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Avoid Encouraging Predatory State Tax Policies, Embrace Taxpayer Protection Legislation!
An Open Letter to the Senate Committee on Finance:
April 25, 2012
Dear Chairman Baucus, Ranking Member Hatch, and Members of the Committee:
The 362,000 members of National Taxpayers Union (NTU) commend you for holding a hearing today on “Tax Reform: What It Means for State and Local Tax and Fiscal Policy.” Throughout our 40-plus-year history, NTU and its members have actively engaged in the debate over fiscal federalism issues and their impact on the economy. As you explore this topic, we urge you to consider the benefits of several House and Senate bills that could protect taxpayers from unwise state and local tax policies – and, to beware of the serious drawbacks behind other pieces of legislation purporting to establish “tax fairness.” Specifically, we commend your attention to the following proposals:
Oppose S. 1452, the Main Street Fairness Act, S. 1832, the Marketplace Fairness Act, and H.R. 3179, the Marketplace Equity Act. All of these bills contain the words “Fairness” or “Equity”; yet, by giving the federal government’s blessing to state tax collection powers on “remote sales” beyond their borders, these pieces of legislation would achieve precisely the opposite outcomes that their titles express. Although supporters of the bills claim that they intend to level the playing field between “brick-and-mortar” retailers and online sellers, the result would be decidedly tilted. Traditional stores with physical outlets would not be forced to quiz their customers about place of residence and remit sales taxes to far-flung jurisdictions, but online and mail-order businesses would be saddled with such requirements. The tax compliance costs – especially to small sellers – would be considerable, and, as with income taxes, would not magically vanish with the existence of tracking software.
Furthermore, whether by compelling states’ entry into the Streamlined Sales and Use Tax regime or by encouraging them to take similar steps voluntarily, this legislation would severely harm one of the most dynamic aspects of the federal system: tax policy competition. The reality is that brick-and-mortar as well as online sellers must contend with tax and regulatory regimes that fall in various ways upon their modes of commerce. Both can face profit and property taxes that are often punitive, especially for sole proprietorships or “Mom and Pop” establishments. “E-tailers,” being heavily reliant on telecommunications and shipping infrastructure, bear a heavier tax load resulting from these necessary activities. Stores have greater sales tax collection and remittance obligations, but they have the business advantage of a physical location customers can visit. Both entities collect taxes on transactions where the buyer and seller are present in the same jurisdiction. We would contend that tax competition can make the commercial environment more hospitable for all sorts of business structures.
Finally, the concept of substantial physical presence, or nexus, has long provided a safeguard against many kinds of overaggressive state and local tax collection tactics. Throwing away this established constitutional doctrine would have adverse consequences not only for sales tax collection standards, but for other types of taxes as well.
Rather than rushing to adopt legislation that would undermine key taxpayer protections, Members of Congress should give thought to other reforms that:
1) Preserve tax competition among states;
2) Protect businesses from onerous compliance burdens;
3) Recognize the federal role in facilitating fair and equitable interstate commerce; and
4) Limit the intrusiveness of governments at all levels in everyday economic activities.
One concept worth exploring is origin-based sourcing, which would treat all transactions – including remote ones – the same, by subjecting them to just one point of taxation (the jurisdiction within which the business is sited). Clearly, any approach designed along these lines would need to include assurances that any revenues resulting from its implementation would be used for across-the-board reductions in tax rates.
Support S. 543, the Wireless Tax Fairness Act. The four tenets of reform expressed above are applicable to many fiscal matters, none more appropriately than to telecommunications taxation. The typical combined federal, state, and local tax bite on a wireless bill is 16 percent, roughly twice as painful as the average bite on other goods and services. Just as it acted nearly 15 years ago to prevent multiple and discriminatory taxes on Internet access, Congress must now work to place limits on multiple and discriminatory layers of state and local taxation on wireless consumers. Such a move would also send the right message to providers, who would be better able to make innovative contributions toward a more robust economic recovery.
Support H.R. 1804, the State Video Tax Fairness Act. By failing to recognize the difference in business models between terrestrial television providers (who themselves are often overtaxed) and satellite providers, some state and local officials have sought to slap satellite customers with higher impositions on video service. Congress should counteract the impulse to impose higher burdens on one provider due to the excessive burdens faced by another. H.R. 1804 would prohibit inequitable net taxes that are dependent on the mode of programming delivery – a worthy idea that Senators should embrace with their own legislation as well.
Support S. 971, the Digital Goods and Services Tax Fairness Act. The dizzying rise of music downloads, mobile-phone apps, and other digital products has left some state and local tax officials giddy over the prospects of higher revenues. Given that consumers can now be charged taxes from several jurisdictions on the same purchase (e.g., from the state where the seller’s server is located, from the state where the customer’s phone bill is sent, from the location where the consumer downloads the item), it is perfectly legitimate for Congress to establish boundaries for these practices. S. 971 prudently prevents states from piling on repetitive download taxes, and requires an affirmative legislative act by a state (as opposed to an administrative edict) in order to tax digital goods. As NTU, Americans for Tax Reform, and other citizen groups stated in a letter delivered separately to you:
Internet and digital commerce is a highly dynamic and rapidly growing sector of the American economy. The Digital Goods and Services Tax Fairness Act will help to eliminate any tax-related burdens on interstate commerce that could stifle the vital online market.
Support H.R. 1864, the Mobile Workforce State Income Tax Simplification Act. In today’s economy, millions of Americans accept temporary assignments outside their state of residence or traditional workplace location. Yet, some state and local tax laws are horrendously out of touch with this fact, causing unnecessary compliance headaches for workers and employers alike. H.R. 1864 would set federal guidelines for the way states and localities can impose earnings taxes on most nonresidents, including a minimum threshold of time spent in-state (more than 30 days) before compliance requirements are triggered. All other tax obligations in the worker’s or employer’s home state would remain unchanged. NTU urges Members of the Committee to consider authoring a Senate companion to H.R. 1864.
Other legislation introduced in this Congress could simplify and clarify state and local tax policy to improve America’s competitiveness. This would include the Business Activity Tax Simplification Act (H.R. 1439) and S. Res. 309, which affirms that Congress will not give states “the authority to impose any new burdensome or unfair tax collecting requirements on small online businesses.”
As Members of the Committee review these and other legislative proposals, NTU would remind you of the fundamental contradictions between bills that would act to expand state tax collection powers in new and destructive directions versus those that establish sensible curbs on such powers. In our view, all Members of Congress who consider themselves taxpayer advocates should recognize these differences and vote accordingly. It is inconsistent to work toward enactment of legislation such as S. 1452 and S. 1832, which directly clashes with the salutary precepts behind legislation such as S. 971 and H.R. 1864. As you and your colleagues consider next steps, NTU and its members look forward to charting with you a legislative course that avoids obstacles to prosperity and leads to a brighter economic future. Toward this end, we hope you will find our recommendations helpful.
Sincerely,Pete SeppExecutive Vice President