[Congressional Record Volume 143, Number 32 (Thursday, March 13, 1997)]
[Senate]
[Pages S2282-S2284]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. WYDEN (for himself and Mr. Kerry):
  S. 442. A bill to establish a national policy against State and local 
government interference with interstate commerce on the Internet or 
interactive computer services, and to exercise Congressional 
jurisdiction over interstate commerce by establishing a moratorium on 
the imposition of exactions that would interfere with the free flow of 
commerce via the Internet, and for other purposes; to the Committee on 
Commerce, Science, and Transportation.


                      the INTERNET TAX FREEDOM ACT

 Mr. WYDEN. Mr. President, a few weeks ago, I met with a group 
of small business folks at an Internet cafe in Portland. We talked 
about the promise electronic commerce holds for businesses and 
consumers. The Internet can give a small businessperson in Astoria, OR 
access to the entire global marketplace. It can give consumers, 
especially in rural areas, entry to a supernational shopping mall.
  For governments, the Internet offers a different type of promise--the 
chance to be a new cash cow. As Federal funds decrease, States and 
local governments are looking to the Internet as a new source of 
revenue. Some have already begun building tollbooths on the information 
superhighway. For sales taxes alone, there are nearly 6,500 different 
taxing authorities in this country. One businessman at the Internet 
cafe told me he is wary of getting into electronic commerce because of 
the prospect of as many as 30,000 different pairs of hands reaching 
into his pockets to collect taxes. If current trends continue, State 
and local levies will transform the Internet from a bright and exciting 
new frontier for commerce into a dark jungle of foreboding taxes.
  Under today's mishmash of State and local Internet taxes, everyone is 
puzzled. Take a customer at his home computer who purchases an item 
from a virtual catalogue. With the click of his mouse, the purchase is 
logged, his account billed and payment made by wire transfer and the 
order sent. The vendor is in another State, or even another country. 
His bank is in a third State and the purchase is a gift being sent to a 
relative in another State. Where did this transaction take place?

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 Where was there nexus for tax purposes--the vendor State? The 
customer's State? The bank's location? Or the State where the gift is 
being sent? Is the answer all of the above, some of the above, or none 
of the above?
  The enormity of the problem is underscored by the fact that the 
hottest selling software today is software to help entrepreneurs and 
companies figure out various State tax policies.
  When a consumer in Corvallis, OR uses an Internet search engine in 
California, is that search a taxable service? When a housewife in 
Houston uses Virginia-based America Online to make a virtual purchase 
from a furniture company in North Carolina, what gets taxed where? Is 
an Internet service provider a public utility, as one State has ruled? 
Even if a State has enacted an online tax law, collection and 
enforcement are often haphazard. This system rewards ignorance and 
punishes the boy scout businesses that play by the rules.
  The purpose of the bill I am introducing today with Congressman Chris 
Cox is to allow everyone to step back and take a deep breath. It says 
let's suspend this crazy tax quilting bee so that everyone can come 
together in a rational way to figure out what policy makes the most 
sense.
  The Internet Tax Freedom Act has three parts. First, it would impose 
an indefinite moratorium on subnational taxes on electronic commerce. 
Where States and local governments have already imposed taxes on 
electronic commerce, their taxes would be grand fathered to the extent 
that they are net income taxes, fairly apportioned business license 
taxes or where the tax is collected in an identical way for mail or 
telephone orders. This will assure uniformity and fairness, while 
targeting inequitable technology taxes. Our intent is that the new tax 
moratorium apply to all Internet and interactive computer services, 
regardless of the technology--such as cable systems and wireless 
networks--being used to deliver those services. It will give us a 
functionally equivalent and technologically equitable tax policy. It 
will assure equity and fairness among all business entities and across 
technologies.

  Second, the bill would call upon the administration to bring together 
State and local governments, businesses and consumers, and any others 
with a stake in the Internet and online commerce to develop policy 
recommendations on taxation of the Internet and use of the Internet to 
deliver products and services. The Executive would have 2 years in 
which to prepare policy recommendations on taxation of the Internet.
  Third, the bill directs the executive branch to seek an international 
agreement making the Internet a duty-free zone. Just as we seek a 
rational policy on electronic commerce taxation here in the United 
States, our businesses cannot be expected to compete overseas if they 
faced more than 160 different foreign tariff policies covering global 
electronic commerce. Although about 75 percent of Web users live in 
North America, most electronic commerce is between companies, rather 
than companies and consumers. Forrester Research of Massachusetts 
predicts business-to-business commerce will soon be worth $67 billion a 
year.
  Trying to find out exactly which States and local authorities are 
imposing taxes on electronic commerce and what types of taxes they are 
imposing is a daunting--if not outright impossible--task in itself. The 
Vice President for a good-sized Internet service provider in California 
said he would need a whole department to untangle the various Internet 
tax laws around the country, ``It's in my nightmare pile,'' he 
observed. If this has stumped some of the best accounting firms in the 
country, how in the world can a small business that wants to sell over 
the Internet figure out its various tax liabilities? The difference 
between States in electronic commerce tax policy is mind-numbing.
  Twenty States and the District of Columbia impose one or more taxes 
on electronic commerce. New York levies taxes on gross receipts on the 
``furnishing of information,'' but not on personal or individual 
information. Ohio taxes electronic transmissions and real estate data 
bases because they provide objective data but exempts news services 
because they provide analysis. Texas taxes the transmission of 
electronic information and software in whatever form, but does not tax 
software sent out of State on a disk. Alabama's Revenue Department 
ruled last fall that a utility tax applies to Internet service 
providers, forcing them to pay a 4-percent public utilities tax.
  Last year in Florida a small Internet service provider asked the 
State's Department of Revenue whether he should add a sales tax to his 
customers' monthly bills. He was certain he wouldn't have to since all 
net surfers there already pay 10 percent or more in taxes for the 
telephone service they use to link to the Internet. To his surprise, 
the Revenue Department said his customers should have been paying a 7-
percent service tax under a decade-old telecommunications law. Then, 
adding shock to surprise, the Department told him his company was 
subject to an additional 2.5-percent tax on its gross annual receipts. 
The uproar from users and providers led the Governor to suspend the 
taxes until a panel could study the implications.
  The legislation is constructed in such a way as to set up a dynamic 
and productive tension. It gives those that seek revenue from 
electronic commerce--the States and local governments--an incentive to 
work with the administration in developing policy recommendations on 
Internet taxation. Indeed, the National Conference of State 
Legislatures wrote me on February 21 that they have been ``working with 
a number of other State organizations as well as the impacted private 
sector industries to find the common ground which will lead to the 
coordination and uniformity of State tax structures which the draft 
legislation desires.'' And an official with the Federal of Tax 
Administrators observed last summer that ``States need to figure out 
how to tax it [the Internet] and to make it a level playing field with 
other services.'' I will also continue to work with the Multistate Tax 
Commission to assure their efforts move forward.
  But the question remains: Will the simple imperative for good public 
policy outweigh the desire of cash-strapped States to tap a new source 
of revenue? Without a moratorium, as proposed in this legislation, I 
fear those State and local governments hungry for new sources of 
revenue have little, if any, incentive to work for a fair and equitable 
Internet tax policy.
  I want to thank a number of groups that have helped us craft this 
legislation, and which have indicated their support for this bill: the 
American Electronics Association, the Software Publishers Association, 
the Association of Online Professionals, the Committee on State 
Taxation, the Direct Marketing Association, the Business Software 
Alliance, the Information Technology Association of America, the U.S. 
Telephone Association, the California State Board of Taxation, the 
Massachusetts High Tech Council, CommerceNet, the Silicon Valley 
Software Industry Coalition, IBM, AT&T, and other companies.
  I view the legislation being introduced today as the beginning of a 
process, not the end. It remains a work in progress and will hopefully 
continue to be refined throughout the congressional hearing process.
  There is a great deal to learn in these unchartered waters. All of 
us--Congress, State and local governments, businesses and consumers--
must educate each other about how this new electronic medium works. We 
must all work together to help it achieve its full potential as a 
marketplace of ideas, products, and services.
  I ask unanimous consent that the text of the bill and a section-by-
section analysis be printed in the Record.
  Thee being no objection, the material was ordered to be printed in 
the Record, as follows:

                                 S. 442

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Internet Tax Freedom Act''.

     SEC. 2. FINDINGS.

       The Congress finds the following:
       (1) As a massive global network spanning not only State but 
     international borders, the Internet is inherently a matter of 
     interstate and foreign commerce within the jurisdiction of 
     the United States Congress under Article I, Section 8 of the 
     United States Constitution.

[[Page S2284]]

       (2) Even within the United States, the Internet does not 
     respect State lines and operates independently of State 
     boundaries. Addresses on the Internet are designed to be 
     geographically indifferent. Internet transmissions are 
     insensitive to physical distance and can have multiple 
     geographical addresses.
       (3) Because transmissions over the Internet are made 
     through packet-switching it is impossible to determine with 
     any degree of certainty the precise geographic route or 
     endpoints of specific Internet transmissions and infeasible 
     to separate intrastate from interstate, and domestic from 
     foreign, Internet transmissions.
       (4) Inconsistent and inadministrable taxes imposed on 
     Internet activity by State and local governments threaten not 
     only to subject consumers, businesses, and other users 
     engaged in interstate and foreign commerce to multiply, 
     confusing, and burdensome taxation, but also to restrict the 
     growth and continued technological maturation of the Internet 
     itself, and to call into question the continued viability of 
     this dynamic medium.
       (5) Because the tax laws and regulations of so many 
     jurisdictions were established before the Internet or 
     interactive computer services, their application to this new 
     medium in unintended and unpredictable ways threatens every 
     Internet user, access provider, vendor, and interactive 
     computer service provider.
       (6) The electronic marketplace of services, products, and 
     ideas available through the Internet or interactive computer 
     services can be especially beneficial to senior citizens, the 
     physically challenged, citizens in rural areas, and small 
     businesses. It also offers a variety of uses and benefits for 
     educational institutions and charitable organizations.
       (7) Consumers, businesses, and others engaging in 
     interstate and foreign commerce through the Internet or 
     interactive computer services could become subject to more 
     than 30,000 separate taxing jurisdictions in the United 
     States alone.
       (8) The consistent and coherent national policy regarding 
     taxation of Internet activity, and the concomitant 
     uniformity, simplicity, and fairness that is needed to avoid 
     burdening this evolving form of interstate and foreign 
     commerce can best be achieved by the United States exercising 
     its authority under Article I, Section 8, Clause 3 of the 
     United States Constitution.

     SEC. 3. MORATORIUM ON IMPOSITION OF TAXES ON INTERNET OR 
                   INTERACTIVE COMPUTER SERVICES.

       (a) Moratorium.--Except as otherwise provided in this 
     section, no State or political subdivision thereof may 
     impose, assess, or attempt to collect a tax directly or 
     indirectly on--
       (1) the Internet or interactive computer services; or
       (2) the use of the Internet or interactive computer 
     services.
       (b) Preservation of State and Local Taxing Authority.--
     Subsection (a)--
       (1) does not apply to taxes imposed on or measured by net 
     income derived from the Internet or interactive computer 
     services;
       (2) does not apply to fairly apportioned business license 
     taxes applied to businesses having a business location in the 
     taxing jurisdiction; and
       (3) does not affect a State or political subdivision 
     thereof of authority to impose a sales or use tax on sales or 
     other transactions effected by the use of the Internet or 
     interactive computer services if--
       (A) the tax is the same as the tax generally imposed and 
     collected by that State or political subdivision thereof on 
     interstate sales or transactions effected by mail order, 
     telephone, or other remote means within its taxing 
     jurisdiction; and
       (B) the obligation to collect the tax from sales or other 
     transactions effected by the use of the Internet or 
     interactive computer services is imposed on the same person 
     or entity as in the case of sales or transactions effected by 
     mail order, telephone, or other remote means.

     SEC. 4. ADMINISTRATION POLICY RECOMMENDATIONS TO CONGRESS.

       (a) Consultative Group.--The Secretaries of the Treasury, 
     Commerce, and State, in consultation with appropriate 
     committees of the Congress, consumer and business groups, 
     States and political subdivisions thereof, and other 
     appropriate groups, shall--
       (1) undertake an examination of United States and 
     international taxation of the Internet and interactive 
     computer services, as well as commerce conducted thereon; and
       (2) jointly submit appropriate policy recommendations 
     concerning United States domestic and foreign policies toward 
     taxation of the Internet and interactive computer services, 
     if any, to the President within 18 months after the date of 
     enactment of this Act.
       (b) President.--Not later than 2 years after the date of 
     enactment of this Act, the President shall transmit to the 
     appropriate committees of Congress policy recommendations on 
     the taxation of sales and other transactions affected on the 
     Internet or through interactive computer services.
       (c) Recommendations To Be Consistent With 
     Telecommunications Act of 1996 Policy Statement.--The 
     Secretaries and the President shall take care to ensure that 
     any policy recommendations are fully consistent with the 
     policy set forth in paragraphs (1) and (2) of section 230(b) 
     of the Communications Act of 1934 (47 U.S.C. 230(b)).

     SEC. 5. DECLARATION THAT THE INTERNET BE FREE OF FOREIGN 
                   TARIFFS, TRADE BARRIERS, AND OTHER 
                   RESTRICTIONS.

       It is the sense of the Congress that the President should 
     seek bilateral and multilateral agreements through the World 
     Trade Organization, the Organization for Economic Cooperation 
     Council, or other appropriate international fora to establish 
     that activity on the Internet and interactive computer 
     services is free from tariff and taxation.

     SEC. 6. DEFINITIONS.

       For purposes of this Act--
       (1) Internet; interactive computer service.--The terms 
     ``Internet'' and ``interactive computer service'' have the 
     meaning given such terms by paragraphs (1) and (2), 
     respectively, of section 230(e) of the Communications Act of 
     1934 (47 U.S.C. 230(e)).
       (2) Tax.--The term ``tax'' includes any tax, license, or 
     fee that is imposed by any governmental entity, and includes 
     the imposition of the seller of an obligation to collect and 
     remit a tax imposed on the buyer.
                                                                    ____


       The Internet Tax Freedom Act--Section-by-Section Analysis

       Section 1: Short title: ``The Internet Tax Freedom Act''
       Section 2: Findings. Sets forth a series of findings, 
     including that the Internet is inherently a matter of 
     interstate commerce; that the Internet operates independently 
     of State lines; that inconsistent and unadministrable taxes 
     imposed on Internet activity by State and local governments 
     subject consumers and businesses to multiple, confusing and 
     burdensome taxation and are creating compliance problems for 
     Internet access providers, vendors and interactive computer 
     service providers; that consumers, businesses and others 
     engaging in interstate commerce through the Internet or 
     interactive computer services could become subject to some 
     30,000 separate taxing jurisdictions in the United States; 
     and that uniformity, simplicity and fairness are needed 
     regarding taxation of Internet activity to avoid burdening 
     this evolving form of interstate commerce.
       Section 3: Moratorium on Imposition of Taxes on Internet or 
     Interactive Computer Services--
       Subsection (a), establishes a moratorium on direct and 
     indirect state or local taxes on the Internet or interactive 
     computer services or the use of those services.
       Subsection (b), preserves state and local authority for 
     taxes for the following types of taxes:
       (1) taxes on or measured by net income derived from these 
     services,
       (2) fairly apportioned business license taxes, and
       (3) sales and use taxes on interstate electronic 
     transactions that are consistent with taxes on mail order and 
     telephone transactions.
       Section 4: Administration Policy Recommendations to 
     Congress.
       Subsection (a), Establishes a consultative group of the 
     Secretaries of the Treasury, Commerce and State that will 
     work with State and local governments, consumer and business 
     groups and others to examine U.S. and international taxation 
     of Internet and interactive computer services and submit 
     policy recommendations to the President within 18 months of 
     enactment.
       Subsection (b), directs the President to transmit to 
     Congress any policy recommendations within two years of 
     enactment.
       Subsection (c), seeks to ensure that any policy 
     recommendations are consistent with the 1996 
     Telecommunications Act policy statement regarding promotion 
     of the Internet and interactive computer services.
       Section 5: Declaration that the Internet Be Free of Foreign 
     Tariffs, Trade Barriers, and Other Restrictions
       Sets forth the sense of the Congress that the President 
     should seek bilateral and multinational agreements through 
     various international trade organizations to keep the 
     Internet and interactive computer services free from tariffs 
     and taxation.
       Section 6: Definitions
       (1) Internet and interactive computer service terms are 
     defined as they are in the Communications Act of 1934, as 
     amended by the 1996 Telecommunications Act.
       (2) Defines tax to include any tax, license or fee imposed 
     by any governmental entity and includes the imposition on the 
     seller of an obligation to collect and remit a tax imposed on 
     the buyer.

                          ____________________