[Senate Hearing 108-980]
[From the U.S. Government Publishing Office]
S. Hrg. 108-980
PROPOSED EXTENSION OF THE INTERNET
TAX MORATORIUM
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JULY 16, 2003
__________
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South
CONRAD BURNS, Montana Carolina, Ranking
TRENT LOTT, Mississippi DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas JOHN D. ROCKEFELLER IV, West
OLYMPIA J. SNOWE, Maine Virginia
SAM BROWNBACK, Kansas JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada RON WYDEN, Oregon
GEORGE ALLEN, Virginia BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire BILL NELSON, Florida
MARIA CANTWELL, Washington
FRANK R. LAUTENBERG, New Jersey
Jeanne Bumpus, Republican Staff Director and General Counsel
Robert W. Chamberlin, Republican Chief Counsel
Kevin D. Kayes, Democratic Staff Director and Chief Counsel
Gregg Elias, Democratic General Counsel
C O N T E N T S
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Page
Hearing held on July 16, 2003.................................... 1
Statement of Senator Allen....................................... 5
Statement of Senator Burns....................................... 3
Statement of Senator Lautenberg.................................. 4
Statement of Senator Lott........................................ 7
Statement of Senator McCain...................................... 1
Statement of Senator Wyden....................................... 2
Witnesses
Joseph A. Ripp, Vice Chairman, America Online, Inc............... 7
Prepared statement........................................... 10
Paul Misener, Vice President For Global Public Policy,
Amazon.com, Inc................................................ 14
Prepared statement........................................... 16
Billy Hamilton, Past President, Federation of Tax Administrators;
Deputy Comptroller, State of Texas............................. 19
Prepared statement........................................... 22
Mark Beshears, Assistant Vice President, State and Local Tax,
Sprint......................................................... 25
Prepared statement........................................... 27
Appendix
International Mass Retail Association, prepared statement........ 47
Letter dated July 15, 2003 to Hon. John McCain from John J.
Castellani, President, The Business Roundtable................. 49
Letter dated July 15, 2003 to Hon. John McCain from Grover G.
Norquist, Americans For Tax Reform............................. 51
Multistate Tax Commission, prepared statement.................... 51
Norquist, Grover, President, Americans For Tax Reform, prepared
statement...................................................... 50
PROPOSED EXTENSION OF THE INTERNET TAX MORATORIUM
----------
WEDNESDAY, JULY 16, 2003
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 9:34 a.m. in room
SR-253, Russell Senate Office Building, Hon. John McCain,
Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
The Chairman. Good morning. I thank all of you for joining
us today for this important hearing on the Internet tax
moratorium, although I must say to my friends, Senator Wyden
and Senator Burns and Senator Allen, when he shows up, this
reminds me of the old line from Yogi Berra, ``It's deja vu all
over again.'' Every year, we go through this complicated
process and end up with what is generally a temporary
extension. And, sooner or later, we need to address this issue
in a comprehensive fashion. And, although I always am willing
to put all the blame on ourselves for not acting appropriately,
this is an issue which is constantly changing due to evolving
technologies and greater use of the Internet, and not one that
is static.
As my colleagues know, the moratorium was first passed in
1998. It was extended for 2 years in 2001, after many weeks of
difficult debate. It's now set to expire November 1 of this
year. And it's my hope, continuing hope--hope springs eternal--
that we can reach a consensus to enable the enactment of
another extension. Among other things, continuing the
moratorium would help ensure that Internet access continues to
grow by keeping the Internet free from overly burdensome
taxation.
In past years, the debate over the moratorium has been
mixed together with several states' efforts to broaden their
authority to collect taxes, sales taxes, from remote sellers.
In fact, many people, even today, seem to think that the
Internet tax moratorium, which addresses only Internet access
taxes, as well as discriminatory and multiple taxes on e-
commerce, is a ban on sales taxes on e-commerce transactions.
It is not.
This year, I believe that we can and should keep the
Internet tax moratorium distinct from the simplified sales tax
debate. I do, however, expect to address, in a separate hearing
later this year, the sales tax issue, and the Streamlined Sales
Tax Project, SSTP, in particular. The sales tax question is a
matter of significant importance, and I look forward to seeing
if there is evidence that the states participating in the SSTP
have advanced toward true sales tax simplification.
For now, though, the primary focus of our discussion and
debate should be on the Internet tax moratorium, which, itself,
will present some complex issues, especially if we are to move
forward with legislation that extends the moratorium
permanently. Both Senators Allen and Wyden have sponsored such
legislation, and I thank them for their continuing efforts to
advance the extension of the moratorium.
I hope we can move to extend the moratorium before the
November deadline, which is fast approaching. I also hope that
this process will not stall as the various stakeholders attempt
to reach consensus language on such matters as the proper
definition of ``Internet access'' in the moratorium
legislation.
I look forward to an informative hearing this morning and
thank the witnesses for appearing today.
Just one additional comment. As we see the budgetary woes
of the states, we also see them understandably looking for
sources of revenue. So we will see more pressure from governors
all over America this year than we have in the previous times
when we debated this, when there was surplus, when most states
were running surpluses. That's a political reality that I think
we have to understand, which probably highlights even more the
importance of this issue.
Having said that, I'd like to ask my colleagues if they
have additional comments, beginning with Senator Wyden----
Senator Wyden. Thank you.
The Chairman.--who has worked assiduously with Senator
Allen on this issue, and I am grateful for theirs and Senator
Burns' participation in this very difficult and, as I mentioned
in my opening statement, sometimes misunderstood issue.
Senator Wyden?
STATEMENT OF HON. RON WYDEN,
U.S. SENATOR FROM OREGON
Senator Wyden. Thank you, Mr. Chairman. And you are so
right about the nature of this debate. This is like the song,
``We Have Passed This Way Before,'' and you have been very
gracious about your time and the Committee's time in an effort
to try to get at this.
When I started pursuing this, five years ago, with
Congressman Cox, and we wrote the original law, and have teamed
with Senator Allen and Senator Burns, what we sought to do was
establish essentially just one principle, and that is that
there should be technological neutrality, that you should treat
the online world the same way you treat the offline world. And
what we have long been concerned about was discriminatory taxes
on electronic commerce. The example we cited, for example, was
if you bought the newspaper the traditional way, the snail mail
way, you wouldn't pay a tax; if you bought the online version,
you paid a tax. That was what the Internet Tax Freedom Bill was
all about. It barred those discriminatory taxes on electronic
commerce.
We sat in this room more than five years ago, people were
at that table, and they said, Western civilization is going to
end if we pass this bill, that you're not going to have the
revenue that we need, and various kind of services, from law
enforcement to property taxes and the like, would all be
decimated. That has not been the case.
Mr. Chairman, you're correct on this point on the budget.
The five-year history of this legislation is, when we started
the budget was in a deficit. Then we had very large surpluses.
Now, once again, we have deficits. So the budget has been all
over the map on it.
But the fact remains that, to this day, 5 years after we
have been pursuing this subject, not a single local
jurisdiction has come forward and demonstrated that they have
been hurt by their inability to impose discriminatory or
multiple taxes on the Internet.
So that is a bit of the history. I also want to say, Mr.
Chairman, that I share your view that this is a very distinct
effort from the whole question of the state Streamlined Sales
Tax Project. Our legislation, what Senator Allen and I have
been pursuing, what Congressman Cox has been pursuing, in no
way slows down the effort of the states to collect taxes that
are owed. What we do here doesn't even provide a speed bump,
certainly not a block, to the effort by the states to
streamline sales tax collections.
Last point is, we will clearly have some work to do on
defining, this time around, ``Internet access,'' because
clearly with all the technologies that have become available
since we first began to tackle this issue, there have been some
changes in this area, but upwards of 97 million Americans have
Internet access. They're already paying taxes on cable and
phone lines that they use for their hookup. And certainly they
want us to be sensitive, to make sure that they are not paying
double the taxation for their Internet access. But we will have
some complicated questions to define ``Internet access,'' given
the changes since our original law.
Again, I thank you for all the time that you've given me. I
can't even estimate how many hours we've spent in your office
working on these arcane kind of matters, and we thank you for
it.
The Chairman. Thank you very much.
Senator Burns?
STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. Thank you, Mr. Chairman, for holding this
hearing today and kind of getting a jumpstart, because the
deadline's coming up. And I want to thank you for holding this
hearing.
There's a lot of us on this Committee that's had an
interest in this topic for a long, long time. In my tenure in
the Senate, I've made it a priority to make telecommunications,
the Internet services, affordable, and a reality to states like
my own, which are remote states and who rely on electronic
commerce probably a little more heavily than those folks who
live in more urbanized areas. Fortunately, the technology has
become less complicated than the laws regarding it may be.
The Internet has emerged as an important vehicle in our
Nation's economy. And even though we've had a downturn in the
economy, we've still shown some growth in the Internet
business--business-to-business, business-to-customer commerce--
which is still a relatively small part of--when you compare it
to the size of our economy. So we've got to do our part to
ensure that our actions continue to provide support for this
industry that promises new business process and paradigms to
the marketplace and, I think, will reduce costs and costs to
the customer services and also cost in goods.
And I support what Senator Wyden and Senator Allen have
done. They've worked very, very hard on this particular matter.
Ever since the Senator from Virginia has come to the Senate,
he's shown a lot of leadership in this area. We want to make
sure that customers pay less for Internet services, and also
that they pay less in taxes. The work we did extending the
moratorium in 1998, and, of course, again in 2001, was
commendable and hopefully set the foundation for permanent
repealing.
I don't think this is an issue that we need to revisit
every few years. I agree with the Chairman on that
wholeheartedly. In my way of thinking, taxing Internet access
is a shortsighted strategy that would tend to exclude our
citizens from not only participating fully in the digital
economy, but, indeed, from engaging in a digital democracy at
the community, state, and national level. And so, as
legislators, we should know the worst thing we can do is to
create uncertainty in the marketplace in our tax structure. So
small businesses rely on the stability, and that's what we
should provide.
Now, we know there are other things that are pending out
there that kind of slows the development of the digital
economy, and we aim to address those issues this year. And so I
think there are many more benefits to a permanent moratorium on
this tax. It has been advocated by a lot of the states. But I
think keeping the tax off there and letting it grow has been
one of the greatest things that we've ever done.
So, Mr. Chairman, I would submit the rest of my statement,
but thank you for the hearing today. And I want to thank--I
want to commend Senator Wyden and Senator Allen for the work
they've done on this.
The Chairman. Well, I thank you, Senator Burns, for the
work that you have done.
Senator Lautenberg?
STATEMENT OF HON. FRANK R. LAUTENBERG,
U.S. SENATOR FROM NEW JERSEY
Senator Lautenberg. Thanks, Mr. Chairman, for holding this
very timely hearing.
And I want to just address my comments to the situation the
states find themselves in. They're facing the biggest fiscal
crisis almost since the Great Depression. According to the
Center for Budget and Policy Priorities, states are facing
budget deficits of approximately $100 billion that have to be
closed over the next several months, on top of the $50 billion
gap they closed when they enacted their fiscal 2003 budgets.
Now, sales and use taxes generate $150 billion each year
and account for one third of the average state's total
revenues. As more and more business-to-consumer and business-
to-business commerce shifts to the Internet, state and local
governments will see their tax bases shrink.
According to Jupiter Communications, 94 percent of all e-
commerce sales over the next several years will be substitutes
for traditional commerce. Only 6 percent of e-commerce sales
will be brand new. In the competition that exists for local
merchants, people who put up the brick and the mortar and pay
the real estate taxes and employ people, could be disadvantaged
if we continue to permit sales to be executed without paying a
fair share of the state and the community costs for operations.
I'm not an advocate for more taxes, believe me, but I think
there has to be a balance in the way we do our business, and
the respect and the regard that we have for the local
merchants. Even though e-commerce is still just a fraction of
the total commerce, the trend is clear, and it spells questions
for the ability of state and local governments to provide the
services their constituents demand and need. The GAO estimates
that states will lose as much as $20 billion in tax revenue
because of the Internet, in 2003.
Now, I come out of the computer service business. I helped
start a company, a longer time ago than a couple of you at the
table--I don't want to try and identify which ones--but we were
at the leading edge of information technology. The company is
ADP. And no one has a greater appreciation of the benefits that
Internet technology and e-commerce can deliver to our society.
But I also appreciate the benefits that government alone
delivers to its citizen. To deliver these benefits, the
government's got to have the revenue. So it's imperative that
we examine the impact that the Internet and e-commerce are
having on the ability to have the revenue available.
And this should be, Mr. Chairman, an informative hearing.
And I can't pass the moment without saying that you've had lots
of informative hearings, and the e-speed with which you get
these done is quite notable, and I commend you for it.
Thanks, Mr. Chairman.
The Chairman. I thank you, Senator Lautenberg.
Senator Allen? Welcome.
STATEMENT OF HON. GEORGE ALLEN,
U.S. SENATOR FROM VIRGINIA
Senator Allen. Thank you, Mr. Chairman. I want to thank
you, Mr. Chairman, Senator McCain, as a Senator and as the
Chairman, for calling this hearing today, and thank all our
witnesses. But, Mr. Chairman, under your leadership and working
with like-minded Senators, Senator Wyden and Senator Burns and
others, I've made one of my top priorities the extension--in
fact, I'd love to see a permanent extension of taxes on the
Internet. And I do think--a permanent moratorium on access--
yes, I know, thank you. Thank you, Trent. I've made a priority
a permanent extension of the moratorium on access taxes on the
Internet, as well as a ban on any new taxes that discriminate
against Internet transactions.
The Federal Government--I know folks talk about the local
and state government and so forth, but the Federal Government
clearly has jurisdiction in this matter, because the Internet
tax policies, regulatory policies, that relate to the Internet
are clearly--it's clearly an interstate and, in fact,
international mode of commerce and information.
I, personally, cannot ever envision a time where it would
be appropriate that we would want to allow discriminatory taxes
or access taxes on the Internet. Putting access taxes on the
Internet will only make it less available to those people of
lower income, to folks in rural areas, about 50 percent of the
population of this country who is currently not logged onto the
Internet. In addition, for the approximately 50 percent of
individuals, families, and small businesses that are logged
onto the Internet, it's going to increase their cost of
operations. You understand very clearly that any dollar you add
to the cost of Internet access will just make it less likely,
less opportunity, for those of lower income to have access to
the Internet for information, for exploration, for individual
opportunity in education.
As you stated, Mr. Chairman and Senator Wyden, too often
the moratorium on Internet taxation is linked--and, actually,
in my view, held hostage--to the issues surrounding the sales-
and-use tax simplification, or the compelling of remote
businesses or enterprises that have no nexus or physical
presence in a state to collect and remit taxes to approximately
7600 different local and state taxing jurisdictions.
I'd like to make abundantly clear, on this point, that the
Internet Tax Nondiscrimination Act, which was my bill, S. 150,
is completely unrelated and does not prohibit online sales
taxes. The bill simply prevents taxation on Internet access and
prohibits multiple and discriminatory taxes.
This debate is not about sales tax collection. It's a
debate about the individuals or the consumers' ability to
access the Internet and to prohibit discriminatory taxation of
Internet transactions. The issue of remote sales collection and
simplification is extremely complicated, it's a cumbersome
issue, and it deserves this Committee's attention, but not at
the expense of a person's ability to access the Internet.
Mr. Chairman, as you know, two years ago Congress let the
access-tax moratorium lapse for about 14 days. Considering the
timing of this hearing, and with the current moratorium set to
expire again in November, I'm hopeful and would appreciate, Mr.
Chairman, if this Committee could move as expeditiously as
possible, try to markup my legislation before we adjourn for
the August recess.
It's my understanding that today the House is already
holding hearings on this topic, and they expect to move
companion legislation, similar to Senator Wyden's and mine,
through the Judiciary Committee. I think it's important that
the House and Senate move together and send a clear message to
the American people that Congress is working to preserve their
freedom to a tax-free Internet.
And, finally, Mr. Chairman, I'm one who stands on the side
of freedom of the Internet, trusting free people and
enterprise, not on the side of making this advancement in
technology easier, or a new method of communication to be taxed
by avaricious local commissars. In my view, Congress should be
promoting and seeking to remove barriers that prevent people
from enjoying this innovative technology and keep the Internet
free from discriminatory or access taxes.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Allen. I had not quite
thought of it in quite such graphic terms, but your argument is
very well presented and very well made, and your many year
involvement in this issue, and Senator Wyden and Senator Burns,
has been very much appreciated.
I take your recommendations seriously, and I'll see what we
can do to see if we can't mark this up before we go into
recess, because then it would have to have some kind of--also
require some time for floor consideration, I am sure.
Senator Lott?
STATEMENT OF HON. TRENT LOTT,
U.S. SENATOR FROM MISSISSIPPI
Senator Lott. No questions, Mr. Chairman. I had hoped to
hear some of the statements from the witnesses.
Thank you for having the hearing.
The Chairman. Thank you, sir.
Our first panel, in our panel of witnesses, is Mr. Joseph
Ripp, who is the Vice Chairman of America Online; Mr. Paul
Misener, who's the Vice President for Global Public Policy,
Amazon.com; Mr. Mark Beshears, who is the Assistant Vice
President of State and Local Tax of Sprint Corporation; and Mr.
Billy Hamilton, the Deputy Comptroller, the Texas comptroller,
of Public Accountants.
Welcome, and we'll begin with you, Mr. Ripp.
STATEMENT OF JOSEPH A. RIPP, VICE CHAIRMAN,
AMERICA ONLINE, INC.
Mr. Ripp. Thank you, Mr. Chairman.
Mr. Chairman and Members of the Commerce Committee, thank
you for inviting America Online to provide its perspective on
the Internet Tax Nondiscrimination Act. Specifically, Mr.
Chairman, I'd like to thank you for holding this important
hearing, and also thank you for your ongoing leadership on this
critical issue facing the online medium and online consumers.
I would also like to salute, on behalf of our millions of
members, the authors of the pending legislation on making
permanent the moratorium on Internet taxation, our home state
senator, Senator George Allen, and Senator Ron Wyden for all of
your efforts and hard work on this issue. AOL strongly supports
enactment of this legislation to make permanent the moratorium
on state taxation on Internet access.
Since 1985, AOL has been the leading pioneer in providing
access to the content and other services offered by the
Internet. AOL members now number over 25 million in the United
States, and our experience in this field has taught us several
things about our industry and our members.
First, Internet access technologies are still changing
continuously. Second, broadband rollout remains critical to the
expansion of Internet access. And, third, about half of the
American people currently have access to the Internet access
services. That's an excellent record in one decade, but it
means we are only one-half way to our goal.
We know something about those Americans who do not have
Internet access. They tend to be disproportionately poor, less
educated, elderly, minorities, or live in rural communities. We
believe several factors will play a critical role in reaching
this remaining 50 percent of Americans--technological
enhancements, keeping online services and Internet access
affordable for average consumers, and constant upgrading of
basic services to make each person's online experience more
useful or entertaining.
To that end, AOL has led the way in reaching out to
underserved communities. One of our best examples is AOL at
School, an innovative, groundbreaking service that we provide
free to over 10,000 schools nationwide and to the Internet
population who are not our subscribers. This Internet service
for school kids, in grades K through 12, as well as other
online educational tools offered through AOL via tutoring,
homework assistance, self-testing, research tools, and
mentoring, literally making the world of knowledge a keystroke
away for America's next generation. National tax policy will
directly impact our industry's ability to achieve these
objectives.
The mid-1990s witnessed a major increase in individual home
use of the Internet. This expansion was noted by state and
local tax administrators. By 1997, several state and local
governments had begun to enact Internet taxes on Internet
access. Tacoma, Washington, Chandler, Arizona, the State of
Connecticut, and handful of other states imposed taxes on
Internet access. These initiatives involved widely varying tax
theories, tax rates, and compliance regulations. Because some
state tax administrators mistakenly equated Internet access
with telecommunications, access providers faced the specter of
potentially filing over 55,000 different tax returns each year.
Many state and local rules impose taxes based on a customer
location, a fact that ISPs often cannot determine with
consumers using dial-up access. State and local taxes also
threaten price increases for consumers. Taxes on the full
amount of the basic monthly dial-up subscription service for
typical AOL members would increase their cost by two to three
dollars per month and as much as five dollars to ten dollars
per month for high-end broadband subscribers. Additionally, the
cost of tax compliance would have to be figured into each new
technological and service enhancement, and, in some cases,
would alter our decisions.
However, in 1998, Congress passed the Internet Tax Freedom
Act to halt the proliferation of state and local taxes on
Internet access. Not coincidentally, in the five years the
moratorium has been in place, the entire access industry has
made great strides toward improving online services, expanding
service to more places, and increasing the number of people
logged onto the Internet. We have also been successful at
extending digital opportunities to more Americans of poorer
means, less education, and less affluence. Indeed, I can say,
unequivocally, that we would not have as many Americans logged
on today, through a diverse array of providers, had the
Congress never enacted the Internet Tax Freedom Act.
That brings us to today's hearing and this Committee's
consideration of the Internet Tax Nondiscrimination Act to make
the moratorium of the last 5 years permanent and national in
scope. AOL sees several advantages in passage of this law. It
will promote digital opportunities for the 50 percent of
Americans who do not currently have Internet access by
preventing tax base price increases. It will protect consumers
and providers from the additional costs that would be necessary
to comply with a multi-jurisdictional tax system. Enactment
will promote competition in the industry. High tax compliance
costs would disadvantage small and independent Internet service
providers, especially in rural areas. The legislation will
promote innovation in information technologies by permitting
Internet service providers to change and expand services
without the distorting economic effects of taxation and without
diverting funds from R&D to tax compliance. It will also
stimulate the technology sector by preventing tax increases on
consumers and businesses, promoting Internet access services,
and stimulating investment in the industry.
And enactment of this legislation will promote U.S.
competitiveness in digital content and online software and
services. America currently dominates the world market in
digital content, services, and software. If you want our
industry to continue as the world leader, then America should
resist extra tax and regulatory burdens.
By contrast, ending the moratorium would result in several
harmful consequences. New taxes on Internet access could reach
as much as $60 to $120 per year for the average consumer. Many
consumers would face double taxation on Internet access
services, on the service itself, as well as the telephone lines
used to connect. The cost of providing Internet access services
would increase because of the administrative costs necessary to
collect, remit, and comply with tax regulations. And the price
of taxes and the costs of compliance would profoundly impact
virtually every aspect of Internet access services.
In closing, let me add that AOL and our industry are proud
of the contributions we have made to national productivity,
economic growth, technological innovation, and the empowerment
of individual people to improve the quality of their lives.
National tax policy that promotes these achievements is sound.
There are many controversial tax policy issues now before
Congress, but maintaining the moratorium against taxes on
Internet access is not one of them.
Prior to the invention of the Internet, only a small
portion of the world's population has had access to the world's
libraries. Imagine the pace of human invention, going forward,
when a child living in a rural community can connect the dots
in ways that none of us have imagined.
I urge you to pass this legislation to ensure continued
deployment of Internet access for all Americans.
Thank you.
[The prepared statement of Mr. Ripp follows:]
Prepared Statement of Joseph A. Ripp, Vice Chairman, America Online,
Inc.
Mr. Chairman, Members of the Committee, thank you for inviting
America Online, Inc. to provide its perspective on the Internet Tax
Nondiscrimination Act (S. 150 and S. 52). AOL strongly supports
enactment of this legislation to make permanent the moratorium on state
taxation of Internet access under the Internet Tax Freedom Act.
AOl's Experience
Since 1985, AOL has been the leading pioneer in providing a package
of services that allow access to the content and other services offered
over the Internet as well as access to proprietary content it and
others have created. This is what constitutes Internet access services
under the Internet Tax Freedom Act.
AOL's members now number over twenty-five million in the United
States, more than any other online or Internet service provider. Our
experience in this field has taught us several things about our
industry and our members.
First, Internet access services, and the services and software that
make access practically useful and navigable for people in their homes
and offices, are still changing continuously to reflect growing
knowledge of consumer interests and priorities, as well as ever
evolving technology. Our entire industry is constantly developing new
and faster transport technologies, more powerful and less expensive
computers and personal communication devices, and Internet access
services that are effortless and fulfilling, always with the interest
and benefit of the member in mind. These advances occur against the
backdrop of economic upheaval for the companies involved in the
industry both directly and indirectly not just online and Internet
service providers, but also dot-coms and telecommunications, cable and
satellite companies that service our industry. We are all familiar with
the wave of bankruptcies, divestitures and acquisitions in these
sectors in recent months.
Second, broadband rollout remains critical to the expansion of
Internet access services. Broadband rollout remains a high priority
throughout the industry and for government at all levels. Why? Because
the Internet has completely transformed the way Americans work, play,
shop and gather information. A new wave of Internet accessibility, the
availability of broadband (high-speed) access, has the potential to be
as revolutionary as the first wave. Broadband access, through Digital
Subscriber Lines (DSL) or cable modems allows users to send and receive
enormous quantities of data, audio, video and voice communication.
However, every technological revolution brings with it the possibility
that some will be left behind.
Third, about half of the American people currently have access to
Internet access services. That is an excellent record of achievement in
a decade. But it means that we are only half way to our goal of
providing these services to virtually all Americans. Certainly AOL and
thousands of our competitors believe it is in our best business
interests, the interests of individual people, and the national
interest to make Internet access services as common as a television in
the homes of America--not just as entrepreneurs but also because we
believe the service we provide is critically important to full
realization of an Information Society and the empowerment of individual
people. Empowering individuals is the cornerstone of a democratic
government.
Fourth, we know something about those Americans who do not yet have
these services. They tend to be disproportionately poor, less affluent,
less educated, elderly, ethnic minorities, or live in rural
communities. AOL has been working hard to reach out to these groups
through such initiatives as prepaid arrangements, where members
purchase a fixed amount of time online without further commitment. AOL
also offers a new client to the Hispanic marketplace-one that prompts a
prospective member to choose instructions in English or Spanish,
somewhat akin to what many ATM screens do today. Once these subscribers
are logged in, they will receive a Welcome Screen that includes special
AOL Latino content. AOL has also recently launched ``AOL Black Focus,''
a comprehensive new area on the AOL service that combines content and
information from an African American perspective with an engaging
online community. These new efforts demonstrate how AOL recognizes that
it cannot speak to its 25+ million members in the same voice . . . we
have to reflect our diverse membership.
Fifth, we believe several factors will play a critical role in
reaching this remaining 50 percent of Americans: (1) technological
enhancements that make access and hardware less expensive and more
ubiquitous, (2) keeping online services and Internet access affordable
for average consumers, and (3) constant upgrading of basic services to
make each person's online experience more practically useful, safe and
entertaining.
National tax policy will directly impact our industry's ability to
achieve the objectives I have outlined. It will have a substantial
financial impact on the tens of millions of American consumers who
already are logged on. It will also have serious implications for our
ability to reach the 50 percent of Americans who are not logged on. And
it will impact our industry directly and significantly as well as the
quality of the service we provide.
The Cost of Tax Compliance
By way of background, AOL began as a small company providing online
services only to users of IBM, Apple and Commodore computers as early
as 1985. In the following years, AOL's explosive growth caused it to
emerge as a national dial-up provider of Internet access services. We
quickly gained members from every state and virtually every city in
America. By 1997, AOL had over seven million members in the United
States. All of these members gained entry to AOL's services through
AOL's data centers located in northern Virginia, which they generally
accessed through computer modems and their telephone lines. Reflecting
on this history, AOL has been both a small online service provider and
a nationwide provider of Internet access services, with the respective
challenges and benefits of each, within a relatively short time frame.
Also by 1997, several state and local governments had begun to
enact differing taxes on online and Internet access services. Tacoma,
Washington, for example, implemented a plan to tax these services as a
telephone utility in September of 1996. Chandler, Arizona began
imposing a local utility tax on these services. The state of
Connecticut, on the other hand, started to impose a 6 percent sales tax
on Internet access service on the theory that it constituted a
``computer and data processing'' service. A handful of other states,
sometimes through their legislatures but much more often through
administrative interpretations of tax administrators, also began to
enact or consider new taxes on Internet access services. The enactments
and debates, however, involved tax theories, tax rates and compliance
and reporting regulations that varied greatly from state to state.
The prospect of hundreds or even thousands of disparate taxes, tax
rates and systems being heaped upon online and Internet service
providers and their customers presented a real dilemma. Because some
states' tax administrators mistakenly equated these services with
telecommunications, online and Internet service providers faced the
specter of potentially filing over 55,000 different tax returns each
year across thousands of jurisdictions, just like a national telephone
company. Thousands of online and Internet service providers, many of
them small entrepreneurial operations, determined that they could not
practically comply with thousands of state and local tax regulations,
much less manage the purely practical function of collecting taxes from
each customer and then remitting the taxes to state and local
governments.
It was no different for AOL, particularly during the rapid
membership growth of the mid to late 1990s. Even for a major national
provider like AOL, the prospect of complying with thousands of state
and local tax regimes was daunting. The tax rules varied greatly from
jurisdiction, to the extent any meaningful tax rules had been published
at all. Furthermore, many of these rules based the amount of taxes and
the fact of taxation on customer location, a fact that is often
impossible to determine for members using the most popular dial-up
access method. While these rules may have had some applicability to
telephone companies, which have years of experience complying with
public utility regulation, they are burdensome and inapplicable to a
company such as AOL.
These costs and difficulties would continue today. We estimate that
taxes on the full amount of the basic monthly dial-up subscription
service for typical members would increase its cost by approximately $2
to $3 per month on basic dial-up service. For higher cost broadband
service, the cost could be an additional $5 to $10 per month.
The cost and practicalities of tax compliance would have to be
figured into each new technological and service enhancement and, in
some cases, would alter our decisions. These costs do not even account
for the burdensome and costly litigation that AOL has been forced to
undertake to defend against multimillion dollar tax assessments by
several states claiming to be grandfathered under the ITFA.
While a large, national company like AOL might be able to muster
the resources to comply with a panoply of tax regulations, it would
come at great cost. The cost of compliance would negatively impact our
customers, our shareholders, and drain resources from technological and
service enhancements. But even with tremendous effort, no dial-up ISP
can reliably identify customer location at the time of use, a common
feature of state tax rules. At a time of transition in the industry, no
company needs this sort of additional burden and cost, without
providing any benefit but simply greater fees, to its customers.
Benefits Achieved Under the Internet Tax Freedom Act
In 1998, Congress passed the Internet Tax Freedom Act to halt the
proliferation of state and local taxes on Internet access services. In
the beginning, the act of Federal preemption of state taxation was
controversial. Accordingly, Congress acted carefully and incrementally:
(1) Congress enacted a moratorium to prohibit taxation for a period
of three years;
(2) Congress ``grandfathered'' states that already had enacted some
form of tax on Internet access services to provide them time to
alter or reverse their policies (or see if Congress might
eventually reverse itself); and
(3) Congress established the Advisory Commission on Electronic
Commerce to study Internet tax policies comprehensively and
report back to Congress during the three-year moratorium
period.
The ITFA passed overwhelmingly in 1998, and President Clinton
signed it into law. Subsequently, the Advisory Commission on Electronic
Commerce (ACEC) studied Internet taxation for a year. AOL--as well as
Time Warner--participated actively through their separate seats on the
ACEC (at the time, AOL and Time Warner had not merged). The ACEC
encountered significant controversy on certain tax policies, but one
issue never proved to be controversial: the moratorium on taxation of
Internet access services. No one ever articulated a justification or
defense of allowing thousands of state and local tax jurisdictions to
burden Internet access service by taxing it. Access taxes were never
debated and the Commission's final Report (April 2000) included, by a
clear majority, a proposal for Congress to permanently extend the
moratorium on Internet access taxes and to make it national in scope.
In 2001, Congress again overwhelmingly passed a two-year extension
of the moratorium, and President Bush signed it into law. Through
Treasury Secretary Snow's letter of May 14, 2003, the Administration
has signaled its continued support for this legislation.
We have operated under a national policy that prohibits state and
local taxes on Internet access for five years. During that time,
several states have abolished or significantly curtailed the taxes they
had enacted on Internet access services. For example, Connecticut,
Iowa, and the District of Columbia eliminated the taxes they claimed
were due on these services. A state court in Tennessee recently ruled
that Prodigy's online services were not subject to the
telecommunications tax assessed by the Department of Revenue. South
Carolina has voluntarily followed the Federal moratorium. The
Washington State legislature overturned the City of Tacoma's tax.
We have made great strides in the past five years at improving
online services, expanding service to more places and increasing the
number of people logged on the Internet. In the process, we also have
been successful in extending digital opportunities to more Americans of
poorer means, less education and less affluence. Indeed, I can say
unequivocally that we would not have as many Americans logged on today,
through a diverse array of providers and ISPs, had the Congress never
enacted the ITFA. However, as I mentioned earlier, the 50 percent of
Americans who are not logged on still are disproportionately of harder
to reach demographic groups, and they are the most likely to be hurt by
additional tax costs. Moreover, the quality and nature of Internet
access services would be significantly different today had ITFA never
been enacted. The ITFA has been beneficial in terms of expanding and
improving Internet access service.
And most significantly, while I cannot speak for all state and
local government lobbies, I am confident in observing that a general
consensus appears to have emerged among most interest groups,
industries and ideological sides of the debate that a national tax
policy prohibiting a panoply of state and local tax burdens on Internet
access services is prudent and constructive.
The Internet Tax Nondiscrimination Act
That brings us to today's hearing and this Committee's
consideration of the Internet Tax Nondiscrimination Act (S. 150 and S.
52). Passage of the Internet Tax Nondiscrimination Act will have
several key benefits:
Passage of S. 150 and S. 52 will promote digital
opportunities for the 50 percent of Americans who do not
currently have Internet access services. Taxes would only
increase their costs and frustrate the national goal of
providing these services for all Americans.
It will protect American consumers and online and Internet
service providers from the additional costs that would be
necessary to comply with a multi-jurisdictional tax system
involving thousands of different and conflicting state and
local tax rates, regulations, collection and remittance
requirements, audits, administrative costs and litigation.
Moreover, taxes on online and Internet services are inherently
difficult to administer because dialup customers can log on
from any location, and their location is often impossible to
determine.
S. 150 and S. 52 will promote competition in the industry.
High tax compliance costs would disadvantage small online and
Internet service providers and diminish competition. States and
localities have imposed inconsistent tax regulations,
increasing the cost of multi-jurisdictional compliance for
online and Internet access service providers. Onerous
compliance costs will inhibit full roll out of competitive
Internet access services to all Americans, especially in rural
areas. Small independent and rural online and Internet service
providers will be at a competitive disadvantage in complying
with complex multi-jurisdictional tax regulations and will find
it cost-prohibitive to expand services to additional states or
localities.
S. 150 and S. 52 will promote innovation in information
technologies. Tax costs will necessarily divert resources from
innovation and service to regulatory compliance. Taxes also
will increase the price of any service enhancements. Left free
of widespread taxation, online and Internet service providers
can innovate and expand services without the distorting
economic effects of taxation.
Passage of S. 150 and S. 52 will stimulate the technology
sector of the economy by (1) preventing tax increases on
consumers and businesses, (2) promoting Internet access
services, and (3) stimulating investment in the industry.
S. 150 & S. 52 promote U.S. competitiveness in digital
content and online software and services. America currently
dominates the world market in digital content, services and
software. The Internet Tax Nondiscrimination Act promotes U.S.
competitiveness in the world marketplace by providing broad tax
and regulatory protection for Internet and online access and
related software and services that make Internet access
services accessible for average Americans. The more accessible
these services become, domestic production of online content
and services increases. By comparison, the European Union now
imposes VAT taxes on Internet access and online content and
services. Already the EU policy has negatively impacted
consumers' use of online and Internet access services in
European countries. If you want our industry to continue as the
world leader in this industry, then America should resist the
EU paradigm.
By contrast, failure to extend to the moratorium will result in
several harmful consequences:
State and local governments will inevitably impose new and
complex taxes on each consumer's monthly Internet access
service charges;
Such taxes could amount, in some states, on some high-end
broadband services, to as much as $5 to $10 per month, or as
much as $60 to $120 per year. According to the Information
Technology Association of America (ITAA), failure to pass the
Internet Tax Nondiscrimination Act will raise the cost of
Internet access services (for the providers as well consumers),
and thereby suppress demand for broadband and network-enabled
innovations at ``the edge of the network.''
Many consumers will face double taxation on Internet access
services--on the service itself as well as the telephone line
so often used to connect to the provider;
The cost of providing Internet access services will increase
because of the administrative costs necessary to collect, remit
and comply with tax regulations; and
The price of taxes as well as the business cost of tax and
regulatory compliance will profoundly impact, in ways obvious
and subtle, virtually every aspect of the provision of Internet
access services-the cost of service delivery for providers,
price for each consumer, resources available for investment in
further technological enhancements, the ability of access
providers to expand service into new tax jurisdictions, and the
cost benefit analysis of certain service enhancements--tax
policy affects each of these market facets.
In short, AOL urges Congress to pass the Internet Tax
Nondiscrimination Act for all of the reasons I have mentioned.
Amendments That Have Been Discussed in Public Debate
During the current consideration of S. 150, S. 52 and the companion
bill in the House, H.R. 49, AOL has sought actively to maintain the
broad industry support for prompt enactment of this legislation. This
interaction has identified two additional critical points. First,
experience under the existing language of the Internet Tax Freedom Act
has shown that some states have sought to interpret its language in
ways that deny protection from taxation based on the use of certain
types of new technology to provide Internet access services. We can
expect to see continuing changes in the technologies used to provide
Internet access services in the coming years, if not months. Securing
the objectives of the moratorium on state taxation, namely stimulation
of a vibrant and broadly available group of Internet access services,
requires that the moratorium be technology neutral. AOL would support
technical changes to the existing language of the Internet Tax Freedom
Act that ensure such technology neutrality.
Second, some state tax administrators and others have argued that
the scope of the tax prohibition should be modified to expose the basic
software and content services provided as part of Internet access
services to taxation while granting tax freedom to only a minimalist
notion of Internet access service. This proposal would fundamentally
shift the status quo in the industry, where a variety of online and
Internet service providers offer a range of software, content and
services as most appropriately suits their membership. To consumers,
they all fall under the conventional understanding of Internet access
services. Furthermore, all of the benefits and detriments of tax policy
outlined above apply regardless of whether an ISP must tax all of its
service or only half of its service. And the practical problems
inherent in such a ``partial-service tax free vs. partial-service
taxed'' system should are obvious. For example, determining the fee
attributable to different aspects of these services would be arbitrary
and expensive, fundamentally an exercise without any other business
purpose and indeed contrary to the very purpose of the ITFA.
Similarly, some businesses would like to amend the scope of the tax
prohibition so as to advantage the business models they currently
employ or that they intend to employ in the future. Such proposals
typically involve narrowing the moratorium to produce state taxation of
other business models. AOL urges the rejection of all such proposals.
The success of a given approach to commercializing Internet access
services should depend only on whether the approach meets the current
needs of Internet users. Such success should not result from other
approaches being burdened by state taxation. Therefore, AOL urges that
the moratorium remain broad in scope, as it has been since the original
1998 enactment.
Third, some people have suggested that the moratorium not be
permanent or national in scope. AOL would urge the Senate to resist
amendments to simply extend the moratorium for another period of years
requiring the issue to be continuously lobbied for what is generally
considered a widely accepted idea. Moreover, during the last five years
of temporary moratoriums, nobody has ever articulated a time when
exposing Internet access service to a complex and regressive multi-
jurisdictional tax system would be beneficial for interstate Internet
access service and the tens of millions of Americans who use them.
Therefore, the consumers of America and access service providers
deserve a national and permanent moratorium.
Conclusion
In closing, let me add that AOL and our industry are proud of the
contributions we have made to national productivity, economic growth,
technological innovation and the empowerment of individual people and
improvement in the quality of their lives. National tax policy that
promotes these achievements is sound. Accordingly, the moratorium
extension contemplated by S. 150 and S. 52 should receive prompt
favorable action by this Committee and the Senate as a whole. There are
many controversial tax policy issues now before Congress, but the
moratorium against taxes on Internet access services is not one of
them.
Thank you.
The Chairman. Thank you, sir.
Mr. Misener, welcome back.
STATEMENT OF PAUL MISENER, VICE PRESIDENT FOR GLOBAL PUBLIC
POLICY, AMAZON.COM, INC.
Mr. Misener. Thank you, sir. I appreciate that very much.
Good morning.
My name is Paul Misener. I am Amazon.com's Vice President
for Global Public Policy. Thank you very much for inviting me
to testify today. And thank you, especially, Mr. Chairman, and
you, Senator Allen, and you, Senator Wyden, for your leadership
on this specific issue that we are going to be discussing this
morning.
Mr. Chairman, on behalf of our customers and company,
Amazon.com supports extending the Internet Tax Freedom Act
moratorium. Congress adopted this wise policy five years ago,
and there is no good reason to deviate from it now. We also
support the decision to split consideration of the moratorium
policy from the entirely separate and intricate constitutional
matter of remote sales tax collection on which Amazon.com has
been working cooperatively with the states for several years.
Mr. Chairman, Amazon.com believes that Congress made the
correct policy choice in 1998, when it established the Internet
Tax Freedom Act's moratorium. At that propitious moment, when
the World Wide Web was but half its current age, e-commerce was
widely celebrated but little understood; and, thus, there was
significant potential for state and local authorities to make
uninformed decisions with respect to Internet taxation.
Although the moratorium does not affect Amazon.com
directly, it has been very beneficial to American consumers,
including Amazon.com's customers, by protecting them from
onerous taxation. The moratorium also has given companies that
provide e-commerce infrastructure and services the certainty of
tax policy necessary for building the Web into the ubiquitous,
reliable, and affordable medium it is today. Moreover, the
moratorium gave the states time to become familiar with the
Internet and its myriad benefits. Because we foresee no reason
for the extant national moratorium policy to change, we support
making it permanent.
Mr. Chairman, the issue of whether and how Congress should
permit states to require out-of-state sellers to collect tax on
sales to in-state consumers is often confused and conflated
with the moratorium policy. As many of you have said this
morning, it is, however, a completely separate matter and
presents Congress with the gravity of a fundamental
constitutional right and the nearly mind-numbing detail of
state sales taxation. Please allow me to elaborate.
The commerce clause of the United States Constitution
establishes an essential protection that bars the states from
encumbering interstate commerce without specific congressional
approval. No less an authority than James Madison opined that
the most important negotiation at the Philadelphia Convention
involved this protection.
On the matter of state sales taxation, the Supreme Court
has held that the commerce clause bars states from requiring
out-of-state sellers to collect taxes on sales to a state's
residents unless these so-called ``remote sellers'' have
substantial nexus with that state. Thus, a fundamental
constitutional protection, not some prior policy choice,
currently bars states from requiring remote sellers without
nexus to collect tax.
Not only is the separate issue of remote sales tax
collection, at base, a grave constitutional matter, it also
involves important yet nearly mind-numbing detail. Nationwide,
there are over 7,500 active local sales tax jurisdictions that
include not just cities, states, and counties, but also school,
transportation, and mosquito-abatement districts. Each of these
jurisdictions has its own tax rates--rules and basic
definitions.
Mr. Chairman, the remote sales tax collection issue is so
constitutionally grave and intricately detailed that thorough
congressional hearings and deliberations are absolutely
essential, and we applaud your efforts to call those later this
year. Indeed, for Congress to consider overturning two Supreme
Court decisions on such a fundamental constitutional
protection, the Senate and House must be presented all the
salient facts and opinions on the matter.
In just a brief preview of what undoubtedly will be
discussed in great detail at upcoming hearings, please
recognize that the states have not yet simplified their tax
codes in a constitutionally meaningful way. You may have heard,
or soon will hear, the claim that some large number of states
have adopted the Streamlined Sales-and-Use Tax Agreement and,
thus, the long-awaited simplification has occurred.
This claim is misleading on three fundamental points.
First, the simplifications included in the agreement are
modest, at best, and certainly are not adequate for Congress to
overturn the Supreme Court's decisions. Second, key states have
failed to adopt key provisions of the agreement. And, third, in
many states the modest changes in the agreement that actually
have been enacted are not set to take effect until as late as
the end of 2005. Progress is, indeed, inadequate, inconsistent,
and often postponed.
Future hearings also will reveal that the seemingly
innocuous proposal to exempt small businesses from any remote
sales tax collection requirement actually would create a sales
tax collection loophole for large companies whose revenue
sources are divided into many hundreds or thousands of small
components.
In conclusion, Mr. Chairman, Amazon.com supports extending
the Internet Tax Freedom Act moratorium. Congress adopted this
wise policy 5 years ago, and there is no good reason to deviate
from it now. We also support the decision to split
consideration of the moratorium policy from the entirely
separate and intricate constitutional matter of remote sales
tax collection.
Thank you, again, for inviting me to testify. I look
forward to your questions. And I ask that my entire written
statement be included in the record.
The Chairman. Without objection.
[The prepared statement of Mr. Misener follows:]
Prepared Statement of Paul Misener, Vice President, Global Public
Policy, Amazon.com
Good morning, Chairman McCain, Senator Hollings, and members of the
Committee. My name is Paul Misener. I am Amazon.com's Vice President
for Global Public Policy. Thank you very much for inviting me to
testify today; I respectfully request that my entire written statement
be included in the record of this hearing. Thank you also--and, in
particular, thank you Senators Allen and Wyden--for your leadership on
the issues we will discuss this morning. Mr. Chairman, on behalf of our
customers and company, Amazon.com supports extending the Internet Tax
Freedom Act moratorium; Congress adopted this shrewd policy five years
ago, and there is no good reason to deviate from it now. We also
support the decision to split consideration of the moratorium policy
from the entirely separate and intricate constitutional matter of
remote sales tax collection, on which Amazon.com has been working
cooperatively with the states for several years.
The Internet Tax Freedom Act Moratorium Should be Extended
Mr. Chairman, Amazon.com believes that Congress made the correct
policy choice in 1998, when it established the Internet Tax Freedom
Act's moratorium on state and local taxes on Internet access; bit
taxes; and new, multiple or discriminatory taxes on electronic commerce
(the ``Moratorium''). At that propitious moment--when the World Wide
Web was but half its current age--ecommerce was widely celebrated but
little understood and, thus, there was significant potential for state
and local authorities to make uninformed decisions with respect to
Internet taxation. Although the Moratorium does not affect Amazon.com
directly, it has been very beneficial to American consumers, including
Amazon.com's customers, by protecting them from onerous taxation. Many
statistics--including the fact that the percentage of Americans who use
the Internet increased from 33 percent in late 1998 to 54 percent by
the fall of 2001--help confirm the wisdom of Congress' decision. The
Moratorium also has given companies that provide ecommerce
infrastructure and services the certainty of tax policy they needed in
order to make the substantial nationwide investments necessary for
building the Web into the ubiquitous, reliable, and affordable medium
it is today. Moreover, the Moratorium gave the states time to become
familiar with the Internet and its myriad benefits. Whereas the
Internet five years ago may have been seen as a novel source for extra
government revenue, today it is accepted as an essential societal good
undeserving of additional layers of taxation. Indeed, unlike some
activities that policymakers often discourage by additional taxation,
it now is widely recognized that Internet use should not be
intentionally reduced in this way. We think it somewhat unlikely,
therefore, that states would now, were the Moratorium to expire, choose
to heap layers of tax burdens on the Internet. Yet, because allowing
states to do exactly that would be the only reason for discontinuing
the Moratorium, we support maintaining it. And, because we foresee no
reason for the extant national Moratorium policy to change, we support
making it permanent--subject, of course, to subsequent Congressional
repeal if currently unforeseeable circumstances were to render the
policy unsound at some point in the future.
Sales Tax Collection is an Entirely Separate and Intricate
Constitutional Matter
Mr. Chairman, the issue of whether and how Congress should permit
states to require out-of-state sellers to collect tax on sales to in-
state consumers is often confused and conflated with the ITFA
Moratorium policy. It is, however, a completely separate matter. And,
unlike the policy choices Congress made to establish, then extend the
Moratorium, the remote sales tax collection issue simultaneously
presents Congress with the gravity of a fundamental constitutional
right and the nearly mind-numbing detail of state sales taxation. For
these reasons, Amazon.com supports considering remote sales tax
collection separately. Please allow me to elaborate. The Commerce
Clause of the United States Constitution establishes an essential
protection that bars the states from encumbering interstate commerce
without specific Congressional approval. No less an authority than
James Madison, the Father of our Constitution, opined that the most
important negotiation at the Philadelphia Convention involved this
protection. On the matter of state sales taxation, the Supreme Court
has held--in the 1968 Bellas Hess and 1992 Quill decisions--that the
Commerce Clause bars states from requiring out-of-state sellers to
collect taxes on sales to a State's residents unless these so-called
``remote sellers'' have ``substantial nexus'' with that State.
Otherwise, held the Court, the current sales tax regime is so
complicated that a collection requirement would impose an
unconstitutional burden on remote sellers. Thus, a fundamental
constitutional protection, not some prior policy choice, currently bars
states from requiring remote sellers without nexus to collect sales
tax, and the present debate is fundamentally about whether remote
sellers will continue to be afforded this protection. Not only is the
separate issue of remote sales tax collection at base a grave
constitutional matter, it also involves important yet nearly mind-
numbing detail. Nationwide, today there are over 7,500 active local
sales tax jurisdictions that include not just states, cities, and
counties, but also school, transportation, and mosquito abatement
districts. Each of these jurisdictions has its own tax rates, rules,
and basic definitions; and their geographic boundaries are often vague
or virtually unknowable for anyone outside the locality. The issue also
involves interstate compacts and ongoing governance mechanisms;
combined audit processes; the creation of a national database of
jurisdictions and rates; vendor compensation; sales tax holidays; and
the bundling of goods and services. Put bluntly: details matter. In
addition to these grave and detailed constitutional considerations, the
remote sales tax collection issue involves a few associated policy
matters, such as whether remote sales (which tend to use fewer local
services, cause less pollution, and save citizen time) should be taxed
the same way as local sales, especially when brick and mortar retailers
regularly receive local tax abatements and need only collect at the tax
rates and rules of their stores' locations, not their customers' homes.
The Gravity and Intricacy of the Sales Tax Issue Necessitate Thorough
Deliberation
Mr. Chairman, the remote sales tax collection issue is so
constitutionally grave and intricately detailed that thorough
Congressional hearings and deliberations are absolutely essential.
Indeed, for Congress to consider overturning two Supreme Court
decisions on such a fundamental constitutional protection, the Senate
and House of Representatives must be presented all the salient facts
and opinions on the matter. Amazon.com has been working cooperatively
with the states on this issue for several years. Unlike the stridently
anti-tax position incorrectly ascribed to our company on occasion, we
long have maintained that we would be willing and able to collect tax
on remote sales so long as the relevant state codes are actually
simplified. In other words, if the unconstitutional burden found in
Bellas Hess and Quill is truly removed, we would not oppose Congress
overturning the Supreme Court decisions. Not surprisingly, therefore,
we have been working constructively with the states to ensure that
their efforts lead to true simplification. Gary Locke, Governor of
Amazon.com's home state of Washington and a strong proponent of sales
tax simplification and eventual mandatory collection by remote sellers,
appointed Amazon.com to be one of Washington State's two private sector
representatives to the Streamlined Sales Tax Project (``SSTP''). Based
on our experiences in this collaboration with the States, and as the
largest online retailer in America, we look forward to sharing the
details of our knowledge and ideas with Congress at upcoming hearings.
Upcoming Hearings Will Reveal that the States Have Not Yet Simplified
Adequately
Mr. Chairman, in just a brief preview of what undoubtedly will be
discussed in great detail at upcoming hearings, please recognize that
the states have not yet simplified their tax codes in a
constitutionally meaningful way. You may have heard, or soon will hear,
the claim that some large number of states (the Streamlined Sales Tax
Implementing States--``SSTIS''--which approved the SSTP's work) have
adopted the Streamlined Sales and Use Tax Agreement (the ``Agreement'')
and, thus, the long-awaited simplification has occurred. This claim is
misleading on three fundamental points. First, the simplifications
included in the Agreement are modest, at best, and certainly are not
adequate for Congress to overturn the Supreme Court's decisions. The
states have thus far avoided the tough choices that would produce true
simplification. For example, they have not solved the thorny problems
of vendor compensation, sales tax holidays, or the bundling of goods
and services or of physical and digital goods. Nor have they developed
an interstate compact with an ongoing governance mechanism, a combined
audit process, or a national database of jurisdictions and rates. In
sum, and as surely will be revealed in detail in upcoming hearings, the
Agreement simply is not yet ready for prime time. Second, key states
have failed to adopt key provisions of the Agreement. For example, some
of the largest states in the Union--California, Texas, Illinois, and
Washington--have longstanding rules that tax goods at the source of the
sale, and they have no plans to change these rules as is required by
the Agreement. Under Texas law, a Houston consumer who buys a lamp from
a Dallas seller must pay both a state sales tax that is remitted to
Austin and a local sales tax that is charged at the Dallas rate and
remitted to the Dallas city government. This is the so-called
``sourcing'' approach to sales taxation. But the Agreement is
fundamentally based on a ``destination'' approach, whereby sales are
taxed at the consumer's--not the seller's--location. If Texas were to
adopt the Agreement, the sale of the lamp by the Dallas seller to the
Houston consumer suddenly would be locally taxed at the Houston rate
and the proceeds would be sent to the Houston city government. The
redistribution of tax assessments and revenue among cities, counties,
legislative districts, and other areas within sourcing states would
potentially be enormous, and at best unpredictable, with various in-
state winners and losers. Key sourcing states in the SSTP--Texas and
Washington, for example--have recognized this huge economic and
political problem and each has deferred adoption of the destination
approach pending future studies that, in Texas, are not due until the
end of 2004. And, of course, another key sourcing state, California,
has not participated in the SSTP and, if it does participate in the
future, faces the extant destination-based Agreement, which may be
amended only by supermajority vote. Thus, not only have state tax
representatives collectively avoided the hard choices necessary to meet
constitutional strictures; state legislatures have individually balked
at even the modest changes the SSTP has proposed. Third, to make
matters even worse, in many states, the modest changes in the Agreement
that actually have been enacted are not set to take effect until the
middle of next year, or even as late as the end of 2005. Progress is,
indeed, inadequate, inconsistent, and often postponed. Future hearings
also will reveal that the seemingly innocuous proposal to exempt small
businesses from any remote sales tax collection requirement actually
serves as a disincentive to the states in their simplification efforts.
Such an exemption--often proposed for companies with less than $5
million annual revenue--would create an obvious sales tax collection
loophole for large companies whose revenue sources are divided into
many hundreds or thousands of small components. More fundamentally, a
small seller exemption also removes states' incentive to simplify their
sales tax codes, because only the big sellers would need to comply. But
if a seller with yearly sales of $4.9 million (or even one fiftieth
that amount) cannot figure out the collection system, it certainly is
not simple. Put another way, a truly simplified sales tax collection
system should be manageable even to businesses annually making one
hundred thousand dollars. Lastly, although reasons behind actions or
inactions are inherently difficult to divine, hearings may also expose
why the states have not yet simplified adequately. There probably are
two essential reasons. First, the SSTP was not clearly chartered as an
effort to simplify tax codes enough to have Congress overturn the
Supreme Court. It began instead as a collegial effort by the states to
improve their tax systems merely for the sake of improvement. In such
circumstances, any progress is good and welcome. But, at some moment
last year, the SSTP almost imperceptibly metamorphosed into an effort
to convince Congress that it should overturn the Court, with or without
real simplification. One prominent governor, addressing the SSTP in a
speech last April, said, ``We want to keep Congress from over-thinking
on this issue . . ..'' Hopefully, this view is rare, for Congress
deserves to receive all the relevant information and opinions. The
second key reason why states have not yet made the tough choices may be
the fact that the potential revenue is so modest. In contrast to some
of the outlandish estimates of huge online markets and potential sales
tax revenue that you may have heard a few years ago or even recently,
the forgone revenue on ecommerce sales is currently at most a meager
$2.4 billion per year nationwide. We certainly wish the potential tax
revenue were higher--because our sales would be proportionately
larger--but it is not. Suggestions that, because the states are in a
budget crisis, Congress must act very quickly to allow the states to
require remote sellers to collect tax are well-meaning but unfounded:
state budget shortfalls dwarf potential tax revenue from remote online
sales; there is plenty of time to get simplification right.
Conclusion
In conclusion, Mr. Chairman, Amazon.com supports extending the
Internet Tax Freedom Act Moratorium. Congress adopted this shrewd
policy five years ago, and there is no good reason to deviate from it
now. We also support the decision to split consideration of the
Moratorium policy from the entirely separate and intricate
constitutional matter of remote sales tax collection, and we hope to
have the opportunity to testify at a subsequent hearing on the details
of this topic. Thank you again for inviting me to testify. I look
forward to your questions.
The Chairman. Welcome, Mr. Hamilton. Mr. Beshears, we'll
save you for last. Thank you.
Mr. Hamilton, welcome.
STATEMENT OF BILLY HAMILTON, PAST PRESIDENT,
FEDERATION OF TAX ADMINISTRATORS;
DEPUTY COMPTROLLER, STATE OF TEXAS
Mr. Hamilton. Mr. Chairman, Members of the Committee, good
morning. My name is Billy Hamilton, and I'm Deputy Comptroller
of Public Accounts, in Texas, a position I've held for 11
years. I'm also a member of the executive committee of the
Multistate Tax Commission, and am a past President of the
Federation of Tax Administrators, on whose behalf I appear
today.
And I also would like to have the full text of my remarks
entered into the record of today's hearing.
The Chairman. Without objection.
Mr. Hamilton. I am here today to discuss the proposal to
extend the moratorium on state taxation and Internet access
charges. The Internet Tax Freedom Act was implemented in 1998,
as you know, as a temporary means of allowing a new form of
technology to gain a foothold in the mainstream of American
life without the encumbrance of taxes. The authors of the
original law highlighted their hope that keeping Internet
access free of taxes would allow more Americans to afford this
basic access to the Internet.
The fledgling industry argument is no longer relevant. The
purchase or supply of Internet access services in states that
tax services has not been adversely affected by the tax, and
the Internet continues to grow. Electronic commerce is now a
mature sector of the U.S. and international economy. And while
we wholeheartedly support its continued expansion as a fast and
efficient avenue of commerce, continuing the preemption of
taxation simply provides a special position for this particular
communications medium that ultimately leads to discrimination
among firms in the Internet access and communication sectors.
Thus, it may be time to reexamine the intent of the original
act to determine whether the special tax treatment of Internet
access is still necessary or whether we can come up with an
alternative solution to put in its place.
I think a more fundamental point is that the states attempt
to exercise common sense in most instances when it comes to
taxing business and commerce. Taxation of Internet access is a
state issue, which Texas and every other state should be
allowed to address. I do not believe that there was ever a
threat of highly discriminatory taxes on the Internet by the
states. Rather, many states seek to provide a tax advantaged
home for Internet companies as an economic development
strategy. I do not believe, for example, that the Texas
legislature would be inclined to pass special taxes in this
area even if strictures were lifted tomorrow. Members of our
legislature understand and value the unique qualities of the
Internet as a means of commerce, but they also understand that
it must be treated like other businesses operating in their
states, many of whom pay state and local taxes and are, in
every respect, good citizens of their community.
While the MTC and FTA maintained a neutral position on
congressional action in the original Tax Freedom Act and its
successor, the Internet Tax Nondiscrimination Act, both
organizations have provided Congress several recommendations
with regard to specific provisions of the act, should you
choose to extend the law.
We recognize, first, that many in Congress have different
views on whether the current moratorium should be extended
permanently or for a short period of time. On this point, we
recommend that if Congress chooses to extend the act, it should
do so for no more than 2 years. Further, if the act is
extended, Congress should undertake a thorough review of its
impact on state and local revenues and the presence of
unintended consequences due to changes in technology.
Second, the MTC and FTA believe that any extension of the
current law should preserve the grandfathered ability of the
limited number of states that currently impose the tax on
charges for Internet access. Currently, nine states impose
taxes that are protected. Repealing the grandfather clause
would disrupt their revenue streams at a time when I think we
all know every state is struggling to balance its budget.
Third, the definition of ``Internet access'' contained in
the act should be rewritten to ensure equity among various
types of access providers and among types of communications
services. It should also eliminate opportunities to bundle
otherwise taxable content into a single package of Internet
access in a manner that would prevent the imposition of taxes
that would otherwise be applicable.
Any extension of the act should not be accompanied by
provisions or separate legislation that grants more favorable
state and local tax treatment to commerce conducted
electronically over commerce conducted by other means.
The definition of ``discriminatory taxes'' contained in the
legislation should be amended to ensure 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. These provisions, in the original act, were
intended to ensure that merely accessing products of an out-of-
state seller via an in-state service provider would not be
considered to create nexus for an out-of-state seller.
When the law was written, these provisions were not
considered problematic. However, as the electronic-commerce
industry has evolved, the potential for this issue to arise has
grown and should be examined carefully.
The MTC and FTA believe that changes in considerations must
be addressed, and both organizations are available to assist
Congress in any way in analyzing the issues as the debate goes
forward.
Now, I would like to turn your attention briefly to how the
Texas legislature addressed the issue of taxation in Internet
access and why this is a unique solution that deserves
consideration by Congress for possible nationwide
implementation.
By 1997, Internet access was already being used by some
Texas businesses and was, at the time, classified as taxable
information services by the state. In the course of heated
debate over proper state and local and Federal taxation of the
Internet that surrounded the 1998 Act, Texas tax law drew
criticism. In response, the comptroller convened a broad-based
working group of industry leaders, traditional businesses which
had an Internet presence, the legal and accounting professions,
who specialized in state tax policy, at our office to suggest
and formulate potential techniques to address Texas' taxation
of Internet transactions.
Our working group concluded that Internet access was
taxable under the statute, and made various recommendations.
One of the recommendations was to repeal the tax on Internet
access. But, if that were not feasible, for financial reasons,
the working group recommended that we seek clarification and
simplification from the legislature.
This clarification occurred in the 1999 legislation, where
our legislature, upon further review and recognition, decided
that to treat Internet access charges as a separate category
from information services under the Texas tax code. However,
the legislature and the comptroller were mindful of the
benefits of this new technology and the desire to ensure that
every Texas resident was able to obtain tax-free basic access
to the Internet.
To achieve this goal, the legislature passed Senate Bill
441 that exempts taxation of the first $25 of Internet access
charges. Our state law has not changed that enactment. We still
provide the first $25 of Internet access tax free to Texas
residents. And hundreds and thousands, if not millions, of
Texas residents have taken advantage of this option.
In 2000, Comptroller Carole Keeton Strayhorn convened an
Electronic Commerce and Technology Advisory Group that formed a
review of the policies affecting taxation of e-commerce in
Texas and to make recommendations that would support expansion
of Internet access to people in areas currently without
adequate access, while ensuring that Texas remains competitive
in the marketplace, in comparison with other states.
Comptroller Strayhorn took the group's advice and came out
with a number of recommendations. One was to seek an increase
in the Internet access exemption. However, due to budget
constraints, the Texas legislature was unable to increase the
exemption at this time. On the other hand, even under a lot of
budget pressure, they did not do away with the exemption.
My purpose in providing a brief background as to how Texas
obtained its solution is to demonstrate that our solution was
not a one-sided decision; it was a solution that was created by
the comptroller's office working closely with a cross-section
of industries and professionals. Despite the Texas
legislature's inability this year to increase the exemption, it
does not in any way undermine the widespread support from both
taxpayers and business to a solution we have implemented. And
we have found that the growth rate of access in the Internet in
the state to be on par with that achieved in other parts of the
country.
The Texas solution is unique, but we believe it is one that
Congress should seriously consider as it analyzes the need for
extending the current law and tries to deal with competing
requests for changes in the definition of Internet access. It
provides a simple but fair method of ensuring that citizens
have tax-free access to basic Internet services, while
immediately resolving many of the questions that Congress
continues to wrestle with regarding purported differential
treatment of Internet service providers and bundled content.
I hope the information I've provided is helpful to the
Committee and to the Senate, as it continues its debate on this
issue. I would also be happy to answer any questions.
[The prepared statement of Mr. Hamilton follows:]
Prepared Statement of Billy Hamilton, Deputy Comptroller, State of
Texas
Mr. Chairman, Members of the Committee, good morning. My name is
Billy Hamilton, and I am Deputy Comptroller of the Texas Comptroller of
Public Accounts, a position I have held for 11 years.
I am also a member of the Executive Committee of the Multistate Tax
Commission and a past President of the Federation of Tax
Administrators, on whose behalf I appear today. The MTC is an
organization of state governments that works with taxpayers to
administer, equitably and efficiently, tax laws that apply to
multistate and multinational enterprises. Forty-four states and the
District of Columbia participate in the Commission. The FTA is an
association of the principal tax administration agencies in each of the
50 states, the District of Columbia and New York City.
I am here today to discuss a proposal to extend the moratorium on
state taxation of Internet access charges. The Internet Tax Freedom Act
was implemented in 1998 as a temporary means of allowing a new form of
technology to gain a foothold in the mainstream of American life
without the encumbrance of taxes. The authors of the original law
highlighted their hope that keeping Internet access free from taxes
would allow more Americans to be able to afford basic access to the
Internet.
The ``fledgling industry'' argument is no longer relevant. The
purchase or supply of Internet access services in the states that tax
services has not been adversely affected and use of the Internet
continues to grow exponentially. Electronic commerce is now a mature
sector of the U.S. and international economy, and while we
wholeheartedly support its continued expansion as a fast and efficient
avenue of commerce, continuing the preemption from taxation simply
provides a special position for this particular communications medium
that ultimately leads to discrimination among firms in the Internet
access and communications sector. Thus, it may be time to re-examine
the intent of the original Act to determine whether the special tax
treatment of Internet access is still necessary or whether an alternate
solution should be put in place.
I think a more fundamental point is that the states' attempt to
exercise common sense in most instances when it comes to taxing
business and commerce. Taxation of Internet access is a state issue,
which Texas--and every other state asks that it be allowed to address
as a state. I do not believe that there was ever a threat of highly
discriminatory taxes on the Internet by the states. Rather, many states
have sought to provide a tax-advantaged home for Internet companies as
an economic development strategy. I do not believe, for example, that
the Texas Legislature would be inclined to pass special taxes in this
area, even if strictures were lifted tomorrow. Members of our
legislatures understand and value the unique qualities of the Internet
as a means of commerce, but they also understand that it should not be
treated differently than other businesses operating in their states,
many of whom pay state and local taxes and are in every respect good
citizens of their communities.
While the MTC and FTA maintain a neutral position on congressional
action on the original Internet Tax Freedom Act and its successor, the
Internet Tax Nondiscrimination Act, both organizations have provided
Congress several recommendations with regard to specific provisions of
the Act should Congress to choose to extend the law. I would like to
discuss those recommendations with you and also provide you with a bit
of background on a unique solution that the state of Texas has
implemented.
First, let me highlight the recommendations from the MTC and FTA.
1. We recognize that many in Congress have differing views on
whether the current moratorium should be extended permanently
or for a short period of time. On this point, we recommend that
if Congress chooses to extend the Act that it should do so for
no more than two years. Further, if the Act is extended
Congress should undertake a thorough review of its impact on
state and local revenues and the presence of unintended
consequences due to changes in technology. The changing nature
of Internet technology and its use in business operations means
that the economic and fiscal impact of this Act will change
over time. For this reason, a temporary--rather than
permanent--extension may be appropriate.
2. The MTC and FTA believe that any extension of the current law
should preserve the grandfathered ability of the limited number
of states that currently impose a tax on charges for Internet
access. Currently, nine states impose taxes that are protected.
Repealing the grandfather clause would disrupt the revenue
stream of these states at a time when nearly every state is
struggling to balance its budget. Our Legislature recently
completed work on a balanced budget that involved literally
billions of dollars in spending reductions and no increase in
taxes. We are struggling at the most fundamental level to make
our revenues and spending match. If these states wish to
continue to impose these taxes, they should be permitted to do
so.
3. The definition of ``Internet access'' contained in the Act should
be rewritten to insure equity among various types of access
providers and among types of communications services. It should
also 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. This last point is
particularly important in insuring that an amended definition
avoids an unintended erosion of state tax bases.
4. Any extension of the Act should not be accompanied by provisions
or separate legislation that grants more favorable state and
local tax treatment to commerce conducted electronically over
commerce conducted by other means.
5. The 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. These provisions in the original Act 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
the law was written these provisions were not considered
problematic. However, as the electronic commerce industry has
evolved, the potential for this issue to arise has grown and
should be examined carefully.
The MTC and FTA believe these changes and considerations must be
addressed to maintain an adequately functioning law on the taxation of
Internet access--and both organizations are available to assist
Congress in analyzing this issue as the debate goes forward.
Now, I would like to turn your attention briefly to how the Texas
Legislature addressed the issue of taxation of Internet access--and why
this is a unique solution that deserves consideration by Congress for
possible nationwide implementation. By 1997, Internet access was
already being utilized by some Texas businesses and was, at that time,
classified as taxable ``information services'' by the Comptroller.
In the course of heated debate over proper state and Federal
taxation of the Internet that surrounded the 1998 Internet Tax Freedom
Act, Texas' tax policy drew some criticism. In response, the
Comptroller at that time convened a broad based working group of
industry leaders, traditional businesses which extensively use Internet
services, and legal and accounting professionals both inside and
outside the Comptroller's office, to suggest and formulate potential
techniques to address Texas' taxation of Internet transactions. Our
working group concluded that Internet access was taxable under the
statute, and made various recommendations. One of the recommendations
was to repeal the tax on Internet access, but if that was not feasible,
the working group recommended that we seek clarification and
simplification from the Texas Legislature.
This clarification did occur at our next legislative session in
1999 when our Legislature upon further review and in recognition of its
expanded use by both individuals and businesses, determined that
charges for Internet access were separated from the category of
``information services'' and classified them separately as ``Internet
access'' in the Texas Tax Code. By this time, numerous Internet Service
Providers had established customer accounts in Texas to provide
Internet access to Texas residents and businesses. However, the
Legislature and Comptroller were mindful of the benefits of this new
technology and the desire to insure that every Texas resident was able
to obtain tax-free basic access to the Internet. To achieve this goal,
in 1999, the Texas Legislature passed Senate Bill441 (Tex. Tax Code
Sec. 151.325) that exempts from taxation the first $25 of Internet
access charges.
Our state law--and our tax rate on Internet access--has not changed
since its enactment. We still provide the first $25 of Internet access
charges tax-free to Texas residents--and hundreds of thousands of Texas
residents have taken advantage of this tax-free option for basic
Internet access.
In 2000, at Comptroller Carole Keeton Strayhorn's request, the
Electronic Commerce and Technology Advisory Group (E-TAG) was formed to
review policies concerning E-commerce issues facing Texas and make
recommendations that would support expansion of Internet access to
people and areas currently without adequate access while ensuring that
Texas remained competitive in the marketplace in comparison with other
states. Comptroller Strayhorn took the group's advice and came out with
several recommendations. One was to seek an increase in the Internet
access exemption from $25 to $50. However, due to budget constraints,
the Texas legislature was unable to increase the exemption at the
present time.
My purpose in providing a brief background as to how Texas obtained
its solution to provide clarification and simplification in 1999 and
our continued effort to improve our policies related to Internet access
and other related transaction is to demonstrate that our solution was
not a one-sided decision. It was a solution that was created by the
Comptroller's office working closely with representatives of a cross-
section of industries and other professionals. The Texas Legislature's
inability this year to increase the exemption from $25 to $50 does not
in any way undermine the widespread support from both taxpayers and
businesses to the solution that we have implemented--and have found the
growth rate for access to the Internet in the state of Texas to be on
par with that achieved in other parts of the country.
The ``Texas solution'' is unique, but we believe it is one that
Congress should seriously consider as it analyzes the need for
extending the current law and tries to deal with competing requests for
changes in the definition of Internet access. It provides a simple-but
fair-method of insuring that citizens have tax-free access to basic
Internet services while immediately resolving many questions that
Congress continues to wrestle with regarding purported differential
treatment of Internet service providers and bundled content.
I hope the information I have provided is helpful to the Committee
and the Senate as it continues its debate on this issue. I would be
happy to answer any questions you may have.
The Chairman. Thank you, sir. Mr. Beshears.
STATEMENT OF MARK BESHEARS, ASSISTANT VICE PRESIDENT, STATE AND
LOCAL TAX, SPRINT
Mr. Beshears. Thank you, Mr. Chairman, Members of the
Committee, for the opportunity to provide testimony on the
extension of the current moratorium on Internet taxes. I am
Mark Beshears, Assistant Vice President of State and Local Tax,
Sprint. I have responsibilities for property tax, sales tax,
income tax in all 50 states for our long distance division, our
wireless division, and in 18 states for our local division.
Sprint is a global telecommunications company. Our world
headquarters is located in Overland Park, Kansas. As I said,
Sprint is a provider of local long distance, wireless
telecommunications, and Internet access services.
In addition to representing the views of Sprint, I'm here
on behalf of the United States Communications Association, the
United States Telephone Association, the Cellular
Telecommunications and Internet Association, and 14
telecommunications companies, and if you've been following
state telecom policy, to get 14 telecommunications companies in
the same room is no small feat.
We strongly support the goals of the Internet Tax
Nondiscrimination Act. We commend the Committee, Senator Wyden,
Senator Allen on their leadership on creating and maintaining
this national policy of encouraging businesses and individuals
to connect to the Internet by preempting State and local
taxation of Internet access.
Our primary concern is that the current law does not
accommodate the technological changes that have occurred since
the act was enacted back in 1998. Internet access was a lot
different. It was essentially a dial-up, 56K type of
technology. Now we have high-speed Internet, broadband
Internet, DSL service, 3G wire service, cable modem and direct
satellite service. These services either did not exist, or were
in their infancy and not available to consumers when the act
was first passed in 1998.
The language of the 1998 Act is causing serious problems
today. Congress wanted to ensure that the moratorium language
cannot be used to preempt existing taxes on traditional
telephone service, or what we call POTS, plain old telephone
service. Language was added to the act to exclude
telecommunications service from the definition of Internet
access, and this is what's causing the problem. 5 years later,
telecommunications companies are the major providers of high-
speed Internet access through DSL and wireless web
technologies, yet because of the telecommunications service
exclusion, some states have asserted that our service is
subject to taxation, while competing cable modem and direct
satellite Internet access are tax-exempt.
As an aside, when I first came to Sprint 11 years ago, I
was faced with a similar situation having to do with our data
transmission service, what we called our X.25 protocol
conversion service, which essentially was the precursor to the
Internet, and when I came to Sprint, the states were starting
to look at this revenue source in this service, and the FCC had
opined in several cases--Computer I, II, and III, this
particular service was an enhanced service, it was not a
telecommunications service. But the States--that was not going
to deter them.
I have been litigating that issue now for 11 years,
expending millions of dollars in legal fees and resources on
what is an enhanced service, what is a data transmission
service. I had even one state whose law was antiquated, but
that did not stop them, they tried to tax data transmission
service as telegraphy, because that's what they taxed in their
particular State, so what we're trying to do is get ahead of
the curve. This is a unique opportunity for Congress to step in
and set the rules so we don't have to expend resources on
litigation and adversarial relationships.
Our proposal has two parts. First, it will eliminate the
disparity in tax treatment between different Internet access
providers, and second, it would address the issue of bundling.
Cable modem and direct satellite providers compete directly
with DSL and 3G wireless providers. Because of certain rulings
by the states and the FCC, these providers sell Internet access
free in most cases. However, some states have asserted the DSL
includes both an Internet access and a taxable
telecommunications service and, as a result, customers that
choose DSL service may be charged tax when competing services
are not taxed. The same service, the same end result, two
different tax treatments.
This disparity we believe clearly violates the intent of
the act. Our proposal makes the act technology-neutral by
clarifying that telecommunications exclusion does not apply to
a telecommunications service used to provide Internet access to
end users, nor does it apply to a telecommunications service
purchased by an Internet access provider when that
telecommunications service is used to provide Internet access,
again to end users, basically a sale for resale type
environment. Our proposal would not have any effect on cable
modem, direct satellite, or other technologies that are
currently exempt. With our proposed change, all Internet access
providers would be treated the same.
The second part of our proposal deals with the issue of
bundling. Most states require that if you are bundling a
taxable and a nontaxable service together and you do not
separately state the taxable from nontaxable charges on a
customer bill, then you have to tax the entire bundle, or the
other option is to break out the cost of the taxable service
and the nontaxable services on the customer's bill.
Our bundling provision would allow companies that sell
Internet access and other taxable services as a part of a
bundle to collect tax only on the taxable portion that they can
reasonably identify on their books and records from the
nontaxable components. Our proposal does not affect Federal,
State, or local taxes and fees on any telecommunications
services that are not used to provide Internet access to users,
including Federal USF charges imposed by the FCC.
Telecommunications services that are not related to Internet
access remain excluded from the definition of Internet access.
In conclusion, as Congress seeks to make the Act permanent,
we believe that it is imperative that it be clarified so that
all providers of Internet access receive the same tax
treatment. A consumer should choose his or her Internet service
based upon the price, equality of service, customer service, et
cetera, not based upon State and local tax considerations.
Thank you, Mr. Chairman. It has been an honor and a
privilege to be here before you. I'll be happy to answer any
questions that you might have.
[The prepared statement of Mr. Beshears follows:]
Prepared Statement of Mark Beshears, Assistant Vice President, State
and Local Tax, Sprint
Thank you Mr. Chairman, and members of the Committee, for the
opportunity to provide testimony for the record to the Senate Commerce
Committee's hearing on the proposed extension of the current moratorium
under Federal law on Internet taxes and on the discriminatory and
multiple taxation of e-commerce transactions.
I am Mark Beshears, Assistant Vice President of State and Local Tax
for Sprint Corporation. Prior to joining Sprint in 1992, I served as
Secretary of Revenue for the state of Kansas. Sprint is a global
telecommunications company with over 72,000 employees and annual
revenues of approximately 27 billion dollars. As one of the Nation's
premier telecommunications companies, Sprint is a provider of local,
long distance, wireless telecommunications, and Internet access
services.
In addition to representing the views of Sprint, I am here on
behalf of the United States Communications Association (USCA), United
States Telephone Association (USTA), Cellular Telecommunications &
Internet Association (CTIA) and 14 telecommunications companies that
contributed to and support my testimony. A list of these supporters is
attached as an Appendix to this testimony.
We strongly support the goals of the Internet Tax Non-
Discrimination Act, and we commend this committee's leadership in
creating and maintaining the national policy goal of encouraging
businesses and individuals to connect to the Internet by pre-empting
state and local taxation of Internet access.
Now that this committee and the Congress are considering a
permanent extension of the moratorium, it is imperative that the intent
of the Act be clarified. We believe that the moratorium cannot be made
permanent unless the concerns outlined in this testimony are addressed.
Our primary concern is the current law does not accommodate the
technological changes that have occurred since the Internet Tax Freedom
Act was enacted back in 1998. Internet access was much different than
it is today. High-speed Internet access--DSL, ``3G'' wireless, cable
modem, and direct satellite--either did not exist or were in their
infancy and not broadly available to consumers.
The language in the 1998 Act is causing problems today. Congress
wanted to ensure the moratorium language could not be used to pre-empt
existing taxes on traditional telephone services. Language was added to
the Act to exclude telecommunications service from the definition of
Internet access.
Five years later, telecommunications companies are major providers
of high-speed Internet access through DSL and wireless web
technologies. Yet because of the telecommunications service exclusion,
some states have asserted that our service is subject to taxation while
competing cable modem and direct satellite Internet access are tax
exempt.
Our proposal has two parts. First, it would eliminate the disparity
in tax treatment between different Internet access providers. Second,
it would create a uniform way to address the tax treatment of Internet
access that is sold in a ``bundle'' with other taxable services.
Cable modem and direct satellite providers compete directly with
DSL and ``3G'' wireless providers as means of accessing the Internet.
Because of certain rulings by states and the FCC, these providers sell
Internet access tax-free. However, some states have asserted DSL
includes both Internet access and taxable telecommunications service.
As a result, customers that choose DSL service may be charged tax when
competing services are not taxed.
These state rulings are particularly damaging to telecommunications
companies that sell Internet access because of the very high rates of
taxation that are applied to telecommunications services by state and
local governments. A study by the Council on State Taxation found that
the average state and local effective tax rate on telecommunications to
be 13.9 percent, compared to 6 percent for other goods and services
subject to state and local sales taxes. Tax rates like these have a
measurable impact on customer purchasing decisions.
This disparity clearly violates the intent of the Internet Tax Non-
Discrimination Act. Our proposal makes the act technology-neutral by
clarifying the ``telecommunications exclusion'' does not apply to
telecommunications service used to provide Internet access to users,
nor does it apply to telecommunications service purchased by an
Internet access provider when that telecommunications service is used
to provide Internet access to users.
Our proposal would have no effect on cable modem, direct satellite,
or other technologies that are currently exempt. With our proposed
change, all Internet access providers would be treated the same.
The second part of our proposal would ensure that Internet access
is not automatically taxable when sold with other telecommunications
services. Currently, most states require that when taxable and non-
taxable goods are sold together, or ``bundled'', the entire ``bundle''
is taxable unless the seller separately states the exempt item on the
customer's bill. Some states also apply this same logic to services.
The ``bundling'' provision would allow companies that sell Internet
access and other taxable services as part of a ``bundle'' to collect
tax only on the taxable portion if they can reasonably identify the
non-taxable Internet access in its books and records kept in the
regular course of business.
Our proposal does not affect federal, state, or local taxes and
fees on any telecommunications services that are not used to provide
Internet access to users or that are purchased and directly used to
provide Internet access to users, including Federal USF charges imposed
by the FCC. Telecommunications services that are not related to
Internet access remain excluded from the definition of Internet access.
The following are ``real world'' examples of the issues addressed
in this testimony:
Retail sales of Internet access
Currently, the retail sale of Internet access is often subject
to varying treatment from state to state. For example, states
are all over the map regarding whether a charge for DSL service
represents a charge for telecommunications or a charge for
Internet access. Alabama and Kentucky have opined that charges
for Internet access via DSL are taxable as telecommunications
service. On the other hand, Louisiana and South Carolina have
opined that similar charges are exempt Internet access.
States have also given different opinions on the taxability of
Dedicated Internet access services. Florida and Illinois have
opined that charges for Sprint's Dedicated Internet access are
subject to tax as charges for communications service. The scope
of these opinions included not only charges for the dedicated
access line, similar to a DSL line, supporting the access; but
also separately stated charges for each user's Internet
Protocol (IP) Ports. These IP Port charges are Sprint's retail
charges to each customer for their ability to access the
Internet. The purpose of the service is the provision of high-
speed, ``always on'' Internet access, yet these states have
opined that such charges represent charges for both
telecommunications service and Internet access. Consequently,
Sprint is collecting tax on sales of Dedicated Internet Access
Service to users in these states. On the other hand, Texas and
Massachusetts have opined that the very same charges represent
charges for Internet access. These examples of the varying tax
treatment of residential DSL and Dedicated Internet access
services have resulted from the outdated language of the
current Act.
The Wholesale sale of Internet access
The language of the current moratorium is also unclear as it
relates to the sale of IP backbone, or bulk Internet access
from IP backbone providers to other Internet Service Providers
(often referred to as the ``Wholesale'' sale of Internet
access). The language of the current Act does not specifically
address this transaction, consequently, the scope of the
moratorium has been interpreted differently by both states and
carriers alike. Florida, Illinois, and Missouri have opined
that Internet Service Providers (ISPs) that make charges for
Internet access cannot purchase underlying communications
services for resale. Thus, sales of IP backbone, or ``bulk''
Internet access, from Sprint to an ISP is subject to tax as
charges for telecommunications service. This is in spite of the
fact that the ISP is purchasing dedicated access to the
Internet backbone for subsequent sale to an end user. Other
states, including Texas, have opined that while a portion of
this transaction is a sale of telecommunications service, at
least some portion of the sale is to be treated as access to
the Internet.
Taxation of Wireless Internet access
The provision of Internet access via wireless services is an
emerging and rapidly growing area of concern. Third generation
wireless (``3G'') Internet access and wireless networking
(``Wi-Fi'') services are experiencing significant growth in
both users and revenue. Because these services are new, there
is little, if any, guidance regarding how such services should
be taxed. These services are essentially Internet access
service, the only difference being that they are provided via a
wireless, rather than wireline, medium. As these wireless
Internet access services are deployed, such services will be
subject to the same inconsistent and confusing treatment unless
Congress clarifies the Act. These services are at a critical
phase of development, and the same protection that led to the
passage of the original ITFA should be extended to these
services to foster their development.
Bundling
A recent and growing trend in the telecommunications industry
is to offer a package of services for a single price. For
example, a company may offer wireless service, local exchange
access and high-speed Internet access for a single monthly
price. Under the moratorium, no tax may be imposed upon charges
for Internet access. However, general sales tax theory and most
state laws with respect to sale of property dictate that when
taxable and non-taxable goods are offered for a single
``bundled'' price, the entire charge is subject to tax. The
clash of these concepts seems to have been misunderstood by
some states, who subject the whole ``bundle'' to tax despite
the Federal pre-emption of tax on Internet access. This has
created substantial confusion within the industry. Nineteen
states have adopted statutes similar to our proposal (tax only
the taxable services). One additional state has adopted the
provision by rule. These states allow Internet Access to remain
tax-free as long as the provider can reasonably identify the
tax-exempt portion in their books and records. Recently, the
state of Florida has proposed a regulation that encompasses a
similar principle. Alabama and Kentucky have taken the opposite
position and ruled that the entire charge was taxable unless
the bill itself separated the charge for Internet access from
the charge for communications services. As one can discern from
these examples, this issue must be addressed and clarified at
the Federal level in order to ensure that Internet Access
remains tax-free even when it is sold as part of a bundle of
services.
As Congress seeks to make the Internet Tax Non-Discrimination Act
permanent, it is imperative that the Act be clarified so that all
providers of Internet access face the same tax treatment. Our proposed
changes would make the Act provider-neutral and technology neutral, so
that price, quality of service, and customer service--not state and
local tax considerations--would determine which provider or type of
technology that customers choose for their Internet access.
Thank you again for the opportunity to present testimony.
Appendix A
List of Supporting Companies and Associations
ALLTEL
AT&T
AT&T Wireless
BellSouth
Cellular Telecommunications and Internet Association (CTIA)
Cincinnati Bell
Cingular Wireless
Level 3 Communications
Nextel
Qwest
SBC
Sprint
T-Mobile USA
United States Communications Association (USCA)
United States Telecommunications Association (USTA)
Verizon
Verizon Wireless
The Chairman. Thank you very much, Mr. Beshears.
Mr. Hamilton has stated that he doesn't believe that
there's a threat of highly discriminatory State taxes on the
Internet if the Internet tax moratorium lapses. Do you agree
with that, Mr. Ripp?
Mr. Ripp. Mr. Chairman, the states, as was discussed today,
are under tremendous pressure to look for sources of revenue,
and if you think of Internet taxation, many states will come up
with various theories about how one should be taxed, or what
the issues of taxation are.
It was mentioned before that there were over 50,000
jurisdictions that could potentially tax an Internet provider.
I do believe that there would be discrimination on Internet
access services. I do believe that the cost of compliance for
the Internet access providers would be truly burdensome, and
most importantly, as the states try to see how do they tax,
most states use point of presence, or where a service is used
as the basis for their taxation.
The problem that we have as an Internet service provider,
we often do not know the address of the people that are using
our service, nor do we know the location that they're dialing
in from, so the complexities that would be created by allowing
states to tax Internet services would be enormous for our
organization, and so I do believe that we would wind up with
varying discriminatory taxes against our service, yes.
The Chairman. Mr. Misener.
Mr. Misener. Mr. Chairman, with the caveat that of course
I'm not on the front lines like Mr. Ripp's company is, I tend
to agree with Mr. Hamilton that it's unlikely that there would
be a slew of discriminatory taxes imposed on Internet access,
or Internet access taxes, rather, and discriminatory taxes on
the Internet, or on e-commerce.
However, since that is the only reason one would
discontinue the moratorium, that bad outcome is one that ought
to be prevented by continuing the moratorium, so just because
it's unlikely, there would be no reason to discontinue the
extant Federal policy as a result.
The Chairman. Mr. Beshears.
Mr. Beshears. Thank you, Mr. Chairman. I believe that the
discrimination in the taxation is more likely to come from, as
Senator Allen said, the Commissars who are going to be
interpreting these tax laws.
My experience, and I've been in this business since 1979,
you have these issues that come up, new technological advances,
and the State audit groups look at ways to assess on these new
technologies and these new services. It's just one of those
things that we have to be aware of. As I said in the data area,
it was clear that a lot of states did not have the ability or
the capacity under the statute to tax these services, but they
went ahead and tried to gimcrack them in as a computer service,
a software service, an information service.
I think just the fact that when this fledgling industry
started back in the mid-nineties, seven or eight states ran in
and started trying to tax this access. We have revenue rulings,
letter rulings from various states that take different
positions on different aspects of this service. For example, if
Sprint provides a dedicated Internet backbone to a commercial
business, the only object of that pipe is for that commercial
business to access the Internet. Some states said that that is
on Internet access, that's a taxable communications service, so
I think until we get some clarification, till we firm up the
interpretation of the act, we're still going to have these
different positions taken by different States, and it's going
to result in different providers being treated differently,
different technology being treated different, and we're going
to have this discrimination.
The Chairman. Mr. Hamilton.
Mr. Hamilton. I agree with myself, Senator.
[Laughter.]
The Chairman. I find myself doing that on occasion.
[Laughter.]
Mr. Hamilton. Quite well. I believe that the states are
responsible in their taxation, and that issues like Mr.
Beshears laid out can be resolved as issues have been resolved
in the streamlined sales tax project and as we did in our
Electronic Commerce and Technology Advisory Group by simply
sitting down with industry and the concerned parties and
working through the issues and coming up with a reasonable
solution that can be brought to our legislatures, and we have
no concern that the industries that are involved won't be
represented at the table and that they won't make their voices
heard, and that those voices won't be considered.
The Chairman. Mr. Ripp, in your testimony you make a very
important allegation, or statement that the recent
implementation by the Europeans of value-added taxes on the
Internet access and online content and services has had a
detrimental impact on its customers. Can you elaborate?
Mr. Ripp. Recently, the European VAT law was applied to all
Internet providers, and in fact as AOL looked at its services
overseas we had to raise our prices pretty dramatically in the
countries affected for Internet access to cover the VAT rates.
As you know, the VAT rates overseas can be anywhere from 15
to 17, 18 percent, and sometimes are over 20.
The Chairman. So it did have a chilling effect.
Mr. Ripp. It had a chilling effect. We had to raise prices
pretty immediately, because the cost to us was pretty high.
The Chairman. That effect was a leveling off, or a
reduction in numbers of subscribers, or how did you feel this
impact?
Mr. Ripp. Certainly, as we looked at raising the prices in
the countries that were affected by the increase in tax, we did
see some leveling off, but as the Internet proliferates--right
now, Europe is further behind the U.S. in deployment. The U.S.
is further ahead. As we look forward, going forward the people
in the U.S. that are going to come on board are certainly less
affluent. They are more in rural communities, and we think that
keeping the cost of the service low for those people to get on
board is very important.
We saw a direct result in Europe that we've had to raise
prices pretty dramatically to cover the tax. We'd be forced to
do the same things in the United States, so my sense is, as we
try to really deploy the Internet to the lower 2 percent of the
American people who are not there yet, the Americans who have
not yet signed on or logged on, increasing the cost of the
service to increase taxation is going to slow down the
deployment of the Internet to those people.
The Chairman. Doesn't that concern you, Mr. Hamilton?
Mr. Hamilton. That the value added tax in other countries--
--
The Chairman. No, if you raise taxes, then obviously the
charges are higher, therefore less people are able to afford
it. I mean, that's a fundamental of economics.
Mr. Hamilton. Well, yes, Mr. Chairman, it is, and that is
why Texas decided to exclude the first $25 to get at the basic
service issue. I mean, if it was--you know, I mean, we could
give it away like water.
The Chairman. The price is $25, and you discount the $25,
that is zero. If you have to raise it to $50, then you discount
the $25, then he's paying $25, Mr. Hamilton.
Mr. Hamilton. Well, he's paying $25 for the access. He's
not paying $25 in tax, Mr. Chairman, I don't believe.
The Chairman. Well, obviously, you and I have a different
view of the fundamentals of economics. If you raise the cost to
the consumer, through imposition of taxes which have to be
passed on to the consumer, then there are less consumers that
can afford it. That's just sort of a precept that I've operated
on and I think the free market operates on, so obviously it
doesn't concern you.
Does it concern you, Mr. Misener or Mr. Beshears?
Mr. Beshears. It does to me, Mr. Chairman. The Committee on
State Taxation did a study several years ago and it showed that
the State and local effective tax rate on telecommunications is
almost 14 percent, compared to 6 percent for other goods and
service. This industry does not need another tax put on it.
The Chairman. Mr. Misener.
Mr. Misener. Mr. Chairman, increasing the cost of Internet
access by the application of new taxes certainly would be
detrimental to consumers, our customers, and so we certainly
would not like it seen done. I said it is likely not to occur,
at least in great amounts, if the moratorium were to expire,
but only because I would hope that that very basic fact is
internalized by State revenue officials, but because it may not
be internalized by a few State revenue officials across the
country, then there is no reason for discontinuing the
moratorium, whose very purpose is to prevent those sorts of bad
judgments from being made.
The Chairman. Thank you. Maybe I'm overemphasizing this,
but if there is an example in Europe of an unhealthy effect on
the continued proliferation of the Internet because of
increases in taxes, which are passed on to the consumers, then
I think it's a factor we have to consider, since it has already
happened in Europe, according to Mr. Ripp's testimony. I'm not
that familiar with what's happened in Europe, but I think the
Committee ought to explore that as we reach our conclusions as
to how to handle this issue.
And perhaps I was a little less than charitable to Mr.
Hamilton. Please go ahead and respond again if you'd like. I
apologize for my sarcasm.
Mr. Hamilton. It's a difficult issue. Obviously, I don't
think anyone, and certainly not the Texas legislature, wants to
see an increase in taxes on business at this point in our
history, with the economy struggling.
The point that we approached in Texas was that the goal
here was to protect basic Internet access, and so we exempted
the first $25. We didn't have to delve into the complexities of
what Internet access was composed of. The first $25 was
accepted.
The Comptroller later came back to the legislature and
recommended increasing that so that broadband access would
actually be exempted. The legislature wasn't able to do that
because of fiscal constraints, but I think the inclination was
there, and I believe, you know, when we see an improvement in
our revenue, just like these gentlemen see an improvement in
theirs, we'll be able to provide that exemption, so the
direction that we're going is to provide more access. That's my
only point.
The Chairman. Thank you. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. That was very
instructive.
Mr. Hamilton, I'm struck by how similar the arguments
you're making are to those that we heard 6 years ago. I mean,
you basically used almost exactly the same words on the first
page of your statement. You talked about how the law preempts
taxation. It says, continuing preemption from taxation. Tell me
how our law preempts taxation when if, for example, you walk
into a store and you buy something the traditional way and you
pay a sales tax, that that purchase, when compared, say, with
walking into a KMart and ordering the same thing online and
paying the tax online, how are we preempting taxation, when our
bill specifically allows that?
Mr. Hamilton. Well, I think in that case, Senator, the
testimony is referring to the taxation of Internet access, or
to the complex of services that might be delivered as part of
an Internet service, and I don't think the issue for the states
are so much that we should be able to tax it, or we should not
be able to tax it. It's simply that we should be able to decide
that policy as a matter of how we finance our States.
Senator Wyden. So you're not saying, then, that your
statement is right, because I gave you a example of how we're
not preempting the Internet from taxation. Do you disagree with
that?
Mr. Hamilton. Senator----
Senator Wyden. All you need to say is yes or no. If you
want to talk about another subject, we'll talk about that, but
I gave you an example of how we're not preempting a state from
taxation. Do you disagree?
Mr. Hamilton. May I explain?
Senator Wyden. Sure.
Mr. Hamilton. I agree that you're not interfering with the
taxation of transactions. The only thing that the testimony was
referring to, and perhaps not as clearly as I needed to have
written it, was that the states should not be preempted from
the taxation of Internet access or other things that are
legitimately taxed under State laws.
We had to go to the taxation of services in the 1980s
because of a budget situation that we faced then. It wasn't a
choice of the tax agencies. It wasn't particularly a choice of
the legislature. It was simply that or go to some other more
obnoxious revenue source, at least as far as we look at it in
Texas, like the personal income tax.
Senator Wyden. Does your organization favor the overturning
of the Quill decision?
Mr. Hamilton. No, sir, we don't.
Senator Wyden. You do not?
Mr. Hamilton. No, sir.
Senator Wyden. You're not in favor of Congress overturning
the Quill decision, which requires a nexus for taxes. Are you
sure about that? I'm almost certain that every Texas official
who has come here to testify against our proposal supports it.
Now, I think it would be great if you were changing your mind,
because I'm sure we'll have another vote on the floor of the
U.S. Senate, so I want to give you a chance to be clear on
that.
Mr. Hamilton. We have had the opportunity, Senator, to join
in lawsuits that would attempt to overturn Quill in the Supreme
Court. What we chose to do, and the Comptroller made a very
definite decision in this way and sought the direction of the
legislature, was to work with the States, to work with the
industry, to work with the citizens to find a way to streamline
the sales tax in all of the states in an effort to convince the
Congress that it was time to bring those transactions under it,
so no, we don't seek to overturn the Quill decision in the
courts.
Senator Wyden. How about in the Congress? That was the
question. We'll have a vote, I'm quite certain. When Senator
Allen and I and others bring this to the floor we'll have a
vote on the floor of the U.S. Senate about whether Quill ought
to be overturned. Are you all going to support the Congress
overturning Quill?
Mr. Hamilton. I think we will support a streamlined
initiative that changes the definition so that we can collect
remote services when it's appropriate.
Senator Wyden. Let me ask a third time. Are you going to
support--there will be an amendment on the floor of the Senate
overturning Quill. Will you support that?
Mr. Hamilton. Senator, I don't believe it will be--I'm not
familiar with how you write laws, but I don't think----
Senator Wyden. We had a vote on it the last time this came
up. It's what the issue has always been about, and you know it
has always been about it because it's been about catalogue
sales, it's about phone sales, now it's about the Internet.
It's a simple question. Maybe after you think about it you'll
give us a position.
Mr. Hamilton. We think, Senator, those sales, if they are
sold into our State, and if they are the same as a brick and
mortar retailer would collect tax on, they should collect tax.
If that means, in your mind, overturning Quill, or coming to
new standards of taxation, we favor that, yes.
Senator Wyden. OK. Let me, if I might, a question for you,
Mr. Beshears, and you all have been very helpful and very
constructive in getting into some of the technical aspects of
this. The moratorium, and I'll read you from the report here,
applies to online services, Internet access services,
communications or transactions conducted through the Internet,
regardless of the technology being used to deliver the
services. We're talking about the switch network, basic phone
system, cable, and wireless. Quote, however, it only applies to
the portion of the medium being used to provide such services.
Companies can and do break their billing now, in landline
phone service, cable service, Internet access, and wireless. My
question to you is, what justification does a state have to tax
Internet access when it's a separate line item? It looks to me
like it would violate our law.
Mr. Beshears. That's a good question, Senator, and that is
the perplexing issue involved in this. We have something called
a dedicated IP port charge that we would charge somebody for,
basically the gateway to the Internet. Some states have opined
that that's not Internet access.
If you look at the 1998 Committee report----
Senator Wyden. That's what I was reading from.
Mr. Beshears.--it's clear that it appears to me that the
transmission piece, the transport piece, if it is being used as
a dedicated Internet pipe, that it should be exempt, but the
states have taken disparate positions on that issue.
Senator Wyden. So we're clear on this point, states are
violating the law right now.
Mr. Beshears. Yes.
Senator Wyden. Is that correct?
Mr. Beshears. That's correct.
Senator Wyden. I think that's an important point, and I
think the Committee report is very clear with respect to
Internet access.
Now, Mr. Hamilton wants to go out and shellac 97 million
American households, and that's his position, to try to figure
out how to impose new taxes, and you've just told us for the
record that the law is being violated right now, because you
can break down billing into these various kinds of services and
states are violating the law. Now, it doesn't give us a lot of
confidence in terms of how we're going to approach this again.
And certainly my colleagues have questions, and my time has
expired.
Senator Burns [presiding]. Thank you, Senator Wyden. Mr.
McCain has turned the gavel over to me, and I shall ask a
couple of questions, and I'm going to turn it over to Senator
Allen. You guys can just have at it. I don't want you to beat
up on these guys. The way these guys started off this morning,
I thought we had a full moon or something.
[Laughter.]
Senator Burns. First of all, a couple of observations. Mr.
Beshears, thank you very much. Obviously, you've had quite a
lot of training in communications, but I think your statement
was as clear about what this debate is about as anybody we've
ever had at the table, to be honest with you.
You know, there are a lot of folks--I hope that every
Senator and every Member of the House of Representatives reads
your statement, because I think it really identifies what this
debate is about, and how we should approach it.
Then I've drawn another conclusion, with Mr. Hamilton, and
I see where he's coming from, that it boils down to
definitions, what we do, how do we define enhanced services, or
special services that would fall under the category of value-
added tax, or any of this kind of thing, so I think we've got
to wrestle a little bit about definitions as we move this
along.
I'm especially interested in the bundling idea, Mr.
Hamilton. How does Texas handle bundled services? Can you give
me an idea on how you look at that?
Mr. Hamilton. Senator, we wrestled with that quite a bit,
and we were very concerned, just because of the complexity of
the technology and the range of providers that were becoming
involved, we would not be able to sort out the services that
were truly Internet access or that were enhanced services, and
that really is why the legislature elected to simply exempt the
first $25 of the access fee, assuming that, you know, let's
say, as a standard America Online--it was $24.95 or something
at the time--would provide basic access at that level.
The Comptroller would like to see that extended to high-
speed, where that basic service is also extended, and what we
tried to do was to avoid the entire issue of what bundling was
and what should or should not be in the service.
Senator Burns. What I'm getting down to is, say you've got
America Online, and basically you're right, back in the mid-
nineties it was basically a 56K dial-up service, and that's all
we had, but then we've seen DSL come on, we've seen broadband
come along, now we've seen 3G, and now Wi-Fi is starting to
really take hold. We're finding it where you buy your coffee
now, I don't want to give them a special plug here, but in
areas where people congregate and spend some time and use the
Internet as a source.
I can't get over the idea that, I was really surprised the
other day at a guy sitting in a coffee shop, and he had a
computer that was about this big, and he was a salesman, he
sticks it in his briefcase, and he had about an hour between
calls, so he goes in, has lunch or whatever, there's Wi-Fi
access, and he does all of his paperwork online between calls.
I mean, I find the efficiency of this--now, in that case, would
you call that an enhanced service in your taxing debate, or in
your taxing code in Texas?
Mr. Hamilton. We simply don't make the distinction,
Senator. The first $25 that that company pays for that Internet
line would be excluded from taxation, and they can deliver
whatever they want after that.
Senator Burns. Mr. Beshears, do you want to respond to
that?
Mr. Beshears. Yes, Mr. Chairman. The bundling issue is an
interesting issue. Congress has addressed bundling once before,
when you passed the Uniform Mobile Sourcing Act to source
wireless telecommunications. Essentially, that bundling
protocol is the same protocol that we are putting forward
today.
Several years ago, Sprint was going to be offering a bundle
of service, long distance, local, Internet, data, fax, for one
flat price, and we realized that there were components of that
bundle that were going to be nontaxable, especially the
Internet fees, but there are some states that don't tax long
distance, there are some states that don't tax local service
but do tax long distance, so we were faced with this issue of
how we're going to tax this bundle.
So we approached the States and said, can we disaggregate
these charges on our books and records, you come in and do an
audit and determine what we are doing, if it's correct or not
on audit, and to date we have had 19 States pass legislation
that allows us to disaggregate our bundle on our books and
records, one State has done it by a rule, so we have 20 States
basically that have adopted essentially the mobile sourcing
bundling protocol.
So it is an issue for State tax administrators. They were
concerned that if we had a package of services for $150, that
we were going to call $149 of it Internet access to try to game
the tax system, and they were very concerned about that, but we
have been able to establish a relationship with a lot of states
to say, you know, come in and do your audit, look at our books
and records, if we can't show you that we're taxing these items
correctly or not taxing these items, then you have to assess
us.
So I think the bundling issue is being addressed, and to
date we have not had any audit experience because it is so new,
but hopefully it will be a workable win-win situation for both
the states and the private sector.
Senator Burns. The reason this concerns me is, we've done
everything policywise that we know how to do, with the
exception of a couple of things, that would create an
environment of a buildout in broadband, high-speed Internet
access into rural areas. We're finding, in states like my own,
where telemedicine will play a large role in the correspondence
of smaller rural hospitals with major medical corridors,
because, number one, we have an aging population in rural
areas, we have also an economic situation where you cannot
provide those services on an affordable basis for people who
live in those areas.
I have 14 counties without a doctor, and we depend highly
on Internet and communications services to provide those
services to those rural areas. They're also the lower income
people, and to make it affordable is very much a concern of
mine, because some people will just be left behind.
Mr. Ripp, I'm trying here, but I want you to respond to the
VAT thing, you know, the value-added tax. I'm afraid that it
would have a chilling effect on, not people who apply for the
services, but I think it will really, really stunt the growth,
the buildout of advanced services, broadband, and the
technology that it's going to take to cover our rural areas,
particularly, basically in the wireless areas.
Mr. Ripp. Senator, I would agree with you. Whenever you
have taxes that are assessed against a business, the cost of
compliance of delivering those taxes back to the potential
55,000 jurisdictions, the cost of the tax itself needs to
either be passed on to consumers to be recovered, or it comes
out of further investment and deployment of new services for
the Internet, so that will be a logical consequence. That
happens every day as people look at what are the various costs
of operating their businesses.
If we get into complex tax schemes for the Internet that
force us all into massive regulatory compliance issues, force
us to debate with States, to enter into litigation with states
over the years, that is certainly going to come out of our R&D
budget. That will certainly come out, and we'll have to raise
prices for people to provide the service, because it's just a
cost of doing business.
And as you think through the Internet, that its deployment
has done, we believe, wonderful things for this country, we
understand what you're talking about with distance learning and
with distance communications for medical services, et cetera,
we think the Internet has the ability to provide tremendous
opportunities for this country, especially in rural areas, and
we'd like to see legislation passed to make sure that the
Internet continues to be simple, continues to be tax-free, to
allow us to continue to invest heavily in our product and in
deploying it for all Americans.
Senator Burns. Well, I thank you for that answer, and as
this legislation moves forward, and just like I said, it kind
of boils down to definitions, that we all define the term the
same way, I would hope that we would like to work with all of
you, Mr. Hamilton, you included, because you're a very
important part of this scenario and this debate, and you
presented your case very well, and we want to work with you and
your group, but I think, as this has developed, with Senator
Allen, and I know he will do that, it will boil down to
definitions on how we apply this law, and I thank all of you
for coming today.
I've got to go over to protect my turf in Water Power
Appropriations, and everybody in this room knows what that's
about.
[Laughter.]
Senator Burns. Thank you for coming today. Senator Allen.
Senator Allen [presiding]. Thank you, Mr. Chairman. I guess
I'm taking over as Chairman now. I do want to say, it's not a
full moon. What just happened recently, it's what is called a
buck moon.
Senator Burns. A what?
Senator Allen. A buck moon. It's when the new antlers start
coming out.
Senator Burns. They're in the moss.
Senator Allen. And then they're in the moss, and so there's
velvet on those antlers, even though it's a buck moon. I don't
know if you see any logic to that bit of lunacy.
[Laughter.]
Senator Allen. At any rate, I welcome again all of the
witnesses here. Let me just make a few points and then ask you
all some questions.
On the issue of Europe, I'm Chairman of the Subcommittee on
European Affairs on the Foreign Relations Committee, and we did
have a hearing on this issue of the VAT tax in Europe, which as
I recollect just kicked in on July 1.
Mr. Ripp. That's correct.
Senator Allen. And maybe we would want to have a hearing in
this Committee on it as well. Just for everyone's reference, it
depends which country you're in in Europe as to which tax
applies, and the taxes are everything from 13 percent to 25
percent, and some countries will not tax books but they will
tax e-books, and the same sort of problems we have here trying
to figure out tax policies, and the E.U. is going to grow, with
the aspirant countries generally in Southeastern and central
Europe joining in, so there will be even more countries.
The problem for a company like AOL and larger companies,
while they have a different rate, the VAT tax, if you actually
have a presence in that country, in Europe in one of those
countries, that's the tax that applies. On the continent of
Europe the lowest tax is in Luxembourg, which is 15 percent, so
AOL has, I understand, set up in Luxembourg.
I'm one who always looks for the lowest prices everywhere.
Madeira Island's actually are 13 percent. I'm not sure what
kind of connections there are, but it's owned by Portugal. They
have a lower tax than Portugal does.
Regardless--and we ought to examine it. Where this ends up
being a big problem is for smaller businesses, U.S.-based
businesses that cannot make an investment and locate a
facility, whether in Luxembourg, or France, or Sweden, or
wherever, over in Europe, and so it makes it very difficult for
them to collect taxes, I know, all the different rates that
they have, whether it's super-reduced rates, reduced rates,
standard rates, parking rates and the various different ways
that items are taxed, very similar to the problems that we have
here in this country for any e-tailer trying to determine what
is the tax, and I've always used the number, 7,600 different
taxing jurisdictions, and I'll always remember that in one zip
code in Denver there are four different taxing jurisdictions
that will try and tax the same item four different ways, which
makes it very--they can't even do it by zip code.
Let's get to some basics here and get the basic
understandings, ground rules as to the impact of this. Who
would want to give me a figure of how many people do not have
Internet access now and how many people in this country do
have? Somebody--AOL, you'd be the best one. Mr. Ripp.
Mr. Ripp. The figures that we have suggest that about 62
million households are online right now.
Senator Allen. And what percentage is that?
Mr. Ripp. Roughly, about half the population.
Senator Allen. Half? Is there any disagreement on that
basic fact? Mr. Hamilton.
Mr. Hamilton. No, sir.
Senator Allen. Does that sound about right to you all? All
right.
Now--and you've heard this on a bipartisan basis--here in
Congress we've been trying to make sure that more people have
access to the Internet, whether it's for e-health, e-business,
e-education, e-Government, and we're trying to increase the
availability of the Internet and broadband in particular for
consumers, because it is good, it's good for their access to
Government, health, education, commerce, information,
knowledge, and all the rest, and the question is, if you allow
the moratorium to expire ultimately it would make the Internet
more expensive, raising the overall cost of service.
It would raise the cost of service--would you not agree,
Mr. Hamilton, raise the cost of service to existing
individuals, families, and enterprises, and, if you increase
the cost of Internet access, whether it's broadband or basic,
would it not also deny people of lower income, that other 50
percent who do not have lower Internet access, wouldn't it make
it harder for them to get Internet access if it costs more?
Mr. Hamilton. Senator, obviously, if states went in and
raised taxes, then on access--our point was really, if you're
going to extend it, extend it temporarily again so that we can
understand the issue. It wasn't really to just get rid of it,
but obviously, if the states impose those taxes it would have
that impact.
I can only speak--or I prefer, or feel more comfortable
speaking for Texas. In our case, it would have no effect, since
we are exempting that under our law, because we recognize the
importance, as you do, and in fact the Comptroller in her
report recommended that special tax breaks, additional tax
breaks be given to providers to extend the Internet and high
speed broadband into rural areas, or areas which were not
currently receiving services, so we're very cognizant of that.
Senator Allen. Well, with our standards of learning in
Virginia, basic economics, a fourth grader does understand that
if you increase the price of whatever the product is, from a
pixie stick to bubblegum cards, to Internet access, you
recognize that if it costs more, fewer people will be able to
afford it and purchase it.
So from my perspective, and I think that of Senators Wyden,
McCain, and Senator Burns, is that we cannot envision any time
where we'd want to add a burden to those existing users, or
with our efforts to expand, as Texans are trying to do, expand
the ability of people to get on the Internet, and broadband in
particular, why would you want to do anything to make it less
attractive, affordable, or accessible to individuals, and so
that's why, when you're talking about a permanent moratorium,
there are certain basic fundamental economic principles that
just aren't going to change in 2 years, 4 years, 5 years.
And the fear also is, for example, that there was a luxury
tax put on telephone service about 100, a little over 100 years
ago, and that was to finance the Spanish-American War, and that
tax is still there. We won that war.
[Laughter.]
Senator Allen. It's not ongoing, but nevertheless, there is
a fear that once a tax is put on, there's always some reason
why some government, whether it's Federal, State, or local will
keep that tax on.
Now, Mr. Hamilton, I closely looked at your testimony, and
you said if there was ever a threat of highly discriminatory
taxes on the Internet's--you said you don't believe there's
ever a threat of highly discriminatory taxes on the Internet by
the States. I'm one who looks at adjectives and adverbs. Well,
do you think that there might be some that are just less than
highly discriminatory taxes?
Mr. Hamilton. Well, I think some states now, there are nine
that actually have taxes on Internet access at some level. I
don't think that they are more--I don't think that they're
discriminatory relative to other taxes on telecommunications
some of the states might have, Senator.
And the other point, you know, under your leadership in
Virginia, I mean, the State went out of its way, everyone
knows--and I used to live in Virginia for a while. It's a great
state--that the State went out of its way to make itself
attractive to technology, and there are other leaders in other
states who are capable of the same sort of thing, so it's
really more a matter of the ability of states to decide than it
is a matter that we really need more revenue in this area.
Senator Allen. Well, I'm one, having been Governor, and one
of the four Governors at the time who was in favor of the
Internet access tax moratorium. There was myself, Governor
Pataki, then Governor Wells, and Governor Wilson. Those are the
four, and since then Governor Owens of Colorado has come on,
and I think all the successors have generally kept that--well,
maybe they haven't, but regardless, that's when this all first
came up in really 1997. Congress finally acted in 1998.
When you talk about the States, I'm one who certainly
respects the rights and the prerogatives of the people of the
states to make decisions when it is within the States'
prerogatives. This, though--and I always look at jurisdiction.
This is clearly--the Internet is not something just within a
State. It is interstate commerce, it's international commerce,
as we've discussed, and so when it is something that clearly a
tax or regulatory burdens will affect interstate commerce,
there is Federal jurisdiction to intercede when there is that
interstate commerce and I think a national policy which is
shared by the vast majority of the people in the states that
you do want people to have access to e-Government, e-commerce,
e-mail, education and so forth.
Now, this issue is one that in all the decisions are based
on the Quill decision and Bella Hess. These all had to do with
the issue of catalogue sales, mail order, and so in my view
this is as old as our Republic as an issue, and it shouldn't be
overturned.
Now, you mentioned that the states, nine states imposed
access taxes. Do you know how many localities imposed access
taxes, Mr. Hamilton?
Mr. Hamilton. No, sir, I don't have that information with
me, I'm sorry.
Senator Allen. OK, fair enough.
If the States--you said if the States want to continue to
impose these taxes, they should be permitted to do so. These
are the nine states that impose access taxes.
Do you know how much revenue is collected by these nine
states that impose access taxes on the Internet?
Mr. Hamilton. The estimate that we have for the
grandfathered states is $117.2 million in 2002.
Senator Allen. $117.2 million?
Mr. Hamilton. Yes, sir.
Senator Allen. So you consider that a significant sum out
of all of the funds that are--well, let me just have you speak
for Texas. How much does Texas, the state of Texas collect from
access taxes?
Mr. Hamilton. With a narrowly defined definition of access,
about $45 million, Senator, a year.
Senator Allen. OK, and what's the overall--that goes to the
State, as opposed to Dallas?
Mr. Hamilton. There would be probably roughly 10 percent of
that, $4 or $5 million that would go to the local governments
of one kind or another.
Senator Allen. Is that out of the $45 million, that you
share 10 percent with localities?
Mr. Hamilton. Well, we have a 6\1/4\ percent state tax, and
then localities can impose an additional, up to 2 percent for
local governments, one way or another.
Senator Allen. And how many local governments impose an
access tax of up to 2 percent?
Mr. Hamilton. Senator, we have a different system than
perhaps Colorado or some other states do. Our law is governing
for the entire State, so no one has the ability to impose an
access fee separate from State law.
Senator Allen. The State of Texas taxes 6\1/4\ percent, is
that right, access tax?
Mr. Hamilton. Above, after the first $25.
Senator Allen. After the first 25,000, all right, and
then--after the first $25, and then the localities, in addition
to that, can have a 2-percent access tax on the amount of
Internet access over $25?
Mr. Hamilton. Yes, sir, the same as you would pay on a pair
of shoes, except you don't get a $25 break.
Senator Allen. On your shoes?
Mr. Hamilton. That's right.
Senator Allen. All right. Now, when you get to the $25
issue, let's get another basic, see if we can stipulate some
facts on this. You're here, Mr. Ripp, from AOL. I know you have
a few competitors, but what's the average cost, monthly cost
for basic Internet access?
Mr. Ripp. For AOL it's $23.90.
Senator Allen. $23.90?
Mr. Ripp. Yes.
Senator Allen. Do others--of course, you're probably a
little--of course, your service is wonderful and all of that.
What do the others--what would competitors charge, about the
same amount?
Mr. Ripp. There are ranges of price plans. AOL also has a
$4.95 price plan, but there are people who charge $9.95 for low
access fees, we're at $23.90, and broadband can go anywhere up
to $55.
Senator Allen. You're getting into my next question.
All right, so for basic service, generally speaking, $25
for example, you'd probably be free and clear of an access tax.
Mr. Ripp. You have some consumers who do pay above that.
Senator Allen. Now, Mr. Hamilton, Mr. Beshears, Mr.
Misener, Mr. Ripp, I think you're all aware that we've been,
for the last several years, at least since I've been in the
Senate, we've been looking at every incentive in the world to
try to get broadband out to people, especially in rural areas.
It's absolutely essential for them to be able to attract and
keep businesses in rural areas. What is the average price for
broadband or high-speed?
Mr. Ripp. It ranges across the country. Some of those
prices are coming down, but probably around $45 would be a
reasonable price.
Senator Allen. All right, well, would you say, then, that
Mr. Hamilton, for broadband, that even Texas law that you
exempt $25 of it, that for broadband, by putting a tax of 6\1/
4\ percent plus a locality, whether it's a county or town or
city, another 2 percent, would actually impede the roll-out of
broadband for these companies that are spending a lot of money,
assuming they are using, say, fiber optic, digging through a
lot of dirt to get to sparsely populated areas, that that could
impede the ability of people in those areas, whether they're
cities, suburbs, or out in the country, to actually be able to
afford broadband? Do you agree that that would make it less
likely, if you're adding----
Mr. Hamilton. Senator, I agree with the economics lesson
that I've had today. I would make two points. The Comptroller
herself studied this in 2000 and recommended to the legislature
that the access fee level be raised to $50 or $55 to over
broadband basic service, and we supported that in the
legislature. The legislature wasn't able to do it. The
Comptroller will be back with that recommendation again, so we
100 percent agree with you on that.
The other thing that we were able to recommend, again we
simply couldn't afford it given the fiscal situation, was to
give further tax exemptions under our corporate franchise and
sales tax to companies who made the investment to extend
broadband into rural areas of the State, because I mean, the
testimony that we heard before that Committee was, the taxes
are obviously one factor, as they always are, but the
additional factor, as you said, was simply the concentration of
people and the expense of moving cable into those areas, or
fiber optics into those areas.
Senator Allen. Right. Mr. Hamilton, obviously everyone has
looked at incentives, but ultimately it's the consumer who
makes the decision as to whether or not for themselves or for
their family or their enterprise can afford it, which gets to
what I want to make as the last point, and that has to do with
modernizing the definition of Internet access, with the changes
that have taken place in technology, and obviously in the
marketplace, and Mr. Beshears was talking about, is that more
and more it will not be necessary to have Internet
access,whether through a telephone line or through a cable
modem. It can be done wirelessly.
And in my view it clearly was not the intent of Congress to
allow states to separately tax the underlying transport of any
Internet access service, regardless of the method or means of
transporting the Internet, or the technology used to deliver
that service, and I'm hopeful that we're going to be able to
address what you were saying, Mr. Beshears, and making sure
it's technology-neutral, so to speak, that the point is
Internet access. It's not to favor fiber or cable or telephone
lines over other methods, and I think as far as I'm concerned
that's one very valuable aspect of this hearing, is as we
consider this legislation for a moratorium on access taxes,
discriminatory taxes, and hopefully we will make it permanent,
or however long it is made it seems to me that this definition
ought to be modernized, and I know Mr. Beshears agrees.
Do you have any--I'd like to hear from Mr. Ripp, Mr.
Misener, and Mr. Hamilton, insofar as the modernizing or
upgrading to technology, the definition.
Mr. Ripp. We agree that the definition, we should be
technology neutral with respect to this law, that Internet
access is what we're talking about. We believe we should not
tax access, and whatever new technologies are invented, and
ways to get there, we believe we should be indifferent to those
technologies going forward.
Mr. Misener. We fully agree.
Senator Allen. Mr. Hamilton, can you agree to that or not?
Mr. Hamilton. Yes, sir, absolutely. Technology should be
treated the same, regardless of who is delivering it, or what
they're delivering.
Senator Allen. That's pretty good, Mr. Beshears.
Mr. Beshears. I rest my case.
Senator Allen. Make sure we get a transcript of Mr.
Hamilton, we finally found agreement.
[Laughter.]
Senator Allen. Well, that is good, because that can be a
contentious issue on how you defined Internet access and the
method of it.
Mr. Beshears. Mr. Chairman, I would say that Texas has
taken several favorable rulings on the issue of Internet access
and IP port charges, so the great state of Texas is forward-
looking on some of these subjects. We could debate some other
subjects.
Senator Allen. Understood. You're being diplomatic. We're
trying to finish up on at least one area of agreement. That's
good. That's very good.
I'd like to know, I'd ask anyone here out of this panel if
you have any closing remarks on the effect of taxation on the
Internet, whether here in the United States, or concerns about
it abroad. There is a concern, and this was raised a couple of
years ago, that what we do here could have an impact on what,
say, the European Union would say as we try to work through the
World Trade Organization and others, and I don't know if any--
Mr. Misener, do you have any final closing comment?
Mr. Misener. Senator Allen, yes, thank you, two quick
points. Point one is, there has been a fair amount of
discussion today about whether or not states would, if the
moratorium were to expire, start to impose these new access
taxes, or discriminatory taxes on electronic commerce, and I
would just suggest, perhaps, that that's not an important
prediction whether or not they would.
We have an extant Federal policy. It's half the age of the
worldwide web. It has been there. It has worked extremely well.
There is no reason to discontinue that policy. It ought to be
continued, whether or not there's a prediction that the states
would take advantage of the expiry of the moratorium.
The second point is, there has been some discussion about
whether or not particular states would favor overturning the
rule in the Quill decision, and in particular whether or not
Texas would. I can say with certainty that Texas would not,
under the current streamlined sales and use tax agreement. The
legislature has definitively voted on the subject, and elected
to study the most important central provision of that
agreement, and come back to the legislature at the end of 2004,
I believe.
The question really is not so much whether a particular
state or a company or industry would agree that it's good to
overturn Quill, it's when should Quill be overturned. At this
point, we're in firm agreement with Texas that the streamlined
sales and use tax agreement is not ready for prime time. It may
someday be ready for prime time, and therefore it may at some
point be the right thing for Congress to overturn that rule. We
just aren't there yet.
Senator Allen. All right. Let me just thank you for those
comments. I hope you all recognize that what we're trying to do
is keep the issue, that issue separate from access and
discriminatory taxes. That whole issue is very complicated,
it's convoluted, and maybe there will be a day where we
overturn Quill.
It's not today, and I don't see it in the near future, and
I do think there is just a basic premise that makes good sense
that if you have a physical presence in a state, you have a
nexus, and you're a voter there, you have a presence in that
state. You're getting fire protection, police protection,
schools and all the rest. If you're not, all this is is a
question of making it easier for tax collectors to collect the
sales and use tax, and many of them might ought to make it
easier for consumers to pay the use tax, but that's not the
point here.
The whole point is access, and discriminatory taxes on the
Internet, and unfortunately every time that this comes up, this
is held up as hostage for that, and when you listen to Mr.
Hamilton, and amount of money, $45 million is collected in
Texas, that's a lot of money, but nevertheless in the whole
scheme of things it's undoubtedly less than 1 percent, and even
for the nine states that are collecting access taxes it's a
small amount, but nevertheless you could see people saying,
well, let's just increase it, and increase it, and increase it,
and again it would be harmful as far as access taxes.
Mr. Ripp, you wanted to answer the question, remarks on
national and international Internet tax policy.
Mr. Ripp. Just if I may, Senator, as we saw our experience
in Europe, in anticipation of that tax is where we did raise
some of our prices in certain countries. Clearly, when you
raise your prices, the Internet is less affordable for people,
and that has an effect on consumers. When you increase the cost
of the business, that has an effect on consumers and, most
importantly, on the development of continued investment in the
Internet.
We just hope, as we continue to consider this legislation,
we understand, as we had the economic lesson we talked about
today, that if we do raise the taxes here, it will affect the
deployment of the Internet to the rest of the other 50 percent
of this United States, so I strongly support this bill. I thank
you for your leadership efforts and I do think that, as we go
forward, keeping the Internet free of taxes for all will
continue to deploy it and get all of the benefits that we know
exist from the Internet today.
Senator Allen. Any other comments? If not, thank you, all
four gentlemen, for your testimony. We look forward to working
with you in the weeks to come, and hopefully get this done by
the end of August in this Committee.
Adjourned.
[Whereupon, at 11:15 a.m., the Committee adjourned.]
A P P E N D I X
Prepared Statement of the International Mass Retail Association
The International Mass Retail Association
The International Mass Retail Association (IMRA) is the world's
leading alliance of retailers and their product and service suppliers.
IMRA members represent over $1 trillion in sales annually and operate
over 100,000 stores, manufacturing facilities, and distribution centers
nationwide. Our member retailers and suppliers have facilities in all
50 states, as well as internationally, and employ millions of
Americans.
IMRA has been intimately involved with the Streamlined Sales Tax
Project, which evolved from the 1998 legislation which originally
imposed a moratorium on Internet taxation.
While IMRA does not oppose extension of the Internet Tax Freedom
Act (ITFA) Moratorium, we would have preferred that the critical issue
of state sales/use tax collection be considered in conjunction with
extending the Internet tax moratorium.
History of the Internet Tax Freedom Act
It is important to recall the legislative history of the moratorium
and the circumstances under which the original Internet Tax Freedom Act
(ITFA) Moratorium was enacted in 1998.
The 1998 ITFA created the Advisory Commission on Electronic
Commerce (ACEC). Brick-and-mortar retailers were not represented on the
Commission even thou9h the ITFA provided that the Commission should
include representatives from ``local retail businesses.''
Much of the discussion, particularly at the final two meetings of
the ACEC, concerned the use tax collection question. At the Final
meeting in Dallas the Commission was very dose to reaching agreement on
a broad range of issues, including a ``roadmap'' by which states would
gain the authority to compel remote sellers to collect use taxes.
Reportedly, the issue that ultimately caused these negotiations to fail
was the provision that would have allowed stores to take returns and
service warrantees without creating ``nexus.''
Ultimately, the ACEC was unable to attain the required two-thirds
majority vote to make a recommendation on any substantive provision.
The majority report, approved by 11 commissioners, included a proposal
to have NCCUSL work on a uniform sales and use tax statute.
Streamlined Sales Tax Project
In March, 2000, the Streamlined Sales Tax Project (SSTP) comprised
of representatives of over 40 states was launched. Working with the
business community, the SSTP developed measures to design, test and
implement a system that radically simplifies sales and use tax
collection and administration by retailers and states. The simplified
system reduces the number of sales tax rates, brings uniformity to
definitions of items In the sales tax base, significantly reduces the
paperwork burden on retailers, and incorporates new technology to
modernize many administrative procedures The majority report, approved
by 11 commissioners, included a proposal to have NCCUSL work on a
uniform sales and use tax statute.
On November 12, 2001 representatives of 33 states and the District
of Columbia voted to approve a multi-state agreement to simplify the
Nation's sales tax laws by establishing one uniform system to
administer and collect sales taxes on nearly $3.5 trillion in retail
transactions annually.
As of July 2003, 19 states have enacted legislation to reform their
sales tax administration in accordance with provisions of the
Streamlined Sales and Use Tax Agreement.
With the Federal moratorium on state and local taxes on Internet
access expiring in November 2003, Congress should address the issue of
Whether states that have simplified will be granted the authority to
require all sellers to collect the states' sales and use taxes.
The Decision Rests with Congress
The decision whether remote sellers should be required to collect
sales/use taxes rests with the Congress. The U.S. Supreme Court's 1992
decision in Quill Corporation v. North Dakota held that the Commerce
Clause of the Constitution prohibits states from requiring sales/use
tax collection by out-of-state sellers without a physical connection
(or ``nexus'') to the state. The Court emphasized that Congress,
because it is authorized to regulate interstate commerce, has the power
to require out-of-state sellers to collect the taxes. Consequently,
brick-and-mortar retailers are at a competitive disadvantage because
they must collect sales taxes In their stores and even on their
Internet-based sales (if they have a store or other facility in the
state/locality of the buyer), while their remote-selling competitors
need not collect the taxes.
This disparity is unfair and leads to some retailers trying to
manipulate the system in order to remain competitive. Some retailers
have concluded that they need not collect sales/use taxes on remote
sales made through separate subsidiaries, except in jurisdictions where
the subsidiary has nexus. While this may eliminate sales tax collection
requirements in states where the subsidiary has no physical presence,
this strategy is not risk-free. Such structural and operational issues
are, of course, business decisions that each company must make for
itself.
The Status Quo Puts Traditional Retailers At A Competitive Disadvantage
At present, many Internet retailers do not collect sales/use taxes
for sales made to purchasers located in states where the retailers do
not have a physical presence. This puts brick-and-mortar retailers at a
competitive disadvantage in the states with sales/use taxes because
they must collect sales taxes, while Internet retailers located outside
the state do not have to collect the tax that applies on the identical
sale (the ``use'' tax). Clearly, retailers that do not have to collect
the tax enjoy an advantage over those that must.
Many of the best-known mass retailers view the Internet as a growth
opportunity for sales and are actively promoting their Internet sites.
Seeking to reduce the competitive disadvantage, some of these stores
have set up separate Internet subsidiaries that need not collect and
remit sales/use taxes, except on purchases made by customers where the
subsidiary has nexus. Even these retailers, however, take little
comfort from the uncertainty of their tax liability and the possibility
of expensive, protracted challenges by state tax agencies.
Other popular mass retailers have elected to keep their Internet
business as part of their main company structure and therefore must
collect and remit applicable sales/use taxes wherever the company has a
physical location. These retailers have taken this route for many
reasons: they fulfill orders out of stores; they want customers to be
able to return items to their physical stores and do not want to assume
the risk that this could create nexus; or they want to set up Internet
kiosks in their stores, again without assuming any risk that this
creates nexus.
IMRA has members that are collecting sales taxes on-line and
members that are not. Even so, they all support a level playing field
where all retailers would be required to collect and remit sales/use
taxes. IMRA strongly believes that certainty and fairness about sales/
use tax collection is rational and sound tax policy.
A Level Playing Field is Sound Tax Policy
IMRA believes a level playing field, not preferential treatment for
one type of seller, is sound tax policy. The most efficient means of
collecting sales/use taxes is to require all retailers to perform the
collection duty. The fact that an out-of-state business does not
directly benefit from the services of the state is a misleading
argument because sales/use taxes fall on consumers, not retailers.
Failure to Collect Sales and Use Tax by Internet Retailers Will
Continue to Erode States' Tax Base
According to the U.S. Department of Commerce, in 2001 electronic
retail sales were $34 billion (or 1.1 percent of all retail sales);
merchant wholesale electronic transactions were $27 billion (or 10
percent of total wholesale merchant sales); and manufacturing shipments
were $725 billion (18.3 percent of all transactions). This year, first
quarter online retail sales in the U.S. grew to $24 billion, a 20
percent year-over-year quarterly increase, according to Forrester
Research, Inc. The University of Tennessee's Center for Business and
Economic Research conducted a study of State and Local Revenue Losses
from E-Commerce. The Center estimated that in 2001, e-commerce caused a
total state and local government revenue loss of $13.3 billion. By
2006, the Center estimates a loss of $45.2 billion.
States are dealing with the most challenging fiscal conditions in
decades. In fact, Congress acknowledged the states' dire fiscal
situation when It enacted the Jobs and Growth Tax Relief Reconciliation
Act, which provided $10 billion in temporary fiscal relief payments.
Clearly, this situation could be resolved, in part, If they were
allowed to require the collection of sales and use taxes on Internet
sales.
Conclusion
The states have responded to the Supreme Court decision in Quill
Corporation v. North Dakota, Congressional intent through its enactment
of the 1998 Internet Tax Freedom Act Moratorium and the majority report
of the Advisory Commission on Electronic Commerce. Meanwhile, E-
Commerce retail transactions continue to grow at a rapid pace, further
eroding a major source of revenue from state budgets.
IMRA strongly believes that now is the time for Congress to take
appropriate action that will provide a level playing field for
retailers by giving states the authority to require the collection of
sales and use taxes for e-commerce transactions.
______
The Business Rountable
Washington, DC, July 15, 2003
Chairman, John J. Castellani,
Philip M. Condit, President.
The Boeing Company.
Cochairmen, Patricia Hanahan Engman,
Henry A. McKinnell, Executive Director.
Pfizer.
Edward B. Rust, Jr.,
State Farm.
BY FACSIMILE
Hon. John McCain,
Chairman,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC.
Dear Mr. Chairman:
The Business Roundtable wishes to submit for the Committee's
hearing record of July 16, 2003, our views on legislation to extend the
current moratorium under the Internet Tax Freedom Act on Internet
access taxes and on the discriminatory and multiple taxation of e-
commerce.
The Business Roundtable, an association of chief executive officers
of leading corporations, supports extending the current protections of
the Internet Tax Freedom Act, which otherwise will expire on November
1, 2003, which is essential for encouraging the continued growth of
electronic commerce.
At the same time, we are concerned that the current definition of
Internet access in the law does not reflect changes in technology and
in the marketplace that have occurred since the first moratorium on
Internet access and on multiple or discriminatory taxes on electronic
commerce was enacted in 1998. For example, some states have asserted
that certain forms of high-speed Internet access, such as those
provided by ``DSL'' and wireless technologies, are actually
telecommunications subject to tax. These technologies, which were not
widely used by consumers in 1998, should not be treated in a disparate
way from technologies that provided Internet access at that time (such
as ``dial-up'' Internet services) or that may not be deemed to be
telecommunications (such as cable modem Internet services).
The Business Roundtable therefore urges the Committee to modernize
the definition of Internet access as part of any legislation it may
consider to extend the current protections in the Internet Tax Freedom
Act. This is essential to ensuring that the law is applied consistently
and in a technology-neutral way.
Given the importance that electronic technologies have for cost
reduction, improvement of service and expansion of markets, the
development of balanced rules for the taxation of e-commerce is
critical both here and abroad. The Business Roundtable looks forward to
working with you to achieve this goal.
Sincerely,
John J. Castellani.
______
Prepared Statement of Grover Norquist, President,
Americans For Tax Reform
Chairman McCain and other members of this committee, thank you for
the opportunity to address you regarding S. 150, the Internet Tax
Nondiscrimination 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, S. 150 meets all of
the above criteria.
In addition, Senator Allen'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 percent 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 de
facto 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.
Sincerely,
Grover Norquist,
President.
______
Americans For Tax Reform
Washington, DC, July 15, 2003
Hon. John McCain
Washington, DC.
Dear Senator McCain:
In addition to my written testimony I have submitted to the Senate
Commerce, Science and Transportation on S. 150, the Internet Non-
Discrimination Act, I would like to state my opposition to narrowing
the definition of ``Internet access'' to force Internet access
providers to unbundle software, services and content. Because narrowing
the definition exposes millions of Internet access subscribers to new
taxes on portions of their monthly subscription fees, support for this
new definition represents a vote for a tax increase.
Those who argue in favor of unbundling software and content
services from Internet router service are advocating for a tax increase
on digital online services for Americans that use them. Because
Americans for Tax Reform (ATR) strongly opposes efforts to tax the
Internet, we believe that there should be no attempt to narrow Internet
access definitions, which, in turn, permits states and localities to
expand their tax jurisdiction to online digital services.
Taxation of digital content will significantly discourage consumers
from accessing content on the Internet. As a member of the Advisory
Commission on Electronic Commerce, I have witnessed firsthand that the
most used aspect of the Internet is the delivery of services,
information, software, and other resources. Applying a myriad of state
and local taxes to this transmitted data will encumber the free flow of
information. Supporters of unbundling will force subscribers to fill
out a tax form, provide a zip code, and pay 5 to 10 percent more for
Internet service, before receiving any information.
Congress has already provided a clearly defined and constructive
prohibition against taxes on Internet access. However, some pro-tax
individuals and governments are advocating for Congress to narrow the
definition of Internet access that will expose Internet users to new
taxes on the services and content that they have been receiving tax-
free. Therefore, any attempt to narrow the current tax protection
provided to American Internet users will result In new tax burdens, or
tax increases, on consumers.
Americans for Tax Reform will continue to work with members of the
Senate Commerce, Science, and Transportation Committee to reduce
current barriers to e-commerce. I strongly encourage you to oppose any
efforts to add language requiring Internet access providers to unbundle
software, services and content.
Sincerely,
Grover G. Norquist,
President.
______
Prepared Statement of the Multistate Tax Commission
The Multistate Tax Commission is pleased to present this statement
regarding the Committee's consideration extending the moratorium on
state taxation of charges for Internet access.
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:
encourages tax practices that reduce administrative costs
for taxpayers and states alike,
develops and recommends uniform laws and regulations that
promote proper state taxation of multistate and multinational
enterprises,
encourages business compliance with state tax laws through
education, negotiation and enforcement, and
protects 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:
The 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.
Any 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.
The 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.
Any 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.
The 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:
Does 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?
To what extent have studies documented that a pre-emption of
taxation of Internet access has increased the volume of
subscribers to such access?
Conversely, 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?
In 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, legislation under
consideration in the Senate 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 the 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.
Attachment
Multistate Tax Commission
Resolution No. 01-08
Resolution Regarding Tax Fairness in the Proposed Federal Extension of
the ``Internet Tax Freedom Act''
WHEREAS, the Internet Tax Freedom Act expires on October 21, 2001;
and
WHEREAS, the Act imposes a moratorium on the imposition of new
taxes on charges for Internet access and prohibits multiple and
discriminatory taxes on electronic commerce; and
WHEREAS, Congress is considering various measures to modify and
extend the Act, including an extension of the moratorium on the
imposition of taxes on charges for Internet access and the elimination
of the existing grandfather clause that permits states that already
imposed and enforced such taxes to continue to do so; and
WHEREAS, electronic commerce business models, technology and
practices have changed significantly since the enactment of the Act in
1998, especially in the areas of ``access'' and ``content''; and
WHEREAS, certain of those changes, when coupled with an extension
of the Act, could have unintended consequences and expose state and
local revenue systems to substantial adverse consequences; and
WHEREAS, Congress is using the extension of the Act as a vehicle to
examine the issue of sales and use tax collection by remote sellers not
now required to collect tax on sales into a state;
WHEREAS, some of the proposals that have been introduced in
Congress potentially treat electronic commerce more favorably than
other forms of commerce; and
WHEREAS, sound tax policy demands that all forms of commerce be
treated equally, and
WHEREAS, there is no economic reason to justify treating electronic
commerce, or other forms of remote commerce more favorably than any
other form of commerce; and
WHEREAS, extension of the Internet Tax Freedom Act would constitute
a preemption of state authority that is traditionally considered
unacceptable by many state officials; and
WHEREAS, the Multistate Tax Commission recognizes that,
nonetheless, Congress may choose to extend the Act; now therefore, be
it
RESOLVED, that if Congress chooses to extend the Act, the
Multistate Tax Commission respectfully urges it to do so in accord with
the following guidelines:
The Act should be extended for not more than five years to
insure a review of its impact on state and local revenues and
the presence of unintended consequences.
Any 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.
The 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.
Any 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.
The definition of discriminatory taxes contained in the bill
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.
Provisions consistent with the standards developed by the
Streamlined Sales Tax Project should be incorporated into an
extension of the Act so States would be authorized to require
some remote sellers without a physical presence in the state to
collect sales and use taxes on sales made into the state under
a simplified sales and use tax administration system.
The requirements for a simplified sales tax system should
not require adoption of specified standards of nexus for other
types of state and local taxes, but should provide that
collection and remittance of sales and use taxes, in and of
itself, would not be considered a factor in determining nexus
for other state and local taxes.
Congress should commit itself to achieving equity in sales
and use tax collections by authorizing states, in advance, but
subject to congressional veto to require collection of the tax
by remote sellers that exceed a de minimis sales threshold, the
authorization taking effect automatically once a critical mass
of states have implemented the simplifications outlined by the
Streamlined Sales Tax Project.
Adopted this 27th day of July, 2001 by the Multistate Tax
Commission.
Dan R. Bucks, Executive Director
This resolution shall expire at the Annual Business Meeting of the
Multistate Tax Commission in 2006.