2141 Rayburn House Office Building

Statement of House Judiciary Committee Chairman Bob Goodlatte

“Welcome to this hearing, entitled, ‘Exploring Alternative Solutions on the Internet Sales Tax Issue.’

“Over the last three years, shopping center foot traffic has fallen 50 percent.  In January, J.C. Penney announced it would close 33 stores and cut 2,000 positions.  RadioShack is shuttering about 500 retail stores nationwide.  Most recently, Staples announced that it will close 225 stores over the next year.

“Meanwhile, Internet commerce is booming.  Fourth quarter, U.S., retail e-commerce sales were $69.2 billion, up 16% from the same period in 2012.  With e-commerce just 6% of total retail sales, there is much room for continued, rapid growth. 

“In part, these trends reflect structural advantages Internet retailers enjoy like lower store overhead.  Congress should not interfere in the natural evolution of the markets.  However, many argue that unfair sales tax laws are contributing to these trends.  Congress should examine this problem and potential solutions.

“In Quill v. North Dakota, the Supreme Court reaffirmed a longstanding rule.  Sellers cannot be forced to collect sales taxes for states in which they have no physical presence, because compliance would unduly burden interstate Commerce.  The Commerce Clause requires physical presence in order to address ‘structural concerns about the effects of state regulation on the national economy.’  Under the Articles of Confederation, state taxes had hindered interstate commerce, and the Commerce Clause sought to remedy such burdensome state laws.  However, the Supreme Court has also indicated that Congress has the ability to relax the physical presence test if Congress determines that there is no longer a burden on interstate commerce by the state activity in question.

“Traditional retailers argue that the physical presence test puts them at a distinct disadvantage to their online counterparts who do not collect sales tax.  Numerous retailers have brought Congress personal examples of what they call ‘show rooming.’  Consumers go to a store, draw on the retailer’s knowledge and then buy the item online specifically to save the sales tax.

“Technically, consumers in the 45 states with a sales tax still owe it if it is not collected by the seller.  This nearly identical obligation is known as a ‘use tax.’ However, it is widely ignored by consumers and unenforced by states for both practical and political reasons.  States estimate the annual lost revenue at $23 billion. 

“The Senate’s solution to this problem, the Marketplace Fairness Act, ostensibly lets states that simplify their tax rules force remote sellers to collect.  In practice, the bill suffers from fundamental defects in three categories. 

“First, the tax is already owed, but the public still views the bill as Congress taxing the Internet.  In a June 2013 Gallup Poll, 57% of Americans opposed it.  Opposition among young voters was 73%. 

“Second, compliance was not sufficiently simple.  The bill required states to provide free software, but did not address integration costs.  Furthermore, compliance software does not help the direct mail industry, and the bill provides no method for handling ‘use based exemptions’ common in agriculture and medical device sales. 

“Other complications abound.  Compliance cost estimates vary wildly.  There are over 9,600 taxing jurisdictions, and the Affordable Care Act experience has left voters wary of highly touted software solutions.

“One of the most significant defects is that the bill exposes remote sellers to multiple audits in jurisdictions in which they have no voice.  Legislators prefer to impose taxing burdens on those least able to hold them accountable.  That is why hotel taxes are so high, 18.27% in Manhattan.  These taxes fall primarily on out-of-towners who cannot vote.  Similarly, remote sellers have no direct recourse to protest unfair or unwise enforcement, making them prime targets.

“That said, the Committee is sympathetic to the plight of traditional retailers.  It is serious about searching for a solution that the various parties can accept.  The issue is just far more complex than it seems at first glance. 

“If Congress is to act, it must do so deliberately and precisely to avoid a cacophony of 9,600 taxing jurisdictions fighting over what is required.

“Accordingly, on September 18, 2013, the Judiciary Committee published seven principles regarding remote sales tax.  The Principles were intended to spark fresh creative solutions.  In the months following, the Committee received a number of ideas in response to the Principles. 

“This hearing will examine these ideas in depth.  One witness representing each idea the Committee would like to explore will advocate for it and defend it against criticisms from fellow panelists.  The merits and shortcomings of each approach will be exposed.  The aim is to start winnowing down the proposals to see if there are any that can garner support from all sides.

"There have been more than 30 Congressional hearings on this issue since 1994.  New approaches are needed and these witnesses will present some today.  I look forward to their testimony, ask everyone to keep an open mind and hope no one finds today’s proceedings too taxing.”

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