Statement for the Senate Finance Committee Hearing:
“Tax Reform: What It Means for State and Local Tax and Fiscal Policy”
U.S. Senator Michael B. Enzi
April 25, 2012
Mr. Chairman, thank you for holding this hearing focusing on how tax reform could possibly affect state and local tax and fiscal policy. I truly appreciate yours and Senator Hatch’s interest in hosting this hearing today. and allowing an open discussion in this Committee about the merits of my bill, S. 1832, The Marketplace Fairness Act.
The Marketplace Fairness Act was written in the aftermath of the Supreme Court's 1992 Quill decision. Congressional involvement is necessary because the ruling stated that the thousands of different state and local sales tax rules were too complicated and onerous to require businesses to collect sales taxes unless they had a physical presence (store, warehouse, etc.) in the purchaser’s home state. The Supreme Court essentially “invited” the Congress to decide how to move forward.
I strongly believe that now is the time for Congress to act. Many Americans do not realize that when they buy something online or order something from a catalog from a business outside of their own State that they still owe the State sales tax. For over a decade, Congress has been debating how to best allow states to collect sales taxes from online retailers in a way that puts Main Street businesses on a level playing field with online retailers. The Marketplace Fairness Act empowers states to make the decision themselves. If they choose to collect already existing sales taxes on all purchases, regardless of whether the sale was online or in store, they can. If they want to keep things the way they are, it’s a state’s choice.
I have been working on this sales tax fairness issue since joining the U.S. Senate in 1997. As a former small business owner, it is important to level the playing field for all retailers – in-store, catalog, and online – so an outdated rule for sales tax collection does not adversely impact small businesses and Main Street retailers. On November 9, 2011, Senator Durbin, Senator Alexander, Senator Tim Johnson and I introduced – with six of our other colleagues - the Marketplace Fairness Act to close the 20-year loophole that distorts the American marketplace by picking winners and losers, by subsidizing some businesses at the expense of other businesses, and subsidizing taxpayers at the expense of other taxpayers. All businesses and their retail sales and all consumers and their purchases should be treated equally.
I want to provide you with some highlights of what the Marketplace Fairness Act accomplishes:
• The bill gives states the right to decide to collect – or not to collect – taxes that are already owed.
• The legislation would streamline the country’s more than 9,000 diverse sales tax jurisdictions and provide two options by which states could begin collecting sales taxes from online and catalog purchases.
• The bill gives states two voluntary options that would allow them to collect the state sales taxes that are already owed if they choose. The first option is the Streamlined Sales and Use Tax Agreement, which is supported by 24 states that have already passed laws to simplify their sales tax collection rules. The second option puts in place basic minimum simplification measures states can adopt to make it easier for out-of-state businesses to comply.
• The bill also carves out small businesses so that they are not adversely affected by the new law by exempting businesses with less than $500,000 in online or out-of-state sales from collection requirements. This small business exemption will protect small merchants and give new businesses time to get started.
Do not let the critics get away with saying this kind of simplification cannot be done. In the early 1990s when the Quill decision was handed down, the Internet was still in diapers and cell phones came with bags and looked like bricks. Cell phones, software, computers, technology have all advanced at an exponential pace. The different rates and jurisdiction problem is no problem for today’s programs.
As a former mayor and state legislator, I strongly favor giving states the authority to require sales and use tax collection from retailers on all sales if they choose to do so. Sales taxes go directly to state and local governments, which brings in needed revenue for maintaining our schools, fixing our roads and supporting local law enforcement. If sales over the Internet continue to go untaxed and electronic commerce continues to soar, revenues to state and local governments will plummet.
My legislation would help both consumers and states by reducing the burden on consumers and providing a mechanism that would allow states to systematically and fairly collect the taxes already owed to them. At a time when states are increasingly turning to the federal government for program funding, it makes sense for Congress to authorize states to collect taxes that are already owed. . The states’ dependency on federal dollars could be offset by collecting taxes that are already owed from everyone who owes them at the state level. But if Congress fails to authorize states to collect tax on remote sales, and electronic commerce continues to grow, we are implicitly blessing a situation where states will be forced to raise other taxes B such as income or property taxes B to offset the growing loss of sales tax revenue. I want to avoid that. That is why we need to implement a plan that will allow states to generate revenue using mechanisms already approved by their local leaders. We need to allow states the ability to collect the sales taxes that are already on the books – which if enacted, it is estimated to provide $23 billion in fiscal relief in the 2012 alone for the states for which Congress does not have to find an offset.
This will give states less of an excuse to come knocking on the federal door for handouts and will reduce the problem of federally attached strings.
The Marketplace Fairness Act is not about new taxes. No one should tax the use of the Internet. No one should tax Internet services. I do, however, have concerns about using the Internet as a sales tax loophole. Sales tax collection is already required by my home state of Wyoming no matter how or where we buy something if it is not taxed by the state we get it from. Under Wyoming law, online purchases are already subject to sales tax – it is just not being collected or given to our state. The situation is very similar to that of other states.
Senators Durbin, Alexander, Tim Johnson, and I have worked tirelessly to assist sellers and state and local governments to simplify sales and use tax collection and administration. For the past several years, I have worked with all interested parties to find a mutually agreeable legislative package to introduce. Many hours have been dedicated to finding the right solution. I will continue to work with all interested parties to improve on the policy issues of concern to the stakeholders. Bill introduction does not stop us from negotiating and working together to improve the final product that should be enacted into public law.
The Marketplace Fairness Act is supported by over 200 organizations, including but not limited to the National Governors’ Association, the National Conference of State Legislatures, the U.S. Conference of Mayors, National League of Cities, National Association of Counties, the National Retail Federation, and the Retail Industry Leaders Association. I would like to submit the entire list into the hearing record. I also would like to submit several letters of support for the Marketplace Fairness Act into the hearing record.
Ten years ago, the bills we considered to try to close this loophole were not adequate to solve the problem. The Marketplace Fairness Act does solve the problem. It is simple, it is about States’ rights, and it is about fairness. At a time when State budgets are under increasing pressure, Congress should give State and local governments the ability to enforce their own laws. I strongly encourage my colleagues to support the Marketplace Fairness Act and get it enacted into public law this year.