U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

35–601 PDF 2008

INTERNET TAX FREEDOM ACT:

INTERNET TAX MORATORIUM

HEARING

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MAY 22, 2007

Serial No. 110–70

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://judiciary.house.gov 

(II)

COMMITTEE ON THE JUDICIARY 

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

LINDA T. SA ́ NCHEZ, California 

STEVE COHEN, Tennessee 

HANK JOHNSON, Georgia 

LUIS V. GUTIERREZ, Illinois 

BRAD SHERMAN, California 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

ARTUR DAVIS, Alabama 

DEBBIE WASSERMAN SCHULTZ, Florida 

KEITH ELLISON, Minnesota 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

DANIEL E. LUNGREN, California 

CHRIS CANNON, Utah 

RIC KELLER, Florida 

DARRELL ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio

PERRY APELBAUM, Staff Director and Chief Counsel 

JOSEPH GIBSON, Minority Chief Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

LINDA T. SA ́ NCHEZ, California, Chairwoman 

JOHN CONYERS, JR., Michigan 

HANK JOHNSON, Georgia 

ZOE LOFGREN, California 

WILLIAM D. DELAHUNT, Massachusetts 

MELVIN L. WATT, North Carolina 

STEVE COHEN, Tennessee 

CHRIS CANNON, Utah 

JIM JORDAN, Ohio 

RIC KELLER, Florida 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona

MICHONE JOHNSON, Chief Counsel 

DANIEL FLORES, Minority Counsel 

(III)

C O N T E N T S 

MAY 22, 2007

Page 

OPENING STATEMENTS 

The Honorable Linda T. Sa ́nchez, a Representative in Congress from the 

State of California, and Chairwoman, Subcommittee on Commercial and 

Administrative Law ............................................................................................. 1

The Honorable Chris Cannon, a Representative in Congress from the State 

of Utah, and Ranking Member, Subcommittee on Commercial and Administrative Law ........................................................................................................... 2

WITNESSES 

Mr. David C. Quam, National Governors Association, Washington, DC 

Oral Testimony ..................................................................................................... 5

Prepared Statement ............................................................................................. 7

Mr. Scott Mackey, Kimbell Sherman Ellis, Montpelier, VT 

Oral Testimony ..................................................................................................... 15

Prepared Statement ............................................................................................. 16

Mr. Jerry Johnson, Oklahoma Tax Commission, Oklahoma City, OK 

Oral Testimony ..................................................................................................... 19

Prepared Statement ............................................................................................. 20

Mr. John Rutledge, The Heartland Institute, Chicago, IL 

Oral Testimony ..................................................................................................... 23

Prepared Statement ............................................................................................. 26

Mr. Mark Murphy, American Federation of State, County and Municipal 

Employees (AFSCME), Washington, DC 

Oral Testimony ..................................................................................................... 78

Prepared Statement ............................................................................................. 79

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Post-Hearing Questions submitted by the Subcommittee on Commercial and 

Administrative Law ............................................................................................. 92

Post-Hearing Questions submitted by the Minority Office .................................. 94

Response to Post-Hearing Questions from David C. Quam, National Governors Association, Washington, DC .................................................................. 97

Response to Post-Hearing Questions from Scott Mackey, Kimbell Sherman 

Ellis, Montpelier, VT ............................................................................................ 101

Response to Post-Hearing Questions from Jerry Johnson, Oklahoma Tax Commission, Oklahoma City, OK ............................................................................... 107

Response to Post-Hearing Questions from Mark Murphy, American Federation of State, County and Municipal Employees (AFSCME), Washington, 

DC .......................................................................................................................... 109

Article submitted by the Honorable Chris Cannon, a Representative in Congress from the State of Utah, and Ranking Member, Subcommittee on 

Commercial and Administrative Law ................................................................. 112

(1)

INTERNET TAX FREEDOM ACT:

INTERNET TAX MORATORIUM 

TUESDAY, MAY 22, 2007

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC.

The Subcommittee met, pursuant to notice, at 2:29 p.m., in Room 

2141, Rayburn House Office Building, the Honorable Linda 

Sa ́nchez (Chairwoman of the Subcommittee) presiding. 

Present: Representatives Sa ́nchez, Johnson, Delahunt, Watt, 

Cannon, and Jordan. 

Ms. SA ́ NCHEZ. This hearing of the Committee on the Judiciary’s 

Subcommittee on Commercial and Administrative Law will now 

come to order. 

I will now recognize myself for a short statement. 

In 2000, 2 years after the Internet Tax Freedom Act was first enacted, total e-commerce sales were estimated at $25.8 billion. In 

2006, total e-commerce sales exploded to an estimated $108.7 billion. This astounding expansion of Internet commerce has changed 

our world. 

Congress must now carefully consider Internet taxation so as to 

support the continued growth of e-commerce, while at the same 

time taking into account the revenue needs of State and local government. 

During today’s hearing, we will hear from a variety of experts 

with differing views on how Congress should address the quickly 

approaching expiration of the Internet tax moratorium on November 1, 2007. 

The Internet Tax Freedom Act prevents State and local taxation 

of Internet access, ensures that multiple jurisdictions do not tax 

the same e-commerce transaction and protects e-commerce from 

discriminatory tax treatment. 

Although commonly misunderstood as a moratorium on all taxes 

related to an Internet transaction, the Internet Tax Freedom Act 

does not prohibit States from requiring in-state consumers to pay 

sales and use taxes on goods purchased online, nor does it prevent 

States from requiring out-of-state sellers with a substantial physical presence in the State to collect and remit sales and use taxes. 

As we consider different legislative approaches before the expiration of the moratorium, we must gain a deeper understanding of 

the critical issues in this debate. Congress must decide whether to 

2

extend the moratorium permanently or temporarily, or to simply 

let it lapse. 

If Congress does extend the moratorium, it should also consider 

whether to continue granting grandfather protection to certain 

States and localities that have imposed taxes on Internet access before the moratorium was enacted. 

Furthermore, Congress could consider the current definitions in 

the Internet Tax Freedom Act that have been the source of some 

apprehension and legal uncertainty for State and local governments, Internet access service providers, telecommunications companies and other interested entities. 

Specifically, the current definition of Internet access and the second clause of the definition of discriminatory tax have been subject 

to differing interpretations. Congress must also consider whether 

the rationales that justified passage of the Internet Tax Freedom 

Act in 1998 still hold true today. 

One of those rationales was that the moratorium would protect 

the fledging Internet and e-commerce industry while accelerating 

the building of the Internet infrastructure into poor and rural communities. 

To help us explore these issues, we have a distinguished witness 

panel with us this afternoon. We are pleased to have Dave Quam, 

director of Federal relations at the National Governors Association; 

Scott Mackey, a partner at Kimbell Sherman Ellis; Jerry Johnson, 

vice chairman of the Oklahoma Tax Commission; John Rutledge, 

senior fellow at The Heartland Institute; and Mark Murphy, a fiscal policy analyst for the American Federation of State, County and 

Municipal Employees. 

Welcome to our witness panel. 

I want to emphasize that today’s oversight hearing is just the beginning of our consideration of issues related to State and local taxation of interstate commerce. While today we will only be generally 

discussing the Internet tax moratorium, the Subcommittee does 

plan to have a legislative hearing on the bills concerning this issue. 

The challenge in our work is not just to determine the impact of 

the Internet moratorium up to now, but also its potential impact 

on the future. We have every reason to believe that this great age 

of innovation has many, many more years ahead. 

Accordingly, I look forward to hearing today’s testimony. 

And at this time, I would now like to recognize my colleague, Mr. 

Cannon, the distinguished Ranking Member of the Subcommittee, 

for his opening remarks. 

Mr. CANNON. Thank you, Madam Chair. 

Today, we are considering the implications of extending the 

Internet tax moratorium. Almost 10 years ago, Congress made the 

decision to protect Internet access and trade from discriminatory 

taxes. That was a wise decision that has led to a prospering of ecommerce beyond what anyone could have imagined. 

Now we have to ask ourselves whether it makes sense to continue that prosperity indefinitely. There are two bills, H.R. 743 and 

H.R. 1077, that would remove the sunset provisions of the Internet 

tax moratorium and forever prohibit States and localities from imposing discriminatory taxes on e-commerce. 

3

Our witnesses today will help answer whether Congress should 

make these provisions permanent. Several of them will agree with 

me that a permanent end to the discriminatory taxes will only help 

ensure America’s place as a leader of Internet commerce in the 

global economy. 

I suspect other witnesses will disagree with that proposition and 

I look forward to hearing their views on how discriminatory taxes 

will improve America’s competitiveness. Both of those would allow 

grandfather exceptions to the Internet moratorium to expire. One 

of those bills, H.R. 1077, would go further by eliminating the 

grandfather exceptions from the law entirely. 

Should we allow these grandfather provisions to expire? Have 

the States that have taken advantage of these provisions had sufficient time to wean themselves from the revenue that their discriminatory Internet taxes bring? I imagine that many here on the 

dais—of course, we don’t have them really on the dais, do we? An 

issue much more important than the presence on the dais would 

suggest. 

And also on the witness panel believe that the answer to both 

of these questions is yes, but I suspect that we will hear differently 

from some of our witnesses. I also look forward to hearing these 

witnesses’ testimony on the efforts of some States to impose taxes 

on some form of Internet access, notwithstanding the clear intent 

of Congress to the contrary. 

I think it is important to learn whether Congress needs to amend 

the Internet Tax Freedom Act to make this point even clearer. 

Madam Chair, keeping Internet commerce and access free from 

discriminatory taxes has been good for the American economy. I 

very much appreciate your efforts to hold this hearing today. However, given the importance of this issue and the fact that the current moratorium is expiring in just over 5 months, I hope that we 

can move quickly to address these issues in a markup. 

I look forward to hearing from our witnesses. 

Thank you, and I yield back. 

Ms. SA ́ NCHEZ. Thank you. I thank the gentleman for his statement. 

And, without objection, other Members’ opening statements will 

be included in the record. 

Without objection, the Chair will be authorized to declare a recess of the hearing. 

And I would like to introduce our witnesses now, if we can. 

We have just been called to vote. I do apologize. We have no control over the voting schedule. I will try to do your introductions, we 

will step across the street for votes, and then we will come back 

and go straight into the testimony. I know you have been very patient in waiting. 

Our first witness is David Quam, director of the Office of Federal 

Relations for the National Governors Association. Mr. Quam manages NGA’s legal and advocacy efforts, working closely with governors, Washington, DC, representatives, and NGA’s standing committees to advance the association’s legislative priorities. Prior to 

working at NGA, Mr. Quam served as counsel on the U.S. Senate 

Subcommittee on the Constitution, Federalism and Property Rights 

for the Committee on the Judiciary. 

4

Welcome. 

Our second witness is Scott Mackey. Mr. Mackey is a partner at 

Kimbell Sherman Ellis and assists clients in designing and implementing successful strategies in State capitals. Prior to joining 

KSE, Mr. Mackey was the National Conference of State Legislators’ 

chief economist. 

Welcome to you. 

Our third witness is Jerry Johnson, vice chairman of the Oklahoma Tax Commission. Mr. Johnson was appointed vice chairman 

of the Oklahoma Tax Commission in August 1997 and reappointed 

to serve until his term expires on January 12, 2009. Mr. Johnson 

is also the first vice president of the Federation of Tax Administrators. 

Our fourth witness is John Rutledge, senior fellow for economic 

growth and technology for The Heartland Institute. Mr. Rutledge 

is also a board member of the Progress and Freedom Foundation 

and a senior fellow at the Pacific Research Institute. Additionally, 

he is the chairman of Rutledge Capital, a private equity investment 

firm. 

Our final witness is Mark Murphy, a fiscal policy analyst for the 

American Federation of State, County and Municipal Employees. 

Mr. Murphy analyzes State and local budget and tax policies, focusing on tax expenditures, contracting, revenue adequacy issues 

and the responses to budget deficits. Additionally, Mr. Murphy conducts financial analysis of State and local governments for collective bargaining. 

Welcome to all of our panelists. We appreciate your willingness 

to participate in today’s hearing. 

Without objection, your written statements will be placed into 

the record, and we would ask that you limit your oral remarks to 

5 minutes. 

You will note that in front of you you have a lighting system. 

You will get the green light when your testimony begins. At 4 minutes, you will get a yellow light, which will warn you that you have 

got 1 minute left, and then you will get the red light. If you happen 

to notice that the red light is on, please try to summarize and wrap 

up your last sentence so we can move on to the next witness. 

After each witness has presented his or her testimony, Subcommittee Members will be permitted to ask questions, subject to 

the 5-minute limit. And depending upon the number of questions 

that are asked, we may go to a second round of questioning as well. 

With that, I think this is a natural place to break so that we can 

get across the street to vote, and when we come back we will jump 

straight into the testimony. So, thank you. 

[Recess.] 

Ms. SA ́ NCHEZ. The Committee will come to order. As I stated, we 

have Members trickling back from across the street, but we are 

going to go ahead and resume our hearing. 

And, with that, I would like to invite Mr. Quam to begin his testimony. 

5

TESTIMONY OF DAVID C. QUAM, NATIONAL GOVERNORS 

ASSOCIATION, WASHINGTON, DC 

Mr. QUAM. Thank you, Madam Chairwoman, Mr. Cannon, Members of the Subcommittee. Thank you for inviting the National Governors Association to testify today. 

My name is David Quam, and I am the director of Federal relations for the NGA. I am pleased to be here on behalf of the Nation’s 

governors to discuss the organization’s perspective on the Internet 

Tax Freedom Act, which expires this November 1st. 

The bottom line for NGA is this: Although governors generally 

oppose Federal interference with State authority to develop and 

manage their revenue systems, NGA supports a temporary extension of the Internet Tax Freedom Act that clarifies the definition 

of Internet access and does not further limit State authority or revenues. 

Since this is an oversight hearing, and as I heard you say there 

would be several hearings on this issue, or other hearings on this 

issue, NGA would urge the Committee to follow a few guidelines 

when looking at this issue. 

First and foremost, be clear. Definitions matter. Because this is 

a bill that interferes with State and local revenues, it should be 

carefully tailored to meet a specific purpose. Second, remain flexible. A temporary solution is better than permanent confusion. 

Third, do no harm. Any extension of the moratorium should preserve existing State and local revenues. 

I will address each of those in turn with regard to the current 

moratorium. First, be clear. The definition of Internet access is one 

of the top issues for the Nation’s governors. That is because the 

definition was written back in 1998, a time I think everyone would 

agree when the Internet was much different than it is today. 

The definition reads, the term Internet access means a service 

that enables users to access content, information, electronic mail or 

other services offered over the Internet. It continues by saying, and 

may also include access to proprietary content, information and 

other services as part of a package of services offered to users. 

The definition is a problem really because of the second phrase. 

Exactly what does it mean to be able to package other services? 

Are there limits on what Congress meant by that phrase? Certainly 

in 1998, in a time of dial-up, the number of services and goods and 

products coming over the Internet was much different than it is 

today. 

Today, services can be and will be delivered in an increasing 

fashion over the Internet, both telecommunications, television, 

other entertainment services, goods and products. In 2007, retail 

sales over the Internet are expected to exceed $252 billion. This is 

a much different Internet than 1998. 

NGA believes that the unlimited ability of providers to bundle together content and other services into a single tax-free offering represents a loophole in the definition that Congress should close. 

Again, on the definitions, be clear. 

Congress should be specific as to what is included. It is our position that Congress did not intend that just because a service is offered over the Internet that it should be tax-free. Rather, it is 

6

Internet access, the ability of a user to get to the Internet, that is 

the key provision. 

Second, stay flexible. Any extension should be temporary. This is 

obviously a very big issue. This law has been extended several 

times, but since 1998 and in every extension, the Internet has 

evolved and grown into something that was not considered during 

the last extension of this moratorium. 

In 2004, the key issue was telecommunications, how to create 

parity between DSL and cable when there was not parity from a 

taxing standpoint. That bill addressed that issue. However, on the 

horizon with VOIP service, would voiceover Internet replace telecommunications, and could it be bundled under the definition and 

the loophole that we described? 

Ultimately, Congress decided to exempt VOIP to address that 

issue. However, it has not solved the problem of the definition. A 

temporary moratorium allows Congress, industry and State and 

local governments another opportunity to review where this industry stands, how has the Internet developed and how is it being 

used? 

This is one of the most dynamic industries in the United States. 

It is succeeding beyond anyone’s imagination. The moratorium 

itself is not the cause of that growth. Rather, it is the innovation 

that comes with a new medium that is causing such explosive use 

of the Internet. Also, if a moratorium is made permanent, there is 

a slippery slope where other industries, seeking to preempt State 

and local taxes, will seek their own moratoriums, with their own 

preemptions of State laws. 

It is very easy to try to come to Congress and ask for a one-stop 

shopping to preempt the States rather than going and dealing with 

those who have to make the decisions, State and local governments 

and local officials regarding the revenue systems. 

Ms. SA ́ NCHEZ. Mr. Quam, I am sorry, but your time has expired. 

It goes quickly, I know. 

Mr. QUAM. That is fine. Thank you. 

[The prepared statement of Mr. Quam follows:]

7

PREPARED STATEMENT OF DAVID C. QUAM


Quam-1.eps
8


Quam-2.eps
9


Quam-3.eps
10


Quam-4.eps
11


Quam-5.eps
12


Quam-6.eps
13


Quam-7.eps
14


Quam-8.eps
15

Ms. SA ́ NCHEZ. We will get at some of those issues, I am sure, in 

the questioning. 

Mr. Mackey, would you please begin your testimony? 

TESTIMONY OF SCOTT MACKEY,

KIMBELL SHERMAN ELLIS, MONTPELIER, VT 

Mr. MACKEY. Thank you, Madam Chair, Mr. Cannon and Members of the Committee. My name is Scott Mackey. I have been 

working with the telecommunications companies, wireless companies, for the past 7 years at the State and local level to work on 

elimination and rolling back of some of the discriminatory taxes on 

telecommunications services. 

Today, I am here to talk primarily about three things, first of all, 

the permanent extension of the moratorium’s beneficial impact on 

investment; secondly, a permanent moratorium and its beneficial 

impact on continued efforts to try to close the digital divide and 

make sure we keep Internet access affordable and don’t burden 

some of our lower-income families with excessive taxes; and, third, 

I would like to make a couple of comments about the 2004 amendments and what the intent was and what some of the results have 

been in the States, as some States have interpreted what Congress 

did back in 2004. 

On the first issue of the impact on investment, I am not going 

to spend much time on it, because Dr. Rutledge is here and he 

knows a lot more about this than any of us in the room. Just a couple of quick points. The Internet tax moratorium, the success of 

that legislation and Congress’s foresight really speaks for itself. 

The U.S. has been a global leader in attracting investments, 

spurring high technology and innovation, both with applications 

providers and with the Internet backbone itself. And I guess the 

takeaway is that taxes do matter. You are going to hear that taxes 

don’t matter, and I think that taxes do matter, and the other thing 

that matters, and the other reason why a permanent moratorium 

would be good for the U.S. economy is that stability matters to investors. 

Investors need to know what the time horizon is going to be, and 

they need to know that there is going to be a stable tax policy 

going forward when they decide how to invest. And a permanent 

moratorium would provide that kind of stability and it would prevent the kind of thing that is happening, for instance, in Missouri, 

where local governments are coming after telecom providers and 

saying the tax that we have had for 50 years on local exchange 

service, you should have been collecting that on wireless and you 

should have been collecting it on other services. And they are actually making them go backwards in trying to get them to pay taxes 

that were never intended to be on those services, and that is the 

kind of instability that really hurts investment. 

The second issue of the digital divide is one where we are finally 

seeing the benefits of competition bringing down prices for highspeed Internet access, and as a result we are seeing more and more 

lower-to moderate-income families being able to afford Internet access, which everyone is calling critical for our competitiveness in 

the 21st century. 

16

So at a time when we are finally starting to make some progress 

there, to allow a moratorium to expire and have new taxes be imposed on Internet access—and what we are talking about here are 

not just sales taxes. We are talking about the excessive and discriminatory taxes that States have been imposing on the telecommunications industries for years, accused of being a monopoly. 

There are ample examples of that happening, where States 

through interpretations in tax departments and through legislative 

decisionmaking could essentially impose these new discriminatory 

taxes on Internet access. And the studies that have been done in 

the late 1990’s by The Heartland Institute show that those tax burdens are 2.5 times those imposed on sales taxes. 

So there is a real threat if the moratorium were to expire that 

you would see these excessive new taxes be imposed on Internet access. And these are regressive taxes that hit low-income people the 

hardest. And, finally, let me just make a quick comment about the 

2004 amendments where the Internet access definition was modernized to try to address really two issues. 

First was to try to bring parity between DSL and wireless Internet access on the one hand and cable modem service on the other, 

where because there was a telecommunications exclusion, those 

services were being subject to tax by some States, where cable 

modem service wasn’t. And I think that issue has primarily been 

addressed, but there was a second thing that Congress was trying 

to do by adding that language to the exclusion, and basically that 

is try to stop States from saying, okay, we are not going to tax the 

end user, we are going to essentially levy a backdoor tax on the 

wholesale Internet telecommunications services that are purchased, 

used or sold to provide Internet access. 

And, therefore, the consumer wouldn’t see a tax on his bill, but 

nonetheless they were being forced to pay and it was embedded in 

the price. And we think Congress intended to stop that. There are 

a handful of States who I think have interpreted it the way Congress intended, but there are a larger number of States who are 

interpreting as saying that we can still tax that telecommunications that is purchased, used or sold. 

So I look forward to the question-and-answer. That is what I concentrated my prepared remarks on, and I again appreciate the opportunity to testify today. Thank you. 

[The prepared statement of Mr. Mackey follows:]

PREPARED STATEMENT OF SCOTT MACKEY

Chairwoman Sa ́nchez, Representative Cannon, and members of the subcommittee, 

thank you for this opportunity to testify on an issue of real importance to millions 

of consumers and businesses across the United States. 

My name is Scott Mackey and I am an economist and partner at Kimbell Sherman Ellis LLP. Over the past seven years, I have worked as a consultant to major 

wireless telecommunications providers seeking to reduce or eliminate excessive and 

discriminatory taxes on communications services at the state and local level. I appear today on behalf of a broader coalition of Internet service providers, Internet 

‘‘backbone’’ providers, and Internet application and content providers—the ‘‘Don’t 

Tax Our Web’’ coalition—to support a permanent extension of the Internet tax moratorium. 

Unless Congress acts, the Internet Tax Freedom Act will expire on November 1, 

2007. I will focus on three important reasons why Congress should make the Internet tax moratorium permanent: 

17

1Lewin, David and Roger Entner. ‘‘Impact of the US Wireless Telecom Industry on the US 

Economy,’’ Ovum and Indepen, Boston, MA, September 2005. 

* First, at a time when state and local economic development experts are touting 

broadband as critical to economic competitiveness, new taxes on Internet access 

could have a chilling effect on broadband investment.

• Second, now that competition between different types of Internet access providers is lowering prices for consumers and making high-speed Internet access more accessible and affordable to lower income households, regressive 

new taxes on Internet access would create a new obstacle in efforts to close 

the ‘‘digital divide.’’

• Finally a number of states and localities are ignoring the will of Congress and 

Congress therefore needs to make it clear once and for all that the transport 

underlying the provision of Internet access and high speed Internet access is 

covered by the moratorium on taxes on Internet access service. Otherwise, the 

record is clear that states and localities will seek to avoid the moratorium on 

Internet access taxes by imposing taxes on the underlying transport and high 

speed Internet access. Recent studies of the taxation of telecommunications 

services suggest that such transport taxes could be excessive and discriminatory.

(1) Taxes on Internet access could have a chilling effect on investment in 

broadband networks.

The Internet Tax Freedom Act was adopted by the Congress and signed into law 

by President Clinton in 1998 to promote the availability of Internet access services 

by avoiding excessive and inconsistent taxation of these services. Congress was 

rightly concerned that high taxes and the administrative burdens of filing in thousands of taxing jurisdictions would impose undue burdens on consumers and impose 

a barrier to competitors and innovation. 

The moratorium, by preventing the imposition of excessive telecommunications 

and other taxes on Internet access, has been instrumental in promoting the rapid 

development of high speed broadband networks and the web-based applications that 

use these networks. Congress’ foresight in adopting the moratorium has benefited 

the entire US economy by improving the productivity of American businesses and 

lowering prices for consumers through competition. 

For example, a recent study by the international technology consulting firm Ovum 

and Indepen found that as much as 80% of the productivity growth in the entire 

economy in 2003 and 2004 was due to just two sectors: communications and information technology.1

Economists strongly discourage policymakers from imposing taxes on investment. 

However, in the case of investments in the communications networks that make up 

the backbone of the Internet, tax policies that discourage investment are especially 

problematic because of the network benefits of advanced investments in the telecommunications infrastructure. Network benefits are the economic benefits provided 

by infrastructure investments—benefits that extend beyond the direct impact on the 

affected industry and enhance growth throughout the entire economy. 

The data are clear: investments that increase the speed and reach of communications networks improve the productivity of the businesses that use these networks 

to conduct business every day. For this reason, tax policies that have the effect of 

reducing investment in telecommunications networks have negative consequences 

that extend far beyond the firms directly hit with the new taxes. 

New taxes on Internet access, or discriminatory taxes on electronic commerce, 

would impose significant new costs on purchasers of Internet access and purchasers 

of goods and services that are delivered over the Internet. Higher prices for such 

services would reduce sales, reduce company revenues, and thus lower the rate of 

return on investments in communications networks and the applications provided 

over them. In addition, new taxes would increase the cost of doing business for US 

firms that increasingly rely on Internet-based applications and services as part of 

their operations. 

Much has been written in the last few years about the investments that our economic competitors in China, India, and other nations are making in their communications networks. They recognize that broadband networks are crucial components 

of a successful strategy to compete in a global economy. 

Here at home, the Congress, our governors, state legislators, and local officials 

also recognize the importance of broadband networks in an overall economic development strategy. In my home state of Vermont, the General Assembly has just 

18

2 Committee on State Taxation, ‘‘50-State Study and Report on Telecommunications Taxation.’’ 

Washington, DC, 1999. 

agreed to a new program to borrow millions of dollars to expand broadband and 

wireless coverage statewide by 2010. 

Unfortunately, in many states, state economic development policy and tax policy 

are not aligned. On the one hand, states subsidize broadband deployment while on 

the other hand they impose excessive property and sales taxes on the equipment 

necessary to provide broadband service. A review of current state tax policy suggests 

that, notwithstanding the good intentions of state and local governments, economic 

development priorities alone are not enough to prevent state and local governments 

from pursuing tax policies that are counterproductive to economic growth. 

Congressional approval of a permanent moratorium would send a clear signal to 

the markets that long-term investment decisions will not be undermined by the imposition of new taxes on Internet access or discriminatory taxes on electronic commerce. Such a strong, pro-investment signal from the Congress would help ensure 

that these investments—which have had such an important role in US economic 

growth and productivity over the last decade—will continue to be encouraged and 

rewarded. It will send a signal to the markets to invest here, not abroad.

(2) Regressive new taxes on Internet access would hurt efforts to close the 

‘‘digital divide.’’

The ‘‘convergence’’ that many in the industry have been touting for years is finally 

here. In more and more areas of the country, consumers have choices. They can get 

high-speed Internet access from a cable provider, DSL from a telecommunications 

company, or WIFI or ‘‘3G’’ service from a wireless provider. Other technologies on 

the horizon may provide even more competitive choices. The key to this consumer 

choice is the availability of competing networks that reach the consumer. 

As a result of competition, the price of broadband Internet access service has fallen in many markets. In those areas that still lack competition, the key to bringing 

down prices for consumers is to get competing networks built and operating. 

At the very time that the benefits of competition are coming to low- and moderateincome households, the imposition of new taxes on Internet access would increase 

prices and make broadband access less affordable. This would be especially problematic if excessive state and local telecommunications taxes were imposed on the service.

(3) Congress should act to ensure that the moratorium is not undermined 

by state and local taxation

The Internet Tax Freedom Act’s moratorium on state and local taxes covers the 

transport purchased, used, and sold by Internet access service providers to provide 

Internet access and high speed Internet access. Nonetheless, some states and localities have persisted in imposing taxes on Internet transport and high speed Internet 

access. If left unchecked, such activities will undermine the moratorium. From an 

economic standpoint, taxes on the transport component of Internet access are indistinguishable from taxes on Internet access services. Both put the same upward pressure on end user rates, deterring the growth of Internet access subscribership. 

The willingness of states and localities to tax communications services at excessive and discriminatory rates highlight the risk to consumers of indiscriminate new 

taxes if the moratorium is not extended and its applicability to Internet transport 

is not clarified once and for all. 

In 1999, the Committee on State Taxation released a comprehensive study of the 

state and local tax burden on telecommunications services.2 The study found that 

consumers of telecommunications services paid effective state/local tax rates that 

were more than twice those imposed on taxable goods sold by general business 

(13.74% vs. 6%). Including federal taxes, the tax burden was nearly three times 

higher than general business. In addition, due to the sheer number of different state 

and local taxes imposed in many jurisdictions, the typical communications service 

provider was required to file seven to eight times as many tax returns compared 

to those filed by typical businesses (63,879 vs. 8,951 annually). 

Unfortunately, with the exception of Virginia, states with excessive and discriminatory taxes on telecommunications service have not reformed their taxes to reduce 

the level of taxation imposed on these services to the same level imposed on other 

competitive goods and services. The Heartland Institute released a new report this 

month that found that consumers of cable TV, wireless and wireline phone service 

paid an average of 13.5% in taxes, more than two times the 6.6% average sales tax 

rate. The study found that the average household would pay $125 less in taxes per 

19

3 AL, AZ, CO, CT, DC, FL, IA, MD, MA, MI, MO, NY, NC, PA, UT, VA. 

year if excessive taxes on cable TV and telecommunications were lowered to the 

sales tax rate. The failure of most State and local governments over the past decade 

to reduce excessive and discriminatory taxes on telecommunications services and 

the efforts by some states and localities to circumvent the moratorium by taxing 

telecommunications transport in blatant disregard of the moratorium heightens the 

risk that, absent the moratorium, these excessive and discriminatory could be extended to Internet access. The moratorium was enacted to prevent this from happening, and this threat is as real in 2007 as it was in 1998. It is time to make the 

moratorium permanent and to end the state grandfather clauses. 

There is widespread agreement that, given the critical importance of education in 

the global economy, broadband access is not a luxury but a necessity for American 

families. Making the moratorium permanent and clarifying the scope of its applicability would ensure that regressive state and local taxes do not impose another obstacle on the ability of low-income families to prepare for and participate in the 

global economy, particularly since only 16 states specifically exempt Internet access 

from their sales or communications taxes.3

To summarize, making the Internet tax moratorium permanent will provide important social and economic benefits for American consumers and businesses. A permanent moratorium will send a strong, pro-investment signal to those entrepreneurs that are looking to improve communications and commerce over the Internet. It will prevent the imposition of expensive new taxes and administrative burdens on businesses that conduct interstate commerce over the Internet. It will ensure that regressive new tax burdens are not imposed on lower-income American 

families seeking to ensure that their kids are prepared for the global economy. 

Madame Chair and members of the subcommittee, thank you again for the opportunity to testify on this important subject, and I respectfully urge you to pass a permanent extension of the moratorium.

Ms. SA ́ NCHEZ. Thank you. You came in right at the 5-minute 

mark. Very good. 

Mr. Johnson, please begin. 

TESTIMONY OF JERRY JOHNSON, OKLAHOMA TAX 

COMMISSION, OKLAHOMA CITY, OK 

Mr. JOHNSON. Thank you, Madam Chairwoman and Mr. Cannon. 

My name is Jerry Johnson. I am the vice chairman of the Oklahoma Tax Commission. I am here today on behalf of the Federation 

of Tax Administrators. FTA is an organization that represents revenue departments in the 50 States, the District of Columbia, Puerto Rico and New York City. 

The main point that I want to get across this afternoon is that 

we would urge this Committee to use extreme caution whenever 

you take action that infringes upon the rights of States to set their 

own tax policy. In the state of Oklahoma, I have served in a couple 

of capacities. For the past 10 years, I have been a member of the 

tax commission, and prior to that I worked for the appropriations 

staff of the State senate. 

And, during my time working for the appropriations staff, I developed an appreciation for the demands that are placed on State 

government and local governments for providing services. And I 

know you are all aware of those demands at the Federal level, but 

those demands are growing at the State level. And my time on the 

tax commission, I have developed an appreciation for the demands 

placed on State revenue systems and the States’ efforts to try to 

keep those systems fair and broad, but also for those systems to try 

to meet the needs of the services that are demanded in the States. 

In Oklahoma, our governor and legislature recently made longterm multiyear commitments to increase funding for education and 

20

increase funding for roads. I think that is a very important thing 

for our State, but it is also a very important thing for our country 

that States are able to make those types of investments if we are 

to compete. 

And a concern that the States have is if this definition and if this 

moratorium can be construed to greatly rolling back existing tax 

revenues that States won’t have the revenues and the sources to 

make those kind of investments. In Oklahoma, for example, not 

only do we have a balanced budget amendment, but we have severe 

constitutional restrictions on the ability of the legislature to raise 

revenues. 

There are two kind of fiscal problems I think that face the 

States. One is we have economic upturns and downturns that mean 

revenues go up and down. And I think States have done a very 

good job of trying to deal with those. We have rainy day funds. We 

use other one-time revenues to try to address those. But, to me, the 

most significant problem facing the States is the long-term erosion 

of the tax base. 

As the economy changes and things shift to services or things 

shift to the Internet or through Federal preemption, if our tax base 

is eroded, then our ability to meet those demands is greatly diminished. 

From the Federation perspective, as Congress continues the extension of the moratorium, we would ask you to consider three 

things: one, we believe that the definition needs to be revisited and 

reworked. We are very concerned that the definition goes beyond 

the original intent and that the definition could be construed to be 

much broader than intended and that would have serious consequences on the ability of State and local governments to fund 

necessary services. 

The second thing is we think it is very appropriate to have a 

temporary extension. In most instances when we are dealing with 

Federal tax law, we have the IRS there or we have an executive 

agency there to monitor the implementation of the law, to write 

rules. That doesn’t exist in this case, and so we are concerned that 

there needs to be that monitoring, that re-looking at the definition, 

and as technology changes that the definition be brought up to date 

to what was really intended by Congress. 

And we think it is very appropriate for Congress to take that 

oversight role and for Congress to come back and revisit the definition and make sure things are working the way you intended, and 

so that is why we feel it should be temporary. 

The third item is the grandfather clause. We think it is very important that the grandfather provision be retained because of possible other consequences on other taxes other than just access 

charges that relate to the grandfather clause. 

But, again, I thank you very much for the opportunity to be here 

and look forward to answering questions. 

[The prepared statement of Mr. Johnson follows:]

PREPARED STATEMENT OF JERRY JOHNSON

My name is Jerry Johnson. I am the Vice Chairman of the Oklahoma Tax Commission and am testifying today on behalf of the Federation of Tax Administrators 

of which I am First Vice President. The Federation is an association of the tax adVerDate 0ct 09 2002 11:58 May 13, 2008 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 H:\WORK\COMM\052207\35601.000 HJUD1 PsN: 35601
21

1Government Accountability Office, ‘‘Telecommunications—Broadband Deployment is Extensive throughout the United States, but It Is Difficult to Assess the Extent of Deployment Gaps 

in Rural Areas’’ (GAO-06-426). In the GAO study, the term ‘‘deployment’’ refers to the offering 

of broadband services by various types of providers and the term ‘‘adoption’’ refers to the use 

of broadband services by consumers.

ministration agencies in each of the 50 states, the District of Columbia, Puerto Rico, 

and New York City. We are headquartered in Washington, D.C. 

The Federation urges the Congress to refrain from enacting measures that abrogate, disrupt or otherwise restrict states from imposing taxes that are otherwise 

lawful under the U.S. Constitution. The current prohibition on the imposition of 

taxes on charges for Internet access as contained in the Internet Tax Nondiscrimination Act (the moratorium) is the type of law that should be avoided, especially on a permanent basis. 

SUMMARY OF POSITION

The Federation urges Congress not to extend the Act because it is disruptive of 

and poses long-term dangers for state and local fiscal systems. Moreover, the General Accountability Office and other researchers have found that the moratorium is 

not effective in achieving its purported purpose of expanding the availability of 

Internet access to the American public and bridging what has been termed as the 

‘‘digital divide.’’

If, however, Congress believes the Act should be extended we believe there are 

three principles that should be followed:

• The definition of ‘‘Internet access’’ in current law must be changed. As currently written, we believe that an Internet service provider could bundle virtually all types of Internet services, content and information (some of which 

may be currently taxable) into a package of ‘‘Internet access’’ and claim that 

the state would be preempted from taxing any part of that package. The danger to state and local fiscal systems over the long term from the current expansive definition is considerable.

• Any extension of the Act should be temporary in nature. The nature of the 

online world and the manner in which the public accesses and uses that 

world continues to change rapidly. The long-term impact on state and local 

finances is still evolving. Given what everyone acknowledges will be continuing rapid change, it seems only prudent that any extension be temporary 

and that Congress revisit the policy and its impact in a few years.

• The provision of the Act preserving those taxes on Internet access that were 

‘‘generally imposed and actually enforced’’ prior to 1998 should be continued 

if the Act is extended. The intent when the original Internet Tax Freedom 

Act was passed in 1998 was not to disrupt existing practices and that commitment should be maintained. 

IMPACT OF THE MORATORIUM

Congress was responding to several concerns when it originally passed the Internet Tax Freedom Act in 1998. Among these was that the Internet and electronic 

commerce were ‘‘fledgling industries’’ that should be protected from state and local 

taxation for fear that the taxes would be burdensome and complex and somehow 

prevent the growth and survival of the industry. In addition, there was a belief that 

preempting state and local taxation of charges for Internet access would provide a 

financial incentive to U.S. households to subscribe to Internet services and would 

encourage the Internet industry to deploy services to underserved areas. 

While the goals are laudable, the economic evidence is that state taxation of Internet access charges has little or nothing to do with the adoption of Internet services 

by consumers or the deployment of services by industry. The Government Accountability Office (GAO) was required to perform a study on the deployment of 

broadband service in the United States when the Moratorium was last extended.1

The key findings regarding taxes in their report reads as follows: 

• ‘‘Finally, using our econometric model, we found that imposition of taxes was 

not a statistically significant factor influencing the deployment of broadband.’’

• ‘‘Using our model, we found that the imposition of the tax was not a statistically significant factor influencing the adoption [by consumers] of broadband 

service at the 5 percent level. It was statistically significant at the 10 percent 

level, perhaps suggesting that it was weakly significant factor. However, giving the nature of our model, it is unclear whether this finding is related to 

the tax or other characteristics of the states in which the households resided.’’

22

2See also Donald Bruce, John Deskins and William F. Fox, ‘‘Has Internet Access Taxation 

Affected Internet Use,’’ State Tax Notes, May 17, 2004, pp. 519–526. 3Section 1105(5) of the original Internet Tax Freedom Act, at 47 U.S.C.A. § 1105(5), provides: 

‘‘The term ‘Internet access’ means a service that enables users to access content, information, 

electronic mail, or other services offered over the Internet, and may also include access to proprietary content, information, and other services as part of a package of services offered to 

users. The term ‘Internet access’ does not include telecommunications services, except to the extent such services are purchased, used, or sold by a provider of Internet access to provide Internet access.’’ 4The Moratorium’s accounting rule for separating individual fees would not come into play 

because all of the bundled content would be considered ‘‘Internet access.’’

GAO found that factors such as the education level of the head of a household 

and the income of the household influenced the purchase of broadband services. A 

household headed by a college graduate was 12 percentage points more likely to 

purchase broadband than those headed by a person who did not graduate from college. High-income households were 39 percent more likely to adopt broadband than 

lower-income households. 

A study by economists at the University of Tennessee likewise found that taxation 

of Internet access had ‘‘no empirical evidence that Internet access rates are lower 

in state that have levied a tax on Internet access, all else being equal.’’ 2

Concern about the moratorium and its extension should not be interpreted as suggesting that states and localities do not recognize the importance of the Internet industry and the benefits improved service and utilization can provide to the citizens. 

The GAO report referenced earlier highlighted several examples of state and local 

programs aimed a providing assistance and incentives for the deployment of Internet technologies, including:

• The Texas Telecommunication Infrastructure Fund begun in 1996 that committed to spend $1 billion on telecommunications infrastructure.

• Connect Kentucky’s an alliance of technology-focused businesses, government 

entities, and universities that work together to accelerate broadband deployment.

• Virginia Tobacco Indemnification and Community Revitalization Commission 

is designed to stimulate economic development opportunities by encouraging 

the creation of new technology-based business and industry. 

DEFINITION OF INTERNET ACCESS

The current definition of Internet access was devised in large part in 1998 with 

‘‘dial-up Internet access’’ in mind. It has not kept pace with the manner in which 

Internet technology and services and electronic commerce have evolved. While 

changes enacted in 2004 did much to remove discrimination among various types 

of Internet access providers, they did nothing to avoid a potential unintended erosion of state tax bases. 

The current definition of ‘‘Internet access’’ 3 effectively allows a broad range of 

content, information and services to be bundled with Internet access and potentially 

be considered as protected under the prohibition on the imposition of taxes on Internet access. This results because the term ‘‘access’’ can be interpreted to mean a 

‘‘right to use,’’ meaning a ‘‘right to use’’ all the information, services and content on 

the Internet as part of a package of access. The range of content and service that 

can be bundled with Internet access is virtually unlimited. It includes all manner 

of electronic books, movies, music, photographs, services, databases, information 

services and the like.4

The current definition allows a growing proportion of the state and local tax base 

to be effectively put ‘‘off limits’’ by federal legislation with such a broad definition 

of Internet access. We do not believe this was the intent of Congress when it originally passed the Internet Tax Freedom Act nearly nine years ago. 

If the current moratorium with the current definition of Internet access is made 

permanent it would lead widespread tax avoidance and litigation that today does 

not occur because it is temporary. The temporary nature of the moratorium deprives 

companies of the long-term financial inducements to ‘‘push the edge of the envelope’’ 

in interpreting the law to maximize their competitive advantage over ‘‘bricks and 

mortar’’ businesses. If the current definition of Internet access were made permanent there would be a considerable opportunity to gain a long-term competitive advantage over traditional businesses that cannot be realistically denied. 

The current definition of Internet access poses an issue not only for state and 

local governments, but also for significant segments of the private sector. Firms that 

are providing content, video, or other services that compete with those provided by 

Internet service providers will face a discriminatory and unfair competitive situation 

23

if those services when provided as part of Internet access are protected from state 

and local taxation, but services provided outside a bundle that includes access are 

subject to state and local taxes. The convergence of technologies and the consolidation in the communications industry suggest that this discrimination will be a real 

issue ‘‘sooner rather than later.’’

The Federation has worked and continues to work to develop a definition of Internet access that is acceptable to all parties and that is consistent with what we believe all parties actually understand the ‘‘intent’’ of the original bill to be. Our intent 

is to craft language that will allow Internet access packages consistent with those 

now offered to continue to be subject to the moratorium, but to avoid the bundling 

of other products and services into the package. 

We have worked with Committee staff and have reached out to the Internet industry to develop such language. We look forward to continuing that effort if an extension of the moratorium moves forward. 

TEMPORARY EXTENSION

If the Act is to be extended, it should be done on a temporary, short-term basis—

even if the definition of Internet access is amended. A short-term extension would 

insure that the Moratorium’s impact on state and local revenues is examined periodically and that unintended consequences are not occurring. This is necessary because of the continuing expansion of Internet availability and the expanding array 

of activities conducted on the Internet, which make it very difficult to predict the 

impact of restrictions. It is also desirable to insure that the industry has not 

changed in ways that somehow causes the moratorium to discriminate among Internet service providers. It was this sort of discrimination among providers that was, 

in fact, among the most contentious issues when the Act was last considered in 

2003–2004. Finally, presuming a change in the definition of Internet access, it 

would be advisable to review the impact of that change in the near- to medium-term 

to insure that it is performing as intended. 

PRESERVATION OF TAXES ON INTERNET ACCESS IMPOSED PRIOR TO 1998

Any extension of the Act should preserve the ability of those states currently imposing a tax on charges for Internet access to continue to do so if they so choose. 

The stated intent when the original Internet Tax Freedom Act was passed in 1998 

was not to disrupt existing practices. Given the economic evidence that taxation of 

charges for Internet access has not impact on the availability or use of Internet access by households in these states, we see no reason that commitment should not 

be maintained. 

Nine states currently impose taxes that are protected—Hawaii, New Hampshire, 

New Mexico, North Dakota, Ohio, South Dakota, Texas, Washington and Wisconsin. 

The Congressional Budget Office estimated that in 2003, these states collected on 

the order of $120 million from their taxes on charges for Internet access. Repealing 

the grandfathering protection would disrupt the revenue stream of these states—

each of which must maintain a balanced budget. Repealing the preemption would 

constitute an intergovernmental mandate under the Unfunded Mandate Reform Act. 

Preservation of the grandfather for pre-1998 taxes is an issue that is important 

not only to these states. The grandfather also covers a variety of general business 

taxes that may be imposed on a wide range of businesses (e.g., state and local gross 

receipts taxes, unemployment taxes, taxes on machinery and equipment purchases, 

real estate transfer taxes, etc.) that are not generally considered ‘‘taxes on Internet 

access’’ but would be subject to challenge under the Act if the grandfather clause 

is repealed. 

CONCLUSION

We submit that the ‘‘fledgling industry’’ argument for Internet services in the 

United States is no longer relevant. Electronic commerce is a mature and important 

part of the U.S. and international economy. The continued moratorium on taxing 

charges for Internet access should be evaluated. In our estimation, there has been 

no showing that the purchase or supply of Internet access services in those states 

that tax the services has been adversely affected. Neither has there been a showing 

of an undue compliance burden on Internet service providers that would justify the 

preemption. Continuing the preemption simply provides a special position for this 

particular communications medium and unfairly shifts the burden of taxation on to 

other activities. 

If the preferential treatment of Internet access continues, three matters should 

be addressed:

24

• The scope of the preferential tax treatment (definition of Internet access) 

needs to be limited to protect businesses that compete with Internet companies;

• The Act should be made temporary to insure periodic review of the Act and 

its consequences; and

• The original commitment to those states imposing taxes on Internet access 

should be continued.

Ms. SA ́ NCHEZ. Thank you, Mr. Johnson. 

Mr. Rutledge? 

TESTIMONY OF JOHN RUTLEDGE,

THE HEARTLAND INSTITUTE, CHICAGO, IL 

Mr. RUTLEDGE. I will have to talk even faster. 

Madam Chairwoman, Representative Cannon, Members of the 

Committee, thank you for having me here to testify on this important issue. 

My name is John Rutledge. I am an economist, chairman of Rutledge Capital, private equity investor in Greenwich, Connecticut. I 

am a senior research fellow at Heartland Institute and a number 

of other think tanks. I am also a professor at the Chinese Academy 

of Sciences and chief adviser to the governor of Haidian, which is 

China’s Silicon Valley. 

I was one of the authors of the U.S. Chamber of Commerce study 

on telecom reform year before last, and I am one of the authors of 

a study Heartland Institute released earlier this month on taxes 

and fees on communications services, which I have appended to my 

testimony. 

Today, I want to focus on three simple things. First is that this 

issue is important for productivity and jobs and growth, second, 

that the key to jobs and growth is capital stock and the quality of 

the communications network and, third, that communications network capital is already heavily taxed. I will end up suggesting that 

the extension is a good idea, that permanent taxes are always better than temporary taxes, including this situation, that grandfather 

clauses be removed over time——

Ms. SA ́ NCHEZ. Pardon me, did you say permanent taxes or permanent moratoriums? 

Mr. RUTLEDGE. Permanent taxes, permanent moratoriums, the 

same, but a permanent moratorium is better. And that suggests 

when the question comes up, what to tax, tax things that won’t 

leave after you tax them. And what not to tax is the capital stock. 

The communications network is not just a sector, it is the central 

nervous system for all the other businesses in the economy. It is 

what allows the workers to be productive and earn paychecks. 

America is the most productive economy in the world. 

Three-quarters of the enormous productivity gains since 1995 are 

attributable to information technology and communication network 

investments, based on numerous studies. They all point to growth 

in jobs, incomes, productivity, from these investments, to lower 

costs that have helped keep inflation and interest rates in line, 

which helps people also buying homes and buying cars. 

As an illustration we did for the U.S. Chamber of Commerce 

study, telecom reform, which in general is what has happened over 

the last year and a half, our results were that it would generate 

25

about $50 billion of capital spending, which is about what we have 

gotten in the last 18 months, 212,000 jobs and $600 billion worth 

of new GDP. 

Modern communications networks are also the key to competitiveness. We all know there is a Chinese delegation in town today, 

led by Vice Premier Wu Yi. They are here to talk about trade and 

competitiveness issues, but fighting over trade numbers, currencies 

and exports and imports of physical goods is yesterday’s battle. 

Today’s battle is energy. There is not enough of it to feed the 

growing world economy. Tomorrow’s battle is going to be technology. It will be fought with communications networks and information technology. The Internet tax moratorium has been a very 

positive influence on capital spending on networks. 

It is important that we now make it permanent in order to keep 

investments in I.T. growing. Other countries are working hard on 

this issue. China, for example, has just released a plan that suggests that they can no longer deliver the 8 to 10 percent growth 

their people demand with manufacturing, so they are switching 

their investments over to information technology, communications 

equipment, software, advanced education, and they are doing a big 

job on it. 

Communications and information technology is the only way 

countries can improve productivity and raise pay without fighting 

over energy. In the U.S., the sector is very heavily taxed. As you 

will see in the study from Heartland, the average family pays $250 

a year of taxes. Tax rates on telecommunications and cable TV 

services are twice normal sales tax rates. 

Tax rates vary widely across regions, across technologies and in 

some cases are higher than sin taxes, beer, alcohol, liquor, tobacco 

taxes. All of these happen during a period when the moratorium’s 

been in place, so if you release the moratorium, I think you are 

going to have very major tax increases and I think that is something that would be detrimental to productivity and growth. 

Thank you. 

[The prepared statement of Mr. Rutledge follows:]

26

PREPARED STATEMENT OF JOHN RUTLEDGE


JR-2.eps
27


JR-3.eps
28


JR-4.eps
29


JR-5.eps
30


JR-6.eps
31


JR-7.eps
32


JR-8.eps
33


JR-9.eps
34


JR-10.eps
35


JR-11.eps
36


JR-12.eps
37


JR-13.eps
38


JR-14.eps
39


JR-15.eps
40


JR-16.eps
41


JR-17.eps
42


JR-18.eps
43


JR-19.eps
44


JR-20.eps
45


JR-21.eps
46


JR-22.eps
47


JR-23.eps
48


JR-24.eps
49


JR-25.eps
50


JR-26.eps
51


JR-27.eps
52


JR-28.eps
53


JR-29.eps
54


JR-30.eps
55


JR-31.eps
56


JR-32.eps
57


JR-33.eps
58


JR-34.eps
59


JR-35.eps
60


JR-36.eps
61


JR-37.eps
62


JR-38.eps
63


JR-39.eps
64


JR-40.eps
65


JR-41.eps
66


JR-42.eps
67


JR-43.eps
68


JR-44.eps
69


JR-45.eps
70


JR-46.eps
71


JR-47.eps
72


JR-48.eps
73


JR-49.eps
74


JR-50.eps
75


JR-51.eps
76


JR-52.eps
77


JR-53.eps
78

Ms. SA ́ NCHEZ. Thank you, Mr. Rutledge. 

Mr. Murphy, will you please begin your testimony? 

TESTIMONY OF MARK MURPHY, AMERICAN FEDERATION OF 

STATE, COUNTY AND MUNICIPAL EMPLOYEES (AFSCME), 

WASHINGTON, DC 

Mr. MURPHY. Good afternoon, Madam Chair and Ranking Member Cannon and Members of the Subcommittee. My name is Mark 

Murphy. I am a fiscal policy analyst with the American Federation 

of State, County and Municipal Employees, and we are pleased to 

offer our testimony on this subject of the Internet access tax ban. 

We have worked on this issue for nearly a decade, a decade or 

more, perhaps, and our views are representative of many unions 

with public employee interests, including the AFL-CIO, the National Education Association, the American Federation of Teachers 

and Firefighters. 

We have three key concerns that I will talk about here today. 

First, a permanent ban would have a negative impact on State 

and local government. The costs of congressional action on this 

issue is going to be borne entirely by State and local governments 

and are not paid for by the Federal Government. 

These jurisdictions, as was mentioned earlier, they balance their 

budgets every year, and they face revenue shortfalls and budget 

deficits with every recession, and so the loss of revenue capacity is 

certain to negatively impact their ability to provide services and 

will negatively impact tax burdens. They will be forced to raise 

other taxes. 

Just to give you a sense of the scale of the problem, for every $1 

billion in lost local and State revenues, that could pay the salaries 

of 24,000 schoolteachers or 19,000 police officers or 19,000 firefighters or 27,000 hospital workers. 

The second problem we see is that there is a distinct lack of evidence that a permanent ban would be an effective and cost-effective 

way to pursue the worthy goals that we all share of seeing the 

Internet grow and develop and affect productivity for the entire 

economy. We just don’t see the evidence that a moratorium or a 

ban, particularly a permanent ban, would have that effect. 

In fact, we have seen evidence to the contrary. The Government 

Accountability Office has studied the issue and found no discernible 

effect. Also, economists at the University of Tennessee studied the 

issue and compared States that had the tax on Internet access to 

those that don’t and found no discernible effect of a tax on the ability of people to have Internet access. 

When the moratorium was imposed in 1998, it was intended to 

be a temporary pause to allow a system, a fair system, of taxation 

to develop, and unfortunately that fair system has not been developed. Instead, we have seen an effort to transform what was supposed to be a temporary moratorium into a permanent ban. 

At the time, Congress also wanted to foster growth in a new 

technology, and I think the growth of the Internet and its status 

today cannot be debated. It is well-established, its widespread, and 

whether you attribute that to a ban on taxation or a moratorium 

on taxation or not, I think that it is beyond debate that it is now 

79

1Government Accountability Office, ‘‘Internet Access Tax Moratorium: Revenue Impacts Will 

Vary By State,’’ GAO 06-273. GAO cites Congressional Budget Office estimates of the revenue 

impact. 

widespread. And so a permanent ban cannot be justified as a needed stimulus. 

The third and final concern we have with a permanent ban is 

that it would have a negative influence on tax policy. When Congress preempts State and local taxation and taxing authority it 

narrows the tax base and raises rates, as was mentioned in previous testimony. 

That is the opposite of what jurisdictions need to do to minimize 

the economic distortions that taxes have on private activity, and so 

preemption should be something Congress should consider very 

carefully before they step into State and local taxing authority. 

Also mentioned earlier, in previous testimony, was that granting 

one industry a complete and total exemption would be a very dangerous precedent, that other industries that can also make very 

valid claims toward having contributing benefits to society will step 

forward as well and ask for their exemption. 

I believe that this impulse to wall off all new technologies and 

services is a harmful one, even if it is motivated by good intentions, 

because as society progresses, more and more economic activity is 

going to be innovative and advanced. It is by definition. It cannot 

all be made tax exempt, and we did not take this approach earlier 

in our history by exempting manufactured goods, the automobile 

and gasoline and airline service and calling them tax-free zones. 

If we had, we would have left agriculture as the only industry 

to bear the entire Nation’s tax burden. If we exempt future technological breakthroughs, we are going to further limit that tax base 

and concentrate it more narrowly on today’s industries. We think 

that will have a very deleterious impact on consumers of vital public services. 

Thank you. 

[The prepared statement of Mr. Murphy follows:]

PREPARED STATEMENT OF MARK MURPHY

Good afternoon, Madam Chairwoman and members of the Subcommittee. My 

name is Mark Murphy. I am a Fiscal Policy Analyst for the American Federation 

of State, County and Municipal Employees (AFSCME). I am pleased to offer testimony on behalf of AFSCME on the subject of the Internet Access Tax Ban. We have 

worked on this issue for nearly a decade now and our views are representative of 

many unions with public employee interests. 

I would like to address four key points today regarding a permanent ban on state 

and local Internet access taxes. Those are:

• What would a permanent ban cost?

• What benefits would be gained?

• What are the potential unintended consequences? And

• What are the tax policy implications? 

WHAT WOULD A PERMANENT BAN ON INTERNET ACCESS COST?

A permanent ban on Internet access taxes would immediately cost state and local 

governments an estimated $120 million per year if the grandfathered taxes are 

eliminated.1 This immediate impact would quickly multiply into the billions if, as 

we expect, additional goods delivered over the Internet are considered tax-exempt, 

or the scope of prohibited taxes expands, consequences I will elaborate on later in 

my testimony. While the range of estimates is necessarily broad, I cite it because 

80

2Michael Mazerov, ‘‘Making the Internet Tax Freedom Act Permanent in the Form Currently 

Proposed Would Lead to a Substantial Revenue Loss for States and Localities,’’ Center on Budget and Policy Priorities, October 20, 2003; Congressional Budget Office, ‘‘Cost Estimate: S. 150, 

Internet Tax Nondiscrimination Act,’’ September 9, 2003. 3 Elliott Dubin, Multistate Tax Commission, email correspondence, May 16, 2007. 

4Mazerov, op. cit. p. 24. 

5Donald Bruce, John Deskins, and William F. Fox, ‘‘Has Internet Access Taxation Affected 

Internet Use?,’’ State Tax Notes, May 17, 2004, p. 519. 6 John B. Horrigan, ‘‘Home Broadband Adoption 2006,’’ Pew Internet & American Life Project, 

May 28, 2006 <http://www.pewinternet.org/pdfs/PIP—Broadband—trends2006.pdf> accessed 

May 16, 2007. 7Mazerov, op. cit., p. 27. 

we should be mindful of both the long-term complications that a permanent ban will 

produce, as well as the short-term impact. 

The Government Accountability Office (GAO) notes that it is difficult to predict 

how many states and local governments would have levied taxes on Internet access 

without enactment of the first moratorium in 1998. At the time of the first moratorium, only 20 percent of Americans had an Internet connection in the home, compared to 50 percent just six years later. The increased penetration of the Internet 

in the population and its growth as a component of economic activity suggests that 

the immediate cost on grandfathered states and local governments represents only 

a fraction of the medium- and long-term fiscal impact on all states. 

No matter what the actual revenue loss of a permanent Internet access tax ban 

would be or may become, it is important to keep in mind that the costs of Congressional action would be borne entirely by states and local governments. Congress recently reformed its budget rules to require a pay-as-you-go approach to federal tax 

cuts. If the Internet access tax ban affected federal revenues, then other spending 

cuts or revenue increases would be necessary to compensate for the lost revenue. 

Instead, the ban imposes revenue losses and a loss of revenue capacity on states 

and local governments, and is not paid for. As such it is an unfunded mandate.2

These jurisdictions must balance their budgets every year, and face revenue shortfalls and budget deficits on a cyclical basis. Therefore, the loss of revenue capacity 

is certain to negatively impact local constituent services and tax burdens. To get a 

sense of the harm this would do, consider that each $1 billion in lost state and local 

revenue would pay the salaries of more than 24,000 school teachers, or 19,000 police, or 19,000 firefighters, or 27,000 hospital workers, according to estimates by the 

Multistate Tax Commission.3

WHAT WOULD A PERMANENT BAN ACCOMPLISH?

The policy rationale for barring state and local taxation of Internet access has 

shifted over time, from establishing a fair system of taxation on the new medium, 

to fostering growth of an innovative technology, to closing the digital divide, to preserving an incentive for even more widespread Internet adoption.4 Are these realistic arguments, or should we be skeptical of the effectiveness and cost-effectiveness 

of the ban in achieving these goals? 

The argument that taxation reduces Internet adoption rests on the assumption 

that Internet access consumers are sensitive to relatively small cost increases. However, there is no reliable evidence that this is the case. In fact, economists at the 

University of Tennessee conducted a regression analysis to determine the impact of 

the existing state and local Internet access taxes on Internet access. These researchers found that ‘‘Internet access taxation has no statistically discernable effect.’’ 5

The growth in popularity of broadband also points to the negligible effect that a 

state and local tax ban has on Internet access. Broadband Internet adoption has 

grown at a rapid pace over the last five years, even as the total number of Internet 

users has leveled off. A Pew Internet Center survey conducted last year found that 

57 percent of broadband Internet users chose it for greater speed, while only 4 percent cited any price factor, such as a discounted introductory rate, in their decision.6

With broadband access prices averaging $36 per month, compared to $18 for dialup service, the growth of broadband offers compelling evidence to counter the assumption of high price sensitivity among Internet access consumers. 

Banning states from levying Internet access taxes similarly is unlikely to have a 

measurable impact on the digital divide. The cost of a computer alone may be the 

single greatest financial barrier to Internet access for those of low and moderate incomes, followed by subscription requirements that often require a credit card.7

Internet access charges themselves are small compared to these impediments; tax 

levies on those charges are smaller still. 

So far, the debate over permanent extension of the Internet access tax ban is proceeding very differently from the typical examination of other government initiaVerDate 0ct 09 2002 11:58 May 13, 2008 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6621 H:\WORK\COMM\052207\35601.000 HJUD1 PsN: 35601
81

8GAO, op. cit., p. 43; Mazerov, op. cit., pp. 8, 13, 18. 

9Mazerov, op. cit., pp. 15, 19. 

tives. Consider some major domestic programs, such as Head Start, State Children’s 

Health Insurance, and the Workforce Investment Act, just to name a few. During 

reauthorizations and appropriations, these programs are subject to regular oversight, monitoring and even rigorous, scientific program evaluations designed to isolate the effects of the program from other factors, to truly determine the effectiveness and value of the government’s investment in the program. The Government 

Performance and Review, as well as the Administration’s Program Assessment Rating Tool, are employed in an effort to identify ineffective or wasteful programs to 

shrink or eliminate. In sharp contrast, proponents of permanent extension of the 

Internet access tax ban have provided shifting rationales for the ban, yet have not 

adequately demonstrated its effectiveness and value. We are left to conclude that 

the drumbeat for the ban may be motivated more by the desire to enhance corporate 

profits than the pursuit of more laudable societal goals. 

UNINTENDED CONSEQUENCES OF A PERMANENT BAN

Permanent extension of the Internet access tax ban presents a number of potentially harmful unintended consequences. These concerns are based on our experience 

with the ban over nearly a full decade, and include properly defining Internet access 

and eliminating the grandfathered state and local taxes. 

The definition of ‘‘Internet access’’ has been and remains problematic. Past issues 

included the taxable status of voice-over-IP telephone and components of DSL services, as well as which parts of the Internet ‘‘backbone’’ are taxable.8 Today’s debate 

centers around audio and video content bundled with Internet service. These are 

complex issues that usually take a number of years to resolve. What new products 

and services will be developed in the future and how will providers arrange and 

package them? We cannot know that today, but if a permanent ban is put into place 

that includes an existing or future loophole, content providers will certainly migrate 

to that channel. Such an arrangement would give much favored status to one particular industry over many others. For these reasons, any moratorium on Internet 

access taxes must be temporary, to allow for clarifications, updates and adjustments 

to the definition and scope of the ban. 

Eliminating the grandfathered state and local taxes would have direct revenue impacts on those jurisdictions ($120 million, as noted above), but may also put at 

risk other state and local taxes that are not intended to be covered by the ban but 

are not protected by the exception for corporate income, capital stock, net worth and 

property taxes. Such additional taxes could include payroll taxes, workers’ compensation taxes, sales taxes on inputs, excise taxes on inputs, and potentially others. An elimination of the grandfather clause would put at risk a number of these 

levies solely because they would apply to entities that happen to provide Internet 

access. Newly enacted state and local taxes that apply to Internet access providers 

also may be at risk, even if they do not single out these entities or charge them 

higher tax rates.9

WHAT ARE THE TAX POLICY IMPLICATIONS OF A PERMANENT BAN?

The tax policy implications of making the Internet a ‘‘tax-free zone’’ are huge and 

far-reaching. Any time a legislature closes off economic activity from taxation, it 

narrows the scope of remaining economic activity and societal wealth that may be 

tapped for public purposes. In the case of Internet access, banning state and local 

taxation effectively limits a tax base that already faces significant challenges, for 

example, from remote sales and tax planning by multi-state corporations. Consequently, states and local governments will be forced to consider undesirable 

choices, such as raising other taxes or reducing the level of service to their citizens. 

Exempting the entire category of Internet access services—whether or not that includes bundled content or other goods—also violates the horizontal equity principle 

of tax policy. Horizontal equity is the principle that tax laws should attempt to 

avoid imposing a higher burden on one taxpayer than on another similarly situated 

taxpayer. Providing one industry with such generous tax treatment—a complete ban 

on state and local taxation—makes it more difficult for firms in other industries to 

accept their tax burden. This will undoubtedly lead to calls for special treatment 

from other industries that can make compelling claims that they contribute benefits 

to society at large. 

The impulse to wall off newly developed technologies and services from taxation 

is a harmful one, even if it is motivated by good intentions. As our economy and 

society evolves, by definition more and more economic activity will be innovative 

82

and advanced. It cannot all be made tax-exempt. One can imagine that if this approach to tax policy had been taken earlier in our history, then manufactured goods, 

or the automobile and gasoline, or airline service would be ‘‘tax free,’’ while only agriculture would be left to bear the tax burden. But a greater concern is what happens in the future with the next technological breakthrough? Will we make all fuelefficient vehicles permanently tax-exempt? Will we ban taxes on advanced textiles, 

innovative consumer services and new entertainments? 

What will be left in the taxable sector if we do this? What will be the impact on 

the consumers of vital public services? How will we invest in the public institutions 

and initiatives that helped to develop so many of our technological and social advances, including the Internet itself? 

In conclusion, I want to reiterate our overall concern with a permanent ban on 

Internet access taxation. It is costly to state and local governments and of questionable value to the greater public, it risks unintended consequences for a broad range 

of state and local revenue sources, and it poses troubling tax policy problems for all 

levels of government. 

Madam Chairwoman and members of the Subcommittee, I thank you for the opportunity to offer testimony today and I am happy to answer any questions you may 

have.

Ms. SA ́ NCHEZ. Thank you, Mr. Murphy. 

We are now going to begin the question-and-answer part of the 

hearing, and I will recognize myself for 5 minutes of questioning. 

Mr. Quam, my first question is for you. If a permanent moratorium were to be imposed, what single recommendation would you 

make to protect State and local governments? 

Mr. QUAM. The priority, really, is the definition of Internet access. A bad definition, a 1998 definition, just does not meet the demands of today’s Internet. While governors are not calling for a 

permanent, they call for a temporary as a very important safety device, frankly, to make sure that we review any changes, the definition is the most problematic. 

We believe that the ability to bundle any service with Internet 

access and make it tax-free subjects State and local governments 

to a lot of uncertainty going forward as the Internet develops, so 

addressing the definition should be a top priority. 

Ms. SA ́ NCHEZ. Thank you. 

Mr. Rutledge, why should Congress simply not impose a temporary moratorium? I am interested. 

Mr. RUTLEDGE. The benefits of permanent tax rates are that you 

can make investment plans with them. People talk about the stock 

market as if it is a short-term game, but if you value the S&P 500 

using projected free cash flows, which is what investors get, there 

is a number called the duration you would calculate, which says 

how long would you have to wait to get back half of the value of 

the money you spent on the stock, and the number is 28 years. 

And so when you put capital in the ground, you have to be able 

to see 20, 30 or even 40 years in the future in terms of the environment you are going to be facing. So whether the tax is high or low, 

a permanent tax and a permanent structure is better than a temporary one for people who have to make capital decisions. 

Ms. SA ́ NCHEZ. Thank you. 

Mr. Murphy, what effect does the moratorium have on the members of AFSCME? 

Mr. MURPHY. Thank you, Madam Chair. 

AFSCME members work in a wide variety of public services, primarily at the State and local level, and also in healthcare. The 

numbers I gave earlier are about the number of salaries you could 

83

pay for with $1 billion of revenue loss, kind of give you the idea 

of just how important these revenues are and the capacity to raise 

revenues, particularly in recessions and budget downturns, we believe that we would see, as we have already seen in previous economic downturns and budget shortfalls, State and local jurisdictions trying to get by with unfilled vacancies, seeing corrections officers who are working with less staff to patrol the same number 

of inmates in a prison, for example, because they just don’t have 

the money to fill those vacancies. 

Ms. SA ́ NCHEZ. Thank you. 

Mr. Johnson, if there is a moratorium, should the grandfather 

protection continue and, if so, why? 

Mr. JOHNSON. I think to the States the grandfather protection is 

very important. It is our view that as part of the original moratorium there was a desire to keep States harmless and not reduce 

the existing taxes on the States that at that time levied the tax on 

Internet access. So we do think it is important for that reason to 

keep that commitment. 

We also think it is important to make sure that the scope of the 

moratorium isn’t expanded to other tax types, and we think that 

the grandfather clause is helpful in being clear that it does not do 

that. 

Ms. SA ́ NCHEZ. Okay. 

And, Mr. Mackey, in light of the February 2006 GAO report concluding that the taxation of Internet access has no statistically significant effect on the deployment of broadband Internet access, how 

can we believe that taxing Internet access creates a barrier to individuals accessing the Internet? 

Mr. MACKEY. I think the report did show that there was a statistical correlation. But the issue of whether or not taxes matter, if 

you will, on broadband penetration, there are a lot of factors. Taxes 

are just one. There is a lot of factors that go into how broadband 

has penetrated down to lower-income families, the wealth, how 

much competition is available. 

I think clearly taxes and prices do matter, because when we have 

seen the explosion in the growth of broadband penetration, it has 

been when competition has driven down prices to certain price 

points, below which some of our low-and moderate-income consumers are able to afford broadband access. 

And we have seen that time and time again, when a second competitor comes into a marketplace, the competition drives down 

prices and you have much more broadband penetration. So, as an 

economist, I have to believe that taxes do matter. Whether a statistical correlation can be found, you really need to look at a number 

of different factors, but clearly taxes and prices do matter to consumers for any product sold in the economy. 

Ms. SA ́ NCHEZ. Thank you. 

I would now recognize our distinguished Ranking Member for 5 

minutes of questioning. 

Mr. CANNON. Thank you, Madam Chair. 

And thank you all for being here today. This is an extraordinarily difficult issue. It is one of the very first issues I dealt with 

when I came to Congress 10 years ago, more than that now, and 

84

it is an environment that is dynamic, so we appreciate your impact 

on these issues. 

Let me start, Mr. Quam, how long do you think the temporary 

moratorium should be extended? What should the next bill cover, 

what period of time? 

Mr. QUAM. That is a tough recommendation. The other extensions have been, first one was for 2 years, the last one was I believe for 4. Two or 4 years, probably 4 years an extension gives the 

Internet time to, again, evolve. 

Four years ago, the issue, as I said, was VOIP. And at the time 

it was being debated, VOIP was not really commercially available. 

During that debate, that changed. 

Mr. CANNON. Isn’t that amazing? 

Mr. QUAM. It is absolutely amazing. 

Mr. CANNON. We have much, much, much cheaper service at 

vastly better quality and more variety. 

Mr. Murphy, how long do you think it should be extended? 

Mr. MURPHY. Thank you, Mr. Cannon. 

We support the temporary extension of the same reasons as Mr. 

Quam stated——

Mr. CANNON. But how long? 

Mr. MURPHY. For 2 to 4 years. 

Mr. CANNON. Two to 4 years. Again, thank you. 

Mr. Rutledge, somewhere you suggested that families in the lowest quintile of earnings pay 10 times as much as families in the 

highest quintile as a percentage of their income for telecommunications taxes. Is that correct? 

Mr. RUTLEDGE. Yes, that is one of the calculations in this Heartland study. 

Mr. CANNON. That is actually, in some ways, a little misleading, 

because people who are very wealthy pay rent or pay a mortgage 

or own a house. They have some kind of cost of capital in that. People who are very poor pay for rent or mortgage or whatever they 

do for their house. Everybody buys groceries. 

So if you take the income of a person who is relatively poor and 

take out the things that those families have to pay for, their marginal income is much, much smaller, is it not? And therefore that 

10 times might be 100 times. 

Mr. RUTLEDGE. Of discretionary income, absolutely, after essentials, yes. And it is also true in terms of the impact of broadband 

services on education, education costs, which is also a very regressive impact. 

Mr. CANNON. So the people who need it most, the people who are 

on the margin, people whose kids have the ability to use access to 

the Internet and move up in life, are the people who you are hitting hardest with taxes. 

Mr. RUTLEDGE. Yes, and those are the kids that should have the 

highest return to education, as well. 

Mr. CANNON. And then, of course, education is evolving, even as 

we speak. I am not going to give my lecture here, although I would 

love to. There are dramatic things. We finally got to the tipping 

point in education, and communications is a big, big part of that. 

So never has there been a society where people have had the ability to move from one level of society to another with more ease, 

85

based upon personal merit and education than we have today, and 

yet we have these taxes that are sort of in the way of the process. 

Could you describe, Mr. Rutledge, or maybe Mr. Mackey, the role 

of telecommunication companies in collecting taxes for States? 

Mr. MACKEY. Because they were formerly monopolies, telecommunications companies are subject to many, many State and 

local taxes, and States vary, but clearly if you look overall at where 

telecommunications companies rank in terms of what share of the 

services is taxable and these taxes are of course pushed onto consumers, it is somewhere in the study that John Rutledge did, it 

was about 31.5 percent of the average communications service tax, 

and that includes cable TV, wireless and wireline, was paid in 

taxes. 

So, for instance, Mr. Cannon, if you were to impose that 13.5 percent on Internet access, which the average price in the study, it 

was found to be $36.50 a month, that would mean essentially an 

additional $5 a month in taxes on families that are already paying 

approximately $250 a year in taxes on their communications bill. 

So it is not an insignificant amount of money when you consider that a $5 reduction when competing providers are out there trying 

to sell service and they tout that they are selling it for $5 less than 

their competition can provide significant new market opportunities 

for them. It is not an insignificant amount of money, particularly 

to low-income families. 

Mr. CANNON. Thank you. Will we have a second round? 

Ms. SA ́ NCHEZ. [Off-mike.] 

Mr. CANNON. Why don’t we have a second round? I think we 

have time. 

Thank you. I would very much like to get a little more in depth 

here, and so I will yield back on the hopes that we will have a separate round of questioning. Thank you. 

Ms. SA ́ NCHEZ. Mr. Johnson, the gentleman from Georgia, is recognized for 5 minutes. 

Mr. JOHNSON OF GEORGIA. Thank you. 

I don’t think I will have 5 minutes’ worth of questions, but I do 

want to know, if we could liken the Internet to a mall, a place 

where you can go in and purchase goods and services, and also 

liken it to a library, a place where you can go and pull a book, pull 

a resource and obtain some information, why would we tax a person upon entering the mall? Or why would we tax a person upon 

entering the library? 

Is there anyone who would care to answer that from a public policy standpoint? Why would we do that? 

Mr. QUAM. Sir, to take that question just a little differently, your 

example with regard to the mall, if the moratorium is allowed to 

expand and cover more and more services that are coming over the 

Internet, you are actually creating a disparity between the goods 

being sold in the mall and those being sold online, so that you are 

actually not creating equal treatment of your retailers who are in 

your community selling the book and somebody who is selling it online. 

Moratoriums actually distort the tax base and create fewer opportunities for States to do what many telecommunications companies would love to see States do, which is reform telecommuniVerDate 0ct 09 2002 11:58 May 13, 2008 Jkt 000000 PO 00000 Frm 00089 Fmt 6633 Sfmt 6601 H:\WORK\COMM\052207\35601.000 HJUD1 PsN: 35601
86

cations taxes, something that, frankly, States will have to do because of the changing nature of that technology. 

The Internet is a means to get there. It is a service that traditionally may be subject to sales tax. 

Mr. JOHNSON OF GEORGIA. Well, certainly, goods and services 

purchased over the Internet would be subject to taxation, but just 

the entry onto the premises, if you will. 

Mr. QUAM. Well, and that is one of the reasons NGA is supporting an extension of the moratorium. Governors are saying, we 

don’t need to tax that access. You are absolutely correct. That can 

remain tax-free, but we have to get the definitions right, less the 

distortion occur within the mall and between the mall and somebody selling online. 

And so the moratorium, we are calling for an extension of the 

moratorium to prevent happening exactly what you are saying. 

Mr. JOHNSON OF GEORGIA. I understand that, but I am just wondering, why would we at the end of the moratorium consider charging someone to just enter the mall or enter the library? 

Mr. MACKEY. Mr. Johnson, I think your example is a very good 

one, and I think in terms of the issue that was raised about whether the definition of Internet access needs to be narrowed so that, 

for instance, abuses don’t occur and anything that is sold with 

Internet access can be swept in. The report that the GAO did said 

that based on their reading of the statute that that was unlikely 

and they didn’t read it that way. 

Secondly, there was a bundling provision added, which made 

clear that if services are sold with taxable Internet access, the 

whole bundle would be taxed unless specifically the Internet access 

portion could be separated out in books and records. 

Also, we haven’t seen any real-world examples that I am aware 

of of companies trying to use this ‘‘loophole’’ to try to sneak things 

in and say they are Internet access as part of a package. So, for 

those reasons, I think, while we are certainly happy to look at the 

language, we think the 2004 amendments already added some protections. 

As Mr. Quam said, the VOIP specifically carved out the bundling 

language, and I know this is technical, but I do think there are provisions to protect from, as you said in your example, sir, the things 

in the mall being swept in with taxing the entrance to the mall. 

And I think you raised a very good point as to why access is so 

important. You are providing access to be able to shop and do business over the Internet, without necessarily taxing or not taxing the 

other items that are already covered differently under State sales 

tax law. 

Mr. MURPHY. I wonder if I might add something to that question. 

I think it is a good question, but I think what would be a better 

analogy is if the owners of the mall charged access to the mall——

Mr. JOHNSON OF GEORGIA. That would be different than government charging access, though, right? 

Mr. MURPHY. Well, in this case, the companies that provide 

Internet access are charging consumers for Internet access and the 

State and local governments may or may not charge a tax on that 

charge to access the Internet. 

87

If there were a case such as the mall I go to, Pentagon City Mall, 

they charge for parking, I think it would be perfectly appropriate 

for a State or a local government to charge a tax, a regular sales 

tax, on a parking charge. That would be the analogy that I would 

think would be most appropriate. 

Ms. SA ́ NCHEZ. The time of the gentleman has expired. 

Mr. Jordan is recognized for 5 minutes. 

Mr. JORDAN. We were meeting with our Ranking Member on immigration issues, and I didn’t catch everyone’s testimony, and I 

apologize. 

But I did hear Mr. Quam’s testimony. He mentioned that the 

moratorium on the taxes on the Internet had really no impact on 

the phenomenal growth we have seen in this industry. 

I would like the rest of your reaction to that. Because taxes always impact everything else in our economy, every other industry, 

and I would assume they have had a major impact in this area, as 

well. 

So maybe some thoughts in that area from our panel. And we 

will go with the guy I referenced first. 

Mr. QUAM. The reference I was making was something Mr. Mackey had been talking about, both a GAO report and there is also 

a University of Tennessee report, which basically found no statistical correlation between tax on Internet access and broadband 

penetration. 

Those two were not linked, and they were able to study that because you have certain grandfather States who have taxes remaining on Internet access that go back to 1998. Broadband penetration 

was no different in those States than the others. Those two studies 

started to indicate that a tax on Internet access was really not relevant to broadband. 

The growth of the Internet, although the tax ban has been in 

place, there are times when it has lapsed, and during those lapses 

the Internet certainly did not fail, did not fall and did not falter. 

It is a very dynamic industry that is growing. The price points and 

competition continue to increase the number of goods and services 

that can be offered, continue to grow. 

Mr. JORDAN. Mr. Mackey? 

Mr. MACKEY. Thank you. 

No, I agree. I think that taxes do matter. I mean, as an economist, we just have to believe that taxes do matter. 

Now, in a specific situation, in a given timeframe, when you are 

comparing a grandfathered State versus a non-grandfathered 

State, there are going to be other factors besides just the moratorium or no moratorium, what is the wealth of the State? Is 

broadband widely available? How broad is it available to the public? Is it a rural State, is it an urban State? 

So I think there are many factors, and I don’t think anyone 

would claim that taxes are the sole factor driving broadband penetration. I certainly wouldn’t make that claim. But it is one of a 

number of factors that people look at. 

In terms of the lapsing of the moratorium, Mr. Quam is right, 

it did lapse, but I do think there was an expectation that the moratorium was going to be extended. And, as Mr. Rutledge said, when 

we are talking about investors and investments where you have to 

88

have a long time horizon, those brief lapses in time weren’t going 

to make any difference in terms of impact——

Mr. JORDAN. I mean, would a tax on the Internet, would that be 

largely regressive? 

Mr. MACKEY. Absolutely, as Mr. Rutledge said before, yes, the 

burden would be 10 times higher on the lower quintile of the population than the upper. And if you are looking at just discretionary 

income, the impact would be even greater. 

Mr. JORDAN. That is what I figured. 

Mr. JOHNSON. I would just like to say, I don’t disagree with 

Scott’s comment that taxes matter. I think they matter both on the 

end of people who pay them, but they also matter on they are there 

to provide services to people. And so I think we would all like to 

pay no taxes or to pay very little taxes, but we all recognize the 

need for revenues to carry on essential government services. 

I would also say that I think the studies do show that the impact 

of the incremental level of taxation hasn’t been a significant factor 

on whether or not broadband service is available to people. 

So I do think the studies do support the idea that the level of 

taxation that we are talking about has not hindered the ability of 

people to have access to those services. 

Mr. RUTLEDGE. In a boardroom when you are making an investment decision, taxes matter a lot, and you wouldn’t make them if 

you didn’t know the tax rates applied. The reason these studies 

don’t show much impact is they happened during a time when the 

rules were changing and the business regarding the ownership of 

telecom assets, including property rights, the ability to price your 

assets, regulations and so forth. So they are washed away by these 

giant tidal waves. 

But believe it that taxes are passed onto consumers. If you pass 

them on to consumers, it will raise the price 1 percent, consumers 

will buy about 1.5 percent less of the stuff you are selling, so it is 

very important for consumers. 

Mr. MURPHY. I would like to say that both studies did show no 

statistical relationship between the tax burdens that are imposed 

in those States that have them and the penetration of either 

broadband or Internet access. 

And I think the question is whether the Congress is going to set 

a precedent of exempting an entire industry based on something 

where there hasn’t been any evidence. I think that that would be 

outside of experience when it comes to Congress acting on either 

appropriated programs or tax issues. 

Ms. SA ́ NCHEZ. The time of the gentleman has expired, and we are 

getting called to our next vote. 

I do, however, think that we can conclude the hearing today by 

recognizing Mr. Delahunt for 5 minutes of questioning, and at the 

close of that, we will wrap up the hearing. 

Mr. DELAHUNT. I thank the gentlelady. 

Putting definitions aside, I am sure that there is the possibility 

of constant tweaking there. I think to suggest that taxation as it 

has been, particularly in those grandfathered States, has had a significant, as opposed to a minimal, impact really doesn’t hold water 

when you take a look at the evidence, voiceover for example. 

89

I mean, can you give to me the statistics in terms of the growth 

of e-commerce in the course of the past 5 years? 

Mr. Quam? 

Mr. QUAM. E-commerce has grown considerably. In 2007, I be- lieve the number is expected to hit $252 billion. 

Mr. DELAHUNT. And what was it 3 or 4 years ago, if you are 

aware, or if anybody has that? 

Mr. QUAM. I do. It was $176 billion just in 2005, $220 billion in 

2006. 

Mr. DELAHUNT. I think you have answered my question. The evidence is this is a dynamic, growing, prosperous market. 

Now, I understand all that, but let me again speak to the issue 

of the States and tax revenue. How much, collectively, in the aggregate, did the grandfathered States receive from the existing taxes 

back in the 1998 taxes? 

Mr. QUAM. CBO estimates if the grandfather clause went away, 

those States lose between $80 million and $120 million. 

Mr. DELAHUNT. Okay, between $80 million and $120 million. 

How much do they lose in terms of sales tax revenue? 

You should know that answer, Mr. Quam. 

Mr. QUAM. In terms of sales tax revenue from——

Mr. DELAHUNT. In a single year. I mean, why do we have this 

streamlined sales tax initiative? 

Mr. QUAM. Under streamline, the estimates are that States are 

not collecting anywhere from $15 million to $22 million per year. 

Mr. DELAHUNT. So we are talking $15 million to $22 million as opposed to $80 million to $120 million. I mean, what we are talking 

here is chump change when we talk about the revenue sources for 

the States. 

I think this is a very—I welcome this hearing, I think it is very 

informative, but I will be filing legislation come July that hopefully 

will deal with the issue of the SST, because we are really putting 

at risk revenue sources for our States to fund all of the service that 

the public demands. 

And my own position is we ought to have a temporary moratorium until we finally resolve the issue of how the States are going 

to support public services with an eroding tax base, predicated on 

the growth of e-commerce. I think that is really kind of simple. 

Why should we have a permanent ban until we can be assured 

that the States and political subdivisions are going to be so limited 

in terms of their tax revenues that they will go to extremely regressive forms of taxation? 

Mr. CANNON. Will the gentleman yield? 

Mr. DELAHUNT. I yield to my friend. 

Mr. CANNON. Just for the record, Mr. Quam, would you mind 

supplying us with the numbers that you just gave about the sales 

tax that has been missed based upon what the sales are? Just 

doing a rough calculation in my mind, I suspect that was a little 

high, so I would love to see those numbers if you have a study to 

that effect. 

Mr. QUAM. We do. 

Mr. CANNON. Thank you. 

Ms. SA ́ NCHEZ. Does the gentleman yield back? 

Mr. DELAHUNT. Well, I think somebody has a need to answer. 

90

Mr. MACKEY. Just very briefly. 

Ms. SA ́ NCHEZ. You have 40 seconds. 

Mr. DELAHUNT. It will be a 40-second response. 

Mr. MACKEY. Just very briefly, it is very easy to quantify the revenue loss by measuring how much the grandfathered States are 

collecting on Internet access. 

What is very difficult to quantify are the benefits to the States 

of the productivity enhancements that Dr. Rutledge was talking 

about, of the low interest rates that are raising property values for 

local governments, and all the other benefits that this high-tech 

and information technology-boosting productivity provides to the 

States. 

And I think one of the reasons States are so flush with revenue 

right now is because of the strong economy that is due in part to 

the growth in e-commerce. 

Ms. SA ́ NCHEZ. The time of the gentleman has expired. 

I want to thank again the witnesses for your testimony today 

and for being so patient with us. 

Without objection, Members will have 5 legislative days to submit any other additional written questions, which we will forward 

to the witnesses and ask that you answer as promptly as you can, 

to be made part of the record. 

Without objection, the record will remain open for 5 legislative 

days for the submission of any other additional materials. 

Again, thank you for your time and your patience. 

And this hearing of the Subcommittee on Commercial and Administrative Law is adjourned. 

[Whereupon, at 4 p.m., the Subcommittee was adjourned.] 

(91)

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

92

POST-HEARING QUESTIONS SUBMITTED BY THE SUBCOMMITTEE ON

COMMERCIAL AND ADMINISTRATIVE LAW


A1-4.eps
93

f


A1-5.eps
94

POST-HEARING QUESTIONS SUBMITTED BY THE MINORITY OFFICE


A2-1.eps
95


A2-2.eps
96

f


A2-3.eps
97

RESPONSE TO POST-HEARING QUESTIONS FROM DAVID C. QUAM, NATIONAL

GOVERNORS ASSOCIATION, WASHINGTON, DC


C-1.eps
98


C-2.eps
99


C-3.eps
100

f


C-4.eps
101

RESPONSE TO POST-HEARING QUESTIONS FROM SCOTT MACKEY,

KIMBELL SHERMAN ELLIS, MONTPELIER, VT


B-1.eps
102


B-2.eps
103


B-3.eps
104


B-4.eps
105


B-5.eps
106

f


B-6.eps
107

RESPONSE TO POST-HEARING QUESTIONS FROM JERRY JOHNSON,

OKLAHOMA TAX COMMISSION, OKLAHOMA CITY, OK


A-1.eps
108

f


A-2.eps
109

RESPONSE TO POST-HEARING QUESTIONS FROM MARK MURPHY, AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL EMPLOYEES (AFSCME), WASHINGTON, 

DC


D-1.eps
110


D-2.eps
111

f


D-3.eps
112

ARTICLE SUBMITTED BY THE HONORABLE CHRIS CANNON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF UTAH, AND RANKING MEMBER, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW


E-1.eps
113

Æ


E-2.eps