April 3, 2000

Personal Statement of Stanley S. Sokul

As a Member of the Commission I represented the Association for 
Interactive Media (“AIM”), a trade association of companies that do business on 
the Web. AIM has some large, well-known members, but its heart and soul are 
smaller e-businesses  whose daily struggles make the Internet economy such a 
dynamic place.

Internet sales taxation affects AIM members directly. The wonderful thing 
about the Internet – its instant national market access – also makes state tax 
designs potentially devastating to Web businesses. Most people do not realize 
that Internet sales are already subject to tax in the 7,600 state and local 
jurisdictions with a sales tax. The controversy exists because states can and do 
force in-state merchants to collect sales taxes, but they cannot force out-of-
state merchants to do the same. The Supreme Court has twice ruled that imposing 
every state’s tax system on a company with cross- border sales would place an 
unconstitutional burden on interstate commerce. Under these rulings, only if the 
company has some form of physical presence, or “nexus,” in a state, can that 
state force the business to collect its taxes.

Consequently, the Internet sales tax issue is actually a collection issue, not 
a taxability issue, and involves the scope of state tax powers. Our Founding 
Fathers confined state tax powers to their borders a long time ago, and nothing 
about the Internet calls for abandoning their basic wisdom. To solve the 
Internet tax “problem,” states seek new nationalized tax authority to force out-
of-state businesses to collect  their taxes. The Commission refused to endorse 
this power quest. I hope Congress will do the same.

While states and localities complain of revenue shortfalls and some “local” 
and mass retailers complain of “unfairness,” the issue really boils down to 
whether electronic merchants should be subject to the full weight of every state 
and local tax system – including those jurisdictions in which they have no 
presence, receive no services, and enjoy no political representation. Knowing 
every jurisdiction’s definitions of taxable items and exemptions, and collecting 
and remitting appropriate taxes, would be burdensome enough. Being subject to 
the audit and enforcement machinery of every state and locality as well is 
downright frightening.

Also frightening are the privacy implications of taxing electronic commerce. 
The Commission process exposed, but did not resolve, some difficult privacy 
issues. Internet merchants know first-hand the high sensitivity consumers have 
to privacy matters. The specter of the government forcing the collection of 
private purchase information, in large multi-state databases for tax purposes, 
may cause consumers to flee e-commerce in droves.

Furthermore, the proposed expansion of tax burdens that would confront 
U.S. electronic merchants could never be enforced internationally as a practical 
matter. Thus, our global competitors would perversely gain new advantage in our 
domestic marketplace.

For all these reasons, granting states the nationalized tax powers they seek 
would significantly discriminate against electronic commerce. A solid majority 
of the Commission wisely sought the opposite result. Extending the Internet Tax 
Freedom Act would prevent electronic commerce from being subject to specific, 
discriminatory taxes. Asking states to simplify their Depression-era tax systems 
highlights the proper problem: namely, the overly burdensome nature of those tax 
systems themselves. The major success of the Commission process was to reveal 
the current condition of state and local tax systems – and they are not a pretty 
sight. Additionally, telecommunications tax simplification and the elimination 
of the federal communications excise tax would make the Internet backbone less 
expensive, and thus Internet access more affordable to help close the Digital 
Divide.

The need to clarify nexus standards with bright line safe harbors 
deserves particular mention. Such clarification would halt the constant churning 
of litigation that results from the states’ relentless push to chip away, state-
by-state, at nexus protections in the courts. The reality of aggressive nexus 
interpretations, and the associated filing or threats of litigation, are real 
problems for AIM members and a growing drag on electronic commerce. Small 
businesses do not have the wherewithal to fight, and thus bear the brunt of 
questionable tax burdens.

Finally, Congress cannot forget the big picture. The Internet is driving a 
dynamic economy under which retail sales are surging and state coffers are 
overflowing. Congress should do nothing to undermine this engine of record 
prosperity, but rather act decisively to preserve it.

It was an honor to serve on this Commission. I thank Senator Trent Lott for 
his appointment, and hope I lived up to the trust he placed in me.

Stanley S. Sokul