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COMMONWEALTH OF PENNSYLVANIA HOUSE OF REPRESENTATIVES HOUSE APPROPRIATIONS COMMITTEE

THE MAIN CAPITOL ROOM 14 0 HARRISBURG, PENNSYLVANIA

TUESDAY, FEBRUARY 1, 2 011 10:30 A.M.

PUBLIC HEARING ON STREAMLINED SALES TAX

BEFORE:

HONORABLE WILLIAM F. ADOLPH, JR., CHAI^IAN HONORABLE JOSEPH F. MARKOSEK HONORABLE JOHN C. BEAR HONORABLE MARTIN T. CAUSER HONORABLE JIM CHRISTIANA HONORABLE GORDON DENLINGER HONORABLE BRIAN L. ELLIS HONORABLE MAUREE GINGRICH HONORABLE GLEN R. GRELL HONORABLE DAVID R. MILLARD HONORABLE T. MARK MUSTIO HONORABLE SCOTT PERRY HONORABLE SCOTT A. PETRI HONORABLE TINA PICKETT 2

CONTINUED:

HONORABLE JEFFREY P. PYLE HONORABLE MARIO M. SCAVELLO HONORABLE CURTIS G. SONNEY HONORABLE H. SCOTT CONKLIN HONORABLE PAUL COSTA HONORABLE DEBERAH KULA HONORABLE TIM MAHONEY HONORABLE MICHAEL H. O'BRIEN HONORABLE CHERELLE L. PARKER HONORABLE JOHN P. SABATINA, JR. HONORABLE STEVE SAMUELSON HONORABLE RONALD G. WATERS

ALSO PRESENT:

HONORABLE KERRY A. BENNINGHOFF HONORABLE PHYLLIS MUNDY HONORABLE SCOTT W. BOYD HONORABLE MARK B. COHEN HONORABLE WILLIAM C. KORTZ, II HONORABLE MICHAEL P. McGEEHAN

EDWARD NOLAN, EXECUTIVE DIRECTOR (R) STACIA RITTER, ASSISTANT EXECUTIVE DIRECTOR (D)

BRENDA S. HAMILTON, RPR REPORTER - NOTARY PUBLIC 3

INDEX

NAME PAGE

OPENING REMARKS BY CHAIRMAN ADOLPH 4

OPENING REMARKS BY REP. MARKOSEK 5

CHRISTOPHER RANTS, MAIN STREET FAIRNESS 9 COALITION 4

P R O C E E D I N G S

CHAI^IAN ADOLPH: Good morning. I'd like to welcome everyone to the balmy Pennsylvania. First of all, on some -- some housekeeping, the reason why we're delayed, and I apologize for that, we had a gentleman coming up from the Philadelphia area from Global

Insights to do an economic report for us and about 9:15 we received an e-mail from him and he was unable to continue to travel, last on the Pennsylvania turnpike, and he was turning around.

So we were very, very fortunate to be able to get ahold of our first speaker, who was actually our afternoon speaker, Christopher Rants, who had the good sense of coming from Iowa yesterday, I guess. Okay. And we have only delayed this meeting for about 30 minutes.

For the members, we have also been able to juggle our afternoon speaker. Eileen McNulty, who works here in the city of Harrisburg. I think she was scheduled to be in tomorrow. So she was going to be coming in this afternoon at one o'clock.

So what I'd like to do before I introduce our speaker is have everyone introduce themselves. I believe that this informational meeting of the House

Appropriations is being televised live on PCN and 5 possibly some other local stations.

So I'll start off by saying my name is Bill

Adolph. I'm from the 165th Legislative District in

Delaware County and I'm the Republican chairman of the

Appropriations Committee.

Chairman Markosek.

REP. MARKOSEK: Thank you, Chairman Adolph, and great to be here.

This is really a great thrill for me personally. This is really my first official

Appropriations Committee meeting as the -- as the minority chair and I'm very glad to be here.

I just want to say how -- how wonderful it is to serve with Chairman Adolph, who I've known for many, many years, and I look forward to working with him and the committee as we move forward in a very difficult year.

Before we go on, I just want to -- I'd like to introduce Chairman Phyllis Mundy, who is our chairman of the Finance Committee, who we have invited to be here as well, and our members of the committee. Chairman

Adolph has asked if each member of the committee would approach the mike and just introduce themselves.

Start with Steve Samuelson.

REP. SAMUELSON: Steve Samuelson. 135th 6

District in the Lehigh Valley.

REP. SABATINA: John Sabatina, 174th

District, Philadelphia.

REP. CONKLIN: Scott Conklin, 77th

District, Centre County.

REP. PARKER: Cherelle Parker, 200th

District, Philadelphia.

REP. KULA: Deberah Kula, 52nd, Fayette and

Westmoreland Counties.

REP. O'BRIEN: Mike O'Brien, 175th

District, Philadelphia.

REP. MAHONEY: We need to dance here. Tim

Mahoney, 51st District, Fayette County.

REP. PAUL COSTA: Good morning, everyone.

I'm Paul Costa. I represent the eastern suburbs of

Allegheny County, and I'm looking forward to today.

REP. WATERS: Ron Waters, Philadelphia and

Delaware Counties.

REP. MARKOSEK: Thank you, Mr. Chairman.

CHAI^IAN ADOLPH: Okay. Thank you.

To my left is the executive director of the

House Appropriations Committee, Dr. Nolan, and to his left is Representative Kerry Benninghoff who is the

Republican chair of the Finance Committee, and I appreciate Representative Benninghoff's attendance at the 7 meeting.

REP. BENNINGHOFF: Thank you.

CHAI^IAN ADOLPH: Okay. And then if the individual members could introduce themselves.

REP. MILLARD: Dave Millard, Columbia

County, 109th District.

REP. GINGRICH: Good morning.

Representative Mauree Gingrich, 101st District, Lebanon

County.

REP. GRELL: Good morning. Representative

Glen Grell, 87th District, Cumberland County.

REP. SONNEY: Curt Sonney, 4th Legislative

District, Erie County.

REP. SCAVELLO: Good morning. Mario

Scavello, 176th District, Monroe County.

REP. PYLE: Good morning. Jeffrey Pyle,

60th Legislative District, Armstrong and Indiana

Counties.

REP. CAUSER: Good morning. Marty Causer,

67th District, McKean, Potter and Cameron Counties.

REP. ELLIS: Brian Ellis, 11th District,

Butler County.

REP. PERRY: Good morning. Scott Perry, the great 92nd, northern York and southern Cumberland.

REP. MUSTIO: Good morning. Mark Mustio, 8

Allegheny County.

REP. PICKETT: Tina Pickett, Bradford,

Sullivan, and Susquehanna Counties, 110th District.

REP. PETRI: Scott Petri, 178th District,

Bucks County, Pennsylvania.

REP. CHRISTIANA: Jim Christiana, Beaver

County, 15th District.

REP. MARKOSEK: Mr. Chairman, I'm sorry. I forgot to mention one of the most important people in the room, our staff, Ms. Stacia Ritter, who is the assistant executive director of the Appropriations Committee.

Thank you.

CHAIRMAN ADOLPH: Thank you, Chairman

Markosek.

These hearings are a new component that traditional department -- departmental hearings that the

Appropriations Committee normally has after the Governor gives his budget address.

However, I thought it was important that we were able to gather together and try to learn from some national experts. As we all know, we are facing some very difficult fiscal issues for the upcoming budget. So

I think you'll find that our speakers over the next several days are very knowledgeable and are going to bring the Appropriations hearings some ideas that we -- 9 we are to work with.

Our first speaker, Christopher Rants, is president and board member at the Legacy Foundation.

Christopher is the former Speaker of the House of the

Iowa House of Representatives and he has developed a system that is catching on nationwide and some of our members have had the privilege to listen to Christopher give his speech and inform them of -- of this sales -¬ sales tax system that is catching on nationwide.

So without further ado, I want to welcome to Pennsylvania Christopher Rants.

MR. RANTS: Thank you, Mr. Chairman, members of the committee. It is a pleasure to be with you here this morning, particularly because it's actually better weather in Pennsylvania than it is in Iowa. So it's definitely a good thing to be here.

And, Mr. Chairman, while I appreciate the gracious introduction, I cannot claim credit for the

Streamlined sales tax system. I've been involved with it for the last ten years, but as a member of the National

Council of State Legislatures Task Force on the -- on the streamlined sales tax.

However, I am here today representing the Main

Street Fairness Coalition, which is a coalition of retailers, technology companies, communication companies, 10 and the SST Governing Board, which is a public entity, all of which are looking to encourage legislatures across the country to pursue joining the Streamlined Sales Tax

Compact.

I'll take you back in time just a little bit.

In 1993 was my first year in the Iowa General Assembly.

I came in. I sat down at my desk. I was the first guy to come in and put a laptop down on his desk. And back in 1993 laptops weighed like 20 pounds. They're not like we think about laptops today.

And that was an important year, because in 1993 the United States Supreme Court in Quill versus the State of North Dakota took away the right and ability of states to collect sales and use tax from remote sellers.

So the Pennsylvania government lost the ability to collect a tax on a citizen or transaction that took place with someone in Iowa, and Iowa lost our ability to collect that tax on a transaction that took place with a seller in Pennsylvania.

What that means today is there are over $706 million in Pennsylvania taxes that are owed to the state of Pennsylvania that are currently going uncollected.

There's similar amounts all across the country. My state, being a much smaller state, it's a smaller amount. 11

But in times of great budget challenges, none of our states, either a small state like Iowa or a larger state like Pennsylvania, we can no longer afford to let taxes that are owed go uncollected. That's looking at it from a government standpoint.

Let me challenge you to look at it from a private sector standpoint. If I'm a Pennsylvania business that is competing with businesses out of state, as that Pennsylvania business, I'm collecting that sales tax.

And I believe you have a property tax here, and an income tax, worker's comp, unemployment comp, maybe a few other associated taxes or fees on the side that I as a Pennsylvania business am collecting and paying. But my out-of-state competition does none of that.

And assuming I'm a good corporate citizen, or a good member of the community in Pennsylvania, I'm also supporting the Little League team or the high school cheerleaders' car wash or something like that, and my out-of-state competitors are doing none of it.

What's happened, ladies and gentlemen, over the last 20 years is we've created -- we've allowed to create an uneven playing field whereby local main street merchants, local businesses are shouldering more and more of the tax burden, and their out-of-state competitors, 12 who only exist in cyberspace, aren't participating and that puts our main street merchants at a very competitive disadvantage.

People started to recognize that. Not too long after the Quill versus North Dakota decision came down, the National Governors Association, the National Council of State Legislatures started looking for a solution, and the solution to that was what has become known as the

Streamlined Sales Tax Project.

It is a compact of states that voluntarily come together to address the issues that were raised by the court in the Quill decision.

The Supreme Court told states that they could no longer collect that tax. They could no longer impose that tax on remote sellers. At the time it was just catalogs and traveling sales forces, but today it's the

Internet. They could no longer impose that tax because of the undue burden it placed on that remote seller.

If you're the Quill Corporation, or whoever you might happen to be, how were you supposed to be able to keep track of 7,500 taxing jurisdictions, the multitude of local option sales taxes, and the varying definitions on products and goods and services that happen to go from state to state?

They also said it was an issue of interstate 13 commerce, and thus the court gave states the prescription to solve this problem. Unify your definitions, come up with a streamlined way of collecting that sales tax remotely, and ask Congress to bless your multi-state compact.

Today 24 states have come together to do that.

That is the majority of states that have a sales tax -¬ not every state does, but the majority of states that have a sales tax have come together to do that.

Georgia was the last state to do that. They came on board as a full member last spring. It was one of the final acts of their General Assembly to consider.

The Streamlined Sales Tax Compact legislation is being introduced in about ten more states this year. Obviously it won't pass them all, but there are a number of states that are giving it very serious consideration.

And so you have 24 states that thus far have collected over $700 million in revenue.

The states retain -- it's important for me to emphasize this. The states themselves retain the decision-making authority on what sales tax rates they want to apply, on what goods or services they want to tax.

What happens under the compact is that states come together to join -- to join together on a series of 14 definitions that we in Iowa and the folks in North Dakota or Georgia have the same definition of durable medical equipment. We have the same definition of food, of clothing, bottled water. You name it.

I mean you think about your sales tax code and you define everything in your sales tax code. Some of it may be a little bit out-of-date. That's what we have found in most of the states. Times continue to evolve and we don't always go back and change our sales tax definitions.

But what has happened is the states are coming together to unify those definitions. Each state still retains its ability whether or not they want to tax clothing. We do that in Iowa. Not tax food. We don't tax food in Iowa.

Whether or not you choose to tax prescription drugs or durable medical equipment or farm machinery or cars, whatever the case might be, is still a decision that the individual state legislature has to make, that it retains that authority.

But if the state wants to grant sales tax holidays. A number of states do that. That's fine.

If a state wants to have local option sales taxes for your cities or your counties or school districts, again certainly permissible under the 15 agreement, but we ask that everyone unify those definitions.

The second thing that goes as part of the

Streamline Sales Tax Compact is providing that assistance to the retailer, the small retailer, the mom or pop operation, the person who is maybe starting their own business out of their garage and thinks that they're going to compete with eBay or Amazon or Wal-Mart by selling whatever widget it is they want to sell.

How does that small business person know what the sales tax rate is in Iowa? Or New York or New Jersey or some place like that?

The key component -- and this -- this addresses the other part of the court decision -- is what is -- I call it the black box software. It's really provided -¬ it's called the certified service provider. It's a piece of software that plugs into their little online shopping cart, or maybe they use Peachtree software or QuickBooks, something like that, so that piece of software that is provided to them by the state so that they know when they're conducting an online transaction just exactly how much sales tax they're supposed to collect for that state and remit it back.

See, ladies and gentlemen, that was the missing piece back in 1993. Today it's technologically possible 16 and easy to provide retailers that sort of database.

With a click on the mouse or click of a button on the

Internet, they can compute that sales tax and automatically remit it back to the state where it is due.

Much of what we have done in this part of the

Streamlined Sales Tax Compact is to make sure that those small retailers are able to compete, that it does not place an undue burden upon them.

Part of the problem that we have is they are at a distinct disadvantage against the Wal-Marts or

Targets -- not to single out any one company -- but those very large brick-and-mortar stores have that technology available today because they're in business in all 50 states.

But it's the small retailer, the person who's just getting started, that doesn't have that capability.

And that's where the Streamlined Sales Tax Compact comes in to give them the technology and that -- and that capability so that they can compete against the big folks and do it in a way that does not jeopardize the tax base of any of our states.

Mr. Chairman, I can -- I can keep going, but

I'm looking around the room and I'm guessing maybe I've raised a few questions. And I'd be happy to -- to stop 17 at this point in time and answer questions.

CHAI^IAN ADOLPH: Thank you, Mr. Rants.

Representative Pickett.

REP. PICKETT: Thank you, Mr. Chairman.

I'm thinking about that retailer that has to now comply with -- with this requirement that we might put in place.

Is there a minimum sales number for a -- a small retailer -- you mentioned mom and pops -- that wouldn't have to be involved?

And also those retailers, how often would they have to -- they have to file a sales tax report to every state they make sales to and how often would they have to do that?

MR. RANTS: Representative, thank you for asking the question, because I realized I neglected to talk about the second part of the Streamlined Sales Tax

Compact and that directly answers your question.

When I said that Quill gave us two directions to states, they said streamline, simplify, and remove that undue burden from the retailer, they also -¬ the Supreme Court also told us we had to go to Commerce to get a blessing for our Interstate Compact. We need federal enabling legislation.

Much of the debate that has taken place 18 about what the federal bill looks like involves what the minimum threshold should be. They call it the small seller exemption. Should it be a half million dollars in online sales? Should it be a million dollars in online sales?

And I'm here to tell you today that that answer has not been settled upon yet. It continues to be a moving target as it sits in Capitol Hill.

I can tell you that there will be some form of small seller exemption, but I will also tell you that many people feel that it's immaterial. That retailer, say they're working out of their garage, selling things on the Internet, used golf balls, for instance, perhaps, or picking them off the golf course and they're going to sell them online on the Internet. I'd be a customer of that company.

They're already having to submit a sales tax statement and collect tax if the neighbor stops by and purchases them because they're selling them to

Pennsylvanians.

If they plug into their website, build their little shopping cart, they go to GoDaddy.com, and put on their shopping cart, it takes that one click to add Fed Tax.

That's one of the certified service 19 providers. They're a national company that does tax work for retailers. Fed Tax has a one-click option to add to that shopping cart. And Fed Tax is the one that actually computes the sales tax, collects it, and remits it back.

And, yes, they would have to remit it back to every state that they sell to. If they sell into

Iowa, if they sell into Nebraska, if they sell into those states that are participating in the Streamlined Sales

Tax Agreement, that -- that has to be done.

But it's also an easy thing to do. It's no longer as complicated as trying to figure out as the retailer exactly what the tax rate is in Iowa or Nebraska or New Jersey. The certified service provider does that for them and is then able to generate the report and remit the tax back.

The whole idea being to make this as business friendly as possible. Because we realize that there are many, many, many small Internet retailers, and those are certainly the kind of companies that we want to see grow and prosper. We don't want to build a system that is onerous and -- and makes it impossible for them to compete.

As I mentioned before, the Streamlined

Sales Tax Governing Board that works on these definitions, it's got a representative from every state. 20

Every state has a vote as part of that process.

It also has what's called the Business

Advisory Council that's made up of the members of the business community. A lot of major tax -- tax consulting companies sit on that advisory council and they spend a lot of time trying to make sure that the governing board doesn't overreach and that businesses have a seat at that table and we don't end up with a monstrosity that actually hurts business, because we're really trying to put something in place that allows business to keep doing what they're doing without having to worry about the taxes.

CHAI^IAN ADOLPH: Representative Petri.

REP. PETRI: Thank you for appearing today, especially on short notice, of a fascinating -¬ fascinating topic.

Let me just start with a comment. You may or may not know, the Pennsylvania sales tax code is cumbersome and difficult. Probably like most states I would imagine.

MR. RANTS: They all are.

REP. PETRI: And, you know, anyone who has been through a sales tax audit as a business owner certainly knows how confusing and cumbersome it can be.

But I want to talk about the use tax 21 provision a minute. As I understand it -- maybe you can answer this, if -- if you know how it works in other states or in Pennsylvania -- when somebody makes a purchase over the Internet in Pennsylvania from -- from out of state, say they're doing some Christmas shopping and it's a big ticket item, they're supposed to file a use tax return and pay -- pay a fee.

So the number you quoted, $706 million, of estimated tax revenue in Pennsylvania, do we know, is that the actual number and, if so, how do we know of scoffers, if you will, people who, like many of us, probably should have filed a use tax return and didn't and paid the tax, or, you know, how do we get to that number as the projected potential tax revenue?

MR. RANTS: Excellent question,

Representative, and -- and thank you for pointing out the fact that we all owe a use tax when we make that purchase. I wouldn't dare ask for a show of hands as to how many people have actually submitted that use tax form this year after they did their Christmas shopping.

I -- you know, I'm sure you all did.

That's why I wouldn't ask for that show of hands. I -- I would be the negligent one in the room for failing to do that.

But that does illustrate the point. It is 22 an existing tax that is owed. It is an existing tax that is owed. The only question is how do we collect it?

To the number of $706 million that -¬ that's owed it comes from a University of Tennessee study done by Dr. Bruce -- Fox. The -- or excuse me.

Dr. Fox.

There are a number of studies that have been done on this issue. This study was completed in -¬ in 2009. It looks at the issue of nonelectronic business to consumer, nonelectronic business to business, electronic business to consumer, and electronic business to business.

It's not all lost revenue because of online transactions. Some -- some people still use catalogs.

There's still sales forces that are out there. So it's a combination of all of those things.

There -- and part of -- one of the things that I have provided this morning, I provided staff a series of CDs. I didn't want to scare anybody by walking in and handing out hundred page documents this morning.

But on -- the CDs that I provided the staff includes three different revenue studies. One of them by the University of Tennessee, one from the University of

Maryland that talks about how many -- just exactly how many Internet retail transactions there are out there. 23

It's not just Amazon or eBay. The tail of transactions really is much longer than you think.

And there's also a study from the -- from the Department of Revenue and Finance at Washington

State -- in Washington state. Many state governments will say -- I've had conversations with comptrollers around the country.

My most recent one was with the comptroller in the state of Texas who informed me that the studies have to be wrong, that they collect every piece or -- or every dime of use tax that's available to be collected out there, and I found that difficult to believe.

So the Streamlined Sales Tax Governing

Board took the list of 1,400 retailers that are participating as voluntary retailers in the Streamlined

Sales Tax Compact and are remitting taxes, collecting and remitting taxes back to the states that are participating.

We compared that list to the list of people in Texas that have a sales and use tax permit, and less than half of them have a sales and use tax permit in the state of Texas.

So -- so there are dollars out there that are being uncollected.

REP. PETRI: Mr. Chairman, if I'd be 24 allowed one follow-up question. We have a list that was provided from that study and it seems to suggest that states, from what they actually estimate from the study could be collected, receive somewhere between nine and one-tenth of one percent of the estimated amount.

Is that because there is no federal mandate and, therefore, this is all on a voluntary basis even if you implement it?

MR. RANTS: Correct. The -- the -- it is a two-step process. The first step is to come into compliance and conform and participate, and that's where you have 1,400 today. If I spoke to you a year ago it would have been 1,200 retailers that are voluntarily participating and collecting and remitting sales tax back to those states.

You don't get your mandatory collection authority to hit the big number until Congress blesses the agreement. And that's where it becomes,

Representative, a bit of a chicken and the egg question.

Which comes first?

If the states conform and join the compact and then ask Congress for action or do you simply wait and ask Congress for action before you join? Both things have to happen.

The problem that we discover is that it's 25 tough to get congressional delegations to take an interest in this subject when their own state isn't participating in the compact.

Perfect example again was Texas. When we went out last year and talked to Senator Kay Bailey

Hutchison about sponsoring and supporting the legislation, the response was why should I? My state isn't on board as a part of the compact yet.

Fair response from her. We -- we hear it both ways. I don't want to take action until Congress does. Congress is, why should we take action until the states do?

Meanwhile states continue to lose revenue.

Our budget holes get bigger, unfortunately.

You know, a lot of people have said this is the one thing Congress could do to help states that doesn't cost the national treasury a nickel. Just empower us to collect the revenue that is owed to us. A lot of our budget problems get solved.

But Congress keeps saying more states need to get on board before we take action.

REP. PETRI: Thank you very much,

Mr. Chairman.

CHAI^IAN ADOLPH: Chairman Benninghoff.

REP. BENNINGHOFF: Thank you, 26

Mr. Chairman.

Both Representative Markosek and Adolph, we appreciate the Finance Committee being a part of this important hearing.

I ask kind of a twofold question here. You talk about a number of 706 million. One of the things I have not heard is whether that is applied to services as well as commodities. The whole discussion seems to be around commodities, but the sales tax can apply to services.

And on a broader perspective, I'd be interested to hear about the Iowa experience a little bit more specifically. You know, from Finance, we're looking at things more from a policy, the implementation of the tax code, and the requirement to have a balanced budget.

If you could just kind of quickly go over

Iowa's experience, the history of it, what it cost to implement it, and, more importantly, what has been the overall financial benefit to Iowa, not to mention the political reality of trying to do these things?

MR. RANTS: Certainly. The number, as I recall -- and I'm not going to dig through the -- the

80-page report -- is applied to goods. Some states have sales taxes on services, but this looked primarily at those sort of business-to-business transactions of goods 27 and a business-to-consumer transaction of goods.

But, again, that's -- that's why I'm supplying you all with the -- the -- the actual copies of the study.

The Iowa experience maybe was a bit unique. Okay. I'll be honest. I was Speaker of the

House at the time that we did it, and it was part of a budget puzzle we were putting together. It was a piece.

It was the combine -- the total piece of what we were trying to do with the budget.

And so it became an amendment on the last appropriations bill, out of town as it were. I'm sure none of you have any experience with that.

But it was -- it was something that generated no partisan squabbling in my state. I -- I'm a

Republican. I put it on. My Democratic governor was supportive of it.

And to be honest, we had to make some -¬ some significant changes in going from origin to a destination state in terms of where it was sourced.

Today, if Iowa were to join, it's no longer an issue. You can be an origin state or you can be a destination state in terms of where you source that -¬ that transaction.

Maybe Georgia is a better experience to -- 28 to consider, because it's the most recent one to come on board and I spent a lot of time in Atlanta last year.

Again, the -- the politics were kept out of it. Both sides, for various reasons, recognized it as the right thing to do.

For some folks it was about the fairness to their retail merchants. The -- the Georgia General

Assembly at the time was looking at tax increases. Of course, they didn't say they were tax increase. Right?

They were fee increases. They were hospital beds to try to drive down more Medicaid dollars. They were shoving things off to local governments.

And -- and they decided that this was -- of all the bad decisions they were making, difficult decisions they were making as part of the budget -- this was the least difficult, to collect the tax that was already owed.

The Georgia Department of Revenue and

Finance initially said it was going to be too costly.

It's too expensive. We're going to have to change all our computer software.

Once the legislation passed, most of those objections went away. They didn't have a lot of problems making those changes.

To be honest, one of the things that you 29 realize when you become a Streamlined Sales Tax state is you don't have to spend as much time or as many people on audits. Part of the Streamlined Sales Tax Compact is an immunity provision. That's why people voluntarily join.

Maybe I got a nexus sender state. Maybe I don't. I can get right with you and -- and -- by participating and start remitting today the sales tax that I should be collecting going forward and I don't have to worry about the department of revenue and finance auditors coming in and looking through my books year after year after year looking for a mistake five years ago.

So you find a lot of people get right and -- and get on board for that reason. Saves the state the headache of sending auditors out looking for back taxes.

To be honest, I haven't heard of a state that's ever backed up on it.

Most states, once they implement it, the biggest, the most difficult thing for many states to do is to make the decision about whether or not they have partial exemptions on a product or a good or a service.

I'll give you an example. In Connecticut, where I was just at yesterday, Connecticut has a partial sales tax on data processing. They have a five percent

-- excuse me. They have a six percent sales taxes on 30 goods and services in Connecticut, and they phased out -¬ they were trying to phrase out the sales tax on data processing. And then for budgetary reasons they stopped the phase-out at one percent. So they -- every — they have six percent on everything except for data processing, which is one.

As part of the Streamlined Sales Tax

Agreement you have to be all in or all out, with one exception, and that's on luxury clothing. But you have to be all in or all out.

So Connecticut would have to make a decision. They're either going to apply a six percent sales tax to that data processing or they're going to completely do away with that last one percent.

And it's always a value judgment when you do that and you have to decide, is it a net overall win or a net loss in comparison with everything else?

If they fully get rid of it, they'll lose a little bit of revenue but they'll gain revenue in a net way because of the rest of the revenue that comes in off of everything else.

That is probably the most difficult decision states have to make.

It's my understanding that most of

Pennsylvania's definitions are not too terribly different 31 than what we already have in our model language. It would be very interesting to get a bill drafted to see just exactly how many of those kinds of decisions you all would have to make to come into compliance.

I have a hunch that there won't be too many like that.

REP. BENNINGHOFF: Does -- does Iowa require a balanced budget?

MR. RANTS: Constitutionally, we are required to have a balanced budget every year.

REP. BENNINGHOFF: All right. Just a clarification and then I'll move on to other members.

And, again, I'm kind of interested -- if you aren't able to answer today, you can provide information as far as the cost to implement this versus net gains by your state in implementing it.

MR. RANTS: Our net gains -- our net gain has been $40 million. I will get back to you,

Representative, with additional information.

Because that is a question that comes up routinely. Departments aren't always -- revenue and finance departments aren't always real ready to tell us just exactly what it cost them or how much money perhaps they actually ended up saving.

But that's a legitimate question to ask, 32 and I will have an answer for you by the end of the week.

REP. BENNINGHOFF: I thank you. Thank you, both chairmen, for allowing us to participate.

CHAI^IAN ADOLPH: Thank you.

Chairman Mundy.

REP. MUNDY: Thank you, Mr. Chairman. I do appreciate being allowed to participate in this

Appropriations Committee hearing.

The 706 million annual amount that you are quoting, that is Pennsylvania's?

MR. RANTS: That's Pennsylvania.

REP. MUNDY: In one year?

MR. RANTS: One year.

REP. MUNDY: Annual?

MR. RANTS: That's -- that's the projection for this year.

REP. MUNDY: Well, this is really fascinating, because I've always felt that -- that our inability to collect this sales tax from Internet users is so unfair to our bricks-and-mortar businesses in our communities, that they should have to collect it, and yet people can order online and it goes uncollected. So this is really interesting to me.

Why haven't many of the larger states -- I mean 33 the -- the states that you're talking about are mostly the smaller states. Do you have any idea why the larger states have not joined the compact yet?

MR. RANTS: Unfortunately, I do. And — and -¬ and -- in retrospect, if someone would have said,

Christopher, go tackle this issue 20 years ago, the first place I would have gone is California or Texas or

Florida.

Each state -- we're all unique. Okay? And that's what makes us great.

But in trying to address this particular issue, it's also a challenge. I'll give you an example.

Florida.

Spent a lot of time in Florida last year.

Florida rounds out their sales tax to an extra decimal point. They did that as a way to raise revenue without raising taxes.

Well, to come into compliance with the -- with the agreement they'd have to change that decimal point back.

That's a very difficult thing for them to do because in that case it is a revenue loser for them in the first year.

California, the biggest stumbling block in

California, quite frankly, is California. It's the 34 notion that they don't want to have one vote at the table with Pennsylvania or with Iowa. They think that they should have multiple votes because they're a mega-state and they don't want to be in the same table with the rest of us.

The other problem with California is the two-thirds vote that's required to make changes to their tax code. The fact that they have partial exemptions on the motion picture and television industry, partial exemptions on agricultural equipment.

They have some -- they have some big hurdles.

They also have a $25 billion budget shortfall. And so -¬

I mean it makes -- it makes all of us look very small in comparison.

But, you know, it's also being debated and discussed there. They're looking for creative ways to address the issue, but they haven't been able to wrap their heads around -- around this one yet. And in part it is because, my belief, it's working in cooperation with other states like ours.

Texas. Texas has had the bill introduced repeatedly. I'm going down there on Thursday to continue to talk with their ways and means and their -- their tax and revenue committee.

Texas has a couple of unique problems. They 35 tax ice differently depending on how is it used. Now, we talk about ice on a day like today and think who really cares whether ice is taxed or not. If you live in Texas, you care whether or not ice is taxed or not.

They also have a couple of partial exemption issues and they had some unique instances where they have created tax -- sales tax zones where -- to entice companies to set up shop. Even though they don't do business there, they're only establishing a -- a -- a sales front, if you will, to collect revenue, which has created some huge revenue boosts for a handful of communities, and if they make that uniform across the state that will pose some challenges for them.

But, again, Texas has a $16 billion budget shortfall and are looking for ways to get at it.

New York. New York is unique in terms of the city of New York City, and the state of New York State have two different tax bases. What is subject to sales tax in the city of New York is not the same thing as what is subject to sales tax in every other part of the state.

And part of the Streamlined Sales Tax Compact requires you to have a unified sales tax base. The whole idea of simplicity.

And apparently in New York, the city of New 36

York has more power than the General Assembly does, and, you know, that's -- that's the battle that's taking place in New York.

I will say, however, that New York has recognized the problem. New York was the first state to pursue what is called an affiliate nexus model of trying to collect online sales tax.

The state of New York a couple years ago decided that they were going to go after Amazon.com and they said that they were going to declare that Amazon had nexus in the state of New York because of using affiliates, the advertising, the click-through ads that appear on various other websites, and declared that as a mechanism for gaining nexus, making Amazon.com subject to tax.

Unfortunately, it doesn't work. It's not constitutional. Every other state that has tried it has failed. Amazon has simply changed their business model and terminated all their affiliate relationships which have cost Rhode Island, North Carolina, Colorado, and probably Illinois, jobs and tax revenue because income went down.

Amazon did not terminate their relationship in the state of New York, because New York tried to collect back tax, so to protect themselves Amazon litigated 37 instead so they could keep their standing in court.

It will eventually go to the Supreme Court. My belief is the Supreme Court will look and say you didn't meet any of the tests of Quill and you didn't even try and declare it to be unconstitutional.

But New York has acknowledged it's a problem.

All states are acknowledging today it's a problem.

There's too much money out there.

And for states that are very dependent upon the sales tax base, to watch that sales tax base erode, they're looking for different ways to address it.

That's why you see the bill being introduced in multiple states. That's why you see some states trying to do the affiliate nexus model. I think the Streamlined is the better way to go, and it's the one that will ultimately be held to be constitutional.

REP. MUNDY: Well, it's interesting that there are different models to pursue.

I -- I want to follow up on Chairman

Benninghoff's question about the role of the Department of Revenue and the administrative costs with regard to the Streamlined Sales Tax collection.

Obviously there would be a slight cost to enter into this program in order to do the software and all of that. 38

MR. RANTS: Right.

REP. MUNDY: But who would be responsible for compliance issues with regard to those companies who have -- who are selling? How do you -- how -- who -- who figures out whether somebody is selling online and not collecting the tax or do we just let those folks go?

MR. RANTS: It's -- it's -- that's a fairly complicated question. Be -- because of the nature of the

Streamlined Sales Tax, again, it's a two-step process.

States participate. We voluntarily join the compact. Step one.

We start collecting remote sales from those that voluntarily choose to participate, because the

Supreme Court ruling still stands. We cannot force an out-of-state company to -- that remotely sells in our state to collect and remit that sales tax.

Today there are 1,400 retailers that do, and that's a number that continues to grow.

They register with the governing board, which is the multi-state agency. They sign up with one of the seven different certified service providers. Fed

Tax, for example, ADP, there are a number of different tax companies that provide that black box software.

That's the group that's responsible for collecting it and then sending that check to Harrisburg 39 or to Des Moines, Iowa or Lincoln, Nebraska.

It isn't until Congress blesses the agreement that we have that mandatory ability and then it's the law of the land, and you're -- you're -¬

REP. MUNDY: But then do the feds provide some funding or administrative oversight?

MR. RANTS: Under — under the -- under the compact and the legislation as it is today, it is down to our states to be able to do that, or we can try to enforce that.

But, bear in mind, we'll be going from a system where no one is required to collect that tax to a system where everyone is required to collect that tax.

The -- the -- the cost about making it free, with providing it to the business, yes, that's a cost to the states.

I would argue that it is a cost that is overshadowed by the revenue that you collect in, and I would also argue that it is a cost that the states should bear because you're asking a retailer to be your agent as a tax collector.

I -- maybe I -- and I -- maybe I should ask someone else this. I don't know if Pennsylvania pays vendor compensation to your retailers today.

REP. MUNDY: We -- 40

CHAI^IAN ADOLPH: One percent.

REP. MUNDY: One percent.

MR. RANTS: One percent. All right.

REP. MUNDY: They keep one percent of the tax that they collect.

MR. RANTS: Pennsylvania has already made the decision then, that if you're going to ask the retailers to collect the sales tax for you and act as an agent of the state, they should be compensated for that.

That is part of the Streamlined Sales Tax

Agreement. It is a sliding scale. Obviously the mom and pops selling golf balls out of their garage has a higher cost in terms of sales -- you know, percentage of collection to sale, they have a higher cost to that than say a Wal-Mart does. We don't want to necessarily compensate Wal-Mart the same way we would compensate the mom-and-pop operation.

I'm assuming Pennsylvania has already addressed that in some fashion. It would be addressed under -- under the agreement.

But since you're already paying vendor compensation that would not be a hurdle for you.

Some states don't pay vendor compensation.

California, for instance -- example, does not pay vendor compensation and that is a hurdle for them. 41

That has been an issue that has gotten a lot of conversation out of the National Governors

Association. Those governors from the states that don't pay vendor compensation aren't too keen on the idea.

But it is part of the grand compromise. Do you want the revenues? Then you ought to let the retailers who are forced to incur costs to cover it -- to collect it, be compensated for it.

REP. MUNDY: And -- and my final question.

How difficult has it been for the states to make their definitions conform?

MR. RANTS: It depends upon the state. My state, it wasn't terribly difficult for the definitions.

Every -- every state is a little unique. I would -- I would encourage you -- the best way to find out is to have the bill drafted here and -- and take a look and see just exactly what the changes -- what changes have to be made.

Some states -- Massachusetts, for instance, has two definitions of clothing. Luxury clothing, I guess, and ordinary clothing. I don't know. In Iowa we only have ordinary clothing.

But Massachusetts has two different kinds of clothing. So that's -- that's a hurdle for them that they have to overcome. 42

Typically everybody has some challenges with food. Food. What's food? What's candy? What's a snack? You know, I -- you know, that's one of those things, it's now come down to what's the quantity of sugar and what's the quantity of flour that is -- that is in that food item to decide whether it's a candy or whether it's a food item.

REP. MUNDY: But basically 24 states have found a way to make their definitions conform without too much -¬

MR. RANTS: Yes, ma'am.

REP. MUNDY: -- difficulty?

MR. RANTS: Yes, ma'am.

REP. MUNDY: Thank you.

Thank you, Mr. Chairman.

CHAI^IAN ADOLPH: Thank you.

At this time I'd like to acknowledge the presence of Representative Gordon Denlinger and

Representative John Bear, both of Lancaster County.

And our next representative who has a question is Dave -- Representative Dave Millard.

REP. MILLARD: Thank you, Mr. Chairman.

And, Speaker Rants, thank you for being here today before this committee.

I'd like to do a little follow-up on what 43

Representative Benninghoff and Representative Mundy talked to you about.

You're talking about 24 states right now.

Fox and Brown -- and I have the study in front of me -¬ did a study that involved 23 states at that time.

Now, they produced an estimate of 23.3 billion in uncollected sales taxes from Internet sales.

The estimated uncollected tax for the 23 member states at that time amounted to 6.4 billion.

The information provided by the Streamlined

Sales Tax Governing Board indicated that these 23 states collected 170 million and a fraction in taxes in 2009 as a result of this Streamlined project.

Now, if you're -- if you're doing the math, aggregating all of these figures, and looking at the estimated uncollected tax and then looking at the actual tax, it equates to about 2.6 percent.

Now, in Pennsylvania this study indicated that -- that we're missing out on about 700 million in sales tax from Internet purchases.

Now, I guess my question to you is, again, when we're looking at the uncollected versus the actual, and it amounts to about 2.6 percent, if Pennsylvania comes in at 706 million and a fraction, 2.6 percent of that is less than 20 million. 44

So it -- it's a far cry from 706 million and my -- my thought process to you is, if we're only going to get less than 20 million, what's it going to cost us to put in the oversight to make sure that we do get that collection of dollars?

Are we, in essence, going to be penny wise and pound foolish? Is it going to cost us more to collect it? You know, the law of diminishing returns plays into this, that the figures look great when they're on the high side, but they may not necessarily be all that advantageous on the low side.

MR. RANTS: Fair -- fair question, representative. And I'm sorry. I missed -- I missed the number or the date when you said you looked at the total aggregate that had been collected among the 23 states and that number was?

REP. MILLARD: 23.3 billion.

MR. RANTS: That -- that is the amount that is owed nationwide.

REP. MILLARD: That's correct.

MR. RANTS: I'm sorry. You — you had indicated a number that has actually been collected I thought.

REP. MILLARD: And out of that 23.3 billion, 170.1 million was collected. 45

MR. RANTS: In aggregate or in — that's in total per year?

REP. MILLARD: In aggregate.

MR. RANTS: Among all states for the time the compact has been -¬

REP. MILLARD: Well, the uncollected tax for the 23 states, the member states, amounted to 6.4 billion.

MR. RANTS: Okay. I -- I understand the gist of — of the question you're asking. What I -- thus far those -- those states that are participating have collected in total over $700 million. Okay. So we agree on that.

Remember, representative, it's a -- it is a two-step process.

REP. MILLARD: Well, you -- you -- let me interrupt you here just a minute. You -- you -- this study states Pennsylvania is missing out.

MR. RANTS: Pennsylvania is missing out on

$700 million.

REP. MILLARD: Right.

MR. RANTS: Yesterday, because the question came up in Connecticut, just exactly how much have all the states collected together. And in between flights I called Scott Peterson at the governing board who is 46 responsible for that sort of information, and he -- he tells me that thus far in total states have collected over $700 million. The states that are participating -¬ that are voluntarily participating, that's the voluntary collection and remittance of that sales and use tax.

You are correct that we don't realize the full gain until there is congressional action. And there's no -- there's no way around that. We collect some revenue immediately.

But it is a far cry from the grand total that is owed to our states. It is a value judgment that you will have to make about whether or not it is penny wise or -- or pound foolish.

But I would suggest to you, representative, that when you look at the fairness question for your main street retailers, you know, those -- those businesses, those -- those entrepreneurs, the people that are collecting and remitting that sales tax today, I'm sure that they will tell you that they're looking for a level playing field, that they're competing against out-of-state interests that aren't collecting that sales tax, and why is -- why is it fair -- why is that a fair situation for them?

I would also suggest that much of what has been put into the compact, the software packages that are 47 available for those retailers, the -- it's at a minimal cost to the state to provide that.

And that in many cases groups like Fed Tax will provide it for free. The technology today is not the challenge that it once was 20 years ago to comply.

Typically your cost of compliance will be in your department of revenue and finance. Okay?

They're going to have to change their software at some point in time. They're going to -- you know, I've dealt with some legislatures that talk about the cost of, you know, rewriting the code because you're going to rewrite -- you're going to have to reprint your whole sales tax code.

Certainly there is a cost. But let's say out of that $700 million that you're owed you only do get

$20 million. I find it difficult to believe that that is outweighed by the cost of compliance.

And I would also submit if you're looking to create a more competitive climate for your

Pennsylvania businesses, it's worth the cost.

REP. MILLARD: Well, and I guess that creating a competitive climate comes at a cost and that's one of the benefits of having uniformity.

But there's a second part to this that there's -- there's always an outlying concern out there 48 as well, and that involves Craigslist and eBay with all the transactions that take place on -- on those sites.

Would those individuals have to register and collect this tax?

MR. RANTS: When federal action takes place, the answer to that question will be sort of the same question, at what level is the minimum threshold?

What is the small seller exemption? Is it half a million dollars? Is it 250,000?

There are some that argue that there should be -- because of the technology that's available there should be no small seller exemption.

If you think about eBay, for example, when you -- when you purchase on -- on eBay or if you're a seller on eBay, eBay gives the seller the tools to collect credit cards, that I otherwise wouldn't have as a seller; allows me to have the plug in to the U.S. Postal

Service or to UPS or Fed Ex to calculate the shipping cost, which I otherwise wouldn't have.

I mean eBay provides all of that to their sellers today. They can also become a certified service provider and provide the tax computation software today to their sellers. Okay? At no cost to their sellers.

Should there really be a small seller exemption? I won't get into that argument because the 49

NFIB, among others, think that there should be, and I'm fine with that argument, but once you see federal action the eBays, the Craigslisters, all folks, if they meet that small seller exemption -- or excuse me -- exceed that small seller exemption will be required to remit and collect.

REP. MILLARD: Well, I'm sure that this discussion will ensue a long time after today, and I thank you very much for coming before this committee.

Thank you, Mr. Chairman.

MR. RANTS: Thanks for the time.

CHAI^IAN ADOLPH: Chairman Markosek.

REP. MARKOSEK: Thank you, Mr. Chairman.

Just a real quick question, sir. We have here in Pennsylvania 67 counties, 65 of which have a five -- six percent sales tax. Two of them, two counties, Philadelphia has an eight percent and

Allegheny, where Pittsburgh is, has a seven percent.

If we were to go to this, would we have to make the entire state uniform in order to participate or how would that work?

MR. RANTS: Well, let me make sure I understand this so I can -- I can answer the question correctly.

The Pennsylvania state sales tax is? 50

REP. MARKOSEK: Six percent in 65 -¬

MR. RANTS: Okay.

REP. MARKOSEK: -- of the 67 counties.

MR. RANTS: And so, for instance, in

Philadelphia, where it's at a higher rate, it's just because they have an local option sales tax of an additional two percent?

REP. MARKOSEK: Yes.

MR. RANTS: That's not a problem. In -- in

-- in --in my -- you -- you -- you won't have to make any change to that.

For instance, in my state we have 99 counties. Well, we have city local option sales taxes.

My city has a local option sales tax. The city to the north of mine does not.

The - -it's all designed upon your zip code. So that certified service provider, that black box software, when you enter in that zip code and it knows you're at eight percent or six percent, whatever that difference might be, that's what it will -- that's what it will charge, collect, and then remit back.

The one thing that -- that -- that has to happen, you don't have to have a single rate in your state, but you have to have a central assessment. So that the retailer sends it to the Pennsylvania department 51 of revenue and finance. It will then have to split it out and remit it to Pennsyl -- to -- to Pittsburgh or to

Philadelphia or some place like that.

REP. MARKOSEK: Thank you.

CHAI^IAN ADOLPH: Representative Perry.

REP. PERRY: Thank you very much,

Mr. Chairman.

And thank — thanks for making the trip.

This is a fascinating subject and I have a lot of questions and I don't think any of them really are on the tenor of what we've been hearing so far and I don't want to be a naysayer.

But let me -- a couple pointed ones and

I'll try not to keep this as a stream of conscientiousness.

But -- but you mentioned that the -- we won't need as many auditors. For the states that have joined the compact, do we have any idea of the number of auditors that -¬

MR. RANTS: No. I -¬

REP. PERRY: Has it gone down? Do we know that?

MR. RANTS: I don't know that. The -¬ the -- the reason I say that is because of the immunity provision in the compact, the fact that if everyone is 52 participating, you no longer have to have the auditors out there chasing after different businesses saying we think you have nexus in our -- in our state.

When you actually have this, that this is actually put into place, it doesn't matter whether you have nexus, physical nexus in the state or not.

That's -- that's a continuing problem for business and industry today, is you have departments of revenue and finance that are constantly knocking on the door saying, how many days this year did you have your sales force in our state because we think that now you have created nexus.

REP. PERRY: Okay. I mean there's a whole -- this is a chicken and the egg thing. I don't know. I almost don't know where to start.

But let me just -- I wrote this down.

Governments have insatiable appetite for revenue and -¬ and the conversation in the room so far to me seems to be like, well, we're due this revenue and we're owed this revenue and we need this revenue and once we get this revenue and fill this hole, whether it's California's billions and billions of dollars or Pennsylvania's billions and billions of dollars, what makes you think that we're not going to try to figure some other way to spend beyond that and yet need more revenue? 53

MR. RANTS: Can I actually make a comment?

REP. PERRY: Isn't this about spending as opposed to -- isn't our problem spending as opposed to revenue generation?

MR. RANTS: I — I don't know what your particular problem is in Pennsylvania. I wouldn't -- I wouldn't hazard a guess on that.

But let -- but let me make a suggestion to you. Okay? I didn't tell you to spend the revenue.

That's -- that's your decision.

Given the fact that your main street businesses today are at an unfair competitive disadvantage, as the -- as the local sales tax receipts drop, typically what happens with the city budget?

Property taxes go up to make up for it. Okay.

I could easily make the argument, and perhaps you should make the argument, that if you do something like this, revenues that are -- or the taxes that are being paid by those local businesses ought to go down.

I'm not suggesting to you that they have to be spent, that the revenues has to be spent there. Use

-- use the revenues to make it even more of a level playing field. That's -- that's completely your decision to make. 54

All I know today is -- is that your main street merchants are paying more in taxes because their competitors are not.

You can make the decision whether or not you want to try to level that playing field and -¬

REP. PERRY: That's a component of it that their competitors are not, but that's not the whole story. At least in my view. I mean it's part of the story, but it's not the whole story.

I mean, you know, I'm thinking about the fairness of it and leveling the playing field, but in some sense isn't it good for some Pennsylvanian businesses that, you know, if I click on them on the

Internet and they've got some product I want to buy and

I -- and I live in Iowa, and -- and they're not charging the taxes, is that not good for that Pennsylvania business and the employees that are working there and producing those goods and selling them to you?

Is that not good?

MR. RANTS: How many Pennsylvania businesses do you have that are doing that?

REP. PERRY: Well, exactly. Who knows?

And -- and you're saying that we can collect this revenue, but does it account for all those businesses in

Pennsylvania that are selling increased sales because of 55 the situation that we're in? How do we know?

MR. RANTS: You — you can make the argument in that case. But I would suggest to you you've got more main street brick-and-mortar merchants that are paying property taxes, workers' comp, unemployment comp that are competing against those folks that are existing only in cyberspace and you have two different tax regimes for each.

For one, the company that exists only in cyberspace, they're not having to collect or pay those kind of taxes. The company that's invested, that's hiring employees, paying property taxes, supporting your community, is the one who's paying the taxes and collecting the taxes.

Which regime, which -- which business model do you want to support? I mean because -- because right now your -- your public policy is to support the one that isn't having to hire employees, hire Pennsylvanians, or support the community.

I would suggest that you ought to be having the tax regime that either treats them equally or supports the one that makes investments in your state.

REP. PERRY: All right. That's a thought.

That gets to my final question, Mr. Chairman.

And I listened and -- and you are obviously 56 supported by a group of -- of reputable businesses or business supporting organizations. I'm a business owner myself. Maybe some government advocacy -- advocacy groups.

Who is representing individual citizens and consumers and instead of advocating for a complete homogeneous taxing of all citizens, why not advocate for no taxing of this across the land?

Instead of us pitting Pennsylvania again

Iowa and Texas against New Jersey, why don't we just -¬ why aren't we looking at what Adam Smith said, the free hand, and just -- and just stay out of this thing and let -- let the market decide?

MR. RANTS: There are only two —

REP. PERRY: Isn't that better?

MR. RANTS: There are only two ways to make this fair. One, you treat them all the same and so you collect the sales tax equally regardless of whether they purchase it from a bricks-and-mortar store or they purchase it online.

The only other way to make it fair is exactly what you're suggesting and repeal your sales and use tax.

REP. PERRY: Thank you. I love it.

CHAI^IAN ADOLPH: Thank you. 57

The next questioner is Representative Pyle.

REP. PYLE: Thank you, Mr. Chairman.

Mr. Rants, greetings from black-and-gold country. I understand we have a commonality there.

MR. RANTS: Ahh.

REP PYLE: My question deals mostly with the technological implementation of what you're discussing right now. You had mentioned the Interstate

Compact and had quoted 23 states belonging.

Obviously there is a federal inference in that. What is involved should Pennsylvania choose to potentially to move forward?

MR. RANTS: Well, the 24 states -¬

REP. PYLE: 24.

MR. RANTS: -- are -- are fully participating now. If -- if you chose to move forward, you'd -- you'd pass the enabling legislation. Obviously, the governing board would spend some time with your bill drafters and make sure that it's drafted correctly.

And to be honest, my recommendation, this is what I'm doing in several states, before the bill ever gets filed, we take the bill and -- and vet it through your business community to make sure that there aren't any unintended consequences.

When we did it initially in Georgia, we 58 filed the bill before we did it. We found out that we were treating Coca Cola differently and that didn't sit very well in the state of Georgia.

So I suggest you make sure that you vet the bill completely to make sure that you've found out if you have any of those sort of unintended consequences that are out there and make sure that it's correct.

When you pass the legislation, you become an associate member state, as then the governing board will want to look at -- to make sure all the sort of best practices and methodologies your department of revenue and finance is using, and then when the governing board approves and says, yes, you've made all of those changes, you -- your legislation is in compliance, we'll award you full membership status and you can start collecting those revenues from the voluntary participants and you'll have a seat at the governing board table and you'll have that vote.

But, again, I think you were asking the question about federal legislation. I mean that's -¬ ultimately, the end goal is the federal piece of legislation. That's being sponsored by Wyoming Senator

Mike Enzi. He's been our sponsor for the last several years. He's a Republican out of Wyoming, former state legislator, former retailer. He understands the issue 59 from that perspective.

We're currently looking for a co-sponsor -¬ or for a sponsor in the House of Representatives.

Congressman Bill Delahunt from Massachusetts was our former sponsor but he chose not to seek re-election and so this year we're looking for a sponsor in the House.

Typically in past years the Main Street

Fairness Act, as we've introduced it, has been a standalone piece of legislation. I don't think that will be the case this year. And this is just me speaking from my gut. That with the new Republican Congress, I think that if states are to see this advance, we're going to have to match it up with some other piece of tax legislation, be part of the grand compromise, and so we'll be looking for, you know, Republican sponsors for that federal piece of legislation.

At such time as the federal government acts on it, it will very much depend on what -- what form it is in, what final form it's in, when it passes Congress.

What do they set the small seller exemption at? That will dictate how states will have to respond to it.

Do they -- what level of vendor compensation do they dictate? States may or may not have to respond to that. But we'll -- we'll have to wait and see. 60

REP. PYLE: Great. My — my next question, as you had mentioned nominal fees involved with technological implementation. Can you further clarify what nominal is?

MR. RANTS: Well, the state is required to provide that certified service provider software to the retailer. Each one of the seven certified service providers does it at a different cost. Fed Tax provides it for free if that's what the retailer wants to have.

But the retailers are able to recoup that cost back from -- back from the states.

And I'm sorry. I cannot tell you that -¬ that particular cost.

REP. PYLE: Sure.

MR. RANTS: But I will get that answer for you by the end of the week.

REP. PYLE: Thank you.

Thank you, Mr. Chairman.

CHAI^IAN ADOLPH: Thank you.

Representative Ron Waters.

REP. WATERS: Thank you, Mr. Chairman. I hope you can hear me.

CHAI^IAN ADOLPH: No, we cannot.

REP. WATERS: Oh, you can't?

CHAIRMAN ADOLPH: You must use the 61 microphone. Thank you.

REP. WATERS: No problem. I had — one of the questions Chairman Markosek already asked about

Philly and Allegheny.

The other question is in terms of compliance with this Streamlined system, is there any -¬ have you experienced any -- any problems with the 24 states that's already online when it comes down to compliance and what are the repercussions for merchants who -- who fail to comply? Or intentionally -¬

MR. RANTS: What -¬

REP. WATERS: -- fail to comply?

MR. RANTS: What states that failed to comply?

REP. WATERS: No. Not states. Merchants.

MR. RANTS: Oh.

REP. WATERS: A problem with merchants who -¬

MR. RANTS: No.

REP. WATERS: — are not paying the taxes.

MR. RANTS: No. To be honest, the bigger problem is with the states. I will give -- and I'll give you an example.

Once -- for the merchants, once they're participating, they're participating. Again, it's a -- 62 it becomes a matter of the software kicking in. Somebody makes that purchase. They -- they -- they -- they -¬ they click on that purchase button, the software kicks in, and the sales tax is collected and remitted back.

I haven't heard of any examples where that has posed to be a problem. Typically where the problem comes in is when a state inadvertently makes a change to something. Maybe they've gone back and made some changes to their sales tax code and inadvertently changed a definition.

We had that in Iowa. We -- Iowa fell out of compliance because of our definition of durable medical equipment. It was pointed out to us by the governing board and then we had to make a decision, did we want to get back into compliance? Or if we fall out of compliance and we lose that collection authority, we could no longer collect the sales tax remotely.

We made the decision, you know, we didn't really intend to fall out of compliance, so we got back into compliance.

That Business Advisory Council I mentioned before that continues to work with the governing board very much wants to hold states accountable. Wants to make sure that if we are about streamlining our sales tax code that we are, in fact, about streamlining our sales 63 tax code and that we don't have little glitches pop up from state to state whereby businesses suddenly have two sets -- again, two set of rules or two sets of definitions they have to deal with.

So there is a compliance review committee that meets on a quarterly basis to look at states and make sure that we are all still in compliance and that we don't fall out of compliance.

Nobody -- nobody -- nobody thus far has intentionally fallen out of compliance. But, you know, as I said, my own state had a problem with durable medical equipment. We had to get back -- get back into compliance on it.

And that's -- that's the challenge that's -- that's out there, is a state may at any time choose not to participate anymore.

Nobody has done that thus far. But, you know, that's -- that's always a possibility. And -- and that's -- and to be honest, that's the sovereignty that

Pennsylvania would retain. If you choose not to comply anymore, you could be out of the compact any time you want.

REP. WATERS: The two municipalities here,

Philadelphia being both a city and a county, has a high tax rate of six — of eight percent. 64

Do you know if in that seven -- $706 million that you say that the -- the state is missing, how much of that maybe would go towards to any particular county?

MR. RANTS: I -- I do not. That is -- that is the aggregate estimate for the state based on the state sales tax rate, not your local cities, school districts or counties. That's -- that's based on the sales -- state sales tax rate.

You've got -- I mean you'll get a copy of one of those CDs and you can -- you can take a look at that study. But those numbers were generated based on the state sales tax rate.

Obviously there's an incentive for the league of cities or the -- state association of counties to support legislation like this because they are interested as well. They see for -- for local governments that are primarily property taxes and sales tax -- sales taxes for their forms of revenue, watching their sales tax base erode is of great concern.

And so they -- they're often -- in many states, they're often the driving force behind this.

Because they are not able to collect a income tax. They don't have the same sort of taxing ability that the state has. 65

For instance, I'm going to be in Missouri in two weeks at the invitation of the Municipal League in

Missouri that's interested in this legislation because they are concerned about their declining sales tax base.

All the -- all -- again, all that we require is that it continues to be a uniform tax base between the state and the city -- between the state and municipals and if you're going to have a sales tax holiday, that it's a sales tax holiday for both the state and municipal, that you don't have a sales tax holiday for one without it being a sales tax holiday for the other.

Again, that's all in the name of uniformity to keep it simple and easy for the businesses to administer.

REP. WATERS: Okay. It's a -- you don't have to answer this. But that 706 million for the state could actually, when you include all the 67 counties, be higher based on what the other states -- the other counties are missing as a result of them having the higher tax structure?

MR. RANTS: Sure. I mean because I'm not making any assumptions about what the city of Pittsburgh or the city of Philadelphia should be collecting.

REP. WATERS: Okay. Thank you. 66

CHAI^IAN ADOLPH: Thank you.

Representative Bear.

REP. BEAR: Thank you, Mr. Chairman.

Mr. Rants, I just had two questions. The first one was if Pennsylvania were to enter into this compact, what is the motivation for vendors to do this voluntarily? What have you generally found?

MR. RANTS: For many vendors it's the question of easing the worry about the auditors. My guess is today that you have someone from your Department of revenue and finance knocking on some business's door, saying we think you have -- we think you have nexus in

Pennsylvania.

They spend a lot of time fighting that.

Probably because it involves owed back taxes.

A lot of the folks that come on board it's about getting rid of that problem, that hassle and that cost. The business has a cost involved in defending itself.

And if it's a questionable call, under the

Streamlined Sales Tax Compact, it's an opportunity to get right with the state, no longer have to worry about that auditor that's knocking on the door and defending that and the taxes that are owed, because of the immunity provision that goes with it. 67

But the trade-off is that they have to collect that sales tax going forward. So you have a lot of businesses that get -- that get right for that very reason. It's been questionable whether or not we have nexus or not. Businesses typically will continue to argue that we don't have nexus. Right?

REP. BEAR: Uh-huh.

MR. RANTS: But this is an opportunity to get right with the states. Particularly if they're a multi-state business. They're either selling -- they're doing business in multiple states and it's a logical choice for them to make.

REP BEAR: Thank you. The second question is, so let's say Pennsylvania -¬

MR. RANTS: Oh, and by the way, let me back up for a second.

REP. BEAR: Yep.

MR. RANTS: If they're in for one -- as a -- as a business, if they're in for one, they're in for all. Those 1,400 businesses that are currently collecting and remitting sales tax in Iowa, New Jersey,

Minnesota and Wisconsin, when Pennsylvania joins, they're in for Pennsylvania, too.

So it's not -- it's not as though one business comes in and says we think we're going to 68 voluntarily collect in Pennsylvania. You get those 1,400 businesses that are currently collecting it today, and that's a number that will then continue to grow.

REP. BEAR: Thank you. The second question is -- let's say we decide we want to move forward with this. What is the first thing we have to do and in a perfect world how long do you see this taking until we actually start seeing some income and actually implementing this?

MR. RANTS: Well, in Georgia it took two months. We got started in the middle of their legislative session in Georgia.

My -- my experience oftentimes is -- is big ideas take a session or two. Right? It takes time to build that buy-in.

Your first step is to get the bill drafted. Again, identify those particular glitches, if you will. Again, I've been told, based on conversations

I had with folks that have looked at your sales tax code, that they don't anticipate a lot of those kind of glitches. You don't have an odd rounding number. I don't -- we haven't -- from the governing board's point of view, we haven't identified partial exemptions, but maybe you have some partial exemptions that we're unaware of. 69

But it's to get that bill drafted to see what your definitional changes will look like. Your legislative leadership will probably want to confer with each other to decide, you know, are there -- are there political problems with making any of these changes.

Odds are not, but that's a conversation you certainly need to have.

And then you move the bill through the process, and you get the buy-in from the administration.

You decide -- you're -- you're -- I assume you have a nonpartisan or a group that scores all your bills and puts a number to it. Then you'll have to decide what you're going to do with the number. Whether you're going to reduce the tax someplace else or use that to -- to deal with your budget problem.

The department of revenue and finance will want to start coming -- coming to the governing board meetings.

I would encourage you as a legislative body -- one of the decisions that oftentimes gets glossed over in -- in drafting your legislation is how you decide who is Pennsylvania's voice at the governing board level.

Many states send their comptroller or their director of their revenue and finance department. I 70 would encourage you not to do that.

I would encourage you to put together a -¬ a group of a member of the House, a member of the Senate, and somebody from the Governor's office as your representative. They have one vote, but they -- they need to work together to come up with that one vote.

And I say that because legislators tend to be more responsive to what's going on in the world with businesses and making sure this is a fair -- a fair deal for -- for those businesses that have to comply than revenue and finance folks.

No disrespect intended toward them, but the legislators just tend to be more responsive toward those -- toward those issues. That question oftentimes gets glossed over.

What we found with Georgia, we passed the bill with -- or Georgia passed the bill at the end of the legislative session in May. They were an associate member that summer, and they became a full member at the

December board meeting and they started collecting revenue in December.

So it -- it -- the sooner you move the sooner you can participate.

REP. BEAR: Well, let me ask you, is that typical, the May to December for most states, is that a 71 typical time frame?

I know the whole legislative process, that's an unknown and that could take a very short amount of time or very long, but once you actually pass that bill -¬

MR. RANTS: Once you pass the bill, it -¬ it can take, you know, four to five months, six months, to make whatever sort of changes your department of revenue and finance folks have to make. The software is ready to go.

I mean -- and once you're in you're added to the database. One of the things -- one of the things your department of revenue and finance will have to do is they'll have to develop the matrix that goes into that database.

They provide -- the certified service providers says the Pennsylvania tax rate is six percent and it applies -- and tell us just exactly which of those definitions that six percent applies to and which definitions it does not apply, and then they'll have to tell us municipal by municipal organization, city or county, which of them have those local option sales taxes and which of them don't.

It's like building a very large matrix.

It's -- it's a database problem. It's all that it really 72 is. It's developing that database.

You already know it instinctively here in

Pennsylvania. But now we have to tell somebody -- tell somebody else what that is so that it can go into software packages so that those retailers, when that transaction occurs and somebody types in their zip code, they know that they're in Philadelphia and it should be eight percent versus Harrisburg where it should be something else.

REP. BEAR: So the primary hurdle might be the legislative process, in particular the actual drafting of the definitions and getting the line together?

MR. RANTS: The legislative process is always the primary hurdle. The -- the and isn't that true with everything that we do?

We're -- we're -- a recovering politician.

I can admit that.

The -- the definitions here, we -- we -- in some states we have drafted the legislation for legislators. We've done that, for instance, in

California, but we still want to take the legislation and run it through your -- obviously every state has its own drafting service or legal counsel, whatever the case might be. We're all slightly different. To make sure it 73 gets put into the right sections of the Pennsylvania code. Because every definition has to match up.

And so that -- a lot of times that looks like a scary piece of legislation, all right, because it could be 50 pages long or more. But in most cases it's no changes. It's moving it from one section or to renumbering or -- or making a slight change to durable medical equipment.

For instance, do you consider prosthetics to be durable medical equipment or not? I don't know.

But that has to be figured into that definition somehow someway.

So it can -- it can look like a big piece of legislation, but as with many pieces of -- big pieces of legislation, a lot of times it's a lot of renumbering and a lot of rewording.

REP. BEAR: Great. Hey, thank you.

CHAI^IAN ADOLPH: Thank you.

Representative Causer.

REP. CAUSER: Thank you, Mr. Chairman.

Thank you, Mr. Rants, for being here and you've given us some really good information to -- to look at and answered a lot of questions today.

But one thing that I wanted to -- to ask you. You talked about computer software and the focus 74 really has been on Internet sales -¬

MR. RANTS: Uh-huh.

REP. CAUSER: — to a great extent. I was curious about how you -- how you account for catalog or mail order sales. I mean that -- it seems like a thing that's -- that's going by the wayside in some respects, but -- but it's still a significant business and -- and how would you account for those sales through streamlined sales collections?

MR. RANTS: Well, you're correct, and they're too often overlooked. We get talking about the

Internet because we think of eBay or -- or Amazon or something like that, and, you know, we still get catalogs in my house all the time, too.

And part of that study, the -- the Fox study that you have on your CD, breaks it out between electronic commerce and nonelectronic commerce, because that's still a significant portion.

For -- for those folks they still get the software. I mean people still use Peachtree or

QuickBooks or -- and -- and the very large firms have their own customized software that they use.

The certified service provider of software still plugs into that. I mean ADP is one of the larger tax companies in the country, works with everybody, and 75 so their software will -- will plug in and, again, it goes to a database problem.

I don't find too many large catalog companies today that are doing it by hand. They're -¬ they're using software and databases. I mean that's -¬ that's what they're doing. They already know your zip code, and so if they know your zip code it's not too difficult to plug in and be able to determine what your sales tax rate ought to be.

REP. CAUSER: Thank you.

Thank you, Mr. Chairman.

CHAI^IAN ADOLPH: Thank you.

Representative Samuelson.

REP. SAMUELSON: Thank you, Mr. Chairman.

I know you've talked about the 24 states that have already adopted this and I -- I noticed there are some neighbors of ours, Ohio and West Virginia and

New Jersey, that are included in that number.

My question is about the $706 million estimate that you put forward.

MR. RANTS: Uh-huh.

REP. SAMUELSON: Is that figure based solely on the 1,400 retailers that are voluntarily participating?

MR. RANTS: No. No. That -- that is -- 76 that is a projection that was made by -- by Dr. Fox looking nationwide and, again, it's a -- it's a fairly long document that -- that you'll get that looks at -- in terms of nationwide and making assumptions, I mean, doing

-- doing calculations based on sales that are going on across the country, and comparing what is currently being purchased in bricks-and-mortar stores and taxes that are owed on that, applying that sort of assumption and calculation to what we know is going on or what we believe we know is going on with remote sales and applying those same sort of statistics and calculations to that.

So it's -- it's based on what the total amount that you're losing is and that's what you would be able to collect once federal action takes place.

Obviously with only 1,400 retailers collecting today you don't get that full amount.

REP. SAMUELSON: Well, then the follow-up question is, any estimate of what percentage of overall online sales is represented by these 1,400 retailers?

MR. RANTS: I cannot — I cannot give that to you. In -- in part, because — I'll be honest with you, it's not the majority, obviously.

I mean Iowa has collected $40 million so far. It's -- it's -- it is not the majority. You don't 77 have the biggest ones on board. You have small ones on board. But you don't have -- you don't have the big ones on board yet.

REP. SAMUELSON: Well, if Iowa has collected 40 million, what is the estimate, the overall estimate for the state of Iowa? Similar to the 706 million that you used for Pennsylvania?

MR. RANTS: Sure. I want to say off the top of my head it's $150 million and we are collecting about $16 million on an annual basis for the last couple of years.

Just bear with me for just a second. I'll try to find that number.

Iowa's total amount that we believe is owed to us on a annual basis is $181 million.

REP. SAMUELSON: That's 16 million annually right now?

MR. RANTS: We're — we're — we're bringing in $16 million annually right now. We're a state of about 3 million people. We're a very small state.

REP. SAMUELSON: About eight percent of the overall total?

MR. RANTS: (Nods head up and down.)

REP. SAMUELSON: Okay. Thanks.

CHAI^IAN ADOLPH: Thank you. 78

Representative Christiana.

REP. CHRISTIANA: Thank you, Mr. Chairman.

I share my concerns of Representative Perry for fiscal responsibility and not using this money to increase spending.

To me, though, this is a fairness issue.

This problem exists because people are taking advantage of the system and that's why I think it's important to have this dialogue.

My concern with Representative Samuelson and some others' concern is that we're only recovering about two-and-a-half -- on average, two-and-a-half percent of that total that is due to us.

I have two questions. First is, of those

1,400 vendors, has there been any discussion of ways to incentivize more vendors to come on board?

You had mentioned a few, but are there any additional?

MR. RANTS: To be honest, I have not participated in those conversations, so I can't -- I cannot give you an honest answer about that.

In the back of my mind I have had various ideas to try and get -- to try to get more of them on board.

REP. CHRISTIANA: Who is -- who is 79 responsible for that part -- let's call it that -- this business? Who is responsible for that?

MR. RANTS: Sure. The -- the governing board is. And, again, the governing board has a Business

Advisory Council that is made up of a lot of big names that you would recognize of -- of major American corporation and tax preparation companies.

They're constantly looking for ways to get more people to participate, but sometimes, again, it becomes a chicken-and-the-egg question, right, which -¬ which do you do first?

As more states come on board, as more states adopt Streamlined, I believe that's an incentive for more states -- for more businesses to participate and come on board. Because we have additional states that perhaps we have nexus in. This is a way for us to get right with those states. Get the auditors off our back.

I think that's a fair -- I think that's a fairly significant incentive for -- for groups to get on board. As more states come on board, the likelihood of us having nexus in those states is even greater.

You have businesses that are looking for a uniform solution. Okay? We'll call it the uniform solution. I think Streamlined represents that uniform solution. 80

I think history is ultimately on our side on this. Eventually there's going to be a solution to this. I think Streamlined is the -- is that solution.

REP. CHRISTIANA: To follow up on

Representative Samuelson's question, looking at the total of $23 billion that's out there -¬

MR. RANTS: Uh-huh

REP. CHRISTIANA: -- that's uncollected, is there any way to quantify that, at what percentage of that total amount is made up of the Amazon, eBays, and

Craig -- Craigslists of the world?

MR. RANTS: Yeah -- I think people can make some educated guesses. People may not -- I mean that will be a very difficult number to pin down.

There are a lot of organizations out there that have put Amazon in their cross hairs because they're the biggest. I tend to think that that's a mistake to go after just one company or one business model, because they can change their business model. That's what Amazon has done in a multitude of states that tried to go after just Amazon.

And the reason that they did that was they went after just Amazon and ignored eBay and Craigslists and all the other folks.

In -- in those CDs I provided, there's this 81

University of Maryland study that tries to do what you suggest, I think, and that is to sort of measure that tail.

While we see that there are a handful of companies that are very, very large that represent maybe the -- or that are the largest collectors, it measures out what that tail looks like. It says the tail is longer than we think.

And I'm sorry. I'm not -- I'm not as familiar with that study, but the reason I provided it is because it's one, I think, is -- is worth taking a look at.

It references the 500 different online-only retailers -- retailers that are out there today. And most of them don't collect sales tax.

Wal-Mart does because Wal-Mart has a physical presence in all of our states.

REP. CHRISTIANA: Yeah.

MR. RANTS: But the companies that don't have that physical presence aren't collecting that sales tax.

REP. CHRISTIANA: One final, simple question. Those companies we mentioned, Amazon, eBay,

Craigslist, do they represent part of the governing board for this organization? 82

MR. RANTS. No. The -- the -- the governing board is made up only of states. It is made up of -- the governing board and voting delegates are the representatives of the 24 states.

Now, groups like Amazon, Wal-Mart, AT&T, the Chambers of Commerce kinds of organizations, they participate in the Business Advisory Council which -¬ which advocate -- and to be honest, I don't know. I mean

I know Wal-Mart is a member of the Business Advisory

Council. And I know AT&T is. I don't know if Amazon is a member of the Business Advisory Council. They may be.

They may not be. I don't know the answer to that question.

But they advocate. They -- they are there to sort of be the watch dog and plead the case. But ultimately they don't get to vote.

And that's why I say when you determine who your representatives are on the governing board, should

Pennsylvania do this, I would encourage you to place legislators on that as -- or include legislators as that vote and not simply just tax administrators.

REP. CHRISTIANA: Thank you very much.

Thank you, Mr. Chairman.

CHAI^IAN ADOLPH: Thank you.

Mr. Rants, I want to thank you so much for 83 all the information that you have given this committee.

I'm sure the members are going to be looking into this system.

I don't know when you're leaving, going back to Iowa, but I would certainly welcome you and invite you to tour our beautiful state capitol building here and we're very proud of that.

And I certainly can see why you rose through the ranks of the Iowa House of Representatives and became the Speaker of the House. You are very well read on the subject. I'm sure there's some differences of opinion about whether this works or not and that, you know, is to be debated in our Pennsylvania House as well.

But -- excuse me -- I want to thank you very much for your presence here today.

MR. RANTS: Mr. Chairman, I very much appreciate the opportunity. My flight doesn't leave until tomorrow afternoon, so I'm going to spend two days in your capitol, if anybody has follow-up questions or would like to talk more, and I assume I need to give you some additional answers, based on a couple questions, and

I need to provide that directly to your office or to your staff. I'll -- I'll have that for you by the end of the week. 84

CHAI^IAN ADOLPH: Thank you so much.

MR. RANTS: Thank you for the opportunity.

CHAI^IAN ADOLPH: Okay. Just a reminder to all the members. The next meeting will be at one o'clock. Thank you.

(The proceedings were concluded at

12:10 p.m.) 85

I hereby certify that the proceedings and evidence are contained fully and accurately in the notes taken by me on the within proceedings and that this is a correct transcript of the same.

Brenda S. Hamilton, RPR Reporter - Notary Public