[Congressional Record Volume 146, Number 32 (Tuesday, March 21, 2000)]
[Senate]
[Pages S1516-S1517]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. McCAIN:
  S. 2255. A bill to amend the Internet Tax Freedom Act to extend the 
moratorium through calendar year 2006; to the Committee on Commerce, 
Science, and Transportation.


                  the internet tax freedom act of 2000

  Mr. McCAIN. Mr. President, I am pleased to introduce legislation 
today to extend the moratorium on Internet taxes through 2006. This 
will ensure that Internet commerce remains free from burdensome, 
anticonsumer taxation while we discuss a fair and equitable tax 
structure for our new economy. This bill simply extends the law passed 
by Congress and signed by the President in October 1998.
  The 1998 legislation imposed a moratorium and provided for a 
commission to report to Congress. While the Commission has not yet 
reported its recommendations, it is clear from published reports of 
their deliberations and from interviews with their members that a clear 
consensus is not imminent. More discussions and more time is necessary 
to arrive at a fair conclusion. Although I feel strongly that in the 
end a permanent moratorium is the best policy, which is why I 
introduced legislation to impose a permanent ban on Internet taxes, I 
also have become convinced that we need more time to determine how 
state and local governments will be affected. We need to consider 
whether the macroeconomic benefits of the new economy will outweigh the 
potential losses in direct revenues, how to ensure a level playing 
field for all venues of commerce, and how to simplify the overwhelming 
morass of tax rules, regulations and paperwork so that opportunities 
for new or small businesses are not lost in complex and archaic 
bureaucracy.
  The compromises being discussed by the Commission are a good start to 
the debate, but more time is necessary to pursue these and other 
possible options. It is becoming increasingly clear that the answer to 
taxation of the internet must affect taxation of other commerce media, 
such as catalog sales, as well. We need to reexamine the level of 
services which the public wants to be provided by government and 
determine how to provide necessary revenue to accomplish the people's 
will. We need to ensure that taxation is not simply imposed to increase 
government bureaucracy.
  Recent studies indicate that state and local governments will not 
suffer during this interim period. A June 1999 report by the well-known 
and respected auditing and business consulting firm or Ernst & Young 
concludes that total sales and use taxes not collected by state and 
local governments from Internet e-commerce transactions in 1998 
amounted to only ``one-tenth of one percent of total state and local 
sales and use tax collections.'' Another May 1999 analysis of Internet 
commerce transactions through 2003 by Austan Goolsvee and Jonathan 
Zittrain, published in the National Tax Journal, predicts ``even with a 
70 percent rate of growth in retail e-commerce transactions, a revenue 
loss of less than 2 percent of sales tax revenue.''
  There are multiple reasons for this very marginal impact on state and 
local revenues. First, most of the e-commerce transactions are wither 
business-to-business transactions, or for services, such as financial 
services and travel, which are exempt from sales and use taxes in most 
states. Ernst & Young estimated only 13 percent of the total e-commerce 
sales transactions were of a type which would be subject to sales and 
use taxes if conducted in person.
  Second, as pointed out by Austan Goolsbee and Jonathan Zittrain, the 
Internet is a ``trade creator''--that is, many transactions which occur 
through e-commerce would not take place at all without the internet.
  Third, the Internet does not divert sales only from brick and mortar 
retailers, but also from mail order catalogs. Those sales are also 
subject to sales and use tax only where a nexus, a physical presence, 
in the taxing state.
  We are currently seeing a continued rise in state and local revenues. 
Many states are currently debating how to refund money to their 
citizens, whether to cut sales taxes or income taxes. Thus, this 
moratorium should not negatively impact their ability to provide 
services during the interim.
  It is important to look at the full picture here. The Internet is 
filled with web sites of small businesses which are expanding in ways 
which would never have before been economically feasible. For example, 
a small store in a small town which has historically had a limited 
market for its good now has a website that allows it to market and sell 
to people all over the country--all over the world. It increases its 
business and needs to hire more employees, and pays taxes on its 
increased revenues. The states and local governments benefits, not only 
from the additional taxes paid on the revenues, but in the economic 
benefits of additional jobs.
  The potential burden of complying with tax regulations and the 
paperwork involved under current law for as many as 7,500 estimated 
taxing units in this country would ovrwhelm many businesses, especially 
small businesses. An example in the March 13, 2000 edition of 
Interactive Week is instructive. ``If you're a raw peanut, five states 
would require that sales taxes are paid

[[Page S1517]]

on your purchase. If you're roasted, 11 states charge a sales tax. Add 
some honey to that roasting, and now 21 states say you're taxable. Get 
drenched in caramel and mixed with caramel-coated popcorn and suddenly 
you're a snack, and 31 states will call the tax man.''
  While I hope that the debate will conclude with a decision to leave 
the Internet as a ``tax-free-zone,'' I believe that it is important to 
continue the discussion and to move all stakeholders toward a 
consensus. This temporary extension of the moratorium already approved 
by Congress and the President will allow us to do that. This is a good 
compromise which will serve as a catalyst for consideration of the 
broader tax policy issues which need to enter into this discussion to 
ensure a fair and equitable tax system in this country.
  I intend to move this bill through committee expeditiously and look 
forward to debating it on the Senate floor.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2255

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

     SECTION 1. INTERNET TAX MORATORIUM EXTENDED THROUGH 2006.

       Section 1101(a) of the Internet Tax Freedom Act (47 U.S.C. 
     151 nt) is amended by striking ``3 years after the date of 
     the enactment of this Act--'' and inserting ``on December 31, 
     2006:'',
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