    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

                       INTERNET TAX NONDISCRIMINATION ACT

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

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                       COMMERCIAL AND ADMINISTRATIVE LAW

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                       ON

                                    H.R. 49

                                   __________

                                 APRIL 1, 2003

                                   __________

                                 Serial No. 13

                                   __________

             Printed for the use of the Committee on the Judiciary

        Available via the World Wide Web: http://www.house.gov/judiciary

                            U.S. GOVERNMENT PRINTING OFFICE

    86-182                          WASHINGTON : 2004
    _____________________________________________________________________
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                           COMMITTEE ON THE JUDICIARY

                F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
    HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
    HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
    LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
    ELTON GALLEGLY, California           JERROLD NADLER, New York
    BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
    STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
    WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
    CHRIS CANNON, Utah                   SHEILA JACKSON LEE, Texas
    SPENCER BACHUS, Alabama              MAXINE WATERS, California
    JOHN N. HOSTETTLER, Indiana          MARTIN T. MEEHAN, Massachusetts
    MARK GREEN, Wisconsin                WILLIAM D. DELAHUNT, Massachusetts
    RIC KELLER, Florida                  ROBERT WEXLER, Florida
    MELISSA A. HART, Pennsylvania        TAMMY BALDWIN, Wisconsin
    JEFF FLAKE, Arizona                  ANTHONY D. WEINER, New York
    MIKE PENCE, Indiana                  ADAM B. SCHIFF, California
    J. RANDY FORBES, Virginia            LINDA T. SANCHEZ, California
    STEVE KING, Iowa
    JOHN R. CARTER, Texas
    TOM FEENEY, Florida
    MARSHA BLACKBURN, Tennessee

                 Philip G. Kiko, Chief of Staff-General Counsel
                   Perry H. Apelbaum, Minority Chief Counsel
                                     ------

               Subcommittee on Commercial and Administrative Law

                          CHRIS CANNON, Utah, Chairman

    HOWARD COBLE, North Carolina         MELVIN L. WATT, North Carolina
    JEFF FLAKE, Arizona                  JERROLD NADLER, New York
    JOHN R. CARTER, Texas                TAMMY BALDWIN, Wisconsin
    MARSHA BLACKBURN, Tennessee          WILLIAM D. DELAHUNT, Massachusetts
    STEVE CHABOT, Ohio                   ANTHONY D. WEINER, New York
    TOM FEENEY, Florida

                      Raymond V. Smietanka, Chief Counsel

                            Susan A. Jensen, Counsel

                            Diane K. Taylor, Counsel

                      James Daley, Full Committee Counsel

                       Stephanie Moore, Minority Counsel

                                C O N T E N T S

                                  ----------

                                 APRIL 1, 2003

                               OPENING STATEMENT

                                                                       Page
    The Honorable Chris Cannon, a Representative in Congress From the
      State of Utah, and Chairman, Subcommittee on Commercial and
      Administrative Law.............................................     1
    The Honorable Christopher Cox, a Representative in Congress From
      the State of California........................................     3

                                   WITNESSES

    Honorable Jack Kemp, Co-Director, Empower America
      Oral Testimony.................................................     6
      Prepared Statement.............................................     8
    Honorable James S. Gilmore, III, former Governor, Commonwealth of
      Virginia
      Oral Testimony.................................................    10
      Prepared Statement.............................................    13
    Mr. Harley T. Duncan, Executive Director, Federation of Tax
      Administrators
      Oral Testimony.................................................    19
      Prepared Statement.............................................    21
    Mr. Harris N. Miller, President, Information Technology
      Association of America
      Oral Testimony.................................................    24
      Prepared Statement.............................................    26

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    The Honorable John Conyers, Jr. a Representative in Congress From
      the State of Michigan, and Ranking Member, Committee on the
      Judiciary......................................................     2

                                    APPENDIX
                   Material Submitted for the Hearing Record

    Additional Questions Presented to the Honorable James S. Gilmore,
      III, by the Honorable Chris Cannon.............................    47
    Responses to Additional Questions by the Honorable James S.
      Gilmore, III...................................................    49
    Additional Questions Presented to the Honorable Jack Kemp, by the
      Honorable Chris Cannon.........................................    57
    Responses to Additional Questions by the Honorable Jack Kemp.....    59
    Additional Questions Presented to Mr. Harley T. Duncan, by the
      Honorable Chris Cannon.........................................    61
    Responses to Additional Questions by Mr. Harley T. Duncan........    63
    Additional Questions Presented to Mr. Harris N. Miller, by the
      Honorable Chris Cannon.........................................    65
    Responses to Additional Questions by Mr. Harris N. Miller, with
      Attachments....................................................    67
    Prepared Statement of Grover Norquist, President, Americans for
      Tax Reform.....................................................    90
    Prepared Statement of Robert Holleyman, President and CEO,
      Business Software Alliance.....................................    90
    Letter from Ralph Hellman, Senior Vice President, Information
      Technology Industry Council....................................    92
    Prepared Statement of Steven K. Berry, Senior Vice President for
      Goverment Affairs, Cellular Telecommunications & Internet
      Association....................................................    94
    Prepared Statement of ALLTEL, AT&T, AT&T Wireless, Cingular,
      Level 3, Spring, T-Mobile, Verizon, Verizon Wireless, BellSouth
      & SBC..........................................................    95
    Letter from Elizabeth Harchenko, Chair, Multistate Tax Commission    97
    Prepared Statement of Elizabeth Harchenko, Chair, Multistate Tax
      Commission.....................................................    98

                       INTERNET TAX NONDISCRIMINATION ACT

                                  ----------

                             TUESDAY, APRIL 1, 2003

                      House of Representatives,
                             Subcommittee on Commercial
                                and Administrative Law,
                                    Committee on the Judiciary,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 10:01 a.m., in
    Room 2141, Rayburn House Office Building, Hon. Chris Cannon
    [Chairman of the Subcommittee] presiding.
        Mr. Cannon. Good morning, ladies and gentlemen. This
    hearing of the Subcommittee on Commercial and Administrative
    Law will now come to order.
        We consider today H.R. 49, the Internet Tax
    Nondiscrimination Act. This bill, sponsored by Representative
    Chris Cox and cosponsored by me and 88 other of our colleagues,
    would eliminate permanently the imposition of multiple and
    discriminatory taxation by States on electronic commerce and
    would ban States' taxes on access to the Internet.
        H.R. 49 follows from earlier legislation, the Internet Tax
    Freedom Act of 1998, or the ITFA, which imposed a 3-year
    moratorium on multiple and discriminatory State taxation and on
    new State taxes on Internet access. During the 107th Congress,
    we considered several approaches as the end of the moratorium
    neared. The legislation ultimately enacted extended the
    moratorium until November 1 of this year.
        As we all know, electronic commerce has witnessed the ebb
    of economic tides. According to the Department of Commerce, the
    second half of 2000 marked an economic turning point. Falling
    profits have weakened business investment and also threaten the
    commercial potential of the Internet. The challenges facing the
    IT industry underscore the urgency of extending the moratorium.
    But these economic conditions aside, it makes sense to banish
    multiple and discriminatory taxes on e-commerce or any other
    type of commerce. By definition, multiple and discriminatory
    taxes cannot be justified, a fact acknowledged by my colleagues
    on both sides of the aisle during prior consideration of the
    moratorium.
        The bill also bans State taxation on access to the
    Internet. While a little over one-half of the U.S. population
    currently uses the Internet, prohibiting Internet access taxes
    would facilitate growing participation in electronic commerce
    for all Americans.
        During the debate in the 107th Congress, the moratorium
    issue became linked with the issue of whether out-of-State
    sellers, such as Internet retailers, should be forced to
    collect taxes and use taxes on their remote sales--that is,
    collect sales and use taxes on their remote sales. Some Members
    argued that the moratorium and sales tax issue must be
    considered together in order to truly address Internet
    taxation.
        What must be made abundantly clear is that H.R. 49 does not
    prevent taxes on online sales. This bill simply prevents
    taxation on Internet access and taxation that singles out
    Internet users for unfair treatment.
        It is my firm belief that these two issues are separate and
    should be so considered. A permanent extension of the
    moratorium should stand on its own and should not be
    unnecessarily joined with other subjects. Linkage of the
    moratorium with the online sales tax can only confuse the
    straightforward concepts of a moratorium. The moratorium faces
    a real deadline, November 1 of this year, and we must consider
    it now or face the potential deluge of duplicative and
    discriminatory taxes on the Internet.
        Moreover, consideration of the sales tax issue at this time
    is premature. Although States have made impressive efforts to
    modify their tax laws to comply with the streamlined sales tax
    agreement, to date, only a few have done so. Supporters of this
    effort are unlikely to present Federal legislation on the sales
    tax collection issue until more States have brought their laws
    into compliance with the agreement. In the very near future, as
    the effort progresses, the Subcommittee plans to vet fully the
    complex issues surrounding the sales tax collection issue in a
    separate hearing.
        Department of Commerce Secretary Donald Evans has noted,
    ``Achievement of the IT revolution's full potential will demand
    skillful public action to guarantee that all Americans can
    participate freely according to their own goals and talents in
    the promise of the digital economy. On all sides, much remains
    to be done.''
        It is time for us to do what needs to be done.
        I now yield to Mr. Delahunt, who is sitting in for Mr.
    Watt, the Ranking Member. Do you have an opening statement,
    Bill?
        Mr. Watt. No, I don't have an opening statement, but I do
    have a statement by the Ranking Member of the full Committee,
    Mr. Conyers, that I would ask unanimous consent to be
    submitted.
        Mr. Cannon. Without objection, so ordered.
        [The prepared statement of Mr. Conyers follows:]
    Prepared Statement of the Honorable John Conyers, Jr., a Representative
                     in Congress From the State of Michigan
        When considering whether or not we should permanently extend the
    Internet tax moratorium as suggested in H.R. 49, there are two equally
    important issues that must be considered. First, we must consider
    whether we should extend the moratoriums on Internet access and
    multiple and discriminatory taxes that we passed in 1998. On this
    issue, nearly all the interested parties appear to agree that we should
    extend the moratorium. It is difficult to justify multiple and
    discriminatory taxes under any circumstances, on the Internet or
    otherwise.
        The second issue concerns the issue of nexus for sales tax
    purposes. This issue is far more complex and ultimately, far more
    important. Pursuant to the Supreme Court's decision in Quill, a state
    cannot tax a remote seller unless it has a ``substantial physical
    presence'' in a state. Thus, the traditional brick and mortars sellers
    are required to collect sales tax while the electronic retailers have
    no such requirement, creating an unlevel playing field between the two.
        Sales taxes constitute the most important State and local revenue
    source, with the census bureau estimating that nearly one half of State
    and local revenues come from sales taxes. Projections of increasing
    online sales indicate huge revenue loses for states and local
    government. For example, my own state of Michigan was estimated to lose
    $502.9 million in foregone sales taxes in 2001 and that number will
    triple by 2006 under the present system.
        This inevitably translates into the loss of important funding for
    quality education, effective public safety, and other basic services.
    In Michigan, the lost revenue from foregone sales taxes will cost my
    state over 100,000 teachers or police officers this year. Think of how
    much we could do to reduce class sizes, build new schools, improve our
    quality of education and protect our streets, communities, and citizens
    with these funds.
        The states, however, have made substantial progress on their
    streamlining initiative. Specifically, representatives of 34 states,
    including Michigan, settled on a framework that individual state
    legislatures can use to streamline their tax code. The framework would
    make it easier for corporations to collect and pay taxes across state
    lines and in states where they operate only via the Internet. Congress,
    which has authority over interstate commerce, must approve the compact
    prior to its enactment.
        Thus, our burden is far greater than simply passing another
    extension of the moratorium. I am hopeful that Congress will also
    consider and pass provisions to provide states that simplify their
    sales tax systems with the authority to collect sales taxes equitably
    from all retailers. A simplified streamlined tax compact would increase
    our nation's economic efficiency, facilitate the growth of electronic
    commerce, and help us maintain our communities.

        Mr. Cannon. The Chair would just note that we have a 5-
    minute rule on the Committee. It makes the system work a lot
    better if we adhere to that rule. As time runs out, either for
    members of the panel or for Members asking questions, I will
    tap the gavel lightly just to remind, and if we could finish up
    the thought and wrap, we'd appreciate that and that'll allow us
    to get to the point where we can--everyone can ask questions.
        The Chair welcomes the presence on the dais of the
    gentleman from California, Mr. Cox. Although not a Member of
    this Subcommittee, he is the sponsor of the legislation which
    is the subject of today's hearing. He is well known by the
    Subcommittee for his valuable testimony as provided us in prior
    hearings on this issue. Mr. Cox, we welcome you and we are
    grateful for your continuing efforts.
        The Chair exercises his discretion in this instance and
    would recognize Mr. Cox for a few minutes for any remarks he
    wishes to make. Mr. Cox?
        Mr. Cox. Thank you, Mr. Chairman. Thank you for your many
    years of leadership in preventing unfair and destructive taxes
    on the Internet and for your leadership today in holding this
    hearing on the Internet Tax Nondiscrimination Act.
        Thanks also for providing us with this distinguished panel
    of witnesses that I'm looking forward to hearing from this
    morning.
        I believe that there is strong opposition in this room,
    strong, broad, and bipartisan opposition to new regressive
    taxes on the Internet. Existing law prevents taxes which will
    make Internet access less affordable for lower-income
    consumers, less available for rural consumers, less accessible
    to those who are still seeking to join the information economy.
    We are here to see to it that this law does not expire. Instead
    of allowing the taxation of Internet access, Congress should
    seek to remove the barriers that prevent people from enjoying
    this amazing technology.
        The Internet is an amazing and liberating technology for
    the individual, for students, for entrepreneurs, for consumers,
    for journalists, for businesses, for senior citizens, and for
    people in every walk of life. We don't need to subsidize it. We
    simply need to not destroy it through taxation.
        A January 2003 UCLA study reports that consumers now rank
    the Internet as their most important source for information.
    Widespread adoption of broadband high-speed Internet
    connections would add an additional half-trillion dollars to
    the U.S. gross domestic product in each of the next 10 years,
    according to a recent study by market researcher Dataquest. New
    taxes that would make the high-speed Internet even less
    affordable will do nothing but discourage the adoption of
    broadband connections.
        In addition to preventing regressive taxes on Internet
    access, H.R. 49 has other benefits to protect the Internet from
    unfair treatment at the hands of tax collectors. My
    legislation, as the Chairman points out, does not prohibit
    online sales taxes. It prohibits multiple and discriminatory
    taxes. In other words, multiple governments in different
    locations can't tax simultaneously the same transaction. Online
    sales can't be taxed at each stop along the electronic path
    between buyer and seller.
        And tax collectors cannot discriminate against web
    consumers by taxing goods and services online that are not
    taxed offline. Just as it sounds, the Internet Tax
    Nondiscrimination Act would ensure that Internet consumers are
    not burdened with taxes that don't exist in the bricks-and-
    mortar world.
        So the question is simply put before us, should Americans
    be forced to pay new taxes on their Internet access? This
    question has been asked and answered many times by many
    distinguished people, including some of the people we will hear
    from next on this panel.
        Should the diverse and growing population of Internet users
    pay double or triple the tax they pay at the mall just because
    they choose to shop online? Should these consumers pay taxes
    online that have never existed in the offline economy? The
    answer to all of these questions should clearly be no.
        State and local governments continue to wrestle with the
    important questions of how to balance budgets and how to treat
    online transactions. The sales tax debate is one that must
    continue and will continue, and it must also be separated from
    the debate on this bill, which is not about sales taxes.
        Some of you here probably remember the National Lampoon
    cover that featured that really cute little puppy, and this
    puppy had a revolver to its head and the cover of the National
    Lampoon said, ``Buy this magazine or we'll shoot the dog.''
        That's what's going on with the debate over Internet sales
    taxes and this legislation to continue the ban on multiple and
    discriminatory taxes. There is no constituency for multiple
    taxes or discriminatory taxes against the Internet. Nobody is
    willing to say, we are for this. There is no time in the future
    when this will be a good idea, and it's time permanently now to
    ban this. We ought not to be here, Mr. Chairman, 2 years from
    now or 3 years from now, going around the same track over
    again.
        This is very much like ``Groundhog Day,'' and as much as I
    enjoy having my legislation passed by Congress not just once
    but multiple times, because it's quite an honor, I think we've
    done this and now it's time to finish the job and then we can
    move on and talk about other more difficult issues in the days
    ahead.
        Thank you very much, Mr. Chairman. I yield back.
        Mr. Cannon. Thank you, Mr. Cox. I agree with you. Passing
    it twice--three times is the charm, right? Let's do it this
    time.
        The Chair would acknowledge the presence of Ms. Baldwin
    from Wisconsin and Mr. Delahunt from Massachusetts. Mr. Coble
    was here briefly, but he had another hearing that he had to
    attend. Mr. Flake was here and I think will be back. Mr. Carter
    from Texas and Mr. Chabot from Ohio, who I think will return.
        Thank you, Mr. Cox. We appreciate those comments.
        And now, we'd like to turn to our rather--our extremely
    impressive panel. It is my honor and privilege to welcome these
    individuals, these gentlemen here today, who are among the most
    noted experts in the area of Internet taxation.
        First of all, we'll hear from my friend, Governor--the
    Honorable James S. Gilmore, III, our first witness and the
    former Governor of the Commonwealth of Virginia from 1998 to
    2002. As Governor, Mr. Gilmore fostered a strong leadership--or
    relationship between the Government and the technology
    community. He created the nation's first Secretariat of
    Technology, established a Statewide Technology Commission, and
    signed into law the nation's first comprehensive State Internet
    policy.
        As a result of his leadership on technology issues, Mr.
    Gilmore was chosen as Chairman of the Federal Advisory
    Commission on Electronic Commerce, the panel established by
    enactment of the Internet Tax Freedom Act that issued its
    report to Congress in April of 2000.
        In addition, Mr. Gilmore has been Chairman of the
    Congressional Advisory Panel to assess domestic response
    capabilities for terrorism involving weapons of mass
    destruction, also known as the Gilmore Commission. This
    commission was influential in developing the office of Homeland
    Security.
        A graduate of the University of Virginia and its law
    school, Mr. Gilmore continues to demonstrate his dedication to
    technology issues as a partner in the law firm of Kelley, Drye
    and Warren here in Washington, D.C.
        Mr. Gilmore, we are grateful for your commitment to the
    important issues before us today and your valuable testimony,
    and may I just add, we appreciate the fact that a governor has
    taken the lead in opposition to other governors around the
    country on an issue that is so fundamentally important to
    America.
        Let me just ask, obviously I have been passed a note. Mr.
    Kemp, do you need to go first?
        Mr. Kemp. I'm such an expert in e-commerce, I can't get
    the----
        Mr. Cannon. Governor, if you would pardon us, Mr. Kemp, if
    you don't mind, I'd like to introduce you.
        Mr. Gilmore. Congressman, I'm certainly prepared to defer
    to the Secretary, but I hope I'll get that introduction over
    again. That was very nice. [Laughter.]
        Mr. Cannon. We probably could ad lib and do a lot more,
    given your background on this issue. I don't think it's a
    surprise to anyone that my Governor in Utah has sort of been on
    the lead on the other side of this, and while I love my State,
    I love the Internet in many ways more. So we'll come back and
    do some more introduction, Governor.
        Our next witness, then, will be Mr. Jack Kemp, who is one
    of the nation's leading promoters of the importance and
    potential of the digital economy. Mr. Kemp serves on the Board
    of Directors of Empower America, a public policy and advocacy
    organization he co-founded in 1993. Empower America is
    dedicated to promoting democratic capitalism, economic growth,
    and policies that empower individuals.
        A graduate of Occidental College in Los Angeles, Mr. Kemp
    served for 4 years as Secretary of Housing and Urban
    Development before his appointment to the cabinet, and after a
    successful professional football career. Mr. Kemp served for
    nine terms here in the House of Representatives, from 1971 to
    1989. In 1995, Mr. Kemp served as Chairman of the National
    Commission on Economic Growth and Tax Reform. In 1996, he was
    nominated as the Republican candidate for Vice President for
    the United States.
        In addition to his work with Empower America, Mr. Kemp
    holds many prestigious appointments, including serving as
    Deputy Chairman of the International Democratic Union, a
    worldwide organization dedicated to advancing democracy,
    freedom, and free market conditions.
        Mr. Kemp, it is great to have you back in these hallowed
    halls. I might just as a personal note say that I have been a
    great admirer of Mr. Kemp's and he has been very gracious with
    his time on these issues with me since I have come to Congress.
    I appreciate your coming here today and sharing your counsel
    and wisdom with us, Mr. Kemp. We shall turn the time over to
    you.

     STATEMENT OF HONORABLE JACK KEMP, CO-DIRECTOR, EMPOWER AMERICA

        Mr. Kemp. Thank you. Well, Mr. Chairman, thank you for that
    very gracious introduction, and Members of the Committee, it is
    a pleasure to be before you. Listening to my old friend, Chris
    Cox, talking about e-commerce and taxation reminds me of our
    old friend Ronald Reagan's comment about Government. He said,
    one of the problems is, any time they see something moving,
    they want to tax it. If it keeps moving, they want to regulate
    it. If it ever stops moving, it'll be subsidized by Government.
    [Laughter.]
        Mr. Kemp. Chris, thank you for your comments. Mr. Chairman,
    thank you for your gracious introduction. Let me say it's a
    pleasure to be here with Governor Gilmore. There is no governor
    in the country for whom I have higher regard and respect than
    Jim Gilmore. He also serves with me on the Board of Empower
    America, and after chairing the Advisory Commission on
    Electronic Commerce, I have come to believe that this is one of
    the most important issues facing the United States in the 21st
    century, the whole idea of a new economy. It doesn't replace
    bricks and mortar, but it expands commerce here and around the
    world. It is a duty-free e-commerce, it is tariff free, and
    hopefully, we can keep it as tax-free as is potential.
        It will add to the revenue base of the country. All
    revenues don't have to come in one direct way. There are many
    different ways to expand the revenue base of this country, and
    as that pie continues to grow or we get it growing again, we
    are going to get more revenue, as I have preached and Jim
    Gilmore has preached and many of you have preached for many,
    many years.
        So I am pleased to be here. I will keep my remarks brief.
    That will, of course, be an historical occasion here in the
    Congress, these hallowed halls. [Laughter.]
        Mr. Kemp. States have been trying for years to tax people
    at businesses located out of State. The issue of taxing remote
    sales started when States tried to tax catalog sales, arguing
    that such favorable tax treatment put brick-and-mortar
    companies at a disadvantage. This is not a new debate. It has
    been going on ad infinitum, if not ad nauseam.
        The Supreme Court in 1992, as you all know, Quill v. North
    Dakota, barred the State of North Dakota from requiring an out-
    of-State mail order company to collect taxes on sales made to
    customers inside the State unless the business had that
    substantial presence or nexus alluded to by the Court.
        With the advent of the Internet in the mid-1990's and the
    growth of e-commerce, some say in the next 5 years, close to
    $1.5, $1.7 trillion of e-commerce. Ninety-five percent of it is
    B-to-B. It is not B-to-C, it is B-to-B, wholesale where there
    is no sales tax.
        In 1998, the Internet tax debate was temporarily stayed for
    3 years with the passage of the Internet Tax Freedom Act,
    alluded to by you, Mr. Chairman, and by Mr. Cox. It barred
    post-1998 access taxes on the Internet as well as multiple and
    discriminatory taxes, again alluded to by Mr. Cox.
        In 2001, when the ITFA was set to expire, the fight to
    permanently or temporarily extend the moratorium was held
    hostage by some Members of the Senate unless Congress allowed
    for some type of a national sales tax cartel to exist. In
    November, almost 2 months after the original moratorium had
    expired, the Senate finally passed that clean 2-year extension
    and we think the Congress should pass a clean extension, or a
    clean moratorium, I should say, this year.
        During the first two rounds of the Internet tax debate,
    many argued that the central issue was fairness. Supporters of
    Internet tax harmonization obfuscated, in my opinion, the
    issues, insisting that somehow the moratorium barred taxation
    of Internet sales, leaving brick-and-mortar industries at a
    disadvantage.
        The Internet tax moratorium and the extension of the
    permanent moratorium only bars access fees, as Mr. Cox alluded
    to, and multiple and discriminatory taxation. It's the U.S.
    Constitution and the Supreme Court precedent, not the
    moratorium, that imposes the restriction on the ability of a
    State and local government to tax remote sales.
        That's an important point to make, it seems to me, along
    with the point that now as States are running deficits--and
    clearly the deficit is a result of the slow-down of the U.S.
    economy and an increase in spending that took place in the
    1990's when the economy was growing--with States running
    deficits, it is interesting that now the talk of fairness is
    being replaced by the so-called plugging of a budget shortfall.
    I think that is fallacious, Mr. Chairman. States have increased
    spending over 50 percent in just three or 4 years. Clearly,
    they took advantage of a growing economy. I don't see how we're
    going to close a gap or plug the States' deficit by 30 to 40
    percent by putting on a tax.
        Congress should pass H.R. 49. I appreciate your leadership
    and that of Mr. Cox and other Members who have supported this.
    We should permanently extend the current Internet tax
    moratorium on access taxes and multiple and discriminatory
    taxation of e-commerce. Congress should definitively end any
    hope that some have of a Congressional authorization of a
    national sales tax cartel.
        I see the red light on. I am going to follow my
    instructions. I will leave my colleague to answer the questions
    as I catch an 11 o'clock shuttle, if that is possible, to New
    York.
        Mr. Cannon. We wish you godspeed. [Laughter.]
        Mr. Kemp. Thank you.
        Mr. Cannon. And a safe arrival.
        Mr. Kemp. I'm leaving Reagan National, but it'll also make
    you all realize that you have a witness here in Governor
    Gilmore who is probably the most able practitioner of these
    views that we have in the country. Thank you, Mr. Chairman, and
    godspeed to you.
        Mr. Cannon. Thank you, Mr. Kemp. We appreciate your time.
        [The prepared statement of Mr. Kemp follows:]
                        Prepared Statement of Jack Kemp
        Mr. Chairman and Members of the Committee, thank you for allowing
    me to express the views of Empower America on H.R. 49, the Internet Tax
    Nondiscrimination Act, which would permanently extend the existing
    moratorium on many forms of internet taxation (the Internet Tax Freedom
    Act of 1998--ITFA--as extended in November 2001 by the Internet Tax
    Nondiscrimination Act of 2001 until the fall of this year). We at
    Empower America enthusiastically support H.R. 49. In my few minutes
    before you this morning, I would like to explain why we support the
    bill and point out some potential pitfalls the committee should be wary
    of as you seek a more permanent resolution of this complex but
    extremely important issue.
        First, I would like to note that Empower America has actively
    participated in the Internet tax debate since it began with the
    Advisory Commission on Electronic Commerce (ACEC), chaired by my good
    friend Gov. James Gilmore who I am glad to see has been called upon to
    testify as well. My views expressed today are based on the work Empower
    America has done on this subject in the past and on work we are
    presently doing in preparation for a white paper on some of the
    economic and legal issues surrounding Internet taxation (a copy of that
    study will subsequently be submitted for the Committee's
    consideration).
        Mr. Chairman, I believe a good starting point for understanding the
    Internet tax debate is laid out in the conclusions of the
    congressionally-mandated ACEC, which was conducted under the
    outstanding leadership of Virginia Gov. James Gilmore. The Commission
    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
    and provides a blueprint for Congress to consider in asserting its
    power to define the scope of states authority to tax cross-border
    transactions. Another excellent source discussing the Constitutional
    limitations on Internet taxation is a paper published by the Institute
    for Policy Innovation (IPI) titled, ``New Economy, Old Constitution,''
    by George Pieler and Empower America Chief Economist Dr. Lawrence
    Hunter.
        However, the authority and foundation on which we rest our case is
    not on the Commission's recommendations or policy studies alone; we
    rest our case on the firm authority and foundation of the Constitution,
    Supreme Court precedent and sound economic policy. It is this authority
    that should guide the members of this Committee and members of Congress
    as you seek to reach a consensus to ultimately resolve this issue.
        In the last six years the debate over Internet taxation has changed
    with the economic climate. During the mid-to-late 1990s as e-commerce,
    the economy and states tax revenues all took-off (no coincidence) the
    focus of the debate by those whom were against the moratorium and in
    favor of sales tax simplification was on the issue of ``fairness.''
    Their case rested on the simple proposition that it is simply wrong to
    give Internet-based companies preferential tax treatment over brick-
    and-mortar industry. And, I would agree if that were the case, but it
    is not.
        The ITFA does not prevent states from taxing e-commerce if there is
    a sufficient ``nexus'' or physical presence between the out-of-state-
    seller and in-state purchaser in their jurisdiction. The ITFA only bars
    access fees and multiple and discriminatory forms of taxation on e-
    commerce. 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. The possibilities for imposing multiple
    and discriminatory taxes on e-commerce are limited only by the law and
    the imagination of the taxing authorities.
        Let me be clear, the Internet deserves neither special tax burdens
    nor unique tax privileges. This is the central premise underlying the
    ITFA and, in practice, it is serving that purpose. The supporters of
    Internet taxation would like to point to the ITFA as the source of
    their problems, and they insist the problem is merely a misguided act
    of Congress that can be remedied with more legislation. But the origins
    of this dispute are much older than the Internet and the source of
    their problem is much more permanent than an act of Congress.
        The central issue in the Internet tax debate is not ``fairness'' as
    the NGA and some others would have us believe; it is taxation without
    representation. States have been trying for more than three decades to
    tax people and businesses that are located out-of-state because
    politicians are acutely aware non-residents can't vote them out of
    office.
        This issue began long before the Internet or the new economy, it
    began with catalogue sales. The Supreme Court finally settled that
    dispute in 1992 in Quill Corp. v. North Dakota. That decision barred
    states from requiring out-of-state mail order companies from collecting
    taxes on sales made to customers inside the state unless the business
    had a ``substantial presence'' within the state. In addition to finding
    no sufficient taxing ``nexus'' the Court also found the North Dakota
    tax scheme too complex for remote sellers and thus created an ``undue
    burden'' on inter-state commerce, rendering the tax scheme
    unconstitutional and settling the issue for the time being. So the
    Constitution, not the ITFA, nor some quaint notion of ``fairness'', is
    the barrier to the states scheme to tax e-commerce.
        By 2001 the technology sector of the economy was devastated by
    deflationary monetary policy and an ever increasing regulatory and tax
    burden from which it has yet to recover. Concurrently, federal, state
    and local tax revenues declined with the sagging economy. A key lesson
    to be learned from the rise and fall of the technology sector during
    the late 1990s through 2003 is that economic growth is the key to
    solving federal, state, and local fiscal problems, not a systematic
    search for new and creative ways to increase the tax burden on
    hardworking Americans.
        Undaunted by the facts, supporters of the new and multiple taxation
    on e-commerce have shifted gears; no longer is the issue one of
    fairness alone, now they argue taxation of e-commerce is necessary to
    plug state budget deficits. But, as we have seen, economic growth not
    new forms of taxation is the key to solving budget shortfalls and we
    need to keep in mind that no government neither here nor abroad has
    ever taxed its way to prosperity.
        Another issue first raised in the Quill case, which was debated by
    the ACEC, and is being pushed aggressively by the National Governors
    Association (NGA) is the agenda for `harmonization' and
    `simplification' of state sales tax laws which would create a de facto
    national sales tax for which neither the federal government or the
    states would be accountable to the taxpayer. Under the proposed plan,
    supporters of the `streamlined sales tax initiative', probably more
    properly labeled the `national sales tax cartel initiative', seek
    preauthorization from Congress (required under the Compact Clause) for
    a national sales tax cartel if just 20 states agree to their
    streamlined sales tax initiative. This national sales tax cartel would
    be levied collectively by all states and run by a non-elected
    `consensus board'; so much for representative democracy.
        In 2001, when Congress debated permanently extending the ITFA, the
    debate was bogged down between those who wanted to make the moratorium
    permanent, on one hand, and those who wanted to tie any extension of
    the ITFA to preauthorizing a national sales tax cartel, on the other.
    Senator Byron Dorgan (D-ND) is already out-of-the box supporting the
    latter approach. At the winter meeting of the National Governors
    Association he urged Congress to pass a sales tax ``streamlining'' bill
    this year. We feel that if that happened it would probably be the worse
    case scenario. Besides pushing the Constitutional limits of the Compact
    Clause, probably overstepping such limits, `streamlining' or
    `harmonizing' sales taxes does not make much economic sense. Tax
    competition in our federal system of government keeps governments
    honest. It allows businesses and individuals to vote with their feet,
    therefore preventing government overreaching. Tax competition, and
    competition in general, is a cornerstone of our economic system and
    federal system of government; it is not a problem that needs to be
    solved, but rather a solution that should be embraced.
        As a result of this political stalemate some are now suggesting
    that the ITFA and the national tax cartel initiative should be
    separated, we disagree. In our view the ITFA and the national sales tax
    cartel initiative are inextricably linked. The purpose of the ITFA was
    to give Congress time to study the issues so that Congress could pass
    policy that would foster economic growth in an emerging industry and to
    give the nascent e-commerce industry a chance to mature. In the
    interim, the NGA and supporters of a national sales tax cartel have
    ramped up efforts at the state level so as to give the national sales
    tax cartel initiative an aura of inevitability. Do not be fooled,
    Congress need not be a party to this policy boondoggle.
        What we have learned from the last eight to ten years is that e-
    commerce, just like every other sector of the economy, is susceptible
    to onerous monetary, tax and regulatory policy. We have also re-learned
    that as the economy goes, so too goes the fiscal picture of governments
    at all levels. And, if you want an idea of the negative consequences of
    tax harmonization schemes simply look across the ocean to our European
    friends. Tax harmonization is nothing more than a euphemism for high
    taxes and is a recipe for economic stagnation. These issues should be
    dealt with head-on and resolved decisively in favor of what is
    Constitutional; while focusing on economic growth and not increasing
    the tax burden; and safeguarding the proper roles of government.
        To this effect our recommendations are simple: we strongly endorse
    H.R. 49 to permanently extend the ITFA moratorium. We also encourage
    Congress to resoundingly quash any notion that Congress would even
    contemplate authorizing a national sales tax cartel. If Congress passed
    such an authorization it may portend the beginning of what might
    appropriately be dubbed an Internet tax revolt. And, if some members of
    Congress should try to hold hostage permanent extension of the ITFA for
    some ``compromise'' authorizing a national sales tax cartel, then
    Congress may be better off allowing the ITFA to expire. The negative
    impact of a national sales tax cartel is even more daunting than the
    multiple and discriminatory taxes states could dream up for taxing e-
    commerce.
        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.
        These are matters 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 permanently
    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.

        Mr. Cannon. I might say, I'm sure that the gentleman from
    Virginia was joking when he said he'd like another
    introduction. I'm happy to do that, because I can talk at great
    length about the contributions of Mr. Gilmore to this debate
    and the gravitas that he has brought to bear on what I think is
    the appropriate sight of the debate, which is a permanent
    moratorium.
        Mr. Gilmore, we are honored to have you here and we would
    look forward to hearing your testimony.

             STATEMENT OF HONORABLE JAMES S. GILMORE, III,
               FORMER GOVERNOR, COMMONWEALTH OF VIRGINIA

        Mr. Gilmore. Thank you, Congressman. I wish I were a Member
    of Congress so I could move that Mr. Kemp be forced to stay
    here and answer the questions of the Members, particularly Mr.
    Delahunt and Ms. Baldwin. [Laughter.]
        Mr. Gilmore. But I am delighted to be here, particularly
    with these distinguished additional witnesses who will be
    making, I think, very persuasive cases to you today. I simply
    would ask that my written remarks be made a part of the record,
    if you should please, Congressman.
        I have, as you know, usually been testifying on homeland
    security issues before this Congress. This is a little bit of a
    different forum today, and compared to the Internet tax debate,
    homeland security is a peach. So this is a hard one to do, but
    not this piece.
        This piece of H.R. 49 that Congressman Cox has come forward
    with here today is something you can let go, you can let go
    ahead, as opposed to having intertwined into the challenging
    sales tax issue. As a matter of fact, there is risk that if you
    don't let it go forward, that this can later on in the year
    become intertwined with the sales tax issue, which is much more
    complicated, much more difficult, and if it becomes
    intertwined, it doesn't get enacted, H.R. 49, and then you run
    the risk that there are going to be additional taxes placed on
    access, which is a fundamental tax increase right in the middle
    of a recession.
        I just don't think that the Congress wants to take that
    responsibility, and Congressman Cox has offered you an
    opportunity to avoid that challenge by going forward with it
    today. Also, the risk is if you don't go forward with it today
    and this expires, then there is a risk that there will be a lot
    of individual access taxes put on.
        I want to congratulate Congressman Cox for his leadership
    in this. He has been doing it for years and continues to. I
    was, of course, chairman of this Advisory Commission on
    Electronic Commerce from 1999 to 2000, a most challenging
    chairmanship to try to perform at. The issue that, of course,
    we have here today is one that on our Commission had virtually
    no controversy, very little debate on this issue. The more
    complicated issues were very controversial, but this was pretty
    easy, to allow this to go forward.
        When you look back at what the Internet Tax Freedom Act
    did, was it prohibited these kinds of taxes, it grandfathered
    the ones that were already in existence, unfortunately, but
    did, and then established the Advisory Commission. Since that
    time, a lot of these access taxes, in fact, have been
    dismantled. Texas has eliminated its tax on access. Connecticut
    phased out its tax on access. Washington State repealed a local
    tax that was put on by the City of Takoma. So the trend is
    against access taxes and I think that's right.
        But we're talking, really, on this entire array of issues,
    ladies and gentlemen, a policy choice, which is, of course, the
    duty of elected officials. It just is. But this is a very
    challenging policy choice, and now the choice before you on
    this narrow issue is, do you want to delay this and run the
    risk that there's going to be myriad State and local taxing
    burdens, as we have seen, for example, in the
    telecommunications industry, or do you want to go forward and
    pass this narrow piece now and avoid that kind of difficulty?
        This is a permanent moratorium that's being offered and I
    think that it's the right policy, and there are policy reasons
    for this.
        Number one, it promotes the freedom and ubiquitous Internet
    access that people have got, and this is something that's very
    powerful in today's society. If we don't do that and
    individual--thousands of individual units or localities are
    entitled to put on taxes, it will increase costs to users and
    create tremendous administrative and regulatory costs at the
    same time. That's probably the fundamental point.
        There are many policy reasons now why we're pushing, for
    example, for broadband rollout. This would be discouraging of
    that. And yet, the telecommunications industry, no matter what
    part of it, would tell you that they need to be pushing ahead
    on that type of program.
        The digital divide would be enhanced by this problem.
    People across the country who need to get into access, mothers
    and fathers across the country who are not as well off want to
    have access to computers and access to these services. This
    would be a burden on them and they are the payers at the local
    level, your constituents, that would be put into that kind of
    position.
        We need an economic stimulus. This has been a good economic
    stimulus over the years. There's no better time than now for
    economic stimulus and this would do that. This would be
    effectively a tax increase if this is allowed to expire at the
    end of the year and we begin to get into all these taxes.
    People are going to start paying more money out of their
    pockets than they otherwise would, and this is the worst time
    that we have ever seen for that.
        We want to hold onto our competitive position in the world
    to the greatest extent that we possible can. Europe will, I
    assure you, take backwards steps here. That is what they do.
    They are going to be putting a lot of taxes on in Europe
    because that's what they do in Europe, and as a result of that,
    they're going to put themselves in a disadvantageous position
    to the United States. We should not follow that lead.
        Furthermore, right now, you're in a good position. This is
    a good time. Localities are not dependent upon these taxes.
    Once they get dependent on it, it's very tough for Congressmen
    and women to say, no, let's take it back away again because of
    policy reasons. You're positioned well right now. If you let it
    expire and you let these people all get dependent upon this,
    it's going to be murder to try to actually perform good policy.
    You will be making a policy decision that will mean an increase
    in taxes.
        I think that the Federal moratorium is sound policy. You've
    been doing it over and over again. The time has come to go
    forward with it.
        So in conclusion--and I'm on time, actually--in conclusion,
    this information technology boom that drove the last boom in
    this country can provide the kind of efficiencies that will
    send us forward again. It will generate new wealth in America,
    as Congressman Kemp said. And it will empower individual
    people, and that's what we're trying to do in America. And it
    will keep tolls off the Internet.
        So I believe that H.R. 49 is a good bill. It's the right
    time to push it forward, and you have an opportunity before
    this thing gets embroiled in a sales tax issue, which is of
    very dubious, questionable policy that is going to be
    thoroughly argued out, may never be completely resolved at the
    end of the year. At least do the right thing now on this piece
    of legislation.
        Mr. Cannon. Thank you, Governor. We appreciate that.
        [The prepared statement of Mr. Gilmore follows:]
                  Prepared Statement of James S. Gilmore, III
                                  introduction
        Chairman Cannon, Congressman Watt, and Members of the Commercial &
    Administrative Law Subcommittee, thank you for inviting me to explain
    why the permanent and national prohibition against Internet access
    taxes proposed in H.R. 49 is critically important to the future of the
    United States economy and to ubiquitous access to the Internet by the
    American people.
        Let me preface these remarks by recognizing the tremendous vision
    of your colleague, Congressman Chris Cox, who had the foresight over
    five years ago to protect the Internet from multiple and discriminatory
    tax burdens with passage of the Internet Tax Freedom Act of 1998.
    Without the Internet Tax Freedom Act, I doubt our Nation would be as
    advanced as it is today in terms of widespread Internet access,
    broadband rollout and international dominance of electronic commerce
    and the exchange of information and digital content on-line.
        I also would like to recognize Senator Allen and Senator Wyden for
    their efforts in the Senate to move tax freedom for Internet access
    forward. And, of course, I would like to acknowledge President Bush and
    Vice President Cheney for the Administration's strong support for a
    permanent federal prohibition against taxes on Internet access.
       history of advisory commission on electronic commerce (1999-2000)
        I have been blessed with several noteworthy honors in my career.
    The highest honor was to be elected by the people of Virginia to serve
    as their Governor from 1998 to 2002. In that role, I had the
    opportunity to pass the nation's first comprehensive Internet policy
    and steer Virginia's tax policy to promote Internet access and
    electronic commerce. I also presided over unprecedented economic growth
    in the Information Technology sector.
        While I served as Governor, I also had the privilege to serve as
    the Chairman of the Advisory Commission on Electronic Commerce from
    1999 to 2000. The Advisory Commission on Electronic Commerce was
    established by Congress to conduct a thorough study of federal, state,
    local and international taxation of electronic commerce. Speaker
    Hastert asked the Commission to send ``sound policy proposals for the
    individual taxpayers of America,'' and former Senate Majority Leader
    Lott requested us to forward ``a clear and unambiguous policy proposal,
    especially if that proposal is bold and innovative.'' For nearly a
    year, 19 Commissioners and their staffs devoted their creativity and
    thousands of hours of work deeply engaged in that endeavor.
        The Commission's membership was comprised of distinguished leaders,
    from both the public and private sectors, representing diverse
    perspectives on the issue Internet taxation.
        They included several distinguished leaders from the private
    sector: Michael Armstrong of AT&T, Grover Norquist of Americans for Tax
    Reform, Richard Parsons of Time Warner, Bob Pittman of AOL, David
    Pottruck of Charles Schwab, John Sidgmore of MCI WorldCom and UUNet,
    Stan Sokul on behalf of the Association of Interactive Media, and Ted
    Waitt of Gateway. And they included an equally impressive group from
    the public sector representing state and local governments: Dean Andal,
    Chairman of the California Board of Equalization, Delegate Paul Harris
    of the Virginia General Assembly, Commissioner Delna Jones of
    Washington County, Oregon, Mayor Ron Kirk of Dallas, Texas, Governor
    Mike Leavitt of Utah, Gene LeBrun of the Commissioners on Uniform State
    Laws, and Governor Gary Locke of Washington State. And representing the
    Clinton-Gore Administration were Joe Guttentag of the Department of
    Treasury, Andy Pincus of the Department of Commerce, and Bob Novick of
    the Office of U.S. Trade Representative.
        In nearly a year of work and four two-day meetings and several
    remote teleconference meetings, the Commission heard testimony from
    over 55 experts, academics, think-tanks and interest groups
    representing as broad a range of perspectives on tax and electronic
    commerce policy as has ever been organized into one study. Each
    Commissioner was able to invite his or her own experts to express a
    viewpoint. We heard from every quarter, from the Heritage Foundation to
    the National Governor's Association and Wal-Mart.
        A year of robust debate yielded a sophisticated set of ideas that
    the Commission reported to Congress in April of 2000. I am confident
    that conclusions we reported to Congress represent an excellent policy
    blueprint that will have tangible and beneficial effects for the people
    of the United States. A copy of the Commission's final Report to
    Congress and its library are archived on-line by George Mason
    University Law School at www.ecommercecommission.org.
         advisory commission on electronic commerce's policy proposals
        The Internet Tax Freedom Act and H.R. 49 address two distinct tax
    policy issues: (1) state and local taxes on Internet access provided by
    a traditional Internet service provider (or ``ISP''), and (2)
    ``multiple and discriminatory'' taxes that treat electronic commerce
    differently than any other kind of commerce. The Commission I chaired
    for Congress studied these two tax policies in detail and a majority of
    the Commission voted to extend the federal prohibition against both of
    these taxes.
        The Commission also studied other taxes, some imposed by the
    federal government and others imposed by state or local governments.
    Before focusing my remarks on the tax question presented by the
    Internet Tax Freedom Act and H.R. 49, however, I would like to
    summarize the other distinct policy questions the Commission addressed.
    It suffices to note that these policies are not necessarily dependent
    upon one another, and each of the Commission's policy proposals should
    be considered on its unique merits. Certainly, resolution of H.R. 49
    should not be dependent upon the policy debate over other issues such
    as interstate sales tax collections on the Internet.
        A majority of Commissioners approved policy prescriptions that, in
    my view, advance the important objectives of promoting Internet
    connectivity and individual empowerment for the people of the United
    States. Among the ideas submitted in the Commission's April 2000
    Report, you will find proposals for the following tax reforms:

             (1) LFirst, Congress should eliminate the 3% federal telephone
            tax--an immediate tax cut of over $5 billion annually for the
            American people. This tax was originally established as a
            luxury tax for the few Americans who owned a telephone to fund
            the Spanish American War of 1898. Since that time, it has been
            scheduled for extinction for decades, but was finally made
            permanent in the late 1980s. In the Information Age, it is
            important to stop taxing people's telephones. Elimination of
            this regressive tax is an important first step in reducing the
            expense of Internet access, one of the contributing factors to
            the digital divide. While this tax once was justified as a
            luxury tax on the few Americans who owned a telephone, it has
            no rationale in the Information Economy.

             (2) LSecond, extend the current moratorium on multiple and
            discriminatory taxation of electronic commerce for an
            additional five years through 2006.

             (3) LThird, prohibit taxation of digitized goods sold over the
            Internet. This proposal would protect consumer privacy on the
            Internet and prevent the slippery slope of taxing all services,
            entertainment and information in the U.S. economy (both on the
            Internet and on Main Streets across America). Moreover, this
            tax prohibition is essential to maintaining U.S. global
            competitiveness since the United States currently dominates the
            world market in digitized goods.

             (4) LFourth, make permanent the current moratorium on Internet
            access taxes, including those access taxes grandfathered under
            the Internet Tax Freedom Act. This proposal is another crucial
            initiative, targeted to reduce the price of Internet access and
            to close the digital divide. By expanding the moratorium to
            eliminate the current grandfather provision, consumers across
            the country would participate in electronic commerce without
            onerous tax burdens.

             (5) LFifth, establish ``bright line'' nexus standards for
            American businesses engaged in interstate commerce. The cyber
            economy has blurred the application of many legal nexus rules.
            American businesses need clear and uniform tax rules.
            Therefore, Congress should codify nexus standards for sales
            taxes in a way that adapts the law of nexus to the New Economy
            and the new ``dot com'' business model. Codification of nexus
            would serve several important policy objectives: (1) provide
            businesses ``bright line'' rules in an otherwise confusing
            system of state-by-state nexus rules; (2) protect businesses,
            especially small businesses, from onerous tax collection
            burdens; (3) reduce the amount of costly litigation spurred by
            confusing nexus rules; (4) nurture the full growth and
            development of electronic commerce; and (5) give consumers and
            individual taxpayers who participate in Internet commerce a tax
            break.

             (6) LSixth, place the burden on states to simplify their own
            labyrinthine telecommunications tax systems as well as sales
            and use tax systems to ease burdens on Internet commerce. This
            effort will be particularly important for small and medium-
            sized retailers with nexus in two or more states. It also will
            be important for telecommunications companies as they build out
            the Internet infrastructure and offer new technologies and
            services. Radical simplification will be necessary in the New
            Economy if small and medium-sized businesses are to succeed.

             (7) LSeventh, clarify state authority to spend TANF funds to
            provide needy families access to computers and the Internet, as
            well as the training they need to participate in the Internet
            economy. This is one strategy the Commission formally
            recommends to close the digital divide and make the personal
            computer and access to the Internet as ubiquitous as the
            telephone and television.

             (8) LEighth, provide tax incentives and federal matching funds
            to states to encourage public-private partnerships to provide
            needy citizens access to computers and the Internet. This is
            yet another strategy the Commission formally recommends to
            close the digital divide.

             (9) LNinth, respect and protect consumer privacy in crafting
            any laws pertaining to online commerce generally and in
            imposing any tax collection and administration burdens on the
            Internet specifically. This is a formal recommendation of the
            Commission.

            (10) LTen, continue to press for a moratorium on any
            international tariffs on electronic transmissions over the
            Internet. This idea also is a formal recommendation of the
            Commission.

            (11) LAnd eleven, a majority of the Commission endorsed a
            comprehensive framework for addressing international tax and
            tariff issues based upon the following core principles: no new
            taxes or tax structures on electronic commerce in the world
            marketplace; tax neutrality toward electronic commerce;
            simplicity and transparency of tax rules applied to electronic
            commerce; and a call for the Organization of Economic &
            Community Development (OECD) to continue fostering
            international dialogue and cooperation on international tax
            issues.

        It is important to note that the Commission's study of the Internet
    Tax Freedom Act and its prohibitions against taxes on Internet access
    and multiple and discriminatory taxes targeting electronic commerce
    elicited little if any controversy. And there was consensus that the
    national goal of any policy addressing the Internet should be to
    promote ubiquitous access. Those issues only became controversial in
    the context of political bargaining over other, more controversial
    topics.
                 background on internet tax freedom act (1998)
        When Congress passed the Internet Tax Freedom Act in 1998, it was
    difficult to predict, or even catalogue, the many policy dimensions of
    federal, state and local taxation of Internet access and Internet-based
    commerce. Mindful of the axiom to do no harm, Congress acted cautiously
    in the beginning:

            (1) LFirst, Congress prohibited state and local taxes targeting
            Internet access temporarily, for three years, so that the
            ramifications of the federal prohibition could be measured;

            (2) LSecond, Congress ``grandfathered'' about ten states that
            already had enacted some form of state or local tax on Internet
            access to allow them time to reverse their policies in light of
            countervailing federal policy without any dramatic revenue
            impact and/or to keep their policies in place in the event
            Congress might eventually reverse national policy; and

            (3) LThird, Congress established the Advisory Commission on
            Electronic Commerce to study Internet tax policies and report
            back to Congress on its deliberations, policy debate and
            majority proposals, as well as any formal findings or
            recommendations that could garner a supermajority.

        Congress wanted to move forward deliberatively and carefully
    because the Internet economy and all of its dimensions were not fully
    understood. Yet, Congress needed to act quickly because state and local
    governments already had begun to target Internet access services,
    websites and content under disparate and often illogical tax theories.
        Tacoma, Washington, for example, implemented a plan in September of
    1996 to tax Internet Service Providers as telephone utility companies
    (a law the state legislature later repealed). Wisconsin enacted a 5%
    sales tax on Internet access, subjecting its taxpayers to two taxes to
    log on the Internet--a tax on their telephone service used to dial up
    the Internet and a second tax on their Internet service. Connecticut,
    on the other hand, started taxing Internet access at 6% under the
    theory that it constituted a ``computer and data processing'' service
    (Connecticut terminated the tax in 2001). New Mexico began imposing a
    gross receipts tax Internet access and continues to this day. Even
    small towns, like Chandler, Arizona, started imposing local utility
    taxes on Internet access service in the mid to late 1990s.
        The real threat of hundreds if not thousands of differing tax
    theories, rates, jurisdictions, audits and regulations getting heaped
    upon Internet access the way it had local and long-distance telephone
    service spurred Congress to enact a federal moratorium against the
    proliferation of such taxes. Congress grandfathered the handful of
    states that had started taxing Internet access.
        The grandfather provision implicitly told those states that had
    rushed to tax Internet access that Congress disapproved of the
    imposition of a myriad of state and local tax burdens (including both
    the costs of taxes as well as the costs of regulatory compliance,
    audits and collection) upon inherently interstate Internet access
    services. These grandfathered states faced a choice. They could either
    reverse their hasty decisions to tax Internet service or they could
    wait to see if Congress might change its mind.
        Since its original enactment in 1998, several states have
    dismantled or significantly curtailed their taxes on Internet access.
    Texas, for example, eliminated its tax on Internet access priced below
    $25 per month. Connecticut decided to phase out its tax on Internet
    access altogether. Washington State repealed the local tax on Internet
    access that the City of Tacoma had imposed.
        In 2001, Congress voted overwhelmingly a second time to extend the
    federal prohibition an additional two years to 2003, endorsing once
    again a national policy of promoting ubiquitous Internet access by
    prohibiting onerous tax and regulatory burdens on access.
         avoiding the consumer telephone tax labyrinth on the internet
        We now approach the conclusion a five-year federal moratorium on
    Internet access taxes and Congress faces a fundamental policy choice:

            (1) LShould Congress adopt the policy that myriad state and
            local tax burdens on Internet access are antithetical to an
            enduring national policy of promoting ubiquitous and
            competitive Internet access by making the moratorium on access
            taxes permanent and universal across all states?

            (2) LOr should Congress reverse course, eliminate the federal
            prohibition, and allow state and local governments to proceed
            to tax Internet access as they see fit?

        I believe the policy goals and purposes that justified Congress'
    original adoption of the Internet Tax Freedom Act in 1998 are equally
    compelling today and justify a permanent and universal prohibition
    against taxes on Internet access throughout the United States.
        Abolishing the federal prohibition would force the Internet
    superhighway to navigate the same labyrinthine maze of overlapping and
    disparate state and local tax regulations and burdens that currently
    strangles the Nation's telecommunications services. Presently, a
    national telecommunications service provider might be required to file
    as many as 55,000 different tax returns each year to comply with the
    tax burdens of all state and local jurisdictions. The effective
    transaction tax rates that apply to telecommunications services exceed
    the effective transaction tax rates applied to almost all other sales.
    Average effective state and local tax rates average about 14% as
    compared to 6.3% for most other sales. When all state, local and
    federal telephone taxes and fees are counted, it is not uncommon for
    20% or more of a consumer's telephone bill to be taxes.
        Also, many state and local governments apply different tax
    structures and tax rules and bases depending upon the type of
    telecommunications services. In one jurisdiction, different tax rates
    might apply to telecommunications services provided by traditional wire
    line, cable, Internet, or wireless firms. Companies that offer
    essentially the same services over different technological media often
    are uncertain regarding the appropriate tax treatment of their service.
        These transaction taxes are complex and compliance is costly.
    Telecommunications service companies bear the compliance costs for
    calculating, collecting, auditing and remitting these taxes, and these
    burdens are prohibitive for small telephone companies. More
    importantly, individual consumers pay these exorbitant taxes. Thus, the
    taxes not only impose significant costs and burdens on businesses, but
    they significantly increase the cost of using the telephone in an
    Information Society where citizens who are elderly, poor and shut-in
    must have a telephone.
        Regardless of one's perspective regarding whether telephone service
    should or should not be taxed, or at what rate, I do not believe anyone
    asked to design an interstate telephone tax structure on a blank slate
    would craft the kind of disparate, complicated and costly system we
    have in place now. It's too complex, it's regressive, and it's a drag
    on the telecommunications infrastructure and connectivity in America.
    We can't let that happen to Internet access too.
        But that is precisely the tax structure being proposed by opponents
    of H.R. 49. If Congress does not pass H.R. 49, small independent
    Internet service providers will face the immediate prospect of filing
    dozens or perhaps hundreds of tax returns and remittances each year.
    The large national Internet service providers will face the daunting
    task of filing 50,000 each year. The big ones might be able to hire the
    administrative overhead, accountants and lawyers to manage that task,
    and pass the cost to their customers in higher prices. But many small
    ones would never be capable of competing in such an environment.
        It is imperative that Congress enact a permanent and national
    prohibition against state and local taxes on Internet access to prevent
    Internet access, the industry that provides access to the Internet, and
    the individual citizens who log on the Internet from the detrimental
    effects of a telephone-like tax system.
     why congress should enact a permanent & national prohibition against
                             internet access taxes
        Moreover, there are numerous compelling policy rationales for a
    permanent and national prohibition against Internet access taxes.

             (1) LIt should be the National Policy of the United States to
            promote freedom and ubiquitous Internet access and connectivity
            in America. The economic, social and political benefits are
            great. The potential for individual empowerment is tremendous.
            We should not inhibit the full outgrowth and ubiquitous access
            to the Internet by allowing onerous tax burdens to slow down
            the Internet superhighway. Taxes would inhibit full outgrowth
            in several ways: (1) by increasing the cost to users and (2)
            imposing significant new administrative and regulatory costs
            upon Internet access providers.

             (2) LThe federal government and many state and local
            governments are subsidizing Internet access and broadband
            rollout in many regions of the United States. It would be
            counterproductive to then take back the subsidies through
            burdensome taxation of the very services we subsidized. For
            example, North Carolina has established the North Carolina
            Rural Internet Access Authority. The Authority's mission is to
            wire rural communities throughout North Carolina in partnership
            with local telephone companies. North Carolina has provided
            over $30 million in public funds to support the project. The
            U.S. Department of Agriculture's Rural Utilities Services makes
            direct grants totaling in the tens of millions of dollars to
            wire rural communities and small towns. U.S.D.A. also
            implements the Rural Broadband Loan and Loan Guarantee Program
            Rural Utilities Service (RUS) which, this year, will make over
            $1.4 billion in government-subsidized loans and loan guarantees
            available to companies deploying broadband service to
            communities of less than 20,000 people.

             (3) LSmall, independent and rural Internet Service Providers
            (ISPs) will be at a competitive disadvantage in rolling out
            access across local and state boundaries if multiple state and
            local taxes and their attendant regulatory and compliance
            burdens are imposed. They can't compete with the big national
            ISPs in complying with regulatory and administrative burdens.
            This would reduce choice for rural consumers and force them to
            higher-cost services.

             (4) LAmerica still suffers from digital divides--rich vs.
            poor, urban vs. rural, white vs. black, educated vs.
            uneducated, young vs. old. Taxes will only widen these divides
            at a time when our goal should be to make the personal computer
            and Internet access as affordable and ubiquitous as the
            telephone and television. According to the U.S. Department of
            Commerce's report, A Nation Online (February 2002), large
            disparities remain in Internet usage rates between certain
            classes of citizens. The access gap between citizens with
            incomes over $75,000 versus those making less than $15,000 grew
            from 35% in 1997 to 54% in 2001. The gap between white and
            black citizens expanded from 12% in 1997 to 20% by September
            2001. We still have a way to go to close these gaps. Imposing
            tax burdens that increase consumer costs and reduce competition
            among ISPs would be counterproductive.

             (5) LWe need continuous economic stimulus to spur economic
            activity and investment, especially in the e-commerce and
            technology sectors. A permanent moratorium will be a positive
            signal to investors and Internet entrepreneurs.

             (6) LFailure to extend the moratorium is effectively a tax
            increase on American consumers who have Internet access in
            their homes and offices. An economic downturn is the worst time
            for a tax increase. For example, if Congress lifted the
            moratorium and allowed states and localities to tax Internet
            access pursuant to their telecommunications tax rates, a
            consumer paying $20 per month for Internet access might pay, in
            an average state, an additional $3 per month and $36 per year
            just to log on the Internet.

             (7) LThe federal prohibition prevents double taxation of ISP
            service as well as taxation of the phone and cable lines people
            use to access their ISP. For many consumers, the $36 noted
            above would duplicate taxes already paid for a local telephone
            line.

             (8) LAmerica currently dominates the world market in
            electronic services, software development and digital content.
            We should strive to build on our competitive position even
            further. Tax policy favorable to Internet access and the
            content and information transferred over the Internet is
            critical to maintaining our competitive position in the world
            marketplace. Europe is looking for more ways to tax the
            Internet and the content, software and information exchanged
            over the web. We should resist the European paradigm of
            imposing VAT taxes on Internet service and the content and
            information accessed over the Internet.

             (9) LStates and localities are not currently dependent upon
            Internet access taxes because Congress enacted the moratorium
            in 1998. The few states that enacted access taxes before 1998
            are not heavily dependent upon the revenues. In fact, since
            enactment of the Internet Tax Freedom Act (ITFA) in 1998, many
            states trended away from access taxes. Texas, Connecticut and
            Washington State are good examples. Yet, what we do know from
            experience in the states that enacted these taxes prior to 1998
            is that their tax rules are unclear and difficult to
            administer. Nevertheless, states with Internet access taxes
            have been provided five years of clear notice that national
            policy disfavors these taxes.

            (10) LThere is a general consensus that the federal moratorium
            is sound policy. Congress has passed it twice (1998 and 2001).
            Even in the ACEC, the moratorium on access taxes was not
            controversial. And in the nearly ten years that I have been
            working on policies regarding information technology, the
            Internet, economic growth, electronic commerce and state and
            local taxes, I have never heard anyone articulate a thoughtful
            reason for why a panoply of state and local taxes on Internet
            access would be sound or constructive policy for the people of
            the United States.
                                   conclusion
        The Internet is the most transforming economic development since
    the Industrial Revolution. Information Technology drove America's
    economic boom in the late 1990s, it has buoyed the economic slowdown,
    and it will lead our economic resurgence. It created new jobs,
    increased our National productive and efficiencies in every sector of
    the economy, and generated new wealth in America. Even in rural areas
    long ago ignored by the economic progress in metropolitan areas and
    bypassed by the Nation's huge investment of public resources on the
    interstate highway system, small businesses are prospering by selling
    products worldwide on the Internet and American consumers have been
    able to obtain everything from information and educational
    opportunities to goods and services otherwise beyond their reach. Every
    person on the Advisory Commission on Electronic Commerce recognized
    that our national economy, U.S. global competitiveness, and American
    culture depend vitally upon nurturing full development of the Internet.
        Most importantly, the Internet and the personal computer have
    empowered individual people as citizens in a democracy, as consumers,
    and as entrepreneurs in unprecedented fashion.
        America can embrace these positive developments and promote more of
    it by keeping taxes and regulatory burdens on Internet access to a
    minimum, or it can thwart them by taxing Internet access. I would urge
    Congress to keep tolls off the Internet superhighway by passing H.R.
    49.

        Mr. Cannon. I'd like to introduce now Mr. Harley Duncan,
    our third witness. He's the Executive Director of the
    Federation of Tax Administrators and has been that since 1988.
    Organized in 1937, the FTA is an association representing the
    principal State revenue collection agencies in each of the 50
    States, the District of Columbia, and New York City. The
    mission of the Federation is to improve the quality of State
    tax administration by providing services to State tax
    authorities and administrators.
        Prior to joining the FTA, Mr. Duncan served for 5 years as
    Secretary of the Kansas Department of Revenue. He also held
    positions as Assistant Director of the Kansas Division of the
    Budget, with the South Dakota State government, the Advisory
    Commission on Inter-Governmental Relations, and the National
    Governors Association.
        Mr. Duncan is the author and co-author of a number of
    articles and papers on State and local taxation and public
    budgeting. He's a frequent speaker at State and local tax
    conferences and meetings. Mr. Duncan holds a bachelor's degree
    from South Dakota State University and a master of public
    affairs from the University of Texas.
        Mr. Duncan, welcome and thank you for being with us here
    today.

     STATEMENT OF HARLEY T. DUNCAN, EXECUTIVE DIRECTOR, FEDERATION
                         OF TAX ADMINISTRATORS

        Mr. Duncan. Thank you very much, Mr. Chairman. It's a
    pleasure to be here.
        The policies of our Federation with respect to H.R. 49 or
    the matters covered by H.R. 49 are laid out in the statement
    before you and were adopted by our Members at the annual
    meeting in 2001. I think I'd like to make five points
    relatively quickly this morning with respect to this.
        The first is that while we will raise questions about H.R.
    49 and continuation of the Internet Tax Nondiscrimination Act,
    that should not be interpreted, I think, as an intent to impede
    the deployment of the Internet or to deny anyone the access to
    Internet services. That's certainly not the intent of the
    Federation of Tax Administrators or State governments
    generally. States have made significant efforts in trying to
    aid the deployment of the Internet services and tax
    administrators are probably the leaders in bringing e-
    Government services, so that's certainly not our intent.
        The second point I would make is that raising questions
    about H.R. 49 shouldn't be interpreted that we are in some
    fashion supportive of multiple and discriminatory taxes on
    electronic commerce or on any sort of commerce. The questions
    that we'd raise are simply, is this the correct vehicle for
    doing it and is it the most effective vehicle for doing it, and
    more importantly, does the bill itself provide anything that
    the Constitution doesn't already provide in terms of preventing
    multiple and discriminatory taxes, because that, in our
    estimation, is where the most effective protections and the
    appropriate constraints on State and local taxation exist, is
    in the U.S. Constitution.
        The third point that we would make is this, that as the
    Committee considers extending the Internet Tax
    Nondiscrimination Act, it's an excellent point in time to go
    back and examine whether the purposes that gave rise to the act
    still exist and whether the act is appropriately meeting those
    particular purposes. If you recall, in 1998, there were, as I
    recall, two reasons given for the need to pass the Internet Tax
    Freedom Act. The first was that the Internet was what was
    commonly referred to as a fledgling industry at the time and
    that it needed time to grow up before it would be considered a
    part of mainstream commerce and perhaps subject to the
    impositions of taxes that other forms of commerce are. I think
    the time that in the past 5 years has proved that the Internet
    is not a fledgling industry. While it is subject to
    considerable change, it continues to do well and, in fact,
    outperformed normal means of commerce.
        The second reason given was that States would rush to
    impose a variety of multiple and discriminatory and other types
    of taxes on the Internet. I think that was misplaced and
    misfounded at the time, and one piece of evidence would be
    that, to my knowledge, there's been no single case before a
    court where the Internet Tax Freedom Act or the
    Nondiscrimination Act has been raised as a defense to something
    that the States are involved in.
        As a second matter, I would urge you, if you do extend the
    act, to do so for a temporary purpose, for a period, because
    there are issues that will remain that should be examined
    periodically if the act is put in place.
        The fourth point that I'd make and the one that I'd like
    you to pay particular attention to is the need to examine the
    definition of Internet access that is in the bill and to
    consider changes to it. There are really three issues that are
    created by the current definition of Internet access.
        The first is, it discriminates among certain types of
    providers of Internet access. It said the current definition
    specifically excludes telecommunication services from Internet
    access and that then causes certain telecommunication providers
    that bundle access in telecommunication service providers and
    treats them differently than those who would provide Internet
    service using normal telecommunications.
        The second thing it does is to discriminate against people
    that provide content without access because the access
    definition is so broad that a wide range of content can be
    bundled with it and receive the tax exemption.
        The third problem with the current definition is it allows
    for an erosion, an unintended erosion, of State tax bases
    because of the content that can be bundled with the access and,
    therefore, considered exempt.
        The fourth point I'd make to you is that H.R. 49--or the
    last point, I'm sorry, is that H.R. 49 would repeal the
    grandfather clause that was originally enacted in 1998. We
    would oppose that and encourage you not to do that. Those
    States, it would disrupt the revenue system of those nine
    States, including States such as Texas, Wisconsin, North
    Dakota, South Dakota, Tennessee, and several others. It would
    constitute an unfunded intergovernmental mandate, and there's
    been no showing that the tax on access either reduces the
    utilization of access services or creates any administrative
    burden and we would encourage you not to repeal that
    grandfather originally contained in the bill in 1998. Thank
    you.
        Mr. Cannon. Thank you, Mr. Duncan. We appreciate that,
    those comments.
        [The prepared statement of Mr. Duncan follows:]
                     Prepared Statement of Harley T. Duncan
        My name is Harley T. Duncan. I am the Executive Director of the
    Federation of Tax Administrators. The Federation is an association of
    the principal tax administration agencies in each of the 50 states, the
    District of Columbia and New York City. We are headquartered in
    Washington, D.C.
        The policies of the Federation are established through resolutions
    adopted by the members at the Annual Meeting or by action of the 18-
    member Board of Trustees. The Federation has adopted two policy
    statements relevant to the issue at hand:

             LResolution 18 adopted in 2001 is a general policy
            statement that urges the Congress and U.S. government agencies
            to refrain from enacting measures, taking actions or making
            decisions which would abrogate, disrupt or otherwise restrict
            states from imposing taxes that are otherwise lawful under the
            U.S. Constitution or from effectively administering those
            taxes.

             LResolution 22 adopted in 2001 states that if Congress
            determines to extend the provisions of the Internet Tax Freedom
            Act, it should do so in accord with the following parameters:

               LThe Act should be extended for not more than five
            years to insure that its impact on state and local revenues is
            examined periodically and that unintended consequences are not
            occurring.

               LAny extension of the Act should preserve the
            ability of those states currently imposing a tax on charges for
            Internet access to continue to do so if they so choose.

               LThe definition of Internet access contained in the
            Act should be rewritten in such a manner that it does not
            create avenues to bundle otherwise taxable content, information
            and services into a single package of Internet access in a
            manner that would prevent states and localities from imposing
            their taxes on the otherwise taxable content, information and
            services.

               LThe definition of discriminatory taxes contained
            in the bill should be amended to insure that it does not create
            a situation in which a seller could avoid a tax collection
            obligation in a state even though the seller has a substantial
            nexus in the state.
                              extension of the act
        As a general proposition, FTA opposes federal legislation that
    preempts the authority of states to structure and administer their
    taxes within the confines of the U.S. Constitution unless there is a
    compelling showing of unfairness, compliance or economic harm from the
    manner in which that power is being exercised. The Internet Tax Freedom
    Act was originally passed in 1998 (and renamed the Internet Tax
    Nondiscrimination Act and extended for two years in 2001) to provide
    the new electronic commerce industry with short-term protection from
    what some thought could become a burdensome and discriminatory system
    of state and local taxation. Any consideration of extending the Act
    should be accompanied with a re-examination of this stated purpose.
        We would submit that the ``fledgling industry'' argument is no
    longer relevant. Electronic commerce is becoming a mature and important
    part of the U.S. and international economy. In particular, the
    continued prohibition on the imposition of new taxes on charges for
    Internet access should be evaluated. In our estimation, there has been
    no showing that the purchase or supply of Internet access services in
    the states that tax the services has been adversely affected. Neither
    has there been a showing of an undue compliance burden on Internet
    service providers that would justify the preemption. Continuing the
    preemption simply provides a special position for this particular
    communications medium. As discussed below, the preemption is beginning
    to discriminate among firms in the Internet access and communications
    sector.
        We also believe it is clear that concerns about states rushing to
    impose burdensome taxes on the electronic commerce sector were
    misplaced and unfounded. While states have had to determine the manner
    in which existing taxes should be applied to Internet services and
    electronic commerce, there was no headlong rush to devise new schemes
    of taxation that in some fashion targeted the electronic commerce
    industry. To the contrary, states have worked diligently to provide
    incentives to the Internet service industry and to consumers in efforts
    to increase access to Internet services. To my knowledge, the Internet
    Tax Nondiscrimination has not been used as a defense in a single
    reported case involving the application of state taxes to electronic
    commerce.
        In short, we would urge the Committee to examine closely the
    continued need for a federal law governing the subject matter covered
    by the Internet Tax Nondiscrimination Act.
                               grandfather clause
        H.R. 49 would repeal the ``grandfather clause'' in the current
    Internet Tax Moratorium that preserves state taxes on charges for
    Internet access that were in place in 1998 when the original Internet
    Tax Freedom Act was enacted. The Federation opposes a repeal of the
    grandfather clause.

             LAccording to our records, nine states currently
            impose taxes that are protected--New Hampshire, New Mexico,
            North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington
            and Wisconsin. Repealing the grandfather would disrupt the
            revenue stream of these states at a time when nearly every
            state is struggling to balance its budget. Repealing the
            preemption would constitute an intergovernmental mandate under
            the Unfunded Mandate Reform Act.

               LThe taxation of charges for Internet access is a
            legitimate exercise of state taxing authority and should not be
            preempted. In most of those states currently taxing access, the
            tax is consistent with their overall policy of taxing most (or
            at least a large number of) service transactions. The tax on
            access charges can in no way be considered a ``money grab'' by
            the states, but is instead a simple extension of their existing
            tax policy.

               LThere is no showing that the imposition of taxes
            on charges for Internet access has affected the growth of
            electronic commerce or the Internet industry. Neither is there
            any showing that administration of the tax on charges for
            Internet access has imposed undue burdens on the industry or
            has in any other way proved to be incapable of being
            administered.

               LThe grandfather clause was part of the terms of
            the original Internet Tax Freedom Act. If the other parts of
            the Act are to be continued, there has been no demonstration of
            why the grandfather clause should not be continued.
                         definition of internet access
        The current definition of Internet access has not kept pace with
    the manner in which the electronic commerce has evolved and
    discriminates among various types of Internet service providers. It
    should be amended to insure equity among various types of access
    providers and among types of communications services. It should also be
    amended so as to avoid an unintended erosion of state tax bases.

             LThe Act's current definition of Internet access is
            ``a service that enables users to access content, information,
            electronic mail, or other services offered over the Internet,
            and may also include access to proprietary content,
            information, and other services as part of a package of
            services offered to users. Such term does not include
            telecommunications services.''

             LThe current definition effectively allows a broad
            range of content and other services to be bundled with Internet
            access and potentially be considered as protected under the
            prohibition on the imposition of new taxes on Internet access.
            The range of content and service that can be bundled with
            Internet access is virtually unlimited. It includes all manner
            of printed material, video material, voice communications and
            other services.

             LBy excluding ``telecommunications services'' from the
            definition of access, the act discriminates against some
            telecommunications services providers (particularly wireless
            providers) that provide access as part of a package of
            telecommunications services and therefore cannot exclude a
            portion of the total charge from taxation.

             LFirms that are providing content, voice, video, or
            other services that compete with those provided by Internet
            service providers will face a discriminatory and unfair
            competitive situation if those services when provided as part
            of Internet access are protected from state and local taxation,
            but services provided outside a bundle that includes access are
            subject to state and local taxes. The convergence of
            technologies, the advent of services such as Internet
            telephony, and the consolidation in the communications industry
            suggest that this discrimination will be a real issues ``sooner
            rather than later.''

             LThe current definition allows a growing proportion of
            the state and local tax base to be effectively put ``off
            limits'' by federal legislation with such a broad definition of
            Internet access. We do not believe this was the intent of
            Congress when it originally passed the Internet Tax Freedom Act
            three years ago.

             LBy attempting to provide protection to one industry
            and one type of service provider, Congress has necessarily
            established a regime that discriminates against similar service
            providers that are not also Internet access providers. This was
            perhaps not a major issue when the Act was originally passed
            4\1/2\ years ago. However, with the advent of advanced forms of
            access, the convergence of technologies and the realignment of
            businesses within the communications and entertainment
            industry, the definition of Internet access is on the cusp of
            creating serious discrimination and base erosion issues.

             LCongress must in any consideration of extending the
            Internet Tax Nondiscrimination Act reconsider the definition of
            Internet access to insure that it does not discriminate and
            does create consequences beyond what was intended.
                              suggested definition
        The issue then is how to define Internet access in a fashion that
    achieves the Congressional goal of protecting access to the medium of
    the Internet without being so broad as to create the inequities and
    distortions described above by including all the services and products
    that may be accessed via the Internet. This is a difficult task.

             LOne approach for Congress to consider is a variation
            of the approach taken by the state of Texas, which exempts up
            to $25 of a bill for Internet access (under current law.) We
            would suggest deeming a set dollar amount of each bill from an
            Internet service provider to be attributable to exempt Internet
            access, while the rest of the bill is deemed to be attributable
            to other services that may or may not be taxable, depending on
            the laws of the specific state. Possible language for such a
            provision is available on request.

             LThe only other workable alternative would be to
            require Internet service providers to state separately the
            charges for each particular service sold as part of the access
            package. We believe such an approach could be burdensome for
            the providers and lead to a number of disputes regarding the
            manner in which the charges are disaggregated.

             LIf Congress is not comfortable adopting the
            ``modified Texas approach'' outlined above, we would strongly
            encourage it to establish at the outset some mechanism to
            examine and respond to the issues of bundling and convergence.
            It should, at a minimum, commission an examination of the
            nature of the issue, expected near-term technological
            developments, and alternatives for addressing the issue.
                       definition of discriminatory taxes
        The definition of discriminatory taxes contained in the Act
    provides that certain activities when performed by an Internet service
    provider on behalf of a retailer will not be considered in determining
    substantial nexus for tax collection purposes. Any extension of the
    moratorium should examine these issues carefully.

             LThe provisions were intended to insure that merely
            accessing products of an out-of-state seller via an in-state
            service provider would not be considered to create nexus for
            the out-of-state seller. When enacted as part of a short-term
            moratorium, these provisions were not considered problematic.

             LThe definition, when read in conjunction with other
            provisions, could be interpreted to allow a seller to avoid a
            collection obligation even though it has substantial activities
            and presence in the state. As the electronic commerce industry
            has evolved, the potential for this issue to arise has grown.

             LIf the Internet Tax Nondiscrimination Act is to be
            extended, however, these provisions should be examined
            carefully.
                                   conclusion
             LAny extension of the Internet Tax Nondiscrimination
            should be accompanied by a serious examination of its actual
            consequences and an assessment of whether it is needed in the
            future.

             LThere has been no showing of a reason to repeal the
            grandfather clause. Any extension should preserve the right of
            those affected states to continue to impose taxes on charges
            for Internet access.

             LAny extension of the Internet Tax Nondiscrimination
            Act should include amendments to the definition of Internet
            access that will insure that it is nondiscriminatory among
            types of service and content providers and will not
            unintentionally erode state and local tax bases.

             LAny extension of the Internet Tax Nondiscrimination
            Act should also examine the definition of discriminatory tax to
            insure that it does not have unintended consequences.

        Mr. Cannon. Our final witness is Mr. Harris Miller,
    President of the Information Technology Association of America.
    The ITAA is the largest and oldest information technology trade
    association, representing over 400 leading software services,
    Internet, telecommunications, e-commerce, and systems
    integration companies.
        Mr. Miller leads the ITAA's public policy focus on subjects
    critical to the IT industry and has spoken and published widely
    on a variety of high-tech issues. Mr. Miller is also President
    of the World Information Technology and Services Alliance, an
    association of associations representing 50 high-tech trade
    groups around the world. In addition, Mr. Miller was recently
    appointed to the Virginia Research and Technology Advisory
    Commission.
        Prior to joining ITAA, Mr. Miller gained broad public
    policy experience through his leadership roles in Government
    relations practices, specializing in the areas of immigration,
    high technology, and banking. Mr. Miller also has many years of
    prior Government service, including positions as the
    Legislative Director to former Senator John Durkin, Deputy
    Director of Congressional Relations at the U.S. Office of
    Personnel Management, and as a Legislative Assistant to the
    Chairman of the Subcommittee on Immigration, Refugees, and
    International Law of the House Judiciary Committee, the
    Honorable Ron Mazzoli.
        Mr. Miller holds an undergraduate degree from the
    University of Pittsburgh and a graduate degree from Yale
    University. Mr. Miller, thank you for being here with us today.

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

        Mr. Miller. Thank you, Mr. Chairman and Members of the
    Subcommittee. You said at the beginning you had a very
    distinguished panel today and I was trying to tell that to my
    wife last night, and she said, ``I'm sure that 'my
    distinguished witnesses' were probably one less than you
    think.'' [Laughter.]
        Mr. Miller. Nevertheless, I do appreciate the honor to be
    here with Secretary Kemp, Mr. Gilmore, and Mr. Duncan to
    explore this important legislation, and it's a great honor to
    be here with now-Chairman Cox for his leadership, along with
    Senator Wyden, as you pointed out, Mr. Chairman, on this
    bipartisan legislation, H.R. 49, which ITAA and our 400 member
    companies strongly support.
        Certainly, our major concern is that the Internet not
    become the tax pinata of 2003, that institutions around the
    country, State and local governments desperate for new revenue
    suddenly turn and say, how can we figure out some new sources
    of revenue, and even though Mr. Duncan tried to reassure the
    Subcommittee that there aren't people out there looking to tax
    the Internet by changing definitions or changing laws.
        In fact, just last week, we had--the association and
    another association had to file an amicus brief in Tennessee
    where a State tax official was trying to get a convoluted
    interpretation to a longstanding legislative interpretation to
    begin to tax Internet access charges. And so this is not a
    theoretical problem, Mr. Chairman. This is a real problem.
        I'd also point out that Mr. Duncan said there had not been
    a rush to legislation. Well, I can tell you, in my 8 years at
    ITAA, probably no period was busier than the period right
    before the first Internet Tax Freedom Act was passed in terms
    of our rushing around the country exactly because when Mr. Cox
    and others took leadership on this issue, there were efforts
    throughout the country at the State level and the local level
    to try to get in under the wire and pass new taxes on the
    Internet or Internet access.
        And so I am afraid that if this legislation is allowed to
    expire, in fact, we will have another rush, and I think
    Governor Gilmore was exactly right. Now is the time to move.
    Now is the time to make it permanent.
        Of course, the good news is, as everyone has said, the
    Internet is continuing to expand. Now 150 million Americans--
    150 million Americans--have access to the Internet. Also, as
    Secretary Kemp said, the Internet is one of the crucial drivers
    of economic activity. The U.S. Department of Commerce says that
    fully one-third of all real economic growth in this country
    over the period 1995 to 2000 took place because of information,
    technology, and even though IT businesses represent only 7
    percent of all businesses in this country, 28 percent of real
    economic growth in the late 1990's and into 2001 occurred
    because of the information technology industry.
        Given these numbers, we don't need a crystal ball to
    understand how important the growth of information technology
    and the Internet is. All that we're saying in this legislation
    and all that Mr. Cox and the 88 other sponsors of this
    legislation in the House are saying is, the Internet does not
    deserve special treatment, but neither should it be an object
    of special discrimination.
        Again, as has been said by all the witnesses and by you,
    Mr. Chairman, and by Mr. Cox, all we are talking about is
    ending permanently discriminatory multiple taxes, which even
    Mr. Duncan admitted is not something his organization
    advocated. Now, there's some ambiguity whether this is covered
    in the law, but if there's ambiguity, I would suggest passage
    of this legislation, as Mr. Cox has drafted the bill, making it
    permanent, is exactly the solution we need.
        Secondly, this issue of imposing access to the Internet. As
    Governor Gilmore said quite clearly, new taxes are only going
    to hurt those who can least afford the ability to access the
    Internet. Those are the people who have not yet crossed that
    digital divide and taken advantage of the digital opportunity
    of the Internet, and those were exactly the people that this
    Congress should be encouraging to get on the Internet.
        In fact, every day, Members of Congress are trying to do
    that, especially in broadband. Again, we have widespread
    support, bipartisan support in Congress, for higher adoption
    rates of broadband access. If we start seeing States and
    localities trying to impose new taxes, increasing the cost of
    Internet access and broadband access, we are going to see the
    rate of broadband adoption slow rather than increase, and will
    be in the ironic position of Congress, on the one hand, saying
    we want to promote broadband adoption because it is such an
    economic driver, because it does give people access to e-health
    and e-education and e-Government, and on the other hand saying,
    by the way, in the process of doing so, we're going to make it
    more expensive for you to do that. That is exactly at the heart
    of the Cox-Wyden legislation, H.R. 49, and another reason why
    this legislation must be passed.
        Another point that Mr. Duncan made which I would like to
    respond to is that, somehow, the way the Internet access
    definition is included in this legislation would be
    discriminatory among certain types of companies. Well, I
    represent all types of companies, content companies, Internet
    service providers, telecommunications firms, and believe me, if
    they thought there were discriminatory problems in this
    language, they would be up here speaking to the Subcommittee if
    they though there were real problems. So with all due respect
    to the previous witness's testimony, if there were really such
    a problem as he has tried to posit to this Subcommittee, then I
    think you would be hearing from the companies themselves who
    felt they were being discriminated against rather than just
    hearing from another witness.
        So in sum, this is a critical legislation to drive more
    people onto the Internet. It's critical to prohibit permanently
    both the Internet access charges and the multiple
    discriminatory taxes, and ITAA and its members stand ready to
    work with you, Mr. Chairman, and the sponsors of this
    legislation to see Congress pass this legislation as quickly as
    possible. Thank you very much.
        Mr. Cannon. Thank you, Mr. Miller.
        [The prepared statement of Mr. Miller follows:]
                     Prepared Statement of Harris N. Miller
                                  introduction
        I am Harris N. Miller, President of the Information Technology
    Association of America (ITAA), representing over 400 companies in the
    information technology (IT) industry--the enablers of the information
    economy. Our members are located in every state in the United States,
    and range from the smallest IT start-ups to industry leaders in the
    custom software, services, systems integration, telecommunications,
    Internet, hardware, and computer consulting fields. Together they
    account for over 90% of all IT sales in the US. These firms are listed
    on the ITAA website at www.itaa.org.
        ITAA appreciates the opportunity to express our Association's
    strong support for the legislation being considered today, H.R. 49, the
    Internet Tax Nondiscrimination Act, to extend permanently the tax
    moratorium on Internet access services and, from a tax fairness
    perspective, to preserve a level playing field for companies involved
    in electronic commerce. I commend the Subcommittee for holding this
    hearing today because much is riding on your deliberations. And I
    commend Congressman Christopher Cox (R-CA) and Senator Ron Wyden (D-OR)
    for their continued leadership in this area.
        The good news is that the Internet is strong and growing stronger.
    Over 150 million people in the United States use the Internet, a number
    that has tripled since 1997. According to the World Information
    Technology and Services Alliance and IDC, Internet commerce per capita
    in the U.S. rose from $295 in 1999 to $983 in 2001.\1\ Over 600 million
    around the world now access the Internet, more than twice the number
    just two years ago.
    ---------------------------------------------------------------------------
        \1\ Digital Planet 2002, the Global Information Economy, February
    2002
    ---------------------------------------------------------------------------
        The bad news is that the tech sector has been rocked in the past
    two years and Internet commerce is not growing nearly as fast as anyone
    had predicted, with dotcoms and telecoms at the leading edge of a
    downward plunge in IT spending growth and capital investment. In fact,
    most of the analysis of Internet growth from years ago showed
    predictions that even then were laughable, and now are just clearly
    horribly wrong. Double-digit increases in business spending on IT have
    been cut to single digits and even gone negative in some customer
    sectors. CEOs and CFOs are taking a far more cautious approach to new
    system investments. Technology refreshment cycles are being stretched
    over longer periods. And the pressure to look overseas for better labor
    rates and fatter margins is growing.
        Why should our lawmakers care so much about the health of the IT
    industry? The IT industry has contributed to U.S. economic growth in
    critical ways. According to the Department of Commerce, the IT industry
    accounts for a full one-third of all real economic growth and half of
    all productivity growth between 1995 and 1999. IT has helped the
    economy contain inflation with average annual computer price declines
    of 26 percent between 1995 and 1999. During each of
        the previous eight recessions, productivity growth turned negative.
    During the economic downturn of 2001, productivity growth remained
    robust at about 2%, jumping 5.2% in the 4th quarter of 2001 \2\ and
    continuing at 5.1% in third quarter 2002, in large part due to the
    contribution of IT.\3\ And, while IT-producing industries represent
    only 7% of all businesses, they accounted for roughly 28% of overall
    real economic growth between 1996-2000.\4\
    ---------------------------------------------------------------------------
        \2\ Remarks by Bruce P. Mehlman , Assistant Secretary for
    Technology Policy, United States Department of Commerce, April, 2002
        \3\ U.S. Department of Commerce, Bureau of Labor Statistics recent
    data, www.bls.gov
        \4\ U.S. Department of Commerce, Economics and Statistics
    Administration, The Digital Economy 2002
    ---------------------------------------------------------------------------
        Given these numbers, we do not need a crystal ball to predict that
    the future of the IT industry, the Internet and the U.S. economy
    overall are linked--and that the steps you take in terms of Internet
    taxation will have far reaching consequences for the American people.
        My message is simple and straightforward. The Internet does not
    deserve carve outs or special treatment. Neither does it deserve to
    become the tax pinata of 2003, hit by every revenue starved taxing
    jurisdiction in the country.
        ITAA believes the Internet tax moratorium should be made permanent
    because it promotes across the board fairness, not special advantages
    for one group over another. Contrary to popular belief, the moratorium
    does not affect the ability of states to collect sales and use taxes.
    The Moratorium prohibits states 1) from imposing multiple and
    discriminatory taxes on electronic commerce and 2) from imposing taxes
    on Internet access.
        So, using this same logic, let me partition my arguments into two
    groups: fairness and access.
        If Congress does not act, the situation will revert to where it was
    years ago where different rules could apply based only on either the
    means of delivery of the product (electronic instead of tangible) or
    based on the means in which an order is placed (via an Internet Web
    site instead of by calling a 1-800 number or even over the counter).
    For instance, states would be free to levy discriminatory taxes on the
    on-line delivery of goods, such as ``newspapers,'' which are explicitly
    exempt from sales and use taxes if delivered over-the-counter, just as
    they started to do in the years before the original Act was put in
    place.
        Allowing the moratorium to lapse will also set the stage for
    discrimination in terms of delivery mode. Currently, out of state sales
    conducted by 800 number, mail order or electronic commerce are not
    subject to mandatory collection of sales tax by the merchant because of
    Supreme Court decisions. Rather the consumer is obligated to remit the
    same amount of sales tax directly to the state of the product's use.
    Changing standards for the Internet, which could happen if the
    moratorium is not extended, makes no sense and is not fair. To be
    clear, I am saying that any move to impose taxes must be done in a
    manner that is fair to all parties, regardless of business model or
    delivery mode.
        So how do we accomplish fairness? First, pass the Constitution's
    test for moving forward. Supporting the view of the U.S. Supreme Court,
    ITAA believes that the states must simplify their tax systems and
    provide bright line business activity tax nexus standards before
    seeking the authority to require remote sellers to collect sales tax on
    their behalf.
        Unfortunately, idle hands and lapsed tax moratoria are apt to
    become the devil's work. If H.R. 49 is not enacted to extend the
    moratorium, some state lawmakers could seize the opportunity to
    generate tax revenues with new laws that appear on their face to remedy
    false disparities between online and offline commerce. These laws could
    be challenged in the courts, but that would be a lengthy, confusing,
    and unnecessary process. Recent legislative proposals, for instance,
    would have allowed a ``tax first, simplify later'' approach.
        This approach does not pass Constitutional muster. Any attempt by
    the states to overturn the Quill decision and the Commerce Clause
    proscriptions against undue burdens on interstate commerce by means of
    an act of Congress requires a rebalancing of the new authority. No
    greater disaster could evolve in this debate than for a mandatory duty
    to collect sales tax to be imposed on out-of-state merchants before the
    states have simplified their sales and use tax provisions in a uniform
    manner. The current balance of power would be upset if states were
    allowed to require out-of-state merchants with no physical contacts in
    the state to collect sales tax in the state before the states simplify
    their tax systems and Congress and the Supreme Court deem the
    simplification sufficient to allow this authority.
        States must simplify first, and then seek Congressional approval in
    order to obtain expanded taxing authority. In the interim, keep the tax
    field level for businesses that do not have nexus and, therefore, tax
    collection responsibilities.
        A final note on fairness: States do have the ability to, and in
    fact do, tax remote commerce. This power to tax is called the use tax.
    Sales made in a state by a remote vendor trigger a use tax obligation
    on the purchaser, rather than an obligation on the remote vendor, to
    collect and remit a sales tax. Again, states have the authority to
    collect the use tax from its residents, although it is admittedly a
    difficult tax to widely enforce. In fact, use taxes are politically
    unpopular, technologically challenging to administer, and
    jurisdictionally messy to enforce. Not surprisingly, therefore, states
    rarely enforce their own mechanisms. This is less--not more--reason to
    shift the burden to online merchants.
        The second key reason ITAA supports H.R. 49 is because it
    eliminates the opportunity for states to tax Internet access. Let me be
    clear what we are talking about in this case. We are talking about
    stopping states from taxing the right to access the information
    superhighway, not sales taxes on goods or services purchased via the
    Internet. I emphasize this distinction because too often insufficient
    attention is paid to these two different ways of ``taxing the
    Internet.''
        Taxing Internet access is bad public policy for a variety of
    reasons:

             LAlthough doing so effectively raises the costs for
            all income levels, it would inhibit Internet use by those least
            able to pay, thus hurting efforts to bring Digital Opportunity
            to all Americans, regardless of income.

             LInternet access is what is referred to as an enhanced
            information service, built on top of existing
            telecommunications infrastructure, a key distinction long
            recognized by the Federal Communications Commission. Internet
            Service Providers and the consumers that use them already pay
            taxes for their use of telecommunications services. For the
            consumer, those taxes paid by their ISP are buried in the fees
            they pay the ISP. Taxing Internet access would force consumers
            to pay taxes twice--once for the basic telecommunications
            service and once for the enhanced information service.

             LBy taxing access and thereby raising the cost of
            Internet service, lawmakers risk suppressing demand for
            broadband and network-enabled innovations at the edge of the
            network. ITAA believes, and this view is widely shared in
            Congress and in the Administration, that every dollar invested
            in broadband use delivers a substantial contribution to the
            economy, expressed in terms of new capital spending,
            productivity gains, next generation products and services, new
            business models and employment. It would be ironic indeed if
            this Congress, which is rightly so focused on expanding
            broadband usage in our country, which lags well behind other
            countries such as Korea, would allow the creation of a double
            taxation system that would inhibit broadband adoption.

        As it should be, the attention of most Americans today is on the
    War in Iraq and homeland defense. In the midst of these headline-
    grabbing events, we must not lose sight of the fact that the U.S.
    economy must be defended. Part of this strategy must involve the
    digital economy and the threats that it faces from multiple and
    conflicting taxes, excessive overhead burdens, jurisdictional bedlam,
    and discrimination. By passing the Internet Tax Nondiscrimination Act,
    Congress has the opportunity to nurture the nation's high tech future
    while preserving a level playing field for business competitors and tax
    fairness for consumers.
        We urge you to do so. Thank you very much.
                                   about itaa
        The Information Technology Association of America (ITAA) provides
    global public policy, business networking, and national leadership to
    promote the continued rapid growth of the IT industry. ITAA consists of
    over 400 corporate members throughout the U.S., and a global network of
    49 countries' IT associations. The Association plays the leading role
    in issues of IT industry concern including information security, taxes
    and finance policy, digital intellectual property protection,
    telecommunications competition, workforce and education, immigration,
    online privacy and consumer protection, government IT procurement,
    human resources and e-commerce policy. ITAA members range from the
    smallest IT start-ups to industry leaders in the Internet, software, IT
    services, ASP, digital content, systems integration,
    telecommunications, and enterprise solution fields. For more
    information visit www.itaa.org.

        Mr. Cannon. We'd like to move to a period of questions, and
    again, we'll be very careful about the clock.
        If I might ask all three of you the same question to begin.
    We live in a fairly complex environment where any CEO,
    especially of a high-tech company, who is persecuted and
    troubled by many things today, has a complicated analysis for
    anything he does. But it seems to me that clarity on this issue
    would have a disproportionate effect on the robustness or the
    aggressiveness of high-tech communities. In other words,
    recognizing the Government is going to get out of the way of
    innovation on the Internet, at least in this particular, would
    seem to me to be a fairly substantial element in the decision
    making of most CEOs of the many, many high-tech companies we
    have in America.
        Would the three of you respond to that, starting, Mr.
    Duncan, if you wouldn't mind, with you.
        Mr. Duncan. Certainty, of course, always adds and improves
    the ability of one to make economic decisions. I think if we're
    talking--if we're talking specifically, though, however, about
    the potential for taxes on charges for Internet access, I think
    that the role that might play in the decision of a CEO in a
    high-tech firm is relatively modest. That's that the charge--
    the tax would be on the charge that goes to the consumer and
    that's paid by the consumer, and while it raises the overall
    cost of service, the impact on his decisions is relatively
    modest.
        Mr. Cannon. Would it not--take both pieces of this, which
    is the access charge and also the nondiscrimination and
    nonduplicative charges. Don't you think that would have an
    effect on most CEOs as they're looking at how they're going to
    perform and the environment in which other companies are also
    performing?
        Mr. Duncan. The nondiscrimination piece, I think, really
    would have two points to make. Most of the pieces and
    descriptions of what constitutes a discriminatory tax, again,
    are related to consumer taxes and the potential of products
    that might be purchased using e-commerce services. So I think
    the impact there is relatively modest, and as I tried to point
    out earlier, the confines and constraints imposed by the U.S.
    Constitution currently provide----
        Mr. Cannon. Let me just go back to the--isn't one of the
    problems here that it's a little complex and most CEOs don't
    want to sit down and figure this whole thing out about the
    difference between the various elements here and giving them
    clarity--if you could answer that briefly, then we'll shift to
    the other two.
        Mr. Duncan. It's a complex world. To the extent that things
    can be clarified, people make better decisions.
        Mr. Cannon. Thank you. Mr. Miller, would you like to
    address that?
        Mr. Miller. I agree with you 100 percent, Mr. Chairman,
    that what CEOs are looking for is clarity and certainty. Let's
    put yourself in the shoes of an ISP CEO, small ISP. There are
    several thousand ISPs in this country. We think of only the big
    ones that we see advertised on television, but the reality is
    the ISP community is very diverse and many of them are very
    small companies. Obviously, having uncertainty about whether or
    not there are going to be Internet access charges makes their
    business model more difficult, so in their position, you're 100
    percent right on the mark.
        Mr. Cannon. And more difficult to fund.
        Mr. Miller. Absolutely, more difficult to fund. Similarly,
    with small businesses that are trying to decide whether to go
    to the Internet and sell products over the Internet, as long as
    they're concerned about multiple and discriminatory taxes being
    levied in various jurisdictions around the country, that makes
    a decision as to whether to invest in setting up an expensive
    website where they're trying to promote themselves on the web
    that much more difficult.
        So I think Governor Gilmore said it well earlier. The one
    region of the world that's trying to tax both the Internet
    access and products on the Internet is Europe, and what we're
    finding in Europe is low adoption rates of the Internet and low
    rate of purchases over the Internet. So what we see is when you
    tax this both access and sales across the Internet, you
    discourage use of the Internet rather than encourage use of the
    Internet.
        Mr. Cannon. Thank you. Governor?
        Mr. Gilmore. I think Mr. Miller has put it exactly right,
    but I think that the foreseeability issue is significant.
    People who wish to create tax revenues are very creative people
    and they'll think about lots of different ways that they can do
    this and all the different localities and different States and
    localities are going to try to do different things and it's
    going to create kind of a mess, frankly, that will be a burden
    not only on consumers, but on the businesses that are trying to
    perform the kind of service. They could decide that they want
    to do e-mail message taxation. They could decide they could do
    bits and bytes taxation or webpage taxation, online information
    taxation, you know. And frankly, all this stuff has been
    proposed and nothing stands in between the creativity of the
    taxer and the poor consumer other than H.R. 49.
        Mr. Cannon. I'll tell you what, it is my experience that a
    mess tends to stand in the way of any kind of investment, that
    the creativity of taxing agencies, I hope, is only exceeded by
    the creativity of the American people, and I would certainly
    like to see a clear path.
        The Chair now yields 5 minutes to the gentleman from
    Massachusetts, Mr. Delahunt.
        Mr. Delahunt. I thank the Chair for yielding.
        If I was correct, Governor, you indicated that some of
    those States that had benefitted from the grandfather provision
    in terms of the application of access taxes had, in fact,
    repealed them. Did I hear you mention the State of Washington?
        Mr. Gilmore. The information that I have is that Tacoma had
    been putting on some additional taxes and that the State of
    Washington reversed that through some State legislation.
        Mr. Delahunt. Okay, and there were other States, I think,
    that you referenced in your opening remarks.
        Mr. Gilmore. Texas and Connecticut, I believe.
        Mr. Delahunt. And I think my memory is that the term you
    used is that the trend is in the other direction, in other
    words, repealing at the State level though existing access
    taxes to the Internet. And while I can appreciate your concern
    and that of Mr. Miller in terms of the efforts to impose access
    charges, I think the reality is that the evidence indicates
    otherwise according to your testimony. I mean, obviously, since
    the moratorium, there has not been any additional effort to
    impose access charges to the Internet.
        Are there any States, and I understand that they have their
    fiscal concerns right now, and maybe, Mr. Duncan, you can
    answer this question--are there any States that you're aware of
    that have under consideration, in the event that this
    moratorium should expire, would impose access taxes on the
    Internet? Mr. Duncan?
        Mr. Duncan. I'm not aware of any that would contemplate
    doing so in the absence of the moratorium, but then, I wouldn't
    have perfect knowledge about that, either. I'm not aware that
    there are. You're correct. There have been--Connecticut is one
    State that repealed its tax on access charges.
        Mr. Delahunt. Mr. Miller, you look like you want to
    respond.
        Mr. Miller. Mr. Delahunt, my hypothesis is that that was
    then and this is now, by which I mean 3 years ago when a lot of
    these repeal decisions were made, States and localities were
    relatively flush because of the strong State economy. As we
    know today, unfortunately, 45 out of 50 States, I believe, are
    running deficits, some of them huge deficits, and so tax
    commissioners and legislators, as Governor Gilmore and
    Secretary Kemp indicated, are trying to be very creative, and I
    understand that. They have to figure out new sources of
    revenue.
        Again, we have the situation in Tennessee that we're
    involved in with this amicus brief where this issue has been
    debated over and over again----
        Mr. Delahunt. But that's on the definition issue, is that
    correct?
        Mr. Miller. But Tennessee was one of the States exempted.
    They kind of quieted down for a couple of years, but now,
    because they're facing a State fiscal crisis, they're back
    revisiting the issue again. And again, it's not that I don't
    understand the pressures these States face, but the reality----
        Mr. Delahunt. Can sympathize with them, obviously.
        Mr. Miller. Obviously, it's a problem that they're having.
    But to turn to the Internet access and make Tennessee as one of
    those States that would suddenly have Internet access charges,
    I think is unfair to the consumers in Tennessee.
        Mr. Delahunt. Governor Gilmore, there are a number of
    governors that don't share your particular position on this
    issue. That's a fair statement.
        Mr. Gilmore. Yes. Many have been defeated. [Laughter.]
        Mr. Delahunt. Which ones have been defeated, Governor? Were
    they Republican or Democratic governors that were defeated?
        Mr. Gilmore. Oh, no, bad tax policy extends to both
    parties, I can assure you. [Laughter.]
        Mr. Delahunt. I'll accept that.
        Mr. Gilmore. You know, I guess my kind of--if I can add
    anything to the discussion, Mr. Delahunt, it would be that if
    there's a sense that the trend, in fact, is against this kind
    of taxation, and the moratorium has been fairly
    uncontroversial, then there's just no harm in going on and
    making it permanent. It looks like we're all agreeing here.
        Mr. Delahunt. Well I----
        Mr. Gilmore. And the grandfather, too. There's no reason
    why people should clutch to these grandfather clauses if, in
    fact, the trend is away from it.
        Mr. Delahunt. I think that's a valid observation. At the
    same time, really, I think what we're talking about here is
    that there are many at the State and local level that feel that
    there is a clear nexus, if there isn't pressure in terms of
    resolving the sales tax issue--that's really what we're walking
    around here--that nothing is going to happen.
        Let me put it right out there, and let me start with Mr.
    Duncan and I'd welcome comments from Governor Gilmore and Mr.
    Miller. What's the progress of the, let me use the acronym, the
    streamlining project, the SSTP, and what can we look forward to
    in terms of resolution?
        Mr. Duncan. First, just one word on the access charge. The
    issue is really the right of State elected officials and
    legislators to choose--legislators and governors to choose
    whether they want to impose the tax on services and whether
    it's consistent with their policy and it's not just a matter of
    which way the tide is going.
        With respect to the streamlined project and the
    simplification, what we had, the point where we are is this,
    that in November of last year, delegates from some 30 States
    adopted the provisions of an interstate sales and use tax
    agreement that provides for some substantial simplification in
    the manner in which current sales and use taxes are
    administered and collected by the retailers. There are
    provisions about uniform definitions, provisions about safe
    harbors for retailers, provisions imposing the obligation on
    States to provide information to those retailers.
        We're now in the process where the implementation of that
    agreement and the detailed changes necessary in State laws are
    being deliberated in State legislatures. To this point, there
    have been six States that have adopted all, or, I would argue,
    substantially all of the provisions that are necessary to
    implement that agreement. Consideration is being given in
    probably at least a dozen others. We would expect by the end of
    the summer to meet a threshold that is contained in that
    agreement of having at least ten States that have passed it and
    that those ten States would represent 20 percent of the
    population of those States with a sales tax.
        So I think it's really been remarkable progress in terms of
    getting the detailed law changes necessary at the State level
    to really simplify administration of the sales tax.
        Mr. Miller. I would agree, Mr. Delahunt. I think that it's
    making very strong progress, and recently, Chairman Cox's
    State, California, announced that it was going to join as an
    observer in this project for the first time, and obviously,
    given how large California is and what a large part of the
    economy, that's a major step forward.
        Again, ITAA is not arguing, and the Chairman already said
    he is going to have a separate hearing on sales tax later on,
    so I'm not trying to preempt that hearing, but ITAA is not
    saying that Internet tax should get--Internet products should
    get favorable treatment as opposed to something you order
    through a 1-800 number or something you send in something from
    a mail order catalog. All we're saying and all the legislation
    is saying is you can't have multiple or discriminatory taxes.
        So if this project moves forward to a successful conclusion
    and deals with the constitutional issues that were raised in
    the Quill decision and previous decisions, ITAA has no
    objection to that solution. But again, this legislation that
    Mr. Cox has narrowly crafted to deal with the issue of Internet
    access charges and multiple and discriminatory taxes, we
    believe is a separate issue, and as Governor Gilmore said, this
    Congress could pass that legislation without impacting one way
    or another the progress made by the State simplification
    effort.
        Mr. Cannon. Did you want to address that, Mr. Gilmore?
        Mr. Gilmore. I concur with Mr. Miller. There will obviously
    be a debate on this subject if they're ever able to get
    together any kind of critical mass of any kind. It's
    interesting that sort of the bar they've raised is that if 20
    percent of the sales tax States could impose a regime even on
    those who don't have a sales tax, well, it's just kind of
    strange, but that's going to be later. That's the sales tax
    debate that's going to be so interesting later on in the year,
    which I will try to avoid if I can.
        But that's not what we're talking about today. The issue
    today is a very simple one, and that is a very uncontroversial
    issue about not allowing the access to this by people and
    citizens all across the United States to be burdened, and this
    is the easy part, so we should move ahead.
        Mr. Cannon. Thank you, Governor.
        Mr. Carter, do you seek time?
        Mr. Carter. Thank you, Mr. Chairman.
        Mr. Cannon. The gentleman is recognized for 5 minutes.
        Mr. Carter. Thank you.
        Mr. Cannon. Would the gentleman suspend for just a moment?
    We wanted to acknowledge the presence of Mr. Watt, appreciate
    his being here. Thank you.
        Mr. Carter?
        Mr. Carter. When you're back home in town hall meetings,
    you have people raise--the bricks-and-mortar people raise the
    issue that we're creating a tax-free haven by the Internet.
    Could I get comment from all three of you about that? Do you
    feel that's a valid complaint?
        Mr. Miller. Mr. Carter, it's not accurate. I can understand
    the frustration of some small business people, but that is not
    accurate. Again, for over three decades, this issue has been
    treated through the courts and put in a major decision in 1992
    which Mr. Gilmore referenced in his statement, the so-called
    Gilmore decision--I mean, the so-called Quill decision--v.
    North Dakota. And it's not because of the Internet, it's
    because of remote sales, and remote sales started back in the
    19th century in this country. It's nothing that started
    suddenly in 1995 when the Internet came along. In fact, as much
    as Internet sales have grown, it is still much smaller than
    sales catalogs and 1-800 numbers. Yes, it's continuing to grow,
    but it's still much smaller than that.
        Certainly, for certain purchases individuals make on the
    Internet, you do pay taxes. For example, if you order an
    airline ticket over the Internet, which is a Federal
    standardized set of rules for taxes, you pay the Federal tax on
    that ticket, just as if you walked into a ticket agent or just
    as if you bought it from your travel agency or just as if you
    bought it at the airport.
        So all that the Cox legislation is saying is, no
    discriminatory taxes. If, as Mr. Delahunt's questions were
    suggesting, the States were able to solve the Supreme Court
    decision on the Quill decision, then the Internet goods and
    services sold over the Internet by remote sellers, just like 1-
    800 numbers, just like mail order catalogs, will be taxed. But
    the Internet didn't create this. This was created by a clear
    constitutional decision by the Supreme Court that unless there
    were a simplified taxing system so that you didn't have 7,500
    different jurisdictions--which is what we have now--with their
    own set of rules and regulations, that was unfair to small
    businesses, that was unfair to people trying to sell to
    customers out of State.
        And so the States have been on notice for a long time that
    they need to solve this problem. As Mr. Duncan said, and I
    agree, I think they're making some progress now, but it should
    not be attributed to the Internet in any way, shape, or form.
        Mr. Carter. Would anyone else like to comment?
        Mr. Gilmore. Well, I think that's right, Congressman. We
    don't really ask bricks-and-mortar retailers to inquire of the
    person standing at their cash register what State they're from
    and then try to look up in some book someplace and apply some
    tax, and then send it up to the main office and send it in. We
    don't do that, so I think this is a reasonable way to approach
    it.
        But today, once again, this is really just about sort of a
    different issue, and that's the question of whether or not
    we're going to impose taxes on coming through the door. We
    don't impose taxes on people going through the door of stores,
    either, and that's really what--all we're really talking about
    here today.
        Mr. Duncan. I think the perception of the people back home
    and those people that are main street retailers is very easy to
    understand. I mean, they're in the business of trying to sell
    goods to people and people that sell remotely are trying to
    sell the same goods to those same people. One has a tax
    collection obligation. The other doesn't have the tax
    collection obligation for reasons that the Court put forth and
    that you've heard.
        I think the message when the States have come and said, we
    ought to remove that differential, is that we're not going to
    remove it until the States simplify their tax collection. We've
    heard the message. We've understood it. We spent 3 years now, 2
    years-plus, working with the retail community to understand
    where the complexities are and what ought to be done to
    simplify it, and I think we're coming close to the time where
    we can put a plan of action into place and actually have a
    simplified agreement.
        I agree with the Governor and Mr. Miller. This debate is
    not about that particular issue, but we will be back here with
    an up-and-running simplified system that will say, you told us
    to go simplify. Here it is and here it works.
        Mr. Carter. But that's addressing the sales tax issues
    we're talking about.
        Mr. Duncan. That's right.
        Mr. Miller. Also, Mr. Carter, if I could make one more
    observation--again, I don't want to preempt the Chairman's
    future hearing on the sales tax, but I do believe Texas is one
    of the many States that does have a use tax. And, in fact,
    there was a story last year, if I remember, some State official
    was caught out because he had not paid a use tax on a fairly
    substantial purchase he had made. I don't think he bought it
    over the Internet, I think he bought it through another means
    of remote seller.
        So at least theoretically, every consumer who buys things
    in most States of the Union, including Virginia, where I live
    and Governor Gilmore's State, theoretically, the consumers, if
    they don't pay a sales tax, are supposed to pay a use tax. Now,
    the reality is that most States don't educate consumers about
    this. They don't go out and actively promote it, and, of
    course, consumers don't even know about it, or if they do, they
    don't pay attention to it when they file their State income
    taxes.
        But the reality is, it is supposed to be a level playing
    field to that extent. The Supreme Court did not outlaw use
    taxes for products bought remotely because the theory was the
    consumer knows what the State sales tax is and should be able
    to pay it. What they outlawed in the Quill decision, they said
    was unconstitutional, was requiring some small business person
    in a remote State who doesn't have any physical location in the
    State where the consumer lives to figure out what the State tax
    rate is or local tax rate is.
        Mr. Carter. Thank you. Mr. Chairman, I'll ask unanimous
    consent to extend my time for 5 minutes so that I can yield to
    Mr. Cox.
        Mr. Cannon. Without objection, so ordered.
        Mr. Carter. I yield my time to Mr. Cox.
        Mr. Cox. Thank you, Mr. Carter. Thank you, Mr. Chairman. I
    want to again thank our panel for being here today, in
    particular for your focus on what I think is a general area of
    agreement. Governor Gilmore, Mr. Kemp, Mr. Duncan, and Mr.
    Miller all told us that, representing your own positions or the
    groups for whom you were speaking, there is no proponent on
    this panel for multiple and discriminatory taxation for the
    Internet. I'd give anybody a chance to correct that record if
    I've mistakenly stated it, but that's my understanding, that
    there is no proponent of multiple and discriminatory tax on the
    Internet now or in the future.
        Mr. Miller. That is correct.
        Mr. Cox. And that being the case, I think we have
    essentially licked 90 percent of this battle. I think that
    there are significant differences, certainly between Mr.
    Duncan, the organization that you represent, and others on this
    panel, concerning the ultimate policy choice of how you would
    tax sales on the Internet and the degree to which Congress has
    a role in this. I know, Mr. Duncan, that your view is that
    Congress, or rather more specifically, your group's view, the
    Federation of Tax Administrators' view is that Congress should
    not pass any statute that in any way, whether we're exercising
    our interstate commerce authority or not, that in any way
    interferes with any State's ability to collect any tax. That is
    how I read Resolution 18 that you've adopted, is that correct?
        Mr. Duncan. That's correct. Our general proposition is that
    the Constitution provides the confines and constraints on State
    and local taxation and that absent some compelling showing that
    that's not working, that Congress should refrain.
        Mr. Cox. Now, you don't suggest that there's anything
    unconstitutional about the Internet Tax Freedom Act or the
    Internet Nondiscrimination Act? You wouldn't challenge its
    constitutionality, would you?
        Mr. Duncan. I'm not challenging it, no.
        Mr. Cox. Okay. That's--so the real question for Congress is
    where should we exercise our interstate commerce authority, and
    the reason that we chose to do so here is not so much the
    fledgling industry argument, but rather two things. First, the
    pervasiveness of the Internet and the degree to which it
    enables so many different things in so many different ways
    throughout both the commercial and non-commercial sectors of
    our economy. It is the most essential of essential
    infrastructures in the information age.
        And second, the degree to which its unique packet-switched
    architecture subjects it to multiple taxation in ways that we
    haven't seen with any other goods or services subject to
    similar tax regimes.
        So we had, prior to the enactment of this legislation, we
    had at least some tax administrators, some witnesses from
    various States claiming that they were going to tax
    transactions where neither the buyer nor the seller was in
    their State, but the transaction was routed through a server
    located in their State. These are unique questions, and it's
    for these reasons that Congress decided to occupy this field.
        That leaves us, then, with this question of Internet access
    taxes and particularly the grandfather that you raised, Mr.
    Duncan. My latest information is as follows, that the States
    that currently tax Internet access are North Dakota, South
    Dakota, Tennessee, Wisconsin, Ohio, and Texas, and, in fact,
    that CRS--I have conflicting reports on this. As of March 2003,
    CRS tells us that Connecticut has no such tax, Iowa has no such
    tax, even though they did back in 1998, that South Carolina has
    no such tax, that the District of Columbia has no such tax.
    They've all gotten rid of theirs since 1998.
        Let's see. The last information I have is that AOL, the
    largest ISP in the country, does not collect taxes in any
    State, suggesting that no tax is imposed lawfully on Internet
    access anywhere in the United States of America, the reason
    being that the original law stated that a tax, in order to be
    grandfathered, had to be generally enforced and actually
    imposed prior to 1998, and, of course, none of these States has
    a statute on the books that taxes Internet access. What they've
    done is they've gone back and reinterpreted old
    telecommunications tax laws or something to apply in the future
    to Internet taxation, and they weren't doing this prior to
    1998, prior to the enactment of the law.
        So, in essence, we have no States in America that have
    lawfully imposed an Internet access tax since the enactment of
    this moratorium. That's my understanding. I don't know if
    anybody wants to comment on that, and I think I've run out of
    time, but I would yield to Mr. Coble if I have any time left.
        Mr. Miller. My only comment would be, Mr. Chairman, we
    agree with you, that there was no legislation passed. It was
    creative tax administrators coming up, and as I said, we're
    fighting this battle in Tennessee.
        The second point, again, I think the Subcommittee is very
    aware of it, but it's probably just worth restating. People who
    access the Internet do pay taxes, Federal, State, and local,
    because they use telecommunications services. The Internet
    rides on telecommunications services. Access to the Internet
    for most people is through telecommunications services and that
    does generate revenue for the Federal Government, the State
    government, and local governments.
        So the idea that somehow there is no taxation involved in
    getting access to the Internet is simply untrue. And, in fact,
    one of the items which is driving telecommunications use in
    this country is, in fact, use of the Internet. We're now
    having, of course, wireless is growing dramatically. The
    wireless providers are trying to provide through their wireless
    devices Internet access. Well, the more you use wireless,
    again, every tax bill you get from your wireless provider has
    taxes on it.
        So the idea that there's no correlation between this
    expansion of the use of the Internet and revenue is simply
    false. It's just that you cannot, under your legislation,
    independently have double taxation by taxing Internet access
    and telecommunications.
        Mr. Cox. In fact, the national average of
    telecommunications access taxes is 18 percent of retail.
        Mr. Duncan. I just have to take exception to the statement
    that there's no lawfully imposed tax on charges for Internet
    access. I think the list of States that you had, we would agree
    with. We would add two others. Washington taxes gross receipts
    of the Internet service providers under its business and
    occupation tax, and New Hampshire imposes a communications
    services tax that picks up some providers of Internet access.
        The States that impose the sales and use tax, including
    Wisconsin, Tennessee, North Dakota, South Dakota, New Mexico,
    have done so under their statutes that either, in one of three
    ways: it was considered part of telecommunications, it was
    considered an information service that had been made subject to
    the tax, or you have situations such as in Tennessee--I mean,
    excuse me, New Mexico and South Dakota where all transactions
    are subject to tax regardless of whether they're a sale of a
    good or service unless they're specifically exempted. Those
    States, to my understanding, do impose the tax on charges for
    Internet access. They did so in 1998. It was known to the
    providers, and they continued to collect them.
        Mr. Cannon. Thank you. Ms. Baldwin?
        Ms. Baldwin. Thank you, Mr. Chairman. I want to express my
    appreciation to the witnesses for sharing their time and
    expertise.
        I wanted to pursue two lines of inquiry in our brief time.
    As you know, Wisconsin is one of the States that is
    grandfathered under current law and the State taxes Internet
    access as part of its 5 percent sales tax. It's my
    understanding that this tax is applied equally regardless of
    type of Internet service, cable, DSL, or dial-up.
        Governor Gilmore, you and others have made arguments that
    the ban or moratorium on Internet access taxes has encouraged
    growth in people's access to the Internet and, conversely, that
    such taxes constitute a barrier to access, and I'm hoping that
    you might be able to provide me with some quantifiable evidence
    to support that contention, and I ask because the evidence that
    I've seen as it relates to my home State of Wisconsin does not
    support that conclusion.
        Let me share with you today that in 1998, when the
    moratorium was first imposed, according to the U.S. Department
    of Commerce data, 26.2 percent of American households had
    Internet access, and in that same year, Wisconsin had roughly
    25.1 percent access, which is within the survey's margin of
    error. By 2001, access had grown to 50.5 percent of American
    households, and in Wisconsin, 50.2 percent of Wisconsin
    households had Internet access.
        And we don't just have to confine our examination to
    Wisconsin. Some of the other States, North Dakota was below the
    national average in 1998 despite their access tax. They reached
    the national average by 2001. Tennessee was 5 percent below
    national average in 1998 and has risen to 3 percent below in
    2001. And so I'm hoping you'll be able to address that.
        I want to quickly leap to my second line of inquiry and
    then let you respond. The other point I wanted to make was also
    raised by Mr. Duncan in his testimony and it goes to that
    definition of Internet access. The definition includes the
    clause, and I quote, ``access to proprietary content
    information and other services as part of a package of services
    offered to users,'' and I'm concerned that this very broad
    definition will allow a telecommunications company to engage in
    an inappropriate type of bundling of services with the sole
    purpose of evading appropriate tax under the law.
        I don't know if this is a plausible example or not, but
    we'll ask you that question. I'll give you an example of what I
    think would be plausible.
        Suppose an Internet provider put together a law firm
    Internet service package. The Internet provider as part of the
    package includes their proprietary content that's the
    equivalent of LEXIS/NEXIS, their own search engine on the U.S.
    Code, and other content that would be quite expensive if
    purchased separately. It seems to me that bundling these things
    tax-free would be permitted by this definition, and Mr. Duncan,
    I wonder if you foresee this type of problem or if you have
    any--and/or if you have any suggestion for our Committee in
    tightening up this definition.
        I don't know if you want to take it in order, Governor
    Gilmore?
        Mr. Gilmore. Congresswoman Baldwin, we'll just have to take
    a look at the good work you've done with respect to your
    statistics and information and just take a look at that and
    make it available. We really don't know, do we, I guess, what
    the difference is between Wisconsin and, say, Texas or Virginia
    or Florida. I think we're really trying to look at people out
    there who are of very limited means, in distressed situations,
    and we probably ought to look at that category of people in
    Wisconsin and see how it has affected them, and the same in
    Florida and the same in Virginia for a national policy.
        It may be that Wisconsin is of a demographic position to
    continue to grow their access because of the favorable economic
    situation of the individual citizens of Wisconsin. It would not
    replicate itself in States with disadvantaged populations.
    That's something, I think, that's reasonable to look at.
        Mr. Miller. I would just add, Ms. Baldwin, that 94 percent
    of American households have access to telephones, but only 50
    percent have access to the Internet. We want to get to 94
    percent, and I would echo the point that Governor Gilmore made.
    If adding the cost is discouraging people of modest means from
    gaining access to the Internet, and various research has shown
    that, in fact, cost is a major factor in the decision of
    whether or not to get Internet access, it seems to me Congress
    wants to be discouraging, making it more expensive by adding in
    access charges. The first 50 percent is the easy part, in a
    sense, upper income and middle income. When we get to people of
    lower socio-economic status, we want to make that as
    inexpensive as possible.
        Ms. Baldwin. Mr. Duncan?
        Mr. Duncan. Just a word here. We've heard several times
    today that there's no desire to provide special treatment to
    the Internet, but a Federal law that prohibits taxes on
    Internet access is exactly that. It is special treatment for
    the Internet. One could list another host of transactions in
    goods and services that ought to be available to all households
    and reach the 94 percent level, but those probably have tax on
    them. The question is, are you going to prevent taxes on those
    at the same time you would Internet access?
        But let me--your bundling question, I think, is exactly on
    target, and that's one of the points that we've tried to raise,
    is that the definition that was devised in 1998 worked then for
    what we knew about Internet access at the time. It's been five
    very rapidly changing years in that business and we think that
    the 1998 definition deserves to be revisited, and one of the
    key issues is exactly this.
        It would be hard to think about a service that couldn't be
    bundled in with access and fit within the definition that's
    currently in the law, whether that's a data service, a voice
    service, or a video service, and the idea that one could put
    together, you know, lawyers.net and package access and that
    package of services, sell it to that particular clientele and
    call it all access and say we can't unbundle it, I think is a
    very real concern, and that has two issues to it. One, it
    erodes the base of a State that might tax information services,
    and the second is, it discriminates against those that are
    trying to sell those very same content services but not
    bundling with the access, and that's why we'd argue that you
    ought to look at the definition.
        We have wrapped ourselves around the axle several times
    trying to devise a definition. One approach that we have
    considered and would suggest that's worth consideration is the
    Texas approach, which says if it's Internet access, the first,
    I believe the current law is $25, is exempt, basically saying
    this is some core level of access that we're willing--that that
    would be exempt in Texas. But if you get above that, then you
    must be bundling content. We tax information services, and that
    part above $25 is considered taxable unless there's a
    demonstration that it's somehow not a taxable information
    service.
        That has some merit that we would suggest that you look at.
    There are probably other approaches and some other issues
    beyond the content bundling that need to be examined, as well.
        Mr. Cannon. The time of the gentlelady has expired, but Mr.
    Miller, would you like to briefly address that, since he
    addressed the question to all three of you?
        Mr. Miller. Again, we have today bundled services available
    through many Internet service providers. I think that Ms.
    Baldwin's case is an interesting one, but it's a business-to-
    business situation. I don't think any of these are consumers
    who are interested in lawyers.com or LEXIS/NEXIS access. That's
    something normally that a business or a law firm would be
    interested in.
        What we're talking about is average consumers and the kind
    of services that are provided or put together in very simple
    packages, and if that encourages more people to use the
    Internet, that's something, again, we should be trying to
    encourage, particularly for the have-nots, the other 50 percent
    of the population who have not yet chosen to get on the
    Internet, which is what we in the IT community are really
    interested in.
        I've already got all the Internet access at my house. I've
    got one, my wife's got one, both kids. The dogs don't get any.
    We're worried about the other 50 percent of the population and
    that's where our future growth is, Mr. Chairman, and we want to
    make sure that that's as easy and affordable as possible for
    consumers so we get up to the telephone level penetration of
    our country.
        Mr. Cannon. Thank you, Mr. Miller.
        Does the gentleman from North Carolina seek recognition?
        Mr. Watt. Thank you, Mr. Chairman.
        Mr. Cannon. The gentleman is recognized for 5 minutes.
        Mr. Watt. I appreciate the gentleman recognizing me. I
    won't take 5 minutes unless Ms. Baldwin needs some of my time.
    I just wanted to thank the witnesses for being here, thank Mr.
    Delahunt for substituting for me and being the Ranking Member
    today. He looks pretty distinguished in that Ranking Member
    chair, I think. [Laughter.]
        Mr. Cannon. With all due respect, not as good as you look.
    [Laughter.]
        Mr. Watt. Well, I don't want him to get too comfortable. I
    needed an Internet provider this morning to do my heating and
    air conditioning services at my house. There's nothing more
    frustrating. And I would have been prepared to pay tax on it,
    if I could have found such. There's nothing more frustrating
    than waiting on people, service providers to come to your
    house, and you can't leave.
        Let me just make a couple comments, one comment about your
    access issue, Mr. Miller. In most of the States I'm aware of,
    telephone access is taxed in some way or another, so to compare
    this to telephone usage really doesn't seem to me to be that
    great an analogy. People, if they want access, will pay the
    tax. If they don't want it, they won't pay the tax, and I think
    that's pretty much the case.
        It was not clear to me whether Mr. Gilmore or Mr. Miller
    ever responded to whether they thought there was a need to
    revisit this definitional issue that Ms. Baldwin raised. Do you
    think there is a problem with the definition or do you not, and
    if so, do you have some ideas about how we might tighten up
    that definition so that we don't run into the problem?
        I disagree with Mr. Miller that it's not individual users
    that access LEXIS/NEXIS. Businesses do access it. Lawyers, law
    firms access it. But a bunch of lawyers I know and non-lawyers
    who try to do their own research access it, too.
        So do you think this definition needs to be tightened up or
    not, and if so, do you have any ideas about how to do it?
        Mr. Miller. Let me respond to the first point and then I'll
    let Governor Gilmore address the second point, since his
    Commission did discuss at length the bundling issue during its
    commission.
        The reason I brought up the telephone service, Mr. Watt, is
    the Congress has established something called the Universal
    Service Fund, as you know, which we all pay into, in order to
    subsidize telephone access in this country. The Internet
    community is not asking for that. We're just asking not to put
    additional charges on access to the Internet. That's what the
    Internet access prohibition in the Cox bill is all about.
        Mr. Watt. That seems to me to be a separate issue than the
    one I raised. I mean, whether you want a universal service fund
    or not----
        Mr. Miller. I don't.
        Mr. Watt [continuing]. Is not the issue, it seems to me.
    The issue is if you're going to compare Internet access to
    phone access and phones have--phone customers, 94 percent of
    them are using the telephones and they are being taxed on it in
    most locations, independent of the Universal Access Fund,
    they're being taxed on it, it just doesn't seem to me that
    that's an appropriate analogy.
        But that's not the heart of my point. I just was making
    that point as an observation.
        Mr. Miller. Right.
        Mr. Watt. The real point is, is there a definitional
    problem here, and if there is, how do we solve it?
        Mr. Miller. We don't believe there is a definitional
    problem, and Governor Gilmore's Commission on Electronic
    Commerce spent a lot of time discussing this issue----
        Mr. Watt. Mr. Gilmore?
        Mr. Gilmore. Congressman, we think the definition is okay.
    I suppose that if you wanted at some future time to consider
    broadening this definition to include telecommunications taxes,
    as well, you could do that. I don't think that you have to do
    that now in order to enact this legislation.
        Mr. Watt. So you're opposed to tightening the definition in
    this bill----
        Mr. Gilmore. Oh, no, the----
        Mr. Watt [continuing]. To make sure that it's limited to
    access rather than content?
        Mr. Gilmore. You know, I think that we have mediums all the
    time that deliver content over the telephone and radio and so
    on. We don't tax individual television shows and so on like
    that. And you want content, it seems to me, to be available to
    the most people that you possibly can.
        I think this definition is okay the way it is, but you
    could revisit it at a future time and address the issue, for
    example, that poor families in the City of Richmond have to
    have a telephone and, therefore, they're sort of forced to pay
    a 25 percent telephone tax and the potential injustice of that,
    but I don't----
        Mr. Watt. Of course, the flip side of that is you may be
    arguing for a Universal Access Fund for--like Mr. Miller said
    he opposed for Internet access, too. I'm not advocating that,
    don't get me wrong, just, you know, what cuts, cuts both ways,
    it seems to me.
        Mr. Gilmore. It's a real problem with this whole issue. But
    I think you could go forward with this definition, Mr. Watts.
        Mr. Watt. Thank you, Mr. Chairman. I apologize to the
    Chairman for being tardy.
        Mr. Cannon. You're fine. I think the game here is to ask
    the questions and let them go way over time on the other side,
    which actually works out pretty well.
        Let me just poll the panel. Is there an interest in a
    second round? One of the problems is just timing, but there's a
    number of people who handed me questions. Congressman Coble
    asked me to ask a question. He had a meeting that he had to run
    to. So I'll ask unanimous consent that I may take an additional
    5 minutes, but not open it up to a second round. Thank you. So
    ordered.
        Let me ask Mr. Coble's question first. His concern is with
    the use tax and the difficulty in enforcing it, because, first
    of all, people either don't know that it's there, that that
    indicates, I think in the case of Utah, that people don't read
    their tax returns before they sign it, because it's part of the
    return, or if they know it's there, they know that it's almost
    impossible to enforce.
        So Mr. Coble's question would be, isn't it difficult to use
    the alternative to a sales tax on the Internet through the use
    tax just because it's hard to apply, and I think, Mr. Duncan,
    if you wouldn't mind answering that, and then, Governor
    Gilmore, with your experience, and perhaps if you have some
    comments, Mr. Miller.
        Mr. Duncan. Collection of use tax on any sort of remote
    transaction from the individual purchaser and consumer is
    difficult. It is not cost efficient for States to try to
    enforce that. It is--there's a burden on the individual of
    keeping records of what they've purchased and then accruing and
    reporting that. So for that reason, the inability to
    effectively deal with it, you know, from the individual
    purchaser on their individual items, that we've argued that it
    ought to be collected by the seller in the same fashion as the
    sales tax. That's where the simplification comes in and the
    requirement for a Congressional authorization so that States
    could require remote sellers to collect, and that's the next
    debate in the next hearing.
        Mr. Cannon. I know I've asked all the panelists to respond
    to that, but can I just add another layer to this. Given what
    you've just said, doesn't it make sense for the States, and
    especially those groups, the States that are working on the
    SSTP, to encourage their legislators to eliminate the use tax
    for Internet as sort of a show of good faith as they move down
    the SSTP path?
        In other words, you can't get the tax, it makes liars out
    of all of us except me. I mean, I don't buy anything in Utah. I
    don't know about my kids. I try not to use anything they buy. I
    don't use their tennis shoes, their cleats, for instance. The
    fact is, I buy my stuff on the Internet, usually books here in
    Washington, D.C., because there's no tax, and so I don't have
    to--I'm not lying when I sign that saying I'm not doing any
    use, but that's an awkward thing that is unique probably in my
    case.
        Shouldn't the States--let me just leave it to you,
    shouldn't we take a look at those in the State legislatures and
    then try and address this later on in the SSTP?
        Mr. Duncan. I think we have to separate the imposition of
    the tax, which is the use tax that's owed by that consumer, and
    the collection responsibility. We wouldn't want to repeal the
    imposition of the use tax on the individual purchaser. What
    we've got to do, in our estimation, to make sure there's a
    level playing field between those that have to collect the tax
    and the remote sellers that now don't have to collect the tax,
    is to simplify it and to have then the authorization extended
    through remote sellers. We're finding that, you know, as we
    simplify, there are some remote sellers coming forward
    voluntarily.
        Mr. Cannon. But I don't think you're going to the question
    that I've asked, which is doesn't it make sense for States to--
    if you want to simplify it, to start out simplifying with a
    good faith effort of getting rid of a tax that's imposed based
    upon the good faith of the recollection of the taxpayer, which
    is the use tax for items purchased on the Internet.
        Mr. Duncan. Apparently, I'm not quite understanding the
    question. I mean, the States at the present time are engaged in
    an effort--I mean, they try to simplify it for individuals, as
    well, through increased use of the income tax and that sort of
    thing.
        Mr. Cannon. I'm sort of skipping away from the SSTP, and
    I'm just irritated in my State legislature because they impose
    a tax on me, as do many other States, that require me when I
    fill out my tax return to sign a statement saying that I swear
    I'm not using anything in the State that was purchased outside
    the State without paying a sales tax. Doesn't it make sense
    not--this is not God ordaining, but shouldn't the governors who
    are pushing the SSTP step forward and say, hey, we're not
    making anything on this use tax. Why don't we not make our
    citizens liars and get rid of it and solve the problem with the
    SSTP?
        Mr. Miller. It seems to me----
        Mr. Duncan. I guess that's what we're trying to do, is to
    get ourselves in a position so that individual doesn't have to
    do that because it'll be collected at the time of purchase.
        Mr. Cannon. I want to talk to my legislators about that in
    the context of your response. [Laughter.]
        Mr. Miller. This is a personal opinion, not an ITAA
    position, Mr. Chairman, but I think you go right to the heart
    of the matter. The sales tax itself was created at a time when
    people were not very mobile in terms of their purchases and in
    which time Government didn't know very much about how much
    people earned, but they knew a lot about how they spent in
    terms of taxing the merchants, and they made the merchants the
    State tax collectors.
        So the question is, why in 2003, when we live in an
    incredibly mobile society, when people make purchases not just
    all over the country but all over the world, in which the
    Government has almost perfect knowledge about how much each of
    us earns, why are we still making small businesses the tax
    collector for the State?
        Again, that's your next hearing on sales taxes. But I think
    your comment goes right to the fundamental position that we
    have a tax system in 2003 designed for the 1930's.
        Mr. Cannon. Governor Gilmore?
        Mr. Gilmore. Use tax doesn't bring much in, as a practical
    matter. That was our experience. If we'd make it more
    consistent across the board, then it probably should be
    eliminated. But simplification alone is no excuse for taking
    the policy position that we're going to impose new taxes on a
    new medium, or multiple and discriminatory taxes, or confused
    sort of regimes like we've seen with telephone. This is an
    opportunity here, it seems to me, to step forward and settle
    the easy part and then fight over the hard part later on this
    year.
        Mr. Cannon. Thank you, Governor.
        I ask unanimous consent to extend my time by 3 minutes. So
    ordered.
        Let me turn some time over to yield to Mr. Delahunt in a
    moment. Let me just point out that the SSTP, the streamlined
    sales tax, is a very important issue and it's an issue that we
    need to deal with. I think that we have an absolute consensus,
    if I can take from your comments, Mr. Duncan, is we have a
    consensus that's an important issue and that we have some
    things in there that are awkward and to solve that is going to
    take some national effort and some focus.
        I've committed to a hearing on that issue, but I would
    encourage the people of America to understand that this is a
    separate issue from the tax moratorium. We need to solve this
    and then start taking some steps toward much more rational
    taxation.
        I might just point out that the SSTP is not the only place
    we can rationalize our tax system in America. We can certainly
    rationalize our Federal system, as well. So we have a number of
    issues before us. I would encourage the panel and the Members
    of the Committee to recognize that difference and support a
    permanent moratorium, and with that, I yield to Mr. Delahunt
    for a question.
        Mr. Delahunt. Before I pose a question to the panel, I just
    want to ask a question of the Chair. When he states that he
    buys nothing in Utah----
        Mr. Cannon. On the Internet.
        Mr. Delahunt. On the Internet, okay.
        Mr. Cannon. Literally, I actually work very hard to not buy
    anything on the Internet in Utah, because when I sign that tax
    return, I don't want to be a liar.
        Mr. Delahunt. Okay.
        Mr. Cannon. And it's a damn inconvenience, if you'll pardon
    the expression here, and Americans ought to be irritated about
    it. To the degree they don't know about it, they ought to
    understand and ought to demand a change in that law.
        Mr. Delahunt. I think you have obviously focused on the
    nub. I mean, clearly, as Governor Gilmore just indicated, I
    think we all recognize compliance with the use tax is just--
    it's not feasible for a variety of different reasons.
        But before we conclude the hearing today, Mr. Duncan, in
    terms of the progress being made on SSTP, and I know this is
    maybe a question that cannot be answered with any precision,
    but just an outside, remote estimate, if you will, at what--how
    far are we in terms of achieving a critical mass that would
    create the--in which a potential interstate compact would be
    presented to Congress for its consideration?
        Mr. Duncan. In the agreement that was adopted by the
    States, the threshold put in there to activate the agreement
    was ten States with 20 percent of the population. We believe
    that that'll be met this year during legislative sessions, and
    it really comes down to meeting that threshold, the handful of
    getting two or three States like Texas, New Jersey, North
    Carolina finishing up some work, to Michigan, States of that
    size. Then, I think, as we go through the year, some of those
    larger States have longer legislative sessions, and as we see a
    movement in California, some in New York, I think the prospects
    then for that 1 percent becoming much larger.
        Mr. Delahunt. Okay. But you use, in my opinion, a near
    future resolution, because I think it's important also to note
    that, you know, the National Governors Association, a variety
    of various business associations, trade associations--I'm
    looking at some of them here, real estate associations,
    shopping centers, the Newspaper Association of America, some
    members of the high-tech community, Gateway and Vertical Net,
    are concerned about coupling these issues, and I understand the
    Governor's position and your position, Mr. Miller.
        But, you know, I dare say the fact that we have extended
    the moratorium for a discrete period of time as opposed to
    making it permanent does not in any way jeopardize the growth
    of the Internet, and I wonder if during the course of this
    particular session of Congress, the 108th, you'd be in a
    position to consider both the SSTP and making it a permanent
    moratorium, and if so, I'm sure the Chair and others would
    welcome the support, if after review by individual Members, for
    both of those particular proposals, because we can't deny the
    reality, and you may be very well correct, Mr. Miller, in terms
    of it's a 1930 answer, but, man, we have serious problems as
    far as these States are concerned.
        I don't know what the aggregate number is, but we hear
    California with a $35 billion deficit. My governor, who is a
    part-time resident of Utah, Governor Romney, I am sure would be
    very upset with me, Mr. Chairman, if I should support a
    permanent moratorium, and he is a very good Republican, by the
    way----
        Mr. Cannon. I would hope not, but also, as Mr. Gilmore
    would say, he's a governor.
        Mr. Delahunt. He's a governor. But the reality is, I guess,
    Mr. Duncan, the message to you is to go back to those that are
    sitting down grappling with this particular issue and let them
    know that I would think, I would think that the fiscal
    pressures on the States now are conducive and would serve as an
    impetus toward the streamlining project to reach a conclusion,
    and I think the Congress obviously is willing to listen to an
    interstate compact dealing with the issue, and with that, I'll
    yield back and thank the Chair.
        Mr. Watt. Mr. Chairman, could you yield to me just for a
    second?
        Mr. Cannon. Certainly, Mr. Watt.
        Mr. Watt. I don't think this is critical to the hearing,
    but just to clear up one thing that Mr. Miller and I had an
    exchange about, and that's about this e-rate. Staff has pointed
    out to me that the e-rate is actually used to encourage access
    to the Internet, not to encourage access to phone service. So
    just to make that clear for the record, I don't think there's
    any disagreement about that, but I wanted to be clear on that.
    It's not really a fund that encourages or subsidizes the use of
    phones. It's a fund that phone companies collect to subsidize
    and encourage the use of the Internet and that kind of
    technology.
        I appreciate and yield back.
        Mr. Cannon. The gentleman yields back.
        First of all, I want to thank the panel for being here
    today. We appreciate your time.
        I'd like to ask unanimous consent to submit questions to
    the witnesses to be included in the record. Hearing no
    objection, so ordered.
        Mr. Cannon. The record will be kept open for another 5 days
    for any submission of comments that you want to make or answers
    to questions.
        Again, thank you very much for your time. I think this has
    been a very enlightening hearing and the meeting is now
    adjourned.
        [Whereupon, at 11:48 a.m., the Subcommittee was adjourned.]
                                A P P E N D I X

                                  ----------

                   Material Submitted for the Hearing Record

                                  ATTACHMENTS

                     Prepared Statement of Grover Norquist
        Chairman Cannon and other members of this committee, thank you for
    the opportunity to address you regarding H.R. 49, the Internet Tax Non-
    Discrimination Act.
        My name is Grover Norquist and I am president Americans For Tax
    Reform (ATR), a non-partisan, not-for-profit non-partisan coalition of
    taxpayers and taxpayer groups who oppose all federal and state tax
    increases. I submit my comments to you today in strong support of a
    permanent moratorium on taxing Internet access.
        In 1998 Congress acted to put to an end taxes that unfairly single
    out the Internet. However, the current moratorium is scheduled to
    expire on November 1, 2003, unless Congress acts to eliminate taxes on
    Internet access, double-taxation of a product or service bought over
    the Internet, and discriminatory taxes that treat Internet purchases
    differently from other types of sales. Fortunately, H.R. 49 meets all
    of the above criteria.
        In addition, Representative Cox's legislation ensures that the
    permanent moratorium on Internet access taxes applies to all 50 states.
    Unfortunately, the original moratorium enacted in 1998 and extended in
    2001 contained a grandfather clause, which permitted a few
    jurisdictions already taxing Internet access to continue to do so. In
    an effort to protect consumers that use the Internet, the Internet Tax
    Non-Discrimination Act strikes the grandfather clause. Federal law
    should no longer reward those tax authorities that rushed to be the
    first ones to tax Internet access.
        ATR has always been supportive of a permanent ban on Internet
    taxes, and supported a two-year extension only as a compromise
    solution. While last years extension was a disappointment, the House of
    Representatives should take the opportunity to permanently extend the
    moratorium in order to keep access taxes off of the Internet.
    Therefore, Congress should ensure that there is no state sales tax
    simplification added on to the current legislation.
        A sales tax on Internet purchases, at this time, would be harmful
    to electronic commerce and the economy as a whole. Internet taxation
    will limit the expansion of electronic commerce and in effect, hinder
    economic growth. Moreover, there is no evidence at this time that
    Internet sales are hurting state sales tax revenue, since Internet
    purchases represent only a small 2% of total retail sales.
        Contrary to some arguments, taxing the Internet will actually hurt
    Main Street businesses far more than it will help them. Internet access
    has allowed Main Street businesses to link into a worldwide market,
    which has the potential to increase market share for small businesses
    and offer consumers more choice. To allow states to tax Internet
    commerce will hurt the very people that some politicians and other
    interest groups are claiming to help.
        ATR advocates for the speedy consideration of the Internet Tax Non-
    Discrimination Act. If Congress does not pass a new ban on Internet
    access taxes and multiple and discriminatory taxes it will mean a
    defacto tax increase on Americans at a time when they least are able to
    pay it. Not only that, this tax will hit schools, libraries, hospitals
    and families--those who use the Internet for research, education, and
    most critically, communication. This is not the time to be adding a new
    tax on Americans trying to keep in touch with loved ones. Therefore,
    ATR supports a clean extension of the moratorium, without sales tax
    simplification language.
        Enacting a permanent moratorium on taxing Internet access will have
    significant benefits to the United States economy and increase the
    standard of living for all Americans. Ultimately, Congress has an
    opportunity to help American workers, individual shareholders, and all
    individuals by reducing the cost Internet access.
        On behalf of Americans for Tax Reform, I urge your committee to
    quickly pass this needed legislation.

                                  ----------

                     Prepared Statement of Robert Holleyman
        Mr. Chairman and Members of this Committee,
        Thank you for the opportunity to provide written comments on H.R.
    49, the Internet Tax Nondiscrimination Act. I am the President and CEO
    of the Business Software Alliance. The Business Software Alliance
    (www.bsa.org) is the foremost organization dedicated to promoting a
    safe and legal online world. BSA is the voice of the world's commercial
    software industry and its hardware partners before governments and in
    the international marketplace. Its members represent the fastest
    growing industry in the world. BSA programs foster technology
    innovation through education and policy initiatives that promote
    copyright protection, cyber security, trade and e-commerce. BSA members
    include Adobe, Apple, Autodesk, Avid, Bentley Systems, Borland, Cisco
    Systems, CNC Software/Mastercam, Entrust, HP, IBM, Intel, Intuit,
    Internet Security Systems, Macromedia, Microsoft, Network Associates,
    Novell, PeopleSoft, SeeBeyond, Sybase and Symantec.
        BSA believes that the Internet has transformed American society.
    Individuals and businesses now have available to them vast sources of
    information that have revolutionized how Americans obtain goods and
    services and American businesses deliver them. One of the reasons for
    the success of the Internet has been the efforts of Congress in the
    past to ensure that the it is not taxed in a discriminatory manner.
    This precedent set by Congress in 1998 should continue permanently and
    endorse the passage of H.R. 49.
        In particular, I see the nondiscrimination issue from a worldwide
    perspective as the head of an international technology trade
    association. BSA members have been opposed to any efforts to
    discriminate against the Internet as a delivery mechanism for goods and
    services. We have worked with the United States Government and other
    member countries of the World Trade Organization to harmonize and
    reduce tariffs in order to increase free trade across the globe. As the
    New Economy continues to spread and grow, there is no doubt that the
    United States will be a leader in using the Internet to deliver goods
    and services to the world.
        Recognizing American leadership in technology, some foreign
    governments have viewed Internet delivered goods and services as a
    source of an additional taxing opportunity that burdens American
    companies more than domestic ones. We have and will continue to oppose
    such discrimination by foreign governments. Passage of the Internet Tax
    Nondiscrimination Act will send a strong signal to the world that
    America puts it money where its mouth is. By showing that we view the
    Internet as an equal partner to offline transactions and oppose any
    efforts to treat it differently.
        This legislation deserves the full support of Congress and the
    nation to ensure that the Internet continues to thrive around the
    world. I thank you for the opportunity to provide written testimony at
    today's hearing.

                     Prepared Statement of Steven K. Berry
        Thank you for the opportunity to submit written testimony for the
    record of the Subcommittees hearing on H.R.49, the Internet Tax Non-
    Discrimination Act. The Cellular Telecommunications & Internet
    Association (herein, CTIA) represents all categories of commercial
    wireless telecommunications carriers, including cellular and personal
    communications services, manufacturers and wireless Internet providers.
        CTIA supports the goals of the Internet Tax Non-Discrimination Act.
    Our concern, however, is that the law as written in 1998 does not
    accommodate the technological changes that are driving the marketplace
    in 2003--and that will continue to drive the market in new directions
    in the years ahead.
        CTIA supports two clarifications in the law that, in our view, are
    consistent with the original intent of the Internet Tax Freedom Act:
    first, that the moratorium on Internet Access applies equally to all
    providers of Internet Access; and second, that the prohibition on
    multiple and discriminatory taxes on electronic commerce applies
    equally to all sellers of such products and services, including
    telecommunications companies.
        The current definition of ``Internet Access'' in Section 1104 reads
    as follows:

            (5) INTERNET ACCESS.--The term ``Internet access'' means a
            service that enables users to access content, information,
            electronic mail, or other services offered over the Internet
            and may also include access to proprietary content,
            information, and other services as part of a package of
            services offered to users. Such term does not include
            telecommunications services. (Emphasis added.)

        Wireless carriers are concerned that the exclusion of
    ``telecommunications service'' from the definition of Internet Access
    will result in wireless Internet Access and electronic commerce
    products being deemed taxable while competing services are tax exempt.
    This disparity places CTIA's member companies at a significant
    competitive disadvantage when they seek to sell Internet Access and
    electronic commerce products and services.
        Today, the wireless industry offers wireless Internet Access and
    numerous electronic commerce products. Wireless Internet Access
    includes both web access from handsets and other handheld devices.
    Wireless Internet Access is also provided using handsets or other
    devices as wireless modems for laptop or desktop computers. Electronic
    commerce products include downloaded software and other digital
    products (such as, ring tones and games) and information services (such
    as, stock quotes and sports scores).
        As new wireless third-generation (``3G'') technologies are
    deployed, wireless Internet Access and other e-commerce products and
    services will increasingly be competing with other types of Internet
    Access and e-commerce products sold through other channels. These
    competing services may include digital subscriber line (DSL) Internet
    Access offered by telecommunications companies, cable modem service
    offered by cable companies, direct satellite Internet Access, and e-
    commerce services offered Internet service providers.
        Subjecting part or all of a wireless carrier's charges for Internet
    Access to state and local taxation is a significant tax burden on
    customers and is contrary to the intent of the Internet Tax Non-
    discrimination Act. The effective tax rate on telecommunications
    companies and their customers averages more than 17% as compared to 6%
    for other businesses according to a recent study completed by the
    Council on State Taxation.
        We believe that these discriminatory telecommunications taxes, if
    applied to our Internet Access and electronic commerce products and
    services, would seriously harm our ability to compete with other
    Internet Access providers by making it more expensive for consumers to
    access the Internet through wireless networks than through other
    technologies. This would, in turn, slow the deployment of the wireless
    broadband infrastructure and slow the roll out of new wireless products
    and services that have the potential to bring dramatic new productivity
    improvements to the entire economy.
        Recent economic studies further highlight the potential ill effects
    of these discriminatory telecommunications taxes. These studies
    document that the demand for wireless services is very price sensitive.
    Technological advancement and fierce competition among wireless
    companies have resulted in more affordable service for a larger number
    of consumers. However, because demand for wireless services is very
    price sensitive, increases in the cost of service attributable to
    discriminatory taxes are likely to result in consumers forgoing the
    purchase of additional wireless services or forgoing the choice to
    become a wireless customer.
        It is unfortunate that legislation designed to prevent multiple and
    discriminatory taxation of Internet and Electronic Commerce
    specifically excludes the one service that is absolutely vital to the
    functioning of the Internet--the telecommunications backbone--and the
    one service that is subject to one of the highest discriminatory state
    and local tax burdens in the country.
        When considering reauthorization of the Internet Tax Non-
    Discrimination Act, CTIA strongly urges Congress to clarify the
    definition of Internet Access to both remove uncertainty and create tax
    parity for all providers of Internet Access and sellers of electronic
    commerce products and services. CTIA looks forward to working with the
    Committee on legislation that will accomplish these important changes.

                                  ----------

     Prepared Statement of ALLTEL, AT&T, AT&T Wireless, Cingular, Level 3,
        Sprint, T-Mobile, Verizon, Verizon Wireless, BellSouth, and SBC
        Thank you for the opportunity to submit written testimony for the
    record on the Internet Tax Non-Discrimination Act.
        Our companies support the goals of the Internet Tax Non-
    Discrimination Act. Our concern, however, is that the law as written in
    1998 does not accommodate the technological changes that are driving
    the marketplace in 2003--and that will continue to drive the market in
    new directions in the years ahead. Specifically, we believe that the
    definition of Internet Access in the Act needs to be re-written to
    ensure that all providers of Internet Access are treated equally under
    the moratorium.
        We all know that rapid technological changes have led to a
    convergence of communications products and services. Companies that may
    be classified as telecommunications, cable, wireless, satellite or
    Internet service providers have the capability to provide voice, data,
    video and Internet access services individually or as part of a bundle
    of services. Many companies are already offering these packages of
    multiple services. However, as a result of historic differences in the
    regulatory classification of businesses that sell voice, data, video
    and Internet access services, such companies are taxed differently
    merely because of such classifications.
        The current definition of ``Internet Access'' in Section 1104 reads
    as follows:

            (5) INTERNET ACCESS.--The term ``Internet access'' means a
            service that enables users to access content, information,
            electronic mail, or other services offered over the Internet
            and may also include access to proprietary content,
            information, and other services as part of a package of
            services offered to users. Such term does not include
            telecommunications services. (emphasis added)

        As telecommunications service providers, we are concerned that the
    exclusion of telecommunications service from the definition of Internet
    Access may result in Internet Access services provided by
    telecommunications companies being taxable while Internet Access
    services by cable companies, direct satellite companies, and Internet
    service providers are exempt from taxation. This disparity places our
    companies at a competitive disadvantage when we sell Internet Access.
        Here are some real-world examples. Currently, high speed Internet
    Access provided by cable modem service or by direct satellite is exempt
    from state and local taxes except in those states grandfathered under
    the Act. Cable modem service competes directly with DSL service
    provided by telecommunications companies, and wireless carriers are now
    rolling out wireless Internet Access service that will offer consumers
    another alternative to both DSL and cable modem service.
        Some states have taken the position that DSL service is not
    Internet Access, but a ``bundle'' that includes both Internet Access
    and telecommunications service. As a result, they claim that part of
    the charge is taxable. Subjecting part or all of our charges for
    Internet Access to state and local taxation is a significant tax burden
    on our customers and is contrary to the intent of the Internet Tax Non-
    Discrimination Act. As we have previously testified to your Committee,
    the effective tax rate on telecommunications companies and their
    customers averages over 17% as compared to just over 6% for other
    businesses, according to a recent study by the Council on State
    Taxation.
        It is ironic that legislation designed to prevent multiple and
    discriminatory taxation of Internet Access and electronic commerce
    specifically excludes the one service that is absolutely vital to the
    functioning of the Internet--the telecommunications backbone--and the
    one service that is subject to one of the highest discriminatory state
    and local tax burdens in the country.
        When considering reauthorization of the Internet Tax Non-
    Discrimination Act, we urge the Committee and the Congress to clarify
    the definition of Internet Access to both remove uncertainty and create
    tax parity for all providers of Internet Access and electronic commerce
    products and services. We look forward to working with the Committee on
    legislation that will accomplish these important changes.

                   Prepared Statement of Elizabeth Harchenko
        The Multistate Tax Commission is pleased to present this statement
    regarding the Subcommittee's consideration of HR 49, the Internet Tax
    Nondiscrimination Act of 2003.
        The Multistate Tax Commission is an organization of state
    governments that works with taxpayers to administer, equitably and
    efficiently, tax laws that apply to multistate and multinational
    enterprises. 44 states and the District of Columbia participate in the
    Commission. Formed by an interstate compact, the Commission:

             Lencourages tax practices that reduce administrative
            costs for taxpayers and States alike,

             Ldevelops and recommends uniform laws and regulations
            that promote proper state taxation of multistate and
            multinational enterprises,

             Lencourages business compliance with state tax laws
            through education, negotiation and enforcement, and

             Lprotects state fiscal authority in Congress and the
            courts.

        The Commission monitored provisions contained in the Internet Tax
    Freedom Act when it was enacted in 1998 for their potential impact on
    state taxing authority. The Commission maintains a neutral position on
    congressional action on the original Act and its successor, the
    Internet Tax Nondiscrimination Act. The Commission does make several
    recommendations with regard to specific provisions of the Act should
    Congress choose to extend the Act. This position is reflected most
    recently in the approval of Commission Resolution 01-08 approved in
    July 2001 (attached).
        The Commission believes that five guidelines should be addressed as
    Congress considers extending the Internet Tax Nondiscrimination Act
    upon its expiration in October 2003. Principally, these guidelines
    include:

             LThe Act should be extended for no more than two years
            to insure a review of its impact on state and local revenues
            and the presence of unintended consequences. The changing
            nature of Internet technology and its use in business
            operations means that the economic and fiscal impact of this
            Act will change. A temporary extension is appropriate in this
            context.

             LAny extension of the Act should preserve the
            grandfathered ability of those states currently imposing a tax
            on charges for Internet access to continue to do so if they so
            choose.

             LThe definition of Internet access contained in the
            Act should be rewritten to eliminate opportunities to bundle
            otherwise taxable content into a single package of Internet
            access in a manner that would prevent states and localities
            from imposing their taxes on the otherwise taxable content,
            thus preserving competitive equity among all forms of commerce.

             LAny extension of the Act should not be accompanied by
            provisions or separate legislation that grants more favorable
            state and local tax treatment to commerce involving goods or
            services transferred, conducted or delivered by electronic or
            other remote means as compared to commerce involving goods or
            services transferred, conducted, or delivered by other means.

             LThe definition of discriminatory taxes contained in
            the legislation should be amended to insure that it does not
            allow a seller through affiliates to avoid a tax collection
            obligation in a state even though the seller has a substantial
            nexus in the state.

        Extending the Act and the Potential Economic Impact. A moratorium
    on taxation of Internet access charges was originally imposed in 1998
    as a means of providing the then-burgeoning Internet industry with
    protection from the sudden imposition of certain specific state and
    local taxes. Five years ago, it was clear that the Internet industry
    would become a major force in the economy and that some temporary
    measures might be warranted to insure that the Internet industry did
    not suffer from a burden of over-regulation or taxation. Today, the
    Internet is a vibrant, well-established industry that is a major
    component of the national economy. Thus, the moratorium was enacted as
    a temporary measure-but its continued effectiveness and necessity
    should be re-examined periodically.
        The Commission believes that several questions regarding the
    potential economic impact on the Internet industry and state and local
    governments should be posed when considering whether to extend the
    existing moratorium:

             LDoes the current preemption of taxation of Internet
            access create discrimination in favor of a select group of
            Internet providers? Specifically, are large companies that have
            the ability to bundle Internet access with other services (like
            telecommunications, information, or entertainment) provided an
            advantage over smaller companies without the financial means to
            provide bundled services?

             LTo what extent have studies documented that a pre-
            emption of taxation of Internet access has increased the volume
            of subscribers to such access?

             LConversely, to what extent have studies documented
            that taxing Internet access has served as a deterrent to
            potential subscribers? Specifically, the existence of state
            taxes on Internet access in nine of the states covered by the
            grandfather provision of the legislation provides for a basis
            for comparing the growth of Internet access in those states vs.
            other states. Will Congress make this comparison before making
            a decision on extending the Act?

             LIn lieu of taxing Internet access, have states and
            localities imposed or increased other taxes on the Internet
            industry to compensate for the loss of revenue?

        In addition to considering the above, HR 49 also proposes repealing
    the grandfather clause in the existing moratorium that provides nine
    states with the ability to continue imposing taxes on Internet access
    that were in effect when the original law was enacted. The Commission
    believes that repealing this grandfather would represent an
    inappropriate pre-emption of a state's existing taxing authority. The
    states protected by the grandfather clause-New Hampshire, New Mexico,
    North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington, and
    Wisconsin-tax Internet access under their current laws that govern the
    taxation of services. The revenue generated from the imposition of the
    tax is an important component in the revenue base of each of these
    states-many of which are now struggling to balance their individual
    state budgets. To repeal the grandfather clause for these states would
    represent an erosion of their revenue base, shift increasing
    responsibility for the tax burden to other taxpayers, and upset the
    balance of the states' internal tax policy objectives.
        Definition of Internet Access. Any consideration of extending the
    moratorium must include a re-evaluation of the definition of Internet
    access within the moratorium to account for the increasing variety and
    extent of services that are ``bundled'' with access.
        Since Congress wrote the original definition, changes in technology
    and corporate business structures have made it clear that it is now
    possible for large enterprises to bundle a broad array of otherwise
    taxable services with Internet access. The current definition appears
    to create the potential for discrimination in tax policy that would
    stifle competition and increase consumer costs, provide financial
    advantages to large enterprises, and erode state and local tax bases.
    Services delivered by large enterprises that can assemble the capital,
    technological, information and entertainment resources to bundle an
    array of services with Internet access would appear to be granted a tax
    exemption under the current language of the moratorium. The same
    services delivered through the Internet by smaller enterprises without
    the bundling capability or by non-electronic means would remain
    taxable. There is no economic or tax policy justification for Congress
    to create this disparity. Expanded bundling by large enterprises can
    substantially erode the tax bases of state and local governments that
    tax services.
        The definition of Internet access should cover only access to the
    Internet. Because of the increasing problems in distinguishing between
    pure access and other services, Congress should explore a quantitative
    approach to defining access, such as was enacted by the State of Texas
    in the last few years. A quantitative approach to defining Internet
    access removes all ambiguity concerning what constitutes ``access'' as
    opposed to other services. Further, it creates a level playing field
    among all providers of Internet access.
        Discriminatory Taxes. Sections 1104(2) (A) (iii) and 2(B) (ii) (II)
    of the1998 Internet Tax Freedom Act and its successor, the Internet Tax
    Nondiscrimination Act, are components of the definition a
    discriminatory tax. In its entirety, the definition was intended to
    protect on-line retailers from unfair taxation by states and localities
    so that e-commerce would receive same tax treatment as all other forms
    of remote commerce. Read together, the interplay between these two
    provisions could have another, unintended effect by encouraging brick
    and mortar retailers to engage in sophisticated tax planning strategies
    that will allow them to escape the responsibility to collect sales tax
    on sales made in those states where they otherwise have clear sales tax
    nexus. Across the nation, large brick and mortar retailers with nexus
    in various states have attempted to escape sales tax collection on in-
    state sales by creating a separate, out-of-state Internet-based sales
    subsidiary to handle customer orders and payments, despite the
    substantive operational ties that exist between the parent retailer and
    its Internet subsidiary. Such ties may include allowing customers to
    return items purchased from the Internet subsidiary to the parent
    retail store, or having the parent retail company distribute
    promotional items on behalf of its subsidiary. Though there are other
    reasons why retailers might implement this ``entity isolation'' tax
    strategy to escape sales tax responsibility, the discriminatory tax
    definition in the Internet Tax Freedom Act has the appearance of
    sanctioning this kind of tax avoidance behavior. The result in these
    cases is unfair to other retailers who register and collect sales and
    use taxes.
                                    summary
        The Internet has developed from infancy to maturity with amazing
    speed and has become an invaluable segment of the nation's economy.
    What was once thought to be technology that would be used by a select
    few has become an integral part of everyday life for nearly all
    Americans. Recognizing that the Internet has reached this mature stage,
    Congress must now decide whether it is necessary to extend protections
    from regulation and taxation that it initially imposed. The Multistate
    Tax Commission strongly urges Congress to give careful consideration to
    the economic impact on states from this continued protection-as well as
    consideration of the consequences of federal pre-emption of state
    taxing authority. In addition, Congress should seriously examine if
    extending the current moratorium on taxation of Internet access creates
    potential disparities and competitive disadvantages in the marketplace
    among providers of Internet access. A careful review and analysis of
    these issues should provide Congress with the background it needs to
    determine if extension of the Internet Tax Nondiscrimination Act is
    warranted at this time.

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