DMA Opposes Misguided Online Tax Proposal

Washington, DC, December 21, 2005 – The Direct Marketing Association (DMA) is cautioning legislators about bills introduced yesterday that would allow states to force online sellers to collect sales taxes for all state and local taxing jurisdictions.

S. 2152 introduced by Senator Michael Enzi (R-WY) and S. 2153, introduced by Senator Byron Dorgan (D-ND), would mandate provisions of the Streamlined Sales and Use Tax Agreement (SSTA), a voluntary agreement that 18 states are currently participating in. SSTA claims to offer a simplified, streamlined solution, but in fact would only add a new layer of complexity, expense and burden for large and small businesses around the country.

"Efficiency, simplicity and results are the ultimate goals of both business and government operations. Neither these legislative efforts, nor the voluntary agreement upon which they are based, accomplish these goals," said DMA president and CEO John A. Greco, Jr. "True sales tax simplification would require states to adopt standardized definitions and offer a single tax rate per state for all types and channels of commerce."

The failure of either of these bills to address a reduction the number of tax jurisdictions is a key flaw, and remains a critical obstacle to a workable streamlined sales tax program. There are currently approximately 7,600 different sales tax jurisdictions in this country, including states, counties and municipalities, and even block-by-block areas that collect additional sales taxes, such as sewer districts, sports arena districts or library districts. Currently, only businesses with a physical presence or "nexus" within a state are required to collect taxes for the jurisdictions within that state.

Jerry Cerasale, DMA’s senior vice president, government affairs noted, "the Supreme Court told states in 1967 and again in 1992 that if they want the power to tax sales originating outside their boundaries, then they have to remove the burden placed on retailers by the complexities of having to comply with the requirements of thousands of different taxing jurisdictions."

The bills would also create a barrier to entry for small entrepreneurs, who rely on the Internet to help create markets, and a barrier to growth for medium-sized businesses seeking to grow operations or expand a customer base. Many would not be able to afford the effort and expense it would take to collect and remit sales taxes for each of the thousands of jurisdictions, much less the cost of an possible audit at any time by 46 different state revenue departments (45 states plus DC impose sales tax). SSTA’s organizers promised that software would be available

to help make tax collection and remittance simple for retailers, yet as of the October 1 implementation date, and the introduction of federal legislation yesterday, a workable prototype has yet to be demonstrated.

The "streamlined" sales tax effort falls short in other areas as well. Although the legislation for consistent definitions of taxable goods, the bills leave far too much leeway in determining what types of goods are taxable. For example, in some states and jurisdictions tennis shoes are considered nontaxable clothing, and in others taxed as "athletic equipment."

Ultimately, even the underlying rationale for collecting taxes from remote sales – allegedly a huge untapped revenue windfall for state governments – can be called into question. A 2001 University of Tennessee study estimated more than $50 billion per year in uncollected sales tax revenue from online sales. Three years later, their predictions were reduced by more than half, although the numbers were still based on hugely optimistic growth predictions developed at the height of the "Internet bubble." An analysis conducted by DMA using publicly available data from the US Department of Commerce indicates that actual revenues would amount to less than 20% of the number estimated by the revised 2004 University of Tennessee study.

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The Direct Marketing Association (www.the-dma.org) is the leading global trade association of business and nonprofit organizations using and supporting direct marketing tools and techniques. DMA advocates industry standards for responsible marketing, promotes relevance as the key to reaching consumers with desirable offers, and provides cutting-edge research, education and networking opportunities to improve results throughout the entire direct marketing process. Founded in 1917, DMA today has more than 4,800 corporate, affiliate, and chapter members from the US and 46 other nations, including 55 companies listed on the Fortune 100.

In 2005, companies will spend more than $161 billion dollars on direct marketing in the United States. Measured against total U.S. sales, these advertising expenditures are expected to generate $1.85 trillion in increased sales in 2005, or 7% of the $26 trillion in total sales in the U.S. economy (which includes intermediate sales). All together, direct marketing will account for 10.3% of total U.S. GDP in 2005.