[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

                              ----------                              
                                                                   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.