[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
THE INTERNET SERVICES PROMOTION ACT OF 2000, AND THE INTERNET ACCESS
CHARGE PROHIBITION ACT OF 1999
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TELECOMMUNICATIONS,
TRADE, AND CONSUMER PROTECTION
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
on
H.R. 1291 and H.R. 4202
__________
MAY 3, 2000
__________
Serial No. 106-114
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
64-761CC Washington : 2000
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING,
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
------
Subcommittee on Telecommunications, Trade, and Consumer Protection
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL G. OXLEY, Ohio, EDWARD J. MARKEY, Massachusetts
Vice Chairman RICK BOUCHER, Virginia
CLIFF STEARNS, Florida BART GORDON, Tennessee
PAUL E. GILLMOR, Ohio BOBBY L. RUSH, Illinois
CHRISTOPHER COX, California ANNA G. ESHOO, California
NATHAN DEAL, Georgia ELIOT L. ENGEL, New York
STEVE LARGENT, Oklahoma ALBERT R. WYNN, Maryland
BARBARA CUBIN, Wyoming BILL LUTHER, Minnesota
JAMES E. ROGAN, California RON KLINK, Pennsylvania
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York (Ex Officio)
ROY BLUNT, Missouri
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
C O N T E N T S
__________
Page
Testimony of:
Grey, Leroy E., President, Raven-Villages Internet........... 38
Lowy, Peter, Co-President, Westfield America................. 25
Miller, Harris N., President, Information Technology
Association of America..................................... 32
Norquist, Grover G., President, Americans for Tax Reform..... 29
Upton, Hon. Fred, a Representative in Congress from the State
of Michigan................................................ 11
Material submitted for the record by:
After the Net Tax Commission: The Gregg-Kohl Nexus Solution,
by Adam D. Thierer, article entitled....................... 50
American Federation of State, County and Municipal Employees. 47
International Council of Shopping Centers.................... 48
(iii)
THE INTERNET SERVICES PROMOTION ACT OF 2000, AND THE INTERNET ACCESS
CHARGE PROHIBITION ACT OF 1999
----------
WEDNESDAY, MAY 3, 2000
House of Representatives,
Committee on Commerce,
Subcommittee on Telecommunications,
Trade, and Consumer Protection,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:10 a.m., in
room 2123, Rayburn House Office Building, Hon. W.J. ``Billy''
Tauzin (chairman) presiding.
Members present: Representatives Tauzin, Stearns, Gillmor,
Cox, Largent, Rogan, Shimkus, Pickering, Ehrlich, Bliley (ex
officio), Markey, Boucher, Gordon, Rush, Luther, Sawyer, Green,
McCarthy, and Dingell (ex officio).
Staff present: Justin Lilley, majority counsel; Cliff
Riccio, legislative analyst; and Andy Levin, minority counsel.
Mr. Tauzin. The subcommittee will please come to order.
Today the subcommittee begins review of two important
pieces of legislation, H.R. 1291, introduced by our good
friend, Mr. Upton, and H.R. 4202, legislation sponsored by Mr.
Ehrlich. The issue of interstate access charges has been with
us and with this subcommittee since 1983, when the FCC first
constructed its access charge regime. In recent years the FCC's
access charge exemption for information service providers has
been and continues to be a subject of much debate.
Some have argued that the rationale for this exemption no
longer makes sense because the information services industry is
no longer in its infancy as it was in 1983. In fact, many ISPs
are larger in terms of market capitalization than many
telecommunications service providers that still must pay
permanent access charges.
On the other hand, there are those who feel that imposing
permanent access charges on ISPs would result in dramatically
increasing the consumer price of dial-up access to the
Internet.
The current exemption they argue enables ISPs to continue
charging customers flat rate monthly fees for access to the
Internet, whereas long distance charges are computed based on
minutes of use.
The subcommittee recently heard from Governor Gilmore of
Virginia, the Chairman of the Advisory Committee on Electronic
Commerce, on this very issue. He believes that permanent access
charges would suppress the demand for Internet services and as
such would stifle innovation in the electronic marketplace.
Consumers today stay on-line for lengthy periods of time,
sometimes for several hours. When confronted with time
sensitive charges, consumers will necessarily pull back and
limit their time spent surfing the Web per week, and not
surprisingly unload on Congress for authorizing Internet
service price hikes.
To ensure that ISPs do not inflict rate shock on their
subscribers, I have joined with Fred Upton in cosponsoring H.R.
1291, which is intended to prevent time based access charges
from being imposed on consumers. Since the introduction of H.R.
1291, I think that all of us have learned a great deal more
about the subject and unfortunately the complexity of the FCC
web of access charges. When the 1983 exemption from access
charges was promulgated, there was little surface traffic, and
certainly no Internet traffic.
As a result, we have a fine line to walk here. We must
ensure that those consumers who use their computers to view a
Web site, send an e-mail or purchase a service or product are
not charged on a permanent basis. Simultaneously, however, we
need to extensively consider whether it is still equitable to
subsidize ISPs by not charging them for their fair share of the
cost of their use of telephone networks, and we also need to
debate issues like whether the Internet telephony or computer
to computer voice services should be exempt from access
charges.
I mean, think about this as we debate this bill. When
telephone services become very prominent on the Internet, and
therefore Internet users are accessing and using the telephone
networks to make telephone calls, not to do data transmissions
or ordinary Internet surfing and e-mailing, but when they
actually begin making telephone calls regularly over the
Internet, as many are beginning to do, is it fair for other
telephone users to have to pay for those networks through
access charges and yet Internet users remain exempt. There is a
question of fairness and equity and concern about the viability
of those networks given a world of Internet telephony.
We are going to debate that and I think before we complete
this session today and before we begin markup on the bill
hopefully we will have a consensus how to deal with that very
thorny issue.
We have also gathered today to discuss the utility of
extending the Internet Tax Freedom Act's moratorium on State
and local taxes. The country is home to over 7,000 taxing
jurisdictions. Many electronic retailers are small operators
that could have real trouble complying with the complexity and
the burden of multiple and discriminatory taxation, and so we
gather today to examine whether or not we ought to extend the
moratorium that we just recently enacted. We cannot lose sight,
however, of what State and local taxation would mean to
consumers as well as the growth of electronic commerce. At the
same time all evidence suggests that States and localities are
prospering even as electronic commerce grows at the same time.
In short, those who asked Congress to empower the States and
localities to discriminatorily tax the Internet have to make a
stronger case, and I look forward to that discussion.
With all of that said, we should consider the two bills
before us today with the clear understanding that they are
vital components of our efforts to implement a sensible and
fair policy regarding the taxation of electronic commerce. Our
debate on this important issue will ultimately determine who
can and should and who will pay for the cost of providing the
facilities and the capabilities necessary to make the Internet
a fully operational network.
The Chair recognizes the gentleman from Massachusetts, Mr.
Markey, for an opening statement.
Mr. Markey. I would to commend you for holding this hearing
on a number of tax issues that are related to the Internet.
This hearing follows the hearing that we had a few weeks ago
where we heard from Virginia Governor Gilmore on his
perspective on the work of the special commission we
established to explore Internet taxation issues. Today we
revisit the issue of Internet taxes, but also focus on the
exemption that many Internet service providers enjoy from
access charges.
The exemption on enhanced service provider access charges
began in 1983. In the late eighties, the Federal Communications
Commission began a rulemaking which sought to reverse its
earlier decision. I believe that the FCC would have imposed
such access charges on Prodigy and CompuServe and the other
forerunners of the Internet revolution back in 1988 but for the
efforts of this subcommittee which at hearing after hearing
with the Federal Communications Commission sitting right at
that table as we tried to persuade them that that would be the
wrong route to go, that flat rate pricing was more preferable
than the per minute charges that they were looking at, and I
believe in many ways that was the pivotal decision.
I think if permanent charges were used today or had been
used over the last 12 years, that there would have been a
completely different direction that the Internet would have
taken, and I am very proud of the work that this subcommittee
did in the 1980's in convincing the FCC to change its position
and to ensure that flat rate pricing was in fact the approach
which was taken because it was the belief of the subcommittee
back then that it was necessary to nurture the fledgling
information industry through the retention of the exemption.
Now, one of those then fledgling beneficiaries of
government protection from access charges now intends to own
CNN, TNT, the Atlanta Braves and all of Time Warner, so
obviously the policy was a success if in 12 years we have been
able to move to the point where one of those fledgling
companies now owns the most important media corporation in the
world. It is quite appropriate and timely as a result to
revisit this issue and to analyze the effect on consumers and
e-commerce if usage sensitive per minute access charges were
levied on Internet service providers.
I have battled time and again to lower universal service
fees over the years, particularly access charges. I continue to
believe that the current universal service support levels are
excessive and bloated. We must examine the overall equities
across industries of universal service obligation. It is unfair
to ask consumers of local phone companies and traditional long
distance services to pay the lion's share of the universal
support of the network, especially if that network is utilized
by Internet companies to offer competing services without such
obligations, especially if those services are identical to the
services which are in fact provided by the local and long
distance phone companies.
As we explore all of these Internet tax related issues, I
believe it is important to keep things in perspective. The
magnitude of what we are talking about is relatively small. The
Department of Commerce announced just last month that the
estimate of U.S. retail e-commerce sales for the fourth quarter
of 1999, October through December, was $5.3 billion. That means
that e-commerce sales accounted for less than 1 percent of the
total retail sales estimates, which was $821 billion for the
quarter. Yet there is little question that the growth curve for
on-line commerce promises to be exponential in nature. That is
why this hearing is absolutely essential.
That is why, Mr. Chairman, I want to compliment you for
calling this double header today. I think we are catching these
issues at the point when they should be dealt with by the
committee.
Mr. Tauzin. I want to compliment the gentleman on his
observation with reference to this fledgling industry becoming
such a giant and also commend him for making sure that there
was at least one competitor that customers could turn to when
we see the awful struggle of these two titans, Disney and Time
Warner. I also want to make the point it would be nice to have
another competitor and maybe we can discuss that in this
committee sometime.
The Chair is now pleased to recognize the author of one of
the pieces of legislation we are going to hear about today, Mr.
Ehrlich.
Mr. Ehrlich. Thank you, I will be brief. This is an issue
that will dominate the work of this committee and Congress for
years to come. I applaud the work of Chairman Bliley on
telecommunications issues. It is his leadership that led to the
enactment of the Telecom Act of 1996, which has provided the
road map for deregulation of the industry generally. In
addition, I want to recognize Mr. Fred Upton at the witness
table and his bill to prohibit access fees, which I support.
Of all of the constituent letters I have received during my
tenure in Congress, Internet taxation and specifically the
imposition of permanent fees is by far the most popular issue.
To date I have received 3700 letters asking me to oppose any
efforts by Congress or the FCC to impose charges on Internet
service. Regardless of whether these fees come in the form of
direct or indirect charges, my constituents have made it clear
that they do not want their Internet bill to resemble their
telephone bill, comprised of outdated taxes and a multitude of
confusing service charges.
In an effort to prevent government from imposing fees and
taxes that increase the cost of Internet service for all
Americans, I recently introduced H.R. 4202. The purpose of this
bill is twofold: One, prohibit access charges or regulatory
fees on Internet service providers and, two, extend the
Internet tax moratorium by an additional 5 years. One of the
primary reasons for the tremendous growth of the Internet is
that government has taken a hands off approach. It is
imperative that Congress prevent unnecessary fees or
regulations that only serve to impede the rollout of Internet
service if the Internet is to fulfill its promise of how the
world communicates.
It is my understanding that there may be concerns regarding
section 2 of my bill which prohibits access charges on Internet
service providers. As always, I would work with any and all
parties to resolve concerns, issues, or unintended consequences
resulting from this provision. With respect to the moratorium,
I want to recognize the hard work of my colleague, Chris Cox,
in passing the original bill in 1996. This moratorium has
resulted in the rabid development and deployment of electronic
commerce across America. John Kasich wants to make this
moratorium permanent. While I share his enthusiasm in this
regard, I believe that a 5-year extension of the moratorium is
appropriate and will provide Congress and the American people
the evidence that is needed to determine whether the moratorium
should be made permanent.
I also want to take this opportunity to recognize a leader
on the Internet tax issue, the Governor of Virginia and
Chairman of the Advisory Commission, Jim Gilmore, who has taken
his time and talent on this important issue and provided
compelling evidence for keeping the Internet tax free.
I look forward to working with him and other members of the
commission to produce legislation that implements the sound
policy recommendations of the commission. Once again, thank
you, Mr. Chairman, for holding this hearing and I look forward
to moving these bills through the committee and onto the House
floor, and I yield back the balance of my time.
Mr. Tauzin. Thank you. The Chair recognizes Mr. Boucher for
an opening statement.
Mr. Boucher. I applaud your intention to move quickly to
approve legislation which will confer a major consumer benefit
through the repeal of the 3 percent Federal excise tax on
telephone services. Since that tax is currently passed through
to consumers, it will be the consumers of telephone services
who will directly benefit from its repeal.
I also endorse your effort to extend the current moratorium
on taxes that are discriminatorily applied with respect to the
Internet and on multiple State and local taxation with respect
to electronic commerce. And I also think that a permanent
prohibition on access charges as applied to Internet service
providers is appropriate.
As we make these changes, however, I want to encourage the
committee this morning to consider removing another unfair
charge that is associated with Internet service delivery. At
the present time local telephone companies make payments to
each other for the termination of one company's network of
telephone calls which originate on another telephone company's
network. This arrangement is called reciprocal compensation.
And while the arrangement works well with regard to traditional
voice based telephone traffic, it operates in an illogical and
inequitable manner when it is applied to the delivery of
Internet traffic. In this context it has become an entirely
one-way arrangement and has no reciprocal nature. Some Internet
service providers have qualified as competitive local exchange
carriers, and as CLECs, they receive these payments from the
local telephone company when that company's customer connects
over the modem to the ISP who carries that customer's Internet
account. In other words, the ISP receives from its customer
traffic that derives from the local telephone company's network
and gets paid by the local telephone company for the privilege
of having that information delivered to the ISP.
No calls are made in return and so all of the payments go
from the local telephone company to the ISP which has qualified
as a CLEC. In some other instances, CLECs have gone into
business just for the purpose of serving ISPs so that they can
receive these reciprocal compensation payments. And since no
calls ever originate on their networks, they make no payments
in return. And the problem is of truly large magnitude.
Payments from CLECs under this distorted structure now total
hundreds of millions of dollars annually, and those numbers are
rising dramatically as the level of Internet usage increases.
It is an unfair system, and as we enact bills before us
that would prohibit the imposition of access charges on ISPs, I
urge that we take this opportunity to remove the current unfair
reciprocal compensation fee that is associated with Internet
access. It is a perfect fit, and as we confer a major benefit
on ISPs, I think we also should correct the distortion in the
current reciprocal compensation system.
I also applaud your statement, Mr. Chairman, that we need
to look carefully at the effect on universal service support in
the event that Internet telephony for the provision of long
distance calling becomes commonplace, and I think that day will
arrive and probably pretty soon. When that happens the access
charges that long distance providers pay to local exchange
carriers for terminating their traffic would no longer be paid,
and I think that would have a dramatic effect on universal
service support. I think it is appropriate that we consider
that as we make the decisions with regard to the imposition of
access charges on ISPs.
These are important subjects, and I am very pleased that
the subcommittee is addressing them. I want to commend our
colleagues, Mr. Upton and Mr. Ehrlich, for bringing these
measures before us and I look forward to the witnesses'
testimony today. Thank you.
Mr. Tauzin. The Chair thanks the gentleman, particularly
for reemphasizing some of the concerns that I think we need to
address before we move the bill forward. The chairman is
pleased to welcome the chairman of the full committee, Mr.
Bliley for an opening statement.
Chairman Bliley. Thank you, Mr. Chairman. With today's
hearing, this committee begins the task of ensuring that the
Internet remains a tax free environment. We have all talked
about how important the Internet and electronic commerce are to
the growth of the economy. They are the engine driving this
long train of economic growth. Now comes the time for Congress
to do more than pay lip service to the principles of lower
taxes and deregulation.
This subcommittee will examine two bills today that give us
an opportunity to provide consumers with relief from taxes and
regulation. I want to commend my colleagues Bob Ehrlich and
Fred Upton for their hard work in crafting these two bills.
They have identified a real problem that affects our
constituents as well as the development and growth of
electronic commerce. We have all seen the e-mails and letters
from constituents pleading us to block the FCC from imposing a
modem tax or an e-mail tax. In fact, I brought two recent
examples with me this morning and I ask unanimous consent, Mr.
Chairman, that they both be included in the record.
I should add that consumers are right to be concerned.
While it is true that Internet service providers are currently
exempt from having to pay access charges, the FCC could always
change its mind. Moreover, some in the telecommunications
industry continue to wage battle at the FCC and in the courts
on this issue. It is clear that some have a vested stake in
extending the FCC's access charge regime so that it sweeps in
consumers of Internet access service.
The Ehrlich and Upton bills would block the FCC from doing
so. More to the point, these bills would block the FCC from
imposing permanent access charges on consumers when they log
on. The practical, not to mention the political implication of
doing otherwise are huge. Keep in mind that a run of the mill
telephone call lasts roughly 5 minutes. By contrast a consumer
stays on-line for about 45 minutes to an hour. Consumers would
be understandably outraged if Congress allowed such a tax.
People using the Internet grows every day precisely because the
cost is falling and it is charged on a flat rate basis. The
imposition of permanent access charges would undue all that.
Moreover, we should recognize access charges for what they
are, an FCC imposed tax that is passed on to the American
consumer. A permanent tax on Internet access hurts consumers,
hurts the Internet and hurts electronic commerce, both of which
depend upon affordable access to the Internet.
I support the 5-year extension of the current moratorium on
State and local taxation of Internet access in electronic
commerce for a number of reasons. First, it is the right thing
to do for the American consumer. Electronic commerce provides
consumers with untold efficiencies, many of which might dry up
if States and localities extend their power to tax the
Internet. Moreover, to those who say the Internet Tax Freedom
Act is unfair to States and localities I would reply that the
government should receive only what it needs, not what it wants
and by every estimate electronic commerce poses little, if any,
threat to their tax revenue needs at this time.
Let me close by acknowledging Grover Norquist, who is with
us today as a member of the Advisory Commission on Electronic
Commerce. He did fine work to advance the cause of lower taxes
and less regulation. Thank you, Mr. Chairman, and I yield back
the balance of my time.
Mr. Tauzin. Thank you, Mr. Chairman. The Chair is now
pleased to recognize the ranking member of the full committee,
the gentleman from Michigan, Mr. Dingell.
Mr. Dingell. I commend you for holding this hearing. The
two bills before us deal with two important Internet policy
issues. The first issue is whether Internet service providers
should be subject to the traditional FCC access charge regimes
or any other universal service support mechanism.
The second issue is whether the current Internet tax
moratorium should be extended temporarily pending resolution of
a permanent Internet tax policy. The subcommittee understands
well that formulating legislative policy dealing with the
Internet is an inordinately complex issue and becoming
increasingly so, it requires making judgments and predictions
about the future evolution of Internet technology and the
consumer applications that are expected to flow from it.
Prognostication of this sort is nearly an impossible task given
the unprecedented speed with which the Internet develops. As a
result, I am more convinced than ever that we need to tread
lightly and to take extreme caution when making legislative
changes in the area. It is vitally important that we understand
the implications of all of our actions because the economic
penalty is more quick and more severe than ever before. One
only has to look to the volatility of the financial markets to
understand the fragile character of the new economy with which
we are tinkering.
On the whole I believe the bill takes a reasonable and
modest approach to dealing with the various regulatory charges
and taxes on the Internet, and I commend you, Mr. Chairman, and
the drafters for their thoughtful work in this regard. While I
generally agree with the purpose and the intent of the bills, I
have some reservations about the legislative language in each
bill and I hope that we will take the time necessary to avoid
serious unintended consequences.
While each bill appears aimed at protecting consumers from
incurring permanent charges for Internet access, H.R. 1291 may
go further than is necessary to achieve this goal. I agree that
we should make sure that the access charges or other universal
service support mechanisms are not applied in a way that will
cause consumers to pay by the minute for their basic Internet
connections. Once consumers connect to the Internet, long
distance telephone paging or other services that happen to be
procured over the Internet should not be treated in a
discriminatory way compared with non-Internet counterparts.
This is a very important point. The statute should not
prevent these services from being treated similarly to those
delivered to consumers by traditional means, particularly for
the purposes of determining whether or not they should
contribute to support universal service. The language of H.R.
4202 may be better suited to achieve this desired result.
On the issue of Internet tax I believe it is wise to extend
to extend the moratorium contained in the Internet Tax Freedom
Act for some period of time. The moratorium was drawn narrowly
to apply to taxes imposed on Internet access and to multiple or
discriminatory State and local taxes on electronic commerce. At
the same time it permits States to tax remote sales via the
Internet in the same way that remote sales by mail order
catalogs are handled today. However, while the moratorium
ostensibly allows States to impose sales and use taxes on these
transactions, it is beyond dispute that the States are
currently ill-equipped to collect this tax on remote sales,
whether Internet or otherwise. Therefore, it is critical that a
cohesive policy be put in place sooner rather than later to
simplify the process for imposing and collecting taxes on these
remote transactions.
As remote sales made via the Internet continue to increase
exponentially, States are playing beat the clock with their
ability to retain in many instances greater than half their
existing tax base. Given the enormity of the stakes involved
for the financing of public schools, roads, police departments
and other essential services, as well as a myriad of other
services to our communities, it is imperative that we revisit
this issue at much shorter intervals.
The 5-year extension proposed in H.R. 4202 actually would
not expire until more than 6 years from today. In the time as
measured by the Internet that is nearly an eternity. I hope the
chairman and the drafters of this legislation will work with us
to establish a more reasonable timeframe and to permit a more
frequent and I think wiser opportunity to review these matters
and to protect the public from potentially crippling results.
Thank you for holding this hearing. I look forward to
working with you as the matter moves forward.
Mr. Tauzin. I thank the gentleman for his thoughtful
comments.
Mr. Stearns.
Mr. Stearns. Thank you, Mr. Chairman. I also applaud you
for having this hearing to examine the legislation of my
colleague, Mr. Upton, and to preclude the FCC from imposing a
per minute charge on Internet access services, as well as
extending the current 3-year moratorium on State and local
taxation on electronic commerce.
Mr. Chairman, I think we probably could move post haste on
this bill because I think the Telecommunication Act of 1996
while it didn't address the issue of the Internet, I think the
FCC with its access charge or form order in its April 1998
report on universal service, the FCC took the steps, probably
the proper steps, to ensure that enhanced service providers and
ISPs are not regulated as telephone carriers under title II and
that enhanced service providers are identified as end users of
the telephone network, thereby not paying the access charges of
long distance. I think that act alone would probably justify
post haste on Mr. Ehrlich's bill and Fred Upton's bill. We can
combine the two of them.
At the same time, Mr. Chairman, we might as well add the
idea of repealing the 3 percent telephone excise tax that was
passed in 1898 and we can call this overall bill the Protection
of the Consumers Who Are Using the Internet Act. I think many
of us realize that way down the road if e-commerce succeeds to
where everyone is buying everything off the Internet,
ultimately there might have to be an adjustment. I am not sure
what that adjustment might be. Cities, towns and States can get
revenues from other sources, but the continued success of the
Internet is--I think in the early stage is contingent on
whether it is taxed or not, and I don't think it should be
taxed.
I urge my colleagues to move forward on these bills and
pass them this year. Thank you. I yield back the balance of my
time.
Mr. Tauzin. The Chair thanks the gentleman, also a
cosponsor of Mr. Upton's bill. The Chair recognizes Mr. Gordon
for an opening statement.
Mr. Gordon. Mr. Chairman, I am enjoying listening to all of
these comments, and I will reserve my remarks to hear Mr.
Upton.
Mr. Tauzin. Mr. Green is recognized, the gentleman from
Texas.
Mr. Green. Thank you. I appreciate the subcommittee's
continued interest in Internet taxation. As a cosponsor of Mr.
Upton's bill, I believe that Congress cannot allow the FCC the
ability to impose permanent charges on Internet access
services. Through explosive growth in data traffic, permanent
access charges would quickly drive consumers off and kill the
promises of this cutting technology in the future. Because the
access fees were originally designed for voice traffic, there
was little concern about adding a few cents per minute to the
fund for the maintenance of the local telecommunication
infrastructure.
Unfortunately, the length of consumers' phone calls differ
greatly from the time consumers spend on-line. Access charges
are designed for the typical 5-minute phone call. They are not
designed for the 45-minute on-line session. I believe that
portions of each of these bills continuing the ban on permanent
access changes is something that the subcommittee should act on
immediately.
I do want to express reservations with portions of Mr.
Ehrlich's bill that deals with extending the current moratorium
on State and local taxation of electronic commerce for an
additional 5 years. The failure of the Advisory Commission on
Electronic Commerce to develop a consensus policy toward State
and local taxation has left many questions unanswered.
For instance, the members of this subcommittee do not have
reliable numbers as to what States stand to lose in local sales
tax revenue if we extend the moratorium. My own State of Texas
has no income tax and relies heavily on the sales taxes to meet
our spending obligations and priorities, and I am not
comfortable with the idea of excluding Internet sales from
local taxation until I am sure how it will affect my own State
and other States in the Nation. I question further the need for
extending the moratorium when the current ban does not expire
until October of next year. I believe we should use this time
to gather more information and let the technology mature so we
have a better idea of the true size and scope of the issue.
I want to make it clear that I don't favor raising taxes.
However, we should not place a mandate on 50 States that could
seriously impact their financial health in the future. The only
issue that I was sure of after last month's hearing was that
the majority of Governors do not feel comfortable with Congress
limiting their options on this issue.
I support the continued growth of e-commerce, but right now
it is the traditional small businesses in my districts that
supply the jobs for my constituents. I believe the subcommittee
could be better served in using the additional time that is
available under the current tax moratorium to gather more
comprehensive information.
I would like to thank the chairman for today's hearing and
also for the hearing last month when we had Governor Gilmore. I
yield back the balance of my time.
Mr. Tauzin. The Chair recognizes Mr. Shimkus for an opening
statement.
Mr. Shimkus. Thank you. I will be brief. I think there is
consensus on the access charge issue that we need to continue
the moratorium. There is a credible debate on the sale tax
issue. I think technology will come around to make that doable.
Although as a prior tax collector in my prior life of property
taxes, I think government officials at all levels do not do
their constituents good service when we have all these sales
taxes, users fees. They can't track back the amount of taxes
that they are paying. When you have a property tax bill and you
get the bill and you have to write the check out to fund
government, that is the best way to be held accountable for the
fees.
So I would challenge the States and local governments to
start being prepared because this new era of technology is
going to change, and I don't know if we are going to be able to
keep up with it. So you may have to be more honest with your
citizens and find an appropriate billing so they can track the
actual cost of government and approve of those.
This is a great time to talk about technology and the
future and the cost of government on our individual consumers,
and I look forward to the hearing. Thank you.
Mr. Tauzin. I thank the gentleman.
The Chair is pleased to recognize Mr. Upton. Mr. Upton, you
finally got a taste what it is like to be on that side
listening to all of us.
STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF MICHIGAN
Mr. Upton. Thank you, Mr. Chairman. I appreciate the
opportunity to testify on behalf of my bill, H.R. 1291, and I
thought I would begin my testimony with a short quiz. Who is
the most unpopular Member of Congress and what is their most
unpopular bill.
Mr. Markey, I thought you would have an answer.
Taxachusetts, that was the State. No. The answer is Congressman
Schnell, and his bill H.R. 602P, and that is the final answer.
There is no such congressman, and there is no such bill. But if
you are like me, you have received thousands and thousands of
letters and e-mails saying that bill in fact will be up in the
next 2 weeks beginning 1\1/2\ years ago, and they are outraged
that the Congress is going to take this bill up. And of course
that is a rumor that is only false.
Around the same time another e-mail campaign suggested that
the FCC was going to impose a permanent access charge on
Internet use and again our constituents flooded our offices
with e-mails to express their outrage. Upon closer examination
the FCC was asked if it was going to authorize a permanent
access fee on Internet use, and in reply the FCC stated it had
no plans at the present time to authorize such a fee.
While I am glad that the FCC has no plans at the present
time to impose such a fee, I am troubled by the fact that there
is nothing to prevent the FCC from doing so today or tomorrow
or the next day or the next, and that is why I introduce my
bill, which so many of you have cosponsored today.
My bill stops, it will prevent a stop watch from being
placed on the Internet so that our constituents are not charged
by the minute when they surf the Web or when they e-mail their
friends, families, customers or even us for that matter. And
after all, our constituents already are paying for phone
service in a monthly fee to their Internet service provider.
Clearly if our constituents were charged by the minute when
they surfed the Web or e-mailed this would drastically increase
the cost and dramatically inhibit their use of the Internet.
This would impact folks who communicate by e-mail, particularly
with families with children or spouses in the military overseas
or children who are in college far away from home, families who
are scattered across the Nation and around the globe and
seniors on fixed incomes who have finally begun to communicate
by e-mail to their grandchildren.
We cannot let this happen, and my bill prevents it and I am
pleased that most of you here today are cosponsors, along with
138 of our colleagues, and I am pleased that Governor Gilmore
testified in support of this bill when he testified in front of
this subcommittee last month.
More specifically, my bill would prohibit the FCC from
imposing any access charge that is based on a measure of time
for the support of the universal service, and as such my bill
is delicately crafted to prevent Internet users from being
swept into the current system of implicit subsidies that local
and long distance telephone companies and their regulators have
relied on to promote and preserve universal service without
underminding the principle that phone companies need to be able
to recoup the legitimate costs associated with providing
services related to the Internet.
On a final note, given the rapid pace of telecommunication
technology, I believe we must carefully consider how steps
Congress might take today will impact or apply to future
technology. In this regard I believe there are legitimate
concerns that a broad interpretation of my bill could
jeopardize the near future deployment of Internet telephony,
which would enable people to use their computers to communicate
by voice over the Internet.
To set the record straight, I would like to make crystal
clear that my bill is not aimed at this type of voice
telecommunication but instead at data communication. That is
why so many of our constituents have e-mailed us over the last
1\1/2\ years.
Furthermore, I recognize that the dazzling advances in
technology have the potential to blur distinctions between data
and voice, making our attempts to legislate all the more
difficult, but I firmly believe that we can craft a proposal
based on my bill which will accomplish our objective in a
responsible manner.
Again, Mr. Chairman, I appreciate the opportunity to come
and testify before my former subcommittee and I look forward to
being back in the future. I yield back the balance of my time.
Mr. Tauzin. The Chair thanks the gentleman for his
presentation.
Who is this Herr Schnell?
Mr. Upton. He is not a Republican. I know that.
Mr. Tauzin. Is that some rumor on the Internet?
Mr. Upton. It is.
Mr. Tauzin. That he is going to impose modem fees?
Mr. Upton. 602P. The word is--and I read and sign all of my
legislative mail, and I have received well over a thousand e-
mails from my constituents telling me that in the 2 weeks we
will be taking up 602P offered by Congressman Schnell and hope
that I will vote no, and I have been receiving that message
since January of last year. I think we did once have a
Congressman Schnell but not during my service in the Congress.
Mr. Tauzin. Mr. Markey and I were commenting about the most
unpopular congressman. It was not that we didn't have a ready
answer for you, we had too many ready answers. Obviously there
is no Herr Schnell. There is your bill which literally is aimed
at targeting protection against access fees for regular data
services on the Internet.
You heard my comments about my concern. Other members
expressed it, that this bill not settle, not get into the
question of whether or not when the Internet becomes the
vehicle for telephony, whether the ISPs who provide telephony
services to people should or should not be required to
contribute to the maintenance of the networks and the universal
service systems that support telephone networks.
Do you share those concerns?
Mr. Upton. I want to make it absolutely clear that you are
correct and we have not had a chance to have that colloquy
until now, but my bill is aimed solely at data transfer. As an
example, my brother-in-law serves in the Air Force. He has been
all over the globe, now in Japan. As he has been on his
missions it has been wonderful for me to communicate in terms
of data that we send back and forth using e-mail. This
legislation looks at that transfer of communication, not at
voice. My bill should not be construed to incorporate voice as
part of this bill but solely on the data end of things.
Mr. Tauzin. I think it is important for all of the members
and the listening audience to understand that this is not just
a fictitious problem, there are currently freephone.com, and I
understand AT&T has BroadNet 2 Phone, which is an effort again
to get into telephony on the Internet, and those forms of
service, voice communications on the Internet indeed are upon
us and so it is a consideration we have to somehow make in the
final passage of this bill that we don't get into that very
thorny issue.
I also want to point out to members that one of the
problems is that the FCC defined ISPs being end users not as
providers, and so it complicates the issue of what happens when
an ISP begins providing telephone service on the Internet as to
whether or not it is subject to access charges for the support
of universal service and the maintenance of telephone networks.
I want to congratulate you on your good work and also tell
you that we intend to expeditiously move this legislation, and
ask your help in making sure that the language is designed in
such a way that it does do exactly what you intended in the
bill.
Mr. Upton. If we need to make further clarification, I
would be glad to accept that language. I appreciate your
support.
Mr. Tauzin. I yield to the ranking member, Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman.
I have this hearing that we conducted in the subcommittee
on October 2, 1987, back long ago when I was chairman of the
subcommittee.
Mr. Upton. I was in junior high school.
Mr. Markey. The subject of the hearing was flat rate versus
per minute charges, and the Federal Communications Commission
was proposing to essentially move to a per minute system and so
the subcommittee held a hearing. At that point we had it at the
Tip O'Neill Building in Boston, Massachusetts on this subject
with all of the concerned parties at the time.
Chairman Dennis Patrick of the FCC was proposing that we
move toward the per minute approach and obviously at that point
in time, as I will go back to my opening statement, less than 1
percent of Americans now use information services and 95
percent of households with personal computers lack the modems
that allow them to access those services. The industry rests on
a precipice, and these ill-timed FCC proposals could push it
into a distant future. So after our series of hearings, we will
convince them to flip their perspective and they ruled in the
opposite direction.
Mr. Tauzin. You are the man, Markey.
Mr. Markey. Even a blind squirrel finds an acorn once in a
while. I am taking credit only for ensuring that the issues of
today are put in the proper context of the long story line that
they embody. And as we sit here today, we recognize the success
of those policies. Let's take credit. This is not something
that happened by accident, you know. The Internet actually had
to be voted from the public sector to the private sector by the
Congress. We had to push it over there after it was constructed
by BB&N in my congressional district. So I am very proud of
that and to a certain extent that is why those hearings were
held because it was being constructed in my district.
The question now is as it becomes much more of a ubiquitous
technology and it can be used for telephony, and since I
continue to oppose moving from a flat rate to a permanent
basis, is it appropriate for us to look at a per line charge in
order to make sure that there is some contribution which is
made to the universal service pool. It could be relatively
modest per month, but at least it would ensure that all sectors
were contributing to the subsidies that go to rural America.
My concern is that this rural America subsidy is something
that I think most members want to protect and we want to make
sure that there is some fairness in this application. So how
would you look at for example per line--maybe $1 or $2 per
month per line charge as a way of ensuring that there is some
aid given to rural subscribers?
Mr. Upton. I would just note as we have looked at the
explosion of the Internet, last week I visited a fifth grade
school outside of Kalamazoo and I asked the students, 120 kids,
how many kids there know how to use the Internet, I don't think
there was a single hand that stayed down.
I know that the practical experience is that as people have
their home computer and whether it is AOL or whatever provider
that they might have, Internet provider, it is now the most
folks are beginning to get two lines. My 8 and 12 year old when
they were on it, pick up to call somebody and if you had only
one line, it disconnected the whole system. And after a couple
of crashes like that, like a lot of households we now have two
lines. We have a line solely dedicated to the computer. Line
charge and the taxes as part of that is----
Mr. Markey. In terms of whether or not a telephone call is
made on a circuit switch network as opposed to a packet switch
network because if you ask those kids how many have phones,
they are going to raise their hands. And we want to maintain
the universal accessibility to phones in rural America and that
is the central issue. How do we maintain that quality rural
telephone service and who should be subsidizing it. Should it
just be my father, the retired milkman, or should there be some
role that the pack and switch network if it is going to provide
telephone service also play but not moving to a per minute
charge system but rather looking at perhaps a per line--again,
I am just raising the question. And more to look for a way to
effectively ensure that there is rural telephone service that
is maintained at a high quality and that it is done on an
equitable basis. Are you open to that per line charge, even if
it is modest?
Mr. Upton. As I look at all of the people on our street,
whether in Michigan or here, there are many people that have
the second line and they are paying the taxes on that second
line and they are paying the additional charge.
Mr. Markey. If two companies are providing telephony and
one is using the Internet to provide it and one is using the
traditional system, should one type of company be favored over
the other one in terms of whether they have to subsidize the
telephone service to rural America?
Mr. Upton. My bill it is clear that we are looking at data
transfer, not at telephony. I can see the case where the
telephone provider might be in competition. There are ways that
you can circumvent and get free voice long distance. I can see
where that puts the existing folks at a real disadvantage, and
that is why my bill is targeted only at data. But I don't
know--I will leave--I don't pretend to be an expert on the per
line charge. I was not part of the hearings back in 1987.
Mr. Markey. Well, in fact it was. To the extent to which we
were trying to again--the analogy here is that at that point in
time there was only 1 percent usage and it was the upper white
middle class.
Mr. Upton. I am surprised it was that high, 1 percent.
Mr. Markey. And 90 percent had college degrees, and without
a decision at that point that was made to go to flat rate
pricing that would lead to a faster democratization of access
to the technology, I don't think that we would be having this
discussion here today. But we have this kind of historical
artifact, the rural subsidies of the telephone. It is all part
of that larger discussion. It is very difficult to separate it
in terms of what the 1s and Os mean in the digital era in the
transmission of information out into the rural parts of the
country. I just raise it to see if you have some thoughts on
it.
Thank you, Mr. Chairman.
Mr. Tauzin. I thank the gentleman. The Chair recognizes Mr.
Largent for a round of questions.
Mr. Largent. Mr. Upton, I just have one question. How do
you respond when people talk about the diversion of tax
dollars, I guess, or the loss of tax revenue to local, State,
city municipalities as a result of the e-commerce which has
taken place over the Internet?
Mr. Upton. With regard to Internet sales?
Mr. Largent. Yes.
Mr. Upton. The way that I respond to it, I look at our
State, our Governor has done a terrific job in cutting taxes
and it has been the No. 1 job creator in our State in probably
the last 3 years. Income taxes have been cut. Our State has a
nice problem right now of having a budget surplus. The way that
I respond to folks that would like to charge for products over
the Internet because of the unfairness of our 6 percent sales
tax versus none is to make things more competitive I think our
State ought to look at lowering the sales tax. We are awash in
cash. That ought to be a proposal on the table so that our
bricks and mortar operations to be more competitive with the
sales that they are competing with, so they can lower that tax
and so they are in better competition, whether it is
automobiles and books or anything else.
Mr. Largent. I yield back the balance of my time.
Mr. Tauzin. I thank the gentleman. The gentleman from
Tennessee, Mr. Gordon, is recognized.
Mr. Gordon. Mr. Upton, do you have an income tax also in
Michigan?
Mr. Upton. We do and our Governor and State legislature
have just reduced that. It is coming down to under 4 percent
now.
Mr. Gordon. I think probably a lot of the surpluses that we
are seeing in various States are not a function of the sales
tax that is fairly inelastic but rather those that have income
taxes at this time of great prosperity. That is the reason that
I think the tax coffers are swelling. As my friend from Texas
mentioned, Texas and Tennessee only have a sales tax. We are
somewhat at a disadvantage in that regard.
Mr. Upton. While I am supportive of the effort to extend
the moratorium and I have had long discussions with my
colleague, Mr. Cox, on this, my bill doesn't address that. But
while I do support it, again, I look at our State. We have cut
our property taxes by a third. It has been terrific. It is one
of the reasons that our State has prospered to the degree that
we have. We have had a Governor and a State legislature that
has thought that cutting taxes would in fact create growth, and
that is exactly what has happened.
Mr. Gordon. Thank you.
Mr. Tauzin. Thank you, Mr. Gordon. The gentleman from
California, Mr. Rogan, is recognized.
Mr. Rogan. Mr. Chairman, I want to thank you for calling
this hearing and also especially thank our colleague from
Michigan for his presentation today. I am fully in support of
the premise under his bill.
Just a quick question. I don't know if you have seen this
before, Mr. Upton. I read a couple of years ago that one of the
premises underlying the creation of a sales tax was this: That
because a business, say, that opens its doors on Main Street
would have to have responsiveness from the local community with
respect to police, fire, parking spaces, meter attendants, and
so forth, that the justification for the sales tax was to help
subsidize the cost of those additional expenses.
Have you in your research on this bill run into language
that would indicate that there was justification for that?
Mr. Upton. I agree with the gentleman's premise, which is
one of the reasons why I support the moratorium on no sales
taxes on the Internet. In fact, it is very much like a catalog
sale where, again, you don't have a presence in that particular
State.
The point was made to me during our 2-week break that with
different products in different States it is terribly
complicated in terms of what is taxed and what is not. As I
read the New York Times here in Washington, I see they are
talking about certain weeks in New York City where they are not
going to have a sales tax on any clothes that are sold in the
city as a special deal to get people to come into the city. How
do you factor that in?
There is a difference in the sales tax rate in New York
City between a bottle of pickles that is in glass and a bottle
of pickles that is in plastic. Those tax codes are terribly
complicated. I don't know how you end up getting the right
thing.
You have to remember, too, as you buy something, as one
buys something on the Internet, they usually have a delay of 1
day to 5 business days in terms of the delivery of the good.
That is somewhat of an inconvenience versus if you are going to
buy a tennis racket on the Internet versus going to Sports
Authority, where you can actually hold it, see it and take it
with you when you leave.
And there is the real thing about the village or the
community that gets the money back from the sales tax when they
do not have to provide police, fire, sewage, all the other
services that a municipality does.
It is sort of interesting, we have one small community in
my district, a two-traffic-light town, that is looking at an e-
commerce company coming in. They are going to provide 300 or
400 jobs if it gets fully up, which is terrific. They will pay
the taxes for those Michigan residents that buy that particular
service.
In a lot of cases, e-commerce companies have in fact
expanded because all of a sudden you have the universe now at
your sales door instead of just the folks in your particular
community. So I buy the argument that we could extend the
moratorium for all those reasons that you suggested.
Mr. Rogan. I know that the question of sales taxes outside
the four corners of your bill, it all goes to the vitality of
the Internet, and precluding the FCC from imposing access
charges is one of the key building blocks to maintaining the
viability of the Internet. Once again, I want to commend you
for your leadership.
Mr. Chairman, thank you again for holding this hearing. I
yield back the balance of my time.
Mr. Tauzin. Thank you.
The gentleman from Texas, Mr. Green, is recognized.
Mr. Green. Thank you, Mr. Chairman.
I am glad you introduced the bill, Mr. Upton. I am glad to
be a cosponsor. All of us have received those letters. Maybe,
Mr. Chairman, what we ought to do is have a hearing and just
maybe subpoena and put that on the Internet. I don't know how
long your letters have been coming in, but ours have been
coming in at least 6 or 7 months.
Mr. Upton. Within the next 2 weeks you are going to have
that bill on the floor.
Mr. Green. That has been the last 6 months, and I am still
looking for Mr. Snell.
Mr. Tauzin. He serves in a virtual Congress, not the real
one.
Mr. Green. Just so they cannot pass real laws.
I yield back the balance of my time. I am glad you
introduced it, Fred.
Mr. Upton. I appreciate your early cosponsorship of this
measure, as well.
Mr. Tauzin. There were 16 members of our full committee who
were original cosponsors. There may be more now. I congratulate
the gentleman on his good work.
The Chair would, first of all--I think the gentleman from
California, Mr. Cox, is recognized next.
Mr. Cox. Thank you. I am not sure. You were going to
recognize the gentleman from Massachusetts.
Mr. Tauzin. I apologize to the gentleman.
Mr. Cox. Thank you, Congressman Upton, my colleague, for
bringing us this bill and for giving us the opportunity to
solve a big problem before it actually happens.
This, like the Internet Tax Freedom Act, is a rescue just
in time. It is a lot easier to prevent these bad things from
happening before they really do occur. And, of course, this is
an area where, so far, the taxes that you are talking about
have not been imposed upon American consumers, but we are
worried that because of the regulatory power that was given to
the Federal Communications Commission in the 1930's that--at a
time, of course, when the Internet was not even a gleam in
anyone's eye, that they might try and interpret that ancient
authority to impose new taxes now in the 21st century.
I just want to run some numbers that my staff has given me
by you and see if this comports with your understanding of just
how bad the problem would be if the FCC were allowed to do
that.
The average Internet user spends 22 hours a month online.
That is our latest data. If the FCC forced the average Internet
user to pay the access charges that your bill would prevent, at
the current average rate of 2\1/2\ cents a minute that works
out to $33 a month, or about $400 a year. Is that your
understanding of just how big this tax would be?
Mr. Upton. It is. It is.
Mr. Cox. Wouldn't this rather obviously price Internet
services out of the range of many, if not most, Americans?
Mr. Upton. I think it would. And, again, a lot of us have
invested in a second line at our house. Your kids are grown up
now as well. If you have only one line, you can lose the whole
connection and you have to go back to the beginning again.
So we have invested in an extra line, we are paying taxes
on that extra line and the charges that are assessed as part of
that, and then to say you are going to pay another $400 a year
per family on average is going to put a lot of families out of
touch with each other.
Mr. Cox. You mentioned the second line. Every phone line in
the House is already subject to this $3.50 Federal subscriber
line charge.
Mr. Upton. Yes. So a lot of us are already paying twice.
Mr. Cox. Now, in 1997, is it not right that the FCC pushed
through another tax on a second line, so you pay an extra tax
on the second line?
Mr. Upton. Yes. The second line is actually, as I
understand it, more expensive than the first line.
Mr. Cox. It is $6 a month for the second line, is that
right? So that amounts--to the extent that people are adding
second lines so they can connect their modems, that amounts to
a modem tax. It amounts to a modem tax in that same range of
hundreds of dollars a year.
Mr. Upton. Yes.
Mr. Cox. Does your bill address that?
Mr. Upton. It does not.
Mr. Cox. Mr. Chairman, I hope that as soon as we enact Mr.
Upton's bill that we can now address this next problem that he
has pointed out for us and get rid of that horrible second line
tax, the modem tax, which discriminates against Internet usage
at a time when a lot of us are listening to the President, the
Governors, and everyone else complain about the digital divide.
I yield back.
Mr. Tauzin. I thank the gentleman.
The Chair recognizes the gentleman from Ohio, Mr. Sawyer,
for questions.
Mr. Sawyer. Thank you, Mr. Chairman. I just want to take a
brief moment to thank our colleague, Fred, for doing the work
that it took to bring this bill to this point. I look forward
to seeing it on the floor.
Mr. Upton. Thank you.
Mr. Tauzin. I thank the gentleman.
The Chair now recognizes the gentleman from Maryland, Mr.
Ehrlich, for a round of questions.
Mr. Ehrlich. I could use any number of one-liners, but I
won't. Thank you, Mr. Chairman.
Fred, just real briefly, first of all, you have done great
work here, as we all know. Getting back to two questions that
have been asked with respect to this great philosophical issue
about sales tax and use tax and fairness and an even playing
field you were asked I think by Mr. Largent, how do you respond
to the equitable type argument that is used?
Isn't it fair also--you also touched on this, and I think
this is an underanalyzed part of the e-commerce explosion--
these entities make things. They are located somewhere. You
have a new one in your district. Obviously, to the extent that
occurs, it is new products, it is new businesses, it is new
property taxes, new income taxes paid by employees, payroll
taxes, the whole nine yards. That is, I think, an underanalyzed
part of the debate with respect to how equitable this whole
thing is in keeping the Internet explosion going.
Would you comment further on that? I find it fairly
compelling, and nobody ever talks about it.
Mr. Upton. I would make a point which I think uses your
district. I play tennis with Chairman Bliley every Wednesday,
and he whipped our butts this morning, despite my getting a new
pair of tennis shoes from your district, Holabird Sports. Is
that in your district?
Mr. Ehrlich. Congratulations. That is right.
Mr. Upton. Catalog sales. I did not pay tax on it because
it was sent--I don't live in Maryland, and it was sent from
your district. I think e-commerce ought to be treated the same
as catalog sales. They don't have a bricks-and-mortar structure
in Michigan, and they sent it UPS, and they are pretty good
shoes that I got. That is the type of system that we ought to
be using. It is the same thing. It is an exact parallel with
catalog sales as it is with e-commerce.
If for some reason all of a sudden we put up that road map
of pickles, whether it is in a glass jar or plastic, or this is
the reason New York City does not have a sales tax on this
week, it is--I have seen the statistics someplace, it is 6,500
different regulations on sales taxes. There is no way people
are going to meet that. That is not why they are buying the
shoes or racket or whatever, it is not because of the sales
tax, but it in fact will inhibit the growth of what has really
helped a lot of businesses and consumers, whether they be in
urban or rural areas.
Mr. Ehrlich. Certainly it would not apply to shoes, but the
fact is new products are introduced as a function of e-
commerce. That is, I think, something, Mr. Chairman, we need to
place in the course of this discussion, the context of this
discussion.
I yield back.
Mr. Tauzin. I thank the gentleman.
The gentleman from Illinois, Mr. Shimkus.
Mr. Shimkus. Thank you. I will be brief.
I want to thank my colleague from Michigan and note that,
since I think today is Tax Freedom Day, it is quite appropriate
we are talking about this. We will just focus on the fact
again, why is it Tax Freedom Day? We cannot just take our
income tax and divide out the amount of days and figure out how
long we work for the Federal Government because we have all
these hidden taxes.
If we can be clear and honest and then let the elected
policy leaders elected by their constituents debate how best
clearly to identify the amount of revenue they need to fund the
services that the constituents desire, we would be much better
off as a Nation.
I see this as a way that we can continue to address this.
E-commerce may force us to do it. I appreciate your work.
Mr. Upton. Just a comment, if the gentleman will yield for
1 second. Our reading of the Constitution is only the Congress
can tax or spend. Yet we have seen a history now over the last
couple of years of the FCC putting their elbows out and taking
that authority. This takes it away and puts it where it ought
to be. We ought to decide here whether to tax access to the
Internet. If we decide not to tax it, it should not be done,
versus allowing someone to tax it before we have to try and
stop it.
Mr. Shimkus. The price of freedom is eternal vigilance. I
appreciate that.
Mr. Tauzin. I thank the gentleman.
Mr. Markey. May I be recognized, Mr. Chairman?
Mr. Tauzin. You may be recognized to strike the last word.
Mr. Markey. Thank you.
I have just been listening to this discussion with Mr.
Ehrlich. The gentleman from Michigan is correct that he does
not owe any taxes to the State of Maryland, but in purchasing
that pair of sneakers he does owe Governor Engler taxes. You do
owe taxes on that.
Mr. Upton. I have them sent to the District of Columbia.
Mr. Markey. You owe taxes to the District of Columbia.
Mr. Upton. Not on a catalog sale.
Mr. Markey. Yes, you do.
Mr. Upton. I will pay it.
Mr. Markey. I know you are quite proud of purchasing it in
a way that did not acquire your actual taxes, but you do owe
the taxes there. I think that is a misunderstanding that a lot
of people have about the Internet.
Mr. Cox. Will the gentleman yield?
Mr. Markey. I will be glad to yield.
Mr. Cox. The use tax obligation is the mirror image of the
sales tax obligation, but it should be added that the Governors
are the first to tell us that they are about as good at
enforcing use taxes against individual consumers as the Federal
Government is at enforcing the penalties for not filling out
all the questions in the long Census form.
Mr. Markey. If I can reclaim my time, although Governor
Gilmore was here testifying taking one position several weeks
ago, as we know, Governor Engler takes just the opposite
position. Although he does take that position, I don't think it
is as a native of Massachusetts. I think he is just generically
a Governor, and I think that is the basis of his position. You
do owe him or the District of Columbia the tax money.
The other point that I was going to make is that the reason
I raised that question about the voice versus data is that in
your bill, as you define it, you say, ``The Commission shall
not impose on any interactive computer service.'' That, of
course, would mean voice and data. So your bill actually----
Mr. Upton. It needs to be clarified.
Mr. Markey. That is the point I was making, just going back
to your own statement. You do include voice in your own bill.
Mr. Upton. If the gentleman will yield for a second, I
introduced this bill 1\1/2\ years ago or so, and at that point
it was not an issue. It has been rightly raised, and I am
absolutely in favor of correcting it to define it the way that
I indicated this morning.
Mr. Markey. I would just add that, looking at this rural
subsidy that urban America does not provide, I am trying to
provide an equitable answer.
Mr. Tauzin. I think it is important at the conclusion of
your testimony, Fred, to point out we are going to hold here
discussion on the moratorium bill as well, but that does not
prohibit the collection of sales taxes or use taxes on Internet
sales any more than they do on catalogue sales. That is a big
confusion. I had to straighten it out everywhere I went in my
district this last week.
The difficulty, as Mr. Cox pointed out, is that there is a
huge difficulty, not only a constitutional question of nexus
but a practical difficulty, in collecting use taxes. Governor
Gilmore, his State tries to do it with a line on the income tax
form that asks the income tax reporters in Virginia to go ahead
and divulge all the purchases they have made from out of State.
I would question how many people use those lines.
It is a very complex and difficult area, and we will
probably have to have some kind of an agreement of the States
and the counties on how to manage the system in the future,
just as we did on uniform sourcing on cellular telephone taxes,
the bill we just passed out a couple of weeks ago from this
committee.
Fred, thank you again.
I also want to point out, by the way, Mr. Cox, and you made
mention of the second line charge, that the Progress and
Freedom Foundation has an excellent report out on telephone
taxes, and I would commend it you to read, where the Foundation
estimates a 20 percent shortfall on poverty access to the
Internet because of the already high level of telephone taxes,
a level that the State, local and now the Federal Government,
through the Spanish American War tax and the FCC's own system
of taxation, levies.
Mr. Upton. Dick Armey said this morning that the Spanish
Ambassador told him that they are not coming again, I would
note.
Mr. Tauzin. Again, I think we will have an opportunity to
deal with that tax. I hope we will.
Mr. Cox. Mr. Chairman, I wonder if I could ask for one
point of clarification.
Mr. Tauzin. The gentleman is recognized to strike the last
word.
Mr. Cox. We have had some good interchange about the
portion of the bill that might direct itself toward Internet
telephony as against Internet transmission of data.
Our colleague from Massachusetts asked you whether or not
you believe that packet-switched telephony should have an
advantage when it comes to these taxes. I think everybody
agrees that we ought not to put the thumb on the scale in favor
of one kind of telephony or another, but what I am concerned
about and what I hope I am not hearing is that we might
impliedly be directing the FCC to impose these taxes on
Internet telephony, which I sure as heck don't want to see, and
I hope nobody here wishes to see that.
The model for the future must be the Internet, not the old
system of the 1930's when we had long land lines subsidizing
local service. That was one thing. Now we have got all these
different competing forms of telecommunication. That is the
world we intended to create with our act a few years ago.
I think it is very, very important for us, for example, not
to encourage the FCC to get into the business of trying to get
inside the packets and figure out how much of it is data and
how much is voice. It is all zeros and ones. It looks the same.
It is, technologically, enormously challenging. It involves
privacy rights if they are going to use other means to find out
what is in your communications.
So I get very concerned when I hear about the importance of
these subsidies and the importance of these taxes and the
importance of this complexity of this old system that we
adopted many decades ago without the Internet in mind, because
it is not necessary for a solution to the problem of the
digital divide, it is not necessary to achieve universal
service.
I will just leave you with this fact, and I will subside
entirely. It is that today in America there is a greater
penetration of the population with television than there is
with telephone. We have universal service, taxes and subsidies
for telephones and not for televisions. More people, more
families, more poor people, have televisions than telephones,
notwithstanding this elaborate system of taxes and subsidies
and so on. You can see why when you figure out how regressive
all these taxes are and how counterproductive the whole system,
the model should be the Internet for the future.
I hope we are very careful when we draft this legislation
and do not encourage it.
Mr. Tauzin. If the gentleman will yield, I simply want to
point out that we may come to a point, hopefully sooner rather
than later, when telephone companies are permitted to cross the
old lines and offer full-blown broadband Internet services to
everyone in this country in competition with the AOLs and AT&T
cables, that second wired competition that I think all of us
want to see 1 day.
Maybe at that point in time we can reach that point with a
new Internet service, including voice transmissions, which I am
told is going to be a loss leader, almost given away free, that
that will no longer require these kinds of charges. The problem
is in the interim. While I agree with the gentleman that we
ought not to direct the FCC on how to resolve it, Mr. Markey
and Mr. Upton had a dialog on potential ways to resolve it,
but, in the interim, what do you do when someone uses the
current system of Internet to provide telephony using the local
networks, when other people who use the local networks through
regular telephone service are required to support those local
networks, and an ISP--under the current definition ISPs do not?
That is a real problem.
Mr. Markey. Would the gentleman from California yield?
Mr. Tauzin. Sure.
Mr. Markey. I share the gentleman's concern about access
charges, and for 20 years I have been trying to do my best to
do away with access charges for the circuit switch network. I
agree with that goal. Obviously, I believe in that. I am
looking very close at this rural subsidy. I believe it is very
bloated.
But if we are not going to eliminate it, if we are--if we
want to maintain a subsidy for rural America, my only point
here is that there should be some understanding that the
service that is provided, whether it be packet switch or
circuit switch, really does not make any difference in terms of
the consumer.
I can understand why back in 1967 AT&T, when it was offered
by the Federal Government, the contract to build the packet
switch network, said no. So did IBM. They had a perfectly good
circuit switch monopoly. So that is why BB&N up in Boston had
to build it.
But the point today is that when you look at it in terms of
its practical application, that there really is not a
difference in terms of the consumer's benefit but there is a
difference in terms of the access charges that are imposed.
I have always believed that these access charges are
bloated. I would like to get rid of them or reduce them down to
an absolute minimum, but I would also like to maintain some
subsidies for rural America. If we are going to do that, then
we are just going to have to find a way of ensuring that there
is some equity. That is the only discussion I am trying to
raise. I want to work with the gentleman toward achieving that
goal.
Mr. Tauzin. If the gentleman would yield once again, I
would simply point out that the day when access charges no
longer become relevant or important is the day when the local
telephone networks finally complete their 271s and they are
into full-blown telephone competition or we are smart enough,
at least in these advanced services areas, to free them from
these old LATA line restrictions which many of you have joined
with me in an effort to do. I hope we do it sooner than later.
But doing that may be the prerequisite, the first thing you
do, in order to get to that point when you can eliminate all
access charges, and then you don't get into a fight as to
whether or not you ought to have them for ISPs and not have
them for telephony.
The sooner we reach that world, frankly, I think the sooner
the folks in rural America are going to be better off, because
they will have the opportunity to get distance-irrelevant
communications going, just the same way the Internet provides
distance-irrelevant services today.
Mr. Markey. Mr. Chairman, the difference between telephone
and television and why a television is more ubiquitous, when
you buy a television, from then on service is free.
Mr. Cox. Actually, it costs $1 billion in subsidies to put
the satellite up so then you can get pay TV.
Mr. Markey. That is another subject. That is a sore point
that the gentleman and I agree upon 100 percent in terms of pay
TV. But in terms of----
Mr. Tauzin. That is a different hearing.
Mr. Markey. In terms of just the television itself, you buy
one, put it in your living room, it is free forever, unless you
want to subscribe to the satellite or cable TV. But when you
buy a phone, you are paying for that service from day one on.
So it makes sense that everyone would have a television in the
home because it is free; and, with a phone, it could be a lower
percentage of the population.
Mr. Tauzin. For quick clarification, there is also a
difference, however, between services that are provided by
wires and services that are provided over the air, the
broadcast spectrum. The notion that somebody had to lay a wire
down to a rural community where very few people live, cable or
telephone wire, causes real cost problems and economic
considerations. So it is a good discussion.
I yield to the gentleman from California.
Mr. Cox. I just hope, Mr. Chairman, that we recognize that
if we take--this is not what Congressman Upton started out to
do, and if we take the step either wittingly or unwittingly of
encouraging the FCC to lay a tax on Internet telephony, that
that is much more than the nose of the camel under the tent.
That is the determinant of the FCC's becoming the regulator of
the Internet and its complete morphing from the Federal
Communications Commission into the Federal Computer Commission,
a step I dearly wish never to see.
Mr. Tauzin. I join you in that concern.
Mr. Upton, thank you so much for your patience, sir. You
can see the way, since you have left, we have really gotten
excited. I think you ought to come back.
For the second panel, we have Mr. Peter Lowy, co-president
of Westfield America in Los Angeles on behalf of e-Fairness
Coalition; Mr. Grover Norquist, president of Americans for Tax
Reform in Washington, DC; Mr. Harris Miller, president of
Information Technology Association of America here in
Arlington; and Mr. Leroy Grey, president of RAVEN-Villages
Internet, a small ISP run in West Virginia.
Gentlemen, welcome.
We will begin with Mr. Peter Lowy, the co-president of
Westfield America. Gentleman, your written statements are part
of our record. We have them. You have 5 minutes to summarize
the high points of your testimony.
Mr. Lowy.
STATEMENTS OF PETER LOWY, CO-PRESIDENT, WESTFIELD AMERICA;
GROVER G. NORQUIST, PRESIDENT, AMERICANS FOR TAX REFORM; HARRIS
N. MILLER, PRESIDENT, INFORMATION TECHNOLOGY ASSOCIATION OF
AMERICA; AND LEROY E. GREY, PRESIDENT, RAVEN-VILLAGES INTERNET
Mr. Lowy. Thank you, Mr. Chairman. I am Peter Lowy,
president of Westfield America and founding chairman of the e-
Fairness Coalition.
I would like to thank Chairman Tauzin and Ranking Member
Markey for providing me the opportunity to speak on this
important issue.
The e-Fairness Coalition represents the real estate
industry and 1.5 million retail stores, ranging from Cody's
Booksellers in San Francisco to national retailers such as Wal-
Mart and Sears, as well as one out of every five American
workers nationwide.
Taxation of the Internet involves three interrelated
issues: taxes on Internet access charges, multiple and
discriminatory taxes, and collection of sales and use taxes on
retail sales made on the Internet.
We oppose H.R. 4202 and H.R. 1291 because we believe there
should be a fully integrated solution with regard to taxation
and the Internet, not a piecemeal one that does not address an
equitable collection of sales taxes on retail sales.
While there is broad agreement on the issues of access and
on multiple and discriminatory taxes, there is clearly no
agreement with respect to sales and use taxes and e-commerce.
If Congress passes bills addressing the first two issues, there
is no incentive to address the most critical and most difficult
issue, which is to provide a level playing field for the
collection of sales taxes.
The States are currently working on simplifying sales tax
rules Nationwide. An extension of the moratorium will stop the
momentum gained in solving the complex issues of sales and use
tax collection.
There should be no rush to extend the current moratorium as
it does not expire until October 21, 2001. We have 16 more
months to consider permanent solutions to all of these issues.
Current law provides for a blatantly unfair playing field
where brick and mortar retailers collect sales taxes, but their
online competitors are exempt from collection responsibility.
As tax-free online consumer sales grow, estimated to be in
excess of $100 billion in 2003, the States and cities will look
for other revenues to offset uncollected sales and use tax from
sales that have migrated to the Internet.
The Nation's Governors also oppose a simple extension of
the moratorium. On April 12, 2000, a bipartisan group of 36
Governors sent a letter to the congressional leadership urging
rejection of the report of the Advisory Commission on
Electronic Commerce and expressing support for a level playing
field. Five additional Governors sent their own letters
expressing similar concerns.
The message of the e-Fairness Coalition is simple. We
support a level playing field so all retailers--in-store,
catalog, and online--have the same sales and use tax collection
responsibilities.
We do not support new taxes on Internet sales. Sales made
over the Internet are already subject to sales and use taxes,
as we saw earlier.
Under current law, if a remote retailer such as an Internet
seller or a catalogue company, has a physical presence or nexus
in the State of the buyer, the retailer is required to collect
sales tax on behalf of the State where the buyer is located. If
it does not have a physical presence, it does not have to
collect sales taxes, but tax is still owed by the consumer.
We currently have a situation where online companies fit
into three categories: pure play, pure Internet retailers that
do not have physical presence in most States and do not collect
sales taxes; integrated clicks and mortar, retailers which have
both physical and online stores. Since many retailers have a
physical presence in most States, they are required to collect
sales tax on in-store and online sales. Then, physical presence
with no nexus. Many retailers with physical and online stores
are setting up a corporate structure in a way that does not
require the collection of sales or use taxes on online sales.
In this arrangement, the online business is set up in a
separate subsidiary that does not have nexus and is therefore
not required to collect sales and use taxes. Indeed, the
expanded nexus provisions included in the ACEC report would
formalize this situation.
If Congress does not address the current inequity in sales
tax collection rules, more companies will create corporate
structures to avoid sales tax collection responsibilities.
While corporations would like to integrate their physical and
online stores, discriminatory tax policies are forcing
retailers to separate their online and in-store strategies.
The e-Fairness Coalition believes Congress should enact
legislation encouraging States to adopt simplified sales tax
systems. States that adopt the simplified systems should be
authorized to require remote sellers to collect sales taxes.
Allowing States to require all retailers to collect and
remit sales tax would expand the collection of taxes and enable
States to lower taxes for all consumers. The best sales tax is
broad-based and low.
Extending the moratorium and continuing the status quo will
narrow the consumption tax base and lead to an increase in
other taxes on business and individuals. Local and State
governments may be forced to raise income, property, sales, or
other taxes to make up for lost revenues. Without solving the
sales and use tax issue, an extension of the moratorium could
result in an increase in taxes to the consumer.
It is important to remember that sales and use taxes are
consumption taxes, paid by the consumer to fund schools,
police, roads, and other services that benefit local consumers.
The retailer is merely the collection agent.
How a product is purchased, whether in-store or online,
should not determine whether a consumption tax is paid. In
either situation, the buyer receives the benefit from those
public services. Congress should support efforts to level the
playing field and provide all retailers with equal sales tax
collection responsibilities.
No one wants to tax the Internet or provide discriminatory
taxes on the Internet. However, extending the moratorium
without addressing the equitable collection of sales tax is
incomplete and counterproductive. Congress must address all
three issues: access taxes, discriminatory taxes, and sales
taxes. Our Nation's Internet tax policy should be fully
integrated, incorporating a permanent solution for all three
issues.
Thank you, Mr. Chairman.
[The prepared statement of Peter Lowy follows:]
Prepared Statement of Peter Lowy, President, Westfield America, on
Behalf of e-Fairness Coalition
I am Peter Lowy, President of Westfield America, and Founding
Chairman of the e-Fairness Coalition. I'd like to thank Chairman Tauzin
and Ranking Member Markey for providing me the opportunity to speak on
this important issue.
Westfield America owns interests in 38 major shopping centers
across the country that are home to approximately 4,700 retail stores.
In many communities, we are one of the largest contributors to the
local tax base through the property taxes we pay and the sales taxes we
generate.
The e-Fairness Coalition includes brick-and-mortar and online
retailers, realtors, retail and real estate associations, and publicly-
and privately owned shopping centers. Our Coalition represents 1.5
million retail stores ranging from Cody's Booksellers in San Francisco
to national retailers such as Wal-Mart and Sears, as well as 1 out of
every 5 American workers nationwide.
The e-Fairness Coalition opposes H.R. 4202, the ``Internet Services
Promotion Act of 2000'' and H.R. 1291, the ``Internet Access Charge
Prohibition Act of 1999.'' Both bills provide prohibitions on FCC fees
on internet access. Section 3 of H.R. 4202 also extends the current
moratorium on taxes on Internet access and on multiple and
discriminatory taxes on the Internet.
Taxation of the internet involves three interrelated issues. 1)
Taxes on internet access charges; 2) Multiple and discriminatory taxes,
and 3) Collection of sales and use taxes on retail sales made on the
internet.
We oppose H.R. 4202 and H.R. 1291 because we believe that there
should be a fully integrated solution with regard to taxation and the
internet, not a piecemeal one that does not address an equitable
collection of sales taxes on retail sales.
While there is broad agreement on the issues of access and on
multiple and discriminatory taxes, there is clearly no agreement with
respect to sales and use tax and e-commerce. If Congress passes bills
addressing the first two issues, there is no incentive to address the
most critical and most difficult issue, which is to provide a level
playing field for the collection of sales taxes.
The states are currently working on simplifying sales tax rules
nationwide. An extension of the moratorium will stop the momentum
gained in solving the complex issue of sales and use tax collection.
There should be no rush to pass federal legislation at this time as
the current moratorium does not expire until October 21, 2001. We have
16 more months to consider permanent solutions to all of these issues.
Problems with Current Law
Current law provides for a blatantly unfair playing field where
brick and mortar retailers collect sales taxes, but their on-line
competitors are exempted from collection responsibility. Because of the
Supreme Court's 1992 Quill decision, the states cannot require remote
retailers to collect and remit sales tax when the seller does not have
a physical presence in the state of the buyer.
Extending the moratorium will allow an unlevel playing field to
continue and unfairly subsidize Internet retailers at the expense of
traditional retailers and the revenue needs of states and cities.
As tax-free online sales grow, estimated to be in excess of $100
billion in 2003, the states and cities will look for other revenues to
offset uncollected sales and use tax from sales that have migrated to
the internet. By not allowing the collection of consumption taxes on
remote sales, the tax base will shrink and lead to increases in other
taxes. Allowing sales tax collection on all sales will expand the tax
base, which can lead to lower taxes.
In addition to the businesses represented by the e-Fairness
Coalition, opposition to a simple extension of the moratorium is joined
by a broad bipartisan group of the nation's Governors.
On April 12, 2000, a bipartisan group of 36 Governors sent a letter
to Speaker Hastert, Minority Leader Gephardt, Majority Leader Lott, and
Minority Leader Daschle urging rejection of the report of the Advisory
Commission on Electronic Commerce. The Governors expressed support for
a fair and equitable system to ensure that Main Street retail stores
and Internet commerce enterprises can compete on a level playing field.
Five additional Governors sent their own letters expressing similar
concerns.
Support for a Level Playing Field
The message of the e-Fairness Coalition is simple: We support a
``level playing field'' so that all retailers--in-store, catalog, and
online--all have the same sales and use tax collection
responsibilities. Preferential tax policies and government subsidies
for Internet retailers distort the market, and give Internet retailers
an unfair competitive advantage.
Therefore, we support the enactment of federal legislation to allow
states to treat all retail sales equally.
We do not support new taxes on Internet sales. Sales made over the
Internet are already subject to sales and use taxes.
Under current law, if a remote retailer, such as an internet seller
or a catalogue company, has a physical presence, or nexus, in the state
of the buyer, the retailer is required to collect sales tax on behalf
of the state where the buyer is located.
However, as I mentioned earlier, under the Supreme Court's 1992
Quill decision, if the remote retailer does not have a physical
presence in the state of the buyer, the retailer cannot be required to
collect sales tax.
Just because the retailer does not collect the tax does not mean
that it is not due or applicable. When a retailer does not collect the
sales tax, the buyer is required to pay a use tax to their home taxing
jurisdiction. The use tax is not widely understood and compliance is
very low.
Today, consumers are burdened with paying a use tax that most don't
even know they owe. Under the traditional retail model--this amounted
to a small impact on state economies. However, as e-commerce grows--the
loss of sales tax created by the transference of sales to the Internet
will not be offset by use tax unless we make that collection system
simpler. The burden must be taken off of the consumer and replaced by
the natural agent to collect these taxes--the Internet retailer. Under
a simplified tax system, this will need to amount to a virtually zero
burden system for the retailer.
We currently have a situation where online companies fit into 3
categories:
1. Pure Play: Pure Internet retailers that do not have physical
presence in most states and do not collect sales taxes
2. Integrated Clicks and Mortar: These retailers have both physical and
online stores. Since many large retailers have a physical
presence in most states, they are required to collect sales
taxes on in-store and on-line sales.
3. Physical Presence with No Nexus: Many retailers with physical and
online stores are setting up a corporate structure in a way
that does not require the collection of sales or use taxes on
on-line sales. In this arrangement, the online business is set
up in a separate subsidiary that does not have nexus, and is
therefore not required to collect sales and use taxes. Indeed,
the expanded nexus provisions included in the ACEC report would
formalize this situation.
If Congress does not address the current inequity in sales tax
collection rules, more companies will create corporate structures that
avoid sales tax collection responsibilities. While corporations would
like to integrate their physical and online stores, discriminatory tax
policies are forcing retailers to separate their on-line and in-store
strategies.
Misunderstanding about the Current Moratorium
There is a tremendous amount of confusion in the media and in
Congress about the taxation of sales made over the Internet, and about
the effect of the moratorium contained in the Internet Tax Freedom Act
of 1998.
The current moratorium does not apply to sales and use taxes. The
moratorium covers:
(1) taxes on Internet access, and
(2) multiple or discriminatory taxes on electronic commerce.
Within the 16 months left on the current moratorium, we believe
that a permanent solution can be found. Congress should carefully
consider this issue, especially since the Advisory Commission on
Electronic Commerce failed to reach the two-thirds vote required.
Responsible Congressional Legislation is Necessary
The e-Fairness Coalition believes that Congress should enact
legislation encouraging the states to adopt simplified sales tax
systems. States that adopt the simplified systems should be authorized
to require remote sellers above a sales volume threshold to collect
sales taxes.
Providing a framework for simplification, and allowing states to
require collection when the states achieve simplification is a
reasonable and necessary step for Congress to take.
Extending the existing moratorium without including language
allowing the states to require collection from all retailers will mean
at least five more years of tax free sales for internet retailers, and
a strong likelihood that internet sales will be given permanent
preferential treatment.
Allowing states to require all retailers to collect and remit sales
taxes will expand the consumption tax base and enable states to lower
taxes for all consumers. The best sales tax is broad-based and low.
Extending the moratorium and continuing the status quo will narrow
the consumption tax base and lead to an increase in other taxes on
businesses and individuals. Local and state governments may be forced
to raise income, property, sales, or other taxes to make up for lost
revenues. Without solving the sales and use tax issue, an extension of
the moratorium could result in an increase in taxes to the consumer.
It is important to remember that sales and use taxes are
consumption taxes paid by the consumer to fund schools, police, roads,
and other services that benefit local consumers. The retailer is merely
the collection agent. How a product is purchased--whether in a store or
on-line--should not determine whether a consumption tax is paid. In
either situation, the buyer receives a benefit from public services
(like roads, police, and fire). Congress should support efforts to
level the playing field and provide all retailers with equal sales tax
collection responsibilities.
No one wants to ``Tax the Internet'' or provide discriminatory
taxes on the Internet. Extending the moratorium without addressing the
equitable collection of sales tax is an incomplete and counter-
productive exercise. Congress must address all three issues: 1) Access
taxes, 2) discriminatory taxes, and 3) sales taxes. Our nation's
internet tax policy should be fully integrated incorporating a
permanent solution for all three issues.
Mr. Tauzin. Next, the Chair will recognize Mr. Grover
Norquist, president of Americans for Tax Reform. Grover.
STATEMENT OF GROVER G. NORQUIST
Mr. Norquist. Thank you, Chairman Tauzin, for the
opportunity to testify here.
In keeping with truth in testimony I am here to represent
Americans for Tax Reform. We do not now nor have we ever
received money from the government--Federal, State, or local.
I served as a commissioner on the Advisory Commission on
Electronic Commerce. My particular job there was to represent
consumers, and we looked at three things, the first one being
present taxes on the Internet.
The component parts of the Internet are extremely heavily
taxed now by the 3 percent Federal excise tax to fund the
Spanish American War that people are familiar with, but also
the average State and local tax on telecommunications, about 14
percent, about triple what the sales taxes on other industries
are. Only tobacco and liquor are more heavily taxed than
telecommunications.
Second were threatened taxes, these access charges we are
talking about, discriminatory taxes that the moratorium
presently puts off for 3 years but does not yet forbid.
The third one is the effort by some people to undermine the
commerce clause and allow politicians in one State to tax
businesses in another State, catalogue sales or electronic
commerce.
We are here today to talk about two prophylactic bills,
H.R. 1291, Mr. Upton's legislation to prohibit the imposition
of access charges, and H.R. 4202, Mr. Ehrlich's legislation
that would both prohibit those access charges by the FCC and
extend the present moratorium for another 5 years. I think they
are both extremely helpful and good bills. I understand there
are certain concerns about some unintended consequences that I
am sure the committee can deal with, but I think both of these
are very good for taxpayers, very important for taxpayers.
These taxes, of course, are paid by consumers, not by
businesses, at the end of the day.
The Commission did actually address both of these issues;
and, in a poll, 18 of the Commissioners agreed when I asked
whether they would support both opposition to taxes and to the
additional access charges. There was one fellow from South
Dakota who was for all taxes at all times and we lost his vote,
but there were 18, including the three Federal representatives.
The second one was a continuation of the moratorium, which
even Governor Leavitt said he would support, although he has
been an advocate in other areas for taxes on the Internet, but
would support the extension of the moratorium.
I believe, however, that we should go beyond a 5-year
extension of the moratorium to a permanent moratorium, which
was the original effort by Congressman Cox and Senator Wyden in
the Cox-Wyden legislation to permanently ban that.
Some people say, why not wait? It is a whole year or more
away from when the moratorium lapses. People do not make last-
minute decisions. People do plan ahead. It is important to
decide now to make that a permanent moratorium. I think a 5-
year moratorium is the least that we should do in that area.
I would also urge the committee to take a look at
sunsetting the Gore tax. Right now the e-rate, the Gore tax, is
set up for a particular purpose and an admirable purpose of
wiring those schools that are not yet wired. Seventy percent
are wired, 30 percent or something are not.
But I think it is important that we sunset that, or our
grandchildren are going to be laughing about the Gore tax the
way we are laughing about the Spanish American War tax. So let
us set up a date certain or an amount spent certain, and when
we have finished spending $10 billion or whatever it is that
tax should lapse.
I would also suggest that we also have an audit of how the
money has been spent.
The other issue that people have been focused on is the
issue of taxing Internet sales or catalogue sales. Right now
the commerce clause does not allow Utah to levy taxes on L.L.
Bean in Maine. This is a good idea. The commerce clause was not
a loophole, as some Governors seem to think. The commerce
clause was put in for good and sound reasons, and it is very
important that a country founded on the revolutionary cry of no
taxation without representation, just as we objected to Britain
taxing America, I think we should object to Utah politicians
taxing businesses either in Washington State or in Maine.
We have already seen the damage done when Alabama juries
are able to rate Michigan businesses. There is no limit to what
a jury would do to out-of-State businesses. There would also be
no limit to what tax collectors from Utah would do to
businesses in Maine. There is a limit to what Maine will do to
L.L. Bean. There is no limit to what tax collectors in Utah
will do to L.L. Bean. I think we need to protect against that.
I would urge you not to allow--what some people want to do
is put politics over policy here. The two ideas put forward
before this committee, this subcommittee, are extremely good.
Prohibiting access charges, I hear everybody saying they are
for that, and extending the moratorium there is strong support
for. Do not let that be held hostage to those politicians who
want to take a great leap forward and undermine the commerce
clause, a discussion that we can have another time.
[The prepared statement of Grover G. Norquist follows:]
Prepared Statement of Grover H. Norquist, President, Americans for Tax
Reform
Mr. Chairman, members of the Subcommittee, thank you for allowing
me to present testimony today in support of H.R. 1291, the Internet
Access Charge Prohibition Act of 1999.
Americans for Tax Reform supports this bill. H.R. 1291 would save
consumers and taxpayers money by preventing the FCC from applying
access charges to Internet Service Providers.
In addition to this bill, I would also like to take on the issue of
Internet taxation in a broader sense. In recent weeks, the debate over
electronic commerce has focused on exactly the wrong question; that is,
``should the Internet be taxed?'' Perhaps in a perfect world, this
would be the right question. Right now, however, the building blocks of
the Internet--phone lines, cable, and, in fact, all
telecommunications--are already some of the most heavily taxed facets
of the American economy.
The first excise tax on telecommunications was levied in 1898 to
fund the Spanish-American War. The war is over. However, the federal
tax remains and is joined by state and local excise taxes that average
14.1% and get as high as 28.6% in Texas, 24.5% in Florida and 15.8% in
Washington, D.C. Just complying with existing law requires enormous
resources. AT&T reports that it files 50,000 tax forms with government
at all levels.
Some governors and big city mayors want to impose additional taxes
on the Internet. They would overturn Supreme Court decisions that now
protect interstate commerce. Part of the benefit of the Internet is its
inherent usefulness as a commercial medium. Present law forbids Utah,
for example, from forcing Amazon.com to collect Utah's sales tax when a
citizen from Utah buys a book over the Internet. Adding additional
taxes and regulations could present a dramatic threat to the growth of
the Internet as a transaction medium.
Some Internet tax advocates, including Utah Governor Mike Leavitt,
argue that the states need the extra taxes, that too much tax revenue
is being lost, and that these additional taxes can be imposed without
hurting the Internet or the Constitution. They are wrong on all four
fronts. First, in 1998, the 50 states ended the year with $11 billion
in surpluses. State and local government revenues have grown from 6.9
percent to 9 percent of GDP from 1968 to 1998--a period in which
federal revenues fell from 20.5 percent to 18.7 percent. Taxpayers
upset about declining productivity in government and increased waste
have been wrong to focus solely on Washington over the past three
decades.
Additionally, a June 1999 study by Ernst & Young points out that,
because most e-commerce involves the sale of intangible services or
other exempt products not subject to sales taxes, or is business-to-
business, the actual ``loss'' to state and local sales tax collection
was $170 million in 1998--one-tenth of 1 percent of sales taxes
collected. Moreover, the definitive study on how taxing e-commerce
would affect Internet sales was done by Professor Austen Goolsbee of
the University of Chicago Business School, who found that changing the
Constitution to allow taxation of electronic commerce would reduce e-
commerce by 24 percent or more. (Now, that would do interesting things
to the market capitalization of those companies presently driving up
the Dow and the NASDAQ.)
Imposing new tax collection schemes on remote sellers would not
``level the playing field'' as the other team suggests. Rather, it
would tilt the playing field heavily against online vendors and their
customers. It would do this by imposing a massive, government-imposed
barrier to market entry insofar as a single vendor selling goods on the
Internet would be compelled to collect and remit sales taxes for more
than 6,000 jurisdictions. A single ``Brick and Mortar'' retailer
operating a single store only needs to collect taxes for one
jurisdiction.
The Constitution's commerce clause is not a loophole. It created
one coherent American market and stopped states from attacking
``foreign'' (out-of-state) businesses. The two pieces of legislation
under consideration today go a long way toward preserving the commerce
clause. We do not want to allow the federal government to tax the
Internet out of existence--nor do we want to create a situation where
Alabama politicians can levy taxes on New York businesses. We have
already seen the damage Alabama juries do to ``foreign'' auto companies
through the abuse of tort law.
As for ``fairness:'' Buy a book in your local bookstore in
Washington, DC and you pay a 5.75% percent sales tax. Buy a book over
the net and you pay $12.00 in overnight shipping fees. You have to buy
more than $200 worth of books at a time for the dot com company to have
any advantage.
One idea before the Electronic Commerce Commission that had merit
was to urge states to lower or abolish sales taxes on big-ticket items,
such as computers. This would eliminate any differential between
electronic commerce and main street businesses without clogging up the
Internet with tax collectors.
Governor James Gilmore of Virginia, who chaired the Commission on
Electronic Commerce, has outlined a plan to ban taxes on electronic
commerce altogether, to phase out the 3% federal excise tax on phone
bills, to ban taxes on Internet access, to ban tariffs on international
trade and to reduce the ``digital divide'' by allowing states to spend
surplus welfare funds to buy computers and Internet access for families
making the transition from welfare to work. Senator John McCain (R-AZ)
and Congressman John Kasich have also introduced federal legislation to
make the ban in Internet taxes permanent and to ban all sales taxes on
electronic commerce.
In addition, the commission recommended banning the taxation of
digitally transferred goods and services. To tax digitally transferred
music, or computer software would require a tremendous violation of
privacy of every American. Better to repeal those taxes than leave them
on the books to be selectively enforced.
Congress might also wish to extend the protection of the 4R laws
prohibiting discriminatory taxation on railroad lines to
telecommunications. I believe this would greatly reduce the tax burden
on lower income Americans using the internet.
Passing H.R. 1291 is an important step in preserving the economic
growth of the Internet. In addition to this legislation, however, I
urge Congress to enact the entire Gilmore Report: abolish the 3%
Federal Excise Tax on telecommunications, sunset the Gore Tax, or E-
Rate, extend the present moratorium on discriminatory taxes on the
internet, and strengthen nexus standards to preserve Commerce Clause
protections for all Americans.
Thank you for allowing me to testify today.
Mr. Tauzin. Thank you, Mr. Norquist.
The Chair recognizes Mr. Harris Miller, president of
Information Technology Association in Arlington, Virginia.
STATEMENT OF HARRIS N. MILLER
Mr. Miller. Thank you very much. It is an honor to be here.
I was disappointed to hear from Congressman Upton that
Congressman Snell does not exist, because I went to a fund-
raiser for his opponent last night.
It is an honor to be before the subcommittee to speak on an
issue which is very important to the future growth of the
Internet, and that is the issue of the access charges and
trying to apply them to the Internet.
We at ITAA range across the whole range of companies with
our more than 26,000 companies across the United States. We
believe that both Mr. Upton's bill and Mr. Ehrlich's bill are
very positive pieces of legislation. We look forward to working
with this subcommittee, the full committee and the Congress to
get these passed.
In the to and fro of the dry discussion of all these
different charges, people tend to lose sight of what is really
at stake. Mr. Cox brought this up in his questions before to
Mr. Upton. If consumers had to pay the same per minute charges
levied on long distance voice calls, access charges would lead
to $20 to $35 a month per user. So if you are thinking of a
household of two or three users, it is actually much more than
what Mr. Cox was suggesting, possibly into the thousands of
dollars.
Just simply traveling to Europe or to Japan and seeing how
much difficulty they have had getting average consumers to use
the Internet because of the telephone charges on a permanent
basis drives home the point that Mr. Markey made earlier, that
if you drive the costs up, even if you give away the Internet
access itself for free, if you make the telephone charges that
substantial, you simply are not going to have average consumers
able to talk about accessing the Internet. We will not have a
digital divide, we will have an unbridgeable digital Gulf. That
is not what this Congress wants.
Second, it is important to continue to point out, as has
been decided by this Congress and reaffirmed in courts in case
after case, that Internet service providers are not, as a
matter of law or a matter of policy, telecommunications
carriers. They are customers of the carriers. They pay charges,
too. They pay charges such as the subscriber line charges and
other business line charges, and of course their customers do
also.
It is also important to point out that the Universal
Service Fund is not exclusively funded by the access charges.
In fact, it is a combination of several different taxes that go
together to serve as the Universal Service Fund.
I think as this subcommittee examines the possibility of
what is going to happen to the Universal Service Fund as more
Internet--telephone over the Internet grows, I think they have
to look into the fact that it is not just access charges that
are funding that but it is a whole series of charges.
In fact, FCC can try to work with Mr. Markey to drive down
the access charges and perhaps look at some other charges,
though I agree with Mr. Cox, we should not take this as a
license for the FCC to go out and start regulating the
Internet.
It is important to keep in mind that, as we look at all of
these bills, that for many consumers, as you have seen in the
e-mail traffic and messages you see from your consumers, access
charges being applied to the Internet will become the third
rail of Internet policy.
It is amazing to us that this issue does keep coming up. It
has been killed off in the courts time after time. Like the
vampire, it keeps resurfacing. Certainly I think Mr. Upton's
bill, if passed by this Congress, would send a very clear
message to the American people that this Congress will not
support anything that is going to slow down the growth of the
Internet and make it more difficult for all the American people
to access the Internet.
I think it is again important to reiterate that access
charges are not technically universal service contributions,
even though that is how they are described. As a result,
perhaps Mr. Upton's bill needs to be modified in another way
also to make sure that it does not have that specific
reference, as it currently does, because someone might imply
from that that that is the only role for the access charges.
Again, Mr. Upton's bill as drafted may need some minor
clarification in that area so it does not become read as
directly contributing solely to the Universal Service Fund.
Any type of charges put on the Internet on a permanent
basis will drive down usage. That is an area which we do not
want to do.
We also have to make sure that--perhaps in Mr. Upton's bill
another way to achieve the same purpose is simply by
reaffirming that information service providers are customers of
telecommunications carriers and that they should not be
discriminated against relative to other end users. That may be
another way of achieving the objective Mr. Upton's and Mr.
Ehrlich's bills are trying to achieve.
Also, regarding the extension of the universal tax
moratorium, Mr. Norquist says clearly and concisely, this issue
is not just an issue of the Internet, though some people try to
make it that way. It is a general issue of on what basis the
types of charges can be levied on out-of-State businesses.
The Quill decision is out there. If Congress and elected
officials want to change the Quill decision they should do it,
but they should not try to ride the back of the Internet as a
way of doing that. Obviously, that is a major public policy
issue. It is unfair for people to come along and say the
Internet is somehow different than these other charges.
I appreciate the committee's great efforts to continue to
pursue policies that promote competition and keep the hands of
the government off the Internet. In fact, yesterday we had our
annual public policy summit and the chairman of the full
committee, Chairman Bliley, came. The one phrase that he said
that stuck in everybody's mind as he addressed our crowd was,
his message to his colleagues is, hands off the Internet. That
is the kind of message this entire committee and you, Mr.
Chairman, as a subcommittee have been sending.
We encourage you to continue that, and we salute you for
getting it right.
Thank you very much.
[The prepared statement of Harris N. Miller follows:]
Prepared Statement of Harris N. Miller, President, Information
Technology Association of America
introduction
Chairman Tauzin and the other Honorable Members of this
Subcommittee, I am Harris N. Miller, President of the Information
Technology Association of America (ITAA). I am honored to testify today
on HR. 1291 and HR 4202 which are intended to assure consumers that
they will never have to pay so-called ``access charges'' to reach the
Internet. ITAA members are very concerned with this issue, and I
commend you for holding public hearings on these bills.
ITAA consists of 400 direct and 26,000 affiliate corporate members
throughout the U.S. The Association plays the leading role in issues of
IT industry concern including taxes and finance policy, intellectual
property, telecommunications competition, workforce and education,
encryption, critical infrastructure protection, online privacy and
consumer protection, securities litigation reform, government IT
procurement, and human resources policy. ITAA members range from the
smallest IT start-ups to industry leaders in the Internet, software, IT
services, ASP, digital content, systems integration,
telecommunications, and enterprise solution fields.
It is my hope that the conclusions drawn from this hearing and the
proposed bills in question will be the end of Internet access charge
proposals, which I believe are the third rail of Internet policy. As
you know, there has been a long history to this issue, with numerous
attempts to impose them in the past. Fortunately today there is no
serious or credible effort to impose access charges on Internet
traffic. The members of this Committee, the Federal Communications
Commission, the ``industry leads'' stance of this Administration, all
have been helpful for leading us to this point, and deserve much
credit.
And yet, the resurfacing of policies advocating special charges on
Internet traffic is a little like the vampire in an old horror movie.
You think you have killed it off, and yet some how, against all the
odds, it has a way of resurfacing. I submit that access charges on
Internet traffic would have the same life-sucking qualities as a
vampire too--slowing adoption and take-up rates for Internet use,
widening the so-called ``digital divide'' to a point where access would
be out of reach for many Americans, and slowing the economic benefits
the Internet has allowed Americans to enjoy. This hearing is an
opportunity to drive a sharp stake through the heart once and for all.
Thank you for taking on the task.
policy history
ITAA has been at the forefront of Internet policy even before there
was an Internet. Over thirty years ago, in its First Computer Inquiry,
the Federal Communications Commission (FCC) began wrestling with what
it described as ``the growing convergence of computers and
communications has given rise to a number of regulatory and policy
questions within the purview of the Communications Act.''
ITAA has been a long time participant in policy deliberations in
support of the robust development of the information services
marketplace. Long before the explosion of ISPs, and the invention of
the World Wide Web, the FCC took action that would eventually help pave
the way for the nationwide growth of ISPs. In the end, these battles
created the regulatory foundation on which the Internet now rests.
One of our continuing battles has been over whether enhanced
service providers--or, as the Telecommunications Act of 1996 refers to
them, Information Service Providers--should be required to pay access
charges. ESPs provide a range of services that allow store, provide,
and process information. These services range from simple voicemail, to
on-line proprietary data bases, to today's Internet access services.
ESPs lease conventional telephone lines from local exchange
carriers to receive ``calls'' from the subscribers. They interconnect
these local facilities to packet-based private-line based networks
(including the Internet) that carriers the traffic to remote servers.
In some cases these servers are in the same state as the end user. In
other cases, the servers are in different states. Indeed, in most
cases, neither the user nor the ESP knows the locations in which the
traffic terminates.
For nearly two decades, a debate has raged as to whether ESPs
should pay the same state-tariffed local charges as other business
users that lease identical local lines or whether ESPs be required to
pay the same interstate ``access charges'' for the use of these
facilities that long-distance carriers are required to pay. This is
more than an academic debate. Business users with traffic patterns
similar to ESPs pay a fairly low (but compensatory) flat-rate monthly
charge for the use of the local lines. By contrast, long-distance
carriers must pay per-minute charges that the long distance carriers
pay to both the originating and terminating local telephone companies
for each minute a long distance call is in progress. While the FCC has
made progress in restructuring and reducing these charges, they have
always been--and remain--significantly above cost.
When the access charge system was established in 1983, ``enhanced
service providers'' were classified as ``end users'' rather than
``carriers'' for purposes of the access charge rules, and therefore
they are not required to pay the per-minute access charges that long-
distance companies pay to local telephone companies.
While that conclusion is sometimes referred to as the ``ESP
exemption,'' in my opinion, that phrase misstates the reality of the
FCC's conclusion. The Commission made a very a common-sense
distinction. ESPs use telecommunications services to provide value-
added services. They should not be treated in the same manner as
telecommunications carriers.
The FCC's long-standing policy has been critical for the growth of
the Information Services industry. Internet service providers, for
example, can generally charge customers a flat monthly fee for access
to the ISP via a local telephone call because the ISP purchases
business telephone lines from a local telephone carrier. Customers then
dial into a modem bank over lines provided by the local telephone
carrier.
The FCC's policy is equitable. ESPs pay the same charges as
similarly situated end-users--the subscriber line charge, the business
line tariff and, where, applicable, a private-line interconnection
charge. A portion of these payments are passed-on, by the local
exchange carrier, to the Universal Service Fund.
This battle took other forms. For example, in 1987 a ``modem tax''
was discussed that would have required enhanced service providers to
pay interstate access charges, which at that time were significantly
higher than they are today. Thankfully, the proposal was abandoned in
1988.
More recently, in June 1996, four incumbent local telephone
companies (Pacific Bell, Bell Atlantic, US West, and NYNEX) petitioned
the FCC concerning the effects of Internet usage on these carriers'
networks. They claimed that the growth of the Internet was a threat to
the financial and technical integrity of their monopoly networks, and
asked the FCC for authority to charge interstate access charges to
ISPs.
Later that year, the commission asked for comments on the treatment
of ISPs and other ``enhanced service providers'' that also use local
telephone companies' facilities. In the Access Reform Order, FCC 97-
158, adopted on May 7, 1997, the FCC rejected the claim that the growth
of the Internet was harming the local monopolists, determined that ESPs
use the local network in fundamentally different ways than do long-
distance telephone companies, and determined that it would be
inappropriate to extended the subsidy-laden carrier access charge
regime to ESPs.
Unfortunately that order was challenged in court. ITAA again
participated in this battle as an intervenor in support of the FCC. In
August 1998, the Court of Appeals for the Eighth Circuit ruled in favor
of the Federal Communication Commission and against Southwestern Bell
Telephone Co.'s challenge on access charge reform.1
---------------------------------------------------------------------------
\1\ Southwestern Bell Telephone Co. v. FCC, 153 F.3d 523, 543 (8th
Cir. 1998)
---------------------------------------------------------------------------
On the Internet access charge aspects of the case, the court
concluded:
``As the FCC argues, the services provided by ISPs may involve both
an intrastate and an interstate component and it may be impractical if
not impossible to separate the two elements. See California v. FCC, 905
F.2d 1217, 1244 (9th Cir. 1990). Consequently, the FCC has determined
that the [local telecommunications] facilities used by ISPs are
``jurisdictionally mixed,'' carrying both interstate and intrastate
traffic. FCC Brief at 79. Because the FCC cannot reliably separate the
two components involved in completing a particular call, or even
determine what percentage of overall ISP traffic is interstate or
intrastate, see id., . . . the Commission has appropriately exercised
its discretion to require an ISP to pay intrastate charges for its line
and to pay the SLC . . .'' 2
---------------------------------------------------------------------------
\2\ ``SLC'' refers to subscriber line charges.
---------------------------------------------------------------------------
That court's language, upholding the FCC's prior ruling, came very
close to driving a stake once and for all through the possibility of
Internet access charges.
In an unrelated 1998 proceeding, the FCC's 1998 appropriations
legislation required a report to Congress on the legal status of
Internet services under the Telecommunications Act of 1996. That
report, the so-called ``Stevens Report,'' again confirmed the existing
access charge treatment for Internet traffic.'' 3
---------------------------------------------------------------------------
\3\ Federal Communications Commission, Report to Congress On
Universal Service Under the Telecommunications Act of 1996, FCC CC
Docket No. 96-45, April 10, 1998
---------------------------------------------------------------------------
the fcc report
In 1999 the Federal Communications Commission released a thoughtful
report, The FCC and the Unregulation of the Internet.4 It
traces how a policy of government non-intervention in the data and
information markets has significantly contributed to the development of
the Internet. The Commission has tried to maintain essentially a hands-
off approach to these markets in order to encourage competition,
consumer choice and speed to market, fostering the development of an
interconnected telecommunications network that ensured near universal
availability of a reliable and affordable telephone system over which
data services could be offered.
---------------------------------------------------------------------------
\4\ FCC Office of Plans and Policy Working Paper, The FCC and the
Unregulation of the Internet. authored by Jason Oxman, July 19, 1999
---------------------------------------------------------------------------
The FCC determined through the Computer Inquiry proceedings that
computer applications offered over that network were not subject to
regulation, giving rise to the unregulated growth of the Internet; and
deregulating the telecommunications equipment market while requiring
carriers to allow users to connect their own terminal equipment,
helping to foster the widespread deployment of the modem and other data
equipment tools that can be easily attached to the public switched
network; and implementing flexible spectrum licensing policies that
permit innovative uses of wireless data services, leading to the
development of wireless Internet applications.
Most significant of all of the report's major conclusion was that
not imposing on enhanced service providers the access charges paid by
interexchange carriers was essential to helping drive the availability
of reasonably prices, flat-rate dial-up Internet access.
stifling the digital opportunity
In the to and fro of the dry, even arcane regulatory battles
surrounding access charges, we should not lose sight of the very real
practical impact that these cumulative decisions have had on consumers.
Seemingly miniscule access charges of 2 or 3 cents per minute would add
$20 to $30 per month to the monthly costs of typical Internet
consumers. Such charges would:
Slow adoption of the Internet as a mass-market medium;
Widen significantly the ``digital divide'';
Hinder new, Internet-based businesses and information sources,
which would become less attractive due to reduced take-up
rates.
Over 6,000 Internet service providers (ISPs) today offer dial-up
service to the Internet, and over 95% of Americans have access to at
least four local ISPs.5 Millions of Americans rely on small
``one POP'' 6 or medium-sized ISPs for their service, ISPs
that may serve several hundred or fewer customers. There is no question
that accessing an ISP through a non-metered telephone call allows
consumers to attain affordable access to the Internet. Because of the
favorable decisions of the FCC, ISPs can purchase the business lines
they need to offer service from any local telephone
company.7 That so many thousands of ISPs offer service in
this country at relatively low rates is evidence of the positive impact
of the FCC's policy of treating ISPs as telecommunications end users.
---------------------------------------------------------------------------
\5\ Downes, Thomas and Shane Greenstein, ``Do Commercial ISPs
Provide Universal Access,'' (Dec. 1998), available at http://
skew2.kellogg.nwu.edu/greenste/research/papers/tprcbook.pdf.
\6\ POP stands for Point of Presence and refers to the number of
local nodes for dial-up access that the ISP has deployed.
\7\ Although business telephone lines may feature metered usage
rates (for intraLATA toll calls, for example), such per-minute charges
are only assessed on outgoing, not incoming calls, and thus dial-up
ISPs, which receive calls from customers dialing in to modem banks,
would not be subject to such charges
---------------------------------------------------------------------------
Comparing the American consumer Internet market with the European,
the advantages of treating ISPs as customers can be observed even more
clearly. In the United Kingdom, for example, ISPs may offer a flat rate
for monthly service, but end users are subject to per-minute charges
for local dial-up connections to that ISP, resulting in a relatively
expensive Internet experience for most consumers. Just as importantly,
users are conscious of the fact that the meter is running. In the U.S.,
consumers whose ISPs are located within their local calling area
generally pay a flat monthly fee to that ISP and are not charged per-
minute rates for the local call to the ISP. This reflects the fact
that, in an efficiently constructed network, the cost of carrying this
traffic is not usage-sensitive. In fact UK policy makers are
considering changing the way British consumers are charged for Internet
access.
prohibiting access charges once and for all
Understandably, H.R. 1291 and H.R. 4202 seek to assure consumers
that they will not pay access charges in the future. As I have already
stated, I heartedly agree with this objective and commend you for
trying to do this. However, on specific language of the legislation, I
would offer a couple of qualifications:
Access charges are not as a technical matter, ``universal service
contributions.'' While they are often described in these terms, there
is not a legal connection between the two. As a result, legislative
language about ``access charges to pay universal service'' may miss its
intended mark.
The greater question of Internet access charges is not simply a
question of per minute charges; it involves any per-minute pricing
structure that treats information service providers differently than
other end users of telecommunications services. The modem tax
discussion that I referred to earlier is an example.
The same intended result could be reached treating all information
service providers as defined in Section 3 of the Communications Act--as
end users, as customers of telecommunications services that should not
be discriminated against relative to other end users. The best language
to accomplish the objectives would:
Give the FCC express authority to continue to regulate
physically local telecommunications facilities and services
used to carry traffic between subscribers and their information
service providers (including Internet service providers);
Continue the FCC's express authority to delegate price setting
to the states; and
Forbid discriminatory treatment between ISP-bound traffic and
other physically local traffic delivered to a business end-user
that interconnects a mixed-use private line network to the
local public switched telephone network.
These are modest suggestions for the end product completely
consistent with the legislation's intent. ITAA and our member companies
are of course ready to work with you to discuss these approached on
more detail.
conclusion
If there should be a fundamental principle for Internet public
policy, it is to draw upon the wisdom of the Hippocratic Oath--``first
do no harm.'' There is a natural temptation with technology policy to
tinker at the margins to reach desired ends. However, the Internet is
evolving which such speed and dynamism that even the best-intentioned
interventions can have unanticipated negative consequences.
This committee deserves great credit for pursuing these policies
and resisting what may sometimes be the natural impulse of government
to intervene. Instead, you have acted to encourage competition, and
have pushed to see once closed markets opened up. And then stepped back
to let markets respond. We salute you for getting it right.
Mr. Tauzin. Thank you.
Mr. Leroy Grey of RAVEN-Villages Internet, Romney, West
Virginia.
STATEMENT OF LEROY E. GREY
Mr. Grey. Thank you, Chairman Tauzin, Mr. Markey, and
members of the subcommittee, for the opportunity to speak here.
I am appearing this morning on behalf of myself and the
Commercial Internet eXchange Association, which advocates on
behalf of ISPs in Washington. I would like to express our
strong support for both bills.
As noted above, I am president of RAVEN-Villages Internet.
Like the vast majority of service providers, my company
operates under very strict conditions with little room for
error. We have 600 customers. The large majority of them are
dial-up residential and small business subscribers.
We are still growing at a fairly good rate, and we hope to
continue to do so. But even in Romney, a town of 2,500 people,
RAVEN-Villages Internet competes with three other ISPs. In
1999, RAVEN-Villages Internet had a gross profit margin of
$22,000 on gross revenues of $130,400.
As a local ISP, we have designed our services and content
to fit what we believe will be of interest to our friends,
neighbors and customers. Because we are part of the community,
we also try always to provide good connectivity, exceptional
customer service and good value.
For example, in addition to the usual news groups and web
hosting services, RAVEN contracts with MindLeaders.com,
formerly DPEC, to provide local server access to over 365
computer, business and professional courses, including many
Microsoft certificate courses.
To enhance communications between our customers and their
friends and business associates worldwide, we recently enabled
our website with FireTalk, which brings up the telephony issue.
We agree totally with Mr. Cox with regard to the fact that you
cannot separate the data--voice from the data; and, therefore,
that is an important issue to try to prevent taxation or fees
on the Internet access.
This free software, FireTalk, allows RAVEN's members to
voice conference with up to 100 others as well as to take those
conferees on web tours in which all participants' web browsers
are synchronized to wherever the moderator browses.
RAVEN-Villages was one of the original 50 companies
establishing the Freedom Network launched by ZKS at the spring,
1999, ISP conference in Baltimore. This revolutionary network
was showcased on a 60 Minutes program and provides customers
the ability to communicate on this network within a network in
unparalleled secure private communications.
In our commitment to local service, value and community,
RAVEN-Villages is like thousands of ISPs throughout the Nation.
Unfortunately, we and they are also alike in our vulnerability
to financial setbacks, competitive threats and technological
markets changes.
In the Internet, there is constant technological
transformation. As local providers, we must constantly upgrade
our networks, software, trained personnel and leased
telecommunications facilities. If our net revenues were
affected by regulatory or legal developments, our capital
expenditures would necessarily reflect these financial
setbacks.
Though there are no precise statistics, it has been
estimated that the average local United States ISP employs
between 10 and 12 workers and has annual revenues in excess of
$1 million. In short, the bulk of ISPs are small community-
based businesses, and many of the new service providers
specialize in serving residential and rural customers,
consumers and small businesses which are not served by large
national online Internet service providers, primarily because
they are in the smaller regions.
Every year my company struggles to meet our modest profit
margins so we can reinvest in our network and employees.
Unfortunately, far too many service providers face similar or
worse financial situations that could in time result in their
exiting the Internet business.
In fact, one of our local competitors who at one time had
nearly 9,000 customer went bankrupt in 1999. They have since
reorganized and are still selling local access, but I benefited
from their poor service. I knew the president of this company
well enough to learn that fierce competition eroded market
share considerably, and that coupled with the loss of a major
NASA contract led to their financial problems.
RAVEN has faced similar erosion of our new customer sign-
ups when our local telephone company became our competitor in
1999. Our new sign-ups dropped from an average of 15 to 7 a
week, and have remained at 50 percent of what they were before
our local phone company became our competitor.
I do not have time to read much more of my statement, but,
basically, as a local ISP, I am in favor of both bills.
I would like to summarize by saying that we believe that
the codification of the current legal status of American ISPs
is an appropriate and responsible position. We would urge the
subcommittee to draft a strong report to accompany whichever
bill is ordered reported.
In addition to the prohibition on access charges, we also
support the 5-year extension of the Internet tax moratorium. We
also have a minor suggestion with regard to definition of one
of the terms used. We can supply that information later.
Thank you.
[The prepared statement of Leroy E. Grey follows:]
Prepared Statement of Leroy E. Grey, President, RAVEN-Villages Internet
Chairman Tauzin, Mr. Markey, Members of the Subcommittee, my name
is Leroy E. Grey. I am the president of RAVEN-Villages Internet [http:/
/www.raven-villages.net], an Internet service provider (ISP)
headquartered in Romney, West Virginia. I appreciate your invitation to
testify this morning on H.R. 1291, the Internet Access Charge
Prohibition Act, introduced by Rep. Fred Upton of Michigan, and H.R.
4202, the Internet Services Promotion Act of 2000, introduced by Rep.
Robert Ehrlich of Maryland. Both bills have similar prohibitions on
access charges for universal service contributions. In addition, H.R.
4202 would extend the Internet tax moratorium an additional five years
as recommended in the recent Advisory Committee on Electronic Commerce
report.
I am appearing this morning for myself and the Commercial Internet
eXchange Association (CIX), which advocates in behalf of ISPs in
Washington. I would like to express our strong support for both bills,
including Section 3 of H.R. 4202 that extends the tax moratorium. While
I am not authorized to speak for the state ISP associations or the
thousands of unaffiliated ISPs, unofficially at least, I have every
reason to believe they would applaud the leadership of Rep. Upton and
Rep. Ehrlich in introducing the two bills. Mr. Chairman, I would also
like to thank you for your tireless efforts in behalf of online
businesses and interest in the Internet.
If enacted, both H.R. 1291 and H.R. 4202 would provide a greater
measure of financial certainty to ISPs and could stimulate network
investment and innovation. This is not to denigrate the Federal
Communications Commission, which has played an important historical
role in promoting the public Internet and data services. However,
Congress's role differs from that of the independent agencies and
executive branch. You have the constitutional authority to make the
laws of the land, not simply to administer, interpret or implement
them.
This morning, I would like to do three things in my written
statement and oral testimony. First, I shall describe the critical
importance to a small business like mine of the current regulatory
policy on ``information services''. Second, I would like to describe to
you the ISP industry's historic leadership role in promoting and
supporting Internet connectivity in the United States. Third, I shall
review briefly why the status quo with respect to information service
providers like ISPs should be extended into the future as proposed by
the two bills.
i. impact of access charges on isps
As noted above, I am president of RAVEN-Villages Internet, an ISP
in Romney, West Virginia. Like the vast majority of service providers,
my company operates under very strict conditions with little room for
error. We have 600 customers, the large majority of them dial-up
residential and small business subscribers. Even in Romney, a town of
2500 people, RAVEN-Villages Internet competes with three other ISPs. In
1999, RAVEN-Villages Internet had a gross profit margin of $22,200 on
gross revenues of $130,400.
As a local ISP, we have designed our services and content to fit
what we believe will be of interest to our friends, our neighbors, our
customers. And because we are part of the community, we also try always
to provide good connectivity, exceptional customer service, and good
value. For example, in addition to the usual newsgroups and web hosting
services, RAVEN contracted with MindLeaders.com (formerly DPEC) to
provide local server access to over 365 computer, business, and
professional courses, including many Microsoft certificate courses. To
enhance communications between our customers and their friends and
business associates worldwide, we recently enabled our website with
FireTalk. This free software allows RAVEN members to voice-conference
with up to 100 others as well as take those conferees on web tours in
which all participants web browsers are synchronized to wherever the
moderator browses. Lastly, RAVEN-Villages Internet was one of the
original 50 companies establishing the ``Freedom Network'' launched by
ZKS at the spring, 1999 ISPCon show in Baltimore. This revolutionary
network was showcased on a ``60 Minutes'' program and provides
customers who communicate via this ``Network within a network''
unparalleled secure, private communications.
In our commitment to local service, value, and community, RAVEN-
Villages Internet is like thousands of ISPs throughout the nation.
Unfortunately we--and they--are also alike in our vulnerability to
financial setbacks, competitive threats, and technological and market
changes. As you are well aware, the Internet undergoes constant
technological transformation. As local service providers, we must
constantly upgrade our networks, software, trained personnel, and
leased telecommunications facilities. If our net revenues were affected
by regulatory or legal developments, our capital expenditures would
necessarily reflect these financial setbacks.
Though there are no precise statistics, it has been estimated that
the average local US ISP employs between 10 and 12 workers and has
annual revenues just in excess of $1 million. In short the bulk of ISPs
are small, community-based businesses. Many of the new service
providers specialize in serving residential and rural customers--
consumers and small businesses--not served by the large national online
and Internet service providers.
Every year my company struggles to meet our modest profit margins
so that we can reinvest in our network and employees. Unfortunately,
far too many service providers face similar or worse financial dilemmas
that could, over time, result in their exiting the Internet access
business. In fact, one of our local competitors, who at one time had
nearly 9000 customers, went bankrupt in 1999. They have since re-
organized and are still selling local access, but I benefited from
their poor service, as many of their customers signed up with RAVEN. I
knew the president of this company well enough to learn that fierce
competition eroded market share considerably and that, coupled with the
loss of a major NASA contract, led to their financial problems. RAVEN
has faced a similar erosion of new customer signups when our local
telco became a competitor in September 1999. Our new signups dropped
from an average of 15 per week to 7 per week, and has remained, on
average, 50% of what they were before our local phone company became a
competitor. We already had two other competitors previous to our ILEC
entering the market, but our figures did not drop until the ILEC's
superior financial and marketing entered the picture.
Universal service charges are a form of taxation even though the
revenues are dedicated to a worthy, socially desirable goal. We support
universal service since it is self-evident that the more people on the
network--even the PSTN voice network--the better for the Internet.
However, taxes have the effect of reducing consumption of the product
or service upon which the tax is levied. Access charges on information
services like Internet access would adversely affect ISPs by repressing
demand for connectivity. Access charges would either be passed on to
subscribers in the form of higher charges (thereby discouraging greater
use of the Internet) or absorbed by providers if market competition
limited their ability to increase prices. Ironically, universal service
charges would fall disproportionately on the very low income groups and
individuals, who already suffer from inadequate access to information
technologies.
The imposition of--or threat to impose--access charges would also
have profound legal, regulatory, and economic implications. By failing
to acknowledge the differences between information service providers
and telecommunications carriers, a future Commission would essentially
open the way for government regulation of Internet access and ISPs.
Although the FCC has not demonstrated an inclination to alter its
current policy that treats Internet access as an information service, a
statutory prohibition--as called for in the two bills under
consideration--would ensure that a future Commission could not reverse
that stand.
ii. the internet service provider sector
Commercial ISPs have been a dynamic part of the Internet economy
from its very inception. As I noted above, there are 7000+ ISPs in the
United States according to Boardwatch Magazine and CIX estimates. One
academic study has estimated that almost every American has access to
the Internet via at least one local service provider. More than 95
percent of all Americans have a choice of four or more ISPs, while tens
of millions can choose from amongst dozens of vendors. I can assure you
from my personal experience that our industry is highly competitive in
price, service, and infrastructure facilities. Many small ISPs excel at
customer service and consequently are fierce, tough competitors in
their local markets.
The ISP industry traces its roots to the mid-1980's--well before
most of the consumer friendly innovations in the early and mid-nineties
that made the Internet such a technical, economic and social
phenomenon. Service providers pursue different business models,
different markets and different customer sets but are functionally
alike in that they aggregate data and route them towards their final
destination.
The explosive expansion in the early and mid-1990's of US Internet
connectivity was due in large part to the tireless work and investments
in data networks by US ISPs, which had long been active in providing
access services. The flourishing US Internet economy stands in stark
contrast to the situation prevailing in many other countries where the
independent ISP sector is small and Internet access service is
dominated by PTT monopolies. Subscribers in these countries face high
per-minute telephone charges on top of their monthly Internet access
bills. However, the absence of a strong independent ISP sector means
weaker competition and a less innovative market in most regions outside
North America.
Independent US service providers are also leading the way in
providing hosting services and other value-added applications beyond
Internet access. Providers in these developing new markets are called
application service providers, or ASPs. Just as independent ISPs
contributed greatly in the 1990's to establishing the US's Internet
leadership, they could continue that role in the new millennium if the
US Government stays its current course on regulation and market
competition.
iii. promoting information services and internet access
Current US Government policy on the regulatory treatment of
information services generally and Internet access in particular is an
amalgam of decisions dating to the early 1980's through 1996. Through
trial and error, the United States has arrived at a set of core
regulatory principles that have been successful in promoting innovation
while protecting the public welfare. The US's Internet leadership is
not coincidental but rather is the direct result US communications
policies. The core principles are--
Fair competition among and between providers, networks and services
wherever possible.
Minimal necessary regulation and cost burdens.
Support for innovation.
Private sector leadership wherever feasible
Consistent, market-based solutions.
During the past two years, CIX and several other state and national
ISP trade associations filed comments in several FCC proceedings that
dealt with the issue of the appropriate regulation of information
services, particularly Internet access, and information service
providers. The positions taken then were convincing and remain cogent.
ISPs already make substantial communications payments to local
exchange companies to rent business lines from them, amounting to
significant percentages of their annual revenues. They thus make
indirect access charge payments to support universal service. The
charge by some commentators that ISPs are being subsidized by
ratepayers to the tune of several billion dollars is without
foundation.
Communications payments are the largest single expense for ISPs
amounting to between 30 to 50 percent of their revenues. The imposition
of yet another charge would have a particularly adverse impact on small
ISPs and those firms already in financial distress.
Furthermore, ISPs operate in a highly competitive, very low margin
business which provides little room to pass along universal service
charges or access charges to customers. The imposition of charges could
even facilitate further consolidation among ISPs, with the greatest
impact on smaller providers.
Even though ISPs indirectly pay into the universal service fund, it
remains to be seen whether they will receive any benefits. Most state
associations have reported that their members have not received any
proceeds.
iv. conclusion
Chairman Tauzin, we believe that the codification of the current
legal status of American ISPs is an appropriate and responsible
position. We would urge the Subcommittee to draft a strong report to
accompany whichever bill is ordered reported. In addition to the
prohibition on access charges, CIX also supports the five year
extension of the Internet tax moratorium. I also have a minor
suggestion with regard to the definition of one of the terms used. We
shall work with the staff on technical issues and definitions. Chairman
Tauzin, I deeply appreciate this opportunity to appear before you, and
I would be pleased to answer any questions you may have.
Mr. Tauzin. Thank you, sir.
The record will remain open for 30 days to insert
statements.
The Chair recognizes himself briefly.
Let me first lay a predicate down, that we are in a period
of transition from a regulated communications world to a
marketplace-hopefully deregulated communications world, and
that in this period of transition we have two Internet worlds.
We have an Internet world that will be delivered on cable and
some wireless systems and maybe even satellites that is subject
to far less regulation than an Internet world delivered on
telephones, and it raises certain questions.
When a cable company charges a customer a cable charge, a
monthly cable rate and even a digital cable rate, if you want
to go digital now, the cable company is free to do so today
without government regulation, without local regulation. It
simply charges its customers based upon its own decisions about
its market, its value and the services to provides.
The customers, as I understand it, who sign up for digital
cable services and who sign up for Internet services with the
cable company will be dealing with primarily a free market
contract condition.
On the other hand, those of us who use the Internet
services over our telephones and hopefully 1 day digital
broadband services fully over our telephones are dealing with
an entity still regulated by government, still required to
subsidize some customers at the expense of other customers, et
cetera. The phone company, as Mr. Cox pointed out, charges us
based upon these regulations, what it can and cannot charge,
some set by a local PUC, some set by the Federal Communications
Commission. They are really two worlds of the Internet.
I would like your comments on that, Mr. Miller and Mr.
Norquist. How do we rationalize this period of transition and
where should we be taking it as we move from one world to the
next?
Mr. Miller. I think you answered the question yourself, Mr.
Chairman. Competition is the answer, competition in the
telecommunications industry, which this committee had such an
important role in starting the ball rolling down the hill in
1996, although we all think that the ball has not rolled nearly
far enough down the hill.
Second, as you mentioned, cable is the second alternative.
Wireless is becoming more available as an alternative. There
are many major wireless companies now that are willing,
although they don't always have access, to wire apartment
buildings by putting wireless in, so that becomes another
alternative. And then there are third-party lines over electric
power lines. So the answer is competition. I don't think that
Congress should get very focused too much on the short term.
Mr. Tauzin. But the problem is in the interim some of the
competitors are heavily regulated, and some are not. Some are
restricted in where they can provide services and what services
they can provide. In the real world of telephony, that might
have worked. In the new world of Internet services, how should
it work?
Mr. Grey. With regards to the local--well, in West Virginia
the State Public Utilities Commission, we were supplying
Internet access to the blind school, which is a State-run blind
school located in Romney right across the street from us. We
were doing that for free for about a year. That gave us
residual income in other areas. We got some money from them for
putting in a 16 LAN computer lab and various other things, but
we gave that service for free.
The Public Utility Commission decided that they were going
to make it statewide, that everybody in the State had to get
connected, so they used the West Virginia University's Internet
Provision Branch to provide that subsidy; I mean, through them
to provide access to the Internet. Therefore we were cut out of
the loop. And that happened to a lot of other Internet
providers in the area, so I think that is something that needs
to be addressed.
Mr. Tauzin. Mr. Norquist.
Mr. Norquist. When we merged East and West Germany, we all
wanted to go to the West German model, not come to some sort of
compromise. We have heard this on, gee, the Governor of
Michigan has high taxes on businesses in Michigan, and there
are businesses in Maine that are escaping this; therefore, we
should tax them. You either extend regulations to the
unregulated market, that could even things up, or raise taxes
on people that have presently not been taxed. That would even
things up.
There are some political leaders whose idea of evening
things up look like trying to even up the table by cutting the
legs, and always toward higher taxes and higher regulations. I
would hope that if somebody comes in and my taxes are higher
than your taxes, fine, let's even the playing field down.
This is time when Federal and State governments are
spending more than they need to spend, but they are raising
more than they spend. It is exactly the right time to reduce
taxes, and it is also the right time to speed up the process as
much as possible of deregulating each of these industries.
I would recommend that you put telecommunications under the
4-R law which protects railroads from discriminatory taxes by
State and local government, because when telecommunications--
you have the same situation with power plants where government-
mandated monopolies, lots of State and local governments tagged
on lots of taxes. Politicians loved that because everybody got
mad at the phone or power company rather than the mayor or the
Governor. But now that we are deregulating both of these
industries, you are deregulating both of these industries, we
can't afford to have the high taxes on telecommunications and
power plants. To the extent of putting the 4-R law that
protects railroads from being looted by State and local
governments, you can't have discriminatory taxes. If you want
to tax property in Utah 1 percent, fine, but you can't tax the
railroad at 10 percent. We now tax telecommunications at 14
percent average, and sales tax and excise taxes on other
industries are a third of that.
Mr. Tauzin. According to the Freedom Foundation, there are
some communities where telephone is taxed at 35 percent, and
the mayor of one of those communities, now Chairman of our full
committee, conceded that is exactly what mayors used to do. He
is now sponsoring with me a truth in billing act to try to shed
some light on those kinds of problems, so we have had a good
confession from a former mayor who is trying to right that
situation.
I am going to have to move to my friend quickly and go to a
15-minute floor vote followed by four 5-minute votes. We are
going to have to take a good 30 to 45-minute break and return
and finish unless we can finish now. The gentleman from
Massachusetts.
Mr. Markey. Thank you, Mr. Chairman.
Mr. Pickering, a Republican from Mississippi on this
committee, and I have introduced legislation on a proposal
endorsed by the cellular phone industry for the Governors and
municipalities to have a uniform method to collect cellular
sales taxes on consumers' cell phone use. So we know it is
possible for a high-tech industry to work with taxing
jurisdictions to come up with workable solutions across State
lines, which is where the domicile of the phone is, and that is
the point of nexus, and the industry likes it, and Governors
like it, and there is bipartisan support on the committee for
the legislation.
How much time would States need to simplify their sales tax
collection, Mr. Lowy?
Mr. Lowy. In the work we have been doing with the States,
we think in the next 12 months they can come back to Congress
with a framework that could be put in place. I think then if
you look at the Minority proposal that came out from the
commission, that they then believe that they would need another
2 years to put that framework into effect, so that 3 years from
now I believe that they could be in a position to have a system
that would work.
Mr. Markey. So is an extension of the tax moratorium
necessary for the States to simplify sales tax collection?
Mr. Lowy. I think the way that we look at it with 16 months
still to go on the current moratorium, that we should give the
States enough time to try to put the framework in place in
working with industry and themselves.
Mr. Markey. The current moratorium does not include
anything about sales tax.
Mr. Lowy. It does not, but we look at it as an integrated
approach to the total taxation on the Internet, and with the
time period on the moratorium coming to a close, that is
creating the political pressure and the pressure on both the
industry and the States to get themselves together to get this
framework and bring it back in front of the Congress.
Mr. Norquist. They first brought up State sales taxes in
Mississippi in 1931. Governors and State legislators created
the present structure that we have. There have been efforts
dating back to the 1980's, and we heard testimony by the very
people who now say that they are going to be able to do it, but
they have never done it before and haven't been able to do it,
and the executive director of the NGA is telling people it is 5
years or more. So there is one line that they give you when
they say don't do anything now, we will get it done in a year,
and there is another line that the NGA staff is telling people
5 years plus.
Since they have been at it for 60, 70 years now, I tend to
think that we are going to do it right away. First of all, they
can do it now, and it has nothing to do with this legislation.
Nothing stops the States from doing it now. All of the
Governors who tell us they care deeply about this have been
drifting in the opposite direction for 20 years.
Mr. Markey. I guess the comment I would make here is that
the world has changed in 60 years. There is now a shotgun at
their back, and many people do things with a shotgun at their
back that they wouldn't do in the absence of that shotgun. What
we are dealing with here is something that probably will get
resolved at the gubernatorial level primarily out of necessity
rather than some voluntary act that they would have engaged in.
Mr. Lowy. If you look at the extension of the moratorium
today, if you look at an article that was put out in the
Washington Post on February 24, in an interview with Governor
Gilmore, he released a statement that the article characterized
as a new proposal and is a political ploy that would get the
tax moratorium extended, and by the year 2006 no tax collector
would be welcome on the Internet. We actually think with the
shotgun at the back of the States, and with the growth of the
Internet, we can solve this problem within the time period
allowed.
Mr. Tauzin. Mr. Sawyer, if you can complete, we can wrap
this up.
Mr. Sawyer. I would not ask the panel to stay for an hour
so I could come back and ask questions. Let me just say I am
particularly interested in Mr. Miller's comments and his
testimony about the EU and particularly the U.K., and I was
interested in whether there was any harmonization going on
throughout the EU with regard to access fees; secondarily, that
the fundamental difference in taxing architectures between the
EU and the United States, one having much more to do with a
wider range of taxation and the value added tax on which the
Europeans depend so heavily and its effect on the topics that
we are talking about here today.
Mr. Miller. Really the problem in the EU is the whole
method of charging individual subscribers. So you are paying
every time the second rolls over even if it is a local call, as
opposed to in the U.S. where it has been primarily long
distance that you had different charges. So on top of that,
they have discriminatory taxes. So you have a problem. Not only
do you have to change the tax regime, but you have to get the
monopolistic telephone companies to change their charging
system. .
Mr. Tauzin. We are going to have to wrap up.
Mr. Sawyer. Mr. Chairman, I get their answers in writing.
Mr. Tauzin. Mr. Norquist?
Mr. Norquist. The European Union harmonization puts a floor
in the value added tax of 15 percent. When the States get
together in restraint of trade by setting floors under taxes,
this is bad, not good.
Second, the National Governors Association is saying that
they put out a statement signed by 36 Governors. I asked them
for signatures. They could only deliver two signatures. I
talked to the Governor, chief of staff of Pennsylvania, who
said that they never signed it, although their name is on it.
So I would suggest that is a taxpayer-subsidized lobby that
illegally uses your Federal grants to lobby for higher taxes at
the State level, and you might ask them to see those
signatures.
Mr. Tauzin. That is interesting.
Gentlemen, thank you. The Chair has to declare this hearing
over. We have a vote on the floor. The hearing is declared
over, and we thank you very much for your contributions.
[Whereupon, at 12:15 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of American Federation of State, County and
Municipal Employees
The American Federation of State, County and Municipal Employees
(AFSCME) submits the following statement for the hearing record in
opposition to Section 3 of the Internet Services Promotion Act of 2000
(H.R. 4202) to extend the moratorium on Internet taxes through calendar
year 2006.
The originally-enacted Internet Tax Freedom Act (47 U.S.C. 151)
imposed a three-year ban, ending September 30, 2001, on any new state
and local taxes on Internet access and multiple or discriminatory taxes
on electronic commerce. The practical effect of this law has been to
exacerbate the existing de facto tax-exempt status of most such remote
sales that result from the inability of states to collect sales taxes
from purchases made by state residents from Internet and catalog sales.
As a result, AFSCME respectfully urges that the moratorium be allowed
to expire in September 2001 and not be extended through calendar year
2006 for the following reasons:
The current moratorium does not expire for nearly 18 months.
This provides time for the states to continue their work to
simplify their sales tax systems, using a combination of
technology-based software systems and administrative systems.
The states are demonstrating that they can attack this
challenge in a constructive and cooperative fashion. Congress
should not arbitrarily constrain these efforts.
State and local governments already may be losing on the order
of $5 billion in sales tax revenues annually from their
inability to tax most mail-order sales. With Internet sales
growing rapidly, these governments could be losing an
additional $10 billion annually by 2003 if Internet purchases
remain effectively tax-exempt.1 Revenue losses would
continue to mount thereafter, as Internet sales grow over time.
---------------------------------------------------------------------------
\1\ Center of Budget and Policy Priorities (February, 2000)
---------------------------------------------------------------------------
The loss of revenue will significantly impair the ability of
states and localities to meet demands for education funding and
other critical services. This scenario is particularly
troubling in the context of education. There is agreement that
primary and secondary education in the United States is in need
of constant improvement so that our children receive the
foundation that will allow them to fill the demand for high-
skilled, well-educated workers in the information economy.
Improving the education system requires investment. In fact,
state education budgets consume 35 to 40 percent of state
revenues. It is ironic that the Internet, the very tool
fostering today's high-tech explosion, stands to play a pivotal
role in the states' inability to fund the desperately needed
improvements in the education system.
Main Street retailers will be at risk of losing considerable
business to remote sellers so long as they must add sales tax
to their prices at the cash register while Internet and mail-
order merchants can sell tax-free. There is evidence that this
tax advantage is already distorting retail competition by
compelling large retail chains to reorganize their operations
solely to be able to compete with their tax-exempt Internet
rivals.
For these reasons, AFSCME opposes the extension of the moratorium
and supports enforcement and active collection of existing sales tax
due on remote purchases.
______
Prepared Statement of the International Council of Shopping Centers
The International Council of Shopping Centers (ICSC) appreciates
this opportunity to present its views to the U.S. House Commerce
Subcommittee on Telecommunications, Trade and Consumer Protection on
the need to apply existing state sales and use taxes to electronic
commerce.
ICSC is the global trade association of the shopping center
industry. Its 40,000 members in the United States, Canada and more than
70 other countries around the world include shopping center owners,
developers, managers, investors, lenders, retailers and other
professionals. The shopping center industry contributes significantly
to the U.S. economy. In 1999, shopping centers in the U.S. generated
over $1.2 trillion in retail sales and over $47 billion in state sales
tax revenue, and employed over 11 million people.
Simply stated, ICSC believes that all goods, regardless if they are
purchased over the Internet, via catalog or in traditional retail
stores, should be subject to the same state and local tax collection
requirements. One form of commerce should not receive preferential tax
treatment over another. Unfortunately, existing tax law is structured
to favor electronic commerce over sales made in local retail stores.
Contrary to popular belief, it is not the existing moratorium on
Internet taxes that precludes states from requiring out-of-state
retailers to collect sales and use taxes on their behalf. Instead, it
is a 1992 Supreme Court case, Quill v. North Dakota, that held that
remote merchants are not required to collect sales and use taxes for
states in which they do not have substantial physical presence or
``nexus''. The moratorium--which expires in October, 2001--applies only
to access charges and new, multiple and discriminatory state sales
taxes. However, because many Internet retailers are not collecting
existing sales and use taxes, a long-term extension of the moratorium
will make this practice an accepted way of doing business.
ICSC does not support the enactment or implementation of Internet
access charges, or new, multiple or discriminatory taxes on electronic
commerce. Instead, we believe that existing sales and use taxes should
be collected uniformly on all types of retail sales. The taxes which
states should be able to require remote sellers to collect are not new
taxes. Instead, they are existing use taxes which buyers are currently
obligated to remit to their state and local governments. However, as a
practical matter, most individuals are either unaware of their tax
obligations, or simply do not bother to comply.
ICSC supports electronic commerce and believes it should be
fostered. In fact, many traditional brick-and-mortar retailers are
incorporating Internet commerce into their businesses in order to
obtain new customers and better serve existing ones. However, as a
matter of fairness and sound tax policy, Internet-based retailers
should not receive a competitive advantage over traditional brick-and-
mortar merchants simply because electronic commerce is a new and
growing form of transacting business.
Although the extent to which Internet sales will displace
traditional retail sales is unknown at this time, the competitive tax
advantage that Internet-based retailers currently have could negatively
affect many local retailers, shopping centers and their communities in
the near future. Not only would traditional retailers generate reduced
sales, but their employees would suffer from reduced working hours,
wages or layoffs.
In addition, state and local governments would receive less sales
tax revenues that go to provide essential public services (i.e.,
education, police and fire protection, road repairs). Governments that
rely heavily on sales tax revenues would either have to cut back on
such services or increase other taxes on local businesses and
residents, such as property and income taxes. If governments decide to
increase sales tax rates to make up for lost revenues, lower-income
individuals would have to pay an even higher disproportionate share of
their income on sales taxes since they are less likely to own computers
and purchase products on-line.
It is this reason why many state and local governmental
organizations support a level playing field for all types of retail
sales. These government groups include the National Governors
Association, Council of State Governments, National Conference of State
Legislators, U.S. Conference of Mayors, National Association of
Counties, National League of Cities and International City and County
Management Association.
Our critics assert that electronic commerce is a new and growing
industry and, therefore, should not be saddled with ``old world'' sales
tax collection requirements. They say we should not kill the goose that
lays the golden egg. Our response is that, while electronic commerce is
a growing and important part of our economy, subjecting it to the same
sales tax collection requirements that traditional merchants have been
subject to for decades would not harm its growth or vitality.
Electronic commerce will continue to flourish, regardless of whether or
not sales and use taxes are imposed on it.
These critics also claim that forcing Internet retailers to collect
sales and use taxes for the thousands of state and local taxing
jurisdictions across the country would be too burdensome on electronic
commerce and just cannot be done. We agree that all businesses,
especially small businesses, should not be overburdened by sales tax
collection requirements and that state and local governments need to
simplify their sales tax systems. However, inexpensive software exists
today that can assist electronic retailers in determining how much
sales and use taxes needs to be collected on their out-of-state sales.
Another argument made by our opponents is that states and
localities are flush with cash and do not need to tax electronic
commerce. While it is true that most state and local governments are
currently enjoying budget surpluses, there is no guarantee that this
economic prosperity will last indefinitely. (In fact, Kentucky and
Tennessee are two states that are currently experiencing budget
deficits. Their Governors strongly believe that the collection of this
existing tax would be beneficial to their states' economies.) If and
when our economy softens, many state and local governments, as well as
traditional merchants, could suffer financial harm, especially if
electronic commerce continues to displace traditional sales tax bases.
ICSC is disappointed that the Advisory Commission on Electronic
Commerce failed to reach agreement that all retailers should be on a
level playing field with regard to state and local sales taxes. Even
more so, we are disappointed at the process of the Commission itself.
To begin with, even though a traditional local retailer was supposed to
be represented on the Commission, no such individual was appointed.
Second, the Commission sent a report to Congress that was agreed to
by only 10 out of 19 Commissioners, clearly short of the 13 votes that
was required under the Internet Tax Freedom Act. Third and most
importantly, the majority report fails to address the level playing
field issue.
Instead, it recommends (although not through an official
``finding'' or ``recommendation'') that Congress permanently extend the
moratorium on Internet access charges, extend for five years the
moratorium on multiple and discriminatory sales taxes, repeal the 3-
percent telecommunications excise tax, establish special ``nexus''
carve-outs for Internet businesses, and create sales tax exemptions
(such as those on ``digitized'' goods and their ``non-digitized''
counterparts) that would directly benefit the ``business caucus''
companies.
ICSC does not oppose the substance of the current moratorium (e.g.
its ban against access charges and discriminatory taxes). However, we
are deeply concerned that the longer the moratorium is extended, the
more difficult it will be for Congress to level the playing field among
retailers with regard to existing, non-discriminatory sales taxes.
The U.S. Supreme Court has recognized Congress' authority to enact
legislation that would allow state and local governments to require
out-of-state retailers to collect sales and use taxes. Therefore, we
urge Congress to enact legislation that would level the playing field
among Internet-based and traditional retailers.
Thank you for this opportunity to express our views on this very
important matter.
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