[House Report 108-234]
[From the U.S. Government Publishing Office]



108th Congress                                                   Report
 1st Session            HOUSE OF REPRESENTATIVES                108-234
======================================================================
 
                   INTERNET TAX NONDISCRIMINATION ACT

                                _______
                                

 July 24, 2003.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

 Mr. Sensenbrenner, from the Committee on the Judiciary, submitted the 
                               following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                         [To accompany H.R. 49]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to whom was referred the 
bill (H.R. 49) to permanently extend the moratorium enacted by 
the Internet Tax Freedom Act, and for other purposes, having 
considered the same, reports favorably thereon with an 
amendment and recommends that the bill as amended do pass.

                                CONTENTS

                                                                   Page
The Amendment....................................................     2
Purpose and Summary..............................................     2
Background and Need for the Legislation..........................     2
Hearings.........................................................    11
Committee Consideration..........................................    11
Vote of the Committee............................................    11
Committee Oversight Findings.....................................    11
New Budget Authority and Tax Expenditures........................    11
Congressional Budget Office Cost Estimate........................    11
Federal Mandate Statement........................................    14
Performance Goals and Objectives.................................    14
Constitutional Authority Statement...............................    14
Section-by-Section Analysis and Discussion.......................    14
Changes in Existing Law Made by the Bill, as Reported............    15
Agency Views.....................................................    18
Markup Transcript................................................    19
Additional Views.................................................    59
    The amendment is as follows:
    Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

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

SEC. 2. PERMANENT EXTENSION OF INTERNET TAX FREEDOM ACT MORATORIUM.

    (a) In General.--Subsection (a) of section 1101 of the Internet Tax 
Freedom Act (47 U.S.C. 151 note) is amended to read as follows:
    ``(a) Moratorium.--No State or political subdivision thereof may 
impose any of the following taxes:
            ``(1) Taxes on Internet access.
            ``(2) Multiple or discriminatory taxes on electronic 
        commerce.''.
    (b) Conforming Amendments.--(1) Section 1101 of the Internet Tax 
Freedom Act (47 U.S.C. 151 note) is amended by striking subsection (d).
    (2) Section 1104(10) of the Internet Tax Freedom Act (47 U.S.C. 151 
note) is amended by striking ``unless'' and all that follows through 
``1998''.
    (3) Section 1104(2)(B)(i) of the Internet Tax Freedom Act (47 
U.S.C. 151 note) is amended by striking ``except with respect to a tax 
(on Internet access) that was generally imposed and actually enforced 
prior to October 1, 1998,''.
    (c) Clarification.--The second sentence of section 1104(5), and the 
second sentence of section 1101(e)(3)(D), of the Internet Tax Freedom 
Act (47 U.S.C. 151 note) are each amended by inserting ``, except to 
the extent such services are used to provide Internet access'' before 
the period.

                          Purpose and Summary

    H.R. 49, the ``Internet Tax Nondiscrimination Act,'' \1\ 
promotes equal access to the Internet and protects electronic 
commerce from discriminatory State and local taxes. The bill 
makes permanent the current moratorium on Internet access taxes 
and on multiple and discriminatory taxes created by the 
Internet Tax Freedom Act \2\ (ITFA) in 1998. The moratorium was 
extended for 2 years during the 107th Congress through H.R. 
1552, also entitled the ``Internet Tax Nondiscrimination Act.'' 
\3\ H.R. 49 applies equally to all States, and thereby 
abolishes the grandfather clause contained in the ITFA for 
those States currently taxing access to the Internet. As 
amended, the bill ensures that all technologies used to provide 
Internet access receive tax protection under the ITFA. Without 
H.R. 49, Internet users will be subject to a potential deluge 
of duplicative and predatory taxation on the Internet when the 
current moratorium expires on November 1, 2003.
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    \1\ H.R. 49 was introduced by Representative Chris Cox on January 
7, 2003.
    \2\ The Internet Tax Freedom Act comprises titles XI and XII of 
Division C of the Omnibus Consolidated and Emergency Supplemental 
Appropriations Act of 1999, Pub. L. No. 105-277, 112 Stat. 2681 (1998) 
(codified as amended at 47 U.S.C. Sec. 151 (1998)).
    \3\ Pub. L. No. 107-75, 115 Stat. 703 (2001).
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                Background and Need for the Legislation

                               BACKGROUND

Internet Retail Commerce in Perspective
    The Internet and information technology (IT) industries are 
a vital component of the U.S. economy. According to the U.S. 
Department of Commerce, despite an economic slowdown, IT 
industries have continued to create the ``enduring foundation 
of a stronger economy.'' \4\ For example, U.S. businesses are 
expanding their use of IT in operations, with IT investment in 
2001 far surpassing every year prior to 2000.\5\ Internet 
retail sales \6\ continue to accelerate. In 2000, Internet 
retail sales totaled $28 billion.\7\ By 2001, this number had 
climbed to over $35 billion.\8\ In the third quarter of 2002, 
e-commerce sales reached more than $10 billion.\9\ These 
numbers, however, comprise a minute fraction of overall retail 
sales. For example, during the third quarter of 2002, online 
retail sales represented a mere 1.3 percent of overall retail 
sales.\10\ According to the U.S. Department of Commerce, 
despite early warnings that online businesses would drive their 
``bricks and mortar'' counterparts to extinction, ``nothing 
approaching these degrees of transformation has yet occurred.'' 
\11\
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    \4\ ECONOMICS AND STATISTICS ADMINISTRATION, U.S. Dep't of 
Commerce, DIGITAL ECONOMY 2002, at v. [hereinafter ``Digital Economy 
2002''].
    \5\ Id. at 7.
    \6\ Retail sales do not include food services.
    \7\ ``Estimated Quarterly U.S. Retail E-commerce Sales: 4th Quarter 
1999--3rd Quarter 2002,'' U.S. Dep't of Commerce (Feb. 2003), available 
at: http://www. census.gov/mrts/www/current.html.
    \8\ Id.
    \9\ Id.
    \10\ Id.
    \11\ Digital Economy 2002 at 9. ``To date the Internet as a 
commercial medium has disappointed initial expectations. E-commerce as 
a share of total U.S. retail sales remains at approximately 1 percent. 
At the industry level, reliance on e-commerce has been widespread but 
uneven.'' Id. at vi.
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Taxing Status of the Internet
    A common misconception concerning Internet taxation is that 
the ITFA prohibits States from imposing a sales tax on sales 
accomplished via the Internet. In fact, the ITFA placed a 
moratorium only on the imposition of new taxes on Internet 
access services or any multiple or discriminatory taxes on 
electronic commerce by State or local governments. In other 
words, States may not (during the moratorium period) enact a 
sales tax which applies only to Internet transactions or which 
taxes Internet transactions at a different rate than other 
transactions. It may apply a sales tax which is imposed on 
sales equally without regard to the medium.\12\
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    \12\ The ITFA specifically states that: ``[n]othing in this title 
shall be construed to modify, impair, or supersede, or authorize the 
modification, impairment, or superseding of, any State or local law 
pertaining to taxation that is otherwise permissible by or under the 
Constitution of the United States or other Federal law and in effect on 
the date of enactment of this Act.'' 47 U.S.C. Sec. 1101(b) (2001).
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    Another misconception is that States do not have the power 
to tax transactions where the seller is located outside the 
State and has no real connection with the State. Rather, the 
important question in the out-of-State seller context is not 
the State's power to tax the transaction, but rather whether 
the out-of-State seller has sufficient nexus to the State so 
the State can require the out-of-State seller to collect the 
sales tax from the purchaser.
    In sum, the Internet is not a tax-free haven as it is often 
mischaracterized. Online retailers do not escape taxation. 
Telecommunications channels such as telephone lines, certain 
wireless transmissions, and satellites are subject to State and 
local taxes. Electronic merchants pay State income and other 
direct taxes and physically-present electronic merchants are 
required to collect and remit sales and use taxes for most 
interstate transactions. In short, almost all existing taxes 
that are applied to traditional businesses are also applied to 
online businesses. The only substantive difference between the 
tax treatment of online and traditional retailers is a State's 
lack of authority to require nonresident electronic merchants 
to collect and remit sales taxes.
State Taxing Efforts Targeting the Internet
    Prior to the enactment of the ITFA, State tax collectors 
had moved toward or begun taxation schemes that targeted 
electronic commerce inequitably. Examples included: (1) Vermont 
and Texas sought to impose more onerous tax collection 
obligations on merchants who take orders via the Internet than 
on those who take only telephone orders; \13\ (2) Tacoma, 
Washington had required Internet service providers (ISPs) to 
pay a 6 percent gross receipts tax, even for national ISPs 
without any employees in Tacoma.\14\ Tacoma's law also required 
everyone, even foreign sellers, who sold a product over the 
Internet to anyone in Tacoma to pay a $72 business license fee; 
\15\ and (3) some States were reportedly contemplating a ``bit 
tax,'' designed to burden only electronic commerce because it 
would be levied on every bit of digital information transmitted 
over the Internet.\16\
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    \13\ H.R. 1552 and H.R. 1675: Internet Tax Nondiscrimination Act: 
Hearing Before the Subcommittee on Commercial and Admin. Law of the 
House Committee on the Judiciary, 107th Cong. (2001) at 8 (statement of 
Mr. Cox). [hereinafter Hearing on H.R. 1552 and H.R. 1675].
    \14\ H.R. 1054: Internet Tax Freedom Act; Hearing Before the 
Subcommittee on Commercial and Admin. Law of the House Committee on the 
Judiciary, 105th Cong. at 45-54 (1997) at 15 (statement of Ms. Ireland) 
[hereinafter Hearing on H.R. 1054].
    \15\ Id.
    \16\ Hearing on H.R. 1552 and H.R. 1675 at 8 (statement of Mr. 
Cox).
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Constitutional Limitations On Taxing Interstate Commerce
    The taxing powers of the States are distinctly limited by 
the Commerce and Due Process Clauses of the United States 
Constitution. The Commerce Clause establishes Congressional 
authority for regulating commerce between the States by 
declaring: ``The Congress shall have power . . . [t]o regulate 
Commerce with foreign Nations, and among the several States. . 
. .'' \17\ While the Commerce Clause establishes a basis for 
congressional regulation, the Supreme Court has also 
interpreted the Commerce Clause to create a ``negative'' 
limitation on State power to regulate in areas that might 
adversely affect interstate commerce.\18\ This limitation on 
State power is commonly referred to as the Dormant Commerce 
Clause. In addition, the Due Process Clause of the Fourteenth 
Amendment to the Constitution requires that, for a State to 
exercise jurisdiction over a defendant, that defendant must 
have minimum contacts with the State ``such that the 
maintenance of the suit does not offend `traditional notions of 
fair play and substantial justice.' '' \19\
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    \17\ U.S. Const. art. I, Sec. 8, cl. 3.
    \18\ See, e.g., South Carolina State Highway Dept. v. Barnwell 
Bros., Inc., 303 U.S. 177. (The Commerce Clause, ``by its own force,'' 
prohibits certain State actions that interfere with interstate 
commerce. Id. at 185).
    \19\ International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) 
(quoting Milliken v. Meyer, 311 U.S. 457, 463 (1940)).
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    The degree to which these constitutional limitations 
protect consumers from sales taxes was examined in a series of 
Supreme Court decisions, notably Quill Corp. v. North Dakota By 
and Through Heitkamp,\20\ decided in 1992. In Quill, the State 
of North Dakota attempted to require an out-of-State mail order 
catalog retailer to collect and pay a use tax on goods 
purchased for use within the State.\21\ Quill Corporation 
(Quill), a Delaware corporation, grossed more than $1 million a 
year in mail order catalog sales to North Dakota residents, but 
lacked a physical presence in the State.\22\ When North Dakota 
moved to compel Quill to collect and remit use taxes, Quill 
claimed the tax was unconstitutional.\23\
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    \20\ 504 U.S. 298 (1992).
    \21\ Id.
    \22\ Id. at 302.
    \23\ Id. at 303.
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    First, the Court ruled that collection of use taxes from 
consumers of businesses without a physical presence in the 
taxing State met the ``minimum contacts requirement'' of the 
Due Process Clause of the Fourteenth Amendment.\24\ The Court 
held that Quill, incorporated in Delaware, had purposefully 
directed its marketing activity toward residents of North 
Dakota, allowing Quill to be subject to the legal jurisdiction 
of the State consistent with the due process clause.\25\
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    \24\ Id. at 308.
    \25\ Id. While the Supreme Court has yet to rule on the degree of 
connection an electronic merchant must have with a taxing State in 
order to satisfy the Due Process minimum contacts test, it is likely a 
remote Internet retailer who seeks to sell merchandise to an in-State 
buyer through advertisement or other solicitation will be deemed to 
have ``purposefully availed'' itself of the benefits of the taxing 
State's market for purposes of meeting the Due Process requirement set 
out in Quill. However, meeting this requirement would not necessarily 
validate the constitutionality of the State tax since ``a corporation 
may have the `minimum contacts' with a taxing State as required by the 
Due Process Clause, and yet lack the `substantial nexus' with that 
State required by the Commerce Clause.'' 504 U.S. at 313.
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    Under Commerce Clause scrutiny, however, Quill's contacts 
with North Dakota did not warrant the State's mandate that 
Quill collect the use tax. The Supreme Court concluded North 
Dakota's efforts to compel a remote seller to collect and remit 
use taxes to that State without a physical presence or other 
sufficient taxing ``nexus'' violated the Commerce Clause.\26\ 
By requiring a remote seller to have a physical presence in the 
taxing State, the Court maintained a previously enunciated use 
tax safe harbor for remote vendors ``whose only connection with 
customers in the taxing State is by common carrier or United 
States mail.'' \27\
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    \26\ Id. at 311. The Court reiterated the four-part test enunciated 
in Complete Auto Transit Inc. v. Brady, 430 U.S. 274 (1977), holding 
that State taxation survives a Dormant Commerce Clause challenge if the 
``tax:
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  (1) is applied to an activity with a substantial nexus with the 
taxing State,
  (2) is fairly apportioned,
  (3) does not discriminate against interstate commerce, and
  (4) is fairly related to services provided by the State.''

Quill, 504 U.S. at 311 (quoting Complete Auto, 430 U.S. at 279).
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    \27\ 504 U.S. at 315 (quoting National Bellas Hess, Inc. v. Dept. 
of Revenue of Illinois, 386 U.S. 753, 758 (1967)).
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    While the Quill Court established that the ``substantial 
nexus'' requirement called for a physical presence for the 
business, it observed that Congress was free to reevaluate that 
requirement:

        No matter how we evaluate the burdens that use taxes 
        impose on interstate commerce, Congress remains free to 
        disagree with our conclusions. . . . Accordingly, 
        Congress is now free to decide whether, when, and, to 
        what extent the States may burden interstate mail order 
        concerns with a duty to collect use taxes.\28\
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    \28\ 504 U.S. at 318.

With this decision, the Court made clear that it was left to 
Congress to decide whether physical presence would continue to 
be a requisite for burdening interstate mail-order, and by 
extension, Internet transactions, with a duty to collect use 
taxes.

                    THE FEDERAL LEGISLATIVE RESPONSE

The Internet Tax Freedom Act
    The ITFA was enacted to address the emerging challenges 
associated with electronic commerce. The Act imposed a 3-year 
moratorium on State and local governments' ability to impose 
new taxes on Internet access, but grandfathered existing taxes 
on Internet access that were in place prior to October 1, 
1998.\29\ The moratorium also applied to multiple and 
discriminatory taxes on electronic commerce. Further, the ITFA 
established a nineteen-member Advisory Commission on Electronic 
Commerce (ACEC) to study and submit a report to Congress on 
international, Federal, State and local tax issues pertaining 
to the Internet.
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    \29\ 47 U.S.C. Sec. 1101(a)(1) (2001).
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Principal Terms and Definitions Contained in the ITFA
    Section 1104(5) of the ITFA defines ``Internet access'' as 
``a service that enables users to access content, information, 
electronic mail, or other services offered over the Internet, 
and may also include access to proprietary content, 
information, and other services as part of a package of 
services offered to users. Such term does not include 
telecommunications services.''
    In general, taxation of Internet access refers to applying 
State and local taxes to the monthly charge that subscribers 
pay for access to the Internet through ISPs. When applied, the 
tax on Internet access is most commonly a retail general sales 
tax, but may also take the form of other transactional taxes 
such a telecommunications or gross receipts.\30\
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    \30\ See generally, Nonna A. Noto, ``Extending the Internet Tax 
Moratorium and Related Issues,'' Cong. Research Serv., Long Report for 
Congress RL31177 (Jan. 17, 2002).
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    The ITFA contains a ``grandfather'' clause with regard to 
Internet access taxes. Section 1101(a)(1) applies only to 
Internet access taxes that were not ``generally imposed or 
actually enforced'' prior to October 1, 1998. Hence, the States 
that collected these taxes prior to October 1, 1998 presently 
have authority to do so.
    Section 1104(2)(A) of the ITFA defines ``multiple'' as 
``any tax that is imposed by one State or political subdivision 
thereof on the same or essentially the same electronic commerce 
that is also subject to another tax imposed by another State or 
political subdivision . . . without a credit . . . for taxes 
paid in other jurisdictions.''
    For example, if State A imposes a tax on an online 
transaction that occurs between an Internet seller in State A 
and a consumer in State B, only one of these States would be 
permitted to collect taxes on the transaction unless a tax 
credit were provided. The ITFA ban on multiple taxes also 
prohibits more than one State from collecting taxes on an 
electronic transaction that might involve more than two taxing 
jurisdictions. This situation might arise if an Internet server 
is located in a State different from that of the Internet 
retailer and customer.
    Section 1104(6)(B) does, however, permit multiple sales and 
use taxes that are geographically vertical. For example, the 
State, county, and city within a county could all levy their 
sales tax on the same e-commerce transaction. The other 
exception included within section 1104(6)(B) permits a tax to 
be levied on persons engaged in electronic commerce (e.g., a 
personal income tax, corporate income tax, or business activity 
tax), even if a sales or use tax is levied on the transaction.
    Section 1104(2) of the ITFA defines a ``discriminatory 
tax'' as: (A) any tax imposed by a State or political 
subdivision on electronic commerce that--(i) is not generally 
imposed and legally collectible by such State or political 
subdivision on transactions involving similar property, goods, 
services or information accomplished through other means; (ii) 
is not generally imposed and legally collectible at the same 
rate by such State or such political subdivision on 
transactions involving similar property, goods, services or 
information accomplished through other means (unless the rate 
is lower as part of a phase-out of the tax over not more than a 
5-year period); (iii) imposes an obligation to collect or pay 
the tax on a different person or entity than in the case of 
transactions involving similar property, goods, services, or 
information accomplished through other means; or (iv) 
establishes a classification on Internet access service 
providers for purposes of establishing a higher tax rate than 
the tax rate generally applied to providers of similar 
information services delivered through other means.
    Discriminatory taxes include taxes levied specifically on 
electronic transactions or taxes that single out the electronic 
transactions for higher rates of taxation. For example, if 
State A collects a 5-percent sales tax on the sale or retail 
goods, State A could not impose a higher tax rate on retail 
goods sold online. This provision also prohibits States from 
imposing a tax collection requirement on persons or businesses 
who would not have to collect these taxes if they occurred in a 
similar, non-electronic transaction. Thus, State A cannot 
require a remote electronic seller to collect and remit sales 
taxes if other merchants selling similar goods are not required 
to do so. Finally, this section prohibits States from 
subjecting ISPs to a tax burden higher than that placed on 
information services delivered through other means.
    Section 1104(2)(B) of the definition addresses nexus 
issues. It lists conditions under which the use of a computer 
server, an Internet access service, or online services, by a 
remote seller, does not establish nexus. Circumstances that do 
not establish nexus include the sole ability to access a site 
on a remote seller's out-of-State computer server; the display 
of a remote seller's information or content on the out-of-State 
computer server of a provider of Internet access service or 
online services; and the processing of orders through the out-
of-State computer server of a provider of Internet access 
service or online services.
Advisory Commission on Electronic Commerce
    As noted above, the ITFA established the ACEC to study 
international, Federal, State, and local tax issues pertaining 
to the Internet.\31\ In accordance with its statutory mandate, 
the ACEC reported the results of its study on April 3, 2000. 
The ACEC made numerous key findings which received a majority 
of the Commissioners' support, including: (1) ``[m]ake 
permanent the current moratorium on any transaction taxes on 
the sale of Internet access, including taxes that were 
grandfathered under the ITFA;'' and (2) ``[f]or 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.'' \32\ Another ACEC majority proposal concerned 
the sales and use tax collection issue: ``[e]ncourage State and 
local governments to work . . . in drafting a uniform sales and 
use tax act within 3 years after the expiration of the [ITFA] 
moratorium . . . that would simplify State and local sales and 
use taxation policies so as to create and maintain parity of 
collection costs . . . between remote sellers and comparable 
single-jurisdiction vendors that do not offer remote sales. . . 
.'' \33\
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    \31\ 47 U.S.C. Sec. 1102 (1998).
    \32\ Advisory Comm. on Electronic Commerce, 2000, Report to 
Congress, at 5.
    \33\ Id. at 19.
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The Internet Tax Nondiscrimination Act
    In light of the ACEC findings, H.R. 49 extends permanently 
the moratorium provisions created by the ITFA. The bill thus 
creates a lasting ban on the imposition of taxes on Internet 
access and on multiple and discriminatory taxes on electronic 
commerce. H.R. 49 also eliminates the grandfather provision, 
thereby encouraging equal access to the Internet in every 
State.
            Developments Since 1998
    On May 22, 2003, the Subcommittee on Commercial and 
Administrative Law held a markup of H.R. 49. During markup, the 
Ranking Minority Member Mel Watt introduced one amendment 
addressing a development in the tax treatment of certain types 
of Internet access since 1998. Mr. Watt noted that some States 
had issued letter rulings that DSL Internet access service 
constituted a ``bundle'' of taxable telecommunications services 
and Internet access. Thus some Internet access had become 
subject to State taxation in contravention to the ITFA, while 
others were not. Mr. Watt withdrew the amendment, and 
Subcommittee Chairman Chris Cannon stated his intention to 
study the issue and develop amendment language with Mr. Watt to 
offer for consideration at the full Committee markup. 
Additionally, Mr. Cannon offered an amendment in the nature of 
a substitute which was adopted by voice vote.
    Prior to markup on July 16, 2003, the Committee made a 
number of observations with regard to the ITFA in light of the 
evolving technological landscape since 1998. First, in enacting 
the ITFA, Congress intended to prohibit States and localities 
from taxing access to the Internet. Congress, therefore, 
prohibited taxes on ``Internet access,'' \34\ which it defined 
in section 1104(5) as:
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    \34\ The ITFA has an exception for Internet access taxes imposed by 
those States subject to the grandfather clause.

        (5) Internet access.--The term `Internet access' means 
        a service that enables users to access content, 
        information, electronic mail, or other services over 
        the Internet, and may also include access to 
        proprietary content, information, and other services as 
        part of a package of services offered to users. Such 
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        term does not include telecommunications services.

    The first sentence of this subsection demonstrates 
Congress' broad, flexible approach to what constitutes 
``Internet access.'' Congress did not define ``Internet 
access'' in terms of a particular technology or a specific 
method of provisioning. Instead, Congress described the general 
functionality encompassed by Internet access, thereby allowing 
for the evolution of Internet access technologies and methods 
of providing Internet access in response to market forces and 
technological advancements.
    Because the first sentence of the definition could be read 
to encompass telecommunications services, including plain old 
telephone service, or ``POTS,'' Congress in the second sentence 
of the definition expressly excluded telecommunications 
services. The net effect of this definition is to create a 
broad moratorium on taxation of Internet access, while still 
preserving the ability of States and localities to tax 
telecommunications services, including traditional telephone 
service.
    Under the ITFA, the moratorium applies to taxes on all 
forms of Internet access, regardless of the means by which that 
access is provided to the user. Whatever the current or future 
technology employed, the ITFA applies to that technology when 
it provides Internet access. In practice, Internet access 
provided to the user may include a transmission component that 
is an integral part of the Internet access, as in the case of 
Digital Subscriber Line (DSL) Internet access, cable modem 
Internet access, and certain wireless Internet access. In such 
cases, the transmission component is not a separate 
telecommunications service subject to taxation.
    Internet access also may be provided to the user without a 
transmission component included, as in the case of dial-up 
Internet access, which requires the use of a telephone line. In 
this case, by contrast, the transmission component is a 
separate telecommunications service subject to taxation. In 
both scenarios, however, the ITFA prohibits the taxation of 
Internet access.
    Moreover, high-speed Internet access may be delivered 
through various arrangements between telecommunications 
companies, Internet access providers (IAPs) and ISPs. In one of 
many such examples, an IAP may purchase the transmission 
capability from a telecommunications company and combine the 
Internet transmission service with its own Internet services in 
order to provide their customers high-speed Internet access. In 
another arrangement, an IAP may purchase from an ISP the 
Internet services and use its own high-speed Internet 
transmission service to provide access. These are only two of 
many possible arrangements which provide Internet access. 
Transmissions pursuant to such arrangements constitute 
``Internet access'' within the definition in the ITFA.
    Since the enactment of the ITFA, States have adopted 
differing views of ``Internet access,'' some of which have been 
overly narrow. They have segregated what they consider to be 
Internet access from the transport used to deliver that access, 
and taxed the transport as ``telecommunications services'' 
separate from, and merely, in their view, ``bundled'' with, 
Internet access.\35\ Taxation of the transport component of 
Internet access is, in reality, a tax on Internet access. The 
result has been unequal treatment of technologies: while 
apparently no States tax the dial-up method of Internet access 
(with the exception of those subject to the grandfather 
clause), some tax other technologies, such as DSL Internet 
services, thereby undermining the purpose of the ITFA. In 
contrast, other States have ruled that transmission and access 
together constitute ``Internet access'' and are included within 
the ITFA moratorium.\36\ The Committee believes that the latter 
interpretation more correctly conforms with Congressional 
intent. But the disparity of treatment necessitated further 
clarification to the definition of ``Internet access'' to 
ensure that the ITFA is technology-neutral.
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    \35\ See Ala. Dept. of Revenue, Priv. Ltr. Rul. (Aug. 22, 2002); 
Ky. Rev. Cabinet, Priv. Ltr. Rul. (Jan. 17, 2003).
    \36\ See La. Dept. of Revenue, Priv. Ltr. Rul. 03-004 (Apr. 4, 
2003); S.C. Dept. of Revenue, Priv. Ltr. Rul. 03-2 (Mar. 10, 2003).
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    At the full Committee markup of H.R. 49 on July 16, 2003, 
Mr. Watt and Mr. Cannon offered the following amendment to the 
definition of Internet access (new language inserted in 
italics), which was adopted:

        (5) Internet access.--The term ``Internet access'' 
        means a service that enables users to access content, 
        information, electronic mail, or other services over 
        the Internet, and may also include access to 
        proprietary content, information, and other services as 
        part of a package of services offered to users. Such 
        term does not include telecommunications services, 
        except to the extent such services are used to provide 
        Internet access.

    The amendment clarified the exception to the definition: 
while telecommunications services are not generally within the 
definition of Internet access, to the extent they are used to 
provide Internet access, they are subject to the moratorium. 
Transmission services used to provide Internet access, whether 
at the wholesale or retail level, constitute ``Internet 
access.'' Those services used to provide Internet access, 
including DSL Internet services, cable modem Internet services, 
and similar or successor technologies, are subject to the tax 
moratorium of the ITFA.
    The amendment further elucidated that ``POTS'' is not 
included within the definition of ``Internet access.'' The 
phrase ``are used to provide Internet access'' is viewed from 
the perspective of the provider, and POTS alone is not, indeed 
cannot be, used to provide Internet access. As noted above, 
cable modem Internet access services, which are not 
telecommunications services, are already subject to the ITFA 
moratorium. This tax exclusion does not apply to cable video 
services, however, which are subject to franchise fees.
    The amendment ensures parity of tax treatment for all 
technologies used to provide Internet access to consumers and 
emphasizes the original intent of the ITFA. Examples of 
services that fall within the definition of ``Internet access'' 
include, but are not limited to:

        --LDSL Internet access services, including their 
        transport mechanisms;

        --LThat portion of wireless telephone services used to 
        provide Internet access, including transport 
        mechanisms; and

        --LThat portion of cable modem service used to provide 
        Internet access, including transport mechanisms.

                                Hearings

    The Committee's Subcommittee on Commercial and 
Administrative Law held a hearing on H.R. 49 on April 1, 2003. 
Testimony was received from the following witnesses: Hon. Jack 
Kemp, Co-Director, Empower America; Hon. James S. Gilmore, III, 
former Governor of the Commonwealth of Virginia; Mr. Harley T. 
Duncan, Executive Director, Federation of Tax Administrators; 
and Mr. Harris N. Miller, President of the Information 
Technology Association of America. Additional materials were 
submitted by six individuals and organizations.

                        Committee Consideration

    On May 22, 2003, the Subcommittee on Commercial and 
Administrative Law met in open session and ordered favorably 
reported the bill H.R.49, with an amendment in the nature of a 
substitute, by voice vote, a quorum being present. On July 16, 
2003, the Committee met in open session and ordered favorably 
reported the bill H.R. 49, with an amendment, by voice vote, a 
quorum being present.

                         Vote of the Committee

    In compliance with clause 3(b) of Rule XIII of the Rules of 
the House of Representatives, the Committee notes that there 
were no recorded votes during the committee consideration of 
H.R. 49.

                      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.

               New Budget Authority and Tax Expenditures

    Clause 3(c)(2) of Rule XIII of the Rules of the House of 
Representatives 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. 49, 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, July 21, 2003.
Hon. F. James Sensenbrenner, Jr., Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 49, the Internet 
Tax Nondiscrimination Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Sarah Puro, 
who can be reached at 225-3220.
            Sincerely,
                                       Douglas Holtz-Eakin.

Enclosure

cc:
        Honorable John Conyers, Jr.
        Ranking Member
H.R. 49--Internet Tax Nondiscrimination Act.

                                SUMMARY

    H.R. 49 would permanently extend a moratorium on certain 
State and local taxation of online services and electronic 
commerce, and would eliminate an exception to the prohibition 
for certain States. Under current law, the moratorium is set to 
expire on November 1, 2003. CBO estimates that enacting H.R. 49 
would have no impact on the Federal budget, but it would impose 
significant costs on some State and local governments.
    By extending and expanding the moratorium on certain types 
of State and local taxes, H.R. 49 would impose an 
intergovernmental mandate as defined in the Unfunded Mandates 
Reform Act (UMRA). CBO estimates that the mandate would cause 
revenue losses to State and local governments that would exceed 
the threshold established in UMRA ($59 million in 2003, 
adjusted annually for inflation). While there is some 
uncertainty about the number of States affected, CBO estimates 
that the direct costs to States and local governments would 
probably total between $80 million and $120 million annually. 
CBO estimates that the bill contains no new private-sector 
mandates as defined in UMRA.

                ESTIMATED COST TO THE FEDERAL GOVERNMENT

    CBO estimates that enacting H.R. 49 would have no impact on 
the Federal budget.

            INTERGOVERNMENTAL MANDATES CONTAINED IN THE BILL

    The Internet Tax Freedom Act (ITFA) currently prohibits 
State and local governments from imposing taxes on Internet 
access until November 1, 2003. The ITFA, enacted as Public Law 
105-277 on October 21, 1998, also contains an exception to this 
moratorium, sometimes referred to as the ``grandfather 
clause,'' which allows certain State and local governments to 
tax Internet access if such tax was generally imposed and 
actually enforced prior to October 1, 1998.
    H.R. 49 would make the moratorium permanent and would 
eliminate the grandfather clause. The bill also would State 
that the term ``Internet access'' or ``Internet access 
services'' as defined in ITFA would not include 
telecommunications services except to the extent that such 
services are used to provide Internet access, known as 
``aggregating'' or ``bundling'' of services. These extensions 
and expansions of the moratorium constitute intergovernmental 
mandates as defined in UMRA.

            ESTIMATED DIRECT COSTS OF MANDATES TO STATE AND 
                           LOCAL GOVERNMENTS

    CBO estimates that repealing the grandfather clause would 
result in revenue losses for about 10 States and for several 
local governments totaling between $80 million and $120 million 
annually beginning in 2004. We also estimate that the change in 
the definition of Internet access could affect tax revenues for 
many States and local governments, but we cannot estimate the 
magnitude or the timing of any such additional impacts at this 
time.
    UMRA includes in its definition of the direct costs of a 
mandate the amounts that State and local governments would be 
prohibited from raising in revenues to comply with the mandate. 
The direct costs of eliminating the grandfather clause would be 
the tax revenues that State and local governments are currently 
collecting but would be precluded from collecting under H.R. 
49. States also could lose revenues that they currently collect 
on certain services if those services are redefined as access 
under the bill.
The Grandfather Clause
    The primary and most immediate budget impact would be the 
revenue losses resulting from eliminating the grandfather 
clause that currently allows some State and local governments 
to collect taxes on Internet access. While there is some 
uncertainty about the number of jurisdictions currently 
collecting such taxes--and the precise amount of those 
collections--CBO believes that about 10 States (Hawaii, New 
Hampshire, New Mexico, North Dakota, Ohio, South Dakota, 
Tennessee, Texas, Washington, Wisconsin) and several local 
jurisdictions in Colorado, Ohio, South Dakota, Texas, 
Washington, and Wisconsin are currently collecting such taxes 
and that these taxes total between $80 million and $120 million 
annually. This estimate is based on information from the States 
involved, from industry contacts, and on data from the 
Department of Commerce. In arriving at this estimate, CBO took 
into account the fact that some companies are challenging the 
applicability of the tax to the service they provide and thus 
may not be collecting or remitting the taxes even though the 
States feel they are obligated to do so. Such potential 
liabilities are not included in the estimate.
    It is possible that if the moratorium were allowed to 
expire as scheduled under current law, some State and local 
governments would enact new taxes or decide to apply existing 
taxes on Internet access during the next 5 years. It is also 
possible that some governments would repeal existing taxes or 
preclude their application to these services. Because such 
changes are difficult to predict, for the purposes of 
estimating the direct costs of the mandate, CBO considered only 
the revenues from taxes that are currently in place and 
actually being collected.
Definition of Internet Access
    Depending on how the language altering the definition of 
what telecommunications services are taxable is interpreted, 
that language also could result in substantial revenue losses 
for States. It is possible that States could lose revenue if 
taxes that they are levying on services that are not defined as 
``access'' would be considered access under this bill. Revenues 
could also be lost if Internet access providers choose to 
bundle products and call the product Internet access. Such 
changes would reduce State and local revenues from 
telecommunications taxes and possibly revenues from content 
currently subject to sales and use taxes. However, CBO cannot 
estimate the magnitude of these losses.

                 ESTIMATED IMPACT ON THE PRIVATE SECTOR

    This bill would impose no new private-sector mandates as 
defined in UMRA.

                         ESTIMATE PREPARED BY:

Impact on State, Local, and Tribal Governments: Sarah Puro 
    (225-3220)
Federal Costs: Melissa Zimmerman and Jenny Lin (226-2860)
Impact on the Private Sector: Paige Piper/Bach (226-2960)

                         ESTIMATE APPROVED BY:

Peter H. Fontaine
Deputy Assistant Director for Budget Analysis

                       Federal Mandate Statement

    In compliance with 2 U.S.C. Sec. 658b, the Committee notes 
that the information required by the applicable parts of such 
section is found in the letter from the Congressional Budget 
Office and the descriptive portions of this report.

                    Performance Goals and Objectives

    H.R. 49 does not authorize funding. Therefore, clause 
3(c)(4) of Rule XIII of the Rules of the House of 
Representatives is inapplicable.

                   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, of the Constitution.

               Section-by-Section Analysis and Discussion

    Section 1. Short Title. Section 1 provides that this Act 
may be cited as the ``Internet Tax Nondiscrimination Act.''
Section 2. Permanent Extension of the Moratorium.
    (a) Moratorium.--Section 1101(a) of the Act is amended to 
read: ``(a) Moratorium.--No State or political subdivision 
thereof may impose any of the following taxes: (1) Taxes on 
Internet access. (2) Multiple and discriminatory taxes on 
electronic commerce.'' This section creates a permanent ban on 
taxes on Internet access and on Internet-specific taxes. This 
section also abolishes the grandfather clause of the ITFA, 
discussed in section (b), infra.
    (b) Conforming Amendments.--
      (1) Section 1101(d), ``Definition of generally imposed 
and actually enforced,'' is deleted.
      (2) The definition of ``Tax on Internet access'' in 
section 1104(10) is amended by striking ``unless such tax was 
generally imposed and actually enforced prior to October 1, 
1998.''
      (3) The definition of ``Discriminatory tax'' in section 
1104(2)(B)(i) is amended by striking ``except with respect to a 
tax (on Internet access) that was generally imposed and 
actually enforced prior to October 1, 1998.''
    Section 1101(a) of the ITFA contains a ``grandfather'' 
provision allowing certain States to impose taxes on Internet 
access. Specifically, States that had taxes on Internet access 
that were ``generally imposed and actually enforced prior to 
October 1, 1998'' are currently permitted to continue to do so.
    In order to ensure that the benefits of the moratorium are 
applied equally to every State, H.R. 49 deletes the grandfather 
provision. Therefore, the grandfather provision contained in 
section 1101(a), the definition of ``generally imposed and 
actually enforced prior to October 1, 1998'' contained in 
section 1104(d), and references to the definition contained in 
sections 1104(1) and 1104(2)(B)(i) were deleted.
    Furthermore, since 1998, there has been uncertainty whether 
some States had legitimately invoked the right to tax under the 
grandfather clause. In particular, at least one ISP has 
asserted that some States claiming authority under the 
grandfather clause have interpreted erroneously certain of 
their pre-tax laws to allow for the imposition of Internet 
access taxes. Such uncertainty, coupled with the goal that 
Internet access remain untaxed for every citizen, bolsters the 
conclusion that the grandfather clause should be deleted.
    At full Committee markup of H.R. 49 on July 16, 2003, two 
amendments were offered by Representative Sheila Jackson Lee to 
preserve or, in the alternative, phase out, the grandfather 
clause. These amendments were defeated by voice vote.
    (c) Clarification.--As discussed supra, this language added 
by the amendment by Mr. Watt and Mr. Cannon clarifies that 
access to the Internet is not subject to State and local 
taxation regardless of the technology used to provide that 
access.

         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):

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 on November 1, 
2003--
            [(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.]
    (a) Moratorium.--No State or political subdivision thereof 
may impose any of the following taxes:
            (1) Taxes on Internet access.
            (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) Exception to Moratorium.--
            (1) * * *

           *       *       *       *       *       *       *

            (3) Definitions.--In this subsection:
                    (A) * * *

           *       *       *       *       *       *       *

                    (D) Internet access service.--The term 
                ``Internet access service'' means a service 
                that enables users to access content, 
                information, electronic mail, or other services 
                offered over the Internet and may also include 
                access to proprietary content, information, and 
                other services as part of a package of services 
                offered to consumers. Such term does not 
                include telecommunications services, except to 
                the extent such services are used to provide 
                Internet access.

           *       *       *       *       *       *       *


SEC. 1104. DEFINITIONS.

      For the purposes of this title:
            (1) * * *
            (2) Discriminatory tax.--The term ``discriminatory 
        tax'' means--
                    (A) * * *
                    (B) any tax imposed by a State or political 
                subdivision thereof, if--
                            (i) [except with respect to a tax 
                        (on Internet access) that was generally 
                        imposed and actually enforced prior to 
                        October 1, 1998,] the sole ability to 
                        access a site on a remote seller's out-
                        of-State computer server is considered 
                        a factor in determining a remote 
                        seller's tax collection obligation; or

           *       *       *       *       *       *       *

            (5) Internet access.--The term ``Internet access'' 
        means a service that enables users to access content, 
        information, electronic mail, or other services offered 
        over the Internet, and may also include access to 
        proprietary content, information, and other services as 
        part of a package of services offered to users. Such 
        term does not include telecommunications services, 
        except to the extent such services are used to provide 
        Internet access.

           *       *       *       *       *       *       *

            (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].

           *       *       *       *       *       *       *


                              Agency Views


                           Markup Transcript





                            BUSINESS MEETING

                        WEDNESDAY, JULY 16, 2003

                  House of Representatives,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:04 a.m., in 
Room 2141, Rayburn House Office Building, Hon. F. James 
Sensenbrenner, Jr., [Chairman of the Committee] presiding.
    [Intervening business.]
    Chairman Sensenbrenner. The next item on the agenda is H.R. 
49, the ``Internet Tax Nondiscrimination Act.''
    The chair recognizes the gentleman from Utah, Mr. Cannon, 
Chairman of the Subcommittee on Commercial and Administrative 
Law.
    Mr. Cannon. Mr. Chairman, the Subcommittee on Commercial 
and Administrative Law reports favorably the bill H.R. 49, with 
a single amendment in the nature of a substitute, and moves its 
favorable recommendation to the full House.
    Chairman Sensenbrenner. Without objection, the bill will be 
considered as read and open for amendment at any point.
    [The bill, H.R. 49, follows:]
      
      

  


      
      

  


    Chairman Sensenbrenner. And the Subcommittee amendment in 
the nature of a substitute, which the Members have before them, 
will be considered as read, considered as the original text for 
purposes of amendment and open for amendment at any point.
    [The Subcommittee amendment follows:]
      
      

  


      
      

  


    Chairman Sensenbrenner. The chair recognizes the gentleman 
from Utah, Mr. Cannon, to strike the last word.
    Mr. Cannon. Thank you, Mr. Chairman.
    The Subcommittee on Commercial and Administrative Law 
reports favorably on H.R. 49, the ``Internet Tax 
Nondiscrimination Act.''
    Consideration of this bill is important because the current 
moratorium on Internet tax expires on November 1st of this 
year.
    H.R. 49 also presents the Committee with the opportunity to 
report to the full House a bill that will assist our economy at 
a time when our Nation can ill afford additional taxation on 
vital business and communications mediums, and it gives clarity 
and the ability to plan for those who are going to invest in 
this vital area of our economy.
    In 1998, Congress passed the Internet Tax Freedom Act. This 
limits State authority to impose new taxes on Internet access, 
and it protects Internet commerce from multiple and 
discriminatory taxes.
    On April 1st of this year, my Subcommittee conducted a 
hearing on H.R. 49, and on May 22nd, the Subcommittee reported 
H.R. 49 favorably by voice vote with one amendment, which I 
offered, making technical and conforming changes to the bill.
    Failure to report H.R. 49 favorably would give States and 
localities free rein to impose crippling and potentially fatal 
taxes on Internet commerce. The costly burdens associated with 
the administration of overlapping and disparate taxes in 
thousands of localities, threaten the viability of some 
independent service providers and will limit consumer choice.
    Taxes on Internet access would result in tax increases for 
consumers and will widen the digital divide in this Nation 
among those with access to the services and information offered 
on the Internet and those without access.
    The bill we consider today extends permanently the 
moratorium on Internet tax or access taxes and multiple and 
discriminatory taxes. This sound policy reflects our insights 
gained since 1998, as well as the position of the 125 co-
sponsors of this bill, of which I am one. I am encouraged by 
the fact that 20 Members of this Committee are also co-
sponsors.
    I want to stress that this bill does not touch the issue of 
the collection of sales taxes by remote vendors, a completely 
separate matter. As I expressed in the past, the Committee will 
consider the States' efforts to streamline sales taxes in a 
hearing shortly.
    Today, my distinguished, the Ranking Member of my 
Subcommittee, Mr. Watt, will offer one amendment, which ensures 
that all technologies used to provide Internet access receive 
equal protection under the ITFA. I commend Mr. Watt for his 
time working on this vital issue, and his dedication to what is 
an issue of fundamental fairness. I intend to support his 
neutrality amendment and urge my colleagues to do the same.
    I, therefore, encourage the Committee to fully support H.R. 
49.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Chairman Sensenbrenner. The gentleman from North Carolina, 
Mr. Watt?
    Mr. Watt. Thank you, Mr. Chairman.
    I concur and move to strike the last word.
    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes.
    Mr. Watt. I concur in the statement of Mr. Cannon. There 
are a number of us who have been working to try to resolve this 
issue, which would free the Internet from any kind of--Internet 
access--from any kind of taxation, yet, at the same time, deal 
with the issue of taxation of sales at remote sites. And the 
failure to deal with the latter issue obviously imposes a 
substantial burden on States and local Governments because 
that's where a lot of them would get substantial parts of their 
revenues.
    These two issues have been tied together for the last 
several years to try to give States and local Governments the 
opportunity to work out some uniform method of treating 
taxation of remote sales over the Internet, and that process is 
still going on. I think those of us who have been trying to tie 
these two things together have understood all along that they 
are really two separate issues. And while we had hoped that 
both issues would be resolved at the same time or in the same 
time frame, it doesn't appear that that's going to be the case.
    So there certainly never has been a problem on our side of 
the aisle or in general about this part of the bill. The 
problem has always been how can we incentivize States to go 
ahead and come up with a uniform regime to deal with remote 
sales, and that work is still ongoing, and Mr. Cannon and the 
Subcommittee will continue to work on that, despite the passage 
of this bill.
    So I plan to offer one amendment, which I will do at the 
appropriate time and hope that my colleagues will support the 
amendment and the underlying bill, and I yield back the balance 
of my time.
    Chairman Sensenbrenner. Without objection, opening 
statements will be placed in the record at this point.
    [The prepared statement of Mr. Coble follows:]
 Prepared Statement of the Honorable Howard Coble, a Representative in 
               Congress From the State of North Carolina
    I am a recent cosponsor of the bill before us, H.R. 49, the 
Internet Tax Nondiscrimination Act. Recent--not because I did not 
previously support a permanent ban on excessive and discriminatory 
taxes on the Internet, but instead because I was concerned that the 
states' sales tax issue would be forgotten without continuing debate on 
Internet taxation.
    I have been assured by the Chairman of the Subcommittee on 
Commercial and Administrative Law, Mr. Cannon, that the subcommittee 
will hold a hearing on the Sales Tax Simplification Plan this 
September. I appreciate Chairman Cannon's willingness to conduct a 
hearing on this issue, and look forward to the opportunity to discuss 
the merits of this plan along with possible room for improvement. Among 
others, the small mom and pop shops in my district have explained to me 
that this is an issue that should be address by Congress sooner than 
later.
    Again, I support a permanent ban on access, multiple, and 
discriminatory taxes on the Internet and encourage my colleagues to 
support of H.R. 49.

    [The prepared statement of Mr. Smith follows:]
 Prepared Statement of the Honorable Lamar Smith, a Representative in 
                    Congress From the State of Texas
    Mr. Chairman, I support this amendment because it will clarify the 
underlying bill and will ensure that the Internet tax moratorium is 
applied consistently.
    The underlying bill makes the current moratorium on Internet taxes 
permanent. This amendment simply clarifies the bill to exclude 
telecommunications services from the definition of Internet access as 
long as they are not used to provide Internet access.
    Doing this is important for several reasons. First, 
telecommunications services are already subject to a large amount of 
federal, state and local taxes. If states were allowed to tax Internet 
access services, these taxes would be an even larger burden, not to 
mention an enormous competitive disadvantage.
    Second, this amendment ensures that the Internet Tax Freedom Act is 
technology neutral. Internet access should be tax-free. Americans 
should be able to access the Internet without being subject to state 
and local taxes, whether these taxes are imposed directly or through 
their Internet service provider.
    This amendment ensures healthy competition among all providers of 
Internet access regardless of speed, technology, or provider. All 
Internet access services should be able to compete fairly and their 
taxation should not be based on the type or speed of service, the type 
of provider, or how the service is billed.
    This amendment has received widespread support from industry 
members such as SBC, AT&T, and Verizon, just to name a few.
    I urge my colleagues to support this amendment.

    [The prepared statement of Mr. Goodlatte follows:]
Prepared Statement of the Honorable Bob Goodlatte, a Representative in 
                  Congress From the State of Virginia
    Mr. Chairman, thank you for holding this markup of this important 
legislation.
    As co-chairman of the Congressional Internet Caucus and chairman of 
the House Republican High Technology Working Group, I have long been a 
champion of efforts to eliminate Internet access taxes and other 
discriminatory taxes on electronic commerce. During the 107th Congress, 
I introduced the Internet Tax Fairness Act, legislation that, in part, 
sought to permanently ban Internet access taxes and discriminatory 
taxes on electronic commerce. Although the prohibition on these taxes 
was extended temporarily until November of 2003, the time is now for 
Congress to act to permanently extend this prohibition.
    Excessive regulations will hamper the Internet's tremendous growth 
and stifle investment in small businesses that utilize this tremendous 
medium. In addition, taxing Internet access will increase the costs of 
households going on-line and result in a greater disparity between 
those households that can afford to go on-line and those that cannot. 
The last thing that consumers need is for the puzzling array of taxes 
on their phone bills to be repeated on their Internet service bills.
    H.R. 49, the Internet Tax Nondiscrimination Act, will encourage 
continued investment in and utilization of the Internet by permanently 
banning all Internet access taxes and by eliminating the 
``grandfather'' clause in the current law that allows certain states to 
continue imposing these crippling taxes on the Internet. This bill is 
forward-looking and will provide the certainty that businesses need to 
make calculated decisions regarding the ways in which they will utilize 
and invest in Internet technologies.
    Mr. Chairman, thank you again for holding this important markup. I 
sincerely hope that the 108th congress acts to permanently ban all 
Internet access taxes and discriminatory taxes on electronic commerce.

    [The prepared statement of Mr. Delahunt follows:]
      Prepared Statement of the Honorable William D. Delahunt, a 
       Representative in Congress From the State of Massachusetts
    Mr. Chairman, I move to strike the last word.
    The states are confronting their worst budget crisis since the 
Great Depression. A declining economy, spiraling Medicaid costs, and 
the erosion of their tax base have left them with a collective deficit 
of some $100 billion. And governors of both political parties face a 
stark choice between unpopular tax increases and drastic cuts in 
Medicaid, education, public safety and other essential services. Or 
both.
    I appreciate the concern of the sponsors of the bill that without a 
continuation of the moratorium on Internet access taxes, some states 
might be tempted to help make up their shortfalls by enacting such 
taxes.
    On the other hand, I wish the proponents of the moratorium were as 
concerned about the fact that states are losing tens of billions of 
dollars each year because the taxable transactions on which they rely 
for half their revenues are increasingly taking place over the 
Internet.
    Some are clearly not concerned. Grover Norquist, who testified at 
our hearing in support of this bill, said that he wants to shrink 
government until ``we can drown it in the bathtub.'' ``I hope a state 
goes bankrupt,'' he said.
    Unless you agree with him, the money has got to come from 
somewhere. Uncollected sales taxes on Internet purchases cost the 
states more than $16 billion in 2001. Unless there is a system in place 
that enables state and local governments to collect these taxes, their 
annual losses from on-line sales will grow to $45 billion by 2006, and 
$66 billion by 2011--with total losses coming to nearly half a trillion 
dollars by that date.
    What does this mean for individual states? To take just a few 
examples: My home state of Massachusetts lost $256 million in 2001, and 
its losses will climb to over a billion dollars in 2011. Tennessee lost 
$450 million in 2001, and by 2011 its annual losses will grow to $1.8 
billion. Florida--which relies on the sales tax for more than half of 
its annual revenues--lost $1.2 billion in 2001, with its losses 
estimated to quadruple to nearly $5 billion just ten years from now. 
And Texas lost $1.4 billion in 2001 and stands to lose $5.6 billion in 
2011.
    These losses are magnifying the fiscal problems that the states 
were already experiencing because of increased costs and shrinking 
revenues. With no relief in sight, nearly every state is curtailing 
health care for the poor and mentally ill. Laying off teachers. 
Dismissing state troopers. Closing parks and libraries. Shortening the 
school year. Eliminating college programs. And slashing other services 
that have long been taken for granted.
    And of course by failing to ensure sales tax parity between remote 
sellers and main street merchants, we are putting at risk the thousands 
of small businesses that sustain our economy and contribute so much to 
our neighborhoods and communities. As former Governor Engler of 
Michigan said the last time we considered this issue, ``It's time to 
close ranks, come together, and stand up for Main Street America. 
Fairness requires that remote sellers collect and pay the same taxes 
that our friends and neighbors on Main Street have to collect and 
pay.''
    And so, Mr. Chairman, while I support the moratorium on Internet 
access taxes, I think it is important that we get our priorities right. 
At subcommittee I offered an amendment expressing the Sense of Congress 
that once we have told the states what they may not do to make up their 
lost revenues we have an obligation to tell them what they may do.
    The Quill decision prohibited a state from collecting sales taxes 
from out-of-state businesses that do not have a physical presence in 
that state. But the Court said that Congress could authorize the states 
to collect those taxes once they have modified their taxing systems to 
alleviate the burdens placed on interstate commerce by multiple taxing 
jurisdictions.
    The states have made substantial progress over the past year in 
developing a simplified, efficient and ``technology-neutral'' system 
for the taxation of goods and services that can meet that test. Once a 
sufficient number of states have implemented the Streamlined Sales and 
Use Tax Agreement, Congress should move expeditiously to consider 
legislation authorizing them to require remote sellers to collect and 
remit sales and use taxes on in-state sales.
    I will shortly introduce such legislation, together with the 
gentleman from Oklahoma (Mr. Istook) and the gentleman from Alabama 
(Mr. Bachus). And I hope that the committee will give it the most 
serious consideration.
    I have refrained from offering my amendment today because our 
subcommittee chairman, the gentleman from Utah (Mr. Cannon), has given 
his commitment that the subcommittee will take up the sales tax issue 
in the near future. I appreciate his responsiveness and I know he is a 
man of his word.
    The states are meeting their responsibilities. It's time for us to 
meet ours.

    Chairman Sensenbrenner. Are there amendments?
    Ms. Lofgren. Mr. Chairman?
    The gentleman from North Carolina, Mr. Watt?
    Ms. Lofgren. Mr. Chairman?
    Chairman Sensenbrenner. Mr. Watt has an amendment.
    Mr. Watt. Yes, Mr. Chairman, I have an amendment at the 
desk.
    Chairman Sensenbrenner. The clerk will report the 
amendment.
    The Clerk. Amendment to H.R. 49 offered by Mr. Watt and Mr. 
Cannon. At the end of Section 2, page 2----
    Mr. Watt. I ask unanimous consent the amendment be 
considered as read.
    Chairman Sensenbrenner. Without objection.
    [The amendment of Mr. Watt and Mr. Cannon follows:]
      
      

  


    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes to explain his amendment.
    Mr. Watt. Thank you, Mr. Chairman.
    I offer this amendment with the Chairman of the 
Subcommittee, Mr. Cannon. The amendment relates to an issue 
that we tried to deal with at the Subcommittee and had some 
preliminary discussions about. I introduced then a proposed 
amendment and withdrew it at the Subcommittee level, and Mr. 
Cannon and I agreed to work together to help clarify the 
meaning of Internet access to put an end to the current 
confusion that has led to discriminatory and inconsistent State 
taxation of some access to the Internet.
    This amendment is the product of numerous discussions since 
the Subcommittee markup, and I commend Mr. Cannon and others 
who have been involved for their commitment to reach this 
consensus.
    I raise this issue at the Subcommittee because I believe 
that if we are going to exempt Internet access from taxation 
that we must do so in a manner that applies to all methods of 
providing that access on an equal basis; in other words, the 
tax prohibition must be technologically neutral. Since the 
enactment of the Internet Tax Freedom Act in 1998, the Internet 
and Internet access have changed dramatically. DSL and wireless 
Internet access are just two examples of those changes.
    Although we still have a digital divide, new technologies 
are bringing higher speeds of access to more people. It is 
certainly my hope that the Internet Tax Freedom Act and this 
amendment will continue to contribute to the growth of the 
Internet and to facilitate the narrowing of the digital divide 
in disadvantaged communities.
    This amendment is intended to address certain ambiguities 
that have surfaced concerning the proper interpretation of the 
Internet Tax Freedom Act. The exclusion of ``telecommunications 
service'' from the current definition of Internet access was 
intended to ensure that traditional telecommunications services 
were not covered by the moratorium. But some States have 
interpreted this exclusion to permit taxation in ways that we 
believe are inconsistent with the Internet Tax Freedom Act.
    For example, some State rulings have held that DSL Internet 
access, when sold to a consumer as part of a larger 
telecommunications package, is taxable as telecommunications 
service, while fully exempting some similar competing services 
offered by others when they are not part of a package.
    Other States have, more in keeping with the goals of the 
Internet Tax Freedom Act, interpreted the moratorium to fully 
exempt the sale of DSL Internet access to consumers, regardless 
of how it is provided or packaged to the consumer.
    Further, adding to the confusion are interpretations by 
some States that would tax the underlying telecommunications 
used by Internet service providers to provide access to the 
Internet.
    The amendment I am offering would clarify that the 
exclusion of telecommunications services from the moratorium 
does not apply to telecommunications used to provide Internet 
access. Internet access offered by DSL, wireless, satellite or 
cable technologies would all be free from State or local taxes 
when purchased by consumers.
    In addition, the telecommunications used by the Internet 
access provider would also be free from taxation. This would 
ensure that the consumers are not paying the heavy burden of 
these taxes by increasing the cost of Internet access. As we 
make the Internet Tax Freedom Act permanent, we must ensure 
that it is neutral as to technology, neutral regardless of 
speed, and neutral regardless of provider.
    While we are fully supportive of facilitating broader 
access to the Internet, we remain fully committed to promoting 
responsible legislative solutions to the State sales tax 
simplification effort and appreciate Chairman Cannon's ongoing 
commitment to conduct hearings on this matter.
    Mr. Chairman, this amendment has gained the wide support of 
wire, line and wireless providers, long distance companies, and 
local exchange carriers and others. Without objection, I would 
like to include in the record a letter of endorsement submitted 
on behalf of hundreds of telecommunication companies and 
Internet providers. I urge my colleagues to support the 
amendment and yield back.
    Chairman Sensenbrenner. Without objection, the letter will 
be included in the record.
    [The endorsement letter follows:]
    
    
    Chairman Sensenbrenner. The gentleman from Utah, Mr. 
Cannon?
    Mr. Cannon. Thank you, Mr. Chairman.
    I ask unanimous consent at this point to submit for the 
record some letters in support of the legislation.
    Chairman Sensenbrenner. Without objection.
    [The letters of support follow:]
    
    
    Mr. Cannon. Thank you, Mr. Chairman.
    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes.
    Mr. Cannon. Mr. Chairman, the amendment offered by Mr. Watt 
achieves technological neutrality for providers of Internet 
access and thereby restores the ITFA to its original intent.
    Since the enactment of the ITFA in 1998, some States have 
termed certain Internet access technologies, in particular the 
transmission of components of access as telecommunications 
services, exempt under the act. The result has been a disparity 
of tax treatment among Internet access providers. The 
moratorium provisions have applied for some Internet access 
providers, but others have been excluded from an act whose 
protections were intended to cover all Internet access.
    At Subcommittee markup of H.R. 49, Mr. Watt offered an 
amendment addressing the problem of disparity of tax treatment 
among technologies that provide Internet access. Mr. Watt 
withdrew his amendment, stating the need for further discussion 
of the issue. At that time, I committed to work with Mr. Watt 
on an amendment to achieve technological neutrality for 
consideration of the full Committee.
    Mr. Watt's amendment today is the bipartisan result of that 
commitment. It achieves tech neutrality by adding a simple 
clarification to the exception for telecommunications services 
with the words ``except to the extent such services are used to 
provide Internet access.''
    The amendment language makes clear that Internet access, 
regardless of the technology used, cannot be taxed under the 
ITFA. This distinction is also a measured one. It does not 
encompass all telecommunications, rather only those to the 
extent that they provide Internet access.
    Therefore, traditional telephone services and 
telecommunications services that are not used to provide 
Internet access remain outside the moratorium. But the 
amendment makes clear that technologies that are used to 
provide Internet access, including DSL Internet services, cable 
modem services and similar technologies are within the ITFA 
moratorium. It effectuates the plain language of the ITFA, 
which makes no distinction among the means by which Internet 
access is provided in order for the tax moratorium to apply.
    For these reasons, the amendment is a thoughtful and 
necessary clarification of the ITFA, in light of the evolving 
tax landscape, and I urge my colleagues to support it.
    Ms. Lofgren. Would the gentleman yield?
    Mr. Cannon. Mr. Chairman, I have given my Ranking Member, 
Mr. Watt, some perfunctory things, but I would like to just say 
that when he introduced his amendment, I desperately wanted to 
see something like that happen, but I could not imagine how we 
would come up with language to do it. And it's been a very 
complicated issue. I'm not sure where the final language came 
from, but the final language is elegant, it serves with great 
clarity, and I think it accomplishes our objective. That would 
not have happened without the time, dedication and effort on 
this issue that Mr. Watt has brought to bear. And so I want to 
thank him, in a heartfelt manner, for his support on this, and 
I urge my colleagues to support the amendment and support the 
final bill on passage.
    Ms. Lofgren. Would the gentleman yield?
    Mr. Cannon. I would be happy to yield to the gentlelady 
from California.
    Ms. Lofgren. Thank you.
    I just want to clarify that earlier this year I introduced 
H.R. 1481 that would have extended the Internet tax moratorium 
for 5 years, and I did that because I thought that was the 
maximum amount of time that was feasible politically.
    However, discriminatory access taxes are not a good idea. 
They won't be a good idea 6 years from now, and I actually 
prefer the permanent moratorium. I'm a co-sponsor of the bill. 
I commend the gentleman and my colleague, Mr. Watt, for the 
amendment which I think does remove a further disparity, and I 
think this a great piece of legislation, and I look forward to 
voting for it here in Committee and again on the floor.
    And I thank the gentleman for yielding.
    Mr. Delahunt. Mr. Chairman?
    Chairman Sensenbrenner. Does the gentleman yield back?
    Mr. Cannon. I yield back the balance of my time, Mr. 
Chairman.
    Chairman Sensenbrenner. The gentleman from Massachusetts?
    Mr. Delahunt. Yes, I move to strike the last word.
    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes.
    Mr. Delahunt. I urge support for the amendment, Mr. 
Chairman, and I applaud the work both of the chair of the 
Committee and the Ranking Member, Mr. Watt.
    It is no secret that the States are confronting their worst 
budget crisis since the Great Depression. A combination of a 
declining economy and spiraling Medicaid costs and erosion of 
the tax base have left them with a collective ``get'' of some 
$100 billion, and governors of both political parties are 
facing a very stark choice between unpopular tax increases and 
drastic cuts in Medicaid, education, public safety and other 
essential services.
    I appreciate the concern of the sponsors of the bill that 
without a continuation of the moratorium on Internet access 
taxes, some States could very well be tempted to help make up 
their shortfalls by enacting such taxes.
    Yesterday, on the front page of the USA Today, there was a 
story regarding needy local and State Governments tacking more 
taxes onto travelers. In the past 2 months, at least four 
States have adopted substantial increases or substantial tax 
increases on lodging, meals, car rentals, et cetera. So there's 
a crisis.
    On the other hand, I hope that the proponents of the 
moratorium will address the fact that the States are losing 
tens of billions of dollars each year because the taxable 
transactions on which they rely for half, half of their 
revenues, are increasingly taking place over the Internet.
    Uncollected sales taxes on Internet purchases cost the 
States more than $16 billion in 2001. Remember, $16 billion, 
with a shortfall of $100 billion. I would submit that is 
substantial and significant. And unless there is a system in 
place that enables State and local Governments to collect these 
taxes, their annual losses from on-line sales will grow to $45 
billion by 2006, $66 billion by 2011, with total losses over 
that period of time in excess of a half-a-trillion dollars.
    From my home State of Massachusetts, they lost $256 million 
in 2001. In Florida, which relies on the sales tax for more 
than half of their total revenue, a loss which registered $1.2 
billion in 2001, with losses estimated to quadruple into $5 
billion in the next 10 years. Now, these losses are obviously 
magnifying the fiscal problems that the States are already 
experiencing.
    By failing to ensure sales tax parity between remote 
sellers and Main Street merchants, we are also putting at risk 
the thousands of small businesses that sustain our economy and 
contribute to our communities at so many different levels. As 
far as the former governor of Michigan, Governor Engler said 
the last time we considered this issue, ``It's time to close 
ranks, come together and stand up for Main Street America.'' 
So, if we're concerned about small businesses, the issue has to 
be addressed of the loss of revenue.
    And so, Mr. Chairman, while I support the moratorium on 
Internet access taxes, I think it's time that we get our 
priorities right. At Subcommittee, I offered an amendment 
expressing the sense of Congress that once we have told the 
States what they may not do to make up their lost revenues, we 
have an obligation to tell them what they may do.
    The Quill decision prohibited a State from collecting sales 
taxes from out-of-State businesses that do not have a physical 
presence in that State. But the Court said in that decision 
that Congress could authorize the States to collect these taxes 
once they have modified their taxing systems to relieve the 
burden on interstate commerce of multiple-taxing jurisdictions.
    The States have made great progress over the past year in 
developing a simplified, efficient and technologically neutral 
system for the taxation of goods and services that can meet 
that test. And once a sufficient number of States have 
implemented the so-called streamlined sales and use tax 
agreement, Congress should move expeditiously to consider 
legislation authorizing them to require remote sellers to 
collect and remit sales and use taxes on Internet sales.
    Mr. Conyers. Would the gentleman yield for a moment?
    Mr. Delahunt. I yield to the gentleman. I don't think I 
have time left.
    Mr. Conyers. I appreciate his----
    Chairman Sensenbrenner. The gentleman's time has expired, 
and without objection, he will be given an additional minute.
    Mr. Delahunt. I thank the chair.
    Mr. Conyers. Thank you, Mr. Chairman.
    I appreciate his approach here, but the mere mention of the 
former governor of Michigan's name, who has----
    Mr. Delahunt. Reclaiming my time---- [Laughter.]
    Mr. Conyers. Who has left the State and is on the wanted 
list in Michigan is not helpful to your argument.
    Mr. Delahunt. Well, reclaiming my time.
    Chairman Sensenbrenner. Will the gentleman yield?
    Mr. Delahunt. I yield to the gentleman.
    Chairman Sensenbrenner. There are a lot of present 
governors that are on the wanted list, starting with the one in 
California. [Laughter.]
    Mr. Delahunt. Reclaiming my time.
    Mr. Smith. Reclaiming or recalling?
    Mr. Delahunt. Reclaiming. [Laughter.]
    Mr. Delahunt. Shortly, I intend to introduce such 
legislation, together with the gentleman from Oklahoma, Mr. 
Istook, and the gentleman from Alabama, Mr. Bachus. I hope that 
the Committee will give that legislation serious consideration. 
I am not going to offer the amendment today expressing a sense 
of Congress because I've had conversations with the chair of 
the Subcommittee, Mr. Cannon, and he has indicated that he will 
hold a hearing and have that issue, have the various 
perspectives on that particular issue heard.
    But I really believe that the States are meeting their 
responsibilities, and it will shortly be time for this 
Committee and this Congress to meet eyes.
    With that, I will yield back.
    Mr. Smith. Mr. Chairman?
    Chairman Sensenbrenner. The gentleman from Texas, Mr. 
Smith?
    Mr. Smith. Mr. Chairman, I move to strike the last word.
    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes.
    Mr. Smith. Thank you, Mr. Chairman, and I'll be brief.
    Mr. Chairman, I support this amendment because it will 
clarify the underlying bill and will ensure that the Internet 
tax moratorium is applied consistently. The bill itself makes 
the current moratorium on Internet taxes permanent. This 
amendment simply clarifies the bill to exclude 
telecommunications services from the definition of Internet 
access, as long as they are not used to provide Internet 
access.
    The amendment has received widespread support from industry 
members such as SBC, AT&T and Verizon, just to name a few, and 
I urge my colleagues to support the amendment
    Mr. Chairman, I will yield back the balance of my time.
    Mr. King. Mr. Chairman?
    Chairman Sensenbrenner. The gentleman from Iowa, Mr. King?
    Mr. King. Thank you, Mr. Chairman. I move to strike the 
last word.
    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes.
    Mr. King. Thank you, Mr. Chairman.
    First, I'd like to associate myself with the remarks of the 
gentleman from Massachusetts with regard to any collection of 
sales tax on Internet sales and the impact on Main Street 
businesses. I think that's an essential issue that we need the 
move forward and work on. And from my position as one who 
supports a national consumption tax, if we don't solve this 
problem early, we'll never be able to transfer into something 
that could totally renovate our economy and create a dynamic 
export market for us in this country. That's one piece.
    But the piece that I really want to address on this issue 
is that situation of voiceover IP, and that emerging technology 
is something that could renovate our voice long distance 
services and something for a long time I've viewed it as an 
opportunity to provide for essentially I won't say free long 
distances services, but coupled into everybody's monthly bill 
would be a minimal amount that would cover all long distance 
charges if the voiceover IP, Internet Protocol, can be 
developed, and it's on the way to that development today. We're 
on the cusp of having that blossom out across our country and 
our economy.
    And if we prohibit the taxation of voiceover IP, then that 
sets the land line traditional long distance services at a 
disadvantage to voiceover IP. So I support the bill. I support 
the policy, but I just would like to point out to the Committee 
that there will be a day, if voiceover IP is developed the way 
it's anticipated, that we'll have to take this issue back up 
again, and that would conclude my remarks.
    I yield back the balance----
    Mr. Cannon. Would the gentleman yield?
    Mr. King. I would yield.
    Mr. Cannon. Thank you.
    I appreciate the gentleman's approach to this. The fact is 
technology is evolving. This language I think does a pretty 
good for where we are today, and clearly this will be an issue 
that we may have to deal with in the future. And so, to the 
degree that becomes an issue, we happily look forward to 
dealing with it.
    If I might, also, if the gentleman would continue to yield, 
I just wanted to respond to the gentleman from Massachusetts. 
He's been very gracious in this process. I appreciate the 
discussion. We have a hearing agreed to probably for some time 
in September. It's subject--on the SSTP--it's subject only to 
getting dates for the witnesses that we're working on together, 
and this is an issue that we do intend to pursue. It's a major 
issue now with about 25 percent of Americans living in States 
where the legislatures have moved the program, and so we do 
intend, on the Subcommittee, to visit this issue at the 
earliest possible moment and hopefully get that on a track 
where we can resolve that as well.
    I thank you and yield back.
    Mr. King. I thank the gentleman from Utah for his remarks, 
and I will say supporting my opinion that one day we will have 
to revisit this, and sooner better than later, should the 
technology develop sooner better than later, for all of us.
    Thank you, Mr. Chairman. I yield back.
    Chairman Sensenbrenner. The gentleman from North Carolina, 
Mr. Coble?
    Mr. Coble. I thank the Chairman. I, too, will be brief, Mr. 
Chairman.
    I am a recent co-sponsor of the bill--recent not because I 
did not previously support a permanent ban on excessive and 
discriminatory taxes on the Internet, but rather because I was 
concerned that the State sales tax issue might be cast aside 
without continuing debate on the Internet taxation.
    I also speak in favor of Mr. Watt's amendment. As has been 
mentioned, the distinguished gentleman from Utah has assured us 
that he will conduct a hearing I believe in September on the 
sales tax simplification plan, and I appreciate his willingness 
to do that.
    I think we need to discuss the merits of this plan, along 
with possible room for improvement. Mr. Chairman, among others, 
the small ``mom and pop'' operations in my district, and 
perhaps in the districts of my colleagues, have explained to me 
that this is an issue that should be addressed by the Congress 
sooner, rather than later.
    Again, I support the permanent ban on access, multiple and 
discriminatory taxes on the Internet and encourage my 
colleagues to support the Watt amendment and the bill H.R. 49, 
and I yield back the balance of my time.
    Mr. Watt. Would the gentleman yield?
    Mr. Coble. Well, I yielded back, but I will yield, if I can 
just reclaim my time.
    Mr. Watt. I wanted to associate myself with your remarks, 
and Mr. Delahunt's remarks, and the gentleman from Iowa's 
remarks.
    The other issue is extremely important, and I hope nobody 
takes this permanent moratorium as an indication that we think 
the other issue is any less important, and I'm sure Mr. Cannon 
feels that way. So we'll keep pushing on it.
    Mr. Coble. Reclaim and yield back.
    Ms. Jackson Lee. Mr. Chairman?
    Mr. Nadler. Mr. Chairman?
    Chairman Sensenbrenner. The gentleman from New York, Mr. 
Nadler.
    Mr. Nadler. Thank you, Mr. Chairman.
    I could not possibly let this opportunity, this all too 
rare opportunity to express agreement with Mr. Coble go 
unutilized.
    I also, in the past, have opposed a permanent extension of 
this moratorium because I feel strongly that we have to act so 
that States can, in fact, collect their use taxes for sales 
over the Internet, both so as not to discriminate against 
``brick and mortar'' businesses and so as not to destroy the 
revenue bases of the States, and I still feel that way, but I 
think, at this point, it makes sense to decouple the two 
issues.
    I also support the Watt amendment and express agreement 
with the views voiced by the distinguished gentleman from 
Massachusetts and by the distinguished gentleman from the 
Carolinas.
    I yield back.
    Ms. Jackson Lee. Mr. Chairman? Mr. Chairman?
    Chairman Sensenbrenner. The gentleman from Virginia, Mr. 
Goodlatte?
    Mr. Goodlatte. I move to strike the last word.
    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    First, I have an opening statement I would ask be made a 
part of the record.
    Second, I would like to commend the gentleman from Utah for 
bringing this legislation forward. I, as you know, have been a 
strong supporter of this for a number of years, working with 
Congressman Cox on this legislation, which the House has passed 
to extend this moratorium. I am pleased that he has been able 
to take it a step further now to make it permanent, and I also 
support this amendment offered by himself and the gentleman 
from North Carolina to make it clear that Internet access is 
Internet access, and it shouldn't be confused with previously 
existing and allowed telecommunications taxes.
    I would also like to thank the gentleman from Massachusetts 
for attempting to move separately the issue of changing the 
nexus rules. I think they are two separate issues, and we work 
better together if we focus on them differently. And I agree 
with him that the States have made some significant progress in 
terms of making it simpler to collect these taxes on the 
Internet, but I want to point out a couple of things.
    First of all, this is not a new problem, it's not new to 
the Internet, and the overwhelming majority of the lost State 
sales taxes, if you identify it as such, that the gentleman 
cited are not from Internet sales. They are from long, 
longstanding catalogue sales and other sales by telephone and 
other means.
    The Internet is still a fraction of the direct sales that 
take place in the country that would otherwise be subject to a 
sales tax.
    Secondly, I think the States still have a considerable way 
to go in simplifying this process so that small businesses or 
really any business, but I'm most concerned about small 
businesses, doing business on the Internet are not 
extraordinarily burdened by having to collect, and remit, and 
keep track of taxes for a multitude of different jurisdictions.
    And while I would like to work with the gentleman, and I 
commend the gentleman from Utah for offering to hold a hearing, 
I do not believe we should rush into this because many of our 
constituents who have grown used to not paying sales taxes on 
these transactions involving out-of-State entities are going to 
view this, rightly or wrongly, are going to view this as a tax 
increase when they suddenly start purchasing the same thing 
they----
    Chairman Sensenbrenner. Will the yield?
    Mr. Goodlatte. Yes, I would be happy to.
    Chairman Sensenbrenner. I'd like to associate myself with 
the gentleman's remarks in this area. And I would point out 
that every State that has a sales tax also has a use tax which 
is supposed to be declared and paid by residents of the State 
who bring taxable items in from out of State. And this is a 
question of the States collecting their own use taxes.
    I know that on the Wisconsin State Income Tax form there is 
a specific line where the taxpayer is supposed to declare the 
use tax that he owes for items that were purchased out of State 
and brought into Wisconsin. And I don't think the other States 
are much different than that.
    The fact that States are not enforcing their use tax law 
and not collecting the use tax that their residents are due and 
owing I think is more a problem that has to be resolved at the 
State level and in enforcing their own State tax collection 
law, rather than being dealt with up here.
    I thank the gentleman for yielding.
    Mr. Goodlatte. I thank the gentleman for his very welcome 
additional comments on this subject, and the last thing I want 
to point out is that this is not a problem that this Congress 
ever created. We have never passed a law prohibiting the States 
from collecting these sales taxes. This is something that the 
U.S. Supreme Court has determined, based upon our Constitution, 
and based upon the lack of the power of one State to compel 
somebody in another State to collect these sales taxes for 
them, it verges on taxation without representation or at least 
the collection of taxation and having to comply with another 
State's regulatory burden without that.
    It could be accomplished through a uniform State law, and I 
think the Congress should look very carefully before we venture 
into this area, and I would urge my colleagues to support this 
legislation which will help to promote commerce, promote the 
Internet, and I would yield back the balance of my time.
    Mr. Delahunt. Would the gentleman yield for just a moment?
    Mr. Goodlatte. I would be happy to yield.
    Mr. Delahunt. I thank the gentleman. I thank him for his 
words and observations.
    I would just simply point out that, and the chair is 
correct, clearly, in terms of the law it's there, but the 
reality----
    Chairman Sensenbrenner. The gentleman's time has expired, 
and without objection, he will be granted an additional minute.
    Mr. Delahunt. The reality is, is that the Supreme Court in 
Quill recognized that the enforcement of the collection of the 
use taxes simply is beyond the capacity of the States, given 
the reality that I'm sure, whether it be Wisconsin or 
Massachusetts or Virginia, people simply will not, either 
intentionally, because they do not understand the concept of a 
use tax, be willing to pay that tax.
    Now, I'm sure during the course of the hearing, and over 
time, as this legislation is filed, we'll have a good and 
healthy debate, but I really think that we have to understand 
what the reality is. And the reality is, if the States do not, 
if we do not assist them in terms of this particular issue, 
they will just simply find other means of meeting their 
budgetary requirements.
    Mr. Goodlatte. Reclaiming my time. I appreciate the 
gentleman's comments. I would just caution Members of the 
Committee not to rush into this because there are many 
complexities, and we do not want to have a negative economic 
impact, nor do I want to see us get the blame for effectively, 
from the standpoint of consumers, being viewed as having been 
the ones responsible for increasing their taxes.
    I yield back.
    Chairman Sensenbrenner. The time of the gentleman has 
expired.
    Ms. Jackson Lee. Mr. Chairman? Mr. Chairman?
    Chairman Sensenbrenner. The question is on----
    Ms. Jackson Lee. Mr. Chairman?
    Chairman Sensenbrenner. For what purpose does the 
gentlewoman from Texas seek recognition?
    Ms. Jackson Lee. I'd like to strike the last word.
    Chairman Sensenbrenner. The gentlewoman is recognized for 5 
minutes.
    Ms. Jackson Lee. If I could yield for a moment to Mr. Watt, 
to try and understand what his amendment is doing.
    Mr. Watt. Well, the amendment is intended to make the 
underlying bill technologically neutral. Right now there's a 
provision in the Telecommunications Tax Freedom law that says 
that communications services are exempt from the moratorium, 
and some States have taken that language to mean that if a 
telephone company provides, as part of a package of telephone 
service and DSL service----
    Ms. Jackson Lee. So you put them all----
    Mr. Watt.--they put them together, and they tax them.
    Ms. Jackson Lee. So you just equalize it.
    Mr. Watt. So we're equalizing them. Wireless DSL is being 
taxes in some States. So we're just making, all the amendment 
does is make it----
    Ms. Jackson Lee. Nontaxable.
    Mr. Watt.--make it impossible to apply taxes to any kind of 
access, I mean, any kind of informational access, not voice 
access.
    Ms. Jackson Lee. I thank the gentleman very much. 
Reclaiming my time.
    Let me, first of all, say that I've listened to the debate, 
and I appreciate Mr. Watt carefully crafting an amendment to 
equalize the burden, if you will, or when I say equalize the 
burden or equalize the burden on States that previously have 
had the right to make their own determination.
    This is all about jobs, and it's about revenue, and it's 
about revenue in a time that is a very difficult time with 
respect to State budgets. And I believe that the fact that we 
have an amendment before us that is equalizing the burden on 
these States that now are not grandfathered in is unfortunate. 
It reminds me of the two initiatives that we've already passed 
dealing with the Chile Free Trade Agreement and the U.S.-
Singapore Free Trade Agreement, which has no basis to suggest 
that they create jobs.
    And I think that we're working negatively against States 
such as New Mexico, North Dakota, Ohio, and South Dakota, and 
Tennessee and Texas, with respect to this overall legislation, 
that removes the grandfather provision that these States have 
depended upon.
    It's interesting to note that this first bill was 
introduced in 1998. It looks as if we could have worked with 
the States to be able to develop a process in which those who 
desire to tax, which is their privilege and right to do so, 
could have done so without the intrusion of Federal law, which 
is likewise what I contribute to the initiatives that we've 
just passed, 2788 and 2739, the two trade bills which also I 
think provide an intrusion on processes that should not have 
had an intrusion on.
    I specifically note that the USTR has been very 
nonresponsive on the issues of legislating immigration issues 
on these trade bills. They haven't responded to the fact that 
jobs in America will be decreased, and I'm very glad that the 
Senate is concerned about losing jobs, as I am, when they say 
that the provisions allowing the entry of temporary workers are 
too broad and far-reaching, and the USTR has negotiated a whole 
new immigration package, and they had no authority to do so.
    So here we have another legislative initiative that I'm 
concerned about intrudes upon the rights of States that already 
had existing laws on taxation, and now this legislation removes 
the provision that protects them to allow them to do so.
    I have no quarrel with Mr. Watts' amendment. I have a 
quarrel with the elimination of the grandfathered taxes, and I 
will say this, as I look forward to offering amendments, that 
this biases retailers who have individuals paying taxes. So now 
we have business done on the Internet, and the access tax is 
considered too burdensome when we know that the reaping of the 
benefits by utilizing the Internet is very, very great.
    So I don't know why the grandfather clause had to be 
eliminated from this legislation and what excuse and reason we 
gave to do so. And I would just offer that thought to my 
colleagues as it relates to I think a discriminatory effect 
against States who had these laws in place.
    And I yield back.
    Chairman Sensenbrenner. The question is on the Watt 
amendment.
    Mr. Schiff. Mr. Chairman?
    Chairman Sensenbrenner. The gentleman from California, Mr. 
Schiff.
    Mr. Schiff. Mr. Chairman, I move to strike the last word, 
and I'll be very brief.
    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes.
    Mr. Schiff. I wanted to speak on behalf of the amendment 
offered by Mr. Watt and Mr. Cannon that would ensure parity of 
tax treatment among various technologies through which Internet 
access can be provided. There can be a legitimate debate about 
what form of Internet services ought to be the subject of 
taxation, what form should not be subject to taxation, but 
there is little argument in favor of discriminating between 
various technologies and various providers.
    To the degree that we can ensure parity, whether you access 
the Internet through DSL technology or cable modem or through 
cellular technology, it is I think very much an imperative that 
we have equality of treatment so that we can have vigorous 
competition among the providers and not use the tax code to 
incentive the use of one means of access over the others, and 
so I urge support for the Watt-Cannon amendment.
    Chairman Sensenbrenner. The question is on the Watt-Cannon 
amendment to the amendment in the nature of a substitute.
    Those in favor will say aye.
    Opposed, no.
    The ayes appear to have it, the ayes have it. The amendment 
to the amendment in the nature of a substitute is agreed to.
    Are there further amendments?
    Ms. Jackson Lee. I have an amendment at the desk.
    Chairman Sensenbrenner. The clerk will report the 
amendment.
    Ms. Jackson Lee. The shorter one, please, the short 
language one.
    The Clerk. Amendment to H.R. 49 offered by Ms. Jackson Lee. 
Page 1, strike line 6 and all that follows through page 2, line 
5 and insert the following:
    Section 1101(a) of the Internet Tax----
    Chairman Sensenbrenner. Without objection, the amendment is 
considered as read.
    [The amendment of Ms. Jackson Lee follows:]
    
    
    Chairman Sensenbrenner. The gentlewoman from Texas is 
recognized for 5 minutes.
    Ms. Jackson Lee. Mr. Chairman, this amendment deals with 
the continuing of the grandfather provision dealing with the 
States who have previously had this access tax. If this bill 
becomes law, the seven States that now collect taxes on 
Internet transactions will be prohibited from doing so.
    There is no present accurate figure on the amount of 
revenue each State derives from these taxes. However, it is 
estimated that millions of dollars will be lost upon 
implementation of a permanent ban on collection. At a time when 
States are financially burdened, depriving those that have come 
to rely upon access taxes of that source of revenue may unduly 
disrupt their ability to manage their budgets and meet their 
fiscal responsibilities.
    But I've likewise heard from retailers who believe that the 
taxation that they have to pay imbalances or the consumers have 
to pay at retail stores creates an imbalance between the 
marketplace on the Internet versus the marketplace in the 
retail industry. The retail industry is already suffering as it 
relates to the good business on the Internet. I don't covet the 
business. Congratulations to them. But if States have had this 
in place, then the Federal law comes in to violate States' 
rights with no substitute or process of which they can either 
engage in this taxation in the future or develop a process of 
which they can utilize their present laws, then I think this 
legislation violates States' rights, but more importantly takes 
away a revenue stream of which will be no source of 
compensation from the Federal Government; in essence, an 
unfunded mandate to these States who have in place this 
Internet access tax.
    I would argue that this was an unnecessary elimination from 
this legislation. It was in the legislation previously. Texas 
had suspended its taxation for a period of time, and it's 
renewed it. It is an access fee of a low amount, and I believe 
that we are interfering with the rights of a State on its own 
taxation policies as it relates to this issue.
    If there is a question of process, and procedure, and 
regularity, then engage in a process where we develop 
procedures, if you will, for States to do so, but not to 
totally eliminate their right to do so. And I'd ask my 
colleagues to support this amendment.
    Chairman Sensenbrenner. The gentleman from Utah, Mr. 
Cannon?
    Mr. Cannon. I thank you, Mr. Chairman.
    I rise in the strong opposition to this amendment. If I 
might just give a little bit of history here. This is, in fact, 
a national issue. Anybody who is going to make an investment in 
the telecommunications or Internet system needs to have clarity 
on this issue, and that clarity has to be national.
    It really, it can't be said that the States which continued 
under the grandfather clause to tax the Internet had any kind 
of right or reason to anticipate that the grandfathering clause 
would continue. They all understood that we were doing the 
Commission on Electronic Commerce, that that was intended to 
create an environment that would be regular, that would be 
national and that would have a bright line in it that would 
encourage investment.
    Now, the gentlelady was talking a moment ago about moving 
jobs off-shore, and I sympathized with that concern, but there 
is little we can do in Congress today that is as important as 
creating clarity in the context of the Internet so as to 
encourage investment in what is going to be the driving force, 
has been and will leap to the forefront of our economy, I 
believe in the near term, as the driving force behind growth in 
the economy and in continuing improvement in quality and 
lowering of costs for consumers.
    We have a broad coalition on this bill, and let me just 
remind everyone that a key factor here is that we want to 
reduce the digital divide. You reduce the digital divide. You 
reduce the digital divide by bringing down the cost of getting 
access to the Internet.
    People who are on the wrong side of the digital divide are 
the people that we need to reach out and draw into this system, 
and we can't mandate that, we can't legislate that, we can't 
order that. The only way you can overcome the digital divide is 
by reducing the cost, and that has to be a national policy, and 
while the gentlelady will acknowledge that I think I've been a 
leader on States' rights, there are certain things that the 
Federal Government has to do, and this is among those things. 
It is not something we're starting now. The grandfather clause 
was an aberration.
    The national telecommunications policy goes back to post-
war America, prior to that; it goes back to post-World War I 
and has continued and has given us the ability to have a system 
that does the remarkable things a system does. To have pockets 
of the system that are grandfathered and therefore dealt with 
inconsistently is I think wrong as a matter of national policy, 
and I can't imagine that anybody really wants to enhance the 
ability of the State to tax something so significant, so 
important to us as the Internet.
    Now, if I might just take another moment and point out the 
magnitude that we're dealing with here. We have several States 
that are grandfathered now, and let me give you the revenue 
that comes from this grandfather provision and compare that 
with Bush's economic package and the amount of money the States 
got so you get a sense of magnitude here.
    Wisconsin collected excess taxes of about $24 million last 
year, and the Bush package would provide $379 million, almost 
20 times as much money.
    Ohio had access taxes of $3.6 million, and they have, from 
the Bush economic development package, $769 million. That's 
roughly 200 times.
    In Texas, the gentlelady's home State, access taxes 
provided $45 million, and the Bush package provides $1.2 
billion. Let me just point out that in Texas, in particular, 
you have what I think is the great nemesis of the Internet, its 
complication. You have an amount of tax or an amount of access 
that is not taxed and then a higher amount that is taxed.
    The higher amount goes to the higher bandwidth utilization 
of the Internet. Why do you want people who can't afford access 
to be penalized from high-speed access? We want poor people to 
just have slow access? It seems to me that this is the time to 
recognize that the issue of the grandfather clause is not 
significant, not important, and for the purposes of national 
consistency, which would encourage investment, we should reject 
this amendment, vote no on it, I urge my colleagues.
    Ms. Lofgren. Would the gentleman yield?
    Mr. Cannon. I'm sorry?
    Ms. Lofgren. Would the gentleman yield?
    Mr. Cannon. I certainly would yield to the gentlelady from 
California.
    Ms. Lofgren. I would just like to note that I also oppose 
the amendment. I agree that this policy must be nationwide in 
scope, that every Nation or locality that has burdened Internet 
access, has retarded the growth of the Internet, we know that 
from localities and other countries who have done this----
    Chairman Sensenbrenner. The gentleman's time has expired.
    Ms. Lofgren. I would ask unanimous consent that the 
gentleman be granted an additional minute.
    Chairman Sensenbrenner. Without objection.
    Ms. Lofgren. To remove, there was never a guarantee, as the 
gentleman has stated, that the grandfather clause would be 
maintained. We do know that if we unburden access to the 
Internet, we will stimulate the roll-out of broadband across 
the country, which is one of the most important things that we 
could do as a Nation to stimulate an economy that is terribly 
troubled.
    As the gentleman knows, I did not support the President's 
tax cut plan, and I think it was ill conceived, but that is, to 
me, unrelated to our need to stimulate the development of 
broadband, which defeating this amendment will help do. And I 
thank the gentleman for yielding.
    Mr. Cannon. Reclaiming my time. Let me just say that the 
purpose of talking about the President's plan is only to give 
an idea of the magnitudes here. These are really truly 
irrelevant numbers, on the one hand, not irrelevant, but small.
    On the other hand, let me associate myself with the 
gentlelady's comments. The rolling out of broadband is the most 
important thing we can do to stimulate this economy over the 
next decade and beyond, and this bill, the underlying bill, 
will help that. This amendment would dramatically injure that, 
and I yield back the balance of my time.
    Chairman Sensenbrenner. The question is on the Jackson Lee 
amendment to the amendment in the nature of a substitute.
    Those in favor will say aye.
    Those opposed, no.
    The noes appear to have it, the noes have it, and the 
amendment is not agreed to.
    Are there further amendments?
    Ms. Jackson Lee. Mr. Chairman, I have an amendment at the 
desk.
    Chairman Sensenbrenner. The clerk will report the 
amendment.
    The Clerk. Amendment to the amendment in the nature of a 
substitute to H.R. 49 offered by Ms. Jackson Lee. Page 1, 
strike line 6 and all that follows through page 2, line 5 and 
insert the following:
    Chairman Sensenbrenner. Without objection, the amendment is 
considered as read.
    [The amendment of Ms. Jackson Lee follows:]
    
    
    Chairman Sensenbrenner. The gentlewoman is recognized for 5 
minutes.
    Ms. Jackson Lee. Thank you very much, Mr. Chairman.
    I restate my position that this eliminating the rights of 
these States to implement Internet access taxes is a ripping 
away of their rights and an abuse of power on our behalf as it 
relates to this legislation.
    This amendment is a gradual elimination of the grandfather 
clause, which would indicate that the rate of the tax cannot 
exceed 50 percent of the rate of the tax on the date of the 
enactment of the Internet Nondiscrimination Act, and beginning 
on the date that is 4 years after the date of the enactment of 
the Internet Tax and Nondiscrimination Act, that State or 
political subdivision may no longer impose the tax.
    I respect my good friend's argument about elimination of 
the digital divide, and I would offer to say that I certainly 
have been one of the strongest proponents of eliminating the 
digital divide. We've been trying to eliminate the digital 
divide for as long as we've probably discovered and found to be 
precise this whole issue of technology and access to the 
Internet, and we certainly have not been as successful as I 
would like.
    I don't think, however, that should be used a firewall or a 
door to the reality of taking away rights of States who have in 
place the taxation of the Internet. I also believe that the 
Internet transactions have, if you will, have not replaced 
traditional ones, in part, presumably due to the digital 
divide--this is the argument--nor have the revenues from e-
commerce met early expectations.
    But I still think this is a representation of the 
opponents, but I still think that H.R. 49 is shortsighted, 
because by imposing a permanent moratorium on a broadly defined 
category of access taxes, the bill may dry up a source of 
revenue from an industry that will be more sophisticated and 
utilized in years to come. Particularly in the post-9/11 
America, consumers and businesses may increase their reliance 
on the Internet in lieu of a vast variety of business services, 
including libraries, movies, concerts and retail goods. There 
lies the elimination of a lot of jobs because if you don't 
utilize them, a lot of jobs will go away in the retail 
industry, movies, concerts and might I say librarians who have 
libraries and books, et cetera.
    So you're giving an unfair advantage to those who would 
operate on the Internet. There is no excuse to not help 
eliminate the digital divide just because you're giving a 
grandfather provision to seven States. It would have been 
worthwhile if during this period, from 1998 to 2003, we could 
have worked with these States to devise a process that would be 
balanced, to allow a certain access fee, maybe a certain 
capping of it, and then as well recognizing that it is 
important to have universal access to the Internet.
    But this carte blanche elimination and moratorium is 
unfair, and I don't see any great movement to close the digital 
divide any more so than what we've been working on. And why 
should something good, closing the Internet divide, be stopped 
because seven States have an access fee? It's bogus. If our 
good friends in the industry are interested, as I believe they 
are in closing the Internet divide, they will do so.
    I mention the two trade agreements, and I suggest that 
they, too, will eliminate jobs--we're lumping these all 
together--but they also have another undermining feature, and 
that is legislating immigration policies that the USTR thinks 
that they can do in spite of Congress.
    So I would argue that this amendment is a fair amendment in 
that it is a gradual elimination and an ultimate elimination of 
the grandfather clause, and it fairly treats the States that 
already have this process in place, and I can't imagine why my 
colleagues would want to deny the rights of separate States.
    Despite a promised, if you will, economic package, I'd 
rather have a bird in hand is worth far more than a promise. 
And so an economic plan that is promised, with a deficit of 
$453 billion, I don't know whether those monies will ever get 
to the State on any kind of economic plan of this 
Administration. And I would argue that this State fee is, of 
necessity, and argue for support of my amendment.
    I yield back.
    Chairman Sensenbrenner. The gentleman from Utah?
    Mr. Cannon. I thank the Chairman.
    The gentlelady, rather than her first, this is the long 
amendment, but I believe that the same arguments apply here as 
otherwise.
    I would first like to commend the gentlelady because I know 
she's been a very strong advocate of eliminating the digital 
divide. We disagree on the effect of this amendment and what it 
would have on the digital divide. But let me just point out 
that to the degree that you have confusion, and that 
grandfather clause creates confusion of the system, you defer 
investment, you defer job development, and you reduce the 
amount of broadband roll-out you're going to have. It seems to 
me that is as straightforward as it possibly could be.
    I would urge the Members of the Committee to reject this 
amendment and----
    Mr. Delahunt. Would the gentleman yield?
    Mr. Goodlatte. Would the gentleman yield?
    Mr. Cannon. I promised to yield to the gentleman from 
Virginia, Mr. Goodlatte first.
    Mr. Goodlatte. I thank the gentleman for yielding, and I 
strongly support his position in opposition to this amendment.
    I would add to his comments about two Congresses ago, I 
offered an amendment to an Internet tax moratorium extension 
that eliminated the grandfather clause, and at that time there 
were only about five States that were claiming to be 
grandfathered.
    Now, the gentlewoman mentioned seven States. We have over 
here a list of nine States that claim to be grandfathered, and 
there's a very compelling reason. The States are going to 
continue to look for ways to claim grandfather status unless we 
make it clear that there's absolutely no grandfather status, 
that every State is treated exactly the same, and I would urge 
my colleagues----
    Ms. Jackson Lee. Would the gentleman yield?
    Mr. Goodlatte.--to oppose the amendment.
    Ms. Jackson Lee. Would the gentleman yield for a question?
    Mr. Cannon. I'm still trying to, if you wouldn't mind, let 
me just respond to the gentleman from Virginia by pointing out 
that he has been a leader on this issue, as in many other 
issues I followed in his path on these things, and what he's 
saying I think is very important.
    What we need here is a bright line and not a fudging line 
that every tax commissioner in every State is going to try to 
figure out a loophole around and to get beyond.
    Ms. Jackson Lee. Would the gentleman yield?
    Mr. Cannon. Now, if the gentlelady wouldn't mind, I believe 
that the gentleman from Massachusetts wanted to be recognized.
    Mr. Delahunt. Just for a moment. I appreciate the gentleman 
yielding.
    I think the arguments that are being made by the proponent 
of the amendment really do speak to the issue of the need to 
address the more fundamental concern and the effort by the 
States, through the streamlined sales and use tax agreement, to 
address these.
    Mr. Cannon. The gentleman is correct. That's the place 
where you deal with this issue, it seems to me, because when 
you deal with it there, you're dealing with it on a basis that 
does not impede investment. And I'd be happy to yield to the 
gentlelady from----
    Mr. Delahunt. Would the gentleman yield? Just yield for one 
moment.
    I have to say, as the Chairman knows, I've been involved in 
this issue since I arrived here some 7 years ago with the 
Chairman and have served on this Committee. And I have to state 
for the record that I have not heard from any representatives 
of the States that are currently grandfathered, neither have I 
heard from the National Association of Governors, nor the 
National Council on State Legislatures, regarding the 
grandfather issue here.
    And as the chair did point out, while in relative terms, 
the magnitude of the revenue that has been generated by the 
existing taxes, you know, is not really that substantial and 
that we should address our efforts in trying to work with our 
colleagues on both sides of the aisle as far as the so-called 
SST agreement.
    With that, I'll yield.
    Mr. Cannon. Actually, it's my time, but I'm happy to yield 
to the gentlelady from California.
    Ms. Lofgren. I would like to note I also oppose this 
amendment. I spent 14 years on the Board of Supervisors in 
Santa Clara County. I'm very sympathetic and concerned about 
the revenue shortfalls that are hitting every locality and 
State. It is a very serious problem.
    But I would note that we need to develop and stimulate 
private-sector high-tech jobs as well. Right now, there is an 
8.5 percent unemployment rate in Silicon Valley. The San Jose 
Mercury News just did a survey and found out that one-third of 
households in Santa Clara County have experienced a layoff 
since the President took office.
    So we need to stimulate broadband development, and I think 
that the amendment would detract from that effort, and we 
certainly don't want to do that. So I join the gentleman from 
Utah in opposing the amendment, although I am sure the 
amendment was offered with the best of intentions. I think in 
the end it would do more harm than good to our economy, and I 
hope that we will defeat the amendment.
    Mr. Cannon. I thank the gentlelady, and I yield back.
    Chairman Sensenbrenner. The gentleman's time has expired.
    The question is on the Jackson Lee amendment to the 
amendment in the nature of a substitute.
    Ms. Sanchez. Mr. Chairman?
    Chairman Sensenbrenner. The gentlewoman from California, 
Ms. Sanchez?
    Ms. Sanchez. I move to strike the last word.
    Chairman Sensenbrenner. The gentlewoman is recognized for 5 
minutes.
    Ms. Sanchez. I yield to the gentlewoman from Texas.
    Ms. Jackson Lee. I thank the distinguished gentlelady from 
California for her kindness.
    I have served as a Member of the House Science Committee 
for the entire 10 years of my time here in Congress and will 
take a back seat to very few on my advocacy for the technology 
industry. I happen not to be on the Subcommittees of 
jurisdiction in this Committee, but I believe in advocating for 
closing the digital divide, for investment in our technology 
industries and certainly trying to enhance and prevent the lull 
in employment, trying to enhance opportunities for employment 
and certainly trying to assist in the elimination of the loss 
of jobs in all areas dealing with technology.
    I've also fought with the industry on the question of the 
digital divide and its investment in our local communities. But 
since we're talking globally, I mentioned the other entities 
that would be negatively impacted, and that is the goods and 
services from a retail perspective. Some said movies, concerts, 
et cetera. There's another component to this. And just as we 
would boost the Internet access, without, according to my 
colleagues, this access tax, you're also hurting other 
industries as well because you give an upper hand.
    I would have preferred that if we could have worked 
together on, this is a gradual elimination. This is fair. This 
is balanced. My colleagues are acting like they should have it 
all, and I think that is unfair, and I think the Judiciary 
Committee, through its jurisdiction, is being unfair.
    If States have gone from five to seven to nine, then 
there's obviously a legitimate law and a legitimate need upon 
which they're basing their taxation, their access. I would 
prefer that we have an amendment and a provision that would 
structure either how you could opt into taxation or how you 
could be allowed to do so. This is not a strictly, if you will, 
right and wrong issue. There is wrong on both sides; those who 
want to eliminate it totally maybe and the process which we 
might be utilizing----
    Mr. Delahunt. Would the gentlelady yield for a moment?
    Ms. Jackson Lee.--it to increase--I'd be happy to yield in 
a moment.
    This amendment is gradual.
    Chairman Sensenbrenner. The time belongs to the gentlewoman 
from California.
    Ms. Jackson Lee. Could the gentlewoman just let me finish 
my sentence, and then I'd be happy to have her yield to him.
    This is a gradual one. It's 50 percent, and then it goes on 
to elimination in 4 years. And so it is trying to seek an 
appropriate balance, and I respect the gentleman from Utah and 
the gentleman from North Carolina on this legislation, but I do 
think this adds a balance.
    I'd be happy to--I don't have the time, but I'd be happy to 
have the gentleman have the time to yield.
    Mr. Delahunt. Would the gentlelady from California yield 
for a moment?
    Ms. Sanchez. I will yield.
    Mr. Delahunt. I would ask my friend from Texas has she 
received any communication from any of the States that have 
impacted, that would be impacted by the elimination of the 
grandfather clause?
    Ms. Jackson Lee. If the gentlelady would yield to me, I'd 
appreciate it very much.
    I thank the gentleman for asking. Yes, I have received 
inquiries and concern from retailers who would be impacted 
negatively.
    Mr. Delahunt. I'm speaking in terms of either State 
legislatures or from the office of the governors of the States 
that would be impacted.
    Ms. Jackson Lee. Over the course of the time that this 
legislation has been moving, yes, I have been in contact and 
have had concerns being expressed, but the specific inquiries 
have come from retailers.
    Mr. Delahunt. I thank the gentlelady.
    Ms. Sanchez. I yield back the balance of my time.
    Chairman Sensenbrenner. The question is on the Jackson Lee 
amendment to the amendment in the nature of a substitute.
    Those in favor will say aye.
    Opposed, no.
    The noes appear to have it. The noes have it. The amendment 
is not agreed to.
    Are there further amendments?
    [No response.]
    Chairman Sensenbrenner. If not, the question is on agreeing 
to the amendment in the nature of a substitute as amended.
    All of those in favor will say aye.
    Opposed, no.
    The ayes appear to have it, the ayes have it, and the 
amendment in the nature of a substitute as amended is agreed 
to.
    A reporting quorum is present. The question now occurs on 
the motion to report the bill H.R. 49 favorably as amended.
    All of those in favor will say aye.
    Opposed, no.
    The ayes appear to have it, the ayes have it, and the 
motion to report favorably is agreed to.
    Without objection, the bill will be reported favorably to 
the House in the form of a single amendment in the nature of a 
substitute, incorporating the amendments adopted here today.
    Without objection, the Chairman is authorized to move to go 
to conference pursuant to House rules.
    Without objection, the staff is directed to make any 
technical and conforming changes, and all Members will be given 
2 days, as provided by House rules, in which to submit 
additional dissenting supplemental or minority views.
    This will conclude the markup for today. The last bill on 
the agenda, the prison industries bill, I have been persuaded 
that an additional week's negotiation would be advisable, so 
that will be the first bill on next Wednesday's markup.
    The business notice before this Committee having been 
completed, the Committee stands adjourned.
    [Whereupon, at 11:26 a.m., the Committee was adjourned.]
                            Additional Views

    We offer these additional views to emphasize our continued 
commitment to the vitally important issue of State sales tax 
simplification which, in past terms of Congress, has been 
linked to the moratorium on Internet access taxes. Because the 
moratorium and simplification issues have been decoupled, we 
support H.R. 49, as amended.\1\ However, our commitment to the 
State sales tax simplification project derives from the ongoing 
need to develop a ``level playing field'' for the collection of 
sales taxes by all forms of retailers. We believe that we must 
address this issue expeditiously and with similar vigor.
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    \1\ Mr. Watt offered an amendment during the markup of H.R. 49 in 
the Subcommittee on Commercial and Administrative Law in May 2003. The 
amendment equalizes the treatment of all providers of Internet access 
regardless of technology. At Full Committee markup, Mr. Cannon, 
Chairman of the subcommittee, joined Mr. Watt in offering the amendment 
which passed with strong bipartisan support. (Ms. Jackson Lee also 
offered two amendments. One, designed to preserve the grandfathered 
States' authority to collect Internet access taxes, and the other, to 
establish a system to phase out those States' collection of access 
taxes were both defeated by voice vote.)
---------------------------------------------------------------------------
    As a result of the 1992 Supreme Court decision in Quill v. 
Heitcamp,\2\ there exists a disparity in the tax treatment of 
similarly situated sellers. Quill held that absent 
congressional authorization, States are not permitted to 
require sellers to collect taxes unless, among other things, 
the seller has a ``substantial nexus'' with the State. Congress 
recognized the potential impact of the Quill decision on 
Internet transactions when the ITFA was passed. Indeed, ITFA 
called for the creation of a commission--the Advisory 
Commission on Electronic Commerce (ACEC) \3\--to conduct a 
study of the impact of electronic commerce on all forms of 
taxation, and specifically the issues concerning the state and 
local taxation of transactions over the Internet. In April 
2000, the ACEC delivered its final report to Congress.\4\ 
Although the ACEC was unable to obtain the requisite consensus 
(two-thirds vote) required by ITFA on the issue of Internet 
sales tax, the report included a majority policy recommendation 
that states simplify their sales and use tax systems. 
Officially established in March 2000, the Streamlined Sales Tax 
Project (SSTP) is a collection of thirty-nine States and the 
District of Columbia organized to accomplish that goal.\5\ 
Since that time the SSTP has made substantial progress towards 
establishing a uniform, modernized and streamlined system of 
sales and tax collection and administration. Presently, over 
thirty States, collectively referred to as the Streamlined 
Sales Tax Implementing States (SSTIS), have adopted an 
interstate tax agreement.\6\
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    \2\ 504 U.S. 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 event a good is sold across 
interstate lines without being subject to a sales tax, the purchaser 
remains subject to a comparable ``use tax'' within his or her own 
State.
    \3\ The ACEC consisted of nineteen members. Eight were 
representatives of State and local governments; eight were from 
business and consumer groups, and three were representative of the 
Federal Government from the offices of the U.S. Trade Representative, 
the U.S. Secretary of Commerce, and the U.S. Secretary of the Treasury.
    \4\ ACEC offered consensus recommendations in only three areas 
unrelated to the sales tax issue: (1) the digital divide; (2) privacy 
implications of the Internet; and (3) international trade and tariffs.
    \5\ The participating States are: Alabama, Arizona, Arkansas, 
Florida, Illionois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, 
Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, 
New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, 
Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, 
Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.
    \6\ Under the procedures of the STTP, the agreement must now be 
converted into legislation by the participating States.
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    The Majority has indicated that hearings will be held to 
address the streamlining issue this fall. We welcome this 
opportunity because failure to revisit this issue raises many 
of the identical concerns we expressed in rejecting long term 
extension of the moratorium last Congress. Those concerns, 
however, are magnified exponentially in light of the tremendous 
budget shortfalls and deficits that many States are currently 
experiencing. Moreover, the significant security burdens 
imposed upon the States post 9/11 suggest that these burdens 
will persist.\7\
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    \7\ The States are currently facing an aggregate revenue shortfall 
of $21.5 billion (23% greater than the Nov. 2002 projections), and that 
number is projected to grow to $53.5 billion for FY 2004. Moreover, 
according to statistics compiled by U.S. Conference of Mayors, a Tom 
Ridge-imposed Code Orange terror alert is projected to cost State 
government $70 million per week.
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    All interested parties--retailers (both electronic and 
traditional), State and local governments, and consumers--will 
suffer if we continue to avoid addressing this issue. The 
problems with the present system from the perspective of the 
retail industry are multifaceted. First, the complexity of the 
tax 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 overlapping definitions of 
goods and services subject to tax, specify differing sets of 
exemptions and de minimus thresholds, have differing bad debt 
rules, and varying sets of forms and audit systems. 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 under ITFA. Determining 
what constitutes a ``substantial nexus'' for a particular 
retailer can be highly subjective. Third, the current disparate 
tax treatment between traditional ``brick and mortar'' 
retailers and remote sellers has the potential to cause 
continuing economic distortion.\8\ Yet the present system, by 
creating a tax incentive to be located in a remote physical 
location, threatens to do exactly that.\9\ This, in turn, has 
the potential to harm local employment and real estate values.
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    \8\ 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.
    \9\ Perversely, the present system also creates an incentive, in 
terms of State sales taxes, to be located outside of the United States.
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    The impact on State and local governments of a prolonged 
maintenance of the current system carries with it the potential 
for significant financial loss at a time when States are 
suffering devastating budget crises. 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. 
Projections of annual online sales were estimated to exceed 
$100-300 billion in 2002. That translates into a loss for State 
and local governments of as much as $20 billion in uncollected 
sales taxes under the present system.\10\ Loss of sales tax 
revenues could have a grave impact on critical services such as 
police, safety, health and education.
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    \10\ 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.
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    Finally, the present system could significantly harm 
individual consumers. The loss of sales taxes from remote sales 
may lead to increasing income and property taxes or declining 
public services. A separate concern is the adverse impact of 
the present bifurcated system on the poor and minorities. 
According to a study by the U.S. Department of Commerce, 
wealthy individuals were 20 times more likely to have Internet 
access, while Hispanics and African Americans were far less 
likely to have such access.\11\ As a result, poor and minority 
consumers are more likely to buy locally (often with cash) and 
thus, face a greater sales tax burden than those with credit 
and broader access to the Internet.
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    \11\ Falling Through the Net II: New Data on the Digital Divide, 
National Telecommunications and Information Administration, National 
Telecommunications and Information Administration, July 1998 (httpL//
www.ntia.doc.gov/ntiahome/net2/falling.html).
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    Since passage of the ITFA in 1998, State governments, 
business leaders and consumer advocates have coalesced to 
address the thorny issue of interstate taxation and e-commerce. 
Reportedly, significant progress has been made in reforming and 
simplifying State laws. The Judiciary Committee has taken an 
important step in passing H.R. 49, as amended, to provide a 
level playing field for all providers of Internet access. The 
Committee should also be on the forefront of providing the 
States with the necessary authority to collect sales taxes in a 
uniform and non-discriminatory manner from all remote sellers, 
including those conducting business over the Internet. Hearings 
devoted to the State tax simplification issue will enable us to 
consider whether we should approve an interstate process that 
addresses the simplification issue.

                                   John Conyers, Jr.
                                   Jerrold Nadler.
                                   Robert C. Scott.
                                   Melvin L. Watt.
                                   Sheila Jackson Lee.
                                   Martin T. Meehan.
                                   William D. Delahunt.
                                   Tammy Baldwin.

                                
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