[House Report 105-570]
[From the U.S. Government Publishing Office]



105th Congress                                            Rept. 105-570
                        HOUSE OF REPRESENTATIVES

 2d Session                                                      Part 1
_______________________________________________________________________


 
                        INTERNET TAX FREEDOM ACT

                                _______
                                

                  June 5, 1998.--Ordered to be printed

_______________________________________________________________________


  Mr. Bliley, from the Committee on Commerce, submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 3849]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Commerce, to whom was referred the bill 
(H.R. 3849) to amend the Communications Act of 1934 to 
establish a national policy against Federal and State 
regulation of Internet access and online services, and to 
exercise congressional jurisdiction over interstate and foreign 
commerce by establishing a moratorium on the imposition of 
exactions that would interfere with the free flow of commerce 
conducted over the Internet, and for other purposes, having 
considered the same, report favorably thereon with an amendment 
and recommend that the bill as amended do pass.

                                CONTENTS

                                                                   Page
Amendment........................................................     2
Purpose and Summary..............................................     7
Background and Need for Legislation..............................     8
Hearings.........................................................    12
Committee Consideration..........................................    13
Rollcall Votes...................................................    13
Committee Oversight Findings.....................................    15
Committee on Government Reform and Oversight.....................    15
New Budget Authority, Entitlement Authority, and Tax Expenditures    15
Committee Cost Estimate..........................................    15
Congressional Budget Office Estimate.............................    15
Federal Mandates Statement.......................................    19
Advisory Committee Statement.....................................    20
Constitutional Authority Statement...............................    20
Applicability to Legislative Branch..............................    20
Section-by-Section Analysis of the Legislation...................    20
Changes in Existing Law Made by the Bill, as Reported............    27
Additional Views.................................................    29

                               Amendment

  The amendment is as follows:
  Strike out all after the enacting clause and insert in lieu 
thereof the following:

SECTION 1. SHORT TITLE.

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

SEC. 2. PROVISION OF INTERNET ACCESS AND ONLINE SERVICES.

  Title II of the Communications Act of 1934 is amended by inserting 
after section 230 (47 U.S.C. 230) the following new section:

``SEC. 231. PROHIBITION ON REGULATION OF INTERNET ACCESS AND ONLINE 
                    SERVICES.

  ``(a) Prohibition.--The Commission shall have no authority or 
jurisdiction under this title or section 4(i), nor shall any State 
commission have any authority or jurisdiction, to regulate the prices 
or charges paid by subscribers for Internet access or online services.
  ``(b) Preservation of Authority.--Nothing in this subsection shall 
limit or otherwise affect--
          ``(1) the Commission's or State commissions' implementation 
        of the Telecommunications Act of 1996 (Public Law 104-104) or 
        the amendments made by such Act; and
          ``(2) the Commission's or State commissions' authority to 
        regulate telecommunications carriers that offer Internet access 
        or online services in conjunction with the provision of any 
        telephone toll, telephone exchange, or exchange access services 
        as such terms are defined in title I.
  ``(c) Definitions.--As used in this section:
          ``(1) Internet.--The term `Internet' means the combination of 
        computer facilities and electromagnetic transmission media, and 
        related equipment and software, comprising the interconnected 
        world-wide network of computer networks that employ the 
        Transmission Control Protocol/Internet Protocol, or any 
        predecessor or successor protocol, to transmit information.
          ``(2) Internet access.--The term `Internet access' means a 
        service that enables users to access content, information, and 
        other services offered over the Internet, but does not mean a 
        telecommunications service.
          ``(3) Online service.--The term `online service' means the 
        offering or provision of information services combined with 
        Internet access to a user.''.

SEC. 3. FEDERAL REGULATORY FEES.

  (a) No Regulatory Fees.--Section 9(h) of the Communications Act of 
1934 (47 U.S.C. 159(h)) is amended by inserting ``; or (3) providers of 
Internet access or online service'' after ``(47 C.F.R. Part 97)'' .
  (b) Conforming Amendment.--Section 9(h) of the Communications Act of 
1934 (47 U.S.C. 159(h)) is amended by striking ``or'' that appears 
before ``(2)''.
  (c) Determination.--Not later than 1 year after the date of the 
enactment of this Act, the National Telecommunications and Information 
Administration shall determine whether any direct or indirect Federal 
regulatory fees, other than the fees identified in subsection (a), are 
imposed on providers of Internet access or online services, and if so, 
make recommendations to the Congress regarding whether such fees should 
be modified or eliminated.

SEC. 4. REPORT ON FOREIGN COMMERCE.

  (a) Contents of Report.--In order to promote electronic commerce, the 
Secretary of Commerce, in consultation with appropriate committees of 
the Congress, shall undertake an examination of--
          (1) barriers imposed in foreign markets on United States 
        providers of property, goods, services, or information engaged 
        in electronic commerce and on United States providers of 
        telecommunications services;
          (2) how the imposition of such barriers will affect United 
        States consumers, the competitiveness of United States citizens 
        providing property, goods, service, or information in foreign 
        markets, and the growth and maturing of the Internet; and
          (3) what measures the Government should pursue to foster, 
        promote, and develop electronic commerce in the United States 
        and in foreign markets.
  (b) Public Comment.--For purposes of this section, the Secretary of 
Commerce shall give all interested persons an opportunity to comment on 
the matters identified in subsection (a) through written or oral 
presentations of data, views, or arguments.
  (c) Transmittal to the President.--Not later than 18 months after the 
date of the enactment of this Act, the Secretary of Commerce shall 
transmit to the President a report containing the results of the 
examination undertaken in accordance with subsection (a).
  (d) Recommendations of the President.--Not later than 2 years and 45 
days after the date of the enactment of this Act, the President shall 
review the report described in subsection (c) and submit to the 
appropriate committees of Congress such policy recommendations as the 
President deems necessary or expedient.

SEC. 5. MORATORIUM ON CERTAIN TAXES.

  (a) Moratorium.--For a period of 3 years following the date of the 
enactment of this Act, neither any State, nor any political subdivision 
thereof, shall impose, assess, collect, or attempt to collect--
          (1) taxes on Internet access or online services;
          (2) bit taxes; or
          (3) multiple or discriminatory taxes on electronic commerce.
  (b) Exception to Moratorium.--
          (1) In general.--The moratorium in subsection (a)(1) shall 
        not apply to taxes on Internet access or online services 
        generally imposed and actually enforced under State law before 
        March 1, 1998.
          (2) Enforceability.--Paragraph (1) shall be enforceable only 
        if a State enacts a law to expressly impose such tax within one 
        year from the date of enactment. Failure of a State to act does 
        not affect liabilities for taxes accrued and enforced prior to 
        March 1, 1998, nor does it affect ongoing litigation relating 
        to any assessments.
  (c) Application of Moratorium.--Subsection (a) shall not apply with 
respect to the provision of Internet access or online services that are 
offered for sale as part of a package of services that includes 
services other than Internet access or online services, unless the 
service provider separately states that portion of the billing that 
applies to such services on the user's bill.

SEC. 6. ADVISORY COMMISSION ON ELECTRONIC COMMERCE.

  (a) Establishment of Commission.--There is established a temporary 
commission to be known as the Advisory Commission on Electronic 
Commerce (in this Act referred to as the ``Commission''). The 
Commission shall--
          (1) be composed of 29 members, which includes 2 chairpersons 
        selected in accordance with subsection (b); and
          (2) conduct its business in accordance with the provisions of 
        this Act.
  (b) Membership.--
          (1) In general.--The Commissioners shall serve for the life 
        of the Commission. The membership of the Commission shall be as 
        follows:
                  (A) Two representatives from the Federal Government 
                comprised of the Secretary of Commerce and the 
                Secretary of the Treasury, or their respective 
                representatives.
                  (B) Fourteen representatives from State, local, and 
                county governments comprised of 2 representatives each 
                from the National Governors' Association, the National 
                Conference of State Legislatures, the Council of State 
                Governments, the National Association of Counties, the 
                National League of Cities, and the United States 
                Conferences of Mayors; and 1 representative each from 
                the International City/County Managers Association and 
                the American Legislative Exchange Council.
                  (C) Thirteen representatives of taxpayers and 
                business, of which 3 shall be appointed by the 
                President and 2 each shall be appointed by the Senate 
                majority leader, the Senate minority leader, the 
                Speaker of the House, the House majority leader, and 
                the house minority leader.
          (2) Chairperson.--The Commission shall have 2 chairpersons to 
        serve as co-chairpersons. One of the Chairpersons shall be a 
        representative selected by the National Governors' Association 
        from 1 of the groups identified in subsection (b)(1)(B). The 
        other Chairperson shall be a representative selected jointly by 
        the Speaker of the House of Representatives and the majority 
        leader of the Senate from 1 of the groups identified in 
        subsection (b)(1)(C).
          (3) Appointments.--Appointments to the Commission shall be 
        made not later than 45 days after the date of enactment of this 
        Act. The Chairpersons shall be appointed not later than 60 days 
        after the date of the enactment of this Act.
  (c) Acceptance of Gifts and Grants.--The Commission may accept, use, 
and dispose of gifts or grants of services or property, both real and 
personal, for purposes of aiding or facilitating the work of the 
Commission. Gifts or grants not used at the expiration of the 
Commission shall be returned to the donor or grantor.
  (d) Other Resources.--The Commission shall have reasonable access to 
materials, resources, data, and other information from the Department 
of Commerce and the Department of the Treasury. The Commission shall 
also have reasonable access to use the facilities of the Department of 
the Commerce and Department of the Treasury for purposes of conducting 
meetings.
  (e) Sunset.--The existence of the Commission shall terminate--
          (1) when the last of the committees of jurisdiction referred 
        to in section 8 concludes consideration of the legislation 
        proposed under section 7; or
          (2) 3 years after the date of the enactment of this Act;
whichever occurs first.
  (f) Rules of the Commission.--
          (1) Fifteen members of the Commission shall constitute a 
        quorum for conducting the business of the Commission.
          (2) Any meetings held by the Commission shall be duly noticed 
        at least 14 days in advance and shall be open to the public.
          (3) The Commission may adopt other rules as needed.
  (g) Duties of the Commission.--The Commission, in consultation with 
the National Tax Association Communications and Electronic Commerce Tax 
Project, and other interested parties, shall--
          (1) identify the taxes, fees, and charges imposed on 
        electronic commerce within the United States that could impede 
        the development of such commerce;
          (2) propose a uniform system of definitions of electronic 
        commerce that may be subject to sales and use tax within each 
        State;
          (3) propose a simplified system for sales and use tax for 
        electronic commerce that would provide for a single statewide 
        sales or use tax rate (which rate may be zero), and would 
        establish a method of distributing to political subdivisions 
        within each State their proportionate share of such taxes;
          (4) examine ways to simplify the interstate administration of 
        sales and use tax on electronic commerce, including a review of 
        the need for a single or uniform tax registration, single or 
        uniform tax returns, simplified remittance requirements, and 
        simplified administrative procedures;
          (5) examine the need for an independent third party 
        collection system that would utilize the Internet to further 
        simplify sales and use tax administration and collection;
          (6) examine the level of contacts sufficient to permit a 
        State to impose a sales or use tax on electronic commerce that 
        would subject a remote seller to collection obligations imposed 
        by the State, including the definition of a level of contacts 
        below which a State may not impose collection obligations on a 
        remote seller;
          (7) examine the level of contacts sufficient to permit a 
        State to impose sales or use tax on transactions not involving 
        electronic commerce, and whether collection obligations imposed 
        by a State are applied in a nondiscriminatory manner with 
        respect to electronic commerce and such transactions;
          (8) examine ways to simplify State and local taxes imposed on 
        the provision of telecommunications services; and
          (9) examine other issues that the Commission determines to be 
        relevant.
  (h) Federal Advisory Committee Act.--The Federal Advisory Committee 
Act (5 U.S.C. App.) shall not apply with respect to the Commission.

SEC. 7. LEGISLATIVE RECOMMENDATIONS.

  (a) Transmission of Proposed Legislation.--Not later than 2 years 
after the date of the enactment of this Act, the Commission described 
in section 6 shall transmit to the President and the Congress proposed 
legislation reflecting any findings concerning the matters described in 
such section.
  (b) Contents of Proposed Legislation.--The proposed legislation 
submitted under subsection (a) by the Commission shall have been agreed 
to by at least 18 members of the Commission and shall--
          (1) define with particularity the level of contacts between a 
        State and remote seller that the Commission considers should be 
        sufficient to permit a State to impose collection obligations 
        on the remote seller;
          (2) provide that if, and only if, a State has adopted a 
        single sales and use tax rate for electronic commerce, and 
        adopted simplified procedures for the administration of its 
        sales and use taxes, including uniform registration, tax 
        returns, remittance requirements, and filing procedures, then 
        such State should be authorized to impose on remote sellers a 
        duty to collect sales or use tax on electronic commerce;
          (3) provide that, effective upon the expiration of a 4-year 
        period beginning on the date of the enactment of such 
        legislation, a State that does not have in effect a single 
        sales and use tax rate and simplified administrative procedures 
        shall be deemed to have in effect a sales and use tax rate on 
        electronic commerce equal to zero, until such time as such 
        State does adopt a single sales and use tax rate and simplified 
        administrative procedures;
          (4) include uniform definitions of categories of property, 
        goods, services, or information subject to, or exempt from, 
        sales and use taxes;
          (5) make permanent the temporary moratorium described in 
        section 5 with respect to Internet access and online services, 
        as well as such other taxes (including those described in 
        section 5) that the Commission deems appropriate;
          (6) provide a mechanism for the resolution of disputes 
        between States regarding matters involving multiple taxation; 
        and
          (7) include other provisions that the Commission deems 
        necessary.
  (c) Recommendations of the President.--Not later than 45 days after 
the receipt of the Commission's legislative proposals, the President 
shall review such proposals and submit to the appropriate committees of 
the Congress such policy recommendations as the President deems 
necessary or expedient.

SEC. 8. EXPEDITED CONSIDERATION OF LEGISLATIVE RECOMMENDATIONS.

  (a) Not later than 90 legislative days after the transmission to the 
Congress of the proposed legislation described in section 7, such 
legislation shall be considered by the respective committees of 
jurisdiction within the House of Representatives and the Senate, and, 
if reported, shall be referred to the proper calendar on the floor of 
each House for final action.
  (b) For purposes of this section, the 90-day period shall be computed 
by excluding--
          (1) the days on which either House is not in session because 
        of an adjournment of more than 3 days to a day certain or an 
        adjournment of the Congress sine die; and
          (2) any Saturday and Sunday, not excluded under paragraph 
        (1), when either House is not in session.

SEC. 9. DECLARATION THAT THE INTERNET SHOULD 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 to remove barriers to global 
electronic commerce, through the World Trade Organization, the 
Organization for Economic Cooperation and Development, the 
International Telecommunications Union, the Asia Pacific Economic 
Cooperation Council, the Free Trade Area of the Americas, and other 
appropriate international fora. Such agreements should require, inter 
alia, that the provision of Internet access or online services be free 
from undue and discriminatory regulation by foreign governments and 
that electronic commercial transactions between United States and 
foreign providers of property, goods, services, and information be free 
from undue and discriminatory regulation, international tariffs, and 
discriminatory taxation.

SEC. 10. DEFINITIONS.

  For the purposes of this Act:
          (1) Bit tax.--The term ``bit tax'' means 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, but does not include taxes imposed on the 
        provision of telecommunications services.
          (2) Computer server.--The term ``computer server'' means a 
        computer that functions as a centralized provider of 
        information and services to multiple recipients.
          (3) Discriminatory tax.--The term ``discriminatory tax'' 
        means--
                  (A) any tax imposed by a State or political 
                subdivision thereof on electronic commerce that--
                          (i) is not generally imposed and legally 
                        collectible by such State or such political 
                        subdivision on transactions involving similar 
                        property, goods, services, or information 
                        accomplished through other means;
                          (ii) is not generally imposed and legally 
                        collectible at the same rate by such State or 
                        such political subdivision on transactions 
                        involving similar property, goods, services, or 
                        information accomplished through other means;
                          (iii) imposes an obligation to collect or pay 
                        the tax on a different person or entity than in 
                        the case of transactions involving similar 
                        property, goods, services, or information 
                        accomplished through other means; or
                          (iv) establishes a classification of Internet 
                        access provider or online service provider for 
                        purposes of establishing a higher tax rate to 
                        be imposed on such providers than the tax rate 
                        generally applied to providers of similar 
                        information services delivered through other 
                        means; or
                  (B) any tax imposed by a State or political 
                subdivision thereof, if--
                          (i) the use of a computer server by a remote 
                        seller to create or maintain a site on the 
                        Internet is considered a factor in determining 
                        a remote seller's tax collection obligation; or
                          (ii) a provider of Internet access or online 
                        services is deemed to be the agent of a remote 
                        seller for determining tax collection 
                        obligations as a result of--
                                  (I) the provider displaying a remote 
                                seller's information or content on such 
                                provider's computer server; or
                                  (II) the provider maintaining or 
                                taking orders through such provider's 
                                computer server.
          (4) Electronic commerce.--The term ``electronic commerce'' 
        means any transaction conducted over the Internet or an online 
        service, comprising the sale, lease, license, offer, or 
        delivery of property, goods, services, or information, whether 
        or not for consideration, and includes the provision of 
        Internet access and online services.
          (5) Information services.--The term ``information services'' 
        has the meaning given such term in section 3(20) of the 
        Communications Act of 1934 (47 U.S.C. 3(20)).
          (6) Internet.--The term ``Internet'' means the combination of 
        computer facilities and electromagnetic transmission media, and 
        related equipment and software, comprising the interconnected 
        worldwide network of computer networks that employ the 
        Transmission Control Protocol/Internet Protocol, or any 
        predecessor or successor protocol, to transmit information.
          (7) Internet access.--The term ``Internet access'' means a 
        service that enable users to access content, information, and 
        other services offered over the Internet, but does not mean a 
        telecommunications service.
          (8) Multiple tax.--The term ``multiple tax'' means--
                  (A) any tax that is imposed by one State or political 
                subdivision thereof on the same or essentially the same 
                electronic commerce that is also taxed by any other 
                State or political subdivision thereof (or the same 
                State, except in the case of sales taxes) whether or 
                not at the same rate or on the same basis without an 
                offsetting credit for taxes paid in other jurisdictions 
                or other similar mechanisms for avoiding double 
                taxation of the same transaction; or
                  (B) any tax on Internet access or online services if 
                the State or political subdivision thereof classifies 
                such services as telecommunications or communications 
                services under State law and such State or political 
                subdivision thereof has already imposed a tax on the 
                underlying telecommunications services that are used to 
                provide such services without allowing a credit for 
                other taxes paid, a sale for resale exemption, or other 
                mechanism for eliminating duplicate taxation.
          (9) Online service.--The term ``online service'' means the 
        offering or provision of information services combined with 
        Internet access to a user.
          (10) Remote seller.--The term ``remote seller'' means a 
        person who sells, leases, licenses, offers, or delivers 
        property, goods, services, or information from one State to a 
        purchaser in another State using the Internet.
          (11) State.--The term ``State'' means any of the several 
        States, the District of Columbia, or any territory or 
        possession of the United States.
          (12) Tax.--The term ``tax'' means--
                  (A) any levy, fee, or charge imposed under 
                governmental authority by any governmental entity; or
                  (B) the imposition of or obligation to collect and to 
                remit to a governmental entity any such levy, fee, or 
                charge imposed by a governmental entity.
        Such term does not include any franchise fees or similar fees 
        imposed by a State or local franchising authority, pursuant to 
        section 622 or 653 of the Communications Act of 1934 (47 U.S.C. 
        542, 573).
          (13) Telecommunications services.--The term 
        ``telecommunications services'' has the meaning given such term 
        in section 3(46) of the Communications Act of 1934 (47 U.S.C. 
        3(46)).

SEC. 11. NO EXPANSION OF TAX AUTHORITY.

  Nothing in this Act shall be construed to expand the power of any 
State or political subdivision thereof to collect taxes on Internet 
access, online services, bits, or electronic commerce beyond the power 
that existed on March 1, 1998.

SEC. 12. PRESERVATION OF AUTHORITY.

  Nothing in this Act shall limit or otherwise affect the 
implementation of the Telecommunications Act of 1996 (Public Law 104-
104) or the amendments made by such Act.

                          Purpose and Summary

    For over two hundred years, the Congress of the United 
States has sought to protect and facilitate the development of 
interstate and foreign commerce. From regulating matters 
regarding ports of entry into the United States (18th century) 
to the creation of a national railroad system (19th century) to 
establishing communications policy (20th century), Congress' 
duty remains constant: to uphold the responsibilities delegated 
to the Congress by the people with respect to the regulation of 
commerce among the several States. As we approach the next 
millennium, electronic commerce is the newest form of 
interstate and foreign commerce and it is essential that the 
Congress not only adopts measures to enhance its development, 
but eliminates efforts that will impede its growth.
    Electronic commerce can be conducted over various 
electromagnetic transmission media. It is the growth and 
development of the Internet, however, that has led to the 
dramatic explosion in electronic transactions. The Internet 
allows for the dissemination of ideas and information 
instantaneously throughout the world by removing paper, 
printing, and postage as major obstacles for companies to 
compete in a global market. With entry costs minimal, new 
companies are created daily. Costs also are decreasing for 
existing companies as they explore ways to sell their products 
over the Internet. Consequently, we have seen incredible growth 
in the number of Internet access providers providing the link 
between consumers and businesses in cyberspace. We have also 
seen incredible growth and increase in the number of online 
service providers as they compete to provide content and data 
services to consumers. Unnecessary regulation of these 
competitive services can only hamper the development of the 
Internet.
    In addition to unnecessary regulation, the growth of the 
Internet, and thus the growth of electronic commerce, should 
not be hampered by State and local taxation. At least twelve 
States have taken measures to tax Internet-related activities 
and they do so in an inconsistent and potentially burdensome 
manner. For example, some States tax Internet access as 
``computer and data processing services.'' Other States tax 
Internet access as either a ``telecommunications service'' or 
``information service.'' These classification difficulties are 
only part of the problem. Given the way data is transmitted 
over the Internet, some States have challenged fundamental 
constitutional doctrines in order to assert substantial nexus 
over out-of-State vendors. As a result of the actions of these 
States, many business executives argue that ambiguity 
surrounding the taxation of Internet-related activities is the 
single most significant impediment to the development of 
electronic commerce in the United States.
    H.R. 3849 was introduced for a number of reasons: (1) to 
ensure that the Internet service providers and online service 
providers are free from Federal and State regulation regarding 
the prices they charge to consumers; (2) to bar special 
Internet taxes, and multiple and discriminatory taxes on 
electronic commerce; and (3) to commission a study on State and 
local taxation of the Internet and to ensure that any taxation 
of the Internet or electronic commerce does not burden 
interstate or foreign commerce. These policies are inextricably 
linked to the success and development of electronic commerce.

                  Background and Need for Legislation

    The power of Congress to regulate interstate and foreign 
commerce stems from the Commerce Clause of the United States 
Constitution and any Federal laws made pursuant to this 
authority shall be the supreme law of the land. The Supreme 
Court has routinely upheld Congressional action to regulate 
interstate commerce even if such action preempts State laws and 
regulations. Over 100 years ago, the Supreme Court described 
the powers granted to Congress under the Commerce Clause and 
how such power has evolved as interstate commerce has changed 
over the centuries. In holding that an 1866 Federal statute 
aiding in construction and operation of telegraph lines 
preempted State law, the Court stated:

          The powers thus granted [by the Commerce Clause] * * 
        * keep pace with the progress of the country, and adapt 
        themselves to the new developments of time and 
        circumstances. They extend from the horse with its 
        rider to the stage-coach, from the sailing-vessel to 
        the steamboat, from the coach and the steamboat to the 
        railroad, and from the railroad to the telegraph, as 
        these new agencies are successively brought into use to 
        meet the demands of increasing population and wealth * 
        * *. As they were intrusted to the general government 
        for the good of the nation, it is not only the right, 
        but the duty, of Congress to see to it that intercourse 
        among the States and transmission of intelligence are 
        not obstructed or unnecessarily encumbered by State 
        legislation. (Pensacola Tel. Co. v. Western Union Tel. 
        Co., 96 U.S. 1, 9 (1878)).

    As we approach the next millennium, Congress must stand 
ready to ``keep pace with the progress of the country, and 
adapt [itself] to the new developments of time and 
circumstances.'' Pensacola Tel. Co., 96 U.S. at 9. One such 
development is the explosive growth of electronic commerce. In 
general, electronic commerce is the term used to describe the 
buying, selling, or transfer of goods and services over 
electromagnetic transmission media. The media could include 
wireline and wireless networks, both of which have been 
previously held to be interstate in nature. While the term 
``electronic commerce'' is relatively new, many industries have 
been conducting electronic commerce in some manner for years. 
Bank-wire transactions, the use of automatic-teller machines, 
credit card verifications, and the purchase of goods or 
services over the telephone all constitute electronic commerce.
    Although the Internet is currently thought of as the medium 
of choice for electronic commerce, a large amount of electronic 
commerce is conducted over other networks including, for 
example, the public switched telephone network and private 
computer networks (often referred to as intranets or 
extranets). It is the growth and use of the Internet, however, 
that has led to the dramatic expansion of electronic commerce.
    The Internet was largely the domain of academic researchers 
from its creation in the late 1960s until the start of the 
1990s. In 1991, the National Science Foundation lifted its 
restriction on commercial activity on the Internet. Also in 
1991, the World Wide Web was created. In 1993, the first 
commercially available Web browser was introduced, thus 
allowing millions of consumers and businesses an easy method of 
navigating on the Internet. These events, combined with the 
widespread availability of inexpensive yet powerful personal 
computers (that allowed computer users to access graphics, 
audio, and video on the World Wide Web in addition to text), 
led to the dramatic growth of the Internet and other online 
services.
    For the business community, the move to electronic commerce 
is seen as an opportunity to lower the traditional costs 
associated with doing business. For many companies, electronic 
commerce is an ideal means to expand business opportunities to 
new markets and reach new customers. For consumers, electronic 
commerce provides a means to engage in transactions when it is 
convenient for them. Consumers are no longer constrained by 
store hours or physical distances. Use of the Internet has also 
helped provide consumers with better information and choice 
about products they wish to buy.
    The growth of electronic commerce is having a profound 
impact on the nation's economy. Over the past decade, the 
information technology sector of our economy has grown rapidly 
and is seen by many as playing a leading role in the current 
economic expansion. According to The Emerging Digital Economy, 
a recent Department of Commerce report on electronic commerce, 
the information technology sector now constitutes 8.2 percent 
of the nation's GDP, up from 4.5 percent in 1985. At the end of 
1997, approximately 7.4 million Americans were employed in this 
field. Many are predicting even stronger growth in the future. 
Estimates of the total value of economic activity conducted 
electronically in 2002 range from $200 billion to more than 
$500 billion, compared to just $2.6 billion in 1996.
    In recent years, we have seen a significant growth in the 
number of service providers offering consumers access to the 
Internet. Such services are known as Internet access services. 
The service providers could be pure access providers (such as 
Erol's), access providers that also offer content services 
(such as America Online), or other service providers that have 
begun to offer Internet access in conjunction with other 
regulated or unregulated activities (such as a telephone or 
cable company that offers Internet access in conjunction with 
the provision of telephone or cable service). Internet access 
providers and online service providers operate in a competitive 
marketplace and consumers have significant choice regarding how 
they access the Internet and how they obtain information. 
Recent data indicates that there are approximately 6,300 
Internet access and online service providers in the United 
States.
    As the Internet access and online service industry grows, 
States have reacted differently to whether, and if so, how, 
Internet access and online services should be taxed. 
Unfortunately, the States have not been consistent with their 
approaches. For example, under existing State interpretations, 
Internet access could be taxed as a ``telecommunications 
service,'' ``communications service,'' ``information service,'' 
or ``computer processing and data service.'' These 
interpretations also appear to directly conflict with national 
telecommunications policy. For more than 30 years, the FCC has 
been analyzing the nature and convergence of communications and 
computer services. On each occasion, the FCC has concluded that 
services offered over a telecommunications network are either 
``basic'' (telecommunications services) or ``enhanced'' 
(computer services) bearing significant regulatory precedent, 
depending on how the service is classified. See 7 FCC 2d 11 
(1966); 72 FCC 2d 358 (1979); and Report to Congress, CC Docket 
96-45 (April 10, 1998). For States now to start classifying 
computer-based services as ``telecommunications services'' only 
creates confusion for the industry.
    In addition, the Constitution has long protected businesses 
in the United States from subjecting themselves to the 
jurisdiction of a State in which it has no ``minimum contacts'' 
or ``substantial nexus.'' More specifically, the Commerce 
Clause and Due Process Clause pose distinct limits on the 
taxing power of States. These principles were recently 
clarified in Quill v. North Dakota, 504 U.S. 298 (1992). In 
Quill, an out-of-State mail order vendor sold products within 
the State of North Dakota, but otherwise did not have any 
outlet stores or sales representatives in North Dakota. When 
North Dakota attempted to collect a tax from the vendor on 
goods purchased in North Dakota, the vendor challenged the tax 
on the grounds that it was unconstitutional. The Supreme Court 
agreed with the vendor, stating that the vendor did not have a 
``substantial nexus'' with North Dakota because the vendor 
lacked a ``bright-line'' physical presence in the State, and 
thus, the State's enforcement of the tax places 
unconstitutional burden on interstate commerce.
    Similarly, in National Bellas Hess, Inc. v. Department of 
Revenue of the State of Illinois, 386 U.S. 753 (1967), the 
Supreme Court noted that if a vendor's only contact with a 
State is over the telephone wires or through the mail, or other 
common carrier service, that vendor does not have the requisite 
``substantial nexus'' required by the Commerce Clause to permit 
the State to impose tax collection duties on the out-of-State 
vendor.
    Selling products over the Internet raises a new set of 
nexus issues. Not only is the Internet decentralized with no 
central controls or boundaries, but there are no key taxing 
points and information can be routed in multiple directions 
traveling through various domestic and international 
jurisdictions before it reaches its final destination. In 
addition, there is a very weak link between a vendor's domain 
name and its physical address. Moreover, it is difficult to 
know the content of what is being transmitted because all 
communications are converted to digital format and the 
communications could be a voice conversation, a letter, or an 
electronic payment. The use of encryption technology makes it 
even more difficult to know the content of the communications 
and its source.
    In light of the classification differences, potential for 
discriminatory or multiple taxes being imposed, and substantial 
nexus uncertainty, many business executives argue that 
ambiguity surrounding the taxation of Internet-related 
activities is the single most significant impediment to the 
development of electronic commerce in the United States. 
Similarly, critics of new State and local taxes on Internet-
related activities argue that taxes dampen the use of the 
Internet itself and impede the ability of the Internet to 
develop into a ubiquitous medium. Critics also argue that it is 
administratively burdensome for Internet access providers and 
online service providers to potentially comply with the 
requirements of over 30,000 State and local taxing 
jurisdictions.
    On the other hand, many State and local government 
officials oppose Federal intervention in State taxing policies. 
They argue that States have not rushed to tax the Internet as 
evidenced by the majority of States that have no Internet-
related taxes. They also assert that uniformity issues are 
being addressed in other forums and Federal intervention in 
this matter is premature. In addition, the States maintain that 
sales and use taxes are the single largest source of State 
revenue. Finally, they argue that freeing the Internet 
community from paying certain taxes may not be competitively 
neutral if other similarly-situated non-Internet businesses are 
required to pay such taxes.
    On March 17, 1997, H.R. 1054 was introduced in the House to 
address the regulatory and taxation issues discussed above. As 
introduced, H.R. 1054 would have prohibited the Federal 
Communications Commission (FCC) and States from regulating the 
prices that certain information service providers would charge 
to subscribers. H.R. 1054 also would have established a 
prohibition on State and local government authority to impose 
any tax or fee on Internet services, or the use of the 
Internet, although the bill did provide general exceptions to 
the prohibition. In addition, the bill would have required the 
formation of a consultative group that would make 
recommendations to the President and the Congress regarding 
domestic and international taxation of electronic commerce and 
Internet-related activities. The President, in turn, would make 
additional recommendations to the Congress. Finally, the bill 
stated that thePresident, in international forums, should 
declare that the Internet be free of foreign tariffs, trade barriers, 
and other restrictions.
    On October 9, 1997, the Subcommittee on Telecommunications, 
Trade, and Consumer Protection considered H.R. 1054 and 
approved the bill for Full Committee consideration, as amended, 
by a voice vote. As amended in Subcommittee, H.R. 1054 would 
establish a moratorium (not a prohibition) on a State's ability 
to tax ``access to, or use of the Internet or online 
services,'' including other Internet-related activities. The 
moratorium would expire after either 6 years or upon the 
occurrence of an event specified in the bill. The moratorium 
did not apply, however, to certain State taxes and the 
Subcommittee bill sought to specifically retain State and local 
authority with respect to income taxes, property taxes, 
business license taxes, as well as other taxes or fees. H.R. 
1054 would also limit a State's ability to tax an out-of-State 
vendor if the only contacts the out-of-State vendor made with 
the State were through the Internet or online services. 
Finally, the amended bill removed a section that would have 
prohibited the FCC or States from regulating the prices that 
subscribers pay for certain information services.
    After the Subcommittee's approval of H.R. 1054, State and 
local officials strongly objected to the structure of the bill. 
They were concerned, inter alia, that the moratorium freezing 
taxes on ``access to, or use of the Internet or online 
services'' was too broadly written and the Subcommittee's 
attempt to protect the ability of State and local governments 
to tax other targets, such as property and income taxes, was 
not successful, nor was it an exhaustive list that could apply 
to all States and political subdivisions. This concern led to 
negotiations among the bill's sponsors, the National Governors' 
Association, and other State and local government organizations 
regarding a restructured bill that would clearly specify the 
taxes that would be prohibited during the moratorium. All other 
State taxes would be preserved. The negotiations also addressed 
other issues such as whether certain taxes would be 
grandfathered and how taxation of the Internet should be 
treated at the conclusion of the moratorium.
    As a result of these negotiations, H.R. 3849 was introduced 
in the House on May 12, 1998. On May 14, 1998, the Full 
Committee considered H.R. 3849 and ordered the bill reported to 
the House, amended, by a roll call vote of 41 yeas to 0 nays. 
As ordered reported by the Full Committee, H.R. 3849 prohibits 
the FCC and State commissions from regulating the prices 
charged for Internet access and online services. H.R. 3849 also 
calls for a ``time-out'' on State and local taxation of the 
Internet so that such taxation does not become a burden on 
interstate and foreign commerce. In particular, H.R. 3849 calls 
for a three year moratorium on State and local governments' 
ability to impose or collect taxes on Internet access and 
online services, and on their ability to collect ``bit'' taxes. 
In addition, the bill calls for a moratorium on discriminatory 
and multiple taxation of electronic commerce. Some States are 
permitted to continue to collect taxes that have already been 
imposed on certain Internet-related activities. While the 
moratorium is in effect, H.R. 3849 requires a group of Federal, 
State, and local officials, as well as interested industry and 
consumer participants, to study long-term domestic issues 
surrounding taxation of the Internet and to report to Congress 
and the President with legislative proposals. H.R. 3849 also 
adopts other measures to ensure that the Internet andelectronic 
commerce can mature and realize their full potential with minimal 
governmental intervention.

                                Hearings

    The Subcommittee on Telecommunications, Trade, and Consumer 
Protection held a hearing on H.R. 1054, the Internet Tax 
Freedom Act, the predecessor to H.R. 3849, on July 11, 1997. 
The Subcommittee received testimony from the following 
witnesses: The Honorable Ron Wyden, Senator, State of Oregon; 
Mr. Wade Anderson, Director of Tax Policy, Comptroller of 
Public Accounts, State of Texas; Mr. Karl A. Frieden, Senior 
Manager, Arthur Andersen LLP; Mr. Michael E. Liddick, Director 
of Taxes, America Online, Inc.; and Mr. Mark Q. Rhoads, 
Legislative Director, U.S. Internet Council.

                        Committee Consideration

    On October 9, 1997, the Subcommittee on Telecommunications, 
Trade, and Consumer Protection met in open markup session and 
approved H.R. 1054, the Internet Tax Freedom Act, the 
predecessor to H.R. 3849, for Full Committee consideration, as 
amended, by a voice vote, a quorum being present.
    On May 14, 1998, the Full Committee met in open markup 
session to consider H.R. 3849 and ordered the bill reported to 
the House, amended, by a roll call vote of 41 yeas to 0 nays.

                             Rollcall Votes

    Clause 2(l)(2)(B) of rule XI of the Rules of the House 
requires the Committee to list the recorded votes on the motion 
to report legislation and amendments thereto. The following are 
the recorded vote on the motion to report H.R. 3849, including 
the names of those Members voting for and against, and the 
voice vote on the amendment offered to the measure.





           committee on commerce--105th congress voice votes

    Bill: H.R. 3849, Internet Tax Freedom Act.
    Amendment: Amendment by Mr. Cox re: making technical and 
clarifying changes.
    Disposition: Agreed to by a voice vote.

                      Committee Oversight Findings

    Pursuant to clause 2(l)(3)(A) of rule XI of the Rules of 
the House of Representatives, the Committee held a legislative 
hearing and made findings that are reflected in this report.

              Committee on Government Reform and Oversight

    Pursuant to clause 2(l)(3)(D) of rule XI of the Rules of 
the House of Representatives, no oversight findings have been 
submitted to the Committee by the Committee on Government 
Reform and Oversight.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 2(l)(3)(B) of rule XI of the 
Rules of the House of Representatives, the Committee finds that 
H.R. 3849, the Internet Tax Freedom Act, would result in no new 
or increased budget authority, entitlement authority, or tax 
expenditures or revenues.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                  Congressional Budget Office Estimate

    Pursuant to clause 2(l)(3)(C) of rule XI of the Rules of 
the House of Representatives, the following is the cost 
estimate provided by the Congressional Budget Office pursuant 
to section 402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, May 22, 1998.
Hon. Tom Bliley,
Chairman, Committee on Commerce,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate and intergovernmental 
mandates statement for H.R. 3849, the Internet Tax Freedom Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Kim Cawley 
(for federal costs), and Pepper Santalucia (for the state and 
local impact).
            Sincerely,
                                         Robert A. Sunshine
                                   (For June E. O'Neill, Director).
    Enclosures.

               congressional budget office cost estimate

H.R. 3849--Internet Tax Freedom Act

    CBO estimates that enacting H.R. 3849 would result in new 
discretionary spending of $1 million to $2 million over the 
1999-2003 period, assuming appropriation of the necessary 
amounts. H.R. 3849 contains no private-sector mandates as 
defined in the Unfunded Mandates Reform Act of 1995, but it 
does contain an intergovernmental mandate on state and local 
governments, as described in a separate mandates statement.
    H.R. 3849 would impose a three-year moratorium on certain 
state and local taxation of online services and electronic 
commerce. Electronic commerce would be defined by the bill as 
the sale, lease, license, offer or delivery of goods or 
services over the Internet. Section 3 would amend the 
Communications Act of 1934 to prohibit the Federal 
Communications Commission (FCC) from collecting fees from 
providers of Internet access or online services to offset the 
cost of the FCC's regulatory program. Thus far, the FCC has not 
imposed regulatory fees on Internet service providers; 
therefore, we estimate this provision would have no budgetary 
impact.
    Section 4 would require the Department of Commerce to 
prepare a report, within 18 months following enactment of the 
bill, regarding barriers to electronic commerce in foreign 
markets. Based on information from the Department of Commerce, 
CBO estimates this work would cost less than $300,000, assuming 
appropriation of the necessary funds. Section 6 would establish 
an Advisory Commission on Electronic Commerce to examine issues 
related to the taxation of electronic commerce. The commission 
would consist of representatives of federal, state and local 
governments, citizens and business. The bill would authorize 
the commission to have reasonable access to information, 
resources, and space to conduct meetings from the Departments 
of Commerce and the Treasury. CBO estimates the commission's 
expenses would be less than $300,000 annually because no staff 
or contractual support would be authorized by the bill.
    H.R. 3849 would authorize the commission to accept and use 
gifts and donations to assist in its work. Donations of money 
are recorded in the budget as governmental receipts (revenues) 
and the use of any such amounts under the bill would be direct 
spending. Because the bill could affect receipts and direct 
spending, pay-as-you-go procedures would apply. CBO expects 
that any such effects would be negligible.
    The CBO staff contact for this estimate is Kim Cawley. This 
estimate was approved by Robert A. Sunshine, Deputy Assistant 
Director for Budget Analysis.

             congressional budget office mandates statement

H.R. 3849--Internet Tax Freedom Act

    Summary: H.R. 3849 contains no private-sector mandates, but 
by imposing a moratorium on certain types of state and local 
taxes, the bill would impose an intergovernmental mandate as 
defined in the Unfunded Mandates Reform Act of 1995 (UMRA). For 
reasons described below, CBO cannot estimate whether the direct 
costs of this mandate would exceed the statutory threshold 
established in UMRA ($50 million in 1996, indexed annually for 
inflation).
    Intergovernmental Mandates Contained in the Bill: H.R. 3849 
would impose a three-year moratorium on certain state and local 
taxes, including taxes on Internet access and online services. 
This moratorium would constitute an intergovernmental mandate 
as defined in UMRA. The bill would allow states that have 
already imposed a tax on these services to reinstate their 
taxes but only if they enact, within a year's time, a new law 
expressly imposing the taxes.

Estimated direct costs of mandates to State, local, and tribal 
        governments

            Is the statutory threshold exceeded?
    Because it is unclear what should be counted as the direct 
costs of the mandate, CBO cannot determine whether the 
threshold for intergovernmental mandates would be exceeded in 
any of the three years of the moratorium.
            Total direct costs of mandates
    UMRA defines the direct costs of an intergovernmental 
mandate as ``the aggregate estimated amounts that all state, 
local, and tribal governments . . . would be prohibited from 
raising in revenues in order to comply with the federal 
intergovernmental mandate.'' There are several reasons why CBO 
is unsure how to measure the direct costs of the mandate in 
this bill, having to do either with ambiguities in UMRA or 
difficulty in interpreting the language of H.R. 3849. In 
particular:
          It is unclear whether giving states the opportunity 
        to opt out of the moratorium effectively eliminates 
        most of the cost of the mandate;
          It is unclear whether taxes assessed but not 
        collected should be counted toward the direct costs of 
        the mandate; and
          It is unclear how the moratorium would apply during 
        the period of up to a year in which states can override 
        it.
    H.R. 3849 would exempt from the moratorium any taxes that 
were ``generally imposed and actually enforced under state law 
before March 1, 1998.'' CBO has identified 12 states (including 
the District of Columbia) that sought to impose their sales and 
use taxes on Internet access and online services by that date. 
However, in order to take advantage of this grandfather clause, 
these 12 states would have to enact a law within a year that 
expressly subjects those services to taxation. The direct costs 
of the mandate could be limited to the administrative costs to 
enact new laws in the 12 states plus any tax revenues lost 
during the interim between the enactment of H.R. 3849 and the 
enactment of those state laws. However, any of these 12 states 
that failed to enact the necessary law within a year would 
incur additional costs because they would be precluded from 
imposing their taxes on these services for two more years.
    CBO is unsure whether those additional forgone revenues 
should also be considered direct costs of the mandate, because 
we are uncertain how to measure the cost of a mandate that 
states can avoid by enacting a law. On the one hand, it could 
be argued that the 12 states would be able to choose whether or 
not to abide by the moratorium--and that the fiscal 
consequences of that choice would be the responsibility of the 
states, not of the federal government. On the other hand, in 
the absence of this bill, a state's failure to act would have 
no consequences. Under this bill, a state's failure to act 
would result in a restriction of its sovereign power to tax. It 
could be argued, therefore, that any loss of revenue should 
count as the costs of a mandate under UMRA.
    Second, CBO cannot make a threshold determination because 
we are unsure whether the direct costs of the tax moratorium 
should be only actual collections forgone or whether tax 
liabilities that are being litigated should also be included. 
Information from states andindustry sources indicates that 
while total collections and unpaid assessments in 1997 were close to 
$50 million, actual collections alone were significantly lower than 
that amount. The difference occurs because, in some of the states, 
companies are challenging the applicability of the tax to the service 
they provide or the state's finding that they are obliged to collect 
the tax on the state's behalf. In those cases, the companies are not 
collecting the tax, but they are accruing a potential tax liability to 
the states. CBO is unsure whether a tax that is being assessed but is 
not being paid should be counted toward the direct costs of a mandate 
when the applicability or constitutionality of the tax is being 
litigated.
    The potential mandate cost would grow over the three years 
that the moratorium would be in effect, because of the 
projected growth of the market for Internet access and online 
services. Some industry analysts have predicted that the market 
will more than double in the next three years. Growth of this 
magnitude would push the state's collections plus potential tax 
liability over $50 million, but whether actual collections 
would reach that threshold would depend on the outcome of 
litigation. If the states prevail in court, the mandate cost 
would exceed the threshold.
    It is possible that, in the absence of this legislation, 
some state and local governments would enact new taxes or 
decide to apply existing taxes to Internet access or online 
services during the next three years. It is also possible that 
some governments would repeal existing taxes or preclude their 
application to these services. Such changes would affect the 
ultimate cost of the mandate but are extremely difficult to 
predict. Therefore, for the purposes of estimating the direct 
costs of the mandate in this bill, CBO considered only the 
revenues from taxes that are currently in place.
    Finally, it is not clear from the language in H.R. 3849 
whether the each of the 12 states would be allowed to continue 
collecting its tax between the date of enactment of this bill 
and the date when it enacts a law reinstating its tax. Even if 
the 12 states were allowed to continue collecting their taxes 
during the first year of the moratorium, H.R. 3849 does not 
clearly indicate what would happen if any of those states did 
not manage to pass a law during the year. It is possible that 
any states failing to pass a law would be required to return 
any collections from the previous year. Because of these 
ambiguities, we cannot estimate whether these 12 states would 
forgo any revenues during the first year of the moratorium.
    The moratorium in H.R. 3849 would also apply to ``bit 
taxes,'' which are taxes based in some way on the volume of 
digital information being transmitted. According to both state 
officials and industry representatives, no state or locality 
has adopted this type of tax. The moratorium would also apply 
to ``multiple or discriminatory taxes on electronic commerce.'' 
CBO could not identify any current state or local taxes that 
would clearly meet the definitions provided in the bill for 
these two types of taxes.
    Appropriation or other Federal financial assistance 
provided in bill to cover mandate costs: None.
    Other impacts on state, local, and tribal governments: H.R. 
3849 would establish a process that could lead to a fundamental 
reform of state and local sales and use taxes as they apply to 
electronic commerce. The bill would establish an Advisory 
Commission on Electronic Commerce made up of federal officials, 
representatives of state and local governments, and 
representatives of taxpayers and businesses. The commission's 
duties would include writing proposed legislation to give 
states expanded authority to require the collection of sales 
and use taxes on electronic commerce if they simplify their tax 
codes. The proposed legislation would also have to provide that 
after four years, states that had not yet simplified their tax 
code would lose any authority to tax electronic commerce until 
they did so. This legislation would be submitted to the 
President, who would then have the choice of submitting some or 
all of it to the Congress. Any proposals submitted to the 
Congress would receive expedited consideration.
    Previous CBO estimates: CBO has completed intergovernmental 
mandates statements for three other versions of the Internet 
Tax Freedom Act. Each version would impose a moratorium on some 
categories of state and local taxes. In each case, we 
determined that the moratorium would constitute an 
intergovernmental mandate as defined in UMRA. The direct costs 
that we estimated for the mandate in each bill differed 
depending on the scope and duration of the moratorium. For two 
bills, we determined that the costs of complying with the 
mandate would exceed the threshold established in UMRA. For the 
remaining bill, we were unable to determine whether the 
threshold was exceeded.

----------------------------------------------------------------------------------------------------------------
                 Date                        Bill number                Version          Threshold determination
----------------------------------------------------------------------------------------------------------------
June 18, 1997........................  S. 442.................  As introduced..........  Threshold exceeded.    
January 21, 1998.....................  S. 442.................  As ordered reported by   Cannot determine.      
                                                                 full committee.                                
March 25, 1998.......................  H.R. 1054..............  As approved by           Threshold exceeded.    
                                                                 subcommittee.                                  
----------------------------------------------------------------------------------------------------------------

    Estimate prepared by: Pepper Santalucia.
    Estimate approved by: Robert A. Sunshine, Deputy Assistant 
Director for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                   Constitutional Authority Statement

    Pursuant to clause 2(l)(4) of rule XI of the Rules of the 
House of Representatives, the Committee finds that the 
Constitutional authority for this legislation is provided in 
Article I, section 8, clause 3, which grants Congress the power 
to regulate commerce with foreign nations, among the several 
States, and with the Indian tribes.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

             Section-by-Section Analysis of the Legislation

                         SECTION 1. SHORT TITLE

    Section 1 identifies the title of the bill as the 
``Internet Tax Freedom Act.''

      SECTION 2. PROVISION OF INTERNET ACCESS AND ONLINE SERVICES

    Section 2 amends Title II of the Communications Act of 1934 
(Communications Act) by adding a new section that would 
prohibit the FCC and State commissions from regulating the 
prices or charges paid by subscribers for Internet access or 
online services. The Committee notes that there are over 6,300 
Internet access and online service providers operating in the 
United States today and market forces will ensure that prices 
remain competitive and cost-based. Therefore, FCC and State 
commission oversight of prices is unnecessary.
    The section defines ``Internet access'' as a service that 
enables users to access content, information, and other 
services offered over the Internet, but does not mean a 
telecommunications service. By including the phrase, ``but does 
not mean a telecommunications service,'' the Committee intends 
to clarify that nothing in this section is meant to limit the 
FCC's or a State commission's ability to regulate basic 
telecommunications services. This section also reserves 
authority for the FCC and State commissions to regulate 
telecommunications carriers that offer telecommunications 
services bundled with Internet access or online services. 
Internet access and online services are both considered 
``information services'' under the FCC's existing 
interpretations of the Communications Act.
    This section adds two other definitions to help clarify the 
FCC's and State commissions' authority. ``Internet'' is defined 
as the combination of computer facilities and electromagnetic 
transmission media that employ the Transmission Control 
Protocol/Internet Protocol (TCP/IP) to transmit information. 
The Committee intends for the term to be technology-neutral and 
one that can evolve over time. ``Online services'' is defined 
as the offering or provision of information services combined 
with Internet access to a user. The Committee believes that for 
a service provider to be an online service provider, it must 
offer a subscriber access to the Internet, which is a specific 
type of information service, and some other information 
service, as part of a single service offering.
    Section 2 also provides that the FCC and State commissions 
are free to implement the Telecommunications Act of 1996, 
including, but not limited to, the universal service provision 
of section 254, notwithstanding the limitations imposed in this 
section of the bill. Section 2 reflects the fact that the 
limitations imposed on FCC and State commission authority in 
H.R. 3849 regarding regulatory treatment of Internet access and 
online service do not impact those agencies' implementation of 
the Telecommunications Act, but rather, relate to policy not 
addressed in the Telecommunications Act.

                   SECTION 3. FEDERAL REGULATORY FEES

    Subsection 3(a) amends section 9 of the Communications Act 
by stating that providers of Internet access or online services 
are exempt from paying Federal regulatory fees to the FCC. In 
general, section 9 fees are used by the FCC to recover the 
costs of performing certain regulatory activities such as 
enforcement activities and policy and rulemaking functions. 
Subsection 3(b) makes conforming amendments to section 9 of the 
Communications Act.
    Subsection 3(c) requires the National Telecommunications 
and Information Administration (NTIA) to determine whether 
providers of Internet access or online services pay any direct 
or indirect Federal regulatory fees. For example, Federal 
agencies may have the authority to collect fees similar to the 
regulatory fees identified in subsection 3(a). By using the 
term ``direct or indirect,'' the Committee intends for NTIA's 
examination to be as thorough and broad as possible. To the 
extent that NTIA determines that ``indirect'' fees may apply, 
NTIA should state its assumptions for the Committee. Once NTIA 
completes its examination, subsection 3(c) requires it to make 
recommendations to Congress regarding whether any such fees 
should be modified or eliminated.

                 SECTION 4. REPORT ON FOREIGN COMMERCE

    Subsection 4(a) requires the Secretary of Commerce, in 
consultation with appropriate committees of the Congress, to 
undertake an examination of: (1) barriers imposed in foreign 
markets on U.S. providers of property, goods, services, or 
information engaged in electronic commerce and barriers imposed 
in foreign markets on U.S. providers of telecommunications 
services; (2) how the imposition of such barriers will affect 
U.S. consumers, the competitiveness of U.S. citizens providing 
property, goods, services, or information in foreign markets, 
and the growth and maturing of the Internet; and (3) what 
measures the Government should pursue to foster, promote, and 
develop electronic commerce in the U.S. and in foreign markets.
    Subsection 4(b) requires the Secretary of Commerce to give 
all interested parties an opportunity to comment on matters set 
forth in subsection 4(a).
    Subsection 4(c) requires the Secretary of Commerce to 
transmit a report containing the results of the examination to 
the President not later than 18 months after the date of 
enactment of the bill.
     Subsection 4(d) requires the President to review the 
Secretary of Commerce's report and to submit to the appropriate 
committees of Congress the policy recommendations that the 
President deems necessary or expedient. To the extent that the 
President wishes to make policy recommendations, the President 
is required by subsection 4(d) to do so not later than 2 years 
and 45 days after the date of enactment of the bill. This 
deadline parallels the other obligation imposed on the 
President that is set forth in section 7.
    The Committee believes that a report by the Secretary of 
Commerce and policy recommendations by the President on matters 
of foreign commerce will assist Congress in determining whether 
additional legislation is needed to protect and promote U.S. 
citizens that engage in global electronic commerce.

                 SECTION 5. MORATORIUM ON CERTAIN TAXES

    Subsection 5(a) establishes a three year moratorium on 
certain Internet-related taxes. Specifically, the provision 
prohibits, for a period of three years, State and local 
governments from imposing, assessing, collecting, or attempting 
to collect: (1) taxes on Internet access or online services; 
(2) bit taxes; or (3) multiple or discriminatory taxes on 
electronic commerce. Section 10 of the bill defines the terms 
``bit tax'', ``discriminatory tax,'' ``electronic commerce,'' 
``Internet,'' ``Internet access,'' ``multiple taxation,'' 
``online service,'' and, as a result, section 10 defines the 
scope of the moratorium.
    Subsection 5(b) provides an exception to the moratorium. To 
the extent that a State has generally imposed and actually 
enforced a tax on Internet access or online services prior to 
March 1, 1998, then that State may continue to collect such 
taxes only if the State enacts a law to expressly impose such 
tax. The State must enact the law within one year from the date 
of enactment of the bill.
    Subsection 5(b) provides further protection for States. 
Even if the State fails to act within one year, it may continue 
to collect outstanding debts owed to the State with respect to 
taxes that have accrued and were enforced prior to March 1, 
1998. In addition, failure of a State to act should not affect 
ongoing litigation relating to any assessments that the State 
may have imposed on any Internet access or online service 
provider.
    Subsection 5(c) provides a further exception to the 
moratorium. Subsection 5(c) states that the moratorium shall 
not apply with respect to the provision of Internet access or 
online services that are offered for sale as part of a package 
of services that includes services other than Internet access 
or online services, unless the service provider separately 
states that portion of the billing that applies to such 
services on the user's bill.

         SECTION 6. ADVISORY COMMISSION ON ELECTRONIC COMMERCE

    Section 6 creates an Advisory Commission on Electronic 
Commerce (the Commission) to study the complex tax issues 
implicated by the growth of electronic commerce. Subsection 
6(a) establishes the temporary commission and requires it to be 
composed of 29 members. Subsection 6(b) designates that the 
membership of the Commission shall be composed of the 
following: two representatives from the Federal government; 
fourteen representatives from the State, local, and county 
governments; and thirteen representatives of taxpayers and 
business groups. Subsection 6(b) also designates the co-chairs 
of the Commission and requires that appointments to the 
Commission be made within 45 days and that co-chairs be 
appointed within 60 days of the date of enactment.
    Subsection 6(c) permits the Commission to receive, use, and 
dispose of gifts or grants for the purposes of aiding the work 
of the Commission. Subsection 6(d) permits the Commission to 
access materials, resources, data, and other information of the 
Department of Commerce and the Department of the Treasury. 
Subsection 6(d) also allows the Commission to use the 
facilities of these agencies for the purposes of conducting 
meetings.
    Subsection 6(e) sunsets the Commission when the last 
Congressional committee has concluded consideration of the 
legislative recommendations pursuant to section 7 or three 
years after date of enactment, whichever is first. Subsection 
6(f) establishes the operating rules of the Commission: fifteen 
members are needed for a quorum; 14 days advanced notice must 
be given for any meetings that may be held; all meetings are 
open to the public; and the Commission may establish any 
additional rules that the Commission determines necessary.
    Subsection 6(g) establishes the duties of the Commission. 
In conducting these duties, the Commission is required to 
consult with the National Tax Association Communications and 
Electronic Commerce Tax Project and other interested parties. 
In general, the purpose of the Commission is to examine a broad 
set of issues involving electronic commerce. Many of theissues 
involve ways to clarify, reduce, or simplify current tax laws as they 
apply to electronic commerce, Internet-related activities, and 
telecommunications services. Subsections 6(g)(1)-(9) set forth the 
specific duties. Subsection 6(h) declares that the Federal Advisory 
Committee Act does not apply to the Commission.

                 SECTION 7. LEGISLATIVE RECOMMENDATIONS

    Subsection 7(a) requires the Commission make legislative 
proposals, within 2 years after the date of enactment of the 
bill, to the President and Congress regarding the results of 
the examination it has undertaken pursuant to section 6.
    Subsection 7(b) states that the proposed legislation 
submitted to the President and Congress must be agreed to by at 
least 18 of the 29 members. In addition, subsections 7(b)(1)-
(7) specify the content of the proposed legislation, but 
provides sufficient flexibility for the Commission to propose 
other provisions that it deems necessary.
    Subsection 7(c) requires the President to review the 
proposed legislation submitted by the Commission and submit, 
within 45 days after receipt of the proposed legislation, to 
the appropriate Congressional committees such policy 
recommendations that the President finds necessary or 
expedient.

   SECTION 8. EXPEDITED CONSIDERATION OF LEGISLATIVE RECOMMENDATIONS

    Section 8 requires that the respective committees in the 
House and the Senate consider, within 90 days, the proposed 
legislation offered by the Commission and any recommendations 
made by the President pursuant to section 7. If a Congressional 
committee takes action, the legislation is required to be 
referred to the proper calendar for floor consideration. 
Subsection 8(b) provides a mechanism for calculating the 
specific 90 day review period.

  SECTION 9. DECLARATION THAT THE INTERNET SHOULD BE FREE OF FOREIGN 
            TARIFFS, TRADE BARRIERS, AND OTHER RESTRICTIONS

    This section states that it is the sense of the Congress 
that the President should seek bilateral and multilateral 
agreements to remove barriers to global electronic commerce in 
appropriate international forums, such as the World Trade 
Organization, the Organization for Economic Cooperation and 
Development, the International Telecommunications Union, the 
Asia Pacific Economic Cooperation Council, and the Free Trade 
Area of the Americas. The provision further provides that such 
agreements should require that the provision of Internet access 
or online services be free from undue and discriminatory 
regulation and that electronic commercial transactions between 
the United States and foreign providers be free from undue and 
discriminatory regulation, international tariffs, and 
discriminatory taxation. The Committee commends the efforts of 
the Administration to date to remove barriers to global 
electronic commerce and to keep discriminatory taxes off the 
Internet.

                        SECTION 10. DEFINITIONS

    This section establishes the definitions of specific terms 
used throughout the bill and, unless otherwise stated, are 
meant to apply only within the context of this bill.
    Subsection 10(1) provides that the term ``bit tax'' means 
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, but does not include taxes 
imposed on the provision of telecommunications services. A 
``bit'' is an abbreviation for ``binary digit'' which denotes 
either a zero or one.
    Subsection 10(2) provides that the term ``computer server'' 
means a computer that functions as a centralized provider of 
information and services to multiple recipients. Generally, 
computer servers send information to other computers known as 
``clients,'' although other recipients could include other 
computer servers and end-users.
    Subsection 10(3)(A)(i) defines ``discriminatory tax'' as 
any tax on electronic commerce that is not generally imposed 
and legally collectible by a State or local government on 
transactions involving similar property, goods, services, or 
information accomplished through other means. Similarly, 
subsection 10(3)(A)(ii) would prohibit a State or local 
government from taxing electronic commerce in a manner that 
resulted in a different tax rate being imposed on electronic 
commerce when compared to a transaction that occurred through 
another means.
    Subsection 10(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 than in 
the case of transactions involving similar property, goods, 
services, or information accomplished through other means.
    Subsection 10(3)(A)(iv) states that a tax on electronic 
commerce is discriminatory if it establishes a classification 
of Internet access provider or online service provider for 
purposes of establishing a higher tax rate to be imposed on 
such providers than the tax rate generally applied to providers 
of similar information services delivered through other means.
    Subsection 10(3)(B)(i) states that the use of a computer 
server by a remote seller to create or maintain a site on the 
Internet cannot be considered as a factor when determining the 
remote seller's collection obligation or else the tax will be 
considered discriminatory.
    Similarly, section 10(3)(B)(ii) states that a tax is 
discriminatory if a State attempts to collect the tax from an 
Internet access or online service provider merely because such 
service provider is displaying a remote seller's information or 
content on the service provider's computer server, or if the 
service provider is merely maintaining or taking orders through 
its computer server.
    Subsection 10(4) provides that the term ``electronic 
commerce'' means any transaction conducted over the Internet or 
an online service, comprising the sale, lease, license, offer, 
or delivery of property, goods, services, or information, 
whether or not for consideration, and includes the provision of 
Internet access and online services.
    Subsection 10(5) provides that the term ``information 
services'' has the meaning given to such term in section 3(20) 
of the Communications Act. Such term has been recently 
interpreted by the FCC in a Report to Congress, CC Docket No. 
96-45 (April 10, 1998).
    Subsection 10(6) provides that the term ``Internet'' means 
the combination of computer facilities and electromagnetic 
transmission media, and related equipment and software, 
comprising the interconnected world-wide network of computer 
networks that employ the TCP/IP protocol, or any predecessor or 
successor protocol, to transmit information. The Committee 
intends for the term to be technology-neutral and one that can 
evolve over time.
    Subsection 10(7) provides that the term ``Internet access'' 
means a service that enables users to access content, 
information, and other services offered over the Internet, but 
does not mean a telecommunications service. For example, 
providers of Internet access services 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. 
In general, these applications are considered ``information 
services'' as defined in section 3(20) of the Communications 
Act.
    Subsection 10(8) defines a ``multiple tax'' in several 
ways. Subsection 10(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 (or the same State, except in the 
case of sales taxes) whether or not at the same rate or on the 
same basis without an offsetting credit for taxes paid in other 
jurisdictions or other similar mechanisms for avoiding double 
taxation of the same transaction.
    Subsection 10(8)(B) states that a tax is a ``multiple tax'' 
if a State or local government classifies Internet access or 
online services as telecommunications or communications 
services under State law and such State or local government has 
already imposed a tax on the underlying telecommunications 
services that are used to provide Internet access or online 
services without allowing a credit for other taxes paid, a sale 
for resale exemption, or other mechanism for avoiding double 
taxation.
    Subsection 10(9) provides that the term ``online service'' 
means the offering or providing of information services 
combined with Internet access to a user. The Committee believes 
that for a service provider to be an online service provider, 
it must offer a subscriber Internet access, which is a specific 
type of information service, and some other information 
service, as part of a single service offering. Examples of 
online service providers include America Online, CompuServe, 
Prodigy, and Microsoft Network.
    Subsection 10(10) provides that the term ``remote seller'' 
means a person who sells, leases, licenses, offers, or delivers 
property, goods, services, or information from one State to a 
purchaser in another State using the Internet.
    Subsection 10(11) defines ``State'' to mean any of the 
several States, the District of Columbia, or any territory or 
possession of the United States.
    Subsection 10(12) provides that the term ``tax'' means any 
levy, fee, or charge imposed under governmental authority by 
any governmental entity; or the imposition of or obligation to 
collect and to remit to a governmental entity any such levy, 
fee, or charge imposed by a governmental entity. This 
subsection also states that cable television franchise fees or 
similar fees should not be construed as taxes.
    Subsection 10(13) provides that the term 
``telecommunications services'' has the meaning given to such 
term in section 3(46) of the Communications Act. Such term has 
been recently interpreted by the FCC in a Report to Congress, 
CC Docket No. 96-45 (April 10, 1998).

               SECTION 11. NO EXPANSION OF TAX AUTHORITY

    This section states that nothing in the bill shall be 
construed to expand the power of any State or political 
subdivision to collect taxes on Internet access, online 
services, bits, or electronic commerce beyond the power that 
existed on March 1, 1998.

                 SECTION 12. PRESERVATION OF AUTHORITY

    This section provides that nothing in the bill shall limit 
or otherwise affect the implementation of the 
Telecommunications Act of 1996. The Committee intends that the 
telecommunications policy established in the Telecommunications 
Act of 1996, especially those provisions that could impact a 
State or local government's ability to impose taxes or fees 
consistent with that Act, shall not be affected by the bill.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3 of rule XIII of the Rules of the 
House of Representatives, changes in existing law made by the 
bill, as reported, are shown as follows (existing law proposed 
to be omitted is enclosed in black brackets, new matter is 
printed in italics, existing law in which no change is proposed 
is shown in roman):

COMMUNICATIONS ACT OF 1934

           *       *       *       *       *       *       *


TITLE I--GENERAL PROVISIONS

           *       *       *       *       *       *       *


SEC. 9. REGULATORY FEES.

  (a) * * *

           *       *       *       *       *       *       *

  (h) Exceptions.--The charges established under this section 
shall not be applicable to (1) governmental entities or 
nonprofit entities; [or] (2) to amateur radio operator licenses 
under part 97 of the Commission's regulations (47 C.F.R. Part 
97); or (3) providers of Internet access or online service.

           *       *       *       *       *       *       *


                       TITLE II--COMMON CARRIERS

PART I--COMMON CARRIER REGULATION

           *       *       *       *       *       *       *


SEC. 231. PROHIBITION ON REGULATION OF INTERNET ACCESS AND ONLINE 
                    SERVICES.

  (a) Prohibition.--The Commission shall have no authority or 
jurisdiction under this title or section 4(i), nor shall any 
State commission have any authority or jurisdiction, to 
regulate the prices or charges paid by subscribers for Internet 
access or online services.
  (b) Preservation of Authority.--Nothing in this subsection 
shall limit or otherwise affect--
          (1) the Commission's or State commissions' 
        implementation of the Telecommunications Act of 1996 
        (Public Law 104-104) or the amendments made by such 
        Act; and
          (2) the Commission's or State commissions' authority 
        to regulate telecommunications carriers that offer 
        Internet access or online services in conjunction with 
        the provision of any telephone toll, telephone 
        exchange, or exchange access services as such terms are 
        defined in title I.
  (c) Definitions.--As used in this section:
          (1) Internet.--The term ``Internet'' means the 
        combination of computer facilities and electromagnetic 
        transmission media, and related equipment and software, 
        comprising the interconnected world-wide network of 
        computer networks that employ the Transmission Control 
        Protocol/Internet Protocol, or any predecessor or 
        successor protocol, to transmit information.
          (2) Internet access.--The term ``Internet access'' 
        means a service that enables users to access content, 
        information, and other services offered over the 
        Internet, but does not mean a telecommunications 
        service.
          (3) Online service.--The term ``online service'' 
        means the offering or provision of information services 
        combined with Internet access to a user.

           *       *       *       *       *       *       *


                ADDITIONAL VIEWS OF HON. CHRISTOPHER COX

    Because certain key provisions of the Internet Tax Internet 
Tax Freedom Act, notably Section 5 (``Moratorium on Certain 
Taxes'') and Section 11 (``No expansion of Tax Authority''), 
fall within the jurisdiction of the Judiciary Committee, and 
not the Commerce Committee, the Committee's report cannot fully 
explain the meaning and intent of these provisions. As the 
bill's author, I am filing these ``Additional Views'' to 
provide clarity on a number of important provisions.
    The Internet Tax Freedom Act is based on a simple 
principle: Information should not be taxed. As we enter the 
digital age, the age of information, establishing this 
principle in law will have profound and long-lasting 
consequences. given the pace of the Internet's growth--the U.S. 
Commerce Department recently told us that the number of 
Internet users and the number of web pages are doubling every 
100 days--protecting the Internet, and the information and 
commerce exchanged over the Net, for special and discriminatory 
taxation on a national basis will prove a further stimulus to 
the continued technological and commercial development of this 
dynamic new medium.
    The Internet Tax Freedom Act is needed not just to give the 
Net room and time to grow. It is also needed because the Net is 
inherently susceptible to multiple and discriminatory taxation 
in a way that commerce conducted in more traditional ways is 
not. The very technologies that make the Net so useful and 
efficient--notably its decentralized, packet-switched 
architecture--also mean that several States and perhaps dozens 
of localities could attempt to impose a tax on a single 
Internet transaction. The Internet Tax Freedom Act will protect 
commerce conducted over the Internet from being singled out and 
taxed in new and creative ways, and will give Americans the 
reassurance they need that they will not be hit with unexpected 
taxes and tax collecting costs from remote governments.
    The Internet Tax Freedom Act has undergone a number of 
changes since it was considered by the Telecommunications 
Subcommittee last October. Most of these changes are the result 
of months of intense negotiations with State and local 
government leaders. As a result, the legislation has been 
altered to reflect State and local concerns, and now reflects a 
balanced compromise between the national interest in protecting 
this burgeoning marketplace and the importance of guarding 
against erosion of the State and local treasuries. Several of 
these new provisions deserve further explanation.

             no taxes on internet access or online service

    Section 5(a)(1) prohibits, for a period of 3 years, State 
and local governments from imposing, assessing, collecting, or 
attempting to collect ``taxes on Internet access or online 
services.'' It is intended that this temporary ban will be made 
permanent in the future, as the legislation submitted to 
Congress by the Advisory Commission pursuant to Section 7 is 
required to include provisions making the 3-year ban on such 
taxes permanent. I am also pleased to note that a number of 
Governors have already publicly declared their support for such 
a permanent ban.
    The term ``Internet access'' is defined in Section 10(7) as 
a service that enables users to access content, information, 
and other services offered over the Internet, but does not mean 
a telecommunications service. For example, providers of 
Internet access services 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 Talnet applications. 
In general, these applications are considered ``information 
services'' as such term is defined in Section 3(20) of the 
Communications Act.
    The term ``online service'' is defined in Section 10(9) as 
the offering or providing of information services combined with 
Internet access to a user. For a service provider to be an 
online service provider, it must offer a subscriber access to 
the Internet, which is a specific type of information service, 
and some other information service, as part of a single service 
offering. Examples of online service providers include America 
Online, CompuServe, Prodigy, and Microsoft Network.
    Section 5(b) provides a limited exception to the moratorium 
on taxes on Internet access and online service. The intent of 
this ``grandfather'' provision is to protect only those States 
that have come to rely on Internet access tax revenues to such 
an extent that they are willing to enact a law to preserve it.
    Specifically, Section 5(b)(1) grandfathers taxes on 
Internet access and online services that were ``generally 
imposed and actually enforced'' under State law prior to March 
1, 1998. The term ``generally imposed and actually enforced'' 
is intended to include taxes imposed pursuant to administrative 
interpretations of existing statues where a pubic notice of 
ruling has been issued clearly stating the taxing authorities' 
intent to tax Internet access and online services. By 
specifying a specific cut-off date (March 1, 1998), it is 
intended to prevent a situation in which a taxing jurisdiction 
might subsequently reinterpret an existing tax statute to apply 
for the first time to Internet access or online service. It is 
also worth mentioning that this grandfather provision only 
addresses the authority of a State to impose a tax on Internet 
access or online service consistent with this legislation. This 
provision does not, for example, alter the limitations on a 
State's ability to impose a tax on these services under the 
Constitution.
    Section 5(b)(2) further qualified those taxes that are 
eligible for the grandfather provision by limiting it to only 
those States that enact--within one year of the moratorium's 
effective date--legislation expressly imposing such tax on 
Internet access or online services. If a State did not 
``generally impose and actually enforce'' a tax on Internet 
access or online service prior to March 1, 1998, the State 
shall not be permitted to tax Internet access or online service 
during the moratorium, regardless of whether it subsequently 
enacts a law to tax such services.
    At present, no State has expressly imposed in statute a tax 
directly on Internet access or online service. But in a handful 
of States, taxes are nevertheless being imposed on Internet 
access or online service, as the result of decisions made by 
local tax administrators to interpret Internet access to fall 
within the definitions of existing telecommunications or other 
taxes. Requiring the express codification of such Internet 
access taxes is intended to ensure that such a significant 
policy decision--whether to continue to tax internet access--
will be made by the State's duly elected representatives rather 
than by the singular action of a tax administrator. It should 
also be noted that it is certainly not without precedent for 
Congress to enact a Federal law and make its applicability 
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).
    Section 5(b)(2) provides further protection for States. 
Even if the State fails to act within one year, it may continue 
to collect outstanding debts owed to the State with respect to 
taxes that have accrued and were enforced prior to March 1, 
1998. In addition, failure of a State to act should not affect 
ongoing litigation relating to any assessments that the State 
may have imposed on any Internet access or online service 
provider. The use of the word ``enforced'' is meant to indicate 
that the State must have taken some formal public action prior 
to March 1 to notify taxpayers that there has been an 
underpayment of taxes for which enforcement action may be taken 
to compel payment of such taxes.
    It is important to note that the exception provided in 
Section 5(b) only applies to ``taxes on Internet access or 
online service.'' It does not apply to the other taxes included 
within the moratorium--bit taxes, or multiple or discriminatory 
taxes on electronic commerce. As a result of this clear 
language, even if a State tax on Internet access or online 
service meets the conditions of the exception set forth in 
Section 5(b), such tax may nevertheless be barred if it is 
determined to be imposed in a manner that would cause it to 
fall within the definition of a ``multiple tax'' or 
``discriminatory tax.''
    Section 5(c) provides a further exception to the moratorium 
to ensure that telecommunications carriers offering 
telecommunications services will not avoid tax liability for 
taxes on those telecommunications services. Specifically, this 
provision requires that, in order to be covered by the 
moratorium, a telephone company that bundles telephone service 
along with Internet access (with or without other 
``information'' services) must separately state on the user's 
bill the portion of the billing that applies to such services.

                              no bit taxes

    Section 5(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 Section 10(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, but does not include taxes imposed 
on the provision of telecommunications services. Because bit 
taxes would be levied not on the value of the information being 
sent but on the number of bits that can flow across the 
Internet, they will prove extremely detrimental to the future 
of the Internet and extremely costly for consumers. For this 
reason, State and local governments should be barred from 
imposing any such tax.

                no multiple taxes on electronic commerce

    Section 5(a)(3) prohibits, for a period of 3 years, State 
and local governments from imposing, assessing, collecting, or 
attempting to collect ``multiple'' taxes on electronic 
commerce. The term ``multiple tax'' is defined in Section 
10(8). In general, this term describes two distinct instances 
where taxes become layered in an unfair manner: first, 
instances where two or more taxing jurisdictions each tax the 
same service; and second, 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.
    Section 10(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 (or the same State, except in the 
case of sales taxes) whether or not at the same rate or on the 
same basis without an offsetting credit for taxes paid in other 
jurisdictions or other similar mechanisms for avoiding double 
taxation of the same transaction. This 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 critically important to 
provide clear protections against multiple taxation, especially 
since the Internet's ubiquity, decentralized packet-switched 
architecture, and increasingly portable nature make it 
vulnerable to such a threat.
    Section 10(8)(B) states that a tax is a ``multiple tax'' if 
a State or local government classifies Internet access or 
online services as telecommunications or communications 
services under State law and such State or local government has 
already imposed a tax on the underlying telecommunications 
services that are used to provide Internet access or online 
services without allowing a credit for other taxes paid, a sale 
for resale exemption, or other mechanism for eliminating double 
taxation of the service and the means for delivering the 
service.

             no discriminatory taxes on electronic commerce

    Section 5(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 Section 
10(3).
    In the world of multi-state tax law, the term 
``discriminatory'' commonly carries with it its own distinct 
set of meanings, and is usually used to describe taxes that 
seek to favor local commerce over interstate commerce. For the 
purposes of this Act and only this Act, however, Section 10(3) 
defines the term ``discriminatory'' in a manner that is meant 
to capture instances where State or local tax policies seek to 
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, but instead to complement these existing 
protections.
    Section 10(3)(A)(i) defines ``discriminatory tax'' as any 
tax on electronic commerce that is not generally imposed and 
legally collectible by a State or local government on 
transactions involving similar property, goods, services, or 
information accomplished through other means. For example, if a 
State does not tax the sale of a particular product purchased 
over the telephone or through a mail-order catalog, then the 
State also would be prohibited from taxing the sale merely 
because the transaction occurs over the Internet. Section 
10(3)(A)(ii) would prohibit a State or local government from 
taxing electronic commerce in a manner that resulted in a 
different tax rate being imposed on electronic commerce when 
compared to a transaction that occurred through another means.

No taxes on Internet-unique services

    Taken together, Section 10(3)(A)(i) and (ii) mean that 
property, goods, services, or information that are sold 
exclusively over the Internet--with no comparable off-line 
equivalent--would be protected from taxation for the duration 
of the moratorium. Examples of such transactions include, but 
are not limited to, electronic mail over the Internet, Internet 
site selections, Internet bulletin boards, and Internet search 
services.

No new collection obligations

    Section 10(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 than in 
the case of transactions involving similar property, goods, 
services, or information accomplished through other means, such 
as over the telephone or via mail-order. For instance, a tax 
does not discriminate against electronic commerce if the 
obligation to collect and remit the tax falls on the vendor if 
the same goods were ordered off-line as well as online.
    This provision would also bar taxes that seek in the case 
of electronic commerce to impose tax collection obligations on 
persons other than the buyer or seller in a transaction. 
Specifically, it would bar taxes that impose collection or 
reporting duties on Internet access or online service 
providers, telephone companies, banks, credit card companies, 
financial intermediaries, or other entities that might have 
access to a consumer's billing address since these obligations 
do not also apply in the case of telephone or mail-order sales.

No classification of an ISP as a phone company

    Section 10(3)(A)(iv) states that a tax on electronic 
commerce is discriminatory if it establishes a classification 
of Internet access provider or online service provider for 
purposes of establishing a higher tax rate to be imposed on 
such providers than the tax rate generally applied to providers 
of similar information services delivered through other means. 
Since the term ``information service'' is defined in such a way 
as to exclude ``telecommunications service,'' this provision 
would prohibit States and localities from classifying providers 
of Internet access or online service as a telephone or similar 
public utility service for the purpose of applying a business 
license tax, if such service providers are subject to higher 
tax rates.

No new ``nexus''

    The definition of ``discriminatory tax'' in Section 
10(3)(B) is intended to prohibit States and localities from 
using Internet-based contacts as a factor in determining 
whether an out-of-State business has ``substantial nexus'' with 
a taxing jurisdiction.
    This is intended to 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 apply to businesses engaged in electronic commerce just as 
they now apply to mail-order firms, unless a future Congress 
should decide to alter the current nexus requirements. Until 
such time, electronic commerce should not be treated less 
favorably than mail-order or catalog sales, because to do so 
would place the former at a competitive disadvantage and do 
much to greatly discourage the continued commercial development 
of the Net.
    These provisions were added in direct response to testimony 
from a State tax administrator, who offered his view to members 
of the Telecommunications Subcommittee at a July 1997 hearing 
that the protections provided by Quill to remote sellers 
without a substantial in-State physical presence do not apply 
to businesses engaged in electronic commerce. During the 
hearing, the tax administrator admitted that if a resident of 
his State uses the telephone to purchase a good from as out-of-
State vendor, his State would not be permitted to reach beyond 
its borders to impose its tax collection obligations on that 
vendor unless it otherwise has a substantial in-State 
physicalpresence. Yet the tax administrator claimed that if the 
Internet were used to place the order (instead of the telephone or the 
U.S mail), his State would be able to require the out-of-State vendor 
to collect taxes, on the specious grounds that the flow of data over 
the Internet into his State, the ``presence'' of a web page on a 
computer server located in-State, or the supposed ``agency'' 
relationship between the remote seller and an in-State Internet access 
provider would be enough to give the remote seller a substantial 
physical presence in his State.
    These arguments fly in the face of 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 before a State has the requisite 
substantial nexus to impose its tax collection obligations on 
an out-of-State business. While the Courts, in light of Quill, 
are likely to view the arguments made by State tax 
administrators on these matters with great skepticism, far 
greater certainty can be provided by specifically outlawing 
State efforts to pursue aggressive theories of nexus in an 
attempt to tax this emerging marketplace. This deterrence 
should also result in decreased litigation which will benefit 
States, localities, taxpayers and an often overworked Court 
system.
    Section 10(3)(B)(i) defines ``discriminatory tax'' in such 
a way as to make it clear that Congress considers the use of a 
computer server by a remote seller to create or maintain a site 
on the Internet to be so insufficient a presence that it shall 
never be used in any way by a State or locality in determining 
whether a remote seller has substantial nexus.
    Section 10(3)(B)(ii) defines ``discriminatory tax'' so as 
to prohibit a State or political subdivision from deeming a 
provider of Internet access or online service to be an 
``agent'' of a remote seller in those common instances where 
such provider displays a remote seller's information or content 
on such provider's computer server (even if located in-State), 
or where such provider maintains or updates a web page on an 
in-State computer server for a remote seller. Even if the 
Internet access or online service provider provides other 
ancillary services, such as web page design or account 
processing, it should be treated no differently than a 
telephone company or mail carrier, neither of which are 
considered agents for purposes of taxation.

                     No Expansion of Tax Authority

    Section 11 expressly states that nothing in the Act shall 
be construed to expand the power of any State or political 
subdivision to collect taxes on Internet access, online 
services, bits, or electronic commerce beyond the power that 
existed on March 1, 1998. This is intended to make it clear 
that any Court reviewing the validity of State and local taxes 
should continue to do so consistent with existing judicial 
precedent and interpretations of the Commerce Clause of the 
United States Constitution. This Act is not meant to subvert 
existing requirements that a tax be applied on an interstate 
activity with a ``substantial nexus'' (determined through a 
``bright-line'' physical-presence test) with the taxing 
jurisdiction, be fairly apportioned, not discriminate against 
interstate commerce, and be fairly related to the services 
provided by the jurisdiction. It is fully intended that a State 
or local tax not subject to the provisions of this Act shall 
not be valid if such tax would otherwise constitute an undue 
burden on interstate and foreign commerce.

                               Conclusion

    For many government officials, developing new taxes for new 
technologies often proves an irresistible temptation. More than 
a century and a half ago, Michael Faraday invented the dynamo--
the first electric motor--by rotating a current-bearing wire 
around a suspended magnet. He became so well-known for this 
invention that, one day, he was granted an audience before King 
William IV. When he described what he had developed, the King 
looked at him and asked: ``But, after all, what use is it?'' 
Faraday came back with a quick response: ``Only time will tell, 
but of this I am certain: Someday, sir, you will tax it.''
    The Internet Tax Freedom Act shows that the government can 
indeed learn the lessons of the past. Through its enactment, we 
can protect the infant technology of the Internet from the very 
real and very destructive dangers of predatory taxation. And in 
so doing we will help ensure that all of us live to realize the 
vast potential of the World Wide Web.

                                                         Chris Cox.

                  ADDITIONAL VIEWS OF HON JOHN DINGELL

    H.R. 3849, the ``Internet Tax Freedom Act,'' unanimously 
passed the Committee on May 14, 1998. The bill was introduced 
only two days earlier and came before the Full Committee with 
amazing speed and a sense of deja vu. A different version, H.R. 
1054, bore the same title and was approved by the 
Telecommunications Subcommittee last October. However, that 
bill contained several infirmities.
    While I strongly supported the notion that Internet-based 
businesses should be treated in a fair and non-discriminatory 
way from a tax standpoint, the actual language of the original 
bill did not accomplish this result. Instead, it conferred 
substantial regulatory and tax benefits on Internet-related 
businesses, benefits not available to businesses providing 
identical services through other channels.
    H.R. 3849 is a vastly improved bill. I commend Chairman 
Bliley, Representative Cox, and their respective staffs for 
their work with the Minority to achieve consensus on these 
issues. The tax moratorium is now limited to Internet access 
and online services, and existing State taxes are 
grandfathered.
    One problem does remain, however. The grandfather for 
existing State taxes does not extend to similar taxes legally 
imposed by local government authorities. I hope that this was 
simply an oversight by the Committee, and that the grandfather 
provision was intended to cover existing laws enacted by local 
jurisdictions. Local laws are entitled to the same protection 
as laws enacted by any other level of government. I urge my 
colleagues to support this important modification when the bill 
comes before the House for consideration.
    Another important improvement to H.R. 3849 is that it 
retains existing Federal and State authority to regulate 
telecommunications services that are provided in combination 
with Internet access. This approach preserves the Committee's 
longstanding bipartisan telecommunications policy to regulate 
(or not regulate) like services in a like manner. Whether 
telephone services are provided over copper wires, digital 
loops, circuit switches or Internet protocol, companies will be 
treated consistently under this bill.
    Just as important, it means that this Committee's 
longstanding bipartisan commitment to Universal Service, i.e., 
ensuring affordable phone service is available for all 
Americans, also is solidly maintained into the future. If a 
company provides a telecommunications service, it will continue 
to be responsible under existing law to contribute to these 
support mechanisms no matter what conduit it uses to provide 
the service.
    The changes made to H.R. 3849 are critical to maintaining 
the cohesive nature of our Nation's telecommunications 
policies. While we may feel protective of the Internet as we 
would a newborn child, not wanting to stifle its growth in any 
way, we must also be responsible enough to see the long term 
consequences of a complete hands-off approach. I believe H.R. 
3849 now strikes the correct balance.

                                                   John D. Dingell.

                                
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