[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]



                        INTERNET TAX FREEDOM ACT

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 26, 2007

                               __________

                           Serial No. 110-136

                               __________

         Printed for the use of the Committee on the Judiciary





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

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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
MAXINE WATERS, California            DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts   CHRIS CANNON, Utah
ROBERT WEXLER, Florida               RIC KELLER, Florida
LINDA T. SANCHEZ, California         DARRELL ISSA, California
STEVE COHEN, Tennessee               MIKE PENCE, Indiana
HANK JOHNSON, Georgia                J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio                   STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
BRAD SHERMAN, California             TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota

            Perry Apelbaum, Staff Director and Chief Counsel
                 Joseph Gibson, Minority Chief Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                LINDA T. SANCHEZ, California, Chairwoman

JOHN CONYERS, Jr., Michigan          CHRIS CANNON, Utah
HANK JOHNSON, Georgia                JIM JORDAN, Ohio
ZOE LOFGREN, California              RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts   TOM FEENEY, Florida
MELVIN L. WATT, North Carolina       TRENT FRANKS, Arizona
STEVE COHEN, Tennessee

                     Michone Johnson, Chief Counsel

                    Daniel Flores, Minority Counsel
























                            C O N T E N T S

                              ----------                              

                             JULY 26, 2007

                                                                   Page

                           OPENING STATEMENT

The Honorable Linda T. Sanchez, a Representative in Congress from 
  the State of California, and Chairwoman, Subcommittee on 
  Commercial and Administrative Law..............................     1
The Honorable Chris Cannon, a Representative in Congress from the 
  State of Utah, and Ranking Member, Subcommittee on Commercial 
  and Administrative Law.........................................     2

                               WITNESSES

The Honorable Anna G. Eshoo, a Representative in Congress from 
  the State of California
  Oral Testimony.................................................     5
  Prepared Statement.............................................     7
The Honorable John Campbell, a Representative in Congress from 
  the State of California
  Oral Testimony.................................................     8
Ms. Meredith Garwood, Vice President, Tax Policy, Time Warner 
  Cable
  Oral Testimony.................................................    17
  Prepared Statement.............................................    19
Mr. David C. Quam, Director of Federal Relations, National 
  Governors Association
  Oral Testimony.................................................    24
  Prepared Statement.............................................    25

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, 
  Chairman, Committee on the Judiciary, and Member, Subcommittee 
  on Commercial and Administrative Law...........................     3
Prepared Statement of the Honorable Steve Cohen, a Representative 
  in Congress from the State of Tennessee, and Member, 
  Subcommittee on Commercial and Administrative Law..............     4
Prepared Statement of the Honorable Lamar Smith, a Representative 
  in Congress from the State of Texas, and Ranking Member, 
  Committee on the Judiciary.....................................     4
H.R. 1077, a bill to amend the Internet Tax Freedom Act to make 
  permanent the moratorium on certain taxes relating to the 
  Internet and to electronic commerce, submitted by the Honorable 
  John Campbell, a Representative in Congress from the State of 
  California.....................................................    11
Editorial from the Wall Street Journal submitted by the Honorable 
  Chris Cannon, a Representative in Congress from the State of 
  Utah, and Ranking Member, Subcommittee on Commercial and 
  Administrative Law.............................................    37

                                APPENDIX
               Material Submitted for the Hearing Record

Responses to Post-Hearing Questions submitted by the Honorable 
  Linda T. Sanchez, a Representative in Congress from the State 
  of California, and Chairwoman, Subcommittee on Commercial and 
  Administrative Law, to Meredith Garwood, Vice President, Tax 
  Policy, Time Warner Cable......................................    40
Responses to Post-Hearing Questions submitted by the Honorable 
  Linda T. Sanchez, a Representative in Congress from the State 
  of California, and Chairwoman, Subcommittee on Commercial and 
  Administrative Law, to David C. Quam, Director of Federal 
  Relations, National Governors Association......................    42
Prepared Statement of Joe Huddleston, Executive Director, 
  Multistate Tax Commisssion.....................................    44

 
                        INTERNET TAX FREEDOM ACT

                              ----------                              


                        THURSDAY, JULY 26, 2007

                  House of Representatives,
                         Subcommittee on Commercial
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:15 a.m., in 
room 2141, Rayburn House Office Building, the Honorable Linda 
T. Sanchez (Chairwoman of the Subcommittee) presiding.
    Present: Representatives Sanchez, Conyers, Lofgren, 
Delahunt, Watt, Cohen, Cannon and Feeney.
    Staff Present: Norberto Salinas, Majority Counsel; Adam 
Russell, Majority Professional Staff Member; and Stewart 
Jeffries, Minority Counsel.
    Ms. Sanchez. This hearing of the Committee on the 
Judiciary, Subcommittee on Commercial and Administrative Law, 
will come to order. And I would now recognize myself for a 
short statement.
    Over 2 months ago this Subcommittee held an oversight 
hearing on the Internet tax moratorium. The hearing provided 
Members of this Subcommittee with the opportunity to learn more 
about the issues the current Internet Tax Freedom Act 
addresses. We heard opposing views regarding whether Congress 
should impose a permanent moratorium, a temporary moratorium or 
no moratorium at all. We heard arguments for and against the 
continuation of grandfather protections for those States that 
had already imposed taxes on Internet access prior to the 
implementation of current law. And most importantly, we heard 
contentious differences regarding the definition of Internet 
access.
    Now that we have gained a deeper understanding of the 
issues in this debate, it is time for us to consider the 
different legislative approaches to the Internet tax 
moratorium, which is scheduled to end, without congressional 
intervention, on November 1, 2007.
    The purpose of today's legislative hearing is to examine 
different legislative approaches to the intricacies of the 
Internet tax moratorium. Specifically, two of our House 
colleagues are here to testify today about their legislation to 
make the Internet tax moratorium permanent. Our other two 
witnesses will discuss the legislation and other legislative 
answers to this question.
    As we hear today's testimony, let us remember how Congress 
approached the original Internet Tax Freedom Act, which was 
enacted in 1998, as well as subsequent developments in the 
information technology industry. Congress understood that when 
considering a moratorium on taxing Internet access, it should 
balance the interests of State and local government to collect 
revenue while encouraging the development of the Internet and 
its related industry. Congress also justified the moratorium as 
a temporary solution to provide time for administrative and 
definitional issues to be addressed regarding the fledgling 
industry.
    However, since 1998, that once-fledgling industry has 
grown, and in 2006 was deemed to be worth an estimated $108.7 
billion. And it is almost certainly worth more today. What was 
still seen as a novelty by some in 1998 has become a daily part 
of life at home, in school and in the workplace.
    To help us explore these issues, we have invited four 
witnesses for this hearing this morning. I am pleased to have 
from my home State, both Representative Anna Eshoo from the 
14th Congressional District of California and Representative 
John Campbell from the 48th District of California on our first 
panel to discuss the Internet tax moratorium legislation that 
each has introduced in this Congress.
    For our second panel, we have Meredith Garwood, Vice 
President for Tax Policy at Time Warner Cable; and David C. 
Quam, Director of Federal Relations at the National Governors 
Association.
    I want to emphasize that today's testimony is very 
important for our understanding of the legislation. 
Accordingly, I look forward to hearing today's testimony and 
welcome a thorough discussion of the issues and the 
legislation.
    At this time, I would now like to recognize my colleague, 
Mr. Cannon, the distinguished Ranking Member of the 
Subcommittee, for any opening remarks he may have.
    Mr. Cannon. Thank you, Madam Chair.
    Today, we are having our second hearing on the implications 
of extending the Internet tax moratorium. Almost 10 years ago, 
Congress made the decision to protect the Internet access and 
trade from discriminatory taxes. I think that was a wise 
decision. It has led to the prospering of eCommerce beyond what 
anyone could have imagined. And now we have to ask ourselves 
whether it makes sense to continue that prosperity 
indefinitely.
    There are two bills, H.R. 743 and H.R. 1077, that would 
remove the sunset provisions of the Internet tax moratorium and 
forever prevent States and localities from imposing 
discriminatory taxes on eCommerce. I am pleased that the 
sponsors of those bills, Representative Eshoo and 
Representative Campbell, are here with us today. They will tell 
us, along with Ms. Garwood, why a permanent end to the 
discriminatory taxes will help guarantee America's place as a 
leader of Internet commerce in the global economy and continue 
to act as a boon to the American consumer.
    Both bills will allow the current grandfather exceptions to 
the Internet tax moratorium to expire. One of the bills, H.R. 
1077, would go further by eliminating the grandfather 
exceptions from the law entirely. Three out of our four 
witnesses here will again testify why it is time for these 
grandfather clauses to expire, given that the States have had 
almost 10 years to wean themselves from the revenue from the 
discriminatory taxes that are protected under these clauses.
    These three witnesses are not alone on these points. Almost 
150 Members of the House of Representatives from both parties 
have cosponsored either one or both of these bills. That is a 
strong showing.
    Against such a strong showing, I am happy that we have a 
Representative from the States who will present the 
counterarguments. I don't think he has the best of those 
arguments, but I respect his willingness to be the lone voice 
of dissent on this panel. I also look forward to his testimony, 
as well as that of Ms. Garwood, on the issue of the definition 
of Internet access.
    One of the issues at our last hearing was that some States 
were attempting to tax some forms of Internet access, 
notwithstanding the clear intent of Congress to the contrary. 
On the other hand, we also heard from the States about their 
concerns that certain companies may attempt to bundle certain 
goods and services that would ordinarily be taxable with 
Internet access in an attempt to make those goods and services 
untaxable.
    I understand that the States and representatives in the 
industry have been working to create a definition for Internet 
access that would address both of these concerns. And I look 
forward to hearing what progress has been made in that regard.
    Finally, Madam Chair, keeping Internet commerce and access 
free from discriminatory taxes has been a success for the 
American economy. I hope that we will move soon to mark up this 
legislation and get it passed prior to the November expiration 
date.
    Thank you, Madam Chair, and I yield back.
    Ms. Sanchez. I thank the gentleman for his statement. We 
may be visited very shortly by Mr. Smith and Mr. Conyers. 
Without objection, all other Members' opening statements will 
be included in the record.
    [The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative 
  in Congress from the State of Michigan, Chairman, Committee on the 
 Judiciary, and Member, Subcommittee on Commercial and Administrative 
                                  Law
    Today we revisit an issue that previous Congresses have dealt with 
during the last ten years. The Internet tax moratorium is a serious 
issue that Congress will have to address before November 1, when the 
current moratorium expires.
    In May this Subcommittee held an oversight hearing on this issue so 
that we could learn how the current moratorium has affected state and 
local revenues and whether it increased the opportunities for every 
American to access the Internet. What we learned is that we face the 
same issues that previous Congresses have faced. What the witnesses 
told us at that hearing was that the moratorium has a negative affect 
on the revenues of state and local governments. The witnesses also told 
us that the United States has fallen behind many other industrialized 
countries in broadband deployment during the last four years.
    The witnesses testified that the definition of ``Internet access'' 
was a major problem with the current moratorium. Since that time I have 
learned that the state and local governments and the industry 
representatives have worked together on that definition. And I thank 
them for doing so.
    As we hear from our witnesses today, we will hear about how the 
introduced legislation on the Internet tax moratorium affects them and 
why they support or oppose it. I look forward to the representative of 
the states and local governments to tell us why the moratorium should 
be temporary and why Congress should continue to protect the states and 
local governments with a grandfather provision. I look forward to 
hearing from the representative of the industry why it and the state 
governments worked together on a such a contentious definition as 
``Internet access.'' And most importantly, I welcome testimony from two 
of my esteemed Members of Congress on why they proposed legislation to 
make the Internet tax moratorium permanent.
    The issues we are examining today go to the heart of state's rights 
to collect taxes as well as the interests of people to have access to 
the Internet. We should not forget how our actions in Congress affect 
the revenues of state and local governments. But we must balance all of 
the interests going forward when we consider legislation on the 
Internet tax moratorium.

    [The prepared statement of Mr. Cohen follows:]
 Prepared Statement of the Honorable Steve Cohen, a Representative in 
   Congress from the State of Tennessee, and Member, Subcommittee on 
                   Commercial and Administrative Law
    I am a co-sponsor of H.R. 743, the ``Permanent Internet Tax Freedom 
Act of 2007,'' because there should be no obstacles to Internet access, 
nor should there be multiple or discriminatory taxes on Internet 
transactions. While proponents of repeal or of a temporary moratorium 
contend that the amount of Internet access tax would be minimal, any 
state or local tax on Internet access, however minimal, would have a 
disproportionate impact on lower income individuals--the last group of 
people who need obstacles to Internet access. Moreover, states and 
localities do not appear to have suffered catastrophic, or even 
notable, financial loss as a result of the moratorium that has been in 
place since 1998. While I understand the states and localities can 
always use additional sources of revenue and I sympathize with their 
situation, I believe that the balance of public interest in this case 
weighs in favor of a permanent Internet tax moratorium. Moreover, I 
would support elimination or expiration of the grandfather provision in 
the Internet Tax Freedom Act because a permanent moratorium on Internet 
taxes should apply to all states equally. I urge my colleagues to join 
me and the other 135 co-sponsors of H.R. 743 in supporting this 
legislation.

    [The prepared statement of Mr. Smith follows:]
 Prepared Statement of the Honorable Lamar Smith, a Representative in 
Congress from the State of Texas, and Ranking Member, Committee on the 
                               Judiciary
    Madame Chair, in the absence of congressional action, the Internet 
tax moratorium will expire next November 1.
    This legislation, which was initially enacted in 1998, prevents 
states or localities from imposing a sales tax that applies only to 
Internet transactions.
    Internet commerce has yet to approach its full potential. The 
imposition of discriminatory taxes would threaten the future growth of 
e-commerce and would discourage companies from using the Internet to 
conduct business. Internet taxation would also create new regional and 
international barriers to global trade.
    I have long supported a permanent extension of the moratorium on 
discriminatory Internet taxes and to end the grandfathered exemptions.
    I was a co-sponsor of the House-passed version of this bill in the 
108th Congress, and I am now a co-sponsor H.R. 743, the ``Permanent 
Internet Tax Freedom Act of 2007.''
    I hope that we will move to extend the Internet tax moratorium for 
as long a period as we can as soon as we can.
    I trust that such measures will continue to enjoy the broad 
bipartisan support they have in the past, and I hope that we can 
successfully move a bill soon without any extraneous provisions 
attached.

    Ms. Sanchez. Without objection, the Chair will be 
authorized to declare a recess of the hearing at any point.
    I am now pleased to introduce the witnesses on our first 
panel for today's hearing. Our first witness is Congresswoman 
Anna Eshoo of the 14th District of California. Ms. Eshoo was 
first sworn in as a Member of the House of Representatives in 
1993, and since then has continued to defend the right of 
consumers and promote American competitiveness and innovation.
    Ms. Eshoo serves on the House Energy and Commerce 
Committee, Subcommittee on Telecommunications and the Internet, 
and on the House Committee on Intelligence as Chairwoman of the 
Subcommittee on Intelligence Community Management.
    Ms. Eshoo is the author of H.R. 743, the ``Permanent 
Internet Tax Freedom Act of 2007.''
    Our second witness is Congressman John Campbell, 
representing the 48th District of California. Elected to 
Congress in December of 2005, Mr. Campbell champions fiscal 
responsibility. He serves as a Member of the House Committees 
on Financial Services, the Budget and Veterans' Affairs.
    Mr. Campbell is the author of H.R. 1077, the ``Internet 
Consumer Protection Act of 2007.''
    I want to thank you both for your willingness to 
participate in today's hearing, especially in light of the fact 
that your schedules can be very hectic. Without objection, any 
written statement that you have will be placed in its entirety 
into the record, and we would ask that you limit your oral 
remarks to 5 minutes.
    I am sure you are both familiar with the lighting system. 
The green light signifies that you may begin your testimony and 
will have 5 minutes to testify, the yellow light warns you that 
you have a minute remaining, and the red light will warn you 
that you are out of time. If you are caught midsentence when 
the red light comes on, we would appreciate it if you could 
finish your thought and wrap up your testimony so that we can 
proceed with the hearing.
    After each witness has presented his or her testimony, 
Subcommittee Members will be permitted to ask questions subject 
to the 5-minute limit.
    With our understanding of the ground rules now settled, Ms. 
Eshoo, I would invite you to proceed with your testimony.

 STATEMENT OF THE HONORABLE ANNA G. ESHOO, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Eshoo. Thank you, Madam Chairwoman, and distinguished 
Members of the Subcommittee. Especially, thanks to you, Madam 
Chairwoman, for not only the hearings, your interest, but also 
allowing us to be here today--Mr. Campbell, myself and others--
to testify on this very important issue.
    The bill that I have sponsored, H.R. 743, is the Permanent 
Internet Tax Freedom Act of 2007. It enjoys strong bipartisan 
support in the House with 138 cosponsors as of today, including 
18 Members of the full Committee, the House Judiciary 
Committee.
    I also want to recognize and thank--I am not going to call 
out all the names, but there are many Members in previous 
Congresses and this Congress that have worked on this effort, 
both sides of the aisle. And then I think the father of the 
effort over in the Senate, Senator Ron Wyden.
    My legislation is very short and it is very simple. It 
strikes the beginning and the end dates of the current 
moratorium, making the moratorium permanent. That is what the 
legislation does. It is silent on the grandfathering issue that 
you commented on in your opening statement, Madam Chairwoman.
    The legislation guarantees that the barriers created by 
taxation of Internet access and eCommerce would not be erected 
when the current moratorium expires later this year, nor would 
the barriers arise in the future. So as we know the Internet 
today, that it is open, it would remain so.
    I think that we use--there is a lot of jargon and 
terminology that hovers around so many issues that we deal with 
in the Congress. We talk about access. What access is, is an 
entrance fee. It is an entrance fee. So think of entering a 
building and having to pay an entrance fee every time you walk 
in, and you can apply that to thousands of situations. That is 
what it means.
    Now, there is the certainty that innovators and start-ups 
are looking for--they always are, we all appreciate that--that 
which I believe and others believe only a moratorium can--a 
permanent moratorium can provide.
    When this issue first arose to prominence in the late 
1990's, in my congressional district, which includes, along 
with Congresswoman Lofgren, Silicon Valley, it was bustling 
with activity in the burgeoning Internet sector. In just 1 
year, from 1997 to 1998, the number of Internet users more than 
doubled from 70 to approximately 150 million people. And the 2 
millionth domain name was registered in May 1998.
    In September 1998 a small, start-up company was born in a 
garage in Menlo Park, Google, Inc. I remember saying to Eric 
Schmidt, what kind of a name is that? Well, it certainly is a 
great brand around the world today.
    Congress and President Clinton at that time recognized the 
promise of the Internet and the need to foster its growth and 
development by maintaining an open architecture with a very, 
very--with very limited barriers to entry.
    A big concern was the potential for Internet access and 
services to become a target for taxation. We realized at the 
time that it wouldn't serve our economy or our country well to 
interfere with the exciting growth and we prohibited new and 
discriminatory taxes.
    I think when you look at the data across the board, that we 
were spot on. We anticipated well and we see what has happened. 
The Internet is now, as you said, Madam Chairwoman, an integral 
part of everyday life. It has integrated itself into everything 
that we do. We can't even think of a day where, whether it is 
in communication, in commerce, in business, in education, in 
research where this doesn't apply.
    I think if we reverse this, we will essentially kill what I 
call the ``golden goose dot-com.'' I don't think it is 
acceptable for our country, the country that has led. And I see 
the applications of this at another Committee that I am on, at 
the House Intelligence Committee, of how this has served our 
country. So to impede this effort that has been successful, I 
think, is clearly the wrong direction. We would drive ourselves 
into the past, pre-1997-1998. And I think that this has served 
the American people well.
    The threat of new Internet taxes will also impede 
innovation. You have to have some kind of certainty for people 
to make their investments, to develop the capital and to move 
forward. So we don't want to dampen this down.
    For all of these reasons, obviously, I think, as well as 
many on both sides of the aisle believe, that it is important 
to enact a permanent moratorium.
    The marvel of the Internet and the key element in its rapid 
growth has been the ability of any user, any business, to get 
onto the Net and reach any other user without paying what I 
call an entrance fee. So I think Congress needs to step up. 
This is an important debate.
    I came out of--my original public service was in local 
government and county government. I know firsthand the 
restrictions that are there. I wish the States had come up with 
a standard, because we would be having a different 
conversation. But the threat of 1,000-2,000 taxing authorities 
in the country jumping on one pony I don't think, number one, 
is attractive; two, I don't think it is workable; three, there 
is a lot at stake when that becomes a major part of the 
conversation. We should have a conversation about it, but I 
think the overwhelming evidence points in this direction.
    So I would be happy to answer questions, I am thrilled to 
be here. It is really nice to be at this end rather than up on 
the dais. It is a different experience. I welcome it. I thank 
you for it, Madam Chairwoman.
    You are all my friends and colleagues, and it is an honor 
to testify before you.
    Ms. Sanchez. Thank you for your testimony Ms. Eshoo. We 
appreciate your taking the time and your thoughtfulness with 
respect to the issues that we are grappling with in this 
Subcommittee.
    [The prepared statement of Ms. Eshoo follows:]
  Prepared Statement the Honorable Anna G. Eshoo, a Representative in 
                 Congress from the State of California
    Thank you Madam Chairwoman for inviting me to testify today about 
my legislation, H.R. 743, the Permanent Internet Tax Freedom Act of 
2007. This effort enjoys strong bipartisan support in the House, with 
138 cosponsors including 18 Members of the Judiciary Committee.
    It's an honor to join with Representative Bob Goodlatte, a Member 
of this Committee and with my longtime friend and ``father'' of this 
effort in the Senate, Senator Ron Wyden.
    My legislation is very short and very simple. It merely strikes the 
beginning and end dates of the current moratorium, thus making the 
moratorium permanent.
    H.R. 743 would guarantee that the barriers created by taxation of 
Internet access and e-commerce would not be erected when the current 
moratorium expires later this year, nor would the barriers arise in the 
future.
    This is the certainty that innovators and start-ups are looking for 
and which only a permanent moratorium can provide.
    When this issue first rose to prominence in the late 1990's, my 
congressional district, home to Silicon Valley, was bustling with 
activity in the burgeoning Internet sector.
    In just one year, from 1997 to 1998, the number of Internet users 
more than doubled from 70 to approximately 150 million, and the 2 
millionth domain name was registered in May of 1998.
    In September of '98 a small, start-up company was also ``born'' in 
a garage in Menlo Park--Google, Inc.
    Congress and President Clinton recognized the promise of the 
Internet and the need to foster its growth and development by 
maintaining an open architecture with limited barriers to entry, and 
minimal regulatory and administrative burdens.
    Of particular concern was the potential for Internet access and 
services to become a target for government taxing authorities looking 
for new sources of revenue.
    We recognized at that time that it would not serve our country well 
to interfere with the growth of this exciting and invaluable tool for 
information, communications, and commerce, and we prohibited new and 
discriminatory taxes on the Internet.
    The moratorium has served us well. The Internet is now an integral 
part of everyday life. Americans across the country utilize the 
Internet for communication, commerce, business, education and research.
    If we reverse course now, we'll essentially kill GoldenGoose.com.
    According to the most recent data, the U.S. now ranks 24th in 
broadband penetration among all industrialized countries.
    This is simply not acceptable for the country that invented the 
Internet, and I'm proud to support a variety of efforts, including the 
Speaker's Innovation Agenda, which will rectify this deplorable 
situation.
    I can think of few things we could do to impede this effort more 
than subjecting Internet access and e-commerce to new taxes. Our 
competitors realize that access to broadband is essential to be 
competitive in the 21st Century global economy, and they are heavily 
subsidizing it.
    Allowing this moratorium to expire would do the opposite and 
disincentivize broadband access for every American.
    These taxes are also inherently regressive and would hit low-income 
households the hardest, widening the breach of the ``Digital Divide.''
    And the threat of new Internet taxes will also impede innovation 
and the development of new technologies and applications that will 
revolutionize business, healthcare, education and entertainment in our 
country, but only if all Americans have affordable access to advanced 
broadband service.
    For all these reasons, it's essential to enact a permanent 
moratorium to remove this cloud over the Internet once and for all.
    The marvel of the Internet and the key element in its rapid growth 
has been the ability of any user or business to get onto the Net and 
reach any other user without paying an ``entrance fee'' or imposing 
significant barriers.
    It's critical for Congress to enact a permanent moratorium:

        1.  To reflect our commitment to universal broadband in 
        America;

        2.  To provide certainty to the entire Internet community that 
        access to the Net will remain tax free;

        3.  To ensure e-commerce will remain free of discriminatory 
        taxes.

    Thank you again Madam Chairwoman for the opportunity to testify 
today. I look forward to working with you to enact this important 
legislation.

    Ms. Sanchez. At this point, I would invite Mr. Campbell to 
begin his testimony.

 STATEMENT OF THE HONORABLE JOHN CAMPBELL, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. Campbell. Thank you Madam Chairwoman, Ranking Member 
Cannon and Members of the Committee. And I, too, appreciate the 
opportunity to be here and speak with you all about this 
important issue.
    Now, I am the primary sponsor of H.R. 1077, but also 
cosponsor of Ms. Eshoo's bill. The only difference between them 
is whether there is a grandfather clause or not, whether you 
allow some entities, some local governments and so forth that 
have imposed taxes to keep them or not. Other than that they 
are identical; the spirit of them is identical. And frankly, 
although I would prefer the grandfather clause be removed, the 
important thing is that we make sure that from now, going 
forward, we don't impede the growth of the Internet; and I 
think that is really what we are talking about.
    The Internet has been a tremendous vehicle for explosive 
growth both in the economy and in the ability of everyday 
people to access information and services that they, prior to 
the Internet, never had the opportunity to access.
    Let me explain what both of these bills--and I will speak 
of them as a single unit at this point--what they don't do. And 
what they don't do is, they do not restrict the ability of 
States and local governments to impose regular taxes that are 
imposed on other transactions, whether they are on the Internet 
or not. They do not restrict the ability of States and local 
governments to impose, for example, sales taxes on transactions 
over the Internet. Those sorts of taxes that are independent of 
whether the triggering mechanisms on the Internet or not are 
not impeded by this bill.
    What it does say is that you cannot impose a discriminatory 
tax. So you cannot have a sales tax on Internet transactions 
that are higher than a sales tax that that same jurisdiction 
imposes on a transaction at a brick and mortar facility. So it 
does say that.
    What it also says, as my colleague from California pointed 
out, is that you can't impose a tax on access to the Internet. 
And that is the important thing here, because access to the 
Internet has become largely free, and as I will explain in a 
moment, is going to become freer. And it wasn't that long ago 
when most people paid $10, $15, $20 a month for access to their 
Internet service provider. Now, virtually all of those are 
entirely free. And so more and more people are able to access 
this tremendous source of information and opportunity without 
charge.
    Now, can you imagine if some jurisdiction decides to put on 
something and says, well, we are going to charge you for each 
e-mail you send, or, well, we are going to charge you for the 
amount of time you are on the Internet, how that is going to 
restrict use of the Internet, both for individuals and how it 
will restrict the growth of commerce that has occurred over the 
Internet.
    And that is what this bill is trying to say, that the 
marketplace is moving for the Internet to become freer and 
freer and freer; and let us not have government go in and start 
making it less and less and less free, and restricting the 
ability of people to get on and do what they want to do.
    Now, in my home county of Orange County, CA, the city of 
Anaheim is in the process of putting together, and I believe 
they advertise that they will be the first city to do this, to 
have complete, public, free Wi-Fi throughout the entire city. 
So anyone with a computer, with Wi-Fi, who is anywhere in the 
city of Anaheim will be able to access the Internet, and since 
Internet service providers are basically free, they will have 
complete, total free access if you are in the city of Anaheim.
    I know there are a bunch of other cities now in other 
localities that are looking at this sort of thing. So when I 
say that it is free and getting freer, that is what I mean, 
that increasingly the benefits of eCommerce and the benefits of 
being able to access the Internet are outweighing the necessity 
or the ability of charging for e-mail addresses or for e-mail 
access or for access at all. So the last thing in the world we 
ought to be doing is restricting that by taking that and adding 
some kind of a tax or some kind of a charge at the city or 
local level.
    So that is really what this bill is about, what these bills 
are about, what the spirit of these bills are about. And the 
benefits are both that--for both commerce and the fact that 
people will be able to access, have freer access to more 
information and more commerce and more things that they have 
never been able to do, in the future.
    And as my colleague from California said some years ago, 
very few of us, certainly not me, but I think the ones who did 
anticipate where the Internet was going to be have a whole lot 
more money than any of us do at this point.
    But--it is hard to anticipate where it will be 10 years 
from now, but the one thing we do want to do is make sure that 
we don't stand in the way of this great engine of growth, 
opportunity and access growing to wherever it may grow.
    And it is great to be with you and I will yield back Madam 
Chairwoman.
    [The bill, H.R. 1077, follows:]
    
    
    
    Ms. Sanchez. I thank Mr. Campbell for his testimony.
    We do have very few questions, so we are actually going to 
proceed under unanimous consent. I am going to ask unanimous 
consent to grant Mr. Cannon 3 minutes to ask a couple very 
quick questions. And I understand Ms. Lofgren will have a 
couple of quick questions as well.
    Without objection, Mr. Cannon.
    Mr. Cannon. Thank you, Madam Chair.
    And I want to thank my two friends for being here and 
taking the initiative on this topic that is so very important.
    I just wonder, and I don't know if you have even thought 
about these things, but associated issues are whether or not we 
are going to tax telephone numbers. If we do that, we are going 
to be regulating the Internet. When some people are talking 
about funding the universal service done by taxing telephone 
numbers, of course, that means to me that people will move away 
from telephone numbers and these other forms of identification.
    But if you have thoughts about that, or also about whether 
municipalities ought to have the ability, whether we ought to 
preempt the laws that prohibit municipalities from building out 
fiber-optic networks as opposed to wireless networks, like you 
talked about in Anaheim, Mr. Campbell.
    So if either of you has thoughts on either of those issues, 
I would love to hear them.
    Ms. Eshoo. Well, I think we are at a juncture right now 
between what is--you know, all of the services that are 
merging, telephones have been taxed forever, telephone service 
has.
    Now we are moving--we had a little conversation when we 
first came into the room about this. Now we are in an era where 
we are racing forward again, where so many services are 
merging. So all of that is going to have to be considered.
    And you have to take a look at the services. I mean, 
myself, what I pay just monthly for all these different 
services, these get to be kind of expensive utility bills. I 
mean, there is a real investment in all of this.
    So the Committee is going to have to make some kind of 
decision on that. I don't know whether it is sooner or a little 
farther down the road.
    There is something that I failed to mention in my opening 
testimony, and that is the whole issue of broadband. You are 
going to have to consider broadband in this because it is part 
of the issue. Are we going to--as a Nation, we are now ranked, 
the latest data for our country is that we rank 24th in the 
world in broadband penetration. American people don't like 
that. We like being first, not 24th. And we continue to slip.
    Now, what kind of an effect is this taxation issue, or not 
having a moratorium or permanent moratorium, what kind of 
effect is that going to have on broadband penetration in our 
country? So it is something else to be considered.
    Mr. Campbell. I agree with those comments. I will just add 
that I think some of those questions, as you say, have to do 
with the convergence of all these technologies, which really 
are outside the scope of this particular bill. Because now, as 
you know, you can get Internet on your cable TV and you can get 
telephone on your Internet; and as all of these converge, then 
I think there are questions relative to that.
    But I think what this bill is saying is that--don't tax the 
access of that Internet. You may tax things that you get from 
the Internet, like purchases, et cetera, et cetera, but don't 
tax the ability to get it in the first place.
    And I think that is where we are coming from.
    Mr. Cannon. Madam Chair, just a quick follow-up. When you 
say what you get on the Internet, that is like maybe a magazine 
or a pair of shoes, but if the service is bits and bytes, you 
don't want to tax that, right?
    Mr. Campbell. No, clearly you don't.
    Mr. Cannon. So if those bits and bytes happen to be voice 
in a communication that is similar to a telephone, I take it 
your view is that should not be taxed.
    Mr. Campbell. I think you can actually have a view either 
way on that. But as long as you are not taxing the bit and the 
byte. If you are taxing the fact that there is a telephone 
there, I suppose that is something you can do; just don't tax 
the access to it.
    Ms. Sanchez. The Congresswoman's time has expired. I would 
ask unanimous consent that Ms. Lofgren be granted 3 minutes for 
questioning without objection.
    Ms. Lofgren. Thank you. And I really appreciate it; I know 
how we are all busy and that the two of you would take time to 
share your thoughts here today really is important to me and to 
the whole Committee. And I am proud that the main authors are 
Californians because certainly high technology is very much 
associated with our State.
    I just had two quick questions. The first has to do with 
definitions. And when we started this process in--I think it 
was the 105th--Commerce, the definition wasn't a major issue 
because we thought we knew. But, of course, things have morphed 
and converged, and I am proud to be a cosponsor.
    But I am wondering whether we should have a further 
discussion to broaden the access, because when we look at our 
need to support the free flow of information in all the bits 
and bytes and data, you know, I think the broadest definition 
of access should be our guide. And I wonder if the two of you 
agree with that.
    Ms. Eshoo. Well, it is certainly my intent as the author. 
But that is why we have hearings, that is why Members have 
discussions with each other when we go to the floor. All of 
that interaction, all of this interaction is very important.
    I have tried, in many situations--and I don't think there 
is a set recipe for this; sometimes the language needs to be so 
broad because you don't want to get into definitions and hamper 
things. On the other hand, some bills really call for high 
definition. So I am open on that.
    I think that, again, this is why we are here, why there is 
a discussion. I would like the principle set down by the 
Congress. We are having a great debate right now, so is the 
FCC, on spectrum. And this happens once every decade or less; 
and it is going to define, it is going to define the next, 
perhaps the first half century of the 21st century.
    So this is a big decision of how we are going to move 
forward. So I am open to it. I mean, you are going to come up 
with ideas, and we will discuss them. I think the principle of 
the legislation is what I am the most concerned about keeping 
intact.
    Mr. Campbell. The same here; I agree with my colleague from 
California.
    And the only thing I will just add is, again anticipating 
where this is going to go. You know, sending e-mails, sending a 
letter costs money, making a phone call costs money, sending an 
e-mail is free. Why is that?
    Because of the advertising and other opportunities, there 
is a lot of money being made on the Internet now with free 
services because of advertising and other things that are going 
on. As we see these things, something goes up on YouTube and a 
million people look at it in 12 hours or so forth; as you see 
that kind of opportunity to get to people, there are going to 
be more things that now cost on the Internet or cost to get to 
that I think are going to increasingly be free because there is 
going to be so much opportunity to make money in other ways, 
because there are a million people looking at it.
    So that is why I agree with you, the broadest definition 
possible, because I think that some things that now, just like 
before, where if you had said 10 years ago, you are going to be 
able to send an e-mail and it is going to be free. Are you 
nuts?
    But I think there are things now that are going to be freer 
as time goes on. And that is where the broader the definition, 
the more opportunity we have for those things to grow that way.
    Ms. Lofgren. Just noting, Congresswoman Eshoo and I were 
both in local government. As a matter of fact, she was on the 
Board of Supervisors in San Mateo County at the same time I was 
on the Board of Supervisors in Santa Clara County, right next 
door. And we both understand the need for an adequate revenue 
base for local government and for States. And I am actually 
quite passionate about county government, as I know Ms. Eshoo 
is.
    Having said that, the consequence of impeding the 
development of telecommunications is dire for the economy and 
ultimately will hurt the economy of the local government. So I 
am wondering--and this is just to Ms. Eshoo, because it is a 
Democratic question. We adopted as a caucus policy something 
called the Innovation Agenda. You and I were very intimately 
associated with the crafting of that Innovation Agenda, and it 
is a policy of the Democratic Caucus. That is our guide.
    I went back and looked to see if there was a specific 
reference to this bill, and there isn't. But I believe that 
this issue is encompassed by that broad language of the 
Innovation Agenda. As one of the co-authors of that, I wonder 
if you have an opinion. I didn't tell you I was going to ask 
you this, so if you want to think about it, that would be fine.
    Ms. Eshoo. I am so glad that you did. As a matter of fact, 
when I was preparing for this late last evening, I had that in 
there, but I needed to cut back on my--believe it or not, I did 
cut back on my comments.
    But we spoke very specifically in the Innovation Agenda, as 
a full caucus policy position, on broadband. And that is, it is 
a huge consideration for both parties, for the Congress of the 
United States.
    This is something that really can fully democratize the 
Internet. When you have a deep broadband penetration in a 
country, it serves everyone with a small ``d''. And when you 
look at--all you have to do is look at our competitors in the 
world and what they have done and what we are not doing. I mean 
it is a stark contrast; there is a reason why we are 24th.
    So the concentration that we brought to designing those 
public policy goals in our Innovation Agenda, the principles of 
this, are embedded in it. Does it say specifically Internet 
access and taxation and that? No. We didn't drill down with 
language like that. It is up to us as legislators to enact the 
principles of it.
    But thank you for raising it.
    Ms. Lofgren. Thank you very much, Madam Chairwoman.
    Ms. Sanchez. We have also been joined by Mr. Conyers, a 
distinguished Member of the Subcommittee and the Chairman of 
the Judiciary Committee, of the whole Committee. I would ask 
unanimous consent to grant Mr. Conyers such time as he may 
consume.
    Mr. Conyers. I just wanted to say good morning to Anna 
Eshoo in public; and Broderick Johnson I see over there, who 
has worked with the Committee on and off across the years; and 
my colleague, Mr. Campbell. This is--well, if you were one, 
like me, who hadn't heard the testimony, it sounds like just 
about everybody is in agreement, mostly, that we have got to 
extend the moratorium and perhaps make it permanent.
    Is that too simplistic?
    Ms. Eshoo. No. I think--I am not going to add to that. I 
think you have an excellent impression, Mr. Chairman.
    Thank you for your warm welcome and for the work that the 
Committee does.
    Mr. Campbell. And we should do it by November 1 because 
time is of the essence.
    Mr. Conyers. It expires, right?
    Well, that takes care of Conyers this morning.
    Ms. Sanchez. I think the briefest Member on this panel. I 
thank you for that, Mr. Chairman.
    With that, I would like to thank the first panel for their 
testimony and excuse you to run off no doubt to more duties 
that you have as Members of Congress. Again, I want to thank 
for your time and for your thoughtfulness.
    We will take a short recess to allow the second panel to 
get settled in. So if the second panel would please do that.
    [Brief recess.]
    Ms. Sanchez. The Subcommittee will now come to order for 
our second panel of witnesses. I am pleased to introduce the 
witnesses of our second panel for today's hearing.
    Our first witness is Meredith Garwood, Vice President of 
Tax Policy for Time Warner Cable. Ms. Garwood represents Time 
Warner Cable in national and State tax organizations and 
projects and serves on the Tax Policy Committee for the Council 
on State Taxation.
    Prior to joining Time Warner Cable, Ms. Garwood was the 
Senior Director of Tax with AT&T Wireless.
    We want to welcome you today.
    And our final witness is David Quam, Director of the Office 
of Federal Relations for the National Governors Association. 
Mr. Quam manages NGA's legal and advocacy efforts, working 
closely with governors, Washington, DC Representatives and 
NGA's standing committees to advance the association's 
legislative priorities.
    Prior to working at NGA, Mr. Quam served as counsel on the 
U.S. Senate Subcommittee on the Constitution, Federalism and 
Property Rights for the Committee on the Judiciary.
    We want to welcome you both.
    And at this time, I would invite Ms. Garwood to please 
begin her testimony.

        STATEMENT OF MEREDITH GARWOOD, VICE PRESIDENT, 
                 TAX POLICY, TIME WARNER CABLE

    Ms. Garwood. Chairwoman Sanchez and Members of the 
Subcommittee, thank you for this opportunity to testify on an 
issue of real and growing importance to millions of consumers 
and businesses in the United States.
    I also want to thank Representatives Eshoo and Campbell for 
their earlier testimony and for their leadership.
    My name is Meredith Garwood, and I am the Vice President of 
Tax Policy for Time Warner Cable. I am responsible for pursuing 
Federal and State legislative tax initiatives that ensure fair 
and nondiscriminatory taxation for consumers of our services. I 
appear today on behalf of a broader coalition of Internet 
service providers, Internet backbone providers and Internet 
application and content providers. Our coalition is known as 
Don't Tax Our Web. On behalf of that coalition, let me extend 
our appreciation to Madam Chairwoman and to you Ranking Member 
Cannon for today's hearing.
    Unless Congress acts, the Internet Tax Freedom Act will 
expire on November 1, 2007. This morning I would like to focus 
on three points. First, I urge Congress to make the moratorium 
permanent. Second, the moratorium should be clarified once and 
for all to prevent taxation of the transport component of 
Internet access, including the Internet backbone. Finally, the 
moratorium should be extended without any further extensions of 
existing taxes on Internet access that were grandfathered in 
1998 and again in 2004.
    H.R. 743 and H.R. 1077 encompass these objectives, and we 
strongly support both bills.
    With regard to making the moratorium permanent; at a time 
when economic development experts are calling for increased 
deployment of broadband, new taxes on Internet access, 
including taxes on transport used to provide that access, will 
greatly increase the cost of that deployment.
    It is hard to imagine that at some point in the future it 
will make sense to allow access to the Internet to be taxed by 
thousands of taxing jurisdictions. Indeed, even with the 
moratorium in place, companies in our coalition have had to 
deal with consequences of contrived loopholes in the Internet 
Tax Freedom Act--litigation, audit risk and class action 
lawsuits--but it is our strong position that access to the 
Internet should be available, as available, as affordable, as 
possible; and therefore we continue to seek a permanent ban.
    That should be our permanent national policy. It is 
important that we make unmistakably clear that the moratorium 
applies to all Internet transport, including the Internet 
backbone.
    The amendments to the Internet Tax Freedom Act in 2004 had 
two main objectives, one, to treat all technologies similarly, 
and two, to ensure that the Internet backbone remained free of 
tax. Many States like Massachusetts and North Carolina acted 
appropriately in issuing rulings consistent with the Federal 
law and Congress' intent that the Internet not be burdened by 
hidden taxes. Unfortunately, a few States, none of which were 
original grandfathered States, chose to ignore the changes made 
by the Congress in 2004. The actions of these States must be 
addressed because they undermine the moratorium, circumvent the 
will of the Congress and put pressure on other States to 
sidestep the moratorium.
    From an economic standpoint, taxes on the transport 
components of Internet access are indistinguishable from taxes 
on Internet access. Both put the same upward pressure on end 
users' cost of service, deterring growth of Internet access 
subscribers. Additionally, new language to clarify this issue 
is important because we currently have companies facing class 
action lawsuits filed by their customers because the companies 
followed the rulings issued by these States.
    Our coalition has been working with the Federation of Tax 
Administrators and with the National Governors Association in 
an effort to make unmistakably clear that the Internet backbone 
and other components of Internet transport are covered by the 
moratorium. We have also worked with the States to address 
their concerns that the definition of Internet access could 
unintentionally include products other than Internet access.
    Our discussions with the States have led to an agreement 
between our coalition and both FTA and NGA on the definition of 
Internet access. We believe that our joint proposal will ensure 
that consumers do not bear the burden of taxes directly, as 
part of the price of Internet access, or indirectly, through 
unwarranted tax-driven increases in the price Internet access 
providers must pay for transport.
    I want to express my appreciation to David Quam and to 
Harley Duncan of FTA for their constructive approach to this 
very challenging issue.
    We must end the grandfathering of taxes on Internet access. 
In 1998 and again in 2004, Congress grandfathered taxation of 
Internet access in several States. Consumers in those States 
were deprived to the benefits of the lower-priced access to the 
information superhighway. Nearly a decade after a handful of 
States were grandfathered, it is time to bring these limited, 
temporary exceptions to a close and fulfill the original 
objective of a national policy against taxing Internet access.
    Now is not the time to allow regressive new taxes to 
reverse the progress we are making in the Nation. Congress 
should ensure that all consumers in all States benefit from the 
moratorium.
    Madam Chairwoman and Members of the Subcommittee, thank you 
again for this opportunity to testify; and I look forward to 
your questions.
    Ms. Sanchez. Thank you, Ms. Garwood.
    [The prepared statement of Ms. Garwood follows:]
                 Prepared Statement of Meredith Garwood



    Ms. Sanchez. Mr. Quam, would you please begin your 
testimony.

  STATEMENT OF DAVID C. QUAM, DIRECTOR OF FEDERAL RELATIONS, 
                 NATIONAL GOVERNORS ASSOCIATION

    Mr. Quam. Gentlewoman Sanchez, Congressman Cannon, Ms. 
Lofgren, thank you very much for having us back to talk again 
on this important issue.
    I hate to upset the apple cart that has been by the other 
witnesses, but it may come as no surprise that the National 
Governors Association, joined by the National Association of 
Counties, the Conference of Mayors, the National League of 
Cities and other State and local government groups oppose a 
permanent moratorium.
    However, the good news: We are maybe not all on the same 
page, but we are all reading from the same book; and that is 
that the NGA is calling for a reasonable extension of the 
current moratorium, which will preserve some of the provisions 
regarding discriminatory taxation, multiple taxation, and 
continue the moratorium, but do it in a more reasonable manner.
    Since we are focused on legislation, let me talk about 
principles for legislation that are important to the governors. 
First, and I mentioned these before, be clear. Definitions 
matter.
    Second, be flexible. A temporary solution is better than 
permanent confusion.
    And do no harm. Congress should continue to grandfather 
protections to preserve existing States authority and revenues.
    These principles are not reflected in the bills that were 
discussed earlier today, and therefore we oppose making the 
current moratorium permanent.
    A couple of the problems with those bills: First and 
foremost is the definition. Those bills rely on the existing 
definition, which is a 1998 definition of the Internet that, 
frankly, just does not apply to the Internet of 2007. I think 
everyone would agree that there have been significant changes 
to what constitutes Internet access; and therefore, governors 
are calling for a precise definition, because Congress is 
preempting State and local taxation. And when Congress preempts 
State authority, particularly with revenues, it should be 
precise, it should be limited and it should be clear.
    Second, those bills upset the balance between Federal 
authority and State sovereignty that was struck by the original 
moratorium by making the bill permanent and, of course, ending 
the grandfather provisions. A better alternative can be found 
in Senate bill S. 1453, that was introduced by Senators Carper, 
Alexander, Feinstein, Voinovich and Enzi. That bill alters the 
definition of Internet access to ensure that it is clear and 
precise and does not make services unrelated to Internet access 
tax free. It also honors State authority by continuing the 
original 1998 grandfather clause and sunsets the moratorium in 
4 years.
    Now, fortunately, as Meredith said, we have some good news; 
and that is, since the last time, we met industry and 
representatives of State and local government have been in 
discussions. We both are looking for an extension of the 
moratorium, and frankly, we both have issues with the current 
definition.
    And so, working together, we have an agreement on a 
definition of Internet access that is much more of a rifle shot 
than the shotgun approach of the existing bill. Following 
largely on the Carper-Alexander model of being more precise, 
the definition is more clear and specific. It says that 
Internet access is a service that enables a user to connect to 
the Internet. It would include incidental services like e-mail 
under the definition of the moratorium. It maintains a lot of 
the telecommunications language and even clarifies it from the 
last extension on the moratorium. And it makes it explicit that 
just because a service uses the Internet does not mean that 
that service had become part of the moratorium.
    This more improved definition, however, does not justify 
making the moratorium permanent. In fact, keeping the 
moratorium temporary is vital to continuing to honor State and 
local sovereignty with regard to this issue. A temporary 
moratorium allows Congress, who is the only arbiter of this 
moratorium, to return to the issue and make sure that we have 
gotten it right.
    I wish I could say that we have gotten the definition 
right, but we have had changes for the last several years every 
time we reauthorize this bill. The Internet is ever-changing. I 
thought Congressman Campbell said it well, we don't know what 
the Internet will look like in 10 years.
    Finally, the grandfathers are also critical. It is the 
principle of ``do no harm.'' States are collecting some taxes. 
The original grandfather States are collecting upwards of $150 
million. But that grandfather clause was also an important 
safety net for other taxes.
    Although there are some exemptions for taxes listed 
currently in the definition, I do not believe that that list is 
exhaustive nor protects all the State and local taxes and fees 
that apply to Internet service providers. That safety net must 
be preserved on a going-forward basis, and the grandfather 
clause did that.
    We would encourage this Committee to join us in the 
collaborative effort that we have forged with the definition, 
but then continue by extending this on a reasonable basis, 
which means keeping the grandfathers and doing so on a 
temporary basis so Congress can return to the issue.
    Madam Chairwoman, thank you.
    Ms. Sanchez. Thank you, Mr. Quam for your testimony.
    [The prepared statement of Mr. Quam follows:]
                  Prepared Statement of David C. Quam
    Chairwoman Snchez, Ranking Member Cannon, and members of the 
Subcommittee, thank you for inviting the National Governors Association 
(NGA) to testify today.
    My name is David Quam, and I am the Director of Federal Relations 
for NGA. I am pleased to be here on behalf of the nation's governors to 
discuss the organization's perspective on the Internet Tax Freedom Act 
(the ``ITFA)''.
    The bottom line regarding the ITFA is this: although governors 
generally oppose federal interference with state authority to develop 
and manage their revenue systems, NGA supports a temporary extension of 
the Internet Tax Freedom Act that clarifies the definition of Internet 
access and does not further limit state authority or revenues.
                               background
    Although the U.S. Constitution grants Congress broad authority to 
regulate interstate commerce, the federal government, historically, has 
been reluctant to interfere with states' ability to raise and regulate 
their own revenues. State tax sovereignty is a basic tenet of our 
federalist system and is fundamental to the inherent political 
independence and viability of states. For this reason governors 
generally oppose any federal legislation that would interfere with 
states' sovereign ability to craft and manage their own revenue 
systems.
    The 1998 Internet Tax Freedom Act, which imposed a moratorium on 
state or local taxation of Internet access, is one exception to 
longstanding congressional forbearance when it comes to state tax 
issues. Designed to help stimulate this new technology by making access 
to the Internet tax free, the moratorium included three important 
restrictions to protect states:

        1.  The moratorium applied only to new taxes--existing taxes on 
        Internet access were grandfathered;

        2.  The definition of ``Internet access,'' while broad, 
        excluded telecommunications services; and

        3.  The moratorium expired after two years to allow Congress, 
        states and industry the opportunity to make adjustments for 
        rapidly developing technologies and markets.

    In 2000 the original moratorium expired, but was extended through 
November 1, 2003, with its protections for states still in place. In 
2003, and 2004, Congress debated bills that targeted state protections 
by proposing to eliminate the grandfather provision, modify the 
telecommunications exclusion to address tax disparities between 
telecommunications broadband services and those of the cable industry, 
and make the moratorium permanent. Fortunately, the final bill retained 
several of the original state protections including the grandfather 
clause, an exception for taxes on voice-over-internet-protocol (VOIP) 
services, and an expiration date of November 1, 2007.
    As Congress begins to consider changes to the ITFA, governors 
recommend that members examine the scope of the moratorium in light of 
technological advancements; update the ITFA's definitions to ensure 
they reflect congressional intent and do not unnecessarily interfere 
with state taxing authority; extend the moratorium on a temporary basis 
to respect state sovereignty and the ever-changing nature of the 
Internet; and retain the original grandfather clause to preserve 
existing state and local tax revenues.
     congress should clarify the definition of ``internet access''
    A core concern for states is the potential breadth of the ITFA's 
definition of ``Internet access.'' The current definition of Internet 
access states:

        ``Internet access means a service that enables users to access 
        content, information, electronic mail, or other services 
        offered over the Internet, and may also include access to 
        proprietary content, information, and other services as part of 
        a package of services offered to users. Such term does not 
        include telecommunications services, except to the extent such 
        services are purchased, used, or sold by a provider of Internet 
        access to provide Internet access.'' (Emphasis added)

    The first sentence of the definition has not changed since 1998 and 
allows a provider of Internet access to bundle ``proprietary content, 
information, and other services'' together with access to make the 
entire offering tax free. NGA believes that the unlimited ability of 
providers to bundle together content and ``other services'' into a 
single, tax-free offering represents a loophole that could have the 
unintended effect of exempting content, information or services from 
otherwise applicable taxes merely because they are delivered over the 
Internet.
    The risk of states losing significant revenues from this provision 
has grown significantly as broadband connections have become more 
common and companies have altered business plans to deliver more 
services over the Internet. Since 2001, the number of high speed lines 
in the United States has risen from more than 9 million to nearly 65 
million with high-speed connections in the United States growing by 52 
percent in 2006 alone.\1\ Governors support the deployment of broadband 
services because they increase the ability of citizens to utilize the 
vast array of services and information available online and are 
critical to our nation's economic growth and competitiveness.
---------------------------------------------------------------------------
    \1\ Response of Kevin J. Martin, Chairman, Federal Communications 
Commission, to pre-hearing questions asked by the House Committee on 
Energy and Commerce, February 7, 2007.
---------------------------------------------------------------------------
    As more consumers move online, Internet protocol technology is also 
making more services available over the Internet. For example, a key 
issue of the 2004 ITFA debate centered on whether VOIP would become a 
viable alternative to traditional phone service. Unlike traditional 
telecommunications services, VOIP uses the Internet to transmit voice 
communications between computers, phones and other communications 
devices. Today, analysts project that VOIP subscriptions will top 18 
million in 2009, a dramatic rise from VOIP's 150,000 customers in 
2003.\2\ The concern in 2004 was what would happen to the $23 billion 
state and local tax base for telecommunications services if VOIP 
replaces telecommunications services and were allowed to be bundled 
with Internet access into a tax-free offering. Congress' solution 
during the last ITFA extension was to specifically exempt VOIP from the 
moratorium. This solution, however, did not solve the problem of the 
underlying definition.
---------------------------------------------------------------------------
    \2\ Telecommunications Industry Association's 2006 
Telecommunications Market Review and Forecast, February 27, 2006.
---------------------------------------------------------------------------
    The next major service moving to the Internet is video programming. 
Known as Internet-protocol television (IPTV), this service represents 
another technological leap for industry and challenge for the ITFA. 
Worldwide, the annual growth rate of IPTV is projected to exceed 92 
percent, rising from 3.9 million subscribers in 2006 to 103 million in 
2011. The service brings together voice, Internet and entertainment 
services in a bundle marketed by some as a triple-play.\3\ Much like 
VOIP in 2004, if a service like IPTV is packaged with Internet access 
and exempted from applicable taxes, it would create tax disparities for 
competitors offering similar services and undermine existing state and 
local revenues.
---------------------------------------------------------------------------
    \3\ Harris, Jan, ``IPTV subscription to grow 92% year on year,'' 
Platinax Small Business News, April 10, 2007.
---------------------------------------------------------------------------
    The emergence of services such as VOIP and IPTV underscore the need 
to clarify the definition of what constitutes ``Internet access'' so 
that the taxability of a good or service is not determined by whether 
it can be bundled with Internet access and delivered over the Internet. 
Although NGA supports having the moratorium apply to services related 
to providing access to the Internet such as email, Congress should 
close the bundling loophole by specifying that the definition of 
``Internet access'' applies only to those services necessary to connect 
a user to the Internet.
                   any extension should be temporary
    When the ITFA became law in 1998, it was passed as a temporary 
measure to assist and nurture the Internet in its commercial infancy. 
The Internet of 2007 is far different. It is a mainstream medium that 
has spawned innovation, created new industries and improved services. 
What started as primarily a dial-up service available through a handful 
of providers, today is available through thousands of internet service 
providers using technologies ranging from high-speed broadband cable or 
Digital Subscriber Line services, to wireless, satellite and even 
broadband Internet access over power lines.
    Commercial transactions over the Internet have also exploded. A 
recent study by the National Retail Federation concluded that Internet 
sales grew from $176 billion in 2005 to $220 billion in 2006, a 25 
percent jump that outpaced projections.\4\ The survey projects online 
sales for 2007 will jump 18 percent to $259 billion. According to one 
of the survey's senior analysts, ``[t]his strong growth is an indicator 
that online retail is years away from reaching a point of saturation.'' 
\5\
---------------------------------------------------------------------------
    \4\ The State of Retailing Online 2007, Shop.com/Forrester Research 
Study, May 14, 2007.
    \5\ Online Clothing Sales Surpass Computers, According to Shop.org/
Forrester Research Study, viewed at www.nrf.com (May 17, 2007).
---------------------------------------------------------------------------
    The rapid pace of innovation in the Internet and telecommunications 
industries makes it difficult to define accurately these complex and 
ever-changing services. Congress made the original moratorium temporary 
in part for this reason: to provide Congress, industry and state and 
local governments with the ability to revisit the issue and make 
adjustments where necessary to accommodate new technologies and market 
realities. With continued questions as to the scope of the moratorium, 
the ongoing evolution of the Internet and its developing role in 
commerce, a temporary extension of the moratorium remains the best way 
for Congress to avoid any unintended consequences that may arise from a 
permanent moratorium.
    Another reason to support a temporary extension is that making the 
moratorium permanent would establish a troubling precedent that 
distorts the state-federal relationship. As mentioned previously, 
governors generally oppose federal efforts to interfere with state 
revenue systems because such interference undermines a states sovereign 
authority to provide government services. A more immediate consequence 
of a permanent ban on state taxes is the increased pressure Congress 
would receive from other industries seeking similar preemptions of 
state laws. Legislation to impose a moratorium on state and local cell 
phone taxes and efforts to dictate state nexus standards for business 
activity taxes are recent examples of the types of preemptions strongly 
opposed by state and local governments that would be bolstered by 
passage of a permanent moratorium.
    congress should maintain the moratorium's ``grandfather'' clause
    NGA recommends that any extension of the moratorium preserve 
existing state and local revenues by continuing the so-called 
grandfather clause for taxes imposed prior to 1998. The grandfather 
clause serves two purposes; first, as a protection for existing state 
and local tax revenue; and second, as a means to preserve other state 
and local taxes not specifically mentioned by the ITFA.
    Today only nine states have direct taxes on Internet access that 
qualify for the protection of the 1998 grandfather clause. Those states 
include Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South 
Dakota, Texas, Washington and Wisconsin. According to Congressional 
Budget Office estimates from the 2004 ITFA extension, eliminating the 
grandfather clause will cost those states between $80 million and $120 
million annually. While these amounts may seem insignificant in terms 
of federal dollars, balanced budget requirements at the state level 
require that any unanticipated loss of revenues must be made up by 
either cutting services or raising revenues. These losses also are high 
enough to make the elimination of the grandfather clause an unfunded 
federal mandate under the Unfunded Mandate Reform Act. Any extension of 
the moratorium should therefore preserve the grandfather clause so as 
not to reduce existing state and local tax revenues.
    The grandfather clause also serves as an important protection for 
all state and local taxes that indirectly affect providers of Internet 
access. Under the ITFA, a ``tax on Internet access'' means:

        [A] tax on Internet access, regardless of whether such tax is 
        imposed on a provider of Internet access or a buyer of Internet 
        access and regardless of the terminology used to describe the 
        tax.''

    Because a tax on Internet access includes both taxes on users and 
Internet access service providers, some experts interpret the 
moratorium as applying to both direct taxes on Internet access and 
indirect taxes such as business taxes on a provider of Internet access. 
In fact, the pre-1998 versions of the moratorium expressly excluded 
certain indirect taxes such as income and property taxes from the 
moratorium. That language was later dropped because the grandfather 
clause applies to all taxes on Internet access in force before October 
1, 1998.\6\ Although the 2004 extension does preserve the ability of 
states to impose a tax ``levied upon or measured by net income, capitol 
stock, net worth, or property value,'' this list is not exhaustive. 
Preservation of the grandfather clause is important because it allows 
Congress to avoid having to define those direct taxes subject to the 
moratorium and any other taxes that lie outside the scope of the 
moratorium.
---------------------------------------------------------------------------
    \6\ Mazerov, Michael, ``Making the Internet Tax Freedom Act 
permanent in the form currently proposed would lead to a substantial 
revenue loss for states and localities,'' Center on Budget and Policy 
Priorities, October, 20, 2003.
---------------------------------------------------------------------------
S. 1453, the ITFA Extension Act of 2007
    Contrary to H.R. 743, the Permanent Internet Tax Freedom Act of 
2007, or H.R. 1077, the Internet Consumer Protection Act of 2007--bills 
that would make the existing moratorium permanent--S. 1453, a 
bipartisan bill introduced by Senators Carper, Alexander, Feinstein, 
Voinovich and Enzi, best reflects the principles for reform set forth 
above.
    First, S. 1453 maintains the balance between federal authority and 
state sovereignty by preserving the original grandfather clause and 
extending the moratorium for four years.
    Second, the bill specifically defines ``Internet access'' as a 
service that ``enables users to connect to the Internet.'' The bill 
includes in its definition of access incidental services such as 
electronic mail or instant messaging. It also recognizes the change to 
the treatment of telecommunications used to provide Internet access 
that was part of the last extension. Finally, it makes it clear that 
just because a service can be provided over the Internet does not mean 
that the service becomes part of the moratorium. The definition in S. 
1453 is specific and clear and cures many of the problems that exist 
with the current ITFA definition of Internet access.
                               conclusion
    Governors remain steadfast in their insistence that decisions 
regarding state and local taxation should remain with state and local 
officials. The independent and sovereign authority of states to develop 
their own revenue systems is a basic tenet of self government and our 
federal system.
    NGA has been working collaboratively with industry to address state 
and industry concerns with the ITFA. Those talks have helped state 
government and industry representatives more specifically define what 
should constitute Internet access in 2007. Like the definition in S. 
1453, the new definition is more specific and clear and addresses the 
uncertainties raised by both industry and states. This improved 
definition, however, does not justify making the ITFA permanent. 
Instead, Congress should continue to honor state sovereignty by 
building upon government and industry's collaborative efforts, 
incorporate the new definition of Internet access into a temporary 
extension of the moratorium, and preserve the original grandfather 
clause.

    Ms. Sanchez. We will now begin a round of questioning, and 
I will begin by recognizing myself for the first 5 minutes.
    Mr. Quam, what effect would either H.R. 743, the 
``Permanent Internet Tax Freedom Act of 2007,'' or H.R. 1077, 
the ``Internet Consumer Protection Act of 2007,'' the two bills 
that were discussed in the previous panel, have on State and 
local revenues if either of those were passed?
    Mr. Quam. If either of those are passed, the concern is 
that on an ongoing forward basis, there is a lot of risk placed 
on States. The current definition and the definition that would 
be used under either bill would include the ability to package 
other services with Internet access and make the entire package 
tax free.
    This was the key issue back in 2004 when this bill was last 
authorized; and during that time the question was, what would 
happen to voiceover Internet services? VOIP ultimately was 
specifically exempted out of fear that all telecommunications 
taxes could be lost under that broad definition.
    Because that definition has not been fixed, Congress has a 
choice. It can keep it and continue to exempt just whatever the 
next technology that is going to move over the Internet is, or 
it can precisely define what the Internet access is and limit 
the scope of this too-early Internet access.
    The fear ultimately would be, the next VOIP may be Internet 
protocol television. And that is a lot of the, say, franchise 
fees are earned under cable. As television moves to an Internet 
protocol, if that was bundled up with Internet access, it would 
make the entire thing tax free. Under a permanent bill, that is 
much more likely.
    Ms. Sanchez. Okay. And if Congress decided to eliminate the 
grandfather protection for those States that had already 
imposed Internet access taxes, as of 1998, what would be your 
suggestion as to the best way to minimize the effect on State 
and local government revenues?
    Mr. Quam. I am not sure I like the premise of the question, 
but for the Chairwoman, I will go with it.
    Ms. Sanchez. Assume a hypothetical.
    Mr. Quam. Fair enough.
    The most important thing is to recognize the safety--in 
your hypothetical is to recognize the safety net that the 
grandfather clause put in place. When this was originally 
drafted in 1998, there had been a provision to try to list all 
the different taxes that should not be part of the moratorium. 
Ultimately, that was taken out of the 1998 bill, what became 
the 1998 law, because you had the safety net of the grandfather 
clause protecting all those taxes, so it was redundant.
    If the grandfather goes away, that safety net is important. 
Unless Congress believes that all taxes should fall under this 
moratorium with regard to providers of Internet access--and, 
again, the definition of tax is quite broad; there are a few 
exceptions--then a safety net has to be there so that Congress 
tells States and, frankly, companies exactly what it means--
what taxes can be applied, what taxes cannot be applied even to 
a business that is offering Internet access.
    Ms. Sanchez. Okay.
    Ms. Garwood, State advocates whom we heard from have 
indicated that the loss of the grandfather protection would 
cause about $150 million revenue loss and that this loss would 
affect local government's ability to hire, for example, more 
police officers and fire fighters, pay for road improvements 
and fund other community projects.
    How do you respond to those legitimate concerns of State 
and local governments?
    Ms. Garwood. Congress adopted a national policy in 1998, 
and we are a decade later, and States have known that this is 
an issue. If the grandfather continues, then we allow disparity 
between consumers from one State to another; and the consumers 
that are in the States that have been grandfathered have not 
had the benefit of Internet access without tax on it. It is now 
the time and there has been a lot of warning coming forth that 
these grandfathers would need to go away.
    On the point that David raised about the definition of tax, 
we disagree on the impact of the grandfather being eliminated 
on that. The definition of tax was an issue for 2004. There was 
a lot of work put around it to get a clear definition, and I 
think the logic doesn't hold true in that many States have put 
in new taxes since 1998 not related to Internet, and this 
definition of taxes have not protected that.
    So we think there is a clear definition of tax on Internet 
access, and we think the removal of the grandfathers does not 
create an issue. We can't allow the definition of tax to be 
manipulated in a way that it will undermine the intent of the 
moratorium. So we have those concerns.
    Ms. Sanchez. Thank you.
    My time has expired, so I would invite Mr. Cannon for 5 
minutes of questions.
    Mr. Cannon. Thank you.
    Ms. Garwood, When Mr. Quam was talking about negotiations, 
you were nodding; and that didn't get in the record. You nodded 
again. Would you mind just saying--let me just ask the 
question. You are discussing these issues, industry is 
discussing these issues, and we have advanced in actually 
redacting something that will work.
    Ms. Garwood. Yes, we do have an agreed-upon definition 
between FTA, NGA and the Coalition. It addresses the concerns 
of the Coalition related to the taxation of the backbone of the 
Internet. And while we believe the 2004 bundling language that 
was put in addressed the States' concerns, we did agree to work 
with the States to further define Internet access in a way 
where they are comfortable, the Coalition is comfortable, and 
we have language.
    Mr. Cannon. This is an extraordinarily complex process.
    I note that Mr. Watt was here earlier, and we worked very 
closely together on many of these issues last time around, and 
I think for a long time we actually had hopes that we would be 
clear on VOIP. But that came to a dramatic stop or halt in the 
other body.
    So, recognizing the complexity, we are working together 
with you on that, my staff and the Committee staff and the 
Chair staff; and we are hopeful that we can get a bill that 
will actually advance the clarity on this issue so that we can 
move forward.
    Mr. Quam, I would like to ask you a question. Thank you for 
being back. We appreciate your involvement and work and 
perspicacity on this issue.
    But one of the things that I think is amazing is that we 
have got State and local revenues going through the 
stratosphere here recently. That in significant part is due to 
e-commerce and the new economy largely driven by the Internet 
but also by technological advances of computers. You would 
agree with that----
    Mr. Quam. The Internet has certainly been a boom to the 
economy, no question.
    Mr. Cannon. I had this discussion with the bricks and 
mortar guys and how they are doing better and how the fact that 
the Internet works is driving that to some degree.
    For purposes of taxation, we do have now some distance and 
some perspective that we didn't have in the past. Over the last 
10 years, L.L. Bean, for instance, which was a catalog company 
at one point--I don't know. I haven't looked at the statistics. 
They are all over Utah. My guess is they are a national 
company, and there are virtually no States that can tax them 
because they already have nexus.
    What I would like from you here is a little perspective on 
what the States ought to be doing to encourage the kind of 
growth that happens because you get a multi-channel 
distribution and therefore the ability to tax and why that is 
good for the economy and then why we ought to be careful as we 
think about what we tax on the Internet. Do you have thoughts? 
I know you have thoughts. Would you mind sharing them with us 
on that?
    Mr. Quam. Thank you, Congressman. You are right. These are 
very complex issues.
    As you well know, here we are talking about tax of Internet 
access, and too often that does get confused with other 
transactions over the Internet. The sales tax issue--I am sure 
if Mr. Delahunt was here, he would speak about the streamlined 
sales tax initiative and how that is a proactive way in which 
States have tried to address that national issue to really 
minimize the difference between bricks and mortar and Internet 
stores. You do talk about a recent phenomenon just in the last 
5 years of what we call bricks and clicks, where all of a 
sudden bricks and mortar stores are going on line and where you 
might order on line but then you go to the store to pick it up, 
maybe you go to the store to get it serviced. And that largely 
has been read to create the type of nexus where sales tax can 
be collected.
    Mr. Cannon. May I interrupt your thoughts to direct it 
particularly? What we are talking about here is access to the 
Internet, and that is the most foundational tax and, therefore, 
it seems to me the tax we need to be most careful about 
constraining. And in particular that is what I would like your 
thoughts on.
    Mr. Quam. Again, we have come up with an extension of the 
moratorium. So those protections will remain in place.
    With regard to the Internet itself--and I think we talked 
about this a little bit in May--there is a couple of studies 
that said that tax on Internet--and we happen to have a 
laboratory here since we have nine States who kept it. But the 
GAO and a study out of the University of Tennessee said those 
taxes had no bearing on broadband penetration. And as a matter 
of fact, the recently report out of the Center on Budget and 
Policy Priorities listed the tax rates for all those countries 
ahead of the United States.
    Mr. Cannon. My time has expired. Madame Chair, may I ask 
unanimous consent just to refine the question?
    Ms. Sanchez. Without objection.
    Mr. Cannon. The issue is not so much broadband penetration. 
We have sort of been over that and the effect. It is the 
chilling of the larger environment that I would like you to 
respond to. In other words, the fact that we have grandfathers, 
the fact that we don't have a permanent Internet moratorium in 
some way--it obviously chills.
    I don't think there are any quantitative studies out there 
that deal with this, but one looks at the economy that is 
booming and says, what are the little impediments out there? 
You can't identify their total effect. But is there an effect 
by these little impediments like a grandfather or like the fact 
that it is not permanent?
    Mr. Quam. I think those studies show for those grandfather 
States this has not been an impediment to people getting on the 
Internet.
    Mr. Cannon. You are right in the answer, and what you said 
is correct, but I don't think that is responsive to the 
question. But I see my time has expired and will yield back, 
Madame Chair.
    Ms. Sanchez. Thank you, Mr. Cannon.
    At this time, I would like to recognize the congresswoman 
from California, Ms. Lofgren, for 5 minutes of questions.
    Ms. Lofgren. Thank you, Madame Chairwoman.
    I don't have probably 5 minutes of questions, but I do want 
to make sure that whatever discussions have occurred between 
the various interested parties, make it very clear that the 
Internet backbone is not subject to taxation. I mean, I think 
it ought to be much broader than that personally, but that 
would be a disaster.
    Do both of you feel confident that we are going to avoid 
the taxation of the backbone in whatever language you guys are 
looking at?
    Ms. Garwood. We have language that does that. It is a very 
strong point that we had, because we do have States from the 
2004 amendments that have taken aggressive positions that they 
continue to tax the Internet backbone. We think it is important 
to once again make it very clear that that cannot continue, and 
the language that we have we think accomplishes that.
    Ms. Lofgren. I do agree. That is good news.
    I can recall, as I mentioned to our first panel of 
witnesses, being in local government; and it is oftentimes a 
tough position, especially in California. You really don't have 
an ability to do--I mean, since Prop. 13, property taxes are 
simply--you could have a hundred percent vote of your 
electorate and you can't do anything.
    So I do understand there is a revenue need and there are 
important services. But it is easy to feel the pressure of 
needing to raise the funds for essential services and to lose 
sight of the broader economic value of the Internet in 
telecommunications, because I really believe that the 
prosperity that has lifted up our Nation is so much related to 
the development of technology, and our future, really, our 
prosperity is going to be tied to that as well.
    So I think, to make sure that this is not tempting to 
States and localities, it is an obligation that we have to 
preserve our opportunity to develop our high-tech sector; and I 
hope that we can have the broadest definition and a permanent 
moratorium. I think that would be the best service we could do 
for all our States, all our counties and cities and for the 
economic future of the country.
    So I thank the Chairwoman.
    Ms. Sanchez. Thank you, Ms. Lofgren.
    At this time, I would like to recognize the gentleman from 
Tennessee, Mr. Cohen.
    Mr. Cohen. Thank you, Madame Chair.
    First, I have got a question; and I am not sure if I should 
address it to the lady from Time Warner or to our friend from 
the Governors Association. But is there any Federal law on 
taxation of cable television services or is that strictly up to 
the States?
    Ms. Garwood. The States.
    Mr. Cohen. Strictly?
    Ms. Garwood. Uh-huh.
    Mr. Cohen. Let me ask you this. I am a sponsor of the bill 
that says there should be a permanent moratorium. I agree with 
Congresswoman Lofgren. I think that access to communications 
and speech should not be taxed, and I just wonder why--and it 
would probably be difficult politically--but why the Federal 
Government hasn't had some limitation on the State and 
localities' ability to tax cable television, at least to the 
basic service rate.
    Has that, to the best of your knowledge, never come up? 
What do you think about that? What is the difference in the 
Internet and cable TV basic service as far as the right of 
people to be able to get ideas and to have access to certain 
news and information?
    Ms. Garwood. I would agree with your theory, and I would 
say that some States do not tax basic service cable for that 
reason. And it has been a State decision. It has not been 
something that has been federally preempted at this time.
    Mr. Cohen. And I know that Mr. Quam--is there any tax at 
all that the Governors don't like?
    Mr. Quam. Congressman, raising taxes is just as difficult 
on Governors as it is on Congressmen. So I would disagree with 
your assessment that somehow Governors like all taxes.
    I think the key part here is that State and local revenue 
systems need to be designed and operated by State and local 
officials, not by the Federal Government.
    Mr. Cohen. I understand and appreciate that position; and 
many times I am a States' rights person, thinking you get 
better response on a local level. But I was a State senator for 
24 years. I was a progressive one, however. Most Governors and 
legislators like the most regressive tax because it is the 
easiest thing, is to tax the people--don't tax me, don't tax 
me, tax that guy behind that tree. That is their philosophy.
    So if the Federal Government can put some progressivity 
into the tax structure and say we think the people should have 
an access to information, which the Internet--it is the 
worldwide Internet. It is not New Mexico's or Tennessee's or 
Los Angeles's. It is the worldwide Internet. I would think we 
ought to go further and look at prohibiting the States and 
localities from taxing basic cable.
    We didn't tax when you plugged in your TV and you watched 
Chet and David. We didn't tax that. But now you have got it 
coming through the cable, and the States benefit in a 
regressive way so that the people in the lower income levels 
have to pay, you know, this regressive tax. It doesn't seem 
fair, does it, Mr. Quam?
    Mr. Quam. That authority has got to remain with the State 
and local officials. If the citizens don't like the tax that is 
applied by State and local officials, then there are elections 
for that.
    I have had Governors say before the most important thing in 
them running their States is really for the Federal Government, 
especially in revenue systems, to stay out of the way and they 
can do the right thing. The characterization may be accurate 
from your experience. However, I think a lot of Governors would 
disagree in that State and local officials really are 
interested in doing the right thing.
    In the hearing before, Congressman Cannon, we talked about, 
last year, what is the most important thing that States could 
do or that the Federal Government could do with regard to 
communications taxes in general. My answer at that time is the 
same as it is today, and it is don't impede the State's ability 
to modernize their own tax systems.
    If Congress steps in and interferes, that actually hinders 
the ability of State and local governments to make other 
choices and to modernize some of the tax systems that are old.
    Mr. Cohen. But if you were progressive, as I am, and you 
had a ban on basic cable television service, that would force 
the Governors and the legislators--and many of them are 
wonderful people and good progressives and even good 
nonprogressives, regressives, so to speak--that they would then 
be forced to have a more humane and progressive tax system 
because this easy one would be taken away from them.
    Mr. Quam. I think you would also have a very serious 
problem, especially at the local level, where a lot of those 
taxes--and this goes to the principle of do no harm. When 
Congress acts under the commerce clause authority, there are 
real consequences at the State and local level, in particular 
because cable franchise fees are a more local issue than 
anything else. But that is starting to change in some States.
    You are talking a significant tax base that goes to fund 
some of the basic services of government. So running those 
governments into a cliff and saying, well, we are going to take 
that one away from you actually hurts the basic services of 
government. That is why those decisions must remain at the 
State and local level.
    Ms. Sanchez. The time for the gentleman has expired.
    Mr. Cohen. As I have learned, when the time expires I yield 
back the remainder of my time.
    Ms. Sanchez. And, of course, we have saved the best for 
last. I would at this time like to recognize the gentleman and 
all-around wonderful colleague from Massachusetts, Mr. 
Delahunt, who has been patiently waiting to be recognized for 
his questioning.
    Mr. Delahunt. Well, thank you so much for your kind 
observations, inaccurate as they may be.
    Mr. Cannon. The minority endorses that recommendation, by 
the way.
    Mr. Delahunt. Well, if I can take those words and use them 
sometime in a different form, I will remember them.
    We have been dealing with these issues now for an extended 
period of time; and I tend to agree in principle with my dear 
friend and colleague to my left, Congresswoman Lofgren. But the 
reality is we have a significant problem.
    And I heard your testimony. I was watching you, Ms. 
Garwood, on TV; and you really didn't respond to a previous 
question about what do we do about the loss of revenue for the 
States. I mean, it really presents an incredibly serious 
problem. Because what we do when we support the moratorium, 
whether it be permanent or temporary, whether it eliminates the 
grandfathered taxes, you know, on the States that currently 
have them, we have to address it. I think it is a 
responsibility by this Congress if we are going to limit the 
options of the individual States.
    My proposal has been the adoption of the SST, the 
streamlined sales tax issue; and I am pleased to note that the 
Chair of this particular Subcommittee has indicated that she 
will hold a hearing on that issue. And there is a nexus between 
those two.
    Let me pose a question to Mr. Quam. I think your testimony 
was that the loss of revenue to the States, if the 
grandfathered taxes were eliminated, would be in the 
neighborhood of $150 million. Is that accurate?
    Mr. Quam. Yes, for the original grandfather States, yes.
    Mr. Delahunt. Yet, in 2008, it is estimated by the Center 
for Business and Economic Research located at the University of 
Tennessee that the loss of revenue in terms of the sales tax in 
2008 would be somewhere between $22 billion and $34 billion. I 
mean, in the sense of proportionality, the States have a much 
more significant interest in resolving that particular issue. 
Is that a fair statement?
    Mr. Quam. It is.
    Mr. Delahunt. I mean, it is clear and obvious. And while I 
don't think there is anybody that doesn't support e-commerce 
and it is the wave of the future, I also have a concern about 
mom and pop, those small businesses that for whatever reason 
don't have the resources or the infrastructure, the capital, 
the talent and the expertise to sell their products and 
services on line. They are at a competitive disadvantage.
    And it is more than just dollars and cents, from my 
perspective. I mean, many of those small businesses really are 
an integral part of the fabric of a community.
    You know, I always use the example of the independent 
drugstore where you could, you know, go in when you were a 
child coming home from school and the proprietor would be the 
sponsor of your little league team and knew your family. You 
don't do that at CVS.
    So there are a lot of issues here. How do we make up for 
that lost revenue? Ms. Garwood? Yeah, go.
    Ms. Garwood. My position would be that there is no evidence 
of States that don't tax Internet access struggle with revenue 
to pay for schools and roads.
    Mr. Delahunt. Let us understand that we are just a bit off 
that right now. We are talking about the collection of the 
sales tax through e-commerce. How do we make up the $22 billion 
or the $33 billion? Do we just ignore it and pretend? Do we 
just continue to focus in on the--I am with you. I am with you 
on the moratorium. I am with you on this. What do we do? Tell 
us what we do to make up the revenue loss.
    Ms. Garwood. Well, I would say our Coalition has a varied 
group of companies, some supportive of streamline, some not. 
And our position is that, while we understand what you are----
    Mr. Delahunt. What you are telling me is that you don't 
have any sense of--the Coalition that you represent--I am not 
saying they don't care----
    Ms. Garwood. It is not that we don't care.
    Mr. Delahunt. But they don't care.
    Ms. Garwood. With the Internet tax moratorium, we have a 
deadline. We have November 1, 2007, upon us quickly. And we 
think this bill, the Internet Tax Freedom Act bill, it is very 
important for it to be a clean bill and that attaching 
streamline or other kinds of----
    Mr. Delahunt. And we can handle that sometime in the 
future.
    Ms. Garwood. Well, I am just saying I don't think we will 
meet the deadline of moving this forward if we attach other 
issues to the Internet tax moratorium.
    Mr. Delahunt. How would you make up the loss of revenue as 
far as the loss of sales tax revenue?
    Ms. Sanchez. The time of the gentleman has expired.
    Mr. Delahunt. Can I ask for unanimous for another minute?
    Ms. Sanchez. Without objection.
    Ms. Garwood. I don't have a solution to your problem. I 
can't----
    Mr. Delahunt. See, it isn't my problem. That is the point 
that I am making.
    Ms. Garwood. The point you are making----
    Mr. Delahunt. The problem is it is the local communities 
that will have to raise the property tax in Massachusetts, for 
example, or in Florida. These are States with a significant 
portion of their revenue from sales tax. It is all of our 
problem.
    I mean, I understand you are here, you are paid by the 
Coalition, and you are doing an excellent job representing 
their position. But I think we make a mistake not to examine 
the context and to understand our collective responsibility to 
assist the States and local governments in meeting this 
shortfall. Otherwise, we are going to have layoffs, and it is 
going to be everybody's problem. Because our children will 
suffer as a result of layoffs of teachers and police and fire 
and all of those services that directly impact the citizens 
that we all represent.
    Ms. Sanchez. The time of the gentleman has once again 
expired.
    Mr. Cannon. Madame Chair, I would like to ask unanimous 
consent to include in the record that Wall Street Journal--I 
think this is an online article--dated June 11, 2007, which 
points out that State tax collections were $1.1 trillion in 
2005, 8\1/2\% higher than in 2004.
    I think the resolution of the gentleman's problem is 
increased revenues, not grasping at every source, but helping--
and this is where Mr. Quam and I have disagreed with great 
regularity; and I think I have been proven right despite the 
particular studies.
    We have a remarkable economy. We ought not kill the golden 
goose. At least at the minimum what we need to do is make sure 
we don't----
    Mr. Delahunt. Would my friend yield?
    Ms. Sanchez. The gentleman has asked unanimous consent to 
enter something into the record. Without objection, the article 
will be entered into the record.
    [The information referred to follows:]
    

    

    Ms. Sanchez. Does Mr. Delahunt seek unanimous consent?
    Mr. Delahunt. I seek unanimous consent for just an 
additional minute to respond.
    I want the economy to improve. I am glad when I see the 
revenues increase so that we can afford better schools, better 
healthcare, et cetera, et cetera. But we have had a pretty good 
run, and I understand that right now the States and local 
governments in some cases are doing well and in other cases 
aren't doing so well, depending on what part of the country and 
what economic group is represented in particular communities.
    But let me tell you, when the economy starts to tank and--
turn on the news today. The market is down again, and we are 
going to have real serious issues. And if you are in favor of 
raising property taxes, then don't do anything in terms of the 
collection of sales taxes. That, in my opinion, will be the 
most logical outcome.
    Ms. Sanchez. The time of the gentleman has expired.
    I think, Mr. Cannon, we have some work to do in terms of 
working out a workable solution, but I am hopeful that that can 
happen.
    I want to thank the witnesses for their testimony today.
    Without objection, Members will have 5 legislative days to 
submit any additional written questions which we will forward 
to the witnesses and ask that you answer as promptly as you can 
to be made a part of the record.
    Without objection, the record will remain open for 5 
legislative days for the submission of any additional 
materials.
    Again, I want to thank the witnesses and everybody on the 
Subcommittee for their time and patience; And this hearing of 
the Subcommittee on Commercial and Administrative Law is 
adjourned.
    [Whereupon, at 11:34 a.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Responses to Post-Hearing Questions submitted by the Honorable Linda T. 
Sanchez, a Representative in Congress from the State of California, and 
   Chairwoman, Subcommittee on Commercial and Administrative Law, to 
    Meredith Garwood, Vice President, Tax Policy, Time Warner Cable



                                

Responses to Post-Hearing Questions submitted by the Honorable Linda T. 
Sanchez, a Representative in Congress from the State of California, and 
Chairwoman, Subcommittee on Commercial and Administrative Law, to David 
 C. Quam, Director of Federal Relations, National Governors Association




                                

       Prepared Statement of Joe Huddleston, Executive Director, 
                       Multistate Tax Commisssion