[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






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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

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               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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