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38–207 PDF 2007

FULL COMMITTEE HEARING ON THE

INTERNET TAX MORATORIUM: THE POTENTIAL

NEGATIVE IMPACTS ON SMALL BUSINESSES

OF ALLOWING MORATORIUM TO EXPIRE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

OCTOBER 3, 2007

Serial Number 110-49

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

HEATH SHULER, North Carolina 

CHARLIE GONZA ́ LEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

BRIAN HIGGINS, New York 

MAZIE HIRONO, Hawaii 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director

STANDING SUBCOMMITTEES 

Subcommittee on Finance and Tax

MELISSA BEAN, Illinois, Chairwoman 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

DEAN HELLER, Nevada, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

Subcommittee on Contracting and Technology

BRUCE BRALEY, IOWA, Chairman 

HENRY CUELLAR, Texas 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

JOE SESTAK, Pennsylvania 

DAVID DAVIS, Tennessee, Ranking 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

MARY FALLIN, Oklahoma

(II) 

Subcommittee on Regulations, Health Care and Trade

CHARLES GONZA ́ LEZ, Texas, Chairman 

RICK LARSEN, Washington 

DAN LIPINSKI, Illinois 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

LYNN WESTMORELAND, Georgia, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

MARILYN MUSGRAVE, Colorado 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

Subcommittee on Urban and Rural Entrepreneurship

HEATH SHULER, North Carolina, Chairman 

RICK LARSEN, Washington 

MICHAEL MICHAUD, Maine 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JEFF FORTENBERRY, Nebraska, Ranking 

ROSCOE BARTLETT, Maryland 

MARILYN MUSGRAVE, Colorado 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee

Subcommittee on Investigations and Oversight

JASON ALTMIRE, PENNSYLVANIA, Chairman 

CHARLIE GONZA ́ LEZ, Texas 

RAUL GRIJALVA, Arizona 

LOUIE GOHMERT, Texas, Ranking 

LYNN WESTMORELAND, Georgia

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1

Chabot, Hon. Steve .................................................................................................. 2

Braley, Hon. Bruce .................................................................................................. 4

WITNESSES

Bieron, Brian, eBay Inc. .......................................................................................... 5

Dewey, Brett, WickedCoolStuff.com ....................................................................... 7

McClure, David P., U.S. Internet Industry Association ....................................... 9

Lieberman, Ross J. American Cable Association .................................................. 10

Keating, Raymond, Small Business & Entrepreneurship Council ...................... 12

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 31

Chabot, Hon. Steve .................................................................................................. 33

Braley, Hon. Bruce .................................................................................................. 35

Bieron, Brian, eBay Inc. .......................................................................................... 38

Dewey, Brett, WickedCoolStuff.com ....................................................................... 40

McClure, David P., U.S. Internet Industry Association ....................................... 42

Lieberman, Ross J. American Cable Association .................................................. 44

Keating, Raymond, Small Business & Entrepreneurship Council ...................... 50

(V) 

(1)

FULL COMMITTEE HEARING ON 

THE INTERNET TAX MORATORIUM: 

THE POTENTIAL NEGATIVE IMPACTS 

ON SMALL BUSINESSES OF 

ALLOWING MORATORIUM TO EXPIRE 

Wednesday, October 3, 2007

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, Washington, DC. 

The Committee met, pursuant to call, at 10:00 a.m., in Room 

2360 Rayburn House Office Building, Hon. Nydia Vela ́zquez 

[Chairwoman of the Committee] presiding. 

Present: Representatives Vela ́zquez, Grijalva, Braley, Clarke, 

Ellsworth, Johnson, Sestak, Hirono, Chabot, Akin, Fortenberry, 

Gohmert, Heller, Davis, Fallin, and Jordan. 

OPENING STATEMENT OF CHAIRWOMAN VELA ́ ZQUEZ 

ChairwomanVELA ́ ZQUEZ. Good morning. I now call this hearing 

to order on the Internet tax moratorium, the potential negative impacts on small businesses of allowing the moratorium to expire. 

With the advent of the Internet, electronic commerce has been a 

driving force for economic growth in our country. Small businesses 

in particular have played a vital role in the digital economy where 

many entrepreneurs and Internet connections can serve as an avenue to start a new business or grow an existing one. 

Today’s hearing will focus on the Internet tax moratorium and 

its spending expiration. Since 1998, federal law has prohibited 

taxes on Internet access and has insured priority between online 

and off-line sales. 

As we have witnessed over the past 15 years, the Internet has 

proven to be the great leveling field in American business today, 

permitting small firms with fewer resources to compete. In a recent 

survey of small business owners, 83 percent reported that the 

Internet had improved communications about their company. Additionally, over 60 percent stated that the Internet has opened up 

new markets for their businesses. 

The current moratorium has played an important role in encouraging Internet sales for small businesses. However, with many 

states and local governments under pressure to find additional 

sources of revenue, some have advocated against extinction. 

Today’s discussion will examine the impact the expiration will 

have on small businesses competing in a technology driven economy. It is fairly clear that the moratorium has been a catalyst for 

2

the growth in E-commerce among smaller companies. The current 

nondiscriminatory tax treatment has allowed many small businesses to use the Internet as another medium to expand. 

While the overall degree of impact may be argued, the growth by 

small businesses in Internet commerce cannot. eBay alone reports 

that approximately 250,000 sellers make their full-time living from 

home-based businesses. They are earning unpredictable taxes, 

many of which will be regressive in nature, could place small businesses at a disadvantage. 

Studies have shown that a hike in these taxes could hit the 

smallest E-retailers the hardest. It could also add significant paperwork burdens for small businesses that simply do not have the resources to meet the new requirements. 

While some may discount the impact of higher access fees, it is 

important to consider the overall price sensitivity of the market. 

Assuming that Internet access is taxed similarly to wireless communications, small businesses could see an upwards of 15 to 30 

percent increase in their Internet bill. For some that could make 

the difference in the decision whether to market products and services on line. 

The moratorium was created as an economic policy to allow small 

businesses to compete. The prohibition has made the Internet a 

gateway for entrepreneurship, regardless of race, income or neighborhood. Many of the most commonly known Internet companies in 

the world, including eBay, Amazon, and Google, started as very 

small Internet companies. We should be careful to make sure we 

are not preventing the next Google. 

At a time when small businesses face many obstacles, we should 

be advancing policies that help small firms compete in our digital 

economy. With the moratorium set to expire in a little less than a 

month, it is important for the Committee to fully understand the 

implications if Congress fails to act. 

I appreciate the witnesses coming here to discuss this important 

issue and look forward to your testimony. 

I will now yield to the Ranking Member, Mr. Chabot, for his 

opening statement. 

OPENING STATEMENT OF MR. CHABOT 

Mr.CHABOT. Thank you, Madam Chair. 

And good morning. I want to thank all of the witnesses for being 

here today to examine the negative effects of allowing the Internet 

tax moratorium to expire. 

I also want to thank you, Madam Chair, for holding this very important hearing, and I agree with almost all of the comments, if not 

all of the comments, that you mentioned. I think you are right on 

point. 

Since 1998, Congress has insured that Internet access is not subject to either state and local taxes or multiple and discriminatory 

taxes on Internet commerce, regardless of the technology consumers use to access the Internet. If the moratorium is allowed to 

lapse, American taxpayers could be exposed to countless new and 

onerous taxes from states and municipalities simply for accessing 

the Internet. 

3

The Internet has changed the way we communicate, as the Chair 

mentioned, the way we learn and do business, all for the better. 

Since the moratorium was first adopted, tremendous investment, 

growth, and innovation in the scope and use of the Internet has occurred. 

By preventing unnecessary taxation of the Internet, Congress 

fostered growth and productivity and innovation and widened public access to information. While Americans use the Internet for a 

myriad of reasons, E-commerce has particularly flourished and continues to grow at an exceptional rate. In 2006 alone, online retail 

sales exceeded $100 billion, increasing 24 percent over the previous 

year. 

This is especially important to small businesses as the Chair 

mentioned. An Internet connection opens doors to the rest of the 

world. No longer must an entrepreneur focus his or her marketing 

strategies to just their neighborhood. With the advent of the Internet, the world is their neighborhood and, quite literally, the sky is 

the limit. 

Although this expansion is impressive, there is still more that we 

must do to insure equal access among all Americans. Internet 

usage still lags behind in rural and lower income areas, and many 

experts have reported that the United States has fallen from fourth 

to around sixteenth in broadband deployment since 2001. 

In order to reverse this trend we must keep Internet access costs 

as a minimum. Prohibiting unnecessary taxes will help accomplish 

this goal. 

In addition to making the moratorium permanent, I believe we 

ought to reexamine the grandfather clause as well. I have been and 

still am concerned about this provision because I believe it rewarded a handful of state tax administrators who rushed to tax 

Internet access. 

With America’s small businesses already strapped with high 

legal costs, regulatory burdens, onerous taxation, high energy 

prices, and rising health care costs, they should not be slapped 

with new taxes on Internet access. Simply put, allowing the moratorium to expire would result in a tax increase on small businesses 

and on American families. 

Permanently extending the moratorium would allow the unfettered growth of the Internet and E-commerce to continue. Tax cuts, 

innovation, and the free market are the surest formula for economic growth and prosperity. The surest way to stifle achievement, 

progress, and growth is to involve the government. 

The evolution of the Internet has directly contributed to the 

growth of the U.S. economy. As Internet usage has grown, so has 

E-commerce. Every day millions of Americans are online making 

various transactions from buying products to managing their bank 

accounts. By making permanent the Internet tax moratorium, Congress can assure that this vital tool remains a key driver of economic growth. 

Again, thank you, Madam Chair, for calling this hearing on such 

a critical and timely issue. I look forward to the witnesses’ testimony, and I yield back the balance of my time. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

And now I recognize Mr. Braley for an opening statement. 

4

OPENING STATEMENT OF MR. BRALEY 

Mr.BRALEY. Thank you, Madam Chairwoman, and thank you for 

holding this hearing. 

As the Chair of the Contracting and Technology Subcommittee, 

I work with Ranking Member Davis very often to talk about the 

intersection of issues of technology and their impact on small businesses, and that is why I am so pleased that we are having this 

hearing today. 

We are here today to talk about an important issue, the Internet 

tax moratorium, which began in 1998 and is set to expire on November 1st. That is why it is essential that we take a look at this 

issue now. The expansion of electronic commerce in this country 

can be directly related to the affordable Internet access and tax 

parity between online and off-line sales. 

The Internet, as we all know, has become a huge economic development tool, especially for small businesses, many of which are located in remote parts of this country. If we make this moratorium 

permanent, this will allow these small businesses to know what 

costs they will be dealing with as they attempt to start new ventures or expand upon an existing one. 

Many of these small businesses will go on to become large Internet companies and have the potential to employ thousands of 

Americans and add billions of dollars to our economy. eBay, which 

has already been mentioned, is one of the companies represented 

by our panel today, is certainly a prime example of this. 

We as a government have a responsibility to promote a permanent tax moratorium on the Internet when there is still so much 

untapped potential in the electronic commerce industry. That is 

why I am a proud co-sponsor of H.R. 743, the Permanent Internet 

Tax Freedom Act. In addition to helping small businesses grow, a 

permanent Internet tax moratorium will help insure that all Americans can afford Internet access. It will also promote further 

broadband deployment in rural areas, such as in many parts of my 

district in Iowa, which still lack affordable access to high speed 

Internet. 

If taxes on Internet access are raised, the number of consumers 

who are able to afford it will go down. If the Internet were taxed 

similarly to wireless communications, many consumers and small 

businesses would see upwards of a 17 percent increase in their 

Internet bill. For small companies operating on thin profit margins, 

this increase could make the difference between their success or 

failure. 

I look forward to hearing from our witnesses today and hearing 

how an extension of the tax moratorium would affect each of them. 

It is essential that we act promptly on this legislation to extend the 

Internet tax moratorium before the current legislation expires on 

November 1st. Our nation’s small businesses are counting on us. 

Again, thank you, Madam Chairwoman, and thank you to the 

witnesses for joining us today. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

Does any other member seek recognition for the purpose of an 

opening statement? 

[No response.] 

5

ChairwomanVELA ́ ZQUEZ. I also want to take a moment to introduce a new member of this Committee, Mazie Hirono. She is currently serving her first term representing the Second District of 

Hawaii in Congress. She sits on the Committee on Education and 

the Committee on Transportation and Infrastructure. 

She recently joined the Committee on Small Business. Ms. 

Hirono is welcome to this Committee. 

Ms.HIRONO. Thank you, Madam Chair. 

ChairwomanVELA ́ ZQUEZ. And so we are going to start with our 

witnesses. Our first witness is Mr. Brian Bieron. Mr. Bieron is the 

Senior Director of Federal Government Relations for eBay Inc. 

Founded in 1995, eBay Inc connects hundreds of millions of people around the world every day empowering them to explore new 

opportunities and innovate together. eBay Inc. does this by providing the Internet platforms of choice for global commerce, payments and communications. Since its inception, eBay has expanded 

to include some of the strongest plans in the world, including eBay, 

Paypal, Skype, Shopping.com, and others. eBay Inc. is 

headquartered in San Jose, California. 

Mr. Bieron, you will have five minutes to make your presentation. Welcome. 

STATEMENT OF BRIAN BIERON, SENIOR DIRECTOR, FEDERAL 

GOVERNMENT RELATIONS, eBAY INC. 

Mr.BIERON. Thank you very much. 

Madam Chairwoman, Ranking Member Chabot, and members of 

the Committee, I would like to thank the Committee for giving 

eBay this opportunity to discuss the importance of the Internet access tax moratorium to small businesses. 

At eBay, first of all, we agree with the opening statements. They 

are far more eloquent than mine will be. So thank you for beginning on such a high note. 

We believe that the Internet is a good thing. We believe that it 

is a remarkable, revolutionary, empowering technology. Of particular importance to this Committee should be the fact that the 

Internet is a powerful force supporting American small business 

success in the global 21st Century economy. 

Today small retailers across America are using eBay to reach a 

global customer base. Some are primarily eBay based businesses. 

Many use eBay as well as other Internet channels to reach Internet enabled consumers. 

Finally, more and more traditional brick and mortar retailers are 

augmenting their storefront business with Internet sales. All in all, 

we estimate that over 720,000 small businesses use eBay in the 

United States as a primary or secondary marketing channel. 

The evolution of brick and mortar small businesses adopting the 

Internet is a particularly interesting story. There was a time when 

many traditional small business retailers seemed threatened or 

maybe awed by the Internet. It was a ‘‘gee whiz’’ technology that 

might make sense in Silicon Valley, but what did it have to do with 

a small retailer trying to stay afloat on Main Street in towns and 

small cities across America? 

The reality of the past decade is that the Internet has proven to 

be a remarkable tool for those small businesses. In the retail indusVerDate 0ct 09 2002 09:38 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\38207.TXT LEANN
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try, small entrepreneurs face a world of global behemoths. Those 

multi-billion dollar businesses source product globally and use technology to relentlessly increase efficiency and drive down prices. 

Mega retailers have been relentlessly pressuring small business 

retailers for decades. In a word, the Internet has been a lifeline for 

many of those small businesses. The Internet allows a small retailers to tap into the global economy in two key ways. 

First, the small business can use the Internet, the ultimate open 

and level playing field, to reach a global customer base. For example, approximately 15 percent of the sales of U.S. small businesses 

using eBay are cross-border sales, and those numbers are going up. 

Yes, eBay is enabling a small business export success story. This 

holds tremendous hope for U.S. small business growth. 

Second, the Internet increasingly allows small businesses to 

source their products globally. The mega retailer is a global giant 

buying from factories in every country of the world and selling from 

stores in every corner of America. Now, the Internet allows the 

small retailer to likewise find the best products at the best prices 

anywhere in the world. 

So what does this mean for your consideration of the Internet access tax moratorium? We believe that you should take up the mantle of Internet enabled small businesses and call on your colleagues 

to extend the moratorium on access taxes and multiple indiscriminate taxes on the Internet permanently. 

By the way, along with learning quite a bit from our community 

about how small businesses use the Internet, we also think that we 

have learned a little bit about how markets work. In fact, eBay has 

often been called the most perfect market. Our marketplace is 

super efficient benefiting hundreds of millions of consumers worldwide and hundreds of thousands of small businesses. 

We know that when you raise prices you reduce demand. Anybody or any study that tries to make the case that even if you raise 

prices you will not reduce demand is highly suspect on its face. If 

taxes on Internet access go up, fewer small businesses will use the 

Internet. 

More importantly, fewer consumers will use the Internet, and for 

small businesses using the Internet, that means fewer sales and 

less opportunity to compete with the big retailers. That is bad 

news. 

So in conclusion, we support maintaining the core regulatory 

principles that have underpinned the Internet as a small business 

success story. On the tax front, this includes policies such as the 

tax free treatment of Internet access. 

This Committee should make a strong statement for small business by calling on your House leadership to rapidly bring a permanent tax moratorium to the House floor. 

Thank you, and I am happy to answer any questions. 

[The prepared statement of Mr. Bieron may be found in the Appendix on page 38.]

ChairwomanVELA ́ ZQUEZ. Thank you, Mr. Bieron. 

Our next witness is Mr. Brett Dewey. Mr. Dewey is the President 

and CEO of WickedCoolStuff.com, which is based in North HollyVerDate 0ct 09 2002 09:38 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\38207.TXT LEANN
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wood, California. Mr. Dewey’s company, owned by him and his 

wife, sells toys, tee shirts and other small gifts exclusively online. 

Started in 1999, it employs six full-time employees throughout 

the year and increases its staff during the holiday season. Mr. 

Dewey’s testimony will focus on the potential negative impacts that 

an expiration of the moratorium will have on a business such as 

his. 

Welcome, sir. 

STATEMENT OF BRETT DEWEY, CEO, WICKEDCOOLSTUFF.COM 

Mr.DEWEY. Thank you, Chairman Vela ́zquez, Ranking Member 

Chabot, members of the Committee. 

Good morning. Thank you for inviting me to be here today. It is 

quite an honor. 

My name is Brett Dewey, and I own a small online company 

called WickedCoolStuff.com that sells toys, tee shirts, and other 

gifts that we think are wicked cool. 

I hope my testimony helps explain some of the importance of extending the Internet tax moratorium. Unlike a lot of people you 

may hear from, I am not part of a formal coalition or any an experienced insider. In fact, this is the first time I have done more than 

vote or write a letter to my Congressman. 

I got here using frequent flyer miles earned on my company credit card. I am sleeping on a friend’s sofa. I have to say this room 

seems a lot smaller on TV. 

WickedCoolStuff.com is a real, live Mom and Pop operation. My 

wife Cynthia and I run the company out of a warehouse in the San 

Fernando Valley region of North Hollywood, of Los Angeles. Our 

son Alex is almost three and primarily helps by playing hide and 

seek among the shelves and boxes. 

We have five full-time permanent employees, and as the Christmas holiday approaches, we will probably add eight full-time seasonal staff to help with the rush. 

Cynthia and I provide health insurance to our full-time employees after they have been with us several months, and we would like 

to do more, but we cannot afford to. We try to be good employers 

and good community members. We believe that makes good business and is the right thing to do. 

The Internet tax moratorium has been in place since before we 

started WickedCoolStuff.com eight years ago. Letting it expire now 

would be a new tax on our small business and one we cannot afford. 

Just like every other small business, ours has its ups and downs. 

Right now, like many small, online retailers we are in a down. We 

are taking steps to improve sales, and I am optimistic we are headed for another up. But a new tax right now would be devastating 

to our business. At the moment we are looking up, but a new tax 

would have us looking out. 

We started WickedCoolStuff.com eight years ago in a spare bedroom. When the boxes took over the living room, den, garage and 

started to creep into the kitchen, we decided it was time to get a 

warehouse. Since then we have grown to as many as seven fulltime employees and sales over 1.3 million at our peak, down to our 

8

current level of five full-time employees and projected sales of 

under a million this year. 

In our best year, Cynthia and I paid ourselves about $60,000, although this year we are unlikely to draw any salary, relying on 

savings and a home equity line to keep our home running. 

I have prepared a small chart that is included in my written testimony to help explain the financial realities of a small company 

like ours and why letting the Internet tax moratorium expire now 

would be so devastating. These numbers are based on our experience, and while they may not withstand an IRS audit, they give 

you a pretty good idea of what it costs to run a very small business 

like ours. 

The handout is for a hypothetical company called 

HypotheticalExamples.com. An online retailer expects to sell a million dollars of small plastic hypotheticals this year. Most of the 

company’s income goes to buy wholesale goods, which cost about 

$500,000. Another 200,000 goes to shipping those goods both from 

the wholesalers to the warehouse and then again out to the consumers; $135,000 for salaries, none of which goes to the owners; 

17,200 goes to health insurance; 15,000 for payroll taxes; rent is 

33,500; marketing is another 34,000; Internet and E-commerce 

hosting, 19,000; another 9,950 to various local taxes and workmen’s 

compensation; $34,000 goes to utilities, bookkeeping, bank fees and 

insurance. That leaves just under $2,000 for the owners of 

HypotheticalExamples.com to share as a salary, which comes to 

roughly 17.50 a week each. 

While this may not sound like WickedCoolStuff.com and may 

sound like less, the numbers are drawn from our experiences. It is 

not our company. We are unlikely to do even that well this year. 

Cynthia and I are working hard to turn our company around, and 

we are confident we can. We are actively adding new features, new 

products, and trying new marketing. 

But letting the Internet tax moratorium expire would derail 

those efforts and with it our company. Our options would be to lay 

off employees, stop providing health insurance for our staff, and 

their families rely on it, or close our doors completely. 

A new tax now would be the equivalent of changing the rules in 

the middle of a game we are currently not winning. 

Thank you, again, for inviting me here today. I hope that my testimony has been helpful. Typically I would give you all a 

WickedCoolStuff.com gift certificate or a Star Wars bobble head as 

a thank you, but I understand there are rules about that sort of 

thing. 

[Laughter.] 

Mr.DEWEY. Instead, I encourage you to visit our Web site and 

purchase one for yourself and your staff and maybe your constituents. We could use all of the help. 

I look forward to your questions. 

[The prepared statement of Mr. Dewey may be found in the Appendix on page 40.]

ChairwomanVELA ́ ZQUEZ. Sure. Thank you very much for you testimony. 

9

Our next witness is Mr. David P. McClure. He is the President 

and Chief Executive Officer or the U.S. Internet Industry Association, the primary U.S. trade association for Internet commerce and 

connectivity. 

Mr. McClure has written and lectured extensively on management and technology issues and is considered an authority on strategic business planning, telecommuting, technology policy, and 

technology integration for businesses with members of every site 

engaged in virtually every facet of the Internet. USIIA works to 

craft a business environment in which Internet companies can 

thrive. 

Welcome, sir. 

STATEMENT OF DAVID P. McCLURE, PRESIDENT AND CEO, U.S. 

INTERNET INDUSTRY ASSOCIATION 

Mr.MCCLURE. Thank you very much. 

Chairwoman Vela ́zquez and members of the Committee, thank 

you for the opportunity to speak. 

My name is David McClure, and I am President of the U.S. 

Internet Industry Association. For 15 years, we have been a trade 

association that serves businesses engaged in Internet connectivity, 

online content, and electronic commerce. Our members, the majority of which are small businesses, are concerned that without your 

action they are going to immediately be subjected to multiple, discriminatory, retroactive and crippling taxes. The impact of allowing 

the Internet Nondiscrimination Act to expire without extension 

would be felt specifically in three ways by small businesses. 

First, they would see an immediate loss of customers. It was alluded to before by Mr. Bieron, and we have data to back it up, that 

Internet connectivity is price elastic. That means as the price goes 

up, demand and use goes down. 

Studies by Ernst & Young, by the University of Massachusetts 

and others have confirmed this elasticity. You can also look at the 

data by the Pew and Internet Life Project, which for the past decade has tracked this extensively. If taxes are permitted that would 

raise the cost of basic Internet access and raise it by as much as 

30 percent, by the way, the predominantly working families that 

are not on the Internet today would not be able to get there, and 

families that now have basic Internet access would not be able to 

afford it any longer. 

Secondarily, there would be a loss of opportunities for small businesses to survive and to grow. In today’s economy, small businesses 

in America are able to compete globally due in part to this nation’s 

superior infrastructure. The Internet backbone, our rich diversity 

of broadband, and the growing wireless network spanning almost 

every corner of the nation, but the growth of this infrastructure depends on sustained and increasing levels of private investment. We 

are looking at as much as one trillion dollars that will need to be 

invested between now and the year 2015. 

If the tax moratorium is not extended, states and localities by 

their own numbers will take about 35 billion dollars a year out of 

our industry in taxes and that does not count the cost of compliance. That is raw taxes. 

10

If you add that up, between now and 2015, that is $320 billion. 

That is almost a third of the trillion dollars we are going to need 

to build and sustain the kind of broadband network this country 

needs and deserves. 

Again, that is not counting the cost of compliance. And I want 

to talk about the cost of compliance because that is really the most 

crippling effect. Look. We know from an Ernest & Young study of 

the cost of compliance for sales taxes that the burden is disproportionate. If you look at companies selling nationally with collection 

responsibilities for taxes, in the 46 states that do collect taxes, 14 

percent of their sales go to sales taxes, 14 percent for a large company. 

For a mid-size company, that goes up to 48 percent, but here is 

the shocker. For a small company, 87 percent of their sales tax 

goes to the cost of compliance. These are companies that do not 

have fully staffed tax compliance departments. They cannot afford 

it. They are not going to be able to maintain it. 

The original Internet Tax Freedom Act was not as some have 

retroactively suggested, an effort to give states time to find a better 

way to tax. I was there. I helped draft the Internet Tax Freedom 

Act in 1998 for Senator Wyden, and it was an alarmed and informed response to a significant pattern of abusive, punitive, and 

destructive taxes passed by local authorities with little regard to 

how their actions would affect consumers, businesses, the economy 

or our national interest. 

It was Congress’ way of putting an end to this abuse. John Marshall, the U.S. Supreme Court Justice who shaped much of our 

Constitutional law, noted that the power to tax involves the power 

to destroy; that the power to destroy may defeat the power to create. There is no clearer example of how this abuse of power and 

its negative impact on creativity will affect us than the imposition 

of multiple discriminatory and predatory taxes on America’s small 

businesses. 

Thank you. 

[The prepared statement of Mr. McClure may be found in the Appendix on page 42.]

ChairwomanVELA ́ ZQUEZ. Thank you, Mr. McClure. 

Our next witness is Mr. Ross Lieberman. Mr. Lieberman is the 

Vice President of Government Affairs for the American Cable Association. 

Based in Pittsburgh, the American Cable Association is a trade 

organization representing 1,100 smaller and medium size independent cable companies who provide broadband services for more 

than eight million cable subscribers primarily located in rural and 

smaller suburban markets across America. 

In his role with ACA, Mr. Lieberman is the trade association’s 

senior government advocate overseeing all Capitol Hill and Federal 

Communications Commission activities. 

Welcome. 

STATEMENT OF ROSS J. LIEBERMAN, VICE PRESIDENT OF 

GOVERNMENT AFFAIRS, AMERICAN CABLE ASSOCIATION 

Mr.LIEBERMAN. Thank you. 

11

Chairwoman Vela ́zquez, Ranking Member Chabot, and members 

of the Committee, thank you for inviting me to testify on the Internet tax moratorium and how its potential expiration would impact 

small cable and broadband providers and consumers across the 

country. 

My name is Ross Lieberman, and I am Vice President of Government Affairs for the American Cable Association. In a telecommunications world that is dominated by industry giants, ACA 

is the voice for nearly 1,100 small and medium sized cable companies that serve more than eight million subscribers. Our members 

range from family run cable businesses serving a single community 

to multiple system operators that focus on smaller markets in rural 

areas. The average operator size is about 7,500 subscribers, but 

some ACA members serve fewer than 1,000. 

ACA members are vital businesses in their communities. In addition to providing broadcasting cable programming, many of our 

members offer unique local programming, such as high school 

sporting events and religious services that are not available from 

satellite TV companies. Most importantly for the purposes of this 

hearing, our members are rolling out high speed Internet access in 

their communities where no other company offers it. 

The ACA supports continuing the Internet tax moratorium. At a 

time when the costs of running their businesses are increasing, 

small cable operators are deploying broadband despite the financial 

hurdles of offering such services. Congress can safeguard these investments and insure high speed Internet access remains affordable by passing legislation that prevents state and local governments from imposing taxes on these services. 

Small cable providers offer broadband services at reasonable 

prices. Operators in rural America where the median household income is below national averages are particularly aware that their 

customers cannot afford to over spend on products and services, including high speed Internet access. If broadband is priced too high, 

then take rates will suffer. 

Our members face various economic challenges offering 

broadband in their markets. First, the cost to upgrade a cable only 

system to provide Internet access is more difficult to recoup for operators with a small number of subscribers. Whether serving 5,000 

or 500,000 customers, cable operators must purchase some of the 

same equipment. 

Second, the cost of maintaining a cable network is high when the 

distance among subscribers is great. A small cable company might 

need an employee to travel an hour or more to make a service call 

to a subscriber’s home. 

Third, access to capital can be difficult. To pay for the necessary 

upgrades and maintenance costs, many of our members must turn 

to bankers on their local main streets, not financiers on Wall 

Street. 

At this time, small cable operators’ overall business costs are increasing. The most significant concern for ACA members is the rising cost of cable and broadcast programming. Small cable operators 

have no leverage in negotiations with network broadcasters and 

national programmers who demand double, even triple the fees 

previously paid for the same content. 

12

Small cable operators are also troubled by costly regulations, particularly new ones recently placed upon them by the FCC. On June 

1st, the Commission mandated that cable operators begin to apply 

more expensive digital set top boxes with separable security to 

their subscribers. 

Then on September 11th, the Commission adopted rules that 

force cable operators to carry certain broadcast stations in both digital and analog formats, requiring our members to make costly upgrades to their systems. This is important. These costs are making 

it difficult for our members to remain viable and reinvest in affordable advanced services for their communities. 

The ACA supports continuing the Internet tax moratorium and 

urges Congress to pass legislation before the ban expires on November 1st. Our members are concerned that an expiration of the 

moratorium could have an unfavorable impact on their businesses 

and communities. Without the moratorium, state and local jurisdictions are likely to impose a patchwork of new taxes on American 

consumers and businesses simply for acquiring the broadband connection. These taxes would increase prices and make Internet access less affordable for consumers. 

New taxes on broadband access would be especially problematic 

if excessive state and local cable taxes were simply extended to the 

Internet. Most cable subscribers already pay a franchise fee of up 

to five percent. Imposing similar taxes on broadband access would 

discourage some consumers from signing up for the service. 

To tax a service that is neither fully deployed nor adopted seems 

to contradict congressional intent to expand broadband coverage 

and penetration. 

Our members who live in the towns in rural areas they serve 

also support the Internet tax moratorium because they know first 

hand how broadband access has improved their communities. It 

has made their towns a better place to live, work and raise a family. 

In addition to offering the service to consumers, some of our 

members provide broadband to their local hospitals, schools, and 

businesses, enhancing their home town’s overall quality of life. At 

a time when the benefits of these services are coming to rural 

America, our members believe government should continue to take 

its hands off approach with respect to taxes. 

Chairwoman and members of the Committee, thank you again 

for the opportunity to testify on this topic of importance to small 

cable operators and consumers. 

[The prepared statement of Mr. Lieberman may be found in the 

Appendix on page 44.]

ChairwomanVELA ́ ZQUEZ. Thank you very much, Mr. Lieberman. 

Our next witness, Mr. Raymond Keating. Mr. Keating is the 

Chief Economist at the Small Business & Entrepreneurship Council. 

SBEC is a small business advocacy group with more than 70,000 

members across the nation. As Chief Economist, Mr. Keating 

writes and speaks on a wide range of issues impacting the entrepreneurial sector of the economy. 

13

Furthermore, he is an expert on taxation, federal, state and city 

budget issues, and a host of other small business issues. 

Welcome, sir. 

STATEMENT OF RAYMOND KEATING, CHIEF ECONOMIST, 

SMALL BUSINESS & ENTREPRENEURSHIP COUNCIL 

Mr.KEATING. Thank you very much. 

Chairwoman Vela ́zquez, Representative Chabot, members of the 

Committee, I very much appreciate you having this hearing today 

and inviting us to speak. 

As you mentioned, I am Chief Economist with the Small Business & Entrepreneurship Council. We have members all across the 

nation. We are nonpartisan, nonprofit, and we work on public policy issues really from A to Z that impact small businesses and entrepreneurs, and that obviously includes the Internet tax moratorium, the moratorium on Internet access and multiple and discriminatory E-commerce taxes. 

And we strongly favor making that moratorium permanent. I 

would like to touch on four points very quickly regarding this issue. 

The first one is the economy, and as we all know, I think the 

watchword right now in the economy is uncertainty, and you can 

look at a whole host of issues, positives, negatives. 

On the negative side, you have energy costs, housing and subprime lending problems, consumers being somewhat less confident, 

and some recent disappointing reports on retail sales and manufacturing production. 

On the flip side, there are positives. There is certainly rising 

household net worth, increasing investment in nonresidential 

structures. Exports look good, and there is good growth in real disposal personal income in recent months. 

And then, of course, there is a whole host of mixed issues out 

there right now. Real GDP growth was pretty good in the last 

quarter, but not so great since late 2005. A critical issue is private 

domestic investment, private sector investment. That was up again 

in the most recent quarter, but it was down in the previous three. 

And of course, employment growth is a big issue, and we saw that 

the last month that we have data for that was not good news. But 

if you look back a little farther, there certainly are positives. 

So in this mix comes tax policy, and it certainly matters a great 

deal. And, again, there is a lot of uncertainty there. If you look at 

the broader tax issue of the 2001 and 2003 tax measures, those are 

due to expire soon. So what is going to happen there? Obviously entrepreneurs and small businesses are very concerned. Are they 

going to be extended? Are they going to be made permanent? Are 

some of them going to be allowed to expire and thereby imposing 

a large tax increase? 

And the Internet tax moratorium access on the Internet taxes, on 

Internet access is a big issue there, and it is another uncertainty 

for many small businesses. The possibility that states and localities 

could be imposing tax increases on Internet access in E-commerce 

would loom as a very big uncertainty and a very big problem for 

a lot of small businesses. That is number one. 

The second issue that I would like to talk about is broadband access and investment. Higher taxes on Internet access would mean 

14

that the growth in broadband access would be restrained, and that 

would take a competitive disadvantage that we have right now and 

make it worse. 

You will see in my written comments that we broke out a table 

on where the U.S. ranks in terms of broadband household penetration rates among various developed nations and unfortunately 

come in last. So creating more uncertainty and opening the door to 

higher Internet taxes are not positive policy developments for investing in those networks. 

All of these things obviously affect small businesses, but then 

there is the direct impact on small business. They will be hurt in 

various ways. Obviously the taxes they pay for Internet access, the 

reduced customers via the Internet and their goods and services potentially facing multiple and punitive levels of taxation. These are 

all significant negative threats to the bottom line of small businesses across the country. 

As many people have mentioned here so far today, advancement 

in the computer and telecommunications technologies have been invaluable for the success of small businesses, and that is a big reason why we need to make this Internet access tax moratorium permanent. 

And the final issue I would just like to bring up is about state 

and local government. There are many state and local officials that 

do not like the idea of a permanent band on Internet access taxes. 

Unfortunately, folks tend to view the Internet as a cash cow to be 

milked rather than a source of economic opportunity for all, and 

the argument is often made that without these additional revenues, 

somehow or other we will be denied the revenues for necessary 

services, vital services from state and local governments. 

But when you look at the numbers, it is really hard to accept 

that, I think. Really state and local governments have been quite 

literally in the taxpayer dough. When you look at total revenues, 

from 1995 to 2005, that is the most recent data that we have from 

the Census Bureau, total revenues went from 1.4 trillion to 2.5 trillion for state and local governments across the country. That was 

a 78 percent increase compared to about 22 percent in inflation 

over that same period, and part of that was sales and gross receipts taxes, and those jumped 62 percent over that period. 

And of course, keep in mind more revenue in the hands of government means fewer resources left in the private sector for consumption, investment, and job creation. If Congress wants to hamper the Internet and related economic opportunities in growth, 

then clearly this Internet tax moratorium should be ended, but if 

they wish to see the full potential of the Internet realized, then the 

current tax moratorium should be made permanent. 

Thank you very much, and I look forward to your questions. 

[The prepared statement of Mr. Keating may be found in the Appendix on page 50.]

ChairwomanVELA ́ ZQUEZ. Thank you. 

And now I would like to address my first question to Mr. Dewey. 

Not only are you a voter, but also you are a real person. It is really 

great to have real people here. 

15

I assume that affordable broadband access has been a crucial factor in allowing you to effectively operate your online store. Would 

you have been hesitant entering this industry had you known the 

rules of the game could possibly be changed and new or unpredictable taxes could be levied on your business? 

Mr.DEWEY. Oh, yeah. It is making me nervous right now. We 

have got a business model set up, and as I stated before, it has 

been a shaky year. So if you throw something new at me or something unpredictable or something where I have got to take care of 

taxes in many different places, then definitely it is going to affect 

our business in the negative. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

Mr. Bieron, due to the fact that many states did not have the 

ability to tax Internet access when the moratorium was enacted, 

there is very little data as to what an Internet access tax might 

look like. Of the states that are levying Internet access taxes, Hawaii levies its general excise tax, New Hampshire its communication services tax, and Washington State its business and occupation tax. 

If there is a way to predict, what services will be taxed if the 

moratorium was not extended and at what rate? 

Mr.BIERON. I mean, I would agree that it is very difficult to predict, although some of the witnesses have referred to some either 

current cable level taxes or current cellular phone level taxes. I 

think at eBay we are concerned about two things. 

First of all, whatever type of tax they choose to just levy on access, it is going to reduce demand, and so in particular, reducing 

consumer demand is a bad thing in the business that we are in, 

and more importantly, in the business that our small business retailers are in. 

But then, half of the regime is also the prohibition on multiple 

and discriminatory taxes. We have always looked at that as the 

prospect that if that prohibition is not there, the incentive is created at the state and local level to potentially try to use taxes to 

discourage distant type of businesses where local business interests 

could attempt to encourage their elected representatives at the 

local level to impose taxes that would give them a benefit because 

it would be a higher level of tax on Internet enabled businesses. 

We think that the—and honestly, only people’s creativity and, 

more importantly, government’s creativity to structure taxes would 

limit how that could be done. 

And so we would simply see that as a great danger. If you open 

up that flood gate, it is hard to predict how it would be used, but 

certainly any small business that is trying to use the Internet to 

reach customers far away potentially competing with business locally, I mean, we see the future as essentially small business everywhere adopting the Internet to help run their business, but that 

creates, unfortunately a competitive dynamic that would be bad. 

ChairwomanVELA ́ ZQUEZ. That was my follow-up question. Thank 

you. 

Mr. McClure, when Congress first passed the ban on Internet 

taxes in 1998, the Internet did not provide many of the services 

that we now use, such as music and video. Some say that Internet 

16

service providers may attempt to bundle these extra services with 

Internet access to avoid paying taxes. 

Is it possible, given the way the moratorium is now worded, that 

Internet service providers may be able to bundle services together 

to avoid taxation? 

Mr.MCCLURE. No, I think we have seen clearly that there has 

been a division. After all, this law has not stood alone since 1998. 

We have gone through two revisions of it, and in both cases the 

states and municipalities have had the opportunity to come back 

and say, ‘‘We are concerned about this issue,’’ and it gets addressed 

in those processes. 

What I find interesting now is they are using as an example, 

voice-over IP that somehow if voice-over IP is included in this taxing regime, that they will be able to bundle them and somehow be 

able to avoid taxes. That is not really the case. The reality is the 

voice-over IP is an Internet service. It is packet switched telephony, 

and it is by virtue of federal court decisions not the venue of the 

state under the Commerce Act, the commerce clause of the Constitution. 

It is not the purview of the states to tax it. So it is not a question 

of somehow this act is preventing them from taxing legitimate 

things they might otherwise tax. The carve-out is very clear. We 

are not looking to expand it. We are simply looking to protect what 

we see as protection of American consumers against very predatory 

taxes. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

And in light of the members that are here, I am going to recognize Mr. Chabot, but once we finish with all the members, I will 

come back and ask more questions. 

Mr.CHABOT. Thank you, Madam Chair. 

Mr. Dewey, I think I will start with you as well. We were just 

going on one of our Blackberries back here on your Web site, and 

we think it has got a great Web site. 

[Laughter.] 

Mr.CHABOT. But I was just thinking with your name, the 

WickedCoolStuff, which is a very clever name, I think, you know, 

if we had started a business like this, if I had the money, say, back 

in high school and a good idea and the Internet existed back in the 

late 1960s when I was in high school, we might have called it 

GrooveyStuff or FarOutStuff or something like that. 

I am just wondering if the name. Are you concerned that it might 

be dated down the road and WickedCool might be pretty lame 

somewhere down the line? 

Mr.DEWEY. Not a concern yet, but we are always looking to the 

future. 

Mr.CHABOT. Good. What are some of your better selling items, 

shall we say? We will give you a little free advertising here. 

Mr.DEWEY. One constant seller would be the classic Superman 

tee shirt. We sell that big S logo worldwide around the world. 

Every day we sell a shirt like that. We sell tee shirts and bobble 

heads and gift items and things like that, movie and cartoon inspired items that people enjoy and especially at gift time. 

Mr.CHABOT. Very good, and we wish you the best. I hope there 

are a lot of folks that take your example and create jobs, and I esVerDate 0ct 09 2002 09:38 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\38207.TXT LEANN
17

pecially was impressed, and I think the Chair was as well, that you 

are paying health care for your employees even though you are not 

rolling in the cash yet. Hopefully you will be some day. But our 

compliments for that, and that has been one of the goals of this 

Committee, to find ways to make health care more affordable, especially to more small businesses around the country. 

But thank you for having the courage to, and I hope you stick 

with it and I hope you are successful, and our compliments to you. 

Mr. Bieron, if I could go to you next, some people have said that 

E-commerce is destroying Main Street retailers, but a recent study 

of historic Main Street downtowns found that they are having an 

economic renaissance with E-commerce, as you mentioned, attracting customers to them from around the world. 

Would you comment a little bit on that again? 

Mr.BRALEY. No, that is absolutely a trend that we think has 

emerged in the last sort of recent years. I mean, Internet time, people joke about Internet time. Things happen really quickly. Certainly when eBay was founded a dozen years ago, there was no 

honest thought on the business side that this would become in 

terms of sellers really a small business engine. Just, I mean, nobody went to eBay originally because they really wanted to work 

for small businesses. 

That is how it has evolved. Likewise there was a time when it 

was seen that the Internet was a threat. Now, as you have said, 

increasingly your small Main Street business has a source of supply of goods to sell. In many cases their biggest inhibiting factor 

on the business side was traffic. It was buyers, and you know, 

when you are trying to sell on the Internet actually one of the big 

challenges is having that source of something to sell. 

And so the small business that currently exists with the brick 

and mortar store, they already have that half of the equation taken 

care of. The Internet gives them the other half which, if they are 

effective in driving traffic, and eBay is a way to get traffic, you 

know, it kind of completes that cycle, and then suddenly you can 

do business. 

And so, no, we absolutely believe that it is an engine that is 

going to keep Main Street small business alive trying to compete 

with the big box retailers who honestly over a number of decades 

from our perspective really are the competitive pressure that in 

many cases really hurts Main Street. 

Mr.CHABOT. Thank you. 

Mr. McClure, would you talk briefly about many of us would just 

go beyond an extension of the exemption on not taxing the Internet, the moratorium? We prefer to make it permanent. Could you 

talk a little bit about is there a cost to the uncertainty to business 

by not making it permanent as far as planning into the future? 

Every couple of years you have got to wonder are they going to 

start taxing us or not. Could you discuss that briefly? 

Mr.MCCLURE. Yes. We have seen that very clearly. I mean, our 

companies, and we represent a great number of infrastructure companies, not just large companies, but very small rural companies, 

but they are independent small businesses, and they have to lay 

out the money, and they have to go to the investment markets to 

get it. Uncertainty raises the cost of that money. 

18

Uncertainty makes that money less available. Just as uncertainty in the marketplace right now makes it more difficult to buy 

a home, to get the loan to buy a home or a new car, we are looking 

at that on a much grander scale. We are talking about a trillion 

dollars. 

So any time you inject uncertainty into the marketplace, you are 

going to raise the cost of that capital, make it more difficult to get 

and make it more difficult to achieve that goal. 

But let’s look even beyond that, sir. Let’s look at simply what we 

want as a national policy. If we sit here today and say we must 

as a national priority have broadband to every American family, to 

every school child who needs to do homework, to every senior citizen who needs it for health monitoring services; if we want to put 

broadband, high speed, affordable broadband to every corner of 

America, then how does it make sense to say we are going to start 

down this road and then erect a large barrier called $35 billion a 

year in new taxes on that service? 

It does not make any sense. If this is, in fact, the nation’s priority and if we’re to believe virtually everyone in this Congress, it 

is a priority and it does not make sense not to make this a permanent tax moratorium. 

We are not talking about E-commerce taxes. We are not talking 

about the larger universe of taxes. We are talking about a narrowly 

scripted tax that helps us to meet our national goal of affordable 

broadband to every American. That is how it makes sense, sir. 

Mr.CHABOT. Thank you. 

Madam Chair, in the interest of time, I will let other members 

and I will yield back, too. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

Mr. Braley. 

Mr.BRALEY. Thank you. 

Mr. Keating, let me start with you. I made a reference earlier in 

my opening statement to the impact that the Internet has had in 

rural communities and rural small businesses. One of the best examples of that from my district is a business that creates high end 

lighting fixtures that move from the Bay area in California to a remote community in Clayton County, Iowa, Elkader, and is now 

marketing its products all over the globe, and there have been a 

number of successful spinoff businesses that have arisen from that 

as this community has embraced the opportunities that come from 

Internet sales and marketing. 

One of them is a product called Little Miss Match that takes mismatched socks and mittens and sells them to young girls who are 

a target audience that really embraces that product. 

But one of the things that I am interested in from you is getting 

some sense of the geographic scope of the tax policies we are talking about today based upon what you hear from your members and 

how these tax policies impact them in places other than our large 

urban shopping areas. 

Mr.KEATING. Well, I think you are hitting a critical area as a 

topic in geography because small business owners in those rural 

areas are probably the ones that have been empowered the most, 

right? Because when you’re in an urban setting, you know, a dense 

suburban area, you have got a market at hand if you are a Mom 

19

and Pop shop. But now the rural businesses are the ones that are 

able to literally reach around the globe. 

So it is a very exciting thing. Geography becomes less and less 

of an issue. So it has been very exciting to look at how those businesses have been empowered. 

Now, what does it mean in terms of tax policy and how they are 

going to be hurt? They are going to be hurt the most because they 

are the ones that have to be able to reach out. They are relying 

on this high tech, wonderful computer world we live in, the Internet, to reach all of those customers, more so perhaps than those 

companies in those other areas. 

So it is most critical to them, and I think it is important for 

members of Congress to keep in mind and, quite frankly, elected 

officials at the state and local level, to keep in mind the impact of 

taxation. Because of the Internet and because of these technologies, 

businesses can become a lot more mobile. 

I happen to live in New York. You do not have to live in New 

York City or work in New York City anymore to make a nice living 

or to start up a business and succeed. You can be in South Dakota. 

You can be in Wyoming. You can be in Iowa. 

So people in all of those states, all of those people that are representing businesses have to keep in mind what is going to happen 

if this moratorium goes away. What are the dangers to small businesses in general, but also, what is going to be the impact on the 

state if we decide to go ahead and do something on the Internet 

access tax front. 

Mr.BRALEY. Mr. McClure, following up on that idea, one of the 

things that I think really transformed business relationships in 

this country was the advent of E-mail communications in addition 

to Internet shopping opportunities, and how it enabled people, customers, suppliers, vendors to develop personal relationships with 

people they never actually had met in their lives. 

And one of the astounding things that arose out of that is when 

you would meet someone in person for the first time. You had the 

sense that you were lifelong friends because you had been communicating with them for so long. 

Could you talk a little bit about some of the human side of the 

explosion and the growth of Internet sales and how that has impacted the future of the business that we have been talking about 

here today that will be also impacted by this tax policy? 

Mr.MCCLURE. Yes, I can. And just for the record, I would like to 

note, sir, that I am a Hawkeye class of ’73. So let me salute you. 

[Laughter.] 

Mr.MCCLURE. I think we focus sometimes—it had to be said. 

Mr.BRALEY. Let me say I am very proud of the fact that both the 

Minority Staff Counsel and the Majority Staff Counsel, like me, are 

University of Iowa College of Law graduates. So we really are 

pleased to have you here today. 

Mr.MCCLURE. Thank you very much. 

So often we focus on E-commerce, and we talk about the miracle 

of electronic commerce without looking at the miracle of communication, and you have hit it immensely there. Imagine. I raised 

three children, and I can tell you first hand that without Instant 

Messaging their social lives would have been totally destroyed. 

20

[Laughter.] 

Mr.MCCLURE. If you look today to the miracle that is communication, it has happened largely because of the Internet. Cell 

phones today are moving toward the Internet. Why? Because that 

is the preferred method of communication. It has enabled me to 

communicate with people around the world. My closest friends now 

are in places like Germany and Australia. That simply would not 

have happened when we were growing up. 

It is an amazing technology, and if we move there into the social 

networking sites, if we look at even what it has done to jobs, your 

ability to find a job, your ability to find a mate, it is an amazing 

process. Communication is the miracle of the Internet, not just 

commerce. 

ChairwomanVELA ́ ZQUEZ. Time has expired. 

Mr. Fortenberry. 

Mr.FORTENBERRY. Thank you, Madam Chair, for holding this important hearing. 

Mr. McClure, I want to give you a friendly warning. When you 

tout your educational credentials as being from the University of 

Iowa, you are also talking to Representatives who have constituents that go to the University of Nebraska, but we want to minimize tensions in this room. 

[Laughter.] 

Mr.FORTENBERRY. All on the same page in trying to think about 

creative ways to expand the opportunities that have exploded on 

the Internet. 

So in fun, I appreciate your comments and your willingness to 

be here. 

I did want to ask you a direct question as well though. You had 

made a comment that 87 percent of Internet taxation goes toward 

compliance. I think we need to go back to probably what was an 

original point stated. We need to be careful. We are talking about 

two things, two issues here. One is taxation on access to the Internet and taxation on Internet commerce. They are separate entities, 

taxation on E-commerce. 

I assumed you were talking about E-commerce sales tax collections as 80 percent of that collection activity going to compliance. 

Was I correct in that understanding? 

Mr.MCCLURE. That is correct, and I am sorry if there is some 

confusion over that, but the data on sales tax collection is the best 

data that we have in terms of percentage of compliance. For small 

businesses, 87 percent of the cost of collecting and remitting taxes 

is tied up in the sheer compliance cost according to Ernst & Young. 

Since we cannot effectively measure the impact of collecting and 

remitting taxes on Internet access or multiple and discriminatory 

taxes on E-commerce, this is the best proxy that we have. And the 

point I was attempting to make is that the level of compliance cost 

is disproportionate. For a large company that already engages in 

multi-state activities and may have nexus in multiple states, the 

cost is lower because they have already absorbed and provided for 

that cost. Small businesses have not. 

So disproportionately this impacts small businesses to a much 

greater degree than it would a large or even medium size company. 

And that was the point I was trying to make. 

21

Mr.CHABOT. Would the gentleman from Nebraska yield for just 

one moment? 

Mr.FORTENBERRY. Certainly. 

Mr.CHABOT. If I could just ask for a clarification, did I hear you 

say that if you collected the tax, 87 percent of what you got, 87 percent was in just collecting it? 

Mr.MCCLURE. Yes, sir. 

Mr.CHABOT. The cost was in collecting it. So you only get 13 percent basically that the governments can use. The other 87 percent 

was just for compliance? 

Mr.MCCLURE. No, sir, because the 87 percent is absorbed by the 

company. The amount of taxes they have to remit do not change, 

but the cost of collecting and remitting those taxes does. 

Mr.CHABOT. All right. Thank you. 

I thank the gentleman for yielding and I yield back. 

Mr.FORTENBERRY. Yes. I think that is an important point. Let’s 

just give a simple example. If a small company has interstate commerce of $1,000, let’s assume sales tax costs are five percent in the 

particular state. That would be $50. Therefore, I am going to get 

stuck doing some math here. That is a bad example. 

[Laughter.] 

Mr.FORTENBERRY. Let me back out, but the major portion—

Mr.MCCLURE. Perhaps I can clarify by saying suppose that the company is required to collect $5,000 in taxes and remit that 

$5,000. 

Mr.FORTENBERRY. Right. 

Mr.MCCLURE. For a small company, you can add another 87 per- cent to that $5,000 on top of that for the cost of compliance. 

Mr.FORTENBERRY. I see. I understand. I think it is an excellent 

point to be made. 

How would you define small business in the parameters in which 

you are talking about? 

Mr.MCCLURE. Generally, and there are lots of definitions, as you 

know, but generally when we look at it from an accounting standpoint, and I have some credentials there as well, we are looking at 

companies of fewer than 200 employees with revenues somewhere 

less than $10 million per year. 

Mr.FORTENBERRY. Well, I think this is a significant finding from 

this hearing, Madam Chair, about the high cost of compliance and 

particularly I would assume elasticity of demand is significant on 

Internet sales as well, as it was suggested on Internet access. So 

that is an important point to be made. 

I would end on this quick story. I have a grain farmer in my district, a small, traditional grain farmer struggling to make ends 

meet; converted the business model into an Internet sales of specialized hay products for the pet market. Now that struggling grain 

farm has I think it is about 50 employees; just received one of the 

major business awards of the year; provides very good jobs in a 

rural county of Nebraska. 

This is the power of what we are talking about here. So I think 

I appreciate all of your input and your involvement in this industry 

that has, again, resulted in so much economic good for small businesses as well as people who work for small businesses throughout 

the country. 

22

ChairwomanVELA ́ ZQUEZ. Time has expired. 

Ms. Hirono. 

Ms.HIRONO. Thank you, Madam Chair. 

Mr. Keating, you represent a nationwide organization, and I am 

wondering whether you have or you are aware of any national demographic data on the people who are engaging in Internet selling. 

In other words, is there any data on the number of women, the minorities, in rural areas? Do you have that kind of information or 

are aware of where that kind of information is available? 

Mr.KEATING. Actually, I do not have it at my fingertips, but we 

do talk about that on our Web site, and I can get the information 

to you. But SBECouncil.org, we have all sorts of analysis on those 

types of things. 

And, you know, as a broad brush statement, it is just across the 

board. I mean the numbers are, you know, every imaginable business. I mean, our group, you know, we range from the consultant 

in the home based business, the one person shop, to manufacturing 

firms, to high tech and everything in between, and all of them one 

way or another are dramatically impacted by obviously the Internet, but they are out there selling things on the Internet, and it 

cuts across all demographics: women businesses. 

The growth, of course, as you know, in women businesses right 

now is far outdistancing males and in various ethnic groups the 

growth rates are dramatic right now. It is a very exciting time in 

terms of the growth of small business, and all of them are working 

with or through or on the Internet, and we can certainly get you 

some more information on that in terms of some exact numbers. 

Ms.HIRONO. Thank you very much. 

One question for Mr. McClure. In your testimony you noted that 

if the moratorium is not extended, states and localities will take 

more than $35 billion per year out of the economy. 

How did you get that number? 

Mr.MCCLURE. Well, that is actually a number generated by the 

states and municipalities based on what they claim they are losing 

each year because of this act. So we can assume that would be the 

minimum level that they would begin with. 

I would also point out the 30 percent figure that we use because 

it tends to be higher than some of the estimates of other groups 

which have said that Internet taxation would only be a modest five 

percent or maybe as much as 14 percent. 

If you look at telecommunications taxes nationwide, you need 

only look to Richmond, Virginia, where local taxes on telecommunications are at 30 percent, and they are not alone. It is in many districts nationwide. 

Our fear is that by the time you heap on multiple indiscriminate 

taxes, 30 percent is going to be a very low figure. 

Ms.HIRONO. Thank you. 

And of course, Hawaii is one of the states that has an exemption 

from this moratorium, and I am sure I will be very unpopular if 

we get rid of that exemption. However, I am all for supporting 

small businesses. 

Thank you, Madam Chair. 

ChairwomanVELA ́ ZQUEZ. Ms. Fallin. 

Ms.FALLIN. Thank you, Madam Chairman. 

23

I am still looking over all of the testimony here. I had a couple 

of questions. 

I enjoyed the conversation with the gentleman on the 87 percent 

of the cost, the taxes and the cost of doing business if taxes were 

to be collected over the Internet, and I was thinking about my 

daughter. Is it Bieron? Is that how you pronounce your name? 

Mr.BRALEY. Bieron. 

Ms.FALLIN. Bieron. She buys nothing but things over the Internet. She just loves the Internet, and she called me up yesterday 

here in Washington, and she said, ‘‘Mom, I bought a dress for 

$5.00. It is absolutely gorgeous.’’

I said, ‘‘Well, great. It saves Mommy money.’’

But I was thinking about, you k now, if she were to ever want 

to sell things on the Internet as a small business person and she 

hopes to kind of have a small business some day and about the collection, and by the way, I am a co-sponsor on this legislation. That 

is where I am at. But what would someone like a young person 

who is wanting to start up a company, and if the moratorium was 

not passed to be made permanent? What would it do to a young 

person or small business owner that is trying to start up a new 

company as far as having to learn how to collect the taxes and the 

time commitment and the financial accounting practices? What 

would it do to that small business owner? 

Mr.BIERON. Sure, and I do think it is important that we distinguish Internet access taxes. There are actually three kinds of taxes 

we are sort of talking about here. There is Internet access taxes 

which are going to show up on your Internet bill. So the bigger the 

small business, the more connectivity, the more band width they 

are paying for; usually the more money they are paying for their 

Internet services. Therefore, they are going to have that bill. 

Then there is the kinds of multiple and discriminatory taxes, 

which in particular in the digital world would be a real threat. If 

you want to deliver movies over the Internet compared to somebody 

who has a Blockbuster video store, you know, the idea that potentially a state or locality without the current prohibition could put 

a 20 percent tax on a downloaded video where it is maybe a seven 

percent sales tax in a store, that is a discriminatory kind of Internet tax. 

And then the third category would be the currently with the 

Quill decision, the issue of sales tax collection is based on nexus 

so that your daughter’s small business would be required to collect 

and remit sales taxes to the State of Oklahoma when she sells to 

a customer in Oklahoma, but if she sells it across the country, she 

would not have the burden of having to know what’s the sales tax 

rate when she sells to San Jose, California. Who do I send those 

taxes to? 

So the compliance cost that Mr. McClure was referring to, I 

think would be the idea that in the sales tax world adding more 

jurisdictions where you have to collect and remit is extraordinarily 

expensive for small business. 

Actually the question was how do you define a small business. 

Actually the Small Business Administration of which this Committee knows something about, one of the things they do is define 

how big small businesses are for all of the various programs that 

24

are over there, and in the area of E-commerce, E-commerce retailers are considered small businesses up until the point where they 

have sales of $21 million, which I often say seems like a lot unless 

you are competing with Wal-Mart. then 21 million is not a lot. 

But changing the Quill decision and requiring a small business 

to start to collect and remit taxes for the 15,000 sales tax jurisdictions that are in America we think would be actually so expensive 

that it is inconceivable that small businesses could do it without 

immediately having to simply outsource the service to technology 

providers, but that would be the burden, is that if she wanted to 

sell when she gets to the point where she is buying and selling 

dresses just because that’s what she likes to do, having to know 

what the sales tax is everywhere when it is a sales tax holiday, you 

know, all of those things, and then where you send all of those 

taxes to, and then keep all of those records for all of those jurisdictions because you could be audited by any one of them in that 

world is extraordinarily difficult to even conceive of. 

Ms.FALLIN. Thank you. I appreciate that answer. 

Can I ask one quick question of Mr. Keating? 

ChairwomanVELA ́ ZQUEZ. Sure. 

Ms.FALLIN. I think it was under your testimony that you list the 

other countries in the world that have better access to broadband, 

and you show the United States ranked towards the bottom. I was 

just curious if any of those other countries have a tax on the Internet on sales. 

Mr.KEATING. I do not know the answer to that actually. I will 

certainly look into it for you though. 

Ms.FALLIN. I am just curious because I notice there are a lot of 

countries that have better access than we do, but I just do not 

know where they are as far as tax and the Internet. 

Mr.KEATING. And just on your earlier question very quickly is 

two things to keep in mind now is that when you have any tax, 

a new tax that comes in, if it applies to individuals and businesses, 

businesses tend to get hit harder, and the harder they get hit, the 

small guys get it even worse compared to the big guys. 

And then there is the regulatory aspect. When you look at the 

numbers, however you want to shake it out, per employee cost, regulations, particularly on the tax front, hit smaller firms much, 

much harder than it does the big guys. 

So the big guys most likely are going to be able to weather these 

things much better than the smaller firms. 

ChairwomanVELA ́ ZQUEZ. Time has expired. 

Ms.FALLIN. Thank you. 

ChairwomanVELA ́ ZQUEZ. Mr. Ellsworth. 

Mr.ELLSWORTH. Thank you, Madam Chairwoman. 

Mr. Bieron, first I want to thank your company for their position 

on the reselling of the banned toys that I heard about just in the 

last few days. Thank you for that position. I hope they continue 

that, and I hope other companies follow that lead. 

Mr. Dewey, thank you. The reason I asked for this Committee as 

a third committee was for people like you back in Indiana. I think 

Indiana beat Iowa last week, didn’t they, by the way? 

[Laughter.] 

25

Mr.ELLSWORTH. Oh, when Indiana wins a football game, we brag 

a lot. 

My question is pretty short really. One thing I have found since 

coming to Congress other than you sell bottle head dollars and 

sometime in eight short months, you feel like a bottle head doll up 

here, but there is always the other side of the coin. If we had another hearing tomorrow or who is going to come into my office next 

week and watches this and takes notes and says, ‘‘That is all bunk. 

There is another side to this story’’? 

It sounds like you have pretty broad support in this room, but 

who is going to come in and tell me the other side of this story? 

Who is the enemy here? 

And as far as you want to go and maybe Mr. Keating and Mr. 

McClure are the appropriate people. 

Mr.KEATING. Well, I think you are going to hear from a lot of 

state and local officials and the folks that represent them. The National Governors Association, I believe, is not too thrilled with this 

idea. The American Federation of State, County, and Municipal 

Employees are not too keen on it. So I think it is pretty predictable 

that is who you are going to see, and they are going to talk a lot 

about needing more revenue for vital services and the sky is falling 

and so on. 

But, again, I think if you take a look at the actual numbers, as 

I said, those are just some broad numbers that I cited, but the 

growth in revenue has been tremendous at the state and local 

level, and the key is there just like at the federal level. If you have 

a growing economy, a growing, healthy economy, you are going to 

have more government revenue. That is one of the benefits. 

So then the question becomes does taxing the Internet make 

sense to keep the economy growing, and I would say no. 

Mr.MCCLURE. A more important factor will be who you will not 

hear from tomorrow. You will not hear from consumers who want 

those taxes. You will not hear from economists. You will not hear 

from consumer advocates. You will not hear about anyone who has 

a responsibility for the growth of broadband, and that includes 

most state legislatures. 

You are going to be talking to people who are looking to raise 

their revenues, and honestly, they cannot give you a good justification for why they need the revenues, which is why it is now being 

repositioned and repackage is somehow a state’s right. You see, it 

doesn’t have to do with the taxes. It has to do with rights. Very 

clearly, it is not a constitutional right to tax interstate commerce. 

So the important thing to remember is you are not going to hear 

about the people who care about deploying broadband to every 

American family. 

Mr.ELLSWORTH. What about industry that is going to say this 

gives you the unfair advantage or we always hear about leveling 

the playing field, and you hear that a lot. Is there any industry 

that is going to come in and say you are getting unfair advantage 

here? 

Mr.MCCLURE. I do not think so, sir, and I do not want to muddy 

the waters again by talking about taxing electronic commerce because this bill is not about that, but if you go back to the Quill decision, one of the things that the Supreme Court was very clear 

26

about is that taxes are a payment for service. Those brick and mortar companies receive direct services. They have received roads 

that go to their premises. They receive police protection and fire 

protection, and taxes are the way they pay for those services. 

When you have an electronic company that has no nexus, when 

it does not have that presence, it does not receive those services 

and, therefore, there is no justification for the payment of taxes 

simply because you want more money. 

Mr.ELLSWORTH. Thank you, Madam Chairwoman. I yield back. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

Mr. Gohmert. 

Mr.GOHMERT. Thank you, Madam Chair. 

And I do appreciate you all being here, your testimony. After my 

alma mater A&M lost to Miami, I was heard to say that I think 

too many schools are spending too much of their emphasis on athletics and need to get back to academics, but after last weekend, 

I think we have got the right proportion. 

[Laughter.] 

Mr.GOHMERT. But the 87 percent cost of compliance intrigues me 

because the way it was described by Mr. Bieron I can see that just 

being a nightmare trying to figure out which city, which state gets 

which part of which taxes, and then you could have disputes over 

who should be getting that, and understand I am signed on. I do 

not want to see the Internet taxed, but when I hear a number like 

that, it does seem to be a little extreme because I think what the 

proponents are talking about is some scheme where, you know, you 

send taxes into a central repository and maybe even let them figure 

out which states get what, and it does not look like it would be an 

87 percent cost of compliance to do that, does it, Mr. McClure? 

Mr.MCCLURE. It would be lovely if there were such a process, sir, 

but the fact is that process does not exist. It is all black box stuff. 

Give us the right to tax and somehow we will figure out a way to 

do it fairly. 

They have been asked for more than a decade to figure out how 

to do it fairly, and then Congress would consider it. They have yet 

to come before you and say, ‘‘This is our plan to do it fairly.’’ It is 

all black box stuff. 

And let me point out we are not—

Mr.GOHMERT. Well, now, I need to dispel one thought that you 

have got, and that is linking the United States government and 

fairness. I have just been here three years, and I have not seen 

that linkage yet. We are still looking, and especially when it comes 

to taxes. 

But we do hear states, local government. We need revenue. More 

and more is going across the Internet. It is going to kill us locally. 

I have not exactly worked out how since the economy is booming 

and the federal and state and local governments, most of them, are 

receiving more money than in history, how this terrible intrusion 

called the Internet has been such an adverse effect. 

I understand conceptually we have got more goods being sold 

across the Internet than ever before, and so perhaps some of those 

are not being sold locally with local sales tax that would have been, 

but it is an interesting dynamic. 

27

Do you have any explanations as to how more commerce is going 

across the Internet and yet most states and local governments are 

receiving more revenue than ever? Anybody? 

Mr.BIERON. Just to provide some data behind that, the Department of Commerce’s, and quarterly they update with the retail 

numbers, and they break out Internet commerce. So at eBay we 

would say, you know, Internet commerce is growing rapidly, but 

traditional retail is so immense that it is almost hard to fathom the 

difference. 

Right now E-commerce in the U.S. is estimated at just under 

three and a half percent of total retail. So last year that was about 

$125 billion of E-commerce retail, compared to over three trillion 

in total retail. 

So in some ways, I mean, again, at eBay we would say that this 

growth is great. Obviously it is our business to empower small 

businesses to do that, and so we see the future being very bright, 

but at the same time we should not lose perspective on the fact 

that traditional storefront retail is trillions and trillions of dollars. 

And so honestly with that growing, traditional retail last year 

grew approximately four percent. Online retail grew about 20 percent, but the baseline for the traditional retail was so huge that actually sales tax revenues for the state reached record levels. 

So when they come in and talk about the Internet, you know, 

threatening their economics, their revenue stream tremendously, I 

mean, maybe in 50 years you would set these growth rates, that 

would be the case, but today some of that really is kind of crying 

wolf. 

Mr.KEATING. If I could, and again, I think it goes back to understanding the phenomenon of economic growth and what that means 

for government revenues overall. You are not just talking about 

sales tax revenues. You are talking about income tax revenues. All 

the other taxes that are paid because of or due to an expanding 

economy, so you have all of those benefits that come into the equation. 

What you will hear though is a very selective definition of E-commerce is increasing by X amount or Internet access is increasing 

by X amount, and if we could get our hands on that, you know, 

that equals X number of dollars. 

But it does not necessarily mean that government should or 

needs to get their hands on those additional revenues. 

Mr.GOHMERT. Thank you. 

My time has expired. 

ChairwomanVELA ́ ZQUEZ. Your time has expired. 

Mr.GOHMERT. Thank you, Madam Chairwoman. 

ChairwomanVELA ́ ZQUEZ. Mr. Lieberman, I would like to address 

one other question to you. Cable companies have obviously made 

efforts to expand access to broadband Internet and other technologies. You stated that many of your members are small and medium size cable companies that are serving smaller communities, 

particularly in rural areas. 

What challenges will your members face in its attempt to provide 

expanded services if the moratorium was not extended? And in particular, how do you believe it may affect efforts in broadband deployment? 

28

Mr.LIEBERMAN. Thank you. 

You are correct. Our operators do serve smaller markets in rural 

areas, and the reality is that many of our members are already offering broadband services in those areas. It is truly the smallest of 

our operators that are still looking for ways to deploy those services 

because of their size and the difficulties in terms of the costs and 

spreading those costs over the number of customers served. 

ChairwomanVELA ́ ZQUEZ. Would you also talk about how this 

broadband deployment has benefited small businesses? 

Mr.LIEBERMAN. Oh, absolutely. Well, mostly our operators from 

their beginning have been video providers, offering services to consumers in homes. Certainly when they have upgraded their systems to offer broadband services there has been new opportunities 

in order to offer these services to businesses, and that has been a 

growth area for many of our members, and they have been able to 

gain a lot of business consumers in their communities. 

ChairwomanVELA ́ ZQUEZ. Mr. Lieberman, the Internet access 

taxes are taxes on the service providers. What is the likelihood that 

cable providers such as yourself would be forced to pass those taxes 

onto consumers and small businesses much like television and fun 

taxes? 

Mr.LIEBERMAN. The unfortunate reality is that they would likely 

be passed along to the consumer. Our operators are running their 

businesses on small margins and do not have the capacity to absorb those costs and would have to pass it along. 

ChairwomanVELA ́ ZQUEZ. Mr. Chabot, do you have any other 

questions? 

Mr.CHABOT. Just briefly, and again, I was going to go to Mr. 

Lieberman also. I would not want him to feel left out in this, but 

there have been a lot of questions that have not necessarily been 

related to the cable industry. 

But let me ask one other thing, Mr. Lieberman, if I can, and that 

has to do with the rates. Could you tell me what the mindset of 

your consumer is right now relative to cable rates and going along 

with the question that the Chairwoman asked about how they 

would feel about rates being increased if this tax, the exemption, 

did not continue? So, in other words, taxes went up. 

How would the general public, in your view, feel about that? 

Mr.LIEBERMAN. They certainly would have a lot of frustration. 

Obviously in the video sector for us, costs are increasing. We constantly hear about it from our consumers, about those cost increases, and question why. Certainly, on the Internet side, we 

rolled out services that we believe are affordable and increasing 

costs on those through taxes, we certainly would hear back from 

our customers why. 

And just to give an example of a small cable operator, there is 

one in western Texas that serves 1,700 video subscribers and 300 

broadband services. The average income in two of the counties, the 

household income is 30,000. For two of the other counties, it is 

22,000. 

There is demand for Internet and broadband Internet, but there 

is also the difficulty in providing it at an affordable cost. An Internet tax would have a serious impact on the ability for people in 

29

these communities to be able to purchase that, and that is a concern for a lot of our operators in those type areas. 

Mr.CHABOT. Thank you. 

And, Mr. Keating, our colleague from Indiana who is not with us 

at the present time, but mentioned who would be on the other side 

of this because we actually have a panel here which is actually 

somewhat unusual here, but then the Chairwoman and I are completely together on this. So I guess we could have drug a governor 

in here or somebody, but that is what happened. 

You know, when I co-sponsored this bill, in fact, I think I was 

one of the original co-sponsors of the legislation some years ago, 

the first phone call I got was from my governor. We were county 

commissioners together, and he went to the governorship and I 

came up here. He was also the lowest rated governor of all the governors over the last couple of years, too. I will not tell you what 

state I am from so that you cannot figure out who he is from, and 

he is really a very good guy and I like him a lot even though, you 

know, he has had some real rough times over the last couple of 

years. 

But in any event, that was the first call I got from him, was how 

devastating this would be, you know, to my people in Cincinnati 

and all of the people of Ohio if we put on this extension and did 

not allow them to tax and how important that was to let them get 

this tax, et cetera. 

So that is one group, is local elected officials and governors, et 

cetera, and the other group that we got some criticism from was 

the so-called, you know, brick and mortar, some of the stores perhaps that say it is an unfair advantage. And you have already 

touched on this, but could you briefly, Mr. Keating, again deflate 

that argument as to why this is a bad thing from the point of view 

of local elected officials and brick and mortar folks? 

Mr.KEATING. Absolutely. You know, I think the first thing is to 

look at the actual numbers, is to see what has been going on in regards to the revenue front for state and local governments. You 

know, I think the exceptional person that holds office at that level 

is going to say, ‘‘You know what? Revenues are rolling in pretty 

good. So we are okay.’’

So you have got to look at the numbers. The numbers show that 

revenues have been increasing at a dramatic rate, about better 

than three times the rate of inflation. So that is number one. 

Number two is, again, the issue of allowing small businesses to 

flourish through the Internet, having the foresight to say, okay, if 

we impose this tax what is it going to mean to the economy overall. 

What is it going to mean to these small businesses? Do we want 

to really take those steps and cause these problems where, again, 

a lot of the big guys are going to be able to handle this in terms 

of the tax itself and all of the red tape and everything that goes 

along with the regulatory aspects of the tax, but the small guys are 

not going to be able to handle this. 

And then finally, the other part of the equation is do the small 

guys matter. Well, of course they do, and when you go back and 

look at all of the aspects of where an innovation comes from, where 

does job growth come from, and any year it is 60 to 80 percent of 

net new jobs come from small businesses. They are employing a litVerDate 0ct 09 2002 09:38 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\38207.TXT LEANN
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tle more than half of the private sector work force. So do you recall 

want to go down this path and open up the door to these taxes that 

are going to do such damage to small businesses and entrepreneurs? 

Mr.CHABOT. Thank you. 

And then finally, one quick question. You mentioned in your 

written statement the 2001 and 2003 tax cuts that were passed 

here in Congress that the President signed into law. In your opinion, how important are these tax cuts to economic growth that we 

have seen and how important is it that we make those tax cuts 

permanent? 

Mr.KEATING. Oh, huge. A huge issue. I mean, when you look at 

when the 2003 tax cut went through, the middle of 2003, it was 

no mere coincidence that at that point the economy started to pick 

up. Private sector investment picked up dramatically. 

Keep in mind that most businesses, better than 90 percent of 

businesses pay the personal income tax rather than the corporate 

income tax. So it hits the bottom line of small businesses. If you 

want, access to capital is critical. So lower capital gains tax is very 

important. 

All of those things are in that package. The estate tax, all of 

those things impact small businesses in a big way, and we need to 

make that permanent, as we need to make the Internet tax moratorium permanent, to help them and to get that certainty into the 

equation. 

Mr.CHABOT. Thank you very much, and I want to thank the entire panel for their testimony. I thought it was very good. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

And I, too, want to thank all of you for your willingness to be 

here, to discuss an issue that is important, and it has been demonstrated that it has an impact on small businesses. Given the fact 

that the Small Business Committee has expanded jurisdiction over 

issues that affect small businesses, we intend to be engaged in this 

issue. 

I ask unanimous consent that members have five legislative days 

to enter statements and supporting materials into the record, and 

with that this hearing is adjourned. 

[Whereupon, at 11:40 a.m., the Committee meeting was adjourned.]

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