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INTERNET TAX FREEDOM ACT

THURSDAY, JULY 17, 1997

House of Representatives,
Subcommittee on Commercial And Administrative Law,
Committee on the Judiciary,
Washington, D.C.

    The subcommittee met, pursuant to notice, at 10:01 a.m., in room 2237, Rayburn House Office Building, Hon. George W. Gekas (chairman of the subcommittee) presiding.
    Present: Representatives George W. Gekas, Bob Inglis, Ed Bryant, Steve Chabot, John Conyers, Jr., Jerrold Nadler, Sheila Jackson Lee, Martin T. Meehan, and William D. Delahunt.
    Also present: Raymond V. Smietanka, chief counsel, Audray Clement, staff assistant; and John Flannery, minority counsel.
OPENING STATEMENT OF CHAIRMAN GEKAS

    Mr. GEKAS. The hour of 10 o'clock having arrived, the subcommittee will come to order. Of course, the rules require that a hearing quorum be present before testimony can be obtained, we therefore will recess until the appearance of a member of the subcommittee. This way, I have kept faith with my chairmanship in having opened every single hearing and meeting of our committee on time.
    We recess now.
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    [Recess.]
    Mr. GEKAS. The time of the recess having expired with the appearance of the gentleman from Massachusetts, Mr. Delahunt, a working quorum has been established for the subcommittee on Commercial and Administrative Law of the House Judiciary Committee, and we are prepared to proceed with the business of the day.
    This hearing, as everyone has aptly learned, is on the Internet, the amazing new industry that is encompassing, literally, the globe. We, in thinking about it, have compared it as the new phenomenon of the 21st century as was the automobile in the 20th century. When the automobile hit the streets when it did, it began slowly of course, but before everyone knew it, it had impact on every household in all of civilization. No less can be said of the Internet and its potential as it begins to make worldwide impact.
    In doing so, we have to also remember that in the automobile industry the regulation of commerce as it had to do with the lease and sales and promotion of the automobile entailed questions of interstate commerce, of taxation, of use in various capacities. So it is with the Internet, and reluctantly, we must take a very slow and careful approach to the full potential that lies ahead for the Internet in all these fields, not the least of which will be and which is the prime responsibility of this subcommittee, the constitutional and statutory questions that have already arisen and are yet to come to be in the world of the Internet.
    [The bill, H.R. 1054, follows:]

INSERT OFFSET RING FOLIOS 44 TO 52 HERE

    Mr. GEKAS. We are pleased to have our first witness, our colleague, Representative Chris Cox of California, who will give us an overview of the intent of the legislation and where he sees it going in the legislative process.
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    We are pleased to have the gentleman from Massachusetts, Mr. Delahunt, who, himself, personally and through his State, has a growing interest in the world of Internet and who will be introducing other witnesses later during this hearing.
    Representative Cox.
STATEMENT OF HON. CHRISTOPHER COX, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. COX. Thank you very much, Chairman Gekas. Thank you, Congressman Delahunt, both for hosting this hearing today and for your sponsorship of the legislation. I know that you are as excited as I am about the prospects of the Internet.
    The Internet has changed so much over the last few years that we can only imagine what it's going to become in the future. Already, about $1 billion of commerce is conducted worldwide on the Internet, but that's just a fraction of what it might become, and the truth is that the rate of growth in the Internet is so fantastic, that it can't reliably be measured on a day-to-day basis. The Internet has the potential to become the most successful, most efficient, cheapest way of people exchanging goods, services, and ideas in all of human civilization. It has that potential, but it is only a potential at this point.
    We can also, through unwise Government policies, stop the Internet dead in its tracks. Anybody who's used the World Wide Web knows it's not perfect; as a matter of fact, it doesn't hold a candle to trying to shop through a catalog at present. There are a great many problems with technology on the Internet, but the pace of change, and the pace of development is so rapid that if things continue this way, we could look forward to a remarkable future.
    I just want to share with you one daydream that I have that when I'm a cadger, when I'm kicking back in my——
    Mr. DELAHUNT. Years from now, Representative, years from now.
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    Mr. COX. I hope——
    Mr. DELAHUNT. Decades, in fact.
    Mr. COX [continuing]. I live a long life that when I'm housebound, and I can't walk very well, but I'm sustained by the miracles of 21st century medicine to live into my later years on a very safe and sound Medicare and Social Security in the 21st century—[laughter]—that I will be able to have a much richer life. I'll be able to contact people all over the country and all over the world. I'll be able to get almost anything I want; have access to all sorts of information, pictures, sound, video, and so on, even if I'm wheelchair-bound. I will be able to do things that my folks, my grandparents who are now gone, were not able to do. It's a remarkable medium, and I just can't imagine what it's going to become, but there's a problem.
    The Internet is uniquely subject to multiple taxation, not just by all the jurisdictions in America, and you know that beyond our 50 States we have over 30,000 local, regional, and special district taxing agencies that might dip their hand into the pocket of Internet users, but also globally, because the Internet is inherently global. It's not just interstate commerce—certainly isn't local—it's not just interstate commerce, it's global, and the packet-switched architecture of the Internet means that unlike a phone call which starts at point a and goes to point b; can be timed and priced accordingly, and we know exactly who is in point a and who is in point b, the Internet traffic is routed through all sorts of jurisdictions. We have had testimony in the House and in the Senate from some taxing officials who say, ''If there's a server in my State, and that Internet traffic is routed through that server, I want to be able to tax it.'' That's the problem that we face here. If everybody decides to cash in on the Internet—one headline read, ''Shaking Down the Net''—if everybody wants to cash in on it, then we're going to kill the goose that laid the golden egg.
    So far, the Internet doesn't suffer from this multiplicity of taxation. It doesn't suffer from very much in the way of special taxes at all, and that's all to the good. That's why we now have the power to act. It's very timely for us to do so, and what Senator Wyden and I have come up with is essentially a timeout. Let's step back, take a look at this new medium; let's not try and put it on the procrustean bed of existing taxes designed for other technology and other aspects of human life, but let's take a look at it for what it is; what it might become—and we can't know that just now as legislators—and see whether or not we can rationalize all of the taxing jurisdictions that presently exist.
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    The fact that this panel this morning—although, Congressman Matsui, I know is in a markup—consists of two Democrats and one Republican, makes it pretty clear how bipartisan in its inception this bill is, and bicameral. The Senate's very far along with their legislation. They've already had hearings. I've testified over there myself. They have essentially premarked up the legislation in many respects, and I approve of those changes, because they're all clarifying. I think this has an excellent chance of becoming law this summer. The Clinton administration, in its testimony up here—Larry Somers from the Treasury Department said he endorses fully what we're trying to do in this bill, and the administration does, and in their recent white paper, ''The Framework for Global Electronic Commerce,'' the administration also endorsed the concept of keeping taxes off the net; applying all the existing taxes that we already have, and in a nondiscriminatory way, but not coming up with new net taxes; not coming up with things like the Europeans are talking about, a bit tax, which would literally tax the zeros and the ones in the digital transfer of data; not taxing the stream of electrons which some people are talking about; not imposing double taxes like a telecommunications tax applicable only to Internet traffic when we're already paying the telecommunication taxes on the underlying phone service, but rather make sure that all the existing taxes are applied in a nondiscriminatory way, exactly as presently they are.
    You may have seen—or if you haven't seen, you will come across it in the course of this hearing—some argument that if this bill were to become law, then a florist who is doing business over the net would escape taxes, whereas, if the florist sold you the stuff in the store, you would have to pay taxes. That just isn't the way this bill works; it's not the way it works. Sales taxes, use taxes, property taxes, franchise taxes, excise taxes, income taxes are all protected under this bill. All that we're after, as the initiators of this idea, is preempting any new taxes targeting the Internet, singling out the Internet for a new special form of taxation that would discriminate against the net. We want a level playing field, and so we have a big job ahead of us to work in partnership with our Governors and our local elected officials.
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    In California, I was notified that the State Board of Equalization, which sets tax policy, had noticed a public hearing for the purpose of authorizing the hiring of a lobbyist to come to Washington to campaign against this bill, and we began talking to members of the board, some of whom had already studied on this issue, and by the time those conversations were finished, the State Board of Equalization held their hearing, and voted unanimously to endorse the legislation. The Governor of the State of California has endorsed the legislation; the Franchise Tax Board in California has endorsed the legislation; many local elected officials, because we recognize as the largest state in the nation that our economy is very dependent on all of the growth that the Internet can produce, all the jobs that it can produce, and so on. We have a big trade surplus in America, $19 billion in software alone. We don't want to jeopardize this lead that America enjoys. We preponderate in all the services that are transferred over the Internet, so we have a great opportunity if only we can work together, and I think we're doing a wonderful job so far at working together as Republicans and Democrats, the legislative branch and the executive branch, and time is of the essence, so I hope we do it all soon.
    If we pass this legislation now, it's rather painless, because we're not trying to unring a bell, but if we wait too long, and if people rush in and try and, as I say, consume the goose that is laying these golden eggs, then it will be much more difficult. This is a classic example of the appropriate use of the interstate commerce power under Article 1, Section 8, that this Congress possesses. We want to make sure that a multiplicity of tax regimes, all well-intentioned, all sound on there own merits, does not collectively impair what is becoming a real national and global asset.
    I thank you for your consideration.
    [The prepared statement of Mr. Cox follows:]
PREPARED STATEMENT OF HON. CHRISTOPHER COX, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
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    Thank you, Mr. Chairman, for holding this important hearing today on the Internet Tax Freedom Act.
    As you know, I introduced and co-wrote the bill that we are considering today. In just the few months since we've introduced this bill, nearly 60 Republican and Democrat members of the House have joined as co-sponsors. In addition, the Clinton Administration, both in testimony before the Congress and in the White House's recently-released ''Framework for Global Electronic Commerce,'' has endorsed the goals and fundamental principles underlying the legislation.
    Hearings have already been held in the Senate, and my co-author and friend, Senator Wyden, is here today to tell us about his progress in the other body. We also held hearings on the legislation last week in the Commerce Committee's Subcommittee on Telecommunications.
PROMOTING PROSPERITY AT HOME AND ABROAD

    The Internet promises to become a completely new way of conducting commerce, one that would have been unimaginable to most people a few years ago. Because the Internet allows the dissemination of ideas and information anywhere in the world cheaply and immediately, it has enormous commercial potential.
    The Internet is already the vehicle for the exchange of more than a billion dollars worth of services and goods internationally. That volume is growing so rapidly at present that it cannot be reliably measured on a day-to-day basis. Its commercial potential is greater than that of any previously existing medium of trade.
    If the Internet continues to develop this potential, it will not only bring more services and products to more people, but also do it faster, easier, and cheaper than current market mechanisms. But note the if. The Internet will not develop this extraordinary potential if it is shackled by government regulation and taxes.
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    It is vital that the Internet remain free from the heavy hand of government, so that its dynamic and creative character can remain intact.
    Today, we have the opportunity to establish the principle that this new area of commerce will remain unrestricted. This is a relatively painless opportunity, since it is far easier to keep taxes and tariffs away in the first place than to eliminate already-existing taxes and tariffs.
THE NEED FOR THE INTERNET TAX FREEDOM ACT

    Fortunately, at present, the Internet remains largely virgin territory. For now at least, it is unmolested by state, local, federal, or even foreign tax collectors. But this may change rapidly. Tax collectors around the country, and around the globe, are increasingly looking to ''shake down the Net,'' as one recent magazine headline put it.
    It is not hyperbole to say that taxes might drive the Internet to an early grave. The Internet's very design—its decentralized, packet-switched architecture—make Internet transmissions vulnerable to multiple taxation. Far more than traditional interstate commercial transactions, the Internet is threatened by the specter of new, targeted, special, and multiple taxes.
    In Europe, lawmakers are already talking openly about a special new Internet tax called a ''bit tax.'' This tax would be levied on every bit of digital data—zeroes and ones—that is transmitted over the Internet. Many foreign governments are also seeking to aggressively apply their ''value added taxes'' to what they feel is their fair share of Internet transactions or electronic commerce. We need our Executive Branch to lead a world-wide foreign policy initiative to keep the Internet a global tax-free zone.
    In the United States, proposed new taxes by states, local governments, and special taxing districts also threaten the continued viability of the Internet. Over 30,000 state and local taxing authorities in America have the power to tax the Internet; many are already rushing out to do so. Some of the more notable examples include:
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The city of Tacoma, Washington, which earned nationwide attention—and opprobrium—last year when it declared its intent to impose a 6% gross receipts tax on providers of Internet access to customers within its jurisdiction. (The city council later voted to repeal the tax.)

Florida, which gave the online community a wake-up call in 1996 with its proposal to expand its tax on ''computer exchange services'' to Internet access. (Gov. Lawton Chiles later backed off from this proposal, and earlier this year signed a law to preclude taxes on Internet access.)

    In a growing number of cases, governments are seeking to ''double tax'' the Internet as a telecommunications service, taxing Internet users once on the underlying phone calls used to transmit information, and again on the actual data or information being transmitted over those phone lines.
Tennessee's Department of Revenue taxes Internet service as a telecommunications service, on the grounds that they transmit electronic messages across telephone lines. (Nashville resident James Walton, who testified in the Senate hearings a few weeks ago, brought us living proof of the truth of Chief Justice John Marshall's celebrated dictum that ''The power to tax involves the power to destroy.'' His Internet access company was literally put out of business by Tennessee's Internet tax.)

Massachusetts levies a 5% telecommunications sales tax on the services provided to its residents by not only in-state, but out-of-state Internet service providers. (A bill to rescind this policy is expected to be approved this week by the full Legislature. Howard Foley from the Massachusetts High Tech Council, who is testifying later today, will provide more recent information on this effort.)

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THE SOLUTION: THE INTERNET TAX FREEDOM ACT

    The Internet is not just interstate but global. States and localities should not impair it. The Internet's inherent susceptibility to special and multiple taxation requires that Congress take action to ensure that state, local, federal, and foreign tax policies promote rather than interfere with the free flow of Internet traffic.
    Dean Andal, who serves as a member of the California State Board of Equalization, which oversees California's state sales tax, recently wrote to members of Congress to endorse the Internet Tax Freedom Act. I'd like to read briefly from his endorsement letter, as it captures nicely not just the interstate justification—but the affirmative need—for congressional action:

The lack of a uniform resolution to the taxation of interstate commerce is a substantial impediment to the growth of electronic commerce. Congress must act, as it should have long ago, to clearly identify the boundaries of state taxation of interstate commerce . . . . The global implications of electronic commerce raise just the type of dilemma the Founding Fathers envisioned being resolved by Congress.

    This is precisely why we must pass the Internet Tax Freedom Act. Let me walk you through the bill's major provisions:
(1) A ''Time Out'' on Internet Taxes

    The bill establishes a national moratorium on taxes that specifically target the Internet, such as taxes on Internet access or online services.
    To ensure that the moratorium will not interfere with legitimate state and local taxing power, the bill expressly permits normal business income taxes, business license taxes, and sales and use taxes (so long as they are the same as those imposed on interstate catalog and mail orders). The bill also permits ''property taxes, motor fuel taxes, sales to companies engaged in the Internet and with interactive computer systems, unemployment taxes, and workers compensation'' and other taxes that are applied neutrally and do not discriminate against the Internet.
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(2) Two-Year Study, and Report to Congress

    The bill commissions a two-year study of U.S. and foreign taxation of Internet commerce. This process will provide policymakers with a better understanding of the Internet, so that new taxes aren't enacted as a result of ignorance, misunderstanding, or lack of reliable data. After all, everyone—Internet users, consumers or businesses who want to buy or sell products or services over the Net, and state and local tax collectors—can benefit from better information.
(3) A Global Free Trade Zone on the Internet

    The final element of H.R. 1054 is its call for the Clinton Administration to be as aggressive as possible internationally in seeking to keep the Internet free of taxes and tariffs.
    This builds on the concept of the Internet as a ''global free trade zone,'' which has been promoted by the White House in its ''Framework for Global Electronic Commerce'' and by the Treasury Department in its November 1996 white paper on the tax policy implications of electronic commerce.
    A global free trade zone on the Internet would have immediate advantages for the United States. The United States excels in the information and media services that preponderate on the Internet. In 1995, U.S. exports associated with licensing fees and royalties earned more than $25 billion, while U.S. imports totaled only $6.5 billion in the same categories. This represented the United States' largest net surplus among all categories of goods and services offered.
    At the same time it helps American companies and workers who sell services and goods around the world, making the Internet duty-free will benefit American consumers buying goods from abroad. One reason this is so is that more Americans use the Internet than citizens of any other nation. More than a third of the 50 million people currently using the Internet are Americans. Keeping tariffs off the Internet will thus disproportionately benefit the American consumer.
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CONCLUSION

    Unwise taxation and regulation of the Internet can cripple this dynamic new medium in its infancy. Enactment of the Internet Tax Freedom Act, however, will ensure that all of us live to realize the vast potential of this fledgling but rapidly changing wonder that today we call the World Wide Web. Congress and the Administration have the opportunity and the duty to work together to safeguard this future. There is no time to lose.
    Thank you again, Mr. Chairman, for holding these hearings today on the need for this critical legislation.

    Mr. GEKAS. We thank our colleague, and we will enter his written statement into the record without objection. We will discharge you, with the thanks of the subcommittee, from any further obligation to remain here——
    Mr. DELAHUNT. Mr. Chairman, before Representative Cox leaves, I just simply want to make a short statement, and compliment him for what is a piece of legislation that can best be described as common sense, and I want to acknowledge his leadership, and I'm glad that he conceived of this concept, and I'm pleased to be a cosponsor.
    I just left a hearing before the Subcommittee on Intellectual Property, and I will be returning there. As he proceeds out the door, I'll be following him, but I was reflecting on the fact that simultaneously in the Rayburn Building there are two hearings that are going on in terms of really what, in my opinion, is the economic future of this Nation, because it's clear that the Internet is the highway of electronic commerce that has so much promise which you've eloquently articulated, and, again, Massachusetts and California do share a common interest here, because both States are leaders in terms of electronic commerce, and myself and my colleague, Mr. Meehan later on, will introduce the head or the executive director of the Massachusetts High Tech Council, Howard Foley, who I see sitting here, and this is an extremely important piece of legislation. And, again, I just want to extend my congratulations and gratitude.
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    Mr. COX. Well, I thank you very much. I look forward to working with you on this.
    Mr. GEKAS. We thank the gentleman, and we now acknowledge the attendance of the gentleman from Massachusetts, Mr. Meehan, and the gentleman from South Carolina, Mr. Inglis. Again, we thank you and dismiss you.
    Mr. COX. Full service.
    Mr. GEKAS. We'll proceed to the second portion of our hearing with a demonstration by Mr. Valenti. We had skipped over the second panel for the moment, but now we'll go back to it.
    The Special Assistant to two Presidents will come to the witness table at our invitation, I'm sure. Mr. Valenti, who had served as a wartime bomber pilot, and who knows Washington like not too many others do, the president and CEO presently of the Motion Picture Association of America. He will be joined at the panel by the president of the Business Software Alliance, Mr. Robert Holleyman.
    Mr. Holleyman, prior to joining his organization, worked for 8 years as senior counsel to the Senate Committee on Commerce, Science, and Transportation. Prior to that he worked as the legislative director to former Senator Russell B. Long.
    Without any further ado, we will listen to the testimony as the witnesses were introduced. First, Mr. Valenti, and without objection, the written statements will be automatically inserted into the record. We will allot the customary 5 minutes for the oral presentation, and then ask, if you would not mind, answering some questions by members of the subcommittee.
    With that, we'll begin with Mr. Valenti.
STATEMENT OF JACK VALENTI, PRESIDENT AND CEO, MOTION PICTURE ASSOCIATION OF AMERICA
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    Mr. VALENTI. Thank you, Mr. Chairman. I'm glad to be here to support this Internet Tax Freedom Act. This committee asked me, particularly, to deal with two questions: One, what's the future of the Internet?. And, the second is, how large will be it's impact on our lives, and the way we gather information? The short answer is, the future is just beginning, and the impact is going to be very large. More precise than that, no one can be, because the sky's the limit. Frankly, this thing has burst on the world community with dazzling, uncomprehending speed that no one really anticipated.
    I just got back from Sun Valley in a business conference where the titans of entertainment and computer software, and Bill Gates and Warren Buffet and Andy Grove were all there, discussing the speed with which this thing has happened. No one—not Gates or Buffet or anybody else—predicted that.
    Now, it's opened a great new world, there's no question about that, of entertainment, information, and the possibilities of global commerce. We all know that. But, I believe, and others share this view, that Internet taxation does pose a threat, because this important prodigy can't grow if it's going to be subject to possibly discriminatory taxation or burdensome taxation. I think this act would put a curb on it. It needs to be studied and analyzed and examined. That's why I'm here supporting it.
    Congressman Cox and Senator Wyden and others, I think, have all realized that this Internet needs room to grow if it's going to become this great supple addition to our lives. I don't know whether you're aware of these numbers, but today there are about 40 to 60 million Internet users. It's expected that by the year 2000 that's going to be a quarter of a billion and that roughly 100 countries now have access to it. There were just 300 Internet host computers in 1980. Today there are more than 10 million. By the year 2000, it will grow to 120 million is the best estimate. The amount of information on the Internet doubles every year—incredible. In 1992, that's 5 years ago, Mr. Chairman, the World Wide Web had about 100 sites. Today there are 200,000 sites with 11 million pages of text and pictures and sound and video, and the World Wide Web grows by 300,000 pages every 7 days. So, when we're talking about growth, we're talking about supernatural growth.
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    It's already changing the face of education and medical research and marketing of products, personal expression, political expression, and I think world global trade is becoming a reality, but there's a thing called the Emersonian Doctrine that I do want to introduce here. It says that ''For every loss, there's a gain, and for every gain, there's a loss.'' That's the way life goes. All these possibilities are quite alluring, as well as worthy, but they carry within them some germs of unauthorized downloading of copyrighted intellectual property which can become epidemic, which is why even as I gaze with approving wonder on this extraordinary future of the Internet, I must passionately caution the Congress never to become casual about the protection of intellectual property. As a member of your committee said just a moment ago, ''It is the future of America.''
    The most seductive, I think, future attraction on the Internet is going to be intellectual property: movies, books, music, computer software, which in turn comprise America's most wanted exports. We're riding an ascending curve into the future as the fastest-growing of all American products marketed abroad. That's a fact. While this Nation begins to brood about deficits, trade deficits, deficit balance of payment, which are being visited upon our economy, I think it's cheering to take note that intellectual property is one of those groups that is providing a surplus balance of trade to this country, and, Mr. Chairman, that phrase, ''surplus balance of trade'' is seldom heard in the corridors of this Congress, which is the central reason, then, that Congress must be the guardian at the gate, the protector of intellectual property. If you don't, one day we will wake up to find all of our fair wealth squandered, and then to paraphrase Mr. Shakespeare, ''We'll sit upon the ground and tell sad stories of the death of America's grandest trade prize.''
    My association, the seven largest producers and distributors of movies, television, home video, and the world is eager to join this Internet future. We want to work very closely with the Congress in shaping the protection on the Internet of intellectual property, including, for example—soon to come before your committee—the important implementing language and the ratification of the World Intellectual Property Organization concluded in Geneva with 10 countries signing on. That's why I support the efforts of Congressman Cox and others who are trying to have some reasoned, practical solution or approach and this moratorium on taxation. I think what they're suggesting makes good sense. Sometimes that's often absent when the future is imprecise.
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    I will tend to the importunings of that red light, and even though I'm quite fascinated by what I'm saying up here—[laughter]—I think I'd better stop. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Valenti follows:]
PREPARED STATEMENT OF JACK VALENTI PRESIDENT AND CEO, MOTION PICTURE ASSOCIATION OF AMERICA

    Thank you, Mr. Chairman for inviting me to testify in support of the Internet Tax Freedom Act. I am happy to lend the support of the Motion Picture Association for this important legislation.
    The Committee asked me to deal with two crucial questions. What is the future of the Internet? How spacious will be its impact on our lives and the way we gather information?
    The short answer is its future is just beginning and its impact will be large. More precise I cannot be, simply because no one really knows. From its stern scientific origins, it has burst upon the world community with dazzling, uncomprehending speed enticing the attention of an ever expanding global user base.
    The Internet has opened a world of possibilities with respect to research, entertainment, information, and global commerce. The motion picture industry is but one of many industries whose future will be enhanced by the worldwide access that the Internet can provide. But Internet taxation poses a threat to the development of this important medium. The Internet Tax Freedom Act would curb this threat by placing a moratorium on new state and local Internet taxes and preventing the Internet from becoming a victim of inconsistent and discriminatory taxation.
    As you know, the Administration recently released a paper outlining its policy for global electronic commerce, and one of the overriding principles of that policy is that ''governments should avoid undue restrictions on electronic commerce.'' Recognizing that overburdensome taxation has the potential to inhibit global commerce and obstruct the development of the Internet, the Administration's policy paper states that the Internet ''should be declared a tariff-free environment'' and that ''no new taxes should be imposed on Internet commerce.'' Congressman Cox, Senator Wyden, and the Administration have all realized that the Internet needs room to grow if it is to become the unsurpassable vehicle for information and business that we hope it will be. The Internet Tax Freedom Act is an important step in giving the Internet the room it needs to grow.
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    Today, there are somewhere between 40 and 60 million Internet users. It is expected that there will be a quarter-billion regular users by the year 2000. According Global Internet Project figures, roughly 100 countries now enjoy Internet access. There were just 300 Internet host computers in 1980. The 1996 figure is more than 10 million. Four years from now it will be 120 million.
    Furthermore, the amount of information on the Internet doubles every year. In 1992, the World Wide Web comprised 100 sites. Today, there are more than 200,000 sites with 11 million pages of data, pictures, and text as well as sound and video. According to the Global Internet Project the Web grows by 300,000 pages every seven days.
    Several years ago, Bill Gates talked about the notion of convergence, that is, the merging of computer and TV set. That all seemed a tad far fetched at the time. Today, the transition appears to be becoming a reality. Experts believe that many standard consumer electronics: televisions, VCRs, telephones and stereos will be subsumed into Internet-based usage. In fact some experts say that within the next ten years new information appliances will be available such as hand-held wristwatch cordless personal computers, computer phones, wall high definition displays.
    The Internet is already changing the face of education, medical diagnoses, marketing of products, personal and political expression and business. World trade over the Internet is becoming a reality. Music, books, movies have the capacity to be available in a variety of formats, including interactive, if users so desire. Three-dimensional viewing to purchase goods and material is just over the horizon. There are literally no barriers to this supple, constantly inventive cyberspace revolution.
    All of these possibilities are quite alluring as well as worthy. But they carry within them the germs of unauthorized downloading of copyrighted Intellectual Property, which can become epidemic. Which is why even as I gaze with approving wonder on the Internet's future, I most passionately caution the Congress never to become casual about the protection of the very essence of the Internet: its content. The most seductive future attraction on the Internet belongs to what we describe as 'intellectual property,' movies, books, music and computer software, which in turn comprise America's most wanted exports, riding an ascending curve into the future as the fastest growing of all American assets marketed abroad.
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    While the nation broods about the bloated trade deficits which are being visited on our economy, it is cheering to take note that intellectual property is a breeder of 'surplus balance of trade,' a phrase seldom heard in the corridors of the Congress. Which is the central reason why Congress must be the guardian at the gate, the protector of copyright, else one day we will wake to find this great asset squandered and we will sit on the ground and tell sad stories of the death of our grand trade prize.
    The MPAA member companies are keen to join the Internet. We laud its promise. But the Internet revolution, and it is that, confronts a future which while exciting is also perilous. We must nourish the excitement even as we challenge the peril of unauthorized use of precious copyrighted material. It is MPAA's intent to work closely with the Congress in the shaping of that protection on the Internet, and in the support of protective implementing language in the ratification of the World Intellectual Property Organization's treaties bound by agreement of some 100 countries in Geneva. We support the efforts of Congressman Cox and his colleagues as they strive to construct a reasoned, practical approach to taxation on the Internet. What Congressman Cox is suggesting makes good sense, which often is absent when the future is imprecise.
    I offer gratitude and applause for the sponsors of this bill. My Association has great zest for the future, and great faith in the Congress never to be laggard in guarding intellectual property, in which the United States is the confirmed world leader. Let the future begin!

    Mr. GEKAS. Well, we'll get back to you and be refascinated in a moment, but now we'll turn to Mr. Holleyman.
STATEMENT OF ROBERT HOLLEYMAN, PRESIDENT, BUSINESS SOFTWARE ALLIANCE
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    Mr. HOLLEYMAN. Mr. Chairman, thank you very much, and members of the subcommittee, for the opportunity to talk this morning with you about what is truly one of the great wonders, not only of our time, but indeed all time; that is the growth of electronic commerce, the Internet, and what it will mean to change the lives of not only hundreds of millions of Americans, but indeed to bring together a global universe and a global marketplace.
    The Business Software Alliance represents the leading publishers of software for personal computers and the leading computer manufacturers. We are testifying this morning with our strong support for the principles embodied in the legislation that the subcommittee is considering the Internet Tax Freedom Act. We believe that adoption of this legislation would be an important means of advancing the goals of electronic commerce, of advancing technology, and allowing this new medium to develop and flourish without being shackled with a myriad of new taxes that could stunt its growth.
    The software industry, Mr. Chairman, is leading the high-tech revolution and spurring economic growth. Mr. Chairman, I would like this morning to introduce for the record a new report that was just issued entitled, ''Building an Information Economy,'' because I think it shows facts that are extremely relevant for today and where we're headed in the future with this medium.
    Mr. GEKAS. Without objection, the document will be entered into the record.
    [The report is in the subcommittee files.]
    Mr. HOLLEYMAN. Thank you, Mr. Chairman.
    What the report shows is that the software industry, from 1990 to 1995, grew at a rate nearly two-and-a-half times faster than the rest of the U.S. economy, and that the software industry paid more than $36.4 billion in wages to Americans in 1996 and that the annual salaries in this industry averaged nearly $60,000 per worker, even excluding senior management salaries from that list. By 2005, wages paid to software employees will nearly double to $60 billion, and the benefits of the industry's success are not simply limited to wages, but they're also what we'd like to view as perhaps our single best contribution to reducing the deficit, which is that we—the software industry—have $15.1 billion in Federal and State taxes. Projections are that, by the year 2005, tax contributions will reach $25 billion.
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    You started off this morning, Mr. Chairman, speaking of automobiles and how they opened up our country. Mr. Delahunt spoke of the highways, and what they've done for our country. It is very much the train of thought that I come here with this morning, because I think if you look at all of the key developments in this country from our inception to present, they always combine two things: They combine a spirit of adventure and opening up new frontiers, and they combine the quest for economic stability and growth and the risks that Americans are inherently willing to take, both the Americans who first came to this country—Horace Greeley in commending people to go west; the railroads when they opened up this country in the Golden Spike; the aerospace innovations of the 1950's, and now the cyberspace innovations of the latter portion of the 20th century and the beginning of the 21st. All have in common expansionist views; all have in common a spirit of adventure, and all have in common great economic success. We're looking at precisely the same thing when we talk about electronic commerce.
    And I would like to make a couple of notations of how fast this is growing. Electronic commerce yielded $500 million in transactions in 1995. That more than doubled last year to $1.1 billion. The U.S. Commerce Department estimates that in 5 years we'll have $70 billion in electronic commerce transactions per year, and there are some industry observers who argue that this could be as high as $150 billion to $600 billion within 5 years. The bottom line is that we don't know what this will yield, but we do know that it is more than doubling each year, and there is great prospect in that.
    I'd like to conclude, if I may, Mr. Chairman, by also introducing into the record a letter that was submitted to Members of Congress, the President, and others on June 4 of this year in which the visionaries of the software industry laid out their views for the growth of electronic commerce. They had nine key points, and one of those key points in that letter is precisely what the legislation would do today. It says, on the subject of taxation, that ''No new Federal or State taxes should be imposed on Internet transactions.'' And our CEO's had in mind when they wrote this letter the very legislation you're considering today, which the BSA was already on record as supporting. It is also consistent with the principles of the new White House Electronic Commerce Paper.
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    While we cannot predict the future, I think we can look to what visionaries of today are saying about the future, and this letter is from the visionaries of our industry ranging from Ed Pfeiffer, the president and CEO of Compaq; to Andy Grove, the CEO of Intel; to Bill Gates, the CEO of Microsoft; to Eric Schmidt, the CEO of Novell; Jeff Papows, the president of Lotus—I'll submit this for the record. They are today's visionaries looking ahead at the future and are very much, as members of this industry, endorsing the legislation that I had the opportunity to speak about today, and I'd like to thank you for that chance.
    [The prepared statement of Mr. Holleyman follows:]
PREPARED STATEMENT OF ROBERT HOLLEYMAN, PRESIDENT, BUSINESS SOFTWARE ALLIANCE

    Mr. Chairman, the Business Software Alliance appreciates the opportunity to testify before this Subcommittee and thanks you for holding a hearing on this important legislation, H.R. 1054, ''The Internet Tax Freedom Act.'' BSA is dedicated to promoting the interests of the software industry through its education, enforcement and public policy programs in the United States and more than 65 countries throughout North American, Europe, Asia, and Latin America. BSA's Policy Council represents the world's leading software and hardware companies, including: Adobe Systems, Inc., Apple Computer, Inc., Autodesk, Inc., Bentley Systems, Inc., Compaq Computer Corporation, Digital Equipment Corp., IBM Corp., Intel Corp., Lotus Development Corp., Microsoft Corp., Novell Inc., SCO Inc., Sybase Inc. and Symantec Corp.
    BSA supports the goals of the ''Internet Tax Freedom Act.'' The software industry builds the tools that will enable electronic commerce, and the industry sees great potential for consumers, businesses and governments in the rapid growth and widespread use of the Internet and other network technologies. A comprehensible, fair and administrable tax scheme by the states and localities is critical to realizing the potential of electronic commerce, and BSA believes H.R. 1054 is a step in the right direction toward providing a framework in which to develop that system.
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I. THE SOFTWARE INDUSTRY IS LEADING THE HIGH-TECH REVOLUTION AND SPURRING ECONOMIC GROWTH

    The software industry is one of the most dynamic business success stories in recent history, with unprecedented growth resulting in more jobs, higher wages, and greater tax revenues. From 1990 to 1996, the industry grew at the rate of 12.5%, or nearly 2.5 times as fast as the rest of the U.S. economy. The industry paid more than $36.4 billion in wages in 1996, with annual salaries averaging nearly $60,000 for its workers. By 2005, total wages paid to software employees will nearly double to $60.5 billion.
    The benefits of this explosive growth are not confined to software companies and their employees. The industry generates at least $15.1 billion in direct and indirect federal and state tax receipts annually. It is projected that tax contributions will reach $25 billion by the year 2005. I would like to submit for the record a recent BSA study which demonstrates these and other benefits of the growth of the software industry.
    This is only the beginning of a steep growth curve. Although the PC software industry only began in earnest in the early 1980s, it has already risen to be the third largest industry in the United States by some measures. Software is increasing efficiency in other industries, enhancing personal productivity, and making the U.S. economy even more competitive abroad. A key component in realizing further benefits from the software revolution in the United States is to ensure the rapid development of national and international electronic commerce.
II. SOFTWARE ENABLES ELECTRONIC COMMERCE

    Much of the growth noted above was generated before widespread use of the Internet became commonplace. We are now entering a new era in which software enables seamless interactions between computers, which, in turn, enable consumers and businesses to exchange information almost instantaneously and without regard to geography. This networking capability is the key to electronic commerce. Enabling it is a promising growth opportunity for the software industry and the U.S. economy in general.
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    The Internet and other network technologies ''ride on'' hardware (e.g., telecommunications, computer chips), but software breathes life into these systems and makes them useful for businesses and consumers. Communications technologies have enabled simple point-to-point communication for years, but it is software that empowers users to manipulate information, customize products, and analyze data and then interact with others to use the information productively. Examples are as simple as ordering clothes from on-line mail order catalogs where the consumers can specify exact measurements and receive customized items, to complicated inventory-management programs that enable businesses to predict their needs in advance and order from suppliers only what they need and when they need it. The potential volume of e-commerce is illustrated by a computer company which recently began selling its PCs via a site on the World Wide Web. Within nine months, its sales rose to more than $1 million a day. The company's goal is to handle all transactions on line. Another company recently began operating a Web-based service that links corporate buyers and sellers. The service cuts procurement time by 50% and costs by 30%.
    Total receipts from electronic commerce conducted on the Internet were $500 million in 1995. That number more than doubled to $1.1 billion in 1996. The Commerce Department predicts that electronic commerce could total $70 billion within five years, and others suggest numbers between $150 billion and $600 billion. Regardless of who is right, everyone agrees that the potential for e-commerce to transform the economy is enormous.
    Electronic commerce is here today, but not yet on the mass scale we hope it will realize in the near future. The software products that enable e-commerce—web browsers, remote access software, database management programs, collaborative project systems—are impressive but in their infancy. The best is yet to come.
III. THE UNREALIZED OPPORTUNITIES OF ELECTRONIC COMMERCE ARE POTENTIALLY ENORMOUS

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    When consumers and businesses can easily and conveniently use network technology such as the Internet to complete their transactions, we can say e-commerce has arrived. This will lead to a revolution in the U.S. and global economy with the potential to transform the economy as did the building of the railroads and the advent of the telephone. Although the specific parameters of this e-commerce revolution are not yet clear, a few specific benefits that will come with e-commerce include the following:
Consumers and businesses will be able to comparison shop across national and international borders instantaneously;

Products, both large and small, will be customized for users because of the new ability of buyer and seller to interact with greater precision and without regard to distance;

Multimedia demonstrations of products could be offered before users make purchases, thus increasing user knowledge and power to make informed choices;

The Internet holds the opportunity to create the 24-hour global economy, as accessible for consumers as it is for businesses.

    The biggest winners, aside from consumers, are likely to be small and mid-size businesses. Simply put, network technologies enable all businesses to compete in national and international markets by dramatically reducing their barriers to entry. Until recently, only large companies could afford the costs involved in far-flung business operations. The Internet has already changed this scenario. Benefits to businesses and individuals include the following: Reduced marketing and advertising costs; reduced warehousing costs; reduced retail space costs; increased international opportunities; and increased U.S. competitiveness.
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    These benefits will only be realized if Congress and the Administration are mindful to craft policies that do not inhibit the growth of electronic commerce on the Internet. On June 4, 1997 BSA released a letter signed by BSA CEOs in which they enumerated the key policies that will facilitate the growth of e-commerce. Those policies include:
Effective intellectual property protection and enforcement are critical to facilitating electronic commerce

Governments should not impose import or export controls on encryption products or attempt to force use of government-mandated key-management infrastructures

No new federal or state taxes should be imposed on Internet transactions

Policy makers should rely on existing laws to address criminal activity on the Internet, and develop new laws cautiously

Technology-based filtering and rating systems are far more effective and flexible than sweeping regulation

Governments should promote competition and deregulation in all telecommunications markets

Market forces should drive the evolution of technology-based electronic payment systems

The Internet should be a free trade environment

Traditional principles of contract law should apply to e-commerce transactions
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    Today, this subcommittee is reviewing an essential element of the success of e-commerce—how to create a consistent, non-discriminatory and administrable basis for taxation.
IV. A PIECEMEAL SCHEME OF TAXATION WILL INHIBIT THESE OPPORTUNITIES

    There is real danger that taxing authorities—comprising 30,000 jurisdictions—will impose redundant, inconsistent and unadministrable taxes on Internet transactions. This raises the specter that a single transaction might be taxed several times by different methods and by different jurisdictions who do not know, and likely cannot know, what another jurisdiction is taxing. Given the dispersed nature of Internet communications, buyers and sellers seeking to do business on-line will face uncertainties regarding taxing jurisdictions and will often be unable to determine when transactions are, or are not, taxable in a particular jurisdiction.
    How the Internet Works: To understand the difficulties inherent in taxing electronic commerce, it is necessary to understand the basics of the network computing. The Internet is a vast network of computers, all connected and all using a common protocol language that allows them to process the information being transmitted. When a message is sent, it includes a digital ''header'' with its destination. Intermediate machines called ''routers'' receive the message and send it on to the next machine. The routers make instant decisions about where to send the message next based on the ultimate destination and which other computers have too much traffic already. For example, a message sent from New York to San Francisco might travel through Washington, D.C. and Seattle one day, yet the same message sent the next day might travel through Chicago and Houston, depending on traffic patterns on those days. Often, the message will be broken into pieces and sent to different intermediate computers for maximum efficiency. It will then be reassembled at its destination according to the instructions in the ''header.'' In this case, different parts of a message may travel through several different locations before being reassembled at its destination.
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    The destination is a server (host computer) from which the recipient can access his or her messages, but which doesn't have to be physically near the recipient. The address itself doesn't even tell the message sender where the server is. For example, the Internet addresses for all BSA employees begin with their name and end with ''@bsa.org,'' whether they are in the D.C. office, the London office or the Singapore office. A message sent to BSA's Internet address might come to our D.C. server or it might be sent overseas, depending on the recipient. This is why it is so difficult for Internet businesses to know the locations of their customers. Even payment doesn't necessarily reveal the purchaser's location, because it is frequently through a credit card, so that only the third-party creditor knows the billing address.
    As you can see, Internet architecture gives rise to significant potential for conflicting, duplicative or unadministrable tax policies. For example, some taxing authorities may choose to tax based on the location of the server (host computer), others on the location of the purchaser. One tax authority actually proposed taxing screen images as property. Some taxing authorities hold that mere presence on the Internet—which enables consumers to access a business from anywhere—creates a sufficient nexus for taxation, while others do not. When each jurisdiction taxes by its own method, the likelihood is great that some transactions will be taxed by several different jurisdictions, each operating on the assumption that they deserve a full ''bite'' of that transaction while other jurisdictions do not. Such a scenario threatens to make the cost of compliance prohibitive for companies trying to do business over the Internet. In addition, any sustainable tax mechanism for Internet transactions must take into account the essential anonymity and flexible routing of Internet transactions and not impose an identification and compliance burden on Internet businesses which they cannot meet.
    Imagine a small, start-up software company with a site on the World Wide Web, taking custom orders from clients around the country. Such a company could literally be based anywhere, especially if it delivers its product over the Internet. With a modest marketing budget and a good product, that company could use the World Wide Web to become, almost immediately, a serious competitor to the biggest companies in the business because savvy clients could go this Web site as easily as any other.
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    Now imagine that company hiring tax counsel to figure out the liability for each individual transaction. The counsel would have no way of knowing the route for his company's transactions and the actual physical location of the end user. Even with this handicap, the counsel would have to not only determine which transactions triggered an obligation to remit taxes to the appropriate jurisdictions, but also would have to determine which transactions are taxed twice or three times, and which ones become prohibitively expensive on the basis of customer locations. The efficiencies offered by the electronic commerce would begin to evaporate from the legal costs of reporting alone.
    Finally, there are some international considerations. The United States holds a position of leadership in the developing market for electronic commerce and products that enable it. You may recall that the Internet was developed in this country. Now it is a global phenomenon and other countries will undoubtedly look to the United States for leadership as they face complex questions of electronic commerce taxation. We have a real opportunity to show leadership by developing a rational, fair, consistent and administrable taxation scheme for this new medium. At the same time, if our states begin taxing foreign companies by a myriad of methods, we risk similar taxes abroad and the financial Balkanization of the Internet.
    A key benefit of the ''Internet Tax Freedom Act'' is that it will facilitate communication between taxing authorities and the Internet industry. BSA believes this communication will lead to a more consistent and administrable tax scheme than would emerge if the taxing process developed in a haphazard manner.
V. WE BELIEVE NOW IS THE TIME, AND CONGRESS IS THE PLACE, TO ADDRESS THIS POTENTIAL PROBLEM

    The Internet is a new medium, and commercial transactions on the Internet present a unique set of circumstances that require state and federal policymakers to collaborate with industry on the development of administrable taxation schemes before they are implemented and before states begin to rely on revenue from such taxation. The time is ripe for this legislation. H.R. 1054 provides an opportunity to get it right the first time, and avoid the morass of inconsistent and incomprehensible taxation by the 30,000 localities that have the power to tax.
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    The software industry and its customers are not by any means seeking a free ride. The goal is not to enable Internet users to pay less, but rather to ensure they pay only once and in a consistent and administrably feasible manner.
    This Subcommittee's jurisdiction over Article 1, Section 8 of the Constitution (the ''Commerce Clause'') gives it a special trust to facilitate commerce between and among the states. BSA believes it is important that state and federal policymakers work with the Internet industry in the framework provided by the ''Internet Tax Freedom Act'' to create an environment in which electronic commerce will grow and its benefits will be realized by consumers, businesses and governments across the nation.
    Thank you.

    Mr. GEKAS. We thank the gentleman, and without objection, that letter, too, will become a part of the record.
    [The information follows:]
Business Software Alliance,
Washington, DC, June 4, 1997.
Hon. William J. Clinton,
President of the United States,
The White House,
Washington, DC.

    DEAR MR. PRESIDENT, today, we are releasing a study which shows that the use of computer software and the growth and development of the software industry are transforming the American economy. The study demonstrates that software is a key factor in increasing U.S. productivity and creating high-skill, high-wage American jobs.(see footnote 1)
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    As we look to the near future, it is our common assessment that ''electronic commerce'' constitutes an important and promising engine for U.S. economic growth. E-commerce will likely become one of the most efficient methods of doing business over the next several years. Realizing its potential will assure continued American leadership, create jobs and maintain U.S. competitiveness. Business and policy makers must work together to ensure the Internet grows into a reliable, secure, affordable and efficient medium for commerce. Sound public policy will help e-commerce thrive, while policy decisions which burden the Internet will cause e-commerce to falter before it has a chance to reach its potential.
    The American software industry holds the promise of leading the United States and the world into the information economy of the 21st Century. We believe the following policy principles are critical to the success of e-commerce and American technological leadership.
   

BSA POLICY PRINCIPLES FOR ELECTRONIC COMMERCE

INTELLECTUAL PROPERTY RIGHTS: EFFECTIVE INTELLECTUAL PROPERTY PROTECTION AND ENFORCEMENT ARE CRITICAL TO FACILITATING ELECTRONIC COMMERCE

    Existing intellectual property laws need to be observed in the digital environment. Marketplace forces should determine how creators commercialize their intellectual property rights, not intrusive policies aimed at ''managing'' the development and dissemination of technology.
SECURITY: GOVERNMENTS SHOULD NOT IMPOSE IMPORT OR EXPORT CONTROLS ON ENCRYPTION PRODUCTS OR ATTEMPT TO FORCE USE OF GOVERNMENT-MANDATED KEY-MANAGEMENT INFRASTRUCTURES
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    Network users must have confidence that their communications, whether personal letters, financial transactions or sensitive business information, are secure and private. Access to products with strong encryption capabilities is critical to providing this confidence.
TAXATION: NO NEW FEDERAL OR STATE TAXES SHOULD BE IMPOSED ON INTERNET TRANSACTIONS

    Taxes specific to the Internet will choke the development of e-commerce. In addition, varied and conflicting tax schemes among states and countries would create confusion and likely be unworkable.
CONSUMER PROTECTION: POLICY MAKERS SHOULD RELY ON EXISTING LAWS TO ADDRESS CRIMINAL ACTIVITY ON THE INTERNET, AND DEVELOP NEW LAWS CAUTIOUSLY

    Criminal activity on-line most often consists of traditional schemes that are already subject to legal protections. New laws should be enacted only as needed to close any gaps or loopholes created by the unique nature of the Internet.
PRIVACY AND CONTENT REGULATION: TECHNOLOGY-BASED FILTERING AND RATING SYSTEMS ARE FAR MORE EFFECTIVE AND FLEXIBLE THAN SWEEPING REGULATION

    Concerns have been raised about the collection of personal data online and the existence of offensive content on the Internet. In both of these instances, user-friendly technical applications are being developed that provide tailored solutions for each individual.
TELECOMMUNICATIONS: GOVERNMENTS SHOULD PROMOTE COMPETITION AND DEREGULATION IN ALL TELECOMMUNICATIONS MARKETS

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    A high-bandwidth, digital network infrastructure is essential for e-commerce. True competition in all communications markets will accelerate the deployment of new technologies and reduce prices to consumers.
INNOVATIVE PAYMENT SYSTEMS: MARKET FORCES SHOULD DRIVE THE EVOLUTION OF TECHNOLOGY–BASED ELECTRONIC PAYMENT SYSTEMS

    A new market is emerging for convenient payment tools for Internet transactions which will increase business efficiency and reduce costs to consumers. Governments should promote increased competition in the deployment of these new systems.
INTERNATIONAL TRADE: THE INTERNET SHOULD BE A FREE TRADE ENVIRONMENT

    Countries should not raise new barriers to trade for products delivered electronically. Trade barriers such as tariff and customs collections are inherently unworkable in the networked environment. Just as an open and free trading system for tangible goods positively contributes to the U.S. economy, global electronic commerce will expand more rapidly in an environment free from trade barriers.
CONTRACT: TRADITIONAL FREEDOM–OF–CONTRACT PRINCIPLES SHOULD APPLY TO E-COMMERCE TRANSACTIONS

    Buyers and sellers need certainty and clarity in their dealings on the Internet and confidence that their contracts are enforceable. Changes to contract law should be made only to ensure freedom-of-contract principles apply in the digital environment.
    We appreciate your consideration of these policy principles which will enable this industry's continued success, leadership and future growth.

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John Warnock, Chairman and CEO, Adobe Systems, Incorporated; Gregory Bentley, President, Bentley Systems, Incorporated; Eckhard Pfeiffer, President and CEO, Compaq Computer Corporation; Andrew S. Grove, Chairman and CEO, Intel Corporation; William Gates, Chairman and CEO, Microsoft Corporation; Alok Mohan, President and CEO, SCO; Gordon Eubanks, President and CEO, Symantec Corporation; Carol Batz, Chairman, President and CEO, Autodesk, Incorporated; Dominique Goupil, President, Claris Corporation; Robert Palmer, President and CEO, Digital Equipment Corporation; Jeff Papows, President Lotus Development Corporation; Eric Schmidt, Chairman and CEO, Novell, Incorporated; and Mitchell Kertzman, President and CEO, Sybase, Incorporated.

    Mr. GEKAS. We now note the presence of the gentleman from Ohio, Mr. Chabot; the gentleman from Tennessee, Mr. Bryant; the lady from Texas, Ms. Jackson Lee, who have now come to the subcommittee table.
    I would like to ask Mr. Holleyman, do you have any anecdotal or specific evidence to date of what you may consider for your members unfair, burdensome, or discriminatory application of taxes at any local or regional level? Or does Mr. Valenti? If you do, we'd like to make those specifics a part of the record, so we have an idea of what we're facing.
    Mr. HOLLEYMAN. Mr. Chairman, in terms of specifics, I would like to follow up for the record on that, but I would note that there are roughly 30,000 taxing authorities in this country, and as I think you will see in the demonstration next there are numerous points at which each transaction would occur, both at the origin, where a server is located and where the receipt is located, and so the complexities for anyone attempting to determine that are almost unfathomable. And so as a general principle, that's what we would state today, but I'd like to supplement the record and perhaps provide you with a couple more specifics.
    Mr. GEKAS. No, I understand that. Are you saying that there are already pieces of evidence in place that X taxing authority and Y and Z have overlapped on top of a particular service or product that has been interneted?
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    Mr. HOLLEYMAN. I can't give you that today, Mr. Chairman. I can say that that is certainly a possibility in light of the way that the Internet works.
    Mr. GEKAS. Mr. Valenti, do you have any—
    Mr. VALENTI. Mr. Chairman, I think that the Internet has a birth, as I said, with such extraordinary speed on the marketplace that a lot of local and State authorities are just waking up to the fact there is out there a landscape that is expanding exponentially, and a lot of transactions are taking place, and I guess if I were the mayor of a city or a county supervisor, I'd say, ''Well, I want my piece of it.'' But the fact is that sales taxes and State taxes are so complicated, it's like putting your finger or your hand into a barrel of slippery eels and trying to find one of them in there.
    I read the testimony that's presented to this committee of, I think, Randall Hoten of the Committee on State Taxation, and just reading the bewildering intricacies of State taxes and how they intertwine, how they interconnect, I have a passing knowledge of the mother tongue, and I think I'm of average intelligence, but I was—I couldn't fathom it; it's so complicated.
    Therefore, what this bill is saying is, ''Stop, look, and listen.'' Let's study this thing, let's see how it works before we rush pellmell into an unmarked and unlit corridor. That's what I think this is all about, and this is what makes good sense.
    Mr. GEKAS. I thank the gentleman.
    The Chair reserves the balance of his time for questions and will yield to the gentleman from Massachusetts, Mr. Meehan, for 5 minutes.
    Mr. MEEHAN. Thank you very much, Mr. Chairman, and I congratulate you for holding hearings on the issue of Internet taxation. With so many American jobs dependent upon the growing hightech sector of our economy and with State and local budgets already strapped for revenue to pay for services, the time, I think, couldn't be more right for today's discussion.
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    One of the guiding principles of President Clinton's electronic commerce initiative is that no new taxes should be imposed on Internet commerce. Accordingly, Deputy Secretary of the Treasury, Lawrence Somers, has announced the administration's support for the goals and underlying objectives of a Senate version of this bill—and I join the administration in endorsing the goals and objectives of this legislation.
    Internet commerce is unlike any commerce we've ever seen before, as the panel has to have indicated, and in particular I think it's difficult to pinpoint the precise site where online transaction has occurred; therein lies many of the problems that we're discussing today.
    Mr. Holleyman, following up on Chairman Gekas' question, it is my understanding that the majority of States do not levy a sales or excise tax on Internet access or online service access charges. Only three States impose sales taxes on both service providers for the purchase of telephone access and consumers for the purchase of Internet or online access. Do you think that this situation is likely to change in the near future without the enactment of a moratorium on the taxation of access charges?
    Mr. HOLLEYMAN. Yes, I think that would change, because even if there are only three States doing it now with this relatively new medium, with the growth of electronic commerce as outlined in my testimony, one could easily see how jurisdictions who are looking for new revenue sources could turn to the Internet.
    Mr. MEEHAN. Well, the study of domestic and international taxation mandated by this legislation has to be completed within 2 years. The moratorium itself on certain Internet taxes is of an indefinite duration. What is a policy rationale for placing no time limit on the tax moratorium, and do you expect that Congress will revisit the moratorium once the 2-year study has been completed and the policy recommendations have been submitted to the President? In other words, what's the policy rationale for not placing a specific time limit on the tax moratorium?
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    Mr. HOLLEYMAN. I couldn't presume to speak for the intent of Congressman Cox who introduced this legislation. I can tell you my understanding, however, of the principles behind it is, simply put, that having a moratorium in place will cause the parties to discuss this issue and to resolve the issue and to determine, in standards that people can understand, where taxes are appropriate and where they're not. And I believe that the view of the drafters was that if there was a time limit imposed in the legislation per se, then there might be delaying tactics in which the parties would simply recognize that it would be to their benefit to delay until that moratorium ended, if it was say, 2 years, for example, and then they would be free to tax in a willy-nilly fashion. That's my understanding.
    Mr. MEEHAN. Of course, the other side of it could be a moratorium of indefinite determination would result in it being politically almost impossible to—even after study and after an analysis, and even after looking at it from a global perspective—that makes it politically very difficult to revisit the issue anyway when a moratorium is in effect. So, I just want to point that out.
    I, too, was looking for specifics in terms of what we can pinpoint in terms of where the threat is relative to State and local governments, and I recognize there's enormous potential, I suppose, that State and local governments may look to the Internet and the technology explosion, but I was, too, looking for more specific information.
    Mr. HOLLEYMAN. Congressman, if I could make one quick note on the myriad of taxes that could be imposed, and certainly it is for this committee and Congress to decide what the duration of this legislation would be, but I think that one of the great benefits in electronic commerce is that it almost uniquely benefits smaller and medium businesses in ways that our general framework in this country has not benefited. One of the most dramatic successes has been the online bookstore, AMAZON.COM, with 2.5 million books, but really very little inventory. Those are precisely the small businesses, plus home businesses, for whom having to determine multiple and conflicting taxation would be most problematic.
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    Mr. MEEHAN. Thank you. Mr. Chairman, I would also like to recognize Howard Foley, the president of the Massachusetts High Tech Council. I'm back and forth in a meeting on national security on NATO, but if I don't have an opportunity, I want to acknowledge Howard Foley's presence. Thank you, Mr. Chairman.
    Mr. GEKAS. We thank the gentleman. We recognize the gentleman from Tennessee, Mr. Bryant.
    Mr. BRYANT. Thank you, Mr. Chairman, and I, too, as I suspect most of the members here have varying commitments with other committees, and, fortunately, mine is just down the hallway. I do want to thank the very distinguished members of the panel for testifying today. I have a question for each one of you. I'll ask Mr. Holleyman my question first regarding my home State, Tennessee.
    We do tax Internet usage to some extent. The Department of Revenue has told us that this bill would cost Tennessee up to $2 million, and while I'm no means an advocate of excess taxation, this would be a shortfall to the State in revenue that Tennessee would have to make up some how. Would it be fair to say, though, that this bill would allow the Internet to grow in such a way that Tennessee would more than make up for this loss in the future with Internet business growth?
    Mr. HOLLEYMAN. One would certainly hope so and expect that if you are seeing a doubling of Internet commerce simply between 1995–96, and the multibillion dollar market in 5 years. The additional wages and taxes that would be spurred by electronic commerce, I think certainly could more than displace that direct loss of tax revenue right now.
    Mr. BRYANT. This bill would allow the continuation of sales tax, as I understand it, on products sold over the Internet if the State is already doing that.
    Mr. HOLLEYMAN. Absolutely. The key principle we endorse is no new taxes on Internet transactions. With any existing transaction for which there's an analogy when it occurs on the Internet—for example, selling a book through AMAZON.COM, you would still impose the taxes as if you were doing it on a mail-order basis. What you would not do would be to impose a new tax on the means of accessing the bookstore, AMAZON.COM.
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    Mr. BRYANT. Mr. Valenti, I have some concerns, and I'd like for you to tell us a little bit more in detail in terms of how big a problem is there going to be with respect to the unauthorized use of copyrighted works on the Internet. I also want to know what you think Congress can do about that.
    Mr. VALENTI. Well, I certainly agree that Tennessee has a big stake in this, particularly in music. I think it's a cancer in the belly of our future, and particularly as it extends to this country, because we are the confirmed leader in the world of intellectual property. I think as one of your members said, ''This is going to be the fastest-growing export of America.''
    We've got to figure out some way—and I'm not prepared to give you the solution today, because it is complex—we've got to figure out some way to protect precious copyrighted materials when they appear on the Internet. People can send up computer software. How do you protect it? Music, books, movies, in which I have more than a passing interest, how is that protected?
    Right now, we estimate that the intellectual property community loses about $30 billion, anywhere from $18 billion to $30 billion a year. These are soft numbers, but we know it's huge. Unless we can figure out a way when more stuff goes on there with encrypted material, that for people to decrypt illegally ought to be a stiffer penalty than a slap on the wrist. Right now, Mr. Bryant, one of the things you have to understand is that only about 30 percent of the homes have computers. That's going to grow, and if you have a 2800-baud modem, which is what most people have, getting downloaded from the Internet sometimes is like the speed of a Conestoga Wagon. But, shortly, there will be high-speed cable modems which will be 100 to 200 times the speed. You can bring down the whole encyclopedia Britannica in a few minutes. That's what we're looking at. When that happens, this Internet is going to expand so exponentially that it will stagger your imagination, and the threat to intellectual property will grow at that same unhappy speed.
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    So, I think the Congress has got to deal with this. That's why I mentioned, Mr. Chairman, about the WIPO implementing language which is the first step. One hundred countries are willing to increase their safeguards against piracy. That's the beginning of it. So we will have an umbilical cord connecting all the countries of the world in stemming piracy.
    What are the most serious problems confronting the Congress? How do you protect your greatest international export which provides more to the economy of the United States than automobiles, aircraft, apparels, chemicals, you name it? Frankly, it's just the beginning.
    Mr. BRYANT. Thank you, Mr. Valenti.
    Mr. Holleyman, let me ask you one other question, if I could. Regarding financial transactions online and the taxations there, I'm concerned when you try to sell stocks, let's say as an example, and you have to cross different States, and maybe you're out away from your home, how do you avoid the double taxation that might result from let's say capital gains taxes plus getting taxed for these Internet services? Can you quickly tell us your thoughts on that? How do you avoid that type of excess taxation?
    Mr. HOLLEYMAN. Well, I think, again, you need to go back to the basic principle that an existing tax that would normally be imposed in one place could be imposed if the transaction occurs across the Internet, but as information is exchanged, and you have packets being routed on the Internet, what you have to prevent is imposing taxes through each point at which a packet is routed as part of the transaction.
    Mr. BRYANT. Thank you, Mr. Chairman, for your leniency.
    Mr. GEKAS. We thank the gentleman. We yield 5 minutes to the lady from Texas, Ms. Jackson Lee.
    Ms. JACKSON LEE. I thank the chairman very much, and good morning to the witnesses. I'm sorry that I was not here earlier to add the additional introduction to Mr. Valenti. He is a Texan, and I always like to remind him of that.
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    We don't have the Silicon Valley, but we do have the Dallas to Houston connection, if you will, with Austin in between, so it is of great interest to us in Texas, as is the interest around the country, on this whole idea of the flourishing technology industry, and certainly the involvement of both of you is certainly a key element.
    Mr. Holleyman, I want to reiterate your opening line here with an explanation, ''The software industry is leading the high-tech revolution in spurring economic growth,'' and I fully agree with that. Let me offer just a few remarks, and then I will ask questions, and Mr. Chairman, I'd ask if my statement, with unanimous consent, could be submitted into the record?
    Mr. GEKAS. Without objection.
    Ms. JACKSON LEE. Thank you.
    Clearly, I have a great interest in the free flowing of the economy and the investment that the software industry and the Internet opportunities that have allowed small businesses to thrive in their homes, the cottage industry of small businesses within individual homes. I think that is a stellar point of what this industry has brought about, along with the giants like Bill Gates and, of course, along with the other entertaining and entertainment aspects of this particular technology. I think it is extremely important, however, for my constituency base that there is access; that the inner city, that schools, and certainly as we look at a national taxation policy, I would assume that part of the issue would be to make sure that there is investment in those communities that can benefit from having access to technology.
    I'd like you gentlemen to respond to that, how—if consistency is given to you on the national level, what kind of private sector investment or responsibility can we expect to treat the issue of fairness and access in our schools and our libraries in our innercity? And I know the FCC legislation that we passed last term did have some indication of that.
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    Let me also bring up another concern: I see my friends from the city and county are here to present another view. I've sat as a member of the city council of Houston and chaired the Cable Franchise Committee, and worked with great consternation of the dilemma between the FCC regulation and seemingly my haplessness and helplessness in being able to regulate cable TV on behalf of our constituents who time after time had poor service and various other concerns. How then do we respond to the needs of local government, both in regulation and access to capital, and be one big happy family—if that is at all possible—in responding to their concerns, but as well, providing a consistency that you need to grow and protecting those folk on the ground, and as I have to represent in poor inner-city district in a great measure? So, if you would respond to the question of how we return an investment back to help those who are most needy, and then how do you work with local governments so that we are not sort of isolated from the opportunity to enjoy in the benefit of this spurring economy?
    Mr. Holleyman.
    Mr. HOLLEYMAN. Three thoughts: One is that all of the companies in the Business Software Alliance are actively engaged in a whole host of educational programs where they are offering deep discounts to schools; they're wiring classrooms; they very much want the lowest-cost access, as the FCC has just provided, for schools to the Internet.
    And, secondly, I think in noting what I've said earlier, that small and medium businesses will be the great beneficiaries of the Internet; that the easiest way and the cheapest way for any homebased business today to be capitalized is to have a computer and Internet access at which point their product—whether it is the skills of their labor, or is the skill of their mind—can be delivered globally from a single computer in a person's home or office. That is the great economic equalizer in home-based businesses and single-family businesses v. the goliaths in the merchandising world.
    And, finally, I would simply note—since you referred to the corridor in Texas—that one of your homegrown companies, Dell Computer, just to note how quickly this is growing, when they began advertising and selling products via the Internet, they found that within a nine-month period their sales of PC's via the Internet grew to $1 million per day. Their goal now is to do all Internet transactions.
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    Ms. JACKSON LEE. Mr. Chairman, I ask for an additional 1 minute to allow Mr. Valenti to answer the question. Can he finish answering the question?
    Mr. GEKAS. The lady may proceed for another minute.
    Ms. JACKSON LEE. I thank the gentleman very much, and Mr. Valenti, would you include in your remarks how there could be any form of sharing of the revenue with local entities, if you had any ideas about it? I thank you.
    Mr. VALENTI. Well, I have a more than casual affection for you, Congresswoman Jackson Lee, since you represent my hometown, so I'm eager to answer the question, and I'm eager to answer, because I don't know the answer. I think one of the reasons for this act is to allow some kind of an intermission to take place while the Congress and its staffs can study this issue to see how you can coordinate or soften the lacerations between the different kind of tax systems that are set up in the States and in counties and local governments, and how they would apply to the Internet. It is so complicated that you need that time to determine how to do it.
    Meanwhile, as I think the greatest thing that could happen, as you mentioned, to inner-city children is education. The Internet may be one of the most greatest educational vehicles known to man. It seems to me that that ought to be a great laudatory garment it wears for you and others who have these kind of concerns, and which, by the way, I share as well.
    Ms. JACKSON LEE. Thank you. Thank you for coming.
    Mr. GEKAS. The time of the lady has expired. We turn to the gentleman from Ohio, Mr. Chabot, and yield 5 minutes.
    Mr. CHABOT. Thank you, Mr. Chairman, and I also want to compliment you on holding this very important hearing today, and apologize to these witnesses and the other witnesses because some members can't be here, and some are, and I, for example, have three hearings going on at the same time. That's one of the occupational hazards here on the Hill, but we try to attend as much as we can, and then follow up by reading the statements, et cetera, if we weren't here to actually hear the witnesses testify.
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    First of all, my comment would be that the Internet is certainly a rapidly-growing high-tech industry that many feel represents the very future of commerce. In fact, with sales through the Internet expected to reach as high as—I've heard figures of about $600 billion by the year 2000, the Internet provides American consumers and businesses with opportunities that were inconceivable just a few years ago. So, that's why this is certainly a very important hearing and a very important issue. My philosophy tends to be for the most part: Federal Government ought to keep its nose out of local folks' affairs as much as possible under most instances, most circumstances. However, because of the Commerce Clause and the fact that we have the responsibility under that clause to regulate commerce with foreign nations as well as between the States, this apparently is a legitimate area for the Federal Government to be involved in. So I'm not hesitant to be involved in it for that particular reason.
    My question would be at this point: Do either one of the gentleman here—have you heard any estimates as to what sort of revenues we might be asking the State and local governments to be forgoing at this point in time?
    Mr. VALENTI. Well, to be honest, Mr. Congressman, I think it's kind of like an economist who if he can't remember his phone number, he'll give you an estimate. [Laughter.]
    I often wonder about the provenane of the numbers that we see floating around about the year 2004 and 2005. I think they're mostly riding on a very soft bottom. The answer is: We don't know, but then no one—as I said in my earlier remarks before some of the members arrived—no one, even the greatest experts in the business predicted the bewildering speed with which the Internet has fastened on to this world economy. So, my guess is that whatever estimates you give is probably low, but I couldn't give you any more than that, to be perfectly honest.
    Mr. CHABOT. Mr. Holleyman, have you heard anything or anything that you'd believe?
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    Mr. HOLLEYMAN. Nothing in addition to that.
    Mr. CHABOT. OK, that's fine. And, perhaps some of the witnesses after this would be able to answer that.
    Mr. VALENTI. If you'd like a number, I'll throw one out.
    Mr. CHABOT. All right. Well, go ahead, throw one out. [Laughter.]
    Mr. VALENTI. I'm just joking.
    Mr. CHABOT. In addition, after the 2-year moratorium, we are talking about in all likelihood at that point or some point thereafter, would you prefer to see the Federal Government essentially not permit this to be taxed or do you think there should be a standard tax, or what are your thoughts in that area?
    Mr. HOLLEYMAN. Well, I think what we would hope is that the same basic principle of no new taxes on the Internet would apply. What we hope is to have an opportunity during that time and through the study to determine how one identifies existing taxes on existing transactions, and clarify how they would apply to the same transaction occurring via the Internet. We also want to end with a principle in which we do not tax simple things like Internet access, because that simply drives up the overall cost of doing business.
    Mr. CHABOT. As you know, one of the things that we're ultimately going to be struggling with is that, at this point in time, we're at a historical time in our governmental relations where we are putting more and more responsibilities, sending more, whether its welfare or anything else, back to the States and back to local communities. As Ms. Jackson Lee mentioned, she was on city council in Houston; I was also on city council in Cincinnati for 5 years and a county commissioner for 5 years following that in Hamilton County, which is the county within which Cincinnati is located, and there is some anxiety, of course, in that we are sending more responsibilities back, but we may be to some degree tying their hands. In general, I support this legislation and am looking very closely at it. So, I think it's appropriate for us to take this action, but it's going to be a fine balance here to make sure that we're not sending all the responsibilities back, but then not giving them the revenue source they need to carry out these additional responsibilities. That's the struggle that we're all going to have.
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    I thank the witnesses for their testimony and, again, thank the chairman for holding these hearings. I yield back the balance of my time.
    Mr. GEKAS. We thank the gentleman.
    We acknowledge the presence of the gentleman from New York, Mr. Nadler, the ranking minority member, and also attendance of the ranking minority member of the entire committee, Mr. Conyers of Michigan.
    We would yield to the gentleman from New York if he wishes to address the panel for 5 minutes.
    Mr. NADLER. Well, thank you. Let me apologize for being late to this committee. I was at a press conference which I thought important, announcing a bill that hopefully will eliminate all our future campaign spending scandals.
    First, let me express my strong support for what I understand Mr. Valenti said about the importance of protecting intellectual property on the Internet. We have to find a way of doing that as thoroughly and rapidly as possible.
    Let me ask Mr. Holleyman first, do you believe it would be constitutional to tax a signal passing through a computer in a State going elsewhere?
    Mr. HOLLEYMAN. Tax a signal going through a computer passing through a State going elsewhere?
    Mr. NADLER. In other words, someone in New York has a business transaction on the Internet with Ohio, and the signal is transmitted through and tried to be taxed by New Jersey.
    Mr. HOLLEYMAN. No, I do not believe so.
    Mr. NADLER. You don't think there's any question of that?
    Mr. HOLLEYMAN. I do not think there's a question of it.
    Mr. NADLER. And are either of you aware of any currently-imposed taxes on the Internet or on transactions over the Internet that might be prohibited?
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    Mr. HOLLEYMAN. I did not give a specific example this morning, except to say that I think there's a reference to three States that are currently taxing Internet access, and those would be the type of taxes that would fall within the moratorium of this bill.
    Mr. NADLER. Well, let me ask you a different question. Let's assume that over the Internet you did a transaction which could be done in a different way. For example, if you order something by phone from another State which is delivered by mail order, assuming that the company from which you ordered has an nexus of business in your State, you could pay a sales tax if the State imposed it. Let's assume that this was done over the Internet instead of by phone, and then they shipped it. Would that normal sales tax be voided by this legislation?
    Mr. HOLLEYMAN. Sales taxes that would be imposed on a mail transaction could be imposed on an Internet-based transaction.
    Mr. NADLER. Could be?
    Mr. HOLLEYMAN. As I understand this bill, yes.
    Mr. NADLER. And if the same transaction was done entirely electronically, for example, instead of calling up Microsoft from New York, and asking them to download Windows 95 by modem into your computer in New York, if that entire transaction took place—and in which case you could impose a sales tax; Microsoft having offices in New York, and a nexus for doing business there—assuming you do the same sort of transaction by Internet—in other words you didn't call them, you did it by Internet, and they downloaded through the Internet into your computer, would that sales tax on that transaction be voided by this bill?
    Mr. HOLLEYMAN. My understanding is that it would not be. The principle of the bill is no new taxes, so that where there's an analogy to an existing tax, it could continue to be applied.
    Mr. NADLER. So, the question is whether there's an analogy to an existing tax or whether it's a tax on the Internet per se?
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    Mr. HOLLEYMAN. That's correct. Or a tax that is unique to the Internet.
    Mr. NADLER. OK.
    Mr. HOLLEYMAN. That's my understanding of the legislation.
    Mr. NADLER. You wouldn't disagree?
    Mr. VALENTI. No, I would not disagree.
    Mr. NADLER. Good. OK. Thank you, I yield back the balance of my time.
    Mr. GEKAS. The Chair recognizes the gentleman from Michigan, Mr. Conyers, if he wishes to pose questions for 5 minutes.
    Mr. CONYERS. Thank you, Mr. Chairman. I'd like to say good morning to our friends from the Senate, Senator Wyden, who remembers his roots; comes back over, and visits us now and then, and has always brought good legislation wherever he went, and, of course, to say hello to Jack Valenti. I carry a message from our Congressional Black Caucus chairwoman, Maxine Waters, who instructed me to give you her warm regards.
    I guess the issue around this morning is whether nonelectronic commerce and electronic commerce will be given a level playing field for tax purposes. The one part in here, Senator, that I want to caution you about is suspending FCC authority. You know, they always—the poor FCC gets almost wiped out in every serious telecommunications transaction, and the antitrust provisions, and both are very large concerns of us on the Judiciary Committee. So, I just wanted to thank you, Mr. Valenti, for always being on the case which has been for some years now. It just did occur to me, though, you're not like some of these new Members in Congress that have imposed term limitations on yourself, have you, in your job?
    Mr. VALENTI. No, sir.
    Mr. CONYERS. You haven't? [Laughter.]
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    Well, people are doing that all over, in and out of government. You know, we're here for only so long and then we're gone, because it should be turned over to—and I'm probably kind of shopping around for a new future position myself—[laughter]—and it just occurred to me that, you know, maybe if I ingratiate myself with you and—who knows?
    Mr. GEKAS. You're stuck here, John. [Laughter.]
    Mr. VALENTI. Well, Mr. Conyers, I'm just learning. I've only been on this job for 30 years, and I'm trying to get the hang of it, for goodness sakes. [Laughter.]
    Mr. CONYERS. Well, I understand those figures pretty well, but it's always good to see you, and we welcome your testimony.
    Mr. VALENTI. Thank you, John.
    Mr. CONYERS. Thank you, Mr. Chairman.
    Mr. GEKAS. We thank the gentleman, and we thank our distinguished panel——
    Mr. NADLER. Mr. Chairman.
    Mr. GEKAS. The gentleman from New York.
    Mr. NADLER. Before we dismiss the panel, could I ask unanimous consent to ask one more question?
    Mr. GEKAS. Granted.
    Mr. NADLER. Thank you, because I understand that nobody has asked this. The discussion so far has been on the tax provisions of this bill. This bill also provides that—and Mr. Conyers just alluded to it briefly, but I want to ask a question about it—the bill also provides that the FCC may not regulate in this area; ban on regulation of Internet prices by the FCC. Could you elucidate the reasons for that? Why should the FCC—I mean, the question—State taxation, conflicting State taxation; trying to figure out how you pay State taxation, all of that we understand, but why should we prohibit the FCC from, at its discretion, setting prices and protecting consumers or whatever else they may want to do with respect to the Internet?
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    Mr. HOLLEYMAN. One, competition is certainly working, and the Internet access prices are rapidly dropping. Secondly, we believe that this Congress, recently, in the Communications Act and other areas, has clearly said that the software industry, the Internet, is a perfect model of something that has grown up without Government regulation, that's worked well and benefited consumers. So, we would support those provisions of the bill as being consistent with congressional intent in other legislation.
    Mr. NADLER. Is it beyond your contemplation that even though prices are dropping now, and things have worked well now, it might at some point in the future be different? I mean, this is a brandnew field, very rapidly growing, very rapidly changing, and it may be wise at some point in the future for the FCC to step in, and regulate something unforeseen at this point now?
    Mr. HOLLEYMAN. I certainly don't see that at this point in time that that would be necessary. Clearly, it's a moratorium, and Congress could always step back into this. And if I just might add quickly, Mr. Nadler, you raise the issue of protection of intellectual property, and the letter that I introduced from our CEO's also highlights the intellectual property protection on the Internet as a key part of electronic commerce.
    Mr. NADLER. Thank you.
    Mr. Valenti.
    Mr. VALENTI. Mr. Nadler, I don't have to tell you, because you've been a staunch supporter of intellectual property, but apart from what this bill—what Senator Wyden and Congressman Cox are doing, which I thoroughly support, but there has to be nestled within that this idea that the Internet can't be Dodge City without a sheriff when you're dealing with intellectual property, which, as I said earlier, is America's most precious trade asset. It has to be protected. I'm not giving you the formula for doing it now, but the procedures are underway to try to figure out how to do that, but that's very much a part of this.
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    And as far as the FCC is concerned, I think that one thing about the Internet is you can't hide. If somebody's offering products for sale, you can't hide the price, and, therefore, I think that competition would serve as the greatest policeman on the beat that I know. But the whole aspect of the bill is to give time to study this thing and to take a look at it to find out what role in the future the FCC might play.
    Mr. GEKAS. We thank the gentleman, and we now discharge the panel with our eternal gratitude.
    Mr. HOLLEYMAN. Thank you, Mr. Chairman.
    Mr. GEKAS. Thank you.
    We invite Senator Wyden, who has an opening statement, to the table.
    Senator Wyden.
STATEMENT OF HON. RON WYDEN, A SENATOR IN CONGRESS FROM THE STATE OF OREGON

    Mr. WYDEN. Well, thank you, Mr. Chairman, and before my good friend John Conyers leaves, let me just say that not only am I am not going to give a filibuster, but I'm anxious to work with you on this, and this bill's about taxes, not about antitrust and other things, and we'll work with you, John, on this very closely.
    Mr. Chairman and colleagues, perhaps I could just put my statement in the record and make——
    Mr. GEKAS. Without objection.
    Mr. WYDEN [continuing]. And make a few comments, because I know you've covered a lot of this.
    What this bill involves—that Congressman Cox and I are dealing with—is just one issue: We are trying to prohibit discriminatory taxes against electronic commerce conducted on the Internet. That is the sole thing that this bill does. If you go and purchase something, and you pay 5 cents' worth of sales tax in the traditional purchase; under this bill, if you order it on the Internet, you can charge exactly the same tax. You can't single out, however, the Internet to charge four times the tax, because you know that the Internet is a cash cow. I would like to give just four examples; concrete, specific examples of what this bill does, because I think it's important that you have it.
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    In the State of Connecticut, for example, if you subscribe to the Wall Street Journal online, you pay a tax, but if you subscribe through regular mail, you pay no tax. That is an example of an Internet-specific tax. You pay if you subscribe online; you don't pay if you purchase snail mail.
    The State of Minnesota has notified vendors who have no physical presence in the State they have to pay a sales tax in Minnesota because they advertise through a catalog on the web. No presence, again; singled out for special treatment, discriminatory treatment, in that State.
    Texas levies a tax on home pages, and taxes the Internet service provider twice—once for leasing a phone line, and again for access to the same line.
    Tennessee retroactively imposed 5 years of back taxes on a homebased Internet service provider, putting the person out of business.
    Four concrete examples where the Net was singled out for differential, discriminatory treatment. As you'll see in the bill, we protect all of the existing taxes that are in place for local government, and we have had some extraordinarily farfetched rhetoric from some of the opponents about how we oppose letting jurisdictions levy property taxes and the like. As you'll see in the bill, we specifically grandfather in all of those existing State and local taxes.
    What this issue is really all about is how you want to approach the new economy. There are going to be hundreds of billions of dollars' worth of commerce conducted on the Internet in the years ahead. What we're saying is, if we have a significant number of the local jurisdictions in this country—and there are 30,000 of them, 30,000 taxing jurisdictions, all trying to take a byte out of the Internet—it's going to crash the Net. The system isn't going to absorb it, and we're going to have a lot of small businesses devastated.
    I mean, think about it: the idea of sort of a series of toll roads all across the United States where everybody tries to take a chunk out of electronic commerce. I've had businesses say that they're just boggled by the thought of trying to get enough accountants and lawyers to figure out how to collect this and account for it and remit it. This is going to be bureaucratic water torture for small home-based businesses, for home-based businesses in rural areas and disabled folks. And I think what it really comes down to, I would say to my colleagues, is if ever there was a subject that ought to be treated in a uniform national way, it's the Internet. I mean, this is what Article 1, Section 8, of the Constitution's supposed to be all about. This is what that whole Commerce Clause concept is supposed to be about. And it seems to me if the Commerce Clause and uniform national treatment doesn't apply here, I don't know what Article 1, Section 8, is really all about. This is as clear a case as you can find.
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    So, Mr. Chairman, I see the light's on, and if I could just briefly touch on some of the arguments of the opponents, I'd wrap up, because I think that there are three or four arguments that we've continually heard, and I'd like to just touch on them.
    First, they argue that there aren't very many States and localities actually imposing taxes on electronic commerce, so Congress shouldn't get involved, but then they say, ''My God, we're going to lose billions of dollars' worth of revenue. Keep this bill from passing.'' You can't really have it both ways, and we think it's all the more reason to take this time out to think through it.
    The second argument that we hear often is that the Internet is just like mail order, and it ought to be treated as such. We accept that argument. The bill says, ''Fine, go ahead. Online business ought to pay a tax just like any other business.'' If a vendor has a nexus with the taxing jurisdiction under current law, then so be it, and that nexus applies whether the transaction is by phone or mail order or online. The problem arises where you have States ignoring some of these Supreme Courts holdings and singling out the Net for special treatment.
    The third argument is that the Internet ought to be treated like phone service. We would, again, say it's different, because phone service is already taxed. When somebody places a call, you've got a phone line dedicated to the conversation between specific points. Online, you don't have those kinds of pauses. Information, data, and images constantly flows. The Internet is borderless. Geography is essentially irrelevant, and we think that's important in the context of phone service.
    My last point is what the State and local folks who oppose this—and remember, there is a great division. The Governor, for example, of New York State is a very strong supporter of the bill, Governor Pataki, Jerry, because he thinks that the localities taxing the Net will cause great damage. The State and localities that oppose the bill argue that this is going to hurt Main Street business. I would argue just the opposite. The freedom from this bureaucratic water torture that could come about through a big chunk of 30,000 jurisdictions is what's going to strangle Main Street businesses in small towns. That's going to make it tough for them to pay State and local taxes. Our bill's going to help them, which is why virtually every small business group in America is supporting this bill, from the home-based businesses and the like. So, the argument that you're hearing from States and localities that this is going to be bad for small businesses is just not borne out by the record.
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    Mr. Chairman, I thank you.
    [The prepared statement of Mr. Wyden follows:]

PREPARED STATEMENT OF HON. RON WYDEN, A SENATOR IN CONGRESS FROM THE STATE OF OREGON

    Imagine this scenario: You and a friend run a small home-based business from Rapid City, South Dakota. You decide to send a token of appreciation to a favorite customer in Ames, Iowa. You log on to the Internet using an Internet service provider in Alexandria, Virginia. You find the home page for Harry and David's Fruit in Medford, Oregon, order a gift basket for your customer and pay for the purchase with your online banking service in Charlotte, North Carolina. Given the extraordinary growth of the Internet and hunger by some politicians to get a ''byte'' of tax revenue wherever possible, an ten of those cities and states may choose to tax part of your transaction.
    There are more than 30,000 taxing jurisdictions in the United States, and already more than a dozen states have exacted tolls on electronic commerce over the Internet. The Internet will be the business infrastructure of the 21st Century, and if the pro-tax forces have their way, you better start budgeting for some lawyers and accountants to advise you how to collect, account for and remit Internet taxes.
    Here are some examples of Internet tax mischief. If you subscribe to the Wall Street Journal online in Connecticut, you pay a tax, but you don't pay the tax if you subscribe through regular, or ''snail'' mail. Tennessee retroactively imposed five years of back-taxes on a home-based Internet service provider, driving the small business into bankruptcy. Minnesota has notified vendors who have no physical presence in that state they must pay sales tax in Minnesota because they advertise through a catalogue on the Web. Texas levies a tax on home pages, and taxes Internet service providers twice: once for leasing the phone lines and again for access to the same phone lines.
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    Congressman Chris Cox and I are concerned that the growth of Internet taxes could kill the goose that is starting to lay golden eggs. That's why we have introduced the Internet Tax Freedom Act. Our bill would prohibit Internet-specific taxes (such as Connecticut's), double-taxation (such as Texas') and new Internet taxes (such as Minnesota's). The bill calls for a moratorium on such taxes. During the moratorium, the administration is directed to bring together state and local governments, business and consumer groups to develop policy recommendations for Congress on Internet taxation. Under the bill, there will be no more tax the Internet first, ask questions later.
    One can never underestimate the desire of some politicians to invent new ways to tax, and the Internet Tax Freedom Act has run up against powerful opposition. Although the bill specifically allows states and localities to continue to levy all technologically neutral taxes—such as sales, income, gross receipts, property and business license taxes—some politicians just can't keep their hands off the Internet. In fact, the Texas Director of Tax policy recently proclaimed with pride ''Texas is a leader in taxing services surrounding the Internet!''
    Here are the four major arguments of the pro-tax forces. First, they claim ere are so few states and localities actually imposing taxes on electronic commerce, there is no need for Congress to rush in with a moratorium. But then they claim the bill will deprive them of so much revenue that it would impose on them an unfunded Federal mandate. It's hard to have it both ways. The Congressional Budget Office estimates the legislation will not surpass the $50 million annual Unfunded Mandates Act threshold, and without a moratorium, there is little incentive for these tax-hungry authorities to come to the table to hammer out policy recommendations.
    Their second argument is that the Internet is just like mail order and should be treated as such. We don't disagree. Online businesses should pay their way like any other business, and if a vendor has nexus with the taxing jurisdiction under current law, then the vendor has tax nexus with the jurisdiction whether the transaction is by phone, mail order or online. The problem arises where states have chosen to ignore Supreme Court rulings. The Supreme Court, in the Bellas Hess and Quill decisions, said that to force companies to collect a tax on mail order there must be physical presence in that jurisdiction, merely sending a catalogue into a town does not constitute physical presence. Our legislation is consistent with the Supreme Court's view: where a business has no physical presence in a state or local jurisdiction—whether it advertises by mailing a catalogue or posting a web page—a state or city should not be allowed to levy taxes.
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    Their third argument is that the Internet should be taxed like telephone service. Because telephone service is already taxed, this amounts to double taxation. When someone places a call, that phone line is dedicated to the conversation between two specific points. If a sneaker pauses during a phone conversation, no other activity happens on that line. But online, there are no pauses: information, such as data and images, is constantly flowing electronically to many different destinations simultaneously. Geographic location is almost meaningless: a company may not know the actual geographic location of someone who both buys and downloads the company's software online.
    Their fourth argument is that competition from online business will hurt main street stores. Most businesses I know welcome competition. This argument goes back to nexus, where a taxing jurisdiction knows its attempt to levy a tax on an out-of-state web pare is beyond the clear legal boundaries set down by the Supreme Court on nexus. Moreover, online business is not in space . . . yet. Every online business has a Physical Presence somewhere and is subject to income, property and other taxes in that jurisdiction. A main street or Mom-and-Pop shop that goes online and increases its sales will generate even more taxable income. Taking a longer view, if the American people and Congress had bought such an argument, we'd still be writing laws by candle light with quill pens. Do we really want a 19th Century economy for a 21st Century world?
    High-tech savvy Governors Pataki, Weld and Wilson have given a strong endorsement to the legislation. Dozens of state legislators from around the country have also written in to express support for the measure. More than two dozen major national groups, from the American Home Business Association and Direct Marketing Association to the U.S. Chamber, National Association of Manufacturers, the American Electronics Association and the leading information technology associations, have gone on record supporting the bill.
    The Internet is a new technology. It is changing the way that we communicate the way that we obtain information, the way that we do business. Electronic commerce holds tremendous potential for small business, people living in rural America the elderly and the disabled. It simply does not fit into the existing geographical mold of state and local taxation. Instead of trying to fit a brand-new square peg into a decades-old round hole, government should take the time to figure out the right way to regulate commerce on the Internet before allowing a taxation feeding frenzy that could doom this still-developing technology.
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    Mr. GEKAS. Does the gentleman feel inclined to take a few questions?
    Mr. WYDEN. Absolutely.
    Mr. GEKAS. All right. We will yield to the minority ranking member for purposes of asking some questions of the Senator.
    Mr. NADLER. Thank you. First of all, let me join with John in welcoming you back. It's good to see you here, Ron, Senator Wyden.
    I'm not surprised that Governor Pataki would comment that way. He just doesn't seem to like any State taxes, but, in any event, the question I have is, granting everything you have said—and I agree with probably everything you've said—but granting all of it, why should we include the provision in the bill prohibiting regulation on the Federal level by the FCC which has nothing to do with local taxes?
    Mr. WYDEN. Jerry, that provision is not in the Senate bill; it is in the House bill. There are some differences on these issues, as I indicated to John. I want this bill to be about taxes. I think this is a plebiscite about taxes. Do you want to strangle these small businesses and put them through this toll system around the country? I think we can work this issue out. I personally—and it's why the Senate bill is different; I think we ought to keep this bill to the tax issue, and I'm not interested in this bill getting into antitrust and various other issues.
    Mr. NADLER. Well, let me just say, I agree with you. I agree with you on the taxes. I think we ought to address that. The FCC, maybe we ought to do something about that; maybe not, but it ought to be in a different bill, and I would, for one, have to see a very large case made why we should eliminate Federal regulation when we haven't even seen it yet, and we don't know whether it's necessary down the road, but I don't think we should burden this tax bill with it. We should deal with one subject in the bill.
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    Mr. WYDEN. If the only difference, when we get to a conference on this legislation, is that the Senate bill doesn't have those provisions that you dislike in it, and the House does, I think we'll get to a pretty quick agreement.
    Mr. NADLER. Thank you.
    Mr. GEKAS. The lady from Texas is recognized for the 5 minutes.
    Ms. JACKSON LEE. I thank the chairman very much, and let me add thanks to the chairman for this hearing. And let me welcome, though I had a shortened period of time, though I was delighted that it was shortened, to serve with now Senator Wyden, I'm delighted to have you back.
    I don't believe you were in the room when I had an opportunity to raise questions, and certainly, as you well know, when you're here judiciary antitrust comes to mind, and so—and competitiveness comes to mind, and I appreciate your perspective to make this bill focused on the issues at hand, which, I offer to say, deal with consistency, but let me put on a local government hat, of which I served as a member of the city council, and raise the questions that I raised with the gentleman before you.
    One, we realize that we have now before us a history of the cable TV scenario, that dealt more with franchises and how you balance regulation between a national body—in this instance, the FCC—and local government, which had a bifurcated role in that instance, and sometimes the partnership was not friendly, and in many instances on the revenue side it was certainly not beneficial in certain instances. So, the question becomes, in seeking an opportunity to strike the balance between what you have so aptly pointed out which is promoting and encouraging this thriving industry, this cottage industry, this independent industry, and providing the much needed revenue sometimes that local government needs.
    Let me add another question and your thoughts on it. We're over here working with you on the right kind of tax bill, and many of us have talked about targeted capital gains, which means, what do we do to give incentives to inner-city investment? What can we look to in terms of long-term discussion about this booming industry that might provide some source of revenue for inner-city—targeted inner-city development? Whether it has to do with technology, whether it has to do with access, but there has to be some sharing. So, I would just offer that to you; congratulate you for the legislation. Consistency is valid, but how can we work together on these problems?
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    Mr. WYDEN. Well, Sheila, I think you're making a couple of very good points, and you'll recall when I was over here we had that bill together to, in effect, promote a rollover for inner-city investment. You know, if you sold an asset and took the proceeds and put them into an inner city kind of investment, we would say the taxman wouldn't cometh, and you would get the capital gains break.
    So, I'm very sympathetic to your point, and I guess one of the reasons I feel so strongly that we not let State and local governments all across this country levy these discriminatory taxes is that I think the hardest hit people will be the people you and I want to see in power. I think if you're a rural person, if you're a disabled person, if you're in an inner city trying to get a small business off the ground—you know, you're not Harry and David's, for example, in Medford, OR, a very important business in my State, but a large business with capable people—but you're a small business, I don't see how it's going to be possible for you to sort through all the different taxing jurisdictions that are going to take a bite out of your business. If you're running, say, an inner-city business, and you want to ship something, say a gift to somebody, you may end up facing taxes in six or eight different jurisdictions, maybe more, if you use an online provider in one State, and the person you're sending the gift to is in another State, and your banker is another.
    So, the people who will benefit the most—the most—are not the largest businesses but the small businesses in the inner city, the disabled, the rural folks who are operating on a shoestring, and who, if they find a multiplicity of jurisdictions and are going to be faced with new taxes, I think they're going to be the hardest hit by the prospect of these new taxes, and they will be the most helped, those businesses will be the most helped by what we're doing.
    Now, with respect to the point on cities, we have done somersaults to satisfy the concern of the city officials. Every time they have come to us with any change that was in any way plausible, we have altered the bill. We have made something like 15 changes since the original draft of this legislation, but the fact is that there is nothing that is acceptable to the opponents of this legislation short of the right to have unfettered taxes. I mean, I am open and willing to other kinds of changes, but we have made many, many changes already, and those that are unalterably opposed to them—the more changes we make, the more that they ask for. All the give has been on this side of the street.
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    Ms. JACKSON LEE. Senator, I thank you, and I hope that we can work together on that targeted capital gains——
    Mr. WYDEN. As always.
    Ms. JACKSON LEE [continuing]. Or some focus—I know your bill is in place, but if I could get with you to talk about any opportunities that would sort of look at redirecting or focusing any taxation as a piece of development or investment maybe along the technological lines or access lines for this industry. Is that——
    Mr. WYDEN. What I will do is develop for you, Congresswoman, two or three scenarios of, how this bill will help those small, strapped inner-city businesses, because I represent a lot of them too, and one of the reasons I put this bill together is that I think they're the ones who are going to be most helped, and I'll send two or three examples of how they'd be helped.
    Ms. JACKSON LEE. I'd appreciate it, and like to work with you. Thank you.
    Thank you, Mr. Chairman.
    Mr. GEKAS. We thank the Senator for giving us his time and his wisdom. We'll be calling upon him when the time comes to sort out the differences between the Senate and the House versions.
    Mr. WYDEN. Thanks very much, Mr. Chairman.
    Mr. GEKAS. We now turn to a special feature of our agenda for the day, and this is a visual display of the workings of the Internet. We have as our presenter, Andrea Ireland. Prior to joining Netscape, Ms. Ireland served as director and associate general counsel at MCI Communications where she specialized in Internet legal counsel. Ms. Ireland also provides pro bono services to the Internet Society.
    What I'd like to do is to have our staff and our technicians angle the screen in such a way that the audience can get the best view of it possible or, in the alternative, ask some of the people in the audience who want to view it to move over to the other side of the room, even if you have to stand for a few minutes.
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    We wish that Valenti would have stayed to be able to critique this.
STATEMENT OF ANDREA L. IRELAND, ASSOCIATE GENERAL COUNSEL, NETSCAPE COMMUNICATIONS CORP.

    Ms. IRELAND. Thank you, Mr. Chairman, members of the subcommittee. I was asked to come here today, not to take a position for or against this bill, but basically to explain how the Internet works and to do that in 5 minutes. Because the red light is looming—I had a nice introduction prepared, but I think we'd better cut right to the chase, because it is a little bit of a complicated subject.
    As you all know——
    Mr. GEKAS. We will exercise the discretion of the Chair, and allot you the time that you require for completion of the program.
    Ms. IRELAND. Oh, thank you. As you all know, the Internet is a decentralized network of public and private computer networks. It grew up over the years since the late 1960's through the progressive, voluntary adoption of open protocols by entities and individuals all over the world wishing to communicate with each other. No one owns the Internet or runs the Internet. It is completely distributed; it's voluntary and bottoms-up, rather than mandated and topdown; it is inescapably international, and in a very important sense—as a couple of people have alluded to already today—it's independent of geography and geographical boundaries.
    From its inception, the Internet was designed to be a distributed—and, therefore, a more efficient and fully redundant—network. The system's architecture today still reflects those design goals. Individual networks comprising the Internet achieve global reach in several ways. First, backbone networks interconnect or peer with each other at various network access points—you'll hear them sometimes referred to as NAP's. Those are the bottlenecks you can see on that slide; where all of the points come together are the NAP's. In an effort to avoid some of these bottlenecks, some of the backbone networks achieve private interconnections to, again, distribute the load across the Internet and avoid the bottlenecks. Smaller networks, Internet service providers or local area networks run by businesses, for example, will buy access from a backbone provider, and establish a direct connection over, for example, a T–1 or a T–3 line directly into that backbone or into a port at a NAP. Individuals connect through the access services provided by these providers.
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    Now, as you can see, this map here is just of the United States, and it's also a couple of years old. So I'd ask you to extrapolate and imagine this all over the world, and it's infinitely more complicated at this point.
    The interconnection points scattered throughout the network are controlled by software called routers. As the name suggests, the sole responsibility of this software is to read the Internet protocol address, sometimes called the IP address, on each message and to route it through the network to its destination. The Internet is highly intelligent and dynamic. Each router along a message's path is capable of looking out over the network, instantly assessing where the bottlenecks are, where the open lines are, which of the myriad paths available at that moment is the best path for the packet coming through it at the moment, and that's the way it routes the message or the packet.
    Internet service providers may take several actions to further distribute the load on the network and to make each transmission more efficient. In the Internet world, information of all kinds is served up to users using software called servers. Obviously, if one server contains extremely popular information, the potential for a disproportionate amount of traffic and for another bottleneck develops. A service provider wishing to avoid this situation might, therefore, set up what's called mirror servers, servers which may be located at different physical locations containing exactly the same information as the information that resides on the original server, and users coming to the crowded server may be routed to one of the mirrors to access the same information.
    Alternatively, a service provider may send his traffic through one or more proxy servers which accept user requests and go out into the Internet to find and retrieve the requested information. Once information has been requested by one user using the proxy server, the proxy server may temporarily save, or cache, the information, so that the service provider's other users can access the same information, which now resides on the proxy server, without going out into the Internet and placing undue burden on the original site serving up the information or on the network connections to and from that site. These and similar actions are taken by most service providers all over the world everyday, again, with the goal of making the Internet work better and more efficiently.
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    So, how do messages travel through this network? Well, once again, the idea is to achieve the most efficient and distributed method for pushing traffic through the network. The Internet and its various protocols are based on packet-switching technologies. At the transmitting end, each communication is broken into numerous small pieces called packets. Each packet is individually addressed to the recipient computer at its unique IP address and is released into the network where that packet is forwarded independently of the other packets in the same communication from router to router, each router along the way choosing the best path available at the moment. At the destination, all the packets comprising a single communication are then reassembled for viewing. If any packet has been lost along the way, the computers along the path understand that and arrange for the originating computer to resend the packet, so that the message will be complete.
    It's extremely important, especially for these hearings, to note that the addresses affixed to the packets and read by the routers do not indicate physical location. IP addresses are simply a series of numbers, like 192.1.1.34, that are assigned from the network level down to the individual host computer level through a hierarchial addressing and assigning system which is tied not to physical location, but to network architecture. Once a computer, such as a laptop, if it's on a LAN, for example, like mine is once my computer is assigned my LAN address, it retains that address regardless of where I take it. All this occurs in a digital medium charged with the responsibility of moving massive amounts of traffic.
    All communications, whether they're text, video, audio, are converted into digital format, are basically a series of 1's and 0's which are called bits. A series of eight bits is called a byte; it represents a single alpha numeric character. This binary code is usually further encoded into base64 or some, other sort of code for ease and more efficient transmission.
    Just to give you an idea of the amount of traffic that runs through this system, one major infrastructure provider reports traffic of 150 terabytes a month. A terabyte is a thousand billion bytes. This translates to roughly—I hope my math is right—350 billion bytes an hour; nearly 6 billion bytes a minute or 100 million, bytes per second running through this one backbone.
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    Finally, I thought it might be helpful to capture all this technical information in a practical example by describing a typical—to the extent there is a typical—Internet transaction today. Sitting at my desk in my office in Bethesda, it occurs to me that I need to add a legal text to my library. I think that a particular bookstore—it's a hypothetical bookstore—call it the Book Place, may have the text, and I know that they're on the Internet. So, I turn to my PC; search for the Book Place; get to the site; order the book; pay for the book. It takes 5 minutes. The book arrives at my office 4 days later. Very simple from my point of view, but let's look at what really happened.
    My employer, Netscape, is headquartered in Mountain View, CA. My office and my individual PC in Maryland are connected to the company local area network, LAN, in Mountain View, through a T–1 line from Bethesda to Mountain View. So, my request, my initial request to find the Book Place site, went first from Bethesda to Mountain View through that T–1 line. In Mountain View, a fair amount of internal routing took place between the two internal networks that Netscape maintains. Then, my message passed through the Netscape firewall, over one of several T–3 lines, into the public Internet. Once on the Internet, the request was routed by numerous routers at NAP's and other interconnection points all over the United States along a path determined solely by the routers—I have no idea where it's going—potentially bouncing all over the country.
    Now, it turns out on the other end that the Book Place, which is located in New York, has contracted out the hosting and management of their website to an Internet service provider headquartered in Washington, DC. The provider, however, maintains its website-hosting business in a building located in Pentagon City, VA. So although it looks to me like I've reached the Book Place in New York, when I get to their page, in reality, all the material I'm accessing is located in Virginia, and the server is being operated by a company headquartered in Washington, DC.
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    When I place my order on the Virginia server, the server then collects that information; processes the transaction; there is probably an interchange with some kind of a credit card processing company; and then ultimately sends the order information to the Book Place in New York, or wherever it is that they ship out books from. So, my message went from Bethesda to Mountain View through numerous points outside my control and probably all over the United States to Virginia to New York with transaction-related activities performed every step along the way. And just to complicate matters, if my request went through a proxy server capable of storing all or part of that information, and serving it up to me before I got out on the open Internet, or if the Internet service provider hosting the Book Place's website has set up mirror servers throughout the United States at alternate physical locations, then the locations involved in the transactions would be still different, although the transaction would look exactly the same to me.
    It's also worth mentioning that from the Book Place's perspective, they have absolutely no idea from my email address where I am geographically located. If I place an order for a physical text to be delivered to Bethesda, of course, they know the delivery address. This is the closest analog to the catalog sales situation. However, if I ask for the electronic delivery of a catalog, and they send it to my email address, they will have no idea where it's going geographically, nor does it matter to them. And, of course, the delivery location will be different, although my computer address will be the same, depending on whether I've placed the order and received the electronic text in Bethesda, at my home in Virginia, or while I'm skiing on vacation in Utah.
    I think the key point to remember when considering regulation of the Internet in any forum, but particularly in the tax area, is that unlike more traditional transaction arenas, this is a medium that is logically independent of space and time. The logic that controls transaction flow over the Internet is network logic, where considerations of load distribution and achieving maximum efficiency and reliability at the lowest cost are paramount. And, of course, preserving these considerations is crucial if we, all of us, are to enjoy the social advantages and are to fully participate in the economic advantages of the global Internet.
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    Thank you.
    [The prepared statement of Ms. Ireland follows:]

PREPARED STATEMENT OF ANDREA L. IRELAND, ASSOCIATE GENERAL COUNSEL, NETSCAPE COMMUNICATIONS CORP.

INTRODUCTION

    I was asked to come here today to explain what the Internet is and how it works—and all in five minutes. Fortunately, that job is easier now than it was three and one-half years ago, when I first started giving talks about the Internet, because now at least everyone has heard of the Internet and has an idea about what it is in fact many of you probably use it every day.
    Still partially because it is so easy to use, many people don't fully appreciate the complexity of the Internet or understand how very different it is from our other more traditional communications media. And those differences become critical when we begin to talk about whether (and if so, how) to regulate behavior and assign responsibilities among the many participants in this revolutionary medium.
    As you all know, the Internet is a decentralized network of public and private computer networks. It has grown up through the progressive, voluntary adoption of open protocols by entities and individuals around the world wishing to communicate, with each other. No one owns it or runs it. It is completely distributed; it is voluntary and bottoms-up rather than mandated and top-down; and it is inescapably international.
    By now, the story of the Internet's explosive growth from its modest 4-node ARPA roots in the late 1960's is well-known. Today's Internet comprises over 100,000 networks and over 14 million host computers supporting in excess of 40 million users, 134 countries are connected via the basic Internet protocols, with email available in 186 countries. The Internet supports ever-increasing international trade and commerce in goods, services and intangibles. Perhaps of equal importance, as Judge Dalzell of the Eastern District of Pennsylvania said in his Communications Decency Act decision last year, the Internet is ''a never-ending worldwide conversation.''
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NETWORK ARCHITECTURE

    From its inception, the Internet was designed to be a distributed (and therefore more efficient) and fully redundant network. The system's architecture today still reflects those design goals. Individual networks comprising the Internet achieve global reach in several ways. First, backbone networks interconnect or ''peer'' with each other at various ''Network Access Points,'' or ''NAPS,'' located all over the world, or they may establish private interconnections in order to achieve greater efficiency and avoid the bottlenecks sometimes found at the NAPs. Smaller networks—service provider networks or LANs run by businesses, for example—buy access from a backbone provider and establish a direct connection—a T–1 or T–3 line, for example—directly into that backbone. Individuals connect through access services provided by these service providers.
    The interconnection points scattered throughout the network are controlled by software called ''routers.'' As the name suggests, the sole responsibility of this software is to read the address information on each message and route it through the network to its destination. The Internet is highly intelligent and dynamic: each router along a message's path is capable of instantly assessing which of the myriad paths available for the next leg of the journey is the best path at the moment—and that is the route it chooses.
    Internet service providers may take several actions to further distribute the load on the network and to make transmission more efficient. In the Internet world, information of all kinds is ''served up'' to users by software called ''servers.'' Obviously if one server contains extremely popular information, the potential for a disproportionate amount of traffic, and for a bottleneck, develops. A service provider wishing to avoid such a situation might therefore set up several ''mirror'' servers, perhaps at other physical locations, containing exactly the same information as the original server, and users may be routed to a mirror site if the original is overcrowded or temporarily unavailable. Or a service provider may send his traffic through one or more ''proxy servers,'' which accept user requests and go out into the Internet to find and retrieve the requested information. Once information has been requested by one user, the proxy server may temporarily save, or ''cache'' the information so that the service provider's other users can access the same information at the proxy level without placing undue burden on the original site serving up the information—or on the network connections to and from that site. These and similar actions are all designed to make the Internet work better and more efficiently.
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PACKET SWITCHING, ADDRESSING AND ENCODING

    So how do messages travel through the network? Once again, the idea is to achieve the most efficient and distributed method for pushing traffic through the network.
    The Internet and its protocols are based on packet switching technologies. At the transmitting end, each communication is broken into numerous small pieces called ''packets.'' Each packet is individually addressed to the recipient computer at its unique address and is released into the network, where it is forwarded, independently of the other packets in the same communication, from router to router, each router along the way choosing the best path available for that packet at that instant. At the destination, an packets comprising a single communication are then reassembled for viewing. If any packet has been lost along the way, the originating computer automatically re-sends it, likely along a different path.
    It is important to note that the addresses affixed to the packets and read by the routers do not indicate physical location. IP addresses are simply a series of numbers (e.g., 192.1.1.34) that are assigned, from the network level down to the individual host computer level, through a hierarchical addressing and assigning system ultimately tied to network architecture. Once a computer such as a laptop is assigned an address, it retains that address regardless of its exact geographical location at the moment any message is sent.
    All this occurs in a digital medium charged with the responsibility of moving massive amounts of traffic. All communications, whether they are text, video or audio are converted into digital format—a series of 1's and 0's, or ''bits.'' A series of 8 bits a ''byte,'' represents a single alphanumeric character. This binary code is usually further encoded into base64 or other code for ease of transmission. One major infrastructure provider reports traffic of 150 terabytes a month. A terabyte equals a thousand billion bytes. This translates to roughly 350 billion bytes an hour, or nearly six billion bytes a minute—or 100 million bytes per second, just for this provider.
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TRANSACTION EXAMPLE

    Finally, I thought it might be helpful to capture all this technical information in a practical example by describing a typical (to the extent there is a typical) hypothetical Internet transaction. Sitting at my desk in my office in Bethesda, it occurs to me that I need to add a legal text to my library. I think that a particular bookstore, call it The Book Place, may have this text and I know they're on the Internet. So I turn to my PC, search for The Book Place, get to their site, find the book and order it over the Internet. It takes 5 minutes, and the book arrives at my office 4 days later. Pretty simple from my point of view. Now let's look at what really happened.
    My employer, Netscape, is headquartered in Mountain View California. My office and my individual PC are connected to the company LAN in Mountain View through a T–1 from Bethesda to Mountain View. So my request—to find The Book Place site—went first from Bethesda to Mountain View through that T–1 line. In Mountain View, a fair amount of internal routing took place between the two internal networks Netscape maintains. My message then passed through the Netscape firewall, over one of the several T–3 lines that Netscape maintains into the Internet. Once on the Internet, the request was routed by numerous routers at NAPs and other interconnection points, along a path determined solely by the routers, potentially bouncing an over the country.
    Now, it turns out that The Book Place, located in New York, have contracted out the hosting and management of their website to an Internet Service Provider headquartered in Washington, DC. The Provider, however, maintains its website hosting business in a building located in Pentagon City, VA. So, although it looks to me like I've reached The Book Place in New York, all the material I'm accessing is really located in Virginia and the server is being operated by a company headquartered in Washington, DC. When I place my order on the Virginia server that server then sends the order information to The Book Place in New York so they can ship out my book.
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    So my message went from Bethesda to Mountain View, through numerous points outside my control and probably all over the U.S., to Virginia, to New York, with transaction-related activities being performed every step along the way. And, just to complicate matters, if my request went through a proxy server capable of storing part or all of the information I requested and serving it up to me before I even got out on the Internet, or if the Internet Service Provider hosting The Book Place's website has set up mirror servers at alternate physical locations, the locations involved in the transaction might be still different, although the transaction would look exactly the same to me. And it is also worth mentioning that, from The Book Place's perspective they have absolutely no idea from my email address itself where I am geographically located. If I place an order for a physical text to be delivered to Bethesda, they know the delivery address however, if I place an order for an online catalog and have it delivered electronically to my email address, The Book Place will have no idea where it is going geographically—nor does it matter to them. And, of course, the delivery location win be different (though the address remains the same) depending on whether I've placed the order and received the electronic text in Bethesda, at my home in Virginia, or on vacation in Utah.
CONCLUSION

    I think a key point to remember when considering regulation of the Internet is that, unlike more traditional transaction arenas, this is a medium that is logically independent of space and time. The logic that controls transaction flow over the Internet is network logic, where considerations of load distribution and achieving maximum efficiency and reliability at the lowest cost are paramount. And preserving these considerations is crucial if we—all of us—are to enjoy the social advantages and are to fully participate in the economic benefits of the global digital marketplace of the future.

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INSERT OFFSET RING FOLIOS 1 TO 2 HERE

    Mr. GEKAS. Thank you. The audience can return to the other side of the boat now before it sinks. [Laughter.]
    Does any member have a series of questions to pose? The gentleman from New York is recognized.
    Mr. NADLER. I didn't have a series of questions. I simply wanted to say that I understand we will be receiving comments on this bill from the administration, and I ask unanimous consent to place those comments in the record when they are received.
    Mr. GEKAS. Without objection.
    Mr. NADLER. Thank you.
    Mr. GEKAS. Mr. Delahunt or Ms. Jackson Lee, does anybody want to pose any questions to our presenter?
    Ms. JACKSON LEE. I have one question.
    Mr. GEKAS. The lady from Texas is recognized.
    Ms. JACKSON LEE. As I looked at the chart—and I will not attempt to recount for you what I saw—but can I assume from the presentation that there might be several multipoints where there would offer an opportunity for taxation, and, therefore, if we did not help to resolve the dilemma, that there would be just a myriad of confusion about different points of taxation? Can I assume that out of the collective expression or interpretation of you telling us how it works, that that could be a possibility?
    Ms. IRELAND. Yes, ma'am. I think that's part of what Mr. Cox and Mr. Wyden were trying to get at, and it's important to remember that, because this is packet-switching, you're not even talking about a single message floating all over the place; you're talking about the message being broken up and the pieces floating all over the place through different routers, through different servers, potentially all over the country. And I think this is part of the issue, to try to figure out where the nexus really is, the meaningful nexus, for purposes of taxation.
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    Ms. JACKSON LEE. Does that differ from cable TV operations?
    Ms. IRELAND. Yes, ma'am.
    Ms. JACKSON LEE. Would you just be able to give me a sentence or two on the differences?
    Ms. IRELAND. I'm not an expert on cable technology. I think packet-switching technology is the only one that breaks up messages this way, and sends them all over the place this way.
    Ms. JACKSON LEE. Thank you very much. Thank you, Mr. Chairman.
    Mr. DELAHUNT. Mr. Chairman, I just want to——
    Mr. GEKAS. Mr. Delahunt is recognized.
    Mr. DELAHUNT. I had the same question as Representative Jackson Lee, but, you know, it was an excellent presentation; I want to compliment you on that, and for those of us that are not particularly conversant with the Internet, I'm sure you would be willing to give us a tutorial, if needed.
    Ms. IRELAND. Absolutely, at any time.
    Mr. DELAHUNT. Thank you very much. On a pro bono basis.
    Ms. IRELAND. Absolutely. [Laughter.]
    Ms. JACKSON LEE. As a public service.
    Mr. DELAHUNT. As part of your public service.
    Ms. IRELAND. Absolutely.
    Mr. DELAHUNT. You can bring the chart with you, and rather than embarrass ourselves publicly, we'll refrain from asking any detailed questions, but it does really visualize for us the potential, as Representative Jackson Lee indicated, to tax at so many—at multiple geographic locations when, I think your term was, that this is really unrelated to geography and space.
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    Ms. JACKSON LEE. I will ditto his request.
    Mr. GEKAS. I'm wondering if the one example that you gave, had the order been to deliver the book through electronics to your email address, that nobody would know where it was delivered. Is that correct?
    Ms. IRELAND. You wouldn't know—yes, sir; you would not know from the email address where it's geographically going. Now, you know, there are other ways, obviously, I don't mean to overstate this. I mean, if you have credit card information, you may have a billing address, you may—but as for pure physical location of delivery in an electronic transmission, you would not know from the email address.
    Mr. GEKAS. I think we have to note that when we consider the realm of taxation and how that can be a target for such taxation.
    We thank the lady, and we discharge her with the gratitude of the subcommittee.
    Ms. IRELAND. Thank you.
    Mr. GEKAS. We now turn to the final panel which will begin with the testimony from the first vice president of the National League of Cities, from the City of Philadelphia Council, who is a member there, Brian O'Neill.
    Also joining him will be the general counsel for the Committee on State Taxation, Ms. Kendall Houghton. Ms. Houghton has served as a member of the American Bar Association's State and Local Tax Committee Task Force, and currently serves as editor and chief of the publication, the State and Local Tax Lawyer.
    We will also hear as a member of this panel the president of the Federation of Tax Administration and commissioner of the New Hampshire Department of Revenue Administration, Stanley R. Arnold. And we will ask the gentleman from Massachusetts, William Delahunt, to introduce the fourth member of the panel.
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    Mr. DELAHUNT. Well, again, as I indicated earlier, Mr. Chairman, Mr. Foley has been a moving force in the Commonwealth in terms of high technology, and in some part is responsible for the fact that Massachusetts has a preeminent position in all matters dealing with high technology and the Internet, and I want to warmly welcome him here today.
    I failed to mention, too, Mr. Chairman, in my opening remarks, because it was alluded to by Representative Cox, that in fact his Governor has endorsed this legislation, and I know that in his prepared remarks, Mr. Foley also notes that Governor Weld from Massachusetts has endorsed this legislation, and I welcome that warmly, and I think it's important to make it a matter for the record.
    Mr. GEKAS. I thank the gentleman.
    The final witness will be Prof. Walter Hellerstein of the University of Georgia School of Law who is recognized as an expert in State and local taxation. With Mr. Hellerstein, we can say we have a familiarity dating several years.
    We look forward to the testimony of all. We'll begin with Councilman O'Neill.
STATEMENT OF BRIAN O'NEILL, COUNCILMEMBER, CITY OF PHILADELPHIA, PA, AND FIRST VICE PRESIDENT, NATIONAL LEAGUE OF CITIES

    Mr. O'NEILL. Thank you, Mr. Chairman and members of the committee. Good morning. I've been a councilmember for Philadelphia for the last 18 years, and I'm now serving as the first vice president of the National League of Cities. I'll be testifying on their behalf as well as the Government Finance Office Association.
    Mr. GEKAS. By the way, we'll begin with the chairman's edict that the written statements of all the witnesses will be accepted for the record, without objection, and we will attempt loosely to restrict the members of the panel to 5 minutes apiece.
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    Mr. O'NEILL. Thank you, Mr. Chairman.
    We believe that an indefinite moratorium on State and local taxes on Internet or online services would be a significant infringement on our State and local sovereignty, create considerable budgetary problems for local governments, and lead to unfair competition in the marketplace. While we can surely appreciate the general concerns in this bill over the impact Federal, State, and local taxation could have on the fiscal health of new and developing industries, we disagree with the legislation's attempt to address these concerns by implementing an indefinite moratorium on taxes. It is our belief that where Congress or the Federal Government has a particular concern that affects our mutual constituents, we should be working in partnership to address the area of concern rather than to mandate draconian preemptions.
    When Federal policies preempt the roles of State and local government in areas of responsibility which legitimately belong to the States they violate the principles of federalism. Federal intervention in these areas cannot be condoned. State and local governments which strongly support access to reasonably-priced technological advances must guard against the preemption of their constitutional authority, including the power to regulate, tax, and charge for interactive computer services that operate in their jurisdictions. State and local governments must retain these powers in a way that does not inhibit the growth and diversity of the industry, but which preserves State and local governments' autonomy and their ability to meet the needs of their citizens.
    In this case, there's already a moving vehicle for cooperation among the three levels of government which would allow us to address our mutual concerns. A study has been underway since last year when a voluntary effort began under the sponsorship of the National Tax Association to study and address the appropriate taxation of businesses using the Internet among other taxation issues. National organizations representing State and local governments have been taking part in this study, along with a broad range of business interests.
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    We urge congressional support for this joint government/industry endeavor, and I might add, Mr. Chairman, that there is no conspiracy out there to impose an abundance of taxes. In fact, we heard one man from the industry say he, could give no examples of unreasonable taxation by State and local government. Another panelist gave four examples, three of which were almost patent violations of the Commerce Clause. State and local officials are not so foolish that we would try to figure out ways to drive businesses out of the largest growing area of our economy. This legislation supposes that we are, and I would strongly disagree with the inference that we are so neglectful that we would be out looking for 30,000 different ways to drive businesses out of our jurisdictions into other jurisdictions.
    Someone mentioned the automobile industry as an example. Now, what is harder to track than all the components of the automobile industry? And yet, we've done a very fine job with our regulation of that industry. Moreover, we have the Commerce Clause protecting our citizens and businesses. The same holds true for the telephone industry in the event their are problems. We don't have any special legislation for the telephone industry. We don't have any special legislation for the automobile industry. I also don't think we've ever in Congress anticipated some terrible taxation of any industry by local government and said upfront, ''Can't do it'' before you even try. I mean, at least give us an attempt to fail; to drive those businesses from Pennsylvania to New Jersey or to New York. I don't think we're so foolish that we would, but if we do, shame on us. I don't think we need someone telling us ahead of time that we're going to do this terrible thing that no one seems to have any evidence that we're planning to do. But, I would just mention that to you, because I think it's important, and if I skip something else in my testimony, I at least want you to hear that.
    The legislation would have other impacts. It is important to remember that Federal policy that creates special benefits for some businesses but not for other competitors erects barriers to fair competition in our communities. Moreover, the bill has no grandfather clause; and it does not protect the sales taxes. It's not in this legislation.
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    The florist example we heard earlier from Mr. Valenti—I believe it was Mr. Valenti or one of the other members of the panel—if the florist is paying the sales tax under this legislation, the Internet transaction is taxable as well. That's clearly not in this bill, and so if Members want similar taxation they have to change the bill, because this bill does not provide for similar taxation.
    So, we have to look at this as public officials, that we're concerned at the local level about any of these Federal actions that would usurp local authority. Lately we've had a pretty good relationship lately with the Federal Government. We hope that continues. Some changes have been made to this bill, it's about the fifth version of it, and we've gotten a little bit farther down the road, but there are still a whole lot of problems that we see with it, and it may take 20 versions, but hopefully we'll get it right before it passes.
    In 1995, as you know, the unfunded mandate bill was passed. That would be undermined by this bill. In fact, a Senate bill identical to this legislation has already been studied by the CBO, and it triggers the special point of order in the unfunded mandate bill. It would cost State and local governments over $50 million. So, it's completely inconsistent with the Unfunded Mandates Reform Act; the CBO analysis supports that. By the turn of the century, less than 2 1/2 years away; telecommunications is going to be one-sixth of our economy. All State and local governments just kind of write off, with this bill, one-sixth of our economy that we're going to provide services to, but we're not going to be able to get any revenues from? I don't understand it, and I think it's wrong, and I think it's something we should rethink.
    [The prepared statement of Mr. O'Neill follows:]

PREPARED STATEMENT OF BRIAN O'NEILL, COUNCILMEMBER, PHILADELPHIA, PA, AND FIRST VICE PRESIDENT, NATIONAL LEAGUE OF CITIES

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INTRODUCION

    Mr. Chairman and members of the Committee, good morning. My name is Brian O'Neill, and I am a councilmember from Philadelphia, Pennsylvania. I am also First Vice President of the National League of Cities. I would like to thank you for the opportunity to testify on H.R. 1054, the ''Internet Tax Freedom Act'' on behalf of the National League of Cities (NLC) and the Government Finance Officers Association (GFOA).
    At the meeting of our Board of Directors last week, NLC passed a resolution affirming our lone-standing position that Congress has an obligation to protect the historic authorities and responsibilities of states and localities to carry out laws and policies in the best interests of the families that reside in our communities. Because H.R. 1054 intrudes on this essential authority and undermines Congress' commitment to devolve power back to states and localities, NLC and GFOA and many other groups representing local governments strongly oppose this legislation. Specifically, we believe that an indefinite moratorium on state and local taxes on Internet or online services, as proposed in H.R. 1054, would be a significant infringement on state and local sovereignty, put hundreds of state and local budgets in a deficit, create considerable budgetary problems for local governments, and lead to unfair competition in the marketplace.
    While we appreciate the general concerns articulated in H.R. 1054 over the impact federal, state and local taxation could have on the fiscal health of new and developing industries, we disagree with the legislation's attempt to address these concerns by implementing an indefinite moratorium on state and local taxation of Internet services. It is our belief that where Congress or the federal government has a particular policy concern that affects our mutual constituents, they should work in partnership with state and local governments to address the area of concern rather than to mandate draconian preemptions.
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    When federal policies preempt the roles of state and local governments in areas of responsibility which legitimately belong to the states, they violate the principles of federalism. Federal intervention in these areas cannot be condoned. State and local governments, which strongly support access to reasonably priced technological advances, must guard against the preemption of their Constitutional authority, including the power to regulate, tax and charge for interactive computer services that operate in their jurisdictions. State and local governments' must retain these powers in a way that does not inhibit the growth and diversity of the industry but which preserves state and local governments autonomy and their ability to meet the needs of their citizens. In this case, there is a moving vehicle for cooperation among the three levels of governments which would allow us to address our mutual concerns.
    We agree with the drafters of this legislation that the issue of Internet taxation is an important one and that a study is in order. However, there should be an opportunity to complete such a study prior to any moratorium on state and local taxation. In fact, a study has been underway since late last year when a voluntary effort began under the sponsorship of the National Tax Association to study and address the appropriate taxation of businesses using the Internet, among other taxation issues. National organizations representing the Governors and State Legislatures as well as the local organizations I am representing here today have been taking part in this study, along with representation from a broad range of business interests. The Multistate Tax Commission and the Federation of Tax Administrators are also actively participating in this effort. It is our intention that this joint project will help us to engage in a review of any existing problems in the taxation of telecommunications and to propose coordinated policies that will help states and localities promote fair competition while ensuring that the telecommunications industry bears its fair share of taxation responsibility. We believe that Congressional support for this joint government-industry endeavor would help to achieve your goals of a consistent and coherent policy regarding the taxation of Internet activity, without intruding upon and interfering with our most basic responsibility of running the nation's states and local governments.
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    Just as the federal government is beginning to examine some of the law enforcement, customs, and other issues created by the Internet's erasure of international boundaries, so too do we need to reexamine—together with the affected industries all of whom are our constituents—how to proceed in this rapidly changing mode of commerce. To us, imposing a solution that penalizes all the other taxpayers and citizens of a community without a full and careful study and recommendations involving all the parties is an inefficient, unfair and unbalanced approach. These issues are not simple, and we are confused at the double standard which says the federal government will study the issues, make recommendations, and then act, but in the case of state and local governments, the federal government will act first and study and make recommendations only later after the damage is done.
    I would now like to discuss some of the impacts we believe H.R. 1054 would have on the nation's cities and towns.
STATE AND LOCAL SOVEREIGNTY

    H.R. l054 would impose an indefinite moratorium on state and local taxation. We believe that such a moratorium violates long-standing Constitutional principles of federalism and undermines the legitimacy of the partnership among the three levels of government.
    It is important to remember that federal policy that unilaterally creates special benefits for some businesses, but not for other competitors, erects barriers to fair competition in our communities. Creating a tax break for some companies, but not others, harms many of our own small businesses—in some sense involving the federal government in bestowing mandated benefits for foreign corporations at the expense of small businesses in our own cities. Unless well thought out, the consequences of such federal intrusion would surely lead to layoffs and foreclosures in our downtowns. As elected public officials with a vital stake in the health of our local economies, we are concerned about any federal actions which could create such unfair outcomes.
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    In 1995, Congress working in partnership with states and localities passed legislation which put obstacles in the path of imposing new, unfunded federal mandates on the taxpayer's of the nation's states and localities. Unfortunately, however, it appears as though the intent of the unfunded mandates law to limit federal financial and regulatory burdens imposed on states and localities could be undermined by efforts of some members of Congress to enact legislation such as H.R. 1054. H.R. 1054 dictates federal solutions on how to solve problems that affect local residents and could best be addressed through state and local initiatives, rather than through federal preemption.
    The proposed legislation is inconsistent and contrary to Public Law 104–4, the Unfunded Mandates Reform Act of 1995. Not only does it propose to undercut, rather than strengthen any partnership between the federal government and state and local governments, but it would mandate offsetting state and local fiscal actions to meet mandated revenue reductions by the federal government. Unlike the federal government, we must balance our budgets every year. Consequently, any federal action which interferes with revenues in already-adopted budgets would mandate us to make difficult fiscal choices impacting our taxpayers. Having observed the enormous difficulties this Congress faces in achieving a balanced budget by the year 2002, try and imagine how much more complicated and frustrating this process would be if some outside body—without any effort to work with you—unilaterally announced that revenues assumed by the Congressional Budget Office could not be collected. This bill marks a significant intrusion and a reversal of the claimed federal commitment to turn over greater power and authority to state and local governments.
    In light of Congress' recent efforts to enact legislation to limit unfunded mandates and to devolve responsibilities for areas traditionally handled by the federal government, such as welfare, back to states and localities, it would seem appropriate for you to want to allow states and local governments to continue their reasonable regulation of the telecommunications industry that reaches into the majority of homes and businesses in this country.
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BUDGETARY CONSIDERATIONS

    By the turn of the century, telecommunications is projected to be one-sixth of our national economy. Consequently, it will be not only an important provider of jobs and opportunities for our citizens, but also an important user of governmental resources and services. The rapid changes in telecommunications, we expect, will do more to change the shape and role of cities in America than perhaps any other changes over the past century. The new act and the rapid technological changes have already dramatically altered how citizens and businesses provide goods and services around the globe. The advent of the Internet could alter commercial growth and shape—with significant consequences for downtowns in every part of the nation.
    It is clear then that the preemption of state and local taxes on Internet transactions will have a profound effect on one of the largest and fastest growing parts of the nation's economy—a change with serious consequences for all taxpayers.
    And, as each of you know all too well, a decision to cut taxes in one area forces offsets in other areas. So while any proposal to preempt municipal revenues collected on Internet transactions would provide financial benefits to that industry cities and counties would be forced to make offsetting changes in order to keep their budgets balanced—meaning higher taxes from someone else, or cuts in school, fire, police or other local services.
    Over the past several years federal resources to local governments have decreased significantly. As a result, many local governments have been forced to rely heavily on revenues generated from sales and use taxes to provide services so vital to the lives of all Americans. Our nation's education system, fire and police departments, and infrastructure depend on monies from sales tax receipts. In addition, school lunch programs public libraries, prenatal care, medical assistance for low income individuals, child protective services, and our nation's park system are just a few of the public programs supported by sales taxes. As consumer purchasing activity on the Internet grows, it is reasonable to expect that such activity will more and more supplant main street businesses, thus reducing the revenue base now associated with these businesses, and relied upon by local governments. These changes win require us to look to income-producing industries for revenues if we are to continue to provide these essential services. An outright prohibition by Congress on our ability to collect a legitimate source of revenue could well interfere with the provision of these services in the future.
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    Let me clarify a misconception that may be held by some. Local governments do not wish to use the telecommunications industry to generate excess revenue for government coffers, nor do they favor outdated tax treatment that would hinder the growth of competition. However, if localities are expected to continue providing essential services to their residents, encourage economic development and protect public health, safety and property, fair taxation of the telecommunications industry will be required. Otherwise, state and local governments will be forced to significantly increase taxes on other taxpayers and businesses or sharply cut services in order to maintain balanced budgets.
UNFAIR COMPETITION

    Although some supporters of this legislation are promoting it as a bill that favors small business, such statements are misleading. While it would undoubtedly help businesses (both large and small) that operate on the Internet, it would in fact significantly harm the main street businesses that operate in our communities. Companies makings sales over the Internet present tough competition to start with. They have centralized, highly automated operations; fewer overhead expenses; no local store; and, no local employees to pay. This system allows companies selling on the Internet to service the same consumer group as local merchants—but if H.R 1054 is enacted, would provide these companies with a ''tax-free'' pricing advantage that could harm thousands of local businesses. And, while local merchants collect and pay their fair share of taxes which support vital state and local services, companies selling over the Internet would enjoy the full advantage of these same services without providing any support. For example, our roads are used in product delivery. Our police protect product delivery. Our courts handle cases of non payment and product theft.
CONCLUSION

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    As I mentioned earlier, a major aspect of the Congressional agenda has been to enact legislation that would turn more authority back to state and local eovernments, as well as to limit the unfunded burdens that might be imposed. We believe that H.R. 1054 would undermine these earlier Congressional initiatives. Once again, H.R. 1054 would intrude on state and local taxing and regulatory authority by imposing an indefinite moratorium on our taxing ability. This, in turn, would require us to significantly increase taxes or sharply cut services in order to maintain our budgets and would create burdens for state and local governments of considerable proportion.
    For these reasons, we strongly oppose H.R. 1054. We urge Congress to reconsider pursing this legislation during the 105th Congress, and instead encourage you to work with our organizations to develop tax and revenue options that would ensure industry growth, the protection of governmental services to citizens, and the avoidance of inequitable taxes or fees on other industries and citizens. In no circumstances can we condone federal interference with already-adopted budgets.
    Thank you.

    Mr. GEKAS. We thank the gentleman. We will return to his statements during the part of the question-and-answer period.
    We turn to Ms. Houghton.
STATEMENT OF KENDALL L. HOUGHTON, GENERAL COUNSEL, COMMITTEE ON STATE TAXATION

    Ms. HOUGHTON. Thank you, Mr. Chairman and members of the subcommittee. My name is Kendall Houghton, and I am the general counsel for COST, the Committee on State Taxation. COST represents and assists nearly half of the Fortune 1,000 in understanding and managing the complexities of State and local taxation. COST members also constitute the vanguard of electronic commerce revolution.
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    All of these businesses interests are supportive of the moratorium embodied in H.R. 1054, the Internet Tax Freedom Act. In contrast, many State and local governments and their representative organizations have launched a full-force, Chicken Little offensive: The sky is falling, and cyberspace is becoming a revenue black hole. But, who really should be concerned about taxation of electronic commerce? The marketplace and the players who bear the burden of the hodgepodge of State and local taxes.
    I will briefly discuss two examples of the threats posed to electronic commerce by our current tax system. One deals with the nonuniform characterization and taxation of given services or products at the State and local level. The other concerns the potential for layered or multiple taxation of Internet or electronic commerce transactions.
    First, Internet access is a service that may fall within the definition of taxable telecommunications, as is the case in Tennessee and Iowa—you've heard this—or it may be labeled taxable computer data processing, as is the case in Connecticut. It is even conceivable that Internet access might currently be characterized as two distinct taxable services by a single State. Texas first identified Internet access as taxable telecommunications and later decided that Internet access was in fact a taxable information service.
    Setting aside the important question of whether these various characterizations are appropriate, COST members realize that some variation from State to State is inevitable. However, what greatly concerns the business community is the exorbitant price associated with doing Internet business on a nationwide basis. Overwhelming compliance burdens and costs are the result both of these inconsistent tax schemes that apply to Internet transactions and of the constantly-changing tax-filing requirements.
    The Clinton administration confirms, in its framework paper, that the uncertainties associated with such taxes and the inconsistencies among them could stifle the development of Internet commerce. This confusion and the resultant costs discourage low and high tech, small and large companies alike, from entering the electronic commerce arena.
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    The second concern arises when dealing with Internet-based transactions. That is, differences in the taxing jurisdictions' rules for determining what is taxable and where the taxable event occurs can result in multiple taxation of a single transaction. I will provide an example: Texas says that if a computer server is located in Texas and information is downloaded outside the State, that is, by an out-of–State customer from the server, the information is considered to be delivered in Texas. Texas also says that computer programs are tangible property, the sale of which is taxable. Therefore, if a Nebraska resident purchases a computer program over the Internet, and the program is downloaded from a Texas-based server, the taxable event would be deemed to occur in Texas, and Texas would apply a sales tax to that transaction. However, if the Nebraska resident purchases that computer program from a Nebraska vendor whose server is located in Texas, then Nebraska will also impose a sales tax on the identical transaction. This is because Nebraska says that, for sales tax purposes, the sale of computer software transferred electronically occurs where the software is used. Likewise, every other State where that program is subsequently used by the Nebraska resident, for instance, on a business trip, can assert that a use tax applies to the transaction. This multiple tax result is unfair, but is likely to occur frequently where taxable goods and services are purchased and transmitted over the Internet.
    If new and revised tax regimes are now appropriate in the electronic commerce arena, those regimes should not be developed unilaterally by State and local taxing authorities. Rather, a tax regime that is fair and equitable is achievable only through a collaborative process in which government and business discuss the issues on an equal footing. Indeed, all aspects of this brave new world of taxation merit the same thoughtful, unhurried, and collaborative process that the Internet Tax Freedom Act promises.
    Committing to such a process will not only prove the Chicken Littles among us wrong, but we will have opened new vistas for both electronic commerce and its effective regulation. Thank you.
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    [The prepared statement of Ms. Houghton follows:]
PREPARED STATEMENT OF KENDALL L. HOUGHTON, GENERAL COUNSEL, COMMITTEE ON STATE TAXATION

INTRODUCTION

    My name is Kendall Houghton, and I am the General Counsel for COST, the Committee On State Taxation. The Committee On State Taxation, or ''COST,'' is a non-profit trade association that was organized in 1969 as an advisory committee to the Council of State Chambers of Commerce. COST represents and assists nearly half of the ''Fortune 1,000'' in understanding and managing the complexities of state and local taxation. It may fairly be stated that COST's accumulated members produce most of this Nation's taxable goods and services, and contribute indispensably to the economy of every state in this Nation through the creation of jobs and payment of state and local taxes. In addition, COST's members constitute the vanguard of the electronic commerce revolution, these companies include: Telecommunications companies, Internet and online service providers, hardware and software infrastructure companies, and content providers and consumers.
    All of these business interests are supportive of the moratorium embodied in H.R. 1054, the Internet Tax Freedom Act.
REASONS WHY COST SUPPORTS THE INTERNET TAX FREEDOM ACT

    There are many excellent reasons to promote a thoughtful, more uniform policy for taxation of the Internet and electronic commerce, which the Administration highlights in its recently released position statement, ''A Global Framework for Electronic Commerce.'' And, as that paper suggests, ''the same broad principles applicable to international taxation, such as not hindering the growth of electronic commerce and neutrality between conventional and electronic commerce, should be applied to subfederal taxation.'' However, before a state and local system of taxation can be effectively designed and implemented that taxes Internet and electronic commerce in a simple, fair and uniform manner, we must ''clear the decks'' of all the current problems and perceived tax threats to electronic commerce.
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    What are those existing burdens and threats? I will briefly discuss three such categories of burdens or threats:
(1) The completely non-uniform characterization and taxation of a given service or product, by various states and localities;

(2) The potential for layered or multiple taxation of Internet or electronic commerce transactions; and

(3) The actual and potential assertion of aggressive new nexus theories, that premise jurisdiction to tax solely upon electronic-based contacts with in-state customers and relationships with Internet and online service providers.

With regard to inconsistent state taxation of Internet transactions:

    Under the provisions of one State's sales tax (Tennessee or Idaho, for instance), Internet access will fall within the definition of a taxable ''telecommunications service,'' whereas another State (Connecticut, for instance) will categorize Internet access as a taxable Computer/data processing service.'' It is even conceivable that Internet access might currently be characterized as two distinct taxable services by a single State—Texas first identified Internet access as a taxable telecommunications service, then decided that Internet access was in fact a taxable information service. Setting aside the question of whether these different classifications are appropriate, COST members realize that some variation from state to state is inevitable, and generally view the variations as the price of engaging in interstate commerce.
    However, what does concern the business community is the exorbitant price associated with doing Internet business on an interstate basis. The number of inconsistent tax characterizations and tax schemes that may apply to Internet access, the subtleties of analysis of taxable versus nontaxable Internet-related services, and the fact that these characterizations and the resultant tax filing requirements may change almost daily, generate overwhelming compliance burdens and costs. As the Clinton Administration has recognized, ''[t]he uncertainties associated with such taxes and the inconsistencies among them could stifle the development of Internet commerce.'' This confusion and the resultant costs do not exactly encourage high tech companies to enter the electronic commerce arena.
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With regard to the potential for layered or multiple taxation:

    States and localities have the right to impose a sales/use tax when a ''taxable event'' occurs within their jurisdictions. However, when dealing with Internet-based transactions—e.g. the sale of goods or services over the Internet—differences in the taxing jurisdictions' rules for determining what is taxable and where the taxable event occurs can result in multiple taxation of a single transaction. For example Texas says that if a computer server is located in Texas and information is downloaded outside the state (i.e., by an out-of-state customer) from the server, the information is considered to be delivered in Texas. Texas also says that computer programs are tangible property, the sale of which is taxable. Therefore, if a Nebraska resident purchases a computer program over the Internet, and the program is downloaded from a Texas-based server, the taxable event would be deemed to occur in Texas, and Texas would impose its sales tax on this transaction. However, if the Nebraska resident purchases the computer program from a Nebraska vendor whose server is located in Texas, then Nebraska will also impose a sales tax on the program. This is because Nebraska says that for tax purposes, the sale of computer software transferred electronically occurs where the software is used. Likewise every other State where the information/program is subsequently used by the Nebraska resident (because she travels or moves to other jurisdictions, where the program is used) can assert that a use tax applies to the transaction. This multiple tax result is unfair, but is likely to occur frequently where taxable goods and services are purchased and transmitted over the Internet.
With regard to the assertion of aggressive new nexus theories:

    Nexus has been and will continue to be a contentious area of state and local taxation. Adding to this confusion, some states and localities have seized upon the uncertainty surrounding electronic commerce as an opportunity to expand the reach of their taxes. For instance, Wade Anderson of the Texas Comptroller of Public Accounts' Office noted that Texas is asserting nexus on out-of-state sellers that use an in-state Internet service provider to electronically store a web page. Mr. Anderson's office has already held that merely setting up a web page on a Texas server creates nexus. However, this position flouts the one ''bright-line'' constitutional nexus rule that exists: for sales and use tax nexus purposes, the seller must maintain a physical presence within the taxing jurisdiction. First announced in 1967 and reaffirmed in 1992, this Supreme Court principle is not new or controversial.(see footnote 2)
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    Texas and some other states apparently are eager to assert nexus over those who utilize the Internet to conduct business, based on the view that the in-state presence of an Internet service provider should be attributed to the out-of-state seller. However, asserting nexus based on the presence of any in-state entity that serves as an unrelated or non-exclusive communications conduit, such as a telephone company television/broadcast company or Internet service provider, renders the Supreme Court's jurisprudence meaningless.
    Some states, such as California, are rejecting the temptation to assert aggressive nexus theories.(see footnote 3) However, other states clearly view the Internet and electronic commerce as an area not covered by existing case law, and therefore fair game for stretching nexus to its limits and beyond. If new or revised nexus theories are now appropriate or will become appropriate in the electronic commerce arena, those theories should not be developed unilaterally by state taxing authorities. Rather, a nexus standard that is fair and equitable is achievable only through a collaborative process in which government and business discuss the issues on an equal footing.

THE ARGUMENTS AGAINST THE INTERNET TAX FREEDOM ACT ARE MISINFORMED AND UNCONVINCING

    Given these burdens and threats, the scope of the Internet Tax Freedom Act seems quite modest: the Act purports merely to prohibit, on a temporary basis, the unfair taxation of Internet and online services transactions. Nevertheless, state and local governments and their representative organization' have launched a full-force ''Chicken Little'' offensive: the sky is falling, and cyberspace is becoming a revenue black hole. In fact, nothing is further from the truth.
    Let's consider the validity of this assertion, in the context of local taxing powers. Localities often derive the large measure of their tax revenues from three types of taxes: (1) gross receipts business license taxes, (2) property taxes, and (3) sales and use taxes. Under which of these taxes does the Act provide unfair advantages to Internet-based businesses? None of them. First, the Act specifically preserves the power of state and local governments to impose a business license tax that is fairly apportioned (a requirement that has been established by the Supreme Court for a state tax levied on or measured by interstate commerce).(see footnote 4) Thus, if an Internet-based business would otherwise be subject to a local business license tax, the fact that it is conducting business via the Internet is irrelevant to the fact and amount of its tax liability. Second the drafters have indicated their intent that this same business will be subject to all personal and real property taxes levied by the locality on property in that jurisdiction—no breaks there, for the Internet. Third, to the extent a locality is already imposing (or can impose) a sales/use tax collection requirement on an out-of-state vendor that makes sales to customers in the jurisdiction via traditional means, it can also impose a tax collection requirement on such a vendor if they instead engage in Internet sales. Related to the sales tax preservation, the drafters intend that Internet-based businesses will, like traditional businesses, be required to pay sales or use taxes on the purchase of business inputs (i.e., goods or services used or consumed by the business in order to provide Internet access or other Internet products and services).
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    Opponents of the Act insist that it is a federal preemption of state and local taxing authority. However, the Act does not purport to substitute a comprehensive Federally crafted tax scheme for state and local tax schemes. Rather, it merely holds state and local tax schemes ''at bay'' for a period of time, in the interest of encouraging multilateral engagement in a rational, deliberative process.
    The Act does not transgress Congress' Commerce Clause authority to regulate interstate commerce, or states' rights. In fact, the Act does not represent the broadest possible exercise of Congressional discretion to intervene, but merely serves as an interim facilitation of a ''cease-fire'' in this turbulent and controversial arena.
    The Act does not prohibit state and local governments from attempting to craft ''bottom-up'' solutions to the real tax policy and administration problems raised by electronic commerce. Rather, it views the contributions of state and local governments as vital to the success of the Consultative Group, which will incorporate the input of all tax policy experts (federal, state and local, business, etc).
    One additional, critical point must be made in this regard: Even if a bottom-up agreement can be reached as to how state and local jurisdictions can tax electronic commerce, for such an agreement to be effective it must be ratified by Congress. In the absence of such federal implementation, there will likely follow a spate of dormant Commerce Clause litigation that will further aggravate the uncertainty facing the broad business community, individual consumers and the taxing jurisdictions, with respect to what tax measures fall within and outside Constitutional parameters.
CONCLUSION

    In conclusion, COST believes that, far from infringing upon or neutralizing state and local rights of self-determination, this bill respects the strength and balance of powers inherent in our federalist system. By imposing a moratorium, Congress will require state and local governments to assume full responsibility and accountability for their actions in taxing interstate and global electronic commerce, this responsibility is the corollary to the authority to tax. It should be noted that business has, and continues to be, ready, willing and able to participate in discussions with state tax administrators.
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    This legislation presents a window of opportunity for states, localities, and taxpayers to: (1) address these issues efficiently (versus through ad hoc, jurisdiction-specific legislative advocacy and litigation); (2) answer critical questions concerning the real impact of technology on Federal and state/local tax policy and systems administration, now and into the future; and (3) to align, in logical and meaningful ways the federal and states and local tax systems, to ensure that American business and technology remain competitive globally.

    Mr. NADLER [presiding]. Thank you.
    Mr. Arnold.
STATEMENT OF STANLEY R. ARNOLD, COMMISSIONER NEW HAMPSHIRE DEPARTMENT OF REVENUE ADMINISTRATION, AND PRESIDENT, FEDERATION OF TAX ADMINISTRATORS

    Mr. ARNOLD. Mr. Chairman and members of the committee, my name is Stanley Arnold, commissioner of the New Hampshire Department of Revenue, and I am serving this year as president of the Federation of Tax Administrators.
    The federation represents the principal revenue agencies in the 50 States, the District of Columbia, and New York City. On behalf of the federation, thank you for the opportunity to appear before you today on H.R. 1054, the Internet Tax Freedom Act.
    In our May 1997 annual meeting, the federation adopted a policy resolution opposing H.R. 1054 as introduced, and we would urge that the Congress take no action on this measure at this time. State tax administrators are generally opposed to Federal preemption of State tax authority. It has been our experience that Federal preemptions have the effect of creating a preferred class of taxpayer, lead to protracted litigation, and often have unintended consequences adverse to the States. The U.S. and State Constitutions provide adequate safeguards and protections to taxpayers and generally the Federal Government should not intervene in State tax matters.
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    We believe, especially, that you should not enact H.R. 1054 as it has been introduced for three principal reasons. First, the bill is based on the false premise that State and local governments are rapidly enacting new taxes on the Internet and that electronic commerce using the Internet and other online services must be protected from a host of new, burdensome State and local levies. However, no State has enacted a new tax on the Internet or online activity. Rather, State activity in this area has occurred where States have been requested to determine, often by the industry, whether existing sales and telecommunications tax laws apply to access charges levied by Internet service and online service providers.
    States have also been requested to determine the manner in which State and local sales and use taxes should be applied to goods and services over online networks. Existing taxes are being applied to access charges by about one-third of the States, and application of sales and use taxes to Internet-based electronic commerce is still developing. It's our belief that the concerns of the Internet-based sellers are, at best, premature. This bill appears to be an attempt to prejudge all factual circumstances in a manner which would absolve Internet sellers from tax collection responsibilities which would effectively require that States pursue use collection, use tax collection, directly from the individual consumers.
    Secondly, State and local governments are already addressing the important issues involved in the application of State and local taxes to electronic commerce. The federation, along with other State and local organizations, is working with the National Tax Association on a project whereby State and local governments work with all of the various aspects of the Internet and online industry to develop——
    Mr. NADLER. Excuse me, sir. Could I ask—excuse me, sir. Could I ask you a question at this point before you proceed further, because I think it's directly apropos? In your statement, you just skipped a paragraph in the interest of brevity, I presume, in which you say that, if enacted, H.R. 1054 would effectively preempt a broad range of State and local taxes, including sales, use, and telecommunication excise taxes and Internet and online service access charges; sales or use taxes on most goods and services sold through online services. Now, I asked Senator Wyden before whether the bill do that, and he specifically said it would not. Why do you think it would?
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    Mr. ARNOLD. There are several aspects: One is usually that devils are in the details. It's the language that's being used that talks about direct and indirect taxation. It doesn't—it specifically starts from the premise that, unless it's outlined within the bill, that it's what is allowable rather than what is not disallowed against the Internet, so it kind of switches the responsibility. So, unless you're specifically outlined in there as being acceptable, it's not an acceptable tax.
    And there are many that will argue or would be argued by some, anyway, that they fit under the exemption; that's always the problem when you have an exemption, is then people want to get under the exemption, and will use the language that's in the particular bill, and that's what our concerns are with.
    Mr. NADLER. Thank you. Proceed with your statement, if you will.
    Mr. ARNOLD. Thank you.
    We agree that there are important issues to be addressed. We believe, however, that the appropriate forum for addressing them is this cooperative effort with the industry and not through Federal legislation such as proposed here. Enacting a permanent moratorium would effectively remove any incentive that certain parts of the industry would have to participate in the NTA project, and will be disruptive, if not fatal, to that effort. We would urge you to allow efforts that have been made to bring government and industry together to examine these issues to go forward without enactment of this bill.
    Finally, H.R. 1054, as introduced, has ramifications far beyond the stated purposes of its supporters. It would effectively amount to a permanent tax exemption for substantial parts of the computer, telecommunications, and online industry, since the moratorium has no end date, and further congressional action would be required to lift it. In addition, if enacted, the bill would preempt a broad range of State and local taxes, which we just discussed.
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    The CBO has estimated that enactment of the bill in its current form would cost State and local governments in excess of $50 million of current revenue, which exceeds the threshold of an unfunded mandate on State and local government. The State of Texas alone has estimated its cost in excess of $1 billion.
    In conclusion, Mr. Chairman, without a clear showing of an existing problem, we believe it is inappropriate for Congress to impose a significant unfunded Federal mandate of this sort on State and local governments, particularly, when they're working in good faith to address the legitimate issues raised in the bill. Thank you for this opportunity to testify.
    [The prepared statement of Mr. Arnold follows:]
PREPARED STATEMENT OF STANLEY R. ARNOLD, COMMISSIONER, NEW HAMPSHIRE DEPARTMENT OF REVENUE ADMINISTRATION AND PRESIDENT, FEDERATION OF TAX ADMINISTRATORS

    Mr. Chairman and Members of the Committee, my name is Stanley R. Arnold. I am Commissioner of the New Hampshire Department of Revenue Administration and I am serving this year as President of the Federation of Tax Administrators. The Federation of Tax Administrators is a membership organization dedicated to improving the techniques and standards of state tax administration. The FTA represents the interests of the principal revenue agencies in the fifty states, the District of Columbia, and New York City. On behalf of the Federation, thank you for the opportunity to appear before you today on H.R. 1054, the ''Internet Tax Freedom Act.''
INTRODUCTION

    In a policy resolution adopted at its recent Annual Meeting, the Federation indicated its opposition to H.R. 1054 as introduced for three principal reasons:
1. The bill is based on a the false premise that state and local governments are rapidly enacting ''new taxes on the Internet,'' and that electronic commerce using the Internet and other online services(see footnote 5) must be protected from a host of new, burdensome state and local levies. This is simply not the case. State and local governments are simply responding to a need to deter mine whether and in what manner current sales/use and telecommunications excise taxes apply to Internet access charges and electronic commerce conducted over the Internet. Existing taxes are being applied to access charges in less than a majority of states, and application of sales and use taxes to Internet-based electronic commerce is still developing.
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2. The bill as introduced has ramifications far beyond the stated purposes of its supporters. If enacted, H.R. 1054 would effectively prevent state and local governments from collecting legitimately due and owing taxes on most goods and services sold through online services and would enact permanent tax exemptions from sales/use, property and other excise taxes for substantial portions of the computer sales, telecommunications and software development industries as well as for most private computer networks in existence today.

3. State and local governments are already addressing the primary positive aspect of the bill (from their perspective) which is study and analysis to develop uniform rules to Govern the application of state and local taxes to electronic commerce conducted through the Internet and other online services. State and local governments believe the cooperative government-industry National Tax Association Communications and Electronic Commerce Tax Project (NTA Project) is the appropriate forum to resolve these issues, and the study called for in H.R. 1054 is effectively subsumed within the NTA effort.

EXISTING TAX PRACTICES

    The FTA believes the draft legislation attempts to apply the solution of a permanent state and local tax moratorium when it is unwarranted. The stated purpose of H.R. 1054 to impose a two-year moratorium on special forms of state, local and federal taxation of the Internet and on-line services and commerce conducted over such networks. The Act has been introduced in response to the perception that States and local governments are enacting, or may enact, new levies specific to the Internet and online services which will impose economic and compliance burdens on the industry and thwart its growth.
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    However, no State has enacted a ''new'' tax on the Internet and on-line activity. Rather, State activity in this area has occurred where States have been required to interpret existing sales and telecommunications tax laws to determine whether these statutes apply to access charges levied by Internet service and on-line service providers as well as to determine the manner in which state and local sales and use taxes should be applied to goods and services over online networks.
    In examining the application of existing taxes to the Internet and electronic commerce, it is important to distinguish between the taxation of charges for access to the Internet or online service under the sales/use tax or a telecommunications excise tax and the application of sales/use taxes to goods and services sold over the Internet and online networks.
    Access charges. Forty-six states (including the District of Columbia) levy a retail sales tax. However, thirty-one of these states do not levy the sales tax or another excise tax (e.g., a telecommunications excise tax) on Internet access or on-line service access charges.(see footnote 6) Of the fifteen states that do impose sales or other excise taxes on Internet access and on-line service charges, one state requires the tax to be paid only if the computer server enabling Internet or on-line access is located in the state. Seven states permit Internet access providers and on-line service providers to obtain the underlying telecommunications service that supports their businesses under a ''sale for resale'' tax exemption, so that the only the end consumer is subject to sales tax. Four states require service providers to pay an excise tax or gross receipts tax on the purchase of underlying telecommunications services (which they may or may not pass through to the customer), but do not levy such taxes on the end consumer.

    Three states impose sales taxes on both the service provider and the end consumer. These states view the service provider's purchase of telephone access as a telecommunications transaction subject to sales tax, and the end consumer's purchase of Internet or on-line access is taxable as a computer/data processing service.
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    Sales of Goods and Services. Supporters of H.R. 1054 argue that sellers of goods and services over the Internet and online services might become subject to ales and use tax collection responsibilities in many states and localities by virtue of their ability to market into all states via the Internet or an online service. The U.S. Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) has held that before a seller can be held responsible by a state for the collection of tax on goods and services shipped into a state it must have a ''substantial nexus'' with the taxing state. In the context of mail order, direct sellers this substantial nexus has been held to require some physical presence (directly or through a representative) in the state and contacts that exceed the solicitation of sales via catalogs and the delivery of goods into the state via common carrier.
    Supporters of H.R. 1054 express concern that states may attempt to assert nexus (and thus tax collection responsibilities) because of the ability to access an Internet server from a state or because of the relationships of a seller and an online service provider with a physical presence in the state. They have attempted to overcome such arguments by simply declaring sales via the Internet and online services to be identical to mail order sales, which effectively requires that any tax which is due to be collected directly from the consumer and which absolves the seller of all collection responsibilities. While there are many parallels between selling via the Internet and mail order firms, the comparison is not necessarily perfect and the attempt to define it as such is to effectively exempt many Internet-based sales of content (goods and services) from state and local taxes.(see footnote 7)

    It is our belief that the concerns of Internet-based sellers are, at best, and that the bill is an attempt to prejudge all factual circumstances in favor of the seller. To the best of our knowledge, no State is currently asserting nexus over a seller based on the presence of a server in the state or based on the relationships between an Internet/online service provider and a seller where there are not other forms of physical presence in the taxing state to support a finding of nexus.
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    The issue of responsibility for collection of tax on Internet-based sales is an important one that will turn on the facts of each situation. Moreover, it is one of the prime topics requiring discussion in the NTA Electronic Commerce Project. Until the completion of the project, it is premature to address the issue in federal legislation.
    As a final matter, we would note that fair state and local taxation of interstate and international commerce is entirely consistent with the Commerce Clauses of the U.S. Constitution. Without a clear showing of an existing problem, we believe that it is inappropriate for Congress to impose a significant unfunded federal mandate on the States. In addition, based upon our experience in similar matters, we can only expect that the legislation, if passed, will inevitably create tax inequities and lead to an extended period of litigation to determine its actual impact.
ACTUAL IMPACT OF H.R. 1054

    As noted above, H.R. 1054 has impacts far beyond the stated purpose as that purpose has been expressed by its sponsors. State tax administrators have two primary concerns in this regard.
    Permanent Moratorium. Public discussions have thus far stressed a 2-year moratorium on state and local enactment of ''new taxes'' on the Internet and on-line activity. However, the bill does not contain any language specifying a date certain on which the moratorium would be lifted. Rather, there is simply a requirement for a Commission to report findings to the President within 18 months after the bill's implementation, and for the President to transmit the Administration's recommendations to Congress within two years of the bill's enactment. Any modification of the preemptive moratorium would require further Congressional enactment. We believe that characterizing the legislation as establishing a moratorium is inappropriate in that it suggests a temporary preemption of State and local taxation. There is no date when 103 is scheduled to sunset, and, further, the delivery of the contemplated federal study recommendations does not require Congress to remove 103. Further even if a sunset provision were included, emerging businesses will rely on the federal moratorium. Those enterprises that grow successfully will inevitably and understandably seek to preserve a provision that they view as beneficial to their operations.
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    Preemption of Existing Taxes. Public discussions of the bill also indicate an intent not to preempt existing taxes, but rather only to limit new levies specifically imposed on the Internet and on-line services. As introduced, there is no language in the bill to ''grandfather'' or limit the effect of the bill to new taxes. Thus, our analysis would be that existing taxes which are implicated by the bill would be preempted.
    It is our further analysis that the specific language of the bill would preempt a broad range of sales, excise, property and payroll taxes not only on Internet and online service providers, but on telecommunications companies, many firms and individuals using computers in their ''every-day business,'' and major segments of the software development industry. It could also potentially affect taxation of a broad range of transactions processed over ''interactive computer services.'' As such, the bill as introduced holds the potential to significantly disrupt state and local taxation in a number of states. The basis for this assessment is detailed below.
    There are very few segments of industry that are not moving to provide goods and services through computer-based telecommunications networks that are clearly within the contemplation of the proposed legislation. If passed as introduced, this legislation potentially would exempt a wide range of industries from State and local taxation. Every good and service that is capable of being sold or delivered through a computer-based telecommunications network could wind up exempt from State and local taxation.
    Reason for the Broad Impact. Our conclusion regarding the impacts of H.R. 1054 stem from the breadth of the limitation on state and local taxes contained in 3 and the scope of the definition of ''interactive computer service'' used in the bill. Section 3 would prohibit any state or local government from attempting to tax ''directly or indirectly'' [emphasis added] the Internet or interactive computer services or the use of the Internet or interactive computer services.(see footnote 8) The bill further defines ''interactive computer service'' as:
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Any information service, system, or access software provider that provides or enables computer access by multiple users to computer server.

    Access software provider is then defined as:
A provider of software (including client or server software), or enabling tools that perform a number of extremely common software functions such as transmit, receive, [or] display content.(see footnote 9)

    In short, the bill prohibits the direct or indirect taxation of on-line services and networked computers or the use of those services and networks as well as on the taxation of a broad range of software providers.
    Preemption of Taxes on Online Services and Transactions. Based upon a plain reading of these provisions, we believe the bill, as introduced, clearly preempts a broad range of state and local taxes specifically on online services and transactions. These include:
The bill clearly preempts sales and telecommunication excise taxes on Internet access charges as wed as charges for access to other on-line computer networks and services, such as America On-line, etc. This would fall within the definition of an ''interactive computer service.

Sales and excise taxes on charges for telecommunications networks and services that are used by businesses and others to connect various computer systems into an internal communications network. Examples would include corporate intranets, proprietary computer networks and the like.

The bill preempts sales and use taxes on content provided via computer networks, including the Internet and proprietary on-line services, as they fall with in the definition of an ''interactive computer service.'' This would include charges for the use of Lexis/Nexis, CCH On-line, real estate multiple listing services, stock quotations, and any other on-line data base for which a subscription or access fee for using the content is made or for which there are specific charges for the content accessed. This has a potentially broad impact among the states given that a number of them have statutes taxing ''information services,'' ''computer services'' or ''data processing services'' which have been interpreted to cover such on-line services. These include Texas, Connecticut, Ohio and others. The most recent FTA report Sales Taxation of Services indicates that 14 states impose the sales tax on computer information services and 11 states impose the tax on computer and data processing services.
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The bill would also preempt sales and use taxes on services offered by Internet providers and others which services are designed to enable individuals or businesses to be present on the Internet, e.g., Web page design or hosting services, E-mail services and the like.

    Property Taxes. Beyond the preemption of taxes on the various on-line services and charges, the bin, as written, seems clearly to preempt State and local property taxes or other fees imposed on providers of Internet access, the telecommunications and computer hardware and software that actually comprise the Internet, and the hardware and software used in providing other on-line computer services. The moratorium applies to all types of state and local taxes that are imposed ''directly or indirectly'' on an interactive computer service (unless specifically excepted), and the definition of''interactive computer service'' includes the service provider. Given the ''directly or indirectly'' language, the imposition of any property tax on the real or personal property of an interactive computer service provider (regardless of whether it may be tangential to providing the service) is likely affected by the bill.
    Software Developers. The bill also appears to prohibit nearly all non-income taxation of a wide range of software providers. The definition of ''interactive computer service'' includes an ''access software provider'' which is in turn defined as ''a provider of software (including client or server software), or enabling tools that . . . transmit, receive, display . . . search'' content. In short, the bill constitutes a flat prohibition on ''direct or indirect'' taxation of nearly an software providers except for the excepted income and business license taxes. This would also seem to encompass the imposition of payroll taxes such as unemployment insurance and workers' compensation levies on such enterprises.
    General Computer Networks. As noted above, the definition of ''interactive computer service'' includes providers of ''any information service, system, or access software that provides or enables computer access by multiple users to a computer server . . . .'' The breadth of this definition encompasses any entity that maintains or provides access to any type of network of computers without regard to whether they are used in electronic commerce, including even ''run-of-the-mill'' local area net works, i.e., they enable access by multiple users to a computer server. The Question is then, what taxes or fees applied to such providers are prohibited by the bin, given the ''directly or indirectly'' language in 3. Property taxes and sales and use taxes on the hardware and software in such networks would seem to be prohibited. Further, property taxes, sales taxes and fees assessed imposed on other parts of businesses (or individuals) using such networks would also be implicated because of the ''directly or indirectly'' language.
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    Telecommunications Firms. In addition, the bill potentially exempts the imposition of sales, use, excise and property taxes on major portions of all telecommunications companies in the U.S.. Telecommunications companies certainly provide a portion of the network services for the Internet itself, they also provide a system or service that ''enables access by multiple users to a computer server'' and thus qualify as an ''interactive computer service.'' As a result, the ability to impose sales and property taxes and other fees on telecommunications or telecommunication companies is brought into question. Depending on the interpretation given to the prohibition on ''directly or indirectly'' taxing interactive computer services it could be interpreted to encompass payroll-related unemployment insurance and workers' compensation taxes on such companies as well as all software development companies.
    Further Potential Preemptions. In the same vein, the bill could extend to a preemption of sales and use taxes on transactions processed over computer networks. Take, for example, credit card approval networks and other networks of company computers used to process consumer transactions. These networks, by which merchants obtain approval of credit card sales, certainly fall within the bill's definition of ''interactive computer services.'' Taxes associated with these transactions, such as sales taxes, state motor fuels excise taxes and the like, could be interpreted to fall within the scope of ''indirect'' taxes on the use of these services, and are thus arguably preempted.
    Franchise Taxes. While the bill preserves the state and local apportioned net income taxes, it does not provide for other types of levies, such as a franchise tax measured by capital. The protections afforded to license taxes does not address other taxes Imposed by state and local authorities which cannot be characterized as ''license'' taxes, and those levies that cannot be labeled ''taxes'' at all.
    Impact on General Sales and Use Taxes. The bill attempts to preserve state and local sales and use taxes imposed on transactions ''effected by', using interactive computer services as long as the tax is imposed and collected in the same manner as generally applicable to mail order, phone sales and other remote selling. As discussed above, the Supreme Court has determined that mail order and other remote sellers must have a substantial nexus with a state before they can be required to collect use taxes on goods shipped into a state. What this provision does is to settle in federal law any nexus issues that may arise with Internet and on-line sellers. It would effectively allow many sellers to establish an entity to make sales via the Internet and not be required to collect tax on such sales. While in many ways selling via the Internet and on-line services may be analogous to direct marketing, this is not always the case. In particular, there may be business relationships between a seller and an on-line provider that would fall within current standards for nexus. A state would not be able to apply those standards in the face of the bill.
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    Inclusion of the ''obligation to collect a tax'' within the meaning of a tax itself also presents issues for states. In the use tax collection cases, one of the reasons the Supreme Court has held against the states is that the burden of compliance was too great given the presence of the seller in the state. It has specifically suggested that solving the compliance issues could produce different results. If this bill is passed as introduced, taxpayers might argue that even a substantial reduction in the compliance burden would not allow the state to impose a collection responsibility on a remote seller operating an ''interactive computer service.''
    We recognize that the draft attempts to preserve traditional sales taxation of goods and services sold electronically. It is our judgment that that provision of the draft—and any other comparable language—is inherently incapable of achieving Congress' intended result of preserving traditional sales taxation. At best, States and industry will engage in protracted litigation as they wrangle over the question of which taxpayers are included within the exemption's scope, and, at worst, will produce immediate and unintended tax exemptions in the several States based on existing precedents.
    Summary. In short, the bill as written would preempt state and local transaction taxes on online services and transactions as well as limiting or preempting other taxes (e.g., property and sales) on a wide range of online service, computer, telecommunications, and software development firms. It also has the potential to substantially disrupt existing sales and use taxes on a wide range of transactions. This broad and likely unintended impact is attributable to the breadth of the prohibition on state and local taxation contained in 3 of the bill and the breadth of the definition of ''interactive computer service'' contained in the bill.
NATIONAL TAX ASSOCIATION COMMUNICATIONS AND ELECTRONIC COMMERCE TAX PROJECT

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    The bill calls for the President to consult with various parties and to issue a report with recommendations addressing the issues raised by state and local taxation of electronic commerce within two years. State and local governments believe a better forum for the discussion of these issues is a cooperative effort currently sponsored by state and local governments and various parts of the interactive service information technology and telecommunications industry under the auspices of the National Tax Association.
    The National Tax Association Communications and Electronic Commerce Project was formed in November 1996 for the purpose of finding fair and equitable solutions to the difficulties surrounding the state and local taxation of electronic commerce. The specific mandate of the Project requires it to develop uniform rules on taxing electronic commerce that are technologically neutral, with an eye towards an building an efficient system of taxation. The project will be guided by a Steering Committee consisting of representatives of state and local governments, the various segments of the online industry and various academicians. The Project should substantially complete its work in the next 18 months.
    We would point out that the NTA Project is consistent with the views of the Clinton Administration as expressed in the Framework for Global Electronic Commerce released on July 1, 1997. In the report, the Administration endorsed the idea that a uniform set of rules to govern the application of state and local taxes to electronic commerce should be developed through a voluntary, cooperative effort among government and industry.
    The most serious concern with the proposed legislation is that it will effectively forestall the forward-looking efforts currently in progress by state and local officials and industry to address issues that are inherent in application of State and local taxes to the Internet and on-line services as well as to examine and modernize outdated state and local tax laws affecting telecommunications and electronic commerce. This effort by state tax officials is a direct response to concerns the industry has outlined in various white papers.(see footnote 10) This cooperative effort, as well as the unilateral efforts of the individual States themselves, should continue. Premature consideration by Congress of preemptive action in this area will only create a negative and adversarial environment that will reduce the ability of the participants to reach mutually acceptable solutions to this emerging commerce. The best action that Congress could take to support a cooperative State-industry solution to these issues would be to table the bill indefinitely.
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CONCLUSION

    As state tax officials, we are keenly aware of the need for sensitivity regarding the taxation of Internet and on-line activity. However, in light of the disruptive effect this legislation as introduced would have on state and local tax administration and the ongoing efforts of government and industry to resolve these issues in a mutually beneficial manner, we believe that Congressional action at this time is unwarranted. We respectfully request that you not proceed with the ''Internet Tax Freedom Act'' as it has been introduced at this time as a means of showing your support for the cooperative efforts of States and industry to find fair and equitable tax solutions to these important issues.
    Thank you for the opportunity to appear before you today. We stand ready to work with you and your staff on this matter in any way you consider desirable.

    Mr. NADLER. Thank you.
    Mr. FOLEY.
STATEMENT OF HOWARD P. FOLEY, PRESIDENT, MASSACHUSETTS HIGH TECHNOLOGY COUNCIL

    Mr. FOLEY. Mr. Chairman, members of the committee, for the record, my name is Howard Foley. I'm the president of the Massachusetts High Technology Council. I'm also an appointee by Governor Weld to a special commission that we've established in the Commonwealth to study this issue. We'll be doing a lot of similar things, hopefully, that will go on here at the national level, assuming what the President has indicated was appropriate, and what's contained in this bill will also be achieved. So I think we're working very much in concert with what's going on down here.
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    We wish to be recorded in favor of H.R. 1054, the Internet Tax Freedom Act. We thank Congressman Delahunt from Massachusetts for being a cosponsor. We also support Senator Wyden's bill, Senate 442. We know there are some differences between the two versions particularly as it relates to the FCC that you Chairman Gekas asked questions about earlier. That bill is also cosponsored by one of our Senators, Senator Kerry.
    We're also aware of the discussions that are going on between the sponsors of the two bills, some of the tightening provisions that are being considered, and, as I heard both Congressman Cox and Senator Wyden say earlier, they're relatively optimistic that there will be agreement on some of these perfecting amendments.
    To summarize what I have presented for the committee's consideration in writing, I'd like to say three things, basically: (1) The first thing is that 17 days ago, we believe what the Clinton administration did was very, very helpful, and should provide some broad context for specific action of Congress to come forward and hopefully achieve many of the objectives that were outlined in the President's Framework. (2) We believe that enacting this specific piece of legislation essentially implements to a great extent what President Clinton has indicated is appropriate. (3) We also feel that in States like the Commonwealth of Massachusetts we have created some of our own problems, and we're going to attempt to deal with them through legislative efforts, and I'd like to comment a little bit on those later.
    In terms of what the Clinton administration did, I'd just like to touch on a couple of points: First of all, one of the five guiding principles that they articulated, ''Government should avoid undue restrictions on electronic commerce. In general, parties should be able to enter into legitimate agreements to buy and sell products, services, across the Internet with minimal government involvement or intervention. Government should refrain from imposing new and unnecessary regulations, bureaucratic procedures, new taxes and tariffs on commercial activities that take place via the Internet.''
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    And among the President's nine recommendations, the first one he pointed out dealt with tariffs and taxation. He said the Internet should be declared a tariff-free environment, no new taxes should be imposed on the Internet, there's a great opportunity for commercial activity, et cetera, et cetera.
    We believe that the Cox bill, H.R. 1054, can help realize many of the benefits and facilitate the growth of the electronic commerce industry that the President and his administration are certainly very interested in.
    With regard to specific provisions of the Cox bill, I think in the findings section, which I understand is also being reworked, our initial feeling on the eight provisions which summarize, I think, quite adequately, what we would characterize as Internet reality. And I think the Ireland presentation we saw earlier was certainly instructive in that regard.
    This whole business of the global transmission and how that's all working, to the endless downside potential of problems which would come from inconsistent and unadministratable nexus, definition and administration problems—that's all on the downside to the upside potential of an infant industry that has tremendous prospects for not only this country, but for many people who live around the world.
    In the context of the moratorium, we think that it is an appropriate strategy and an appropriate feature of this bill, whether it's 2 years or 3 years or 4 years or unspecified. I understand there are arguments on both sides and there are concerns on both sides. I think the moratorium concept is, ''preempt'' before, taxing jurisdictions like Mr. O'Neill suggested do something to tax the Internet.
    I don't think the intent of this bill is based on the assumption that they're intentionally going to do something that's stupid or counterproductive, but, inadvertently, because of the complexity of this, we want to make sure that we don't do something like that.
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    In terms of what is going on right now in Massachusetts, we passed a law in 1990 that was an extension of a sales tax on services, and there are literally hundreds of new services that were taxed, and when Governor Weld came in he repealed that tax, except for certain taxes that related to telecommunication transactions.
    Since then there has been an interpretation by our Department of Revenue that extends the language for telecommunication tax-related matters into Internet online service, Web posting—those different services. So right now we're passing a bill to clarify that it doesn't.
    Mr. GEKAS. We thank the gentleman, and we'll turn to Professor Hellerstein, and we'll elucidate, I think, on some of your propositions during the question and answer period.
    Professor Hellerstein.
STATEMENT OF PROF. WALTER HELLERSTEIN, UNIVERSITY OF GEORGIA, SCHOOL OF LAW

    Mr. HELLERSTEIN. I appreciate the subcommittee's invitation to testify today on H.R. 1054. I do not appear here on behalf of any client, public or private, and the views I'm expressing here today reflect my best independent professional judgment.
    I wish to make it clear at the outset that I'm not here to support or to oppose H.R. 1054. The subcommittee has already heard ample testimony, both in support and opposition to H.R. 1054, and I have nothing to add to the general debate over the merits of congressional legislation limiting State taxation of the Internet.
    Instead I would like to focus on three issues the bill raised, issues to which I believe the subcommittee should give serious thought in determining whether to approve H.R. 1054 in its present form.
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    First and foremost, I would urge the subcommittee to pay close attention to the precise language of H.R. 1054, in light of what may be unintended consequences of the legislation. Second, I would urge the subcommittee to consider carefully whether it intends, through H.R. 1054, to enact, I quote, ''a moratorium'' on State taxation of the Internet as that term is commonly understood and, if so, whether H.R. 1054, if enacted into law, constitutes such a moratorium.
    Third, I would encourage the subcommittee to enlist those with expertise and experience in the field of State and local taxation in establishing the consultative group charged with developing policy recommendations for congressional legislation in this domain. I would like to elaborate briefly on each of these points.
    Incidentally, it is my understanding that changes to be proposed in the markup of H.R. 1054, as well as changes to which Senator Wyden alluded in his testimony earlier today, reflect some of the suggestions I have made in my testimony, which is directed to H.R. 1054 as it was provided to me. If, and to the extent that, this is so, I would obviously support those proposed changes. But such changes have not been made available to me, and my testimony is not directed to them.
    Let me start with the point about unintended consequences. In contrast to areas in which Congress has considerable legislative experience and expertise—for example, the Federal income tax—Congress has rarely legislated in the State tax field. Congress' relative unfamiliarity with State and local taxing regimes creates the risk that when Congress does legislate in this area, it may bring about consequences that it did not intend—and I give an example of that in my written testimony that I won't burden you with here.
    Although I enumerate several examples of what may be the unintended consequences of H.R. 1054 in my written testimony, let me focus on just one for the moment. Does the subcommittee truly intend to extend the prohibition of H.R. 1054 to, quote, ''any tax or fee directly or indirectly on interactive computer services or the use of interactive computer services?''
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    To be sure, the subcommittee has borrowed the definition of, quote, ''interactive computer services'' from recent amendments to the Federal Communications Act. These definitions embrace an enormous range of computer-related activity, so long as it, quote, ''provides or enables computer access by multiple users to a computer server.'' '
    In preparing my testimony, for example, I used a, quote, ''system'' that, quote, ''provides or enables access by multiple users to a computer server,'' namely, the University of Georgia network server. Well no one, so far as I know, was attempting to tax the system. Yet there is nothing particularly unusual or Internet-related about what I was doing.
    I'm not suggesting that the subcommittee should or should not extend the bar of H.R. 1054 to such services. I am suggesting only that the subcommittee be aware of precisely how far this legislation extends, and to clarify its intent to reach all of the transactions that it appears, in my judgment, to include.
    Second, H.R. 1054 purports to impose a moratorium on the imposition of taxes on Internet or interactive computer services while a consultative group examines the problem and develops recommendations for a consistent and coherent national policy regarding taxation of Internet activity. While we can quibble over the precise definition of a moratorium, there is little question that in its usual usage, it connotes a temporary delay or suspension, rather than a permanent one.
    The language of H.R. 1054, however, imposes no temporal limits on its restraint on State taxing authority. Perhaps that is precisely what the subcommittee intends, and if so, the language of H.R. 1054 accomplishes its intended purpose.
    If, on the other hand, the subcommittee intends that its moratorium on State taxes should, in fact, be temporary, it should say so explicitly in H.R. 1054. Otherwise the moratorium may well become a permanent fixture in the framework of Federal legislation limiting State taxing authority.
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    Third, while in general I have refrained from either supporting or opposing H.R. 1054 on the merits, I wholeheartedly endorse section 4 of the bill that establishes a consultative group to examine the complex problems raised by taxation of the Internet and interactive computer services, and to submit appropriate policy recommendations to solve these problems.
    In the subcommittee's consideration of the participants in this consultative group, however, I would strongly urge—and I see the red light; if this were the Supreme Court, I would say, ''Thank you, Mr. Chief Justice.''
    Mr. GEKAS. No, you may proceed.
    Mr. HELLERSTEIN. In the subcommittee's consideration, I would strongly urge it to enlist the participation of those with expertise and experience with regard to State taxation.
    Specifically, I would urge the subcommittee to work with the National Tax Association-sponsored Committee on Taxation of Telecommunications and Electronic Commerce, which includes a broad spectrum of interested and knowledgeable private and public sector parties who are currently engaged in fashioning a solution for the complex problems to which H.R. 1054 is addressed.
    Let me close with a parting word that I always give to my teenage kids as they rush out the door into their cars: ''Please be careful.'' I would urge you, whatever you do, to please be careful. You are dealing with extremely complex issues, and many conflicting and legitimate concerns lie in the balance. Legislation that does not take careful account of all of these concerns may do more harm than good.
    Thank you very much.
    [The prepared statement of Mr. Hellerstein follows:]
PREPARED STATEMENT OF PROF. WALTER HELLERSTEIN, UNIVERSITY OF GEORGIA, SCHOOL OF LAW
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    I am Walter Hellerstein, Professor of Law at the University of Georgia and a partner in the law firm of Sutherland, Asbill & Brennan. I have devoted most of my professional life to the study and practice of state and local taxation, and, in recent years, I have devoted particular attention to state and local taxation of telecommunications and electronic commerce. Pursuant to House Rule XI, clause 2(g)(4), I have attached to this statement a curriculum vitae. I have also attached to this statement two recent articles I have written addressed specifically to issues raised by state and local taxation of Internet-related activities. In accord with House Rule XI, clause 2(g)(4), I hereby declare that neither I nor any entity I represent at the hearings(see footnote 11) have received any federal grant, contract, or subcontract in the current or preceding two fiscal years.

    I am honored by Chairman Hyde's invitation to appear before the Subcommittee and to testify on H.R. 1054, ''the Internet Tax Freedom Act.'' I do not appear here on behalf of any client, public or private, and the views I am expressing here today reflect my best, independent professional judgment.
    I wish to make it clear at the outset that I am not here to support or to oppose H.R. 1054. The Subcommittee will have heard ample testimony both in support and in opposition to H.R. 1054, and I have nothing to add to the general debate over the merits of congressional legislation limiting state taxation of the Internet. Instead, I would like to focus on three issues that the bill raises—issues to which I believe the Subcommittee should give serious thought in determining whether to approve H.R. 1054 in its present form.
    First, and foremost, I would urge the Subcommittee to pay close attention to the precise language of H.R. 1054 in light of what may be unintended consequences of the legislation. Second, I would urge the Subcommittee to consider carefully whether it intends through H.R. 1054 to enact a ''moratorium'' on state taxation of the Internet, as that term is commonly understood, and, if so, whether H.R. 1054, if enacted into law, would constitute such a moratorium. Third, I would encourage the Subcommittee to enlist those with expertise and experience in the field of state and local taxation in establishing the consultative group charged with developing policy recommendations for congressional legislation in this domain. I elaborate on each of these three points below.
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1. ANY CONGRESSIONAL LEGISLATION LIMITING STATE TAXATION OF
THE INTERNET SHOULD BE CAREFULLY CRAFTED TO AVOID UNINTENDED CONSEQUENCES

    In contrast to areas in which Congress has considerable legislative experience and expertise (e.g., the federal income tax), Congress has rarely legislated in state tax field.(see footnote 12) Congress' relative unfamiliarity with state and local taxing regimes creates the risk that when Congress does legislate in this area, it may bring about consequences that it did not intend.

    To illustrate the problem, consider one recent piece of federal legislation designed to limit state tax power. In Oklahoma Tax Commission v. Jefferson Lines, Inc.,(see footnote 13) the U.S. Supreme Court upheld an Oklahoma sales tax on the full sales price of bus tickets for interstate trips. Eight months after the Court's decision, Congress enacted the following legislation in an apparent effort to overrule Jefferson Lines:

A State or political subdivision thereof may not collect or levy a tax, fee, head charge, or other charge on (1) a passenger traveling in interstate commerce by motor carrier; (2) the transportation of a passenger traveling in interstate commerce by motor carrier; (3) the sale of passenger transportation in interstate commerce by motor carrier; or (4) the gross receipts derived from such transportation.(see footnote 14)

    While Congress thus overturned the particular result in Jefferson Lines, it arguably did much more. Jefferson Lines involved taxes on consumer purchases of bus tickets. Read literally, the legislation preempts not only retail sales taxes on interstate passenger transportation but also ''a tax . . . on . . . the gross receipts derived from such transportation.'' Under this language, an apportioned gross receipts tax imposed on a company providing inter state transportation—a type of levy that has long been regarded as constitutionally acceptable(see footnote 15) and whose propriety none of the parties in Jefferson Lines questioned—apparently is barred.(see footnote 16) I doubt Congress intended these consequences.
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    In my judgment, H.R. 1054 raises similar issues of unintended consequences. Turning to the specific terms of H.R. 1054, I would like to raise the question whether the Subcommittee really intends to bring about certain consequences that arguably flow from the bill's language.
    Does the Subcommittee intend to preempt property taxes o
nthose who use the Internet or provide interactive computer services? H.R. 1054 preserves the states' authority to impose income taxes and certain business license and sales or use taxes, but says nothing about preserving their authority to impose property taxes. A broad—perhaps an overbroad—reading of the preemptive language barring ''any tax or fee . . . indirectly'' imposed on the Internet or interactive services (or the use thereof) arguably could extend to taxes on property employed in connection with the use or provision of Internet-related services. For example, a creative lawyer might contend that a property tax on a computer server employed by an Internet service provider (ISP) is a tax ''indirectly'' imposed on the use of the Internet, especially if those taxes are passed on to the ISP's customers in the form of higher Internet access charges. If the Subcommittee does not intend to preempt such taxes, it should say so in H.R. 1054.

    Does the Subcommittee intend to preempt gross receipts taxes in lieu of property taxes on those who use the Internet or provide interactive computer services? Several states impose gross receipts taxes on telecommunications companies in lieu of the property taxes that would ordinarily be imposed on the property of such companies.(see footnote 17) If such taxes are not deemed to be ''business license taxes''(see footnote 18) (and there is clearly room for argument that gross receipts taxes imposed in lieu of property taxes do not constitute ''business license taxes''), there is at least a plausible claim that a taxpayer can make along the lines suggested in the preceding paragraph that Congress has preempted such taxes, should it enact H.R. 1054 in its present form. If the Subcommittee does not intend to preempt such taxes, it should say so in H.R. 1054.
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    Does the Subcommittee intend to preempt taxes on Internet or interactive computer services that are taxable under existing (and, in many instances, long-standing) state taxes on telecommunications services, information services, or data processing services?(see footnote 19) For example, many states impose taxes on charges imposed for access to the Internet, either as a telecommunications service, computer service, or information service.(see footnote 20) While Section 3(a) of the bill appears to prohibit such taxes, Section 3(b) suggests such taxes may be still be imposed if they are ''the same'' as the tax imposed on other transactions ''effected by mail order, telephone or other remote means'' and if the obligation to collect the tax ''is imposed on the same person or entity as in the case of sales or other transactions effected by mail order, telephone or other remote means.''

    The scope of this ''savings'' clause, however, is unclear. Suppose the tax is ''the same'' not as a tax on ''sales or interstate transactions'' effected by ''remote means'' but rather as a tax on ''sales'' effected by ''proximate'' means, e.g. a tax on services provided by a local telecommunications system access provider. Is the tax on Internet access still preempted? Or suppose the state imposes a tax on a transaction effected by ''remote means'' (e.g., an interstate telephone call) but relies on a local exchange carrier to collect the tax on the call. Is the local exchange carrier ''the same person or entity'' as the on-line service provider or the Internet service provider? These are important questions to which H.R. 1054 provides no ready answers. The Subcommittee should clarify its intent with regard to these questions in language that explicitly addresses them.
    H.R. 1054 also raises thorny definitional questions. The savings clause preserves state ''taxes imposed on and measured by net income derived from the Internet or interactive computer services.'' Does this mean that H.R. 1054 does not preserve such taxes imposed on a corporate franchise and measured by net income?(see footnote 21) Or was the use of the conjunction ''and'' rather than ''or'' merely a loose use of language?
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    H.R. 1054 does not affect states' power to impose fairly apportioned ''business license taxes'' on businesses with a business location in the taxing jurisdiction. Does a ''business license tax'' include a corporate privilege or franchise tax that many states impose? Or is it limited to a tax on a true ''license'' to do business, such as the business occupation taxes imposed by many states and localities? Without clarification of this definition, this provision could be construed to have a much narrower scope than the Subcommittee may have intended.
    And does the Subcommittee truly intend to extend the prohibition of H.R. 1054 to ''any tax or fee directly or indirectly on . . . interactive computer services . . . or the use of . . . interactive computer services.'' To be sure, the Subcommittee has borrowed the definition of ''interactive computer services'' from 47 U.S.C. 230(e)(2).(see footnote 22) These definitions embrace an enormous range of computer-related activity as long as it ''provides or enables computer access by multiple users to a computer server.''

47 U.S.C. 230(e)(3) in turn defines an ''access software provider'' as ''a provider of software (including client or server software), or enabling tools that do one or more of the following: (A) Filter, screen, allow, or disallow content, (B) Pick, choose, analyze, or digest content, and (C) Transmit, receive, display, forward, cache, search, subset, organize, reorganize, or translate content.

    Right now, for example, in preparing this testimony, I am using a ''system'' that ''provides or enables access by multiple users to a computer server,'' namely, the University of Georgia network server. While no one (so far as I know) is attempting to tax this system, there is nothing particularly unusual or Internet-related about what I am doing. Again, I am not suggesting that the Subcommittee should (or should not) extend the bar of H.R. 1054 to such services. I am suggesting only that the Subcommittee be aware of precisely how far this legislation extends and to clarify its intent to reach all of the transactions that it appears, in my judgment, to include.
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2. IF THE SUBCOMMITTEE INTENDS TO IMPOSE A ''MORATORIUMS'' IN THE SENSE OF A TEMPORARY SUSPENSION—AS DISTINGUISHED FROM A PERMANENT PROHIBITION OF—STATE TAXES ON THE INTERNET AND INTERACTIVE COMPUTER SERVICES, IT SHOULD MAKE ITS INTENTION CLEAR IN H.R. 1054

    H.R. 1054 purports to impose a ''moratorium'' on the imposition of taxes on Internet or interactive computer services while a consultative group examines the problem and develops recommendations for a ''consistent and coherent national policy regarding taxation of Internet activity.'' While we can quibble over the precise definition of a ''moratorium,''(see footnote 23) there is little question that in its usual usage it connotes a temporary delay or suspension rather than a permanent one. And, in light of H.R. 1054s explicit establishment of a consultative group to develop broader recommendations for a coherent solution raised by state taxation of the Internet and interactive computer services, one can surmise that the drafters of H.R. 1054 had in mind a temporary rather than a permanent limitation on the states' power to tax such services.

    The language of H.R. 1054, however, imposes no temporal limits on its restraint of state taxing authority. Perhaps that is precisely what the Subcommittee intends and, if so, the language of H.R. 1054 accomplishes its intended purpose. If, on the other hand, the Subcommittee intends that its ''moratorium'' on state taxes should in fact be temporary, it should say so explicitly in H.R. 1054. Otherwise the ''moratorium'' may well be become a permanent fixture in the framework of federal legislation limiting state taxing authority.
    I would again turn to our experience with other federal legislation limiting state power as evidence that the issue I am raising should be taken seriously. In 1959, the U.S. Supreme Court held in Northwestern States Portland Cement Co. v. Minnesota(see footnote 24) that a state could constitutionally impose a nondiscriminatory, fairly apportioned net income tax on a foreign corporation engaged exclusively in interstate commerce in the taxing state. In response to this decision, Congress enacted a ''stopgap measured''(see footnote 25) designed to limit state taxing authority in limited circumstances analogous to those at issue in Northwestern.(see footnote 26) At the same time Congress, established a special subcommittee to consider broadly the problems of state taxation of interstate commerce and to propose remedial legislation.(see footnote 27) After five years of labor, the congressional subcommittee produced the most extensive study of virtually all major aspects of state taxation in our history.(see footnote 28) Yet no legislation ever emerged from Congress as a result of this study. Meanwhile, the ''stopgap measure,'' popularly known as Public Law 86–272,(see footnote 29) enacted nearly 40 years ago, remains a permanent feature of the state tax landscape.
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    My point, in the end, is a simple one. If the Subcommittee wishes to make the legislation it is contemplating in H.R. 1054 temporary, it should so provide explicitly. Otherwise the law of inertia may operate to make it permanent. Moreover, the real possibility that the legislation that Congress enacts will be on the books for some time reinforces my first point: that the Subcommittee should take considerable care with the precise implications of the legislation it is contemplating because the legislation may well outlive its current life expectancy.
3. THE SUBCOMMITTEE SHOULD ENLIST THOSE WITH EXPERTISE AND EXPERIENCE IN THE FIELD OF STATE AND LOCAL TAXATION IN ESTABLISHING THE CONSULTATIVE GROUP CHARGED WITH DEVELOPING POLICY RECOMMENDATIONS FOR CONGRESSIONAL LEGISLATION REGARDING STATE TAXATION OF THE INTERNET AND INTERACTIVE COMPUTER SERVICES

    My third point is brief. While in general I have refrained from either supporting or opposing H.R. 1054 on the merits, I wholeheartedly endorse Section 4 of the bill that establishes a consultative group to examine the complex problems raised by taxation of the Internet and interactive computer services and to submit appropriate policy recommendations to solve these problems. In the Subcommittee's consideration of the participants in this consultative group, however, I would strongly urge it to enlist the participation of those with expertise and experience with regard to state taxation.
    As I mentioned at the outset of my testimony, Congress lacks the depth of expertise in this area that it has in many of the other areas in which it traditionally legislates. Therefore it is particularly important for Congress to include those with the requisite expertise and experience in the deliberative process. In particular, the Subcommittee may wish to work with the National Tax Association sponsored Committee on Taxation of Telecommunications and Electronic Commerce, which includes a broad spectrum of interested and knowledgeable private and public sector parties who are currently engaged in fashioning a solution to the complex problems to which H.R. 1054 is addressed.
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CONCLUSION

    Let me close with the parting words I always leave with my teenage children as they rush out the door into their cars: please be careful. I would urge you—whatever you do—please to be careful. You are dealing with extremely complex issues, and many conflicting and legitimate concerns lie in the balance. Legislation that does not take careful account of all of these concerns may do more harm than good.

INSERT OFFSET RING FOLIOS 3 TO 20 HERE

    Mr. GEKAS. Thank you, Professor Hellerstein. My first question comes to you because of your last group of recommendations or comments.
    The bill calls for the Secretaries of the Treasury, Commerce, or State, in consultation with the appropriate committees of the Congress, consumer and business groups, States and political subdivisions thereof, to be this consultative group to make recommendations to the Congress and to the President, et cetera.
    It was my thought, on first conceiving this, that we ought to have the Attorney General included in there, only because the main reason that it comes to the Judiciary Committee is because of the constitutional questions that arise—interstate commerce, et cetera—and I thought that perhaps the Attorney General should be included in this consultative group. Do you have any strong feelings for or against that addendum—possible addendum?
    Mr. HELLERSTEIN. I certainly couldn't see any objections to it, except for the idea that the more people that are in the group, sometimes the less workable it becomes. But I would certainly think the Attorney General would be an appropriate party to this.
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    Mr. GEKAS. Well, I'd put her in and cut somebody else out. But I just wanted to make the point for the record and ask you to think about it. If we do create this group that the Attorney General would have salient features to present via the constitutional questions that arise.
    Mr. O'Neill, isn't the fact that this group is being formed by virtue of this legislation, a partial answer to you? And buttressing what Ms. Houghton said about the consultative methodology that we're going to employ here that we're not going to wander off and do mandates like you fear, but rather declare time out, as some have said, and then work through with our groups to arrive to at some solution?
    Mr. O'NEILL. Let me respond to both halves of that question, because there are two halves. The mandate is here; you'll be doing that whether you have the study group afterwards or not. As soon as you—without a grandfathering clause, because there isn't any—take money out of local governments' and State governments' pockets, we've got to find a way to make it up. That's a mandate, and you're preempting our right to do something that we're already doing.
    So let me make that clear. There is no grandfather clause in here.
    Mr. GEKAS. Well what do you fear that you've already levied in Philadelphia that would be eliminated here?
    Mr. O'NEILL. I mean, in Philadelphia—and I checked with our finance department—they're looking at—and as I say, it's very complex with our sales tax; we get a piece of the State sales tax. The gentleman mentioned that in applying certain taxes that are already on the books—no new Internet taxes—State and local governments throughout the country are clearly collecting at least $50 million, I believe.
    The $1 million sounds too small, but, anyway, it triggers the point of order. The CBO has already established that. That's a mandate; there's no question about it.
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    Mr. GEKAS. I'm asking, does city council impose a tax?
    Mr. O'NEILL. No, I don't believes so. And anyway I probably would never vote for it, but I don't want to have the Congress remove my right to vote for it. And I think that is very, very important here. Let's take the example—you just came up with a very difficult balanced budget by the year 2002. As difficult as it is, that stream of revenue that's coming in helped you greatly.
    Something as simple as entitlement reform, you haven't gotten to yet. I'm kidding when I say that, but it's very difficult, what you've done. If somebody were to come in and say, ''We're taking $50 billion out of what CBO has said you're going to collect. Find another $50 billion.'' That's what you're doing to us here in a clear analogy.
    Mr. GEKAS.I want to know if this legislation is going to harm the revenue stream already flowing into the tax——
    Mr. O'NEILL. Yes, it is.
    Mr. GEKAS [continuing]. Collections of the city council.
    Mr. O'NEILL. Well, no, see, I'm representing—I don't know, 14——
    Mr. GEKAS. I understand—cities.
    Mr. O'NEILL. Specifically to that, I can't give you a count on that, and if we're not, and somebody said, ''Boy, we're going to nail them tomorrow,'' I may vote against it. But I think we should have the chance to make a mistake. We're having a study here—that's fine. Putting a commission together, as I mentioned—there's a local and State government study going on already that the Congress could plug right into to, and it's been going on.
    But the way this works is, we won't even have a real-life example of a mistake, if there is one to be made, for that committee to study. All they're going to be studying is theories and hypotheticals because you're saying——
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    Mr. GEKAS. But didn't you already say in part of your testimony, Mr. O'Neill, that three States that have imposed so-called taxes, are unconstitutional in your judgment?
    Mr. O'NEILL. Oh, they were pretty way-out examples. I don't even remember them, but they can be challenged, and we've got a court system here to deal with that. But what I'm saying is——
    Mr. GEKAS.So, why allow those mistakes to be made when you say——
    Mr. O'NEILL. Well, if we start legislating for every possible mistake, we'll never get anywhere. What I'm saying is, we're not doing anything wrong. There is no conspiracy out there. There's no ration of bad decisions——
    Mr. GEKAS. We agree; we agree.
    Mr. O'NEILL. I mean, if there are 30,000 jurisdictions and there are four minor tax examples that are arguably hurting this problem—they weren't major examples; I mean, they were very, very minor—I don't see the need for some unprecedented action of the Congress when a study first, and then action later, would be the way to go. We don't usually have moratoriums on actions that haven't happened to study what the impact would be if they did, and I just think——
    Mr. GEKAS. Maybe it's wise to do so. Did you ever stop to think of that?
    Mr. O'NEILL. Well, you probably wouldn't have the airline tax that we just passed——
    Mr GEKAS. It might be wise to anticipate the——
    Mr. O'NEILL [continuing]. And a balanced budget with it. But here you don't just have that. You're taking money that's already there. It's unfair to any level of government, including the Federal Government, to do that, just coming in on top and saying, ''These are the revenues you've collected. It's a trigger-point amount. Find another way to feed that revenue stream with the citizens, whether you're hitting other small businesses, whether you're going after real estate taxes.''
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    Whatever it is, it's a very strong move, and I just want the Congress to know that that's what you're doing. It's an unfunded mandate, clearly.
    Mr. GEKAS. The Chair's time has expired. The gentleman from New York is recognized.
    Mr. NADLER. Thank you. I have a number of questions, but let me just follow up on this dialog for a moment and ask Professor Hellerstein, and, perhaps, Mr. Arnold a few questions. First, let me say analytically, I think we're talking about two or maybe three separate things, and confusing them here.
    No. 1, our normal State taxes, such as a sales tax or a use tax, as applied to transactions over the Internet, which everybody sort of says ought to be continued, which Mr. Arnold says would be prohibited by this bill. Ms. Houghton says it would not be prohibited by this bill, and Professor Hellerstein, I think, implies it would be prohibitive by this bill.
    Mr. HELLERSTEIN. Well, I think there's certainly a large area of transactions that would, or at least arguably would, be prohibited by the bill. The language. at least as I read it. is so unclear——
    Mr. NADLER. It's very broad.
    Mr. HELLERSTEIN [continuing]. That we don't know.
    Mr. NADLER. OK, so that's No. 1, and one question before us is, perhaps we ought to tighten up the language—if we're going to pass the bill—perhaps we ought to tighten up the language of the bill. So, is there any support on this panel? Would anybody be willing to say that we ought to say that a sales or use tax applied generally should not be applied if the transaction was over the Internet?
    [No response.]
    Mr. NADLER. No. All right, so clearly we ought to at least tighten up that language to make sure that it can't be read that way.
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    The second thing we're talking about is—and here I'm not clear about whether Mr. O'Neill is referring to when you're talking about a stream of revenue that's already existing for State and local government, whether you're talking about what I was just talking about, only, or if you're also talking about existing special taxes aimed at the Internet. Could you clarify that?
    Mr. O'NEILL. I don't have all the taxes that made up that trigger-point, but I'm telling you they're out there, whether it's the $1 million in Tennessee that is clearly identified—and it's a complicated area, just to identify it.
    Mr. NADLER. No, no. My question is, if we were to tighten up the language of the bill so that the bill clearly did not apply to general taxes, such as sales or use taxes, simply when those previously taxed transactions are done over the Internet, but would only apply to taxes directed at the Internet, would that implicate existing streams of revenue that you are talking about?
    Mr. O'NEILL. No, no. That would be the grandfather clause.
    Mr. NADLER. So that would satisfy as a grandfather clause?
    Mr. O'NEILL. As a grandfather clause, yes.
    Mr. NADLER. That would constitute a grandfather clause. In other words, the revenue stream you're talking about does not include taxes directed specifically at the Internet at this point?
    Mr. O'NEILL. Right.
    Mr. NADLER. OK, so that might solve that problem. And that was my first question, really.
    Mr. O'NEILL. I'm assuming you mean a discriminatory tax just aimed at the Internet and nothing else, which was the intent of——
    Mr. NADLER. That's right.
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    Mr. O'NEILL. OK.
    Mr. NADLER. In other words, that's what I assume is the intent of the bill, and everybody seems to agree that if the language goes beyond that, it ought to be tightened up. And I wanted to ask if that language were tightened up to make that clear, that that would solve the problem that you were raising, and you're saying, ''Yes, it would.''
    Mr. O'NEILL. Well, I understand that in our fifth draft in the Senate, we've only eliminated property tax, payroll tax, and workman's comp tax, even though there's a whole——
    Mr. NADLER. And let's say that the current draft is for the sake of a or out doing that; I'm just elucidating the principle we're talking about, because there may be a lot of work yet to be done.
    OK, the second question I have, sir, arises about a moratorium, and quite properly Professor Hallerstein points out that a moratorium generally is a temporary thing.
    Now you have here a clash of principles, and principle number one says that you have this whole new field of commerce; you want to encourage it; you want it to be developed. You don't want it to be stifled by impossible taxes, or taxes which cannot possibly be apportioned, or just a huge collection of taxes different all over the place, and you have to work something out. A moratorium might make sense, while some system or some agreement is worked out by the States or by a commission.
    I'd like to ask for comment from the proponents of the bill; namely, Mr. Foley and Ms. Houghton. Should a moratorium be a temporary moratorium of 18 months to 2 years or 5 months, or something, with this commission until we can figure out what we want to do? Or is a permanent moratorium necessary, and if so, why?
    Mr. FOLEY. I'll be glad to offer an opinion. I heard an argument earlier that one of the reasons for not specifying an end-date was that if you did, you could create a delaying tactic scenario that might be more likely to be implemented if you had an end-date, than if you didn't.
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    I've also heard that the proponents of an indefinite moratorium were concerned that if you specified a date, you could have taxing jurisdictions, imposed statutes that would take effect at a time certain in the future. I don't know how valid those scenarios are.
    In my written testimony we commented on the desirability of the language that's in the Cox bill, which is nonspecific with regard to an end-date, for the reason that we felt that it was important at this stage to send this message to this industry that this is what was intended at this point, and we're comfortable with that position.
    Mr. NADLER. Mr. Chairman, could I ask unianimous consent for 2 additional minutes?
    Mr. GEKAS. You may proceed.
    Mr. NADLER. Thank you, Mr. Chairman. Let me just go further on this, and then ask Ms. Houghton and Professor Hellerstein to comment on this. The activity to date, to get rid of it—there are ways of dealing with that problem.
    All the practical questions have been raised about how a jumble of taxation, could stifle proper commercial development here, and it is obviously what we are fearful of, but let's assume that we came bet up with some sort of ordered reasonable State taxation. Is there any reason why States shouldn't be able to impose an ordered, reasonable nonconflicting, nonoverlapping system of State taxation?
    Mr. FOLEY. That are also nondiscriminatory?
    Mr. NADLER. Nondiscriminatory. Assume we came up with a good system.
    Mr. FOLEY. Well, my sense, again, of reading the bill, is that that's provided for in the language.
    Mr. NADLER. How is it provided for in the language when you have a permanent moratorium in there?
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    Mr. FOLEY. Well, the moratorium deals with new initiatives that are discriminatory aimed at specific Internet transactions.
    Mr. NADLER. No, no; I'm sorry. I didn't express myself properly. Is it your position that there is no, and can never be a proper tax aimed specifically at Internet transactions?
    Mr. FOLEY. Well, that's certainly not the position of the Massachusetts High Technology Council—you know, can never be.
    Mr. NADLER. That is not the position.
    Mr. FOLEY. That is not the position. That's what would, hopefully, come out of a study of this in terms of what's appropriate and what isn't, and I think the underlying theme right now is that the arguments for moratorium are persuasive enough to impose one.
    Mr. NADLER. But then the question is, should it be permanent?
    OK, Ms. Houghton.
    Ms. HOUGHTON. Yes, it ignores its position of COST that the Internet should be free from taxation or that transactions conducted over the Internet—we've definitely subscribed to the philosophy of Congressman Cox and Senator Wyden that this bill is designed to create a level playing field, and that means that there would be no discriminatory or specialized sorts of taxes on the Internet.
    That does not mean that if you are engaged in Internet-based business activities that you should not be subject to taxes. You know, there's been some discussion by Mr. O'Neill about what can't localities and States do under this bill. There's a lot that, very clearly, they can do. They can impose net income taxes on a business that uses the Internet, and so on.
    And in the process of discussing the bill, I think that we've all—I would hope that I would be graded highly by Professor Hellerstein because in going through this process, we have thought very carefully about what does the bill do? What was it intended to do? And we're tightening it up.
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    Mr. NADLER. Let me ask you a philosophical question. Never mind income taxes. We impose road taxes. Why shouldn't we impose a tax on the use of the Internet, like a road, if you could figure out an appropriate way to do that that wouldn't foul it up commercially and so forth?
    Ms. HOUGHTON. I think the concern is, are you taxing the use of the Internet where you would not be taxing the use of another medium—let's say a more traditional medium of conducting commerce? Now it may be that you tax every medium of conducting commerce——
    Mr. NADLER. But we don't.
    Ms. HOUGHTON [continuing]. In which case the Internet would also logically be subject to tax.
    Mr. NADLER. OK. Professor, could you comment?
    Mr. Hellerstein. Yes, I just want to return to the first point you made. I think there's a very important distinction to be made here. I don't believe that there are any State taxes that we've been talking about today and that involve the hypotheticals or the real examples that people are giving that, quote, ''single out'' the Internet.
    We are talking about the application of existing generalized, nondiscriminatory taxes on activities such as data processing, telecommunication services, which embrace within their scope certain Internet-related of services.
    Now it may well be that what Congress wants to do—and this may be a very good idea—is to say that in so far as we have services that are uniquely provided over the Internet, that have no analog anywhere else, we want to prohibit those.
    But I think it's important to understand that, if tomorrow, for example, the subcommittee were to introduce the word ''discriminatory''—and Ike heard Mr. Foley and certainly Senator Wyden saying this is the purpose of the bill; it's to prevent taxes that discriminate against Internet services—I think you would have quite a different bill than what you've got here, and one that I assume the States would take much greater comfort in.
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    But nowhere in the bill does it say ''discriminate.'' What it says is all taxes are barred, and then it says that certain taxes are saved. It seems to me that's a pretty important point, and I'd just like to make it.
    Mr. GEKAS. I thank the gentleman, and also thank the members of the panel. We assume that each one of you would be susceptible to submission of written questions to follow up on your statements, because many questions have arisen from our questions.
    Thank you very much. The committee is dissolved.
    [Whereupon, at 12:42 p.m., the subcommittee adjourned.]
A P P E N D I X

Material Submitted for the Hearing

PREPARED STATEMENT OF HON. WILLIAM D. DELAHUNT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MASSACHUSETTS

    Thank you, Mr. Chairman. As a cosponsor of the Internet Tax Freedom Act, I want to thank you for holding this hearing.
    We are witnessing: today the emergence of a vast new global marketplace which is profoundly transforming the way in which both goods and information are exchanged.
    Government can either foster this development through wise policies or impede it through foolish ones. I believe it would be very foolish for us to allow the Internet to become encumbered with a patchwork of duplicative and overlapping taxes. The bill before us would ensure that policy makers, consumers, and Internet providers—both here and abroad—have the chance to develop a more rational and uniform regulatory structure in the coming years.
    I was very pleased to see President Clinton endorse this approach, and I look forward to working with the Administration and with Congressman Cox and Senator Wyden to see that the bill becomes law.
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    This matter is of immense importance to Massachusetts, which is a world leader in advanced technology. To underscore this fact, I am pleased to introduce Mr. Howard P. Foley, President of the Massachusetts High Technology Council, a respected leader in the industry who is here to speak in support of the bill. Before assuming his current role, Mr. Foley was executive director of Jobs for Massachusetts, Inc., a private, non-profit economic development corporation. He previously held various marketing positions with a small company called IBM.
    It is a pleasure to have him here, Mr. Chairman, and I look forward to his testimony.
   

PREPARED STATEMENT OF HON. JOHN CONYERS, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN

    I am very concerned that this nation be able to compete in the Information Age.
    I am very concerned therefore that we not strangle this infant industry, this Information Technology, that has been growing up around the Internet.
    It has been charged that complex and contradictory tax obligations apply to the Internet and vary from state to state.
    I know that these concerns—that we are hurting ourselves at home and abroad—have prompted this bill co-sponsored by Democrats and Republicans who urge a moratorium on state taxation of the Internet.
    In principle, this is a policy that recommends itself to me.
    We should carefully and deliberately arrive at definitions and tax policies that make sense and are uniform.
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    I am, however, concerned that we not interfere with a state's ability to tax this cyberspace industry the way any other industry is taxed while we're making up our collective mind.
    I am concerned that this Bill doesn't have a deadline for this moratorium. I think we need one.
    I want to be reassured that our own definitions are not vague or overbroad if we have a moratorium. We must improve the situation, not make it worse.
    For these and for many other reasons, I look forward to hearing from the informed witnesses that have been gathered for this important hearing. I shall be guided by your testimony today.
    Thank you, Mr. Chairman.
   

PREPARED STATEMENT ON BEHALF OF THE UNITED STATES TELEPHONE ASSOCIATION

    The United States Telephone Association (''USTA'') is pleased to have this opportunity to submit testimony on H.R. 1054, the ''Internet Tax Freedom Act,'' to the Subcommitte on Commercial and Administrative Law of the Committee on the Judiciary. USTA is the primary trade association of local telephone companies which serves more than 98 percent of the access lines in the United States and represents over 1100 telephone companies ranging from the smallest of independents to the largest regional companies.
    USTA supports the goal of this legislation to allow the positive growth and development of the Internet by preventing it from being stifled by a patchwork of conflicting and burdensome state and local taxes. A haphazard system like that may allow the imposition of an endless number of taxes upon taxes, and may result in double and triple taxation. USTA companies have the same such patchwork to contend with in the telephone business, and therefore are able to appreciate the difficulties that emerging Internet businesses will experience at the state and local level unless a more rational and consistent tax policy is developed. Since the Internet industry is still young, it seems reasonable for Congress to provide a moratorium during which interested parties may work together to develop recommendations for fair and rational tax rules.
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    The Internet is growing and changing before our eyes as society comes to terms with the power and flexibility of this new and unique medium. Through the perspective of technology, it is said that each calendar year contains three or four ''Internet years,'' each observing a stunning array of hardware and software developments. Through the perspective of the business community, established firms struggle each year to adapt existing products and services to developing Internet technology, and new companies constantly seek to develop new Internet-focused products and services.
    The state and local tax treatment of the Internet is no more settled than the constantly changing technology or challenges in the business community. For example professional Journals which 12 months ago may have only mentioned the Internet in passing now routinely contain articles dedicated to Internet and electronic commerce issues.(see footnote 30) While some of these articles report on concrete developments, they more typically explore broad-brush concepts, and hypothesize on how such concepts should apply to this brave new and changing world. The vacuum which exists with regard to any clear set of rules for local taxation of electronic commerce is clearly attracting the attention of the business world.

    While writers debate how the Internet should be taxed, state and local taxing authorities are moving quickly to modify or reinterpret their tax rules to take into account these new technologies. Often when the results of a new interpretation appear favorable to taxpayers, the implications are disturbing to the business community. For example, New York announced in January 1997 that, for purposes of the New York corporate franchise tax, sales and use tax, a nexus with New York would not be created ''merely by having a non–New York company's advertising appear on a New York server or through a New York Internet service provider.''(see footnote 31) While this is clearly the correct result, the mere fact that it was announced implies that the state could have decided otherwise—or that other states or localities might reach a different result and attempt to fashion a ''cyber'' or ''virtual'' nexus based on electronic presence. Pending the adoption of New York's result by all jurisdictions, a cautious business may well abstain from Internet activity until concepts of cyber and virtual nexus are conclusively resolved.
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    In some jurisdictions, tax administrators are taking the position that Internet activity is taxable under existing laws. For example, the District of Columbia has sent out notices to Internet service providers instructing them to collect a sales tax on Internet access services, based on a definition of ''data processing service''(see footnote 32) which was drafted long before the creation of the World Wide Web. Other states such as Iowa, have determined that Internet access charges are ''communication'' services which are subject to a gross receipts tax.(see footnote 33) At least one state—Florida—has undergone a public policy shift, first ruling that Internet access charges are taxable(see footnote 34) and then suspending that decision pursuant to a direct request from the Governor to the Florida Department of Revenue.

    Although several local taxing authorities have made public their respective positions on taxing electronic commerce, others have refrained, and have thus created substantial uncertainty from an interstate commerce perspective. For example, Pennsylvania has never taken any public position as to whether Internet access charges are subject to sales and use taxes as ''computer services.'' Fortunately for Pennsylvania-based Internet access providers, legislation enacted last month, provides that computer services will not be subject to a sales tax in Pennsylvania after June, 1997. Due to the uncertainties that exist throughout many states, Internet providers are often placed in the precarious position of not knowing how much tax to collect. Should they collect too much, they risk discouraging customers; should they collect too little, they risk tax liability or penalties.
    Pursuant to the limited record developed thus far, states are aligning in four categories with respect to the taxation of Internet access service: those which have announced that such services are not taxable, those which have defined it as a service subject to a general sales tax; those which have defined it as a taxable communication or telecommunication service; and those which have not yet made such policy decisions public. However, this four-part puzzle does not begin to reflect the complexity of the situation, since state-level taxes are not the only taxes which may apply to Internet access. A leading tax software firm reports that more than 5,600 different state and local taxes are levied in the United States on communications(see footnote 35) and that more than 7,000 jurisdictions levy sales and use taxes.(see footnote 36) Some of these are levied and collected at the state level, but many more are imposed by local jurisdictions. Although there have been a few well-publicized instances of local governments considering whether to apply local taxes to Internet access (such as the Tacoma, Washington, City Councils 1996 attempt to subject Internet access to the city's 6% utility gross receipts tax), the vast majority of local jurisdictions have offered no public position. Thus, the universe of potential tax consequences facing current participants and potential entrants to the Internet access business are, to say the least, somewhat daunting.
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    Policy decisions of taxing authorities regarding Internet access service represent only part of the uncertainty. Perhaps more substantial but even less well-defined issues exist with respect to the legal concept of nexus. Though, as mentioned earlier New York has addressed this subject, most other jurisdictions have not. By one estimate, the United States contains approximately 60,000 potential taxing jurisdictions.(see footnote 37) With one web page on one web server, a business may—theoretically—access the market of each of these jurisdictions. If, by doing so, a nexus is established, then each such jurisdiction will acquire the power to tax that business, and the commercial potential of the Internet will be substantially at risk.

    We believe that H.R. 1054 adopts the right approach by attempting to remove the existing uncertainty and providing a method to resolve such uncertainty through a rational study. However, as technologies emerge and converge, it is critical to ensure that functionally similar businesses enjoy tax parity with one another—a fundamental principle of sound tax policy. Such parity helps create a level playing field on which the dominant technology will prevail based on economic efficiency, unassisted by artificial tax distinctions. Thus, while USTA supports a temporary moratorium during the economic infancy of the Internet, we hope that Congress will look to the issues created by conflicting local taxation structures from a broader perspective.
    Furthermore, we agree with the argument that inconsistent local taxation schemes will impose an unreasonable burden on the development of the new Internet industry, and proffer that the evidence to support this argument is found by looking to the tax burden currently borne by telecommunications companies. In 1995, USTA member companies paid taxes on revenues of $103 billion and provided service in fifty different states in the US. Unfortunately for these companies, most of their applicable state and local tax structures were established before the current competitive environment within which they operate was created by the Telecommunications Act of 1996. Consequently, telephone companies find themselves today competing with businesses which are taxed differently. Additionally, we are finding that the enactment of the 1996 Act has given rise to an incorrect assumption on the part of many that the Act provides a grant of new local authority to extract even additional revenue from the telecommunications businesses. The combination of these factors has resulted in the telecommunications industry becoming ever more vigilant against potentially new local tax burdens.
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    There is considerable recognition in the telecommunications industry that its economic development is increasingly impacted by inequitable local tax policies. A 1996 report published by the American Legislative Exchange Council on telecommunications reform highlighted many examples of local government tax policies that are affecting the telecommunications industry nationwide.(see footnote 38) Additionally, the Information Highway State And Local Tax Study Group in a paper published in 1995 argued that the lack of uniformity among states and localities regarding the manner in which they treat identical services, results in substantial tax discrimination between taxpayers, services, and property.(see footnote 39) Furthermore, the National Governors Association at its 1997 Winter Meeting adopted a Resolution entitled Telecommunications Taxation which emphasized the need for local governments to tax similar services in a similar manner; and endorsed a process by the National Tax Association to begin a review of existing problems regarding local taxation of the telecommunications industry.(see footnote 40) Thus, while it is clear that the taxing policy of local governments is critical to the telecommunications industry and has attracted the attention of many academics and government officials, an enormous amount of work lies ahead to seriously address this nationwide problem. We respectfully request that the documents cited above be made a part hereof and incorporated as part of the record.

    USTA supports the legislation you are considering today, however, we are concerned that the creation of a tax policy which treats competing industries differently will inhibit competition and ultimately harm consumers. Consequently, we would ask this Committee to be cognizant that the inconsistent local taxation scheme that currently exists coupled with the new and aggressive policies of many taxing jurisdictions presents not only a potential threat to the development of the Internet, but a real and present threat to existing telecommunications companies. If a broadbased study of the fundamental taxing practices of state and local governments will benefit Congress' ability to address Internet tax issues, we would urge you to include in that study the past and future effect of such practices on all communications companies. USTA looks forward to helping the Committee in any way we are able to forge a fair and practical solution to the issues raised by the legislation and the local taxation issue in general.
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INSERT OFFSET RING FOLIOS 21 TO 43 HERE

PREPARED STATEMENT OF LAWRENCE H. SUMMERS, DEPUTY SECRETARY, DEPARTMENT OF THE TREASURY

    I am pleased today to have this opportunity to present the views of the Treasury Department on the Internet Tax Freedom Act, H.R. 1054. The Internet Tax Freedom Act would impose an indefinite moratorium on subnational taxation of the Internet, interactive computer services, and electronic commerce. The restrictions would not apply to income taxes, franchise taxes, and generally applicable sales and use taxes, administered in a neutral manner. The Secretaries of the Treasury, Commerce, and State, in consultation with other interested parties, would be required to study the domestic and international taxation of the Internet and electronic commerce and to develop appropriate policy recommendations. Finally, the Bill declares that it is the sense of the Congress that the President should seek bilateral and multinational agreements to establish that ''activity on the Internet and interactive computer services is free from tariff end taxation.''
    Treasury fully supports the goals and underlying objectives of this Bill.
    The growth of the Internet, and the resulting growth in electronic commerce, is one of the most exciting technological and business developments of our era. As President Clinton recently stated, ''If we establish an environment in which electronic commerce can grow and flourish, then every computer will be a window open to every business, large and small, everywhere in the world.'' And as Vice President Gore has said, ''Soon electronic networks will allow people to transcend the barriers of time and distance and take advantage of global markets and business opportunities not even imaginable today . . . .'' The Administration's goal is that every school and library in the United States will be connected to the Internet by the year 2000.
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    The Internet, which is part of the ''Information Superhighway'' or Global Information Infrastructure, is not a single computer network or means of communication but instead refers to the convergence of previously separate communications and computing systems into an interoperable, global network of networks. The Internet has been described as:
A world-wide network of networks with gateways linking organizations in North and South America, Europe, the Pacific Basin and other countries . . . . The organizations are administratively independent from one another. There is no central, worldwide, technical control point. Yet, working together, these organizations have created what to a user seems to be a virtual network that spans the globe.

The Internet has grown from a computer network linking a handful of universities to a rapidly-growing worldwide network linking over 16 million computers that is used for education, commerce, and entertainment.
    The Internet permits information to be created, transmitted and used at speeds and in ways never before imagined. Information is one of the nation's most critical economic resources, for service industries as well as manufacturing, for economic security as well as national security. By one estimate, two-thirds of U.S. workers are in information-related jobs, and the rest are in industries that rely heavily on information. In an era of global markets and global competition, the technologies to create, manipulate, manage and use information are of strategic importance for the United States. Those technologies will help U.S. businesses remain competitive and create challenging, high-paving jobs. They will also fuel economic growth which, in turn, will generate a steadily-increasing standard of living for all Americans.
    The Internet will have a significant impact on our lives in almost every area imaginable. Using the Internet and other elements of the global information infrastructure:
    The best schools, teachers and courses will be available to all students, without regard to geography, distance, resources or disability.
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    The vast resources of art, literature, and science will be available everywhere not just in large institutions or big-city libraries and museums.
    Services that improve America's health care system and respond to other important social needs will be available on-line, without waiting in line, when and where people need them.
    American's will be able to live in many places without foregoing opportunities for useful and fulfilling employment, by ''telecommuting'' to their offices through an electronic highway instead of by automobile, bus or train.
    Small manufacturers will be able to get orders from all over the world electronically—with detailed specifications—in a form that the machines will use to produce the necessary items.
    People will be able to see the latest movies, play the best video games, or bank and shop from the comfort of their home whenever they chose.
    Americans will be able to obtain government information directly or through local organizations like libraries, apply for and receive government benefits electronically and net in touch with government officials easily.
    Individual governments agencies, businesses and other entities all will exchange information electronically—reducing paperwork and improving service.
    The growth of electronic commerce the ability to perform transactions involving the exchange of goods or services between two or more parties using electronic tools and techniques—is one of the most exciting aspects of the Internet. Electronic commerce will play a significant role in our economy in the years and decades to come. Electronic commerce win provide an integrated collection of low-cost, reliable services to handle tremendous volumes of business and technical transactions and to amass, analyze, and control large quantities of data. Organizations will be able to improve efficiency accuracy, and reduce costs, while prodding faster, more reliable, and more convenient services. U.S. companies will be able to reengineer their business processes, and then use the Internet to realize the productivity potential of their current and future information technology investments. Smaller firms will be able to enter and participate at lower cost and with greater efficiency in new markets, and larger firms Will be able to evaluate, select, and more readily work with other companies. New ways of doing business and new forms of economic activities will become commonplace, including telecommuting, global sourcing arrangements, new training and education capabilities, and desegregated alliances or networks of companies.
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    Already, millions of dollars worth of goods are being bought and sold over the Internet every day and although forecasts vary, electronic commerce could account for tens of billions of dollars in sales by the year 2000. Electronic commerce is exciting because it allows businesses, both big and small, to do business around the clock and around the world. For example, industrial companies are now buying billions of dollars of goods annually from their suppliers on-line and many of these purchases are from small suppliers that they had not previously dealt with. Computer-equipment manufacturers are selling billions of dollars of products annually. And a one-woman book shop specializing in hard-to-find needlework books is now doing business with customers an over the world as a result of the Internet. This is just the beginning and as entrepreneurs develop new businesses and scientists create new technologies, electronic commerce will continue to grow in ways that we cannot now imagined.
    In order to encourage the growth of this technology and the resulting social and economic benefits, it is crucial that government take a responsible role to'' ward regulating and taxing the Internet. In the realm of international taxation, the Administrations hey objectives are: no new Internet taxes, neutrality in taxing electronic commerce as compared with economically similar transactions and above all no tax rules at the national, international, federal or subfederal levels which inappropriately impede the full development of these exciting new technologies. As President Clinton has stated, 'We want to encourage all nations to refrain from imposing discriminatory taxes, tariffs, unnecessary regulations, or cumbersome bureaucracies on electronic commerce.''
    Treasury has been a leader in adapting international tax rules to electronic commerce. In November 1996, Treasury published Selected Tax Policy Implications of Global Electronic Commerce, an issues paper which set forth both the major international tax issues created by electronic commerce and the general tax policy principles that will be applied in this area. This paper has been very well-received and has been widely read both in the United States and abroad. The paper requested comments on the issues raised and these comments will be used in formulating specific administrative guidance and any necessary legislative proposals. Treasury has also been active in the work of the Organization for Economic Cooperation and Development, which has been at the forefront in developing international rules in order to achieve our mutually desired objectives.
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    In addition to Treasury's efforts, the Administration as a whole is committed to encouraging the growth of electronic commerce. We recognize that the success of electronic commerce will require an effective partnership between the private and public sectors. Government participation will be coherent and cautious, avoiding the contradictions and confusions that can sometimes arise when different governmental agencies individually assert authority too vigorously and operate without coordination. For the past year, Ira Magaziner, Senior Advisor to the President for Policy Development, has been leading an interagency working group that has developed a set of principles to Nude government's role in promoting electronic commerce. These principles deal with financial issues, such as tariffs, taxation and electronic money legal issues, such as a ''Uniform Commercial Coder for electronic commerce, intellectual property protection, privacy, and security, and market access issues, such as telecommunications infrastructure and information technology, content regulation, and technical standards. These principles are set forth in the Administration's A Framework For Global Electronic Commerce, which President Clinton released on July 1.
    While recognizing that government has an important role to play, we also recognize that the private sector must lead this growth. As stated in A Framework for Global Electronic Commerce ''Innovation, expanded services, broader participation, and lower prices win arise in a market-driven arena, not in an environment that operates as a regulated industry.'' Government's role should be limited to extending appropriate regulatory policies to the Internet and electronic commerce. For example, businesses need to know that contracts entered into on-line are valid, consumers need to know that goods and services purchased on-line are subject to consumer protection laws, and government to know that the Internet is not being used to further criminal activity. This must be accomplished while recognizing the unique qualities of the Internet and electronic commerce.
    In this context, we note that section 6 of the bill states that it is the sense of the Congress that the President should seek multilateral agreements through the World Trade Organization, the Organization for Economic Cooperation and Development (OECD), the Asia Pacific Economic Cooperation Council, or other appropriate international fore to establish that activity on the Internet and interactive computer services is free from tariff end taxation. The Administration is already working to achieve these goals. In the tax area, Treasury is currently working in the OECD to develop neutral and uniform principles for the taxation of electronic commerce. With regard to tariffs, A Framework for Global Electronic Commerce states that ''the United States will advocate in the World Trade Organization (WTO) and other appropriate international fore that the Internet be declared a tariff-free environment whenever it is used to deliver products or services.''
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    One of the most important areas in which government must adopt appropriate rules is in the field of taxation. Unreasonable taxation of the Internet, or even the fear of unreasonable taxation, could be a significant impediment to the growth of the Internet and electronic commerce. Some are tempted to view the Internet as a source of new tax revenues. We believe this strategy will be counterproductive in the long-tern. The Internet has a major role to play in ensuring the continuing vitality of our economy and our global competitiveness. The imposition of new taxes that are limited to the Internet or electronic commerce will inevitability discourage the growth and use of the Internet. While new taxes may initially raise some revenue they win impede the growth of the economy. Instead of seeking to impose new taxes on the Internet, we should encourage the growth and use of the Internet, which will result in a growing economy and greater revenues from existing taxes.
    Therefore, the Administration is opposed to any new taxes specifically imposed on electronic commerce, whether imposed by other countries or at either the federal or subfederal level. This position is also shared by many of our major trading partners. Although proposals have been made for a European ''bit tax,'' these proposals have been rejected. For example, EC Commissioner Mario Monti recently stated that he sees no need for a ''bit tax'' because the tax burden on electronic commerce should not be heavier than the tax burden on traditional commerce—confirming our neutrality concept.
    Instead of enacting new taxes on the Internet or electronic commerce, Treasury believes that neutrality should be the fundamental principle guiding the development of tax rules in this area. Neutrality requires that the tax system treat economically similar transactions equally, regardless of whether such transactions occur through electronic means or through more conventional channels of commerce. Ideally, tax rules should not affect economic choices about the structure of markets and commercial activities. This win ensure that market forces alone determine the success or failure of new commercial methods. The best means by which neutrality can be achieved is through an approach which adopts and adapts existing principles—in lieu of imposing new or additional taxes. In addition, tax rules should be uniform across jurisdictions, so as to minimize the possibility of multiple or no taxation and these rules should be transparent and easy to administer.
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    These principles apply to taxation at an levels of government. As stated in A Framework for Global Electronic Commerce:
The Administration believes that the same broad principles applicable to international taxation, such as not hindering the growth of electronic commerce and neutrality between conventional and electronic commerce, should be applied to subfederal taxation. No new taxes should be applied to electronic commerce, and states should coordinate their allocation of income derived from electronic commerce.


    Adapting existing tax rules to deal with electronic commerce raises a number of novel issues in international, federal and local income taxation because all systems must seek to allocate taxing jurisdiction over income that crosses jurisdictional boundaries. The relevant tax rules generally require that income first be classified as to type and then this classification is used to assign a geographical source to this income. The jurisdiction of source generally has a right to tax income arising within it although in many cases this right to tax is ceded to the country in which the person earning the income resides. Income derived from electronic commerce poses a number of problems under this traditional framework. However, in the world of electronic commerce, it is often difficult, if not impossible, to link an item of income with a specific geographic location. Therefore, traditional source rules become more difficult to apply. In addition, electronic commerce often involves income from ''digitized information,'' i.e. information expressed in the binary format of ones and zeros. This type of income can be difficult to classify under traditional rules, which were developed for an economy based on manufacturing. Treasury is working to resolve these issues in the international arena and it looks forward to working with the states to resolve these issues at the state level. However, Treasury recognizes that the implementation of basic principles of tax policy may vary at the state level.
    Treasury also recognizes that while the Interstate Commerce Clause gives Congress the authority to regulate state taxation of electronic commerce, this is an authority which Congress must cautiously exercise. The States' authority to tax is a central aspect of state sovereignty and our federal system requires that this authority be respected. Congress also has an obligation to promote a robust national economy. When legislating in this area, Congress must remain mindful of these two obligations. Treasury looks forward to working with state and local governments on these issues.
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    The goals of the Internet Tax Freedom Act are consistent with both the general tax policy principles I have described and Congress's obligations in our federal system.(see footnote 41) The Act would prohibit new state or local taxes specifically imposed on the Internet or electronic commerce, while income derived from and transactions effected through electronic commerce would remain subject to the neutral application of existing taxes as compared to conventional commerce. The bill would also require the Administration to establish a consultative group to develop policy recommendations on the taxation of electronic commerce, so that existing taxes can be applied in a neutral and uniform manner. Treasury wholeheartedly supports the goals and underlying objectives of the Internet Tax Freedom Act and we are prepared to work with the Committee in order to assure the realization of our shared objectives.

   

PREPARED STATEMENT OF KAYE K. CALDWELL, PRESIDENT AND POLICY DIRECTOR SILICON VALLEY SOFTWARE INDUSTRY COALITION

JULY 11 AND 17 HEARINGS ON THE INTERNET TAX FREEDOM ACT

    The Silicon Valley Software Industry Coalition consists of several of the software and electronic commerce industry's leading edge companies. Collectively our members have over 240,000 employees and world-wide revenues of over $60 billion. The business interests of our members are heavily involved with Internet and other telecommunications network usage in a variety of ways. Many of our members are focused on providing various components of the infrastructure for electronic commerce. As such, the Coalition's interests encompass not only the aspects of multistate taxation which directly affect our members, but also the aspects of multistate taxation which affect our members' customers and business associates. Furthermore, the software industry's products are one of the first products to be commonly delivered electronically via the Internet. Thus we have been exposed for some time now to the problems of multistate tax laws in that environment.
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INCORPORATION OF MAY 22 SENATE TESTIMONY

    The Coalition submitted written testimony for the May 22 Senate Commerce Committee Subcommittee on Communications on the Internet Tax Freedom Act. We have attached that testimony and would like to submit it into the record for the House hearings. We win not therefore repeat all of the points we have made in that testimony, but win address instead some of the comments made by other witnesses to this hearing.
    We note that Senator Wyden in his July 11 amendments to S. 442.(see footnote 42) the Senate Internet Tax Freedom Act, has addressed some of the concerns in our May 22 testimony. We note that Senator Wyden has specifically included domestic taxation in the subject matter of the Consultative Group, has specifically included any recommendations of the National Conference of Commissioners on Uniform State Laws in the proposals to be considered, has reiterated the Supreme Court's ruling on the physical presence requirement for imposition of taxes or collection duties has addressed most, if not an, of the concerns raised in the testimony of Mr. wale Anderson and Mr. Walter Hellerstein concerning broad application of the Act, and has included a provision stating clearly that the mere use of the Internet to conduct marketing or sales of goods or services is not a factor in determining whether a business has the substantial nexus required for a state to impose taxes or tax collection obligations. We commend the Senator for the improvements to his bill and thank him for addressing those concerns.

    We note that we continue to believe that Items 2 and 3 on page 5 of our Senate testimony need to be addressed, however, we refer you to that document and win not repeat those points in detail here. We would like to suggest however, a perhaps simpler mechanism for dealing with the problem that arises when the location of the buyer is undetermined inserting the following language as Section 3(b)(6)(D)(see footnote 43) of the Wyden bill as amended 7/11:
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(D) the use of the Internet to transmit the product or service that is the subject of a transaction is treated, when the merchant does not bill the customer directly, as if the customer has traveled to the location of the merchant's web site and completed the transaction in that location.

    The question of how to treat transactions in digital products in which the buyer's location is unknown is perhaps the most difficult electronic commerce taxation for a very significant, and rapidly growing, segment of Internet merchants. This language would not pre-empt taxation of the transaction, but would merely assign the tax to a location which Is known to the party collecting it. Should a better mechanism than this be devised by the Consultative Group, then of course Congress could implement that mechanism at the appropriate time.
COMMENTS ON OTHER TESTIMONY

    Thanks to the Internet, through which we obtained conies of the hearing testimony, and the fact that the record has been held open for a period of time after the hearing date, we have read much of the testimony at the 7/11 and 7/17 hearings. We appreciate this opportunity to respond to the testimony of others almost as if we were physically present at the hearing itself.
    Professor Hellerstein points out that it is essential to craft the Internet Tax Freedom Act carefully so that it has the intended effect. We agree. We are especially concerned that the areas of unintended consequence, such as property taxes, motor fuel taxes unemployment taxes and workers compensation, pointed out by both Professor Hellerstein and Mr. Wade Anderson of Texas be rectified. We further agree with Professor Hellerstein in his comments that:
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In contrast to areas in which Congress has considerable legislative experience and expertise (e.g., the federal income tax), Congress has rarely legislated in the state tax field. Congress' relative unfamiliarity with state and local taxing regimes creates the risk that when Congress does legislate in this area, it may bring about consequences that it did not intend. (Footnote omitted.)

    However, we would further state that Congress should rectify its lack of attention to state tax matters. Congress does need to gain expertise in this important field. This is one of the reasons that we so strongly support the Internet Tax Freedom Act and the Consultative Group that it creates. The Internet is making participation in interstate commerce commonplace for even very small businesses. The U.S. Supreme Court has invited Congress to act to resolve mail order (and by analogy Internet) taxation issues, under the authority granted to Congress by the Commerce Clause of the U.S. Constitution, stating in the Quill(see footnote 44) decision, that ''Accordingly Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns a duty to collect use taxes.''

THE NATIONAL TAX ASSOCIATION STUDY

    We again agree with Professor Hellerstein and Mr. Anderson that Congress needs to listen to those with experience in the field of state taxation. Professor Hellerstein Mr. Wade Anderson (representing the Texas Office of the Comptroller of Public Accounts), and Mr. Brian O'Neill (representing the National League of Cities) an urge Congress to heed the yet to be released results of the NTA Study. Business representatives however are more cautious, pointing out that the NTA has no experience in conducting such multi-party studies, let alone multi-party legislation drafting efforts, and furthermore has no process in place to implement any recommended model state legislation that results from the study unlike the National Conference of Commissioners on Uniform State Laws which Las extensive expertise in these areas. While we urge the NTA to proceed with its efforts and while we intend to participate in those efforts, we must point out that there are significant problems with that process specifically the slowness with which it is proceeding. The project was first proposed by Professor Hellerstein last November. So far, eight months later, a few meetings have taken place on how to do such a study, and a steering committee, and an operating committee have been created, but no actual consideration of any solution has yet even begun. Under current law state and local tax agencies can talk about studying this problem for decades, as they have done in the mail order case. As long as Congress takes no other actions, they can continue to impose what Mr. Bob Levering of the Direct Marketers Association has characterized as ''tax terrorism'' on those who participate in interstate commerce. This is why the Internet Tax Freedom Act is so very important.
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    We would also like to point out that whereas the state tax agency organizations have much experience inventing tax regimes for others to adhere to, they have riffle, if any experience in actually complying with those very same tax regimes. In fact, as we pointed out in a recent letter (attached) to the Executive Director of the Multistate Tax Commission the MTC and several other organizations of tax or local government agencies do not, in fact collect use taxes on the publications they sell. We are assured by Mr. Bucks that the MTC is looking into this matter, but frankly, as an agency that actuary performs multistate use tax audits on behalf of its member states, we have little sympathy for their own lack of compliance with the laws and regulations that they are hired to enforce. This situation also highlights our concern with organizations that set tax policy and then are hired to enforce the policies they set. The conflict of interest is readily apparent—there is little incentive to create a system that is easy to administer—for, should they succeed, their own revenue stream would be threatened.
COMPETITION—WHEN IS ''FAIR'' ACTUALLY ''UNFAIR''?

    In his July 17 testimony Mr. Brian O'Neill representing the National League of Cities states:

It is important to remember that federal policy that unilaterally creates special benefits for some businesses, but not for other competitors, erects barriers to fair competition in our communities. Creating a tax break for some companies, but not others, harms many of our own small businesses—in some sense involving the federal government in bestowing mandated benefits for foreign corporations at the expense of small businesses in our own cities. Unless wed thought out, the consequences of such federal intrusion would surely lead to layoffs and foreclosures in our downtowns. As elected public officials with a vital stake in the health of our local economies, we are concerned any federal actions which could create such unfair outcomes.
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    First of all, we note that state and local governments continue to ignore the fact that no tax break exists when the out of state seller does not collect the tax—the buyer still is required to pay the tax. Furthermore, we too are concerned that fair treatment should be given to all businesses. We refer you to our testimony for the Senate hearing in which we point out that imposing massively larger administrative burdens and compliance costs on interstate commerce in order to protect ''downtown'' retail businesses hardly constitutes fairness. And we note that sales tax receipts of state and local governments are growing(see footnote 45)—not shrinking. Good jobs, th
eresult of a vibrant interstate and international economy, are resulting in increased sales tax revenues, as those residents spend their increased income. Protecting lowpaying ''downtown'' retail jobs at the expense of more remunerative jobs in interstate and international commerce is just bad policy.

A TIME LIMIT ON THE ''MORATORIUM'' OR A ''REWARD'' FOR STATE DELAY?

    Various representative of state and local taxing agencies have stated that the lack of a time limit on the moratorium creates a disincentive for any solution to evolve. We disagree. A time limit would only serve as an incentive for delay on the part of state and local taxing agencies. After all, they would merely have to study the problem that much more thoroughly in order to be relieved of any necessity to create a real solution. And the more they can delay Congress in acting the more time they have to impose more taxes on the Internet and out-of-state businesses—thus making it more difficult for Congress to act.
    The tune to act is now. We urge Congress to do so.
   

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MAY 22, 1997 HEARING ON THE INTERNET TAX FREEDOM ACT

    The Silicon Valley Software Industry Coalition consists of several of the software and electronic commerce industry's leading edge companies. Collectively our members have over 240,000 employees and world-wide revenues of over $60 billion. The business interests of our members are heavily involved with Internet and other telecommunications network usage in a variety of ways. Many of our members are focused on providing various components of the infrastructure for electronic commerce. As such, the Coalition's interests encompass not only the aspects of multistate taxation which directly affect our members, but also the aspects of multistate taxation which affect our members' customers and business associates. Furthermore, the software industry's products are one of the first products to be commonly delivered electronically via the Internet. Thus we have been exposed for some time now to the problems of multistate tax laws in that environment.
TAXATION OF INTERNET ACCESS

    The Coalition is primarily concerned with the taxation of transactions which are entered into via the Internet. We will devote most of our testimony to that issue. However, we should point out that fragmented and uncertain taxation of Internet access services, especially when applied retroactively, or by numerous local jurisdictions, threatens to impede the ability of U.S. citizens to engage in electronic commerce. The testimony of Mr. Walton before this subcommittee was compelling. We note also the recent claim by San Bernadino, that Internet access services were subject to retroactive taxation since they met the city's definition of a ''teletypewriter'' service. The Internet industry should not have to keep fighting every local government which decides to impose burdensome and even retroactive taxes on Internet service providers. The Internet is inherently interstate commerce. Congress is the appropriate authority to regulate state taxation of both Internet access services and the transactions which take place on the Internet.
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STATE TAX LAWS IMPEDE ELECTRONIC COMMERCE

    KPMG Peat Marwick's July 1996 study, Electronic Commerce: Taxation without Clarification, surveyed 291 companies with gross revenues in excess of $50 million on the effects of U.S. state and local tax systems on Internet commerce.(see footnote 46) Nine out of ten executives agreed that government needs to clarify the tax situation and that failure to do so may result in outdated and unclear tax schemes thwarting the growth of electronic commerce.

    The Internet offers enormous opportunity for both small and large businesses to reach national and global marketplaces. However, as the KPMG study indicated, a multitude of confusing, contradictory and hard to comply with sub-national taxing systems is a significant barrier to entry for even large companies. It significantly more daunting for the small companies which are the source of most jobs in the U.S.
    State and local tax laws are impeding interstate commerce in several ways:
    1. Nexus Uncertainty and Burdensome Administrative Complexly: Many states' laws governing under what conditions a state may impose tax collection obligations on out-of-state companies are unclear, unconstitutional, or both. The administrative burden of dealing with over 6500 different jurisdictions which currently impose taxes is difficult for even the largest companies to comply with. Furthermore, there are over 30,000 jurisdictions which could potentially impose additional taxes. Although the Internet offers the smallest of startup companies access to nationwide markets it also subjects those companies to uncertain and complex state and local tax systems.
    2. Obsolete State Tax Laws: Companies selling electronically transmitted goods and services frequently are unable to determine the information, such as the location of the buyer, which is necessary to comply with obsolete tax laws that were designed to apply to sales of tangible personal property.
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    3. Obsolete Federal Protection From Overreaching State Tax Laws: Thirty years ago, Congress protected out-of-state businesses from income tax obligations imposed by the states if the company was only selling products into that state. But that law only applies to the sales of tangible personal property. That law needs to be extended to apply to today's transactions in software and other electronically delivered goods and services. This is particularly necessary since many transactions can be completed without the seller's knowledge of the location of the buyer.
IS STATE TRANSACTION TAX COMPLEXITY INTENTIONAL?

    Under the ''guise of ''Fairness to Main Street Businesses'' many states impose onerous tax compliance systems on out-of-state businesses. However these systems do not ''level the playing field'' as claimed but instead impose enormous burdens on out-of-state businesses in order to protect in-state retailers. For example:
    1. In—State Businesses Are Exempted from Burdensome Laws: In some states out-of-state vendors must collect use taxes for each local jurisdiction based on the location of the buyer. However, in those same states the in-state seller need only collect the sales tax based on their own location, not on the location of the buyer. This practice directly discriminates against interstate commerce.
    2. States' Disregard for Supreme Court Decisions Imposes Litigation Burden on Out-of—State Businesses: Many states maintain unconstitutional nexus laws. In 1984, the Multistate Tax Commission withdrew its Uniform Nexus standard even though it had been adopted by 36 states. Instead the states revised their laws to impose unconstitutional use tax collection requirements on out-of-state businesses, claiming that the 1967 Supreme Court decision in National Bellas Hess(see footnote 47) was ''out-of-date.'' Even though the Supreme Court upheld that decision again in 1992,(see footnote 48) most states have not revised their nexus laws. In order to protect their in-state businesses, states continue to claim that out-of-state businesses must collect use taxes or find themselves forced into litigation in order to defend their constitutional rights. California, which typically repeals unconstitutional sections of its law, is a notable exception to this practice.
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    3. New Burdensome Reporting Requirements Being Imposed Only on Out-of-State Businesses: Unfortunately, as the courts overturn specific state efforts to burden out-of-state businesses, the states simply invent new burdensome requirements to impose. States' most recent attempts to burden out-of-state businesses involve requiring them to report all sales records to state tax agencies, an obligation which is not imposed on in-state businesses. Pending legislation in Nebraska requires out-of-state businesses which cannot constitutionally be required to collect Nebraska taxes to report all sales transactions which involve Nebraska residents. In Texas, recent proposed amendments(see footnote 49) to HB 4 would require out-of-state businesses to report all transactions involving Texas buyers to Texas tax authorities. Under the proposed law, failure to comply with requests for records is a crime and an additional violation each day. While HB 4 failed to pass, we have no doubt that this extremely burdensome reporting proposal will resurface. In addition to the administrative burden, proposed laws such as these not only violate privacy recommendations of Federal agencies(see footnote 50) but, in some cases, conflict with Federal law.(see footnote 51) Businesses engaging in interstate commerce may soon be required by state tax laws to choose between violating state law or violating both federal law and their customers' privacy rights.

    While some of these practices are not new, but have been plaguing mail and telephone order companies for decades, others are new and are examples of the states' practice of continuously imposing new burdensome tax collection obligations that taxpayers must repeatedly litigate until the Supreme Court again overturns them. The advent of electronic commerce exposes thousands of new start-up companies to the states' campaign to protect in-state retailers against competition from interstate commerce. While there are on-going efforts to resolve these problems, the fact that for the past thirty years the states have been unable to resolve these problems for mail order companies does not bode well for state attempts to resolve them for electronic commerce.
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FEDERAL INTERVENTION NEEDED

    Since state tax laws affecting interstate commerce are imposed only on out-of-State businesses, it is unlikely that state legislatures will resolve interstate commerce problems. It is inherently the laws of other states that are the problem. In his testimony before this committee, Mr. Timothy Kaine, Richmond City Councilman pointed out that he had heard no complaints from his constituency regarding taxation of electronic commerce. We are not surprised. In point of fact it is usually not the laws of a businessperson's own state which negatively impact the company engaged in interstate commerce, it is the laws of other states. Thus the businessperson engaged in interstate commerce has only one place to turn—to Congress.
    In addition to the fact that the businessperson has no representation in the states imposing unfair burdens on interstate commerce, there are other reasons that we believe Congress is the only possible venue for resolution of electronic commerce taxation problems:
    1. States Can Rescind Uniform Laws At Any Time: Voluntarily adopted state uniformity guidelines can be arbitrarily withdrawn by the states at any time. Indeed they did exactly that in 1984, when the Multistate Tax Commission (MTC) withdrew its Uniform Nexus Guideline after it had been adopted by 36 states. In the ensuing 13 Years no new uniform guidelines have been adopted and none are being worked on. The MTC's current effort only involves a statement on Constitutional boundaries, not a uniformly enforced standard.
    2. Many State Nexus Laws Are Currently Unconstitutional: According to the 1994–95 American Bar Association Sales and Use Tax Desk Book, 2/3 of the states have unconstitutional nexus laws.
    3. Uniform State Laws May Be Controversial: Any uniform nexus guideline or law enacted by the states may well be controversial, especially given the current unconstitutionality of state nexus laws, and will be challenged in court by one or more taxpayers.
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    4. The U.S. Supreme Court Has Asked Congress to Act: The U.S. Supreme Court, in its Quill decision (Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. (1992)), has invited Congress to act to resolve the nexus issue, under the authority granted to Congress by the Commerce Clause of the U.S. Constitution. Since then, the Supreme Court has declined to hear conflicting nexus cases (Vermont Information Processing/Orvis and Share International), indicating their intention to stay out of the nexus issue.
    5. Numerous Jurisdictions Impose Different Standards and Rates: County and municipal governments insist on collection of use taxes for each of their different rates and jurisdictions, currently exposing remote sellers to over 6500 different jurisdictions, with different tax rates, different forms, different applicability of taxes to different items, and different filing and remittance regulations. Additional jurisdictions, perhaps as many as 30,000 of them, could impose taxes in the future.
    6. Simplification May Require Congressional Approval: Missouri attempted to deal with the administrative burden imposed on remote sellers via collection obligations for local use tax rates by imposing a single state wide rate to be collected by remote sellers. That system was overturned by the U.S. Supreme Court (Associated Indus. Of Missouri v. Lohman (1994)) on the grounds that it ''violates the Commerce Clause's cardinal rule of nondiscrimination'' and is therefore unconstitutional. Thus the Supreme Court has once again, indicated that only Congress can resolve the problems of use tax collection.
    It is very clear that Federal legislation is the only possible mechanism for resolving either the use tax collection nexus issue or the administrative burden problem for remote sellers. While the Coalition continues to participate in multistate efforts on Internet taxation problems, we believe that ultimately this problem cannot be solved by the states atone even if they truly wished to do so.
THE INTERNET TAX FREEDOM ACT
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    If the U.S. economy is to continue to benefit economically from the growth of electronic commerce, these problems must be solved soon. The Internet Tax Freedom Act recognizes that state and local taxation is interfering with interstate commerce on the Internet and exercises Congress' jurisdiction over interstate commerce under the authority of the Commerce Clause of the U.S. Constitution. S. 442 imposes a moratorium on taxation that interferes with Internet commerce and creates a consultative group to examine domestic and foreign tax policies on taxation of electronic commerce.
    The Silicon Valley Software Industry Coalition supports the Internet Tax Freedom Act, however we believe that additional clarity regarding the moratorium is necessary. We recommend the following:
1. The Internet Tax Freedom Act should make clear that the use of the Internet does not create the obligation for a seller to collect state use taxes where that obligation would not otherwise exist. This would not pre-empt states' ability to tax the transactions, but would only affect their ability to impose collection obligations on out-of-state companies. The states can still collect the use tax, if applicable, from the in-state purchaser. While the current bill implies that nexus obligations are not different for Internet-based merchants, the language is not as clear as it could be. Therefore it leaves open the possibility, indeed likelihood, of continued uncertainty and continued litigation in this area.

2. The Internet Tax Freedom Act should extend P.L. 86–272 to apply to transactions in electronically transmitted products, whether those products are sold or licensed, and whether or not a state considers them ''tangible.'' Again, this does not pre-empt state taxation of income derived from these transactions it merely limits the number of states that are allowed to claim a portion of the tax.
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3. In order to make sure that companies can comply with state use tax laws the Internet Tax Freedom Act should impose the following rules to apply to transactions in products which are transmitted electronically:

(a) The buyer's state cannot impose on the seller an obligation to collect that state's use tax which is imposed on the buyer, regardless of whether the seller is located in the buyer's state. However, the buyer's state may impose a use tax on the buyer, provided that the seller's state has not imposed a sales tax on the transaction.

(b) The seller's state may impose a sales tax on the buyer of an electronically transmitted product and may impose the obligation to collect that tax on the seller, regardless of the state in which the buyer is located. (For companies which maintain a website in Texas, Texas already follows this rule. It is consistent with the rule in many states that unless proof of out-of-state delivery is available, the transaction is taxable in that state. As Texas states, for electronically transmitted products, it is as if the buyer came to Texas to pick up the product. However, if the buyer's state does not follow rule (a) duplicate taxation can result.)

Again we emphasize that this does not pre-empt state taxation of the transaction, it merely prevents the states from imposing tax collection obligations on parties who cannot obtain the information necessary to collect the tax owed by others. The states are free to use other tax collection mechanisms to tax the transaction.

    We also note that Section 4 of the Internet Tax Freedom Act does not specifically state that the Consultative Group consider state and local taxes in the examination it is to undertake. While we believe that it is the intent of the legislation to include those taxes in the study, we recommend that the bill be amended to specifically state that intent.
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CONCLUSION

    In summary, the Silicon Valley Software Industry Coalition does not believe that Congress should preempt state taxation of transactions which are completed via the Internet. However, only Congress can ensure that tax obligations imposed on out-of-state businesses do not discriminate against interstate commerce in order to protect in-state businesses. Taxation of electronic commerce transactions must be simple and administrable, and must not lead to duplicate taxation by conflicting jurisdictions on the same transaction. The Coalition will continue to work with any group which is attempting to address this issue. However, we urge Congress not to delay in hopes that multistate efforts, which have already been on-going for 30 years in the mail-order arena, arrive at a solution. If electronic commerce and the economic benefits it promises are to become a reality, Congress will need to act. Only a moratorium on the current discriminatory practices will truly motivate the states to participate in recommending a solution, rather than continuing for another 30 years to ''study'' the problem. A moratorium on unfairly burdensome and confusing tax collection mechanisms and the formation of a group to make recommendations to Congress is exactly the right step. We urge Congress to pass the Internet Tax Freedom Act.
   


Silicon Valley Software Industry Coalition
San Jose, CA July 28, 1997
Dan Bucks,
Multistate Tax Commission.

    DEAR DAN, as you recall, during the Dallas Public Participation Working Group Meeting on the MTC's Draft Constitutional Nexus Guideline for application of a State's Sales and Use Tax to an Out-of-State Business the need for educational efforts to alert buyers to their use tax obligations was discussed. I pointed out that one step in the right direction would be for the MTC to start meeting its own sales and use tax collections obligations on the publications it sells and you then indicated that the MTC was in the process of looking into that situation. I am writing to ask that you give the Working Group an update on the situation at our upcoming meeting in Montana.
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    As the MTC is in the business of conducting multistate use tax audits on behalf of its member, associate member, and project member states, I urge you to proceed with this unfortunate situation exactly as you would if you were auditing any other taxpayer. While I doubt that any of your member or associate member states would actually themselves impose penalties and interest on you, I would urge you to impose and pay them yourselves. Furthermore I urge you to do so for all prior years since the formation of the MTC, or since it first started selling publications, since your neglect to file returns does put you in the position of having no statute of limitations protection in some and perhaps all of the states.
    I would further urge the MTC to take a leadership role in suggesting that other organizations of state and local governments take the same steps to ensure that they are complying with the sales and use tax laws of each of the states. In fact you might suggest that, given the nature of their concerns with local taxation, they should consider voluntarily filing even in states where they may not have nexus.
    Additional educational efforts might also be extremely appropriate and again the MTC has an opportunity to take a leadership role. I refer to the issues raised in the 1996 petition to the Federal Trade Commission, in which several state and local government organizations joined with the MTC and petitioned the FTC to require that mail order companies provide notices to their customers that use taxes may be due on their purchases. While the FTC rejected that petition,(see footnote 52) we believe that at the very least the MTC and other organizations participating in the petition should, as an educational effort, provide the information that they requested the FTC to require. In a brief perusal of the web sites of those organizations we were unable to find even one that was in complete conformance with the requested requirements. Furthermore, that brief look indicated that the following organizations who participated in that petition not only do not provide the notice requested in the petition, but also do not collect use taxes on their sales of publications to buyers in various states. For example:
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Federation of Tax (ETA)—Order form at http://sso.org/fta/order.html: Collects sales tax only in Texas and the District of Columbia. Provides notice that ''others must contact their state tax agencies concerning applicable use tallest but fails to comply with the requested notification standards in the petition, including the language of the notice and reference to the notice on the line for calculation of tax.

National League of Cities (NLC)—Newsletter subscription pricing page at http://www.cais.com/nlc/nlc-ncw.html: Contains no information on sales or use tax due on the subscriptions offered. We note also that the League of California Cities (A member of the NLC) publications order form (at http:/www.cacities.org/pubcat.asp) notes only that ''an prices include sales tax and postage'' but does not indicate that the price also includes use tax or that a use tax may be due, nor does it contain the above referenced notices requested in the petition. Given that there is only one price stated, we find it unlikely that the price reflects the varying use tax rate of each state.

International Council of Shopping Centers (ICSC)—Publications order page at http://www.icsc.org/cai/pubcat?sesid=0038664: Placing an order through this page results in a order confirmation form which includes sales tax only for New York state and which displays no notice of any use taxes which may be due.

National Conference of State Legislatures (NCSL)—Book Ordering Information Page at http://www.ncsl.org/public/catalog/ordrcat.htm: Indicates that NCSL is collect sales taxes for Colorado and the District of Columbia, but makes no mention of any use tax obligations of buyers.

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    While I realize that the work of the MTC in making sure that business taxpayers collect the appropriate taxes and file the appropriate returns is a time-consuming endeavor, I would strongly urge you to take on this additional endeavor. I am sure that your fellow organizations of state and local governments will be more than glad to cooperate in setting a better example for the business community.
    I look forward to the meeting in Montana and receiving an update on the MTC efforts since our last meeting in Dallas to ensure their own compliance with the use tax laws they enforce.
Sincerely,


Kaye K. Caldwell,
President and Policy Director.
   

PARPARED STATEMENT OF THE COMPUTING TECHNOLOGY INDUSTRY ASSOCIATION

    The Computing Technology Industry Association (CompTIA) congratulates the House Judiciary Subcommittee on Commercial and Administrative Law for holding hearings on H.R. 1054, the Internet Tax Freedom Act. CompTIA represents 6,300 microcomputer rescuers, manufacturers, software publishers, distributors, integrators and Internet and other service providers. A significant and rapidly growing share of the business transactions of the estimated 60,000 companies in our industry are done over the Internet.
    The Internet Tax Freedom Act would impose a moratorium on the imposition of taxes on the Internet or interactive computer services. It would set an 18 month timetable for the development of policy recommendations to Congress regarding the taxation of the Internet. It includes a ''sense of Congress'' that the Internet be free of foreign tariffs, trade barriers and other restrictions.
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    CompTIA strongly supports the measure. We appreciate the leadership of Congressman Cox, Senator Wyden, and the nearly 60 other cosponsors of this effort to deal with the challenging issues arising from the unprecedented integration of domestic and international markets in the electronic information age. The Internet Tax Freedom Act is consistent with the Administration's recently released ''Framework for Global Electronic Commerce'' which includes the following among its five guiding principles:
    ''Governments should avoid undue restrictions on electronic commerce. In general parties should be able to enter into legitimate agreements to buy and sea products and services across the Internet with minimal government intervention. Governments should refrain from imposing new and unnecessary regulations, bureaucratic procedures or new taxes and tariffs on commercial activities that take place via the Internet.''
    The Internet already supports more than a billion dollars worth of roods and services internationally, and the growth rate is exponential. As the growth continues the medium win bring more products and services to more people faster, easier, and cheaper than current market mechanisms.
    The Internet Tax Freedom Act is consistent with other pre-emptions of state and local taxation of interstate commerce such as when there is no significant nexus between the state and the taxable activity conducted. In addition there are both industry and income specific state and local tax pre-emptions, such as state and local preemptions of taxation of interstate motor carriers, air commerce, direct satellite television services, and out-of-state pension income.
    It is vital that the heavy hand of government be kept off of the Internet so that this dynamic network can achieve its fun potential. Otherwise taxes and regulations imposed at a time while the technology is still evolving rapidly could have the effect of locking the Internet into technologies that win soon be surpassed in terms of potential. Most of the more than 4,000 ISP's are small businesses who have neither the resources individually nor collectively in most states to challenge proposed Internet taxes or regulations.
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    European lawmakers are discussing a bit tax and are seeking to apply value added taxes to Internet transactions. Florida sought in 1996 to expand its tax on ''computer exchange services'' to Internet access. CompTIA discovered that a similar measure had been proposed in the Maryland General Assembly when we were working on other legislation in Annapolis earlier this Year. Tennessee's Department of Revenue retroactively taxed Internet service as a telecommunications service, and already one defunct Tennessee Internet Access Service attributed its demise to that tax. Texas taxes home pages, and taxes ISPs both for leasing phone lines and for access to phone lines. Minnesota has notified vendors who have no physical presence in the state that they must pay sales tax in Minnesota because they advertise on the Web.
    Organizations representing state and local government have opposed H.R. 1054. They argue that there is not yet significant state and local taxation. However those organizations also argue that H.R. 1054 will deprive them of substantial revenue, suggesting that the intent is to exploit the revenue raising potential of Internet taxation. State and local representatives have argued that the Internet should be treated like mail order, and we agree. The judicial interpretations of nexus applied to mail order should be applied in a similar fashion to Internet transactions. The measure's opponents further propose that the Internet should be taxed like a telephone service, but the telephone service is already taxed so this would amount to double taxation. Lastly these organizations state that online business will hurt storefront retailers. However, main street stores are increasingly turning to the Internet themselves to expand their own market opportunities and most businesses support the philosophy of open competition.
    Over 30,000 state and local taxing authorities in the US could tax the Internet. Many are in need of additional tax revenues due to unfunded federal mandates. The opportunities for multiple taxation of the Internet's decentralized, packet-switched architecture abound. Clearly what is needed is a moratorium on such efforts so that uncertainty about future tax liability does not impede the growth of Internet commerce and so that the many complex state, local, federal, and international tax issues can be considered thoughtfully, consistently, and fairly.
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    H.R. 1054 takes that reasonable approach. The measure's national moratorium on taxes that specifically target the Internet does not prohibit other normal business taxes so long as they are the same as those imposed on interstate catalogue and mail order firms. At the same time it commissions a thorough study of U.S. and foreign Internet taxation to provide the President and Congressional policymakers a better understanding of the Internet.
    The Internet Tax Freedom Act also cans on the Clinton Administration to be as aggressive as possible in seeking to keep the Internet free of taxes and tariffs. CompTIA believes that the Internet should become a global free trade zone in order to maximize its benefits to all.
    Founded in 1984, the Computing Technology Industry Association represents over 6,300 microcomputer resellers, distributors, manufacturers, software publishers and service companies. CompTIA is a growing vertically integrated computing sector trade association focused on training and education, technical standards, and on promoting public policy that win contribute to US technological leadership.
   

STRAIGHT TALK: INTERNET, TAX AND INTERSTATE COMMERCE

A WHITE PAPER ON TAXATION OF ELECTRONIC COMMERCE AND THE INTERNET

I. Introduction

    The Information Technology Association of America (ITAA) is the leading national trade association representing the computer software and services industry. Its more than 11,000 direct and affiliate member companies provide Internet access, online services. Internet software, intranet development products. telecommunications services, business software, software programming services, information systems integration services, and information processing services.
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    This paper is intended to answer questions and to facilitate understanding regarding electronic commerce and the Internet, specifically in relation to state and local taxation.
    The information technology (IT) industry is one of the fastest growing U.S. industries, and the U.S. is the world leader in information technology. A study recently commissioned by the ITAA's Global Internet Project found that an estimated 1.1 million jobs worldwide created by the Internet in 1996. These are high paying high skilled jobs. The IT industry also helps U.S. companies in other industries modernize. increase productivity, and compete more effectively, both here and overseas. Advancing the Internet is not just an industry concern, it underlies the nation's economic future.
    We need to ensure that taxation does not become an obstacle to the transfer and deployment of IT products and services to ensure continued growth and leadership for U.S. IT firms and the ability to leverage their products and services throughout the U.S. economy.
II. What Is The Internet?

    The Internet is an international, open-ended aggregation of computer and communications networks, people who use those networks, and resources that can be accessed from those networks. It is not an entity in and of itself When people connect to the Internet they become a part of it. It is perfectly dynamic, constantly changing as users engage and exit. What comprises the Internet one day win be different the next.
    The Internet evolved from the first four-node computer network known as ARPAnet. Created by the U.S. Department of Defense in 1969, ARPAnet was designed to maintain a means of communication despite a nuclear attack. Expanded use and popularity of the Internet came about in the 1980's when the National Science Foundation (NSF) created a network to link university supercomputer centers, tying in regional networks of research and academic sites. Then in 1990. the LISP backbone replaced the original military network. Under the NSF's management ARPAnet became known as NSFnet and expanded to reach many institutions of higher learning and government agencies. Ultimately, it expanded outside the education and government communities to the public at large.
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    By 1995, the NSF shutdown its backbone and its operations were turned over primarily to seven companies: the ANS unit of America On Line (which had managed the ANS backbone), Apex Global Information Services (AGIS), BEN (which had installed the first node of the original Defense Department network in 1969), MCI Communications, Inc., PSInet. Inc. Sprint Corporation and UUNet Technologies. Inc.
    Using a computer, a modem, and software that allows access to the Internet, residential and small business subscribers of ISP services (defined in Section III) dial a local telephone number or an 800 number to reach the ISP's computer which provides access to the Internet.(see footnote 53)

    An ISP maintains a computer with a dedicated link to an other networks, both of which are part of the international aggregation.
III. Definitions Important To Understanding This Paper

    Telecommunications Service—The transport between or among points specified by the user, of information of the user's choosing, without chance in the form or content of the information as sent and received.(see footnote 54)

    Enhanced Service—These services, such as e-mail and Internet access, are distinct from telecommunications services. They are value added services, the primary purpose of which is to act on the form, content, code or protocol of information. They are distinct products which are made available to consumers through the use of telecommunications services. They are not, in and of themselves, telecommunication services.
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    Internet Access Provider—An entity that maintains a computer that is directly linked to the Internet through the use of telecommunications facilities.
    Internet Service Provider—An entity that provides accessibility to some information that is available on the Internet. An ISP may also provide Internet access.
    On-line Service Provider—An entity that provides its own proprietary databases to both consumers and businesses, and may provide Internet access.
    Vendor—A seller of products or services on the Internet or through on-line services. Vendors offers use a Web page to advertise their goods and services.
    Server—A computer with specialized software connected directly to other computer networks and/or the Internet.
    World Wide Web—The ''Web'' is a network of computers using Web application software. Users access documents housed on World Wide Web servers located worldwide. The Web is essentially a subset of what makes up the Internet.
    Web Site—A software application, that may contain advertising which is located on space in a computer server's memory. This space is like a group of computer files, with its own address and affiliation. The server must be both capable of running Web server software and connected to the World Wide Web.
    Tax Nexus—A minimum threshold of connection with a jurisdiction that is required by the U.S. Constitution before taxes or tax collection responsibility can be imposed on an individual or business.
    For purposes of the remainder of this paper, Internet access providers, Internet service providers and online service providers will be collectively referred to as ISPs.
IV. State And Local Trends

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    Electronic commerce, including use of the Internet, is changing the way we do business. We have moved from an industrial economy where machines dominated productivity, to an information based economy where intellectual content is the dominant source of value added and which knows no geographic boundaries. Yet most existing tax law and regulations were established decades ago and were designed for taxing tangible products. Some state and local governments have nonetheless attempted to capture emerging technologies in their tax structure by simply expanding old concepts to new types of businesses. The detailed tax regulations developed generations ago, however are not easily applied to modern technological realities and present serious compliance problems for ISPs, vendors and telecommunications service providers.
    The following are frequently asked questions and corresponding explanations about electronic commerce and Internet related transactions and services. This discussion is intended to identify problems created by the state and local taxation of electronic commerce and the Internet and to suggest possible solutions.
    Q. 1. Do ISPs Provide Telecommunications Service To Their Customers?
    A. No. Telecommunications is commonly held to be the transport between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information as sent and received. Internet access service is a distinct product which is provided to consumers through the use of telecommunications facilities—facilities which are already subject to tax. ISPs do not provide transport of communications signals. They purchase telecommunications services from long distance and local exchange telecommunications companies in order to provide enhanced services to their subscribers. According to the Federal Communications Commission enhanced services have been determined not to be telecommunications services.
    Q. 2. Are ISPs Resellers Of Telecommunications Service And Therefore Subject To Telecommunications Taxes?
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    A. No. Consumers pay telephone companies to supply telecommunications services. They pay ISPs to instead supply them with access to the Internet, among other things.
    ISPs are telecommunications consumers which pay telecommunications companies for the use of telecommunications facilities to deliver Internet access to customers. That's what telecommunications services are purchased for to transport something. The fact that ISPs may recover the cost of the telecommunications services they purchase through charges to customers is irrelevant.
    By way of analogy, the new Boeing 777 aircraft was designed completely on computers using a single, digital database. Through the use of interactive graphics, subcontractors at more than 2000 work stations around the world were able to concurrently design features of the plane which were shared through telecommunications. This effort involved millions of minutes in telephone calls in the course of designing manufacturing and seeing 777s. As Boeing sells 777s, it recovers the cost of its phone calls in the price of its planes. No one would argue that Boeing is in the business of reselling telephone service. Boeing makes airplanes and defense and space products, and that is what its customers buy.
    Q. 3. Should The Same Criteria Used To Determine The Establishment Of An Agency Relationship For Tax Purposes In The Tangible World Be Applied To Electronic Commerce?
    A. Yes. In the few agency tax cases decided by the U.S. Supreme Court, an agency relationship was established when a company utilized independent agents rather than employees to market products. With the agency relationship established, the Court has held that a company utilizing such agents will create tax nexus for itself in a state where such agents operate, provided the agents' activities had they been performed by employees, would have also created tax nexus.
    Some states have recently suggested that the use of telecommunications facilities in providing Internet services creates an agency relationship between telecommunications companies and ISPs, and therefore creates tax nexus required by the courts to allow states to impose income tax burdens or sales/use tax collection responsibilities on ISPs or telecommunications service providers. Some states have also suggested that the use of telecommunications facilities by ISPs, which in turn provide services to vendors establish an agency relationship between the telecommunications companies and the ISP and then between the ISP and the vendor, such that the vendor has tax nexus wherever the telecommunications company has tax nexus. This is clearly contrary to established case law on agency nexus.
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    It is no different ordering a product or service via a computer than when an order is placed over the telephone or by U.S. mail. A company that uses the U.S. Postal Service or United Parcel Service (UPS) to receive its orders and deliver its products is not considered to have entered into an agency relationship with the Postal Service or UPS and thus does not establish nexus from its relationship with the conventional carrier. Why should products or services ordered or delivered via the Internet be any different? The Internet is only a different medium of delivery. Taxation should be based on the substance of a transaction and the surrounding facts, not the incidental form of conveyance. To date, no court has held that the mere use by a business of a commonly available means of transporting goods or services creates an agency relationship and therefore imparts tax nexus to such a business based on the relationship.
    Q. 4. Are There Other Agency Relationships That States Are Asserting Apply To Electronic Commerce Which Are Problematic?
    A. Some states have asserted that the location of a computer server gives rise to tax nexus for an ISP that uses it (but may not own it) and/or for a vendor which has its Web site on it. In addition. some jurisdictions have suggested that sales tax be applied to products and services sold electronically by vendors from a Web site based on the location of the Web site server. These positions are not practical for a number of reasons.
    First, ISPs often do not own their own server and therefore do not know where the server they are using is located. In addition, multiple or mirror servers in different locations are commonly used to avoid problems that would occur if one server becomes inoperative or overloaded. In such cases, it may not be possible to know which server provides service. Although typically the ownership of property in a state is evidence of tax nexus, it is far from clear that the placement of a server in a state has anything to do with income earned in that state. Moreover, given the ease and speed with which content providers, vendors or ISPs can move the use of software that operates the server from one jurisdiction to another, if they are put at a competitive disadvantage in certain jurisdictions, these businesses could very easily move their server software to a more tax friendly jurisdiction.
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    Likewise, a vendor who does not own the server on which its Web page is located would be unlikely to know where a Web site server is located. Because an ISP can deliver the same level of service to a vendor regardless of the location of the server an on-line vendor who today has its Web page on a server in Virginia, tomorrow may have that same Web page on a server in Malaysia and not be aware of the change in location.
    For these reasons, any rule attributing nexus based on the location of a server will be administratively unworkable.
    Q. 5. Has The U.S. Supreme Court Addressed The Issue Of Nexus?
    A. Yes. The most recent case in which the U.S. Supreme Court addressed the issue was in Quill Corp v. North Dakota. The court held that North Dakota's enforcement of its use tax collection responsibilities against an out-of-state mail order company with no physical presence in the state, which merely mails catalogs into the state and fills orders by U.S. mail or common carriers, was an unconstitutional burden on interstate commerce (i.e., violated the Commerce Clause of the U.S. Constitution). The fact that the sever had licensed software in the state for use by customers to electronically order its products was considered insufficient to meet the nexus requirement of the U.S. Constitution Commerce Clause.
    There is no reason to believe that the Supreme Court would have decided Quill differently if the sales there had been made over the Internet, because a vendor selling via the Internet involves even less physical contact with the state than catalogs mailed to North Dakota. and indeed may involve no physical contact whatsoever.
    Q. 6. Should Intangible Products Sold And Delivered Over The Internet Be Treated The Same Way For Tax Purposes As Products Purchased Off-Line In The Tangible World?
    A. Yes. There should be fair and equitable tax treatment of goods and services purchased over the Internet and in the tangible world. The administration of transactional taxes in this medium, however, is virtually impossible under existing rules governing tax nexus, given the difficulty in capturing relevant customer information.
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    An essential tenet of any tax system is the ability of taxpayers to comply. The inability to discern boundaries in the electronic marketplace makes it difficult, if not impossible, for Internet providers or other businesses selling or licensing products and services electronically to identity the location where they are being used. A customer on the Internee may use nothing other than an e-mail address and utilize a service from virtually anywhere in the world. His or her location usually cannot be determined. Where is a product or service being delivered when it is sent to an Internet address' A billing address may be available, but may merely be a Post Office box Even then a bluing address may only be known to a credit care intermediary company. nor the vendor or ISP.
    Government and industry must work together to craft acceptable solutions in keeping with well-established principles of tax nexus.
    Q. 7. How Should Tangible Goods Purchased Over The Internet And Delivered Physically Be Subject To Taxation?
    A. When a product is physically delivered to a location the taxing jurisdiction is known, which is often not the case when a product is delivered electronically to an Internet address. Such transactions should be subject to the same transactional tax requirements imposed on the mail order industry. Based on the Supreme Court ruling in Quill, a vendor that has physical presence, or substantial nexus, in the jurisdiction where the goods are delivered, can be required to collect and remit sales tax to that jurisdiction. A vendor that does not have substantial physical presence in the jurisdiction where the goods are delivered can not be required to collect and remit the tax. The purchaser of the goods, however, remains obligated to pay sales tax (i.e. use tax) to the jurisdiction where the goods are being used if such a tax is applicable.
    Q. 8. Should ISPs Or Vendors Who Have Nexus In A State and Sea Products Or Services Electronically Be Required To Pay Income Tax Or A Gross Receipts Tax Based In Part On Where Their Customers Are Located?
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    A. The question of whether the point of delivery of goods or services is a factor to be used in determining income taxation is not unique to Internet or other forms of electronic commerce. As stated previously there should be no distinction between the taxability of transactions which take place electronically and those that occur in the tangible world.
    A complication may arise in applying some income tax concepts to profits from electronic commerce because certain data may not be available. In some cases, for example, the location of the customer may not be readily determined. Under conventional tax practice, there are rules to deal with analogous conditions. One example is the ''throw-back'' rule. If the location of delivery cannot be determined, or tax nexus does not exist where delivery is made, then the sale is often deemed to be made at the location from which the goods were shipped. When ''mirror servers'' in different locations are utilized. however, it is difficult to know even where the goods are shipped from. Services are often sourced where they are performed, and income from intangible assets is frequently attributed to the taxpayer's legal domicile. It may be desirable to refine the application of traditional rules of practice to deal with peculiarities of electronic commerce, but these issues are not beyond resolution.
    The important thing, to keep in mind is that the substance of a transaction or activity should determine its tax status, not the vehicle by which it is conducted.
    Of concern to ISPs and vendors operating on the Internet is that every effort be made by taxing, jurisdictions to avoid the risk of double taxation. The adoption or consistent taxing terms, definitions and concepts would eliminate many of the problems that will otherwise occur when one jurisdiction seeks to impose income tax based on one criteria while another jurisdiction embraces a conflicting taxing criteria.
    Q. 9. What Are The Implications For State Taxation Of Internet Services In A Global Tax Environment?
    A. As the world leader in technology development, the U.S. is in the position of establishing industry standards and protocols for the world at large This is also true of tax issues associated with emerging technology and the new services and transactions it has fostered. Other nations are monitoring U.S. practices to guide them in formulating their own policies.
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    For example, if states impose a tax on transactions that take place over a server located in their state, regardless of where a purchaser is, on-line consumers outside of the U.S. will be assessed state taxes on their transactions. This may encourage foreign countries to impose similar taxes on all transactions conducted over servers that reside in their jurisdictions including cross-border transactions. This could result in the Balkanization of the Internet, as companies try to determine how to deal with this multiplicity of tax law.
    Some nations may single out U.S. companies for retaliatory treatment, as the United Kingdom (UK) did in response to Barclays Bank International, Ltd. v. Franchise Tax Board. In that case, California applied a worldwide unitary apportionment formula for income tax purposes on a UK corporation with a subsidiary operating in California. The UK responded by threatening onerous taxes on all U.S. companies with subsidiaries operating in the UK. (The matter was only resolved when California instituted the alternative ''waters-edge'' election effectively ending worldwide taxation of Barclays' operations.) If states move forward aggressively and begin taxing Internet commerce in such a way that it affects the tax liability of businesses or individuals located outside the U.S., we may find ourselves involved in substantial international tax disputes before we have a chance to negotiate international tax agreements. Such a course of action would be misguided.
    Any tax requirements imposed on Internet transactions by states and localities will Potentially have global ramifications, and should therefore be approached very cautiously.
    Q. l0. Isn't It Reasonable For States To Expect To Benefit From The New Technology And The Resulting Products and Services This Technology Bias Fostered?
    A. Yes, and they are. Internet related activity is already being taxed. Both Internet access providers and their customers already pay taxes on the telecommunications facilities used to provide access to the Internet. As more and more people access the Internet, states are benefiting from increased tax revenue they are receiving from increased use of telecommunications facilities. They are also benefiting from increased purchases of tangible property such as personal computers, printers. servers and peripheral equipment.
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    It is logical to assume that as industry grows and hires more and more people to meet the increased demand for goods and services. states will reap the benefits of economic growth through the increase in income taxes, sales taxes, property taxes, and payroll taxes being paid. as well as expanded availability of disposable income. Other benefits include expansion of educational opportunities, better healthcare, increased quality and reduced cost of government services, and a new way to reach rural areas and inner cities to provide services.
1V. Recommendations

    A. Traditional concepts of nexus may not be entirely appropriate for electronic commerce and Internet related services. Whatever standards are applied should be done uniformly from state to state and from taxpayer to taxpayer.
    B. No unique taxes should be imposed on electronic commerce. Existing structures are flexible enough to adapt to electronic commerce. Specific rules and interpretations at the regulation level, however, do not always fit the new pattern of business activity in electronic commerce.
    C. Intangible products sold and delivered over the Internet should be treated the same way for tax purposes as products purchased off-line in the tangible world. Traditional rules of practice, however, must be refined to deal with the peculiarities of electronic commerce.
    D. Tangible goods purchased electronically and physically delivered should be subject to the same transactional tax requirements imposed on the mail order industry.
    E. The same standards used to determine the establishment of an agency relationship for tax purposes in the tangible world should be applied to electronic commerce.
    F. Use of the location of a computer server to determine the taxability of ISPs vendors or transactions they engage in is virtually unworkable from an administrative perspective.
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    G. Any tax requirements imposed on Internet transactions by states and localities win potentially have global ramifications, and should therefore be approached very cautiously.
    H. State and local governments should take action to prevent double taxation.
    I. Tax policy should encourage Made in electronic commerce.
    J. States need to recognize and acknowledge the difference between the transport Of a signal (telecommunications), enhanced services, and content.
VI. Conclusion

    Unreasonable tax burdens will hinder the growth of the Internet, a medium with great potential for contributions to the economic health of the states and the welfare of their citizens. If the Internet is going to be a boon, it will also be a boon to the states. Any new public policy should remove obstacles to achieving the maximum economic growth possible, enable more Americans to use the Internet to take advantage of the rich resources in information, communications, and computing technologies, and create the largest possible marketplace for U.S. providers of high technology products and services.
    State and local governments have a responsibility to create an environment that will facilitate economic growth and make available to its citizens the many benefits new technology has to offer.
    For more information, contact Carol Cayo of the Information Technology Association of America at 703–284–5352 or ccayo@.itaa.org.
    Special thanks to the following ITAA member companies for their contributions to the completion of this paper: Deloitte and Touche LLP, MCI, IBM, Arthur Andersen LLP, General Electric, ISSC, EDS and Microsoft.
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PREPARED STATEMENT OF GROVER G. NORQUIST, PRESIDENT, AMERICANS FOR TAX REFORM

    Mr. Chairman, Americans for Tax Reform strongly supports the Internet Tax Freedom Act introduced in the House of Representative by Congressman Chris Cox as H.R. 1054 and in the Senate by Senator Ron Wyden as S. 442. This is absolutely essential legislation that sets the tone for much tax and regulatory policy in the future.
    Though not a tax bill as such, the Cox-Wyden legislation does represent one of the most important statements about tax policy that Congress will make in this session, and it marks the first attempt by Congress to grapple with difficult issues that arise from the unprecedented global integration of markets in the information age. We will have to live with precedents set by this decision for many years to come. Thus, it is critically important that Congress get this decision right.
    There are both short-term and long-term considerations to examine in assessing Cox–Wyden. Understandably, the short-term considerations have gotten most attention in other testimony. Notably:
Uncertainty about future tax liability is impeding the growth of commerce on the Internet.

Net-specific taxes and taxes on Internet access threaten to choke the Internet itself economically at a critical early stage of its development.

Taxes and regulation imposed at a time when technology is still evolving rapidly would have the effect of locking the Internet into specific technologies and modes of service that fall far short of likely potential.
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    The definitional issues posed by taxation are particularly difficult at a time when so-called Technological convergence'' is making services offered by wired, wireless and satellite technologies interchangeable. Similarly, ''economic convergence'' is making it impossible to distinguish between various communications services. Whatever the technology or mode of transmission, all such services merely involve swapping binary digits one way or another. In short, the traditional fixed targets of industrial-age tax policy are disappearing which is a point I will return to later.
    Meanwhile, the Constitutional issues raised are absolutely clear. The United States Constitution reserves to Congress in Article 1, Section 8 the authority to regulate interstate commerce. The historical antecedents to this were barriers to bade erected by the states and attempts by the states to practice mercantilistic trade policies directed at one another. In keeping with the Framers' intent, Congress has acted to pre-empt state and local taxation of interstate commerce in an enormous variety of circumstances. These include: Taxes on interstate motor canters. Taxes on out of state pension income. Local taxes on direct-to-home satellite television services. Taxes on air commerce. Taxation of securities transactions based solely on the physical locality of registered clearing agents. Taxes that discriminate against electric power transmission by out of state companies. Taxation of income from interstate commerce where there is no significant nexus between the state and the taxable activity conducted.
    Thus, in practical and Constitutional terms, there is simply no case for allowing states to tax the Internet in any discriminatory fashion that is prejudicial to interstate brace. States might just as soon attempt to tax use of the United States Postal Service. Other witnesses will point out the impossibility of linking activity on the Internet to any one geographic location, and the problems that arise when in theory a single transaction conducted over the Internet can pass through every point in which Internet exists.
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    For my purposes, it suffices to observe that the fanciful definitions of nexus we see some states advancing are little more than polite covering for a revenue grab. As a taxpayer activist interested in smaller government, I would oppose such measures even if they did not violate every principle of Federalism.
    Allow me then, to bring up a second set of issues: long term, secular trends that are transforming the world economy. The information age and global economic integration are steadily forcing the public sector everywhere to consolidate and reduce the costs imposed on private sector activity. Speaker Gingrich has talked about the coming painful rationalization of the regulatory-welfare state. He was right. That day is here; that time is now.
    The globally integrated world economy of the information age imposes a much higher standard of efficiency on tax and regulatory policy than has been possible or even imaginable previously. In the past, market inefficiencies arose due to imperfect knowledge, lack of information processing capability, poor communications, the cost of transportation, cultural barriers, and other impediments to trade. Today electronic communications and deregulated transportation services make physical distance an almost irrelevant consideration in matching suppliers with consumers worldwide.
    Increasingly sophisticated performance measures and management theory have made possible a revolution in quality and productivity throughout the industrial world. Improved methods of analysis and decades of empirical data on the impact of regulation have made possible similarly advanced analyses of the costs and benefits of various tax and regulatory models. Now, just as global competition has forced American businesses of all sizes and types to cut costs, to innovate, to learn new flexibility, and to systematically eliminate structural inefficiency wherever it occurs similar pressures are coming to bear on all levels of government. Federal, state, and local government agencies must choose to be on this train or under it.
    The history of tax and regulatory policy in the industrial age up to now has followed a simple pattern. Every time new industries arose, governments attempted to impose a new tax on their products. The British Townshend Acts of 1767 which imposed taxes on such items as paper, glass, paint, and tea entering the American colonies played a critical role in furthering our national drive for independence. Even after Independence, the United States Government still obtained the bulk of its revenues from tariffs on trade and excise taxes on manufactured items well into the 20th century.
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    Since the ratification of the Sixteenth Amendment and the imposition of the income tax, the emphasis in federal taxation has moved to new taxes that have been successively imposed on broadening economic definitions of income. In effect, entire new tax systems were layered on top of one another, resulting in much conflict and repeated taxation of the same income stream. The systems were also applied to increasingly complex, many-tiered definitions of taxpayers, which further compounded the problem. Today, the only way to make this mess better is to stop adding to it and to replace the entire existing tax code with an integrated, single-rate tax system such as the Hall-Rabushka flat tax. This has the advantage of sweeping away an bureaucracy and taxing all forms of economic activity the same way at a single low rate that can be lowered further over time.
    In like manner, regulatory policy has resulted in a series regulatory goals, each one of which was met by the establishment of a new, centralized regulatory bureaucracy. Bureaucracy upon bureaucracy has piled up, at a cost of hundreds of billions of dollars to the U.S. economy annually. Here too, the first step in reform is to stop adding to the mess. We must institute strict regulatory budgeting and set about the task of deregulating the economy wherever possible. Further, we must replace bureaucratic models of regulation with new systems based on property rights private negotiations, and market mechanisms. This win be difficult, but no challenge is more critical than the initial commitment to reject the creation of any new bureaucracy. Only then will appropriate structural change in government come about.
    On the state level, tax and regulatory systems have been even more ad hoc. While many states have adopted income, property, and broad based sales taxes, the heritage of many opportunistic excise taxes still remains. There was a pronounced tendency among the states to impose discriminatory taxes of ah kinds directed against ''public utilities,'' particularly if these were privately owned monopolies such as the old Bell System. For instance, the property tax on two identical buildings, side by side, might be radically different if one happened to be owned by a local telephone company. Today, one must truly ask: who is the phone company? Who is the cable company? Are cables along public rights of way the only viable infrastructure for delivering services, or can wireless or satellite-based systems offer equivalent products with digital quality? The questions go on and on. The only answer is to stop attempting to differentiate between various types of information businesses by political criteria and to concentrate instead on achieving neutrality and transparency. The old-industry specific taxes only impede the course of future innovation. New cybertaxes are like pouring sand in the gears the structurally friction-free economy we strive for in the future.
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    I would also like to point out the folly of building potentially hidden transactional taxes and fees into what should be a global web of commerce. The global Tobin Tax that has been proposed as a transactional fee of one-tenth of one percent levied on international currency flows seems small but would nonetheless generate $1.5 trillion per year for an agency such as the United Nations. On a national or state level similar small transactional levies or ''bit taxes'' based on the amount of information transferred could certainly contribute to the growth of government. Such taxes would also discourage global commerce in favor of the more easily taxed and regulated kind. This is precisely the goal of bit taxes in nations such as Italy and Belgium. Even American states such as Nebraska and Texas are attempting to devise Internet taxes that discriminate against or play the proverbial ''gotcha'' game with out-of-state businesses.
    Enlightened states and enlightened Governors such as Pete Wilson of California, Bill Weld of Massachusetts, George Pataki of New York, and Fob James of Alabama have all determined that their states' future prosperity depend on continued development of the Internet at its current exhilarating pace. The 744 state legislator—more than one tenth of all state legislators who have signed the Americans for Tax Reform State Taxpayer Protection Pledge against any state tax increase whatsoever would agree. A list of the state legislators who have signed the Taxpayer Protection Pledge is appended to this testimony and available on the Americans for Tax Reform website at www.atr.org.

43–665 CC

1997
INTERNET TAX FREEDOM ACT

HEARING
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BEFORE THE

SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW

OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

ON

H.R. 1054

INTERNET TAX FREEDOM ACT

July 17, 1997

Serial No. 25

Printed for the use of the Committee on the Judiciary
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For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
STEVEN SCHIFF, New Mexico
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
SONNY BONO, California
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRISTOPHER B. CANNON, Utah
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JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN ROTHMAN, New Jersey

THOMAS E. MOONEY, Chief of Staff-General Counsel
JULIAN EPSTEIN, Minority Staff Director

Subcommittee on Commercial and Administrative Law
GEORGE W. GEKAS, Pennsylvania, Chairman
STEVEN SCHIFF, New Mexico
LAMAR SMITH, Texas
BOB INGLIS, South Carolina
ED BRYANT, Tennessee
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STEVE CHABOT, Ohio

JERROLD NADLER, New York
SHEILA JACKSON LEE, Texas
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts

RAYMOND V. SMIETANKA, Chief Counsel
CHARLES E. KERN II, Counsel

C O N T E N T S

HEARING DATE
    July 17, 1997

    H.R. 1054

    Gekas, Hon. George W., a Representative in Congress from the State of Pennsylvania, and chairman, Subcommittee on Commercial and Administrative Law

    Arnold, Stanley R., Comissioner New Hampshire Department of Revenue Administration, and president, Federation of Tax Administrators

    Foley, Howard P., president, Massachusetts High Technology Council

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    Holleyman, Robert, president, Business Software Alliance

    Ireland, Andrea L., associate general counsel, Netscape Communications Corp.

    Valenti, Jack, president and CEO, Motion Picture Association of America

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Arnold, Stanley R., Comissioner New Hampshire Department of Revenue Administration, and president, Federation of Tax Administrators: Prepared statement

    Hellerstein, Prof. Walter, University of Georgia, School of Law: Prepared statement

BAS Policy Principles for Electronic Commerce
Letter dated June 4, 1997, to Hon. William J. Clinton
Prepared statement

    Houghton, Kendall L., general counsel, Committee on State Taxation: Prepared statement

    O'Neill, Brian, councilmember, City of Philadelphia, PA, and first vice president, National League of Cities: Prepared statement

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    Wyden, Hon. Ron, a Senator in Congress from the State of Oregon: Prepared statement

    Material submitted for the hearing










(Footnote 1 return)
Attachment: Building an Information Economy—Software Industry Positions United States for New Digital Era.

(Footnote 2 return)
While there are many aspects of constitutional nexus that are unclear or open to debate, the Supreme Court stated the ''continuing value of a bright-line rule in this area and the doctrine and principles of stare decisis indicate that the Bellas Hess [physical presence] rule remains good law.'' Quill Corp. v. North Dakota, 504 U.S. 298, 317 (1994).

(Footnote 3 return)
The California State Board of Equalization (SBE) has approved an amendment to Regulation 1684, ''Collection of Use Tax by Retailers,'' that clarifies that the use of a computer server on the Internet to create or maintain a World Wide Web page or site by an out-of-state retailer will not be considered a factor in determining whether the retailer has substantial nexus with California. Likewise, the SBE rejects representative or agency nexus theories that depend upon the retailer's relationship with an Internet service or World Wide Web hosting service provider.

(Footnote 4 return)
Complete Auto Transit Inc. v. Brady, 430 U.S. 274 (1977); see also City of Winchester v. American Woodmark Corp., 252 Va. 98, 471 S.E.2d 495 (Va. 1996).

(Footnote 5 return)
Throughout the testimony the term ''Internet'' should also be read to include proprietary, online subscriber networks (e.g. American Online, Prodigy) unless so stated or the context otherwise requires.

(Footnote 6 return)
This information was obtained from Blatt, Is Internet Access Subject to Sales Tax? Current Practices Discussed, 58 State Tax Review (CCH), No. 10 (March 10, 1997), plus telephone interviews by FTA with selected states.

(Footnote 7 return)
There has also been some discussion that multiple states might attempt to tax a single transaction because the message completing the transaction may travel through multiple states or several states might have some part in the transaction e.g., seller, buyer, server, etc. State sales taxes are ''destination-based'' meaning it is their state to which the good is shipped or in which the service is used that his primary claim to the taxation of the sale. In addition, the U.S. Supreme Court in Goldberv v. Sweet, 484 U.S. 1057 (1988), analyzed state taxation of interstate telecommunications and its teachings are relevant here.

(Footnote 8 return)
The bill contains an exception from the moratorium for the imposition of taxes measured by net income and fairly apportioned business license taxes. It also excepts the imposition of a requirement on interactive computer service providers to collect sales and use taxes on sales effected by the Internet or interactive computer services as long as the rules are identical for those direct marketers and mail order sellers. This itself raises certain issues that are discussed below.

(Footnote 9 return)
The definitions of 'Internet' and 'interactive computer service' are borrowed from the ''Decency Act'' provisions of the Telecommunications Reform Act of 1996 [Section 230(e) of the Communications Act of 1934 (47 U.S.C. 230(e)).] These provisions were intended to prevent the distribution of obscene material over the Internet to children and others. The definitions given the terms in the context of the Decency Act were understandably broad in nature. Moving those same definitions to a tax context, however, creates serious problems.

(Footnote 10 return)
See, e.g., Straight Talk: Internet, Tax and Electronic Commerce, A White Paper on Taxation of Electronic Commerce and the Internet, December 1996, Information, Technology Association of America; and Logging On to Cyberspace Tax Policy (White Paper), December, 1996, Interactive Services Association.

(Footnote 11 return)
As noted in the next paragraph, I represent no such entity.

(Footnote 12 return)
See Jerome R. Hellerstein and Walter Hellerstein, State and Local Taxation 305 (6th ed. 1997) (describing the relatively few statutes in which Congress has exercised its power under the Commerce Clause to restrain state tax power).

(Footnote 13 return)
115 S.Ct. 1331 (1995).

(Footnote 14 return)
Pub. Law 104–88, 109 St. 803, Dec. 29, 1995, 49 U.S.C. 14505.

(Footnote 15 return)
See Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 653 (1948).

(Footnote 16 return)
Indeed, the literal language of the statute would bar a state from imposing any ''tax, fee, head charge, or other charge on . . . a passenger traveling in interstate commerce by motor carrier.'' Thus, an state income taxes imposed on those who have travailed as passengers in interstate commerce are arguably prohibited. To confine its scope, one might read the legislation as limiting the states from imposing taxes on passengers ''with respect to'' their travel in interstate commerce by motor carrier. But so read, the legislation might not reach the tax in Jefferson Lines itself, because the tax, as in interpreted by the Court, was imposed not ''with respect to'' interstate transportation but rather on the freedom to purchase a ticket. See generally, Walter Hellerstein, et al., Commerce Clause Restraints on State Taxation After Jefferson Lines, 51 Tax L. Rev. 47 (1995).

(Footnote 17 return)
For example, in North Dakota, mutual or cooperative telephone companies pay a cross receipts tax in lieu of property tax, in South Dakota, small telephone companies (less than $25 million in receipts) pay a gross receipts tax in lieu of property tax; and in Wisconsin, local exchange carriers pay a gross receipts tax in lieu of property tax, although the law has been repealed effective May 15, 19987. Office of Tax Policy Analysis, New York State Department of Taxation and Finance, Improving New York State's Telecommunications Taxes: A Background Study and Status Report 49–53 (1996); [1 Wis.] State Tax Rptr. (CCH) 80–130 (1997).

(Footnote 18 return)
I consider definitional issues further below.

(Footnote 19 return)
Almost all states with sales and use taxes impose such levies on telecommunications services, and many states tax information, data processing, and mainframe access services. Federation of Tax Administrators, Sales Taxation of Services: 1996 Update 9–10 (1997); Office of Tax Policy Analysis, New York State Department of Taxation and Finance, Improving New York State's Telecommunications Taxes: A background Study and Status Report 49–53 (1996).

(Footnote 20 return)
David Cowling and Andrew M. Ferris, Internet Taxation Reviewed, State Tax Notes July 7, 1997, pp. 41, 45–46.

(Footnote 21 return)
Students of state taxation will recognize the distinction between so-called ''direct'' net income taxes imposed ''on'' the income and ''indirect'' taxes imposed on some other subject (e.g., a corporate franchise) and merely measured by net income. The distinction, though discarded as anachronistic and formalistic in some areas of state tax law, continues to be important in other areas. See, e.g. 31 U.S.C. 3124 (barring ''direct'' state taxes on federal obligations or the income there from but permitting ''a nondiscriminatory franchise tax'' measured by such obligations or income).

(Footnote 22 return)
That section defines ''interactive computer services'' as ''any information service, system, or access software provider that provides or enables computer access by multiple users to a computer server, including specifically a service or system that provides access to the Internet and such systems operated or services offered by libraries or educational institutions.''

(Footnote 23 return)
Webster's Third New International Dictionary (1967) defines it as ''a legally authorized period of delay in the performance of a legal obligation or the payment of a debt's (e.g., ''asked the legislature for a moratorium of one year on farm mortgage payments''), ''a waiting period set by some authority'' (e.g., ''usually there was at least one day's moratorium on news coming out of such background briefings''); ''a suspension of activity: a temporary ban on the use or production of something' (e.g., ''so thorough was the moratorium on brains that nobody in power dared do any primary thinking'').

(Footnote 24 return)
358 U.S. 450 (1959).

(Footnote 25 return)
Comment, State Taxation of Interstate Commerce, 36 U. Chi. L. Rev. 186, 189 (1968).

(Footnote 26 return)
Act of Sept. 14, 1959, Pub. L. 86–272, 73 Stat. 55, codified at 15 U.S.C. 381–85. See generally Walter Hellerstein, State Taxation of Interstate Business and the Supreme Court, 1974 Term Standard Pressed Steel and Colonial Pipeline, 62 VA. L. Rev. 149, 151–54 (1976).

(Footnote 27 return)
Id.

(Footnote 28 return)
Special Subcomm. on State Taxation of Interstate Commerce of the House Comm. on the Judiciary, State Taxation of Interstate Commerce, H.R. Rep. No. 1480, 88th Cong., 2d Sess. (1964) H.R. Rep. Nos. 565 and 952, 89th Cong., 1st Sess. (1965) (popularly known as the ''Willis Committee Report'').

(Footnote 29 return)
See supra note 16.

(Footnote 30 return)
For example, the April 7, 1997 issue of State Tax Notes includes three such articles, Kutten Electronic Commerce and Tax Law: Two Often-Overlooked Issues, Steele, Nexus at the Dawn of the Electronic Commerce Revolution, and Hamilton, Toward More Cogent Policy on Electronic Commerce.

(Footnote 31 return)
Memorandum TSB–M–97(1), reprinted in CCH New York St. Tax Rep. 300–224 (1997).

(Footnote 32 return)
D.C. Code 47–2001(n)(1)(N)(A)(I).

(Footnote 33 return)
Iowa Rule 701–18.20(422), reprented in CCH Iowa St. Tax Rep. 64–720 (1997).

(Footnote 34 return)
For example, see Technical Assistance Advisement, No. 95A–025R (Oct. 3, 1995), reprented in CCH Fla. St Tax Rep. 11202–989.

(Footnote 35 return)
See Tax Implications of the Telecommunications Act of 1996, published by Vertex, Inc. on its web site at http://www.vertexinc.com/taxcybrary20/article—20A.html.

(Footnote 36 return)
See Vertex, Inc. web site at http://www.uertexinc.com/products40/quantum—41Ahtml.

(Footnote 37 return)
Id.

(Footnote 38 return)
The State Factor, Telecommunications Taxation Reform, American Legislative Exchange Council, Volume 22, Number 3, July 1996. (See attached Appendix I)

(Footnote 39 return)
Supporting the Information Superhighway: A Framework for State and Local Taxation of Telecommunications Services, The Information Highway State and Local Tax Study Group, State Tax Notes, July 3, 1995. (See attached Appendix II)

(Footnote 40 return)
Telecommunications Taxation Resolution, National Governor's Association Winter Meeting 1997. (See attached Appendix III)

(Footnote 41 return)
Treasury notes that section 5 of the Act would prohibit governmental regulation of the price of interactive computer services or information services transmitted through the Internet. The Administration has no position on section 5 at this time.

(Footnote 42 return)
As reported in Tax Analysts' State Tax Today 7–17–97, Document Reference 97 STN 137–9.

(Footnote 43 return)
This would be equivalent to a Section 3(b)(3)(C) in the Cox bill as introduced.

(Footnote 44 return)
Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. (1992).

(Footnote 45 return)
State Revenue Report: Robust Revenue Trend Continues by Donald J. Boyd and Elizabeth I. Davis, which appeared in the March 24, 1997, issue of State Tax indicates that nationwide state stales and use tax revenues increased 6.1% over the same quarter in the previous year, with individual states reporting sales and use tax revenue increases up to 25%. Five states had double digit increases and no states had decreases. After adjusting overall tax receipts for the effects of inflation and legislated tax changes the fourth quarter was one of the three strongest measured by the State Revenue Report since it began publication in 1990.

(Footnote 46 return)
See: http://www.us.kpmg.com/salt/archive/july96/storyl.html.

(Footnote 47 return)
National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753.

(Footnote 48 return)
Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. (1992).

(Footnote 49 return)
We note that the testimony of Mr.Wade Anderson, Texas Director of Tax Policy, before this subcommittee, made no mention of this provision which was At that time under consideration before the Texas legislature.

(Footnote 50 return)
See, for example, the recommendation contained in the NTIA report Privacy And The NII: Safeguarding Telecommunications-Related Personal Information, which recommends that customers be required to consent, in advance, to any disclosures of their purchase information. The report is available on the Internet at: http://www.ntia.doc.gov/ntiahome/privwhitepaper.html.

(Footnote 51 return)
For example, 18 U.S.C. 2710 (Video Privacy Act of 1988).

(Footnote 52 return)
On December 23, 1996 the FTC issued a letter rejecting the petition, stating that ''it does not appear that there is significant consumer injury associated with catalogs and mail order forms that do not disclose the existence of use taxes'' and that ''it is not clear that the disclosure recommended in the petition would effectively inform consumers of their use tax obligations.''

(Footnote 53 return)
A substantial percentage of users of the Internet do not make use of ISPs or the public telephone network to access the Internet. Rather, these individuals, typically due to arrangements made by their employers, access the Internet more directly through a server owned or leased and operated by their employer.

(Footnote 54 return)
The Telecommunications Act of 1996 defines the term ''telecommunications'' to mean ''the transmission, between or among points specified by the user, of information of the user's choosing, without chance in the form of content of the information as sent and received.''