[Senate Report 105-184]
[From the U.S. Government Publishing Office]
Calendar No. 357
105th Congress Report
SENATE
2d Session 105-184
_______________________________________________________________________
INTERNET TAX FREEDOM ACT
_______
May 5, 1998.--Ordered to be printed
_______________________________________________________________________
Mr. McCain, from the Committee on Commerce, Science, and
Transportation, submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany S. 442]
The Committee on Commerce, Science, and Transportation, to
which was referred the bill to establish a national policy
against State and local government interference with interstate
commerce on the Internet or interactive computer services, and
to exercise congressional jurisdiction over interstate commerce
by establishing a moratorium on the imposition of exactions
that would interfere with the flow of commerce via the
Internet, and for other purposes, reports favorably thereon
with an amendment in the nature of a substitute and recommends
that the bill, as amended, do pass.
Purpose of the Bill
The purpose of the bill is to foster the growth of
electronic commerce and the Internet by facilitating the
development of a fair and consistent Internet tax policy.
Background and Needs
Commerce conducted through use of the Internet is
experiencing tremendous growth. According to Forrester Research
Inc., a Massachusetts consulting firm, the value of goods and
services traded over the Internet could grow to over $300
billion in 2002, a substantial increase from the $8 billion
that electronic commerce is estimated to have generated in
1997. This immense growth is expected to boost our nation's
economy by creating new jobs and new business opportunities.
The Internet also offers advantages such as providing
small- and medium-sized companies the opportunity to compete
with multinational conglomerates because they can now gain
access to consumers globally without having to invest in costly
marketing and distribution channels. Moreover, through the
Internet, individuals in rural areas will have the same access
to goods and services as those located in urban areas, and
disabled and elderly persons will be able to purchase products
without having to leave their homes.
The benefits to be gained by the surge in electronic
commerce could be stifled, however, by the haphazard imposition
of multiple and confusing State and local taxes that apply only
to Internet-related transactions and services. If these taxes
are not levied in a consistent and equitable manner, electronic
commerce will not continue to develop at its expected pace.
In general, there are three types of Internet taxation.
Some States tax Internet access charges, which are fees
Internet service providers (ISPs) impose on Internet users for
access to the Internet and other services like electronic mail.
About 12 States subject Internet access charges to a sales, use
or other transaction tax while others view Internet access as a
tax-exempt service.
Another type of Internet-related tax is one that involves
sales of goods over the Internet. When a consumer orders a
product online, it is often delivered through traditional
channels, like the U.S. mail. Such transactions are sometimes
compared to mail order catalogue sales. In the latter
situation, taxability of a transaction turns on the issue of
nexus. Under the United States Supreme Court's Quill decision,
a seller cannot be subject to a State's tax jurisdiction unless
it has a ``substantial nexus'' with that jurisdiction.
Substantial nexus can exist if a seller has a physical presence
in the taxing jurisdiction, such as a store, office, or
warehouse, or if the seller's agent, such as a sales
representative or contractor, is conducting business in a
location.
These traditional notions of nexus are difficult to apply
to the Internet because of the way that Internet transactions
occur. For example, a company can be based in State A, have a
server located in State B, and receive an order from a consumer
in State C who purchases a product from the company and has the
product delivered to State D. Under these circumstances, it is
unclear which State would have the ability to tax the event.
One problem is that State and local taxing authorities may
disagree on whether or not maintenance of a server in their
location is sufficient to establish nexus. A State or locality
also could decide that an ISP which hosts a World Wide Web site
on its servers for another company is an agent of that company.
In either situation, the same transaction could be subjected to
multiple taxes.
A third type of Internet tax concerns purchases of software
or information through the downloading of the software or
information off of the Internet. Most States only tax tangible
goods, tangible goods traditionally being those that you can
physically see and touch. Many States take different positions
on whether downloading software is a transfer of a tangible or
intangible good. Currently, approximately 25 States tax the
downloading of software or information from the Internet while
such transactions are tax exempt in as many as 17 States.
Confusing and inconsistent interpretations of these
important issues could lead to redundant taxation and
uncertainty regarding the tax collection and remittance
obligations of Internet-based companies. Such confusion and
uncertainty can be enough to discourage companies from doing
business on the Internet. In particular, small- and medium-
sized companies will be adversely affected. The Internet is a
low cost way for these companies to market their products to
customers worldwide. While a substantial portion of the
country's 30,000 taxing jurisdictions have not adopted Internet
taxes, the potential costs of complying with the tax demands of
these authorities could make use of the Internet uneconomical
for such companies.
Most State and local commercial tax codes were enacted
prior to the development of the Internet and electronic
commerce. Efforts to impose these codes without any adjustment
to Internet communications, transactions or services or to
impose discriminatory Internet-related taxes will lead to State
and local taxes that are imposed in unpredictable and overly
burdensome ways. Before States and localities are allowed to
take such actions and thereby stunt the growth of electronic
commerce, a temporary moratorium on Internet-specific taxes is
necessary to facilitate the development of a fair and uniform
taxing scheme. Congress has the authority under Article I,
section 8, clause 3 of the United States Constitution to
establish such a moratorium because communications or
transactions using the Internet, online services, and Internet
access service are all services or activities that are
inherently interstate in nature.
Because policymakers must be given an opportunity to
develop an equitable, technology-neutral tax policy, this
moratorium is intended to prohibit taxes that discriminate
against Internet communications or transactions and Internet
access and online services.
Legislative History
introduction
S. 442 was introduced on March 13, 1997, by Senator Wyden.
may 22, 1997 hearing
The full committee held a hearing on S. 442, the Internet
Tax Freedom Act, on May 22, 1997.
witnesses
Panel I
Hon. Christopher Cox (R-CA)
Hon. Rick White (R-WA)
Hon. Lawrence H. Summers, Deputy Secretary, Department of Treasury
Panel II
Timothy Kaine, Richmond City Councilman, National League of Cities,
Richmond, Virginia
Wade Anderson, Director of Tax Policy, Office of the State Comptroller,
State of Texas
Kendall Houghton, General Counsel, Committee on State Taxation
Linda Rankin, General Counsel, Bear Creek Corporation
James Walton, Association of Online Professionals
panel i
Congressman Cox testified that it is Congress' responsibility
to examine what is necessary to promote the continued
development of the Internet. He stated that there are over
30,000 taxing jurisdictions that could tax Internet
communications, transactions or services. He asserted that if
these jurisdictions do tax the Internet in pursuit of their own
interests, the Internet will not continue to grow at its
phenomenal rate. Congressman Cox also stated that the
moratorium would apply only to taxes that target the Internet
and that are applied in a discriminatory way. He also said that
it is possible for Congress to work with the States and the
special taxing jurisdictions on this issue. He noted that the
California State Board of Equalization, the California
Franchise Tax Board, and the Governor of the State of
California have voted unanimously to endorse S. 442.
Congressman White argued that the moratorium in S. 442
applies only to special taxes on the Internet. It does not
include nondiscriminatory taxes such as a property tax on a
building that houses an Internet server. He also asserted that
it is Congress' duty, pursuant to the Commerce Clause of the
United States Constitution, to protect the Internet as a
national market phenomenon. According to Congressman White,
States and localities should not be allowed to harm the
Internet by imposing unfair taxes.
Lawrence Summers testified that the Treasury wholeheartedly
supports the goals and objectives of S. 442. In November of
1996, the Treasury issued a white paper on taxes relating to
electronic commerce, and its central principle was that there
should be no taxes directed at limiting or scaling back the
growth of the Internet. He agreed with the approach of
temporarily prohibiting discriminatory taxes while preserving
technology-neutral taxes. Summers noted the potential chilling
effect of possible future taxes on business activity and stated
that it will be much easier to deal with the tax issue at an
early stage. He said that S. 442 furthers important public
policy objectives because it will help business, make the
United States more competitive, and empower American citizens
by promoting the growth of Internet technology.
panel ii
Timothy Kaine testified that an indefinite moratorium on
State and local Internet taxes is unnecessary because so few
States and localities actually tax the Internet. He stated that
the moratorium would harm localities by denying them revenue
they now rely on and would promote discriminatory treatment of
local businesses. Kaine also said that S. 442 is inconsistent
with the Unfunded Mandates Reform Act of 1995. He asserted that
State and local governments and business interests can work
together to establish a fair tax policy. He also suggested that
the bill should be amended to preserve other existing, neutral
taxes, such as local property taxes. He expressed concern about
the burden of local taxation falling harder on Main Street
retailers than on companies who conduct business over the
Internet.
Wade Anderson expressed concern about the preservation
language in S. 442. He said that sales taxes are the primary
revenue source in Texas. Anderson also mentioned that Texas
does tax Internet access charges because they view it as a
local transaction. He stated that electronic commerce and
Internet access are 2 distinct areas that can be addressed
separately. Anderson also asserted that there is no end date
for the moratorium in the bill.
Kendall Houghton testified that the moratorium in S. 442 will
do three positive things. First, it will send a message to
States and localities that electronic commerce is not to be
taxed in inconsistent and burdensome ways that will hamper the
growth of the Internet. Second, it will facilitate constructive
dialogue among the different interests involved. Third, it will
help American companies compete on a global basis. Houghton
said that Congress can act in this area pursuant to its
Commerce Clause authority. She also stated that taxpayers are
clearly willing to pay their fair share of taxes on electronic
commerce.
Linda Rankin stated that the potential of the Internet could
be severely impaired if this national and international
business medium is subjected to a host of provincial taxes
without coordination and consideration of the national
interest. She said that while the United States Supreme Court
has ruled a number of times that to force national marketers
with no presence in a State to collect and remit sales and use
taxes would be an undue burden on interstate commerce, States
have repeatedly tried to impose these duties on out-of-State
marketers. Rankin asserted that under pressure to raise needed
revenue, State and local governments will act without regard to
national policies or the economy as a whole.
James Walton testified that he received opinion letters from
the Tennessee Department of Revenue in 1994 and 1996 stating
that as an ISP, he did not provide a taxable service, and
therefore, he did not have to collect sales tax. In 1996, after
his business was audited by the Tennessee Department of
Revenue, Walton was told that he should have been collecting
sales tax on Internet access charges since January of 1993.
This decision caused Walton's business to fail, and Walton
ultimately was forced to file for bankruptcy protection. Walton
asserted that ISPs already pay taxes on every phone line they
use, on every dollar they make, and on the salaries they pay.
He said that the Internet industry has become a target for
State and local taxing authorities seeking to increase their
revenues.
november 4, 1997 executive session
In open executive session on November 4, 1997, the Committee
ordered reported S. 442, the ``Internet Tax Freedom Act,'' by a
vote of 14 to 5, with an amendment in the nature of a
substitute.
Estimated Costs
In accordance with paragraph 11(a) of rule XXVI of the
Standing Rules of the Senate and section 403 of the
Congressional Budget Act of 1974, the Committee provides the
following cost estimate, prepared by the Congressional Budget
Office:
U.S. Congress,
Congressional Budget Office,
Washington, DC., January 21, 1998.
Hon. John McCain,
Chairman, Committee on Commerce, Science, and Transportation, U.S.
Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate and mandates statement for
S. 442, the Internet Tax Freedom Act. The bill contains an
intergovernmental mandate as defined in the Unfunded Mandates
Reform Act of 1995.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Rachel
Forward (for federal costs), and Pepper Santalucia, (for the
state and local impacts).
Sincerely,
June E. O'Neill, Director.
Enclosure.
CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
S. 442--Internet Tax Freedom Act
CBO estimates that enacting S. 442 would result in new
discretionary spending of less than $1 million over the 1998-
2003 period, assuming appropriation of the necessary amounts.
Because the bill would not affect direct spending, pay-as-you-
go procedures would not apply. S. 442 contains no private-
sector mandates as defined in the Unfunded Mandates Reform Act
of 1995 (UMRA), but it does contain an intergovernmental
mandate on state and local governments (see the attachment
mandates statement).
S. 442 would impose a moratorium on certain state and local
taxation of online services, Internet access service, and
communications or transactions using the Internet until January
1, 2004. In addition, S. 442 would require the Secretaries of
Treasury, Commerce, and State to examine domestic and
international taxation of these Internet services and to
recommend policies regarding the taxation of such services to
the President. Based on information provided by the affected
agencies, CBO estimates that the agencies would spend a total
of less than $1 million between 1998 and 2000 to complete the
studies required by the bill, assuming appropriation of the
necessary amounts.
The CBO staff contact for this estimate is Rachel Forward.
This estimate was approved by Robert A. Sunshine, Deputy
Assistant Director for Budget Analysis.
CONGRESSIONAL BUDGET OFFICE MANDATES STATEMENT
S. 442--Internet Tax Freedom Act
Summary: S. 442 contains no private-sector mandates, but by
prohibiting the collection of certain types of state an local
taxes, the bill would impose an intergovernmental mandate as
defined in the Unfunded Mandates Reform Act of 1995 (UMRA). 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 bill: S. 442 would
place a moratorium until January 1, 2004, on certain state and
local taxes on online services, Internet access service, or
communications or transactions using the Internet. The
moratorium would not affect state and local taxes on these
services and transactions as long as the taxes meet certain
criteria in the bill. Because existing taxes are not
specifically grandfathered by the bill, any current taxes that
fail to meet these criteria would be preempted until the year
2004.
Estimated direct costs of mandates to State, local, and tribal
Governments
Is the statutory threshold exceeded?
Because it is unclear how the criteria in the bill would
apply to the state and local taxes that are currently levied on
Internet-related transactions or services, CBO is unable to
determinewhether the threshold for intergovernmental mandates
($50 million in 1996, indexed annually for inflation) would be exceeded
in any of the first five years of the moratorium. The applicability of
many of the criteria and definitions allowing for the collection of
certain taxes would likely be litigated, and we cannot predict the
outcome of such litigation at this time. If the criteria allowing for
the collection of taxes are interpreted narrowly and if, as a result,
most or all existing taxes that could be affected by this bill are
suspended, the loss of revenues would probably exceed the threshold.
Total direct costs of mandates
UMRA includes in its definition of the direct costs of a
federal intergovernmental mandate the estimated amounts that
state, local, and tribal governments would be prohibited from
raising in revenues in order to comply with the mandate. The
direct costs of the mandate in S. 442 would be the tax revenues
that state and local governments would be precluded from
collecting because of the moratorium.
Because the taxation of Internet-related services and
transactions is changing rapidly, it is possible that in the
absence of this legislation some state and local governments
would impose new taxes or decide to apply existing taxes in
this area over the next five years. (UMRA requires CBO to
estimate the direct costs of a mandate for the first five years
that it is effective.) It is also possible that during this
time some state and local governments would repeal existing
taxes or administratively limit their application to Internet-
related services and transactions. These changes would affect
the ultimate cost of the mandate but are extremely difficult to
predict. Therefore, for the purposes of preparing this
estimate, CBO limited its analysis to those taxes currently
collected by state and local governments.
S. 442 would temporarily prohibit state and local
governments from taxing Internet access service, online
services, or communications or transactions using the Internet,
unless the tax fell into one of the categories of taxes
specifically preserved by the bill. These categories include:
taxes imposed on or measured by net or gross income
derived from such services;
taxes imposed on or measures by value added, net
worth, or capital stock;
fairly apportioned business license taxes;
property taxes;
taxes imposed on or collected by common carriers or
other providers of telecommunications service;
franchise fees imposed on cable services; and
sales, use, or other transaction taxes that are also
imposed and collected ``in the case of similar sales,
uses, or transactions not using the Internet, online
services, or Internet access service.''
While many existing taxes would clearly fall within one of
these categories and thus would be preserved, some current
state and local taxes do not fit neatly in one of the
categories. These taxes are sales, use, or other transaction
taxes on internet access and online services and on information
and data processing services. As described below, however, CBO
cannot predict whether these taxes would be temporarily
suspended by the bill's moratorium.
Basis of estimate: The moratorium in S. 442 could affect
some taxes currently collected by state and local governments.
For the purpose of preparing an estimate of those potential
losses, CBO gathered information from 25 states and from
interest groups representing both state governments and the
industries that would be affected by the bill.
Taxes on Internet Access Service and Online Services. CBO
has identified 12 states nationwide that currently impose a
sales, use, or other transaction-based tax on the fees charged
by providers of Internet access or online services. Some of
those states also allow local taxes on these same services.
Half of these states tax Internet access as an information or
data-processing service. The other half tax Internet access as
a telecommunications service. In general, states could not
provide definitive estimates of their tax revenues, because
many providers of these services also provide other taxable
services and typically remit their tax collections to the
states as one sum. In addition, the industry is growing so
quickly that revenue figures from previous years are not very
useful for estimating present collections. Based on the
information that states could provide and on national market
data, CBO estimates that 1997 revenues for the 12 states and
various localities that currently collect these taxes were
close to $50 million. Given the rapid growth in use of the
Internet, these revenues are likely to grow in coming years as
more households and businesses decide to purchase Internet
access.
It is not clear whether S. 442 would allow states and
localities to continue collecting all of these revenues. The
question is whether the taxes are also imposed and collected in
the case of ``similar sales, uses, or transactions not using
the Internet, online services, or Internet access service.''
This question is likely to be the subject of litigation.
In the case of a sales/use tax on information and data
processing services, a state wishing to preserve its tax could
argue that it imposes the tax both on Internet access and on
similar services not using the Internet, such as Westlaw or
Lexis/Nexis. However, a provider could argue that Internet
access is significantly different from access to a single data
base, and that sales of Internet access should not be
considered ``similar sales'' for taxation purposes. The same
arguments could be made concerning taxes imposed on Internet
access and online services as telecommunications services. It
is not clear whether courts would find these services
``similar'' to other telecommunication services, such as
telephone, fax, paging, and voice mail.
Taxes on Information and Data Processing Services. CBO also
cannot predict exactly how S. 442 would affect sales, use, or
other transaction-based taxes on information services or data
processing services provided via the Internet or online
services. For decades, companies have provided these services
by allowing customers to directly connect to the companies'
computers via modem. It is increasingly common, however, for
firms to also provide these services over the Internet. In some
cases, the companies are completely Internet-based.
A 1996 survey by the Federation of Tax Administrators
identified 15 states that levy a sales, use, or other
transaction-based tax on some kinds of information and data
processing services. Some of those states also allow localities
to levy an additional sales tax on these same services. Of
those states and localities, three states and one major city
were able to provide estimates of their revenue from these
sources. The 1997 revenues for these jurisdictions alone were
between $35 million and $45 million annually. As with Internet
access, the market for information and data processing services
provided over the Internet is growing quickly, and state tax
revenues from this market are likely to follow suit. Some
portion of future revenues could be interrupted by the bill's
moratorium.
If S. 442 were enacted, states and localities would have to
show that they tax the sales or use of information services
provided via the Internet the same way that they tax
``similar'' sales or uses not using the Internet or online
services. CBO expects that litigation would be required to
determine which state and local taxes pass this test. For
example, a state that levies a sales tax on the subscription
that a customer pays to access news or financial information at
an Internet site could argue that the tax is preserved, because
it also applies to computer-based information services that do
not utilize the Internet. However, the information provider
could argue that its product is more similar to newspapers and
magazines, which may not be subject to sales and use tax in the
state.
Regulatory Impact Statement
In accordance with paragraph 11(b) of rule XXVI of the
Standing Rules of the Senate, the Committee provides the
following evaluation of the regulatory impact of the
legislation, as reported:
number of persons covered
This legislation will impose a moratorium on the imposition,
assessment, or collection of State and local taxes that
discriminate against communications or transactions using the
Internet, and against online services or Internet access
service. It will have no effect on the number of individuals
regulated.
economic impact
This legislation establishes a moratorium until January 1,
2004, on State and local taxes that discriminate against the
Internet. It would preserve State and local taxing authorities'
ability to impose traditional sales and use taxes, excise
taxes, and other taxes that are technology-neutral. These taxes
make up the vast majority of State and local tax revenues.
Therefore, any adverse economic impact that the moratorium
would have is minimized. In addition, this measure will allow
for growth in electronic commerce and the Internet industry and
will thereby create benefits for the economy.
privacy
This legislation will not have any adverse impact on the
personal privacy of the individuals affected.
paperwork
This bill will require State and local taxing authorities
temporarily to stop imposing, assessing or collecting
discriminatory Internet taxes. Therefore, the paperwork
requirements associated with this measure should be minimal.
Section-by-Section Analysis
Section 1. Short title
Section 1 provides that the bill may be cited as the
``Internet Tax Freedom Act.''
Section 2. Findings
Section 2 includes the findings of Congress. Among the
findings are: that as a massive global network spanning not
only State but international borders, the Internet and the
related provision of online services and Internet access
service are inherently a matter of interstate and foreign
commerce within the jurisdiction of the United States Congress
under Article I, section 8, clause 3 of the United States
Constitution; that consumers, businesses and others engaging in
interstate and foreign commerce through online services and
Internet access service could become subject to more than
30,000 separate taxing jurisdictions in the United States
alone; and that because the tax laws and regulations of so many
jurisdictions were established long before the advent of the
Internet, online services, and Internet access service, their
application to this new medium and services in unintended and
unpredictable ways could prove to be an unacceptable burden on
interstate and foreign commerce of the Nation.
Section 3. Moratorium on the imposition of taxes on the Internet,
online services, or Internet access service
Section 3 of the reported bill establishes a moratorium,
which expires on January 1, 2004, on State and local taxes that
discriminate against communications and transactions using the
Internet, and online services and Internet access service. The
purpose of the ``time out'' on discriminatory taxes is to allow
for a process to examine current policies and practices and to
develop policy recommendations with respect to taxation of
communications and transactions using the Internet, online
services, and Internet access service. Ideally, this process
will produce policies on taxation that eliminate any
disproportionate burden on interstate commerce conducted
electronically and establish a level playing field between
electronic commerce using the new media of the Internet and
traditional means of commerce, such as in-store sales, mail
order and telephone sales. It is expected that participants in
electronic commerce will pay their ``fair share'' of State and
local taxes.
The original verion of the bill provided for an indefinite
moratorium on taxes that discriminate against the Internet. The
committee substitute establishes an end date for the
moratorium. The inclusion of an end date for the moratorium
strikes a balance between the interests of State and local
authorities in imposing taxes on the Internet, and businesses
that believe State and local tax authorities would simply
``wait out'' the moratorium and then tax electronic commerce in
whatever manner they desired. The duration of the moratorium is
designed to allow the Consultative Group established in Section
4 of the Act sufficient time to develop policy recommendations
for the President, for the President to prepare policy
recommendations for Congress, and for Congress or the State and
local authorities to act upon any legislative policy
recommendations made by the President pursuant to the work of
the Consultative Group.
Section 3(a) provides that except as otherwise provided in
this Act, prior to January 1, 2004, no State or political
subdivision thereof may impose, assess, or attempt to collect
any tax on communications or transactions using the Internet,
online services or Internet access service. The moratorium
would not affect any State or local tax on communications or
transactions using the Internet, online services or Internet
access service as long as they are imposed or assessed in a
technologically neutral and nondiscriminatory way. The
moratorium applies to both existing and new taxes and
administrative interpretations that are inconsistent with the
provisions of this Act. For example, the moratorium would apply
to a tax that a State or local authority imposes and assesses
on a subscription to a newspaper accessed online if that State
does not also tax a newspaper subscription ordered over the
telephone or through the mail. The moratorium would also apply
to ``double taxation'' of products or services, such as a tax
imposed or assessed on telecommunications services provided by
a local phone company to an Internet service provider (ISP)
where the ISP has already paid a tax on the telecommunications
services.
The moratorium applies to online services, Internet access
service, or communications or transactions conducted through
the Internet, regardless of the technology being used to
deliver these services--e.g., the public switched network,
cable systems, and wireless networks. However, it applies only
to the portion of the medium being used to provide such
services. For example, the moratorium would apply to
discriminatory taxes imposed on online services via a cable
network, but only to the portion of the cable network
provider's communications or transactions that employ the
Transmission Control Protocol, Internet Protocol, or any
predecessor or successor protocols. The moratorium does not
allow a cable network, public switched network or wireless
network to claim or to seek immunity from taxes--discriminatory
or otherwise--for the provision of other products or services,
such as cable programming or telephone calls, that do not
employ the Transmission Control Protocol/Internet Protocol, or
any predecessor or successor protocols.
Section 3(b), Preservation of State and Local Taxing
Authority, specifically preserves the authority of State and
local entities to tax in a nondiscriminatory manner online
services, Internet access service, and communications or
transactions using the Internet. Existing taxes are
specifically grandfathered by the bill provided they are
imposed and assessed in a nondiscriminatory and
technologically-neutral manner. This subsection specifically
preserves sales, use, or other transaction taxes; taxes imposed
or measured by gross or net income derived from online
services, Internet access service, or communications or
transactions using the Internet, or on value added, net worth
or capital stock; fairly apportioned business license taxes;
taxes paid by a provider or user of online services or Internet
access service as a consumer of goods and services; property
taxes imposed or assessed on property owned or leased by a
provider or user of online services or Internet access service;
taxes imposed on or collected by a common carrier acting as a
common carrier; taxes imposed on or collected by a provider of
telecommunications service (as defined in the Communications
Act of 1934 (47 U.S.C. 153)); and franchise fees for the
provision of cable services.
The bill as reported preserves general forms of State and
local taxation, which account for the vast majority of State
and local level tax revenues on an annual basis; they will be
unaffected bythe bill. These taxes include net income taxes,
gross income (e.g., business license) taxes, property taxes and sales
and use taxes. The bill as introduced preserved three types of taxes;
the committee substitute significantly expands the coverage to preserve
the eight most common types of taxes.
Subsection (b)(1) would ensure that transactions effected
through the Internet or online services which are functionally
equivalent to transactions effected through traditional forms
of commerce (e.g., mail order or phone sales) remain subject to
sales and use tax. Other transaction taxes include taxes on the
sale of alcohol, tobacco, and fuel. For example, if a taxable
event occurs when a customer orders a computer from a mail
order company, using its 1-800 telephone line to place the
order, then the transaction should likewise be taxable if that
customer goes online to order the computer from the mail order
company's Web site.
Another example involves software vendors that deliver their
product electronically and who have had to analyze the sales
tax implications of the mode of delivery of their products.
Traditionally, determining whether a software vendor has a
sales or use tax obligation involves a 2-step analysis. First,
it must be determined whether the electronic delivery of the
software is considered tangible personal property subject to
tax or whether it should instead be treated as exempt
intangible property. As an illustration, Virginia has ruled
that software which would otherwise be taxable as the sale of
tangible personal property is not subject to tax when delivered
electronically because the electronically-delivered software is
considered intangible property. Second, if the software is
taxable, the seller must have the requisite nexus with the
jurisdiction in order to have a sales and use tax collection
obligation. Thus, if the seller does not have any physical
presence in the jurisdiction, either through employees or
property, the seller may not have a tax obligation regardless
of the tax classification of the software. States must treat
sales of other electronically-delivered items, such as movies
and music, in a like manner.
Pursuant to the bill as reported, 2 conditions must exist in
order to preserve the ability to impose a sales or use tax on
an electronic commerce transaction: (1) the tax (including the
rate at which it is imposed) is the same as it would have been
had the transaction been conducted via telephone (e.g., as a
catalogue sale); and (2) the obligation to collect the tax is
imposed on the same person or entity as in the case of non-
electronic commerce transactions (e.g., the vendor has the duty
to collect and remit the tax, in both cases). In other words,
as long as the State or local sales tax is imposed on Internet
transactions at the same rate and in the same manner as mail
order transactions, then the tax is not affected by the bill.
As a related matter, the committee substitute directly
addresses concerns about the labeling of taxes raised by the
State of Hawaii (e.g., that its General Excise Tax will be
suspended during the period of the moratorium) and the State of
Illinois (e.g., that its Retail Occupation Tax will be
suspended during the period of the moratorium). These taxes may
have different names or labels, but the purpose they serve is
that of a sales tax, and experts widely regard and call them
such. The use of the term ``sales or use tax'' in the committee
substitute is intended to apply to the many varieties of sales
and use taxes, regardless of their label.
Subsection (b)(2) would ensure that participants in
electronic commerce pay their fair share of State and local
income taxes. Because income taxes are typically imposed in a
neutral fashion (e.g., without regard to the manner in which
the income is earned or derived) and do not create inordinate
compliance burdens, income taxes are specifically excluded from
the moratorium. The committee substitute removes the word
``net'' so as to preserve both net income taxes and gross
income taxes. States' business taxes are typically imposed on
or measured by net income, but not every State takes this
approach: one example of an alternative business tax is the
Washington State Business and Occupation Tax, which is imposed
on gross rather than net income. The committee substitute, by
eliminating the word ``net,'' broadens the income tax
preservation to include net and gross income taxes and
clarifies that Washington's State-level income tax is
preserved. Similarly, California imposes a ``franchise tax''
that is measured by the net income of corporations subject to
the tax; although the tax is not labeled as an ``income tax,''
it clearly operates in the prescribed fashion and is
specifically preserved by the committee substitute.
Subsection (b)(3) preserves fairly apportioned business
license taxes, which are typically imposed on the gross
receipts of businesses that have a location within the taxing
jurisdiction. Such taxes are a significant source of revenue
for localities. The committee substitute provision is
consistent with United States Supreme Court precedent by
requiring business license taxes to be fairly apportioned. By
including the words ``fairly apportioned,'' the committee does
not intend to imply that other preserved taxes do not have to
be fairly apportioned.
Subsection (b)(4) preserves taxes paid by a provider of
Internet or online services as a consumer of goods and services
not otherwise excluded from taxation pursuant to this
legislation. This subsection was added to the original version
of the bill to ensure that Internet service providers and other
entities providing Internet and online services pay State and
local taxes when acting as consumers (e.g., purchasing goods
and services) as opposed to providing electronic commerce
services. The bill as reported does not excuse Internet sellers
and online service providers from paying sales and use taxes on
their purchases. Where an Internet or online service provider
purchases a good or service that is already subject to a resale
exemption, such exemption should continue to apply.
Subsection (b)(5) preserves property taxes imposed or
assessed on property owned or leased by an Internet or online
service provider. Property taxes include real property,
personal property, and intangible property taxes assessed on
property that is owned or leased. This subsection was added to
the original version of the bill to reflect the committee's
intent that the moratorium would not apply to property taxes
assessed or collected at the State or local level.
Subsection (b)(6) preserves taxes imposed on a common carrier
acting as a common carrier, and subsection (b)(7) preserves
taxes imposed on a provider of telecommunications services to
ensure that State and local telecommunications taxes, fees, and
regulations are unaffected by the bill. The preservation of
this taxing authority, added to the original version of the
bill, is intended to apply to entities when they act as
telecommunications service providers and not as Internet access
or online service providers. For example, a company that
provides both telecommunications and Internet access service
and uses its lines to provide Internet access does not cause
such lines to be exempt from telecommunications taxes.
Subsection (b)(8) preserves franchise fees imposed by a State
or local franchising authority for the provision of cable
services. The preservation of this authority, which parallels
the provisions of subsections (b)(6) and (7), ensures that
cable providers remain liable for local franchise fees in
connection with the provision of cable services, pursuant to
section 622 or 653 of the Communications Act of 1934.
The broad preservation of State and local taxing authority
set forth in section 3(b) is not intended to be an inclusive or
exhaustive list of preserved taxes; rather, it is illustrative
of the general categories of taxes that State and local
authorities impose or assess on businesses and consumers. State
and local authorities may continue to impose and assess sales,
use, and other transaction taxes on communications and
transactions using the Internet, online services or Internet
access services provided the tax is the same tax imposed on
traditional means of commerce, and the obligation to collect or
pay the tax is imposed on the same person as in the case of
traditional means of commerce. Sales, use, and other
transaction taxes that create a substantively greater burden on
electronic commerce or participants in electronic commerce than
other means of commerce are not preserved. For example, the
preservation authority in this subsection means that if a State
generally imposes and collects a sales or use tax on mail order
sales, then it may impose and collect a sales or use tax on
sales made using the Internet, online services or Internet
access service. This subsection does not provide special
protection from taxes for communications or transactions using
the Internet, online services or Internet access service that
are also generally applied to communications or transactions
using other means, such as mail order or in-store retail;
rather, it seeks to ensure that taxes are imposed and assessed
in a technologically neutral way and in a manner that does not
discriminate against communications or transactions using the
Internet, online services or Internet access service.
Section 4. Administration policy recommendations to Congress
Section 4 establishes a process by which the Administration,
State and local governments, and business and consumer groups
will examine current policies and practices, and develop and
recommend to Congress policies on taxation of communications
and transactions using the Internet, online services, and
Internet access service.
Section 4(a) directs the Secretaries of the Treasury,
Commerce and State, in consultation with appropriate committees
of Congress, State and local authorities, and consumer and
business groups, to examine United States domestic and
international taxation of communications and transactions using
the Internet, online services, and Internet access service, and
the telecommunications infrastructure used by them, and to
jointly transmit within18 months of the date of enactment of S.
442 any recommendations to the President. It is expected that the
Consultative Group first will determine whether taxes should be imposed
and assessed on communications and transactions using the Internet,
online services and Internet access service. Second, if taxation is
recommended, it is expected the Consultative Group will examine and
recommend policies to ensure such taxation is uniform, fair, and
administrable. It is expected the Consultative Group will evaluate
current domestic and foreign policies and practices on taxation of
communications and transactions using the Internet, online services,
and Internet access service, and will develop policy recommendations
for the President on taxation of the Internet, online services, and
Internet access service. The Consultative Group shall consider any
specific proposals from the National Tax Association's Joint
Communications and Electronic Commerce Tax Project and the National
Conference of Commissioners of Uniform State Laws.
The confusion caused by the variety of ways in which
different States tax communications and transactions using the
Internet, online services, and Internet access service is
underscored by the Congressional Budget Office (CBO) in its
January 21, 1998 estimate, on S. 442. The CBO states it ``has
identified 12 States nationwide that currently impose a sales,
use or other transaction-based tax on the fees charged by
providers of Internet access or online services. Some of those
States also allow local taxes on these same services. Half of
these States tax Internet access as an information or data-
processing service. The other half tax Internet access as a
telecommunications service. In general, States could not
provide definitive estimates of their tax revenues because many
providers of these services also provide other taxable services
and typically remit their tax collections to the States as one
sum.'' If communications and transactions using the Internet,
online services or Internet access service are to be taxed,
then the tax policy should be simple, uniform, and
administrable.
Section 4(b) directs the President not later than 2 years
after the date of enactment of S. 442 to transmit to the
appropriate committees of Congress policy recommendations on
taxation of online services, Internet access service, and
communications and transactions using the Internet.
Section 5. Declaration that the Internet should be free of foreign
tariffs, trade barriers, and other restrictions
Section 5 expresses the sense of the Congress that the
President should seek bilateral and multilateral agreements
through appropriate international organizations and fora to
establish that commercial transactions using the Internet are
free from tariff and taxation. This section supports the policy
of the Administration to work to create a worldwide ``duty free
zone'' on the Internet.
Section 6. Definitions
Section 6 sets forth the definitions of the ``Internet,''
``online services,'' ``Internet access service,'' and ``tax''
for purposes of S. 442. The definitions of the ``Internet,''
``online services,'' and ``Internet access service'' apply only
to the terms as used in the reported bill, and are not intended
to affect in any way existing law, regulation, or policy.
Rollcall Votes in Committee
In accordance with paragraph 7(c) of rule XXVI of the
Standing Rules of the Senate, the Committee provides the
following description of the record votes during its
consideration of S. 442:
Senator McCain (for himself, Mr. Wyden, Mr. Burns, and Mr.
Kerry) offered an amendment in the nature of a substitute to S.
442. By rollcall vote of 14 yeas and 5 nays as follows, the
amendment was agreed to:
YEAS--14 -- NAYS--5
Mr. McCain- Mr. Gorton
Mr. Stevens \1\ Mrs. Hutchison
Mr. Burns- - Mr. Ford \1\
Ms. Snowe-- Mr. Bryan \1\
Mr. Ashcroft \1\- Mr. Dorgan
Mr. Frist \1\
Mr. Abraham
Mr. Brownback
Mr. Hollings
Mr. Inouye
Mr. Rockefeller
Mr. Kerry \1\
Mr. Breaux
Mr. Wyden
\1\ By proxy
Changes in Existing Law
In compliance with paragraph 12 of rule XXVI of the Standing
Rules of the Senate, the Committee states that the bill as
reported would make no change to existing law.
MINORITY VIEWS OF SENATOR DORGAN
I oppose S. 442, the Internet Tax Freedom Act on several
grounds, not the least of which is the fact that this
legislation constitutes one of the more significant federal
assaults on state and local sovereignty in recent memory. In my
judgment, this legislation is unwarranted and if enacted, it
would significantly erode state and local tax bases and hurt
main street businesses. The claims of the bill's sponsors that
S. 442 is needed to fend off aggressive tax discrimination by
states and to prevent a crippling burden on Internet commerce,
as well as the erroneous assertion that Internet traffic
constitutes a unique form of interstate commerce, are without
foundation and cannot justify this broad reaching assault on
state and local sovereignty. I object to the notion that the
Congress ought to step in and write state and local tax laws.
Until specific tax problems or abuses are identified and
supported with evidence, federal legislation of this nature
should not be entertained.
This legislation violates the Unfunded Mandates Reform Act of
1995 (P.L. 104-4) and I intend to raise a point of order on
this legislation should it be considered by the full Senate.
Because the billcontains ambiguous language and new definitions
which have not been adequately reviewed by the Commerce Committee, the
bill's exact impact on state and local revenues is hard to determine at
this point. However, it is clear that the impact will be large, the
question is how large (in terms of hundreds of millions of dollars).
In addition to the unfairness of Congress dictating state and
local tax policy, this legislation would create an unfair
competitive situation with respect to telecommunications
providers and local business by carving out a specific
technology from broad based state and local taxation; placing
some telecommunications providers and local businesses at an
unfair disadvantage because they would remain subject to state
and local taxation. This bill creates more than just a tax
break--it creates a technology preference policy and a new
unregulated, untaxable medium for commerce. What is the
justification for singling out Internet commerce for special
tax treatment? Why should buying a sweater through an Internet
service be exempted from the same tax that is imposed when the
identical sweater is purchased at a store on main street or
purchased through a mail order catalog? The tax effect of this
bill is that Internet commerce will be given favored tax
treatment, and that is not fair to other lines of commerce.
This should raise concerns with not just state and local
governments but the businesses and individuals that are left
subject to regulations and taxes. It is my belief that taxes--
whether federal, state, or local--ought to be imposed in a fair
and equitable manner and I object to the approach embodied
under S. 442 which creates a special tax status for a
particular technology and category of users who have not made a
public policy case why government should single them out for
special tax treatment.
The effect of this legislation, if enacted in its present
form, would be to create the ``Cayman Islands'' of sales taxes
by establishing a tax free haven that will hurt main street
businesses and dictate to state and local governments an
inequitable application of sales, use, and other taxes that
have historically been under state and local jurisdiction. This
legislation attempts to create a ``tax free access road'' along
the information superhighway that will unfairly hurt local
businesses and create an unfair competitive situation with
respect to the use of telecommunications services; creating a
``nexus free'' medium for commerce that will circumvent state
and local tax laws that all other businesses are obligated to
follow. Given the fact that the Internet is a new medium and
business activity is just beginning to grow in this area, it is
not surprising that there would be issues that need to be
resolved. However, these issues should be resolved
appropriately--through cooperative discussions between industry
and state and local governments. Congress should not dictate a
moratorium on state and local governments. In fact, I contend
that the moratorium imposed under S. 442 will actually be
counter productive to the efforts of those who are attempting
to develop uniform taxation of electronic commerce.
Further, the ambiguities in terms of what is included in the
legislation's moratorium and the vague definition of the so-
called exceptions to that moratorium indicate that the bill is
certain to create extensive litigation as telecommunications
providers and businesses that use electronic commerce vie for
the tax breaks provided by this legislation.
legislation is unwarranted
S. 442 is a solution in search of a problem. The proponents
of this legislation have simply failed to make the case that it
is necessary to pass federal legislation preempting state and
local taxation on electronic commerce. It seems to me that if
Congress is to consider taking such drastic action as to tell
state and local governments how they can and cannot tax, then
those seeking the tax breaks must make a compelling case that
such action is necessary. That case has certainly not been made
with respect to S. 442.
Advocates have claimed that electronic commerce is being
subjected to unfair and discriminatory taxation by state and
local governments. The fact is that there is no discriminatory
taxation occurring that warrants a federal moratorium.
Proponents have failed to identify a single enacted state or
local law that singles out Internet services or on-line
services for punitive or discriminatory taxation. The bill's
advocates fail to identify any specific tax in any specific
state or local jurisdiction which would justify a federal
preemption. The justification cited by the advocates seeking
the tax preemption is that state and local governments are
discriminating against Internet providers and on-line services
in their taxation policies is simply not grounded in fact.
Different tax treatment of a newspaper, for example, may be due
to the fact that products that are exempt from a sales tax in
tangible form may be subject to a sales tax in electronic form
because it is available through an online service--which, in
general, is subject to a broad based use tax. The reason why it
may be taxed in the latter situation is because it is part of a
broad based use, sales, or other taxes on ``information
services'' regardless of the method of delivery--not because of
an Internet-specific tax. Even if there were discriminatory
taxation occurring at the state or local levels, there is no
need for a federal law to correct that situation for such
taxation has long ago been declared unconstitutional. If a
state or local government were to impose a discriminatory tax,
then those who are subject to such discriminatory taxation have
constitutional protection. Each state must, and does, provide
ready avenues to aggrieved taxpayers to protest potentially
discriminatory taxes through the court system. The U.S. Supreme
Court has determined that fairly apportioned state and local
taxation that does not discriminate against interstate commerce
are constitutional so long as the tax is applied on an activity
with a substantial nexus with the taxing state.\1\ Court
precedent has made it clear that discriminatory taxation is not
constitutional.\2\
---------------------------------------------------------------------------
\1\ Quill v. North Dakota, 504 U.S. 298 (1992).
\2\ A variety of types of discrimination in state taxation have
been struck down by the state and federal courts. For example, the
Pennsylvania courts determined that a statutory exemption from the
sales and use tax and corporate taxes that was allowed for broadcasters
but not for cable television operators violated the Equal Protection
Clause of the U.S. Constitution, in Suburban Cable TV Co. V.
Commonwealth, 570 A.2nd 601 (Pa. Cmwlth. 1990), aff'd, 527 Pa. 364, 591
A.2d 1054 (1991), Taxes that discriminated among speakers that were
based on content [Arkansas Writers] Project, Inc. v. Ragland, 481 U.S.
221 (1987), City of Cincinnati v. Discovery Network, Inc., 507 U.S. 410
(1993)], or that singled out the press or targeted a small group of
speakers [Grosjean v. American Press Co., 460 U.S. 575 (1983)], have
been struck down as violations of the First Amendment. And, tax
classifications that discriminated against interstate commerce have
been determined to be violations of the Commerce Clause, Boston Stock
Exchange v. State Tax Commission, 429 U.S. 318 (1977), Armco Inc. v.
Hardesty, 467 U.S. 638 (1984).
---------------------------------------------------------------------------
I am opposed to discriminatory taxation and I will not defend
attempts by state or local governments to single out electronic
commerce for punitive or discriminatory taxation. However, no
evidence of such discriminatory taxation has been presented to
the Congress that would substantiate the claims of the bill's
proponents.
I believe that there is no policy justification for the
moratorium on state and local taxation in this legislation.
There is not a signal state or local enacted law, currently in
effect, that imposes a specific tax on Internet or on-line
services or the use of those services. There are instances
where these services are taxed, but where they are taxed, they
are subject to broad based taxes that apply generally to sales
of goods and services or to telecommunications services or
similar business activities.
The bill advocates have also claimed that the legislation is
necessary to address fears that states and localities will
impose taxes on the transmission of Internet traffic. The
bill's findings suggest that the future viability of the
Internet is threatened because of excessive taxation and that
state and local taxes are restricting the growth of this
medium. Internet commerce hardly shows any sign of being
impeded. The sponsors claim that without federal protection,
Internet commerce would be strangled as state and local
governments seek to impose taxes on the transmission of
Internet traffic, regardless of any nexus determination. Such
claims have no foundation. The Supreme Court has ruled that
there must be a sufficient connection between the state and the
activity seeking to be taxed, and the mere transmission of
communications through a state is insufficient to meet this
test. No new Federal law is necessary to address this fear.\3\
---------------------------------------------------------------------------
\3\ Cf: Goldberg v. Sweet, 488 U.S. 252 (1989) establishing that a
state may tax interstate telephone services only if the origin or
destination of the call was within the state AND the billing address
for the call was in the state. Moreover, the Court required that there
be a mechanism to avoid multiple taxation by two or more states to pass
constitutional muster.
---------------------------------------------------------------------------
It is important to note that Internet commerce is thriving
without the special federal protection that the bill sponsors'
claim is urgently needed. In 1997 alone, web-generated revenues
exceeded $24 billion, which was an 800 percent increase from
the previous year. Web-generated revenues are forecasted to
exceed $300 billion by 1999 and over $1 trillion by the year
2001, constituting increases from 1996 of 1130 percent and 3875
percent respectively. The total value of goods traded in 1997
on the Internet was an estimated $8 billion and is expected to
reach $327 billion by the year 2002 \4\--absent any special tax
protection imposed by the Congress. Compared to other
industries, Internet commerce is far from a struggling infant.
According to figures from Standard and Poor's, in 1997, the
wireless telecommunications industry grew 20%; biotechnology
revenues grew 15%; radio advertising 8.2%; national network
television advertising 3.1%; and air transportation revenues
0.2% from the previous year. The growth of Internet commerce--
which is growing at an annual rate exceeding 800%--is
staggering compared to these other major growth industries.
---------------------------------------------------------------------------
\4\ The Forrester Report, Volume One, Number One (July, 1997).
---------------------------------------------------------------------------
Finally, there is nothing unique about the ``interstate''
nature of on-line commerce, which is the foundational premise
of this legislation, according to the sponsors. The issues
surrounding the debate over how to tax Internet commerce are
fundamentally no different than the debates over the past 30
years over mail order sales and other matters of interstate
commerce. This legislation uses the ``interstate nature'' of
Internet commerce as justification to further exacerbate the
current inequities for local businesses with respect to their
mail order competitors who are often not collecting the same
local sales taxes for example. The only unique quality in the
debate over Internet commerce taxation viz a viz other forms of
commerce is the technological means--not its interstate nature.
There is no policy justification to enact a federal tax break
that will cost state and local governments millions of dollars
simply because a new technology has emerged into commerce.
unfunded mandate
The preemption imposed under this legislation constitutes an
unfunded mandate on state and local governments that could cost
them billions of dollars in revenue that is needed for
education, welfare services, transportation infrastructure and
other state and local needs. I take seriously the new era of
federal-state relations that was set when the Congress passed
the Unfunded Mandates Reform Act of 1995 (PL 104--4) and I
believe that the Congress ought to resist granting special
interest tax breaks at the expense of state and local
governments. In the past few years, numerous special interests
have come running to Congress seeking special tax breaks at the
state and local level. In the last Congress, I saw satellite
companies, airlines, busing companies, cellular companies, and
even the National Weather Service, claiming that they needed a
special tax break at the expense of state and local
governments. The scenario in each case is similar where special
interests claim that state and local governments are unfair and
are signaling them out for special taxation. Each special
interest makes the same assertion that they are victims of
discrimination by unreasonable local and state governments that
Congress must take up their cause. But the facts reveal that
the necessity of federal preemption are rarely, if ever,
warranted.
S. 442 places an unfunded mandate on states and local
governments and would be subject to a point of order under the
Unfunded Mandates Act enacted in the last Congress. Since the
bill affects both future and present methods of state and local
taxation, the financial impact on state and local governments
is likely to be very significant. The basic premise of S. 442
flies in the face of the principle that the Congress ought to
return power to the states and I reject the notion that
``Washington knows best.'' It would be unfortunate if the
Congress would undermine the important principle of deferring
to state and local governments in areas that are traditionally
in their jurisdiction such as taxation.
According to the CBO analysis required under the Unfunded
Mandates Reform Act, (January 21, 1998) the version of S. 442
that was reported by the Senate Commerce Committee ``contains
an intergovernment mandate as defined in the Unfunded Mandates
Reform Act of 1995'' and that the bill would preempt ``existing
taxes.'' Because of the ambiguity of the language in the bill
with respect to the preemptions on state and local taxes, the
CBO stated that it could not estimate whether or not the bill
in its present form would exceed the statutory threshold
established in the unfunded mandates law ($50 million
annually). CBO predicts that litigation that will likely occur
over the ambiguous language in this legislation and, depending
on the interpretation provided to the terms in the bill after
court battles, the loss of revenues to state and local
governments could probably exceed the $50 million threshold
test under the Unfunded Mandates Reform Act.
The CBO's determination that the scope of the bill's impact
on state and local revenues cannot be accurately determined
triggers Section 424(a)(3) of the Unfunded Mandates Reform Act
which states that:
[I]f the Director determines that it is not feasible
to make a reasonable estimate that would be required
under paragraphs (1) and (2), the Director shall not
make an estimate, but shall report in the statement the
reasons for that determination in the statement. If
such determination is made by the Director, a point of
order under this part shall lie only under section
425(a)(1) and as if the requirement of section
425(a)(1) had not been met.
Section 425(a)(1) states that:
[I]t shall not be in order in the Senate or the House
of Representatives to consider any bill or joint
resolution that is reported by a committee unless the
committee has published a statement of the Director on
the direct costs of Federal mandates in accordance with
section 423(f) before such consideration * * *
Thus, S. 442 is subject to a point of order in the Senate
should S. 442 be considered by the full Senate, the first vote
on this legislation will be on the point of order raised under
the Unfunded Mandates Reform Act.
impact of s. 442
S. 442, would, among other things, preempt state and local
taxes by imposing a moratorium on state and local taxation on
Internet or on-line services until 2004. S. 442 would prohibit
state and local taxation on ``communications or transactions
using the Internet and online services or Internet access
service.'' In addition to the certain litigation that will
occur over the scope and meaning of this broad and ambiguous
language if this legislation is enacted, there are serious
consequences that could be financially devastating for local
businesses and the budgets of state and local governments.
While the bill sponsors contend that Sec. 3(b) preserves
certain state and local taxes from the preemption, I am not
convinced. Such a claim cannot be held with much confidence
since it is not possible to determine--without extensive
litigation--whether or not the specific state and local taxes
identified under this subsection will be upheld or preempted.
The structure of the bill, which establishes a blanket
prohibition followed by several exceptions creates uncertainty
and the risk of litigation for states and localities, which
will have to prove for every challenge that their taxes fall
completely and squarely within one of the exceptions.
This legislation takes the approach of establishing a broad
preemption of taxation of electronic commerce and then attempts
the absurd by authorizing state and local governments to impose
only certain types of taxes. If an existing state or local tax
does not meet the exact description provided under this
legislation, then such tax would be preempted. This approach is
fatally flawed and instead of identifying and addressing any
particular problem of state or local tax application on
Internet commerce, it will launch a new era of litigation that
will cost state and local governments and corporations millions
in unnecessary court battles.
Communications using the Internet would be excluded from
state and local taxation under this legislation, which
establishes a very broad application of Internet commerce and
excludes all communications using the Internet and online
services from state and local taxation. Thus, the preemption in
the bill would affect any tax applied to e-mail services, web
page hosting, advertising, and Internet telephony. This would
create a circumstance where communications through other
telecommunications mediums would be subject to tax but the same
service provided through the Internet would be exempted from
that same tax.
This legislation is not prospective. Instead, it exempts a
certain category of users--i.e., electronic commerce--from
existing taxes. The Commerce Committee heard testimony from the
Texas Comptroller of Public Accounts who said that the state of
Texas alone would lose hundreds of millions of dollars in
revenues from existing broad-based taxes that would be
preempted under this legislation.\5\ In addition, a survey of
some states conducted by the Federation of Tax Administrators
calculated that several states would lose between $1 million
and $1.5 billion each.\6\
---------------------------------------------------------------------------
\5\ Attachment A.
\6\ Attachment B.
---------------------------------------------------------------------------
The bill creates more questions about taxation than it
resolves. The findings suggest that Internet services are
solely a matter of interstate commerce, thereby implying that
state and local jurisdictions have no authority to impose a
regulation or tax on any aspect of Internet services. What is
it that makes Internet services different from other forms of
interstate telecommunications services that justifies this
privilege status? Long distance phone calls that cross state
boundaries are interstate commerce. However, like Internet
services, telephone calls have a local origin and a local
destination. As a result, telephone services are not shielded
from state or local jurisdiction. Internet and on-line
communications ought to be treated in similar fashion.
Does the assertion that Internet services are solely a matter
of interstate commerce mean that no state or local government
could impose a state or local regulation of any kind? How does
this affect the growing controversy over direct alcohol sales
and the attempt of state and local governments to regulate
access to Internet pornography, the growing commerce of
Internet pornography, and the burgeoning field of Internet
gambling? What impact does this policy have on state and local
attempts to address problems associated with the Internet being
used to lure minors into sexual encounters or the distribution
of pornographic material that would otherwisebe banned or
prohibited if it were distributed to minors through other mediums? If
Internet commerce is solely a matter of interstate commerce, then does
that mean state and local laws that require minimum drinking ages would
not apply to the distribution of alcohol via Internet commerce? Is this
legislation the beginning of a slippery slope agenda designed to make
the Internet a tax-free, regulation-free medium that will not only
disrupt the fair and non- discriminatory application of state and local
taxes but also undermine the ability of local communities to control
otherwise illegal activity such as the distribution of alcohol to
minors? Under the bill, can electronic commerce be used to conduct tax-
free, regulation-free Internet gambling and games of chance?
The revised version of S. 442 provides new federal
definitions on a broad range of state and local taxes such as
sales and use taxes, property taxes, income taxes, franchise
taxes, and business license taxes. In analyzing the bill, the
question is: what kinds of sales and use taxes, for example,
fall within the definition in the bill and what kinds of sales
or use taxes fall outside of the definition and therefore would
be preempted? Below is a discussion of just a few examples of
the problems created by this legislation by the vague language
and broad preemption.
Income Taxes. The bill attempts to preserve corporate income
taxes. However, the bill does not take into account the
different ways in which states impose corporate income taxes
and how they apportion revenues and assets to determine those
taxes. The bill raises questions as to how states are going to
have to differentiate between revenues derived from Internet
services as opposed to other services. With respect to states
that impose corporate income taxes, how will this bill affect
the manner in which these states apportion income related to
Internet services as opposed to other telecommunications
services? Will states have to restructure their income taxes
differently for determining income derived from Internet
services as a result of this legislation? To my knowledge, the
Committee has not obtained an analysis on how this legislation
will affect the imposition of income taxes on those states that
provide Internet services; neither has the Committee reviewed
the corporate income statutes in all the states to determine
whether or not there are any states that currently apply income
taxes measured by something other than gross or net revenue or
on net worth or capital stock. The Committee never conducted an
analysis on the various means that States use to determine
income taxes to determine which income taxes are not included
in this clause so as to provide a means to avoid the
determination of income in that particular instance.
The beneficiaries of the tax break provided under this
legislation will include some very significant
telecommunications and computer companies who not only provide
Internet services but other telecommunications services as
well. I fear that this legislation will create a significant
tax loophole for major corporations.
In addition, there is the question as to how this legislation
affects payroll taxes such as unemployment insurance and
workers compensation taxes. Would these taxes--which are paid
by corporations that provide Internet services and online
services--be preempted? These are not income taxes and there is
no mention in the exceptions of this legislation to ensure that
the corporations receiving the tax breaks provided under this
legislation would have to pay payroll taxes, unemployment
taxes, or workers compensation taxes.
Fairly apportioned business license taxes. What is the
meaning of fairly apportioned business license taxes in this
legislation? There is already a constitutional requirement that
taxes on interstate commerce be fairly apportioned.\7\ Does the
inclusion of this phrase in this legislation suggest a
different meaning? The Committee did not determine what state
and local governments currently impose business taxes nor did
it determine whether or not this phrase refers to all kinds of
business license taxes or only certain specific types of
business license taxes.
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\7\Cf: Complete Auto Transit v. Brady.
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Because of the way in which the preemption under this
legislation is structured (i.e., imposes a broad preemption
than identifies exceptions to that broad preemption), a tax
that operates like a business tax but is named something else
and may not be directly related to the privilege of doing
business will be preempted.
According to a letter addressed to Senator McCain dated
October 3, 1997,\8\ the State of Texas claimed that this
legislation would cost the State of Texas about $1.5 billion.
My understanding is that the business license taxes supposedly
permitted under Sec. 3(b) do not include the Texas franchise
tax which is imposed on all telecommunications carriers,
including Internet service providers and commerce over that
medium. How does this provision relate to the franchise tax on
telecommunications services imposed in a state like Texas and
why would Texas come to the conclusion that this legislation
would cost them $1.5 billion?
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\8\ Cf: Attachment B.
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According to a letter from the Comptroller of the State of
Texas, Wade Anderson,\9\ said that the franchise tax imposed by
Texas is not a business tax and therefore would be preempted
under this legislation. The Committee never conducted an
assessment on how the franchise taxes in States like New York
and Ohio would be impacted under this provision. What is a
business license tax? How is it defined in the bill? What
happens if a tax is called a ``privilege tax?'' Who decides
whether it will be treated like a ``business license'' tax?
Here again, the structure of the bill creates a problem in that
if a tax does not fall squarely within the 4-corners of one of
the exceptions, it could be prohibited.
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\9\ Cf: Attachment A.
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Sales Taxes. Section 3(b)(6)(A) of the bill states that sales
taxes would be exempted from the moratorium if they are imposed
on ``similar sales or transactions.'' But, ``similar'' is
highly ambiguous. Does this refer to an item-by-item comparison
(e.g., electronic newspaper vs. tangible newspaper) or is it a
comparison of classifications of taxation (e.g., use taxes on
like tangible products or use taxes on electronic services or
products?) In addition, the ambiguity creates a whole host of
issues and potential litigation as to what constitutes a
``similar sale.'' It is my understanding that in the case of
newspapers, some jurisdictions have exempted the tangible
versions from sales taxes (based on statutes decades old) but
the electronic version is captured under a broader sales or use
tax on ``computer services'' or ``information services.'' Would
this legislation mean that in those jurisdictions where this
situation exists, the broader computer services tax or
information services tax would be preempted? If that is the
interpretation, would that not then create an incentive for
those jurisdictions to remove their sales tax exemptions on
tangible versions to avoid a major revenue loss because this
new law would strike down their broad based computer services
tax or their broad based information services tax?
Our understanding is that some states impose sales taxes on
computer information services--which is unique to Internet or
online commerce in terms of its delivery and distribution in
some cases. Computer and information service taxes are unique
by their very nature, but the imposition of them may not
suggest discrimination. If, in a state or local jurisdiction,
sales taxes were imposed on all information services, then does
that mean the sales tax on computer and information services is
preempted or would it be permissible under this legislation?
What is the impact of the bill on sales and use taxes applied
to Internet access charges to end consumers? If the sales tax
is applied generally to telecommunications, does it meet the
``similar sales'' requirement of Section 3(b)? What if the tax
exempts residential service, or applies only to intra- and
interstate long-distance calls? Does it still meet the
``similar sales'' requirement? Who will decide? The latest
version seems to allow sales taxes on access charges if they
meet the requirement of also being applied to ``similar'' sales
not involving the Internet. The problem is it just becomes
another area for litigation.
What is the impact of the bill on sales taxes on electronic
information services? In some services, a person can receive
news already sorted by specified topics delivered to one's
computer daily. A data base of historical news of particular
stocks with regular updates and performance for example can be
delivered as well. Is this a ``similar sale'' to a newspaper or
a library or the services of a stockbroker? Will the bill allow
a state or locality to impose a tax on that service since it
all takes place using the Internet? Some research and services
are available only on-line. In this case, what will determine
whether or not there is a similar sale? The point here is the
difficulty created by the sales tax preservation language. The
``similar sale'' language will create a great deal of
litigation and constrain the ability of states and localities
to make reasonable decisions and classifications on what they
want to tax and what they do not want to tax.
Most importantly, the bill attempts to establish that
electronic commerce sales should be compared to mail order or
direct marketing sales in determining whether the seller should
be required to collect use taxes on the transaction. As we all
know, the Supreme Court has held that states may not require a
direct marketer without physical presence in the state to
collect such taxes.\10\ The bill attempts by fiat to treat all
electronic commerce marketers as mail order marketers and to
prevent states from requiring them to collect use taxes whether
or not they have the requisite presence in the state. The
effect is to blow a gaping hole in the revenue base of state
and local governments and to further place main street
businesses at a competitive disadvantage.
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\10\ Cf: Quill v. North Dakota, 504 U.S. 298 (1992).
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About half of all revenues to state governments are derived
from sales taxes. Any preemption of that revenue base could
have a dramatic impact on States. According to a recent
Federation of Tax Administrators report, 14 states impose sales
taxes on computer and information services and 11 states impose
sales taxes on computer and data processing services. It is not
clear how the sales taxes in these states be impacted under
this bill and whether or not the states that impose such sales
taxes will satisfy the ``similar'' test under Sec. 3(b)(6)(A).
Unfortunately, the Committee has not done a sufficient analysis
on what State and local sales taxes would be preempted and
which ones would be permissible under this legislation and
nobody, including the bill sponsors nor CBO, can explain with
confidence the full scope of the impact this legislation will
have on State and local sales taxes.
Finally, section 3(b)(4) of the bill would exempt ``taxes
paid by a provider or user of online service or Internet access
service as a consumer of goods and services not otherwise
excluded from taxation pursuant to this Act.'' What kinds of
taxes are referenced in this subsection? The clause ``not
otherwise excluded from taxation pursuant to this Act'' seems
to create a negative, canceling out what tax is being referred
to in the first part of the sentence.
The revised version says that the tax preemption does not
apply to common carriers acting in their capacity as common
carriers. Does this mean that transnational taxes and access
charges would not be preempted when common carriers--such as
phone companies--provide Internet service but the same service
would be preempted from taxes if it were provided by someone
other than a common carrier? Is this an equitable application
of a tax?
Despite the failed attempts of the legislation to preserve
certain types of taxes from the broad preemption imposed, there
are a range of taxes on the books in many States and local
governments that are clearly not mentioned in Sec. 3(b) and
therefore would be preempted under this legislation. Those
taxes include:
Franchise Taxes. There are at least 3 states that impose
franchise taxes: Texas, New York, and Ohio and these taxes
would be preempted under S. 442 with respect to Internet
services and online services, but would still apply to other
telecommunications services. The bill does not specifically
mention that franchise taxes are preserved and therefore I can
only conclude that these would be preempted with respect to the
application of these kinds of taxes on Internet commerce.
Information Services Taxes. There are 11 states that have
information services taxes which would be preempted. Those
states are: South Dakota; Texas; New Mexico; South Carolina;
Iowa; Connecticut; Ohio; Pennsylvania; Colorado; New York; and
District of Columbia. It appears that under this legislation,
Internet services and online services would be exempted from
the information services taxed in these States.
Internet Access Taxes. The legislation specifically preempts
Internet access taxes. I understand that 16 States have laws
taxing Internet access: Tennessee; South Dakota; Texas; New
Mexico; Utah; South Carolina; Iowa; Connecticut; Ohio;
Illinois; North Dakota; Wisconsin; West Virginia; Colorado;
Alabama; and the District of Columbia.
Tobacco and Alcohol Taxes. Tobacco sales over the Internet
are growing fast. Under this legislation, it appears that
tobacco sold through Internet commerce or through an online
service would be exempted from taxes whereas tobacco purchased
at a store remain subject to tax. The same situation exists for
alcohol sales--which I understand is a growing problem, not
only with respect to taxes but also with respect to minors
accessing alcohol through Internet commerce, circumventing
state and local laws designed to limit access to alcohol and
tobacco. Will this bill allow special excise taxes to be
applied to the purchase of cigarettes, cigars, wine and the
like over the Internet? In some states, it is possible to
purchase certain quantities of these products via mail order or
by phone orders and a requirement that state tobacco taxes or
liquor taxes be paid. If they are purchased over the Internet
under this bill, the sale would seem to be tax exempt because
there is no exception for the taxes.
Gaming Taxes. Where gaming taxes exist, they would be
preempted under this legislation with respect to gaming
activity over the Internet.
Telecommunications Excise Taxes. The effect of the bill on
existing special telecommunication excise taxes on Internet
access charges to the end consumer and the purchase of
telecommunications services to create the networks that make up
the Internet is unclear at best. Only a couple of states impose
a special telecommunications excise tax (special in that it
applies only to telecommunications and not just Internet
access), but a number of others apply such a tax to the
purchase of telecommunications services that make up the
backbone of the Internet and the corporate intranet. There is
no exception for such taxes and therefore these taxes would be
preempted.
Definitions. The bill introduces new definitions, creating
uncertainty about the bill's impact. This legislation would
preempt taxation on ``online services'' and on ``Internet
access service,'' and it is not clear on how ``on line
services,'' as defined in this bill, relates to how these
services are defined in the Communications Act.
The term ``online services'' is defined as the ``offering or
provision of information, information processing, and products
or services to a user as part of a package of services that are
combined with Internet access service and offered to the user
for a single price.'' It appears this includes preempting taxes
on the use of Lexis/Nexus, stock quotations, real estate
listings, and other on-line data bases that are currently
subject to taxation.
Our understanding is that several states have statutes taxing
``information services,'' ``computer services,'' and ``data
processing'' services and these are interpreted as online
services. It appears that these taxes would all be preempted.
For the most part, the consumer paying these kinds of taxes are
law firms, corporations, and significantly-sized businesses. It
is the determination of the bill sponsors that law firms and
major companies need a break from these taxes? And have the
sponsors determined how much revenue is at stake here and would
be shifted to other revenue sources that may have a large
impact on individuals? In other words, it appears that the
preemption of taxation on online services is largely going to
benefit law firms; shifting State and local tax burdens on
individuals.
Finally, this definition may capture private communications
networks set up between the various locations of a single
business enterprise. These ``intranet'' networks are becoming
increasingly popular and are proliferating. Thus,
telecommunications taxes applied to the telecommunications
services used for such networks would be preempted.
``Internet access services'' are defined as the ``offering or
provision of the storage, computer processing, and transmission
of information that enables the user to make use of resources
found via the Internet'' i.e., the Internet connection. The
definition says that these services include the use of
telecommunications services and cable services defined under
602 of the Communications Act.
Does this mean that under the legislation, taxes on cable
services would be preempted from taxation? Or would a portion
of cable services, i.e., Internet services, be immune from
taxation while other cable services would remain subject to
taxation? I understand that the legislation says that franchise
fees for the provision of cable services are specifically
excluded from the preemption. However, the definition of
Internet access services suggests that any tax imposed on a
cable company outside of franchise fees would be preempted. Is
that the intent of the legislation: to provide a tax break for
cable companies who provide Internet access? Also, what is to
keep cable companies (and other telecommunications carriers for
that matter) from exploiting this special tax treatment by
classifying their other telecommunications services as Internet
access services? If Internet access qualifies for tax breaks,
what aspects of telecommunications networks would be excluded
from this special tax treatment and what would be included?
Does this definition mean that sales taxes imposed on cable
services would be preempted? Following the logic of the
legislation's claim that taxes on ``similar sales or
transactions'' would not be preempted, would that mean all
sales taxes on cable services would be preempted because of
Section 602 of the Telecommunications Act which preempts state
and local taxation on direct-to-home satellite services,
thereby ensuring that there are no other similar taxes?
There is also the concern about this definition undermining
universal service. According to the May, 1997 universal service
order issued by the Federal Communications Commission (FCC)
\11\ Internet service providers are specifically excluded from
the requirement to contribute to universal service. Under S.
442, cable services are classified as Internet services,
thereby creating a loophole for some providers to avoid the
requirement to contribute to universal service. Although
Section 7 of this legislation states that nothing in this Act
shall affect the implementation of the Telecommunications Act,
if this Act defines cable services as Internet services--which
the FCC specifically exempted from the Telecommunications Act's
requirements to contribute to universal service--this
legislation then establishes a new category of
telecommunications carriers excluded from the requirement to
contribute to universal service. Although this legislation does
not change the Telecommunications Act statute--it does expand
the exclusion created by the FCC's interpretation of the
Telecommunications Act in terms of allowing a new class of
telecommunications carriers to avoid contributing into
universal service.
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\11\ FCC Report and Order (FCC 97-157), May 7, 1997.
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summary
This legislation creates an unfair special interest tax break
for a particular category of telecommunications providers based
on technological means of commerce, provided on the backs of
state and local governments. Why should Congress decide that
one specific technology deserves a special tax break over other
means of commerce? The moratorium imposed in S. 442 would
create an unfair competitive situation by providing on-line
providers with a tax break that others not utilizing electronic
commerce would not receive. This is a tax break provided solely
on the basis of a particular technology, not on the service;
creating a technologically-specific preference policy. It is a
tax break that is not technologically neutral and therefore, it
runs counter to one of the fundamental principles of the
Telecommunications Act of 1996 that was designed to create a
regulatory environment to promote competition on a
technologically neutral basis.
S. 442 is the opposite of fairness and equitable tax
treatment. The fundamental approach of this legislation is not
to level the playing field but to tilt the field in favor of a
special class of commerce, namely electronic commerce. This
legislation is seriously flawed and ill-conceived and it ought
not be considered by the Senate until the Commerce Committee
and other appropriate Committees that have jurisdiction over
issues of taxation can explore the issues related to taxation
of electronic commerce.
This legislation would seriously hurt main street businesses,
creating a tax-protected avenue for commerce that discriminates
against main street businesses and other areas of commerce.
Under this bill, transactions and the use of a particular area
of commerce--namely, Internet use and online activity--receive
special federal tax protection. There are a whole host of
business activities which would be exempted from state and
local taxation as long as those activities are occurring over
the Internet and not from main street or mail order
distribution. Non-electronic commerce activity would remain
subject to State and local taxation.
This legislation will impose unfair taxation circumstances on
main street businesses and create a ``tax free'' pricing
advantage for those doing business via on-line services. Main
street businesses will be disadvantaged because they will have
to continue paying taxes that their competitors who use the
Internet as their commercial medium will receive special tax
treatment.
A dozen major state and local government organizations have
informed the Committee of their opposition of this legislation:
The National Governors Association;
The International City/County Management
Association;
The National Association of Counties;
The National Council of State Legislatures;
The National League of Cities;
The Council of State Governments;
The U.S. Conference of Mayors;
The National Association of County
Treasurers and Finance Officers;
The National Association of State Auditors,
Comptrollers, and Treasurers;
The National Association of
Telecommunication Officers and Advisors;
The National Association of State
Treasurers; and
The Government Finance Officers
Association.\12\
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\12\ Attachment C.
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My objective is to advance policies that neither favor nor
discriminate against particular types of commerce, electronic
or otherwise. In my judgement, electronic commerce ought not to
be subject to discriminatory taxation, nor should it receive
special tax treatment unless a legitimate public policy reason
requires unique tax status. So far, such a case has not been
made.
This legislation is harmful and counter productive to the
discussions currently taking place between industry and state
and local government officials that are attempting to develop
model legislation for the taxation of Internet services.
Discussions have been ongoing between the industry and state
and local government officials under the sponsorship of the
National Tax Association. NTA, working with industry and state
and local officials, is studying methods to address issues
related to the appropriate taxation of businesses using the
Internet and other issues related to on-line commerce. Although
the bill sponsors altered the original bill to limit the
moratorium to 6 years, I doubt that once the Internet industry
is provided with the special tax status afforded under this
legislation, they will never give up their special tax
privilege and will have no incentive to participate in those
discussions. S. 442 in its present form creates a circumstance
in which the industry will have no incentive to negotiate with
state and local governments to develop uniform taxation. By
installing a permanent tax preemption, the industry will have
the incentive to fight any new method of taxation. In contrast
to S. 442, we ought to create a level playing field where all
sides will have the appropriate pressure and incentive to work
cooperatively to develop a uniform method of taxation. The
Congress should encourage the industry to work in good faith
with state and local governments to address legitimate issues
of taxation of on-line services as opposed to granting a
special interest tax break. Granting a moratorium will not be
productive. Rather, it will be counter productive and will not
encourage either side to work for a consensus solution.
The Congress needs to be reminded about the serious
commitment that state and local governments are making to work
cooperatively with the industry to address legitimate concerns.
Imposing moratoriums on state and local rights do not move the
process forward. Rather, moratoriums will have a chilling
affect on these important discussions.
The National Governors Association also endorses this
approach instead of the legislation. According to a resolution
approved by the NGA at their winter meeting,\13\ the Governors
will continue to oppose federal action to preempt the sovereign
right of the states to determine their own tax policies. The
Governors therefore endorse the process undertaken by the
National Tax Association with the support of the Federation of
Tax Administrators and the Multistate Tax Commission to review
existing problems in the taxation of telecommunications and to
propose coordinated policies that will help states promote fair
competition while ensuring that the telecommunications industry
bears it fair share of taxation.
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\13\ Attachment D.
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It seems to me that the objective we should seek to
accomplish is to establish a uniform method of taxation of not
only Internet services but other telecommunications services
and lines of commerce as well. Section 4 of S. 442 is
productive in that it calls for a discussion between all levels
of government to study taxation issues and develop proposals
for a uniform taxation system. However, the process is already
taking place and the moratorium imposed under Sec. 3(a) defeats
the purpose of ensuring a good faith dialog. Our efforts ought
to focus on how to ensure that the existing process succeeds,
rather than creating an erosion of state and local tax bases.
The fundamental difficulty with S. 442 in its present form is
that it preempts existing broad based taxes and creates an un-
uniform method of imposing a whole host of state and local
taxes on commerce by exempting a specific technology from
existing broad-based taxes. I believe that taxes that target a
specific technology--such as the Internet--should not be
imposed. Broad-based taxes that are fair and reasonable because
they apply to all categories of services and on all categories
of telecommunications providers should not be carved up through
a special interest Federal preemption. Under S. 442, state and
local governments could lose hundreds of millions of dollars
because their existing broad-based taxes would have certain
persons and businesses carved out in an anti-competitive
fashion.