[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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \10\ Cf: Quill v. North Dakota, 504 U.S. 298 (1992).
---------------------------------------------------------------------------
  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.
---------------------------------------------------------------------------
    \11\ FCC Report and Order (FCC 97-157), May 7, 1997.
---------------------------------------------------------------------------

                                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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.





                                
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