[Senate Hearing 106-1107]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 106-1107

  S. 2255, A BILL TO AMEND THE INTERNET TAX FREEDOM ACT TO EXTEND THE 
                 MORATORIUM THROUGH CALENDAR YEAR 2006

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 12, 2000

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation




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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                  Mark Buse, Republican Staff Director
            Martha P. Allbright, Republican General Counsel
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 12, 2000...................................     1
Statement of Senator Abraham.....................................     8
Statement of Senator Breaux......................................    11
Statement of Senator Bryan.......................................    13
Statement of Senator Burns.......................................    10
    Prepared statement...........................................    10
Statement of Senator Dorgan......................................     9
Statement of Senator Gorton......................................    31
Statement of Senator Hollings....................................     4
Statement of Senator Hutchison...................................    12
Statement of Senator McCain......................................     1
    Prepared statement...........................................     3
Statement of Senator Stevens.....................................     6
Statement of Senator Wyden.......................................     6
    Prepared statement...........................................     7

                               Witnesses

Berthoud, Dr. John, President, National Taxpayers Union..........    39
    Prepared statement...........................................    41
Bruce, Dr. Donald, Professor, Center for Business and Economic 
  Research, the University of Tennessee..........................    45
    Prepared statement...........................................    48
Bullington, David, Vice President of Taxes, Wal-Mart Corporation.    49
    Prepared statement...........................................    51
Cox, Hon. Christopher, U.S. Representative from California.......    14
    Prepared statement...........................................    16
Leahy, Hon. Patrick J., U.S. Senator from Vermont, prepared 
  statement......................................................    53
Leavitt, Hon. Michael, Governor of the State of Utah.............    17
    Prepared statement...........................................    20
Morse, Burr, President, Morse Farm Sugar Works...................    54
    Prepared statement...........................................    55
Ridge, Tom, Governor of Pennsylvania, letter dated April 12, 
  2000, to Hon. Trent Lott and Hon. J. Dennis Hastert............    45
Zittrain, Jonathan, Berkman Center Internet and Society, Harvard 
  Law School.....................................................    56
    Prepared statement with attachment...........................    58

                                Appendix

American Federation of State, County and Municipal Employees 
  (AFSCME), prepared statement...................................    90
Cleland, Hon. Max, U.S. Senator from Georgia, prepared statement.    83
Computing Technology Industry Association, prepared statement....    90
American Association of State Colleges and Universities, Curris, 
  Constantine W., President, and Travis Reindl, Policy Analyst, 
  letter dated April 7, 2000, to Hon. John McCain and Hon. Thomas 
  J. Bliley, Jr..................................................    93
Joint Prepared Statement of Lawrence A. Hunter, Chief Economist, 
  Empower America, and George A. Pieler, Adjunct Fellow, 
  Competitive Enterprise Institute...............................    93
International Council of Shopping Centers, prepared statement....    96
Response to written questions submitted by Hon. John McCain to:
    Burr Morse...................................................    83
    Jonathan Zittrain............................................    87
Response to written questions submitted by Hon. Max Cleland to:
    Dr. John Berthoud............................................    84
    Dr. Donald Bruce.............................................    85
    David Bullington.............................................    86
    Hon. Michael Leavitt.........................................    86
    Burr Morse...................................................    87
    Jonathan Zittrain............................................    88

 
  S. 2255, A BILL TO AMEND THE INTERNET TAX FREEDOM ACT TO EXTEND THE 
                 MORATORIUM THROUGH CALENDAR YEAR 2006

                              ----------                              


                       WEDNESDAY, APRIL 12, 2000

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 a.m. in room 
253 of the Russell Senate Office Building, Hon. John McCain, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. I am pleased to welcome all our witnesses 
this morning. We can expect diversity of views and opinions on 
one of the most important issues facing us this session: the 
future of the Internet and e-commerce transactions. I believe 
that we are at a critical juncture in determining the future 
regulatory scheme under which the new economy will either 
continue to grow and prosper or will be thwarted by government 
bureaucracy, taxation and shortsighted greed.
    Our founding fathers certainly did not have the Internet in 
mind but nevertheless understood the potential dangers and 
pitfalls of States taxing and regulating interstate commerce. 
That is why our constitution reserves the power to regulate 
commerce among the several States. The purpose of Federal power 
over interstate commerce is to ensure that one or more States 
do not unduly burden the transaction of interstate 
transactions. The Internet is the epitome of interstate 
commerce. If each state and local jurisdiction attempts to 
impose its own business regulations and taxes to it, the 
opportunities presented by this new economic engine will be 
destroyed. It is important to look at the full picture of our 
economy as assessing the impact of taxation on the Internet and 
e-commerce.
    The Internet is filled with websites of small businesses, 
businesses that are expanding in ways which would never before 
have been economically feasible. One of our witnesses today, 
Mr. Morse, will be able to give us a reality check as to how 
the Internet has afforded him an opportunity to compete with 
much larger companies. The Internet is the last frontier for 
the small business entrepreneur to develop a business and 
compete without massive amounts of investment capital. His or 
her small business, his small business, which has historically 
had a limited market for its goods, now has a website that 
allows him to market and sell to people all over the country, 
even all over the world. Mr. Morse, like other small business 
men and women, benefit from the freedom of the Internet and the 
country benefits from their success.
    When a small business increases its sales and revenues, it 
needs to hire more employees and it pays taxes on the increased 
revenues and the newly hired employees pay taxes on their 
wages. State and local governments benefit not only from the 
additional taxes paid on the revenues, but in the economic 
benefits of additional jobs and a growing economy. The 
potential burden of complying with tax regulations and the 
paperwork involved under current law for as many as 7,500 
estimated taxing units in this country would overwhelm many 
businesses, especially small businesses. The cost of complying 
with multiple States filing and regulatory requirements would 
in many instances exceed the amounts collected and transmitted.
    A multistate company currently files many tax returns. AT&T 
has informed the Committee staff that last year, it completed 
approximately 99,000 separate tax filings. Under current law, 
States can require businesses who have a nexus with the state 
to collect taxes, collect sales and use taxes. The moratorium 
does not disrupt this existing law nor would an extension of 
the moratorium. The Supreme Court has found that businesses, 
with a physical nexus to a state, have created a relationship 
with that state sufficient to submit themselves to the 
regulatory and taxing authority of that state. In essence, the 
business becomes a citizen of the state and its transactions 
with other citizens of that state are intrastate in nature. 
Thus there is no burden on interstate commerce.
    By contrast, the essence of what the tax and spend 
advocates who oppose this legislation demand is 50 state 
jurisdiction over every Internet business, large and small, 
regardless of any other connection to each state. They advocate 
that a Vermont businessman such as Mr. Morse collects sales 
taxes and comply with the tax regulations of every state and 
local jurisdiction in the country.
    Where does this expansive jurisdiction lead? Does such an 
expansive jurisdiction also result in potential liability in 
each state for noncompliance or miscompliance for state 
regulations? What about business licenses, occupational fees, 
occupational or retail licensing regulations, blue laws? How do 
we ensure that in the zeal to collect more money to permit even 
more expansive governments, we protect the privacy of the 
consumers? How does imposing more regulatory burdens affect 
competition in the marketplace? What impact does increasing the 
regulatory and tax burden on Internet commerce have on rural, 
handicapped and low-income consumers? How does it affect our 
trade opportunities with other countries?
    We need to consider whether the macroeconomic benefits of 
the new economy will outweigh the potential losses in direct 
revenues. We must ensure a level playing field for all venues 
of commerce, not simply create a new remote sales tax system. 
We must simplify the overwhelming morass of tax rules, 
regulations and paperwork so that opportunities for new or 
small businesses are not lost in complex and archaic 
bureaucracies. We need to re-examine the level of services 
which the public wants to be provided by government and 
determine how to provide necessary revenue to accomplish the 
people's will. We need to ensure that taxation is not simply 
imposed to increase government bureaucracy.
    I am looking forward to hearing from the witnesses on all 
of these issues. It is clear that these are complex issues 
which will require extensive investigation, analysis and 
debate. The commission established by the Internet Freedom Act 
did not reach consensus, nor did it resolve the multitude of 
issues presented by the new framework of interstate commerce 
which the Internet presents.
    I do not see how we can arrive at consensus on these 
critical issues between now and October of next year, which is 
why I proposed a 5-year simple extension of the current 
moratorium. Extension would not affect the current nexus rules. 
It would not affect the grandfather provisions. It is a simple 
extension of the status quo.
    It had been my intent to include S. 2255, the 5-year 
moratorium extension legislation, on the Committee markup 
tomorrow. The advocates of increasing the tax burden on the 
public have prevailed in having it removed from tomorrow's 
agenda so that they can look into this matter further. However, 
I want to emphasize this is critical legislation. It is in the 
best interests of our nation's economic prosperity to bring it 
to the full Senate. Therefore, I intend to include it in a 
future markup and ensure that the Senate is permitted to debate 
these issues fully.
    [The prepared statement of Senator McCain follows:]

   Prepared Statement of Hon. John McCain, U.S. Senator from Arizona

    I am pleased to welcome all of our witnesses this morning. We can 
expect a diversity of views and opinions on one of the most important 
issues facing us this session, the future of the Internet and e-
commerce transactions. I believe that we are at a critical juncture in 
determining the future regulatory scheme under which the new economy 
will either continue to grow and prosper, or will be thwarted by 
government bureaucracy, taxation and shortsighted greed.
    Our Founding Fathers certainly did not have the Internet in mind, 
but nevertheless understood the potential dangers and pitfalls of 
states taxing and regulating interstate commerce. That is why our 
Constitution reserves the ``power . . . to regulate Commerce among the 
several states.'' The purpose of federal power over interstate commerce 
is to ensure that one or more states do not unduly burden the 
transaction of interstate transactions. The Internet is the epitome of 
interstate commerce. If each state and local jurisdiction attempts to 
impose its own business regulations and taxes to it, the opportunities 
presented by this new economic engine will be destroyed.
    It is important to look at the full picture of our economy in 
assessing the impact of taxation on the Internet and e-commerce. The 
Internet is filled with web sites of small businesses, businesses that 
are expanding in ways which would never have before been economically 
feasible. One of our witnesses today, Mr. Morse, will be able to give 
us a reality check as to how the Internet has afforded him an 
opportunity to compete with much larger companies. The Internet is the 
last frontier for the small business entrepreneur to develop a business 
and compete without massive amounts of investment capital. His small 
business which has historically had a limited market for its goods now 
has a website that allows him to market and sell to people all over the 
country--even all over the world.
    Mr. Morse, like other small businessmen and women benefit from the 
freedom of the Internet, and the country benefits from their success. 
When a small business increases its sales and revenues, it needs to 
hire more employees, and it pays taxes on the increased revenues. And 
the newly hired employees pay taxes on their wages. The state and local 
governments benefit, not only from the additional taxes paid on the 
revenues, but in the economic benefits of additional jobs and a growing 
economy.
    The potential burden of complying with tax regulations and the 
paperwork involved under current law for as many as 7,500 estimated 
taxing units in this country would overwhelm many businesses, 
especially small businesses. The cost of complying with multiple 
states' filing and regulatory requirements would in many instances 
exceed the amounts collected and transmitted. A multi-state company 
currently files many tax returns. AT&T has informed the Committee staff 
that last year it completed approximately 99,000 separate tax filings.
    Under current law, a state can require businesses who have a nexus 
with the state to collect sales and use taxes. The moratorium does not 
disrupt this existing law, nor would an extension of the moratorium. 
The Supreme Court has found that businesses with a physical nexus to a 
state have created a relationship with that state sufficient to submit 
themselves to the regulatory and taxing authority of that state. In 
essence, the business becomes a ``citizen'' of the state, and its 
transactions with other citizens of that state are intrastate in 
nature, thus there is no burden on interstate commerce.
    By contrast, the essence of what the tax and spend advocates who 
oppose this legislation demand is 50 state jurisdiction over every 
Internet business--large and small--regardless of any other connection 
to each state. They advocate that a Vermont business man such as Mr. 
Morse collect sales taxes and comply with the tax regulations of every 
state and local jurisdiction in the country. Where does this expansive 
jurisdiction lead?
    Does such an expansive jurisdiction also result in potential 
liability in each state for non-compliance or mis-compliance with state 
regulations? What about business licenses, occupational fees, 
occupational or retail licensing regulations, ``blue laws''?
    How do we ensure that, in the zeal to collect more money to permit 
even more expansive governments, we protect the privacy of the 
consumers? How does imposing more regulatory burdens affect competition 
in the marketplace? What impact does increasing the regulatory and tax 
burden on Internet commerce have on rural, handicapped and low income 
consumers? How does it affect our trade opportunities with other 
countries?
    We need to consider whether the macroeconomic benefits of the new 
economy will outweigh the potential losses in direct revenues. We must 
ensure a level playing field for all venues of commerce, not simply 
create a new remote sales tax system. We must simplify the overwhelming 
morass of tax rules, regulations and paperwork so that opportunities 
for new or small businesses are not lost in complex and archaic 
bureaucracy.
    We need to reexamine the level of services which the public wants 
to be provided by government and determine how to provide necessary 
revenue to accomplish the people's will. We need to ensure that 
taxation is not simply imposed to increase government bureaucracy.
    I am looking forward to hearing from the witnesses on all of these 
issues. It is clear that these are complex issues which will require 
extensive investigation, analysis and debate. The Commission 
established by the Internet Freedom Act did not reach consensus, nor 
did it resolve the multitude of issues presented by the new framework 
of interstate commerce which the Internet presents. I do not see how we 
can arrive at consensus on these critical issues between now and 
October of next year, which is why I have proposed a five-year simple 
extension of the current moratorium. The extension would not affect the 
current nexus rules. It would not affect the grandfather provisions. It 
is a simple extension of the status quo.
    It had been my intent to include S. 2255, the five-year moratorium 
extension legislation on the Committee mark-up tomorrow. The advocates 
of increasing the tax burden on the public have prevailed in having it 
removed from tomorrow's agenda so that they can look into this matter 
further. However, I want to emphasize, this is critical legislation, it 
is in the best interest of our nation's economic prosperity to bring it 
to the full Senate. Therefore, I intend to include it in a future mark-
up, and ensure that the Senate is permitted to debate these issues 
fully.

    Senator Hollings.

             STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Senator Hollings. Mr. Chairman, the problem is not 
increasing the tax burden, the problem is decreasing the tax 
burden at the local level. Everyone would agree we shouldn't 
tax access to the Internet, and I do not know of anybody who 
has suggested taxing access to the Internet. What has really 
occurred is a pell-mell rush to identify the technology. 
Everyone is running around saying ``oh, I have done 
something.'' One individual, of course, said he invented the 
Internet. Others are hastening to try to identify with the 
technology, saying they are against or for a moratorium. We got 
to save the Internet, acting like the Internet is some sick 
chicken or needs Viagra, heck, we have a runaway animal here. 
You do not have to worry about saving the Internet. Even the 
Chinese are trying to block it, and cannot do it. So let us not 
get onto this bit about increasing the tax.
    The problem is decreasing the tax. I had the privilege of 
working with Charles Conlin of the Federation of Tax 
Administrators in Chicago back in 1949 and 1950 when we wrote 
the sales tax. It was a sales and use tax. Incidentally, we 
more or less used the California and Ohio laws, and they have 
never been disturbed. We never really attempted to repeal it in 
the conservative legislature of South Carolina, or set it aside 
at the court level.
    It says use. All the States, except two or three, have the 
use tax so that if I buy a jacket from L.L. Bean in Freeport, 
Maine, by telephone, by letter, or by Internet, I am subject to 
the use tax because it is bought in Maine for use in South 
Carolina.
    The problem, of course, has been over the years that the 
bureaucracy entailed in trying to collect that use tax far 
exceeded any kind of benefit, so no one has bothered to really 
collect. On the other hand, with the volume of Internet sales 
everybody will buy their car on the Internet. That fellow 
Heisinger, he is running around putting these agencies 
everywhere. You are going to put every automobile dealer in 
your state and community out of business because they are just 
programmed. These big companies, General Motors, Ford, they 
will put the cars, about 30 of them at the most, which is 
better than 130 because they require those dealers to program 
some 130. They just look at what you want and the dealer itself 
will order it on the Internet and it will be delivered the next 
day. And you would save 500, 600 dollars on a car, plus the 
added less expense of actually programming all the automobiles 
out on the lot. It is a trauma to local business and to the 
local revenue system.
    I had introduced a bill along that line that says look, we 
used to have what we call revenue sharing in February of 1967. 
We had it, and it worked extremely well up until when we 
senators were understanding we were financing everybody at the 
local level to run against us. We said wait a minute, we are 
giving them all the money and they are taking it and they are 
running against us at the local level. So with Howard Baker, 
myself and others, we just eliminated the revenue sharing. But 
with that approach, we ought really to just give a service to 
the States. We could waive the Interstate Commerce Clause, put 
in a 5 percent tax for the 50 States, and send it back to the 
States and let them fuss about how they are going to divide it 
up. We do not have to charge the States anything, but we can 
lessen the impact of this new technology at the local level.
    That is the real problem. The real problem is not a 
moratorium. You cannot tax the Internet. Nobody wants to tax 
access to the Internet. But it is a problem at the local level 
of trying to maintain what is left of Main Street. Wal-Mart is 
going to close down half of it and this will close down the 
other half. So what we need to do is look at what Senator 
Dorgan and others have been working on. They know the tax 
system. Let us provide a service for the States and get on with 
the problem and quit mounting these strawmen like somebody 
trying to ruin the Internet or interfere with the technology. 
You have no chance of doing it. Thank you very much, Mr. 
Chairman.
    Senator McCain. Senator Stevens.

                STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Senator Stevens. I do not have a prepared statement. I just 
want to endorse your statement, Mr. Chairman. I support this 
bill.
    Senator McCain. Thank you.
    Senator Wyden.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, Mr. Chairman. I think Senator 
Hollings has identified the key issues, with the question of 
the impact of technology on local revenue. I would just like to 
begin by offering up a few facts about what we have seen with 
respect to the impact on local government since the Internet 
Tax Freedom bill was passed. In fact, I guess the New York 
Times summed it up this week when they said in a headline on 
page one, ``A Resurgent Michigan Leads Newly Flush States.'' 
The fact of the matter is that local revenue is way up since 
the Internet Tax Freedom bill was passed, and in States where 
Internet usage is highest, local revenues are up the most.
    For example, California sales tax collections were up 20 
percent over 1998. The traditional bricks and mortar retailers 
had one of their best holiday seasons. They had a nearly 8 
percent jump in sales over the previous year. The States and 
localities ended fiscal 1999 with a 35 billion dollar surplus. 
So this notion that technology is somehow devastating local 
revenues just is not borne out by the facts. The record clearly 
shows otherwise.
    Now, the problems that States and localities are having 
with respect to collecting these sales and use taxes have 
nothing to do with the Internet. I am pleased that our co-
author, Congressman Cox, is here today. He and I have pointed 
out, as the Chairman has repeatedly, that there is nothing in 
the Internet Tax Freedom bill that prevents a state from going 
out right now and putting in place a better and more cost-
effective system of collecting sales and use taxes.
    But the States, as we have heard, will not do it because 
they do not want the political heat. Governor Cellucci of 
Massachusetts put it very well when he recently came to the 
Hill and said, I cannot station a bunch of policemen on the 
Massachusetts border to run down folks coming over from New 
Hampshire and try and stick them with taxes.
    So what we now have is a situation like that in which some 
of those opposed us so vehemently in 1997. I have gone back and 
looked at the record. It is an incredible record. The League of 
Cities, National Association of Counties and others said, and I 
quote, ``that our moratorium would cause a virtual collapse in 
the state and local revenue base.'' They said, and I quote, 
``one of the gravest concerns of this new electronic era will 
be the almost complete erosion or potential implosion in the 
sales tax.''
    So all these folks who were proven wrong in the years since 
the Internet Tax Freedom Act are now saying that what the 
Congress ought to do is let local jurisdictions go out and 
impose a new tax on a merchant 2500 miles away from that 
jurisdiction who has no connection with the jurisdiction other 
than a website, and that new tax ought to be imposed without a 
vote of the U.S. Congress. That is really what is at issue 
here. The Internet Tax Freedom bill is about technological 
neutrality. It says that you can do anything you want on the 
Internet, as long as you do unto the offline world what you do 
to the online world.
    I am anxious to work with these mayors and Governors and 
others who opposed us in 1997 and that oppose us now as we try 
to extend the moratorium. I think at some point, those who keep 
predicting these parades of horribles as a result of technology 
in our legislation have some obligation to offer a factual 
foundation for their position. I really urge my colleagues to 
look at the transcript, because it is extraordinary in terms of 
what they predicted.
    What we have seen is just the opposite, record setting 
revenues in places where Internet usage is highest, and now 
these folks would like to go out and impose these new taxes 
without even a vote of the U.S. Congress. This is an important 
hearing, Mr. Chairman. I have talked with Senator Dorgan and 
others. I am anxious to try to find some common ground so we 
can move rapidly to a markup. We ought to extend at a minimum 
the ban on discriminatory Internet taxes. In fact, so that 
there would be clarity this time, Congressman Cox and I, in 
introducing our legislation, have renamed the bill. It is 
called the Internet Non-Discrimination Act so as to make it 
clear.
    Senator McCain. That is a much better name.
    Senator Wyden. I hope. I hope. And I look forward to our 
testimony, and I have a full statement that I would just ask it 
be part of the record, Mr. Chairman.
    [The prepared statement of Senator Wyden follows:]

     Prepared Statement of Hon. Ron Wyden, U.S. Senator from Oregon

    Three years ago, when Congressman Chris Cox and I introduced the 
Internet Tax Freedom Act (ITFA), we said you can't squeeze the new 
economy into a set of rules written for the smokestack industry.
    Three years ago, opponents of our bill predicted retailers were 
going to vanish from Main Street. The National Governors Association 
predicted our bill would ``have severe consequences on state and local 
economies'' (Oct. '97), the National League of Cities, the National 
Association of Counties and the U.S. Conference of Mayors warned the 
moratorium on Internet taxes ``would cause a virtual collapse in the 
state and local revenue base.'' The National League of Cities said 
``one of the gravest concerns of this new electronic era will be the 
almost complete erosion or potential implosion of the sales tax.''
    The Denver Post editorialized on November 16, 1997 that the 
Internet Tax Freedom Act would ``make states and cities wave goodbye to 
their tax revenues,'' and that ``services citizens expect of local 
government will decline drastically.'' ``Democracy and federalism as 
America knows them could be zapped from the screen of history.''
    A front page story in this past Monday's New York Times paints a 
very different picture: ``A Resurgent Michigan Leads Newly Flush 
States.'' The article begins: ``Lawmakers here and in many other 
states, now in the throes of writing their budgets for the 2001 fiscal 
year, are witnessing the biggest of six consecutive years of rising 
revenues, inspiring inventive new ways to spend money and wave upon 
wave of tax reductions.'' It goes on to point out that ``New York, 
California, Texas, Maryland, Minnesota, Indiana, Washington, 
Pennsylvania and Michigan have been amassing annual surpluses exceeding 
$1 billion.''
    In the 18 months since enactment of the ITFA:

   States and localities have continued to collect sales and 
        use taxes, and state budgets ended fiscal 1999 with a $35 
        billion surplus;

   Traditional bricks and mortar retailers had one of their 
        best holiday seasons, recording a nearly 8% jump in sales over 
        the previous year;

   In states where Internet usage is highest, revenues are up 
        the most;

   California's sales tax collections were up 20% over 1998; 
        and

   ABC News reported that 74% of Main Street merchants now also 
        do business online. Bricks and mortar have become clicks and 
        mortar.

    The Internet Non-Discrimination Act (INDA) that Rep. Cox and I 
introduced earlier this year is about one principle: you cannot stick 
it to the new economy. The Internet Non-Discrimination Act is about 
fairness and balance. The bill would continue current law that bans 
discriminatory taxes on e-commerce. No business gets any more favorable 
tax treatment by selling online, and no business gets any less 
favorable treatment by selling online.
    I believe that a permanent ban on discriminatory taxes on the 
Internet is the way to go. I am willing to let the states and 
localities try their hand at developing a simplified sales and use tax 
system that doesn't stick it to the Internet. But the Supreme Court set 
the bar high in the Quill decision. The states have a lot of work to do 
to make sure any new sales tax collection obligation they want to 
impose on remote vendors can satisfy the undue burden test. If the 
state simplification plan passes the undue burden test, it will not 
have any problem passing the nondiscrimination test.

    Senator McCain. Thank you very much, Senator Wyden. Thank 
you for your informed and very passionate effort on this very 
important issue.
    Senator Abraham.

              STATEMENT OF HON. SPENCER ABRAHAM, 
                   U.S. SENATOR FROM MICHIGAN

    Senator Abraham. Senator McCain, I will be brief. As you 
know, I am a cosponsor of your legislation. I would just make 
the observation today that I made a couple of weeks ago in the 
Budget Committee when we heard from several Governors and 
others talking about this issue. And that is that, I believe, 
that the ability today to predict the tax system of five or 10 
years from now is very minimal.
    I believe that the changes in behavior with respect to the 
way people live their lives, buy things for their home, 
purchase goods and services, run their companies, and so on, 
will be so dramatically affected by the high technology 
information age transition that we are going through that what 
we are debating today will, I predict, in five or 10 years seem 
to be a relatively innocent and somewhat perhaps even amusing 
debate in retrospect.
    I think that the Internet and the changes that technology 
and the information age bring to human behavior will force tax 
reform in ways that think tanks, that political candidates, all 
of us combined in fact have been unable to accomplish because 
of the changes that will happen in society. I question, for 
example, as we, as the introduction of broad-band and high-
speed Internet access becomes universal, how many companies 
will continue to build skyscrapers to house their employees 
under one roof. I believe we will see dramatic changes in the 
number of people who in fact work out of their homes.
    I think we will see changes in a variety of other ways that 
affect commercial transactions and as we pass legislation such 
as our e-signatures bill, we will see changes brought about by 
that as well and so while I do support the legislation, I just 
would say that I suspect we will be having many more hearings 
to address the issues of changes that technology brings about 
with respect to taxation and other various areas of government 
activity. I look forward to it. I think it is very exciting and 
I am sure under your leadership, we will continue to be on the 
cutting edge of these issues. Thank you.
    Senator McCain. Thank you very much.
    Senator Dorgan.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much. I 
support the moratorium, supported the legislation that called 
for it; although I must say to my colleagues that had we passed 
the legislation as originally written and introduced, we 
wouldn't have had much of a tax base in local governments for 
consumption taxes, but it was changed dramatically. I support 
it. I would support its extension as well. But I think its 
extension needs to be accompanied by a series of 
considerations.
    This explosion of information technology and the Internet 
is exciting, dynamic and wonderful for our economy, and I agree 
that we should not have a tax system that would impose burdens 
upon it or injure it or injure the growth of this new exciting 
part of our economy. Having said that, we have a series of 
questions we need to answer. There are some principles here 
that are important.
    One: despite all of the rhetoric, there is no new tax being 
discussed by anyone, no new tax. On these transactions, there 
is a use tax that a consumer has a responsibility to report to 
the state in which the consumption occurred. Of course, that 
use tax is seldom ever paid. It is far too complicated to have 
tens and tens of millions of Americans filing use tax returns, 
so the sales tax is generally the complementary piece of that 
and the tax is collected upstream rather than downstream.
    Now, my colleague seems to suggest the States just do not 
have the wherewithal or the will to go out and collect this. 
That would suggest that he is proposing an army of more 
government agents and inspectors. I mean, I want less 
government, not more government. If you really want a use tax 
collected from tens and tens of millions of people through some 
regime, then you are talking about more government, more 
complexity. I am talking about less government and simplicity.
    A tax exists on these transactions. The question is: How 
will it be collected? I think it is in our interest to find a 
simplified method, a very simplified method, simple for those 
who are Internet sellers. I think every state ought to be 
required to have one blended rate, only one, and a tax system, 
a tax base that is common, one rate, a common base. That is 
simplification.
    Second: I think you have to be concerned about preserving a 
local tax base. Our schools are predominantly funded by the 
local tax base, especially the consumption tax. I think you 
have to be concerned about that in the long run. And third, I 
think there is a significant issue with respect to fairness to 
Main Street merchants with respect to the obligation of a tax 
on a transaction so, you know, all of these things need to be 
part of the balanced approach that we take.
    Again, I support Senator McCain in extension of the 
moratorium. The moratorium on discriminatory taxes makes 
eminent good sense. I support prohibition on taxes on access, 
but I do think there needs to be more considered with respect 
to the other items I have just discussed. I want to end by 
saying that no one is talking about a new tax. No one.
    There is no new tax involved. There is a consumption tax in 
this country that has complementary sales and use taxes. When a 
sales tax does not apply, a use tax does, but to suggest 
somehow to find a way to simplify the collection of a use tax 
as representing a new tax burden on the American people is just 
wrong. It is just not accurate. I hope that we can work 
together and find a way to resolve this issue and do it as we 
did a year and a half ago with respect to the bill we passed in 
the Senate.
    If I might make one additional short comment. We put 
together a Commision in that piece of legislation, and in my 
judgment the Commision has failed. I understand that even 
though we provided that they would not make recommendations 
without a two-thirds recommendation on the Commision, I think 
this Commision largely has not achieved the goals that we would 
have liked.
    Perhaps we need to find some other way of doing that. Thank 
you, Mr. Chairman.
    Senator McCain. Senator Burns.

                STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. Thank you, Mr. Chairman, and thank you for 
elevating this hearing to a full Committee. I think it warrants 
full Committee. I am going to offer my statement for the record 
and add my name as a cosponsor. I think what we have done so 
far has worked very well and I think we ought to continue this, 
and I am looking forward to hearing from the witnesses.
    Senator McCain. Thank you. Your statement will be made part 
of the record without objection.
    [The prepared statement of Senator Burns follows:]

   Prepared Statement of Hon. Conrad Burns, U.S. Senator from Montana

    Thank you, Mr. Chairman.
    I commend the Chairman for holding today's hearing, as it concerns 
a topic of great importance to the future development of the Internet--
how to make sure that our nation's tax policy keeps pace with rapid 
technological change.
    The ``Internet Tax Freedom Act'' recognized that uniformity and 
common sense must be brought to taxation policy on the Internet. The 
Act placed a three-year moratorium on state and local taxes that 
discriminate against online transactions. I strongly supported this 
bill and welcomed its passage by the Senate in October of 1998.
    In the short period since the Act's passage, we have seen a 
continuation of the explosive growth in electronic commerce. Companies 
ranging from garage startups to multinational corporations are bringing 
their goods and services into the electronic realm at an ever-
escalating rate. In my home state of Montana, companies such as 
Vanns.com and healthdirectory.com are taking advantage of the virtual 
markets provided by the Internet.
    The Internet does not depend on physical geography or even the sale 
of physical goods. The virtual transactions that take place on the 
Internet may span hundreds or even thousands of individual taxing 
jurisdictions. Those states and cities that have decided that Internet 
commerce is subject to local sales taxes, even though the transaction 
occurs in cyberspace, created a paperwork nightmare for small 
businesses.
    After witnessing the further growth of the Internet and electronic 
commerce, I am more convinced than ever of the folly of imposing a 
devastating patchwork of taxes on Internet transactions. I agree with 
the recommendation of the Advisory Commission on Electronic Commerce 
that we should extend the moratorium. Mr. Chairman, I would like to add 
my name as a co-sponsor to S. 2255, which will keep the Internet a 
``tax-free'' zone and help foster the continuing growth of electronic 
commerce.
    Both consumers and businesses will benefit from a reasoned Internet 
tax policy. Growth will create more revenue and an expanding tax base 
for the future. The empowering aspects of the Internet for small 
business--low barriers to entry and an immediate global reach--must not 
be allowed to be harmed by a heavy-handed government approach to 
Internet taxation.
    Extending the moratorium on discriminatory taxes on Internet 
transactions will help to ensure that the nearly limitless potential of 
electronic commerce is realized.
    Thank you, Mr. Chairman.

    Senator McCain. Senator Breaux.

               STATEMENT OF HON. JOHN B. BREAUX, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Breaux. Thank you very much, Mr. Chairman. Also 
thanks for having the hearing at the full Committee level. I 
think it is important enough. Let me just obviously make my 
position very clear from the outset. I think that Congress 
should give the States the authority to require the collection 
of a sales tax by businesses who sell products into a 
particular state over the Internet or any other means that they 
see fit to do so.
    I think that there is something patently wrong with a 
situation that allows a person to walk downtown to Main Street 
and buy a pair of shoes and pay the locally imposed sales tax 
on that transaction which in most cases, as Senator Dorgan has 
said, goes to run the police protection, the fire protection, 
and the schools within that local community. Yet somehow if 
that person buys the same pair of shoes ordering it out of 
state or with the Internet, they somehow escape the legal 
liability of having the sales tax collected by the seller of 
the merchandise. It does not make any sense, and I think it is 
wrong. Congress should act in this area.
    I congratulate Mike Leavitt and others who served on the 
Commision. Having some experience with being on a Commision 
that requires a super, supermajority, I know how difficult that 
happens to be, if not impossible to ever accomplish. The work 
that they did was very helpful and shows that there is a real 
interest in solving this problem. I would suggest that it is 
not a question of whether sales taxes increased at the local 
level last year. It is a question of what they are going to do 
in 5 years or 10 years or 20 years.
    Of course, with a booming economy, sales taxes were up in 
most States. Mine was an exception and as more and more people 
look at this as a loophole to escape paying local sales taxes, 
in 5, 15, 20 years you are going to see a system that does 
wreak real hardships on local communities because of Congress' 
failure to act to allow the imposition of what the local 
communities have already legally decided was appropriate sales 
tax.
    As far as the connection, I mean, it seems to me that the 
only connection that the companies have outside of a particular 
state is a pipeline directly into the States sucking money out 
of local communities. They certainly have the right to sell 
their merchandise. They have a huge advantage because they are 
not located there. They do not hire people. They do not pay 
property taxes. They do not own buildings. Most times they do 
not contribute to local charities or become involved in local 
activities. They have a huge advantage selling in a local 
community.
    Why say that we are going to carve out a special exemption 
and allow them to get away with not having to pay the local 
sales tax that the local people in that community say is 
appropriate and proper and is imposed upon themselves for 
important functions like schools and police protection and fire 
protection. Congress should act on this. I think a 2-year 
moratorium was appropriate. We should figure out a universal 
state sales tax so that one tax could be collected and 
submitted to the state and the state would distribute it to the 
local communities based on what is appropriate under the state 
rules and laws. Thank you.
    Senator McCain. Senator Hutchison.

            STATEMENT OF HON. KAY BAILEY HUTCHISON, 
                    U.S. SENATOR FROM TEXAS

    Senator Hutchison. Thank you, Mr. Chairman. I appreciate 
your holding this hearing. Certainly I think the Commision that 
was put together has looked at this issue very carefully, but 
it is a crucial issue for a state like mine that does not have 
a state income tax. I spilled some of my own blood in my state 
to avoid having a state income tax. And if we allow this 
inequity to continue to occur, I can see that we are not going 
to have the sales tax base that will support our state, and I 
can see a drumbeat beginning for a state income tax, which I 
would fight to the death. So I hope that we can take a 
responsible step. I am not sure that I agree with my colleague 
from Louisiana that collecting sales taxes at the federal level 
is the answer. I had hoped this Commision would bring forward a 
fair plan.
    Senator Breaux. Would the gentlewoman yield on that point?
    Senator McCain. The Senator from Louisiana is not 
recognized.
    Senator Breaux. She has the time. If she wants to yield, 
she can yield.
    Senator McCain. No, she does not. She is making an opening 
statement. I have ruled the Senator from Louisiana out of 
order. That is the ruling of the chair. Please complete your 
opening statement so that we can go forward with the witnesses.
    Senator Breaux. She can't yield on her time?
    Senator McCain. Time is for opening statements, I say to 
the Senator from Louisiana. I thank the Senator from Louisiana 
for his courtesy.
    Senator Hutchison. Let me say that perhaps I should not 
have mentioned a disagreement. We will have time to debate at 
another time, but I do believe that it is important for us to 
find the right answer. At the very least, we should not treat 
retail sales differently on the Internet than they are from 
catalogues, and States have been able to pass laws that would 
require the collection of a sales tax from a consumer in a 
state if there is a catalogue purchase. I think we have got to 
look at this issue very carefully. I do not think we should tax 
the Internet itself, but I think the issue of a level playing 
field where a retailer pays taxes and supports the community, 
and should not have an unfair competitive disadvantage because 
you can buy something without paying a sales tax on a retail 
purchase from an Internet company.
    So I think we have a very tough issue here, but we also 
need to realize that we have certain services that are done at 
the state and local level that are supported by retailers who 
invest in the community and by consumers who pay a sales tax so 
thank you, Mr. Chairman. I appreciate having this hearing. I 
hope we can do something responsible that does keep a level 
playing field for all of the businesses in our country.
    Senator McCain. Senator Bryan.

              STATEMENT OF HON. RICHARD H. BRYAN, 
                    U.S. SENATOR FROM NEVADA

    Senator Bryan. Thank you very much, Mr. Chairman. In the 
interest of time let me say that I associate myself with some 
of the observations made by our distinguished colleague from 
Texas. I think the growth of the Internet has been a very 
positive thing for us in this country. I think it has helped to 
spawn a technology explosion that will put us well ahead of our 
competitors in the 21st century. Having said that as a former 
Governor, I am concerned about what the implications are for 
tax bases in state and local governments who are heavily 
dependent upon sales tax collections.
    In my own state, one third of the revenue derived offered 
all the essential services of government, primarily education, 
in the state are dependent upon the sales tax, so I think we do 
have to look in terms of how we treat this issue in no way to 
penalize or to limit the opportunities for expansion, but to 
deal with the very legitimate concerns that state governments 
have.
    Second thing I have is this inherent sense that there ought 
to be some equity and fairness. I mean, for many communities in 
my own state, and I am sure for that of my colleagues as well, 
local businessmen and women in Main Street America really form 
the hub and base of so much of what we do, whether it is the 
support of the little league or the Boy Scouts, the Girl 
Scouts, the Camp Fire Girls are done as a result of the 
involvement civically by those individuals who are active in 
the business community.
    It seems to me that they are entitled in any kind of system 
to be treated fairly and equally, and so I think there is an 
equity issue as well, and I hope we might be able to address 
those two issues. And again, I thank the chair for convening 
this very timely and important hearing.
    Senator McCain. I thank you very much. I would ask the 
Honorable Christopher Cox of the U.S. House of Representatives 
and the Honorable Mike Leavitt to come forward. Congressman 
Cox, would you make your statement, followed by Governor 
Leavitt. Welcome to both of you before the Committee.

              STATEMENT OF HON. CHRISTOPHER COX, 
              U.S. REPRESENTATIVE FROM CALIFORNIA

    Mr. Cox. Thank you very much, Mr. Chairman, and members of 
the Committee. Thank you for inviting me to testify this 
morning as a co-author of the Cox-Wyden legislation, more 
popularly known as the Internet Tax Freedom Act, and I 
certainly appreciate the opportunity to join my co-author. It 
was this Committee, your Committee, Mr. Chairman, that held the 
first-ever hearing on the issue of Internet taxation.
    I am also joined this morning at the witness table by the 
distinguished Governor of Utah, Governor Mike Leavitt, who 
served on the Internet Tax Commission created by the Internet 
Tax Freedom Act, and it was with Governor Leavitt that I spent 
many, many long hours a few years ago writing the legislation 
that created not only the Commision, but also the existing 
moratorium. We brought together very different points of view 
from the state governments, from local governments, from many 
municipalities all over the country, and we agreed on one very, 
very important principle, and that is that the Internet should 
not be singled out for special taxation, for multiple taxation 
or for discriminatory taxation.
    It is important to get straight what the Internet Tax 
Freedom Act is and therefore what your bill, Senator McCain, 
which is co-authored by Senators Wyden, Abraham and Leahy, does 
when it extends that existing moratorium. Just 3 years ago, our 
purpose was to prevent tyranny of the parochial over the 
Internet, which is not just national in scope but global. There 
were already afoot a few years ago incipient efforts by some 
30,000 potential taxing jurisdictions in this country alone to 
lay claim to a piece of the Net. There were news articles that 
talked to us about efforts by state and local governments to 
shake down the Net. People viewed this as a great cash cow that 
could be exploited, and perhaps exploited without notice.
    Internet access services were a big target. This was long 
before politicians grabbed the issue of the digital divide as 
something that they wanted to prevent; rather, governments were 
talking about actually taxing Internet access. Multiple 
taxation was a big concern. That is because the Internet's very 
design, its packet-switched architecture made it especially 
vulnerable to taxation by multiple jurisdictions. And 
discriminatory taxation was also a real threat.
    Just a few years ago, many academics, governments in 
Europe, and even the United Nations were talking, for example, 
about a bit tax, something specially designed to prey upon 
electronic commerce. It would have taxed every single bit, 
every zero and one of digital information in cyberspace--
literally an information tax. The Internet Tax Freedom Act, 
which you are talking about extending here today, stopped such 
multiple discriminatory and technologically targeted taxation. 
That is exactly what it did.
    It ensured that the Internet is not caught up in this 
tyranny, the parochial and 30,000 taxing jurisdictions.
    What it did not do is protect Internet transactions from 
sales tax. That is an important issue that many people on this 
Committee that Governor Leavitt, many people across the country 
wished to discuss. That is not what this legislation is about. 
This legislation is about protecting the Internet from 
discriminatory taxation. The two are very, very different. The 
Internet Tax Freedom Act does not create a preference for 
electronic commerce over bricks and mortar. The existing tax 
moratorium that this Committee helped write does not even 
mention sales taxes.
    It stops multiple and discriminatory taxes on products 
ordered over the Internet, but it does not bar taxation of 
Internet commerce by state and local government. So whatever 
disagreements there might be on other aspects of this question, 
on sales tax, for example, on nexus, on physical presence, on 
the Supreme Court's decisions, there ought to be as a starting 
point agreement on this principle of Internet 
nondiscrimination.
    As we all know, the version of the Internet Tax Freedom Act 
that became law lasts only 3 years. That is why this 
legislation is important. The temporary nature of the 
moratorium was something that many of us thought was an 
important compromise because it would give us a chance to see 
what happened, and as Senator Wyden pointed out in his opening 
statements, there were concerns that we were going to sail off 
the edge of the earth, that everything would fall apart, that 
there would be a big falloff in revenues. That did not happen. 
As we meet here today, not only is it true, as Senator Breaux 
said, that of course the economy is doing well and tax 
collections are up, but I think most economists are willing to 
tell us that the reason we are enjoying this prosperity is the 
new economy.
    We have it to thank for the Federal Government, for state 
governments and for local governments being awash in new tax 
revenues so far from the cataclysm in tax collections that was 
predicted by preventing discrimination against the Internet, 
and that is what this Committee did. We have protected and 
promoted the collection of taxes by state and local governments 
and by the Federal Government.
    Brick and mortar sales are not down. They are up. And they 
are way up. The International Council of Shopping Centers 
reports that 1999 holiday sales the most recent holiday season 
were up 8 percent. Now, 8 percent growth in a mature industry 
that is enormously bigger than e-commerce is quite spectacular. 
The Internet has helped traditional retailers expand beyond 
Main Street to sell to new markets. Tax collections by state 
and local governments in part and consequence of this explosion 
in traditional commerce are also way up.
    In my state of California, sales tax collections 1999 
versus 1998 are up 11 percent, and for the fourth quarter they 
are up 20 percent. The growth in Internet commerce and taxable 
sales has fattened state budgets, which ended fiscal 1999 with 
a combined 35 billion dollars in state surpluses, and the 
Federal Government is a big beneficiary of this as well, even 
though we collect no sales taxes. Total Federal tax collections 
as a result of the economic growth spurred by this new economy 
were up 118 billion dollars in 1999 over 1998.
    So I think the facts are in. We have learned from this 
moratorium. The results are conclusive. The new economy is 
generating tremendous new revenue. The current tax policy is 
working, and it ought to be extended. It is working not only 
for States, not only for the Federal Government, but for 
counties and for cities whose power to tax has been protected 
by this legislation, but the national interest at the same time 
has also been protected and the global interest in this new 
medium exchange has also been protected.
    I would like to conclude with a brief anecdote, if I might. 
About a century-and-a-half ago Michael Faraday became world 
renowned for his invention of the first electric motor, the 
Dynamo. He did this by rotating a current-bearing wire around a 
magnet. His invention came to the attention of King William IV, 
and he got an audience with the King, and Faraday described and 
demonstrated his invention, upon which the King said to him, 
``This is interesting, but of what use is it?'' And Faraday 
replied, ``Only time will tell; but of this I am certain: some 
day, sir, you will tax it.'' We are here today to discuss new 
ways to tax Faraday's invention.
    I hope that this Committee will be wise in exercising that 
responsibility because the art of taxation has been compared 
wisely, I think, to plucking a goose. The object is to get the 
most amount of feathers with the least amount of squawking. If 
we want to protect this extraordinary expansion in federal and 
state and local revenues that we are experiencing, we would be 
wise to tread lightly in this area. I want to thank the 
Committee for your patience and your interest and your 
attention to this issue.
    [The prepared statement of Mr. Cox follows:]

              Prepared Statement of Hon. Christopher Cox, 
                  U.S. Representative from California

    Thank you for allowing me to testify this morning on our common 
interest in protecting the digital economy--and the tax revenues it 
generates for federal, state, and local government budgets--from 
special taxation.
    I'm here today to deliver my strong support for S. 2255, the 
legislation introduced by Chairman McCain, and sponsored by Senators 
Ron Wyden, Spence Abraham, and Pat Leahy to extend the moratorium on 
new, multiple, and discriminatory Internet taxes.
    In the House, we hope to bring similar legislation to the floor of 
the House before Memorial Day.
    I'm pleased to be back before the Commerce Committee, which three 
years ago held the first-ever Congressional hearing on the issue of 
Internet taxation. At the time, our purpose was to nip in the bud the 
incipient efforts of some 30,000 taxing jurisdictions to lay claim to a 
piece of the Internet. Back then, this was a very real threat. News 
magazines warned that tax collectors around the country were looking to 
``shake down the Net.''

   Internet access services were a big target for taxes, as 
        more and more Americans were connecting to the Internet.

   Multiple taxation was a big concern, given that the 
        Internet's very design--its decentralized nature--makes 
        Internet transmissions vulnerable to taxation by different 
        jurisdictions.

   Discriminatory taxation was a real threat, too, as a number 
        of academics were promoting the ``bit tax,'' a tax system 
        designed to burden only electronic commerce.

    The Internet Tax Freedom Act stopped these special types of taxes, 
and ensured that the Internet would not be caught up in an inconsistent 
patchwork of taxes by the United States' 30,000 taxing jurisdictions.
    The final tax moratorium that this Committee helped write does not 
overreach. It stops new taxes on Internet access, and multiple and 
discriminatory taxes on products ordered over the Internet--but does 
not bar all Internet taxes. This fundamental structure is ideally 
suited to become a long-term--if not permanent--policy. Whatever 
disagreements there might be on other aspects of the Internet tax 
debate, surely we can all agree--as a starting point--that the Internet 
should not be subject to new, multiple, or discriminatory taxes.
    This principle makes sense independent of whatever rules Congress 
or the U.S. Supreme Court may adopt on ``nexus''--whether we have the 
existing physical-presence rule, as outlined in the 1967 Bellas Hess 
case and the 1992 Quill case, or some new rule. Whatever the standard, 
surely there is agreement that all sellers should be subject to the 
same standard. None of us wants a regime that subjects the same seller 
differently if he sells by catalog or over the Internet.
    As you all know, the version of the Internet Tax Freedom Act that 
became law lasts only three years--and then expires. The temporary 
nature of the moratorium was something that many of us accepted out of 
respect for the concerns of state and local government leaders, who 
issued dire warnings about the effect the bill might have on their 
budgets. But now, as we have reached the half-way point of the 
moratorium, the data is rolling in about the real effects that the 
moratorium has had:

   Internet sales are up, way up. For the 1999 holiday season 
        alone, Americans bought $10 billion worth of goods over the 
        Internet.

   ``Brick and mortar'' sales are up, too. The International 
        Council of Shopping Centers reports that 1999 holiday sales at 
        shopping malls were up 8 percent over 1998. The Internet has 
        also helped traditional retailers expand beyond Main Street to 
        sell to new markets.

   Taxes collected by state and local governments are up--way 
        up. In my State of California, sales tax collections for 1999 
        were up a whopping 11 percent from 1998.

   The growth in Internet commerce and taxable sales has 
        fattened state budgets, which ended fiscal 1999 with a combined 
        $35 billion in surpluses.

   The federal government has benefited, too: Total federal tax 
        collections grew by $118 billion from 1998 to 1999.

    The facts are in, and conclusively so: the Internet economy--the 
``new economy''--is generating tremendous tax revenue for federal, 
state, and local governments. The Internet is opening up new markets 
for Main Street businesses and contributing to new jobs, better wages, 
and a stronger economy--all of which boost tax receipts.
    These are signs that the current tax policy is working--not only 
for consumers, but also for states, counties, and cities whose power to 
tax has been modestly constrained by the Internet Tax Freedom Act. 
Every level of government has a stake in ensuring that the Internet 
will continue to propel the new economy that is contributing to record 
tax receipts at every level of government.

I'd like to conclude with a brief anecdote:

        More than a century and a half ago, Michael Faraday invented 
        the first electric motor--the Dynamo--by rotating a current-
        bearing wire around a suspended magnet. He became so well known 
        for this invention that, one day, he was granted an audience 
        before King William IV. After Faraday described what he had 
        developed, the King looked at him and asked: ``But, after all, 
        what use is it?''

        Faraday came back with a quick response. ``Only time will tell, 
        but of this I am certain: Someday, sir, you will tax it.''

    Developing new taxes for new technologies need not be an 
irresistible temptation. I commend the Chairman and the members of this 
Committee for their interest in showing that the government can indeed 
learn the lessons of the past, and that we can protect new technology--
and the new economy--from the very real dangers of predatory taxation.

    Senator McCain. Thank you very much, Congressman Cox.
    Governor Leavitt, welcome.

              STATEMENT OF HON. MICHAEL LEAVITT, 
                 GOVERNOR OF THE STATE OF UTAH

    Governor Leavitt. Just one housekeeping item. The testimony 
that I submitted to the Committee--as I reviewed the formal 
testimony, I recognized that a portion of that testimony was, 
had drawn not directly from my words, but from a group of words 
that were part of the Advisory Commission on E-commerce, and I 
would just like to acknowledge that, and I will submit a 
correction so that it is clear.
    I would like to begin by just echoing what I have heard 
around the room today, and that is the Internet is the most 
powerful force of expansion that this planet has ever known 
economically. I would like to acknowledge the fact that 
Congressman Cox and I did work long hours and that the Internet 
Tax Freedom Act was a bill that I supported and that the 
Governors supported. We believed fervently then, and do now, 
that there should be no bit tax, there should be no, there 
should be no bandwidth tax, no access tax, no multiple tax, no 
discriminatory tax. The Internet simply should not be inhibited 
in any way by tax policy on its growth.
    This debate, I believe, will focus really around three 
issues. The first is what should the relationship be between 
the state and the national government? Who ought to be making 
decisions on this and important issues related to education and 
roads and schools and how does the Internet change that?
    Second, is the sales tax going to be a viable tool in the 
21st century? It might not be. We might find out that because 
of the nature and changes that occur in the way we transact 
business, that it may not be viable. I would suggest unless we 
make some substantial changes, it probably will not be, and we 
need to begin to think about what the consequences would be and 
are we prepared to accept them?
    The third issue is if we are to have a sales tax, will we 
adopt the philosophy that will create a level playing field 
where all sellers and all buyers are treated the same, or will 
we adopt the philosophy that says we are going to grant a 
special privilege to certain segments of our economy not to 
have to contribute to our schools or roads or law enforcement? 
As Congressman Cox pointed out, the existing moratorium is 
something that had my support and continues to have my support.
    It is, at the proper time I would be very optimistic and 
pleased to see it extended. We still have 18 months left on the 
moratorium. There are a lot of things that have changed even 
since we enacted the first moratorium, the whole area of 
telephony, how we are going to deal with that. Many of those 
issues are just now emerging and the next 18 months will be an 
important time for us to be able to analyze those, but I would 
be very optimistic and willing to see it extended.
    I would like to comment briefly, Mr. Chairman, on the 
Advisory Commission on Electronic Commerce. As was pointed out, 
we were not able to achieve the two-thirds that was required in 
order to put forward a report. A report is being advanced, but 
it did not require the--did not attain the statutory 
requirement. I feel some disappointment in reporting what I 
believe to be a lack of success--unnecessarily--in the 
Commision's efforts. We were so close, so close to what I think 
could have been a powerful statement of direction and 
recommendation to the Congress.
    I would like to review with you the things on which we had 
virtual agreement. Out of 10 major areas, we had expressive 
agreement on eight. We simply had disagreement on two, and I 
would like to highlight both the agreements and the 
disagreements.
    The first was our general acknowledgment of the power of 
this engine of economic expansion and that we ought to do 
nothing to inhibit it. We all agreed on that.
    The second was that there should be no discriminatory 
taxes, no new taxes placed on the Internet. All agreed. Both 
those who voted in the majority and those who were not voting 
on the side of the majority. We agreed in our first meeting, 15 
out of 19 commissioners, that the ultimate goal needed to be a 
level playing field. We also agreed that unless we had radical 
simplification, harmonization of the existing system, that it 
simply would not work in the 21st century. The current system 
is a mess and if it is not fixed it will not be compatible with 
the economy of the 21st century.
    We agreed that the telecommunications industry was 
dramatically overtaxed as an industry, and that the tax system 
we had was far too complex and needed to be simplified. We 
agreed that these should all be revenue neutral that we were 
not in any way attempting to impose requirements on the 
Internet that would make it a tax collection vehicle, that 
anything we do should be revenue neutral. We also agreed that 
it should be zero burden to the seller, that if we did not meet 
the requirement of being able to essentially make this a zero 
burden to those who have to use the Internet as a collection 
means that it, that the sales tax likely would not be a viable 
vehicle in the 21st century.
    We agreed that there needed to be protection for small 
firms that the tender chutes of Congress that are coming up to 
the soil ought to receive some special protection perhaps in 
the form of some sort of a de minimis rule where small firms 
would not have to be burdened in any way, but that once they 
reach a certain point, that in fact we ought to go, they ought 
to become full citizens and meet the requirements of corporate 
citizenship.
    Now, where are the areas in which we did not agree? There 
were two. First, that the national government should preempt 
the capacity of state and local governments to control their 
own tax policy. The report clearly indicated that they should. 
We disagree with that. And second of all, that there should be 
some form of special tax privileges granted. We believe in a 
level playing field, so those are the only two areas in which 
there was disagreement.
    Now Mr. Chairman, I would like to submit for the record 
today a letter from 40 Governors in this country asking that 
the conclusions of the report be rejected. Given the fact that 
they clearly call for preemptions of state authority, and 
second of all that they would not create a level playing field. 
I would also like to submit a letter from 170 of the country's 
most respected academic tax experts, who indicate that there is 
no rational basis to pursue a tax policy that does not include 
as its foundation a level playing field, and I would like to 
submit, if you would allow it, a copy of a report drafted by a 
minority on the commission.
    Where do we go from here?
    Senator McCain. Without objection, all those documents will 
be included in the record.*
---------------------------------------------------------------------------
    * The information referred to has been retained in the Committee 
files.
---------------------------------------------------------------------------
    Governor Leavitt. Thank you, Mr. Chairman. The States are 
pursuing actively and aggressively through the Uniform 
Commission on State Laws the creation of a model state law that 
would standardize, harmonize and modernize the sales tax 
system. It would be our hope that in the next 2 years we can 
come to Congress and ask them to authorize the creation of an 
interstate compact that States would have the option of moving 
into or facing certain privileges that would not be accorded 
them. We also believe that this can lead us, this is a pathway 
to a level playing field.
    Mr. Chairman, I would like to just conclude today by making 
reference to a piece of legislation that the President recently 
signed that came from you as the Chairman. I think it is a 
tribute to your leadership and that is the Airport Investment 
and Reform Act of the 21st century. I would like to say in 
particular there is one thing I like as a fellow Westerner who 
has to travel from the west and endure that 1-hour drive from 
Dulles Airport, thank you for the flights going into National. 
That will be great.
    Senator McCain. Thank you very much.
    Governor Leavitt. That will be a great benefit to many of 
us. But the legislation also clearly included an increase on 
sales taxes collected over the Internet. The taxes, it would 
have been a terrible imbalance if it had not. There was not a 
single senator who stepped up to offer an amendment that would 
have changed that. It would have dramatically reduced the 
mechanism for collecting funds that go to improve airports that 
we all depend on. I can just imagine the fuss that would have 
been caused if suddenly state legislatures started passing laws 
saying you cannot collect taxes on the Internet with respect to 
airport or to airline tickets.
    The Congress would have rushed to the Supreme Court saying 
that is a violation of interstate commerce and they would have 
been right. They would have said you are not allowing us to 
collect the dollars that are necessary from the proper people 
who are using it to pay for those services. It would have been 
seen as anti-Internet. It would be seen as--if the States were 
saying it is anti-Internet and pro-tax to be doing that, then I 
would like to suggest we are talking about the sales tax in the 
same way.
    This boils down to just a couple of things. One, nobody 
likes taxes, but if we are going to have them they at least 
ought to be fair; and, second, a question of whether or not the 
sales tax is going to be a viable tool in the 21st century. If 
it is not, we need to begin to look at what the alternatives 
are. They are very clearly more income taxes and property 
taxes--something that I do not believe the people in this 
country are prepared to accept. And the third, where are we 
going to control basic decisions about our schools and roads 
and law enforcement? Those are traditionally and very clearly 
local prerogatives and best managed at the local level, and 
this issue very much reflects the question of whether or not 
local communities will continue to be able to do so. Thank you, 
Mr. Chairman.
    [The prepared statement of Governor Leavitt follows:]

              Prepared Statement of Hon. Michael Leavitt, 
                     Governor of the State of Utah

    Mr. Chairman and members of the Committee, I am Michael Leavitt, 
Governor of Utah. I am here today not only as a member of the Advisory 
Commission on Electronic Commerce, but also on behalf of the National 
Governors' Association. Thank you very much for the courtesy that's 
been extended to me this morning.
    No other innovation--no other way of doing business--has 
revolutionized our nation's economy faster than the Internet. It took 
generations for the Industrial Revolution to play out around the world. 
The Internet Revolution has unfolded before our eyes, in less than a 
decade. The speed of this change has been astounding. In the Industrial 
Age, as change took place, governments were able to react accordingly. 
In the Internet Age, today's innovation is tomorrow's standard. 
Government must act on Internet time.
    Congress, as well as state and local governments, need to function 
in this new economy by facilitating its continued expansion. In one 
area, we have an opportunity, if unencumbered by the federal 
government, to do just that--to create a radically simplified and 
streamlined sales tax system that eliminates the burdens from our 
current horse and buggy system.
    And I believe we came close in the Commission to achieving a 
balanced approach, a fair approach with a level playing field. I remain 
convinced that the states are already moving rapidly in the right 
direction, and I remain convinced that the high tech industry, the 
nation's retailers, and states and local governments could reach 
consensus amongst ourselves.
    Any thoughtful discussion on e-commerce must include the following 
key issues:

    1. The proper relationship between the federal government and the 
    states on issues of taxation, and which levels of government ought 
    to bear the responsibility for determining and financing the needs 
    of their citizens and businesses;
    2. The necessity of keeping tax policy neutral so that neither 
    traditional retailers nor remote sellers (catalog, Internet, or 
    similar enterprises) are given an advantage based on tax policy; 
    and
    3. The need to stop erosion of essential revenue streams that 
    support education and other key public services at the local level.

    Governors are vitally concerned about any action that could 
negatively affect the vast majority of retailers--most of them small 
businesses, by the way--as well as their employees in our states, and 
erode the revenue source most important to the provision of education, 
public safety, and transportation services to the American people and 
businesses.

Extending the Moratorium
    On behalf of the National Governors' Association, we oppose S. 
2255, which would extend the provisions of the Internet Tax Freedom Act 
(ITFA) for an additional five years. Since the current moratorium does 
not expire until October of 2001, there is no compelling need to act at 
this time. This is particularly true since the technology is changing 
rapidly and creates substantial uncertainty with regard to unintended 
consequences. A rush to judgment on this matter could be detrimental to 
the Internet and electronic commerce industry, to Main Street America, 
as well as to state and local governments and all of our citizens who 
rely on government services every day.
    Some of the technology issues that create uncertainty with respect 
to impacts include:

   Bundled services;
   Discriminatory Tax Definition; and
   Internet Telephony.

    These issues have little or nothing to do with the sales tax 
collection issue that has dominated debate on extension of the ITFA. 
They are, instead, the result of the rapid pace of technological change 
and developments since the ITFA was originally enacted. We believe it 
is important to the Internet industry as well as state and local 
governments that you address these issues as part of any extension of 
the ITFA. Failure to address them is likely to mean that the ITFA does 
not meet the expectations of Congress.

Future of the Sales Tax
    The Advisory Commission report very directly raises the issue of 
the future of the sales tax in our country--the single most important 
source of revenue in America for public education, and which level of 
government ought to be responsible for determining and meeting the 
education, public safety, transportation, and infrastructure needs of 
our citizens. The central issue between the states and federal 
government as it relates to e-commerce is not about new taxes on the 
Internet, but rather how the states will collect taxes already on the 
books, and whether states will remain sovereign in their right to 
collect those taxes.
    In Utah and other states, we strongly oppose any new taxes on the 
Internet. We should not seek to enrich our state or federal coffers 
with new taxes just because of new technology and new methods of 
delivering goods.
    There is no more fundamental responsibility for any of us elected 
to office than to that of representing our respective constituents and 
taxpayers. The concept of reciprocal immunity is an inherent part of 
our federal system, consistent with the basic sovereignty states retain 
under the 10th Amendment to the Constitution. For decades the states 
have had the authority to enact and modify sales tax laws and their 
complement use tax laws. Use tax laws have been effectively enforced 
for decades as it relates to business purchases.
    The ACEC report asking Congress to impose unfounded mandates on 
states and local governments in excess of $30 billion annually through 
the preemption of existing taxes and creation of special privileges for 
certain kinds of companies through changes in state and local income, 
business activity, property, and sales and use taxes simply boggles any 
concept of our appropriate responsibilities to our respective citizens.
    Is it possible that the federal government will override long-
standing state policies in each of these areas that vary so dynamically 
from one state to the next? Once successful in this regard, will we see 
additional actions of the federal government? Will the federal 
government declare that income taxes can no longer be applied to the 
software engineers who build the websites involved? Will dot.com firms' 
warehouses be exempted from property taxes by action of the federal 
government?
    Such an action would clearly violate the sovereignty of the states 
to enact and enforce sales and use taxes.
    Imagine where that slippery slope leads in the years ahead--
congressional tax cuts imposed by eliminating state taxes! The taste of 
enacting tax cuts that don't reduce federal revenue could, of course, 
easily prove to be addictive. What about the elimination of state use 
tax on equipment necessary to reduce environmental emissions? Why not 
override states authority to tax diesel fuel that is used to transport 
goods across state lines? How about an end to income taxes for 
teachers? Or firemen? The opportunity for mischief is unlimited.
    Only with state action to efficiently collect existing taxes will 
our traditional main-street retailers compete with the new world of e-
commerce on a level playing field, and will our funding base for 
critical services be preserved for the years to come.
    There is no question that the federal government has the right to 
regulate interstate commerce. But it would be virtually unprecedented 
for the federal government to stomp on the most basic rights of the 
citizens and taxpayers of each and every state by determining how they 
may or may not raise revenues.

Creating a Level Playing Field
    Any action taken by this Committee should guarantee assistance 
towards achieving a streamlined sales tax system for the 21st century, 
a level playing field for all businesses, and no special privileges. In 
the face of the impending transformation of retail shopping, government 
tax policy must remain neutral. It is not the time to have government 
tilt competitive forces in favor of either traditional retailers or 
emerging electronic retailers. Unfortunately, without the states 
effective enforcement of our current laws--and with the passage of 
proposals like that proposed by the Commission--such government-
sponsored special privileges will result.
    We nineteen members of the Advisory Commission on Electronic 
Commerce (ACEC) gathered research, hearing and reviewing testimony from 
interested parties, sifting through proposals and debating varying 
perspectives; all in an attempt to form the basis of a balanced 
recommendation that addresses the most pressing issues raised by all 
parties and therefore could garner the requisite support of the 
Commission necessary to make a formal recommendation to Congress. We 
did not succeed.
    Throughout the process some broadly held general views emerged and 
deserve to be articulated. They are the core concepts upon which any 
federal policies should be based.
    Clearly our main task was intended to be the issue of the 
collection of taxes on remote sales over the Internet. We encountered a 
great degree of confusion about the current state of play in this area. 
The current rules for remote sales tax collection are guided primarily 
by the set of interpretations and practices emanating from the U.S. 
Supreme Court Quill decision, which essentially said that remote 
sellers are not responsible for collecting sales taxes for taxing 
jurisdictions where they do not have physical nexus. We have lived with 
this construct for decades and it has guided the tax policy of direct 
merchants and catalogue sellers for years. The reality is that sales 
taxes apply to electronic commerce conducted over the Internet and any 
seller that has nexus with a taxing jurisdiction is required to collect 
and remit such taxes today.
    So why the current great debate? Today there is a view that the 
world is largely made up of electronic commerce companies and 
traditional brick and mortar companies. Inevitably, however, somewhere 
down the road, in 3, 5 or 10 years, take your pick, commerce will be 
intertwined with the cyberspace and physical worlds will merge and 
interact to meet the increasing demands of consumers. ``Bricks and 
mortar'' retailers will pour millions into their online shopping 
offerings as they morph into ``clicks and mortar'' retailers. Clients 
will browse at home and order direct or head down to the store to 
``feel the fabric'' or ``swing the golf club.'' Remote sellers will 
have contracts with local providers (who may or may not be legally 
affiliated entities) to provide service or accept returns.
    In a world like this, if remote sales over the Internet are taxed 
differently than intrastate sales we will have a system based upon a 
tangle of legal maneuvering that will create separations between local 
merchant and their Internet counterparts and a playing field that will 
be viewed as inherently unfair. Such unfairness, if left to fester, 
will bring contempt and non-compliance. It is hard to argue with the 
need for an enormous simplification of state and local sales taxes that 
can pave the way toward a level playing field that does not 
discriminate between methods of access.
    In reality, of course, taxes on remote sales are already due. They 
are called use taxes and the obligation falls on the consumers to 
calculate and pay them. While they exist in most states, with respect 
to individual consumers they are collected more by exception than by 
the rule. So while any new system that implements a way to collect 
remote sales taxes would not increase the theoretical taxes on the 
books of government, it would undoubtedly lead to increased revenues 
collected. This raises its own issues.
    I am pleased to report to you this morning that we, the states, 
have already achieved substantial progress in moving to radically 
simplify state and local sales taxes. For those of you that remember 
the efforts of former President Reagan, Senator Packwood, and Rep. 
Rostenkowski; you can well understand and appreciate the challenge we 
have undertaken. I can report to you that substantial progress was made 
as 26 states gathered in a cooperative effort in Denver, Colorado on 
March 30-31, 2000, to continue discussions focusing on the 
implementation of a revolutionary streamlined sales and use tax system. 
The Streamlined Sales Tax System Project is a comprehensive undertaking 
in direct response to the widespread call for simplifying the sales 
tax. The states have enthusiastically embraced this unique opportunity 
to attain the fundamental simplification measures needed to maintain a 
viable sales tax system.
    The states embarked on this mission in September 1999, by 
initiating discussions to develop and implement a simplified sales tax 
system. Two subsequent meetings were held prior to this most recent 
Denver meeting and continuing discussions are being conducted to 
resolve integrating the design elements of the new system. It is 
anticipated that a pilot project of the new system will be in place in 
Fall 2000.
    Work Groups were established and charged with addressing a 
multitude of issues essential to successfully implementing the new 
system. The Work Groups are:

   Paying for the System, Technology, Audit, and Privacy 
        Issues;

   Sourcing and Other Simplification Issues;

   Tax Rate, Registration, Returns, and Other Remittances; and

   Tax Base and Exemption Processing.

Several key issues received attention from the Work Groups, including:

   Ensuring that the use of technology does not breach the 
        basic tenets of consumer privacy while simultaneously 
        establishing a new benchmark of security measures designed to 
        preserve the integrity of transactions;

   Developing straight-forward sourcing rules that can be 
        easily implemented and adapted to an electronic environment;

   Implementing the use of existing technology that provides 
        for the accurate mapping of tax rates to the appropriate taxing 
        jurisdiction;

   Consideration of one local use tax rate for remote sellers 
        and exploration of the available technology that will 
        facilitate the administration of multiple tax rates; and

   Drafting uniform definitions, standardizing exemption 
        processing procedures for use- and entity-based exemptions, and 
        arranging for the use of a product coding mechanism that will 
        provide a bridge between the tax base and the use of 
        technology.

    The Project States seek the input of both public and private sector 
groups, in addition to those companies and individuals willing to 
provide technical assistance to the Work Groups. A public comment 
period will be provided at each Project Meeting during which interested 
parties may comment on the Project's design initiatives and 
accompanying issues with the Project States.
    Electronic commerce is growing exponentially and only if we start 
the process today of developing a tax system that contemplates the 
burdens the new economy will place on our existing structures will we 
be prepared to face the challenge.
    The burden and responsibility of reform lies with the state and 
local governments. Clearly, any tax system must not disproportionately 
burden remote sellers. However, if a system can be established that 
equates the burden of inter- and intrastate sellers, a level playing 
field could exist. Finally, in designing a process to produce this 
system, we, as Commissioners, recognized that while there is a national 
interest in creating an environment that fosters growth of electronic 
commerce and ensuring any taxing system does not unduly burden 
interstate commerce, we also recognize the need to be mindful of the 
sovereignty of state and local officials in setting policies for their 
electorate.

Closing
    Last week, Congress sent the President the Airport Investment and 
Reform Act for the 21st century. That legislation is a tribute to you, 
Mr. Chairman, and the members of this Committee. It is another 
important step to deal with not only critical safety issues, but also 
expanding the nation's ability to compete globally in this new economy.
    The new legislation provides for an increase in taxes on the 
Internet. Not a single member of the House or Senate offered an 
amendment to exempt airline tickets purchased over the Internet from 
this tax increase. I believe we all understand how self-defeating such 
an amendment or policy would have been. It would have been terribly 
imbalanced. It would have sanctioned a double standard. And it most 
certainly would have led to significant erosion of the very funds this 
Committee has made such a leadership effort to ensure are available to 
meet the nation's needs.
    Let us be clear. No Governor is looking to tax the Internet, any 
more than any Senator is trying to impose a special, discriminatory tax 
on the Internet.
    The states' sales and use taxes are existing taxes, not new taxes.
    All we are asking is to keep the right we now have as a state to 
determine our own revenue policies under the laws the people of our 
state have adopted and we are elected to implement. Most of these sales 
and use taxes have been in place for at least 50 years.
    The largest revenue collections in the nation, even in the income 
tax states, are through state sales taxes. If Congress overrides 
states' tax policies by cutting our tax base, it will fundamentally 
upset both the states' and the nation's capacity to provide critical 
services to the people. The sales and use tax revenues belong to people 
and taxpayers of the states, not the federal government.
    Finally, if we gravitate towards a tax system that creates a 
specific loophole for retailers that use the Internet, we risk creation 
of a federal policy that favors Internet vendors at the expense of Main 
Street stores and home-town merchants. We cannot adopt a tax policy in 
America that assists in harming traditional Main Street retailers.
    Thank you for the opportunity you've given me to testify, Mr. 
Chairman.

FACTS AND FIGURES



States rely heavily on sales taxes to provide essential public 
services.




    Senator McCain. Thank you very much, Governor Leavitt. The 
moratorium runs out in about 16 months. Do you have some 
confidence that this model state law can be agreed upon in that 
period of time?
    Governor Leavitt. I feel very confident that we are going 
to be able to have the model legislation developed before the 
Congress for the authorization of an interstate compact. Now, 
if sufficient progress has not been made by that time, then I 
think the Congress clearly ought to make a decision based in 
that framework. It may be that we will get to that point and 
conclude that a lot of progress has been made and at that point 
we would extend the moratorium. I would be in support of that.
    Senator McCain. I believe you stated that you supported the 
first moratorium, is that correct?
    Governor Leavitt. I did in fact. Yes.
    Senator McCain. We received letters from the National 
Governors' Association and many Governors. Did you weigh in at 
that time?
    Governor Leavitt. I think Congressman Cox had recognized in 
fact we did. We had grave concern about the first version of 
the moratorium which very clearly, very clearly would have 
ended local control of the sales tax as we know it today. 
Gratefully, substantial changes were made. We became not just 
supportive, not just comfortable with the moratorium, but 
supportive of it.
    Senator McCain. It seems to me your model would apply one 
rate of sales tax to Internet transactions and a different rate 
to local in-person transactions. Is that correct?
    Governor Leavitt. Not necessarily.
    Senator McCain. Not necessarily?
    Governor Leavitt. No. We are interested in coming up with a 
level playing field.
    Senator McCain. And every state in America is going to 
adopt that same model. Please, Governor.
    Governor Leavitt. There are many, Senator, there are many 
instances where that has occurred already. The fuel tax is one 
example. We have a model already where each state collects, and 
there is a process through which the States have cooperated. 
This is an issue that the States have grave interest in and it 
is very clear to me that when the interstate compact goes on 
the table that there is going to have to be incentives for the 
States to do it, some of them positive, some of them negative. 
If the States do not, Mr. Chairman, then I believe the Congress 
should, but the States in fact I believe will act and just need 
some time to pull this together. This is a problem that the 
States have to solve.
    Senator McCain. What progress have the States made in the 
area of taxation of mail order catalogue sales?
    Governor Leavitt. The States--I would suggest the Congress 
has not made much progress in the collection. If the States 
were allowed, they would have done very well.
    Mr. Cox. Mr. Chairman, I wonder if I might comment on this. 
I mentioned in my remarks that the Internet Tax Freedom Act 
itself does not address sales taxes. Any concerns about the 
collection of sales taxes or the counterpart to sales taxes, 
use taxes, are a function not of the Internet Tax Freedom Act, 
not of the existing moratorium, which only prevents new taxes 
and discriminatory taxes and multiple taxes, but remember the 
Supreme Court decisions. What those Supreme Court decisions 
have decided, first in 1967 and then in 1992, can essentially 
be described in plain English as no taxation without 
representation. States have jurisdiction over the people who 
live there, and they can tax them. States do not have 
jurisdiction over people who do not live there, and they cannot 
tax them.
    Therefore, if someone is doing interstate commerce, they 
are subjecting themselves to tax by entering the state and what 
the Supreme Court has said is that if you mail something into 
the state, that is not enough. If you set up a business there 
and you have people there, well then that is different, and the 
principle of no taxation without representation is not violated 
if you are taxed.
    Are States left without recourse if they cannot collect a 
sales tax on a remote seller? Absolutely not. Every state in 
America that has a sales tax has a use tax which is identical 
in every respect, the same rate, the same application collected 
on the same transaction, so in economic effect it is exactly 
the same. States can tax the purchaser and the Internet, I 
submit, actually making this possible in ways that it was not 
before.
    Now, I am not a big fan of adding taxes to commerce, even 
sales taxes that support state and local governments, but that 
is not a matter of my personal predilection. As a matter of 
power, States ought to have that power and they do, but what we 
are being asked to do in Congress is to change that federalism, 
to change that Federal-state relation and expand the power of 
States to tax so that the principle of no taxation without 
representation would be violated. That would be a terrible 
thing, so I agree with Governor Leavitt that States ought to 
have jurisdiction over the people who live there and over the 
transactions that take place in that jurisdiction, but that 
means that all they need to do is tax the transaction in 
exactly the same way that otherwise they would if it occurs on 
the Internet by taxing the purchaser. That is the person over 
whom they have jurisdiction. The amount is the same as sales 
tax, it looks and feels the same as sales taxes. Nobody would 
know the difference.
    I am not encouraging the expansion of use taxes or use tax 
collection because I personally think it is nice to have a 
modest level of taxation. But as a matter of power, I cannot 
disagree with the Governor, States ought to have that power and 
they do, and Congress should not go any further and expand the 
power of States to collect taxes.
    Governor Leavitt. Mr. Chairman, it is very clear to me, and 
I think to Governors and state and local officials that if we 
do not fix the existing tax system that the capacity to collect 
the sales tax will, will not be there in the future. E-commerce 
is growing at such a rate, and we are encouraging it, doing all 
we can to encourage it to grow. It is growing at such a rate 
that ultimately in order for people to be competitive, they are 
going to have to remain using e-commerce. And our purpose is 
simply to say this: set up a hurdle for us to meet. The hurdle 
is zero burden on sellers.
    If we cannot create a system where the burden is virtually 
zero on those who sell over the Internet, then it is likely 
that the sales tax is not a viable tool in the future because 
the field will no longer be level and those who ultimately sell 
with bricks and mortar will be so disadvantaged that ultimately 
we will be required by fairness and economic policy to 
eliminate the sales tax altogether and that may be where we 
want to go in this country, but if it is, we need to analyze 
what the consequences are. The Senator from Texas has indicated 
very clearly what they would be in Texas.
    Senator McCain. Senator Burns?
    Senator Burns. I am not next, am I?
    Senator McCain. Yes, sir.
    Senator Burns. I have one question, I guess, through this 
whole thing on what you agreed on and what you did not agree 
on. What do we do, Governor, with States who have no sales 
taxes and, I live in one of those States?
    Governor Leavitt. We would simply, under the proposal we 
are making, we would simply have a standardized national system 
and Montana, which does not have a sales tax, would simply be 
able to say we do not impose it, we are not going to collect 
it, we would have a zero rate. It would have no impact on you. 
I will point out that the majority report that was issued by 
the Commission would have quite an impact on Montana because it 
would have interfered with your capacity to collect income and 
property taxes from certain vendors. It would have made the 
playing field unlevel in those areas, but it would have no 
impact on sales tax.
    Senator McCain. Senator Wyden.
    Senator Wyden. Both of you have been very helpful. 
Governor, let me start with you. There is not a word in the 
Internet Tax Freedom Act that prevents Utah or any other state 
from going on out today and improving its system of collecting 
sales and use taxes, and I think we agree on that. Governor 
Cellucci came and he told us the reason we do not do it is 
because there is too much political heat. I cannot track people 
down running from New Hampshire.
    Same is true in the State of Washington. My friend Senator 
Gorton is here. They could go out and collect these taxes that 
are owed. They do not do it because of the political heat. Now, 
you all have come forward with a proposal for simplifying 
taxes. I do not happen to think it is very workable. But I am 
anxious again to try to find common ground, and supposing we go 
forward with a markup in Committee next week that looks like 
this.
    We extend the moratorium on discriminatory taxes on the 
Internet. I would like to make it permanent. Maybe we say 5 
years. We will work with you on the time. But we also say we 
direct NUCSL or one of the other groups involved in the state 
and local tax area to work with the Governors and the mayors 
and the cities on the proposal for tax simplification, and we 
would commit to giving you all a vote within say 180 days of 
the time NUCSL comes forward with the recommendation so that 
that way we could have a debate about whether it is actually 
workable. I do not think you all have come up with something 
that is workable yet.
    Maybe there is a technological fix out there that would not 
impose any burdens on remote sellers. But supposing we went to 
a markup next week with those two provisions at the heart of 
the legislation--an extension of the moratorium on 
discriminatory taxes on e-commerce, and by the way, Governor 
Engler came to another Committee and told me he would support a 
permanent ban on discriminatory taxes on e-commerce. We have 
that on the record. We would make that the first provision of 
the bill, but then we would direct NCSL or some other group 
that you all feel comfortable with to go forward with their tax 
simplification proposal, and the Congress commits to giving you 
an up-or-down vote after we have the hearings and look at 
whether it is workable and we pass legislation out of this 
Committee in the next few weeks, what is your reaction to that?
    Governor Leavitt. Senator, as you know, I did support and 
continue to support moratoriums on discriminatory taxes on the 
Internet. We have 18 months left on the existing moratorium. We 
are very anxious to bring to Congress model legislation having 
been developed by NCSL that could form the basis of an 
interstate compact. That interstate compact would be the 
solution put forward that you are looking for.
    I am the first to tell you if we cannot come up with that 
system not only do I believe we will not be able to collect a 
remote sales tax, I believe within a period of three to five to 
seven years that the sales tax as we know it will no longer be 
a viable tool. The point is the States have an enormous 
incentive to get this fixed. Now, with--we need to put the fix 
up. The States need to put the fix up. And if we cannot, then 
we need to get on with the analysis of the alternatives. This 
is clearly on the plate of the States and local governments. If 
we cannot fix this system, and it is a mess, then the sales tax 
as we know it will not be a viable tool in the 21st century.
    Senator Wyden. So what would be wrong with our moving 
forward with what I proposed? You all have already said that 
you are not for discriminatory taxes on e-commerce, so that 
would be the first plank and second, we would commit to giving 
you all a vote. You would get the vote that you wanted in the 
Congress on your proposal. What would be wrong with going 
forward with that?
    Governor Leavitt. We went down that road before, and we 
became buried with it. I think no one knows better at this 
table that part of the moratorium was the incentives that it 
created for everyone to come to the table and solve the 
problem. It also became very clear that the insurance of a vote 
could not be enforced under Senate rules, and certainly in the 
House, and it was far too complex to be able to see that as the 
solution. What we are proposing is we want to have a couple of 
years to bring back a solution. If we cannot, our world is not 
going to----
    Senator Wyden. Governor, we can write in a law a fast-track 
process that commits to a vote, and I guess what troubles me is 
I am trying to reach out and extend the olive branch. You all 
were proven wrong in 1997, and it was not just before the bill 
that you all predicted all of these problems. There has been a 
drumbeat ever since the enactment of the law about how this is 
going to erode all these revenue bases. I cannot find one 
state, not one in America, that has seen its sales tax base 
eroded as a result of the Internet Tax Freedom Act, and your 
reluctance to go along with something that I think is at least 
trying to meet you halfway is an indication that what you all 
really want, the real goal here is frankly to let the 
moratorium expire.
    Then we will let all these jurisdictions go out and start 
doing their own thing and to me, that undermines your view that 
you all really are committed to a nondiscriminatory approach on 
e-commerce. So I hope that you will work with us on this 
because I think that Chairman McCain and I and others on both 
sides of the aisle would like to find common ground, but we are 
not going to let you be like grease going through a goose, 
subject these out-of-state remote sellers to new, what appear 
to be, bureaucratic requirements for collecting taxes without 
our having at least a chance to examine it and what I am 
offering to you I think shows a reasonable common ground 
position that I hope you look at.
    Governor Leavitt. Senator, let me respond. First of all, we 
are sincere and were sincere in our support in the, in support 
of the moratorium. We will continue to do so, but I think it is 
important that we recognize that when we started talking about 
a moratorium in 1997, it was not the same moratorium we are 
talking about today. Period. And it would have had every 
consequence that was pointed out by state and local government 
then and it would now. This is a good economy. The States have 
had an average increase in the growth of their tax revenues of 
5.2 percent.
    The Federal government, I might add, has had one of 7.7 
percent during that exact same period. I pointed out earlier 
that Members of the Congress and the President supported the 
bill I suggested on national airports. It included a clear 
increase in Internet taxation. I didn't see a single United 
States Senator stand up and say let us not tax the Internet on 
this one because you needed the revenue and you wanted to have 
a system that was balanced and provided a level playing field. 
That is all we are asking for here. Give us a chance to fix a 
system that is dramatically broken and that will not be 
compatible with the 21st century.
    We are reaching out saying we'll bring the solution to the 
table. If we can't, let us all recognize we have to get on to 
the next option, which is property tax and income tax.
    Senator Wyden. I just offered you a proposal that is in 
line with what you say you all support. That you say you are 
for a ban on discriminatory Internet taxes. That is what 
Governor Engler said. You said you would support an extension 
of the moratorium on Internet taxes. I have just offered you a 
proposal that is a middle ground and----
    Senator McCain. Senator Wyden.
    Senator Wyden. Can I ask one additional question.
    Senator McCain. Please make it brief. The other members--
and we have another panel.
    Senator Wyden. You have a seller 2500 miles from a local 
jurisdiction. They have no presence other than a website. They 
use no services, no water permits, plants, nothing. All they 
have is a website. How do you envision that person getting a 
fair shake under your proposal?
    Governor Leavitt. First of all, the tax is not on the 
Internet seller. It is on the person who lives in the state who 
does use the roads and sewer and water. The issue is not 
whether or not the taxes are owed, but rather who do we place 
the burden on to collect it. If we put a burden on a new firm 
that does not have the capacity and sophistication to do it, 
that would be wrong and we ought to have a de minimis rule.
    Second, if we ultimately put any kind of a substantial 
burden on any business, be it K-Mart or Wal-Mart or any 
business, then the system will not work and if we cannot bring 
back a system that creates zero burden to those who have to 
collected it, we would have failed. It is going to be unviable 
in general on bricks and mortar because this country will not 
stand for the kind of unlevel playing field that would be 
created where you can go into a store and buy one thing and go 
to a kiosk outside the store and buy it on the Internet and 
have taxes collected on one and not the other. It will not 
work.
    Senator McCain. Before I recognize Senator Gorton, sir, we 
have ample precedent for fast-track authority that requires a 
vote on an issue. You are incorrect in that response that we do 
not have that kind of authority.
    Senator Gorton.

                STATEMENT OF HON. SLADE GORTON, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Gorton. Thank you, Mr. Chairman. I suspect that 
this is an issue on which almost every member of this panel, if 
not every member, has made up his mind, and I would just like 
to make a couple of comments, one to my good friend Chris Cox.
    I argued cases like this in the Supreme Court, Congressman 
Cox, and it is not true to say that the Supreme Court rule is 
no taxation without representation. That is a total distortion 
of the Supreme Court decisions. We tax the people of the 
District of Columbia without representation. Senator Wyden's 
state taxes my Washington residents without representation if 
they so much as cross over the state line in the course of 
doing any of their work.
    The decision of the Supreme Court is that there is no 
taxation without presence, which is quite different from 
representation. And they have determined that the catalogue 
seller in one state does not have a tax presence without 
Congress authorizing them to do so, which is why this issue is 
before us. It has also been very clear from the Supreme Court 
that it would, that it would regard an act of Congress as 
perfectly within our power over interstate commerce, and I 
think it is the implication of those decisions that we ought to 
do it, but in order to create the very fairness that Governor 
Leavitt is speaking about, I think we should be extremely 
cautious at setting policies for other people.
    Boy, is it easy for Congress to say that someone else 
should not impose a tax and that is what we are doing even, 
even with the moratorium, we are doing that.
    We are saying Congress should say someone else should 
impose a tax, but just yesterday we voted on whether Congress 
ought to impose a tax that we collect and we spend. We had a 
vote on whether or not we ought to temporarily suspend a 4 cent 
gasoline tax and we voted rather overwhelmingly against it. 
Why? Because members of the Senate got up and said we cannot do 
that. We will not be able to build roads if we do not continue 
to impose this tax, but evidently, we do not care whether or 
not States can fund schools.
    Now, in connection with what Senator Wyden had to say, of 
course the tax base has been eroded. It has been eroded to 
exactly the extent that sales take place without a sales or use 
tax being collected. We have States that are doing pretty well 
now and haven't directly suffered as a result of it, but their 
tax base has been eroded. Presumably, in many of their cases, 
their sales taxes would be lower on everything if they had, if 
they had a broader base. And for anyone to say well, it is 
perfectly easy just to collect the use tax on the resident when 
it arrives, that has been the law in the United States in every 
state with the sales tax for 50 or 100 years and you cannot for 
all practical purposes collect that use tax, except on an 
automobile or something that is so large that it has to be 
registered.
    In my view, which is different from some of the others in 
this connection, it is easy. Once a state has agreed that it is 
going to only impose a single rate of sales tax on all sales, 
there is no burden whatsoever in requiring the out-of-state 
seller to collect that from the buyer and submit it to the 
state. Personally, I think Governor Leavitt gives up too much 
in the argument that he makes to us here. But the answer to 
Senator Wyden is, those of us who believe in fair treatment, 
and I think the fairness to retail sellers is the overwhelming 
argument here, not to mention the proposition that we should 
not be determining state tax policies, the argument is 
overwhelming. If we have a vehicle that we can get a hearing 
on, we ought to use that vehicle.
    Governor Leavitt says it a little more politely than I do, 
but that is the beginning and the end of it and this is a 
fascinating hearing but I think members have made up their 
minds. In non-sales tax States like Oregon you are not losing a 
dime telling Washington that it cannot collect tax when someone 
sells something from Oregon into the State of Washington. It 
does not cost you a dime.
    Senator Wyden. Would the gentleman yield?
    Senator Gorton. If I were the Senator from Oregon, I would 
take that point of view. Sure.
    Senator Wyden. I am taking the position on the Internet Tax 
Freedom Act for the same reason I worked with you on the Y2K 
legislation. I thank the gentleman for yielding.
    Senator Gorton. I agree with that. We have a year and a 
half. If Governor Leavitt's group does not come up with an 
answer a year from now, then we ought to extend it, but it is 
perfectly appropriate to vote on both of these closely related 
issues at the same time. I am sorry I was late.
    Senator McCain. Thank you very much, Senator Gorton. Could 
I give both our witnesses a chance to respond to your comments.
    Representative Cox. I very much appreciate that, because I 
think, Senator Gorton, that you and I agree on some big 
principles.
    Senator Gorton. We certainly do.
    Representative Cox. That is the allocation of 
responsibilities between state and local governments. I come 
from Orange County, California which has more people than 17 
States and no Senators and so every time we send our money to 
Washington we get short-changed. We have to share our senators 
with 34 million others and we recognize, for example, when it 
comes to the gas tax, the 18.4 cent per gallon tax on gasoline 
that we pay the Federal Government, that goes in the Highway 
Trust Fund and we have an expectancy that we are going to get 
Rhode Island's. But good luck. Rhode Island has \1/3\ fewer 
people than Orange County but gets more money than we do.
    Senator McCain. I have some affection for Rhode Island.
    Representative Cox. Particularly as a fiscal conservative 
and as a Republican and also as somebody who lives in a place 
that gets cheated by this Federal system on a daily basis. I do 
not want to send power, influence, and money to Washington. I 
want the county supervisors and States to have this authority. 
I strongly agree with you. The reason that I have co-authored 
the Internet Tax Freedom Act in the first place was that we 
have to recognize the possibility with the Internet of the 
tyranny and the parochial. There is too much of a good thing 
here.
    I want my local people involved, but I do not want the 
local city council in some neighboring state and all 50 States 
to be taking a piece of a transaction because electrons are 
running through their state. All we have done is put together 
legislation that bans discriminatory taxes, multiple taxes, new 
taxes and what is being said here this morning is that 
everybody agrees on that. Yet some people are willing to take 
this bill, which would simply keep in place the ban on multiple 
and discriminatory taxes, take it hostage and hold up support 
for what is right and what they agree is fair so that they get 
to vote on something else which is somewhat related.
    It is the same general topic as the Internet, but I don't 
think that on the merits anybody can object to a ban on new 
taxes, technologically targeted taxes, multiple taxes, tell me 
everybody here is in favor of it. I have heard none.
    The Supreme Court is concerned. I think you recognize when 
I say no taxation without representation is what cities are 
about, that I don't believe that that sentence is written into 
the constitution. Instead, those decisions were based upon 
Article 1 Section 8 of the Constitution, the Interstate 
Commerce Clause and the earlier decision also on a separate 
ground, due process. But we have to ask ourselves why is that 
Interstate Commerce Clause in the Constitution? Why did the 
founders fear discrimination against one state?
    Senator McCain. We wanted you to respond.
    Representative Cox. They have good reason to do so. The 
essential genius of the Interstate Commerce Clause is that it 
gives the national government jurisdiction over preventing the 
tyranny of the parochial. That is all we are doing here, and 
that is a very important thing to uphold. I did not hear 
anything in any of the senators' or Governor's comments that we 
should somehow discriminate against electronic commerce. The 
Internet Non-Discrimination Act moving forward in the House, 
which is essentially the same as Senator McCain's bill that 
many of you sponsored, does that. I think because these issues 
are coming up in 18 months, we ought to take a look at and not 
confuse them.
    Senator McCain. Governor Leavitt.
    Governor Leavitt. The Supreme Court very simply said you 
can't expect 7500 taxing jurisdictions to respond and people to 
respond to all of them. They said either you bring back a 
system that has zero burden on sellers or we are going to 
impose a limit on your ability to do that, and what we are 
proposing to do is figure out that system, and if we cannot, it 
is clear we will continue to suffer the same problem.
    I would like to comment on one point that you made related 
to Senator Wyden's comments. Let me begin by expressing a 
story. My mother is the grandmother of 29 grandchildren and on 
a December morning last year she came to my home on her way to 
the mall, and it was snowing, and she knew the crowds were 
going to be there and I said why do you not do it on the 
Internet.
    She had never shopped on the Internet. We sat down for an 
hour and a half and she bought a gift for all 29 of her 
grandchildren and not only--she was thrilled. She did not have 
to fight the crowds. She did not have to--and then they 
packaged them for her and mailed them to her grandchildren and 
she was done. Now, I kept track as we went through that just 
because of my own curiosity to make sure my mother paid her use 
tax. There was 2,400 dollars spent that day and all but 400 
dollars of it was not subject to taxation. 400 of it was 
because they had nexus in the state. Now, my mother would still 
owe that, and I am confident she will take care of it, but the 
point is this, people are not shopping on the Internet to avoid 
the sales tax. They are shopping because it is convenient and 
because it is a very good thing and our economy is booming, 
yes, because of the new economy, but we should not be making 
tax policy decisions on the basis of a temporary economic 
expansion.
    We ought to be dealing with tax policy that creates a level 
playing field that will endure forever. I invite anyone in this 
room who has made a purchase on the Internet to ask themselves: 
why did they do it? Did they do it because it was 1 o'clock in 
the morning and they did not want to go to the mall and it was 
not open, or did they do it because they wanted to avoid the 
sales tax? I would submit to you in your heart it is pretty 
clear what it is.
    Senator McCain. Senator Dorgan.
    Senator Dorgan. Mr. Chairman, thank you very much. Governor 
Leavitt, my colleagues Senator Wyden and Congressman Cox 
indicated the state should really just collect the use tax if 
they want to. Having been a tax administrator and actually 
administered a state sales and use tax, I can tell you it is 
impossible to collect a use tax on a broad basis, but as a 
Governor, can you describe for me what kind of burden this 
imposes on the taxpayer, No. 1, and No. 2, what kind of 
additional employees would the State of Utah need to collect a 
broad-based use tax throughout the State of Utah?
    Governor Leavitt. Well, it has simply been impossible in 
the past, as the Chairman pointed out, on remote sales of any 
sort, to do that. It would be an imposition in many cases. We 
do in certain cases where it can be tracked, collect a use tax 
mostly on business, but as you know, when you go to a catalogue 
and it says if you live in the State of Maine or Virginia or 
Utah or South Carolina, you have to calculate it, it is being 
collected today, but only where there is a nexus, so we are 
doing our best, but what we are proposing is a system that 
would be zero burden to anyone and it is not just zero burden 
to remote sellers. We think we can redesign the system to save 
billions of dollars in inefficiency and friction that is 
currently in the system that can go to the benefit of the 
American economy and be a very substantial benefit to 
taxpayers.
    Senator Dorgan. My point was if you did really try to 
collect the use tax across the board, you would have to hire 
thousands of people. You would impose new burdens on virtually 
all of your constituents because they would have to file 
individual use tax returns and declare a use tax on small 
amounts of goods they have purchased, so the point is it is an 
impractical thing to do to say well let us just collect the use 
tax. That is not a solution. It is totally impractical.
    Governor Leavitt. As your neighbor Governor Janklow 
recently said, we would have to put--have to start stopping men 
in brown suits in little brown trucks and we would have to hire 
armies of policemen and it would be just impractical. It would 
be unreasonable. People would not accept it. It is not a 
solution.
    Senator Dorgan. And a better solution is one that has 
inherent simplicity and removes the burden effectively from the 
consumer and removes the burden from the seller. And that is 
what you are talking about.
    Let me ask a couple of additional questions. One, the 
contention is that, gee, this really does not mean anything. 
The States have growing economies and are collecting more 
money. The Internet sellers, I am told, last year sold 13 
billion dollars through the Internet and it is expected in the 
next 10 years to grow to 1 trillion dollars. Is there any, any 
reason that one can say this will not have an impact on a state 
sales tax or use tax base?
    Governor Leavitt. Those would argue this is not going to be 
a burden or not going to affect States' capacities to deliver 
services, simply ignore reality. On the one hand we say we want 
to grow without any inhibiting force. On the other hand, we say 
it is not going to have an impact. Those two are inconsistent. 
It is having an impact. I would challenge anyone to go to a 
state that has a sales tax, talk to the people who are 
estimating revenue and despite the fact that in most states we 
are seeing increases you will find that almost every tax 
commission who estimates revenue will have a category for 
Internet sales and it is a negative.
    Senator Dorgan. Governor, you have heard discussion of some 
here who say they want to impose new taxes describing this 
debate. These are not new taxes, are they?
    Governor Leavitt. They are not new taxes. And that is 
political rhetoric.
    Senator Dorgan. Are you aware of anyone who wants to impose 
new taxes here?
    Governor Leavitt. I know of no one who wants to impose a 
new tax on the Internet. There may be a few but we are not 
among them.
    Senator Dorgan. Congressman Cox, you indicated that prior 
to the moratorium that there were a range of governments, local 
governments attempting to develop discriminatory taxes. Can you 
give us some examples of that?
    Representative Cox. Sure. Takoma.
    Senator Dorgan. What was Takoma trying to do?
    Representative Cox. They were trying to levy a tax directly 
on Internet access.
    Senator Dorgan. And did they do that?
    Representative Cox. I believe they were either successful 
in getting it started or we nipped it in the bud.
    Senator Dorgan. Are there a range of others?
    Representative Cox. Indeed we have a website, the Internet 
Tax Freedom website, that can be accessed through my website 
and it lists many of them. It was not just the United States as 
I mentioned. This is also something that was also going on 
around the world.
    Senator Dorgan. One final question. Governor Leavitt, my 
understanding is that some of the largest retailers who are 
going to be involved in Internet selling--because they feel 
they must from news reports--I am told that they are intending 
to organize in a way and incorporate in a way that they will 
have an Internet sales component that will be able to sell 
without a responsibility to collect the local sales tax. If 
that occurs on a widespread basis, I assume that will also 
exacerbate the problem with the local tax base.
    Governor Leavitt. Major retailers in this country--and we 
are talking about the Wal-Marts and K-Marts who are perfectly 
capable of speaking for themselves--are clearly moving into a 
dot com mode because it is the most efficient way of selling. 
And they should. And they will. They are suggesting, ``just 
give us a level playing field. Define the rules for us.'' It is 
very clear from their actions and their words they would prefer 
a level playing field but if in this country we define the 
playing field as creating special privileges for a certain 
component of it, they will be forced by the competitive 
atmosphere in which they are in to move to that point.
    They will have kiosks outside of shopping malls, of stores, 
they will hook their cash registers to the Internet they will 
find whatever ways they have to within the carve-outs that we 
define to move to that point, and that is the point I suggest 
that the sales tax generally does not become viable or another 
thing occurs. People say we cannot stand this inequity. We need 
to have a balanced system that is a level playing field so let 
us have a national system and the IRS will stand on their 
tiptoes and say we are national, we will collect it for you and 
I will be willing to bet there are those in Congress who say if 
the IRS is collecting it we ought to be appropriating it.
    And suddenly you will have revenues that have been 
collected and appropriated by state and local jurisdictions for 
schools and roads and for law enforcement will now be 
appropriated by the Congress and collected by the IRS because 
the inequality of one having to collect it and one not simply 
will not be allowed to stand in the long term.
    Representative Cox. I should point out that kind of tax is 
banned in the Internet Tax Freedom Act that we are trying to 
extend here.
    Senator Dorgan. The Interstate Commerce Clause is actually 
why we are discussing this. It gives Congress the authority to 
do this, and the other genius in the Constitution is 640,000 
North Dakotans have two senators.
    Representative Cox. That is one part of the Constitution 
that is not amenable even under Article V.
    Senator Dorgan. I want to work with Senator McCain, Senator 
Wyden, Senator Breaux and other colleagues to respond to this 
area. I support an extension of the moratorium. I support it 
for an eternity. I don't support discriminatory taxation. There 
are other things we need to balance as we do this and that is 
the reason for the questions. Mr. Chairman, thank you.
    Senator McCain. Thank you.
    Senator Breaux.
    Senator Breaux. Thank you, Mr. Chairman. I apologize for 
having to leave, but I have heard both of your testimonies and 
we appreciate you being here. I have two points, I guess. 
Governor, I would like to once again thank you for serving on 
that Commission. It can sometimes be a thankless task, 
particularly when you have a two-thirds requirement to get an 
agreement. If we do extend the moratorium for 5 years or what 
have you, it would seem to me that it takes a great deal of the 
pressure off for you folks to come to any kind of a consensus 
or agreement on what to recommend. Do you agree or disagree 
with that?
    Governor Leavitt. As I indicated that, I supported the 
Internet Tax Freedom Act and the moratorium that is there and I 
am prepared to support its extension. I do believe we have 16 
or 18 months left on it. We have much to be done during that 
period.
    Senator Breaux. And then if you are not able at that time, 
I take it from your testimony, you would support an extension 
that would at least give you the time to see if you can do it 
during this period.
    Governor Leavitt. In the last 12 months we have seen 
dramatic changes. We will see dramatic changes in the next 12. 
I would suggest that one of those will be that we will start to 
see the clear shaping of a national model that could provide a 
zero burden system for the development of taxation on commerce.
    Senator Breaux. I apologize if you have gone into detail on 
explaining those, but can you give me some indication so I can 
better understand what you all are attempting to do with regard 
to getting an agreement on a unified sales tax to be collected 
for Internet sales transaction--and we are not talking about 
the Congress determining what each state's sales taxes would 
be, or amount would be, as I understand it. Can you give me 
some more elaboration on what you are all recommending?
    Governor Leavitt. I think what you are asking me is what 
would a zero burden system look like if we were to be able to 
develop it? We set a very high hurdle for ourselves. It would 
have centralized one-stop registration. You would not have to 
go to fifty different states. You would go to one website, 
register and you are registered in all 50 States. It would have 
uniform tax definitions so that what was a peanut in one state 
would be a peanut in another. It would have uniform and simple 
sourcing rules. In other words, we would have a standardized 
set of rules as to who was obligated to pay and who had the 
obligation to collect. We would have uniform exemption rules 
for those who have tax exempt status. It would do away with the 
tax audit as we know it. It would essentially have software 
that could be embedded in the software of a website that would 
completely eliminate and remove from the seller any 
responsibility for this. This would be a boon to those who are 
currently involved in commerce at the bricks and mortar level.
    Senator Breaux. This recommendation which you just 
described would come to the Congress for Congress to take 
action on?
    Governor Leavitt. We would bring it to the Congress for 
them to authorize an interstate compact among the States and 
with it I believe would be a group of benefits for those who 
adopt it and some sanctions for those who do not. It is clear 
to me that the States have an enormous amount of incentive to 
adopt this. If we do not, we are going to be completely left 
behind and the sales tax as we know it will no longer be a 
viable tool. We have to solve this problem.
    Senator Breaux. What would the process be by which the 
States participate in making this recommendation?
    Governor Leavitt. The NUCSL process, which is the Uniform 
Commission on State Laws--each state sends representatives to 
the process and they also include other stakeholders. They go 
through an exhaustive process to develop a model state law. It 
is then taken back to each state and passed in each state 
legislature as such.
    Senator Breaux. The amount of each state sales tax under 
that recommendation could be different. It would not 
necessarily be all the same. Louisiana could have five sets, 5 
percent. Texas could have whatever Texas has. California could 
have whatever.
    Governor Leavitt. There are those who argue that a single 
rate in every state would benefit. In my own state in this last 
legislature we authorized a single rate for remote sales. There 
are those who also argue that the technology will not make that 
necessary. Those who argue would not be necessary say that the 
technology exists today to be able to disseminate where it goes 
and that we ought to use the existing. That will be part of the 
debate that will occur during the next 2 years.
    Senator Breaux. I think you are attempting to accomplish 
something that is very, very helpful--obviously to Congress, if 
we can get that type of a recommendation. I think that you all 
have done terrific work and we appreciate it. Chris, I 
appreciate your position. We have some disagreements on it but 
hopefully in the end we can come together and find a solution 
that everybody can work with. Thank you.
    Senator Wyden. Would it be possible to ask one additional 
question?
    Senator McCain. Only one.
    Senator Wyden. Thanks. And----
    Senator McCain. Short one, please.
    Senator Wyden. I ask it only because the point that Senator 
Breaux makes I think is right at the heart of our getting the 
bill out in the next few weeks and my concern is if the 
moratorium ends without action, we can go back to letting all 
these local jurisdictions have at it. And my question would be, 
Governor Leavitt, if you support what you all say you are for, 
which is an extension of a moratorium on discriminatory taxes, 
I will support your getting a vote on the fast-track that the 
Chairman was talking about of something I am very skeptical of, 
which is you can come up with a workable system. Can you all 
look at that over the next few weeks and get back to the 
Chairman and Senator Dorgan, Senator Breaux and me so that we 
can see if at least that can be examined.
    Governor Leavitt. We are always willing to talk, as both 
you and Congressman Cox know from our previous successful 
discussions that culminated in the Internet Tax Freedom Act.
    Senator Wyden. Thank you, Mr. Chairman.
    Senator McCain. Thank you both for being here this morning. 
I apologize for the length that you had to remain in the 
docket, but I appreciate the very important testimony you have 
given the Committee. Thank you both.
    Our next panel is Dr. John Berthoud, who is the President 
of the National Taxpayers Union; Dr. Donald Bruce, Professor, 
Center for Business and Economic Research at the University of 
Tennessee; Mr. David Bullington Vice President of Taxes at Wal-
Mart Corporation; Mr. Burr Morse, who is the President of Morse 
Farm Sugar Works in Montpelier, Vermont; Mr. Jonathan Zittrain, 
who is from the Berkman Center for Internet and Society at the 
Harvard Law School. Mr. Berthoud, thank you very much for being 
here and we'll begin with your opening statement.

          STATEMENT OF DR. JOHN BERTHOUD, PRESIDENT, 
                    NATIONAL TAXPAYERS UNION

    Dr. Berthoud. Thank you, Mr. Chairman. Thank you for 
correctly pronouncing my name! It is a pleasure to appear 
before your Committee and you, who are a repeat winner of the 
NTU Friend of the Taxpayer Award year after year.
    It is a pleasure to talk with you this morning on behalf of 
our 300,000 members nationwide. I come before you to state our 
views on Internet taxation and your legislation S. 2255, which 
would extend the moratorium through 2006. The National 
Taxpayers Union strongly supports your efforts, Mr. Chairman, 
and encourages the Committee to act favorably on this bill.
    While proponents of more taxes on the American people have 
lobbied to establish taxes on Internet commerce, a close 
examination of the facts reveals no justification at all for 
creating taxes on Internet access, creating discriminatory 
taxes on the Internet or perhaps most importantly forcing 
vendors to collect taxes for cities and States in which they 
are not located, proposals such as Governor Leavitt outlined 
previously.
    I will briefly examine and refute the claims of the pro-
taxing crowd and make the case why it is important to keep the 
destructive power of government as far as possible from the 
Internet. First we hear that failure to establish a tax regime 
such as the NGA is proposing will lead to underfunding of 
critical services and let me quote from some of the NGA scare 
stories on their web page and this is a quote, ``state and 
local governments can lose nearly 10 billion dollars by 2003 in 
uncollected sales tax revenues in Internet and mail order 
sales. If this problem is not addressed, America would have 
200,000 fewer teachers and police officers educating our 
children and keeping our communities safe.''
    However, facts and a brief review of state and local 
revenues and how states collect the revenues will quickly 
dispel this type of hysteria. State governments, as has been 
recognized, are flush with money and in my testimony you have a 
figure that shows based on OMB numbers, state and local tax 
receipts have grown by over 30 percent--a stunning amount in 
just the past 5 years. Many states such as New York, 
California, Texas, Maryland, Pennsylvania and others have seen 
year after year of surpluses exceeding 1 billion dollars.
    The fact is that states have so much money, they are 
creating endless new programs. In fact, there was a state 
senator from Michigan who admitted to the New York Times that 
they have new programs coming out of the weeds and he said only 
some of them have merit. This was in the New York Times just a 
couple of days ago. The fact that the States have so much money 
that they are creating myriad new programs, again some 
legislators are making the admission that they have little 
merit, seems to clearly disprove the scare tactics of the NGA 
and others. Make no mistake, Mr. Chairman, as you wisely know, 
part of the reason for this boom in revenues is the Internet e-
commerce and the high-tech sector.
    Because governments at all levels have so far wisely left 
the Internet, e-commerce and indeed the entire high-tech sector 
alone, it has been able to flourish. In turn, these businesses 
have returned massive amounts of revenue to states and 
localities via the taxes currently in place. Adding new taxes 
to the Internet would adversely affect e-commerce and in turn 
stifle this revenue growth that the States are luxuriating in.
    A 1999 study by the National Bureau of Economic Research 
concluded that applying existing sales taxes to the Internet 
would slash the number of online buyers by 25 percent and 
plummet purchases by 30 percent or more. Proponents--and 
perhaps ``fairness'' is a word that has been used by almost 
every person testifying before the Committee this morning--
proponents of new tax regimes say that it is unfair that 
Internet businesses are not subject to sales taxes and other 
taxes and that they are supposedly escaping their obligation to 
fund ``needed government services.'' Again, nothing could be 
further from the truth.
    Anyone who knows about state and local taxes knows that all 
businesses, large and small, face myriad other taxes beyond the 
sales and use tax. They pay corporate income taxes, employees 
pay personal income taxes, property taxes, and literally 
hundreds of different types of fees. When Governor Leavitt was 
recounting his story about all the sales tax revenue that was 
lost by his grandmother's purchases, he of course did not 
mention that States and localities gained literally hundreds, 
perhaps thousands of dollars through other taxes that were 
collected based on those sales.
    Rather than figuring out new taxes to add on to businesses, 
Congress and the States should be focused on the ways to lower 
the old ones. For those businesses that currently do not have 
an Internet presence and who feel that fairness dictates the 
establishment of new taxes on e-commerce, our message is 
simple. Government is never the solution to your competitive 
problems. More government always ends up hurting commerce and 
we would advise them to look instead to getting into the 
Internet or expanding an Internet presence themselves.
    Mr. Chairman, we share your vision of equity and the issue 
of equity and fairness has been fundamental to debates over 
NGA's type of tax regime. The question is, is it fair to brick 
and mortar businesses if we do not have an NGA type regime on 
Internet commerce? We would argue that every business in 
America has the opportunity to sell on a tax-free Internet, and 
what could possibly be more fair than that?
    As you well know, Mr. Chairman, the debate over taxes has 
been central to the 2000 election cycle. While you and others 
have offered wise and sensible plans for reducing the Federal 
tax burden and returning some of the Federal tax overpayment 
(what is also called the surplus) to its rightful owners, the 
American taxpayers, the issue we are talking about today is 
perhaps of greater long-term significance to taxpayers. We thus 
strongly support your legislation and indeed we urge Congress 
to go further and adopt your legislation S. 1611 which would 
amend the Internet Tax Freedom Act to broaden its scope and 
make the moratorium permanent. We have also endorsed in the 
House H.R. 3252, the Internet Tax Elimination Act sponsored by 
your colleague, Congressman Kasich which would bar sales and 
other types of taxes permanently on e-commerce.
    In closing, I would like to quote from one of the great 
political philosophers of the 20th century, former President 
Ronald Reagan, who observed the government's view of the 
economy could be summed up in a few short phrases, ``if it 
moves, tax it; if it keeps moving regulate it; and if it stops 
moving subsidize it.'' Now is the time, Mr. Chairman, to put a 
stop to schemes to tax the Internet to keep it moving and 
growing, so government one day does not have to step in and 
regulate it or subsidize it. This is the challenge before you 
and the distinguished members of this Committee.
    [The prepared statement of Dr. Berthoud follows:]

          Prepared Statement of Dr. John Berthoud, President, 
                        National Taxpayers Union
I. Introduction
    Mr. Chairman and Members of the Committee, my name is John 
Berthoud. I am President of the National Taxpayers Union, a nationwide 
grassroots lobbying organization of taxpayers with 300,000 members.
    I come before you today to state our views on Internet taxation and 
Chairman McCain's legislation, S. 2255, which would extend the 
moratorium on Internet taxation through 2006. The National Taxpayers 
Union strongly supports this effort and encourages the Committee to act 
favorably on this bill.

II. The Moratorium Should Be Extended
    A moratorium is a prohibition on action. We believe government 
should not act--through taxation, spending, or regulation--unless there 
is a clear and compelling reason for it to do so. While proponents of 
more taxes on the American people have lobbied hard to establish taxes 
on Internet commerce, a close examination of the facts reveals no 
justification at all for a) creating taxes on Internet access; b) 
creating discriminatory taxes on the Internet; or c) forcing vendors to 
collect taxes for states and cities in which they are not located.
    I will briefly examine--and refute--the claims of the pro-taxing 
crowd and make the case why it is important to keep the destructive 
power of government as far as possible from the Internet.

III. Claim: Failure to Tax the Internet Will Lead to ``Under-Funding of 
        Critical Government Services''
    Repeatedly, we hear from the pro-tax side that without a new tax 
regime on the Internet, ``critical government services'' will have to 
be cut. The pro-tax National Governors' Association (NGA) argues that 
if the NGA Internet tax plan is not adopted, ``States and local 
governments could lose more than $10 billion per year by 2003 in 
uncollected sales tax revenues on Internet and mail-order sales . . . 
If this problem is not addressed, America would have 200,000 fewer 
teachers and police officers educating our children and keeping our 
communities safe.'' \1\
---------------------------------------------------------------------------
    \1\ ``Sales Taxes and the Internet--Myths and Facts,'' National 
Governors' Association web site, http://www.nga.org/Internet/Facts.asp.
---------------------------------------------------------------------------
    NGA's scare tactics about laying off police and teachers are 
repeated by other big government advocates who argue in favor of 
similar tax schemes. However, the facts quickly disprove this type of 
groundless hysteria.
    State governments are flush with money. Total state taxes, 
including traditional sales taxes, have grown at almost twice the rate 
of inflation and population for the past six years. Figure 1 shows that 
state and local government tax receipts grew by over 30 percent between 
1994 and 1999.




    Many states--such as New York, California, Texas, Maryland, 
Minnesota, Indiana, Michigan, Washington, and Pennsylvania--have seen 
year-after-year of surpluses exceeding $1 billion.\2\ One Michigan 
State Senator commented that as a result of the year-after-year 
surpluses in that state, ``we have programs coming out of the weeds--
groups with something warm and fuzzy, and some of them have merit '' 
\3\ (italics added).
---------------------------------------------------------------------------
    \2\ Peter T. Kilborn, ``A Resurgent Michigan Leads Newly Flush 
States,'' The New York Times, April 10, 2000, Page A1.
    \3\ Ibid, Page A16.
---------------------------------------------------------------------------
    Meanwhile, the federal government's share of the economy has 
reached a postwar high. In FY 2001, the Office of Management and Budget 
projects the federal government will collect 54 percent more revenue 
than it did just ten years ago (adjusting for inflation).\4\
---------------------------------------------------------------------------
    \4\ Office of Management and Budget, Historical Tables of the 
Budget of the United States Government--Fiscal Year 2001, Table 1.3.
---------------------------------------------------------------------------
    And make no mistake--a substantial part of the reason for this boom 
in revenues is the Internet, e-commerce, and the high-tech sector. 
Because governments at all levels have so far mostly left the Internet, 
e-commerce, and indeed, the entire high-tech sector alone, it has been 
able to flourish. In turn, these businesses have returned massive 
amounts of revenue to states and localities through the taxes currently 
in place.
    Adding taxes to the Internet would adversely affect e-commerce and 
in turn stifle the revenue growth that we have seen in most types of 
state and local taxes. A 1999 study by the National Bureau of Economic 
Research concluded that applying existing sales taxes to the Internet 
would slash the number of online buyers by 25 percent and plummet 
purchases by 30 percent or more.\5\
---------------------------------------------------------------------------
    \5\ ``A World Without Borders: The Impact of Taxes on Internet 
Commerce,'' National Bureau of Economic Research Working Paper No. 
6863, 1999.
---------------------------------------------------------------------------
IV. Claim: E-Commerce Businesses Are Escaping Taxation
    Proponents of more taxation argue that it is unfair that Internet 
businesses are not subject to new types of Internet tax plans--they are 
supposedly ``escaping their obligation'' to fund ``needed government 
services.'' Nothing could be further from the truth.
    Businesses in America--those on the Internet or those not yet on 
the Internet--are already overtaxed through a great variety of levies. 
Some of the more prominent ones include:

   corporate income taxes
   personal income taxes
   sales taxes
   use taxes
   property taxes
   literally hundreds of different types of fees

    The small business sector would once again be hit hardest by 
Internet taxation. Their smaller size means that the compliance burdens 
would be proportionately greater. Chris Wysocki, President of the 
50,000-member Small Business Survival Committee, testified to the 
Advisory Commission on Electronic Commerce that, ``Allowing the 
taxation of e-commerce would jeopardize the growth of the new digital 
economy and hamper the ability of entrepreneurs across America . . . 
The burdens that would be imposed are simply unacceptable.'' \6\
---------------------------------------------------------------------------
    \6\ ``Fed Panel Urged To Keep Web Tax Free,'' The Associated Press, 
December 15, 1999.
---------------------------------------------------------------------------
    Rather than figuring out new taxes to add onto businesses, Congress 
and the states should be focusing on ways to lower the old ones.
    For those businesses who don't currently have an Internet presence 
and who feel that ``fairness'' dictates the establishment of new taxes 
on e-commerce, our message is simple: government is never the solution 
to your competitive problems. More government always ends up hurting 
commerce. Look instead to getting into the Internet yourself.
    The situation with non-Internet retailers pursuing taxes on those 
with an Internet presence is analogous to the situation where some 
businesses have lobbied the U.S. Department of Justice to pursue 
Microsoft in the hopes of achieving a competitive advantage. Any short-
run advantage to these firms is clearly outweighed by the longer-run 
costs of government intrusion. Nobel Laureate Milton Friedman made this 
point very eloquently in a dialogue with us last year:

        Business, in general, has something of a suicidal instinct. It 
        often proposes laws in its own self-interest which destroy the 
        underlying basis of the whole private enterprise system. I 
        believe that is what has been happening recently in the 
        computer industry. Silicon Valley is suicidal in calling 
        government in to mediate in the disputes among some of the big 
        companies in the area and Microsoft. The end result will be 
        that an industry that up to now has been able to proceed at a 
        marvelous pace with little or no government regulation--it has 
        been a wonderful example of the efficiencies of a strictly free 
        private-market--that industry is now going to have government 
        all over it. It's going to spend in legal fees over the next 
        ten or twenty years, money which society would benefit from 
        much more if it were spent in the kind of research and 
        development that has brought us the many miracles in the area 
        of Internet, in the area of home computers, industry computers, 
        and all the rest.\7\
---------------------------------------------------------------------------
    \7\ ``Dr. Milton Friedman Talks with National Taxpayers Union 
President John Berthoud,'' Spring 1999--San Francisco, California.
---------------------------------------------------------------------------
V. Why Do Proponents of Internet Taxation Want to Add Internet Taxes?
    It is quite clear why advocates of Internet taxation have lobbied 
hard for Congress and state legislatures to either establish special 
taxes on the Internet or else create new tax regimes to snare e-
commerce in the web of state sales tax collectors. They want lots more 
money from taxpayers to fund their plans for even bigger government.
    One of the clearest examples is that of America's teacher unions. 
One of the strongest voices for more taxes--on the Internet and 
everything else--America's teacher union leaders are pushing an agenda 
that would add $906 billion to the existing mountain of federal 
spending.\8\ That's each and every year. To enact an agenda of this 
size would require a staggering tax increase of $7,490 per taxpayer.\9\
---------------------------------------------------------------------------
    \8\ Jared Adams, `` `What About the Children?' The Legislative 
Agenda of the National Education Association and the Politics of New 
Unionism,'' NTU Foundation Policy Paper 122, October 19, 1999, Page 1.
    \9\ Ibid.
---------------------------------------------------------------------------
    Advocates of Internet taxation are advancing this idea to help fund 
their dreams for a massive expansion in government. This agenda is bad 
news for taxpayers and America's future.

VI. Practical Considerations
    Mr. Chairman, your legislation extending the moratorium makes sense 
for all the reasons noted previously. But even if Internet taxes 
wouldn't add a huge burden to businesses and even if states weren't 
already overflowing in revenues, there are more practical reasons to 
continue the moratorium. For example, we have yet to hear a sensible 
argument on who would be owed a tax if a resident of Arizona, using an 
Internet Service Provider located in Utah, ordered a product from a 
company headquartered in Delaware, but whose main office is in Maine, 
and who ships their goods from New York. Absent a moratorium, we would 
expect to see state or local legislation that could lead to taxes being 
paid to a variety of these jurisdictions, meaning multiple taxation 
placed on a single sale.
    And we would anticipate that it will be very difficult for tax and 
regulatory laws to keep pace with technological change as it occurs. We 
don't want to put laws in place that will quickly be made obsolete. As 
the respected magazine, The Economist argues, ``The Internet is so new 
that the direction of technological change is fiendishly hard to 
predict. By contrast, tax rules are precise and inflexible, and take a 
long time to change.''\10\
---------------------------------------------------------------------------
    \10\ ``Why the taxman fears the Internet,'' The Economist, January 
29, 2000.
---------------------------------------------------------------------------
VII. Conclusion
    As you well know Mr. Chairman, the debate over taxes has been 
central to the 2000 election cycle. While you and others offered wise 
and sensible plans for reducing the federal tax burden and returning 
some of the current federal tax over-payment (what is also called the 
surplus) to its rightful owners, the American taxpayers,\11\ the issue 
we are talking about today is probably of even greater long-term 
significance to taxpayers.
---------------------------------------------------------------------------
    \11\ Contrary to the opinion of many ``Inside-the-Beltway'' 
experts, Americans believe they are overtaxed and want to see federal 
tax dollars returned to them rather than spent on more government 
programs. This was brought out in polling by John Zogby last September:
    Q. Statement A says that tax refunds should be returned to those 
who were overtaxed.
    Statement B says tax refunds should be kept to shore up 
effectiveness of government programs.

    Respondents who agreed with:

      Statement A--64%
      Statement B--27%
      Neither--6%
      Not Sure--3%

    (Source: ``Zogby Poll Sets New Course for America,'' The O'Leary 
Report, Vol. IV, Issue V, September 1999, Page 3.)
---------------------------------------------------------------------------
    We thus strongly support this legislation and indeed, we urge 
Congress to go further and adopt your legislation S. 1611, which would 
amend the Internet Tax Freedom Act to broaden its scope and make the 
moratorium permanent. We have also endorsed H.R. 3252, the Internet Tax 
Elimination Act sponsored by House Budget Committee Chairman John 
Kasich, which would bar sales taxes and other taxes on e-commerce.
    In conclusion, I want to quote one of the great political 
philosophers of the Twentieth century, former President Ronald Reagan, 
who observed, ``Government's view of the economy could be summed up in 
a few short phrases: If it moves, tax it. If it keeps moving, regulate 
it. And if it stops moving, subsidize it.'' Now is the time, Mr. 
Chairman, to put a stop to schemes to tax the Internet--to keep it 
moving and growing, so government one day doesn't have to regulate it 
or subsidize it. This is the challenge before you and the Members of 
this Committee.
    Thank you.

    Senator McCain. I thank you for that informed statement, 
but also I want to thank you for the great job your 
organization has done for many years in informing the American 
people and being of assistance and providing me with additional 
information and knowledge over many years. I would like to, 
before I call on Dr. Donald Bruce, at this time to enter a 
letter into the record from the Governor of Pennsylvania, who 
supports the extension of the current moratorium on access, 
multiple or discriminatory taxes.
    In fact, he points out he proposed the legislature approve 
the repeal of Pennsylvania sales taxes on computer services as 
well as tax prohibition on Internet access charges. There are 
some states and some Governors who I must say I think are more 
enlightened on this issue than others but we will leave that to 
others to judge.
    Dr. Bruce, welcome. Thank you for being here. I want to 
thank all the witnesses for your patience while we interrogated 
the first panel. Thank you, Dr. Bruce.
    [The information referred to follows:]

                              Commonwealth of Pennsylvania,
                                    Office of the Governor,
                                     Harrisburg, PA, April 12, 2000

Hon. Trent Lott,
Majority Leader, U.S. Senate,
Washington, D.C.

Hon. J. Dennis Hastert,
Speaker of the House, U.S. House of Representatives,
Washington, D.C.

Dear Senator Lott and Speaker Hastert:

    I understand that Congress may soon consider proposals addressing 
the Internet Tax Moratorium set to expire next year. Technology has 
been a central focus of my administration since I took office 5 years 
ago. From education to public safety, our commitment to information 
technology is helping Pennsylvania to remain competitive in the global 
economy and preserve the high quality of life in the Commonwealth. 
Internet based commerce is changing the face of how we do business in 
Pennsylvania and providing rapid access to a whole new world of 
information.
    To foster the electronic boom I support an extension of the current 
moratorium on access, multiple, or discriminatory taxes. The Internet 
has been growing at a record pace and I believe the moratorium has 
facilitated that process by assuring that commerce over the Internet is 
not singled out and taxed in new and creative ways. That is why I 
proposed and the Legislature approved a repeal of Pennsylvania sales 
taxes on computer services as well as a tax prohibition on Internet 
access charges. More recently, in my 2001 budget, I have proposed a 
Sales Tax Holiday for Commonwealth residents who buy personal 
computers.
    Pennsylvania is rather unique because we continue to manufacture 
goods. Thus, technological advances are often applied to many of those 
goods produced in Pennsylvania. Decisions on the taxation on Internet 
commerce therefore, are very complex and must balance the needs of both 
Internet and Main Street based businesses.
    The report submitted by the ACEC Business Caucus to the Advisory 
Commission on Electronic Commerce acknowledged that ``In addressing 
whether and how the Internet should be subject to taxation, a major 
priority should be reducing or removing access barriers to perhaps the 
most advanced and useful medium of communication and commerce yet 
devised.'' I concur.
    I also agree with the Caucus position that the system taxation of 
remote sales should be simplicity, efficiency and fairness--and that 
``(o)ur system of federalism mandates that the burden to produce such a 
system falls on the states.''
    My concerns with the report include their preemption of the state 
role, albeit for allegedly a period of five years, during which time 
the Caucus recommends that Congress pass laws preempting state 
sovereignty. We, state and local elected officials, are best suited to 
reach a consensus on what changes need to be made to our sales and 
property taxes without creating a competitive disadvantage for any of 
our businesses. The magnitude of the undertaking is only equaled by its 
importance. States must work with local governments and its 
stakeholders--consumers, telecommunication and other remote businesses 
as well as our Main Street business to address these challenges.
    As Congress considers legislation on Internet taxation, I hope that 
a guiding principle will be fair competition between Main Street 
businesses and Internet businesses. An extension of the moratorium will 
provide us more time to assess the situation and ensure that we do no 
harm to either side. I strongly urge that when considering the impact 
of electronic commerce on our economy, any changes to the state tax 
structure should be done gradually and with consultation of all 
stakeholders.
        Sincerely,
                                                 Tom Ridge,
                                                           Governor

           STATEMENT OF DR. DONALD BRUCE, PROFESSOR, 
          CENTER FOR BUSINESS AND ECONOMIC RESEARCH, 
                  THE UNIVERSITY OF TENNESSEE

    Dr. Bruce. Good morning, Mr. Chairman and thank you so much 
for this opportunity to present these remarks on behalf of 
myself and my colleague Dr. William Fox, who is also at the 
University of Tennessee. We appreciate this opportunity. Let me 
just begin by stating that we are in agreement with the basic 
theme of this Act. That taxes should be levied in a 
nondiscriminatory way is absolutely fundamental.
    Our objection to the Act's extension is that it represents 
a failure to act on an issue of such monumental importance. It 
places us on a policy trajectory that prevents meaningful 
cooperative action to solve the actual problems.
    First, it erodes the ideal of tax neutrality. The notions 
or decisions to produce or purchase a particular good or 
service should not be made on the basis of differential tax 
treatment. Second, it perpetuates reliance on a court 
determined standard of nexus that is based on physical rather 
than economic presence. A consequence of this is that future 
efforts toward simplification and improvement of sales and use 
taxes becomes even more difficult and state and local 
governments end up losing significant amounts of tax revenue.
    The primary issue, however, in the great debate is that of 
tax neutrality. Essentially the tax treatment of a particular 
good or service should not depend on how that good or service 
is obtained for final consumption. Differential taxation 
affects not only consumer decisions of where to buy but also 
business decisions of where to produce and in this electronic 
world both sides will go wherever they get the better deal and 
taxes can make the difference thereby disadvantaging many 
regions of the country and many traditional businesses in the 
process. This idea is presumably at the heart of the original 
act. Discriminatory taxes on Internet sales should be 
prohibited.
    However, nondiscrimination must go in both directions. In 
other words, the tax treatment of Internet sales must not 
discriminate against local bricks and mortar establishments. 
Subsidizing Internet firms through apparent non-taxation places 
a direct comparative disadvantage on local retailers inevitably 
forcing some of them out of business forever. Now a key 
component of the Act is its implicit acceptance of a definition 
of nexus that is based on physical presence, effectively 
limiting each state's ability to enforce collection of use 
taxes on remote sales. Extending the moratorium through 2006 
will only make it more difficult for States to collect the 
sales and use taxes that are legally owed.
    Our research, which we have submitted in its full form for 
the record, shows that revenue losses to state and local 
governments, while not particularly large in the immediate 
term, will grow dramatically under the status quo. Admittedly, 
state and local sales tax bases were already eroding prior to 
the development of the Internet. E-commerce will only 
accelerate this historical trend and will result in our 
estimation of an additional revenue loss of 10.8 billion 
dollars in 2003.
    It has been argued in defense of this act that States have 
enjoyed strong revenue growth in recent years, and we must 
note, however, that this is a cyclical phenomenon. Long-term 
revenue growth is not excessive. Similarly, the robust growth 
of e-commerce is a result of things like convenience, price, 
quality of service and the like and cannot be attributed solely 
to this act. Taxing remote sales like their local counterparts 
would certainly not kill the golden goose.
    To be clear, our position is neither for nor against big 
government. We are merely advocating the neutral non-
discriminatory tax treatment of all types of commerce such that 
state and local governments can finance their activities as 
they see fit. The primary question then seems to be whether or 
not the sales tax should be preserved as a source of state and 
local revenue. Extending this act will permit the continued 
erosion of sales and use tax bases and state and local 
governments will have no choice but to turn away from our 
nation's primary consumption-based tax system, toward higher 
taxes on income and wealth. As it generates nearly \1/3\ of all 
state tax revenues, we are of the opinion that the sales tax 
should be preserved with the following general modifications.
    First, Congress should replace the outdated definition of 
nexus with one that is more in line with the modern economy 
based on economic rather than physical presence. Firms that 
significantly exploit a particular state's market should be 
expected to withhold sales and use taxes for that state 
regardless of whether or not the firm has physical presence.
    Second, in exchange for this broader definition of nexus, 
States should be expected to implement substantial 
simplification measures. Included in this would be each state's 
adoption of a single sales and use tax rate and a state 
specific definition of a set of taxable goods and services 
presumably drawn from a uniform nationwide set of product 
definitions. These simplification measures would enable a more 
streamlined and less burdensome collection process for remote 
vendors. More importantly, production and purchasing decisions 
would be based on economically relevant factors rather than on 
differential sales and use tax treatment.
    It has been said that the sales tax is a dying tax and that 
e-commerce is just the thing to push it to an early grave. Our 
contention is that e-commerce could provide the incentive for 
Congress to work with the States to improve our system of 
consumption taxation such that sales and use taxes can continue 
to be stable and significant sources of revenue. Thank you, Mr. 
Chairman.
    [The prepared statement of Dr. Bruce follows:]

Prepared Statement of Dr. Donald Bruce, Professor, Center for Business 
           and Economic Research, the University of Tennessee

Introduction
    Good morning, and thank you for this opportunity to address whether 
the Internet Tax Freedom Act (henceforth referred to as the Act) should 
be extended through 2006. Let me begin by stating that we are in 
agreement with the basic theme of the Act. That taxes should be levied 
in a nondiscriminatory way is absolutely fundamental.
    Our objection to the Act's extension is that it represents the 
failure to act on an issue of monumental importance. It places us on a 
policy trajectory that prevents meaningful cooperative action to solve 
the problems at hand. First, such a policy erodes the ideal of tax 
neutrality--the notion that decisions to produce or purchase a 
particular good or service should not be made on the basis of 
differential tax treatment. Second, extending the Act perpetuates 
reliance on the Court-determined standard of nexus that is based on 
physical rather than economic presence. A consequence of this is that 
future effort toward simplification and improvement of sales and use 
taxes becomes even more difficult, and state and local governments lose 
significant amounts of tax revenue.

Tax Neutrality
    The primary issue in the greater debate is that of tax neutrality. 
Essentially, the tax treatment of a particular good or service should 
not depend on how that good or service is obtained for final 
consumption. Differential taxation affects not only consumer decisions 
of where to buy, but also business decisions of where to produce. In 
this electronic world, both sides will go wherever they get the best 
deal--and taxes can make the difference, thereby disadvantaging many 
regions of the country and many traditional businesses.
    This idea is presumably at the heart of the original Act--
discriminatory taxes on Internet sales should be prohibited. However, 
nondiscrimination must go in both directions. In other words, the tax 
treatment of Internet sales must not discriminate against local bricks-
and-mortar establishments.
    To illustrate, consider the following parallel with local 
infrastructure investments. A city that decides to renovate a downtown 
street will inevitably subject a number of businesses--and their 
customers--to tremendous inconvenience. Potential patrons will be less 
likely to visit these establishments during the construction period, 
and the businesses may have to close their doors as a result. These 
businesses probably will not reopen after the completion of the 
construction.
    In a similar manner, the Act represents an investment in the 
Internet as a transaction mechanism. Nonetheless, subsidizing Internet 
firms (through non-taxation) places a direct comparative disadvantage 
on local retailers, inevitably forcing some of them out of business 
forever.

Nexus and Revenue Implications
    A key component of the Act is its implicit acceptance of a 
definition of nexus that is based on physical presence--effectively 
limiting each state's ability to enforce collection of use taxes on 
remote sales. Extending the moratorium through 2006, while delaying any 
cooperative effort between the Federal and state governments toward 
sales and use tax simplification, will only make it more difficult for 
states to collect sales and use taxes.
    Our research shows that revenue losses to state and local 
governments, while not particularly large in the immediate term, will 
grow dramatically under the status quo. Admittedly, state and local 
sales tax bases were already eroding as a result of the growth of all 
types of remote sales, greater consumption of untaxed services relative 
to taxed goods, and the continuation of legislated exemptions, long 
before the development of the Internet. E-commerce will only accelerate 
this historical trend, and will result in an additional revenue loss of 
$10.8 billion by 2003.\1\
---------------------------------------------------------------------------
    \1\ Donald Bruce and William F. Fox, ``E-Commerce in the Context of 
Declining State Sales Tax Bases,'' Center for Business and Economic 
Research, University of Tennessee, April 2000.
---------------------------------------------------------------------------
    It has been argued in defense of this Act that states have enjoyed 
strong revenue growth in recent years. It should be noted, however, 
that this is a cyclical phenomenon--long-term revenue growth is not 
excessive. Similarly, the robust growth of e-commerce is a result of 
convenience, price, quality of service, and the like, and cannot be 
attributed solely to this Act. Taxing remote sales like their local 
counterparts would certainly not kill the ``golden goose.'' To be 
clear, our position is neither for nor against larger government--we 
are merely advocating the neutral, nondiscriminatory tax treatment of 
all types of commerce such that state and local governments can finance 
their activities as they see fit.

Policy Options
    The primary question, then, seems to be whether or not the sales 
tax should be preserved as a source of state and local revenue. 
Extending this Act will permit the continued erosion of sales and use 
tax bases due to the expansion of e-commerce, and state and local 
governments will have no choice but to turn away from our nation's 
primary consumption-based tax toward higher taxes on income and wealth. 
As it generates nearly one-third of all state tax revenues, we are of 
the opinion that the sales tax should be preserved, with the following 
general modifications.\2\
---------------------------------------------------------------------------
    \2\ For a broader discussion of these issues, see William F. Fox 
and Matthew N. Murray, ``The Sales Tax and Electronic Commerce: So 
What's New?'' National Tax Journal 50(3): 573-592.*
    * The information referred to has been retained in the Committee 
files.
---------------------------------------------------------------------------
    First, Congress should replace the outdated definition of nexus 
with one that is more in line with the modern economy--nexus should be 
based on economic rather than physical presence. Firms that 
significantly exploit a particular state's market should be expected to 
withhold sales and use taxes for that state, regardless of whether or 
not the firm has physical presence.
    Second, in exchange for this broader definition of nexus, states 
should be expected to implement substantial simplification measures. 
Included in this would be each state's adoption of a single sales and 
use tax rate and a state-specific definition of the set of taxable 
goods and services, presumably drawn from a set of uniform product 
definitions. Whether a bag of honey-roasted peanuts is ``food'' should 
be determined by a national standard, while the decision of whether or 
not it is taxable (and at what rate) should still be left to each 
individual state.
    These simplification measures would, in the process of restoring 
significant lost revenues, enable a more streamlined and less 
burdensome collection process for remote vendors. More importantly, 
production and purchasing decisions would then be based on economically 
relevant factors rather than on differential sales and use tax 
treatment.

Conclusion
    It has been said that the sales tax is a dying tax, and that e-
commerce is just the thing to push it toward an early grave. Our belief 
is that e-commerce can provide the incentive for Congress to work with 
the states to improve our system of consumption taxation, such that 
sales and use taxes can continue to be stable and significant sources 
of revenue.

    Senator McCain. Thank you very much, Dr. Bruce. Mr. 
Bullington.

         STATEMENT OF DAVID BULLINGTON, VICE PRESIDENT 
                 OF TAXES, WAL-MART CORPORATION

    Mr. Bullington. Mr. Chairman, members of the Committee, 
thank you for including a voice from the broader retail 
community in today's hearing. Sound economic policy in a free 
enterprise economy requires equal tax treatment of the 
different channels of retail distribution. The existing state 
sales tax rules, as constrained by Supreme Court decisions 
issued well before e-commerce, have created two fields of 
retail competition.
    On one playing field, brick and mortar retail stores, both 
large and small, are required to collect sales tax on behalf of 
States and localities. On the other, the largely unenforceable 
rules applicable to remote sales do nothing more than encourage 
consumers to voluntarily pay the use tax equivalent of a sales 
tax. As we all know, the use tax is easily ignored. Only across 
the board collection of this existing tax will level the 
playing field and rationalize our tax policy.
    We believe it is now up to Congress to resolve this issue 
fairly, so that all channels of retail distribution are treated 
the same. Brick and mortar retailers are now at a competitive 
``pricing'' disadvantage because, unlike many of their Internet 
and other remote selling counterparts, they must collect sales 
tax on most in-store sales. And, unless they take drastic steps 
to separate their Internet business from their brick and mortar 
businesses, they must collect sales tax on their own remote 
sales as well.
    Furthermore, customers who do not have access to the 
Internet, often lower income individuals who can least afford 
the burden of taxes, must pay sales taxes, while Internet 
shoppers in most cases do not. Access aside, the issue of 
credit availability is a much larger impediment to lower income 
individuals.
    We are greatly concerned about the effect the existing tax 
structure, if not fixed, will have on our communities. We share 
everyone's concern with the tax burden issue, and in no way do 
we want any additional tax burdens placed on consumers. Without 
across-the-board sales and use tax collection, revenues will 
actually decrease, and many States will be forced to raise 
sales taxes or introduce tax increases in other areas such as 
property taxes. In these circumstances, States will have fewer 
taxing options and will, as a result, have less control over 
their tax policy. As we all know, sales tax revenues are 
critical to the funding of public services such as schools, 
city streets, police and fire protection.
    We believe the Congress may fairly require Internet and 
other remote sellers to collect and remit sales or use taxes 
and that simplification is the key, coupled with technology. We 
emphasize that even with simplification any across the board 
collection requirement must allow for suitable de minimis 
thresholds below which mom-and-pop websites and other small 
businesses need only concern themselves with the filing 
requirements of their own state as required by current law.
    Additionally, appropriate collection allowances should be 
provided to compensate those remote sellers above the de 
minimis threshold for their cost of collection. There was 
general agreement in the Advisory Commission on Electronic 
Commerce as to the requirements for simplification. We believe 
that the States are willing to work together to implement these 
types of simplification. It will not work, however, to just say 
to the States ``go simplify yourselves and then come back and 
talk to us.'' More is required, a framework, a direction and a 
simplification threshold beyond which States may require 
collection.
    In inviting me you asked that I address specifically the 
consequences of extending the moratorium. If Congress extends 
the current tax moratorium, without at the same time approving 
legislation to achieve a level playing field for all retailers, 
future resolution of the issue will be seriously jeopardized. 
Already, many consumers have been led to mistakenly believe 
that the existing moratorium precludes sales tax on Internet 
purchases.
    I do not know who believes it will be any easier to 
resolve. I don't know anyone who believes it will be any easier 
to resolve the issue in five or six years. We urge Congress not 
to extend the existing moratorium without creating the 
framework within which those States that continue to move 
forward on simplification can aim for a threshold or date 
certain, after which collection can be required for those 
States that have simplified. Thank you, Mr. Chairman.
    Senator McCain. Mr. Bullington, it is rare that I interrupt 
a sequence of witnesses, but I am now. I have defended your 
organization when it came to Cottonwood, Arizona, and everybody 
is driven out of business because of what some view as 
predatory pricing and the enormous advantages that you have. 
And here you are talking about the ensuring of a level playing 
field. I am really, it is remarkable. It is one of the more 
remarkable comments that I have heard in all my years as a 
member of this Committee.
    Mr. Bullington. May I respond?
    Senator McCain. No. Sure. I am sorry. Certainly respond.
    Mr. Bullington. Senator, we do represent tough competition 
for anyone. Many of our best customers are small businesses and 
they turn to us to buy goods for the same efficiencies of 
distribution that, Sam's Club and even our Wal-Mart stores, the 
same pricing reasons that they turn to the efficiencies in the 
Internet and for other reasons.
    Senator McCain. If some of those small businesses that had 
to shut down when you come into these communities' 
representatives were here they would have a very different view 
of your impact on them and their economies and their lifestyles 
but, which may be one of the reasons why there has been so much 
controversy associated with your locating in some parts of the 
country. I have always defended your right to do that. Now we 
have a technology that gives an enormous opportunity to so many 
people to acquire goods and services at a lower price and you 
are here in that position.
    Mr. Bullington. Not at all. We look forward to being part 
of that expansive Internet economy that is out there.
    [The prepared statement of Mr. Bullington follows:]

   Prepared Statement of David Bullington, Vice President of Taxes, 
                          Wal-Mart Corporation

    Mr. Chairman, Senator Hollings, members of the Committee, thank you 
for including a voice from the broader retail community in today's 
hearing. Sound economic policy in a free enterprise economy requires 
equal tax treatment of the different channels of retail distribution. 
The existing state rules, as constrained by Supreme Court decisions 
issued well before the superhighway of technology was introduced, have 
created two fields of retail competition. On one playing field, brick 
and mortar retail stores, both small and large, are required to collect 
sales tax on behalf of states and localities. On the other, the 
unenforceable rules applicable to remote sales do nothing more than 
encourage consumers to voluntarily pay the use tax equivalent of a 
sales tax. As we all know, the use tax is easily ignored. Only across-
the-board collection of this existing tax will level the playing field 
and rationalize our tax policy.
    We believe that it is now up to Congress to resolve this issue 
fairly, so that all channels of retail distribution are treated the 
same. brick and mortar retailers are now at a competitive ``pricing'' 
disadvantage because, unlike many of their Internet and other remote 
selling counterparts, they must collect sales taxes on most in-store 
sales. And, unless they take drastic steps to separate their Internet 
business from their brick and mortar business, they must collect sales 
taxes on their own remote sales as well.
    We are greatly concerned about the effect the existing tax 
structure, if not fixed, will have on our communities. We share 
everyone's concern with the tax burden issue, and in no way do we want 
any additional tax burdens placed on consumers. Without across-the-
board sales and use tax collection, revenues will actually decrease, 
and many states will be forced to raise sales tax rates or introduce 
tax increases in other areas, such as property taxes, to offset the 
loss of sales tax revenue. In these circumstances, states will have 
fewer taxing options and will, as a result, have less control over 
their tax policy. Sales tax revenues are critical to the funding of 
public services such as schools, roads, police, and fire protection.
    Furthermore, customers who do not have access to the Internet--
often lower income individuals, who can least afford the burden of 
taxes--must pay sales taxes, while Internet shoppers in most cases do 
not. Access aside, the issue of credit availability is a much larger 
impediment to lower income individuals.
    Wal-Mart and the International Mass Retail Association (IMRA) \1\ 
are among the founding members of the e-Fairness Coalition--a coalition 
that advocates fairness for businesses and consumers, and that supports 
a level playing field, including fair and efficient collection of the 
existing tax already applied to remote sales. The e-Fairness Coalition 
very firmly believes that Congress must not extend the existing 
moratorium--which does not expire until October 2001--without resolving 
this sales tax collection issue.
---------------------------------------------------------------------------
    \1\ IMRA is an alliance of retailers and their product and service 
suppliers that is committed to bringing price-competitive value to the 
world's consumers. IMRA represents over 200 retail companies, which 
operate more than 133,000 stores worldwide and have sales of over $450 
billion annually. IMRA represents over 600 supplier companies with 
sales totaling over $600 billion per year. Together, IMRA's membership 
represents over $1 trillion in sales and employs millions of workers.
---------------------------------------------------------------------------
Background
    The issue of whether remote sellers should be required to collect 
and remit sales taxes is certainly not new, but the spectacular growth 
of the Internet and the opportunities for increased sales that most 
businesses see on the Internet have refocused attention on the issue.
    Deciding whether remote sellers should be required to collect taxes 
rests with the Congress, under the U.S. Constitution's Commerce Clause. 
The Supreme Court's 1992 decision in Quill Corporation v. North Dakota 
held that the Constitution prevents states from requiring use tax 
collection by out-of-state sellers without a physical connection to the 
state, but that Congress has the power to require such out-of-state 
sellers to collect the taxes. As the Court pointed out, only Congress 
has the authority to regulate interstate commerce. The best and most 
thoughtful course of action for Congress would be to give those states 
that undertake specified simplification steps the authority to require 
remote sellers to collect. This would resolve any concerns about 
burdening interstate commerce and would put all retailers, at least in 
those states that simplify, on a level playing field.

Simplification
    We believe that Congress may fairly require Internet and other 
remote sellers to collect and remit sales or use taxes on all taxable 
business to consumer sales, and that simplification is the key. Much 
has been made of the thousands of different taxing jurisdictions across 
the nation and of the other elements of state sales taxes that add to 
the current complexity. And at present it is a complex patchwork of 
systems that causes even the largest and most efficient retailers great 
headaches. While technology has made tremendous progress, it is not yet 
by itself a silver bullet that can entirely eliminate the burden of 
collecting. Technology coupled with simplification is the answer.
    We emphasize that even with simplification, any across-the-board 
collection requirement must allow for suitable de minimis thresholds 
below which Mom-and-Pop web sites and other small businesses need only 
concern themselves with the filing requirements of their home state, as 
required by current law.
    Recently there has been a tremendous amount of discussion about 
sales and use tax simplification. While there is by no means universal 
agreement on exactly how simplification should proceed, there is broad 
agreement on a number of items that we believe should make up the basis 
of Congressional legislation to provide collection authority for 
states.
    Simplification should include a centralized, one-stop, multi-state 
registration system for sellers; uniform definitions for goods or 
services that may be included in the tax base; uniform and simple rules 
for attributing transactions to particular taxing jurisdictions; 
uniform rules for the designation and identification of purchasers 
exempt from sales and use taxes, including a database of all exempt 
entities and a rule ensuring that reliance on such database shall 
immunize sellers from liability; uniform procedures for the 
certification of software that sellers rely on to determine state and 
local use tax rates and taxability; uniform bad debt rules; uniform tax 
returns and remittance forms; consistent electronic filing and 
remittance methods; state administration of all state and local sales 
taxes; uniform audit procedures; reasonable compensation for tax 
collection that reflects the complexity of an individual state's tax 
structure, including the structure of its local taxes; an exemption 
from use tax collection requirements for sellers falling below a 
specified de minimis threshold; appropriate protections for consumer 
privacy; and any other features that the states deem warranted to 
promote simplicity, uniformity, neutrality, efficiency, and fairness. 
We believe that many states are willing to work together to implement 
these types of simplification.
    To encourage simplification, Congress should give states the 
authority to adopt a single state-wide use tax rate, which would be a 
blended rate of the various state and local sales tax rates. Current 
Commerce Clause judicial restrictions limit a state's ability to create 
a single blended rate applicable only to remote sales.
    Some in Congress are already working on legislation to allow states 
to enter into an interstate compact to implement the simplification 
described above. This legislation would allow states that join the 
compact and meet the simplification goals (upon certification by the 
General Accounting Office) to require businesses selling into their 
state (remote sales) to collect and remit the proper tax. We commend 
this effort to the members of the Committee. The compact arrangement 
removes from Congress the decision of whether states impose and collect 
the tax and returns it to the states, where sales tax administration 
properly belongs.

Consequences of Extending the Moratorium Without Addressing Sales Taxes
    If Congress extends the current Internet tax moratorium without at 
the same time approving legislation to achieve a level playing field 
for all retailers, future resolution of the issue will be seriously 
jeopardized. I don't know anyone who believes it will be any easier to 
resolve the issue in five or six years. In fact, I can almost guarantee 
you that it will be nearly impossible, because absent a solution, most 
brick and mortar businesses that also sell on the Internet will have 
been forced to reorganize their corporate structure in order to remain 
price competitive. Companies will, as Wal-Mart has already, restructure 
their Internet business as a separate subsidiary with nexus in only a 
handful of states and collecting sales tax in only those states. While 
Wal-Mart has taken this step for reasons in addition to tax collection, 
I respectfully suggest that this is not the result Congress should be 
seeking. Congress should not force businesses to alter their corporate 
structure simply to remain price competitive.
    Rather, Congress should take this opportunity to level the playing 
field for sales tax collection. A level playing field, where all 
retailers are treated equally with regard to tax collection duties is 
the only rational policy available. Simply put, government should not 
be meddling in the marketplace. By perpetuating the status quo--
extending the moratorium without fixing the problem--Congress would be 
giving Internet and other remote retailers a de facto tax subsidy, 
while at the same time making it much more difficult to resolve the 
issue in the future. Internet retailers do not need, nor should they be 
given, a tax preference. All retail businesses should compete on the 
traditional bases of price, selection and service. Tax preferences are 
bad tax policy and bad economic policy, and Congress must take this 
opportunity to encourage and eventually allow the states to bring this 
unintended tax subsidy to an end.

Conclusion
    Senator McCain, you have long been a champion of ending corporate 
welfare and closing down special interest loopholes. Surely you cannot 
have intended to give a special tax subsidy to Internet retailers. By 
all means, keep the Internet free from taxes on access and do not let 
the Internet be burdened by special levies or regulations targeted 
solely at the Internet. Just as there is no justification for singling 
out the Internet for discriminatory treatment, there is no reason to 
perpetuate a deficient, outdated system that gives Internet retailers 
preferential treatment. Internet commerce will continue to flourish as 
more and more brick and mortar retailers take advantage of it. It need 
not be propped up at the expense of others.

    Senator McCain. I thank you. Mr. Morse, Senator Leahy has 
been here a couple of times in his desire to introduce you. He 
is so proud of you and everything you have done and on behalf 
of Senator Leahy may I say that we welcome you and Senator 
Jeffords, we welcome you and we welcome your testimony today 
and thanks for being here.
    [The prepared statement of Senator Leahy follows:]

 Prepared Statement of Hon. Patrick J. Leahy, U.S. Senator from Vermont

    Chairman McCain and Senator Hollings, I want to commend the 
Commerce Committee for holding this hearing on taxation of electronic 
commerce. I am proud to be a cosponsor of S. 2255, Senator McCain and 
Senator Wyden's legislation to extend the present moratorium on 
discriminatory taxes on Internet goods and services for an additional 
five years.
    I am also proud that the Committee has invited Burr Morse to 
testify here today. Burr Morse is a seventh generation Vermonter who 
owns and operates the Morse Farm Sugar Works in Montpelier, Vermont. He 
has been part of the Morse Farm organization, a front runner in the 
field of Agri-Tourism, since graduating from the University of Vermont 
in 1971. His interests include a desire to preserve small business in 
America and family farms.
    I am also proud to note that Mr. Morse is the grandson of the late 
Vermont Senator George Aiken. I have the honor to serve in the same 
seat as Senator Aiken. I am sure that Burr Morse will prove to be a 
wise owl, just as Senator Aiken was for some many years here in the 
Senate.

   STATEMENT OF BURR MORSE, PRESIDENT, MORSE FARM SUGAR WORKS

    Mr. Morse. Thank you, Senator McCain. Thanks for having me 
come, a small businessman from a small state which incidentally 
has two senators. I am Burr Morse. My business is the Morse 
Farm Sugar Works in Montpelier, Vermont. I am a diversified 
farmer and maple sugar maker with roots back to the late 
1700's. In central Vermont diversification is necessary because 
maple sugar making is a seasonal activity that lasts but 1 
month out of 12 and that is on a good year. To supplement the 
income derived from gathering and boiling down 40 gallons of 
sugar maple sap to get one single gallon of Vermont maple 
syrup, I grow crops and I host tourists in my sugar house.
    In any given year, 1 to 4 percent of our 50,000 visitors 
become mail order customers by placing orders over the phone 
and by mail from our annual catalogue or newsletters. In 1999, 
we expanded our sales program into the electronic media market 
by publishing a web site to increase the reach of our print and 
broadcast advertising. The site required an investment of 
$6,000 and incurs monthly fees of a minimum of $225. The 
response to the quality and uniqueness of our site has been 
overwhelming.
    This is what brings me to these proceedings today. I have 
been able to document visits to the Morse Farm that have 
resulted directly from the web and we are enjoying some success 
with on-line orders. In real terms, however, our web presence 
is a long-term investment and not a panacea for the uneven 
cash-flow generated by a seasonal business like ours.
    I encourage you all to visit www.morsefarm.com on the 
Internet, but please recognize that it is not a dot com 
business that is likely to appear on the Nasdaq charts one day. 
It is a way for me to better serve my customers to ensure their 
loyalty to my Vermont product. It is a new crop, if you will, 
in a field that without time to grow will not provide a 
harvest.
    I submit that a moratorium on taxation of Internet sales 
until 2006 is the very minimum of what traffic will bear. My 
business is threatened daily by megamergers in the food, travel 
and mail order industries. Big business has won the battle and 
without an affordable way to communicate with customers who 
want traditional products, I cannot compete. If afforded the 
opportunity of nurturing this new field, that is the Internet, 
I might be able to recoup my original investment and find a 
little stability in a dynamic marketplace. And when I make 
money on my investments, I pay taxes on those profits. Talk of 
taxing sales over the Internet affects me times two.
    My father told a story once about sending his hired man out 
into the woods one day to check on how fast the sap was 
dripping. When he returned, he exclaimed, ``Mr. Morse, I 
counted 18 drops between the end of the spout and the bottom of 
the bucket.'' Now, either he was seeing drops that just weren't 
there or he could surely count faster than a Pentium chip. 
Anyone who supports the concept of taxing sales made over the 
Internet is seeing imaginary profits or drops and could for 
short-term gains stifle a new and up-and-coming market. No, it 
will still take 40 gallons of sap to create one naturally sweet 
gallon of maple syrup in the year 3000, but if taxed 40 ways, 
nobody will be recognizing the taste and nobody will be 
recognizing the taste that came out of New England all those 
years ago. Thank you very much.
    [The prepared statement of Mr. Morse follows:]

  Prepared Statement of Burr Morse, President, Morse Farm Sugar Works

    Thank you for allowing me to testify today. My name is Burr Morse 
and my business is the Morse Farm Sugar Works in Montpelier, Vermont. I 
am a diversified farmer with roots back to the late 1700s in Central 
Vermont. Diversification is necessary because maple sugar making is a 
seasonal activity that lasts but one month out of twelve, and that is 
on a good year. To supplement the income derived from gathering and 
boiling down forty gallons of sugar maple sap to get one single gallon 
of Vermont maple syrup, I grow crops and host tourists in my sugar 
house.
    In any given year, one to four percent of our fifty thousand 
visitors become mail order customers by placing orders over the phone 
and by mail from our annual catalog or newsletters. In 1999 we expanded 
our sales program into the electronic media market by publishing a web 
site to increase the reach of our print and broadcast advertising.
    The site required an investment of $6000.00 and incurs monthly fees 
of a minimum of $225.00. The response to the quality and uniqueness of 
our site has been overwhelming and brings me to these proceedings 
today. I have been able to document visits to the Morse Farm that have 
resulted directly from the web, and we are enjoying some success with 
on-line orders. In real terms, however, our web presence is a long term 
investment and not a panacea for the uneven cash flow generated by a 
seasonal business like ours.
    I encourage you all to visit www.morsefarm.com on the Internet, but 
please recognize that it is not a dot-com business that is likely to 
appear on the Nasdaq charts one day. It is a way for me to better serve 
my customers to assure their loyalty to my Vermont product. It is a new 
``crop,'' if you will, in a field that without time to grow, will not 
provide a harvest. I submit that a moratorium on taxation of Internet 
sales until 2006 is the very minimum of what traffic will bear.
    My business is threatened daily by mega-mergers in the food, 
travel, and mail order industries. Big business has won the battle and 
without an affordable way to communicate with customers who want 
traditional products, I can not compete. If afforded the opportunity of 
nurturing this new field that is the Internet I might be able to recoup 
my original investment and find a little stability in a dynamic 
marketplace. If and when I make money on my investments, I pay taxes on 
those profits. Talk of taxing sales over the Internet affects me times 
two. My father told a story about sending the hired man out into the 
woods one day to check on how fast the sap was dripping. He returned to 
exclaim, ``Mr. Morse, I counted eighteen drops between the end of the 
spout and the bottom of the bucket!'' Now either he was seeing drops 
that were not there or he could count faster than a Pentium chip. 
Anyone who supports the concept of taxing sales made over the Internet 
is seeing imaginary profits and could, for short term gain, ruin a new 
and up-and-coming market.
    No, it will still take forty gallons of sap to create one naturally 
sweet gallon of maple syrup in the year 3000, but if taxed forty ways, 
nobody will be making the effort and nobody will even recognize the 
taste that came out of New England all those years ago.
    Addendum to oral testimony:

          Report: Customer loyalty is e-commerce king

          A report by Mainspring Communications and Bain & Co. finds 
        that building customer loyalty is key to long term 
        profitability on the Web. http://www.computerworld.com/home/
        print.nsf/CWFlash/000331D006

          The study found that retailers on the web have to retain a 
        customer for 12 months to break even on that customer and 
        online grocers have to hang on to a shopper for 18 months to 
        recoup the $80.00 customer acquisition cost.

          Average repeat shopper at an apparel site spent 67% more in 
        months 31 to 36 than in the first six months of shopping at the 
        site.

    Conclusion based on research and actual experience at the Morse 
Farm Web site: Web shoppers are as price conscious as traditional 
shoppers. The shipping and handling costs past on to Web shoppers are a 
definite consideration and in many cases, deterrent to actual 
purchasing. Any additional charges incurred through a potential 
taxation of Web sales would increase the deterrent factor and place Web 
shopping at a distinct disadvantage over ``counter'' shopping. The 
above statistics indicate that Web merchants are presently in a period 
of debt with their Web sites and the payback period is measured in 
multi-years.

    Senator Breaux. Thank you very much. Mr. Zittrain.

STATEMENT OF JONATHAN ZITTRAIN, BERKMAN CENTER FOR INTERNET AND 
                  SOCIETY, HARVARD LAW SCHOOL

    Mr. Zittrain. Thank you. Senator Breaux, Senator Wyden, 
good morning. My name is Jonathan Zittrain. I am the executive 
director of the Berkman Center for Internet and Society for 
Harvard Law School, where I teach classes on Internet law, and 
have done some research on the taxation of the Internet, 
including coauthoring an article with Austan Goolsbee of the 
University of Chicago for the National Tax Journal on the 
impact of a moratorium on Internet commerce on state coffers 
and other aspects of the economy.
    First, the bill in question today, the Internet Tax Freedom 
Act--apparently now renamed the Internet Anti-discrimination 
Act--is relatively uncontroversial and relatively modest. This 
is an act that is meant to proscribe multiple and 
discriminatory taxes. So far as I know, there are no states 
clamoring to impose either multiple or discriminatory taxes. 
The only place I see it, actually, is in Europe, which appears 
to be on the cusp of imposing a 7 percent tax on goods, or for 
instance in Germany, a 16 percent tax on services. They then 
define digitally-delivered goods and services, and suddenly a 
newspaper that is on paper is taxed at a much lower rate than a 
newspaper delivered digitally. This may be because many of the 
sources of digital goods and services are thought to come from 
the United States--and that may be then a tax to worry about. 
Within the United States, however, there simply aren't any 
taxes that fit into that category, so it seems perfectly 
harmless to restrict fares further. To whatever extent there is 
a subsidy to access--thanks to a restriction on new taxes on 
Internet access, such as restriction on charges by AOL or 
Mindspring--this also seems to be a general benefit, because 
the more people we can get onto the Internet more quickly--at 
least while it is in its infancy--the sooner we can all 
benefit. You will get more web sites which will in turn draw 
more customers, etcetera.
    But it seems also true to me--I should also add, by the 
way, that Wally Hellerstein has written a nice piece that 
highlights some ambiguities in the current phrasing of the 
Internet Tax Freedom Act and suggests some ways to tighten it 
up. Those might be worthy of some consideration. The real issue 
is: what is in essence an effective moratorium on collection of 
state sales tax that has been imposed through an interpretation 
of the Commerce Clause. That is a moratorium, as you have said 
today, that comes not from the Internet Tax Freedom Act but 
simply from Supreme Court precedent and that awaits 
Congressional action to be lifted, and that is the moratorium 
that we are all, I think, really here today worried about in 
terms of impact on state coffers.
    Professor Goolsbee and I tried in our paper to make an 
estimate. Out of a total of $193 billion of sales tax collected 
by state and local governments in 1998, we estimate that only 
$430 million, that is a quarter of 1 percent, was actually lost 
thanks to Internet commerce that caused new transactions to 
happen interstate. To put that into perspective, one way of 
making up the shortfall would be to raise the average state 
sales tax rate from 6.33 percent to 6.35 percent; so currently, 
I think, everybody agrees this is not a big impact on state 
coffers.
    As you move forward it is just a question of when, from 
what we can tell, that this will be a big impact on state 
coffers. Professor Bruce just mentioned his study showing that 
there may be $10.8 billion in lost revenue in 2003. I should 
just flag a significant discrepancy between his study and ours, 
which are, interestingly, based on exactly the same numbers. We 
differ by about $7 billion as to the actual costs in 2003. We 
estimate that there is only $3.5 billion in sales lost, still 
less than 2 percent of the state coffers, and the reason from 
what I can tell for that huge disparity is a different 
calculation of how easy it is to collect use tax on business-
to-business sales. Professors Bruce and Fox say it is not that 
easy to do. We actually believe it is the consumer sales that 
pose that problem, and that businesses do pay their taxes. It 
is thought that 90 percent of Internet commerce will be 
business-to-business stuff by 2003. So there is not, right now, 
a big impact on state coffers, and we do not think that most 
Internet sales--those that are business-to-business--will evade 
an applicable state sales tax.
    There are these network externalities to consider; I talked 
about things that make something like eBay much more valuable 
to people who use it because you are much more likely to find 
the item you want or find the price you want--even better. So 
the more people we can get on quickly, the better it is for 
everyone.
    That all said, however, in the long haul it seems that 
fairness must reign and I define fairness as equivalent 
treatment for interstate and intrastate transit of goods. It is 
clear that revenues are up. I say lower sales tax across the 
board, if that is how states want to return the surplus to the 
people--not have an essentially ``swiss cheese'' framework 
where some stuff gets taxed and other stuff does not because of 
increasingly arbitrary lines determined by whether the item was 
ordered electronically or by walking up to a store counter.
    My bottom line is the moratorium is perfectly 
unobjectionable. There is no reason not to extend it from a 
policy statement. The moratorium that is de facto in place--
thanks to the Supreme Court's decision in Quill--is something 
relatively harmless to state commerce and is in fact having 
positive effects. But sooner or later--it is just a question of 
when--the piper will have to be paid and we will have to come 
up with a tax simplification scheme of the kind that Governor 
Leavitt was talking about, and any help that Congress can give 
to the states to encourage them to simplify their tax bases and 
structures and lower the burden on out-of-state merchants would 
be sensible. The clock is ticking. It is just a question of 
when time will run out and whether we will have to abandon 
sales tax or roll back Quill and Congressional action.
    [The prepared statement of Mr. Zittrain follows:]

 Prepared Statement of Jonathan Zittrain, Berkman Center for Internet 
                    and Society, Harvard Law School
Chairman McCain, Ranking Member Hollings, Members of the Committee:

    My name is Jonathan Zittrain, and I am the executive director of 
the Berkman Center for Internet & Society at Harvard Law School, where 
I also teach on Internet-related subjects as a lecturer on law. Among 
my research interests is the taxation of Internet commerce, and last 
year I wrote an article (attached) for the National Tax Journal on the 
subject with Prof. Austan Goolsbee of the University of Chicago.
    Today the Committee considers S. 2255, which is Chairman McCain's 
proposal to extend through 2006 the moratorium on certain kinds of 
taxes set in place by the Internet Tax Freedom Act. I will try to touch 
on the economic implications of 
S. 2255 (and thus of the Internet Tax Freedom Act), as well as on 
other, more significant forms of ``Internet taxation'' to which the Act 
does not speak.
    My bottom line: The moratorium of the Internet Tax Freedom Act is 
not objectionable, because the moratorium is so limited in scope that 
it has little consequence for state tax revenues--it does not apply to 
sales tax for physical goods bought over the Internet. The moratorium 
may also help the Internet's growth at an important time. However, the 
real issues still lie ahead, particularly because while the Internet 
Tax Freedom Act is silent on state sales tax for online commerce, a 
Supreme Court decision has itself imposed an essential moratorium on 
such taxes. It thus falls to Congress to decide what the boundaries of 
state taxation power are in this area, and what research I have done in 
this area suggests that this more significant moratorium may be helpful 
now, but should be lifted later. I will first speak to the peripheral 
taxes covered by the ITFA moratorium, then to the more central taxes 
covered by the Supreme Court's moratorium, and finally to some guiding 
principles that might help sort out what the ultimate policies should 
be.

Why the Internet Tax Freedom Act's moratorium is not harmful to state 
        revenue interests and is helpful to Internet growth
    The scope of the Internet Tax Freedom Act's moratorium is quite 
modest. It restricts states' abilities to impose discriminatory or 
multiple taxes on Internet commerce, and it prohibits new taxes on 
Internet access.
    One example of a discriminatory tax might be a surtax on products 
ordered through the Internet (for example, a state assessing a 10% tax 
on books ordered online when it only demands a 5% tax on books bought 
in a bookstore). Another would be claims by multiple states to collect 
tax for a single transaction with a buyer in one state and a seller in 
another, thus doubly taxing. Each of these examples is hypothetical; I 
know of no major attempts by states to impose discriminatory or 
multiple taxes on Internet commerce, and thus no substantial state 
money at risk if this revenue stream were clearly marked off-limits. By 
its very terms, this aspect of the moratorium seems at best sensible 
and at least unobjectionable.
    Examples of the prohibition on new taxes on Internet access are 
taxes on monthly subscription fees for America Online, mindspring.com, 
or any other service that provides Internet access. This moratorium may 
impact the coffers of states that wish to tax Internet access but did 
not have corresponding legislation on their books before the moratorium 
came into force. The category of taxable commerce affected here is 
small compared to the revenue to be gleaned from the broad swath of 
traditional goods typically covered by sales tax.
    While the impact on state coffers may be small, the subsidy to 
Internet usage and to all the economic progress that flows from it 
could be large. This is because the Internet is subject to positive 
``network externalities,'' which is to say that it becomes more useful 
to everyone as more people use it. (This is a general phenomenon of 
networks; compare how useful a fax machine might be to someone when 
only ten others own one versus when millions of others own one.) Such 
networks can grow exponentially once they reach critical mass, and 
signing more people on at a given time--thanks to an ability to offer 
comparatively lower access rates--amounts to a boost to future economic 
activity generally, at least to the extent that new Internet commerce 
need not simply be drawn from competition with existing retail stores. 
Further, any lessening of Internet access fees might help bridge the 
``digital divide'' by making Internet access that much more accessible. 
A five or six percent difference might not seem like a lot, but there 
will be some group of people on the margin for whom it would make the 
difference between signing on and not signing on.
    To be sure, once the Internet has reached a natural saturation 
point among potential users, there is less reason to treat its 
provision any differently from any other transaction subject to sales 
tax. Thus the infant industry protection represented by the ``no new 
access taxes part'' of the moratorium may not need to become ensconced 
as established industry protection.

The bigger controversy, unaffected by the Internet Tax Freedom Act: 
        Taxation of Internet commerce
    More notable than what the ITFA moratorium covers is what it 
doesn't cover. The moratorium does not preclude the application of 
state sales tax for physical goods ordered through the Internet. The 
meat and potatoes of state sales tax revenue comes from the sale of 
physical goods generally, so this is the source of revenue that states 
are most concerned about losing to tax-free sales of goods over the 
Internet.
    If the moratorium creates no boundary, why the worry? Because there 
is another boundary out there: one that separates in-state from out-of-
state merchants. Sales tax is a tax technically imposed on a consumer--
when we buy something we fork over a little extra money to cover the 
tax--but it is enforced and collected by the merchant. In its landmark 
Quill decision,\1\ the Supreme Court made it clear that it was 
Congress's province to decide the extent to which one state could force 
a merchant located elsewhere to collect a sales tax, even if the buyer, 
located in the first state, is clearly subject to the tax. Since 
Congress has been silent on the issue, states can only force out-of-
state merchants to collect sales tax on items they sell to people 
living there if the merchants have other ``contacts'' with the state: 
so-called ``nexus.'' In practice, out-of-state merchants can usually 
avoid creating that nexus, so many distant merchants (whether they 
receive customer orders through the Internet, mail order, or telephone) 
cannot be forced to, and do not, collect sales tax.
---------------------------------------------------------------------------
    \1\ See Quill Corporation v. North Dakota, 504 U.S. 298 (1994).
---------------------------------------------------------------------------
    According to the Census Bureau, sales tax amounted to $193 billion 
of state and local tax revenues in 1998. How do transactions placed 
through the Internet fit in? The best estimate Prof. Goolsbee and I 
could make on state sales tax revenue lost to out-of-state merchants 
receiving taxable orders through the Internet for 1998 is $430 million 
on total sales of $7.3 billion, or 0.2% of the collected tax kitty. 
Failure to pay tax on Internet-generated sales is thus not currently 
significantly denting state coffers.
    What makes sales tax on goods purchased through the Internet such 
an issue then, despite the ITFA moratorium's silence on the subject and 
the relatively small revenues currently at stake?
    I can offer two reasons. First, Quill provides its own effective 
moratorium on sales tax on most Internet-driven sales unless Congress 
rescinds it, and everyone has big expectations for the growth of the 
proportion of sales taking place through Internet commerce. The most 
recent figures from the Census Bureau estimate $5.3 billion in online 
commerce sales for the fourth quarter of 1999, and Forrester Research 
estimates $108 billion per year in online retail sales by 2003. 
Predictions beyond 2003 are due to be quite speculative; perhaps 
between 2004 and 2007 revenue loss from online, interstate transactions 
for which Quill blocks sales tax collection could amount to ten percent 
of total sales tax revenue, if more interstate, sales tax-exempt trade 
happens overall thanks to the added ease of Internet ordering.
    A second reason for the current worry over an inability to apply 
sales tax to goods purchased across state lines has to do with a desire 
not to unduly distort markets with arbitrarily applied taxes. Tax 
experts may have differing personal views as to whether taxes should be 
raised or lowered generally, but they tend to be in agreement over the 
idea that one should tinker with rate rather than scope when seeking to 
adjust the public's tax burden. Over the short term, at least, Quill's 
moratorium on out-of-state tax collection will likely encourage more 
people to use the Internet for shopping, just as the ITFA's moratorium 
on new access charges will encourage more people to sign up for 
Internet access in the first instance. But as the use of the Internet 
matures and the benefits of the network externalities I discussed 
earlier are reaped, distinctions such as ``in-state/out-of-state'' or 
``ordered through Internet/ordered in a store'' become truly arbitrary. 
Differences in tax rates should be made on the basis of the substance 
of a sales transaction, not on where or through what medium it takes 
place. Local merchants, themselves in many instances limited to margins 
of 4 or 5% on their wares, should not forever pay a sales tax while 
their online and/or out-of-state counterparts do not.
    Further, the enforcement costs of imposing taxes on goods ordered 
and paid for over the Internet could drop over time. Thanks to 
authentication and encryption technologies under development in the 
private sector--technologies to ensure that when one orders a dozen 
pizzas through the Internet, one cannot repudiate the bargain by saying 
someone else actually placed the order--it may become quite easy to 
know who is buying what from whom, to know where the buyer is, and then 
to collect the appropriate tax. This raises serious privacy issues, 
particularly if the scope of state sales tax varies so much that one 
must know and verify the nature of the item purchased in order to 
actually assess and account for the tax. But in a simplified scheme 
where the various states can agree on common definitions if not rates--
something sorely needed and long overdue--one could actually imagine 
the collection of sales tax as second nature in online transactions, 
far easier than the corresponding calculation, collection, and 
remittance by local merchants in a traditional transaction. Indeed, 
structured properly, the collection of tax could come straight from the 
user, converting ``sales tax'' collected from the merchant into a 
corresponding ``use tax'' collected from the buyer, and in such a way 
that the buyer would not revolt. (Current use taxes, owed by consumers 
whenever they have managed to avoid having their merchants collect 
sales taxes thanks to Quill, remain largely uncollected, presumably 
because consumers would not take well to having to maintain accounts of 
everything they have purchased and what tax they might owe on it.)
    In the current political climate it seems difficult to imagine 
Congress enabling states' collection of sales tax from out-of-state 
merchants, so the revenues will only be obtained--if at all--through 
creative electronic collection schemes that can manage to only 
minimally burden both seller and buyer, or through reciprocal state tax 
collection agreements, through which New York, say, could ask a New 
York merchant to collect and remit New Jersey sales tax for its New 
Jersey customers. Neither of these solutions is particularly appealing, 
nor are they easy to implement, though they well emerge as alternatives 
to Congressional action to allow states to collect sales taxes across 
state borders.
    Again, over the long run, state boundaries seem odd and unhelpful 
lines to draw on sales tax collection, as do boundaries between 
electronic and physical means of ordering. The legal and technical 
status quo whereby some transactions avoid the tax while others do not 
should, in the long run, be traded in for a more comprehensive tax 
reform that offers uniform tax relief (perhaps in tax rates) while 
enabling or maintaining other revenue streams in as simple and direct a 
way as possible.

Digital goods
    So far I have interpreted ``Internet commerce'' to cover the 
purchase of physical goods ordered via a computer network instead of a 
telephone call or visit to a store. I do see this as the core of the 
Internet tax controversy, because a lot of money will sooner or later 
be at stake through such channels, and because there exist bricks and 
mortar merchants who sell identical products and for whom differential 
tax treatment seems, over the long run, unfair.
    But the Internet also enables the sale of digital goods: e-books 
and software, for example. Depending on one's reading of the Internet 
Tax Freedom Act, these purchases may not be taxed by the states, 
whether the purchase is inter-state or intrastate. Since the 
distribution of wholly digital goods is especially in its infancy, even 
more so than the online purchase of physical goods, this would be an 
auspicious time for a moratorium on taxes of such goods.
    Indeed, we may see the creation of new markets where individuals 
can sell cookie recipes or bedtime stories one at a time, for 25 or 50 
cents each. To insist on collection and calculation of sales tax on 
such transactions might produce an administrative barrier that would 
preclude the development of such a ``small fry'' sellers' market.
    It is also important to ensure that other countries to not impose 
onerous or discriminatory taxes on digital Internet commerce, 
especially as they might perceive that digital merchants on the 
Internet are disproportionately American vendors.

Conclusion
    The Internet Tax Freedom Act does not speak to the taxes that 
really fill state coffers--and hit consumers' pocketbooks. What few 
taxes it does preclude deserve to be precluded, and thus an extension 
of the Act's moratorium seems perfectly appropriate, if not 
particularly efficacious. But in passing this Act, it's important to 
note that much more work remains to be done. In particular, the 
convening of the commission that the Act chartered has helped focus 
attention on a long-simmering issue for which the growth of the 
Internet is turning up the heat: the fact that states require 
Congress's formal assent before they can readily collect most of the 
taxes they wish to on goods purchased by in-state consumers from out-
of-state merchants. A long-term compromise might be the easing of 
states' ability to collect such taxes in exchange for a serious 
simplification and harmonization of the substantive scope and 
administrative burden associated with the respective state sales tax 
regimes.
    An extension of the moratorium should be accompanied by efforts to 
broaden the difficult conversation begun in earnest by the Advisory 
Commission on Electronic Commerce and among officials representing 
state and local governments, attempting to agree on the fairest and 
most practical ways to enjoy economic growth and freedom while paying 
the piper for the common services from which we benefit.

                                                 Attachment

     EVALUATING THE COSTS AND BENEFITS OF TAXING INTERNET COMMERCE

            Austan Goolsbee, University of Chicago, G.S.B., 
                 American Bar Foundation, and N.B.E.R.
      Jonathan Zittrain, Berkman Center for Internet and Society, 
                           Harvard Law School
                     National Tax Journal, May 1999

Abstract--Current tax law makes it difficult to enforce sales taxes on 
most Internet commerce and has generated considerable policy debate. In 
this paper we analyze the costs and benefits of enforcing such taxes 
including revenue losses, competition with retail, externalities, 
distribution, and compliance costs. The results suggest that the costs 
of not enforcing taxes are quite modest and will remain so for several 
years. At the same time, compliance costs and the benefits of nurturing 
the Internet diminish over time. When tax costs and benefits take this 
form, a moratorium provides a natural compromise.

Introduction
    Existing sales tax law treats goods sold over the Internet the same 
way it treats goods sold from catalog companies. This means, roughly, 
that any company without a physical presence in a state (known as 
nexus) cannot be required to collect that state's sales tax even if the 
customer lives in the state. If a buyer in Boston, for example, orders 
a book from Amazon.com (located in Washington state), although the 
buyer technically owes a use tax (equivalent to the sales tax) on the 
purchase to Massachusetts, the state cannot require Amazon.com to 
collect the tax because Amazon.com has no nexus in Massachusetts. 
Instead, states must rely on self-reporting and payment by the 
customers, making enforcement almost nonexistent except in special 
cases such as for goods like automobiles that must be registered. In 
this sense, the Internet is a virtually tax-free sales channel.
    While most of the tax issues raised by the Internet are the same as 
those raised in the earlier battles over the taxation of mail-order 
sales (ACIR, 1986), the rapid growth of online commerce has ignited a 
major debate as to how Internet commerce should be treated. Sheppard 
(1998) has declared the issue of taxes and electronic commerce to be 
``the hottest topic in multistate taxation.'' On one side, state 
governments and the National Governors Association have noted the 
potential revenue losses from online transactions and called for 
immediate enforcement of sales taxes. On the other, Internet advocates 
have argued that cyberspace is still fragile and its future uncertain; 
to tax it now, they say, might seriously damage its growth (Wyden, 
1997; Andal, 1997; Stephenson and Zeisser, 1998).
    In 1998, Congress passed the Internet Tax Freedom Act (ITFA) 
placing a three-year moratorium on new taxes on the Internet. The ITFA, 
however, does not restrict the right of states to apply sales and use 
taxes to online commerce (these are not, after all, new taxes). Instead 
it primarily prevents states from applying new taxes to Internet 
access. Its primary effect regarding sales taxes is to prevent states 
from either applying sales taxes to categories of electronic services 
or goods with no physical counterpart or applying discriminatory sales 
taxes on Internet commerce that do not, for example, apply to catalog 
sales.
    Though the ITFA itself did not change the sales tax status quo, it 
did call for Congress to appoint an advisory commission to come up with 
recommendations about how the tax system should treat online commerce. 
The panel's work is taken seriously enough that the National 
Association of Counties and U.S. Conference of Mayors, fearing that the 
panel was stacked against local governments, filed suit to prevent the 
advisory Commisiona from meeting to draft recommendations.
    On the basic issue of weighing the costs and benefits of enforcing 
taxes on the Internet, most of the discussion has taken place in the 
political arena rather in academic research (Graham, 1999; Smith, 
1999). Most of the existing academic literature on the subject of 
Internet taxes has been conceptual discussions and legal analyses.\1\ 
Because the area is so new there has been very little empirical 
work.\2\ Most of the explicit discussions weighing the costs and 
benefits of tax policy toward Internet commerce has taken place in the 
popular press and has been more political.
---------------------------------------------------------------------------
    \1\ Examples of the existing literature include Fox and Murray 
(1997), Hellerstein (1997a; 1997b; 1997c), Horner and Owen (1996), 
McLure (1997; 1998; forthcoming), Aui-Yonah (1997), Murray (1997), and 
Steele and Hellerstein (1994).
    \2\ One exception is Goolsbee (1998), who empirically examines the 
question of how current sales tax rates influence the likelihood of 
consumers to buy over the Internet.
---------------------------------------------------------------------------
    In this paper we use the best available data in an attempt to 
evaluate some of the costs and benefits claimed in the debate about 
Internet commerce. The lack of systematic data sources means that, on 
many important points, the evidence is more qualitative and suggestive 
rather than definitive. In our discussion, we emphasize the importance 
of distinguishing between the short and the long run when thinking 
about Internet commerce. The timing of Internet tax policy is crucial. 
For example, most of the major benefits from taxing the Internet, such 
as preventing revenue losses or eliminating competition with retail 
stores, are unlikely to become important for several years, while the 
importance of the costs of taxing Internet commerce, including 
enforcement costs and lost externalities, are likely to fall over time. 
A cost/benefit structure such as this naturally lends itself to a 
moratorium as a compromise position.
    The first five sections of the paper evaluate the main costs and 
benefits of taxing Internet commerce. These include revenue loss from 
Internet commerce, competition with retail trade, distribution, 
enforcement costs, and externalities. The final section concludes with 
a discussion of the potential for compromise and the future of tax 
policy.

Revenue Loss from Internet Commerce
    The most important presumed cost of not enforcing taxes on Internet 
commerce is the potential revenue loss. Sales taxes are, obviously, 
quite important to state and local government finance. As Table 1 
shows, in fiscal year 1995-6, general sales taxes raised almost $170 
billion. This was second only to property taxes as an overall source of 
tax revenue and was the largest source of revenue for state 
governments. Given this importance, it is understandable why 
policymakers are concerned about the issue and decry the potential 
narrowing of the sales tax base. As Newman (1995) rather colorfully put 
it, ``state and local government finances are becoming road kill on the 
information superhighway.'' The National Governors Association has 
quoted forecasts that by 2002 there may be more than $300 billion of 
commerce and concluded that this will cost up to $20 billion in lost 
tax revenue (Boston Globe, 1998). Similar numbers are often cited by 
advocates of enforcing Internet taxation (for example, Graham, 1999).


         Table 1. Total State and Local Tax Revenue in the U.S.
                           (in millions of $)
------------------------------------------------------------------------
                                               1995-96
                                                 (FY)   1995-96  1995-96
               Type Of Revenue                  State     (FY)     (FY)
                                                 and     State    Local
                                                Local
------------------------------------------------------------------------
Total tax revenue                              689,038  418,390  270,602

General sales taxes                            169,071  139,363  29,709

Property taxes                                 209,440   9,973   199,467
Individual income taxes                        146,843  133,548  13,296
Corporate income taxes                         32,009   29,315    2,693
Selective sales taxes (total)                  79,922   66,751   13,123
Other taxes and charges (total)                51,753   39,440   12,313
------------------------------------------------------------------------
Source: Bureau of the Census, United States State and Local Government
  Finances 1998. Washington, D.C.: Government Printing Office


    As best we can tell, the standard calculation in these revenue loss 
estimates is made by multiplying total sales by the average tax rate 
and calling that the loss in revenue. For several reasons, however, 
this is highly inaccurate. First, the predicted amounts of commerce 
seem to include business-to-business sales as well as business-to-
consumer. The business-to-business is largely exempt from sales tax or 
else the buyers actually pay the use tax. Forrester Research, the 
leading market research company regarding the information economy, has 
estimated that business-to-business sales will be (and are) much larger 
than the business-to-consumer (McQuivey et al., 1998; Erwin et al., 
1997). Second, the predicted revenue losses ignore the possibility of 
trade creation. Products that might not have been purchased in a store 
were it not for the Internet, such as online greeting cards, should not 
be counted for lost revenue. Third, even if we assume that electronic 
commerce is entirely diversionary and that all of the commerce will be 
business-to-consumer, the calculations still have serious flaws by 
failing to account for the types of products being sold.
    Table 2A, for example, presents data from the Boston Consulting 
Group (BCG) report on Internet business-to-consumer sales by type of 
product in the first quarter of 1998 (1998). Notice that several of the 
categories, including financial services, travel, automotive, and, in 
some states, food and apparel, do not result in lost sales tax revenue 
for the states either because no sales tax applies (travel and 
financial) or because, although taxable, seller's nexus is likely even 
if the Internet is used to make purchases (automobiles and groceries). 
Together, the obviously nontaxed categories account for more than 40 
percent of total online sales in this period (about $2.3 billion).\3\
---------------------------------------------------------------------------
    \3\ In this calculation we ignore the fact that in some states food 
and clothing are exempt from sales tax. This would make the number even 
larger.

          Table 2A. Estimated Online Consumer Sales  by Sector
                        (first 6 months of 1998)
------------------------------------------------------------------------
                                                                 Amount
                                                                   (in
                            Sector                              millions
                                                                  of $)
------------------------------------------------------------------------
Computer goods                                                   1,510
Financial services                                               1,429
Auctions                                                           898
Travel                                                             848
Books and entertainment                                            366
Gifts                                                              138
Consumer goods                                                     138
Apparel                                                             92
Food and wine                                                       67
Automotive                                                          28
Home and garden                                                     27

    Total                                                        5,541
------------------------------------------------------------------------
Source: BCG (1998).


    Of the remaining 60 percent of sales that may qualify as revenue 
losers, computer goods alone account for almost half. When calculating 
the incremental revenue loss from the growth of the Internet, however, 
computer goods raise several important issues. First, many computer 
sellers online already pay sales taxes. Having in-state repair 
services, for example, can create nexus for the seller (Multistate Tax 
Commission, 1995), and one of the largest online sellers, Gateway, does 
charge sales tax.
    Second, for those without nexus, it is important to note that not 
every computer bought over the Internet would have been purchased in a 
store if the Internet did not exist. Computer goods have had a brisk 
mail-order business for many years (well before the Internet began). 
Forrester Research's Technographics data (described in more detail in 
the Appendix) suggests that about 20 percent of computer owners 
purchased their latest machines directly from the manufacturer (while a 
bit less than two percent bought them over the Internet). It is 
doubtful that a customer who today buys from Dell online, for example, 
would buy a computer in a store if there were no Internet when she 
could instead buy from Dell directly by telephone. If Internet sales 
cannibalize nontaxed catalog sales rather than retail store sales, the 
growth of Internet commerce does not imply any additional revenue 
losses to state governments.
    Although it is hard to find data to make an industry-wide argument, 
Dell is an important example. Our estimates indicate that in the first 
six months of 1998, Dell may have sold around $435 million online to 
consumers (more than one-quarter of the computer goods in the BCG 
sample).\4\ Few of those sales were taken away from stores. If not for 
the Internet, they would have likely gone to Dell's mail-order 
business.
---------------------------------------------------------------------------
    \4\ This estimate is calculated as follows: At the end of 1998/
start of 1999, Dell announced online sales at a rate of $14 million per 
day or $1.25 billion per quarter (Dell, 1999). Because this is after a 
substantial growth rate over the course of the year we assume that 
Dell's revenue over the year grew at the 213 percent annual rate (33 
percent per quarter) estimated in the BCG (1998) report for total 
commerce that Dell's online sales were divided the same way as their 
total sales (according to Dell (1998), this was about 65 percent to 
government, big business, and educational users). With total sales of 
$1.25 billion in the last quarter of 1998, this would imply sales of 
$531 million and $707 million in the first two quarters of the year, 
and if 35 percent of these sales were to individuals, this would total 
$435 million for the period.
---------------------------------------------------------------------------
    Taken together, we believe that much of the computer goods category 
should not be considered a revenue loser. For simplicity, then, let us 
assume that one-half of computer goods sales consumers did not pay the 
sales tax but would have if the law were changed. The true number is 
probably much lower. This assumption would imply that another 15 
percent of online retail sales did not cut into local revenues.
    After eliminating all of the non-applicable sales, there were about 
$2.5 billion of sales that may qualify as revenue losses to state 
governments (if we make the somewhat implausible assumption that all 
auction transactions would have paid sales tax if they had taken place 
through newspaper classified ads, and so on). The weighted average 
sales tax rate in the United States is about 6.33 percent (Goolsbee, 
1998), so the actual revenue loss in the first six months of 1998 was 
on the order of $157 million. Even with a 213 percent annual growth 
rate, the total revenue loss for the 1998 entire year was a bit more 
that $430 million. The same analysis using more detailed data from 
Forrester Research listed in Table 2B puts the total revenue loss for 
1998 at around $210 million (McQuivey et al., 1998).\5\ With overall 
sales tax revenue growing at 6 percent nominal rates (as indicated in 
Bureau of the Census, 1997, 1998), the revenue loss in 1998 using 
either measure amounted to less than one-quarter of one percent of 
total state and local sales tax revenue (or 0.05 percent of total tax 
revenue).
---------------------------------------------------------------------------
    \5\ This assumes one-half of computer software and computer 
hardware currently do not require payment of sales taxes but would 
under a rule change. It also assumes that flowers and food satisfy the 
nexus requirements and thus do not result in revenue losses when 
purchased online. Event tickets and online greetings are assumed to be 
untaxed.


          Table 2B. Online Revenue by Category in 1998 and 2003
                           (in millions of $)
------------------------------------------------------------------------
                                                    Estimate:  Forecast:
                     Category                          1998       2003
------------------------------------------------------------------------
Total U.S. revenue                                   7,826     108,031

Software                                               665      3,179
Books                                                  630      3,002
Music                                                  187      2,495
Videos                                                 151      1,346
Event tickets                                          115      2,572

Apparel                                                530     13,510
Flowers                                                212        906
Greetings                                               36        320
Specialty gifts                                         63        544

Toys                                                    68      1,481
Sporting goods                                          56      1,918
Tools and garden                                        63      1,021

Travel                                               3,073     29,447
Computer hardware                                    1,090     14,965
Consumer electronics                                    84      6,132

Appliances                                              17      2,275
Household goods                                         83      3,446
Food and beverage                                      235     10,836
Health and beauty                                      213      6,294
Miscellaneous                                          255      2,342
------------------------------------------------------------------------
Source: Forrester Research, Inc. (1998).


    Looking to the future, Forrester estimates that, from now to 2003, 
online retail spending will grow almost 70 percent per year when it 
will total more than $108 billion. Their prediction includes estimates 
by category. Doing the same calculation on the five-years-out 
projection yields a revenue loss of $3.5 billion--still less than two 
percent of sales tax revenue even after a half-decade of rapid 
growth.\6\ With average growth rates of general sales taxes, the 
Internet revenue losses will, even after several years of dramatic 
growth, amount to less than two percent of sales tax revenue.
---------------------------------------------------------------------------
    \6\ Repeating the analysis in the interim years yielded a revenue 
loss of $470 million in 1999, $880 million in 2000, $1.4 billion in 
2001, and $2.3 billion in 2002. The last number is 15 to 20 times 
smaller than the estimates quoted by advocates in the popular press for 
the same year.
---------------------------------------------------------------------------
    To put these revenue numbers in perspective, note that the Census 
Bureau's Monthly Retail Sales suggests that mail-order sales topped $55 
billion in 1998, and this is likely to be significantly understated, as 
explained in ACIR (1986). The existence of untaxed catalog sales has 
not bankrupted state budgets and, for the next several years, online 
sales are likely to be considerably smaller than mail-order sales were 
even decades ago.
    Alternatively, consider the numerical question of how much the 
sales tax on retail goods would have to rise in order to cover the 
revenue shortfalls generated by the Internet sales.\7\ Based on the 
Forrester forecasts, to keep revenue constant, the average tax rate on 
sales would need to rise from 6.33 percent to 6.35 percent in 1998. 
Five years later, in 2003, to keep revenue constant would require an 
increase from 6.33 percent to about 6.40 percent. These small changes 
may imply that the costs of enforcement might not be better applied 
elsewhere in the short run. For example, the estimates in Slemrod 
(1999) concerning the revenue generated in Michigan from a simple 
crackdown in cigarette smuggling imply that this had a substantially 
greater impact on Michigan state tax revenue than aggressive 
enforcement of Internet taxation would have had.
---------------------------------------------------------------------------
    \7\ This is assuming no behavioral responses on the part of retail 
sales of raising the sales tax.
---------------------------------------------------------------------------
    In some sense, the modest costs of not enforcing taxation on 
Internet sales numbers illustrate why the advocates of immediate 
enforcement consistently invoke revenue loss projections from well into 
the future. Only after an extended period of rapid growth will the 
issue become substantively important. If the growth rate of online 
retail commerce continues at 70 percent per year after 2003, by 2007 
the revenue loss would amount to as much as 10 percent of total sales 
tax revenue. If Forrester were significantly too conservative and 
online retail commerce doubled every year, the revenue losses would 
amount to as much as ten percent of sales tax revenue as early as 2004. 
It is the possibility of these extreme losses, albeit well into the 
future, that makes the issue of enforcement so politically sensitive 
today. The states want to ensure that online sales will be taxed before 
they become important rather than after. When Internet sales account 
for, say 10 or 20 percent of total retail sales, the states believe it 
may be difficult to put the genie back in the bottle. The data suggest, 
however, that for the next several years, at least, there is little 
revenue to be gained from enforcing taxes on Internet sales.
Internet Competition With Retail Stores
    Another basic benefit claimed by advocates of enforcing taxes on 
Internet commerce is to eliminate the unfair disadvantage that uneven 
tax enforcement puts retail stores at relative to their online (and 
out-of-state) counterparts. Presumably, there is some notion about tax-
induced distortions. If consumers, for example, would prefer to buy 
from a local store but buy online only to avoid taxes, the tax is 
creating an inefficiency.\8\
---------------------------------------------------------------------------
    \8\ Note that optimal tax theory does not necessarily call for the 
rates to be equal on the two types of commerce. While the well-known 
results of Cortlett and Hague (1954) suggest that we should tax similar 
goods similarly, if the price elasticities of Internet customers and 
retail customers are very different, it may actually be efficient to 
allow those with high elasticities to have lower rates. This is the 
finding of Sandmo (1981) in a different context. In some sense, the 
least distortive tax would be the one with high rates on those people 
who would not change their behavior.
---------------------------------------------------------------------------
    Evaluating the competition with retail is really asking whether 
Internet purchases are being diverted from retail purchases or are 
wholly new transactions. This is very much like the trade creation 
versus trade diversion arguments about bilateralism found in the 
international trade literature (Viner, 1950). Thus far, Internet sales 
are so small that no one has addressed the question.
    To properly answer it would require panel data on the retail and 
online buying habits of individuals over time. No such data exist. 
Instead, we use cross-sectional data from Forrester studies conducted 
at the end of 1997, compiled in Technographics '98 and described in the 
data Appendix. This random survey of 110,000 people yielded 
approximately 25,000 users of the Internet. Each of these individuals 
was also asked to give a qualitative ranking of how frequently they 
shop in certain types of retail stores (OFTEN, SOMETIMES, RARELY, 
NEVER). We aggregate their answers for discount retailers, wholesale 
clubs, upscale department stores, moderate department stores, and other 
department stores in two ways. First, we choose the maximum level of 
shopping in the five categories as the measure of retail shopping 
(i.e., if they report rarely shopping at an upscale department store 
and often shopping at a wholesale club, they would count as shopping 
often). Second, we rank each of the categories numerically (0 for 
NEVER, 1 for RARELY, and so on) and sum them across the five store 
types to get a measure of total retail shopping.
    To test for the competition between Internet and retail commerce, 
we estimate equations for the amount of retail shopping done by an 
individual controlling for that person's education, income, age, race, 
gender, marital status, presence of children under 18, use of a 
computer at work, running of a business from home, and ownership of a 
computer in the year before the survey. In addition to these controls, 
we also include whether the person has bought online. If online buying 
comes at the expense of retail buying, we would expect a significant 
negative coefficient. We do not list the coefficients on the controls 
for reasons of space, but they are generally not surprising.
    Because this is not panel data, of course, this regression may 
suffer from bias due to unobservable, individual-specific traits. This 
bias could go either way. There could be an upward bias if the people 
who, beyond their observables, shop online are people with higher 
consumption levels who shop more in every venue. There could be 
downward bias if the people buying online are people who, for example, 
have little access to retail stores. In either case, the estimated 
substitution pattern between retail and the Internet will not reflect 
the true pattern but instead will reflect the distribution of 
unobservable traits across people. Despite these potential limitations, 
these are the only data that exist.
    Column 1 of Table 3 shows the results from an ordered logit 
estimation, where the dependent variable is the maximum amount of 
shopping (four categories) across the five store types. The results 
indicate that people who have bought online are more likely to shop 
frequently at some type of retail store, controlling for individual 
characteristics. The same is true in column 2, where we conduct an 
ordered logit of the aggregated measure of shopping (20 categories). 
There is, again, a small but significantly positive coefficient on 
buying online for the amount of retail shopping. Finally, in column 3, 
we do a linear regression of the aggregated measure but include state-
metropolitan area dummies to account for correlated unobservables, 
differences in sales tax rates, and so on. The results do not change 
much.
    Evidence like this is only suggestive, but it does not seem to 
point to intense competition between retail and online commerce at 
present--consistent with the notion of Internet as trade creator. As 
time progresses, however, and the Internet becomes a larger fraction of 
total retail, the competition may become more intense.


      Table 3. Impact of Online Buying on Retail Shopping Frequency
------------------------------------------------------------------------
          Indep. Var.                (1)           (2)           (3)
------------------------------------------------------------------------
Bought Online                         0.153         0.183         0.248
                                    (0.034)       (0.029)       (0.039)

Other Controls                           11            11            11
                                  variables     variables     variables

Dummies                                none          none   metro-state

Estimation                          ordered       ordered           OLS
                                      logit         logit

n                                    24,412        22,465        22,465

R \2\                                    --            --          0.08
------------------------------------------------------------------------
Note: The dependent variable in (1) is the maximum amount of shopping
  reported in the five categories, as described in the text. The
  dependent variable in (2) and (3) is the summation of the five
  categories, also as described in the text. Standard errors are in
  parentheses. The included control variables are not listed to save
  space. They are the same variables as those in Table 5. The estimation
  method is listed at the bottom of the column.


Distributional Considerations
    Not enforcing taxes on the Internet, as argued in the popular 
press, does have particular distributional effects (see, for example, 
Gillmor, 1999). The incidence is not random. The argument is that 
online purchasers are disproportionately wealthy so failing to collect 
tax on Internet commerce then represents an indirect transfer to the 
rich. If online purchases are not taxed, anyone with enough money to 
buy a computer can avoid sales tax, while less well-off individuals 
cannot.
    A general lack of data has prevented much analysis of the issue, 
but it seems intuitive that online individuals would be better off than 
those not online. The Forrester data (listed in Table 4) confirm the 
significant difference in terms of income and education between wired 
and non-wired customers. The average Internet user has almost two more 
years of education and $22,000 more family income than the average 
nonuser.


                                 Table 4. Income and Education of Internet Users
----------------------------------------------------------------------------------------------------------------
                                                                       Income                   Education
----------------------------------------------------------------------------------------------------------------
Internet Access                                                                  57.2                      14.9
No Internet Access                                                               35.6                      13.0

Internet 3+ years                                                                61.4                      15.6
Internet 2-3 years                                                               61.4                      15.2
Internet 1-2 Years                                                               58.4                      14.8
Internet <1 year                                                                 52.2                      14.3

                                                                                              Percent of Online
                                                                              Percent              Users Having
                                                                               Online             Bought Online
----------------------------------------------------------------------------------------------------------------
Income <25,000                                                                   0.11                      0.17
Income 25-50,000                                                                 0.22                      0.21
Income >50,000                                                                   0.41                      0.23
----------------------------------------------------------------------------------------------------------------
Source: Authors' calculations using data from Forrester Research, Inc.


    The regressiveness, however, is becoming noticeably less pronounced 
over time. Dividing the Internet users by when they first started going 
online, we see that newer users have significantly lower levels of 
education and income than existing users. Because the number of 
Internet adopters is accelerating dramatically over time, the data 
suggest that the distributional issues seem to be lessening.
    Furthermore, the data are not consistent with the broader claim 
that online buying is primarily serving as a way for the rich to avoid 
paying sales taxes. As the bottom panel of Table 4 shows, while richer 
people are more likely to have online access than poorer people, even 
among those in the highest third of income (more than $50,000 per 
year), most do not have Internet access. The second column shows, as 
well, that of those with access, slightly more than one in five has 
actually bought something online, and these rates do not vary much by 
income level. In addition, the calculations in Goolsbee (1998) and 
Krantz (1998) suggest that, even for those with access who choose to 
buy, the amount they spend is fairly modest.

Enforcement Costs
    One frequently mentioned potential cost to taxing Internet commerce 
is the difficulty of enforcing such taxes (The Economist, 1997). Basic 
theory suggests that tax rates should be low on activities where 
enforcement is difficult or costly. The potential enforcement problems 
of Internet taxes are numerous. First, in a reprise of the original 
argument establishing the nexus requirement for taxing mail-order 
business, opponents argue that, with more than 6,400 different tax 
rates in the United States (Rappaport, 1994), simply calculating and 
remitting the applicable taxes to every jurisdiction from which a 
customer orders could be quite burdensome, particularly for the 
smaller, ``pushcart'' type sellers thought to populate the Internet 
marketspace. Complex tax regulations enforceable on a mature market 
might eliminate entire classes of small, less sophisticated Internet 
sellers.
    Practically speaking, however, the importance of this enforcement 
problem has fallen over time. Calculation of taxes for each particular 
jurisdiction may be tedious, but such a task is well-suited to an 
electronic environment. Companies such as Vertex or Taxware 
International have produced databases that can calculate the amount of 
tax to be collected if given the address of the purchaser and the 
amount of the purchase, data known to the merchant for transactions 
involving the shipment of physical goods. In the unlikely event that 
private companies price this software beyond the reach of most smaller 
merchants, state governments would have incentives to invest in a low-
cost or even free system fully linked to popular electronic commerce 
platforms.
    Some administrative aspects of remittance still remain. For some 
products the tax base differs across jurisdictions. Also, sales may 
entail pre-registration with certain state tax authorities and a 
significant amount of paperwork. Some commentators have suggested the 
creation of a single national clearinghouse to streamline the 
ministerial aspects of tallying and remitting tax on transactions made 
by small firms with customers in multiple jurisdictions (Eads et al., 
1997). Here, again, states have a strong incentive to take up 
simplifying recommendations to make collection easy. Many proposals, 
for example, would simplify collection by having only a single rate per 
state. Also, the BCG (1998) report suggests that online sales are 
actually somewhat concentrated among a small number of sellers. About 
half of all sales come from the top ten sellers and more than three-
quarters come from the top 50. Thus applying a de minimis rule would 
probably not result in much reduction in revenue.
    A second set of potential enforcement difficulties concerns the 
difficulty of identifying individuals or even transactions in the 
electronic environment. At the extreme, if both merchant and consumer 
can be anonymous online (giving no indication of their physical 
location) and can transact in untraceable ``e-cash,'' enforcing the 
sales tax online could have serious problems.
    At present, we do not believe that this difficulty is as relevant 
as has been portrayed in the popular debate. For now, online commerce 
is dominated by credit card payments, and credit card verification 
often hinges on whether one can confirm the billing address of the 
account. Given this zip code and address information, simple software 
could immediately calculate the tax and send payment for most 
transactions involving physical goods sold online. Merchants with nexus 
already make such calculations regularly.
    There still remains the potential problem of verifying location of 
the buyer for transactions involving electronic goods. Note, however, 
that such transactions are not typically subject to sales tax as they 
often do not have physical counterparts. This is, then, largely a 
question of whether sales taxes should apply to this new category of 
goods. This issue is no different than existing discussions about 
whether sales taxes should apply to services (McLure, 1997). Such 
issues are certainly beyond the scope of this paper and are likely 
beyond the scope of the ITFA advisory commission, as well.
    In the future, however, non-credit card payment mechanisms such as 
incentive-based scriplike systems (e.g., ``Cybergold''), where members 
earn and trade ``points'' redeemable through participating merchants or 
micropayment systems (e.g., Cybercash and Echarge) may become 
increasingly important and would seem to restore the problems of 
anonymous customers. This assumes, however, that the Internet of 
tomorrow will be similar in the relevant respects to the Internet of 
today. It is conceivable that compliance and enforcement may actually 
become easier as the architecture of the Internet evolves to better 
suit electronic commerce--perhaps even easier than they are for non-
Internet-based transactions. Further, government policy decisions 
themselves will likely have a major influence on the ``code'' 
underlying the Internet and its transparency to government policy 
(Lessig, 1998).
    Network effects, for example, are likely to narrow the payment 
mechanisms to a small number of choices. As long as there is general 
centralization at some key point among Internet payment schemes, the 
government will have a way to collect taxes from most transactions. If 
policymakers, for example, simply attach their reporting requirements 
to the most popular payment schemes, they could calculate, collect, and 
remit sales tax on transactions without requiring the merchant to do 
much work. An extra charge representing a sales tax would be applied, 
collected, and electronically remitted as an integral part of each 
instance of payment. Apart from payment mechanisms, server-side e-
commerce software could be revised to incorporate sales tax. Government 
tax rules could give incentives to those controlling the payment 
mechanism software to ensure that their products incorporate 
calculation, collection, and remittance of tax at the moment of sale. 
Those wanting to evade tax collection and remittance would have to 
develop nonstandard software to handle customer payments (and do so in 
a way that could not be easily detected by state governments).
    More generally, the advent of digital signatures to enable trusted 
commerce means that the respective states could themselves become 
common to a transaction, freely verifying the residence of someone 
wishing to buy something. Merchants with consumers who are unable or 
unwilling to offer residence verification from any jurisdiction could 
be assessed some sort of tax then allocated in a ``throwback'' way to 
the jurisdiction in which the merchant operates, or among the known 
jurisdictions in which the merchant sells (see Eads et al., 1997). 
(Klassen and Shackelford (1998) analyze the economic effects of 
throwback rules in the retail context.)
    The essence of any effort on enforcement is not to spend resources 
in an effort to eliminate every single instance of fraud. This standard 
is unrealistic even for retail sales taxes. Rather, the goal is to make 
compliance easy and evasion difficult so that the problem is limited. 
In this sense, in the short run, there may be some problems with trying 
to enforce sales taxes online, but looking forward, these problems are 
likely to lessen in importance.

Externalities and Under-Provision
    A final set of costs associated with taxing Internet commerce 
relate to the potential existence of externalities. According to the 
results in Goolsbee (1998), if taxes were applied effectively to 
Internet purchases, there would be a significant reduction in the 
amount bought online. If there are important externalities, this 
reduction could be a significant social cost. Many of the arguments in 
the political arena that we should protect or nurture the Internet at 
an early stage of development are in this spirit. Here, we evaluate two 
potential sources of social under-provision: network benefits and 
information problems.\9\
---------------------------------------------------------------------------
    \9\ There is a third potential source relating to retail market 
power, but we do not consider it in detail here. If local retailers 
have market power, Trandel (1992) shows that having a tax-free outside 
option can reduce this market power and actually improve consumer 
welfare. Given that we have no data on market power, we will just 
assume that markets are competitive.
---------------------------------------------------------------------------
    The first problem is the potential positive spillovers arising from 
network externalities--that the benefit to each Internet user rises 
with the size of the overall network. The idea is that seeding the 
Internet early will yield large benefits in the future. There is very 
little empirical evidence concerning the magnitudes of network benefits 
associated with either the Internet in general or Internet commerce 
specifically.\10\ In the case of online commerce, the potential 
spillovers may involve local learning spillovers (e.g., a friend 
explains which websites are useful or that using credit cards online is 
safe), demand side economies of scale (e.g., with a big enough 
potential market, a merchant will be willing to incur fixed costs to 
enter various niche markets or develop additional features), or direct 
network benefits (e.g., if auction sites can create networks of 
otherwise thin markets, both buyers and sellers benefit). In each case, 
as the number of Internet customers grows, the value of Internet 
commerce rises. It is important to note, however, that for network 
externalities to justify, essentially, infant industry protection of 
the Internet, electronic commerce must do more than simply divert sales 
from retail stores, as discussed above.
---------------------------------------------------------------------------
    \10\ Goolsbee and Klenow (1998) show that there seem to be 
significant local spillovers from using the Internet and using e-mail.
---------------------------------------------------------------------------
    We first ask if there is any empirical evidence favoring the 
existence of spillovers associated with Internet commerce. Does getting 
a person to buy online actually lead others to follow suit? Existing 
data are largely inadequate to answer this question precisely, but for 
the individuals in our data, we have some qualitative information on 
the topic. In addition to reporting demographic information, people 
with online access also provide information about the share of their 
friends and family who buy things online. They can answer ALL (<1 
percent), MOST (2 percent), SOME (17 percent), VERY FEW (46 percent), 
or NONE (35 percent).
    Because this is a single cross-section that lacks further 
information, we cannot deal with the obvious potential problem of 
unobserved common traits among friends beyond the observables and 
location dummies as, for example, Goolsbee and Klenow (1998) do in 
their study of network benefits; nor can we show that spillovers are 
actually externalities in the spirit of Leibowitz and Margolis (1994). 
Given that these are the only data available, however, we attempt to 
examine what correlations exist in them.
    We do a standard probit regression of whether an individual with 
online access has bought something online. In it, we include the same 
individual control variables as before (income, age, education, gender, 
race, marital status, the presence of children, the use of a computer 
at work, the operation of a business from home, whether the individual 
already had a computer in the year preceding the survey, and dummy 
variables for the metropolitan area of residence). In addition, we 
include dummy variables for the share of friends buying online. If 
there are network spillovers, having more friends and family buying 
online should make the individual more likely to purchase. As shown in 
Table 5, people are more likely to have bought on the Internet the 
greater the share of their friends that have done so. Moving from 
having no friends buying online to having most buying online, for 
example, raises the probability of purchase by more than 0.40. This is 
a large and significant coefficient and is consistent with local 
spillovers (although also consistent with common unobservables among 
friends).
    At the same time, it is important to think about the size of future 
network externalities. The major network externalities are likely to 
exhaust or at least diminish once the Internet achieves major scale. 
Too often, infant industry protection turns into established industry 
protection. Further, we expect that eventually there will be an 
important negative network externality at work (to the extent it is not 
already) in increasing Internet congestion due to the prevalence of 
zero marginal cost pricing.\11\ The congestion problem is likely to get 
worse as the Internet grows and argues against subsidizing the growth 
rate through tax policies.
---------------------------------------------------------------------------
    \11\ Some important early discussions of congestion can be found in 
Mackie-Mason and Varian (1995; 1996), Bohm et al. (1994), and Gupta et 
al. (1995).


    Table 5. Influence of Friends on the Probability of Buying Online
------------------------------------------------------------------------
                     Variable                               (1)
------------------------------------------------------------------------
All friends buy online                                    0.470 (0.049)
Most friends buy online                                   0.408 (0.021)
Some friends buy online                                   0.333 (0.007)
Very few friends buy online                               0.147 (0.006)

Income                                                    0.003 (0.001)
Education                                                 0.005 (0.001)
Age                                                     -0.002 (0.001)
Female                                                    0.061 (0.005)
Single                                                    0.025 (0.006)
Children under 18                                       -0.041 (0.006)
Asian                                                   -0.011 (0.018)
Non-white minority                                      -0.009 (0.007)
Use a computer at work                                    0.005 (0.006)
Run a business from home                                  0.044 (0.007)
Owned a computer in 1996                                  0.110 (0.007)

Dummies                                               Metropolitan Area
------------------------------------------------------------------------
n                                                                24,059
R\2\                                                               0.14
------------------------------------------------------------------------
Notes: The dependent variable is a variable equal to one if the
  respondent reports having bought something online in the past three
  months. Standard errors are in parentheses. The equation is estimated
  using a probit.


    The second externality-type argument regards the information 
problems associated with the security of Internet transactions. In 
reality, credit card security on the Internet is extremely high. There 
are no direct calculations of the incidence of online fraud, but 
experts generally agree that it is much more likely to have one's 
credit card number stolen over the phone, for example, than online, yet 
over-the-phone use is common (Fraza, 1998). Further, even if one's 
credit card is stolen, there is a $50 limit on the amount of charges 
for which the consumer is liable.
    The Forrester Technographics '98 data asked the 80 percent of 
Internet users who have not bought online why they have not done so. By 
far the most common answer, accounting for 45 percent of the responses, 
was that they did not want to give out their credit card information 
over the Internet. When asked to give their opinions of the level of 
security of credit card information given out over the web (rated from 
one to ten with ten being extremely secure and one being not at all 
secure), the respondents' average rating was only a 2.9. The overall 
safety and the limited risk associated with Internet purchases do not 
appear to be widely understood by Internet users. Once they buy 
something, however, the repurchase rates are very high.
    With the apparent asymmetric information on the part of new 
consumers about security, there may be justification for encouraging 
people to try shopping online. In the social sense, there may be too 
little Internet commerce. Qualitatively, this is a cost of taxing 
Internet commerce, though, again, this is a strictly short-run 
justification. Once Internet commerce is established as a conventional 
sales channel, there is no reason to give a benefit.

Conclusions
    In this paper, we have examined the costs and benefits associated 
with enforcing taxes on Internet commerce. The results suggest several 
things. One, because of its limited size relative to retail and because 
of the type of products being purchased, aggressive enforcement of 
taxes on Internet commerce would raise only a small amount of revenue 
over the next several years. Two, Internet commerce does not seem to be 
primarily fueled by diversion from retail sales. Third, not enforcing 
taxes on the Internet does disproportionally benefit higher income and 
highly educated people, but this effect has lessened substantially in 
the last two years. Fourth, the costs of complying with taxes on 
Internet commerce are unlikely to be very large for most online 
transactions. Fifth, there is suggestive evidence of spillovers and of 
information problems that should be considered costs of aggressively 
applying taxes. These benefits are primarily restricted to the short 
run, however.
    Given that the costs of maintaining the status quo are small and 
the benefits of nurturing the Internet seem to be somewhat concentrated 
in the short run, a natural compromise position might be a moratorium 
on enforcement of Internet sales taxes in the short run followed by 
equal treatment once the conditions change. This is not quite the same 
as the ITFA. The ITFA is a moratorium only on new and discriminatory 
taxes and leaves the broader question of sales taxes to be resolved in 
the future upon the recommendations of an advisory commission. 
Hopefully, results such as those in this paper will encourage advocates 
and policymakers on both sides to give more empirical thought to the 
tax issues raised by the Internet.

Acknowledgments
    We wish to thank the American Bar Foundation and the Berkman Center 
for Internet and Society for financial assistance and Ben Edelman, 
Christine Jolls, Peter Klenow, Lawrence Lessig, and Steven Levitt for 
helpful comments. Michelle Spaulding and David Melaugh provided 
excellent research assistance on the project.
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Appendix
    Forrester Research is a leading market research company whose 
specialty is the information economy. In their Technographics '98 
program they conducted a major consumer survey about technology in 
which they asked more than 110,000 people about their characteristics 
and their ownership of technology (the field work was done by the NPD 
Group). A greater description of the survey can be found in Goolsbee 
(1998).
    The individual variables we use are income, education, age, gender, 
marital status, race, children under 18, ownership of a computer in 
1996, use of a computer at work, and running of a business from home. 
We turned the series of dummy variables for education, age, and income 
into continuous variables. If income was stated as between $35,000 and 
$40,000 for example, we imputed an income of $37,500. For top-coded 
variables, we tried various values, but changing them had almost no 
impact on the results. Similarly, just including the variables as 
dummies gave the same results.
    Though the sampling methodology is proprietary, it is meant to make 
the survey nationally representative and the data is both widely 
respected and very expensive for private sector companies. It also 
matches up somewhat well with government sources such as the Current 
Population Survey on obvious variables like income, gender, and so on.
    The survey also presents data about whether individuals owned a 
computer, when they got their computer, what type of computer they 
bought, whether they had access to the Internet, and many other 
questions of this nature. For those who reported having online access, 
they were also asked how long they had been online, whether they had 
bought something online, what share of their friends and family are 
online, and what share of their friends and family have bought 
something online. These are variables we use in our analysis.

    Senator Breaux. [presiding]. Our Chairman has had to step 
away. He will be recognized when he returns. Thank all of you 
for coming. This has been a terrific discussion on a very 
interesting and very, very important issue that really cries 
out for some resolution.
    Dr. Berthoud, I know that have you never met a tax you 
liked, no matter what shape, size or form it happens to be in. 
But let me ask you to, sort of philosophically, I mean, what is 
wrong with a case where in my hometown of Crowley, Louisiana, 
the city fathers and the citizens of that community determine 
that it is appropriate to levy a five percent sales tax on 
purchases. They are going to use it for police protection and 
fire protection and some of it will go to schools, and yet have 
a situation where some local citizen buys a pair of shoes at 
the local shoe store he pays that five percent sales tax and 
goes for those purchases. What is wrong with saying that if 
that same person orders a same pair of shoes over the Internet 
for someone who is not located there that somehow they should 
not have to pay the five percent sales tax?
    Dr. Berthoud. Senator, you ask a very important question. 
This really is the heart, I think, of the debate as these 
panelists and the previous panelists have gotten to. That 
ultimately is the issue--should we impose sales taxes on remote 
sales. That ultimately is the public policy question. We would 
again argue that we would reverse the logic, if you will, and 
rebutting those who suggest it is unfair for one type of 
business not to pay a tax and one to pay it, we would say that 
any business can begin e-commerce. This is the ultimate in 
economic democracy, we believe, and that is the beauty of the 
Internet, for any business can get on and their customers shop 
sales tax-free.
    And I would remind you that if that consumer purchases that 
item locally or purchases that item remotely, some government 
somewhere in America is still getting taxes, be it as I said 
property taxes, income taxes, corporate income taxes, or 
individual income taxes. There are plenty of taxes on every 
single purchase that we make, whether there is a sales tax--
Senator Wyden's State does not have a sales tax, but every 
single purchase, whether you see it or not at the register, has 
myriad taxes and indeed every American pays 35 percent to 40 
percent of their income in taxes. So we are, we are not in any 
danger, if we exempt that purchase from sales tax, of 
governments running out of money. And indeed we have heard 
testimony about the revenue loss, but I have not seen in any 
projection for any State--despite the growing prevalence of e-
commerce--in five years, to be collecting less revenue than 
they are today.
    Senator Breaux. I go back to the point we were discussing 
with Senator Hutchison. Her State does not have an income tax.
    Dr. Berthoud. Very wisely.
    Senator Breaux. But her State still generates revenues 
through the sales tax for all these important purposes. I 
totally agree with her that if all of a sudden people start 
saying I am going to avoid a five cent or five percent sales 
tax on everything I can buy and get it almost as quickly by 
ordering it on the Internet, it is going to put a tremendous 
pressure to make up those lost revenues by establishing 
something that you also do not like, which is an income tax on 
a State level.
    Dr. Berthoud. That would certainly be correct, Senator.
    Senator Breaux. You do not like that tax either.
    Dr. Berthoud. No, but Texas is among the States that has 
had over a number of years a billion dollars in surplus. We see 
for the foreseeable future that state over-spending is a far 
greater threat and I would reference you to the article cited 
in my testimony in the New York Times. States have so much 
money now.
    Senator Breaux. Let me make sure you do not include mine. 
We have a $600 million deficit. We can talk about why. Most 
States have a substantial deficit.
    Dr. Berthoud. Most States have a substantial surplus. They 
are creating programs. Some of them have merit, but apparently 
most of them do not and that seems to us as the far greater 
threat to taxpayers, and again the great State of Texas, for 
the foreseeable future, it is projecting, despite the expansion 
of e-commerce, it is projecting revenue growth at the State 
level and indeed there is, according to Texas' own projections, 
there is no threat to the Texas revenue source.
    Senator Breaux. My final question if I might, Mr. 
Bullington of Wal-Mart. If I was a smart fellow and wanted to 
really compete against your chains, I take it that under this 
scenario that we are currently under that you got a Wal-Mart in 
my local town that sells all the wonderful things that you do 
and I got to go to Wal-Marts about once a week for a Wal-Mart 
fix, but I could establish Easy Mart and locate Easy Mart maybe 
in Maine. And I could survey everything and every Wal-Mart 
store in my State and put every single thing that you have in 
your Wal-Mart and put it in Easy Mart located in Maine; 
establish a web site that clearly spells out everything that 
you have in your Wal-Mart store that I have in my Easy Mart up 
in Maine; buy billboards and advertise the hell out of it all 
over my State that say: See it, feel it, touch it at Wal-Mart, 
but buy it at Easy Mart, and encourage people just to go 
through your store and see it, feel it and touch it and then 
come out and just go right out there and say I'll buy it from 
Easy Mart. And Easy Mart would not collect the sales tax.
    I mean, that is a hypothetical. If I was really smart and I 
thought this was going to be the current situation for the 
indefinite future, I would do that. Not me personally. I do not 
have enough money to establish anything, but somebody might do 
that. I mean, would that be possible?
    Mr. Bullington. It is certainly possible. We welcome that 
type of competition. Just do not tie one arm behind us with a 
six to eight percent pricing range.
    Senator Breaux. So that is fine for Wal-Mart and most 
retailers that are in your type of business as long as there is 
not a discriminatory assessment or nonassessment of a local 
sales tax?
    Mr. Bullington. Absolutely. We might be very well doing 
Wal-Mart whatever, side by side, selling on the Internet the 
same way.
    Senator Breaux. From your perspective, discrimination, I 
agree we should ban and put a moratorium ad infinitum on 
discriminatory taxes. I think they are illegitimate. Thank you.
    Senator McCain. Thank you very much. Senator Wyden.
    Senator Wyden. I just have two questions for this panel, 
one for you, Mr. Zittrain. You have heard about the Governors' 
proposal with respect to tax simplification and you heard about 
it again today. What is your assessment of what it would cost 
the typical small business to collect and remit these remote 
sales taxes? We have gotten projections that for every dollar 
you would collect, the burden on the small business person 
would be very substantial. What is your assessment on that 
point vis-a-vis the Governors' proposal?
    Mr. Zittrain. Is that under the way things currently work?
    Senator Wyden. No. Under the proposal that they have been 
talking about. As you know, and it was described again today, 
the centralized kind of system and the like.
    Mr. Zittrain. What I would want to know first is when the 
proposal talks about a de minimis exemption, for example if you 
are just selling a few cookie recipes over the Internet, do you 
have to comply with 50 States' tax codes? The higher that de 
minimis exemption is, the more that businesses who are Mom and 
Pop doing small amounts, just getting started, do not have to 
worry about compliance. So one question would be: How big is 
the de minimis exemption going to be?
    Another question would be, can Governor Leavitt see the 
states actually unifying their tax bases? And by that I mean, 
if you are selling blankets, you would not need to know whether 
the blankets are covered in Nevada or Texas. You would know 
whether or not with respect to all 50 States that you have 
actually got something coming under the tax. As far as actually 
calculating the rate and doing remittance, if in fact Governor 
Leavitt's group can produce a system whereby it is one-stop 
registration, one-stop calculation as far as actually figuring 
out how much to collect and where to send it, that could make 
it quite easy. There are companies like Taxware International 
where it says this is how much you owe and away you go and with 
microtransactions it would then be easy to remit the tax.
    Senator Wyden. We are just skeptical that that can be done. 
You heard me say I am trying to meet him halfway and approach 
this along the lines of giving him a vote on a date certain 
with respect to doing this. It is just that some of the leading 
accounting firms in the country have done an estimate of what 
it would cost for the Governors' proposal and for the typical 
small business person, I mean, relative to each sales tax 
dollar collected, the burden would be very, very great.
    I mean, as you know, you have to distinguish between 
cookies in one State and candy and profit-making organizations 
and nonprofit-making organizations and I think your first point 
was very, you know, very correct, which is we have to see what 
the de minimis exemption is. And of course the higher you make 
it the less likely you are to flatten Mr. Morse there. And that 
is what is very important and I appreciate it.
    I am also going to put into the record the studies that 
have shown that as of now, based on what the Governors have 
said, the cost for the average small business to collect and 
remit the sales tax is very, very high.
    Mr. Morse, one question for you. We are so glad that 
Senator Leahy pushed to have you come because I think you are 
really the face of the new economy. This has been portrayed now 
for 3 years as sort of bricks and mortar vs. folks who are 
online and they are going to be in this bloody sort of battle, 
but Senator Leahy has really brought to our attention that in a 
sense you are the integration of these two worlds. You have 
this traditional business, so-called bricks and mortar 
business, have an online economy and I and others called this 
sort of bricks and clicks. And my sense is that this has 
accelerated much more rapidly than we ever thought when we 
wrote the original law.
    There was one study that showed since the Internet Tax 
Freedom Act, 74 percent of the Main Street retailers are like 
you. They have set up a serious online kind of operation and 
that leads me to believe that if and when our country has 
economic problems again, it is not going to be because of the 
Internet, it is going to be because of all kinds of other 
considerations, maybe it will be oil prices. Maybe it will be 
interest rates. It could be a variety of things but it will not 
be because of the Internet.
    My question to you is based on your involvement as a Main 
Street retailer, is it your sense that a lot of your colleagues 
on Main Street are going to go the route that you have and sort 
of integrate these two worlds because that is how you see your 
future?
    Mr. Morse. Yes. I believe that they will. I know of many 
cases where that has happened. I had the good fortune to be 
interviewed by ABC World News back before Christmas.
    Senator Wyden. I saw the show.
    Mr. Morse. You saw that show. Small world. The--subject 
matter was Main Street USA and was presented prior to Christmas 
over the Internet and there were several Montepelier businesses 
that stood to be interviewed by them, small businesses like 
mine and did not, were not interviewed, but I just feel like it 
is the new way coming down for businesses, large and small.
    Senator Wyden. When you say it is the new wave, I think 
that really sums it up. This is not going to be bricks and 
mortar versus the online world. This is going to be an 
integration of the two.
    We are really glad that Senator Leahy pushed to have you 
come and I appreciate your coming. All of you have been very 
helpful. We have worked with almost all of your organizations 
and will continue to do so.
    Senator Dorgan. Let me thank all of the panel. I regret 
that I had to go for a meeting with Senator Daschle in the 
middle of your presentations but I have read much of what you 
had to say and I appreciate your being here and your 
willingness to testify. Mr. Zittrain, my understanding from 
your response to Senator Wyden is that there are circumstances 
under which the simplification of a collection of a sales or 
use tax would not impose a burden and if that were the case, 
you would not oppose that. Is that what I understand you to 
mean?
    Mr. Zittrain. That is correct. If there is a strong 
administrative burden imposed on those out of state trying to 
collect it, that is good reason not to bother collecting the 
tax, as our article explains. On the other hand, if there is a 
way to make that burden go away over time, it is another reason 
why imposing a moratorium now, but being sure to lift it later, 
actually makes sense.
    Senator Dorgan. The piece of legislation that actually 
passed a Subcommittee in the U.S. House probably 15 years ago 
now in the Ways and Means Committee, dealing with remote 
sellers--in this case it was catalogue sales--included a $10 
million de minimis. That is businesses that were not at a $10 
million revenue threshold would not be required to be involved. 
Mr. Morse, would your business meet that test?
    Mr. Morse. Yes, it would.
    Senator Dorgan. I do not quite understand, is it below $10 
million?
    Mr. Morse. No. It is below.
    Senator Dorgan. The reason that was included is there needs 
to be, if we are going to simplify here the collection of what 
is now a use tax, there must be genuine simplification in the 
requirement that the States impose a single rate against remote 
sellers, a single sales tax rate, a common sales tax base. And 
in addition there needs to be a de minimis that will allow 
smaller businesses not to get caught in the net.
    So I think in any event, when the compact is created among 
the States, it will include all three of those circumstances 
and I do not know what the de minimis would be, but I will just 
say to you that what it was 15 years ago with catalogue sellers 
in the House, recognizing the compliance issues which then 
would not be radically simplified but now I think would be 
simplified by technology, the de minimis was $10 million. And I 
want to say that, Mr. Morse, for your comfort because I think 
all of us understand those who are starting out, you do not 
want to impose upon them significant burdens.
    In the State sales tax bases, most sales tax administrators 
will create de minimis levels, but their de minimis levels are 
normally the people doing $1,000 a year or $2,000, crocheting 
doilies with magnets to hang on refrigerators and putting some 
brand name and making $1,000 or $2,000 a year. Those are 
normally excluded. That is a relatively low de minimis. With 
respect to this, the de minimis would have to be more 
significant.
    Dr. Berthoud, I was interested in your testimony. You are 
obviously well versed in all of these issues and you talk about 
the pro-tax side. There in fact is not a pro- or anti-tax side 
in this debate, is there; because we are not talking about a 
new tax. A tax exists on these transactions, so when you talk 
about the pro-tax side what are you referring to?
    Dr. Berthoud. An example of that would be the type of 
regime that Governor Leavitt is talking about creating.
    Senator Dorgan. But would that result in the imposition of 
a tax that does not now exist?
    Dr. Berthoud. Well, it would result in already high State 
tax collections going even higher, yes.
    Senator Dorgan. So he is pro-tax because he advocates the 
collection of a tax that already exists?
    Dr. Berthoud. He is pro-tax because he is advocating higher 
taxes on already overburdened taxpayers.
    Senator Dorgan. How is it a higher tax if a dollar 
transaction imposes a current use tax and Governor Leavitt 
suggests the simplification of its collection, how is Governor 
Leavitt advocating a higher tax?
    Dr. Berthoud. Senator, we at the National Taxpayers Union 
look at it this way. The average American has to turn over 35 
percent of their income to the government. The average 
American, by the way, supports taxes at 25 percent or less. 75 
percent of Americans across all demographics support that. The 
adoption of what Governor Leavitt is proposing would increase 
that. It means more taxes for States. It is more taxes paid by 
taxpayers.
    Senator Dorgan. Do you view tax compliance as an increased 
tax burden?
    Dr. Berthoud. We view more taxes as more taxes.
    Senator Dorgan. Would you admit this: that the current use 
tax that exists on a transaction, if it exists, is not going to 
be increased by its collection through some other mechanism?
    Dr. Berthoud. Absolutely.
    Senator Dorgan. And if it is not going to be increased, how 
then do you suggest that someone who suggests collection is 
pro-tax?
    Dr. Berthoud. Tightening enforcement mechanisms, creating a 
tax regime which would potentially climb above the $10 million 
threshold is adding taxes and adding a burden to both small 
businesses and to individuals. I would also add that it would 
be very, very hard to create an exemption for businesses. Or 
let me just say it seems to be a huge loophole where there 
would be a $10 million threshold.
    Senator Dorgan. I am talking about the folks above who 
would be collecting a tax that is already owed. I graduated in 
a high school class of nine, I was in the top five. I am not 
the quickest on all of this. But my sense is that if you do not 
support the payment of taxes that are owed, then you must 
support the nonpayment of taxes or nonenforcement of existing 
taxes.
    Dr. Berthoud. Let me try and clarify. We do not support the 
creation of an Internet compact for Internet sales taxes such 
as Governor Leavitt is proposing.
    Senator Dorgan. You would not oppose Governor Leavitt 
deciding we are going to collect every dollar of use tax in his 
State?
    Dr. Berthoud. That certainly is his right.
    Senator Dorgan. Would you encourage the filing of returns 
of every Utah resident that complies with the requirement that 
exists in the law?
    Dr. Berthoud. We would not support that.
    Senator Dorgan. I think I made my point. When you use the 
word pro-tax, I don't think you are using it properly. I was 
not born into this world to defend Governor Leavitt. We are not 
even of the same political party, but he is not a pro-tax 
Governor. He is here talking about collecting a tax that is 
currently owed and a mechanism to do that that is simple, 
effective, fair, and does not obliterate your tax base. I mean, 
we disagree on that, but I just wanted to make the point, I 
think throwing around this notion of new tax, pro-tax and so on 
is unfortunate because I do not think it fairly describes this 
debate.
    Dr. Berthoud. If I may, Senator, I would argue on the other 
side. I think it is terribly unfortunate for groups like the 
NGA to say if we do not adopt their proposed regime, to use 
these scare tactics such as the forced firing of firemen and 
teachers and policemen. I think that is just as unfortunate.
    Senator Dorgan. What taxes do you support, Dr. Berthoud? 
Can you describe what kind of taxes you do support?
    Dr. Berthoud. We support a lower tax on all Americans. We 
do not advocate zero taxation but we think the current level of 
taxes at 35 to 40 percent on every single American is far too 
high.
    Senator Dorgan. But tax rates above zero then would require 
a need to describe a certain kind of tax system. What would you 
prefer? Sales tax or income tax? Property tax?
    Dr. Berthoud. It is up to the States what type of tax 
system that they have. Income taxes are the most pernicious 
types of taxes. I think our message here is an effort to say 
that the aggregate level of taxes is too high and it should be 
lowered. If the States want to have one type of tax or another, 
that is their business.
    Senator Dorgan. I do not mean to single you out but you use 
the word pro-tax which I think is horribly inappropriate in 
this debate and I wanted to straighten that out.
    Mr. Bullington, you represent Wal-Mart?
    Mr. Bullington. Yes.
    Senator Dorgan. Is Wal-Mart going online? I read your 
testimony. Wal-Mart is going online to be an e-tailer on line?
    Mr. Bullington. Have been for sometime. Yes.
    Senator Dorgan. Are you separately incorporated to do that?
    Mr. Bullington. Effective early this year, yes.
    Senator Dorgan. What is the result of that with respect to 
your tax base?
    Mr. Bullington. We only collect State taxes of California, 
Utah and Arkansas.
    Senator Dorgan. You did that for what reason?
    Mr. Bullington. Well, we did it because California is 
certainly a magnet as far as things going on, Silicon Valley 
and that industry and we brought in venture capital.
    Senator Dorgan. I am not talking about the three States, I 
am talking about the decision to separately incorporate.
    Mr. Bullington. Because of the reasons to attract outside 
management investment capital and to deal with the competitive 
issue as it relates to sales tax collection.
    Senator Dorgan. If you had not done that you would be one 
of the larger merchandisers in the country with brick and 
mortar in every State and on the Internet, but being on the 
Internet would require you to collect sales taxes and your 
competitors would not?
    Mr. Bullington. As a division of Wal-Mart stores we 
collected sales tax from every jurisdiction where we delivered 
product to.
    Senator Dorgan. Mr. Morse, congratulations. I am one of the 
great maple syrup fans in America and we do not produce any of 
it in our State so to the extent that I am able to access it, 
it has to be through the Internet, catalogue sales or in the 
grocery store. Bring those prices down just a little bit, if 
you will, but maple syrup is one of the great substances, as 
far as I am concerned.
    Thanks to the rest of you for sharing your thoughts with 
us. This is not an easy issue at all. It is complicated and 
difficult, and contrary to what some believe, I think the 
stakes are very, very high here, and this should be done 
thoughtfully and done promptly. I am not someone who wants to 
injure the Internet. I want it to grow and flourish and I want 
to work with my colleagues to find a way to solve all of the 
problems and there are several problems here, not just the 
issue of preventing discriminatory taxation which I will join 
in doing.
    We should not allow discriminatory taxes. That is one 
issue. There are two or three other issues. Let us solve that 
at the same time. Let us not believe that one has more weight 
than the others. Let us address this as a group of problems 
that we can come together on and do good things. I say the 
Chairman feels very strongly about this. I have great respect 
for him and when we provided the previous moratorium on the 
floor of the Senate, we worked together to reach an agreement 
on it and I will again support him on extending the moratorium.
    I hope, however, that we can work in a way that adds some 
things to the extension that will create some balance to 
addressing the other sides of these issues. I would say the 
same with respect to my colleague, Senator Wyden, who also 
feels strongly about it. Again, thank you for being with us. 
This Committee is adjourned.
    [Whereupon, at 12:10 p.m., the hearing was adjourned.]

                             A P P E N D I X

                Prepared Statement of Hon. Max Cleland, 
                       U.S. Senator from Georgia

    Mr. Chairman, thank you for holding this hearing today on the 
important issue of Internet sales tax policy.
    As a former state official, I believe that the sovereignty of 
states must be a closely held and protected authority. However, 
Congress has pre-empted the state's authority to develop its own tax 
policy with regard to Internet sales since 1998. State and local 
officials in Georgia and elsewhere went along with this plan with the 
understanding that after three years there would be some direction on 
this issue from the Advisory Commission on Electronic Commerce (ACEC). 
However, the Commission did not reach the statutorily required two-
thirds majority necessary to make a recommendation, and instead of 
working together to reach a valid recommendation, they submitted to 
Congress a simple ``findings''. Thus, unfortunately, the ACEC failed in 
this assigned mission of consensus-making.
    Some in Congress contend that the state and local sales tax system 
is too cumbersome, and, therefore, Internet sales should be exempt from 
sales taxes. This may be the case, and I encourage state officials to 
evaluate their tax policies. However, in today's society, where the 
``new economy'' leaders survive by filling voids, there are companies 
that have developed software that enables an on-line seller to assess 
the appropriate local sales tax. For example, Taxware, in Salem, 
Massachusetts, licenses their software to on-line retailers who also 
have nexus in states, requiring the collection of local sales taxes.
    On the other hand, some traditional bricks and mortar stores have 
established separate, independent on-line businesses that do not 
collect sales taxes because as separate businesses they do not 
technically have nexus in as many states as the ``bricks and mortar'' 
stores by the same name. How would the Supreme Court have interpreted 
this business arrangement if it was hearing the Quill case today? And, 
I would question if this was the intent of Congress when it passed the 
Internet Tax Freedom Act.
    Additionally, is Congress in the business of rewarding stores that 
only choose to offer products on-line? Or, punishing stores whose 
owners only choose to offer goods to consumers who visit their store? 
Barring outside intervention, I believe that the most efficient form of 
commerce will prevail. Congress should not favor one form of commerce 
over another, whether in tax or other forms of public policy, but 
rather must allow the businesses to compete equally for customers.
    Finally, some of our colleagues in Congress would like to make this 
into an anti-tax versus pro-tax issue. This is not the issue. Sales 
taxes are not new taxes and are not imposed by the federal government. 
This tax policy is developed at the most local level to support local 
services--education, emergency services, local healthcare, and 
infrastructure development. In Georgia, tax policy decisions are even 
more localized than elected officials. Proposed sales taxes must be put 
to the voters in a referendum for their choice. Are my colleagues 
asking me to support denying my constituents the right to vote for a 
sales tax to improve their local school?
    I look forward to the testimony today and hopefully to having some 
of the questions I have raised in my statement addressed.

                                 ______
                                 
      Response to Written Questions Submitted by Hon. John McCain 
                             to Burr Morse

    Question 1. How many employees work for you?
    Answer. 18 employees.
    Question 2. How many employees do bookkeeping/accounting or tax 
work for you?
    Answer. 1 employee does bookeeping/accounting.
    Question 3. How much does your maple sugar sell for? How much does 
someone usually order at a time? Do you charge for shipping and 
handling? How much is the shipping charge for a typical order?
    Answer. We sell a full range of sizes and grades of maple syrup 
from 1.7 oz. (nips) to gallons. Our gallons average about $40.00 and 
our nips are $1.49. We also sell cases of \1/2\ pts., and qts. Our 
average order is about $38.00 for the syrup and $10.25 for the shipping 
and handling. Yes, we charge for shipping and handling. Maple syrup is 
a heavy, bulky, liquid and slightly perishable product. Carriers like 
UPS do not like several of the above qualities. Many sizes of syrup 
have to be double boxed with special packing material. Again, our 
average shipping charge is $10.25.
    Question 4. Do you collect sales tax on sales within Vermont? Do 
you know how much sales tax would be charged on your market in Salt 
Lake City, Utah? How would you go about collecting a sales tax on a can 
of maple syrup you sell and ship to a customer in Moses Lake, 
Washington?
    Answer. Within Vermont, maple syrup is considered a grocery item 
and groceries are not taxable in Vermont. I have no idea about the tax 
repercussions in Salt Lake City or any other municipality in the U.S. 
In some, no doubt, maple syrup would be considered a luxury product and 
taxable. In others, groceries may be taxable. For the Moses Lake order, 
we would probably have to purchase software that would list Moses Lake 
tax code. We would then have to pay the Moses Lake tax, by mail, out of 
our pocket, or collect an amount of tax on every container of syrup to 
create a pool for paying taxes when due. (Would this even be legal--
charging tax to every one where only some were liable?) I doubt if here 
is presently software available that would categorize every product as 
taxable or not taxable for every municipality and then electronically 
add the tax to any given order. My point is, for the Moses Lake order, 
I think there would be considerable manual labor in handling the 
taxation.
    Question 5. Do you have competitors in your business? Are they 
large or small companies? What effect has the Internet had on your 
ability to compete with your competitors?
    Answer. Maple syrup is a pure product that is very labor intensive 
to produce on an extremely seasonal level. There is no such thing as a 
national brand of pure maple syrup. Our competitors are relatively 
small companies. On ``over the counter'' orders, we feel a minimum of 
grief over competition. Traditional mail order brings minimal 
competition because we all tend to have our own exclusive customer 
lists. Internet, in my opinion, is getting to be the most competitive 
means of selling maple syrup because we are all competing on the search 
engines to be top on the list.

                                 ______
                                 
    Response to Written Questions Submitted by Hon. Max Cleland to 
                           Dr. John Berthoud

    Questions. Georgia's state and local leaders strongly support 
technology advances and the opportunities offered by electronic 
commerce. Georgia is home to corporations, such as EarthLink, iXL, and 
UPS, which are carving the path to the new economy. Why should the 
federal government extend a moratorium that prevents local leaders from 
establishing local tax policy to serve these corporations and their 
employees?
    In Georgia, citizens must vote by referendum to impose sales taxes 
on products they purchase. Why should Congress limit local citizens' 
ability to determine how they wish to tax themselves?
    As we know, e-commerce is experiencing tremendous growth. Each 
transaction taking place on-line translates in to a loss of revenue for 
state and local services, and this amount will continue to grow. 
Services like police protection and ambulances will still be needed to 
support their local community. The revenue lost will have to be made up 
somewhere. In Georgia, the Governor and General Assembly have developed 
a tax policy that includes reducing property taxes for our citizens. Do 
you support a bill that may force local lawmakers to alter this popular 
tax policy change and actually increase property taxes to make up the 
lost revenue to support emergency services?
    Isn't it true that the ability to set revenue policy to deliver 
necessary public services is a fundamental authority of state and local 
government?
    Answer. It is perhaps the ultimate irony that opponents of the 
Internet Tax Moratorium have, on occasion, invoked the argument of 
``freedom'' to support their point of view. Throughout the history of 
mankind, the single greatest threat to freedom has been from 
overreaching government. The Internet Tax Moratorium simply blocks the 
establishment of new and discriminatory taxes on the Internet. Senator 
Cleland's question seems to imply that Senator McCain's Internet Tax 
Moratorium is a threat to freedom. With due respect to Senator Cleland, 
that is absolutely backwards: Senator McCain's legislation expands the 
freedom of individuals by blocking government.
    Regarding the line of questioning on how limitations on Internet 
taxes may supposedly force Georgia to raise other taxes, as I stated in 
my testimony, the far greater threat to Georgia residents right now is 
from runaway spending. Legislators at all levels of government, instead 
of turning surplus dollars back to the people who have earned them, are 
creating hundreds of new programs and dramatically expanding the old 
ones.
    The well-respected Georgia Public Policy Foundation perfectly 
captures the real problems in Georgia:

        Georgia collected $4,479 million in general sales and use taxes 
        in 1999, up 11.81 percent over 1998, plus another $646 million 
        in sales taxes on fuels, alcohol, and tobacco. Total tax 
        revenues were up 8.81 percent over the prior year. With the 
        exception of 1998 when food sales became exempt, Georgia's 
        revenues since 1988 from general sales and use taxes have 
        increased steadily and have remained remarkably stable as a 
        percentage of the total revenue collected by the State. 
        Moreover, most of the states, including Georgia, are awash in 
        budget surpluses: $11.3 billion in 1998, with $36 billion in 
        ``rainy day funds.'' Georgia's rainy day fund is now $548 
        million. Georgia has a $1 billion surplus that the General 
        Assembly has voted to spend entirely plus borrow an additional 
        $530 million. Georgia is not experiencing a loss of sales tax 
        revenue but rather a lack of fiscal restraint.\1\
---------------------------------------------------------------------------
    \1\ Hans A. von Spakovsky, ``Sales Taxes and the E-commerce 
Revolution,'' The Georgia Public Policy Foundation, www.gppf.org/pubs/
commentaries/2000/etax.htm.

    For those with a concern about Georgia's fiscal future, the 
paramount threat comes from irresponsible politicians. Blocking the 
ability of politicians to get their hands on at least a few of the 
dollars that Georgians earn should be applauded, not condemned.

                                 ______
                                 
    Response to Written Questions Submitted by Hon. Max Cleland to 
                            Dr. Donald Bruce

    Questions. In your publication ``E-Commerce in the Context of 
Declining State Sales Tax Bases,'' you state several options for 
recouping lost revenue that may be used by local officials. Is there 
one option you see as more optimal than others? What effect do you see 
these policies having on local citizens?
    Answer. Local officials will have several options for recouping 
revenue lost to untaxed e-commerce sales. Generally, these choices 
include cutting government expenditures, increasing sales tax rates, or 
turning toward a different tax source such as the property or income 
tax. To be sure, many local governments are enjoying revenue surpluses 
and will be able to maintain current expenditure levels without 
additional taxation, at least for a few years. For many other 
municipalities, tax increases will be necessary to maintain budgets 
that have already been trimmed to the limit.
    The most probable option will be an increase in property taxes, 
which currently represent the vast majority of local tax revenue. 
Consequently, a small rate increase could generate a large amount of 
revenue. This is perhaps the optimal policy choice since local 
governments currently have the administrative structure in place. An 
increase in property tax rates would be less costly and easier to 
administer than most of the other options.
    Alternatively, localities could increase sales taxes in states 
where local options are available. However, it must be noted that such 
a policy reaction would work against other state and local 
simplification measures. The perpetuation of differentiated local add-
on rates only makes the existing system more complex.
    Other options include local income taxes (which are extremely 
rare), special excise taxes or user charges, or other miscellaneous 
local fees. Inevitably, the optimal choice will be municipality-
specific, as no particular revenue solution will be perfect for all 
local governments.
    As with any situation involving a budget cut or a tax increase, 
there will be winners and losers among the local citizenry. The 
particular reform that is chosen must minimize the adverse impact on 
the losers while maintaining a sufficient and stable level of public 
services. It is important to keep in mind that the localities with the 
largest revenue losses--those that will require the largest tax 
increases due to revenue losses from e-commerce--are the very 
localities that are currently avoiding the most taxes by shopping 
online. To the extent that property, sales, or income taxes are 
increased to replace lost revenue, then, there will be no net tax 
increase.

                                 ______
                                 
    Response to Written Questions Submitted by Hon. Max Cleland to 
                            David Bullington

    Question. Why did Wal-Mart establish a separate company to run its 
on-line business as opposed to a subsidiary of the parent company?
    Answer. By way of the outside equity participant, Wal-Mart wanted 
to gain access to additional Internet expertise within the Silicon 
Valley area as well as the management recruiting ties offered by this 
equity participant. Additionally, this structure offers the opportunity 
to do a public offering of stock of the Internet company. Further, it 
allowed for direct pricing competition with those remote sellers that 
do not collect the sales tax.

    Question. Should your on-line stores have a tax advantage over your 
bricks and mortar stores?
    Answer. No.

    Question. If there is a level playing field among all forms of 
commerce, I believe consumers will be the winners by having new options 
when entering a traditional ``bricks and mortar'' store like Wal-Mart. 
For instance, if an item is not in the store, the consumer can go to a 
terminal and order it on-line. Do you agree that there will be more 
options for consumers if there is a level playing field among all forms 
of commerce? Has Wal-Mart discussed ways to incorporate its on-line 
business in to its stores if these two businesses are treated equally?
    Answer. Yes, we agree that numerous options will be created by way 
of a business model that allows complete integration with store 
operations. Wal-Mart has and continues to study ways by which store and 
web operations can be leveraged off each other. For example, the 
ability to allow in-store web site access to a customer combined with a 
cash payment option at an adjacent register would facilitate Internet 
purchasing by customers who do not have credit cards.

                                 ______
                                 
    Response to Written Questions Submitted by Hon. Max Cleland to 
                          Hon. Michael Leavitt

    Question. Unfortunately, we are holding this hearing the same 
morning as the formal release of the Advisory Commission on Electronic 
Commerce's report, and I and my colleagues have not had the opportunity 
to read and evaluate this report. Many people opposed to allowing 
states to determine their own tax policy claim that current tax policy 
is too cumbersome. However, apparently software currently exists that 
takes into account the tax laws for all jurisdictions. Was the Advisory 
Commission on Electronic Commerce aware that such software exists? And, 
is there any mention of this in the report?
    Answer. Senator, because no retailers were appointed to the 
Advisory Commission on Electronic Commerce, no one with the practical 
experience who currently uses software to determine sales taxes in 
every jurisdiction served on the panel. However, Tax Ware, a company 
which provides such software was permitted to testify at one of the 
commission meetings. To the best of my knowledge, there is no mention 
of the availability of the software in the report.

    Question. The Internet is providing a more convenient way to 
purchase goods for consumers. However, I am interested in whether the 
Advisory Commission on Electronic Commerce found that tax avoidance was 
leading consumers to online purchasing?
    Answer. Senator, the Commission did find that current federal 
policy permitting tax avoidance is reducing revenues to state and local 
governments. Clearly, this finding demonstrates both the inequity for 
Main Street vendors and that--all other factors being equal--being able 
to purchase the same item at the same price, without paying taxes is 
one factor in this inequity.

    Question. Is the ability to set revenue policy to ensure the 
deliverance of essential public services a fundamental authority of 
state and local lawmakers?
    Answer. There is no more fundamental tenet of our country's federal 
system than the ability and authority of state and local elected 
loaders to determine the revenue policies necessary to balance their 
budgets and meet the needs--federally mandated and otherwise--of the 
people.

    Question. Major corporations like AT&T, MCI Worldcom, Gateway, and 
others have implied that they might support tax on goods sold over the 
Internet if there is a continued ban on taxes on Internet access and 
provisions for making state and local sales taxes simpler and more 
business friendly. In hearing from my constituents over the years and 
by being a member of the Small Business Committee, I have heard that 
they too are interested in simplifying the sales and use tax systems. 
As a state elected official who shapes Utah's tax policies, do you have 
a recommendation on a way to minimize complexity, improve compliance, 
and remove the burden from the retailer or ``e-tailer''?
    Answer. Senator, I believe we need to develop and implement a 2lst 
century, streamlined state and local sales tax system. Because of my 
strong commitment on that front, and that of many of my colleagues, for 
the past year we have embarked on an undertaking to do just that; to 
eliminate the burden on remote and electronic retailers by enacting a 
radically simplified and streamlined system. I am pleased to note that 
27 states have formally acted to join in this challenge. In fact, we 
intend to hold a hearing in Chicago on September 29th specifically to 
obtain public feedback on our Streamlined project proposals.
    The project expects to release a majority of the work that has been 
done so far by the Tax Rates, Returns, Registration, and Remittances 
Work Group; recommendations on the treatment of state exemption 
certificates by the Tax Base Work Group; and a majority of the 
proposals from the group dealing with technology, audit, privacy, and 
system funding issues.
    Major draft proposals completed so far include:

   a uniform sourcing rule for all transactions;
   uniform required notice and limited frequency of rate 
        changes;
   minimal sales tax returns or reporting requirements for 
        participating sellers;
   simplified exemption administration;
   uniform treatment of bad debts;
   voluntary registration not a factor in determining nexus for 
        income or other taxes;
   minimal seller exposure to audits; and
   state compensation for the system.

    Some areas, including all but the most essential taxing definitions 
and the concept of coding products to make administration easier, will 
be deferred until Phase II of the project, after model state 
legislation is developed and unveiled in December.
    The system we are developing is focused on reducing the burden on 
sellers. In the audit and technology area, a linchpin of the system 
would allow retailers to contract with certified service providers 
(CSPs) to take care of all their tax collection and remittance 
responsibilities. Other models under the system would allow the use of 
certified software systems that would provide retailers significant 
protections from audit and from the consequences of any errors 
resulting from good-faith use of the systems.

                                 ______
                                 
     Response to Written Question Submitted by Hon. Max Cleland to 
                               Burr Morse

    Question. Mr. Morse, I note that you are an ``e-tailer'' of your 
Vermont products. I am sure you have experienced growth in your sales 
as a result of your website, which is a wonderful tool to promote your 
products. Do you believe there are advantages in allowing your local 
elected officials to develop tax policy for Vermont?
    Answer. I do not believe there are advantages in allowing our local 
elected officials to develop tax policy for Vermont as it relates to 
web sales. I think that web sales should not be taxed and the origin of 
legislation toward this end makes no difference, nationally or locally. 
Either way would be a mistake. I enclose the following addendum to 
further support this question. Thank you very much.
Addendum
    Vermont has a tax policy that already impacts all tailers, e-, re-, 
whatever; it is an income tax. There are also sales taxes in Vermont 
that must be collected whenever sales occur in our state (phone, fax, 
on-site, mail order, or WWW), and I believe that is the case in most 
states already.
    Happily, one very positive aspect of a strong economy and the 
expansion of the information highway (the World Wide Web), is that 
Americans are again discovering America. They can easily plan 
customized holidays that take them to businesses like the Morse Farm 
Sugar Works where they can learn about Vermont's most traditional 
occupation (maple sugaring), and farm life in our state while shopping 
for regional crafts and specialty foods in our Country Store. We think 
as many as half of the visitors to our website will eventually make 
their way to our state capital and the Morse Farm, where they will pay 
taxes on fuel, meals, purchases, and accommodations. Here in New 
England at least, where we once started a revolution over taxes, I 
doubt that state or federal taxes on web sales would be well-received.
    On the other hand, contributors to the information highway, who are 
helping Americans re-discover the traditional arts, crafts, and way of 
life that made this country so unique should be nourished and 
encouraged to continue to bring their businesses to this expanding new 
audience who has become so used to filling day to day needs at Wal-
Mart, Walgreens, and McDonalds!

                                 ______
                                 
    Response to Written Questions Submitted by Hon. Max Cleland and 
                 Hon. John McCain to Jonathan Zittrain

    Question 1. What is a discriminatory tax?
    Answer. Prof. Walter Hellerstein succinctly defines a 
discriminatory tax in his article analyzing the provisions of the 
Internet Tax Freedom Act. Hellerstein writes:

        A discriminatory state tax is ordinarily understood to be an 
        exaction that singles out one class of taxpayers, activities, 
        or property for disadvantageous treatment by comparison with 
        the treatment accorded another class of taxpayers, activities, 
        or property, when the distinction between the two classes is 
        one that the law does not tolerate as an appropriate basis of 
        classification (e.g., the conduct of interstate commerce or the 
        exercise of First Amendment rights).

    See Hellerstein, ``Internet Tax Freedom Act Limits States' Power to 
Tax Internet Access and Electronic Commerce,'' (90 Journal of Taxation, 
5 January 1999).

    Question 2. In an effort to simplify state taxes, would it be 
sufficient for each state to simply establish a state ``remote sales'' 
rate, that is a tax rate, which might be different from the sales tax 
rate a person would pay during an ``in person'' sale?
    Answer. If a state were to have one sales tax rate for a purchase 
made through the Internet, and another for the same transaction entered 
into in person, the difference would amount to a discriminatory tax, 
discriminating on the basis of mode of ordering. It is difficult to 
imagine a valid long-term justification for such discrimination from a 
policy standpoint, particularly if the remote sales tax rate were 
higher than the in-person rate.
    State sales tax simplification for the purposes of reducing burdens 
on out-of-state sellers, and thus making a good case to Congress for a 
liberalization of Quill's restrictions on applying tax to sellers with 
no appreciable in-state presence,\1\ should focus on administrability 
(for example, arranging a single point of registration and remittance 
for merchants for all state sales taxes collected) and scope (for 
example, harmonizing definitions of ``juice'' across states; Wisconsin 
currently taxes any beverage which is not 100% juice, while 
Pennsylvania allows exemption so long as the beverage contains 24% or 
more juice). These alone are daunting tasks, especially since states' 
respective idiosyncratic exemptions may reflect long-settled local 
political dynamics. Harmonizing sales tax rates from one state to the 
next is not necessary so long as the tax is grounded on where the goods 
or services are consumed rather than sold, and indeed may be 
undesirable. Such ``simplification'' across states at the cost of 
creating intrastate tiers of tax based on mode of ordering or location 
of seller would be even worse.
---------------------------------------------------------------------------
    \1\ See Quill Corporation v. North Dakota, 504 U.S. 298 (1992).
---------------------------------------------------------------------------
    There are some states that allow local subdivisions to impose their 
own additional taxes to state sales tax at a point of sale. As a 
result, the tax on a given product might amount to 6% in one town and 
6.5% in another, even with both towns in the same state. One could 
imagine a state seeking to create a single, blended tax that averaged 
across all subdivisions to make calculation easier for remote sellers 
while retaining the complications for local merchants and consumers. 
However, the Supreme Court has made it clear that such schemes aren't 
allowed without Congressional assent so long as the remote rate ends up 
higher in comparison to that of any state subdivision. See Associated 
Industries of Missouri v. Lohman, 511 U.S. 641 (1994). This casts doubt 
on any attempt to create a remote rate that differs from an in-state 
rate, even if done for the purposes of simplification.

    Question 3. In Georgia, citizens vote by referendum to place sales 
taxes on products they purchase. Why should Congress limit local 
citizens' ability to determine how they want to tax themselves?
    Answer. There are many reasons to want to leave the determination 
of state sales tax to the discretion of the respective states, each in 
turn accountable to its citizens. Under the legal status quo, states 
are indeed free to set their own consumption tax rates. They can demand 
of their citizens the remittance of a tax on particular goods and 
services that they purchase (no matter where purchased), and they can 
demand that merchants collect that tax on behalf of in-state consumers, 
so long as the merchants themselves are in-state.
    The problem arises in collecting tax through physically remote 
merchants for transactions involving in-state consumers. In such 
instances in which a state's citizens wish to tax themselves via 
external parties, and the Supreme Court has held in cases like Quill 
that those out-of-state parties may be unduly burdened by a requirement 
that they calculate, collect, and remit taxes for distant 
jurisdictions. The worry inheres not in the fact of state citizens 
choosing to tax themselves, but rather in a requirement that out-of-
state entities participate in the tax scheme. As a result, states are 
prohibited from requiring physically remote merchants to serve as the 
instruments of collection of otherwise-legitimate taxes. Congress can 
relax this requirement if it chooses, so one might suggest that this is 
a ``Congressional limit'' even though it has been imposed in the first 
instance by the Supreme Court.
    An ideal solution might see the states working together to present 
a scheme to Congress for approval that would minimize the tax-
collecting burden on out-of-state merchants while still having those 
merchants collect sales tax. That way, over the long term, the states 
would not have to choose among (1) allowing the distortion and lost 
revenues that come from a failure to collect tax on remote sales, (2) 
seeking to enforce the politically and logistically difficult 
collection of corresponding use tax from their citizens when no sales 
tax is paid in a transaction, or (3) giving up the sales tax entirely.
    To be sure, a harmonization across states of the scope and 
definitions of goods and services covered by state sales tax might be 
an important part of simplification; as my answer to question two 
suggests, differing interpretations of such matters as what constitutes 
``juice'' could contribute to burdensome confusion among retailers as 
to whether their goods fall under a given state's tax regime. Thus 
simplification could require some measure of compromise: Georgia might 
be compelled to alter its own definition of, say, ``juice'' as part of 
a process to create common definitions among states, thereby lowering 
tax collection burdens on physically remote vendors and eliminating any 
reason to remove such vendors from states' reach.

    Question 4. Goods and services ordered over the Internet are 
delivered to consumers on the roads everyone uses. Roads are subject to 
wear and tear each time they are used, and the states are receiving no 
revenue from the delivery causing the damage. However, the state and 
local leaders are responsible for the upkeep of these roads. Is this an 
unfunded mandate?
    Answer. Generally speaking, a Congressional restriction or 
preemption of state taxing ability may well be an unfunded mandate 
under the Unfunded Mandates Reform Act of 1995, which erects certain 
procedural hurdles in the path of Congressional legislation that seeks 
to impose certain costly duties on states without providing funds to 
pay for their execution.\2\ Indeed, it appears that the drafters of the 
original Internet Tax Freedom Act's proscriptions on state taxes 
contemplated that they could fall under the UMRA. Elements of S. 2255's 
extension may, if resulting in a large enough loss to state coffers, 
also represent unfunded mandates covered by the Act, as might a 
Congressional narrowing of the definition of ``nexus'' such that 
merchants additional to those covered by Quill were free from state tax 
collection obligations. However, the current specific restriction on 
states' abilities to force physically remote merchants to collect sales 
tax comes not from the Internet Tax Freedom Act or other affirmative 
Congressional legislation, but from Supreme Court cases like Quill, 
grounded in the Commerce Clause of the Constitution.
---------------------------------------------------------------------------
    \2\ See Tracy A. Kaye, ``Show Me the Money: Congressional 
Limitations on State Tax Sovereignty,'' 35 Harvard Journal on 
Legislation 149 (1998); Pub. L. 104-4, 109 Stat. 48 (1995) (codified in 
scattered sections of 2 U.S.C. (1995)).
---------------------------------------------------------------------------
    As a result, it is difficult to see how Quill's restrictions are 
unfunded mandates covered by the UMRA, despite the UMRA's inclusion of 
court decisions in the definition of ``Federal mandates'' generally.\3\ 
The technical definitions of the UMRA aside, however, one might view an 
inability to effectively collect tax on out-of-state products delivered 
to in-state addresses as an unfunded mandate in colloquial terms: 
states are providing certain necessary infrastructure and services 
while being restricted in their efforts to have those who benefit from 
them contribute a share. This is why, ultimately, it would be desirable 
to create a system whereby out-of-state purchases can be treated 
similarly to in-state purchases. This is true even as, for the next few 
years while the burgeoning Internet remains an infant industry, the 
serendipitous restrictions on out-of-state tax collection--a rough 
proxy for collection of tax on items ordered through the Internet--may 
be helpful to the economy without great cost to state coffers.\4\
---------------------------------------------------------------------------
    \3\ See 2 U.S.C. Sec. 1555 (1995).
    \4\ See Goolsbee and Zittrain, ``Evaluating the Costs and Benefits 
of Taxing Internet Commerce,'' 52 National Tax Journal 413 (1999).
---------------------------------------------------------------------------

                                 ______
                                 
        Prepared Statement of the American Federation of State, 
                County and Municipal Employees (AFSCME)

    The American Federation of State, County and Municipal Employees 
(AFSCME) submits the following statement for the hearing record in 
opposition to the amendment to the Internet Tax Freedom Act (S. 2255) 
to extend the moratorium 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 Computing Technology Industry Association

    The Computing Technology Industry Association is pleased to submit 
our suggestions regarding the taxation of electronic commerce. We 
endorse the majority recommendations of the Commissioners of the 
Advisory Commission on Electronic Commerce. The majority of 
Commissioners voted to:

          1. Reduce consumers' tax burden by repealing the Federal 
        three-percent excise tax on communications services;

          2. Forge a meaningful pathway to simplification of states' 
        sales and use tax systems;

          3. Permanently prohibit states or localities from taxing 
        Internet access subscription charges;

          4. Extend the current Internet tax moratorium legislated by 
        the Congress on multiple and discriminatory taxation; and

          5. Clarify nexus standards that impact the obligation of 
        businesses to collect and remit state and local taxes on remote 
        transactions.

    The Commission's Final Report recommends to Congress the need to 
bridge the ``Digital Divide'' to permit all Americans to participate in 
the Internet economy. It addresses the issue of privacy concerns, 
noting that any tax administering system for e-commerce should be 
developed in a manner that minimizes disclosure of consumers' personal 
information, and should contain sufficient security to protect that 
information. The Commission recommended that the appropriate committees 
of Congress should explore privacy issues associated with the 
collection and administration taxes on e-commerce.
    We believe that the first priority should be to extend the current 
Internet tax moratorium legislated by the Congress on multiple and 
discriminatory taxation and address growing public concerns regarding 
privacy of personal data. We believe the appropriate approach to the 
latter is to appoint an independent commission with ample 
representation of individual taxpayers, the IT sector and public 
interest groups to simultaneously assess options to address public 
concerns as well as progress and the outlook for adoption of voluntary 
standards by Internet vendors.
    CompTIA disagrees with the assessment of the issue as well as 
solutions proposed by some representatives of state and local 
government. At the same time we are heartened by positive steps of 
state and local government leaders which we believe will greatly 
enhance the effectiveness in collecting from their constituents the 
sales and use taxes owed to state and local governments.
    The actual scope of the problem of noncompliance by taxpayers with 
their state and local sales tax laws is not presently known. Surveys 
have shown that many taxpayers are unaware of their obligation to pay 
appropriate state and local taxes not collected by vendors in other 
states.
    Several states have initiated aggressive programs to educate their 
citizens of the obligation to pay any state and local taxes that were 
not collected by Internet vendors. Other states need to follow their 
example. This effort will undoubtedly reduce noncompliance. Once this 
task is accomplished the scope of revenue losses due to deliberate 
noncompliance will be known.
    The Internet community also has an ethical responsibility not to 
mislead the public. Internet retailers should avoid statements that 
suggest that purchases made over the Internet relieve consumers of any 
obligation to report and pay any appropriate state and local taxes on 
those purchases.
    The recognition by state and local government associations of the 
need to simplify and rationalize the many thousands of inconsistent 
state and local tax laws is a laudable goal in its own right. It will 
also pave the way for increased voluntary support of state and local 
governments by Internet vendors located outside their jurisdiction.
    CompTIA disagrees with a few state and local government leaders who 
argue that a major expansion of the definition of nexus is good policy, 
fair, or necessary. CompTIA believes the state representatives who were 
Constitution's authors were wise in precluding other state governments 
from imposing any of their respective state laws, whether they relate 
to taxes or regulations, on businesses or individuals in other states.
    The question of what constitutes nexus should be reviewed, because 
new business models have posed legitimate questions and clarification 
would benefit all parties. However the review should be approached 
narrowly, from the perspective framers of the Interstate Commerce 
Clause. If Internet vendors with an actual physical presence in the 
state substantially benefit from the programs and services funded by 
state and local sales and use taxes, then requiring them to support the 
state's sales tax system is appropriate. If their ``presence'' is de 
minimis, and they receive no real benefit from the programs and 
services funded by state and local sales and use taxes, then they 
should not be required to provide tax collection services for that 
state.
    Requiring Internet vendors to provide free state and local tax 
collection services for other jurisdictions is not fair to companies 
that receive no direct benefits from those states and have chosen not 
to physically locate in those states. It would undermine the healthy 
competition between states to balance the benefits of a business 
friendly environment with other priorities of the state and local 
governments.
    CompTIA believes the Streamlined Sales Tax System for the 21st 
century may well provide a framework that can provide the incentives 
necessary to enlist the assistance of Internet vendors in the 
collection of state and local taxes for governments outside of their 
home state. Most businesses find it necessary on occasion to use 
outside debt collection services themselves. They recognize that this 
is a necessary process and entirely appropriate for use by state and 
local governments. The Streamlined Sales Tax System for the 21st 
century contemplates a technology oriented business model utilizing 
trusted third parties to protect the privacy of purchasers and vendors.
    At the same time the creators of the Streamlined Sales Tax System 
for the 21st century should recognize that they are asking the Internet 
vendors to provide debt collection services. Fees for commercial debt 
collection services are determined by supply and demand. Similarly, 
support by the Internet community will be determined by the 
compensation package offered to participating vendors. We believe that 
over time the program's developers will develop a package that will 
lead to participation by the majority of Internet vendors.
    Aggressive consumer education programs will result in increased 
sales and use tax collections by state and local governments. 
Effectively implemented, the Streamlined Sales Tax System for the 21st 
century will result in the collection of the majority of the remaining 
state and local taxes. In combination CompTIA believes that the bulk of 
the sales and use taxes on Internet sales will ultimately be collected.
    CompTIA, the Computing Technology Industry Association, is a not-
for-profit trade association, founded in 1982. Today it represents over 
8,000 computer hardware and software manufacturers, distributors, 
retailers, e-tailers, resellers, VAR5, system integrators and training, 
service, telecommunications and Internet companies in over 50 countries 
worldwide. Over 1,000 industry professionals are represented in the 
association's new individual membership category.
   American Association of State Colleges and Universities,
                                      Washington, DC, April 7, 2000

Hon. John McCain,
Chairman, Senate Committee on Commerce, Science, and Transportation
Washington, DC 20510

Hon. Thomas J. Bliley, Jr.,
Chairman, House Committee on Commerce
Washington, DC 20515

Dear Senator McCain and Representative Bliley:

    On behalf of the undersigned higher education associations, I write 
to urge Congress not to pursue measures such as a permanent federal ban 
on e-commerce taxation, which has been proposed by members of both the 
House and the Senate.
    As you are probably aware, the law establishing the Advisory 
Commission on Electronic Commerce (Public Law 105-277) clearly 
stipulated that a ``supermajority'' vote (two-thirds of the members) 
would be required for the Commission to issue its findings/
recommendations to Congress. The Commission failed to achieve this, 
which signifies a lack of consensus on fundamental issues, including 
the neutral tax treatment of e-commerce relative to other forms of 
remote sales.
    In light of this failure, Congress should refrain from taking any 
action that could adversely impact state and local tax systems. 
Additionally, AASCU's analysis of trends in state and local taxation 
strongly suggests that any decision to ban taxation of e-commerce 
should be weighed carefully against the likely fiscal ramifications. 
Over the past 30 years, the state portion of state and local taxes has 
grown significantly, and sales tax proceeds as a portion of all state-
local tax proceeds has grown as well. More recently, however, the shift 
from goods to services and information as the focus of economic 
activity and the changing consumption patterns of an aging economy are 
eroding the sales tax base of many states and localities. As a result, 
many states will be forced to confront the issue of tax reform in the 
very near future. State-level reform discussions should not be pre-
empted by a federally legislated ban on the taxation of e-commerce, 
especially when those advising Congress on these issues could not 
arrive at a meaningful consensus.
    In sum, we urge Congress to act carefully and thoughtfully with 
respect to the issues considered by the ACEC. Failure to do so could 
destabilize state and local revenue systems, which in turn would have 
an immediate and adverse impact on public services such as higher 
education. As always, our organizations and our member institutions are 
prepared to help facilitate the policy conversations on this vital 
issue.
        With warm regards,
                                     Constantine W. Curris,
 President, American Association of State Colleges and Universities

                                              On behalf of:
                         American Association of Community Colleges
                               Association of American Universities
 National Association of State Universities and Land-Grant Colleges

                                             Travis Reindl,
        Policy Analyst, American Association of State Colleges and 
                                                       Universities

                                 ______
                                 
   Joint Prepared Statement of Lawrence A. Hunter, Chief Economist, 
        Empower America, and George A. Pieler, Adjunct Fellow, 
                    Competitive Enterprise Institute

    Mr. Chairman and Members of the Committee, we are pleased to offer 
our support for the Chairman's bill, S. 2255, to extend the existing 
moratorium on many forms of Internet taxation (the Internet Tax Freedom 
Act of 1998, or ITFA) through the year 2006. We would just like to 
explain why we support this approach and suggest a few useful avenues 
of inquiry for the Committee to consider as it explores this complex 
but extremely important issue.
    First, we should say at the outset that although each of us is 
affiliated with organizations that do work on Internet policy (Dr. 
Hunter is Chief Economist for Empower America, Mr. Pieler an Adjunct 
Fellow with the Competitive Enterprise Institute), the views expressed 
in our statement to the Committee are strictly our own. They are based 
on the work we did in preparing [email protected], a study 
of some of the practical and constitutional issues surrounding Internet 
taxation recently published by the Institute for Policy Innovation's 
new Center for Technology Freedom (a copy of that study is submitted 
herewith for the Committee's consideration).
The Work of the ACEC
    Mr. Chairman, we believe the congressionally-mandated Advisory 
Commission on Electronic Commerce, which recently completed its work 
under the outstanding leadership of Virginia Gov. James Gilmore, did an 
excellent job of framing the issues involved with Internet taxation 
from the perspective of protecting the taxpayer, advancing economic 
growth, and balancing the interests of the states and the national 
government with due regard for our constitutional structure. The 
Commission's conclusions, which have been laid before Congress, lay out 
a thoughtful blueprint for Congress to consider in asserting its power 
to define the scope of state authority to tax cross-border 
transactions. The Commission also made abundantly clear by majority 
vote that the Internet must not be viewed as an easy way to both raise 
taxes and increase the number of revenue sources that states (or the 
federal government, for that matter) can tap. Electronic commerce does 
open up entirely new fields of commercial endeavor, but at heart it is 
simply a new, dynamically productive way of doing business.
    As such, the Internet deserves neither special tax burdens nor 
unique tax privileges. The Commission appears to agree, although there 
are several areas in its attempt to define `nexus' with a state for 
(constitutionally permitted) taxation of cross-border transactions 
where it may step a bit over the line in limiting state power. At the 
same time, the Commission lays out an agenda for `harmonization' and 
`simplification' of state sales and use taxes that threatens to go too 
far in the opposite direction by creating the framework for a de facto 
national sales tax for which the federal government or the states would 
be accountable to the taxpayer. While we discuss these issues at some 
length in the attached paper, for present purposes we simply suggest 
that the weighty political issues and controversies (even among sincere 
tax professionals) involved in the broader agenda laid out by the 
Commission make it unlikely that Congress can hammer out an equitable, 
constitutional, and pro-taxpayer agreement in time for the expiration 
of the ITFA moratorium in October, 2001.
    For these reasons we urge the Committee and Congress to study the 
work of the Commission carefully, since there is much to be learned 
from its outstanding effort. But as a practical matter, the wisest 
course for the Congress is to extend the existing moratorium on 
Internet taxation as set forth in S. 2255.

Why It Matters. Mr. Chairman, you have made it abundantly clear by your 
initiatives on the Internet tax issue over the years that you 
understand this is a topic with very high stakes for America. It is 
universally understood that electronic commerce over the Internet is a 
major driving force behind our economic expansion, cutting costs for 
both businesses and consumers and creating whole new markets that are 
only just beginning to emerge. The Internet, not coincidentally, is 
helping break down barriers to trade, investment, and employment, as 
well as facilitating the exchange of ideas and interests across 
national boundaries as never before in history.
    None of this, however, explains why the Internet poses such unusual 
challenges--and opportunities--for tax policy. Much of the interaction 
between our tax systems and the Internet is purely conventional: 
companies involved in e-commerce have payrolls, generate income, and 
make investments, and those companies already pay the taxes every other 
company pays as a consequence. Why, then, the allegation that so-called 
`e-tailing' gives Internet companies an undue competitive advantage and 
erodes the state and local tax base?
    One answer is that states and localities are using the Internet tax 
issue to reopen the old debate over taxing mail-order sales, a debate 
they have lost in the past when they sought federal backing for their 
efforts to mail-order sales in a comprehensive way. A corollary to 
this, however, is that many jurisdictions in the U.S. really do fear 
the advent of electronic commerce because it upsets their long-standing 
notions of how and what to tax; because they don't feel they have 
control over the situation; and because they don't know how to plan for 
a 21st century economy in which physical, geographical location is the 
least important factor for buyers, seller, investors, and innovators.
    There are grounds for being sympathetic to these concerns, but as 
Gov. Gilmore's work on the Advisory Commission demonstrates, the 
evolution of commerce in cyberspace can give responsible, innovative 
policymakers a head start in revolutionizing tax policy. Tax policy no 
longer need be confined to 20th century notions of comprehensive, 
cradle-to-grave taxation of wealth and income, redistribution of 
income, and tax-based industrial policy. We have a fresh, unique 
opportunity to craft tax rules that are economically neutral, clearly 
visible to the taxpayer, and generate a fair share of our national 
income to public purposes without being as prone to short-term 
political manipulation as our present tax structure--state, local, and 
federal--most assuredly is.
    Whether lawmakers choose to shift to broad-based consumption taxes, 
user fees, transaction taxes, or devices not yet thought of is 
something legislators and tax administrators at every level of 
government will have to decide. But the fact that they have the 
opportunity, the challenge, the obligation to rethink tax policy from 
the ground up is ultimately why the debate over Internet taxation 
matters so much. It is critically important, however, that our tax 
systems evolve in a way consistent with the constitutional order 
crafted by the Founders and produce revenue-collection mechanisms that 
are truly better for the taxpayer, and not just for the tax collector.

A Few Watchwords. To that end, Mr. Chairman, let us conclude by 
suggesting a few Rules of the Road for anyone working in the area of 
Internet taxation to consider, and hopefully to follow:

          1. Be Constitutional. As the Advisory Commission reports, and 
        as our paper discusses, the Constitution defines clear, 
        unambiguous constraints on the power of states to collect taxes 
        beyond their borders (the Commerce Clause) and on their ability 
        to act in concert to `enhance' their power to collect such 
        taxes (the Compact Clause, and in extreme cases, the 
        Confederation Clause). It is vitally important that this 
        Committee and this Congress avoid falling into the trap of 
        legislating, or given credence to, the notion that interstate 
        harmonization, indeed uniformity, of tax policy is a good 
        thing. States on their own may do as they please, but there is 
        a real danger that the desire for simplicity and uniformity on 
        the part of the business community, coupled with the state and 
        local eagerness for enhanced revenue authority, could create an 
        anti-Constitutional tax structure that is neither federal nor 
        state in nature, but a `third layer' of government 
        unaccountable to the people. At the same time it is appropriate 
        to warn against federal overreaching in this area via 
        excessively prescriptive rules on what states can and cannot do 
        within their sovereign boundaries. Remember the 10th Amendment, 
        and the fact that we are a union of states, and you should have 
        no trouble striking the proper balance.
          2. Keep an Eye on the Tax Burden. While most discussion of 
        Internet taxation focuses on disparate effects on different 
        states, different businesses, and different forms of retailing, 
        our key ultimate objective must be to ensure that electronic 
        commerce does not become an engine for increasing the overall 
        tax burden on the American people, whether imposed directly or 
        indirectly (as by pass-through taxes imposed on corporations). 
        This is not entirely within the power of the federal government 
        to prevent, of course, but a minimum the Congress should commit 
        to ensuring that any new tax on the Internet, on e-commerce, or 
        in any related sector be offset dollar-for-dollar elsewhere in 
        the revenue-raising scheme. The same pledge should be 
        undertaken by every state and local official in America. And to 
        the extent that scrutiny of e-commerce from a tax standpoint 
        produces bold new tax reform proposals, it should be crystal 
        clear that Americans expect any major new revenue source to be 
        a substitute for, not an addition to, an existing tax 
        authority. If you're going to create a new tax code you've got 
        to scrap an old one, lock, stock and barrel.
          3. Don't Ignore Fiscal Federalism. Each of us has worked in 
        the past in the area of federal-state fiscal relations, 
        including both tax policy and grantmaking authorities. We are 
        not insensitive to the constraints states and localities face 
        due to the overwhelming presence of the federal government in 
        the economy and in the field of taxation, and we do believe 
        there is room for a diminished federal role in many areas of 
        domestic policy, which would leave states and localities more 
        freedom to innovate and take charge. What we must all guard 
        against, however, is the kind of massive `final solution' to 
        public policy problems that too often takes center stage: e.g. 
        the feds give up the income tax, the states give up the sales 
        tax. There is no way to enforce that kind of bargain absent 
        constitutional amendment, and there is a great risk that any 
        grand bargain on tax and fiscal policy between the states and 
        the federal government would in the end produce bigger 
        government at all levels. Just as Internet taxation should not 
        be an excuse for increasing the tax burden, so it should not be 
        a back-door way of increasing the role and power of government. 
        To this end we suggest that this Committee and the Congress 
        consider a simple rule of thumb: any measure that increases the 
        power or wealth of one sector of government should be offset 
        with countermeasures to restore the balance. For example, if 
        Congress chooses to give states any enhanced power to collect 
        sales and use taxes, it should require states to forgo an 
        equivalent share of federal aid in the form of categorical or 
        matching grants. If the many Governors who have spoken out on 
        this issue are serious in what they say, they aren't seeking to 
        increase their wealth overall, merely prevent it from eroding. 
        If that is true, they should have no objection to an exchange 
        they gives them more revenue authority (which they control) in 
        return for less federal aid (which Washington controls).

    These, then, are the matters we submit as most worthy of the 
Committee's consideration in the field of Internet taxation. Again, we 
applaud the initiative you and your Committee have taken, Mr. Chairman, 
in seeking to extend the moratorium on unwarranted taxation of the 
Internet, and we look forward to a stimulating and productive debate 
over tax policy and fiscal federalism in the months ahead.
    Thank you.

                                 ______
                                 
  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 Senate Committee on 
Commerce, Science, and Transportation 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 39,000 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 $1.1 trillion in retail sales and over $47 billion in state sales 
tax revenue, and employed over 10 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 the 
existing sales and use taxes, a long-term extension of the moratorium 
will make this practice an accepted way to do 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 don't 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 claim that electronic commerce is a new and growing 
industry and, therefore, it 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 certainly 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 can not be done. We agree that all businesses, 
especially small businesses, should not be overburdened by sales tax 
collections and that state and local governments need to simplify their 
sales tax systems. However, inexpensive software exists today that 
assists retailers in determining how much state and local taxes needs 
to be collected on their sales.
    Another argument that is 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 a deficit 
crisis. Their Governors strongly believe that the collection of this 
existing tax would be beneficial.) 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.
    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 ``formally'') that 
Congress extend the current moratorium, 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 address and take action to 
level the playing field among retailers.
    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.

