[Congressional Record Volume 144, Number 93 (Tuesday, July 14, 1998)]
[Extensions of Remarks]
[Pages E1288-E1290]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                        INTERNET TAX FREEDOM ACT

                                 ______
                                 

                               speech of

                          HON. CHRISTOPHER COX

                             of california

                    in the house of representatives

                         Tuesday, June 23, 1998

  Mr. COX of California. Mr. Speaker, I introduced the bill we are 
considering today, H.R. 4105, the Internet Tax Freedom Act, yesterday. 
It has not been reported to the House by either the Commerce Committee 
or the Judiciary Committee, or by any committee of Congress. It does, 
however, represent a synthesis of two bills approved by the Commerce 
Committee (H.R. 3849) and by the Judiciary Committee (H.R. 3529). Thus, 
while normally there be one or more committee reports filed in 
connection with H.R. 4105, there is none. As the author of the 
consensus bill, as well as of the original Internet Tax Freedom Act 
(H.R. 1054), upon which both H.R. 3849 and H.R. 3529 were based, I am 
pleased to set forth for the Record the author's intent concerning 
certain key provisions of the bill, notably Section 2 (``Moratorium on 
Certain Taxes'') and Section 7 (``No Expansion of Tax Authority''), 
since this important information will not be fully reflected in the 
committee reports accompanying the two previous bills.

Report Concerning Provisions of H.R. 4105, the Internet Tax Freedom Act


                     A. Moratorium on Certain Taxes

       Section 2 of H.R. 4105 amends Title 4 of the U.S. Code to 
     add a new Chapter 6 (Sections 151-155). New Section 151 of 
     Title 4 prohibits, for a period of 3 years, State and local 
     governments from imposing, assessing, collecting, or 
     attempting to collect ``taxes on Internet access,'' ``bit 
     taxes,'' ``multiple'' taxes on electronic commerce, and 
     ``discriminatory'' taxes on electronic commerce.

                     1. No taxes on Internet access

       New Section 151(a) prohibits, for a period of 3 years, 
     State and local governments from imposing, assessing, 
     collecting, or attempting to collect ``taxes on Internet 
     access.'' It is intended that this temporary ban will be made 
     permanent in the future, as it is envisioned that the 
     legislation submitted to Congress by the Advisory Commission 
     pursuant

[[Page E1289]]

     to new Section 153(b)(5) will include provisions making the 
     3-year ban on such taxes permanent. The National Governors' 
     Association has already publicly declared its support for 
     such a permanent ban.
       The term ``Internet access'' is defined in new Section 
     155(7). It means any service that enables users to access 
     content, information, and other services offered over the 
     Internet. It includes access to proprietary content, 
     information, and other services as part of a package of 
     services offered to consumers. It does not, however, mean a 
     telecommunications service. Providers of Internet access 
     often provide their subscribers with the ability to run a 
     variety of applications, including World Wide Web browsers, 
     File Transfer Protocol clients, Usenet newsreaders, 
     electronic mail clients, and Telnet applications. Providers 
     of Internet access may also provide access to proprietary 
     content as well as access to the Internet. American Online, 
     CompuServe, Prodigy, and Microsoft Network are examples of 
     providers of Internet access.
       New Section 151(b) provides a limited exception to the 
     moratorium on taxes on Internet access for eight States that 
     presently tax Internet access--Connecticut, Wisconsin, Iowa, 
     North Dakota, South Dakota, New Mexico, Tennessee, and Ohio. 
     Any one of these States' taxes on Internet access would be 
     ``grandfathered'' if the State enacts a law within one year 
     expressly affirming that the State intends to tax Internet 
     access. The intent of this provision is to ``grandfather'' 
     only those States that have already come to rely on Internet 
     access taxes as an important source of revenue, and that have 
     expressly described in statute that Internet access is 
     subject to taxation. The reason a further legislative act is 
     required in order to quality for the exception is that none 
     of the eight potentially ``grandfathered'' State statutes 
     makes express reference to the Internet. (The Governors of 
     two States that presently tax Internet access--Texas and 
     South Carolina--opted not to have their States' laws included 
     in the ``grandfather'' provision, because they oppose the 
     taxation of Internet access.)
       Because none of the States presently taxing Internet access 
     has a law on the books that expressly authorizes the taxation 
     of Internet access, such taxes are being imposed as the 
     result of decisions made by tax administrators rather than by 
     legislators. For example, a tax administrator may decide that 
     Internet access falls within the definition of existing 
     telecommunications or other taxes, even though the Internet 
     is nowhere referred to or described in the State's law. New 
     Section 151(b)(2), which requires the express codification of 
     such Internet access taxes, is intended to ensure that the 
     significant decision of a State to override national policy 
     against the taxation of Internet access will be made by the 
     State's duly elected representatives. In form, this provision 
     is similar to other instances in which Congress has chosen to 
     make applicability of a Federal law contingent upon the 
     actions of others, including State officials. See Currin v. 
     Wallace, 306 U.S. 1 (1939); North Dakota v. United States, 
     460 U.S. 300 (1983); and Confederated Tribes of Siletz 
     Indians v. United States, 110 F.3d 688 (9th Cir. 1997).
       It is important to note that the ``grandfather'' exception 
     provided in new Section 151(b) only applies to ``taxes on 
     Internet access.'' It does not apply to the other taxes 
     included within the moratorium--bit taxes, multiple taxes, or 
     discriminatory taxes. As a result of this clear language, 
     even if a State tax on Internet access meets the conditions 
     of the exception set forth in Section 151(b), the tax may 
     nevertheless be barred if it is imposed in a manner that 
     would cause it to fall within the definition of a 
     ``multiple'' tax or a `` discriminatory'' tax. Moreover, a 
     tax on Internet access that comes within the ``grandfather'' 
     provision is not thereby rendered valid for all purposes. 
     Coming within the ``grandfather'' means only that the tax is 
     only excepted from the moratorium imposed by this Act, not 
     that is is excepted from any other limitations on a State's 
     ability to tax--such as, for example, limitations imposed by 
     the Constitution.
       New Section 15(c) provides a further exception to the 
     moratorium to ensure that telecommunications carriers will 
     not avoid liability for taxes on telecommunications services 
     as such. This provision requires that, in order to be covered 
     by the moratorium, a telephone company that bundles telephone 
     service along with Internet access must separately state 
     on the customer's bill the portion of the billing that 
     applies to telephone services.
     2. No. bit taxes
       New Section 151(a)(2) prohibits, for a period of 3 years, 
     State and local governments from imposing, assessing, 
     collecting, or attempting to collect so-called ``bit'' taxes. 
     A ``bit'' is an abbreviation for ``binary digit,'' which 
     denotes either a zero or one. The term ``bit tax'' is defined 
     in new Section 155(1) as any tax on electronic commerce 
     expressly imposed on or measured by the volume of digital 
     information transmitted electronically, or the volume of 
     digital information per unit of time transmitted 
     electronically. It does not include taxes imposed on the 
     provision of telecommunications services. Because bit taxes 
     target digital communications, they would be extremely 
     detrimental to the future of the Internet and extremely 
     costly for consumers. It is for these reasons that State and 
     local governments are barred from imposing any such tax.
     3. No multiple taxes on electronic commerce
       New Section 151(a)(3) prohibits, for a period of 3 years, 
     State and local governments from imposing, assessing, 
     collecting, or attempting to collect ``multiple'' taxes on 
     electric commerce. The term ``multiple tax'' is defined in 
     new Section 155(8). In general, this definition covers two 
     distinct ways that taxes may become layered in an unfair 
     manner. The first concerns instances where two or more taxing 
     jurisdictions all tax the same sercice. The second covers 
     instances where one taxing jurisdiction applies a 
     telecommunications tax in a manner that results in the 
     consumer paying the same tax twice: once on the underlying 
     phone service used to connect to the Internet, and again on 
     the Internet service itself.
       New Section 155(8)(A) states that a tax is a ``multiple 
     tax'' if it is imposed by one State or locality on the same 
     or essentially the same electronic commerce that is also 
     taxed by another State or locality. Whether two or more taxes 
     are ``multiple'' is independent of whether they are levied at 
     the same rate, or on the same basis. A credit for taxes paid 
     in other jurisdictions, or some other similar mechanism for 
     avoiding double taxation, will prevent a tax from falling 
     within this definition. This section is intended to 
     strengthen the protections already afforded by the U.S. 
     Supreme Court against multiple jurisdictional taxation. For 
     instance, in Goldberg v. Sweet, 488 U.S. 252 (1989), the 
     Court limited the ability of two States to double-tax the 
     same service by requiring that an interstate telephone call 
     must originate or terminate in the State and must be billed 
     to an in-State address in order for that State to tax the 
     telephone call. In the case of electronic commerce, it is 
     even more important to provide clear protections against 
     multiple taxation. The Internet's decentralized packet-
     switched architecture means that Internet transmissions 
     almost always cross several jurisdictions. Moreover, the 
     variety of technologies employed to deliver Internet services 
     means that each aspect of a transaction could be subjected to 
     separate taxation--for example, transmission of data and also 
     the data itself--on the grounds that these are not ``the 
     same.'' (For this reason, the definition in new Section 
     155(8)(A) expressly adds the alternative ``or essentially 
     the same.'') These factors, combined with the Internet's 
     increasingly portable nature, makes it especially 
     vulnerable to the threat of multiple taxation.
       New Section 155(8)(B) states that if a State or local 
     government classifies Internet access as telecommunications 
     or communications services, then any State or local 
     government tax on the underlying telecommunications services 
     used to provide Internet access will constitute a ``multiple 
     tax.'' The definition provides an exception to this rule if 
     the State or local government allows a credit for other taxes 
     paid, a sale for resale exemption, or similar mechanism for 
     eliminating double taxation of the service and the means for 
     delivering the service.
     4. No discriminatory taxes On electronic commerce
       New Section 151(a)(3) prohibits, for a period of 3 years, 
     State and local governments from imposing, assessing, 
     collecting, or attempting to collect discriminatory taxes on 
     electronic commerce. The term ``discriminatory tax'' is 
     defined in new Section 155(3).
       In the world of multi-state tax law, the term 
     ``discriminatory'' commonly carries distinct meanings. It is 
     most often used to describe taxes that favor local commerce 
     over interstate commerce. For the purposes of this Act and 
     only this Act, however, new Section 155(3) defines the term 
     ``discriminatory'' in a manner that is meant to capture 
     instances where State or local tax policies intentionally or 
     unintentionally place electronic commerce at a disadvantage 
     compared to similar commerce conducted through more 
     traditional means, such as over the telephone or via mail-
     order. Adopting such a definition of ``discriminatory tax'' 
     is not intended to disturb Commerce Clause protections 
     against State or local tax laws that burden interstate 
     commerce. Rather, the Act is meant to complement these 
     existing protections.
       New Section 155(3)(A)(i) defines ``discriminatory tax'' as 
     any tax on electronic commerce that is not generally imposed 
     and legally collectable by a State or local government on 
     transactions involving similar property, goods, services, or 
     information accomplished through other means. For example, if 
     a State requires the seller of books at a retail outlet to 
     collect and remit sales tax, but does not impose the same tax 
     collection and remittance obligations on the seller if the 
     same sale is made over the telephone from a mail-order 
     catalog, then the State would be prohibited from imposing 
     collection and remittance obligations on the seller when the 
     transaction occurs in whole or in part over the Internet. A 
     tax is discriminatory if it is imposed on an Internet 
     transaction but not imposed on any other similar transaction 
     off the Internet, or if it is imposed only in some but not 
     all other cases. The property, goods, services, or 
     information need not be identical, but only ``similar.'' This 
     is intended to cover the common phenomenon of ``interactive'' 
     Internet versions of non-interactive products sold off the 
     Internet. Likewise, any taxation of property, goods, 
     services, or information that is inherently unique to the 
     Internet would be discriminatory, because there is no non-
     Internet property, goods, services, or information that is 
     similar and that the State generally taxes.

[[Page E1290]]

       New Section 155(3)(A)(ii) extends the definition of 
     ``discriminatory tax'' to include any levy by a State or 
     local government that taxes electronic commerce in a manner 
     that results in a different tax rate being imposed on 
     electronic commerce when compared to a transaction that 
     occurred through another means.
       (a) No taxes on Internet-unique property, goods, services, 
           or information
       Taken together, new Section 155(3)(A)(i) and (ii) mean that 
     property, goods, services, or information that is exchanged 
     or used exclusively over the Internet--with no comparable 
     off-line equivalent--will always be protected from taxation 
     for the duration of the moratorium. Examples of Internet-
     unique property, goods, services, or information include, but 
     are not limited to, electronic mail over the Internet, 
     Internet site selections, Internet bulletin boards, and 
     Internet search services.
       (b) No new collection obligations
       New Section 155(3)(A)(iii) states that a tax on electronic 
     commerce is discriminatory if it imposes an obligation to 
     collect or pay a tax on a different person or entity that 
     would be the case if the transaction were accomplished 
     without using the Internet, such as over the telephone or via 
     mail-order. For instance, a tax is not discriminatory if the 
     obligation to collect and remit it falls on the vendor 
     whether the sale is made off-line or online.
       This definition also includes taxes that impose tax 
     collection obligations on persons other than the buyer or 
     seller in an Internet transaction. For example, a tax is 
     discriminatory if it imposes tax collection or tax reporting 
     duties on Internet access providers, telephone companies, 
     banks, credit card companies, financial intermediaries, or 
     other entities that might have access to a customer's billing 
     address, since these collection and reporting obligations are 
     not imposed in the case of telephone, mail-order, or retail 
     outlet sales.
       (c) No classification of an ISP as a phone company
       New Section 155(3)(A)(iv) states that a tax on electronic 
     commerce is discriminatory if it establishes a classification 
     of Internet access provider, and imposes a higher tax rate on 
     this classification than on similar information services 
     delivered through means other than the Internet. The term 
     ``information services'' is expressly defined in new Section 
     155(5) and in Section 3(2) of the Communications Act of 1934 
     to exclude ``telecommunications service.'' As a result, 
     neither telephone companies nor similar public utilities, as 
     such, may be ``providers of information services delivered 
     through other means'' within the meaning of new Section 
     155(3)(A)(iv). For this reason, the fact that a telephone 
     company or similar public utility service pays tax at the 
     same or a higher tax rate than an Internet access provider 
     will not prevent the tax on the Internet access provider 
     from being discriminatory. In this way, new Section 
     155(3)(A)(iv) effectively serves to prohibit States and 
     localities from classifying a provider of Internet access 
     as a telephone company or similar public utility service--
     for example, for the purpose of applying a business 
     license tax--if such classifications are subject to higher 
     tax rates than other non-Internet information services.
       (d) No New ``Nexus''
       The definition of ``Discriminatory tax'' in new Section 
     155(3)(B) is intended to prohibit States and localities from 
     using Internet-based contacts as factor in determining 
     whether an out-of-State business has ``substantial nexus'' 
     with a taxing jurisdiction.
       This is intended to is provide added assurance and 
     certainty that the protections of Quill v. North Dakota, 504 
     U.S. 298 (1992)--including its requirement that substantial 
     nexus be determined through a ``bright-line'' physical-
     presence test--will continue to apply to electronic commerce 
     just as they apply to mail-order commerce, unless and until a 
     future Congress decides to alter the current nexus 
     requirements.
       In this way, the Act intends to encourage the continued 
     commercial and non-commercial development of the Internet. 
     New Section 155(3)(B) is a direct response to testimony from 
     a State tax administrator, who offered his view to Congress 
     at a July 1997 hearing that the Quill protections provided to 
     remote sellers without a substantial in-State physical 
     presence should not apply to businesses engaged in electronic 
     commerce. During the hearing, the tax administrator 
     acknowledged that if a resident of his State were to use the 
     telephone to purchase a good from an out-of-State vendor, his 
     State would not be permitted to impose its tax collection 
     obligations on that vendor unless the vendor otherwise had a 
     substantial in-State physical presence. The tax administrator 
     further testified, however, that if instead the Internet were 
     used to place the order, his State would attempt to require 
     the out-of-State vendor to collect taxes. His rationale was 
     that the flow of data over the Internet into his State, the 
     ``presence'' of a web page on a computer server located in-
     State, of the supposed ``agency'' relationship between the 
     remote seller and an in-State Internet access provider should 
     be enough to give the remote seller a substantial physical 
     presence in his State.
       The Act rejects this approach. The promotion of electronic 
     commerce requires faithful adherence to the U.S. Supreme 
     Court's clear statement in Quill that a ``bright-line'' 
     physical presence--not some malleable theory of electronic or 
     economic presence--is required for a State to claim 
     substantial nexus. Even without the Act, the courts, in light 
     of Quill, are likely to view such arguments by State tax 
     administrators with great skepticism. But the Act provides 
     clarity and far greater certainty by specifically outlawing 
     State or local efforts to pursue aggressive theories of 
     nexus. This should result in decreased litigation which will 
     benefit States, localities, taxpayers, and an often 
     overworked court system.
       New Section 155(3)(B)(i) defines ``Discriminatory tax'' so 
     as to make it clear that Congress considers the creation or 
     maintaining of a site on the Internet to be so insignificant 
     a physical presence that the use of an in-State computer 
     server in this way by a remote seller shall never be 
     considered in determining nexus.
       New Section 155(3)(B)(ii) defines ``discriminatory tax'' so 
     as to prohibit a State or political subdivision from deeming 
     a provider of Internet access to be an ``agent'' of a remote 
     seller. Internet access providers commonly display 
     information on the Internet for remote sellers, and often 
     maintain or update the remote seller's web page. Even if the 
     Internet access provider provides these and other ancillary 
     services (such as web page design or account processing) on 
     an in-State computer server, the provider should not be 
     considered an agent for purposes of taxation.
     B. No expansion of tax authority
       The Act is meant to prevent Internet taxes, not 
     proliferate, encourage, or authorize them. Section 7 of H.R. 
     4105 expressly states, therefore, that nothing in the Act 
     shall be construed to expand the duty of any person to 
     collect or pay taxes beyond that which existed on the date of 
     enactment of the Act.
       Section 7 is specifically intended to make it clear that 
     the Act does not, directly or indirectly, expand the 
     definition of ``substantial nexus'' beyond existing judicial 
     precedent and interpretations of the Commerce Clause of the 
     Untied States Constitution. It is intended to negate any 
     possible inference that the Act might subvert existing 
     requirements that interstate activity have a ``substantial 
     nexus'' (determined through a ``bright-line'' physical-
     presence test) with the taxing jurisdiction, and that taxes 
     on such activities be fairly apportioned, be fairly related 
     to the services provided by the jurisdiction, and not 
     discriminate against interstate commerce.
       It is fully intended that a State or local tax not barred 
     by the provisions of this Act shall not be valid if such tax 
     would otherwise constitute an undue burden on interstate or 
     foreign commerce.

     

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