debate over whether goods sold over the internet should carry a sales tax. patrick byrnes shall the c.e.o. of overstock.com and scott peterson of the sales tax governing board explain their differing viewings. one of the issues bewitching state governments is local retailers and national on-line retailers and now congress is the issue of internet sales tax. that's our issue this week on the communictors. joining us is the chairman and c.e.o. of o.co. and the sales tax that could be collected p for states. >> there is a policy argument. which do you want to hear first? >> go with both. >> ok.

constitutional argument, this was taken up 20 years ago by the supreme court with regards to quill, which was an office supply retailer. north dakota went after them. it was in illinois and north dakota went after them, people to have to take them to collect taxes. they had an early computer program. you could go on-line and check in and order things, a lot like a website. when north dakota tried to get them to collect taxes, it went to the supreme court and the supreme court found 8-1 in the case that under the article one section 8 of the commerce clause of the constitution says congress has the right to regulate interstate commerce, and from that has been inferred what they kaleed the dormant commerce clause which is the state's right to impede or burden interstate commerce and the supreme court found 8-1 that forced an outof

state retailer to collect their tax violates the constitution. now, they left open to the u.s. power to do, to create some sort of national system but the u.s. congress has not done that, so this is flagrantly goes against the grain of a supreme court decision from 20 years ago, and then on the policy side, it goes after people, websites like ours, if we have an affiliate, an affiliate marketing relationship with anyone in california, say, 40,000 people in this country who are raff fill yachts and somebody just in their -- just in their spare time makes pocket money, links to amazon, anyone who goes through their site to us, we pay the commissions and so now california is saying that is the same thing as having a factory in california. we are saying we're sorry, because we love these affiliates but we end our

relationship with them so thousands of people get their businesses destroyed by california's act and the experience of this is that it doesn't actually raise new revenue because people just move to wisconsin or some neighboring state. it is bad constitutionally and bad policy. >> does it give an overstock.com or amazon an unfair advantage over a brick and mortar retailer? >> no, it does not give an unfair advantage. although you have hit the nail by the head, pushed by walmart and target because they unequivocally have a presence in all these states. they are brick and mortar stores. they have to collect taxes even on-line so walmart and target have been hiring lock buyists for two or three years so this is really all the walmart, target bill. they're just hiding behind a smokes screen. they're calling it fair street retailer. well they never cared about

fairness toss main street retailers. >> thank you. now, mr. byrne, can you tell us what impact would collecting a sales tax have on your business, if you could quantify that would be great but if you could, describe the process or the burden. >> ok. the impact would be, you know, there is about 12% of the u.s. population is in california, and about 10 to 15% of e-commerce runs through affiliates so if you multiply those two together, you get about 2%, so that's that's -- by california passing this, this means about 2% of revenue, because we have to end those relationships. and in addition, i have always -- this world of affiliate marketing is, i call it the ho chi minh war of the elephants, of the fleas against the elephant. the tiny companies that

somebody may be a schoolteacher and have a website at night that she maintains called best buy on purses.com, and then people who are looking for purses come to her site. she has found purses from 20 different retailers and internet retailers and what she writes a little blog on what she thinks is a good buy or not and people click and come to our site and purchase, so she might be making, you know, thousands of dollars a month on the side and then some of these people are sort of million -- multi-million dollar businesses and in a state like california or rhode island or illinois or arkansas passed these laws, it means we have to say we're sorry, these affiliates have helped us. we really have won all kinds of awards from the affiliate industry of working with these people but we have to say sorry, we have to end our relationship. that's the effect on us and on the affiliates.

>> now, you have mentioned the affiliates but one of the main issues of contention when we talk about this issue is what exactly constitutes a physical presence in the state that would thereabout make the company liable for sales taxes. can you describe what you view as what should constitute a fiscal presence, because with amazon, this has been an issue regarding wearing houses in their case, i believe in texas, a judge ruled that they had a physical presence on the basis of a similar facility. what do you think should constitute a physical presence and is there any states in which overstock has a physical presence and pays sales taxes? >> that's a great question, and that's a very fair point, and i don't like to get in the business of hitting any particular competitor but i would say official presence, i think a warehouse is certainly a physical presence, and frankly, i believe that amazon has pushed that very,

very hard for years. they create warehouses in places like texas and then they say, well, we don't own the warehouse, we put it in a subsidiary and the subsidiary owns the warehouse and they do that all over the states. i think that is transparent and i think that is a legal fiction, and we don't buy into that. now, we have a warehouse in utah. a couple warehouses in utah. there was a point we opened a warehouse in indiana and what we did, we paid taxes in indiana and then we shut the warehouse and brought it all back to utah. we're considering opening a warehouse now in kentucky and part of our plan is we opened the warehouse. we're not going to play these games and put it in a subsidiary and that means we don't have to pay tax there, so i think that amazon, frankly, has pushed the line here very, very hard with their strategy of having warehouses and subsidiaries.

that's a different question and i would be more open to the state's position on that, at the are risk of people saying, well, you're just saying this about a competitorment. >> mr. byrne, what is the status of the new york legal? what is the new york legal status right now? , well, new york did the same -- passed the same kind of law. we ended our relationship with affiliates. so did amazon, and amazon filed a suit and the appellate court, the state court, pretty quickly ruled against amazon, but it got kicked immediately up to the appellate court and may actually be at the new york state supreme court now to decide this. it will get kicked back until it reaches, i think, the u.s. supreme court, and then they will really have a choice between standing by the analysis they did in 1991 in quill versus north dakota or sort of changing the whole doctrine, but until they do that, i think

tax lawyers are confident that once this gets kicked up all the levels from new york to the supreme court, it will be decided against new york, you know, and it will be a sharp turn in supreme court reasoning if they go from an 8-1 decision 20 years ago to a completely to taking the other side now. >> mr. byrne, are you collecting sales tax in new york and what about california? >> no. we're collecting sales tax in neither place because as soon as the law gets passed, we or the night before it gets passed or becomes effective, we send an e-mail to all of our affiliates in our state saying we're sorry, weeing thank you, we built a nice business together but as long as your state has this law in force, we have to serve our relationship, so we keep our nose very clean, because as soon as they expand the definition of nexus to include a relationship with those small businesses we sever the relationship, so we don't really have any

question that we should be, in our view, that we should be collecting tax. but with amazon, it was a little different because they already had -- they have companies like the kindle software developers are braced in the bay area, and they have warehouses there and stuff so it wasn't as simple for them just to really make sure they didn't have these relationships. >> now, mr. byrne, you have discussed the legislation as being propelled by target and walmart, obviously large national retailers but from the state's point of view, there are two real concerns here that seem to be driving the policy, which is, one, a shortage of revenue in the current budgetary climate. there have been studies anywhere from 4.7 to $11.4 billion in terms of the estimated liabilities for on-line retailers should they have to pay the sales tax and then the other issue, of course, is concern about main street retailers, small retailers an unfair competition, sales tax

ranging from 4 to 8% in most states and that would be a sizable advantage when you add the other advantage of on-line retail so leaving aside target and walmart, what would you say to concerns from states that their small retailers are losing business to companies like overstock or amazon, and then they're no longer available to pay taxes to the state, so that's a net loss on both ends? >> well, i have three things to say. first of all, overstock or 0.co has a special decision that just supports, and we've had this for a year and a half now, just supports main street retailers, main street manufacturers. we're doing everything we can for them. the main response i would say is taxes, taxes don't come out of a burning bush somewhere. taxes are just a name for the price that a government sets on its services. it's just the price that they're setting on their services, and when anybody raises the price of something, when the plumber

raises the price of his services, people buy less of it, and that's what is happening, and we consume less of the services of a state than a store does, be it walmart, target or even a small store, by having people there, you know, driving having the police force, having the fire department, having people in school and so forth. the stores consuming many more resources from the state than we are consuming just by having a u.p.s. drive and deliver something, so it seems extraordinarily unfair to say that we should pay the same price for the services of the state, so i don't, frankly, buy the fact -- i think the fairness argument cuts in our direction. >> mr. byrne, do you -- what would you like to see congress do, if anything? >> well, if they're going --

if this is to be done, i would say the -- what they could do is one of these -- is set up sort of a streamlined national sales tax, some rule that said we're going to -- there's 7,000 taxing jurisdictions in america, and some jurisdictions, cotton candy is food. in some it's entertainment and in some it is candy. they have to create some central data bank that said these 7,000 jurisdictions, this is how every possible thing is, you know, millions of products, are classified as this type of thing with this tax rate and there was some central data base that could be interrogated by on-line retailers and at least that would get past the argument that the quill decision which basically said it was unfairly burdensome to expect maine to know what the tax rate is in kansas on duck hunting

boots. at least congress could, if they made a regular national system and provided a central data base, it would at least get by the arguments in quill. >> have you been in contact with senator durbin or are you familiar with the terms of legislation that he has drafted and would that constitute and acceptable solution to 0.co? >> no. i'm not familiar. you would have to tell me. i don't know the specifics. >> it's the main street fairness act is what he is calling it. >> that would be -- ok. that would be sort of this national washington-created system, is that what you're asking me? >> yes, sir. >> well, if they did that, i think it would still be -- i think that would get by the constitutionality test, so, would i be foreit for it? no, i would still be against it. i would say we are still

consuming a lot less reece sources from any particular state than from somebody that is physically located there, so i don't know if it would get passed. in my view, in fairness or the achievement it is stated to achieve, stated as raising morgue money but at least would be constitutional. >> go ahead. please finish. >> well, because the supreme court decision actually did specifically carve out that said, you know, this is the way things stand now, but the u.s. congress, under the same article one section 8 would have the power to create a national solution to this problem, but states can't do it unilaterally, so it would get by the constitutional issue. >> final question. >> thank you. we're seeing a referendum or an effort to get a ballot measure on the ballot for the next election. is that something you support or is that independent of 0.co? >> in california? >> yes. >> well, we -- i support it.

i think the cooperation on many issues between us and amazon. you won't see us out there, but i think that this is a good referendum, and i think it at least is good that they're having the -- they're giving the people the right to choose. the people are getting the right to choose what their business model is and it's not being imposed from sacramento. in that sense, i like the fact that they'ring doing this referendum but you won't see us involved, i don't think. >> finally, give us a snapshot of your company and why you changed the name from overstock.com to 0.co? >> overstock is an on-line discount shopping. that's where we started off. it is like an outlet store. like a venue you would drive to, an outlet mall, 200,000 products plus music and games and we have the lowest price on the internet, and they really are the lowest prices, and we liquidate

inventory for people, so they're great prices. we don't claim to have everything everybody else has, but what we have is 80, 85% of the time it is cheaper, and we changed the name from overstock to 0.co both because we're going global and it's going to be easier to teach a billion folks in china what 0.co than overdoing.com and we discovered it was catching on in the u.s., and somewhere between 20 to 40% has shifted from overstock to o.co so we decided to make that the brand. it is like the exo to transitions in the '70 he a. >> how many employee and how much in revenues? >> 1600 in employees, $1.1 billion in revenues, made $14 million last year, and positive $30 million cash flow. we have a nice business emerging in utah. >> all 1,600 employees in utah?

>> every one of them. you want to may monopoly, read the top of the box. we read the top of the box, understood the rules an organized our business model this way. maybe that's why reresent other people coming in and sort of wiping out what part of the rules they like. >> patrick byrne is the chairman and c.e.o. of 0.co, also known as overstock.com. thank you, sir, for joining us from salt lake, and as we continue our conversation on the issue of internet sales tax, up next is scott peterson, executive director of the streamlined sales tax governing board. it is a group that works with the states to find a solution to the internet sales tax issue. we will be right back. >> and we are continuing our conversation about internet sales tax on the communictor s now joining us is scott peterson, executive director of the streamline sales tax governing board. first of all, mr. peterson, what is your organization? >> an organization of state

governments whose principal purpose is to reduce the burden that retailers face as they're trying to collect state sales taxes. >> well, we just finished talking with patrick byrne of overstock.com and he told us why he doesn't think a company such as his based solely in utah should have to collect sales tax from all the different taxing jurisdictions around the country. why do you think that a company like overstock should? >> our view is that retailing has changed. there was a time when retailing was impossible across state boundaries, even though some tried to engage in business throughout state boundaries. today it is simple to engage in intersate business. the world is slowly moving toward -- in the not too distant future we will be the majority of total sales and the state sales tax will have ceased to exist. the internet, frankly, is

perfectly suited for collecting sales tax because sales tax is best done when it is fully automated, and the internet is built for automation. they bill those companies to e they build those companies to eliminate people. there is hardly anybody that touches a transaction on the internet and the software that exists today for companies that do collect sales tax on their sales is very simple to install and it operates with almost no errors. >> but philosophically, do you think that the quill decision is outdated? >> i do believe -- i think frankly quill was outdated the day its was made. physical presence is probably the worst test one can possibly think of, think up to test -- to make this thing possible, because the people who often have the physical presence are the people who have the least ability to collect sales tax. i talk to a lost retailers and manufacturers and service providers around this country who are mom and pop service providers and because of how they do

business, they have to collect sales tax. my wife and i were at an antique glass show over the weekend. every one of those people outside of tennessee have to collect sales tax everywhere they g once they create that physical presence in tennessee, every time they make a sale in tennessee, whether over the phone or internet or catalog, they have to collect the tennessee sales tax, so it hits those people who have the least ability to do it the hardest, while those who are r. are raringbly the world's greatest technology companies don't have to do it and they're the ones that are most perfectly suited to do it. >> thank you. now, we discussed collecting sales tax and you said the quill decision is outdated. do you believe that there is any chance that the supreme court would be willing to readdress or reverse that decision as it is currently constituted? >> it's going to take a lot of creativity to come up with a set of facts where we can prove to the court that the facts have changed. the court isn't going to

reevaluate its legal decision, but it is, we think, possible to get the court to reevaluate the facts, and the facts in the quill decision, frankly, weren't particularly good for today's environment, because it was long before the internet. we were still talking about a legacy industry that was doing things through catalogs, whereas today, there is still a very large catalog industry in this country, it is not the prevalent way of making sales remotely and because we think the facts changed, we think we at least have an opportunity to ask them to reconsider. >> absolutely. now, in that decision, my understand something that there was some concern to the number of different tax jurisdictions and the varying rates and you said that's something that can be addressed because the internet allows for automation. can you talk about that difficulty. is it -- mr. byrne says it is quite onerous and i hope you can offer your

perspective. >> one of the requirements we make on states, at the request of retailers was to figure out boundaries. retailers said they always had to do the boundary analysis themselves so they had to figure out which city wassing changing its boundaries on any given day and build that into their computer system and be responsible for any errors. streamline sales tax governing board requires states to do that for them and to give that data to retailers at no cost. all the liability then is on the states for any errors that might happen in that. computers are built for numbers and the world in retailing, in remote commerce is, tied to two things -- your zip code and your tax rate, and every streamline state has to built a data base all the nine-digit zip codes that exist inside their state and the corresponding tax ate and give it away for retailers. all they have to do is build that into their system or what we would prefer is that they use the software that

we are trying to get the whole world to use, which does all this for them. we have a thing called a certified service provider, which is not a fancy name, but it describes the relationship that these folks have with the states, which is we certify that their systems are accurate. we certify that their system will calculate the right sales tax every time in any jurisdiction in this country, and then we give to the sellers that use it complete liability relief in case there happens to be an error in it. >> you're talking about collecting sales tax in all states, not just the ones where the retailer has a physical presence? >> that's correct. we don't believe physical presence a valid test anymore. we don't believe that retail something now a business that is solely done where you are located. your customers are everywhere. my customers are everywhere. i don't need to have a store. i don't need to have a warehouse. i don't need to have somebody packaging boxes.

i can outsource 100% of my business. all i need to do is come up with an idea, go to amazon or google or yahoo and ask them to create a store for me, enter into a contract with a bunch of suppliers to provide that information or provide the products, have them be third party drop shippers and all i do is sit in my basement and watch the money roll in. the software that goes along with your credit card and you're creating your store and the drop shipment tracking something exactly like what exists today for sales tax administration. >> well, if mr. peterson, could that lead to even more offshore businesses such as moving to the bahamas and doing it from the bahamas so you don't have to worry about the sales tax issue? >> there is some concern about that, but it's not really very much, because all the stuff that comes to the united states has to come through customs and to the extent that someone was able to bring something into the united states without going through customs, i suppose that could happen but the overwhelming majority of stuff that comes

through the united states has to go through customs so there has to be some -- the federal government actually has a hand in helping the states administer that part of the sales tax, not a very good hand, mind you, but there is some discussion in that it would be something that we would want to make sure doesn't happen. >> what about the argument raiseed by "the wall street journal" editorial that an overstock.com doesn't require the same services that a local grocery store or local pharmacy would have, a local macy's may need in that city, if it burns down, the macy's in the local city is not going to come to overstock's rescue in utah. >> that's very true, but i think we're confusing tax collection burden and tax burden. the tax burden in this situation is the consumers, and the consumer does use the fire department and the police department where they are sitting. their house burns while the u.p.s. truck shows up with

the overstock.com box, that fire department is going to protect the u.p.s. truck, overstock's box and the customer. you could make the argument that the state may not be able to tax the income of overstock.com, although a lot of states would disagree with, that but that is the only direct tax burden on overstock. all we're asking overstock to do is collect their customer sales tax. they collect sales tax in you utah today. they presumably benefit from the fire protection and police protection that the utah sales tax provides to their warehouses and corporate offices but it's their customers whose fire department and police departments are not being funded because overstock is not collecting a sales tax. >> of course, there is also the other issue of how the taxation differences affect small businesses or retailers in states, physical and on-line. in your view, there has been

estimates of $5 billion to $11 billion of the amount of revenue that could be collected if sales taxes were applied on-line. does your organization have any estimate of how much that shortfall is and how do you think it impacts retailers and states where they are at a disadvantage to on-line companies? >> our estimate is $23 billion in revenue from lost collections from on-line sales, catalog sales, 1-800 sales, television sales, the whole -- in our world, all of those things are equal. they're smaller compared to the internet but they are all part of the big package. we think that is actually low, because it was given to us in 2009, and we're concerned it will be much higher than that and will continue to get higher than

that. the collection is a big issue for the states that rely onto revenue but those folks in the towns across the country are trying to make a living selling to the people inside their community that have an automatic 6 to 8% price dis advantage simply because that truck is driving around town and dropping off packages is truly having a devastating effect on small and, frankly, medium-sized retailers in this country. there is a lot of them. i get way too many conversations, telephone calls from small retailers around this country that are in their view, being killed by that price differential. >> now, mr. byrne raises the point that some of the leading opponents of sales tax on-line is walmart and target, national retailers, who have also been blamed by small retailers for price pressures and that sort of thing. wo