OVERVIEWUnique to RILA is our approach to fully integrate public policy and retail operations. This integration ensures that our public policies, and the information they contain, reflect the business realities of today’s retail operations. As the only retail trade association representing all aspects of the retail industry, RILA is also able to gather key stakeholders when necessary to collaborate on certain issues.
As a board-driven organization, our strategy and focus is set by our Board of Directors. From through, our various councils and committees assist us in determining key issues and in prioritizing the resources to be put toward those issues. We encourage our members to become involved with our councils and committees to share their input on the challenges and opportunities facing the retail industry.
RILA supports strong action to combat organized retail crime (ORC), including tightening regulations for online auction sites and other entities that may serve as conduits for stolen goods, recognizing ORC as a federal felony offense and providing law enforcement the necessary funding to effectively deter and prosecute ORC. In addition, state governments should enact ORC legislation that would address felony theft levels.
Prior to the close of the 111th Congress, the House of Representatives passed legislation that was supported by RILA and other national trade associations, as a good first step to addressing ORC. Entering the new Congress, RILA led the effort among coalition partners to establish consensus priorities for Federal ORC legislation that included both investigative and preventative measures. The priorities agreed upon in that document were to serve as a unified stakeholder voice on Capitol Hill.
Following the creation of this document, RILA, and other stakeholders met with eBay to discuss legislation and determine whether a compromise could be reached, and if so, what that compromise would entail. These discussions are ongoing; however, eBay has stated that, in order to support any legislation, current bills would need to be extended to include all “Ecommerce Enablers,” defined as “a service accessible on the Internet that allows a business or person to promote the sale of goods or services, excluding payment processor services.”This definition would extend to Amazon, Google, Facebook, Craigslist and other Internet businesses, including brick-and-mortar retailers with an internet presence. The political make up of Congress, along with priority issues, such as budget and debt reduction, poses challenges for any legislation in the 112th Congress. While Members of Congress who have introduced legislation in the past remain interested in filing legislation again this Congress, to date, no ORC legislation has been introduced. RILA will continue to monitor relevant legislation proceeding through the committees of jurisdiction, as well as both chambers of Congress in order to add effective ORC provisions to a moving bill.
Support state legislation that would address ORC rings and create reasonable felony theft levels.
Working with member companies and trade association partners, RILA has taken the lead in advocating for federal legislation that would recognize ORC as a federal crime. The growth of ORC has clear interstate commerce relevance because criminals have increasingly sold these stolen goods online as well as transported the merchandise across state lines to avoid tougher criminal penalties.
The growth of the online marketplace has also given criminals an unfettered avenue to fence their goods to unwitting customers. The absence of face-to-face contact with buyers allows ORC gangs to sell the stolen merchandise at prices close to 70 cents on the dollar compared to the average 30 cents on the dollar a similar product would sell for at a flea market or pawn shop. Given the still largely unrestricted environment that the Internet provides, compared to other sources of income, e-fencing is a low-risk, high-reward venture for organized crime. Addressing these concerns and creating new federal and state laws will assist in making ORC a high-risk, low-profit crime.
For more information, please contact David Garriepy, director of government affairs at david.garriepy@rila.org, or Doug Thompson, vice president of government affairs at doug.thompson@rila.org.
The retail industry is at the forefront of business innovation, consumer choice and corporate responsibility. Retailers play a vital role in addressing the issues facing the businesses they run, the workers they employ and the customers and communities they serve. RILA members are committed and responsible corporate citizens who recognize their important role in shaping our nation's future. They are engaged in efforts to advance environmentally sustainable business practices and processes, and will champion other emerging issues that strengthen our nation's economy, communities and workforce.
Key enterprise issues for RILA include:
The issue of consumer privacy and data security is one of great importance for retailers whose business models are based upon creating value for consumers in the form of relevant product marketing and just-in-time information to strengthen brand relationships. As technology evolves at a lightning speed pace and marketers use the latest tools to reach consumers, retailers are making data breach prevention and responsible use of consumer information a top priority with legal counsel, human resources, and IT departments working toward the same goal of protecting consumer information.
AdministrationSince the outset of the Obama Administration, senior FTC officials have made public statements, testified at legislative hearings and taken select enforcement actions to lay the groundwork for updating the Fair Information Practice Principles. Most notably, FTC Chairman Jon Leibowitz has indicated that FTC privacy enforcement efforts will focus on companies that do not adequately make consumers aware of their data collection practices, even in cases that do not involve personally identifiable information or pose a risk of individual economic harm. According to U.S. Deputy Chief Technology Officer Daniel Weitzner, the White House will release a consumer bill of rights shortly, which Weitzner stated would be voluntary but enforceable.Federal Trade CommissionAt the close of 2010, the FTC issued a comprehensive draft report, Protecting Consumer Privacy in an Era of Rapid Change: A Proposed Framework for Businesses and Policymakers. The FTC report set forth initial recommendations on how companies should protect consumers’ privacy and consists of three major elements: (1) privacy by design, (2) simplified consumer choice, and (3) greater transparency. The report is intended to guide businesses as they create privacy practices and to help Congress with privacy legislation. The final report will most likely be released in December or early 2012.Department of CommerceThe Department of Commerce’s final report on privacy is also expected to be released in late 2011 or early 2012. The draft report, Commercial Data Privacy and Innovation in the Internet Economy, was released in December 2010. The report detailed their initial policy recommendations aimed at promoting consumer privacy on the Internet. The Framework includes policy recommendations under four broad categories: (1) enhancing consumer trust online through recognition of revitalized fair information practice principles (FIPPs), (2) encouraging the development of voluntary, enforceable privacy codes of conduct in specific industries through collaborative efforts, (3) encouraging global interoperability, and (4) ensuring nationally consistent security breach notification rules. The DOC also recommended a new Privacy Policy Office to be established within the DOC. PLC Comment Letters in Response to FTC and Commerce Draft ProposalsRILA submitted two separate comment letters to the FTC and Commerce Department outlining what we supported and opposed within the recommendations. Our letters had many recommendations, but key points included:
LEGISLATIVE UPDATEWe have seen a flurry of privacy, data security and breach notification bills introduced during the 112th Congress and hearings are still ongoing in both houses. However, there is still no consensus between both chambers of Congress and the administration on what should be done to address consumer privacy concerns, the so-called “cyberazzi,” and data security and breach notification issues. Although there are those on both sides of the aisle who want to legislate these issues, there are still many, including those serving on the committees of legislative jurisdiction, who feel that tough laws and government regulation would hurt innovation, commerce and economic growth. Those members would prefer that industry continue to adopt self-regulatory guidelines into their business models. These issues have taken a back seat to the debt problems and job creation issues for the time being and it is unlikely that a comprehensive privacy, data security, or breach notification bill will be completed this year. Sources on both sides of the aisle have said that any further action will likely be delayed until after next year’s election. Another large breach like those at Sony PlayStation or Epsilon, however, could quickly move this issue back to the front burner. We believe the continued educational privacy hearings in the House, along with RILA-led member and staff briefings, will help committee members fully understand the implications that new privacy and data security regulations could have on retailers. If a new breach does occur, our goal is to have done our due diligence so Congress will have enough information to act responsibly and to prevent a knee-jerk reaction that could have dire consequences for retailers.HouseIn the House, Commerce, Manufacturing and Trade Subcommittee Chairwoman Mary Bono Mack (R-CA) indicates that H.R. 2577, the Secure and Fortify Electronic (SAFE) Data Act, is a major priority for the subcommittee. H.R. 2577, which would require a national standard for data breach notification for companies when consumers’ personal information is compromised, passed her subcommittee in July. Full Committee Chair Fred Upton, although busy with the deficit reduction committee, held a members meeting in November to discuss H.R. 2577, in order to gauge Republican interest in the bill and address any outstanding issues. The Chairman is assessing whether Republicans can get on the same page and move a bill out of the full committee. On the Democratic side, there appear to be several unresolved issues with the bill. Moving the bill without Democratic support could be tricky, as some Republican members do not want to chance acting on a bill considered by some to be lacking in consumer protections.
Senate The Senate Judiciary Committee passed three data security bills this fall: S. 1151 (Leahy, D-VT), S. 1408 (Feinstein, D-CA) and S. 1535 (Blumenthal, D-CT). At this time, no further action has been taken by the full Senate on any of the Judiciary bills. Despite the fact that the Senate Commerce Committee has historically enjoyed full jurisdiction over data security issues, the committee has not made substantial progress on its efforts to craft data security legislation. The committee had planned to mark up S. 1207, Senators Mark Pryor’s (D-AR) and Jay Rockefeller’s (D-WV) Data Security and Breach Notification Act, but pulled the bill from the agenda at the last minute. According to committee staff, there were significant disagreements on the bill, especially regarding its scope and application. The bill is currently being modified to address members’ concerns, and a spokeswoman for Senator Pryor said committee members hope to resolve these disagreements. It remains to be seen if Majority Leader Harry Reid (D-NV) will attempt an omnibus bill on privacy, data security, breach notification or cyber security, but this appears unlikely at this time. Should a bill manage to get through the Senate, action by the House also seems unlikely. RILA continues to hold member and staff educational briefings in order to ensure that legislation does not hamper the consumer experience or prevent the even flow of goods and services domestically or internationally without a corresponding benefit in consumer privacy or data security.
Retailers should continue to engage the FTC, Commerce Department and Congress in the areas of consumer privacy, data security and breach notification to ensure that the unique needs of retailers who operate in both online and offline settings are understood. Opportunities to help shape legislation and provide comments on rule changes will continue to arise in the coming year.
The basic rules governing privacy of customer information have been relatively stable for a number of years. But this regulatory environment is in the midst of fundamental change as a result of slowly emerging shifts in the policy-making and enforcement functions of the Federal Trade Commission and the Department of Commerce, which could be codified by Congress into new privacy laws that would apply broadly to commercial industries.
There are four primary laws that businesses concern themselves with in the privacy arena. The first is the FTC Act which provides the Federal Trade Commission (FTC) with statutory prosecution authority to protect consumers against “unfair and deceptive acts.” Next are the Gramm-Leach-Bliley Act (GLBA) regulating personally identifiable information (PII)—typically in the area of financial transactions—and the Health Insurance Portability and Accountability Act (HIPAA) placing restrictions on the use of medical-related marketing. The final law is the Children’s Online Privacy Protection Act (COPPA) which applies special rules for advertising to children under the age of 13. Other less prominent laws surrounding telemarketing, email solicitation, and consumer credit reports are also on the books as are a myriad of state laws and regulations.
There is no one overarching federal privacy or data breach law to broadly regulate business use of data. To fill the void, the FTC has issued accepted reports to give a framework for industry self-regulation, embracing several general standards:
For more information, please contact Doug Thompson, vice president of government affairs, at doug.thompson@rila.org, Dave Garriepy, director of government affairs, at dave.garriepy@rila.org, or Carolyn Burnett, manager of government affairs, at carolyn.burnett@rila.org.
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RILA opposes the adoption of a national retail sales or value-added tax. A national consumption tax would drive up retail prices for consumers, have a devastating effect on the retail sector of the economy, and create excessive administrative burdens for retailers.
In the current debate over tax reform, suggestions have been made that a national sales or value-added tax should be considered, especially for purposes of deficit reduction. Such suggestions, notwithstanding, proposals for a consumption tax have not been widely embraced by lawmakers.
As part of its series of hearings on tax reform, the House Ways and Means Committee held a hearing on July 26, 2011, focusing on consumption-based taxes. The hearing reflected a significant lack of support for shifting the U.S. tax system to a consumption tax and away from the current income-based tax system. RILA submitted testimony for the hearing, opposing a national sales or value-added tax. /1/
In the 112th Congress, Rep. Rob Woodall (R-GA) and Sen. Saxby Chambliss (R-GA) introduced the Fair Tax Act of 2011 (H.R. 25, /2/ S. 13 /3/), which would replace the federal income tax with a national sales tax.
Some policymakers, economists, and academicians support replacing the current income tax system with a national consumption tax. They argue that a sales tax is fairer than the current income tax system and will give Americans more incentive to save, simplify federal taxation, reduce the cost of tax filing compliance, and lower the cost of goods and services.
Notwithstanding their arguments, a national retail sales or value-added tax raises a number of serious concerns, which undermine its viability:
In confirmation of many of the foregoing structural flaws, the President's Advisory Panel on Federal Tax Reform, formed by President Bush in January 2005 to make recommendations on fundamental reform of the tax system, rejected a national retail sales tax in its final report, stating that such tax system would result in a high tax rate, be difficult to administer, and burdensome for state taxing authorities. /5/
For its part, the Obama Administration has undertaken two broad reviews of the U.S. tax system – the President’s Economic Recovery Advisory Board (PERAB) and the President’s National Commission on Fiscal Responsibility and Reform /6/ – to address the serious deficit projections over the next ten years and ballooning national debt. In August 2010, the PERAB released a report that outlines a range of tax reform options, but with no specific recommendations. /7/ Notably, a national sales or value-added tax was not included as an option. Similarly, the final report of the National Commission on Fiscal Responsibility and Reform, released in December 2010, included broad principles and illustrations for individual and corporate tax reform, but made no reference to a value-added or national sales tax. /8/
Following public remarks in September 2009 by PERAB Chairman Paul Volcker on the potential for a value-added tax, then-House Speaker Nancy Pelosi (D-CA) also stated publicly that such a tax should be on the table to address the country’s fiscal situation. In response, RILA wrote to then-Speaker Pelosi expressing opposition to a value-added or national sales tax, noting its regressive nature and compliance burdens on retailers. /9/ RILA echoed similar concerns in a letter to the PERAB in December 2009, regarding tax reform. /10/
With talk of a value-added tax continuing in 2010, the Senate adopted, by a vote of 85 to 13, a Sense-of-the-Senate amendment on April 15, 2010, declaring that a value-added tax “is a massive tax increase that will cripple families on a fixed income and only further push back America's economic recovery and the Senate opposes the tax.” /11/ Similarly, on May 20, 2010, 154 House Republicans sent a letter to the National Commission on Fiscal Responsibility and Reform stating their opposition to an add-on value-added tax. /12/
For more information, please contact Mark Warren, tax consultant, at mark.warren@rila.org. Additional References
In his Fiscal Year 2012 budget, President Obama included a number of proposals affecting the current international tax provisions of the Internal Revenue Code, revising similar proposals from the Fiscal Year 2010 and 2011 budgets. /1/ While the budget does propose extending two important international tax benefits – the Subpart F active finance and look-through exceptions – the vast majority of the proposals are intended simply to raise revenues without regard for their effect on U.S. jobs or the competitiveness of U.S. companies that also operate abroad. These changes would generally be effective beginning in 2012.
The Obama Administration estimates /2/ that the package of international tax changes would raise more than $129.2 billion through 2021, although the Joint Committee on Taxation (JCT) scores the package at $133.15 billion over ten years. /3/ Based on the Administration’s estimates, the limitations on deferral and foreign tax credits would account for nearly 70 percent of that revenue. Several of the Administration’s proposals were included as revenue raisers in legislation to extend state Medicaid and educational funding in August 2010. /4/
More recently, House Ways & Means Committee Chairman Dave Camp (R-MI) released draft legislation on international tax reform on October 26, 2011. The proposal envisions a significant shift in U.S. tax rules applicable to foreign earnings of U.S. companies, effectively moving the United States to a territorial system based on a 25-percent corporate tax rate. /5/ The Committee has requested comments on the discussion draft and is expected to evaluate revisions well into 2012.
Debate on tax reform is expected to continue as major portions of the tax code are set to expire once again, including the Subpart F active finance and look-through exceptions, which will expire along with the annual business tax provisions at the end of 2011. /6/ Moreover, efforts to enact budget reforms continue to contemplate the role that tax reform, both domestic and international, should play in addressing the serious fiscal challenges facing the nation and the need for U.S. businesses to remain competitive in the global marketplace.
In recent years, a growing number of U.S. retailers have expanded into the global marketplace through the establishment of both retail operations in other countries as well as subsidiaries that strengthen the supply-chain of goods and services they provide to their customers.
Despite its competition with Japan for the highest corporate tax rate in the world, the United States is one of the last major industrialized countries to tax all of the worldwide income of its citizens, including the domestic and foreign earnings of U.S. companies as well as the income earned abroad by foreign subsidiaries of U.S. multinationals. Typically, other countries tax their domestic companies on a territorial basis, with tax imposed only on the income earned within their borders and not on the earnings of their multinational companies’ foreign subsidiaries that are located outside of their national borders.
Current U.S. tax law attempts to address the competitive advantage that foreign territorial tax systems pose for U.S. companies in two ways. First, under the so-called “deferral rule,” U.S. companies are not taxed on income from the active business operations of a foreign subsidiary until that income is repatriated to the United States, typically through dividend payments. The long-standing policy of the deferral rule allows U.S. multinationals to remain competitive against their foreign competitors, which are not subject to tax on their worldwide income at all. The deferral rule, however, applies only to foreign earnings derived from active business operations. The Subpart F rules, enacted in 1962, prevent U.S. multinationals from deferring tax on foreign income that is generally not related to active operations, such as interest and dividends from investments of their foreign earnings.
The Obama Administration’s budget proposal would restrict the ability of U.S. companies to deduct interest expenses associated with foreign earning until such earnings were repatriated to the United States. The result would be increased U.S. taxes for businesses that can no longer deduct financing expenses, which can also relate to U.S. headquarter jobs and other selling, general and administrative expenses, allocated to foreign earnings that are necessarily reinvested abroad to maintain the company’s global business operations. This proposal is made worse by requiring companies to allocate such expenses under the same flawed rules as currently apply to foreign tax credits, without the benefit of the worldwide interest allocation rule that Congress has repeatedly delayed, most recently until 2021 under the HIRE Act. /7/ Accordingly, the proposal would create additional disparities between the U.S. tax system and that of our major trading partners, further eroding the competitiveness of U.S. businesses.
Second, since 1917, the United States has allowed a U.S. company that repatriates the income of its foreign subsidiary to reduce its U.S. tax liability by any foreign taxes paid on that income through a “foreign tax credit,” which reduces the potential for double taxation of the same income by the United States and a foreign jurisdiction. The Obama Administration’s budget proposal would limit the availability of foreign tax credits by requiring companies to calculate them on a combined basis rather than by the taxes paid by each subsidiary making up the U.S. company’s worldwide organization. Despite this combined approach, another Administration proposal (now enacted) /8/ requires companies to match their foreign tax credits with the associated repatriated income to prevent so-called “cross crediting,” which was previously permitted. As a result, U.S. businesses now have to combine credits derived from high- and low-tax jurisdictions but are not able to apply the credits to the overall repatriated income, making it more likely that they will be subject to double taxation of their foreign earnings.
While the Obama Administration has put forth targeted international tax proposals, the Treasury Department under the Bush Administration released a study /9/ in December 2007 outlining three broad approaches to overhauling the corporate tax code. The first approach would replace the corporate income tax with a business activity tax (BAT) on gross receipts, minus the cost of goods and services purchased from other businesses, at a tax rate between 5 percent and 6 percent (to achieve revenue neutrality). The second approach would lower the corporate tax rate by eliminating the majority of current business tax deductions, and implement a territorial system for the taxation of U.S. companies’ foreign earnings. Treasury estimated that to maintain revenue neutrality the rate could be lowered to 28 percent with full business-tax base broadening or 31 percent if accelerated depreciation was retained. The third approach offered a package of proposals, short of full reform of the tax code, aimed at specific areas of the business tax system that could be modified. While Treasury found that the BAT option would result in modest improvements in economic performance, the second option would require significantly lower business tax rates (e.g., 20 percent) or greater equipment expensing in order to achieve significant benefits to the U.S. economy and the competitiveness of U.S. companies.
Also at the end of 2007, former House Ways and Means Committee Chairman Charles Rangel (D-NY) introduced a $1.3 trillion tax measure, the Tax Reduction and Reform Act of 2007 (H.R. 3970), /10/ which was partially offset by provisions similar to the Obama Administration’s limitations on the deferral rule and on the use of foreign tax credits. Although the legislation did not receive a hearing or markup, it continues to serve as a marker for a broader tax-reform agenda.
For more information, please contact Mark Warren, tax consultant at mark.warren@rila.org.
Additional References
RILA supports tax policies that will improve the business climate for retailers, both domestically and internationally, by helping them continue to create jobs and bring price-competitive value to American consumers. RILA also supports tax policies that spur economic growth by maintaining low income tax rates to help taxpayers keep more of what they earn for savings, investment, and spending. Contrary to these goals would be a consumption-based tax system, such as a national sales or value-added tax.
With the beginning of the 112th Congress, considerable attention has been focused on tax reform in varying respects. Both the House Ways and Means Committee and the Senate Finance Committee have held a series of hearing focusing on fundamental tax reform, which are expected to continue at least through 2011.
President Obama has taken a narrower perspective, advocating only reform of the aspects of the tax code applicable to corporations. It remains unclear the extent to which the Administration will engage in broader tax reform applicable to businesses, small and large, individuals, and U.S. businesses competing internationally.
Legislative action on tax reform is not expected in the near term as congressional hearings continue and reform plans are prepared. RILA has submitted testimony for hearings by the House Ways and Means Committee in January /1/ and May 2011, /2/ and to the Senate Finance Committee in July 2011, /3/ emphasizing the importance of lower tax rates and a simple, stable, and predictable tax system for the retail industry. RILA also submitted testimony for the House Ways and Means Committee hearing in July 2011 opposing a national sales or value-added tax. /4/
For its part, the President’s National Commission on Fiscal Responsibility and Reform /5/ released its final report late in 2010, which included broad principles and illustrations for individual and corporate tax reform. /6/
More recently, House Ways & Means Committee Chairman Dave Camp (R-MI) released draft legislation on international tax reform on October 26, 2011. The proposal envisions a significant shift in U.S. tax rules applicable to foreign earnings of U.S. companies, effectively moving the United States to a territorial system based on a 25-percent corporate tax rate. /7/ The Committee has requested comments on the discussion draft and is expected to evaluate revisions well into 2012.
Debate on tax reform is expected to continue as major portions of the tax code are set to expire once again at the end of next year – the annual business tax provisions will expire at the end of 2011 and the tax relief enacted in 2001/2003 will expire after 2012. /8/ Moreover, efforts to enact budget reforms continue to contemplate the role that tax reform should play in addressing the serious fiscal challenges facing the nation and the need for U.S. businesses to remain competitive in the global marketplace.
Retail taxpayers typically have among the highest effective tax rates, hitting the top statutory rate of 35 percent in many cases. In addition, retail companies typically benefit from few tax provisions currently in the tax code. As a result, RILA urges Congress to undertake a comprehensive effort to broaden the tax base in order to lower the business tax rates substantially. RILA looks forward to working with policymakers at all levels of government to implement meaningful tax reform that includes provisions that support the retail industry, help it grow, and create jobs.
As part of any major tax reform proposal, it is important to recognize that the current rules governing individual taxation and domestic and international taxation are inexorably intertwined. Accordingly, fundamental tax reform must address all aspects of the tax system, and Congress should focus on the following principles:
Retail is vital to our nation’s economy, representing one of the largest industry sectors in the United States with more than 14 million jobs today /9/ and $3.9 trillion in annual sales according to the most recent data from 2010. /10/ The industry pays billions of dollars in federal, state, and local income taxes, and collects and remits billions more in state and local sales taxes.
Most policymakers recognize that the current federal tax system is overly complex and in dire need of reform. The last major overhaul of the system occurred with the enactment of the Internal Revenue Code of 1986, which compressed 15 individual income tax brackets down to two and restructured much of the corporate tax system as well. Since 1986, Congress has made thousands of changes to the tax code, in many cases only on a temporary basis, increasing its complexity, instability and compliance burdens for individuals and businesses alike. Periodically, over the past two decades efforts to reform the tax code have been started, but none have reached fruition.
Legislation introduced in the 112th Congress concerning fundamental tax reform, includes the Bipartisan Tax Fairness and Simplification Act of 2011, introduced by Sen. Ron Wyden (D-OR) and Sen. Dan Coats (R-IN). While this legislation models reform on the structure of the 1986 Tax Reform Act, it also includes provisions to eliminate important provisions under current law, such as the last-in-first-out (LIFO) inventory accounting method. /11/ Although some plans for fundamental tax reform are more specific than others, none includes the level of detail that would be required to make a plan completely operational, and significant transitional considerations remain to be addressed.
More broadly, the work of the National Commission on Fiscal Responsibility and Reform in 2010 (noted above), adds to the historic efforts to rekindle broad-based tax reform and follows the review undertaken by the President’s Economic Recovery Advisory Board in 2009 and 2010. The latter panel released a report on August 27, 2010, which outlines a range of tax reform options, including a corporate rate reduction, but the report makes no specific recommendations and did not mention a value-added or national sales tax. /12/
Another recent example was the President’s Panel on Federal Tax Reform, established by President Bush. On November 1, 2005, the Panel released its final report, which recommended two options to reform the tax code. /13/ The first, the Simplified Income Tax Plan, would eliminate most of the current targeted tax deductions and hidden taxes like the Alternative Minimum Tax, and provide lower tax rates. It also proposed an updated corporate tax regime to help American corporations compete in global markets. The second option, the Growth and Investment Tax Plan, expanded on the Simplified Income Tax Plan by seeking to eliminate the tax on individual savings and businesses investments by establishing a single, low tax rate on dividends, interest, and capital gains and allowing businesses to expense their investments immediately. Notably, the Panel’s report did not include a recommendation for a national retail sales or value-added tax.
Similarly, the Treasury Department released a study in December, 2007, outlining three broad approaches to overhauling the corporate tax code. /14/ The first approach would replace the corporate income tax with a business activity tax (BAT) with a tax rate between 5 percent and 6 percent to achieve revenue neutrality. Companies would be taxed on gross receipts, minus the cost of goods and services purchased from other businesses. Because wages would no longer be deductible, this approach would raise business taxes on labor. Treasury estimated this approach would improve economic performance, ultimately increasing the size of the economy by roughly 2.0 percent to 2.5 percent over the long term.
The second option would lower the maximum corporate tax rate (currently 35 percent) by eliminating the majority of business tax deductions, including the research and development tax credit, deduction for charitable contributions, and low-income housing tax credit. Of particular importance to retailers, this approach did not contemplate changes to the LIFO or the lower-of-cost-or-market inventory accounting methods. This approach would also implement a territorial system for the taxation of U.S. companies’ foreign earnings. Treasury estimated that to maintain revenue neutrality the rate could be lowered to 28 percent with full business-tax base broadening or 31 percent if accelerated depreciation was retained. However, the report noted that at such tax rates, this approach would not provide much, if any, net gain to the U.S. economy. In addition, U.S. statutory business tax rates would still be higher than those of most Organisation for Economic Cooperation and Development (OECD) countries. Treasury estimated that business tax rates would have to be cut dramatically (e.g., 20 percent) or greater equipment expensing would have to be provided in order to achieve more significant benefits to the U.S. economy.
Third, short of full reform of the tax code, the Treasury study offered a package of proposals aimed at specific areas of the business tax system that could be modified, including elimination of multiple taxation of corporate profits through a corporate capital gains rate and dividends received deduction, modification of the tax bias favoring debt financing, improvements to the taxation of international income, broader allowance of losses, improvements to book-tax conformity, and other areas to improve tax administration.
RILA opposes proposals to repeal long-standing accounting methods applicable to retailers, namely the last-in/first-out (LIFO) and the lower-of-cost-or-market (LCM) methods of accounting. LIFO and LCM are essential inventory-accounting methods used for decades by companies throughout the United States for financial reporting purposes as well as for determining their federal tax liability. Because of the nature of the business, LIFO and LCM (particularly under the retail inventory method) are widely used within the retail industry.
In his Fiscal Year 2012 budget, President Obama again proposed to repeal LIFO and LCM, /1/ and the budget assumes both changes would be effective beginning in 2013. The Administration has also raised the LIFO proposal as part of the debate surrounding extension of the federal debt limit for purposes of raising additional revenues.
The Obama Administration estimates /2/ that LIFO repeal would raise more than $52.8 billion through 2021, significantly less than the $69.7 billion estimated by the Joint Committee on Taxation (JCT). /3/ Similarly, the Administration estimates that LCM repeal would raise more than $8.2 billion over 10 years, while the JCT estimated substantially less, approximately $3 billion over 10 years. /4/ The difference in the estimates is likely due to differing assumptions regarding the use of LIFO and LCM by U.S. businesses.
RILA, along with the broader business community, has made headway with many congressional tax-writers in opposing the repeal of inventory accounting methods. However, both of these proposals remain a threat given their significant revenue-raising potential and Congressional deliberation over debt and tax reform.
RILA urges members of Congress to oppose repeal of these widely accepted inventory accounting methods, which the tax law and regulations have permitted companies of all sizes throughout the U.S. economy to use since as early as 1918. Any income-based tax system must include accounting methods that enable businesses, which purchase and sell millions of items of inventory every day, to determine the cost of such inventory and the resulting income or loss in an efficient manner so that taxable income can be reflected accurately.
A fundamental principle of accounting is to match the sale of an item with its cost in order to produce a clear reflection of the selling company’s income. Because of the difficulty in accounting for inventory on an item-by-item basis, businesses are permitted to use several different methods to identify the cost of the inventory sold, including the first-in/first-out (FIFO) method, the last-in/first-out method (LIFO), and the retail inventory method. For purposes of determining a company’s remaining inventory at year end, financial and tax accounting rules also permit businesses in certain cases to write down the book value of an inventory item – under the lower-of-cost-or-market (LCM) method – to take into account a decrease in the economic value of the item offered for sale.
Last-in/First-out Accounting Method
Under the LIFO method, a business assumes that the last item added to inventory is the first item sold. Thus, current sales are reduced by the cost of the most recently acquired inventory to determine the net income from the sale. (Under the FIFO method, the business assumes that the first item added to inventory is the first item sold.)
When inventory costs are rising, as in an inflationary period, the LIFO method results in lower taxable income since the cost of goods sold reflects the more recent, higher inventory values. Conversely, if inventory costs decline during a year, LIFO will increase taxable income as current lower-cost inventory values are used to determine the business’ cost of goods sold. Under the Internal Revenue Code, a business may only use the LIFO method if it also applies it for financial-accounting purposes, and once adopted, taxpayers may not switch between inventory accounting methods without consent of the Internal Revenue Service.
For many retail businesses, LIFO is a more accurate method for measuring financial performance and calculating the associated income tax. LIFO takes into account the greater costs of replacing inventory, thereby giving a more conservative measure of both the financial condition of the business and the economic income subject to tax. Absent LIFO, phantom profits would be taxed. In addition, LIFO improves a company’s cash flow, which allows the company to use its retained capital more efficiently to finance ongoing inventory replenishment.
LIFO repeal would mean a forced change in fundamental tax accounting for any business that has historically relied on LIFO for its tax reporting, including countless retailers. As a result, such businesses would have to recapture their LIFO reserves. The result would be substantial additional income tax, even if spread over several years, especially for businesses that have relied on LIFO for many years or even decades. In effect, elimination of LIFO would amount to an enormous retroactive tax increase by repealing fully authorized deductions from income with respect to products sold, in many cases years or decades in the past. Moreover, since companies would have no economic income from such an accounting adjustment, they would effectively be taxed on non-existent cash flow.
Moreover, LIFO repeal will create future tax increases for businesses if inflation accelerates as some expect due to the fiscal imbalances facing the United States. Since inflation increases prices, a business that can no longer utilize LIFO will have to calculate its taxable income based on older inventory costs that do not reflect the inflationary growth in prices, resulting in a higher future tax bills.
Lower-of-Cost-or-Market Accounting Method
Retail businesses that do not use LIFO, often apply the LCM method to write down the book value of their ending inventory that has declined in economic value. Under this accounting method, the business determines the market value of its inventory at the end of the business’ tax year (generally the cost of replacement or reproduction of the item or comparable sales), and then writes down that value to the lower of the inventory’s original cost or the current market value. The tax law also permits a business to write down the cost of certain “subnormal” goods, such as those that cannot be sold in the ordinary manner due to damage, imperfections, shop wear, changes of style, odd or broken lots, or similar causes). In addition, retailers are permitted to use LCM under the retail inventory method. Unlike the use of LIFO, a business applying the LCM method or subnormal goods method for tax purposes is not required to use it for financial reporting purposes.
In explaining the reasons for the Administration’s FY 2012 budget proposal to repeal the LCM and subnormal goods methods, the Treasury Department stated that “[t]he allowance of inventory write-downs under the LCM and subnormal goods provisions is an exception from the realization principle, and is essentially a one-way mark-to-market regime that understates taxable income.” /5/ To the contrary, these accounting methods, which originated from the principle of conservatism in financial accounting, have evolved to provide relief to businesses in situations where the value of their inventory has declined to create a measurable loss.
The LCM and subnormal goods methods provide an important cushion during economic downturns, including the current economic environment. Without these methods, businesses are precluded from recognizing the loss until disposal of the inventory. The loss in value is a real economic loss, and these methods allow businesses to recognize the loss in the year it occurs. Moreover, any recovery in the value of the inventory in a subsequent year is not lost. Rather, the business will recognize a larger amount of taxable income in the year the inventory is sold.
Repeal of the LCM and subnormal goods methods would mean higher taxes on a retailer that would no longer be able to account for a current economic loss in inventory value, but instead would have to wait until it is able to dispose of such items. In addition, during economic downturns, the value of the LCM write-down will also grow, especially under the retail inventory method as retailers are forced to mark down retail prices. Thus, the repeal of the LCM method will have an even greater adverse effect on businesses’ tax liabilities in a down economy, at a time when businesses can least afford additional tax liabilities.
Legislative and Regulatory Activity
In recent Congresses, significant legislative efforts have included LIFO and LCM repeal as a means to generate revenue. In 2006, Senate leaders proposed repealing the LIFO inventory accounting method to pay for a $100-per-family gas-tax rebate. They eventually dropped the proposal because of backlash from the business community, including a strong response from RILA.
During the 109th Congress, former House Ways and Means Committee Chairman Charles Rangel (D-NY) introduced a $1.3 trillion tax measure, the Tax Reduction and Reform Act of 2007 (H.R. 3970), /6/ which was partially offset by repealing LIFO and LCM over an eight-year period. Although the legislation did not receive a hearing or markup, it continues to serve as a marker for a broader tax-reform agenda.
President Obama’s Fiscal Year 2012 budget follows his first two budget submissions, which also included LIFO repeal to help pay for other policy priorities. The Fiscal Year 2010 and 2011 budgets similarly proposed the repeal of the LCM method, while specifically designating the resulting revenue in 2010 for the Obama Administration’s health care reform initiative. (Repeal of the LCM method was also included in budget submissions by the Clinton Administration.) Additionally, in its final report released in December 2010, the President’s National Commission on Fiscal Responsibility and Reform proposed in to repeal LIFO as part its principles for business tax reform. /7/
On a separate track, the U.S. Securities and Exchange Commission (SEC) has been considering the adoption of International Financial Reporting Standards (IFRS) to replace the United States’ Generally Accepted Accounting Principles (GAAP). /8/ If adopted, IFRS would mean an end to the LIFO accounting method for SEC registrants since LIFO is not allowed under the international accounting rules. (The LCM method would continue to be permitted under IFRS, with certain modifications.) However, it is unlikely that Congress would refrain from acting on LIFO repeal or modification while the SEC considers such a change given the amount of revenue that the repeal would generate under the current congressional budget rules.
For more information, please contact Mark Warren, tax consultant, at mark.warren@rila.org.
RILA supports legislation to make the Work Opportunity Tax Credit (WOTC) permanent, including recent expansion of the credit. The WOTC provides an incentive for companies to hire hard-to-employ workers and to contribute to the recovery of economically lagging areas. Since its enactment in 1996, this tax credit has help businesses across the nation, including retailers, provided quality jobs to Americans who might otherwise remain unemployed.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA) extended the WOTC through 2011. /1/
In 2009, President Obama signed the American Recovery and Reinvestment Act (ARRA), /2/ which included a provision to expand the WOTC temporarily to include two new targeted groups: unemployed veterans and disconnected youth. The provision became effective on February 17, 2009, and applies to qualified individuals hired between January 1, 2009, and December 31, 2010. The extension of the WOTC under TRUIRJCA, however, did not include the ARRA expansion of the credit for unemployed veterans and disconnected youth.
The Obama Administration proposed in its Fiscal Year 2012 budget to extend the WOTC through 2012. /3/ Representatives Aaron Schock (R-IL) and Charles Rangel (D-NY) have introduced the Work Opportunity Credit Improvements Act, which would extent the WOTC through December 31, 2014 and make other modifications to the program, including application of the credit to veterans and disconnected youth (renamed “at-risk youth). /4/
As part of legislation to repeal the 3-percent withholding requirement on payments to government contractors, H.R. 674, the WOTC credit available for hiring veterans was expanded to include a $2,400 to $5,600 credit depending on the veteran’s length of unemployment and a credit of up to $9,600 for hiring veterans with service-connected disabilities who have been unemployed for more than six months. /5/ The expanded veterans-hiring provisions are effective from November 21, 2011 through 2012.
RILA urges Congress to make the WOTC permanent as soon as possible, including restoration of the expanded application of the WOTC to unemployed veterans and disconnected youth. Short of that goal, RILA will continue to advocate for extending the credit.
Congress created the WOTC in 1996 as part of the Small Business Job Protection Act. /6/ This federal tax credit assists employers in hiring individuals from specific targeted groups, including recipients of public assistance, qualified veterans, disabled persons, low-income seniors, high-risk youth, and residents of designated areas. Under current law, businesses may claim a WOTC equal to 40 percent of the first $6,000 of wages paid to employees from these qualifying groups, and the credit is allowed on a larger amount of annual wages for disabled veterans and long-term welfare recipients.
The WOTC helps many retailers offset the added costs of hiring and training individuals who have been on public assistance programs, and through these credits, businesses have helped thousands of disadvantaged individuals find meaningful employment in retail and other settings.
Permanent extension of the WOTC will help retailers administer these programs more efficiently. For the last few years, Congress has allowed this credit to lapse, ultimately extending it retroactively. A permanent program would remove uncertainty in business planning, expand employer participation, and improve program administration.
The past few years have also seen significant WOTC expansion. Most recently, under the ARRA, the WOTC applied temporarily to an unemployed veteran if he or she was discharged or released from active duty from the Armed Forces during the five-year period prior to hiring and received unemployment compensation for more than four weeks during the year before being hired. The ARRA also expanded the WOTC to include disconnected youth – an individual between the ages of 16 and 25 who has not been regularly employed or attended school in the past six months. Both expansions expired at the end of 2010.
RILA supports the extension of the credit for increasing research activities – commonly known as the research and development (R&D) tax credit. Retailers are continually looking for ways to provide cutting-edge products, manage costs, and keep consumer prices down. The R&D tax credit helps many retailers develop new products, often through private-label brands, as well as develop innovative technology and software.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the R&D tax credit through 2011. /1/ Under the prior extension, the Emergency Economic Stabilization Act of 2008 (EESA) /2/ also increased the new alternative simplified research credit (ASC) from its original 12 percent to 14 percent for qualified research expenses, and the legislation terminated the alternative incremental credit after December 31, 2008.
The Obama Administration proposed in its Fiscal Year 2012 budget to enhance the R&D credit and make it permanent. /3/ In the current Congress, on March 8, 2011, Representative Kevin Brady (R-TX) introduced the American Research and Competitiveness Act of 2011, which would extend the regular R&D tax credit through 2012, increase the ASC to 20 percent, and make the ASC permanent. /4/ Senators Max Baucus (D-MT) and Orrin Hatch (R-UT) introduced similar legislation – the Greater Research Opportunities with Tax Help Act of 2011 (GROWTH Act) on September 19, 2011. /5/
RILA urges Congress to make the R&D tax credit permanent to encourage businesses to invest in long-term product development and technological improvements in the United States. Short of that goal, RILA will continue to advocate for extending the credit and the ASC percentage for a multi-year period, given the importance of the R&D tax credit to the retail industry.
As part of the Economic Recovery Act of 1981, /6/ Congress enacted a tax credit for research and development expenses. Since it was established, the R&D credit has been extended 14 times, often retroactively after it had lapsed. The credit has also been tightened and expanded many times during the 30 years it has existed.
Today, businesses can claim a 20-percent tax credit for certain qualified R&D expenditures that exceed an historic base amount. Beginning in 2007, /7/ businesses were permitted to claim the alternative simplified research credit, which is now equal to 14 percent of the qualified research expenses for the taxable year that exceed 50 percent of the average research expenses for the three preceding years. (Between 1996 /8/ and 2009, /9/ an alternative incremental research credit (AIRC) also existed, which was based on a three-tiered system of fixed-percentage credits.)
The R&D credit applies to qualified R&D expenditures, such as wages paid with respect to research activities, certain payments to third-party contractors for qualified research, and materials and supplies used to conduct the research. However, the credit is available only for R&D expenditures incurred in the United States.
For retailers, the R&D credit is an important incentive for the development of new and improved materials and products – often seen as “private labels.” Many retailers also utilize the credit to help finance innovative research into new technology and software in areas such as inventory management, packaging, loss prevention, production development, and automated systems.
Making the R&D tax credit permanent (or at a minimum enacting a multi-year extension) is essential for the credit to achieve its objective of encouraging long-term research and development in the United States and its aim of increasing the high-paying U.S. jobs that such research requires. Too often over the past three decades, the R&D credit has been allowed to lapse, and the extensions have often been for only one or two years. The result has been significant uncertainly for businesses seeking to undertake research projects, which can frequently span multiple years. Moreover, the uncertainty surrounding the credit has had adverse effects on financial reporting for companies relying on the credit when it has lapsed.
The R&D credit is also an important inducement for businesses to keep research activities in the United States. In recent years, foreign governments have offered substantial tax and other financial incentives to attract U.S. companies to invest their research dollars abroad. In an increasingly global economy, the R&D credit helps level the playing field so the United States can maintain its position as a leader in research and development.
As retailers work to recover from the recent lengthy recession, RILA also supports the bonus depreciation and other stimulus provisions intended to encourage economic growth and job creation.
With the enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA), /1/ the AMT exemption was adjusted and extended through 2011, and individual tax relief enacted in 2001/2003 was extended through 2012. TRUIRJCA also extended dozens of other expiring tax provisions generally through 2011, including the state and local sales-tax deduction and the other business provisions listed above.
TRUIRJCA also provided important economic stimulus incentives for business investments – 100-percent expensing for certain business assets placed in service in 2011 and 50-percent bonus depreciation for such assets in 2012.
RILA urges Congress to enact legislation to extend the temporary business tax provisions that expire at the end of 2011. In addition, RILA urges Congress to extend all of the individual tax relief enacted in 2001/2003, which is now scheduled to expire at the end of 2012. Ideally, these tax provisions should be made permanent.
Should Congress undertake fundamental tax reform, RILA will continue to advocate for permanent tax policy with respect to the individual tax rates as well as business tax provisions to ensure a stable, consistent and predictable tax code that fosters economic growth and the competitiveness of American businesses in the global marketplace. Additionally, RILA believes that tax reform legislation should permanently repeal the AMT to provide additional tax relief, especially to moderate-income earners.
Since the tax code was last reformed in 1986, Congress has enacted dozens of important tax provisions for American businesses to encourage:
Unfortunately, due to budgetary and political constraints, too many of these provisions were enacted on a temporary basis, requiring repeated extensions (increasingly on a retroactive basis). The uncertainty resulting from such temporary tax policy makes it difficult for American businesses, which rely on five- and ten-year business strategies, to plan effectively for the future and remain competitive in an increasingly global economy.
During economic downturns, such as the recent recession, Congress has also enacted temporary tax provisions to help stimulate the economy and job growth. For example, in the Economic Stimulus Act of 2008, Congress expanded the amount of new equipment purchases that small businesses could immediately expense and allowed all businesses to claim 50-percent bonus depreciation on qualifying assets placed in service during 2008. For businesses unable to utilize the bonus-depreciation incentive (e.g., businesses with net operating losses), the Housing and Economic Recovery Act of 2008 allowed companies in 2008 to claim unused corporate AMT credits or R&D credits in lieu of the bonus depreciation and receive a refund to invest in new property or equipment. With the enactment of the American Recovery and Reinvestment Act of 2009, these provisions, designed to stimulate business investments, were extended through 2009. As the economy continued to seek its footing, the bonus depreciation provision was extended through 2010 under the Small Business Jobs Act, and full business expensing was provided for 2011 under TRUIRJCA (with 50-percent expensing in 2012).
For individuals and families, the temporary nature of much of the tax code also makes it increasingly difficult for them to plan for the future, especially in terms of saving for education and retirement. Beginning in 2001 with the Economic Growth and Tax Relief Reconciliation Act, /2/ substantial tax relief was provided for individuals, including owners of pass-through businesses (e.g., S corporations, partnerships, and sole proprietorships), ranging from lower tax rates, expanded child tax credit, and marriage penalty relief to expanded expensing of equipment, lower rates on capital investments, and estate-tax relief. Through subsequent legislation – Jobs and Growth Tax Relief Reconciliation Act of 2003, /3/ Working Families Tax Relief Act of 2004, /4/ and Tax Increase Prevention and Reconciliation Act of 2005 /5/ – these temporary provisions were generally aligned to expire at the end of 2010 – and all were extended through 2012 under TRUIRJCA.
Making the tax relief enacted since 2001 permanent will help stimulate the nation’s economy. By enabling American taxpayers, especially low-and moderate-income earners, to retain more of their earnings, the tax relief will stimulate savings, investment and spending on retail purchases. Moreover, permanent extension of this tax relief will make it easier for families to plan their financial future by eliminating the uncertainty about whether and when their taxes will increase should these temporary tax provisions expire.
Another temporary provision affecting a growing number of individuals is the AMT. Under current law, individual taxpayers are generally required to pay either the regular tax or the AMT, whichever is greater. Unlike the regular tax, however, the various aspects of the AMT were never indexed for inflation. As a result, it now affects several million taxpayers, with millions more at risk each year (and affecting increasingly lower amounts of taxable income) if the exemption amount is not extended and adjusted for inflation.
Originally established in 1969 to ensure that the top income earners in the United States (which numbered a few hundred individuals) did not entirely escape taxation, the AMT has grown far beyond its intended purpose and now threatens millions of Americans and a growing number of moderate-income earners. In past years, Congress has annually enacted legislation to constrain the AMT’s expansion by increasing the exemption amount from the alternative tax. Permanent repeal of the AMT will provide much-needed certainty as well as critical tax relief to the middle-income earners and families.
RILA supports balanced measures to strengthen corporate governance, including reasonable reforms to executive compensation practices, that would strengthen shareholder communications and information without impeding the innovation, responsible risk taking, and strategic decision making of the nation’s retailers. RILA is opposed, however, to one-size-fits-all proposals that would impose unnecessary, costly, and overly restrictive corporate governance requirements on publicly traded corporations, which include the vast majority of retail leaders.
In the wake of the crises in the financial and mortgage sectors, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. /1/ The bill includes a number of corporate governance provisions – namely requirements that the Securities and Exchange Commission (SEC) issue rules that:
Prior to the Dodd-Frank legislation, the SEC issued several proposals concerning corporate governance. On July 1, 2009, the SEC issued a proposed rule titled, “Proxy Disclosure and Solicitation Enhancements,” which would, among other things, expand existing compensation disclosure requirements to include the relationship of the company’s compensation policies to risk, and impose new disclosure requirements concerning the qualifications of directors, executive officers and nominees and the company’s leadership structure. /2/ RILA submitted comments on the proposed rule, urging the SEC to avoid a one-size-fits-all rule and recommending substantial revisions to prevent unnecessary burdens and potential competitive harm to retailers. /3/ A final rule on proxy disclosure was approved by the SEC on December 16, 2009. /4/
On August 25, 2010, the SEC finalized its rule titled “Facilitating Shareholder Director Nominations,” commonly referred to as the proxy-access rule. /5/ This proposed rule would allow certain large shareholders and shareholder groups (i.e., those owning at least 3 percent of the voting shares for at least 3 years) to include in the company’s proxy materials (at the company’s expense) nominations for up to 25 percent of the company’s directors. On July 22, 2011, the District of Columbia Circuit Court of Appeals vacated the SEC’s proxy-access regulations, finding that the regulations were arbitrary and capricious under the Administrative Procedure Act and that the SEC failed to assess properly the rules’ effects on “efficiency, competition and capital formation” as required by law. /6/
The SEC also released proposed rules regarding the say-on-pay vote on October 18, 2010, /7/ and final rules concerning the whistleblower program on May 25, 2011. /8/
While the SEC is not expected to take up the CEO-median employee compensation disclosure requirements under the Dodd-Frank bill until the next year, RILA submitted a pre-comment letter outlining the significant costs and burdens that the disclosure requirement poses for the retail industry. /9/ In addition, on June 22, 2011, the House Financial Services Committee reported favorably the Burdensome Data Collection Relief Act, /10/ which would repeal the compensation-ratio disclosure requirement, and action in the full House is expected.
Corporate governance has generally been within the purview of the states and prescribed by the state laws in which a business is incorporated. A fundamental tenet of state corporate law is that shareholders, as investors in the company, have the right to elect directors who represent them on the corporation’s board of directors, which in turn hires executives to manage the day-to-day operations of the company. The responsibility of the board and management is to pursue policies that will achieve successful outcomes for the corporation and enhance the value of the shareholders’ investments in the company. Shareholders do not have direct management control of the company, although they are generally accorded a say on certain major events affecting a corporation, such as merger and acquisition transactions and equity-compensation plans.
While the federal securities laws were never intended to regulate the internal affairs and management of corporations, they do play a significant role in ensuring that shareholders have sufficient information to exercise their voting rights. SEC rules require companies to disclose extensive information about the operating and financial results of publicly traded corporations as well as a wide array of information, including corporate management, executive compensation, internal controls, risk management, litigation, and contingencies.
Recent legislation and proposals by the SEC are intended to give shareholders more detailed information and more direct access to the management of the corporations in which they invest. However, due to the size of publicly trade corporations and the constant turnover in their shareholders, it is not feasible to operate such a business as a pure shareholder democracy. Such a fundamental shift in corporate control would create a host of unintended consequences, such as:
RILA member companies have built strong relationships with their shareholders, and through strong, positive dialogues between shareholders and company directors and management, RILA members have listened and responded to many shareholders concerns and proposals to improve corporate governance in recent years. RILA members’ boards and management work hard to make sure that strategic and operating plans are in place to control risk-taking appropriately and to ensure the long-term success of the corporation and long-term enhancement of shareholder value. Legislative and regulatory proposals that threaten that balance undermine well-performing boards and, thus, are not in the best interest of, and could ultimately be detrimental to, the corporations and their shareholders.
1. Public Law 111-203 (Jul. 21, 2010) – available at: http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf. 2. 74 Fed. Reg. 35076 (2009) (to be codified at 17 CFR PARTS 229, 239, 240, 249, 270 and 274) (proposed Jul. 10, 2009) – http://www.sec.gov/rules/proposed/2009/33-9052.pdf. 3. Letter from Mark E. Warren, Vice President, Tax and Finance, Retail Industry Leaders Association, to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission (Sep. 15, 2009) – available at: http://www.rila.org/news/pblccomments/Testimony%20Documents/RILA%20Comments%20re%20SEC%20File%20S7-13-09.pdf.4. 74 Fed. Reg. 68334 (2009) (to be codified at 17 CFR Parts 229, 239, 240, 249 and 274) (adopted Dec. 16, 2009) – available at: http://www.sec.gov/rules/final/2009/33-9089.pdf.5. 74 Fed. Reg. 56668 (2010) (to be codified at 17 CFR Parts 200, 232, 240 and 249) (adopted Aug. 25, 2010) – available at: http://www.sec.gov/rules/final/2010/33-9136.pdf.6. Business Roundtable & Chamber of Commerce v. U.S. Securities and Exchange Commission, Case No. 10-1305 (Sept. 29, 2010) – available at: http://www.cadc.uscourts.gov/internet/opinions.nsf/89BE4D084BA5EBDA852578D5004FBBBE/$file/10-1305-1320103.pdf.7. 74 Fed. Reg. 66590 (2010) (to be codified at 17 CFR Parts 229, 240, and 249) (adopted Oct. 18, 2010) – available at: http://www.sec.gov/rules/proposed/2010/33-9153fr.pdf. 8. 75 Fed. Reg. 34300 (2011) (to be codified at 17 CFR Parts 240 and 249) (adopted May 25, 2011) – available at: http://sec.gov/rules/final/2011/34-64545.pdf. 9. Letter from Mark E. Warren, Vice President, Tax and Finance, Retail Industry Leaders Association, to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission (Oct. 27, 2010) – available at: http://www.rila.org/email/RILACommentsDodd-FrankSec953.pdf. 10. H.R. 1062, 112th Cong., 1st Sess. (May 25, 2011) – available at: http://financialservices.house.gov/UploadedFiles/HR1062_REPSUBCOM_xml.pdf. See also, Letter from Bill Hughes, Senior Vice President, Government Affair, Retail Industry Leaders Association, to the Hon. Spencer Bachus, Chairman, Committee on Financial Services, U.S. House of Representatives (Jun. 20, 2011) – available at: http://www.rila.org/email/HR1062supportletterHFSChairman.pdf.
RILA supports federal legislation that would grant states the authority to require businesses to collect and remit, through a simplified system, state sales and use taxes on remote sales, including sales made over the Internet and through other remote methods. RILA also supports state action seeking to allow states collection authority by establishing nexus for online-only retailers through various means, or through direct state assessments of online-only retailers that have established facilities in a given state, as stop-gap measures until federal action to level the playing field can be enacted. Today, brick-and-mortar retailers are required to collect sales taxes while many online and catalog retailers are not. This difference is not only unfair to brick-and-mortar retailers, which create jobs in the community, but it is also costing states and localities, which are already facing severe budget crises, billions of dollars in lost revenue that could benefit vital public services and/or lower state tax rates.
Faced with significant budget deficits caused by the recent recession and slow economic recovery, states have been grappling with steep drop offs in revenues, which has prompted many states to consider various approaches to crack down on the sales-tax collection loophole enjoyed by online-only retailers. States like New York, North Carolina, Rhode Island, and most recently, California, Illinois, Connecticut, Vermont and Arkansas, have enacted affiliate-nexus legislation, while other states, like California, Texas, Oklahoma and South Dakota have taken steps to expand their nexus definitions to require businesses with a sufficient connection to the state to collect sales tax. Colorado has adopted a more contentious requirement that online retailers (not already collecting sales taxes) report to state tax authorities regarding purchases made by state residents, which is currently subject to an injunction pending the outcome of litigation challenging the statute. The State of North Carolina has taken a similar approach by administrative action. Legislatures in many other states have considered one or more of these approaches during the 2011 legislative sessions. At the federal level, a new approach to provide states with sales-tax collection authority has been introduced in both Houses of Congress, which recognizes the states’ right to enforce their sales tax collection laws while leveling the playing field for brick-and-mortar retailers. On October 13, 2011, Rep. Steve Womack (R-AR) and Rep. Jackie Speier (D-CA) introduced the Marketplace Equity Act of 2011 (H.R. 3179), along with a strong bipartisan group of cosponsors. /1/ In the Senate, Sen. Mike Enzi (R-WY), Sen. Richard Durbin (D-IL) and Sen. Lamar Alexander (R-TN), introduced the Marketplace Fairness Act 2011 (S.1832) on November 9, 2011, also with strong bipartisan cosponsorship. /2/ Both bills would provide a state with authority to require out-of-state businesses to collect sales taxes if the state implements specified minimum simplification requirements, including an exemption for small businesses, an easily identifiable tax rate, uniform tax-base rules, and centralized filing and remittance of the sales taxes withheld. The bills would also provide collection authority for states opting to join the Streamlined Sales and Use Tax Agreement, which has been the focus of the Main Street Fairness Act (MSFA), introduced earlier this year by Sen. Durbin and Rep. John Conyers (D-MI) and Peter Welch (D-VT) – S. 1452 /3/ and H.R. 2701. /4/
The House Judiciary Committee, which has jurisdiction over sales-tax collection legislation, held a hearing on November 30, 2011, to examine the Internet sales tax collection issue and the need for a federal solution. RILA secured the testimony of a small business owner from Michigan who provided the perspective of a brick-and-mortar retailer struggling to compete with online-only giants that do not collect sales tax in every state.
Streamlined Sales Tax Project
The Streamlined Sales and Use Tax Agreement (SSUTA) /5/ is an agreement among participating states that simplifies and modernizes state sales and use tax laws. The agreement was developed in 2002 in response to two U.S. Supreme Court rulings – National Bellas Hess v. Department of Revenue of the State of Illinois /6/ and Quill Corp. v. North Dakota /7/ – holding that remote sellers could only be required to collect sales tax from customers in states where the sellers have a physical presence. With more than 7,500 state and local jurisdictions collecting sales tax at that time – many with different rates, different kinds of taxable items, and different definitions – the Court recognized that requirements on out-of-state merchants to collect and remit state and local sales taxes were unfair and overly burdensome.
Responding to this situation, 30 states and the District of Columbia – working in conjunction with the business community – approved the SSUTA on November 12, 2002. The agreement simplifies state and local sales tax systems, limits the burdens on interstate commerce, levels the playing field between local and out-of-state merchants, and reduces administrative costs.
Today, 24 states /8/ have enacted legislation to conform their tax laws and implement the requirements of the SSUTA. Legislation has been introduced in additional states to expand the SSUTA’s membership. Sellers also support the SSUTA as evidenced by the more than 1,100 companies volunteering to take advantage of its streamlined compliance requirements. In return, those companies have collected more than $500 million in state and local revenues that would not otherwise have been collected. It is widely accepted, however, that these revenues constitute a small fraction of the amount of sales tax that goes uncollected. Some studies estimate that states lose as much as $23 billion each year in uncollected sales tax.
The SSUTA does not impose a new tax on Internet commerce; it merely provides states with the mechanism to collect legally owed sales taxes that currently go uncollected since few consumers understand that they are obligated to pay the tax directly to their state if the online merchant does not collect sales taxes. Because not all states are likely to join the SSUTA, a comprehensive federal solution now also includes a non-SSUTA avenue for states to begin collecting remote sales taxes. /9/
State Legislative and Administrative Efforts
Without federal legislation, a growing number of states have turned to alternative approaches to collect their sales taxes from out-of-state vendors. Overall, these individual state efforts highlight the significant disadvantage that brick-and-mortar retailers face in the Internet marketplace and the difficult challenges states face in collecting sales taxes due on sales from out-of-state vendors.
The New York affiliate-nexus statute is currently being challenged in New York State court on the grounds that it violates the Commerce Clause of the U.S. Constitution as defined by the 1992 Supreme Court case. Last year, the New York Supreme Court Appellate Division released its ruling on Amazon’s (and Overstock’s) appeal upholding the lower court’s finding that the parties do not have a case that the states’ affiliate-nexus statute is unconstitutional on its face. The court also remanded the case back to the trial court (New York Supreme Court Trial Division) for further proceedings on the specific facts of the case to determine if Amazon’s relationship with its affiliates constitutes actual solicitation and sales to Amazon, thereby establishing sufficient nexus OR if the relationship is merely advertising, which would not be considered sufficient nexus to require Amazon to collect New York sales taxes.
As expected, several companies affected by Colorado’s reporting law have initiated a lawsuit in an effort to overturn the reporting requirement. The Federal court overseeing the litigation issued an injunction in January 2011 against the state’s implementation of the statute until the litigation is decided. Amazon also sued North Carolina in response to the state’s request for similar information on purchases made by North Carolina residents. The litigation gained the support of the American Civil Liberties Union as the case centers on consumer privacy and the First Amendment rights of North Carolina residents. The Federal District Court (Western District of Washington) found that while North Carolina had overstepped privacy boundaries in its broad request, the state could still make a more limited request from online retailers that could include name, address and total purchase amount, which would enable the state to collect the lawful, but to date practically unenforceable, sales taxes directly from its residents.
In September 2010, the Texas comptroller assessed Amazon for roughly $260 million in uncollected sale taxes from Internet sales between 2005 and 2009 citing the presence of an Amazon-owned facility in the state. Other states where Amazon maintains a physical presence but does not collect a sales tax include Arizona, California, Florida, Indiana, Michigan, Nevada, New Jersey, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia and Wisconsin. Special exemptions for new Amazon distribution facilities in Tennessee and South Carolina raised significant public opposition given the impact that such special deals would have on Main Street businesses and state budgets in those states.
In California, after the state adopted both the affiliate NY model legislation as well as the expanded nexus definitions, Amazon started the process for a ballot initiative to reverse the new statute. In response, the California legislature undertook compromise legislation under which Amazon would begin collecting sales tax in California by September 2012 or January 2013 if a federal bill is enacted. That legislation, which Amazon ultimately endorsed, was enacted in September 2011, and represents a significant victory for the state and brick-and-mortar retailers and has led to Amazon’s endorsement of a federal solution to this issue. RILA has been vigilant in monitoring and weighing in as appropriate on these state efforts. The recently formed “Alliance for Main Street Fairness” is an Alliance of large and small brick-and-mortar retailers that are actively supporting many of these independent state efforts. Some notable challenges with this state-by-state legislative approach are that Amazon’s response to such bills has been either to sever its relationships with its in-state affiliates in smaller market states, thereby eliminating its liability for sales tax collection, or to take the state to court, as seen in larger market states like New York. Other state efforts similar to Colorado and North Carolina raise privacy concerns regarding government access to consumer data. Despite these challenges, however, state statutes continue to put pressure on pure-play Internet sellers to collect state sales taxes and compete fairly with brick-and-mortar retailers, including RILA members. RILA will continue to take advantage of the negative public perception that these state efforts create for Amazon and other online-only retailers that do not collect state sales taxes, and will continue to drive home the need for federal legislation that can provide a comprehensive solution.
Federal Legislative Efforts
Although the SSUTA went into effect on a voluntary basis in 2005, passage of federal legislation is needed to level the playing field between retailers and to allow states to collect legally owed sales taxes from out-of-state merchants.
In the last Congress, former Rep. Delahunt introduced Main Street Fairness Act (H.R. 5660), /10/ and in the 110th Congress, former Reps. Delahunt and Ray LaHood (R-IL) and Sen. Mike Enzi (R-WY) introduced the Sales Tax Fairness and Simplification Act (H.R. 3396, /11/ S. 34 /12/ ), to give states that have joined the SSUTA the authority to require out-of-state sellers to collect sales tax on remote sales. In the House, this legislation has been referred to the Judiciary Committee, and while in the Senate, it has been referred to the Finance Committee. On November 30, 2011, the House Judiciary Committee held an oversight hearing on the issue.
As a result of the ongoing state activity, there has been a dramatic shift in attention paid to this issue on Capitol Hill, leading to the introduction of the new approach embodied in the Marketplace Equity Act and the Marketplace Fairness Act. Ultimately, federal legislation is the only comprehensive solution for states to have the authority to require out-of-state vendors to collect sales tax. A federal solution is supported by brick-and-mortar and online retailers, retail and real estate associations, publicly and privately owned shopping centers, state government groups, and organizations representing firefighters, teachers, police and other public-sector workers.
For more information, please contact Joe Rinzel, vice president of state government affairs, at joe.rinzel@rila.org, or Bill Hughes, senior vice president of federal government affairs, at bill.hughes@rila.orgAdditional References
Durbin Amendment: The Dodd-Frank Act, included a Senate amendment originally offered by Senate Majority Whip Dick Durbin (D-IL) that provides authority to the Federal Reserve to ensure that debit card interchange fees are “reasonable and proportional” to actual processing costs. On June 29, 2011, the Federal Reserve approved final rules implementing the Durbin Amendment, modifying the proposed rules issued in December 2010. The new rules, which are set to take effect on October 1, 2011, include the following provisions:
Following the enactment of the Durbin Amendment and leading up to the issuance of final rules, RILA shifted its strategy to the implementation phase of the law and the Federal Reserve rules described above. RILA worked with members of the Merchants Payments Coalition (MPC) to create a Task Force, chaired by RILA and comprised of the MPC Executive Committee, focusing solely on these rulemakings in order derive the maximum results of interchange reform for the retail industry. The Task Force hired counsel, a team of economists, and other industry experts to produce economic white papers and expert testimony that were presented to Federal Reserve staff on November 2, 2010. The white papers also served as the basis for comments that the Task Force provided on the proposed rules implementing the new law.
Tester-Corker/Capito-Wasserman Schultz Delay Efforts: In Congress, legislation was introduced earlier in 2011 in both the United States Senate and the U.S. House of Representatives to delay implementation of the Durbin Amendment by one or two years, respectively. In the Senate, Senators Jon Tester (D-MT) and Bob Corker (R-TN) introduced the Debit Interchange Fee Study Act of 2011 (S. 575) in March, later modifying their proposal and offering it as an unsuccessful amendment to unrelated legislation reauthorizing the Economic Development Administration (S. 782). In addition to Sens. Tester and Corker, the amendment (S.Amdt. 392) was cosponsored by Sens. Kay Hagan (D-NC), Mike Crapo (R-ID), Michael Bennet (D-CO), Roy Blunt (R-MO), Tom Carper (D-DE), Jon Kyl (R-AZ) and Chris Coons (D-DE). If enacted, it would have delayed the effective dates in the Durbin Amendment by one year, directed the Federal Reserve to withdraw the proposed rulemakings, and required a joint study by the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration. On June 8, 2011, having not reached the required 60 votes needed for passage, the Senate voted down the Tester-Corker amendment by a vote of 54-45, effectively killing any further legislative attempts by this Congress to modify or repeal the Durbin Amendment.
In the House, Representatives Shelley Moore Capito (R-WV) and Debbie Wasserman Schultz (D-FL) introduced the Consumers Payment System Protection Act (H.R. 1081). The bill would delay implementation of the effective dates in the Durbin Amendment by one year and direct the Federal Reserve to make revisions to any proposed or final rule if two of the federal agencies (i.e., the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration), required to conduct a joint study under the bill, opposed the rule. Following the failure of the Tester-Corker effort in the Senate, the House Financial Services Committee has not indicated any plans to take up the Capito bill.
Similar to efforts that RILA led with respect to the passage of the Durbin Amendment, RILA executed an aggressive media, grassroots, and advocacy strategy with a small-business focus to ensure that neither the Senator nor House bill were successful in delaying the Durbin Amendment.
DOJ Lawsuit Against American Express, MasterCard and Visa: On October 4, 2010, the U.S. Department of Justice (DOJ) and the Attorneys General (AGs) from Connecticut, Iowa, Maryland, Michigan, Missouri, Ohio and Texas filed a lawsuit against Visa, MasterCard and American Express claiming anticompetitive practices relating to prohibitions placed on merchants’ ability to steer customers towards cheaper forms of payments. Simultaneous with the filing of the lawsuit in the United States District Court for the Eastern District of New York, the DOJ announced that it had entered into a settlement with Visa and MasterCard with respect to the case. American Express subsequently announced that it would challenge the lawsuit. While DOJ officials have indicated their belief that the case will bring more competition on interchange fees, the lawsuit and subsequent settlement do not challenge the more egregious practices by the credit card networks, including the honor-all-cards rule and the prohibition against merchant surcharging.
The central provision of the proposed settlement prohibits Visa and MasterCard rules that prevent merchant from: “(1) offering the customer a price discount, rebate, free or discounted product or service, or other benefit if the customer uses a particular brand or type of General Purpose Card or particular form of payment; (2) expressing a preference for the use of a particular brand or type of General Purpose Card or particular form of payment; (3) promoting a particular brand or type of General Purpose Card or particular form of payment through posted information; through the size, prominence, or sequencing of payment choices; or through other communications to the customer; or (4) communicating to customers the reasonably estimated or actual costs incurred by the merchant when a customer pays with a particular brand or type of General Purpose Card.” Visa and MasterCard are also required to notify DOJ and the state AGs if they adopt any new rule that “limits or restrains how Merchants accept, process, promote, or encourage use of Forms of Payment other than General Purpose Cards or of General Purpose Cards bearing the Brand of another General Purpose Card Network.”
In December 2010 RILA filed public comments with the DOJ under the Tunney Act, stressing that the settlement would be largely ineffective unless merchants were provided with visual and/or electronic identifiers in order to instantaneously determine the interchange rate associated with each card to determine if some sort of a discount or other benefit should be applied at the point of sale. On June 14, 2011, the DOJ filed its responses to the public Tunney Act comments, and, as expected, the DOJ did not modify the proposed settlement agreement. In its response to RILA’s comment letter, DOJ noted that Visa and MasterCard will make available an electronic system for identifying a credit card’s interchange rate and that the two networks will “face consequences” under the agreement if they impose or increase fees for the system that “prevent or restrain merchants from engaging in” permitted steering activities. The DOJ, however, dismissed the need for a visual identifier on the card to help merchants and consumers determine the type of card.
RILA anticipates that the court will approve the settlement without modification later this summer. RILA will continue to urge the DOJ to take other actions to bring competition and transparency to interchange fees.
TCF Constitutional Challenge of Durbin Amendment: On October 12, 2010, TCF National Bank of Minnesota filed suit challenging the constitutionality of the interchange provisions included in the Dodd-Frank Act (National Bank vs. the Board of Governors of the Federal Reserve System). The lawsuit seeks a preliminary injunction against the enforcement of the Durbin Amendment and is based on three primary grounds: (1) the amendment is facially unconstitutional under the Due Process Clause of the Fifth Amendment of the U.S. Constitution because the forthcoming regulations will prevent TCF from “recovering its costs and earning a fair rate of return on its invested capital”; (2) the amendment constitutes a taking of property without just compensation in violation of the Takings Clause of the Fifth Amendment; and (3) the Durbin Amendment violates TCF’s right to equal protection of law as applied to the United States through the Due Process Clause.
Following an April 4, 2011, hearing, the U.S. District Court of South Dakota denied TCF’s motion for a preliminary injunction, finding that TCF “has not shown a likelihood of success on the merits.” Subsequently, TCF filed an appeal, and on June 29, 2011, the U.S. Court of Appeals for the Eighth Circuit in St. Louis refused TCF National Bank’s request to enjoin the Federal Reserve Board from enforcing the Durbin Amendment’s debit card interchange fee standards. In a short opinion, the appeals court ruled that the district court had correctly found that TCF was not likely to prevail on the merits of its claims that the Durbin Amendment would violate its Due Process and Equal Protection rights under the Constitution. Consequently, there could be no grounds to issue a preliminary injunction. One day after circuit court ruling, TCF announced that it was withdrawing its case entirely, saying that it was “time to move on.” The Retail Litigation Center, which is supported by RILA and many of its members, filed two separate amicus briefs on behalf of the retail industry opposing TCF’s constitutional challenge to the Durbin Amendment and subsequent appeal.
Merchant Litigation Challenging Federal Reserve’s Rulemaking: On November 22, a group of merchants and their trade associations sued the Federal Reserve in the federal District Court for the District of Columbia challenging the Federal Reserve’s rulemakings implementing the so-called Durbin Amendment relating to debit card interchange fees. The suit, which was brought by the National Association of Convenience Stores, National Retail Federation, Food Marketing Institute, Miller Oil Co., Inc., and Boscov’s Department Stores, LLC, claims that the Federal Reserve ignored the intent and statutory direction of the Durbin Amendment in promulgating its final rule. Plaintiffs have asked the court to “enter a declaratory judgment, declaring that the portions of the Final Rule setting standards for reasonable and proportional interchange fees (12 C.F.R. 235.3(b)) and networks necessary for routing debit transactions (12 C.F.R. 235.7(a)(2)) are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”
RILA has made available a press statement reacting to the litigation, saying that “The Retail Industry Leaders Association (RILA) believes that the Federal Reserve debit interchange rule was inconsistent with the swipe fee reform law passed by Congress and signed into law. The Federal Reserve’s misguided rule will harm many of those that Congress set out to help. RILA supports the goals of the lawsuit and will continue to pursue stronger reforms to the broken debit and credit payments market.”
Although RILA was not party to the suit, many of our members were adversely affected by the Federal Reserve’s final rule. RILA is committed to ensuring that the Durbin Amendment reforms – for which RILA and our member companies fought so hard – are not eroded or repealed by Congress.
RILA will continue its leadership role in efforts to reform interchange fees and to implement the Durbin Amendment as well as inform and engage RILA member companies of the latest developments through its Interchange Working Group. With the enactment of the Durbin Amendment and issuance of the Federal Reserve’s final rules, RILA will monitor the effective implementation of the new rules. In addition, RILA will continue to advocate for additional interchange reform and work with the White House, Department of Justice (DOJ), Federal Trade Commission, and other relevant agencies, all of which have shown an interest in recent years. RILA will also continue engaging at the state level to enact reasonable reforms to permit merchants to manage interchange fees.
For many years, the broader retail community has been pursuing legislation in Congress to combat excessive interchange fees. Over the past 18 months, RILA worked with member companies to develop and implement a comprehensive, strategic approach to effect interchange reform, relying upon key alliances with small business and consumer advocacy groups both in Washington, D.C. and outside the Capital Beltway. This approach ultimately achieved success in the amendment authored by Senator Durbin, included in the Dodd-Frank Act, which provides the Federal Reserve with significant authority to reform debit interchange fees, and was replicated in the successful defeat of the Tester-Corker Amendment to delay the interchange reforms in June 2011.
RILA serves as a member of the Merchants Payment Coalition’s (MPC) Executive Committee. The coalition is made up of retailers, restaurants, supermarkets, drug stores, convenience stores, gas stations, online merchants and other businesses that accept credit and debit cards. A number of these industry trade associations were involved in the antitrust litigation that settled in 2003, forcing Visa and MasterCard to lower interchange rates for signature debit transactions and untie the requirement that merchants accept both debit and credit cards.
The Nilson Report, a well respected payments newsletter, estimates that American businesses paid more than $64 billion in interchange fees in 2009, more than twice the amount paid by consumers in credit card late fees, overdraft fees, and other hidden fees. Unlike cash or check payments, merchants do not receive the full value of payment transactions that customers make with credit and debit cards. Rather, the credit or debit card issuing bank subtracts a “merchant discount” (e.g., 2 percent) from the amounts owed to the merchant for the privilege of accepting electronic payment from customers. While some of this discount reimburses the acquiring bank for services provided to the merchant, most of the discount reflects an interchange fee, charged by the issuing bank, which is subsequently passed through to the merchant.
Interchange fees do not reimburse the card associations themselves; rather, they are payments from one group of competing banks (acquirers) to another (overlapping) group of competing banks (card issuers) at a price collectively set by these competitors through their control over the credit card associations.
Interchange fees on merchants are used by card issuers to subsidize their marketing efforts and rewards programs and bolster their rapidly expanding bottom lines, among other things. In fact, Visa, MasterCard, American Express and Discover, have continued to report record earnings since the start of the recession despite the fact that during this same timeframe retail sales have plummeted due to a drop in consumer consumption. The use of interchange fees has allowed card companies to issue lines of credit without properly assessing risk, serving as a guaranteed source of revenue that has fueled the proliferation of cards to the point where the average consumer has nine cards today. In addition, the use of interchange fees provides cardholders with points, miles, concierge services and cash-back features and thus adds a substantial burden on the cost of goods and services that Americans of all income levels buy, especially cash paying customers who must pay more for the goods they purchase as a result.
On April 24, 2006, numerous merchants filed class action litigation challenging collectively set interchange fees, but the ultimate resolution of this litigation could be years away. While the class action lawsuit remains in a lengthy discovery phase, Congress and competition authorities around the world continue to take an increased notice of the exorbitant fees that credit card companies are charging merchants.
For more information, please contact Katherine Lugar, executive vice president, public affairs, at katherine.lugar@rila.org, Bill Hughes, senior vice president, government affairs, at bill.hughes@rila.org, or Andrew Szente, senior director of government affairs, at andrew.szente@rila.org.
After RILA and the broader business community’s success in preventing passage of the Employee Free Choice Act (EFCA) in the 111th Congress, attention now turns to the Department of Labor (DOL) and National Labor Relations Board (NLRB), where organized labor and the trial bar are pushing an aggressive anti-business agenda. As exemplified in recent months, the federal agencies administering the labor and employment laws have proceeded with a renewed vigor as union leaders have pushed for backdoor ways to bolster their agenda.
Businesses must use every tool at their disposal to shine the light on labor’s proposed changes, which will affect every facet of labor and employment law from workplace safety and family leave, to wage determinations and discrimination prevention. With the 112th Congress’ Republican-controlled House and a more evenly-divided Senate, there have been and will continue to be opportunities for the business community to use oversight hearings, appropriations riders, and resolutions of disapproval to keep the federal agencies in check and guard against far-reaching new rules. RILA continues to lead in the workforce arena and is pursuing a number of actions to block the most egregious of these rule-makings and case decisions by the NLRB.
Many threatening regulations, case decisions and proposed rules have been released that could drastically hamper the operations of retailers and the larger business community. Among the issues that could have the biggest impact upon retailers are:
When President Obama was sworn in to office in January 2009, he had the benefit of a large Democratic majority in the House and a filibuster-proof Senate to push through his top priorities. In the ensuing months, labor unions reportedly committed to temporarily put aside their own top agenda item—passage of the Employee Free Choice Act (EFCA)—and devote their full efforts to bolstering health insurance reform legislation in exchange for a White House push of EFCA immediately afterward.
However, the battle over health insurance reform legislation consumed far more time and political will in the Senate than initially anticipated by the White House. Further, while labor leaders were focused on health care, not only did their second-tier priorities such as women’s pay parity and OSHA enforcement expansions fall by the wayside, but the business community continued a targeted campaign against EFCA in key states, making the issue all the more politically unpalatable. As a result, by the time the health insurance reform legislation was signed into law in mid-2010, top Congressional and Administration officials had little desire to tackle a divisive issue such as EFCA and not enough prep work had been done by unions to garner support for other labor and employment bills.
Today, with the health insurance reform bill now law and the window of opportunity for a vote on EFCA closed, union leaders have focused their efforts squarely on the regulatory process at the U.S. Department of Labor (DOL), NLRB and the Equal Employment Opportunity Commission (EEOC).
For more information, please contact Kelly Kolb, vice president of government affairs, at kelly.kolb @rila.org, or David Garriepy, director, of government affairs at david.garriepy@rila.org.
On November 7, House Democrats approved their version of comprehensive health reform legislation by a 220-215 vote. 39 Democrats—primarily freshmen and members from Southern states—voted against the bill while all but one Republican opposed the measure. The tipping point came at the eleventh hour when a pro-life amendment authored by Rep. Bart Stupak (D-MI) was agreed to by a wide margin after the U.S. Conference of Catholic Bishops gave its blessing, swaying as many as 40 Democrats who were holdouts on the issue.
Due to the number of concerns RILA has with the House-passed health care bill, we were in the unfortunate position of having to oppose the measure. Specifically, in a letter to House Speaker Nancy Pelosi (D-CA), we noted that the Affordable Health Care for America Act (H.R. 3962) could actually increase costs beyond the status quo while erecting barriers to the hiring and maintenance of a healthy and productive workforce. Further, we believe that H.R. 3692 would make health insurance more expensive and drive many Americans out of the plans that they now favor.
In the Senate, the most recent action was a November 21 party-line 60-39 vote to begin debate on the Patient Protection and Affordable Care Act, which was unveiled only a few days before the vote. The legislation to be considered by the Senate is a result of weeks of closed-door deliberations between Senate Majority Leader Harry Reid (D-NV), Senate Finance Committee Chairman Max Baucus (D-MT), Senate Health, Education, Labor and Pensions Committee member Chris Dodd (D-CT) and senior White House officials.
Despite the fact that he held his caucus together for a procedural motion to proceed to debate, the path to final passage is far from clear and Sen. Reid has the unenviable job of rallying together a Democratic caucus known for its wide array of conservative and progressive members and the deals necessary to strike a careful balance between these competing factions. Undoubtedly, some of the issues most hotly contested in the House such as immigration, abortion, and a public option could also divide the Senate and Republican Leader Mitch McConnell has pledged to do his part to see to it that these divisions are exploited to keep the bill from passing. In particular, all eyes will be on a handful of centrist and conservative Democrats who continue to express ongoing concerns with the bill. Those key Democrats are Sens. Ben Nelson (D-NE), Mary Landrieu (D-LA), Blanche Lincoln (D-AR), Evan Bayh (D-IN) and Joe Lieberman (ID-CT).
Even if the Senate is able to complete their bill by the end of the year, experts agree that Congress will need time in the New Year for both chambers to merge their bills together and issue a Conference Report for a final up-or-down vote. Therefore, President Obama is unlikely to sign a health reform measure into law before January 2010.
At the outset of the health care reform debate, RILA member companies identified several core areas of importance to the industry in an effort to place targeted emphasis on issues that could have the greatest impact upon our ability to continue offering quality, affordable health benefits to our employees. Among these issues is preservation of the Employee Retirement and Income Security Act (ERISA), ensuring plan affordability for both employers and employees, opposition to a government-run “public option” health plan, and recognition of our industry’s unique workforce challenges.
Preserve ERISA. A requirement that all health insurance plans offer a minimum level of benefits undermines the fundamental premise of ERISA, which is to allow employers the opportunity to tailor health plans which meet the specific needs of their individual workforces. Because of ERISA, 170 million Americans retain health insurance coverage through an employer and therefore must be preserved.
Ensure Affordability. If the cost burden becomes too onerous for companies to continue offering health benefits, they will drop coverage, forcing employees to leave the plans that they now have and like. Establishing arbitrary thresholds for how much a plan must be subsidized or how a benefit is valued against other plans risks not only increasing costs for many employers but also decreases the plan innovation, flexibility and design that ultimately benefits our employees. A subsequent penalty assessment for falling even slightly below these standards could serve as a further disincentive for employers to continue offering health coverage.
Oppose a Public Plan. A public plan, particularly when combined with Medicare, Medicaid and other government plans, would be highly disruptive and destabilizing to the private health care marketplace. Under a public plan option, the government would soon become the largest health care purchaser in the under-65 health care market, as it already is for seniors. Soon there would be tremendous pressure for the new public plan to pay below-market rates, just as we have seen in Medicare and Medicaid, even if initially the public plan is directed to pay negotiated rates. This would result in enormous cost-shifts to private payers, undercut market-based insurance reforms, and reduce innovation in our health care system.
Exclude Part-Time, Temporary and Seasonal Hires. In service sector industries, it is commonplace for employees to be hired for part-time and/or seasonal work, or to leave a full-time job after a just few weeks. Clarifying that full-time employment is 390 hours in a quarter (or 30 hours per week for 13 weeks) and allowing employers in high-turnover industries a 90-day waiting period before automatic enrollment into health benefit plans will eliminate ambiguity about who is considered full-time and who is committed to making a career with the company. Without these safeguards, health benefit costs will either increase for those who do choose to stay or, worse, discourage job growth and creation.
RILA supports workers’ rights to freedom of association, as well as the freedom of contract, allowing employees and employers to bargain over the terms of their own agreements without government interference. RILA further supports legislation that would preserve employees’ access to a federally supervised private ballot election when deciding whether or not to join a union. RILA has joined the employer community in adamantly opposing the Employee Free Choice Act (EFCA) which would strip workers of their fundamental, democratic right to a private ballot vote and also interfere with the ability of workers and employers to bargain freely and come to agreement over working terms and conditions.
The tenets of this issue remain the top union priority because they provide the surest means to increase union rank-and-file membership, which has been steadily declining for decades, now accounting for 7.2 percent of the private workforce. Increased union membership translates to increased union funding that can and will be spent to forward that movement’s political agenda.
The terms of current NLRB members are as follows:
At the end of the year, when Craig Becker’s term expires, the Board will consist of only two members, which is significant due to a recent U.S. Supreme Court decision ruling that a two-member Board did not have the authority to issue any case decisions, even if they were deemed noncontroversial. The political realities in Washington, make it unlikely that a third member to join the Board until early 2013 at the earliest, preventing both new decisions and appeals to existing ones. More importantly, this timeframe makes it extremely likely that the Board will release its final rule on ambush elections prior to the end of the year.
Facing the December 31 “deadline”, the NLRB has acted swiftly in recent months through case decisions to reverse course from the management-friendly Bush era toward the labor-friendly Obama era. The Board’s first proposed rule focused on increasing penalties for employers and requiring electronic posting of unfair labor practice citations. Although these rules may present challenges, the more recent rule proposing to allow for website, telephone and e-mail balloting during union organizing elections is of great concern to retailers and other employers. If adopted, this new rule would allow the NLRB to swap the effective in-person private ballot process currently used in most workplaces in favor of voting methods, which have in the past led to ballot box stuffing, voter impersonation and intimidation and fraud. As for case decisions, the NLRB is now attempting to take away an employee’s right to request a secret ballot verification election after his workplace is organized through a card check campaign, and allowing unions to distribute anti-organizing literature on company private property.
Most recently, the NLRB and DOL have released two proposed rules on “Quickie Elections” and “Persuader Activity”, in addition to the NLRB’s decision on the Specialty Healthcare case. Combined together, these three pieces of legislation are the Administration’s attempt to implement EFCA at the regulatory level. Each case/rulemaking if implemented, will impact the retail industry as follows:
RILA has been a leading voice in opposition to EFCA and any regulatory efforts to achieve the same goal. We are working with the business community in an attempt to mitigate the severe threat these proposed regulations and case decisions will have on employers. As the process moves forward, we must continue to remain completely united in opposition to any portion of it being enacted through law, regulation or case decision.
RILA continues to work with member companies and with the broader business community to educate retail employees, the general public and members of Congress about Big Labor’s back-door agenda for EFCA and the impact their success would have on our industry. RILA has partnered with the Coalition for a Democratic Workplace, the Workforce Fairness Institute, the U.S. Chamber of Commerce, various state and local trade associations and others to ensure that our employees retain their rights to a private ballot and a say in their wages, benefits and working conditions.
RILA continues to work closely with state retail associations, and other state-based partners, to monitor and defeat state legislation relative to secret ballots and mandatory arbitration.
With the Republican control of the House of Representatives—many of whom ran in opposition to EFCA in their campaigns—some politicians have declared EFCA “dead”. However, union leaders are tenacious and are not about to give up on their top priority so easily, especially not after spending tens of millions of dollars and countless man hours to push the bill. For these reasons, the National Labor Relations Board (NLRB) appears to be the next best hope for labor bosses who want to increase their membership by stripping American workers of their rights at the workplace. RILA remains vigilant in our campaign to oppose EFCA in any form.
The National Labor Relations Board is an independent federal agency created by Congress in 1935 to administer the National Labor Relations Act, the primary law governing relations between unions and employers in the private sector. The NLRB does not have the ability to implement EFCA without Congress first passing it into law. However, using regulations and case decisions, the Board can accomplish some of the goals of EFCA, including shortened election times, reduced bargaining unit sizes, and increased union access to tilt the organizing process in favor of labor unions.
For more information, please contact Katherine Lugar, executive vice president of public affairs, at katherine.lugar@rila.org, or Kelly Kolb, vice president of government affairs, at kelly.kolb@rila.org, or David Garriepy, director of government affairs, at david.garriepy@rila.org.
RILA supports the expansion of the Information Technology Agreement to include additional information and communication technology (ICT) products. This expansion would increase global demand for ICT products, stimulate innovation, spur productivity, and create thousands of jobs in the United States and abroad.
United States Trade Representative (USTR) recently indicated that the United States is working closely with other ITA members to outline a feasible approach to negotiations on ITA expansion. However, the U.S. is facing major challenges from the European Union (EU). The two entities are at an impasse regarding the inclusion of non-tariff barriers (NTBs) in ITA expansion negotiations. The EU is in favor of inclusion while the US opposes the inclusion of NTBs, and prefers to conduct ITA negotiations solely on expanding the scope of products covered by the ITA to ensure timely results.
The United States is also seeking to expand ITA membership as part of the Trans-Pacific Partnership (TPP) negotiations. The United States has proposed that all current and future TPP members to join the ITA. Of the nine current TPP members, only Chile and Brunei are non-participants of the ITA.
The World Trade Organization (WTO) Information Technology Agreement (ITA), eliminates all import duties in participating countries on a wide range of information technology products. The six main categories of goods receiving duty-free status are computers, telecommunications equipment, semiconductors, semiconductor manufacturing equipment, software, and scientific equipment. Today, 74 of the 153 WTO member nations participate in the ITA, the signatory countries account for approximately 95 per cent of world trade in IT products. The scope of products covered by the ITA has not expanded since the agreement’s inception in 1996. As a result, modern, every-day consumer electronic products such as DVD players, audio speakers, GPS systems, and flat panel displays for video game consoles are excluded from the ITA’s non-tariff schedule. The exclusion of these products represents an untapped opportunity for economic growth in the U.S. and in our trading partners.The Information Technology Information Foundation estimates that ITA expansion would create 60,000 new U.S. jobs, boost U.S. exports of ICT products by $2.8 billion, and raise U.S. ICT firms’ (e.g. Apple, Microsoft, IBM, etc.) revenue by $10 billion. The increased revenue would allow U.S. ICT firms to invest additional resources in research and development to create new cutting edge ICT products.
The expansion of the ITA would also have a positive effect on the global economy. Experts suggest that ITA expansion would increase global demand for ICT products to a projected $28 billion. This in turn would increase labor productivity, especially in developing countries, which account for 42 percent of ITA membership. As a result, poverty would be reduced in these nations and the standard of living would improve. In addition, global supply chains for ICT products would be boosted because of better access to cheaper inputs.
Illegal logging is a global problem that has serious environmental and economic consequences, and effectively addressing this problem is an important goal that retailers support. However, Congress’ 2008 amendment of the Lacey Act was enacted with little input from the importing community, and it has become apparent that there are some challenges with the law as it is written. RILA believes legislation is necessary to address some of the challenges with the 2008 amendment without undermining the goal to stop illegal logging.
In October 2011, Congressman Jim Cooper (D-TN) introduced a bill (H.R. 3210) to amend the Lacey Act without undermining the goal to stop illegal logging. H.R. 3210 would limit the Lacey declaration requirements to plant products that are solid wood, if the plant product is derived from a tree, and would require a review on the feasibility of creating a public database of all foreign laws from countries in which plants are exported. RILA sent a letter to Congressman Cooper supporting H.R. 3210. Environmental non-government organizations (NGOs) are opposed to H.R. 3210.
Senators Ron Wyden (D-OR) and Lamar Alexander (R-TN) are also in the process of drafting legislation to amend the Lacey Act, and are holding a series of meetings with stakeholders to identify consensus solutions.
RILA has worked closely with environmental NGOs and other stakeholders to find positive solutions to the challenges that have been identified with the Lacey Act. We have organized and signed three consensus statements, along with other business interests and NGOs, that are intended to help guide Congress and the Administration on this issue.
Separately, the Lacey National Consensus Committee unveiled a Lacey Consensus Due Care Standard in February 2012. The Standard’s purpose is to protect and enhance the global forest environment; increase Lacey compliance and reduce illegal logging by providing more certainty on how to comply with Lacey Due Care; achieve a sales and competitive advantage for companies certifying to the Standard; and provide defenses to liability for companies executing a bona fide legally binding certification of compliance to the Standard, including to the FTC Environmental Marketing Guides. The intent of the Standard is to identify measures that companies can take to meet the “due care” requirements of the Act. The standard hopes to serve as precedent for a court to look to an industry standard in defining due care.
For more information, please contact Stephanie Lester, vice president of international trade at stephanie.lester@rila.org.
Despite significant volume reduction as a result of the economic contraction, America’s ports and infrastructure require new investment to handle existing cargo volume and mitigate the environmental impact caused by congestion. Federal, state and local officials continue to propose and implement numerous fees and regulations on those operating at the ports. However, in many cases fee collection has been postponed due to the economic downturn. It is a sure bet that the tide will turn when the economy begins to bounce back, and so RI LA members are committed to working with federal, state, and local governments to help proactively address emerging port issues.
National Freight Policy Discussions Congress is scheduled to reauthorize legislation for surface transportation (highways, transit) projects. The two issues that affect RILA members most directly are the source of funding for the legislation and the inclusion of a national freight policy. Surface transportation reauthorization legislation is expected shortly in both the House and the Senate; currently one bill has been introduced that suggests there will be additional fees on the freight community.
ON TIME Act: Representative Ken Calvert (R-CA) reintroduced his legislation that directs the Secretary of Transportation to designate key trade transportation corridors, or National Trade Gateway Corridors, extending out from every official air, land, and sea port of entry in the United States. The bill plans to derive its trade-based dedicated funding stream through the establishment of a capped and nominal ad valorem fee (at .075 percent) on all goods entering and exiting through official ports of entry. The fee is capped at $500 per shipment and would be deposited into the newly created “National Trade Gateway Corridor Fund.” Discussion has taken place on possibly including this fee to help finance the next surface transportation reauthorization bill, but the authors of the bill have not hinted that they intend to use this mechanism. This legislation was introduced in 2008 and 2009 and did not gain traction.The Freight is the Future of Commerce in the United States Act of 2011 (Freight FOCUS Act): In March 2011, Congresswoman Richardson reintroduced legislation aimed at developing a more comprehensive approach to funding freight. The legislation (H.R. 1122) creates an Office of Freight Planning at the Department of Transportation to prioritize key freight corridors and arranges for both public and private sector involvement in the process. It creates a dedicated source of funding for goods movement, while providing funding to mitigate the effects of goods movement on the environment and public health by increasing the diesel tax by 12 cents. This legislation was endorsed by RILA.Clean Trucks EffortsDespite recent reductions in volumes at ports across the country as a result of the recession, basic infrastructure improvements remain a necessity in order to improve the shipments of goods. Environmental mitigation will continue to be combined with infrastructure improvement needs especially in localities surrounding major port operations as local leaders struggle with health concerns for their constituencies and maintaining the competiveness of their ports. This once local fight has moved to the national arena. As Congress continues to deliberate on congestion issues, major U.S. ports have added an additional item for possible consideration: a new policy shift focused on sustainability at the ports.
Local Level:Port of Los Angeles and Long Beach: In 2006, both ports approved a Clean Air Action Plan (CAAP) to reduce emissions from trucks, vessels and operating equipment by 45 percent over five years. The Los Angeles/Long Beach plans are as follows:
Port of Seattle/Tacoma: In Spring 2009, the Port of Seattle Commission and the Port of Tacoma Commission separately approved plans to reduce emissions from trucks that serve the port without involving additional cargo fees. The Port of Seattle’s plan prohibits the most polluting trucks (1994 model-year and older) from entering port terminals which began on January 1, 2011, in keeping with the 2010 standard of the Northwest Ports Clean Air Strategy. The program includes measures to scrap the old trucks, compensate truck owners for their older trucks and help them buy or lease newer ones. The Port of Tacoma’s plan does not have a truck replacement program. Port officials are instead encouraging the use of low sulfur fuels and are using an on-dock rail system to minimize the concentration of trucks in the port.
Port of Oakland: In March 2008, the Port of Oakland approved a container fee but the fee collection has been postponed. Port of Oakland commissioners also approved an air quality improvement plan in April 2009 designed to reduce diesel emissions from port activities 85 percent by 2020. In June, the Port of Oakland approved its Maritime Comprehensive Truck Management Plan, which sets hard targets for truck retirement goals without the imposition of new container fees or an employee driver mandate. Oakland became the second major west coast port (after Seattle/Tacoma) to adopt a retailers supported clean truck plan. Port of New York/New Jersey: In March 2010, the Port Authority of New York and New Jersey announced their clean truck program; a truck phase-out plan. As of January 1, 2011 all pre-1994 model trucks were be banned from the Port Authority marine terminals, trucks not equipped with engines that meet or exceed 2007 federal emissions standards will no longer be able to serve the marine terminals starting on January 1, 2017.
State Level:California: On a state level, the west coast has been focused on establishing standards to continue their focus on “greening” the economy. The California Air Resources Board (CARB) passed a series of vehicle and fuel rules to cut port diesel emissions. One rule bars old diesel trucks from visiting California ports after January 1, 2010, unless they install diesel filters. CARB also announced that it is releasing $90 million in state bond money for the state's Goods Movement Emission Reduction Program. The funding will go toward cleaning up port trucks, upgrading trucks in the Central Valley and Mexican Border regions and installing shore-based electrical power for two ship berths at the Port of Oakland.
Two new pieces of legislation will also aid in California’s effort to force an employee mandate on all drayage truckers and to levy a container fee on Beneficial Cargo Owners (BCOs):
AB 950: This legislation, introduced in February by Speaker of the Assembly John Perez (D-Los Angeles) and coauthored by Assemblyman Sandre Swanson (D-Oakland), Chairman of the Assembly Labor & Employment Committee, seeks to force an employee mandate on all drayage truckers in the state. The language in the bill states that it will “deem drayage truck operators as employees of those persons who arrange for or engage their services.” The result of this bill will be a ban all independent contractors, also known as owner-operators, from California ports including Los Angeles, Long Beach and Oakland. The Committee passed the legislation on a 4-1 party-line vote, but the bill stalled, and was not brought up for a vote on the Assembly floor prior to the end of the 2011 session. Since the California State Legislature has large pro-labor majorities in both the Senate and the Assembly, along with a pro-labor Governor, this is a real threat in the 2012 session, one that RILA is actively working to oppose. SB 862: Senator Alan Lowenthal (D-Long Beach) introduced legislation to levy a container fee on Beneficial Cargo Owners (BCO) through PierPASS. This bill would establish the Southern California Goods Movement Authority comprised of local port, city and county officials. Although the bill did not pass this session, RILA will actively oppose this legislation in the 2012 session.
AB 950: This legislation, introduced in February by Speaker of the Assembly John Perez (D-Los Angeles) and coauthored by Assemblyman Sandre Swanson (D-Oakland), Chairman of the Assembly Labor & Employment Committee, seeks to force an employee mandate on all drayage truckers in the state. The language in the bill states that it will “deem drayage truck operators as employees of those persons who arrange for or engage their services.” The result of this bill will be a ban all independent contractors, also known as owner-operators, from California ports including Los Angeles, Long Beach and Oakland. The Committee passed the legislation on a 4-1 party-line vote, but the bill stalled, and was not brought up for a vote on the Assembly floor prior to the end of the 2011 session. Since the California State Legislature has large pro-labor majorities in both the Senate and the Assembly, along with a pro-labor Governor, this is a real threat in the 2012 session, one that RILA is actively working to oppose.
SB 862: Senator Alan Lowenthal (D-Long Beach) introduced legislation to levy a container fee on Beneficial Cargo Owners (BCO) through PierPASS. This bill would establish the Southern California Goods Movement Authority comprised of local port, city and county officials. Although the bill did not pass this session, RILA will actively oppose this legislation in the 2012 session.
While legislative activity has seen activity in California, other states have begun to focus their attention on legislative vehicles focused on employee misclassification and container fees. They are as follows:New Jersey (AB 4146): This bill, introduced in the New Jersey Assembly, addresses misclassification of drayage truck operators and is currently in the Assembly Labor Committee awaiting further action. It is important to note that since New Jersey’s legislative session is rolling (no session end date), there is no deadline to when this bill must be passed to become law.
Washington (SB 5945): This legislation would raise business & occupation (B&O) tax rates for several areas related to logistics and international trade, including drayage trucking, customs brokers, stevedoring services and freight forwarders. The bill was not reported out of the Senate Committee on Ways & Means in the 2011 Special Session, but all indications suggest this legislation will remain alive for the 2012 session. Illinois (Transportation District Authority Act): This legislative language, intended as an amendment to a Senate bill, would create the Illinois Transportation District Authority to have sole power and responsibility to impose regulations and commercial vehicle user fees related to roadway infrastructure within the territorial jurisdiction. The proposed fee schedule for container/truck movements in and out of the Authority range from $3.50 to $12 a movement. This legislation was introduced in the state’s General Assembly only three days prior to the end of the session and although this bill did not pass, it will likely be brought up in the next session.
Federal Level:National Update: Following the U.S. District Court’s initial decision on the Port of Los Angeles’ clean air action plan, the Los Angeles Harbor Commission hired a Washington lobbying firm to develop language that would override current federal law. Advocacy efforts focused on amending the Federal Aviation Administration Authorization Act (F4A) to grant ports regulatory authority. The Port of Oakland, the Port Authority of New York New Jersey, and a number of big city mayors also added their support for a change in legislation. In July 2010, Congressman Jerrold Nadler (D-NY) introduced the Clean Ports Act of 2010 (H.R. 5967), which had widespread Democratic support in the House with over 90 co-sponsors in the 111th Congress. In February 2011, Nadler reintroduced this bill in and currently has 56 co-sponsors.
Amending the F4A could, and most certainly would, lead to the unionization of harbor truck drivers across the nation. Last May, the House Transportation and Infrastructure (T&I) Subcommittee held a hearing to shed light on the Port of Los Angeles /Long Beach’s Clean Air Action Plan. The Coalition for Responsible Transportation (CRT) testified at the hearing to convey the proactive measures that shippers are taking at the ports. Instead of the hearing focusing on the original intent of sustainability efforts at the ports, the outcome of the hearing turned the discussion towards viable leasing agreements between licensed motor carriers (LMCs) and independent owner operators (IOOs).
With a Republican majority now in the House of Representatives, it is highly unlikely that legislation to open up the definition of interstate commerce and allow a patchwork of regulations on the trucking industry will gain any traction. If the House and Senate do not take up the issue, as expected, it can be anticipated that attention to this issue could very well divert to the Administration through regulatory actions on employee misclassification.
RILA continues to work with stakeholders to ensure that onerous legislation is not enacted. RILA is continuing to protect retailer interests by working to ensure that policies address real infrastructure shortcomings and that policies do not unfairly punish infrastructure users with duplicative costly fees and mandates.
In 2009, RILA partnered with the Coalition for Responsible Transportation (CRT) to further advocate the retailers’ sustainability efforts at the ports. Through RILA’s efforts with CRT, the Environmental Protection Agency (EPA) launched a new SmartWay Drayage partnership to bring SmartWay long-haul benefits to our nation’s ports. RILA will also work with local port authorities considering environmental mitigation and/or infrastructure plans to ensure the development of sound programs that achieve shared goals and without disrupting the movement of goods.
American ports require new investment in infrastructure to handle the annual increase in cargo volume and mitigate the environmental impact caused by port congestion. Dramatic environmental action plans that include new port fees, and sometimes employee mandates, are becoming increasingly popular to fund port investments, reduce congestion, and alleviate pollution caused by port operations.
Nowhere is this dynamic more true than in California, particularly at the ports of Los Angeles and Long Beach. Los Angeles and Long Beach are the nation’s two largest ports, handling approximately 44 percent of the nation’s containerized cargo. Congestion at the ports is significant, and operations from both locations have been recognized as a substantial source of pollution in the Los Angeles metropolitan area. Taken in total, the port fee proposals at the state and local levels have the potential to cost RILA companies an additional $182 per 40-foot container to import goods into Southern California. Other west coast ports have followed suit, including Seattle/Tacoma and Oakland, and now New York/New Jersey has implemented their own plan. It is only a matter of time before these proposed fees expand to all ports located throughout the nation.
Discussions on addressing port matters are not only taking place at the local level but are also happening at the federal level. As Congress continues to deliberate on transportation focused legislation, there is potential for national policies to be crafted to address these issues directly. Some policies currently under consideration will result in a positive outcome for industry; other policies will potentially hamper the economy and the productivity of the retailer’s supply chains.
For more information, please contact Kelly Kolb, vice president of government affairs, at kelly.kolb@rila.org.
Trade preference programs are important development tools. Reducing tariffs and establishing dependable sourcing options are also important for successful retail supply chains. RILA is committed to promoting flexible, meaningful, predictable and simple-to-use preference programs that will assist development in the world’s poorest countries while offering American families the opportunity to purchase a variety of high-quality products at affordable prices.
Trade preference programs help developing countries create jobs and economic opportunity to lift people out of poverty. Retailers also rely on these programs to provide lower-cost goods for American families. Programs, such as the Generalized System of Preferences (GSP) and Andean preferences, were renewed in 2011.
For more information, please contact Stephanie Lester, vice president of international trade, at stephanie.lester@rila.org.
RILA supports open economic engagement, including in apparel trade. Open competition in apparel creates healthier industries in both the United States and in our trading partners. RILA believes it is time for U.S. trade policy to reflect commercial realities of global value chains, and to recognize that millions of American jobs support the 98 percent of apparel sold in the United States that is imported.
RILA believes that the U.S. should negotiate flexible rules governing trade in apparel so as to spur new trade and investment in the industry in the ongoing Trans Pacific Partnership (TPP) talks with Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam.
RILA and other interested associations have formed the TPP Apparel Coalition to aggressively advocate to Congress and the Administration that the U.S. position on apparel should be updated in the TPP to adopt rules of origin for apparel that are simple, flexible, and accommodate global value chains. Moreover, apparel products should be integrated into the TPP market access negotiations, with no separate chapter or separate provisions. This includes no separate safeguard process for apparel products, and no separate customs enforcement measures. Finally, duties on qualifying apparel articles should be eliminated on a reciprocal basis on the first day a TPP agreement enters into force.
After eleven negotiating rounds, the TPP talks continue at a positive rate and steady progress was made during the last negotiating round in March. In November 2011, the TPP Heads of State announced the broad outlines of a TPP agreement during the Asia-Pacific Economic Cooperation (APEC) leaders’ summit. TPP leaders also agreed that they would try to substantially finish the talks by July 2012, with tough issues and a legal review to follow in the second half of 2012, and a TPP signing by the end of 2012. RILA has been present for the last four negotiating rounds, and has held productive discussions with government officials and other industry stakeholders. RILA has also met with other U.S. stakeholder groups, who increasingly view a positive outcome on apparel as critical to the overall success of the negotiations.
U.S. market access for apparel goods from TPP countries is important leverage in the TPP negotiations. In 2011, U.S. tariffs on clothing and home linens from the TPP countries were just under $1.3 billion, accounting for about 68 percent of the total U.S. tariffs collected from those countries last year. Eliminating these duties for apparel, coupled with commercially-meaningful rules of origin, is a top priority in the talks for some TPP countries.
In September 2011, the Chairman of the Senate Finance Subcommittee on International Trade, Customs and Global Competitiveness, Ron Wyden (D-OR), sent to U.S. Trade Representative Ron Kirk a detailed letter on why he believes the TPP negotiators should reject yarn-forward rules of origin for apparel in the TPP.
In October 2011, thirty bipartisan Members of the House of Representatives sent a letter to USTR Kirk urging the United States to adopt a new approach on apparel trade in the TPP agreement.
RILA recommends that companies to reach out to their Congressional delegations to educate them on the significant costs of protectionist U.S. policy toward apparel trade, and to ask them to urge U.S. negotiators to adopt a more flexible approach in the ongoing TPP talks.
Most U.S. free trade agreements (FTAs) have very restrictive and onerous rules governing preferential trade in textiles and apparel (as opposed to most other goods). Most importantly, they generally have a yarn-forward rule of origin, which requires originating yarns, fabrics, sewing thread and other inputs for all apparel products, even if there is insufficient availability of quality inputs and a reliable supply chain within the FTA countries. If any one of these inputs cannot be sourced within the FTA territory, the entire garment would fail to be eligible for duty-free treatment.
The FTAs also require significant documentation to substantiate the use of originating materials, which adds further cost and complications and makes the supply chain cumbersome with tracking and monitoring. These added costs often negate any cost benefit from the duty preference. A yarn-forward rule also is very difficult to enforce because it requires U.S. Customs and Border Protection officials to rely solely on documentation instead of verification of manufacturing processing in a FTA country. As a result, previous U.S. FTAs have done little to incentivize new investment in apparel production in the United States or FTA partner countries.
The U.S. textile industry continues to advocate for a yarn-forward rule of origin in the TPP talks out of concern that its textile export markets in South and Central America would be undermined if the U.S. pursues a more liberal approach to apparel trade. This is despite evidence that some of the fastest growing markets for U.S. textile exports are non-FTA partners that are not shackled with yarn-forward rules.
While the most recent surface transportation reauthorization legislation expired in September 2009, Congress has yet to pass a new six-year reauthorization. Discussions underway on the framework of the reauthorization include what role a national freight policy might play in transportation over the next several years. RILA members are committed to working with federal, state and local governments to help shape this discussion and influence the legislation.
Since September 2009, the bill has been extended several times. The latest extension expires in March 2012. While some in Congress have discussed the possibility of producing transportation legislation in 2012, it is unlikely that such legislation will be comprehensive and long term, nor will it include a new approach to freight policy.
Earlier this year, the Obama Administration included their version of surface transportation reauthorization principles in the fiscal year 2012 budget proposal, but did not include a funding guideline. Shortly thereafter, the Administration floated (and then quickly distanced themselves from) a controversial new surface transportation draft bill which most notably included a six year pilot for vehicle-miles-traveled (VMT) tax. The draft proposal was not received well by many on the Hill, especially when considering our nation’s current economic state.Most recently in November, the Senate Environment and Public Works (EPW) Committee approved a bipartisan two-year highway reauthorization bill by a unanimous vote of 18-0. The legislation --- entitled Moving Ahead for Progress in the 21st Century or better known as “MAP21” --- is comprised of various freight components, including some of the following initiatives: a National Freight Network Program that provides formula funds to states for projects to improve the movement of freight on highways, including freight intermodal connectors; a Transportation Mobility Program that replaces the current Surface Transportation Program but retains the same structure, goals, and flexibility to allow states and metropolitan areas to invest in projects fitting their needs and priorities; and the Projects of National and Regional Significance Program, which authorizes a program to fund major projects of national and regional significance which meet rigorous criteria and eligibility requirements, and authorizes $1 billion for appropriation in Fiscal Year 2013. The legislation still seeks the Finance Committee’s approval on a funding scheme to pay for the $109 billion proposal.With regards to developments in the House, House Speaker John Boehner (R-OH) and House Transportation and Infrastructure Committee Chairman John Mica (R-FL) said they will introduce a measure in coming weeks that will compete with the two-year plan passed by the Senate EPW Committee. Labeled the American Energy Infrastructure Jobs Act, the legislation will focus on a five-six year plan and its main purpose will be to spur job creation. As such, the House Natural Resources Committee recently disclosed its contentious proposal to open portions of the Alaska National Wildlife Refuge to oil and gas drilling and use the revenue to help fund surface transportation investment, which will be tied in with Speaker Boehner’s overall jobs plan. Developments are still forthcoming as the House and Senate continue to deliberate on their proposals. With the House and Senate considering different financing mechanisms, expect extensions to continue as it is likely that there will not be enough fervor to pass the bill without the administration’s support of a central focus, such as a gas tax increase. This has already become a longer and lengthier process than what took place in 2005 with SAFETEA-LU (2 years and 12 extensions). With the 2012 elections beginning to come into view, it is very likely that the administration and Congressional leadership will not have an appetite to pass the bill in the 112th session of Congress. Two additional pieces of legislation that deserve to be noted are of the Focusing Resources, Economic Investment, and Guidance to Help Transportation (FREIGHT) Act of 2011 introduced by Commerce Subcommittee Chairman Lautenberg (D-NJ) and Senators Patty Murray (D-WA) and Maria Cantwell’s (D-WA) reintroduction and the Freight is the Future Of Commerce in the United States Act of 2011 (Freight FOCUS Act) (H.R. 6291) introduced by Congresswoman Laura Richardson’s (D-CA). The FREIGHT Act was designed to establish a national freight transportation strategy and to dedicate funds to freight transportation projects, while adding notable sustainability goals. Richardson’s Freight FOCUS Act, which was endorsed by RILA, arranges for public and private sector involvement in the process, prioritizes key freight corridors, and provides funding to mitigate the effects of goods movement on the environment and public health by increasing the diesel tax. Even though this legislation has been reintroduced, it must be noted that it will not move as a stand-alone bill.
Congress is expected to reauthorize legislation for surface transportation (highways, transit, etc.) projects sometime in the near future. The Transportation Equity Act for the 21st Century was reauthorized in August 2005 as the Safe, Accountable, Flexible, Efficient Transportation Equity Act – A Legacy for Users (SAFETEA-LU) and expired on September 30, 2009. The two issues that will affect RILA members most directly are the sources of funding for the legislation and the possible inclusion of a national freight policy. The Highway Trust Fund (HTF) is the primary source of funding for the programs in the bill. The HTF is composed of the Highway Account, which funds highway and intermodal programs, and the Transit Account. Federal motor fuel taxes have been the major source of income into the HTF. Under current law, the funds are released to the states by a mathematical formula that attempts to match the scope and usage of each state's surface transportation system with payments received from the federal government. The HTF fund is unsustainable and expected to go into deficit in the near future. In 2008, Congress infused $8 billion to keep the fund from reaching a zero balance, infused another $7 billion in July 2009, and an additional $19.5 billion in March 2010. Discussions are underway on how to fund the HTF going forward, as Congress is reluctant to raise the federal fuel tax on motorists and truckers, as many argue the viability and sustainability of the gas tax. Consequently, Congress is focusing on finding alternative funding methods. In addition, Congress would like to significantly increase the funding for the next reauthorization bill. The 2005 reauthorization allocated $286 billion toward the Act’s programs --- that amount is expected to double in the next six-year reauthorization.The consideration of the last reauthorization (SAFETEA-LU) included much debate over how to construct a national freight policy. With congestion issues increasing and a new majority in place to craft the legislation, the new reauthorization will likely include a freight congestion/goods movement program.
RILA members are committed to partnering with federal and state agencies to enhance global supply chain security. RILA has supported congressional efforts to improve supply chain security, specifically, the Security and Accountability for Every (SAFE) Port Act. Building upon the multi-layered, risk-based approach used by the U.S. government since September 11, 2001, this legislation allows government and industry to work together to develop measures that not only improve security but also enhance the movement of legitimate commerce.
DHS Secretary Janet Napolitano has stated concerns about the ability to implement the 100 percent scanning mandate at foreign seaports by 2012. As a result, consensus appears to be slowly building behind the scenes in Congress that the law is neither practical nor effective and should be modified. As such, the Senate Committees on Homeland Security and Commerce, Science, and Transportation are taking a look at tweaking the language as they draft the next SAFE Port Reauthorization legislation. RILA is continuing to reach out to members at DHS, Customs and Border Protection (CBP) and Hill staff on this important issue.
With the discovery of U.S.-bound bombs disguised as printer cartridges on a UPS plane in England and in a FedEx facility in Dubai in late 2010, there will continue to be a focus on Capitol Hill in the 112th Congress to tighten security measures on all passenger and cargo planes. The Transportation Security Administration (TSA) has already been begun screening all cargo on domestic passenger planes, as mandated by Congress. However, TSA is only screening about two-thirds of international cargo, due to struggles in securing agreements with other countries. Some Congressional members have taken an interest in mandating 100 percent scanning on all cargo planes, but others are willing to look at additional resources and methods to securing the supply chain.
On November 25, 2008, CBP released its interim final rule on the Advance Trade Data Requirements, also known as “10+2.” This rule took effect on January 26, 2009, (60 days after the publication date) and allowed for a 12-month delayed compliance period to allow industry to comply with the new requirements. The final compliance date came into effect on January 26, 2010, with CBP implementing a graduated process during the first six months, with warnings being issued to those who are non-compliant. RILA continues to monitor the program and work with CBP staff to address issues.Effective April 2009, the Transportation Security Administration (TSA) requires Transportation Worker Identification Credential Card (TWIC) for all personnel, including truck drivers, requiring unescorted access to secure areas of ports around the country. The TWIC program was established by Congress through the Maritime Transportation Security Act (MTSA). By way of background, individuals meeting TWIC eligibility requirements are issued a tamper-resistant credential containing the worker's biometric (fingerprint template), allowing for a positive link between the card and the individual.
Enrollment and issuance of cards began at the Port of Wilmington, Delaware, October 16, 2007, and has continued through 2009 with over 1 million cards being issued nationwide. The compliance deadline for the TWIC initiative passed on April 15, 2009. Since the April enforcement, all personnel requiring unescorted access to secure areas in facilities and vessels (regulated under the Maritime Transportation Security Act of 2002) are required to have their TWIC card.
The TWIC program has been under fire after the Government Accountability Office (GAO) reported that covert testing, requested by the Senate, allowed government investigators to infiltrate major U.S. seaports with simulated explosives by using fraudulently obtained cards. The highly critical report states that security directives under the program have not been achieved and weaknesses in the program have not properly assessed, despite nearly a decade of effort and total funding of the program reaching $420 million.
As a response to the report, committees in the Senate and House have held hearings, questioning the legitimacy of the program and the methods TSA uses to review the cost-benefit analysis. Senator John Rockefeller (D-WV), Chairman of the Senate Commerce Committee, plans to introduce a port security authorization bill addressing shortcomings in port security credentialing, including potential options in less costly port security measures.
RILA will continue to oppose efforts to impose arbitrary security mandates. RILA will continue to engage Congress and the Department of Homeland Security to effectively implement new supply chain security policies. Industry must also continue to educate Congress on why risk-management is the only way to meet the dual objectives of a secure and efficient supply chain. Specifically:
Safe and secure seaports and airports are essential elements in efficient and technologically advanced supply chains that can move cargo quickly to distribution centers, stores and factories around the world. In the post-9/11 era, RILA and its members have played a critical leadership role in shaping our nation’s supply chain security policies. As some of the largest users of the global supply chain, RILA members have actively participated in and supported public-private collaboration to enhance security through efforts such as the Customs-Trade Partnership Against Terrorism (C-TPAT) and the Secure Freight Initiative.
Congress also addressed container scanning with the passage of the Implementing the Recommendations of the 9/11 Commission Act of 2007 (9/11 bill). RILA played an active role in the development of the legislation and will continue to work with Congress and the Department of Homeland Security (DHS) as the law is implemented.
A provision in the 9/11 bill mandated that DHS require foreign seaports to scan 100 percent of U.S. containers for radiation and density by 2012. The proposal allows the Secretary of Homeland Security to grant renewable waivers for up to two-year increments if the Secretary can certify that: scanning technology is not available for purchase, the scanning technology does not have a sufficient false alarm rate, the equipment cannot be deployed because of the physical characteristics of the port, scanning systems cannot be integrated, the scanning systems will significantly affect trade or the systems do not provide automated notification of questionable or high-risk cargo for further inspection. It also requires the Secretary to consult with other appropriate federal agencies to ensure that actions taken under this section do not violate international trade obligations.
DHS submitted a report to Congress on container scanning pilot projects at three foreign seaports. The report, which is required by the SAFE Port Act, demonstrated the results of projects that occurred in Port Qasim, Pakistan; Puerto Codero, Honduras; and Southampton, United Kingdom. The report highlighted the logistical, staffing, and financial challenges associated with 100 percent scanning.
RILA believes that the United States should maintain open economic policies that ensure the United States remains competitive in a commercially interconnected world. Free Trade Agreements (FTAs) seek to reduce trade barriers and enhance trading partnerships between nations. FTAs can provide significant benefits to retailers through trade and investment liberalization, transparency in regulatory trade practices, reductions in tariffs and non-tariff barriers, and the creation of reliable and predictable sourcing opportunities. These issues are essential to retailers’ ability to provide American families with a variety of high-quality goods at affordable prices.
RILA welcomes Congressional passage of the three FTAs with Colombia, South Korea and Panama. RILA also applauds the ongoing negotiations for the Trans-Pacific Partnership (TPP) with Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam, and strongly supports the timely conclusion of a comprehensive, high-standard, 21st century TPP agreement that will generate new trade and investment, and create a potential platform for economic integration across the Asia-Pacific region.
The strong, bipartisan support that was shown in last fall’s votes in Congress for the three FTAs with Colombia, Korea and Panama has renewed America’s ability to pursue a more proactive trade agenda, and provides momentum for the Administration in the ongoing TPP negotiations.
After eleven negotiating rounds, the TPP talks continue at a positive rate, and steady progress was made during the last negotiating round in March. Last November, country leaders announced the broad outlines of an agreement at the meeting of Asia-Pacific Economic Cooperation (APEC) leaders in Hawaii. APEC leaders directed negotiators to try to substantially finish the talks in 2012.
Meanwhile, the FTA with Korea entered into force on March 15, 2012. The FTAs with Colombia and Panama are expected to enter into force later this year, after implementation packages are approved by the Colombian and Panamanian legislatures.
RILA encourages companies to provide input to trade negotiators to ensure that the TPP results on a commercially significant agreement that liberalizes and facilitates trade and investment among TPP countries. RILA is working with other business associations to actively provide input to trade negotiators on policies that would bring tangible benefits for American retailers, workers, and families.
The United States has negotiated a number of FTAs. Trade Promotion Authority (TPA), which allows the president to negotiate new FTAs by providing thorough consultation requirements and streamlined Congressional approval procedures, expired in June 2007. Countries with which the United States has an FTA:
In August 2011, Congress enacted modest changes to improve the implementation of the CPSIA. The amendment addressed several major concerns with the CPSIA, and gave the CPSC meaningful new authorities and flexibilities that were previously missing. Some of the most important fixes for retailers included:
RILA continues to advocate with the CPSC on issues related to CPSIA implementation, and encourages retailers to continue to actively engage with RILA on these issues.
In August 2008, Congress enacted the CPSIA with broad, bipartisan support. The CPSIA established new federal standards for lead and phthalates, and requires testing, certification and labeling for certain children's products. The CPSIA was the most comprehensive overhaul of consumer product safety laws since the CPSC was created in 1972.
Some of the most significant impacts of the CPSIA include:
Since enactment of the CPSIA, the law’s inflexibilities have led to unintended consequences that have cost industry millions of dollars without necessarily always improving product safety. Some examples included the retroactive effective dates for the lead and phthalate bans, prohibitive testing costs for small-batch toy producers, and effective bans on children’s all-terrain vehicles, bicycles and books.
For more information, please contact Jim Neill, vice president of product safety, at jim.neill@rila.org or Stephanie Lester, vice president of international trade, at stephanie.lester@rila.org.