Hatch Floor Statement on Internet Sales Tax Bill
As Prepared For Delivery
Mr. President, on Monday, before the cloture vote on the motion to proceed to the Marketplace Fairness Act, I came to the floor to discuss the need to reinstate the committee process here in the Senate.
I have come to the floor many times over the past few months to talk about the importance of restoring regular order. I know a number of my colleagues share the same concerns.
Yet, here we are today debating another piece of legislation that hasn’t gone through the full committee process. And, once again, it appears we’ll be getting less than optimal results.
I think the legislation before us today is a prime example of why regular order is so essential. The Marketplace Fairness Act is a complicated piece of legislation that deserves a more thorough examination.
I think the bill is well-intentioned and I’m not fundamentally opposed to it. But, make no mistake, there are problems with this legislation as it is currently drafted. Problems that likely could have been avoided if the Finance Committee had been given an opportunity to fully consider the bill.
Now, I’m not here today to talk about the process failures we’ve had with regard to this legislation. I think I’ve made that point and others have as well.
Instead, I’m going to take a few minutes to talk about just a few of the specific problems I see with this legislation and how I propose to fix them.
I’ve filed an amendment that would address some of my concerns. I believe my amendment would make this bill more workable for businesses and consumers around the country.
For example, my amendment would implement a five-year sunset on the taxing authority provided under this legislation. Like I said, this is a complicated bill and we’re not precisely sure what the impact will be.
Whenever Congress deals with legislation this complex, unintended consequences are to be expected.
I believe that we need to ensure that Congress has an opportunity to revisit these issues once we’ve had a chance to see how the bill is implemented. A five-year sunset would provide that opportunity.
But, that’s not enough. If we’re really serious about preventing unintended consequences, we need to change some of the specific provisions of the bill.
One particularly troublesome aspect of this bill is the preemption provision.
In order to downplay the need for regular order on this legislation, proponents of the Marketplace Fairness Act have repeatedly claimed that the bill has been around – in some form or another – for over ten years.
And, in a sense, that’s true.
However, none of the previous versions of this bill – including the version that was introduced just 18 months ago – have included a preemption provision.
Specifically, this provision states that this legislation “shall not be construed to preempt or limit any power exercised by a State or local jurisdiction under the law of such State or local jurisdiction or under any other Federal law.”
At first glance, this sounds innocuous, but why was it only added to this latest version of the bill? Why was it not included in previous drafts?
My concern is that this provision seeks to address an issue that the authors of the Streamlined Sales and Use Tax Agreement have been wrestling with for years, which is that states are reluctant to surrender any taxing authority at all.
Mr. Chairman, I have always been a proponent of states’ rights. I’ve fought hard to preserve the right of states to regulate issues within their own spheres in a number of contexts.
But, we need to recognize that, with this provision in place, we would be backing up state laws with federal enforcement. And, by passing this legislation as it currently stands, we would essentially be signing off on laws that haven’t been written yet.
I think it’s only reasonable to consider whether we should, after passing this bill, expect more aggressive state sales tax laws to be enacted with the promise of federal authority to enforce them.
My amendment would help us avoid the potential problems with this preemption provision by simply striking it from the bill. As I stated, this is a new provision that deserves more careful examination before being enacted into law.
If the Finance Committee had been given an opportunity to examine this provision more thoroughly, it’s possible that these concerns could have been addressed. But, that’s not the world we’re living in. Under the current circumstances, this provision should be removed from the bill.
I should point out that I’m not the only person expressing concern about the potential impact of enforcing new state sales tax laws with federal authority.
Earlier this week, the Securities Industry and Financial Markets Association released a statement saying: “We believe the impact of this legislation on trade in services has not been adequately explored by Congress. The bill could lead to unexpected costs being passed on to consumers of financial services, including sales taxes on services or state-level stock transaction taxes.”
On Monday, I quoted from a letter delivered to Senators from the American Society of Pension Professionals and Actuaries that argued: “The legislation would allow states to impose a financial transaction tax that would apply to American workers’ 401(k) contributions and other transactions within workers’ accounts.”
These aren’t concerns that can just be cast aside. These are experts in the financial services industry saying that there’s a problem with the way this bill is drafted.
I’m not saying the Marketplace Fairness Act will automatically create these new taxes on financial services. But, unless we’re sure the legislation would prohibit such taxes, we may be handing a blank check of federal power to states that are becoming increasingly aggressive with regard to tax enforcement.
That’s why my amendment requires the Government Accountability Office to study whether, and under what circumstances, the authority granted under this legislation might allow states to impose taxes on financial transactions or retirement contributions.
My amendment provides a simple, straightforward way to address a potentially serious problem with the Marketplace Fairness Act.
My amendment would also require the GAO to conduct a study on the costs incurred by remote sellers in complying with the new sales tax requirements that would be imposed by states under this bill.
There are serious questions regarding the economic impact of the legislation. We’re talking about a bill that would impose new costs on businesses throughout the country – costs that will most certainly impact the ability of these companies to grow and expand.
I don’t need to tell you, Mr. President, that these are perilous economic times.
What impact will the Marketplace Fairness Act have on job creation? We simply don’t know.
This study would help provide us with some answers.
But, we need to do more to ensure that this legislation will not harm small businesses.
Another concern I have with this bill is that it could potentially create a situation in which small remote sellers are routinely audited by multiple states at the same time.
This would be a severe impediment to small business growth and job creation. I think we need to ensure that this legislation does not impose administrative burdens that crush small remote sellers under an avalanche of paperwork.
To help address this concern, my amendment would institute a three-year statute of limitations on state audits of remote sellers. This would provide a uniform rule for state sales tax audits, one that mirrors the current federal statute of limitations in situations where fraud is not alleged.
Now, one of the major driving forces behind this legislation is the fact that, over the years, the number of tangible goods purchased over the Internet has increased exponentially. Proponents of the Marketplace Fairness Act believe that it is necessary to level the playing field between Internet and brick-and-mortar businesses.
While this is a fair point, it doesn’t address the issues surrounding the sale of digital goods.
Digital goods are often consumed in places that are not at the location of either the buyer or the seller. That being the case, applying state sales taxes to the purchases of digital goods presents a number of problems that are simply not contemplated under this bill.
Some of my colleagues in the Senate have spent time working on legislation in this area. In addition, the Streamlined Sales and Use Tax Agreement has also considered this issue. However, the legislation before us is completely silent on the matter.
These issues demand more consideration than will be possible under this bill. That’s why my amendment includes a carve-out for digital goods.
Exempting digital goods from the sales taxes authorized by this legislation will give Congress an opportunity to examine this matter more fully and provide a solution that makes sense.
Another problem with this legislation is that it doesn’t take into account the costs businesses will face as they transition into a new sales tax system.
There’s just no way around it. This bill represents a change to long-standing policy that will require many companies to incur additional costs.
For example, if the bill stands as written, businesses that sell into multiple states will likely have to incorporate multiple software packages into their operations, or create their own programming.
Furthermore, an online retailer will still be required to pay interchange fees on all transactions, regardless of whether the amounts transacted represent the tax or the price of the item purchased.
My amendment would help to address this problem by providing for compensation for remote sellers that will be required to withhold and remit sales taxes as a result of this legislation. A simple, fair system of vendor compensation will help businesses overcome the difficulties of transitioning into the new sales tax regime.
The amendment would phase out vendor compensation over a five-year period. It would begin at ten percent of amounts collected for two years, eight percent of amounts collected for an additional two years after that, and then six percent of amounts collected for one year.
This is a simple approach that would go a long way toward ensuring that businesses – particularly small businesses – are not unduly harmed by this legislation.
Now, Mr. President, if you haven’t noticed, a common theme running through all the provisions of my amendment is a desire to protect small businesses.
I think we all want to ensure that small businesses are allowed to grow, expand, and create jobs. While I don’t think the proponents of this bill want to intentionally harm small businesses, I do not think they’ve done enough to protect them from the burdens that this legislation would impose.
Let me just give you one more example.
Businesses making less than $1 million a year in remote sales would be exempt from the sales taxes authorized under this legislation.
Now, that may sound like a fair concession, but it warrants further examination.
First of all, previous versions of the bill set the exemption at $5 million a year.
Why has that number been reduced over time?
Is it just an arbitrary number that sounds good or is there a specific target in mind?
These are the questions I have when I look at that number.
My concern with placing the exemption at $1 million is that it could subject smaller, regional companies to sales tax burdens in states where they only do a small amount of business. In our already fragile economy, the last thing we want to do is discourage businesses from growing, expanding, and creating new jobs.
My amendment would set the exemption at $10 million in remote sales a year. It would also index the level of the exemption to inflation to ensure that it doesn’t shrink as the years go by.
Now, I recognize that coming up with an exact definition of a small business is no easy task.
Any single number we use will necessarily be a rough figure because it has to encompass different industries and business models.
But, setting the exemption at $10 million would protect small businesses in a number of different sectors and ensure that we are not discouraging expansion and investment in those types of companies.
As you can see, Mr. President, I have a number of concerns with the Marketplace Fairness Act as it is currently drafted. These are just some of the concerns I have.
I respect my colleagues who have worked on this legislation over the years and I want to work with them to improve the bill.
But, as you can see, there are simply too many problems and too many unanswered questions surrounding this legislation for me to support it as-is.
As I’ve stated, I believe these problems could easily be resolved by a return to regular order. Indeed, if the Finance Committee had been given an opportunity to fully examine this legislation, many of these problems would undoubtedly be solved already.
But, as I said, that’s not the world we’re living in.
Once again, Mr. President, I want to work with my colleagues to improve this bill. I hope they will listen to these concerns and consider the changes my amendment would make.
If no changes are made to this legislation – if it’s forced through the Senate without any real improvements – I will have to vote No.
We’ve already missed some real opportunities to examine and improve this legislation. I hope we can change course and take a good look at all the implications surrounding this bill.