BEFORE THE HOUSE WAYS & MEANS COMMITTEE
Interested Party Testimony on HB 165
Wednesday – May 23, 2007

Mr. Chairman and Members of the Committee,

My name is Daniel Navin and I am the Assistant Vice President, Tax & Economic Policy, for the Ohio Chamber of Commerce. I am here today to share our thoughts on HB 165, legislation that tries to strike a balance among harming neither primarily larger multi-state vendors that have already moved to destination sourcing nationally nor smaller in-state vendors who conduct all or most of their business with Ohio customers only and want nothing to do with destination sourcing, while attempting to convince the Streamlined Sales Tax (SST) Governing Board that the end result of the bill still constitutes a valid form of destination sourcing, with no constitutional problems, that would allow Ohio to become a full-fledged member state of the Governing Board.

The SST Governing Board has stipulated, and Ohio has changed its law to require by January 1, 2008, that sellers/vendors source sales of property, services and digital goods on a destination basis. Under this destination/delivery-based rule, the seller/vendor would source the sale to the vendor’s business location for over-the-counter transactions and to the customer’s shipping address when the customer takes delivery or possession of the purchased items outside the county of the vendor’s business location.

Therefore, for Ohio purposes, when the customer takes possession of the property sold at the vendor’s location, the vendor will charge the sales tax rate in effect in the county of the vendor’s location. On the other hand, when the property is delivered to the customer or the service is consumed or used by the customer outside the county of the vendor’s business location, the vendor must charge the sales tax rate in effect in the county where delivery is made to or the service is used or consumed by the customer.

Destination sourcing was adopted by the Governing Board primarily because it was already the law for sourcing intrastate sales in the majority of the states. Thus, although this approach meant a change in some states that used origin sourcing, such as Ohio, it was determined that destination sourcing was the least disruptive choice in a simplified and uniform system. Since the sales tax is a tax on consumption, destination rather than origin was deemed the preferred method.

The Ohio Chamber continues to support the Streamlined Sales Tax effort and Ohio’s on-going endeavor to become a full-fledged member of the multi-state compact. We have a number of larger retail businesses that do business in every state and support the nationwide streamlined sales tax system. They are pleased to have made the shift in Ohio to destination sourcing.
We have said before to this committee that with any simplification process, invariably there are transition issues that can be difficult for any affected state to adjust to and destination sourcing for Ohio is just such an issue. Little did we expect that destination sourcing would continue to be the proverbial “fly in the ointment” to our state’s membership in the compact three years later.
In contrast to larger retailers who have sophisticated computer networks and hirer webmasters and computer specialists to monitor systems implementations, destination sourcing represents a quantum change in sales tax compliance for a number of Ohio small businesses. This is particularly true for those that deliver their products or sell their services to customers outside the county of their business location. This is because these small businesses would incur up-front computer software consulting expenses, possible additional computer hardware costs and more employee training expenses, which would negatively affect the company’s profit margin and would not expand their presence in the market.

Finally, I want to comment on the issue of the constitutionality of the proposed plan for in-state and out-of-state vendors to elect to collect and remit Ohio use tax at a uniform rate, instead of at the numerous rates applying in the various counties. While I am no federal constitutional tax expert, I have spoken with several of my members who are more knowledgeable on the subject and have participated in the establishment of the compact and the Governing Board’s deliberations. They have told me that at least one issue regarding any uniform rate would be the likelihood that an out-of-state vendor pays a higher rate than an in-state competitor, thus giving rise to a potential constitutional challenge. This would be more likely to happen if the blended or uniform rate is any rate above the lowest county rate currently.

The point these members make is that the courts would be more likely to analyze the issue from the standpoint of whether the election of the single rate would result in giving an in-state competitor a rate advantage, rather than the administrative convenience of having a single rate or the fact that both in-state and out-of-state vendors can elect to use the single rate. These members believe that if the single rate election would result in an in-state vendor gaining a rate advantage over an out-of-state company, then the courts could strike down the provision as unconstitutionally discriminatory. So it would be very important at the very least that this single, uniform rate be the lowest county rate.

Mr. Chairman, that completes my testimony and I will be happy to answer any questions.