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State Taxes on Internet Sales: Are



Washington, D.C.
Friday, February 5, 2010


President and Publisher, Tax Analysts


Partner, Sutherland, Asbill & Brennan

Senior Partner, Brann & Isaacson

Executive Director, Streamlined Sales Tax Governing Board

Senior Fellow, Center on Budget and Policy Priorities










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(9:06 a.m.)

MR. BERGIN: Good morning. Let it be duly noted that tax policy people are tough people. We have a pretty good room in advance of the blizzard that's coming to Washington, D.C. We also welcome all the people who are listening on the audiocast. You may not be as brave as we are, but you're probably smarter.
Welcome to the latest in Tax Analysts' series of discussions on key issues in tax policy and tax administration. The topic for today is State Taxes on Internet Sales: Are So Called "Amazon" Laws the Answer? I'm Chris Bergin, the president of Tax Analysts, the nonprofit publisher of "State Tax Notes", "State Tax Today", "Tax Notes", "Tax Notes International", and many other fine print and online products on federal, state and international taxation.

This is our eighth year of conducting discussions on tax policy and administration. In fact, we've been doing them for so long that I'm beginning to think I should stop bragging about how long we've been doing them. But if you are new to our discussions, let me say first it's great to have you here. Also, if you don't already have this package that we had up in front, we have handouts of articles on our topics, including a discussion on Tax Analysts' sister website, This issue created quite a buzz on, so that's in the package, as well. It will also be available to anyone who's interested in the subject on our main website,

Let me take just a moment to explain our process today. I will open things up with some brief remarks to introduce our topic. I will then introduce our distinguished panel of speakers. Each of them will address aspects of our topic. After that, we will open up the discussion to all of you, and we encourage all of you to participate; that's what makes these work.

Whether you are seated at the table or away from it, just wave and I'll find you. We are streaming audio of this event on our website, and again, I welcome everyone who is listening via audiocast, and we will post both the audiocast and a transcript on our site.

For media purposes, we are on the record, so when I recognize you, please tell us who you are. Also, please speak into a microphone. For those of you away from the table, we have handheld mics that we will quickly get to you. I will moderate the discussion, and we will end by 11:00, hopefully before the snow starts to fly. Now onto our topic. I am generally not sympathetic to politicians, but it really must be tough to be a state lawmaker right now. Basically, your state is broke, your revenue base is drying up, your federal stimulus money is running out, and the economic recovery that you're reading about in the financial sector is completely alien to what's happening to you.

You see this potential great revenue source taxing Internet sales into your state, your eyes light up. You think to yourself, an end to my troubles, but wait, it's not that easy. The Supreme Court won't help you, the high court's last big pronouncement on the issue of taxing remote sales within a state was Quill. Even if we weren't in the Internet age, that still sounds like more like an old pen than a landmark court decision.

You could try to get the federal government to help you -- that's probably a long shot, presuming you're looking for action rather than just talk. You could bad together under the streamlined sales tax project, but many of the big states won't join you, and you'll probably need the federal government to help you there, as well. Or you could imitate New York, striking out on your own and attacking giant remote sellers like That's just what an increasing number of states are exploring as we speak. Today we have assembled an excellent panel of experts to address these important sales tax issues that many of the states face, so let me get out of the way. I find this a fascinating subject, and I'd like to listen more than talk and introduce them in the order in which they will speak.

Michael Mazerov is a Senior Fellow at the State Fiscal Project of the Center on Budget and Policy Priorities, and he has written a number of very provocative papers about Amazon, the way it operates and whether states should require the online giant to charge sales tax.

Stephen Kranz is a partner with Sutherland, Asbill, Brennan, LLP, whose practice includes state and local taxation. He writes and speaks widely about such issues, and I'm happy to say he writes a column for "State Tax Notes" called "A Pinch of Salt".

Scott Peterson is Executive Director of the Streamlined Sales Tax Governing Board and has been involved in the streamlined sales tax project since its inception. Before taking this position, he served for ten and a half years as Director of the Business Tax Division for South Dakota's Department of Revenue and Regulation, and before that as a Tax Policy Analyst for the South Dakota Legislature.

George Isaacson is Tax Council to the Direct Marketing Association and represents over 80 catalog companies and electronics merchants across the country. He was DMA's representative to the National Tax Association Project on taxation and electronic commerce and serves on the Editorial Advisory Board of CCH Sales and Use Tax Alert. Michael, will you get it started, please?

MR. MAZEROV: Thank you very much, Chris, and I appreciate the invitation to be here with everyone this morning. As you just said, the title of our panel is "State Taxes on Internet Sales: Are 'Amazon' Laws the Answer?" And I think the answer to that question is an emphatic no, Amazon laws are not the answer to the problem of the de facto tax exempt status of a significant share of taxable remote sales.

The answer is what it has been since the Supreme Court made clear almost 18 years ago in Quill, that the physical presence requirement was only a commerce clause nexus threshold and not a due process one. Namely, the answer is federal legislation granting states authority to require nonphysically present remote sellers to collect use taxes in exchange for reasonable requirements for simplification and harmonization of state and local sales and use taxes. Now, I suspect in the next couple of hours, we all hear that, at least three out of the four of us on this panel probably agree with that, that that is the ultimate solution. The streamlined agreement, I think, is a critical step toward that goal and it's a major achievement. And although I think, as I'll say in a second, the streamlined states have erred in a few critical areas, I think the vast majority of the elements of the agreement are correct and that Congress could reasonably expect their adoption by a state prior to its being authorized to require a remote seller to collect use tax.

That said, the fundamental problem, in my opinion, is that there is virtually no realistic prospect of such legislation being enacted by the Congress in the foreseeable future.

Now, a nontrivial explanation for that, I think, is that the streamlined states made some concessions to demand to the business community that has kept some states out of the agreement and has kept many of the local government organizations deeply suspicious of it.

And I would point it especially initially committing the states in the agreement to significant amounts of vendor compensation for all businesses and also allowing very complicated telecommunications tax issues to be brought into the process when, in my opinion, they should have been addressed in an entirely separate process. I also think to some extent that the streamlined states framed their goals vis-à-vis Capitol Hill in a way that overly raised expectations and gave Congress an out in not passing the legislation. By that I mean instead of framing the goals primarily developing the structure and substance of a simplified and harmonized system and getting enough states to actually adopt it to show that it was feasible and indicate good faith on the part of the state, an expectation was raised that the vast majority of states could actually be expected to adopt the agreement prior to the enactment of the federal legislation.

And so now I think Congress has an out to say that because almost none of the large states have implemented the agreement, enacting the legislation would be essentially meaningless rather than the carrot that the nonmember states need to join.

But all that said, I think the more basic problem is that in the current political climate of this country, I think it's obvious that there's no way you're going to get 60 senators to vote for cloture on this legislation. If any congressional committee had the temerity to vote it out, the antitax right would immediately start attacking it vigorously as a new tax on millions of middle class Americans, and I just don't see that many senators standing up to that. Let's remember that there are five states with no sales tax, for example. And I ask if anyone in this room can tell me with a straight face that they think that any of those ten senators are likely to vote for this legislation. Then can anyone tell me with a straight face that 60 of the remaining 90 senators will vote for this legislation? That's what it will take to get the Main Street Fairness Act enacted. And I don't, as I've said, I don't think there's any realistic prospect of that, you know, given what's going on politically in the United States.

So where does that leave the states in dealing with this intolerable and unfair situation in which they're losing billions of dollars of revenue at a time when they critically need it to keep teachers in classrooms and when their in-state businesses continue to be hammered by companies like Amazon that exploit their pricing advantage to the most aggressive extent imaginable?

Well, I think a -- with every right and obligation to use whatever legal authority they might have to chip away at the problem, and that's exactly what New York's law represents. It's by no means the only approach that states -- states can and should be doing a lot more. For example, there are still a few big box retailers that have stores in every state that don't collect tax in those states on their Internet sales. And I think states should be seeking nexus over them on the basis that every bit of marketing done by the stores is effectively also marketing done on behalf of the web operations when the web operation sells the same merchandise under the same trade name.

And I think states should also go further and even pursue unitary theories of nexus. As I wrote in a recent paper, I think it's unconscionable to allow a situation to continue in which Amazon develops a Kindle in a lab in California, and yet when a Kindle is sold to a resident of that state, no sales tax is collected because the nominal seller is a separate subsidiary of the Amazon located in Washington.

As for the Amazon itself, I think there is ample legal basis for it in the holdings of Scripto and Tyler Pipe, and I'm sure we'll get into a lot of debate on that issue as the Q and A goes on. But these made clear that activities in a state by an independent third party can establish nexus for an out of state seller.

New York is applying its law in an extremely conservative way, one that, in my opinion, may be excessively conservative. And I'll remind you that it's not taking the position that the mere existence of an affiliated relationship with someone in the state establishes nexus, it's taking the position that some form of additional instate solicitation by the affiliate is necessary.

Now, could the states -- could New York courts find the law to be constitutional? Of course, they could, and if they do, that will be the end of this. No other state is going to enact an Amazon law, let alone pursue litigation to defend it. And then states will have to go on to some of the other approaches I mentioned a minute ago.

But I think there is sufficiently solid legal basis for the line, Scripto and Tyler Pipe, that I felt quite comfortable writing a report last summer urging other states to emulate New York's law, and I still feel comfortable having written that paper and continuing to urge states to do this.

Of course, the key issue with respected constitutionality is the claim that these affiliate programs are fundamentally just advertising, and again, I acknowledge that the courts could rule that way. But I think if someone takes a careful objective look at some of these programs, particularly an Amazon affiliate program, they will see that this is very much an ongoing completely symbiotic marketing relationship, not merely the purchase of an advertising service, arguing that its advertising completely ignores the fact that the affiliate provides a direct electronic link from the viewer of the ad to Amazon's website, something that an article in a newspaper or an ad on a cable TV network clearly doesn't do.

Amazon relies on its affiliates to decide where and when and which products to advertise. Amazon calls its affiliates associates, that is, its sales associates, sales people. It pays commissions to affiliates for signing up people for its Amazon prime membership program. To me, that's a finder's fee, that's not compensation for advertising.

Amazon has created quite sophisticated proprietary computer software code that is located on the websites of its affiliate's to facilitate sales such as software that streams music and movie samples from Amazon's site, allows a search of Amazon's catalog directly on the affiliates website, and in particular, allows its proprietary one-click ordering from the affiliate's website. I mean, in my view, that's taking -- that is the electronic version of taking an order in the state on the affiliate's website and forwarding it to the remote seller; that's exactly what the sales people in Scripto were doing. So again, I would argue that this is a symbiotic marketing relationship, not just mere advertising. I'm running out of my allotted time, and I'm sure we'll get into this much more in discussion, and there is this whole additional issue of Amazon and other drug marketers terminating their affiliate programs and states that have enacted this legislation, but I think we'll leave that for the discussions. So thank you.

MR. BERGIN: Thank you, Michael, thanks for sticking to your time, I think we'll get to it later. Stephen.

MR. KRANZ: I'm glad to hear Michael recognize that the Amazon laws are not the answer, but I am disappointed to hear that one of the justifications for supporting this approach is that there's no realistic prospect of federal legislation. The Center on Budget and Policy Priorities has not been at the table supporting the streamline effort at the state level or at the federal level.

Similarly, though, I think it's fair to look at the remote seller community, and segments of it have not been at the table identifying what they would expect a simplified sales tax system to include, what kind of rules they could live with in a remote seller collection obligation. And I want to make two points generally; one is that the Amazon nexus laws are unconstitutional and are failing to deliver, as promised. Secondly, that the streamline sales tax project at the state level and through federal legislation is the only appropriate solution to solve this problem.

And, you know, we've seen the New York litigation by Amazon and Overstock and the constitutional issues that are being raised there, we're expecting a court decision any day, and are hopeful that the court will find that New York's law is an unconstitutional approach.

When Michael says this is not advertising, at a conference of -- the National Conference of State Legislators last week, we had an exchange and discussed -- started going down the road of how far these laws go, and we talked about what I'm now calling couch potato nexus, and that is the view that, similar to, you know, in the world, you've got an in state customer, an affiliate in the state, and the retailer outside the state, and the discussion at the NCSL meeting focused around whether someone sitting on their sofa with a remote control ordering product through the television system, through a video provider who's in the state, they've got -- lines run right up to your house, it's clear that they have nexus, much like the affiliate in the New York situation has nexus; does the presence of the video provider in the state create nexus for the advertisers who are selling product to the person sitting on their sofa? That's the next step. And your response was, well, yes, of course, it creates nexus for them.

Then I'd like to throw out -- and this is -- it's a spectrum. The next issue is, you've got a magazine sitting on your coffee table, and you open it up, and there is a postcard that you tear-out, write in your name and address and mail it in, and order a product using a postcard.

Well, the magazine company may very well be an in state company, have nexus, is it creating nexus for everybody who advertises through the magazine in that kind of situation?

And let's assume that the postcard has a promotion code that leads to a payment by the vendor, by the advertiser to the magazine company for every postcard that leads to a successful sale. It's nothing more than different types of advertising. And I think what Michael is saying is that because the Internet, or because cable TV or interactive television is a faster form of communicating and facilitates communication between the consumer and the advertiser in an electronic way, that somehow that is constitutionally different than the type of advertising that we're used to, which is, you put an ad in the newspaper, you pay a flat dollar amount for the ad, and no one has pushed the edge

of that envelope, no one is claiming that a simple advertisement in a newspaper by a remote seller would create nexus. But does the tear out postcard create nexus? Does the interactive TV. create nexus? Does the link on a computer website create nexus?

We can fight about these issues for the next ten years. And I've been involved in the simplification effort since SST got started, and one of the first things I did was look at how long this issue had been around. And Bellas Hess was decided in '67. Six years later, Congress introduced the first bill to overturn that decision.

In 1973, there was a bill introduced in Congress to require remote sellers to collect. This issue has been around a long time. And until the SST got started, there was never a real effort to simplify our sales tax system, to modernize the antiquated rules that were passed in the 1930s, '40s and '50s to update them for our modern economy. This is a real chance to do that. And

having the Center on Budget and Policy Priorities supporting an alternative that will undercut state efforts to simplify and will undercut the effort to get federal legislation is disappointing. We've got an opportunity to bring our sales tax code up to modern times, and we've got an opportunity to work together, business and state governments, and that effort has been going on, and while I can understand Michael's disappointment that the federal legislation provides better compensation or that the federal legislation includes simplification of telecommunications taxes, which everyone recognizes are a disaster, even worse than the sales tax, those are things necessary to get support for the legislation and for the SST effort, and there are things that, quite frankly, are good policy reasons behind.

You can have a debate over how much compensation is the right compensation, but the bottom line is, business is the indentured servant of state government. They are collecting the tax that pays for fundamental government services, and covering some of the cost of that administrative burden is not unreasonable.

MR. BERGIN: Thank you. Scott.

MR. PETERSON: Thank you, Chris. Thanks to the folks at Tax Analysts, and Doug especially for inviting me to this. I appreciate this opportunity to discuss what obviously is my entire life. I would like to take a bit of an issue with a comment that Steve made about this thing starting in 1967 with Bellas Hess, and maybe it's just the difference in our age, but this debate started 80 years ago, when the state legislators of this country realized that the sales tax that they just enacted to get themselves funding for the depression was completely useless without a use tax.

So 80 years ago, when the first use tax was invented, was the day that we started this debate. And it is very frustrating for those who have had to be in this business for as long as I've been in this business to sit back and think that, you know, here it is, it's 2010, and I'm having a debate about the use tax -- act of 1935.

You know, there's something fundamentally wrong with this taking as long as it's taken. And, in my opinion, and I think my board's opinion, the thing that is wrong is the fact that this whole entire concept is based on physical presence.

Yesterday, Professor Waller Hellerstein made a comment at a congressional hearing that I hadn't actually thought about in the way that he had said it, but if you are that unfortunate retailer that makes your sales through traveling sales people, and you have the lack of foresight to not build the world's largest Web company, instead have this person that you're paying $15 an hour and three percent commission to go out and drive around the countryside and make sales for you, it doesn't make any difference how sophisticated you are or not, you're trapped, you're stuck, you have no choice but to -- that sales tax wherever you go.

And yet the world's largest and second largest and 15th largest and 1,000th largest retailer out there making sales on the web that has all the sophistication that's possible to have in this world doesn't have the same obligation that that person who has very likely zero sophistication in tax administration has placed on them. The concept that needs to go away is physical presence. It wasn't right in the beginning, it isn't right now.

So 80 years later, we're still having this debate. I am actually very glad. I had to be part of the -- what I think is the right answer to this, and the right answer to this solution -- the right solution is to acknowledge that states have lived in their little silos for too long, and the little sovereign creatures that they are have created kingdoms instead of a country when it comes to sales tax administration especially. And we actually sat down with one another and look at what we've done and what our neighbors have done and decide that maybe one way of doing exactly the same thing is the right way of solving this problem. I was -- for 12 years I wrote tax legislation for the -- legislation, never once did I pick up the phone and call the folks in Minnesota and say you guys do exactly what this legislator wants South Dakota to do, how do you do it, never once, I just thought it up.

I was their employee, I was smart enough to do this, I just did what I wanted to do, and that concept gets replicated every day, and this time of the year it's being replicated every day in every state in this country, and every business person in this country is finding himself being subjected to 50 different ways of doing exactly the same thing, and that's what we're trying to do in streamlining, we're trying to figure out how to do the same thing the same way.

There isn't any rational reason why you have to have six different ways of defining candy, and five different ways of defining soft drinks, and 12 different ways of defining clothing. It's bizarre, what we make retailers go through on a day-to-day basis to collect sales tax, and yet we enforce that extremely well on that poor unfortunate soul that happens to have that traveling salesperson. Steve used indentured servants, that's a bit harsh, but I put more than one retailer in jail when I was Director of Sales Tax for South Dakota because they had the poor misfortune of being in my state and not doing the right thing. There is a debtor's prison when it comes to sales tax administration.

So ten years ago we decided that this was the wrong approach, let's get together, let's talk with one another, let's figure out why business thinks this thing is complicated.

The first meeting we had was almost embarrassing because we -- this group of 50 tax administrators sat around the room and each told the other we had the best sales tax in the world. I knew South Dakota's was simple because I had written most of it, and I had spent ten years administering it, I knew we were the best in the country, but Diane Hardt in Wisconsin thought hers was the same, and I thought, well, one of us has got to be wrong in the room and it's not going to be me.

So we did what we thought we had to do, which asked business why we were so clueless as to what made our sales tax system complicated. And I was very pleased, they took the issue very seriously. And a lot of the work that George and the DMA had done with the National Tax Association gave them a good basis to start this discussion, and they gave us a list of 25 different things that they thought we could do to make the sales tax system better. Unfortunately, we took up all 25 of those issues, probably should have left three or four of them on the table and said that's suicide, we're not doing that, but we didn't, so we committed suicide.

And this approach clearly is a benefit to retailers. You know, one of our initial debates was, should we do a sales tax for Internet retailers. And we spent two full meetings debating whether or not we should have a system that applied only to Internet retailers.

And it took us two full meetings to realize we probably could, but there isn't a soul who's going to support it. Internet retailers aren't going to support it. And our folks that were collecting the sales tax, they certainly weren't going to support it because they don't get anything out of it.

But it took us two full meetings to realize that that was a flawed concept and what we needed to do was fix the problem for the people collecting the tax and then figure out a way of getting the folks that aren't collecting the tax to appreciate the value of what we've done for those who are collecting the sales tax. We have spent very little time with the folks in the Direct Marketing Association on why they think and how they think we can improve the system, and they're not playing, so we don't think we need to play with them. But after ten years, it's clear there are folks around this country that have lost their enthusiasm for patience, and I'm not -- in fact, I'm not surprised, I'm surprised it's taken as long as it has.

Ten years of having the simplification debate and we're still getting $20 billion a year that goes uncollected. You can't let $20 billion a year lay on the table year after year after year; even in Congress, that's beginning to be real money.

So I'm not surprised by what New York has done. I'm -- one of the things I'm very proud of, frankly, in the last ten years is, in 1999 to 2000, we made -- the states made a conscience decision to stop taking people to court over nexus. And we got almost ten full years without going to court on nexus, I'm very proud of that. But maybe I was unrealistic to think that that was going to continue forever.

Unfortunately, the issue that I started with is that nexus is the wrong way of going about this issue. We need to define the obligation to collect on the amount of sales that you make and not on whether or not you happen to have a sales person running around your state. This is going to get much, much worse very quickly. Yesterday the Governor of Oklahoma said, I'm going to get $90 million from Internet sales one way or the other, and if that means I have to get my members of Congress to do something, which I'm thrilled that he's finally saying that, or I have to drag some poor bugger into court, he's going to do that, and that's where we are.

Oklahoma has got a $1.3 billion budget deficit. Minnesota, $1.2 billion budget deficit. I'm not sure California can even estimate the size of their budget deficit. I know it's -- you could buy South Dakota, North Dakota, Montana and Wyoming, you could buy all four of those states for California's deficit.

On Wednesday, I get this daily e-mail from Internet Retailer, a great publication, and on Wednesday they reported that of the 117 merchants that have reported to them so far, if annual Web sales increase 21.7 percent in 2009 over 2008, while total industry retail sales declined two and a half percent, according to the National Retail Federation, Web owner retailers led the growth in 2009, among the 70 Web only retailers who have reported, sales were up 27.3 percent in 2009 versus 2008. When the Internet was invented, people said this will change the world; I said nah, nothing changes the world; I was wrong, the Internet has truly changed the world. I'm just amazed at how much I do on the Internet. But you can't let people who don't collect your sales tax have 20 plus annual percentage increases in sales without deciding that it doesn't make any difference what you have to do to get the tax collected, you're going to get the tax collected.

MR. BERGIN: Thanks, Scott. Before I turn it over to George let me just say that due to the inclement weather -- and that may be an understatement -- George is going to have to leave us a little early, about 10:00. So after he completes his remarks, if you have questions specifically for him, get your licks in quickly. George.

MR. ISAACSON: Thanks, Chris. It's always nice to be the last of the speakers because you have an opportunity to take shots at people. And maybe I'll start with my good friend, Michael.

One of Michael's opening comments was saying that three of the four people at the table all agree -- and I'm obviously the skunk at the table -- that the best solution would be federal legislation. And I think we've heard that resonate with the other speakers. And it seems to me one of the things that's important to give consideration to is to be careful what you ask for because eventually you may get it.

And what the states have banked on -- and it's certainly what the goal of the SSTP project is -- is to get Congress involved in the issue of state taxes, asking Congress to expand state tax jurisdiction. I think it's naïve on the part of the states to think that that kind of congressional legislation, either in the first instance or over the long haul, would come without substantial strings attached. And the likelihood is that the strings wouldn't be limited to the initial legislation. That you would have businesses coming back repeatedly to Congress and saying now that you're involved in the business of designing state tax systems, placing limits on what they can do and granting them authority that they otherwise would not have under the Constitution, business will come and will ask Congress to limit items that can be taxed, to limit procedures that states can impose, to require vendor compensation that the states may not want.

And what it really comes down to, in my opinion, is a question of whether the states are prepared to sell their birthright -- the independence and sovereignty which Congress has basically been willing to permit -- in return for what they see as a "pot of gold" which is, in fact, probably a "teacup of gold" and not a "pot of gold" for reasons that I'll explain in a moment.

Congress has the ability to place limits on state taxing power. They did it with the Internet Tax Freedom Act, for example. They've done it with PL 86-272. There's no reason to believe that Congress will not be more aggressive once they get involved in these issues.

Let me give what I think may be a good example of a major target that Congress might well go after because industry would like them to. The Tax Injunction Act right now prohibits Federal District Court jurisdiction over challenges to state tax laws. Which means that if you're a direct marketer in my state of Maine and you have an objection to a tax that's being imposed by a state, like Tennessee, then what you've got to do is you've got to wrangle your way through the Tennessee administrative system and eventually get yourself into Chancery Court and wind your way through their appellate system.

Well, if you're violating this new federal legislation that you're seeking, or even worse if you're violating the Constitution of the United States -- equal protection, due process, commerce clause - - why shouldn't a remote vendor have the same right that any other citizen has to go to Federal District Court and challenge that tax, seek a declaratory judgment action or an injunction? Well, the Tax Injunction Act right now is a deference that Congress has given to states saying that you can run your own tax systems. But if you're going to Congress and you're asking Congress to meddle in those systems to expand your power, it's a reasonable request on the part of the national tax community to say we should have the same right as any other citizen and go into Federal Court to protect federal constitution rights. It's important to think about that because what you're going after has very strong implications associated with it, especially when you consider the fact that in many respects this is a self-correcting problem.

You know, the figures that Scott was talking about are figures of Internet sales, but not figures of untaxed Internet sales. And the Deputy Commissioner for Tax Policy in New York State just came out with a statement that the figures that the SSTP has relied upon -- these university of Tennessee figures -- are inaccurate. They don't properly reflect what the lost revenue is for the State of New York. And the reason for it is that it overestimates those figures because of the fact that most electronic commerce sales are B-to-B sales. Over 85 percent of electronic commerce sales are businesses-to-businesses. Tax is either collected or the tax is self-reported.

And the problem is to a very large extent a self-correcting one. If you look at the number of Clicks and Mortar Retailers who at one time did not collect and now do collect, the reason for it is that they find that having valuable real estate in a state enables them to be a multichannel retailer with cross-referencing of sales. It's not a question of avoiding or not avoiding nexus. It's a question of how you're going to best use your multi-channel status. And so you find a large number of retailers who become collectors because of business reasons, not because of difficult tax laws that are being imposed upon them.

Scott was kind enough to point out that when this project began, the Direct Marketing Association did submit 25 proposals. I sat down with the two original cochairs, Diane Hardt and Charles Collins, and one of the things that we discussed was the fact that this concept of a streamlined sales tax was not being built on a fresh foundation. The National Tax Association, and also the Advisory Commission for Electronic Commerce that had been appointed by Congress, both studied this issue carefully. The only proposal that came out of the National Tax Association that was unanimous by all of the participants -- all of the participants -- that included the National Governors' Association, the National Conference of Mayors -- it included the NCSL -- was that there should be one rate per state. One sales tax rate per state. We have 7,500 different tax jurisdictions in this country. We're the only industrialized, modern economy that has that. Other countries that have sales taxes, like Brazil and India, have a tax at the state level. Twenty-seven states in Brazil, for example.

It is pure insanity to design a tax system as Scott pointed out that originated in the Depression when sales were made over-the-counter and to have 7,500 different tax jurisdictions. The proposal that came out of the NTA, one rate per state. A state can divide how it wants to divide it between the state level and the local level. And you reduce 7,500 jurisdictions to 45 jurisdictions. What was the first thing that the stream project did? Was to reject that proposal. DMA said we should have one audit. If you're going to have companies that you are seeking to attract into this program, or even if you're going to impose it on them, you should have one audit.

We suggested that the model that's used by IFTA -- International Fuel Tax Agreement -- where your base state taxation administration - - your home state if it's a member of the project would administer -- they would conduct all the audits. Rejected. So it isn't that DMA did not have good ideas. The problem was the DMA ideas were rejected outright. And I think that's where the core of the problem lay.

MR. BERGIN: Thank you, George. I usually save this for the end, but since you have to leave a little early I just want to say, great panel. So thank you for being here. Who wants to get in the first question? I know this guy here so I'll call on him first.

MR. BRUNORI: I think he was talking to me. You can go first.

MR. BERGIN: It's a little interfamily squabbling here. We'll fix it in a minute.

MR. LOBEL: Go ahead, David.

MR. BRUNORI: David Brunori. My question is for George because what I'd like to know is if you don't think congressional -- if you don't think the Streamlined Sales Tax project and congressional legislation is the answer, and you're certainly not for overturning Quill I would imagine -- unless you are; that would be news actually -- what is the solution though? I mean, if, in fact -- and maybe Bill Fox overstates the lost revenue a little bit, but everybody agrees the states are losing billions of dollars. I mean, how many billions is a matter of debate. But what is the solution then? I mean, what is the -- how do you stem the tide? Because if e-commerce keeps growing and the Internet is not a fad, and it's going to keep growing --

MR. PETERSON: It's over tomorrow.

MR. BRUNORI: It's over tomorrow. If it's going to keep growing, this will never end. I mean, we'll be here 10 years from now having the same discussion. I mean, there's got to be at some point some breaking point.

MR. ISAACSON: The answer, I think, is simple. It's true simplification. I mean, that is why on day one the Direct Marketing Association sought to participate in this project by saying here's what the elements of true simplification would be. For a businessman, nexus avoidance is a pain. I sometimes describe myself to my clients as their sales avoidance department. The process of being a multi-channel merchant, which is really where the popularity lies right now, is very attractive to merchants. And nexus avoidance is an important issue for pure play direct marketers because it's an easy tripwire to fall over and to find that you have nexus.

If becoming a voluntary tax collector means that you're going to be subject to tens or dozens of audits per year; if it means that you're going to have to be dealing with these arcane tax review systems located in far jurisdictions -- for example, one of the suggestions we made was there should be a mediation system. If you get a tax assessment you should be able to sit down with an independent mediator and have that be mediated so that you don't have to absorb the expense of going to South Dakota in order to be dealing with --

MR. PETERSON: It's a beautiful state.

MR. ISAACSON: And so there's a laundry list that was provided. And if you give business the alternative of being able to run their businesses without having to be concerned about nexus in a manner that would not involve the burdens -- what the streamline project has done, David, which I think is shameful, is it's moved from a starting point of looking for real simplification to a point where now what's happened is it's really a lowest common denominator.

I mean, you look at this recent thing with Massachusetts, for example. You know, you were going to have uniform definitions for clothing, but we want to get Massachusetts to play in so we're going to let Massachusetts be permitted to keep a threshold. We're going to have destination sourcing for all states, but some states want to keep origin sourcing for their local taxes. And so we'll give a bunch of exceptions. So what's happened is that the project has in many respects deteriorated and retreated from its original goals.

MR. BERGIN: Steve.

MR. KRANZ: Can I just comment on the One Rate Per State proposal? And well, I don't think anyone in the room would disagree that that is pure simplification, the problem is it's not politically sellable anywhere. Not to state governments, not to local governments, and quite frankly not to many members of the business community. What a One Rate Per State proposal would do is force the local jurisdictions that have no tax right now or who have a tax lower than the average to raise their taxes. And that's why very early on in the discussion at SST there was a decision reached to jettison One Rate Per State and work within a system that allowed localities to maintain their rates or maintain no tax in return for uniform sourcing.

Now, I will join George in criticizing the project for having backed away from uniform destination sourcing. That was something that was very important to the business community. And I recognize there are political issues surrounding that for the localities as well. I'd like to see the Streamline Agreement return to uniform destination sourcing, but for many members of the business community One Rate Per State would have been equivalent to them saying we want to force localities to impose new taxes and raise tax rates. And that was not saleable.

MR. PETERSON: One of the very first negative reports that we got when Kansas went to destination sourcing was a -- one of the tax engine companies sends me an e-mail saying, you know, I thought you guys were making things simpler and all of a sudden we have 750 new taxes just from Kansas alone because we went to destination sourcing.

I think one of the things -- clearly, if we had done everything the Direct Marketing Association wanted we would have a beautiful document sitting on a shelf because that's exactly what would have happened. It'd be sitting on a shelf. We took everything the Direct Marketing Association gave us and implemented absolutely every one of those things that we could actually implement. The politics of doing some of the things that are around those issues are just so extreme they get nowhere.

As I said in my presentation that -- or my comments -- that there were 25 things on that list that we decided we would take up and we should have left three or four of them on the table. Sourcing -- destination sourcing is one of the things we should have left on the table. To trade the complication that goes with destination sourcing -- the simplification that comes from destination sourcing for major multistate retailers for the complication that comes from destination sourcing that we would impose on small retailers is so unbelievably complicated and creates so much pain and hardship I'm surprised that any of the states have actually done this. And frankly, every state that has done it has regretted it.

MR. ISAACSON: Scott, the alternative is to have origin sourcing.

MR. PETERSON: No, the alternative is for you to hire -- get someone to hire you to go to Texas and create a lawsuit and declare - - if you get this concept of origin sourcing and destination sourcing in the same state declared unconstitutional, then we've got something we can sell. But until some court says that it's unconstitutional, the National Federation of Independent Businesses will eat our lunch. There is no way we can ever overcome the complexity that comes with destination.

Now, that's -- the irony of it is the best solution in the world is the most complicated solution in the world.

MR. ISAACSON: If you have origin sourcing, which by the way is the way the sales tax system is administrated in India, it's from the state to which the product is delivered. So the state where the shipment originates is the state that has the opportunity to tax. That's -- in fact, origin sourcing is what you have with cross-border shopping center buying. When you go from Maine or Massachusetts to New Hampshire and you go to the mall in Nashua, you don't pay destination sourcing. I'm from Maine and I don't pay a Maine sales tax.


MR. ISAACSON: What you pay when you go to that shopping center is nothing because it's an origin sourcing system we have.

MR. PETERSON: It's destination.

MR. ISAACSON: At the point of sale.

MR. PETERSON: The point of sale is destination.

MR. ISAACSON: Not at the point of use. So consider the point of sale to be wherever the order is accepted and originates and give that state the opportunity to tax.

MR. BERGIN: Hang on a second. Hang on a second, please.

For those of you who are listening to audiocast, that exchange was between George and Scott who I'm pretty sure has a job I would not want.

Okay. Michael.

MR. MAZEROV: Michael Mazerov. I mean, I think there's a better solution still to that issue, which is leave the sourcing out of the agreement and let Congress require that there be destination sourcing. And then, you know, then states can make a choice. There will be additional revenue at the state level that can be used to, you know, to mitigate the impact on the local governments that are adversely affected by switching from origin to destination sourcing. Or let those states choose not to have nexus authority over remote sellers.

But, I mean, I agree that, you know, in principle I certainly agree with destination sourcing. But, you know, it did prove an incredible impediment to getting more states to join the agreement. And this is sort of what I was talking about in terms of expectations were raised about levels of uniformity that prevented many states from coming into the agreement. And, you know, the effort, you know, would have been in some areas like, you know, like telecommunications, like vendor compensation, like sourcing rules. It would have worked out a lot better if those things that politically could not be done -- we're definitely not going to bring 45 states in -- were left out. And then let Congress -- you know, if Congress says if you want this authority, you know, you have to do those things.

MR. BERGIN: Marty.

MR. LOBEL: My name is Marty Lobel. I was part of the Quill case. I represented the MTC in that. And I will tell you, having read the decision more times than I care to remember, Stevens had this great thing about Congress could change all this. And I bet at that time it would be 10 years before anything happens and it's now 19. And nothing has happened. The only logical conclusion is those who are making it are delaying, with perfectly appropriate intellectual arguments. But if they really wanted to reach a conclusion, it doesn't take 19 years to do it.

Second is, where are all the small businesses who are getting eaten alive by the Internet sales? I mean, I use Politics and Prose and it's a wonderful, independent bookstore. And they're getting eaten alive by They cannot compete. They have to compete on other issues, and this is happening time and time again. So, you know, the only conclusion one can reach is that this is, you know, an interesting intellectual exercise designed to delay any implementation.

MR. ISAACSON: You know, I think the criticism of small businesses that are on the Internet, the Internet is an avenue which enables small businesses to sell to a national marketplace. I buy cheese from a small business located in Brooklyn because you can do it on the Internet now.

MR. BERGIN: Go ahead, please. Grab a mic.

MS. MCDOWELL: Leslie McDowell with the International Council of Shopping Centers. My question is for George.

You've talked about some of the concerns that DMA has with streamlined sales tax. My question would be, what are your feelings on Amazon law then? Because I think something that we see is that it looks like right now you're kind of being given your choice on Amazon or streamline sales tax. So how do you guys feel about Amazon tax? Do you feel like maybe given what you see as two evils, which one is the lesser?

MR. ISAACSON: You know, I think Amazon -- the Amazon law is a lose-lose proposition. What a lot of remote sellers have done -- have terminated their Web affiliate relationships. And so you have a situation where many of those Web affiliates are charitable organizations. So now you have churches and youth organizations and arts organizations that once had a source of revenue that don't because they've been terminated. In regard to companies that terminated those relationships the state doesn't get any more tax revenue. And you have a state like New York which tries to hold itself out as being a leader in new technology development, which is viewed as being hostile to electronic commerce. So it seems to me it's a losing proposition for everyone.

Then you have the "Me, too" states, like North Carolina, which says even though our legislature passed a law that went into effect - - I think it was on August 7th of 2009 -- we're going to reinforce it retroactively to 2003. And that's their notion of what the Amazon law -- the Amazon concept enables them to do. This is a very slippery slope with a lot of downside consequences for a lot of bodies.

MR. RODRIGUEZ: Jorge Rodriguez. My question is for George.

If the Tax Injunction Act were modified or repealed, would that change your views regarding the role that federal government or Congress should play with respect to these affiliate nexus laws?

MR. ISAACSON: You know, it would be a major change in view. The fact that you can't go into a Federal District Court now to challenge a state under PL 86-272 I think is absurd. I've had PL 86-272 litigations in state courts and you have judges who stare at you and say what is that statute and where do we find it in our state books. And it makes absolutely no sense.

So that if what you have is greater access to federal courts where you feel that your federal rights have been denied, be they statutory or constitutional, I think it would be a major advance in terms of being able to make progress on this issue.

MR. SHEPPARD: Doug Sheppard, State Tax Notes. I had a question for George. I guess I better be quick because we're at about 10 o'clock.

You said that the states have been going to Congress trying to ask for a simplified tax system. And that is correct for the past 10 years, and granted, before that. But in the modern incarnation, which is the streamlined sales tax issue, hasn't their hand been forced a little bit? Because in 1999 you had the ACEC people, like Jim Gilmore -- which the commission was, by the way, not staffed according to congressional prescriptions -- saying that they want to ban any kind of state taxes on the Internet. You had John Kasich -- who, of course, is now running for governor of Ohio -- and John Boehner introducing a bill saying they want to ban even existing taxes that were collectible, intrastate nexus sales, from any kind of sales taxation. So wasn't states' hands kind of forced on this, as well?

MR. ISAACSON: I don't think so. The fact that states are opposed to certain kinds of federal legislation, such as business activity tax legislation the states have been opposed to, and so far they've been successful in resisting it. So I don't think in order to resist what they consider to be bad laws they need to come in with bad laws of their own.

MR. BERGIN: Steve?

MR. KRANZ: George, you said that Amazon laws are lose-lose. Don't you think there's one group out there that's going to win if more states pass these laws? And that's the law firms like the one you work at and the one that I work at that make a living depending, you know, defending taxpayers who have been assessed unconstitutionally? And that will be the winners. This will lead to litigation on a state-by-state basis with potentially one State Supreme Court saying it's constitutional and another one saying it's not. And we have the Quill decision which says we've looked at this twice; we're done. It's up to the states and Congress to figure it out.

MR. ISAACSON: It's interesting. The Bellas Hess case was decided on a 6-3 decision. When Quill was argued in 1992, the argument was, it's a new age now, interstate commerce makes the commerce clause no longer relevant, and the Quill decision was an 8-1 decision. And so I think the notion of talking about the death knell of the physical presence standard may be premature.

MR. PETERSON: Thank you. According to Council on State Taxation, 45 percent of all taxes paid in this country -- state taxes -- are paid by businesses. I'm not sure I agree with Mr. Platner that Dr. Fox and Dr. Bruce's numbers were wrong for New York. New York is entitled to have their own opinion. We have the same debate going on with the state of Illinois. They think that their estimate is different than Dr. Fox and Dr. Bruce's. And what we've learned is that the state of Illinois is doing their estimates based upon the tax structure of existing Illinois today. And if you want to have a real tax structure you've got to change the tax structure. And if they change the tax structure, Drs. Fox and Bruce's numbers are much more accurate.

The concept of physical presence is clearly different today than it was in 1967. And it has to be different than it was in 1992. We could disagree with what the Supreme Court said in 1992, but I thought they said, well, there's an entire industry built up over this policy that we created out of whole cloth and that we just can't throw them under the bus. And eight of those justices said, yeah, we're not going to throw these people under the bus. You know, the decision that we made in '67 has to stand until somebody else does something different.

I don't think it's fair to say that a 6-3 vote in '67 and an 8-1 vote in '92 are the same vote on the same issue. The 8-1 vote was to keep it the way it was. Not that it was right; just to keep it the way it was. Because they said an entire industry had developed under this concept and they weren't going to throw them under the bus. So I disagree with you that the 8-1 is a determination of their desire to maintain the interstate commerce clause the way that they interpreted it in 1967.

MR. BERGIN: Over in the corner.


MR. BERGIN: State your name, please.

MR. SHAFROTH: Frank Shafroth. I write for Tax Analysts.

Two thousand seven looks like it will be the highest year for the sale of gasoline in the United States in its history. So it will continue to decline. People are going to buy more gas-efficient cars. The federal system for paying for surface transportation and every state uses the gasoline tax. It's a fundamentally broken system.

So, the result is we haven't had a new federal surface transportation program now for 15 months. The states -- Virginia -- I think we're going to return to the horse and buggy system of South Dakota.

Now, I'm raising this --

MR. BERGIN: You can't get a break here.

MR. SHAFROTH: -- because I asked my students last week -- these are all graduate students, two different classes -- how many had ever purchased a vinyl record. They gave me the look with the eyes crossed. They didn't know what a vinyl record was.

MR. PETERSON: They didn't know what vinyl is?

MR. SHAFROTH: Well, some of them were wearing it, but not in a way that you can put on a turntable.

I asked how many had purchased a CD.

Nobody. I look at our bifurcated economy where manufacturing is disappearing. But I look at the number of people that have iPhones and the number of apps they have on them and what they're buying. I look at the Ministry of Culture in France, which is proposing a 20 percent tax on downloads from iPhones. It's the nature of what a thing is, which is currently before the Supreme Court is changing.

So it gets to George's issue. When we talk about physical presence, the concept of physical presence is changing. Today, state sales taxes are approximately 33 percent of all state revenues. Medicaid is approximately 33 percent of all state expenditures. But in a recession, Medicaid is going up, sales tax is -- even if you had physical items that you could capture -- is going down. But because physical items are disappearing, the system isn't working anymore.

So a little bit, I guess, my question is we're talking about something that's dying so we really need to be rethinking a whole new system. Obviously, the gas tax system. I have made no progress in the Congress explaining to them you're working on a broken tax concept. But I wonder here if 33 percent of state revenues are to come from the sales tax in the future, it can't be on physical items any longer.

MR. HENCHMAN: Jow Henchman from the Tax Foundation. I'd like to predictably ask a tough question for Mr. Mazerov.

We submitted a brief in the Amazon case so we, I mean, you can look at it on our website where we go into the Scripto-Tyler Pipe analysis where, you know, our view, of course is that what's going on in Amazon goes far beyond Scripto-Tyler Pipe, which themselves are the furthest extension of nexus as the Court called it. But I have -- so that's sort of the legal thing which we haven't really touched on too much here. But there's that argument going on, of course.

But as far as the policy goes, I was wondering what the panelists and Mr. Mazerov especially think about implying or supposing that this is a way to solve short-term state budget problems. I think George mentioned in his opening remarks that these bills are introduced because states think that it's a way to solve their short-term budget problem. But I think there's been sort of a consensus from the panelists that, if anything, this is just going to be lots of litigation. And if they ever see money it's not going to be seen recently.

I'm sure Mr. Mazerov doesn't have nice things to say about Amazon and the related companies pulling out of Rhode Island and North Carolina, but, I mean, that's what's going to happen. I think it's good -- important that we be truthful to state legislatures and say Amazon taxes are not the way to solve this year's budget problem. But I'm curious to hear what the panelists have to say on that.

MR. MAZEROV: Well, of course, I mean, I don't -- Michael Mazerov -- I don't, you know, I would never say that they're a solution to state budget problems. The question is can they potentially raise any additional revenue toward state budget problems. And the answer may very well be in the short term, no, they won't. I mean, I think -- I mean, I think of New York, you know, if New York wins the case at the Appeals Court level I think additional states are likely to adopt it. And I think we would be emboldened to adopt these laws. And I think if a sufficiently large number of states adopt the laws and hang together that, you know, I think there's a reasonable prospect that the companies that are basically choosing to play hardball and basically treat their, you know, in-state affiliates as pawns in this conflict, you know, we'll begin to start collecting. I mean, this is a major marketing venue for many, many of these companies.

I mean, over 200 of the 250 largest Internet retailers have affiliate programs. You know, my paper cites quotation from Amazon saying that, you know, they pay hundreds of millions of dollars a year in affiliate commissions. And their 10K said that their worldwide marketing expenses were about half a billion dollars. So these programs are a major form of marketing. If the states hung together and a lot of states adopted this -- these laws -- I think there is potential for them to raise additional revenue.

But, you know, and if they don't, I mean, if, you know, if companies continue to pull out their affiliate programs, you know, the affiliates themselves have the option to join affiliate programs of other companies that are selling the exact same items that are collecting tax in the states. If they're doing less affiliate marketing, you know, some of those sales, they're going to lose some market share. That market share is going to shift back to companies that are collecting tax or perhaps even to local businesses that are collecting tax. So, you know, this is, you know, as I said this is fundamentally about moving, you know, trying to solve this problem and chip away at this problem.

And, you know, clearly, you know, a small state like Rhode Island can, you know, this was a godsend to Amazon that Rhode Island enacted this. But if a number of other large states had, you know, I think there's a reasonable prospect that in the long run these companies will start collecting.

MR. BERGIN: Steve.

MR. KRANZ: Doesn't it just result in forcing the online world to change the type of marketing they do? You can, you know, you can still engage in marketing in a state without creating nexus. You just can't do it using this affiliate program. See, all you're doing is passing them on. They terminate the affiliate program. They engage in a different type of marketing to continue making sales without any nexus implications.

MR. MAZEROV: Well, they could, but, I mean, this is an incredibly cost-effective means of marketing because they don't have to -- they don't pay anything until it actually results in a sale. And as I said, I mean, this is -- for Amazon itself, the evidence that's on the public record suggests that these commissions, you know, are a huge proportion of their overall marketing budget. So, yeah, could they shift to another form of marketing? Potentially they could, but, I mean, it's not a coincidence that, you know, the 200 of the 250 largest companies have affiliate programs. It's an extremely cost-effective form of marketing.

MR. BERGIN: Over here.

MR. NICELY: I don't have a microphone.

MR. BERGIN: It's right there.

MR. NICELY: I do now. Fred Nicely with the Council on State Taxation. And my question is to Mr. Mazerov kind of following up on you pointing out that, well, if all the states adopt this, you know, potentially it's going to be something that's really successful if all the states go out there and do the presumption of nexus litigation -- legislation.

And you've seen in North Carolina, you've seen the results in Rhode Island. What do these types of sellers do? They cancel their programs. So, can't you make a good argument that these programs are actually counterproductive in that you're not getting the sales tax dollars in. And lo and behold, your residents in that state are no longer going to get the income from the commissions they're receiving off these programs.

Then the second one is, you know, we talked a little bit about commission before and whether or not Scripto-Tyler Pipe appies and is there an agency relationship. How are these programs any different than, you know, where you have a phone number that is used in a certain advertising market and the seller is paying a commission to the advertiser in that market based off the number of calls that they're getting in? How is that any different than what's happening when you click on an Internet site and you're being paid a commission based off of the amount of sale that occurs when the purchaser makes that click going to whoever the seller's site is?

MR. MAZEROV: Well, all right. I mean, I think I pretty much -- I mean, I tried to answer -- anticipate an answer to the first question, which is, you know, I don't think -- it may be a wash. I doubt that it's counterproductive. I mean, I think that with less marketing in the state there will be, you know, with less active marketing within the state there will be fewer sales. And those sales may very well shift back to companies, you know, that are collecting tax in the state. So that was my response to that.

In terms of the -- in terms of the second question, how is it different? Well, I would say -- I would say it is -- I'm not saying necessarily that it is different. I'm saying that basically when you have -- and this goes back to Steve's initial comment about my comment at NCSL last week about interactive television. I mean, my view is that if an in-state -- if there is an in-state entity and it has set up a technological system that allows -- that allows another -- an out-of-state vendor to make sales into a state and it is remunerated for setting up that tax system on the basis of a commission based on the actual amount of sales that occurs, that to me that is the technological equivalent of the Scripto salesperson. And it ought to be. It ought to be nexus-creating. I mean, absolutely.

I am not saying that a mere advertising relationship creates nexus and I am not saying that the magazine, you know, that the pullout card in the magazine does, but I'm saying that we have to make the logical extension in the development of a new technology. And if in-state solicitation, in-state passing out a catalogue door-to-door compensated on the basis of a commission, you know, is nexus-creating under Scripto? Yeah, the technological equivalent of that ought to be as well.

MR. KRANZ: At one point in time the printing press and the newspaper were new technologies. So it seems to me -- and that didn't create nexus. It seems to me that you really are focusing on the fact that this is a faster way of communicating and somehow thus justifies imposition of nexus.

MR. MAZEROV: No, I'm focusing on the fact that it is an in-state way -- an in-state way of communicating. It is physical presence within the state of a third party that is facilitating sales by an out-of-state remote seller and is being compensated on the basis of a sales commission, which is exactly what a -- you know, it is the technological equivalent of a door-to-door salesperson. That's what I'm saying.

MR. KRANZ: If I'm an out-of-state company and I buy an advertisement in Hard Copy Newspaper and on there is a promotion code or a specific number so that the vendor knows this ad came from the newspaper, is that somehow nexus-creating in your mind then, too?

MR. MAZEROV: If the newspaper were compensated on the basis of a commission based on the amount of purchasing that those codes generated, yes, I would say that it is. Just, you know, just as I -- I mean, just as I would say someone -- salespeople on the street corner passing out flyers for a remote seller with a code identifying that person as the person handing out the flyer. And the person handing out the flyer is compensated on the basis of purchases that resulted from that activity. Yeah, I would say that that ought to be nexus-creating.

Now, again, whether the courts will -- I think it ought to be and I think it's a logical extension of Scripto. Now, whether the courts will rule that way or not, you know, time will tell. But, yeah, I mean, I think that's the difference. If it's, you know, if it's pay-per-click, you know, nexus is about -- obviously, this is all about drawing lines. But I am comfortable in saying when it's compensation based on purchasing and the activity -- the solicitation activity -- the activity is conducted within the state that, yeah, it ought to be nexus-creating.

MR. NICELY: Mr. Mazerov, I think if you look at Tyler Pipe though and Scripto, it doesn't talk anything about commissions being a basis for that being a situation -- why there should be nexus in that situation. Wasn't that -- those two cases really about the fact that you have salespersons in the state. And salespersons can do a lot more than just having a link where you can click on an Internet site or having an advertisement in the newspaper or on the air where you can't answer questions. These are live salespersons that are actually in the state that are able to answer questions and foster relationships with the purchasers. Isn't that quite different than what you have going on here with these -- just you click on a link. And then because you decide that you're not going to pay just because it's on a per-click basis -- you decide that you're going to pay on a commission basis, how is that any different than the normal advertising out there that the states have acknowledged that they can't use to answer that they have nexus over the seller in that situation?

MR. MAZEROV: Well, I think it's different because, you know, you know, I mean, these, you know, these are in-state -- these people may not be going face-to-face or door-to-door, but, you know, you have membership organizations that are, you know, that are, you know, that are affiliates and that are soliciting their own members. I mean, you know, they're sending, you know, their website -- right on the website it says, you know, buy from Amazon and we get a commission. I mean, you know, this is -- you know, this is active -- this is active exploitation of an in-state market. And, you know, in many cases it is arguably more effective than someone just going passing out catalogues door-to-door.

So I agree. I mean, it is not the facts. It is not the facts in Scripto. And the courts may find that it isn't. But, you know, I'm comfortable, you know, from a policy standpoint, you know, I think it ought to be. And I think it's a logical extension. And when you have Tyler Pipe saying that the standard isn't just solicitation, that it's engaging in activity significantly associated with an out-of-state company creating and maintaining a market in a state, you know, it isn't necessarily just limited to solicitation.

MR. BERGIN: Great discussion. I'll try to get everybody in order here to be fair. So, Scott?

MR. PETERSON: Hi, Scott Peterson. What concerns my board with this discussion is that we continue down the same path of trying to decide who's going to collect and who's not going to collect based upon what they're doing in my state. We should be concentrating on the fact that they're making sales in my state. And it's making the sales in my state that's an issue and that needs to be the driver on whether or not you're collecting sales tax or not. I do think it's perhaps an unrealistic side to take in this debate that the courts don't evolve and that laws doesn't evolve. You know, Tyler Pipe and Scripto were an evolution of something. There was a case that came before them that the two of those cases changed. And Fred Nicely and I argue really all the time. But it's professional; it's not personal.

We don't really know whether or not that local affiliate in that state is doing nothing, but just putting a link on their website. We don't know if there aren't flyers on that person's desk. We don't know if they aren't telling their members, "Go to Amazon and buy because I'm going to get a 10 percent commission and that's going to reduce the dues that you have to pay to be on membership." I mean, those things -- if you started to do those things you're starting to walk and talk like a salesperson. And I would be concerned. And my board is concerned because if this stuff -- if New York is successful, I believe -- my board believes that all the efforts that we've done in all these years to make the system better just go away. And that every one of you retailers out there, international shopping centers, council and state taxations -- everybody that's out there representing somebody who is forced to collect sales tax, your life just got complicated because my members no longer have to care how simple and uniform they make their laws.

MR. BERGIN: Over here. Do we have a mic?

MS. COOLEY: Bethanne Cooley, Council on State Taxation.

I don't mean this as an attack on you at all, Michael. I know you probably feel like you're getting beat up.

MR. MAZEROV: I'm used to it.

MS. COOLEY: This is really more of a comment. As someone who monitors all the legislation in all 50 states and we see this Amazon law coming up everywhere, my biggest concern is that we're beginning to see the dollar threshold being lowered in a lot of these proposals. For example, in Connecticut last year we saw 5,000; Tennessee at 3,000, 2,000. And Mississippi this year, while it's dead, there was no dollar threshold. So what does that mean? That you simply have a link and you click on it; therefore, you have nexus? So from a cost perspective, aside from this being unconstitutional, it's a really slippery slope. And I just worry that other states may be jumping on this bandwagon. And if there's no dollar threshold, what does that mean?

MR. BERGIN: Michael?

MR. MAZEROV: Well, you know, as I said, I mean, you know, you know, the dollar, I mean, the dollar threshold, you know, doesn't greatly, you know, concern me because, I mean, even New York's dollar threshold, you know, is pretty trivial. I mean, you know, you know, this is, I mean, I absolutely support a de minimis -- a de minimis level of sales threshold in federal legislation. But, you know, in practical terms, you know, most of the companies that -- I mean, most of the companies that affiliate programs in most states are making sales far in excess of any threshold that's going to be in any state's bill. So I don't think whatever the dollar threshold is in the legislation is going to make much difference as to who is going to comply with it and who isn't, and who is going to be subject to it and who isn't.

MR. BERGIN: Okay. Over here.

MR. FORMAN: Jon Forman, University of Oklahoma. I wonder if ultimately uniform state sales taxation may be replaced with something like a national sales tax where the money will be redistributed back out to the states and that ultimately that may be the only solution to the problems that I'm hearing today. I wonder if people have comments on that.

MR. BERGIN: Scott?

MR. PETERSON: This is a question that I get asked too often.

My first comment always is, well, the IRS couldn't collect those taxes. They'd need the states to do it for them. And that leads me to say (inaudible) which means that the states become more powerful in this federal organization that we have.

I wish George had anointed a replacement because he made this comment that we're the only industrialized country in the world that has 7,500 taxing jurisdictions. And we're also the only industrialized country in the world where the Constitution says that each of them are little sovereign countries and they have to function solely with -- inside their own borders. This is not a problem in Europe and this is not a problem in Canada. If you have a physical presence -- if you're making sales in Canada, you're collecting the taxes. If you're making sales in Europe, you're collecting the taxes.

Amazon -- and I love the folks at Amazon -- they collect their taxes in Europe. This isn't an issue there. So I don't think this is a function of whether or not the Federal government would ever adopt all these taxes because unfortunately, I agree with Michael that the politics of taxes in this city is the politics of hatred. And how we have allowed an entire generation of people to grow up thinking they don't have to pay taxes if they buy on the Internet just makes me very angry about how we have -- where the next generation of people in this country are going to go.

But, no, we don't believe this legal federal tax. They couldn't do it. They'd have to do it -- now, could there be a federal pickup tax on the state sales tax? That is a much more realistic -- a much more realistic option. I can see that happening. I can see Congress saying, well, we'll just impose a one percent sales tax on whatever you tax. And you just send it to us. People should be more concerned about that as an option instead of the reverse because that they could do.

MR. BERGIN: Marty, do you want in here?


MR. BERGIN: Grab the mic there.

MR. SULLIVAN: Marty Sullivan. Marty Sullivan, Tax Analysts.

I'm not -- I'm an economist and I don't really follow all this nexus, Quill, Scripto-Taylor Pipe. You know, I really don't care about nexus. I really don't even care about the Constitution. I care -- I mean, really, I'm being facetious, but I'm really not. I'm looking for the economic guiding principle here. And every time Michael makes a suggestion or anybody makes a suggestion I hear about nexus and sovereignty. You know, frankly, I don't give a -- about any of that stuff.

I'm trying to figure out what the right answer is. And if there isn't nexus because I don't have two mouse clicks or I don't have traveling salesmen, I mean, what is the right answer then? If you don't -- to me the answer -- I'm just asking. Isn't the right answer neutrality? That everybody is taxed once and they're not taxed twice? Okay, so if it isn't nexus or whatever you want to have to be the dividing line between one state's taxation and the other, what is the solution?

MR. KRANZ: Simplification.

MR. SULLIVAN: What does that mean?

MR. KRANZ: Well -- SPEAKER: (inaudible) tax his clients.

MR. KRANZ: No. When I got involved in this issue and was working on behalf of some companies that wanted simplification, somebody sent me a book of the tax rates. And it was about four inches thick.

MR. SULLIVAN: Well, assume all the tax rates are the same. Now what do we do?

MR. KRANZ: That sounds pretty simple.

MR. SULLIVAN: Okay, well, then how do we divide the revenue between the states?

MR. KRANZ: I think you should do it on a destination basis where the sales are made.

MR. SULLIVAN: Then we're done. Then Amazon should be taxed, just like you were saying they do in Canada. Everybody should be taxed on the sales. And Amazon should comply with that. Right? Is that right? Shouldn't Amazon -- shouldn't Amazon collect taxes on all of its sales for the states based on that principle?

MR. KRANZ: Right. But they don't have to under --

MR. SULLIVAN: No, no, no. I'm asking in principle. Isn't that what Amazon should be doing? Collecting sales tax on all of its sales in the jurisdictions where the sales are made?

MR. KRANZ: Well, I think -- I mean, as I said at the beginning, you know, three of the four of us absolutely, you know, agree with that. We agree that -- we agree from a policy standpoint that taxes should be collected on a destination basis.

MR. SULLIVAN: So now that we have established the right answer, the thing -- the only thing I see in the way is politics and so-called sovereignty.

MR. KRANZ: Well, it's politics. Politics and the U.S. Constitution.

MR. BERGIN: Aren't they always in the way?

MR. SULLIVAN: But the right answer from an economic point of view -- from a principle point of view -- is that Amazon should pay - - should collect tax from all of its customers in all of the locations where those customers' state governments have taxes. That's the right answer.

MR. DURBIN: And another -- oh, I'm sorry.

MR. BERGIN: We go over here.

SPEAKER: Regardless of nexus.

MR. OSTEN: Neal Osten, National Conference of State Legislatures.

This discussion has been pretty interesting this morning, but for us in the states trying to do something that becomes very misleading. And one of the problems that we've had and one of the reasons why we've taken action in this area is that since last fall there have been a number of articles in newspapers and not State Tax Notes, because you guys understand it, but in a lot of the national press, from Parade Magazine down, who are calling it affiliate nexus streamlined sales tax. And I'm not accusing Michael of going out there and spreading misleading information about this, but somebody has. And I get calls every day from state legislators saying we're going to deal with streamlining. And I look at what they're, doing and its affiliate nexus.

So NCSL has taken -- we -- our executive committee has approved -- we're doing a letter to all legislative leaders, tax chairs around the country, basically making clear that there are two different things. But affiliate nexus is at best -- is a gimmick that's not going to get them the kind of money they're looking at. And they should seriously -- because it's a small niche that they're going at. Some of our members are concerned that, you know, this effort on affiliate nexus is nothing more than sort of tax malpractice. That you're really telling them this is going to solve your problems, but it doesn't. Because at the end of the day they're still going to have to come back and do the simplifications and the streamlined sales tax. And affiliate nexus is really going to take them off the mark for a while.

MR. BERGIN: Okay. I'm going here and then back here. Christine.

MS. HARRIS: Christine Harris, Tax Analysts, Before I ask my question, though, I just invite everyone if you want more straight talk and commentary from Marty Sullivan and other of our bloggers at Tax Analysts, please visit I think Marty is priceless.

MR. BERGIN: And he solves problems, too.

MS. HARRIS: Yeah. Yeah. But my question goes back to someone made a comment about a link on the site, I think, versus a noisier sales presence where there's endorsements and saying we're getting a commission and that sort of thing. And I'm wondering if anyone on the panel might have a good analogy that might flush that out a little better. The only thing I can think of might be, I guess, the difference between those vending machines where they have the DVDs. I think they even have them down in Adams Morgan where you can go and it's just a box.

SPEAKER: (off mic) Red Box.

MS. HARRIS: Red Box. Yeah. I do Netflix, but, yeah, Red Box. And so it's just the box there. But you're, as a consumer, going there, getting your products, and someone is making money off of it versus a store that's a branch where there's a salesperson. That's the only analogy I can think, but, I mean, what would be -- is that what you all are saying when you're talking about just a link on a site that's quiet versus, you know, again, a noisier sales presence where there's like, endorsement and "buy here"?

MR. BERGIN: Steve.

MR. KRANZ: The box with the video games, the vending machine, is the same as having a store location. The distinction that I think we're trying to draw is between that type of physical presence, which everyone agrees creates nexus and the world of the Internet or other presence that's not physical in the state and sales being made. Netflix -- I'm not sure what their nexus footprint is, but let's say that they don't have Netflix in a state; they don't have a box; they don't have a store. They're just an Internet company delivering video content. They don't have nexus. They have no obligation to collect. That is the state of the constitutional law. And Scripto-Tyler Pipe are the furthest extension of the law and they say you have to have some human being in a state doing something for you. So Netflix wouldn't have a human being, but somebody who has a store or has a vending machine has physical presence.

MR. BERGIN: Over in the corner of the table. One, two. Yeah.

MR. DURBIN: Well, I'm going to have to back up my colleague, Marty Sullivan.

MR. BERGIN: State your name.

MR. DURBIN: It's Elliott Durbin, Multistate Tax Commission.

I hear all the lawyers arguing, you know. What Marty is saying is this is what it should be, not what it is. Yeah, if I buy something from Netflix, why is it different -- a different structure than buying it from the Red Box? And I do buy from the Red Box and there's a tax on it. Why -- you know, I said, well, oh, I'm going to go to Netflix. I don't have to pay the tax. I mean, I'm sorry, I do have to pay the tax, but I won't. And that's the difference. In Virginia where I live, yeah, there's a little thing on the income tax form that tells you, well, what did you buy from out of state firms that didn't collect tax and write it down. Right.

MR. BERGIN: I do that.

MR. DURBIN: I do it, too.

MR. PETERSON: Thank you, Elliott.

MR. DURBIN: I do half of it or something like that. Because who keeps records? I don't keep records. But what I'm saying, and I think Marty is right, it doesn't matter. Netflix -- well, the person who buys the Netflix where there's no tax selected should pay the tax. They're not going to and that's why the collection should be from the company.

And second, what about the administration? Do you think every state wants everybody --

MR. BERGIN: Okay. Promised over here.

MS. CHUMLEY: Loren Chumley with KPMG. A couple of comments earlier speakers made, Mr. Isaacson and Mr. Shafroth specifically, Mr. Isaacson urged the states to be very careful what they ask for when they go to the federal government because all sorts of things can happen when you go to Congress to seek legislation.

SPEAKER: That's for sure.

MS. CHUMLEY: Mr. Shafroth, you correctly pointed out, I think, that the question really before us is not the taxation of all tangible personal property, but how do you deal with a form of commerce that now equates services and intangibles with TPP. Certainly, my clients right now are looking at trying to create -- forget the borderless cash register that is dealing with the city of Birmingham or the state of Alabama, but rather how do you comply with a cash register that's making sales all over the world.

Once you start down this path I think you have to observe the federal government. You can't look at this in isolation of what is going on at the federal level at this point. Scott, you referred earlier to a possible pickup tax. It certainly is going to have needs for revenue of its own over the next few years. In the end I guess the question is what kind of sympathy will Congress have to empower the states to collect more and more consumption tax revenue when the federal government is going to be desperate for that type of revenue on its own? And I guess the question I would pose to the panelists is, do you think this is a new time for the business community, the federal, government, the state government, the local governments -- who I once had a state legislator compare to the seagulls in Finding Nemo who came out after the fish going "mine, mine, mine, mine." Is it time for those to all band together and rethink how we fund government overall?

MR. BERGIN: Scott?

MR. PETERSON: Sure. I'm kind of trapped because she's my wife so I need to respond in a very positive manner.

MR. KRANZ: Yes, dear. Yes, dear.

MR. BERGIN: You may be safer here.

MR. PETERSON: No. Yes. There's some question about that.

A couple of things. Going back on the Netflix versus Red Box. The way that Netflix runs their operation today, those two companies are exactly the same. This gets back to my comment earlier when I quoted Waller Hellerstein on physical -- the types of physical presence -- Netflix remains the owner of that video. And when it comes to your door, they have tangible personal property in your state. That necessitates their collection of your state sales tax. No difference in the videos that are sitting in that Red Box. So if you do Netflix you're going to pay the sales tax.

Now, when Netflix decides that the shipping costs are greater than the profit that they earn, they are going to figure out a way of distributing the thing electronically. And you get to Frank's world. And Steve and I --

SPEAKER: My kids' world.

MR. PETERSON: Your kids' world. Well, my world, unfortunately. For 10 years Steve and I have had a physics debate on whether or not something delivered electronically is physical or not. And I don't want to bore you --

MR. KRANZ: The short story is it's not.

MR. PETERSON: It is. It takes up space on that hard drive. You can see it; you can measure it; you can feel it if you're dumb enough to put your finger in the outlet.

MR. KRANZ: I have done that, too.

MR. PETERSON: Yes. That's a great story, by the way.

But to Loren's point, yesterday in the congressional hearing the representative from Iowa. And I can't think --


MR. PETERSON: King, from Iowa, was having -- he frankly was having the same debate with -- unfortunately, with himself. Yeah, but -- that we're having today, which is, does the taxes that we have created that we're using today match the economy of today? Are they the right way of getting the money? Everybody -- I think we all use - - I mean, we all walk on the sidewalk to get here. We all drove on a street to get here. There isn't going to be less need for sidewalks and streets and airlines -- not airlines, airports.

Do -- should -- would we be better off starting over? And clearly if you're going to start over, you would have states, local governments, and the federal government working together instead of this system we all created independently of one another and still admit that ours is better than yours and somebody else thinks theirs is better than mine.

How was that, dear? Is that okay?

MR. BERGIN: Risa. And then we'll go to Michael.

MS. WILLIAMS: Hi, Risa Williams, Tax Analysts. One thing that I've noticed following this over the years is it seems that technology is outrunning our discussions. It's like we keep discussing and discussing and we get close to a solution and then there's another -- a new problem because technology is just far more advanced than any of us are apparently in our discussions. So I'm concerned. And I just wanted someone to address that possibility. We could come up with a response on how to tax sales as they exist now and we could be right on the brink of something new.

Just, for example, Netflix. Using the example, as soon as we get used to the idea of going on the Internet, getting -- ordering our videos, it comes to our door, now it comes to our computer, eliminating the nexus issue of actually having the tangible property in the state. So, can anybody address that? Or is that a continuing thought? It is for me -- is that it's not the governments working together. Is technology going to continue to outrun us and we're just continually going to have this conversation for another 20 years?

MR. BERGIN: Michael.

MR. MAZEROV: Well, I mean, I guess, I don't think the problem really fundamentally is that the technology is outrunning our understanding of it or our capability to adjust tax policy in the way that, you know, we think and we know it ought to be adjusted. You know, the problem is a political problem. The problem is the attitude towards taxation and rationalization of tax policy in this country. It's an obsolete court decision and it's the fact that, you know, that Congress is unwilling to reverse an obsolete court decision because there are some people in Congress who don't care about good tax policy. They care about minimizing the ability of governments at all levels to raise revenues.

And, you know, that's basically what the stalemate is here. It's not, you know, the streamlined, you know, the streamlined system has rules, you know, wonderful, uniform rules for taxation of digital downloads. They thought about it carefully. They understand, you know, that this -- if you're going to tax the physical equivalent of downloads you ought to tax the digital downloads. I mean, the technologies have not outrun us. It's, you know, it's a fundamental political problem.

And I guess, you know, part of my frustration continues to be that I'm not enamored with Amazon rules. I mean, you know, I wish, you know, the streamlined -- the federal legislation were enacted. But, you know, political reality, I think, is what it is. And no one is -- no one here today is, you know, has, you know, taken head-on my characterization, you know, of what I think the political reality is. So we're left with these second-best solutions. And, you know, and I think the states, you know, the states have patiently been, you know, waiting for this issue to be addressed for 20 years. And if anything, politics have evolved in a direction, you know, at the national level that the federal legislation is less likely rather than more likely.

And so the question is, what are the states going to do, and what do they have the right to do given the political context in which they find themselves. And I think this is one thing they may have the capability to do. And there are other things that they can do to chip away at the problem. And I think that they ought to. But I think fundamentally it's much more a problem of politics than it is an issue of us not understanding the technology or not being able to keep up with it.

And along the same lines, I mean, in terms of what the evolution of tax policy should be, given the changes of the economy, I mean, if you want to maintain the ability to governments, you know, to preserve services, the kind of taxation that is least likely to be eroded by the changing economy is destination-based consumption taxation. I mean, people don't move across, you know, move across the street. I mean, no one would argue people move across the street to pay a lower consumption tax. But there are all kinds of people arguing that people move across the street to pay -- not to pay income taxes, not to pay corporate income taxes. And so, you know, we've got to make -- we've got to make the consumption tax work. And this is a key piece of that.

MR. BERGIN: David Brunori.

MR. BRUNORI: David Brunori. I'm sorry. Michael just said something I thought was interesting -- that we're dealing with an obsolete court case. I have to tell you, you know what the real problem in this debate is, is that some people in this room, including myself, think the idea of a physical presence in the Internet age in this world economy is ridiculous. Right? The idea that geographic presence matters one bit to anyone -- and it will ever deter interstate commerce or hinder interstate commerce, I am telling you is ridiculous.

I'll give you an example. My son ordered a baseball bat from Baseball Express. And I don't even know where Baseball Express is. It could be in Hong Kong for all I know. And they delivered that baseball bat -- way too expensive for a 14-year-old boy, by the way, but that's a different debate. They delivered that baseball bat; the company somehow knew who his baseball coach was. They knew that he played on Astroturf. They knew all kinds of information about him that we did not provide. I mean, I don't know where they got it from, but they knew tons of information about him. And they delivered that, pinpoint accuracy, along with coupons to local sports bars -- sporting goods stores and stuff.

SPEAKER: Sports bars.

MR. BRUNORI: Sports bars. Exactly.

MR. BERGIN: Sports bars.

MR. BRUNORI: That was for me.

MR. BERGIN: Those were for dad. I've got to get the name of that coupon.

MR. BRUNORI: It was coupons for all kinds of stuff in our neighborhood. The idea that they couldn't figure out how to collect a five percent Virginia sales tax is ridiculous. I mean, it really is ridiculous.

Now, I understand the Supreme Court said physical presence is the standard, so we have to have this discussion about whether two clicks is enough or one click or its advertising or a newspaper and everything else. And the premise is ridiculous. The premise of physical presence is -- I will tell you, to younger people, completely ridiculous. That somehow the state line of Virginia matters with respect to commerce.

And my question is -- that was my little speech, but my question is for Scott. Do you think there's any realistic, I mean, Michael says no. I can't remember what Steven said. Do you think -- I think he said yes, actually. But do you think there's a realistic chance that Congress will do something? I know Senator Enzi had, you know, there was a couple of bills introduced in the last couple of years. Is there any chance that this could happen? Because otherwise we're going to keep having this debate.

MR. LOBEL: And bill the time.

MR. BRUNORI: Well, these guys are going to be billing time and that's okay. But how do you -- I mean, is there any chance Congress will do something in your opinion?

MR. PETERSON: Yes, actually I do -- I don't -- I'm not as pessimistic as some are about the likelihood of this getting done. There's no chance this will ever be introduced and go through the committee process and come out and be a standalone piece of legislation. That's just not the way -- first of all, that's not the way Congress does business.

But second, it does. I mean, if this were a piece of standalone legislation that got introduced and went through the committee process and got to the President's desk, I'd be dumbfounded because it would attract the exact same kind of debate that Michael very well -- described very well. But, no, our discussions with members of Congress are we know states are hurting. We know that this is not the right way of enacting and administering a tax law. And that there needs to be a federal solution. And we get that from -- we get that from members of both political parties. And from the left and the right on both political parties. This isn't -- this is not a Republican and Democrat issue. This is an antitax versus responsible -- and I'll be blunt -- anti-tax versus responsible government issue. And the overwhelming majority of the people in this country are responsible people. The overwhelming majority of state legislators and members of Congress are responsible people regardless of their political party.

So, yes, we are very optimistic. For us it's a function of timing. 2009 would have been a lot better. 2010, our window for getting things done before things become strictly politics is very quickly evaporating. But, no, we get very positive responses from members of both political parties. Frankly, I'd be more concerned about those who think that the sales taxes are regressive and aren't going to do anything to help you have a regressive sales tax. That group has bothered me a lot more than the anti-tax people because the anti-tax people have to get in their car and drive somewhere. And eventually they've got to accept the fact that they're driving on something that's paid for by taxes.

MR. BERGIN: Joe, then Doug.

MR. HENCHMAN: Joe Henchman, Tax Foundation. I don't want some of the comments that were just made to go unchallenged. That's why I'm just going to throw something out here.

Mr. Mazerov, and to some extent, Mr. Peterson, characterized it as sort of an anti-tax versus responsible government, sort of angels versus demons argument of, you know, if everybody was just rational we would all do this. But, you know, we've got these crazy, anti-tax people out there that are stopping it. I mean, there's a -- I favor responsible taxation to pay for the services society needs, but in a way that doesn't impose unnecessary costs on society. And, you know, I think that's sort of the economic perspective on it and that's why I think these Amazon taxes are a bad idea and why I think a lot of sales taxation needs a lot of reform.

You know, I've been kind of mixed on the SSTP. I think you guys have done wonderful stuff on uniformity. I'm more sympathetic to sort of George's arguments on the simplicity side of things, but, I mean, who could really oppose uniformity. But that's the real problem here. It's not so much that people just don't want to pay taxes, it's that we have offered them a system that is so complicated and so terrible that it's easier to opt out of it and get away -- to just leave it and find something else. So the solution is uniformity and simplicity, which are the mantras of the SSTP.

But I don't want it to go unchallenged, this notion that it's just, you know, people who favor responsible government versus these people that don't want to pay for the services they use because I think that's a mischaracterization and I think it leads to -- I mean, it doesn't lead to honest debate between two sensible, intellectual points of view.


MR. SHEPPARD: Well, first briefly, Frank was talking about vinyl records. Actually, they're making a comeback. Pressing plants are backed up across the country right now and the new trend is to put a download card in them. In fact, they're adding people.

MS. SHAFROTH: (off mic) coupons.

MR. SHEPPARD: Yeah. And plus, to bring this back to this whole discussion, Amazon two years ago decided to let people sell used vinyl on their site. So, anyway.

So my question revolves around, is there -- and I'm not naïve enough to think that this would not be demagogued in a similar manner that has been described by Michael and Scott, but is there a way to encourage use tax compliance? That is to articulate that a tax is already due on these transactions. I mean, this question actually might be more for Neal Osten sitting over there and Joe Huddleston. I don't know.

MR. OSTEN: (off mic), well, to encourage use taxes, Michigan tried that a few years ago. They spent $10 million to instruct the public on collecting or paying the use tax on the line on their tax form. They got a million dollars. And so after 1 year of spending $10 million to get 1 million, they decided it wasn't worth it.

MR. BERGIN: Go ahead. Oh, I'm sorry. Go ahead.

MR. HUDDLESTON: Yeah. I'd just like to comment. Joe Huddleston, Multistate Tax Commission.

I think the use tax component is a very difficult one to achieve. We've seen a number of states, as Neal mentioned, try to add it to their income tax returns and see how people comply with that. They simply haven't. So it's very difficult historically. And that really goes back to why the whole structure has been there. The use tax is focused almost entirely upon business applications that make it auditable.

The other thing that I would like to say since -- as I listened to this discussion, a very good one, I kept being reminded what my dad always told me -- that I didn't have to say anything. But in this case I would like to remind everybody that we have been very cavalier in our attitude about tax sovereignty. And I think it's really important to understand that the fundamental concepts of how we tax ourselves, when we start talking about changing those things, when we start talking about eliminating states' real authorities, that there are tremendous ramifications to doing that and of shifting it to the federal level. And it's far outside the tax policy range and falls down heavily in public policy that will be very difficult to deal with. And those people who would cavalierly say that states have no tax sovereignty and, in fact, don't care about sovereignty, I would say to you be very careful because it doesn't stop at the tax door.

SPEAKER: I'm not worried.

MR. HUDDLESTON: I am. And it's a good thing somebody is.

MR. SULLIVAN: What is the issue besides power with states surrendering some of their tax sovereignty? What is the problem? It would create massive simplification and bring us more toward uniformity. I hear sovereignty like it's something sacred, but it's really just an artificial construct. It's a very deep legal construct, but it's not important.

MR. HUDDLESTON: I beg to differ with you.

MR. SULLIVAN: Tell me why.

MR. HUDDLESTON: It is stunningly important to the whole structure of who we are as a people.

MR. SULLIVAN: What does that mean? What does that mean?

MR. HUDDLESTON: And I will say this to you, that we sit here and we talk about a segment -- a small segment of the overall activity of business in this country. We're talking about a group of 20 percent or less of the business activity. Most of the business activity in this country takes place within a single jurisdiction. It is not multistate in nature. While the dollars are tremendous, the number of people engaged in business activity is far greater within a single jurisdiction. So don't let the problems of a 20 percent segment override and destroy the issues that support the 80.

MR. BERGIN: Boy, on a snowy day I'm sorry to say I'm going to have to end the discussion because it is 11 o'clock. I'm going to give Marty Lobel, Chairman of the Board of Tax Analysts, the last question or comment.

MR. LOBEL: The last dialogue sort of exemplified this whole situation. We had an economist, Marty Sullivan, who after 19 years of legal debate about the constitutionality and the practicality came up with a very simple solution that respects the states' sovereignty to experiment with their state taxation however they want. You have one tax, destination. The state sets the rate. The people who have the computer capability pay it. Very simple. That's the problem when economists get into the law.

MR. BERGIN: All right. Let me thank this terrific panel. George, in absentia. Thank you all for coming.

(Whereupon at 11:00 a.m., the PROCEEDINGS were adjourned.)