Testimony of John Tate, President, Campaign for Liberty Before the House Judiciary Committee Hearing on Exploring Alternati

es on the !nternet "ales Tax !ssue #arch $%, %&$' Chairman (oodlatte, )an*ing #ember Conyers, and the other members of the Committee, than* you for holding this hearing on the topic of !nternet "ales Tax legislation+ ,n behalf of Campaign for Liberty-s nearly three .uarters of a million grassroots acti ists, ! am pleased to ha e this opportunity to urge Congress to re/ect any legislation gi ing state go ernments ne0 po0er to collect sales taxes on out1of1 state goods purchased online+ Big1spending go ernors of both parties ha e been lobbying Congress to pass legislation gi ing state tax collectors the po0er to force out1of1state !nternet businesses to collect sales taxes and send a chec* to state go ernments+ Large 2bric*1and1mortar3 stores, as 0ell as established !nternet businesses, ha e also thro0n their considerable 0eight behind this proposal+ Last year, the special interests behind 0hat 0e refer to as the 4ational !nternet Tax #andate succeeded in getting their 2#ar*etplace 5airness Act3 6"+ 7789 through the "enate+ 5ortunately, the :nited "tates House has thus far not acted upon this bill, and many members of the House; including Chairman (oodlatte and other members of the House leadership ; ha e indicated they ha e no interest in considering the "enate bill+ :nfortunately, they ha e not re/ected the concept of creating a ne0 regulatory frame0or* for the purpose of collecting online sales taxes+ Last fall, Chairman (oodlatte un eiled a series of 2principles3 to guide the Judiciary Committee in drafting !nternet "ales Tax legislation+ Legislation based on the Chairman-s principles may differ in the details, but 0hen it comes to the !nternet Tax #andate, the de il is in the principle+ The Chairman and others on this Committee say that any !nternet "ales Tax legislation that emerges from this Committee 0ill not impose ne0 regulatory burdens on small businesses+ But anyone 0ho understands this issue *no0s there is simply no 0ay to force businesses to *eep trac* of 0hich of the nearly $&,&&& /urisdictions in America their online customers o0e sales taxes to 0ithout imposing ne0 costs on those businesses ; costs that ultimately 0ill be borne by consumers+ "ome legislators ha e said not to 0orry about the compliance costs because they 0ill not appro e any legislation unless they find a soft0are system that can easily be integrated into the operating system of e ery !nternet business in the country+ They claim this mythical soft0are 0ill be capable of automatically calculating the proper sales

tax for any customer from the thousands of /urisdictions that impose sales taxes+ ! am tempted to endorse this proposal because ! am s*eptical that such a system actually exists or can be easily de eloped+ ! refrain from doing so, since ! am concerned that there may be a soft0are program that appears fla0less 0hen demonstrated before a congressional committee but does not 0or* as ad ertised in the real 0orld+ Proponents of the !nternet Tax #andate also promise that the soft0are 0ill be pro ided 2free3 to businesses+ By free, they mean that state go ernments that 2agree3 to force out1of1state businesses to collect sales taxes 0ill pay for it+ But there seems to be no plan to as* the taxpayers of those states if they 0ill agree to purchase the soft0are+ And operators of !nternet businesses 0ould still pay for the soft0are since they presumably pay state taxes+ "ome claim that the burdens of the !nternet Tax #andate can be a oided by ha ing businesses simply charge their customers the state sales tax rate in the businesseshome state+ The business 0ould then send the sales taxes to the state-s Attorney (eneral, along 0ith a record of ho0 many sales they made in each state, and ha e the state A ( figure out ho0 much sales tax the business o0es to other state go ernments+ This proposal does not eliminate compliance costs< at most, it shifts the costs from the businesses to the state-s taxpayers+ Legislation allo0ing state go ernments to collect !nternet sales taxes from products purchased from out1of1state businesses pro ides a /ustification for re enue1hungry state legislators to raise sales taxes+ After all, the reasoning 0ill go, 0hy should our in1state businesses and=or state go ernment spend all this time and effort to benefit other state go ernments> ,r, state legislators could reason that their businesses are forced to spend time and effort collecting high sales taxes for other states, so 0hy shouldn-t they s.uee?e out1of1state businesses for more re enue> "ome businesses may e en lobby for increased taxes+ These businesses could be see*ing increased spending on programs that could benefit them, so they 0ould not mind increased costs to their customers, and they certainly 0ould not ob/ect to the increased burdens on their !nternet1based competitors+ E ery ersion of the !nternet Tax #andate 0ill expose !nternet businesses to increased audits+ "ome ha e floated the idea of ha ing the audits performed by the Attorney (eneral in the business- home state+ #ost of these proposals 0ould still re.uire !nternet1based companies to comply 0ith tax la0s from outside their /urisdiction+ "tate go ernments 0ill benefit from the !nternet Tax #andate as much as a /un*ie benefits from a fresh shot of heroin+ The influx of ne0 re enue 0ill gi e them a fresh high, but it 0ill ma*e it e en harder for them to *ic* the spending habit+ !t does not stri*e me as responsible fiscal policy to help postpone the urgency for states li*e

California to underta*e the spending cuts and reforms needed to get their fiscal houses in order+ "adly, in one respect, the proposals being 0or*ed on by the Judiciary Committee may actually be 0orse than the "enate1passed 2#ar*etplace 5airness Act+3 "tatements from the Chairman and others indicate that the Judiciary Committee-s bill 0ill not contain an exception for small businesses, or if one is included, it 0ill be phased out after three or fi e years+ Thus, e ery little 2#om1and1Pop3 store 0hich has re i ed its fortunes by opening a 0ebsite 0ill e entually be forced to comply 0ith the !nternet Tax #andate+ And no one 0ill ultimately be able to start an !nternet business 0ithout ha ing to comply 0ith the !nternet Tax #andate from the moment they create their 0ebsite and begin attracting customers+ Tal* about a go ernment policy discouraging small businesses and entrepreneurs+ !f Congress 0ere to pass an !nternet Tax #andate, American consumers determined to a oid state sales taxes could still do so by buying from non1American !nternet merchants+ This is 0hy some ha e named the !nternet "ales Tax legislation the 2Canadian Commerce Empo0erment Act+3 All proposals for an !nternet Tax #andate fly in the face of the original purpose of the Commerce Clause and set a dangerous precedent+ Contrary to modern political thought, the Commerce Clause 0as not intended to grant Congress unfettered regulatory po0er+ !nstead, it 0as meant to enable Congress to guarantee free trade among the states by ensuring states could not impose onerous regulations or taxes on out1of1state businesses and=or consumers+ (i ing states the po0er to impose their sales taxes on out1of1state businesses ; 0hether directly, as by the #ar*etplace 5airness Act, or through some bac*door means ; flips the Commerce Clause on its head+ The argument that this bill 0ill help 2#om1and1Pop3 stores compete 0ith large !nternet businesses may be one of the 0orst deceptions spread by the idea-s supporters+ #any small stores ha e turned to the !nternet in order to sur i e and thri e in the face of competition from 2Big Box3 stores+ These small !nternet businesses are the ones opposing the bill+ By contrast, the !nternet Tax #andate has the support of large !nternet retailers, 0ho can easily absorb its compliance and other costs+ The fa orable reaction from many of these special interests to the Chairman-s principles suggests that legislation based on the Chairman-s 2principles3 0ill aid big businesses at the expense of small businesses as much as the 2#ar*etplace 5airness Act+3 !nstead of see*ing to expand go ernment-s tax and regulatory po0ers e en further, a truly conser ati e, limited go ernment approach 0ould in ol e cutting existing taxes and regulations to help bric*1and1mortar shops better compete 0ith online commerce+

All in ol ed ; especially business o0ners and customers ; 0ould greatly benefit from such a course of action+ "ince it helps large, bric*1and1mortar stores, 0ell1established !nternet businesses, and giant entrepreneurs 0hile hurting smaller companies that ha e gotten a ne0 lease on life ia !nternet commerce, the !nternet Tax #andate is a form of corporate 0elfare+ This bill also turns the Commerce Clause on its head by using the Clause-s limited grant of federal po0er to burden interstate commerce 0ith taxes and regulations and to pro ide state go ernments 0ith incenti es to increase sales taxes+ ,nce again, on behalf of Campaign for Liberty-s nearly three .uarters of a million grassroots acti ists, ! urge Congress to re/ect all !nternet "ales Tax legislation+