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INTERNET TAX NONDISCRIMINATION ACT

HEARING

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

ON

H.R. 49

APRIL 1, 2003

Serial No. 13

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://www.house.gov/judiciary 

(II)

COMMITTEE ON THE JUDICIARY 

F. JAMES SENSENBRENNER, JR., Wisconsin, Chairman 

HENRY J. HYDE, Illinois 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

WILLIAM L. JENKINS, Tennessee 

CHRIS CANNON, Utah 

SPENCER BACHUS, Alabama 

JOHN N. HOSTETTLER, Indiana 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

MELISSA A. HART, Pennsylvania 

JEFF FLAKE, Arizona 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

JOHN R. CARTER, Texas 

TOM FEENEY, Florida 

MARSHA BLACKBURN, Tennessee 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California

PHILIP G. KIKO, Chief of Staff-General Counsel 

PERRY H. APELBAUM, Minority Chief Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

CHRIS CANNON, Utah, Chairman

HOWARD COBLE, North Carolina 

JEFF FLAKE, Arizona 

JOHN R. CARTER, Texas 

MARSHA BLACKBURN, Tennessee 

STEVE CHABOT, Ohio 

TOM FEENEY, Florida 

MELVIN L. WATT, North Carolina 

JERROLD NADLER, New York 

TAMMY BALDWIN, Wisconsin 

WILLIAM D. DELAHUNT, Massachusetts 

ANTHONY D. WEINER, New York

RAYMOND V. SMIETANKA, Chief Counsel 

SUSAN A. JENSEN, Counsel 

DIANE K. TAYLOR, Counsel 

JAMES DALEY, Full Committee Counsel 

STEPHANIE MOORE, Minority Counsel 

(III)

C O N T E N T S 

APRIL 1, 2003

OPENING STATEMENT 

Page 

The Honorable Chris Cannon, a Representative in Congress From the State 

of Utah, and Chairman, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 1

The Honorable Christopher Cox, a Representative in Congress From the 

State of California ................................................................................................ 3

WITNESSES 

Honorable Jack Kemp, Co-Director, Empower America 

Oral Testimony ..................................................................................................... 6

Prepared Statement ............................................................................................. 8

Honorable James S. Gilmore, III, former Governor, Commonwealth of Virginia 

Oral Testimony ..................................................................................................... 10

Prepared Statement ............................................................................................. 13

Mr. Harley T. Duncan, Executive Director, Federation of Tax Administrators 

Oral Testimony ..................................................................................................... 19

Prepared Statement ............................................................................................. 21

Mr. Harris N. Miller, President, Information Technology Association of America 

Oral Testimony ..................................................................................................... 24

Prepared Statement ............................................................................................. 26

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

The Honorable John Conyers, Jr. a Representative in Congress From the 

State of Michigan, and Ranking Member, Committee on the Judiciary ......... 2

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Additional Questions Presented to the Honorable James S. Gilmore, III, by 

the Honorable Chris Cannon .............................................................................. 47

Responses to Additional Questions by the Honorable James S. Gilmore, III ..... 49

Additional Questions Presented to the Honorable Jack Kemp, by the Honorable Chris Cannon ............................................................................................... 57

Responses to Additional Questions by the Honorable Jack Kemp ...................... 59

Additional Questions Presented to Mr. Harley T. Duncan, by the Honorable 

Chris Cannon ........................................................................................................ 61

Responses to Additional Questions by Mr. Harley T. Duncan ............................. 63

Additional Questions Presented to Mr. Harris N. Miller, by the Honorable 

Chris Cannon ........................................................................................................ 65

Responses to Additional Questions by Mr. Harris N. Miller, with Attachments ..................................................................................................................... 67

Prepared Statement of Grover Norquist, President, Americans for Tax Reform ....................................................................................................................... 90

Prepared Statement of Robert Holleyman, President and CEO, Business Software Alliance ........................................................................................................ 90

Page

IV

Letter from Ralph Hellman, Senior Vice President, Information Technology 

Industry Council ................................................................................................... 92

Prepared Statement of Steven K. Berry, Senior Vice President for Goverment 

Affairs, Cellular Telecommunications & Internet Association ......................... 94

Prepared Statement of ALLTEL, AT&T, AT&T Wireless, Cingular, Level 

3, Spring, T-Mobile, Verizon, Verizon Wireless, BellSouth & SBC ................. 95

Letter from Elizabeth Harchenko, Chair, Multistate Tax Commission .............. 97

Prepared Statement of Elizabeth Harchenko, Chair, Multistate Tax Commission ........................................................................................................................ 98

(1)

INTERNET TAX NONDISCRIMINATION ACT 

TUESDAY, APRIL 1, 2003

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC.

The Subcommittee met, pursuant to notice, at 10:01 a.m., in 

Room 2141, Rayburn House Office Building, Hon. Chris Cannon 

[Chairman of the Subcommittee] presiding. 

Mr. CANNON. Good morning, ladies and gentlemen. This hearing 

of the Subcommittee on Commercial and Administrative Law will 

now come to order. 

We consider today H.R. 49, the Internet Tax Nondiscrimination 

Act. This bill, sponsored by Representative Chris Cox and cosponsored by me and 88 other of our colleagues, would eliminate permanently the imposition of multiple and discriminatory taxation by 

States on electronic commerce and would ban States’ taxes on access to the Internet. 

H.R. 49 follows from earlier legislation, the Internet Tax Freedom Act of 1998, or the ITFA, which imposed a 3-year moratorium 

on multiple and discriminatory State taxation and on new State 

taxes on Internet access. During the 107th Congress, we considered 

several approaches as the end of the moratorium neared. The legislation ultimately enacted extended the moratorium until November 

1 of this year. 

As we all know, electronic commerce has witnessed the ebb of 

economic tides. According to the Department of Commerce, the second half of 2000 marked an economic turning point. Falling profits 

have weakened business investment and also threaten the commercial potential of the Internet. The challenges facing the IT industry 

underscore the urgency of extending the moratorium. But these 

economic conditions aside, it makes sense to banish multiple and 

discriminatory taxes on e-commerce or any other type of commerce. 

By definition, multiple and discriminatory taxes cannot be justified, 

a fact acknowledged by my colleagues on both sides of the aisle 

during prior consideration of the moratorium. 

The bill also bans State taxation on access to the Internet. While 

a little over one-half of the U.S. population currently uses the 

Internet, prohibiting Internet access taxes would facilitate growing 

participation in electronic commerce for all Americans. 

During the debate in the 107th Congress, the moratorium issue 

became linked with the issue of whether out-of-State sellers, such 

as Internet retailers, should be forced to collect taxes and use taxes 

2

on their remote sales—that is, collect sales and use taxes on their 

remote sales. Some Members argued that the moratorium and 

sales tax issue must be considered together in order to truly address Internet taxation. 

What must be made abundantly clear is that H.R. 49 does not 

prevent taxes on online sales. This bill simply prevents taxation on 

Internet access and taxation that singles out Internet users for unfair treatment. 

It is my firm belief that these two issues are separate and should 

be so considered. A permanent extension of the moratorium should 

stand on its own and should not be unnecessarily joined with other 

subjects. Linkage of the moratorium with the online sales tax can 

only confuse the straightforward concepts of a moratorium. The 

moratorium faces a real deadline, November 1 of this year, and we 

must consider it now or face the potential deluge of duplicative and 

discriminatory taxes on the Internet. 

Moreover, consideration of the sales tax issue at this time is premature. Although States have made impressive efforts to modify 

their tax laws to comply with the streamlined sales tax agreement, 

to date, only a few have done so. Supporters of this effort are unlikely to present Federal legislation on the sales tax collection issue 

until more States have brought their laws into compliance with the 

agreement. In the very near future, as the effort progresses, the 

Subcommittee plans to vet fully the complex issues surrounding 

the sales tax collection issue in a separate hearing. 

Department of Commerce Secretary Donald Evans has noted, ‘‘Achievement of the IT revolution’s full potential will demand skillful public action to guarantee that all Americans can participate 

freely according to their own goals and talents in the promise of 

the digital economy. On all sides, much remains to be done.’’ It is time for us to do what needs to be done. 

I now yield to Mr. Delahunt, who is sitting in for Mr. Watt, the 

Ranking Member. Do you have an opening statement, Bill? 

Mr. WATT. No, I don’t have an opening statement, but I do have 

a statement by the Ranking Member of the full Committee, Mr. 

Conyers, that I would ask unanimous consent to be submitted. 

Mr. CANNON. Without objection, so ordered. 

[The prepared statement of Mr. Conyers follows:]

PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN

When considering whether or not we should permanently extend the Internet tax 

moratorium as suggested in H.R. 49, there are two equally important issues that 

must be considered. First, we must consider whether we should extend the moratoriums on Internet access and multiple and discriminatory taxes that we passed in 

1998. On this issue, nearly all the interested parties appear to agree that we should 

extend the moratorium. It is difficult to justify multiple and discriminatory taxes 

under any circumstances, on the Internet or otherwise. 

The second issue concerns the issue of nexus for sales tax purposes. This issue 

is far more complex and ultimately, far more important. Pursuant to the Supreme 

Court’s decision in Quill, a state cannot tax a remote seller unless it has a ‘‘substantial physical presence’’ in a state. Thus, the traditional brick and mortars sellers are 

required to collect sales tax while the electronic retailers have no such requirement, 

creating an unlevel playing field between the two. 

Sales taxes constitute the most important State and local revenue source, with the 

census bureau estimating that nearly one half of State and local revenues come 

from sales taxes. Projections of increasing online sales indicate huge revenue loses 

for states and local government. For example, my own state of Michigan was estiVerDate 0ct 09 2002 15:49 May 28, 2003 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6621 G:\WORK\COMM\040103\86182.000 HJUD1 PsN: 86182
3

mated to lose $502.9 million in foregone sales taxes in 2001 and that number will 

triple by 2006 under the present system. 

This inevitably translates into the loss of important funding for quality education, 

effective public safety, and other basic services. In Michigan, the lost revenue from 

foregone sales taxes will cost my state over 100,000 teachers or police officers this 

year. Think of how much we could do to reduce class sizes, build new schools, improve our quality of education and protect our streets, communities, and citizens 

with these funds. 

The states, however, have made substantial progress on their streamlining initiative. Specifically, representatives of 34 states, including Michigan, settled on a 

framework that individual state legislatures can use to streamline their tax code. 

The framework would make it easier for corporations to collect and pay taxes across 

state lines and in states where they operate only via the Internet. Congress, which 

has authority over interstate commerce, must approve the compact prior to its enactment. 

Thus, our burden is far greater than simply passing another extension of the moratorium. I am hopeful that Congress will also consider and pass provisions to provide states that simplify their sales tax systems with the authority to collect sales 

taxes equitably from all retailers. A simplified streamlined tax compact would increase our nation’s economic efficiency, facilitate the growth of electronic commerce, 

and help us maintain our communities.

Mr. CANNON. The Chair would just note that we have a 5-minute 

rule on the Committee. It makes the system work a lot better if 

we adhere to that rule. As time runs out, either for members of the 

panel or for Members asking questions, I will tap the gavel lightly 

just to remind, and if we could finish up the thought and wrap, 

we’d appreciate that and that’ll allow us to get to the point where 

we can—everyone can ask questions. 

The Chair welcomes the presence on the dais of the gentleman 

from California, Mr. Cox. Although not a Member of this Subcommittee, he is the sponsor of the legislation which is the subject 

of today’s hearing. He is well known by the Subcommittee for his 

valuable testimony as provided us in prior hearings on this issue. 

Mr. Cox, we welcome you and we are grateful for your continuing 

efforts. 

The Chair exercises his discretion in this instance and would recognize Mr. Cox for a few minutes for any remarks he wishes to 

make. Mr. Cox? 

Mr. COX. Thank you, Mr. Chairman. Thank you for your many 

years of leadership in preventing unfair and destructive taxes on 

the Internet and for your leadership today in holding this hearing 

on the Internet Tax Nondiscrimination Act. 

Thanks also for providing us with this distinguished panel of witnesses that I’m looking forward to hearing from this morning. 

I believe that there is strong opposition in this room, strong, 

broad, and bipartisan opposition to new regressive taxes on the 

Internet. Existing law prevents taxes which will make Internet access less affordable for lower-income consumers, less available for 

rural consumers, less accessible to those who are still seeking to 

join the information economy. We are here to see to it that this law 

does not expire. Instead of allowing the taxation of Internet access, 

Congress should seek to remove the barriers that prevent people 

from enjoying this amazing technology. 

The Internet is an amazing and liberating technology for the individual, for students, for entrepreneurs, for consumers, for journalists, for businesses, for senior citizens, and for people in every 

walk of life. We don’t need to subsidize it. We simply need to not 

destroy it through taxation. 

4

A January 2003 UCLA study reports that consumers now rank 

the Internet as their most important source for information. Widespread adoption of broadband high-speed Internet connections 

would add an additional half-trillion dollars to the U.S. gross domestic product in each of the next 10 years, according to a recent 

study by market researcher Dataquest. New taxes that would make 

the high-speed Internet even less affordable will do nothing but 

discourage the adoption of broadband connections. 

In addition to preventing regressive taxes on Internet access, 

H.R. 49 has other benefits to protect the Internet from unfair treatment at the hands of tax collectors. My legislation, as the Chairman points out, does not prohibit online sales taxes. It prohibits 

multiple and discriminatory taxes. In other words, multiple governments in different locations can’t tax simultaneously the same 

transaction. Online sales can’t be taxed at each stop along the electronic path between buyer and seller. 

And tax collectors cannot discriminate against web consumers by 

taxing goods and services online that are not taxed offline. Just as 

it sounds, the Internet Tax Nondiscrimination Act would ensure 

that Internet consumers are not burdened with taxes that don’t 

exist in the bricks-and-mortar world. 

So the question is simply put before us, should Americans be 

forced to pay new taxes on their Internet access? This question has 

been asked and answered many times by many distinguished people, including some of the people we will hear from next on this 

panel. 

Should the diverse and growing population of Internet users pay 

double or triple the tax they pay at the mall just because they 

choose to shop online? Should these consumers pay taxes online 

that have never existed in the offline economy? The answer to all 

of these questions should clearly be no. 

State and local governments continue to wrestle with the important questions of how to balance budgets and how to treat online 

transactions. The sales tax debate is one that must continue and 

will continue, and it must also be separated from the debate on 

this bill, which is not about sales taxes. 

Some of you here probably remember the National Lampoon 

cover that featured that really cute little puppy, and this puppy 

had a revolver to its head and the cover of the National Lampoon 

said, ‘‘Buy this magazine or we’ll shoot the dog.’’

That’s what’s going on with the debate over Internet sales taxes 

and this legislation to continue the ban on multiple and discriminatory taxes. There is no constituency for multiple taxes or discriminatory taxes against the Internet. Nobody is willing to say, we are 

for this. There is no time in the future when this will be a good 

idea, and it’s time permanently now to ban this. We ought not to 

be here, Mr. Chairman, 2 years from now or 3 years from now, 

going around the same track over again. 

This is very much like ‘‘Groundhog Day,’’ and as much as I enjoy 

having my legislation passed by Congress not just once but multiple times, because it’s quite an honor, I think we’ve done this and 

now it’s time to finish the job and then we can move on and talk 

about other more difficult issues in the days ahead. 

Thank you very much, Mr. Chairman. I yield back. 

5

Mr. CANNON. Thank you, Mr. Cox. I agree with you. Passing it 

twice—three times is the charm, right? Let’s do it this time. 

The Chair would acknowledge the presence of Ms. Baldwin from 

Wisconsin and Mr. Delahunt from Massachusetts. Mr. Coble was 

here briefly, but he had another hearing that he had to attend. Mr. 

Flake was here and I think will be back. Mr. Carter from Texas 

and Mr. Chabot from Ohio, who I think will return. 

Thank you, Mr. Cox. We appreciate those comments. 

And now, we’d like to turn to our rather—our extremely impressive panel. It is my honor and privilege to welcome these individuals, these gentlemen here today, who are among the most noted 

experts in the area of Internet taxation. 

First of all, we’ll hear from my friend, Governor—the Honorable 

James S. Gilmore, III, our first witness and the former Governor 

of the Commonwealth of Virginia from 1998 to 2002. As Governor, 

Mr. Gilmore fostered a strong leadership—or relationship between 

the Government and the technology community. He created the nation’s first Secretariat of Technology, established a Statewide Technology Commission, and signed into law the nation’s first comprehensive State Internet policy. 

As a result of his leadership on technology issues, Mr. Gilmore 

was chosen as Chairman of the Federal Advisory Commission on 

Electronic Commerce, the panel established by enactment of the 

Internet Tax Freedom Act that issued its report to Congress in 

April of 2000. 

In addition, Mr. Gilmore has been Chairman of the Congressional Advisory Panel to assess domestic response capabilities for 

terrorism involving weapons of mass destruction, also known as the 

Gilmore Commission. This commission was influential in developing the office of Homeland Security. 

A graduate of the University of Virginia and its law school, Mr. 

Gilmore continues to demonstrate his dedication to technology 

issues as a partner in the law firm of Kelley, Drye and Warren 

here in Washington, D.C. 

Mr. Gilmore, we are grateful for your commitment to the important issues before us today and your valuable testimony, and may 

I just add, we appreciate the fact that a governor has taken the 

lead in opposition to other governors around the country on an 

issue that is so fundamentally important to America. 

Let me just ask, obviously I have been passed a note. Mr. Kemp, 

do you need to go first? 

Mr. KEMP. I’m such an expert in e-commerce, I can’t get the——

Mr. CANNON. Governor, if you would pardon us, Mr. Kemp, if you 

don’t mind, I’d like to introduce you. 

Mr. GILMORE. Congressman, I’m certainly prepared to defer to 

the Secretary, but I hope I’ll get that introduction over again. That 

was very nice. [Laughter.] 

Mr. CANNON. We probably could ad lib and do a lot more, given 

your background on this issue. I don’t think it’s a surprise to anyone that my Governor in Utah has sort of been on the lead on the 

other side of this, and while I love my State, I love the Internet 

in many ways more. So we’ll come back and do some more introduction, Governor. 

6

Our next witness, then, will be Mr. Jack Kemp, who is one of the 

nation’s leading promoters of the importance and potential of the 

digital economy. Mr. Kemp serves on the Board of Directors of Empower America, a public policy and advocacy organization he cofounded in 1993. Empower America is dedicated to promoting 

democratic capitalism, economic growth, and policies that empower 

individuals. 

A graduate of Occidental College in Los Angeles, Mr. Kemp 

served for 4 years as Secretary of Housing and Urban Development 

before his appointment to the cabinet, and after a successful professional football career. Mr. Kemp served for nine terms here in the 

House of Representatives, from 1971 to 1989. In 1995, Mr. Kemp 

served as Chairman of the National Commission on Economic 

Growth and Tax Reform. In 1996, he was nominated as the Republican candidate for Vice President for the United States. 

In addition to his work with Empower America, Mr. Kemp holds 

many prestigious appointments, including serving as Deputy Chairman of the International Democratic Union, a worldwide organization dedicated to advancing democracy, freedom, and free market 

conditions. 

Mr. Kemp, it is great to have you back in these hallowed halls. 

I might just as a personal note say that I have been a great admirer of Mr. Kemp’s and he has been very gracious with his time 

on these issues with me since I have come to Congress. I appreciate 

your coming here today and sharing your counsel and wisdom with 

us, Mr. Kemp. We shall turn the time over to you. 

STATEMENT OF HONORABLE JACK KEMP, CO-DIRECTOR, 

EMPOWER AMERICA 

Mr. KEMP. Thank you. Well, Mr. Chairman, thank you for that 

very gracious introduction, and Members of the Committee, it is a 

pleasure to be before you. Listening to my old friend, Chris Cox, 

talking about e-commerce and taxation reminds me of our old 

friend Ronald Reagan’s comment about Government. He said, one 

of the problems is, any time they see something moving, they want 

to tax it. If it keeps moving, they want to regulate it. If it ever 

stops moving, it’ll be subsidized by Government. [Laughter.] 

Mr. KEMP. Chris, thank you for your comments. Mr. Chairman, 

thank you for your gracious introduction. Let me say it’s a pleasure 

to be here with Governor Gilmore. There is no governor in the 

country for whom I have higher regard and respect than Jim Gilmore. He also serves with me on the Board of Empower America, 

and after chairing the Advisory Commission on Electronic Commerce, I have come to believe that this is one of the most important 

issues facing the United States in the 21st century, the whole idea 

of a new economy. It doesn’t replace bricks and mortar, but it expands commerce here and around the world. It is a duty-free ecommerce, it is tariff free, and hopefully, we can keep it as tax-free 

as is potential. 

It will add to the revenue base of the country. All revenues don’t 

have to come in one direct way. There are many different ways to 

expand the revenue base of this country, and as that pie continues 

to grow or we get it growing again, we are going to get more revVerDate 0ct 09 2002 15:49 May 28, 2003 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6601 G:\WORK\COMM\040103\86182.000 HJUD1 PsN: 86182
7

enue, as I have preached and Jim Gilmore has preached and many 

of you have preached for many, many years. 

So I am pleased to be here. I will keep my remarks brief. That 

will, of course, be an historical occasion here in the Congress, these 

hallowed halls. [Laughter.] 

Mr. KEMP. States have been trying for years to tax people at 

businesses located out of State. The issue of taxing remote sales 

started when States tried to tax catalog sales, arguing that such 

favorable tax treatment put brick-and-mortar companies at a disadvantage. This is not a new debate. It has been going on ad infinitum, if not ad nauseam. 

The Supreme Court in 1992, as you all know, Quill v. North Dakota, barred the State of North Dakota from requiring an out-ofState mail order company to collect taxes on sales made to customers inside the State unless the business had that substantial 

presence or nexus alluded to by the Court. 

With the advent of the Internet in the mid-1990’s and the growth 

of e-commerce, some say in the next 5 years, close to $1.5, $1.7 trillion of e-commerce. Ninety-five percent of it is B-to-B. It is not Bto-C, it is B-to-B, wholesale where there is no sales tax. 

In 1998, the Internet tax debate was temporarily stayed for 3 

years with the passage of the Internet Tax Freedom Act, alluded 

to by you, Mr. Chairman, and by Mr. Cox. It barred post-1998 access taxes on the Internet as well as multiple and discriminatory 

taxes, again alluded to by Mr. Cox. 

In 2001, when the ITFA was set to expire, the fight to permanently or temporarily extend the moratorium was held hostage by 

some Members of the Senate unless Congress allowed for some 

type of a national sales tax cartel to exist. In November, almost 2 

months after the original moratorium had expired, the Senate finally passed that clean 2-year extension and we think the Congress 

should pass a clean extension, or a clean moratorium, I should say, 

this year. 

During the first two rounds of the Internet tax debate, many argued that the central issue was fairness. Supporters of Internet tax 

harmonization obfuscated, in my opinion, the issues, insisting that 

somehow the moratorium barred taxation of Internet sales, leaving 

brick-and-mortar industries at a disadvantage. 

The Internet tax moratorium and the extension of the permanent 

moratorium only bars access fees, as Mr. Cox alluded to, and multiple and discriminatory taxation. It’s the U.S. Constitution and the 

Supreme Court precedent, not the moratorium, that imposes the 

restriction on the ability of a State and local government to tax remote sales. 

That’s an important point to make, it seems to me, along with 

the point that now as States are running deficits—and clearly the 

deficit is a result of the slow-down of the U.S. economy and an increase in spending that took place in the 1990’s when the economy 

was growing—with States running deficits, it is interesting that 

now the talk of fairness is being replaced by the so-called plugging 

of a budget shortfall. I think that is fallacious, Mr. Chairman. 

States have increased spending over 50 percent in just three or 4 

years. Clearly, they took advantage of a growing economy. I don’t 

8

see how we’re going to close a gap or plug the States’ deficit by 30 

to 40 percent by putting on a tax. 

Congress should pass H.R. 49. I appreciate your leadership and 

that of Mr. Cox and other Members who have supported this. We 

should permanently extend the current Internet tax moratorium on 

access taxes and multiple and discriminatory taxation of e-commerce. Congress should definitively end any hope that some have 

of a Congressional authorization of a national sales tax cartel. 

I see the red light on. I am going to follow my instructions. I will 

leave my colleague to answer the questions as I catch an 11 o’clock 

shuttle, if that is possible, to New York. 

Mr. CANNON. We wish you godspeed. [Laughter.] 

Mr. KEMP. Thank you. 

Mr. CANNON. And a safe arrival. 

Mr. KEMP. I’m leaving Reagan National, but it’ll also make you 

all realize that you have a witness here in Governor Gilmore who 

is probably the most able practitioner of these views that we have 

in the country. Thank you, Mr. Chairman, and godspeed to you. 

Mr. CANNON. Thank you, Mr. Kemp. We appreciate your time. 

[The prepared statement of Mr. Kemp follows:]

PREPARED STATEMENT OF JACK KEMP

Mr. Chairman and Members of the Committee, thank you for allowing me to express the views of Empower America on H.R. 49, the Internet Tax Nondiscrimination Act, which would permanently extend the existing moratorium on many forms 

of internet taxation (the Internet Tax Freedom Act of 1998—ITFA—as extended in 

November 2001 by the Internet Tax Nondiscrimination Act of 2001 until the fall of 

this year). We at Empower America enthusiastically support H.R. 49. In my few 

minutes before you this morning, I would like to explain why we support the bill 

and point out some potential pitfalls the committee should be wary of as you seek 

a more permanent resolution of this complex but extremely important issue. 

First, I would like to note that Empower America has actively participated in the 

Internet tax debate since it began with the Advisory Commission on Electronic Commerce (ACEC), chaired by my good friend Gov. James Gilmore who I am glad to 

see has been called upon to testify as well. My views expressed today are based on 

the work Empower America has done on this subject in the past and on work we 

are presently doing in preparation for a white paper on some of the economic and 

legal issues surrounding Internet taxation (a copy of that study will subsequently 

be submitted for the Committee’s consideration). 

Mr. Chairman, I believe a good starting point for understanding the Internet tax 

debate is laid out in the conclusions of the congressionally-mandated ACEC, which 

was conducted under the outstanding leadership of Virginia Gov. James Gilmore. 

The Commission did an excellent job of framing the issues involved with Internet 

taxation from the perspective of protecting the taxpayer, advancing economic 

growth, and balancing the interests of the states and the national government with 

due regard for our constitutional structure and provides a blueprint for Congress to 

consider in asserting its power to define the scope of states authority to tax crossborder transactions. Another excellent source discussing the Constitutional limitations on Internet taxation is a paper published by the Institute for Policy Innovation 

(IPI) titled, ‘‘New Economy, Old Constitution,’’ by George Pieler and Empower 

America Chief Economist Dr. Lawrence Hunter. 

However, the authority and foundation on which we rest our case is not on the 

Commission’s recommendations or policy studies alone; we rest our case on the firm 

authority and foundation of the Constitution, Supreme Court precedent and sound 

economic policy. It is this authority that should guide the members of this Committee and members of Congress as you seek to reach a consensus to ultimately resolve this issue. 

In the last six years the debate over Internet taxation has changed with the economic climate. During the mid-to-late 1990s as e-commerce, the economy and states 

tax revenues all took-off (no coincidence) the focus of the debate by those whom 

were against the moratorium and in favor of sales tax simplification was on the 

issue of ‘‘fairness.’’ Their case rested on the simple proposition that it is simply 

9

wrong to give Internet-based companies preferential tax treatment over brick-andmortar industry. And, I would agree if that were the case, but it is not. 

The ITFA does not prevent states from taxing e-commerce if there is a sufficient ‘‘nexus’’ or physical presence between the out-of-state-seller and in-state purchaser 

in their jurisdiction. The ITFA only bars access fees and multiple and discriminatory forms of taxation on e-commerce. One example of a discriminatory tax might 

be a surtax on products ordered through the Internet (for example, a state assessing 

a 10% tax on books 

ordered online when it only demands a 5% tax on books bought in a bookstore). 

Another would be claims by multiple states to collect tax for a single transaction 

with a buyer in one state and a seller in another, thus doubly taxing. The possibilities for imposing multiple and discriminatory taxes on e-commerce are limited only 

by the law and the imagination of the taxing authorities. 

Let me be clear, the Internet deserves neither special tax burdens nor unique tax 

privileges. This is the central premise underlying the ITFA and, in practice, it is 

serving that purpose. The supporters of Internet taxation would like to point to the 

ITFA as the source of their problems, and they insist the problem is merely a misguided act of Congress that can be remedied with more legislation. But the origins 

of this dispute are much older than the Internet and the source of their problem 

is much more permanent than an act of Congress. 

The central issue in the Internet tax debate is not ‘‘fairness’’ as the NGA and 

some others would have us believe; it is taxation without representation. States 

have been trying for more than three decades to tax people and businesses that are 

located out-of-state because politicians are acutely aware non-residents can’t vote 

them out of office. 

This issue began long before the Internet or the new economy, it began with catalogue sales. The Supreme Court finally settled that dispute in 1992 in Quill Corp. v. North Dakota. That decision barred states from requiring out-of-state mail order 

companies from collecting taxes on sales made to customers inside the state unless 

the business had a ‘‘substantial presence’’ within the state. In addition to finding 

no sufficient taxing ‘‘nexus’’ the Court also found the North Dakota tax scheme too 

complex for remote sellers and thus created an ‘‘undue burden’’ on inter-state commerce, rendering the tax scheme unconstitutional and settling the issue for the time 

being. So the Constitution, not the ITFA, nor some quaint notion of ‘‘fairness’’, is 

the barrier to the states scheme to tax e-commerce. 

By 2001 the technology sector of the economy was devastated by deflationary 

monetary policy and an ever increasing regulatory and tax burden from which it has 

yet to recover. Concurrently, federal, state and local tax revenues declined with the 

sagging economy. A key lesson to be learned from the rise and fall of the technology 

sector during the late 1990s through 2003 is that economic growth is the key to 

solving federal, state, and local fiscal problems, not a systematic search for new and 

creative ways to increase the tax burden on hardworking Americans. 

Undaunted by the facts, supporters of the new and multiple taxation on e-commerce have shifted gears; no longer is the issue one of fairness alone, now they 

argue taxation of e-commerce is necessary to plug state budget deficits. But, as we 

have seen, economic growth not new forms of taxation is the key to solving budget 

shortfalls and we need to keep in mind that no government neither here nor abroad 

has ever taxed its way to prosperity. 

Another issue first raised in the Quill case, which was debated by the ACEC, and 

is being pushed aggressively by the National Governors Association (NGA) is the 

agenda for ‘harmonization’ and ‘simplification’ of state sales tax laws which would 

create a de facto national sales tax for which neither the federal government or the 

states would be accountable to the taxpayer. Under the proposed plan, supporters 

of the ‘streamlined sales tax initiative’, probably more properly labeled the ‘national 

sales tax cartel initiative’, seek preauthorization from Congress (required under the 

Compact Clause) for a national sales tax cartel if just 20 states agree to their 

streamlined sales tax initiative. This national sales tax cartel would be levied collectively by all states and run by a non-elected ‘consensus board’; so much for representative democracy. 

In 2001, when Congress debated permanently extending the ITFA, the debate was 

bogged down between those who wanted to make the moratorium permanent, on one 

hand, and those who wanted to tie any extension of the ITFA to preauthorizing a 

national sales tax cartel, on the other. Senator Byron Dorgan (D-ND) is already outof-the box supporting the latter approach. At the winter meeting of the National 

Governors Association he urged Congress to pass a sales tax ‘‘streamlining’’ bill this 

year. We feel that if that happened it would probably be the worse case scenario. 

Besides pushing the Constitutional limits of the Compact Clause, probably overstepping such limits, ‘streamlining’ or ‘harmonizing’ sales taxes does not make much 

10

economic sense. Tax competition in our federal system of government keeps governments honest. It allows businesses and individuals to vote with their feet, therefore 

preventing government overreaching. Tax competition, and competition in general, 

is a cornerstone of our economic system and federal system of government; it is not 

a problem that needs to be solved, but rather a solution that should be embraced. 

As a result of this political stalemate some are now suggesting that the ITFA and 

the national tax cartel initiative should be separated, we disagree. In our view the 

ITFA and the national sales tax cartel initiative are inextricably linked. The purpose of the ITFA was to give Congress time to study the issues so that Congress 

could pass policy that would foster economic growth in an emerging industry and 

to give the nascent e-commerce industry a chance to mature. In the interim, the 

NGA and supporters of a national sales tax cartel have ramped up efforts at the 

state level so as to give the national sales tax cartel initiative an aura of inevitability. Do not be fooled, Congress need not be a party to this policy boondoggle. 

What we have learned from the last eight to ten years is that e-commerce, just 

like every other sector of the economy, is susceptible to onerous monetary, tax and 

regulatory policy. We have also re-learned that as the economy goes, so too goes the 

fiscal picture of governments at all levels. And, if you want an idea of the negative 

consequences of tax harmonization schemes simply look across the ocean to our European friends. Tax harmonization is nothing more than a euphemism for high taxes 

and is a recipe for economic stagnation. These issues should be dealt with head-on 

and resolved decisively in favor of what is Constitutional; while focusing on economic growth and not increasing the tax burden; and safeguarding the proper roles 

of government. 

To this effect our recommendations are simple: we strongly endorse H.R. 49 to 

permanently extend the ITFA moratorium. We also encourage Congress to resoundingly quash any notion that Congress would even contemplate authorizing a national sales tax cartel. If Congress passed such an authorization it may portend the 

beginning of what might appropriately be dubbed an Internet tax revolt. And, if 

some members of Congress should try to hold hostage permanent extension of the 

ITFA for some ‘‘compromise’’ authorizing a national sales tax cartel, then Congress 

may be better off allowing the ITFA to expire. The negative impact of a national 

sales tax cartel is even more daunting than the multiple and discriminatory taxes 

states could dream up for taxing e-commerce. 

States on their own may do as they please, but there is a real danger that the 

desire for simplicity and uniformity on the part of the business community, coupled 

with the state and local eagerness for enhanced revenue authority, could create an 

anti-constitutional tax structure that is neither federal nor state in nature, but a 

‘third layer’ of government unaccountable to the people. At the same time it is appropriate to warn against federal overreaching in this area via excessively prescriptive rules on what states can and cannot do within their sovereign boundaries. 

These are matters most worthy of the Committee’s consideration in the field of 

Internet taxation. Again, we applaud the initiative you and your Committee have 

taken, Mr. Chairman, in seeking to permanently extend the moratorium on unwarranted taxation of the Internet, and we look forward to a stimulating and productive 

debate over tax policy and fiscal federalism in the months ahead. 

Thank you.

Mr. CANNON. I might say, I’m sure that the gentleman from Virginia was joking when he said he’d like another introduction. I’m 

happy to do that, because I can talk at great length about the contributions of Mr. Gilmore to this debate and the gravitas that he 

has brought to bear on what I think is the appropriate sight of the 

debate, which is a permanent moratorium. 

Mr. Gilmore, we are honored to have you here and we would look 

forward to hearing your testimony. 

STATEMENT OF HONORABLE JAMES S. GILMORE, III,

FORMER GOVERNOR, COMMONWEALTH OF VIRGINIA 

Mr. GILMORE. Thank you, Congressman. I wish I were a Member 

of Congress so I could move that Mr. Kemp be forced to stay here 

and answer the questions of the Members, particularly Mr. 

Delahunt and Ms. Baldwin. [Laughter.] 

11

Mr. GILMORE. But I am delighted to be here, particularly with 

these distinguished additional witnesses who will be making, I 

think, very persuasive cases to you today. I simply would ask that 

my written remarks be made a part of the record, if you should 

please, Congressman. 

I have, as you know, usually been testifying on homeland security issues before this Congress. This is a little bit of a different 

forum today, and compared to the Internet tax debate, homeland 

security is a peach. So this is a hard one to do, but not this piece. 

This piece of H.R. 49 that Congressman Cox has come forward 

with here today is something you can let go, you can let go ahead, 

as opposed to having intertwined into the challenging sales tax 

issue. As a matter of fact, there is risk that if you don’t let it go 

forward, that this can later on in the year become intertwined with 

the sales tax issue, which is much more complicated, much more 

difficult, and if it becomes intertwined, it doesn’t get enacted, H.R. 

49, and then you run the risk that there are going to be additional 

taxes placed on access, which is a fundamental tax increase right 

in the middle of a recession. 

I just don’t think that the Congress wants to take that responsibility, and Congressman Cox has offered you an opportunity to 

avoid that challenge by going forward with it today. Also, the risk 

is if you don’t go forward with it today and this expires, then there 

is a risk that there will be a lot of individual access taxes put on. 

I want to congratulate Congressman Cox for his leadership in 

this. He has been doing it for years and continues to. I was, of 

course, chairman of this Advisory Commission on Electronic Commerce from 1999 to 2000, a most challenging chairmanship to try 

to perform at. The issue that, of course, we have here today is one 

that on our Commission had virtually no controversy, very little debate on this issue. The more complicated issues were very controversial, but this was pretty easy, to allow this to go forward. 

When you look back at what the Internet Tax Freedom Act did, 

was it prohibited these kinds of taxes, it grandfathered the ones 

that were already in existence, unfortunately, but did, and then established the Advisory Commission. Since that time, a lot of these 

access taxes, in fact, have been dismantled. Texas has eliminated 

its tax on access. Connecticut phased out its tax on access. Washington State repealed a local tax that was put on by the City of Takoma. So the trend is against access taxes and I think that’s right. 

But we’re talking, really, on this entire array of issues, ladies 

and gentlemen, a policy choice, which is, of course, the duty of 

elected officials. It just is. But this is a very challenging policy 

choice, and now the choice before you on this narrow issue is, do 

you want to delay this and run the risk that there’s going to be 

myriad State and local taxing burdens, as we have seen, for example, in the telecommunications industry, or do you want to go forward and pass this narrow piece now and avoid that kind of difficulty? 

This is a permanent moratorium that’s being offered and I think 

that it’s the right policy, and there are policy reasons for this. 

Number one, it promotes the freedom and ubiquitous Internet access that people have got, and this is something that’s very powerful in today’s society. If we don’t do that and individual—thousands 

12

of individual units or localities are entitled to put on taxes, it will 

increase costs to users and create tremendous administrative and 

regulatory costs at the same time. That’s probably the fundamental 

point. 

There are many policy reasons now why we’re pushing, for example, for broadband rollout. This would be discouraging of that. And 

yet, the telecommunications industry, no matter what part of it, 

would tell you that they need to be pushing ahead on that type of 

program. 

The digital divide would be enhanced by this problem. People 

across the country who need to get into access, mothers and fathers 

across the country who are not as well off want to have access to 

computers and access to these services. This would be a burden on 

them and they are the payers at the local level, your constituents, 

that would be put into that kind of position. 

We need an economic stimulus. This has been a good economic 

stimulus over the years. There’s no better time than now for economic stimulus and this would do that. This would be effectively 

a tax increase if this is allowed to expire at the end of the year and 

we begin to get into all these taxes. People are going to start paying more money out of their pockets than they otherwise would, 

and this is the worst time that we have ever seen for that. 

We want to hold onto our competitive position in the world to the 

greatest extent that we possible can. Europe will, I assure you, 

take backwards steps here. That is what they do. They are going 

to be putting a lot of taxes on in Europe because that’s what they 

do in Europe, and as a result of that, they’re going to put themselves in a disadvantageous position to the United States. We 

should not follow that lead. 

Furthermore, right now, you’re in a good position. This is a good 

time. Localities are not dependent upon these taxes. Once they get 

dependent on it, it’s very tough for Congressmen and women to 

say, no, let’s take it back away again because of policy reasons. 

You’re positioned well right now. If you let it expire and you let 

these people all get dependent upon this, it’s going to be murder 

to try to actually perform good policy. You will be making a policy 

decision that will mean an increase in taxes. 

I think that the Federal moratorium is sound policy. You’ve been 

doing it over and over again. The time has come to go forward with 

it. 

So in conclusion—and I’m on time, actually—in conclusion, this 

information technology boom that drove the last boom in this country can provide the kind of efficiencies that will send us forward 

again. It will generate new wealth in America, as Congressman 

Kemp said. And it will empower individual people, and that’s what 

we’re trying to do in America. And it will keep tolls off the Internet. 

So I believe that H.R. 49 is a good bill. It’s the right time to push 

it forward, and you have an opportunity before this thing gets embroiled in a sales tax issue, which is of very dubious, questionable 

policy that is going to be thoroughly argued out, may never be completely resolved at the end of the year. At least do the right thing 

now on this piece of legislation. 

Mr. CANNON. Thank you, Governor. We appreciate that. 

13

[The prepared statement of Mr. Gilmore follows:]

PREPARED STATEMENT OF JAMES S. GILMORE, III 

INTRODUCTION

Chairman Cannon, Congressman Watt, and Members of the Commercial & Administrative Law Subcommittee, thank you for inviting me to explain why the permanent and national prohibition against Internet access taxes proposed in H.R. 49 

is critically important to the future of the United States economy and to ubiquitous 

access to the Internet by the American people. 

Let me preface these remarks by recognizing the tremendous vision of your colleague, Congressman Chris Cox, who had the foresight over five years ago to protect 

the Internet from multiple and discriminatory tax burdens with passage of the 

Internet Tax Freedom Act of 1998. Without the Internet Tax Freedom Act, I doubt 

our Nation would be as advanced as it is today in terms of widespread Internet access, broadband rollout and international dominance of electronic commerce and the 

exchange of information and digital content on-line. 

I also would like to recognize Senator Allen and Senator Wyden for their efforts 

in the Senate to move tax freedom for Internet access forward. And, of course, I 

would like to acknowledge President Bush and Vice President Cheney for the Administration’s strong support for a permanent federal prohibition against taxes on 

Internet access. 

HISTORY OF ADVISORY COMMISSION ON ELECTRONIC COMMERCE (1999–2000)

I have been blessed with several noteworthy honors in my career. The highest 

honor was to be elected by the people of Virginia to serve as their Governor from 

1998 to 2002. In that role, I had the opportunity to pass the nation’s first comprehensive Internet policy and steer Virginia’s tax policy to promote Internet access 

and electronic commerce. I also presided over unprecedented economic growth in the 

Information Technology sector. 

While I served as Governor, I also had the privilege to serve as the Chairman of 

the Advisory Commission on Electronic Commerce from 1999 to 2000. The Advisory 

Commission on Electronic Commerce was established by Congress to conduct a thorough study of federal, state, local and international taxation of electronic commerce. 

Speaker Hastert asked the Commission to send ‘‘sound policy proposals for the individual taxpayers of America,’’ and former Senate Majority Leader Lott requested us 

to forward ‘‘a clear and unambiguous policy proposal, especially if that proposal is 

bold and innovative.’’ For nearly a year, 19 Commissioners and their staffs devoted 

their creativity and thousands of hours of work deeply engaged in that endeavor. 

The Commission’s membership was comprised of distinguished leaders, from both 

the public and private sectors, representing diverse perspectives on the issue Internet taxation. 

They included several distinguished leaders from the private sector: Michael Armstrong of AT&T, Grover Norquist of Americans for Tax Reform, Richard Parsons of 

Time Warner, Bob Pittman of AOL, David Pottruck of Charles Schwab, John 

Sidgmore of MCI WorldCom and UUNet, Stan Sokul on behalf of the Association 

of Interactive Media, and Ted Waitt of Gateway. And they included an equally impressive group from the public sector representing state and local governments: 

Dean Andal, Chairman of the California Board of Equalization, Delegate Paul Harris of the Virginia General Assembly, Commissioner Delna Jones of Washington 

County, Oregon, Mayor Ron Kirk of Dallas, Texas, Governor Mike Leavitt of Utah, 

Gene LeBrun of the Commissioners on Uniform State Laws, and Governor Gary 

Locke of Washington State. And representing the Clinton-Gore Administration were 

Joe Guttentag of the Department of Treasury, Andy Pincus of the Department of 

Commerce, and Bob Novick of the Office of U.S. Trade Representative. 

In nearly a year of work and four two-day meetings and several remote teleconference meetings, the Commission heard testimony from over 55 experts, academics, 

think-tanks and interest groups representing as broad a range of perspectives on 

tax and electronic commerce policy as has ever been organized into one study. Each 

Commissioner was able to invite his or her own experts to express a viewpoint. We 

heard from every quarter, from the Heritage Foundation to the National Governor’s 

Association and Wal-Mart. 

A year of robust debate yielded a sophisticated set of ideas that the Commission 

reported to Congress in April of 2000. I am confident that conclusions we reported 

to Congress represent an excellent policy blueprint that will have tangible and beneficial effects for the people of the United States. A copy of the Commission’s final 

14

Report to Congress and its library are archived on-line by George Mason University 

Law School at www.ecommercecommission.org. 

ADVISORY COMMISSION ON ELECTRONIC COMMERCE’S POLICY PROPOSALS

The Internet Tax Freedom Act and H.R. 49 address two distinct tax policy issues: 

(1) state and local taxes on Internet access provided by a traditional Internet service 

provider (or ‘‘ISP’’), and (2) ‘‘multiple and discriminatory’’ taxes that treat electronic 

commerce differently than any other kind of commerce. The Commission I chaired 

for Congress studied these two tax policies in detail and a majority of the Commission voted to extend the federal prohibition against both of these taxes. 

The Commission also studied other taxes, some imposed by the federal government and others imposed by state or local governments. Before focusing my remarks 

on the tax question presented by the Internet Tax Freedom Act and H.R. 49, however, I would like to summarize the other distinct policy questions the Commission 

addressed. It suffices to note that these policies are not necessarily dependent upon 

one another, and each of the Commission’s policy proposals should be considered on 

its unique merits. Certainly, resolution of H.R. 49 should not be dependent upon the 

policy debate over other issues such as interstate sales tax collections on the Internet. 

A majority of Commissioners approved policy prescriptions that, in my view, advance the important objectives of promoting Internet connectivity and individual 

empowerment for the people of the United States. Among the ideas submitted in 

the Commission’s April 2000 Report, you will find proposals for the following tax 

reforms:

(1) First, Congress should eliminate the 3% federal telephone tax—an immediate tax cut of over $5 billion annually for the American people. This tax 

was originally established as a luxury tax for the few Americans who 

owned a telephone to fund the Spanish American War of 1898. Since that 

time, it has been scheduled for extinction for decades, but was finally made 

permanent in the late 1980s. In the Information Age, it is important to 

stop taxing people’s telephones. Elimination of this regressive tax is an important first step in reducing the expense of Internet access, one of the 

contributing factors to the digital divide. While this tax once was justified 

as a luxury tax on the few Americans who owned a telephone, it has no 

rationale in the Information Economy.

(2) Second, extend the current moratorium on multiple and discriminatory 

taxation of electronic commerce for an additional five years through 2006.

(3) Third, prohibit taxation of digitized goods sold over the Internet. This proposal would protect consumer privacy on the Internet and prevent the slippery slope of taxing all services, entertainment and information in the U.S. 

economy (both on the Internet and on Main Streets across America). Moreover, this tax prohibition is essential to maintaining U.S. global competitiveness since the United States currently dominates the world market in 

digitized goods.

(4) Fourth, make permanent the current moratorium on Internet access taxes, 

including those access taxes grandfathered under the Internet Tax Freedom Act. This proposal is another crucial initiative, targeted to reduce the 

price of Internet access and to close the digital divide. By expanding the 

moratorium to eliminate the current grandfather provision, consumers 

across the country would participate in electronic commerce without onerous tax burdens.

(5) Fifth, establish ‘‘bright line’’ nexus standards for American businesses engaged in interstate commerce. The cyber economy has blurred the application of many legal nexus rules. American businesses need clear and uniform tax rules. Therefore, Congress should codify nexus standards for sales 

taxes in a way that adapts the law of nexus to the New Economy and the 

new ‘‘dot com’’ business model. Codification of nexus would serve several 

important policy objectives: (1) provide businesses ‘‘bright line’’ rules in an 

otherwise confusing system of state-by-state nexus rules; (2) protect businesses, especially small businesses, from onerous tax collection burdens; (3) 

reduce the amount of costly litigation spurred by confusing nexus rules; (4) 

nurture the full growth and development of electronic commerce; and (5) 

give consumers and individual taxpayers who participate in Internet commerce a tax break.

(6) Sixth, place the burden on states to simplify their own labyrinthine telecommunications tax systems as well as sales and use tax systems to ease 

15

burdens on Internet commerce. This effort will be particularly important 

for small and medium-sized retailers with nexus in two or more states. It 

also will be important for telecommunications companies as they build out 

the Internet infrastructure and offer new technologies and services. Radical simplification will be necessary in the New Economy if small and medium-sized businesses are to succeed.

(7) Seventh, clarify state authority to spend TANF funds to provide needy 

families access to computers and the Internet, as well as the training they 

need to participate in the Internet economy. This is one strategy the Commission formally recommends to close the digital divide and make the personal computer and access to the Internet as ubiquitous as the telephone 

and television.

(8) Eighth, provide tax incentives and federal matching funds to states to encourage public-private partnerships to provide needy citizens access to 

computers and the Internet. This is yet another strategy the Commission 

formally recommends to close the digital divide.

(9) Ninth, respect and protect consumer privacy in crafting any laws pertaining to online commerce generally and in imposing any tax collection 

and administration burdens on the Internet specifically. This is a formal 

recommendation of the Commission.

(10) Ten, continue to press for a moratorium on any international tariffs on 

electronic transmissions over the Internet. This idea also is a formal recommendation of the Commission.

(11) And eleven, a majority of the Commission endorsed a comprehensive 

framework for addressing international tax and tariff issues based upon 

the following core principles: no new taxes or tax structures on electronic 

commerce in the world marketplace; tax neutrality toward electronic commerce; simplicity and transparency of tax rules applied to electronic commerce; and a call for the Organization of Economic & Community Development (OECD) to continue fostering international dialogue and cooperation 

on international tax issues.

It is important to note that the Commission’s study of the Internet Tax Freedom 

Act and its prohibitions against taxes on Internet access and multiple and discriminatory taxes targeting electronic commerce elicited little if any controversy. And 

there was consensus that the national goal of any policy addressing the Internet 

should be to promote ubiquitous access. Those issues only became controversial in 

the context of political bargaining over other, more controversial topics. 

BACKGROUND ON INTERNET TAX FREEDOM ACT (1998)

When Congress passed the Internet Tax Freedom Act in 1998, it was difficult to 

predict, or even catalogue, the many policy dimensions of federal, state and local 

taxation of Internet access and Internet-based commerce. Mindful of the axiom to 

do no harm, Congress acted cautiously in the beginning:

(1) First, Congress prohibited state and local taxes targeting Internet access 

temporarily, for three years, so that the ramifications of the federal prohibition could be measured;

(2) Second, Congress ‘‘grandfathered’’ about ten states that already had enacted 

some form of state or local tax on Internet access to allow them time to reverse their policies in light of countervailing federal policy without any dramatic revenue impact and/or to keep their policies in place in the event Congress might eventually reverse national policy; and

(3) Third, Congress established the Advisory Commission on Electronic Commerce to study Internet tax policies and report back to Congress on its deliberations, policy debate and majority proposals, as well as any formal findings or recommendations that could garner a supermajority.

Congress wanted to move forward deliberatively and carefully because the Internet economy and all of its dimensions were not fully understood. Yet, Congress 

needed to act quickly because state and local governments already had begun to target Internet access services, websites and content under disparate and often illogical 

tax theories. 

Tacoma, Washington, for example, implemented a plan in September of 1996 to 

tax Internet Service Providers as telephone utility companies (a law the state legislature later repealed). Wisconsin enacted a 5% sales tax on Internet access, subjecting its taxpayers to two taxes to log on the Internet—a tax on their telephone 

16

service used to dial up the Internet and a second tax on their Internet service. Connecticut, on the other hand, started taxing Internet access at 6% under the theory 

that it constituted a ‘‘computer and data processing’’ service (Connecticut terminated the tax in 2001). New Mexico began imposing a gross receipts tax Internet 

access and continues to this day. Even small towns, like Chandler, Arizona, started 

imposing local utility taxes on Internet access service in the mid to late 1990s. 

The real threat of hundreds if not thousands of differing tax theories, rates, jurisdictions, audits and regulations getting heaped upon Internet access the way it had 

local and long-distance telephone service spurred Congress to enact a federal moratorium against the proliferation of such taxes. Congress grandfathered the handful 

of states that had started taxing Internet access. 

The grandfather provision implicitly told those states that had rushed to tax 

Internet access that Congress disapproved of the imposition of a myriad of state and 

local tax burdens (including both the costs of taxes as well as the costs of regulatory 

compliance, audits and collection) upon inherently interstate Internet access services. These grandfathered states faced a choice. They could either reverse their 

hasty decisions to tax Internet service or they could wait to see if Congress might 

change its mind. 

Since its original enactment in 1998, several states have dismantled or significantly curtailed their taxes on Internet access. Texas, for example, eliminated its 

tax on Internet access priced below $25 per month. Connecticut decided to phase 

out its tax on Internet access altogether. Washington State repealed the local tax 

on Internet access that the City of Tacoma had imposed. 

In 2001, Congress voted overwhelmingly a second time to extend the federal prohibition an additional two years to 2003, endorsing once again a national policy of 

promoting ubiquitous Internet access by prohibiting onerous tax and regulatory burdens on access. 

AVOIDING THE CONSUMER TELEPHONE TAX LABYRINTH ON THE INTERNET

We now approach the conclusion a five-year federal moratorium on Internet access taxes and Congress faces a fundamental policy choice:

(1) Should Congress adopt the policy that myriad state and local tax burdens 

on Internet access are antithetical to an enduring national policy of promoting ubiquitous and competitive Internet access by making the moratorium on access taxes permanent and universal across all states?

(2) Or should Congress reverse course, eliminate the federal prohibition, and 

allow state and local governments to proceed to tax Internet access as they 

see fit?

I believe the policy goals and purposes that justified Congress’ original adoption 

of the Internet Tax Freedom Act in 1998 are equally compelling today and justify 

a permanent and universal prohibition against taxes on Internet access throughout 

the United States. 

Abolishing the federal prohibition would force the Internet superhighway to navigate the same labyrinthine maze of overlapping and disparate state and local tax 

regulations and burdens that currently strangles the Nation’s telecommunications 

services. Presently, a national telecommunications service provider might be required to file as many as 55,000 different tax returns each year to comply with the 

tax burdens of all state and local jurisdictions. The effective transaction tax rates 

that apply to telecommunications services exceed the effective transaction tax rates 

applied to almost all other sales. Average effective state and local tax rates average 

about 14% as compared to 6.3% for most other sales. When all state, local and federal telephone taxes and fees are counted, it is not uncommon for 20% or more of 

a consumer’s telephone bill to be taxes. 

Also, many state and local governments apply different tax structures and tax 

rules and bases depending upon the type of telecommunications services. In one jurisdiction, different tax rates might apply to telecommunications services provided 

by traditional wire line, cable, Internet, or wireless firms. Companies that offer essentially the same services over different technological media often are uncertain regarding the appropriate tax treatment of their service. 

These transaction taxes are complex and compliance is costly. Telecommunications service companies bear the compliance costs for calculating, collecting, auditing and remitting these taxes, and these burdens are prohibitive for small telephone 

companies. More importantly, individual consumers pay these exorbitant taxes. 

Thus, the taxes not only impose significant costs and burdens on businesses, but 

they significantly increase the cost of using the telephone in an Information Society 

where citizens who are elderly, poor and shut-in must have a telephone. 

17

Regardless of one’s perspective regarding whether telephone service should or 

should not be taxed, or at what rate, I do not believe anyone asked to design an 

interstate telephone tax structure on a blank slate would craft the kind of disparate, 

complicated and costly system we have in place now. It’s too complex, it’s regressive, 

and it’s a drag on the telecommunications infrastructure and connectivity in America. We can’t let that happen to Internet access too. 

But that is precisely the tax structure being proposed by opponents of H.R. 49. 

If Congress does not pass H.R. 49, small independent Internet service providers will 

face the immediate prospect of filing dozens or perhaps hundreds of tax returns and 

remittances each year. The large national Internet service providers will face the 

daunting task of filing 50,000 each year. The big ones might be able to hire the administrative overhead, accountants and lawyers to manage that task, and pass the 

cost to their customers in higher prices. But many small ones would never be capable of competing in such an environment. 

It is imperative that Congress enact a permanent and national prohibition against 

state and local taxes on Internet access to prevent Internet access, the industry that 

provides access to the Internet, and the individual citizens who log on the Internet 

from the detrimental effects of a telephone-like tax system. 

WHY CONGRESS SHOULD ENACT A PERMANENT & NATIONAL PROHIBITION AGAINST

INTERNET ACCESS TAXES

Moreover, there are numerous compelling policy rationales for a permanent and 

national prohibition against Internet access taxes.

(1) It should be the National Policy of the United States to promote freedom 

and ubiquitous Internet access and connectivity in America. The economic, 

social and political benefits are great. The potential for individual empowerment is tremendous. We should not inhibit the full outgrowth and 

ubiquitous access to the Internet by allowing onerous tax burdens to slow 

down the Internet superhighway. Taxes would inhibit full outgrowth in 

several ways: (1) by increasing the cost to users and (2) imposing significant new administrative and regulatory costs upon Internet access providers.

(2) The federal government and many state and local governments are subsidizing Internet access and broadband rollout in many regions of the 

United States. It would be counterproductive to then take back the subsidies through burdensome taxation of the very services we subsidized. For 

example, North Carolina has established the North Carolina Rural Internet Access Authority. The Authority’s mission is to wire rural communities 

throughout North Carolina in partnership with local telephone companies. 

North Carolina has provided over $30 million in public funds to support 

the project. The U.S. Department of Agriculture’s Rural Utilities Services 

makes direct grants totaling in the tens of millions of dollars to wire rural 

communities and small towns. U.S.D.A. also implements the Rural 

Broadband Loan and Loan Guarantee Program Rural Utilities Service 

(RUS) which, this year, will make over $1.4 billion in government-subsidized loans and loan guarantees available to companies deploying 

broadband service to communities of less than 20,000 people.

(3) Small, independent and rural Internet Service Providers (ISPs) will be at 

a competitive disadvantage in rolling out access across local and state 

boundaries if multiple state and local taxes and their attendant regulatory 

and compliance burdens are imposed. They can’t compete with the big national ISPs in complying with regulatory and administrative burdens. This 

would reduce choice for rural consumers and force them to higher-cost 

services.

(4) America still suffers from digital divides—rich vs. poor, urban vs. rural, 

white vs. black, educated vs. uneducated, young vs. old. Taxes will only 

widen these divides at a time when our goal should be to make the personal computer and Internet access as affordable and ubiquitous as the 

telephone and television. According to the U.S. Department of Commerce’s 

report, A Nation Online (February 2002), large disparities remain in Internet usage rates between certain classes of citizens. The access gap between 

citizens with incomes over $75,000 versus those making less than $15,000 

grew from 35% in 1997 to 54% in 2001. The gap between white and black 

citizens expanded from 12% in 1997 to 20% by September 2001. We still 

have a way to go to close these gaps. Imposing tax burdens that increase 

18

consumer costs and reduce competition among ISPs would be counterproductive.

(5) We need continuous economic stimulus to spur economic activity and investment, especially in the e-commerce and technology sectors. A permanent moratorium will be a positive signal to investors and Internet entrepreneurs.

(6) Failure to extend the moratorium is effectively a tax increase on American 

consumers who have Internet access in their homes and offices. An economic downturn is the worst time for a tax increase. For example, if Congress lifted the moratorium and allowed states and localities to tax Internet access pursuant to their telecommunications tax rates, a consumer 

paying $20 per month for Internet access might pay, in an average state, 

an additional $3 per month and $36 per year just to log on the Internet.

(7) The federal prohibition prevents double taxation of ISP service as well as 

taxation of the phone and cable lines people use to access their ISP. For 

many consumers, the $36 noted above would duplicate taxes already paid 

for a local telephone line.

(8) America currently dominates the world market in electronic services, software development and digital content. We should strive to build on our 

competitive position even further. Tax policy favorable to Internet access 

and the content and information transferred over the Internet is critical 

to maintaining our competitive position in the world marketplace. Europe 

is looking for more ways to tax the Internet and the content, software and 

information exchanged over the web. We should resist the European paradigm of imposing VAT taxes on Internet service and the content and information accessed over the Internet.

(9) States and localities are not currently dependent upon Internet access 

taxes because Congress enacted the moratorium in 1998. The few states 

that enacted access taxes before 1998 are not heavily dependent upon the 

revenues. In fact, since enactment of the Internet Tax Freedom Act (ITFA) 

in 1998, many states trended away from access taxes. Texas, Connecticut 

and Washington State are good examples. Yet, what we do know from experience in the states that enacted these taxes prior to 1998 is that their 

tax rules are unclear and difficult to administer. Nevertheless, states with 

Internet access taxes have been provided five years of clear notice that national policy disfavors these taxes.

(10) There is a general consensus that the federal moratorium is sound policy. 

Congress has passed it twice (1998 and 2001). Even in the ACEC, the moratorium on access taxes was not controversial. And in the nearly ten years 

that I have been working on policies regarding information technology, the 

Internet, economic growth, electronic commerce and state and local taxes, 

I have never heard anyone articulate a thoughtful reason for why a panoply of state and local taxes on Internet access would be sound or constructive policy for the people of the United States. 

CONCLUSION

The Internet is the most transforming economic development since the Industrial 

Revolution. Information Technology drove America’s economic boom in the late 

1990s, it has buoyed the economic slowdown, and it will lead our economic resurgence. It created new jobs, increased our National productive and efficiencies in 

every sector of the economy, and generated new wealth in America. Even in rural 

areas long ago ignored by the economic progress in metropolitan areas and bypassed 

by the Nation’s huge investment of public resources on the interstate highway system, small businesses are prospering by selling products worldwide on the Internet 

and American consumers have been able to obtain everything from information and 

educational opportunities to goods and services otherwise beyond their reach. Every 

person on the Advisory Commission on Electronic Commerce recognized that our national economy, U.S. global competitiveness, and American culture depend vitally 

upon nurturing full development of the Internet. 

Most importantly, the Internet and the personal computer have empowered individual people as citizens in a democracy, as consumers, and as entrepreneurs in unprecedented fashion. 

America can embrace these positive developments and promote more of it by keeping taxes and regulatory burdens on Internet access to a minimum, or it can thwart 

them by taxing Internet access. I would urge Congress to keep tolls off the Internet 

superhighway by passing H.R. 49.

19

Mr. CANNON. I’d like to introduce now Mr. Harley Duncan, our 

third witness. He’s the Executive Director of the Federation of Tax 

Administrators and has been that since 1988. Organized in 1937, 

the FTA is an association representing the principal State revenue 

collection agencies in each of the 50 States, the District of Columbia, and New York City. The mission of the Federation is to improve the quality of State tax administration by providing services 

to State tax authorities and administrators. 

Prior to joining the FTA, Mr. Duncan served for 5 years as Secretary of the Kansas Department of Revenue. He also held positions as Assistant Director of the Kansas Division of the Budget, 

with the South Dakota State government, the Advisory Commission on Inter-Governmental Relations, and the National Governors 

Association. 

Mr. Duncan is the author and co-author of a number of articles 

and papers on State and local taxation and public budgeting. He’s 

a frequent speaker at State and local tax conferences and meetings. 

Mr. Duncan holds a bachelor’s degree from South Dakota State 

University and a master of public affairs from the University of 

Texas. 

Mr. Duncan, welcome and thank you for being with us here 

today. 

STATEMENT OF HARLEY T. DUNCAN, EXECUTIVE DIRECTOR, 

FEDERATION OF TAX ADMINISTRATORS 

Mr. DUNCAN. Thank you very much, Mr. Chairman. It’s a pleasure to be here. 

The policies of our Federation with respect to H.R. 49 or the matters covered by H.R. 49 are laid out in the statement before you 

and were adopted by our Members at the annual meeting in 2001. 

I think I’d like to make five points relatively quickly this morning 

with respect to this. 

The first is that while we will raise questions about H.R. 49 and 

continuation of the Internet Tax Nondiscrimination Act, that 

should not be interpreted, I think, as an intent to impede the deployment of the Internet or to deny anyone the access to Internet 

services. That’s certainly not the intent of the Federation of Tax 

Administrators or State governments generally. States have made 

significant efforts in trying to aid the deployment of the Internet 

services and tax administrators are probably the leaders in bringing e-Government services, so that’s certainly not our intent. 

The second point I would make is that raising questions about 

H.R. 49 shouldn’t be interpreted that we are in some fashion supportive of multiple and discriminatory taxes on electronic commerce 

or on any sort of commerce. The questions that we’d raise are simply, is this the correct vehicle for doing it and is it the most effective vehicle for doing it, and more importantly, does the bill itself 

provide anything that the Constitution doesn’t already provide in 

terms of preventing multiple and discriminatory taxes, because 

that, in our estimation, is where the most effective protections and 

the appropriate constraints on State and local taxation exist, is in 

the U.S. Constitution. 

The third point that we would make is this, that as the Committee considers extending the Internet Tax Nondiscrimination Act, 

20

it’s an excellent point in time to go back and examine whether the 

purposes that gave rise to the act still exist and whether the act 

is appropriately meeting those particular purposes. If you recall, in 

1998, there were, as I recall, two reasons given for the need to pass 

the Internet Tax Freedom Act. The first was that the Internet was 

what was commonly referred to as a fledgling industry at the time 

and that it needed time to grow up before it would be considered 

a part of mainstream commerce and perhaps subject to the impositions of taxes that other forms of commerce are. I think the time 

that in the past 5 years has proved that the Internet is not a fledgling industry. While it is subject to considerable change, it continues to do well and, in fact, outperformed normal means of commerce. 

The second reason given was that States would rush to impose 

a variety of multiple and discriminatory and other types of taxes 

on the Internet. I think that was misplaced and misfounded at the 

time, and one piece of evidence would be that, to my knowledge, 

there’s been no single case before a court where the Internet Tax 

Freedom Act or the Nondiscrimination Act has been raised as a defense to something that the States are involved in. 

As a second matter, I would urge you, if you do extend the act, 

to do so for a temporary purpose, for a period, because there are 

issues that will remain that should be examined periodically if the 

act is put in place. 

The fourth point that I’d make and the one that I’d like you to 

pay particular attention to is the need to examine the definition of 

Internet access that is in the bill and to consider changes to it. 

There are really three issues that are created by the current definition of Internet access. 

The first is, it discriminates among certain types of providers of 

Internet access. It said the current definition specifically excludes 

telecommunication services from Internet access and that then 

causes certain telecommunication providers that bundle access in 

telecommunication service providers and treats them differently 

than those who would provide Internet service using normal telecommunications. 

The second thing it does is to discriminate against people that 

provide content without access because the access definition is so 

broad that a wide range of content can be bundled with it and receive the tax exemption. 

The third problem with the current definition is it allows for an 

erosion, an unintended erosion, of State tax bases because of the 

content that can be bundled with the access and, therefore, considered exempt. 

The fourth point I’d make to you is that H.R. 49—or the last 

point, I’m sorry, is that H.R. 49 would repeal the grandfather 

clause that was originally enacted in 1998. We would oppose that 

and encourage you not to do that. Those States, it would disrupt 

the revenue system of those nine States, including States such as 

Texas, Wisconsin, North Dakota, South Dakota, Tennessee, and 

several others. It would constitute an unfunded intergovernmental 

mandate, and there’s been no showing that the tax on access either 

reduces the utilization of access services or creates any administraVerDate 0ct 09 2002 15:49 May 28, 2003 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6601 G:\WORK\COMM\040103\86182.000 HJUD1 PsN: 86182
21

tive burden and we would encourage you not to repeal that grandfather originally contained in the bill in 1998. Thank you. 

Mr. CANNON. Thank you, Mr. Duncan. We appreciate that, those 

comments. 

[The prepared statement of Mr. Duncan follows:]

PREPARED STATEMENT OF HARLEY T. DUNCAN

My name is Harley T. Duncan. I am the Executive Director of the Federation of 

Tax Administrators. The Federation is an association of the principal tax administration agencies in each of the 50 states, the District of Columbia and New York 

City. We are headquartered in Washington, D.C. 

The policies of the Federation are established through resolutions adopted by the 

members at the Annual Meeting or by action of the 18-member Board of Trustees. 

The Federation has adopted two policy statements relevant to the issue at hand:

• Resolution 18 adopted in 2001 is a general policy statement that urges the 

Congress and U.S. government agencies to refrain from enacting measures, 

taking actions or making decisions which would abrogate, disrupt or otherwise restrict states from imposing taxes that are otherwise lawful under the 

U.S. Constitution or from effectively administering those taxes.

• Resolution 22 adopted in 2001 states that if Congress determines to extend 

the provisions of the Internet Tax Freedom Act, it should do so in accord with 

the following parameters:

Æ The Act should be extended for not more than five years to insure that its 

impact on state and local revenues is examined periodically and that unintended consequences are not occurring.

Æ Any extension of the Act should preserve the ability of those states currently imposing a tax on charges for Internet access to continue to do so 

if they so choose.

Æ The definition of Internet access contained in the Act should be rewritten 

in such a manner that it does not create avenues to bundle otherwise taxable content, information and services into a single package of Internet access in a manner that would prevent states and localities from imposing 

their taxes on the otherwise taxable content, information and services.

Æ The definition of discriminatory taxes contained in the bill should be 

amended to insure that it does not create a situation in which a seller could 

avoid a tax collection obligation in a state even though the seller has a substantial nexus in the state. 

EXTENSION OF THE ACT

As a general proposition, FTA opposes federal legislation that preempts the authority of states to structure and administer their taxes within the confines of the 

U.S. Constitution unless there is a compelling showing of unfairness, compliance or 

economic harm from the manner in which that power is being exercised. The Internet Tax Freedom Act was originally passed in 1998 (and renamed the Internet Tax 

Nondiscrimination Act and extended for two years in 2001) to provide the new electronic commerce industry with short-term protection from what some thought could 

become a burdensome and discriminatory system of state and local taxation. Any 

consideration of extending the Act should be accompanied with a re-examination of 

this stated purpose. 

We would submit that the ‘‘fledgling industry’’ argument is no longer relevant. 

Electronic commerce is becoming a mature and important part of the U.S. and international economy. In particular, the continued prohibition on the imposition of new 

taxes on charges for Internet access should be evaluated. In our estimation, there 

has been no showing that the purchase or supply of Internet access services in the 

states that tax the services has been adversely affected. Neither has there been a 

showing of an undue compliance burden on Internet service providers that would 

justify the preemption. Continuing the preemption simply provides a special position 

for this particular communications medium. As discussed below, the preemption is 

beginning to discriminate among firms in the Internet access and communications 

sector. 

We also believe it is clear that concerns about states rushing to impose burdensome taxes on the electronic commerce sector were misplaced and unfounded. While 

states have had to determine the manner in which existing taxes should be applied 

to Internet services and electronic commerce, there was no headlong rush to devise 

22

new schemes of taxation that in some fashion targeted the electronic commerce industry. To the contrary, states have worked diligently to provide incentives to the 

Internet service industry and to consumers in efforts to increase access to Internet 

services. To my knowledge, the Internet Tax Nondiscrimination has not been used 

as a defense in a single reported case involving the application of state taxes to electronic commerce. 

In short, we would urge the Committee to examine closely the continued need for 

a federal law governing the subject matter covered by the Internet Tax Nondiscrimination Act. 

GRANDFATHER CLAUSE

H.R. 49 would repeal the ‘‘grandfather clause’’ in the current Internet Tax Moratorium that preserves state taxes on charges for Internet access that were in place 

in 1998 when the original Internet Tax Freedom Act was enacted. The Federation 

opposes a repeal of the grandfather clause.

• According to our records, nine states currently impose taxes that are protected—New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, 

Tennessee, Texas, Washington and Wisconsin. Repealing the grandfather 

would disrupt the revenue stream of these states at a time when nearly every 

state is struggling to balance its budget. Repealing the preemption would constitute an intergovernmental mandate under the Unfunded Mandate Reform 

Act.

Æ The taxation of charges for Internet access is a legitimate exercise of state 

taxing authority and should not be preempted. In most of those states currently taxing access, the tax is consistent with their overall policy of taxing 

most (or at least a large number of) service transactions. The tax on access 

charges can in no way be considered a ‘‘money grab’’ by the states, but is 

instead a simple extension of their existing tax policy.

Æ There is no showing that the imposition of taxes on charges for Internet 

access has affected the growth of electronic commerce or the Internet industry. Neither is there any showing that administration of the tax on charges 

for Internet access has imposed undue burdens on the industry or has in 

any other way proved to be incapable of being administered.

Æ The grandfather clause was part of the terms of the original Internet Tax 

Freedom Act. If the other parts of the Act are to be continued, there has 

been no demonstration of why the grandfather clause should not be continued. 

DEFINITION OF INTERNET ACCESS

The current definition of Internet access has not kept pace with the manner 

in which the electronic commerce has evolved and discriminates among various 

types of Internet service providers. It should be amended to insure equity among 

various types of access providers and among types of communications services. It 

should also be amended so as to avoid an unintended erosion of state tax bases.

• The Act’s current definition of Internet access is ‘‘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.’’

• The current definition effectively allows a broad range of content and other 

services to be bundled with Internet access and potentially be considered as 

protected under the prohibition on the imposition of new taxes on Internet access. The range of content and service that can be bundled with Internet access is virtually unlimited. It includes all manner of printed material, video 

material, voice communications and other services.

• By excluding ‘‘telecommunications services’’ from the definition of access, the 

act discriminates against some telecommunications services providers (particularly wireless providers) that provide access as part of a package of telecommunications services and therefore cannot exclude a portion of the total 

charge from taxation.

• Firms that are providing content, voice, video, or other services that compete 

with those provided by Internet service providers will face a discriminatory 

and unfair competitive situation if those services when provided as part of 

Internet access are protected from state and local taxation, but services provided outside a bundle that includes access are subject to state and local 

23

taxes. The convergence of technologies, the advent of services such as Internet 

telephony, and the consolidation in the communications industry suggest that 

this discrimination will be a real issues ‘‘sooner rather than later.’’

• The current definition allows a growing proportion of the state and local tax 

base to be effectively put ‘‘off limits’’ by federal legislation with such a broad 

definition of Internet access. We do not believe this was the intent of Congress when it originally passed the Internet Tax Freedom Act three years ago.

• By attempting to provide protection to one industry and one type of service 

provider, Congress has necessarily established a regime that discriminates 

against similar service providers that are not also Internet access providers. 

This was perhaps not a major issue when the Act was originally passed 41⁄2

years ago. However, with the advent of advanced forms of access, the convergence of technologies and the realignment of businesses within the communications and entertainment industry, the definition of Internet access is on 

the cusp of creating serious discrimination and base erosion issues.

• Congress must in any consideration of extending the Internet Tax Nondiscrimination Act reconsider the definition of Internet access to insure that 

it does not discriminate and does create consequences beyond what was intended. 

SUGGESTED DEFINITION

The issue then is how to define Internet access in a fashion that achieves the Congressional goal of protecting access to the medium of the Internet without being so 

broad as to create the inequities and distortions described above by including all the 

services and products that may be accessed via the Internet. This is a difficult task.

• One approach for Congress to consider is a variation of the approach taken 

by the state of Texas, which exempts up to $25 of a bill for Internet access 

(under current law.) We would suggest deeming a set dollar amount of each 

bill from an Internet service provider to be attributable to exempt Internet 

access, while the rest of the bill is deemed to be attributable to other services 

that may or may not be taxable, depending on the laws of the specific state. 

Possible language for such a provision is available on request.

• The only other workable alternative would be to require Internet service providers to state separately the charges for each particular service sold as part 

of the access package. We believe such an approach could be burdensome for 

the providers and lead to a number of disputes regarding the manner in 

which the charges are disaggregated.

• If Congress is not comfortable adopting the ‘‘modified Texas approach’’ outlined above, we would strongly encourage it to establish at the outset some 

mechanism to examine and respond to the issues of bundling and convergence. It should, at a minimum, commission an examination of the nature of 

the issue, expected near-term technological developments, and alternatives for 

addressing the issue. 

DEFINITION OF DISCRIMINATORY TAXES

The definition of discriminatory taxes contained in the Act provides that certain 

activities when performed by an Internet service provider on behalf of a retailer will 

not be considered in determining substantial nexus for tax collection purposes. Any 

extension of the moratorium should examine these issues carefully.

• The provisions were intended to insure that merely accessing products of an 

out-of-state seller via an in-state service provider would not be considered to 

create nexus for the out-of-state seller. When enacted as part of a short-term 

moratorium, these provisions were not considered problematic.

• The definition, when read in conjunction with other provisions, could be interpreted to allow a seller to avoid a collection obligation even though it has substantial activities and presence in the state. As the electronic commerce industry has evolved, the potential for this issue to arise has grown.

• If the Internet Tax Nondiscrimination Act is to be extended, however, these 

provisions should be examined carefully. 

CONCLUSION

• Any extension of the Internet Tax Nondiscrimination should be accompanied 

by a serious examination of its actual consequences and an assessment of 

whether it is needed in the future.

24

• There has been no showing of a reason to repeal the grandfather clause. Any 

extension should preserve the right of those affected states to continue to impose taxes on charges for Internet access.

• Any extension of the Internet Tax Nondiscrimination Act should include 

amendments to the definition of Internet access that will insure that it is 

nondiscriminatory among types of service and content providers and will not 

unintentionally erode state and local tax bases.

• Any extension of the Internet Tax Nondiscrimination Act should also examine 

the definition of discriminatory tax to insure that it does not have unintended 

consequences.

Mr. CANNON. Our final witness is Mr. Harris Miller, President 

of the Information Technology Association of America. The ITAA is 

the largest and oldest information technology trade association, 

representing over 400 leading software services, Internet, telecommunications, e-commerce, and systems integration companies. 

Mr. Miller leads the ITAA’s public policy focus on subjects critical 

to the IT industry and has spoken and published widely on a variety of high-tech issues. Mr. Miller is also President of the World 

Information Technology and Services Alliance, an association of associations representing 50 high-tech trade groups around the 

world. In addition, Mr. Miller was recently appointed to the Virginia Research and Technology Advisory Commission. 

Prior to joining ITAA, Mr. Miller gained broad public policy experience through his leadership roles in Government relations practices, specializing in the areas of immigration, high technology, and 

banking. Mr. Miller also has many years of prior Government service, including positions as the Legislative Director to former Senator John Durkin, Deputy Director of Congressional Relations at 

the U.S. Office of Personnel Management, and as a Legislative Assistant to the Chairman of the Subcommittee on Immigration, Refugees, and International Law of the House Judiciary Committee, 

the Honorable Ron Mazzoli. 

Mr. Miller holds an undergraduate degree from the University of 

Pittsburgh and a graduate degree from Yale University. Mr. Miller, 

thank you for being here with us today. 

STATEMENT OF HARRIS N. MILLER, PRESIDENT, 

INFORMATION TECHNOLOGY ASSOCIATION OF AMERICA 

Mr. MILLER. Thank you, Mr. Chairman and Members of the Subcommittee. You said at the beginning you had a very distinguished 

panel today and I was trying to tell that to my wife last night, and 

she said, ‘‘I’m sure that ’my distinguished witnesses’ were probably 

one less than you think.’’ [Laughter.] 

Mr. MILLER. Nevertheless, I do appreciate the honor to be here 

with Secretary Kemp, Mr. Gilmore, and Mr. Duncan to explore this 

important legislation, and it’s a great honor to be here with nowChairman Cox for his leadership, along with Senator Wyden, as 

you pointed out, Mr. Chairman, on this bipartisan legislation, H.R. 

49, which ITAA and our 400 member companies strongly support. 

Certainly, our major concern is that the Internet not become the 

tax pinata of 2003, that institutions around the country, State and 

local governments desperate for new revenue suddenly turn and 

say, how can we figure out some new sources of revenue, and even 

though Mr. Duncan tried to reassure the Subcommittee that there 

25

aren’t people out there looking to tax the Internet by changing definitions or changing laws. 

In fact, just last week, we had—the association and another association had to file an amicus brief in Tennessee where a State tax 

official was trying to get a convoluted interpretation to a longstanding legislative interpretation to begin to tax Internet access 

charges. And so this is not a theoretical problem, Mr. Chairman. 

This is a real problem. 

I’d also point out that Mr. Duncan said there had not been a 

rush to legislation. Well, I can tell you, in my 8 years at ITAA, 

probably no period was busier than the period right before the first 

Internet Tax Freedom Act was passed in terms of our rushing 

around the country exactly because when Mr. Cox and others took 

leadership on this issue, there were efforts throughout the country 

at the State level and the local level to try to get in under the wire 

and pass new taxes on the Internet or Internet access. 

And so I am afraid that if this legislation is allowed to expire, 

in fact, we will have another rush, and I think Governor Gilmore 

was exactly right. Now is the time to move. Now is the time to 

make it permanent. 

Of course, the good news is, as everyone has said, the Internet 

is continuing to expand. Now 150 million Americans—150 million 

Americans—have access to the Internet. Also, as Secretary Kemp 

said, the Internet is one of the crucial drivers of economic activity. 

The U.S. Department of Commerce says that fully one-third of all 

real economic growth in this country over the period 1995 to 2000 

took place because of information, technology, and even though IT 

businesses represent only 7 percent of all businesses in this country, 28 percent of real economic growth in the late 1990’s and into 

2001 occurred because of the information technology industry. 

Given these numbers, we don’t need a crystal ball to understand 

how important the growth of information technology and the Internet is. All that we’re saying in this legislation and all that Mr. Cox 

and the 88 other sponsors of this legislation in the House are saying is, the Internet does not deserve special treatment, but neither 

should it be an object of special discrimination. 

Again, as has been said by all the witnesses and by you, Mr. 

Chairman, and by Mr. Cox, all we are talking about is ending permanently discriminatory multiple taxes, which even Mr. Duncan 

admitted is not something his organization advocated. Now, there’s 

some ambiguity whether this is covered in the law, but if there’s 

ambiguity, I would suggest passage of this legislation, as Mr. Cox 

has drafted the bill, making it permanent, is exactly the solution 

we need. 

Secondly, this issue of imposing access to the Internet. As Governor Gilmore said quite clearly, new taxes are only going to hurt 

those who can least afford the ability to access the Internet. Those 

are the people who have not yet crossed that digital divide and 

taken advantage of the digital opportunity of the Internet, and 

those were exactly the people that this Congress should be encouraging to get on the Internet. 

In fact, every day, Members of Congress are trying to do that, especially in broadband. Again, we have widespread support, bipartisan support in Congress, for higher adoption rates of broadband 

26

access. If we start seeing States and localities trying to impose new 

taxes, increasing the cost of Internet access and broadband access, 

we are going to see the rate of broadband adoption slow rather 

than increase, and will be in the ironic position of Congress, on the 

one hand, saying we want to promote broadband adoption because 

it is such an economic driver, because it does give people access to 

e-health and e-education and e-Government, and on the other hand 

saying, by the way, in the process of doing so, we’re going to make 

it more expensive for you to do that. That is exactly at the heart 

of the Cox-Wyden legislation, H.R. 49, and another reason why this 

legislation must be passed. 

Another point that Mr. Duncan made which I would like to respond to is that, somehow, the way the Internet access definition 

is included in this legislation would be discriminatory among certain types of companies. Well, I represent all types of companies, 

content companies, Internet service providers, telecommunications 

firms, and believe me, if they thought there were discriminatory 

problems in this language, they would be up here speaking to the 

Subcommittee if they though there were real problems. So with all 

due respect to the previous witness’s testimony, if there were really 

such a problem as he has tried to posit to this Subcommittee, then 

I think you would be hearing from the companies themselves who 

felt they were being discriminated against rather than just hearing 

from another witness. 

So in sum, this is a critical legislation to drive more people onto 

the Internet. It’s critical to prohibit permanently both the Internet 

access charges and the multiple discriminatory taxes, and ITAA 

and its members stand ready to work with you, Mr. Chairman, and 

the sponsors of this legislation to see Congress pass this legislation 

as quickly as possible. Thank you very much. 

Mr. CANNON. Thank you, Mr. Miller. 

[The prepared statement of Mr. Miller follows:]

PREPARED STATEMENT OF HARRIS N. MILLER

INTRODUCTION

I am Harris N. Miller, President of the Information Technology Association of 

America (ITAA), representing over 400 companies in the information technology (IT) 

industry—the enablers of the information economy. Our members are located in 

every state in the United States, and range from the smallest IT start-ups to industry leaders in the custom software, services, systems integration, telecommunications, Internet, hardware, and computer consulting fields. Together they account 

for over 90% of all IT sales in the US. These firms are listed on the ITAA website 

at www.itaa.org. 

ITAA appreciates the opportunity to express our Association’s strong support for 

the legislation being considered today, H.R. 49, the Internet Tax Nondiscrimination 

Act, to extend permanently the tax moratorium on Internet access services and, 

from a tax fairness perspective, to preserve a level playing field for companies involved in electronic commerce. I commend the Subcommittee for holding this hearing today because much is riding on your deliberations. And I commend Congressman Christopher Cox (R-CA) and Senator Ron Wyden (D-OR) for their continued 

leadership in this area. 

The good news is that the Internet is strong and growing stronger. Over 150 million people in the United States use the Internet, a number that has tripled since 

1997. According to the World Information Technology and Services Alliance and 

IDC, Internet commerce per capita in the U.S. rose from $295 in 1999 to $983 in 

27

1Digital Planet 2002, the Global Information Economy, February 2002

2 Remarks by Bruce P. Mehlman , Assistant Secretary for Technology Policy, United States 

Department of Commerce, April, 2002 3 U.S. Department of Commerce, Bureau of Labor Statistics recent data, www.bls.gov 4 U.S. Department of Commerce, Economics and Statistics Administration, The Digital Economy 2002

2001.1 Over 600 million around the world now access the Internet, more than twice 

the number just two years ago. 

The bad news is that the tech sector has been rocked in the past two years and 

Internet commerce is not growing nearly as fast as anyone had predicted, with 

dotcoms and telecoms at the leading edge of a downward plunge in IT spending 

growth and capital investment. In fact, most of the analysis of Internet growth from 

years ago showed predictions that even then were laughable, and now are just clearly horribly wrong. Double-digit increases in business spending on IT have been cut 

to single digits and even gone negative in some customer sectors. CEOs and CFOs 

are taking a far more cautious approach to new system investments. Technology refreshment cycles are being stretched over longer periods. And the pressure to look 

overseas for better labor rates and fatter margins is growing. 

Why should our lawmakers care so much about the health of the IT industry? The 

IT industry has contributed to U.S. economic growth in critical ways. According to 

the Department of Commerce, the IT industry accounts for a full one-third of all 

real economic growth and half of all productivity growth between 1995 and 1999. 

IT has helped the economy contain inflation with average annual computer price declines of 26 percent between 1995 and 1999. During each of 

the previous eight recessions, productivity growth turned negative. During the 

economic downturn of 2001, productivity growth remained robust at about 2%, 

jumping 5.2% in the 4th quarter of 2001 2 and continuing at 5.1% in third quarter 

2002, in large part due to the contribution of IT.3 And, while IT-producing industries represent only 7% of all businesses, they accounted for roughly 28% of overall 

real economic growth between 1996–2000.4

Given these numbers, we do not need a crystal ball to predict that the future of 

the IT industry, the Internet and the U.S. economy overall are linked—and that the 

steps you take in terms of Internet taxation will have far reaching consequences for 

the American people. 

My message is simple and straightforward. The Internet does not deserve carve 

outs or special treatment. Neither does it deserve to become the tax pin ̃ ata of 2003, 

hit by every revenue starved taxing jurisdiction in the country. 

ITAA believes the Internet tax moratorium should be made permanent because 

it promotes across the board fairness, not special advantages for one group over another. Contrary to popular belief, the moratorium does not affect the ability of states 

to collect sales and use taxes. The Moratorium prohibits states 1) from imposing 

multiple and discriminatory taxes on electronic commerce and 2) from imposing taxes 

on Internet access. 

So, using this same logic, let me partition my arguments into two groups: fairness 

and access. 

If Congress does not act, the situation will revert to where it was years ago where 

different rules could apply based only on either the means of delivery of the product 

(electronic instead of tangible) or based on the means in which an order is placed 

(via an Internet Web site instead of by calling a 1–800 number or even over the 

counter). For instance, states would be free to levy discriminatory taxes on the online delivery of goods, such as ‘‘newspapers,’’ which are explicitly exempt from sales 

and use taxes if delivered over-the-counter, just as they started to do in the years 

before the original Act was put in place. 

Allowing the moratorium to lapse will also set the stage for discrimination in 

terms of delivery mode. Currently, out of state sales conducted by 800 number, mail 

order or electronic commerce are not subject to mandatory collection of sales tax by 

the merchant because of Supreme Court decisions. Rather the consumer is obligated 

to remit the same amount of sales tax directly to the state of the product’s use. 

Changing standards for the Internet, which could happen if the moratorium is not 

extended, makes no sense and is not fair. To be clear, I am saying that any move 

to impose taxes must be done in a manner that is fair to all parties, regardless of 

business model or delivery mode. 

So how do we accomplish fairness? First, pass the Constitution’s test for moving 

forward. Supporting the view of the U.S. Supreme Court, ITAA believes that the 

states must simplify their tax systems and provide bright line business activity tax 

nexus standards before seeking the authority to require remote sellers to collect 

sales tax on their behalf. 

28

Unfortunately, idle hands and lapsed tax moratoria are apt to become the devil’s 

work. If H.R. 49 is not enacted to extend the moratorium, some state lawmakers 

could seize the opportunity to generate tax revenues with new laws that appear on 

their face to remedy false disparities between online and offline commerce. These 

laws could be challenged in the courts, but that would be a lengthy, confusing, and 

unnecessary process. Recent legislative proposals, for instance, would have allowed 

a ‘‘tax first, simplify later’’ approach. 

This approach does not pass Constitutional muster. Any attempt by the states to 

overturn the Quill decision and the Commerce Clause proscriptions against undue 

burdens on interstate commerce by means of an act of Congress requires a rebalancing of the new authority. No greater disaster could evolve in this debate than 

for a mandatory duty to collect sales tax to be imposed on out-of-state merchants 

before the states have simplified their sales and use tax provisions in a uniform 

manner. The current balance of power would be upset if states were allowed to require out-of-state merchants with no physical contacts in the state to collect sales 

tax in the state before the states simplify their tax systems and Congress and the 

Supreme Court deem the simplification sufficient to allow this authority. 

States must simplify first, and then seek Congressional approval in order to obtain expanded taxing authority. In the interim, keep the tax field level for businesses that do not have nexus and, therefore, tax collection responsibilities. 

A final note on fairness: States do have the ability to, and in fact do, tax remote 

commerce. This power to tax is called the use tax. Sales made in a state by a remote 

vendor trigger a use tax obligation on the purchaser, rather than an obligation on 

the remote vendor, to collect and remit a sales tax. Again, states have the authority 

to collect the use tax from its residents, although it is admittedly a difficult tax to 

widely enforce. In fact, use taxes are politically unpopular, technologically challenging to administer, and jurisdictionally messy to enforce. Not surprisingly, therefore, states rarely enforce their own mechanisms. This is less—not more—reason to 

shift the burden to online merchants. 

The second key reason ITAA supports H.R. 49 is because it eliminates the opportunity for states to tax Internet access. Let me be clear what we are talking about 

in this case. We are talking about stopping states from taxing the right to access 

the information superhighway, not sales taxes on goods or services purchased via 

the Internet. I emphasize this distinction because too often insufficient attention is 

paid to these two different ways of ‘‘taxing the Internet.’’

Taxing Internet access is bad public policy for a variety of reasons:

• Although doing so effectively raises the costs for all income levels, it would 

inhibit Internet use by those least able to pay, thus hurting efforts to bring 

Digital Opportunity to all Americans, regardless of income.

• Internet access is what is referred to as an enhanced information service, 

built on top of existing telecommunications infrastructure, a key distinction 

long recognized by the Federal Communications Commission. Internet Service 

Providers and the consumers that use them already pay taxes for their use 

of telecommunications services. For the consumer, those taxes paid by their 

ISP are buried in the fees they pay the ISP. Taxing Internet access would 

force consumers to pay taxes twice—once for the basic telecommunications 

service and once for the enhanced information service.

• By taxing access and thereby raising the cost of Internet service, lawmakers 

risk suppressing demand for broadband and network-enabled innovations at 

the edge of the network. ITAA believes, and this view is widely shared in 

Congress and in the Administration, that every dollar invested in broadband 

use delivers a substantial contribution to the economy, expressed in terms of 

new capital spending, productivity gains, next generation products and services, new business models and employment. It would be ironic indeed if this 

Congress, which is rightly so focused on expanding broadband usage in our 

country, which lags well behind other countries such as Korea, would allow 

the creation of a double taxation system that would inhibit broadband adoption.

As it should be, the attention of most Americans today is on the War in Iraq and 

homeland defense. In the midst of these headline-grabbing events, we must not lose 

sight of the fact that the U.S. economy must be defended. Part of this strategy must 

involve the digital economy and the threats that it faces from multiple and conflicting taxes, excessive overhead burdens, jurisdictional bedlam, and discrimination. 

By passing the Internet Tax Nondiscrimination Act, Congress has the opportunity 

to nurture the nation’s high tech future while preserving a level playing field for 

business competitors and tax fairness for consumers. 

29

We urge you to do so. Thank you very much. 

ABOUT ITAA

The Information Technology Association of America (ITAA) provides global public 

policy, business networking, and national leadership to promote the continued rapid 

growth of the IT industry. ITAA consists of over 400 corporate members throughout 

the U.S., and a global network of 49 countries’ IT associations. The Association 

plays the leading role in issues of IT industry concern including information security, taxes and finance policy, digital intellectual property protection, telecommunications competition, workforce and education, immigration, online privacy and consumer protection, government IT procurement, human resources and e-commerce 

policy. ITAA members range from the smallest IT start-ups to industry leaders in 

the Internet, software, IT services, ASP, digital content, systems integration, telecommunications, and enterprise solution fields. For more information visit 

www.itaa.org.

Mr. CANNON. We’d like to move to a period of questions, and 

again, we’ll be very careful about the clock. 

If I might ask all three of you the same question to begin. We 

live in a fairly complex environment where any CEO, especially of 

a high-tech company, who is persecuted and troubled by many 

things today, has a complicated analysis for anything he does. But 

it seems to me that clarity on this issue would have a disproportionate effect on the robustness or the aggressiveness of high-tech 

communities. In other words, recognizing the Government is going 

to get out of the way of innovation on the Internet, at least in this 

particular, would seem to me to be a fairly substantial element in 

the decision making of most CEOs of the many, many high-tech 

companies we have in America. 

Would the three of you respond to that, starting, Mr. Duncan, if 

you wouldn’t mind, with you. 

Mr. DUNCAN. Certainty, of course, always adds and improves the 

ability of one to make economic decisions. I think if we’re talking—

if we’re talking specifically, though, however, about the potential 

for taxes on charges for Internet access, I think that the role that 

might play in the decision of a CEO in a high-tech firm is relatively 

modest. That’s that the charge—the tax would be on the charge 

that goes to the consumer and that’s paid by the consumer, and 

while it raises the overall cost of service, the impact on his decisions is relatively modest. 

Mr. CANNON. Would it not—take both pieces of this, which is the 

access charge and also the nondiscrimination and nonduplicative 

charges. Don’t you think that would have an effect on most CEOs 

as they’re looking at how they’re going to perform and the environment in which other companies are also performing? 

Mr. DUNCAN. The nondiscrimination piece, I think, really would 

have two points to make. Most of the pieces and descriptions of 

what constitutes a discriminatory tax, again, are related to consumer taxes and the potential of products that might be purchased 

using e-commerce services. So I think the impact there is relatively 

modest, and as I tried to point out earlier, the confines and constraints imposed by the U.S. Constitution currently provide——

Mr. CANNON. Let me just go back to the—isn’t one of the problems here that it’s a little complex and most CEOs don’t want to 

sit down and figure this whole thing out about the difference between the various elements here and giving them clarity—if you 

could answer that briefly, then we’ll shift to the other two. 

30

Mr. DUNCAN. It’s a complex world. To the extent that things can 

be clarified, people make better decisions. 

Mr. CANNON. Thank you. Mr. Miller, would you like to address 

that? 

Mr. MILLER. I agree with you 100 percent, Mr. Chairman, that 

what CEOs are looking for is clarity and certainty. Let’s put yourself in the shoes of an ISP CEO, small ISP. There are several thousand ISPs in this country. We think of only the big ones that we 

see advertised on television, but the reality is the ISP community 

is very diverse and many of them are very small companies. Obviously, having uncertainty about whether or not there are going to 

be Internet access charges makes their business model more difficult, so in their position, you’re 100 percent right on the mark. 

Mr. CANNON. And more difficult to fund. 

Mr. MILLER. Absolutely, more difficult to fund. Similarly, with 

small businesses that are trying to decide whether to go to the 

Internet and sell products over the Internet, as long as they’re concerned about multiple and discriminatory taxes being levied in various jurisdictions around the country, that makes a decision as to 

whether to invest in setting up an expensive website where they’re 

trying to promote themselves on the web that much more difficult. 

So I think Governor Gilmore said it well earlier. The one region 

of the world that’s trying to tax both the Internet access and products on the Internet is Europe, and what we’re finding in Europe 

is low adoption rates of the Internet and low rate of purchases over 

the Internet. So what we see is when you tax this both access and 

sales across the Internet, you discourage use of the Internet rather 

than encourage use of the Internet. 

Mr. CANNON. Thank you. Governor? 

Mr. GILMORE. I think Mr. Miller has put it exactly right, but I 

think that the foreseeability issue is significant. People who wish 

to create tax revenues are very creative people and they’ll think 

about lots of different ways that they can do this and all the different localities and different States and localities are going to try 

to do different things and it’s going to create kind of a mess, frankly, that will be a burden not only on consumers, but on the businesses that are trying to perform the kind of service. They could 

decide that they want to do e-mail message taxation. They could 

decide they could do bits and bytes taxation or webpage taxation, 

online information taxation, you know. And frankly, all this stuff 

has been proposed and nothing stands in between the creativity of 

the taxer and the poor consumer other than H.R. 49. 

Mr. CANNON. I’ll tell you what, it is my experience that a mess 

tends to stand in the way of any kind of investment, that the creativity of taxing agencies, I hope, is only exceeded by the creativity 

of the American people, and I would certainly like to see a clear 

path. 

The Chair now yields 5 minutes to the gentleman from Massachusetts, Mr. Delahunt. 

Mr. DELAHUNT. I thank the Chair for yielding. 

If I was correct, Governor, you indicated that some of those 

States that had benefitted from the grandfather provision in terms 

of the application of access taxes had, in fact, repealed them. Did 

I hear you mention the State of Washington? 

31

Mr. GILMORE. The information that I have is that Tacoma had 

been putting on some additional taxes and that the State of Washington reversed that through some State legislation. 

Mr. DELAHUNT. Okay, and there were other States, I think, that 

you referenced in your opening remarks. 

Mr. GILMORE. Texas and Connecticut, I believe. 

Mr. DELAHUNT. And I think my memory is that the term you 

used is that the trend is in the other direction, in other words, repealing at the State level though existing access taxes to the Internet. And while I can appreciate your concern and that of Mr. Miller 

in terms of the efforts to impose access charges, I think the reality 

is that the evidence indicates otherwise according to your testimony. I mean, obviously, since the moratorium, there has not been 

any additional effort to impose access charges to the Internet. 

Are there any States, and I understand that they have their fiscal concerns right now, and maybe, Mr. Duncan, you can answer 

this question—are there any States that you’re aware of that have 

under consideration, in the event that this moratorium should expire, would impose access taxes on the Internet? Mr. Duncan? 

Mr. DUNCAN. I’m not aware of any that would contemplate doing 

so in the absence of the moratorium, but then, I wouldn’t have perfect knowledge about that, either. I’m not aware that there are. 

You’re correct. There have been—Connecticut is one State that repealed its tax on access charges. 

Mr. DELAHUNT. Mr. Miller, you look like you want to respond. 

Mr. MILLER. Mr. Delahunt, my hypothesis is that that was then 

and this is now, by which I mean 3 years ago when a lot of these 

repeal decisions were made, States and localities were relatively 

flush because of the strong State economy. As we know today, unfortunately, 45 out of 50 States, I believe, are running deficits, 

some of them huge deficits, and so tax commissioners and legislators, as Governor Gilmore and Secretary Kemp indicated, are trying to be very creative, and I understand that. They have to figure 

out new sources of revenue. 

Again, we have the situation in Tennessee that we’re involved in 

with this amicus brief where this issue has been debated over and 

over again——

Mr. DELAHUNT. But that’s on the definition issue, is that correct? 

Mr. MILLER. But Tennessee was one of the States exempted. 

They kind of quieted down for a couple of years, but now, because 

they’re facing a State fiscal crisis, they’re back revisiting the issue 

again. And again, it’s not that I don’t understand the pressures 

these States face, but the reality—— Mr. DELAHUNT. Can sympathize with them, obviously. 

Mr. MILLER. Obviously, it’s a problem that they’re having. But to 

turn to the Internet access and make Tennessee as one of those 

States that would suddenly have Internet access charges, I think 

is unfair to the consumers in Tennessee. 

Mr. DELAHUNT. Governor Gilmore, there are a number of governors that don’t share your particular position on this issue. 

That’s a fair statement. 

Mr. GILMORE. Yes. Many have been defeated. [Laughter.] 

Mr. DELAHUNT. Which ones have been defeated, Governor? Were 

they Republican or Democratic governors that were defeated? 

32

Mr. GILMORE. Oh, no, bad tax policy extends to both parties, I 

can assure you. [Laughter.] 

Mr. DELAHUNT. I’ll accept that. 

Mr. GILMORE. You know, I guess my kind of—if I can add anything to the discussion, Mr. Delahunt, it would be that if there’s 

a sense that the trend, in fact, is against this kind of taxation, and 

the moratorium has been fairly uncontroversial, then there’s just 

no harm in going on and making it permanent. It looks like we’re 

all agreeing here. 

Mr. DELAHUNT. Well I—— Mr. GILMORE. And the grandfather, too. There’s no reason why 

people should clutch to these grandfather clauses if, in fact, the 

trend is away from it. 

Mr. DELAHUNT. I think that’s a valid observation. At the same 

time, really, I think what we’re talking about here is that there are 

many at the State and local level that feel that there is a clear 

nexus, if there isn’t pressure in terms of resolving the sales tax 

issue—that’s really what we’re walking around here—that nothing 

is going to happen. 

Let me put it right out there, and let me start with Mr. Duncan 

and I’d welcome comments from Governor Gilmore and Mr. Miller. 

What’s the progress of the, let me use the acronym, the streamlining project, the SSTP, and what can we look forward to in terms 

of resolution? 

Mr. DUNCAN. First, just one word on the access charge. The issue 

is really the right of State elected officials and legislators to 

choose—legislators and governors to choose whether they want to 

impose the tax on services and whether it’s consistent with their 

policy and it’s not just a matter of which way the tide is going. 

With respect to the streamlined project and the simplification, 

what we had, the point where we are is this, that in November of 

last year, delegates from some 30 States adopted the provisions of 

an interstate sales and use tax agreement that provides for some 

substantial simplification in the manner in which current sales and 

use taxes are administered and collected by the retailers. There are 

provisions about uniform definitions, provisions about safe harbors 

for retailers, provisions imposing the obligation on States to provide information to those retailers. 

We’re now in the process where the implementation of that 

agreement and the detailed changes necessary in State laws are 

being deliberated in State legislatures. To this point, there have 

been six States that have adopted all, or, I would argue, substantially all of the provisions that are necessary to implement that 

agreement. Consideration is being given in probably at least a 

dozen others. We would expect by the end of the summer to meet 

a threshold that is contained in that agreement of having at least 

ten States that have passed it and that those ten States would represent 20 percent of the population of those States with a sales tax. 

So I think it’s really been remarkable progress in terms of getting the detailed law changes necessary at the State level to really 

simplify administration of the sales tax. 

Mr. MILLER. I would agree, Mr. Delahunt. I think that it’s making very strong progress, and recently, Chairman Cox’s State, California, announced that it was going to join as an observer in this 

33

project for the first time, and obviously, given how large California 

is and what a large part of the economy, that’s a major step forward. 

Again, ITAA is not arguing, and the Chairman already said he 

is going to have a separate hearing on sales tax later on, so I’m 

not trying to preempt that hearing, but ITAA is not saying that 

Internet tax should get—Internet products should get favorable 

treatment as opposed to something you order through a 1–800 

number or something you send in something from a mail order 

catalog. All we’re saying and all the legislation is saying is you 

can’t have multiple or discriminatory taxes. 

So if this project moves forward to a successful conclusion and 

deals with the constitutional issues that were raised in the Quill

decision and previous decisions, ITAA has no objection to that solution. But again, this legislation that Mr. Cox has narrowly crafted 

to deal with the issue of Internet access charges and multiple and 

discriminatory taxes, we believe is a separate issue, and as Governor Gilmore said, this Congress could pass that legislation without impacting one way or another the progress made by the State 

simplification effort. 

Mr. CANNON. Did you want to address that, Mr. Gilmore? 

Mr. GILMORE. I concur with Mr. Miller. There will obviously be 

a debate on this subject if they’re ever able to get together any kind 

of critical mass of any kind. It’s interesting that sort of the bar 

they’ve raised is that if 20 percent of the sales tax States could impose a regime even on those who don’t have a sales tax, well, it’s 

just kind of strange, but that’s going to be later. That’s the sales 

tax debate that’s going to be so interesting later on in the year, 

which I will try to avoid if I can. 

But that’s not what we’re talking about today. The issue today 

is a very simple one, and that is a very uncontroversial issue about 

not allowing the access to this by people and citizens all across the 

United States to be burdened, and this is the easy part, so we 

should move ahead. 

Mr. CANNON. Thank you, Governor. 

Mr. Carter, do you seek time? 

Mr. CARTER. Thank you, Mr. Chairman. 

Mr. CANNON. The gentleman is recognized for 5 minutes. 

Mr. CARTER. Thank you. 

Mr. CANNON. Would the gentleman suspend for just a moment? 

We wanted to acknowledge the presence of Mr. Watt, appreciate 

his being here. Thank you. 

Mr. Carter? 

Mr. CARTER. When you’re back home in town hall meetings, you 

have people raise—the bricks-and-mortar people raise the issue 

that we’re creating a tax-free haven by the Internet. Could I get 

comment from all three of you about that? Do you feel that’s a 

valid complaint? 

Mr. MILLER. Mr. Carter, it’s not accurate. I can understand the 

frustration of some small business people, but that is not accurate. 

Again, for over three decades, this issue has been treated through 

the courts and put in a major decision in 1992 which Mr. Gilmore 

referenced in his statement, the so-called Gilmore decision—I 

mean, the so-called Quill decision—v. North Dakota. And it’s not 

34

because of the Internet, it’s because of remote sales, and remote 

sales started back in the 19th century in this country. It’s nothing 

that started suddenly in 1995 when the Internet came along. In 

fact, as much as Internet sales have grown, it is still much smaller 

than sales catalogs and 1–800 numbers. Yes, it’s continuing to 

grow, but it’s still much smaller than that. 

Certainly, for certain purchases individuals make on the Internet, you do pay taxes. For example, if you order an airline ticket 

over the Internet, which is a Federal standardized set of rules for 

taxes, you pay the Federal tax on that ticket, just as if you walked 

into a ticket agent or just as if you bought it from your travel agency or just as if you bought it at the airport. 

So all that the Cox legislation is saying is, no discriminatory 

taxes. If, as Mr. Delahunt’s questions were suggesting, the States 

were able to solve the Supreme Court decision on the Quill decision, then the Internet goods and services sold over the Internet by 

remote sellers, just like 1–800 numbers, just like mail order catalogs, will be taxed. But the Internet didn’t create this. This was 

created by a clear constitutional decision by the Supreme Court 

that unless there were a simplified taxing system so that you didn’t 

have 7,500 different jurisdictions—which is what we have now—

with their own set of rules and regulations, that was unfair to 

small businesses, that was unfair to people trying to sell to customers out of State. 

And so the States have been on notice for a long time that they 

need to solve this problem. As Mr. Duncan said, and I agree, I 

think they’re making some progress now, but it should not be attributed to the Internet in any way, shape, or form. 

Mr. CARTER. Would anyone else like to comment? 

Mr. GILMORE. Well, I think that’s right, Congressman. We don’t 

really ask bricks-and-mortar retailers to inquire of the person 

standing at their cash register what State they’re from and then 

try to look up in some book someplace and apply some tax, and 

then send it up to the main office and send it in. We don’t do that, 

so I think this is a reasonable way to approach it. 

But today, once again, this is really just about sort of a different 

issue, and that’s the question of whether or not we’re going to impose taxes on coming through the door. We don’t impose taxes on 

people going through the door of stores, either, and that’s really 

what—all we’re really talking about here today. 

Mr. DUNCAN. I think the perception of the people back home and 

those people that are main street retailers is very easy to understand. I mean, they’re in the business of trying to sell goods to people and people that sell remotely are trying to sell the same goods 

to those same people. One has a tax collection obligation. The other 

doesn’t have the tax collection obligation for reasons that the Court 

put forth and that you’ve heard. 

I think the message when the States have come and said, we 

ought to remove that differential, is that we’re not going to remove 

it until the States simplify their tax collection. We’ve heard the 

message. We’ve understood it. We spent 3 years now, 2 years-plus, 

working with the retail community to understand where the complexities are and what ought to be done to simplify it, and I think 

35

we’re coming close to the time where we can put a plan of action 

into place and actually have a simplified agreement. 

I agree with the Governor and Mr. Miller. This debate is not 

about that particular issue, but we will be back here with an upand-running simplified system that will say, you told us to go simplify. Here it is and here it works. 

Mr. CARTER. But that’s addressing the sales tax issues we’re 

talking about. 

Mr. DUNCAN. That’s right. 

Mr. MILLER. Also, Mr. Carter, if I could make one more observation—again, I don’t want to preempt the Chairman’s future hearing 

on the sales tax, but I do believe Texas is one of the many States 

that does have a use tax. And, in fact, there was a story last year, 

if I remember, some State official was caught out because he had 

not paid a use tax on a fairly substantial purchase he had made. 

I don’t think he bought it over the Internet, I think he bought it 

through another means of remote seller. 

So at least theoretically, every consumer who buys things in 

most States of the Union, including Virginia, where I live and Governor Gilmore’s State, theoretically, the consumers, if they don’t 

pay a sales tax, are supposed to pay a use tax. Now, the reality 

is that most States don’t educate consumers about this. They don’t 

go out and actively promote it, and, of course, consumers don’t even 

know about it, or if they do, they don’t pay attention to it when 

they file their State income taxes. 

But the reality is, it is supposed to be a level playing field to that 

extent. The Supreme Court did not outlaw use taxes for products 

bought remotely because the theory was the consumer knows what 

the State sales tax is and should be able to pay it. What they outlawed in the Quill decision, they said was unconstitutional, was requiring some small business person in a remote State who doesn’t 

have any physical location in the State where the consumer lives 

to figure out what the State tax rate is or local tax rate is. 

Mr. CARTER. Thank you. Mr. Chairman, I’ll ask unanimous consent to extend my time for 5 minutes so that I can yield to Mr. Cox. 

Mr. CANNON. Without objection, so ordered. 

Mr. CARTER. I yield my time to Mr. Cox. 

Mr. COX. Thank you, Mr. Carter. Thank you, Mr. Chairman. I 

want to again thank our panel for being here today, in particular 

for your focus on what I think is a general area of agreement. Governor Gilmore, Mr. Kemp, Mr. Duncan, and Mr. Miller all told us 

that, representing your own positions or the groups for whom you 

were speaking, there is no proponent on this panel for multiple and 

discriminatory taxation for the Internet. I’d give anybody a chance 

to correct that record if I’ve mistakenly stated it, but that’s my understanding, that there is no proponent of multiple and discriminatory tax on the Internet now or in the future. 

Mr. MILLER. That is correct. 

Mr. COX. And that being the case, I think we have essentially 

licked 90 percent of this battle. I think that there are significant 

differences, certainly between Mr. Duncan, the organization that 

you represent, and others on this panel, concerning the ultimate 

policy choice of how you would tax sales on the Internet and the 

degree to which Congress has a role in this. I know, Mr. Duncan, 

36

that your view is that Congress, or rather more specifically, your 

group’s view, the Federation of Tax Administrators’ view is that 

Congress should not pass any statute that in any way, whether 

we’re exercising our interstate commerce authority or not, that in 

any way interferes with any State’s ability to collect any tax. That 

is how I read Resolution 18 that you’ve adopted, is that correct? 

Mr. DUNCAN. That’s correct. Our general proposition is that the 

Constitution provides the confines and constraints on State and 

local taxation and that absent some compelling showing that that’s 

not working, that Congress should refrain. 

Mr. COX. Now, you don’t suggest that there’s anything unconstitutional about the Internet Tax Freedom Act or the Internet Nondiscrimination Act? You wouldn’t challenge its constitutionality, 

would you? 

Mr. DUNCAN. I’m not challenging it, no. 

Mr. COX. Okay. That’s—so the real question for Congress is 

where should we exercise our interstate commerce authority, and 

the reason that we chose to do so here is not so much the fledgling 

industry argument, but rather two things. First, the pervasiveness 

of the Internet and the degree to which it enables so many different things in so many different ways throughout both the commercial and non-commercial sectors of our economy. It is the most 

essential of essential infrastructures in the information age. 

And second, the degree to which its unique packet-switched architecture subjects it to multiple taxation in ways that we haven’t 

seen with any other goods or services subject to similar tax regimes. 

So we had, prior to the enactment of this legislation, we had at 

least some tax administrators, some witnesses from various States 

claiming that they were going to tax transactions where neither the 

buyer nor the seller was in their State, but the transaction was 

routed through a server located in their State. These are unique 

questions, and it’s for these reasons that Congress decided to occupy this field. 

That leaves us, then, with this question of Internet access taxes 

and particularly the grandfather that you raised, Mr. Duncan. My 

latest information is as follows, that the States that currently tax 

Internet access are North Dakota, South Dakota, Tennessee, Wisconsin, Ohio, and Texas, and, in fact, that CRS—I have conflicting 

reports on this. As of March 2003, CRS tells us that Connecticut 

has no such tax, Iowa has no such tax, even though they did back 

in 1998, that South Carolina has no such tax, that the District of 

Columbia has no such tax. They’ve all gotten rid of theirs since 

1998. 

Let’s see. The last information I have is that AOL, the largest 

ISP in the country, does not collect taxes in any State, suggesting 

that no tax is imposed lawfully on Internet access anywhere in the 

United States of America, the reason being that the original law 

stated that a tax, in order to be grandfathered, had to be generally 

enforced and actually imposed prior to 1998, and, of course, none 

of these States has a statute on the books that taxes Internet access. What they’ve done is they’ve gone back and reinterpreted old 

telecommunications tax laws or something to apply in the future to 

37

Internet taxation, and they weren’t doing this prior to 1998, prior 

to the enactment of the law. 

So, in essence, we have no States in America that have lawfully 

imposed an Internet access tax since the enactment of this moratorium. That’s my understanding. I don’t know if anybody wants to 

comment on that, and I think I’ve run out of time, but I would 

yield to Mr. Coble if I have any time left. 

Mr. MILLER. My only comment would be, Mr. Chairman, we 

agree with you, that there was no legislation passed. It was creative tax administrators coming up, and as I said, we’re fighting 

this battle in Tennessee. 

The second point, again, I think the Subcommittee is very aware 

of it, but it’s probably just worth restating. People who access the 

Internet do pay taxes, Federal, State, and local, because they use 

telecommunications services. The Internet rides on telecommunications services. Access to the Internet for most people is through 

telecommunications services and that does generate revenue for the 

Federal Government, the State government, and local governments. 

So the idea that somehow there is no taxation involved in getting 

access to the Internet is simply untrue. And, in fact, one of the 

items which is driving telecommunications use in this country is, 

in fact, use of the Internet. We’re now having, of course, wireless 

is growing dramatically. The wireless providers are trying to provide through their wireless devices Internet access. Well, the more 

you use wireless, again, every tax bill you get from your wireless 

provider has taxes on it. 

So the idea that there’s no correlation between this expansion of 

the use of the Internet and revenue is simply false. It’s just that 

you cannot, under your legislation, independently have double taxation by taxing Internet access and telecommunications. 

Mr. COX. In fact, the national average of telecommunications access taxes is 18 percent of retail. 

Mr. DUNCAN. I just have to take exception to the statement that 

there’s no lawfully imposed tax on charges for Internet access. I 

think the list of States that you had, we would agree with. We 

would add two others. Washington taxes gross receipts of the Internet service providers under its business and occupation tax, and 

New Hampshire imposes a communications services tax that picks 

up some providers of Internet access. 

The States that impose the sales and use tax, including Wisconsin, Tennessee, North Dakota, South Dakota, New Mexico, have 

done so under their statutes that either, in one of three ways: it 

was considered part of telecommunications, it was considered an 

information service that had been made subject to the tax, or you 

have situations such as in Tennessee—I mean, excuse me, New 

Mexico and South Dakota where all transactions are subject to tax 

regardless of whether they’re a sale of a good or service unless 

they’re specifically exempted. Those States, to my understanding, 

do impose the tax on charges for Internet access. They did so in 

1998. It was known to the providers, and they continued to collect 

them. 

Mr. CANNON. Thank you. Ms. Baldwin? 

Ms. BALDWIN. Thank you, Mr. Chairman. I want to express my 

appreciation to the witnesses for sharing their time and expertise. 

38

I wanted to pursue two lines of inquiry in our brief time. As you 

know, Wisconsin is one of the States that is grandfathered under 

current law and the State taxes Internet access as part of its 5 percent sales tax. It’s my understanding that this tax is applied equally regardless of type of Internet service, cable, DSL, or dial-up. 

Governor Gilmore, you and others have made arguments that the 

ban or moratorium on Internet access taxes has encouraged growth 

in people’s access to the Internet and, conversely, that such taxes 

constitute a barrier to access, and I’m hoping that you might be 

able to provide me with some quantifiable evidence to support that 

contention, and I ask because the evidence that I’ve seen as it relates to my home State of Wisconsin does not support that conclusion. 

Let me share with you today that in 1998, when the moratorium 

was first imposed, according to the U.S. Department of Commerce 

data, 26.2 percent of American households had Internet access, and 

in that same year, Wisconsin had roughly 25.1 percent access, 

which is within the survey’s margin of error. By 2001, access had 

grown to 50.5 percent of American households, and in Wisconsin, 

50.2 percent of Wisconsin households had Internet access. 

And we don’t just have to confine our examination to Wisconsin. 

Some of the other States, North Dakota was below the national average in 1998 despite their access tax. They reached the national 

average by 2001. Tennessee was 5 percent below national average 

in 1998 and has risen to 3 percent below in 2001. And so I’m hoping you’ll be able to address that. 

I want to quickly leap to my second line of inquiry and then let 

you respond. The other point I wanted to make was also raised by 

Mr. Duncan in his testimony and it goes to that definition of Internet access. The definition includes the clause, and I quote, ‘‘access 

to proprietary content information and other services as part of a 

package of services offered to users,’’ and I’m concerned that this 

very broad definition will allow a telecommunications company to 

engage in an inappropriate type of bundling of services with the 

sole purpose of evading appropriate tax under the law. 

I don’t know if this is a plausible example or not, but we’ll ask 

you that question. I’ll give you an example of what I think would 

be plausible. 

Suppose an Internet provider put together a law firm Internet 

service package. The Internet provider as part of the package includes their proprietary content that’s the equivalent of LEXIS/

NEXIS, their own search engine on the U.S. Code, and other content that would be quite expensive if purchased separately. It 

seems to me that bundling these things tax-free would be permitted by this definition, and Mr. Duncan, I wonder if you foresee 

this type of problem or if you have any—and/or if you have any 

suggestion for our Committee in tightening up this definition. 

I don’t know if you want to take it in order, Governor Gilmore? 

Mr. GILMORE. Congresswoman Baldwin, we’ll just have to take a 

look at the good work you’ve done with respect to your statistics 

and information and just take a look at that and make it available. 

We really don’t know, do we, I guess, what the difference is between Wisconsin and, say, Texas or Virginia or Florida. I think 

we’re really trying to look at people out there who are of very limVerDate 0ct 09 2002 15:49 May 28, 2003 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6601 G:\WORK\COMM\040103\86182.000 HJUD1 PsN: 86182
39

ited means, in distressed situations, and we probably ought to look 

at that category of people in Wisconsin and see how it has affected 

them, and the same in Florida and the same in Virginia for a national policy. 

It may be that Wisconsin is of a demographic position to continue 

to grow their access because of the favorable economic situation of 

the individual citizens of Wisconsin. It would not replicate itself in 

States with disadvantaged populations. That’s something, I think, 

that’s reasonable to look at. 

Mr. MILLER. I would just add, Ms. Baldwin, that 94 percent of 

American households have access to telephones, but only 50 percent have access to the Internet. We want to get to 94 percent, and 

I would echo the point that Governor Gilmore made. If adding the 

cost is discouraging people of modest means from gaining access to 

the Internet, and various research has shown that, in fact, cost is 

a major factor in the decision of whether or not to get Internet access, it seems to me Congress wants to be discouraging, making it 

more expensive by adding in access charges. The first 50 percent 

is the easy part, in a sense, upper income and middle income. 

When we get to people of lower socio-economic status, we want to 

make that as inexpensive as possible. 

Ms. BALDWIN. Mr. Duncan? 

Mr. DUNCAN. Just a word here. We’ve heard several times today 

that there’s no desire to provide special treatment to the Internet, 

but a Federal law that prohibits taxes on Internet access is exactly 

that. It is special treatment for the Internet. One could list another 

host of transactions in goods and services that ought to be available to all households and reach the 94 percent level, but those 

probably have tax on them. The question is, are you going to prevent taxes on those at the same time you would Internet access? 

But let me—your bundling question, I think, is exactly on target, 

and that’s one of the points that we’ve tried to raise, is that the 

definition that was devised in 1998 worked then for what we knew 

about Internet access at the time. It’s been five very rapidly changing years in that business and we think that the 1998 definition 

deserves to be revisited, and one of the key issues is exactly this. 

It would be hard to think about a service that couldn’t be bundled in with access and fit within the definition that’s currently in 

the law, whether that’s a data service, a voice service, or a video 

service, and the idea that one could put together, you know, lawyers.net and package access and that package of services, sell it to 

that particular clientele and call it all access and say we can’t 

unbundle it, I think is a very real concern, and that has two issues 

to it. One, it erodes the base of a State that might tax information 

services, and the second is, it discriminates against those that are 

trying to sell those very same content services but not bundling 

with the access, and that’s why we’d argue that you ought to look 

at the definition. 

We have wrapped ourselves around the axle several times trying 

to devise a definition. One approach that we have considered and 

would suggest that’s worth consideration is the Texas approach, 

which says if it’s Internet access, the first, I believe the current law 

is $25, is exempt, basically saying this is some core level of access 

that we’re willing—that that would be exempt in Texas. But if you 

40

get above that, then you must be bundling content. We tax information services, and that part above $25 is considered taxable unless there’s a demonstration that it’s somehow not a taxable information service. 

That has some merit that we would suggest that you look at. 

There are probably other approaches and some other issues beyond 

the content bundling that need to be examined, as well. 

Mr. CANNON. The time of the gentlelady has expired, but Mr. 

Miller, would you like to briefly address that, since he addressed 

the question to all three of you? 

Mr. MILLER. Again, we have today bundled services available 

through many Internet service providers. I think that Ms. Baldwin’s case is an interesting one, but it’s a business-to-business situation. I don’t think any of these are consumers who are interested 

in lawyers.com or LEXIS/NEXIS access. That’s something normally 

that a business or a law firm would be interested in. 

What we’re talking about is average consumers and the kind of 

services that are provided or put together in very simple packages, 

and if that encourages more people to use the Internet, that’s 

something, again, we should be trying to encourage, particularly for 

the have-nots, the other 50 percent of the population who have not 

yet chosen to get on the Internet, which is what we in the IT community are really interested in. 

I’ve already got all the Internet access at my house. I’ve got one, 

my wife’s got one, both kids. The dogs don’t get any. We’re worried 

about the other 50 percent of the population and that’s where our 

future growth is, Mr. Chairman, and we want to make sure that 

that’s as easy and affordable as possible for consumers so we get 

up to the telephone level penetration of our country. 

Mr. CANNON. Thank you, Mr. Miller. 

Does the gentleman from North Carolina seek recognition? 

Mr. WATT. Thank you, Mr. Chairman. 

Mr. CANNON. The gentleman is recognized for 5 minutes. 

Mr. WATT. I appreciate the gentleman recognizing me. I won’t 

take 5 minutes unless Ms. Baldwin needs some of my time. I just 

wanted to thank the witnesses for being here, thank Mr. Delahunt 

for substituting for me and being the Ranking Member today. He 

looks pretty distinguished in that Ranking Member chair, I think. 

[Laughter.] 

Mr. CANNON. With all due respect, not as good as you look. 

[Laughter.] 

Mr. WATT. Well, I don’t want him to get too comfortable. I needed an Internet provider this morning to do my heating and air conditioning services at my house. There’s nothing more frustrating. 

And I would have been prepared to pay tax on it, if I could have 

found such. There’s nothing more frustrating than waiting on people, service providers to come to your house, and you can’t leave. 

Let me just make a couple comments, one comment about your 

access issue, Mr. Miller. In most of the States I’m aware of, telephone access is taxed in some way or another, so to compare this 

to telephone usage really doesn’t seem to me to be that great an 

analogy. People, if they want access, will pay the tax. If they don’t 

want it, they won’t pay the tax, and I think that’s pretty much the 

case. 

41

It was not clear to me whether Mr. Gilmore or Mr. Miller ever 

responded to whether they thought there was a need to revisit this 

definitional issue that Ms. Baldwin raised. Do you think there is 

a problem with the definition or do you not, and if so, do you have 

some ideas about how we might tighten up that definition so that 

we don’t run into the problem? 

I disagree with Mr. Miller that it’s not individual users that access LEXIS/NEXIS. Businesses do access it. Lawyers, law firms access it. But a bunch of lawyers I know and non-lawyers who try 

to do their own research access it, too. 

So do you think this definition needs to be tightened up or not, 

and if so, do you have any ideas about how to do it? 

Mr. MILLER. Let me respond to the first point and then I’ll let 

Governor Gilmore address the second point, since his Commission 

did discuss at length the bundling issue during its commission. 

The reason I brought up the telephone service, Mr. Watt, is the 

Congress has established something called the Universal Service 

Fund, as you know, which we all pay into, in order to subsidize 

telephone access in this country. The Internet community is not 

asking for that. We’re just asking not to put additional charges on 

access to the Internet. That’s what the Internet access prohibition 

in the Cox bill is all about. 

Mr. WATT. That seems to me to be a separate issue than the one 

I raised. I mean, whether you want a universal service fund or 

not——

Mr. MILLER. I don’t. 

Mr. WATT [continuing]. Is not the issue, it seems to me. The 

issue is if you’re going to compare Internet access to phone access 

and phones have—phone customers, 94 percent of them are using 

the telephones and they are being taxed on it in most locations, 

independent of the Universal Access Fund, they’re being taxed on 

it, it just doesn’t seem to me that that’s an appropriate analogy. 

But that’s not the heart of my point. I just was making that 

point as an observation. 

Mr. MILLER. Right. 

Mr. WATT. The real point is, is there a definitional problem here, 

and if there is, how do we solve it? 

Mr. MILLER. We don’t believe there is a definitional problem, and 

Governor Gilmore’s Commission on Electronic Commerce spent a 

lot of time discussing this issue—— Mr. WATT. Mr. Gilmore? 

Mr. GILMORE. Congressman, we think the definition is okay. I 

suppose that if you wanted at some future time to consider broadening this definition to include telecommunications taxes, as well, 

you could do that. I don’t think that you have to do that now in 

order to enact this legislation. 

Mr. WATT. So you’re opposed to tightening the definition in this 

bill——

Mr. GILMORE. Oh, no, the—— Mr. WATT [continuing]. To make sure that it’s limited to access 

rather than content? 

Mr. GILMORE. You know, I think that we have mediums all the 

time that deliver content over the telephone and radio and so on. 

We don’t tax individual television shows and so on like that. And 

42

you want content, it seems to me, to be available to the most people that you possibly can. 

I think this definition is okay the way it is, but you could revisit 

it at a future time and address the issue, for example, that poor 

families in the City of Richmond have to have a telephone and, 

therefore, they’re sort of forced to pay a 25 percent telephone tax 

and the potential injustice of that, but I don’t——

Mr. WATT. Of course, the flip side of that is you may be arguing 

for a Universal Access Fund for—like Mr. Miller said he opposed 

for Internet access, too. I’m not advocating that, don’t get me 

wrong, just, you know, what cuts, cuts both ways, it seems to me. 

Mr. GILMORE. It’s a real problem with this whole issue. But I 

think you could go forward with this definition, Mr. Watts. 

Mr. WATT. Thank you, Mr. Chairman. I apologize to the Chairman for being tardy. 

Mr. CANNON. You’re fine. I think the game here is to ask the 

questions and let them go way over time on the other side, which 

actually works out pretty well. 

Let me just poll the panel. Is there an interest in a second 

round? One of the problems is just timing, but there’s a number of 

people who handed me questions. Congressman Coble asked me to 

ask a question. He had a meeting that he had to run to. So I’ll ask 

unanimous consent that I may take an additional 5 minutes, but 

not open it up to a second round. Thank you. So ordered. 

Let me ask Mr. Coble’s question first. His concern is with the use 

tax and the difficulty in enforcing it, because, first of all, people either don’t know that it’s there, that that indicates, I think in the 

case of Utah, that people don’t read their tax returns before they 

sign it, because it’s part of the return, or if they know it’s there, 

they know that it’s almost impossible to enforce. 

So Mr. Coble’s question would be, isn’t it difficult to use the alternative to a sales tax on the Internet through the use tax just 

because it’s hard to apply, and I think, Mr. Duncan, if you wouldn’t 

mind answering that, and then, Governor Gilmore, with your experience, and perhaps if you have some comments, Mr. Miller. 

Mr. DUNCAN. Collection of use tax on any sort of remote transaction from the individual purchaser and consumer is difficult. It 

is not cost efficient for States to try to enforce that. It is—there’s 

a burden on the individual of keeping records of what they’ve purchased and then accruing and reporting that. So for that reason, 

the inability to effectively deal with it, you know, from the individual purchaser on their individual items, that we’ve argued that 

it ought to be collected by the seller in the same fashion as the 

sales tax. That’s where the simplification comes in and the requirement for a Congressional authorization so that States could require 

remote sellers to collect, and that’s the next debate in the next 

hearing. 

Mr. CANNON. I know I’ve asked all the panelists to respond to 

that, but can I just add another layer to this. Given what you’ve 

just said, doesn’t it make sense for the States, and especially those 

groups, the States that are working on the SSTP, to encourage 

their legislators to eliminate the use tax for Internet as sort of a 

show of good faith as they move down the SSTP path? 

43

In other words, you can’t get the tax, it makes liars out of all of 

us except me. I mean, I don’t buy anything in Utah. I don’t know 

about my kids. I try not to use anything they buy. I don’t use their 

tennis shoes, their cleats, for instance. The fact is, I buy my stuff 

on the Internet, usually books here in Washington, D.C., because 

there’s no tax, and so I don’t have to—I’m not lying when I sign 

that saying I’m not doing any use, but that’s an awkward thing 

that is unique probably in my case. 

Shouldn’t the States—let me just leave it to you, shouldn’t we 

take a look at those in the State legislatures and then try and address this later on in the SSTP? 

Mr. DUNCAN. I think we have to separate the imposition of the 

tax, which is the use tax that’s owed by that consumer, and the collection responsibility. We wouldn’t want to repeal the imposition of 

the use tax on the individual purchaser. What we’ve got to do, in 

our estimation, to make sure there’s a level playing field between 

those that have to collect the tax and the remote sellers that now 

don’t have to collect the tax, is to simplify it and to have then the 

authorization extended through remote sellers. We’re finding that, 

you know, as we simplify, there are some remote sellers coming forward voluntarily. 

Mr. CANNON. But I don’t think you’re going to the question that 

I’ve asked, which is doesn’t it make sense for States to—if you 

want to simplify it, to start out simplifying with a good faith effort 

of getting rid of a tax that’s imposed based upon the good faith of 

the recollection of the taxpayer, which is the use tax for items purchased on the Internet. 

Mr. DUNCAN. Apparently, I’m not quite understanding the question. I mean, the States at the present time are engaged in an effort—I mean, they try to simplify it for individuals, as well, 

through increased use of the income tax and that sort of thing. 

Mr. CANNON. I’m sort of skipping away from the SSTP, and I’m 

just irritated in my State legislature because they impose a tax on 

me, as do many other States, that require me when I fill out my 

tax return to sign a statement saying that I swear I’m not using 

anything in the State that was purchased outside the State without 

paying a sales tax. Doesn’t it make sense not—this is not God ordaining, but shouldn’t the governors who are pushing the SSTP 

step forward and say, hey, we’re not making anything on this use 

tax. Why don’t we not make our citizens liars and get rid of it and 

solve the problem with the SSTP? 

Mr. MILLER. It seems to me——

Mr. DUNCAN. I guess that’s what we’re trying to do, is to get ourselves in a position so that individual doesn’t have to do that because it’ll be collected at the time of purchase. 

Mr. CANNON. I want to talk to my legislators about that in the 

context of your response. [Laughter.] 

Mr. MILLER. This is a personal opinion, not an ITAA position, 

Mr. Chairman, but I think you go right to the heart of the matter. 

The sales tax itself was created at a time when people were not 

very mobile in terms of their purchases and in which time Government didn’t know very much about how much people earned, but 

they knew a lot about how they spent in terms of taxing the merchants, and they made the merchants the State tax collectors. 

44

So the question is, why in 2003, when we live in an incredibly 

mobile society, when people make purchases not just all over the 

country but all over the world, in which the Government has almost perfect knowledge about how much each of us earns, why are 

we still making small businesses the tax collector for the State? 

Again, that’s your next hearing on sales taxes. But I think your 

comment goes right to the fundamental position that we have a tax 

system in 2003 designed for the 1930’s. 

Mr. CANNON. Governor Gilmore? 

Mr. GILMORE. Use tax doesn’t bring much in, as a practical matter. That was our experience. If we’d make it more consistent 

across the board, then it probably should be eliminated. But simplification alone is no excuse for taking the policy position that 

we’re going to impose new taxes on a new medium, or multiple and 

discriminatory taxes, or confused sort of regimes like we’ve seen 

with telephone. This is an opportunity here, it seems to me, to step 

forward and settle the easy part and then fight over the hard part 

later on this year. 

Mr. CANNON. Thank you, Governor. 

I ask unanimous consent to extend my time by 3 minutes. So ordered. 

Let me turn some time over to yield to Mr. Delahunt in a moment. Let me just point out that the SSTP, the streamlined sales 

tax, is a very important issue and it’s an issue that we need to deal 

with. I think that we have an absolute consensus, if I can take 

from your comments, Mr. Duncan, is we have a consensus that’s 

an important issue and that we have some things in there that are 

awkward and to solve that is going to take some national effort and 

some focus. 

I’ve committed to a hearing on that issue, but I would encourage 

the people of America to understand that this is a separate issue 

from the tax moratorium. We need to solve this and then start taking some steps toward much more rational taxation. 

I might just point out that the SSTP is not the only place we can 

rationalize our tax system in America. We can certainly rationalize 

our Federal system, as well. So we have a number of issues before 

us. I would encourage the panel and the Members of the Committee to recognize that difference and support a permanent moratorium, and with that, I yield to Mr. Delahunt for a question. 

Mr. DELAHUNT. Before I pose a question to the panel, I just want 

to ask a question of the Chair. When he states that he buys nothing in Utah——

Mr. CANNON. On the Internet. 

Mr. DELAHUNT. On the Internet, okay. 

Mr. CANNON. Literally, I actually work very hard to not buy anything on the Internet in Utah, because when I sign that tax return, 

I don’t want to be a liar. 

Mr. DELAHUNT. Okay. 

Mr. CANNON. And it’s a damn inconvenience, if you’ll pardon the 

expression here, and Americans ought to be irritated about it. To 

the degree they don’t know about it, they ought to understand and 

ought to demand a change in that law. 

Mr. DELAHUNT. I think you have obviously focused on the nub. 

I mean, clearly, as Governor Gilmore just indicated, I think we all 

45

recognize compliance with the use tax is just—it’s not feasible for 

a variety of different reasons. 

But before we conclude the hearing today, Mr. Duncan, in terms 

of the progress being made on SSTP, and I know this is maybe a 

question that cannot be answered with any precision, but just an 

outside, remote estimate, if you will, at what—how far are we in 

terms of achieving a critical mass that would create the—in which 

a potential interstate compact would be presented to Congress for 

its consideration? 

Mr. DUNCAN. In the agreement that was adopted by the States, 

the threshold put in there to activate the agreement was ten States 

with 20 percent of the population. We believe that that’ll be met 

this year during legislative sessions, and it really comes down to 

meeting that threshold, the handful of getting two or three States 

like Texas, New Jersey, North Carolina finishing up some work, to 

Michigan, States of that size. Then, I think, as we go through the 

year, some of those larger States have longer legislative sessions, 

and as we see a movement in California, some in New York, I 

think the prospects then for that 1 percent becoming much larger. 

Mr. DELAHUNT. Okay. But you use, in my opinion, a near future 

resolution, because I think it’s important also to note that, you 

know, the National Governors Association, a variety of various 

business associations, trade associations—I’m looking at some of 

them here, real estate associations, shopping centers, the Newspaper Association of America, some members of the high-tech community, Gateway and Vertical Net, are concerned about coupling 

these issues, and I understand the Governor’s position and your position, Mr. Miller. 

But, you know, I dare say the fact that we have extended the 

moratorium for a discrete period of time as opposed to making it 

permanent does not in any way jeopardize the growth of the Internet, and I wonder if during the course of this particular session of 

Congress, the 108th, you’d be in a position to consider both the 

SSTP and making it a permanent moratorium, and if so, I’m sure 

the Chair and others would welcome the support, if after review by 

individual Members, for both of those particular proposals, because 

we can’t deny the reality, and you may be very well correct, Mr. 

Miller, in terms of it’s a 1930 answer, but, man, we have serious 

problems as far as these States are concerned. 

I don’t know what the aggregate number is, but we hear Cali- fornia with a $35 billion deficit. My governor, who is a part-time 

resident of Utah, Governor Romney, I am sure would be very upset 

with me, Mr. Chairman, if I should support a permanent moratorium, and he is a very good Republican, by the way—— Mr. CANNON. I would hope not, but also, as Mr. Gilmore would 

say, he’s a governor. 

Mr. DELAHUNT. He’s a governor. But the reality is, I guess, Mr. 

Duncan, the message to you is to go back to those that are sitting 

down grappling with this particular issue and let them know that 

I would think, I would think that the fiscal pressures on the States 

now are conducive and would serve as an impetus toward the 

streamlining project to reach a conclusion, and I think the Congress obviously is willing to listen to an interstate compact dealing 

with the issue, and with that, I’ll yield back and thank the Chair. 

46

Mr. WATT. Mr. Chairman, could you yield to me just for a second? 

Mr. CANNON. Certainly, Mr. Watt. 

Mr. WATT. I don’t think this is critical to the hearing, but just 

to clear up one thing that Mr. Miller and I had an exchange about, 

and that’s about this e-rate. Staff has pointed out to me that the 

e-rate is actually used to encourage access to the Internet, not to 

encourage access to phone service. So just to make that clear for 

the record, I don’t think there’s any disagreement about that, but 

I wanted to be clear on that. It’s not really a fund that encourages 

or subsidizes the use of phones. It’s a fund that phone companies 

collect to subsidize and encourage the use of the Internet and that 

kind of technology. 

I appreciate and yield back. 

Mr. CANNON. The gentleman yields back. 

First of all, I want to thank the panel for being here today. We 

appreciate your time. 

I’d like to ask unanimous consent to submit questions to the witnesses to be included in the record. Hearing no objection, so ordered. 

Mr. CANNON. The record will be kept open for another 5 days for 

any submission of comments that you want to make or answers to 

questions. 

Again, thank you very much for your time. I think this has been 

a very enlightening hearing and the meeting is now adjourned. 

[Whereupon, at 11:48 a.m., the Subcommittee was adjourned.] 

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PREPARED STATEMENT OF GROVER NORQUIST

Chairman Cannon and other members of this committee, thank you for the opportunity to address you regarding H.R. 49, the Internet Tax Non-Discrimination Act. 

My name is Grover Norquist and I am president Americans For Tax Reform 

(ATR), a non-partisan, not-for-profit non-partisan coalition of taxpayers and taxpayer groups who oppose all federal and state tax increases. I submit my comments 

to you today in strong support of a permanent moratorium on taxing Internet access. In 1998 Congress acted to put to an end taxes that unfairly single out the Internet. However, the current moratorium is scheduled to expire on November 1, 2003, 

unless Congress acts to eliminate taxes on Internet access, double-taxation of a 

product or service bought over the Internet, and discriminatory taxes that treat 

Internet purchases differently from other types of sales. Fortunately, H.R. 49 meets 

all of the above criteria. 

In addition, Representative Cox’s legislation ensures that the permanent moratorium on Internet access taxes applies to all 50 states. Unfortunately, the original 

moratorium enacted in 1998 and extended in 2001 contained a grandfather clause, 

which permitted a few jurisdictions already taxing Internet access to continue to do 

so. In an effort to protect consumers that use the Internet, the Internet Tax NonDiscrimination Act strikes the grandfather clause. Federal law should no longer reward those tax authorities that rushed to be the first ones to tax Internet access. 

ATR has always been supportive of a permanent ban on Internet taxes, and supported a two-year extension only as a compromise solution. While last years extension was a disappointment, the House of Representatives should take the opportunity to permanently extend the moratorium in order to keep access taxes off of 

the Internet. Therefore, Congress should ensure that there is no state sales tax simplification added on to the current legislation. 

A sales tax on Internet purchases, at this time, would be harmful to electronic 

commerce and the economy as a whole. Internet taxation will limit the expansion 

of electronic commerce and in effect, hinder economic growth. Moreover, there is no 

evidence at this time that Internet sales are hurting state sales tax revenue, since 

Internet purchases represent only a small 2% of total retail sales. 

Contrary to some arguments, taxing the Internet will actually hurt Main Street 

businesses far more than it will help them. Internet access has allowed Main Street 

businesses to link into a worldwide market, which has the potential to increase market share for small businesses and offer consumers more choice. To allow states to 

tax Internet commerce will hurt the very people that some politicians and other interest groups are claiming to help. 

ATR advocates for the speedy consideration of the Internet Tax Non-Discrimination Act. If Congress does not pass a new ban on Internet access taxes and multiple 

and discriminatory taxes it will mean a defacto tax increase on Americans at a time 

when they least are able to pay it. Not only that, this tax will hit schools, libraries, 

hospitals and families—those who use the Internet for research, education, and 

most critically, communication. This is not the time to be adding a new tax on 

Americans trying to keep in touch with loved ones. Therefore, ATR supports a clean 

extension of the moratorium, without sales tax simplification language. 

Enacting a permanent moratorium on taxing Internet access will have significant 

benefits to the United States economy and increase the standard of living for all 

Americans. Ultimately, Congress has an opportunity to help American workers, individual shareholders, and all individuals by reducing the cost Internet access. 

On behalf of Americans for Tax Reform, I urge your committee to quickly pass 

this needed legislation.

PREPARED STATEMENT OF ROBERT HOLLEYMAN

Mr. Chairman and Members of this Committee, 

Thank you for the opportunity to provide written comments on H.R. 49, the Internet Tax Nondiscrimination Act. I am the President and CEO of the Business Software Alliance. The Business Software Alliance (www.bsa.org) is the foremost organization dedicated to promoting a safe and legal online world. BSA is the voice of the 

world’s commercial software industry and its hardware partners before governments 

and in the international marketplace. Its members represent the fastest growing industry in the world. BSA programs foster technology innovation through education 

and policy initiatives that promote copyright protection, cyber security, trade and 

e-commerce. BSA members include Adobe, Apple, Autodesk, Avid, Bentley Systems, 

Borland, Cisco Systems, CNC Software/Mastercam, Entrust, HP, IBM, Intel, Intuit, 

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Internet Security Systems, Macromedia, Microsoft, Network Associates, Novell, 

PeopleSoft, SeeBeyond, Sybase and Symantec. 

BSA believes that the Internet has transformed American society. Individuals and 

businesses now have available to them vast sources of information that have revolutionized how Americans obtain goods and services and American businesses deliver 

them. One of the reasons for the success of the Internet has been the efforts of Congress in the past to ensure that the it is not taxed in a discriminatory manner. This 

precedent set by Congress in 1998 should continue permanently and endorse the 

passage of H.R. 49. 

In particular, I see the nondiscrimination issue from a worldwide perspective as 

the head of an international technology trade association. BSA members have been 

opposed to any efforts to discriminate against the Internet as a delivery mechanism 

for goods and services. We have worked with the United States Government and 

other member countries of the World Trade Organization to harmonize and reduce 

tariffs in order to increase free trade across the globe. As the New Economy continues to spread and grow, there is no doubt that the United States will be a leader 

in using the Internet to deliver goods and services to the world. 

Recognizing American leadership in technology, some foreign governments have 

viewed Internet delivered goods and services as a source of an additional taxing opportunity that burdens American companies more than domestic ones. We have and 

will continue to oppose such discrimination by foreign governments. Passage of the 

Internet Tax Nondiscrimination Act will send a strong signal to the world that 

America puts it money where its mouth is. By showing that we view the Internet 

as an equal partner to offline transactions and oppose any efforts to treat it differently. 

This legislation deserves the full support of Congress and the nation to ensure 

that the Internet continues to thrive around the world. I thank you for the opportunity to provide written testimony at today’s hearing.

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PREPARED STATEMENT OF STEVEN K. BERRY

Thank you for the opportunity to submit written testimony for the record of the 

Subcommittees hearing on H.R.49, the Internet Tax Non-Discrimination Act. The 

Cellular Telecommunications & Internet Association (herein, CTIA) represents all 

categories of commercial wireless telecommunications carriers, including cellular 

and personal communications services, manufacturers and wireless Internet providers. 

CTIA supports the goals of the Internet Tax Non-Discrimination Act. Our concern, 

however, is that the law as written in 1998 does not accommodate the technological 

changes that are driving the marketplace in 2003—and that will continue to drive 

the market in new directions in the years ahead. 

CTIA supports two clarifications in the law that, in our view, are consistent with 

the original intent of the Internet Tax Freedom Act: first, that the moratorium on 

Internet Access applies equally to all providers of Internet Access; and second, that 

the prohibition on multiple and discriminatory taxes on electronic commerce applies 

equally to all sellers of such products and services, including telecommunications 

companies. 

The current definition of ‘‘Internet Access’’ in Section 1104 reads as follows:

(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. (Emphasis added.)

Wireless carriers are concerned that the exclusion of ‘‘telecommunications service’’

from the definition of Internet Access will result in wireless Internet Access and 

electronic commerce products being deemed taxable while competing services are tax 

exempt. This disparity places CTIA’s member companies at a significant competitive 

disadvantage when they seek to sell Internet Access and electronic commerce products and services. 

Today, the wireless industry offers wireless Internet Access and numerous electronic commerce products. Wireless Internet Access includes both web access from 

handsets and other handheld devices. Wireless Internet Access is also provided 

using handsets or other devices as wireless modems for laptop or desktop computers. Electronic commerce products include downloaded software and other digital 

products (such as, ring tones and games) and information services (such as, stock 

quotes and sports scores). 

As new wireless third-generation (‘‘3G’’) technologies are deployed, wireless Internet Access and other e-commerce products and services will increasingly be competing with other types of Internet Access and e-commerce products sold through 

other channels. These competing services may include digital subscriber line (DSL) 

Internet Access offered by telecommunications companies, cable modem service offered by cable companies, direct satellite Internet Access, and e-commerce services 

offered Internet service providers. 

Subjecting part or all of a wireless carrier’s charges for Internet Access to state 

and local taxation is a significant tax burden on customers and is contrary to the 

intent of the Internet Tax Non-discrimination Act. The effective tax rate on telecommunications companies and their customers averages more than 17% as compared to 6% for other businesses according to a recent study completed by the Council on State Taxation. 

We believe that these discriminatory telecommunications taxes, if applied to our 

Internet Access and electronic commerce products and services, would seriously 

harm our ability to compete with other Internet Access providers by making it more 

expensive for consumers to access the Internet through wireless networks than 

through other technologies. This would, in turn, slow the deployment of the wireless 

broadband infrastructure and slow the roll out of new wireless products and services 

that have the potential to bring dramatic new productivity improvements to the entire economy. 

Recent economic studies further highlight the potential ill effects of these discriminatory telecommunications taxes. These studies document that the demand for 

wireless services is very price sensitive. Technological advancement and fierce competition among wireless companies have resulted in more affordable service for a 

larger number of consumers. However, because demand for wireless services is very 

price sensitive, increases in the cost of service attributable to discriminatory taxes 

are likely to result in consumers forgoing the purchase of additional wireless services or forgoing the choice to become a wireless customer. 

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It is unfortunate that legislation designed to prevent multiple and discriminatory 

taxation of Internet and Electronic Commerce specifically excludes the one service 

that is absolutely vital to the functioning of the Internet—the telecommunications 

backbone—and the one service that is subject to one of the highest discriminatory 

state and local tax burdens in the country. 

When considering reauthorization of the Internet Tax Non-Discrimination Act, 

CTIA strongly urges Congress to clarify the definition of Internet Access to both remove uncertainty and create tax parity for all providers of Internet Access and sellers of electronic commerce products and services. CTIA looks forward to working 

with the Committee on legislation that will accomplish these important changes.

PREPARED STATEMENT OF ALLTEL, AT&T, AT&T WIRELESS, CINGULAR, LEVEL 3, 

SPRINT, T-MOBILE, VERIZON, VERIZON WIRELESS, BELLSOUTH, AND SBC 

Thank you for the opportunity to submit written testimony for the record on the 

Internet Tax Non-Discrimination Act. 

Our companies support the goals of the Internet Tax Non-Discrimination Act. Our 

concern, however, is that the law as written in 1998 does not accommodate the technological changes that are driving the marketplace in 2003—and that will continue 

to drive the market in new directions in the years ahead. Specifically, we believe 

that the definition of Internet Access in the Act needs to be re-written to ensure 

that all providers of Internet Access are treated equally under the moratorium. 

We all know that rapid technological changes have led to a convergence of communications products and services. Companies that may be classified as telecommunications, cable, wireless, satellite or Internet service providers have the capability to provide voice, data, video and Internet access services individually or as 

part of a bundle of services. Many companies are already offering these packages 

of multiple services. However, as a result of historic differences in the regulatory 

classification of businesses that sell voice, data, video and Internet access services, 

such companies are taxed differently merely because of such classifications. 

The current definition of ‘‘Internet Access’’ in Section 1104 reads as follows:

(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. (emphasis added)

As telecommunications service providers, we are concerned that the exclusion of 

telecommunications service from the definition of Internet Access may result in 

Internet Access services provided by telecommunications companies being taxable 

while Internet Access services by cable companies, direct satellite companies, and 

Internet service providers are exempt from taxation. This disparity places our companies at a competitive disadvantage when we sell Internet Access. 

Here are some real-world examples. Currently, high speed Internet Access provided by cable modem service or by direct satellite is exempt from state and local 

taxes except in those states grandfathered under the Act. Cable modem service competes directly with DSL service provided by telecommunications companies, and 

wireless carriers are now rolling out wireless Internet Access service that will offer 

consumers another alternative to both DSL and cable modem service. 

Some states have taken the position that DSL service is not Internet Access, but 

a ‘‘bundle’’ that includes both Internet Access and telecommunications service. As 

a result, they claim that part of the charge is taxable. Subjecting part or all of our 

charges for Internet Access to state and local taxation is a significant tax burden 

on our customers and is contrary to the intent of the Internet Tax Non-Discrimination Act. As we have previously testified to your Committee, the effective tax rate 

on telecommunications companies and their customers averages over 17% as compared to just over 6% for other businesses, according to a recent study by the Council on State Taxation. 

It is ironic that legislation designed to prevent multiple and discriminatory taxation of Internet Access and electronic commerce specifically excludes the one service that is absolutely vital to the functioning of the Internet—the telecommunications backbone—and the one service that is subject to one of the highest discriminatory state and local tax burdens in the country. 

When considering reauthorization of the Internet Tax Non-Discrimination Act, we 

urge the Committee and the Congress to clarify the definition of Internet Access to 

both remove uncertainty and create tax parity for all providers of Internet Access 

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and electronic commerce products and services. We look forward to working with the 

Committee on legislation that will accomplish these important changes.

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PREPARED STATEMENT OF ELIZABETH HARCHENKO

The Multistate Tax Commission is pleased to present this statement regarding 

the Subcommittee’s consideration of HR 49, the Internet Tax Nondiscrimination Act

of 2003. 

The Multistate Tax Commission is an organization of state governments that 

works with taxpayers to administer, equitably and efficiently, tax laws that apply 

to multistate and multinational enterprises. 44 states and the District of Columbia 

participate in the Commission. Formed by an interstate compact, the Commission:

• encourages tax practices that reduce administrative costs for taxpayers and 

States alike,

• develops and recommends uniform laws and regulations that promote proper 

state taxation of multistate and multinational enterprises,

• encourages business compliance with state tax laws through education, negotiation and enforcement, and

• protects state fiscal authority in Congress and the courts.

The Commission monitored provisions contained in the Internet Tax Freedom Act

when it was enacted in 1998 for their potential impact on state taxing authority. 

The Commission maintains a neutral position on congressional action on the original Act and its successor, the Internet Tax Nondiscrimination Act. The Commission 

does make several recommendations with regard to specific provisions of the Act 

should Congress choose to extend the Act. This position is reflected most recently 

in the approval of Commission Resolution 01-08 approved in July 2001 (attached). 

The Commission believes that five guidelines should be addressed as Congress 

considers extending the Internet Tax Nondiscrimination Act upon its expiration in 

October 2003. Principally, these guidelines include:

• The Act should be extended for no more than two years to insure a review 

of its impact on state and local revenues and the presence of unintended consequences. The changing nature of Internet technology and its use in business 

operations means that the economic and fiscal impact of this Act will change. 

A temporary extension is appropriate in this context.

• Any extension of the Act should preserve the grandfathered ability of those 

states currently imposing a tax on charges for Internet access to continue to 

do so if they so choose.

• The definition of Internet access contained in the Act should be rewritten to 

eliminate opportunities to bundle otherwise taxable content into a single 

package of Internet access in a manner that would prevent states and localities from imposing their taxes on the otherwise taxable content, thus preserving competitive equity among all forms of commerce.

• Any extension of the Act should not be accompanied by provisions or separate 

legislation that grants more favorable state and local tax treatment to commerce involving goods or services transferred, conducted or delivered by electronic or other remote means as compared to commerce involving goods or 

services transferred, conducted, or delivered by other means.

• The definition of discriminatory taxes contained in the legislation should be 

amended to insure that it does not allow a seller through affiliates to avoid 

a tax collection obligation in a state even though the seller has a substantial 

nexus in the state.

Extending the Act and the Potential Economic Impact. A moratorium on 

taxation of Internet access charges was originally imposed in 1998 as a means of 

providing the then-burgeoning Internet industry with protection from the sudden 

imposition of certain specific state and local taxes. Five years ago, it was clear that 

the Internet industry would become a major force in the economy and that some 

temporary measures might be warranted to insure that the Internet industry did 

not suffer from a burden of over-regulation or taxation. Today, the Internet is a vibrant, well-established industry that is a major component of the national economy. 

Thus, the moratorium was enacted as a temporary measure-but its continued effectiveness and necessity should be re-examined periodically. 

The Commission believes that several questions regarding the potential economic 

impact on the Internet industry and state and local governments should be posed 

when considering whether to extend the existing moratorium:

• Does the current preemption of taxation of Internet access create discrimination in favor of a select group of Internet providers? Specifically, are large 

companies that have the ability to bundle Internet access with other services 

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(like telecommunications, information, or entertainment) provided an advantage over smaller companies without the financial means to provide bundled 

services?

• To what extent have studies documented that a pre-emption of taxation of 

Internet access has increased the volume of subscribers to such access?

• Conversely, to what extent have studies documented that taxing Internet access has served as a deterrent to potential subscribers? Specifically, the existence of state taxes on Internet access in nine of the states covered by the 

grandfather provision of the legislation provides for a basis for comparing the 

growth of Internet access in those states vs. other states. Will Congress make 

this comparison before making a decision on extending the Act?

• In lieu of taxing Internet access, have states and localities imposed or increased other taxes on the Internet industry to compensate for the loss of revenue?

In addition to considering the above, HR 49 also proposes repealing the grandfather clause in the existing moratorium that provides nine states with the ability 

to continue imposing taxes on Internet access that were in effect when the original 

law was enacted. The Commission believes that repealing this grandfather would 

represent an inappropriate pre-emption of a state’s existing taxing authority. The 

states protected by the grandfather clause-New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington, and Wisconsin-tax Internet access under their current laws that govern the taxation of services. The revenue generated from the imposition of the tax is an important component in the revenue base of each of these states-many of which are now struggling to balance their 

individual state budgets. To repeal the grandfather clause for these states would 

represent an erosion of their revenue base, shift increasing responsibility for the tax 

burden to other taxpayers, and upset the balance of the states’ internal tax policy 

objectives. 

Definition of Internet Access. Any consideration of extending the moratorium 

must include a re-evaluation of the definition of Internet access within the moratorium to account for the increasing variety and extent of services that are ‘‘bundled’’ with access. 

Since Congress wrote the original definition, changes in technology and corporate 

business structures have made it clear that it is now possible for large enterprises 

to bundle a broad array of otherwise taxable services with Internet access. The current definition appears to create the potential for discrimination in tax policy that 

would stifle competition and increase consumer costs, provide financial advantages 

to large enterprises, and erode state and local tax bases. Services delivered by large 

enterprises that can assemble the capital, technological, information and entertainment resources to bundle an array of services with Internet access would appear to 

be granted a tax exemption under the current language of the moratorium. The 

same services delivered through the Internet by smaller enterprises without the 

bundling capability or by non-electronic means would remain taxable. There is no 

economic or tax policy justification for Congress to create this disparity. Expanded 

bundling by large enterprises can substantially erode the tax bases of state and 

local governments that tax services. 

The definition of Internet access should cover only access to the Internet. Because 

of the increasing problems in distinguishing between pure access and other services, 

Congress should explore a quantitative approach to defining access, such as was enacted by the State of Texas in the last few years. A quantitative approach to defining Internet access removes all ambiguity concerning what constitutes ‘‘access’’ as opposed to other services. Further, it creates a level playing field among all providers of Internet access. 

Discriminatory Taxes. Sections 1104(2) (A) (iii) and 2(B) (ii) (II) of the1998 

Internet Tax Freedom Act and its successor, the Internet Tax Nondiscrimination 

Act, are components of the definition a discriminatory tax. In its entirety, the definition was intended to protect on-line retailers from unfair taxation by states and localities so that e-commerce would receive same tax treatment as all other forms of 

remote commerce. Read together, the interplay between these two provisions could 

have another, unintended effect by encouraging brick and mortar retailers to engage 

in sophisticated tax planning strategies that will allow them to escape the responsibility to collect sales tax on sales made in those states where they otherwise have 

clear sales tax nexus. Across the nation, large brick and mortar retailers with nexus 

in various states have attempted to escape sales tax collection on in-state sales by 

creating a separate, out-of-state Internet-based sales subsidiary to handle customer 

orders and payments, despite the substantive operational ties that exist between the 

parent retailer and its Internet subsidiary. Such ties may include allowing cusVerDate 0ct 09 2002 15:49 May 28, 2003 Jkt 000000 PO 00000 Frm 00103 Fmt 6601 Sfmt 6621 G:\WORK\COMM\040103\86182.000 HJUD1 PsN: 86182
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tomers to return items purchased from the Internet subsidiary to the parent retail 

store, or having the parent retail company distribute promotional items on behalf 

of its subsidiary. Though there are other reasons why retailers might implement 

this ‘‘entity isolation’’ tax strategy to escape sales tax responsibility, the discriminatory tax definition in the Internet Tax Freedom Act has the appearance of sanctioning this kind of tax avoidance behavior. The result in these cases is unfair to 

other retailers who register and collect sales and use taxes. 

SUMMARY

The Internet has developed from infancy to maturity with amazing speed and has 

become an invaluable segment of the nation’s economy. What was once thought to 

be technology that would be used by a select few has become an integral part of 

everyday life for nearly all Americans. Recognizing that the Internet has reached 

this mature stage, Congress must now decide whether it is necessary to extend protections from regulation and taxation that it initially imposed. The Multistate Tax 

Commission strongly urges Congress to give careful consideration to the economic 

impact on states from this continued protection-as well as consideration of the consequences of federal pre-emption of state taxing authority. In addition, Congress 

should seriously examine if extending the current moratorium on taxation of Internet access creates potential disparities and competitive disadvantages in the marketplace among providers of Internet access. A careful review and analysis of these 

issues should provide Congress with the background it needs to determine if extension of the Internet Tax Nondiscrimination Act is warranted at this time.

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