Congress Curious About Authority over E-Commerce Taxation

That’s exactly what it is, said Subcommittee Chairman Steve Cohen, D-Tenn., a “classic situation” of states wanting more revenue and businesses “not wanting to be interfered with.” Ranking Member Trent Franks, R-Ariz., said he was wary of encroaching on state jurisdiction but called their justifications for applying remote taxes “inconsistent.” The notion of when a state has nexus is “not really that hard to understand, but it’s hard to apply,” he said. Rep. Zoe Lofgren, D-Calif., sponsor of a bill to restrict “discriminatory” taxes on mobile phone service, said Congress must ensure the health of the national economy through e-commerce against a “patchwork of taxes."

The Supreme Court’s 1991 Quill ruling enshrining the “physical presence” standard for taxation made clear that “Congress can pretty much do anything it wants” to regulate interstate commerce, said Walter Hellerstein, professor of taxation law at the University of Georgia. But “there is no one-size-fits-all solution” and lawmakers should make distinctions, not subjecting income taxes to the same remote rules as sales and use taxes, for example, he said. A big company with “sophisticated software” for calculating taxes also could be judged differently than a small one.

The “hodgepodge” of state laws on nexus are “constantly changing” and expanding jurisdiction, offering “neither clarity nor certainty” for businesses and consumers, said Joseph Crosby, chief operating officer for the Council on State Taxation, which represents 600 large businesses. Courts have avoided nexus cases since Quill, and the SSUTA is “predicated” on congressional authorization, such as would happen under a bill in development from Rep. William Delahunt, D-Mass., Crosby said. State officials have been waiting for his perennial bill since last spring (WID April 24 p4), and though Delahunt briefly stopped by the hearing before it started, he didn’t stay.

Congress has largely avoided flexing its interstate commerce authority and “we urge that forbearance to continue,” said Bruce Johnson, a member of the Utah State Tax Commission, representing the Federation of Tax Administrators. “The economy of the 21st century is electronic and borderless,” and many out-of-state companies have a bigger impact where they do business than in-state competitors, he said. “Amazon knows a heck of a lot more about me” and Johnson’s purchase habits than his local bookstore, yet is exempt from collecting taxes. The physical-presence standard is a “relic of a bygone era” and should be replaced with “economic presence,” Johnson said.

The remote taxation issue “keeps going and going and never gets resolved,” said Rep. Mel Watt, D-N.C. But the SSUTA is “alive and well,” Johnson said. Wisconsin’s joining last year (WID Feb 23 p5) brought the total to 23 states. That’s actually more than the “magic number” -- 10 states with 20 percent of the national population -- that had been set as the trigger for congressional authorization before the SSUTA took effect, Johnson said. “We've made progress,” Crosby said: “We're not at the end of the game.” Many states are holding off from joining SSUTA until Congress acts because it could harm them, he added. Crosby didn’t elaborate, but a handful of states have backed down from affiliate-tax demands after Amazon and Overstock threatened to drop those affiliates.

Lofgren said the tax burden on mobile phone services and providers was growing twice as fast as on any other goods, harming the low-income and minority populations that disproportionately depend on mobile services for Internet access. Those populations also receive more government assistance, a revenue stream that’s imperiled without sufficient taxation of services, Johnson said. Rep. Howard Coble, R-N.C., said he was confused why mobile services were singled out for exemption under Lofgren’s bill, which would freeze discriminatory taxes for five years. Mobile is a “dynamically changing industry” and “'discriminatory’ is in the eye of the beholder,” Johnson said. But Crosby cautioned that legislators had disproportionately increased the tax burden on mobile services in the first place.

Crosby urged lawmakers to “set the boundaries for when state tax jurisdictions end.” That’s certainly not the Quill standard, which has made it possible for companies with a large “economic footprint” to structure their operations as they would in a tax haven, Johnson said. It’s better to set “reasonable floors” under which states wouldn’t require companies to pay taxes, a feature of the SSUTA. “The states frankly need to do a better job” of simplifying their systems, but businesses could make their lives easier by proactively meeting states halfway regardless of progress at the federal level, he said.

Congress should be looking at taxation from “the 10,000-foot level,” said Rep. Steve King, R-Iowa, adding that he worked nearly “to the point of despair” on the SSUTA as a state legislator. “We're still going to end up with 50 different models” for taxation without some big changes, perhaps the abolition of the IRS, he said. If Congress sets a national sales tax and lets states opt in and dump their own systems, “we eliminate every problem here."

The Direct Marketing Association said in submitted testimony that estimates of uncollected remote-sales taxes are “grossly exaggerated,” largely based on a University of Tennessee study that came up with $45 billion in lost revenue in 2006 and which was subsequently revised to $24 billion. The study rests on “faulty assumptions,” namely overrepresenting the share of consumer e-commerce relative to e-commerce between businesses that is already taxed, and doesn’t include U.S. government data. Studies by Forrester and the DMA, using government data, have come up with $3 billion and $4.2 billion losses, the group said. “There is no $24 billion pot of gold."

The SSUTA has done little to simplify taxes for businesses, which are still subject to 7,000 jurisdictions, state-by-state audits, and have no “uniform vendor compensation” scheme, DMA said. It has also continued to grant exceptions such as for sales-tax holidays, increasing the complexity of collection, and done nothing to dissuade states from defining nexus in “exotic” ways, such as taxing e-commerce sales through affiliate Web links, the group said.

The Consumer Electronics Association asked Congress to approve the Business Activity Tax Simplification Act (HR-1083), which would clarify circumstances under which taxes could be levied on out-of-state business activities. “These taxes cause massive compliance costs, when these funds today would be better put to use hiring additional workers or investing in new technologies that will grow their individual business and the American economy as a whole."

States have asserted “economic nexus” on activities including broadcasting that reaches out-of-state residents and selling downloadable movies, the MPAA told the subcommittee. Taxing such downloads at best provides “nebulous and incidental benefit” to out-of-state sellers, who can’t avail themselves of benefits in jurisdictions that tax them, such as roads and educational services, the testimony said. HR-1083 would provide a “much-needed bright line” standard that fits the modern economy, the MPAA said.