[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




 
 E-COMMERCE: THE BENEFITS AND PITFALLS OF CONDUCTING BUSINESS OVER THE 
                                INTERNET

=======================================================================

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                              MAY 26, 1999

                               __________

                           Serial No. 106-15

                               __________

         Printed for the use of the Committee on Small Business




                      U.S. GOVERNMENT PRINTING OFFICE
60-258                        WASHINGTON : 1999





                      COMMITTEE ON SMALL BUSINESS

                  JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
DONALD A. MANZULLO, Illinois             California
ROSCOE G. BARTLETT, Maryland         DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey        CAROLYN McCARTHY, New York
SUE W. KELLY, New York               BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio               RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania           DONNA M. CHRISTIAN-CHRISTENSEN, 
DAVID M. McINTOSH, Indiana               Virgin Islands
RICK HILL, Montana                   ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania        TOM UDALL, New Mexico
MICHAEL P. FORBES, New York          DENNIS MOORE, Kansas
JOHN E. SWEENEY, New York            STEPHANIE TUBBS JONES, Ohio
PATRICK J. TOOMEY, Pennsylvania      CHARLES A. GONZALEZ, Texas
JIM DeMINT, South Carolina           DAVID D. PHELPS, Illinois
EDWARD PEASE, Indiana                GRACE F. NAPOLITANO, California
JOHN THUNE, South Dakota             BRIAN BAIRD, Washington
MARY BONO, California                MARK UDALL, Colorado
                                     SHELLEY BERKLEY, Nevada
                     Harry Katrichis, Chief Counsel
                  Michael Day, Minority Staff Director




                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 26, 1999.....................................     1

                               Witnesses

Hill, Daniel O., Assistant Administrator for Technology, U.S. 
  Small Business Administration..................................     6
Miller, Harris N., President, Information Technology Association 
  of America.....................................................     8
Whinston, Andrew B., Director, Center for Research in Electronic 
  Commerce, University of Texas at Austin........................    11
Anderson, Alan W., Senior Vice President, American Institute of 
  Certified Public Accountants...................................    13
Hanson, Brian, Owner, Hanson Bros. Fresh Seafood.................    15

                                Appendix

Opening statements:
    Talent, Hon. James M.........................................    57
    Velazquez, Hon. Nydia M......................................    61
    McCarthy, Hon. Carolyn.......................................    65
    Sweeney, Hon. John E.........................................    66
Prepared statements:
    Hill, Daniel O...............................................    69
    Miller, Harris N.............................................    80
    Whinston, Andrew B...........................................    92
    Anderson, Alan W.............................................   114
    Hanson, Brian................................................   158
Additional material:
    Additional Information Submitted by the Small Business 
      Administration.............................................   162




 ELECTRONIC COMMERCE: THE BENEFITS AND PITFALLS OF CONDUCTING BUSINESS 
                           OVER THE INTERNET

                              ----------                              


                        WEDNESDAY, MAY 26, 1999

                          House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10 a.m., in Room 
2361, Rayburn House Office Building, Hon. Jim Talent (chair of 
the Committee) presiding.
    Present: Representatives Talent, LoBiondo, Kelly, Pitts, 
Forbes, Sweeney, Thune, Velazquez, Pascrell, Christensen, 
Brady, Moore, Napolitano, Baird, and Mark Udall.
    Chairman Talent. I will convene the hearing. I am informed 
that the ranking member, Ms. Velazquez, is in a markup in the 
Banking Committee. So I will go ahead without her and when she 
comes, we will suspend the hearing so she can make her opening 
statement then if she prefers.
    Electronic commerce, commonly referred to as e-commerce, is 
altering the way we conduct many of our business and personal 
transactions.
    E-commerce is simply the ability to conduct many of our 
business and personal transactions over the Internet. Some of 
the most familiar forms of e-commerce are business-to-consumer 
transactions where a company sells its product to a consumer 
over the Internet in a way that is similar to traditional mail 
order catalogs.
    Some popular examples of this type of e-commerce are Barnes 
and Nobles.com, Amazon.com and CDNow.com.
    While consumer purchasing is the most popular notion of e-
commerce, business-to-business sales actually comprise the 
majority of e-commerce transactions. This is important because 
many small businesses have not yet embraced the notion of e-
commerce.
    According to eMarketer, less than 2 percent of the 7 
million U.S. small businesses with fewer than 100 employees 
conduct on-line transactions. Of the 340,000 U.S. business Web 
sites, 145,000 sell products and services on-line. Most of 
these businesses are big companies. In fact, 40 percent of 
companies with over 1,000 or more employees conduct on-line 
transactions.
    These numbers mean that small businesses face the potential 
of losing market share to companies that are staying ahead of 
this technological wave. Indeed, a recent study by Merrill 
Lynch shows that only companies that attain market share on-
line will survive.
    The Merrill Lynch study points to the growth of Internet 
banking, brokerages, and publishers as a direct threat to their 
brick and mortar counterparts.
    The study concluded that, quote, the Internet tends to 
cannibalize retail sales away from store-based retailers, end 
quote.
    E-commerce has attracted many businesses because it has the 
ability to make them more efficient. Additionally, many 
consumers find that computer-based purchasing is easier and 
quicker than fighting traffic and crowds at their local 
shopping mall. A website has the ability to turn a local 
operation into a nationwide or global operation because the 
Internet can reach consumers at the far corners of the Earth.
    Another important benefit of e-commerce is its ability to 
enable employees to handle multiple tasks, since they do not 
have to spend all of their time taking orders over the 
telephone. Additionally, e-commerce has the potential to 
eliminate points in the supply chain and enable manufacturers 
to offer products directly related to the consumer, with the 
aid and expense of traditional distribution in retail chains.
    Finally, the Internet is an easy place for a business to 
obtain its customers' demographics and preferences through 
simple point and click inquiries of those who visit its 
website.
    Although e-commerce has the potential to be a powerful 
force and change the way companies conduct businesses, there 
are some concerns. Many are fearful of transmitting their 
credit card numbers and home addresses over the Internet 
because of the pervasive threat of hackers who can bypass 
supposedly secure networks and later commit fraudulent 
transactions.
    There are also many complaints about the poor return in 
exchange services offered by on-line retailers when their 
customers are not satisfied with their purchases.
    The theft of intellectual property over the Internet has 
also become a pervasive problem. The music industry, to use one 
high profile example, has had difficulty maintaining control of 
its product due to illegal, free downloads that are available 
on thousands of electronic bulletin boards.
    This is the first time that this Committee is tackling the 
issue of e-commerce, and I am sure we will have an interesting 
discussion about its positive aspects and its drawbacks. We 
will hear testimony from Daniel Hill, the Assistant 
Administrator for Technology of the Small Business 
Administration; Harris Miller, who is President of the 
Information Technology Association of America; Professor Andrew 
Whinston, the Director of the Center for Research and 
Electronic Commerce at the University of Texas at Austin; Alan 
Anderson, the Senior Vice President of the American Institute 
of Certified Public Accountants; and Brian Hanson the founder 
of Hanson Brothers Fresh Seafood in Portland, Maine.
    The Internet is an exciting and still developing medium for 
companies to use to conduct businesses. I am looking forward to 
the testimony of our witnesses.
    [Mr. Talent's statement may be found in the appendix.]
    Chairman Talent. When Ms. Velazquez comes, I will be happy 
to recognize her for any comments that she may wish to make. 
And we will go to the witnesses after we have a demonstration 
of how e-commerce operates. So I am going to ask our Committee 
counsel, Mr. Andrews, to proceed with a mock electronic-
commerce transaction.
    Mr. Andrews. Yes.
    Chairman Talent. We are not actually going to purchase 
lobster from Hanson Brothers Fresh Seafood today, but we are 
going to show everybody how it would work if we did indeed want 
to do that.
    I will note that today's mock transaction is with the 
business of one of our witnesses today, Mr. Hanson, who we will 
hear from later.
    Mr. Andrews. Thank you, Mr. Chairman. What we are going to 
do is, as you said, go to the website of the Hanson Brother 
Fresh Seafood Company. The website is www.SeafoodNow.com. We 
are going to operate all the way up until we actually have to 
put in a credit card number.
    Chairman Talent. The Committee counsel asked if he could 
use my credit card number tomake the transaction a reality, and 
I said no. So that is as far as we are going to go towards verity here. 
but perhaps I will be the Dr. Watson of this whole drama, and on behalf 
of everybody here who is computer illiterate, as the chairman is, ask 
the questions that everybody else might be thinking.
    The e-commerce, is it usually done over the website or is 
there a separate Internet location?
    Mr. Andrews. Well, once you place your order, most websites 
take you to a secure website where the information is 
encrypted.
    Encryption is basically just a way to transform the 
information into a complex array of algorithms similar to 
nuclear launch codes.
    Now, what I am going to do is move down the website, to 
select an item. and today with your credit card number, sir, we 
are going to purchase blue claw crab.
    As you can see, the website has a description of blue claw 
crab. It is number 251. It is $9.99 per pound with a five-pound 
minimum order. And it is a popular item so it is unavailable. 
So we shall select another one.
    Chairman Talent. Mr. Baird wants to know how you get the 
crab through the telephone wire. It is questions like that that 
show why we desperately need this hearing.
    Mr. Forbes. It is called virtual reality.
    Chairman Talent. Now, do most of these websites have a list 
perhaps of commonly asked questions, I mean, if you have a 
question about the product, can you do that through the 
Internet?
    Mr. Andrews. Most good websites will have a FAQ section, a 
frequently asked questions section, where many basic questions 
can be answered right at the website.
    Chairman Talent. Okay.
    Mr. Andrews. So now what we are going to do is order 10 
lobster dinners for $400.95. Each lobster is approximately one 
and a half pounds. We would enter the number we want in 
quantity box and just click here to hook this item for your 
order.
    I haven't put in the credit card yet. So right now we are 
at a screen, commonly called the shipping cart screen, which is 
an electronic version of what you would have in your regular 
grocery store, a shopping cart. Right now, If we look at our 
shopping cart we have Cold Bay's Downeast Lobster Feed for 10, 
quantity one, and the price. So I can either recalculate, check 
out, or stop shopping, and I want the check our because that is 
all that I want to order
    On the screen, you have a security alert: You are about to 
view pages over a secure connection. Any information you 
exchange with this website cannot be viewed by anyone else on 
the Web.
    Chairman Talent. It is at the point at the end of the order 
sequence that you go to the secure website?
    Mr. Andrews. Yes, sir, that is correct.
    Chairman Talent. We can ask witnesses today if we want to 
about how secure this is or what steps have been taken to make 
sure they are secure, what concerns there are in this area, et 
cetera?
    Mr. Andrews. Yes, sir. that will be apart of some of the 
testimony that we will be given today.
    Chairman Talent. Okay. Do any Committee Members have 
questions before we end the demonstration Here?
    All right. Thank you, Mr. Andrews. We will go to the 
witnesses.
    If we could have the lights please.
    The ranking member has come and I am pleased to recognize 
her for her opening statement
    Ms. Velazquez. Thank you, Mr. Chairman, and thank you for 
holding the hearing on e-commerce. This is a very important 
topic for our Nation's small businesses and I look forward to 
hearing the witness testimony.
    The Internet revolution is rapidly transforming the way the 
Nation communicates with information and perhaps most 
importantly the way it does business. In 1997, Internet 
commerce accounted for $1.3 billion in retail sales in the 
United States, and though this represents only a small fraction 
of the total, the number is expected to increase to $25 billion 
by the year 2000.
    Furthermore, because the Internet allows small businesses 
to expand more rapidly, it is now possible for entrepreneur to 
reach new customer across the country and around the world with 
a few strokes of the keyboard. The low start-up costs of e-
commerce also enables a greater number of people to start a 
business by removing many of the traditional barriers, and a 
further advantage is that a small business can be open the 24 
hours a day, 7 days a week.
    As these facts indicate e-commerce offers a great deal of 
promise to the future of this Nation's small businesses and, in 
all likelihood, it is only going to grow. Despite all the 
possibilities of success, however, e-commerce also carries with 
it a number of potential pitfalls for the small business 
community.
    There is a great deal of uncertainty about the issue of 
taxes. Although there is currently a moratorium on new taxes, 
many brick and mortar stores, which chart sales tax, are losing 
customers. Additionally, studies have shown that many consumers 
are comparison shopping at traditional stores and buying over 
the Internet.
    As a result, traditional stores, which pay salespeople and 
need to have showrooms, are also losing out. This also ties in 
with the lack of intimacy on which many small businesses rely 
for their customers. The growth of e-commerce has provided 
consumers with unprecedented information about products and 
prices. Some enterprises worry that if they lose intimacy with 
their customers, they will not longer know their needs, a key 
element in remaining competitive with larger, more impersonal 
competitors.
    These are obviously issues that need to be addressed if 
small businesses are to remain competitive. As such, e-commerce 
is the double-edged sword for small businesses. It offers them 
the chance to reach out to new customers and provides greater 
flexibility.
    At the same time, however, the loss of interaction with the 
consumers and lower costs on the Internet represent a 
substantial threat that needs to be addressed. I am glad that 
the Chairman has called today's hearing because it is still 
early enough to study the potential problems small businesses 
may face and work to address these issues. I remain confident 
that our Nation's entrepreneurs will continue to thrive. They 
have faced numerous challenges in the past and one can see from 
the unprecedented economic growth we are experiencing that 
small businesses have met those challenges.
    Once again, thank you Mr. Chairman, for holding this 
hearing.
    [Ms. Velazquez' statement may be found in the appendix.]
    Chairman Talent. I thank the gentlelady, as always. We will 
go right to the witnesses.
    The gentleman from New Jersey has asked about more opening 
statements. It is the general practice of the Committee, unless 
there is some special interest or history of one of the members 
with it, just to go with the opening statements from me and the 
ranking member but if you want to put one in the record that 
would be fine.
    I will tell you what, Mr. Pascrell, your interest and 
involvement in the Committee is such that with everybody's 
indulgence, go right ahead. I will recognize you for a few 
minutes.
    Mr. Pascrell. Thank you, Mr. Chairman.
    I will not read my entire statement. I will put it into the 
record.
    I am very concerned, Mr. Chairman, about something you have 
spoken about and the ranking member have spoken about, and that 
is the issue of taxes and the Web.
    I can remember, as a mayor of a city, Mr. Chairman, having 
to deal with many trucks that rolled into my fairly large 
community, set up base on a street and sold out of the back of 
the truck furniture, to you name it, and in the city you name 
it. Those folks who came up from different parts of the South 
to sell their wares made decent products. They not only put at 
disadvantage those folks within the community who sold those 
same products, similar products, but they also, since they were 
mobile, they also paid no taxes whatsoever to the community 
where taxes were called for.
    I know we have put a moratorium on this, but as this grows 
and as the Internet grows, we need to be very aware and very 
sensitive, and I thank you for having this hearing, to what 
this is going to mean in terms of local revenues. If this is a 
way to skirt the issue, to skirt taxes, as that truck that 
wheeled into Patterson, New Jersey, so many times, I think this 
is a lot more serious than we think. This is happening all 
across the United States of America.
    To me, there is no difference between selling things on the 
Internet and whelling a truck into town from another state; 
there is none whatsoever. I think we need to understand what's 
at stake here and move accordingly.
    I thank you for allowing me to make an opening statement.
    Chairman Talent. Of course. I appreciate the gentleman's 
point. It is a very serious one. Not only is this a potential 
threat to the revenue base of municipalities and States but, it 
introduced a potentially unfair note of competition with the 
retailers who do have to collect sales taxes. We have all 
struggled with this in other contexts with catalog sales, and 
the gentleman mentions another instance, these roving 
retailers, if you will, and this is one of the major issues we 
have to confront with regard to Internet sales.
    I don't think anybody in principle wants to prevent people 
from doing e-commerce, but the question is whether, and to what 
extent, we should insist upon equality in tax treatment. That 
is a major issue that only the Congress can deal with and I 
appreciate the gentleman's opening statement. I am sure he will 
want to follow up with questions on that issue.
    Our first witness is Mr. Daniel Hill, the Assistant 
Administrator for Technology of the U.S. Small Business 
Administration. Mr. Hill.

 STATEMENT OF MR. DANIEL O. HILL, ASSISTANT ADMINISTRATOR FOR 
    TECHNOLOGY, UNITED STATES SMALL BUSINESS ADMINISTRATION

    Mr. Hill. Thank you, Mr. Chairman. Good morning, Mr. 
Chairman, and members of the Committee. I will keep my remarks 
brief and with your permission ask that my full written 
statement be incorporated into the record.
    Chairman Talent. Without objection, and we appreciate your 
brevity. Thank you.
    Mr. Hill. Thank you for inviting the U.S. Small Business 
Administration to appear before you to discuss our current 
activities in the area of electronic commerce, otherwise known 
as e-commerce. My name is Daniel Hill and I am the Assistant 
Administrator for Technology at the SBA.
    It is indeed the age of electronic commerce. Twenty-seven 
million purchases are now made on the world Wide Web every day. 
At the beginning of 1993, there were just 50 sites on the Web 
and now the number is estimated to be over one billion. The 
number of small firms engaged in electronic commerce is growing 
rapidly. Global electronic commerce is expected to grow to more 
than $300 billion annually in just a few years.
    The percentage of small businesses will access to the 
Internet nearly doubled in the past 2 years from under 22 
percent in 1996 to over 41 percent in 1998. But there remain 
significant obstacles to small business involvement in this new 
medium. The SBA is working and committed to help small 
businesses overcome these obstacles and take advantage of the 
many opportunities afforded by electronic commerce.
    What is electronic commerce? Electronic commerce refers to 
more than just the buying and selling of goods over the 
Internet. It is using the power of computers, the Internet and 
shared software to send and receive product specifications, 
drawings, bids, purchase orders and invoices, and any other 
type of data that needs to be communicated to customers, 
suppliers or employees.
    Electronic commerce is a new way to conduct business, 
affecting not only internal business activities within a firm 
but also requiring new kinds of coordination with other clients 
and other institutions.
    In most industries, this requires the adoption of new 
business models involving new organizational structures and 
business strategies.
    The potential opportunities that electronic commerce and 
the Internet afford small business are staggering. The smallest 
companies now can have instant access to customers and 
suppliers worldwide in ways that only the largest multinational 
corporations have had in the past, and, many small businesses 
are being formed on the basis of this new-found opportunity.
    At the same time, small firms that do not adopt electronic 
techniques run the risk of losing market share and customers 
from missed opportunities. At the SBA, we are working hard to 
encourage small business involvement in electronic commerce 
both as users and as developers and innovators of this new 
technology.
    Many small firms do not have access to the Internet and do 
not understand the need for it. These firms are in danger of 
missing the competitive opportunities made possible by 
electronic commerce. The SBA can and does play an important 
role in helping such firms by providing technical assistance, 
training and information.
    At the other end of the spectrum of small firms are the new 
high-tech start-ups that are formed with advanced computer and 
information technology expertise. Many of these firms are in 
the business of developing and adapting the information, 
telecommunications and computer technologies that make 
electronic commerce possible. They are at the cutting edge of 
the Internet and electronic computer technologies. These firms 
do not need assistance or training, but they do need to have a 
fair legal and regulatory environment to foster innovation.
    The SBA is working hard on the various electronic commerce 
related projects, which I have included in my full written 
testimony. We will be introducing very shortly an e-commerce 
course on our on-line classroom. We are working with other 
government agencies. We are working with credit card companies. 
We are part of the digital economy working, that is being 
chaired by the White House.
    We have created a number of Internet-based systems, PRO-NET 
and ACE-NET, and we areabout to unveil TECH-NET. I have 
attached complete descriptions of those projects in my written 
testimony.
    Our ongoing activities are consistent with President 
Clinton's directive on electronic commerce and policy which was 
issued November 30, 1998. This statement directed the U.S. 
Department of Commerce and the Small Business Administration to 
develop strategies to help small businesses overcome barriers 
to the use of the Internet and electronic commerce.
    In response, we are planning a series of activities and 
working closely with the Department of Commerce, and other 
agencies as well, to implement a broad-based effort to identify 
specific areas of need and to provide outreach, extension and 
technical assistance to small firms.
    Some of our plans include working in partnership with the 
private sector and other Federal agencies. We have already 
talked with the ITAA, whom you will hear from shortly. We are 
going to target small, minority and women-owned businesses, 
educating them about electronic commerce. We want to develop a 
framework for understanding the ways electronic commerce and 
the Internet affect small business activities, including 
marketing, network production and innovation. We are also 
developing improved means of measuring and analyzing this 
impact.
    We have a tremendous website already on-line. We intend to 
expand on that. We want to reach out to every small business to 
make them aware of the benefits of Internet and EDI, electronic 
data interchange.
    Of course, our traditional role is to provide the training, 
the consultation and, where possible, some technical support 
services in concert with our resource partners.
    SBA's FY 2000 budget request to Congress includes $2 
million to help support some of these electronic commerce 
activities that I have spoken about. If approved, we propose to 
use these funds to carry out the presidential directive and 
work with private sector and other Federal agencies engaged in 
electronic commerce.
    Thank you for the opportunity, Mr. Chairman, to discuss 
SBA's activities in the area of electronic commerce. I will be 
happy to answer any questions that you and the Committee might 
have. Thank you.
    [Mr. Hill's statement may be found in the appendix.]
    Chairman Talent. Thank you, Mr. Hill.
    Our next witness is Mr. Harris N. Miller, who is the 
President of the Information Technology Association of America 
in Arlington, Virginia. Mr. Miller.

   STATEMENT OF MR. HARRIS N. MILLER, PRESIDENT, INFORMATION 
        TECHNOLOGY ASSOCIATION OF AMERICA, ARLINGTON, VA

    Mr. Miller. Chairman Talent, thank you for having me back 
before the Committee. I appreciate the opportunity. I would 
like to have my full statement included in the record.
    I also have a request whether counsel is going to serve us 
some of that lobster after the hearing as a reward for our 
appearing here before your Committee.
    Chairman Talent. If the Information Technology Association 
wants to use its credit card.
    Mr. Miller. I will have to check on that. Thank you.
    Chairman Talent, I would like to thank you for the 
opportunity to appear before your Committee and address the 
benefits and challenges, I wouldn't use the word pitfalls, of 
electronic commerce for small businesses. As president of an 
association which represents over 11,000 companies in the IT 
sector, we believe that electronic commerce provides great 
opportunities to channel the entrepreneurial spirit of every 
small business person to grow his or her business and become an 
even more effective part of the electronic commerce digital 
age.
    Today I will outline the dispel six myths which we find in 
talking to small businesses and then give you some sense of the 
benefits of electronic commerce among small businesses.
    Number one, as Mr. Hill pointed out, there is the myth that 
e-commerce consists solely of buying and selling on the 
Internet. In fact, e-commerce is much more than that. It 
includes customer service, sending e-mails, marketing, 
advertising, transferring funds between business, doing on-line 
research. That is all part of e-commerce.
    So any small business which is saying, how do I get into e-
commerce, should realize it is more than just the physical 
transaction of ordering a book or ordering some lobster or 
ordering a sweater.
    Secondly, many small businesses believe that to be 
successful in electronic commerce, all they need is to hook up 
to the Internet.
    Ladies and gentlemen of the Committee, e-commerce success 
for a small business is much more than that. Even the smallest 
firms with the least complicated business models must plan 
their strategy carefully and recognize the potential challenges 
that may await them.
    They need to factor into their entire business model how 
electronic commerce can help them. For example, if they don't 
hook into their ordering system, their supply system, their 
financial management system, their marketing system, the 
electronic commerce transactions and advertising they are 
doing, they are not taking full advantage of it. So we think 
this is a great opportunity for small businesses, and using the 
digital age they can be as effective and efficient and as 
productive as even the largest businesses.
    A third myth is that people think that electronic commerce 
means solely selling products to consumers over the Internet. 
While the growth in consumer purchases on-line is certainly 
growing dramatically and is the stuff of front page stories in 
USA Today, the fact is that by most metrics over 80 percent of 
electronic transactions worldwide are business-to-business, not 
business-to-consumers.
    Another great opportunity, therefore, for small businesses 
is that more and more large businesses in the supply chain 
expect that their suppliers will be able to conduct business 
on-line. You hear the phrase frequently, disintermediation. 
What that means is eliminating the middleman, creating new 
opportunities for small businesses to sell directly to large 
businesses.
    For example, in the automotive world, the large automotive 
producers which used to only order from a very limited number 
of manufacturers and a limited number of small businesses, now 
because of the Internet order from hundred and thousands of 
suppliers, because it is so inexpensive to do business over the 
Internet.
    A fourth myth is that there are no programs to help small 
and medium enteprises; this is primarily a big business 
opportunity. Well, as Mr. Hill outlined, there are many other 
oportunities. In fact, there are many opportunities for small 
business to learn about and to take advantage of electronic 
commerce. Large and small companies alike are providing 
technical assistance to small businesses, sometimes free of 
charge, sometimes with relatively minimal charges, because they 
want to get people into the e-business world.
    The commercial service of the U.S. Department of Commerce 
has developed programs to reach out to small and medium 
enterprises, particularly to give them more advantages in 
export opportunities.
    Mr. Hill outlined the numerous programs at the Small 
Business Administration. Even theDepartment of Defense has a 
program called the electronic commerce resource centers, which advise 
small businesses, often for free, on how to do business with the 
Federal Government electronically.
    Of course, associations such as ours work with small 
businesses all the time to give them free advice on using the 
electronic commerce world.
    Another myth is that every small business person has to 
become a computer geek in order to take advantage of the 
electronic commerce world. That is not true, Mr. Chairman. 
There are plenty of very good services out there where a 
person, as long as he or she knows his or her business and 
works with the information technology community, can easily 
become part of electronic commerce without becoming an expert 
in electronic commerce technology itself.
    The last issue I want to address is that a lot of 
government intervention is going to be necessary here. On the 
contrary, we believe that industry is showing a great deal of 
leadership and self-regulation such as areas like the On-line 
Privacy Alliance which are protecting consumer privacy.
    What does this mean in dollar terms? Well, electronic 
commerce solutions, to give you one example, can reduce the 
costs of a transaction of buying and selling business to 
business or business to consumer by over 90 percent; over 90 
percent. Obviously, that can go right to the bottom line of a 
small business if it can take these transaction costs out of 
its sale.
    It costs Ford Motor Company, for example, $5,000 to get you 
a car, but using the Internet, in its Ford supplier network, it 
plans to reduce that distribution support cost to $500 per car.
    A survey of 500 large companies with sophisticated networks 
found out that 23 percent are using outside firms for 
installation, and they are primarily using small and medium 
enterprises.
    Let me last introduce the issue that Mr. Pascrell and the 
Chairman and Ms. Velazquez raised about Internet taxation. The 
Internet community, the electronic commerce community, is not 
asking for different treatment that catalog orders, mail order 
orders, and other order that is being done across State lines. 
All that we are asking for is there not be special taxes put on 
the Internet.
    If you read the legislation which this Congress passed, 
with the support of many of you, and the mandate given to the 
commission which Governor James Gilmore of Virginia is now 
heading, nowhere is it suggested that people ordering over the 
Internet or suppliers selling over the Internet should be 
allowed to escape taxes, but they are being asked to be taxed 
in the same way as if you ordered something over the telephone 
or ordered something in a written form through a mail order 
catalog. That is what is interesting to us and that is the 
challenge that the commission faces.
    Thank you for allowing me to testify today, Mr. Chairman.
    [Mr. Miller's statement may be found in the appendix.]
    Chairman Talent. Thank you, Mr. Miller.
    Next, we are honored to have with us Professor Andrew B. 
Whinston. Here is a copy of his book, The Economics of 
Electronic Commerce, which I presume is available from 
bookstores or probably Amazon.com, for those wishing to order 
that way.
    Professor Whinston is the Director of the Center for 
Research in Electronic Commerce at the University of Texas at 
Austin in Austin, Texas. Professor Whinston.

   STATEMENT OF MR. ANDREW B. WHINSTON, DIRECTOR, CENTER FOR 
RESEARCH IN ELECTRONIC COMMERCE, UNIVERSITY OF TEXAS AT AUSTIN, 
                           AUSTIN, TX

    Mr. Whinston. Thank you, Mr. Chairman, for inviting me 
here. I will be brief and dispel the myth that all professors 
are long winded.
    First, I will point out that if you want to buy a copy of 
my book, which I recommend, you would get a much better price 
over the Internet. And then the question on taxation, if you 
buy it from Amazon and most other on-line bookstores you 
wouldn't pay any taxes on it because the would be----
    Chairman Talent. Professor Whinston, Mr. Pascrell was just 
beginning to calm down and now you have gotten him excited 
again.
    Mr. Whinston. Well, unfortunately, I am going to come back 
to the taxation issue because I see his point, and we have 
raised that point in our book that taxation in a very broad 
sense is a real challenge.
    Chairman Talent. All right.
    Mr. Whinston. There is this idea that you go on the 
Internet and you have the whole world as your potential market, 
and I think that is, from a practical point of view, a myth. I 
think there is also a lot of talk about the Internet being a 
great equalizer; that is, the large and small are all equal on 
the Internet, and I think that is also a myth.
    The companies that we refer to, E-Bay, Amazon, Yahoo, they 
were all small businesses at one point, probably for 5 or 6 
hours, until they exploded, and it will be interesting, I 
think, to look at why and how these small businesses became 
almost instant, huge businesses.
    Let met mention some of the points that I think are 
critical in this area, which I think are a detriment to small 
business. One is the area of trust. Now, 99.99 percent of small 
businesses, I think, are very trustworthy but from the 
consumer's point of view, now I am going to talk about consumer 
to business, there is a recognition that there are more and 
more scams being developed on the Internet. The question then 
for consumer is should I go with a large recognized brand name 
or take a chance and go with a small business that is unknown 
to me? I don't have physical contact with that business, as you 
have in the traditional world where I can go down to the store, 
see the people in the store, look at them, look at their 
eyeballs, see how they appear and develop this sort of person-
to-person trust.
    On the Internet you have no contact with the people. so 
there is a serious problem of trust, a problem of 
authentication, where individuals are running scams, can run 50 
scams with 50 different identities, have them close down and 
start up with 100 new identities. So these are things that 
result from the cryptographic technology.
    There is a question of how you get identified if you are a 
small business. We have portals that lead people to a small 
business but portals, as money-making businesses, charge for 
having you listed and listed at a high level in the portals. So 
if somebody is searching for a lobster store, you as a lobster 
company want to get listed first, you my have to make a deal 
with the portal. So that is a deterrent.
    Chairman Talent. Professor Whinston, just a minute and tell 
us what a portal is, please.
    Mr. Whinston. A portal is something like a mall in the 
physical world. So a portal is something where somebody is 
standing out in front of a store and everytime you go into 
thestore, you pay them a dollar. So it is just somebody standing out 
there collecting a fee and they are collecting a fee because they are 
telling you, if you want to buy shoes or lobsters on-line this is the 
place to go to. So they are bringing you to that place.
    We think of it as something like the equivalent of a mall. 
Yahoo, Excite, Lycos, these are all portals and they have 
power, especially for small business. Everybody who is in the 
Internet world knows about Amazon and all the other well-known 
brand names and they are marked on their browser. When it comes 
to finding something that is not a brand name, which may have a 
better price, the typical way is you would go to a portal. This 
is a problem, that portals are out to make money.
    Another point, going back to the taxation issue, and of 
course as pointed out it really reflects the way we treat 
catalog companies, so Internet companies in some sense is an 
automation, a higher performance catalog company. So all 
catalog companies to survive would have to go on the Internet 
and thereby getting that type of tax treatment. But even from 
the point of view of small business, if you are on the 
Internet, and we have some way of changing the tax system to 
make it more uniform, there will be a heavy cost to small 
business in dealing with the taxes, in collecting taxes because 
they have to maintain information on taxes all over the country 
or indeed all over the world.
    So the tax thing is really a multifaceted problem for small 
business as against large business, where they are able to 
handle this administrative burden more efficiently with the 
volume.
    Let me just briefly mention some issues of open standards. 
This gets into the question of the Microsoft issue, the Justice 
Department complaint. Microsoft is obviously a large company, 
and the other point of view that is really emerging is to look 
at Linux. Now I am mentioning Linux because you hear about it 
in the news but Linux is really the way, I think, small 
business will exist in the digital version of electronic 
commerce. That is, Linux is an operating system which is really 
a collection of individuals, of small businesses, who prepare 
components. So each business has a competency and a certain 
facet of the operating system field.
    Then as a buyer, you are buying a collection of components 
which are able to integrate. So the point for small business is 
that we have to ensure that as we move to the digital world of 
small business, entertainment, education, digital products, 
that we have open standards. That is, that standards are set by 
a consortium of groups involved in that business, including 
small business. The government should be very vigilant at 
ensuring that no one company gets access to and controls a 
certain standard and thereby, in effect, a certain industry. So 
I think that is an important policy area.
    There will be the growth of electronic money and that will 
raise issues of sovereign money versus electronic money. There 
will be a growth of cryptography, which will mean a basic 
problem of collecting taxes because transactions will be 
encrypted and you won't know whether somebody is sending a bill 
for a couple of million dollars for products or they are 
sending New Year's greetings to someone.
    All the information will be encrypted and only the company 
will have the ability to decrypt it.
    So finally I would make a pitch, as a professor, for more 
research in the area because research benefits small business. 
Large companies can, in effect, have Anderson Consulting or 
other large consulting firms do the work for them. The 
government should sponsor more research so we have a better 
understanding of how business on the Internet will operate so 
small business can draw upon that pool of information to be 
effective competitors in the Internet world.
    Thank you very much.
    [Mr. Whinston's statement may be found in the appendix.]
    Chairman Talent. Thank you, Professor Whinston.
    Our next witness is Mr. Alan Anderson, who is a Senior Vice 
President of the American Institute of Certified Public 
Accountants. Mr. Anderson.

STATEMENT OF MR. ALAN ANDERSON, SENIOR VICE PRESIDENT, AMERICAN 
    INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, NEW YORK, NY

    Mr. Anderson. Mr. Chairman and members of the Committee, it 
is an honor to be here today, and I would like to thank you for 
allowing the American Institute of Certified Public Accountants 
to make a presentation about a highly important and visible 
issue in the industry today, e-commerce.
    I would request that my testimony which I submitted be made 
a part of the permanent record, and I will summarize that 
testimony right now.
    First and foremost, Mr. Chairman, had SeafoodNow.com 
received the Web trust seal, you would have felt very 
comfortable and assured that you could have provided your 
credit card number over the Internet and the security of that 
credit card would have been maintained and, in fact, you would 
have received the product in high quality condition as well as 
fresh and very edible. I might say lobster is quite good.
    Chairman Talent. I should make myself clear, Mr. Anderson, 
candor requires me to say the reason I didn't supply my credit 
card was not that I was afraid of a lack of security but that I 
did not want to pay for the lobster.
    Mr. Anderson. I fully understand that. Thank you very much.
    Chairman Talent. Please, go ahead.
    Mr. Anderson. I am here today representing the 330,000 
members of the American Institute of Certified Public 
Accountants, of which many are either employed in small 
businesses today or small CPA firms.
    We believe that e-commerce provides a tremendous 
opportunity for small businesses today to grow and compete 
against their larger brothers and sisters in corporate America. 
We think that the WebTrust seal of approval and WebTrust 
assurance, if you will, is a vehicle which can provide for that 
competitive edge and competitive advantage.
    Customers entering the World Wide Web or the Internet today 
are scared. They are uncertain as to what's happening. They ask 
questions, how do I know who I am conducting a transaction 
with? Will I receive what I ordered? Is this a reliable 
business? Is it a secure site? Will my privacy be protected and 
will I get scammed?
    All of those questions are questions that every customer 
that goes on the Internet asks when they are pursuing and 
deciding whether they want to execute a transaction. In fact, 
70 to 75 percent of those customers do not execute a 
transaction for those very reasons.
    What we have done in the profession is to develop a 
service, CPA WebTrust, which is really a trust seal, which if 
you go to the Web, you see this seal, it provides you certain 
assurances. It follows the framework of that of an audit of 
financial statements. I think everybody could relate to an 
audit of financial statements. But what we do is audit that 
website for various pieces of information.
    One is the business integrity of the company and the 
business practices of the company transacting business on the 
Internet. We also do an audit of the transaction integrity, 
that will theintegrity of that transaction be maintained and 
assured so that that customer is protected and that the business is 
aboveboard, if you will?
    It also provides an information protection piece of the 
equation, which ensures the consumer's privacy, which is 
important both for the small business owner as well as the 
customer.
    We believe that CPA WebTrust is well positioned to help 
move the process forward, to help small businesses succeed in 
the marketplace.
    It has been said that the Internet is a large company venue 
to conduct business. In fact, in Business Week of May 1999, 
Jeff Bezos, the CEO of Amazon.com was quoted as saying, I think 
this is one of the most misunderstood things about e-commerce. 
There aren't going to be a few winners. There are going to be 
tens of thousands of winners. This is a big, huge, complicated 
space, and it is going to be as complex, with as much variety 
and as many winners as the physical world.
    We believe CPA WebTrust is there to help small businesses 
take advantage of the opportunities afforded them on the 
Internet.
    CPA WebTrust is a program that is international in scope 
for that matter. We have our international societies around the 
world, the United Kingdom, Australia, Ireland, Scotland, et 
cetera, also providing this service. CPA WebTrust is a program 
where you get licensed to provide this service. A CPA firm will 
then go into a small business, once they are licensed to 
provide this service, and basically audit that website.
    An interesting thing that we found as we have moved this 
process forward in CPA WebTrust is that many of the websites 
that have been put up in the rush to get on the Web, many 
websites have missed certain basic controls and control 
structures and processes which have prevented them from getting 
the seal.
    If we want to enhance and improve the quality of e-commerce 
on the Internet, if we want to enhance and improve the business 
success of small businesses, CPA WebTrust, I think, is well 
positioned to satisfy that need.
    Many people are always asking me, well, what is the cost of 
CPA WebTrust? This has got to be expensive because of the 
tremendous amount of assurances that CPA WebTrust provides.
    Well, the first website that was placed was a company 
called Resource Marketing in Ohio. I know there are some 
Committee members from Ohio. Resource Marketing is a small 
company that it cost them $1,400 to get the seal and about 
$5,000 in CPA fees to do the work. Within 60 days of the seal 
being placed on that website, Resource Marking maintains that 
their business grew by 300 percent and their cost structures 
went down by a tremendous amount, an amount to basically reduce 
their staffing levels or rechannel their staffing levels to 
that of one full-time equivalent.
    We believe CPA WetTrust is a tremendous vehicle to help 
position small businesses to be successful and compete in 
today's growing e-commerce marketplace.
    Thank you very much.
    [Mr. Anderson's statement may be found in the appendix.]
    Chairman Talent. Thank you. Our next witness, Mr. Brian 
Hanson, is the founder and owner of Hanson Brothers Fresh 
Seafood, in Portland, Maine. Mr. Hanson.

STATEMENT OF MR. BRIAN HANSON, FOUNDER AND OWNER, HANSON BROS. 
                  FRESH SEAFOOD, PORTLAND, ME

    Mr. Hanson. Thank you, Mr. Chairman and members of the 
Committee, for inviting me. I think I sit alone in a way that I 
represent the most basic of Internet businesses. I am a very 
small business that got on the Internet, and I am selling 
directly to consumers. So I am really running the most basic 
Internet model that you see on the Internet.
    Hanson Brothers Fresh Seafood, it is privately-owned by 
myself and my family. We have an extensive history in seafood, 
wholesaling, shipping, processing, but this is really our first 
real venture on our own into seafood retailing.
    Seafood selling is not the easiest business. The industry 
is fragmented. The product is highly perishable and it is 
competitive because it is so locally based.
    Because of our perishable products, we need to look at as 
many channels to distribute our products as possible so when we 
opened our retail we saw the Internet as probably the newest 
channel that we could use to sell our product in.
    We are fishermen. We don't know very much about the 
Internet, although I did have e-mail when I was in college. So 
I started doing some research, and I would really like to talk 
about the nuts and bolts of Internet retailing because I have 
gone through the process of choosing to go on the Internet and 
then actually going out and doing it.
    I really noticed three problems that small businesses have 
when they enter the Internet, and they touch on a lot of things 
that the other witnesses have talked about.
    The first problem is a poorly designed website. 
Unfortunately, every business out there is scrambling to get on 
the net, and that does not necessarily mean that they are 
making the right decisions to do so. There is an equal number 
of Internet providers that will offer you Web design 
capabilities. That does not mean that they can do that well. We 
see this in any industry. You are approached by vendors all the 
time offering services and products, but some providers are 
good and some are bad.
    Having a good website is inherently critical to being 
successful on the Web. You need to have a website that is 
friendly and attractive and easy to use. So we needed to 
address that problem.
    The second, and I think probably the most important, is 
lack of traffic or exposure. You can build the best website on 
the Internet but that doesn't mean that anybody is going to 
come to it, and this is the problem that small businesses 
really have.
    I didn't have a $40 million budget to advertise during the 
Super Bowl to brand my product. Up until recently, I didn't get 
a whole lot of media attention.
    There is really two basic methods that people get traffic 
to their Internet site. One is a branding campaign using 
traditional media and the other is getting on the portals or 
the search engines. That, too, requires an expertise that most 
small businesses do not have. So we need to address that 
problem.
    The third obstacle that most Internet businesses have to 
confront is a lack of functionality. As I said, a lot of small 
businesses are jumping on the Web but they have never asked 
themselves why they are doing that. They just say, I think the 
phrase was, you either have to play or pay. But unfortunately, 
few people actually are conceiving strategies to get on the 
Internet. Are they selling something? Are they offering product 
support? Are they offering information about their company? 
There are a variety of things you can do. The Internet and e-
commerce is not just selling but you have to say to yourself 
what am I doing this for? Am I spending money without a 
strategy now where later on I will have to tear this all down 
and start all over again? The Internet is moving too fast to 
make errors like this.
    Those three problems are mutually exclusive. All three need 
to be addressed, and I did that.Unfortunately, I didn't have 
the resources, the skills or the time to do that myself and I was lucky 
to be approached by a company, Global Store, which had the search 
engine teams that could put me on the search engines, which had the 
website teams that could make in effect a website and had the capital 
that they were willing to build my website for me.
    Now, as a small business, I can honestly say I wouldn't 
have been as successful or maybe even successful at all had I 
not had that help. I don't have the economies of scale to do 
such things and I do not have the skills. I am not going out on 
a limb and saying most small businesses don't have the 
capabilities to truly be successful on the Internet without a 
lot of luck, and when I say small business I am going to say 
businesses such as mine that are doing a million dollars in 
sales and are locally based in a small community.
    To actually create our site took us almost three or four 
months, and again we wanted to make sure that our site was 
effective, it was functional, it was usable and it was without 
errors. So I missed an important holiday season.
    I opened up my retail store 8 months ago and I opened up my 
Internet commerce about 3 months ago. Now I started with zero 
sales on the Internet and right now the Internet is accounting 
for 25 to 30 percent of my sales. This year alone I will 
probably do $2 million just on my retail.
    Chairman Talent. I was going to ask you about sales volume. 
How much of an Internet volume do you have?
    Mr. Hanson. This year we are looking at doing about 
$600,000.
    Chairman Talent. Thank you.
    Mr. Hanson. And that was business that I wouldn't normally 
have.
    Now, besides addressing all the problems that I noted, I 
was also lucky enough to get in Time Magazine. So I am not 
going to tell you that it was all preparedness, and the Good 
Morning, America helped, too.
    Chairman Talent. We are all interested in your plan for 
getting such press. Several members of the Committee will be 
talking with you about it afterwards.
    Mr. Hanson. What the Internet has done for me as a small 
business is created a very important sales venue to move a 
perishable product. That is probably the most important thing.
    My inventory control is probably the single most important 
thing to the success of my business. I don't buy a lot of 
frozen product, which is typically the type of seafood sold at 
larger retail chains and grocery stores. I sell smaller, more 
specialized fresh seafood.
    The Internet has allowed me to reach an international and 
national market. There isn't a day that goes by that I do not 
receive inquiries from out of the country on either brokering 
wholesale deals or just shipping out lobsters to other 
countries.
    Thirdly, the Internet has provided me cash flows in slow 
months. January, February and March are not great months for 
any retail business. The Internet has provided me cash flows to 
really help a fledgling business survive and get through the 
first couple of years.
    Finally, it is a new profit center and it is one that has 
lower distribution costs than perhaps anything else. I also 
take orders via telephone, but to take telephone orders 
requires me to place someone at a phone and answer and talk to 
a customer.
    Now, the benefits of that are you can actually deal 
physically with a customer and talk to them, and I don't want 
to under emphasize how important that is. But unfortunately, I 
am a small business and if I can shift some of those telephone 
calls over to the Internet and also get new customers to the 
Internet, then it is better for me. It doesn't require the 
staffing.
    My effort and costs for developing the website were paid 
for by Global Store, and the shipping costs are paid for by the 
customer. So it is very low distribution. It is really opening 
another retail store without the start-up costs of one.
    Chairman Talent. Do you think if they called in on the 
phone, and you had a good person talking to them, they might 
buy more?
    Mr. Hanson. There is always that possibility. You can 
always either upsale or you can create a relationship with a 
customer to create repeat business, but, you know, during the 
holidays that phone could be ringing off the hook all day long 
and it might take three people. And I would rather shift those 
three people to working with the true core of my business, 
which is over-the-counter retail sales.
    We are firmly aware that competition is coming. I think 
that I have been lucky that I started in an Internet business 
that not a lot of people have jumped into. The perishable food 
Internet business is, they a few and far between. I think the 
only other one that is really, I think, doing any volume at all 
is probably one we all know, Omaha Steaks, but they have always 
had a national branding and they shifted to the Internet quite 
easily.
    We are expecting a lot of competition so it is very 
important for us to establish ourselves first and foremost as 
oriented towards customer service, to having a good website and 
making our customers feel as though they can confidently order 
product through our website.
    I think one of the things we talked about, seals of 
approval and all of that, but I know that if I don't service a 
customer well they won't come back, and ultimately that will be 
the death of my Internet business. So I have to go out of my 
way, even though I don't have that customer contact like I 
normally would, I have to go out of my way to make sure that 
every point of service is completed properly.
    I have actually--it is probably fair to say that 20 percent 
of my business now is repeat customers. Thank You.
    [Mr. Hanson's statement may be found in the appendix.]
    Chairman Talent. Thank you, Mr. Hanson. I am grateful to 
you for traveling so far.
    I am going to defer my questions because I know, I can tell 
from the attendance, that the Committee is interested and I 
want them to be able to get to their questions.
    In Ms. Velazquez' absence, I will yield to Mr. Brady.
    Mr. Brady. Thank you, Mr. Chairman.
    My concern is more security. I was interviewed by a major 
TV station in the City of Philadelphia, and this reporter had 
said to me that over the Internet there was an advertisement 
you can order drugs. I guess that you may not be able to give 
me an answer but maybe you can help me answer her a little bit, 
or maybe somebody--I could jog you a little bit and come up 
with something that I could say or maybe even respond to.
    What was happening was Ritalin, Viagra, Prozac were being 
ordered over the Internet, and they were being advertised as no 
prescriptions needed. This is a documented thing. It is right 
on TV, and it is playing every other day in my city.
    What happened was they had one drug, I don't know the name, 
long name, not even approved in the United States of America, 
but it was ordered out of Sweden, and she received this.
    The other three drugs, the Prozac, the Ritalin and the 
Viagra were ordered out of the State of Florida, and they were 
ordered from the city of Florida with a suite number. The suite 
number turned out to be a box number. And she received and was 
delivered to her, or to the person whowas ordering them, these 
four drugs; one not even approved in the United States of America yet; 
and again, advertised no prescription necessary.
    I don't know whether you can answer my question. I don't 
know if you can give me any insight. We went to the Federal 
authorities. Actually, I did because I needed some type of an 
answer. They are overwhelmed. They can't even begin to try to 
address this problem.
    But the two main problems, again, no prescription necessary 
and it was ordered by her niece, who was 10 years old. So I 
have a problem with that. I have a major problem with ordering 
over the Internet, and I understand what you are doing here is 
CPA approval, you know, let's let people, consumers, know that 
you are interested, you watch and you monitor this, it is a 
good thing to do, but I just think we need to look at this real 
hard.
    No disrespect to the business that is now becoming no more. 
You have got to go to another Committee, you don't come to 
Small Business anymore, you are going to be big business, 
hopefully. We don't want to hurt you, but there are some 
concerns, and this is my concern. I don't know if any of you 
can help me with any kind of direction to this.
    Thank you, Mr. Chairman.
    Chairman Talent. Perhaps, Mr. Miller, would you like to 
take a crack at that, or Mr. Hill, maybe?
    Mr. Miller. Clearly, Mr. Brady, any kind of global commerce 
where people step outside the normal channels of ordering 
prescription drugs, they can do it through the telephone, they 
can do it by traveling outside the country, they can do it 
through mail order.
    Mr. Brady. A 10-year-old could do it by traveling outside 
the country?
    Mr. Miller. They could do it by telephone. It happens all 
the time.
    Mr. Brady. You can order a drug by a telephone?
    Mr. Miller. You can.
    Mr. Brady. With no prescription? A 10-year-old could do 
that?
    Mr. Miller. Yes, you can. I hate to tell you that, but as 
long as that 10-year-old has access to his or her parents' 
credit card--now, one hopes the parents don't give a 10-year-
old access to a credit card. Obviously, when you are ordering 
something, sir, at the end of the day you have to pay for it. 
People don't send you drugs or any other product over the 
Internet on approval. They require you to pay in advance.
    So I think the real critical question here is how a 10-
year-old got his or her parents' credit card, because 
presumably he or she could have ordered all kinds of things 
that you wouldn't want a 10-year-old to order. So I think at 
some point or another there has to be some personal 
responsibility here, because the same things you just detailed 
can be ordered through all kinds of ways if you have a means of 
paying for it. That is the critical issue.
    Mr. Brady. So what you are telling me is that it is okay to 
order Prozac?
    Mr. Miller. I don't think it is okay at all.
    Mr. Brady. It is okay to order Ritalin, it is okay to order 
Viagra?
    Mr. Miller. Absolutely not.
    Mr. Brady. As long as your parents give you the credit 
card? You are 10 years old, and she stumbled on the Internet by 
using a computer, so that is okay?
    Mr. Miller. Mr. Brady, obviously I am not saying that. I am 
saying that----
    Mr. Brady. That is what I heard.
    Mr. Miller. Absolutely not. If you are going to try to stop 
international commerce, you have to stop the ability of people 
who do not have the age of responsibility to make those kinds 
of decisions. You can't cut off telephone service to those 
countries. You can't cut off Internet services. You can't cut 
off mail service to those countries.
    So what I am saying is the problem you are trying to 
identify is not unique to the Internet. What I am concerned 
with is you are portraying it as if this is somehow unique to 
the Internet.
    Mr. Brady. I wish you would answer that TV reporter like 
that and see what would happen.
    Mr. Miller. I would be glad to. I get those questions all 
the time.
    Mr. Brady. I am sure you would be.
    Mr. Miller. Okay.
    Mr. Brady. What I am saying to you is that a kid is on the 
Internet.
    Mr. Miller. Right.
    Mr. Brady. And they are playing around and they are doing 
their computers. They are all taught it in school, and here 
they bump into this no prescription necessary.
    Mr. Miller. Right.
    Mr. Brady. And here they bump into a chance to be able to 
order drugs that you need a prescription for, which is illegal 
to do already.
    Mr. Miller. Right.
    Mr. Brady. And now this person who is receiving this order 
doesn't know who they are receiving an order form, it is a post 
office box, and a 10-year-old, what happened, as you all know, 
she went to her aunt who is a TV reporter, and she said, look, 
I will give you my credit card. Let's see how far we can get 
with this. And that is how far they got with it.
    I just think there is something wrong with that. It is a 
little different from ordering over the telephone.
    Mr. Miller. I am not quite sure what the difference is, 
sir, with all due respect.
    Chairman Talent. Does the gentleman have any further 
questions?
    Mr. Brady. No, I am finished.
    Chairman Talent. Okay. Mr. Hill, your questions lead me to 
think that maybe we should have had somebody from the 
Department of Justice here to talk about these kinds of 
concerns.
    Mr. Hill, have you, on behalf of the agency, networked at 
all with the law enforcement people? Mr. Brady's comments 
certainly disturb me, since it seems by saying we are 
overwhelmed; we are throwing up our hands and not doing 
anything about this. I mean, that is really a source of 
concern. Do you have anything you want to add?
    Mr. Hill. Well, just very quickly. You know, personally I 
share many of the same concerns. I have an 11-year-old daughter 
who can operate my personal computer on the Internet in ways 
that just amaze me, and every time she get on, about every 
other time I go in an remind her, don't give your name out, 
don't use my credit card. I keep working on that over and over 
again, because there is a real problem.
    In addition to working at the SBA, I engage in what I 
considered a small business activity. I fish professionally in 
bass tournaments. I do want to assure you I am not leaving the 
SBA any time soon. My wife tells me I have bankrupted the firm 
several times. But I am currently selling my boat on the 
Internet, and I am getting inquires from literally all over the 
country, but because they are over the Internet I don't know 
where they are coming from. I don't know who they are. I don't 
know if they are serious, if they are pranksters. We all read 
not too long ago about the E-Bay sale, that there was a 
youngster who got on who was buying cars, and he almost bought 
a resort island.
    There are a lot of concerns like this.
    I think what Professor Whinston said earlier is what the 
SBA thinks is very important. We need to do a lot more 
research. Part of our emphasis at the SBA begins with focus 
groups that we hope to run this summer with the Department of 
Commerce, where we need to actually explore all of these issues 
and understand them.
    This is a brand new world. It is moving very fast. 
Technology is going a million miles an hour, and we need to 
catch up and see where we can be helpful. But there are a lot 
of concerns like that that we need to work on.
    Mr. Miller. Mr. Chairman, maybe just two more general 
points to Mr. Brady's specific point. One is the issue of 
security, and I think in terms of security on the Internet, 
most people when they send their credit cards over the Internet 
can feel fairly secure because of what is called the secure 
socket layer of the security issues.
    There is a second issue, which is authentication, which 
Professor Whinston referred to, which is you are who you say 
you are. To some extent that may address Mr. Brady's concern 
that at least when you are filling these questionnaires out, if 
you say 18 years old, how do they really know you are 18 years 
old?
    Then these is a third question about consumer fraud and 
scams, which Professor Whinston also talked about, which the 
AICPA program, BBB On-line, Trustee and other programs, but I 
don't agree with--don't know who responded to Mr. Brady from 
the government, but I don't agree that the government isn't 
able to deal with consumer fraud or other opportunities.
    I talk to the FTC all the time. They recently had a 
meeting. They have another one coming up June 8th and 9th. We 
talk to the Department of Justice all the time. We talk to 
state attorneys general. Number one, they tell us the numbers 
of consumer fraud on the Internet compared to general consumer 
fraud is still infinitesimal. People doing fraud still use the 
old fashioned way, by and large. But that is not to say it is 
not important because obviously it reflects badly on the 
industry.
    So what we are trying to do is work with organizations like 
the AICPA, with BBB On-line, with Trustee, to be able to deal 
with that challenge so that there is a general answer. I can't 
deal with every specific problem that comes up because 
obviously no matter how good you try to set it up there are 
always going to be scam artists that are always going to out 
scam the system.
    The last point I would make is that most of the access to 
the Internet providers, AOL being the most prominent but it is 
also true with others, are trying to put parental control 
systems built into the system. I think that that is important. 
It is becoming a market differentiator because they want to 
know that if I as a parent turn the Internet over to my 11-
year-old or 10-year-old, my kids are now 15 and 17, then I am 
able to set that setting on the computer so that they cannot 
access certain websites that contain sex, violence; they cannot 
order any materials unless I explicitly come on. So those 
settings are very, very important. I think that is a market 
differentiator when parents are out there buying software or 
deciding which Internet access provider to use, and the 
Internet providers are advertising that to parents, come and 
use our website or use our portal or use our access because we 
can offer those protections to try to minimize, I am not going 
to say eliminate but try to minimize the kind of situations 
that Mr. Brady was talking about.
    Chairman Talent. Well, thank you. I appreciate Mr. Brady's 
questions. I think we can expect the market on its own to take 
pretty effective steps to protect people against pilfering of 
their credit cards because if they don't, any company that 
isn't doing that is going to lose business. So there is a 
tremendous incentive, and Mr. Anderson talked about them.
    I expect that the market will respond pretty well on its 
own to that, but the issue where the person is not being 
defrauded, they are getting what they ordered and the problem 
is it is a kid ordering, I mean, there is much less incentive 
for the market to respond to that on its own, and that is an 
area where I do think the government needs to be involved, and 
I think Mr. Brady made some excellent points.
    Bob, if you will let us know who in the DOJ threw up their 
hands and said that we are overwhelmed, I would be interested 
in knowing that because they ought to be letting us know that.
    Mr. Brady. We followed that up and they went and they found 
out that the suite was a post office box; they confiscated it 
and they shut that down.
    Chairman Talent. Good.
    Mr. Brady. But the initial person said that, and I didn't 
follow up with that. No question.
    Chairman Talent. Okay.
    Mr. Brady. I didn't mean to be argumentative with you.
    The 10-year-old was probably done--no disrespect to 
reporters but you all know how you are--was probably done for 
effect. I am sure that she stumbled on it and let the 10-year-
old now actually do the manipulation of the ordering so it can 
be effective when she does her TV show. But the reality of it 
is that it was done with no prescription, advertised and no 
prescription needed. Thanks.
    Chairman Talent. I thank the gentleman. I will recognize 
Mr. Forbes.
    Mr. Forbes. Thank you, Mr. Chairman. I sincerely appreciate 
you conducting this hearing today.
    For me, I think this is a tremendously exciting opportunity 
for America's small businesses. Probably no opportunity like it 
has ever come before small businesses in the last century, and 
I think there are great things ahead.
    I respect Mr. Brady's concerns. I absolutely share them. I 
would just make this one note, though, and I think it is in 
line with what has been said here by Mr. Miller and others, is 
there are Federal agencies who are charged with the 
responsibility of making sure that kind of fraud does not 
happen, and we need to give them the tools to extend that kind 
of oversight on the Internet as well.
    As was mentioned, telephone solicitation, telephone sales, 
this is an area that obviously has gone on for decades and it 
is a tremendous concern, I think with the ease of the Internet 
and we are talking about ease, notwithstanding parental 
controls that many of the major search engines are providing, 
that it is an area that I think it is rightful that the 
government take some sensitivity to.
    The United States Postal Service, frankly, has jurisdiction 
there and it is a violation to order internationally without a 
prescription. So there are some violations of law here that 
exist that our Federal Government and its various agencies need 
to be sensitive to, and to the extent that this Committee can 
help provide some guidance on that as we move into this brave 
new world--we all know over the last 5 years exponentially the 
growth here has been phenomenal. My wife, my children, our 
family, are active users of the Internet and of this e-
commerce. Frankly, we have found it to be just phenomenal.
    If you come from an area like I do in eastern Long Island, 
which is largely rural, which is a seasonal economy, this 
tremendous opportunity, as Mr. Hanson has suggested, provides 
you a marketplace that you would never, ever have access to. It 
provides for an expanded local economy, and there are only 
great upsides, I think, to the growth of this, understanding 
that wedo have to be mindful. As my good friend from New 
Jersey, Mr. Pascrell alluded to, you do not want to create an 
atmosphere where frankly those who are smart enough to get into the 
Internet world and e-commerce are somehow advantaged over those who 
have made investments in a physical plant, who are paying business 
fees, who are paying local taxes. I think that as much as I ran on and 
believe very much in a strong tax reduction policy, I think we have got 
to keep the playing field level and make sure that we don't advantage a 
firm like Amazon.com while we are putting others who sell books who are 
not on the Internet to a disadvantage.
    So I think there are some areas here we have to deal with.
    Let me, if I might, Mr. Anderson, you talked about 
something that I found extremely exciting and, frankly, gets to 
the issue of trust, as has been raised here, the whole idea of 
CPA WebTrust. Now, are you saying to me that the American 
Institute of Certified Public Accountants has the technical 
expertise to not only certify, if you will, the financial 
health of the entities that you go in and you give the seal of 
approval to, but you also have the technical expertise to 
certify the technological security of these websites?
    In other words, for example, you go to Mr. Hanson's firm 
and you basically give him the seal of approval because you 
have certified that he has the financial health, he is not some 
guy working out of the back of a truck that is leaving town and 
he takes orders and never fulfills them, but in fact you have 
certified that he has a secure website where you can use a 
credit card, where you don't have to worry about whether your 
credit card has all of a sudden been copies by a thousand other 
hackers with access to that website, who take that credit card 
and use it for other things?
    Mr. Anderson. Actually, yes, we do. We have 330,000 
members, and not all 330,000 members have the technical 
expertise.
    We license firms, small firms and large firms, to provide 
this service. What happens is, it usually will take a team of 
people to certify the website, one with a technical skill set.
    One firm that is licensed is a firm out in California and 
it is a one-person firm, and this CPA has the full complement 
of skills to do the technological piece of the equation, as 
well as the examination of the balance of the business 
principles that the company is saying are in place. We provide 
the training. You have to have training in order to get the 
license, and so we are building the technical infrastructure to 
support this seal program.
    Mr. Forbes. I just want to make crystal clear in here, 
because much like a consumer might see the good seal--the seal 
of approval of Good Housekeeping, or whatever they call it, and 
it gets consumers frankly to go to some of those businesses, 
what you are saying to me is when your seal is placed on a 
business, that the consumer knows that technologically there is 
no fear that somehow encryption can be violated; that there is 
a hacker who can get in there and steal those credit card 
numbers that are in the process of being filed with perhaps a 
seafood company or Amazon.com or any other?
    Mr. Anderson. I would say that there is no fear.
    Mr. Forbes. Well, that is I think a great advance, and I 
appreciate that on the private side that the private sector, 
frankly, has moved in this direction because that is really 
what we need.
    I was going to ask Mr. Miller about that a little bit and 
how his industry feels about that, but that is probably the 
single most--and Mr. Hanson, if you could comment on this in a 
second, but it is probably the single most concern about all of 
us who see a great opportunity on the Internet, something we 
want to buy, you go through the whole process and then it says, 
click, you know, to send that credit card number, and I will 
admit that I am one of those who has said, you know what, I 
think I will print this out and then I will call on the 
telephone Mr. Hanson and order those lobsters, just to make 
sure that my credit card is not going in this vast netherworld 
out there for others to take advantage of.
    Mr. Hanson, could you just perhaps, and I apologize for the 
TV that is separating us here, but could you comment? Do you 
find that there are perhaps a majority, or close to a majority 
of your customers, that are going the full menu, seeing what 
you have to offer and then picking up the phone, again because 
they had that last remaining concern about security?
    Mr. Hanson. No, that absolutely happens. I would say 
probably 10 or 15 percent of our customers will either put 
their order through and then call us to make sure it actually 
was processed, just to be sure.
    Mr. Forbes. Do you have one of these seals of approval that 
the CPA Web masters talked about?
    Mr. Hanson. Actually, this is the first time I have heard 
about it, but it sounds like a great idea. We use VeriSign, 
which is one of the industry standards for credit and 
encryption, ordering encryption. So we feel comfortable with 
our security, but obviously any other approvals, we can get, a 
some sort of overview, we are going to look at.
    But there are still a lot of customers out there that feel 
very comfortable surfing the Internet and looking at price 
comparison but still do not feel comfortable taking that final 
step of actually sending their credit care number over that. 
And we probably get 10 to 15 percent of our orders that will 
look at our website, print something out and then just call us 
and place the order that way. And then that is fine. It is 
going to take a while for people to feel comfortable.
    I personally think the technology is there to make 
transactions safe. I do a lot of my purchasing on-line, but 
everybody is different.
    Mr. Forbes. Mr. Miller, could you just comment, too, and 
maybe clarify for me, because I was not aware of what your 
industry, ITAA, does, again, to put build that trust that this 
is a secure transaction.
    Mr. Miller. It is absolutely critical. We don't have our 
own certification program because we do believe a lot of other 
products are already out there. And clearly, businesses doing 
business on-line have come to realize that, number one, privacy 
is a major concern, which is why the Georgetown survey, which 
was released approximately 2 weeks ago, Mr. Forbes, indicated 
the number of heavily traveled websites that now have a posted 
privacy policy is around 90 percent; whereas, last year it was 
around 15 or 20 percent. There has been that dramatic shift 
because the marketplace is responding to consumers' concern 
about privacy and now they have a privacy policy posted.
    Mr. Forbes. If you would yield just for a second.
    Mr. Miller. Sure.
    Mr. Forbes. But don't we run the risk, if we get into a lot 
of multicertification situations or we have upwards of dozens 
or even hundreds of different certifications, that the public 
gets very confused about really what certification is the real 
certification?
    Mr. Miller. I think that there are not going to be dozens 
or hundreds. I think you are going to see a relatively small 
number because there is going to have some heft behind the 
branding itself.
    Mr. Forbes. Some standards set?
    Mr. Miller. Exactly.
    Mr. Forbes. Would your industry set those standards?
    Mr. Miller. I don't think we would want to set them. I 
think we would want to work with our customers and with 
organizations like and AICPA. I don't think the IT industry 
itself wants to set them.
    Mr. Forbes. Why wouldn't we want to have basic, basic 
standards that the public can say, well, if you are meeting 
these basic standards then I know I can feel assured that there 
is privacy and security in my transaction?
    Mr. Miller. We do have standards various technologies. For 
example, as Mr. Hanson said, VeriSign is a commercial industry 
product which is widely recognized as being secure in terms of 
protecting the financial transaction, which is one of the 
things you are very concerned about. That is a commercial 
product. It is not agreed to by industry. Industry has worked 
in the credit card area. You may have heard of the set process 
where MasterCard and Visa have been working to set up 
standards.
    It has been widely adopted in Europe, not so widely adopted 
in the U.S., but I think the feeling of the industry is this is 
an industry of constant change. We don't want to be so 
pretentious or so obnoxious as an industry association to claim 
that we can dictate those standards.
    Let the marketplace evolve. I think you are going to see 
very few----
    Mr. Forbes. I do appreciate where you are coming from.
    Mr. Chairman, I would suggest, as somebody who believes 
there should be as minimal government intrusion into this area 
as possible. I have already acknowledged that there are some 
rightful areas that the government should be involved in, and 
before the government actually decides what standards, because 
I think the escalating--it is exponentially growing as an 
opportunity but it is exponentially growing as a site of fraud 
and abuse. I think before the government is forced to set 
minimum standards I would think the industry would want to 
seriously look at setting their own core, basic standards. 
Thank you.
    Mr. Miller. I will take that back to my membership, Mr. 
Forbes. Thank you.
    Mr. Forbes. Thank you, Mr. Chairman.
    Chairman Talent. I thank the gentleman for his interest. We 
only have a couple of other members, and I will certainly be 
happy to have a second round of questioning if he wants to 
stick around and ask some others. I am going to try to clean up 
on some issues but I would be happy to have him do it.
    Next, Mrs. Napolitano.
    Ms. Napolitano. Thank you, Mr. Chair.
    A lot of the questions that I would have, having been a 
small business women myself and coming from local government, 
stem out of the fact that for a long time small businesses 
faced quite unfair competition from catalog sales. Now we have 
Internet sales.
    Understand that in a small community that is using sales 
revenue for its base budget, that if there are no tax revenues 
coming in from the businesses that operate within its 
boundaries, things happen. There is just enough money flowing 
into the coffers for the local community to do its job for the 
community itself.
    How would you think, because I do not believe that you pay 
any local taxes as yet because all of yours is done on the 
Internet, in cyperspace, but how do we in all fairness to 
business, in all fairness to the communities that you reside 
in, deal with this issue of being able to pay into the coffers 
that small business that are physically located, do business 
face-to-face, have to pay to the local coffers? Anybody?
    Mr. Miller. I think the answer is a couple of fold, Mrs. 
Napolitano. I think, number one, the amount of growth of the 
Internet industry itself, and the way it is driving our 
economy, as has been documented by the Department of Commerce 
and others, has in itself given for the first time ever 
consistent Federal budget tax surpluses. States are now 
wealthier and have bigger surpluses than they ever have.
    Ms. Napolitano. Do you know what the problem, sir, is? And 
I hate to interrupt you. Having served as in the State 
legislature, the government takes from the local coffers to 
balance its budget and so the community really is crying for 
those extra dollars.
    Mr. Miller. I haven't gotten to the local government 
because I know that was your specific concern was the local 
government.
    Ms. Napolitano. That still is.
    Mr. Miller. I think at least at the Federal level and even 
at the State level, I know many of the governors were concerned 
about the Internet Tax Freedom Act passage and its potential 
negative impact on those States which have high sales taxes. I 
think the arguments have been somewhat undercut by the reality 
that they are just sitting on these huge budget surpluses.
    The local governments, I think, have a couple of different 
issues they have to address. Number one, whether in the digital 
age, whether their traditional taxation models are going to 
continue to work. And I think that is what the Internet 
Commission that Governor Gilmore is heading up is going to have 
to examine. I wouldn't pretend to have an answer to that, but I 
think that that is one of the fundamental issues that is going 
to need to be addressed.
    Number two is, there was a very important decision, Sunday, 
several years by the Supreme Court, the so-called Quill 
decision, which really determined the whole issue of taxation 
and site of your business. Whether the Internet came along or 
the Internet didn't come along, it is that Quill decision which 
allows catalog firms or other firms which do not have sites in 
a particular State or locality not to pay taxes. So I think 
that is the kind of more fundamental baseline issue which the 
Internet Commission is going to have to take a look at, whether 
that Supreme Court decision is underlying it.
    Last but not least, the activity, I would contend, and 
again there can be disagreement, but our industry would contend 
that the economic activity generated in places like California, 
Virginia, North Carolina, Missouri, Pennsylvania, et cetera, 
this growth of the economy is generating so much economic 
activity that it has to be benefiting those localities, whether 
you talk about inner cities in New York, parts of New York, 
that were very run down a few years now, now it is called 
Silicon Alley, I believe; whether you are talking about inner 
cities which are now becoming wired and new technology brought 
into the schools; Cisco Academy now operating in 1,400 inner 
city schools across the United States.
    That doesn't totally answer the specific question of well, 
what about my one dollar of taxes I was collecting before, but 
I think if you look at it in a larger context we would argue 
that the benefit to local government of the general activity of 
the Information Technology Age and the general benefit it 
brings to the community far outweighs maybe one dollar of taxes 
that a particular small business may not have gotten.
    Last but not least, I would contend that if you get more 
businesses like Mr. Hanson, I think his example is--while it is 
exciting, it is not unique. In fact, there are tens of 
thousands of businesses doing this every day. He pays his 
employees; he pays more taxes locally on his business; and that 
generates economic activity. I think any community would love 
to have many more Mr. Hansons, who continues to have a retail 
operation, as I understand it, locally, as well as the Internet 
business. And that can only benefit the community, and that is 
the way to look at it,in my mind, in the digital age.
    Ms. Napolitano. Well, the first comment you had, we found 
out trickle down economy does not work. I mean, by the time it 
gets to the local communities, it just isn't there.
    You are right, I think there are many, many ramifications 
to whether the business has an on-site, in addition to the 
cyberspace site, whether or not it is going to benefit the 
community, but I think the community itself needs to understand 
that there is an impact on the community. If it is totally just 
cyberspace, then something has to be done to be able to allow 
the community to benefit from that, if they are headquartered 
or if their business is located within the framework of that 
community.
    There are many other things that I would like to ask. Do I 
have time?
    Chairman Talent. I would encourage the gentlelady to ask 
another question.
    Ms. Napolitano. Thank you.
    Chairman Talent. We may actually have a follow-up hearing 
on this because you have raised tax issues, and Mr. Miller has 
done an excellent job responding, but it might be interesting 
to have other witnesses on that and also on the law enforcement 
issues.
    Members are interested in what you are asking about so 
please go ahead and ask.
    Ms. Napolitano. Thank you very much.
    Professor Whinston, it appears you are not really 
particularly optimistic on small business will be able to 
compete in cyberspace. In your testimony, Phil Sisenbrand, a 
name familiar and already important, will be even more of a 
factor in driving economic decision-making. But do you have any 
suggestions that small business could follow to ensure their 
continued ability to compete and be able to be successful?
    Mr. Whinston. Yes. As you indicated, what we have seen in 
the data, and we are collecting data about Internet activity, 
is that we see thousands of small businesses on-line, let's 
say, selling books or CDs, but very few of them do any 
significant business. The business is really concentrated in a 
few very large companies, and I think that is going to be a 
problem for small business.
    So my suggestion, or the suggestions that we have 
considered, relate to this issue of research, meaning that we 
have a body of knowledge that small business can draw upon so 
it can become effective and in many cases may end up to be 
leaving the category of small business to medium or large 
business. So it may be that we are entering a world where being 
small, except if you have a very special niche market that 
people need, is not going to be sort of a viable, long run 
alternative. You are either small and then you grow to medium 
or large to handle all of the technological issues--even if we 
figure out a way of doing the taxation, I go back to my point 
that the costs of managing the payment of taxes, the 
recognition of what taxes should be charged, will become a 
major cost to small business as against a larger company that 
can really amortize that cost over a larger base.
    So I see a big challenge for small business in this 
Internet world.
    Ms. Napolitano. Thank you, sir.
    Thank you. I will hold for the next round. Thank you.
    Chairman Talent. Would any of the other gentlemen on the 
panel like to respond? It was another excellent question. Are 
the rest of you as pessimistic about the chances of small 
business? Well, let's jump in there.
    Ms. Miller. Obviously, I disagree with everything Professor 
Whinston said after he said ``the.''
    Basically, I believe that the opportunities are incredible, 
as Congressman Forbes said. I mean, the fact that now virtually 
anybody who wants to sell to General Motors can sell to General 
Motors, for example, 5 years ago if you were a supplier and you 
wanted to sell to General Motors you had to become part of 
their electronic data interchange, private network. You had to 
go through all kinds of rigmarole and it was not worth it 
either to General Motors or to small business manufacturers who 
manufactured parts to try to go through that, because they had 
a very small cluster. The same with Ford, the same with Daimler 
Chrysler.
    Now because of the Internet and the automotive exchange 
network, virtually anybody who wants to supply a part, a seat 
cover, a bumper or whatever it is you want to manufacture, now 
has the opportunity to sell to the largest car manufacturer in 
the world and become a regular supplier.
    That also means, as Mr. Hanson suggested, if you don't do a 
good job once you get that opportunity, the word gets around 
the Internet pretty quickly and you are going to lose that 
contract. But thousands of manufacturers, mostly small 
businesses or medium-sized businesses, who never could have 
dreamed to selling to General Motors, now can do so.
    The same thing with companies like Wal-Mart. Before, it was 
a relatively small number of middlemen, middle manufacturers, 
who could do business with Wal-Mart, because Wal-Mart had to 
touch you and feel you and see you and go through this whole 
big formalized process and you had to have a big private 
network.
    Wal-Mart now is out there on the Internet. Anybody who 
produces goods and services they are looking for, salt and 
peppers shakers, skirts, shirts, tennis rackets, whatever it 
is, you can electronically deal with Wal-Mart. As long as they 
know you are a reliable supplier, you can suddenly do business 
with them.
    I think the opportunities are what I focus on; not to 
minimize the challenges. Some of the ones that he identified, 
that Professor Whinston identified, are true but they are being 
dealt with in the marketplace, and they are being dealt with by 
appropriate government laws and regulations. But to sit here 
and talk about these problems as some kind of overwhelming 
obstacle to small businesses, I think, is just turning the 
glass not just half full or half empty, totally upside down.
    I think if you have a hearing a year from now, you will 
have 10 Mr. Hansons here, and 2 years from now you will have 
100 Mr. Hansons here. Now, maybe he doesn't want to have a 
hundred competitors on the Internet selling lobsters, but that 
is what is so exciting about the Internet.
    One other thing that I don't think the Committee has heard 
about fully is again the power of communications. Yes, 
Amazon.com is a great company but Amazon.com didn't exist 3 
years ago or 4 years ago.
    I will tell you the other thing about Amazon.com, if they 
don't do a good job, they could be dead tomorrow because if you 
go to a restaurant and you get a bad meal, it happens once, 
maybe you tell a couple of friends but it is going to be years 
and years before the word gets around that that restaurant has 
kind of gone downhill.
    You get bad delivery from Amazon.com from a few customers 
on the Internet and the word will spread like wildfire, and 
before you know it no one will be ordering anything from 
Amazon.com.
    So their emphasis on quality and service and reliability to 
the customers has to be paramount, has to be at the top of 
their agenda, because if they can't have comfortable customers, 
the Internet which made them will be the Internet which kills 
them.
    Mr. Hill. If I could just say, you know, I totally agree 
with Mr. Miller's assessment.
    We have been focusing on some of the external challenges. 
We think there are a lot of internalchallenges for small 
businesses to transform themselves to meet the challenges offered by 
electronic commerce. But one point I would like to leave you with, as 
you look at the Internet and you look at studies, we have talked today 
a number of times about our daughters. When that generation gets to be 
the consumer generation 10 years from now, the barriers that many 
people face now won't be there. The young people of today are growing 
up computer literate, and this is the way of the future. We think the 
opportunities for small business and the leveling of the playing field, 
both domestically and internationally, are just staggering. That is why 
we think this is going to be a major issue at the SBA for the near 
future.
    Chairman Talent. One more question, and Mrs. Kelly has been 
very, very patient. Mr. Hanson, you mentioned in your statement 
that you felt like the big players always have an advantage 
going in. Do you want to offer an opinion on this?
    Mr. Hanson. I have got a lot of opinions on this, actually, 
if you will give me just a minute. I agree with what everybody 
is saying, to some extent. It is my belief that the ability for 
a traditional retailer, business-to-customer, as a stand-alone 
small business to succeed on the Internet is diminishing 
rapidly.
    In real practical terms, to succeed on the Internet, the 
phrase we use is you have to bring the eyeballs in. It is all 
about traffic.
    The first model of the Internet, and we are shifting that 
and you will see it in the valuation of stocks, the first way 
we valued stocks was how much traffic. Now we are looking at 
how much of that can be converted to business. But the very 
essence of it is traffic to your site, and a very small 
business that gets on the Internet, if it makes no alliances, 
has no capital and it doesn't have the technical expertise to 
get on to the search engines, will not get anybody to their 
site, except maybe a few local customers, and then they will 
just languish on the Internet.
    The bigger sites, I mean, we see it, there is not a day 
that goes by that I do not hear on the radio or see on the TV a 
company, a brand new company, with millions of dollars, 
creating instant brand recognition. Go.com is doing right now, 
and every hour on TV you can see them. They are a brand new 
company. Amazon.com did the same thing.
    I can't to that. So I had to align myself with a larger 
company that had the technical expertise and the ability to 
bring me the eyeballs, or I wouldn't have succeeded, either.
    The Internet has so many different possibilities and so 
many different business models, not just business-to-customers. 
It is also the exchange of concepts, and there is so much to 
it. I mean, we are seeing now webcasting and the ability to 
transmit audio and video signal, that there is tremendous 
opportunity out there, I wouldn't disagree with that. But 
traditional, small business retailers, unless they can get 
traffic to their sites, won't be successful at all.
    Chairman Talent. All right. I will give Professor Whinston 
an opportunity to respond later, but right now I want to 
recognize Mrs. Kelly, who has been very patient, for any 
questions she may want to ask.
    Mrs. Kelly. Thank you very much.
    The first thing I want to say is I thank you, Mr. Miller, 
for recognizing Silicon Alley. It is my district. I represent 
the world headquarters of IBM.
    When I came to Congress in 1994, we had 30 small high tech 
firms and less than four of them were Web focused. Today there 
are 113 small firms and, of these, 70 are Web focused. So we 
are growing very slowly but it is coming. It is a very exciting 
process for me to see that happen.
    I wanted to ask Professor Whinston, you were talking in 
terms of the taxing issues about the issue of sovereign money. 
I wonder if you would be willing to develop that issue a little 
bit because I think it is a serious one that could be 
problematic.
    Mr. Whinston. Yes. To do business on the Internet now the 
model is to use credit cards. As we move towards sort of a more 
mature movement in electronic commerce, there will be more and 
more interest in having electronic money that is in effect 
private money.
    So, for example, Microsoft could issue money and that money 
would be used to settle transactions anywhere in the world; the 
money would, in effect, be international money. It would be 
technically a liability of Microsoft, but it would circulate so 
it could be a liability that nobody would ever ask to get 
redeemed, and it, in effect, could become a very profitable 
business; in effect, a more profitable business than their 
current software business.
    So electronic money is really a digital product. It 
involves encryption. It gives you anonymity that you have with 
cash. So, again, it raises the specter of the sovereign money 
being partially displayed. It raises broad issues on monetary 
policy.
    The Federal Reserve is always very concerned about the 
growth in money supply and other issues related to that. If we 
introduce this new kind of money, it makes that issue 
confusing.
    The Federal Government makes money on issuing money. It is 
a couple of billion dollars in contributions to our Federal 
budget, and that could be displaced.
    With the electronic money, in effect, you could be doing 
cash transactions which are in the millions, which raises 
questions again about, as you have indicated, taxation, and 
that, again, would be a problem.
    So as everybody has indicated here, there are great 
opportunities. I run a center at the University of Texas and, 
of course, I see tremendous opportunities in electronic 
commerce but on the other hand I think we have to understand 
there are great challenges. In those challenges, an opportunity 
mixture, we have to work it out so that the positive end of 
this whole revolution is where we are going and avoid the 
pitfalls.
    I would also mention parenthetically, since I referred to 
cryptography, that it is not, in my judgment, possible to give 
guarantees about security. I think the AICPA or other 
organizations have to deal with reasonable care, and an 
indication that while nothing is absolute that companies have 
taken the kind of care which reflects a judgment that will, in 
most cases, protect security.
    But, for example, in our research center, we have gotten 
destroyed by hackers. Hackers have broken into all the security 
features we have and have destroyed our files, have knocked us 
out of business for weeks, because you are dealing in an area 
where the people who are hackers are very creative people. They 
are sort of like the Dr. Moriarty in the Sherlock Holmes cases, 
usually very brilliant people who have a certain personality, I 
could say, that they like to exhibit in this way, and this 
becomes a real problem.
    Chairman Talent. Of course, Dr. Whinston, you are on a 
college campus, which makes you a special target probably.
    Mr. Whinston. I would think just the opposite. I mean, we 
have, many people would say, nothing of any particular value. 
And yet these people, in fact sometimes they break in and just 
say, look, we have broken in and this time we are not going to 
destroy your stuff but we just want to let you know that with 
all your sophisticated protection it is not doing you much 
good.
    Chairman Talent. I mean that there are a lot of students 
around who probably are brilliant.
    Mr. Whinston. But students can go anywhere on the Internet, 
and they could be students from India or Pakistan or China who 
just feel like roving the network and finding holes.
    Also software companies announce. We had a case where the--
--
    Chairman Talent. The subject of the Chinese is probably one 
you should not have introduced.
    Mr. Whinston. Okay. I will withdraw the Chinese mention.
    Chairman Talent. This hearing is not getting into that, I 
will tell you that.
    Mr. Whinston. We saw a posting by Hewlett-Packard that they 
discovered a hole in their operating system, and they announced 
it at say, 10:00 at night. Maybe one of our people saw it at 
6:00 in the morning, but the hackers had seen it probably at 
10:01 and they were roving the world, finding Hewlett-Packard 
sites and breaking in and doing destruction.
    So by the time we tried to use the patch that Hewlett-
Packard suggested it was too late. We already were wiped out.
    So I think the security issue and the whole issue of 
cryptography is a serious challenge that companies, 
organizations like the AICPA, will deal with, but we should not 
let people think that there is anything absolute in that realm 
that we can rely upon.
    Mrs. Kelly. Thank you very much.
    That kind of segues into the question I was going to ask 
Mr. Hanson, which was whether or not he feels his site is 
secure from hackers. How comfortable are you?
    I can't even see you but I know you are there, Mr. Hanson; 
if you would be willing to respond.
    Mr. Hanson. Well, we use VeriSign and, again, I don't--I 
feel very confident in that. I suspect that anybody that had an 
inclination to break into my seafood site could probably do so. 
I don't know of what benefit it would be; maybe to gain access 
to credit cards. But I haven't----
    Mrs. Kelly. That is exactly what I am driving at, that they 
could pick up the credit cards.
    Mr. Hanson. Well, I would like to flip this around, if I 
could have the indulgence of the Committee for a second because 
we have talked a lot about protecting consumers and in a lot of 
macro sense protecting the country from the Internet. But one 
of the concerns that I have as a small business owner, and 
maybe it can be addressed by other people here, is that people 
that use credit cards to order a product from me are not really 
liable to pay for it because there is no physical signature, 
and about 10 percent of my orders are disputed by customers who 
feel they just don't want to pay.
    When they dispute it to their credit card company, the 
credit card company just wipes it off and takes the money back 
from me. Unless I have a signature from them, from a shipping 
company, from exactly the person that ordered it, not their 
wife, not their son, not their friend, then there is nothing I 
can do, except take them to civil court, which I don't have the 
resources to do every time; especially track people and drag 
them into my State or drag them into my country.
    This is not a problem that I just have. This is a problem 
that everybody has, and that is why the professor here has 
raised a real issue about sovereign Internet cash, which we 
have been talked to about from a number of different companies 
that are exploring that, with some out of the country on-line 
banks.
    It is a concern of ours, and I don't know what is being 
done to address that.
    Chairman Talent. In your case it is not like you can resell 
your merchandise.
    Mr. Hanson. Well, it is gone. They will eat it and then 
they will just call the company and say I never received it. 
That is tough.
    Mrs. Kelly. Thank you very much. There is one other 
question I would like to kind of throw out to the whole panel 
but specifically to Mr. Miller, Mr. Whinston and Mr. Anderson, 
I want to know what you think, just speaking for yourselves, 
what you would think of a Federal law that would require 
parental interaction on the Internet with regard to the 
purchase of products?
    Mr. Whinston. Well, I could take a shot at it. I think 
there is a problem of jurisdiction. The Internet is a worldwide 
business, and we could pass laws in the U.S. that would, say, 
deal with on-line gambling or pornography.
    Mrs. Kelly. I am sorry. I narrowed that, Professor, to the 
purchase of products.
    Mr. Whinston. Okay. So what you mean by product is a 
physical product that is delivered by Federal Express?
    Mrs. Kelly. I mean putting some kind of parental 
interaction required by Federal law for a child to order, for 
instance, as Mr. Brady was saying, drugs, pornography, even 
lobsters, on the Internet.
    If a 7-year-old child--I have a 5-year-old granddaughter 
who is pretty sophisticated. She can do things on the Internet. 
What if my 5-year-old granddaughter picked up my credit card 
and ordered lobsters from Mr. Hanson? That is exactly Mr. 
Brady's point.
    Perhaps there is a need here for some kind of legal 
structure for purchases, and that is what I am asking a 
question about.
    Mr. Whinston. I would agree in principle. Again, there is 
this jurisdiction issue, which is an unfortunate problem, that 
companies, as soon as they see some regulation that they don't 
find attractive, they move out of the jurisdiction.
    So a company could be selling drugs, and I think this was 
the--well, not the Florida case, but the drug company could 
move to some place that doesn't have a strong jurisdictional 
concern and operate from there.
    Mrs. Kelly. But, Professor, if it required a parental 
interaction, in other words, a code number for the parent, some 
way of limiting the child's ability, that would translate 
around the globe. That is not something that--I mean that is 
just simply so that we could control it here, as I see it.
    Mr. Whinston. Well, I would agree that we ought to consider 
such laws, and I think that the question I am trying to look at 
is how do we enforce it.
    So let's suppose we have a company that was opening in 
Florida; there is a law and they decide to move to Cuba. The 
person making the order has no idea where or generally doesn't 
know where the site is located, and they put in an order. If 
the ISP, the local connector, such as an AOL or PSI or MCI or 
AT&T is not able itself to manage that control process, which 
is a lot of them are not interested in or not anxious to do 
because it leaves them open for liability issues, it becomes 
hard to practically enforce the law.
    So I am in favor of the things that you are trying to 
achieve. And certainly myself as a parent or a grandparent 
would be very concerned, but I am trying to look at the 
practical aspect of how we enforce laws which because of the 
Internet's ability to move these servers anywhere they feel 
like and still do business is a practical enforcement problem.
    Chairman Talent. Is the gentlelady finished?
    Mrs. Kelly. Yes, Mr. Chairman.
    Chairman Talent. Okay.
    Mrs. Kelly. Thank you.
    Chairman Talent. Next I will recognize a new member of the 
Committee and welcome him to the Committee as well, Mr. Udall.
    Mr. Mark Udall. Thank you, Mr. Chairman. I appreciate the 
opportunity to serve on theCommittee with you and all my 
colleagues.
    In my district in Colorado, the Second District, which is 
the northern Denver suburbs and the County of Boulder and the 
City of Boulder, there are a lot of small businesses and there 
are a lot of small businesses involved in electronic commerce 
and high tech pursuit. So this is a great opportunity for me. 
So I appreciate the welcome.
    I had a couple of questions, and I apologize I was late 
from another Committee, but I hear a lot right now in my 
district about tax issues, and the moratorium. I imagine some 
of you have been asked the question already, but I would be 
very interested in the opinion of a couple of you as to what we 
eventually do with these tax issues.
    There are a lot of small businesspeople who say to me, we 
are going to penalize Main Street in the long run. The 
businesses who have a physical location on Main Street provide 
more than just economic activity. They provide some of the 
strength of the community.
    Mr. Hill, Mr. Miller, Mr. Whinston, I would be curious, 
without nailing you down, what you think some of the long range 
proposals on the table are for dealing with these tax issues, 
particularly as regards local and regional needs for 
infrastructure and schools and so on.
    Mr. Hill. Well, as you know, the Internet Commission is 
looking at this issue and the administration members are 
Treasury, Commerce, and the U.S. Trade Representative's Office. 
From an SBA or a small business point of view, our concern will 
be to follow their debate and to ensure that as they continue 
down that road that whatever they enact is fair to all small 
businesses.
    At this point I don't have an administration position on 
that. They are still studying it. I don't believe the 
commission has met yet. I am not confident of that. Someone 
just handed me a note. So I think we need to wait and see, but 
clearly it is going to have a major impact on small businesses, 
and we will follow that debate very closely.
    Mr. Miller. Mr. Udall, the information technology 
industry's position is that for the Internet itself, it doesn't 
want double taxation, and that is really what the Internet Tax 
Freedom Act says. The more fundamental question you are raising 
about companies in a local area selling only to local people 
versus companies selling out of State or out of the region 
really goes back to the Quill decision the Supreme Court 
reached several years ago about location and taxation.
    That issue is not addressed in the Internet Tax Freedom Act 
one way or another, but it may be an issue that emerges in a 
discussion of the Internet Commission, which will start meeting 
next month under Governor Gilmore's leadership.
    We as an industry don't have a particular position on that 
one way or the other. All we are saying is it should be a level 
playing field. What you can do in ordering on-line should be no 
different than what you can do ordering through the mails or 
ordering telephonically.
    The challenge, however, I was trying to suggest in response 
to an earlier question from Mrs. Napolitano, is that it is 
possible, and this may even go beyond the scope of this 
commission, that as we enter the 21st century and as we get to 
be a more global and mobile economy, that those economic 
taxation models built on a local sales tax model are going to 
have to be rethought fundamentally.
    The Quill decision aside, the Internet aside, the whole 
idea that the average financial transaction involves me getting 
out of my house, walking down the street, buying something from 
a merchant and coming back, is becoming so outmoded, which was 
really developed basically in the 19th century, or if you want 
to go back actually hundreds of years into the earliest days, 
it just has to be rethought in the 21st century. But I think 
that is beyond this hearing, as Chairman Talent was suggesting 
earlier.
    Mr. Mark Udall. I think, was it Gertrude Stein who said, 
there is no there there, and I think that is the dynamic that 
is at play here.
    Where are you when you purchase something on the Internet? 
You could say that about Washington, too, I think.
    Chairman Talent. Thank you.
    Mr. Whinston. I would agree with Mr. Miller, and I would 
also follow up on your point that it is not even clear where 
the transaction, which I think is your point, where the 
transaction is taking place. Is it at the site, the server, so-
called, or is it on your client, that is, your machine, where 
the copy is made of the information and then you are entering 
it and finally saying I commit to the transaction?
    We are not even clear legally where the transaction takes 
place. So I would agree with Mr. Miller that we have to rethink 
the tax system as we move towards electronic commerce. Of 
course, we could say let's just get rid of the catalog 
exemption and everybody should pay taxes wherever they buy, and 
that, of course, could take place but then I earlier raised the 
point that for a small company, the administrative costs, if 
they start dealing on the Internet with places in different 
parts of the U.S. and even overseas, keeping track of all the 
tax regime, the changes in the taxes and being able to properly 
collect it, will become a very big cost.
    So to me, the directions you go in, still raises a lot of 
significant problems. I think we all go back to the point that 
maybe we have to rethink as we move towards the millennium; and 
with the continued growth of electronic commerce the way we 
look at taxes will have to be rethought.
    Mr. Mark Udall. Mr. Chairman, I know my time is up but if I 
could make one quick comment. I don't know how it is in other 
States but in Colorado our tax collection and tax allocation 
system is very Balkanized. There may be a silver lining in this 
that it provides us with an opportunity to streamline how we do 
that.
    I hear from a lot of small businesspeople that I am very 
willing to make my contribution to the community but, boy, I go 
to Denver and it is 7.5 percent, I am in Louisville, it is 7.2, 
I am in Boulder, it is 6.8, this is local sales tax, for 
example, and it is a headache. The paperwork is an enormous 
burden for them, so maybe there is some silver lining in this. 
I thank you.
    Chairman Talent. I thank the gentleman.
    Mr. Sweeney.
    Mr. Sweeney. Thank you, Mr. Chairman. Like my good friend 
Mr. Udall, I was at another Committee markup. I do apologize 
for coming late and I would ask that I may submit a statement 
to the record as well.
    Chairman Talent. Without objection.
    [Mr. Sweeney's statement may be found in the appendix.]
    Mr. Sweeney. To the panelists, and more particularly to Mr. 
Hill, Mr. Miller has spoken at length about the great 
opportunities that e-commerce is going to present for the 
future, and Professor Whinston just spoke of the great 
challenges as well that are going to face us.
    I know the Department of Commerce has estimated that more 
than $70 billion in sales will be generated by 2000, and by 
2002 it is around $327 billion.
    I would like to try to get a handle on our capacity for the 
present. How we are able to determine where we are at this 
point and how do we plan for the future? So I would like to ask 
Mr. Hill if the SBA has developed or do you have relevant data 
from this year to last or this year to some other marked period 
of time of how many new business opportunities have been 
created,how many more tax dollars have been generated, how many 
more people are paying taxes because it is directly tied to e-commerce?
    Do we have any sense of the growth today?
    Mr. Hill. In my testimony, I talk about a few statistics 
that we have pulled together. The number of small businesses 
using the Internet has doubled in the past 2 years, from 22 
percent in 1996 to 41 percent in 1998. We estimate that 
electronic commerce is going to grow to more than $300 billion 
annually in just a few years.
    I don't have a table of statistics with me but I would be 
happy to provide that for you for the record, either from our 
Office of Advocacy or from other government sites that we have 
access to.
    Mr. Sweeney. In your testimony, you spoke of the SBA 
efforts thus far, developing a framework for understanding the 
ways e-commerce work, educating certain demographic groups, 
including small businesses. In my district, small business is a 
predominant employer and the predominant means of commerce and 
e-commerce will offer great opportunities and increasing 
certifications.
    I have a concern about identifying what that market is and 
how we can more positively proactively, as a government entity, 
encourage that growth. Could you talk to me a little bit about 
how the SBA, through the Office of Advocacy, is working to pull 
together that kind of information; what new jobs are being 
created and taxes, and how prepared are you, what do you need?
    Mr. Hill. Thank you for the opportunity. We are at the 
beginning of this process, as many people are. The presidential 
directive was issued last fall and we are working very closely 
with the Department of Commerce.
    We intend to launch a campaign very similar to the one that 
we did on the Y2K outreach. We think it is really critical, and 
we have heard today over and over again that we begin that by 
conducting focus groups and doing research to try to clearly 
identify what are the issues and what are the impacts. Again, 
electronic commerce is more than just the buying and selling. 
It is really the transformation of a small business.
    We think from there we need to move into the next phase, 
which would be an awareness phase, where we need to mount a 
national campaign and leverage our existing resource partners, 
as well as our friends in the industry.
    We have been in consultation continually with ITAA and 
other groups that have pledged their support to us, to help get 
the word out about the opportunities. We have heard a lot about 
the external issues facing small businesses as they move into 
e-commerce.
    There are a lot of internal issues, in our view, at the 
SBA, that also need to be thought through and explained.
    Mr. Sweeney. On that note, I know that in the past the 
complaint has been, from both he SBA and the small business 
community, that the playing field hasn't been level in terms of 
accessing information on government business and contracts.
    Mr. Hill. Right.
    Mr. Sweeney. What have you done in that respect and how are 
we using technology to get small businesses out? Do we have 
something going now? Is there something planned?
    Mr. Hill. Yes, sir, we do. At the SBA, we have enacted a 
system called PRO-NET, an Internet-based system that allows 
small businesses to go on and hotlink to the websites of 
government procurement offices as well as identify what goods 
and services they can sell.
    The beauty of the system is that it was intended to be a 
tool for government contract officers to locate small 
businesses who could meet their specific mission needs, but it 
is wide open on the Internet. Small businesses can use it to 
find other small businesses to support them.
    Large businesses can use it as well. We can look at it, and 
if we find that a certain agency may be lacking in their goals 
for small business procurement, we will go to the agency and 
say, have you used PRO-NET? The age-old, tired excuse that we 
hear over and over again, we just can't find those small 
businesses. Well, this is an Internet-based system. I will give 
you the absolute number but I believe it is over 180,000 small 
firms on the PRO-NET site today.
    Mr. Sweeney. That is the kind of hits you had. That is 
great. If you could provide that information.
    Mr. Hill. I would be happy to.
    [The information may be found in the appendix.]
    Mr. Sweeney. I would appreciate that. And either Mr. 
Anderson or Professor Whinston, we have talked about--it is 
ironic. My colleague, Mrs. Kelly, spoke of the potential 
problem with the use of children using credit cards to purchase 
goods through the Internet.
    I had that experience about 5 weeks ago with my 8-year-old 
daughter, who purchased a very nice $125 porcelain Princess Di 
statue. It looks very good in her room.
    Chairman Talent. The gentleman may have actually gotten off 
easily. Is that all she bought?
    Mr. Sweeney. At this point.
    Chairman Talent. It may be all she ever buys for the rest 
of her life.
    Mr. Sweeney. It may be.
    I am interested in how we look at the issue of developing a 
sovereign Internet cash system and what the possible 
jurisdictional authorities are, and what they may be. How much 
work has been done and what would your recommendations be for 
us in the House to begin to look at that issue? Either for Mr. 
Anderson or Professor Whinston.
    Mr. Whinston. So what you are saying is that we, besides 
the development of this sort of private industry money or 
private money, the government should look at developing an 
electronic surrogate for the U.S. dollar, $10 and so forth?
    Mr. Sweeney. Not necessarily. But I am asking what are the 
options and what are the----
    Mr. Whinston. Well, that would be an option, to have 
surrogate money that the banks would make available that would 
circulate electronically. I know the Federal Reserve has a 
study group, the Federal Reserve and some of the reserve banks 
together are studying this whole area of electronic money, 
whether it is private or sovereign; what are the legal issues 
of having private money.
    Because again, Microsoft and some other well-known company, 
IBM, could start letting its liability circulate and not just 
call it money. So you could say the only legal tender in the 
U.S. is U.S. money, whether it is in the traditional form or 
the electronic surrogate, but there could be other forms which 
play that role.
    Some people argue that frequent flier miles, which is 
moving more towards electronic form, is really a type of money 
that the airlines issue.
    The concern about private money, and I just mentioned that, 
is that it may be over issued; that is, many people argue that 
frequent flier miles are over issued. It is hard to use it and 
so there is an incentive to--you have a good thing going. Why 
not just expand it?
    So there are concerns about the development of private 
money. There is an historic precedent;150 years ago we had 
private money in the U.S., and there were some failures of various 
types. So I think it is an area that has to be studied, but there is, I 
think, clearly an interest in creating--going beyond credit cards, 
creating money that people can use electronically; or the efficiency, 
the ability to buy things at very small prices, to buy ball scores, 
stock market quotes, and the desire of the public to have privacy.
    Mr. Sweeney. Will part of the solution exist in how we 
develop a tax structure and how we begin to look at the tax 
issues?
    Mr. Whinston. Well, it relates to the tax issue, because to 
the extent that you have a cash-oriented economy, as it is 
recognized, it makes tax collection more challenging. So as we 
move towards electronic money, which is then encrypted and 
moves around the network, moves globally around the network, it 
presents a challenge for tax collection and also, of course, 
opens up opportunities for criminal elements to move huge sums 
of money around without any hope of detection.
    Mr. Sweeney. Mr. Chairman, one last question, and I am 
going to go back to Mr. Hill on the PRO-NET issue, I am 
wondering--you mentioned that you have 800,000 hits and that it 
is a new process that is available to both large and small 
businesses.
    Have we asked or required that all government agencies 
participate in the posting of those notices?
    Mr. Hill. What is posted on PRO-NET is information on 
individual small businesses. It is very similar to a small 
business registry.
    We have strongly urged and suggested that the procurement 
officers in the Federal agencies use PRO-NET to help them 
attain the quality contractors and service providers they need 
to accomplish their mission needs. So it is not a matter of the 
government logging solicitations on PRO-NET. It is a registry 
of small businesses that are available to do work.
    As a report card, we are paying attention to which agencies 
are using it and which are not using it.
    Mr. Sweeney. How many are and how many aren't?
    Mr. Hill. I will get you the actual accurate number. I 
believe there are quite a few that are using it, but I will 
provide that information for the record.
    Mr. Sweeney. Thank you.
    Ms. Napolitano. I would like to have a copy of that.
    Mr. Hill. Yes. We will provide it to the whole Committee.
    [The information may be found in the appendix.]
    Mr. Sweeney. Thank you, Mr. Chairman.
    Chairman Talent. I thank the gentleman.
    I have some questions. This has been very educational for 
me. Let me go on to this question of private money, because I 
just asked the staff, well, suppose Mr. Hanson wanted to set up 
his own private money, how would he do this? The answer that 
came back was that at least as far as we anticipate this now, 
he couldn't because he is not big enough.
    Do you want to comment on that, Mr. Hanson?
    Mr. Hanson. Yes, because I have actually talked to people 
about this.
    Chairman Talent. Yes, go ahead.
    Mr. Hanson. We have a local bank that is moving on-line, 
Pepperall Trust Company. What they have suggested to us is 
connect their site to ours; allow people to make deposits 
through wire transfer from their own bank accounts and then 
they would settle out accounts through purchases at our site.
    So, in effect, it is virtual cash or the first step towards 
it.
    Chairman Talent. Let me take this step-by-step because I do 
not get this stuff real fast so I have to take it slowly.
    Mr. Miller, did you have a comment?
    Mr. Miller. That doesn't strike me as private money. That 
is still dealing with a federally licensed and regulated 
institution.
    With all due respect to Professor Whinston, I think this is 
Esperanto.
    Chairman Talent. Esperanto, is that a kind of coffee?
    Mr. Miller. That is that language that everyone thinks is 
going to be the universal language that everybody is going to 
go to, that they have been talking about for 50 years. No one 
in the world speaks Esperanto, except the three people in the 
Esperanto Society. I mean, I think----
    Chairman Talent. Professor Whinston, Mr. Miller has been 
provocative with regard to several of your positions, and you 
are a professor and so, please--tell us why this is not 
Esperanto or why if it is Esperanto it is still okay.
    Mr. Whinston. Well, I think Mr. Miller has a good point. 
Today we don't see electronic money. I am trying to look a bit 
into the future and ask the question, from a private sector 
point of view, is there money to be made; is there a demand for 
electronic money versus a credit card?
    I think there is a demand. From the point of view of 
privacy, that is people are not that happy to use a credit card 
if they want to have privacy. The credit card provides others 
information. The credit card number provides an identity to 
where the transaction is going on. People like to not let 
everybody potentially know what they are doing. So there is a 
privacy issue, and then there will be an issue of selling 
things that are in small--the small priced items, ball scores, 
stock market quotes.
    So I see where companies, as we move towards electronic 
commerce as a more pervasive form of business, will look 
towards trying to make money by creating electronic money. I 
mean, it is analogous to the Traveler's Checks that companies 
have found very profitable over the years.
    So it will happen, and we shouldn't wait until it is 
suddenly there and then try to scramble to figure out what we 
are going to do, but to anticipate that that will happen.
    The Federal Reserve, as I indicated, does have a study 
committee and Chairman Greenspan has made public statements 
about his view, or the Federal Reserve's view, on the 
development of private money and has indicated that as a free 
market advocate he sees that as a possible development to take 
place.
    The seigniorage which the Treasury earns by being in the 
money business may be something that will be whittled down over 
the years. So I think it is something that we have to 
anticipate.
    Chairman Talent. Well, let me do what lawyers call a little 
laying of foundation here so I understand what it is we are 
talking about. We are not talking about a line of credit. That 
is a familiar concept. If I was a regular customer with you, 
Mr. Hanson, I might decide I am going to send you a certain 
amount of money to put in an account and I will draw on that 
when I purchase from you. This is beneficial to you because you 
would have a secured form of payment. That is something that we 
can all grasp.
    That is not what we are talking about, right; just a line 
of credit?
    Mr. Whinston. No.
    Chairman Talent. We are talking about a situation, if I 
understand it right, where a big company like Microsoft would 
say to you, that there must be a point at which you use the 
publicmoney to buy the private money.
    Mr. Whinston. That is correct.
    Chairman Talent. And probably they would require you to buy 
large amounts, although maybe it would get sophisticated so it 
wouldn't.
    Mr. Whinston. Well, no.
    Chairman Talent. You would buy half million dollars maybe 
of Microsoft dollars, except that they would give you more in 
Microsoft dollars than the public dollars that you are 
offering. So for $500,000 in United States dollars, you would 
get $600,000 in Microsoft dollars; is there some premium that 
is necessarily involved in this?
    Mr. Whinston. I wouldn't think so, especially when you 
refer to Microsoft. I think it could be on par; maybe a little 
better. Again, we are thinking of international money and if 
you recognize that many sovereign currencies outside the U.S. 
are not all that stable, you would find an instant demand. For 
example, in Russia, people would probably prefer to buy what 
you could call ``Bills'' or ``Gates'' or whatever you want to 
call it, rather than dealing with the ruble, and that would be 
an accepted----
    Chairman Talent. But why would an American consumer who is 
just getting an even exchange ever do that, as opposed to just 
establishing a line of credit of some kind through a bank or 
something with Microsoft? What would be the advantage to you as 
an American of trying to trade in Microsoft currency, unless 
you are getting some premium in it?
    Mr. Whinston. Well, again, I think the currency can be 
configured. For example, Microsoft may sell you currency and 
they could sell you $10 worth and you could use it to buy 
products that Microsoft had arranged to give you at a discount. 
They could work all sorts of clever----
    Chairman Talent. Premium I can understand, and then if they 
gave you some premium is the concern that they might oversell 
it so that if a whole bunch of people decided to spend a whole 
lot of the Microsoft dollars all at once there might not be 
enough Microsoft inventory?
    That would be a nice problem for Microsoft, wouldn't it?
    Mr. Whinston. Right. Well, Microsoft would be a hard 
example to look at because they are such a well-financed 
company. It is hard to conceive of them running into problems.
    But various businesses, banks could start selling and there 
is then a question which the Federal Reserve is looking at, 
should there be reserve requirements for selling electronic 
money?
    Should you somehow have backing in let's say, for every $5 
of electronic money you have out there, you have some Treasury 
bills for a dollar sitting in the bank to understand when is 
the money going to be redeemed?
    In some cases, people may be using it for years; it is just 
circulating in the system.
    Chairman Talent. See, what I don't understand insofar as 
this relates to e-commerce, and I know Mr. Forbes wants to ask 
a question, and I am going to yield to him so he can do it, is 
the only reason you do this in e-commerce that you all have 
identified is security concerns. One way to avoid a security 
concern is just set up some kind of an account, a wire account 
of some kind, so that you don't have to put some generalized 
credit card in; you just draw against the account. I have not 
understood from what anybody has said here today what the 
advantage is of doing that in a private monetary system as 
opposed to a public system.
    You can always just set up a line of credit, if that is 
what you want. Why do you have to buy Microsoft or IBM dollars 
or Anheuser-Bush dollars to get a credit? They are 
headquartered in St. Louis, Missouri, by the way. So you are a 
regular purchaser of Bud Light and you decide to do that over 
the Internet, so why would you want AB dollars as opposed to 
American dollars from a security standpoint?
    Mr. Miller. What you are talking about, Mr. Chairman, 
already does exist. There are companies such as Cybercash where 
you give them a certain amount of good old greenback dollars or 
you use a credit card or write them a check, but anyhow plain 
old U.S. Treasury-backed dollars, and then you have electronic 
money, which to deal with the issue that Professor Whinston was 
talking about, where I want to buy something that only costs a 
dollar or something only costs a quarter over the Intenet and 
the credit card charge makes it feasible for me and the credit 
card company and the merchant to allow me to pay a dollar for 
something using my credit card. Just as when you go into a 
normal retail establishment, they are not going to take a 
credit card in most cases for $10. So the whole idea behind 
Cybercash, which by the way has not taken off. It is a local 
company based here in Reston; you can go visit with them, if 
you want, to see more about their product. But the idea was 
that when you wanted to do real small transactions and they 
wouldn't accept a credit card, or for the reason Professor 
Whinston was suggesting because the credit card, there is an 
easy trail with the credit card, whereas theoretically with the 
cash, cybercash is----
    Chairman Talent. Although a hacker could crack into your 
cybercash account, too, and deplete it.
    Mr. Miller. It is not only the hacker. It is a privacy 
issue, that some people say I want to buy Mr. Hanson's lobster 
but I don't want to use my Visa card because I am a real 
private person and I want them to be able to trace that back to 
me through the Visa card or the MasterCard or the American 
Express card, but if I use this cypercash that I have bought 
through the Cybercash Company with money, that it is harder to 
trace. It is very easy to trace something through Visa or 
MasterCard because the law enforcement officials or the privacy 
people who are trying to intrude into my privacy, they just go 
to MasterCard or Visa and get that; whereas, if they go to 
Cybercash they can find out I got $300 worth of cybercash.
    Chairman Talent. A money order, in other words?
    Mr. Miller. Right, exactly. But they can't show that I 
spent it at Mr. Hanson's location as opposed to Amazon.com as 
opposed to some other website. So I think that is the privacy 
issue, it I understand correctly, that Professor Whinston is 
talking about.
    Chairman Talent. Okay.
    Mr. Forbes, did you have something you wanted to ask?
    Mr. Forbes. Thank you, Mr. Chairman. On this whole issue, 
and I certainly can see in small denominations why there may be 
a need for something like Cybercash but I would suggest that 
you know, international commerce and the frequency of 
international commerce in today's world, even absent e-
commerce, you know, we are exchanging currencies all the time 
and I am a little bit concerned that it might be distracting 
ourselves from the real issue, which is providing for the 
privacy and the security of using credit cards.
    I know that I was reminded that the Banking Committee 
certainly has had extensive hearings on this issue, and the 
Treasury Department particularly has expressed a concern for 
its ability to track fraud and abuse, particularly if we are 
going to create a whole another, if you will, unregulated, 
outside the Federal money supply, source of funds.
    So I hear where you are coming from, Professor, but I guess 
I do have some trepidation.
    Mr. Miller, if you wouldn't mind, I hear you on Cybercash, 
which I think from a functional point of view low denominations 
might be valuable, but I was sensing, and correct me if I 
amwrong, that you had some concerns about this sovereign money issue as 
well.
    Mr. Miller. I just don't think it is an issue, with all due 
respect to Professor Whinston. I understand the Federal reserve 
is studying it. They need to study something to keep them busy 
over there, with the economy going so well.
    We have something called international money. It is called 
a credit card. Yes, there is going to be competition with the 
credit card companies because people are going to try to get 
their fees down and as Professor Whinston said correctly, there 
is money to be made from being part of this transaction 
process, but at the end of the day we have come up with this 
transaction system. It is called a credit card.
    When I go to France physically, or order something from 
France over the Internet, I don't have to worry about 
transacting that--or doing the transaction. I don't have to 
worry about converting it from francs to dollars. The credit 
card company does all that. They charge a fee. They charge a 
fee to me. They charge a fee to the merchant who sold it to me. 
That is how the process is working.
    Maybe Professor Whinston is right, that there is going to 
be this sudden growth to this, or long-term growth to this, but 
I would be willing to bet one of Mr. Hanson's very nice lobster 
dinners with Professor Whinston that it is not going to be any 
time in our lifetimes.
    Mr. Forbes. Thank you very much.
    Chairman Talent. I understand you have some more, and we 
will go back there in a minute.
    Let me finish, if I can. Mr. Hanson, what you are saying 
your local bank is going to be willing to do is basically act 
as an intermediary and for some kind of premium guarantee the 
payments to you, is that it?
    Mr. Hanson. That is right, but they are also looking at 
creating this relationship with hundreds of other websites, 
too. They are looking to acquire deposits at their bank.
    Chairman Talent. Yes. I can understand why it would be a 
useful service for small merchants.
    Let me address the relative advantages or disadvantages to 
small merchants. I don't know that I have really heard anything 
that wouldn't be equally applicable to business life outside of 
e-commerce. Yes, it is harder for a small merchant to break 
this way into the consciousness of the consumer because he 
doesn't have the advertising dollars. Well, that exists outside 
of e-commerce. Although there may be different ways--for 
example, those services that will aggregate and direct 
customers to small businesses, that is kind of similar in the 
e-commerce or the digital world, isn't it, to the mall?
    In other words, you have an anchor store at a mall and then 
that allows people like smaller businesses to get traffic that 
way? Is that channeling thing similar in the digital world to a 
small kind of concept?
    Mr. Miller. It is, and it isn't. One difference in the 
digital world, Mr. Chairman, from the real world is one of the 
reasons that malls have beaten up Main Street. When you talk 
about another challenge to small businesses on Main Street it 
is the mall, is because of the physical factor. You go in your 
car, you go to one location, and there are no costs to you 
because once you have driven there you don't have to get in 
your car and drive to another place to find the supporting 
goods store or drive to another place get to the candy store, 
et cetera. The cyber world is frictionless. I mean, you can go 
anywhere. One of the reasons the cybermalls, per se, have 
failed, and MCI and other companies tried to set up cybermalls, 
is because the anchor itself didn't work.
    So instead, what is happening, as Professor Whinston 
suggested, is these portals are all trying to figure out what 
the secret is. AOL, in that context, is a portal. Any ISP can 
be a portal. They are all trying to figure out partnerships, 
and it is mutually beneficial because what draws you to Excite 
or Yahoo or AOL or Microsoft network, whatever those first ones 
are, is not just the content they have got on their own page 
but it is their ability to, in turn, reference you to, if you 
are looking for a lobster dinner to Mr. Hanson or from one of 
his competitors, or if you are looking for a new car, a good 
car site.
    So I guess I share Mr. Hanson's concern that those who 
arrive late may be potentially at a disadvantage, but I don't 
think the marketplace is so fixed yet, and I don't think it is 
going to be fixed in the next, I would guess 5 years, maybe 
that is too long a time horizon, that it really is that 
exclusionary.
    Let me draw a different analogy, which is the Yellow Pages. 
The Yellow Pages is sort of everybody but it is always just 
located in the geographical area, Washington, D.C., Northern 
Virginia, St. Louis, whatever it may be. The question is, how 
do you differentiate yourself in there? And the Yellow Pages 
has kind of figured it out by title. You are a baker or a 
candle stick maker or you are mother goods, whatever your 
particular store is.
    The way we do that on the net is through the search 
engines. So the trick is to find those--get placed--I think Mr. 
Hanson is exactly right. If you can't get placed in a search 
engine, and again there are dozens of them out there right now, 
you are clearly going to be in trouble.
    On the other hand, if you can get a decent place on a 
search engine and if you create the idea that you can buy fresh 
food, then Mr. Hanson's opportunities, or anybody who gets into 
this market, are much better than they would ever be in a 
normal business environment.
    Chairman Talent. Sure. It works in the other direction, 
too. The same disadvantages you may have as a small business 
outside of e-commerce exist in e-commerce, but the same 
advantages you have as well, flexibility, all the things I 
think that are moving the economy generally in the direction of 
smaller organizations because you are able to meet consumer 
demand more flexibility will exist. Then you are going to have, 
I would think, some advantages in terms of economies of scale 
as well because you can link up so much more easily.
    For example, big businesses have huge distribution chains. 
You don't need that anymore, because you connect up directly. 
At least in some industries I would think that would be the 
case.
    Now, is there a danger of these search engines, the number 
of them being small enough that they wouldn't be competitive 
and they would acquire too much leverage over the small 
businesses so there is one search engine, let's say, you have 
to be in, and they go to Mr. Hanson who doesn't have enough 
leverage because he is not big enough and say, now, you are 
going to have to pay this enormous premium? It seems to me what 
protects small businesses is if there are enough of them out 
there to hold the price down of access. Do you see a possible 
problem in that area?
    Mr. Miller. Clearly there is a potential problem, but let 
me give you a little more data on point. I visited Network 
Solutions on Monday out here in Herndon, which is where all the 
domain names for dot com and dot org and dot net are. You know 
how many new domain names they register each day? This is a new 
website. 30,000 a day; 30,000 a day go into the database.
    I think with that many new Web pages out there, there is 
always going to be a chance for a new search engine or a new 
portal to come along. I mean, that is what is so exciting about 
this industry.
    Let me go back to your distribution point. I met with a 
company three weeks ago. The CEO is 22 years old. This is his 
third company. He is distributing music over the net. He is 
taking on the largest music companies in the world because he 
believes that the new digital generation that Mr. Hill talked 
about doesn't want to be constrained to have to go to the 
record store and buy a physical record.
    There is a big debate. Some people in the recording 
industry are very concerned about that, the same way that the 
video industry was very concerned when VCRs first came on-line.
    Chairman Talent. Yes. We are going to have a hearing, I 
hope, on this subject, Mr. Miller, with personalities that 
should be very attractive for the Committee.
    Mr. Miller. I am sure it will be.
    Chairman Talent. I feel like I am sort of announcing the 
exciting scene from next week's show.
    Mr. Miller. I will look forward to hearing it. But since I 
met with them and they became a member of my association three 
weeks ago, two of the largest music companies in the world 
which had said previously they were not going to sell music 
over the Web because of the concerns about copyright 
violations, et cetera, have turned 180 degrees.
    I am not saying it is inevitable but it sure smells pretty 
close to inevitable. That, number one, I think the small 
companies are going to succeed and, number two, they have 
changed the whole marketplace almost overnight.
    Chairman Talent. With regard to music, Mr. Miller, then the 
question that begins arising and is arising in the minds of a 
number of artists, and we are going to explore this, is why do 
we need the companies?
    Mr. Miller. That is one of their selling points.
    Chairman Talent. And the companies, if we have this 
hearing, will have an opportunity to explain why the artists 
need the companies. But why not just go directly on-line? There 
are a lot of issues there.
    Let's get to the tax issue, which is certainly one that the 
government is going to have to be involved in because it is our 
function to regulate interstate commerce and to resolve these 
kinds of issues.
    Mr. Miller, with the greatest respect to you, and I see the 
point you are making about the overall benefits of this being 
so great as necessarily to outweigh the detriments to local 
governments, but Mrs. Napolitano was right. I was in the state 
legislature. I represent a number of municipalities now. This 
is their tax base that is at issue here. They are the ones 
providing the trash pickup and filling the potholes and doing 
the day-to-day things that are so absolutely vital, and we will 
hear from our constituents if those start going down because we 
are losing money from e-commerce sales.
    So you said something that was interesting to me. You said 
all the e-commerce community wants is equality. You want to be 
treated the way the catalog companies are. In other words, you 
are willing to pay a use tax, for example, on a transaction 
like that. I mean, is that correct? Elaborate on that a little 
bit.
    Mr. Miller. What we mean by that, Mr. Chairman, is let's 
say that there were no Quill decision. Let's assume the Supreme 
Court had ruled differently, which means that if you ordered 
something by mail or telephone from L.L. Bean you had to 
automatically pay the Maine sales tax, or if I live in Virginia 
I automatically had to pay the sales tax.
    Chairman Talent. Did the Quill decision say that States 
can't tax catalog sales?
    Mr. Miller. It basically said, as I understand it, and I am 
not a legal expert but I think I have it fundamentally right, 
if a merchant doesn't have a physical location, does not have a 
site in the State where the customer purchases the product----
    Chairman Talent. In the State?
    Mr. Miller. In the State--that basically the customer has 
to pay on his or her own the sales tax. In other words, what I 
am supposed to be technically, and I guess I shouldn't confess 
this. I may be confessing I am violating some tax law. If I 
order something from L.L. Bean and if L.L. Bean doesn't have a 
physical location in Virginia when I order this product, then I 
don't have to pay the sales tax. I am supposed to turn around 
at the end of the year, when I pay my Virginia State tax, and 
voluntarily say, well, I bought this many products outside the 
state.
    Chairman Talent. Sure. We all know what that means.
    Mr. Miller. Exactly. Which means that it doesn't get paid. 
So that is what the Quill issue said. It is a basic issue of 
what is called nexus.
    Chairman Talent. In fairness, though, Mr. Miller, the Quill 
decision, was it a constitutional decision?
    Mr. Miller. Yes.
    Chairman Talent. Okay.
    So it wasn't based on a silent commerce clause type of 
thing? It is not something we can do anything about?
    Mr. Miller. You are beyond my pay grade in that area. I 
think you need some constitutional scholars to look at that. I 
am sure there is some disagreement.
    Chairman Talent. You serve so well as an expert in so many 
different areas already, Mr. Miller.
    Mr. Miller. Thank you, Mr. Chairman.
    But I think that that kind--so I am saying----
    Chairman Talent. Let's forget about that for just a minute.
    Mr. Miller. So if you said that ordering something on-line 
were the same rules and regulations, that is fine. What we 
objected to is what was happening in many States, Mr. Chairman, 
where some State regulators, and in some cases some State 
legislators were saying that an ISP, an Internet Service 
Provider, whether you are talking about a large one, a portal 
like AOL, or whether you are talking about many of these local 
ones, not only would they have to pay their telecommunications 
taxes that they are normally paying because they are using 
telephone lines, in addition they would have to pay an 
additional telephone tax.
    That is really what this debate was all about. It wasn't 
about whether you pay sales tax. That was already--what we 
would contend is that was already decided, for better or worse 
in terms of the outcome of the local governments, many years 
ago in the Quill decision. I think what happened when the bill 
went through Congress is some of the governors were coming to 
Congress and saying, overturn the Quill decision and then we 
won't object to what--and some of the mayors and other 
localities said, we don't care about this Internet Tax Freedom 
Act.
    All we are saying is that is a different issue. If Congress 
wants to tackle, if they can legally, I am not sure they can, 
the Quill decision, fine, and say that L.L. Bean products 
whether they are sold telephonically, through the mail or on-
line all require the consumer to pay a local tax, that is fine.
    Chairman Talent. The Quill decision couldn't have been a 
constitutional decision. It is not like a service of process or 
something. It had to deal with a commerce clause issue, because 
if Congress wished to, provided that you are dealing with a 
company that does business in the United States, which the 
professor has mentioned that some of these are international, 
Congress could authorize this.
    Mr. Miller. Let me get back to you on that. I don't want to 
be definitive on that.
    Chairman Talent. I am not an expert on this either.
    Mr. Miller. But that is the defining decision about on-line 
catalog buying, and that is the same issue that applies here on 
the Internet. So again, do we disagree?
    Chairman Talent. Then we have the question of where is it 
sold. You would almost have to do it where the product or 
service is delivered, wouldn't you? Because the server is in 
one place and the business is in another. Mr. Hanson could use 
servers in places other than where he is at. So you would 
almost have to do it in the jurisdiction where it was 
delivered, right?
    Mr. Miller. That is right.
    Chairman Talent. Heck, you could order it on a laptop in an 
airplane. Not even delivery. You probably have to do it where 
the person ordering the service was domiciled, I would imagine.
    Mr. Miller. That is the challenge that they were trying to 
face, because obviously we have been talking mostly about 
sweaters and lobsters.
    Chairman Talent. Right.
    Mr. Miller. But, as you know, a lot of this is going to be 
digital. They are going to download a piece of software which 
is never going to be physically in a physical form, or you may 
be getting some technical advice. Let's say you get some advice 
from your accountant online, and then the accountant bills you 
for that. I mean, all kinds of questions about that. So even 
though it is relatively easy when you are talking about a 
Federal Express truck or a UPS truck dropping something off, 
Mr. Sweeney's doll that his daughter ordered, it gets much more 
complicated when you are talking about servers being in 
different locations, as Professor Whinston said, or services as 
opposed to hard goods.
    Chairman Talent. Professor, I understand that figuring out 
what tax you are to charge is difficult, and that is difficult 
in catalog sales today. But why couldn't we take advantage of 
the Internet to solve this problem? In other words, if Congress 
said to the States and the localities, if you want to charge 
your tax here is this certified kind of program about taxing 
schedules around the country. All right? You better make sure 
that you have entered your tax on this schedule so that when 
the business person has to figure out what they are going to 
pay in tax, they click on and they can do this very easily. If 
you are not on here, they are not liable. What is on there, by 
the way, better reflect what you are really taxing, because 
there will be penalties if you try and kick the tax up by 
saying it was bigger than it was. There are municipalities that 
might do that.
    Couldn't we solve this through some kind of Internet?
    Mr. Whinston. Yes, I think except for this jurisdictional 
issue where somebody just moves the server outside of the U.S. 
and then it is up to the Customs people to deal with it, but I 
agree with you and I think that is actually an interesting 
opportunity for a small business to go in to that whole area of 
saying to lots of companies, I am going to focus on the tax 
issue. So every time you have a customer, when you need to 
compute the tax you jump to my server and I will provide that 
information and sell it to you on a per transaction basis or 
have a fee, a monthly or yearly fee. It would be specialized 
business where somebody would just focus on the whole question 
of taxation and keeping track of when things change and 
updating it and certifying it.
    I think that could work, except of course for any 
jurisdictional problem.
    Chairman Talent. What we might have to do, though, is if 
this is going to be a legal consequence, if the business is 
going to be able to have as an absolute shield against further 
liability, and be able to say, look, we accessed and charged 
what was on this schedule, it probably would have to be some 
kind of standardized program, possibly federally supervised. 
You could outsource the work in doing this, but you would have 
to have some kind of government imprimatur to it to make that 
work. I think we could solve that problem.
    I have just been informed by staff that he is leaving me to 
set up that business, so thank you very much, Professor 
Whinston.
    Mr. Miller. Mr. Chairman, could I suggest one other part of 
that, too?
    Chairman Talent. Sure.
    Mr. Miller. Which is, you could also do something close to 
what the AICPA is doing, again built this into the transaction, 
in terms of the quality of the merchant. I mean, in addition to 
the separate seal process, which the AICPA has set up through 
their CPA trust, you could, for example, have automatically 
built into the transaction a D&B. You know, a lot of times when 
you are doing business with a merchant for the first time, you 
do a Dunn & Bradstreet, or you go to some other independent 
rating organization and you get a rating back to make sure they 
are legitimate and pay their bills on time, et cetera, et 
cetera.
    That can also be done, built into the electronic 
transaction. I know Dunn & Bradstreet is thinking about it, and 
other companies are thinking about it. So a lot of these things 
are very difficult for small businesses if they had to be done 
in a physical world, because they would require a lot of 
additional staff resources, done electronically for a 
relatively minimal fee could be built right into the 
transaction.
    So if a small business person is ordering from a new 
supplier for the first time and says, I am concerned, is this a 
legitimate supplier, I want an independent verification of 
that, that could literally be built into the transaction, where 
the small business person would pay some kind of automatic fee 
when getting that information and it would come flashing up 
red, saying don't order from this merchant; they have got a bad 
credit rating or they got a bad record of delivery.
    So that could even go beyond the general kind of rating 
system that the CPA WebTrust has built up, which I think is 
excellent, to much more specific if the merchants wanted to pay 
for it.
    Mr. Anderson. Mr. Chairman, actually we are working on the 
business-to-business end of that to do that exact piece. CPA 
WebTrust right now is business-to-consumer, but we are well 
aware of the business-to-business piece of the equation to 
legitimatize those types of transactions so you know who you 
are dealing with and that you can be assured that you are 
entering into a secure transaction and that you are going to 
get and get paid for what you are buying.
    Chairman Talent. Focused on residence or domicile, you have 
to figure that out, too, because people, at least outside of 
the movie the Matrix, don't exist in cyberspace. They live some 
place.
    Mr. Forbes. Most of them.
    Chairman Talent. I mean, they occupy space. This is matter 
we are talking about here. So you could tie it into that. It is 
not completely clean. But you know then, if you did that, 
forget about your privacy being protected by having some kind 
of separate money because every transaction that is taxed has 
to go to where you live, with everything else that you could 
accessthrough that.
    I don't want to think out loud when you all have important 
things to do.
    I think I am basically done, but Mr. Forbes has some more 
questions and I would recognize him.
    Mr. Forbes. I will be very quick, Mr. Chairman, because our 
panel has been very patient.
    I do appreciate your presence here today. I have found this 
to be perhaps one of the most productive and informative 
hearings that I have been to in a long time. First of all, let 
me thank the AICPA and the ITAA, both of you, for the 
leadership that your trade associations, frankly, are bringing 
to this question. I mean that sincerely, because I am a great, 
great believer in what is taking place in the world of e-
commerce.
    I have two quick questions. The first one to Mr. Hill, if 
you would, sir. My sister-in-law owns a novelty business,, a 
very small business in Patchogue, Long Island, and she 
determines that it is to her advantage and the growth of her 
business to get into e-commerce. So she picks up the phone and 
calls the Office of Technology at the Small Business 
Administration and says, how do I do it? What do you folks do 
with that question?
    Mr. Hill. At the SBA, we are developing our campaign now 
but currently what we would say is, as Mr. Hanson has said, we 
would start out by congratulating her. She is seeing the 
future. This is an important thing. We would reaffirm to her 
that this is something that she should be doing.
    I think Mr. Hanson's testimony earlier was right on the 
mark. We had a long discussion about search engines and 
portals, but if you are a small business like your sister-in-
law, the very first thing you have to do is get your own 
website. It has to be a good one, because you can have 12 
search engines listing your commodities, goods or services, but 
if it is not done with a certain degree of expertise then you 
won't ever show up on a search, no matter how many times people 
look.
    Mr. Forbes. Mr. Hill, does the SBA have the ability right 
now to tell her how to do that? It is a really easy yes or no.
    Mr. Hill. The answer is no, but we are developing it and we 
intend to do that.
    Mr. Forbes. I appreciate that. I have to say, as somebody 
who has great affection for the Small Business Administration, 
I think you folks have missed the boat completely. I don't 
think it took a presidential directive to understand that this 
is the most aggressive, fastest growing area for small 
businesses and the Small Business Administration is really 
absent on this whole question.
    I mean that in the most respect to you, Mr. Hill, but I 
think you need to go back to the agency and you need to sit 
down with those folks and you need to kind of sit down and 
figure out how this agency, which is charged with helping small 
businesses, can do a better job of helping educate and inform 
the small businesses across this country who want to get into 
this business, and I would hope that your involvement in the 
hearing today would suggest to you as well that this is a great 
void at the SBA.
    SBA is doing some great things in cutting edge assistance 
to women-owned businesses and minority-owned businesses but I 
think that we have literally missed the boat on this thing, and 
it is not like we didn't see it coming. So I would just 
encourage you, Mr. Hill, to go back and send a wake-up call. It 
takes more than just a presidential edict to suggest that we 
need to do something in this area, and I thank you for being 
here today.
    My final question, if I might, for either Mr. Miller or 
also Mr. Hanson, one of the areas that is of, I think, great 
confusion to those who are engaging in commerce on the Internet 
is the whole idea of advertising and the preponderance of spam 
and just what that is doing to run interference on qualified 
businesses, wonderful opportunities like Mr. Hanson's, people 
who don't have the opportunity to be on Good Morning, America 
or some national media outlet, how do they get their word out 
in the wake of what I think is one of probably the growing 
problems on how you get legitimate advertising on the Web 
versus, you know, all of this stuff that is being bombarded to 
people when they go on-line and they have got 435 unsolicited 
messages?
    Mr. Miller. Well, I think Chairman Talent hit it on the 
head a few minutes ago. In a sense, the challenge is no 
different in the cyber world in terms of advertising than it is 
in the analogue world, which is how do you differentiate 
yourself from everybody else.
    It goes back to the point that Mr. Hanson made. Number one, 
it is the quality of your website. Number two, it is hooking up 
with the right search engines and making sure you are listed on 
all the right search engines.
    Number three, it is looking for partnership opportunities. 
I can't speak specifically to Mr. Hanson's situation, but I can 
talk about a small golf shop that I know of that teamed up with 
a travel agency that promoted trips, on the theory that if they 
cross marketed across those websites, the travel agency sent a 
lot of people on golf trips and then they put a click on their 
website to this golf shop on the assumption that people would 
perhaps need some golfing equipment.
    In fact, the theory behind some models, like the Pea Pod 
model, although the Pea Pod is primarily just in food, is you 
do exactly that; you would come to the website and there would 
be what is called an intelligent agent, and it would say, Mr. 
Miller, it is nice you signed up to go to Pinehurst. By the 
way, I know a golf shop that is having a special on clubs. 
Wouldn't you like to go there?
    So you click over to that one and then you go to that site 
and they say, well, we know a place that has the newest books 
about golf. Wouldn't you like to do that?
    This isn't all fantasy. This can be done today. The 
industry is trying to figure out exactly how that works 
because, as Mr. Hanson said correctly before, the early metrics 
were how many visitors do you have? But now people are talking 
about things like sticky websites, not just people coming to 
your website but actually staying, and then the ability to 
actually sell out the website and refer.
    I don't have an answer yet, because we are still finding 
our way through it. So there is no simple answer, whether you 
are talking to General Motors or whether you are talking to a 
small business. We are all trying to figure out what it is that 
is going to separate the wheat from the chaff. When we figure 
that out, obviously you are going to have some separation of 
the successful business from the unsuccessful.
    The early theory, Mr. Forbes, was just get out there early, 
just get out there early. But then the question----
    Mr. Forbes. Which worked when there were not so many people 
doing it, right?
    Mr. Miller. Exactly. And Amazon.com, clearly their market 
cap today is a reflection of a belief among a lot of investors 
that that works. But with Barnes & Noble out there, too, and a 
lot of others, how long will that hold? I don't know the 
answer. The answer is the marketplace will determine that, and 
we just don't know yet.
    Mr. Forbes. Thank you.
    Mr. Hanson, could you quickly just comment on the 
difficulties or not, and maybe it is a little tougher for you 
since you have had a little notoriety, about advertising and 
getting the word outabout your seafood business?
    Mr. Hanson. Sure. Well, actually, I mean, I received 
attention from Time Magazine because I came up number one on 
the search engines, which is----
    Mr. Forbes. That helps, too.
    Mr. Hanson. Yes, absolutely. That is not easy to do. We 
have several different types of strategies. One is we link up 
with other websites that there is a synergy between the two. 
Number two, we own eleven different Web addresses so we come up 
under seafood now, but actually also come up under lobster on-
line. We just basically buy up as many domain names as possible 
because there is a huge secondary market now in domain names, 
and that also allows us to come in and index higher on the 
search engine.
    And then third, that the company that I work with, Global 
Store, has eight people, and I feel bad for them. All they do 
is sit around all day an do what is called ``medicoding'' and 
they go through and they retype in these key search words into 
all of these different indexes. It is very labor intensive. 
Some days we come in in the top 20. The next day I might come 
in all positions, 1 through 10, on a search engine. But it is 
something they have to do every single day. These are people 
that earn $40,000 a year each because they are programmers and 
there are four of them working on it. I couldn't afford to do 
that myself or even hire these people, but Global Store was 
able to do that because they have the resources.
    Mr. Forbes. Thank you very much.
    Thank you, gentlemen, for being here. And thank you, Mr. 
Chairman.
    Mr. Miller. Mr. Chairman, just one more response to Mr. 
Forbes. Every IT company that is in the e-commerce world, which 
is virtually all of them, are doing as much as possible now to 
reach out to small business. To some extent the big business 
world, it is not saturated; they are constantly updating and 
learning new things, but if you look at IBM, Microsoft, Oracle, 
AOL, NetScape, you talk about any of them, in terms of what 
they are doing right now, they are doing everything possible to 
reach out to the small businesses because they see, as Mr. Hill 
pointed out earlier, while it is impressive that 41 percent of 
small businesses now have a website, that is 10 million 
businesses, something like that. If you assume there are 23 
million, that still means there are 12 or 13 million that don't 
have a website.
    So in terms of where you go to try to sell your product and 
service, the opportunities to sell a service to Ford, Ford 
already has websites and Web designers, et cetera. The 
opportunity to sell to the other 20 lobster people in Maine, or 
40 or 50, is really where you are going to want to go.
    Chairman Talent. Mr. Thune wanted to ask a question or two 
or just to make a comment.
    Mr. Thune. Well, Mr. Chairman, I think probably every 
question that could be asked has been asked. I appreciate very 
much, though, your holding this hearing. I think this is an 
incredibly important subject and one with which we are going to 
have to grapple in the days ahead. I appreciate the fact that 
you have allowed our Committee to begin examination of what I 
think is a very important issue.
    Some of you have probably seen, and maybe you made 
reference to it already, last week's Wall Street Journal story 
about stock transactions that are now conducted electronically 
and how we are going to at some point probably end up with a 
24-hour market because there are so many companies out there 
that are making that service available.
    It just points again to the dramatic changes that this is 
making in the way that we do business. I think for my state of 
South Dakota it presents enormous opportunities. We have 
traditionally been isolated by distance, and I think it is just 
incredible, in terms of if we are willing to make the 
investment that is necessary to have everybody wired and ready 
to go.
    So on the other side of it, I think it also presents some 
enormous challenges. The South Dakota Retailer Association was 
in my office yesterday to talk about the question of equity and 
how we figure the tax burden in terms of Maine Street business 
versus Internet and catalog businesses in a lot of the States. 
Our State is a sales tax State, and the competitive 
disadvantage that they are under relative to those that are 
doing business either through catalog sales or the Internet, 
and that has been an issue that has been visited here before, 
and I am sure will be again, but I think this is going to 
amplify in a bigger way this issue and how we address State and 
local government's needs to collect revenue, and address the 
equity argument as well with our retailers on Main Street.
    So it is going to be a big subject, and I think as this 
thing continues to grow and the opportunities are out there, I 
hope that we, in particularly rural America, can take advantage 
of those, but I think at the same time we are going to have to 
figure out how best we accommodate that growth in a way that 
protects and respects the rights of States and local 
governments to collect revenues, as well as respects the rights 
of Main Street businesses.
    So thank you for holding the hearing, and I look forward to 
further discussions on this subject.
    Chairman Talent. I thank the gentleman for his comments and 
I think they are probably as good a summation on the hearing as 
I could make. So I will thank the witnesses for your indulgence 
and adjourn the hearing.
    [Whereupon, at 1:00 p.m., the Committee was adjourned.]
      



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