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80–402 PDF 2003

S. HRG. 106–1107

S. 2255, A BILL TO AMEND THE INTERNET

TAX FREEDOM ACT TO EXTEND THE

MORATORIUM THROUGH CALENDAR YEAR

2006

HEARING

BEFORE THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

APRIL 12, 2000

Printed for the use of the Committee on Commerce, Science, and Transportation

(

(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

JOHN MCCAIN, Arizona, Chairman 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

SLADE GORTON, Washington 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

JOHN ASHCROFT, Missouri 

BILL FRIST, Tennessee 

SPENCER ABRAHAM, Michigan 

SAM BROWNBACK, Kansas 

ERNEST F. HOLLINGS, South Carolina 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

RICHARD H. BRYAN, Nevada 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

MAX CLELAND, Georgia 

MARK BUSE, Republican Staff Director 

MARTHA P. ALLBRIGHT, Republican General Counsel 

KEVIN D. KAYES, Democratic Staff Director 

MOSES BOYD, Democratic Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on April 12, 2000 .............................................................................. 1

Statement of Senator Abraham .............................................................................. 8

Statement of Senator Breaux ................................................................................. 11

Statement of Senator Bryan ................................................................................... 13

Statement of Senator Burns ................................................................................... 10

Prepared statement .......................................................................................... 10

Statement of Senator Dorgan ................................................................................. 9

Statement of Senator Gorton .................................................................................. 31

Statement of Senator Hollings ............................................................................... 4

Statement of Senator Hutchison ............................................................................ 12

Statement of Senator McCain ................................................................................. 1

Prepared statement .......................................................................................... 3

Statement of Senator Stevens ................................................................................ 6

Statement of Senator Wyden .................................................................................. 6

Prepared statement .......................................................................................... 7

WITNESSES

Berthoud, Dr. John, President, National Taxpayers Union ................................. 39

Prepared statement .......................................................................................... 41

Bruce, Dr. Donald, Professor, Center for Business and Economic Research, 

the University of Tennessee ................................................................................ 45

Prepared statement .......................................................................................... 48

Bullington, David, Vice President of Taxes, Wal-Mart Corporation ................... 49

Prepared statement .......................................................................................... 51

Cox, Hon. Christopher, U.S. Representative from California .............................. 14

Prepared statement .......................................................................................... 16

Leahy, Hon. Patrick J., U.S. Senator from Vermont, prepared statement ......... 53

Leavitt, Hon. Michael, Governor of the State of Utah ......................................... 17

Prepared statement .......................................................................................... 20

Morse, Burr, President, Morse Farm Sugar Works .............................................. 54

Prepared statement .......................................................................................... 55

Ridge, Tom, Governor of Pennsylvania, letter dated April 12, 2000, to Hon. 

Trent Lott and Hon. J. Dennis Hastert .............................................................. 45

Zittrain, Jonathan, Berkman Center Internet and Society, Harvard Law 

School .................................................................................................................... 56

Prepared statement with attachment ............................................................. 58

APPENDIX

American Federation of State, County and Municipal Employees (AFSCME), 

prepared statement .............................................................................................. 90

Cleland, Hon. Max, U.S. Senator from Georgia, prepared statement ................. 83

Computing Technology Industry Association, prepared statement ..................... 90

American Association of State Colleges and Universities, Curris, Constantine 

W., President, and Travis Reindl, Policy Analyst, letter dated April 7, 

2000, to Hon. John McCain and Hon. Thomas J. Bliley, Jr. ............................ 93

Joint Prepared Statement of Lawrence A. Hunter, Chief Economist, Empower 

America, and George A. Pieler, Adjunct Fellow, Competitive Enterprise 

Institute ................................................................................................................ 93

International Council of Shopping Centers, prepared statement ........................ 96

Response to written questions submitted by Hon. John McCain to: 

Burr Morse ........................................................................................................ 83

Jonathan Zittrain ............................................................................................. 87

Page

IV

Response to written questions submitted by Hon. Max Cleland to: 

Dr. John Berthoud ............................................................................................ 84

Dr. Donald Bruce .............................................................................................. 85

David Bullington .............................................................................................. 86

Hon. Michael Leavitt ........................................................................................ 86

Burr Morse ........................................................................................................ 87

Jonathan Zittrain ............................................................................................. 88

(1)

S. 2255, A BILL TO AMEND THE INTERNET 

TAX FREEDOM ACT TO EXTEND THE

MORATORIUM THROUGH CALENDAR YEAR 

2006

WEDNESDAY, APRIL 12, 2000

U.S. SENATE, 

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Committee met, pursuant to notice, at 9:30 a.m. in room 253 

of the Russell Senate Office Building, Hon. John McCain, Chairman of the Committee, presiding. 

OPENING STATEMENT OF HON. JOHN McCAIN,

U.S. SENATOR FROM ARIZONA 

The CHAIRMAN. I am pleased to welcome all our witnesses this 

morning. We can expect diversity of views and opinions on one of 

the most important issues facing us this session: the future of the 

Internet and e-commerce transactions. I believe that we are at a 

critical juncture in determining the future regulatory scheme under 

which the new economy will either continue to grow and prosper 

or will be thwarted by government bureaucracy, taxation and 

shortsighted greed. 

Our founding fathers certainly did not have the Internet in mind 

but nevertheless understood the potential dangers and pitfalls of 

States taxing and regulating interstate commerce. That is why our 

constitution reserves the power to regulate commerce among the 

several States. The purpose of Federal power over interstate commerce is to ensure that one or more States do not unduly burden 

the transaction of interstate transactions. The Internet is the epitome of interstate commerce. If each state and local jurisdiction attempts to impose its own business regulations and taxes to it, the 

opportunities presented by this new economic engine will be destroyed. It is important to look at the full picture of our economy 

as assessing the impact of taxation on the Internet and e-commerce. 

The Internet is filled with websites of small businesses, businesses that are expanding in ways which would never before have 

been economically feasible. One of our witnesses today, Mr. Morse, 

will be able to give us a reality check as to how the Internet has 

afforded him an opportunity to compete with much larger companies. The Internet is the last frontier for the small business entrepreneur to develop a business and compete without massive 

amounts of investment capital. His or her small business, his small 

2

business, which has historically had a limited market for its goods, 

now has a website that allows him to market and sell to people all 

over the country, even all over the world. Mr. Morse, like other 

small business men and women, benefit from the freedom of the 

Internet and the country benefits from their success. 

When a small business increases its sales and revenues, it needs 

to hire more employees and it pays taxes on the increased revenues 

and the newly hired employees pay taxes on their wages. State and 

local governments benefit not only from the additional taxes paid 

on the revenues, but in the economic benefits of additional jobs and 

a growing economy. The potential burden of complying with tax 

regulations and the paperwork involved under current law for as 

many as 7,500 estimated taxing units in this country would overwhelm many businesses, especially small businesses. The cost of 

complying with multiple States filing and regulatory requirements 

would in many instances exceed the amounts collected and transmitted. 

A multistate company currently files many tax returns. AT&T 

has informed the Committee staff that last year, it completed approximately 99,000 separate tax filings. Under current law, States 

can require businesses who have a nexus with the state to collect 

taxes, collect sales and use taxes. The moratorium does not disrupt 

this existing law nor would an extension of the moratorium. The 

Supreme Court has found that businesses, with a physical nexus 

to a state, have created a relationship with that state sufficient to 

submit themselves to the regulatory and taxing authority of that 

state. In essence, the business becomes a citizen of the state and 

its transactions with other citizens of that state are intrastate in 

nature. Thus there is no burden on interstate commerce. 

By contrast, the essence of what the tax and spend advocates 

who oppose this legislation demand is 50 state jurisdiction over 

every Internet business, large and small, regardless of any other 

connection to each state. They advocate that a Vermont businessman such as Mr. Morse collects sales taxes and comply with the 

tax regulations of every state and local jurisdiction in the country. 

Where does this expansive jurisdiction lead? Does such an expansive jurisdiction also result in potential liability in each state for 

noncompliance or miscompliance for state regulations? What about 

business licenses, occupational fees, occupational or retail licensing 

regulations, blue laws? How do we ensure that in the zeal to collect 

more money to permit even more expansive governments, we protect the privacy of the consumers? How does imposing more regulatory burdens affect competition in the marketplace? What impact 

does increasing the regulatory and tax burden on Internet commerce have on rural, handicapped and low-income consumers? How 

does it affect our trade opportunities with other countries? 

We need to consider whether the macroeconomic benefits of the 

new economy will outweigh the potential losses in direct revenues. 

We must ensure a level playing field for all venues of commerce, 

not simply create a new remote sales tax system. We must simplify 

the overwhelming morass of tax rules, regulations and paperwork 

so that opportunities for new or small businesses are not lost in 

complex and archaic bureaucracies. We need to re-examine the 

level of services which the public wants to be provided by governVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
3

ment and determine how to provide necessary revenue to accomplish the people’s will. We need to ensure that taxation is not simply imposed to increase government bureaucracy. 

I am looking forward to hearing from the witnesses on all of 

these issues. It is clear that these are complex issues which will require extensive investigation, analysis and debate. The commission 

established by the Internet Freedom Act did not reach consensus, 

nor did it resolve the multitude of issues presented by the new 

framework of interstate commerce which the Internet presents. 

I do not see how we can arrive at consensus on these critical 

issues between now and October of next year, which is why I proposed a 5-year simple extension of the current moratorium. Extension would not affect the current nexus rules. It would not affect 

the grandfather provisions. It is a simple extension of the status 

quo. 

It had been my intent to include S. 2255, the 5-year moratorium 

extension legislation, on the Committee markup tomorrow. The advocates of increasing the tax burden on the public have prevailed 

in having it removed from tomorrow’s agenda so that they can look 

into this matter further. However, I want to emphasize this is critical legislation. It is in the best interests of our nation’s economic 

prosperity to bring it to the full Senate. Therefore, I intend to include it in a future markup and ensure that the Senate is permitted to debate these issues fully. 

[The prepared statement of Senator McCain follows:]

PREPARED STATEMENT OF HON. JOHN MCCAIN, U.S. SENATOR FROM ARIZONA

I am pleased to welcome all of our witnesses this morning. We can expect a diversity of views and opinions on one of the most important issues facing us this session, 

the future of the Internet and e-commerce transactions. I believe that we are at a 

critical juncture in determining the future regulatory scheme under which the new 

economy will either continue to grow and prosper, or will be thwarted by government bureaucracy, taxation and shortsighted greed. 

Our Founding Fathers certainly did not have the Internet in mind, but nevertheless understood the potential dangers and pitfalls of states taxing and regulating 

interstate commerce. That is why our Constitution reserves the ‘‘power . . . to regulate Commerce among the several states.’’ The purpose of federal power over interstate commerce is to ensure that one or more states do not unduly burden the transaction of interstate transactions. The Internet is the epitome of interstate commerce. 

If each state and local jurisdiction attempts to impose its own business regulations 

and taxes to it, the opportunities presented by this new economic engine will be destroyed. 

It is important to look at the full picture of our economy in assessing the impact 

of taxation on the Internet and e-commerce. The Internet is filled with web sites 

of small businesses, businesses that are expanding in ways which would never have 

before been economically feasible. One of our witnesses today, Mr. Morse, will be 

able to give us a reality check as to how the Internet has afforded him an opportunity to compete with much larger companies. The Internet is the last frontier for 

the small business entrepreneur to develop a business and compete without massive 

amounts of investment capital. His small business which has historically had a limited market for its goods now has a website that allows him to market and sell to 

people all over the country—even all over the world. 

Mr. Morse, like other small businessmen and women benefit from the freedom of 

the Internet, and the country benefits from their success. When a small business 

increases its sales and revenues, it needs to hire more employees, and it pays taxes 

on the increased revenues. And the newly hired employees pay taxes on their wages. 

The state and local governments benefit, not only from the additional taxes paid on 

the revenues, but in the economic benefits of additional jobs and a growing economy. 

The potential burden of complying with tax regulations and the paperwork involved under current law for as many as 7,500 estimated taxing units in this counVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00007 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
4

try would overwhelm many businesses, especially small businesses. The cost of complying with multiple states’ filing and regulatory requirements would in many instances exceed the amounts collected and transmitted. A multi-state company currently files many tax returns. AT&T has informed the Committee staff that last 

year it completed approximately 99,000 separate tax filings. 

Under current law, a state can require businesses who have a nexus with the 

state to collect sales and use taxes. The moratorium does not disrupt this existing 

law, nor would an extension of the moratorium. The Supreme Court has found that 

businesses with a physical nexus to a state have created a relationship with that 

state sufficient to submit themselves to the regulatory and taxing authority of that 

state. In essence, the business becomes a ‘‘citizen’’ of the state, and its transactions 

with other citizens of that state are intrastate in nature, thus there is no burden 

on interstate commerce. 

By contrast, the essence of what the tax and spend advocates who oppose this legislation demand is 50 state jurisdiction over every Internet business—large and 

small—regardless of any other connection to each state. They advocate that a 

Vermont business man such as Mr. Morse collect sales taxes and comply with the 

tax regulations of every state and local jurisdiction in the country. Where does this 

expansive jurisdiction lead? 

Does such an expansive jurisdiction also result in potential liability in each state 

for non-compliance or mis-compliance with state regulations? What about business 

licenses, occupational fees, occupational or retail licensing regulations, ‘‘blue laws’’? 

How do we ensure that, in the zeal to collect more money to permit even more 

expansive governments, we protect the privacy of the consumers? How does imposing more regulatory burdens affect competition in the marketplace? What impact 

does increasing the regulatory and tax burden on Internet commerce have on rural, 

handicapped and low income consumers? How does it affect our trade opportunities 

with other countries? 

We need to consider whether the macroeconomic benefits of the new economy will 

outweigh the potential losses in direct revenues. We must ensure a level playing 

field for all venues of commerce, not simply create a new remote sales tax system. 

We must simplify the overwhelming morass of tax rules, regulations and paperwork 

so that opportunities for new or small businesses are not lost in complex and archaic bureaucracy. 

We need to reexamine the level of services which the public wants to be provided 

by government and determine how to provide necessary revenue to accomplish the 

people’s will. We need to ensure that taxation is not simply imposed to increase government bureaucracy. 

I am looking forward to hearing from the witnesses on all of these issues. It is 

clear that these are complex issues which will require extensive investigation, analysis and debate. The Commission established by the Internet Freedom Act did not 

reach consensus, nor did it resolve the multitude of issues presented by the new 

framework of interstate commerce which the Internet presents. I do not see how we 

can arrive at consensus on these critical issues between now and October of next 

year, which is why I have proposed a five-year simple extension of the current moratorium. The extension would not affect the current nexus rules. It would not affect 

the grandfather provisions. It is a simple extension of the status quo. 

It had been my intent to include S. 2255, the five-year moratorium extension legislation on the Committee mark-up tomorrow. The advocates of increasing the tax 

burden on the public have prevailed in having it removed from tomorrow’s agenda 

so that they can look into this matter further. However, I want to emphasize, this 

is critical legislation, it is in the best interest of our nation’s economic prosperity 

to bring it to the full Senate. Therefore, I intend to include it in a future mark-up, 

and ensure that the Senate is permitted to debate these issues fully.

Senator Hollings. 

STATEMENT OF HON. ERNEST F. HOLLINGS,

U.S. SENATOR FROM SOUTH CAROLINA 

Senator HOLLINGS. Mr. Chairman, the problem is not increasing 

the tax burden, the problem is decreasing the tax burden at the 

local level. Everyone would agree we shouldn’t tax access to the 

Internet, and I do not know of anybody who has suggested taxing 

access to the Internet. What has really occurred is a pell-mell rush 

to identify the technology. Everyone is running around saying ‘‘oh, 

I have done something.’’ One individual, of course, said he invented 

5

the Internet. Others are hastening to try to identify with the technology, saying they are against or for a moratorium. We got to save 

the Internet, acting like the Internet is some sick chicken or needs 

Viagra, heck, we have a runaway animal here. You do not have to 

worry about saving the Internet. Even the Chinese are trying to 

block it, and cannot do it. So let us not get onto this bit about increasing the tax. 

The problem is decreasing the tax. I had the privilege of working 

with Charles Conlin of the Federation of Tax Administrators in 

Chicago back in 1949 and 1950 when we wrote the sales tax. It was 

a sales and use tax. Incidentally, we more or less used the California and Ohio laws, and they have never been disturbed. We 

never really attempted to repeal it in the conservative legislature 

of South Carolina, or set it aside at the court level. 

It says use. All the States, except two or three, have the use tax 

so that if I buy a jacket from L.L. Bean in Freeport, Maine, by telephone, by letter, or by Internet, I am subject to the use tax because 

it is bought in Maine for use in South Carolina. 

The problem, of course, has been over the years that the bureaucracy entailed in trying to collect that use tax far exceeded any 

kind of benefit, so no one has bothered to really collect. On the 

other hand, with the volume of Internet sales everybody will buy 

their car on the Internet. That fellow Heisinger, he is running 

around putting these agencies everywhere. You are going to put 

every automobile dealer in your state and community out of business because they are just programmed. These big companies, General Motors, Ford, they will put the cars, about 30 of them at the 

most, which is better than 130 because they require those dealers 

to program some 130. They just look at what you want and the 

dealer itself will order it on the Internet and it will be delivered 

the next day. And you would save 500, 600 dollars on a car, plus 

the added less expense of actually programming all the automobiles out on the lot. It is a trauma to local business and to the 

local revenue system. 

I had introduced a bill along that line that says look, we used 

to have what we call revenue sharing in February of 1967. We had 

it, and it worked extremely well up until when we senators were 

understanding we were financing everybody at the local level to 

run against us. We said wait a minute, we are giving them all the 

money and they are taking it and they are running against us at 

the local level. So with Howard Baker, myself and others, we just 

eliminated the revenue sharing. But with that approach, we ought 

really to just give a service to the States. We could waive the Interstate Commerce Clause, put in a 5 percent tax for the 50 States, 

and send it back to the States and let them fuss about how they 

are going to divide it up. We do not have to charge the States anything, but we can lessen the impact of this new technology at the 

local level. 

That is the real problem. The real problem is not a moratorium. 

You cannot tax the Internet. Nobody wants to tax access to the 

Internet. But it is a problem at the local level of trying to maintain 

what is left of Main Street. Wal-Mart is going to close down half 

of it and this will close down the other half. So what we need to 

do is look at what Senator Dorgan and others have been working 

6

on. They know the tax system. Let us provide a service for the 

States and get on with the problem and quit mounting these 

strawmen like somebody trying to ruin the Internet or interfere 

with the technology. You have no chance of doing it. Thank you 

very much, Mr. Chairman. 

Senator MCCAIN. Senator Stevens. 

STATEMENT OF HON. TED STEVENS,

U.S. SENATOR FROM ALASKA 

Senator STEVENS. I do not have a prepared statement. I just 

want to endorse your statement, Mr. Chairman. I support this bill. 

Senator MCCAIN. Thank you. 

Senator Wyden. 

STATEMENT OF HON. RON WYDEN,

U.S. SENATOR FROM OREGON 

Senator WYDEN. Thank you, Mr. Chairman. I think Senator Hollings has identified the key issues, with the question of the impact 

of technology on local revenue. I would just like to begin by offering 

up a few facts about what we have seen with respect to the impact 

on local government since the Internet Tax Freedom bill was 

passed. In fact, I guess the New York Times summed it up this 

week when they said in a headline on page one, ‘‘A Resurgent 

Michigan Leads Newly Flush States.’’ The fact of the matter is that 

local revenue is way up since the Internet Tax Freedom bill was 

passed, and in States where Internet usage is highest, local revenues are up the most. 

For example, California sales tax collections were up 20 percent 

over 1998. The traditional bricks and mortar retailers had one of 

their best holiday seasons. They had a nearly 8 percent jump in 

sales over the previous year. The States and localities ended fiscal 

1999 with a 35 billion dollar surplus. So this notion that technology 

is somehow devastating local revenues just is not borne out by the 

facts. The record clearly shows otherwise. 

Now, the problems that States and localities are having with respect to collecting these sales and use taxes have nothing to do 

with the Internet. I am pleased that our co-author, Congressman 

Cox, is here today. He and I have pointed out, as the Chairman has 

repeatedly, that there is nothing in the Internet Tax Freedom bill 

that prevents a state from going out right now and putting in place 

a better and more cost-effective system of collecting sales and use 

taxes. 

But the States, as we have heard, will not do it because they do 

not want the political heat. Governor Cellucci of Massachusetts put 

it very well when he recently came to the Hill and said, I cannot 

station a bunch of policemen on the Massachusetts border to run 

down folks coming over from New Hampshire and try and stick 

them with taxes. 

So what we now have is a situation like that in which some of 

those opposed us so vehemently in 1997. I have gone back and 

looked at the record. It is an incredible record. The League of Cities, National Association of Counties and others said, and I quote, 

‘‘that our moratorium would cause a virtual collapse in the state 

and local revenue base.’’ They said, and I quote, ‘‘one of the gravest 

7

concerns of this new electronic era will be the almost complete erosion or potential implosion in the sales tax.’’ So all these folks who were proven wrong in the years since the 

Internet Tax Freedom Act are now saying that what the Congress 

ought to do is let local jurisdictions go out and impose a new tax 

on a merchant 2500 miles away from that jurisdiction who has no 

connection with the jurisdiction other than a website, and that new 

tax ought to be imposed without a vote of the U.S. Congress. That 

is really what is at issue here. The Internet Tax Freedom bill is 

about technological neutrality. It says that you can do anything you 

want on the Internet, as long as you do unto the offline world what 

you do to the online world. 

I am anxious to work with these mayors and Governors and others who opposed us in 1997 and that oppose us now as we try to 

extend the moratorium. I think at some point, those who keep predicting these parades of horribles as a result of technology in our 

legislation have some obligation to offer a factual foundation for 

their position. I really urge my colleagues to look at the transcript, 

because it is extraordinary in terms of what they predicted. 

What we have seen is just the opposite, record setting revenues 

in places where Internet usage is highest, and now these folks 

would like to go out and impose these new taxes without even a 

vote of the U.S. Congress. This is an important hearing, Mr. Chairman. I have talked with Senator Dorgan and others. I am anxious 

to try to find some common ground so we can move rapidly to a 

markup. We ought to extend at a minimum the ban on discriminatory Internet taxes. In fact, so that there would be clarity this time, 

Congressman Cox and I, in introducing our legislation, have renamed the bill. It is called the Internet Non-Discrimination Act so 

as to make it clear. 

Senator MCCAIN. That is a much better name. 

Senator WYDEN. I hope. I hope. And I look forward to our testimony, and I have a full statement that I would just ask it be part 

of the record, Mr. Chairman. 

[The prepared statement of Senator Wyden follows:]

PREPARED STATEMENT OF HON. RON WYDEN, U.S. SENATOR FROM OREGON

Three years ago, when Congressman Chris Cox and I introduced the Internet Tax 

Freedom Act (ITFA), we said you can’t squeeze the new economy into a set of rules 

written for the smokestack industry. 

Three years ago, opponents of our bill predicted retailers were going to vanish 

from Main Street. The National Governors Association predicted our bill would 

‘‘have severe consequences on state and local economies’’ (Oct. ’97), the National 

League of Cities, the National Association of Counties and the U.S. Conference of 

Mayors warned the moratorium on Internet taxes ‘‘would cause a virtual collapse 

in the state and local revenue base.’’ The National League of Cities said ‘‘one of the 

gravest concerns of this new electronic era will be the almost complete erosion or 

potential implosion of the sales tax.’’

The Denver Post editorialized on November 16, 1997 that the Internet Tax Freedom Act would ‘‘make states and cities wave goodbye to their tax revenues,’’ and 

that ‘‘services citizens expect of local government will decline drastically.’’ ‘‘Democracy and federalism as America knows them could be zapped from the screen of history.’’

A front page story in this past Monday’s New York Times paints a very different 

picture: ‘‘A Resurgent Michigan Leads Newly Flush States.’’ The article begins: 

‘‘Lawmakers here and in many other states, now in the throes of writing their budgets for the 2001 fiscal year, are witnessing the biggest of six consecutive years of 

rising revenues, inspiring inventive new ways to spend money and wave upon wave 

8

of tax reductions.’’ It goes on to point out that ‘‘New York, California, Texas, Maryland, Minnesota, Indiana, Washington, Pennsylvania and Michigan have been 

amassing annual surpluses exceeding $1 billion.’’

In the 18 months since enactment of the ITFA:

• States and localities have continued to collect sales and use taxes, and state 

budgets ended fiscal 1999 with a $35 billion surplus;

• Traditional bricks and mortar retailers had one of their best holiday seasons, 

recording a nearly 8% jump in sales over the previous year;

• In states where Internet usage is highest, revenues are up the most;

• California’s sales tax collections were up 20% over 1998; and

• ABC News reported that 74% of Main Street merchants now also do business 

online. Bricks and mortar have become clicks and mortar.

The Internet Non-Discrimination Act (INDA) that Rep. Cox and I introduced earlier this year is about one principle: you cannot stick it to the new economy. The 

Internet Non-Discrimination Act is about fairness and balance. The bill would continue current law that bans discriminatory taxes on e-commerce. No business gets 

any more favorable tax treatment by selling online, and no business gets any less 

favorable treatment by selling online. 

I believe that a permanent ban on discriminatory taxes on the Internet is the way 

to go. I am willing to let the states and localities try their hand at developing a 

simplified sales and use tax system that doesn’t stick it to the Internet. But the Supreme Court set the bar high in the Quill decision. The states have a lot of work 

to do to make sure any new sales tax collection obligation they want to impose on 

remote vendors can satisfy the undue burden test. If the state simplification plan 

passes the undue burden test, it will not have any problem passing the nondiscrimination test.

Senator MCCAIN. Thank you very much, Senator Wyden. Thank 

you for your informed and very passionate effort on this very important issue. 

Senator Abraham. 

STATEMENT OF HON. SPENCER ABRAHAM,

U.S. SENATOR FROM MICHIGAN 

Senator ABRAHAM. Senator McCain, I will be brief. As you know, 

I am a cosponsor of your legislation. I would just make the observation today that I made a couple of weeks ago in the Budget Committee when we heard from several Governors and others talking 

about this issue. And that is that, I believe, that the ability today 

to predict the tax system of five or 10 years from now is very minimal. 

I believe that the changes in behavior with respect to the way 

people live their lives, buy things for their home, purchase goods 

and services, run their companies, and so on, will be so dramatically affected by the high technology information age transition 

that we are going through that what we are debating today will, 

I predict, in five or 10 years seem to be a relatively innocent and 

somewhat perhaps even amusing debate in retrospect. 

I think that the Internet and the changes that technology and 

the information age bring to human behavior will force tax reform 

in ways that think tanks, that political candidates, all of us combined in fact have been unable to accomplish because of the 

changes that will happen in society. I question, for example, as we, 

as the introduction of broad-band and high-speed Internet access 

becomes universal, how many companies will continue to build skyscrapers to house their employees under one roof. I believe we will 

9

see dramatic changes in the number of people who in fact work out 

of their homes. 

I think we will see changes in a variety of other ways that affect 

commercial transactions and as we pass legislation such as our esignatures bill, we will see changes brought about by that as well 

and so while I do support the legislation, I just would say that I 

suspect we will be having many more hearings to address the 

issues of changes that technology brings about with respect to taxation and other various areas of government activity. I look forward to it. I think it is very exciting and I am sure under your 

leadership, we will continue to be on the cutting edge of these 

issues. Thank you. 

Senator MCCAIN. Thank you very much. 

Senator Dorgan. 

STATEMENT OF HON. BYRON L. DORGAN,

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. Mr. Chairman, thank you very much. I support 

the moratorium, supported the legislation that called for it; although I must say to my colleagues that had we passed the legislation as originally written and introduced, we wouldn’t have had 

much of a tax base in local governments for consumption taxes, but 

it was changed dramatically. I support it. I would support its extension as well. But I think its extension needs to be accompanied 

by a series of considerations. 

This explosion of information technology and the Internet is exciting, dynamic and wonderful for our economy, and I agree that 

we should not have a tax system that would impose burdens upon 

it or injure it or injure the growth of this new exciting part of our 

economy. Having said that, we have a series of questions we need 

to answer. There are some principles here that are important. 

One: despite all of the rhetoric, there is no new tax being discussed by anyone, no new tax. On these transactions, there is a use 

tax that a consumer has a responsibility to report to the state in 

which the consumption occurred. Of course, that use tax is seldom 

ever paid. It is far too complicated to have tens and tens of millions 

of Americans filing use tax returns, so the sales tax is generally the 

complementary piece of that and the tax is collected upstream rather than downstream. 

Now, my colleague seems to suggest the States just do not have 

the wherewithal or the will to go out and collect this. That would 

suggest that he is proposing an army of more government agents 

and inspectors. I mean, I want less government, not more government. If you really want a use tax collected from tens and tens of 

millions of people through some regime, then you are talking about 

more government, more complexity. I am talking about less government and simplicity. 

A tax exists on these transactions. The question is: How will it 

be collected? I think it is in our interest to find a simplified method, a very simplified method, simple for those who are Internet 

sellers. I think every state ought to be required to have one blended rate, only one, and a tax system, a tax base that is common, one 

rate, a common base. That is simplification. 

10

Second: I think you have to be concerned about preserving a local 

tax base. Our schools are predominantly funded by the local tax 

base, especially the consumption tax. I think you have to be concerned about that in the long run. And third, I think there is a significant issue with respect to fairness to Main Street merchants 

with respect to the obligation of a tax on a transaction so, you 

know, all of these things need to be part of the balanced approach 

that we take. 

Again, I support Senator McCain in extension of the moratorium. 

The moratorium on discriminatory taxes makes eminent good 

sense. I support prohibition on taxes on access, but I do think there 

needs to be more considered with respect to the other items I have 

just discussed. I want to end by saying that no one is talking about 

a new tax. No one. 

There is no new tax involved. There is a consumption tax in this 

country that has complementary sales and use taxes. When a sales 

tax does not apply, a use tax does, but to suggest somehow to find 

a way to simplify the collection of a use tax as representing a new 

tax burden on the American people is just wrong. It is just not accurate. I hope that we can work together and find a way to resolve 

this issue and do it as we did a year and a half ago with respect 

to the bill we passed in the Senate. 

If I might make one additional short comment. We put together 

a Commision in that piece of legislation, and in my judgment the 

Commision has failed. I understand that even though we provided 

that they would not make recommendations without a two-thirds 

recommendation on the Commision, I think this Commision largely 

has not achieved the goals that we would have liked. 

Perhaps we need to find some other way of doing that. Thank 

you, Mr. Chairman. 

Senator MCCAIN. Senator Burns. 

STATEMENT OF HON. CONRAD BURNS,

U.S. SENATOR FROM MONTANA 

Senator BURNS. Thank you, Mr. Chairman, and thank you for 

elevating this hearing to a full Committee. I think it warrants full 

Committee. I am going to offer my statement for the record and 

add my name as a cosponsor. I think what we have done so far has 

worked very well and I think we ought to continue this, and I am 

looking forward to hearing from the witnesses. 

Senator MCCAIN. Thank you. Your statement will be made part 

of the record without objection. 

[The prepared statement of Senator Burns follows:]

PREPARED STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR FROM MONTANA

Thank you, Mr. Chairman. 

I commend the Chairman for holding today’s hearing, as it concerns a topic of 

great importance to the future development of the Internet—how to make sure that 

our nation’s tax policy keeps pace with rapid technological change. 

The ‘‘Internet Tax Freedom Act’’ recognized that uniformity and common sense 

must be brought to taxation policy on the Internet. The Act placed a three-year moratorium on state and local taxes that discriminate against online transactions. I 

strongly supported this bill and welcomed its passage by the Senate in October of 

1998. 

In the short period since the Act’s passage, we have seen a continuation of the 

explosive growth in electronic commerce. Companies ranging from garage startups 

11

to multinational corporations are bringing their goods and services into the electronic realm at an ever-escalating rate. In my home state of Montana, companies 

such as Vanns.com and healthdirectory.com are taking advantage of the virtual 

markets provided by the Internet. 

The Internet does not depend on physical geography or even the sale of physical 

goods. The virtual transactions that take place on the Internet may span hundreds 

or even thousands of individual taxing jurisdictions. Those states and cities that 

have decided that Internet commerce is subject to local sales taxes, even though the 

transaction occurs in cyberspace, created a paperwork nightmare for small businesses. 

After witnessing the further growth of the Internet and electronic commerce, I am 

more convinced than ever of the folly of imposing a devastating patchwork of taxes 

on Internet transactions. I agree with the recommendation of the Advisory Commission on Electronic Commerce that we should extend the moratorium. Mr. Chairman, 

I would like to add my name as a co-sponsor to S. 2255, which will keep the Internet a ‘‘tax-free’’ zone and help foster the continuing growth of electronic commerce. 

Both consumers and businesses will benefit from a reasoned Internet tax policy. 

Growth will create more revenue and an expanding tax base for the future. The empowering aspects of the Internet for small business—low barriers to entry and an 

immediate global reach—must not be allowed to be harmed by a heavy-handed government approach to Internet taxation. 

Extending the moratorium on discriminatory taxes on Internet transactions will 

help to ensure that the nearly limitless potential of electronic commerce is realized. 

Thank you, Mr. Chairman.

Senator MCCAIN. Senator Breaux. 

STATEMENT OF HON. JOHN B. BREAUX,

U.S. SENATOR FROM LOUISIANA 

Senator BREAUX. Thank you very much, Mr. Chairman. Also 

thanks for having the hearing at the full Committee level. I think 

it is important enough. Let me just obviously make my position 

very clear from the outset. I think that Congress should give the 

States the authority to require the collection of a sales tax by businesses who sell products into a particular state over the Internet 

or any other means that they see fit to do so. 

I think that there is something patently wrong with a situation 

that allows a person to walk downtown to Main Street and buy a 

pair of shoes and pay the locally imposed sales tax on that transaction which in most cases, as Senator Dorgan has said, goes to 

run the police protection, the fire protection, and the schools within 

that local community. Yet somehow if that person buys the same 

pair of shoes ordering it out of state or with the Internet, they 

somehow escape the legal liability of having the sales tax collected 

by the seller of the merchandise. It does not make any sense, and 

I think it is wrong. Congress should act in this area. 

I congratulate Mike Leavitt and others who served on the 

Commision. Having some experience with being on a Commision 

that requires a super, supermajority, I know how difficult that happens to be, if not impossible to ever accomplish. The work that they 

did was very helpful and shows that there is a real interest in solving this problem. I would suggest that it is not a question of whether sales taxes increased at the local level last year. It is a question 

of what they are going to do in 5 years or 10 years or 20 years. 

Of course, with a booming economy, sales taxes were up in most 

States. Mine was an exception and as more and more people look 

at this as a loophole to escape paying local sales taxes, in 5, 15, 

20 years you are going to see a system that does wreak real hardships on local communities because of Congress’ failure to act to 

12

allow the imposition of what the local communities have already legally decided was appropriate sales tax. 

As far as the connection, I mean, it seems to me that the only 

connection that the companies have outside of a particular state is 

a pipeline directly into the States sucking money out of local communities. They certainly have the right to sell their merchandise. 

They have a huge advantage because they are not located there. 

They do not hire people. They do not pay property taxes. They do 

not own buildings. Most times they do not contribute to local charities or become involved in local activities. They have a huge advantage selling in a local community. 

Why say that we are going to carve out a special exemption and 

allow them to get away with not having to pay the local sales tax 

that the local people in that community say is appropriate and 

proper and is imposed upon themselves for important functions like 

schools and police protection and fire protection. Congress should 

act on this. I think a 2-year moratorium was appropriate. We 

should figure out a universal state sales tax so that one tax could 

be collected and submitted to the state and the state would distribute it to the local communities based on what is appropriate 

under the state rules and laws. Thank you. 

Senator MCCAIN. Senator Hutchison. 

STATEMENT OF HON. KAY BAILEY HUTCHISON,

U.S. SENATOR FROM TEXAS 

Senator HUTCHISON. Thank you, Mr. Chairman. I appreciate 

your holding this hearing. Certainly I think the Commision that 

was put together has looked at this issue very carefully, but it is 

a crucial issue for a state like mine that does not have a state income tax. I spilled some of my own blood in my state to avoid having a state income tax. And if we allow this inequity to continue 

to occur, I can see that we are not going to have the sales tax base 

that will support our state, and I can see a drumbeat beginning for 

a state income tax, which I would fight to the death. So I hope that 

we can take a responsible step. I am not sure that I agree with my 

colleague from Louisiana that collecting sales taxes at the federal 

level is the answer. I had hoped this Commision would bring forward a fair plan. 

Senator BREAUX. Would the gentlewoman yield on that point? 

Senator MCCAIN. The Senator from Louisiana is not recognized. 

Senator BREAUX. She has the time. If she wants to yield, she can 

yield. 

Senator MCCAIN. No, she does not. She is making an opening 

statement. I have ruled the Senator from Louisiana out of order. 

That is the ruling of the chair. Please complete your opening statement so that we can go forward with the witnesses. 

Senator BREAUX. She can’t yield on her time? 

Senator MCCAIN. Time is for opening statements, I say to the 

Senator from Louisiana. I thank the Senator from Louisiana for his 

courtesy. 

Senator HUTCHISON. Let me say that perhaps I should not have 

mentioned a disagreement. We will have time to debate at another 

time, but I do believe that it is important for us to find the right 

answer. At the very least, we should not treat retail sales difVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00016 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
13

ferently on the Internet than they are from catalogues, and States 

have been able to pass laws that would require the collection of a 

sales tax from a consumer in a state if there is a catalogue purchase. I think we have got to look at this issue very carefully. I do 

not think we should tax the Internet itself, but I think the issue 

of a level playing field where a retailer pays taxes and supports the 

community, and should not have an unfair competitive disadvantage because you can buy something without paying a sales tax on 

a retail purchase from an Internet company. 

So I think we have a very tough issue here, but we also need to 

realize that we have certain services that are done at the state and 

local level that are supported by retailers who invest in the community and by consumers who pay a sales tax so thank you, Mr. 

Chairman. I appreciate having this hearing. I hope we can do 

something responsible that does keep a level playing field for all 

of the businesses in our country. 

Senator MCCAIN. Senator Bryan. 

STATEMENT OF HON. RICHARD H. BRYAN,

U.S. SENATOR FROM NEVADA 

Senator BRYAN. Thank you very much, Mr. Chairman. In the interest of time let me say that I associate myself with some of the 

observations made by our distinguished colleague from Texas. I 

think the growth of the Internet has been a very positive thing for 

us in this country. I think it has helped to spawn a technology explosion that will put us well ahead of our competitors in the 21st 

century. Having said that as a former Governor, I am concerned 

about what the implications are for tax bases in state and local 

governments who are heavily dependent upon sales tax collections. 

In my own state, one third of the revenue derived offered all the 

essential services of government, primarily education, in the state 

are dependent upon the sales tax, so I think we do have to look 

in terms of how we treat this issue in no way to penalize or to limit 

the opportunities for expansion, but to deal with the very legitimate concerns that state governments have. 

Second thing I have is this inherent sense that there ought to be 

some equity and fairness. I mean, for many communities in my 

own state, and I am sure for that of my colleagues as well, local 

businessmen and women in Main Street America really form the 

hub and base of so much of what we do, whether it is the support 

of the little league or the Boy Scouts, the Girl Scouts, the Camp 

Fire Girls are done as a result of the involvement civically by those 

individuals who are active in the business community. 

It seems to me that they are entitled in any kind of system to 

be treated fairly and equally, and so I think there is an equity 

issue as well, and I hope we might be able to address those two 

issues. And again, I thank the chair for convening this very timely 

and important hearing. 

Senator MCCAIN. I thank you very much. I would ask the Honorable Christopher Cox of the U.S. House of Representatives and the 

Honorable Mike Leavitt to come forward. Congressman Cox, would 

you make your statement, followed by Governor Leavitt. Welcome 

to both of you before the Committee. 

14

STATEMENT OF HON. CHRISTOPHER COX,

U.S. REPRESENTATIVE FROM CALIFORNIA 

Mr. COX. Thank you very much, Mr. Chairman, and members of 

the Committee. Thank you for inviting me to testify this morning 

as a co-author of the Cox-Wyden legislation, more popularly known 

as the Internet Tax Freedom Act, and I certainly appreciate the opportunity to join my co-author. It was this Committee, your Committee, Mr. Chairman, that held the first-ever hearing on the issue 

of Internet taxation. 

I am also joined this morning at the witness table by the distinguished Governor of Utah, Governor Mike Leavitt, who served on 

the Internet Tax Commission created by the Internet Tax Freedom 

Act, and it was with Governor Leavitt that I spent many, many 

long hours a few years ago writing the legislation that created not 

only the Commision, but also the existing moratorium. We brought 

together very different points of view from the state governments, 

from local governments, from many municipalities all over the 

country, and we agreed on one very, very important principle, and 

that is that the Internet should not be singled out for special taxation, for multiple taxation or for discriminatory taxation. 

It is important to get straight what the Internet Tax Freedom 

Act is and therefore what your bill, Senator McCain, which is coauthored by Senators Wyden, Abraham and Leahy, does when it 

extends that existing moratorium. Just 3 years ago, our purpose 

was to prevent tyranny of the parochial over the Internet, which 

is not just national in scope but global. There were already afoot 

a few years ago incipient efforts by some 30,000 potential taxing 

jurisdictions in this country alone to lay claim to a piece of the Net. 

There were news articles that talked to us about efforts by state 

and local governments to shake down the Net. People viewed this 

as a great cash cow that could be exploited, and perhaps exploited 

without notice. 

Internet access services were a big target. This was long before 

politicians grabbed the issue of the digital divide as something that 

they wanted to prevent; rather, governments were talking about 

actually taxing Internet access. Multiple taxation was a big concern. That is because the Internet’s very design, its packetswitched architecture made it especially vulnerable to taxation by 

multiple jurisdictions. And discriminatory taxation was also a real 

threat. 

Just a few years ago, many academics, governments in Europe, 

and even the United Nations were talking, for example, about a bit 

tax, something specially designed to prey upon electronic commerce. It would have taxed every single bit, every zero and one of 

digital information in cyberspace—literally an information tax. The 

Internet Tax Freedom Act, which you are talking about extending 

here today, stopped such multiple discriminatory and technologically targeted taxation. That is exactly what it did. 

It ensured that the Internet is not caught up in this tyranny, the 

parochial and 30,000 taxing jurisdictions. 

What it did not do is protect Internet transactions from sales tax. 

That is an important issue that many people on this Committee 

that Governor Leavitt, many people across the country wished to 

discuss. That is not what this legislation is about. This legislation 

15

is about protecting the Internet from discriminatory taxation. The 

two are very, very different. The Internet Tax Freedom Act does 

not create a preference for electronic commerce over bricks and 

mortar. The existing tax moratorium that this Committee helped 

write does not even mention sales taxes. 

It stops multiple and discriminatory taxes on products ordered 

over the Internet, but it does not bar taxation of Internet commerce 

by state and local government. So whatever disagreements there 

might be on other aspects of this question, on sales tax, for example, on nexus, on physical presence, on the Supreme Court’s decisions, there ought to be as a starting point agreement on this principle of Internet nondiscrimination. 

As we all know, the version of the Internet Tax Freedom Act that 

became law lasts only 3 years. That is why this legislation is important. The temporary nature of the moratorium was something 

that many of us thought was an important compromise because it 

would give us a chance to see what happened, and as Senator 

Wyden pointed out in his opening statements, there were concerns 

that we were going to sail off the edge of the earth, that everything 

would fall apart, that there would be a big falloff in revenues. That 

did not happen. As we meet here today, not only is it true, as Senator Breaux said, that of course the economy is doing well and tax 

collections are up, but I think most economists are willing to tell 

us that the reason we are enjoying this prosperity is the new economy. 

We have it to thank for the Federal Government, for state governments and for local governments being awash in new tax revenues so far from the cataclysm in tax collections that was predicted 

by preventing discrimination against the Internet, and that is what 

this Committee did. We have protected and promoted the collection 

of taxes by state and local governments and by the Federal Government. 

Brick and mortar sales are not down. They are up. And they are 

way up. The International Council of Shopping Centers reports 

that 1999 holiday sales the most recent holiday season were up 8 

percent. Now, 8 percent growth in a mature industry that is enormously bigger than e-commerce is quite spectacular. The Internet 

has helped traditional retailers expand beyond Main Street to sell 

to new markets. Tax collections by state and local governments in 

part and consequence of this explosion in traditional commerce are 

also way up. 

In my state of California, sales tax collections 1999 versus 1998 

are up 11 percent, and for the fourth quarter they are up 20 percent. The growth in Internet commerce and taxable sales has fattened state budgets, which ended fiscal 1999 with a combined 35 

billion dollars in state surpluses, and the Federal Government is 

a big beneficiary of this as well, even though we collect no sales 

taxes. Total Federal tax collections as a result of the economic 

growth spurred by this new economy were up 118 billion dollars in 

1999 over 1998. 

So I think the facts are in. We have learned from this moratorium. The results are conclusive. The new economy is generating 

tremendous new revenue. The current tax policy is working, and it 

ought to be extended. It is working not only for States, not only for 

16

the Federal Government, but for counties and for cities whose 

power to tax has been protected by this legislation, but the national 

interest at the same time has also been protected and the global 

interest in this new medium exchange has also been protected. 

I would like to conclude with a brief anecdote, if I might. About 

a century-and-a-half ago Michael Faraday became world renowned 

for his invention of the first electric motor, the Dynamo. He did 

this by rotating a current-bearing wire around a magnet. His invention came to the attention of King William IV, and he got an 

audience with the King, and Faraday described and demonstrated 

his invention, upon which the King said to him, ‘‘This is interesting, but of what use is it?’’ And Faraday replied, ‘‘Only time will 

tell; but of this I am certain: some day, sir, you will tax it.’’ We are 

here today to discuss new ways to tax Faraday’s invention. 

I hope that this Committee will be wise in exercising that responsibility because the art of taxation has been compared wisely, 

I think, to plucking a goose. The object is to get the most amount 

of feathers with the least amount of squawking. If we want to protect this extraordinary expansion in federal and state and local revenues that we are experiencing, we would be wise to tread lightly 

in this area. I want to thank the Committee for your patience and 

your interest and your attention to this issue. 

[The prepared statement of Mr. Cox follows:]

PREPARED STATEMENT OF HON. CHRISTOPHER COX, U.S. REPRESENTATIVE FROM CALIFORNIA

Thank you for allowing me to testify this morning on our common interest in protecting the digital economy—and the tax revenues it generates for federal, state, 

and local government budgets—from special taxation. 

I’m here today to deliver my strong support for S. 2255, the legislation introduced 

by Chairman McCain, and sponsored by Senators Ron Wyden, Spence Abraham, 

and Pat Leahy to extend the moratorium on new, multiple, and discriminatory 

Internet taxes. 

In the House, we hope to bring similar legislation to the floor of the House before 

Memorial Day. 

I’m pleased to be back before the Commerce Committee, which three years ago 

held the first-ever Congressional hearing on the issue of Internet taxation. At the 

time, our purpose was to nip in the bud the incipient efforts of some 30,000 taxing 

jurisdictions to lay claim to a piece of the Internet. Back then, this was a very real 

threat. News magazines warned that tax collectors around the country were looking 

to ‘‘shake down the Net.’’

• Internet access services were a big target for taxes, as more and more Americans were connecting to the Internet.

• Multiple taxation was a big concern, given that the Internet’s very design—its 

decentralized nature—makes Internet transmissions vulnerable to taxation by 

different jurisdictions.

• Discriminatory taxation was a real threat, too, as a number of academics were 

promoting the ‘‘bit tax,’’ a tax system designed to burden only electronic commerce.

The Internet Tax Freedom Act stopped these special types of taxes, and ensured 

that the Internet would not be caught up in an inconsistent patchwork of taxes by 

the United States’ 30,000 taxing jurisdictions. 

The final tax moratorium that this Committee helped write does not overreach. 

It stops new taxes on Internet access, and multiple and discriminatory taxes on 

products ordered over the Internet—but does not bar all Internet taxes. This fundamental structure is ideally suited to become a long-term—if not permanent—policy. 

Whatever disagreements there might be on other aspects of the Internet tax debate, 

surely we can all agree—as a starting point—that the Internet should not be subject 

to new, multiple, or discriminatory taxes. 

17

This principle makes sense independent of whatever rules Congress or the U.S. 

Supreme Court may adopt on ‘‘nexus’’—whether we have the existing physical-presence rule, as outlined in the 1967 Bellas Hess case and the 1992 Quill case, or some 

new rule. Whatever the standard, surely there is agreement that all sellers should 

be subject to the same standard. None of us wants a regime that subjects the same 

seller differently if he sells by catalog or over the Internet. 

As you all know, the version of the Internet Tax Freedom Act that became law 

lasts only three years—and then expires. The temporary nature of the moratorium 

was something that many of us accepted out of respect for the concerns of state and 

local government leaders, who issued dire warnings about the effect the bill might 

have on their budgets. But now, as we have reached the half-way point of the moratorium, the data is rolling in about the real effects that the moratorium has had:

• Internet sales are up, way up. For the 1999 holiday season alone, Americans 

bought $10 billion worth of goods over the Internet.

• ‘‘Brick and mortar’’ sales are up, too. The International Council of Shopping 

Centers reports that 1999 holiday sales at shopping malls were up 8 percent 

over 1998. The Internet has also helped traditional retailers expand beyond 

Main Street to sell to new markets.

• Taxes collected by state and local governments are up—way up. In my State 

of California, sales tax collections for 1999 were up a whopping 11 percent from 

1998.

• The growth in Internet commerce and taxable sales has fattened state budgets, 

which ended fiscal 1999 with a combined $35 billion in surpluses.

• The federal government has benefited, too: Total federal tax collections grew by 

$118 billion from 1998 to 1999.

The facts are in, and conclusively so: the Internet economy—the ‘‘new economy’’—

is generating tremendous tax revenue for federal, state, and local governments. The 

Internet is opening up new markets for Main Street businesses and contributing to 

new jobs, better wages, and a stronger economy—all of which boost tax receipts. 

These are signs that the current tax policy is working—not only for consumers, 

but also for states, counties, and cities whose power to tax has been modestly constrained by the Internet Tax Freedom Act. Every level of government has a stake 

in ensuring that the Internet will continue to propel the new economy that is contributing to record tax receipts at every level of government.

I’d like to conclude with a brief anecdote:

More than a century and a half ago, Michael Faraday invented the first electric 

motor—the Dynamo—by rotating a current-bearing wire around a suspended 

magnet. He became so well known for this invention that, one day, he was granted an audience before King William IV. After Faraday described what he had 

developed, the King looked at him and asked: ‘‘But, after all, what use is it?’’

Faraday came back with a quick response. ‘‘Only time will tell, but of this I am 

certain: Someday, sir, you will tax it.’’

Developing new taxes for new technologies need not be an irresistible temptation. 

I commend the Chairman and the members of this Committee for their interest in 

showing that the government can indeed learn the lessons of the past, and that we 

can protect new technology—and the new economy—from the very real dangers of 

predatory taxation.

Senator MCCAIN. Thank you very much, Congressman Cox. 

Governor Leavitt, welcome. 

STATEMENT OF HON. MICHAEL LEAVITT,

GOVERNOR OF THE STATE OF UTAH 

Governor LEAVITT. Just one housekeeping item. The testimony 

that I submitted to the Committee—as I reviewed the formal testimony, I recognized that a portion of that testimony was, had drawn 

not directly from my words, but from a group of words that were 

part of the Advisory Commission on E-commerce, and I would just 

like to acknowledge that, and I will submit a correction so that it 

is clear. 

18

I would like to begin by just echoing what I have heard around 

the room today, and that is the Internet is the most powerful force 

of expansion that this planet has ever known economically. I would 

like to acknowledge the fact that Congressman Cox and I did work 

long hours and that the Internet Tax Freedom Act was a bill that 

I supported and that the Governors supported. We believed fervently then, and do now, that there should be no bit tax, there 

should be no, there should be no bandwidth tax, no access tax, no 

multiple tax, no discriminatory tax. The Internet simply should not 

be inhibited in any way by tax policy on its growth. 

This debate, I believe, will focus really around three issues. The 

first is what should the relationship be between the state and the 

national government? Who ought to be making decisions on this 

and important issues related to education and roads and schools 

and how does the Internet change that? 

Second, is the sales tax going to be a viable tool in the 21st century? It might not be. We might find out that because of the nature 

and changes that occur in the way we transact business, that it 

may not be viable. I would suggest unless we make some substantial changes, it probably will not be, and we need to begin to think 

about what the consequences would be and are we prepared to accept them? 

The third issue is if we are to have a sales tax, will we adopt 

the philosophy that will create a level playing field where all sellers and all buyers are treated the same, or will we adopt the philosophy that says we are going to grant a special privilege to certain segments of our economy not to have to contribute to our 

schools or roads or law enforcement? As Congressman Cox pointed 

out, the existing moratorium is something that had my support and 

continues to have my support. 

It is, at the proper time I would be very optimistic and pleased 

to see it extended. We still have 18 months left on the moratorium. 

There are a lot of things that have changed even since we enacted 

the first moratorium, the whole area of telephony, how we are 

going to deal with that. Many of those issues are just now emerging and the next 18 months will be an important time for us to be 

able to analyze those, but I would be very optimistic and willing 

to see it extended. 

I would like to comment briefly, Mr. Chairman, on the Advisory 

Commission on Electronic Commerce. As was pointed out, we were 

not able to achieve the two-thirds that was required in order to put 

forward a report. A report is being advanced, but it did not require 

the—did not attain the statutory requirement. I feel some disappointment in reporting what I believe to be a lack of success—

unnecessarily—in the Commision’s efforts. We were so close, so 

close to what I think could have been a powerful statement of direction and recommendation to the Congress. 

I would like to review with you the things on which we had virtual agreement. Out of 10 major areas, we had expressive agreement on eight. We simply had disagreement on two, and I would 

like to highlight both the agreements and the disagreements. 

The first was our general acknowledgment of the power of this 

engine of economic expansion and that we ought to do nothing to 

inhibit it. We all agreed on that. 

19

* The information referred to has been retained in the Committee files. 

The second was that there should be no discriminatory taxes, no 

new taxes placed on the Internet. All agreed. Both those who voted 

in the majority and those who were not voting on the side of the 

majority. We agreed in our first meeting, 15 out of 19 commissioners, that the ultimate goal needed to be a level playing field. 

We also agreed that unless we had radical simplification, harmonization of the existing system, that it simply would not work in the 

21st century. The current system is a mess and if it is not fixed 

it will not be compatible with the economy of the 21st century. 

We agreed that the telecommunications industry was dramatically overtaxed as an industry, and that the tax system we had was 

far too complex and needed to be simplified. We agreed that these 

should all be revenue neutral that we were not in any way attempting to impose requirements on the Internet that would make 

it a tax collection vehicle, that anything we do should be revenue 

neutral. We also agreed that it should be zero burden to the seller, 

that if we did not meet the requirement of being able to essentially 

make this a zero burden to those who have to use the Internet as 

a collection means that it, that the sales tax likely would not be 

a viable vehicle in the 21st century. 

We agreed that there needed to be protection for small firms that 

the tender chutes of Congress that are coming up to the soil ought 

to receive some special protection perhaps in the form of some sort 

of a de minimis rule where small firms would not have to be burdened in any way, but that once they reach a certain point, that 

in fact we ought to go, they ought to become full citizens and meet 

the requirements of corporate citizenship. 

Now, where are the areas in which we did not agree? There were 

two. First, that the national government should preempt the capacity of state and local governments to control their own tax policy. 

The report clearly indicated that they should. We disagree with 

that. And second of all, that there should be some form of special 

tax privileges granted. We believe in a level playing field, so those 

are the only two areas in which there was disagreement. 

Now Mr. Chairman, I would like to submit for the record today 

a letter from 40 Governors in this country asking that the conclusions of the report be rejected. Given the fact that they clearly call 

for preemptions of state authority, and second of all that they 

would not create a level playing field. I would also like to submit 

a letter from 170 of the country’s most respected academic tax experts, who indicate that there is no rational basis to pursue a tax 

policy that does not include as its foundation a level playing field, 

and I would like to submit, if you would allow it, a copy of a report 

drafted by a minority on the commission. 

Where do we go from here? 

Senator MCCAIN. Without objection, all those documents will be 

included in the record.* 

Governor LEAVITT. Thank you, Mr. Chairman. The States are 

pursuing actively and aggressively through the Uniform Commission on State Laws the creation of a model state law that would 

standardize, harmonize and modernize the sales tax system. It 

would be our hope that in the next 2 years we can come to ConVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00023 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
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gress and ask them to authorize the creation of an interstate compact that States would have the option of moving into or facing certain privileges that would not be accorded them. We also believe 

that this can lead us, this is a pathway to a level playing field. 

Mr. Chairman, I would like to just conclude today by making reference to a piece of legislation that the President recently signed 

that came from you as the Chairman. I think it is a tribute to your 

leadership and that is the Airport Investment and Reform Act of 

the 21st century. I would like to say in particular there is one thing 

I like as a fellow Westerner who has to travel from the west and 

endure that 1-hour drive from Dulles Airport, thank you for the 

flights going into National. That will be great. 

Senator MCCAIN. Thank you very much. 

Governor LEAVITT. That will be a great benefit to many of us. 

But the legislation also clearly included an increase on sales taxes 

collected over the Internet. The taxes, it would have been a terrible 

imbalance if it had not. There was not a single senator who 

stepped up to offer an amendment that would have changed that. 

It would have dramatically reduced the mechanism for collecting 

funds that go to improve airports that we all depend on. I can just 

imagine the fuss that would have been caused if suddenly state legislatures started passing laws saying you cannot collect taxes on 

the Internet with respect to airport or to airline tickets. 

The Congress would have rushed to the Supreme Court saying 

that is a violation of interstate commerce and they would have 

been right. They would have said you are not allowing us to collect 

the dollars that are necessary from the proper people who are 

using it to pay for those services. It would have been seen as antiInternet. It would be seen as—if the States were saying it is antiInternet and pro-tax to be doing that, then I would like to suggest 

we are talking about the sales tax in the same way. 

This boils down to just a couple of things. One, nobody likes 

taxes, but if we are going to have them they at least ought to be 

fair; and, second, a question of whether or not the sales tax is going 

to be a viable tool in the 21st century. If it is not, we need to begin 

to look at what the alternatives are. They are very clearly more income taxes and property taxes—something that I do not believe the 

people in this country are prepared to accept. And the third, where 

are we going to control basic decisions about our schools and roads 

and law enforcement? Those are traditionally and very clearly local 

prerogatives and best managed at the local level, and this issue 

very much reflects the question of whether or not local communities will continue to be able to do so. Thank you, Mr. Chairman. 

[The prepared statement of Governor Leavitt follows:]

PREPARED STATEMENT OF HON. MICHAEL LEAVITT, GOVERNOR OF THE STATE OF UTAH

Mr. Chairman and members of the Committee, I am Michael Leavitt, Governor 

of Utah. I am here today not only as a member of the Advisory Commission on Electronic Commerce, but also on behalf of the National Governors’ Association. Thank 

you very much for the courtesy that’s been extended to me this morning. 

No other innovation—no other way of doing business—has revolutionized our nation’s economy faster than the Internet. It took generations for the Industrial Revolution to play out around the world. The Internet Revolution has unfolded before 

our eyes, in less than a decade. The speed of this change has been astounding. In 

the Industrial Age, as change took place, governments were able to react accordVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
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ingly. In the Internet Age, today’s innovation is tomorrow’s standard. Government 

must act on Internet time. 

Congress, as well as state and local governments, need to function in this new 

economy by facilitating its continued expansion. In one area, we have an opportunity, if unencumbered by the federal government, to do just that—to create a radically simplified and streamlined sales tax system that eliminates the burdens from 

our current horse and buggy system. 

And I believe we came close in the Commission to achieving a balanced approach, 

a fair approach with a level playing field. I remain convinced that the states are 

already moving rapidly in the right direction, and I remain convinced that the high 

tech industry, the nation’s retailers, and states and local governments could reach 

consensus amongst ourselves. 

Any thoughtful discussion on e-commerce must include the following key issues:

1. The proper relationship between the federal government and the states on 

issues of taxation, and which levels of government ought to bear the responsibility 

for determining and financing the needs of their citizens and businesses; 

2. The necessity of keeping tax policy neutral so that neither traditional retailers nor remote sellers (catalog, Internet, or similar enterprises) are given an advantage based on tax policy; and 

3. The need to stop erosion of essential revenue streams that support education 

and other key public services at the local level.

Governors are vitally concerned about any action that could negatively affect the 

vast majority of retailers—most of them small businesses, by the way—as well as 

their employees in our states, and erode the revenue source most important to the 

provision of education, public safety, and transportation services to the American 

people and businesses. 

Extending the Moratorium 

On behalf of the National Governors’ Association, we oppose S. 2255, which would 

extend the provisions of the Internet Tax Freedom Act (ITFA) for an additional five 

years. Since the current moratorium does not expire until October of 2001, there is 

no compelling need to act at this time. This is particularly true since the technology 

is changing rapidly and creates substantial uncertainty with regard to unintended 

consequences. A rush to judgment on this matter could be detrimental to the Internet and electronic commerce industry, to Main Street America, as well as to state 

and local governments and all of our citizens who rely on government services every 

day. 

Some of the technology issues that create uncertainty with respect to impacts include:

• Bundled services;

• Discriminatory Tax Definition; and 

• Internet Telephony.

These issues have little or nothing to do with the sales tax collection issue that 

has dominated debate on extension of the ITFA. They are, instead, the result of the 

rapid pace of technological change and developments since the ITFA was originally 

enacted. We believe it is important to the Internet industry as well as state and 

local governments that you address these issues as part of any extension of the 

ITFA. Failure to address them is likely to mean that the ITFA does not meet the 

expectations of Congress. 

Future of the Sales Tax 

The Advisory Commission report very directly raises the issue of the future of the 

sales tax in our country—the single most important source of revenue in America 

for public education, and which level of government ought to be responsible for determining and meeting the education, public safety, transportation, and infrastructure needs of our citizens. The central issue between the states and federal government as it relates to e-commerce is not about new taxes on the Internet, but rather 

how the states will collect taxes already on the books, and whether states will remain sovereign in their right to collect those taxes. 

In Utah and other states, we strongly oppose any new taxes on the Internet. We 

should not seek to enrich our state or federal coffers with new taxes just because 

of new technology and new methods of delivering goods. 

There is no more fundamental responsibility for any of us elected to office than 

to that of representing our respective constituents and taxpayers. The concept of reciprocal immunity is an inherent part of our federal system, consistent with the 

basic sovereignty states retain under the 10th Amendment to the Constitution. For 

22

decades the states have had the authority to enact and modify sales tax laws and 

their complement use tax laws. Use tax laws have been effectively enforced for decades as it relates to business purchases. 

The ACEC report asking Congress to impose unfounded mandates on states and local governments in excess of $30 billion annually through the preemption of existing taxes and creation of special privileges for certain kinds of companies through 

changes in state and local income, business activity, property, and sales and use 

taxes simply boggles any concept of our appropriate responsibilities to our respective 

citizens. 

Is it possible that the federal government will override long-standing state policies 

in each of these areas that vary so dynamically from one state to the next? Once 

successful in this regard, will we see additional actions of the federal government? 

Will the federal government declare that income taxes can no longer be applied to 

the software engineers who build the websites involved? Will dot.com firms’ ware- houses be exempted from property taxes by action of the federal government? 

Such an action would clearly violate the sovereignty of the states to enact and 

enforce sales and use taxes. 

Imagine where that slippery slope leads in the years ahead—congressional tax 

cuts imposed by eliminating state taxes! The taste of enacting tax cuts that don’t 

reduce federal revenue could, of course, easily prove to be addictive. What about the 

elimination of state use tax on equipment necessary to reduce environmental emissions? Why not override states authority to tax diesel fuel that is used to transport 

goods across state lines? How about an end to income taxes for teachers? Or firemen? The opportunity for mischief is unlimited. 

Only with state action to efficiently collect existing taxes will our traditional 

main-street retailers compete with the new world of e-commerce on a level playing 

field, and will our funding base for critical services be preserved for the years to 

come. 

There is no question that the federal government has the right to regulate interstate commerce. But it would be virtually unprecedented for the federal government 

to stomp on the most basic rights of the citizens and taxpayers of each and every 

state by determining how they may or may not raise revenues. 

Creating a Level Playing Field 

Any action taken by this Committee should guarantee assistance towards achieving a streamlined sales tax system for the 21st century, a level playing field for all 

businesses, and no special privileges. In the face of the impending transformation 

of retail shopping, government tax policy must remain neutral. It is not the time 

to have government tilt competitive forces in favor of either traditional retailers or 

emerging electronic retailers. Unfortunately, without the states effective enforcement of our current laws—and with the passage of proposals like that proposed by 

the Commission—such government-sponsored special privileges will result. 

We nineteen members of the Advisory Commission on Electronic Commerce 

(ACEC) gathered research, hearing and reviewing testimony from interested parties, 

sifting through proposals and debating varying perspectives; all in an attempt to 

form the basis of a balanced recommendation that addresses the most pressing 

issues raised by all parties and therefore could garner the requisite support of the 

Commission necessary to make a formal recommendation to Congress. We did not 

succeed. 

Throughout the process some broadly held general views emerged and deserve to 

be articulated. They are the core concepts upon which any federal policies should 

be based. 

Clearly our main task was intended to be the issue of the collection of taxes on 

remote sales over the Internet. We encountered a great degree of confusion about 

the current state of play in this area. The current rules for remote sales tax collection are guided primarily by the set of interpretations and practices emanating from 

the U.S. Supreme Court Quill decision, which essentially said that remote sellers 

are not responsible for collecting sales taxes for taxing jurisdictions where they do 

not have physical nexus. We have lived with this construct for decades and it has 

guided the tax policy of direct merchants and catalogue sellers for years. The reality 

is that sales taxes apply to electronic commerce conducted over the Internet and any 

seller that has nexus with a taxing jurisdiction is required to collect and remit such 

taxes today. 

So why the current great debate? Today there is a view that the world is largely 

made up of electronic commerce companies and traditional brick and mortar companies. Inevitably, however, somewhere down the road, in 3, 5 or 10 years, take your 

pick, commerce will be intertwined with the cyberspace and physical worlds will 

merge and interact to meet the increasing demands of consumers. ‘‘Bricks and morVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00026 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
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tar’’ retailers will pour millions into their online shopping offerings as they morph 

into ‘‘clicks and mortar’’ retailers. Clients will browse at home and order direct or 

head down to the store to ‘‘feel the fabric’’ or ‘‘swing the golf club.’’ Remote sellers 

will have contracts with local providers (who may or may not be legally affiliated 

entities) to provide service or accept returns. 

In a world like this, if remote sales over the Internet are taxed differently than 

intrastate sales we will have a system based upon a tangle of legal maneuvering that 

will create separations between local merchant and their Internet counterparts and 

a playing field that will be viewed as inherently unfair. Such unfairness, if left to 

fester, will bring contempt and non-compliance. It is hard to argue with the need for 

an enormous simplification of state and local sales taxes that can pave the way toward a level playing field that does not discriminate between methods of access.

In reality, of course, taxes on remote sales are already due. They are called use 

taxes and the obligation falls on the consumers to calculate and pay them. While 

they exist in most states, with respect to individual consumers they are collected 

more by exception than by the rule. So while any new system that implements a 

way to collect remote sales taxes would not increase the theoretical taxes on the 

books of government, it would undoubtedly lead to increased revenues collected. 

This raises its own issues. 

I am pleased to report to you this morning that we, the states, have already 

achieved substantial progress in moving to radically simplify state and local sales 

taxes. For those of you that remember the efforts of former President Reagan, Senator Packwood, and Rep. Rostenkowski; you can well understand and appreciate the 

challenge we have undertaken. I can report to you that substantial progress was 

made as 26 states gathered in a cooperative effort in Denver, Colorado on March 

30–31, 2000, to continue discussions focusing on the implementation of a revolutionary streamlined sales and use tax system. The Streamlined Sales Tax System 

Project is a comprehensive undertaking in direct response to the widespread call for 

simplifying the sales tax. The states have enthusiastically embraced this unique opportunity to attain the fundamental simplification measures needed to maintain a 

viable sales tax system. 

The states embarked on this mission in September 1999, by initiating discussions 

to develop and implement a simplified sales tax system. Two subsequent meetings 

were held prior to this most recent Denver meeting and continuing discussions are 

being conducted to resolve integrating the design elements of the new system. It is 

anticipated that a pilot project of the new system will be in place in Fall 2000. 

Work Groups were established and charged with addressing a multitude of issues 

essential to successfully implementing the new system. The Work Groups are:

• Paying for the System, Technology, Audit, and Privacy Issues;

• Sourcing and Other Simplification Issues;

• Tax Rate, Registration, Returns, and Other Remittances; and

• Tax Base and Exemption Processing.

Several key issues received attention from the Work Groups, including:

• Ensuring that the use of technology does not breach the basic tenets of consumer privacy while simultaneously establishing a new benchmark of security 

measures designed to preserve the integrity of transactions;

• Developing straight-forward sourcing rules that can be easily implemented and 

adapted to an electronic environment;

• Implementing the use of existing technology that provides for the accurate mapping of tax rates to the appropriate taxing jurisdiction;

• Consideration of one local use tax rate for remote sellers and exploration of the 

available technology that will facilitate the administration of multiple tax rates; 

and

• Drafting uniform definitions, standardizing exemption processing procedures for 

use- and entity-based exemptions, and arranging for the use of a product coding 

mechanism that will provide a bridge between the tax base and the use of technology.

The Project States seek the input of both public and private sector groups, in addition to those companies and individuals willing to provide technical assistance to 

the Work Groups. A public comment period will be provided at each Project Meeting 

during which interested parties may comment on the Project’s design initiatives and 

accompanying issues with the Project States. 

24

Electronic commerce is growing exponentially and only if we start the process 

today of developing a tax system that contemplates the burdens the new economy 

will place on our existing structures will we be prepared to face the challenge. 

The burden and responsibility of reform lies with the state and local governments. 

Clearly, any tax system must not disproportionately burden remote sellers. However, if a system can be established that equates the burden of inter- and intrastate 

sellers, a level playing field could exist. Finally, in designing a process to produce 

this system, we, as Commissioners, recognized that while there is a national interest in creating an environment that fosters growth of electronic commerce and ensuring any taxing system does not unduly burden interstate commerce, we also recognize the need to be mindful of the sovereignty of state and local officials in setting 

policies for their electorate. 

Closing 

Last week, Congress sent the President the Airport Investment and Reform Act 

for the 21st century. That legislation is a tribute to you, Mr. Chairman, and the 

members of this Committee. It is another important step to deal with not only critical safety issues, but also expanding the nation’s ability to compete globally in this 

new economy. 

The new legislation provides for an increase in taxes on the Internet. Not a single 

member of the House or Senate offered an amendment to exempt airline tickets purchased over the Internet from this tax increase. I believe we all understand how 

self-defeating such an amendment or policy would have been. It would have been 

terribly imbalanced. It would have sanctioned a double standard. And it most certainly would have led to significant erosion of the very funds this Committee has 

made such a leadership effort to ensure are available to meet the nation’s needs. 

Let us be clear. No Governor is looking to tax the Internet, any more than any 

Senator is trying to impose a special, discriminatory tax on the Internet. 

The states’ sales and use taxes are existing taxes, not new taxes. 

All we are asking is to keep the right we now have as a state to determine our 

own revenue policies under the laws the people of our state have adopted and we 

are elected to implement. Most of these sales and use taxes have been in place for 

at least 50 years. 

The largest revenue collections in the nation, even in the income tax states, are 

through state sales taxes. If Congress overrides states’ tax policies by cutting our 

tax base, it will fundamentally upset both the states’ and the nation’s capacity to 

provide critical services to the people. The sales and use tax revenues belong to people and taxpayers of the states, not the federal government. 

Finally, if we gravitate towards a tax system that creates a specific loophole for 

retailers that use the Internet, we risk creation of a federal policy that favors Internet vendors at the expense of Main Street stores and home-town merchants. We 

cannot adopt a tax policy in America that assists in harming traditional Main Street 

retailers. 

Thank you for the opportunity you’ve given me to testify, Mr. Chairman.

25

FACTS AND FIGURES

States rely heavily on sales taxes to provide essential public services.


412leav1.eps 412leav2.eps
26

Senator MCCAIN. Thank you very much, Governor Leavitt. The 

moratorium runs out in about 16 months. Do you have some confidence that this model state law can be agreed upon in that period 

of time? 

Governor LEAVITT. I feel very confident that we are going to be 

able to have the model legislation developed before the Congress 

for the authorization of an interstate compact. Now, if sufficient 

progress has not been made by that time, then I think the Congress clearly ought to make a decision based in that framework. It 

may be that we will get to that point and conclude that a lot of 

progress has been made and at that point we would extend the 

moratorium. I would be in support of that. 

Senator MCCAIN. I believe you stated that you supported the 

first moratorium, is that correct? 

Governor LEAVITT. I did in fact. Yes. 

Senator MCCAIN. We received letters from the National Governors’ Association and many Governors. Did you weigh in at that 

time? 

Governor LEAVITT. I think Congressman Cox had recognized in 

fact we did. We had grave concern about the first version of the 

moratorium which very clearly, very clearly would have ended local 

control of the sales tax as we know it today. Gratefully, substantial 

changes were made. We became not just supportive, not just comfortable with the moratorium, but supportive of it. 

Senator MCCAIN. It seems to me your model would apply one 

rate of sales tax to Internet transactions and a different rate to 

local in-person transactions. Is that correct? 

Governor LEAVITT. Not necessarily. 

Senator MCCAIN. Not necessarily? 

Governor LEAVITT. No. We are interested in coming up with a 

level playing field. 

Senator MCCAIN. And every state in America is going to adopt 

that same model. Please, Governor. 

Governor LEAVITT. There are many, Senator, there are many instances where that has occurred already. The fuel tax is one example. We have a model already where each state collects, and there 

is a process through which the States have cooperated. This is an 

issue that the States have grave interest in and it is very clear to 

me that when the interstate compact goes on the table that there 

is going to have to be incentives for the States to do it, some of 

them positive, some of them negative. If the States do not, Mr. 

Chairman, then I believe the Congress should, but the States in 

fact I believe will act and just need some time to pull this together. 

This is a problem that the States have to solve. 

Senator MCCAIN. What progress have the States made in the 

area of taxation of mail order catalogue sales? 

Governor LEAVITT. The States—I would suggest the Congress has 

not made much progress in the collection. If the States were allowed, they would have done very well. 

Mr. COX. Mr. Chairman, I wonder if I might comment on this. 

I mentioned in my remarks that the Internet Tax Freedom Act 

itself does not address sales taxes. Any concerns about the collection of sales taxes or the counterpart to sales taxes, use taxes, are 

a function not of the Internet Tax Freedom Act, not of the existing 

27

moratorium, which only prevents new taxes and discriminatory 

taxes and multiple taxes, but remember the Supreme Court decisions. What those Supreme Court decisions have decided, first in 

1967 and then in 1992, can essentially be described in plain 

English as no taxation without representation. States have jurisdiction over the people who live there, and they can tax them. States 

do not have jurisdiction over people who do not live there, and they 

cannot tax them. 

Therefore, if someone is doing interstate commerce, they are subjecting themselves to tax by entering the state and what the Supreme Court has said is that if you mail something into the state, 

that is not enough. If you set up a business there and you have 

people there, well then that is different, and the principle of no taxation without representation is not violated if you are taxed. 

Are States left without recourse if they cannot collect a sales tax 

on a remote seller? Absolutely not. Every state in America that has 

a sales tax has a use tax which is identical in every respect, the 

same rate, the same application collected on the same transaction, 

so in economic effect it is exactly the same. States can tax the purchaser and the Internet, I submit, actually making this possible in 

ways that it was not before. 

Now, I am not a big fan of adding taxes to commerce, even sales 

taxes that support state and local governments, but that is not a 

matter of my personal predilection. As a matter of power, States 

ought to have that power and they do, but what we are being asked 

to do in Congress is to change that federalism, to change that Federal-state relation and expand the power of States to tax so that 

the principle of no taxation without representation would be violated. That would be a terrible thing, so I agree with Governor 

Leavitt that States ought to have jurisdiction over the people who 

live there and over the transactions that take place in that jurisdiction, but that means that all they need to do is tax the transaction 

in exactly the same way that otherwise they would if it occurs on 

the Internet by taxing the purchaser. That is the person over whom 

they have jurisdiction. The amount is the same as sales tax, it 

looks and feels the same as sales taxes. Nobody would know the 

difference. 

I am not encouraging the expansion of use taxes or use tax collection because I personally think it is nice to have a modest level 

of taxation. But as a matter of power, I cannot disagree with the 

Governor, States ought to have that power and they do, and Congress should not go any further and expand the power of States to 

collect taxes. 

Governor LEAVITT. Mr. Chairman, it is very clear to me, and I 

think to Governors and state and local officials that if we do not 

fix the existing tax system that the capacity to collect the sales tax 

will, will not be there in the future. E-commerce is growing at such 

a rate, and we are encouraging it, doing all we can to encourage 

it to grow. It is growing at such a rate that ultimately in order for 

people to be competitive, they are going to have to remain using 

e-commerce. And our purpose is simply to say this: set up a hurdle 

for us to meet. The hurdle is zero burden on sellers. 

If we cannot create a system where the burden is virtually zero 

on those who sell over the Internet, then it is likely that the sales 

28

tax is not a viable tool in the future because the field will no longer 

be level and those who ultimately sell with bricks and mortar will 

be so disadvantaged that ultimately we will be required by fairness 

and economic policy to eliminate the sales tax altogether and that 

may be where we want to go in this country, but if it is, we need 

to analyze what the consequences are. The Senator from Texas has 

indicated very clearly what they would be in Texas. 

Senator MCCAIN. Senator Burns? 

Senator BURNS. I am not next, am I? 

Senator MCCAIN. Yes, sir. 

Senator BURNS. I have one question, I guess, through this whole 

thing on what you agreed on and what you did not agree on. What 

do we do, Governor, with States who have no sales taxes and, I live 

in one of those States? 

Governor LEAVITT. We would simply, under the proposal we are 

making, we would simply have a standardized national system and 

Montana, which does not have a sales tax, would simply be able 

to say we do not impose it, we are not going to collect it, we would 

have a zero rate. It would have no impact on you. I will point out 

that the majority report that was issued by the Commission would 

have quite an impact on Montana because it would have interfered 

with your capacity to collect income and property taxes from certain vendors. It would have made the playing field unlevel in those 

areas, but it would have no impact on sales tax. 

Senator MCCAIN. Senator Wyden. 

Senator WYDEN. Both of you have been very helpful. Governor, 

let me start with you. There is not a word in the Internet Tax 

Freedom Act that prevents Utah or any other state from going on 

out today and improving its system of collecting sales and use 

taxes, and I think we agree on that. Governor Cellucci came and 

he told us the reason we do not do it is because there is too much 

political heat. I cannot track people down running from New 

Hampshire. 

Same is true in the State of Washington. My friend Senator Gorton is here. They could go out and collect these taxes that are 

owed. They do not do it because of the political heat. Now, you all 

have come forward with a proposal for simplifying taxes. I do not 

happen to think it is very workable. But I am anxious again to try 

to find common ground, and supposing we go forward with a markup in Committee next week that looks like this. 

We extend the moratorium on discriminatory taxes on the Internet. I would like to make it permanent. Maybe we say 5 years. We 

will work with you on the time. But we also say we direct NUCSL 

or one of the other groups involved in the state and local tax area 

to work with the Governors and the mayors and the cities on the 

proposal for tax simplification, and we would commit to giving you 

all a vote within say 180 days of the time NUCSL comes forward 

with the recommendation so that that way we could have a debate 

about whether it is actually workable. I do not think you all have 

come up with something that is workable yet. 

Maybe there is a technological fix out there that would not impose any burdens on remote sellers. But supposing we went to a 

markup next week with those two provisions at the heart of the 

legislation—an extension of the moratorium on discriminatory 

29

taxes on e-commerce, and by the way, Governor Engler came to another Committee and told me he would support a permanent ban 

on discriminatory taxes on e-commerce. We have that on the 

record. We would make that the first provision of the bill, but then 

we would direct NCSL or some other group that you all feel comfortable with to go forward with their tax simplification proposal, 

and the Congress commits to giving you an up-or-down vote after 

we have the hearings and look at whether it is workable and we 

pass legislation out of this Committee in the next few weeks, what 

is your reaction to that? 

Governor LEAVITT. Senator, as you know, I did support and continue to support moratoriums on discriminatory taxes on the Internet. We have 18 months left on the existing moratorium. We are 

very anxious to bring to Congress model legislation having been developed by NCSL that could form the basis of an interstate compact. That interstate compact would be the solution put forward 

that you are looking for. 

I am the first to tell you if we cannot come up with that system 

not only do I believe we will not be able to collect a remote sales 

tax, I believe within a period of three to five to seven years that 

the sales tax as we know it will no longer be a viable tool. The 

point is the States have an enormous incentive to get this fixed. 

Now, with—we need to put the fix up. The States need to put the 

fix up. And if we cannot, then we need to get on with the analysis 

of the alternatives. This is clearly on the plate of the States and 

local governments. If we cannot fix this system, and it is a mess, 

then the sales tax as we know it will not be a viable tool in the 

21st century. 

Senator WYDEN. So what would be wrong with our moving forward with what I proposed? You all have already said that you are 

not for discriminatory taxes on e-commerce, so that would be the 

first plank and second, we would commit to giving you all a vote. 

You would get the vote that you wanted in the Congress on your 

proposal. What would be wrong with going forward with that? 

Governor LEAVITT. We went down that road before, and we became buried with it. I think no one knows better at this table that 

part of the moratorium was the incentives that it created for everyone to come to the table and solve the problem. It also became very 

clear that the insurance of a vote could not be enforced under Senate rules, and certainly in the House, and it was far too complex 

to be able to see that as the solution. What we are proposing is we 

want to have a couple of years to bring back a solution. If we cannot, our world is not going to——

Senator WYDEN. Governor, we can write in a law a fast-track 

process that commits to a vote, and I guess what troubles me is I 

am trying to reach out and extend the olive branch. You all were 

proven wrong in 1997, and it was not just before the bill that you 

all predicted all of these problems. There has been a drumbeat ever 

since the enactment of the law about how this is going to erode all 

these revenue bases. I cannot find one state, not one in America, 

that has seen its sales tax base eroded as a result of the Internet 

Tax Freedom Act, and your reluctance to go along with something 

that I think is at least trying to meet you halfway is an indication 

30

that what you all really want, the real goal here is frankly to let 

the moratorium expire. 

Then we will let all these jurisdictions go out and start doing 

their own thing and to me, that undermines your view that you all 

really are committed to a nondiscriminatory approach on e-commerce. So I hope that you will work with us on this because I think 

that Chairman McCain and I and others on both sides of the aisle 

would like to find common ground, but we are not going to let you 

be like grease going through a goose, subject these out-of-state remote sellers to new, what appear to be, bureaucratic requirements 

for collecting taxes without our having at least a chance to examine 

it and what I am offering to you I think shows a reasonable common ground position that I hope you look at. 

Governor LEAVITT. Senator, let me respond. First of all, we are 

sincere and were sincere in our support in the, in support of the 

moratorium. We will continue to do so, but I think it is important 

that we recognize that when we started talking about a moratorium in 1997, it was not the same moratorium we are talking about 

today. Period. And it would have had every consequence that was 

pointed out by state and local government then and it would now. 

This is a good economy. The States have had an average increase 

in the growth of their tax revenues of 5.2 percent. 

The Federal government, I might add, has had one of 7.7 percent 

during that exact same period. I pointed out earlier that Members 

of the Congress and the President supported the bill I suggested 

on national airports. It included a clear increase in Internet taxation. I didn’t see a single United States Senator stand up and say 

let us not tax the Internet on this one because you needed the revenue and you wanted to have a system that was balanced and provided a level playing field. That is all we are asking for here. Give 

us a chance to fix a system that is dramatically broken and that 

will not be compatible with the 21st century. 

We are reaching out saying we’ll bring the solution to the table. 

If we can’t, let us all recognize we have to get on to the next option, 

which is property tax and income tax. 

Senator WYDEN. I just offered you a proposal that is in line with 

what you say you all support. That you say you are for a ban on 

discriminatory Internet taxes. That is what Governor Engler said. 

You said you would support an extension of the moratorium on 

Internet taxes. I have just offered you a proposal that is a middle 

ground and—— Senator MCCAIN. Senator Wyden. 

Senator WYDEN. Can I ask one additional question. 

Senator MCCAIN. Please make it brief. The other members—and 

we have another panel. 

Senator WYDEN. You have a seller 2500 miles from a local jurisdiction. They have no presence other than a website. They use no 

services, no water permits, plants, nothing. All they have is a 

website. How do you envision that person getting a fair shake 

under your proposal? 

Governor LEAVITT. First of all, the tax is not on the Internet seller. It is on the person who lives in the state who does use the roads 

and sewer and water. The issue is not whether or not the taxes are 

owed, but rather who do we place the burden on to collect it. If we 

31

put a burden on a new firm that does not have the capacity and 

sophistication to do it, that would be wrong and we ought to have 

a de minimis rule. 

Second, if we ultimately put any kind of a substantial burden on 

any business, be it K-Mart or Wal-Mart or any business, then the 

system will not work and if we cannot bring back a system that 

creates zero burden to those who have to collected it, we would 

have failed. It is going to be unviable in general on bricks and mortar because this country will not stand for the kind of unlevel playing field that would be created where you can go into a store and 

buy one thing and go to a kiosk outside the store and buy it on the 

Internet and have taxes collected on one and not the other. It will 

not work. 

Senator MCCAIN. Before I recognize Senator Gorton, sir, we have 

ample precedent for fast-track authority that requires a vote on an 

issue. You are incorrect in that response that we do not have that 

kind of authority. 

Senator Gorton. 

STATEMENT OF HON. SLADE GORTON,

U.S. SENATOR FROM WASHINGTON 

Senator GORTON. Thank you, Mr. Chairman. I suspect that this 

is an issue on which almost every member of this panel, if not 

every member, has made up his mind, and I would just like to 

make a couple of comments, one to my good friend Chris Cox. 

I argued cases like this in the Supreme Court, Congressman Cox, 

and it is not true to say that the Supreme Court rule is no taxation 

without representation. That is a total distortion of the Supreme 

Court decisions. We tax the people of the District of Columbia without representation. Senator Wyden’s state taxes my Washington 

residents without representation if they so much as cross over the 

state line in the course of doing any of their work. 

The decision of the Supreme Court is that there is no taxation 

without presence, which is quite different from representation. And 

they have determined that the catalogue seller in one state does 

not have a tax presence without Congress authorizing them to do 

so, which is why this issue is before us. It has also been very clear 

from the Supreme Court that it would, that it would regard an act 

of Congress as perfectly within our power over interstate commerce, and I think it is the implication of those decisions that we 

ought to do it, but in order to create the very fairness that Governor Leavitt is speaking about, I think we should be extremely 

cautious at setting policies for other people. 

Boy, is it easy for Congress to say that someone else should not 

impose a tax and that is what we are doing even, even with the 

moratorium, we are doing that. 

We are saying Congress should say someone else should impose 

a tax, but just yesterday we voted on whether Congress ought to 

impose a tax that we collect and we spend. We had a vote on 

whether or not we ought to temporarily suspend a 4 cent gasoline 

tax and we voted rather overwhelmingly against it. Why? Because 

members of the Senate got up and said we cannot do that. We will 

not be able to build roads if we do not continue to impose this tax, 

32

but evidently, we do not care whether or not States can fund 

schools. 

Now, in connection with what Senator Wyden had to say, of 

course the tax base has been eroded. It has been eroded to exactly 

the extent that sales take place without a sales or use tax being 

collected. We have States that are doing pretty well now and 

haven’t directly suffered as a result of it, but their tax base has 

been eroded. Presumably, in many of their cases, their sales taxes 

would be lower on everything if they had, if they had a broader 

base. And for anyone to say well, it is perfectly easy just to collect 

the use tax on the resident when it arrives, that has been the law 

in the United States in every state with the sales tax for 50 or 100 

years and you cannot for all practical purposes collect that use tax, 

except on an automobile or something that is so large that it has 

to be registered. 

In my view, which is different from some of the others in this 

connection, it is easy. Once a state has agreed that it is going to 

only impose a single rate of sales tax on all sales, there is no burden whatsoever in requiring the out-of-state seller to collect that 

from the buyer and submit it to the state. Personally, I think Governor Leavitt gives up too much in the argument that he makes to 

us here. But the answer to Senator Wyden is, those of us who believe in fair treatment, and I think the fairness to retail sellers is 

the overwhelming argument here, not to mention the proposition 

that we should not be determining state tax policies, the argument 

is overwhelming. If we have a vehicle that we can get a hearing 

on, we ought to use that vehicle. 

Governor Leavitt says it a little more politely than I do, but that 

is the beginning and the end of it and this is a fascinating hearing 

but I think members have made up their minds. In non-sales tax 

States like Oregon you are not losing a dime telling Washington 

that it cannot collect tax when someone sells something from Oregon into the State of Washington. It does not cost you a dime. 

Senator WYDEN. Would the gentleman yield? 

Senator GORTON. If I were the Senator from Oregon, I would 

take that point of view. Sure. 

Senator WYDEN. I am taking the position on the Internet Tax 

Freedom Act for the same reason I worked with you on the Y2K 

legislation. I thank the gentleman for yielding. 

Senator GORTON. I agree with that. We have a year and a half. 

If Governor Leavitt’s group does not come up with an answer a 

year from now, then we ought to extend it, but it is perfectly appropriate to vote on both of these closely related issues at the same 

time. I am sorry I was late. 

Senator MCCAIN. Thank you very much, Senator Gorton. Could 

I give both our witnesses a chance to respond to your comments. 

Representative COX. I very much appreciate that, because I 

think, Senator Gorton, that you and I agree on some big principles. 

Senator GORTON. We certainly do. 

Representative COX. That is the allocation of responsibilities between state and local governments. I come from Orange County, 

California which has more people than 17 States and no Senators 

and so every time we send our money to Washington we get shortchanged. We have to share our senators with 34 million others and 

33

we recognize, for example, when it comes to the gas tax, the 18.4 

cent per gallon tax on gasoline that we pay the Federal Government, that goes in the Highway Trust Fund and we have an expectancy that we are going to get Rhode Island’s. But good luck. 

Rhode Island has 1⁄3 fewer people than Orange County but gets 

more money than we do. 

Senator MCCAIN. I have some affection for Rhode Island. 

Representative COX. Particularly as a fiscal conservative and as 

a Republican and also as somebody who lives in a place that gets 

cheated by this Federal system on a daily basis. I do not want to 

send power, influence, and money to Washington. I want the county supervisors and States to have this authority. I strongly agree 

with you. The reason that I have co-authored the Internet Tax 

Freedom Act in the first place was that we have to recognize the 

possibility with the Internet of the tyranny and the parochial. 

There is too much of a good thing here. 

I want my local people involved, but I do not want the local city 

council in some neighboring state and all 50 States to be taking a 

piece of a transaction because electrons are running through their 

state. All we have done is put together legislation that bans discriminatory taxes, multiple taxes, new taxes and what is being said 

here this morning is that everybody agrees on that. Yet some people are willing to take this bill, which would simply keep in place 

the ban on multiple and discriminatory taxes, take it hostage and 

hold up support for what is right and what they agree is fair so 

that they get to vote on something else which is somewhat related. 

It is the same general topic as the Internet, but I don’t think 

that on the merits anybody can object to a ban on new taxes, technologically targeted taxes, multiple taxes, tell me everybody here is 

in favor of it. I have heard none. 

The Supreme Court is concerned. I think you recognize when I 

say no taxation without representation is what cities are about, 

that I don’t believe that that sentence is written into the constitution. Instead, those decisions were based upon Article 1 Section 8 

of the Constitution, the Interstate Commerce Clause and the earlier decision also on a separate ground, due process. But we have 

to ask ourselves why is that Interstate Commerce Clause in the 

Constitution? Why did the founders fear discrimination against one 

state? 

Senator MCCAIN. We wanted you to respond. 

Representative COX. They have good reason to do so. The essential genius of the Interstate Commerce Clause is that it gives the 

national government jurisdiction over preventing the tyranny of the 

parochial. That is all we are doing here, and that is a very important thing to uphold. I did not hear anything in any of the senators’ 

or Governor’s comments that we should somehow discriminate 

against electronic commerce. The Internet Non-Discrimination Act 

moving forward in the House, which is essentially the same as Senator McCain’s bill that many of you sponsored, does that. I think 

because these issues are coming up in 18 months, we ought to take 

a look at and not confuse them. 

Senator MCCAIN. Governor Leavitt. 

Governor LEAVITT. The Supreme Court very simply said you 

can’t expect 7500 taxing jurisdictions to respond and people to reVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00037 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
34

spond to all of them. They said either you bring back a system that 

has zero burden on sellers or we are going to impose a limit on 

your ability to do that, and what we are proposing to do is figure 

out that system, and if we cannot, it is clear we will continue to 

suffer the same problem. 

I would like to comment on one point that you made related to 

Senator Wyden’s comments. Let me begin by expressing a story. 

My mother is the grandmother of 29 grandchildren and on a December morning last year she came to my home on her way to the 

mall, and it was snowing, and she knew the crowds were going to 

be there and I said why do you not do it on the Internet. 

She had never shopped on the Internet. We sat down for an hour 

and a half and she bought a gift for all 29 of her grandchildren and 

not only—she was thrilled. She did not have to fight the crowds. 

She did not have to—and then they packaged them for her and 

mailed them to her grandchildren and she was done. Now, I kept 

track as we went through that just because of my own curiosity to 

make sure my mother paid her use tax. There was 2,400 dollars 

spent that day and all but 400 dollars of it was not subject to taxation. 400 of it was because they had nexus in the state. Now, my 

mother would still owe that, and I am confident she will take care 

of it, but the point is this, people are not shopping on the Internet 

to avoid the sales tax. They are shopping because it is convenient 

and because it is a very good thing and our economy is booming, 

yes, because of the new economy, but we should not be making tax 

policy decisions on the basis of a temporary economic expansion. 

We ought to be dealing with tax policy that creates a level playing field that will endure forever. I invite anyone in this room who 

has made a purchase on the Internet to ask themselves: why did 

they do it? Did they do it because it was 1 o’clock in the morning 

and they did not want to go to the mall and it was not open, or 

did they do it because they wanted to avoid the sales tax? I would 

submit to you in your heart it is pretty clear what it is. 

Senator MCCAIN. Senator Dorgan. 

Senator DORGAN. Mr. Chairman, thank you very much. Governor 

Leavitt, my colleagues Senator Wyden and Congressman Cox indicated the state should really just collect the use tax if they want 

to. Having been a tax administrator and actually administered a 

state sales and use tax, I can tell you it is impossible to collect a 

use tax on a broad basis, but as a Governor, can you describe for 

me what kind of burden this imposes on the taxpayer, No. 1, and 

No. 2, what kind of additional employees would the State of Utah 

need to collect a broad-based use tax throughout the State of Utah? 

Governor LEAVITT. Well, it has simply been impossible in the 

past, as the Chairman pointed out, on remote sales of any sort, to 

do that. It would be an imposition in many cases. We do in certain 

cases where it can be tracked, collect a use tax mostly on business, 

but as you know, when you go to a catalogue and it says if you live 

in the State of Maine or Virginia or Utah or South Carolina, you 

have to calculate it, it is being collected today, but only where there 

is a nexus, so we are doing our best, but what we are proposing 

is a system that would be zero burden to anyone and it is not just 

zero burden to remote sellers. We think we can redesign the system to save billions of dollars in inefficiency and friction that is 

35

currently in the system that can go to the benefit of the American 

economy and be a very substantial benefit to taxpayers. 

Senator DORGAN. My point was if you did really try to collect the 

use tax across the board, you would have to hire thousands of people. You would impose new burdens on virtually all of your constituents because they would have to file individual use tax returns 

and declare a use tax on small amounts of goods they have purchased, so the point is it is an impractical thing to do to say well 

let us just collect the use tax. That is not a solution. It is totally 

impractical. 

Governor LEAVITT. As your neighbor Governor Janklow recently 

said, we would have to put—have to start stopping men in brown 

suits in little brown trucks and we would have to hire armies of 

policemen and it would be just impractical. It would be unreasonable. People would not accept it. It is not a solution. 

Senator DORGAN. And a better solution is one that has inherent 

simplicity and removes the burden effectively from the consumer 

and removes the burden from the seller. And that is what you are 

talking about. 

Let me ask a couple of additional questions. One, the contention 

is that, gee, this really does not mean anything. The States have 

growing economies and are collecting more money. The Internet 

sellers, I am told, last year sold 13 billion dollars through the 

Internet and it is expected in the next 10 years to grow to 1 trillion 

dollars. Is there any, any reason that one can say this will not have 

an impact on a state sales tax or use tax base? 

Governor LEAVITT. Those would argue this is not going to be a 

burden or not going to affect States’ capacities to deliver services, 

simply ignore reality. On the one hand we say we want to grow 

without any inhibiting force. On the other hand, we say it is not 

going to have an impact. Those two are inconsistent. It is having 

an impact. I would challenge anyone to go to a state that has a 

sales tax, talk to the people who are estimating revenue and despite the fact that in most states we are seeing increases you will 

find that almost every tax commission who estimates revenue will 

have a category for Internet sales and it is a negative. 

Senator DORGAN. Governor, you have heard discussion of some 

here who say they want to impose new taxes describing this debate. These are not new taxes, are they? 

Governor LEAVITT. They are not new taxes. And that is political 

rhetoric. 

Senator DORGAN. Are you aware of anyone who wants to impose 

new taxes here? 

Governor LEAVITT. I know of no one who wants to impose a new 

tax on the Internet. There may be a few but we are not among 

them. 

Senator DORGAN. Congressman Cox, you indicated that prior to 

the moratorium that there were a range of governments, local governments attempting to develop discriminatory taxes. Can you give 

us some examples of that? 

Representative COX. Sure. Takoma. 

Senator DORGAN. What was Takoma trying to do? 

Representative COX. They were trying to levy a tax directly on 

Internet access. 

36

Senator DORGAN. And did they do that? 

Representative COX. I believe they were either successful in getting it started or we nipped it in the bud. 

Senator DORGAN. Are there a range of others? 

Representative COX. Indeed we have a website, the Internet Tax 

Freedom website, that can be accessed through my website and it 

lists many of them. It was not just the United States as I mentioned. This is also something that was also going on around the 

world. 

Senator DORGAN. One final question. Governor Leavitt, my understanding is that some of the largest retailers who are going to 

be involved in Internet selling—because they feel they must from 

news reports—I am told that they are intending to organize in a 

way and incorporate in a way that they will have an Internet sales 

component that will be able to sell without a responsibility to collect the local sales tax. If that occurs on a widespread basis, I assume that will also exacerbate the problem with the local tax base. 

Governor LEAVITT. Major retailers in this country—and we are 

talking about the Wal-Marts and K-Marts who are perfectly capable of speaking for themselves—are clearly moving into a dot com 

mode because it is the most efficient way of selling. And they 

should. And they will. They are suggesting, ‘‘just give us a level 

playing field. Define the rules for us.’’ It is very clear from their 

actions and their words they would prefer a level playing field but 

if in this country we define the playing field as creating special 

privileges for a certain component of it, they will be forced by the 

competitive atmosphere in which they are in to move to that point. 

They will have kiosks outside of shopping malls, of stores, they 

will hook their cash registers to the Internet they will find whatever ways they have to within the carve-outs that we define to 

move to that point, and that is the point I suggest that the sales 

tax generally does not become viable or another thing occurs. People say we cannot stand this inequity. We need to have a balanced 

system that is a level playing field so let us have a national system 

and the IRS will stand on their tiptoes and say we are national, 

we will collect it for you and I will be willing to bet there are those 

in Congress who say if the IRS is collecting it we ought to be appropriating it. 

And suddenly you will have revenues that have been collected 

and appropriated by state and local jurisdictions for schools and 

roads and for law enforcement will now be appropriated by the 

Congress and collected by the IRS because the inequality of one 

having to collect it and one not simply will not be allowed to stand 

in the long term. 

Representative COX. I should point out that kind of tax is banned 

in the Internet Tax Freedom Act that we are trying to extend here. 

Senator DORGAN. The Interstate Commerce Clause is actually 

why we are discussing this. It gives Congress the authority to do 

this, and the other genius in the Constitution is 640,000 North Dakotans have two senators. 

Representative COX. That is one part of the Constitution that is 

not amenable even under Article V. 

Senator DORGAN. I want to work with Senator McCain, Senator 

Wyden, Senator Breaux and other colleagues to respond to this 

37

area. I support an extension of the moratorium. I support it for an 

eternity. I don’t support discriminatory taxation. There are other 

things we need to balance as we do this and that is the reason for 

the questions. Mr. Chairman, thank you. 

Senator MCCAIN. Thank you. 

Senator Breaux. 

Senator BREAUX. Thank you, Mr. Chairman. I apologize for having to leave, but I have heard both of your testimonies and we appreciate you being here. I have two points, I guess. Governor, I 

would like to once again thank you for serving on that Commission. 

It can sometimes be a thankless task, particularly when you have 

a two-thirds requirement to get an agreement. If we do extend the 

moratorium for 5 years or what have you, it would seem to me that 

it takes a great deal of the pressure off for you folks to come to any 

kind of a consensus or agreement on what to recommend. Do you 

agree or disagree with that? 

Governor LEAVITT. As I indicated that, I supported the Internet 

Tax Freedom Act and the moratorium that is there and I am prepared to support its extension. I do believe we have 16 or 18 

months left on it. We have much to be done during that period. 

Senator BREAUX. And then if you are not able at that time, I 

take it from your testimony, you would support an extension that 

would at least give you the time to see if you can do it during this 

period. 

Governor LEAVITT. In the last 12 months we have seen dramatic 

changes. We will see dramatic changes in the next 12. I would suggest that one of those will be that we will start to see the clear 

shaping of a national model that could provide a zero burden system for the development of taxation on commerce. 

Senator BREAUX. I apologize if you have gone into detail on explaining those, but can you give me some indication so I can better 

understand what you all are attempting to do with regard to getting an agreement on a unified sales tax to be collected for Internet 

sales transaction—and we are not talking about the Congress determining what each state’s sales taxes would be, or amount would 

be, as I understand it. Can you give me some more elaboration on 

what you are all recommending? 

Governor LEAVITT. I think what you are asking me is what would 

a zero burden system look like if we were to be able to develop it? 

We set a very high hurdle for ourselves. It would have centralized 

one-stop registration. You would not have to go to fifty different 

states. You would go to one website, register and you are registered 

in all 50 States. It would have uniform tax definitions so that what 

was a peanut in one state would be a peanut in another. It would 

have uniform and simple sourcing rules. In other words, we would 

have a standardized set of rules as to who was obligated to pay and 

who had the obligation to collect. We would have uniform exemption rules for those who have tax exempt status. It would do away 

with the tax audit as we know it. It would essentially have software that could be embedded in the software of a website that 

would completely eliminate and remove from the seller any responsibility for this. This would be a boon to those who are currently 

involved in commerce at the bricks and mortar level. 

38

Senator BREAUX. This recommendation which you just described 

would come to the Congress for Congress to take action on? 

Governor LEAVITT. We would bring it to the Congress for them 

to authorize an interstate compact among the States and with it 

I believe would be a group of benefits for those who adopt it and 

some sanctions for those who do not. It is clear to me that the 

States have an enormous amount of incentive to adopt this. If we 

do not, we are going to be completely left behind and the sales tax 

as we know it will no longer be a viable tool. We have to solve this 

problem. 

Senator BREAUX. What would the process be by which the States 

participate in making this recommendation? 

Governor LEAVITT. The NUCSL process, which is the Uniform 

Commission on State Laws—each state sends representatives to 

the process and they also include other stakeholders. They go 

through an exhaustive process to develop a model state law. It is 

then taken back to each state and passed in each state legislature 

as such. 

Senator BREAUX. The amount of each state sales tax under that 

recommendation could be different. It would not necessarily be all 

the same. Louisiana could have five sets, 5 percent. Texas could 

have whatever Texas has. California could have whatever. 

Governor LEAVITT. There are those who argue that a single rate 

in every state would benefit. In my own state in this last legislature we authorized a single rate for remote sales. There are those 

who also argue that the technology will not make that necessary. 

Those who argue would not be necessary say that the technology 

exists today to be able to disseminate where it goes and that we 

ought to use the existing. That will be part of the debate that will 

occur during the next 2 years. 

Senator BREAUX. I think you are attempting to accomplish something that is very, very helpful—obviously to Congress, if we can 

get that type of a recommendation. I think that you all have done 

terrific work and we appreciate it. Chris, I appreciate your position. 

We have some disagreements on it but hopefully in the end we can 

come together and find a solution that everybody can work with. 

Thank you. 

Senator WYDEN. Would it be possible to ask one additional question? 

Senator MCCAIN. Only one. 

Senator WYDEN. Thanks. And——

Senator MCCAIN. Short one, please. 

Senator WYDEN. I ask it only because the point that Senator 

Breaux makes I think is right at the heart of our getting the bill 

out in the next few weeks and my concern is if the moratorium 

ends without action, we can go back to letting all these local jurisdictions have at it. And my question would be, Governor Leavitt, 

if you support what you all say you are for, which is an extension 

of a moratorium on discriminatory taxes, I will support your getting a vote on the fast-track that the Chairman was talking about 

of something I am very skeptical of, which is you can come up with 

a workable system. Can you all look at that over the next few 

weeks and get back to the Chairman and Senator Dorgan, Senator 

Breaux and me so that we can see if at least that can be examined. 

39

Governor LEAVITT. We are always willing to talk, as both you 

and Congressman Cox know from our previous successful discussions that culminated in the Internet Tax Freedom Act. 

Senator WYDEN. Thank you, Mr. Chairman. 

Senator MCCAIN. Thank you both for being here this morning. I 

apologize for the length that you had to remain in the docket, but 

I appreciate the very important testimony you have given the Committee. Thank you both. 

Our next panel is Dr. John Berthoud, who is the President of the 

National Taxpayers Union; Dr. Donald Bruce, Professor, Center for 

Business and Economic Research at the University of Tennessee; 

Mr. David Bullington Vice President of Taxes at Wal-Mart Corporation; Mr. Burr Morse, who is the President of Morse Farm 

Sugar Works in Montpelier, Vermont; Mr. Jonathan Zittrain, who 

is from the Berkman Center for Internet and Society at the Harvard Law School. Mr. Berthoud, thank you very much for being 

here and we’ll begin with your opening statement. 

STATEMENT OF DR. JOHN BERTHOUD, PRESIDENT,

NATIONAL TAXPAYERS UNION 

Dr. BERTHOUD. Thank you, Mr. Chairman. Thank you for correctly pronouncing my name! It is a pleasure to appear before your 

Committee and you, who are a repeat winner of the NTU Friend 

of the Taxpayer Award year after year. 

It is a pleasure to talk with you this morning on behalf of our 

300,000 members nationwide. I come before you to state our views 

on Internet taxation and your legislation S. 2255, which would extend the moratorium through 2006. The National Taxpayers Union 

strongly supports your efforts, Mr. Chairman, and encourages the 

Committee to act favorably on this bill. 

While proponents of more taxes on the American people have lobbied to establish taxes on Internet commerce, a close examination 

of the facts reveals no justification at all for creating taxes on 

Internet access, creating discriminatory taxes on the Internet or 

perhaps most importantly forcing vendors to collect taxes for cities 

and States in which they are not located, proposals such as Governor Leavitt outlined previously. 

I will briefly examine and refute the claims of the pro-taxing 

crowd and make the case why it is important to keep the destructive power of government as far as possible from the Internet. First 

we hear that failure to establish a tax regime such as the NGA is 

proposing will lead to underfunding of critical services and let me 

quote from some of the NGA scare stories on their web page and 

this is a quote, ‘‘state and local governments can lose nearly 10 billion dollars by 2003 in uncollected sales tax revenues in Internet 

and mail order sales. If this problem is not addressed, America 

would have 200,000 fewer teachers and police officers educating 

our children and keeping our communities safe.’’

However, facts and a brief review of state and local revenues and 

how states collect the revenues will quickly dispel this type of 

hysteria. State governments, as has been recognized, are flush with 

money and in my testimony you have a figure that shows based on 

OMB numbers, state and local tax receipts have grown by over 30 

percent—a stunning amount in just the past 5 years. Many states 

40

such as New York, California, Texas, Maryland, Pennsylvania and 

others have seen year after year of surpluses exceeding 1 billion 

dollars. 

The fact is that states have so much money, they are creating 

endless new programs. In fact, there was a state senator from 

Michigan who admitted to the New York Times that they have new 

programs coming out of the weeds and he said only some of them 

have merit. This was in the New York Times just a couple of days 

ago. The fact that the States have so much money that they are 

creating myriad new programs, again some legislators are making 

the admission that they have little merit, seems to clearly disprove 

the scare tactics of the NGA and others. Make no mistake, Mr. 

Chairman, as you wisely know, part of the reason for this boom in 

revenues is the Internet e-commerce and the high-tech sector. 

Because governments at all levels have so far wisely left the 

Internet, e-commerce and indeed the entire high-tech sector alone, 

it has been able to flourish. In turn, these businesses have returned massive amounts of revenue to states and localities via the 

taxes currently in place. Adding new taxes to the Internet would 

adversely affect e-commerce and in turn stifle this revenue growth 

that the States are luxuriating in. 

A 1999 study by the National Bureau of Economic Research concluded that applying existing sales taxes to the Internet would 

slash the number of online buyers by 25 percent and plummet purchases by 30 percent or more. Proponents—and perhaps ‘‘fairness’’ is a word that has been used by almost every person testifying before the Committee this morning—proponents of new tax regimes 

say that it is unfair that Internet businesses are not subject to 

sales taxes and other taxes and that they are supposedly escaping 

their obligation to fund ‘‘needed government services.’’ Again, nothing could be further from the truth. 

Anyone who knows about state and local taxes knows that all 

businesses, large and small, face myriad other taxes beyond the 

sales and use tax. They pay corporate income taxes, employees pay 

personal income taxes, property taxes, and literally hundreds of different types of fees. When Governor Leavitt was recounting his 

story about all the sales tax revenue that was lost by his grandmother’s purchases, he of course did not mention that States and 

localities gained literally hundreds, perhaps thousands of dollars 

through other taxes that were collected based on those sales. 

Rather than figuring out new taxes to add on to businesses, Congress and the States should be focused on the ways to lower the 

old ones. For those businesses that currently do not have an Internet presence and who feel that fairness dictates the establishment 

of new taxes on e-commerce, our message is simple. Government is 

never the solution to your competitive problems. More government 

always ends up hurting commerce and we would advise them to 

look instead to getting into the Internet or expanding an Internet 

presence themselves. 

Mr. Chairman, we share your vision of equity and the issue of 

equity and fairness has been fundamental to debates over NGA’s 

type of tax regime. The question is, is it fair to brick and mortar 

businesses if we do not have an NGA type regime on Internet commerce? We would argue that every business in America has the opVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00044 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
41

portunity to sell on a tax-free Internet, and what could possibly be 

more fair than that? 

As you well know, Mr. Chairman, the debate over taxes has been 

central to the 2000 election cycle. While you and others have offered wise and sensible plans for reducing the Federal tax burden 

and returning some of the Federal tax overpayment (what is also 

called the surplus) to its rightful owners, the American taxpayers, 

the issue we are talking about today is perhaps of greater longterm significance to taxpayers. We thus strongly support your legislation and indeed we urge Congress to go further and adopt your 

legislation S. 1611 which would amend the Internet Tax Freedom 

Act to broaden its scope and make the moratorium permanent. We 

have also endorsed in the House H.R. 3252, the Internet Tax Elimination Act sponsored by your colleague, Congressman Kasich which 

would bar sales and other types of taxes permanently on e-commerce. 

In closing, I would like to quote from one of the great political 

philosophers of the 20th century, former President Ronald Reagan, 

who observed the government’s view of the economy could be 

summed up in a few short phrases, ‘‘if it moves, tax it; if it keeps 

moving regulate it; and if it stops moving subsidize it.’’ Now is the 

time, Mr. Chairman, to put a stop to schemes to tax the Internet 

to keep it moving and growing, so government one day does not 

have to step in and regulate it or subsidize it. This is the challenge 

before you and the distinguished members of this Committee. 

[The prepared statement of Dr. Berthoud follows:]

PREPARED STATEMENT OF DR. JOHN BERTHOUD, PRESIDENT,

NATIONAL TAXPAYERS UNION

I. Introduction 

Mr. Chairman and Members of the Committee, my name is John Berthoud. I am 

President of the National Taxpayers Union, a nationwide grassroots lobbying organization of taxpayers with 300,000 members. 

I come before you today to state our views on Internet taxation and Chairman 

McCain’s legislation, S. 2255, which would extend the moratorium on Internet taxation through 2006. The National Taxpayers Union strongly supports this effort and 

encourages the Committee to act favorably on this bill. 

II. The Moratorium Should Be Extended 

A moratorium is a prohibition on action. We believe government should not act—

through taxation, spending, or regulation—unless there is a clear and compelling 

reason for it to do so. While proponents of more taxes on the American people have 

lobbied hard to establish taxes on Internet commerce, a close examination of the 

facts reveals no justification at all for a) creating taxes on Internet access; b) creating discriminatory taxes on the Internet; or c) forcing vendors to collect taxes for 

states and cities in which they are not located. 

I will briefly examine—and refute—the claims of the pro-taxing crowd and make 

the case why it is important to keep the destructive power of government as far as 

possible from the Internet. 

III. Claim: Failure to Tax the Internet Will Lead to ‘‘Under-Funding of Critical Government Services’’

Repeatedly, we hear from the pro-tax side that without a new tax regime on the 

Internet, ‘‘critical government services’’ will have to be cut. The pro-tax National 

Governors’ Association (NGA) argues that if the NGA Internet tax plan is not adopted, ‘‘States and local governments could lose more than $10 billion per year by 2003 

in uncollected sales tax revenues on Internet and mail-order sales . . . If this probVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00045 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
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1 ‘‘Sales Taxes and the Internet—Myths and Facts,’’ National Governors’ Association web site, 

http://www.nga.org/Internet/Facts.asp. 2Peter T. Kilborn, ‘‘A Resurgent Michigan Leads Newly Flush States,’’ The New York Times,

April 10, 2000, Page A1. 3 Ibid, Page A16. 

4Office of Management and Budget, Historical Tables of the Budget of the United States Government—Fiscal Year 2001, Table 1.3. 

lem is not addressed, America would have 200,000 fewer teachers and police officers 

educating our children and keeping our communities safe.’’ 1

NGA’s scare tactics about laying off police and teachers are repeated by other big 

government advocates who argue in favor of similar tax schemes. However, the facts 

quickly disprove this type of groundless hysteria. 

State governments are flush with money. Total state taxes, including traditional 

sales taxes, have grown at almost twice the rate of inflation and population for the 

past six years. Figure 1 shows that state and local government tax receipts grew 

by over 30 percent between 1994 and 1999.

Many states—such as New York, California, Texas, Maryland, Minnesota, Indiana, Michigan, Washington, and Pennsylvania—have seen year-after-year of surpluses exceeding $1 billion.2 One Michigan State Senator commented that as a result of the year-after-year surpluses in that state, ‘‘we have programs coming out 

of the weeds—groups with something warm and fuzzy, and some of them have 

merit’’ 3 (italics added). 

Meanwhile, the federal government’s share of the economy has reached a postwar 

high. In FY 2001, the Office of Management and Budget projects the federal government will collect 54 percent more revenue than it did just ten years ago (adjusting 

for inflation).4

And make no mistake—a substantial part of the reason for this boom in revenues 

is the Internet, e-commerce, and the high-tech sector. Because governments at all 

levels have so far mostly left the Internet, e-commerce, and indeed, the entire hightech sector alone, it has been able to flourish. In turn, these businesses have reVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00046 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT

412bert1.eps
43

5 ‘‘A World Without Borders: The Impact of Taxes on Internet Commerce,’’ National Bureau 

of Economic Research Working Paper No. 6863, 1999. 6 ‘‘Fed Panel Urged To Keep Web Tax Free,’’ The Associated Press, December 15, 1999. 7 ‘‘Dr. Milton Friedman Talks with National Taxpayers Union President John Berthoud,’’

Spring 1999—San Francisco, California. 

turned massive amounts of revenue to states and localities through the taxes currently in place. 

Adding taxes to the Internet would adversely affect e-commerce and in turn stifle 

the revenue growth that we have seen in most types of state and local taxes. A 1999 

study by the National Bureau of Economic Research concluded that applying existing sales taxes to the Internet would slash the number of online buyers by 25 percent and plummet purchases by 30 percent or more.5

IV. Claim: E-Commerce Businesses Are Escaping Taxation 

Proponents of more taxation argue that it is unfair that Internet businesses are 

not subject to new types of Internet tax plans—they are supposedly ‘‘escaping their 

obligation’’ to fund ‘‘needed government services.’’ Nothing could be further from the 

truth. 

Businesses in America—those on the Internet or those not yet on the Internet—

are already overtaxed through a great variety of levies. Some of the more prominent 

ones include:

• corporate income taxes 

• personal income taxes 

• sales taxes 

• use taxes 

• property taxes 

• literally hundreds of different types of fees

The small business sector would once again be hit hardest by Internet taxation. 

Their smaller size means that the compliance burdens would be proportionately 

greater. Chris Wysocki, President of the 50,000-member Small Business Survival 

Committee, testified to the Advisory Commission on Electronic Commerce that, ‘‘Allowing the taxation of e-commerce would jeopardize the growth of the new digital 

economy and hamper the ability of entrepreneurs across America . . . The burdens 

that would be imposed are simply unacceptable.’’ 6

Rather than figuring out new taxes to add onto businesses, Congress and the 

states should be focusing on ways to lower the old ones. 

For those businesses who don’t currently have an Internet presence and who feel 

that ‘‘fairness’’ dictates the establishment of new taxes on e-commerce, our message 

is simple: government is never the solution to your competitive problems. More government always ends up hurting commerce. Look instead to getting into the Internet yourself. 

The situation with non-Internet retailers pursuing taxes on those with an Internet presence is analogous to the situation where some businesses have lobbied the 

U.S. Department of Justice to pursue Microsoft in the hopes of achieving a competitive advantage. Any short-run advantage to these firms is clearly outweighed by the 

longer-run costs of government intrusion. Nobel Laureate Milton Friedman made 

this point very eloquently in a dialogue with us last year:

Business, in general, has something of a suicidal instinct. It often proposes laws 

in its own self-interest which destroy the underlying basis of the whole private 

enterprise system. I believe that is what has been happening recently in the 

computer industry. Silicon Valley is suicidal in calling government in to mediate 

in the disputes among some of the big companies in the area and Microsoft. The 

end result will be that an industry that up to now has been able to proceed at 

a marvelous pace with little or no government regulation—it has been a wonderful example of the efficiencies of a strictly free private-market—that industry 

is now going to have government all over it. It’s going to spend in legal fees 

over the next ten or twenty years, money which society would benefit from 

much more if it were spent in the kind of research and development that has 

brought us the many miracles in the area of Internet, in the area of home computers, industry computers, and all the rest.7

V. Why Do Proponents of Internet Taxation Want to Add Internet Taxes? 

It is quite clear why advocates of Internet taxation have lobbied hard for Congress 

and state legislatures to either establish special taxes on the Internet or else create 

new tax regimes to snare e-commerce in the web of state sales tax collectors. They 

44

8 Jared Adams, ‘‘ ‘What About the Children?’ The Legislative Agenda of the National Education Association and the Politics of New Unionism,’’ NTU Foundation Policy Paper 122, October 19, 1999, Page 1. 9 Ibid. 

10 ‘‘Why the taxman fears the Internet,’’ The Economist, January 29, 2000. 11 Contrary to the opinion of many ‘‘Inside-the-Beltway’’ experts, Americans believe they are 

overtaxed and want to see federal tax dollars returned to them rather than spent on more government programs. This was brought out in polling by John Zogby last September: 

Q. Statement A says that tax refunds should be returned to those who were overtaxed. 

Statement B says tax refunds should be kept to shore up effectiveness of government programs.

Respondents who agreed with:

Statement A—64%

Statement B—27%

Neither—6%

Not Sure—3%

(Source: ‘‘Zogby Poll Sets New Course for America,’’ The O’Leary Report, Vol. IV, Issue V, September 1999, Page 3.) 

want lots more money from taxpayers to fund their plans for even bigger government. 

One of the clearest examples is that of America’s teacher unions. One of the 

strongest voices for more taxes—on the Internet and everything else—America’s teacher union leaders are pushing an agenda that would add $906 billion to the existing mountain of federal spending.8 That’s each and every year. To enact an agen- da of this size would require a staggering tax increase of $7,490 per taxpayer.9

Advocates of Internet taxation are advancing this idea to help fund their dreams 

for a massive expansion in government. This agenda is bad news for taxpayers and 

America’s future. 

VI. Practical Considerations 

Mr. Chairman, your legislation extending the moratorium makes sense for all the 

reasons noted previously. But even if Internet taxes wouldn’t add a huge burden to 

businesses and even if states weren’t already overflowing in revenues, there are 

more practical reasons to continue the moratorium. For example, we have yet to 

hear a sensible argument on who would be owed a tax if a resident of Arizona, using 

an Internet Service Provider located in Utah, ordered a product from a company 

headquartered in Delaware, but whose main office is in Maine, and who ships their 

goods from New York. Absent a moratorium, we would expect to see state or local 

legislation that could lead to taxes being paid to a variety of these jurisdictions, 

meaning multiple taxation placed on a single sale. 

And we would anticipate that it will be very difficult for tax and regulatory laws 

to keep pace with technological change as it occurs. We don’t want to put laws in 

place that will quickly be made obsolete. As the respected magazine, The Economist

argues, ‘‘The Internet is so new that the direction of technological change is fiendishly hard to predict. By contrast, tax rules are precise and inflexible, and take a 

long time to change.’’10

VII. Conclusion 

As you well know Mr. Chairman, the debate over taxes has been central to the 

2000 election cycle. While you and others offered wise and sensible plans for reducing the federal tax burden and returning some of the current federal tax over-payment (what is also called the surplus) to its rightful owners, the American taxpayers,11 the issue we are talking about today is probably of even greater long-term 

significance to taxpayers. 

We thus strongly support this legislation and indeed, we urge Congress to go further and adopt your legislation S. 1611, which would amend the Internet Tax Freedom Act to broaden its scope and make the moratorium permanent. We have also 

endorsed H.R. 3252, the Internet Tax Elimination Act sponsored by House Budget 

Committee Chairman John Kasich, which would bar sales taxes and other taxes on 

e-commerce. In conclusion, I want to quote one of the great political philosophers of the Twentieth century, former President Ronald Reagan, who observed, ‘‘Government’s view 

of the economy could be summed up in a few short phrases: If it moves, tax it. If 

it keeps moving, regulate it. And if it stops moving, subsidize it.’’ Now is the time, 

Mr. Chairman, to put a stop to schemes to tax the Internet—to keep it moving and 

growing, so government one day doesn’t have to regulate it or subsidize it. This is 

the challenge before you and the Members of this Committee. 

Thank you.

45

Senator MCCAIN. I thank you for that informed statement, but 

also I want to thank you for the great job your organization has 

done for many years in informing the American people and being 

of assistance and providing me with additional information and 

knowledge over many years. I would like to, before I call on Dr. 

Donald Bruce, at this time to enter a letter into the record from 

the Governor of Pennsylvania, who supports the extension of the 

current moratorium on access, multiple or discriminatory taxes. 

In fact, he points out he proposed the legislature approve the repeal of Pennsylvania sales taxes on computer services as well as 

tax prohibition on Internet access charges. There are some states 

and some Governors who I must say I think are more enlightened 

on this issue than others but we will leave that to others to judge. 

Dr. Bruce, welcome. Thank you for being here. I want to thank 

all the witnesses for your patience while we interrogated the first 

panel. Thank you, Dr. Bruce. 

[The information referred to follows:]

COMMONWEALTH OF PENNSYLVANIA, 

OFFICE OF THE GOVERNOR, 

Harrisburg, PA, April 12, 2000

Hon. TRENT LOTT,

Majority Leader, U.S. Senate, 

Washington, D.C.

Hon. J. DENNIS HASTERT, 

Speaker of the House, U.S. House of Representatives, 

Washington, D.C.

Dear Senator Lott and Speaker Hastert:

I understand that Congress may soon consider proposals addressing the Internet 

Tax Moratorium set to expire next year. Technology has been a central focus of my 

administration since I took office 5 years ago. From education to public safety, our 

commitment to information technology is helping Pennsylvania to remain competitive in the global economy and preserve the high quality of life in the Commonwealth. Internet based commerce is changing the face of how we do business in 

Pennsylvania and providing rapid access to a whole new world of information. 

To foster the electronic boom I support an extension of the current moratorium 

on access, multiple, or discriminatory taxes. The Internet has been growing at a 

record pace and I believe the moratorium has facilitated that process by assuring 

that commerce over the Internet is not singled out and taxed in new and creative 

ways. That is why I proposed and the Legislature approved a repeal of Pennsylvania 

sales taxes on computer services as well as a tax prohibition on Internet access 

charges. More recently, in my 2001 budget, I have proposed a Sales Tax Holiday 

for Commonwealth residents who buy personal computers. 

Pennsylvania is rather unique because we continue to manufacture goods. Thus, 

technological advances are often applied to many of those goods produced in Pennsylvania. Decisions on the taxation on Internet commerce therefore, are very complex and must balance the needs of both Internet and Main Street based businesses. 

The report submitted by the ACEC Business Caucus to the Advisory Commission 

on Electronic Commerce acknowledged that ‘‘In addressing whether and how the 

Internet should be subject to taxation, a major priority should be reducing or removing access barriers to perhaps the most advanced and useful medium of communication and commerce yet devised.’’ I concur. 

I also agree with the Caucus position that the system taxation of remote sales 

should be simplicity, efficiency and fairness—and that ‘‘(o)ur system of federalism 

mandates that the burden to produce such a system falls on the states.’’

My concerns with the report include their preemption of the state role, albeit for 

allegedly a period of five years, during which time the Caucus recommends that 

Congress pass laws preempting state sovereignty. We, state and local elected offiVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00049 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
46

cials, are best suited to reach a consensus on what changes need to be made to our 

sales and property taxes without creating a competitive disadvantage for any of our 

businesses. The magnitude of the undertaking is only equaled by its importance. 

States must work with local governments and its stakeholders—consumers, telecommunication and other remote businesses as well as our Main Street business to 

address these challenges. 

As Congress considers legislation on Internet taxation, I hope that a guiding principle will be fair competition between Main Street businesses and Internet businesses. An extension of the moratorium will provide us more time to assess the situation and ensure that we do no harm to either side. I strongly urge that when considering the impact of electronic commerce on our economy, any changes to the state 

tax structure should be done gradually and with consultation of all stakeholders. 

Sincerely, 

TOM RIDGE, 

Governor

STATEMENT OF DR. DONALD BRUCE, PROFESSOR,

CENTER FOR BUSINESS AND ECONOMIC RESEARCH,

THE UNIVERSITY OF TENNESSEE 

Dr. BRUCE. Good morning, Mr. Chairman and thank you so much 

for this opportunity to present these remarks on behalf of myself 

and my colleague Dr. William Fox, who is also at the University 

of Tennessee. We appreciate this opportunity. Let me just begin by 

stating that we are in agreement with the basic theme of this Act. 

That taxes should be levied in a nondiscriminatory way is absolutely fundamental. 

Our objection to the Act’s extension is that it represents a failure 

to act on an issue of such monumental importance. It places us on 

a policy trajectory that prevents meaningful cooperative action to 

solve the actual problems. 

First, it erodes the ideal of tax neutrality. The notions or decisions to produce or purchase a particular good or service should not 

be made on the basis of differential tax treatment. Second, it perpetuates reliance on a court determined standard of nexus that is 

based on physical rather than economic presence. A consequence of 

this is that future efforts toward simplification and improvement of 

sales and use taxes becomes even more difficult and state and local 

governments end up losing significant amounts of tax revenue. 

The primary issue, however, in the great debate is that of tax 

neutrality. Essentially the tax treatment of a particular good or 

service should not depend on how that good or service is obtained 

for final consumption. Differential taxation affects not only consumer decisions of where to buy but also business decisions of 

where to produce and in this electronic world both sides will go 

wherever they get the better deal and taxes can make the difference thereby disadvantaging many regions of the country and 

many traditional businesses in the process. This idea is presumably 

at the heart of the original act. Discriminatory taxes on Internet 

sales should be prohibited. 

However, nondiscrimination must go in both directions. In other 

words, the tax treatment of Internet sales must not discriminate 

against local bricks and mortar establishments. Subsidizing Internet firms through apparent non-taxation places a direct comparative disadvantage on local retailers inevitably forcing some of them 

out of business forever. Now a key component of the Act is its implicit acceptance of a definition of nexus that is based on physical 

presence, effectively limiting each state’s ability to enforce collecVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00050 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
47

tion of use taxes on remote sales. Extending the moratorium 

through 2006 will only make it more difficult for States to collect 

the sales and use taxes that are legally owed. 

Our research, which we have submitted in its full form for the 

record, shows that revenue losses to state and local governments, 

while not particularly large in the immediate term, will grow dramatically under the status quo. Admittedly, state and local sales 

tax bases were already eroding prior to the development of the 

Internet. E-commerce will only accelerate this historical trend and 

will result in our estimation of an additional revenue loss of 10.8 

billion dollars in 2003. 

It has been argued in defense of this act that States have enjoyed 

strong revenue growth in recent years, and we must note, however, 

that this is a cyclical phenomenon. Long-term revenue growth is 

not excessive. Similarly, the robust growth of e-commerce is a result of things like convenience, price, quality of service and the like 

and cannot be attributed solely to this act. Taxing remote sales like 

their local counterparts would certainly not kill the golden goose. 

To be clear, our position is neither for nor against big government. We are merely advocating the neutral non-discriminatory tax 

treatment of all types of commerce such that state and local governments can finance their activities as they see fit. The primary 

question then seems to be whether or not the sales tax should be 

preserved as a source of state and local revenue. Extending this act 

will permit the continued erosion of sales and use tax bases and 

state and local governments will have no choice but to turn away 

from our nation’s primary consumption-based tax system, toward 

higher taxes on income and wealth. As it generates nearly 1⁄3 of all 

state tax revenues, we are of the opinion that the sales tax should 

be preserved with the following general modifications. 

First, Congress should replace the outdated definition of nexus 

with one that is more in line with the modern economy based on 

economic rather than physical presence. Firms that significantly 

exploit a particular state’s market should be expected to withhold 

sales and use taxes for that state regardless of whether or not the 

firm has physical presence. 

Second, in exchange for this broader definition of nexus, States 

should be expected to implement substantial simplification measures. Included in this would be each state’s adoption of a single 

sales and use tax rate and a state specific definition of a set of taxable goods and services presumably drawn from a uniform nationwide set of product definitions. These simplification measures 

would enable a more streamlined and less burdensome collection 

process for remote vendors. More importantly, production and purchasing decisions would be based on economically relevant factors 

rather than on differential sales and use tax treatment. 

It has been said that the sales tax is a dying tax and that e-commerce is just the thing to push it to an early grave. Our contention 

is that e-commerce could provide the incentive for Congress to work 

with the States to improve our system of consumption taxation 

such that sales and use taxes can continue to be stable and significant sources of revenue. Thank you, Mr. Chairman. 

[The prepared statement of Dr. Bruce follows:]

48

1Donald Bruce and William F. Fox, ‘‘E-Commerce in the Context of Declining State Sales Tax 

Bases,’’ Center for Business and Economic Research, University of Tennessee, April 2000. 

PREPARED STATEMENT OF DR. DONALD BRUCE, PROFESSOR, CENTER FOR BUSINESS

AND ECONOMIC RESEARCH, THE UNIVERSITY OF TENNESSEE

Introduction 

Good morning, and thank you for this opportunity to address whether the Internet Tax Freedom Act (henceforth referred to as the Act) should be extended through 

2006. Let me begin by stating that we are in agreement with the basic theme of 

the Act. That taxes should be levied in a nondiscriminatory way is absolutely fundamental. 

Our objection to the Act’s extension is that it represents the failure to act on an 

issue of monumental importance. It places us on a policy trajectory that prevents 

meaningful cooperative action to solve the problems at hand. First, such a policy 

erodes the ideal of tax neutrality—the notion that decisions to produce or purchase 

a particular good or service should not be made on the basis of differential tax treatment. Second, extending the Act perpetuates reliance on the Court-determined 

standard of nexus that is based on physical rather than economic presence. A consequence of this is that future effort toward simplification and improvement of sales 

and use taxes becomes even more difficult, and state and local governments lose significant amounts of tax revenue. 

Tax Neutrality 

The primary issue in the greater debate is that of tax neutrality. Essentially, the 

tax treatment of a particular good or service should not depend on how that good 

or service is obtained for final consumption. Differential taxation affects not only 

consumer decisions of where to buy, but also business decisions of where to produce. 

In this electronic world, both sides will go wherever they get the best deal—and 

taxes can make the difference, thereby disadvantaging many regions of the country 

and many traditional businesses. 

This idea is presumably at the heart of the original Act—discriminatory taxes on 

Internet sales should be prohibited. However, nondiscrimination must go in both directions. In other words, the tax treatment of Internet sales must not discriminate 

against local bricks-and-mortar establishments. 

To illustrate, consider the following parallel with local infrastructure investments. 

A city that decides to renovate a downtown street will inevitably subject a number 

of businesses—and their customers—to tremendous inconvenience. Potential patrons 

will be less likely to visit these establishments during the construction period, and 

the businesses may have to close their doors as a result. These businesses probably 

will not reopen after the completion of the construction. 

In a similar manner, the Act represents an investment in the Internet as a transaction mechanism. Nonetheless, subsidizing Internet firms (through non-taxation) 

places a direct comparative disadvantage on local retailers, inevitably forcing some 

of them out of business forever. 

Nexus and Revenue Implications 

A key component of the Act is its implicit acceptance of a definition of nexus that 

is based on physical presence—effectively limiting each state’s ability to enforce collection of use taxes on remote sales. Extending the moratorium through 2006, while 

delaying any cooperative effort between the Federal and state governments toward 

sales and use tax simplification, will only make it more difficult for states to collect 

sales and use taxes. 

Our research shows that revenue losses to state and local governments, while not 

particularly large in the immediate term, will grow dramatically under the status 

quo. Admittedly, state and local sales tax bases were already eroding as a result 

of the growth of all types of remote sales, greater consumption of untaxed services 

relative to taxed goods, and the continuation of legislated exemptions, long before 

the development of the Internet. E-commerce will only accelerate this historical 

trend, and will result in an additional revenue loss of $10.8 billion by 2003.1

It has been argued in defense of this Act that states have enjoyed strong revenue 

growth in recent years. It should be noted, however, that this is a cyclical phenomenon—long-term revenue growth is not excessive. Similarly, the robust growth 

of e-commerce is a result of convenience, price, quality of service, and the like, and 

cannot be attributed solely to this Act. Taxing remote sales like their local counterparts would certainly not kill the ‘‘golden goose.’’ To be clear, our position is neither 

for nor against larger government—we are merely advocating the neutral, nonVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00052 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
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2For a broader discussion of these issues, see William F. Fox and Matthew N. Murray, ‘‘The 

Sales Tax and Electronic Commerce: So What’s New?’’ National Tax Journal 50(3): 573–592.*

* The information referred to has been retained in the Committee files. 

discriminatory tax treatment of all types of commerce such that state and local governments can finance their activities as they see fit. 

Policy Options 

The primary question, then, seems to be whether or not the sales tax should be 

preserved as a source of state and local revenue. Extending this Act will permit the 

continued erosion of sales and use tax bases due to the expansion of e-commerce, 

and state and local governments will have no choice but to turn away from our nation’s primary consumption-based tax toward higher taxes on income and wealth. 

As it generates nearly one-third of all state tax revenues, we are of the opinion that 

the sales tax should be preserved, with the following general modifications.2

First, Congress should replace the outdated definition of nexus with one that is 

more in line with the modern economy—nexus should be based on economic rather 

than physical presence. Firms that significantly exploit a particular state’s market 

should be expected to withhold sales and use taxes for that state, regardless of 

whether or not the firm has physical presence. 

Second, in exchange for this broader definition of nexus, states should be expected 

to implement substantial simplification measures. Included in this would be each 

state’s adoption of a single sales and use tax rate and a state-specific definition of 

the set of taxable goods and services, presumably drawn from a set of uniform product definitions. Whether a bag of honey-roasted peanuts is ‘‘food’’ should be determined by a national standard, while the decision of whether or not it is taxable (and 

at what rate) should still be left to each individual state. 

These simplification measures would, in the process of restoring significant lost 

revenues, enable a more streamlined and less burdensome collection process for remote vendors. More importantly, production and purchasing decisions would then 

be based on economically relevant factors rather than on differential sales and use 

tax treatment. 

Conclusion 

It has been said that the sales tax is a dying tax, and that e-commerce is just 

the thing to push it toward an early grave. Our belief is that e-commerce can provide the incentive for Congress to work with the states to improve our system of 

consumption taxation, such that sales and use taxes can continue to be stable and 

significant sources of revenue.

Senator MCCAIN. Thank you very much, Dr. Bruce. Mr. 

Bullington. 

STATEMENT OF DAVID BULLINGTON, VICE PRESIDENT

OF TAXES, WAL-MART CORPORATION 

Mr. BULLINGTON. Mr. Chairman, members of the Committee, 

thank you for including a voice from the broader retail community 

in today’s hearing. Sound economic policy in a free enterprise economy requires equal tax treatment of the different channels of retail 

distribution. The existing state sales tax rules, as constrained by 

Supreme Court decisions issued well before e-commerce, have created two fields of retail competition. 

On one playing field, brick and mortar retail stores, both large 

and small, are required to collect sales tax on behalf of States and 

localities. On the other, the largely unenforceable rules applicable 

to remote sales do nothing more than encourage consumers to voluntarily pay the use tax equivalent of a sales tax. As we all know, 

the use tax is easily ignored. Only across the board collection of 

this existing tax will level the playing field and rationalize our tax 

policy. 

We believe it is now up to Congress to resolve this issue fairly, 

so that all channels of retail distribution are treated the same. 

Brick and mortar retailers are now at a competitive ‘‘pricing’’ disVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00053 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
50

advantage because, unlike many of their Internet and other remote 

selling counterparts, they must collect sales tax on most in-store 

sales. And, unless they take drastic steps to separate their Internet 

business from their brick and mortar businesses, they must collect 

sales tax on their own remote sales as well. 

Furthermore, customers who do not have access to the Internet, 

often lower income individuals who can least afford the burden of 

taxes, must pay sales taxes, while Internet shoppers in most cases 

do not. Access aside, the issue of credit availability is a much larger impediment to lower income individuals. 

We are greatly concerned about the effect the existing tax structure, if not fixed, will have on our communities. We share everyone’s concern with the tax burden issue, and in no way do we want 

any additional tax burdens placed on consumers. Without acrossthe-board sales and use tax collection, revenues will actually decrease, and many States will be forced to raise sales taxes or introduce tax increases in other areas such as property taxes. In these 

circumstances, States will have fewer taxing options and will, as a 

result, have less control over their tax policy. As we all know, sales 

tax revenues are critical to the funding of public services such as 

schools, city streets, police and fire protection. 

We believe the Congress may fairly require Internet and other 

remote sellers to collect and remit sales or use taxes and that simplification is the key, coupled with technology. We emphasize that 

even with simplification any across the board collection requirement must allow for suitable de minimis thresholds below which 

mom-and-pop websites and other small businesses need only concern themselves with the filing requirements of their own state as 

required by current law. 

Additionally, appropriate collection allowances should be provided to compensate those remote sellers above the de minimis 

threshold for their cost of collection. There was general agreement 

in the Advisory Commission on Electronic Commerce as to the requirements for simplification. We believe that the States are willing to work together to implement these types of simplification. It 

will not work, however, to just say to the States ‘‘go simplify yourselves and then come back and talk to us.’’ More is required, a 

framework, a direction and a simplification threshold beyond which 

States may require collection. 

In inviting me you asked that I address specifically the consequences of extending the moratorium. If Congress extends the 

current tax moratorium, without at the same time approving legislation to achieve a level playing field for all retailers, future resolution of the issue will be seriously jeopardized. Already, many consumers have been led to mistakenly believe that the existing moratorium precludes sales tax on Internet purchases. 

I do not know who believes it will be any easier to resolve. I don’t 

know anyone who believes it will be any easier to resolve the issue 

in five or six years. We urge Congress not to extend the existing 

moratorium without creating the framework within which those 

States that continue to move forward on simplification can aim for 

a threshold or date certain, after which collection can be required 

for those States that have simplified. Thank you, Mr. Chairman. 

51

Senator MCCAIN. Mr. Bullington, it is rare that I interrupt a sequence of witnesses, but I am now. I have defended your organization when it came to Cottonwood, Arizona, and everybody is driven 

out of business because of what some view as predatory pricing and 

the enormous advantages that you have. And here you are talking 

about the ensuring of a level playing field. I am really, it is remarkable. It is one of the more remarkable comments that I have 

heard in all my years as a member of this Committee. 

Mr. BULLINGTON. May I respond? 

Senator MCCAIN. No. Sure. I am sorry. Certainly respond. 

Mr. BULLINGTON. Senator, we do represent tough competition for 

anyone. Many of our best customers are small businesses and they 

turn to us to buy goods for the same efficiencies of distribution 

that, Sam’s Club and even our Wal-Mart stores, the same pricing 

reasons that they turn to the efficiencies in the Internet and for 

other reasons. 

Senator MCCAIN. If some of those small businesses that had to 

shut down when you come into these communities’ representatives 

were here they would have a very different view of your impact on 

them and their economies and their lifestyles but, which may be 

one of the reasons why there has been so much controversy associated with your locating in some parts of the country. I have always 

defended your right to do that. Now we have a technology that 

gives an enormous opportunity to so many people to acquire goods 

and services at a lower price and you are here in that position. 

Mr. BULLINGTON. Not at all. We look forward to being part of 

that expansive Internet economy that is out there. 

[The prepared statement of Mr. Bullington follows:]

PREPARED STATEMENT OF DAVID BULLINGTON, VICE PRESIDENT OF TAXES,

WAL-MART CORPORATION

Mr. Chairman, Senator Hollings, members of the Committee, thank you for including a voice from the broader retail community in today’s hearing. Sound economic policy in a free enterprise economy requires equal tax treatment of the different channels of retail distribution. The existing state rules, as constrained by Supreme Court decisions issued well before the superhighway of technology was introduced, have created two fields of retail competition. On one playing field, brick and 

mortar retail stores, both small and large, are required to collect sales tax on behalf 

of states and localities. On the other, the unenforceable rules applicable to remote 

sales do nothing more than encourage consumers to voluntarily pay the use tax 

equivalent of a sales tax. As we all know, the use tax is easily ignored. Only acrossthe-board collection of this existing tax will level the playing field and rationalize 

our tax policy. 

We believe that it is now up to Congress to resolve this issue fairly, so that all 

channels of retail distribution are treated the same. brick and mortar retailers are 

now at a competitive ‘‘pricing’’ disadvantage because, unlike many of their Internet 

and other remote selling counterparts, they must collect sales taxes on most in-store 

sales. And, unless they take drastic steps to separate their Internet business from 

their brick and mortar business, they must collect sales taxes on their own remote 

sales as well. 

We are greatly concerned about the effect the existing tax structure, if not fixed, 

will have on our communities. We share everyone’s concern with the tax burden 

issue, and in no way do we want any additional tax burdens placed on consumers. 

Without across-the-board sales and use tax collection, revenues will actually decrease, and many states will be forced to raise sales tax rates or introduce tax increases in other areas, such as property taxes, to offset the loss of sales tax revenue. 

In these circumstances, states will have fewer taxing options and will, as a result, 

have less control over their tax policy. Sales tax revenues are critical to the funding 

of public services such as schools, roads, police, and fire protection. 

52

1 IMRA is an alliance of retailers and their product and service suppliers that is committed 

to bringing price-competitive value to the world’s consumers. IMRA represents over 200 retail companies, which operate more than 133,000 stores worldwide and have sales of over $450 billion annually. IMRA represents over 600 supplier companies with sales totaling over $600 billion per year. Together, IMRA’s membership represents over $1 trillion in sales and employs 

millions of workers. 

Furthermore, customers who do not have access to the Internet—often lower income individuals, who can least afford the burden of taxes—must pay sales taxes, 

while Internet shoppers in most cases do not. Access aside, the issue of credit availability is a much larger impediment to lower income individuals. 

Wal-Mart and the International Mass Retail Association (IMRA) 1 are among the 

founding members of the e-Fairness Coalition—a coalition that advocates fairness 

for businesses and consumers, and that supports a level playing field, including fair 

and efficient collection of the existing tax already applied to remote sales. The eFairness Coalition very firmly believes that Congress must not extend the existing 

moratorium—which does not expire until October 2001—without resolving this sales 

tax collection issue. 

Background 

The issue of whether remote sellers should be required to collect and remit sales 

taxes is certainly not new, but the spectacular growth of the Internet and the opportunities for increased sales that most businesses see on the Internet have refocused 

attention on the issue. 

Deciding whether remote sellers should be required to collect taxes rests with the 

Congress, under the U.S. Constitution’s Commerce Clause. The Supreme Court’s 1992 decision in Quill Corporation v. North Dakota held that the Constitution prevents states from requiring use tax collection by out-of-state sellers without a physical connection to the state, but that Congress has the power to require such outof-state sellers to collect the taxes. As the Court pointed out, only Congress has the 

authority to regulate interstate commerce. The best and most thoughtful course of 

action for Congress would be to give those states that undertake specified simplification steps the authority to require remote sellers to collect. This would resolve any 

concerns about burdening interstate commerce and would put all retailers, at least 

in those states that simplify, on a level playing field. 

Simplification 

We believe that Congress may fairly require Internet and other remote sellers to 

collect and remit sales or use taxes on all taxable business to consumer sales, and 

that simplification is the key. Much has been made of the thousands of different 

taxing jurisdictions across the nation and of the other elements of state sales taxes 

that add to the current complexity. And at present it is a complex patchwork of systems that causes even the largest and most efficient retailers great headaches. 

While technology has made tremendous progress, it is not yet by itself a silver bullet 

that can entirely eliminate the burden of collecting. Technology coupled with simplification is the answer. 

We emphasize that even with simplification, any across-the-board collection requirement must allow for suitable de minimis thresholds below which Mom-and-Pop 

web sites and other small businesses need only concern themselves with the filing 

requirements of their home state, as required by current law. 

Recently there has been a tremendous amount of discussion about sales and use 

tax simplification. While there is by no means universal agreement on exactly how 

simplification should proceed, there is broad agreement on a number of items that 

we believe should make up the basis of Congressional legislation to provide collection authority for states. 

Simplification should include a centralized, one-stop, multi-state registration system for sellers; uniform definitions for goods or services that may be included in the 

tax base; uniform and simple rules for attributing transactions to particular taxing 

jurisdictions; uniform rules for the designation and identification of purchasers exempt from sales and use taxes, including a database of all exempt entities and a 

rule ensuring that reliance on such database shall immunize sellers from liability; 

uniform procedures for the certification of software that sellers rely on to determine 

state and local use tax rates and taxability; uniform bad debt rules; uniform tax returns and remittance forms; consistent electronic filing and remittance methods; 

state administration of all state and local sales taxes; uniform audit procedures; reasonable compensation for tax collection that reflects the complexity of an individual 

state’s tax structure, including the structure of its local taxes; an exemption from 

use tax collection requirements for sellers falling below a specified de minimis 

threshold; appropriate protections for consumer privacy; and any other features that 

53

the states deem warranted to promote simplicity, uniformity, neutrality, efficiency, 

and fairness. We believe that many states are willing to work together to implement 

these types of simplification. 

To encourage simplification, Congress should give states the authority to adopt a 

single state-wide use tax rate, which would be a blended rate of the various state 

and local sales tax rates. Current Commerce Clause judicial restrictions limit a 

state’s ability to create a single blended rate applicable only to remote sales. 

Some in Congress are already working on legislation to allow states to enter into 

an interstate compact to implement the simplification described above. This legislation would allow states that join the compact and meet the simplification goals 

(upon certification by the General Accounting Office) to require businesses selling 

into their state (remote sales) to collect and remit the proper tax. We commend this 

effort to the members of the Committee. The compact arrangement removes from 

Congress the decision of whether states impose and collect the tax and returns it 

to the states, where sales tax administration properly belongs. 

Consequences of Extending the Moratorium Without Addressing Sales 

Taxes 

If Congress extends the current Internet tax moratorium without at the same 

time approving legislation to achieve a level playing field for all retailers, future resolution of the issue will be seriously jeopardized. I don’t know anyone who believes 

it will be any easier to resolve the issue in five or six years. In fact, I can almost 

guarantee you that it will be nearly impossible, because absent a solution, most 

brick and mortar businesses that also sell on the Internet will have been forced to 

reorganize their corporate structure in order to remain price competitive. Companies 

will, as Wal-Mart has already, restructure their Internet business as a separate subsidiary with nexus in only a handful of states and collecting sales tax in only those 

states. While Wal-Mart has taken this step for reasons in addition to tax collection, 

I respectfully suggest that this is not the result Congress should be seeking. Congress should not force businesses to alter their corporate structure simply to remain 

price competitive. 

Rather, Congress should take this opportunity to level the playing field for sales 

tax collection. A level playing field, where all retailers are treated equally with regard to tax collection duties is the only rational policy available. Simply put, government should not be meddling in the marketplace. By perpetuating the status quo—

extending the moratorium without fixing the problem—Congress would be giving 

Internet and other remote retailers a de facto tax subsidy, while at the same time 

making it much more difficult to resolve the issue in the future. Internet retailers 

do not need, nor should they be given, a tax preference. All retail businesses should 

compete on the traditional bases of price, selection and service. Tax preferences are 

bad tax policy and bad economic policy, and Congress must take this opportunity 

to encourage and eventually allow the states to bring this unintended tax subsidy 

to an end. 

Conclusion 

Senator McCain, you have long been a champion of ending corporate welfare and 

closing down special interest loopholes. Surely you cannot have intended to give a 

special tax subsidy to Internet retailers. By all means, keep the Internet free from 

taxes on access and do not let the Internet be burdened by special levies or regulations targeted solely at the Internet. Just as there is no justification for singling out 

the Internet for discriminatory treatment, there is no reason to perpetuate a deficient, outdated system that gives Internet retailers preferential treatment. Internet 

commerce will continue to flourish as more and more brick and mortar retailers 

take advantage of it. It need not be propped up at the expense of others.

Senator MCCAIN. I thank you. Mr. Morse, Senator Leahy has 

been here a couple of times in his desire to introduce you. He is 

so proud of you and everything you have done and on behalf of 

Senator Leahy may I say that we welcome you and Senator Jeffords, we welcome you and we welcome your testimony today and 

thanks for being here. 

[The prepared statement of Senator Leahy follows:]

PREPARED STATEMENT OF HON. PATRICK J. LEAHY, U.S. SENATOR FROM VERMONT

Chairman McCain and Senator Hollings, I want to commend the Commerce Committee for holding this hearing on taxation of electronic commerce. I am proud to 

54

be a cosponsor of S. 2255, Senator McCain and Senator Wyden’s legislation to extend the present moratorium on discriminatory taxes on Internet goods and services 

for an additional five years. 

I am also proud that the Committee has invited Burr Morse to testify here today. 

Burr Morse is a seventh generation Vermonter who owns and operates the Morse 

Farm Sugar Works in Montpelier, Vermont. He has been part of the Morse Farm 

organization, a front runner in the field of Agri-Tourism, since graduating from the 

University of Vermont in 1971. His interests include a desire to preserve small business in America and family farms. 

I am also proud to note that Mr. Morse is the grandson of the late Vermont Senator George Aiken. I have the honor to serve in the same seat as Senator Aiken. 

I am sure that Burr Morse will prove to be a wise owl, just as Senator Aiken was 

for some many years here in the Senate.

STATEMENT OF BURR MORSE, PRESIDENT, MORSE FARM 

SUGAR WORKS 

Mr. MORSE. Thank you, Senator McCain. Thanks for having me 

come, a small businessman from a small state which incidentally 

has two senators. I am Burr Morse. My business is the Morse 

Farm Sugar Works in Montpelier, Vermont. I am a diversified 

farmer and maple sugar maker with roots back to the late 1700’s. 

In central Vermont diversification is necessary because maple 

sugar making is a seasonal activity that lasts but 1 month out of 

12 and that is on a good year. To supplement the income derived 

from gathering and boiling down 40 gallons of sugar maple sap to 

get one single gallon of Vermont maple syrup, I grow crops and I 

host tourists in my sugar house. 

In any given year, 1 to 4 percent of our 50,000 visitors become 

mail order customers by placing orders over the phone and by mail 

from our annual catalogue or newsletters. In 1999, we expanded 

our sales program into the electronic media market by publishing 

a web site to increase the reach of our print and broadcast advertising. The site required an investment of $6,000 and incurs 

monthly fees of a minimum of $225. The response to the quality 

and uniqueness of our site has been overwhelming. 

This is what brings me to these proceedings today. I have been 

able to document visits to the Morse Farm that have resulted directly from the web and we are enjoying some success with on-line 

orders. In real terms, however, our web presence is a long-term investment and not a panacea for the uneven cash-flow generated by 

a seasonal business like ours. 

I encourage you all to visit www.morsefarm.com on the Internet, 

but please recognize that it is not a dot com business that is likely 

to appear on the Nasdaq charts one day. It is a way for me to better serve my customers to ensure their loyalty to my Vermont product. It is a new crop, if you will, in a field that without time to 

grow will not provide a harvest. 

I submit that a moratorium on taxation of Internet sales until 

2006 is the very minimum of what traffic will bear. My business 

is threatened daily by megamergers in the food, travel and mail 

order industries. Big business has won the battle and without an 

affordable way to communicate with customers who want traditional products, I cannot compete. If afforded the opportunity of 

nurturing this new field, that is the Internet, I might be able to 

recoup my original investment and find a little stability in a dynamic marketplace. And when I make money on my investments, 

55

I pay taxes on those profits. Talk of taxing sales over the Internet 

affects me times two. 

My father told a story once about sending his hired man out into 

the woods one day to check on how fast the sap was dripping. 

When he returned, he exclaimed, ‘‘Mr. Morse, I counted 18 drops 

between the end of the spout and the bottom of the bucket.’’ Now, 

either he was seeing drops that just weren’t there or he could surely count faster than a Pentium chip. Anyone who supports the concept of taxing sales made over the Internet is seeing imaginary 

profits or drops and could for short-term gains stifle a new and upand-coming market. No, it will still take 40 gallons of sap to create 

one naturally sweet gallon of maple syrup in the year 3000, but if 

taxed 40 ways, nobody will be recognizing the taste and nobody will 

be recognizing the taste that came out of New England all those 

years ago. Thank you very much. 

[The prepared statement of Mr. Morse follows:]

PREPARED STATEMENT OF BURR MORSE, PRESIDENT, MORSE FARM SUGAR WORKS

Thank you for allowing me to testify today. My name is Burr Morse and my business is the Morse Farm Sugar Works in Montpelier, Vermont. I am a diversified 

farmer with roots back to the late 1700s in Central Vermont. Diversification is necessary because maple sugar making is a seasonal activity that lasts but one month 

out of twelve, and that is on a good year. To supplement the income derived from 

gathering and boiling down forty gallons of sugar maple sap to get one single gallon 

of Vermont maple syrup, I grow crops and host tourists in my sugar house. 

In any given year, one to four percent of our fifty thousand visitors become mail 

order customers by placing orders over the phone and by mail from our annual catalog or newsletters. In 1999 we expanded our sales program into the electronic media 

market by publishing a web site to increase the reach of our print and broadcast 

advertising. 

The site required an investment of $6000.00 and incurs monthly fees of a minimum of $225.00. The response to the quality and uniqueness of our site has been 

overwhelming and brings me to these proceedings today. I have been able to document visits to the Morse Farm that have resulted directly from the web, and we 

are enjoying some success with on-line orders. In real terms, however, our web presence is a long term investment and not a panacea for the uneven cash flow generated by a seasonal business like ours. 

I encourage you all to visit www.morsefarm.com on the Internet, but please recognize that it is not a dot-com business that is likely to appear on the Nasdaq charts 

one day. It is a way for me to better serve my customers to assure their loyalty to 

my Vermont product. It is a new ‘‘crop,’’ if you will, in a field that without time to 

grow, will not provide a harvest. I submit that a moratorium on taxation of Internet 

sales until 2006 is the very minimum of what traffic will bear. 

My business is threatened daily by mega-mergers in the food, travel, and mail 

order industries. Big business has won the battle and without an affordable way to 

communicate with customers who want traditional products, I can not compete. If 

afforded the opportunity of nurturing this new field that is the Internet I might be 

able to recoup my original investment and find a little stability in a dynamic marketplace. If and when I make money on my investments, I pay taxes on those profits. Talk of taxing sales over the Internet affects me times two. My father told a 

story about sending the hired man out into the woods one day to check on how fast 

the sap was dripping. He returned to exclaim, ‘‘Mr. Morse, I counted eighteen drops 

between the end of the spout and the bottom of the bucket!’’ Now either he was seeing drops that were not there or he could count faster than a Pentium chip. Anyone 

who supports the concept of taxing sales made over the Internet is seeing imaginary 

profits and could, for short term gain, ruin a new and up-and-coming market. 

No, it will still take forty gallons of sap to create one naturally sweet gallon of 

maple syrup in the year 3000, but if taxed forty ways, nobody will be making the 

effort and nobody will even recognize the taste that came out of New England all 

those years ago. 

Addendum to oral testimony:

Report: Customer loyalty is e-commerce king

56

A report by Mainspring Communications and Bain & Co. finds that building 

customer loyalty is key to long term profitability on the Web. http://

www.computerworld.com/home/print.nsf/CWFlash/000331D006

The study found that retailers on the web have to retain a customer for 12 

months to break even on that customer and online grocers have to hang on to 

a shopper for 18 months to recoup the $80.00 customer acquisition cost.

Average repeat shopper at an apparel site spent 67% more in months 31 to 

36 than in the first six months of shopping at the site.

Conclusion based on research and actual experience at the Morse Farm Web site: 

Web shoppers are as price conscious as traditional shoppers. The shipping and handling costs past on to Web shoppers are a definite consideration and in many cases, 

deterrent to actual purchasing. Any additional charges incurred through a potential 

taxation of Web sales would increase the deterrent factor and place Web shopping 

at a distinct disadvantage over ‘‘counter’’ shopping. The above statistics indicate 

that Web merchants are presently in a period of debt with their Web sites and the 

payback period is measured in multi-years.

Senator BREAUX. Thank you very much. Mr. Zittrain. 

STATEMENT OF JONATHAN ZITTRAIN, BERKMAN CENTER FOR 

INTERNET AND SOCIETY, HARVARD LAW SCHOOL 

Mr. ZITTRAIN. Thank you. Senator Breaux, Senator Wyden, good 

morning. My name is Jonathan Zittrain. I am the executive director of the Berkman Center for Internet and Society for Harvard 

Law School, where I teach classes on Internet law, and have done 

some research on the taxation of the Internet, including coauthoring an article with Austan Goolsbee of the University of Chicago for the National Tax Journal on the impact of a moratorium 

on Internet commerce on state coffers and other aspects of the 

economy. 

First, the bill in question today, the Internet Tax Freedom Act— apparently now renamed the Internet Anti-discrimination Act—is 

relatively uncontroversial and relatively modest. This is an act that 

is meant to proscribe multiple and discriminatory taxes. So far as 

I know, there are no states clamoring to impose either multiple or 

discriminatory taxes. The only place I see it, actually, is in Europe, 

which appears to be on the cusp of imposing a 7 percent tax on 

goods, or for instance in Germany, a 16 percent tax on services. 

They then define digitally-delivered goods and services, and suddenly a newspaper that is on paper is taxed at a much lower rate 

than a newspaper delivered digitally. This may be because many 

of the sources of digital goods and services are thought to come 

from the United States—and that may be then a tax to worry 

about. Within the United States, however, there simply aren’t any 

taxes that fit into that category, so it seems perfectly harmless to 

restrict fares further. To whatever extent there is a subsidy to access—thanks to a restriction on new taxes on Internet access, such 

as restriction on charges by AOL or Mindspring—this also seems 

to be a general benefit, because the more people we can get onto 

the Internet more quickly—at least while it is in its infancy—the 

sooner we can all benefit. You will get more web sites which will 

in turn draw more customers, etcetera. 

But it seems also true to me—I should also add, by the way, that 

Wally Hellerstein has written a nice piece that highlights some ambiguities in the current phrasing of the Internet Tax Freedom Act 

and suggests some ways to tighten it up. Those might be worthy 

of some consideration. The real issue is: what is in essence an effecVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00060 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
57

tive moratorium on collection of state sales tax that has been imposed through an interpretation of the Commerce Clause. That is 

a moratorium, as you have said today, that comes not from the 

Internet Tax Freedom Act but simply from Supreme Court precedent and that awaits Congressional action to be lifted, and that is 

the moratorium that we are all, I think, really here today worried 

about in terms of impact on state coffers. 

Professor Goolsbee and I tried in our paper to make an estimate. Out of a total of $193 billion of sales tax collected by state and local 

governments in 1998, we estimate that only $430 million, that is 

a quarter of 1 percent, was actually lost thanks to Internet commerce that caused new transactions to happen interstate. To put 

that into perspective, one way of making up the shortfall would be 

to raise the average state sales tax rate from 6.33 percent to 6.35 

percent; so currently, I think, everybody agrees this is not a big impact on state coffers. 

As you move forward it is just a question of when, from what we 

can tell, that this will be a big impact on state coffers. Professor 

Bruce just mentioned his study showing that there may be $10.8 

billion in lost revenue in 2003. I should just flag a significant discrepancy between his study and ours, which are, interestingly, 

based on exactly the same numbers. We differ by about $7 billion 

as to the actual costs in 2003. We estimate that there is only $3.5 

billion in sales lost, still less than 2 percent of the state coffers, and 

the reason from what I can tell for that huge disparity is a different calculation of how easy it is to collect use tax on businessto-business sales. Professors Bruce and Fox say it is not that easy 

to do. We actually believe it is the consumer sales that pose that 

problem, and that businesses do pay their taxes. It is thought that 

90 percent of Internet commerce will be business-to-business stuff 

by 2003. So there is not, right now, a big impact on state coffers, 

and we do not think that most Internet sales—those that are business-to-business—will evade an applicable state sales tax. 

There are these network externalities to consider; I talked about 

things that make something like eBay much more valuable to people who use it because you are much more likely to find the item 

you want or find the price you want—even better. So the more people we can get on quickly, the better it is for everyone. 

That all said, however, in the long haul it seems that fairness 

must reign and I define fairness as equivalent treatment for interstate and intrastate transit of goods. It is clear that revenues are 

up. I say lower sales tax across the board, if that is how states 

want to return the surplus to the people—not have an essentially 

‘‘swiss cheese’’ framework where some stuff gets taxed and other 

stuff does not because of increasingly arbitrary lines determined by 

whether the item was ordered electronically or by walking up to a 

store counter. 

My bottom line is the moratorium is perfectly unobjectionable. 

There is no reason not to extend it from a policy statement. The 

moratorium that is de facto in place—thanks to the Supreme 

Court’s decision in Quill—is something relatively harmless to state 

commerce and is in fact having positive effects. But sooner or 

later—it is just a question of when—the piper will have to be paid 

and we will have to come up with a tax simplification scheme of 

58

the kind that Governor Leavitt was talking about, and any help 

that Congress can give to the states to encourage them to simplify 

their tax bases and structures and lower the burden on out-of-state 

merchants would be sensible. The clock is ticking. It is just a question of when time will run out and whether we will have to abandon sales tax or roll back Quill and Congressional action. 

[The prepared statement of Mr. Zittrain follows:]

PREPARED STATEMENT OF JONATHAN ZITTRAIN, BERKMAN CENTER FOR INTERNET AND

SOCIETY, HARVARD LAW SCHOOL

Chairman McCain, Ranking Member Hollings, Members of the Committee:

My name is Jonathan Zittrain, and I am the executive director of the Berkman 

Center for Internet & Society at Harvard Law School, where I also teach on Internet-related subjects as a lecturer on law. Among my research interests is the taxation of Internet commerce, and last year I wrote an article (attached) for the National Tax Journal on the subject with Prof. Austan Goolsbee of the University of 

Chicago. 

Today the Committee considers S. 2255, which is Chairman McCain’s proposal to 

extend through 2006 the moratorium on certain kinds of taxes set in place by the 

Internet Tax Freedom Act. I will try to touch on the economic implications of

S. 2255 (and thus of the Internet Tax Freedom Act), as well as on other, more significant forms of ‘‘Internet taxation’’ to which the Act does not speak. 

My bottom line: The moratorium of the Internet Tax Freedom Act is not objectionable, because the moratorium is so limited in scope that it has little consequence 

for state tax revenues—it does not apply to sales tax for physical goods bought over 

the Internet. The moratorium may also help the Internet’s growth at an important 

time. However, the real issues still lie ahead, particularly because while the Internet Tax Freedom Act is silent on state sales tax for online commerce, a Supreme 

Court decision has itself imposed an essential moratorium on such taxes. It thus 

falls to Congress to decide what the boundaries of state taxation power are in this 

area, and what research I have done in this area suggests that this more significant 

moratorium may be helpful now, but should be lifted later. I will first speak to the 

peripheral taxes covered by the ITFA moratorium, then to the more central taxes 

covered by the Supreme Court’s moratorium, and finally to some guiding principles 

that might help sort out what the ultimate policies should be. 

Why the Internet Tax Freedom Act’s moratorium is not harmful to state 

revenue interests and is helpful to Internet growth 

The scope of the Internet Tax Freedom Act’s moratorium is quite modest. It restricts states’ abilities to impose discriminatory or multiple taxes on Internet commerce, and it prohibits new taxes on Internet access. 

One example of a discriminatory tax might be a surtax on products ordered 

through the Internet (for example, a state assessing a 10% tax on books ordered online when it only demands a 5% tax on books bought in a bookstore). Another would 

be claims by multiple states to collect tax for a single transaction with a buyer in 

one state and a seller in another, thus doubly taxing. Each of these examples is hypothetical; I know of no major attempts by states to impose discriminatory or multiple taxes on Internet commerce, and thus no substantial state money at risk if this 

revenue stream were clearly marked off-limits. By its very terms, this aspect of the 

moratorium seems at best sensible and at least unobjectionable. 

Examples of the prohibition on new taxes on Internet access are taxes on monthly 

subscription fees for America Online, mindspring.com, or any other service that provides Internet access. This moratorium may impact the coffers of states that wish 

to tax Internet access but did not have corresponding legislation on their books before the moratorium came into force. The category of taxable commerce affected here 

is small compared to the revenue to be gleaned from the broad swath of traditional 

goods typically covered by sales tax. 

While the impact on state coffers may be small, the subsidy to Internet usage and 

to all the economic progress that flows from it could be large. This is because the 

Internet is subject to positive ‘‘network externalities,’’ which is to say that it becomes more useful to everyone as more people use it. (This is a general phenomenon 

of networks; compare how useful a fax machine might be to someone when only ten 

others own one versus when millions of others own one.) Such networks can grow 

exponentially once they reach critical mass, and signing more people on at a given 

time—thanks to an ability to offer comparatively lower access rates—amounts to a 

59

1See Quill Corporation v. North Dakota, 504 U.S. 298 (1994). 

boost to future economic activity generally, at least to the extent that new Internet 

commerce need not simply be drawn from competition with existing retail stores. 

Further, any lessening of Internet access fees might help bridge the ‘‘digital divide’’ by making Internet access that much more accessible. A five or six percent difference might not seem like a lot, but there will be some group of people on the 

margin for whom it would make the difference between signing on and not signing 

on. To be sure, once the Internet has reached a natural saturation point among potential users, there is less reason to treat its provision any differently from any other 

transaction subject to sales tax. Thus the infant industry protection represented by 

the ‘‘no new access taxes part’’ of the moratorium may not need to become ensconced 

as established industry protection. 

The bigger controversy, unaffected by the Internet Tax Freedom Act: Taxation of Internet commerce 

More notable than what the ITFA moratorium covers is what it doesn’t cover. The 

moratorium does not preclude the application of state sales tax for physical goods 

ordered through the Internet. The meat and potatoes of state sales tax revenue 

comes from the sale of physical goods generally, so this is the source of revenue that 

states are most concerned about losing to tax-free sales of goods over the Internet. 

If the moratorium creates no boundary, why the worry? Because there is another 

boundary out there: one that separates in-state from out-of-state merchants. Sales 

tax is a tax technically imposed on a consumer—when we buy something we fork 

over a little extra money to cover the tax—but it is enforced and collected by the 

merchant. In its landmark Quill decision,1 the Supreme Court made it clear that 

it was Congress’s province to decide the extent to which one state could force a merchant located elsewhere to collect a sales tax, even if the buyer, located in the first 

state, is clearly subject to the tax. Since Congress has been silent on the issue, 

states can only force out-of-state merchants to collect sales tax on items they sell 

to people living there if the merchants have other ‘‘contacts’’ with the state: so-called ‘‘nexus.’’ In practice, out-of-state merchants can usually avoid creating that nexus, 

so many distant merchants (whether they receive customer orders through the 

Internet, mail order, or telephone) cannot be forced to, and do not, collect sales tax. According to the Census Bureau, sales tax amounted to $193 billion of state and 

local tax revenues in 1998. How do transactions placed through the Internet fit in? 

The best estimate Prof. Goolsbee and I could make on state sales tax revenue lost 

to out-of-state merchants receiving taxable orders through the Internet for 1998 is 

$430 million on total sales of $7.3 billion, or 0.2% of the collected tax kitty. Failure 

to pay tax on Internet-generated sales is thus not currently significantly denting 

state coffers. 

What makes sales tax on goods purchased through the Internet such an issue 

then, despite the ITFA moratorium’s silence on the subject and the relatively small 

revenues currently at stake? 

I can offer two reasons. First, Quill provides its own effective moratorium on sales 

tax on most Internet-driven sales unless Congress rescinds it, and everyone has big 

expectations for the growth of the proportion of sales taking place through Internet 

commerce. The most recent figures from the Census Bureau estimate $5.3 billion 

in online commerce sales for the fourth quarter of 1999, and Forrester Research estimates $108 billion per year in online retail sales by 2003. Predictions beyond 2003 

are due to be quite speculative; perhaps between 2004 and 2007 revenue loss from 

online, interstate transactions for which Quill blocks sales tax collection could 

amount to ten percent of total sales tax revenue, if more interstate, sales tax-exempt 

trade happens overall thanks to the added ease of Internet ordering. 

A second reason for the current worry over an inability to apply sales tax to goods 

purchased across state lines has to do with a desire not to unduly distort markets 

with arbitrarily applied taxes. Tax experts may have differing personal views as to 

whether taxes should be raised or lowered generally, but they tend to be in agreement over the idea that one should tinker with rate rather than scope when seeking 

to adjust the public’s tax burden. Over the short term, at least, Quill’s moratorium 

on out-of-state tax collection will likely encourage more people to use the Internet 

for shopping, just as the ITFA’s moratorium on new access charges will encourage 

more people to sign up for Internet access in the first instance. But as the use of 

the Internet matures and the benefits of the network externalities I discussed earlier are reaped, distinctions such as ‘‘in-state/out-of-state’’ or ‘‘ordered through Internet/ordered in a store’’ become truly arbitrary. Differences in tax rates should be 

made on the basis of the substance of a sales transaction, not on where or through 

60

what medium it takes place. Local merchants, themselves in many instances limited 

to margins of 4 or 5% on their wares, should not forever pay a sales tax while their 

online and/or out-of-state counterparts do not. 

Further, the enforcement costs of imposing taxes on goods ordered and paid for 

over the Internet could drop over time. Thanks to authentication and encryption 

technologies under development in the private sector—technologies to ensure that 

when one orders a dozen pizzas through the Internet, one cannot repudiate the bargain by saying someone else actually placed the order—it may become quite easy 

to know who is buying what from whom, to know where the buyer is, and then to 

collect the appropriate tax. This raises serious privacy issues, particularly if the 

scope of state sales tax varies so much that one must know and verify the nature 

of the item purchased in order to actually assess and account for the tax. But in 

a simplified scheme where the various states can agree on common definitions if not 

rates—something sorely needed and long overdue—one could actually imagine the 

collection of sales tax as second nature in online transactions, far easier than the 

corresponding calculation, collection, and remittance by local merchants in a traditional transaction. Indeed, structured properly, the collection of tax could come 

straight from the user, converting ‘‘sales tax’’ collected from the merchant into a corresponding ‘‘use tax’’ collected from the buyer, and in such a way that the buyer 

would not revolt. (Current use taxes, owed by consumers whenever they have managed to avoid having their merchants collect sales taxes thanks to Quill, remain 

largely uncollected, presumably because consumers would not take well to having 

to maintain accounts of everything they have purchased and what tax they might 

owe on it.) 

In the current political climate it seems difficult to imagine Congress enabling 

states’ collection of sales tax from out-of-state merchants, so the revenues will only 

be obtained—if at all—through creative electronic collection schemes that can manage to only minimally burden both seller and buyer, or through reciprocal state tax 

collection agreements, through which New York, say, could ask a New York merchant to collect and remit New Jersey sales tax for its New Jersey customers. Neither of these solutions is particularly appealing, nor are they easy to implement, 

though they well emerge as alternatives to Congressional action to allow states to 

collect sales taxes across state borders. 

Again, over the long run, state boundaries seem odd and unhelpful lines to draw 

on sales tax collection, as do boundaries between electronic and physical means of 

ordering. The legal and technical status quo whereby some transactions avoid the 

tax while others do not should, in the long run, be traded in for a more comprehensive tax reform that offers uniform tax relief (perhaps in tax rates) while enabling 

or maintaining other revenue streams in as simple and direct a way as possible. 

Digital goods 

So far I have interpreted ‘‘Internet commerce’’ to cover the purchase of physical 

goods ordered via a computer network instead of a telephone call or visit to a store. 

I do see this as the core of the Internet tax controversy, because a lot of money will 

sooner or later be at stake through such channels, and because there exist bricks 

and mortar merchants who sell identical products and for whom differential tax 

treatment seems, over the long run, unfair. 

But the Internet also enables the sale of digital goods: e-books and software, for 

example. Depending on one’s reading of the Internet Tax Freedom Act, these purchases may not be taxed by the states, whether the purchase is inter-state or intrastate. Since the distribution of wholly digital goods is especially in its infancy, even 

more so than the online purchase of physical goods, this would be an auspicious 

time for a moratorium on taxes of such goods. 

Indeed, we may see the creation of new markets where individuals can sell cookie 

recipes or bedtime stories one at a time, for 25 or 50 cents each. To insist on collection and calculation of sales tax on such transactions might produce an administrative barrier that would preclude the development of such a ‘‘small fry’’ sellers’ market. 

It is also important to ensure that other countries to not impose onerous or discriminatory taxes on digital Internet commerce, especially as they might perceive 

that digital merchants on the Internet are disproportionately American vendors. 

Conclusion 

The Internet Tax Freedom Act does not speak to the taxes that really fill state 

coffers—and hit consumers’ pocketbooks. What few taxes it does preclude deserve 

to be precluded, and thus an extension of the Act’s moratorium seems perfectly appropriate, if not particularly efficacious. But in passing this Act, it’s important to 

note that much more work remains to be done. In particular, the convening of the 

61

commission that the Act chartered has helped focus attention on a long-simmering 

issue for which the growth of the Internet is turning up the heat: the fact that 

states require Congress’s formal assent before they can readily collect most of the 

taxes they wish to on goods purchased by in-state consumers from out-of-state merchants. A long-term compromise might be the easing of states’ ability to collect such 

taxes in exchange for a serious simplification and harmonization of the substantive 

scope and administrative burden associated with the respective state sales tax regimes. 

An extension of the moratorium should be accompanied by efforts to broaden the 

difficult conversation begun in earnest by the Advisory Commission on Electronic 

Commerce and among officials representing state and local governments, attempting 

to agree on the fairest and most practical ways to enjoy economic growth and freedom while paying the piper for the common services from which we benefit.

Attachment 

EVALUATING THE COSTS AND BENEFITS OF TAXING INTERNET COMMERCE

Austan Goolsbee, University of Chicago, G.S.B.,

American Bar Foundation, and N.B.E.R.

Jonathan Zittrain, Berkman Center for Internet and Society,

Harvard Law School 

National Tax Journal, May 1999

Abstract—Current tax law makes it difficult to enforce sales taxes on most Internet 

commerce and has generated considerable policy debate. In this paper we analyze the 

costs and benefits of enforcing such taxes including revenue losses, competition with 

retail, externalities, distribution, and compliance costs. The results suggest that the 

costs of not enforcing taxes are quite modest and will remain so for several years. 

At the same time, compliance costs and the benefits of nurturing the Internet diminish over time. When tax costs and benefits take this form, a moratorium provides a 

natural compromise. 

Introduction

Existing sales tax law treats goods sold over the Internet the same way it treats 

goods sold from catalog companies. This means, roughly, that any company without 

a physical presence in a state (known as nexus) cannot be required to collect that 

state’s sales tax even if the customer lives in the state. If a buyer in Boston, for 

example, orders a book from Amazon.com (located in Washington state), although 

the buyer technically owes a use tax (equivalent to the sales tax) on the purchase 

to Massachusetts, the state cannot require Amazon.com to collect the tax because 

Amazon.com has no nexus in Massachusetts. Instead, states must rely on self-reporting and payment by the customers, making enforcement almost nonexistent except in special cases such as for goods like automobiles that must be registered. In 

this sense, the Internet is a virtually tax-free sales channel. 

While most of the tax issues raised by the Internet are the same as those raised 

in the earlier battles over the taxation of mail-order sales (ACIR, 1986), the rapid 

growth of online commerce has ignited a major debate as to how Internet commerce 

should be treated. Sheppard (1998) has declared the issue of taxes and electronic 

commerce to be ‘‘the hottest topic in multistate taxation.’’ On one side, state governments and the National Governors Association have noted the potential revenue 

losses from online transactions and called for immediate enforcement of sales taxes. 

On the other, Internet advocates have argued that cyberspace is still fragile and its 

future uncertain; to tax it now, they say, might seriously damage its growth 

(Wyden, 1997; Andal, 1997; Stephenson and Zeisser, 1998). 

In 1998, Congress passed the Internet Tax Freedom Act (ITFA) placing a threeyear moratorium on new taxes on the Internet. The ITFA, however, does not restrict 

the right of states to apply sales and use taxes to online commerce (these are not, 

after all, new taxes). Instead it primarily prevents states from applying new taxes 

to Internet access. Its primary effect regarding sales taxes is to prevent states from 

either applying sales taxes to categories of electronic services or goods with no physical counterpart or applying discriminatory sales taxes on Internet commerce that 

do not, for example, apply to catalog sales. 

Though the ITFA itself did not change the sales tax status quo, it did call for Congress to appoint an advisory commission to come up with recommendations about 

how the tax system should treat online commerce. The panel’s work is taken seriously enough that the National Association of Counties and U.S. Conference of MayVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00065 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
62

1 Examples of the existing literature include Fox and Murray (1997), Hellerstein (1997a; 

1997b; 1997c), Horner and Owen (1996), McLure (1997; 1998; forthcoming), Aui-Yonah (1997), 

Murray (1997), and Steele and Hellerstein (1994). 2One exception is Goolsbee (1998), who empirically examines the question of how current 

sales tax rates influence the likelihood of consumers to buy over the Internet. 

ors, fearing that the panel was stacked against local governments, filed suit to prevent the advisory Commisiona from meeting to draft recommendations. 

On the basic issue of weighing the costs and benefits of enforcing taxes on the 

Internet, most of the discussion has taken place in the political arena rather in academic research (Graham, 1999; Smith, 1999). Most of the existing academic literature on the subject of Internet taxes has been conceptual discussions and legal 

analyses.1 Because the area is so new there has been very little empirical work.2

Most of the explicit discussions weighing the costs and benefits of tax policy toward 

Internet commerce has taken place in the popular press and has been more political. 

In this paper we use the best available data in an attempt to evaluate some of 

the costs and benefits claimed in the debate about Internet commerce. The lack of 

systematic data sources means that, on many important points, the evidence is more 

qualitative and suggestive rather than definitive. In our discussion, we emphasize 

the importance of distinguishing between the short and the long run when thinking 

about Internet commerce. The timing of Internet tax policy is crucial. For example, 

most of the major benefits from taxing the Internet, such as preventing revenue 

losses or eliminating competition with retail stores, are unlikely to become important for several years, while the importance of the costs of taxing Internet commerce, including enforcement costs and lost externalities, are likely to fall over time. 

A cost/benefit structure such as this naturally lends itself to a moratorium as a compromise position. 

The first five sections of the paper evaluate the main costs and benefits of taxing 

Internet commerce. These include revenue loss from Internet commerce, competition 

with retail trade, distribution, enforcement costs, and externalities. The final section 

concludes with a discussion of the potential for compromise and the future of tax 

policy. 

Revenue Loss from Internet Commerce 

The most important presumed cost of not enforcing taxes on Internet commerce 

is the potential revenue loss. Sales taxes are, obviously, quite important to state and 

local government finance. As Table 1 shows, in fiscal year 1995–6, general sales 

taxes raised almost $170 billion. This was second only to property taxes as an overall source of tax revenue and was the largest source of revenue for state governments. Given this importance, it is understandable why policymakers are concerned 

about the issue and decry the potential narrowing of the sales tax base. As Newman 

(1995) rather colorfully put it, ‘‘state and local government finances are becoming 

road kill on the information superhighway.’’ The National Governors Association has 

quoted forecasts that by 2002 there may be more than $300 billion of commerce and 

concluded that this will cost up to $20 billion in lost tax revenue (Boston Globe, 

1998). Similar numbers are often cited by advocates of enforcing Internet taxation 

(for example, Graham, 1999).

Table 1. Total State and Local Tax Revenue in the U.S. 

(in millions of $) 

Type Of Revenue 1995–96 (FY)

State and Local 

1995–96 (FY)

State 

1995–96 (FY)

Local 

Total tax revenue 689,038 418,390 270,602

General sales taxes 169,071 139,363 29,709

Property taxes 209,440 9,973 199,467

Individual income taxes 146,843 133,548 13,296

Corporate income taxes 32,009 29,315 2,693

Selective sales taxes (total) 79,922 66,751 13,123

Other taxes and charges (total) 51,753 39,440 12,313

Source: Bureau of the Census, United States State and Local Government Finances 1998. Washington, D.C.: 

Government Printing Office 

As best we can tell, the standard calculation in these revenue loss estimates is 

made by multiplying total sales by the average tax rate and calling that the loss 

63

3 In this calculation we ignore the fact that in some states food and clothing are exempt from 

sales tax. This would make the number even larger.

in revenue. For several reasons, however, this is highly inaccurate. First, the predicted amounts of commerce seem to include business-to-business sales as well as 

business-to-consumer. The business-to-business is largely exempt from sales tax or 

else the buyers actually pay the use tax. Forrester Research, the leading market research company regarding the information economy, has estimated that businessto-business sales will be (and are) much larger than the business-to-consumer 

(McQuivey et al., 1998; Erwin et al., 1997). Second, the predicted revenue losses ignore the possibility of trade creation. Products that might not have been purchased 

in a store were it not for the Internet, such as online greeting cards, should not be 

counted for lost revenue. Third, even if we assume that electronic commerce is entirely diversionary and that all of the commerce will be business-to-consumer, the 

calculations still have serious flaws by failing to account for the types of products 

being sold. 

Table 2A, for example, presents data from the Boston Consulting Group (BCG) report on Internet business-to-consumer sales by type of product in the first quarter 

of 1998 (1998). Notice that several of the categories, including financial services, 

travel, automotive, and, in some states, food and apparel, do not result in lost sales 

tax revenue for the states either because no sales tax applies (travel and financial) 

or because, although taxable, seller’s nexus is likely even if the Internet is used to 

make purchases (automobiles and groceries). Together, the obviously nontaxed categories account for more than 40 percent of total online sales in this period (about 

$2.3 billion).3

Table 2A. Estimated Online Consumer Sales

by Sector 

(first 6 months of 1998) 

Sector Amount

(in millions of $) 

Computer goods 1,510

Financial services 1,429

Auctions 898

Travel 848

Books and entertainment 366

Gifts 138

Consumer goods 138

Apparel 92

Food and wine 67

Automotive 28

Home and garden 27

Total 5,541

Source: BCG (1998). 

Of the remaining 60 percent of sales that may qualify as revenue losers, computer 

goods alone account for almost half. When calculating the incremental revenue loss 

from the growth of the Internet, however, computer goods raise several important 

issues. First, many computer sellers online already pay sales taxes. Having in-state 

repair services, for example, can create nexus for the seller (Multistate Tax Commission, 1995), and one of the largest online sellers, Gateway, does charge sales tax. 

Second, for those without nexus, it is important to note that not every computer 

bought over the Internet would have been purchased in a store if the Internet did 

not exist. Computer goods have had a brisk mail-order business for many years 

(well before the Internet began). Forrester Research’s Technographics data (described in more detail in the Appendix) suggests that about 20 percent of computer 

owners purchased their latest machines directly from the manufacturer (while a bit 

less than two percent bought them over the Internet). It is doubtful that a customer 

who today buys from Dell online, for example, would buy a computer in a store if 

there were no Internet when she could instead buy from Dell directly by telephone. 

If Internet sales cannibalize nontaxed catalog sales rather than retail store sales, 

the growth of Internet commerce does not imply any additional revenue losses to 

state governments. 

Although it is hard to find data to make an industry-wide argument, Dell is an 

important example. Our estimates indicate that in the first six months of 1998, Dell 

64

4This estimate is calculated as follows: At the end of 1998/start of 1999, Dell announced online sales at a rate of $14 million per day or $1.25 billion per quarter (Dell, 1999). Because this 

is after a substantial growth rate over the course of the year we assume that Dell’s revenue over the year grew at the 213 percent annual rate (33 percent per quarter) estimated in the 

BCG (1998) report for total commerce that Dell’s online sales were divided the same way as 

their total sales (according to Dell (1998), this was about 65 percent to government, big business, and educational users). With total sales of $1.25 billion in the last quarter of 1998, this 

would imply sales of $531 million and $707 million in the first two quarters of the year, and 

if 35 percent of these sales were to individuals, this would total $435 million for the period. 5This assumes one-half of computer software and computer hardware currently do not require 

payment of sales taxes but would under a rule change. It also assumes that flowers and food 

satisfy the nexus requirements and thus do not result in revenue losses when purchased online. 

Event tickets and online greetings are assumed to be untaxed.

may have sold around $435 million online to consumers (more than one-quarter of 

the computer goods in the BCG sample).4 Few of those sales were taken away from 

stores. If not for the Internet, they would have likely gone to Dell’s mail-order business. 

Taken together, we believe that much of the computer goods category should not 

be considered a revenue loser. For simplicity, then, let us assume that one-half of 

computer goods sales consumers did not pay the sales tax but would have if the law 

were changed. The true number is probably much lower. This assumption would 

imply that another 15 percent of online retail sales did not cut into local revenues. 

After eliminating all of the non-applicable sales, there were about $2.5 billion of 

sales that may qualify as revenue losses to state governments (if we make the somewhat implausible assumption that all auction transactions would have paid sales 

tax if they had taken place through newspaper classified ads, and so on). The 

weighted average sales tax rate in the United States is about 6.33 percent 

(Goolsbee, 1998), so the actual revenue loss in the first six months of 1998 was on 

the order of $157 million. Even with a 213 percent annual growth rate, the total 

revenue loss for the 1998 entire year was a bit more that $430 million. The same 

analysis using more detailed data from Forrester Research listed in Table 2B puts 

the total revenue loss for 1998 at around $210 million (McQuivey et al., 1998).5

With overall sales tax revenue growing at 6 percent nominal rates (as indicated in 

Bureau of the Census, 1997, 1998), the revenue loss in 1998 using either measure 

amounted to less than one-quarter of one percent of total state and local sales tax 

revenue (or 0.05 percent of total tax revenue). 

Table 2B. Online Revenue by Category in 1998 and 2003 

(in millions of $) 

Category Estimate:

1998 

Forecast:

2003

Total U.S. revenue 7,826 108,031

Software 665 3,179

Books 630 3,002

Music 187 2,495

Videos 151 1,346

Event tickets 115 2,572

Apparel 530 13,510

Flowers 212 906

Greetings 36 320

Specialty gifts 63 544

Toys 68 1,481

Sporting goods 56 1,918

Tools and garden 63 1,021

Travel 3,073 29,447

Computer hardware 1,090 14,965

Consumer electronics 84 6,132

Appliances 17 2,275

Household goods 83 3,446

Food and beverage 235 10,836

Health and beauty 213 6,294

Miscellaneous 255 2,342

Source: Forrester Research, Inc. (1998). 

65

6 Repeating the analysis in the interim years yielded a revenue loss of $470 million in 1999, $880 million in 2000, $1.4 billion in 2001, and $2.3 billion in 2002. The last number is 15 to 

20 times smaller than the estimates quoted by advocates in the popular press for the same year. 7This is assuming no behavioral responses on the part of retail sales of raising the sales tax. 

8 Note that optimal tax theory does not necessarily call for the rates to be equal on the two 

types of commerce. While the well-known results of Cortlett and Hague (1954) suggest that we 

should tax similar goods similarly, if the price elasticities of Internet customers and retail customers are very different, it may actually be efficient to allow those with high elasticities to 

have lower rates. This is the finding of Sandmo (1981) in a different context. In some sense, 

the least distortive tax would be the one with high rates on those people who would not change 

their behavior. 

Looking to the future, Forrester estimates that, from now to 2003, online retail spending will grow almost 70 percent per year when it will total more than $108 

billion. Their prediction includes estimates by category. Doing the same calculation 

on the five-years-out projection yields a revenue loss of $3.5 billion—still less than 

two percent of sales tax revenue even after a half-decade of rapid growth.6 With average growth rates of general sales taxes, the Internet revenue losses will, even 

after several years of dramatic growth, amount to less than two percent of sales tax 

revenue. To put these revenue numbers in perspective, note that the Census Bureau’s Monthly Retail Sales suggests that mail-order sales topped $55 billion in 1998, and 

this is likely to be significantly understated, as explained in ACIR (1986). The existence of untaxed catalog sales has not bankrupted state budgets and, for the next 

several years, online sales are likely to be considerably smaller than mail-order 

sales were even decades ago. 

Alternatively, consider the numerical question of how much the sales tax on retail 

goods would have to rise in order to cover the revenue shortfalls generated by the 

Internet sales.7 Based on the Forrester forecasts, to keep revenue constant, the average tax rate on sales would need to rise from 6.33 percent to 6.35 percent in 1998. 

Five years later, in 2003, to keep revenue constant would require an increase from 

6.33 percent to about 6.40 percent. These small changes may imply that the costs 

of enforcement might not be better applied elsewhere in the short run. For example, 

the estimates in Slemrod (1999) concerning the revenue generated in Michigan from 

a simple crackdown in cigarette smuggling imply that this had a substantially 

greater impact on Michigan state tax revenue than aggressive enforcement of Internet taxation would have had. 

In some sense, the modest costs of not enforcing taxation on Internet sales numbers illustrate why the advocates of immediate enforcement consistently invoke revenue loss projections from well into the future. Only after an extended period of 

rapid growth will the issue become substantively important. If the growth rate of 

online retail commerce continues at 70 percent per year after 2003, by 2007 the revenue loss would amount to as much as 10 percent of total sales tax revenue. If 

Forrester were significantly too conservative and online retail commerce doubled 

every year, the revenue losses would amount to as much as ten percent of sales tax 

revenue as early as 2004. It is the possibility of these extreme losses, albeit well 

into the future, that makes the issue of enforcement so politically sensitive today. 

The states want to ensure that online sales will be taxed before they become important rather than after. When Internet sales account for, say 10 or 20 percent of total 

retail sales, the states believe it may be difficult to put the genie back in the bottle. 

The data suggest, however, that for the next several years, at least, there is little 

revenue to be gained from enforcing taxes on Internet sales. 

Internet Competition With Retail Stores 

Another basic benefit claimed by advocates of enforcing taxes on Internet commerce is to eliminate the unfair disadvantage that uneven tax enforcement puts retail stores at relative to their online (and out-of-state) counterparts. Presumably, 

there is some notion about tax-induced distortions. If consumers, for example, would 

prefer to buy from a local store but buy online only to avoid taxes, the tax is creating an inefficiency.8

Evaluating the competition with retail is really asking whether Internet purchases are being diverted from retail purchases or are wholly new transactions. This 

is very much like the trade creation versus trade diversion arguments about bilateralism found in the international trade literature (Viner, 1950). Thus far, Internet 

sales are so small that no one has addressed the question. 

To properly answer it would require panel data on the retail and online buying 

habits of individuals over time. No such data exist. Instead, we use cross-sectional 

data from Forrester studies conducted at the end of 1997, compiled in 

Technographics ’98 and described in the data Appendix. This random survey of 

66

110,000 people yielded approximately 25,000 users of the Internet. Each of these individuals was also asked to give a qualitative ranking of how frequently they shop 

in certain types of retail stores (OFTEN, SOMETIMES, RARELY, NEVER). We aggregate their answers for discount retailers, wholesale clubs, upscale department 

stores, moderate department stores, and other department stores in two ways. First, 

we choose the maximum level of shopping in the five categories as the measure of 

retail shopping (i.e., if they report rarely shopping at an upscale department store 

and often shopping at a wholesale club, they would count as shopping often). Second, we rank each of the categories numerically (0 for NEVER, 1 for RARELY, and 

so on) and sum them across the five store types to get a measure of total retail shopping. 

To test for the competition between Internet and retail commerce, we estimate 

equations for the amount of retail shopping done by an individual controlling for 

that person’s education, income, age, race, gender, marital status, presence of children under 18, use of a computer at work, running of a business from home, and 

ownership of a computer in the year before the survey. In addition to these controls, 

we also include whether the person has bought online. If online buying comes at 

the expense of retail buying, we would expect a significant negative coefficient. We 

do not list the coefficients on the controls for reasons of space, but they are generally not surprising. 

Because this is not panel data, of course, this regression may suffer from bias due 

to unobservable, individual-specific traits. This bias could go either way. There could 

be an upward bias if the people who, beyond their observables, shop online are people with higher consumption levels who shop more in every venue. There could be 

downward bias if the people buying online are people who, for example, have little 

access to retail stores. In either case, the estimated substitution pattern between 

retail and the Internet will not reflect the true pattern but instead will reflect the 

distribution of unobservable traits across people. Despite these potential limitations, 

these are the only data that exist. 

Column 1 of Table 3 shows the results from an ordered logit estimation, where 

the dependent variable is the maximum amount of shopping (four categories) across 

the five store types. The results indicate that people who have bought online are 

more likely to shop frequently at some type of retail store, controlling for individual 

characteristics. The same is true in column 2, where we conduct an ordered logit 

of the aggregated measure of shopping (20 categories). There is, again, a small but 

significantly positive coefficient on buying online for the amount of retail shopping. 

Finally, in column 3, we do a linear regression of the aggregated measure but include state-metropolitan area dummies to account for correlated unobservables, differences in sales tax rates, and so on. The results do not change much. 

Evidence like this is only suggestive, but it does not seem to point to intense competition between retail and online commerce at present—consistent with the notion 

of Internet as trade creator. As time progresses, however, and the Internet becomes 

a larger fraction of total retail, the competition may become more intense.

Table 3. Impact of Online Buying on Retail Shopping Frequency 

Indep. Var. (1) (2) (3) 

Bought Online 0.153

(0.034) 

0.183

(0.029) 

0.248

(0.039)

Other Controls 11 

variables 

11 

variables 

11 

variables

Dummies none none metro-state

Estimation ordered 

logit 

ordered 

logit 

OLS

n 24,412 22,465 22,465

R 2 — — 0.08

Note: The dependent variable in (1) is the maximum amount of shopping 

reported in the five categories, as described in the text. The dependent variable in (2) and (3) is the summation of the five categories, also as described 

in the text. Standard errors are in parentheses. The included control variables are not listed to save space. They are the same variables as those in 

Table 5. The estimation method is listed at the bottom of the column. 

67

Distributional Considerations 

Not enforcing taxes on the Internet, as argued in the popular press, does have 

particular distributional effects (see, for example, Gillmor, 1999). The incidence is 

not random. The argument is that online purchasers are disproportionately wealthy 

so failing to collect tax on Internet commerce then represents an indirect transfer 

to the rich. If online purchases are not taxed, anyone with enough money to buy 

a computer can avoid sales tax, while less well-off individuals cannot. 

A general lack of data has prevented much analysis of the issue, but it seems intuitive that online individuals would be better off than those not online. The 

Forrester data (listed in Table 4) confirm the significant difference in terms of income and education between wired and non-wired customers. The average Internet 

user has almost two more years of education and $22,000 more family income than 

the average nonuser.

Table 4. Income and Education of Internet Users 

Income Education 

Internet Access 57.2 14.9

No Internet Access 35.6 13.0

Internet 3+ years 61.4 15.6

Internet 2–3 years 61.4 15.2

Internet 1–2 Years 58.4 14.8

Internet <1 year 52.2 14.3

Percent 

Online 

Percent of Online 

Users Having 

Bought Online

Income <25,000 0.11 0.17

Income 25–50,000 0.22 0.21

Income >50,000 0.41 0.23

Source: Authors’ calculations using data from Forrester Research, Inc. 

The regressiveness, however, is becoming noticeably less pronounced over time. 

Dividing the Internet users by when they first started going online, we see that 

newer users have significantly lower levels of education and income than existing 

users. Because the number of Internet adopters is accelerating dramatically over 

time, the data suggest that the distributional issues seem to be lessening. 

Furthermore, the data are not consistent with the broader claim that online buying is primarily serving as a way for the rich to avoid paying sales taxes. As the 

bottom panel of Table 4 shows, while richer people are more likely to have online 

access than poorer people, even among those in the highest third of income (more 

than $50,000 per year), most do not have Internet access. The second column shows, 

as well, that of those with access, slightly more than one in five has actually bought 

something online, and these rates do not vary much by income level. In addition, 

the calculations in Goolsbee (1998) and Krantz (1998) suggest that, even for those 

with access who choose to buy, the amount they spend is fairly modest. 

Enforcement Costs 

One frequently mentioned potential cost to taxing Internet commerce is the difficulty of enforcing such taxes (The Economist, 1997). Basic theory suggests that tax 

rates should be low on activities where enforcement is difficult or costly. The potential enforcement problems of Internet taxes are numerous. First, in a reprise of the 

original argument establishing the nexus requirement for taxing mail-order business, opponents argue that, with more than 6,400 different tax rates in the United 

States (Rappaport, 1994), simply calculating and remitting the applicable taxes to 

every jurisdiction from which a customer orders could be quite burdensome, particularly for the smaller, ‘‘pushcart’’ type sellers thought to populate the Internet 

marketspace. Complex tax regulations enforceable on a mature market might eliminate entire classes of small, less sophisticated Internet sellers. 

Practically speaking, however, the importance of this enforcement problem has 

fallen over time. Calculation of taxes for each particular jurisdiction may be tedious, 

but such a task is well-suited to an electronic environment. Companies such as 

Vertex or Taxware International have produced databases that can calculate the 

amount of tax to be collected if given the address of the purchaser and the amount 

68

of the purchase, data known to the merchant for transactions involving the shipment of physical goods. In the unlikely event that private companies price this software beyond the reach of most smaller merchants, state governments would have 

incentives to invest in a low-cost or even free system fully linked to popular electronic commerce platforms. 

Some administrative aspects of remittance still remain. For some products the tax 

base differs across jurisdictions. Also, sales may entail pre-registration with certain 

state tax authorities and a significant amount of paperwork. Some commentators 

have suggested the creation of a single national clearinghouse to streamline the 

ministerial aspects of tallying and remitting tax on transactions made by small 

firms with customers in multiple jurisdictions (Eads et al., 1997). Here, again, states 

have a strong incentive to take up simplifying recommendations to make collection 

easy. Many proposals, for example, would simplify collection by having only a single 

rate per state. Also, the BCG (1998) report suggests that online sales are actually 

somewhat concentrated among a small number of sellers. About half of all sales 

come from the top ten sellers and more than three-quarters come from the top 50. 

Thus applying a de minimis rule would probably not result in much reduction in revenue. A second set of potential enforcement difficulties concerns the difficulty of identifying individuals or even transactions in the electronic environment. At the extreme, 

if both merchant and consumer can be anonymous online (giving no indication of 

their physical location) and can transact in untraceable ‘‘e-cash,’’ enforcing the sales 

tax online could have serious problems. 

At present, we do not believe that this difficulty is as relevant as has been portrayed in the popular debate. For now, online commerce is dominated by credit card 

payments, and credit card verification often hinges on whether one can confirm the 

billing address of the account. Given this zip code and address information, simple 

software could immediately calculate the tax and send payment for most transactions involving physical goods sold online. Merchants with nexus already make 

such calculations regularly. 

There still remains the potential problem of verifying location of the buyer for 

transactions involving electronic goods. Note, however, that such transactions are 

not typically subject to sales tax as they often do not have physical counterparts. 

This is, then, largely a question of whether sales taxes should apply to this new category of goods. This issue is no different than existing discussions about whether 

sales taxes should apply to services (McLure, 1997). Such issues are certainly beyond the scope of this paper and are likely beyond the scope of the ITFA advisory 

commission, as well. 

In the future, however, non-credit card payment mechanisms such as incentivebased scriplike systems (e.g., ‘‘Cybergold’’), where members earn and trade ‘‘points’’ redeemable through participating merchants or micropayment systems (e.g., 

Cybercash and Echarge) may become increasingly important and would seem to restore the problems of anonymous customers. This assumes, however, that the Internet of tomorrow will be similar in the relevant respects to the Internet of today. It 

is conceivable that compliance and enforcement may actually become easier as the 

architecture of the Internet evolves to better suit electronic commerce—perhaps 

even easier than they are for non-Internet-based transactions. Further, government 

policy decisions themselves will likely have a major influence on the ‘‘code’’ underlying the Internet and its transparency to government policy (Lessig, 1998). 

Network effects, for example, are likely to narrow the payment mechanisms to a 

small number of choices. As long as there is general centralization at some key point 

among Internet payment schemes, the government will have a way to collect taxes 

from most transactions. If policymakers, for example, simply attach their reporting 

requirements to the most popular payment schemes, they could calculate, collect, 

and remit sales tax on transactions without requiring the merchant to do much 

work. An extra charge representing a sales tax would be applied, collected, and electronically remitted as an integral part of each instance of payment. Apart from payment mechanisms, server-side e-commerce software could be revised to incorporate 

sales tax. Government tax rules could give incentives to those controlling the payment mechanism software to ensure that their products incorporate calculation, collection, and remittance of tax at the moment of sale. Those wanting to evade tax 

collection and remittance would have to develop nonstandard software to handle 

customer payments (and do so in a way that could not be easily detected by state 

governments). 

More generally, the advent of digital signatures to enable trusted commerce 

means that the respective states could themselves become common to a transaction, 

freely verifying the residence of someone wishing to buy something. Merchants with 

consumers who are unable or unwilling to offer residence verification from any jurisVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00072 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
69

9There is a third potential source relating to retail market power, but we do not consider it 

in detail here. If local retailers have market power, Trandel (1992) shows that having a taxfree outside option can reduce this market power and actually improve consumer welfare. Given 

that we have no data on market power, we will just assume that markets are competitive. 10Goolsbee and Klenow (1998) show that there seem to be significant local spillovers from 

using the Internet and using e-mail. 

diction could be assessed some sort of tax then allocated in a ‘‘throwback’’ way to 

the jurisdiction in which the merchant operates, or among the known jurisdictions 

in which the merchant sells (see Eads et al., 1997). (Klassen and Shackelford (1998) 

analyze the economic effects of throwback rules in the retail context.) 

The essence of any effort on enforcement is not to spend resources in an effort 

to eliminate every single instance of fraud. This standard is unrealistic even for retail sales taxes. Rather, the goal is to make compliance easy and evasion difficult 

so that the problem is limited. In this sense, in the short run, there may be some 

problems with trying to enforce sales taxes online, but looking forward, these problems are likely to lessen in importance. 

Externalities and Under-Provision 

A final set of costs associated with taxing Internet commerce relate to the potential existence of externalities. According to the results in Goolsbee (1998), if taxes 

were applied effectively to Internet purchases, there would be a significant reduction 

in the amount bought online. If there are important externalities, this reduction 

could be a significant social cost. Many of the arguments in the political arena that 

we should protect or nurture the Internet at an early stage of development are in 

this spirit. Here, we evaluate two potential sources of social under-provision: network benefits and information problems.9

The first problem is the potential positive spillovers arising from network 

externalities—that the benefit to each Internet user rises with the size of the overall 

network. The idea is that seeding the Internet early will yield large benefits in the 

future. There is very little empirical evidence concerning the magnitudes of network 

benefits associated with either the Internet in general or Internet commerce specifically.10 In the case of online commerce, the potential spillovers may involve local 

learning spillovers (e.g., a friend explains which websites are useful or that using 

credit cards online is safe), demand side economies of scale (e.g., with a big enough 

potential market, a merchant will be willing to incur fixed costs to enter various 

niche markets or develop additional features), or direct network benefits (e.g., if auction sites can create networks of otherwise thin markets, both buyers and sellers 

benefit). In each case, as the number of Internet customers grows, the value of 

Internet commerce rises. It is important to note, however, that for network 

externalities to justify, essentially, infant industry protection of the Internet, electronic commerce must do more than simply divert sales from retail stores, as discussed above. 

We first ask if there is any empirical evidence favoring the existence of spillovers 

associated with Internet commerce. Does getting a person to buy online actually 

lead others to follow suit? Existing data are largely inadequate to answer this question precisely, but for the individuals in our data, we have some qualitative information on the topic. In addition to reporting demographic information, people with online access also provide information about the share of their friends and family who 

buy things online. They can answer ALL (<1 percent), MOST (2 percent), SOME (17 

percent), VERY FEW (46 percent), or NONE (35 percent). 

Because this is a single cross-section that lacks further information, we cannot 

deal with the obvious potential problem of unobserved common traits among friends 

beyond the observables and location dummies as, for example, Goolsbee and Klenow 

(1998) do in their study of network benefits; nor can we show that spillovers are 

actually externalities in the spirit of Leibowitz and Margolis (1994). Given that 

these are the only data available, however, we attempt to examine what correlations 

exist in them. 

We do a standard probit regression of whether an individual with online access 

has bought something online. In it, we include the same individual control variables 

as before (income, age, education, gender, race, marital status, the presence of children, the use of a computer at work, the operation of a business from home, whether 

the individual already had a computer in the year preceding the survey, and dummy 

variables for the metropolitan area of residence). In addition, we include dummy 

variables for the share of friends buying online. If there are network spillovers, having more friends and family buying online should make the individual more likely 

to purchase. As shown in Table 5, people are more likely to have bought on the 

Internet the greater the share of their friends that have done so. Moving from havVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00073 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
70

11Some important early discussions of congestion can be found in Mackie-Mason and Varian 

(1995; 1996), Bohm et al. (1994), and Gupta et al. (1995).

ing no friends buying online to having most buying online, for example, raises the 

probability of purchase by more than 0.40. This is a large and significant coefficient 

and is consistent with local spillovers (although also consistent with common 

unobservables among friends). 

At the same time, it is important to think about the size of future network 

externalities. The major network externalities are likely to exhaust or at least diminish once the Internet achieves major scale. Too often, infant industry protection 

turns into established industry protection. Further, we expect that eventually there 

will be an important negative network externality at work (to the extent it is not 

already) in increasing Internet congestion due to the prevalence of zero marginal 

cost pricing.11 The congestion problem is likely to get worse as the Internet grows 

and argues against subsidizing the growth rate through tax policies. 

Table 5. Influence of Friends on the Probability of 

Buying Online 

Variable (1) 

All friends buy online 0.470 (0.049) 

Most friends buy online 0.408 (0.021) 

Some friends buy online 0.333 (0.007) 

Very few friends buy online 0.147 (0.006)

Income 0.003 (0.001) 

Education 0.005 (0.001) 

Age –0.002 (0.001)

Female 0.061 (0.005) 

Single 0.025 (0.006) 

Children under 18 –0.041 (0.006)

Asian –0.011 (0.018)

Non-white minority –0.009 (0.007)

Use a computer at work 0.005 (0.006) 

Run a business from home 0.044 (0.007) 

Owned a computer in 1996 0.110 (0.007)

Dummies Metropolitan Area

n 24,059

R2 0.14

Notes: The dependent variable is a variable equal to one if 

the respondent reports having bought something online in the 

past three months. Standard errors are in parentheses. The 

equation is estimated using a probit. 

The second externality-type argument regards the information problems associated with the security of Internet transactions. In reality, credit card security on 

the Internet is extremely high. There are no direct calculations of the incidence of 

online fraud, but experts generally agree that it is much more likely to have one’s 

credit card number stolen over the phone, for example, than online, yet over-thephone use is common (Fraza, 1998). Further, even if one’s credit card is stolen, there 

is a $50 limit on the amount of charges for which the consumer is liable. 

The Forrester Technographics ’98 data asked the 80 percent of Internet users who 

have not bought online why they have not done so. By far the most common answer, 

accounting for 45 percent of the responses, was that they did not want to give out 

their credit card information over the Internet. When asked to give their opinions 

of the level of security of credit card information given out over the web (rated from 

one to ten with ten being extremely secure and one being not at all secure), the respondents’ average rating was only a 2.9. The overall safety and the limited risk 

associated with Internet purchases do not appear to be widely understood by Internet users. Once they buy something, however, the repurchase rates are very high. 

With the apparent asymmetric information on the part of new consumers about 

security, there may be justification for encouraging people to try shopping online. 

In the social sense, there may be too little Internet commerce. Qualitatively, this 

is a cost of taxing Internet commerce, though, again, this is a strictly short-run jusVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00074 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
71

tification. Once Internet commerce is established as a conventional sales channel, 

there is no reason to give a benefit. 

Conclusions 

In this paper, we have examined the costs and benefits associated with enforcing 

taxes on Internet commerce. The results suggest several things. One, because of its 

limited size relative to retail and because of the type of products being purchased, 

aggressive enforcement of taxes on Internet commerce would raise only a small 

amount of revenue over the next several years. Two, Internet commerce does not 

seem to be primarily fueled by diversion from retail sales. Third, not enforcing taxes 

on the Internet does disproportionally benefit higher income and highly educated 

people, but this effect has lessened substantially in the last two years. Fourth, the 

costs of complying with taxes on Internet commerce are unlikely to be very large 

for most online transactions. Fifth, there is suggestive evidence of spillovers and of 

information problems that should be considered costs of aggressively applying taxes. 

These benefits are primarily restricted to the short run, however. 

Given that the costs of maintaining the status quo are small and the benefits of 

nurturing the Internet seem to be somewhat concentrated in the short run, a natural compromise position might be a moratorium on enforcement of Internet sales 

taxes in the short run followed by equal treatment once the conditions change. This 

is not quite the same as the ITFA. The ITFA is a moratorium only on new and discriminatory taxes and leaves the broader question of sales taxes to be resolved in 

the future upon the recommendations of an advisory commission. Hopefully, results 

such as those in this paper will encourage advocates and policymakers on both sides 

to give more empirical thought to the tax issues raised by the Internet. 

Acknowledgments 

We wish to thank the American Bar Foundation and the Berkman Center for 

Internet and Society for financial assistance and Ben Edelman, Christine Jolls, 

Peter Klenow, Lawrence Lessig, and Steven Levitt for helpful comments. Michelle 

Spaulding and David Melaugh provided excellent research assistance on the project. 

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Appendix 

Forrester Research is a leading market research company whose specialty is the 

information economy. In their Technographics ’98 program they conducted a major 

consumer survey about technology in which they asked more than 110,000 people 

74

about their characteristics and their ownership of technology (the field work was 

done by the NPD Group). A greater description of the survey can be found in 

Goolsbee (1998). 

The individual variables we use are income, education, age, gender, marital status, race, children under 18, ownership of a computer in 1996, use of a computer 

at work, and running of a business from home. We turned the series of dummy variables for education, age, and income into continuous variables. If income was stated 

as between $35,000 and $40,000 for example, we imputed an income of $37,500. For 

top-coded variables, we tried various values, but changing them had almost no impact on the results. Similarly, just including the variables as dummies gave the 

same results. 

Though the sampling methodology is proprietary, it is meant to make the survey 

nationally representative and the data is both widely respected and very expensive 

for private sector companies. It also matches up somewhat well with government 

sources such as the Current Population Survey on obvious variables like income, 

gender, and so on. 

The survey also presents data about whether individuals owned a computer, when 

they got their computer, what type of computer they bought, whether they had access to the Internet, and many other questions of this nature. For those who reported having online access, they were also asked how long they had been online, 

whether they had bought something online, what share of their friends and family 

are online, and what share of their friends and family have bought something online. These are variables we use in our analysis.

Senator BREAUX. [presiding]. Our Chairman has had to step 

away. He will be recognized when he returns. Thank all of you for 

coming. This has been a terrific discussion on a very interesting 

and very, very important issue that really cries out for some resolution. 

Dr. Berthoud, I know that have you never met a tax you liked, 

no matter what shape, size or form it happens to be in. But let me 

ask you to, sort of philosophically, I mean, what is wrong with a 

case where in my hometown of Crowley, Louisiana, the city fathers 

and the citizens of that community determine that it is appropriate 

to levy a five percent sales tax on purchases. They are going to use 

it for police protection and fire protection and some of it will go to 

schools, and yet have a situation where some local citizen buys a 

pair of shoes at the local shoe store he pays that five percent sales 

tax and goes for those purchases. What is wrong with saying that 

if that same person orders a same pair of shoes over the Internet 

for someone who is not located there that somehow they should not 

have to pay the five percent sales tax? 

Dr. BERTHOUD. Senator, you ask a very important question. This 

really is the heart, I think, of the debate as these panelists and the 

previous panelists have gotten to. That ultimately is the issue—

should we impose sales taxes on remote sales. That ultimately is 

the public policy question. We would again argue that we would reverse the logic, if you will, and rebutting those who suggest it is 

unfair for one type of business not to pay a tax and one to pay it, 

we would say that any business can begin e-commerce. This is the 

ultimate in economic democracy, we believe, and that is the beauty 

of the Internet, for any business can get on and their customers 

shop sales tax-free. 

And I would remind you that if that consumer purchases that 

item locally or purchases that item remotely, some government 

somewhere in America is still getting taxes, be it as I said property 

taxes, income taxes, corporate income taxes, or individual income 

taxes. There are plenty of taxes on every single purchase that we 

make, whether there is a sales tax—Senator Wyden’s State does 

75

not have a sales tax, but every single purchase, whether you see 

it or not at the register, has myriad taxes and indeed every American pays 35 percent to 40 percent of their income in taxes. So we 

are, we are not in any danger, if we exempt that purchase from 

sales tax, of governments running out of money. And indeed we 

have heard testimony about the revenue loss, but I have not seen 

in any projection for any State—despite the growing prevalence of 

e-commerce—in five years, to be collecting less revenue than they 

are today. 

Senator BREAUX. I go back to the point we were discussing with 

Senator Hutchison. Her State does not have an income tax. 

Dr. BERTHOUD. Very wisely. 

Senator BREAUX. But her State still generates revenues through 

the sales tax for all these important purposes. I totally agree with 

her that if all of a sudden people start saying I am going to avoid 

a five cent or five percent sales tax on everything I can buy and 

get it almost as quickly by ordering it on the Internet, it is going 

to put a tremendous pressure to make up those lost revenues by 

establishing something that you also do not like, which is an income tax on a State level. 

Dr. BERTHOUD. That would certainly be correct, Senator. 

Senator BREAUX. You do not like that tax either. 

Dr. BERTHOUD. No, but Texas is among the States that has had 

over a number of years a billion dollars in surplus. We see for the 

foreseeable future that state over-spending is a far greater threat 

and I would reference you to the article cited in my testimony in 

the New York Times. States have so much money now. 

Senator BREAUX. Let me make sure you do not include mine. We 

have a $600 million deficit. We can talk about why. Most States 

have a substantial deficit. 

Dr. BERTHOUD. Most States have a substantial surplus. They are 

creating programs. Some of them have merit, but apparently most 

of them do not and that seems to us as the far greater threat to 

taxpayers, and again the great State of Texas, for the foreseeable 

future, it is projecting, despite the expansion of e-commerce, it is 

projecting revenue growth at the State level and indeed there is, 

according to Texas’ own projections, there is no threat to the Texas 

revenue source. 

Senator BREAUX. My final question if I might, Mr. Bullington of 

Wal-Mart. If I was a smart fellow and wanted to really compete 

against your chains, I take it that under this scenario that we are 

currently under that you got a Wal-Mart in my local town that 

sells all the wonderful things that you do and I got to go to WalMarts about once a week for a Wal-Mart fix, but I could establish 

Easy Mart and locate Easy Mart maybe in Maine. And I could survey everything and every Wal-Mart store in my State and put 

every single thing that you have in your Wal-Mart and put it in 

Easy Mart located in Maine; establish a web site that clearly spells 

out everything that you have in your Wal-Mart store that I have 

in my Easy Mart up in Maine; buy billboards and advertise the hell 

out of it all over my State that say: See it, feel it, touch it at WalMart, but buy it at Easy Mart, and encourage people just to go 

through your store and see it, feel it and touch it and then come 

76

out and just go right out there and say I’ll buy it from Easy Mart. 

And Easy Mart would not collect the sales tax. 

I mean, that is a hypothetical. If I was really smart and I 

thought this was going to be the current situation for the indefinite 

future, I would do that. Not me personally. I do not have enough 

money to establish anything, but somebody might do that. I mean, 

would that be possible? 

Mr. BULLINGTON. It is certainly possible. We welcome that type 

of competition. Just do not tie one arm behind us with a six to 

eight percent pricing range. 

Senator BREAUX. So that is fine for Wal-Mart and most retailers 

that are in your type of business as long as there is not a discriminatory assessment or nonassessment of a local sales tax? 

Mr. BULLINGTON. Absolutely. We might be very well doing WalMart whatever, side by side, selling on the Internet the same way. 

Senator BREAUX. From your perspective, discrimination, I agree 

we should ban and put a moratorium ad infinitum on discriminatory taxes. I think they are illegitimate. Thank you. 

Senator MCCAIN. Thank you very much. Senator Wyden. 

Senator WYDEN. I just have two questions for this panel, one for 

you, Mr. Zittrain. You have heard about the Governors’ proposal 

with respect to tax simplification and you heard about it again 

today. What is your assessment of what it would cost the typical 

small business to collect and remit these remote sales taxes? We 

have gotten projections that for every dollar you would collect, the 

burden on the small business person would be very substantial. 

What is your assessment on that point vis-a-vis the Governors’ proposal? 

Mr. ZITTRAIN. Is that under the way things currently work? 

Senator WYDEN. No. Under the proposal that they have been 

talking about. As you know, and it was described again today, the 

centralized kind of system and the like. 

Mr. ZITTRAIN. What I would want to know first is when the proposal talks about a de minimis exemption, for example if you are 

just selling a few cookie recipes over the Internet, do you have to 

comply with 50 States’ tax codes? The higher that de minimis exemption is, the more that businesses who are Mom and Pop doing 

small amounts, just getting started, do not have to worry about 

compliance. So one question would be: How big is the de minimis 

exemption going to be? 

Another question would be, can Governor Leavitt see the states 

actually unifying their tax bases? And by that I mean, if you are 

selling blankets, you would not need to know whether the blankets 

are covered in Nevada or Texas. You would know whether or not 

with respect to all 50 States that you have actually got something 

coming under the tax. As far as actually calculating the rate and 

doing remittance, if in fact Governor Leavitt’s group can produce 

a system whereby it is one-stop registration, one-stop calculation as 

far as actually figuring out how much to collect and where to send 

it, that could make it quite easy. There are companies like Taxware 

International where it says this is how much you owe and away 

you go and with microtransactions it would then be easy to remit 

the tax. 

77

Senator WYDEN. We are just skeptical that that can be done. You 

heard me say I am trying to meet him halfway and approach this 

along the lines of giving him a vote on a date certain with respect 

to doing this. It is just that some of the leading accounting firms 

in the country have done an estimate of what it would cost for the 

Governors’ proposal and for the typical small business person, I 

mean, relative to each sales tax dollar collected, the burden would 

be very, very great. 

I mean, as you know, you have to distinguish between cookies in 

one State and candy and profit-making organizations and nonprofit-making organizations and I think your first point was very, 

you know, very correct, which is we have to see what the de minimis exemption is. And of course the higher you make it the less 

likely you are to flatten Mr. Morse there. And that is what is very 

important and I appreciate it. 

I am also going to put into the record the studies that have 

shown that as of now, based on what the Governors have said, the 

cost for the average small business to collect and remit the sales 

tax is very, very high. 

Mr. Morse, one question for you. We are so glad that Senator 

Leahy pushed to have you come because I think you are really the 

face of the new economy. This has been portrayed now for 3 years 

as sort of bricks and mortar vs. folks who are online and they are 

going to be in this bloody sort of battle, but Senator Leahy has 

really brought to our attention that in a sense you are the integration of these two worlds. You have this traditional business, socalled bricks and mortar business, have an online economy and I 

and others called this sort of bricks and clicks. And my sense is 

that this has accelerated much more rapidly than we ever thought 

when we wrote the original law. 

There was one study that showed since the Internet Tax Freedom Act, 74 percent of the Main Street retailers are like you. They 

have set up a serious online kind of operation and that leads me 

to believe that if and when our country has economic problems 

again, it is not going to be because of the Internet, it is going to 

be because of all kinds of other considerations, maybe it will be oil 

prices. Maybe it will be interest rates. It could be a variety of 

things but it will not be because of the Internet. 

My question to you is based on your involvement as a Main 

Street retailer, is it your sense that a lot of your colleagues on 

Main Street are going to go the route that you have and sort of integrate these two worlds because that is how you see your future? 

Mr. MORSE. Yes. I believe that they will. I know of many cases 

where that has happened. I had the good fortune to be interviewed 

by ABC World News back before Christmas. 

Senator WYDEN. I saw the show. 

Mr. MORSE. You saw that show. Small world. The—subject matter was Main Street USA and was presented prior to Christmas 

over the Internet and there were several Montepelier businesses 

that stood to be interviewed by them, small businesses like mine 

and did not, were not interviewed, but I just feel like it is the new 

way coming down for businesses, large and small. 

78

Senator WYDEN. When you say it is the new wave, I think that 

really sums it up. This is not going to be bricks and mortar versus 

the online world. This is going to be an integration of the two. 

We are really glad that Senator Leahy pushed to have you come 

and I appreciate your coming. All of you have been very helpful. 

We have worked with almost all of your organizations and will continue to do so. 

Senator DORGAN. Let me thank all of the panel. I regret that I 

had to go for a meeting with Senator Daschle in the middle of your 

presentations but I have read much of what you had to say and I 

appreciate your being here and your willingness to testify. Mr. 

Zittrain, my understanding from your response to Senator Wyden 

is that there are circumstances under which the simplification of 

a collection of a sales or use tax would not impose a burden and 

if that were the case, you would not oppose that. Is that what I understand you to mean? 

Mr. ZITTRAIN. That is correct. If there is a strong administrative 

burden imposed on those out of state trying to collect it, that is 

good reason not to bother collecting the tax, as our article explains. 

On the other hand, if there is a way to make that burden go away 

over time, it is another reason why imposing a moratorium now, 

but being sure to lift it later, actually makes sense. 

Senator DORGAN. The piece of legislation that actually passed a 

Subcommittee in the U.S. House probably 15 years ago now in the 

Ways and Means Committee, dealing with remote sellers—in this 

case it was catalogue sales—included a $10 million de minimis. 

That is businesses that were not at a $10 million revenue threshold 

would not be required to be involved. Mr. Morse, would your business meet that test? 

Mr. MORSE. Yes, it would. 

Senator DORGAN. I do not quite understand, is it below $10 million? 

Mr. MORSE. No. It is below. 

Senator DORGAN. The reason that was included is there needs to 

be, if we are going to simplify here the collection of what is now 

a use tax, there must be genuine simplification in the requirement 

that the States impose a single rate against remote sellers, a single 

sales tax rate, a common sales tax base. And in addition there 

needs to be a de minimis that will allow smaller businesses not to 

get caught in the net. 

So I think in any event, when the compact is created among the 

States, it will include all three of those circumstances and I do not 

know what the de minimis would be, but I will just say to you that 

what it was 15 years ago with catalogue sellers in the House, recognizing the compliance issues which then would not be radically 

simplified but now I think would be simplified by technology, the 

de minimis was $10 million. And I want to say that, Mr. Morse, 

for your comfort because I think all of us understand those who are 

starting out, you do not want to impose upon them significant burdens. 

In the State sales tax bases, most sales tax administrators will 

create de minimis levels, but their de minimis levels are normally 

the people doing $1,000 a year or $2,000, crocheting doilies with 

magnets to hang on refrigerators and putting some brand name 

79

and making $1,000 or $2,000 a year. Those are normally excluded. 

That is a relatively low de minimis. With respect to this, the de 

minimis would have to be more significant. 

Dr. Berthoud, I was interested in your testimony. You are obviously well versed in all of these issues and you talk about the protax side. There in fact is not a pro- or anti-tax side in this debate, 

is there; because we are not talking about a new tax. A tax exists 

on these transactions, so when you talk about the pro-tax side 

what are you referring to? 

Dr. BERTHOUD. An example of that would be the type of regime 

that Governor Leavitt is talking about creating. 

Senator DORGAN. But would that result in the imposition of a tax 

that does not now exist? 

Dr. BERTHOUD. Well, it would result in already high State tax 

collections going even higher, yes. 

Senator DORGAN. So he is pro-tax because he advocates the collection of a tax that already exists? 

Dr. BERTHOUD. He is pro-tax because he is advocating higher 

taxes on already overburdened taxpayers. 

Senator DORGAN. How is it a higher tax if a dollar transaction 

imposes a current use tax and Governor Leavitt suggests the simplification of its collection, how is Governor Leavitt advocating a 

higher tax? 

Dr. BERTHOUD. Senator, we at the National Taxpayers Union 

look at it this way. The average American has to turn over 35 percent of their income to the government. The average American, by 

the way, supports taxes at 25 percent or less. 75 percent of Americans across all demographics support that. The adoption of what 

Governor Leavitt is proposing would increase that. It means more 

taxes for States. It is more taxes paid by taxpayers. 

Senator DORGAN. Do you view tax compliance as an increased tax 

burden? 

Dr. BERTHOUD. We view more taxes as more taxes. 

Senator DORGAN. Would you admit this: that the current use tax 

that exists on a transaction, if it exists, is not going to be increased 

by its collection through some other mechanism? 

Dr. BERTHOUD. Absolutely. 

Senator DORGAN. And if it is not going to be increased, how then 

do you suggest that someone who suggests collection is pro-tax? 

Dr. BERTHOUD. Tightening enforcement mechanisms, creating a 

tax regime which would potentially climb above the $10 million 

threshold is adding taxes and adding a burden to both small businesses and to individuals. I would also add that it would be very, 

very hard to create an exemption for businesses. Or let me just say 

it seems to be a huge loophole where there would be a $10 million 

threshold. 

Senator DORGAN. I am talking about the folks above who would 

be collecting a tax that is already owed. I graduated in a high 

school class of nine, I was in the top five. I am not the quickest 

on all of this. But my sense is that if you do not support the payment of taxes that are owed, then you must support the nonpayment of taxes or nonenforcement of existing taxes. 

80

Dr. BERTHOUD. Let me try and clarify. We do not support the 

creation of an Internet compact for Internet sales taxes such as 

Governor Leavitt is proposing. 

Senator DORGAN. You would not oppose Governor Leavitt deciding we are going to collect every dollar of use tax in his State? 

Dr. BERTHOUD. That certainly is his right. 

Senator DORGAN. Would you encourage the filing of returns of 

every Utah resident that complies with the requirement that exists 

in the law? 

Dr. BERTHOUD. We would not support that. 

Senator DORGAN. I think I made my point. When you use the 

word pro-tax, I don’t think you are using it properly. I was not born 

into this world to defend Governor Leavitt. We are not even of the 

same political party, but he is not a pro-tax Governor. He is here 

talking about collecting a tax that is currently owed and a mechanism to do that that is simple, effective, fair, and does not obliterate your tax base. I mean, we disagree on that, but I just wanted 

to make the point, I think throwing around this notion of new tax, 

pro-tax and so on is unfortunate because I do not think it fairly describes this debate. 

Dr. BERTHOUD. If I may, Senator, I would argue on the other 

side. I think it is terribly unfortunate for groups like the NGA to 

say if we do not adopt their proposed regime, to use these scare 

tactics such as the forced firing of firemen and teachers and policemen. I think that is just as unfortunate. 

Senator DORGAN. What taxes do you support, Dr. Berthoud? Can 

you describe what kind of taxes you do support? 

Dr. BERTHOUD. We support a lower tax on all Americans. We do 

not advocate zero taxation but we think the current level of taxes 

at 35 to 40 percent on every single American is far too high. 

Senator DORGAN. But tax rates above zero then would require a 

need to describe a certain kind of tax system. What would you prefer? Sales tax or income tax? Property tax? 

Dr. BERTHOUD. It is up to the States what type of tax system 

that they have. Income taxes are the most pernicious types of 

taxes. I think our message here is an effort to say that the aggregate level of taxes is too high and it should be lowered. If the 

States want to have one type of tax or another, that is their business. 

Senator DORGAN. I do not mean to single you out but you use the 

word pro-tax which I think is horribly inappropriate in this debate 

and I wanted to straighten that out. 

Mr. Bullington, you represent Wal-Mart? 

Mr. BULLINGTON. Yes. 

Senator DORGAN. Is Wal-Mart going online? I read your testimony. Wal-Mart is going online to be an e-tailer on line? 

Mr. BULLINGTON. Have been for sometime. Yes. 

Senator DORGAN. Are you separately incorporated to do that? 

Mr. BULLINGTON. Effective early this year, yes. 

Senator DORGAN. What is the result of that with respect to your 

tax base? 

Mr. BULLINGTON. We only collect State taxes of California, Utah 

and Arkansas. 

Senator DORGAN. You did that for what reason? 

81

Mr. BULLINGTON. Well, we did it because California is certainly 

a magnet as far as things going on, Silicon Valley and that industry and we brought in venture capital. 

Senator DORGAN. I am not talking about the three States, I am 

talking about the decision to separately incorporate. 

Mr. BULLINGTON. Because of the reasons to attract outside management investment capital and to deal with the competitive issue 

as it relates to sales tax collection. 

Senator DORGAN. If you had not done that you would be one of 

the larger merchandisers in the country with brick and mortar in 

every State and on the Internet, but being on the Internet would 

require you to collect sales taxes and your competitors would not? 

Mr. BULLINGTON. As a division of Wal-Mart stores we collected 

sales tax from every jurisdiction where we delivered product to. 

Senator DORGAN. Mr. Morse, congratulations. I am one of the 

great maple syrup fans in America and we do not produce any of 

it in our State so to the extent that I am able to access it, it has 

to be through the Internet, catalogue sales or in the grocery store. 

Bring those prices down just a little bit, if you will, but maple 

syrup is one of the great substances, as far as I am concerned. 

Thanks to the rest of you for sharing your thoughts with us. This 

is not an easy issue at all. It is complicated and difficult, and contrary to what some believe, I think the stakes are very, very high 

here, and this should be done thoughtfully and done promptly. I 

am not someone who wants to injure the Internet. I want it to grow 

and flourish and I want to work with my colleagues to find a way 

to solve all of the problems and there are several problems here, 

not just the issue of preventing discriminatory taxation which I will 

join in doing. 

We should not allow discriminatory taxes. That is one issue. 

There are two or three other issues. Let us solve that at the same 

time. Let us not believe that one has more weight than the others. 

Let us address this as a group of problems that we can come together on and do good things. I say the Chairman feels very strongly about this. I have great respect for him and when we provided 

the previous moratorium on the floor of the Senate, we worked together to reach an agreement on it and I will again support him 

on extending the moratorium. 

I hope, however, that we can work in a way that adds some 

things to the extension that will create some balance to addressing 

the other sides of these issues. I would say the same with respect 

to my colleague, Senator Wyden, who also feels strongly about it. 

Again, thank you for being with us. This Committee is adjourned. 

[Whereupon, at 12:10 p.m., the hearing was adjourned.] 

(83)

A P P E N D I X

PREPARED STATEMENT OF HON. MAX CLELAND,

U.S. SENATOR FROM GEORGIA

Mr. Chairman, thank you for holding this hearing today on the important issue 

of Internet sales tax policy. 

As a former state official, I believe that the sovereignty of states must be a closely 

held and protected authority. However, Congress has pre-empted the state’s authority to develop its own tax policy with regard to Internet sales since 1998. State and 

local officials in Georgia and elsewhere went along with this plan with the understanding that after three years there would be some direction on this issue from the 

Advisory Commission on Electronic Commerce (ACEC). However, the Commission 

did not reach the statutorily required two-thirds majority necessary to make a recommendation, and instead of working together to reach a valid recommendation, 

they submitted to Congress a simple ‘‘findings’’. Thus, unfortunately, the ACEC 

failed in this assigned mission of consensus-making. 

Some in Congress contend that the state and local sales tax system is too cumbersome, and, therefore, Internet sales should be exempt from sales taxes. This may 

be the case, and I encourage state officials to evaluate their tax policies. However, 

in today’s society, where the ‘‘new economy’’ leaders survive by filling voids, there 

are companies that have developed software that enables an on-line seller to assess 

the appropriate local sales tax. For example, Taxware, in Salem, Massachusetts, licenses their software to on-line retailers who also have nexus in states, requiring 

the collection of local sales taxes. 

On the other hand, some traditional bricks and mortar stores have established 

separate, independent on-line businesses that do not collect sales taxes because as 

separate businesses they do not technically have nexus in as many states as the 

‘‘bricks and mortar’’ stores by the same name. How would the Supreme Court have 

interpreted this business arrangement if it was hearing the Quill case today? And, 

I would question if this was the intent of Congress when it passed the Internet Tax 

Freedom Act. 

Additionally, is Congress in the business of rewarding stores that only choose to 

offer products on-line? Or, punishing stores whose owners only choose to offer goods 

to consumers who visit their store? Barring outside intervention, I believe that the 

most efficient form of commerce will prevail. Congress should not favor one form of 

commerce over another, whether in tax or other forms of public policy, but rather 

must allow the businesses to compete equally for customers. 

Finally, some of our colleagues in Congress would like to make this into an antitax versus pro-tax issue. This is not the issue. Sales taxes are not new taxes and 

are not imposed by the federal government. This tax policy is developed at the most 

local level to support local services—education, emergency services, local healthcare, 

and infrastructure development. In Georgia, tax policy decisions are even more localized than elected officials. Proposed sales taxes must be put to the voters in a 

referendum for their choice. Are my colleagues asking me to support denying my 

constituents the right to vote for a sales tax to improve their local school? 

I look forward to the testimony today and hopefully to having some of the questions I have raised in my statement addressed. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. JOHN MCCAIN

TO BURR MORSE

Question 1. How many employees work for you? 

Answer. 18 employees. 

Question 2. How many employees do bookkeeping/accounting or tax work for you? 

Answer. 1 employee does bookeeping/accounting. 

84

Question 3. How much does your maple sugar sell for? How much does someone 

usually order at a time? Do you charge for shipping and handling? How much is 

the shipping charge for a typical order? 

Answer. We sell a full range of sizes and grades of maple syrup from 1.7 oz. (nips) to gallons. Our gallons average about $40.00 and our nips are $1.49. We also sell 

cases of 1⁄2 pts., and qts. Our average order is about $38.00 for the syrup and $10.25 

for the shipping and handling. Yes, we charge for shipping and handling. Maple 

syrup is a heavy, bulky, liquid and slightly perishable product. Carriers like UPS 

do not like several of the above qualities. Many sizes of syrup have to be double 

boxed with special packing material. Again, our average shipping charge is $10.25. 

Question 4. Do you collect sales tax on sales within Vermont? Do you know how 

much sales tax would be charged on your market in Salt Lake City, Utah? How 

would you go about collecting a sales tax on a can of maple syrup you sell and ship 

to a customer in Moses Lake, Washington? 

Answer. Within Vermont, maple syrup is considered a grocery item and groceries 

are not taxable in Vermont. I have no idea about the tax repercussions in Salt Lake 

City or any other municipality in the U.S. In some, no doubt, maple syrup would 

be considered a luxury product and taxable. In others, groceries may be taxable. For 

the Moses Lake order, we would probably have to purchase software that would list 

Moses Lake tax code. We would then have to pay the Moses Lake tax, by mail, out 

of our pocket, or collect an amount of tax on every container of syrup to create a 

pool for paying taxes when due. (Would this even be legal—charging tax to every 

one where only some were liable?) I doubt if here is presently software available 

that would categorize every product as taxable or not taxable for every municipality 

and then electronically add the tax to any given order. My point is, for the Moses 

Lake order, I think there would be considerable manual labor in handling the taxation. 

Question 5. Do you have competitors in your business? Are they large or small 

companies? What effect has the Internet had on your ability to compete with your 

competitors? 

Answer. Maple syrup is a pure product that is very labor intensive to produce on 

an extremely seasonal level. There is no such thing as a national brand of pure 

maple syrup. Our competitors are relatively small companies. On ‘‘over the counter’’

orders, we feel a minimum of grief over competition. Traditional mail order brings 

minimal competition because we all tend to have our own exclusive customer lists. 

Internet, in my opinion, is getting to be the most competitive means of selling maple 

syrup because we are all competing on the search engines to be top on the list. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. MAX CLELAND TO

DR. JOHN BERTHOUD

Questions. Georgia’s state and local leaders strongly support technology advances 

and the opportunities offered by electronic commerce. Georgia is home to corporations, such as EarthLink, iXL, and UPS, which are carving the path to the new 

economy. Why should the federal government extend a moratorium that prevents 

local leaders from establishing local tax policy to serve these corporations and their 

employees? 

In Georgia, citizens must vote by referendum to impose sales taxes on products 

they purchase. Why should Congress limit local citizens’ ability to determine how 

they wish to tax themselves? 

As we know, e-commerce is experiencing tremendous growth. Each transaction 

taking place on-line translates in to a loss of revenue for state and local services, 

and this amount will continue to grow. Services like police protection and ambulances will still be needed to support their local community. The revenue lost will 

have to be made up somewhere. In Georgia, the Governor and General Assembly 

have developed a tax policy that includes reducing property taxes for our citizens. 

Do you support a bill that may force local lawmakers to alter this popular tax policy 

change and actually increase property taxes to make up the lost revenue to support 

emergency services? 

Isn’t it true that the ability to set revenue policy to deliver necessary public services is a fundamental authority of state and local government? 

Answer. It is perhaps the ultimate irony that opponents of the Internet Tax Moratorium have, on occasion, invoked the argument of ‘‘freedom’’ to support their point 

of view. Throughout the history of mankind, the single greatest threat to freedom 

has been from overreaching government. The Internet Tax Moratorium simply 

blocks the establishment of new and discriminatory taxes on the Internet. Senator 

Cleland’s question seems to imply that Senator McCain’s Internet Tax Moratorium 

85

1 Hans A. von Spakovsky, ‘‘Sales Taxes and the E-commerce Revolution,’’ The Georgia Public 

Policy Foundation, www.gppf.org/pubs/commentaries/2000/etax.htm.

is a threat to freedom. With due respect to Senator Cleland, that is absolutely backwards: Senator McCain’s legislation expands the freedom of individuals by blocking 

government. 

Regarding the line of questioning on how limitations on Internet taxes may supposedly force Georgia to raise other taxes, as I stated in my testimony, the far greater threat to Georgia residents right now is from runaway spending. Legislators at 

all levels of government, instead of turning surplus dollars back to the people who 

have earned them, are creating hundreds of new programs and dramatically expanding the old ones. 

The well-respected Georgia Public Policy Foundation perfectly captures the real 

problems in Georgia:

Georgia collected $4,479 million in general sales and use taxes in 1999, up 

11.81 percent over 1998, plus another $646 million in sales taxes on fuels, alcohol, and tobacco. Total tax revenues were up 8.81 percent over the prior year. 

With the exception of 1998 when food sales became exempt, Georgia’s revenues since 1988 from general sales and use taxes have increased steadily and have 

remained remarkably stable as a percentage of the total revenue collected by 

the State. Moreover, most of the states, including Georgia, are awash in budget 

surpluses: $11.3 billion in 1998, with $36 billion in ‘‘rainy day funds.’’ Georgia’s rainy day fund is now $548 million. Georgia has a $1 billion surplus that the 

General Assembly has voted to spend entirely plus borrow an additional $530 

million. Georgia is not experiencing a loss of sales tax revenue but rather a lack 

of fiscal restraint.1

For those with a concern about Georgia’s fiscal future, the paramount threat 

comes from irresponsible politicians. Blocking the ability of politicians to get their 

hands on at least a few of the dollars that Georgians earn should be applauded, not 

condemned. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. MAX CLELAND TO

DR. DONALD BRUCE

Questions. In your publication ‘‘E-Commerce in the Context of Declining State 

Sales Tax Bases,’’ you state several options for recouping lost revenue that may be 

used by local officials. Is there one option you see as more optimal than others? 

What effect do you see these policies having on local citizens? 

Answer. Local officials will have several options for recouping revenue lost to 

untaxed e-commerce sales. Generally, these choices include cutting government expenditures, increasing sales tax rates, or turning toward a different tax source such 

as the property or income tax. To be sure, many local governments are enjoying revenue surpluses and will be able to maintain current expenditure levels without additional taxation, at least for a few years. For many other municipalities, tax increases will be necessary to maintain budgets that have already been trimmed to 

the limit. 

The most probable option will be an increase in property taxes, which currently 

represent the vast majority of local tax revenue. Consequently, a small rate increase 

could generate a large amount of revenue. This is perhaps the optimal policy choice 

since local governments currently have the administrative structure in place. An increase in property tax rates would be less costly and easier to administer than most 

of the other options. 

Alternatively, localities could increase sales taxes in states where local options are 

available. However, it must be noted that such a policy reaction would work against 

other state and local simplification measures. The perpetuation of differentiated 

local add-on rates only makes the existing system more complex. 

Other options include local income taxes (which are extremely rare), special excise 

taxes or user charges, or other miscellaneous local fees. Inevitably, the optimal 

choice will be municipality-specific, as no particular revenue solution will be perfect 

for all local governments. 

As with any situation involving a budget cut or a tax increase, there will be winners and losers among the local citizenry. The particular reform that is chosen must 

minimize the adverse impact on the losers while maintaining a sufficient and stable 

level of public services. It is important to keep in mind that the localities with the 

largest revenue losses—those that will require the largest tax increases due to revenue losses from e-commerce—are the very localities that are currently avoiding the 

86

most taxes by shopping online. To the extent that property, sales, or income taxes 

are increased to replace lost revenue, then, there will be no net tax increase. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. MAX CLELAND TO

DAVID BULLINGTON

Question. Why did Wal-Mart establish a separate company to run its on-line business as opposed to a subsidiary of the parent company? 

Answer. By way of the outside equity participant, Wal-Mart wanted to gain access 

to additional Internet expertise within the Silicon Valley area as well as the management recruiting ties offered by this equity participant. Additionally, this structure offers the opportunity to do a public offering of stock of the Internet company. 

Further, it allowed for direct pricing competition with those remote sellers that do 

not collect the sales tax.

Question. Should your on-line stores have a tax advantage over your bricks and 

mortar stores? 

Answer. No.

Question. If there is a level playing field among all forms of commerce, I believe 

consumers will be the winners by having new options when entering a traditional 

‘‘bricks and mortar’’ store like Wal-Mart. For instance, if an item is not in the store, 

the consumer can go to a terminal and order it on-line. Do you agree that there will 

be more options for consumers if there is a level playing field among all forms of 

commerce? Has Wal-Mart discussed ways to incorporate its on-line business in to 

its stores if these two businesses are treated equally? 

Answer. Yes, we agree that numerous options will be created by way of a business 

model that allows complete integration with store operations. Wal-Mart has and 

continues to study ways by which store and web operations can be leveraged off 

each other. For example, the ability to allow in-store web site access to a customer 

combined with a cash payment option at an adjacent register would facilitate Internet purchasing by customers who do not have credit cards. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. MAX CLELAND TO

HON. MICHAEL LEAVITT

Question. Unfortunately, we are holding this hearing the same morning as the formal release of the Advisory Commission on Electronic Commerce’s report, and I and 

my colleagues have not had the opportunity to read and evaluate this report. Many 

people opposed to allowing states to determine their own tax policy claim that current tax policy is too cumbersome. However, apparently software currently exists 

that takes into account the tax laws for all jurisdictions. Was the Advisory Commission on Electronic Commerce aware that such software exists? And, is there any 

mention of this in the report? 

Answer. Senator, because no retailers were appointed to the Advisory Commission 

on Electronic Commerce, no one with the practical experience who currently uses 

software to determine sales taxes in every jurisdiction served on the panel. However, Tax Ware, a company which provides such software was permitted to testify 

at one of the commission meetings. To the best of my knowledge, there is no mention of the availability of the software in the report.

Question. The Internet is providing a more convenient way to purchase goods for 

consumers. However, I am interested in whether the Advisory Commission on Electronic Commerce found that tax avoidance was leading consumers to online purchasing? 

Answer. Senator, the Commission did find that current federal policy permitting 

tax avoidance is reducing revenues to state and local governments. Clearly, this 

finding demonstrates both the inequity for Main Street vendors and that—all other 

factors being equal—being able to purchase the same item at the same price, without paying taxes is one factor in this inequity.

Question. Is the ability to set revenue policy to ensure the deliverance of essential 

public services a fundamental authority of state and local lawmakers? 

Answer. There is no more fundamental tenet of our country’s federal system than 

the ability and authority of state and local elected loaders to determine the revenue 

policies necessary to balance their budgets and meet the needs—federally mandated 

and otherwise—of the people.

87

Question. Major corporations like AT&T, MCI Worldcom, Gateway, and others 

have implied that they might support tax on goods sold over the Internet if there 

is a continued ban on taxes on Internet access and provisions for making state and 

local sales taxes simpler and more business friendly. In hearing from my constituents over the years and by being a member of the Small Business Committee, I have 

heard that they too are interested in simplifying the sales and use tax systems. As 

a state elected official who shapes Utah’s tax policies, do you have a recommendation on a way to minimize complexity, improve compliance, and remove the burden 

from the retailer or ‘‘e-tailer’’? 

Answer. Senator, I believe we need to develop and implement a 2lst century, 

streamlined state and local sales tax system. Because of my strong commitment on 

that front, and that of many of my colleagues, for the past year we have embarked 

on an undertaking to do just that; to eliminate the burden on remote and electronic 

retailers by enacting a radically simplified and streamlined system. I am pleased 

to note that 27 states have formally acted to join in this challenge. In fact, we intend to hold a hearing in Chicago on September 29th specifically to obtain public 

feedback on our Streamlined project proposals. 

The project expects to release a majority of the work that has been done so far 

by the Tax Rates, Returns, Registration, and Remittances Work Group; recommendations on the treatment of state exemption certificates by the Tax Base 

Work Group; and a majority of the proposals from the group dealing with technology, audit, privacy, and system funding issues. 

Major draft proposals completed so far include:

• a uniform sourcing rule for all transactions; 

• uniform required notice and limited frequency of rate changes; 

• minimal sales tax returns or reporting requirements for participating sellers; 

• simplified exemption administration; 

• uniform treatment of bad debts; 

• voluntary registration not a factor in determining nexus for income or other 

taxes; 

• minimal seller exposure to audits; and 

• state compensation for the system.

Some areas, including all but the most essential taxing definitions and the concept of coding products to make administration easier, will be deferred until Phase 

II of the project, after model state legislation is developed and unveiled in December. 

The system we are developing is focused on reducing the burden on sellers. In the 

audit and technology area, a linchpin of the system would allow retailers to contract 

with certified service providers (CSPs) to take care of all their tax collection and remittance responsibilities. Other models under the system would allow the use of certified software systems that would provide retailers significant protections from 

audit and from the consequences of any errors resulting from good-faith use of the 

systems. 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. MAX CLELAND TO

BURR MORSE

Question. Mr. Morse, I note that you are an ‘‘e-tailer’’ of your Vermont products. 

I am sure you have experienced growth in your sales as a result of your website, 

which is a wonderful tool to promote your products. Do you believe there are advantages in allowing your local elected officials to develop tax policy for Vermont? 

Answer. I do not believe there are advantages in allowing our local elected officials to develop tax policy for Vermont as it relates to web sales. I think that web 

sales should not be taxed and the origin of legislation toward this end makes no 

difference, nationally or locally. Either way would be a mistake. I enclose the following addendum to further support this question. Thank you very much. 

Addendum 

Vermont has a tax policy that already impacts all tailers, e-, re-, whatever; it is 

an income tax. There are also sales taxes in Vermont that must be collected whenever sales occur in our state (phone, fax, on-site, mail order, or WWW), and I believe 

that is the case in most states already. 

Happily, one very positive aspect of a strong economy and the expansion of the 

information highway (the World Wide Web), is that Americans are again discovering 

America. They can easily plan customized holidays that take them to businesses like 

the Morse Farm Sugar Works where they can learn about Vermont’s most tradiVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00091 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
88

1See Quill Corporation v. North Dakota, 504 U.S. 298 (1992). 

tional occupation (maple sugaring), and farm life in our state while shopping for regional crafts and specialty foods in our Country Store. We think as many as half 

of the visitors to our website will eventually make their way to our state capital 

and the Morse Farm, where they will pay taxes on fuel, meals, purchases, and accommodations. Here in New England at least, where we once started a revolution 

over taxes, I doubt that state or federal taxes on web sales would be well-received. 

On the other hand, contributors to the information highway, who are helping 

Americans re-discover the traditional arts, crafts, and way of life that made this 

country so unique should be nourished and encouraged to continue to bring their 

businesses to this expanding new audience who has become so used to filling day 

to day needs at Wal-Mart, Walgreens, and McDonalds! 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. MAX CLELAND AND

HON. JOHN MCCAIN TO JONATHAN ZITTRAIN

Question 1. What is a discriminatory tax? 

Answer. Prof. Walter Hellerstein succinctly defines a discriminatory tax in his article analyzing the provisions of the Internet Tax Freedom Act. Hellerstein writes:

A discriminatory state tax is ordinarily understood to be an exaction that singles out one class of taxpayers, activities, or property for disadvantageous treatment by comparison with the treatment accorded another class of taxpayers, activities, or property, when the distinction between the two classes is one that 

the law does not tolerate as an appropriate basis of classification (e.g., the conduct of interstate commerce or the exercise of First Amendment rights).

See Hellerstein, ‘‘Internet Tax Freedom Act Limits States’ Power to Tax Internet 

Access and Electronic Commerce,’’ (90 Journal of Taxation, 5 January 1999).

Question 2. In an effort to simplify state taxes, would it be sufficient for each state 

to simply establish a state ‘‘remote sales’’ rate, that is a tax rate, which might be 

different from the sales tax rate a person would pay during an ‘‘in person’’ sale? 

Answer. If a state were to have one sales tax rate for a purchase made through 

the Internet, and another for the same transaction entered into in person, the difference would amount to a discriminatory tax, discriminating on the basis of mode 

of ordering. It is difficult to imagine a valid long-term justification for such discrimination from a policy standpoint, particularly if the remote sales tax rate were higher 

than the in-person rate. 

State sales tax simplification for the purposes of reducing burdens on out-of-state 

sellers, and thus making a good case to Congress for a liberalization of Quill’s re- strictions on applying tax to sellers with no appreciable in-state presence,1 should 

focus on administrability (for example, arranging a single point of registration and 

remittance for merchants for all state sales taxes collected) and scope (for example, 

harmonizing definitions of ‘‘juice’’ across states; Wisconsin currently taxes any beverage which is not 100% juice, while Pennsylvania allows exemption so long as the 

beverage contains 24% or more juice). These alone are daunting tasks, especially 

since states’ respective idiosyncratic exemptions may reflect long-settled local political dynamics. Harmonizing sales tax rates from one state to the next is not necessary so long as the tax is grounded on where the goods or services are consumed 

rather than sold, and indeed may be undesirable. Such ‘‘simplification’’ across states 

at the cost of creating intrastate tiers of tax based on mode of ordering or location 

of seller would be even worse. 

There are some states that allow local subdivisions to impose their own additional 

taxes to state sales tax at a point of sale. As a result, the tax on a given product 

might amount to 6% in one town and 6.5% in another, even with both towns in the 

same state. One could imagine a state seeking to create a single, blended tax that 

averaged across all subdivisions to make calculation easier for remote sellers while 

retaining the complications for local merchants and consumers. However, the Supreme Court has made it clear that such schemes aren’t allowed without Congressional assent so long as the remote rate ends up higher in comparison to that of 

any state subdivision. See Associated Industries of Missouri v. Lohman, 511 U.S. 

641 (1994). This casts doubt on any attempt to create a remote rate that differs from 

an in-state rate, even if done for the purposes of simplification.

Question 3. In Georgia, citizens vote by referendum to place sales taxes on products they purchase. Why should Congress limit local citizens’ ability to determine 

how they want to tax themselves? 

89

2See Tracy A. Kaye, ‘‘Show Me the Money: Congressional Limitations on State Tax Sovereignty,’’ 35 Harvard Journal on Legislation 149 (1998); Pub. L. 104–4, 109 Stat. 48 (1995) 

(codified in scattered sections of 2 U.S.C. (1995)). 3See 2 U.S.C. § 1555 (1995). 

Answer. There are many reasons to want to leave the determination of state sales 

tax to the discretion of the respective states, each in turn accountable to its citizens. 

Under the legal status quo, states are indeed free to set their own consumption tax 

rates. They can demand of their citizens the remittance of a tax on particular goods 

and services that they purchase (no matter where purchased), and they can demand 

that merchants collect that tax on behalf of in-state consumers, so long as the merchants themselves are in-state. 

The problem arises in collecting tax through physically remote merchants for 

transactions involving in-state consumers. In such instances in which a state’s citizens wish to tax themselves via external parties, and the Supreme Court has held 

in cases like Quill that those out-of-state parties may be unduly burdened by a requirement that they calculate, collect, and remit taxes for distant jurisdictions. The 

worry inheres not in the fact of state citizens choosing to tax themselves, but rather 

in a requirement that out-of-state entities participate in the tax scheme. As a result, 

states are prohibited from requiring physically remote merchants to serve as the instruments of collection of otherwise-legitimate taxes. Congress can relax this requirement if it chooses, so one might suggest that this is a ‘‘Congressional limit’’

even though it has been imposed in the first instance by the Supreme Court. 

An ideal solution might see the states working together to present a scheme to 

Congress for approval that would minimize the tax-collecting burden on out-of-state 

merchants while still having those merchants collect sales tax. That way, over the 

long term, the states would not have to choose among (1) allowing the distortion 

and lost revenues that come from a failure to collect tax on remote sales, (2) seeking 

to enforce the politically and logistically difficult collection of corresponding use tax 

from their citizens when no sales tax is paid in a transaction, or (3) giving up the 

sales tax entirely. 

To be sure, a harmonization across states of the scope and definitions of goods 

and services covered by state sales tax might be an important part of simplification; 

as my answer to question two suggests, differing interpretations of such matters as 

what constitutes ‘‘juice’’ could contribute to burdensome confusion among retailers 

as to whether their goods fall under a given state’s tax regime. Thus simplification 

could require some measure of compromise: Georgia might be compelled to alter its 

own definition of, say, ‘‘juice’’ as part of a process to create common definitions 

among states, thereby lowering tax collection burdens on physically remote vendors 

and eliminating any reason to remove such vendors from states’ reach.

Question 4. Goods and services ordered over the Internet are delivered to consumers on the roads everyone uses. Roads are subject to wear and tear each time 

they are used, and the states are receiving no revenue from the delivery causing 

the damage. However, the state and local leaders are responsible for the upkeep of 

these roads. Is this an unfunded mandate? 

Answer. Generally speaking, a Congressional restriction or preemption of state 

taxing ability may well be an unfunded mandate under the Unfunded Mandates Reform Act of 1995, which erects certain procedural hurdles in the path of Congressional legislation that seeks to impose certain costly duties on states without providing funds to pay for their execution.2 Indeed, it appears that the drafters of the 

original Internet Tax Freedom Act’s proscriptions on state taxes contemplated that 

they could fall under the UMRA. Elements of S. 2255’s extension may, if resulting 

in a large enough loss to state coffers, also represent unfunded mandates covered 

by the Act, as might a Congressional narrowing of the definition of ‘‘nexus’’ such 

that merchants additional to those covered by Quill were free from state tax collection obligations. However, the current specific restriction on states’ abilities to force 

physically remote merchants to collect sales tax comes not from the Internet Tax 

Freedom Act or other affirmative Congressional legislation, but from Supreme Court 

cases like Quill, grounded in the Commerce Clause of the Constitution. 

As a result, it is difficult to see how Quill’s restrictions are unfunded mandates 

covered by the UMRA, despite the UMRA’s inclusion of court decisions in the definition of ‘‘Federal mandates’’ generally.3 The technical definitions of the UMRA aside, 

however, one might view an inability to effectively collect tax on out-of-state products delivered to in-state addresses as an unfunded mandate in colloquial terms: 

states are providing certain necessary infrastructure and services while being restricted in their efforts to have those who benefit from them contribute a share. This 

is why, ultimately, it would be desirable to create a system whereby out-of-state 

90

4See Goolsbee and Zittrain, ‘‘Evaluating the Costs and Benefits of Taxing Internet Commerce,’’ 52 National Tax Journal 413 (1999). 1 Center of Budget and Policy Priorities (February, 2000).

purchases can be treated similarly to in-state purchases. This is true even as, for 

the next few years while the burgeoning Internet remains an infant industry, the 

serendipitous restrictions on out-of-state tax collection—a rough proxy for collection 

of tax on items ordered through the Internet—may be helpful to the economy without great cost to state coffers.4

PREPARED STATEMENT OF THE AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL EMPLOYEES (AFSCME) 

The American Federation of State, County and Municipal Employees (AFSCME) 

submits the following statement for the hearing record in opposition to the amendment to the Internet Tax Freedom Act (S. 2255) to extend the moratorium through 

calendar year 2006. 

The originally-enacted Internet Tax Freedom Act (47 U.S.C. 151) imposed a threeyear ban, ending September 30, 2001, on any new state and local taxes on Internet 

access and multiple or discriminatory taxes on electronic commerce. The practical 

effect of this law has been to exacerbate the existing de facto tax-exempt status of 

most such remote sales that result from the inability of states to collect sales taxes 

from purchases made by state residents from Internet and catalog sales. As a result, 

AFSCME respectfully urges that the moratorium be allowed to expire in September 

2001 and not be extended through calendar year 2006 for the following reasons:

• The current moratorium does not expire for nearly 18 months. This provides 

time for the states to continue their work to simplify their sales tax systems, 

using a combination of technology-based software systems and administrative 

systems. The states are demonstrating that they can attack this challenge in 

a constructive and cooperative fashion. Congress should not arbitrarily constrain these efforts.

• State and local governments already may be losing on the order of $5 billion 

in sales tax revenues annually from their inability to tax most mail-order sales. 

With Internet sales growing rapidly, these governments could be losing an additional $10 billion annually by 2003 if Internet purchases remain effectively taxexempt.1 Revenue losses would continue to mount thereafter, as Internet sales 

grow over time. 

• The loss of revenue will significantly impair the ability of states and localities 

to meet demands for education funding and other critical services. This scenario 

is particularly troubling in the context of education. There is agreement that 

primary and secondary education in the United States is in need of constant 

improvement so that our children receive the foundation that will allow them 

to fill the demand for high-skilled, well-educated workers in the information 

economy. Improving the education system requires investment. In fact, state 

education budgets consume 35 to 40 percent of state revenues. It is ironic that 

the Internet, the very tool fostering today’s high-tech explosion, stands to play 

a pivotal role in the states’ inability to fund the desperately needed improvements in the education system.

• Main Street retailers will be at risk of losing considerable business to remote 

sellers so long as they must add sales tax to their prices at the cash register 

while Internet and mail-order merchants can sell tax-free. There is evidence 

that this tax advantage is already distorting retail competition by compelling 

large retail chains to reorganize their operations solely to be able to compete 

with their tax-exempt Internet rivals.

For these reasons, AFSCME opposes the extension of the moratorium and supports enforcement and active collection of existing sales tax due on remote purchases. 

PREPARED STATEMENT OF THE COMPUTING TECHNOLOGY INDUSTRY ASSOCIATION

The Computing Technology Industry Association is pleased to submit our suggestions regarding the taxation of electronic commerce. We endorse the majority recommendations of the Commissioners of the Advisory Commission on Electronic 

Commerce. The majority of Commissioners voted to:

91

1. Reduce consumers’ tax burden by repealing the Federal three-percent excise tax on communications services;

2. Forge a meaningful pathway to simplification of states’ sales and use tax 

systems;

3. Permanently prohibit states or localities from taxing Internet access subscription charges;

4. Extend the current Internet tax moratorium legislated by the Congress on 

multiple and discriminatory taxation; and

5. Clarify nexus standards that impact the obligation of businesses to collect 

and remit state and local taxes on remote transactions.

The Commission’s Final Report recommends to Congress the need to bridge the 

‘‘Digital Divide’’ to permit all Americans to participate in the Internet economy. It 

addresses the issue of privacy concerns, noting that any tax administering system 

for e-commerce should be developed in a manner that minimizes disclosure of consumers’ personal information, and should contain sufficient security to protect that 

information. The Commission recommended that the appropriate committees of Congress should explore privacy issues associated with the collection and administration 

taxes on e-commerce. 

We believe that the first priority should be to extend the current Internet tax 

moratorium legislated by the Congress on multiple and discriminatory taxation and 

address growing public concerns regarding privacy of personal data. We believe the 

appropriate approach to the latter is to appoint an independent commission with 

ample representation of individual taxpayers, the IT sector and public interest 

groups to simultaneously assess options to address public concerns as well as 

progress and the outlook for adoption of voluntary standards by Internet vendors. 

CompTIA disagrees with the assessment of the issue as well as solutions proposed 

by some representatives of state and local government. At the same time we are 

heartened by positive steps of state and local government leaders which we believe 

will greatly enhance the effectiveness in collecting from their constituents the sales 

and use taxes owed to state and local governments. 

The actual scope of the problem of noncompliance by taxpayers with their state 

and local sales tax laws is not presently known. Surveys have shown that many taxpayers are unaware of their obligation to pay appropriate state and local taxes not 

collected by vendors in other states. 

Several states have initiated aggressive programs to educate their citizens of the 

obligation to pay any state and local taxes that were not collected by Internet vendors. Other states need to follow their example. This effort will undoubtedly reduce 

noncompliance. Once this task is accomplished the scope of revenue losses due to 

deliberate noncompliance will be known. 

The Internet community also has an ethical responsibility not to mislead the public. Internet retailers should avoid statements that suggest that purchases made 

over the Internet relieve consumers of any obligation to report and pay any appropriate state and local taxes on those purchases. 

The recognition by state and local government associations of the need to simplify 

and rationalize the many thousands of inconsistent state and local tax laws is a 

laudable goal in its own right. It will also pave the way for increased voluntary support of state and local governments by Internet vendors located outside their jurisdiction. 

CompTIA disagrees with a few state and local government leaders who argue that 

a major expansion of the definition of nexus is good policy, fair, or necessary. 

CompTIA believes the state representatives who were Constitution’s authors were 

wise in precluding other state governments from imposing any of their respective 

state laws, whether they relate to taxes or regulations, on businesses or individuals 

in other states. 

The question of what constitutes nexus should be reviewed, because new business 

models have posed legitimate questions and clarification would benefit all parties. 

However the review should be approached narrowly, from the perspective framers 

of the Interstate Commerce Clause. If Internet vendors with an actual physical presence in the state substantially benefit from the programs and services funded by 

state and local sales and use taxes, then requiring them to support the state’s sales 

tax system is appropriate. If their ‘‘presence’’ is de minimis, and they receive no real 

benefit from the programs and services funded by state and local sales and use 

taxes, then they should not be required to provide tax collection services for that 

state. 

92

Requiring Internet vendors to provide free state and local tax collection services 

for other jurisdictions is not fair to companies that receive no direct benefits from 

those states and have chosen not to physically locate in those states. It would undermine the healthy competition between states to balance the benefits of a business 

friendly environment with other priorities of the state and local governments. 

CompTIA believes the Streamlined Sales Tax System for the 21st century may 

well provide a framework that can provide the incentives necessary to enlist the assistance of Internet vendors in the collection of state and local taxes for governments outside of their home state. Most businesses find it necessary on occasion to 

use outside debt collection services themselves. They recognize that this is a necessary process and entirely appropriate for use by state and local governments. The 

Streamlined Sales Tax System for the 21st century contemplates a technology oriented business model utilizing trusted third parties to protect the privacy of purchasers and vendors. 

At the same time the creators of the Streamlined Sales Tax System for the 21st 

century should recognize that they are asking the Internet vendors to provide debt 

collection services. Fees for commercial debt collection services are determined by 

supply and demand. Similarly, support by the Internet community will be determined by the compensation package offered to participating vendors. We believe 

that over time the program’s developers will develop a package that will lead to participation by the majority of Internet vendors. 

Aggressive consumer education programs will result in increased sales and use 

tax collections by state and local governments. Effectively implemented, the Streamlined Sales Tax System for the 21st century will result in the collection of the majority of the remaining state and local taxes. In combination CompTIA believes that 

the bulk of the sales and use taxes on Internet sales will ultimately be collected. 

CompTIA, the Computing Technology Industry Association, is a not-for-profit 

trade association, founded in 1982. Today it represents over 8,000 computer hardware and software manufacturers, distributors, retailers, e-tailers, resellers, VAR5, 

system integrators and training, service, telecommunications and Internet companies in over 50 countries worldwide. Over 1,000 industry professionals are represented in the association’s new individual membership category.

93

AMERICAN ASSOCIATION OF STATE COLLEGES AND UNIVERSITIES, 

Washington, DC, April 7, 2000

Hon. JOHN MCCAIN, Chairman, Senate Committee on Commerce, Science, and Transportation 

Washington, DC 20510

Hon. THOMAS J. BLILEY, JR., Chairman, House Committee on Commerce 

Washington, DC 20515

Dear Senator McCain and Representative Bliley:

On behalf of the undersigned higher education associations, I write to urge Congress not to pursue measures such as a permanent federal ban on e-commerce taxation, which has been proposed by members of both the House and the Senate. 

As you are probably aware, the law establishing the Advisory Commission on 

Electronic Commerce (Public Law 105–277) clearly stipulated that a ‘‘supermajority’’

vote (two-thirds of the members) would be required for the Commission to issue its 

findings/recommendations to Congress. The Commission failed to achieve this, 

which signifies a lack of consensus on fundamental issues, including the neutral tax 

treatment of e-commerce relative to other forms of remote sales. 

In light of this failure, Congress should refrain from taking any action that could 

adversely impact state and local tax systems. Additionally, AASCU’s analysis of 

trends in state and local taxation strongly suggests that any decision to ban taxation of e-commerce should be weighed carefully against the likely fiscal ramifications. Over the past 30 years, the state portion of state and local taxes has grown 

significantly, and sales tax proceeds as a portion of all state-local tax proceeds has 

grown as well. More recently, however, the shift from goods to services and information as the focus of economic activity and the changing consumption patterns of an 

aging economy are eroding the sales tax base of many states and localities. As a 

result, many states will be forced to confront the issue of tax reform in the very 

near future. State-level reform discussions should not be pre-empted by a federally 

legislated ban on the taxation of e-commerce, especially when those advising Congress on these issues could not arrive at a meaningful consensus. 

In sum, we urge Congress to act carefully and thoughtfully with respect to the 

issues considered by the ACEC. Failure to do so could destabilize state and local 

revenue systems, which in turn would have an immediate and adverse impact on 

public services such as higher education. As always, our organizations and our 

member institutions are prepared to help facilitate the policy conversations on this 

vital issue. 

With warm regards, 

CONSTANTINE W. CURRIS, 

President, American Association of State Colleges and Universities

On behalf of: 

American Association of Community Colleges 

Association of American Universities 

National Association of State Universities and Land-Grant Colleges

TRAVIS REINDL, 

Policy Analyst, American Association of State Colleges and Universities 

JOINT PREPARED STATEMENT OF LAWRENCE A. HUNTER, CHIEF ECONOMIST,

EMPOWER AMERICA, AND GEORGE A. PIELER, ADJUNCT FELLOW,

COMPETITIVE ENTERPRISE INSTITUTE

Mr. Chairman and Members of the Committee, we are pleased to offer our support for the Chairman’s bill, S. 2255, to extend the existing moratorium on many 

forms of Internet taxation (the Internet Tax Freedom Act of 1998, or ITFA) through 

the year 2006. We would just like to explain why we support this approach and suggest a few useful avenues of inquiry for the Committee to consider as it explores 

this complex but extremely important issue. 

First, we should say at the outset that although each of us is affiliated with organizations that do work on Internet policy (Dr. Hunter is Chief Economist for Empower America, Mr. Pieler an Adjunct Fellow with the Competitive Enterprise Institute), the views expressed in our statement to the Committee are strictly our own. 

They are based on the work we did in preparing New.Economy@Old.Constitution, 

a study of some of the practical and constitutional issues surrounding Internet taxVerDate Apr 24 2002 11:42 Sep 16, 2003 Jkt 080402 PO 00000 Frm 00097 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\80402.TXT SCOM1 PsN: CAROLT
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ation recently published by the Institute for Policy Innovation’s new Center for 

Technology Freedom (a copy of that study is submitted herewith for the Committee’s consideration). 

The Work of the ACEC 

Mr. Chairman, we believe the congressionally-mandated Advisory Commission on 

Electronic Commerce, which recently completed its work under the outstanding 

leadership of Virginia Gov. James Gilmore, did an excellent job of framing the 

issues involved with Internet taxation from the perspective of protecting the taxpayer, advancing economic growth, and balancing the interests of the states and the 

national government with due regard for our constitutional structure. The Commission’s conclusions, which have been laid before Congress, lay out a thoughtful blueprint for Congress to consider in asserting its power to define the scope of state authority to tax cross-border transactions. The Commission also made abundantly 

clear by majority vote that the Internet must not be viewed as an easy way to both 

raise taxes and increase the number of revenue sources that states (or the federal 

government, for that matter) can tap. Electronic commerce does open up entirely 

new fields of commercial endeavor, but at heart it is simply a new, dynamically productive way of doing business. 

As such, the Internet deserves neither special tax burdens nor unique tax privileges. The Commission appears to agree, although there are several areas in its attempt to define ‘nexus’ with a state for (constitutionally permitted) taxation of crossborder transactions where it may step a bit over the line in limiting state power. 

At the same time, the Commission lays out an agenda for ‘harmonization’ and ‘simplification’ of state sales and use taxes that threatens to go too far in the opposite 

direction by creating the framework for a de facto national sales tax for which the 

federal government or the states would be accountable to the taxpayer. While we 

discuss these issues at some length in the attached paper, for present purposes we 

simply suggest that the weighty political issues and controversies (even among sincere tax professionals) involved in the broader agenda laid out by the Commission 

make it unlikely that Congress can hammer out an equitable, constitutional, and 

pro-taxpayer agreement in time for the expiration of the ITFA moratorium in October, 2001. 

For these reasons we urge the Committee and Congress to study the work of the 

Commission carefully, since there is much to be learned from its outstanding effort. 

But as a practical matter, the wisest course for the Congress is to extend the existing moratorium on Internet taxation as set forth in S. 2255.

Why It Matters. Mr. Chairman, you have made it abundantly clear by your initiatives on the Internet tax issue over the years that you understand this is a topic 

with very high stakes for America. It is universally understood that electronic commerce over the Internet is a major driving force behind our economic expansion, cutting costs for both businesses and consumers and creating whole new markets that 

are only just beginning to emerge. The Internet, not coincidentally, is helping break 

down barriers to trade, investment, and employment, as well as facilitating the exchange of ideas and interests across national boundaries as never before in history. 

None of this, however, explains why the Internet poses such unusual challenges— and opportunities—for tax policy. Much of the interaction between our tax systems 

and the Internet is purely conventional: companies involved in e-commerce have 

payrolls, generate income, and make investments, and those companies already pay 

the taxes every other company pays as a consequence. Why, then, the allegation 

that so-called ‘e-tailing’ gives Internet companies an undue competitive advantage 

and erodes the state and local tax base? 

One answer is that states and localities are using the Internet tax issue to reopen 

the old debate over taxing mail-order sales, a debate they have lost in the past when 

they sought federal backing for their efforts to mail-order sales in a comprehensive 

way. A corollary to this, however, is that many jurisdictions in the U.S. really do 

fear the advent of electronic commerce because it upsets their long-standing notions 

of how and what to tax; because they don’t feel they have control over the situation; 

and because they don’t know how to plan for a 21st century economy in which physical, geographical location is the least important factor for buyers, seller, investors, 

and innovators. 

There are grounds for being sympathetic to these concerns, but as Gov. Gilmore’s 

work on the Advisory Commission demonstrates, the evolution of commerce in 

cyberspace can give responsible, innovative policymakers a head start in revolutionizing tax policy. Tax policy no longer need be confined to 20th century notions of 

comprehensive, cradle-to-grave taxation of wealth and income, redistribution of income, and tax-based industrial policy. We have a fresh, unique opportunity to craft 

tax rules that are economically neutral, clearly visible to the taxpayer, and generate 

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a fair share of our national income to public purposes without being as prone to 

short-term political manipulation as our present tax structure—state, local, and federal—most assuredly is. 

Whether lawmakers choose to shift to broad-based consumption taxes, user fees, 

transaction taxes, or devices not yet thought of is something legislators and tax administrators at every level of government will have to decide. But the fact that they 

have the opportunity, the challenge, the obligation to rethink tax policy from the 

ground up is ultimately why the debate over Internet taxation matters so much. It 

is critically important, however, that our tax systems evolve in a way consistent 

with the constitutional order crafted by the Founders and produce revenue-collection 

mechanisms that are truly better for the taxpayer, and not just for the tax collector.

A Few Watchwords. To that end, Mr. Chairman, let us conclude by suggesting a 

few Rules of the Road for anyone working in the area of Internet taxation to consider, and hopefully to follow:

1. Be Constitutional. As the Advisory Commission reports, and as our paper 

discusses, the Constitution defines clear, unambiguous constraints on the power 

of states to collect taxes beyond their borders (the Commerce Clause) and on 

their ability to act in concert to ‘enhance’ their power to collect such taxes (the 

Compact Clause, and in extreme cases, the Confederation Clause). It is vitally 

important that this Committee and this Congress avoid falling into the trap of 

legislating, or given credence to, the notion that interstate harmonization, indeed uniformity, of tax policy is a good thing. States on their own may do as 

they please, but there is a real danger that the desire for simplicity and uniformity on the part of the business community, coupled with the state and local 

eagerness for enhanced revenue authority, could create an anti-Constitutional 

tax structure that is neither federal nor state in nature, but a ‘third layer’ of 

government unaccountable to the people. At the same time it is appropriate to 

warn against federal overreaching in this area via excessively prescriptive rules 

on what states can and cannot do within their sovereign boundaries. Remember 

the 10th Amendment, and the fact that we are a union of states, and you should 

have no trouble striking the proper balance. 

2. Keep an Eye on the Tax Burden. While most discussion of Internet taxation 

focuses on disparate effects on different states, different businesses, and different forms of retailing, our key ultimate objective must be to ensure that electronic commerce does not become an engine for increasing the overall tax burden on the American people, whether imposed directly or indirectly (as by passthrough taxes imposed on corporations). This is not entirely within the power 

of the federal government to prevent, of course, but a minimum the Congress 

should commit to ensuring that any new tax on the Internet, on e-commerce, 

or in any related sector be offset dollar-for-dollar elsewhere in the revenue-raising scheme. The same pledge should be undertaken by every state and local official in America. And to the extent that scrutiny of e-commerce from a tax standpoint produces bold new tax reform proposals, it should be crystal clear that 

Americans expect any major new revenue source to be a substitute for, not an 

addition to, an existing tax authority. If you’re going to create a new tax code 

you’ve got to scrap an old one, lock, stock and barrel. 

3. Don’t Ignore Fiscal Federalism. Each of us has worked in the past in the 

area of federal-state fiscal relations, including both tax policy and grantmaking 

authorities. We are not insensitive to the constraints states and localities face 

due to the overwhelming presence of the federal government in the economy 

and in the field of taxation, and we do believe there is room for a diminished 

federal role in many areas of domestic policy, which would leave states and localities more freedom to innovate and take charge. What we must all guard 

against, however, is the kind of massive ‘final solution’ to public policy problems 

that too often takes center stage: e.g. the feds give up the income tax, the states 

give up the sales tax. There is no way to enforce that kind of bargain absent 

constitutional amendment, and there is a great risk that any grand bargain on 

tax and fiscal policy between the states and the federal government would in 

the end produce bigger government at all levels. Just as Internet taxation 

should not be an excuse for increasing the tax burden, so it should not be a 

back-door way of increasing the role and power of government. To this end we 

suggest that this Committee and the Congress consider a simple rule of thumb: 

any measure that increases the power or wealth of one sector of government 

should be offset with countermeasures to restore the balance. For example, if 

Congress chooses to give states any enhanced power to collect sales and use 

taxes, it should require states to forgo an equivalent share of federal aid in the 

form of categorical or matching grants. If the many Governors who have spoken 

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out on this issue are serious in what they say, they aren’t seeking to increase 

their wealth overall, merely prevent it from eroding. If that is true, they should 

have no objection to an exchange they gives them more revenue authority 

(which they control) in return for less federal aid (which Washington controls).

These, then, are the matters we submit as most worthy of the Committee’s consideration in the field of Internet taxation. Again, we applaud the initiative you and 

your Committee have taken, Mr. Chairman, in seeking to extend the moratorium 

on unwarranted taxation of the Internet, and we look forward to a stimulating and 

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

Thank you. 

PREPARED STATEMENT OF THE INTERNATIONAL COUNCIL OF SHOPPING CENTERS

The International Council of Shopping Centers (ICSC) appreciates this opportunity to present its views to the Senate Committee on Commerce, Science, and 

Transportation on the need to apply existing state sales and use taxes to electronic 

commerce. ICSC is the global trade association of the shopping center industry. Its 39,000 

members in the United States, Canada and more than 70 other countries around 

the world include shopping center owners, developers, managers, investors, lenders, 

retailers and other professionals. The shopping center industry contributes significantly to the U.S. economy. In 1999, shopping centers in the U.S. generated over 

$1.1 trillion in retail sales and over $47 billion in state sales tax revenue, and employed over 10 million people. 

Simply stated, ICSC believes that all goods, regardless if they are purchased over 

the Internet, via catalog or in traditional retail stores, should be subject to the same 

state and local tax collection requirements. One form of commerce should not receive 

preferential tax treatment over another. Unfortunately, existing tax law is structured to favor electronic commerce over sales made in local retail stores. 

Contrary to popular belief, it is not the existing moratorium on Internet taxes 

that precludes states from requiring out-of-state retailers to collect sales and use 

taxes on their behalf. Instead, it is a 1992 Supreme Court case, Quill v. North Dakota, that held that remote merchants are not required to collect sales and use taxes 

for states in which they do not have substantial physical presence or ‘‘nexus.’’ The 

moratorium—which expires in October, 2001—applies only to access charges and 

new, multiple and discriminatory state sales taxes. However, because many Internet 

retailers are not collecting the existing sales and use taxes, a long-term extension 

of the moratorium will make this practice an accepted way to do business. 

ICSC does not support the enactment or implementation of Internet access 

charges, or new, multiple or discriminatory taxes on electronic commerce. Instead, 

we believe that existing sales and use taxes should be collected uniformly on all 

types of retail sales. The taxes which states should be able to require remote sellers 

to collect are not new taxes. Instead, they are existing use taxes which buyers are 

currently obligated to remit to their state and local governments. However, as a 

practical matter, most individuals are either unaware of their tax obligations, or 

simply don’t bother to comply. 

ICSC supports electronic commerce and believes it should be fostered. In fact, 

many traditional brick and mortar retailers are incorporating Internet commerce 

into their businesses in order to obtain new customers and better serve existing 

ones. However, as a matter of fairness and sound tax policy, Internet-based retailers 

should not receive a competitive advantage over traditional brick and mortar merchants simply because electronic commerce is a new and growing form of 

transacting business. 

Although the extent to which Internet sales will displace traditional retail sales 

is unknown at this time, the competitive tax advantage that Internet-based retailers 

currently have could negatively affect many local retailers, shopping centers and 

their communities in the near future. Not only would traditional retailers generate 

reduced sales, but their employees would suffer from reduced working hours, wages 

or layoffs. 

In addition, state and local governments would receive less sales tax revenues 

that go to provide essential public services (i.e., education, police and fire protection, 

road repairs). Governments that rely heavily on sales tax revenues would either 

have to cut back on such services or increase other taxes on local businesses and 

residents, such as property and income taxes. If governments decide to increase 

sales tax rates to make up for lost revenues, lower-income individuals would have 

to pay an even higher disproportionate share of their income on sales taxes since 

they are less likely to own computers and purchase products on-line. 

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It is this reason why many state and local governmental organizations support 

a level playing field for all types of retail sales. These government groups include 

the National Governors Association, Council of State Governments, National Conference of State Legislators, U.S. Conference of Mayors, National Association of 

Counties, National League of Cities and International City and County Management Association. 

Our critics claim that electronic commerce is a new and growing industry and, 

therefore, it should not be saddled with ‘‘old world’’ sales tax collection requirements. They say we should not kill the goose that lays the golden egg. Our response 

is that, while electronic commerce is certainly a growing and important part of our 

economy, subjecting it to the same sales tax collection requirements that traditional 

merchants have been subject to for decades would not harm its growth or vitality. 

Electronic commerce will continue to flourish, regardless of whether or not sales and 

use taxes are imposed on it. 

These critics also claim that forcing Internet retailers to collect sales and use 

taxes for the thousands of state and local taxing jurisdictions across the country 

would be too burdensome on electronic commerce and just can not be done. We 

agree that all businesses, especially small businesses, should not be overburdened 

by sales tax collections and that state and local governments need to simplify their 

sales tax systems. However, inexpensive software exists today that assists retailers 

in determining how much state and local taxes needs to be collected on their sales. 

Another argument that is made by our opponents is that states and localities are 

flush with cash and do not need to tax electronic commerce. While it is true that 

most state and local governments are currently enjoying budget surpluses, there is 

no guarantee that this economic prosperity will last indefinitely. (In fact, Kentucky 

and Tennessee are two states that are currently experiencing a deficit crisis. Their 

Governors strongly believe that the collection of this existing tax would be beneficial.) If and when our economy softens, many state and local governments, as well 

as traditional merchants, could suffer financial harm, especially if electronic commerce continues to displace traditional sales. 

ICSC is disappointed that the Advisory Commission on Electronic Commerce 

failed to reach agreement that all retailers should be on a level playing field with 

regard to state and local sales taxes. Even more so, we are disappointed at the process of the Commission itself. To begin with, even though a traditional local retailer 

was supposed to be represented on the Commission, no such individual was appointed. 

Second, the Commission sent a report to Congress that was agreed to by only 10 

out of 19 Commissioners, clearly short of the 13 votes that was required under the 

Internet Tax Freedom Act. Third and most importantly, the majority report fails to 

address the level playing field issue. Instead, it recommends (although not ‘‘formally’’) that Congress extend the current moratorium, repeal the 3-percent telecommunications excise tax, establish special ‘‘nexus’’ carve-outs for Internet businesses, and create sales tax exemptions (such as those on ‘‘digitized’’ goods and their 

‘‘non-digitized’’ counterparts) that would directly benefit the ‘‘business caucus’’ companies. 

ICSC does not oppose the substance of the current moratorium (e.g. its ban 

against access charges and discriminatory taxes). However, we are deeply concerned 

that the longer the moratorium is extended, the more difficult it will be for Congress 

to address and take action to level the playing field among retailers. 

The U.S. Supreme Court has recognized Congress’ authority to enact legislation 

that would allow state and local governments to require out-of-state retailers to collect sales and use taxes. Therefore, we urge Congress to enact legislation that would 

level the playing field among Internet-based and traditional retailers. 

Thank you for this opportunity to express our views on this very important

matter.

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