[House Report 106-609]
[From the U.S. Government Publishing Office]
106th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 106-609
======================================================================
INTERNET NONDISCRIMINATION ACT OF 2000
_______
May 8, 2000.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Gekas, from the Committee on Judiciary, submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 3709]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to whom was referred the
bill (H.R. 3709) to make permanent the moratorium enacted by
the Internet Tax Freedom Act as it applies to new, multiple,
and discriminatory taxes on the Internet, having considered the
same, reports favorably thereon with amendments and recommends
that the bill as amended do pass.
TABLE OF CONTENTS
Page
The Amendment.............................................. 2
Purpose and Summary........................................ 2
Background and Need for the Legislation.................... 2
Hearings................................................... 6
Committee Consideration.................................... 6
Votes of the Committee..................................... 6
Committee Oversight Findings............................... 9
Committee on Government Reform Findings.................... 9
New Budget Authority and Tax Expenditures.................. 9
Congressional Budget Office Cost Estimate.................. 9
Constitutional Authority Statement......................... 11
Section-by-Section Analysis and Discussion................. 12
Changes in Existing Law Made by the Bill, as Reported...... 12
Minority Views............................................. 14
The amendments are as follows:
Strike out all after the enacting clause and insert in lieu
thereof the following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Internet Nondiscrimination Act of
2000''.
SEC. 2. 5-YEAR EXTENSION OF MORATORIUM ON STATE AND LOCAL TAXES ON THE
INTERNET.
(a) Extension of Moratorium.--Section 1101 of title XI of division
C of Public Law 105-277 (112 Stat. 2681-719; 47 U.S.C. 151 note) is
amended--
(1) in subsection (a)--
(A) by striking ``3 years after the date of the
enactment of this Act'' and inserting ``October 21,
2006'', and
(B) in paragraph (1) by striking ``, unless'' and
all that follows through ``1998'',
(2) by striking subsection (d), and
(3) by redesignating subsections (e) and (f) as subsections
(d) and (e), respectively.
(b) Technical Amendment.--Section 1104(10) of title XI of division
C of Public Law 105-277 (112 Stat. 2681-719; 47 U.S.C. 151 note) is
amended by striking ``unless'' and all that follows through ``1998''.
SEC. 3. APPLICATION OF AMENDMENTS.
The amendments made by this Act shall not apply with respect to
conduct occurring before the date of the enactment of this Act.
Amend the title so as to read:
A bill to extend for 5 years the moratorium enacted by
the Internet Tax Freedom Act; and for other purposes.
Purpose and Summary
The Internet Nondiscrimination Act, H.R. 3709, extends for
an additional 5 years the moratorium on internet access taxes
and multiple and discriminatory taxes on electronic commerce
imposed by the Internet Tax Freedom Act. It also eliminates the
current exception to the moratorium on internet access taxes
for selected States which had such taxes in place at the time
of the enactment of that act.
Background and Need for the Legislation
The Internet Tax Freedom Act, P.L. 105-277, created an
Advisory Commission on Electronic Commerce for the purpose of
conducting a thorough study of Federal, State and local, and
international taxation of transactions using the internet and
internet access. On April 12, 2000, the Commission submitted
its report to Congress. While the Commission was able to make
several formal findings and recommendations related to internet
taxation \1\, it did not achieve the two-thirds vote \2\
necessary to do so on the core issues pertaining to State sales
and use taxes. However, as a result of the Commission's work,
two competing proposals have emerged which address how the tax
system in the United States should be adjusted so that both
electronic commerce and Government can fulfill the roles
required of them in the new economy. It is clear that Congress
will have to spend time studying these proposals and hearing
from interested parties before determining how best to proceed
on this core issue--whether and how State and local taxing
authorities should be permitted to collect taxes on
transactions occurring over the internet.
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\1\ The report contains three formal findings and recommendations.
These relate to (1) the digital divide; (2) privacy implications of
internet taxation; and (3) international taxes and tariffs. Report to
Congress, Advisory Commission on Electronic Commerce, April 2000,
(hereinafter, Report) at 4. The Report may be viewed in its entirely on
the Commission's web site, www.ecommercecommission.org.
\2\ The Internet Tax Freedom Act provides that ``No finding or
recommendation shall be included in the report unless agreed to by at
least two-thirds of the members of the Commission serving at the time
the finding or recommendation is made.'' Section 1103, 47 U.S.C. 151
note.
---------------------------------------------------------------------------
Notwithstanding the Commission's inability formally to
issue a recommendation on internet taxation policies, there is
substantial unanimity that the current moratorium on taxes on
internet access and multiple and discriminatory taxes on
electronic commerce should be continued. The majority
position,\3\ which was discussed at length in the Report,
includes these two proposals:
---------------------------------------------------------------------------
\3\ The majority proposal was agreed to by a vote of 11 yeas, 1
nay, and 7 abstentions.
Make permanent the current moratorium on any
transaction taxes on the sale of internet access,
including taxes that were grandfathered under the
Internet Tax Freedom Act.
For a period of 5 years, extend the current
moratorium barring multiple and discriminatory taxation
of e-commerce and prohibit taxation of sales of
digitized goods and products and their non-digitized
counterparts;
Report at 19 and 23.
The minority viewpoint similarly urges extension of the
current moratorium:
The temporary moratorium on transaction taxes on
Internet access charges established in the Internet Tax
Freedom Act (ITFA) should be extended.
The temporary moratorium barring multiple and
discriminatory taxes on electronic commerce should be
extended for a period of time commensurate with the
implementation of sales tax simplification efforts
outlined below. Congress should then examine whether
these provisions of the ITFA should be continued.
A Proposal for a Streamlined, Fair Tax System, submitted to the
Advisory Commission on Electronic Commerce by Commissioners
Jones, Kirk, Leavitt, Lebrun and Loche at 4.
In addition, the three administration representatives on
the Commission (who were among those who abstained from voting
on the majority proposal) wrote in their individual statement
contained in the Report:
1. No Internet Access Taxes
The current statutory moratorium on Internet access
taxes should be made permanent.
It is critically important to encourage access to the
Internet. Because taxes on Internet access would create
an obstacle to the access of all Americans to the
Internet, and in turn, their ability to participate in
electronic commerce these taxes should be prohibited
permanently.
2. No Multiple and Discriminatory Taxes
The current statutory moratorium on multiple and
discriminatory taxes should be extended.
Multiple or discriminatory taxes on electronic
commerce plainly would hinder its development. The
existing statutory moratorium should be extended, and
final protections against such taxes should be crafted
after the States develop simplified sales tax systems.
Report at 58.
THE CURRENT MORATORIUM
The 3-year moratorium enacted as part of the Internet Tax
Freedom Act emerged from a debate that recognized the need to
avoid stifling the potential for an innovative form of
technology to provide information, goods, and services quickly
and cheaply throughout the world. Congress also recognized, as
did the Advisory Commission in its Report, that a major
priority in addressing whether and how the internet should be
subject to taxation should be reducing or removing barriers to
access to perhaps the most advanced and useful medium of
communications and commerce yet devised. These dual concerns
led to two modest limitations on State and local taxation of
the internet:
A. No State or political subdivision may impose a tax on internet
access, unless the tax was in place prior to enactment of the
statute.
At the time the ITFA was passed, 12 States and the District
of Columbia asserted that they levied sales taxes on internet
access. Since the moratorium's enactment, several of these
States have reversed their policies on taxing internet access
charges.\4\ It is the committee's understanding that 10 States
continue to impose internet access taxes pursuant to the
grandfather clause:\5\
---------------------------------------------------------------------------
\4\ In 1999, Iowa enacted a law specifically exempting internet
access charges from tax. In May 1999, the South Carolina Department of
Revenue formally indicated that it would not impose taxes on internet
access charges for the duration of the moratorium.
\5\ The validity of many of the taxes enumerated here are currently
the subject of legal challenge. For example, America Online, one of the
largest internet access service providers in the State of Tennessee,
has challenged the constitutionality of the State requirement that AOL
collect sales taxes on internet access provided to customers in the
State. During the pendency of the litigation, AOL has not collected the
disputed tax. The Tennessee Department of Revenue estimates that the
amount of revenue in dispute in this case is in excess of $10 million
annually.
---------------------------------------------------------------------------
a. Connecticut--under the authority of Section 12-
407(2)(i)(A) of the General Statutes of Connecticut, the State
imposes a sales and use tax on internet access charges.
However, this tax is scheduled to be completely phased out by
July 1, 2001.
b. Montana--Title 15, chapter 53 of the Montana Code
Annotated is a retail telecommunications excise tax which
applies to retail sales of 2-way communications of voice, data
or video, regardless of medium. This includes internet access
services.
c. New Hampshire--The New Hampshire Communications Services
tax, Revised Statutes Annotated (RSA) chapter 82-A, is a
telecommunications excise tax which covers 2-way
telecommunications services offered by certain types of
providers, notably cable television system operators. Thus, it
will apply to internet access charges imposed by cable
companies.
d. New Mexico--under the authority of New Mexico Statutes
Annotated 7-9-3, internet access charges are subject to gross
receipts taxes.
e. North Dakota--at the time of enactment of the Internet
Tax Freedom Act, North Dakota had two taxes that applied to
internet access charges--North Dakota Century Code 57-39.2 and
57-34. One tax was a telecommunication gross receipts tax; the
other is a sales and use tax. The Board of Equalization of the
State had ruled initially that internet access charges were
included within the definition of telecommunications gross
receipts to which that tax applied. However, effective in July
1999, the Board stopped enforcing the telecommunications tax on
internet access, on the grounds that the legislative intent of
the tax was unclear as to its scope. The sales and use tax
continues to be applied to internet access charges.
f. Ohio--Chapter 5739 of the Ohio Revised Code subjects the
business use of internet access to a sales and use tax.
g. South Dakota--South Dakota Codified Law Annotated 10-45-
5 imposes a sales and use tax on internet access charges.
h. Tennessee--pursuant to Tennessee Code Annotated 67-6-
221, 67-6-102(23)(iii), and 67-6-702(g), the State imposes a
sales and use tax on internet access charges.
i. Texas--although under the Internet Tax Freedom Act the
State would have been permitted to tax all internet access
charges, it has chosen to exempt up to $25 per month of
internet access fees from its sales and use tax. Texas Tax
Code, chapter 151, section 151.325.
j. Wisconsin--sales and use taxes are imposed on internet
access charges pursuant to Section 77.52(2)(a)5 of the
Wisconsin Statutes (1995-96).
In addition, 16 cities in Colorado, including Wheat Ridge,
Woodland Park, and Longmont, and the city of Tuscon, Arizona
impose internet access taxes.
B. No State or political subdivision may impose a multiple or
discriminatory tax on electronic commerce.
The Internet Tax Freedom Act defines electronic commerce as
a transaction conducted over the internet or through internet
access, comprising the sale, lease, license, offer or delivery
of property, goods, services or information.
A multiple tax is a tax by one State or political
subdivision on the same, or essentially the same, electronic
commerce which is also subject to another tax by another State
without allowing a credit for taxes paid in other
jurisdictions. The limitation on multiple taxes would not
prevent a State and one or more political subdivision from
taxing the same transaction, but it would prevent the
transaction from being subject to tax by competing States or
localities. Thus, for example, a purchase made in Virginia from
a seller in Maryland could be taxed by the State of Virginia
and the county of Arlington. It could not also be taxed by
Maryland, however, unless the a credit for the tax paid in
Virginia were available.
A discriminatory tax is one that is imposed on a
transaction occurring over the internet but not on non-internet
transactions involving similar goods; one which taxes internet
transactions at rates higher than similar non-internet
transactions; one which imposes the tax collection obligation
for an internet transaction on an entity different than one
involving a non-internet transaction; or one which taxes
information providers at a higher rate when the information is
delivered over the internet.
The definition of discriminatory tax also clarifies that
certain types of contact with a taxing jurisdiction will be
insufficient to establish ``nexus'' (the constitutionally
required relationship between a taxing authority and the entity
on which it seeks to impose a tax collection obligation). Under
this provision, a taxing jurisdiction will not be able to
require a seller to collect a tax on electronic commerce if:
(a) the sole ability to access a site on a remote seller's
out-of-state computer server is a factor in determining the
remote seller's tax collection obligation; or
(b) an internet service provider (ISP) is deemed to be the
agent of a remote seller for determining tax collection
obligations solely because of the display of a remote seller's
information on the ISP's out-of-state computer server, or
because it processes orders through an out-of-state computer
server.
The current moratorium does not place any other
restrictions on a State or local taxing authority's ability to
impose a sales or use tax on a transaction that takes place
over the internet.
EFFECT OF H.R. 3709 ON CURRENT LAW
As introduced, H.R. 3709 would have simply made permanent
the current moratorium. The committee adopted an amendment in
the nature of a substitute, offered by Mr. Goodlatte and Mr.
Boucher, which instead extended its length by 5 years. If the
bill is enacted, the moratorium will expire on October 21,
2006. The substitute amendment adopted by the committee also
eliminates the grandfather clause which permits the collection
of internet access taxes enumerated above.
Hearings
No hearings were held on H.R. 3709. However, in the 105th
Congress, the committee's Subcommittee on Commercial and
Administrative Law held a hearing on H.R. 1054, the ``Internet
Tax Freedom Act,'' which included a provision creating the
moratorium which is the subject of H.R. 3709.
Committee Consideration
On May 4, 2000, the committee met in open session and
ordered favorably reported the bill H.R. 3709 with amendment by
a recorded vote of 29 to 8, a quorum being present.
Votes of the Committee
There were three rollcall votes during committee
deliberations on H.R. 3709. In addition, an amendment in the
nature of a substitute by Mr. Goodlatte and Mr. Boucher which
would extend the moratorium for 5 years and eliminate the
grandfather clause was adopted by voice vote. The rollcall
votes were as follows:
An amendment by Mr. Chabot to the Goodlatte/Boucher
amendment in the nature of a substitute which would make the
moratorium permanent and eliminate the grandfather clause. The
amendment was defeated by a rollcall vote of 10 to 23.
ROLLCALL NO. 1
----------------------------------------------------------------------------------------------------------------
Ayes Nays Present
----------------------------------------------------------------------------------------------------------------
Mr. Sensenbrenner............................................... X .............. ..............
Mr. McCollum.................................................... X .............. ..............
Mr. Gekas....................................................... X .............. ..............
Mr. Coble....................................................... .............. X ..............
Mr. Smith (TX).................................................. .............. .............. ..............
Mr. Gallegly.................................................... X .............. ..............
Mr. Canady...................................................... .............. X ..............
Mr. Goodlatte................................................... .............. X ..............
Mr. Chabot...................................................... X .............. ..............
Mr. Barr........................................................ X .............. ..............
Mr. Jenkins..................................................... .............. X ..............
Mr. Hutchinson.................................................. .............. X ..............
Mr. Pease....................................................... X .............. ..............
Mr. Cannon...................................................... .............. .............. ..............
Mr. Rogan....................................................... X .............. ..............
Mr. Graham...................................................... X .............. ..............
Ms. Bono........................................................ X .............. ..............
Mr. Bachus...................................................... .............. X ..............
Mr. Scarborough................................................. .............. .............. ..............
Mr. Vitter...................................................... .............. X ..............
Mr. Conyers..................................................... .............. X ..............
Mr. Frank....................................................... .............. X ..............
Mr. Berman...................................................... .............. X ..............
Mr. Boucher..................................................... .............. X ..............
Mr. Nadler...................................................... .............. X ..............
Mr. Scott....................................................... .............. X ..............
Mr. Watt........................................................ .............. X ..............
Ms. Lofgren..................................................... .............. X ..............
Ms. Jackson Lee................................................. .............. X ..............
Ms. Waters...................................................... .............. X ..............
Mr. Meehan...................................................... .............. X ..............
Mr. Delahunt.................................................... .............. X ..............
Mr. Wexler...................................................... .............. .............. ..............
Mr. Rothman..................................................... .............. X ..............
Ms. Baldwin..................................................... .............. X ..............
Mr. Weiner...................................................... .............. X ..............
Mr. Hyde, Chairman.............................................. .............. X ..............
-----------------------------------------------
Total....................................................... 10 23 ..............
----------------------------------------------------------------------------------------------------------------
An amendment by Mr. Delahunt to the Goodlatte/Boucher
amendment in the nature of a substitute which would have
extended the current moratorium for 3 years from the date of
enactment, and which would have continued the grandfather
clause. The amendment was defeated by a rollcall vote of 15 to
22.
ROLLCALL NO. 2
----------------------------------------------------------------------------------------------------------------
Ayes Nays Present
----------------------------------------------------------------------------------------------------------------
Mr. Sensenbrenner............................................... .............. X ..............
Mr. McCollum.................................................... .............. X ..............
Mr. Gekas....................................................... .............. X ..............
Mr. Coble....................................................... X .............. ..............
Mr. Smith (TX).................................................. .............. X ..............
Mr. Gallegly.................................................... .............. X ..............
Mr. Canady...................................................... .............. X ..............
Mr. Goodlatte................................................... .............. X ..............
Mr. Chabot...................................................... .............. X ..............
Mr. Barr........................................................ .............. X ..............
Mr. Jenkins..................................................... X .............. ..............
Mr. Hutchinson.................................................. .............. X ..............
Mr. Pease....................................................... .............. X ..............
Mr. Cannon...................................................... .............. X ..............
Mr. Rogan....................................................... .............. X ..............
Mr. Graham...................................................... .............. X ..............
Ms. Bono........................................................ .............. X ..............
Mr. Bachus...................................................... .............. X ..............
Mr. Scarborough................................................. .............. X ..............
Mr. Vitter...................................................... .............. X ..............
Mr. Conyers..................................................... X .............. ..............
Mr. Frank....................................................... X .............. ..............
Mr. Berman...................................................... X .............. ..............
Mr. Boucher..................................................... .............. X ..............
Mr. Nadler...................................................... X .............. ..............
Mr. Scott....................................................... X .............. ..............
Mr. Watt........................................................ X .............. ..............
Ms. Lofgren..................................................... .............. X ..............
Ms. Jackson Lee................................................. X .............. ..............
Ms. Waters...................................................... X .............. ..............
Mr. Meehan...................................................... .............. X ..............
Mr. Delahunt.................................................... X .............. ..............
Mr. Wexler...................................................... X .............. ..............
Mr. Rothman..................................................... X .............. ..............
Ms. Baldwin..................................................... X .............. ..............
Mr. Weiner...................................................... X .............. ..............
Mr. Hyde, Chairman.............................................. .............. X ..............
-----------------------------------------------
Total....................................................... 15 22 ..............
----------------------------------------------------------------------------------------------------------------
Motion to report H.R. 3709 as amended by the amendment in
the nature of a substitute. By a rollcall vote of 29 to 8, the
motion to report favorably was agreed to.
ROLLCALL NO. 3
----------------------------------------------------------------------------------------------------------------
Ayes Nays Present
----------------------------------------------------------------------------------------------------------------
Mr. Sensenbrenner............................................... X .............. ..............
Mr. McCollum.................................................... X .............. ..............
Mr. Gekas....................................................... X .............. ..............
Mr. Coble....................................................... X .............. ..............
Mr. Smith (TX).................................................. X .............. ..............
Mr. Gallegly.................................................... X .............. ..............
Mr. Canady...................................................... X .............. ..............
Mr. Goodlatte................................................... X .............. ..............
Mr. Chabot...................................................... X .............. ..............
Mr. Barr........................................................ X .............. ..............
Mr. Jenkins..................................................... .............. X ..............
Mr. Hutchinson.................................................. X .............. ..............
Mr. Pease....................................................... X .............. ..............
Mr. Cannon...................................................... X .............. ..............
Mr. Rogan....................................................... X .............. ..............
Mr. Graham...................................................... X .............. ..............
Ms. Bono........................................................ X .............. ..............
Mr. Bachus...................................................... X .............. ..............
Mr. Scarborough................................................. X .............. ..............
Mr. Vitter...................................................... X .............. ..............
Mr. Conyers..................................................... .............. X ..............
Mr. Frank....................................................... .............. X ..............
Mr. Berman...................................................... X .............. ..............
Mr. Boucher..................................................... X .............. ..............
Mr. Nadler...................................................... X .............. ..............
Mr. Scott....................................................... .............. X ..............
Mr. Watt........................................................ .............. X ..............
Ms. Lofgren..................................................... X .............. ..............
Ms. Jackson Lee................................................. .............. X ..............
Ms. Waters...................................................... X .............. ..............
Mr. Meehan...................................................... X .............. ..............
Mr. Delahunt.................................................... .............. X ..............
Mr. Wexler...................................................... X .............. ..............
Mr. Rothman..................................................... X .............. ..............
Ms. Baldwin..................................................... .............. X ..............
Mr. Weiner...................................................... X .............. ..............
Mr. Hyde, Chairman.............................................. X .............. ..............
-----------------------------------------------
Total....................................................... 29 8 ..............
----------------------------------------------------------------------------------------------------------------
Committee Oversight Findings
In compliance with clause 3(c)(1) of rule XIII of the Rules
of the House of Representatives, the committee reports that the
findings and recommendations of the committee, based on
oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated in the
descriptive portions of this report.
Committee on Government Reform Findings
No findings or recommendations of the Committee on
Government Reform were received as referred to in clause
3(c)(4) of rule XIII of the Rules of the House of
Representatives.
New Budget Authority and Tax Expenditures
Clause 3(c)(2) of House Rule XIII is inapplicable because
this legislation does not provide new budgetary authority or
increased tax expenditures.
Congressional Budget Office Cost Estimate
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, the committee sets forth, with
respect to the bill, H.R. 3709, the following estimate and
comparison prepared by the Director of the Congressional Budget
Office under section 402 of the Congressional Budget Act of
1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, May 8, 2000.
Hon. Henry J. Hyde, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed federal cost estimate and mandates
statement for H.R. 3709, the Internet Nondiscrimination Act of
2000.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Mark Hadley
(for federal costs), who can be reached at 226-2860, and
Shelley Finlayson (for the state and local impact), who can be
reached at 225-3220.
Sincerely,
Dan L. Crippen, Director.
Enclosure
cc:
Honorable John Conyers Jr.,
Ranking Democratic Member.
H.R. 3709--Internet Nondiscrimination Act of 2000.
CBO estimates that enacting H.R. 3709 would have no impact
on the federal budget. Because the bill would not affect direct
spending or receipts, pay-as-you-go procedures would not apply.
The bill's impact on state, local, and tribal governments, and
on the private sector are discussed in a separate mandates
statement.
H.R. 3709 would extend a moratorium on certain state and
local taxation of on-line services and electronic commerce
through October 21, 2006. Under current law, the moratorium is
set to expire on October 21, 2001. The bill also would expand
the moratorium to include certain taxes that were imposed and
generally enforced prior to October 1, 1998. Under current law,
such taxes are exempt from the moratorium.
The CBO staff contact is Mark Hadley, who can be reached at
226-2860. This estimate was approved by Peter H. Fontaine,
Deputy Assistant Director for Budget Analysis.
SUMMARY
H.R. 3709 contains no private-sector mandates, but by
extending and expanding the moratorium on certain types of
state and local taxes, the bill would impose an
intergovernmental mandate as defined in the Unfunded Mandates
Reform Act (UMRA). CBO estimates that the costs of complying
with this mandate would exceed the threshold established in the
act ($55 million in 2000, adjusted annually for inflation) at
some point over the next five years.
INTERGOVERNMENTAL MANDATES CONTAINED IN THE BILL
H.R. 3709 would extend for five additional years a
moratorium on certain state and local taxes that was imposed by
the Internet Tax Freedom Act (ITFA). In addition, the bill
would remove the grandfather provision of ITFA that allowed
some states to continue taxing Internet access. This extension
and expansion of the moratorium would constitute an
intergovernmental mandate as defined in UMRA.
ESTIMATED DIRECT COSTS OF MANDATES TO STATE, LOCAL, AND TRIBAL
GOVERNMENTS
Is the Statutory Threshold Exceeded?
Because at least one significant state revenue source--
taxes on internet access--would clearly be affected and others
might be affected, CBO estimates that the extension and
expansion of the moratorium would cause revenue losses that
would exceed the annual statutory threshold at some point over
the five-year period.
Total Direct Costs of Mandates
UMRA defines the direct costs of an intergovernmental
mandate as ``the aggregate estimated amounts that all state,
local, and tribal governments . . . would be prohibited from
raising in revenues in order to comply with the federal
intergovernmental mandate.'' CBO estimates that revenue losses
would result from the removal of the grandfather provision for
states that, prior to the passage of IFTA, collected taxes on
Internet access.
Several states currently levy taxes on Internet access.
Based on information provided by these states and industry
sources, and using conservative assumptions about actual
collections and the projected growth of the market for Internet
access, CBO estimates that the repeal of the grandfather
provision would result in revenue losses exceeding the
threshold at some point over the next five years. It is
possible that, in the absence of this legislation, some state
and local governments would enact new taxes or decide to apply
existing taxes to Internet access or on-line services during
the next five years. It is also possible that some governments
would repeal existing taxes or preclude their application to
these services. Such changes would affect the ultimate cost of
the mandate but are difficult to predict. Therefore, for the
purposes of estimating the direct costs of the mandate in this
bill, CBO considered only the revenues from taxes that are
currently in place.
In addition, by extending the current moratorium, the bill
may affect the ability of state and local governments to
collect certain other taxes. Significant and continuous change
within the industry, as well as uncertainty about possible
legal interpretations of those definitions, make it impossible
for CBO to predict the likelihood or magnitude of such effects
on state and local budgets.
ESTIMATE PREPARED BY:
Shelley Finlayson (225-3220)
ESTIMATE APPROVED BY:
Peter H. Fontaine
Deputy Assistant Director for Budget Analysis
Constitutional Authority Statement
Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the committee finds the authority for
this legislation in Article I, section 8, clause 3 of the
Constitution.
Section-by-Section Analysis and Discussion
Section 1. Short Title
The act may be cited as the ``Internet Nondiscrimination
Act of 2000.''
Section 2. Extension of Moratorium on State and local taxes on the
internet.
Subsection (a) extends for 5 years the current moratorium
on taxes on internet access and multiple or discriminatory
taxes on electronic commerce found in section 1101 of 47 U.S.C.
151 note, which is scheduled to expire on October 21, 2001.
Under the act, the moratorium will remain in effect until
October 21, 2006.
Subsection (a)(1)(B) eliminates the current grandfathering
of State and local taxes on internet access, which permits
taxes generally imposed and actually enforced prior to October
1, 1998 to be collected notwithstanding the moratorium.
Consequently, the States which are currently taxing internet
access will no longer be permitted to assess such a tax on
internet access occurring on or after the date of enactment of
the act.
As a technical and conforming change, subsection (a)(2)
strikes current section 1101(d) of the Internet Tax Freedom
Act, which contains a definition of ``generally imposed and
actually enforced.'' Because the exception to the moratorium
which was governed by this term will not survive this act, the
definition is no longer needed. Subsection (a)(3) merely
redesignates subsections to adjust to the elimination of this
definition.
Subsection (b) completes the technical and conforming
changes required to effect the elimination of the grandfather
clause. It strikes from current section 1104(10) language
defining ``Tax on Internet Access'' as a tax on internet access
``unless such tax was generally imposed and actually enforced
prior to October 1, 1998.''
Section 3. Application of Amendments
The amendments to the Internet Tax Freedom Act contained in
this legislation shall not apply with respect to conduct
occurring before the date of its enactment. Thus, for example,
a State which may currently impose a tax on internet access
under the authority of the grandfather clause may continue to
seek collection of such a tax after the date of enactment,
provided the access upon which the tax is assessed was effected
prior to enactment.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italics, existing law in which no change
is proposed is shown in roman):
PUBLIC LAW 105-277
* * * * * * *
DIVISION C--OTHER MATTERS
* * * * * * *
TITLE XI--MORATORIUM ON CERTAIN TAXES
SEC. 1100. SHORT TITLE.
This title may be cited as the ``Internet Tax Freedom
Act''.
SEC. 1101. MORATORIUM.
(a) Moratorium.--No State or political subdivision
thereof shall impose any of the following taxes during the
period beginning on October 1, 1998, and ending [3 years after
the date of the enactment of this Act] on or after October 1,
2006--
(1) taxes on Internet access[, unless such tax was
generally imposed and actually enforced prior to
October 1, 1998]; and
(2) multiple or discriminatory taxes on electronic
commerce.
* * * * * * *
[(d) Definition of Generally Imposed and Actually
Enforced.--For purposes of this section, a tax has been
generally imposed and actually enforced prior to October 1,
1998, if, before that date, the tax was authorized by statute
and either--
[(1) a provider of Internet access services had a
reasonable opportunity to know by virtue of a rule or
other public proclamation made by the appropriate
administrative agency of the State or political
subdivision thereof, that such agency has interpreted
and applied such tax to Internet access services; or
[(2) a State or political subdivision thereof
generally collected such tax on charges for Internet
access.]
[(e)] (d) Exception to Moratorium.--
(1) * * *
* * * * * * *
[(f)] (e) Additional Exception to Moratorium.--
(1) * * *
* * * * * * *
SEC. 1104. DEFINITIONS.
For the purposes of this title:
(1) * * *
* * * * * * *
(10) Tax on internet access.--The term ``tax on
Internet access'' means a tax on Internet access,
including the enforcement or application of any new or
preexisting tax on the sale or use of Internet services
[unless such tax was generally imposed and actually
enforced prior to October 1, 1998].
Minority Views
We offer these minority views because we are concerned that
an extension of the moratorium on taxes through 2006 (as the
committee-reported legislation provides) is so lengthy that
Congress may never return to the far more important issue of
State tax simplification and because the procedural context by
which this legislation has been considered has been deeply
flawed. Concerns with extending the moratorium through 2006 or
even longer have been expressed by representatives of the
Administration,\1\ and a number of important organizations,
including the National Governors Association (in a letter
signed by 36, including 22 Republican, Governors),\2\ numerous
city, county and local governments, organized labor (including
the AFL-CIO, NEA, AFT, AFSCME, and the International Union of
Police) \3\ education groups,\4\ the National Retail Federation
and a wide variety of individual retailers (such as Wal-Mart,
Sears, Home Depot, K-Mart, Radio Shack, Target, and Circuit
City),\5\ and shopping center owners.\6\ (Many of these
entities have come together to form the e-Fairness Coalition,
representing a total of more than 1.5 million retailers and
other businesses.)
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\1\ See Advisory Commission on Electronic Commerce, Statement
submitted by Commissioners Joseph Guttentag, Andrew Pincus, and Robert
Novick.
\2\ Letters from Governors to Senator Trent Lott, majority leader
and Congressman Dennis Hastert, Speaker of the House (April 7, 2000;
April 10, 2000; April 11, 2000; April 12, 2000) regarding urging the
rejecting of the Advisory Commission on Electronic Commerce (ACEC).
\3\ Letter from the AFL-CIO urging Representatives to vote against
H.R. 3709. (AFL-CIO Letter). See also Letter from AFSCME, International
Association of Fire Fighters, CWA, Dept. of Prof. Employees, AFL-CIO,
and SEIU to Congressman John Conyers, Jr. (May 3, 2000) expressing
concern regarding the proposed extension of the moratorium on Internet
taxes (AFSCME Letter).
\4\ Letter from Constantine W. Curris, President, American
Association of State College and Universities (AASCU) to John McCain,
Chair, Senate Committee on Commerce, Science and Transportation and
Congressman Thomas J. Bliley, Jr. (April 7, 2000) urging Congress not
to pursue measures such as a permanent Federal ban on e-commerce
taxation (AASCU Letter).
\5\ Letter from Lisa Cowell, Executive Director of E-fairness
Coalition to Governor James Gilmore, Chairmen of the Advisory
Commission on Electronic Commerce (March 16, 2000).
\6\ Statement of Peter Lowy, Co-President of Westfield America,
before the Subcommittee on Telecommunications Trade & Consumer
Protection on May 3, 2000.
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Under current law,\7\ there is a limited moratorium on
State and local Internet access taxes \8\ (subject to a
grandfather on taxes of this nature imposed prior to 1998) \9\
as well as on so-called ``multiple and discriminatory taxes''
imposed on Internet transactions.\10\ The current moratorium is
scheduled to expire on October 21, 2001 and was created as a
interim device to allow a commission to study the problem of
Internet taxes and the need for developing a ``level playing
field'' for the collection of sales taxes by all forms of
retailers. (This unlevel playing field results from the Supreme
Court's 1992 decision in Quill v. Heitcamp,\11\ which held that
absent congressional authorization, States are not permitted to
require sellers to collect sales taxes unless, among other
things, the seller has a ``substantial physical nexus'' within
the State.) H.R. 3709, as reported by the committee, would
extend the present moratorium for an additional five years--
from 2001 until 2006--and eliminate the grandfather of State
taxes on Internet access already in place. A summary of our
concerns follows.
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\7\ Internet Tax Freedom Act of 1998, 47 U.S.C. Sec. 151 note
Sec. 1101.
\8\ Contrary to the understanding of many, the 1998 law did not
provide for any sort of general prohibition on Internet taxes by the
States.
\9\ At the time the Act was passed 12 States asserted that they
levied sales taxes on Internet access. Presently, only 10 remaining
States have taxes on Internet access charges: Connecticut, Montana, New
Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington,
and Wisconsin.
\10\ A discriminatory tax is one that is imposed on a transaction
occurring over the internet but not on no-internet transacation
involving similar goods; one, which taxes internet transactions at
rates higher than similar no-internet transactions; one which imposes
the tax collection obligation for internet transaction on an entity
different than one involving a non-intenet transaction; or one which
taxes information providers at a higher rate when the information is
delivered over the internet. The definition of discriminatory tax also
clarifies that certain contact with a taxing jurisdiction will be
insufficient to establish ``nexus'' (the constitutionally required
relationship between a taxing authority and the entity on which it
seeks to impose a tax collection obligation). A tax will be
discriminatory if: (a) the sole ability to access a site on a remote
seller's out-of-state computer server is a factor in determining the
remote seller's tax collection obligation; or (b) an internet service
provider (ISP) is deemed to be the agent of a remote seller for
determining tax collection obligations solely because of the display of
a remote seller's information on the ISP's out-of-state computer
server.
\11\ 504 US 298 (1992). Quill held that in order to sustain an
interstate sales tax, the tax must apply to an activity with a
substantial nexus with the taxing State; be fairly apportioned; not
discriminate against interstate commerce; and be fairly related to the
services provided by the State. In the events a good is sold across
interstate lines without being subject to sales tax, the purchaser
remains subject to a comparable ``use tax'' within their own State.
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I. Extending the Moratorium Through 2006 Will Unduly, if Not
Indefinitely, Delay Revisiting the More Important Issue of
State Tax Simplification
If Congress extends the present moratorium through 2006--
more than two presidential elections from today's date--there
is a risk that we may never return to the more important issue
of State tax simplification. This would undermine a principal
purpose of the 1998 Internet Tax legislation which gave the
Advisory Commission on Electronic Commerce the ability to
consider how best to develop a more simple and rationale system
than exists at present.\12\
---------------------------------------------------------------------------
\12\ Internet Tax Freedom Act of 1998, 47 U.S.C. Sec. 151 note
Sec. 1102(g)(1).
---------------------------------------------------------------------------
Unfortunately, the Advisory Commission was unable to reach
a consensus on this, or any other important issue. Thus,
although we do not support multiple or discriminatory State
taxes on the Internet, we are concerned that extending the
present moratorium through 2006 would only serve to
indefinitely delay work on the real problem--an overly complex
system of more than 6,500 local and State sales tax
jurisdictions, and the potential of current law under Quill to
subject similarly situated sellers to different tax collection
regimes. Indeed, there is a real risk that if we extend the
moratorium until 2006, many interests will be come so dependent
on the current system that it will be impossible to ever
revisit the issue of State tax simplification. Tellingly,
Governor Gilmore, who headed the Advisory Commission on
Electronic Commerce, admitted that by the time a five year
moratorium expired, consumers would not accept additional
taxes, ``No tax collector will be welcome on the Internet after
2006.'' \13\
---------------------------------------------------------------------------
\13\ John Schwartz, Gilmore Denies E-Tax Reversal; Plan Could Allow
Levies on Internet After Five Years, The Washington Post, Feb. 24,
2000, at E03.
---------------------------------------------------------------------------
As the International Council of Shopping Centers explained,
``we are deeply concerned that the longer the moratorium is
extended, the more difficult it will be for Congress [and the
States] to address and take action.'' \14\ These same concerns
have been echoed by the Vice President of Wal-Mart who warned,
``I don't know anyone who believes it will be any easier to
resolve the issue in five or six years. In fact, I can almost
guarantee you that it will be nearly impossible, because absent
a solution, most brick-and-mortar businesses that also sell on
the Internet will have been forced to reorganize their
corporate structure in order to remain price competitive. . . .
Congress should not force businesses to alter their corporate
structure simply to remain price competitive.'' \15\
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\14\ Statement of the International Council of Shopping Centers on
The Taxation of Electronic Commerce to the U.S. Senate Committee on
Commerce, Science and Transportation on April 12, 2000.
\15\ Testimony of David Bullington, Vice-President of Taxes, Wal-
Mart Stores, Inc., before the Senate Commerce Committee, April 12,
2000.
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This is why many of us believe it would be far preferable
to extend the present moratorium until 2003. This amendment was
offered by Rep. Delahunt, but rejected by the majority on a
largely party line vote. It is our hope that by 2003 the States
could build on the very serious steps they have already taken
to reform and simplify their laws.\16\ Then, Congress could
consider whether we should approve any interstate process that
addresses the simplification issue. If the States were not
making any progress by 2003, it would be a simple matter to
extend the moratorium for an additional period of time.
---------------------------------------------------------------------------
\16\ Ongoing simplification efforts by the States are proceeding.
Most recently a March 30-31, 2000 meeting in Denver, Colorado focused
on implementation of streamlined sales and use tax systems. See
Statement of Governor Micheal Leavitt before the Senate Commerce
Committee on April 12, 2000.
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II. Failure to Revisit the State Tax Simplification Issue Will Harm
Retailers, State and Local Governments, and Individual
Consumers
An undue delay, or total failure to revisit the issue of
State tax simplification, will harm all interested parties--
retailers (both electronic and otherwise), State and local
governments, and consumers. The problems with the present
system from the perspective of the retail industry are several
fold. First, the complexity of the system is daunting. There
are presently over 6,500 taxing jurisdictions in the United
States, when all State, county and municipal authorities are
included. The jurisdictions generally require separate
collection, have developed overlapping definitions of goods and
services subject to tax, specify differing sets of exemptions
and de minimis thresholds, have differing bad debt rules, and
varying sets of forms and audit systems. Needless to say, any
retailer with a physical nexus to a State is subject to a
myriad of confusing and complex State and local taxes. This
carries with it large paperwork and collection burdens.
Second, the legal uncertainty of the present system can be
harmful, even for remote sellers, because of the many questions
left unresolved by the Quill decision and by current law.
Determining the meaning of ``substantial physical nexus'' for a
particular retailer can be highly subjective. For example,
would the mere presence of a computer server in a particular
State constitute a substantial physical presence for State tax
purposes? If an electronic retailer developed its own
distribution system, would that subject it to local taxes?
Would a retailer's hiring employees or independent contractors
to solicit sales or engage in advertising within a State
constitute the necessary nexus? How are purely electronic sales
of books, movies and sound recordings to be treated? Would the
existence of a kiosk to place sales orders through the Internet
or a physical return facility in a State constitute the type of
physical nexus needed to establish sales tax collection
authority? Would it matter whether these physical facilities
were owned outright by the remote retailer or through a
separate subsidiary? There are no clear answers to these
questions under Quill--creating a large degree of uncertainty
for all electronic sellers, and threatening to artificially
constrain their business development plans. The Internet Tax
Freedom Act enacted in 1998 also gives rise to legal
uncertainty. For example, the meaning of ``discriminatory tax''
is not fully flushed out, and we are given no guidance on the
manner in which the ban on access taxes would apply if Internet
access was bundled with other services, such as cable and long
distance. All of these issues could be addressed as part of a
comprehensive tax simplification effort, yet this will be far
less likely to occur if we extend the present system through
2006.
Third, the current disparate tax treatment as between
traditional ``bricks and mortar'' retailers and remote sellers
has the potential to cause continuing economic distortion.\17\
As the New York Times editorial board has written, ``[a]n
elementary principle of taxation says that taxes should distort
purchasing decisions as little as possible. It is not the role
of a tax code to determine whether customers shop in stores,
online, or by mail order.'' \18\ Similarly, preeminent
economist Robert Samuelson has observed, ``[e]xempting items
sold over the Internet [is] . . . a disguised subsidy that
favors one business over another. . . . Ideally, the Internet
ought to compete with traditional stores on an equal footing.
People should buy online if e-commerce offers lower prices or
greater convenience.'' \19\ Yet the present system, by creating
a tax incentive to be located in a remote physical location,
threatens to do exactly that.\20\ This in turn, has the
potential to harm local employment and real estate values.
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\17\ In an industry such as retail sales, where a 1-2% profit
margin may be standard, a 6-8% sales tax differential can offer a
significant price advantage.
\18\ New York Times, December 19, 1999.
\19\ Robert J. Samuelson, Fair Play on the Net, Washington Post
Online, March 1, 2000, at A17.
\20\ Perversely, the present system also creates an incentive, in
terms of State sales taxes, to be located outside of the United States
as well.
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With regard to the impact on State and local governments,
an undue maintenance of the current system carries with it the
potential for significant financial loss. Sales taxes
constitute the most important State and local revenue source,
far greater than income and property taxes, with the Census
Bureau estimating that 47.9% of State and local revenues come
from sales taxes. With projections of online sales estimated to
exceed $100-300 billion annually by 2002, State and local
governments could lose as much as $20 billion in uncollected
sales taxes under the present system.\21\ This is why the
Washington Post warned that loss or significant erosion of
sales tax would leave huge holes in State budgets.\22\ This, in
turn, could have a grave impact on critical services such as
police and safety, health, and most notably, education. A
consortium of labor unions led by AFSCME, NEA, and AFT has
written, ``the loss of revenue will significantly impair the
ability of States and localities to meet demands for education
funding'' particularly since ``States generally devote 35%-40%
of their overall budget to education,'' \23\ and the American
Association of State Colleges and Universities, warned that
hasty congressional action in this area ``could destabilize
State and local revenue systems, which in turn would have an
immediate and adverse impact on public services such as higher
education.'' \24\
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\21\ See Donald Bruce and William F. Fox, E-Commerce in Context of
Declining State Sales Tax Basis, Center for Business and Economic
Research (CBER), University of Tennessee, Knoxville, February 2000.
\22\ The Internet Tax Game, The Washington Post, April 6, 2000.
\23\ AFSCME Letter; AFL-CIO Letter.
\24\ AASCU Letter.
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Finally, the present system could significantly harm
individual consumers. This could obviously be the case if
individuals faced increasing income and property taxes or
declining services as a result of the loss of sales taxes from
remote sales. A separate concern is the adverse impact of the
present bifurcated system on poor and minorities. According to
a recent Commerce Department study, wealthy individuals are 20
times more likely to have Internet access, and Hispanics and
African Americans are far less likely to have such access.\25\
This means that poor and minorities who only buy locally face a
greater sales tax burden than their counterparts. As the AFL-
CIO warned, ``H.R. 3709 would . . . force poorer working
families who do not have access to the Internet to bear a
greater share of their State and local sales tax burdens by
allowing affluent families with the ability to shop on the
Internet to use this medium to avoid their sales tax
obligations through October 2006.'' \26\
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\25\ Falling Through the Net II: New Data on the Digital Divide,
National Telecommunications and Information Administration, National
Telecommunications and Information Administration, July 1998 (http://
www.ntia.doc.gov/ntiahome/net2/falling.html).
\26\ AFL-CIO Letter.
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III. The Process by which H.R. 3709 Has Been Considered is Deeply
Flawed
The process by which H.R. 3709 has been considered has been
neither serious nor credible. There have been no Judiciary
Committee hearings to obtain input from interested or affected
parties. Our markup was scheduled on only one day's notice--the
bare minimum required under House and committee rules. Yet we
are now in a headlong rush to the House floor, which will
likely necessitate several waivers of House rules. For example,
the committee report will not have laid over the requisite
three days, and we may not have received the required
Congressional Budget Office Report, with its analysis of the
legislation's impact on State and local revenues.
The entire process appears to have been more the result of
partisan political considerations than sound policy. Why else
would the majority leader announce that the legislation is
slated for floor consideration before the committee had heard
from a single witness or even scheduled a subcommittee or Full
Committee markup? The majority would appear to be using this
legislation in a desperate effort to create the appearance of a
serious high-technology agenda, even while H.R. 3709 postpones
and defers consideration of the larger issues. It is indeed
ironic that the majority could claim to be champions of a tax
free Internet, at the same time that the Republican Chairman of
the Ways & Means Committee is proposing a new 30% Federal tax
on sales transactions, including all electronic sales
consummated over the Internet.
Conclusion
Interstate taxation is an important and complex issue. It
affects the ability of States and localities to provide
critical services, such as schools, police, and fire
enforcement. It could also impact the growth and viability of e
commerce as well as the competitiveness of traditional bricks
and mortar retailers. The Judiciary Committee should take its
time and get this issue right. At a minimum, we should hear
from the affected parties. We are concerned that by extending
the present moratorium through 2006, as the majority proposes,
we will be delaying or permanently deferring the more important
issue of State tax simplification to far into the future, and
create a situation where there is little incentive for the
States to simplify and reform their own laws. This benefits no
one, and we would urge a more deliberative and thoughtful
approach.
John Conyers, Jr.
Jerrold Nadler.
Robert C. Scott.
Melvin L. Watt.
William D. Delahunt.
Steven R. Rothman
Tammy Baldwin.