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


 
                     FULL COMMITTEE HEARING ON THE 
                 INTERNET TAX MORATORIUM: THE POTENTIAL 
                  NEGATIVE IMPACTS ON SMALL BUSINESSES 
                    OF ALLOWING MORATORIUM TO EXPIRE 

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

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 3, 2007

                               __________

                          Serial Number 110-49

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                house

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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


HEATH SHULER, North Carolina         STEVE CHABOT, Ohio, Ranking Member
CHARLIE GONZALEZ, Texas              ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington              SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona               TODD AKIN, Missouri
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas                 STEVE KING, Iowa
DAN LIPINSKI, Illinois               JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin                LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa                   DEAN HELLER, Nevada
YVETTE CLARKE, New York              DAVID DAVIS, Tennessee
BRAD ELLSWORTH, Indiana              MARY FALLIN, Oklahoma
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


HENRY CUELLAR, Texas                 DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania             TODD AKIN, Missouri
                                     MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)

  


           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


RICK LARSEN, Washington              LYNN WESTMORELAND, Georgia, 
DAN LIPINSKI, Illinois               Ranking
MELISSA BEAN, Illinois               BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin                STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma
                                     VERN BUCHANAN, Florida
                                     JIM JORDAN, Ohio

                                 ______

            Subcommittee on Urban and Rural Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DEAN HELLER, Nevada
HANK JOHNSON, Georgia                DAVID DAVIS, Tennessee

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLIE GONZALEZ, Texas              LOUIE GOHMERT, Texas, Ranking
RAUL GRIJALVA, Arizona               LYNN WESTMORELAND, Georgia

                                 (iii)

  
























                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2
Braley, Hon. Bruce...............................................     4

                               WITNESSES

Bieron, Brian, eBay Inc..........................................     5
Dewey, Brett, WickedCoolStuff.com................................     7
McClure, David P., U.S. Internet Industry Association............     9
Lieberman, Ross J. American Cable Association....................    10
Keating, Raymond, Small Business & Entrepreneurship Council......    12

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    31
Chabot, Hon. Steve...............................................    33
Braley, Hon. Bruce...............................................    35
Bieron, Brian, eBay Inc..........................................    38
Dewey, Brett, WickedCoolStuff.com................................    40
McClure, David P., U.S. Internet Industry Association............    42
Lieberman, Ross J. American Cable Association....................    44
Keating, Raymond, Small Business & Entrepreneurship Council......    50

                                  (v)

  


                       FULL COMMITTEE HEARING ON
                     THE INTERNET TAX MORATORIUM:
                     THE POTENTIAL NEGATIVE IMPACTS
                         ON SMALL BUSINESSES OF
                     ALLOWING MORATORIUM TO EXPIRE

                              ----------                              


                       Wednesday, October 3, 2007

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia Velazquez 
[Chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Grijalva, Braley, 
Clarke, Ellsworth, Johnson, Sestak, Hirono, Chabot, Akin, 
Fortenberry, Gohmert, Heller, Davis, Fallin, and Jordan.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    ChairwomanVelazquez. Good morning. I now call this hearing 
to order on the Internet tax moratorium, the potential negative 
impacts on small businesses of allowing the moratorium to 
expire.
    With the advent of the Internet, electronic commerce has 
been a driving force for economic growth in our country. Small 
businesses in particular have played a vital role in the 
digital economy where many entrepreneurs and Internet 
connections can serve as an avenue to start a new business or 
grow an existing one.
    Today's hearing will focus on the Internet tax moratorium 
and its spending expiration. Since 1998, federal law has 
prohibited taxes on Internet access and has insured priority 
between online and off-line sales.
    As we have witnessed over the past 15 years, the Internet 
has proven to be the great leveling field in American business 
today, permitting small firms with fewer resources to compete. 
In a recent survey of small business owners, 83 percent 
reported that the Internet had improved communications about 
their company. Additionally, over 60 percent stated that the 
Internet has opened up new markets for their businesses.
    The current moratorium has played an important role in 
encouraging Internet sales for small businesses. However, with 
many states and local governments under pressure to find 
additional sources of revenue, some have advocated against 
extinction.
    Today's discussion will examine the impact the expiration 
will have on small businesses competing in a technology driven 
economy. It is fairly clear that the moratorium has been a 
catalyst for the growth in E-commerce among smaller companies. 
The current nondiscriminatory tax treatment has allowed many 
small businesses to use the Internet as another medium to 
expand.
    While the overall degree of impact may be argued, the 
growth by small businesses in Internet commerce cannot. eBay 
alone reports that approximately 250,000 sellers make their 
full-time living from home-based businesses. They are earning 
unpredictable taxes, many of which will be regressive in 
nature, could place small businesses at a disadvantage.
    Studies have shown that a hike in these taxes could hit the 
smallest E-retailers the hardest. It could also add significant 
paperwork burdens for small businesses that simply do not have 
the resources to meet the new requirements.
    While some may discount the impact of higher access fees, 
it is important to consider the overall price sensitivity of 
the market. Assuming that Internet access is taxed similarly to 
wireless communications, small businesses could see an upwards 
of 15 to 30 percent increase in their Internet bill. For some 
that could make the difference in the decision whether to 
market products and services on line.
    The moratorium was created as an economic policy to allow 
small businesses to compete. The prohibition has made the 
Internet a gateway for entrepreneurship, regardless of race, 
income or neighborhood. Many of the most commonly known 
Internet companies in the world, including eBay, Amazon, and 
Google, started as very small Internet companies. We should be 
careful to make sure we are not preventing the next Google.
    At a time when small businesses face many obstacles, we 
should be advancing policies that help small firms compete in 
our digital economy. With the moratorium set to expire in a 
little less than a month, it is important for the Committee to 
fully understand the implications if Congress fails to act.
    I appreciate the witnesses coming here to discuss this 
important issue and look forward to your testimony.
    I will now yield to the Ranking Member, Mr. Chabot, for his 
opening statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr.Chabot. Thank you, Madam Chair.
    And good morning. I want to thank all of the witnesses for 
being here today to examine the negative effects of allowing 
the Internet tax moratorium to expire.
    I also want to thank you, Madam Chair, for holding this 
very important hearing, and I agree with almost all of the 
comments, if not all of the comments, that you mentioned. I 
think you are right on point.
    Since 1998, Congress has insured that Internet access is 
not subject to either state and local taxes or multiple and 
discriminatory taxes on Internet commerce, regardless of the 
technology consumers use to access the Internet. If the 
moratorium is allowed to lapse, American taxpayers could be 
exposed to countless new and onerous taxes from states and 
municipalities simply for accessing the Internet.
    The Internet has changed the way we communicate, as the 
Chair mentioned, the way we learn and do business, all for the 
better. Since the moratorium was first adopted, tremendous 
investment, growth, and innovation in the scope and use of the 
Internet has occurred.
    By preventing unnecessary taxation of the Internet, 
Congress fostered growth and productivity and innovation and 
widened public access to information. While Americans use the 
Internet for a myriad of reasons, E-commerce has particularly 
flourished and continues to grow at an exceptional rate. In 
2006 alone, online retail sales exceeded $100 billion, 
increasing 24 percent over the previous year.
    This is especially important to small businesses as the 
Chair mentioned. An Internet connection opens doors to the rest 
of the world. No longer must an entrepreneur focus his or her 
marketing strategies to just their neighborhood. With the 
advent of the Internet, the world is their neighborhood and, 
quite literally, the sky is the limit.
    Although this expansion is impressive, there is still more 
that we must do to insure equal access among all Americans. 
Internet usage still lags behind in rural and lower income 
areas, and many experts have reported that the United States 
has fallen from fourth to around sixteenth in broadband 
deployment since 2001.
    In order to reverse this trend we must keep Internet access 
costs as a minimum. Prohibiting unnecessary taxes will help 
accomplish this goal.
    In addition to making the moratorium permanent, I believe 
we ought to reexamine the grandfather clause as well. I have 
been and still am concerned about this provision because I 
believe it rewarded a handful of state tax administrators who 
rushed to tax Internet access.
    With America's small businesses already strapped with high 
legal costs, regulatory burdens, onerous taxation, high energy 
prices, and rising health care costs, they should not be 
slapped with new taxes on Internet access. Simply put, allowing 
the moratorium to expire would result in a tax increase on 
small businesses and on American families.
    Permanently extending the moratorium would allow the 
unfettered growth of the Internet and E-commerce to continue. 
Tax cuts, innovation, and the free market are the surest 
formula for economic growth and prosperity. The surest way to 
stifle achievement, progress, and growth is to involve the 
government.
    The evolution of the Internet has directly contributed to 
the growth of the U.S. economy. As Internet usage has grown, so 
has E-commerce. Every day millions of Americans are online 
making various transactions from buying products to managing 
their bank accounts. By making permanent the Internet tax 
moratorium, Congress can assure that this vital tool remains a 
key driver of economic growth.
    Again, thank you, Madam Chair, for calling this hearing on 
such a critical and timely issue. I look forward to the 
witnesses' testimony, and I yield back the balance of my time.
    ChairwomanVelazquez. Thank you.
    And now I recognize Mr. Braley for an opening statement.

                OPENING STATEMENT OF MR. BRALEY

    Mr.Braley. Thank you, Madam Chairwoman, and thank you for 
holding this hearing.
    As the Chair of the Contracting and Technology 
Subcommittee, I work with Ranking Member Davis very often to 
talk about the intersection of issues of technology and their 
impact on small businesses, and that is why I am so pleased 
that we are having this hearing today.
    We are here today to talk about an important issue, the 
Internet tax moratorium, which began in 1998 and is set to 
expire on November 1st. That is why it is essential that we 
take a look at this issue now. The expansion of electronic 
commerce in this country can be directly related to the 
affordable Internet access and tax parity between online and 
off-line sales.
    The Internet, as we all know, has become a huge economic 
development tool, especially for small businesses, many of 
which are located in remote parts of this country. If we make 
this moratorium permanent, this will allow these small 
businesses to know what costs they will be dealing with as they 
attempt to start new ventures or expand upon an existing one.
    Many of these small businesses will go on to become large 
Internet companies and have the potential to employ thousands 
of Americans and add billions of dollars to our economy. eBay, 
which has already been mentioned, is one of the companies 
represented by our panel today, is certainly a prime example of 
this.
    We as a government have a responsibility to promote a 
permanent tax moratorium on the Internet when there is still so 
much untapped potential in the electronic commerce industry. 
That is why I am a proud co-sponsor of H.R. 743, the Permanent 
Internet Tax Freedom Act. In addition to helping small 
businesses grow, a permanent Internet tax moratorium will help 
insure that all Americans can afford Internet access. It will 
also promote further broadband deployment in rural areas, such 
as in many parts of my district in Iowa, which still lack 
affordable access to high speed Internet.
    If taxes on Internet access are raised, the number of 
consumers who are able to afford it will go down. If the 
Internet were taxed similarly to wireless communications, many 
consumers and small businesses would see upwards of a 17 
percent increase in their Internet bill. For small companies 
operating on thin profit margins, this increase could make the 
difference between their success or failure.
    I look forward to hearing from our witnesses today and 
hearing how an extension of the tax moratorium would affect 
each of them. It is essential that we act promptly on this 
legislation to extend the Internet tax moratorium before the 
current legislation expires on November 1st. Our nation's small 
businesses are counting on us.
    Again, thank you, Madam Chairwoman, and thank you to the 
witnesses for joining us today.
    ChairwomanVelazquez. Thank you.
    Does any other member seek recognition for the purpose of 
an opening statement?
    [No response.]
    ChairwomanVelazquez. I also want to take a moment to 
introduce a new member of this Committee, Mazie Hirono. She is 
currently serving her first term representing the Second 
District of Hawaii in Congress. She sits on the Committee on 
Education and the Committee on Transportation and 
Infrastructure.
    She recently joined the Committee on Small Business. Ms. 
Hirono is welcome to this Committee.
    Ms.Hirono. Thank you, Madam Chair.
    ChairwomanVelazquez. And so we are going to start with our 
witnesses. Our first witness is Mr. Brian Bieron. Mr. Bieron is 
the Senior Director of Federal Government Relations for eBay 
Inc.
    Founded in 1995, eBay Inc connects hundreds of millions of 
people around the world every day empowering them to explore 
new opportunities and innovate together. eBay Inc. does this by 
providing the Internet platforms of choice for global commerce, 
payments and communications. Since its inception, eBay has 
expanded to include some of the strongest plans in the world, 
including eBay, Paypal, Skype, Shopping.com, and others. eBay 
Inc. is headquartered in San Jose, California.
    Mr. Bieron, you will have five minutes to make your 
presentation. Welcome.

STATEMENT OF BRIAN BIERON, SENIOR DIRECTOR, FEDERAL GOVERNMENT 
                      RELATIONS, eBAY INC.

    Mr.Bieron. Thank you very much.
    Madam Chairwoman, Ranking Member Chabot, and members of the 
Committee, I would like to thank the Committee for giving eBay 
this opportunity to discuss the importance of the Internet 
access tax moratorium to small businesses.
    At eBay, first of all, we agree with the opening 
statements. They are far more eloquent than mine will be. So 
thank you for beginning on such a high note.
    We believe that the Internet is a good thing. We believe 
that it is a remarkable, revolutionary, empowering technology. 
Of particular importance to this Committee should be the fact 
that the Internet is a powerful force supporting American small 
business success in the global 21st Century economy.
    Today small retailers across America are using eBay to 
reach a global customer base. Some are primarily eBay based 
businesses. Many use eBay as well as other Internet channels to 
reach Internet enabled consumers.
    Finally, more and more traditional brick and mortar 
retailers are augmenting their storefront business with 
Internet sales. All in all, we estimate that over 720,000 small 
businesses use eBay in the United States as a primary or 
secondary marketing channel.
    The evolution of brick and mortar small businesses adopting 
the Internet is a particularly interesting story. There was a 
time when many traditional small business retailers seemed 
threatened or maybe awed by the Internet. It was a ``gee whiz'' 
technology that might make sense in Silicon Valley, but what 
did it have to do with a small retailer trying to stay afloat 
on Main Street in towns and small cities across America?
    The reality of the past decade is that the Internet has 
proven to be a remarkable tool for those small businesses. In 
the retail industry, small entrepreneurs face a world of global 
behemoths. Those multi-billion dollar businesses source product 
globally and use technology to relentlessly increase efficiency 
and drive down prices.
    Mega retailers have been relentlessly pressuring small 
business retailers for decades. In a word, the Internet has 
been a lifeline for many of those small businesses. The 
Internet allows a small retailers to tap into the global 
economy in two key ways.
    First, the small business can use the Internet, the 
ultimate open and level playing field, to reach a global 
customer base. For example, approximately 15 percent of the 
sales of U.S. small businesses using eBay are cross-border 
sales, and those numbers are going up.
    Yes, eBay is enabling a small business export success 
story. This holds tremendous hope for U.S. small business 
growth.
    Second, the Internet increasingly allows small businesses 
to source their products globally. The mega retailer is a 
global giant buying from factories in every country of the 
world and selling from stores in every corner of America. Now, 
the Internet allows the small retailer to likewise find the 
best products at the best prices anywhere in the world.
    So what does this mean for your consideration of the 
Internet access tax moratorium? We believe that you should take 
up the mantle of Internet enabled small businesses and call on 
your colleagues to extend the moratorium on access taxes and 
multiple indiscriminate taxes on the Internet permanently.
    By the way, along with learning quite a bit from our 
community about how small businesses use the Internet, we also 
think that we have learned a little bit about how markets work. 
In fact, eBay has often been called the most perfect market. 
Our marketplace is super efficient benefiting hundreds of 
millions of consumers worldwide and hundreds of thousands of 
small businesses.
    We know that when you raise prices you reduce demand. 
Anybody or any study that tries to make the case that even if 
you raise prices you will not reduce demand is highly suspect 
on its face. If taxes on Internet access go up, fewer small 
businesses will use the Internet.
    More importantly, fewer consumers will use the Internet, 
and for small businesses using the Internet, that means fewer 
sales and less opportunity to compete with the big retailers. 
That is bad news.
    So in conclusion, we support maintaining the core 
regulatory principles that have underpinned the Internet as a 
small business success story. On the tax front, this includes 
policies such as the tax free treatment of Internet access.
    This Committee should make a strong statement for small 
business by calling on your House leadership to rapidly bring a 
permanent tax moratorium to the House floor.
    Thank you, and I am happy to answer any questions.
    [The prepared statement of Mr. Bieron may be found in the 
Appendix on page 38.]

    ChairwomanVelazquez. Thank you, Mr. Bieron.
    Our next witness is Mr. Brett Dewey. Mr. Dewey is the 
President and CEO of WickedCoolStuff.com, which is based in 
North Hollywood, California. Mr. Dewey's company, owned by him 
and his wife, sells toys, tee shirts and other small gifts 
exclusively online.
    Started in 1999, it employs six full-time employees 
throughout the year and increases its staff during the holiday 
season. Mr. Dewey's testimony will focus on the potential 
negative impacts that an expiration of the moratorium will have 
on a business such as his.
    Welcome, sir.

       STATEMENT OF BRETT DEWEY, CEO, WICKEDCOOLSTUFF.COM

    Mr.Dewey. Thank you, Chairman Velazquez, Ranking Member 
Chabot, members of the Committee.
    Good morning. Thank you for inviting me to be here today. 
It is quite an honor.
    My name is Brett Dewey, and I own a small online company 
called WickedCoolStuff.com that sells toys, tee shirts, and 
other gifts that we think are wicked cool.
    I hope my testimony helps explain some of the importance of 
extending the Internet tax moratorium. Unlike a lot of people 
you may hear from, I am not part of a formal coalition or any 
an experienced insider. In fact, this is the first time I have 
done more than vote or write a letter to my Congressman.
    I got here using frequent flyer miles earned on my company 
credit card. I am sleeping on a friend's sofa. I have to say 
this room seems a lot smaller on TV.
    WickedCoolStuff.com is a real, live Mom and Pop operation. 
My wife Cynthia and I run the company out of a warehouse in the 
San Fernando Valley region of North Hollywood, of Los Angeles. 
Our son Alex is almost three and primarily helps by playing 
hide and seek among the shelves and boxes.
    We have five full-time permanent employees, and as the 
Christmas holiday approaches, we will probably add eight full-
time seasonal staff to help with the rush.
    Cynthia and I provide health insurance to our full-time 
employees after they have been with us several months, and we 
would like to do more, but we cannot afford to. We try to be 
good employers and good community members. We believe that 
makes good business and is the right thing to do.
    The Internet tax moratorium has been in place since before 
we started WickedCoolStuff.com eight years ago. Letting it 
expire now would be a new tax on our small business and one we 
cannot afford.
    Just like every other small business, ours has its ups and 
downs. Right now, like many small, online retailers we are in a 
down. We are taking steps to improve sales, and I am optimistic 
we are headed for another up. But a new tax right now would be 
devastating to our business. At the moment we are looking up, 
but a new tax would have us looking out.
    We started WickedCoolStuff.com eight years ago in a spare 
bedroom. When the boxes took over the living room, den, garage 
and started to creep into the kitchen, we decided it was time 
to get a warehouse. Since then we have grown to as many as 
seven full-time employees and sales over 1.3 million at our 
peak, down to our current level of five full-time employees and 
projected sales of under a million this year.
    In our best year, Cynthia and I paid ourselves about 
$60,000, although this year we are unlikely to draw any salary, 
relying on savings and a home equity line to keep our home 
running.
    I have prepared a small chart that is included in my 
written testimony to help explain the financial realities of a 
small company like ours and why letting the Internet tax 
moratorium expire now would be so devastating. These numbers 
are based on our experience, and while they may not withstand 
an IRS audit, they give you a pretty good idea of what it costs 
to run a very small business like ours.
    The handout is for a hypothetical company called 
HypotheticalExamples.com. An online retailer expects to sell a 
million dollars of small plastic hypotheticals this year. Most 
of the company's income goes to buy wholesale goods, which cost 
about $500,000. Another 200,000 goes to shipping those goods 
both from the wholesalers to the warehouse and then again out 
to the consumers; $135,000 for salaries, none of which goes to 
the owners; 17,200 goes to health insurance; 15,000 for payroll 
taxes; rent is 33,500; marketing is another 34,000; Internet 
and E-commerce hosting, 19,000; another 9,950 to various local 
taxes and workmen's compensation; $34,000 goes to utilities, 
bookkeeping, bank fees and insurance. That leaves just under 
$2,000 for the owners of HypotheticalExamples.com to share as a 
salary, which comes to roughly 17.50 a week each.
    While this may not sound like WickedCoolStuff.com and may 
sound like less, the numbers are drawn from our experiences. It 
is not our company. We are unlikely to do even that well this 
year. Cynthia and I are working hard to turn our company 
around, and we are confident we can. We are actively adding new 
features, new products, and trying new marketing.
    But letting the Internet tax moratorium expire would derail 
those efforts and with it our company. Our options would be to 
lay off employees, stop providing health insurance for our 
staff, and their families rely on it, or close our doors 
completely.
    A new tax now would be the equivalent of changing the rules 
in the middle of a game we are currently not winning.
    Thank you, again, for inviting me here today. I hope that 
my testimony has been helpful. Typically I would give you all a 
WickedCoolStuff.com gift certificate or a Star Wars bobble head 
as a thank you, but I understand there are rules about that 
sort of thing.
    [Laughter.]
    Mr.Dewey. Instead, I encourage you to visit our Web site 
and purchase one for yourself and your staff and maybe your 
constituents. We could use all of the help.
    I look forward to your questions.
    [The prepared statement of Mr. Dewey may be found in the 
Appendix on page 40.]

    ChairwomanVelazquez. Sure. Thank you very much for you 
testimony.
    Our next witness is Mr. David P. McClure. He is the 
President and Chief Executive Officer or the U.S. Internet 
Industry Association, the primary U.S. trade association for 
Internet commerce and connectivity.
    Mr. McClure has written and lectured extensively on 
management and technology issues and is considered an authority 
on strategic business planning, telecommuting, technology 
policy, and technology integration for businesses with members 
of every site engaged in virtually every facet of the Internet. 
USIIA works to craft a business environment in which Internet 
companies can thrive.
    Welcome, sir.

STATEMENT OF DAVID P. McCLURE, PRESIDENT AND CEO, U.S. INTERNET 
                      INDUSTRY ASSOCIATION

    Mr.McClure. Thank you very much.
    Chairwoman Velazquez and members of the Committee, thank 
you for the opportunity to speak.
    My name is David McClure, and I am President of the U.S. 
Internet Industry Association. For 15 years, we have been a 
trade association that serves businesses engaged in Internet 
connectivity, online content, and electronic commerce. Our 
members, the majority of which are small businesses, are 
concerned that without your action they are going to 
immediately be subjected to multiple, discriminatory, 
retroactive and crippling taxes. The impact of allowing the 
Internet Nondiscrimination Act to expire without extension 
would be felt specifically in three ways by small businesses.
    First, they would see an immediate loss of customers. It 
was alluded to before by Mr. Bieron, and we have data to back 
it up, that Internet connectivity is price elastic. That means 
as the price goes up, demand and use goes down.
    Studies by Ernst & Young, by the University of 
Massachusetts and others have confirmed this elasticity. You 
can also look at the data by the Pew and Internet Life Project, 
which for the past decade has tracked this extensively. If 
taxes are permitted that would raise the cost of basic Internet 
access and raise it by as much as 30 percent, by the way, the 
predominantly working families that are not on the Internet 
today would not be able to get there, and families that now 
have basic Internet access would not be able to afford it any 
longer.
    Secondarily, there would be a loss of opportunities for 
small businesses to survive and to grow. In today's economy, 
small businesses in America are able to compete globally due in 
part to this nation's superior infrastructure. The Internet 
backbone, our rich diversity of broadband, and the growing 
wireless network spanning almost every corner of the nation, 
but the growth of this infrastructure depends on sustained and 
increasing levels of private investment. We are looking at as 
much as one trillion dollars that will need to be invested 
between now and the year 2015.
    If the tax moratorium is not extended, states and 
localities by their own numbers will take about 35 billion 
dollars a year out of our industry in taxes and that does not 
count the cost of compliance. That is raw taxes.
    If you add that up, between now and 2015, that is $320 
billion. That is almost a third of the trillion dollars we are 
going to need to build and sustain the kind of broadband 
network this country needs and deserves.
    Again, that is not counting the cost of compliance. And I 
want to talk about the cost of compliance because that is 
really the most crippling effect. Look. We know from an Ernest 
& Young study of the cost of compliance for sales taxes that 
the burden is disproportionate. If you look at companies 
selling nationally with collection responsibilities for taxes, 
in the 46 states that do collect taxes, 14 percent of their 
sales go to sales taxes, 14 percent for a large company.
    For a mid-size company, that goes up to 48 percent, but 
here is the shocker. For a small company, 87 percent of their 
sales tax goes to the cost of compliance. These are companies 
that do not have fully staffed tax compliance departments. They 
cannot afford it. They are not going to be able to maintain it.
    The original Internet Tax Freedom Act was not as some have 
retroactively suggested, an effort to give states time to find 
a better way to tax. I was there. I helped draft the Internet 
Tax Freedom Act in 1998 for Senator Wyden, and it was an 
alarmed and informed response to a significant pattern of 
abusive, punitive, and destructive taxes passed by local 
authorities with little regard to how their actions would 
affect consumers, businesses, the economy or our national 
interest.
    It was Congress' way of putting an end to this abuse. John 
Marshall, the U.S. Supreme Court Justice who shaped much of our 
Constitutional law, noted that the power to tax involves the 
power to destroy; that the power to destroy may defeat the 
power to create. There is no clearer example of how this abuse 
of power and its negative impact on creativity will affect us 
than the imposition of multiple discriminatory and predatory 
taxes on America's small businesses.
    Thank you.
    [The prepared statement of Mr. McClure may be found in the 
Appendix on page 42.]

    ChairwomanVelazquez. Thank you, Mr. McClure.
    Our next witness is Mr. Ross Lieberman. Mr. Lieberman is 
the Vice President of Government Affairs for the American Cable 
Association.
    Based in Pittsburgh, the American Cable Association is a 
trade organization representing 1,100 smaller and medium size 
independent cable companies who provide broadband services for 
more than eight million cable subscribers primarily located in 
rural and smaller suburban markets across America.
    In his role with ACA, Mr. Lieberman is the trade 
association's senior government advocate overseeing all Capitol 
Hill and Federal Communications Commission activities.
    Welcome.

 STATEMENT OF ROSS J. LIEBERMAN, VICE PRESIDENT OF GOVERNMENT 
              AFFAIRS, AMERICAN CABLE ASSOCIATION

    Mr.Lieberman. Thank you.
    Chairwoman Velazquez, Ranking Member Chabot, and members of 
the Committee, thank you for inviting me to testify on the 
Internet tax moratorium and how its potential expiration would 
impact small cable and broadband providers and consumers across 
the country.
    My name is Ross Lieberman, and I am Vice President of 
Government Affairs for the American Cable Association. In a 
telecommunications world that is dominated by industry giants, 
ACA is the voice for nearly 1,100 small and medium sized cable 
companies that serve more than eight million subscribers. Our 
members range from family run cable businesses serving a single 
community to multiple system operators that focus on smaller 
markets in rural areas. The average operator size is about 
7,500 subscribers, but some ACA members serve fewer than 1,000.
    ACA members are vital businesses in their communities. In 
addition to providing broadcasting cable programming, many of 
our members offer unique local programming, such as high school 
sporting events and religious services that are not available 
from satellite TV companies. Most importantly for the purposes 
of this hearing, our members are rolling out high speed 
Internet access in their communities where no other company 
offers it.
    The ACA supports continuing the Internet tax moratorium. At 
a time when the costs of running their businesses are 
increasing, small cable operators are deploying broadband 
despite the financial hurdles of offering such services. 
Congress can safeguard these investments and insure high speed 
Internet access remains affordable by passing legislation that 
prevents state and local governments from imposing taxes on 
these services.
    Small cable providers offer broadband services at 
reasonable prices. Operators in rural America where the median 
household income is below national averages are particularly 
aware that their customers cannot afford to over spend on 
products and services, including high speed Internet access. If 
broadband is priced too high, then take rates will suffer.
    Our members face various economic challenges offering 
broadband in their markets. First, the cost to upgrade a cable 
only system to provide Internet access is more difficult to 
recoup for operators with a small number of subscribers. 
Whether serving 5,000 or 500,000 customers, cable operators 
must purchase some of the same equipment.
    Second, the cost of maintaining a cable network is high 
when the distance among subscribers is great. A small cable 
company might need an employee to travel an hour or more to 
make a service call to a subscriber's home.
    Third, access to capital can be difficult. To pay for the 
necessary upgrades and maintenance costs, many of our members 
must turn to bankers on their local main streets, not 
financiers on Wall Street.
    At this time, small cable operators' overall business costs 
are increasing. The most significant concern for ACA members is 
the rising cost of cable and broadcast programming. Small cable 
operators have no leverage in negotiations with network 
broadcasters and national programmers who demand double, even 
triple the fees previously paid for the same content.
    Small cable operators are also troubled by costly 
regulations, particularly new ones recently placed upon them by 
the FCC. On June 1st, the Commission mandated that cable 
operators begin to apply more expensive digital set top boxes 
with separable security to their subscribers.
    Then on September 11th, the Commission adopted rules that 
force cable operators to carry certain broadcast stations in 
both digital and analog formats, requiring our members to make 
costly upgrades to their systems. This is important. These 
costs are making it difficult for our members to remain viable 
and reinvest in affordable advanced services for their 
communities.
    The ACA supports continuing the Internet tax moratorium and 
urges Congress to pass legislation before the ban expires on 
November 1st. Our members are concerned that an expiration of 
the moratorium could have an unfavorable impact on their 
businesses and communities. Without the moratorium, state and 
local jurisdictions are likely to impose a patchwork of new 
taxes on American consumers and businesses simply for acquiring 
the broadband connection. These taxes would increase prices and 
make Internet access less affordable for consumers.
    New taxes on broadband access would be especially 
problematic if excessive state and local cable taxes were 
simply extended to the Internet. Most cable subscribers already 
pay a franchise fee of up to five percent. Imposing similar 
taxes on broadband access would discourage some consumers from 
signing up for the service.
    To tax a service that is neither fully deployed nor adopted 
seems to contradict congressional intent to expand broadband 
coverage and penetration.
    Our members who live in the towns in rural areas they serve 
also support the Internet tax moratorium because they know 
first hand how broadband access has improved their communities. 
It has made their towns a better place to live, work and raise 
a family.
    In addition to offering the service to consumers, some of 
our members provide broadband to their local hospitals, 
schools, and businesses, enhancing their home town's overall 
quality of life. At a time when the benefits of these services 
are coming to rural America, our members believe government 
should continue to take its hands off approach with respect to 
taxes.
    Chairwoman and members of the Committee, thank you again 
for the opportunity to testify on this topic of importance to 
small cable operators and consumers.
    [The prepared statement of Mr. Lieberman may be found in 
the Appendix on page 44.]

    ChairwomanVelazquez. Thank you very much, Mr. Lieberman.
    Our next witness, Mr. Raymond Keating. Mr. Keating is the 
Chief Economist at the Small Business & Entrepreneurship 
Council.
    SBEC is a small business advocacy group with more than 
70,000 members across the nation. As Chief Economist, Mr. 
Keating writes and speaks on a wide range of issues impacting 
the entrepreneurial sector of the economy.
    Furthermore, he is an expert on taxation, federal, state 
and city budget issues, and a host of other small business 
issues.
    Welcome, sir.

STATEMENT OF RAYMOND KEATING, CHIEF ECONOMIST, SMALL BUSINESS & 
                    ENTREPRENEURSHIP COUNCIL

    Mr.Keating. Thank you very much.
    Chairwoman Velazquez, Representative Chabot, members of the 
Committee, I very much appreciate you having this hearing today 
and inviting us to speak.
    As you mentioned, I am Chief Economist with the Small 
Business & Entrepreneurship Council. We have members all across 
the nation. We are nonpartisan, nonprofit, and we work on 
public policy issues really from A to Z that impact small 
businesses and entrepreneurs, and that obviously includes the 
Internet tax moratorium, the moratorium on Internet access and 
multiple and discriminatory E-commerce taxes.
    And we strongly favor making that moratorium permanent. I 
would like to touch on four points very quickly regarding this 
issue. The first one is the economy, and as we all know, I 
think the watchword right now in the economy is uncertainty, 
and you can look at a whole host of issues, positives, 
negatives.
    On the negative side, you have energy costs, housing and 
sub-prime lending problems, consumers being somewhat less 
confident, and some recent disappointing reports on retail 
sales and manufacturing production.
    On the flip side, there are positives. There is certainly 
rising household net worth, increasing investment in 
nonresidential structures. Exports look good, and there is good 
growth in real disposal personal income in recent months.
    And then, of course, there is a whole host of mixed issues 
out there right now. Real GDP growth was pretty good in the 
last quarter, but not so great since late 2005. A critical 
issue is private domestic investment, private sector 
investment. That was up again in the most recent quarter, but 
it was down in the previous three. And of course, employment 
growth is a big issue, and we saw that the last month that we 
have data for that was not good news. But if you look back a 
little farther, there certainly are positives.
    So in this mix comes tax policy, and it certainly matters a 
great deal. And, again, there is a lot of uncertainty there. If 
you look at the broader tax issue of the 2001 and 2003 tax 
measures, those are due to expire soon. So what is going to 
happen there? Obviously entrepreneurs and small businesses are 
very concerned. Are they going to be extended? Are they going 
to be made permanent? Are some of them going to be allowed to 
expire and thereby imposing a large tax increase?
    And the Internet tax moratorium access on the Internet 
taxes, on Internet access is a big issue there, and it is 
another uncertainty for many small businesses. The possibility 
that states and localities could be imposing tax increases on 
Internet access in E-commerce would loom as a very big 
uncertainty and a very big problem for a lot of small 
businesses. That is number one.
    The second issue that I would like to talk about is 
broadband access and investment. Higher taxes on Internet 
access would mean that the growth in broadband access would be 
restrained, and that would take a competitive disadvantage that 
we have right now and make it worse.
    You will see in my written comments that we broke out a 
table on where the U.S. ranks in terms of broadband household 
penetration rates among various developed nations and 
unfortunately come in last. So creating more uncertainty and 
opening the door to higher Internet taxes are not positive 
policy developments for investing in those networks.
    All of these things obviously affect small businesses, but 
then there is the direct impact on small business. They will be 
hurt in various ways. Obviously the taxes they pay for Internet 
access, the reduced customers via the Internet and their goods 
and services potentially facing multiple and punitive levels of 
taxation. These are all significant negative threats to the 
bottom line of small businesses across the country.
    As many people have mentioned here so far today, 
advancement in the computer and telecommunications technologies 
have been invaluable for the success of small businesses, and 
that is a big reason why we need to make this Internet access 
tax moratorium permanent.
     And the final issue I would just like to bring up is about 
state and local government. There are many state and local 
officials that do not like the idea of a permanent band on 
Internet access taxes. Unfortunately, folks tend to view the 
Internet as a cash cow to be milked rather than a source of 
economic opportunity for all, and the argument is often made 
that without these additional revenues, somehow or other we 
will be denied the revenues for necessary services, vital 
services from state and local governments.
    But when you look at the numbers, it is really hard to 
accept that, I think. Really state and local governments have 
been quite literally in the taxpayer dough. When you look at 
total revenues, from 1995 to 2005, that is the most recent data 
that we have from the Census Bureau, total revenues went from 
1.4 trillion to 2.5 trillion for state and local governments 
across the country. That was a 78 percent increase compared to 
about 22 percent in inflation over that same period, and part 
of that was sales and gross receipts taxes, and those jumped 62 
percent over that period.
    And of course, keep in mind more revenue in the hands of 
government means fewer resources left in the private sector for 
consumption, investment, and job creation. If Congress wants to 
hamper the Internet and related economic opportunities in 
growth, then clearly this Internet tax moratorium should be 
ended, but if they wish to see the full potential of the 
Internet realized, then the current tax moratorium should be 
made permanent.
    Thank you very much, and I look forward to your questions.
    [The prepared statement of Mr. Keating may be found in the 
Appendix on page 50.]

    ChairwomanVelazquez. Thank you.
    And now I would like to address my first question to Mr. 
Dewey. Not only are you a voter, but also you are a real 
person. It is really great to have real people here.
    I assume that affordable broadband access has been a 
crucial factor in allowing you to effectively operate your 
online store. Would you have been hesitant entering this 
industry had you known the rules of the game could possibly be 
changed and new or unpredictable taxes could be levied on your 
business?
    Mr.Dewey. Oh, yeah. It is making me nervous right now. We 
have got a business model set up, and as I stated before, it 
has been a shaky year. So if you throw something new at me or 
something unpredictable or something where I have got to take 
care of taxes in many different places, then definitely it is 
going to affect our business in the negative.
    ChairwomanVelazquez. Thank you.
    Mr. Bieron, due to the fact that many states did not have 
the ability to tax Internet access when the moratorium was 
enacted, there is very little data as to what an Internet 
access tax might look like. Of the states that are levying 
Internet access taxes, Hawaii levies its general excise tax, 
New Hampshire its communication services tax, and Washington 
State its business and occupation tax.
    If there is a way to predict, what services will be taxed 
if the moratorium was not extended and at what rate?
    Mr.Bieron. I mean, I would agree that it is very difficult 
to predict, although some of the witnesses have referred to 
some either current cable level taxes or current cellular phone 
level taxes. I think at eBay we are concerned about two things.
    First of all, whatever type of tax they choose to just levy 
on access, it is going to reduce demand, and so in particular, 
reducing consumer demand is a bad thing in the business that we 
are in, and more importantly, in the business that our small 
business retailers are in.
    But then, half of the regime is also the prohibition on 
multiple and discriminatory taxes. We have always looked at 
that as the prospect that if that prohibition is not there, the 
incentive is created at the state and local level to 
potentially try to use taxes to discourage distant type of 
businesses where local business interests could attempt to 
encourage their elected representatives at the local level to 
impose taxes that would give them a benefit because it would be 
a higher level of tax on Internet enabled businesses.
    We think that the--and honestly, only people's creativity 
and, more importantly, government's creativity to structure 
taxes would limit how that could be done.
    And so we would simply see that as a great danger. If you 
open up that flood gate, it is hard to predict how it would be 
used, but certainly any small business that is trying to use 
the Internet to reach customers far away potentially competing 
with business locally, I mean, we see the future as essentially 
small business everywhere adopting the Internet to help run 
their business, but that creates, unfortunately a competitive 
dynamic that would be bad.
    ChairwomanVelazquez. That was my follow-up question. Thank 
you.
    Mr. McClure, when Congress first passed the ban on Internet 
taxes in 1998, the Internet did not provide many of the 
services that we now use, such as music and video. Some say 
that Internet service providers may attempt to bundle these 
extra services with Internet access to avoid paying taxes.
    Is it possible, given the way the moratorium is now worded, 
that Internet service providers may be able to bundle services 
together to avoid taxation?
    Mr.McClure. No, I think we have seen clearly that there has 
been a division. After all, this law has not stood alone since 
1998. We have gone through two revisions of it, and in both 
cases the states and municipalities have had the opportunity to 
come back and say, ``We are concerned about this issue,'' and 
it gets addressed in those processes.
    What I find interesting now is they are using as an 
example, voice-over IP that somehow if voice-over IP is 
included in this taxing regime, that they will be able to 
bundle them and somehow be able to avoid taxes. That is not 
really the case. The reality is the voice-over IP is an 
Internet service. It is packet switched telephony, and it is by 
virtue of federal court decisions not the venue of the state 
under the Commerce Act, the commerce clause of the 
Constitution.
    It is not the purview of the states to tax it. So it is not 
a question of somehow this act is preventing them from taxing 
legitimate things they might otherwise tax. The carve-out is 
very clear. We are not looking to expand it. We are simply 
looking to protect what we see as protection of American 
consumers against very predatory taxes.
    ChairwomanVelazquez. Thank you.
    And in light of the members that are here, I am going to 
recognize Mr. Chabot, but once we finish with all the members, 
I will come back and ask more questions.
    Mr.Chabot. Thank you, Madam Chair.
    Mr. Dewey, I think I will start with you as well. We were 
just going on one of our Blackberries back here on your Web 
site, and we think it has got a great Web site.
    [Laughter.]
    Mr.Chabot. But I was just thinking with your name, the 
WickedCoolStuff, which is a very clever name, I think, you 
know, if we had started a business like this, if I had the 
money, say, back in high school and a good idea and the 
Internet existed back in the late 1960s when I was in high 
school, we might have called it GrooveyStuff or FarOutStuff or 
something like that.
    I am just wondering if the name. Are you concerned that it 
might be dated down the road and WickedCool might be pretty 
lame somewhere down the line?
    Mr.Dewey. Not a concern yet, but we are always looking to 
the future.
    Mr.Chabot. Good. What are some of your better selling 
items, shall we say? We will give you a little free advertising 
here.
    Mr.Dewey. One constant seller would be the classic Superman 
tee shirt. We sell that big S logo worldwide around the world. 
Every day we sell a shirt like that. We sell tee shirts and 
bobble heads and gift items and things like that, movie and 
cartoon inspired items that people enjoy and especially at gift 
time.
    Mr.Chabot. Very good, and we wish you the best. I hope 
there are a lot of folks that take your example and create 
jobs, and I especially was impressed, and I think the Chair was 
as well, that you are paying health care for your employees 
even though you are not rolling in the cash yet. Hopefully you 
will be some day. But our compliments for that, and that has 
been one of the goals of this Committee, to find ways to make 
health care more affordable, especially to more small 
businesses around the country.
    But thank you for having the courage to, and I hope you 
stick with it and I hope you are successful, and our 
compliments to you.
    Mr. Bieron, if I could go to you next, some people have 
said that E-commerce is destroying Main Street retailers, but a 
recent study of historic Main Street downtowns found that they 
are having an economic renaissance with E-commerce, as you 
mentioned, attracting customers to them from around the world.
    Would you comment a little bit on that again?
    Mr.Braley. No, that is absolutely a trend that we think has 
emerged in the last sort of recent years. I mean, Internet 
time, people joke about Internet time. Things happen really 
quickly. Certainly when eBay was founded a dozen years ago, 
there was no honest thought on the business side that this 
would become in terms of sellers really a small business 
engine. Just, I mean, nobody went to eBay originally because 
they really wanted to work for small businesses.
    That is how it has evolved. Likewise there was a time when 
it was seen that the Internet was a threat. Now, as you have 
said, increasingly your small Main Street business has a source 
of supply of goods to sell. In many cases their biggest 
inhibiting factor on the business side was traffic. It was 
buyers, and you know, when you are trying to sell on the 
Internet actually one of the big challenges is having that 
source of something to sell.
    And so the small business that currently exists with the 
brick and mortar store, they already have that half of the 
equation taken care of. The Internet gives them the other half 
which, if they are effective in driving traffic, and eBay is a 
way to get traffic, you know, it kind of completes that cycle, 
and then suddenly you can do business.
    And so, no, we absolutely believe that it is an engine that 
is going to keep Main Street small business alive trying to 
compete with the big box retailers who honestly over a number 
of decades from our perspective really are the competitive 
pressure that in many cases really hurts Main Street.
    Mr.Chabot. Thank you.
    Mr. McClure, would you talk briefly about many of us would 
just go beyond an extension of the exemption on not taxing the 
Internet, the moratorium? We prefer to make it permanent. Could 
you talk a little bit about is there a cost to the uncertainty 
to business by not making it permanent as far as planning into 
the future?
    Every couple of years you have got to wonder are they going 
to start taxing us or not. Could you discuss that briefly?
    Mr.McClure. Yes. We have seen that very clearly. I mean, 
our companies, and we represent a great number of 
infrastructure companies, not just large companies, but very 
small rural companies, but they are independent small 
businesses, and they have to lay out the money, and they have 
to go to the investment markets to get it. Uncertainty raises 
the cost of that money.
    Uncertainty makes that money less available. Just as 
uncertainty in the marketplace right now makes it more 
difficult to buy a home, to get the loan to buy a home or a new 
car, we are looking at that on a much grander scale. We are 
talking about a trillion dollars.
    So any time you inject uncertainty into the marketplace, 
you are going to raise the cost of that capital, make it more 
difficult to get and make it more difficult to achieve that 
goal.
    But let's look even beyond that, sir. Let's look at simply 
what we want as a national policy. If we sit here today and say 
we must as a national priority have broadband to every American 
family, to every school child who needs to do homework, to 
every senior citizen who needs it for health monitoring 
services; if we want to put broadband, high speed, affordable 
broadband to every corner of America, then how does it make 
sense to say we are going to start down this road and then 
erect a large barrier called $35 billion a year in new taxes on 
that service?
    It does not make any sense. If this is, in fact, the 
nation's priority and if we're to believe virtually everyone in 
this Congress, it is a priority and it does not make sense not 
to make this a permanent tax moratorium.
    We are not talking about E-commerce taxes. We are not 
talking about the larger universe of taxes. We are talking 
about a narrowly scripted tax that helps us to meet our 
national goal of affordable broadband to every American. That 
is how it makes sense, sir.
    Mr.Chabot. Thank you.
    Madam Chair, in the interest of time, I will let other 
members and I will yield back, too.
    ChairwomanVelazquez. Thank you.
    Mr. Braley.
    Mr.Braley. Thank you.
    Mr. Keating, let me start with you. I made a reference 
earlier in my opening statement to the impact that the Internet 
has had in rural communities and rural small businesses. One of 
the best examples of that from my district is a business that 
creates high end lighting fixtures that move from the Bay area 
in California to a remote community in Clayton County, Iowa, 
Elkader, and is now marketing its products all over the globe, 
and there have been a number of successful spinoff businesses 
that have arisen from that as this community has embraced the 
opportunities that come from Internet sales and marketing.
    One of them is a product called Little Miss Match that 
takes mismatched socks and mittens and sells them to young 
girls who are a target audience that really embraces that 
product.
    But one of the things that I am interested in from you is 
getting some sense of the geographic scope of the tax policies 
we are talking about today based upon what you hear from your 
members and how these tax policies impact them in places other 
than our large urban shopping areas.
    Mr.Keating. Well, I think you are hitting a critical area 
as a topic in geography because small business owners in those 
rural areas are probably the ones that have been empowered the 
most, right? Because when you're in an urban setting, you know, 
a dense suburban area, you have got a market at hand if you are 
a Mom and Pop shop. But now the rural businesses are the ones 
that are able to literally reach around the globe.
    So it is a very exciting thing. Geography becomes less and 
less of an issue. So it has been very exciting to look at how 
those businesses have been empowered.
    Now, what does it mean in terms of tax policy and how they 
are going to be hurt? They are going to be hurt the most 
because they are the ones that have to be able to reach out. 
They are relying on this high tech, wonderful computer world we 
live in, the Internet, to reach all of those customers, more so 
perhaps than those companies in those other areas.
    So it is most critical to them, and I think it is important 
for members of Congress to keep in mind and, quite frankly, 
elected officials at the state and local level, to keep in mind 
the impact of taxation. Because of the Internet and because of 
these technologies, businesses can become a lot more mobile.
    I happen to live in New York. You do not have to live in 
New York City or work in New York City anymore to make a nice 
living or to start up a business and succeed. You can be in 
South Dakota. You can be in Wyoming. You can be in Iowa.
    So people in all of those states, all of those people that 
are representing businesses have to keep in mind what is going 
to happen if this moratorium goes away. What are the dangers to 
small businesses in general, but also, what is going to be the 
impact on the state if we decide to go ahead and do something 
on the Internet access tax front.
    Mr.Braley. Mr. McClure, following up on that idea, one of 
the things that I think really transformed business 
relationships in this country was the advent of E-mail 
communications in addition to Internet shopping opportunities, 
and how it enabled people, customers, suppliers, vendors to 
develop personal relationships with people they never actually 
had met in their lives.
    And one of the astounding things that arose out of that is 
when you would meet someone in person for the first time. You 
had the sense that you were lifelong friends because you had 
been communicating with them for so long.
    Could you talk a little bit about some of the human side of 
the explosion and the growth of Internet sales and how that has 
impacted the future of the business that we have been talking 
about here today that will be also impacted by this tax policy?
    Mr.McClure. Yes, I can. And just for the record, I would 
like to note, sir, that I am a Hawkeye class of '73. So let me 
salute you.
    [Laughter.]
    Mr.McClure. I think we focus sometimes--it had to be said.
    Mr.Braley. Let me say I am very proud of the fact that both 
the Minority Staff Counsel and the Majority Staff Counsel, like 
me, are University of Iowa College of Law graduates. So we 
really are pleased to have you here today.
    Mr.McClure. Thank you very much.
    So often we focus on E-commerce, and we talk about the 
miracle of electronic commerce without looking at the miracle 
of communication, and you have hit it immensely there. Imagine. 
I raised three children, and I can tell you first hand that 
without Instant Messaging their social lives would have been 
totally destroyed.
    [Laughter.]
    Mr.McClure. If you look today to the miracle that is 
communication, it has happened largely because of the Internet. 
Cell phones today are moving toward the Internet. Why? Because 
that is the preferred method of communication. It has enabled 
me to communicate with people around the world. My closest 
friends now are in places like Germany and Australia. That 
simply would not have happened when we were growing up.
    It is an amazing technology, and if we move there into the 
social networking sites, if we look at even what it has done to 
jobs, your ability to find a job, your ability to find a mate, 
it is an amazing process. Communication is the miracle of the 
Internet, not just commerce.
    ChairwomanVelazquez. Time has expired.
    Mr. Fortenberry.
    Mr.Fortenberry. Thank you, Madam Chair, for holding this 
important hearing.
    Mr. McClure, I want to give you a friendly warning. When 
you tout your educational credentials as being from the 
University of Iowa, you are also talking to Representatives who 
have constituents that go to the University of Nebraska, but we 
want to minimize tensions in this room.
    [Laughter.]
     Mr.Fortenberry. All on the same page in trying to think 
about creative ways to expand the opportunities that have 
exploded on the Internet.
    So in fun, I appreciate your comments and your willingness 
to be here.
    I did want to ask you a direct question as well though. You 
had made a comment that 87 percent of Internet taxation goes 
toward compliance. I think we need to go back to probably what 
was an original point stated. We need to be careful. We are 
talking about two things, two issues here. One is taxation on 
access to the Internet and taxation on Internet commerce. They 
are separate entities, taxation on E-commerce.
    I assumed you were talking about E-commerce sales tax 
collections as 80 percent of that collection activity going to 
compliance. Was I correct in that understanding?
    Mr.McClure. That is correct, and I am sorry if there is 
some confusion over that, but the data on sales tax collection 
is the best data that we have in terms of percentage of 
compliance. For small businesses, 87 percent of the cost of 
collecting and remitting taxes is tied up in the sheer 
compliance cost according to Ernst & Young.
    Since we cannot effectively measure the impact of 
collecting and remitting taxes on Internet access or multiple 
and discriminatory taxes on E-commerce, this is the best proxy 
that we have. And the point I was attempting to make is that 
the level of compliance cost is disproportionate. For a large 
company that already engages in multi-state activities and may 
have nexus in multiple states, the cost is lower because they 
have already absorbed and provided for that cost. Small 
businesses have not.
    So disproportionately this impacts small businesses to a 
much greater degree than it would a large or even medium size 
company. And that was the point I was trying to make.
    Mr.Chabot. Would the gentleman from Nebraska yield for just 
one moment?
    Mr.Fortenberry. Certainly.
    Mr.Chabot. If I could just ask for a clarification, did I 
hear you say that if you collected the tax, 87 percent of what 
you got, 87 percent was in just collecting it?
    Mr.McClure. Yes, sir.
    Mr.Chabot. The cost was in collecting it. So you only get 
13 percent basically that the governments can use. The other 87 
percent was just for compliance?
    Mr.McClure. No, sir, because the 87 percent is absorbed by 
the company. The amount of taxes they have to remit do not 
change, but the cost of collecting and remitting those taxes 
does.
    Mr.Chabot. All right. Thank you.
    I thank the gentleman for yielding and I yield back.
    Mr.Fortenberry. Yes. I think that is an important point. 
Let's just give a simple example. If a small company has 
interstate commerce of $1,000, let's assume sales tax costs are 
five percent in the particular state. That would be $50. 
Therefore, I am going to get stuck doing some math here. That 
is a bad example.
    [Laughter.]
    Mr.Fortenberry. Let me back out, but the major portion--
    Mr.McClure. Perhaps I can clarify by saying suppose that 
the company is required to collect $5,000 in taxes and remit 
that $5,000.
    Mr.Fortenberry. Right.
    Mr.McClure. For a small company, you can add another 87 
percent to that $5,000 on top of that for the cost of 
compliance.
    Mr.Fortenberry. I see. I understand. I think it is an 
excellent point to be made.
    How would you define small business in the parameters in 
which you are talking about?
    Mr.McClure. Generally, and there are lots of definitions, 
as you know, but generally when we look at it from an 
accounting standpoint, and I have some credentials there as 
well, we are looking at companies of fewer than 200 employees 
with revenues somewhere less than $10 million per year.
    Mr.Fortenberry. Well, I think this is a significant finding 
from this hearing, Madam Chair, about the high cost of 
compliance and particularly I would assume elasticity of demand 
is significant on Internet sales as well, as it was suggested 
on Internet access. So that is an important point to be made.
    I would end on this quick story. I have a grain farmer in 
my district, a small, traditional grain farmer struggling to 
make ends meet; converted the business model into an Internet 
sales of specialized hay products for the pet market. Now that 
struggling grain farm has I think it is about 50 employees; 
just received one of the major business awards of the year; 
provides very good jobs in a rural county of Nebraska.
    This is the power of what we are talking about here. So I 
think I appreciate all of your input and your involvement in 
this industry that has, again, resulted in so much economic 
good for small businesses as well as people who work for small 
businesses throughout the country.
    ChairwomanVelazquez. Time has expired.
    Ms. Hirono.
    Ms.Hirono. Thank you, Madam Chair.
    Mr. Keating, you represent a nationwide organization, and I 
am wondering whether you have or you are aware of any national 
demographic data on the people who are engaging in Internet 
selling. In other words, is there any data on the number of 
women, the minorities, in rural areas? Do you have that kind of 
information or are aware of where that kind of information is 
available?
    Mr.Keating. Actually, I do not have it at my fingertips, 
but we do talk about that on our Web site, and I can get the 
information to you. But SBECouncil.org, we have all sorts of 
analysis on those types of things.
    And, you know, as a broad brush statement, it is just 
across the board. I mean the numbers are, you know, every 
imaginable business. I mean, our group, you know, we range from 
the consultant in the home based business, the one person shop, 
to manufacturing firms, to high tech and everything in between, 
and all of them one way or another are dramatically impacted by 
obviously the Internet, but they are out there selling things 
on the Internet, and it cuts across all demographics: women 
businesses.
    The growth, of course, as you know, in women businesses 
right now is far outdistancing males and in various ethnic 
groups the growth rates are dramatic right now. It is a very 
exciting time in terms of the growth of small business, and all 
of them are working with or through or on the Internet, and we 
can certainly get you some more information on that in terms of 
some exact numbers.
    Ms.Hirono. Thank you very much.
    One question for Mr. McClure. In your testimony you noted 
that if the moratorium is not extended, states and localities 
will take more than $35 billion per year out of the economy.
    How did you get that number?
    Mr.McClure. Well, that is actually a number generated by 
the states and municipalities based on what they claim they are 
losing each year because of this act. So we can assume that 
would be the minimum level that they would begin with.
    I would also point out the 30 percent figure that we use 
because it tends to be higher than some of the estimates of 
other groups which have said that Internet taxation would only 
be a modest five percent or maybe as much as 14 percent.
    If you look at telecommunications taxes nationwide, you 
need only look to Richmond, Virginia, where local taxes on 
telecommunications are at 30 percent, and they are not alone. 
It is in many districts nationwide.
    Our fear is that by the time you heap on multiple 
indiscriminate taxes, 30 percent is going to be a very low 
figure.
    Ms.Hirono. Thank you.
    And of course, Hawaii is one of the states that has an 
exemption from this moratorium, and I am sure I will be very 
unpopular if we get rid of that exemption. However, I am all 
for supporting small businesses.
    Thank you, Madam Chair.
    ChairwomanVelazquez. Ms. Fallin.
    Ms.Fallin. Thank you, Madam Chairman.
    I am still looking over all of the testimony here. I had a 
couple of questions.
    I enjoyed the conversation with the gentleman on the 87 
percent of the cost, the taxes and the cost of doing business 
if taxes were to be collected over the Internet, and I was 
thinking about my daughter. Is it Bieron? Is that how you 
pronounce your name?
    Mr.Braley. Bieron.
    Ms.Fallin. Bieron. She buys nothing but things over the 
Internet. She just loves the Internet, and she called me up 
yesterday here in Washington, and she said, ``Mom, I bought a 
dress for $5.00. It is absolutely gorgeous.''
    I said, ``Well, great. It saves Mommy money.''
    But I was thinking about, you k now, if she were to ever 
want to sell things on the Internet as a small business person 
and she hopes to kind of have a small business some day and 
about the collection, and by the way, I am a co-sponsor on this 
legislation. That is where I am at. But what would someone like 
a young person who is wanting to start up a company, and if the 
moratorium was not passed to be made permanent? What would it 
do to a young person or small business owner that is trying to 
start up a new company as far as having to learn how to collect 
the taxes and the time commitment and the financial accounting 
practices? What would it do to that small business owner?
    Mr.Bieron. Sure, and I do think it is important that we 
distinguish Internet access taxes. There are actually three 
kinds of taxes we are sort of talking about here. There is 
Internet access taxes which are going to show up on your 
Internet bill. So the bigger the small business, the more 
connectivity, the more band width they are paying for; usually 
the more money they are paying for their Internet services. 
Therefore, they are going to have that bill.
    Then there is the kinds of multiple and discriminatory 
taxes, which in particular in the digital world would be a real 
threat. If you want to deliver movies over the Internet 
compared to somebody who has a Blockbuster video store, you 
know, the idea that potentially a state or locality without the 
current prohibition could put a 20 percent tax on a downloaded 
video where it is maybe a seven percent sales tax in a store, 
that is a discriminatory kind of Internet tax.
    And then the third category would be the currently with the 
Quill decision, the issue of sales tax collection is based on 
nexus so that your daughter's small business would be required 
to collect and remit sales taxes to the State of Oklahoma when 
she sells to a customer in Oklahoma, but if she sells it across 
the country, she would not have the burden of having to know 
what's the sales tax rate when she sells to San Jose, 
California. Who do I send those taxes to?
    So the compliance cost that Mr. McClure was referring to, I 
think would be the idea that in the sales tax world adding more 
jurisdictions where you have to collect and remit is 
extraordinarily expensive for small business.
    Actually the question was how do you define a small 
business. Actually the Small Business Administration of which 
this Committee knows something about, one of the things they do 
is define how big small businesses are for all of the various 
programs that are over there, and in the area of E-commerce, E-
commerce retailers are considered small businesses up until the 
point where they have sales of $21 million, which I often say 
seems like a lot unless you are competing with Wal-Mart. then 
21 million is not a lot.
    But changing the Quill decision and requiring a small 
business to start to collect and remit taxes for the 15,000 
sales tax jurisdictions that are in America we think would be 
actually so expensive that it is inconceivable that small 
businesses could do it without immediately having to simply 
outsource the service to technology providers, but that would 
be the burden, is that if she wanted to sell when she gets to 
the point where she is buying and selling dresses just because 
that's what she likes to do, having to know what the sales tax 
is everywhere when it is a sales tax holiday, you know, all of 
those things, and then where you send all of those taxes to, 
and then keep all of those records for all of those 
jurisdictions because you could be audited by any one of them 
in that world is extraordinarily difficult to even conceive of.
    Ms.Fallin. Thank you. I appreciate that answer.
    Can I ask one quick question of Mr. Keating?
    ChairwomanVelazquez. Sure.
    Ms.Fallin. I think it was under your testimony that you 
list the other countries in the world that have better access 
to broadband, and you show the United States ranked towards the 
bottom. I was just curious if any of those other countries have 
a tax on the Internet on sales.
    Mr.Keating. I do not know the answer to that actually. I 
will certainly look into it for you though.
    Ms.Fallin. I am just curious because I notice there are a 
lot of countries that have better access than we do, but I just 
do not know where they are as far as tax and the Internet.
    Mr.Keating. And just on your earlier question very quickly 
is two things to keep in mind now is that when you have any 
tax, a new tax that comes in, if it applies to individuals and 
businesses, businesses tend to get hit harder, and the harder 
they get hit, the small guys get it even worse compared to the 
big guys.
    And then there is the regulatory aspect. When you look at 
the numbers, however you want to shake it out, per employee 
cost, regulations, particularly on the tax front, hit smaller 
firms much, much harder than it does the big guys.
    So the big guys most likely are going to be able to weather 
these things much better than the smaller firms.
    ChairwomanVelazquez. Time has expired.
    Ms.Fallin. Thank you.
    ChairwomanVelazquez. Mr. Ellsworth.
    Mr.Ellsworth. Thank you, Madam Chairwoman.
    Mr. Bieron, first I want to thank your company for their 
position on the reselling of the banned toys that I heard about 
just in the last few days. Thank you for that position. I hope 
they continue that, and I hope other companies follow that 
lead.
    Mr. Dewey, thank you. The reason I asked for this Committee 
as a third committee was for people like you back in Indiana. I 
think Indiana beat Iowa last week, didn't they, by the way?
    [Laughter.]
    Mr.Ellsworth. Oh, when Indiana wins a football game, we 
brag a lot.
    My question is pretty short really. One thing I have found 
since coming to Congress other than you sell bottle head 
dollars and sometime in eight short months, you feel like a 
bottle head doll up here, but there is always the other side of 
the coin. If we had another hearing tomorrow or who is going to 
come into my office next week and watches this and takes notes 
and says, ``That is all bunk. There is another side to this 
story''?
    It sounds like you have pretty broad support in this room, 
but who is going to come in and tell me the other side of this 
story? Who is the enemy here?
    And as far as you want to go and maybe Mr. Keating and Mr. 
McClure are the appropriate people.
    Mr.Keating. Well, I think you are going to hear from a lot 
of state and local officials and the folks that represent them. 
The National Governors Association, I believe, is not too 
thrilled with this idea. The American Federation of State, 
County, and Municipal Employees are not too keen on it. So I 
think it is pretty predictable that is who you are going to 
see, and they are going to talk a lot about needing more 
revenue for vital services and the sky is falling and so on.
    But, again, I think if you take a look at the actual 
numbers, as I said, those are just some broad numbers that I 
cited, but the growth in revenue has been tremendous at the 
state and local level, and the key is there just like at the 
federal level. If you have a growing economy, a growing, 
healthy economy, you are going to have more government revenue. 
That is one of the benefits.
    So then the question becomes does taxing the Internet make 
sense to keep the economy growing, and I would say no.
    Mr.McClure. A more important factor will be who you will 
not hear from tomorrow. You will not hear from consumers who 
want those taxes. You will not hear from economists. You will 
not hear from consumer advocates. You will not hear about 
anyone who has a responsibility for the growth of broadband, 
and that includes most state legislatures.
    You are going to be talking to people who are looking to 
raise their revenues, and honestly, they cannot give you a good 
justification for why they need the revenues, which is why it 
is now being repositioned and repackage is somehow a state's 
right. You see, it doesn't have to do with the taxes. It has to 
do with rights. Very clearly, it is not a constitutional right 
to tax interstate commerce. So the important thing to remember 
is you are not going to hear about the people who care about 
deploying broadband to every American family.
    Mr.Ellsworth. What about industry that is going to say this 
gives you the unfair advantage or we always hear about leveling 
the playing field, and you hear that a lot. Is there any 
industry that is going to come in and say you are getting 
unfair advantage here?
    Mr.McClure. I do not think so, sir, and I do not want to 
muddy the waters again by talking about taxing electronic 
commerce because this bill is not about that, but if you go 
back to the Quill decision, one of the things that the Supreme 
Court was very clear about is that taxes are a payment for 
service. Those brick and mortar companies receive direct 
services. They have received roads that go to their premises. 
They receive police protection and fire protection, and taxes 
are the way they pay for those services.
    When you have an electronic company that has no nexus, when 
it does not have that presence, it does not receive those 
services and, therefore, there is no justification for the 
payment of taxes simply because you want more money.
    Mr.Ellsworth. Thank you, Madam Chairwoman. I yield back.
    ChairwomanVelazquez. Thank you.
    Mr. Gohmert.
    Mr.Gohmert. Thank you, Madam Chair.
    And I do appreciate you all being here, your testimony. 
After my alma mater A&M lost to Miami, I was heard to say that 
I think too many schools are spending too much of their 
emphasis on athletics and need to get back to academics, but 
after last weekend, I think we have got the right proportion.
    [Laughter.]
    Mr.Gohmert. But the 87 percent cost of compliance intrigues 
me because the way it was described by Mr. Bieron I can see 
that just being a nightmare trying to figure out which city, 
which state gets which part of which taxes, and then you could 
have disputes over who should be getting that, and understand I 
am signed on. I do not want to see the Internet taxed, but when 
I hear a number like that, it does seem to be a little extreme 
because I think what the proponents are talking about is some 
scheme where, you know, you send taxes into a central 
repository and maybe even let them figure out which states get 
what, and it does not look like it would be an 87 percent cost 
of compliance to do that, does it, Mr. McClure?
    Mr.McClure. It would be lovely if there were such a 
process, sir, but the fact is that process does not exist. It 
is all black box stuff. Give us the right to tax and somehow we 
will figure out a way to do it fairly.
    They have been asked for more than a decade to figure out 
how to do it fairly, and then Congress would consider it. They 
have yet to come before you and say, ``This is our plan to do 
it fairly.'' It is all black box stuff.
    And let me point out we are not--
    Mr.Gohmert. Well, now, I need to dispel one thought that 
you have got, and that is linking the United States government 
and fairness. I have just been here three years, and I have not 
seen that linkage yet. We are still looking, and especially 
when it comes to taxes.
    But we do hear states, local government. We need revenue. 
More and more is going across the Internet. It is going to kill 
us locally. I have not exactly worked out how since the economy 
is booming and the federal and state and local governments, 
most of them, are receiving more money than in history, how 
this terrible intrusion called the Internet has been such an 
adverse effect.
    I understand conceptually we have got more goods being sold 
across the Internet than ever before, and so perhaps some of 
those are not being sold locally with local sales tax that 
would have been, but it is an interesting dynamic.
    Do you have any explanations as to how more commerce is 
going across the Internet and yet most states and local 
governments are receiving more revenue than ever? Anybody?
    Mr.Bieron. Just to provide some data behind that, the 
Department of Commerce's, and quarterly they update with the 
retail numbers, and they break out Internet commerce. So at 
eBay we would say, you know, Internet commerce is growing 
rapidly, but traditional retail is so immense that it is almost 
hard to fathom the difference.
    Right now E-commerce in the U.S. is estimated at just under 
three and a half percent of total retail. So last year that was 
about $125 billion of E-commerce retail, compared to over three 
trillion in total retail.
    So in some ways, I mean, again, at eBay we would say that 
this growth is great. Obviously it is our business to empower 
small businesses to do that, and so we see the future being 
very bright, but at the same time we should not lose 
perspective on the fact that traditional storefront retail is 
trillions and trillions of dollars.
    And so honestly with that growing, traditional retail last 
year grew approximately four percent. Online retail grew about 
20 percent, but the baseline for the traditional retail was so 
huge that actually sales tax revenues for the state reached 
record levels.
    So when they come in and talk about the Internet, you know, 
threatening their economics, their revenue stream tremendously, 
I mean, maybe in 50 years you would set these growth rates, 
that would be the case, but today some of that really is kind 
of crying wolf.
    Mr.Keating. If I could, and again, I think it goes back to 
understanding the phenomenon of economic growth and what that 
means for government revenues overall. You are not just talking 
about sales tax revenues. You are talking about income tax 
revenues. All the other taxes that are paid because of or due 
to an expanding economy, so you have all of those benefits that 
come into the equation.
    What you will hear though is a very selective definition of 
E-commerce is increasing by X amount or Internet access is 
increasing by X amount, and if we could get our hands on that, 
you know, that equals X number of dollars.
    But it does not necessarily mean that government should or 
needs to get their hands on those additional revenues.
    Mr.Gohmert. Thank you.
    My time has expired.
    ChairwomanVelazquez. Your time has expired.
    Mr.Gohmert. Thank you, Madam Chairwoman.
    ChairwomanVelazquez. Mr. Lieberman, I would like to address 
one other question to you. Cable companies have obviously made 
efforts to expand access to broadband Internet and other 
technologies. You stated that many of your members are small 
and medium size cable companies that are serving smaller 
communities, particularly in rural areas.
    What challenges will your members face in its attempt to 
provide expanded services if the moratorium was not extended? 
And in particular, how do you believe it may affect efforts in 
broadband deployment?
    Mr.Lieberman. Thank you.
    You are correct. Our operators do serve smaller markets in 
rural areas, and the reality is that many of our members are 
already offering broadband services in those areas. It is truly 
the smallest of our operators that are still looking for ways 
to deploy those services because of their size and the 
difficulties in terms of the costs and spreading those costs 
over the number of customers served.
    ChairwomanVelazquez. Would you also talk about how this 
broadband deployment has benefited small businesses?
    Mr.Lieberman. Oh, absolutely. Well, mostly our operators 
from their beginning have been video providers, offering 
services to consumers in homes. Certainly when they have 
upgraded their systems to offer broadband services there has 
been new opportunities in order to offer these services to 
businesses, and that has been a growth area for many of our 
members, and they have been able to gain a lot of business 
consumers in their communities.
    ChairwomanVelazquez. Mr. Lieberman, the Internet access 
taxes are taxes on the service providers. What is the 
likelihood that cable providers such as yourself would be 
forced to pass those taxes onto consumers and small businesses 
much like television and fun taxes?
    Mr.Lieberman. The unfortunate reality is that they would 
likely be passed along to the consumer. Our operators are 
running their businesses on small margins and do not have the 
capacity to absorb those costs and would have to pass it along.
    ChairwomanVelazquez. Mr. Chabot, do you have any other 
questions?
    Mr.Chabot. Just briefly, and again, I was going to go to 
Mr. Lieberman also. I would not want him to feel left out in 
this, but there have been a lot of questions that have not 
necessarily been related to the cable industry.
    But let me ask one other thing, Mr. Lieberman, if I can, 
and that has to do with the rates. Could you tell me what the 
mindset of your consumer is right now relative to cable rates 
and going along with the question that the Chairwoman asked 
about how they would feel about rates being increased if this 
tax, the exemption, did not continue? So, in other words, taxes 
went up.
    How would the general public, in your view, feel about 
that?
    Mr.Lieberman. They certainly would have a lot of 
frustration. Obviously in the video sector for us, costs are 
increasing. We constantly hear about it from our consumers, 
about those cost increases, and question why. Certainly, on the 
Internet side, we rolled out services that we believe are 
affordable and increasing costs on those through taxes, we 
certainly would hear back from our customers why.
    And just to give an example of a small cable operator, 
there is one in western Texas that serves 1,700 video 
subscribers and 300 broadband services. The average income in 
two of the counties, the household income is 30,000. For two of 
the other counties, it is 22,000.
    There is demand for Internet and broadband Internet, but 
there is also the difficulty in providing it at an affordable 
cost. An Internet tax would have a serious impact on the 
ability for people in these communities to be able to purchase 
that, and that is a concern for a lot of our operators in those 
type areas.
    Mr.Chabot. Thank you.
    And, Mr. Keating, our colleague from Indiana who is not 
with us at the present time, but mentioned who would be on the 
other side of this because we actually have a panel here which 
is actually somewhat unusual here, but then the Chairwoman and 
I are completely together on this. So I guess we could have 
drug a governor in here or somebody, but that is what happened.
    You know, when I co-sponsored this bill, in fact, I think I 
was one of the original co-sponsors of the legislation some 
years ago, the first phone call I got was from my governor. We 
were county commissioners together, and he went to the 
governorship and I came up here. He was also the lowest rated 
governor of all the governors over the last couple of years, 
too. I will not tell you what state I am from so that you 
cannot figure out who he is from, and he is really a very good 
guy and I like him a lot even though, you know, he has had some 
real rough times over the last couple of years.
    But in any event, that was the first call I got from him, 
was how devastating this would be, you know, to my people in 
Cincinnati and all of the people of Ohio if we put on this 
extension and did not allow them to tax and how important that 
was to let them get this tax, et cetera.
    So that is one group, is local elected officials and 
governors, et cetera, and the other group that we got some 
criticism from was the so-called, you know, brick and mortar, 
some of the stores perhaps that say it is an unfair advantage. 
And you have already touched on this, but could you briefly, 
Mr. Keating, again deflate that argument as to why this is a 
bad thing from the point of view of local elected officials and 
brick and mortar folks?
    Mr.Keating. Absolutely. You know, I think the first thing 
is to look at the actual numbers, is to see what has been going 
on in regards to the revenue front for state and local 
governments. You know, I think the exceptional person that 
holds office at that level is going to say, ``You know what? 
Revenues are rolling in pretty good. So we are okay.''
    So you have got to look at the numbers. The numbers show 
that revenues have been increasing at a dramatic rate, about 
better than three times the rate of inflation. So that is 
number one.
    Number two is, again, the issue of allowing small 
businesses to flourish through the Internet, having the 
foresight to say, okay, if we impose this tax what is it going 
to mean to the economy overall. What is it going to mean to 
these small businesses? Do we want to really take those steps 
and cause these problems where, again, a lot of the big guys 
are going to be able to handle this in terms of the tax itself 
and all of the red tape and everything that goes along with the 
regulatory aspects of the tax, but the small guys are not going 
to be able to handle this.
    And then finally, the other part of the equation is do the 
small guys matter. Well, of course they do, and when you go 
back and look at all of the aspects of where an innovation 
comes from, where does job growth come from, and any year it is 
60 to 80 percent of net new jobs come from small businesses. 
They are employing a little more than half of the private 
sector work force. So do you recall want to go down this path 
and open up the door to these taxes that are going to do such 
damage to small businesses and entrepreneurs?
    Mr.Chabot. Thank you.
    And then finally, one quick question. You mentioned in your 
written statement the 2001 and 2003 tax cuts that were passed 
here in Congress that the President signed into law. In your 
opinion, how important are these tax cuts to economic growth 
that we have seen and how important is it that we make those 
tax cuts permanent?
    Mr.Keating. Oh, huge. A huge issue. I mean, when you look 
at when the 2003 tax cut went through, the middle of 2003, it 
was no mere coincidence that at that point the economy started 
to pick up. Private sector investment picked up dramatically.
    Keep in mind that most businesses, better than 90 percent 
of businesses pay the personal income tax rather than the 
corporate income tax. So it hits the bottom line of small 
businesses. If you want, access to capital is critical. So 
lower capital gains tax is very important.
    All of those things are in that package. The estate tax, 
all of those things impact small businesses in a big way, and 
we need to make that permanent, as we need to make the Internet 
tax moratorium permanent, to help them and to get that 
certainty into the equation.
    Mr.Chabot. Thank you very much, and I want to thank the 
entire panel for their testimony. I thought it was very good.
    ChairwomanVelazquez. Thank you.
    And I, too, want to thank all of you for your willingness 
to be here, to discuss an issue that is important, and it has 
been demonstrated that it has an impact on small businesses. 
Given the fact that the Small Business Committee has expanded 
jurisdiction over issues that affect small businesses, we 
intend to be engaged in this issue.
    I ask unanimous consent that members have five legislative 
days to enter statements and supporting materials into the 
record, and with that this hearing is adjourned.
    [Whereupon, at 11:40 a.m., the Committee meeting was 
adjourned.]

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