U.S. GOVERNMENT PRINTING OFFICE

64–761CC WASHINGTON : 2000

THE INTERNET SERVICES PROMOTION ACT OF

2000, AND THE INTERNET ACCESS CHARGE

PROHIBITION ACT OF 1999

HEARING

BEFORE THE

SUBCOMMITTEE ON TELECOMMUNICATIONS,

TRADE, AND CONSUMER PROTECTION

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

ON

H.R. 1291 and H.R. 4202

MAY 3, 2000

Serial No. 106–114

Printed for the use of the Committee on Commerce

(

(II)

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON TELECOMMUNICATIONS, TRADE, AND CONSUMER PROTECTION

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL G. OXLEY, Ohio,

Vice Chairman

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ROBERT L. EHRLICH, Jr., Maryland

TOM BLILEY, Virginia,

(Ex Officio)

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

BILL LUTHER, Minnesota

RON KLINK, Pennsylvania

TOM SAWYER, Ohio

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

JOHN D. DINGELL, Michigan,

(Ex Officio)

3

C O N T E N T S

Page

Testimony of:

Grey, Leroy E., President, Raven-Villages Internet ...................................... 38

Lowy, Peter, Co-President, Westfield America .............................................. 25

Miller, Harris N., President, Information Technology Association of America ................................................................................................................... 32

Norquist, Grover G., President, Americans for Tax Reform ......................... 29

Upton, Hon. Fred, a Representative in Congress from the State of Michigan .................................................................................................................. 11

Material submitted for the record by:

After the Net Tax Commission: The Gregg-Kohl Nexus Solution, by Adam

D. Thierer, article entitled ........................................................................... 50

American Federation of State, County and Municipal Employees ............... 47

International Council of Shopping Centers .................................................... 48

(III)

(1)

THE INTERNET SERVICES PROMOTION ACT

OF 2000, AND THE INTERNET ACCESS

CHARGE PROHIBITION ACT OF 1999

WEDNESDAY, MAY 3, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON TELECOMMUNICATIONS,

TRADE, AND CONSUMER PROTECTION,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:10 a.m., in room

2123, Rayburn House Office Building, Hon. W.J. ‘‘Billy’’ Tauzin

(chairman) presiding.

Members present: Representatives Tauzin, Stearns, Gillmor, Cox,

Largent, Rogan, Shimkus, Pickering, Ehrlich, Bliley (ex officio),

Markey, Boucher, Gordon, Rush, Luther, Sawyer, Green, McCarthy, and Dingell (ex officio).

Staff present: Justin Lilley, majority counsel; Cliff Riccio, legislative analyst; and Andy Levin, minority counsel.

Mr. TAUZIN. The subcommittee will please come to order.

Today the subcommittee begins review of two important pieces of

legislation, H.R. 1291, introduced by our good friend, Mr. Upton,

and H.R. 4202, legislation sponsored by Mr. Ehrlich. The issue of

interstate access charges has been with us and with this subcommittee since 1983, when the FCC first constructed its access

charge regime. In recent years the FCC’s access charge exemption

for information service providers has been and continues to be a

subject of much debate.

Some have argued that the rationale for this exemption no longer

makes sense because the information services industry is no longer

in its infancy as it was in 1983. In fact, many ISPs are larger in

terms of market capitalization than many telecommunications service providers that still must pay permanent access charges.

On the other hand, there are those who feel that imposing permanent access charges on ISPs would result in dramatically increasing the consumer price of dial-up access to the Internet.

The current exemption they argue enables ISPs to continue

charging customers flat rate monthly fees for access to the Internet, whereas long distance charges are computed based on minutes

of use.

The subcommittee recently heard from Governor Gilmore of Virginia, the Chairman of the Advisory Committee on Electronic Commerce, on this very issue. He believes that permanent access

charges would suppress the demand for Internet services and as

2

such would stifle innovation in the electronic marketplace. Consumers today stay on-line for lengthy periods of time, sometimes

for several hours. When confronted with time sensitive charges,

consumers will necessarily pull back and limit their time spent

surfing the Web per week, and not surprisingly unload on Congress

for authorizing Internet service price hikes.

To ensure that ISPs do not inflict rate shock on their subscribers,

I have joined with Fred Upton in cosponsoring H.R. 1291, which is

intended to prevent time based access charges from being imposed

on consumers. Since the introduction of H.R. 1291, I think that all

of us have learned a great deal more about the subject and unfortunately the complexity of the FCC web of access charges. When the

1983 exemption from access charges was promulgated, there was

little surface traffic, and certainly no Internet traffic.

As a result, we have a fine line to walk here. We must ensure

that those consumers who use their computers to view a Web site,

send an e-mail or purchase a service or product are not charged on

a permanent basis. Simultaneously, however, we need to extensively consider whether it is still equitable to subsidize ISPs by not

charging them for their fair share of the cost of their use of telephone networks, and we also need to debate issues like whether

the Internet telephony or computer to computer voice services

should be exempt from access charges.

I mean, think about this as we debate this bill. When telephone

services become very prominent on the Internet, and therefore

Internet users are accessing and using the telephone networks to

make telephone calls, not to do data transmissions or ordinary

Internet surfing and e-mailing, but when they actually begin making telephone calls regularly over the Internet, as many are beginning to do, is it fair for other telephone users to have to pay for

those networks through access charges and yet Internet users remain exempt. There is a question of fairness and equity and concern about the viability of those networks given a world of Internet

telephony.

We are going to debate that and I think before we complete this

session today and before we begin markup on the bill hopefully we

will have a consensus how to deal with that very thorny issue.

We have also gathered today to discuss the utility of extending

the Internet Tax Freedom Act’s moratorium on State and local

taxes. The country is home to over 7,000 taxing jurisdictions. Many

electronic retailers are small operators that could have real trouble

complying with the complexity and the burden of multiple and discriminatory taxation, and so we gather today to examine whether

or not we ought to extend the moratorium that we just recently enacted. We cannot lose sight, however, of what State and local taxation would mean to consumers as well as the growth of electronic

commerce. At the same time all evidence suggests that States and

localities are prospering even as electronic commerce grows at the

same time. In short, those who asked Congress to empower the

States and localities to discriminatorily tax the Internet have to

make a stronger case, and I look forward to that discussion.

With all of that said, we should consider the two bills before us

today with the clear understanding that they are vital components

of our efforts to implement a sensible and fair policy regarding the

3

taxation of electronic commerce. Our debate on this important

issue will ultimately determine who can and should and who will

pay for the cost of providing the facilities and the capabilities necessary to make the Internet a fully operational network.

The Chair recognizes the gentleman from Massachusetts, Mr.

Markey, for an opening statement.

Mr. MARKEY. I would to commend you for holding this hearing

on a number of tax issues that are related to the Internet. This

hearing follows the hearing that we had a few weeks ago where we

heard from Virginia Governor Gilmore on his perspective on the

work of the special commission we established to explore Internet

taxation issues. Today we revisit the issue of Internet taxes, but

also focus on the exemption that many Internet service providers

enjoy from access charges.

The exemption on enhanced service provider access charges

began in 1983. In the late eighties, the Federal Communications

Commission began a rulemaking which sought to reverse its earlier

decision. I believe that the FCC would have imposed such access

charges on Prodigy and CompuServe and the other forerunners of

the Internet revolution back in 1988 but for the efforts of this subcommittee which at hearing after hearing with the Federal Communications Commission sitting right at that table as we tried to

persuade them that that would be the wrong route to go, that flat

rate pricing was more preferable than the per minute charges that

they were looking at, and I believe in many ways that was the pivotal decision.

I think if permanent charges were used today or had been used

over the last 12 years, that there would have been a completely different direction that the Internet would have taken, and I am very

proud of the work that this subcommittee did in the 1980’s in convincing the FCC to change its position and to ensure that flat rate

pricing was in fact the approach which was taken because it was

the belief of the subcommittee back then that it was necessary to

nurture the fledgling information industry through the retention of

the exemption.

Now, one of those then fledgling beneficiaries of government protection from access charges now intends to own CNN, TNT, the Atlanta Braves and all of Time Warner, so obviously the policy was

a success if in 12 years we have been able to move to the point

where one of those fledgling companies now owns the most important media corporation in the world. It is quite appropriate and

timely as a result to revisit this issue and to analyze the effect on

consumers and e-commerce if usage sensitive per minute access

charges were levied on Internet service providers.

I have battled time and again to lower universal service fees over

the years, particularly access charges. I continue to believe that the

current universal service support levels are excessive and bloated.

We must examine the overall equities across industries of universal

service obligation. It is unfair to ask consumers of local phone companies and traditional long distance services to pay the lion’s share

of the universal support of the network, especially if that network

is utilized by Internet companies to offer competing services without such obligations, especially if those services are identical to the

4

services which are in fact provided by the local and long distance

phone companies.

As we explore all of these Internet tax related issues, I believe

it is important to keep things in perspective. The magnitude of

what we are talking about is relatively small. The Department of

Commerce announced just last month that the estimate of U.S. retail e-commerce sales for the fourth quarter of 1999, October

through December, was $5.3 billion. That means that e-commerce

sales accounted for less than 1 percent of the total retail sales estimates, which was $821 billion for the quarter. Yet there is little

question that the growth curve for on-line commerce promises to be

exponential in nature. That is why this hearing is absolutely essential.

That is why, Mr. Chairman, I want to compliment you for calling

this double header today. I think we are catching these issues at

the point when they should be dealt with by the committee.

Mr. TAUZIN. I want to compliment the gentleman on his observation with reference to this fledgling industry becoming such a giant

and also commend him for making sure that there was at least one

competitor that customers could turn to when we see the awful

struggle of these two titans, Disney and Time Warner. I also want

to make the point it would be nice to have another competitor and

maybe we can discuss that in this committee sometime.

The Chair is now pleased to recognize the author of one of the

pieces of legislation we are going to hear about today, Mr. Ehrlich.

Mr. EHRLICH. Thank you, I will be brief. This is an issue that

will dominate the work of this committee and Congress for years

to come. I applaud the work of Chairman Bliley on telecommunications issues. It is his leadership that led to the enactment of the

Telecom Act of 1996, which has provided the road map for deregulation of the industry generally. In addition, I want to recognize

Mr. Fred Upton at the witness table and his bill to prohibit access

fees, which I support.

Of all of the constituent letters I have received during my tenure

in Congress, Internet taxation and specifically the imposition of

permanent fees is by far the most popular issue. To date I have received 3700 letters asking me to oppose any efforts by Congress or

the FCC to impose charges on Internet service. Regardless of

whether these fees come in the form of direct or indirect charges,

my constituents have made it clear that they do not want their

Internet bill to resemble their telephone bill, comprised of outdated

taxes and a multitude of confusing service charges.

In an effort to prevent government from imposing fees and taxes

that increase the cost of Internet service for all Americans, I recently introduced H.R. 4202. The purpose of this bill is twofold:

One, prohibit access charges or regulatory fees on Internet service

providers and, two, extend the Internet tax moratorium by an additional 5 years. One of the primary reasons for the tremendous

growth of the Internet is that government has taken a hands off

approach. It is imperative that Congress prevent unnecessary fees

or regulations that only serve to impede the rollout of Internet

service if the Internet is to fulfill its promise of how the world communicates.

5

It is my understanding that there may be concerns regarding section 2 of my bill which prohibits access charges on Internet service

providers. As always, I would work with any and all parties to resolve concerns, issues, or unintended consequences resulting from

this provision. With respect to the moratorium, I want to recognize

the hard work of my colleague, Chris Cox, in passing the original

bill in 1996. This moratorium has resulted in the rabid development and deployment of electronic commerce across America. John

Kasich wants to make this moratorium permanent. While I share

his enthusiasm in this regard, I believe that a 5-year extension of

the moratorium is appropriate and will provide Congress and the

American people the evidence that is needed to determine whether

the moratorium should be made permanent.

I also want to take this opportunity to recognize a leader on the

Internet tax issue, the Governor of Virginia and Chairman of the

Advisory Commission, Jim Gilmore, who has taken his time and

talent on this important issue and provided compelling evidence for

keeping the Internet tax free.

I look forward to working with him and other members of the

commission to produce legislation that implements the sound policy

recommendations of the commission. Once again, thank you, Mr.

Chairman, for holding this hearing and I look forward to moving

these bills through the committee and onto the House floor, and I

yield back the balance of my time.

Mr. TAUZIN. Thank you. The Chair recognizes Mr. Boucher for an

opening statement.

Mr. BOUCHER. I applaud your intention to move quickly to approve legislation which will confer a major consumer benefit

through the repeal of the 3 percent Federal excise tax on telephone

services. Since that tax is currently passed through to consumers,

it will be the consumers of telephone services who will directly benefit from its repeal.

I also endorse your effort to extend the current moratorium on

taxes that are discriminatorily applied with respect to the Internet

and on multiple State and local taxation with respect to electronic

commerce. And I also think that a permanent prohibition on access

charges as applied to Internet service providers is appropriate.

As we make these changes, however, I want to encourage the

committee this morning to consider removing another unfair charge

that is associated with Internet service delivery. At the present

time local telephone companies make payments to each other for

the termination of one company’s network of telephone calls which

originate on another telephone company’s network. This arrangement is called reciprocal compensation. And while the arrangement

works well with regard to traditional voice based telephone traffic,

it operates in an illogical and inequitable manner when it is applied to the delivery of Internet traffic. In this context it has become an entirely one-way arrangement and has no reciprocal nature. Some Internet service providers have qualified as competitive

local exchange carriers, and as CLECs, they receive these payments from the local telephone company when that company’s customer connects over the modem to the ISP who carries that customer’s Internet account. In other words, the ISP receives from its

customer traffic that derives from the local telephone company’s

6

network and gets paid by the local telephone company for the privilege of having that information delivered to the ISP.

No calls are made in return and so all of the payments go from

the local telephone company to the ISP which has qualified as a

CLEC. In some other instances, CLECs have gone into business

just for the purpose of serving ISPs so that they can receive these

reciprocal compensation payments. And since no calls ever originate on their networks, they make no payments in return. And the

problem is of truly large magnitude. Payments from CLECs under

this distorted structure now total hundreds of millions of dollars

annually, and those numbers are rising dramatically as the level

of Internet usage increases.

It is an unfair system, and as we enact bills before us that would

prohibit the imposition of access charges on ISPs, I urge that we

take this opportunity to remove the current unfair reciprocal compensation fee that is associated with Internet access. It is a perfect

fit, and as we confer a major benefit on ISPs, I think we also

should correct the distortion in the current reciprocal compensation

system.

I also applaud your statement, Mr. Chairman, that we need to

look carefully at the effect on universal service support in the event

that Internet telephony for the provision of long distance calling becomes commonplace, and I think that day will arrive and probably

pretty soon. When that happens the access charges that long distance providers pay to local exchange carriers for terminating their

traffic would no longer be paid, and I think that would have a dramatic effect on universal service support. I think it is appropriate

that we consider that as we make the decisions with regard to the

imposition of access charges on ISPs.

These are important subjects, and I am very pleased that the

subcommittee is addressing them. I want to commend our colleagues, Mr. Upton and Mr. Ehrlich, for bringing these measures

before us and I look forward to the witnesses’ testimony today.

Thank you.

Mr. TAUZIN. The Chair thanks the gentleman, particularly for reemphasizing some of the concerns that I think we need to address

before we move the bill forward. The chairman is pleased to welcome the chairman of the full committee, Mr. Bliley for an opening

statement.

Chairman BLILEY. Thank you, Mr. Chairman. With today’s hearing, this committee begins the task of ensuring that the Internet

remains a tax free environment. We have all talked about how important the Internet and electronic commerce are to the growth of

the economy. They are the engine driving this long train of economic growth. Now comes the time for Congress to do more than

pay lip service to the principles of lower taxes and deregulation.

This subcommittee will examine two bills today that give us an

opportunity to provide consumers with relief from taxes and regulation. I want to commend my colleagues Bob Ehrlich and Fred

Upton for their hard work in crafting these two bills. They have

identified a real problem that affects our constituents as well as

the development and growth of electronic commerce. We have all

seen the e-mails and letters from constituents pleading us to block

the FCC from imposing a modem tax or an e-mail tax. In fact, I

7

brought two recent examples with me this morning and I ask

unanimous consent, Mr. Chairman, that they both be included in

the record.

I should add that consumers are right to be concerned. While it

is true that Internet service providers are currently exempt from

having to pay access charges, the FCC could always change its

mind. Moreover, some in the telecommunications industry continue

to wage battle at the FCC and in the courts on this issue. It is

clear that some have a vested stake in extending the FCC’s access

charge regime so that it sweeps in consumers of Internet access

service.

The Ehrlich and Upton bills would block the FCC from doing so.

More to the point, these bills would block the FCC from imposing

permanent access charges on consumers when they log on. The

practical, not to mention the political implication of doing otherwise

are huge. Keep in mind that a run of the mill telephone call lasts

roughly 5 minutes. By contrast a consumer stays on-line for about

45 minutes to an hour. Consumers would be understandably outraged if Congress allowed such a tax. People using the Internet

grows every day precisely because the cost is falling and it is

charged on a flat rate basis. The imposition of permanent access

charges would undue all that.

Moreover, we should recognize access charges for what they are,

an FCC imposed tax that is passed on to the American consumer.

A permanent tax on Internet access hurts consumers, hurts the

Internet and hurts electronic commerce, both of which depend upon

affordable access to the Internet.

I support the 5-year extension of the current moratorium on

State and local taxation of Internet access in electronic commerce

for a number of reasons. First, it is the right thing to do for the

American consumer. Electronic commerce provides consumers with

untold efficiencies, many of which might dry up if States and localities extend their power to tax the Internet. Moreover, to those who

say the Internet Tax Freedom Act is unfair to States and localities

I would reply that the government should receive only what it

needs, not what it wants and by every estimate electronic commerce poses little, if any, threat to their tax revenue needs at this

time.

Let me close by acknowledging Grover Norquist, who is with us

today as a member of the Advisory Commission on Electronic Commerce. He did fine work to advance the cause of lower taxes and

less regulation. Thank you, Mr. Chairman, and I yield back the

balance of my time.

Mr. TAUZIN. Thank you, Mr. Chairman. The Chair is now pleased

to recognize the ranking member of the full committee, the gentleman from Michigan, Mr. Dingell.

Mr. DINGELL. I commend you for holding this hearing. The two

bills before us deal with two important Internet policy issues. The

first issue is whether Internet service providers should be subject

to the traditional FCC access charge regimes or any other universal service support mechanism.

The second issue is whether the current Internet tax moratorium

should be extended temporarily pending resolution of a permanent

Internet tax policy. The subcommittee understands well that forVerDate 11-MAY-2000 09:41 Nov 30, 2000 Jkt 010199 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 E:\HEARINGS\64761 pfrm11 PsN: 64761
8

mulating legislative policy dealing with the Internet is an inordinately complex issue and becoming increasingly so, it requires

making judgments and predictions about the future evolution of

Internet technology and the consumer applications that are expected to flow from it. Prognostication of this sort is nearly an impossible task given the unprecedented speed with which the Internet develops. As a result, I am more convinced than ever that we

need to tread lightly and to take extreme caution when making legislative changes in the area. It is vitally important that we understand the implications of all of our actions because the economic

penalty is more quick and more severe than ever before. One only

has to look to the volatility of the financial markets to understand

the fragile character of the new economy with which we are tinkering.

On the whole I believe the bill takes a reasonable and modest approach to dealing with the various regulatory charges and taxes on

the Internet, and I commend you, Mr. Chairman, and the drafters

for their thoughtful work in this regard. While I generally agree

with the purpose and the intent of the bills, I have some reservations about the legislative language in each bill and I hope that we

will take the time necessary to avoid serious unintended consequences.

While each bill appears aimed at protecting consumers from incurring permanent charges for Internet access, H.R. 1291 may go

further than is necessary to achieve this goal. I agree that we

should make sure that the access charges or other universal service

support mechanisms are not applied in a way that will cause consumers to pay by the minute for their basic Internet connections.

Once consumers connect to the Internet, long distance telephone

paging or other services that happen to be procured over the Internet should not be treated in a discriminatory way compared with

non-Internet counterparts.

This is a very important point. The statute should not prevent

these services from being treated similarly to those delivered to

consumers by traditional means, particularly for the purposes of

determining whether or not they should contribute to support universal service. The language of H.R. 4202 may be better suited to

achieve this desired result.

On the issue of Internet tax I believe it is wise to extend to extend the moratorium contained in the Internet Tax Freedom Act

for some period of time. The moratorium was drawn narrowly to

apply to taxes imposed on Internet access and to multiple or discriminatory State and local taxes on electronic commerce. At the

same time it permits States to tax remote sales via the Internet in

the same way that remote sales by mail order catalogs are handled

today. However, while the moratorium ostensibly allows States to

impose sales and use taxes on these transactions, it is beyond dispute that the States are currently ill-equipped to collect this tax on

remote sales, whether Internet or otherwise. Therefore, it is critical

that a cohesive policy be put in place sooner rather than later to

simplify the process for imposing and collecting taxes on these remote transactions.

As remote sales made via the Internet continue to increase exponentially, States are playing beat the clock with their ability to reVerDate 11-MAY-2000 09:41 Nov 30, 2000 Jkt 010199 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 E:\HEARINGS\64761 pfrm11 PsN: 64761
9

tain in many instances greater than half their existing tax base.

Given the enormity of the stakes involved for the financing of public schools, roads, police departments and other essential services,

as well as a myriad of other services to our communities, it is imperative that we revisit this issue at much shorter intervals.

The 5-year extension proposed in H.R. 4202 actually would not

expire until more than 6 years from today. In the time as measured

by the Internet that is nearly an eternity. I hope the chairman and

the drafters of this legislation will work with us to establish a more

reasonable timeframe and to permit a more frequent and I think

wiser opportunity to review these matters and to protect the public

from potentially crippling results.

Thank you for holding this hearing. I look forward to working

with you as the matter moves forward.

Mr. TAUZIN. I thank the gentleman for his thoughtful comments.

Mr. Stearns.

Mr. STEARNS. Thank you, Mr. Chairman. I also applaud you for

having this hearing to examine the legislation of my colleague, Mr.

Upton, and to preclude the FCC from imposing a per minute

charge on Internet access services, as well as extending the current

3-year moratorium on State and local taxation on electronic commerce.

Mr. Chairman, I think we probably could move post haste on this

bill because I think the Telecommunication Act of 1996 while it

didn’t address the issue of the Internet, I think the FCC with its

access charge or form order in its April 1998 report on universal

service, the FCC took the steps, probably the proper steps, to ensure that enhanced service providers and ISPs are not regulated as

telephone carriers under title II and that enhanced service providers are identified as end users of the telephone network, thereby

not paying the access charges of long distance. I think that act

alone would probably justify post haste on Mr. Ehrlich’s bill and

Fred Upton’s bill. We can combine the two of them.

At the same time, Mr. Chairman, we might as well add the idea

of repealing the 3 percent telephone excise tax that was passed in

1898 and we can call this overall bill the Protection of the Consumers Who Are Using the Internet Act. I think many of us realize

that way down the road if e-commerce succeeds to where everyone

is buying everything off the Internet, ultimately there might have

to be an adjustment. I am not sure what that adjustment might be.

Cities, towns and States can get revenues from other sources, but

the continued success of the Internet is—I think in the early stage

is contingent on whether it is taxed or not, and I don’t think it

should be taxed.

I urge my colleagues to move forward on these bills and pass

them this year. Thank you. I yield back the balance of my time.

Mr. TAUZIN. The Chair thanks the gentleman, also a cosponsor

of Mr. Upton’s bill. The Chair recognizes Mr. Gordon for an opening statement.

Mr. GORDON. Mr. Chairman, I am enjoying listening to all of

these comments, and I will reserve my remarks to hear Mr. Upton.

Mr. TAUZIN. Mr. Green is recognized, the gentleman from Texas.

Mr. GREEN. Thank you. I appreciate the subcommittee’s continued interest in Internet taxation. As a cosponsor of Mr. Upton’s

10

bill, I believe that Congress cannot allow the FCC the ability to impose permanent charges on Internet access services. Through explosive growth in data traffic, permanent access charges would

quickly drive consumers off and kill the promises of this cutting

technology in the future. Because the access fees were originally

designed for voice traffic, there was little concern about adding a

few cents per minute to the fund for the maintenance of the local

telecommunication infrastructure.

Unfortunately, the length of consumers’ phone calls differ greatly

from the time consumers spend on-line. Access charges are designed for the typical 5-minute phone call. They are not designed

for the 45-minute on-line session. I believe that portions of each of

these bills continuing the ban on permanent access changes is

something that the subcommittee should act on immediately.

I do want to express reservations with portions of Mr. Ehrlich’s

bill that deals with extending the current moratorium on State and

local taxation of electronic commerce for an additional 5 years. The

failure of the Advisory Commission on Electronic Commerce to develop a consensus policy toward State and local taxation has left

many questions unanswered.

For instance, the members of this subcommittee do not have reliable numbers as to what States stand to lose in local sales tax revenue if we extend the moratorium. My own State of Texas has no

income tax and relies heavily on the sales taxes to meet our spending obligations and priorities, and I am not comfortable with the

idea of excluding Internet sales from local taxation until I am sure

how it will affect my own State and other States in the Nation. I

question further the need for extending the moratorium when the

current ban does not expire until October of next year. I believe we

should use this time to gather more information and let the technology mature so we have a better idea of the true size and scope

of the issue.

I want to make it clear that I don’t favor raising taxes. However,

we should not place a mandate on 50 States that could seriously

impact their financial health in the future. The only issue that I

was sure of after last month’s hearing was that the majority of

Governors do not feel comfortable with Congress limiting their options on this issue.

I support the continued growth of e-commerce, but right now it

is the traditional small businesses in my districts that supply the

jobs for my constituents. I believe the subcommittee could be better

served in using the additional time that is available under the current tax moratorium to gather more comprehensive information.

I would like to thank the chairman for today’s hearing and also

for the hearing last month when we had Governor Gilmore. I yield

back the balance of my time.

Mr. TAUZIN. The Chair recognizes Mr. Shimkus for an opening

statement.

Mr. SHIMKUS. Thank you. I will be brief. I think there is consensus on the access charge issue that we need to continue the

moratorium. There is a credible debate on the sale tax issue. I

think technology will come around to make that doable. Although

as a prior tax collector in my prior life of property taxes, I think

government officials at all levels do not do their constituents good

11

service when we have all these sales taxes, users fees. They can’t

track back the amount of taxes that they are paying. When you

have a property tax bill and you get the bill and you have to write

the check out to fund government, that is the best way to be held

accountable for the fees.

So I would challenge the States and local governments to start

being prepared because this new era of technology is going to

change, and I don’t know if we are going to be able to keep up with

it. So you may have to be more honest with your citizens and find

an appropriate billing so they can track the actual cost of government and approve of those.

This is a great time to talk about technology and the future and

the cost of government on our individual consumers, and I look forward to the hearing. Thank you.

Mr. TAUZIN. I thank the gentleman.

The Chair is pleased to recognize Mr. Upton. Mr. Upton, you finally got a taste what it is like to be on that side listening to all

of us.

STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF MICHIGAN

Mr. UPTON. Thank you, Mr. Chairman. I appreciate the opportunity to testify on behalf of my bill, H.R. 1291, and I thought I

would begin my testimony with a short quiz. Who is the most unpopular Member of Congress and what is their most unpopular bill.

Mr. Markey, I thought you would have an answer. Taxachusetts,

that was the State. No. The answer is Congressman Schnell, and

his bill H.R. 602P, and that is the final answer. There is no such

congressman, and there is no such bill. But if you are like me, you

have received thousands and thousands of letters and e-mails saying that bill in fact will be up in the next 2 weeks beginning 11⁄2

years ago, and they are outraged that the Congress is going to take

this bill up. And of course that is a rumor that is only false.

Around the same time another e-mail campaign suggested that

the FCC was going to impose a permanent access charge on Internet use and again our constituents flooded our offices with e-mails

to express their outrage. Upon closer examination the FCC was

asked if it was going to authorize a permanent access fee on Internet use, and in reply the FCC stated it had no plans at the present

time to authorize such a fee.

While I am glad that the FCC has no plans at the present time

to impose such a fee, I am troubled by the fact that there is nothing to prevent the FCC from doing so today or tomorrow or the

next day or the next, and that is why I introduce my bill, which

so many of you have cosponsored today.

My bill stops, it will prevent a stop watch from being placed on

the Internet so that our constituents are not charged by the minute

when they surf the Web or when they e-mail their friends, families,

customers or even us for that matter. And after all, our constituents already are paying for phone service in a monthly fee to their

Internet service provider. Clearly if our constituents were charged

by the minute when they surfed the Web or e-mailed this would

drastically increase the cost and dramatically inhibit their use of

the Internet. This would impact folks who communicate by e-mail,

12

particularly with families with children or spouses in the military

overseas or children who are in college far away from home, families who are scattered across the Nation and around the globe and

seniors on fixed incomes who have finally begun to communicate by

e-mail to their grandchildren.

We cannot let this happen, and my bill prevents it and I am

pleased that most of you here today are cosponsors, along with 138

of our colleagues, and I am pleased that Governor Gilmore testified

in support of this bill when he testified in front of this subcommittee last month.

More specifically, my bill would prohibit the FCC from imposing

any access charge that is based on a measure of time for the support of the universal service, and as such my bill is delicately crafted to prevent Internet users from being swept into the current system of implicit subsidies that local and long distance telephone

companies and their regulators have relied on to promote and preserve universal service without underminding the principle that

phone companies need to be able to recoup the legitimate costs associated with providing services related to the Internet.

On a final note, given the rapid pace of telecommunication technology, I believe we must carefully consider how steps Congress

might take today will impact or apply to future technology. In this

regard I believe there are legitimate concerns that a broad interpretation of my bill could jeopardize the near future deployment of

Internet telephony, which would enable people to use their computers to communicate by voice over the Internet.

To set the record straight, I would like to make crystal clear that

my bill is not aimed at this type of voice telecommunication but instead at data communication. That is why so many of our constituents have e-mailed us over the last 11⁄2 years.

Furthermore, I recognize that the dazzling advances in technology have the potential to blur distinctions between data and

voice, making our attempts to legislate all the more difficult, but

I firmly believe that we can craft a proposal based on my bill which

will accomplish our objective in a responsible manner.

Again, Mr. Chairman, I appreciate the opportunity to come and

testify before my former subcommittee and I look forward to being

back in the future. I yield back the balance of my time.

Mr. TAUZIN. The Chair thanks the gentleman for his presentation.

Who is this Herr Schnell?

Mr. UPTON. He is not a Republican. I know that.

Mr. TAUZIN. Is that some rumor on the Internet?

Mr. UPTON. It is.

Mr. TAUZIN. That he is going to impose modem fees?

Mr. UPTON. 602P. The word is—and I read and sign all of my

legislative mail, and I have received well over a thousand e-mails

from my constituents telling me that in the 2 weeks we will be taking up 602P offered by Congressman Schnell and hope that I will

vote no, and I have been receiving that message since January of

last year. I think we did once have a Congressman Schnell but not

during my service in the Congress.

Mr. TAUZIN. Mr. Markey and I were commenting about the most

unpopular congressman. It was not that we didn’t have a ready anVerDate 11-MAY-2000 09:41 Nov 30, 2000 Jkt 010199 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 E:\HEARINGS\64761 pfrm11 PsN: 64761
13

swer for you, we had too many ready answers. Obviously there is

no Herr Schnell. There is your bill which literally is aimed at targeting protection against access fees for regular data services on

the Internet.

You heard my comments about my concern. Other members expressed it, that this bill not settle, not get into the question of

whether or not when the Internet becomes the vehicle for telephony, whether the ISPs who provide telephony services to people

should or should not be required to contribute to the maintenance

of the networks and the universal service systems that support

telephone networks.

Do you share those concerns?

Mr. UPTON. I want to make it absolutely clear that you are correct and we have not had a chance to have that colloquy until now,

but my bill is aimed solely at data transfer. As an example, my

brother-in-law serves in the Air Force. He has been all over the

globe, now in Japan. As he has been on his missions it has been

wonderful for me to communicate in terms of data that we send

back and forth using e-mail. This legislation looks at that transfer

of communication, not at voice. My bill should not be construed to

incorporate voice as part of this bill but solely on the data end of

things.

Mr. TAUZIN. I think it is important for all of the members and

the listening audience to understand that this is not just a fictitious problem, there are currently freephone.com, and I understand

AT&T has BroadNet 2 Phone, which is an effort again to get into

telephony on the Internet, and those forms of service, voice communications on the Internet indeed are upon us and so it is a consideration we have to somehow make in the final passage of this bill

that we don’t get into that very thorny issue.

I also want to point out to members that one of the problems is

that the FCC defined ISPs being end users not as providers, and

so it complicates the issue of what happens when an ISP begins

providing telephone service on the Internet as to whether or not it

is subject to access charges for the support of universal service and

the maintenance of telephone networks.

I want to congratulate you on your good work and also tell you

that we intend to expeditiously move this legislation, and ask your

help in making sure that the language is designed in such a way

that it does do exactly what you intended in the bill.

Mr. UPTON. If we need to make further clarification, I would be

glad to accept that language. I appreciate your support.

Mr. TAUZIN. I yield to the ranking member, Mr. Markey.

Mr. MARKEY. Thank you, Mr. Chairman.

I have this hearing that we conducted in the subcommittee on

October 2, 1987, back long ago when I was chairman of the subcommittee.

Mr. UPTON. I was in junior high school.

Mr. MARKEY. The subject of the hearing was flat rate versus per

minute charges, and the Federal Communications Commission was

proposing to essentially move to a per minute system and so the

subcommittee held a hearing. At that point we had it at the Tip

O’Neill Building in Boston, Massachusetts on this subject with all

of the concerned parties at the time.

14

Chairman Dennis Patrick of the FCC was proposing that we

move toward the per minute approach and obviously at that point

in time, as I will go back to my opening statement, less than 1 percent of Americans now use information services and 95 percent of

households with personal computers lack the modems that allow

them to access those services. The industry rests on a precipice,

and these ill-timed FCC proposals could push it into a distant future. So after our series of hearings, we will convince them to flip

their perspective and they ruled in the opposite direction.

Mr. TAUZIN. You are the man, Markey.

Mr. MARKEY. Even a blind squirrel finds an acorn once in a

while. I am taking credit only for ensuring that the issues of today

are put in the proper context of the long story line that they embody. And as we sit here today, we recognize the success of those

policies. Let’s take credit. This is not something that happened by

accident, you know. The Internet actually had to be voted from the

public sector to the private sector by the Congress. We had to push

it over there after it was constructed by BB&N in my congressional

district. So I am very proud of that and to a certain extent that

is why those hearings were held because it was being constructed

in my district.

The question now is as it becomes much more of a ubiquitous

technology and it can be used for telephony, and since I continue

to oppose moving from a flat rate to a permanent basis, is it appropriate for us to look at a per line charge in order to make sure that

there is some contribution which is made to the universal service

pool. It could be relatively modest per month, but at least it would

ensure that all sectors were contributing to the subsidies that go

to rural America.

My concern is that this rural America subsidy is something that

I think most members want to protect and we want to make sure

that there is some fairness in this application. So how would you

look at for example per line—maybe $1 or $2 per month per line

charge as a way of ensuring that there is some aid given to rural

subscribers?

Mr. UPTON. I would just note as we have looked at the explosion

of the Internet, last week I visited a fifth grade school outside of

Kalamazoo and I asked the students, 120 kids, how many kids

there know how to use the Internet, I don’t think there was a single hand that stayed down.

I know that the practical experience is that as people have their

home computer and whether it is AOL or whatever provider that

they might have, Internet provider, it is now the most folks are beginning to get two lines. My 8 and 12 year old when they were on

it, pick up to call somebody and if you had only one line, it disconnected the whole system. And after a couple of crashes like that,

like a lot of households we now have two lines. We have a line solely dedicated to the computer. Line charge and the taxes as part of

that is——

Mr. MARKEY. In terms of whether or not a telephone call is made

on a circuit switch network as opposed to a packet switch network

because if you ask those kids how many have phones, they are

going to raise their hands. And we want to maintain the universal

accessibility to phones in rural America and that is the central

15

issue. How do we maintain that quality rural telephone service and

who should be subsidizing it. Should it just be my father, the retired milkman, or should there be some role that the pack and

switch network if it is going to provide telephone service also play

but not moving to a per minute charge system but rather looking

at perhaps a per line—again, I am just raising the question. And

more to look for a way to effectively ensure that there is rural telephone service that is maintained at a high quality and that it is

done on an equitable basis. Are you open to that per line charge,

even if it is modest?

Mr. UPTON. As I look at all of the people on our street, whether

in Michigan or here, there are many people that have the second

line and they are paying the taxes on that second line and they are

paying the additional charge.

Mr. MARKEY. If two companies are providing telephony and one

is using the Internet to provide it and one is using the traditional

system, should one type of company be favored over the other one

in terms of whether they have to subsidize the telephone service

to rural America?

Mr. UPTON. My bill it is clear that we are looking at data transfer, not at telephony. I can see the case where the telephone provider might be in competition. There are ways that you can circumvent and get free voice long distance. I can see where that puts

the existing folks at a real disadvantage, and that is why my bill

is targeted only at data. But I don’t know—I will leave—I don’t

pretend to be an expert on the per line charge. I was not part of

the hearings back in 1987.

Mr. MARKEY. Well, in fact it was. To the extent to which we were

trying to again—the analogy here is that at that point in time

there was only 1 percent usage and it was the upper white middle

class.

Mr. UPTON. I am surprised it was that high, 1 percent.

Mr. MARKEY. And 90 percent had college degrees, and without a

decision at that point that was made to go to flat rate pricing that

would lead to a faster democratization of access to the technology,

I don’t think that we would be having this discussion here today.

But we have this kind of historical artifact, the rural subsidies of

the telephone. It is all part of that larger discussion. It is very difficult to separate it in terms of what the 1s and Os mean in the

digital era in the transmission of information out into the rural

parts of the country. I just raise it to see if you have some thoughts

on it.

Thank you, Mr. Chairman.

Mr. TAUZIN. I thank the gentleman. The Chair recognizes Mr.

Largent for a round of questions.

Mr. LARGENT. Mr. Upton, I just have one question. How do you

respond when people talk about the diversion of tax dollars, I

guess, or the loss of tax revenue to local, State, city municipalities

as a result of the e-commerce which has taken place over the Internet?

Mr. UPTON. With regard to Internet sales?

Mr. LARGENT. Yes.

Mr. UPTON. The way that I respond to it, I look at our State, our

Governor has done a terrific job in cutting taxes and it has been

16

the No. 1 job creator in our State in probably the last 3 years. Income taxes have been cut. Our State has a nice problem right now

of having a budget surplus. The way that I respond to folks that

would like to charge for products over the Internet because of the

unfairness of our 6 percent sales tax versus none is to make things

more competitive I think our State ought to look at lowering the

sales tax. We are awash in cash. That ought to be a proposal on

the table so that our bricks and mortar operations to be more competitive with the sales that they are competing with, so they can

lower that tax and so they are in better competition, whether it is

automobiles and books or anything else.

Mr. LARGENT. I yield back the balance of my time.

Mr. TAUZIN. I thank the gentleman. The gentleman from Tennessee, Mr. Gordon, is recognized.

Mr. GORDON. Mr. Upton, do you have an income tax also in

Michigan?

Mr. UPTON. We do and our Governor and State legislature have

just reduced that. It is coming down to under 4 percent now.

Mr. GORDON. I think probably a lot of the surpluses that we are

seeing in various States are not a function of the sales tax that is

fairly inelastic but rather those that have income taxes at this time

of great prosperity. That is the reason that I think the tax coffers

are swelling. As my friend from Texas mentioned, Texas and Tennessee only have a sales tax. We are somewhat at a disadvantage

in that regard.

Mr. UPTON. While I am supportive of the effort to extend the

moratorium and I have had long discussions with my colleague,

Mr. Cox, on this, my bill doesn’t address that. But while I do support it, again, I look at our State. We have cut our property taxes

by a third. It has been terrific. It is one of the reasons that our

State has prospered to the degree that we have. We have had a

Governor and a State legislature that has thought that cutting

taxes would in fact create growth, and that is exactly what has

happened.

Mr. GORDON. Thank you.

Mr. TAUZIN. Thank you, Mr. Gordon. The gentleman from California, Mr. Rogan, is recognized.

Mr. ROGAN. Mr. Chairman, I want to thank you for calling this

hearing and also especially thank our colleague from Michigan for

his presentation today. I am fully in support of the premise under

his bill.

Just a quick question. I don’t know if you have seen this before,

Mr. Upton. I read a couple of years ago that one of the premises

underlying the creation of a sales tax was this: That because a

business, say, that opens its doors on Main Street would have to

have responsiveness from the local community with respect to police, fire, parking spaces, meter attendants, and so forth, that the

justification for the sales tax was to help subsidize the cost of those

additional expenses.

Have you in your research on this bill run into language that

would indicate that there was justification for that?

Mr. UPTON. I agree with the gentleman’s premise, which is one

of the reasons why I support the moratorium on no sales taxes on

17

the Internet. In fact, it is very much like a catalog sale where,

again, you don’t have a presence in that particular State.

The point was made to me during our 2-week break that with

different products in different States it is terribly complicated in

terms of what is taxed and what is not. As I read the New York

Times here in Washington, I see they are talking about certain

weeks in New York City where they are not going to have a sales

tax on any clothes that are sold in the city as a special deal to get

people to come into the city. How do you factor that in?

There is a difference in the sales tax rate in New York City between a bottle of pickles that is in glass and a bottle of pickles that

is in plastic. Those tax codes are terribly complicated. I don’t know

how you end up getting the right thing.

You have to remember, too, as you buy something, as one buys

something on the Internet, they usually have a delay of 1 day to

5 business days in terms of the delivery of the good. That is somewhat of an inconvenience versus if you are going to buy a tennis

racket on the Internet versus going to Sports Authority, where you

can actually hold it, see it and take it with you when you leave.

And there is the real thing about the village or the community

that gets the money back from the sales tax when they do not have

to provide police, fire, sewage, all the other services that a municipality does.

It is sort of interesting, we have one small community in my district, a two-traffic-light town, that is looking at an e-commerce company coming in. They are going to provide 300 or 400 jobs if it gets

fully up, which is terrific. They will pay the taxes for those Michigan residents that buy that particular service.

In a lot of cases, e-commerce companies have in fact expanded

because all of a sudden you have the universe now at your sales

door instead of just the folks in your particular community. So I

buy the argument that we could extend the moratorium for all

those reasons that you suggested.

Mr. ROGAN. I know that the question of sales taxes outside the

four corners of your bill, it all goes to the vitality of the Internet,

and precluding the FCC from imposing access charges is one of the

key building blocks to maintaining the viability of the Internet.

Once again, I want to commend you for your leadership.

Mr. Chairman, thank you again for holding this hearing. I yield

back the balance of my time.

Mr. TAUZIN. Thank you.

The gentleman from Texas, Mr. Green, is recognized.

Mr. GREEN. Thank you, Mr. Chairman.

I am glad you introduced the bill, Mr. Upton. I am glad to be a

cosponsor. All of us have received those letters. Maybe, Mr. Chairman, what we ought to do is have a hearing and just maybe subpoena and put that on the Internet. I don’t know how long your letters have been coming in, but ours have been coming in at least

6 or 7 months.

Mr. UPTON. Within the next 2 weeks you are going to have that

bill on the floor.

Mr. GREEN. That has been the last 6 months, and I am still looking for Mr. Snell.

Mr. TAUZIN. He serves in a virtual Congress, not the real one.

18

Mr. GREEN. Just so they cannot pass real laws.

I yield back the balance of my time. I am glad you introduced

it, Fred.

Mr. UPTON. I appreciate your early cosponsorship of this measure, as well.

Mr. TAUZIN. There were 16 members of our full committee who

were original cosponsors. There may be more now. I congratulate

the gentleman on his good work.

The Chair would, first of all—I think the gentleman from California, Mr. Cox, is recognized next.

Mr. COX. Thank you. I am not sure. You were going to recognize

the gentleman from Massachusetts.

Mr. TAUZIN. I apologize to the gentleman.

Mr. COX. Thank you, Congressman Upton, my colleague, for

bringing us this bill and for giving us the opportunity to solve a

big problem before it actually happens.

This, like the Internet Tax Freedom Act, is a rescue just in time.

It is a lot easier to prevent these bad things from happening before

they really do occur. And, of course, this is an area where, so far,

the taxes that you are talking about have not been imposed upon

American consumers, but we are worried that because of the regulatory power that was given to the Federal Communications Commission in the 1930’s that—at a time, of course, when the Internet

was not even a gleam in anyone’s eye, that they might try and interpret that ancient authority to impose new taxes now in the 21st

century.

I just want to run some numbers that my staff has given me by

you and see if this comports with your understanding of just how

bad the problem would be if the FCC were allowed to do that.

The average Internet user spends 22 hours a month online. That

is our latest data. If the FCC forced the average Internet user to

pay the access charges that your bill would prevent, at the current

average rate of 21⁄2 cents a minute that works out to $33 a month,

or about $400 a year. Is that your understanding of just how big

this tax would be?

Mr. UPTON. It is. It is.

Mr. COX. Wouldn’t this rather obviously price Internet services

out of the range of many, if not most, Americans?

Mr. UPTON. I think it would. And, again, a lot of us have invested in a second line at our house. Your kids are grown up now

as well. If you have only one line, you can lose the whole connection and you have to go back to the beginning again.

So we have invested in an extra line, we are paying taxes on that

extra line and the charges that are assessed as part of that, and

then to say you are going to pay another $400 a year per family

on average is going to put a lot of families out of touch with each

other.

Mr. COX. You mentioned the second line. Every phone line in the

House is already subject to this $3.50 Federal subscriber line

charge.

Mr. UPTON. Yes. So a lot of us are already paying twice.

Mr. COX. Now, in 1997, is it not right that the FCC pushed

through another tax on a second line, so you pay an extra tax on

the second line?

19

Mr. UPTON. Yes. The second line is actually, as I understand it,

more expensive than the first line.

Mr. COX. It is $6 a month for the second line, is that right? So

that amounts—to the extent that people are adding second lines so

they can connect their modems, that amounts to a modem tax. It

amounts to a modem tax in that same range of hundreds of dollars

a year.

Mr. UPTON. Yes.

Mr. COX. Does your bill address that?

Mr. UPTON. It does not.

Mr. COX. Mr. Chairman, I hope that as soon as we enact Mr.

Upton’s bill that we can now address this next problem that he has

pointed out for us and get rid of that horrible second line tax, the

modem tax, which discriminates against Internet usage at a time

when a lot of us are listening to the President, the Governors, and

everyone else complain about the digital divide.

I yield back.

Mr. TAUZIN. I thank the gentleman.

The Chair recognizes the gentleman from Ohio, Mr. Sawyer, for

questions.

Mr. SAWYER. Thank you, Mr. Chairman. I just want to take a

brief moment to thank our colleague, Fred, for doing the work that

it took to bring this bill to this point. I look forward to seeing it

on the floor.

Mr. UPTON. Thank you.

Mr. TAUZIN. I thank the gentleman.

The Chair now recognizes the gentleman from Maryland, Mr.

Ehrlich, for a round of questions.

Mr. EHRLICH. I could use any number of one-liners, but I won’t.

Thank you, Mr. Chairman.

Fred, just real briefly, first of all, you have done great work here,

as we all know. Getting back to two questions that have been

asked with respect to this great philosophical issue about sales tax

and use tax and fairness and an even playing field you were asked

I think by Mr. Largent, how do you respond to the equitable type

argument that is used?

Isn’t it fair also—you also touched on this, and I think this is an

underanalyzed part of the e-commerce explosion—these entities

make things. They are located somewhere. You have a new one in

your district. Obviously, to the extent that occurs, it is new products, it is new businesses, it is new property taxes, new income

taxes paid by employees, payroll taxes, the whole nine yards. That

is, I think, an underanalyzed part of the debate with respect to

how equitable this whole thing is in keeping the Internet explosion

going.

Would you comment further on that? I find it fairly compelling,

and nobody ever talks about it.

Mr. UPTON. I would make a point which I think uses your district. I play tennis with Chairman Bliley every Wednesday, and he

whipped our butts this morning, despite my getting a new pair of

tennis shoes from your district, Holabird Sports. Is that in your

district?

Mr. EHRLICH. Congratulations. That is right.

20

Mr. UPTON. Catalog sales. I did not pay tax on it because it was

sent—I don’t live in Maryland, and it was sent from your district.

I think e-commerce ought to be treated the same as catalog sales.

They don’t have a bricks-and-mortar structure in Michigan, and

they sent it UPS, and they are pretty good shoes that I got. That

is the type of system that we ought to be using. It is the same

thing. It is an exact parallel with catalog sales as it is with e-commerce.

If for some reason all of a sudden we put up that road map of

pickles, whether it is in a glass jar or plastic, or this is the reason

New York City does not have a sales tax on this week, it is—I have

seen the statistics someplace, it is 6,500 different regulations on

sales taxes. There is no way people are going to meet that. That

is not why they are buying the shoes or racket or whatever, it is

not because of the sales tax, but it in fact will inhibit the growth

of what has really helped a lot of businesses and consumers,

whether they be in urban or rural areas.

Mr. EHRLICH. Certainly it would not apply to shoes, but the fact

is new products are introduced as a function of e-commerce. That

is, I think, something, Mr. Chairman, we need to place in the

course of this discussion, the context of this discussion.

I yield back.

Mr. TAUZIN. I thank the gentleman.

The gentleman from Illinois, Mr. Shimkus.

Mr. SHIMKUS. Thank you. I will be brief.

I want to thank my colleague from Michigan and note that, since

I think today is Tax Freedom Day, it is quite appropriate we are

talking about this. We will just focus on the fact again, why is it

Tax Freedom Day? We cannot just take our income tax and divide

out the amount of days and figure out how long we work for the

Federal Government because we have all these hidden taxes.

If we can be clear and honest and then let the elected policy leaders elected by their constituents debate how best clearly to identify

the amount of revenue they need to fund the services that the constituents desire, we would be much better off as a Nation.

I see this as a way that we can continue to address this. E-commerce may force us to do it. I appreciate your work.

Mr. UPTON. Just a comment, if the gentleman will yield for 1 second. Our reading of the Constitution is only the Congress can tax

or spend. Yet we have seen a history now over the last couple of

years of the FCC putting their elbows out and taking that authority. This takes it away and puts it where it ought to be. We ought

to decide here whether to tax access to the Internet. If we decide

not to tax it, it should not be done, versus allowing someone to tax

it before we have to try and stop it.

Mr. SHIMKUS. The price of freedom is eternal vigilance. I appreciate that.

Mr. TAUZIN. I thank the gentleman.

Mr. MARKEY. May I be recognized, Mr. Chairman?

Mr. TAUZIN. You may be recognized to strike the last word.

Mr. MARKEY. Thank you.

I have just been listening to this discussion with Mr. Ehrlich.

The gentleman from Michigan is correct that he does not owe any

taxes to the State of Maryland, but in purchasing that pair of

21

sneakers he does owe Governor Engler taxes. You do owe taxes on

that.

Mr. UPTON. I have them sent to the District of Columbia.

Mr. MARKEY. You owe taxes to the District of Columbia.

Mr. UPTON. Not on a catalog sale.

Mr. MARKEY. Yes, you do.

Mr. UPTON. I will pay it.

Mr. MARKEY. I know you are quite proud of purchasing it in a

way that did not acquire your actual taxes, but you do owe the

taxes there. I think that is a misunderstanding that a lot of people

have about the Internet.

Mr. COX. Will the gentleman yield?

Mr. MARKEY. I will be glad to yield.

Mr. COX. The use tax obligation is the mirror image of the sales

tax obligation, but it should be added that the Governors are the

first to tell us that they are about as good at enforcing use taxes

against individual consumers as the Federal Government is at enforcing the penalties for not filling out all the questions in the long

Census form.

Mr. MARKEY. If I can reclaim my time, although Governor Gilmore was here testifying taking one position several weeks ago, as

we know, Governor Engler takes just the opposite position. Although he does take that position, I don’t think it is as a native

of Massachusetts. I think he is just generically a Governor, and I

think that is the basis of his position. You do owe him or the District of Columbia the tax money.

The other point that I was going to make is that the reason I

raised that question about the voice versus data is that in your bill,

as you define it, you say, ‘‘The Commission shall not impose on any

interactive computer service.’’ That, of course, would mean voice

and data. So your bill actually——

Mr. UPTON. It needs to be clarified.

Mr. MARKEY. That is the point I was making, just going back to

your own statement. You do include voice in your own bill.

Mr. UPTON. If the gentleman will yield for a second, I introduced

this bill 11⁄2 years ago or so, and at that point it was not an issue.

It has been rightly raised, and I am absolutely in favor of correcting it to define it the way that I indicated this morning.

Mr. MARKEY. I would just add that, looking at this rural subsidy

that urban America does not provide, I am trying to provide an equitable answer.

Mr. TAUZIN. I think it is important at the conclusion of your testimony, Fred, to point out we are going to hold here discussion on

the moratorium bill as well, but that does not prohibit the collection of sales taxes or use taxes on Internet sales any more than

they do on catalogue sales. That is a big confusion. I had to

straighten it out everywhere I went in my district this last week.

The difficulty, as Mr. Cox pointed out, is that there is a huge difficulty, not only a constitutional question of nexus but a practical

difficulty, in collecting use taxes. Governor Gilmore, his State tries

to do it with a line on the income tax form that asks the income

tax reporters in Virginia to go ahead and divulge all the purchases

they have made from out of State. I would question how many people use those lines.

22

It is a very complex and difficult area, and we will probably have

to have some kind of an agreement of the States and the counties

on how to manage the system in the future, just as we did on uniform sourcing on cellular telephone taxes, the bill we just passed

out a couple of weeks ago from this committee.

Fred, thank you again.

I also want to point out, by the way, Mr. Cox, and you made

mention of the second line charge, that the Progress and Freedom

Foundation has an excellent report out on telephone taxes, and I

would commend it you to read, where the Foundation estimates a

20 percent shortfall on poverty access to the Internet because of the

already high level of telephone taxes, a level that the State, local

and now the Federal Government, through the Spanish American

War tax and the FCC’s own system of taxation, levies.

Mr. UPTON. Dick Armey said this morning that the Spanish Ambassador told him that they are not coming again, I would note.

Mr. TAUZIN. Again, I think we will have an opportunity to deal

with that tax. I hope we will.

Mr. COX. Mr. Chairman, I wonder if I could ask for one point of

clarification.

Mr. TAUZIN. The gentleman is recognized to strike the last word.

Mr. COX. We have had some good interchange about the portion

of the bill that might direct itself toward Internet telephony as

against Internet transmission of data.

Our colleague from Massachusetts asked you whether or not you

believe that packet-switched telephony should have an advantage

when it comes to these taxes. I think everybody agrees that we

ought not to put the thumb on the scale in favor of one kind of telephony or another, but what I am concerned about and what I

hope I am not hearing is that we might impliedly be directing the

FCC to impose these taxes on Internet telephony, which I sure as

heck don’t want to see, and I hope nobody here wishes to see that.

The model for the future must be the Internet, not the old system of the 1930’s when we had long land lines subsidizing local

service. That was one thing. Now we have got all these different

competing forms of telecommunication. That is the world we intended to create with our act a few years ago.

I think it is very, very important for us, for example, not to encourage the FCC to get into the business of trying to get inside the

packets and figure out how much of it is data and how much is

voice. It is all zeros and ones. It looks the same. It is, technologically, enormously challenging. It involves privacy rights if they

are going to use other means to find out what is in your communications.

So I get very concerned when I hear about the importance of

these subsidies and the importance of these taxes and the importance of this complexity of this old system that we adopted many

decades ago without the Internet in mind, because it is not necessary for a solution to the problem of the digital divide, it is not

necessary to achieve universal service.

I will just leave you with this fact, and I will subside entirely.

It is that today in America there is a greater penetration of the

population with television than there is with telephone. We have

universal service, taxes and subsidies for telephones and not for

23

televisions. More people, more families, more poor people, have

televisions than telephones, notwithstanding this elaborate system

of taxes and subsidies and so on. You can see why when you figure

out how regressive all these taxes are and how counterproductive

the whole system, the model should be the Internet for the future.

I hope we are very careful when we draft this legislation and do

not encourage it.

Mr. TAUZIN. If the gentleman will yield, I simply want to point

out that we may come to a point, hopefully sooner rather than

later, when telephone companies are permitted to cross the old

lines and offer full-blown broadband Internet services to everyone

in this country in competition with the AOLs and AT&T cables,

that second wired competition that I think all of us want to see 1

day.

Maybe at that point in time we can reach that point with a new

Internet service, including voice transmissions, which I am told is

going to be a loss leader, almost given away free, that that will no

longer require these kinds of charges. The problem is in the interim. While I agree with the gentleman that we ought not to direct the FCC on how to resolve it, Mr. Markey and Mr. Upton had

a dialog on potential ways to resolve it, but, in the interim, what

do you do when someone uses the current system of Internet to

provide telephony using the local networks, when other people who

use the local networks through regular telephone service are required to support those local networks, and an ISP—under the current definition ISPs do not? That is a real problem.

Mr. MARKEY. Would the gentleman from California yield?

Mr. TAUZIN. Sure.

Mr. MARKEY. I share the gentleman’s concern about access

charges, and for 20 years I have been trying to do my best to do

away with access charges for the circuit switch network. I agree

with that goal. Obviously, I believe in that. I am looking very close

at this rural subsidy. I believe it is very bloated.

But if we are not going to eliminate it, if we are—if we want to

maintain a subsidy for rural America, my only point here is that

there should be some understanding that the service that is provided, whether it be packet switch or circuit switch, really does not

make any difference in terms of the consumer.

I can understand why back in 1967 AT&T, when it was offered

by the Federal Government, the contract to build the packet switch

network, said no. So did IBM. They had a perfectly good circuit

switch monopoly. So that is why BB&N up in Boston had to build

it.

But the point today is that when you look at it in terms of its

practical application, that there really is not a difference in terms

of the consumer’s benefit but there is a difference in terms of the

access charges that are imposed.

I have always believed that these access charges are bloated. I

would like to get rid of them or reduce them down to an absolute

minimum, but I would also like to maintain some subsidies for

rural America. If we are going to do that, then we are just going

to have to find a way of ensuring that there is some equity. That

is the only discussion I am trying to raise. I want to work with the

gentleman toward achieving that goal.

24

Mr. TAUZIN. If the gentleman would yield once again, I would

simply point out that the day when access charges no longer become relevant or important is the day when the local telephone

networks finally complete their 271s and they are into full-blown

telephone competition or we are smart enough, at least in these advanced services areas, to free them from these old LATA line restrictions which many of you have joined with me in an effort to

do. I hope we do it sooner than later.

But doing that may be the prerequisite, the first thing you do,

in order to get to that point when you can eliminate all access

charges, and then you don’t get into a fight as to whether or not

you ought to have them for ISPs and not have them for telephony.

The sooner we reach that world, frankly, I think the sooner the

folks in rural America are going to be better off, because they will

have the opportunity to get distance-irrelevant communications

going, just the same way the Internet provides distance-irrelevant

services today.

Mr. MARKEY. Mr. Chairman, the difference between telephone

and television and why a television is more ubiquitous, when you

buy a television, from then on service is free.

Mr. COX. Actually, it costs $1 billion in subsidies to put the satellite up so then you can get pay TV.

Mr. MARKEY. That is another subject. That is a sore point that

the gentleman and I agree upon 100 percent in terms of pay TV.

But in terms of——

Mr. TAUZIN. That is a different hearing.

Mr. MARKEY. In terms of just the television itself, you buy one,

put it in your living room, it is free forever, unless you want to subscribe to the satellite or cable TV. But when you buy a phone, you

are paying for that service from day one on. So it makes sense that

everyone would have a television in the home because it is free;

and, with a phone, it could be a lower percentage of the population.

Mr. TAUZIN. For quick clarification, there is also a difference,

however, between services that are provided by wires and services

that are provided over the air, the broadcast spectrum. The notion

that somebody had to lay a wire down to a rural community where

very few people live, cable or telephone wire, causes real cost problems and economic considerations. So it is a good discussion.

I yield to the gentleman from California.

Mr. COX. I just hope, Mr. Chairman, that we recognize that if we

take—this is not what Congressman Upton started out to do, and

if we take the step either wittingly or unwittingly of encouraging

the FCC to lay a tax on Internet telephony, that that is much more

than the nose of the camel under the tent. That is the determinant

of the FCC’s becoming the regulator of the Internet and its complete morphing from the Federal Communications Commission into

the Federal Computer Commission, a step I dearly wish never to

see.

Mr. TAUZIN. I join you in that concern.

Mr. Upton, thank you so much for your patience, sir. You can see

the way, since you have left, we have really gotten excited. I think

you ought to come back.

For the second panel, we have Mr. Peter Lowy, co-president of

Westfield America in Los Angeles on behalf of e-Fairness Coalition;

25

Mr. Grover Norquist, president of Americans for Tax Reform in

Washington, DC; Mr. Harris Miller, president of Information Technology Association of America here in Arlington; and Mr. Leroy

Grey, president of RAVEN-Villages Internet, a small ISP run in

West Virginia.

Gentlemen, welcome.

We will begin with Mr. Peter Lowy, the co-president of Westfield

America. Gentleman, your written statements are part of our

record. We have them. You have 5 minutes to summarize the high

points of your testimony.

Mr. Lowy.

STATEMENTS OF PETER LOWY, CO-PRESIDENT, WESTFIELD

AMERICA; GROVER G. NORQUIST, PRESIDENT, AMERICANS

FOR TAX REFORM; HARRIS N. MILLER, PRESIDENT, INFORMATION TECHNOLOGY ASSOCIATION OF AMERICA; AND

LEROY E. GREY, PRESIDENT, RAVEN-VILLAGES INTERNET

Mr. LOWY. Thank you, Mr. Chairman. I am Peter Lowy, president of Westfield America and founding chairman of the e-Fairness

Coalition.

I would like to thank Chairman Tauzin and Ranking Member

Markey for providing me the opportunity to speak on this important issue.

The e-Fairness Coalition represents the real estate industry and

1.5 million retail stores, ranging from Cody’s Booksellers in San

Francisco to national retailers such as Wal-Mart and Sears, as well

as one out of every five American workers nationwide.

Taxation of the Internet involves three interrelated issues: taxes

on Internet access charges, multiple and discriminatory taxes, and

collection of sales and use taxes on retail sales made on the Internet.

We oppose H.R. 4202 and H.R. 1291 because we believe there

should be a fully integrated solution with regard to taxation and

the Internet, not a piecemeal one that does not address an equitable collection of sales taxes on retail sales.

While there is broad agreement on the issues of access and on

multiple and discriminatory taxes, there is clearly no agreement

with respect to sales and use taxes and e-commerce. If Congress

passes bills addressing the first two issues, there is no incentive to

address the most critical and most difficult issue, which is to provide a level playing field for the collection of sales taxes.

The States are currently working on simplifying sales tax rules

Nationwide. An extension of the moratorium will stop the momentum gained in solving the complex issues of sales and use tax collection.

There should be no rush to extend the current moratorium as it

does not expire until October 21, 2001. We have 16 more months

to consider permanent solutions to all of these issues.

Current law provides for a blatantly unfair playing field where

brick and mortar retailers collect sales taxes, but their online competitors are exempt from collection responsibility. As tax-free online

consumer sales grow, estimated to be in excess of $100 billion in

2003, the States and cities will look for other revenues to offset unVerDate 11-MAY-2000 09:41 Nov 30, 2000 Jkt 010199 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 E:\HEARINGS\64761 pfrm11 PsN: 64761
26

collected sales and use tax from sales that have migrated to the

Internet.

The Nation’s Governors also oppose a simple extension of the

moratorium. On April 12, 2000, a bipartisan group of 36 Governors

sent a letter to the congressional leadership urging rejection of the

report of the Advisory Commission on Electronic Commerce and expressing support for a level playing field. Five additional Governors

sent their own letters expressing similar concerns.

The message of the e-Fairness Coalition is simple. We support a

level playing field so all retailers—in-store, catalog, and online—

have the same sales and use tax collection responsibilities.

We do not support new taxes on Internet sales. Sales made over

the Internet are already subject to sales and use taxes, as we saw

earlier.

Under current law, if a remote retailer such as an Internet seller

or a catalogue company, has a physical presence or nexus in the

State of the buyer, the retailer is required to collect sales tax on

behalf of the State where the buyer is located. If it does not have

a physical presence, it does not have to collect sales taxes, but tax

is still owed by the consumer.

We currently have a situation where online companies fit into

three categories: pure play, pure Internet retailers that do not have

physical presence in most States and do not collect sales taxes; integrated clicks and mortar, retailers which have both physical and

online stores. Since many retailers have a physical presence in

most States, they are required to collect sales tax on in-store and

online sales. Then, physical presence with no nexus. Many retailers

with physical and online stores are setting up a corporate structure

in a way that does not require the collection of sales or use taxes

on online sales. In this arrangement, the online business is set up

in a separate subsidiary that does not have nexus and is therefore

not required to collect sales and use taxes. Indeed, the expanded

nexus provisions included in the ACEC report would formalize this

situation.

If Congress does not address the current inequity in sales tax collection rules, more companies will create corporate structures to

avoid sales tax collection responsibilities. While corporations would

like to integrate their physical and online stores, discriminatory tax

policies are forcing retailers to separate their online and in-store

strategies.

The e-Fairness Coalition believes Congress should enact legislation encouraging States to adopt simplified sales tax systems.

States that adopt the simplified systems should be authorized to

require remote sellers to collect sales taxes.

Allowing States to require all retailers to collect and remit sales

tax would expand the collection of taxes and enable States to lower

taxes for all consumers. The best sales tax is broad-based and low.

Extending the moratorium and continuing the status quo will

narrow the consumption tax base and lead to an increase in other

taxes on business and individuals. Local and State governments

may be forced to raise income, property, sales, or other taxes to

make up for lost revenues. Without solving the sales and use tax

issue, an extension of the moratorium could result in an increase

in taxes to the consumer.

27

It is important to remember that sales and use taxes are consumption taxes, paid by the consumer to fund schools, police, roads,

and other services that benefit local consumers. The retailer is

merely the collection agent.

How a product is purchased, whether in-store or online, should

not determine whether a consumption tax is paid. In either situation, the buyer receives the benefit from those public services. Congress should support efforts to level the playing field and provide

all retailers with equal sales tax collection responsibilities.

No one wants to tax the Internet or provide discriminatory taxes

on the Internet. However, extending the moratorium without addressing the equitable collection of sales tax is incomplete and

counterproductive. Congress must address all three issues: access

taxes, discriminatory taxes, and sales taxes. Our Nation’s Internet

tax policy should be fully integrated, incorporating a permanent solution for all three issues.

Thank you, Mr. Chairman.

[The prepared statement of Peter Lowy follows:]

PREPARED STATEMENT OF PETER LOWY, PRESIDENT, WESTFIELD AMERICA, ON

BEHALF OF E-FAIRNESS COALITION

I am Peter Lowy, President of Westfield America, and Founding Chairman of the

e-Fairness Coalition. I’d like to thank Chairman Tauzin and Ranking Member Markey for providing me the opportunity to speak on this important issue.

Westfield America owns interests in 38 major shopping centers across the country

that are home to approximately 4,700 retail stores. In many communities, we are

one of the largest contributors to the local tax base through the property taxes we

pay and the sales taxes we generate.

The e-Fairness Coalition includes brick-and-mortar and online retailers, realtors,

retail and real estate associations, and publicly- and privately owned shopping centers. Our Coalition represents 1.5 million retail stores ranging from Cody’s Booksellers in San Francisco to national retailers such as Wal-Mart and Sears, as well

as 1 out of every 5 American workers nationwide.

The e-Fairness Coalition opposes H.R. 4202, the ‘‘Internet Services Promotion Act

of 2000’’ and H.R. 1291, the ‘‘Internet Access Charge Prohibition Act of 1999.’’ Both

bills provide prohibitions on FCC fees on internet access. Section 3 of H.R. 4202 also

extends the current moratorium on taxes on Internet access and on multiple and

discriminatory taxes on the Internet.

Taxation of the internet involves three interrelated issues. 1) Taxes on internet

access charges; 2) Multiple and discriminatory taxes, and 3) Collection of sales and

use taxes on retail sales made on the internet.

We oppose H.R. 4202 and H.R. 1291 because we believe that there should be a

fully integrated solution with regard to taxation and the internet, not a piecemeal

one that does not address an equitable collection of sales taxes on retail sales.

While there is broad agreement on the issues of access and on multiple and discriminatory taxes, there is clearly no agreement with respect to sales and use tax

and e-commerce. If Congress passes bills addressing the first two issues, there is

no incentive to address the most critical and most difficult issue, which is to provide

a level playing field for the collection of sales taxes.

The states are currently working on simplifying sales tax rules nationwide. An extension of the moratorium will stop the momentum gained in solving the complex

issue of sales and use tax collection.

There should be no rush to pass federal legislation at this time as the current

moratorium does not expire until October 21, 2001. We have 16 more months to consider permanent solutions to all of these issues.

Problems with Current Law

Current law provides for a blatantly unfair playing field where brick and mortar

retailers collect sales taxes, but their on-line competitors are exempted from collection responsibility. Because of the Supreme Court’s 1992 Quill decision, the states

cannot require remote retailers to collect and remit sales tax when the seller does

not have a physical presence in the state of the buyer.

28

Extending the moratorium will allow an unlevel playing field to continue and unfairly subsidize Internet retailers at the expense of traditional retailers and the revenue needs of states and cities.

As tax-free online sales grow, estimated to be in excess of $100 billion in 2003,

the states and cities will look for other revenues to offset uncollected sales and use

tax from sales that have migrated to the internet. By not allowing the collection of

consumption taxes on remote sales, the tax base will shrink and lead to increases

in other taxes. Allowing sales tax collection on all sales will expand the tax base,

which can lead to lower taxes.

In addition to the businesses represented by the e-Fairness Coalition, opposition

to a simple extension of the moratorium is joined by a broad bipartisan group of

the nation’s Governors.

On April 12, 2000, a bipartisan group of 36 Governors sent a letter to Speaker

Hastert, Minority Leader Gephardt, Majority Leader Lott, and Minority Leader

Daschle urging rejection of the report of the Advisory Commission on Electronic

Commerce. The Governors expressed support for a fair and equitable system to ensure that Main Street retail stores and Internet commerce enterprises can compete

on a level playing field. Five additional Governors sent their own letters expressing

similar concerns.

Support for a Level Playing Field

The message of the e-Fairness Coalition is simple: We support a ‘‘level playing

field’’ so that all retailers—in-store, catalog, and online—all have the same sales and

use tax collection responsibilities. Preferential tax policies and government subsidies

for Internet retailers distort the market, and give Internet retailers an unfair competitive advantage.

Therefore, we support the enactment of federal legislation to allow states to treat

all retail sales equally.

We do not support new taxes on Internet sales. Sales made over the Internet are

already subject to sales and use taxes.

Under current law, if a remote retailer, such as an internet seller or a catalogue

company, has a physical presence, or nexus, in the state of the buyer, the retailer

is required to collect sales tax on behalf of the state where the buyer is located.

However, as I mentioned earlier, under the Supreme Court’s 1992 Quill decision,

if the remote retailer does not have a physical presence in the state of the buyer,

the retailer cannot be required to collect sales tax.

Just because the retailer does not collect the tax does not mean that it is not due

or applicable. When a retailer does not collect the sales tax, the buyer is required

to pay a use tax to their home taxing jurisdiction. The use tax is not widely understood and compliance is very low.

Today, consumers are burdened with paying a use tax that most don’t even know

they owe. Under the traditional retail model—this amounted to a small impact on

state economies. However, as e-commerce grows—the loss of sales tax created by the

transference of sales to the Internet will not be offset by use tax unless we make

that collection system simpler. The burden must be taken off of the consumer and

replaced by the natural agent to collect these taxes—the Internet retailer. Under a

simplified tax system, this will need to amount to a virtually zero burden system

for the retailer.

We currently have a situation where online companies fit into 3 categories:

1. Pure Play: Pure Internet retailers that do not have physical presence in most

states and do not collect sales taxes

2. Integrated Clicks and Mortar: These retailers have both physical and online

stores. Since many large retailers have a physical presence in most states, they

are required to collect sales taxes on in-store and on-line sales.

3. Physical Presence with No Nexus: Many retailers with physical and online

stores are setting up a corporate structure in a way that does not require the

collection of sales or use taxes on on-line sales. In this arrangement, the online

business is set up in a separate subsidiary that does not have nexus, and is

therefore not required to collect sales and use taxes. Indeed, the expanded

nexus provisions included in the ACEC report would formalize this situation.

If Congress does not address the current inequity in sales tax collection rules,

more companies will create corporate structures that avoid sales tax collection responsibilities. While corporations would like to integrate their physical and online

stores, discriminatory tax policies are forcing retailers to separate their on-line and

in-store strategies.

29

Misunderstanding about the Current Moratorium

There is a tremendous amount of confusion in the media and in Congress about

the taxation of sales made over the Internet, and about the effect of the moratorium

contained in the Internet Tax Freedom Act of 1998.

The current moratorium does not apply to sales and use taxes. The moratorium covers:

(1) taxes on Internet access, and

(2) multiple or discriminatory taxes on electronic commerce.

Within the 16 months left on the current moratorium, we believe that a permanent solution can be found. Congress should carefully consider this issue, especially

since the Advisory Commission on Electronic Commerce failed to reach the twothirds vote required.

Responsible Congressional Legislation is Necessary

The e-Fairness Coalition believes that Congress should enact legislation encouraging the states to adopt simplified sales tax systems. States that adopt the simplified systems should be authorized to require remote sellers above a sales volume

threshold to collect sales taxes.

Providing a framework for simplification, and allowing states to require collection

when the states achieve simplification is a reasonable and necessary step for Congress to take.

Extending the existing moratorium without including language allowing the

states to require collection from all retailers will mean at least five more years of

tax free sales for internet retailers, and a strong likelihood that internet sales will

be given permanent preferential treatment.

Allowing states to require all retailers to collect and remit sales taxes will expand

the consumption tax base and enable states to lower taxes for all consumers. The

best sales tax is broad-based and low.

Extending the moratorium and continuing the status quo will narrow the consumption tax base and lead to an increase in other taxes on businesses and individuals. Local and state governments may be forced to raise income, property, sales,

or other taxes to make up for lost revenues. Without solving the sales and use tax

issue, an extension of the moratorium could result in an increase in taxes to the

consumer.

It is important to remember that sales and use taxes are consumption taxes paid

by the consumer to fund schools, police, roads, and other services that benefit local

consumers. The retailer is merely the collection agent. How a product is purchased—whether in a store or on-line—should not determine whether a consumption tax is paid. In either situation, the buyer receives a benefit from public services

(like roads, police, and fire). Congress should support efforts to level the playing

field and provide all retailers with equal sales tax collection responsibilities.

No one wants to ‘‘Tax the Internet’’ or provide discriminatory taxes on the Internet. Extending the moratorium without addressing the equitable collection of sales

tax is an incomplete and counter-productive exercise. Congress must address all

three issues: 1) Access taxes, 2) discriminatory taxes, and 3) sales taxes. Our nation’s internet tax policy should be fully integrated incorporating a permanent solution for all three issues.

Mr. TAUZIN. Next, the Chair will recognize Mr. Grover Norquist,

president of Americans for Tax Reform. Grover.

STATEMENT OF GROVER G. NORQUIST

Mr. NORQUIST. Thank you, Chairman Tauzin, for the opportunity

to testify here.

In keeping with truth in testimony I am here to represent Americans for Tax Reform. We do not now nor have we ever received

money from the government—Federal, State, or local.

I served as a commissioner on the Advisory Commission on Electronic Commerce. My particular job there was to represent consumers, and we looked at three things, the first one being present

taxes on the Internet.

The component parts of the Internet are extremely heavily taxed

now by the 3 percent Federal excise tax to fund the Spanish American War that people are familiar with, but also the average State

30

and local tax on telecommunications, about 14 percent, about triple

what the sales taxes on other industries are. Only tobacco and liquor are more heavily taxed than telecommunications.

Second were threatened taxes, these access charges we are talking about, discriminatory taxes that the moratorium presently puts

off for 3 years but does not yet forbid.

The third one is the effort by some people to undermine the commerce clause and allow politicians in one State to tax businesses

in another State, catalogue sales or electronic commerce.

We are here today to talk about two prophylactic bills, H.R. 1291,

Mr. Upton’s legislation to prohibit the imposition of access charges,

and H.R. 4202, Mr. Ehrlich’s legislation that would both prohibit

those access charges by the FCC and extend the present moratorium for another 5 years. I think they are both extremely helpful

and good bills. I understand there are certain concerns about some

unintended consequences that I am sure the committee can deal

with, but I think both of these are very good for taxpayers, very

important for taxpayers. These taxes, of course, are paid by consumers, not by businesses, at the end of the day.

The Commission did actually address both of these issues; and,

in a poll, 18 of the Commissioners agreed when I asked whether

they would support both opposition to taxes and to the additional

access charges. There was one fellow from South Dakota who was

for all taxes at all times and we lost his vote, but there were 18,

including the three Federal representatives.

The second one was a continuation of the moratorium, which

even Governor Leavitt said he would support, although he has been

an advocate in other areas for taxes on the Internet, but would

support the extension of the moratorium.

I believe, however, that we should go beyond a 5-year extension

of the moratorium to a permanent moratorium, which was the

original effort by Congressman Cox and Senator Wyden in the CoxWyden legislation to permanently ban that.

Some people say, why not wait? It is a whole year or more away

from when the moratorium lapses. People do not make last-minute

decisions. People do plan ahead. It is important to decide now to

make that a permanent moratorium. I think a 5-year moratorium

is the least that we should do in that area.

I would also urge the committee to take a look at sunsetting the

Gore tax. Right now the e-rate, the Gore tax, is set up for a particular purpose and an admirable purpose of wiring those schools

that are not yet wired. Seventy percent are wired, 30 percent or

something are not.

But I think it is important that we sunset that, or our grandchildren are going to be laughing about the Gore tax the way we

are laughing about the Spanish American War tax. So let us set

up a date certain or an amount spent certain, and when we have

finished spending $10 billion or whatever it is that tax should

lapse.

I would also suggest that we also have an audit of how the

money has been spent.

The other issue that people have been focused on is the issue of

taxing Internet sales or catalogue sales. Right now the commerce

clause does not allow Utah to levy taxes on L.L. Bean in Maine.

31

This is a good idea. The commerce clause was not a loophole, as

some Governors seem to think. The commerce clause was put in for

good and sound reasons, and it is very important that a country

founded on the revolutionary cry of no taxation without representation, just as we objected to Britain taxing America, I think we

should object to Utah politicians taxing businesses either in Washington State or in Maine.

We have already seen the damage done when Alabama juries are

able to rate Michigan businesses. There is no limit to what a jury

would do to out-of-State businesses. There would also be no limit

to what tax collectors from Utah would do to businesses in Maine.

There is a limit to what Maine will do to L.L. Bean. There is no

limit to what tax collectors in Utah will do to L.L. Bean. I think

we need to protect against that.

I would urge you not to allow—what some people want to do is

put politics over policy here. The two ideas put forward before this

committee, this subcommittee, are extremely good. Prohibiting access charges, I hear everybody saying they are for that, and extending the moratorium there is strong support for. Do not let that be

held hostage to those politicians who want to take a great leap forward and undermine the commerce clause, a discussion that we

can have another time.

[The prepared statement of Grover G. Norquist follows:]

PREPARED STATEMENT OF GROVER H. NORQUIST, PRESIDENT, AMERICANS FOR TAX

REFORM

Mr. Chairman, members of the Subcommittee, thank you for allowing me to

present testimony today in support of H.R. 1291, the Internet Access Charge Prohibition Act of 1999.

Americans for Tax Reform supports this bill. H.R. 1291 would save consumers and

taxpayers money by preventing the FCC from applying access charges to Internet

Service Providers.

In addition to this bill, I would also like to take on the issue of Internet taxation

in a broader sense. In recent weeks, the debate over electronic commerce has focused on exactly the wrong question; that is, ‘‘should the Internet be taxed?’’ Perhaps in a perfect world, this would be the right question. Right now, however, the

building blocks of the Internet—phone lines, cable, and, in fact, all telecommunications—are already some of the most heavily taxed facets of the American economy.

The first excise tax on telecommunications was levied in 1898 to fund the Spanish-American War. The war is over. However, the federal tax remains and is joined

by state and local excise taxes that average 14.1% and get as high as 28.6% in

Texas, 24.5% in Florida and 15.8% in Washington, D.C. Just complying with existing law requires enormous resources. AT&T reports that it files 50,000 tax forms

with government at all levels.

Some governors and big city mayors want to impose additional taxes on the Internet. They would overturn Supreme Court decisions that now protect interstate commerce. Part of the benefit of the Internet is its inherent usefulness as a commercial

medium. Present law forbids Utah, for example, from forcing Amazon.com to collect

Utah’s sales tax when a citizen from Utah buys a book over the Internet. Adding

additional taxes and regulations could present a dramatic threat to the growth of

the Internet as a transaction medium.

Some Internet tax advocates, including Utah Governor Mike Leavitt, argue that

the states need the extra taxes, that too much tax revenue is being lost, and that

these additional taxes can be imposed without hurting the Internet or the Constitution. They are wrong on all four fronts. First, in 1998, the 50 states ended the year

with $11 billion in surpluses. State and local government revenues have grown from

6.9 percent to 9 percent of GDP from 1968 to 1998—a period in which federal revenues fell from 20.5 percent to 18.7 percent. Taxpayers upset about declining productivity in government and increased waste have been wrong to focus solely on Washington over the past three decades.

32

Additionally, a June 1999 study by Ernst & Young points out that, because most

e-commerce involves the sale of intangible services or other exempt products not

subject to sales taxes, or is business-to-business, the actual ‘‘loss’’ to state and local

sales tax collection was $170 million in 1998—one-tenth of 1 percent of sales taxes

collected. Moreover, the definitive study on how taxing e-commerce would affect

Internet sales was done by Professor Austen Goolsbee of the University of Chicago

Business School, who found that changing the Constitution to allow taxation of electronic commerce would reduce e-commerce by 24 percent or more. (Now, that would

do interesting things to the market capitalization of those companies presently driving up the Dow and the NASDAQ.)

Imposing new tax collection schemes on remote sellers would not ‘‘level the playing field’’ as the other team suggests. Rather, it would tilt the playing field heavily

against online vendors and their customers. It would do this by imposing a massive,

government-imposed barrier to market entry insofar as a single vendor selling goods

on the Internet would be compelled to collect and remit sales taxes for more than

6,000 jurisdictions. A single ‘‘Brick and Mortar’’ retailer operating a single store only

needs to collect taxes for one jurisdiction.

The Constitution’s commerce clause is not a loophole. It created one coherent

American market and stopped states from attacking ‘‘foreign’’ (out-of-state) businesses. The two pieces of legislation under consideration today go a long way toward

preserving the commerce clause. We do not want to allow the federal government

to tax the Internet out of existence—nor do we want to create a situation where Alabama politicians can levy taxes on New York businesses. We have already seen the

damage Alabama juries do to ‘‘foreign’’ auto companies through the abuse of tort

law.

As for ‘‘fairness:’’ Buy a book in your local bookstore in Washington, DC and you

pay a 5.75% percent sales tax. Buy a book over the net and you pay $12.00 in overnight shipping fees. You have to buy more than $200 worth of books at a time for

the dot com company to have any advantage.

One idea before the Electronic Commerce Commission that had merit was to urge

states to lower or abolish sales taxes on big-ticket items, such as computers. This

would eliminate any differential between electronic commerce and main street businesses without clogging up the Internet with tax collectors.

Governor James Gilmore of Virginia, who chaired the Commission on Electronic

Commerce, has outlined a plan to ban taxes on electronic commerce altogether, to

phase out the 3% federal excise tax on phone bills, to ban taxes on Internet access,

to ban tariffs on international trade and to reduce the ‘‘digital divide’’ by allowing

states to spend surplus welfare funds to buy computers and Internet access for families making the transition from welfare to work. Senator John McCain (R-AZ) and

Congressman John Kasich have also introduced federal legislation to make the ban

in Internet taxes permanent and to ban all sales taxes on electronic commerce.

In addition, the commission recommended banning the taxation of digitally transferred goods and services. To tax digitally transferred music, or computer software

would require a tremendous violation of privacy of every American. Better to repeal

those taxes than leave them on the books to be selectively enforced.

Congress might also wish to extend the protection of the 4R laws prohibiting discriminatory taxation on railroad lines to telecommunications. I believe this would

greatly reduce the tax burden on lower income Americans using the internet.

Passing H.R. 1291 is an important step in preserving the economic growth of the

Internet. In addition to this legislation, however, I urge Congress to enact the entire

Gilmore Report: abolish the 3% Federal Excise Tax on telecommunications, sunset

the Gore Tax, or E-Rate, extend the present moratorium on discriminatory taxes on

the internet, and strengthen nexus standards to preserve Commerce Clause protections for all Americans.

Thank you for allowing me to testify today.

Mr. TAUZIN. Thank you, Mr. Norquist.

The Chair recognizes Mr. Harris Miller, president of Information

Technology Association in Arlington, Virginia.

STATEMENT OF HARRIS N. MILLER

Mr. MILLER. Thank you very much. It is an honor to be here. I

was disappointed to hear from Congressman Upton that Congressman Snell does not exist, because I went to a fund-raiser for his

opponent last night.

33

It is an honor to be before the subcommittee to speak on an issue

which is very important to the future growth of the Internet, and

that is the issue of the access charges and trying to apply them to

the Internet.

We at ITAA range across the whole range of companies with our

more than 26,000 companies across the United States. We believe

that both Mr. Upton’s bill and Mr. Ehrlich’s bill are very positive

pieces of legislation. We look forward to working with this subcommittee, the full committee and the Congress to get these

passed.

In the to and fro of the dry discussion of all these different

charges, people tend to lose sight of what is really at stake. Mr.

Cox brought this up in his questions before to Mr. Upton. If consumers had to pay the same per minute charges levied on long distance voice calls, access charges would lead to $20 to $35 a month

per user. So if you are thinking of a household of two or three

users, it is actually much more than what Mr. Cox was suggesting,

possibly into the thousands of dollars.

Just simply traveling to Europe or to Japan and seeing how

much difficulty they have had getting average consumers to use the

Internet because of the telephone charges on a permanent basis

drives home the point that Mr. Markey made earlier, that if you

drive the costs up, even if you give away the Internet access itself

for free, if you make the telephone charges that substantial, you

simply are not going to have average consumers able to talk about

accessing the Internet. We will not have a digital divide, we will

have an unbridgeable digital Gulf. That is not what this Congress

wants.

Second, it is important to continue to point out, as has been decided by this Congress and reaffirmed in courts in case after case,

that Internet service providers are not, as a matter of law or a matter of policy, telecommunications carriers. They are customers of

the carriers. They pay charges, too. They pay charges such as the

subscriber line charges and other business line charges, and of

course their customers do also.

It is also important to point out that the Universal Service Fund

is not exclusively funded by the access charges. In fact, it is a combination of several different taxes that go together to serve as the

Universal Service Fund.

I think as this subcommittee examines the possibility of what is

going to happen to the Universal Service Fund as more Internet—

telephone over the Internet grows, I think they have to look into

the fact that it is not just access charges that are funding that but

it is a whole series of charges.

In fact, FCC can try to work with Mr. Markey to drive down the

access charges and perhaps look at some other charges, though I

agree with Mr. Cox, we should not take this as a license for the

FCC to go out and start regulating the Internet.

It is important to keep in mind that, as we look at all of these

bills, that for many consumers, as you have seen in the e-mail traffic and messages you see from your consumers, access charges

being applied to the Internet will become the third rail of Internet

policy.

34

It is amazing to us that this issue does keep coming up. It has

been killed off in the courts time after time. Like the vampire, it

keeps resurfacing. Certainly I think Mr. Upton’s bill, if passed by

this Congress, would send a very clear message to the American

people that this Congress will not support anything that is going

to slow down the growth of the Internet and make it more difficult

for all the American people to access the Internet.

I think it is again important to reiterate that access charges are

not technically universal service contributions, even though that is

how they are described. As a result, perhaps Mr. Upton’s bill needs

to be modified in another way also to make sure that it does not

have that specific reference, as it currently does, because someone

might imply from that that that is the only role for the access

charges.

Again, Mr. Upton’s bill as drafted may need some minor clarification in that area so it does not become read as directly contributing

solely to the Universal Service Fund.

Any type of charges put on the Internet on a permanent basis

will drive down usage. That is an area which we do not want to

do.

We also have to make sure that—perhaps in Mr. Upton’s bill another way to achieve the same purpose is simply by reaffirming

that information service providers are customers of telecommunications carriers and that they should not be discriminated against

relative to other end users. That may be another way of achieving

the objective Mr. Upton’s and Mr. Ehrlich’s bills are trying to

achieve.

Also, regarding the extension of the universal tax moratorium,

Mr. Norquist says clearly and concisely, this issue is not just an

issue of the Internet, though some people try to make it that way.

It is a general issue of on what basis the types of charges can be

levied on out-of-State businesses.

The Quill decision is out there. If Congress and elected officials

want to change the Quill decision they should do it, but they

should not try to ride the back of the Internet as a way of doing

that. Obviously, that is a major public policy issue. It is unfair for

people to come along and say the Internet is somehow different

than these other charges.

I appreciate the committee’s great efforts to continue to pursue

policies that promote competition and keep the hands of the government off the Internet. In fact, yesterday we had our annual public policy summit and the chairman of the full committee, Chairman Bliley, came. The one phrase that he said that stuck in

everybody’s mind as he addressed our crowd was, his message to

his colleagues is, hands off the Internet. That is the kind of message this entire committee and you, Mr. Chairman, as a subcommittee have been sending.

We encourage you to continue that, and we salute you for getting

it right.

Thank you very much.

[The prepared statement of Harris N. Miller follows:]

35

PREPARED STATEMENT OF HARRIS N. MILLER, PRESIDENT, INFORMATION

TECHNOLOGY ASSOCIATION OF AMERICA

INTRODUCTION

Chairman Tauzin and the other Honorable Members of this Subcommittee, I am

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

(ITAA). I am honored to testify today on HR. 1291 and HR 4202 which are intended

to assure consumers that they will never have to pay so-called ‘‘access charges’’ to

reach the Internet. ITAA members are very concerned with this issue, and I commend you for holding public hearings on these bills.

ITAA consists of 400 direct and 26,000 affiliate corporate members throughout the

U.S. The Association plays the leading role in issues of IT industry concern including taxes and finance policy, intellectual property, telecommunications competition,

workforce and education, encryption, critical infrastructure protection, online privacy and consumer protection, securities litigation reform, government IT procurement, and human resources policy. ITAA members range from the smallest IT startups to industry leaders in the Internet, software, IT services, ASP, digital content,

systems integration, telecommunications, and enterprise solution fields.

It is my hope that the conclusions drawn from this hearing and the proposed bills

in question will be the end of Internet access charge proposals, which I believe are

the third rail of Internet policy. As you know, there has been a long history to this

issue, with numerous attempts to impose them in the past. Fortunately today there

is no serious or credible effort to impose access charges on Internet traffic. The

members of this Committee, the Federal Communications Commission, the ‘‘industry leads’’ stance of this Administration, all have been helpful for leading us to this

point, and deserve much credit.

And yet, the resurfacing of policies advocating special charges on Internet traffic

is a little like the vampire in an old horror movie. You think you have killed it off,

and yet some how, against all the odds, it has a way of resurfacing. I submit that

access charges on Internet traffic would have the same life-sucking qualities as a

vampire too—slowing adoption and take-up rates for Internet use, widening the socalled ‘‘digital divide’’ to a point where access would be out of reach for many Americans, and slowing the economic benefits the Internet has allowed Americans to

enjoy. This hearing is an opportunity to drive a sharp stake through the heart once

and for all. Thank you for taking on the task.

POLICY HISTORY

ITAA has been at the forefront of Internet policy even before there was an Internet. Over thirty years ago, in its First Computer Inquiry, the Federal Communications Commission (FCC) began wrestling with what it described as ‘‘the growing

convergence of computers and communications has given rise to a number of regulatory and policy questions within the purview of the Communications Act.’’

ITAA has been a long time participant in policy deliberations in support of the

robust development of the information services marketplace. Long before the explosion of ISPs, and the invention of the World Wide Web, the FCC took action that

would eventually help pave the way for the nationwide growth of ISPs. In the end,

these battles created the regulatory foundation on which the Internet now rests.

One of our continuing battles has been over whether enhanced service providers—

or, as the Telecommunications Act of 1996 refers to them, Information Service Providers—should be required to pay access charges. ESPs provide a range of services

that allow store, provide, and process information. These services range from simple

voicemail, to on-line proprietary data bases, to today’s Internet access services.

ESPs lease conventional telephone lines from local exchange carriers to receive

‘‘calls’’ from the subscribers. They interconnect these local facilities to packet-based

private-line based networks (including the Internet) that carriers the traffic to remote servers. In some cases these servers are in the same state as the end user.

In other cases, the servers are in different states. Indeed, in most cases, neither the

user nor the ESP knows the locations in which the traffic terminates.

For nearly two decades, a debate has raged as to whether ESPs should pay the

same state-tariffed local charges as other business users that lease identical local

lines or whether ESPs be required to pay the same interstate ‘‘access charges’’ for

the use of these facilities that long-distance carriers are required to pay. This is

more than an academic debate. Business users with traffic patterns similar to ESPs

pay a fairly low (but compensatory) flat-rate monthly charge for the use of the local

lines. By contrast, long-distance carriers must pay per-minute charges that the long

distance carriers pay to both the originating and terminating local telephone companies for each minute a long distance call is in progress. While the FCC has made

36

1Southwestern Bell Telephone Co. v. FCC, 153 F.3d 523, 543 (8th Cir. 1998) 2 ‘‘SLC’’ refers to subscriber line charges.

3Federal Communications Commission, Report to Congress On Universal Service Under the

Telecommunications Act of 1996, FCC CC Docket No. 96-45, April 10, 1998

progress in restructuring and reducing these charges, they have always been—and

remain—significantly above cost.

When the access charge system was established in 1983, ‘‘enhanced service providers’’ were classified as ‘‘end users’’ rather than ‘‘carriers’’ for purposes of the access charge rules, and therefore they are not required to pay the per-minute access

charges that long-distance companies pay to local telephone companies.

While that conclusion is sometimes referred to as the ‘‘ESP exemption,’’ in my

opinion, that phrase misstates the reality of the FCC’s conclusion. The Commission

made a very a common-sense distinction. ESPs use telecommunications services to

provide value-added services. They should not be treated in the same manner as

telecommunications carriers.

The FCC’s long-standing policy has been critical for the growth of the Information

Services industry. Internet service providers, for example, can generally charge customers a flat monthly fee for access to the ISP via a local telephone call because

the ISP purchases business telephone lines from a local telephone carrier. Customers then dial into a modem bank over lines provided by the local telephone carrier.

The FCC’s policy is equitable. ESPs pay the same charges as similarly situated

end-users—the subscriber line charge, the business line tariff and, where, applicable, a private-line interconnection charge. A portion of these payments are passedon, by the local exchange carrier, to the Universal Service Fund.

This battle took other forms. For example, in 1987 a ‘‘modem tax’’ was discussed

that would have required enhanced service providers to pay interstate access

charges, which at that time were significantly higher than they are today. Thankfully, the proposal was abandoned in 1988.

More recently, in June 1996, four incumbent local telephone companies (Pacific

Bell, Bell Atlantic, US West, and NYNEX) petitioned the FCC concerning the effects

of Internet usage on these carriers’ networks. They claimed that the growth of the

Internet was a threat to the financial and technical integrity of their monopoly networks, and asked the FCC for authority to charge interstate access charges to ISPs.

Later that year, the commission asked for comments on the treatment of ISPs and

other ‘‘enhanced service providers’’ that also use local telephone companies’ facilities. In the Access Reform Order, FCC 97-158, adopted on May 7, 1997, the FCC

rejected the claim that the growth of the Internet was harming the local monopolists, determined that ESPs use the local network in fundamentally different ways

than do long-distance telephone companies, and determined that it would be inappropriate to extended the subsidy-laden carrier access charge regime to ESPs.

Unfortunately that order was challenged in court. ITAA again participated in this

battle as an intervenor in support of the FCC. In August 1998, the Court of Appeals

for the Eighth Circuit ruled in favor of the Federal Communication Commission and

against Southwestern Bell Telephone Co.’s challenge on access charge reform.1

On the Internet access charge aspects of the case, the court concluded:

‘‘As the FCC argues, the services provided by ISPs may involve both an intrastate

and an interstate component and it may be impractical if not impossible to separate

the two elements. See California v. FCC, 905 F.2d 1217, 1244 (9th Cir. 1990). Consequently, the FCC has determined that the [local telecommunications] facilities

used by ISPs are ‘‘jurisdictionally mixed,’’ carrying both interstate and intrastate

traffic. FCC Brief at 79. Because the FCC cannot reliably separate the two components involved in completing a particular call, or even determine what percentage

of overall ISP traffic is interstate or intrastate, see id.,...the Commission has appropriately exercised its discretion to require an ISP to pay intrastate charges for

its line and to pay the SLC . . .’’ 2

That court’s language, upholding the FCC’s prior ruling, came very close to driving a stake once and for all through the possibility of Internet access charges.

In an unrelated 1998 proceeding, the FCC’s 1998 appropriations legislation required a report to Congress on the legal status of Internet services under the Telecommunications Act of 1996. That report, the so-called ‘‘Stevens Report,’’ again confirmed the existing access charge treatment for Internet traffic.’’ 3

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4FCC Office of Plans and Policy Working Paper, The FCC and the Unregulation of the Internet. authored by Jason Oxman, July 19, 1999 5Downes, Thomas and Shane Greenstein, ‘‘Do Commercial ISPs Provide Universal Access,’’

(Dec. 1998), available at http://skew2.kellogg.nwu.edu/greenste/research/papers/tprcbook.pdf. 6POP stands for Point of Presence and refers to the number of local nodes for dial-up access

that the ISP has deployed. 7 Although business telephone lines may feature metered usage rates (for intraLATA toll calls,

for example), such per-minute charges are only assessed on outgoing, not incoming calls, and

thus dial-up ISPs, which receive calls from customers dialing in to modem banks, would not be

subject to such charges

THE FCC REPORT

In 1999 the Federal Communications Commission released a thoughtful report,

The FCC and the Unregulation of the Internet.4 It traces how a policy of government

non-intervention in the data and information markets has significantly contributed

to the development of the Internet. The Commission has tried to maintain essentially a hands-off approach to these markets in order to encourage competition, consumer choice and speed to market, fostering the development of an interconnected

telecommunications network that ensured near universal availability of a reliable

and affordable telephone system over which data services could be offered.

The FCC determined through the Computer Inquiry proceedings that computer

applications offered over that network were not subject to regulation, giving rise to

the unregulated growth of the Internet; and deregulating the telecommunications

equipment market while requiring carriers to allow users to connect their own terminal equipment, helping to foster the widespread deployment of the modem and

other data equipment tools that can be easily attached to the public switched network; and implementing flexible spectrum licensing policies that permit innovative

uses of wireless data services, leading to the development of wireless Internet applications.

Most significant of all of the report’s major conclusion was that not imposing on

enhanced service providers the access charges paid by interexchange carriers was

essential to helping drive the availability of reasonably prices, flat-rate dial-up

Internet access.

STIFLING THE DIGITAL OPPORTUNITY

In the to and fro of the dry, even arcane regulatory battles surrounding access

charges, we should not lose sight of the very real practical impact that these cumulative decisions have had on consumers. Seemingly miniscule access charges of 2 or

3 cents per minute would add $20 to $30 per month to the monthly costs of typical

Internet consumers. Such charges would:

• Slow adoption of the Internet as a mass-market medium;

• Widen significantly the ‘‘digital divide’’;

• Hinder new, Internet-based businesses and information sources, which would become less attractive due to reduced take-up rates.

Over 6,000 Internet service providers (ISPs) today offer dial-up service to the

Internet, and over 95% of Americans have access to at least four local ISPs.5 Millions of Americans rely on small ‘‘one POP’’ 6 or medium-sized ISPs for their service,

ISPs that may serve several hundred or fewer customers. There is no question that

accessing an ISP through a non-metered telephone call allows consumers to attain

affordable access to the Internet. Because of the favorable decisions of the FCC,

ISPs can purchase the business lines they need to offer service from any local telephone company.7 That so many thousands of ISPs offer service in this country at

relatively low rates is evidence of the positive impact of the FCC’s policy of treating

ISPs as telecommunications end users.

Comparing the American consumer Internet market with the European, the advantages of treating ISPs as customers can be observed even more clearly. In the

United Kingdom, for example, ISPs may offer a flat rate for monthly service, but

end users are subject to per-minute charges for local dial-up connections to that ISP,

resulting in a relatively expensive Internet experience for most consumers. Just as

importantly, users are conscious of the fact that the meter is running. In the U.S.,

consumers whose ISPs are located within their local calling area generally pay a flat

monthly fee to that ISP and are not charged per-minute rates for the local call to

the ISP. This reflects the fact that, in an efficiently constructed network, the cost

of carrying this traffic is not usage-sensitive. In fact UK policy makers are considering changing the way British consumers are charged for Internet access.

38

PROHIBITING ACCESS CHARGES ONCE AND FOR ALL

Understandably, H.R. 1291 and H.R. 4202 seek to assure consumers that they will

not pay access charges in the future. As I have already stated, I heartedly agree

with this objective and commend you for trying to do this. However, on specific language of the legislation, I would offer a couple of qualifications:

Access charges are not as a technical matter, ‘‘universal service contributions.’’

While they are often described in these terms, there is not a legal connection between the two. As a result, legislative language about ‘‘access charges to pay universal service’’ may miss its intended mark.

The greater question of Internet access charges is not simply a question of per

minute charges; it involves any per-minute pricing structure that treats information

service providers differently than other end users of telecommunications services.

The modem tax discussion that I referred to earlier is an example.

The same intended result could be reached treating all information service providers as defined in Section 3 of the Communications Act—as end users, as customers of telecommunications services that should not be discriminated against relative to other end users. The best language to accomplish the objectives would:

• Give the FCC express authority to continue to regulate physically local telecommunications facilities and services used to carry traffic between subscribers

and their information service providers (including Internet service providers);

• Continue the FCC’s express authority to delegate price setting to the states; and

• Forbid discriminatory treatment between ISP-bound traffic and other physically

local traffic delivered to a business end-user that interconnects a mixed-use private line network to the local public switched telephone network.

These are modest suggestions for the end product completely consistent with the

legislation’s intent. ITAA and our member companies are of course ready to work

with you to discuss these approached on more detail.

CONCLUSION

If there should be a fundamental principle for Internet public policy, it is to draw

upon the wisdom of the Hippocratic Oath—‘‘first do no harm.’’ There is a natural

temptation with technology policy to tinker at the margins to reach desired ends.

However, the Internet is evolving which such speed and dynamism that even the

best-intentioned interventions can have unanticipated negative consequences.

This committee deserves great credit for pursuing these policies and resisting

what may sometimes be the natural impulse of government to intervene. Instead,

you have acted to encourage competition, and have pushed to see once closed markets opened up. And then stepped back to let markets respond. We salute you for

getting it right.

Mr. TAUZIN. Thank you.

Mr. Leroy Grey of RAVEN-Villages Internet, Romney, West Virginia.

STATEMENT OF LEROY E. GREY

Mr. GREY. Thank you, Chairman Tauzin, Mr. Markey, and members of the subcommittee, for the opportunity to speak here.

I am appearing this morning on behalf of myself and the Commercial Internet eXchange Association, which advocates on behalf

of ISPs in Washington. I would like to express our strong support

for both bills.

As noted above, I am president of RAVEN-Villages Internet. Like

the vast majority of service providers, my company operates under

very strict conditions with little room for error. We have 600 customers. The large majority of them are dial-up residential and

small business subscribers.

We are still growing at a fairly good rate, and we hope to continue to do so. But even in Romney, a town of 2,500 people,

RAVEN-Villages Internet competes with three other ISPs. In 1999,

RAVEN-Villages Internet had a gross profit margin of $22,000 on

gross revenues of $130,400.

39

As a local ISP, we have designed our services and content to fit

what we believe will be of interest to our friends, neighbors and

customers. Because we are part of the community, we also try always to provide good connectivity, exceptional customer service and

good value.

For example, in addition to the usual news groups and web

hosting services, RAVEN contracts with MindLeaders.com, formerly DPEC, to provide local server access to over 365 computer,

business and professional courses, including many Microsoft certificate courses.

To enhance communications between our customers and their

friends and business associates worldwide, we recently enabled our

website with FireTalk, which brings up the telephony issue. We

agree totally with Mr. Cox with regard to the fact that you cannot

separate the data—voice from the data; and, therefore, that is an

important issue to try to prevent taxation or fees on the Internet

access.

This free software, FireTalk, allows RAVEN’s members to voice

conference with up to 100 others as well as to take those conferees

on web tours in which all participants’ web browsers are synchronized to wherever the moderator browses.

RAVEN-Villages was one of the original 50 companies establishing the Freedom Network launched by ZKS at the spring, 1999,

ISP conference in Baltimore. This revolutionary network was showcased on a 60 Minutes program and provides customers the ability

to communicate on this network within a network in unparalleled

secure private communications.

In our commitment to local service, value and community,

RAVEN-Villages is like thousands of ISPs throughout the Nation.

Unfortunately, we and they are also alike in our vulnerability to

financial setbacks, competitive threats and technological markets

changes.

In the Internet, there is constant technological transformation.

As local providers, we must constantly upgrade our networks, software, trained personnel and leased telecommunications facilities. If

our net revenues were affected by regulatory or legal developments,

our capital expenditures would necessarily reflect these financial

setbacks.

Though there are no precise statistics, it has been estimated that

the average local United States ISP employs between 10 and 12

workers and has annual revenues in excess of $1 million. In short,

the bulk of ISPs are small community-based businesses, and many

of the new service providers specialize in serving residential and

rural customers, consumers and small businesses which are not

served by large national online Internet service providers, primarily because they are in the smaller regions.

Every year my company struggles to meet our modest profit margins so we can reinvest in our network and employees. Unfortunately, far too many service providers face similar or worse financial situations that could in time result in their exiting the Internet

business.

In fact, one of our local competitors who at one time had nearly

9,000 customer went bankrupt in 1999. They have since reorganized and are still selling local access, but I benefited from their

40

poor service. I knew the president of this company well enough to

learn that fierce competition eroded market share considerably,

and that coupled with the loss of a major NASA contract led to

their financial problems.

RAVEN has faced similar erosion of our new customer sign-ups

when our local telephone company became our competitor in 1999.

Our new sign-ups dropped from an average of 15 to 7 a week, and

have remained at 50 percent of what they were before our local

phone company became our competitor.

I do not have time to read much more of my statement, but, basically, as a local ISP, I am in favor of both bills.

I would like to summarize by saying that we believe that the

codification of the current legal status of American ISPs is an appropriate and responsible position. We would urge the subcommittee to draft a strong report to accompany whichever bill is

ordered reported.

In addition to the prohibition on access charges, we also support

the 5-year extension of the Internet tax moratorium. We also have

a minor suggestion with regard to definition of one of the terms

used. We can supply that information later.

Thank you.

[The prepared statement of Leroy E. Grey follows:]

PREPARED STATEMENT OF LEROY E. GREY, PRESIDENT, RAVEN-VILLAGES INTERNET

Chairman Tauzin, Mr. Markey, Members of the Subcommittee, my name is Leroy

E. Grey. I am the president of RAVEN-Villages Internet [http://www.raven-villages.net], an Internet service provider (ISP) headquartered in Romney, West Virginia. I appreciate your invitation to testify this morning on H.R. 1291, the Internet

Access Charge Prohibition Act, introduced by Rep. Fred Upton of Michigan, and

H.R. 4202, the Internet Services Promotion Act of 2000, introduced by Rep. Robert

Ehrlich of Maryland. Both bills have similar prohibitions on access charges for universal service contributions. In addition, H.R. 4202 would extend the Internet tax

moratorium an additional five years as recommended in the recent Advisory Committee on Electronic Commerce report.

I am appearing this morning for myself and the Commercial Internet eXchange

Association (CIX), which advocates in behalf of ISPs in Washington. I would like to

express our strong support for both bills, including Section 3 of H.R. 4202 that extends the tax moratorium. While I am not authorized to speak for the state ISP associations or the thousands of unaffiliated ISPs, unofficially at least, I have every

reason to believe they would applaud the leadership of Rep. Upton and Rep. Ehrlich

in introducing the two bills. Mr. Chairman, I would also like to thank you for your

tireless efforts in behalf of online businesses and interest in the Internet.

If enacted, both H.R. 1291 and H.R. 4202 would provide a greater measure of financial certainty to ISPs and could stimulate network investment and innovation.

This is not to denigrate the Federal Communications Commission, which has played

an important historical role in promoting the public Internet and data services.

However, Congress’s role differs from that of the independent agencies and executive branch. You have the constitutional authority to make the laws of the land, not

simply to administer, interpret or implement them.

This morning, I would like to do three things in my written statement and oral

testimony. First, I shall describe the critical importance to a small business like

mine of the current regulatory policy on ‘‘information services’’. Second, I would like

to describe to you the ISP industry’s historic leadership role in promoting and supporting Internet connectivity in the United States. Third, I shall review briefly why

the status quo with respect to information service providers like ISPs should be extended into the future as proposed by the two bills.

I. IMPACT OF ACCESS CHARGES ON ISPS

As noted above, I am president of RAVEN-Villages Internet, an ISP in Romney,

West Virginia. Like the vast majority of service providers, my company operates

under very strict conditions with little room for error. We have 600 customers, the

41

large majority of them dial-up residential and small business subscribers. Even in

Romney, a town of 2500 people, RAVEN-Villages Internet competes with three other

ISPs. In 1999, RAVEN-Villages Internet had a gross profit margin of $22,200 on

gross revenues of $130,400.

As a local ISP, we have designed our services and content to fit what we believe

will be of interest to our friends, our neighbors, our customers. And because we are

part of the community, we also try always to provide good connectivity, exceptional

customer service, and good value. For example, in addition to the usual newsgroups

and web hosting services, RAVEN contracted with MindLeaders.com (formerly

DPEC) to provide local server access to over 365 computer, business, and professional courses, including many Microsoft certificate courses. To enhance communications between our customers and their friends and business associates worldwide,

we recently enabled our website with FireTalk. This free software allows RAVEN

members to voice-conference with up to 100 others as well as take those conferees

on web tours in which all participants web browsers are synchronized to wherever

the moderator browses. Lastly, RAVEN-Villages Internet was one of the original 50

companies establishing the ‘‘Freedom Network’’ launched by ZKS at the spring, 1999

ISPCon show in Baltimore. This revolutionary network was showcased on a ‘‘60

Minutes’’ program and provides customers who communicate via this ‘‘Network

within a network’’ unparalleled secure, private communications.

In our commitment to local service, value, and community, RAVEN-Villages Internet is like thousands of ISPs throughout the nation. Unfortunately we—and they—

are also alike in our vulnerability to financial setbacks, competitive threats, and

technological and market changes. As you are well aware, the Internet undergoes

constant technological transformation. As local service providers, we must constantly upgrade our networks, software, trained personnel, and leased telecommunications facilities. If our net revenues were affected by regulatory or legal developments, our capital expenditures would necessarily reflect these financial setbacks.

Though there are no precise statistics, it has been estimated that the average

local US ISP employs between 10 and 12 workers and has annual revenues just in

excess of $1 million. In short the bulk of ISPs are small, community-based businesses. Many of the new service providers specialize in serving residential and rural

customers—consumers and small businesses—not served by the large national online and Internet service providers.

Every year my company struggles to meet our modest profit margins so that we

can reinvest in our network and employees. Unfortunately, far too many service providers face similar or worse financial dilemmas that could, over time, result in their

exiting the Internet access business. In fact, one of our local competitors, who at

one time had nearly 9000 customers, went bankrupt in 1999. They have since reorganized and are still selling local access, but I benefited from their poor service,

as many of their customers signed up with RAVEN. I knew the president of this

company well enough to learn that fierce competition eroded market share considerably and that, coupled with the loss of a major NASA contract, led to their financial

problems. RAVEN has faced a similar erosion of new customer signups when our

local telco became a competitor in September 1999. Our new signups dropped from

an average of 15 per week to 7 per week, and has remained, on average, 50% of

what they were before our local phone company became a competitor. We already

had two other competitors previous to our ILEC entering the market, but our figures did not drop until the ILEC’s superior financial and marketing entered the picture.

Universal service charges are a form of taxation even though the revenues are

dedicated to a worthy, socially desirable goal. We support universal service since it

is self-evident that the more people on the network—even the PSTN voice network—the better for the Internet. However, taxes have the effect of reducing consumption of the product or service upon which the tax is levied. Access charges on

information services like Internet access would adversely affect ISPs by repressing

demand for connectivity. Access charges would either be passed on to subscribers

in the form of higher charges (thereby discouraging greater use of the Internet) or

absorbed by providers if market competition limited their ability to increase prices.

Ironically, universal service charges would fall disproportionately on the very low

income groups and individuals, who already suffer from inadequate access to information technologies.

The imposition of—or threat to impose—access charges would also have profound

legal, regulatory, and economic implications. By failing to acknowledge the differences between information service providers and telecommunications carriers, a

future Commission would essentially open the way for government regulation of

Internet access and ISPs. Although the FCC has not demonstrated an inclination

to alter its current policy that treats Internet access as an information service, a

42

statutory prohibition—as called for in the two bills under consideration—would ensure that a future Commission could not reverse that stand.

II. THE INTERNET SERVICE PROVIDER SECTOR

Commercial ISPs have been a dynamic part of the Internet economy from its very

inception. As I noted above, there are 7000+ ISPs in the United States according

to Boardwatch Magazine and CIX estimates. One academic study has estimated

that almost every American has access to the Internet via at least one local service

provider. More than 95 percent of all Americans have a choice of four or more ISPs,

while tens of millions can choose from amongst dozens of vendors. I can assure you

from my personal experience that our industry is highly competitive in price, service, and infrastructure facilities. Many small ISPs excel at customer service and consequently are fierce, tough competitors in their local markets.

The ISP industry traces its roots to the mid-1980’s—well before most of the consumer friendly innovations in the early and mid-nineties that made the Internet

such a technical, economic and social phenomenon. Service providers pursue different business models, different markets and different customer sets but are functionally alike in that they aggregate data and route them towards their final destination.

The explosive expansion in the early and mid-1990’s of US Internet connectivity

was due in large part to the tireless work and investments in data networks by US

ISPs, which had long been active in providing access services. The flourishing US

Internet economy stands in stark contrast to the situation prevailing in many other

countries where the independent ISP sector is small and Internet access service is

dominated by PTT monopolies. Subscribers in these countries face high per-minute

telephone charges on top of their monthly Internet access bills. However, the absence of a strong independent ISP sector means weaker competition and a less innovative market in most regions outside North America.

Independent US service providers are also leading the way in providing hosting

services and other value-added applications beyond Internet access. Providers in

these developing new markets are called application service providers, or ASPs. Just

as independent ISPs contributed greatly in the 1990’s to establishing the US’s Internet leadership, they could continue that role in the new millennium if the US Government stays its current course on regulation and market competition.

III. PROMOTING INFORMATION SERVICES AND INTERNET ACCESS

Current US Government policy on the regulatory treatment of information services generally and Internet access in particular is an amalgam of decisions dating

to the early 1980’s through 1996. Through trial and error, the United States has

arrived at a set of core regulatory principles that have been successful in promoting

innovation while protecting the public welfare. The US’s Internet leadership is not

coincidental but rather is the direct result US communications policies. The core

principles are—

Fair competition among and between providers, networks and services wherever

possible.

Minimal necessary regulation and cost burdens.

Support for innovation.

Private sector leadership wherever feasible

Consistent, market-based solutions.

During the past two years, CIX and several other state and national ISP trade

associations filed comments in several FCC proceedings that dealt with the issue

of the appropriate regulation of information services, particularly Internet access,

and information service providers. The positions taken then were convincing and remain cogent.

ISPs already make substantial communications payments to local exchange companies to rent business lines from them, amounting to significant percentages of

their annual revenues. They thus make indirect access charge payments to support

universal service. The charge by some commentators that ISPs are being subsidized

by ratepayers to the tune of several billion dollars is without foundation.

Communications payments are the largest single expense for ISPs amounting to

between 30 to 50 percent of their revenues. The imposition of yet another charge

would have a particularly adverse impact on small ISPs and those firms already in

financial distress.

Furthermore, ISPs operate in a highly competitive, very low margin business

which provides little room to pass along universal service charges or access charges

to customers. The imposition of charges could even facilitate further consolidation

among ISPs, with the greatest impact on smaller providers.

43

Even though ISPs indirectly pay into the universal service fund, it remains to be

seen whether they will receive any benefits. Most state associations have reported

that their members have not received any proceeds.

IV. CONCLUSION

Chairman Tauzin, we believe that the codification of the current legal status of

American ISPs is an appropriate and responsible position. We would urge the Subcommittee to draft a strong report to accompany whichever bill is ordered reported.

In addition to the prohibition on access charges, CIX also supports the five year extension of the Internet tax moratorium. I also have a minor suggestion with regard

to the definition of one of the terms used. We shall work with the staff on technical

issues and definitions. Chairman Tauzin, I deeply appreciate this opportunity to appear before you, and I would be pleased to answer any questions you may have.

Mr. TAUZIN. Thank you, sir.

The record will remain open for 30 days to insert statements.

The Chair recognizes himself briefly.

Let me first lay a predicate down, that we are in a period of transition from a regulated communications world to a marketplacehopefully deregulated communications world, and that in this period of transition we have two Internet worlds. We have an Internet world that will be delivered on cable and some wireless systems

and maybe even satellites that is subject to far less regulation than

an Internet world delivered on telephones, and it raises certain

questions.

When a cable company charges a customer a cable charge, a

monthly cable rate and even a digital cable rate, if you want to go

digital now, the cable company is free to do so today without government regulation, without local regulation. It simply charges its

customers based upon its own decisions about its market, its value

and the services to provides.

The customers, as I understand it, who sign up for digital cable

services and who sign up for Internet services with the cable company will be dealing with primarily a free market contract condition.

On the other hand, those of us who use the Internet services over

our telephones and hopefully 1 day digital broadband services fully

over our telephones are dealing with an entity still regulated by

government, still required to subsidize some customers at the expense of other customers, et cetera. The phone company, as Mr.

Cox pointed out, charges us based upon these regulations, what it

can and cannot charge, some set by a local PUC, some set by the

Federal Communications Commission. They are really two worlds

of the Internet.

I would like your comments on that, Mr. Miller and Mr.

Norquist. How do we rationalize this period of transition and where

should we be taking it as we move from one world to the next?

Mr. MILLER. I think you answered the question yourself, Mr.

Chairman. Competition is the answer, competition in the telecommunications industry, which this committee had such an important role in starting the ball rolling down the hill in 1996, although we all think that the ball has not rolled nearly far enough

down the hill.

Second, as you mentioned, cable is the second alternative. Wireless is becoming more available as an alternative. There are many

major wireless companies now that are willing, although they don’t

always have access, to wire apartment buildings by putting wireVerDate 11-MAY-2000 09:41 Nov 30, 2000 Jkt 010199 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 E:\HEARINGS\64761 pfrm11 PsN: 64761
44

less in, so that becomes another alternative. And then there are

third-party lines over electric power lines. So the answer is competition. I don’t think that Congress should get very focused too

much on the short term.

Mr. TAUZIN. But the problem is in the interim some of the competitors are heavily regulated, and some are not. Some are restricted in where they can provide services and what services they

can provide. In the real world of telephony, that might have

worked. In the new world of Internet services, how should it work?

Mr. GREY. With regards to the local—well, in West Virginia the

State Public Utilities Commission, we were supplying Internet access to the blind school, which is a State-run blind school located

in Romney right across the street from us. We were doing that for

free for about a year. That gave us residual income in other areas.

We got some money from them for putting in a 16 LAN computer

lab and various other things, but we gave that service for free.

The Public Utility Commission decided that they were going to

make it statewide, that everybody in the State had to get connected, so they used the West Virginia University’s Internet Provision Branch to provide that subsidy; I mean, through them to provide access to the Internet. Therefore we were cut out of the loop.

And that happened to a lot of other Internet providers in the area,

so I think that is something that needs to be addressed.

Mr. TAUZIN. Mr. Norquist.

Mr. NORQUIST. When we merged East and West Germany, we all

wanted to go to the West German model, not come to some sort of

compromise. We have heard this on, gee, the Governor of Michigan

has high taxes on businesses in Michigan, and there are businesses

in Maine that are escaping this; therefore, we should tax them. You

either extend regulations to the unregulated market, that could

even things up, or raise taxes on people that have presently not

been taxed. That would even things up.

There are some political leaders whose idea of evening things up

look like trying to even up the table by cutting the legs, and always

toward higher taxes and higher regulations. I would hope that if

somebody comes in and my taxes are higher than your taxes, fine,

let’s even the playing field down.

This is time when Federal and State governments are spending

more than they need to spend, but they are raising more than they

spend. It is exactly the right time to reduce taxes, and it is also

the right time to speed up the process as much as possible of deregulating each of these industries.

I would recommend that you put telecommunications under the

4-R law which protects railroads from discriminatory taxes by

State and local government, because when telecommunications—

you have the same situation with power plants where governmentmandated monopolies, lots of State and local governments tagged

on lots of taxes. Politicians loved that because everybody got mad

at the phone or power company rather than the mayor or the Governor. But now that we are deregulating both of these industries,

you are deregulating both of these industries, we can’t afford to

have the high taxes on telecommunications and power plants. To

the extent of putting the 4-R law that protects railroads from being

looted by State and local governments, you can’t have discriminaVerDate 11-MAY-2000 09:41 Nov 30, 2000 Jkt 010199 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 E:\HEARINGS\64761 pfrm11 PsN: 64761
45

tory taxes. If you want to tax property in Utah 1 percent, fine, but

you can’t tax the railroad at 10 percent. We now tax telecommunications at 14 percent average, and sales tax and excise taxes on

other industries are a third of that.

Mr. TAUZIN. According to the Freedom Foundation, there are

some communities where telephone is taxed at 35 percent, and the

mayor of one of those communities, now Chairman of our full committee, conceded that is exactly what mayors used to do. He is now

sponsoring with me a truth in billing act to try to shed some light

on those kinds of problems, so we have had a good confession from

a former mayor who is trying to right that situation.

I am going to have to move to my friend quickly and go to a 15-

minute floor vote followed by four 5-minute votes. We are going to

have to take a good 30 to 45-minute break and return and finish

unless we can finish now. The gentleman from Massachusetts.

Mr. MARKEY. Thank you, Mr. Chairman.

Mr. Pickering, a Republican from Mississippi on this committee,

and I have introduced legislation on a proposal endorsed by the cellular phone industry for the Governors and municipalities to have

a uniform method to collect cellular sales taxes on consumers’ cell

phone use. So we know it is possible for a high-tech industry to

work with taxing jurisdictions to come up with workable solutions

across State lines, which is where the domicile of the phone is, and

that is the point of nexus, and the industry likes it, and Governors

like it, and there is bipartisan support on the committee for the

legislation.

How much time would States need to simplify their sales tax collection, Mr. Lowy?

Mr. LOWY. In the work we have been doing with the States, we

think in the next 12 months they can come back to Congress with

a framework that could be put in place. I think then if you look

at the Minority proposal that came out from the commission, that

they then believe that they would need another 2 years to put that

framework into effect, so that 3 years from now I believe that they

could be in a position to have a system that would work.

Mr. MARKEY. So is an extension of the tax moratorium necessary

for the States to simplify sales tax collection?

Mr. LOWY. I think the way that we look at it with 16 months still

to go on the current moratorium, that we should give the States

enough time to try to put the framework in place in working with

industry and themselves.

Mr. MARKEY. The current moratorium does not include anything

about sales tax.

Mr. LOWY. It does not, but we look at it as an integrated approach to the total taxation on the Internet, and with the time period on the moratorium coming to a close, that is creating the political pressure and the pressure on both the industry and the States

to get themselves together to get this framework and bring it back

in front of the Congress.

Mr. NORQUIST. They first brought up State sales taxes in Mississippi in 1931. Governors and State legislators created the

present structure that we have. There have been efforts dating

back to the 1980’s, and we heard testimony by the very people who

now say that they are going to be able to do it, but they have never

46

done it before and haven’t been able to do it, and the executive director of the NGA is telling people it is 5 years or more. So there

is one line that they give you when they say don’t do anything now,

we will get it done in a year, and there is another line that the

NGA staff is telling people 5 years plus.

Since they have been at it for 60, 70 years now, I tend to think

that we are going to do it right away. First of all, they can do it

now, and it has nothing to do with this legislation. Nothing stops

the States from doing it now. All of the Governors who tell us they

care deeply about this have been drifting in the opposite direction

for 20 years.

Mr. MARKEY. I guess the comment I would make here is that the

world has changed in 60 years. There is now a shotgun at their

back, and many people do things with a shotgun at their back that

they wouldn’t do in the absence of that shotgun. What we are dealing with here is something that probably will get resolved at the

gubernatorial level primarily out of necessity rather than some voluntary act that they would have engaged in.

Mr. LOWY. If you look at the extension of the moratorium today,

if you look at an article that was put out in the Washington Post

on February 24, in an interview with Governor Gilmore, he released a statement that the article characterized as a new proposal

and is a political ploy that would get the tax moratorium extended,

and by the year 2006 no tax collector would be welcome on the

Internet. We actually think with the shotgun at the back of the

States, and with the growth of the Internet, we can solve this problem within the time period allowed.

Mr. TAUZIN. Mr. Sawyer, if you can complete, we can wrap this

up.

Mr. SAWYER. I would not ask the panel to stay for an hour so

I could come back and ask questions. Let me just say I am particularly interested in Mr. Miller’s comments and his testimony about

the EU and particularly the U.K., and I was interested in whether

there was any harmonization going on throughout the EU with regard to access fees; secondarily, that the fundamental difference in

taxing architectures between the EU and the United States, one

having much more to do with a wider range of taxation and the

value added tax on which the Europeans depend so heavily and its

effect on the topics that we are talking about here today.

Mr. MILLER. Really the problem in the EU is the whole method

of charging individual subscribers. So you are paying every time

the second rolls over even if it is a local call, as opposed to in the

U.S. where it has been primarily long distance that you had different charges. So on top of that, they have discriminatory taxes.

So you have a problem. Not only do you have to change the tax regime, but you have to get the monopolistic telephone companies to

change their charging system. .

Mr. TAUZIN. We are going to have to wrap up.

Mr. SAWYER. Mr. Chairman, I get their answers in writing.

Mr. TAUZIN. Mr. Norquist?

Mr. NORQUIST. The European Union harmonization puts a floor

in the value added tax of 15 percent. When the States get together

in restraint of trade by setting floors under taxes, this is bad, not

good.

47

1 Center of Budget and Policy Priorities (February, 2000)

Second, the National Governors Association is saying that they

put out a statement signed by 36 Governors. I asked them for signatures. They could only deliver two signatures. I talked to the

Governor, chief of staff of Pennsylvania, who said that they never

signed it, although their name is on it. So I would suggest that is

a taxpayer-subsidized lobby that illegally uses your Federal grants

to lobby for higher taxes at the State level, and you might ask

them to see those signatures.

Mr. TAUZIN. That is interesting.

Gentlemen, thank you. The Chair has to declare this hearing

over. We have a vote on the floor. The hearing is declared over, and

we thank you very much for your contributions.

[Whereupon, at 12:15 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

PREPARED STATEMENT OF AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL

EMPLOYEES

The American Federation of State, County and Municipal Employees (AFSCME)

submits the following statement for the hearing record in opposition to Section 3

of the Internet Services Promotion Act of 2000 (H.R. 4202) to extend the moratorium on Internet taxes through calendar year 2006.

The originally-enacted Internet Tax Freedom Act (47 U.S.C. 151) imposed a threeyear ban, ending September 30, 2001, on any new state and local taxes on Internet

access and multiple or discriminatory taxes on electronic commerce. The practical

effect of this law has been to exacerbate the existing de facto tax-exempt status of

most such remote sales that result from the inability of states to collect sales taxes

from purchases made by state residents from Internet and catalog sales. As a result,

AFSCME respectfully urges that the moratorium be allowed to expire in September

2001 and not be extended through calendar year 2006 for the following reasons:

• The current moratorium does not expire for nearly 18 months. This provides time

for the states to continue their work to simplify their sales tax systems, using

a combination of technology-based software systems and administrative systems. The states are demonstrating that they can attack this challenge in a constructive and cooperative fashion. Congress should not arbitrarily constrain

these efforts.

• State and local governments already may be losing on the order of $5 billion in

sales tax revenues annually from their inability to tax most mail-order sales.

With Internet sales growing rapidly, these governments could be losing an additional $10 billion annually by 2003 if Internet purchases remain effectively taxexempt.1 Revenue losses would continue to mount thereafter, as Internet sales

grow over time.

• The loss of revenue will significantly impair the ability of states and localities to

meet demands for education funding and other critical services. This scenario

is particularly troubling in the context of education. There is agreement that

primary and secondary education in the United States is in need of constant

improvement so that our children receive the foundation that will allow them

to fill the demand for high-skilled, well-educated workers in the information

economy. Improving the education system requires investment. In fact, state

education budgets consume 35 to 40 percent of state revenues. It is ironic that

the Internet, the very tool fostering today’s high-tech explosion, stands to play

a pivotal role in the states’ inability to fund the desperately needed improvements in the education system.

• Main Street retailers will be at risk of losing considerable business to remote sellers so long as they must add sales tax to their prices at the cash register while

Internet and mail-order merchants can sell tax-free. There is evidence that this

tax advantage is already distorting retail competition by compelling large retail

chains to reorganize their operations solely to be able to compete with their taxexempt Internet rivals.

For these reasons, AFSCME opposes the extension of the moratorium and supports enforcement and active collection of existing sales tax due on remote purchases.

48

PREPARED STATEMENT OF THE INTERNATIONAL COUNCIL OF SHOPPING CENTERS

The International Council of Shopping Centers (ICSC) appreciates this opportunity to present its views to the U.S. House Commerce Subcommittee on Telecommunications, Trade and Consumer Protection on the need to apply existing state

sales and use taxes to electronic commerce.

ICSC is the global trade association of the shopping center industry. Its 40,000

members in the United States, Canada and more than 70 other countries around

the world include shopping center owners, developers, managers, investors, lenders,

retailers and other professionals. The shopping center industry contributes significantly to the U.S. economy. In 1999, shopping centers in the U.S. generated over

$1.2 trillion in retail sales and over $47 billion in state sales tax revenue, and employed over 11 million people.

Simply stated, ICSC believes that all goods, regardless if they are purchased over

the Internet, via catalog or in traditional retail stores, should be subject to the same

state and local tax collection requirements. One form of commerce should not receive

preferential tax treatment over another. Unfortunately, existing tax law is structured to favor electronic commerce over sales made in local retail stores.

Contrary to popular belief, it is not the existing moratorium on Internet taxes

that precludes states from requiring out-of-state retailers to collect sales and use

taxes on their behalf. Instead, it is a 1992 Supreme Court case, Quill v. North Dakota, that held that remote merchants are not required to collect sales and use taxes

for states in which they do not have substantial physical presence or ‘‘nexus’’. The

moratorium—which expires in October, 2001—applies only to access charges and

new, multiple and discriminatory state sales taxes. However, because many Internet

retailers are not collecting existing sales and use taxes, a long-term extension of the

moratorium will make this practice an accepted way of doing business.

ICSC does not support the enactment or implementation of Internet access

charges, or new, multiple or discriminatory taxes on electronic commerce. Instead,

we believe that existing sales and use taxes should be collected uniformly on all

types of retail sales. The taxes which states should be able to require remote sellers

to collect are not new taxes. Instead, they are existing use taxes which buyers are

currently obligated to remit to their state and local governments. However, as a

practical matter, most individuals are either unaware of their tax obligations, or

simply do not bother to comply.

ICSC supports electronic commerce and believes it should be fostered. In fact,

many traditional brick-and-mortar retailers are incorporating Internet commerce

into their businesses in order to obtain new customers and better serve existing

ones. However, as a matter of fairness and sound tax policy, Internet-based retailers

should not receive a competitive advantage over traditional brick-and-mortar merchants simply because electronic commerce is a new and growing form of

transacting business.

Although the extent to which Internet sales will displace traditional retail sales

is unknown at this time, the competitive tax advantage that Internet-based retailers

currently have could negatively affect many local retailers, shopping centers and

their communities in the near future. Not only would traditional retailers generate

reduced sales, but their employees would suffer from reduced working hours, wages

or layoffs.

In addition, state and local governments would receive less sales tax revenues

that go to provide essential public services (i.e., education, police and fire protection,

road repairs). Governments that rely heavily on sales tax revenues would either

have to cut back on such services or increase other taxes on local businesses and

residents, such as property and income taxes. If governments decide to increase

sales tax rates to make up for lost revenues, lower-income individuals would have

to pay an even higher disproportionate share of their income on sales taxes since

they are less likely to own computers and purchase products on-line.

It is this reason why many state and local governmental organizations support

a level playing field for all types of retail sales. These government groups include

the National Governors Association, Council of State Governments, National Conference of State Legislators, U.S. Conference of Mayors, National Association of

Counties, National League of Cities and International City and County Management Association.

Our critics assert that electronic commerce is a new and growing industry and,

therefore, should not be saddled with ‘‘old world’’ sales tax collection requirements.

They say we should not kill the goose that lays the golden egg. Our response is that,

while electronic commerce is a growing and important part of our economy, subjecting it to the same sales tax collection requirements that traditional merchants

have been subject to for decades would not harm its growth or vitality. Electronic

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commerce will continue to flourish, regardless of whether or not sales and use taxes

are imposed on it.

These critics also claim that forcing Internet retailers to collect sales and use

taxes for the thousands of state and local taxing jurisdictions across the country

would be too burdensome on electronic commerce and just cannot be done. We agree

that all businesses, especially small businesses, should not be overburdened by sales

tax collection requirements and that state and local governments need to simplify

their sales tax systems. However, inexpensive software exists today that can assist

electronic retailers in determining how much sales and use taxes needs to be collected on their out-of-state sales.

Another argument made by our opponents is that states and localities are flush

with cash and do not need to tax electronic commerce. While it is true that most

state and local governments are currently enjoying budget surpluses, there is no

guarantee that this economic prosperity will last indefinitely. (In fact, Kentucky and

Tennessee are two states that are currently experiencing budget deficits. Their Governors strongly believe that the collection of this existing tax would be beneficial to

their states’ economies.) If and when our economy softens, many state and local governments, as well as traditional merchants, could suffer financial harm, especially

if electronic commerce continues to displace traditional sales tax bases.

ICSC is disappointed that the Advisory Commission on Electronic Commerce

failed to reach agreement that all retailers should be on a level playing field with

regard to state and local sales taxes. Even more so, we are disappointed at the process of the Commission itself. To begin with, even though a traditional local retailer

was supposed to be represented on the Commission, no such individual was appointed.

Second, the Commission sent a report to Congress that was agreed to by only 10

out of 19 Commissioners, clearly short of the 13 votes that was required under the

Internet Tax Freedom Act. Third and most importantly, the majority report fails to

address the level playing field issue.

Instead, it recommends (although not through an official ‘‘finding’’ or ‘‘recommendation’’) that Congress permanently extend the moratorium on Internet access charges, extend for five years the moratorium on multiple and discriminatory

sales taxes, repeal the 3-percent telecommunications excise tax, establish special

‘‘nexus’’ carve-outs for Internet businesses, and create sales tax exemptions (such as

those on ‘‘digitized’’ goods and their ‘‘non-digitized’’ counterparts) that would directly

benefit the ‘‘business caucus’’ companies.

ICSC does not oppose the substance of the current moratorium (e.g. its ban

against access charges and discriminatory taxes). However, we are deeply concerned

that the longer the moratorium is extended, the more difficult it will be for Congress

to level the playing field among retailers with regard to existing, non-discriminatory

sales taxes.

The U.S. Supreme Court has recognized Congress’ authority to enact legislation

that would allow state and local governments to require out-of-state retailers to collect sales and use taxes. Therefore, we urge Congress to enact legislation that would

level the playing field among Internet-based and traditional retailers.

Thank you for this opportunity to express our views on this very important matter.

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