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1 NetChoice Promoting Convenience, Choice, and Commerce on The Net Carl Szabo, Senior Policy Counsel 1401 K St NW, Suite 502 Washington, DC 20005 202-420-7485 www.netchoice.org Representative Jeffrey Hickman, Speaker of the House May 13, 2016 2300 N. Lincoln Blvd. Room 401 Oklahoma City, OK 73105 RE: Opposition to HB 2531 – An Act relating to revenue and taxation Dear Speaker Hickman and members of the House: We understand the purpose behind HB 2531, but we respectfully ask that you not pass HB 2531. We fully understand the need for states to seek out additional revenue. However, the “reporting requirement” language in HB 2531 could costs Oklahoma thousands in legal fees with no positive outcome for the state. The “commonly controlled” language will undermine the value of Oklahoma businesses seeking investment or acquisition by out-of-state investors. At the same time, the advertiser-nexus language in HB 2531 presents a new pain with no gain burden that would cause job loss across Oklahoma and harm the Oklahoma economy. Reporting Requirements for Internet Sales HB 2531 mirrors a 2010 Colorado law 1 that federal courts determined was in violation of the US Constitution – based on both the dormant commerce clause and first amendment. Shortly after enactment, a federal court in Colorado enjoined the Colorado reporting mandate. Nearly six years later the law still remains enjoined and the state has spent thousands of dollars trying to overturn the decision. It currently awaits a hearing on the facts in the Federal District Court of Colorado which previously found the Colorado law unconstitutional. Like the Colorado law, HB 2531 would impose undue burdens on every out-of-state seller, pointing to similar constitutional infirmities and an expensive court battle with a predictable outcome. The mandated disclosure of Connecticut residents’ buying habits is not only invasive, but federal courts have determined that it violates the first amendment. A federal district court struck down a North Carolina reporting mandate similar to HB 2531, saying: “The First Amendment protects a buyer form having the expressive content of her purchase of books, music and audiovisual materials disclosed to the government. The fear of government tracking and censoring one’s reading, listening and viewing choices chills the exercise of First Amendment rights.” 2 HB 2531 erodes the physical presence standard that protects Oklahoma businesses from tax collectors in other states. Enactment could prompt other states to force Oklahoma businesses to comply with their tax rules, rates, tax holidays, thresholds, and caps. HB 2531 could thereby encourage 46 state tax auditors to go 1 Rev. Stat. § 39-21-112 2 Amazon Inc. v. Lay, Case No. C10-664 MJP (WA Fed Ct, Oct. 10).

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Page 1: NetChoicewebsites for displaying advertisements. The law redefines what it means to be a “business” in the state and creates a presumption of nexus when an out-of-state company

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NetChoicePromotingConvenience,Choice,andCommerceonTheNetCarlSzabo,SeniorPolicyCounsel1401KStNW,Suite502Washington,DC20005202-420-7485www.netchoice.org

RepresentativeJeffreyHickman,SpeakeroftheHouse May13,20162300N.LincolnBlvd.Room401OklahomaCity,OK73105

RE:OppositiontoHB2531–AnActrelatingtorevenueandtaxation

DearSpeakerHickmanandmembersoftheHouse:

WeunderstandthepurposebehindHB2531,butwerespectfullyaskthatyounotpassHB2531.Wefullyunderstandtheneedforstatestoseekoutadditionalrevenue.However,the“reportingrequirement”languageinHB2531couldcostsOklahomathousandsinlegalfeeswithnopositiveoutcomeforthestate.The“commonlycontrolled”languagewillunderminethevalueofOklahomabusinessesseekinginvestmentoracquisitionbyout-of-stateinvestors.Atthesametime,theadvertiser-nexuslanguageinHB2531presentsanewpainwithnogainburdenthatwouldcausejoblossacrossOklahomaandharmtheOklahomaeconomy.

ReportingRequirementsforInternetSales

HB2531mirrorsa2010Coloradolaw1thatfederalcourtsdeterminedwasinviolationoftheUSConstitution–basedonboththedormantcommerceclauseandfirstamendment.Shortlyafterenactment,afederalcourtinColoradoenjoinedtheColoradoreportingmandate.Nearlysixyearslaterthelawstillremainsenjoinedandthestatehasspentthousandsofdollarstryingtooverturnthedecision.ItcurrentlyawaitsahearingonthefactsintheFederalDistrictCourtofColoradowhichpreviouslyfoundtheColoradolawunconstitutional.

LiketheColoradolaw,HB2531wouldimposeundueburdensoneveryout-of-stateseller,pointingtosimilarconstitutionalinfirmitiesandanexpensivecourtbattlewithapredictableoutcome.ThemandateddisclosureofConnecticutresidents’buyinghabitsisnotonlyinvasive,butfederalcourtshavedeterminedthatitviolatesthefirstamendment.AfederaldistrictcourtstruckdownaNorthCarolinareportingmandatesimilartoHB2531,saying:

“TheFirstAmendmentprotectsabuyerformhavingtheexpressivecontentofherpurchaseofbooks,musicandaudiovisualmaterialsdisclosedtothegovernment.Thefearofgovernmenttrackingandcensoringone’sreading,listeningandviewingchoiceschillstheexerciseofFirstAmendmentrights.”2

HB2531erodesthephysicalpresencestandardthatprotectsOklahomabusinessesfromtaxcollectorsinotherstates.EnactmentcouldpromptotherstatestoforceOklahomabusinessestocomplywiththeirtaxrules,rates,taxholidays,thresholds,andcaps.HB2531couldtherebyencourage46statetaxauditorstogo

1Rev.Stat.§39-21-1122AmazonInc.v.Lay,CaseNo.C10-664MJP(WAFedCt,Oct.10).

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afterOklahomabusinesses.ImaginetellingyourlocalbusinessesthatNewYorkandIllinoistaxauditorscannowgoafterthemfortaxesdueonout-of-statesales.

HB2531WillDevalueOklahomaBusinesses

HB2531isdesignedtoincreasecollectionofsalestaxeswhenOklahomaresidentspurchasefromout-of-stateretailers.ItwouldextendtaxobligationstoaremoteretailerifanyothercompanyinthesamecorporatefamilyhadapresenceinOklahoma.

However,asidefromconstitutionalchallengesthisapproachmayinvite,wewanttoalertyoutoapredictableandpracticalproblemthislegislationwouldcreateforOklahoma’semergingbusinesses.

ThislegislationextendstaxnexussolelyonthebasisofaparentcompanyhavingasubsidiarywithOklahomanexus.ThiswouldimposesignificanttaxconsequencesforretailerswhosecorporateparentacquiresanOklahomabusiness--eveniftheretailerhasnosubstantialnexusinOklahomaandnoconnectionwhatsoevertothebusinessbeingacquired.

IfHB2531becomeslaw,anyoneconsideringinvestmentsoracquisitionsinOklahomawillhavetoconsiderthenegativeimpactonretailoperationsanywhereintheircorporateportfolio.ThatwillreducethevalueofOklahomainvestments:someinvestorswillavoidtheproblembynotbiddingonOklahomabusinesses;otherinvestorswillreducetheirvaluationtoaccountforaddedtaxcompliancecostscausedbyinvestinginanOklahomabusiness.

Eitherway,Oklahoma’semergingbusinesseswilllosevaluethedayafterHB2531becomeslaw.

StuntingOklahoma’sAffiliate-Advertisers

Theadvertiser-nexuslanguageinHB2531isdesignedtoincreasecollectionofsalestaxeswhenOklahomaresidentspurchasefromout-of-stateretailers.Itwouldapplytoretailersthatuseanextendednetworkofwebsitesfordisplayingadvertisements.Thelawredefineswhatitmeanstobea“business”inthestateandcreatesapresumptionofnexuswhenanout-of-statecompanypaysOklahoma’sbusinessesforsold-thrureferralsfromitswebsites.

Today,bothonlineandtraditionalcompaniesareexperimentingwithwaystodeliverproducts,services,andcontent,whilebusinessesofallkindsareusingonlineadvertisingtofinddistantcustomers.StatelawsthatdeclareInternetadvertisingaproxyforin-statesalesagentswillstuntthegrowthofnewbusinessmodelsanddistorttheevolutionofInternetmarketing.

Oklahomashouldavoidtheproceduralpitfallsandfundamentalunfairnessofmakingonlineadvertisinganexusdeterminant.AfarmoreimportantconsiderationforOklahoma’slegislatorsisthelikelyunintendedimpactontheOklahomaaffiliate-marketsaswellastheotherin-statebusinessesandcharitiesthatrelyonthisverysameadvertisingtofundtheiroperations.

HarmtoOklahoma’sSchoolsandCharities

Considerthebill’simpactonagrowingsourceoffundraisingdollarsforOklahomaschoolsandcharities—BoxTopsforEducation.

Foryears,kidsaroundthecountryhavebeencollectingboxtopsfromcerealboxestoraisemoneyforfieldtripsandnewequipment.BoxTopsforEducationhasraisedoverahundredmilliondollars--bycollectingjustafewcentsoneveryboxtop.Today,thisfundraisinghasgoneonlineviaBoxTopsMarketplace,generatingcommissionswhenparentsshopataffiliatede-commercewebsites.

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Here’stheBoxTopsMarketplacewebpage:

TheBoxTopsMarketplacehasgrowntooverahundredparticipatingwebsites,offeringparentingessentialssuchaspetsupplies,shoes,books,clothing,andhouseholdgoods.EachoftheonlinestoresintheBoxTopsMarketplacegivesapercentageofsalestosupportgoodcausesinOklahoma:

AlsoinOklahoma,schoolsencourageparentstodotheironlineshoppingatBoxTopsMarketplacetogeneratecommissionsfortheirschoolfundraisingefforts.

Thingis,someoftheonlinestoresparticipatinginBoxTopsMarketplacehaveanyphysicalpresenceinOklahoma.IfHB2531werepassed,theout-of-stateretailersinvolvedintheBoxTopsMarketplacewouldlikelycanceltheiraffiliateprogramsinOklahomaandshutoffthissourceofschoolandcharityfunding.

TheLossofaGrowingSourceofRevenueforOklahomaMarketers

ThemarketersacrossOklahomarelyonrevenuegeneratedfromreferraladvertising.Oftenthesereferralsaretoout-of-stateretailerswithnophysicalpresenceinOklahomaandnoobligationtocollectandremitsalestaxforOklahomapurchasers.

Acriticalquestionbeforeyourcommitteeiswhetherout-of-stateretailerswouldcontinuetoadvertisewithOklahomamarketersifOklahomaenactedtheadvertiser-nexuslanguageinHB2531.

Wouldtheysuethestateoverquestionsofconstitutionality?

WouldtheyfollowtheexampleofhundredsofretailerswhosimplystoppedtheircommissionbasedadvertisinginNewYork,RhodeIsland,Illinois,andNorthCarolinaafterthosestatesenactedasimilarlaw?

EncouragesOklahomaBusinessestoLeavetheState

Asyouknow,Illinoismadethemistakeofpassingabillsimilartotheadvertiser-nexuslanguageinHB2531.WhenIllinoispassedHB365,thousandsofaffiliateslostamajorsourceofincomewithinamatterofhours.

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Infact,ofthe12largestaffiliatesinIllinois,11movedtootherstates,takingover275jobswiththem.ManyofthesebusinessesmovedtoIndianaandWisconsin–includingCouponCabinandMr.RebateswhomovedtoIndiana.

ThisisanalogoustotheproblemOklahomafacesifitpassestheadvertiser-nexuslanguageinHB2531.Ifpassed,websiteadvertiserscouldleaveOklahomaandmovetoWisconsin,takingtheirjobsandbusinesseswiththem.

Weaskthatyounotbecomeanotherstate’sbenefactorbypassingHB2531.

NewPainwithNoGainEffectsoftheAdvertiser-Nexus

It'sessentialtorememberthatout-of-statebusinessescanavoidtheburdenofcollectingtaxesbycuttingofftheiradcommissionpaymentswithOklahoma’swebsites.Ofcourse,Oklahomaconsumerscouldstillbuyfromout-of-statebusinessesthatstoppayingcommissionstoOklahomawebsites.Thatmeanstheadvertiser-nexuslanguageinHB2531couldhavetheunintendedconsequenceofreducingadrevenueforOklahomaadvertiserswithoutincreasingsalestaxcollections.

Theneteffectoftheadvertiser-nexuslanguageinHB2531could,therefore,benewpainwithnogain.InnoeventwouldnewmoneyflowintoOklahoma;anyincrementalsalestaxcollectedjustmovesfromtheOklahomapurchasertothestatetreasuryatatimewhenhouseholdsarebeingsqueezedbyastrugglingeconomy.Tothecontrary,feweradvertisingdollarswouldflowtoOklahomawebsiteswhoemployandserveOklahomaresidents.

WethereforeurgeyoutoopposeHB2531andtorefrainfromimposingadditionalburdensonOklahomabusinesses.

Thankyouforconsideringourviews.PleaseletmeknowifIcanprovidefurtherinformation.

Sincerely,

CarlSzaboSeniorPolicyCounsel,NetChoice

NetChoiceisatradeassociationofe-Commercebusinesses.Moreinformationatwww.netchoice.org

The Wisconsin governor met online advertiser Fat Wallet at the state border as the company moved from Illinois to Wisconsin.


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