negative impact on a major sector of the
12 economy.
13 Brick and mortar retailers want to
14 be part of finding a solution that works for
15 everyone. We at the E-Fairness Coalition
16 look forward to working with you as you go
17 forward. I'll be pleased to answer any
18 questions you might have. Thank you.
19 CHAIRMAN GILMORE: Mr. Lowy, I would
20 love to ask you some questions, as a matter
21 of fact, but time -- hopefully time will
22 permit. But, in the meanwhile, we will
225
1 continue on and then circle back, if we have
2 time.
3 Mr. Bullington, thank you very much
4 for being here, Wal-Mart.
5 MR. BULLINGTON: Thank you. Mr.
6 Chairman and Commissioners, my name is David
7 Bullington. I am vice president of taxes for
8 Wal-Mart Stores. Separately we've provided
9 written comments. For the sake of time, I
10 will proceed immediately into my summary of
11 those comments.
12 We've been asked to react to the
13 different proposals. I've divided my
14 reaction into three parts. The first part
15 being the tax-free proposals, the second
16 being the simplification proposals, the
17 third, the technology solutions. But we have
18 a little background.
19 Wal-Mart operates a Web site in
20 addition to its brick-and-mortar locations.
21 Wal-Mart currently collects the
22 sales tax on all its Internet sales based
226
1 upon delivery destination. Admittedly, this
2 is difficult and not all determinations
3 regarding jurisdictional lines and item
4 taxability are perfect. It is also an
5 expensive process and one that is a major
6 burden for any retailer, especially any
7 mid-size retailer. It may be an
8 impossibility for mom and pop Web site.
9 Accordingly, the minimis thresholds are
10 necessary with regard to any solution in this
11 area.
12 First to the tax-free Internet
13 proposals: Proposals to make the Internet a
14 tax -- a sales tax-free zone are attractive.
15 They are alluring even to us. But they have
16 potentially devastating economic tax and
17 social consequences. Yesterday's dialogue as
18 to where the kiosk could be, whether on the
19 premises -- maybe it's a community-provided
20 kiosk in the common area of a shopping
21 center. Those type things show the
22 difficultly of making the Internet zone tax
227
1 free.
2 The reality is, given the current
3 stalemate we have, we are already in a no-tax
4 environment when it comes to sales tax on the
5 Internet. Consumers can choose whether they
6 make that purchase from a site that charges
7 sales tax or not. More and more, brick and
8 mortar businesses are concluding that they
9 too can operate a separate subsidiary and not
10 have to collect the sales tax.
11 Lawyers, accountants, Web
12 consultants have advised many companies that
13 they can sell products without collecting the
14 sales tax by establishing a separate dot.com
15 subsidiary, as long as they preserve the
16 separateness of the company.
17 Some even advise that the return of
18 goods can be contracted for. These experts
19 cannot, however, tell one how many states
20 that they will have to litigate in relative
21 to this issue. Sound tax policy requires
22 certainty for all of us. Any of the tax-free
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1 Internet proposals only work to encourage,
2 again, a chase to the bottom as to how you
3 take advantage of this tax-free zone.
4 We've heard the call for empirical
5 evidence as to what's the impact to this.
6 Well, the early studies, once we get through
7 this season -- once we go into January and we
8 look at the new forecast, they're all going
9 to be out-of- date. The reality is if you
10 look at the gross growth and the gross
11 national product, you look at the projected
12 growth of the Internet, with or without
13 taxation, it's going to grow at such a rapid
14 pace it outstrips the rest of the gross
15 national product.
16 Now think about the erosion that at
17 some point in time has to occur, if this
18 thing really ramps up and takes off, if
19 existing tax policy is allowed to continue.
20 For sake of -- maybe even referring
21 to me as a de facto expert as it comes to
22 economic policy, because I think it's safe to
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1 assume that Wal-Mart understands pricing --
2 as it comes to the so-called excuse, if you
3 will, that there's somewhat rough equity in
4 the area, because we on our side have to
5 charge shipping and handling, where's the
6 parity as it comes to my site as I have to
7 charge shipping and handling and also a sales
8 tax?
9 But the bottom line reality is,
10 where was the freight that was incurred in
11 getting these goods to anyone's brick and
12 mortar site to begin with? Where's the
13 equity as it relates to that consumer's
14 decision as to whether they choose to go and
15 spend the money in their car to go to my
16 store? That is a very, very, made-up excuse
17 as to rough justice in this area.
18 As to the simplification programs
19 -- proposals. These call, basically, for the
20 states to fix the existing system. We agree
21 that major overhaul of the state systems are
22 required. We believe, however, that the
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1 states need help and direction in this
2 process. Significant hurdles include the
3 fundamental state sovereignty issues that
4 have been explained to be so important
5 already in these discussions: The difficulty
6 of moving 46 states in a single unified
7 direction in a short time line.
8 Several proposals call for
9 meaningful collection allowances to be
10 provided to the retailer to offset the burden
11 of collection and encourage the merchant to
12 collect voluntarily. So as not to disrupt
13 existing collections, such allowances could
14 be made to apply just to sales in interstate
15 commerce. Going a step further, we recommend
16 that the collection allowance percentage be
17 structured to reward those states that take
18 steps to simplify their systems. Those
19 states that have the most burdensome systems
20 should be required to pay a larger collection
21 allowance.
22 And I'll wrap-up quickly, if you'll
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1 bare with me. In the five states that allow
2 local administration -- their cities, their
3 counties are allowed to collect -- these need
4 the most help as far as direction. Two of
5 those five states, in particular, I spend
6 more time than 10 other states. If those
7 five states got to a uniform
8 state-administered system, we would be down
9 to 46 remittance points, 46 state
10 administrators to deal with, 46 audits.
11 Now that's not yet the greatest
12 scheme, but it is significant simplification.
13 And, quickly, all the discussion
14 about the 6,000, if not 30,000, jurisdictions
15 to deal with, that's overblown. I deal with
16 all of them everyday, day in and day out.
17 There is the need for uniform definitions,
18 better uniformity across state lines. Yes,
19 if the states can get to a unified rate for
20 each. But, again, if the collection
21 allowance could be structured to encourage the
22 states to move in that direction, we'll get
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1 the states there quickly enough.
2 With the right direction from the
3 Commission, we believe the states will take
4 necessary legislative steps. The Commission
5 should recommend to Congress a
6 federally-legislated, incentive-base
7 collection allowance. That same legislation
8 should establish the threshold of uniformity
9 and simplification at which remote sellers
10 can be compelled to collect.
11 And quickly as to technology, it's
12 important, it's part of the solution, it
13 needs to be encouraged, it needs to be part
14 of the debate and the solution. Thank you.
15 CHAIRMAN GILMORE: Thank you, Mr.
16 Bullington. We appreciate your insight.
17 Mr. Julian?
18 MR. JULIAN: Good afternoon. My
19 name is Frank Julian. I'm operating vice
20 president and tax council, Federated
21 Department Stores, Inc., in Cincinnati.
22 Federated is one of the nation's leading
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1 department store retailers. We operate more
2 than 400 department stores in 33 states under
3 the names of Bloomingdale's, Macy's, the Bon
4 Marche, and others. Federated also has a
5 significant direct mail catalog and
6 E-commerce with its Fingerhut, Bloomingdale's
7 by Mail, Macy's by Mail, Macy's.com,
8 subsidiaries. Although Bloomingdale's by
9 Mail, Macy's by Mail, and Macy's.com are each
10 separate subsidiaries, they collect tax on
11 sales into any state where Bloomingdale's and
12 Macy's, respectively, have department stores.
13 I'm here today to discuss the zero
14 burden proposal that has been proposed by the
15 National Governors' Association and other
16 groups.
17 Let me begin by saying that the
18 Commission hearings have raised an awareness
19 in an unprecedented manner of the
20 complexities facing the current sales tax
21 system. Federated Collection remits more
22 than $1 billion per year in sales tax for the
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1 state and local governments where we do
2 business. We accrue substantial costs in
3 collecting and remitting these taxes and
4 administering the many audits that follow.
5 The simplification that I believe
6 will result from these proceedings will make
7 it much for the states to administer and
8 enforce their tax and will make it much
9 easier for sellers to comply with the tax.
10 If this occurs, I think your work will have
11 been a success.
12 The zero burden proposal goes
13 beyond simplification. It calls for a system
14 that actually removes tax collection
15 obligations from E-commerce vendors. We are
16 in the business of selling goods and services
17 to our customers. Nothing would please us
18 more than to be able to get out of the costly
19 side-business of collecting and remitting
20 sales tax. Accordingly, we encourage the
21 sponsors to expand the proposal so that it
22 not only removes the collection burdens from
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1 E-commerce vendors, but removes the burdens
2 from all sellers, regardless of the manner in
3 which they sell their goods.
4 We applaud the sponsors for
5 devising a proposal that does not call for
6 federal legislation overturning Quill.
7 However, I want to express some concerns we
8 have about certain aspects of the proposal
9 and some issues that we believe should be
10 considered as the sponsors develop the
11 details.
12 First, determination of taxable
13 items. Determining the taxability of certain
14 products, such as clothing, food, and
15 medicine, is extremely complicated in
16 multi-state environment. Several states
17 exempt these items in whole or in part, but
18 the states all have different definitions
19 and/or interpretations.
20 As a leader in the apparel
21 industry, Federated is most familiar with the
22 challenges imposed by the clothing
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1 exemptions. There are nine states with
2 permanent or temporary clothing exemptions,
3 and that handkerchief that Mayor Kirk is
4 wearing in his jacket is considered exempt
5 clothing in five of those states, but in the
6 other four it's considered taxable
7 nonclothing.
8 The software that is available
9 today cannot accurately determine the
10 taxability of all articles of clothing in
11 these nine states, because each state has its
12 own peculiar set of rules.
13 To accurately tax an article of
14 clothing in a multi-state environment, the
15 retailer must assign one of dozens of tax
16 product codes, or clothing product codes, to
17 each and every item or skew, which that
18 retailer sells. Whether your an E-com
19 retailer with 30,000 skews or a department
20 store with 3 million skews, the proposal is
21 unlikely to attract voluntary participants
22 unless the states adopt single uniform
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1 definitions of food, clothing, and medicine,
2 so that the product code decision is a simple
3 choice. Although development of software is
4 important, the key to success lies in
5 simplification and uniformity.
6 Compatibility of software. Every
7 different industry uses a different type of
8 system to identify the types of products that
9 it sells. The software must be compatible
10 with each and every one of these systems.
11 Businesses shouldn't be required to change
12 their business practices.
13 Protection of proprietary data. As
14 vendors develop new products, they will
15 presumably be required to provide information
16 about these products to the trusted
17 third-parties in advance of advertising them
18 for sell so the taxability can be imputed
19 into the system. Due to the competitive
20 nature of the business, however, most vendors
21 will have legitimate concerns about
22 prematurely disclosing their product mix to a
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1 third party, particularly in the case of
2 unique items which the seller has developed
3 itself.
4 In our business, for example, we
5 develop a significant amount of private label
6 merchandise which we do not want our
7 competitors to know about before it hits our
8 shelves.
9 States will choose their trusted
10 third-parties based on a competitive bidding
11 process. I anticipate that some retailers
12 might actually submit bids to become a
13 trusted third-party. I can assure you that
14 no retailer would participate in a system
15 that requires it to turn over proprietary
16 product information to a competitor.
17 The system must account for exempt
18 customers such as -- resale certificates,
19 charitable organizations and so forth.
20 Returns and adjustments. The
21 proposal must efficiently and timely refund
22 sales tax to customers when they return
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1 merchandise or when the seller makes a price
2 adjustment after the initial sale, for
3 example, to accommodate a customer's
4 complaint. Bear in mind that many E-commerce
5 vendors also have brick and mortars stores.
6 For example, if you purchase something from
7 Macy's.com you can return it in any Macy's
8 store. When that happens, the customer with
9 legitimately expect a refund of the purchase
10 price and the sales tax at that point in time
11 when they're standing there in the store. If
12 that occurs, the system must have a way to
13 reimburse the retailer for those sales taxes.
14 Privacy of customers. Maintaining
15 customer privacy will be critical to the
16 proposal's success. Under no circumstances
17 should a retailer ever be required to
18 disclose the name and/or address of its
19 customers to the states or a to a trusted
20 third-party.
21 Customer complaints. This is one
22 of the biggest concerns that we, along with
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1 most other retailers, have about the zero
2 burden proposal. No matter how good the
3 system is, there will undoubtedly be errors
4 and customer complaints due to
5 over-collection of tax, customer confusion,
6 and other causes. When this occurs, it is
7 only logical for the customer to complain to
8 the retailer from which he or she made the
9 purchase.
10 It will be difficult, if not
11 impossible, for the retailer to convince
12 their customer that the retailer did not
13 cause the problem and cannot do anything to
14 fix the problem. This puts the retailer in
15 an untenable position. Retailers will not
16 participate in a system where there is a
17 significant risk that they will lose
18 customers by doing so.
19 Third-party gift sales. Under
20 current law, if a person who lives in
21 California, for example, orders the gift from
22 a non-California direct marketer, or
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1 E-commerce vendor, to be sent directly to a
2 third party in New York, for example, neither
3 state may impose their sales or use tax on
4 that transaction. The proposal will be
5 constitutionally flawed if it is unable to
6 recognize this type of transaction.
7 Applicability to mail order and
8 check sales. The use of a trusted
9 third-party presumes that all payments are by
10 credit card which, in fact, is not the case.
11 A substantial portion of direct marketing
12 customers pay by check. The proposal leaves
13 these sales unaddressed.
14 If there is no tax collection on
15 these sales, then the method of payment
16 determines tax treatment and this could be
17 very confusing to customers. One the other
18 hand, if remote sellers who volunteer to
19 participate in the problem will have an
20 obligation to collect use tax directly from
21 their check-paying customers, then they will
22 incur all the problems associated with use
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1 tax collection in multiple jurisdictions.
2 Credit card fees. Credit card
3 companies typically charge vendors a fee in
4 terms of the percentage of the amount
5 charged. The zero burden proposal should not
6 allow these fees to be passed on to the
7 sellers for the sales tax. The states or the
8 trusted third-party should bear the entire
9 cost of these fees.
10 Proprietary charge cards. Many
11 customers make purchases using a vendor's
12 proprietary charge card rather than
13 universally accepted cards such as VISA and
14 MasterCard. It is unclear whether charges
15 made on proprietary charge cards will be
16 covered under the zero burden proposal. To
17 the extent that a vendor must remit the sales
18 tax directly to the state on purchases paid
19 for with a proprietary card, the program is
20 no longer zero burden.
21 Bad debts. If a customer doesn't
22 pay all of his/her bill, the proposal must
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1 have a way to reimburse the entity that
2 remitted the taxes for the bad debts.
3 The states appear willing to bear
4 the entire cost of this proposed system,
5 including paying for the software to be used
6 by all vendors and compensating the trusted
7 third-party. I would like to know if the
8 sponsors ever considered offering a
9 meaningful collection allowance to all
10 retailers, rather than creating a complicated
11 trusted third-party system for E-commerce
12 retailers only.
13 Of the 45 states with a sales tax,
14 only seven provide for an uncapped collection
15 allowances over 1 percent, and studies show
16 that the cost to collect taxes is typically
17 greater than 3 percent. I believe the
18 presence of permanent meaningful collection
19 allowance along with significant
20 simplifications in the sales tax laws would
21 be enough for some remote sellers to begin
22 voluntarily collecting the tax.
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1 As I stated earlier, the concept of
2 being entirely removed from the tax
3 collection process is certainly appealing,
4 and perhaps the best mousetrap is built with
5 help from the mouse. As the sponsors develop
6 the details of the proposal, I would strongly
7 encourage them to seek some significant input
8 from those who will be most impacted by it,
9 the business community and the tax-paying
10 public.
11 And I thank you for allowing me to
12 go over. I feel like the guy in the Fed Ex
13 commercial, but I will be happy to answer any
14 questions.
15 CHAIRMAN GILMORE: Well, you did fine.
16 You did well. Mr. Winn, please?
17 MR. WINN: It is clear as mud, as
18 we can tell from what we've heard thus far.
19 This Commission is contemplating the engine
20 that is propelling the American economy,
21 about the tool that obliterating the
22 geographical boundaries that today is now
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1 shrinking our world. And even more
2 important, it's about our best hope to
3 conquer the digital divide and provide hope
4 where there is despair and to create real
5 opportunity where there is current
6 dependence.
7 And, yes, these are all related
8 issues, because the way that we choose to tax
9 will propel our throttle, our success, and
10 theirs.
11 My name is Craig Winn. I am
12 founder of Value America. We are one of the
13 nation's largest E-tailers. We are a pure
14 E-tailer. We are expected to do
15 approximately one-half billion dollars next
16 year in revenue, which sounded significant to
17 me until I recognized I was sitting next to
18 Wal-Mart, Federated, and Dell, and now fairly
19 anemic by comparison. We are a very fast
20 growing company and a extremely innovative
21 company, and today my testimony is going to
22 be fairly simple. That we must stop and we
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1 should not start.
2 If we are to optimize this
3 opportunity, this engine that is driving our
4 nation, we stop taxing telecommunications and
5 Internet infrastructure so outrageously, and,
6 I believe, unwisely. We are already paying
7 an extraordinary tax because the sales tax
8 and excise taxes and surplus taxes on the
9 infrastructure that we use is four to five
10 times greater than is the sales tax or use
11 tax on anything else.
12 For example, in Virginia, while the
13 state tax fairly modest at 1 percent, it's
14 actually 18 percent by the time you put on
15 all of the municipality taxes on this
16 Internet infrastructure. It is perhaps one
17 of the most regressive taxes in our nation,
18 and what we need as a nation now is to use
19 this technology, to reach out a conquer the
20 digital divide and create opportunity for
21 underprivileged children so that we all have
22 equal opportunity. Why would we want to tax
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1 something like this so disproportionately?
2 Imagine what would have happened if
3 100 years ago a panel of distinguished
4 politicians and businessmen had gathered
5 together and decided they wanted to tax the
6 railroads, just as we now tax Internet
7 infrastructure? Well, that was the engine
8 that brought our nation together and
9 propelled the industrial revolution that
10 built the great American economy that
11 actually liberated the world from the tyranny
12 that we would all live under today.
13 And I don't think anyone can come
14 to the conclusion that the Internet and
15 e-commerce is any less important as an
16 economic engine to drive the future of our
17 economy and the progress of our people.
18 Therefore, we must recognize that
19 the first law of taxation is if you want more
20 of something, tax it less. If you want less
21 of something, tax it more.
22 We need more and open and less
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1 expensive access for all of Americans to the
2 telecommunications and the cable and the
3 communications industry that is powering this
4 E-commerce revolution and empowering our
5 children's opportunity to learn and compete,
6 and we need to tax it less.
7 That is the easy part. The hard
8 part is what in the world do you do about
9 goods and services that are sold online? The
10 first is that we recognize we have a world
11 right now that is based upon nexus and nexus
12 is based upon geography, and the Internet
13 knows no geography. So under that basis, it
14 is really impossible to take this structure
15 that we have now and to apply it to a world
16 without borders, unless we were to get all
17 30,000 taxing municipalities to all agree to
18 a similar plan.
19 And now the fact is, that if we're
20 a Virginia company and we sell goods to
21 someone in California, do we have a nexus in
22 California? Well, today I'm speaking to you.
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1 Am I an asset to the company and therefore do
2 we have a nexus here today? Perhaps we do.
3 But it's as clear as mud. And the fact is
4 that we do play in the sales tax world even
5 today. And the reason that we do is the fact
6 that if someone in Virginia buys something
7 from us and we're a Virginia company, we do
8 collect and pay sales taxes.
9 But the issues of geography are
10 actually less complex than the issues of
11 medium. We've been hearing that there is
12 brick and mortar, but brick and mortar, like
13 Wal-Mart, is selling goods online. We also
14 know that cataloguer's have online stores,
15 and we're an online store and we use a
16 catalogue. And then there's call centers and
17 QVC-kinds of sellers, as well, all that have
18 online stores and online stores that use
19 these mediums.
20 The fact is that businesses, retail
21 and all forms of business, will use every
22 tool in their arsenal to contemplate and to
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1 complete a sale. And there is no way that
2 one can say, this sale was Internet-related
3 and this sale was not Internet-related, it
4 was over the telephone or through the mailbox
5 or through some brick and mortar store.
6 They're all being brought together a
7 converged into a singular solution.
8 Therefore, if you're going to have
9 a tax that is fair, it must be simple, it
10 must be practical, it must be clearly
11 understood and pragmatic, which means there's
12 only one choice and that choice is
13 impossible. That choice is to have a
14 singular national sales tax that supersedes
15 the jurisdiction of municipalities and
16 states. One tax, all products, all
17 companies, regardless of how goods are sold
18 or where they are bought, who buys them or
19 who sells them or what medium that sale is
20 conducted on.
21 And since that is politically
22 impossible, I think we have to deal with the
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1 pragmatic reality, that there is no
2 opportunity to tax E-commerce apart from the
3 rules of geography and nexus that currently
4 exist.
5 So we must stop taxing that which
6 we are already are excessively taxing and we
7 must not start taxing that which we are not
8 taxing apart from the existing nexus rules.
9 Thank you.
10 CHAIRMAN GILMORE: Mr. Winn, thank you
11 very much. Ms. Oakes?
12 MS. OAKES: Thank you. My name is
13 Cindy Oakes and I'm a state and local tax
14 manager for Dell Computer Corporation. Dell
15 designs, manufactures and customizes computer
16 products and services to customer
17 requirements. Our orders are accepted via
18 phone, mail, fax, and the Internet. We very
19 proudly say that at the end of our last
20 quarter, Dell's sales through the
21 www.dell.com reached $35 million per day.
22 For the calendar year 1999, Dell
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1 will collect approximately $400 million of
2 state and local sales and use tax and file
3 over 1,900 tax returns. My department
4 manages and exemption database that exceeds
5 500,000 records and is increasing by 3,000
6 records monthly. Jointly, our collections
7 and tax department are currently working a
8 list of over 6,000 invoices where customers
9 have short-paid the tax to us. We have six
10 audits that were started this year and six
11 audits that are carrying over from last year,
12 and we have audits currently scheduled into
13 the year 2001.
14 The multi-state tax Commission and
15 some of its member states continue to
16 challenge our catalogue company, and this has
17 been going on for over two years now. So in
18 listening -- reading the proposals and
19 listening to the panels, my company has many
20 of the same concerns that Frank has listed.
21 We want our customers' privacy
22 protected. We want to have the customer
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1 contact. We also believe that the NGA
2 proposal should be available to all sellers,
3 not just over the Internet.
4 A comment was made by Governor
5 Leavitt that you were looking for voluntary
6 participation and you were looking for the
7 big boys. Well, I think we fall into the
8 big-boy category. One of things, though,
9 that is in the proposal is that if you have
10 already been contacted by states regarding
11 prior liabilities, you would not be eligible
12 for the program or those liabilities would
13 not be relieved.
14 So, to Richard Parson's question,
15 why would we volunteer? We need the
16 simplification on our business-to-business
17 sales. That's where the main complexity is,
18 it's not on sales to consumers. Obviously,
19 we're a big company, I have a big department,
20 it wouldn't be that hard for me to flip the
21 tax switch and start collecting from
22 consumers. We don't do it today, because
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1 Quill says we don't have to. The states and
2 local governments have not done a
3 particularly good job educating citizens, so
4 we would be dealing with consumer questions
5 about why they're being taxed, because many
6 of them believe it is illegal for a mail
7 order company to charge them tax.
8 Even with our business-to-business
9 sales today, we have to make copies of our
10 registration statements and send them to
11 customers, because they don't believe we have
12 the right to collect the tax, because we
13 don't have stores in the state, which they
14 believe is the rule.
15 So I will wrap up quickly here. I
16 have the same concerns that Frank does. We
17 are asking for simplification. Before we
18 start looking a technology solution, we have
19 a lot concerns around bandwidth. If we
20 started running our $35 million a day to an
21 outside system to calculate the tax and send
22 it back, would it be able to support it?
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1 Because we do use Taxware today, its audit
2 file cannot handle the size of our
3 transactions, so we don't believe there is a
4 technology solution that's available and
5 ready to launch today.
6 Thank you.
7 CHAIRMAN GILMORE: Thank you, Ms. Oakes.
8 Ms. Doerflerr?
9 MS. DOERFLERR: Mr. Chairman and
10 members of the Commission, my name is Katrina
11 Doerflerr. I'm with CISCO Systems, Inc. I'm
12 also representing the American Electronics
13 Association, and I'd like to spend the next
14 five minutes addressing why the American
15 Electronics Association supports
16 nexus-clarifying proposals like the Andal
17 Uniform Jurisdictional Standards, and why
18 those clear nexus standards are important for
19 business with respect to business activity
20 tax nexus. And by business activity taxes, I
21 mean those taxes that are based on things
22 such as income or franchise tax.
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1 AEA supports the following
2 E-commerce tax principles as jurisdictions
3 look to whether and how to tax Internet
4 sales: One, impose no greater tax burden on
5 electronic commerce than other traditional
6 means of commerce. Two, support simplicity
7 in administration. Three, retain and clarify
8 nexus standards. Four, avoid new taxes on
9 the Internet. And, five, consider tax issues
10 in a global context.
11 We believe that clarification of
12 the nexus standards for all types of taxes is
13 a good idea for both state tax authorities as
14 well as business. It will result in
15 litigation and audit cost savings for both
16 government and business. It creates
17 certainty in the marketplace, which is good
18 for all business, including E-commerce.
19 Without clarity, there will continue to be
20 differing interpretations by different states
21 as to the type and quality of nexus standards
22 to apply. For example -- I'm using one of
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1 the examples earlier -- attending a meeting
2 such as this or attending a trade show for a
3 number of days in state may create nexus in
4 one state versus another state.
5 Clarity of the nexus standards goes
6 hand-in-hand with simplification and
7 compliance. The Andal proposal and proposals
8 like it are a reasonable way to apply Public
9 Law 86-272, in essence a codification of the
10 Quill and the national Belles Hess standards.
11 One comment, too, in respect to a
12 comment that I heard earlier today, Public
13 Law 86-272 is a codification of certain nexus
14 standards in the income tax area, has been
15 around for 25 or 30 years, and has worked
16 just fine.
17 The reason clarification and nexus
18 standards is important, not only in the sales
19 tax area, but also -- it's also important in
20 the business activity tax nexus area. This
21 Commission has heard a lot about sales and
22 use taxes in the context of E-commerce.
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1 There's a whole other area of taxes out there
2 that affect business and are just as
3 important and costly to business that should
4 be considered. We need a bright line test in
5 the business activity tax nexus area.
6 States have increasing used new and
7 novel nexus theories to assert jurisdiction
8 over out-of-state companies in this area.
9 Some of those nexus theories include such
10 things as agency nexus: The theory that
11 unrelated parties can somehow create nexus
12 for each other, because of the type and
13 quality of business relationships that they
14 have. Those -- that type of theory is
15 represented in cases such as the Scholastic
16 Bookclub Case and Troll Books' case law.
17 Affiliate nexus is another area.
18 The theory that a subsidiary of yours that
19 does have traditional nexus in a state,
20 creates nexus for all other legal entities in
21 your structure, represented by
22 Bloomingdale's-by-Mail cases and the SSA
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1 Folio cases.
2 Also, economic nexus theories,
3 which are represented by cases such as
4 Jeffery in South Carolina and JC Penny in
5 Tennessee. The fact that -- or this theory
6 that if you have a certain level of economic
7 activity in a state, you must have nexus for
8 income tax purposes.
9 States have aggressively tried to
10 use these theories to pull more states --
11 more companies into their state for income
12 tax purposes.
13 Permitting such expansion would
14 damper business innovation and expansion and,
15 thus, bring harm, we believe, to the American
16 economy. When a company's presence in a
17 state is minimal, it is not deriving material
18 or meaningful protections or benefits from a
19 state. There's a whole body of case law that
20 underpins and defines what is a
21 constitutional tax with respect to a
22 multi-state business. Most of this case law
260
1 revolves around, you know, a four-prong test
2 to determine if a tax is constitutional. One
3 of those prongs is, is the tax fairly related
4 to the benefits received in a state? And we
5 don't believe that happens with economic,
6 affiliate, or agency nexus theories. States
7 are aggressively using those, though, to pull
8 states in -- to pull companies in.
9 The other area that -- or the other
10 type of tax that this effects is city income
11 taxes. All the different local and municipal
12 jurisdictions across the United States apply
13 income taxes. We believe that a Public Law
14 86-272 threshold should apply to them, also.
15 And clarity in this area, with respect to
16 city income taxes, would also help.
17 And just in conclusion, the
18 imposition of new and expanded tax
19 liabilities on the business community would
20 seriously undermine the ability of the US
21 economy to remain robust. E-commerce is
22 changing business-to-business relationships
261
1 in a profound way. Many unrelated companies
2 are going to market together to jointly
3 exploit technology or they're creating
4 Internet ecosystems, where many businesses in
5 a particular industry or niche work together
6 to create a market for products and services.
7 Businesses shouldn't be hampered or
8 penalized in this new world by business
9 activity tax nexus standards that are
10 confusing and inconsistent between
11 jurisdictions. There should be clearly
12 defined and uniform safe harbors for business
13 activity tax nexus. The business community
14 fears that any expansion of state tax
15 jurisdiction rules in the area of sales and
16 use taxes may have an unintended effect on
17 business activity tax nexus standards.
18 We would urge the Commission to
19 recommend clarifying the nexus standards at
20 the same time that they're recommending that
21 states simplify the current sales tax
22 administration system. We should encourage
262
1 the states to simplify first, before we begin
2 to discuss proposals on how or whether to
3 tax. Although commending many of the efforts
4 that we heard today -- the different
5 proposals that you've heard over the last day
6 and a half -- it's just interesting to note
7 that many of them are long on new process and
8 short on the details of radical
9 simplification. Thank you.
10 CHAIRMAN GILMORE: Thank you very much.
11 Mr. Kostenbauder?
12 MR. KOSTENBAUDER: Chairman Gilmore
13 and commissioners, my name is Dan
14 Kostenbauder. I'm general tax counsel at
15 Hewlett Packard Company, and among other
16 responsibilities for the last 10 years, I
17 have managed our sales and use tax
18 department. The current discussion relating
19 to the taxation of E-commerce provides a
20 great window of opportunity with respect to
21 simplifying and making more uniform the sales
22 and use tax system that we have in the US.
263
1 One rate per state is the rubric
2 that's used to describe that, but really the
3 rate issue is relatively minor from an
4 administration point of view within a
5 company. The various definitions of the tax
6 base procedures relating to exemptions and
7 audits and other factors are much, much more
8 expensive.
9 Just to give you an idea of how
10 expensive the sales and use tax is to
11 administer -- and I think this is probably
12 true broadly of most companies -- but at
13 Hewlett Packard Company, we have twice as
14 many people involved in administering our
15 sales and use tax as we do in all of the
16 federal and state income tax compliance and
17 planning and audit activities. So it really
18 is, compared to another set of taxes, very
19 expensive and very costly.
20 And that expense and that cost is
21 due primarily to all of the complexity within
22 the sales and use tax system. And, in
264
1 particular, the lack of uniformity across the
2 many states.
3 You've spent a lot of time already
4 discussing some of the system solutions that
5 might be available for electronic commerce.
6 I'd like to focus on one particular aspect of
7 that expense, and that's the expense that
8 businesses incur taking the tax calculation
9 software which is available today, and our
10 enterprise business software that's used to
11 do invoicing, accounting, order processing,
12 other business functions.
13 That linkage, between those two
14 software packages, is a nontrivial
15 undertaking. We know how to do it, but it is
16 expensive, costly, and it takes time. And
17 all but the smallest companies need to do
18 that. The American Electronics Association
19 recently did a survey where we asked a few
20 companies to provide us, on an informal
21 basis, some information, and the larger
22 companies tended to spend a half a million
265
1 dollars to $1 million per year. The smallest
2 companies spent $100- to $500,000 linking
3 these two packages of software that they
4 needed.
5 In Hewlett Packard Company's case,
6 and bearing in mind that we're a company with
7 worldwide revenues of over $40 billion a
8 year, we going to spend over $2 million this
9 year on that linkage. So it's something to
10 keep in mind, and we urge to keep that
11 expense in mind as you begin to deliver --
12 deliberate and decide that perhaps that one
13 of these software solutions is appropriate.
14 And I'm not here to say that it isn't, but I
15 just want to make sure that this Commission
16 understands that there is great expense, and
17 a large measure of that expense is a function
18 of the complexity and the lack of uniformity
19 in the current system.
20 One of the other general
21 recommendations that everyone has been making
22 and I'll make it, too, is that we must move
266
1 forward and the Commission would do great
2 good if it strongly recommended to the
3 Congress that the Congress do whatever it can
4 and the states do whatever they can to
5 achieve a level of simplicity and uniformity.
6 One of the ways that some of the states help
7 deal with the cost of compliance with all the
8 system is in a regime called, vendor's
9 compensation or vendor discounts, where the
10 states actually provide some revenue to
11 companies involved in the compliance for
12 collecting sales tax.
13 A number of states have this. I
14 think a majority do not, but it is a great
15 idea, because the companies are, in a sense,
16 compensated, but it also provides a
17 recognition by the state that the companies
18 are doing, in fact, a service on their
19 behalf, helping them with the tax collection
20 opportunity.
21 One of the very interesting things
22 that has not been said yet about the National
267
1 Governors' Association's proposal, is a very
2 subtle undercurrent, which is that the
3 philosophy that has been used thus far in the
4 entire history of the sales tax, which is the
5 vendor is responsible for dealing with the
6 customer and then dealing with the tax
7 authority to pay this tax, it potentially
8 severs that link, and the government is now
9 going to deal directly with the taxpayer,
10 potentially leaving out the vendor, who
11 really is now just facilitating the
12 collection, but is not really involved as a
13 taxpayer in this particular situation.
14 And either through -- think about
15 it, through either the vendor's compensation
16 approach or something along this
17 philosophical change that the NGA has
18 proposed, if the state governments and the
19 local governments who are getting the benefit
20 of the sales tax, were, in fact, bearing the
21 cost of collecting the sales tax, we would
22 see the simplification that we've been
268
1 talking about happening at a much more rapid
2 pace.
3 And today I think it hasn't
4 happened, despite the national Belles Hess
5 case and the Quill case -- the obvious
6 advantages of simplifying things hasn't
7 happened because businesses are forced to
8 bear the expense of the complexity rather
9 than the tax collectors.
10 So I can see there's an opportunity
11 here and I think if the simplification
12 occurs, a lot of the questions that we've
13 been dealing with that seem intractable
14 relating to remote sales and also relating to
15 digital delivery, will become much easier to
16 solve and will be much easier to manage and
17 to come to some content -- consensus on.
18 Thank you very much.
19 CHAIRMAN GILMORE: Thank you, Mr.
20 Kostenbauder. Ladies and gentlemen of the
21 Commission, it's 1:45. If we were to get
22 back on schedule, after a short break at 2:00
269
1 -- like at 2:05 -- we've got about three
2 hours and 15 minutes to talk about the issues
3 and options paper, and to take up Mr.
4 Norquist's resolutions, and then still a few
5 minutes after 5:15 to talk about the budgeted
6 administration, although I think they're non-
7 controversial matters.
8 Therefore, we can take about a
9 quarter of an hour, right now, to talk to
10 these folks and to ask them questions. And I
11 think that's a pretty good thing to do, with
12 the caliber of the people who are here today.
13 However, I would ask the
14 Commissioners -- we had a free-for-all this
15 morning that, I thought, very positive, but
16 it was very long. If we could ask the
17 Commissioners to avoid the speeches this time
18 and ask questions to the panel people and get
19 answers from the panel people, we can get
20 some questions and answers in within this
21 period of time and stay more-or-less on
22 schedule. If that is satisfactory to the
270
1 Commission, why don't we take a few minutes
2 for Q and A to this panel?
3 Governor Leavitt?
4 GOVERNOR LEAVITT: Thank you, Mr.
5 Chairman. I'll just make one point to
6 several of you who queried about the National
7 Governors' Association proposal. I believe
8 it is the intention of that group to have the
9 system apply to both retail and E-tail. This
10 was just something several of you brought up.
11 I agree with what you've suggested, that it
12 would difficult to have those duel systems.
13 I like the idea of the better
14 mousetrap involving the mouse, and I'd like
15 to ask all of the panel members who would
16 wish to respond very briefly, as you look --
17 being the tax experts that you are, dealing
18 with the day-to-day, where the rubber is
19 meeting the road, and if you assume that it's
20 going to take us three to five years to do
21 anything that will fundamentally change this
22 system, I'd like to know if you believe it's
271
1 possible for us to radically simplify, to
2 dramatically change the system to be
3 compatible with the technology as we've
4 talked about it and benefit the retail
5 segment as well as the electronic commerce?
6 I'd like to know if you believe it's possible
7 and worth the endeavor.
8 MR. JULIAN: Governor, if I may
9 respond? I certainly think it's worth the
10 effort. The proof will be in the pudding,
11 whether or not it's possible. I know that
12 members of the industry and members of
13 government have worked together in the past.
14 For example, I also -- I chair the Direct
15 Marketing Association's Tax Committee, and on
16 two occasions, in the last 10 years, members
17 of the DMA and members of the states --
18 generally represented by Mr. Duncan and Mr.
19 Bodson and some of those organizations --
20 have gotten together to try to work out, what
21 at the time was called a voluntary collection
22 agreement. It was done once before the Quill
272
1 decision and once a few years ago, even
2 though I personally didn't participate in the
3 efforts a few years ago.
4 I can say that both sides
5 approached it in good faith and gave it an
6 honest effort. They did not succeed, but
7 that's not to say that shouldn't try. And,
8 as I said earlier, if nothing else occurs
9 from this Commission, I think that the sales
10 tax system is in dire need of simplification
11 and I think the efforts would be worthwhile.
12 CHAIRMAN GILMORE: Any other responders
13 to Governor Leavitt, on the panel?
14 Mr. Winn?
15 MR. WINN: I don't think it's
16 possible to get 30,000 jurisdictions to agree
17 on anything. And unless you do, both, deal
18 with the geography issues and eliminate all
19 the nexus issues, which are -- put all of us
20 at great risk. We spend enormous amounts of
21 money trying to deal with states who wish to
22 be litigious and sue us for decisions that
273
1 really don't have any basis of law, but yet
2 they have deeper pockets than we do. And so
3 you've got to deal with those issues, which I
4 think would be very difficult. And then you
5 have to deal with the issues of medium, which
6 means you have to have one policy, regardless
7 of how goods are sold: By mailbox, by
8 telephone, by brick and mortar store, or on
9 line.
10 And the combination of those things
11 means that the only solution would be a
12 national sales tax which would supersede the
13 rights of municipalities and states, which I
14 don't think is politically palatable.
15 GOVERNOR LEAVITT: So you're suggesting
16 is that we either have inequity or a national
17 sales tax?
18 MR. WINN: I believe that we either
19 have the disaster that we have now or a
20 singular national plan that is clear, simple,
21 and comprehensive.
22 CHAIRMAN GILMORE: Mr. Bullington?
274
1 MR. BULLINGTON: Governor Leavitt,
2 we owe it to our cities, our counties, our
3 states, to make the effort. We'll be along
4 the way with you. The trade organizations
5 that I belong to, The International Mass
6 Retail Association, the E-Fairness Coalition
7 -- we'll be there, state-by-state, to help
8 you get the job done. And it's going to take
9 more of us, it's going to take a grassroots
10 effort to understand the issue, to understand
11 that the tax already applies, and to educate
12 people, and we'll be with you on Capitol
13 Hill.
14 CHAIRMAN GILMORE: Any other -- if not
15 any other questions, Mr. Andal then Mr.
16 Guttentag.
17 MR. ANDAL: I have just two
18 clarifying questions. Is it Mr. Lowy?
19 MR. LOWY: Lowy.
20 MR. ANDAL: Lowy. You represent a
21 company that actually owns malls. You
22 also -- did you say you represented an
275
1 association?
2 MR. LOWY: The ICSC.
3 MR. ANDAL: Which is the
4 International Council of Shopping Centers?
5 MR. LOWY: Yes.
6 MR. ANDAL: I just -- I'm trying to
7 understand where the mall owners are. There
8 seems to be dissension in your ranks. This
9 is a publication, the industry standards, and
10 is it Malachi Cavanah? The spokesman for the
11 International Council of Shopping Centers
12 said the following: "Those in the mall
13 business say that the Internet is an
14 opportunity, not a threat. We really don't
15 see the Internet causing any downsizing in
16 traffic," said Malachi Cavanah, a spokesman
17 for the International Council of Shopping
18 Centers. "For the most part, the data shows
19 that the Internet is driving sales to the
20 stores. It has created an educated consumer,
21 one who searches the Web but buys at our
22 store."
276
1 Who's right?
2 MR. LOWY: I don't think it's a
3 question of who's right and who's wrong. The
4 issues that the Commission are dealing with
5 are going to be the tax polices for what will
6 happen with E-commerce and bricks and mortar
7 retail in the future, really in the years
8 2003, 2004, 2005.
9 If you start to look at the
10 estimates of where E-commerce will be, the
11 estimates are that 9 percent of retail sales
12 will be done over the Internet by the year
13 2003. Those issues and that amount of sales,
14 then, have a profound effect on what goes on
15 in the cities and the towns that we do
16 business in. So I don't actually think there
17 is any difference between what we're saying
18 and what's being said by the ICSC.
19 MR. ANDAL: Let me move to Mr.
20 Bullington. I was amazed at one of
21 statements you made which was that you think
22 that the complexities of the sales and use
277
1 tax system are overblown. And I represent a
2 district that's in the other California, the
3 Central Valley, and we -- part of my district
4 includes the Fresno area.
5 Wal-Mart has come through the
6 Central Valley in the last 10 years and put
7 stores in virtually every city down the
8 Central Valley, and one of the places they
9 put a store was Fresno. Fresno had a very
10 unusual tax that has recently been declared
11 unconstitutional.
12 It was called the Arts to Zoo tax
13 -- one I opposed as a legislator. Anyway,
14 the Arts and Zoo tax was specific, not just
15 to the city of Fresno, but to a smaller
16 subset of the city of Fresno. You happened
17 to place your store in that subset. It was
18 designed so the tax would pass. You built
19 your first store there, in California. You
20 built the store and you called my agency, The
21 Board of Equalization, and said, what's the
22 tax rate? We told you. For that area, it's
278
1 a certain rate. It had an add-on for the
2 Arts to Zoo tax. You later, the next year,
3 built a store in Selma. Selma is outside of
4 the area that the Arts to Zoo tax collected
5 in and thus had a lower rate.
6 Your guys didn't call on that one.
7 You assumed that the rate in Fresno, which is
8 only five miles away, would be the same as in
9 Selma. And it took you three years and an
10 audit to figure out that you had been
11 overcharging the customers in Selma, a $3
12 million overcharge.
13 And so I think it's astonishing for
14 a company like Wal-Mart, who actually deals
15 with these problems and for whom I have great
16 sympathy for on questions like this, to make
17 such a blanket statement that it is not
18 difficult to comply with the complexity of
19 local tax rates. It's an extraordinary
20 complex -- complexity, and that's just one
21 example of 100 that I could offer.
22 MR. BULLINGTON: If you were doing
279
1 your job, why didn't you tell us about it?
2 Now, let me explain. In states
3 like Connecticut -- in states like
4 Connecticut business is tough, competition's
5 tough, that's why we want a level playing
6 field. But look at Connecticut. There's 16
7 retailers there that have been sued by class
8 action, because of the very issue of, is a
9 20-ounce bottle a single serve or not? We
10 face those issues day in and day out. It's
11 not easy.
12 I didn't say it was easy, but it's
13 been overblown that there's 30,000
14 jurisdictions. There's maybe, at most, 6,000
15 rate determinations to be made. If it
16 weren't for those five states that allow
17 local optionists to administration of their
18 base, I would have 46 returns. So we need to
19 simplify lots of things.
20 It can be moved in that direction.
21 Drastic simplification would be to move to 46
22 states -- excuse me, 46 filings, but let's
280
1 combine that with uniform definitions as to
2 what is or isn't food, single serve, what is
3 or isn't exempt as far as
4 business-to-business, those type
5 requirements, and let's get on down the road.
6 It can done.
7 MR. GILLMORE: Mr. Guttentag?
8 MR. GUTTENTAG: Thank you, Mr.
9 Chairman. I was going to ask Ms. Doerflerr --
10 I would like to understand your position with
11 respect to what you described as Mr. Andal's
12 proposal and the proposal to codify Quill,
13 because I want to make sure that I understand
14 it. It seems to me that those are not
15 synonymous.
16 For example, under Mr. Andal's
17 proposal, as I understand it, he would make
18 the test to be substantial physical presence,
19 which under the Quill case, the test is
20 physical presence. So that -- that proposal
21 would then limit state jurisdiction. I just
22 want to understand that that's -- whether
281
1 that's your proposal or not.
2 Also, you say, that this would
3 simplify and remove us from so much
4 litigation. We are then instituting, are we
5 not, under the substantial physical presence
6 test, a new standard which I assume would
7 generate litigation, because we are moving
8 away from Quill and then we would then have
9 to test that in the courts. So I'm not sure
10 I understand why you believe this would
11 reduce litigation.
12 Also, it seems to me that you
13 raised the issue under the Andal approach,
14 which Mr. Bullington noted, and that has to
15 do with related corporations. As I
16 understand Mr. Andal's proposal, related
17 corporations would not create nexus, so that
18 there could be the E-commerce subsidiary and
19 the bricks and mortar subsidiary and the
20 E-commerce committee could -- a subsidiary
21 could be free of tax collection
22 opportunities. I just trying to see if
282
1 that's your proposal.
2 And, also, the Quill case deals
3 with sales taxes, and your discussion focused
4 a great deal on other kinds of taxes, such as
5 income and franchise taxes. So that you
6 would propose, then, if you were to adopt the
7 Andal proposal and to limit state taxing
8 jurisdiction with respect to income taxes.
9 And I wonder if you could, in that connection
10 -- I'm not aware of cases, income tax cases,
11 which involve the issues we're discussing
12 now, such as jurisdictional issues arising
13 from e-commerce activities, such as locations
14 of servers or not. But maybe you are aware
15 of those cases.
16 And, also, on the 86-272, do you
17 think that's a good model? Well, you made
18 these proposals, so I'm just asking for
19 clarification.
20 MS. DOERFLERR: I'll just make a
21 comment, that's a lot of questions. I don't
22 know if I can remember back to the first one,
283
1 but go ahead.
2 MR. GUTTENTAG: Yes, it is.
3 86-272, hadn't there been quite a bit of
4 litigation to use under that legislation and
5 to use that as a model for a legislative
6 standard to simplify the law, do you think
7 that's appropriate?
8 MS. DOERFLERR: If I'm remembering
9 the first one, you were making a comparison
10 between codification of Quill and the Andal
11 proposal.
12 My comment was that AEA feels that
13 the Andal proposal -- and proposals like it
14 -- are a reasonable way to apply Public Law
15 86-272. In other words, a codification of
16 Quill and national Belles Hells would be
17 good.
18 It's interesting that in the public
19 law -- and I think your next question was,
20 gee, that's just substituting one standard
21 for another. Isn't that just trading one
22 bunch of litigation for another?
284
1 It's interesting that in the Public
2 Law 86-272 area for income tax nexus there
3 are generally less litigation cases than in
4 the sales and use tax area under Quill.
5 That's as far as -- then your next?
6 CHAIRMAN GILMORE: Can we do one more,
7 Joe? And then move on to the next question.
8 MR. GUTTENTAG: Yes. Let me --
9 were you proposing -- there is a difference,
10 then, between Mr. Andal's proposal and the
11 proposal that you're -- and the codification
12 of Quill. Mr. Andal's proposal is not
13 limited to codification of Quill.
14 MS. DOERFLER: You're right. And I
15 guess the main point that I want to make
16 there is that those proposals are steps in
17 the direction of a clear nexus standard.
18 The reason why it's important to
19 have a clear nexus standard and not a
20 deterioration of the standard we have today
21 in the sales and use tax area, is because
22 business fears that any expansion of
285
1 jurisdiction or any deterioration of those
2 standards in the sales and use tax area will
3 have an unintended effect of having that same
4 effect on the income tax area.
5 So as you lower and deteriorate on
6 one, you will lower and deteriorate on the
7 other.
8 MR. GUTTENTAG: Have you considered
9 other standards? For example, if you wanted
10 a clear, bright line, to set a monetary sales
11 threshold for nexus standards? Wouldn't that
12 -- or some other alternatives create a
13 brighter line than this physical presence
14 test which you've described?
15 MS. DOERFLER: Certainly it may be a
16 brighter line, but that's just right along
17 the same line of thinking as an economic
18 nexus theory, which generally we don't
19 support because it doesn't -- again, you're
20 not addressing the issue of is the tax fairly
21 related to the benefits received? Just
22 because you economically sell a lot into a
286
1 state, doesn't necessarily mean that you're
2 benefitting that much from state services.
3 CHAIRMAN GILMORE: Mr. Norquist, and
4 then I have a question or two, and then we
5 will be, I think, concluded.
6 Mr. Norquist?
7 MR. NORQUIST: Yes. I wanted to
8 thank Craig Winn for reminding us of the
9 tremendous tax burdens now carried by the
10 Internet, before we discuss adding to them.
11 I wanted to get a yes or no from
12 Katrina. Katrina, as I understand it, your
13 answer, would the passage of Dean Andal's
14 legislation at the federal level reduce in
15 more or fewer court cases in litigation?
16 MS. DOERFLER: Yes. We believe it
17 would.
18 MR. NORQUIST: Okay. Because there
19 were some people earlier who didn't seem to
20 understand that.
21 And could -- Dan, could you give us
22 that number again for how much it cost you to
287
1 do the software, to interact with the --
2 somebody gives you software to make it easy
3 for you to pay your sales taxes. You have to
4 pay how much to write your own software or
5 hardware, and what would that be for a small
6 store rather than a big business?
7 MR. KOSTENBAUDER: The number for
8 Hewlett-Packard for this year, and comparable
9 numbers last year and into the future, was
10 over $2 million a year just to link up the
11 business offer we need, invoicing,
12 accounting, order processing, and those
13 things with the tax software.
14 And in large measure due to
15 complexity. For smaller companies -- smaller
16 AEA companies that are using a systematic
17 approach to their sales tax compliance --
18 which is to say they're not so small that
19 they can do it manually. But when they've
20 got to, you know, do it using computer
21 systems, our range for even the smaller
22 companies was in the hundred to $500,000
288
1 range from some of the advisors that we
2 talked to, who were estimating the cost of
3 that linkage. So it's fairly substantial.
4 And I think the message there for
5 me is not that we shouldn't go forward and if
6 the NGA proposal otherwise has good things to
7 recommend it, that we don't go there because
8 of that cost. But the cost is because of
9 complexity. And we can make the whole
10 economy work better if we take the cost out
11 of the system for the tax authorities and for
12 all the companies complying with all of the
13 Main Street taxes today, and it will
14 facilitate and provide a better environment
15 in which we can figure out the right way to
16 tax electronic commerce and remote commerce
17 and digital delivery and those issues.
18 MR. NORQUIST: Yes, but 100,000 to
19 500,000 cost --
20 MR. KOSTENBAUDER: Is our estimate.
21 Thank you.
22 MR. NORQUIST: Okay. Not my idea
289
1 of zero burden. Okay.
2 CHAIRMAN GILMORE: Let me ask one or two
3 questions, if I could.
4 Mr. Bullington and Mr. Lowy, too --
5 especially Mr. Bullington -- is it
6 Bullington or Billington?
7 MR. BULLINGTON: Bullington.
8 CHAIRMAN GILMORE: Mr. Bullington, most
9 governors in most localities like Wal-Mart.
10 They come in, they build, they enhance the
11 property value, they hire new jobs, they
12 increase commercial activity. And as a
13 result, a lot of people are prepared to
14 subsidize Wal-Mart, aren't they?
15 They build -- they build roads,
16 they offer tax breaks and incentives and so
17 on, and it's not just Wal-Mart. It's
18 thousands and thousands of other businesses
19 that are asked to do the same thing.
20 MR. BULLINGTON: Can I respond to
21 that?
22 CHAIRMAN GILMORE: Sure.
290
1 MR. BULLINGTON: Retail is the one
2 segment that gets almost no incentive
3 relative to locating in a particular place.
4 There are some aspects of distribution, yes,
5 that get incentives. In the location of a
6 retail store, there are no incentives. There
7 are no particular tax breaks. It's expected
8 that retailers are -- in the vast majority of
9 cases -- there to pay the property taxes, to
10 pay the sales taxes collected on behalf.
11 Retail is the one segment -- you go out and
12 look at across the board -- that gets
13 essentially no incentives as to location.
14 CHAIRMAN GILMORE: I believe that's not
15 correct. I beg to differ. Come on down to
16 Richmond and we'll chat about it.
17 But in the meanwhile, is it not
18 true, also, Mr. Lowy, that -- is it not also
19 true that shopping malls are considered good
20 things for the community? They bring in new
21 businesses, they create more commercial
22 activity and new jobs. And, in fact, that
291
1 very frequently people work to build
2 on-ramps, off-ramps, roads into malls, and so
3 on like that, which is an incentive and an
4 advantage that sometimes small businesses
5 don't get; isn't that right?
6 MR. LOWY: It depends on which
7 state you do business in. If you look in
8 some states, actually we build the roads, we
9 rebuild the highways, and the cities and the
10 states use the approvals that they need to
11 give you so that you can do the expansions,
12 to actually have you build the
13 infrastructure.
14 There are some states in some
15 cities where you can get -- there's things
16 known as tax incremental financing, which is
17 where the city actually borrows the money,
18 uses the increased real estate taxes that you
19 generate by expanding your malls, and builds
20 infrastructure for the city for that.
21 But on the main, we actually --
22 when we go and develop, have to spend more
292
1 money in developing the infrastructure for
2 the cities.
3 CHAIRMAN GILMORE: One last question.
4 Mr. Bullington, how's business? Things
5 pretty good at Wal-Mart?
6 MR. BULLINGTON: The economy is
7 exceptionally good. You look at all
8 retailers right now, it's exceptional in most
9 segments. And, again, to what I said
10 earlier, you look at the growth and the gross
11 national product. You look at where the
12 Internet is expecting to go. We, like many
13 other people, want to be part of that
14 exponential growth associated with the
15 Internet.
16 But from the standpoint of good tax
17 policy, good social policy, what it means to
18 communities, that erosion will occur to the
19 tax base unless we set out to fix the system
20 now.
21 CHAIRMAN GILMORE: Sales are up, Mr.
22 Bullington?
293
1 MR. BULLINGTON: We continue to
2 grow and expand, yes.
3 CHAIRMAN GILMORE: Mr. Lowy, how are the
4 malls doing? Business good?
5 MR. LOWY: Sales are up, except, as
6 I said before, I think the issue that the
7 Commission is looking at is where will sales
8 and where will E-commerce sales be in five
9 years' time, not where they are today.
10 CHAIRMAN GILMORE: Wish we had that
11 crystal ball. Thank you very much,
12 gentlemen.
13 MAYOR KIRK: May I ask one quick
14 question?
15 CHAIRMAN GILMORE: Yes, Mayor Kirk. Go
16 right ahead.
17 MAYOR KIRK: I'm going to follow your
18 admonition and ask a question, not make a
19 statement.
20 Dan, I think -- just to put that $2
21 million in perspective, that was on $40
22 billion of revenue?
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1 MR. KOSTENBAUDER: That's our
2 worldwide number. The U.S. --
3 MAYOR KIRK: I understand, but I
4 presume that's a $2 million worldwide?
5 MR. KOSTENBAUDER: No, it's the
6 U.S. piece.
7 MAYOR KIRK: What's the U.S. part of
8 that 40 billion?
9 MR. KOSTENBAUDER: Half of 40,
10 roughly.
11 MAYOR KIRK: Still, we're talking
12 less than -- and I don't have my
13 Hewlett-Packard with me -- fortunately,
14 because I still couldn't compute it, but it
15 seems like in my mind -- and I'm not saying
16 that's insignificant. But, you know, in
17 relative terms that still seems like it's
18 about less than one-tenth of a percent.
19 MR. KOSTENBAUDER: It's a small
20 number, but it's also --
21 MAYOR KIRK: That's all I wanted.
22 How much you imagine you all pay for, say, a
295
1 brand new set of golf clubs? Do you write
2 any of this off on your taxes or you all eat
3 that up?
4 MR. KOSTENBAUDER: It's all income
5 tax deductible. If you make a simpler sales
6 tax system, we'll have more income and you'll
7 get more tax.
8 I think it's important to --
9 MAYOR KIRK: Do you think you spend
10 more on corporate memberships than you spend
11 on tax compliance? Corporate memberships to
12 supper clubs, golf clubs, country clubs?
13 MR. KOSTENBAUDER: I'm sure we --
14 MAYOR KIRK: I'm just curious.
15 MR. KOSTENBAUDER: I will assure
16 you that we spend a lot more on tax
17 compliance than we spend on those things.
18 Absolutely.
19 MAYOR KIRK: Okay.
20 MR. KOSTENBAUDER: No question.
21 MAYOR KIRK: Okay. Thank you.
22 CHAIRMAN GILMORE: Ladies and gentlemen,
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1 come back in five minutes and we'll start
2 issues and answers papers.
3 (Recess)
4 CHAIRMAN GILMORE: Okay. Everyone,
5 please have your seats. The trouble with
6 breaks are, the five-minute breaks are always
7 20-minute breaks. There's nothing you can
8 seem to do about it, but we're doing the best
9 we can.
10 Now, under the agenda that we have
11 set forth, we still have until about 5:30.
12 To the extent that members wish to leave
13 early, I can't help that. But we're doing
14 the best we can to get everything in within
15 the period of time that we have.
16 Now it's time for us to discuss the
17 issues and options paper. Just as a preface,
18 the work plan called for preparation of an
19 issues and options paper to crystallize
20 specific policy options and to facilitate a
21 constructive discussion of the Commissioners
22 at a level of specificity that we haven't yet
297
1 engaged in. Although, I think that we have
2 engaged dramatically yesterday and today over
3 most of the issues and concepts. Now, we can
4 get down into talking about what it is that
5 we're trying to put down onto paper.
6 As you recall, the Commissioners
7 were concerned at the beginning of the
8 process that we didn't know exactly how we
9 were going to produce a document in time to
10 meet our charge. And this drafting work plan
11 was put into place in order to be able to do
12 that.
13 The drafting subcommittee has, in
14 fact, offered a document that crystallizes
15 these issues, although many are obviously in
16 opposition to each other, and yet at the same
17 time all of the ideas have been included.
18 At the outset, let me assure the
19 Commissioners that I do not intend to call
20 for votes on specific policy options. The
21 information we have has been that all the
22 members would prefer to argue these things
298
1 out in San Francisco, and then make the final
2 votes -- up or down -- on these issues in
3 Dallas. But we will at that point have a
4 final document, which can be finally edited
5 and sent on in time. But the votes will be
6 saved for Dallas, unless someone wants to
7 re-raise that issue.
8 Now, I'm sorry that Bob Pitman was
9 unable to be with us today -- of America
10 Online, because of illness. I think he has
11 the flu, and we wish him speedy recovery from
12 that.
13 Bob and his staff at America Online
14 took the lead in drafting the issues and
15 options paper. And so in Bob's absence, I've
16 asked George Vradenburg, who's the senior
17 vice president of America Onlne, to introduce
18 the issues and options paper to the
19 Commission.
20 I've also asked George to remain at
21 the presenter's table to our discussions, to
22 answer any questions about the policy and
299
1 options paper, and because he and AOL staff
2 will be instrumental in drafting the final
3 report, as well in support of the drafting
4 subcommittee.
5 So with that, I'll turn the podium
6 over to George Vradenburg.
7 MR. VRADENBURG: Thank you, Mr.
8 Chairman, Governor Gilmore, and members of
9 the Commission.
10 Just as a reminder to the
11 Commission, you appointed a report drafting
12 subcommittee to develop an issues and options
13 work paper, as the Chairman has described,
14 and the report drafting subcommittee was made
15 up of nine members of this Commission --
16 virtually half of the Commission. Governors
17 Gilmore and Bob Pitman of AOL co-chaired that
18 report drafting subcommittee. Governor
19 Locke, Ms. Jones, Messrs. Andal, Parsons,
20 Pottruck, Pincus, Pitman and Sokul were on
21 the Commission, as well. So we had nine
22 members.
300
1 The charge for the work plan was to
2 come up with an effort to develop a
3 spring-board for discussion, to try and
4 classify the issues before the Commission, to
5 provide a variety of options in as objective
6 and a straightforward and nonpartisan manner
7 as we could.
8 We did that. We met on a number of
9 occasions by teleconference and exchanged
10 substantial comments on each other's work.
11 And all staff members, and then members of
12 the report drafting committee, had a very
13 substantial hand in the final -- in the final
14 work product.
15 Indeed, notices of the meeting were
16 sent to staff of all the Commissioners, and a
17 number of other Commissioner staffs listened
18 in on the phone.
19 The working process in putting this
20 issues and policy options paper together then
21 was a corroborative -- very much a team
22 effort, very much inclusive and tended to be
301
1 essentially staff work to this Commission,
2 and not a set of binding recommendations in
3 any form or fashion. It intended to be
4 provocative on how we classified and looked
5 at the options, but not exhaustive. And
6 something to spark discussion and to present
7 alternatives and to determine where the
8 controversial issues lay.
9 We have got to remember that we are
10 working within the context of a congressional
11 charge to us, pursuant to the Internet Tax
12 Freedom Act, in which we have to produce our
13 recommendations to Congress by next April
14 21st, and pursuant to which at the moment
15 there is a moratorium on two types of taxes:
16 Multiple and discriminatory taxes on
17 electronic commerce.
18 Thus, obviously, states continue to
19 impose nonmultiple and non-discriminatory
20 taxes on electronic commerce today, pursuant
21 to existing nexus rules.
22 There's a moratorium on taxes on
302
1 Internet access, unless such tax was
2 generally imposed and actually enforced prior
3 to October 1, '98, thus grandfathering
4 roughly 11 states' ability to continue to
5 impose taxes on Internet access.
6 That moratorium continues for three
7 years from the date of the adoption of the
8 statute, and that moratorium will expire in
9 October of 2001. Giving, thus, Congress an
10 opportunity between the submission of our
11 report and the expiration of that moratorium
12 to determine what to do with respect to that
13 moratorium and with respect to whatever other
14 recommendations this Commission may make to
15 Congress.
16 The issues and policy options paper
17 presents and categorizes the issues in seven
18 sort of issue buckets, as it were. And I,
19 for purposes of this discussion, not
20 intending to suggest that this is the way
21 that any member of the Commission may want to
22 look at this, am going to classify these in
303
1 three categories.
2 I think the most controversial and
3 the most difficult, obviously, is the tax
4 treatment of sales conducted over the
5 Internet. To that, I'll come back in a
6 second.
7 The second category of items are
8 matters which certainly have received the
9 attention of a number of presenters and
10 questions from the Commission, but as to
11 which there seems to be less controversy.
12 I'm now speaking here of tax treatment of
13 telecommunication service providers, as to
14 which there's been discussion of both the
15 federal, state, and local taxation of those
16 providers.
17 There are two buckets of issues
18 within that general category, namely
19 transactions and how to treat federal excise
20 taxes on those kinds of services, and how to
21 treat state and local taxation of those
22 services, both in terms of their
304
1 simplification and in terms of their
2 disparate rates.
3 The second category within
4 telecommunications taxes is the Ad valorum
5 property tax, which Commissioner Andal has
6 raised.
7 The second issue, bucket, within
8 this second category is the tax treatment of
9 Internet access, which did receive attention
10 in New York, some attention here today, but
11 as to which there seems at the moment not to
12 be as much controversy, although clearly the
13 options before the Commission are laid out in
14 the issues and policy options paper in terms
15 of extending the moratorium, with or without
16 a grandfather, or allowing the moratorium to
17 expire.
18 The third category, the third
19 bucket issue, that I would put in the second
20 category of less controversial items is
21 international tax and tariff, where we heard
22 a good deal during our sessions here in San
305
1 Francisco, but as to which, with respect to at least
2 to customs duties, the Commission has already
3 spoken. With respect to international taxes,
4 I do think that there may not be much
5 controversy that whatever we do has to be
6 done in an international context, and
7 understood in that fashion.
8 Finally, there is a third category
9 of issues which have received less attention,
10 but are included in the issue and policy
11 options paper. The impact of nexus standards
12 on business activity taxes, as to which we've
13 laid out some policy options in the paper,
14 redress mechanism for imposition of
15 unconstitutional state and local taxes, as to
16 whether there are adequate remedies now for
17 taxpayers who have to continue to pay taxes
18 during their contests of arguably
19 unconstitutional taxes, and the proposal with
20 respect to the digital divide, that we
21 recommend to Congress an amendment of the
22 federal welfare guidelines to permit states
306
1 to spend a surplus of TANF monies, temporary
2 assistance to needy families' monies, to buy
3 computers and Internet access for needy
4 families.
5 So with respect to the issues that
6 we have laid out, the seven issue categories,
7 I would say there are some that are highly
8 contested, controversial, and obviously
9 subject to quite differing opinions from the
10 Commission.
11 A second category, where I think
12 while there are several policy options,
13 there's less controversy.
14 A third category, which certainly
15 is included within our issues and policy
16 options papers, as to which there's been less
17 discussion and may, Mr. Chair, depending on
18 your preference, may receive either less or
19 some discussion at this time.
20 With respect to the sales and use
21 category, obviously the most controversial
22 category of the issues and options paper,
307
1 again without intending to be exhaustive, but
2 at least provocative, provides three general
3 potential branches in which this Commission
4 could take.
5 First is to preempt the state's
6 ability to tax sales conducted over the
7 Internet.
8 Second, to recommend to Congress
9 that they do nothing, essentially allowing
10 states to tax sales conducted over the
11 Internet pursuant to current nexus rules. On
12 that branch, clearly the question before you
13 is whether you would like to try to clarify
14 those nexus rules by statute. If you take
15 that route, as well, then the question with
16 respect to all of the simplifications and
17 cost-less approaches being proposed to the
18 Commission is how to try to bring those
19 about.
20 In that particular bucket you at
21 least have the question of what to do about
22 the current moratorium? Would you like to
308
1 see a moratorium on discriminatory and
2 multiple layers of taxation continued or not?
3 So there's a second branch here, which is to
4 recommend to Congress to do nothing and allow
5 the states to tax sales.
6 Third, there is a third branch
7 which is to recommend to Congress to permit
8 state tax sales over the Internet without
9 regard to nexus. Thus, extending the
10 obligations to collect and remit taxes to
11 sellers, no matter whether they have nexus or
12 not.
13 Those three quite divergent points
14 of view, and received a good deal of
15 attention from the members of this Commission
16 through the presentations.
17 I'll wrap up my remarks now. But I
18 would suggest that the report drafting
19 subcommittee obviously works to your mandate
20 and pursuant to your directions, but we do
21 have the charge to try to get ourselves to a
22 meeting in Dallas where we have some certain
309
1 issues tee'd up for either vote or decision
2 by the Commission and where we would like to
3 have as much as we can of a final report
4 before you, so that the Commission can see
5 the work product, obviously, that it would
6 like to submit to Congress.
7 But we recognize very much that
8 we're not going to have straw votes today, but it
9 would be useful to have some direction on
10 what direction to take, so that we can draft
11 something up. It may be, Mr. Chairman, that
12 the Commissioners would like to direct the
13 report drafting subcommittee to have either
14 interim meetings or calls with respect to
15 various proposals during the course of the
16 next three months. So that we're sure that
17 we get to Dallas with a good work product
18 reflecting the views of the Commissioners and
19 of the Commission, and so that we can submit
20 our report to Congress on time.
21 With that, I've concluded my
22 report.
310
1 CHAIRMAN GILMORE: George, thank you
2 very much. I want to recognize the work of
3 George Vradenburg and Ellen Fishbein of AOL
4 in taking the lead in the document. I think
5 it's a constructive tool for the Commission
6 and the public. It's been broadly
7 publicized. It's on the Net.
8 At the outset, let me tell
9 everybody that the document doesn't represent
10 the final report of the Commission.
11 Everybody, I think, needs to understand that.
12 It is merely a vehicle to guide discussion
13 among the Commissioners today, as, in fact,
14 the drafting subcommittee does go forward in
15 order to produce a document which can, in
16 fact, be voted on in Dallas. And, see whether or
17 not there are any areas of agreement.
18 Now, I think we will find some
19 areas of agreement today, which will be very
20 instructive to the working group as they go
21 forward. I think that it, just as last time,
22 it's perfectly appropriate for there to be a
311
1 lot of involvement and engagement among all
2 the people, that the committee is very broad.
3 But everybody is having a chance to
4 have their input into it, and we can go
5 forward and just vote on this in Dallas. Or
6 any of its provisions, or any substitutes, or
7 anything else that anybody wants to add when
8 we get to Dallas. So I think the time will
9 be well spent there.
10 But this is a good first step for
11 the Commission to commit specific ideas to
12 papers here today. All of you should have a
13 copy of it. In fact, mine is dated. It's
14 shown a sixth draft, dated December 2nd.
15 Why don't we turn to page 4 of the
16 issues and options paper? Page 4 being the
17 question with respect to international tax
18 and tariff issues.
19 The option offered in No. 1 may be
20 a topic of some discussion. The options in 2
21 through 4 may be consensus opinion -- may be
22 a consensus opinion of the Commission, based
312
1 on the resolutions that were passed at the
2 New York meeting.
3 The first item under policy options
4 is "work towards harmonization of certain
5 basic principles." Again, inconsistent basic
6 tax policies may impede or limit the
7 international growth potential of electronic
8 commerce. Non-discriminatory and neutral
9 taxation of electronic commerce are two
10 fundamental principles that should be adopted
11 worldwide in order to ensure that electronic
12 commerce serves as a viable trade vehicle
13 between trade countries.
14 Jurisdictional and administrative
15 rules should be harmonized so that tax
16 administrators can coordinate collection and
17 remittance of transactional taxes due with
18 respect to cross-border transactions.
19 Harmonization should ensure that no taxable
20 transaction is subject to a double taxation
21 or no taxation.
22 This is a harmonization principle,
313
1 to work towards on the international level.
2 Let me read at least the headers on the
3 others, and then come back and open the floor
4 for further discussion.
5 Set No. 2: There should be no
6 international taxes on electronic commerce.
7 No. 3: Recommended tariff-free
8 Internet.
9 No. 4, which is right at the bottom
10 of the page, with its commentary on the back
11 page: Recommend continue federal leadership.
12 Again, there is commentary on each
13 one, which we can read through. But the
14 first is harmonization. Second is opposition
15 to all international taxes on electronic
16 commerce. Third is opposition to all
17 international tariffs on electronic commerce.
18 Fourth is aggressive leadership by the
19 executive branch to pursue a tax and
20 tariff-free international trading zone on the
21 Internet.
22 Let's open the floor for discussion
314
1 on any of these areas. Let's begin by asking
2 is there opposition to any of these options?
3 Mr. Gene Lebrun?
4 MR. LEBRUN: Chairman Gilmore, I don't
5 necessarily have any opposition and I was not
6 a member of this subcommittee, but why are we
7 singling out E-commerce from other types of
8 international commerce?
9 Whether it be, you know, over the
10 mail or shipping or telephonic commerce,
11 information, as I understand it, is one of
12 the largest and fastest growing items of
13 international commerce today, whether it's
14 trade names or whatever. Why are we singling
15 out electronic commerce?
16 CHAIRMAN GILMORE: You can certainly ask
17 the drafting committee people that question,
18 but I think it's because this Commission is
19 intended to offer recommendations to the
20 Congress with respect to the Internet and
21 E-commerce across the world. To extend
22 ourselves out into general tariff and trade
315
1 policy would probably go beyond the scope of
2 this Commission.
3 Mr. George, do you have a response
4 on that?
5 MR. VRADENBURG: Yes, sir. Indeed,
6 the charge to this advisory committee on
7 electronic commerce was to study the issues
8 surrounding the Internet and electronic
9 commerce. Clearly, one ought to take account
10 of the large context in which all of this is
11 occurring, but the charge was to study the
12 international tax context in the context of
13 electronic commerce.
14 MR. LEBRUN: Mr. Chairman, if I may
15 follow-up? I guess I'd inquire, then, of the
16 federal representatives here, who represent
17 the Department of Commerce, the Treasury and
18 U.S. trade, does it make sense for us as a
19 country to single out electronic commerce and
20 treat that differently than other types of
21 commerce when it comes to international
22 tariffs?
316
1 CHAIRMAN GILMORE: Go ahead,
2 Mr. Guttentag.
3 MR. GUTTENTAG: No, certainly we
4 have to deal with all kinds of taxes, which
5 we do internationally, but I think as
6 Mr. Vradenburg has pointed out, that our
7 mission has been directed in this area. As I
8 commented yesterday, we are working in this
9 area along the lines set forth in some of
10 these proposals here. So we would support
11 certainly the idea of agreeing to certain
12 standards. As I said yesterday, we would
13 also support the US work within the OECD,
14 which presently has a mandate to work on
15 these. We would certainly also involve,
16 Mr. Chairman, all of the interested
17 stakeholders.
18 There's a reference in here to
19 involving the states and localities. We
20 think that all of the interested stakeholders
21 should be consulted with respect to the
22 issues as they affect them.
317
1 CHAIRMAN GILMORE: Let's see, let's let
2 Robert Novick say something and then we'll
3 come back to Grover Norquist.
4 Robert?
5 MR. NOVICK: I think on the tariff
6 issue this reflects, as we've discussed
7 before, longstanding administration policy to
8 keep the Net tariff-free. It reflects the
9 resolution that was passed by the Commission
10 at its last meeting.
11 E-commerce is somewhat different
12 than tariffs on the rest of the economy, in
13 that currently no one imposes tariffs on
14 E-commerce. That's what we'd like to see
15 maintained.
16 The administration policy over many
17 administrations has tried to systematically
18 reduce tariffs on goods across the world. So
19 this is perfectly in line with longstanding
20 administration policy, this administration
21 and previous administrations.
22 CHAIRMAN GILMORE: Mr. Norquist?
318
1 MR. NORQUIST: Yes. Pat Buchanan
2 never quite understands this, but tariffs are
3 taxes. As was just said, since the '60s, at
4 least, it's been American policy from
5 different presidents of both parties to phase
6 down all tariff and non-tariff barriers for
7 trade, not just regionally, but
8 internationally.
9 If Mr. Lebrun would like, I'd be
10 willing to say that we're in favor of
11 reducing all tariffs. But if we're to limit
12 ourselves to speaking to electronic commerce,
13 given that that's not taxed now, we should
14 start by saying first do no harm. Let's not
15 impose tariffs and international taxes on
16 electronic commerce while we continue to
17 support the administration's efforts to
18 reduce tariff barriers and non-tariff
19 barriers in all circumstances.
20 CHAIRMAN GILMORE: Nonetheless, I don't
21 think there's any authority on the part of
22 this Commission to extend itself into tax or
319
1 into tariff policy, generally, nor have we
2 done any research or presented anything with
3 respect to any of that.
4 Anyone else wish to kick in on this
5 international section, Roman I? David
6 Pottruck.
7 MR. POTTRUCK: Chairman, I have
8 just a question on process here. We're not
9 assuming that no comment means approval or
10 agreement, it's just an opportunity to offer
11 observation?
12 For example, we passed by the
13 introduction, and, in fact, there are several
14 things I think were missing from that
15 introduction, or that may be points of
16 discussion. I don't want to slow the process
17 down, I know we have a lot of work to do this
18 afternoon.
19 So I just would like some sense of
20 the process we're going to use here. We're
21 going to go through this, people are going
22 to, section-by-section, offer thoughts,
320
1 additions, dialogue, discussion, and then
2 we'll move on to the next thing. We'll have
3 more work in between the meetings to see
4 where we can forge consensus or not forge
5 consensus, come back in Dallas, and we will
6 have people vote there to see in the public
7 domain where there's consensus and where
8 there isn't. Does that sound right?
9 CHAIRMAN GILMORE: Yes, that is, I
10 believe, what we're doing here today. We'll
11 have a very clear sense, I think, at the
12 conclusion of this two hours about where the
13 controversial areas are and where the likely
14 serious votes will be in Dallas. So I would
15 agree with that. I think there will be
16 ongoing discussions.
17 Let me also say again, as we have
18 said in the work plan and otherwise, anyone
19 can offer a resolution at any time if it's
20 properly filed. Anyone can offer an
21 amendment to this in Dallas, either to take
22 something in or to put something out. So I
321
1 would agree with all of that.
2 With respect to the introduction, I
3 have no difficulty, once we've completed with
4 Roman I, doubling back and picking up the
5 introduction. No difficulty at all.
6 Would anyone else like to add
7 anything on Roman I? Mayor Kirk?
8 MAYOR KIRK: Just one procedural
9 question in that vein. Because regrettably
10 so, I may have to leave pretty close or right
11 before 5:00 to make my plane.
12 Is it your intent that we would
13 vote on the Norquist resolution today, or
14 that we're going to vote on everything in
15 Dallas?
16 CHAIRMAN GILMORE: As a matter of fact,
17 the rules say that if a Commissioner has
18 properly filed and wishes to bring them
19 forward, he has the right to do so. It's my
20 understanding that he wishes to do so. It
21 would be my intention of bringing those up
22 right around 5:00, that would be my thought.
322
1 MAYOR KIRK: Does bringing them up
2 presuppose that we're going to vote on them?
3 CHAIRMAN GILMORE: Oh, absolutely,
4 unless they're tabled, they will be voted on.
5 MR. ANDAL: How about 4:45 or
6 whenever?
7 CHAIRMAN GILMORE: Sure.
8 MR. ANDAL: So that he can
9 participate?
10 CHAIRMAN GILMORE: Sure. Would you like
11 to do that?
12 MAYOR KIRK: I'd like to do that or
13 just wait and hold off and have all the votes
14 in Dallas.
15 CHAIRMAN GILMORE: At 4:45, let's take
16 it up and see what the pleasure of the
17 Commission is as to whether to take it up and
18 discuss it or whether there's any other
19 motion to be made here. But I would like to
20 bring it up before you have to leave. Or any
21 other Commissioner. Unless, of course, some
22 Commissioner wants to bolt out of here in the
323
1 next five minutes, in which case we can't do
2 anything about that.
3 How about international tax and
4 tariff issues, anybody else want to offer
5 anything on this?
6 I think that the point, really,
7 that we're getting to here is that this
8 Commission, through a lot of work and a lot
9 of effort and a lot of staff work and a lot
10 drafting, has pretty much reached an
11 agreement on policy with respect to
12 international tax and tariff issues, and
13 reached a consensus on this matter. Once
14 again, they are not closed and may be
15 readdressed again in Dallas.
16 Mr. Pottruck, let's double back to
17 the introduction and get your comments on
18 that.
19 MR. POTTRUCK: Thank you. First of
20 all, this is a statement of broad, sweeping
21 themes. I would offer a theme that I think
22 is important here. That is the theme that
324
1 perfection is not practical. We cannot let
2 perfection be the enemy of the good. So we
3 may come up with an approach that is not
4 perfect, but which goes a long way to a great
5 solution to move the ball forward.
6 So I would simply offer that as a
7 theme that we may want to offer to the
8 Congress as a guiding principle.
9 Secondly, we say here in No. 11,
10 not to nitpick, but just as a thought "In
11 order to foster the growth of electronic
12 commerce any recommendations for change
13 should remove financial and logistical
14 burdens on sellers." That's a pretty big
15 step forward, as oppose to the word
16 "minimize."
17 So I thought that was a very big
18 standard to set for ourselves, something,
19 perhaps to think about.
20 Then I think at some point there's
21 going to be some degree of robust discussion
22 around No. 7. It's listed here, I think,
325
1 very nicely, as a central policy question.
2 It's about whether the Internet
3 should receive some sort of preferential tax
4 treatment temporarily, permanently. I would
5 suggest that we're going to need to have a
6 dialogue around that in Dallas to see how
7 people feel about that point.
8 That's all.
9 CHAIRMAN GILMORE: No one would object,
10 I suppose, to the introduction of the word
11 "minimize financial and logistical burdens on
12 sellers," as opposed to "remove." So just be
13 aware of that, Mr. Drafter, that we can do
14 that and take that up, if necessary.
15 I might say, by the way, that I had
16 penciled in sellers and buyers. But that can
17 be delayed to another time.
18 I agree with that "perfection is
19 not going to be possible." Does anyone
20 object to that type of an approach?
21 In the absence of that, let's go
22 back to the point that Mr. Pottruck made on
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1 No. 7 and No. 8. Let's just read that:
2 "State and local and federal
3 governments often grant tax preferences to
4 certain forms of businesses, marketing and
5 commerce, for a variety of public purposes.
6 Internet commerce produces significant
7 benefits affecting the general public. A
8 central policy question for government at all
9 levels is whether these benefits produced by
10 the Internet commerce justify similar
11 preferential tax treatment or whether they be
12 tax treatment that neither advantages nor
13 disadvantages electronic commerce."
14 I agree that that will be a robust
15 discussion in Dallas and shortly.
16 MR. POTTRUCK: My own perception,
17 and I'm not trying to mince words, is that
18 what's driving our economic expansion is
19 innovation. The Internet happens to be an
20 enormous source and focus of innovation, but
21 we have innovation on entertainment.
22 We have innovation on education.
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1 We have innovation in the stock market. We
2 have innovation on things called ECNs, which
3 is creating competition with stock markets,
4 the result of which are lower and lower costs
5 to all participants. The burgeoning of
6 innovation is largely tied to lots of things
7 that are going on. The Internet is a piece
8 of it. Technology is a piece of it. Reduced
9 regulation, greater global competition, all
10 of this is part of what's powering our
11 economy forward.
12 So I sometimes find that we have
13 given all of our economic wonder to the
14 doorstep of the Internet. I think that's
15 rather an overstatement of where the United
16 States is today.
17 CHAIRMAN GILMORE: More comments? Ron
18 Kirk?
19 MAYOR KIRK: I'm trying to be brief,
20 but, David, I think that is a wonderfully
21 astute observation. It occurred to me that,
22 and I'm not arguing that we should go back,
328
1 but I don't know that we've ever defined the
2 Internet economy. It just seems to me that
3 we entered into this and just said the
4 Internet economy is great, and everything
5 that's happening to the economy we've just
6 presumed has been a part of that. I think
7 that's a very astute observation.
8 But I will tell you that I think
9 the policy, the question itself, is phrased
10 exactly correctly, that we should make the
11 determination of whether it's due special
12 treatment. I think, David, your observation
13 goes more to the previous sentence, that this
14 Internet commerce has produced all of these
15 benefits, separate from all of those
16 distinctions that you made. But I appreciate
17 you for bringing that up.
18 CHAIRMAN GILMORE: Electronic commerce
19 is defined in the statutory definitions,
20 which can be reviewed. Again, the Council,
21 of course, is in a position to read that to
22 you, if necessary.
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1 We may have an issue about whether
2 or not that kind of this, this article,
3 whether this should be included in the final
4 report or not. We can take that up to
5 Dallas.
6 My own position is that this is
7 exactly the issue with respect to the task
8 that we have before us. I concur that the
9 economy is doing well generally and that the
10 Internet is only a piece of it. But our
11 treatment of that piece is what is the topic
12 of this conference, of this Commission.
13 Shall we proceed? Off we go to
14 Roman II, which I believe is on page 6.
15 MR. SOKUL: Governor?
16 CHAIRMAN GILMORE: Yes, sir? Stan
17 Sokul?
18 MR. SOKUL: Can I make a comment,
19 just a brief comment on international before
20 we move on?
21 CHAIRMAN GILMORE: Certainly.
22 MR. SOKUL: Keeping in mind that
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1 we're recommending policy positions or other
2 recommendations to Congress, on a couple of
3 these, the first and the fourth, in
4 particular, I wonder what the role of
5 Congress is. Should we add that Congress
6 upstep its involvement in these areas, this
7 oversight over the Executive Branch so that I
8 think if there were tariffs, Congress would
9 be involved.
10 If there were taxes, Congress would
11 be involved. But in terms of harmonization,
12 the principles, and federal leadership, and
13 the way this is phrased, the involvement of
14 different groups and interests that maybe
15 Congress does have a role to play in that, to
16 ensure that there are hearings, processes,
17 and other things that Mr. Guttentag,
18 Mr. Pincus, maybe Mr. Novick, are pursuing
19 these things and are actually involving as
20 many people as possible. So maybe we should
21 add some words about congressional activities
22 in this regard, as well.
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1 CHAIRMAN GILMORE: Mr. Norquist?
2 MR. NORQUIST: I hope that it's a
3 friendly amendment to point out that
4 Congress, obviously, is going to have to pass
5 legislation to reduce tariffs working with
6 the administration. So I assume it would be
7 friendly to give Congress also a role in
8 reducing tariffs and keeping electronic
9 commerce internationally tax-free.
10 But I think it would be appropriate
11 to single out and praise the Clinton
12 administration and previous administrations
13 for their continued policy of reducing
14 tariffs over time, and of keeping the
15 Internet tax-free. So I think we should both
16 specifically commend the Clinton
17 administration for its positions, and also
18 make the comment that obviously Congress
19 plays a role in continuing this process.
20 CHAIRMAN GILMORE: Being nonplussed.
21 MR. NORQUIST: I don't get to do
22 this a lot, so I thought I'd take the
332
1 opportunity.
2 CHAIRMAN GILMORE: We don't get
3 commended a lot. Mr. Novick?
4 MR. NOVICK: Just for the record,
5 in the area of E-commerce, since we have a
6 tariff-free environment, there is no action
7 that's necessary. It's rather taking no
8 action. In the area of reduction of tariffs
9 as to goods and other matters, to the extent
10 that we don't already have authority to do
11 it, Congress would be involved in that.
12 But to the extent our mandate is
13 limited to E-commerce, there's no
14 congressional involvement in implementing the
15 maintenance of the existing structure.
16 In terms of oversight, I can assure
17 you that Congress exercises that role quite
18 diligently, and all of us have appeared
19 before Congress and briefed members and their
20 staffs on all of the issues we're pursuing,
21 and our policies in this arena.
22 MR. SOKUL: In response, my only
333
1 comment is, I guess more stylistic than that.
2 When we make our recommendations in these
3 options. Keep in mind who we're talking to.
4 We're not talking necessarily to the USTR.
5 We're talking to Congress. But it's as
6 simple as that.
7 CHAIRMAN GILMORE: Stan, I would suggest
8 you draft a little language to be included
9 as 5. Let's let Mr. Novick, Guttentag, and
10 Pincus see it and see if they wish to offer
11 an alternative. Then we'll vote in Dallas,
12 although this is, of course, perhaps not
13 central, but it is a nuance, and if you would
14 add it about communicating with AOL and staff
15 people, I would appreciate it.
16 Mr. Guttentag?
17 MR. GUTTENTAG: Just briefly.
18 Mr. Norquist mentioned that there seemed to
19 be some agreement there should be no
20 international taxes on electronic commerce.
21 I'm not quite sure what that means in the two
22 sentences under there. You mentioned,
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1 Mr. Chairman, that you thought there was
2 consensus on these issues.
3 I find that somewhat problematic.
4 We heard, for example, the E.U. say they
5 impose a value added tax on goods coming from
6 the United States. Do we really mean here
7 that the U.S. should prohibit such taxes? If
8 so, it's rather difficult to know how we
9 would do that and whether that is the best
10 policy. And whether we would want goods
11 coming into the United States from overseas
12 being exempt from sales taxes.
13 So, I think those issues are open.
14 I think some of the issues Mr. Sokul raised
15 are good. As he said, maybe drafting issues
16 that we can solve. This one here seems to be
17 a more substantive issue, and I think should
18 be one of the open issues. Thank you.
19 CHAIRMAN GILMORE: Open issue it is,
20 although I certainly would not approve the
21 E.U.’s VAT tax approach. I think I
22 implied as much, and I certainly would hope
335
1 that this group would not think that the
2 E.U.'s taxation policy should be a guide post
3 to the United States. Nonetheless, it is an
4 open issue for further discussion.
5 Mr. Pincus?
6 MR. PINCUS: I was just going to
7 add I think that I concur with a lot. As I
8 said, a lot of concern about what the EU's
9 doing. But probably what we say in this
10 paragraph may be influenced by what we say
11 with respect to our domestic system. So it
12 may depend on things that come later on in
13 the document.
14 CHAIRMAN GILMORE: Let's move on, then,
15 to page 6, tax treatment of Internet access.
16 Tax treatment of Internet access,
17 this is the area where there indeed may be a
18 consensus point of view. There are three
19 policy options that are outlined here for
20 final report.
21 First, to extent the current
22 moratorium against Internet access taxes
336
1 contained in the Internet Tax Freedom Act for
2 an additional five years. But to eliminate
3 the grandfather clause for those states that
4 have taxes on the Internet access.
5 If you'll recall, there was a
6 grandfather clause put into the Internet Tax
7 Freedom Act, allowing any states or
8 localities that are, in fact, taxing access
9 to be able to continue to do that.
10 In our final report to the
11 Congress, this option would suggest that it
12 be consistent across the nation, that there
13 should not be access taxes on the Internet.
14 The second element in this is:
15 Prohibit all taxes on Internet access, which
16 is the same, a similar approach. It might
17 not be an extension of the moratorium, but
18 just simply a straight-up prohibition on
19 taxes on the Internet access.
20 Third: Permit states and
21 localities to tax Internet access.
22 Those seem to be the three options
337
1 that have been discussed and presented in the
2 paper. Anyone else may have an additional
3 point to put in, or may wish to comment on
4 any of these. The floor is open to
5 discussion of taxation of Internet access in
6 the United States.
7 We may conclude, of course, this
8 fairly represents the choices. Would anyone
9 like to argue for or against this?
10 MR. POTTRUCK: I'd like to make a
11 comment.
12 CHAIRMAN GILMORE: David?
13 MR. POTTRUCK: I see the
14 alternatives here, Governor, and yet I'm
15 trying to recall all of the dialogue we've
16 had. I can't remember anybody saying that
17 they're in favor of imposing transaction
18 taxes on Internet access.
19 So I see it here as an option, to
20 permit it, but I'm wondering if it's an
21 option that anyone at all supports or it's
22 simply presented here to define the potential
338
1 range of choices that we have. I realize the
2 effort your group has made, and AOL, to be
3 fair. But I have yet to hear anyone suggest
4 that there should be access taxes for the
5 Internet.
6 CHAIRMAN GILMORE: We'll let George
7 Vradenburg on it, and I may call for a
8 consensus on this.
9 MR. VRADENBURG: David, you're
10 right. These policy options are intended to
11 be options. So the first option is extend
12 the moratorium for five years, eliminating
13 the grandfather. The second one is make
14 permanent, essentially, any state taxation on
15 Internet access. The third one was to
16 permit.
17 So these are choices. What we
18 needed for the drafting subcommittee is at
19 least some directional element.
20 As you will see at the end, as an
21 area of potential agreement, we thought that
22 there was an emerging consensus for either
339
1 Option 1 or 2.
2 So Option 1 is an extension for
3 five years, on the grounds that we shouldn't
4 decide this permanently. Option 2 is a
5 permanent bar on it. So I think if, in fact,
6 you thought there was consensus emerging
7 against taxing the basic access to the
8 Internet, then I think the choices, if
9 there's a direction here, is either 1 or 2,
10 and not 3.
11 CHAIRMAN GILMORE: Dean Andal?
12 MR. ANDAL: I agree with David. In
13 fact, it's one of the few items where I've
14 actually heard no dissent on the Commission.
15 Maybe what we could do is unless, at least
16 one Commissioner here today wants it to stay
17 in the policies and options paper, we could
18 remove item 3.
19 I haven't heard from a single
20 Commissioner that supports that view.
21 CHAIRMAN GILMORE: Gene Leburn?
22 MR. LEBRUN: I think it's premature
340
1 to start removing anything. I think this
2 sets forth the issues. But I think there's a
3 lot of things we have to consider like
4 bundling of types of Internet access. We
5 have companies in South Dakota that are going
6 to provide access to your phone systems, the
7 Internet, your cable, all as a bundled
8 process. I think all of those issues have to
9 fairly developed before we make any final
10 decisions.
11 If you start prohibiting taxes on
12 the access, is the question then going to be
13 protection? There is a tax in place now to
14 access some things and not others. If you
15 bundle those, I think there's too many issues
16 for us to start making final decisions.
17 I think there's phraseology that's
18 included in here that I don't agree with
19 in 1, 2 and in 3. I think it should be left
20 on the table for further consideration when
21 we get to Dallas.
22 MR. ANDAL: I stand corrected.
341
1 CHAIRMAN GILMORE: Mr. Guttentag?
2 MR. GUTTENTAG: Yes, I think we
3 would say that Internet-specific access fees
4 should not be charged. I'm concerned, just
5 as a matter of process as we get into that, I
6 can't agree with some of this language, or I
7 would propose that we have to review the
8 language. I would think we want to define
9 what we mean by Internet access fees.
10 I'd like to know, for example, when
11 we talk about grandfathering, before we
12 eliminate this, and, therefore, put a mandate
13 on whatever states or localities are imposing
14 them, I'd like to know how much is involved.
15 What are we talking about specifically?
16 So I think it's the language and
17 getting some more information.
18 But other than that, I think that
19 we see eye-to-eye pretty much on those
20 issues.
21 CHAIRMAN GILMORE: All right.
22 Mr. Norquist. I have a comment, but go
342
1 ahead, Mr. Norquist.
2 MR. NORQUIST: I guess apart from
3 wanting to wait, is there any of the
4 Commissioners who think that we ought to be
5 taxing access? I mean, I brought it up in
6 New York, largely because Governor Locke had
7 brought it up consistently back in
8 Williamsburg. Everybody seemed to agree with
9 Governor Locke's position in Williamsburg,
10 which is why I put it together as a
11 resolution for New York, and here, as well.
12 I'm pleased to say that I think
13 we're getting consensus not just in this
14 Commission on this issue, but nationally.
15 All of the Republican presidential candidates
16 have weighed in. I understand. I sent a
17 letter to Vice President Gore asking his
18 position. I was told today that he is quoted
19 in Newsweek saying he's opposed to taxing
20 access. I have not seen this article, but
21 one of the reporters told me about it. I
22 think that level of broad-based consensus in
343
1 the country bodes very well and probably
2 flows from our Commission's fine work.
3 CHAIRMAN GILMORE: I'm going to ask the
4 legal counsel to read the definition of
5 Internet access, as contained in the Internet
6 Tax Freedom Act.
7 Tom?
8 MR. GRIFFITH: This is from Section 2(b),
9 Internet Access Services.
10 "The term 'Internet access
11 services' means the provision of computer and
12 communication services through which a
13 customer using a computer and a modem or
14 other communications device may obtain access
15 to the Internet, but does not include
16 telecommunication services provided by a
17 common carrier."
18 MR. LEBRUN: Mr. Chairman?
19 CHAIRMAN GILMORE: Mr. Lebrun?
20 MR. LEBRUN: That makes my point.
21 If we have a provider who bundles all of
22 those things together and there's one charge,
344
1 and that includes not just Internet access,
2 as just read, but other types of commerce and
3 telecommunications or whatever, how are you
4 going to split them out? I think those are
5 issues we have to address, and we're not
6 prepared to do so at this point in time.
7 CHAIRMAN GILMORE: This, it seems to me,
8 would be a place where we typically could get
9 some consensus, even if it is bundled into
10 something else. But I don't think that we're
11 in any kind of draconian position here with
12 this Commission today. So, does anyone have
13 any comment on it?
14 I think we'll bow to Mr. Lebrun's
15 suggestions on this and maintain the document
16 as is, but we at least know that we may have
17 an issue here that requires a little more
18 attention when we get to Dallas.
19 All right. Ladies and gentlemen?
20 MAYOR KIRK: Governor? I'm sorry,
21 one though I had, Gene, and for someone much
22 more knowledgeable in this that may help Gene
345
1 through that. There might be one option
2 under No. 1 is rather than eliminating the
3 grandfather clause, if you extend it for five
4 years and somehow gives those states that
5 have the bundling problem that five-year
6 period to try to work that out. So that they
7 can continue to apply the telecom or others
8 and not tax. That might be a way we can get
9 that resolved in which we can get comity
10 on that issue.
11 CHAIRMAN GILMORE: That language could
12 go into Option 1. Would that be satisfactory
13 so as to remove 3, or would you just still
14 want everything.
15 MAYOR KIRK: I wasn't suggesting to
16 remove 3. I was just saying somebody smarter
17 than me can take that and work with it, and
18 maybe in Dallas that may be a way to break
19 that log jam.
20 CHAIRMAN GILMORE: So you're not trying
21 to break the log jam today?
22 MAYOR KIRK: No.
346
1 CHAIRMAN GILMORE: Okay.
2 MAYOR KIRK: It was just a thought.
3 CHAIRMAN GILMORE: Move, if you would,
4 George, if your staff please would make a
5 note of that point?
6 Move, if you would, please, to page
7 8 of the issues and options paper. This is
8 policy options regarding the tax treatment of
9 telecommunications service providers. The
10 paper outlines five options regarding
11 telephone taxes paid by the consumers of
12 America.
13 It appears that some of these
14 options are hybrids of some of the others,
15 and maybe the discussion today can merge some
16 of these options. Let's talk about what they
17 are.
18 Policy Option 1 is to dramatically
19 simplify current telecommunications taxes and
20 repeal the federal three percent tax on local
21 and long distance telephone service. So
22 we're talking about a simplification. As we
347
1 have learned repeatedly in our discussions,
2 there are, of course, state and local taxes
3 on telecommunications. And there is a
4 federal three percent tax. This Option 1
5 would call for the repeal of that.
6 2 is: Eliminate the federal 3
7 percent tax all consumers pay on their local
8 and long distance telephone bills, and call
9 for the federal government to undertake an
10 in-depth study of the disproportionate tax
11 burden on the telecommunications industry. I
12 don't know if we have any telephone people on
13 this panel, or not, but that's probably where
14 that came from.
15 3: Eliminate, and this is, I might
16 say, is my proposal, eliminate 2 percent of
17 the federal telephone tax and make the other
18 one percent available to states as an
19 incentive to encourage them to simplify their
20 state and local telephone taxes.
21 Number 4: Encourage state and
22 local governments to work cooperatively with
348
1 the telecommunications industry to reduce
2 complexity in state and local telephone tax
3 structures, with the objective of treating
4 like services the same for tax purposes.
5 And 5: Present the current tax
6 structure for telecommunications taxes.
7 Any of those, of course, would be
8 options. I might say that as people are
9 certainly aware, my proposal, which has been
10 filed appropriately with the Commission, is
11 about seven elements, and that is contained
12 within the various categories of this paper.
13 This is one piece of that that I have
14 proposed. But the array of other options are
15 there, as well.
16 Is there discussion on this,
17 particularly perhaps on the issue of the
18 federal three percent telecommunications tax?
19 There are two formats suggested, one is the
20 elimination of the three percent tax, the
21 other is my proposal to offer one percent as
22 an incentive to the states, that would go
349
1 back to the states.
2 I will just say that I don't think
3 that there is any loss because of Internet
4 taxes, I think I've made that clear. But if
5 there is, the numbers of losses of Internet
6 commerce, some estimates have been that
7 Internet commerce is in the range of $270
8 million a year nationwide. This would put
9 $1.7 billion on the table to go back to the
10 states. Nice windfall. The feds might not
11 like it, but it certainly would eliminate
12 this possibility of all the states and little
13 people starving.
14 Mr. Norquist?
15 MR. NORQUIST: Yes. This has come
16 up before and we've discussed this, getting
17 rid of the three percent telecommunications
18 tax, which was originally put in to fund the
19 Spanish-American War 101 years ago.
20 I would just ask here whether
21 anyone feels strongly that it's a good idea
22 to have this and we should keep it. Also,
350
1 specifically does this administration, the
2 Clinton administration, have a position on
3 whether you consider this an important tax to
4 maintain.
5 CHAIRMAN GILMORE: Hands are raised.
6 Mr. Lebrun first, I think, even though the
7 question was directed to some of the fed
8 guys. But, still, Mr. Lebrun?
9 MR. LEBRUN: My only comment would
10 be is whether or not we recommend a repeal of
11 that should be part of a final
12 recommendation. I think it would be wrong
13 for us to start singling out that issue and
14 making a decision that early.
15 I think when we get our whole
16 package done, then we make a decision whether
17 or not that's part of it. And I would urge
18 that we wait until then before we just start
19 taking any positions on it.
20 MR. NORQUIST: We'll have an
21 opportunity to vote on my resolution later.
22 I was just asking where people were on this.
351
1 It's not a vote or anything. I'm just asking
2 does anybody think this is an important tax
3 to maintain. Specifically, since it's
4 federal revenue, whether the Clinton
5 administration has a position. And if you
6 don't know that they have one, could you get
7 one for us?
8 CHAIRMAN GILMORE: It's certainly a much
9 cleaner document if we can agree on any of
10 the policy positions that are contained
11 within the document. But the document is
12 designed to be a broad array of putting the
13 options down on paper.
14 Mr. Guttentag, you had your hand
15 up?
16 MR. GUTTENTAG: Yes. I think in
17 answer to Mr. Norquist, the administration
18 does feel that this is an important tax.
19 This is a tax which raises $4 billion a year
20 over the next 10 years. Our figures show $52
21 billion over a 10-year period of revenue loss
22 if it were to be repealed.
352
1 In putting it in terms of what it
2 buys, it's far larger, these tax revenues,
3 than the administration tax proposals on
4 child care, dependant care, health and the
5 environment all combined. So in answer to
6 Mr. Norquist's issue, this is an important
7 tax. Of course, the tax policy is decided at
8 the highest levels of the Clinton
9 administration in connection with the entire
10 budget process with which I know some of you
11 are familiar.
12 We can understand. I understand
13 Mr. Norquist and other comments and positions
14 regarding this tax, and certainly I can
15 understand there are various sides to this
16 issue. But in answer to the question of the
17 importance of this, I think you can see the
18 importance of this revenue and the need to
19 give careful and most careful consideration.
20 Therefore, we certainly are not in a position
21 to believe that there could be consensus on
22 this issue.
353
1 CHAIRMAN GILMORE: Mr. Pottruck?
2 MR. POTTRUCK: I'm speaking here
3 simply as a consumer. My company really has
4 no real stake in this issue, but as a
5 consumer and as an observer, as a member of
6 our Commission, I would like to urge the
7 Commission to consider recommending the
8 repeal of this tax. This is the time to do
9 it.
10 We have the tax revenues we need.
11 Grover has made the quip and I suppose it's a
12 joke, but it's really serious. I mean, we
13 obviously won the Spanish-American War. We
14 don't need this tax any more.
15 But more importantly this tax is a
16 very regressive tax. The poorest households
17 are paying this tax. We want to make access
18 to the Internet to all telecommunications
19 more available, less expensive, and I think
20 we'd be taking a step forward to have a clear
21 position coming out of Dallas that supports
22 the repeal of this tax and as a good step for
354
1 improving the telecommunications in America.
2 CHAIRMAN GILMORE: Paul Harris?
3 MR. HARRIS: Yes, I'd like to ask
4 Mr. Guttentag, given the fact that the
5 federal excise tax on telecommunications
6 makes it more difficult for poor people
7 across the country to access the Internet,
8 how does that square with the
9 administration's position on closing the
10 digital divide?
11 MR. GUTTENTAG: As I suggested,
12 there's no question that there are some
13 merits for some of the proposals to reduce or
14 eliminate this tax. But they have to be
15 considered in connection with these other
16 budgetary considerations. I mentioned what
17 is happening to those funds that are provided
18 by this tax. Those are important budgetary
19 issues and we can't just drop those from the
20 budget.
21 MR. HARRIS: Which of the budgetary
22 issues are more important in the 21st century
355
1 than closing the divide that now exists
2 between middle income families and poor and
3 rural families who don't have access to all
4 of the information services, goods,
5 marketplaces, that are available over the
6 Internet? Which one of the items, I'm
7 curious to know, are more important than
8 that?
9 MR. GUTTENTAG: I don't have the
10 liberty of making those calls, Mr. Harris,
11 but I did point out what these, the kinds of
12 programs that a tax of this magnitude funds.
13 We're spending, we're collecting more on this
14 tax and it's used for child care, dependant
15 care, a lot of which goes to the same kinds
16 of people that you're talking about.
17 MR. NORGUIST: Could I get a
18 clarification? Are you telling us that the
19 $4 billion a year is set aside for child
20 care?
21 MR. GUTTENTAG: The federal excise
22 tax goes into the general funds.
356
1 MR. NORGUIST: So it could be spent
2 on tobacco subsidies? I mean, the government
3 does a lot of different things with money.
4 You're not telling us that this is earmarked
5 just for good things. It goes into general
6 revenues and gets spent, right? Am I
7 correct?
8 MR. GUTTENTAG: Yes, that's right.
9 MR. NORGUIST: So you had a list of
10 things that didn't have any relationship to
11 this tax, though.
12 MR. GUTTENTAG: I'm quantifying the
13 amounts collected on this tax with the tax
14 benefits provided in these other programs.
15 MR. NORGUIST: That's about the size
16 of the sugar subsidy.
17 CHAIRMAN GILMORE: I want to get in on
18 my proposal on this here in just a moment,
19 but I don't want to jump ahead of anyone.
20 Mr. Pincus?
21 MR. PINCUS: Thank you, Governor.
22 Just to elaborate on what my colleagues said.
357
1 I think that we recognize the policy issue
2 that Mr. Pottruck and others have raised, but
3 we're in an era of fiscal responsibility and
4 budget cuts have to be paid for.
5 The question just is what the
6 offset is. It's something that we're looking
7 at and would welcome input from people on the
8 Commission as we look toward Dallas. A
9 question if we're going to eliminate $4
10 billion worth of revenue is how to make that
11 up on the expenditure side if we're going to
12 maintain fiscal discipline, which I think
13 everyone would agree is important to our
14 economic growth, maybe as important as the
15 Internet.
16 So I think that's just an issue
17 that has to be wrestled with, as anyone does
18 when they balance a budget.
19 MR. NORQUIST: But the budget could
20 be balanced by reducing the growth of
21 spending by $4 billion, not just by other
22 taxes. You only left one option and that's
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1 not the only option, correct?
2 MR. PINCUS: I didn't leave that
3 option, actually, Grover. I'm just saying it
4 has to be paid for by an offset. An offset
5 could be an additional tax or it could be a
6 reduction in expenditures.
7 But everyone has to agree, and many
8 people have different priorities. What you
9 might think was inappropriate $4 billion
10 towards those expenditures, many other people
11 on the Commission might not agree, and that's
12 just a question that has to be played out as
13 we look toward resolving this issue in
14 Dallas.
15 MR. NORQUIST: You're telling us,
16 then, that the Clinton administration opposes
17 eliminating this tax, correct?
18 MR. PINCUS: No, I'm telling you.
19 MR. NORQUIST: That's the Clinton
20 administration's position? Question.
21 MR. PINCUS: I'm telling you that
22 the Clinton administration's position is that
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1 we recognize the policy concern that
2 motivates it, and we're certainly sympathetic
3 with the things that Mr. Harris mentioned,
4 but that we have to identify the $4 billion
5 that we're going to reduce the budget by
6 before we can sign on the dotted line.
7 Because the President has the responsibility
8 of presenting a budget that balances, which
9 other people on this Commission may not have.
10 CHAIRMAN GILMORE: We're getting a
11 little more discussion here than I expected
12 on this, which is okay.
13 Delna Jones, and then I'll come
14 back to Dean Andal and then Stan Sokul.
15 MS. JONES: I think this is
16 interesting, because, to one, it's a sugar
17 subsidy, to another, it's tobacco, to another
18 it's forest receipts. But the issue, I
19 think, is a couple of things. First of all,
20 I believe it is a discriminatory tax. I
21 think it needs to be dealt with.
22 I don't know exactly how the
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1 Commission is going to come out as to how we
2 deal with it, but I think it's an issue that
3 we will want to deal with in Dallas.
4 The other piece is that this is
5 really a congressional responsibility, also,
6 to balance a budget. It isn't just the
7 Clinton administration's responsibility. So
8 when you look at these issues, we have
9 representation in Congress that's required to
10 do this, as well. That's where we ought to
11 also direct some of our attention. Because I
12 know what it's like to try to speak for your
13 boss. It's not always easy, so.
14 CHAIRMAN GILMORE: But this is a
15 communication to Congress.
16 Let's see here, I think it was
17 Mr. Andal and then Mr. Sokul.
18 MR. ANDAL: Just a point. Other
19 than these terribly hard choices you're going
20 to have to make for this relatively small
21 text, isn't one of the options that instead
22 of cutting any spending you could take the
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1 excise tax out of the projected budget
2 surplus that the administration is predicting
3 over the next 10 years? Instead of spending
4 that new money, offering a tax cut and
5 getting rid of this long-standing tax.
6 That's one question of the administration.
7 The second is, the administration
8 thus far, although they sent three very
9 bright people who sometimes agree with each
10 other, has not made really any hard choices.
11 This Commission is going to have to make some
12 hard choices, one way or the other, in about
13 three months.
14 My strong recommendation to the
15 administration is that you come to
16 conclusions on some of these issues and let
17 the rest of us know what you plan on doing.
18 Are you for or against removing the excise
19 tax? We'd like to know. Are you for or
20 against taxing Internet access fees? We'd
21 like to know.
22 Most of the rest of us are pretty
362
1 outspoken about these subjects, but
2 sympathizing with everybody concerned. In
3 other words, the administration, so far,
4 seems to sympathize with the complexity of
5 the Tax Code for small businesses. At the
6 same time, you sympathize with state and
7 local governments that are worried about
8 revenue loss.
9 But sympathy doesn't offer
10 solutions, nor does it come to a conclusion
11 or make hard choices, which is what the
12 Commission has to do. So I'm hopeful that
13 the administration in its collective wisdom
14 will come to our next meeting prepared to
15 vote.
16 CHAIRMAN GILMORE: Mr. Sokul? I'm going
17 to Sokul, Pottruck, Gilmore and Norquist, in
18 that order so far. Go ahead, Stan.
19 MR. SOKUL: Thank you. I'd just
20 note that I understand the position that the
21 three administration officials are in. But
22 our next meeting is in March and the
363
1 President's budget comes out in February 1st
2 or late January? February 1st. So I think
3 on this issue, which will be a line item in
4 the budget or maybe it will, somehow this
5 issue will be, the highest levels will have
6 spoken on this issue by the time we get to
7 Dallas.
8 Now, as to repealing the tax, I
9 agree with what Mr. Pottruck said and Delna
10 Jones said, and also what Mr. Harris said,
11 that this is a highly aggressive tax that
12 affects the digital divide. There's a couple
13 of ways to deal with the digital divide.
14 You can increase taxes, including
15 on the poor, in order to help the poor, or
16 you can, since the digital divide is
17 income-related, cut taxes on the poor so they
18 can, will have more income, perhaps to go buy
19 something as simple as web TV, which is $50,
20 I think, for the original versions.
21 So I note that the E-rate is talked
22 about, I'm jumping way ahead here, getting to
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1 Mayor Kirk's outline of digital divide options.
2 I mean there's a lot of talk about the E-rate
3 and that's basically a communications tax, as
4 well.
5 But sometimes reducing the tax is a
6 way to help the poor, not increasing taxes in
7 order to have people in Washington then
8 funnel it back in particular ways.
9 CHAIRMAN GILMORE: Mr. Pottruck?
10 MR. POTTRUCK: I'd like to make
11 another additional point, and I'd like to do
12 this because we're not a telecommunications
13 company. There's a worldwide competition
14 right now for in the telecom industry. We
15 want our U.S. telecommunications companies to
16 be competitive worldwide.
17 The nice thing about reducing taxes
18 or the Gilmore proposal, which has a very
19 effective process for phasing out the tax, is
20 that if you lower a tax rate you still have
21 all the administrative burden of filing the
22 returns and reporting on all of that. You
365
1 eliminate a tax, all that administration goes
2 away and it improves the efficiency of our
3 economy and the competitiveness of our
4 telecommunications companies.
5 So as we think about all the
6 options we have with our surplus and people
7 are talking about income tax reductions and
8 so forth. I, for one, personally would much
9 prefer to see the complete elimination of a
10 tax so that we can have the efficiency that
11 comes with that and the value that that
12 provides to the poorer parts of our nation.
13 So that, in particular, their access to all
14 the benefits that come with
15 telecommunications would be improved.
16 CHAIRMAN GILMORE: Let me take a moment,
17 then, to restate once again what my proposal
18 is. It is an elimination of the 3 percent
19 federal excise tax on communications. My
20 proposal is that we get rid of 2 percent of
21 it right away. One percent of it remains for
22 a period of three years. Then that be an
366
1 incentive to the states.
2 So as states simplify their
3 telecommunications taxes, which is certainly
4 better for our industry, that locals and
5 states could then receive one percent back to
6 them as an incentive. At the end of that
7 three years, those states which have, in
8 fact, simplified, continue to be able to
9 charge that additional 1 percent at the state
10 or local level.
11 At the end, though, it is an
12 elimination of the federal tax.
13 Now, the last time I think I
14 checked, the national budget is $1.7
15 trillion. This elimination of this tax at
16 the federal level would be $3.3 billion
17 annually. I haven't done the math, but it's
18 not much. There's no relationship, really,
19 to the dramatic tax cuts that have been
20 suggested and vetoed previously. This is,
21 however, a good start of giving tax relief
22 back to the people of the United States.
367
1 In fact, it would shift $1.7
2 billion annually from the federal government
3 back to the states and localities.
4 Where, as Mayor Kirk has so
5 eloquently said, the money is being spent on
6 education, public safety, and other areas, as
7 well.
8 So it's not like the money will be
9 lost. The services that are being provided
10 will simply be provided at the place where
11 it's best provided, which is at the state and
12 at the local level.
13 So that's my proposal, and I
14 certainly hope that the Commission will adopt
15 it in Dallas. But I wanted to be in a
16 position to answer any questions that anybody
17 might have about it. But I wanted to lay
18 that out.
19 Mr. Norquist?
20 MR. NORQUIST: Yes, two things.
21 One, just when we talk about $4 billion taken
22 in this tax every year from citizens, some
368
1 can point and say, well, the federal
2 government is going to do bunches of stuff
3 with it, if the federal government wasn't
4 taking it, the citizens would have it and
5 you'd reduce the digital divide and parents
6 would have resource to take care of their own
7 households and their own families.
8 So it's not as if the government
9 didn't have it in order to, you know,
10 subsidize sugar production and tobacco, that
11 somehow it would get lost somewhere. It
12 actually would rest with the American people.
13 So lost revenue isn't lost if
14 you're a taxpayer. It's actually kind of
15 found.
16 I did want to clarify one thing. I
17 had been told by a reporter here that Vice
18 President Gore had spoken in a Business Week
19 article to the Internet access issue. In
20 point of fact, he has not. I have sent him a
21 letter, asking for his position. I don't yet
22 have his position now on access. So I
369
1 thought he was with the rest of us on this
2 issue. It hasn't happened yet. If the
3 administration could encourage him to make a
4 statement on that, it would be helpful, and I
5 could share it with everybody.
6 CHAIRMAN GILMORE: Mayor Kirk?
7 MAYOR KIRK: I'm growing in
8 popularity by the minute. Or disfavor.
9 I agree wholeheartedly with David
10 Pottruck and Delna Jones, in the sense that
11 this Commission was asked to look at the
12 impact of taxes on the Internet. To me, at
13 least, this is one that is directly applied
14 to the instrument itself.
15 I do think that that's different
16 from sales taxes. I think it's different
17 from other taxes. I say that with the caveat
18 that I had complained the most about other
19 people telling folks how to spend their
20 money. But, to me, if Congress is truly
21 serious about opening up access to the Net,
22 the best place for them to start is with the
370
1 telecommunications tax.
2 I do believe, with all due respect,
3 Governor, to your proposal, I agree with
4 David. The best way to do that is a total
5 elimination. I don't think it makes the tax
6 any better by saying we're still going to tax
7 it, but give the money to Ron to spend on
8 something else.
9 If you really want to open it up,
10 we ought to do it. I would support Mr.
11 Pottruck and Delna in terms of option No. 2.
12 CHAIRMAN GILMORE: Let me be clear that
13 the one percent that I'm holding back to go
14 back to the states is an incentive on
15 simplification, which we had talked to death
16 around here for two days.
17 MR. NORQUIST: I wasn't necessarily
18 seeking clarity. I was just aligning myself
19 with Mr. Pottruck and Ms. Jones. Thank you.
20 CHAIRMAN GILMORE: That being said, the
21 debate is between my proposal and the general
22 completely-total proposal elimination.
371
1 However, as we depart this area, No. 5 is to
2 preserve this current tax structure for
3 telecommunications taxes.
4 Do I gather there is not a
5 consensus to eliminate that at this time from
6 this draft paper? Is there a consensus to
7 eliminate it? I see some shaking heads,
8 right?
9 It stays in for the time being.
10 MR. PINCUS: Governor, I don't know
11 if we're going to leave this section, but I
12 wanted to respond to Mr. Norquist. I don't
13 know whether the Vice President has had a
14 chance to speak to this issue, but I believe
15 that the President has said that the
16 administration doesn't support taxes on
17 Internet access.
18 MR. NORQUIST: Governor, can I just
19 interpose a question? There is at least a
20 proposal on the table here to encourage
21 states and localities to simplify and
22 potential re-equalize state and local
372
1 telecommunications taxes, as well. We ought
2 not to lose that issue in this discussion.
3 CHAIRMAN GILMORE: Which item are you
4 specifically talking about? Is there an
5 item?
6 MR. NORQUIST: In my version of
7 this final draft it's Item 4: Encouraging
8 state and local governments to work
9 cooperatively with industry to reduce
10 complexity and cost of complying with
11 telecommunications taxes, adopt tax policies
12 that consistently treat like services alike.
13 CHAIRMAN GILMORE: I think that's right.
14 MR. POTTRUCK: Governor, I think
15 that we've talked a lot about simplification
16 and there seems to be a lot of support for
17 that idea. In terms of getting state and
18 local government to work together to
19 simplify, unless there's some incentive to do
20 that, that's going to be a tough row to hoe.
21 I think that the likelihood is that unless we
22 adopt something or vote for something like
373
1 your proposal, which has an economic
2 incentive to promote this idea of
3 simplification, it's just not going to
4 happen.
5 MR. VRADENBURG: The question may
6 be, David, whether or not we ought to be
7 recommending to Congress that there be some
8 either establishment of a Commission that
9 does that or some other incentive to induce
10 it.
11 But it does seem to me at least an
12 issue of national policy whether we ought to
13 be continuing to sustain a system that has as
14 many tax forms to fill out with respect to
15 state and local telecommunications taxes, and
16 which has an average rate across all the
17 states of something in excess of 14 percent,
18 which is clearly significantly higher than
19 franchise taxes on cable or other like
20 services.
21 So I do think your question is
22 right. I think maybe the issue, perhaps put
374
1 it back to us, is, all right, drafting
2 subcommittee, what would you suggest or
3 recommend for your consideration might be the
4 incentive or the mechanism to bring about
5 that state simplification and
6 re-equalization.
7 MR. POTTRUCK: George, that was
8 exactly my point. That I'm challenging the
9 drafting subcommittee to come back to this
10 group with an incentive, a way that's
11 realistic to get this done. To give a
12 proposal which has no teeth is just not going
13 to happen. Let's go the extra mile, if we're
14 going to put something like this on the
15 table, and offer something that we can
16 support that says, yes, this is what we think
17 would be the right incentive to get that.
18 It's not only important. It's important
19 enough to put an incentive on the table to
20 get it done.
21 CHAIRMAN GILMORE: Ted Waitt, did you
22 wish?
375
1 MR. WAITT: Yeah, I just had one
2 comment. By the way, things are shaping up.
3 It looks like there's going to be a lot of
4 off-line work that we do between now and the
5 meeting in Dallas. Just a clarification, so
6 I think we can frame our report properly.
7 In Section 1103 of the Internet Tax
8 Freedom Act, the second sentence says:
9 "Any recommendation agreed to by
10 the Commission shall be tax and
11 technologically neutral and applied to all
12 forms of remote commerce."
13 Now, I don't know if somebody on
14 your staff can help clarify that definition
15 for me. For instance, does "tax neutral"
16 mean "revenue neutral," for instance, if we
17 recommend abolishing the 3 percent excise
18 tax? Therefore, that's three or $4 billion.
19 Do we have to come up with another way to
20 make up that three or $4 billion? Was that
21 tax or revenue neutral?
22 And then as it applies to an
376
1 Exception 4, that we'll be talking about in a
2 minute, it says, "Applies to all forms of
3 remote commerce." A lot of times we're
4 talking specifically E-commerce, and I think
5 E-commerce is the definition all remote
6 commerce, meaning telephone sales, fax sales,
7 as well as sales made over the Internet?
8 Because I think it's fairly specified in our
9 charter. I'm just looking for a
10 clarification.
11 CHAIRMAN GILMORE: The suggestion is
12 that we don't have a right to offer a tax cut
13 at any level, because it wouldn't be
14 revenue-neutral?
15 MR. WAITT: I'm asking for your
16 interpretation, or if we have an
17 interpretation there. Because it says "tax
18 neutral." Is it tax neutral or revenue
19 neutral?
20 CHAIRMAN GILMORE: We don't have an
21 answer, but it is worth looking at between
22 now and Dallas, to make sure that we're
377
1 living up to the charter in the right way.
2 Very good.
3 MR. WAITT: In terms as it applies
4 to Section 4, and I think it ties back to the
5 international tariff piece, as well, in
6 Section 1, and possibly the introduction.
7 When we talk about E-commerce, it specifies
8 that we just talk about remote commerce, as
9 well.
10 CHAIRMAN GILMORE: Good question.
11 MR. WAITT: So I think we have to
12 look into that, because we want to make sure
13 that in all the work that is done between now
14 and the meeting in Dallas, that we get all of
15 these things framed properly, so we can get
16 things done. Because we've been going
17 through a lot of work. There's some varying
18 degrees of thought, and we really, I think,
19 all want to get something really done when we
20 get to Dallas.
21 CHAIRMAN GILMORE: If we're in a
22 position where it's interpreted that we can't
378
1 make any suggestions that don't change
2 finances, then the Congress would have
3 stopped us at the very inception. I don't
4 think that's what they intended to do.
5 MR. WAITT: I just want to make
6 sure it's clear.
7 CHAIRMAN GILMORE: We'll see if we can
8 find out. Thank you.
9 What else do we have, now, on this
10 topic? There are still hands up.
11 Mr. Pincus?
12 MR. PINCUS: Governor, I just have
13 a question about this question of state and
14 local telecommunication taxes and fees. We
15 had some interesting proposals yesterday.
16 There are some other proposals in this
17 document.
18 But I don't know if we've had any
19 reaction at all by the representatives of
20 state and local government to any of those
21 proposals. I don't know if it would be in
22 order, if any of them are still here, if they
379
1 have comments or just to say. It seems to me
2 if they have some interest, and these
3 proposals range all the way from just
4 directing simplification to providing
5 incentives to doing nothing. It just seems
6 to me if I were them, obviously I'd want to
7 have some input.
8 There's just been no input at all
9 on these proposals from the state and local
10 government community. As I say, I don't know
11 if it's in order to ask them now or just urge
12 them to submit something.
13 CHAIRMAN GILMORE: I think they can
14 certainly submit something. We have a
15 virtual office and plenty of information that
16 could be made available and sent to the
17 Commissioners well in advance.
18 In the meanwhile, there are state
19 and local officials represented on the
20 Commission who are perfectly entitled to give
21 their point of view, so that the other
22 Commissioners can know the point of view on
380
1 it.
2 I've certainly expressed my view,
3 and so has Ron Kirk. If there are others,
4 naturally that's available. And that's why
5 they were named to the Commission, I believe.
6 Other matters involving that policy
7 A? If not, on page 10 is a related topic
8 involving property taxes.
9 The next topic on page 10 is a
10 related topic on tax treatment on
11 telecommunications property. Two options
12 appear in the document. One, to prohibit
13 discriminatory ad valorem taxes on interstate
14 telecommunications equipment. Then the taxes
15 that are imposed on other property. Or,
16 number two, leave the states and localities
17 alone to determine the nature and level of ad
18 valorem taxes on interstate
19 telecommunications property.
20 I believe this matter may have been
21 offered by Mr. Andal. Do you have anything
22 that you wish to add, Dean?
381
1 MR. ANDAL: I have nothing else to
2 offer, other than what I said yesterday,
3 which is I think that the discriminatory tax
4 offered by states on the property of
5 telecommunications companies discourages
6 capital investment. Capital investment by
7 the telecommunications companies is where the
8 Internet backbone, infrastructure is going to
9 be built.
10 I think it's unwise to do that. I
11 also think that the burden is is that the few
12 states that do discriminate, offer a taxing
13 formula that's different from other
14 businesses in their state, that is built into
15 long distance telephone rates, which are set
16 nationally.
17 Which means that the states that
18 don't do discriminatory tax and property tax
19 are subsidizing those who do, because the tax
20 load is higher in some states than others.
21 But I've written all of that and
22 all of the Commissioners have had access to
382
1 it. I think my option is fairly presented by
2 the drafting committee, and so is the
3 alternative.
4 CHAIRMAN GILMORE: Delna Jones, then
5 Grover, and then Mr. Lebrun.
6 MS. JONES: I think this is getting
7 into an issue where we are now attempting to
8 determine ad valorem tax at the state level.
9 While I might be in agreement with the idea,
10 I have a real concern for dictating now how
11 each state should tax.
12 We have varying tax structures in
13 relationship to property tax regarding farms
14 and forest lands and various things, and they
15 vary all over the nation. I really have a
16 concern having this Commission look at that
17 as being an issue that we need to deal with
18 and ask Congress to do something about.
19 MR. ANDAL: That's fair enough,
20 Delna. I think the difference, though,
21 between the examples that you gave me and the
22 one I've offered is that telecommunications
383
1 property and especially long distance
2 telephone cross the state lines, unlike a lot
3 of property. Of course, that's what the
4 other 4-R Act for railroads, for oil
5 pipelines, and for other similarly-related
6 activities, including airlines now, that's
7 what it deals with.
8 So my point is is that long
9 distance telephone, because it's an
10 inter-state business, deserves protection.
11 It's also subject to tax, more often than
12 not, because more often than not the
13 headquarters is located outside of the state.
14 MS. JONES: Let me just respond,
15 not all is inter-state, some of it is also
16 intra-state. So are you going to get into
17 that kind of a definition in which properties
18 are which or the other? I see a concern of
19 getting into issues that I'm not certain this
20 Commission ought to get into.
21 CHAIRMAN GILMORE: The next speaker is
22 Mr. Norquist.
384
1 MR. NORQUIST: Yes. Delna, you may
2 not support the idea, but it is, of course,
3 this Commission's job to talk about total
4 level of taxation on the Internet and its
5 component parts. So the high level of
6 taxation by state level governments on
7 telecommunications, which came about during a
8 time when they were government-mandated
9 monopolies, and it made some sense that you
10 were imposing taxes on a defined area, now,
11 of course, they're opened up and we have much
12 more a competitive market.
13 We're not completely there, but
14 we're getting there on a competitive market
15 across the country. So you may not want to
16 vote for it, but certainly it's within the
17 Commission's what we've been asked to do here
18 is to look at the total tax burden.
19 I would suggest that we not only
20 look at extending the 4-R law to property
21 taxes on telecommunications, but also on
22 excise and sales taxes. Because it's been
385
1 reported to this group the average sales tax
2 in the country is around, you know, four to
3 six percent, and the average
4 telecommunications taxes are about 14.1
5 percent.
6 So it's a heavily discriminated
7 against industry, which may have made sense
8 when it was a government monopoly and a
9 regulated monopoly, but makes less and less
10 sense in a competitive world.
11 MS. JONES: Let me see if I can
12 respond. First of all, don't assume that I
13 agree that the tax level ought to be
14 different or be discriminatory in terms of
15 property tax. That's not my assumption.
16 But let me also assure you that
17 various states are dealing with this in
18 various ways. Some through their public
19 utility Commission are giving incentives in a
20 different way to offset some of that. Some
21 of them are reducing that property tax burden
22 in a very specific way, getting certain
386
1 benefits for that company.
2 So what I'm saying is I don't have
3 any problem with it staying right here where
4 it is, but since Dean was making the case for
5 his proposal, I thought it ought also be
6 raised that there are a lot of ways states
7 are dealing with this issue.
8 I'm not certain the federal
9 government is the best place to do it.
10 CHAIRMAN GILMORE: Mr. Lebrun?
11 MR. LEBRUN: I would agree with
12 Delna. I think this is at least stretching
13 the scope of our charge. There are other
14 factors that states look at when determining
15 how to tax the property of utilities, whether
16 they're telecommunication, electrical, or
17 whatever.
18 As an example, South Dakota does
19 not charge utilities at all for the use of
20 the public right-of-way. That's a real
21 benefit to them. Part of the policy of the
22 state was to encourage the spread of
387
1 electricity throughout the state, through
2 REAs or whatever. But those are all factors
3 that states individually made a policy
4 decision on, and I think it would take much
5 more time and study than we've got to come up
6 with a recommendation on that issue. I think
7 it is beyond the scope of our charge.
8 CHAIRMAN GILMORE: Other comments on
9 this matter?
10 MR. VRADENBURG: Mr. Chairman?
11 CHAIRMAN GILMORE: Yes, George?
12 MR. VRADENBURG: I just want to
13 refer you to the statute, which does charge
14 us to conduct a thorough study of federal,
15 state, local, international taxation, and
16 other comparable intra-state, inter-state and
17 international sales activities. So it's
18 within the charter, although I understand
19 Commissioner Jones and Commissioner Lebrun
20 also made a different point.
21 Which was that perhaps maybe
22 offsets to what seems to be a discriminatory
388
1 tax makes it non-discriminatory. But at
2 least it is within the charter.
3 CHAIRMAN GILMORE: Further comments? If
4 you'll turn to page 12 of the issues and
5 options paper? We have reached the central
6 sales tax issue. The application of sales
7 and use taxes to transactions conducted over
8 the Internet.
9 There are seven policy options that
10 are outlined in the document, as they go on,
11 and they are worthy, I think, of some
12 discussion here today. Let's go through
13 them.
14 One is to extend the moratorium of
15 the Internet Tax Freedom Act by an additional
16 five years. Prohibit sales tax on the sale
17 of tangible and intangible goods or property,
18 intellectual property, digital goods,
19 services, securities, information, and
20 entertainment.
21 Two: Make no change in the
22 authority of state and local governments to
389
1 tax Internet transactions. This probably
2 means the maintenance of the Quill doctrine.
3 Three: Preempting state and local
4 sales taxes on tangible goods and services
5 sold over the Internet.
6 Four: Prohibit all sales and use
7 taxes on business to consumer, remote
8 Internet transactions, including all sales
9 and use taxes on the sale of tangible and
10 intangible goods and property, intellectual
11 property, digital goods, services,
12 securities, information, and entertainment
13 sold over the Internet.
14 Actually, I don't even think the
15 word "remote" is in there, but it should go
16 in there.
17 I'm not reading verbatim the items,
18 but I shall, if that's what people would
19 prefer. I'll start back on 12, the first
20 item.
21 Extend the moratorium of the
22 Internet Tax Freedom Act for five additional
390
1 years. While modifying the prohibition
2 against sales and use taxes to prohibit all
3 sale taxes on Internet business, to consumer
4 sales of tangible or intangible goods or
5 property, intellectual property, digital
6 goods, services, securities, information, and
7 entertainment.
8 Second: Recommending making no
9 change in the state and local governments'
10 authority to impose transaction taxes on
11 sales of tangible personal property
12 facilitated by the Internet. Taxes would be
13 imposed by state and local governments in the
14 same manner and to the same extent as they
15 impose transaction taxes on sales facilitated
16 through any other means, including
17 face-to-face retail sales and mail order
18 sales.
19 Third: Recommend preempting state
20 and local governments' authority to tax sales
21 of tangible personal property on services via
22 the Internet, making such sales exempt from
391
1 any transaction taxes.
2 Fourth: Recommend prohibiting all
3 sales and use taxes on business to consumer
4 Internet transactions by amending the
5 Internet Tax Freedom Act to prohibit all
6 sales taxes on Internet businesses to
7 consumer sales or tangible or intangible
8 goods and property, intellectual property,
9 digital goods, services, securities,
10 information, and entertainment.
11 Five: Encourage the development
12 and implementation of a voluntary system for
13 collecting sales use taxes on electronic
14 commerce and remote sales that would
15 eventually utilize advance technologies to
16 overcome certain complexities and would
17 eliminate the financial and logistical tax
18 collection burdens and liability of the
19 seller.
20 Again, there's commentary through
21 all of this, as well, which everybody I
22 believe has.
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1 Six: Recommend requiring state and
2 local governments to simplify sales and use
3 tax systems in a manner meeting certain
4 federally-mandated requirements, negotiated
5 by interested public and private sector
6 parties in consultation with federal policy
7 makers.
8 Number 7: Recommend imposing a
9 nationally collected single rate uniform
10 sales and use tax on electronic commerce and
11 remote sales in lieu of all sales tax and use
12 taxes. All revenues to be shared with state
13 and local government.
14 Those are the seven regarding the
15 tax treatment of tangible personal property.
16 Now, since this could interest the
17 Commissioners, and I hope that the
18 Commissioners will speak specifically to the
19 different options. Mr. Lebrun, did you speak
20 first?
21 MR. LEBRUN: Just a quick question.
22 I am assuming that each of these would apply
393
1 the idea would be to address the issue of
2 sales tax on services, as well as tangible
3 and intangible property. I think some of
4 these don’t address services, but I recognize in
5 some states that actually tax services, and some don't. But we
6 talked about simplification or whatever. It
7 would apply to the sales tax on services,
8 just as well as tangible goods.
9 Is that a correct assumption?
10 CHAIRMAN GILMORE: I think that it
11 would. Again George, you may have a comment
12 on this. I did not draft the document,
13 although, in fact, I think there's an
14 essential concept in one of mine that is not
15 in appearance here, which I'll talk about in
16 a moment.
17 Did you have a response to Gene
18 Lebrun with respect to the inclusion of
19 services in every instance? I believe that's
20 the thrust of what you were saying.
21 MR. LEBRUN: Yes. Some of them
22 address services, some don't. But I am
394
1 assuming that all of them, you're not going
2 to make one recommendation for sales tax on
3 goods and a different recommendation on sales
4 tax on services. Would that be correct?
5 MR. VRADENBURG: Commissioner
6 Lebrun, you're absolutely right. The whole
7 heading deals with tax treatment of tangible
8 personal and tangible services. You'll see
9 the next section does -- taxable services.
10 The next section will deal with digitized
11 goods, which may or may not warrant
12 differential treatment. But this one does
13 deal with both goods and taxable services.
14 CHAIRMAN GILMORE: I want to make it
15 clear that the policy options that I have put
16 in do not deal with the taxation of services.
17 It is specifically intended to be a
18 narrowly-drawn, narrowly-defined benefit for
19 the consumer, for the people who, in fact,
20 use the Internet.
21 Also, the original policy paper
22 that I filed discussed remote sales. And I
395
1 don't believe that that appears in any of
2 these, either.
3 So my proposal is the elimination,
4 prohibiting all sales and use taxes on
5 business to consumer, not business to
6 business, Internet transactions by amending
7 the Internet Tax Freedom Act. This is No. 4;
8 to prohibit all sales taxes on Internet
9 business to consumer sales of tangible and
10 intangible goods and services and property,
11 intellectual property, services, securities,
12 information, and entertainment. But that is
13 for remote sales, and should be amended to
14 that effect in the final draft.
15 There is going to be, I think, a
16 discussion on this, and I will engage in it,
17 also. But, first, the floor is open, if
18 someone else would prefer to go first.
19 Dean?
20 MR. ANDAL: Just a point of
21 clarification. Item B is called the taxation
22 of digitized goods. And I assume that deals
396
1 with what are commonly referred to as
2 services, as well. Just a point.
3 I can't remember earlier whether or
4 not it was Governor Leavitt or Mayor Kirk who
5 asked the question of two of our experts,
6 Harley Duncan and Dan Bucks, whether or not
7 my proposal would invite new litigation or
8 reduce litigation. It was Mr. Guttentag? I
9 never got a chance to respond.
10 I'd like to ask an expert who is
11 actually a litigator, who litigates
12 nexus-type cases, to come forward and answer
13 that question, as well. Art Rosen, are you
14 still here? Art? Yeah, come on up.
15 The question, just so that you
16 don't wander too much. The question is, is
17 my proposal, which codifies Quill and expands
18 Public Law 86-272, whether or not that
19 proposal would reduce or increase litigation,
20 in your view.
21 Please introduce yourself, so that
22 the Commission knows who you are.
397
1 MR. ROSEN: I'm Arthur Rosen from
2 New York. It seems to me there's been a lot
3 of confusion by the use of the term
4 "codifying Quill." I read your proposal, and
5 heard you speak. It seems to me it's a
6 shorthand that you're using. As Professor
7 Hellerstein said earlier, you're not
8 suggesting a statute that says what the
9 Supreme Court in Quill is the law of the
10 land. Furthermore, you're not saying let's
11 just replicate the Supreme Court's opinion.
12 Rather, what you're doing is what
13 the Supreme Court has done in Quill, as all
14 courts do, is set forth an outline, general
15 standards. What a statute does, it fills in
16 the details in a statute. And the more
17 details you have in a law, the less
18 litigation there is.
19 Public Law 86-272 is an example. A
20 pretty specific statute. There are a handful
21 of cases pending now in the United States on
22 this issue. In contrast to the Quill sales
398
1 tax issue, where all you have is the Supreme
2 Court decision, there are a dozen, or there
3 are scores of cases that I know about, that I
4 or my partners are involved in.
5 There must be hundreds of cases
6 going on now, in contrast to a tightly-worded
7 statute. We have a few cases, very narrow
8 controversies. It cuts down the
9 contentiousness between taxpayers and tax
10 collectors, as well as the amount of
11 litigation.
12 The only person that really suffers
13 when you have real specific statutes and less
14 litigation are my children. They're going to
15 eat a lot less good food, I guess, if we have
16 less litigation. But that's probably good
17 for America.
18 MR. ANDAL: Yes. So, I guess the
19 point that needs to be made is it defies
20 common sense that my proposal would increase
21 litigation. What my proposal does, and maybe
22 it was my shorthand that was my problem, is
399
1 it doesn't just restate what Quill says. It
2 offers specific definition to what
3 substantial physical presence might mean in a
4 real life environment. Thus, would reduce
5 some of the litigation that's going on now.
6 It could not increase litigation.
7 The other question that was brought
8 forward was the substantial physical presence
9 test that I use. It was said that Quill does
10 not say that. That's true. Quill does not
11 say that. Quill says physical presence. But
12 Complete Auto-Transit, which is also a
13 Supreme Court case, uses the term
14 "substantial nexus." Read together, those
15 two cases represent the Supreme Court's view
16 on what is required to have nexus in a state.
17 I didn't want that to go
18 unanswered. I don't believe Quill says
19 substantial physical presence, either. But I
20 do believe that is the state of the law.
21 MR. GUTTENTAG: Well, read together
22 by Mr. Andal, I'll accept that.
400
1 CHAIRMAN GILMORE: Mr. Pottruck?
2 MR. POTTRUCK: I think that it was
3 surprising to me when I, not being a lawyer,
4 not being a tax expert, when I came on the
5 Commission, to find out that really the
6 Internet tax moratorium was really not about
7 sales taxes. That, in fact, Quill is what
8 governs sales taxes on the Internet.
9 And so under any of our proposals,
10 to continue with the moratorium or in the
11 state we're in today, it would seem to me to
12 make a lot of sense for us to think about
13 this issue, about Quill. Unless we're going
14 to go to a recommendation that overturns
15 Quill, that says we ought to do something
16 different, that the time is now, which is one
17 choice we have. The time is now to do
18 something different than Quill.
19 The other choice is, remote
20 commerce is going to be bigger than ever. If
21 we're going to stay where we are, then we
22 ought to improve upon Quill. We ought to
401
1 take it to the next level. I think Dean's
2 proposal is a good beginning in that regard.
3 To really think about all the unanswered
4 questions that Quill leaves, isn't good for
5 America. If we're going to stay in that
6 direction, and I don't know that I've come to
7 that conclusion yet, but if we're going to
8 stay in that direction, I think we ought to
9 seriously think about a recommendation to
10 Congress about clarifying the issues around
11 Quill, so that we have something better to
12 govern the economic expansion of America.
13 CHAIRMAN GILMORE: Delna?
14 MS. JONES: I asked one of my state
15 tax folks to take a look at Dean's proposal, and one of the concerns I have
16 Normally I would say, whatever you want to do
17 about Quill isn't going to bother me one way
18 or the other, but, in terms of my state, I
19 think in your proposal you extend it beyond
20 that. Look at Public Law 86-272 and extend
21 it to all business activity taxes. That
22 takes in those of us who are dependant upon
402
1 income taxes, as well.
2 So, I'm a little concerned as to
3 being sure what kind of impact between now
4 and Dallas. If you have further
5 clarifications, things you want to add, I
6 think it's time for the drafting committee to
7 look at those issues. Because, before I can
8 make a decision on this issue, I have to have
9 more information.
10 MR. ANDAL: In response to Delna's
11 question, she's absolutely correct. I think
12 I used my words carefully earlier when I said
13 that I do three things. I codified Quill,
14 in that I lined it out and defined what I
15 think is substantial physical presence. I
16 also integrated that into the existing Public
17 Law 86-272, and then I added other safe
18 harbors that should apply to business
19 activity tax.
20 That's been in my proposal since
21 the beginning, in New York. It's laid out
22 very carefully, and it won't change between
403
1 now and Dallas.
2 MS. JONES: I didn't expect it to
3 change. But I guess my question is the
4 rationale for it.
5 CHAIRMAN GILMORE: Ron Kirk?
6 MAYOR KIRK: Mr. Chairman and Dean, being that
7 we'll obviously have a much more extended
8 debate on that in Dallas, but Delna, your
9 observation is very astute and important.
10 This is not a codification of Quill, at all.
11 This takes the restrictions that the Supreme
12 Court put in terms of how it defines nexus
13 and takes it to an entirely different level.
14 It takes it way beyond the aspect of what
15 we're talking about, sales tax. The way it
16 could be applied to, as you said, income taxes
17 and a number of other things and redefines
18 the entire relationships between companies
19 and their presence in the states in ways that
20 I don't think we want to see encouraged, and
21 that weren't set out within the code.
22 Some of the definitions that Dean
404
1 now includes, that were in his specific list,
2 were things not envisioned by the Court, and
3 in some cases are much more restrictive than
4 that. In terms of the relationship between,
5 say, a seller and a contractor, he would say
6 that that doesn't grant nexus. The report in
7 that particular case said that it does.
8 What you would have, if we would
9 adopt that, is a system in which we would
10 encourage companies, and essentially give
11 them a road map to say, "Here's how to avoid
12 not paying any tax. Forget the Internet,
13 here's a way to avoid paying income taxes.
14 Here's a way to avoid ever being brought into
15 court." I mean, if you want to do that, it's
16 a great prescription for how to tell
17 corporate America how to avoid ever having a
18 presence anywhere. And I, for one, would
19 oppose that in every form of it.
20 CHAIRMAN GILMORE: They're going to be
21 somewhere. I think that the intention, if I
22 understood the proposal from the very
405
1 beginning, is, in fact, to redefine Quill.
2 It's to place a statutory definition on it,
3 so that there is a bright line, clear
4 definition of what the Quill restrictions
5 would be. It wouldn't necessarily mirror
6 exactly what the statute meant.
7 Wasn't that your intention?
8 MR. ANDAL: It is, in some ways.
9 Mayor Kirk and I don't even disagree. One of
10 the reasons that we're here today is that the
11 court in Quill and in Complete Auto Transit
12 sent out a standard using one fact pattern.
13 They sent out a standard that wasn't clearly
14 defined and didn't recognize a lot of the
15 disputes that go on between states and
16 companies that sell from outside of the
17 state.
18 My proposal, if you look at the
19 seven items, I doubt you disagree with some
20 of them as to what creates substantial
21 physical presence. But they're designed to
22 take away some of the conflicts that we know
406
1 exist right now in state courts over what
2 substantial physical presence is.
3 When I say "codify Quill," I'm
4 saying Quill says physical presence, Complete
5 Auto says substantial nexus. We create that
6 standard, and then we tell, using seven
7 examples, what is not substantial physical
8 presence. And that is designed to clean up
9 some of the conflict between states and
10 companies.
11 But what is commonly unrecognized
12 is that 98 percent of the sales in America
13 have nexus, and they're not in conflict.
14 MAYOR KIRK: I don't agree with your
15 list. I think it's a prescription for
16 businesses to avoid ever having to be defined
17 as having nexus in there. Some of them would
18 love your proposal. I think it would be --
19 MR. ANDAL: But the 98 percent;
20 nobody even argues it has nexus. The
21 companies don't argue, the states don't
22 argue. The tax is collected. The 98 percent
407
1 that's there now would continue to be there
2 after my proposal.
3 It is certainly an overreach to say
4 that if my proposal passed, everybody could
5 avoid physical presence when almost 98
6 percent do not and cannot, even if my
7 proposal were enacted into law.
8 CHAIRMAN GILMORE: Yours applies to the
9 Internet, to e-commerce?
10 MR. ANDAL: No, it applies to
11 remote sellers.
12 CHAIRMAN GILMORE: To remote sellers?
13 MR. ANDAL: Right. I didn't want
14 to create more ambiguity and more confusion
15 by treating different remote sellers
16 different ways.
17 CHAIRMAN GILMORE: Mr. Pottruck, you had
18 your hand up?
19 MR. POTTRUCK: Thank you, Governor.
20 If we've learned anything, it's that this a
21 real heart and soul issue for this
22 Commission, and it is unlikely, I think, that
408
1 we're going to come out of here, from the
2 Dallas meeting, and have a solution that
3 anyone thinks can be implemented immediately.
4 Anything we do, we're either going to vote
5 for a continuation of the tax moratorium or a
6 permanent tax moratorium or some new
7 approach. And that new approach is going to
8 take time to implement.
9 So in the interim, for some number
10 of years, we're going to have growing remote
11 sales and growing confusion over Quill. Now,
12 I don't know if it's really within the
13 mandate or within the do-ability of this
14 group to re-define Quill, but we can
15 recommend to Congress that they take it up as
16 a very important issue. That it's our view
17 that where we are today with the confusion,
18 the lack of specificity, the lack of clarity
19 around Quill, is not a good solution for
20 America, and that we would recommend that
21 Congress try to get more definition around
22 Quill as an important order of business.
409
1 CHAIRMAN GILMORE: Mr. Parsons next.
2 Mr. Sokul and then Governor Leavitt.
3 MR. PARSONS: Thank you, Mr.
4 Chairman. The first thing I would note, was
5 that I was getting confused by the
6 discussion, because I thought we were on Part
7 A of the draft outline, and we've been
8 spending a lot of time talking about Dean
9 Andal's proposal, which is not in that part.
10 It comes later on. It's an important
11 discussion, on nexus, but it's not as
12 fundamental, I think, as the discussion in
13 Part A. A suggestion, The issue here in Part A is
14 essentially, do we go back to the observation
15 I made yesterday: Do we conclude that there
16 is something about electronic commerce that
17 warrants treating it differently; sales
18 effected by electronic commerce, treating
19 those sales differently than sales effected
20 in some non-electronic way? Should they be
21 treated the same, essentially, as sales done
22 non-electronically?
410
1 The problem I have with this
2 section, while it certainly throws out a
3 whole bunch of options around how you resolve
4 that question, is that there isn't anything
5 in here that would help the rational man from
6 Mars who came down to help decide this.
7 There isn't anything in here that would give
8 him guidance. There are lots of arguments,
9 you know, and if you buy the assumptions of
10 one argument, you would come out one way and
11 if you buy the assumptions of another set of
12 arguments, you'd come out the other way, but
13 there's no analysis. There are no
14 projections, even. There's no factual basis
15 with which to intelligently grapple with that
16 issue and come to an informed view. Or at
17 least that's my sense.
18 So I wonder if we have seven
19 different policy options under this one
20 fundamental question. I don't think we need
21 to expand that list to eight or nine, seven
22 is more than enough. My hope would be that
411
1 somehow between now and Dallas we could get
2 some real analysis around this. What does it
3 mean? I mean, if you extend it for five
4 years, the policy, and extend it to sales on
5 the Internet, which, as was pointed out by
6 Mr. Pincus earlier, the current moratorium
7 doesn't prevent states from attempting to
8 reach Internet sales.
9 So if we impose the five-year
10 moratorium on that, what's the financial
11 impact to the states and local governments,
12 as best we can assess or judge?
13 If we made it permanent, what's the
14 long-term impact?
15 CHAIRMAN GILMORE: It depends on who you
16 ask.
17 MR. PARSONS: Well, I understand
18 that. The comment was, "It depends on who
19 you ask." But at least to get something more
20 than just this rather clear, but
21 unsubstantiated, set of arguments on either
22 side, would help those of us who, frankly,
412
1 don't know what the answer is right now. As
2 I sit here today, I don't have a view. I
3 understand what the question is, but I'm
4 looking for tangible facts, analysis,
5 evidence, that would help me conclude what
6 would be the best recommendation to the
7 Congress.
8 CHAIRMAN GILMORE: Before I call on Mr.
9 Sokul, Richard, I think there would be
10 nothing wrong with further advocacy of the
11 different positions by those who have
12 submitted them, by this Commission, either in
13 writing or otherwise. I don't think there's
14 any difficulty with it. We have, of course,
15 now heard between 40 and 50 presenters on an
16 array of these issues. Certainly on my part,
17 I put some commentary in with my proposal at
18 the time so that it could be examined.
19 There's absolutely no reason why any member
20 of this Commission can't come forward and
21 debate this issue in writing or otherwise.
22 For example, the entire panel today
413
1 has dealt with the question of the NGA
2 proposal and gave every member of the
3 Commission a thorough opportunity to think
4 about that. They asked Governor Janklow, and
5 any of the others who were there, their ideas
6 about that. In a moment I'm going to talk
7 over with you why I have made the proposal
8 that I have made, so that at least you can
9 think about that, as well.
10 I will do that, but I don't want to
11 step ahead of those whose hands have been up
12 first and we'll go first to Mr. Sokul.
13 MR. SOKUL: I found out that my
14 comments belong in Section C, so I just want
15 to be first in line when we get to C.
16 CHAIRMAN GILMORE: Remind me if you
17 would. Governor Leavitt?
18 GOVERNOR LEAVITT: I'd like to be
19 associated with the stream of logic that's
20 being put forth by Mr. Pottruck and also Mr.
21 Parsons.
22 It seems clear to me that you've
414
1 got, in this section, at least, three basic
2 questions that we're going to have to wrestle
3 with. The first one is, is the sales tax a
4 viable tool for the 21st century, given the
5 fact the we know all this change is going to
6 be happening? If we assume that it is, or
7 that it can be fixed, then we go to the
8 second question.
9 The second question is, should
10 E-commerce have a special privilege or should
11 we have a level playing field? If we decide,
12 and I think that's a very basic question we
13 have to ask ourselves, if we decide that it
14 requires special privilege, we've got to go
15 down a level of logic and say, how do you get
16 there?
17 If we decide that it is actually a
18 level playing field we're after, then we need
19 to go down a system of logic to get there.
20 Now, what I heard from Mr. Pottruck
21 is, that may take some time. And it's
22 possible we would fail, and not get there.
415
1 So perhaps there is some combination of these
2 items that will ultimately come together to
3 be part of the solution. Maybe it is the
4 extension of a moratorium. Maybe it does
5 include a period of time where we allow the
6 system to be worked out, with an
7 acknowledgement if that at the end of that
8 time, if it isn't happening, then we go to a
9 different course, which could include the
10 re-defining by Congress in some form.
11 So I'm not sure we have, in any of
12 these seven proposals, the final. It may be
13 that there's iteration of these that will
14 ultimately form that up, and at some point we
15 ought to begin to talk about what those would
16 be. I do think that the logic chain is, is
17 this salvageable, should it have special
18 privilege, or level playing field, and if so,
19 how do you get there?
20 CHAIRMAN GILMORE: Let me take a moment,
21 if I could, since I put in one of the more
22 definite proposals, and, Mike, let me say
416
1 that I think the sales tax is viable.
2 There's nothing that's going on in the states
3 that says that states ought not to impose a
4 sales tax on commerce, on goods, and maybe
5 even services that are going on outside. As
6 I walk outside this door into Union Square at
7 this hotel, there is very vigorous commerce
8 going on and they're paying taxes. They're
9 paying more taxes than they pay in Virginia,
10 I might say, in California, but they're
11 paying them like crazy, and there are some
12 lovely places right here along Union Square
13 that are very impressive. I certainly don't
14 accept the idea, should E-commerce have a
15 special privilege or should there be a level
16 playing field? I don't agree with that
17 presentation of the issue.
18 I see the Internet as an
19 opportunity for the people of the United
20 States and an opportunity for this Commission
21 to not treat it in a privileged way, treat it
22 differently. I just simply don't assume that
417
1 because it's not being taxed that that would
2 mean that somehow it's privileged. I just
3 don't start from the assumption everything in
4 America ought to be taxed. And, therefore,
5 to not tax it is somehow implying some type
6 of privilege.
7 Instead, I think the question is,
8 do we go there? Is that a place where we
9 need to go, or are there legitimate policy
10 reasons why you don't.
11 The proposal that I put forward is
12 specific and narrow. It deals with remote
13 sales, only remote sales, which, of course, I
14 think eliminates this argument that's been
15 going on, I think rather pointlessly, for the
16 last couple of days about the idea of the
17 kiosk at the cash register, and all that. It
18 should be dealing with remote sales, however
19 the Congress would choose to define that.
20 I believe that it is a narrow
21 definition that excludes business-to-business
22 Internet sales, which could be taxed, under
418
1 my proposal. And, in fact, that is the big
2 bulk of the Internet sales and commerce that
3 is going on right now, and all of commercial
4 sales are not very much in the big scheme of
5 things. The big bulk is
6 business-to-business. My proposal doesn't
7 cover that. And why is that? It is because
8 of the policy objective that is involved.
9 The point that I think has been made from
10 time to time in these proceedings is, we are
11 entitled to make policy decisions about what
12 we want to do with tax policy in order to
13 encourage certain conduct in the United
14 States. We do it frequently.
15 Mr. Lebrun gave us an example just
16 a few moments ago. He said South Dakota does
17 not tax the use of telecommunications usage
18 in right-of-ways. And he began to explain
19 why. Sure we have a right to make a decision
20 that we want to encourage certain conduct,
21 and in this case I would imagine it's the
22 extension of telecommunications across the
419
1 prairies of South Dakota. They're entitled
2 to make that decision and I think that's
3 legitimate.
4 We're entitled to make a decision,
5 too, about whether or not Internet commerce,
6 from individuals to businesses and vice
7 versa, on remote sales, is so good for the
8 people of the United States that we ought to,
9 in fact, not extend taxes to that point.
10 We're entitled to make that decision.
11 There's nothing wrong with doing that.
12 With respect to the question of
13 fairness, a level playing field, it may be
14 argued, and has been argued to death here,
15 that if you have taxes on bricks and mortar
16 and you do not have taxes on dollars, that
17 that is an advantage and, indeed, it is. But
18 there are other advantages all throughout
19 commerce. There are advantages that the
20 bricks and mortar people have that will never
21 be equaled by the Internet. The ability to
22 have a facility, to draw in customers, to
420
1 create the socialization of going out and
2 engaging in commerce, the opportunities to
3 present a product and see if it's the right
4 size, right then, to try it on, to see if the
5 color is really something you want to buy,
6 whether the field is exactly what you want,
7 and most importantly, to get it right then --
8 right then -- and don't go home and think
9 about it and order it and wait for it to
10 come. Instead, to be able to pick it up and
11 take it home; which is, I suggest to you,
12 exactly what people are doing right now. And
13 there is no empirical evidence that says that
14 the growth of the Internet is going to rise so
15 high above such a ceiling that it will, in
16 fact, take away funds from traditional
17 sources.
18 Once again, we make policy
19 decisions all the time. We make it for
20 pharmaceutical companies and the purchases of
21 pharmaceuticals, because we want to encourage
22 people who need them to buy pharmaceuticals.
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1 We make them for sports all the time and
2 spend money, state money or local money, for
3 sports complexes, because we believe that's
4 in the best interest of our community.
5 We have made decisions across this
6 country. We're not going to tax the service
7 sector. We make it all the time. That is,
8 by the way, not a level playing field.
9 I see this as an opportunity for
10 small business. People who have not had an
11 opportunity to engage the kind of capital
12 that we see by large corporations. For the
13 first time, small business, which is just
14 being squeezed out, has a chance to get out
15 there and increase their market share and
16 have more opportunity to do that. We're
17 calling them "Mom and Pops," and they are,
18 but they're all small business. From the
19 individual entrepreneur who's setting up an
20 Internet company, all the way to Mom and Pop
21 who are running the local store. They have a
22 chance to increase their markets.
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1 There are, of course, impediments
2 to going the other way and to finding,
3 instead, a different kind of approach. For
4 example, the simple inability to do this,
5 that is so difficult. Nobody has been able
6 to answer over these two days, or any other
7 days, how we're going to tax digital goods
8 and services. Nobody has suggested any way
9 to do that, and they can't do it in the
10 European Union, either. If they were going
11 to get it done, they'd get it done in the
12 European Union. They tax there and they're
13 good at it, and they're professionals at it.
14 The concern of loss of revenue; I
15 believe the proposal I put forward saves the
16 sales tax. All right, it doesn't do anything
17 to say the sales tax is unviable. It is, I
18 think, a fundamental flaw to suggest that
19 this is a zero-sum game and that only, if
20 there's money that's going to be spent on
21 Internet commerce, ergo, it must be coming
22 out of retail commerce. No empirical
423
1 evidence suggests that. There's nothing
2 anywhere that says that we're not seeing
3 vigorous retail that is going on everywhere
4 all the time, including with the people
5 who've come before the Commission today.
6 It was said earlier today, we've
7 got to make up for lost revenue. Mr. Andal
8 asked the right question, "What lost
9 revenue?" It's impossible to really
10 determine what it is, but we know this, and
11 this is very fundamental, government ought to
12 tax what it needs, to do what it needs to do.
13 I do not disagree with Mayor Kirk
14 on this. To the extent that government needs
15 to supply the correct, proper services, they
16 ought to tax to do that.
17 We ought to go through the inquiry
18 of whether or not, in fact, we're going to
19 see a diminution of those resources as to
20 make that unable. Otherwise, just simply
21 because it's a level playing field, we'd have
22 no reason to go there, and to go to a new
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1 place in order to tax.
2 And so the point I'm making is that
3 my approach is a simple plan. It saves the
4 sales tax. It is easy to implement. It is
5 easy to understand. It doesn't face the
6 other side of the coin which is, in fact, the
7 policy debate that we're going through on
8 this Commission, which is that if you're
9 going to go the other way and say that you
10 must move to tax the Internet, because it's
11 there, because it's the same thing that's
12 going on, theoretically, in local areas, then
13 you have to come up with a plan that works,
14 that isn't complicated, that does hang
15 together, that is feasible. This is what the
16 discussion was in New York. I don't think
17 that we have that yet.
18 I think that Governor Janklow was
19 fairly honest about that in his presentation
20 today. There is no costs of implementation,
21 either. Where there are dramatic costs of
22 implementation for someone, and I think the
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1 NGA's suggestion was it's going to be states,
2 and it's between $100,000 and a million
3 dollars for every store or commerce vehicle
4 that wants to implement this, which is
5 apparently is going to be a state cost.
6 So, finally, ladies and gentlemen,
7 I would just suggest that there's no evidence
8 that there's going to be a collapse. But
9 people have said, "Gee, there's going to be a
10 collapse. Show us, at least, where you're
11 going to make up the losses." I would
12 suggest it should be made up as part of the
13 overall plan I've put forward. Don't tax the
14 Internet. Don't tax access to the Internet.
15 Eliminate the three percent excise tax. Use
16 one percent as a incentive for what I believe
17 everybody here agrees is right, which is a
18 tax simplification. If you go with this
19 approach, then I think that we do good things
20 for the individual consumers, for small
21 businesses, and you don't kill the goose that
22 lays the golden egg, that is helping to drive
426
1 the economy. That's my case.
2 Now, there will be other hands.
3 MR. NORQUIST: Do you want to
4 address your TANF proposal?
5 CHAIRMAN GILMORE: Well, as part of the
6 proposal, and again, I don't have the whole
7 proposal before me, because we're going
8 through this piece by piece, but the TANF
9 proposal, which does come in at a later time,
10 also suggests that we merely clarify at the
11 national level the use of TANF funds for
12 the purpose of the states being able to use
13 it to supply access and ability to people of
14 poor means to be able to get on the Internet.
15 If poor people can get on the Internet in a
16 no-tax environment, it can enhance the
17 quality of their life. In fact, enhance the
18 quality of everybody's life. But right now
19 there's some uncertainty as to whether the
20 federal regulations will permit states to use
21 those TANF monies for that purpose. I
22 merely suggest that we have the Congress
427
1 clarify that, and then we begin to do what we
2 ought to do, get poor people on the Internet
3 and give them an opportunity to improve the
4 quality of their lives and don't have a
5 digital divide. And don't assume, either,
6 that people who are poor or people that don't
7 have money will forever be shut out of this.
8 I think that the policy goals
9 should be the reverse. That we should trying
10 to get people into the Internet process and
11 give them a chance to enhance their lives.
12 Let's see now, I've got lots of
13 hands up, and we're going to give everybody a
14 chance to speak, because, you know, I've been
15 talking for about 10 minutes.
16 Let's go to Mr. Parsons, first,
17 then Mr. Pottruck, and then move around the
18 table, and Governor Leavitt also, of course,
19 and Mr. Sidgmore.
20 MR. PARSONS: I just want to make
21 sure that I understand your proposal,
22 Governor, as it relates to this particular
428
1 section that we're dealing with right now. I
2 understand not taxing access to the Internet,
3 the 3 percent and how you would stimulate
4 states, but now we're on how you tax
5 transactions, commercial transactions, that
6 are engaged in over the Internet.
7 As I understand it, after listening
8 all these days, that currently, even in the
9 face of the current moratorium, that
10 commercial transactions over the Internet,
11 remote sales over the Internet, would be
12 taxable if there is a nexus under our
13 favorite case.
14 CHAIRMAN GILMORE: Are taxable, today.
15 MR. PARSONS: Quill, right. I
16 forgot it, Quill. Are taxable today. So if
17 we literally didn't go anywhere, that would
18 be the status quo. That would be the
19 situation going forward.
20 Your proposal is to move to a place
21 where business-to-consumer sales, done from
22 remote locations are not taxable if done on
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1 the Internet, and the theory is because that
2 will stimulate small business growth. I'll
3 call it that way.
4 CHAIRMAN GILMORE: Among other things,
5 yes.
6 MR. PARSONS: Okay.
7 MR. ANDAL: Which item number is
8 your proposal and other option paper?
9 CHAIRMAN GILMORE: My proposal is number
10 four, but it needs to have the language,
11 "remote." I didn't draft the document, I
12 think that was just left there. That concept
13 is very key to what we're doing here.
14 Let me also say, and I know
15 Governor Leavitt will have some more to say
16 about this in a moment, it is true, today,
17 under the Quill situation we're existing in
18 today, taxes are imposed on commerce on the
19 Internet, they're owed. There's just no way
20 to collect them and the struggle that, I
21 believe, the NGA is going through is to say,
22 we should have that tax and we should collect
430
1 that tax.
2 My proposal is to decriminalize all
3 those millions of people out there who owe
4 this tax and aren't paying.
5 MR. PARSONS: Just to hit you with
6 a question, is there any -- again, so that
7 could analyze or attempt somehow to analyze
8 this -- because I do think that those who are
9 advocating a change from the status quo.
10 There are a number of lawyers sitting around
11 this table, so I'll put it in a vernacular so
12 that they can understand it; bear the burden
13 of proof.
14 The question I have is, what
15 percentage of remote Internet sales that
16 would be picked up by this proposal would
17 currently be taxable under Quill? I mean, is
18 this a lot or a little? My impression would
19 be that most remote sales over the Internet
20 probably don't need a nexus test, anyway. So
21 it may not be all of that substantial, and it
22 would just be codifying the kind of current
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1 practical state of things.
2 I could be wrong, I just don't
3 know.
4 CHAIRMAN GILMORE: I think that there's
5 no evidence that this is a large amount of
6 transactions today. The anxiety is what
7 might happen in the future, as people try to
8 look into a crystal ball.
9 Mr. Pottruck, I believe you were
10 next, and then Governor Leavitt, and Mr.
11 Sidgmore, at least. And others, I'm sure.
12 MR. POTTRUCK: Thank you, Governor.
13 I've actually a suggestion and a question.
14 I know we're getting ahead a little
15 bit here, but I've thought about your
16 suggestion to use, I think it's called the
17 TANF funds, for provision of access. I
18 would recommend that we think about that. If
19 we consider that we don't think about --
20 well, we think about that in the context of
21 schools. I think, actually, giving computers
22 to people who are having a hard time paying
432
1 for food is likely to end up in a black
2 market for computers and it's not really
3 going to solve the problem. What we need are
4 more computers in schools, more teachers who
5 are certified and educated to help young
6 people use those computers.
7 So I agree with your concept, and I
8 would offer you the suggestion to expand upon
9 it so that it might even be a little more
10 workable.
11 Let me move on and ask a question
12 about your proposal. When I look out into
13 the future what I see is a greater and
14 greater convergence of bricks and mortar
15 retailers and online retailers, and more and
16 more where you might order something over the
17 Internet and pick it up at the store, which
18 is a mile away.
19 I'm trying to think down the road
20 how this is all going to affect the behaviors
21 of how retailers operate, as we have more and
22 you know, there will be a point where
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1 everyone will be an Internet retailer. To
2 survive, it will be a part of everyone's
3 business. Have we thought about what this
4 looks like, you know, five years from now?
5 I'd appreciate that.
6 CHAIRMAN GILMORE: David, first of all,
7 I think everyone will be. I think that
8 you're seeing the increasing incidence of
9 bricks and mortar, clicks and mortar. More
10 and more people are trying to find ways to
11 utilize both resources, and I think you're
12 going to see more and more of that.
13 In fact, I think that the proposal
14 needs to include a concept of remoteness to
15 avoid exactly the issue that you and Governor
16 Locke raised so eloquently yesterday, which
17 is the question of just simply finding a way
18 to evade the sales tax. My proposal is not
19 intended to destroy the sales tax, but
20 probably to save it.
21 But with respect to the remote
22 sales, we could define that any way we wanted
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1 to, under the state, under the city -- 500
2 miles, 200 miles. But it gets rid of the
3 idea that you're going to evade this by
4 running off into the showroom kiosk.
5 I've got my list, but did you want
6 to comment on that, Dean?
7 MR. ANDAL: I just wanted to add to
8 David's question, which is part of this
9 debate is using shorthand, and that's what
10 makes it difficult. Just because somebody is
11 an Internet retailer does not mean they don't
12 have substantial physical presence in the
13 state. As a matter of fact, most Internet
14 retailers do.
15 MR. POTTRUCK: Yes. But I thought
16 Governor Gilmore's proposal --
17 CHAIRMAN GILMORE: First of all, remote.
18 And there is a provision in my proposal --
19 overall proposal -- which is on the Net,
20 which says you should perhaps define that
21 through nexus.
22 The next person is Governor
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1 Leavitt.
2 GOVERNOR LEAVITT: Thank you. I would
3 like to make just three quick points. One
4 is, we're dealing with a horizon here that's
5 20, 25, 30 years. This is a literally once
6 in a generation opportunity. So I think that
7 we ought to be thinking about the power of
8 this remarkable thing that we're talking
9 about, the Internet, and how big this problem
10 is going to be 20, 25 years from now. I do
11 think we have to be thinking in very large
12 portions, because of the power that you've
13 suggested.
14 Second, Governor Gilmore, I'd like
15 to say there's an area in which we have
16 agreement, and we ought to find those. The
17 whole question of digital, being able to tax
18 digital transactions. I envision a day very
19 clearly when -- because I agree it's very
20 difficult on software, CDs, music, movies,
21 books, that -- where they can be digitally
22 transmitted. Those are almost impossible to
436
1 tax in the long-term. We may want to
2 eliminate taxation of books, movies, tickets
3 et cetera, both at the box office, at the
4 video box, and on the download. I mean, in
5 order to gain that kind of a level playing
6 field, we may ultimately have to modify our
7 policies to do that.
8 The last thing I'd like to point
9 out is it's very difficult to find empirical
10 evidence on these these days, and so we all
11 kind of depend, I suspect, on our gut feel
12 and our anecdotal experience. So if you'll
13 excuse an anecdote, my wife has been
14 resistant to this, and recently we needed to
15 get a sofa for our house, for our basement.
16 And I said, "Why don't you look on the
17 Internet?" Which may have been a mistake,
18 because she has now become kind of a
19 confirmed Internet shopper, and she spent a
20 good part of the afternoon finding what she
21 wanted.
22 The next thing I saw, she was at
437
1 the yellow pages, and she was looking and
2 found a dealer that had the sofa brand that
3 she wanted and she went down there and sat on
4 a sofa like that and felt the swatch, and
5 then came back and switched it.
6 I had a similar experience with my
7 mother on Saturday, who was going out to do
8 Christmas shopping for her grandchildren.
9 There are 23 of them, it's a big job. I
10 said, "Mother, why don't you use the
11 Internet?" It was cold, snowy. We sat down
12 and in two hours we'd shopped for everybody.
13 Now, in either of those cases,
14 those weren't newcomers. Those were both
15 people who would normally go to the
16 department store.
17 I'm just curious. I'd be
18 interested to know in this audience, in this
19 Christmas season, how many of us have made
20 purchases over the Internet? Can I just ask
21 for a show of hands?
22 Now, I would ask for you to ask
438
1 yourself how many of you did that as a
2 replacement for your trip to the mall or was
3 it an additional purchase? This is not
4 entirely a zero-sum gain, but it is in large
5 measure, people are using the tremendous
6 power of this instrument to add convenience
7 to their lives. And while that may be
8 anecdotal, I think it resonates inside the
9 heart of every person who's made an Internet
10 purchase at 2:00 in the morning because the
11 store wasn't open or they didn't want to go
12 out on a Saturday morning because it was
13 snowy.
14 CHAIRMAN GILMORE: Grover Norquist?
15 MR. NORQUIST: Yes. I just want to
16 make sure we address my resolutions before
17 Commissioner Kirk has to leave. So I don't
18 know at what point you want to insert it, but
19 I didn't want to -- since he's been vocal in
20 opposing the 3 percent federal communication
21 tax, I didn't want to lose him.
22 CHAIRMAN GILMORE: I'm going to call on
439
1 Ted Waitt. And then if we can perhaps think
2 about what more we have to do through the
3 issues and answers paper, as time goes on --
4 but we will get these resolutions onto the
5 floor, I think next. Because we're almost
6 done with this. But let's continue on.
7 Ted?
8 MR. WAITT: Yes. Thanks, Governor.
9 Just a few comments here in regards to things
10 different people said.
11 In terms of the nexus issue and the
12 Quill issue that Mr. Pottruck brought up, I
13 mean I think that is very integrated to this
14 issue. I mean, if you listen to the business
15 panel that was here today, the people from
16 Dell, Cisco, HP, I mean these are people that
17 are driving this new economy. And they
18 talked about the frustration around the nexus
19 issue and the lack of clarity.
20 Dean Andal's proposal that he has
21 made, as I think Mayor Kirk pointed out, if
22 that definition of nexus would have existed
440
1 for us a few years ago, clearly we would not
2 have collected sales tax in any states,
3 because it's a very loose definition of
4 nexus. Now, that can either be a good thing
5 or a bad thing, but clearly it would have had
6 pretty significant ramifications on our
7 business, where we would not have been
8 collecting sales tax based on his definition.
9 But regardless of that point, I
10 think it is important for us to clarify Quill
11 and the nexus issue as it relates to this
12 remote sales.
13 I think, based on the various
14 options that we have here, I think Governor
15 Gilmore modified his proposal No. 4 to apply
16 to all remote sales. But I think options 1
17 and 3 also need to be applied to all remote
18 sales, as well. Since I think they specify
19 only Internet sales. And I think, as Mr.
20 Parsons pointed out, he put it much more
21 eloquently than I could, but I think what he
22 was saying is, you know, show me the money.
441
1 How much is this going to cost?
2 There's been a lot of talk about
3 lack of empirical evidence about how much
4 business is going to move to the Internet and
5 move to remote sales.
6 Just as a point of fact, and I've
7 been trying to get the data here, but I
8 haven't got it yet, because we just recently
9 made a move within our business where we used
10 to charge sales tax on the Internet. And
11 because of the vagaries around nexus and the
12 current definitions of nexus, now we're not
13 in certain states, as well as in our phone
14 business. I did get the data on the increase
15 of our phone business, just recently. I'm
16 still waiting on the exact numbers on the
17 Internet business. But it looks like our
18 telephone sales increased on the order of
19 five percent. And this is very short-term
20 data, so don't take this to the bank, but
21 just to give people some indications.
22 And our Internet sales are looking
442
1 like they increased at least double that kind
2 of a rate from this sales tax issue.
3 So this is very early data. I can
4 try and get some better numbers for the
5 Commission to help quantify this issue,
6 because we'll have real time data of what our
7 business was in certain markets. I mean, we
8 sell by the phone, by the stores, and by
9 Internet. We've been moving around where we
10 charge sales tax and where we don't charge
11 sales tax.
12 So I think we can hopefully provide
13 some data that can help quantify that.
14 Back to your proposal, Governor
15 Gilmore. I think when you open up that
16 definition as it's specified under Section
17 1103 in our report, when you open up that
18 definition to include all remote sales,
19 clearly that's going to be a much larger
20 dollar impact to the gentleman on the states
21 here. So I think it is important that
22 between now and Dallas that we at least try
443
1 to get our arms around that. Because the
2 definition of just Internet sales is very
3 small today. But if you include all remote
4 sales and treat them identically, as I think
5 we're told we're supposed to do, we could be
6 talking about a pretty big number, and I
7 think we need to understand what we're
8 getting into as we have these discussions
9 between now and Dallas.
10 And just a few comments on this
11 issue. I think we really do need to get this
12 issue resolved. I had a dinner last night
13 with a group of people in the Internet
14 community, and one of the things that they
15 said was when a business -- two of the people
16 in the Internet business said, "I want you to
17 design my web site for me." The most common
18 response is, "You don't need an Internet
19 strategy. What you really need to do is
20 understand what the real strategy of your
21 business is." What is the strategy of our
22 company, not what is our Internet strategy.
444
1 And then you take that strategy and take it
2 to the Internet.
3 I think that relates to this tax
4 question that we're talking about today, is
5 we don't need an Internet strategy. It's
6 what is our total strategy for taxation into
7 the 21st century, as it was laid down to us,
8 to talk about all remote commerce.
9 A couple of points in your proposal
10 that I'd just like to bring up in terms of
11 benefitting small business and the digital
12 divide issue. I'm very cautious that if we
13 do not collect sales tax on all Internet
14 transactions with the current state of
15 affairs today, that we do wide the digital
16 divide rather than close it.
17 A couple of points of data: In the
18 month of November -- in the month of October
19 of this year, Gateway -- our company --
20 refused 184,000 families credit for PCs. In
21 the month of November, it was closer to
22 250,000 families that we declined credit for
445
1 a PC. We called these people back and
2 surveyed them and found that they didn't get
3 a PC anywhere else. They cannot get credit.
4 They don't have credit cards. They do not
5 have credit. And the number one reason they
6 want to buy this PC is for their children, so
7 their children don't fall behind, and so they
8 can get their kids on the Internet.
9 Now, they don't have credit cards,
10 so they're not going to be large E-commerce
11 purchasers, and if we're giving the Internet
12 just an exemption in terms of collecting
13 sales tax, we do run the risk of widening
14 that gap.
15 Another comment is in terms of
16 small business. Anybody who's familiar with
17 kind of the dot.com economy that we're in
18 today, there's a tremendous amount of venture
19 capital that exists today for Internet
20 start-ups. Take an auto parts company,
21 right? If you are, you know, Billy Ray's
22 Auto Parts with five guys and you're
446
1 somewhere, trying to sell auto parts, you
2 might be struggling. But if you're Billy
3 Ray's Auto Parts.com and you've got five guys
4 in the business plan, you're worth $20
5 million.
6 So I think we just need to take
7 these things into consideration. You know,
8 I'm not for putting any taxes on the
9 Internet. I think we had a lot of good
10 discussions and a lot of work that we can do
11 between now and Dallas, as we can nail some
12 of these decisions. Thank you.
13 CHAIRMAN GILMORE: Thank you, Ted. I
14 passed by Mr. Sidgmore a few minutes ago
15 inadvertently.
16 John?
17 MR. SIDGMORE: That's okay. I
18 just -- two quick things. One, a question --
19 a short question. How do you in your
20 proposal differ from what Dean has proposed,
21 in your mind, with the exception of sort of
22 bright lining some of the issues around
447
1 Quill? How do you differ with Dean's
2 proposal?
3 CHAIRMAN GILMORE: I'm not sure I've
4 done the analysis, but Dean's Quill basically
5 places you in a position where the people in
6 the states can -- are continuing to tax on
7 the Internet in the local state. And he is
8 defining exactly what that level of nexus is.
9 I believe that's right, Dean.
10 MR. SIDGMORE: I was under the
11 impression that your proposal also allowed
12 taxation within the state where you have
13 nexus?
14 CHAIRMAN GILMORE: On the general sales
15 tax. But we can define remote sales as to
16 what that should be, and then beyond that, I
17 think my proposal does reach further. It
18 calls for an elimination of sales tax on the
19 Internet on remote sales, whether or not
20 there's a nexus.
21 Although we can fold the nexus
22 proposal into that. But go ahead.
448
1 MR. SIDGMORE: Right, because it
2 doesn't sound like they're that far apart.
3 CHAIRMAN GILMORE: No.
4 MR. SIDGMORE: A couple of things.
5 You know, just listening to Ted here, I think
6 we're pretty polarized in our views, you
7 know, to no surprise of anyone here. And
8 there are obviously a lot of strong views.
9 And I was trying to think through whether
10 there are a couple of things that we could
11 sort of energize around.
12 To me, with respect to your
13 proposal, there are two fundamental issues.
14 I -- first of all, I completely agree with
15 Ted on the digital divide question. I do
16 think the digital divide gets worse if we go
17 forward under this kind of a scenario.
18 But I think the two issues
19 fundamentally are a level playing field
20 issue -- which we've heard a lot about and
21 we've sort of debated to death here over the
22 last couple of days. But I don't, at least
449
1 in my mind, feel that there is any kind of
2 satisfactory resolution to that. I think the
3 fact of the matter is under the no-tax
4 proposals of any sort, we do create sort of a
5 special class around the Internet, for better
6 or worse. And I do think that will hurt
7 traditional Main Street players, almost no
8 matter what we do.
9 And I think that has to be
10 addressed if we're going to reach any kind of
11 consensus.
12 The second thing is this whole
13 question about whether or not we're going to
14 lose revenue, and whether or not there's
15 going to be a state tax burden here as a
16 result of all of this, we've had a lot of
17 debate about whether there's data to support
18 the fact that commerce is moving from
19 traditional Main Street to the Internet. But
20 the fact of the matter is, E-commerce is in
21 its infancy. And if you look out five years,
22 like others have said, or eight years, I
450
1 don't think there's an economist or an
2 investment banker or an analyst in the United
3 States that wouldn't tell you that E-commerce
4 is going to grow dramatically faster than the
5 rest of retail sales. And if you just take
6 those two simple points and you run the math
7 out a few years, there's no question about
8 the fact that you're going to lose economic
9 power from the traditional economy.
10 Therefore, there is going to be a reduction
11 in sales tax revenue.
12 Now, you can argue about how much
13 that is, is it important, should we be
14 lowering taxes, anyway -- Grover's comments,
15 we should have a smaller government. Those
16 are fair questions. But I think there's no
17 question about the fact that it's going to
18 move from one pile to the other. And
19 therefore, coming to my conclusion here,
20 since no one's really sure how fast this is
21 going to happen, or how much of it is going
22 to happen, and, you know, we didn't talk
451
1 about this much, but the truth is that the
2 role of infrastructure and the Internet is
3 just starting to be examined now. People
4 haven't noticed this, but amazon.com is
5 buying more and more warehouses. They're
6 buying toy stores, they're buying bookstores,
7 things that they never said that they would
8 buy before.
9 And so there may be a situation
10 five years from now where people have nexus
11 in 17 states or 25 states and they actually
12 do pay more tax. But as you look at it,
13 nobody knows how much it's going to move.
14 And therefore, why wouldn't it be
15 more prudent -- I guess in your mind, since
16 you have sort of this one polar presentation
17 here -- why wouldn't it be more prudent to
18 punt and to delay the issue? I mean, I think
19 everybody would agree that during the infancy
20 of a great technology like this it might be a
21 good idea to help it along, so that it
22 develops nicely. Why wouldn't it be smarter
452
1 to give it a three-year or a four-year break
2 before we conclude for sure that it should
3 never be taxed or that it should be taxed?
4 CHAIRMAN GILMORE: I suppose that's a
5 possibility which we can discuss between now
6 and Dallas. And thank you.
7 We need to move immediately now to
8 Mr. Norquist's resolutions, even if we return
9 to this topic afterwards, in order to make
10 sure that Mayor Kirk's in a position to be
11 here.
12 MAYOR KIRK: Before you do that, I
13 would just do one thing. And I regret --
14 because I don't think I'm going to be able to
15 remain if we visit the resolution.
16 There's an issue paper that I
17 provided to you on the digital divide. It
18 represents a compilation of thoughts that I
19 tried to ascertain from the National League
20 of Cities and Conference of Mayors. I have
21 no pride in authorship of it. It's more of
22 an issue piece to that, but I did want to say
453
1 that I associate myself with the comments of
2 John Sidgmore and Ted Waitt, particularly on
3 that of the digital divide and the unknown,
4 but determined economic impact of
5 non-taxation of E-commerce.
6 CHAIRMAN GILMORE: Thank you, Mr. Mayor.
7 MAYOR KIRK: And my staff will kill
8 me if I didn't do it, but to remind everyone
9 on the Commission, the meeting in Dallas will
10 be in March, the 20th and 21st -- because
11 there was some confusion on the dates -- at
12 the Fairmont Hotel.
13 You should know that the very first
14 sporting event in the next century will be
15 telecast at 10:00 in the Cotton Bowl, when
16 the Texas Longhorns and those red-hat,
17 hog-wearing folk from Arkansas tip off in the
18 Cotton Bowl.
19 CHAIRMAN GILMORE: I want to call on
20 Grover Norquist. If you can remain just a
21 moment or two, Mr. Mayor, he could get
22 started.
454
1 MR. LEBRUN: Mr. Chairman, may I?
2 CHAIRMAN GILMORE: Yes, Mr. Lebrun?
3 MR. LEBRUN: In New York, I stated
4 that I did not think it was appropriate for
5 this Commission to be taking piecemeal votes
6 on such resolutions, and I retain that
7 position. And I've read the resolutions. I
8 think that they are, again, asking us to take
9 piecemeal positions on things that should be
10 waited on until we have our final report,
11 which will be in Dallas.
12 I think at this time of the day
13 when we know people are going to have to
14 leave, we don't have time for further
15 substitive deliberation on these resolutions.
16 I would hope that Commissioner Norquist would
17 see fit to defer his resolutions until
18 Dallas, and if he isn't so fit, I would move
19 to table them at this point in time.
20 CHAIRMAN GILMORE: Mr. Norquist, you may
21 restate what your resolutions are and whether
22 or not you would withdraw or whether you
455
1 would like to put them on, that is your
2 privilege, naturally.
3 MR. NORQUIST: Yeah, I would
4 certainly like the opportunity to present
5 them. The first resolution deals with
6 putting a sunset on all federal taxes imposed
7 on telecommunications. The reason for this
8 is to avoid the problem we all focused on
9 with 101-year-old telecommunications tax.
10 We have now the most recently
11 FCC-imposed tax, the Gore Tax, the E-Rate,
12 which has been put in and it was given sort
13 of a specific duty. We're going to spend
14 X amount of money wiring schools. But it
15 doesn't have a sunset clause, and so I'm
16 going to working with Congress to put in
17 legislation to say, okay, what were you
18 planning on doing? How much money did you
19 need? And the thing sunsets in five years or
20 six years, I'd like to suggest that we would
21 present that in the Commission report as a
22 policy that ought to applied in other
456
1 circumstances.
2 This is the first time I've put
3 this measure forward, and so I'm not asking
4 for a vote on it, but I wanted everybody to
5 have a chance to look at it.
6 CHAIRMAN GILMORE: I will call on you to
7 further discuss each resolution after you
8 have stated it, unless Mr. Lebrun's motion
9 succeeds. But I just wanted to give you
10 notice that if you'll just state them,
11 I'll -- we'll let Mr. Lebrun have his day.
12 But it's a -- I do fully intend for you to
13 have plenty of time to present your case, you
14 know. But if you'll just state it now then
15 we -- I don't want to slam down Mr. Lebrun is
16 my point. But go right ahead.
17 MR. NORQUIST: Okay. The second
18 resolution deals with business activity
19 taxes. And the reason I brought it up was in
20 previous discussions it basically goes along
21 the lines that Commissioner Andal had
22 broached. He certainly put together reform
457
1 of nexus questions dealing with both income
2 taxes and sales taxes, and I've heard a lot
3 of concern from affected companies, that
4 discussion about making it easier for Alabama
5 to impose sales taxes on businesses in Maine,
6 is also a Trojan horse for allowing income
7 taxes to be imposed across state borders, as
8 well.
9 Because that's the first time I'm
10 putting it forward, and because Mr. Andal has
11 a proposal that deals with that, I'm not
12 asking for a vote on it.
13 The two that I'd like to submit for
14 a vote are the ones that were discussed in
15 this Commission, both in New York, and there
16 was consensus on it then, and we've just
17 discussed both here and there was
18 overwhelming support for both, as well. The
19 first was not taxing Internet access. I
20 think that's a very important part of the
21 digital divide. One can guess about what
22 else creates a digital divide, but putting
458
1 regressing taxes on Internet access
2 definitely augments the digital divide.
3 And then the second one was the
4 3 percent telecommunications tax, which was
5 imposed to fund the Spanish-American War. It
6 was imposed as a tax on rich people, because
7 only 100,000 people at the time had phones.
8 Recently I discovered the Spanish-American
9 War is over, and now everybody has phones in
10 the country, as they ought. And so this tax
11 that was once a tax on rich people is now
12 actually a regressive tax on families, and I
13 would like to -- since, again, we've asked
14 whether there's opposition to their
15 concepts -- their two other concepts -- and I
16 haven't seen substantial -- we polled this
17 before in New York and we had two-thirds
18 support for both of them.
19 I'd like to call them up for a
20 vote, both, so we can demonstrate to the
21 country that we're making some progress on
22 consensus items, because as Commissioner
459
1 Sidgmore pointed out, we're probably not
2 going to agree on the general questions. I
3 know I disagree with Governor Leavitt's
4 direction in which he wants to go in, which I
5 think will lead to higher taxes and more loss
6 of people's privacy, and other people -- and
7 I side myself with them -- want to go toward
8 the direction where we have more competition
9 between the states and over time less
10 intrusive taxes and less violations of
11 people's property in order to extract those
12 taxes.
13 So since we've got those two very
14 different directions people want to move in,
15 I think since Bill Clinton has endorsed -- as
16 it was said -- not taxing access, and we've
17 got the Republican candidates moving in the
18 same direction, that it's helpful for us to
19 point out to ourselves and to the country
20 that on these two issues we have consensus.
21 And that there's strong support for this and
22 then the gentleman of the fourth estate will
460
1 have a story to write about.
2 CHAIRMAN GILMORE: Mr. Norquist?
3 MR. NORQUIST: So I'd like to move
4 voting the measure on telecommunications
5 services.
6 CHAIRMAN GILMORE: Mr. Norquist has
7 properly filed his resolutions and has a
8 perfect right to bring them up, which he has,
9 in fact, done. I believe they are seconded,
10 Mr. Andal, and that is fine.
11 Now, Mr. Lebrun?
12 MR. LEBRUN: Thank you,
13 Mr. Chairman. I'd appreciate Commissioner
14 Norquist not asking to vote on resolution
15 number two. My position with regard to the
16 other two remains the same. I think if we
17 take a vote at this point in time, we are
18 piecemealing matters that have been
19 discussed, both at this meeting and at our
20 prior meetings. I think the consensus
21 earlier was that we should wait and take a
22 look at them again in Dallas, when we have
461
1 completed our work and look at them as part
2 of the entire package.
3 And, therefore, Mr. Chairman, I
4 would move that both Resolutions 3 and 4 be
5 tabled.
6 CHAIRMAN GILMORE: Mr. Lebrun has moved
7 to table.
8 MR. NORQUIST: May I speak to that?
9 CHAIRMAN GILMORE: You certainly may.
10 Is there a second to the motion?
11 MR. NOVICK: Second.
12 CHAIRMAN GILMORE: There is a second by
13 Robert Novick to table the motion. The floor
14 is open to discussion.
15 Mr. Norquist, why do you oppose the
16 table?
17 MR. NORQUIST: Well, Mr. Lebrun
18 didn't like the last resolution we passed
19 18-to-1, which was the one in support of the
20 Clinton Administration's negotiating
21 position. So we did actually decide to do
22 something piecemeal, and I'm glad we did.
462
1 Because there's a time sensitivity
2 on this, this is not something that can wait.
3 I mean, the world is not waiting. It's
4 operating in real time. If we had waited, we
5 would not have passed our resolution in
6 support of the Clinton Administration's
7 position on trade until after Seattle. That
8 would have been a little late. Partly
9 because of our resolution -- and I worked on
10 it on the hill -- we got the House of
11 Representatives to pass 430-something to 1 a
12 resolution in support of the Clinton
13 Administration's position in -- a negotiating
14 position on WTO and on Seattle.
15 I think it's helpful for this
16 Commission to be a part of this national
17 debate. And two things are going to happen
18 between now and Dallas. And one of them is,
19 the Administration is going to put forward a
20 budget, and Congress is starting to write a
21 budget. And whether or not -- I mean, as we
22 went around this room, and everybody from Ron
463
1 Kirk to Commissioner Pottruck and others said
2 they endorsed getting rid of the 3 percent
3 telecommunications tax. I think it would pay
4 for our voice to be heard before Bill Clinton
5 writes his budget and the Congress begins to
6 enact theirs.
7 And the same thing with access
8 charges. Congress isn't going to wait until
9 we're in Dallas before they start moving on
10 them.
11 So that's why I think it pays to
12 weigh in on them now as opposed to later.
13 CHAIRMAN GILMORE: With my apologies to
14 Mr. Sokul, Mr. Waitt, and Mr. Andal, who have
15 asked to be recognized on the issue to table,
16 the legal counsel advises me that the motion
17 to table is not debatable.
18 So we have heard something from
19 both sides, with Mr. Lebrun and Mr. Norquist,
20 but I guess now we ought to follow the rule.
21 Motion to table is not debatable,
22 it has been seconded. The rules of our
464
1 Commission call for a roll call vote on any
2 of that matter. There are 15 present. Eight
3 is a simple majority to table.
4 Mr. Andal, do you have a point of
5 order?
6 MR. ANDAL: Yeah, a point of order.
7 I'm not sure it matters, but Mr. Norquist did
8 not offer Resolution 4 yet, so you have wait
9 to table. You can't table a motion that
10 hasn't been offered.
11 CHAIRMAN GILMORE: I understood that
12 both resolutions were offered.
13 MR. ANDAL: I offered 3. I thought
14 we'd have a vote on 3 and then on 4.
15 CHAIRMAN GILMORE: The Chair rules that
16 both have been offered, 3 and 4. And there
17 will be a motion -- the Chair rules that both
18 have been offered. We'll call the role.
19 Mr. Andal, should we table, yes or
20 no?
21 MR. ANDAL: No.
22 CHAIRMAN GILMORE: Mr. Andal votes no.
465
1 Mr. Guttentag?
2 MR. GUTTENTAG: Yes.
3 CHAIRMAN GILMORE: Delegate Harris?
4 MR. HARRIS: No.
5 CHAIRMAN GILMORE: Governor Leavitt?
6 GOVERNOR LEAVITT: Yes.
7 CHAIRMAN GILMORE: Delna Jones?
8 MS. JONES: Yes.
9 CHAIRMAN GILMORE: Gene Lebrun?
10 MR. LEBRUN: Yes.
11 CHAIRMAN GILMORE: Grover Norquist?
12 MR. NORQUIST: No.
13 CHAIRMAN GILMORE: Mr. Novick?
14 MR. NOVICK: Yes.
15 CHAIRMAN GILMORE: Mr. Parsons?
16 MR. PARSONS: Yes.
17 CHAIRMAN GILMORE: Mr. Pincus?
18 MR. PINCUS: Yes.
19 CHAIRMAN GILMORE: Mr. Pottruck?
20 MR. POTTRUCK: Yes.
21 CHAIRMAN GILMORE: Mr. Sidgmore?
22 MR. SIDGMORE: Yes.
466
1 CHAIRMAN GILMORE: Mr. Sokul?
2 MR. SOKUL: No.
3 CHAIRMAN GILMORE: Mr. Waitt?
4 MR. WAITT: Yes.
5 CHAIRMAN GILMORE: And the Chairman
6 votes no. There are -- the yeas ten. The
7 nays are five. The motion is tabled to
8 Dallas.
9 Sorry, Grover.
10 MR. NORQUIST: That's all right.
11 Everybody got to see where everybody voted,
12 so.
13 CHAIRMAN GILMORE: We are now returned
14 back to the issue of the application of sales
15 taxes. I believe we have concluded that, in
16 the absence of another hand.
17 It is 5:00. We still have a few
18 minutes left, even on our calendar, before we
19 go into the administrative matters.
20 Yes, sir, Mr. Pottruck? Before we
21 resume the pre-policy and issues?
22 MR. POTTRUCK: Thank you.
467
1 Governor.
2 I just would like to state my own
3 observation. I think in the area of sales
4 taxes, we have had a really magnificent
5 discussion. And over the three meetings that
6 I have sat in on this, my own information on
7 this has expanded enormously. I really do
8 think that we've had a terrific assembly of
9 expert speakers from all corners. I think
10 you and your staff have done a terrific job
11 in organizing an informing debate, which is
12 exactly what we're supposed to do. I think
13 all of that has been terrific.
14 I think the problem is clearly more
15 complicated than I ever imagined it would be.
16 And my own perception is that, as many people
17 said, this is really not a problem today.
18 E-commerce is still small, we have wonderful
19 revenues pouring into our state, local, and
20 even federal governments.
21 So the question, really, becomes
22 one of what the right long-term solution will
468
1 be, and whether we can make a recommendation
2 that can motivate the right approach for a
3 21th-century solution.
4 We have a lot of wonderful
5 consensus here. I think we're going to -- I
6 think there's little debate about the fact
7 that existing sales taxes are too
8 complicated, the existing system produces an
9 unusual burden on business, none of which is
10 good for America.
11 And so I hope that we will
12 continue, between now and Dallas, to have
13 active participation from the members of this
14 Commission in one-on-one discussions, in
15 conference calls, to not only work with the
16 seven proposals that are on the table right
17 now, but to look at forming new proposals as
18 well. I think all of these proposals have
19 things that I like a lot, things that I don't
20 think yet work, and that -- my presumption is
21 that we are not at all limited to these
22 seven, and that we will continue to work the
469
1 process to see if we can find the best parts
2 of each, and continue to find compromise and
3 consensus for new ideas to continue to
4 emerge.
5 And this whole meeting has been
6 around new ideas, so it's almost impossible
7 to presume that we could come in, prior to
8 hearing all the testimony and all the
9 wonderful questions and answers that have
10 been part of this debate, with the best
11 ideas, and that, in fact, following this
12 meeting, I would hope that we would see an
13 enormous level of activity among our staffs
14 and among ourselves to form the basis of our
15 debate, discussion, and resolutions in
16 Dallas.
17 CHAIRMAN GILMORE: Thank you,
18 Mr. Pottruck. I think this is the most
19 high-powered and sophisticated Commission
20 I've ever been involved in, and I'm confident
21 there will be more discussions among all of
22 us as we move ahead towards Dallas. But
470
1 things are getting crystallized, I think,
2 pretty fast here.
3 I would remind the Commissioners
4 that, again, we still have a few minutes
5 remaining before we are even late on our
6 agenda. We have a few more items to go
7 through. We can run through them quickly, or
8 we can engage in any discussion on these as
9 we go along. We have covered, I think, the
10 heart of most of them.
11 On Page 15 of your paper, the paper
12 outlines three options on how digital goods
13 are taxed. I've always wondered why any
14 sales tax system would want to distinguish
15 between digital goods, information and
16 services. The Internet blurs the distinction
17 between goods and services, and taxation of
18 one might inevitably lead to taxation on a
19 service provided. So I'm interested in this
20 matter.
21 The policy options that are here
22 are, number one, to recommend sales, and
471
1 local governments retain the authority to tax
2 or exempt digitalized goods in a manner
3 consistent with tangible goods and tangible
4 services. Two, recommend preempting state
5 and local governments' authority to impose
6 sales and use tax on those electronic
7 commerce transactions involving transfers of
8 digitized goods. Or, three, impose a central
9 of federal sales tax on sales of digitized
10 goods or by formula distribute the revenue to
11 the states.
12 These are the policy matters that
13 are in the document at this point. Does
14 anyone wish to comment on any of those, or do
15 we move ahead? Mr. Lebrun?
16 MR. LEBRUN: I think it's an
17 excellent item for further discussion. It
18 would be easy if there was a clear bright
19 line as to what's digital and what isn't.
20 But there's mixed media. The Uniform Laws
21 Conference struggled for a couple of years
22 working on a uniform information transactions
472
1 act. And we had people there from the
2 entertainment industry, the banking industry,
3 and more and more of this mixed media-type of
4 transaction is happening out there.
5 I think yesterday we used the
6 example that, if I had retained a lawyer from
7 California to write a brief for me, he can
8 submit that to me either in the mail, over
9 the fax, or over the Internet. As it comes
10 over the Internet, is that digital
11 information?
12 So I think this is an excellent
13 topic. But it's not that simple, because of
14 the mixed media and the various options that
15 are available for how it's transmitted. And
16 to just say that they shouldn't be taxed
17 raises many questions as to say it should be
18 taxed. It deserves to be on the agenda, but
19 it's too early to make any final decisions.
20 CHAIRMAN GILMORE: Other comments on
21 this issue? The next topic on this sales tax
22 issue is involved under nexus concerns. The
473
1 options listed on the nexus concerns are:
2 Number one, to recommend preserving
3 the status quo. Out-of-state merchants
4 making sales of tangible personal property
5 facilitated by the Internet should not be
6 required to collect transaction taxes if they
7 do not meet the substantial nexus standard
8 articulated in Quill vs. North Dakota.
9 That's the first proposal.
10 The second: Redefining existing
11 nexus standards, to provide state and local
12 government with expanded authority to impose
13 tax collection duties on out-of-state
14 sellers, even though the sellers have no
15 physical presence in the taxing state.
16 Or, third: Recommend clarifying
17 existing nexus standards by identifying with
18 greater precision than under current law the
19 business activities which taxpayers involved
20 in interstate commerce may engage in without
21 being subject to state and local tax
22 collection obligations.
474
1 Those are the three issues
2 regarding nexus.
3 MR. PARSONS: Can I ask a question?
4 CHAIRMAN GILMORE: Mr. Parsons?
5 MR. PARSONS: Are 1 and 3 really
6 different?
7 CHAIRMAN GILMORE: They have been
8 offered by different people, I believe, and
9 that's probably why they're both here. It's
10 a question of whether they're different, so
11 we could strike one. We're on Page 16 of the
12 policy document paper.
13 George, would you like to comment
14 on that? Mr. Parsons has asked whether the
15 Policy Directives 1 and 3 really have any
16 difference between them.
17 MR. VRADENBURG: I think 1 simply
18 reflects the current world in which Quill is
19 our guiding light. And 3 is intended to
20 reflecting the Andal suggestion that we have
21 a statutory clarification.
22 Number 2 would repeal nexus --
475
1 MR. PARSONS: No, no. 2, I
2 understand. I'm asking, I guess, the
3 offerors of these, are they different? You
4 could state them, I guess, differently. 1
5 would be, we don't do anything, and Quill is
6 Quill, and the states are the states, and the
7 law is the law.
8 MR. VRADENBURG: And let litigation
9 prevail, or Dean Andal's suggestion that by
10 statutory clarification, one would reduce
11 litigation and increase clarity and
12 certainty.
13 MR. PARSONS: Which is Item 3, is
14 that correct?
15 MR. ANDAL: I'm not sure I'm right
16 here. I just looked at it, but it looks like
17 Item 1 relates to sales and use tax
18 collection, and Item 3 relates to business
19 activity taxes. But I'm not sure if that's
20 right.
21 MR. PARSONS: I got it. I was
22 given bad information by somebody's staff.
476
1 CHAIRMAN GILMORE: Other comments on
2 this? We know where these issues are. And
3 if anyone wants to eliminate one of these,
4 speak now. We haven't done too much
5 narrowing of these varying things today.
6 Dean Andal, do you wish to say
7 anything else about this before we move on?
8 MR. ANDAL: I wouldn't think of it.
9 CHAIRMAN GILMORE: You wouldn't think of
10 it.
11 Okay. We have still three topics
12 to cover. The first are business activity
13 taxes, the second is redress for
14 unconstitutionally-imposed taxes, and the
15 third is the digital divide. Let's take a
16 look at this, page 18, "Impact on Business
17 Activity Taxes."
18 Dean, did you want to add anything
19 to this?
20 MR. ANDAL: No.
21 CHAIRMAN GILMORE: Those three are:
22 Recommending adopting bright line standards
477
1 for business activity taxes, nexus, including
2 extending the protections of Public Law
3 86-272 to all state and local government
4 taxation. And, two, recommending no change
5 in current business activity taxes. Or,
6 three, recommend requiring electronic
7 commerce businesses to pay business activity
8 taxes on a basis reasonably equal to all the
9 businesses earning income in the state by
10 encouraging states to develop uniform
11 apportionment methods for all enterprises,
12 including those conducting electronic
13 commerce and by adopting nexus standards for
14 all businesses based on clear and certain
15 levels of economic activity. Got it?
16 George, what we may want to do is
17 survey the Commission members a little bit at
18 the conclusion of the meeting. Everybody, I
19 think, understands what the document says,
20 and we're giving an opportunity now for any
21 commentary on it. But we ought to be giving
22 the Commission an opportunity to narrow this
478
1 perhaps a little bit, and then put it back
2 in, if people want to.
3 On page 20, VI, "Redress mechanism
4 for imposition of unconstitutional state and
5 local taxes."
6 I believe this is yours, Mr. Sokul.
7 MR. SOKUL: It's getting late, and
8 this is perhaps viewed as a somewhat
9 tangential issue or a side issue. Let me
10 just quickly explain what I'm trying to do
11 with this proposal and the basis of it. And
12 I'll send everyone more information, a better
13 explanation of it than the summary
14 explanation in this document.
15 But basically, if you're going to
16 have a world with Quill or with a Dean Andal
17 proposal, where nexus is governed by
18 constitutional standards -- or in the future
19 maybe a federal standard -- you end up with
20 litigation. We've heard a lot about the cost
21 of litigation, and there's hundreds of cases
22 going on.
479
1 My proposal can be simply put as,
2 the federal courts should hear the federal
3 question. Right now, one of the reasons
4 there's so much litigation and so much chaos
5 on the enforcement side of all these
6 questions is that it has to go
7 state-by-state, because of a 1937 federal
8 law, which was obviously enacted in a
9 different time. And I think we can agree,
10 and the panelists have agreed, that the
11 Internet is inherently interstate, and that
12 means federal.
13 And so I think it does relate quite
14 strongly to electronic commerce and the
15 growth of electronic commerce, that we should
16 establish a system, or at least consider the
17 notion that whatever we do when it does
18 produce litigation on a federal question,
19 that Congress should really consider looking
20 at what it did in 1937, and saying, "Well,
21 you know something? Maybe the federal court
22 should be deciding these federal issues."
480
1 And that's really the basis of my
2 proposal.
3 CHAIRMAN GILMORE: Any other comments by
4 any Commissioner on this?
5 Mr. Sokul has indicated he will
6 distribute some additional information as
7 well.
8 On the last document, on page 22,
9 is on the digital divide. We have had some
10 commentary on this already. Mr. Norquist
11 asked me to define that a little further.
12 In addition to that, Mayor Kirk has
13 submitted an option paper as well on some
14 additional ideas on closing the digital
15 divide. I think -- I want to make sure I
16 have a copy of Mayor Kirk's paper. It was
17 just submitted.
18 Everyone is aware of my proposal to
19 amend federal welfare guidelines, to permits
20 states to spend temporary assistance to needy
21 families, surpluses to buy computers and
22 Internet access for needy families. This is
481
1 a case where, because of welfare reform, most
2 of the governors have substantial TANF
3 surpluses. It is unclear, we believe, that
4 we have the ability to spend this money in
5 Virginia for needy families on this issue.
6 But this paper calls for clarification to
7 make sure there is no misunderstanding or
8 impropriety with respect to the use of that
9 money for the purpose of beginning to expand
10 the use of the money for needy families to
11 close the digital divide.
12 Any further discussion? Mr. Sokul,
13 did you have your hand up first? You did
14 not.
15 Mr. Norquist?
16 MR. NORQUIST: I would just add
17 that we add into this section all of the tax
18 reduction that I and others have talked
19 about, the 3 percent federal
20 telecommunications tax, as well as reduction
21 in state and local taxes, and the access tax,
22 all of them as they exacerbate the digital
482
1 divide.
2 And I would also ask, just for
3 purposes of understanding, where we are in
4 consensus. What is the Clinton
5 Administration's position about this measure?
6 And the National Governor's Association
7 that's here, have they weighed in?
8 CHAIRMAN GILMORE: Does anybody chose to
9 make a comment on this topic? There is no
10 gun to anyone's head, except Delna's.
11 Delna, go ahead.
12 MS. JONES: Well, Delna doesn't
13 have a gun to her head, but I do think it
14 might be helpful also to add into this that
15 they have the opportunity to use these funds
16 for training of families, so that they have
17 training to use the computers that we're
18 talking about. I think that would be
19 helpful.
20 MR. PINCUS: We have
21 representatives from the Clinton
22 Administration here. Could I just ask if
483
1 there is a policy? And maybe the answer is
2 there isn't one, I don't know.
3 MR. GUTTENTAG: I'm not aware of
4 any.
5 MR. PINCUS: No, we've asked the
6 people who are in charge of this, when the
7 Governor made his proposal to look into it.
8 Their preliminary indications are that they
9 think that unobligated funds can be used for
10 this purpose. And we'll certainly, well
11 before Dallas, have a final view on that.
12 CHAIRMAN GILMORE: That's great. I
13 would like to start a new program in Virginia
14 to use some of these welfare dollars to
15 partner with AOL, or with Gateway, or with --
16 to provide computers and access. I believe
17 we can leverage a great deal with this. So
18 we want to be very careful about this and
19 make sure that we get a clarification. I
20 appreciate the opportunity to get an
21 endorsement of this.
22 Let me also emphasize, by the way,
484
1 this would be an option for the states. They
2 would not be obligated to do it. It would be
3 merely a choice that they might make with any
4 of those surpluses. And they're going to be
5 used for the same people that would otherwise
6 be put forward.
7 That's the proposal in a nutshell.
8 Is there any opposition to this proposal? I
9 can't imagine there would be.
10 Then this will -- Mr. Lebrun?
11 MR. LEBRUN: Not in opposition.
12 But Governor Janklow -- and he didn't address
13 this at all when he was here -- but over the
14 last few years, he's implemented a major
15 program in South Dakota where he's got all
16 the schools wired for the Internet. I will
17 ask him to prepare -- and I'll get it
18 distributed to the rest of the Commission --
19 an outline of what he's done, and what funds
20 he's used, and what his position would be,
21 and how to implement this, before the next
22 meeting.
485
1 CHAIRMAN GILMORE: Very good.
2 MR. GUTTENTAG: Mr. Chairman, even
3 if there's no opposition to this, it's not --
4 we shouldn't be looking at this -- and I
5 don't think you meant that this would be the
6 sole solution to the issue of the digital
7 divide. You may need other options.
8 CHAIRMAN GILMORE: I'm certain the floor
9 will be open in Dallas. And we're also going
10 to, of course, include Mayor Kirk's ideas on
11 this, as well.
12 The day has grown long, but we are
13 on time. And I know everybody is tired. I
14 appreciate your attentiveness and your
15 participation. We have closing
16 administrative matters to take up.
17 So first of all, let me get some
18 minor matters our of the way, just a few
19 administrative matters. First, everyone has
20 had a chance to review the minutes of the New
21 York meeting. Does anyone have any changes
22 to propose to the minutes?
486
1 MR. GUTTENTAG: Small wording
2 changes. Can we take them up with staff?
3 CHAIRMAN GILMORE: Small wording changes
4 can be taken up with the staff, if that is
5 the sense of the Commission, yes.
6 Otherwise, is there any objection
7 or addition to the minutes? Can we approve
8 the minutes? Move to adopt?
9 Second? All in favor of adopting
10 the minutes, please say aye. All opposed,
11 nay.
12 The minutes are adopted.
13 Now, I want to recognize Delna
14 Jones to provide an update of federal funding
15 on behalf of the funding subcommittee.
16 Delna?
17 MS. JONES: Thank you. I hope all
18 of you have had an opportunity to review the
19 budget, the revised budget. If you have not,
20 Heather will be glad to get you one right
21 away. And I know many of you are preparing
22 to leave. I'll make this as brief as I can.
487
1 One of the benefits that we have
2 today that we haven't had in the past is, we
3 have $1.4 million approved by Congress and
4 signed by the President, and we actually have
5 the funds in the George Mason University
6 Foundation available for expenditure.
7 I wanted to also to be sure that we
8 give credit to all of the folks who have
9 helped in this regard: Senator Lott, Senator
10 Gregg, and Congressman Bliley, because I think
11 it's important that they get credit for what
12 they've done on our behalf, as well as Mike
13 Armstrong, who actually chairs the committee
14 and isn't here today.
15 Let me also comment that, if you
16 will notice in the budget -- and I'm talking
17 very fast -- if you will notice in the budget
18 that we are now looking at only federal
19 funds, we are not relying on any private
20 funds. In addition to that, we are not going
21 to be compensating for in-kind contributions
22 that have already been received. Those are
488
1 received and acknowledged and will not be
2 compensated for.
3 That includes legal advice, that
4 includes the digital sandbox, and other
5 public services, including the Commonwealth
6 of Virginia and George Mason University.
7 Also, we do propose in this budget
8 to reimburse the corporate folks, as well as
9 the Commonwealth of Virginia. But that will
10 be the last expenditure after the balance of
11 the budget is balanced and expended, so that
12 we'll know that we have that money to
13 reimburse. But that is a part of this
14 proposal.
15 And I think everything else in this
16 is pretty self-explanatory. If you have
17 questions, I or Heather will be glad to
18 answer them.
19 CHAIRMAN GILMORE: Then I'll say that --
20 go ahead, Delna, I'm sorry.
21 MS. JONES: Then I was going to
22 make a motion.
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1 CHAIRMAN GILMORE: Make a motion.
2 MS. JONES: I move we accept the
3 budget.
4 UNKNOWN: Second.
5 CHAIRMAN GILMORE: Motion to approve the
6 budget. I want to particularly thank
7 Gateway, AOL, Schwab, AT&T, MCI WorldCom,
8 Time-Warner, and the Commonwealth of
9 Virginia, for providing cash to get this
10 started.
11 And now we're in a position to
12 reimburse these firms and the Commonwealth
13 for the money that they used, the seed money
14 to get this started. But, as Delna has said,
15 no in-kind or other types of services
16 previously provided to this Commission will
17 be reimbursed, only the cash that had been
18 put out. Otherwise, we have received gifts
19 and services in large measure from people who
20 have worked hard to make this a success.
21 MS. JONES: I would like to add,
22 Governor, that, if you will notice, also
490
1 there is a balance that, even after
2 reimbursement, would be available to return
3 funds to Congress if, in fact, we do not need
4 them. But we do have a cushion in case we
5 need additional meetings or anything between
6 now and Dallas.
7 CHAIRMAN GILMORE: I know that Congress
8 needs it. The motion has been made and
9 seconded to approve the budget. All in favor
10 of the budget, please say aye.
11 MULTIPLE VOICES: Aye.
12 CHAIRMAN GILMORE: All opposed say nay.
13 Finally, just a few minutes on the
14 final report. Let me just share with you
15 that the work plan direction is to -- if not
16 to a staff, to a subcommittee -- we have a
17 subcommittee that is working on this. The
18 work plan says that, once a draft is written
19 that it will be distributed to all
20 Commissioners. The Commission may desire one
21 more conference calls to discuss the document
22 prior to the Dallas meeting. It is my sense
491
1 that we probably do want a conference call,
2 at least one, to discuss the final document
3 before the Dallas meeting.
4 At the meeting in Dallas, the
5 primary function of the Commission will be to
6 approve the final report, and to entertain
7 debate on motions to modify or amend the
8 final report as drafted. Should the
9 Commission decide prior to Dallas it needs
10 any further expertise or data to inform any
11 findings or recommendations in the final
12 report, a limited substantive program can be
13 placed on the Dallas agenda.
14 So if the Commissioners feel that
15 after they have seen it that they wish to
16 have more substantive presentations they may
17 do that. Otherwise, the primary function of
18 the Commission will be to debate and argue
19 the final report.
20 Following the Dallas meeting, the
21 final edits will be made, after the actions
22 that go on in Dallas, the actions of the
492
1 Commission, it will be published and
2 forwarded to Congress no later than
3 April 21st in the year 2000.
4 The proposed procedure that I would
5 foresee is that the final report would
6 include an overview of the Commission's
7 legislative charge, a synopsis of the
8 Commission's deliberations, an objective
9 narrative explaining the tax issues
10 implicated by the Internet economy, and
11 policy recommendations.
12 For purposes of the Dallas meeting,
13 the section would incorporate the policy
14 options contained in the policy and options
15 papers, as discussed here in San Francisco.
16 I would remind you that the
17 Commission by statute can make a
18 recommendation, a formal recommendation on a
19 two-thirds vote only. The Commission may
20 wish to consider intensely between now and
21 Dallas what types of proposals may come
22 forward, although the policy and options
493
1 paper will indeed come forward pursuant to
2 the workforce plan. And there may be other
3 ways, of course, of communicating within the
4 document without it being a formal
5 recommendation.
6 At the Dallas meeting, the majority
7 of the time will be devoted to discussion of
8 the final report and ultimate approval of the
9 final report consistent with the statutory
10 requirements.
11 Any further comment on this matter?
12 Is there any other business to come before
13 the Commission here in San Francisco?
14 Mr. Pincus?
15 MR. PINCUS: Just to thank Heather
16 Rosenker and the staff and your staff for
17 putting together what I felt was an
18 exceptional meeting.
19 CHAIRMAN GILMORE: Heather, will you
20 please stand?
21 Thank you. There is a motion to
22 adjourn. All in favor, say aye.
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1 MULTIPLE VOICES: Aye.
2 CHAIRMAN GILMORE: The Commission stands
3 adjourned in San Francisco.
4 (Whereupon, at 5:30 p.m., the
5 PROCEEDINGS were adjourned.)
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On this page: transcript of December 15 |
