BEFORE THE HOUSE WAYS AND MEANS COMMITTEE
Interested Party Testimony on HB 407
Thursday – April 22, 2004

Chairman Kilbane and Members of the Committee,

My name is Daniel Navin and I am the managing director of legislative affairs for the Ohio Chamber of Commerce. I am here today to outline the perspective of the Chamber on the important issue of the implementation of the Streamlined Sales Tax Project (SSTP) and, more specifically, the proposed destination-sourcing rule that represents a significant change in sales tax compliance for many Ohio retail businesses.

First, the Chamber supports the collaborative national effort of states, local governments, bricks & mortar retailers and remote sellers to simplify the process of paying, collecting and remitting sales taxes. The SSTP has been making progress as it pushes states to simplify sales taxes and “level the playing field” between Main Street vendors and their e-commerce competitors. But as with any simplification process, invariably there are major transition issues that can be difficult for the affected states to adjust to. Such is the case in Ohio and several other states regarding destination-sourcing, which a majority of the states that levy a sales/use tax already have.

Second, our membership includes a significant number of small Ohio-based retailers who are losing a competitive advantage to e-retailers that do not charge sales tax. In addition, a number of those same small businesses and other small- and medium-size retailers that deliver their products to customers outside their home-base county would incur up-front computer software consulting expenses, possibly additional computer hardware expenditures and more training costs.

Third, because of the diversity of our membership, we are looking to strike a balance between the desire of companies that do business in multiple states to have a nationwide streamlined sales tax system, and other mostly smaller businesses who cannot routinely incur unexpected computer software consulting, training and hardware expenses that neither make them more profitable or nor expand their presence in the market. HB 407 is a good faith attempt to strike that balance, to soften the blow of the change in the sourcing rule to both smaller companies and affected counties, but we have concerns about certain aspects of the bill.

These concerns center on the bill’s treatment of sales where the property or services sold are received somewhere other than the seller’s place of business. The bill’s proposed rule allows some remote sales made by an Ohio-based seller to be sourced on the basis of the seller’s place of business (point of origin) rather than where the customer receives or takes possession or delivery of the product or service (destination). This alternative origin-based rule applies 1) where the origin and destination are both in Ohio and 2) where the origin is in Ohio but the destination is in another SSTP member state and the other member state reciprocates by using an origin-based rule for remote states originating in that state and destined for Ohio.

The Chamber has two issues with this aspect of the bill. The first is that it creates special rules for certain intra-state sales and allows special agreements between states in giving differential treatment to particular kinds of transactions. This goes entirely against the grain or primary purpose of the streamlined sales tax system – that is, to establish a uniform and simplified sales tax system of definitions and sourcing standards among states so that the burden on sellers doing business in interstate commerce, whether through bricks & mortar stores or through electronic commerce, is substantially reduced.

The second issue is that if the bill is enacted into law as introduced, invariably a lawsuit would be filed by a remote seller or out-of-state vendor that sells in Ohio alleging Ohio’s rule unconstitutionally discriminates against interstate commerce by giving preferential treatment to in-state vendors. While I’m certainly no constitutional lawyer, some members of the Chamber’s Taxation & Public Expenditures Committee do practice in this area, and they have substantial concerns about the constitutionality of this provision and believe a remote seller has an excellent chance of prevailing in the case.

We do support the provisions that attempt to create a small business exception to the SSTP’s filing and remittance requirements. Ohio must either exempt or provide adequate monetary allowances for small businesses that have a minimal amount of out-of-state sales or have no access to the computer technology needed to electronically file and remit sales taxes.
Finally, the accounting firm of PriceWaterhouseCoopers is currently conducting a study of the appropriate amount of monetary allowances for vendors based on the costs incurred by them in collecting sales taxes. Unfortunately, the study’s findings probably won’t be ready or available for six to eight months. That obviously doesn’t help further the process of calculating or credibly estimating the actual up-front costs of smaller vendors and other retailers that would have to comply with the new destination-sourcing rule. In the absence of that kind of data, we support the provision of compensation to vendors to assist them in complying with the new sourcing rule and the setting of reasonable conditions before Ohio becomes a participating member of the SSTP governing board.

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