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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
 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

                    U.S. GOVERNMENT PRINTING OFFICE
64-761CC                    Washington : 2000

                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
    Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
                   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,              EDWARD J. MARKEY, Massachusetts
  Vice Chairman                      RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               BART GORDON, Tennessee
PAUL E. GILLMOR, Ohio                BOBBY L. RUSH, Illinois
CHRISTOPHER COX, California          ANNA G. ESHOO, California
NATHAN DEAL, Georgia                 ELIOT L. ENGEL, New York
STEVE LARGENT, Oklahoma              ALBERT R. WYNN, Maryland
BARBARA CUBIN, Wyoming               BILL LUTHER, Minnesota
JAMES E. ROGAN, California           RON KLINK, Pennsylvania
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING,       KAREN McCARTHY, Missouri
    Mississippi                      JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ROY BLUNT, Missouri
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                            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)

  

 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 
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 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 
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.
    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 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 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 formulating 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 retain 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 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 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 1\1/2\ 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, 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 
1\1/2\ 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 
answer 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.
    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 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 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 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.
    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 2\1/2\ 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?
    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.
    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 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 1\1/2\ 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.
    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 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.
    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; 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 uncollected 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.
    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.
    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.
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 two-thirds 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 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 Cox-Wyden 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. 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.
    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.
    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.
    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:]
    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 start-ups 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 so-called ``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 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 passed-on, 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
---------------------------------------------------------------------------
    \1\ Southwestern Bell Telephone Co. v. FCC, 153 F.3d 523, 543 (8th 
Cir. 1998)
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \2\ ``SLC'' refers to subscriber line charges.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \3\ Federal Communications Commission, Report to Congress On 
Universal Service Under the Telecommunications Act of 1996, FCC CC 
Docket No. 96-45, April 10, 1998
---------------------------------------------------------------------------
                             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.
---------------------------------------------------------------------------
    \4\ FCC Office of Plans and Policy Working Paper, The FCC and the 
Unregulation of the Internet. authored by Jason Oxman, July 19, 1999
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \5\ Downes, Thomas and Shane Greenstein, ``Do Commercial ISPs 
Provide Universal Access,'' (Dec. 1998), available at http://
skew2.kellogg.nwu.edu/greenste/research/papers/tprcbook.pdf.
    \6\ POP 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
---------------------------------------------------------------------------
    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.
              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.
    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 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 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 re-
organized 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 
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.
    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 
marketplace-hopefully 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 wireless 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 government-
mandated 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 discriminatory 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 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.
    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 three-year 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 tax-exempt.1 Revenue losses would 
        continue to mount thereafter, as Internet sales grow over time.
---------------------------------------------------------------------------
    \1\ Center of Budget and Policy Priorities (February, 2000)
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 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 tax-exempt 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.
                                 ______
                                 
  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 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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