U.S. GOVERNMENT PRINTING OFFICE

60–258 WASHINGTON : 1999

E-COMMERCE: THE BENEFITS AND PITFALLS OF

CONDUCTING BUSINESS OVER THE INTERNET

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

WASHINGTON, DC

MAY 26, 1999

Serial No. 106–15

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS

JAMES M. TALENT, Missouri, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

DONALD A. MANZULLO, Illinois

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVEN J. CHABOT, Ohio

PHIL ENGLISH, Pennsylvania

DAVID M. MCINTOSH, Indiana

RICK HILL, Montana

JOSEPH R. PITTS, Pennsylvania

MICHAEL P. FORBES, New York

JOHN E. SWEENEY, New York

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

EDWARD PEASE, Indiana

JOHN THUNE, South Dakota

MARY BONO, California

NYDIA M. VELA ́ZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

CAROLYN MCCARTHY, New York

BILL PASCRELL, New Jersey

RUBEN HINOJOSA, Texas

DONNA M. CHRISTIAN-CHRISTENSEN,

Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

DENNIS MOORE, Kansas

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

MARK UDALL, Colorado

SHELLEY BERKLEY, Nevada

HARRY KATRICHIS, Chief Counsel

MICHAEL DAY, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on May 26, 1999 ............................................................................... 1

WITNESSES

Hill, Daniel O., Assistant Administrator for Technology, U.S. Small Business

Administration ..................................................................................................... 6

Miller, Harris N., President, Information Technology Association of America .. 8

Whinston, Andrew B., Director, Center for Research in Electronic Commerce,

University of Texas at Austin ............................................................................. 11

Anderson, Alan W., Senior Vice President, American Institute of Certified

Public Accountants ............................................................................................... 13

Hanson, Brian, Owner, Hanson Bros. Fresh Seafood ........................................... 15

APPENDIX

Opening statements:

Talent, Hon. James M ...................................................................................... 57

Vela ́zquez, Hon. Nydia M ................................................................................ 61

McCarthy, Hon. Carolyn .................................................................................. 65

Sweeney, Hon. John E ..................................................................................... 66

Prepared statements:

Hill, Daniel O .................................................................................................... 69

Miller, Harris N ................................................................................................ 80

Whinston, Andrew B ........................................................................................ 92

Anderson, Alan W ............................................................................................. 114

Hanson, Brian ................................................................................................... 158

Additional material:

Additional Information Submitted by the Small Business Administration . 162

(1)

ELECTRONIC COMMERCE: THE BENEFITS

AND PITFALLS OF CONDUCTING BUSINESS

OVER THE INTERNET

WEDNESDAY, MAY 26, 1999

HOUSE OF REPRESENTATIVES,

COMMITTEE ON SMALL BUSINESS,

Washington, DC.

The Committee met, pursuant to call, at 10 a.m., in Room 2361,

Rayburn House Office Building, Hon. Jim Talent (chair of the Committee) presiding.

Present: Representatives Talent, LoBiondo, Kelly, Pitts, Forbes,

Sweeney, Thune, Vela ́zquez, Pascrell, Christensen, Brady, Moore,

Napolitano, Baird, and Mark Udall.

Chairman TALENT. I will convene the hearing. I am informed

that the ranking member, Ms. Vela ́zquez, is in a markup in the

Banking Committee. So I will go ahead without her and when she

comes, we will suspend the hearing so she can make her opening

statement then if she prefers.

Electronic commerce, commonly referred to as e-commerce, is altering the way we conduct many of our business and personal

transactions.

E-commerce is simply the ability to conduct many of our business

and personal transactions over the Internet. Some of the most familiar forms of e-commerce are business-to-consumer transactions

where a company sells its product to a consumer over the Internet

in a way that is similar to traditional mail order catalogs.

Some popular examples of this type of e-commerce are Barnes

and Nobles.com, Amazon.com and CDNow.com.

While consumer purchasing is the most popular notion of e-commerce, business-to-business sales actually comprise the majority of

e-commerce transactions. This is important because many small

businesses have not yet embraced the notion of e-commerce.

According to eMarketer, less than 2 percent of the 7 million U.S.

small businesses with fewer than 100 employees conduct on-line

transactions. Of the 340,000 U.S. business Web sites, 145,000 sell

products and services on-line. Most of these businesses are big companies. In fact, 40 percent of companies with over 1,000 or more

employees conduct on-line transactions.

These numbers mean that small businesses face the potential of

losing market share to companies that are staying ahead of this

technological wave. Indeed, a recent study by Merrill Lynch shows

that only companies that attain market share on-line will survive.

2

The Merrill Lynch study points to the growth of Internet banking, brokerages, and publishers as a direct threat to their brick and

mortar counterparts.

The study concluded that, quote, the Internet tends to cannibalize retail sales away from store-based retailers, end quote.

E-commerce has attracted many businesses because it has the

ability to make them more efficient. Additionally, many consumers

find that computer-based purchasing is easier and quicker than

fighting traffic and crowds at their local shopping mall. A website

has the ability to turn a local operation into a nationwide or global

operation because the Internet can reach consumers at the far corners of the Earth.

Another important benefit of e-commerce is its ability to enable

employees to handle multiple tasks, since they do not have to

spend all of their time taking orders over the telephone. Additionally, e-commerce has the potential to eliminate points in the supply

chain and enable manufacturers to offer products directly related

to the consumer, with the aid and expense of traditional distribution in retail chains.

Finally, the Internet is an easy place for a business to obtain its

customers’ demographics and preferences through simple point and

click inquiries of those who visit its website.

Although e-commerce has the potential to be a powerful force

and change the way companies conduct businesses, there are some

concerns. Many are fearful of transmitting their credit card numbers and home addresses over the Internet because of the pervasive

threat of hackers who can bypass supposedly secure networks and

later commit fraudulent transactions.

There are also many complaints about the poor return in exchange services offered by on-line retailers when their customers

are not satisfied with their purchases.

The theft of intellectual property over the Internet has also become a pervasive problem. The music industry, to use one high profile example, has had difficulty maintaining control of its product

due to illegal, free downloads that are available on thousands of

electronic bulletin boards.

This is the first time that this Committee is tackling the issue

of e-commerce, and I am sure we will have an interesting discussion about its positive aspects and its drawbacks. We will hear testimony from Daniel Hill, the Assistant Administrator for Technology of the Small Business Administration; Harris Miller, who is

President of the Information Technology Association of America;

Professor Andrew Whinston, the Director of the Center for Research and Electronic Commerce at the University of Texas at Austin; Alan Anderson, the Senior Vice President of the American Institute of Certified Public Accountants; and Brian Hanson the

founder of Hanson Brothers Fresh Seafood in Portland, Maine.

The Internet is an exciting and still developing medium for companies to use to conduct businesses. I am looking forward to the

testimony of our witnesses.

[Mr. Talent’s statement may be found in the appendix.]

Chairman TALENT. When Ms. Vela ́zquez comes, I will be happy

to recognize her for any comments that she may wish to make. And

we will go to the witnesses after we have a demonstration of how

3

e-commerce operates. So I am going to ask our Committee counsel,

Mr. Andrews, to proceed with a mock electronic-commerce transaction.

Mr. ANDREWS. Yes.

Chairman TALENT. We are not actually going to purchase lobster

from Hanson Brothers Fresh Seafood today, but we are going to

show everybody how it would work if we did indeed want to do

that.

I will note that today’s mock transaction is with the business of

one of our witnesses today, Mr. Hanson, who we will hear from

later.

Mr. ANDREWS. Thank you, Mr. Chairman. What we are going to

do is, as you said, go to the website of the Hanson Brother Fresh

Seafood Company. The website is www.SeafoodNow.com. We are

going to operate all the way up until we actually have to put in

a credit card number.

Chairman TALENT. The Committee counsel asked if he could use

my credit card number to make the transaction a reality, and I

said no. So that is as far as we are going to go towards verity here.

but perhaps I will be the Dr. Watson of this whole drama, and on

behalf of everybody here who is computer illiterate, as the chairman is, ask the questions that everybody else might be thinking.

The e-commerce, is it usually done over the website or is there

a separate Internet location?

Mr. ANDREWS. Well, once you place your order, most websites

take you to a secure website where the information is encrypted.

Encryption is basically just a way to transform the information

into a complex array of algorithms similar to nuclear launch codes.

Now, what I am going to do is move down the website, to select

an item. and today with your credit card number, sir, we are going

to purchase blue claw crab.

As you can see, the website has a description of blue claw crab.

It is number 251. It is $9.99 per pound with a five-pound minimum

order. And it is a popular item so it is unavailable. So we shall select another one.

Chairman TALENT. Mr. Baird wants to know how you get the

crab through the telephone wire. It is questions like that that show

why we desperately need this hearing.

Mr. FORBES. It is called virtual reality.

Chairman TALENT. Now, do most of these websites have a list

perhaps of commonly asked questions, I mean, if you have a question about the product, can you do that through the Internet?

Mr. ANDREWS. Most good websites will have a FAQ section, a frequently asked questions section, where many basic questions can

be answered right at the website.

Chairman TALENT. Okay.

Mr. ANDREWS. So now what we are going to do is order 10 lobster

dinners for $400.95. Each lobster is approximately one and a half

pounds. We would enter the number we want in quantity box and

just click here to hook this item for your order.

I haven’t put in the credit card yet. So right now we are at a

screen, commonly called the shipping cart screen, which is an electronic version of what you would have in your regular grocery

store, a shopping cart. Right now, If we look at our shopping cart

4

we have Cold Bay’s Downeast Lobster Feed for 10, quantity one,

and the price. So I can either recalculate, check out, or stop shopping, and I want the check our because that is all that I want to

order

On the screen, you have a security alert: You are about to view

pages over a secure connection. Any information you exchange with

this website cannot be viewed by anyone else on the Web.

Chairman TALENT. It is at the point at the end of the order sequence that you go to the secure website?

Mr. ANDREWS. Yes, sir, that is correct.

Chairman TALENT. We can ask witnesses today if we want to

about how secure this is or what steps have been taken to make

sure they are secure, what concerns there are in this area, et

cetera?

Mr. ANDREWS. Yes, sir. that will be apart of some of the testimony that we will be given today.

Chairman TALENT. Okay. Do any Committee Members have

questions before we end the demonstration Here?

All right. Thank you, Mr. Andrews. We will go to the witnesses.

If we could have the lights please.

The ranking member has come and I am pleased to recognize her

for her opening statement

Ms. VELA ́ZQUEZ. Thank you, Mr. Chairman, and thank you for

holding the hearing on e-commerce. This is a very important topic

for our Nation’s small businesses and I look forward to hearing the

witness testimony.

The Internet revolution is rapidly transforming the way the Nation communicates with information and perhaps most importantly

the way it does business. In 1997, Internet commerce accounted for

$1.3 billion in retail sales in the United States, and though this

represents only a small fraction of the total, the number is expected to increase to $25 billion by the year 2000.

Furthermore, because the Internet allows small businesses to expand more rapidly, it is now possible for entrepreneur to reach new

customer across the country and around the world with a few

strokes of the keyboard. The low start-up costs of e-commerce also

enables a greater number of people to start a business by removing

many of the traditional barriers, and a further advantage is that

a small business can be open the 24 hours a day, 7 days a week.

As these facts indicate e-commerce offers a great deal of promise

to the future of this Nation’s small businesses and, in all likelihood,

it is only going to grow. Despite all the possibilities of success, however, e-commerce also carries with it a number of potential pitfalls

for the small business community.

There is a great deal of uncertainty about the issue of taxes. Although there is currently a moratorium on new taxes, many brick

and mortar stores, which chart sales tax, are losing customers. Additionally, studies have shown that many consumers are comparison shopping at traditional stores and buying over the Internet.

As a result, traditional stores, which pay salespeople and need to

have showrooms, are also losing out. This also ties in with the lack

of intimacy on which many small businesses rely for their customers. The growth of e-commerce has provided consumers with

unprecedented information about products and prices. Some enterVerDate 20-MAR-2000 12:30 Apr 17, 2000 Jkt 010199 PO 00000 Frm 00007 Fmt 6633 Sfmt 6602 E:\HEARINGS\60258 pfrm02 PsN: 60258
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prises worry that if they lose intimacy with their customers, they

will not longer know their needs, a key element in remaining competitive with larger, more impersonal competitors.

These are obviously issues that need to be addressed if small

businesses are to remain competitive. As such, e-commerce is the

double-edged sword for small businesses. It offers them the chance

to reach out to new customers and provides greater flexibility.

At the same time, however, the loss of interaction with the consumers and lower costs on the Internet represent a substantial

threat that needs to be addressed. I am glad that the Chairman

has called today’s hearing because it is still early enough to study

the potential problems small businesses may face and work to address these issues. I remain confident that our Nation’s entrepreneurs will continue to thrive. They have faced numerous challenges in the past and one can see from the unprecedented economic growth we are experiencing that small businesses have met

those challenges.

Once again, thank you Mr. Chairman, for holding this hearing.

[Ms. Vela ́zquez’ statement may be found in the appendix.]

Chairman TALENT. I thank the gentlelady, as always. We will go

right to the witnesses.

The gentleman from New Jersey has asked about more opening

statements. It is the general practice of the Committee, unless

there is some special interest or history of one of the members with

it, just to go with the opening statements from me and the ranking

member but if you want to put one in the record that would be

fine.

I will tell you what, Mr. Pascrell, your interest and involvement

in the Committee is such that with everybody’s indulgence, go right

ahead. I will recognize you for a few minutes.

Mr. PASCRELL. Thank you, Mr. Chairman.

I will not read my entire statement. I will put it into the record.

I am very concerned, Mr. Chairman, about something you have

spoken about and the ranking member have spoken about, and

that is the issue of taxes and the Web.

I can remember, as a mayor of a city, Mr. Chairman, having to

deal with many trucks that rolled into my fairly large community,

set up base on a street and sold out of the back of the truck furniture, to you name it, and in the city you name it. Those folks who

came up from different parts of the South to sell their wares made

decent products. They not only put at disadvantage those folks

within the community who sold those same products, similar products, but they also, since they were mobile, they also paid no taxes

whatsoever to the community where taxes were called for.

I know we have put a moratorium on this, but as this grows and

as the Internet grows, we need to be very aware and very sensitive,

and I thank you for having this hearing, to what this is going to

mean in terms of local revenues. If this is a way to skirt the issue,

to skirt taxes, as that truck that wheeled into Patterson, New Jersey, so many times, I think this is a lot more serious than we

think. This is happening all across the United States of America.

To me, there is no difference between selling things on the Internet and whelling a truck into town from another state; there is

6

none whatsoever. I think we need to understand what’s at stake

here and move accordingly.

I thank you for allowing me to make an opening statement.

Chairman TALENT. Of course. I appreciate the gentleman’s point.

It is a very serious one. Not only is this a potential threat to the

revenue base of municipalities and States but, it introduced a potentially unfair note of competition with the retailers who do have

to collect sales taxes. We have all struggled with this in other contexts with catalog sales, and the gentleman mentions another instance, these roving retailers, if you will, and this is one of the

major issues we have to confront with regard to Internet sales.

I don’t think anybody in principle wants to prevent people from

doing e-commerce, but the question is whether, and to what extent,

we should insist upon equality in tax treatment. That is a major

issue that only the Congress can deal with and I appreciate the

gentleman’s opening statement. I am sure he will want to follow up

with questions on that issue.

Our first witness is Mr. Daniel Hill, the Assistant Administrator

for Technology of the U.S. Small Business Administration. Mr. Hill.

STATEMENT OF MR. DANIEL O. HILL, ASSISTANT ADMINISTRATOR FOR TECHNOLOGY, UNITED STATES SMALL BUSINESS ADMINISTRATION

Mr. HILL. Thank you, Mr. Chairman. Good morning, Mr. Chairman, and members of the Committee. I will keep my remarks brief

and with your permission ask that my full written statement be incorporated into the record.

Chairman TALENT. Without objection, and we appreciate your

brevity. Thank you.

Mr. HILL. Thank you for inviting the U.S. Small Business Administration to appear before you to discuss our current activities

in the area of electronic commerce, otherwise known as e-commerce. My name is Daniel Hill and I am the Assistant Administrator for Technology at the SBA.

It is indeed the age of electronic commerce. Twenty-seven million

purchases are now made on the world Wide Web every day. At the

beginning of 1993, there were just 50 sites on the Web and now the

number is estimated to be over one billion. The number of small

firms engaged in electronic commerce is growing rapidly. Global

electronic commerce is expected to grow to more than $300 billion

annually in just a few years.

The percentage of small businesses will access to the Internet

nearly doubled in the past 2 years from under 22 percent in 1996

to over 41 percent in 1998. But there remain significant obstacles

to small business involvement in this new medium. The SBA is

working and committed to help small businesses overcome these

obstacles and take advantage of the many opportunities afforded by

electronic commerce.

What is electronic commerce? Electronic commerce refers to more

than just the buying and selling of goods over the Internet. It is

using the power of computers, the Internet and shared software to

send and receive product specifications, drawings, bids, purchase

orders and invoices, and any other type of data that needs to be

communicated to customers, suppliers or employees.

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Electronic commerce is a new way to conduct business, affecting

not only internal business activities within a firm but also requiring new kinds of coordination with other clients and other institutions.

In most industries, this requires the adoption of new business

models involving new organizational structures and business strategies.

The potential opportunities that electronic commerce and the

Internet afford small business are staggering. The smallest companies now can have instant access to customers and suppliers worldwide in ways that only the largest multinational corporations have

had in the past, and, many small businesses are being formed on

the basis of this new-found opportunity.

At the same time, small firms that do not adopt electronic techniques run the risk of losing market share and customers from

missed opportunities. At the SBA, we are working hard to encourage small business involvement in electronic commerce both as

users and as developers and innovators of this new technology.

Many small firms do not have access to the Internet and do not

understand the need for it. These firms are in danger of missing

the competitive opportunities made possible by electronic commerce. The SBA can and does play an important role in helping

such firms by providing technical assistance, training and information.

At the other end of the spectrum of small firms are the new hightech start-ups that are formed with advanced computer and information technology expertise. Many of these firms are in the business of developing and adapting the information, telecommunications and computer technologies that make electronic commerce

possible. They are at the cutting edge of the Internet and electronic

computer technologies. These firms do not need assistance or training, but they do need to have a fair legal and regulatory environment to foster innovation.

The SBA is working hard on the various electronic commerce related projects, which I have included in my full written testimony.

We will be introducing very shortly an e-commerce course on our

on-line classroom. We are working with other government agencies.

We are working with credit card companies. We are part of the digital economy working, that is being chaired by the White House.

We have created a number of Internet-based systems, PRO–NET

and ACE–NET, and we are about to unveil TECH–NET. I have attached complete descriptions of those projects in my written testimony.

Our ongoing activities are consistent with President Clinton’s directive on electronic commerce and policy which was issued November 30, 1998. This statement directed the U.S. Department of Commerce and the Small Business Administration to develop strategies

to help small businesses overcome barriers to the use of the Internet and electronic commerce.

In response, we are planning a series of activities and working

closely with the Department of Commerce, and other agencies as

well, to implement a broad-based effort to identify specific areas of

need and to provide outreach, extension and technical assistance to

small firms.

8

Some of our plans include working in partnership with the private sector and other Federal agencies. We have already talked

with the ITAA, whom you will hear from shortly. We are going to

target small, minority and women-owned businesses, educating

them about electronic commerce. We want to develop a framework

for understanding the ways electronic commerce and the Internet

affect small business activities, including marketing, network production and innovation. We are also developing improved means of

measuring and analyzing this impact.

We have a tremendous website already on-line. We intend to expand on that. We want to reach out to every small business to

make them aware of the benefits of Internet and EDI, electronic

data interchange.

Of course, our traditional role is to provide the training, the consultation and, where possible, some technical support services in

concert with our resource partners.

SBA’s FY 2000 budget request to Congress includes $2 million to

help support some of these electronic commerce activities that I

have spoken about. If approved, we propose to use these funds to

carry out the presidential directive and work with private sector

and other Federal agencies engaged in electronic commerce.

Thank you for the opportunity, Mr. Chairman, to discuss SBA’s

activities in the area of electronic commerce. I will be happy to answer any questions that you and the Committee might have. Thank

you.

[Mr. Hill’s statement may be found in the appendix.]

Chairman TALENT. Thank you, Mr. Hill.

Our next witness is Mr. Harris N. Miller, who is the President

of the Information Technology Association of America in Arlington,

Virginia. Mr. Miller.

STATEMENT OF MR. HARRIS N. MILLER, PRESIDENT, INFORMATION TECHNOLOGY ASSOCIATION OF AMERICA, ARLINGTON, VA

Mr. MILLER. Chairman Talent, thank you for having me back before the Committee. I appreciate the opportunity. I would like to

have my full statement included in the record.

I also have a request whether counsel is going to serve us some

of that lobster after the hearing as a reward for our appearing here

before your Committee.

Chairman TALENT. If the Information Technology Association

wants to use its credit card.

Mr. MILLER. I will have to check on that. Thank you.

Chairman Talent, I would like to thank you for the opportunity

to appear before your Committee and address the benefits and

challenges, I wouldn’t use the word pitfalls, of electronic commerce

for small businesses. As president of an association which represents over 11,000 companies in the IT sector, we believe that

electronic commerce provides great opportunities to channel the entrepreneurial spirit of every small business person to grow his or

her business and become an even more effective part of the electronic commerce digital age.

9

Today I will outline the dispel six myths which we find in talking

to small businesses and then give you some sense of the benefits

of electronic commerce among small businesses.

Number one, as Mr. Hill pointed out, there is the myth that ecommerce consists solely of buying and selling on the Internet. In

fact, e-commerce is much more than that. It includes customer

service, sending e-mails, marketing, advertising, transferring funds

between business, doing on-line research. That is all part of e-commerce.

So any small business which is saying, how do I get into e-commerce, should realize it is more than just the physical transaction

of ordering a book or ordering some lobster or ordering a sweater.

Secondly, many small businesses believe that to be successful in

electronic commerce, all they need is to hook up to the Internet.

Ladies and gentlemen of the Committee, e-commerce success for

a small business is much more than that. Even the smallest firms

with the least complicated business models must plan their strategy carefully and recognize the potential challenges that may await

them.

They need to factor into their entire business model how electronic commerce can help them. For example, if they don’t hook

into their ordering system, their supply system, their financial

management system, their marketing system, the electronic commerce transactions and advertising they are doing, they are not

taking full advantage of it. So we think this is a great opportunity

for small businesses, and using the digital age they can be as effective and efficient and as productive as even the largest businesses.

A third myth is that people think that electronic commerce

means solely selling products to consumers over the Internet.

While the growth in consumer purchases on-line is certainly growing dramatically and is the stuff of front page stories in USA

Today, the fact is that by most metrics over 80 percent of electronic

transactions worldwide are business-to-business, not business-toconsumers.

Another great opportunity, therefore, for small businesses is that

more and more large businesses in the supply chain expect that

their suppliers will be able to conduct business on-line. You hear

the phrase frequently, disintermediation. What that means is

eliminating the middleman, creating new opportunities for small

businesses to sell directly to large businesses.

For example, in the automotive world, the large automotive producers which used to only order from a very limited number of

manufacturers and a limited number of small businesses, now because of the Internet order from hundred and thousands of suppliers, because it is so inexpensive to do business over the Internet.

A fourth myth is that there are no programs to help small and

medium enteprises; this is primarily a big business opportunity.

Well, as Mr. Hill outlined, there are many other oportunities. In

fact, there are many opportunities for small business to learn about

and to take advantage of electronic commerce. Large and small

companies alike are providing technical assistance to small businesses, sometimes free of charge, sometimes with relatively minimal charges, because they want to get people into the e-business

world.

10

The commercial service of the U.S. Department of Commerce has

developed programs to reach out to small and medium enterprises,

particularly to give them more advantages in export opportunities.

Mr. Hill outlined the numerous programs at the Small Business

Administration. Even the Department of Defense has a program

called the electronic commerce resource centers, which advise small

businesses, often for free, on how to do business with the Federal

Government electronically.

Of course, associations such as ours work with small businesses

all the time to give them free advice on using the electronic commerce world.

Another myth is that every small business person has to become

a computer geek in order to take advantage of the electronic commerce world. That is not true, Mr. Chairman. There are plenty of

very good services out there where a person, as long as he or she

knows his or her business and works with the information technology community, can easily become part of electronic commerce

without becoming an expert in electronic commerce technology

itself.

The last issue I want to address is that a lot of government intervention is going to be necessary here. On the contrary, we believe

that industry is showing a great deal of leadership and self-regulation such as areas like the On-line Privacy Alliance which are protecting consumer privacy.

What does this mean in dollar terms? Well, electronic commerce

solutions, to give you one example, can reduce the costs of a transaction of buying and selling business to business or business to consumer by over 90 percent; over 90 percent. Obviously, that can go

right to the bottom line of a small business if it can take these

transaction costs out of its sale.

It costs Ford Motor Company, for example, $5,000 to get you a

car, but using the Internet, in its Ford supplier network, it plans

to reduce that distribution support cost to $500 per car.

A survey of 500 large companies with sophisticated networks

found out that 23 percent are using outside firms for installation,

and they are primarily using small and medium enterprises.

Let me last introduce the issue that Mr. Pascrell and the Chairman and Ms. Vela ́

zquez raised about Internet taxation. The Internet community, the electronic commerce community, is not asking

for different treatment that catalog orders, mail order orders, and

other order that is being done across State lines. All that we are

asking for is there not be special taxes put on the Internet.

If you read the legislation which this Congress passed, with the

support of many of you, and the mandate given to the commission

which Governor James Gilmore of Virginia is now heading, nowhere is it suggested that people ordering over the Internet or suppliers selling over the Internet should be allowed to escape taxes,

but they are being asked to be taxed in the same way as if you ordered something over the telephone or ordered something in a written form through a mail order catalog. That is what is interesting

to us and that is the challenge that the commission faces.

Thank you for allowing me to testify today, Mr. Chairman.

[Mr. Miller’s statement may be found in the appendix.]

Chairman TALENT. Thank you, Mr. Miller.

11

Next, we are honored to have with us Professor Andrew B.

Whinston. Here is a copy of his book, The Economics of Electronic

Commerce, which I presume is available from bookstores or probably Amazon.com, for those wishing to order that way.

Professor Whinston is the Director of the Center for Research in

Electronic Commerce at the University of Texas at Austin in Austin, Texas. Professor Whinston.

STATEMENT OF MR. ANDREW B. WHINSTON, DIRECTOR, CENTER FOR RESEARCH IN ELECTRONIC COMMERCE, UNIVERSITY OF TEXAS AT AUSTIN, AUSTIN, TX

Mr. WHINSTON. Thank you, Mr. Chairman, for inviting me here.

I will be brief and dispel the myth that all professors are long

winded.

First, I will point out that if you want to buy a copy of my book,

which I recommend, you would get a much better price over the

Internet. And then the question on taxation, if you buy it from

Amazon and most other on-line bookstores you wouldn’t pay any

taxes on it because the would be——

Chairman TALENT. Professor Whinston, Mr. Pascrell was just beginning to calm down and now you have gotten him excited again.

Mr. WHINSTON. Well, unfortunately, I am going to come back to

the taxation issue because I see his point, and we have raised that

point in our book that taxation in a very broad sense is a real challenge.

Chairman TALENT. All right.

Mr. WHINSTON. There is this idea that you go on the Internet

and you have the whole world as your potential market, and I

think that is, from a practical point of view, a myth. I think there

is also a lot of talk about the Internet being a great equalizer; that

is, the large and small are all equal on the Internet, and I think

that is also a myth.

The companies that we refer to, E-Bay, Amazon, Yahoo, they

were all small businesses at one point, probably for 5 or 6 hours,

until they exploded, and it will be interesting, I think, to look at

why and how these small businesses became almost instant, huge

businesses.

Let met mention some of the points that I think are critical in

this area, which I think are a detriment to small business. One is

the area of trust. Now, 99.99 percent of small businesses, I think,

are very trustworthy but from the consumer’s point of view, now

I am going to talk about consumer to business, there is a recognition that there are more and more scams being developed on the

Internet. The question then for consumer is should I go with a

large recognized brand name or take a chance and go with a small

business that is unknown to me? I don’t have physical contact with

that business, as you have in the traditional world where I can go

down to the store, see the people in the store, look at them, look

at their eyeballs, see how they appear and develop this sort of person-to-person trust.

On the Internet you have no contact with the people. so there is

a serious problem of trust, a problem of authentication, where individuals are running scams, can run 50 scams with 50 different

identities, have them close down and start up with 100 new identiVerDate 20-MAR-2000 12:30 Apr 17, 2000 Jkt 010199 PO 00000 Frm 00014 Fmt 6633 Sfmt 6602 E:\HEARINGS\60258 pfrm02 PsN: 60258
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ties. So these are things that result from the cryptographic technology.

There is a question of how you get identified if you are a small

business. We have portals that lead people to a small business but

portals, as money-making businesses, charge for having you listed

and listed at a high level in the portals. So if somebody is searching for a lobster store, you as a lobster company want to get listed

first, you my have to make a deal with the portal. So that is a deterrent.

Chairman TALENT. Professor Whinston, just a minute and tell us

what a portal is, please.

Mr. WHINSTON. A portal is something like a mall in the physical

world. So a portal is something where somebody is standing out in

front of a store and everytime you go into the store, you pay them

a dollar. So it is just somebody standing out there collecting a fee

and they are collecting a fee because they are telling you, if you

want to buy shoes or lobsters on-line this is the place to go to. So

they are bringing you to that place.

We think of it as something like the equivalent of a mall. Yahoo,

Excite, Lycos, these are all portals and they have power, especially

for small business. Everybody who is in the Internet world knows

about Amazon and all the other well-known brand names and they

are marked on their browser. When it comes to finding something

that is not a brand name, which may have a better price, the typical way is you would go to a portal. This is a problem, that portals

are out to make money.

Another point, going back to the taxation issue, and of course as

pointed out it really reflects the way we treat catalog companies,

so Internet companies in some sense is an automation, a higher

performance catalog company. So all catalog companies to survive

would have to go on the Internet and thereby getting that type of

tax treatment. But even from the point of view of small business,

if you are on the Internet, and we have some way of changing the

tax system to make it more uniform, there will be a heavy cost to

small business in dealing with the taxes, in collecting taxes because they have to maintain information on taxes all over the country or indeed all over the world.

So the tax thing is really a multifaceted problem for small business as against large business, where they are able to handle this

administrative burden more efficiently with the volume.

Let me just briefly mention some issues of open standards. This

gets into the question of the Microsoft issue, the Justice Department complaint. Microsoft is obviously a large company, and the

other point of view that is really emerging is to look at Linux. Now

I am mentioning Linux because you hear about it in the news but

Linux is really the way, I think, small business will exist in the

digital version of electronic commerce. That is, Linux is an operating system which is really a collection of individuals, of small

businesses, who prepare components. So each business has a competency and a certain facet of the operating system field.

Then as a buyer, you are buying a collection of components which

are able to integrate. So the point for small business is that we

have to ensure that as we move to the digital world of small business, entertainment, education, digital products, that we have open

13

standards. That is, that standards are set by a consortium of

groups involved in that business, including small business. The

government should be very vigilant at ensuring that no one company gets access to and controls a certain standard and thereby,

in effect, a certain industry. So I think that is an important policy

area.

There will be the growth of electronic money and that will raise

issues of sovereign money versus electronic money. There will be

a growth of cryptography, which will mean a basic problem of collecting taxes because transactions will be encrypted and you won’t

know whether somebody is sending a bill for a couple of million

dollars for products or they are sending New Year’s greetings to

someone.

All the information will be encrypted and only the company will

have the ability to decrypt it.

So finally I would make a pitch, as a professor, for more research

in the area because research benefits small business. Large companies can, in effect, have Anderson Consulting or other large consulting firms do the work for them. The government should sponsor

more research so we have a better understanding of how business

on the Internet will operate so small business can draw upon that

pool of information to be effective competitors in the Internet

world.

Thank you very much.

[Mr. Whinston’s statement may be found in the appendix.]

Chairman TALENT. Thank you, Professor Whinston.

Our next witness is Mr. Alan Anderson, who is a Senior Vice

President of the American Institute of Certified Public Accountants. Mr. Anderson.

STATEMENT OF MR. ALAN ANDERSON, SENIOR VICE PRESIDENT, AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, NEW YORK, NY

Mr. ANDERSON. Mr. Chairman and members of the Committee,

it is an honor to be here today, and I would like to thank you for

allowing the American Institute of Certified Public Accountants to

make a presentation about a highly important and visible issue in

the industry today, e-commerce.

I would request that my testimony which I submitted be made

a part of the permanent record, and I will summarize that testimony right now.

First and foremost, Mr. Chairman, had SeafoodNow.com received

the Web trust seal, you would have felt very comfortable and assured that you could have provided your credit card number over

the Internet and the security of that credit card would have been

maintained and, in fact, you would have received the product in

high quality condition as well as fresh and very edible. I might say

lobster is quite good.

Chairman TALENT. I should make myself clear, Mr. Anderson,

candor requires me to say the reason I didn’t supply my credit card

was not that I was afraid of a lack of security but that I did not

want to pay for the lobster.

Mr. ANDERSON. I fully understand that. Thank you very much.

Chairman TALENT. Please, go ahead.

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Mr. ANDERSON. I am here today representing the 330,000 members of the American Institute of Certified Public Accountants, of

which many are either employed in small businesses today or small

CPA firms.

We believe that e-commerce provides a tremendous opportunity

for small businesses today to grow and compete against their larger

brothers and sisters in corporate America. We think that the

WebTrust seal of approval and WebTrust assurance, if you will, is

a vehicle which can provide for that competitive edge and competitive advantage.

Customers entering the World Wide Web or the Internet today

are scared. They are uncertain as to what’s happening. They ask

questions, how do I know who I am conducting a transaction with?

Will I receive what I ordered? Is this a reliable business? Is it a

secure site? Will my privacy be protected and will I get scammed?

All of those questions are questions that every customer that

goes on the Internet asks when they are pursuing and deciding

whether they want to execute a transaction. In fact, 70 to 75 percent of those customers do not execute a transaction for those very

reasons.

What we have done in the profession is to develop a service, CPA

WebTrust, which is really a trust seal, which if you go to the Web,

you see this seal, it provides you certain assurances. It follows the

framework of that of an audit of financial statements. I think everybody could relate to an audit of financial statements. But what

we do is audit that website for various pieces of information.

One is the business integrity of the company and the business

practices of the company transacting business on the Internet. We

also do an audit of the transaction integrity, that will the integrity

of that transaction be maintained and assured so that that customer is protected and that the business is aboveboard, if you will?

It also provides an information protection piece of the equation,

which ensures the consumer’s privacy, which is important both for

the small business owner as well as the customer.

We believe that CPA WebTrust is well positioned to help move

the process forward, to help small businesses succeed in the marketplace.

It has been said that the Internet is a large company venue to

conduct business. In fact, in Business Week of May 1999, Jeff

Bezos, the CEO of Amazon.com was quoted as saying, I think this

is one of the most misunderstood things about e-commerce. There

aren’t going to be a few winners. There are going to be tens of

thousands of winners. This is a big, huge, complicated space, and

it is going to be as complex, with as much variety and as many

winners as the physical world.

We believe CPA WebTrust is there to help small businesses take

advantage of the opportunities afforded them on the Internet.

CPA WebTrust is a program that is international in scope for

that matter. We have our international societies around the world,

the United Kingdom, Australia, Ireland, Scotland, et cetera, also

providing this service. CPA WebTrust is a program where you get

licensed to provide this service. A CPA firm will then go into a

small business, once they are licensed to provide this service, and

basically audit that website.

15

An interesting thing that we found as we have moved this process forward in CPA WebTrust is that many of the websites that

have been put up in the rush to get on the Web, many websites

have missed certain basic controls and control structures and processes which have prevented them from getting the seal.

If we want to enhance and improve the quality of e-commerce on

the Internet, if we want to enhance and improve the business success of small businesses, CPA WebTrust, I think, is well positioned

to satisfy that need.

Many people are always asking me, well, what is the cost of CPA

WebTrust? This has got to be expensive because of the tremendous

amount of assurances that CPA WebTrust provides.

Well, the first website that was placed was a company called Resource Marketing in Ohio. I know there are some Committee members from Ohio. Resource Marketing is a small company that it cost

them $1,400 to get the seal and about $5,000 in CPA fees to do the

work. Within 60 days of the seal being placed on that website, Resource Marking maintains that their business grew by 300 percent

and their cost structures went down by a tremendous amount, an

amount to basically reduce their staffing levels or rechannel their

staffing levels to that of one full-time equivalent.

We believe CPA WetTrust is a tremendous vehicle to help position small businesses to be successful and compete in today’s growing e-commerce marketplace.

Thank you very much.

[Mr. Anderson’s statement may be found in the appendix.]

Chairman TALENT. Thank you. Our next witness, Mr. Brian Hanson, is the founder and owner of Hanson Brothers Fresh Seafood,

in Portland, Maine. Mr. Hanson.

STATEMENT OF MR. BRIAN HANSON, FOUNDER AND OWNER,

HANSON BROS. FRESH SEAFOOD, PORTLAND, ME

Mr. HANSON. Thank you, Mr. Chairman and members of the

Committee, for inviting me. I think I sit alone in a way that I represent the most basic of Internet businesses. I am a very small

business that got on the Internet, and I am selling directly to consumers. So I am really running the most basic Internet model that

you see on the Internet.

Hanson Brothers Fresh Seafood, it is privately-owned by myself

and my family. We have an extensive history in seafood, wholesaling, shipping, processing, but this is really our first real venture

on our own into seafood retailing.

Seafood selling is not the easiest business. The industry is fragmented. The product is highly perishable and it is competitive because it is so locally based.

Because of our perishable products, we need to look at as many

channels to distribute our products as possible so when we opened

our retail we saw the Internet as probably the newest channel that

we could use to sell our product in.

We are fishermen. We don’t know very much about the Internet,

although I did have e-mail when I was in college. So I started doing

some research, and I would really like to talk about the nuts and

bolts of Internet retailing because I have gone through the process

16

of choosing to go on the Internet and then actually going out and

doing it.

I really noticed three problems that small businesses have when

they enter the Internet, and they touch on a lot of things that the

other witnesses have talked about.

The first problem is a poorly designed website. Unfortunately,

every business out there is scrambling to get on the net, and that

does not necessarily mean that they are making the right decisions

to do so. There is an equal number of Internet providers that will

offer you Web design capabilities. That does not mean that they

can do that well. We see this in any industry. You are approached

by vendors all the time offering services and products, but some

providers are good and some are bad.

Having a good website is inherently critical to being successful

on the Web. You need to have a website that is friendly and attractive and easy to use. So we needed to address that problem.

The second, and I think probably the most important, is lack of

traffic or exposure. You can build the best website on the Internet

but that doesn’t mean that anybody is going to come to it, and this

is the problem that small businesses really have.

I didn’t have a $40 million budget to advertise during the Super

Bowl to brand my product. Up until recently, I didn’t get a whole

lot of media attention.

There is really two basic methods that people get traffic to their

Internet site. One is a branding campaign using traditional media

and the other is getting on the portals or the search engines. That,

too, requires an expertise that most small businesses do not have.

So we need to address that problem.

The third obstacle that most Internet businesses have to confront

is a lack of functionality. As I said, a lot of small businesses are

jumping on the Web but they have never asked themselves why

they are doing that. They just say, I think the phrase was, you either have to play or pay. But unfortunately, few people actually are

conceiving strategies to get on the Internet. Are they selling something? Are they offering product support? Are they offering information about their company? There are a variety of things you can

do. The Internet and e-commerce is not just selling but you have

to say to yourself what am I doing this for? Am I spending money

without a strategy now where later on I will have to tear this all

down and start all over again? The Internet is moving too fast to

make errors like this.

Those three problems are mutually exclusive. All three need to

be addressed, and I did that. Unfortunately, I didn’t have the resources, the skills or the time to do that myself and I was lucky

to be approached by a company, Global Store, which had the search

engine teams that could put me on the search engines, which had

the website teams that could make in effect a website and had the

capital that they were willing to build my website for me.

Now, as a small business, I can honestly say I wouldn’t have

been as successful or maybe even successful at all had I not had

that help. I don’t have the economies of scale to do such things and

I do not have the skills. I am not going out on a limb and saying

most small businesses don’t have the capabilities to truly be successful on the Internet without a lot of luck, and when I say small

17

business I am going to say businesses such as mine that are doing

a million dollars in sales and are locally based in a small community.

To actually create our site took us almost three or four months,

and again we wanted to make sure that our site was effective, it

was functional, it was usable and it was without errors. So I

missed an important holiday season.

I opened up my retail store 8 months ago and I opened up my

Internet commerce about 3 months ago. Now I started with zero

sales on the Internet and right now the Internet is accounting for

25 to 30 percent of my sales. This year alone I will probably do $2

million just on my retail.

Chairman TALENT. I was going to ask you about sales volume.

How much of an Internet volume do you have?

Mr. HANSON. This year we are looking at doing about $600,000.

Chairman TALENT. Thank you.

Mr. HANSON. And that was business that I wouldn’t normally

have.

Now, besides addressing all the problems that I noted, I was also

lucky enough to get in Time Magazine. So I am not going to tell

you that it was all preparedness, and the Good Morning, America

helped, too.

Chairman TALENT. We are all interested in your plan for getting

such press. Several members of the Committee will be talking with

you about it afterwards.

Mr. HANSON. What the Internet has done for me as a small business is created a very important sales venue to move a perishable

product. That is probably the most important thing.

My inventory control is probably the single most important thing

to the success of my business. I don’t buy a lot of frozen product,

which is typically the type of seafood sold at larger retail chains

and grocery stores. I sell smaller, more specialized fresh seafood.

The Internet has allowed me to reach an international and national market. There isn’t a day that goes by that I do not receive

inquiries from out of the country on either brokering wholesale

deals or just shipping out lobsters to other countries.

Thirdly, the Internet has provided me cash flows in slow months.

January, February and March are not great months for any retail

business. The Internet has provided me cash flows to really help

a fledgling business survive and get through the first couple of

years.

Finally, it is a new profit center and it is one that has lower distribution costs than perhaps anything else. I also take orders via

telephone, but to take telephone orders requires me to place someone at a phone and answer and talk to a customer.

Now, the benefits of that are you can actually deal physically

with a customer and talk to them, and I don’t want to under emphasize how important that is. But unfortunately, I am a small

business and if I can shift some of those telephone calls over to the

Internet and also get new customers to the Internet, then it is better for me. It doesn’t require the staffing.

My effort and costs for developing the website were paid for by

Global Store, and the shipping costs are paid for by the customer.

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So it is very low distribution. It is really opening another retail

store without the start-up costs of one.

Chairman TALENT. Do you think if they called in on the phone,

and you had a good person talking to them, they might buy more?

Mr. HANSON. There is always that possibility. You can always either upsale or you can create a relationship with a customer to create repeat business, but, you know, during the holidays that phone

could be ringing off the hook all day long and it might take three

people. And I would rather shift those three people to working with

the true core of my business, which is over-the-counter retail sales.

We are firmly aware that competition is coming. I think that I

have been lucky that I started in an Internet business that not a

lot of people have jumped into. The perishable food Internet business is, they a few and far between. I think the only other one that

is really, I think, doing any volume at all is probably one we all

know, Omaha Steaks, but they have always had a national branding and they shifted to the Internet quite easily.

We are expecting a lot of competition so it is very important for

us to establish ourselves first and foremost as oriented towards

customer service, to having a good website and making our customers feel as though they can confidently order product through

our website.

I think one of the things we talked about, seals of approval and

all of that, but I know that if I don’t service a customer well they

won’t come back, and ultimately that will be the death of my Internet business. So I have to go out of my way, even though I don’t

have that customer contact like I normally would, I have to go out

of my way to make sure that every point of service is completed

properly.

I have actually—it is probably fair to say that 20 percent of my

business now is repeat customers. Thank You.

[Mr. Hanson’s statement may be found in the appendix.]

Chairman TALENT. Thank you, Mr. Hanson. I am grateful to you

for traveling so far.

I am going to defer my questions because I know, I can tell from

the attendance, that the Committee is interested and I want them

to be able to get to their questions.

In Ms. Vela ́zquez’ absence, I will yield to Mr. Brady.

Mr. BRADY. Thank you, Mr. Chairman.

My concern is more security. I was interviewed by a major TV

station in the City of Philadelphia, and this reporter had said to

me that over the Internet there was an advertisement you can

order drugs. I guess that you may not be able to give me an answer

but maybe you can help me answer her a little bit, or maybe somebody—I could jog you a little bit and come up with something that

I could say or maybe even respond to.

What was happening was Ritalin, Viagra, Prozac were being ordered over the Internet, and they were being advertised as no prescriptions needed. This is a documented thing. It is right on TV,

and it is playing every other day in my city.

What happened was they had one drug, I don’t know the name,

long name, not even approved in the United States of America, but

it was ordered out of Sweden, and she received this.

19

The other three drugs, the Prozac, the Ritalin and the Viagra

were ordered out of the State of Florida, and they were ordered

from the city of Florida with a suite number. The suite number

turned out to be a box number. And she received and was delivered

to her, or to the person who was ordering them, these four drugs;

one not even approved in the United States of America yet; and

again, advertised no prescription necessary.

I don’t know whether you can answer my question. I don’t know

if you can give me any insight. We went to the Federal authorities.

Actually, I did because I needed some type of an answer. They are

overwhelmed. They can’t even begin to try to address this problem.

But the two main problems, again, no prescription necessary and

it was ordered by her niece, who was 10 years old. So I have a

problem with that. I have a major problem with ordering over the

Internet, and I understand what you are doing here is CPA approval, you know, let’s let people, consumers, know that you are interested, you watch and you monitor this, it is a good thing to do,

but I just think we need to look at this real hard.

No disrespect to the business that is now becoming no more. You

have got to go to another Committee, you don’t come to Small Business anymore, you are going to be big business, hopefully. We don’t

want to hurt you, but there are some concerns, and this is my concern. I don’t know if any of you can help me with any kind of direction to this.

Thank you, Mr. Chairman.

Chairman TALENT. Perhaps, Mr. Miller, would you like to take

a crack at that, or Mr. Hill, maybe?

Mr. MILLER. Clearly, Mr. Brady, any kind of global commerce

where people step outside the normal channels of ordering prescription drugs, they can do it through the telephone, they can do

it by traveling outside the country, they can do it through mail

order.

Mr. BRADY. A 10-year-old could do it by traveling outside the

country?

Mr. MILLER. They could do it by telephone. It happens all the

time.

Mr. BRADY. You can order a drug by a telephone?

Mr. MILLER. You can.

Mr. BRADY. With no prescription? A 10-year-old could do that?

Mr. MILLER. Yes, you can. I hate to tell you that, but as long as

that 10-year-old has access to his or her parents’ credit card—now,

one hopes the parents don’t give a 10-year-old access to a credit

card. Obviously, when you are ordering something, sir, at the end

of the day you have to pay for it. People don’t send you drugs or

any other product over the Internet on approval. They require you

to pay in advance.

So I think the real critical question here is how a 10-year-old got

his or her parents’ credit card, because presumably he or she could

have ordered all kinds of things that you wouldn’t want a 10-yearold to order. So I think at some point or another there has to be

some personal responsibility here, because the same things you just

detailed can be ordered through all kinds of ways if you have a

means of paying for it. That is the critical issue.

20

Mr. BRADY. So what you are telling me is that it is okay to order

Prozac?

Mr. MILLER. I don’t think it is okay at all.

Mr. BRADY. It is okay to order Ritalin, it is okay to order Viagra?

Mr. MILLER. Absolutely not.

Mr. BRADY. As long as your parents give you the credit card? You

are 10 years old, and she stumbled on the Internet by using a computer, so that is okay?

Mr. MILLER. Mr. Brady, obviously I am not saying that. I am

saying that——

Mr. BRADY. That is what I heard.

Mr. MILLER. Absolutely not. If you are going to try to stop international commerce, you have to stop the ability of people who do

not have the age of responsibility to make those kinds of decisions.

You can’t cut off telephone service to those countries. You can’t cut

off Internet services. You can’t cut off mail service to those countries.

So what I am saying is the problem you are trying to identify is

not unique to the Internet. What I am concerned with is you are

portraying it as if this is somehow unique to the Internet.

Mr. BRADY. I wish you would answer that TV reporter like that

and see what would happen.

Mr. MILLER. I would be glad to. I get those questions all the

time.

Mr. BRADY. I am sure you would be.

Mr. MILLER. Okay.

Mr. BRADY. What I am saying to you is that a kid is on the Internet.

Mr. MILLER. Right.

Mr. BRADY. And they are playing around and they are doing

their computers. They are all taught it in school, and here they

bump into this no prescription necessary.

Mr. MILLER. Right.

Mr. BRADY. And here they bump into a chance to be able to order

drugs that you need a prescription for, which is illegal to do already.

Mr. MILLER. Right.

Mr. BRADY. And now this person who is receiving this order

doesn’t know who they are receiving an order form, it is a post office box, and a 10-year-old, what happened, as you all know, she

went to her aunt who is a TV reporter, and she said, look, I will

give you my credit card. Let’s see how far we can get with this.

And that is how far they got with it.

I just think there is something wrong with that. It is a little different from ordering over the telephone.

Mr. MILLER. I am not quite sure what the difference is, sir, with

all due respect.

Chairman TALENT. Does the gentleman have any further questions?

Mr. BRADY. No, I am finished.

Chairman TALENT. Okay. Mr. Hill, your questions lead me to

think that maybe we should have had somebody from the Department of Justice here to talk about these kinds of concerns.

21

Mr. Hill, have you, on behalf of the agency, networked at all with

the law enforcement people? Mr. Brady’s comments certainly disturb me, since it seems by saying we are overwhelmed; we are

throwing up our hands and not doing anything about this. I mean,

that is really a source of concern. Do you have anything you want

to add?

Mr. HILL. Well, just very quickly. You know, personally I share

many of the same concerns. I have an 11-year-old daughter who

can operate my personal computer on the Internet in ways that

just amaze me, and every time she get on, about every other time

I go in an remind her, don’t give your name out, don’t use my credit card. I keep working on that over and over again, because there

is a real problem.

In addition to working at the SBA, I engage in what I considered

a small business activity. I fish professionally in bass tournaments.

I do want to assure you I am not leaving the SBA any time soon.

My wife tells me I have bankrupted the firm several times. But I

am currently selling my boat on the Internet, and I am getting inquires from literally all over the country, but because they are over

the Internet I don’t know where they are coming from. I don’t know

who they are. I don’t know if they are serious, if they are pranksters. We all read not too long ago about the E-Bay sale, that there

was a youngster who got on who was buying cars, and he almost

bought a resort island.

There are a lot of concerns like this.

I think what Professor Whinston said earlier is what the SBA

thinks is very important. We need to do a lot more research. Part

of our emphasis at the SBA begins with focus groups that we hope

to run this summer with the Department of Commerce, where we

need to actually explore all of these issues and understand them.

This is a brand new world. It is moving very fast. Technology is

going a million miles an hour, and we need to catch up and see

where we can be helpful. But there are a lot of concerns like that

that we need to work on.

Mr. MILLER. Mr. Chairman, maybe just two more general points

to Mr. Brady’s specific point. One is the issue of security, and I

think in terms of security on the Internet, most people when they

send their credit cards over the Internet can feel fairly secure because of what is called the secure socket layer of the security

issues.

There is a second issue, which is authentication, which Professor

Whinston referred to, which is you are who you say you are. To

some extent that may address Mr. Brady’s concern that at least

when you are filling these questionnaires out, if you say 18 years

old, how do they really know you are 18 years old?

Then these is a third question about consumer fraud and scams,

which Professor Whinston also talked about, which the AICPA program, BBB On-line, Trustee and other programs, but I don’t agree

with—don’t know who responded to Mr. Brady from the government, but I don’t agree that the government isn’t able to deal with

consumer fraud or other opportunities.

I talk to the FTC all the time. They recently had a meeting. They

have another one coming up June 8th and 9th. We talk to the Department of Justice all the time. We talk to state attorneys general.

22

Number one, they tell us the numbers of consumer fraud on the

Internet compared to general consumer fraud is still infinitesimal.

People doing fraud still use the old fashioned way, by and large.

But that is not to say it is not important because obviously it reflects badly on the industry.

So what we are trying to do is work with organizations like the

AICPA, with BBB On-line, with Trustee, to be able to deal with

that challenge so that there is a general answer. I can’t deal with

every specific problem that comes up because obviously no matter

how good you try to set it up there are always going to be scam

artists that are always going to out scam the system.

The last point I would make is that most of the access to the

Internet providers, AOL being the most prominent but it is also

true with others, are trying to put parental control systems built

into the system. I think that that is important. It is becoming a

market differentiator because they want to know that if I as a parent turn the Internet over to my 11-year-old or 10-year-old, my

kids are now 15 and 17, then I am able to set that setting on the

computer so that they cannot access certain websites that contain

sex, violence; they cannot order any materials unless I explicitly

come on. So those settings are very, very important. I think that

is a market differentiator when parents are out there buying software or deciding which Internet access provider to use, and the

Internet providers are advertising that to parents, come and use

our website or use our portal or use our access because we can offer

those protections to try to minimize, I am not going to say eliminate but try to minimize the kind of situations that Mr. Brady was

talking about.

Chairman TALENT. Well, thank you. I appreciate Mr. Brady’s

questions. I think we can expect the market on its own to take

pretty effective steps to protect people against pilfering of their

credit cards because if they don’t, any company that isn’t doing

that is going to lose business. So there is a tremendous incentive,

and Mr. Anderson talked about them.

I expect that the market will respond pretty well on its own to

that, but the issue where the person is not being defrauded, they

are getting what they ordered and the problem is it is a kid ordering, I mean, there is much less incentive for the market to respond

to that on its own, and that is an area where I do think the government needs to be involved, and I think Mr. Brady made some excellent points.

Bob, if you will let us know who in the DOJ threw up their

hands and said that we are overwhelmed, I would be interested in

knowing that because they ought to be letting us know that.

Mr. BRADY. We followed that up and they went and they found

out that the suite was a post office box; they confiscated it and they

shut that down.

Chairman TALENT. Good.

Mr. BRADY. But the initial person said that, and I didn’t follow

up with that. No question.

Chairman TALENT. Okay.

Mr. BRADY. I didn’t mean to be argumentative with you.

The 10-year-old was probably done—no disrespect to reporters

but you all know how you are—was probably done for effect. I am

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sure that she stumbled on it and let the 10-year-old now actually

do the manipulation of the ordering so it can be effective when she

does her TV show. But the reality of it is that it was done with

no prescription, advertised and no prescription needed. Thanks.

Chairman TALENT. I thank the gentleman. I will recognize Mr.

Forbes.

Mr. FORBES. Thank you, Mr. Chairman. I sincerely appreciate

you conducting this hearing today.

For me, I think this is a tremendously exciting opportunity for

America’s small businesses. Probably no opportunity like it has

ever come before small businesses in the last century, and I think

there are great things ahead.

I respect Mr. Brady’s concerns. I absolutely share them. I would

just make this one note, though, and I think it is in line with what

has been said here by Mr. Miller and others, is there are Federal

agencies who are charged with the responsibility of making sure

that kind of fraud does not happen, and we need to give them the

tools to extend that kind of oversight on the Internet as well.

As was mentioned, telephone solicitation, telephone sales, this is

an area that obviously has gone on for decades and it is a tremendous concern, I think with the ease of the Internet and we are talking about ease, notwithstanding parental controls that many of the

major search engines are providing, that it is an area that I think

it is rightful that the government take some sensitivity to.

The United States Postal Service, frankly, has jurisdiction there

and it is a violation to order internationally without a prescription.

So there are some violations of law here that exist that our Federal

Government and its various agencies need to be sensitive to, and

to the extent that this Committee can help provide some guidance

on that as we move into this brave new world—we all know over

the last 5 years exponentially the growth here has been phenomenal. My wife, my children, our family, are active users of the

Internet and of this e-commerce. Frankly, we have found it to be

just phenomenal.

If you come from an area like I do in eastern Long Island, which

is largely rural, which is a seasonal economy, this tremendous opportunity, as Mr. Hanson has suggested, provides you a marketplace that you would never, ever have access to. It provides for an

expanded local economy, and there are only great upsides, I think,

to the growth of this, understanding that we do have to be mindful.

As my good friend from New Jersey, Mr. Pascrell alluded to, you

do not want to create an atmosphere where frankly those who are

smart enough to get into the Internet world and e-commerce are

somehow advantaged over those who have made investments in a

physical plant, who are paying business fees, who are paying local

taxes. I think that as much as I ran on and believe very much in

a strong tax reduction policy, I think we have got to keep the playing field level and make sure that we don’t advantage a firm like

Amazon.com while we are putting others who sell books who are

not on the Internet to a disadvantage.

So I think there are some areas here we have to deal with.

Let me, if I might, Mr. Anderson, you talked about something

that I found extremely exciting and, frankly, gets to the issue of

trust, as has been raised here, the whole idea of CPA WebTrust.

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Now, are you saying to me that the American Institute of Certified

Public Accountants has the technical expertise to not only certify,

if you will, the financial health of the entities that you go in and

you give the seal of approval to, but you also have the technical expertise to certify the technological security of these websites?

In other words, for example, you go to Mr. Hanson’s firm and you

basically give him the seal of approval because you have certified

that he has the financial health, he is not some guy working out

of the back of a truck that is leaving town and he takes orders and

never fulfills them, but in fact you have certified that he has a secure website where you can use a credit card, where you don’t have

to worry about whether your credit card has all of a sudden been

copies by a thousand other hackers with access to that website,

who take that credit card and use it for other things?

Mr. ANDERSON. Actually, yes, we do. We have 330,000 members,

and not all 330,000 members have the technical expertise.

We license firms, small firms and large firms, to provide this

service. What happens is, it usually will take a team of people to

certify the website, one with a technical skill set.

One firm that is licensed is a firm out in California and it is a

one-person firm, and this CPA has the full complement of skills to

do the technological piece of the equation, as well as the examination of the balance of the business principles that the company is

saying are in place. We provide the training. You have to have

training in order to get the license, and so we are building the technical infrastructure to support this seal program.

Mr. FORBES. I just want to make crystal clear in here, because

much like a consumer might see the good seal—the seal of approval

of Good Housekeeping, or whatever they call it, and it gets consumers frankly to go to some of those businesses, what you are saying to me is when your seal is placed on a business, that the consumer knows that technologically there is no fear that somehow

encryption can be violated; that there is a hacker who can get in

there and steal those credit card numbers that are in the process

of being filed with perhaps a seafood company or Amazon.com or

any other?

Mr. ANDERSON. I would say that there is no fear.

Mr. FORBES. Well, that is I think a great advance, and I appreciate that on the private side that the private sector, frankly, has

moved in this direction because that is really what we need.

I was going to ask Mr. Miller about that a little bit and how his

industry feels about that, but that is probably the single most—and

Mr. Hanson, if you could comment on this in a second, but it is

probably the single most concern about all of us who see a great

opportunity on the Internet, something we want to buy, you go

through the whole process and then it says, click, you know, to

send that credit card number, and I will admit that I am one of

those who has said, you know what, I think I will print this out

and then I will call on the telephone Mr. Hanson and order those

lobsters, just to make sure that my credit card is not going in this

vast netherworld out there for others to take advantage of.

Mr. Hanson, could you just perhaps, and I apologize for the TV

that is separating us here, but could you comment? Do you find

that there are perhaps a majority, or close to a majority of your

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customers, that are going the full menu, seeing what you have to

offer and then picking up the phone, again because they had that

last remaining concern about security?

Mr. HANSON. No, that absolutely happens. I would say probably

10 or 15 percent of our customers will either put their order

through and then call us to make sure it actually was processed,

just to be sure.

Mr. FORBES. Do you have one of these seals of approval that the

CPA Web masters talked about?

Mr. HANSON. Actually, this is the first time I have heard about

it, but it sounds like a great idea. We use VeriSign, which is one

of the industry standards for credit and encryption, ordering

encryption. So we feel comfortable with our security, but obviously

any other approvals, we can get, a some sort of overview, we are

going to look at.

But there are still a lot of customers out there that feel very comfortable surfing the Internet and looking at price comparison but

still do not feel comfortable taking that final step of actually sending their credit care number over that. And we probably get 10 to

15 percent of our orders that will look at our website, print something out and then just call us and place the order that way. And

then that is fine. It is going to take a while for people to feel comfortable.

I personally think the technology is there to make transactions

safe. I do a lot of my purchasing on-line, but everybody is different.

Mr. FORBES. Mr. Miller, could you just comment, too, and maybe

clarify for me, because I was not aware of what your industry,

ITAA, does, again, to put build that trust that this is a secure

transaction.

Mr. MILLER. It is absolutely critical. We don’t have our own certification program because we do believe a lot of other products are

already out there. And clearly, businesses doing business on-line

have come to realize that, number one, privacy is a major concern,

which is why the Georgetown survey, which was released approximately 2 weeks ago, Mr. Forbes, indicated the number of heavily

traveled websites that now have a posted privacy policy is around

90 percent; whereas, last year it was around 15 or 20 percent.

There has been that dramatic shift because the marketplace is responding to consumers’ concern about privacy and now they have

a privacy policy posted.

Mr. FORBES. If you would yield just for a second.

Mr. MILLER. Sure.

Mr. FORBES. But don’t we run the risk, if we get into a lot of

multicertification situations or we have upwards of dozens or even

hundreds of different certifications, that the public gets very confused about really what certification is the real certification?

Mr. MILLER. I think that there are not going to be dozens or hundreds. I think you are going to see a relatively small number because there is going to have some heft behind the branding itself.

Mr. FORBES. Some standards set?

Mr. MILLER. Exactly.

Mr. FORBES. Would your industry set those standards?

26

Mr. MILLER. I don’t think we would want to set them. I think we

would want to work with our customers and with organizations like

and AICPA. I don’t think the IT industry itself wants to set them.

Mr. FORBES. Why wouldn’t we want to have basic, basic standards that the public can say, well, if you are meeting these basic

standards then I know I can feel assured that there is privacy and

security in my transaction?

Mr. MILLER. We do have standards various technologies. For example, as Mr. Hanson said, VeriSign is a commercial industry

product which is widely recognized as being secure in terms of protecting the financial transaction, which is one of the things you are

very concerned about. That is a commercial product. It is not

agreed to by industry. Industry has worked in the credit card area.

You may have heard of the set process where MasterCard and Visa

have been working to set up standards.

It has been widely adopted in Europe, not so widely adopted in

the U.S., but I think the feeling of the industry is this is an industry of constant change. We don’t want to be so pretentious or so

obnoxious as an industry association to claim that we can dictate

those standards.

Let the marketplace evolve. I think you are going to see very

few——

Mr. FORBES. I do appreciate where you are coming from.

Mr. Chairman, I would suggest, as somebody who believes there

should be as minimal government intrusion into this area as possible. I have already acknowledged that there are some rightful

areas that the government should be involved in, and before the

government actually decides what standards, because I think the

escalating—it is exponentially growing as an opportunity but it is

exponentially growing as a site of fraud and abuse. I think before

the government is forced to set minimum standards I would think

the industry would want to seriously look at setting their own core,

basic standards. Thank you.

Mr. MILLER. I will take that back to my membership, Mr. Forbes.

Thank you.

Mr. FORBES. Thank you, Mr. Chairman.

Chairman TALENT. I thank the gentleman for his interest. We

only have a couple of other members, and I will certainly be happy

to have a second round of questioning if he wants to stick around

and ask some others. I am going to try to clean up on some issues

but I would be happy to have him do it.

Next, Mrs. Napolitano.

Ms. NAPOLITANO. Thank you, Mr. Chair.

A lot of the questions that I would have, having been a small

business women myself and coming from local government, stem

out of the fact that for a long time small businesses faced quite unfair competition from catalog sales. Now we have Internet sales.

Understand that in a small community that is using sales revenue for its base budget, that if there are no tax revenues coming

in from the businesses that operate within its boundaries, things

happen. There is just enough money flowing into the coffers for the

local community to do its job for the community itself.

How would you think, because I do not believe that you pay any

local taxes as yet because all of yours is done on the Internet, in

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cyperspace, but how do we in all fairness to business, in all fairness to the communities that you reside in, deal with this issue of

being able to pay into the coffers that small business that are physically located, do business face-to-face, have to pay to the local coffers? Anybody?

Mr. MILLER. I think the answer is a couple of fold, Mrs.

Napolitano. I think, number one, the amount of growth of the

Internet industry itself, and the way it is driving our economy, as

has been documented by the Department of Commerce and others,

has in itself given for the first time ever consistent Federal budget

tax surpluses. States are now wealthier and have bigger surpluses

than they ever have.

Ms. NAPOLITANO. Do you know what the problem, sir, is? And I

hate to interrupt you. Having served as in the State legislature,

the government takes from the local coffers to balance its budget

and so the community really is crying for those extra dollars.

Mr. MILLER. I haven’t gotten to the local government because I

know that was your specific concern was the local government.

Ms. NAPOLITANO. That still is.

Mr. MILLER. I think at least at the Federal level and even at the

State level, I know many of the governors were concerned about

the Internet Tax Freedom Act passage and its potential negative

impact on those States which have high sales taxes. I think the arguments have been somewhat undercut by the reality that they are

just sitting on these huge budget surpluses.

The local governments, I think, have a couple of different issues

they have to address. Number one, whether in the digital age,

whether their traditional taxation models are going to continue to

work. And I think that is what the Internet Commission that Governor Gilmore is heading up is going to have to examine. I wouldn’t

pretend to have an answer to that, but I think that that is one of

the fundamental issues that is going to need to be addressed.

Number two is, there was a very important decision, Sunday,

several years by the Supreme Court, the so-called Quill decision,

which really determined the whole issue of taxation and site of

your business. Whether the Internet came along or the Internet

didn’t come along, it is that Quill decision which allows catalog

firms or other firms which do not have sites in a particular State

or locality not to pay taxes. So I think that is the kind of more fundamental baseline issue which the Internet Commission is going to

have to take a look at, whether that Supreme Court decision is underlying it.

Last but not least, the activity, I would contend, and again there

can be disagreement, but our industry would contend that the economic activity generated in places like California, Virginia, North

Carolina, Missouri, Pennsylvania, et cetera, this growth of the

economy is generating so much economic activity that it has to be

benefiting those localities, whether you talk about inner cities in

New York, parts of New York, that were very run down a few years

now, now it is called Silicon Alley, I believe; whether you are talking about inner cities which are now becoming wired and new technology brought into the schools; Cisco Academy now operating in

1,400 inner city schools across the United States.

28

That doesn’t totally answer the specific question of well, what

about my one dollar of taxes I was collecting before, but I think if

you look at it in a larger context we would argue that the benefit

to local government of the general activity of the Information Technology Age and the general benefit it brings to the community far

outweighs maybe one dollar of taxes that a particular small business may not have gotten.

Last but not least, I would contend that if you get more businesses like Mr. Hanson, I think his example is—while it is exciting,

it is not unique. In fact, there are tens of thousands of businesses

doing this every day. He pays his employees; he pays more taxes

locally on his business; and that generates economic activity. I

think any community would love to have many more Mr. Hansons,

who continues to have a retail operation, as I understand it, locally,

as well as the Internet business. And that can only benefit the

community, and that is the way to look at it, in my mind, in the

digital age.

Ms. NAPOLITANO. Well, the first comment you had, we found out

trickle down economy does not work. I mean, by the time it gets

to the local communities, it just isn’t there.

You are right, I think there are many, many ramifications to

whether the business has an on-site, in addition to the cyberspace

site, whether or not it is going to benefit the community, but I

think the community itself needs to understand that there is an

impact on the community. If it is totally just cyberspace, then

something has to be done to be able to allow the community to benefit from that, if they are headquartered or if their business is located within the framework of that community.

There are many other things that I would like to ask. Do I have

time?

Chairman TALENT. I would encourage the gentlelady to ask another question.

Ms. NAPOLITANO. Thank you.

Chairman TALENT. We may actually have a follow-up hearing on

this because you have raised tax issues, and Mr. Miller has done

an excellent job responding, but it might be interesting to have

other witnesses on that and also on the law enforcement issues.

Members are interested in what you are asking about so please

go ahead and ask.

Ms. NAPOLITANO. Thank you very much.

Professor Whinston, it appears you are not really particularly optimistic on small business will be able to compete in cyberspace. In

your testimony, Phil Sisenbrand, a name familiar and already important, will be even more of a factor in driving economic decisionmaking. But do you have any suggestions that small business could

follow to ensure their continued ability to compete and be able to

be successful?

Mr. WHINSTON. Yes. As you indicated, what we have seen in the

data, and we are collecting data about Internet activity, is that we

see thousands of small businesses on-line, let’s say, selling books

or CDs, but very few of them do any significant business. The business is really concentrated in a few very large companies, and I

think that is going to be a problem for small business.

29

So my suggestion, or the suggestions that we have considered, relate to this issue of research, meaning that we have a body of

knowledge that small business can draw upon so it can become effective and in many cases may end up to be leaving the category

of small business to medium or large business. So it may be that

we are entering a world where being small, except if you have a

very special niche market that people need, is not going to be sort

of a viable, long run alternative. You are either small and then you

grow to medium or large to handle all of the technological issues—

even if we figure out a way of doing the taxation, I go back to my

point that the costs of managing the payment of taxes, the recognition of what taxes should be charged, will become a major cost to

small business as against a larger company that can really amortize that cost over a larger base.

So I see a big challenge for small business in this Internet world.

Ms. NAPOLITANO. Thank you, sir.

Thank you. I will hold for the next round. Thank you.

Chairman TALENT. Would any of the other gentlemen on the

panel like to respond? It was another excellent question. Are the

rest of you as pessimistic about the chances of small business?

Well, let’s jump in there.

Ms. MILLER. Obviously, I disagree with everything Professor

Whinston said after he said ‘‘the.’’

Basically, I believe that the opportunities are incredible, as Congressman Forbes said. I mean, the fact that now virtually anybody

who wants to sell to General Motors can sell to General Motors, for

example, 5 years ago if you were a supplier and you wanted to sell

to General Motors you had to become part of their electronic data

interchange, private network. You had to go through all kinds of

rigmarole and it was not worth it either to General Motors or to

small business manufacturers who manufactured parts to try to go

through that, because they had a very small cluster. The same with

Ford, the same with Daimler Chrysler.

Now because of the Internet and the automotive exchange network, virtually anybody who wants to supply a part, a seat cover,

a bumper or whatever it is you want to manufacture, now has the

opportunity to sell to the largest car manufacturer in the world and

become a regular supplier.

That also means, as Mr. Hanson suggested, if you don’t do a good

job once you get that opportunity, the word gets around the Internet pretty quickly and you are going to lose that contract. But

thousands of manufacturers, mostly small businesses or mediumsized businesses, who never could have dreamed to selling to General Motors, now can do so.

The same thing with companies like Wal-Mart. Before, it was a

relatively small number of middlemen, middle manufacturers, who

could do business with Wal-Mart, because Wal-Mart had to touch

you and feel you and see you and go through this whole big formalized process and you had to have a big private network.

Wal-Mart now is out there on the Internet. Anybody who produces goods and services they are looking for, salt and peppers

shakers, skirts, shirts, tennis rackets, whatever it is, you can electronically deal with Wal-Mart. As long as they know you are a reliable supplier, you can suddenly do business with them.

30

I think the opportunities are what I focus on; not to minimize the

challenges. Some of the ones that he identified, that Professor

Whinston identified, are true but they are being dealt with in the

marketplace, and they are being dealt with by appropriate government laws and regulations. But to sit here and talk about these

problems as some kind of overwhelming obstacle to small businesses, I think, is just turning the glass not just half full or half

empty, totally upside down.

I think if you have a hearing a year from now, you will have 10

Mr. Hansons here, and 2 years from now you will have 100 Mr.

Hansons here. Now, maybe he doesn’t want to have a hundred

competitors on the Internet selling lobsters, but that is what is so

exciting about the Internet.

One other thing that I don’t think the Committee has heard

about fully is again the power of communications. Yes, Amazon.com

is a great company but Amazon.com didn’t exist 3 years ago or 4

years ago.

I will tell you the other thing about Amazon.com, if they don’t

do a good job, they could be dead tomorrow because if you go to

a restaurant and you get a bad meal, it happens once, maybe you

tell a couple of friends but it is going to be years and years before

the word gets around that that restaurant has kind of gone downhill.

You get bad delivery from Amazon.com from a few customers on

the Internet and the word will spread like wildfire, and before you

know it no one will be ordering anything from Amazon.com.

So their emphasis on quality and service and reliability to the

customers has to be paramount, has to be at the top of their agenda, because if they can’t have comfortable customers, the Internet

which made them will be the Internet which kills them.

Mr. HILL. If I could just say, you know, I totally agree with Mr.

Miller’s assessment.

We have been focusing on some of the external challenges. We

think there are a lot of internal challenges for small businesses to

transform themselves to meet the challenges offered by electronic

commerce. But one point I would like to leave you with, as you look

at the Internet and you look at studies, we have talked today a

number of times about our daughters. When that generation gets

to be the consumer generation 10 years from now, the barriers that

many people face now won’t be there. The young people of today

are growing up computer literate, and this is the way of the future.

We think the opportunities for small business and the leveling of

the playing field, both domestically and internationally, are just

staggering. That is why we think this is going to be a major issue

at the SBA for the near future.

Chairman TALENT. One more question, and Mrs. Kelly has been

very, very patient. Mr. Hanson, you mentioned in your statement

that you felt like the big players always have an advantage going

in. Do you want to offer an opinion on this?

Mr. HANSON. I have got a lot of opinions on this, actually, if you

will give me just a minute. I agree with what everybody is saying,

to some extent. It is my belief that the ability for a traditional retailer, business-to-customer, as a stand-alone small business to succeed on the Internet is diminishing rapidly.

31

In real practical terms, to succeed on the Internet, the phrase we

use is you have to bring the eyeballs in. It is all about traffic.

The first model of the Internet, and we are shifting that and you

will see it in the valuation of stocks, the first way we valued stocks

was how much traffic. Now we are looking at how much of that can

be converted to business. But the very essence of it is traffic to

your site, and a very small business that gets on the Internet, if

it makes no alliances, has no capital and it doesn’t have the technical expertise to get on to the search engines, will not get anybody

to their site, except maybe a few local customers, and then they

will just languish on the Internet.

The bigger sites, I mean, we see it, there is not a day that goes

by that I do not hear on the radio or see on the TV a company,

a brand new company, with millions of dollars, creating instant

brand recognition. Go.com is doing right now, and every hour on

TV you can see them. They are a brand new company. Amazon.com

did the same thing.

I can’t to that. So I had to align myself with a larger company

that had the technical expertise and the ability to bring me the

eyeballs, or I wouldn’t have succeeded, either.

The Internet has so many different possibilities and so many different business models, not just business-to-customers. It is also

the exchange of concepts, and there is so much to it. I mean, we

are seeing now webcasting and the ability to transmit audio and

video signal, that there is tremendous opportunity out there, I

wouldn’t disagree with that. But traditional, small business retailers, unless they can get traffic to their sites, won’t be successful at

all.

Chairman TALENT. All right. I will give Professor Whinston an

opportunity to respond later, but right now I want to recognize

Mrs. Kelly, who has been very patient, for any questions she may

want to ask.

Mrs. KELLY. Thank you very much.

The first thing I want to say is I thank you, Mr. Miller, for recognizing Silicon Alley. It is my district. I represent the world headquarters of IBM.

When I came to Congress in 1994, we had 30 small high tech

firms and less than four of them were Web focused. Today there

are 113 small firms and, of these, 70 are Web focused. So we are

growing very slowly but it is coming. It is a very exciting process

for me to see that happen.

I wanted to ask Professor Whinston, you were talking in terms

of the taxing issues about the issue of sovereign money. I wonder

if you would be willing to develop that issue a little bit because I

think it is a serious one that could be problematic.

Mr. WHINSTON. Yes. To do business on the Internet now the

model is to use credit cards. As we move towards sort of a more

mature movement in electronic commerce, there will be more and

more interest in having electronic money that is in effect private

money.

So, for example, Microsoft could issue money and that money

would be used to settle transactions anywhere in the world; the

money would, in effect, be international money. It would be technically a liability of Microsoft, but it would circulate so it could be

32

a liability that nobody would ever ask to get redeemed, and it, in

effect, could become a very profitable business; in effect, a more

profitable business than their current software business.

So electronic money is really a digital product. It involves

encryption. It gives you anonymity that you have with cash. So,

again, it raises the specter of the sovereign money being partially

displayed. It raises broad issues on monetary policy.

The Federal Reserve is always very concerned about the growth

in money supply and other issues related to that. If we introduce

this new kind of money, it makes that issue confusing.

The Federal Government makes money on issuing money. It is

a couple of billion dollars in contributions to our Federal budget,

and that could be displaced.

With the electronic money, in effect, you could be doing cash

transactions which are in the millions, which raises questions

again about, as you have indicated, taxation, and that, again,

would be a problem.

So as everybody has indicated here, there are great opportunities. I run a center at the University of Texas and, of course, I see

tremendous opportunities in electronic commerce but on the other

hand I think we have to understand there are great challenges. In

those challenges, an opportunity mixture, we have to work it out

so that the positive end of this whole revolution is where we are

going and avoid the pitfalls.

I would also mention parenthetically, since I referred to cryptography, that it is not, in my judgment, possible to give guarantees

about security. I think the AICPA or other organizations have to

deal with reasonable care, and an indication that while nothing is

absolute that companies have taken the kind of care which reflects

a judgment that will, in most cases, protect security.

But, for example, in our research center, we have gotten destroyed by hackers. Hackers have broken into all the security features we have and have destroyed our files, have knocked us out

of business for weeks, because you are dealing in an area where

the people who are hackers are very creative people. They are sort

of like the Dr. Moriarty in the Sherlock Holmes cases, usually very

brilliant people who have a certain personality, I could say, that

they like to exhibit in this way, and this becomes a real problem.

Chairman TALENT. Of course, Dr. Whinston, you are on a college

campus, which makes you a special target probably.

Mr. WHINSTON. I would think just the opposite. I mean, we have,

many people would say, nothing of any particular value. And yet

these people, in fact sometimes they break in and just say, look,

we have broken in and this time we are not going to destroy your

stuff but we just want to let you know that with all your sophisticated protection it is not doing you much good.

Chairman TALENT. I mean that there are a lot of students

around who probably are brilliant.

Mr. WHINSTON. But students can go anywhere on the Internet,

and they could be students from India or Pakistan or China who

just feel like roving the network and finding holes.

Also software companies announce. We had a case where the——

Chairman TALENT. The subject of the Chinese is probably one

you should not have introduced.

33

Mr. WHINSTON. Okay. I will withdraw the Chinese mention.

Chairman TALENT. This hearing is not getting into that, I will

tell you that.

Mr. WHINSTON. We saw a posting by Hewlett-Packard that they

discovered a hole in their operating system, and they announced it

at say, 10:00 at night. Maybe one of our people saw it at 6:00 in

the morning, but the hackers had seen it probably at 10:01 and

they were roving the world, finding Hewlett-Packard sites and

breaking in and doing destruction.

So by the time we tried to use the patch that Hewlett-Packard

suggested it was too late. We already were wiped out.

So I think the security issue and the whole issue of cryptography

is a serious challenge that companies, organizations like the

AICPA, will deal with, but we should not let people think that

there is anything absolute in that realm that we can rely upon.

Mrs. KELLY. Thank you very much.

That kind of segues into the question I was going to ask Mr.

Hanson, which was whether or not he feels his site is secure from

hackers. How comfortable are you?

I can’t even see you but I know you are there, Mr. Hanson; if you

would be willing to respond.

Mr. HANSON. Well, we use VeriSign and, again, I don’t—I feel

very confident in that. I suspect that anybody that had an inclination to break into my seafood site could probably do so. I don’t

know of what benefit it would be; maybe to gain access to credit

cards. But I haven’t——

Mrs. KELLY. That is exactly what I am driving at, that they could

pick up the credit cards.

Mr. HANSON. Well, I would like to flip this around, if I could

have the indulgence of the Committee for a second because we

have talked a lot about protecting consumers and in a lot of macro

sense protecting the country from the Internet. But one of the concerns that I have as a small business owner, and maybe it can be

addressed by other people here, is that people that use credit cards

to order a product from me are not really liable to pay for it because there is no physical signature, and about 10 percent of my

orders are disputed by customers who feel they just don’t want to

pay.

When they dispute it to their credit card company, the credit

card company just wipes it off and takes the money back from me.

Unless I have a signature from them, from a shipping company,

from exactly the person that ordered it, not their wife, not their

son, not their friend, then there is nothing I can do, except take

them to civil court, which I don’t have the resources to do every

time; especially track people and drag them into my State or drag

them into my country.

This is not a problem that I just have. This is a problem that everybody has, and that is why the professor here has raised a real

issue about sovereign Internet cash, which we have been talked to

about from a number of different companies that are exploring

that, with some out of the country on-line banks.

It is a concern of ours, and I don’t know what is being done to

address that.

34

Chairman TALENT. In your case it is not like you can resell your

merchandise.

Mr. HANSON. Well, it is gone. They will eat it and then they will

just call the company and say I never received it. That is tough.

Mrs. KELLY. Thank you very much. There is one other question

I would like to kind of throw out to the whole panel but specifically

to Mr. Miller, Mr. Whinston and Mr. Anderson, I want to know

what you think, just speaking for yourselves, what you would think

of a Federal law that would require parental interaction on the

Internet with regard to the purchase of products?

Mr. WHINSTON. Well, I could take a shot at it. I think there is

a problem of jurisdiction. The Internet is a worldwide business, and

we could pass laws in the U.S. that would, say, deal with on-line

gambling or pornography.

Mrs. KELLY. I am sorry. I narrowed that, Professor, to the purchase of products.

Mr. WHINSTON. Okay. So what you mean by product is a physical

product that is delivered by Federal Express?

Mrs. KELLY. I mean putting some kind of parental interaction required by Federal law for a child to order, for instance, as Mr.

Brady was saying, drugs, pornography, even lobsters, on the Internet.

If a 7-year-old child—I have a 5-year-old granddaughter who is

pretty sophisticated. She can do things on the Internet. What if my

5-year-old granddaughter picked up my credit card and ordered

lobsters from Mr. Hanson? That is exactly Mr. Brady’s point.

Perhaps there is a need here for some kind of legal structure for

purchases, and that is what I am asking a question about.

Mr. WHINSTON. I would agree in principle. Again, there is this

jurisdiction issue, which is an unfortunate problem, that companies, as soon as they see some regulation that they don’t find attractive, they move out of the jurisdiction.

So a company could be selling drugs, and I think this was the—

well, not the Florida case, but the drug company could move to

some place that doesn’t have a strong jurisdictional concern and operate from there.

Mrs. KELLY. But, Professor, if it required a parental interaction,

in other words, a code number for the parent, some way of limiting

the child’s ability, that would translate around the globe. That is

not something that—I mean that is just simply so that we could

control it here, as I see it.

Mr. WHINSTON. Well, I would agree that we ought to consider

such laws, and I think that the question I am trying to look at is

how do we enforce it.

So let’s suppose we have a company that was opening in Florida;

there is a law and they decide to move to Cuba. The person making

the order has no idea where or generally doesn’t know where the

site is located, and they put in an order. If the ISP, the local connector, such as an AOL or PSI or MCI or AT&T is not able itself

to manage that control process, which is a lot of them are not interested in or not anxious to do because it leaves them open for liability issues, it becomes hard to practically enforce the law.

So I am in favor of the things that you are trying to achieve. And

certainly myself as a parent or a grandparent would be very conVerDate 20-MAR-2000 12:30 Apr 17, 2000 Jkt 010199 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 E:\HEARINGS\60258 pfrm02 PsN: 60258
35

cerned, but I am trying to look at the practical aspect of how we

enforce laws which because of the Internet’s ability to move these

servers anywhere they feel like and still do business is a practical

enforcement problem.

Chairman TALENT. Is the gentlelady finished?

Mrs. KELLY. Yes, Mr. Chairman.

Chairman TALENT. Okay.

Mrs. KELLY. Thank you.

Chairman TALENT. Next I will recognize a new member of the

Committee and welcome him to the Committee as well, Mr. Udall.

Mr. MARK UDALL. Thank you, Mr. Chairman. I appreciate the

opportunity to serve on the Committee with you and all my colleagues.

In my district in Colorado, the Second District, which is the

northern Denver suburbs and the County of Boulder and the City

of Boulder, there are a lot of small businesses and there are a lot

of small businesses involved in electronic commerce and high tech

pursuit. So this is a great opportunity for me. So I appreciate the

welcome.

I had a couple of questions, and I apologize I was late from another Committee, but I hear a lot right now in my district about

tax issues, and the moratorium. I imagine some of you have been

asked the question already, but I would be very interested in the

opinion of a couple of you as to what we eventually do with these

tax issues.

There are a lot of small businesspeople who say to me, we are

going to penalize Main Street in the long run. The businesses who

have a physical location on Main Street provide more than just economic activity. They provide some of the strength of the community.

Mr. Hill, Mr. Miller, Mr. Whinston, I would be curious, without

nailing you down, what you think some of the long range proposals

on the table are for dealing with these tax issues, particularly as

regards local and regional needs for infrastructure and schools and

so on.

Mr. HILL. Well, as you know, the Internet Commission is looking

at this issue and the administration members are Treasury, Commerce, and the U.S. Trade Representative’s Office. From an SBA

or a small business point of view, our concern will be to follow their

debate and to ensure that as they continue down that road that

whatever they enact is fair to all small businesses.

At this point I don’t have an administration position on that.

They are still studying it. I don’t believe the commission has met

yet. I am not confident of that. Someone just handed me a note.

So I think we need to wait and see, but clearly it is going to have

a major impact on small businesses, and we will follow that debate

very closely.

Mr. MILLER. Mr. Udall, the information technology industry’s position is that for the Internet itself, it doesn’t want double taxation,

and that is really what the Internet Tax Freedom Act says. The

more fundamental question you are raising about companies in a

local area selling only to local people versus companies selling out

of State or out of the region really goes back to the Quill decision

36

the Supreme Court reached several years ago about location and

taxation.

That issue is not addressed in the Internet Tax Freedom Act one

way or another, but it may be an issue that emerges in a discussion of the Internet Commission, which will start meeting next

month under Governor Gilmore’s leadership.

We as an industry don’t have a particular position on that one

way or the other. All we are saying is it should be a level playing

field. What you can do in ordering on-line should be no different

than what you can do ordering through the mails or ordering telephonically.

The challenge, however, I was trying to suggest in response to

an earlier question from Mrs. Napolitano, is that it is possible, and

this may even go beyond the scope of this commission, that as we

enter the 21st century and as we get to be a more global and mobile economy, that those economic taxation models built on a local

sales tax model are going to have to be rethought fundamentally.

The Quill decision aside, the Internet aside, the whole idea that

the average financial transaction involves me getting out of my

house, walking down the street, buying something from a merchant

and coming back, is becoming so outmoded, which was really developed basically in the 19th century, or if you want to go back actually hundreds of years into the earliest days, it just has to be rethought in the 21st century. But I think that is beyond this hearing, as Chairman Talent was suggesting earlier.

Mr. MARK UDALL. I think, was it Gertrude Stein who said, there

is no there there, and I think that is the dynamic that is at play

here.

Where are you when you purchase something on the Internet?

You could say that about Washington, too, I think.

Chairman TALENT. Thank you.

Mr. WHINSTON. I would agree with Mr. Miller, and I would also

follow up on your point that it is not even clear where the transaction, which I think is your point, where the transaction is taking

place. Is it at the site, the server, so-called, or is it on your client,

that is, your machine, where the copy is made of the information

and then you are entering it and finally saying I commit to the

transaction?

We are not even clear legally where the transaction takes place.

So I would agree with Mr. Miller that we have to rethink the tax

system as we move towards electronic commerce. Of course, we

could say let’s just get rid of the catalog exemption and everybody

should pay taxes wherever they buy, and that, of course, could take

place but then I earlier raised the point that for a small company,

the administrative costs, if they start dealing on the Internet with

places in different parts of the U.S. and even overseas, keeping

track of all the tax regime, the changes in the taxes and being able

to properly collect it, will become a very big cost.

So to me, the directions you go in, still raises a lot of significant

problems. I think we all go back to the point that maybe we have

to rethink as we move towards the millennium; and with the continued growth of electronic commerce the way we look at taxes will

have to be rethought.

37

Mr. MARK UDALL. Mr. Chairman, I know my time is up but if

I could make one quick comment. I don’t know how it is in other

States but in Colorado our tax collection and tax allocation system

is very Balkanized. There may be a silver lining in this that it provides us with an opportunity to streamline how we do that.

I hear from a lot of small businesspeople that I am very willing

to make my contribution to the community but, boy, I go to Denver

and it is 7.5 percent, I am in Louisville, it is 7.2, I am in Boulder,

it is 6.8, this is local sales tax, for example, and it is a headache.

The paperwork is an enormous burden for them, so maybe there

is some silver lining in this. I thank you.

Chairman TALENT. I thank the gentleman.

Mr. Sweeney.

Mr. SWEENEY. Thank you, Mr. Chairman. Like my good friend

Mr. Udall, I was at another Committee markup. I do apologize for

coming late and I would ask that I may submit a statement to the

record as well.

Chairman TALENT. Without objection.

[Mr. Sweeney’s statement may be found in the appendix.]

Mr. SWEENEY. To the panelists, and more particularly to Mr.

Hill, Mr. Miller has spoken at length about the great opportunities

that e-commerce is going to present for the future, and Professor

Whinston just spoke of the great challenges as well that are going

to face us.

I know the Department of Commerce has estimated that more

than $70 billion in sales will be generated by 2000, and by 2002

it is around $327 billion.

I would like to try to get a handle on our capacity for the

present. How we are able to determine where we are at this point

and how do we plan for the future? So I would like to ask Mr. Hill

if the SBA has developed or do you have relevant data from this

year to last or this year to some other marked period of time of

how many new business opportunities have been created, how

many more tax dollars have been generated, how many more people are paying taxes because it is directly tied to e-commerce?

Do we have any sense of the growth today?

Mr. HILL. In my testimony, I talk about a few statistics that we

have pulled together. The number of small businesses using the

Internet has doubled in the past 2 years, from 22 percent in 1996

to 41 percent in 1998. We estimate that electronic commerce is

going to grow to more than $300 billion annually in just a few

years.

I don’t have a table of statistics with me but I would be happy

to provide that for you for the record, either from our Office of Advocacy or from other government sites that we have access to.

Mr. SWEENEY. In your testimony, you spoke of the SBA efforts

thus far, developing a framework for understanding the ways ecommerce work, educating certain demographic groups, including

small businesses. In my district, small business is a predominant

employer and the predominant means of commerce and e-commerce

will offer great opportunities and increasing certifications.

I have a concern about identifying what that market is and how

we can more positively proactively, as a government entity, encourage that growth. Could you talk to me a little bit about how the

38

SBA, through the Office of Advocacy, is working to pull together

that kind of information; what new jobs are being created and

taxes, and how prepared are you, what do you need?

MR. HILL. Thank you for the opportunity. We are at the beginning of this process, as many people are. The presidential directive

was issued last fall and we are working very closely with the Department of Commerce.

We intend to launch a campaign very similar to the one that we

did on the Y2K outreach. We think it is really critical, and we have

heard today over and over again that we begin that by conducting

focus groups and doing research to try to clearly identify what are

the issues and what are the impacts. Again, electronic commerce

is more than just the buying and selling. It is really the transformation of a small business.

We think from there we need to move into the next phase, which

would be an awareness phase, where we need to mount a national

campaign and leverage our existing resource partners, as well as

our friends in the industry.

We have been in consultation continually with ITAA and other

groups that have pledged their support to us, to help get the word

out about the opportunities. We have heard a lot about the external

issues facing small businesses as they move into e-commerce.

There are a lot of internal issues, in our view, at the SBA, that

also need to be thought through and explained.

Mr. SWEENEY. On that note, I know that in the past the complaint has been, from both he SBA and the small business community, that the playing field hasn’t been level in terms of accessing

information on government business and contracts.

Mr. HILL. Right.

Mr. SWEENEY. What have you done in that respect and how are

we using technology to get small businesses out? Do we have something going now? Is there something planned?

Mr. HILL. Yes, sir, we do. At the SBA, we have enacted a system

called PRO-NET, an Internet-based system that allows small businesses to go on and hotlink to the websites of government procurement offices as well as identify what goods and services they can

sell.

The beauty of the system is that it was intended to be a tool for

government contract officers to locate small businesses who could

meet their specific mission needs, but it is wide open on the Internet. Small businesses can use it to find other small businesses to

support them.

Large businesses can use it as well. We can look at it, and if we

find that a certain agency may be lacking in their goals for small

business procurement, we will go to the agency and say, have you

used PRO-NET? The age-old, tired excuse that we hear over and

over again, we just can’t find those small businesses. Well, this is

an Internet-based system. I will give you the absolute number but

I believe it is over 180,000 small firms on the PRO-NET site today.

Mr. SWEENEY. That is the kind of hits you had. That is great.

If you could provide that information.

Mr. HILL. I would be happy to.

[The information may be found in the appendix.]

39

Mr. SWEENEY. I would appreciate that. And either Mr. Anderson

or Professor Whinston, we have talked about—it is ironic. My colleague, Mrs. Kelly, spoke of the potential problem with the use of

children using credit cards to purchase goods through the Internet.

I had that experience about 5 weeks ago with my 8-year-old

daughter, who purchased a very nice $125 porcelain Princess Di

statue. It looks very good in her room.

Chairman TALENT. The gentleman may have actually gotten off

easily. Is that all she bought?

Mr. SWEENEY. At this point.

Chairman TALENT. It may be all she ever buys for the rest of her

life.

Mr. SWEENEY. It may be.

I am interested in how we look at the issue of developing a sovereign Internet cash system and what the possible jurisdictional

authorities are, and what they may be. How much work has been

done and what would your recommendations be for us in the House

to begin to look at that issue? Either for Mr. Anderson or Professor

Whinston.

Mr. WHINSTON. So what you are saying is that we, besides the

development of this sort of private industry money or private

money, the government should look at developing an electronic surrogate for the U.S. dollar, $10 and so forth?

Mr. SWEENEY. Not necessarily. But I am asking what are the options and what are the——

Mr. WHINSTON. Well, that would be an option, to have surrogate

money that the banks would make available that would circulate

electronically. I know the Federal Reserve has a study group, the

Federal Reserve and some of the reserve banks together are studying this whole area of electronic money, whether it is private or

sovereign; what are the legal issues of having private money.

Because again, Microsoft and some other well-known company,

IBM, could start letting its liability circulate and not just call it

money. So you could say the only legal tender in the U.S. is U.S.

money, whether it is in the traditional form or the electronic surrogate, but there could be other forms which play that role.

Some people argue that frequent flier miles, which is moving

more towards electronic form, is really a type of money that the

airlines issue.

The concern about private money, and I just mentioned that, is

that it may be over issued; that is, many people argue that frequent flier miles are over issued. It is hard to use it and so there

is an incentive to—you have a good thing going. Why not just expand it?

So there are concerns about the development of private money.

There is an historic precedent; 150 years ago we had private money

in the U.S., and there were some failures of various types. So I

think it is an area that has to be studied, but there is, I think,

clearly an interest in creating—going beyond credit cards, creating

money that people can use electronically; or the efficiency, the ability to buy things at very small prices, to buy ball scores, stock market quotes, and the desire of the public to have privacy.

Mr. SWEENEY. Will part of the solution exist in how we develop

a tax structure and how we begin to look at the tax issues?

40

Mr. WHINSTON. Well, it relates to the tax issue, because to the

extent that you have a cash-oriented economy, as it is recognized,

it makes tax collection more challenging. So as we move towards

electronic money, which is then encrypted and moves around the

network, moves globally around the network, it presents a challenge for tax collection and also, of course, opens up opportunities

for criminal elements to move huge sums of money around without

any hope of detection.

Mr. SWEENEY. Mr. Chairman, one last question, and I am going

to go back to Mr. Hill on the PRO–NET issue, I am wondering—

you mentioned that you have 800,000 hits and that it is a new

process that is available to both large and small businesses.

Have we asked or required that all government agencies participate in the posting of those notices?

Mr. HILL. What is posted on PRO–NET is information on individual small businesses. It is very similar to a small business registry.

We have strongly urged and suggested that the procurement officers in the Federal agencies use PRO–NET to help them attain the

quality contractors and service providers they need to accomplish

their mission needs. So it is not a matter of the government logging

solicitations on PRO–NET. It is a registry of small businesses that

are available to do work.

As a report card, we are paying attention to which agencies are

using it and which are not using it.

Mr. SWEENEY. How many are and how many aren’t?

Mr. HILL. I will get you the actual accurate number. I believe

there are quite a few that are using it, but I will provide that information for the record.

Mr. SWEENEY. Thank you.

Ms. NAPOLITANO. I would like to have a copy of that.

Mr. HILL. Yes. We will provide it to the whole Committee.

[The information may be found in the appendix.]

Mr. SWEENEY. Thank you, Mr. Chairman.

Chairman TALENT. I thank the gentleman.

I have some questions. This has been very educational for me.

Let me go on to this question of private money, because I just

asked the staff, well, suppose Mr. Hanson wanted to set up his own

private money, how would he do this? The answer that came back

was that at least as far as we anticipate this now, he couldn’t because he is not big enough.

Do you want to comment on that, Mr. Hanson?

Mr. HANSON. Yes, because I have actually talked to people about

this.

Chairman TALENT. Yes, go ahead.

Mr. HANSON. We have a local bank that is moving on-line,

Pepperall Trust Company. What they have suggested to us is connect their site to ours; allow people to make deposits through wire

transfer from their own bank accounts and then they would settle

out accounts through purchases at our site.

So, in effect, it is virtual cash or the first step towards it.

Chairman TALENT. Let me take this step-by-step because I do

not get this stuff real fast so I have to take it slowly.

Mr. Miller, did you have a comment?

41

Mr. MILLER. That doesn’t strike me as private money. That is

still dealing with a federally licensed and regulated institution.

With all due respect to Professor Whinston, I think this is Esperanto.

Chairman TALENT. Esperanto, is that a kind of coffee?

Mr. MILLER. That is that language that everyone thinks is going

to be the universal language that everybody is going to go to, that

they have been talking about for 50 years. No one in the world

speaks Esperanto, except the three people in the Esperanto Society.

I mean, I think——

Chairman TALENT. Professor Whinston, Mr. Miller has been provocative with regard to several of your positions, and you are a professor and so, please—tell us why this is not Esperanto or why if

it is Esperanto it is still okay.

Mr. WHINSTON. Well, I think Mr. Miller has a good point. Today

we don’t see electronic money. I am trying to look a bit into the

future and ask the question, from a private sector point of view,

is there money to be made; is there a demand for electronic money

versus a credit card?

I think there is a demand. From the point of view of privacy, that

is people are not that happy to use a credit card if they want to

have privacy. The credit card provides others information. The

credit card number provides an identity to where the transaction

is going on. People like to not let everybody potentially know what

they are doing. So there is a privacy issue, and then there will be

an issue of selling things that are in small—the small priced items,

ball scores, stock market quotes.

So I see where companies, as we move towards electronic commerce as a more pervasive form of business, will look towards trying to make money by creating electronic money. I mean, it is analogous to the Traveler’s Checks that companies have found very

profitable over the years.

So it will happen, and we shouldn’t wait until it is suddenly

there and then try to scramble to figure out what we are going to

do, but to anticipate that that will happen.

The Federal Reserve, as I indicated, does have a study committee

and Chairman Greenspan has made public statements about his

view, or the Federal Reserve’s view, on the development of private

money and has indicated that as a free market advocate he sees

that as a possible development to take place.

The seigniorage which the Treasury earns by being in the money

business may be something that will be whittled down over the

years. So I think it is something that we have to anticipate.

Chairman TALENT. Well, let me do what lawyers call a little laying of foundation here so I understand what it is we are talking

about. We are not talking about a line of credit. That is a familiar

concept. If I was a regular customer with you, Mr. Hanson, I might

decide I am going to send you a certain amount of money to put

in an account and I will draw on that when I purchase from you.

This is beneficial to you because you would have a secured form of

payment. That is something that we can all grasp.

That is not what we are talking about, right; just a line of credit?

Mr. WHINSTON. No.

42

Chairman TALENT. We are talking about a situation, if I understand it right, where a big company like Microsoft would say to

you, that there must be a point at which you use the public money

to buy the private money.

Mr. WHINSTON. That is correct.

Chairman TALENT. And probably they would require you to buy

large amounts, although maybe it would get sophisticated so it

wouldn’t.

Mr. WHINSTON. Well, no.

Chairman TALENT. You would buy half million dollars maybe of

Microsoft dollars, except that they would give you more in Microsoft dollars than the public dollars that you are offering. So for

$500,000 in United States dollars, you would get $600,000 in

Microsoft dollars; is there some premium that is necessarily involved in this?

Mr. WHINSTON. I wouldn’t think so, especially when you refer to

Microsoft. I think it could be on par; maybe a little better. Again,

we are thinking of international money and if you recognize that

many sovereign currencies outside the U.S. are not all that stable,

you would find an instant demand. For example, in Russia, people

would probably prefer to buy what you could call ‘‘Bills’’ or ‘‘Gates’’

or whatever you want to call it, rather than dealing with the ruble,

and that would be an accepted——

Chairman TALENT. But why would an American consumer who

is just getting an even exchange ever do that, as opposed to just

establishing a line of credit of some kind through a bank or something with Microsoft? What would be the advantage to you as an

American of trying to trade in Microsoft currency, unless you are

getting some premium in it?

Mr. WHINSTON. Well, again, I think the currency can be configured. For example, Microsoft may sell you currency and they could

sell you $10 worth and you could use it to buy products that Microsoft had arranged to give you at a discount. They could work all

sorts of clever——

Chairman TALENT. Premium I can understand, and then if they

gave you some premium is the concern that they might oversell it

so that if a whole bunch of people decided to spend a whole lot of

the Microsoft dollars all at once there might not be enough Microsoft inventory?

That would be a nice problem for Microsoft, wouldn’t it?

Mr. WHINSTON. Right. Well, Microsoft would be a hard example

to look at because they are such a well-financed company. It is

hard to conceive of them running into problems.

But various businesses, banks could start selling and there is

then a question which the Federal Reserve is looking at, should

there be reserve requirements for selling electronic money?

Should you somehow have backing in let’s say, for every $5 of

electronic money you have out there, you have some Treasury bills

for a dollar sitting in the bank to understand when is the money

going to be redeemed?

In some cases, people may be using it for years; it is just circulating in the system.

Chairman TALENT. See, what I don’t understand insofar as this

relates to e-commerce, and I know Mr. Forbes wants to ask a quesVerDate 20-MAR-2000 12:30 Apr 17, 2000 Jkt 010199 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 E:\HEARINGS\60258 pfrm02 PsN: 60258
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tion, and I am going to yield to him so he can do it, is the only

reason you do this in e-commerce that you all have identified is security concerns. One way to avoid a security concern is just set up

some kind of an account, a wire account of some kind, so that you

don’t have to put some generalized credit card in; you just draw

against the account. I have not understood from what anybody has

said here today what the advantage is of doing that in a private

monetary system as opposed to a public system.

You can always just set up a line of credit, if that is what you

want. Why do you have to buy Microsoft or IBM dollars or Anheuser-Bush dollars to get a credit? They are headquartered in St.

Louis, Missouri, by the way. So you are a regular purchaser of Bud

Light and you decide to do that over the Internet, so why would

you want AB dollars as opposed to American dollars from a security standpoint?

Mr. MILLER. What you are talking about, Mr. Chairman, already

does exist. There are companies such as Cybercash where you give

them a certain amount of good old greenback dollars or you use a

credit card or write them a check, but anyhow plain old U.S. Treasury-backed dollars, and then you have electronic money, which to

deal with the issue that Professor Whinston was talking about,

where I want to buy something that only costs a dollar or something only costs a quarter over the Intenet and the credit card

charge makes it feasible for me and the credit card company and

the merchant to allow me to pay a dollar for something using my

credit card. Just as when you go into a normal retail establishment, they are not going to take a credit card in most cases for

$10. So the whole idea behind Cybercash, which by the way has

not taken off. It is a local company based here in Reston; you can

go visit with them, if you want, to see more about their product.

But the idea was that when you wanted to do real small transactions and they wouldn’t accept a credit card, or for the reason

Professor Whinston was suggesting because the credit card, there

is an easy trail with the credit card, whereas theoretically with the

cash, cybercash is——

Chairman TALENT. Although a hacker could crack into your

cybercash account, too, and deplete it.

Mr. MILLER. It is not only the hacker. It is a privacy issue, that

some people say I want to buy Mr. Hanson’s lobster but I don’t

want to use my Visa card because I am a real private person and

I want them to be able to trace that back to me through the Visa

card or the MasterCard or the American Express card, but if I use

this cypercash that I have bought through the Cybercash Company

with money, that it is harder to trace. It is very easy to trace something through Visa or MasterCard because the law enforcement officials or the privacy people who are trying to intrude into my privacy, they just go to MasterCard or Visa and get that; whereas, if

they go to Cybercash they can find out I got $300 worth of

cybercash.

Chairman TALENT. A money order, in other words?

Mr. MILLER. Right, exactly. But they can’t show that I spent it

at Mr. Hanson’s location as opposed to Amazon.com as opposed to

some other website. So I think that is the privacy issue, it I understand correctly, that Professor Whinston is talking about.

44

Chairman TALENT. Okay.

Mr. Forbes, did you have something you wanted to ask?

Mr. FORBES. Thank you, Mr. Chairman. On this whole issue, and

I certainly can see in small denominations why there may be a

need for something like Cybercash but I would suggest that you

know, international commerce and the frequency of international

commerce in today’s world, even absent e-commerce, you know, we

are exchanging currencies all the time and I am a little bit concerned that it might be distracting ourselves from the real issue,

which is providing for the privacy and the security of using credit

cards.

I know that I was reminded that the Banking Committee certainly has had extensive hearings on this issue, and the Treasury

Department particularly has expressed a concern for its ability to

track fraud and abuse, particularly if we are going to create a

whole another, if you will, unregulated, outside the Federal money

supply, source of funds.

So I hear where you are coming from, Professor, but I guess I

do have some trepidation.

Mr. Miller, if you wouldn’t mind, I hear you on Cybercash, which

I think from a functional point of view low denominations might be

valuable, but I was sensing, and correct me if I am wrong, that you

had some concerns about this sovereign money issue as well.

Mr. MILLER. I just don’t think it is an issue, with all due respect

to Professor Whinston. I understand the Federal reserve is studying it. They need to study something to keep them busy over there,

with the economy going so well.

We have something called international money. It is called a

credit card. Yes, there is going to be competition with the credit

card companies because people are going to try to get their fees

down and as Professor Whinston said correctly, there is money to

be made from being part of this transaction process, but at the end

of the day we have come up with this transaction system. It is

called a credit card.

When I go to France physically, or order something from France

over the Internet, I don’t have to worry about transacting that—

or doing the transaction. I don’t have to worry about converting it

from francs to dollars. The credit card company does all that. They

charge a fee. They charge a fee to me. They charge a fee to the

merchant who sold it to me. That is how the process is working.

Maybe Professor Whinston is right, that there is going to be this

sudden growth to this, or long-term growth to this, but I would be

willing to bet one of Mr. Hanson’s very nice lobster dinners with

Professor Whinston that it is not going to be any time in our lifetimes.

Mr. FORBES. Thank you very much.

Chairman TALENT. I understand you have some more, and we

will go back there in a minute.

Let me finish, if I can. Mr. Hanson, what you are saying your

local bank is going to be willing to do is basically act as an intermediary and for some kind of premium guarantee the payments to

you, is that it?

45

Mr. HANSON. That is right, but they are also looking at creating

this relationship with hundreds of other websites, too. They are

looking to acquire deposits at their bank.

Chairman TALENT. Yes. I can understand why it would be a useful service for small merchants.

Let me address the relative advantages or disadvantages to

small merchants. I don’t know that I have really heard anything

that wouldn’t be equally applicable to business life outside of ecommerce. Yes, it is harder for a small merchant to break this way

into the consciousness of the consumer because he doesn’t have the

advertising dollars. Well, that exists outside of e-commerce. Although there may be different ways—for example, those services

that will aggregate and direct customers to small businesses, that

is kind of similar in the e-commerce or the digital world, isn’t it,

to the mall?

In other words, you have an anchor store at a mall and then that

allows people like smaller businesses to get traffic that way? Is

that channeling thing similar in the digital world to a small kind

of concept?

Mr. MILLER. It is, and it isn’t. One difference in the digital world,

Mr. Chairman, from the real world is one of the reasons that malls

have beaten up Main Street. When you talk about another challenge to small businesses on Main Street it is the mall, is because

of the physical factor. You go in your car, you go to one location,

and there are no costs to you because once you have driven there

you don’t have to get in your car and drive to another place to find

the supporting goods store or drive to another place get to the

candy store, et cetera. The cyber world is frictionless. I mean, you

can go anywhere. One of the reasons the cybermalls, per se, have

failed, and MCI and other companies tried to set up cybermalls, is

because the anchor itself didn’t work.

So instead, what is happening, as Professor Whinston suggested,

is these portals are all trying to figure out what the secret is. AOL,

in that context, is a portal. Any ISP can be a portal. They are all

trying to figure out partnerships, and it is mutually beneficial because what draws you to Excite or Yahoo or AOL or Microsoft network, whatever those first ones are, is not just the content they

have got on their own page but it is their ability to, in turn, reference you to, if you are looking for a lobster dinner to Mr. Hanson

or from one of his competitors, or if you are looking for a new car,

a good car site.

So I guess I share Mr. Hanson’s concern that those who arrive

late may be potentially at a disadvantage, but I don’t think the

marketplace is so fixed yet, and I don’t think it is going to be fixed

in the next, I would guess 5 years, maybe that is too long a time

horizon, that it really is that exclusionary.

Let me draw a different analogy, which is the Yellow Pages. The

Yellow Pages is sort of everybody but it is always just located in

the geographical area, Washington, D.C., Northern Virginia, St.

Louis, whatever it may be. The question is, how do you differentiate yourself in there? And the Yellow Pages has kind of figured

it out by title. You are a baker or a candle stick maker or you are

mother goods, whatever your particular store is.

46

The way we do that on the net is through the search engines. So

the trick is to find those—get placed—I think Mr. Hanson is exactly right. If you can’t get placed in a search engine, and again

there are dozens of them out there right now, you are clearly going

to be in trouble.

On the other hand, if you can get a decent place on a search engine and if you create the idea that you can buy fresh food, then

Mr. Hanson’s opportunities, or anybody who gets into this market,

are much better than they would ever be in a normal business environment.

Chairman TALENT. Sure. It works in the other direction, too. The

same disadvantages you may have as a small business outside of

e-commerce exist in e-commerce, but the same advantages you

have as well, flexibility, all the things I think that are moving the

economy generally in the direction of smaller organizations because

you are able to meet consumer demand more flexibility will exist.

Then you are going to have, I would think, some advantages in

terms of economies of scale as well because you can link up so

much more easily.

For example, big businesses have huge distribution chains. You

don’t need that anymore, because you connect up directly. At least

in some industries I would think that would be the case.

Now, is there a danger of these search engines, the number of

them being small enough that they wouldn’t be competitive and

they would acquire too much leverage over the small businesses so

there is one search engine, let’s say, you have to be in, and they

go to Mr. Hanson who doesn’t have enough leverage because he is

not big enough and say, now, you are going to have to pay this

enormous premium? It seems to me what protects small businesses

is if there are enough of them out there to hold the price down of

access. Do you see a possible problem in that area?

Mr. MILLER. Clearly there is a potential problem, but let me give

you a little more data on point. I visited Network Solutions on

Monday out here in Herndon, which is where all the domain names

for dot com and dot org and dot net are. You know how many new

domain names they register each day? This is a new website.

30,000 a day; 30,000 a day go into the database.

I think with that many new Web pages out there, there is always

going to be a chance for a new search engine or a new portal to

come along. I mean, that is what is so exciting about this industry.

Let me go back to your distribution point. I met with a company

three weeks ago. The CEO is 22 years old. This is his third company. He is distributing music over the net. He is taking on the

largest music companies in the world because he believes that the

new digital generation that Mr. Hill talked about doesn’t want to

be constrained to have to go to the record store and buy a physical

record.

There is a big debate. Some people in the recording industry are

very concerned about that, the same way that the video industry

was very concerned when VCRs first came on-line.

Chairman TALENT. Yes. We are going to have a hearing, I hope,

on this subject, Mr. Miller, with personalities that should be very

attractive for the Committee.

Mr. MILLER. I am sure it will be.

47

Chairman TALENT. I feel like I am sort of announcing the exciting scene from next week’s show.

Mr. MILLER. I will look forward to hearing it. But since I met

with them and they became a member of my association three

weeks ago, two of the largest music companies in the world which

had said previously they were not going to sell music over the Web

because of the concerns about copyright violations, et cetera, have

turned 180 degrees.

I am not saying it is inevitable but it sure smells pretty close to

inevitable. That, number one, I think the small companies are

going to succeed and, number two, they have changed the whole

marketplace almost overnight.

Chairman TALENT. With regard to music, Mr. Miller, then the

question that begins arising and is arising in the minds of a number of artists, and we are going to explore this, is why do we need

the companies?

Mr. MILLER. That is one of their selling points.

Chairman TALENT. And the companies, if we have this hearing,

will have an opportunity to explain why the artists need the companies. But why not just go directly on-line? There are a lot of

issues there.

Let’s get to the tax issue, which is certainly one that the government is going to have to be involved in because it is our function

to regulate interstate commerce and to resolve these kinds of

issues.

Mr. Miller, with the greatest respect to you, and I see the point

you are making about the overall benefits of this being so great as

necessarily to outweigh the detriments to local governments, but

Mrs. Napolitano was right. I was in the state legislature. I represent a number of municipalities now. This is their tax base that

is at issue here. They are the ones providing the trash pickup and

filling the potholes and doing the day-to-day things that are so absolutely vital, and we will hear from our constituents if those start

going down because we are losing money from e-commerce sales.

So you said something that was interesting to me. You said all

the e-commerce community wants is equality. You want to be treated the way the catalog companies are. In other words, you are willing to pay a use tax, for example, on a transaction like that. I

mean, is that correct? Elaborate on that a little bit.

Mr. MILLER. What we mean by that, Mr. Chairman, is let’s say

that there were no Quill decision. Let’s assume the Supreme Court

had ruled differently, which means that if you ordered something

by mail or telephone from L.L. Bean you had to automatically pay

the Maine sales tax, or if I live in Virginia I automatically had to

pay the sales tax.

Chairman TALENT. Did the Quill decision say that States can’t

tax catalog sales?

Mr. MILLER. It basically said, as I understand it, and I am not

a legal expert but I think I have it fundamentally right, if a merchant doesn’t have a physical location, does not have a site in the

State where the customer purchases the product——

Chairman TALENT. In the State?

Mr. MILLER. In the State—that basically the customer has to pay

on his or her own the sales tax. In other words, what I am supVerDate 20-MAR-2000 12:30 Apr 17, 2000 Jkt 010199 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 E:\HEARINGS\60258 pfrm02 PsN: 60258
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posed to be technically, and I guess I shouldn’t confess this. I may

be confessing I am violating some tax law. If I order something

from L.L. Bean and if L.L. Bean doesn’t have a physical location

in Virginia when I order this product, then I don’t have to pay the

sales tax. I am supposed to turn around at the end of the year,

when I pay my Virginia State tax, and voluntarily say, well, I

bought this many products outside the state.

Chairman TALENT. Sure. We all know what that means.

Mr. MILLER. Exactly. Which means that it doesn’t get paid. So

that is what the Quill issue said. It is a basic issue of what is

called nexus.

Chairman TALENT. In fairness, though, Mr. Miller, the Quill decision, was it a constitutional decision?

Mr. MILLER. Yes.

Chairman TALENT. Okay.

So it wasn’t based on a silent commerce clause type of thing? It

is not something we can do anything about?

Mr. MILLER. You are beyond my pay grade in that area. I think

you need some constitutional scholars to look at that. I am sure

there is some disagreement.

Chairman TALENT. You serve so well as an expert in so many different areas already, Mr. Miller.

Mr. MILLER. Thank you, Mr. Chairman.

But I think that that kind—so I am saying——

Chairman TALENT. Let’s forget about that for just a minute.

Mr. MILLER. So if you said that ordering something on-line were

the same rules and regulations, that is fine. What we objected to

is what was happening in many States, Mr. Chairman, where some

State regulators, and in some cases some State legislators were

saying that an ISP, an Internet Service Provider, whether you are

talking about a large one, a portal like AOL, or whether you are

talking about many of these local ones, not only would they have

to pay their telecommunications taxes that they are normally paying because they are using telephone lines, in addition they would

have to pay an additional telephone tax.

That is really what this debate was all about. It wasn’t about

whether you pay sales tax. That was already—what we would contend is that was already decided, for better or worse in terms of

the outcome of the local governments, many years ago in the Quill

decision. I think what happened when the bill went through Congress is some of the governors were coming to Congress and saying,

overturn the Quill decision and then we won’t object to what—and

some of the mayors and other localities said, we don’t care about

this Internet Tax Freedom Act.

All we are saying is that is a different issue. If Congress wants

to tackle, if they can legally, I am not sure they can, the Quill decision, fine, and say that L.L. Bean products whether they are sold

telephonically, through the mail or on-line all require the consumer

to pay a local tax, that is fine.

Chairman TALENT. The Quill decision couldn’t have been a constitutional decision. It is not like a service of process or something.

It had to deal with a commerce clause issue, because if Congress

wished to, provided that you are dealing with a company that does

49

business in the United States, which the professor has mentioned

that some of these are international, Congress could authorize this.

Mr. MILLER. Let me get back to you on that. I don’t want to be

definitive on that.

Chairman TALENT. I am not an expert on this either.

Mr. MILLER. But that is the defining decision about on-line catalog buying, and that is the same issue that applies here on the

Internet. So again, do we disagree?

Chairman TALENT. Then we have the question of where is it sold.

You would almost have to do it where the product or service is delivered, wouldn’t you? Because the server is in one place and the

business is in another. Mr. Hanson could use servers in places

other than where he is at. So you would almost have to do it in

the jurisdiction where it was delivered, right?

Mr. MILLER. That is right.

Chairman TALENT. Heck, you could order it on a laptop in an airplane. Not even delivery. You probably have to do it where the person ordering the service was domiciled, I would imagine.

Mr. MILLER. That is the challenge that they were trying to face,

because obviously we have been talking mostly about sweaters and

lobsters.

Chairman TALENT. Right.

Mr. MILLER. But, as you know, a lot of this is going to be digital.

They are going to download a piece of software which is never

going to be physically in a physical form, or you may be getting

some technical advice. Let’s say you get some advice from your accountant online, and then the accountant bills you for that. I mean,

all kinds of questions about that. So even though it is relatively

easy when you are talking about a Federal Express truck or a UPS

truck dropping something off, Mr. Sweeney’s doll that his daughter

ordered, it gets much more complicated when you are talking about

servers being in different locations, as Professor Whinston said, or

services as opposed to hard goods.

Chairman TALENT. Professor, I understand that figuring out

what tax you are to charge is difficult, and that is difficult in catalog sales today. But why couldn’t we take advantage of the Internet

to solve this problem? In other words, if Congress said to the States

and the localities, if you want to charge your tax here is this certified kind of program about taxing schedules around the country.

All right? You better make sure that you have entered your tax on

this schedule so that when the business person has to figure out

what they are going to pay in tax, they click on and they can do

this very easily. If you are not on here, they are not liable. What

is on there, by the way, better reflect what you are really taxing,

because there will be penalties if you try and kick the tax up by

saying it was bigger than it was. There are municipalities that

might do that.

Couldn’t we solve this through some kind of Internet?

Mr. WHINSTON. Yes, I think except for this jurisdictional issue

where somebody just moves the server outside of the U.S. and then

it is up to the Customs people to deal with it, but I agree with you

and I think that is actually an interesting opportunity for a small

business to go in to that whole area of saying to lots of companies,

I am going to focus on the tax issue. So every time you have a cusVerDate 20-MAR-2000 12:30 Apr 17, 2000 Jkt 010199 PO 00000 Frm 00052 Fmt 6633 Sfmt 6602 E:\HEARINGS\60258 pfrm02 PsN: 60258
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tomer, when you need to compute the tax you jump to my server

and I will provide that information and sell it to you on a per

transaction basis or have a fee, a monthly or yearly fee. It would

be specialized business where somebody would just focus on the

whole question of taxation and keeping track of when things

change and updating it and certifying it.

I think that could work, except of course for any jurisdictional

problem.

Chairman TALENT. What we might have to do, though, is if this

is going to be a legal consequence, if the business is going to be

able to have as an absolute shield against further liability, and be

able to say, look, we accessed and charged what was on this schedule, it probably would have to be some kind of standardized program, possibly federally supervised. You could outsource the work

in doing this, but you would have to have some kind of government

imprimatur to it to make that work. I think we could solve that

problem.

I have just been informed by staff that he is leaving me to set

up that business, so thank you very much, Professor Whinston.

Mr. MILLER. Mr. Chairman, could I suggest one other part of

that, too?

Chairman TALENT. Sure.

Mr. MILLER. Which is, you could also do something close to what

the AICPA is doing, again built this into the transaction, in terms

of the quality of the merchant. I mean, in addition to the separate

seal process, which the AICPA has set up through their CPA trust,

you could, for example, have automatically built into the transaction a D&B. You know, a lot of times when you are doing business with a merchant for the first time, you do a Dunn & Bradstreet, or you go to some other independent rating organization and

you get a rating back to make sure they are legitimate and pay

their bills on time, et cetera, et cetera.

That can also be done, built into the electronic transaction. I

know Dunn & Bradstreet is thinking about it, and other companies

are thinking about it. So a lot of these things are very difficult for

small businesses if they had to be done in a physical world, because they would require a lot of additional staff resources, done

electronically for a relatively minimal fee could be built right into

the transaction.

So if a small business person is ordering from a new supplier for

the first time and says, I am concerned, is this a legitimate supplier, I want an independent verification of that, that could literally

be built into the transaction, where the small business person

would pay some kind of automatic fee when getting that information and it would come flashing up red, saying don’t order from this

merchant; they have got a bad credit rating or they got a bad

record of delivery.

So that could even go beyond the general kind of rating system

that the CPA WebTrust has built up, which I think is excellent, to

much more specific if the merchants wanted to pay for it.

Mr. ANDERSON. Mr. Chairman, actually we are working on the

business-to-business end of that to do that exact piece. CPA

WebTrust right now is business-to-consumer, but we are well

aware of the business-to-business piece of the equation to

51

legitimatize those types of transactions so you know who you are

dealing with and that you can be assured that you are entering

into a secure transaction and that you are going to get and get paid

for what you are buying.

Chairman TALENT. Focused on residence or domicile, you have to

figure that out, too, because people, at least outside of the movie

the Matrix, don’t exist in cyberspace. They live some place.

Mr. FORBES. Most of them.

Chairman TALENT. I mean, they occupy space. This is matter we

are talking about here. So you could tie it into that. It is not completely clean. But you know then, if you did that, forget about your

privacy being protected by having some kind of separate money because every transaction that is taxed has to go to where you live,

with everything else that you could access through that.

I don’t want to think out loud when you all have important

things to do.

I think I am basically done, but Mr. Forbes has some more questions and I would recognize him.

Mr. FORBES. I will be very quick, Mr. Chairman, because our

panel has been very patient.

I do appreciate your presence here today. I have found this to be

perhaps one of the most productive and informative hearings that

I have been to in a long time. First of all, let me thank the AICPA

and the ITAA, both of you, for the leadership that your trade associations, frankly, are bringing to this question. I mean that sincerely, because I am a great, great believer in what is taking place

in the world of e-commerce.

I have two quick questions. The first one to Mr. Hill, if you

would, sir. My sister-in-law owns a novelty business,, a very small

business in Patchogue, Long Island, and she determines that it is

to her advantage and the growth of her business to get into e-commerce. So she picks up the phone and calls the Office of Technology

at the Small Business Administration and says, how do I do it?

What do you folks do with that question?

Mr. HILL. At the SBA, we are developing our campaign now but

currently what we would say is, as Mr. Hanson has said, we would

start out by congratulating her. She is seeing the future. This is

an important thing. We would reaffirm to her that this is something that she should be doing.

I think Mr. Hanson’s testimony earlier was right on the mark.

We had a long discussion about search engines and portals, but if

you are a small business like your sister-in-law, the very first thing

you have to do is get your own website. It has to be a good one,

because you can have 12 search engines listing your commodities,

goods or services, but if it is not done with a certain degree of expertise then you won’t ever show up on a search, no matter how

many times people look.

Mr. FORBES. Mr. Hill, does the SBA have the ability right now

to tell her how to do that? It is a really easy yes or no.

Mr. HILL. The answer is no, but we are developing it and we intend to do that.

Mr. FORBES. I appreciate that. I have to say, as somebody who

has great affection for the Small Business Administration, I think

you folks have missed the boat completely. I don’t think it took a

52

presidential directive to understand that this is the most aggressive, fastest growing area for small businesses and the Small Business Administration is really absent on this whole question.

I mean that in the most respect to you, Mr. Hill, but I think you

need to go back to the agency and you need to sit down with those

folks and you need to kind of sit down and figure out how this

agency, which is charged with helping small businesses, can do a

better job of helping educate and inform the small businesses

across this country who want to get into this business, and I would

hope that your involvement in the hearing today would suggest to

you as well that this is a great void at the SBA.

SBA is doing some great things in cutting edge assistance to

women-owned businesses and minority-owned businesses but I

think that we have literally missed the boat on this thing, and it

is not like we didn’t see it coming. So I would just encourage you,

Mr. Hill, to go back and send a wake-up call. It takes more than

just a presidential edict to suggest that we need to do something

in this area, and I thank you for being here today.

My final question, if I might, for either Mr. Miller or also Mr.

Hanson, one of the areas that is of, I think, great confusion to those

who are engaging in commerce on the Internet is the whole idea

of advertising and the preponderance of spam and just what that

is doing to run interference on qualified businesses, wonderful opportunities like Mr. Hanson’s, people who don’t have the opportunity to be on Good Morning, America or some national media

outlet, how do they get their word out in the wake of what I think

is one of probably the growing problems on how you get legitimate

advertising on the Web versus, you know, all of this stuff that is

being bombarded to people when they go on-line and they have got

435 unsolicited messages?

Mr. MILLER. Well, I think Chairman Talent hit it on the head a

few minutes ago. In a sense, the challenge is no different in the

cyber world in terms of advertising than it is in the analogue

world, which is how do you differentiate yourself from everybody

else.

It goes back to the point that Mr. Hanson made. Number one,

it is the quality of your website. Number two, it is hooking up with

the right search engines and making sure you are listed on all the

right search engines.

Number three, it is looking for partnership opportunities. I can’t

speak specifically to Mr. Hanson’s situation, but I can talk about

a small golf shop that I know of that teamed up with a travel agency that promoted trips, on the theory that if they cross marketed

across those websites, the travel agency sent a lot of people on golf

trips and then they put a click on their website to this golf shop

on the assumption that people would perhaps need some golfing

equipment.

In fact, the theory behind some models, like the Pea Pod model,

although the Pea Pod is primarily just in food, is you do exactly

that; you would come to the website and there would be what is

called an intelligent agent, and it would say, Mr. Miller, it is nice

you signed up to go to Pinehurst. By the way, I know a golf shop

that is having a special on clubs. Wouldn’t you like to go there?

53

So you click over to that one and then you go to that site and

they say, well, we know a place that has the newest books about

golf. Wouldn’t you like to do that?

This isn’t all fantasy. This can be done today. The industry is

trying to figure out exactly how that works because, as Mr. Hanson

said correctly before, the early metrics were how many visitors do

you have? But now people are talking about things like sticky

websites, not just people coming to your website but actually staying, and then the ability to actually sell out the website and refer.

I don’t have an answer yet, because we are still finding our way

through it. So there is no simple answer, whether you are talking

to General Motors or whether you are talking to a small business.

We are all trying to figure out what it is that is going to separate

the wheat from the chaff. When we figure that out, obviously you

are going to have some separation of the successful business from

the unsuccessful.

The early theory, Mr. Forbes, was just get out there early, just

get out there early. But then the question——

Mr. FORBES. Which worked when there were not so many people

doing it, right?

Mr. MILLER. Exactly. And Amazon.com, clearly their market cap

today is a reflection of a belief among a lot of investors that that

works. But with Barnes & Noble out there, too, and a lot of others,

how long will that hold? I don’t know the answer. The answer is

the marketplace will determine that, and we just don’t know yet.

Mr. FORBES. Thank you.

Mr. Hanson, could you quickly just comment on the difficulties

or not, and maybe it is a little tougher for you since you have had

a little notoriety, about advertising and getting the word out about

your seafood business?

Mr. HANSON. Sure. Well, actually, I mean, I received attention

from Time Magazine because I came up number one on the search

engines, which is——

Mr. FORBES. That helps, too.

Mr. HANSON. Yes, absolutely. That is not easy to do. We have

several different types of strategies. One is we link up with other

websites that there is a synergy between the two. Number two, we

own eleven different Web addresses so we come up under seafood

now, but actually also come up under lobster on-line. We just basically buy up as many domain names as possible because there is

a huge secondary market now in domain names, and that also allows us to come in and index higher on the search engine.

And then third, that the company that I work with, Global Store,

has eight people, and I feel bad for them. All they do is sit around

all day an do what is called ‘‘medicoding’’ and they go through and

they retype in these key search words into all of these different indexes. It is very labor intensive. Some days we come in in the top

20. The next day I might come in all positions, 1 through 10, on

a search engine. But it is something they have to do every single

day. These are people that earn $40,000 a year each because they

are programmers and there are four of them working on it. I

couldn’t afford to do that myself or even hire these people, but

Global Store was able to do that because they have the resources.

Mr. FORBES. Thank you very much.

54

Thank you, gentlemen, for being here. And thank you, Mr. Chairman.

Mr. MILLER. Mr. Chairman, just one more response to Mr.

Forbes. Every IT company that is in the e-commerce world, which

is virtually all of them, are doing as much as possible now to reach

out to small business. To some extent the big business world, it is

not saturated; they are constantly updating and learning new

things, but if you look at IBM, Microsoft, Oracle, AOL, NetScape,

you talk about any of them, in terms of what they are doing right

now, they are doing everything possible to reach out to the small

businesses because they see, as Mr. Hill pointed out earlier, while

it is impressive that 41 percent of small businesses now have a

website, that is 10 million businesses, something like that. If you

assume there are 23 million, that still means there are 12 or 13

million that don’t have a website.

So in terms of where you go to try to sell your product and service, the opportunities to sell a service to Ford, Ford already has

websites and Web designers, et cetera. The opportunity to sell to

the other 20 lobster people in Maine, or 40 or 50, is really where

you are going to want to go.

Chairman TALENT. Mr. Thune wanted to ask a question or two

or just to make a comment.

Mr. THUNE. Well, Mr. Chairman, I think probably every question

that could be asked has been asked. I appreciate very much,

though, your holding this hearing. I think this is an incredibly important subject and one with which we are going to have to grapple

in the days ahead. I appreciate the fact that you have allowed our

Committee to begin examination of what I think is a very important issue.

Some of you have probably seen, and maybe you made reference

to it already, last week’s Wall Street Journal story about stock

transactions that are now conducted electronically and how we are

going to at some point probably end up with a 24-hour market because there are so many companies out there that are making that

service available.

It just points again to the dramatic changes that this is making

in the way that we do business. I think for my state of South Dakota it presents enormous opportunities. We have traditionally

been isolated by distance, and I think it is just incredible, in terms

of if we are willing to make the investment that is necessary to

have everybody wired and ready to go.

So on the other side of it, I think it also presents some enormous

challenges. The South Dakota Retailer Association was in my office

yesterday to talk about the question of equity and how we figure

the tax burden in terms of Maine Street business versus Internet

and catalog businesses in a lot of the States. Our State is a sales

tax State, and the competitive disadvantage that they are under

relative to those that are doing business either through catalog

sales or the Internet, and that has been an issue that has been visited here before, and I am sure will be again, but I think this is

going to amplify in a bigger way this issue and how we address

State and local government’s needs to collect revenue, and address

the equity argument as well with our retailers on Main Street.

55

So it is going to be a big subject, and I think as this thing continues to grow and the opportunities are out there, I hope that we,

in particularly rural America, can take advantage of those, but I

think at the same time we are going to have to figure out how best

we accommodate that growth in a way that protects and respects

the rights of States and local governments to collect revenues, as

well as respects the rights of Main Street businesses.

So thank you for holding the hearing, and I look forward to further discussions on this subject.

Chairman TALENT. I thank the gentleman for his comments and

I think they are probably as good a summation on the hearing as

I could make. So I will thank the witnesses for your indulgence and

adjourn the hearing.

[Whereupon, at 1:00 p.m., the Committee was adjourned.]

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